Whether you’re selling real estate or buying real estate, you will be involved with an agent or brokerage within some aspect of the process. This “fiduciary relationship” is setup through an agency. It really doesn’t matter if you want to sell your home or property by yourself. The buyer may have an agent, broker, and a brokerage involved. You’ll definitely have agents calling you with potential buyers or even wanting to sell it for you. So, why not get a general idea of what it is they do?
A real estate brokerage is the business of bringing buyers and sellers together in the marketplace. The thing is the nature of real estate brokerage services has significantly changed in recent years. In the traditional sense, a broker represented the seller’s interest in a transaction, whether the broker was the listing broker or a co-broker working with the buyer. That meant buyers weren’t represented. Today’s laws and practices have changed so that both have access to representation.
Well, let’s define what a real estate broker is.. .
Real Estate Brokerage Defined
So, a brokerage is just the business of bringing people together in a real estate transaction. This business acts as a point of contact between two or more people in negotiating the sale, purchase, exchange, or rental of property. Now operating as a brokerage, you need to be licensed in any state. These licenses fall into two categories: brokers and salespersons.
- A broker can work as the firm’s principal (designated or sponsoring) broker or as a broker licensee affiliated with the office. So in this context, the broker is the one in charge of the office and the one who enters into contractual arrangements with buyers and sellers. Brokers are even in charge of the activities of the affiliated licensees in the office. They conduct brokerage activities on behalf of the firm and the firm’s clients. These folks could be brokers or salespersons. They may work as employees or independent contractors.
With that, anyone who employs a broker is called a principal. This could be a seller, a prospective buyer, an owner who wishes to lease property, or someone looking to rent. Now the broker acts as an agent to the principal and is paid by a commission. This amount is usually a percentage of the sales or rental price. The broker just has to perform the service before being compensated.
Need a quick intro into the real estate business? Check this out..
Let’s jump into some real estate license law to clarify a few things..
Real Estate License Law
Licensing and Regulation
This is AMERICA! All states have a regulatory body that controls activities by anyone licensed in real estate. They touch on a number of things. They may be called councils, boards, or commissions etc.. The point is, these governmental bodies issue rules and regulations to implement laws passed by state legislatures.
The real estate license laws are designed to protect the public from incompetent brokers and salespeople. This is done through prescribing and enforcing standards and qualifications for licensing brokers and salespersons. Just like any other typical regulation, they govern criteria for obtaining and maintaining a license as well as penalties for non-compliance.
Licensing Categories
You need a license if you want to sell, purchase, rent, exchange, or auction of real property. Most states, require you to be licensed as either a salesperson or a broker. Check some of these categories out:
- Exemptions. Each state lists those who are exempt from licensing. These typically include owners who sell, purchase, or lease their own property. Even attorneys who are involved in real estate strictly as part of duties to a client, receivers or trustees of estates, and government agencies.
- Assistants. States also have regulations. These are regarding what an unlicensed real estate assistant can do. Which means, generally, assistants who act in any capacity other than as clerical support need to be licensed.
- Single Licensure. Single licensure is legal in some states, such as Colorado and Oregon. This just means that all licensees have the same license, not the traditional brokers and salespersons. However, this still requires supervision by a managing broker.
Pre-licensing Education Requirements
Even though most states require pre-licensing education before an exam, the hours vary widely. Some states require live classroom instruction, while others allow some form of distance education. This might be correspondence or online for pre-licensing. You can’t escape EXAMS! And all states have examinations that test the applicant for at least MINIMUM competency. Generally, seeking a broker license requires additional hours and experience.
Post-Licensing and Continuing Education
Almost all states impose an additional post-licensing education requirement. This can happen as additional hours required during your first year being licensed. Or as additional hours added to the normal continuing education requirements for maintaining a license. Your continuing education usually consists of topics in agency, contract law, fair housing, ethics, or trust accounts. This is required to maintain the license.
Trust (Escrow) Accounts
Any client or customer’s money is place in special trust (escrow) accounts. These are strictly regulated, including whether or not the accounts can earn interest. Also, who can receive the interest. When you engage in commingling, you’re mixing the office operating funds with the client’s funds. So this is not allowed. Conversion isn’t either. This is when you misappropriate trust funds.
