Maine Real Estate Professionals

Transcription

2016 Edition
Maine Real Estate Professionals
Continuing
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Table of Contents
CE for Maine Real Estate Professionals
3 Maine Core Course for Brokers and Associate Brokers- l 3 Hours
$35.95
28 Maine Core Course for Designated Brokers - I 3 Hours $35.95
70
Real Estate Safety: Protect Yourself During a Showing
3 Hours $35.95
83 A Day in the Life of a Buyer Agent 3 Hours $35.95
98 How to Work with Real Estate Investors - Part 1 3 Hours
$35.95
117 Navigating a Hot Sellers' Market 4 Hours
$45.95
134 A Home Buyer’s Guide to Credit Scores 2 Hours
$25.95
145 Know The Code: Your Guide To The Code Of Ethics
3 Hours
$35.95
167-174 Book & Individual Course Evaluations Form
175
Registration Form
176
Assessment Answer Sheet
Three Steps to Completing Your CE
Step 1: Complete your CE Courses
• Read course material.
• Answer course questions on the Answer Sheet (back of this book).*
• Complete the Maine Student Evaluation Forms (back of this book).*
PLEASE NOTE: An evaluation form is required for EACH course completed,
per the Maine Real Estate Commission.
• Complete the Student Registration Form (back of this book).*
Step 2: Submit your Completed Forms
• Submit your Answer Sheet, Evaluation Form, Registration Form along with
payment to McKissock online*, by mail, or by fax.
Step 3: Receive your Completion Certificates
• If submitting your CE online, once your Student Evaluation Form is submitted,
you will receive your completion certificate within 24 hours by email.
• If submitting your Answer Sheet, Evaluation Form, and Registration Form by
mail or fax, certificates will be emailed to you within 2 business days of receipt.
All 21 Hrs
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can also take your CE via Online
Courses. Check out these NEW
online topics:
• How is the Legalization of
Marijuana Affecting the Real
Estate Market? (LL233C709IT)
Also available in correspondence format.
• Technology, Relationships, and
the Digital Consumer (TT233C728IT)
• The End of the Paper Trail:
How to Conduct Paperless
Transactions (LL233C712IT)
*If you plan on completing your CE online, you can register and complete
the final exams online. You may print your evaluations when you have
passed and fax or mail to McKissock.
Required passing score of at least 85%.
Maintain your certificate of completion so you are able to provide proof in the event of an audit.
Maine Real Estate Commission Student Evaluations, Registration Form,
and Assessment Answer Sheet can be found in the back of this book.
Have questions?
Give us a call at 1-800-328-2008.
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Maine Core Course for Brokers and Associate Brokers- l
(Mandatory) - 3 CE Credit Hours
Approval #: CC233C716IT
The purpose of this course is to address two fundamental aspects of real estate brokerage that are the
basis of complaints to the Maine Real Estate Commission (MREC) - property disclosures and offers and
counter-offers.
The purpose of Chapter One is to address the requirements of Maine’s residential property disclosure
laws and rules. The MREC receives numerous and varied complaints related to the disclosure of property
information during a real estate transaction. Chapter One also addresses common misconceptions
concerning a licensees’ responsibility to consumers, and to each other.
Chapter Two offers a comprehensive review of the Maine Real Estate Commission’s guiding principles that
have been established for real estate licensees with respect to offers and counter-offers. We will review the
document from MREC, Real Estate Transactions: Offers/Counter Offers – Guidelines (June 2014, MREC).
Chapter Two also includes the June 2014 MREC updates to these principle guidelines as well an introduction to a brand new
section that specifically addresses the concerns a licensee may face when dealing with a buyer or seller who is not represented
by a licensed agent. This chapter includes case studies to emphasize the relevant guidelines set forth by MREC.
Chapters:
•Chapter One: Residential Property Disclosure Laws
•Chapter Two: Offers and Counteroffers
Learning Objectives:
•Recognize the risk of non-compliance with Maine’s residential property disclosure laws
•Define and understand property disclosure standards as they relate to a seller agent, a buyer agent and a transaction broker
•Understand the relationship between misrepresentation and Maine’s disclosure laws
•Differentiate between a selling agent’s responsibilities and a buyer’s agent’s responsibilities
•Understand the importance of completing the property disclosure form and determine when the licensee must gather information from third party sources
•Be familiar with other Maine required disclosures
•Review the MREC document Real Estate Transactions: Offers/Counter Offers – Guidelines (June 2014, MREC)
•Identify and understand the June 2014 updates for Real Estate Transactions: Offers/Counter Offers – Guidelines (June 2014, MREC)
•Recognize and understand the new section (Customer FAQs) added to Real Estate Transactions: Offers/Counter Offers – Guidelines (June 2014, MREC)
Customer Testimonial
“I was challenged and able to learn at my own pace and from the comfort and ease of my office." ~ Peter
3
Chapter One
Residential Property
Disclosure Laws
Overview
The purpose of this chapter is to address the requirements of Maine’s
property disclosure laws. The Maine Real Estate Commission (MREC)
receives countless complaints each year related to property disclosures for
real estate transactions. Consumers rely on the information provided in
property disclosures to make well informed purchasing decisions.
As a convenience, selected and relevant laws and rules relating to this
course, you can reference page 17.
Chapter One provides a general review of the requirements related to
property disclosure laws and addresses misconceptions concerning a
licensees’ responsibility to consumers and to each other.
Learning Objectives
•
Recognize the risk of non-compliance with Maine residential
property disclosure law for real estate licensees
•
Define and understand property disclosure standards as they relate to
a seller agent, buyer agent and transaction broker
•
Understand the relationship between misrepresentation and Maine’s
disclosure laws
•
Differentiate between a selling agent’s responsibilities and a buyer’s
agent’s responsibilities
•
Understand the importance of completing the property disclosure
form and determine when the licensee must gather information from
third party sources
•
Be familiar with other Maine required disclosures
Introduction
Maine real estate law requires that certain information with regards to the
‘subject property’ of a real estate transaction be made available to buyers
prior to or during the preparation of an offer to purchase. Therefore, a
written property disclosure statement must be completed and provided to
prospective buyers so they can appropriately and thoroughly evaluate a
property they are considering for purchase.
This disclosure is not a warranty of the condition of the property and does
not become a part of any contract between the seller and any buyer, but it is
required by law that the buyer receives the disclosures in writing. The seller
of residential real property must provide a property disclosure statement
which contains information on the water supply system, insulation, waste
disposal system, hazardous materials and any other known defects. (Title
33, Ch7, SubCh 1-A, §173)
Any changes to a property during the sales process, must be promptly
changed on the existing disclosure. This updated property disclosure
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must then be disseminated to all relevant parties to the transaction. It is
important to note that there is no specific required form and the seller is
NOT required to sign any property disclosure.
Consequences of Non-Compliance of Property
Disclosure Law
If the property disclosure statement is delivered to the purchaser after the
purchaser makes an offer, the purchaser may terminate any resulting real
estate contract or withdraw the offer no later than 72 hours after receipt of the
property disclosure statement. (Title 33: Chapter 7, Subchapter 1-A, §174)
Additionally, the potential for a civil liability exists against the licensee
(which may extend for six years beyond the point of the licensee’s
misconduct) as a result of not complying with property disclosure laws.
In addition, the Maine Real Estate Commission (MREC) has the authority
to issue fines or suspend/revoke the license of the agent found to be noncompliant. (32 MRSA §13068)
Finally, the failure to comply with Maine residential property disclosures
law could certainly impact and damage an invaluable aspect of any real
estate agency’s success – their reputation.
The Importance of Property Disclosures
A property disclosure is a real estate document to disclose to home buyers,
potential home buyers, listing agents and selling agents, material defects
and conditions known which may materially affect the value of the
property. It is quite relevant to reiterate that when a real estate licensee
is involved with a transaction, it is the licensee’s responsibility, (and
NOT that of the seller) to provide a reasonably-researched and complete
disclosure of the subject property.
When home buyers make an offer on a typical resale of a home, they will
have the opportunity to read the property disclosure form and then appropriately factor the information disclosed into any offers they make on that
property ... or at least they should!
The reality is the property disclosure form is of utmost importance to a
buyer as it provides the basis for a buyer to make an informed decision
regarding issues that WILL impact the buyer’s financial investment.
It should also be noted that being dishonest when filling out a property
disclosure form could leave a seller (and real estate agent) with serious
exposure later. That is why most sellers answer the questions honestly and
to the best of their knowledge.
Property Disclosure Standards
It is the licensee’s duty to obtain and provide disclosure information on a
private water supply, the heating system, the waste disposal system and
any known hazardous materials to the buyer. These four disclosure categories are discussed in detail next.
First, it should be noted that these property disclosure standards apply to
the following real estate transactions:
THE FOLLOWING LIST OF DISCLOSURES APPLY TO ALL
REAL ESTATE TRANSACTIONS WITH A RESIDENTIAL
COMPONENT
Private Water Supply Disclosure
A licensee listing any of the property types noted in Table 1 that is served by
a private water supply, and a licensee in such transactions when the property is not listed with a real estate brokerage agency, shall ask the seller for
the following information concerning the private water supply:
•
Type of system
•
Location
•
Malfunctions
•
Date of installation
•
Date of most recent water test
•
Whether or not the seller has experienced a problem – such as an
unsatisfactory water test or a water test with notations.
The previous information plus any other information deemed pertinent
to the heating system(s) and/or source(s) shall be disclosed, in writing, to
a buyer prior to or during the preparation of an offer. The fact that information pertinent to the heating system(s) and/or source(s) is not available shall
be disclosed, in writing, when such is the case. (Chapter 410, Section 16)
Waste Disposal System Disclosure – Private
Waste Disposal System
A licensee listing any of the property types noted in Table 1, or a licensee
in such transactions when the property is not listed with a real estate brokerage agency, when subject property is served by a private waste disposal
system, shall ask the seller for the following information concerning their
private waste disposal system:
•
Type of system
“Such information and any other information* pertinent to the private
water supply shall be conveyed, in writing, to a buyer prior to or during
preparation of an offer. The fact that information regarding the private water supply is not available shall also be conveyed, in writing, when such is
the case.” (Chapter 410, Section 15)
•
Size of tank
•
Type of tank
•
Location of tank
•
Malfunctions of tank
*It is important to note that the seller is ONLY one source of information.
If the seller cannot provide the requested information, the licensee MUST
make a reasonable effort to obtain the information from another available
source.
•
Date of installation of tank
•
Location of leach field
•
Malfunctions of leach field
•
Date of installation of leach field
•
Date of most recent servicing of system
•
Name of the contractor who services the system
Heating Disclosure
A licensee listing any of the property types noted in Table 1, or a licensee in
such transactions when the property is not listed with a real estate brokerage
agency, shall ask the seller for the following information regarding the heating
system(s) and/or source(s):
• Type(s)
•
•
•
Age of system/source(s)
Name of company who services system/source(s)
Date of most recent service call
•
Annual consumption per system/source (i.e. gallons, kilowatt hours,
cords)
•
Malfunctions per system/source within the past 2 years
The above information and any other information pertinent to the
private waste disposal system shall be disclosed, in writing, to a buyer
prior to or during preparation of an offer. The fact that information regarding
the waste disposal system is not available shall also be disclosed, in writing,
when this situation arises. (Chapter 410, Section 17(1))
5
Waste Disposal System Disclosure – Municipal
or Quasi-Public Waste Disposal System
agency, when subject property is served by a municipal or quasi-public
waste disposal system, shall ask the seller if the seller has experienced any
system or line malfunction. This information shall be disclosed, in writing,
to a buyer prior to or during the preparation of an offer. (Chapter 410,
Section 17(2))
Known Hazardous Materials Disclosure
prior to re-listing the property should the transaction not close. Any and
all property disclosures (and subsequent changes as needed) MUST BE
MADE IN WRITING.
More often than not, sellers do not think to update licensees about relevant
property information that should be modified subsequent to completing the
initial property disclosure (Examples: installing a wood stove, replacing a
well pump, etc.). A licensee should consistently remind the seller to keep
them informed of any changes to the property.
In sum, it is the licensee’s responsibility to provide the buyer with a
property disclosure. One source of disclosure information is the seller. If
the information provided by the seller (for whatever reason) is not sufficient
or simply unavailable, it is then the licensee’s responsibility to obtain this
information through reasonable alternate sources.
A licensee is actually required by law to be informed of the rules and
regulations surrounding hazardous materials and their disclosure. According
to Chapter 410, Section 18 (1):
Material Defects
“A licensee shall keep informed of any federal, state, or local laws, rules
regulations or ordinances concerning known hazardous materials that may
impact negatively upon the health and wellbeing of buyers and sellers.”
According to International Association of Certified Home Inspectors
(InterNACHI) Standards of Practice for Performing a General Home
Inspection, a material defect is defined as follows:
In addition, the licensee has a specific duty to disclose hazardous material
information as detailed in Chapter 410, Section 18 (2):
“1.2 A material defect is a specific issue with a system or component of a
residential property that may have a significant, adverse impact on the value
of the property, or that poses an unreasonable risk to people. The fact that
a system or component is near, at, or beyond the end of its normal useful
life is not, in itself, a material defect.” (http://www.nachi.org/materialdefects-for-home-inspectors.htm)
“A listing licensee, and a licensee in transactions when the property
is not listed with a real estate brokerage agency, shall disclose, in
writing, whether the seller makes any representations regarding current
or previously existing known hazardous materials on or in the real
estate. In addition, the licensee shall give a written statement to the
buyer encouraging the buyer to seek information from professionals
regarding any specific hazardous material issue or concern. Such written
representation and statement shall be conveyed to a buyer prior to or
during the preparation of an offer.”
agency, must ask the seller whether the seller has knowledge of current or
previously existing hazardous materials issues. The seller shall disclose the
presence or prior removal of hazardous materials or elements for any of the
property types noted in Table 1 including, but not limited to:
A prudent approach to managing the property disclosure requirements
would be to remind the seller/selling-agent to keep you informed of
changes to the property. And, if a material defect is discovered or occurs
while a property is under contract, the licensee must notify either the seller
or buyer in writing.
Licensee Duties with Respect to Material Defects
Selling Licensee
•
Asbestos
The duty of a seller agent with regards to a buyer is governed by the following:
•
Lead-based paint for pre-1978 homes in accordance with federal
regulations
•
Radon;
•
Underground storage tanks
“A seller agent shall treat all prospective buyers honestly and may not
knowingly give false information and shall disclose in a timely manner to a
prospective buyer all material defects pertaining to the physical condition of
the property of which the seller agent knew or, acting in a reasonable manner,
should have known. A seller agent is not liable to a buyer for providing false
information to the buyer if the false information was provided to the seller
agent by the seller agent’s client and the seller agent did not know or, acting
in a reasonable manner, should not have known that the information was
false. A seller agent is not obligated to discover latent defects in the property.”
