Chapter 8 –Real Estate Brokerage

Agency Theory

Principal – a person who authorizes another to work for them

Agent – the person empowered to act by and on behalf of the principal

Examples: Home buyer or seller (principal)/Real estate broker (agent) Real estate broker (principal)/Real estate salesperson (agent)

Three Levels of Agency

1. Universal Agency

1. General Agency

1. Special Agency

Broker’s Obligations to the Principal(for brokers representing buyers and sellers)

Any time agency is created, there is a fiduciary relationship established which legally requires the following from the agent:

1. Faithful performance

2. Loyalty to the principal

3. Protecting the principal’s interest

4. Reasonable care

5. Accounting for funds received

6. No comingling of funds

Broker’s Obligations to Third Parties

1. Lead-based paint disclosure

2. Red flags

3. “As is”

4. Puffing

Principal’s Obligations to the Agent

1. Act with honesty

2. Compensate the agent

3. Indemnify the agent from loss suffered through no fault of the agent

4. Duty of performance

Multiple Listing Service

A database of local homes for sale along with details about the property, selling price, and broker’s commission

Only member brokers can access the database

Cooperating Brokers

In 70% of all sales made through the multiple listing service, the broker who locates the buyer is not the same broker who listed the property for sale. The broker who locates the buyer is known as the cooperating broker. Who is he an agent of? Middleman Principle – Under this theory the cooperating broker who brings both

parties together represents neither party as an agent.

Dual Agency – When the same broker represents both the buyer and seller in a transaction, there is dual or divided agency established. In 17 states this makes the broker and agent to neither party Required disclosure statements establish no agency or disclosed dual agency

Seller Disclosure Statement

A detailed disclosure of property defects (of lack thereof)

24 states recommend but do not require the use of seller disclosure statements

Over the past 15 years there has been extensive litigation regarding material misrepresentation and omission in real estate transactions, so a seller disclosure statement provides a means of insurance against such litigation.

Listing Contracts

Real estate Listing – a contract where a broker is employed to find a buyer or tenant

Elements of a Listing Contract

Parties involved in transaction (principal and agent) Description of property Price and terms of financing the transaction Broker’s obligations and authority Seller’s obligations Compensation for broker Terms for cooperation with other brokers Specification of the brokerage arrangement Conditions for termination

Types of Listing Contracts

Exclusive Right to Sell

Exclusive Agency

Open Listing

Net Listing

Advance Fee Listing

Advance Cost Listing

Completion of the Contract

Procuring Cause – A selling broker can expect a commission if the actions of the broker caused the seller to find a “ready, willing, and able buyer” Ready to buy at the seller’s price and terms Has the financial capacity to purchase

Terminating a contract – contracts can only be terminated prior to the ending date if by mutual agreement or if the broker is said to have abandoned the client

Brokerage Commission

The standard commission rate for a broker is 6% of the sales price. This may be negotiable when you sign the contract. For example, on a very high priced home a lower commission rate is often negotiated.

The Department of Justice has used this standard commission rate structure as evidence in its case against the real estate industry for non-competitive practices and collusion.

Buyer’s Broker

Buyers may want to hire their own broker to assist them in their search and purchasing process.

Exclusive Authority to Purchase

Brokerage commission is typically split in half between the listing broker and the buyer’s broker

Bargain Brokers

Flat Fee Brokers – Payment is a fixed dollar amount rather than a percent of sales price. Usually provide a lesser menu of services than a traditional full service broker.

Discount Broker – A full service broker who works for a lower commission rate.

Variable Rate Broker – The listing broker may charge a lower rate for services but still offers a full 3% to the full service buyer broker.

Rationale for Licensing

Does the public have a vested interest in seeing that real estate salespersons and brokers have the qualifications of honesty, truthfulness, good reputation, and real estate knowledge before they are allowed to negotiate real estate transactions on behalf of others?

It was this concern that brought about real estate licensing laws as we know them today.

Until 1917, no state required real estate agents to be licensed. Anyone who wanted to be an agent could simply hang up an agent’s sign.

