2Agency TheoryPrincipal – a person who authorizes another to work for themAgent – the person empowered to act by and on behalf of the principalExamples:Home buyer or seller (principal)/Real estate broker (agent)Real estate broker (principal)/Real estate salesperson (agent)
3Three Levels of AgencyUniversal AgencyGeneral AgencySpecial Agency
4Broker’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:Faithful performanceLoyalty to the principalProtecting the principal’s interestReasonable careAccounting for funds receivedNo comingling of funds
5Broker’s Obligations to Third Parties Lead-based paint disclosureRed flags“As is”Puffing
6Principal’s Obligations to the Agent Act with honestyCompensate the agentIndemnify the agent from loss suffered through no fault of the agentDuty of performance
7Multiple Listing Service A database of local homes for sale along with details about the property, selling price, and broker’s commissionOnly member brokers can access the database
8Cooperating BrokersIn 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 partyRequired disclosure statements establish no agency or disclosed dual agency
9Seller Disclosure Statement A detailed disclosure of property defects (of lack thereof)24 states recommend but do not require the use of seller disclosure statementsOver 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.
10Listing ContractsReal estate Listing – a contract where a broker is employed to find a buyer or tenant
11Elements of a Listing Contract Parties involved in transaction (principal and agent)Description of propertyPrice and terms of financing the transactionBroker’s obligations and authoritySeller’s obligationsCompensation for brokerTerms for cooperation with other brokersSpecification of the brokerage arrangementConditions for termination
12Types of Listing Contracts Exclusive Right to SellExclusive AgencyOpen ListingNet ListingAdvance Fee ListingAdvance Cost Listing
13Completion 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 termsHas the financial capacity to purchaseTerminating 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
14Brokerage CommissionThe 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.
15Buyer’s BrokerBuyers may want to hire their own broker to assist them in their search and purchasing process.Exclusive Authority to PurchaseBrokerage commission is typically split in half between the listing broker and the buyer’s broker
16Bargain BrokersFlat 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.
17Rationale 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.
18LicenseeA 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 estateIs required to hold a valid real estate license.
19More on LicenseesSome 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.
20License Types Real Estate Broker Real Estate Salesperson A person or legal entity licensed to act independently in conducting real estate brokerage business.Real Estate SalespersonA person employed by a broker to list, negotiate, sell, or lease real property for others.Real Estate Sales AssociateEither a salesperson or broker employed by a broker. This is an employment arrangement but not a licensing category.
21Qualifications for Licensing ExaminationEducationContinuing Education
22Licensing 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.
23Non-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).
24Non-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.
25Licensing 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.
26Licensing in Mississippi Mississippi Real Estate Commission
31Minimum 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 VirginiaStates with waivable MSRs: Delaware, Florida, Nevada, New Mexico, Ohio, Pennsylvania, Tennessee, Wisconsin
33Minimum 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.