(32 MRSA §13273(2)(A))
As with previous disclosure information, such information and any other
information pertinent to hazardous materials shall be disclosed, in writing, to
a buyer prior to or during preparation of an offer. The face that information
regarding hazardous materials is not available must also be conveyed, in
writing, when such is the case. (Chapter 410, Section 18 (3))
Changes to Information Disclosed by Seller
It might be helpful to think about a property disclosure form as if it was
a ‘living document’ – one that can and often does change during the sales
process. The property disclosure should be periodically reviewed and
updated (dates/source) throughout the listing period and, if necessary,
6
In other words, the selling agent has a duty to disclose a) what they
know/knew or, acting in a reasonable manner, b) should have known.
Buying Licensee
According to 32 MRSA §13274(1)(B)(3):
“1. Duty to buyer. A buyer agent: (B) Shall promote the interests of the
buyer to exercising agency duties as set forth in section 13272 including:
(3) Disclosing to the buyer material facts of which the buyer agent has
actual knowledge or, if acting in a reasonable manner, should have known
concerning the transaction, except as directed in section 13280. Nothing
in this subchapter limits any obligation of a buyer to inspect the physical
condition of the property.”
So a buyer’s agent also has a duty to disclose any material facts that they
know, or should know, to the buyer. Clearly, any physical condition or
defect in a property a buyer is considering for purchase would be considered
‘material.’
Transaction Broker
And, according to 32 MRSA §13067-A(4), a licensee could be subjected
to a denial or refusal to renew a license or disciplinary action if they have
been found to be responsible for making substantial misrepresentation
by omission or commission. However, disciplinary action would not be
recommended if it is found that the action in the situation was innocent
misrepresentation.
Misrepresentation by omission, for example, is established when fuel
consumption information about a property is provided for only one source
when in fact, the property has two sources of heat. Whereas misrepresentation
by commission is found when disclosing septic information is present for a
4 bedroom home being sold, when the septic system used by this home had
only been designed for a 3 bedroom home.
A transaction broker is not an agent and therefore, does not represent any
party as a client in a real estate transaction. With regards to the disclosure
of material defects, according to 32 MRSA §13283(2)(B), the transaction
broker must:
DO YOU KNOW?
“Disclose in a timely manner to a buyer to a transaction all material defects
pertaining to the physical condition of the property of which the transaction
broker has actual notice or knowledge.”
•
On a related matter, it should be noted that ‘actual notice or knowledge’
is simply what the transaction broker sees or knows. Licensees acting
as transaction brokers have the same obligation as any other licensee to
obtain and provide disclosure information on private water supply, heating,
waste disposal system, and known hazardous materials. Obtaining and
providing property disclosure information does not fall under the category of
‘investigation’ and is therefore not a client-level service.
ANSWER: No, but a licensee has the responsibility
to make the mandated disclosures, including any
material defects, regardless of the form that has
been used to make the property disclosure.
In addition, according to 32 MRSA §13283(2):
“A transaction broker is not liable for providing false information if the
false information was provided to the transaction broker and the transaction
broker did not know that the information was false. A transaction broker is
not obligated to discover latent defects in the property. A cause of action does
not arise on behalf of any person against a transaction broker who reveals
information or makes disclosures permitted or required by this subchapter.”
Is there a Maine Real Estate Commission
mandated property disclosure form?
Examples of Misrepresentation Issues
As a licensee, it is also advised that you are mindful to avoid
misrepresentation during the real estate sales process. Some of the common
misrepresentations areas where issues often arise are shown below.
•
Number of bedrooms
•
Promotion inconsistent with legal use (e.g. “three unit property” when
town approval is for two units)
Special Considerations: Unlisted Property
•
Fuel consumption (e.g. fuel consumption figures for oil furnace only
when seller also burns three cords of wood)
As noted above in Table 1, a licensee shall be responsible for obtaining
(from the seller or any other reasonable source) the required disclosure
information and providing it to the buyer in a real estate brokerage
transaction where the property is not listed with a real estate brokerage
agency, this property information is necessary for making the above
required disclosures, and for assuring that the disclosures are made to by
the buyer. (Chapter 410 Section 15-18)
•
“New roof” when roof was only re-shingled
•
“Completely remodeled/renovated”
•
“Surveyed” when seller only has a mortgage loan inspection
•
Inaccurate tax information (e.g. taxes increase or decrease during
listing term; exemptions un-accounted for)
Misrepresentation
The result of non-compliance of property disclosure requirements in Maine
could result in a disciplinary action against the licensee or their license
due to substantial misrepresentation. But what exactly is substantial
misrepresentation? Substantial misrepresentation is defined as:
“Any misrepresentation on which the person to whom it was made could
reasonably be expected to rely, or has reasonably relied, to that person’s
detriment.” http://definitions.uslegal.com/s/substantial-misrepresentationeducation
CAN YOU THINK OF ANY OTHER EXAMPLES OF
MISREPRESENTATION?
•
How about the following scenario? During the
listing presentation, the seller tells you that he
repairs everything in his home himself. In fact,
he just finished rewiring the entire house and
last year
he replaced the plumbing.
7
•
Do you need to ask more questions?
If the seller is not a licensed electrician or
plumber, it would be prudent to ask how long
he has been doing electrical and plumbing
work.
•
Are there potential issues that concern
whether the work done by the seller actually
meets the electrical or plumbing code?
•
If there is no information available, how would
you represent the systems to the buyer?
For example, a seller may not know when their furnace was installed as it
was installed years before they owned the property, or perhaps the seller
does not remember and (for whatever reason) has not maintained records
for the heating system. Because of the seller’s limited knowledge about
an important issue contained within the property disclosure, the licensee
performs the required investigation and checks with local businesses in the
heating industry to ascertain when this heating system had been installed;
but has no luck finding the date the system was installed. Given this
scenario, would the correct response to a property disclosure question about
the date the heating system was installed be “unknown” or “N/A”?
The appropriate answer to the above scenario would be “unknown.” This
is because the use of “N/A” is reserved for situations where the question
is actually “not applicable.” Clearly, if a furnace exists in the property,
the answer to the date the heating system was installed could not be ‘not
applicable,’ but ‘unknown.’
If the contract says sold ‘as-is’
Property Disclosure vs. Seller Disclosure
MREC rules mandate that a licensee in a real estate brokerage transaction
obtain and provide disclosure information, not the seller!
In reality, there are disclosure forms which utilize the word ‘Seller’ in its
title which only adds to the misconception that it is actually the seller who
is responsible for appropriately disclosing the required information.
The rule (that a licensee is obligated to obtain and provide disclosure
information) speaks to ALL licensees – regardless of their relationship with
the buyer or seller; as a client or customer. (Chapter 410, Section 14)
In fact, a licensee’s responsibilities are exactly the same whether they are
selling a property that has been foreclosed upon or a new construction, or
any other property for that matter.
Who is Allowed to Complete the Disclosure Form?
Maine Real Estate Commission rules require that a licensee obtain and
provide the disclosure information. However, these MREC rules do not
specifically require or restrict who is required to actually complete, or
amend, the written disclosure. Most, if not all, real estate companies utilize
pre-printed property disclosure forms that contain a series of propertyrelated questions with spaces/blanks to be completed for each question.
As a result, licensees are expected to be familiar with their real estate
brokerage’s property disclosure form and to understand the purpose for
asking each of the property-related questions.
It is imperative to note that a seller should not be misled that it is the seller’s
responsibility to provide the property information disclosures. Sellers may
not have sufficient real estate experience to understand the questions on a
pre-printed property disclosure form. The seller’s inability to understand may
result in the seller making their “best guess” or leaving information blank
with the responsibility (and exposure to risk) ultimately resting upon the
shoulders of the licensee.
How to Answer Property Disclosure Questions
With regards to the property disclosure forms, if an ‘as-is’ clause is
applicable to this property’s sale, it DOES NOT relieve the licensee of
responsibility or liability from obtaining and providing the information on
the disclosure.
Can I disclose this information verbally?
Under no circumstance should a licensee choose to provide a verbal
disclosure in lieu of a written disclosure. Disclosures, or the fact that
information cannot be provided must be made in writing and the answers to
the property disclosure questions must be legible.
Finally, it should be noted that any and all blanks/spaces provided to answer
any property disclosure questions must be completed. The completed and
signed property disclosure form should have no unanswered questions and
no blank answer spaces at all!
Licensee Disclosure Responsibilities
Listing Licensee vs. Selling Licensee
The listing licensee is responsible for obtaining the information necessary
to appropriately convey and disclose the property information required to
the selling licensee.
Conversely, the selling licensee acts as a conduit of information between the
listing licensee and the buyer. Therefore, the selling licensee is responsible
for obtaining the property information from the listing licensee and for
ensuring the information is appropriately conveyed an to the buyer.
Incomplete Disclosures
If the selling licensee is given an incomplete or partially complete property
disclosure form, it is the selling licensee’s responsibility to obtain the
property information required and to provide this property information to
the buyer.
Representing a Buyer who is Purchasing a For Sale By Owner (FSBO)
Property
If the seller does not know
A licensee, (working as a transaction broker or buyer agent), is responsible
for obtaining and providing property disclosure information to the buyer.
It is not uncommon for property information to be unknown by the seller, and
to be not visually observable by the licensee or attainable through other sources.
For example, a selling licensee may have to research some of the answers to
the property disclosure form by examining property records at city hall or the
8
town clerk, or by contacting a septic servicing company to obtain the required
information about the septic system of a home being purchased as a FSBO.
These scenarios happen more often than one
would think. For instance, a seller who has
inherited a property would be more than unlikely
to be able to provide the necessary property
information.
How to Gather Property Information to Complete
a Required Disclosure
The licensee’s responsibility with regards to the property disclosure does not
end by simply asking the seller for the information to complete the required
disclosure. As noted above, most sellers would not have sufficient real estate
experience to adequately understand (and therefore complete) the questions
on a pre-printed property disclosure form.
Ultimately, the responsibility for providing the buyer with a completed
property disclosure rests squarely with the selling agent, regardless of the
licensee’s relationship with the buyer as a client or customer.
Maine Real Estate Commission rules require that the listing licensee ask
the seller for specific information but also further requires all licensees to
convey this property information “and any other information pertinent” to
the disclosure to all buyers (clients and customers).
The reality is that in order for a selling licensee
to provide thorough and accurate information
you may be required to reach out to other
sources of information.
Real estate licensees are hired and compensated
as professionals and are therefore expected to
a) be aware of Maine’s real estate disclosure
process, b) recognize ‘red flags’ during the
selling process and c) be diligent and proactively take the appropriate steps
to obtain and convey the information necessary for the buyer to have to
make an informed purchase.
Property information provided in this disclosure is a written representation
of the seller’s property; its provision and accuracy provides the basis for
the buyer to make an educated buying decision. It is highly recommended
that a licensee contact other sources (e.g. town office, well driller, fuel
company, septic tank service company, etc.) for property information that
cannot be provided accurately by the seller.
Furthermore, it is also advisable and a prudent business practice to verify
property information by more than one source, when possible or practical.
Each sale is different with countless variables that could potentially impact the
sales process. Although a seller may want to provide the information required
to complete the disclosure, the reality is there are sellers that may not be able to
provide the information.
THINK ABOUT IT…
•
As a real estate licensee, have you
encountered situations where the seller
was unable to provide the information to
complete the property disclosure?
•
Wouldn’t the same be true for a seller whose
ownership was granted by foreclosure?
Contacting other sources to obtain or confirm property information for the
required disclosure is a part of the professional service one offers as a real
estate licensee, and is a requirement prescribed by Maine law.
Often, a licensee will find that a seller, with the best intentions, may provide
information about their property they believe to be accurate, but in reality, the
information may not be true. Some examples of these scenarios are as follows:
Example #1: The seller believes the property’s furnace was installed in
2007. While viewing the basement of the property you notice a service tag
hanging on the furnace.
•
Do you examine the service tag to confirm information provided by
the seller?
Answer: YES
•
If information conflicts with information provided by seller should
you call servicing company to verify info?
Answer: YES
Example #2: Seller states on the property disclosure that the location of the
property’s well is unknown but adds that the well “must be an artesian well.”
•
Are you confident the information provided by the seller on the
property disclosure is accurate?
•
Does the seller even understand what an artesian well is?
TABLE 2 E xamples of “Other Information”
Pertinent
to Property Disclosure
Disclosure Issue
Other Relevant
Information
to Include
Private Water
Supply
Is well shared
with neighbor?
Heating System
Are there two fuel sources
attached to one chimney
or an unlined fuel line?
Waste Disposal System
Is it subject to Coast
Shore-land Zoning?
Known Hazardous
Materials
Have pesticides been used
on property?
9
When gathering information to complete the written property disclosure as
a licensee, it is important to listen very carefully to the seller’s answers. A
property issue the seller may simply view as routine maintenance may in fact
actually be an undisclosed material defect for the buyer after closing.
To protect the seller, the buyer and yourself, it is prudent to pay careful
attention to ‘red flag’ statements that may require additional discussion
or investigation. It is always smart to ask the seller if they are aware of
property issues that you have not asked about that may be important.
Property Disclosure Scenarios to Consider
A licensee, during a routine walk-through of a property may encounter
situations where the information disclosed by the seller on the disclosure
actually conflicts with the licensee’s visual inspection of the property. It is
therefore recommended that a licensee inspect the property more than once
during the sales process as property conditions often change. These additional
inspections can be done during showings throughout the listing period.
When necessary, the property disclosure must be amended or modified to
disclose the most up-to-date and accurate information about the property.
The several scenarios presented below give you an opportunity to understand
just how varied and complex property disclosure situations can become:
Scenario #1
You are listing a property and the seller states that the home’s electric
wiring is “ok.” During this discussion about the condition of the
property the seller offers you a cup of coffee. While preparing the
coffee the licensee notices that the seller unplugs another appliance
before plugging in the coffee maker. Should the licensee act on what
the licensee observed?
•
Would you ask the seller more questions to determine what “ok”
means to the seller?
•
Is it possible that the seller has become so accustomed to avoiding
plugging two appliances into the same receptacle that seller does not
consider it to be an issue?
Scenario #2
You are listing a property and the seller tells you that she has lived at
the property for over 10 years but has never had the need to service
the septic system. Is that important? Would you ask more questions?
•
•
Would you suggest having the septic system serviced (pumped, clean
filter, check baffles; check distribution box, etc.)?
Would you personally check town records to determine if system was
approved by the Code Enforcement Officer and that there is a plan on
file? (Lack of maintenance may suggest that the system is not properly
functioning or at the very least that the seller may not know if there is
a septic tank or leach field).
Scenario #3
You are listing a property and the seller reports that the roof to their
property being sold does not leak. During discussion with the seller
about why she is selling, she mentions that she is moving to Florida
because she’s tired of raking the roof off after every snowstorm. How
relevant would that information be to the property disclosure?
10
•
Do homeowners maintain their homes differently?
•
The fact that the seller rakes the roof after each snowstorm may, or
may not, indicate a problem. Should the listing licensee disclose that
the seller rakes the roof after every snowstorm?
Scenario #4
You are a buyer’s agent and the disclosure that has been completed by
the seller/selling licensee states “water quantity is adequate.”
•
Isn’t the term “adequate” subjective? What is adequate to one person
may not meet the standards of another.
•
Should you note the size of the current family and your buyer’s family?
•
Should you ask the buyer client if he/she has lived on a property
served by a well?
