Chapter 8

1
Chapter 8 Real Estate Brokerage
2
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)

3
Three Levels of Agency

• Universal Agency
• General Agency
• Special Agency

4
Brokers 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
• Faithful performance
• Loyalty to the principal
• Protecting the principals interest
• Reasonable care
• Accounting for funds received
• No comingling of funds

5
Brokers Obligations to Third Parties

1. Lead-based paint disclosure
2. Red flags
3. As is
4. Puffing

6
Principals 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

7
Multiple Listing Service

• A database of local homes for sale along with
  details about the property, selling price, and
  brokers commission
• Only member brokers can access the database

8
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

9
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.

10
Listing Contracts

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

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Elements of a Listing Contract

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

12
Types of Listing Contracts

• Exclusive Right to Sell
• Exclusive Agency
• Open Listing
• Net Listing
• Advance Fee Listing
• Advance Cost Listing

13
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 sellers 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

14
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.

15
Buyers 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 buyers broker

16
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.

17
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 agents sign.

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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.

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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.

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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.

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Qualifications for Licensing

• Examination
• Education
• Continuing Education

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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.

23
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
  states license (full and partial).

24
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.

25
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.

26
Licensing in Mississippi

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

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Broker Affiliation

• Training
• Compensation
• Support
• Franchise offices

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Independent Contractor

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

29
REALTOR

• Registered trade name
• Member of NAR and not synonymous with real estate
  agent

30
Minimum Service Requirements
31
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

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Minimum Service Requirements
33
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.