Real Estate Brokerage and Marketing

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					                                                           Topic 13:
                                                     Real Estate Brokerage

In this course we study real estate primarily from a legal and financial standpoint. However, we devote a little time and
effort to the study of real estate sales because it is a branch of the financial services industry, and because the institutional
framework through which real estate is marketed has financial implications for buyers and sellers of property. For example,
because of the high cost of real estate, the type of intermediary party that facilitates transactions is a broker (who typically
does not take an ownership position), not a dealer (who buys and then resells at a markup). Economists and others who
analyze labor markets and human capital sometimes find the real estate sales/brokerage field interesting to study; the multiple
listing arrangement leaves all of an area’s brokers/salespeople selling essentially the same inventory of properties, so the
impact that features like education, experience, and hours worked have on income can more effectively be examined.

Of particular interest is the broker’s role as an agent for the buyer or seller of real estate.

I. Definitions & General Concepts
A. Broker – a person (or firm) engaged in facilitating the purchase, sale, leasing, or exchanging of property for others.
A broker must be licensed, and typically is compensated through a commission that is a percentage of the transaction price.

B. Salesperson – employed by a broker (can not act independently; broker holds the salesperson’s license) to perform some
duties, such as showing houses to prospective buyers. Must be licensed also, but exam is less difficult than for broker, and
there is a less stringent educational requirement (just one 45 clock-hour course in Illinois).

[In Illinois, an individual must hold a salesperson’s license for one year before he/she can take the broker’s license
examination. Must also complete two additional 30-hour classes. Exception: licensed attorney can sit at any time for
broker’s license exam; need not be a salesperson for a year or take any classes. People with broker or salesperson licenses
must also meet continuing education requirements.

Real estate license laws are administered in Illinois by Executive Director of the Real Estate Division in the Office of Banks
and Real Estate.]

C. Broker/salesperson – an individual who holds a broker’s license but does not own a brokerage firm, yet may be able to
perform a more extensive range of duties for the firm where he/she is employed than could someone with only a salesperson’s

D. Realtor® – a broker who is a member of the National Association of Realtors® (NAR) and adheres to that organization’s
code of ethics. A broker does not have to be a Realtor®, and someone associating with the Realtors® does not have to be a
practicing broker.

NAR is a trade association, which real estate brokers (and others) can choose to join. (Salespeople can join as associate
members; loan officers, builders, others in related fields can join as affiliate members.) NAR has 50 state sub-associations
(since real estate selling is regulated at the state government level, and Realtors ® like to have an influence on the attendant
laws), and each state association is broken down into local boards.

So an active broker in ISU’s local area is reasonably likely to be a member of the National Association of Realtors®, Illinois
Association of Realtors®, and Bloomington-Normal Board of Realtors®.

[Only about half of those who sell real estate professionally nationwide are Realtors ®, and only about 1/3 of those who hold
broker or salesperson licenses in Illinois are members of the Illinois Association of Realtors ®. Not all brokers find it
profitable to pay the membership fees, part of which provides access to the Multiple Listing Service (discussed more below).
Professional property managers in Illinois must hold broker licenses; many of them likely will not choose to be Realtors ®.]

The term Realtor® is a trademarked name (they actually call it a “registered collective membership mark”), which always
should be capitalized and accompanied by the trademark sign. The National Association of Realtors ® protects the use of this
name so that it can not become a generic (though even people who are Realtors® sometimes write “realtor.”

E. Multiple Listing Service (MLS) – a plan through which a broker can sell properties “listed” by other brokers in the local
market area (if the sign in front says “For Sale; Contact ABC Realty,” then ABC Realty has the listing). MLS plans usually
allow a broker to keep a listing “in-house” for up to a few weeks before registering it with the MLS.
F. Commission – a percentage of the transaction price paid as compensation to the broker (occasionally payment comes as a
flat fee). Under the traditional arrangement, a total commission is split 4 ways: owner of listing brokerage firm, salesperson
for listing brokerage firm, owner of showing (“selling”) brokerage firm, salesperson for showing brokerage firm.