Scenario #5
On an annual basis, the seller sprays around the foundation of the
house to control an infestation of carpenter ants. The seller mentions
this to the licensee. The licensee tells the seller there is no need to
disclose – maintenance of the property is not a required disclosure. The
buyer purchases and shortly thereafter is confronted with a significant
infestation problem. When asked by the buyer why the annual spraying
was not disclosed, the seller responds that the licensee told him that this
was maintenance and not a defect.
•
Was the licensee’s advice correct?
•
No. It would be prudent for the listing agent (and buyer’s
agent to listing agent) to ask if there is any seasonal or routine
maintenance required for the property. In this instance
spraying should be disclosed.
Buyer Agent Responsibility
Buyers purchase properties for many different reasons. Their needs and
preferences are as unique as each individual purchaser. Therefore, as a
licensee, to meet the needs of your buyers, you may be required to assist
your clients by researching and then providing information about a specific
property beyond the typical required information denoted on a property
disclosure.
Examples of some of the types of additional information a buyer may
need to know about a property are shown below. This list is by no means
comprehensive, but provided to show some basic examples.
•
Buyer plans to work from home – is high speed internet available?
•
Buyer owns a motor home – can it be stored on the property?
•
Buyer is looking for land to build a home on – is electricity available
at the lot?
•
Buyer plans to keep chickens – any zoning restrictions?
It should be noted that the information being conveyed to your buyers should
always be given in writing. Good business practice would also suggest that
the buyer confirm receipt of this information.
As a side note, it should be mentioned that the seller’s signature does not relieve
the licensee’s responsibility/liability from the information on the disclosure.
Maine license law and real estate commission rules do not require buyers
and sellers to sign the property disclosure; however, some agencies may
specifically require or recommend that the buyer and seller sign these
disclosures. Often times, the buyer agent and seller agent work for two
separate and distinct brokerages, so it is important to note that licensees
are only required to follow the written procedures of their own company.
Other Related Disclosures
In addition to the property disclosure we’ve discussed previously, it should
be noted that there are other disclosures a licensee should be aware of
that may need to be completed and provided to the buyer. Some examples
would be:
Flood Insurance
Current Issues:
•
Revised Flood Zone Maps
•
Insurance Rate Changes
Case Studies
The following case studies are provided to assist and allow the student to
synthesize the information provided thus far.
The scenarios shown below are actual cases that formally appeared before
the Maine Real Estate Commission. In some cases there was a final
agreement in which a licensee contributed to the costs or was fined.
Case Study #1
Arsenic
A listed property is serviced by a private road. The listing agent completes
their company’s property disclosure form for this property as required.
The seller of residential property must provide buyer with information
developed by US Department of Health and Human Services (DHHS)
regarding what homeowners should know about arsenic in water supplies
and/or treated wood. (33 MRSA § 173-A)
The licensee answers this specific disclosure item as follows:
Radon Testing (rental properties)
Beginning March 1, 2014 residential rental properties are required to be
tested for radon air quality - unless a radon mitigation system has been
installed. There are exceptions and restrictions as to who can do this
specific testing. Information is available at the State of Maine - Division of
Environmental Health. (14 MRSA § 6030-D)
Uranium
Stay informed as the presence of uranium in well water is an evolving
topical issue.
Transfer of Shoreland/Coastal Shoreland
The transfer of ANY shoreland property with a subsurface waste water
disposal system located in a designated shoreland area requires the seller
to provide the buyer in writing, a statement addressing whether or not the
system has malfunctioned within 180 days preceding the transfer date.
It is required (prior to the actual sale date) that the transfer of Coastal
Shoreland properties with a subsurface waste water disposal system located
in a designated shoreland, be inspected by a professional who has been
certified by the Environmental Protection Board. If weather prohibits this
inspection, then it is permitted that the inspection be done within 9 months
of transfer. (30-A MRSA § 4216)
Note: If system is malfunctioning it must be repaired or replaced within 1
year of transfer.
Inspection Exclusions
Required inspections are excluded for the following situations:
•
The system has been installed within three years prior to the transfer
of the property.
•
The seller has invested in and provided a written inspection report for an
inspection by a professional within three years prior to date of transfer.
•
The buyer certifies to the local plumbing inspector that the system will
be replaced within one year of transfer.
Applicable rights of way, easements, homeowner associations, condo fees,
private roads, restrictive easements? Yes. Deed restrictions. How would you answer the following questions?
What information about the property is this disclosure providing? Answer: The agent has not clearly identified what they are disclosing and
that may be perceived as misrepresentation.
Why are applicable items not clearly identified?
Answer: The agent may have thought the answer space was too limited.
If this happens, use an addendum to answer each disclosure question
honestly and to the best of your ability.
Case Study # 2
A licensee lists a property. The property has not been tested for radon. The
buyers smartly conduct a radon test and receive a high radon reading test
result. Given the radon test results, the buyer and seller negotiate a Purchase
and Sale agreement requiring the seller to install a radon mitigation system.
Although this radon issue was appropriately addressed in the contract, the
property disclosure was not updated to include the radon test results. Soon after, the property receives another offer to purchase. The seller takes
advantage of their “kick-out clause” which consequently causes the first
buyers to withdraw their offer - before the radon mitigation system has
been installed.
A new Purchase and Sale agreement is executed by the new buyers with the
transaction closing soon after. After closing, the new buyers test for radon
with their report showing similarly high radon levels.
To remain compliant with property disclosure requirements, what should
licensee have done differently?
Answer: The licensee should have provided the second buyer with the
written disclosure that included the results of the new radon test at the
earliest opportunity.
11
Summary
Chapter One of this course has discussed the requirements of Maine’s
property disclosure laws. As noted above, the Maine Real Estate
Commission receives various, and numerous, complaints directly related
to the use of property disclosures within real estate transactions each year.
Property disclosure laws are designed to ensure that consumers have
reliable information to rely upon when making purchasing decisions for
what is often the most expensive purchase of their lives.
Additionally, Chapter One also addresses the misconceptions concerning
licensees’ responsibility to consumers and each other.
Chapter Two
Offers and Counteroffers
Overview
Chapter Two offers a review of the Maine Real Estate Commission’s
Offers/Counter Offers – Guidelines and what it means in terms of
handling offers and counter offers for real estate licensees. Chapter Two
also includes the June 2014 updates to these guidelines as well as an
introduction to a brand new section that specifically addresses frequently
asked questions by buyers and sellers not represented by a licensee. This
chapter includes case studies to emphasize the relevant guidelines set forth
by the Main Real Estate Commission (MREC).
Learning Objectives
•
Understand the contents of the document Offers/Counter Offers –
Guidelines (June 2014) by the Maine Real Estate Commission
•
Identify and understand the June 2014 updates for Offers/Counter
Offers – Guidelines (MREC, June 2014)
•
Recognize and understand the new section (Customer FAQs) added
to Offers/Counter Offers – Guidelines (MREC, June 2014)
Introduction
Real estate licensees’ earnings are usually based upon the commissions
earned by the sale or rental of real property. To be successful, a licensee
should have a comprehensive understanding of one of the most important
facets of the sales/rental process – the art of negotiating.
According to investopedia.com, ‘negotiation’ is defined as:
“A strategic discussion that resolves an issue in a way that both parties
find acceptable. In a negotiation, each party tries to persuade the other
to agree with his or her point of view.” www.investopedia.com
Real estate negotiations proceed through a series of offers by one party
(either the seller or buyer) to the other party, who has the option of either
a) accepting the offer that was presented, b) rejecting the offer presented
or, c) in the spirit of cooperation - making a counter-offer.
Negotiations between well-informed buyers and sellers will often unfold
more smoothly than transactions with less-informed buyers and sellers.
The MREC, through the Department of Professional & Financial Regulation developed guidelines for real estate transactions to help real estate
licensees, sellers and buyers understand the offer process. We will review
their document Offers/Counter Offers – Guidelines (MREC, June 2014)
in detail in this course.
Offer/Counter-Offers - Guidelines
The following guidance with respect to offers and counter-offers has been
approved by the MREC as of June 2014. To print a copy of these guidelines for future reference: See Page 16.
12
As a real estate licensee, it is important to have a solid understanding as to
how a real estate negotiation process usually unfolds. It’s important that a
licensee is able to convey the principles contained within this document to
sellers and buyers.
Guiding Principles Issued by MREC – Seller/
Buyer Client
Communicate Early and Often
Whether a licensee is taking a listing (representing the seller) or entering
into a buyer representation agreement, the licensee should manage their
client’s expectations by explaining in detail to their client the process by
which the negotiation unfolds. This explanation should specifically define
the exact purpose of an offer and a counter-offer, how they are handled
through the process and the potential outcomes for negotiations which
sometimes may include multiple offers.
June 2014 Update to Guidelines:
A June 2014 change to these guidelines includes the replacement with of
the word ‘competing’ with the more common industry term of ‘multiple.’
This specific wording modification has been amended throughout the
guidelines.
The Agent Advises – The Client Decides
The decisions that need to be made by the client during the negotiation
process include how offers will be presented, negotiated and ultimately
accepted or rejected. The ultimate decision to accept or to reject an offer is
made by the client – not the licensee!
All offers must be communicated and it is the responsibility of the licensee
to keep the client informed of any expressed interest in their property.
Offers and counter-offers in writing
Offers and counter-offers made on behalf of a seller or buyer should always
be in writing. The written offer ensures that the terms, time frames and legal
obligations of the parties are understood and can be later verified. It is also
advised that a written counter-offer should include a specific time period
during which the receiving party may accept the terms offered.
Finally, it is noted that the withdrawal of a written offer or counter-offer
should also be made in writing.
A Full-Price offer does not obligate the seller to accept the offer
Listing a property for sale is an invitation from the seller for buyers to
make offers to purchase said property. The seller is not obligated to sell the
property even if a buyer makes a full price, cash offer.
No priority to offers
The first or highest offer made to the seller does not bind (or otherwise
limit) the seller to act upon that offer before they have had a chance to
consider other offers.
Agent Communication
Agents should make reasonable efforts to keep cooperating brokers
informed, consistent with their client’s instructions.
Agents are not Attorneys
Agents should advise their clients to seek legal counsel from an attorney
regarding their questions concerning the legal status of their offer or the
legal ramifications of the content within the contract.
The Seller Client
An informed seller will be ready to make the right decision when an offer
or multiple offers are received!
The following guiding principles as outlined in Offers/Counter Offers –
Guidelines (MREC, June 2014) will help guide a licensee in keeping their
seller client informed.
When taking the listing:
•
Discuss the seller’s motivation for selling.
•
Discuss the impact of current market conditions (i.e., season, types of
financing, length of time on market).
•
Review the Guiding Principles of offers and counter-offers.
•
Explain that multiple offers may be received and that the client decides
whether to disclose the existence of other offers to other agents and/
or buyers.
•
Confirm that decisions about how offers will be presented, negotiated
and ultimately accepted or withdrawn will be made by the seller – not
the agent.
The Terms of offers and counter-offers are confidential
The terms of any offers or counter-offers may not be disclosed by a
licensee without the prior written consent of both the seller and the buyer. For
example, disclosing that a full price offer has been made is clearly a violation
as it discloses specific terms of an offer. (Chapter 410, Section 12)
When the offer is received:
•
Discuss the terms of the offer(s) – if multiple offers, compare terms.
•
Inform the seller of any other interest in the property.
• Potential of other offers
• Scheduled showings
The Existence of an Offer is Not confidential
Disclosing that an offer has been made or that an offer may be received is
not considered confidential information.
•
•
The information on the Guiding Principles page provided by the MREC
applies to both sellers and buyers. In previous years, this guideline
contained information which was specific to the seller – this seller specific
guideline has now been moved to those guidelines that relate specifically to
the Seller Client Section.
Recent showings that may require follow-up.
Seller may instruct the agent to keep the existence of offers or interest
confidential.
Seller’s options – one offer:
•
Accept, reject, counter, delay during time for acceptance, seek out
other offer or do nothing.
13
•
Explain pluses and minuses of each option – including the potential of
a buyer withdrawing an offer during a delay.
The wording has been changed to reflect that the seller may delay a response to an offer during the acceptance for any reason, not only to seek
other available offers.
•
Explain that seller is not obligated to acknowledge, counter or reject
an offer and may inform other buyers of existence of an offer or may
do nothing.
•
Confirm that the decisions about how offers will be negotiated and
presented or withdrawn will be made by the buyer – not the agent.
June 2014 Updates to Guidelines:
“Offer will result in a sale” has been replaced with “Offer may result in
a sale.”
Seller’s options – multiple offers:
•
Accept one offer.
•
Reject all offers and encourage “best” offers.
•
Counter one offer (may withdraw counter, in writing, prior to
acceptance) – do not inform other buyers.
•
Delay during time for acceptance.
•
Alert one or more buyers that they are in a multiple offer situation.
•
Reject all offers.
•
Initial offer may be the only opportunity to buy.
•
Do nothing.
•
•
Consider the pluses and minuses of each option – delaying or inviting
all buyers to make their “best” offer may produce better offer(s) or
may discourage buyers who may withdraw.
Inform buyer of any other interest in property buyer agent is aware
of, even if from other clients of buyer agent who have expressed an
interest in the property. Remind the buyer client that the buyer agent
will notify those other clients that an offer has been made (terms and
conditions remain confidential).
•
There is no requirement that the buyer be informed by the seller or
listing agent of the existence of other offers.
•
Seller has the right to negotiate with only one buyer at a time and not
reveal this to other buyers.
•
The agent may not disclose the terms of buyer’s offer but the existence
of the offer may be communicated to other buyers.
•
Seller may accept an offer on terms other than the price.
•
All buyers may be notified to present their “best” offer – buyer may
choose to:
In the second bullet, the word ‘high’ has been replace with ‘best,’ (Note:
The highest offer may not always be the best offer for the seller as it depends upon their specific circumstances).
A delayed response during the allotted time for acceptance is allowed for
reasons other than waiting for another offer.
“Reject all offers” has been added as an option available to the seller.
The Buyer Client
An informed buyer will be ready to make the right decision when making
an offer.
The following guiding principles as outlined in Offers/Counter Offers –
Guidelines (MREC, June 2014) will help guide a licensee in keeping their
buyer client informed.
When entering into a buyer agent agreement:
•
Discuss the buyer’s motivation for purchasing.
•
Discuss current market conditions, i.e. season, types of financing, average length of time for properties on the market.
•
Review Guiding Principles (on page one).
•
Explain that multiple offers may be made on one property. In those situations, only one offer may result in a sale and one (or more) buyer(s)
may be disappointed.
•
14
Explain that buyer agent may have more than one client interested in
the same property. In those situations, the buyer agent will notify all
clients who have expressed an interest in the property of any other
interest and/or that an offer has been made.
The 5th bullet has been added this year. It offers guidance to a buyer
agent with more than one client interested in the same property. Interest
in a property is a material fact and the agent has a fiduciary responsibility
to disclose material facts to their client(s).
When the offer is made – discuss with buyer the possibility of multiple
offers:
•
make different offer
•
leave original offer
•
withdraw offer in writing if period for acceptance is current
•
do nothing.