Licensure Recognition and Nonresidency
This ones an interesting case.. If you live in a jurisdiction bordered by other states. In this situation, it won’t be unusual to find licensees who hold licenses in those states as well. So, it depends on the regulatory agency if any, education or additional testing is required, to get that non-resident license. I mean, these requirements vary. It could be an application or a letter of licensure from the applicant’s current state.
Fee Sharing
Most states allow referral fees from one jurisdiction to another. The employing broker pays this fee though. However, there are rules about doing sales transactions in a state without a real estate license issued by that state. This situation needs investigation before conducting any licensing activities also. How you’re able to share or rebate fees, also varies by state as well.
Noncompliance
Each state’s licensing and regulatory bodies have procedures for responding to complaints about licensee’s activities. What type of activities might result in being disciplined?!.. Well.. Misrepresentation, mishandling client funds, and nondisclosure of material facts. So with that you get different penalties. These include additional education, fines, and/or license suspension or revocation.
Errors and Omissions (E&O) Insurance
For licensees, errors and omissions (E&O) insurance is not required for salespersons and brokers in all states. Nonetheless, office policies should still address it. What do most policies cover? Usually, unintentional (not fraudulent) contractual errors and protect a broker if there’s litigation. There are limitations though. Like, E&O insurance, won’t protect a licensee from antitrust charges.
Recovery Funds
Some states have established funds to protect consumers. This is when they have lost money in a transaction due to negligence or illegal activities done by a licensee. The money comes from fees paid by licensees. So, an injured party can collect if a judgment against a licensee is can’t be collected.
Future Considerations
We all know that technology continues to grow and information is way more accessible. As a result, regulatory agencies are facing new challenges. From national licensure recognition to regulation of internet sales and virtual offices. As you can see, protecting the public while still satisfying consumer demands is a daunting task.
Agency Relationships
So when, a broker signs on to be an agent of the principal, the broker has statutory duties. So, the broker can sign on as a brokerage relationship or fiduciary relationship. It just depends on the requirement of the state. What defines the relationship between the principal and the agent? The law of agency does. In real estate, the principal can be the seller, the landlord, the buyer, or the tenant. We will get into each parties’ certain rights and responsibilities.
Subagency
In the past, all licensees represented the seller under subagency. A broker created this by appointing other brokers to represent the same principal. This all happened with the knowledge and consent of the principal too. Those cooperating brokers became the principal’s subagents. So, this meant they owed the same fiduciary obligations to the seller. As well as, the listing broker. The listing broker was responsible for the actions of the subagent. The buyer didn’t have any representation. Today, things are a little different. In fact, parties don’t assume or even practice subagency. Just remember, you create an agency relationship by contract. So paying a commission, doesn’t automatically create that agency relationship.
Agent’s Fiduciary Responsibilities to Principal
Remember what common law is??!.. Well under common law, agents have a fiduciary relationship with their principals. Which really means, a relationship of trust and confidence between an employer and employee. But there are certain duties that abroker has to perform. These are care, obedience, accounting, loyalty, and disclosure. So, just remember this acronym, COALD. Let’s break these down a little..
Care
Brokers, as agents, have to exercise a reasonable degree of care while transacting business entrusted to them by their principals. It makes sense do so because, brokers are liable to their principals for any loss resulting from negligence or carelessness.
Obedience
Because of the agency created, as a broker you have to act in good faith. Also, in conformity with the principal’s lawful instructions and authority. Remember, you’re liable for any losses if you’re a broker. Specifically, due to your performance of any act that isn’t within your scope of authority.
Accounting
Brokers have to report the status of all funds entrusted to them by their principals. Most state real estate license laws require brokers to give accurate copies of all documents to all parties affected by them. They also must keep copies of such documents on file for a specified period.
Loyalty
Brokers owe their principals 100% loyalty. Agents have to practice a principal’s interest above any other person’s that they’re dealing with. As a result, agent’s can’t disclose info of a principal’s financial condition. Even if a principal will accept a lower price than the listing price or if they’re willing to offer more. Anything that’ll damage a principal’s bargaining position, is off limits.
Disclosure
Along with these four responsibilities, is the duty of disclosure, or notice. Licensees have the responsibility to keep their principals fully informed. This is at all times, of all facts the licensee obtains that could affect the transaction. So obviously, failure to do so would result in being liable for any damages that result. I mean, licensees can even be liable for facts they should have known and revealed to the principal. If the disclosure, might jeopardize your transaction, its best to say everything.