Licensee

A person who, for compensation or promise of compensation, lists or offers to list, sells or offers to sell, buy or offers to buy, negotiates or offers to negotiate either directly or indirectly for the purpose of bringing about a sale, purchase or option to purchase, exchange, auction, lease, or rental of real estate, or any interest in real estate

Is required to hold a valid real estate license.

More on Licensees

Some states also require real estate licenses for persons offering their services such as appraisers, property managers, mortgage bankers, apartment locators, or rent collectors.

Exemptions: property owners dealing with their own property, attorneys conducting real estate transactions as part of their duties as an attorney for a client, other trustees or executors acting on behalf of an estate, etc.

License Types

Real Estate Broker A person or legal entity licensed to act independently in conducting

real estate brokerage business.

Real Estate Salesperson A person employed by a broker to list, negotiate, sell, or lease real

property for others.

Real Estate Sales Associate Either a salesperson or broker employed by a broker. This is an

employment arrangement but not a licensing category.

Qualifications for Licensing

Examination

Education

Continuing Education

Licensing Procedure

Application with fee

Character references (loyalty, honest, truthfulness)

Examination date will be set by the state real estate commission. Frequency of exams varies by state.

If applicant passes the exam, pays license fee and license is mailed to applicant. Upon receipt the applicant can begin operating as a salesperson or broker.

Non-resident Licensing

In general, a person must be licensed in the state in which he negotiates. A sale can be brokered in another state as long as the negotiations are done in the state in which the salesperson/broker is licensed.

Non-resident license - a license given by some states to out-of-state brokers, particularly when the broker is located close to the state line.

License reciprocity - one state honors another state’s license (full and partial).

Non-resident Licensing

Notice of consent - when a broker operates outside of his home state, he must file notice with the secretary of state. This permits the secretary of state to receive legal summonses on behalf of the nonresident broker.

Moving to another state? Most states will give credit for the education and licensing time in another state when you go to move and start up a real estate business in a new resident state.

Licensing the Business Firm

A broker can operate as a sole proprietorship under his name or a fictitious business name. A broker can also operate in partnership with other brokers or as a corporation. If operating as a corporation, its CEO or President or some other designated officer must act as the licensed broker responsible for managing the firm.

A broker who expands by opening branch offices must have a licensed broker managing each branch location.

Licensing in Mississippi

Mississippi Real Estate Commission http://www.mrec.ms.gov/

Broker Affiliation

Training

Compensation

Support

Franchise offices

Independent Contractor

Paid only if a sale produces a commission and is responsible for income taxes and social security.

REALTOR®

Registered trade name

Member of NAR and not synonymous with real estate agent

Minimum Service Requirements

Minimum Service Requirements

According to the Department of Justice, there are 21 states with minimum service requirements. States with non-waivable MSRs: Alabama, Illinois, Indiana, Iowa, Missouri, District

of Columbia, Kansas, Texas, Utah, Idaho, Oregon, Washington, West Virginia States with waivable MSRs: Delaware, Florida, Nevada, New Mexico, Ohio,

Pennsylvania, Tennessee, Wisconsin

Minimum Service Requirements

AL DC IA ID IL IN KS MO OR TX UT WA WVAccept delivery/present offers X X X X X X X X X X X X XAnswer questions X X X X X X XAssist communications/negotiations X X X X XProvide access to listed properties XAccept deposits X X X XPromote best interests of client X X XDisclose all adverse material facts X X X XUse reasonable skill/care/good faith X X X XProvide advice to client X X XContinuous good faith effort to find buyer unless otherwise agreed XPresent written contract with all terms and condiitons X

Minimum Service Requirements

Goodwin, Johnson, Zumpano (Journal of Real Estate Finance and Economics, 2010) looks at the effect of discount brokerage in a sample of over 11,700 properties between January 1, 2006 and July 20, 2007 in Montgomery, Alabama.

The study found that sellers using discount brokers had a trade-off between a 2% higher sales price and a 20.5% longer time on market. Using a discount broker also lowered the probability of finding a match between a buyer and seller in a given marketing period.