The 2nd bullet noted above is new. It addresses the fact that a buyer’s
agent must notify their buyer client of any other interest in a property; including interest from other clients they represent. Interest in any property
is a material fact; the buyer agent has a duty to disclose material facts
to their client(s).
An unnecessary sentence has been deleted from this section as follows:
“This negotiation may continue until seller accepts an offer.”
Clarification is offered by MREC by not limiting communication of the
existence of an offer “to obtain better terms or price.”
“Highest and best” offer description has been replaced with “best.”
Clarified option to make a “different” offer as the offer it may not be
“better.”
Buyer/Seller Customer FAQs
The last section of the Offers/Counter Offers – Guidelines (MREC, June
2014) is a new section that has been added which offers guidance for
those situations where the seller or the buyer is not represented by a
real estate licensee and is simply a customer bidding on or selling real
property.
A customer is a buyer or seller who is not represented by a real estate
licensee in a transaction; the guiding principles have now been amended
to include offers or counter-offers by customers who are not represented
by a real estate licensee.
The FAQ’s are written for the customer, we’ll rephrase slightly so they
are presented from the licensees point of view so the licensee can understand their obligations with regard to negotiating with customers.
The following FAQ’s are described in Offers/Counter Offers – Guidelines (MREC, June 2014):
What should a customer expect when making or receiving an offer?
•
Offers, counter-offers or withdrawal of an offer should be in writing;
•
Terms of offers and counter-offers are confidential;
•
The existence of an offer is not confidential;
•
A full-price offer does not obligate seller to accept the offer;
•
There is no priority to offers submitted.
A customer is ready to make an offer. Who is permitted to prepare
the offer?
The listing agent (the seller’s agent) or another licensee can perform
ministerial acts (those acts that a real estate brokerage agency performs
for a person who is not a client and that are informative or clerical in
nature and do not rise to the level of active representation on behalf of
the person) for a buyer such as filling in the blanks on the company’s
purchase and sale agreement.
Can a customer ask the listing agent (seller’s agent) if other offers
have been submitted to the seller?
A customer can ask, but the listing agent is under no obligation to answer
this question. The listing agent has fiduciary duties to the seller client
they represent. However, the seller client has the option and may authorize the agent to inform a customer of the existence of other offers.
Can a customer ask a licensee for advice about offers made by the
customer?
A customer can ask, but a licensee may not provide advice or counsel to
a customer.
Summary
Chapter Two has provided the student with a comprehensive review of
Offers/Counter Offers – Guidelines (MREC, June 2014). Additionally,
the June 2014 updates to the guidelines have been discussed as well as
the introduction of a new section that specifically addresses seller/buyer
customers.
15
DEPARTMENT OF PROFESSIONAL & FINANCIAL REGULATION
OFFICE OF PROFESSIONAL AND OCCUPATIONAL REGULATION
MAINE REAL ESTATE COMMISSION
REAL ESTATE TRANSACTIONS
OFFERS/COUNTER OFFERS – GUIDELINES
Approved June 2014
Guiding Principles – Seller/Buyer Client
Communicate early and often
When taking a listing or entering into a buyer representation
agreement the agent should explain to the client how offers and
counter offers are handled and the possibility of multiple offers.
The agent advises – the client
decides
The decisions about how offers will be presented, negotiated and
ultimately accepted or rejected are made by the client – not the agent.
All offers must be communicated and agent must keep client
informed of stated interest in property.
Offers and counter offers in
writing
Offers and counter offers should be in writing to ensure that the
terms, time frames and legal obligations of the parties are understood.
Written counter offers should include a specific time period for
acceptance. Withdrawal of a written offer or counter offer should be
made in writing.
Terms of offers and counter
offers are confidential
The terms of offers and counter offers may not be disclosed by agent
without the prior written consent of both the seller and buyer.
Disclosing that a full price offer has been made is disclosing a term
and is a violation.
The existence of an offer
is not confidential
Disclosing that an offer has been made or that an offer may be
received is not confidential information.
Full-price offer does not
obligate the seller to accept the
offer
Listing property for sale is an invitation from the seller for buyers to
make offers. The seller is not obligated to sell the property even if a
buyer makes a full price, cash offer.
•
No priority to offers
The first or highest offer made does not bind or otherwise limit the
seller to act upon that offer before considering any other offers.
•
Agent communication
Agents should make reasonable efforts to keep cooperating brokers
informed, consistent with client’s instructions.
•
Agents are not attorneys
Agents should advise clients to seek legal counsel from attorneys
regarding any questions about the legal status of an offer or contract.
•
•
•
•
•
•
Original March 2003 (Amended May 2007 & June 2014)
16
Page 1 of 4
Core Course for Brokers and Associate Brokers - I
Selected Laws/Rules
Chapter 410 Sections 14-18
14.
Licensee's Duty to Obtain and Provide Disclosure Information on Private Water Supply,
Heating, Waste Disposal System and Known Hazardous Materials
1.
Listing Licensee
Alistinglicenseeshallberesponsibleforobtaininginformationnecessarytomake
disclosures,assetforthinSections15to18ofthischapter,tobuyersandshallmakea
reasonableefforttoassurethattheinformationisconveyedto asellinglicensee.
2.
Selling Licensee
Asellinglicenseeshallberesponsibleforobtainingfromthelistinglicenseethe
informationnecessaryformakingdisclosures,assetforthinSections15to18ofthis
chapter,andforassuringthatthedisclosuresaremadetobuyers.
3.
Unlisted Property
Alicenseeshallberesponsibleforobtainingfromthesellerinarealestatebrokerage
transactionwherethepropertyisnotlistedwitharealestatebrokerageagency,the
informationnecessaryformakingdisclosures,assetforthinSections15to18ofthis
chapter,andforassuringthatthedisclosuresaremadetothebuyer.
15.
Private Water Supply Disclosure
Alicenseelistingasingle-familyresidentialproperty,amultifamilyproperty,aresidentiallotora
commercialpropertywitharesidentialcomponentservedbyaprivatewatersupply,anda
licenseeinsuchtransactionswhenthepropertyisnotlistedwitharealestatebrokerageagency,
shallaskthesellerforthefollowinginformation:
1.
Typeofsystem;
2.
Location;
3.
Malfunctions;
4.
Dateofinstallation;
5.
Dateofmostrecentwatertest;and
6.
Whetherornotthesellerhasexperiencedaproblemsuchasanunsatisfactorywatertest
orawatertestwithnotations.
Such informationandanyotherinformationpertinenttotheprivatewatersupplyshallbe
conveyed,inwriting,toabuyerpriortoorduringpreparationofanoffer.Thefactthat
MREC Core Course for Brokers and Associate Brokers – I
Selected Laws/Rules
Page1 of10
17
informationregardingtheprivatewatersupplyisnotavailableshallalsobeconveyed,inwriting,
whensuchisthecase.
16.
Heating Disclosure
Alicenseelistingasingle-familyresidentialproperty,amultifamilypropertyoracommercial
propertywitharesidentialcomponent,andalicenseeinsuchtransactionswhenthepropertyis
notlistedwitharealestatebrokerageagency,shallaskthesellerforthefollowinginformation
regardingtheheatingsystem(s)and/orsource(s):
1.
Type(s);
2.
Ageofsystem/source(s);
3.
Nameofcompanywhoservicessystem/source(s);
4.
Dateofmostrecentservicecall;
5.
Annualconsumptionpersystem/source(i.e.gallons,kilowatthours,cords);
6.
Malfunctionspersystem/sourcewithinthepast2years.
Suchinformationandanyotherinformationpertinenttotheheatingsystem(s)and/orsource(s)
shallbeconveyed,inwriting,toabuyerpriortoorduringthepreparationofanoffer.Thefact
thatinformationpertinenttotheheatingsystem(s)and/orsource(s)isnotavailableshallbe
conveyed,inwriting,whensuchisthecase.
17.
Waste Disposal System Disclosure
1.
Private Waste Disposal System
Alicenseelistingasingle-familyresidentialproperty,amultifamilyproperty,a
residentiallotoracommercialpropertywitharesidentialcomponentservedbyaprivate
wastedisposalsystem,andalicenseeinsuchtransactionswhenthepropertyisnotlisted
witharealestatebrokerageagency,shallaskthesellerforthefollowinginformation:
A.
Typeofsystem;
B.
Sizeoftank;
C.
Typeoftank;
D.
Locationoftank;
E.
Malfunctionsoftank;
F.
Dateofinstallationoftank;
G.
Locationofleachfield;
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H.
Malfunctionsofleachfield;
I.
Dateofinstallationofleachfield;
J.
Dateofmostrecentservicingofsystem;and
K.
Nameofthecontractorwhoservicesthesystem.
Suchinformationandanyotherinformationpertinenttothewastedisposalsystemshall
beconveyed,inwriting,toabuyerpriortoorduringpreparationofanoffer.Thefactthat
informationregardingthewastedisposalsystemisnotavailableshallalsobeconveyed,
inwriting,whensuchisthecase.
2.
Municipal or Quasi-Public Waste Disposal System
residentiallotoracommercialpropertywitharesidentialcomponentservedbya
municipalorquasi-publicwastedisposalsystem,andalicenseeinsuchtransactions
whenthepropertyisnotlistedwitharealestatebrokerageagency,shallaskthesellerif
thesellerhasexperiencedanysystemorlinemalfunction. Thisinformationshallbe
conveyed,inwriting,toabuyerpriortoorduringthepreparationofanoffer.
18.
Known Hazardous Materials Disclosure
1.
Duty to Keep Informed
Alicenseeshallkeepinformedofanyfederal,stateorlocallaws,rules,regulationsor
ordinancesconcerningknownhazardousmaterialsthatmayimpactnegativelyuponthe
healthandwellbeingofbuyersandsellers.
2.
Duty to Disclose
Alistinglicensee,andalicenseeintransactionswhenthepropertyisnotlistedwithareal
estatebrokerageagency,shalldisclose,inwriting,whetherthesellermakesany
representationsregardingcurrentorpreviouslyexistingknownhazardousmaterialsonor
intherealestate.Inaddition,thelicenseeshallgiveawrittenstatementtothebuyer
encouragingthebuyertoseekinformationfromprofessionalsregardinganyspecific
hazardousmaterialissueorconcern.Suchwrittenrepresentationandstatementshallbe
conveyedtoabuyerpriortoorduringthepreparationofanoffer.
3.
Request for Information from Seller
commercialpropertywitharesidentialcomponentandalicenseeinsuchtransactions
whenthepropertyisnotlistedwitharealestatebrokerageagency,shallasktheseller
whetherthesellerhasanyknowledgeofcurrentorpreviouslyexistingasbestos,radon,
leadbasedpaint,andundergroundstoragetanks.Suchinformationandanyother
informationpertinenttohazardousmaterialsshallbeconveyed,inwriting,toabuyer
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19
priortoorduringpreparationofanoffer.Thefactthatinformationregardinghazardous
materialsisnotavailableshallalsobeconveyed,in writing,whensuchisthecase.
32 MRSA §13067-A. DENIAL OR REFUSAL TO RENEW LICENSE; DISCIPLINARY
ACTION
InadditiontothegroundsenumeratedinTitle10,section8003,subsection5-A,paragraphA,the
commissionmaydenyalicense,refusetorenewalicenseorimposethedisciplinarysanctions
authorizedbyTitle10,section8003,subsection5-Afor:
1. Lack of trustworthiness. Lackoftrustworthinessandcompetencetotransactrealestatebrokerage
servicesinsuchmannerastosafeguardtheinterestsofthepublic;
2. Misconduct. Anyactorconduct,whetherofthesameordifferentcharacterthanspecifiedinthis
chapter,thatconstitutesordemonstratesbadfaith,incompetency,untrustworthinessordishonest,
fraudulentorimproperdealings;
3. Act that constitutes grounds for denial. Performingorattemptingtoperformanyactoractsfor
whichalicensemaylawfullybedeniedtoanyapplicant;
4. Substantial misrepresentation. Makinganysubstantialmisrepresentationbyomissionor
commission,butnotincludinginnocentmisrepresentation;
5. Failure to protect principal. Failingtoactinareasonablyprudentmannerinordertoprotectand
promotetheinterestsoftheprincipalwithabsolutefidelity;
6. Failure to avoid error, exaggeration or concealment. Failingtoactinareasonablyprudent
mannerinordertoavoiderror,exaggerationorconcealmentofpertinentinformation;
§13068. DECISIONS
1. Licensing. Afterhearing,thecommissionmayaffirm,modifyorreversethedirector'sdecisionto
denyanexamination,licenseorrenewallicenseor,initsdiscretion,fileacomplaintintheDistrict
CourtpursuanttoTitle4,chapter5andTitle5,section10051todeterminewhetheralicensemaybe
denied.
2. Violation of chapter. If, afterhearing,thecommissionfindsthataviolationofthischapterhas
occurred,it
may:
A.Reprimandthepersonorentity;
B.Requirethepersonorentitytocomplywithsuchtermsandconditionsasitdeterminesnecessary
tocorrectthebasisfortheviolationorpreventfurtherviolationsbyissuingaceaseanddesistorder.
Violationofaceaseanddesistordershallconstituteaviolationofthischapter;
C.Assesstheviolatorafineofnomorethan$2,000aviolation;
D.Suspendorrevokeany licenseissuedunderthischapter;or
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E.ReportitsfindingsandrecommendationstotheAttorneyGeneralorthedistrictattorney
recommendingprosecution.
3. Appeals.
NotwithstandingtheprovisionsofTitle10,section8003,subsection5-A,revocationsorderedbythe
commissionaresubjecttojudicialreviewexclusivelyintheSuperiorCourtinaccordancewithTitle
5,chapter375,subchapter7.
32 MRSA §13272. SCOPE OF AGENCY
Arealestatebrokerageagencythatprovidesservicesthroughabrokerageagreementforaclientisbound
bythedutiesofloyalty,obedience,disclosure,confidentiality,reasonablecare,diligenceandaccounting
assetforthinthischapter.Sucharealestatebrokerageagencymaybeaselleragent,abuyeragent,a
subagentoradiscloseddualagent.