Agency Disclosure
Today, most states require that the licensee explain brokerage representation options available to the consumer. Even the type of relationship the licensee has with others in the transaction. Make this type of disclosure as early as possible.
Stigmatized Properties
When a property is stigmatized it means its psychologically impacted. That means buying decisions are basing off of negative emotional factors rather than economic factors. For example, properties on the scene of a murder, suicide, rape, rumored to have ghosts, toxic wastes, or previous occupant had HIV or AIDS etc.. These are all stigmatized properties. Disclosure of stigmas is not so clear. Most states, but not all, do not require any disclosure about stigmatized properties.
Meghan’s Law
This is the federal law that requires certain sex offenders, especially involving children, to register with local law enforcement. Some states passed laws prohibiting these individuals from living within a certain distance from day care centers and schools. Reporting varies from state to state. It’s not a requirement to discover or disclose this info as a real estate licensee. It’s encourage to provide information about the websites to their buyer clients though.
Agent’s Statutory Responsibilities to Principal
In some states, specific statutory duties replaces the common law of agency. Owing to both the client and a customer. The exact wording of these duties varies from state to state. But the basic premise of providing protection and promotion of the client’s best interests is paramount.
Principal’s Responsibilities to the Agent
An agency agreement is not one-sided. The principal has to deal in good faith and comply with the agency agreement. In order to compensate the agent according to the agency agreement.
Types of Agency
A licensed real estate broker becomes the principal’s agent when the principal hires the broker. Let’s define an agent. Its someone who has the authority and negotiates the interests of another person. You’re classified as a general agent or a special agent based off your given authority.
A general agent can perform any and all acts associated with a particular limited activity. For example, a property manager might be the general agent of the apartment building. A special agent, on the other hand, has extremely limited authority. They can represent the principal in only one specific transaction or piece of business. That would mean that the real estate broker is a special agent. That’s because a seller or a buyer hires them for a specific real estate transaction.
Creation of Agency
A consensual agreement of parties creates a broker-client relationship. A listing agreement is not necessary in all states. Even though a listing agreement is preferred. Some states recognize agency relationships created by (1) oral agreement, (2) implication, or (3) ratification. Let’s break these down a little further to see what they involve.
Oral Agreement
Usually contracts through verbal agreement, don’t fly, but some states actually allow it. So, in some states an oral, open listing is binding. Only requirements is for both the client and broker to express willingness for representation and to follow directions.
Implication
If one party gives another party reason to believe that the broker is the first party’s agent, they create a relationship. They call this an ostensible agency. That means it appears on the surface to exist. So if this agency exists, the law prevents the principal from denying its existence. Estoppel is the law that stops this.
Ratification
You can create ratification if the broker acts without authority and without the seller’s knowledge of the broker’s act, but the seller later approves all of the broker’s previous unauthorized acts. Because of the special nature of a real estate broker’s responsibility, for payment, most states require that brokerage agreements be in writing. To secure a person who is ready, willing, and able to buy, sell, or rent.
Remember! Paying a commission by one party does not create an agency relationship. Contracts create agency relationships, regardless who’s obligated to pay a commission.
Termination of Agency
Actions of either the principal or agent or the operation of law in a number of ways terminates an agency relationship.
Ways an Agency May be Terminated
- Acts of the Parties
- Full performance by agent
- Expiration of the listing period
- Abandonment by the agent
- Revocation by the principal
- Cancellation by the agent
- Mutual agreement by the parties
- Operation of Law
- Death of either party
- Incapacity of either party
- Destruction of the property
- Bankruptcy of either party
- Condemnation of the property
- Revocation of the agent’s license
Agent’s Responsibilities to Third Parties
An agent owes duties to the agent’s principal and to non-represented third-parties. Duties to third parties include using reasonable care and skill, honesty and fair dealing, accounting, and disclosure of known and reasonably knowable material facts. Agents have to abide by state licensing laws, fair housing laws, and ethical obligations when dealing with customers.
Before buying any form of real estate, please read this article on the rights and interests in real estate property..
Broker-Seller Relationship
The broker can choose to represent the seller and work with the buyer as a third party. The broker can choose to represent a buyer and work with the seller as a third party. Let’s break these down a little further.