G. Agent – from Latin word meaning “to act.” An agent performs certain duties on behalf of a principal. A real estate
broker helping someone to buy or sell a property is likely to be acting, from a legal standpoint, as an agent for a party to the
transaction. It is important to identify whether the broker is an agent for the buyer or the seller (or neither or both), because
an agent holds a fiduciary obligation – obligation of utmost good faith – to the principal. Among qualities a fiduciary owes:

1. Representation – represent only the interests of the principal; for example, seek the highest price for the seller.
2. Diligence; the exercise of due care. There have been cases in which brokers were found to have acted in a negligent
manner, and thereby to have failed in their professional obligations and lost the right to collect commissions.
3. Loyalty – no conflict of interest; no self-dealing or commingling of money.

[Two Peoria brokers were sued for self-dealing after buying a house cheap from their principal after these brokers had been
“unable” to sell under the listing contract, but then turned around and sold it at a big profit a short time later.]

4. Full information – even if doing so hurts the agent’s position, or even if the broker does not feel that the principal needs to
know (e.g., an offer at a very low price).
5. Duty to follow instructions, not to be negligent, not to commit misrepresentation or fraud. (It’s fraud if the agent intends
to mislead the principal, makes a material false statement, and the principal is harmed after relying on that statement.)
6. Agent’s authority to act on principal’s behalf can be:
         a. Express – explicit spoken or written instructions.
         b. Implied through express authority to do something else. For example, an agent with express authority to sell a
                   house would have implied authority to take potential buyers inside.
         c. Apparent – through past exercise of the agent’s authority. For example, a salesperson used to work for broker.
                   Outside parties may still view that salesperson as broker’s agent if broker does not take reasonable steps to
                   notify people that it is no longer so.

Any of the 3 may bind the principal to the agent’s actions (an agent acting within his/her powers can bind the principal to a
given course of action).

[In real estate leasing, a broker typically has power to commit the owner to a lease. In real estate sales the broker typically
does not have the power to bind the owner to a contract unless he/she has written power of attorney. But statements made
about the property by the broker to a potential buyer may expose the owner to a lawsuit, or to rescission of a sale contract.
The old rule was that a broker could not be held responsible for things he/she did not know. But at least one court has ruled
that a broker has a duty to look for facts that can materially affect a property’s value or desirability. Since October of 1994,
owners in Illinois have had to give potential buyers a list of all material problems with the property.]

Still, in the typical case, a broker has no fiduciary obligation to a potential buyer. But a broker can not misrepresent material
facts (some forms of “puffing” are acceptable, such as “great view”), and a broker owes a general duty of integrity to the
public through being licensed. In one case, a court found that a broker had acted improperly in failing to understand a lease
on rented property so that she could accurately describe the terms to a potential buyer.

In a traditional transaction, a broker is an agent for a property seller, and a salesperson is an agent of the broker. There can be
many circumstances under which a person can be deemed to have agency authority and, therefore, agency responsibility.

II. The Dual Agency Problem
If a real estate broker (either directly or through a salesperson) has a listing on a property, there is not much question that the
broker is the seller’s agent. Now consider a competing broker who shows that house to potential buyers through the Multiple
Listing arrangement. In the traditional transaction arrangement, the law views this second broker as also being an agent of the
seller (actually a sub-agent of the broker who has the listing).

Question: can this “selling” or “showing” broker ever owe a fiduciary duty to the buyer as well? Often the answer is yes,
especially if the buyer reveals confidential information and the broker knows the buyer is relying on his or her advice.