32 MRSA §13273. SELLER AGENT
1. Duty to seller. Aselleragent:
A.Shallperformthetermsofthebrokerageagreementmadewiththeseller;
B. Shallpromotetheinterestsofthesellerbyexercisingagencydutiesassetforthinsection13272
including:
(1)Seekingasaleatthepriceandtermsstatedinthebrokerageagreementoratapriceandterms
acceptabletothesellerexceptthattheselleragentisnotobligatedtoseekadditionaloffersto
purchasethepropertywhilethepropertyissubjecttoacontractofsaleunlessthebrokerage
agreementsoprovides;
(2)Presentinginatimelymannerallofferstoandfromtheseller,evenwhenthe propertyis
subjecttoacontractofsale;
(3)Disclosingtothesellermaterialfactsofwhichtheselleragenthasactualknowledgeorif
actinginareasonablemannershouldhaveknownconcerningthetransaction,exceptasdirected
insection13280;
(4)Advisingthesellertoobtainexpertadviceonmaterialmattersthatarebeyondtheexpertise
oftheselleragent;and
(5)Accountinginatimelymannerforallmoneyandpropertyreceivedinwhichthesellerhasor
mayhaveaninterest;
C.Shallexercisereasonableskillandcare;
D.Shallcomplywithallrequirementsofthelawsgoverningrealestatecommissionbrokerage
licensesandanyrulesadoptedbythecommission;
E.Shallcomplywithanyapplicablefederal,stateorlocallaws,rules,regulationsorordinances
relatedtorealestatebrokerageincludingfairhousingandcivilrightslawsorregulations;
F.Hasanobligationtopreserveconfidentialinformationprovidedbythesellerduringthecourseof
therelationshipthatmighthaveanegativeimpactontheseller'srealestateactivityunless:
(1)Thesellertowhomtheinformationpertainsgrantsconsenttodisclosetheinformation;
(2)Disclosureoftheinformationisrequiredbylaw;
(3)Theinformationismadepublicorbecomespublicbythewordsorconductofthesellerto
whomtheinformationpertainsorfromasourceotherthantheselleragent;or
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21
(4)Disclosureisnecessarytodefendtheselleragentagainstanaccusationofwrongfulconduct
inajudicialproceedingbeforethecommissionorbeforeaprofessionalcommittee;and
G.Mustbeabletopromotealternativepropertiesnotownedbythesellertoprospectivebuyersas
wellaslistcompetingpropertiesforsalewithoutbreachinganydutytotheclient.
2. Duty to buyer. Thedutyofaselleragenttoabuyerisgovernedbythefollowing.
A.Aselleragentshalltreatallprospectivebuyershonestlyandmaynotknowinglygivefalse
informationandshalldiscloseinatimelymannertoaprospectivebuyerallmaterialdefects
pertainingtothephysicalconditionofthepropertyofwhichtheselleragentknewor,actingina
reasonablemanner,shouldhaveknown.Aselleragentisnotliabletoabuyerforprovidingfalse
informationtothebuyerifthefalseinformationwasprovidedtotheselleragentbytheselleragent's
clientandtheselleragentdidnotknowor,actinginareasonablemanner,shouldnothaveknown
thattheinformationwasfalse.Aselleragentisnotobligatedtodiscoverlatentdefectsinthe
property.
B.Nothinginthissubchapterprecludestheobligationofabuyertoinspectthephysicalconditionof
theproperty.Acauseofactionmaynotariseonbehalfofanypersonagainstaselleragentfor
revealinginformationincompliancewiththissubchapter.
C. Aselleragentmayprovideassistancetothebuyerbyperformingministerialactssuchas
preparingoffersandconveyingthoseofferstothesellerandprovidinginformationandassistance
concerningprofessionalservicesnotrelatedtorealestatebrokerageservices.Performingministerial
actsforthebuyermaynotbeconstruedasviolatingtheselleragent'sagreementwiththeselleror
formingabrokerageagreementwiththebuyer.Performingministerialactsforthebuyerdoesnot
maketheselleragent atransactionbrokerforthebuyer.
32 MRSA §13274. BUYER AGENT
1. Duty to buyer. Abuyeragent:
A.Shallperformthetermsofthebrokerageagreementmadewiththebuyer;
B.Shallpromotetheinterestsofthebuyerbyexercisingagencydutiesassetforthinsection13272
including:
(1)Seekingapropertyatapriceandtermsspecifiedbythebuyerexceptthatthebuyeragentis
notobligatedtoseekotherpropertiesforthebuyerwhilethebuyerisapartytoacontractto
purchasethatpropertyunless itisprovidedbythebrokerageagreement;
(2)Presentinginatimelymannerallofferstoandfromthebuyer;
(3)Disclosingtothebuyermaterialfactsofwhichthebuyeragenthasactualknowledgeor,if
actinginareasonablemanner,shouldhaveknown concerningthetransaction,exceptasdirected
insection13280.Nothinginthissubchapterlimitsanyobligationofabuyertoinspectthe
physicalconditionoftheproperty;
(4)Advisingthebuyertoobtainexpertadviceonmaterialmattersthatarebeyondtheexpertise
ofthebuyeragent;and
(5)Accountinginatimelymannerforallmoneyandpropertyreceivedinwhichthebuyerhasor
mayhaveaninterest; [2005, c. 378, §14 (AMD);
C.Shallexercisereasonableskillandcare,exceptthatabuyeragentisnotobligatedtodiscover
latentdefectsintheproperty; [2005, c. 378, §14 (AMD);
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D.Shallcomplywithallrequirementsofthelawsgoverningrealestatecommissionbrokerage
licensesandanyrulesadoptedbythecommission;
E.Shallcomplywithanyapplicablefederal,stateorlocallaws,rules,regulationsorordinances
relatedtorealestatebrokerageincludingfairhousingandcivilrightslawsorregulations;
F.Hasanobligationtopreserveconfidentialinformationprovidedbythebuyer duringthecourseof
therelationshipthatmighthaveanegativeimpactonthebuyer'srealestateactivityunless:
(1)Thebuyertowhomtheinformationpertainsgrantsconsenttodisclosetheinformation;
(2)Disclosureoftheinformationisrequiredby law;
(3)Theinformationismadepublicorbecomespublicbythewordsorconductofthebuyerto
whomtheinformationpertainsorfromasourceotherthanthebuyeragent;or
(4)Disclosureisnecessarytodefendthebuyeragentagainstanactionofwrongfulconductina
judicialproceedingbeforethecommissionorbeforeaprofessionalcommittee;and
G.Mustbeabletopromoteotherpropertiesinwhichthebuyerisinterestedtootherbuyerswho
mightalsobeclientsofthebuyeragentwithoutbreaching anydutyorobligation.
2. Duty to seller. Thedutyofabuyeragenttoasellerisgovernedbythefollowing.
A.Abuyeragentshalltreatallprospectivesellershonestlyandmaynotknowinglygivethemfalse
informationincludingmaterialfactsabout thebuyer'sfinancialabilitytoperformthetermsofthe
transaction.
B.Abuyeragentisnotliabletoasellerforprovidingfalseinformationtothesellerifthefalse
informationwasprovidedtothebuyeragentbythebuyeragent'sclientandthebuyeragentdidnot
knowor,actinginareasonablemanner,shouldnothaveknownthattheinformationwasfalse.A
causeofactionmaynotariseonbehalfofanypersonagainstabuyeragentforrevealinginformation
incompliancewiththissubchapter.
C. Abuyeragentmayprovideassistancetothesellerbyperformingministerialactssuchaspreparing
andconveyingofferstothebuyerandprovidinginformationandassistanceconcerningprofessional
servicesnotrelatedtorealestatebrokerageservices.Performingministerialactsforthesellermay
notbeconstruedasviolatingthebuyeragent'sagreementwiththebuyerorformingabrokerage
agreementwiththeseller.Performingministerialactsforthesellerdoesnotmakethebuyeragenta
transaction brokerfortheseller.
32 MRSA §13283. TRANSACTION BROKER
1. Not an agent. Atransactionbrokerdoesnotrepresentanypartyasaclienttoarealestate
transactionandisnotboundbythedutiessetforthinsection13272.
2. Responsibilities. A transactionbrokershall:
A.Accountinatimelymannerforallmoneyandpropertyreceived;
B.Discloseinatimelymannertoabuyertoatransactionallmaterialdefectspertainingtothe
physicalconditionofthepropertyofwhichthetransactionbrokerhasactualnoticeorknowledge;
C.Complywithallrequirementsofthelawsgoverningrealestatecommissionbrokeragelicenses
andanyrulesadoptedbythecommission; [2005, c. 378, §23 (NEW);
D.Complywithanyapplicablefederal,stateorlocallaws,rules,regulationsorordinancesrelatedto
realestatebrokerage,includingfairhousingandcivilrightslawsorregulations;
E.Treatallpartieshonestlyandmaynotknowinglygivefalseinformation;and
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23
F.Performsuchministerialactsasmaybe agreeduponbetweenthetransactionbrokerandoneor
morepartiestoarealestatetransaction.
Atransactionbrokerisnotliableforprovidingfalseinformationifthefalseinformationwasprovidedto
thetransactionbrokerandthetransactionbroker didnotknowthattheinformationwasfalse.A
transactionbrokerisnotobligatedtodiscoverlatentdefectsintheproperty.Acauseofactiondoesnot
ariseonbehalfofanypersonagainstatransactionbrokerwhorevealsinformationormakesdisclosures
permittedorrequiredbythissubchapter.
3. Prohibited acts. Atransactionbrokermaynot:
A.Conductaninspection,investigationoranalysisofapropertyforthebenefitofanyparty;
B.Verifytheaccuracyorcompletenessoforalorwrittenstatementsmadebythesellerorbuyeror
any3rdparty;or
C.Promotetheinterestsofeitherpartytoatransactionexceptasrequiredtocomplywiththis
section.
4. No vicarious liability. Apartytoarealestatetransactionisnotvicariouslyliablefortheactsor
omissionsofatransactionbroker.
5. Actual knowledge; information. Inasituationinwhichoneaffiliatedlicenseeactingasan
appointedagentofarealestatebrokerageagencyrepresentsapartytoarealestatetransactionasthereal
estatebrokerageagency'sclientandanotheraffiliatedlicenseeofthesamerealestatebrokerageagencyis
actingasatransactionbrokerforanotherpartytothetransaction,therealestatebrokerageagencyandits
affiliatedlicenseesareconsideredtopossessonlyactualknowledgeandinformation.Thereisno
imputationofknowledgeorinformationbyoperationoflawamongorbetweentheparties,therealestate
brokerageagencyoritsaffiliatedlicensees.
33 MRSA §173-A. INFORMATION PROVIDED
BeginningJanuary1,2004,unlessthetransactionisexemptundersection172,thesellerofresidential
realpropertyshallprovidetothepurchaserinformationdevelopedbytheDirectoroftheBureauofHealth
withintheDepartmentofHealthandHumanServicesregardingwhathomeownersshouldknowabout
arsenicinprivatewatersuppliesandarsenicintreatedwood.Copiesofthisinformationmustbeprovided
tosellersatcost.
14 MRSA §6030-D. RADON TESTING
1. Testing. ByMarch1,2014,and,unlessamitigationsystemhasbeeninstalledinthatresidential
building,every10yearsthereafterwhenrequestedbyatenant,alandlordorotherpersonwhoonbehalf
ofalandlordentersintoaleaseortenancyatwillagreementforaresidentialbuildingshall havetheairof
theresidentialbuildingtestedforthepresenceofradon.Foraresidentialbuildingconstructedorthat
beginsoperationafterMarch1,2014,alandlordorotherpersonactingonbehalfofalandlordshallhave
theairoftheresidential buildingtestedforthepresenceofradonwithin12monthsoftheoccupancyof
thebuildingbyatenant.Exceptasprovidedinsubsection5,atestrequiredtobeperformedunderthis
sectionmustbeconductedbyapersonregisteredwiththeDepartmentof HealthandHumanServices
pursuanttoTitle22,chapter165.
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1-A. Short-term rentals. Asusedinthissection,"residentialbuilding"doesnotincludeabuilding
usedexclusivelyforrentalundershort-termleasesof100daysorlesswherenoleaserenewalor
extensioncanoccur.
2. Notification. Within30daysofreceivingresultsofatestwithrespecttoexistingtenantsor
beforeatenantentersintoaleaseortenancyatwillagreementorpaysadeposittorentorleasea
property,alandlordorotherpersonwhoonbehalfofalandlordentersintoaleaseortenancyatwill
agreementforaresidentialbuildingshallprovidewrittennotice,asprescribedbytheDepartmentof
HealthandHumanServices,toatenantregardingthepresenceofradoninthebuilding,includingthedate
andresultsofthemostrecenttestconductedundersubsection1,5or6,whethermitigationhasbeen
performedtoreducethelevelofradon,noticethatthetenanthastherighttoconductatestandtherisk
associatedwith radon.Uponrequestbyaprospectivetenant,alandlordorotherpersonactingonbehalf
ofalandlordshallprovideoralnoticeregardingthepresenceofradoninaresidentialbuildingasrequired
bythissubsection.TheDepartmentofHealthandHumanServicesshallprepareastandarddisclosure
statementformforalandlordorotherpersonwhoonbehalfofalandlordentersintoaleaseortenancyat
willagreementforrealpropertytousetodisclosetoatenantinformationconcerningradon.Theform
mustincludeanacknowledgmentthatthetenanthasreceivedthedisclosurestatementrequiredbythis
subsection.Thedepartmentshallpostandmaintaintheformsrequiredbythissubsectiononitspublicly
accessiblewebsiteinaformatthatiseasilydownloaded.
4. Penalty; breach of implied warranty. Apersonwhoviolatesthissectioncommitsacivil
violationforwhichafineofnotmorethan$250perviolationmaybeassessed.Thefailureofalandlord
orotherpersonwhoonbehalfofalandlordenters intoaleaseortenancyatwillagreementfora
residentialbuildingtoprovidethenoticerequiredundersubsection2orthefalsificationofatestortest
resultsbythelandlordorotherpersonisabreachoftheimpliedwarrantyoffitnessforhumanhabitation
inaccordancewithsection6021.
5. Testing by landlords. Alandlordorotherpersonactingonbehalfofalandlordmayconducta
testrequiredtobeperformedunderthissectiononaresidentialbuildingthat,ataminimum,doesnot
includean elevatorshaft,anunsealedutilitychaseoropenpathway,aforcedhotairorcentralairsystem
orprivatewellwaterunlessthewaterhasbeentestedforradonbyapersonregisteredunderTitle22,
chapter165andtheresultsshowaradonlevelacceptabletotheDepartmentofHealthandHuman
Services,oronabuildingotherwisedefinedinrulesadoptedbytheDepartmentofHealthandHuman
Services.Atestortestingequipmentusedaspermittedunderthissubsectionmustconformtoany
protocolsidentifiedinrulesadoptedbytheDepartmentofHealthandHumanServices.
6. Testing by tenants; disputed test results. Atenantmayconductatestforthepresenceofradon
inthetenant'sdwellingunitinaresidentialbuildinginconformitywithrulesadoptedbytheDepartment
ofHealthandHumanServicesorhaveatestconductedbyapersonregisteredwiththeDepartmentof
HealthandHumanServicespursuanttoTitle22,chapter165.Afterreceivingnoticeofaradontestfrom
atenantindicatingthepresenceofradonatorinexcessof4.0picocuriesperliterofair,eitherthe
landlordshalldisclosethoseresultsasrequiredbysubsection2orthelandlordorotherpersonactingon
behalfofthelandlordshallhaveatestconductedbyapersonregisteredwiththeDepartmentofHealth
andHumanServicespursuanttoTitle22,chapter165andshalldisclosetheresultsofthattesttothe
tenantasrequiredbysubsection2.
7. Reporting of test results. AlandlordorapersonregisteredwiththeDepartmentofHealthand
HumanServicespursuanttoTitle22,chapter165whohasconductedatestofaresidentialbuildingas
requiredbythissectionoracceptedtheresultsofatenant-initiatedtestassetforthinsubsection6shall
reporttheresultsofthetesttotheDepartmentofHealthandHumanServiceswithin30daysofreceiptof
theresultsinaformandmannerrequiredbythedepartment.