Seller as Principal
Historically, real estate brokers represented the seller under the terms of the listing agreement. The broker marketed the seller’s property, found buyers, and receives a commission from the seller’s equity. Brokers find the best offer for the seller reflecting the current market.
Seller as Unrepresented Third Party
The seller can choose to be the third party. That’s for those who don’t have representation when the broker represents the buyers. In this situation, the broker owes the seller reasonable care and skill, honesty and fair dealing, accounting, and disclosure of known facts.
Broker-Buyer Relationship
A buyer can be either the principal or a third party who doesn’t have representation. But the broker still works with. In the traditional sense, a buyer is a customer of a broker.
Buyer as Principal
Today, state laws developed rules and procedures to regulate buyer-brokers. An agency agreement depends on the terms of the agency agreements. Not from any fee payments. It doesn’t matter if the buyer pays the broker upfront for services or the buyer’s broker accepts a split of the listing agent’s commission. In both instances, the buyer is the broker’s principal (client). So the traditional duties must be provided.
Buyer as Third Party (customer)
A broker who represents the seller owes the nonrepresented buy honesty, reasonable care and skill, fair dealing, accounting and disclosure of known facts. The seller’s agent does not owe the buyer customer confidentiality and loyalty. Brokers need to use care in making statements about a parcel of real estate. Exaggerated statements of opinion, called puffing, are permissible. They just have to be opinions and have no intention to deceive. Brokers need to take precaution. Broker’s statements can’t involve fraud even in interpretation.
Read how to acquire and transfer real estate title..
Fraud
Any deceitful or dishonest practice that intends to harm or take advantage of another person is fraud. Fraud also consists of false statements about a property, and concealment or nondisclosure of important facts. A contract formed from fraudulent info, the purchaser can disaffirm or renounce the contract. So the broker won’t even receive a commission. If any party suffers loss because of a broker’s misrepresentations, then the broker can be held liable. If the broker’s misstatements are based on the owner’s own inaccurate statements, the the broker could be entitled to a commission. Even if the buyer rescinds the sales contract.
Latent Defects
Buyers are responsible for responding to patent defects. These are defects readily seen and understood by the buyer. But a seller is responsible for revealing to a buyer any hidden or latent defects in a property. Latent defects are known to the seller, but not the buyer. You also can’t discover them as well. So, withholding this info from buyers, buyers can rescind a sales contract. Possibly even receiving damages.
Property Condition Disclosure
Many states require seller property disclosure statements in residential transactions of one-to four-family dwelling units. Typically, the buyer receives the form before signing the contract. If not, the buyer has the opportunity to revoke the offer or rescind the contract. The seller is responsible for completing the form. Not the licensee.
Need a few reasons why you should hire a real estate agent? Check this article out..
Top reasons to hire a Real Estate Agent..
Other Forms of Agency
Disclosed Dual Agency
Some states allow a broker to represent both the seller and the buyer in a single transaction by both parties so long as both parties agree, in writing, to dual agency. Although representing both parties can be legal, dual agency, is not always easy. The dual agent is limited to what may be disclosed, such as the seller will accept less, the buyer would offer more, and the confidential reasons why either is buying or selling. This happens most when a buyer client wishes to purchase a property listed with the agent’s office. The compensation arrangement needs to be in writing. Only if the agent is receiving payment from both parties.
Designated Agency
To avoid the conflict of dual agency, some state laws allow designated agency. A broker can designate one affiliate licensee as the buyer’s agent and another affiliate licensee as the seller’s agent in a single in-house transaction. The role of the broker may vary in these instances. Depending on the state statutes, it ranges from being totally removed from the transaction to being a dual agent.
Single Agency
Another method of avoiding conflict with dual agency situations is for a broker to represent only the buyer or the seller, not both. In any single transaction. For example, under single agency, the broker will not sell an in-house listing to a buyer client.
Limited Agency
In Several states, the agent explains in detail exactly what duties will, and will not, be performed.
Read why it’s important to hire a real estate agent..
Non-representation
Transaction Broker
These brokers facilitate a real estate transaction between a buyer and a seller. They’re not agents of either of the parties. These brokers must treat all parties honestly and competently. But they are not subject to any rules of confidentiality and agency laws usually don’t govern them. But all parties need to understand the nature of their services.