If the broker has a fiduciary obligation to both parties, then a dual agency exists. Dual agency is not necessarily illegal, but it
can be, and it raises all kinds of troubling questions. For example, how can someone serve the seller’s best interests (getting
the highest price) while also serving the buyer’s best interest (getting the lowest price)?
FIL 260/Trefzger                                                                                                                    2
A broker acting as a dual agent should disclose the situation to both buyer and seller, and should get explicit approval from
both parties. If a buyer later finds that “his” broker was also a fiduciary of the seller, that buyer can rescind the contract (and
the broker loses the commission).

Situations in which dual agency has been found to exist:
             Unsophisticated buyer was advised by broker.
             Broker located builder to build custom home for buyer; charged each a commission.
             Buyer and seller were represented by two different salespeople in same brokerage firm.

How to solve these problems? Illinois has tried some legislative solutions: A 1989 law requires a broker to get a buyer’s
signed acknowledgment that broker represents the seller, and a 1993 law allows a brokerage firm to designate particular
employees as representatives of the buyer/seller in a given transaction. Brokers have also in some cases tried to act as
facilitators, representing neither the seller nor the buyer as agents, but merely helping bring the two parties together.

These are steps in the right direction, but problems remain. For example, it is awkward for a brokerage firm to conduct sales
meetings when two salespeople are working opposite sides of the sale transaction and can not share information; a more
workable solution probably would be for firms to specialize in representing sellers or buyers. Also, even those who act as
buyer’s brokers, directly working for the buyer and disclaiming any fiduciary obligation to the seller (“who you work with is
who you work for”), expect to be paid a % of the transaction price as compensation; that is troubling. [See outside reading.]

III. When is a commission due?
A listing broker earns a commission when she locates a buyer who is ready, willing, and able to purchase the property under
the terms spelled out in the listing agreement, or under other negotiated terms that the owner accepts. So the buyer must be
financially able, willing to buy, and ready to buy now. Brokers typically insert procuring clauses into their listing contracts:
the seller owes a commission even if he chooses not to sell to the ready/willing/able buyer. The seller also owes a commission
if a sale is completed 2 – 6 months after the listing agreement has expired if the buyer first learned of the property through
the broker’s marketing efforts.

To be eligible to receive the commission, the broker must be currently licensed in the state where the property is located. A
commission may be owed even if seller sells the property himself without broker’s help (see below). By law, commissions
must be negotiable, but most commissions follow local traditions (often 6-7% for residential, 10% for land, something in
between for income property).

As noted, a commission is owed to the broker who locates a ready/willing/able buyer even if the transaction is not completed.
The broker can sue the seller for payment; in Illinois, an unpaid broker can file a lien in a commercial property sale.

IV. Organization of Brokerage Operations
A. Sole Proprietorship
B. Partnership
C. Corporation
D. Franchise – a firm of one of the above types pays an entrance fee plus regular rent for trade names, advertising, and
referral service of a national firm. Examples: Coldwell-Banker, Century 21, RE-MAX. (RE-MAX pioneered the “100%
commission” concept, in which independent broker/salespeople pay toward the firm’s office expenses but keep the full
commissions on all properties they list or sell.

V. Listing Agreements
A listing agreement is an employment contract between a property owner and a real estate broker. It allows the broker to
advertise and show the property to prospective buyers, and spells out the time period and other conditions that must be met for
the broker to earn a commission. A listing agreement should describe the property, specify the broker’s duties and limitations
on those duties, and state an asking price and a date when the listing expires. (It is a contract, and therefore should contain
all features requisite to an enforceable contract.)
In connection with accepting a listing, the broker typically recommends:
         an asking price – should be a price that reasonably reflects the property's value; too high or too low causes problems.
         minor repairs and improvements to make the property more salable.

Types of listings:

FIL 260/Trefzger                                                                                                                      3
A. Open listing – the broker has no exclusive privileges; other brokers may list and sell the same property. Only the one who
delivers a ready/willing/able buyer gets a commission, or the owner can find a buyer by himself and pay no commission. (The
federal government sometimes uses this approach with houses it has repossessed under federal loan guarantee programs; a
series of brokers may hold open houses over a series of weekends.)