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25
8. Termination of lease or tenancy at will. Ifatestofaresidentialbuildingunderthissection
revealsalevelofradonof4.0picocuriesperliterofairorabove,theneitherthelandlordorthetenant
mayterminatetheleaseortenancyatwillwithaminimumof30days’notice.Exceptasprovidedin
section6033,alandlordmaynotretainasecuritydepositor aportionofasecuritydepositforaleaseor
tenancyatwillterminatedasaresultofaradontestinaccordancewiththissubsection.
30-A MRSA §4216. TRANSFERS OF SHORELAND PROPERTY
1. Shoreland areas. Anypersontransferringpropertyonwhichasubsurfacewastewaterdisposal
systemislocatedwithinashorelandarea,asdescribedinTitle38,section435,shallprovidethe
transfereewithawrittenstatementbythetransferorastowhetherthesystem hasmalfunctionedduring
the180daysprecedingthedateoftransfer.
2. Coastal shoreland areas. Inadditiontotherequirementsofsubsection1,thefollowingprovisions
applytothetransferofpropertywithinacoastalshorelandareaasdescribedinTitle38,section435.
A.Apersonpurchasingpropertyonwhichasubsurfacewastewaterdisposalsystemislocatedwithina
coastalshorelandarea,asdescribedinTitle38,section435,shallpriortopurchasehavethesystem
inspectedbyapersoncertifiedbythedepartmentexceptthatifitisimpossibleduetoweatherconditions
toperformaninspectionofthesystempriortothepurchase,theinspectionmustbeperformedwithin9
monthsaftertransferoftheproperty.Iftheinspectionfindsthatthesystemismalfunctioning,thesystem
mustberepairedorreplacedwithinoneyearaftertransferoftheproperty.Forpurposesofthisparagraph
only,indicationsofamalfunctioningsystemarelimitedtotheindicationsspecifiedinthedefinitionof
"malfunctioningsystem"inthedepartment'srulesregulatingsubsurfacewastewaterdisposalthatarein
effectontheeffectivedateofthisparagraph.
B.Asubsurfacewastewaterdisposalsystemthathasbeeninstalledpursuanttosection4211andrules
adoptedunderTitle22,section42within3yearspriortotheclosingdateofthetransferofpropertyisnot
subjecttotheinspectionrequirementsofparagraphA.
C.Iftheselleroftheshorelandpropertyhasawritteninspectionreportforaninspectionofthesubsurface
wastewaterdisposalsystemthatwasperformedwithin3yearspriortothedateofthetransferofproperty
byapersoncertifiedbythedepartment,thenthesellershallprovidetheinspectionresultstothe
purchaser,andthepurchaserisnotrequiredtohavethesysteminspectedpursuanttoparagraphA.
D.TheinspectiondescribedinparagraphAisnotrequiredifthepurchasercertifiestothelocalplumbing
inspectorthatthepurchaserwillreplacethesubsurfacewastewaterdisposalsystemwithinoneyearofthe
transferofproperty.
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~ Final Assessment Questions ~
Select the best answer for each question and mark your answers on the Answer Sheet (last page of book)
or complete your assessment online at www.McKissock.com/MERE.
Please Note: There is a 85% passing score for each course. Online questions may differ from the questions in this book.
1.
The property disclosure is the real estate document where
home sellers disclose _____ material defects known to the
seller which may materially affect the value of the property.
a. Exterior
b. Interior
c. All
d. None of the answers shown are correct
2.
If a material defect is discovered or occurs while a property is
under contract, the licensee must notify either the seller or the
buyer, ______________________?
a. Within 2 days
b. Within 7 days
c. In writing
d. By telephone
3.
If the selling licensee is given an incomplete or partially
complete property disclosure form, it is the _______licensee’s
responsibility to obtain the property information required.
a. Selling
b. Listing
c. Both answers shown are correct
d. None of the answer shown is correct.
4.
It is recommended that a listing licensee check the information
disclosed by the seller on the disclosure how often?
a. Just when the listing is taken.
b. More than once during the listing period.
c. Only if the seller lets the licensee knows something has
changed.
d. All of the answers shown are correct.
5.
A property disclosure is not a _______________ of the
condition of the property.
a. contract
b. warranty
c. requirement
d. legally binding assertion
6.
A real estate licensee should have a solid understanding as
to how a real estate negotiation process unfolds because,
as a licensee you must be able to convey MREC’s guiding
principles to those ________ you represent as a licensee.
a. Customers
b. Brokers
c. Clients
d. Lawyers
7.
The seller is not obligated to sell the property even if a buyer
makes a ___________________.
a. counter-offer
b. full price, cash offer
c. an offer above the asking price
d. None of the answer shown are correct
8.
Can a customer ask the listing agent (seller’s agent) if other
offers have been submitted to the seller?
a. A customer can ask, but the listing agent is not required to
answer this question.
b. A customer is not allowed to ask the agent because they are
not represented by any licensee.
c. A customer should ask because the listing agent is required to
answer this question.
d. No, a customer must act alone.
9.
When entering into a buyer agent agreement as a licensee, you
should do which of the following?
a. Discuss buyer’s motivation for purchasing.
b. Discuss current market conditions, i.e. season, types of financing,
average length of time for properties on the market.
c. Review Offers/Counter Offers – Guidelines (June 2014).
d. All answers shown are correct.
10. There is no requirement that the ______ be informed by the
________ or listing agent of the existence of other offers.
a. Seller/buyer
b. Buyer/seller
c. Listing agent/buyer
d. Buyer/listing agent
27
Maine Core Course for Designated Brokers - I
(Mandatory) - 3 CE Credit Hours
Approval #: CC233C714IT
Maine law requires that real estate brokerage services that are to be provided on behalf of a real estate
agency be under the direct supervision of a designated broker. The owner or a duly authorized agency
official must hold a Maine real estate broker license and be designated by the agency to act for it in the
conduct of real estate brokerage. (32 MRSA § 13173)
The Maine Core Course for Designated Brokers provides a comprehensive overview of the supervisory
and operational responsibilities and duties of a designated broker with respect to the management, review
and supervision of all licensed and unlicensed employees within a real estate agency in the state of Maine.
The Core Course also examines how a designated broker must operate a trust account and maintain
appropriate records for their trust account(s).
Finally, the Maine Core Course demonstrates that the designated broker must also maintain complete and accurate records
of all real estate brokerage activity conducted on behalf of the real estate agency. This record-keeping responsibility is quite
comprehensive and includes the financial aspects of the brokerage firm as well as the maintenance required to appropriately
manage and control the licenses of those licensees for which you are responsible.
Chapters:
•Chapter One: Responsibilities and Duties
•Chapter Two: Operational Requirements
•Upon completion of this course, the participant will be able to:
•Identify the designated broker’s supervisory requirements for licensed brokers, sales agents and unlicensed employees.
•Understand and apply the supervisory responsibilities of a designated agent with regards to affiliated licensees as well as the termination of licensees working for the real estate brokerage.
•Understand how to oversee the proper usage of brokerage agreements to establish the agent-client relationship.
•Identify and apply the requirements a designated broker must meet with reference to the appointment of agents.
•How to maintain trust accounts and supporting records in a manner prescribed by commission rule.
•Identify the operational requirements for a designated broker to manage and oversee the overall operations of the real estate brokerage.
•Maintain Complete and Accurate Records of All Real Estate Brokerage Activity Conducted on Behalf of the Real Estate Agency.
“Concise, informative and relevant -- great value too!”
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~ Judith
Chapter One
Responsibilities and
Duties
Overview
Chapter One provides a comprehensive overview of the supervisory
responsibilities and duties of a designated broker with respect to the
management, review and supervision of all licensed and unlicensed
employees within a real estate agency in the state of Maine.
To access a comprehensive list of relevant selected sections of Title 10
that are referenced throughout this course, please see Page 55.
Maine state law (Maine Revised Statutes, Title 32, Chapter 114: Real
Estate Brokerage License Act) requires that real estate brokerage
services that are to be provided on behalf of a real estate agency be
under the direct supervision of a designated broker. “The owner or a duly
authorized agency official shall hold a Maine real estate broker license
and be designated by the agency to act for it in the conduct of real estate
brokerage.” (32 MRSA § 13173)
In addition, according to statute, “It is unlawful for any person or entity
to engage in real estate brokerage without a current real estate brokerage
license issued under this chapter or a license authorizing the person
to engage in brokerage activity on behalf of a brokerage agency.” (32
MRSA § 13003)
All real estate brokerage services performed by a real estate broker,
associate broker or sales agent are on behalf of the agency. (32 MRSA §§
13198, 13199 & 13200)
Learning Objectives
1.
2.
3.
4.
Identify the designated broker’s supervisory requirements for
licensed brokers, sales agents and unlicensed employees.
Understand and apply the supervisory responsibilities of a
designated agent with regards to current affiliated licensees as
well as the termination of all licensees working for the real estate
brokerage.
Understand how to oversee the proper use of brokerage agreements
to establish the agent-client relationship.
Identify and apply the requirements a designated broker must meet
with reference to appointing agents.
Introductory Quiz #1
Before we begin, consider the next few questions. These questions will
provide some basic insight into your current working knowledge of the
supervisory requirements of a designated broker.
•
T or F — A designated broker’s supervisory duties vary
depending on the number of affiliated licensees.
False – The duties are the same regardless of the number of
licensees. Implementation of those duties may be different; the need
for delegation may increase as the number of affiliated licensees
increases. Chapter 400 Section 1
•
T or F — Once an affiliated licensee is licensed at the broker
level, the designated broker is no longer required to supervise
the licensee.
False – A designated broker is responsible for supervising all
employees and independent contractors commensurate with their
level of qualification and experience. 32 MRSA § 13179
•
T or F — In 2013, the majority of closed complaints filed with the
Maine Real Estate Commission were filed against “experienced”
licensees.
True – The statistics speak for themselves. Comparatively speaking,
the most complaints were registered against the broker. Shockingly,
59% of the registered complaints were submitted against licensees
who have held their license for at least 11 years!
License Type
Sales Agent
3%
Associate Broker
23%
Broker
44%
Designated Broker
29%
Number of Years Licensed
0-5 years
9%
6-10 years
19%
11-20 years
30%
21-30 years
29%
> 30 years
12%
Designated Broker’s supervisory
Responsibilities
The designated broker shall supervise the activities of affiliated licensees,
the activities of unlicensed employees affiliated with the real estate
brokerage agency and the operation of the real estate brokerage agency.
(Note: the operational responsibilities of a designated broker will be
covered in Chapter Two.)
The designated broker’s supervision includes, at a minimum, the
establishment of policies and procedures that enable the designated
broker to review, manage and oversee the employees and independent
contractors that work for the real estate brokerage they manage.
(Reference: Chapter 400, Section 1)
Ultimately the designated broker is responsible for any and all violations
by any licensed or unlicensed person acting on their agency’s behalf if:
A. The designated broker had prior knowledge and did not take
reasonable action to prevent the violation;
B. The designated broker permitted or authorized a person to engage
in activity for which that person was not properly licensed; or
C. The designated broker failed to exercise a reasonable degree
29
of supervision over employees and independent contractors
commensurate with their qualifications and experience. (Reference:
32 MRSA § 13067-A(7))
According to statute, “The designated broker shall exercise a reasonable
level of supervision commensurate with the level of qualification and
experience of agency employees and independent contractors supervised, in
order to protect and promote the interests of its clients with absolute fidelity.
The designated broker shall not permit or authorize any person to engage
in any activity for which they are not properly licensed.” (Reference: 32
MRSA § 13179)
In addition, according to statute, “An agency, through its designated broker,
may perform all of the brokerage services contemplated by this chapter
and may employ or retain others to perform brokerage services on behalf
of the agency. The designated broker may also delegate any of his duties
and authority provided for under this chapter, but when doing so shall not
be relieved of any responsibility imposed by this chapter.” (Reference: 32
MRSA § 13183)
Supervisory Requirements
The designated broker shall exercise a reasonable level of supervision in
line with the qualification levels and experience of their agency employees
as well as the independent contractors being supervised. This is to ensure
that the agency’s clients are protected as the real estate brokerage agency
promotes the best interests of its clients.
The designated broker is responsible for supervision of all a) licensed b)
unlicensed employees and c) independent contractors affiliated with the
real estate brokerage.
A Statutory Independent Contractor is defined as follows:
1.
Is a licensed real estate sales agent, associate broker, broker
2. Receives compensation directly related to his/her sales or output,
regardless of time spend, and
3. Has a written contact with the real estate agency stating that the
worker will not be treated as an employee for federal tax purposes.
(Reference: 26 United States Code § 3508: “Treatment of real estate agents
and direct sellers”)
It bears repeating: The designated broker’s responsibility to supervise employees and independent contractors is THE SAME.
The designated broker is also responsible for prohibiting any person to
engage in any activity for which they are not properly licensed. (Reference:
32 MRSA § 13179 and Chapter 400 Section 1)
Within a busy real estate agency, there are many potential circumstances
where an unlicensed individual may choose to engage in a practice (or
action) for which they are not licensed.
For example, an unlicensed assistant in the real estate agency answers a
telephone call (which is part of his/her office duties) from a person inquiring
about a listing, and instead of taking a message for an affiliated licensee, the
unlicensed assistant begins to question the caller about what type of home they
are looking for – even going as far as asking the caller for their price range.
This unlicensed assistant would clearly be attempting to assist an interested
caller, however, this unlicensed assistant has actually begun the sales process
and is engaging in an area for which they are not properly licensed.
30
The consequence and liability of this unlicensed employee’s choices rests
squarely on the designated broker’s shoulders.
In addition, although it may seem obvious, it should be noted that a
designated broker may not permit an affiliated licensee to continue to
practice if their license has expired.
AS A DESIGNATED BROKER IT WOULD BE
PRUDENT TO CONSIDER THE FOLLOWING
SCENARIOS:
•
Are there office policies in place in your
agency that allows you to know when
affiliated licensees’ licenses will expire or will
need a renewal?
•
Are there office policies in place in your
agency that ensures that those licensees
transferring to your real estate agency are
properly licensed to conduct brokerage
services?
THE BOTTOM LINE: The designated broker
is responsible for the actions of everyone in
the brokerage, licensed or unlicensed. It is the
designated broker’s responsibility to supervise
employees and independent contractors.
Termination of an Agent’s Affiliation with Real
Estate Agency
According to statute, when a broker, associate broker or real estate sales
agent is discharged or terminates their employment with a brokerage
agency, the designated broker must immediately deliver the license of the
broker, associate broker or real estate sales agent to the Maine Real Estate
Commission. The designated broker shall also, at the same time, send
written communication to the last known address advising the terminated
licensee that his license has been mailed to the Maine Real Estate
Commission. A copy of this communication with the terminated affiliated
licensee shall accompany the license when delivered to the Maine Real
Estate Commission. (Reference: 32 MRSA § 13180)
In addition, upon receipt of the notice of termination by the licensee, the
terminated licensee’s license shall become void and may only be reinstated
or placed on inactive status after proper application and payment of the
prescribed fee. It is unlawful for any broker, associate broker or real estate
sales agent to perform any brokerage services without first receiving a new
active license. (Reference: 32 MRSA § 13180)
It is imperative to properly follow the protocol required to terminate
an affiliated licensee because in doing so, the designated broker can be
assured that they are no longer responsible for the licensee’s conduct.