Agency Disclosure
Many unrepresented buyers believe that the listing agent at an open house represents them in subsequent negotiations. Sometimes, a For Sale by Owner (unrepresented seller) doesn’t understand that the agent who brought the buyer to the house is representing the buyer. Not the seller. To avoid this type of problem, states enacted statutes requiring licensees to present an agency disclosure statement or form. These forms explain the representation options available to the consumer. Even though the timing can vary, most require that the options be presented before the consumer (buyer or seller) enters into a contract that obligates them to pay a fee. So as a real estate licensee, you need to be knowledgeable of your state’s disclosure requirements.
Nature of The Real Estate Business
Real estate brokers are independent business-people. They set their own policies in their office. Brokers engage employees and salespeople, determine their compensation, and direct their activities. They can reject or accept agency relationships with principals. It’s actually an important aspect of the brokerage business: brokers have the right to reject agency contracts that violate their standards. Obviously, without any discrimination. But once the brokerage relationship has been established, brokers represent the people who engaged them.
Broker-Salesperson Relationship
Anyone who is licensed to perform the real estate activities discussed on behalf of a licensed brokerage, is usually licensed as a real estate salesperson or an associate broker. The licensee’s responsibility lies only to the broker under the affiliation the licensee is part of. Which also means, the licensee can only carry out the responsibilities assigned by that broker.
Employee versus Independent-Contractor Status
Affiliate licensees engaged with brokers as either employees or independent contractors. The agreement between a broker and an affiliate licensee in a written contract defines the obligations and responsibilities of the relationship.
Employee
The nature of the employer-employee relationship allows a broker to exercise certain controls over salespeople who are employees. The broker requires an employee to adhere to regulations concerning working hours, office routine, and dress or language standards. As an employer, the federal government requires the broker to withhold Social Security tax and income tax from wages paid to employees. The broker has to pay unemployment compensation tax on wages paid to one or more employees, defined by state and federal laws. The broker can also provide employees with health insurance and profit-sharing plans.
Independent Contractor
A broker’s relationship with independent contractors is very different. Basically, the broker can control what the independent contractor does, but not how it is done. Independent contractors pay their own income and Social Security taxes and provide their own health insurance. Only if they want. These independent contractors can’t receive anything from their brokers considered as an employee benefit.
The Internal Revenue Service (IRS) often investigates the independent contractor/employee situation in real estate offices. The Internal Revenue Code has three requirements to establish independent contractor statues:
- The individual must have a current real estate license.
- The individual must have a written contract with the broker containing the following clause: “The salesperson will not be treated as an employee with respect to the services performed by such salesperson as a real estate agent for federal tax purposes.”
- Of the individual’s income asa licensee, 90% or more must be based on sales production and on the number of hours worked for the broker.
So, the broker employs an attorney to create a standardized agreement to comply with these federal statutes.
Broker’s Compensation
The broker’s compensation is specified in the brokerage agreement with the principal and is always negotiable between broker and seller or buyer. Typically, the broker earns their commission when a sales contract is signed by a ready, willing, and able buyer and accepted by the seller.
Procuring Cause
In order to be considered the procuring cause, the broker must have taken action that started or caused a chain of events that resulted in the sale. A broker can considered a volunteer if the broker causes or completes an action without a promise or contract.
How Real Estate Agent and Broker fees work?
Antitrust Laws
The real estate industry is subject to federal and state antitrust laws. These laws prohibit monopolies and contracts , combinations, and conspiracies that unreasonably restrain trade. The most common antitrust violations in the real estate business are price-fixing and allocation of customers or markets.
Illegal price-fixing occurs when brokers conspire to set prices for the services they perform (sales commissions, management rates), rather than letting those prices be established through competition in the open market.
In Closing.. .
In some form or another, in real estate you will come in contact with an agent, a broker, or a brokerage. It’s important to get the general idea of what their responsibilities are and what their business entails. Also, this will help you in your home search, apartment search, finding sellers, finding buyers, and even tenants. Brokers provide a useful service and can make processes easier..
Thanks for reading!
Real Estate Company Amarillo
https://www.amarillosparkviewrealty.com/
Amarillo’s Parkview Realty, LLC, is committed to providing the highest quality residential and commercial real estate brokerage services to our clients and customers. Amarillo’s Parkview Realty, LLC provides a business environment that enables it’s sales associates and employees to reach their financial and professional goals and maintain a reputation for honesty and integrity, while continuing to be responsible citizens within our community, and earning a fair and reasonable profit.