B. Exclusive agency – only 1 broker has listing rights. But if the owner sells to a party that the broker did not locate, no
commission is owed. (If the owner lets another broker sell the property, he probably owes a commission to both.)

C. Exclusive right to sell – the most common. It is best for the broker, in that the broker earns a commission if anyone, even
the owner, finds a buyer during the period when the listing agreement is in force. Multiple listing arrangements typically call
for participating brokers to accept only this type of listing. It likely provides benefits for the property seller as well, in that the
broker can more confidently advertise and otherwise promote the property, knowing that her right to compensation can not be
undermined by her own client.

D. Net listing – the broker’s commission is the amount in excess of the amount the owner had expected to receive. For
example, the owner expects $160,000. If the broker sells for $175,000 she gets a $15,000 commission. If she sells for
$162,000 she gets only a $2,000 commission. Net listings are not illegal in Illinois, but brokers generally view them as
unethical. (The idea is that they should give their seller clients their best advice and efforts, and should then get a fair
percentage commission in return.)

E. Limited service listing – the broker accepts a flat fee for placing the seller’s property on the Multiple Listing Service, but
provides limited service otherwise (does not hold open houses or individually advertise the property, for example). This type
of listing arrangement is controversial among traditional brokers, who feel that clients are best served by full-service brokers.

VI. Unauthorized Practice of Law
In completing the paper work in connection with listing and selling a property, a broker could, inadvertently but nonetheless
illegally, perform duties that should be completed by a licensed attorney.

To remove any doubt, several years ago the major real estate and bar associations in Illinois adopted a broker-lawyer accord.
Under the terms of this agreement, a broker can fill in blanks (price, closing date, identities of parties) on pre-printed, bar
association-approved listing contracts and offers to purchase (must be for a sale that the broker is involved in, and the broker
can not charge a separate fee for filling in the form). But beyond that, brokers should encourage parties to seek independent
legal counsel. In return, attorneys are not to advise clients on property values or real estate market conditions.

VII. A Few Final Points

A. One of the most important legal duties of a real estate broker is to comply with the fair housing laws. A broker can not
refuse to show, sell, or lease real estate (or agree to do so only on different terms) to anyone based on that individual’s race,
religion, age, national origin, or family status. If a home seller asks a broker, for example, to “sell my house, just not to any
racial minority family,” the broker has a legal duty to inform the client that such action would violate the law, and if the client
persists in this desire then the broker is legally obligated to refuse to work for the client.

B. Brokers are making increased use of unlicensed and licensed assistants. A licensed assistant can actually show properties
to prospective buyers, while an unlicensed person is restricted to office activities. Someone with a license might choose to
work as an assistant in order to earn a steady paycheck while getting established in the profession. A highly successful broker
might operate her own operation within a large brokerage office, “The Jane Davidson Home Selling Team” consisting of Jane
and a few licensed assistants – who tend to leave these teams and work independently once they get some experience.

C. The idea of buyer brokerage is not new in commercial transactions. In fact, firms that use a lot of office or other
commercial real estate space have long hired leasing brokers to negotiate favorable leases for them. A broker representing a
buyer may obtain a buyer representation agreement, such as an exclusive right to represent, similar to the listing agreements
secured by brokers who represent property sellers.

D. Personal Safety of Real Estate Brokers/Salespeople. There have been cases of real estate salespeople, especially women,
being stalked, assaulted, and even murdered while showing homes. Some of the same actions that can enhance professional
success (maintaining an attractive appearance and making one’s face known through photo ads) can also attract sick, wacko
perverts. Use common sense. A few good practices: always let someone know where you are to be, do not agree to meet
unknown parties for showings of secluded homes at night, do not go alone to show a home at night or in a secluded location,
always stand between a prospective buyer and an accessible exit. •
FIL 260/Trefzger                                                                                                                     4