Supervisory Responsibilities of a Designated
Broker with Reference to Brokerage
Agreement Concerns
As a designated broker it is imperative that you are aware that you are
ultimately responsible for ensuring that those you supervise within your
real estate brokerage agency are using brokerage agreements properly to
establish the agent-client relationship pursuant to statute.
According to statute, “A real estate brokerage agency that provides services
through a brokerage agreement for a client is bound by the duties of loyalty,
obedience, disclosure, confidentiality, reasonable care, diligence and
accounting as set forth in this chapter. Such a real estate brokerage agency
may be a seller agent, a buyer agent, a subagent or a disclosed dual agent.”
(Reference: 32 MRSA § 13272)
The following are abbreviated definitions of each of type of acceptable
agency relationship in Maine:
Seller Agent
A seller agent shall perform the terms of the brokerage agreement made
with the seller and shall promote the interests of the seller. The seller agent
shall exercise reasonable skill and care and comply with all requirements of
the law governing real estate commission brokerage licenses and also comply with applicable federal, state or local laws and rules. The seller agent
must preserve confidential information provided by the seller, except under
specific situations. (For exceptions please refer to 32 MRSA § 13273.)
In addition, the seller agent must treat all prospective buyers honestly and
shall disclose all material defects pertaining to the physical condition of the
property (of which the seller agent knew, or should have known) in a timely
manner. A seller agent may provide assistance to the buyer by performing
ministerial acts such as preparing offers and conveying those offers to the
seller, providing such acts may not be construed as violating the seller
agent’s agreement with the seller or forming a brokerage agreement with
the buyer. (Reference: 32 MRSA § 13273)
According to 32 MRSA § 13275 (Disclosed dual agent):
“A real estate brokerage agency may act as a disclosed dual agent
only with the informed written consent of all parties. Consent is presumed to be informed if the party signs an agreement that discloses the
following:
A.
A description of the transactions in which the real estate brokerage
will serve as a disclosed dual agent;
B. A statement that, in serving as a disclosed dual agent, the real estate
brokerage agency represents 2 clients whose interests are adverse and
the agency duties are limited;
C. A statement that the disclosed dual agent may disclose any information
to one party that the disclosed dual agent gains from the other party if
that information is relevant to the transaction, except:
1. The willingness or ability of the seller to accept less than the
asking price;
2. The willingness or ability to pay more than has been offered;
3. Confidential negotiating strategy not disclosed in the sales offer
as terms of the sale; and
4. The motivation of the seller for selling and the motivation of the
buyer for buying.
D. A statement that the client may choose to consent or not consent to the disclosed dual agency; and
E. A statement that the consent of the client has been given voluntarily and that the agreement has been read and understood.”
Brokerage Agreements
As a reminder, as a designated broker it is imperative that you are aware
that you are also responsible for the brokerage agreements that apply to
all real estate transaction type (residential, land, commercial and industrial
transactions - it doesn’t matter).
A brokerage agreement must be in writing and provided in a timely manner
to buyers and sellers of residential real estate property. According to 32
MRSA § 13177-A (Brokerage agreements), the brokerage agreement must,
at a minimum, include the following:
Buyer Agent
A buyer agent shall perform the terms of the brokerage agreement made with
the buyer and shall promote the interests of the buyer. (32 MRSA 13274)
The buyer agent shall exercise reasonable skill and care and comply with all
requirements of the law governing real estate commission brokerage licenses
and also comply with applicable federal, state or local laws and rules. The
buyer agent must preserve confidential information provided by the buyer,
except under specific situations. (For these specific situations, please refer to
32 MRSA § 13274.)
In addition, the buyer agent must treat all prospective sellers honestly and
may not knowingly provide false or misleading information, including facts
which could affect the buyer’s ability to perform the terms of the transaction. As with a seller agent above, a buyer agent may perform ministerial
acts for a seller without being considered in violation of the agreement with
the buyer or forming a brokerage agreement with the seller. (Reference: 32
MRSA § 13274)
Disclosed Dual Agent
Items Required to be Included
in a Brokerage Agreement
Item Required
Reference
The signature of the client
to be charged
[2005, c. 378, §4 (NEW);
2005, c. 378, §29 (AFF).
The terms and conditions
of the brokerage services
to be provided
[2005, c. 378, §4 (NEW);
2005, c. 378, §29 (AFF).]
The method or amount of
compensation to be paid
[2011, c. 286, Pt. J, §2
(AMD).]
Disclosed dual agency is allowed in Maine, however it is important to note
that there are some key issues which must be addressed in writing before proceeding. All parties must provide informed written consent of the dual agency
and there are very specific disclosure requirements which must be met.
31
The date upon which the
agreement will expire; and
[2011, c. 286, Pt. J, §2
(AMD).]
A statement that the
agreement creates an
agency-client relationship
[2011, c. 286, Pt. J, §2
(NEW).]
Have you as the designated broker authorized affiliated licensees to
terminate the brokerage agreement without your approval?
As the designated broker have you considered the ‘Pros’ and ‘Cons’ of
allowing this authorization?
Quiz #2
Up next is another short quiz to help evaluate your current working
knowledge of a designated broker’s supervisory responsibilities.
As the designated broker you should be aware that the terms and duti es
delineated in a brokerage agreement may not be enforced against any
client who in good faith subsequently engages the services of another real
estate brokerage agency following the expiration date of the first brokerage
agreement.
•
False – The designated broker sets the policy for the agency; the
policy is for ALL employees and licensees affiliated with the real estate
agency. The policy should reflect how the business is run (e.g. staff
meetings and auto insurance requirements, etc.).
In addition, according to 32 MRSA § 13177-A (Brokerage agreements),
“Any brokerage agreement provision that extends a real estate brokerage
agency’s right to a fee following the expiration of the brokerage agreement
may not extend that right to a fee beyond 6 months.”
•
Brokerage Agreement Considerations
The following are a list of questions to consider as the designated broker
of a real estate brokerage agency. Your answers will begin to reveal to you
whether or not your current office policy has, or has not, addressed potential
risks and liabilities with reference to managing the use of brokerage
agreements.
Are brokerage agreements currently in use designed specifically for the
agency and do they meet company policy?
If they do not meet your company’s standards, have the brokerage
agreements been appropriately amended or has an addendum been
added to reflect the company policy/terms required?
Does company policy allow affiliated licensees to amend agreements
without designated broker approval (i.e. – commission rate, term of
agreement, brokerage services to be provided)?
As the designated broker, are you confident those you supervise can
modify these agreements?
Who is responsible for confirming that all required parties signed the
agreement?
Should your approval, as designated broker be mandatory?
Are all the terms that should be a part of the brokerage agreement in
writing?
T or F — A designated broker may not legally require an affiliated
licensee who is an independent contractor to comply with company
policies.
T or F — A team or group leader may assume the role of a designated
broker for the team.
False – There may be multiple levels of supervision but the designated
broker is ultimately responsible for the activities of all staff and
affiliated licensees. A designated broker may delegate authority to a socalled team or group leader. (32 MRSA §§ 13179 & 13183)
Managing the Advice Given to Clients by
Affiliated Licensees
As the designated broker, it is extremely important to be aware of the level
of advice given by the affiliated licensees because ultimately, the liability
of their actions rests on the designated broker’s shoulders.
Buyers often expect client-level service but remain hesitant to sign a
brokerage agreement that will “tie them down” to a licensee. Of course, it
is important to give a licensee time to build a relationship with a potential
buyer. However, the licensee must be very careful not to go beyond the
terms of the current agreement (e.g. agreements for day/weekend/week,
property-specific, etc.). As the relationship builds, the current agreement
must be revised, or, if necessary the licensee must enter into new agreement.
The objective of this real estate relationship building process is to legally
provide the service potential buyers/sellers request in a manner acceptable
to them, until a relationship is established and they begin to feel comfortable
making the decision to sign a brokerage agreement.
On a related note, it should be mentioned that affiliated licensees
CANNOT provide Opinions of Market Value for a Fee (Broker Price
opinion, CMA) without a written brokerage agreement. This is simply a
client-level service which requires a written brokerage agreement.
What policy is in place to ensure that there are no verbal terms, (e.g.
licensee to client - “If you are unhappy just let me know and I will tear
up the agreement”)?
What policy is in place to ensure that there are no verbal terms, (e.g.
licensee to client - “If you are unhappy just let me know and I will tear
up the agreement”)?
Does the brokerage agreement’s terms reflect the agreement for services
you have reached with the client?
32
CONSIDER THE FOLLOWING
•
•
Do you know if the affiliated licensees you
supervise are providing advice (and other
client-level services) without a written
brokerage agreement?
Have you considered alternative solutions
to this potentially risky area of a designated
broker’s duties?
Disseminating Information to Affiliated
Licensees
address other policies and remember, real estate agency policies apply to
all licensed and unlicensed affiliates. An affiliated licensee does not have
the ability to decide whether or not they choose to follow the policy; it is
required that they do. (Chapter 400 Section 1(4))
Are you – the Designated Broker - the Last to Know?
Affiliated licensees are required to keep designated brokers informed of
all activities conducted on behalf of the agency and notify the designated
broker of transactional events and potential risky situations that may impact
the designated broker’s supervisory duties. (Reference: Chapter 410:
Minimum Standards of Practice: Section 13)
The examples are numerous. For instance, an affiliated licensee receives a
call from a client who is demanding better service. Clearly, the designated
broker should be notified of the issue, but are there office policies in effect
(and properly communicated) to affiliated licensees as to how to handle
these scenarios?
When undermanaged or improperly managed, the formal and informal
sharing of information as the regular course of business in a real estate
brokerage is often the root cause of why information is mishandled. This
is quite problematic as this mishandled sharing of information can potentially
cause an undisclosed dual agency in the representation of clients.
TAKE
A
MOMENT
THE FOLLOWING
According to 32 MRSA § 13280(2) (Real Estate Commission rules, 2.
Handling of information):
“The rules must include, but are not limited to, the following: 2.
Handling of information. Procedures to be followed by a real estate
brokerage agency and its affiliated licensees to prevent the mishandling
of information and undisclosed dual agency in the representation
of clients. In adopting these rules, the commission shall consider
the formal and informal sharing of information within a real estate
brokerage agency, the arrangement of real estate brokerage agency
office space, the relationships of affiliated licensees within a real estate
brokerage agency who are representing clients with adverse interests
and means of avoiding client representation by an undisclosed dual
agent. The commission shall review the professional responsibility rules
and practices of the legal profession with regard to conflict of interest in
considering the adoption of rules under this subsection.”
AND
CONSIDER
•
Do those you supervise feel comfortable
approaching you to discuss a potential
problem, or are you the last to know?
•
And if you are the last to know, how does
this increase your potential liability as the
designated broker?
Managing a Sales Agent during the First 90
Days
The designated broker is responsible for adopting a written set of procedures
to be followed with regard to the formal and informal sharing of information
within their own office to help avoid potential conflicts of interest amongst
the agents within the same brokerage.
The designated broker must review and initial all real estate brokerage
documents and information prepared by a sales agent during the first 90 days
of a sales agent’s affiliation with the agency, not the first 90 days licensed.
(Chapter 400 Section 1(5))
The following is a list of considerations a designated broker faces with
regard to information sharing within a real estate brokerage agency.
This means that the designated broker must examine, as soon as possible,
for accuracy all ‘real estate brokerage’ documents used by an affiliated
licensee during the first 90 days of a sales agent’s affiliation with the agency.
This requirement has a dual purpose. First, it identifies errors that may be
occurring for a current transaction and perhaps as importantly, it serves as a
training exercise to prevent future issues from actually occurring for both the
new affiliated licensee as well as all affiliated licensees employed by the real
estate brokerage.
•
Does your company have system(s) in place to monitor compliance
with your real estate agency policies and Maine state law?
•
Does your company have system(s) in place to advise affiliated
licensees and unlicensed employees how to handle confidential
information? Do unlicensed employees have access to all agency files
- including those transactions currently under contract, CMAs, etc.?
What policies are in place to protect confidential information?
•
When and how are these policies updated? How are policy modifications
communicated to affiliated licensees?
It is quite important to note that your company’s real estate agency policy
manual is not limited to “agency relationship policy.” The manual should
At a bare minimum, the designated broker must review and initial the
following during an affiliated licensee’s first 90 days with their real estate
brokerage:
•
Brokerage agreements
•
Offers/counter offers
•
Purchase and sale contracts
•
Property data sheets
33
•
Disclosure forms (including Real Estate Brokerage Relationships
Form, Property Disclosures.)
•
Market analyses
•
Other relevant information
In the event that a new sales agent has no sales transactions during their first
90 days affiliated with your brokerage, the real estate agency policy should
advise (note: that this is not mandatory but considered good practice) that
this ‘review period’ shall be extended to include a careful review of the
relevant documents used by an affiliated licensee’s first few transactions
beyond this initial 90 day period.
Sales agents are required to complete the Documented Field Experience
Form as part of the “Associate Broker Course”. This form must be signed
by the Designated Broker or designee. The Documented Field Experience
Form (DFE) is quite comprehensive and includes relevant categories as
noted below:
1. Real Estate Office Orientation (Policy Manual, Independent
Contractor Agreement, Office equipment, forms, personnel and
policies)
2. Taking A Listing (Obtaining Property information, Developing the
Listing Packet, Prepare for Meeting the Seller, Meeting with the
Seller, Office Procedures for New Listing)
3. Working With A Buyer (Develop buyer presentation, Buyer
counseling session, Communicate regularly with Buyer)
4. Making The Offer (Preparing the purchase and sale agreement and
writing up offers, Writing an offer, Presentation of offers and Counteroffers)
5. Under Contract To Closing (Monitor Contingencies and key dates,
Prepare for closing)
6. Record Keeping for Buyers and Sellers
The Documented Field Experience Form should be considered for use as a
training instrument for other affiliated licensees. See Page 46.
Appointing Affiliated Licensee to Represent a
Seller or Buyer as an Appointed Agent
According to statute, “A real estate brokerage agency entering into a
brokerage agreement may, through the designated broker, appoint in writing
to the client those affiliated licensees within the real estate brokerage
agency who will be acting as appointed agents of that client to the exclusion
of all other affiliated licensees within the real estate brokerage agency.”
(Reference: 32 MRSA § 13278(1))
and shall include, at a minimum:
I. The name of the appointed agent and type of license held;
II. A statement that the appointed agent will be the client’s agent and will
owe the client fiduciary duties;
III. A statement that the real estate brokerage agency may be representing
both the seller and the buyer in connection with the sale or purchase
of real estate.
IV. A statement that other agents may be appointed during the term of
the written brokerage agreement should the appointed agent not be
able to fulfill the terms of the written brokerage agreement or, as by
agreement between the designated broker and client.
V. A section for the client to consent or not consent, in writing, to the
appointment.
When an appointed agent leaves the real estate agency or for some reason
is no longer able to fulfill the terms of the written brokerage agreement, it
is important to remember that the designated broker does not become an
appointed agent by default. A new appointment agent can be named but
only in writing with the client’s approval. In addition, according to Chapter
410, Section 8 (D), “An appointment of another agent as a new or additional
agent does not relieve the first appointed agent of any of the fiduciary duties
owed to the client.”
SITUATIONAL DILEMMAS FOR APPOINTED
AGENTS
1. When an appointed agent is “removed” as
the appointed agent at the client’s request
(but remains with the real estate agency),
the designated broker must require that the
written termination (of the agent-level duties)
be signed by the client.
2. The designated broker can only appoint an
agent who is an affiliated licensee.
3. If an appointed agent chooses to leave the
real estate agency and the client does not
accept the new appointed agent, how would
you handle this situation?
A designated broker appointing an affiliated licensee to act as an agent
of a client shall take ordinary and necessary care to protect confidential
information disclosed by the client to the appointed agent.
It is the designated broker who is responsible for appointing an affiliated
agent to represent a seller or buyer as an appointed agent. It is imperative
that the designated broker’s appointments are done correctly and comply
with Maine law or the commission’s rules and regulations. They must be in
writing and include the client’s consent.
Note that the client is NOT required to consent to an appointment.
If the client does not consent to an appointment, the agency cannot
provide client-level services.
The Appointed Agent Disclosure
According to Chapter 410, Section 8, the appointed agent disclosure shall be
provided to the client prior to entering into a written brokerage agreement
34
ANSWER: An appointed agent must be made with
the client’s written consent. If the client does not
consent, the agency, to remain compliant with the
law, may no longer provide agent-level services.
From a practical point of view, if the client
does not consent to the new appointment, the
real estate agency cannot fulfill the original
agreement to provide “agent-level” brokerage
services. The decision to appoint a licensee does
not default to the designated broker; the client
must agree, in writing, to the appointment.
The designated broker is not automatically an
appointed agent; like any licensee, the designated
broker must be appointed, in writing, to provide
client level services.
Examinations for Compliance with Maine
Licensing Laws
A real estate brokerage is required to allow the commission to examine
its records for compliance with license laws upon request with regard to
a complaint or at certain times during the licensing period.
According to statute, “A real estate brokerage office may be examined
for compliance with licensing laws once during each licensing period, as
necessary as part of an investigation of a complaint filed with the director
or may be examined upon receipt of prima facie evidence indicating
improper use of a real estate trust account.” (Reference: Chapter 400:
Agency/Designated Broker Responsibilities, Section 4)
Also according to statute, “The designated broker shall produce for
inspection by an authorized representative of the Commission any
document or record reasonably necessary for investigation or audit in
the enforcement of 32 MRSA Chapter 114 and in enforcement of the
rules promulgated by the Commission. Failure to submit such documents
or records as requested by the director shall be grounds for disciplinary
action. The examiner shall notify the agency of the results of such office
examination and may file a complaint.” (Reference: Chapter 400,
Section 4)
Summary
Chapter One was a comprehensive overview of the supervisory
responsibilities and duties of a designated broker specifically with
respect to the management, review and supervision of all licensed and
unlicensed employees within a real estate agency in the state of Maine.
Maine law requires that real estate brokerage services that are to be
provided on behalf of a real estate agency be under the direct supervision
of a designated broker.
Chapter One specifically discusses the supervisory protocol and resultant
liabilities a designated broker faces which includes the management
of licenses, proper use of brokerage agreements, the appointed agent
process and the examination of real estate brokerage records to evaluate
compliance with Maine licensing law.
Chapter Two
Operational
Requirements
Overview
Chapter Two provides an in-detailed perspective as to the operational
requirements expected of a designated broker in the state of Maine.
Chapter Two examines how a designated broker must operate a trust
account and maintain appropriate records for their trust account(s). It
also delineates how and when deposits are made to this trust account and
how and when earnest money funds shall be disbursed from this trust
account.
As a designated broker, one must also maintain complete and accurate
records of all real estate brokerage activity conducted on behalf of the real
estate agency. This record-keeping responsibility is quite comprehensive
and includes the financial aspects of the brokerage firm as well as the
maintenance required to appropriately manage and control the licenses
of those licensees a designated broker is responsible for.
Finally, this chapter provides a designated broker with the necessary
guidance required to properly handle information in their office and
advertising on the internet.
Learning Objectives
1.
2.
3.
Understand how to maintain trust accounts and supporting records
in a manner prescribed by commission rule.
Identify the operational requirements for a designated broker
to manage and oversee the overall operations of the real estate
brokerage.
Understand how to maintain complete and accurate records of all
real estate brokerage activity conducted on behalf of the real estate
agency.
Introductory - Quiz #1
As we did last chapter, let’s begin with a few simple questions that
will provide some insight into your current working knowledge of the
operational requirements of a designated broker.
•
T or F — The designated broker is not responsible for a website
created or paid for by an affiliated licensee.
False – According to Chapter 410: Minimum Standards of Practice,
Section 13(3), the designated broker must consent to domain names
and websites that promote real estate brokerage services or the sale
or purchase of real estate through the agency.
•
T or F — The owner of the real estate agency has the same legal
responsibilities as the designated broker.
False – The designated broker is responsible for the real estate
brokerage activities authorized by Title 32, c. 114 and rules adopted
by the Real Estate Commission. (32 MRSA § 13173(1))
35
Operational Responsibilities of Designated
Broker
As a designated broker, one must review, manage and oversee the overall
operations of the real estate brokerage. Although each brokerage will have
company specific protocols and policy, the basic operational responsibilities
of a designated broker are:
•
The review and management of brokerage transactions.
•
The review of documents, the maintenance of transactional records and
the management of company finances.
•
The management and authorization of advertising - both print and
electronic - for the sale or purchase of real estate, promotion of
brokerage services including registration of domain name for a web
site and the development or uploading to the internet of a website.
•
The dissemination of regulatory information to affiliated licensees.
be maintained for a period of at least 3 years after the closing date of a
transaction, if any, or the date the earnest money deposit was disbursed.
Every agency shall maintain a federally insured trust account in a financial
institution authorized to do business in the state of Maine. A trust account
is required for each real estate agency for the sole purpose of depositing
all earnest money deposits and all other money held by it as agency in
which its clients or other persons with whom it is dealing have an interest.
(Reference: 32 MRSA § 13178)
Specifically, 32 MRSA § 13178 states:
“Every agency shall maintain a federally insured account or accounts in
a financial institution authorized to do business in this State, as defined
in Title 9-B, section 131, subsection 17-A, or a credit union authorized to
do business in this State, as defined in Title 9-B, section 131, subsection
12-A, for the sole purpose of depositing all earnest money deposits and
all other money held by it as an agency in which its clients or other
persons with whom it is dealing have an interest. The trust account and
withdrawal orders, including all checks drawn on the account, must
name the subject agency and be identified as a real estate trust account.
Real estate trust accounts must be free from trustee process, except by
those persons for whom the brokerage agency has made the deposits and
then only to the extent of the interest. The designated broker, except for
an amount necessary to maintain the accounts not to exceed an amount
prescribed by commission rule, shall withdraw from the accounts all fees
due within 30 days after but not until consummation or termination of
the transaction when the designated broker makes or causes to be made
a full accounting to the broker’s principal. The designated broker shall
maintain trust accounts and supporting records in a manner prescribed
by commission rule. These accounts and records must be open for
inspection by the director or the director’s authorized representative
at the agency’s place of business during generally recognized business
hours. Upon order of the director, the designated broker shall authorize
the director in writing to confirm the balance of funds held in all agency
trust accounts. Rules adopted pursuant to this section are routine
technical rules as defined in Title 5, chapter 375, subchapter 2-A.”
The designated broker provides the approved forms and documents to be
used by licensees to conduct the brokerage’s real estate business activity.
These documents used by affiliated licensees must comply with statutory
and rule standards. It, therefore, should logically follow that the designated
broker is expected to understand and be able to explain the terms/provisions
of each brokerage document provided to affiliated licensees.
Delegating Designated Brokerage Duties
An agency, through its designated broker, may perform all of the brokerage
operations pursuant to Maine law and commission rules; and may employ
or retain others to perform brokerage services on behalf of the agency.
The designated broker may also delegate any of his duties and authority
provided for, but when doing so shall not be relieved of any responsibility
imposed by the relevant law, rules or regulations.
In other words, a designated broker may choose to delegate operational
duties to others; however, the delegation of these duties does not relieve the
designated broker of the overall responsibility for the actions and choices of
affiliated licensees and unlicensed persons. (Reference: 32 MRSA §13183
& Chapter 400 Section 1(3))
Written Policies
As the designated broker, the brokerage agency you manage must adopt
and maintain a policy manual that identifies and describes the real estate
agency’s operational policies. In addition to general policy, a brokerage
agency must adopt a written company policy that identifies and describes
the types of real estate brokerage relationships in which the designated
broker and affiliated licensees may engage. The designated broker must
also establish a system for monitoring compliance with all policies, rules,
procedures and systems, including written company policy manuals.
(Reference: 32 MRSA § 13277 and Chapter 400 Sections 1(2) and (4))
Trust Account Maintenance
According to Chapter 400 (Agency/Designated Broker Responsibilities),
Section 2 (Real Estate Trust Accounts), (6), the designated broker must
maintain trust accounts and supporting records in a manner prescribed
by commission rule. The designated broker must maintain records and
supporting documents sufficient to verify the adequacy and proper use of
the real estate trust account. The records and supporting documents must
36
There are no exceptions to the trust account requirements! Even a
real estate agency that specializes in only referral business and therefore
has little or no need for a trust account, must still maintain a trust account
in compliance with statute and rule. (Reference: 32 MRSA § 13178 &
Chapter 400, Section 2)
A real estate agency is permitted to have more than one trust account;
however, each real estate brokerage trust account must comply with statute
and rule standards as noted above. Compliance is required for all trust
accounts, not just for the “primary” trust account. Although a real estate
agency may have “non-real estate brokerage” escrow/trust accounts for
property management/rental services, these accounts are quite different
and it is strongly advised to exercise caution when making deposits and
withdrawals to ensure they are posted to the correct account.
A designated broker has complete accountability for the brokerage agency’s
trust accounts. Additionally, trust accounts and all relevant trust account
records must be available for inspection by the commission at the agency’s
place of business during generally recognized business hours. Another
important point to consider is that, upon request by the commission, the
designated broker shall authorize the director in writing to confirm the
balance of funds held in all agency trust accounts.
More specifically, according to Chapter 400, Section 2 (Real Estate Trust
Accounts), trust account requirements include:
•
The trust account’s bank statements/checks must disclose
the trade name of the real estate agency and be imprinted
with
the
following:
“Real
Estate
Trust
Account.”
•
An earnest money deposit received by a designated broker, as trustee,
must be deposited within five business days of acceptance of the
offer. Of course the deposits may be made sooner but remember,
the buyer and seller may have to agree to more specific terms.
the designated broker must notify each party in writing of the dispute and
keep all parties informed of any actions regarding the deposit. (Reference:
•
A designated broker
deposit of buyers or
real estate brokerage
contain up to $500
Once notice of the dispute of the earnest money is delivered, the designated
broker holding the disputed funds may:
must not commingle the earnest money
sellers with any funds belonging to the
agency. If necessary, the account may
if necessary to keep the account open.
•
Rely on the purchase and sale agreement and other documentation to
determine how the disbursement of earnest money should be made.
A deposit cannot be released before 5 business days of notification to
parties in writing of the decision. Civil action over release of deposit
remains a possibility.
Hold earnest money until court-ordered decision is received. Designated
broker must notify parties of the decision in writing.
•
The trust account must only receive deposits related to the sale or
purchase of real property. Deposits for rental transactions or property
management fees must be NOT be deposited into trust accounts.
•
An earnest money deposit must not be used prior to closing
for selling or buying expenses (title fee, survey, etc.),
unless agreed to in writing by all parties in the transaction.
•
•
There must be proper accounting for all monies held in the trust
account and any remittance must be made within a reasonable time,
but not more than 30 days, after the conclusion of the transaction.
Absent written authorization from the party to be charged, the designated
broker is not entitled to withhold any portion of the earnest money deposit
when a real estate transaction fails to close even if a commission is earned.
Real Estate Trust Account Supporting
Documents
According to Chapter 400, Section 2, supporting documents that must be
maintained to document trust accounts include:
a. Bank statements
Quiz #2
Take a moment to consider the following questions and how they might
apply to your real estate agency brokerage firm.
•
b. Canceled checks
c. Copies of contracts
False – A designated broker is responsible for supervising all
employees and independent contractors commensurate with their level
of qualification and experience. (32 MRSA § 13179)
d. Closing statements, if available
e. Correspondence; and
f. Additional items necessary to verify and explain record entries
Disbursement of Undisputed Earnest Money
Deposits Held in Trust
There are very specific rules regarding disbursement of undisputed earnest money deposits held in trust accounts that must be followed by the managing broker. According to Chapter 400, Section 2:
“Disbursement of an undisputed earnest money deposit may occur by one of the two following procedures:
a. Authorization, in writing, from the parties to a real estate
brokerage transaction agreeing to the disbursement; or
b. Authorization by the designated broker who, in reasonable
reliance on the terms of the purchase and sale agreement or
other written documents signed by both parties, determines
the appropriate disbursement of the undisputed earnest money
deposit. The designated broker may, at the designated broker’s
own discretion, make such disbursement to release the undisputed
earnest money deposit no sooner than 5 business days after
notifying both parties of the designated broker’s proposed decision
to release the undisputed earnest money deposit. The earnest
money deposit shall not be disbursed under this Section if prior
to disbursement the designated broker receives actual knowledge
of a dispute as provided in Section 2(10) of this chapter.”
Disbursement of Disputed Earnest Money Held
in Trust
In the event that a dispute arises with reference to an earnest money deposit,
T or F — A designated broker is not responsible for an unlicensed
assistant working with a team or group.
•
T or F — As long as the designated broker renews his/her license
within 90 days of the expiration date, the agency and affiliated
licensees are not impacted.
False – Upon the expiration of the designated broker’s license the agency
is not properly licensed which affects all affiliated licensees. A license
is required to engage in real estate brokerage. (32 MRSA §§ 13003).
The suspension or expiration of an agency or designated broker’s license
automatically suspends every license granted to any licensee affiliated
with the agency whose license has expired. (32 MRSA § 13182)
Record Maintenance and Retention
Requirements
As a designated broker you are responsible for maintaining complete and
adequate records of all real estate brokerage activity conducted on behalf
of the broker’s agency.
Take a moment to consider some examples of brokerage records:
Certainly the listing and buyer brokerage agreements, appointed
agent consent forms, disclosed dual agent consent forms and Real
Estate Brokerage Relationship Forms would be excellent examples of
brokerage records.
A complete list of brokerage records would also include an original
or a true copy of all offers, counter offers and purchase and sale
agreements should also be included.
But what about property disclosure forms, data sheets and other
property information prepared by the agency; like a Broker Price
Opinion or a Comparable Competitive Market Analysis?
37
The answer is yes, they would all need to be maintained in accordance
with the standards set by the commission.
Examinations for Compliance with Licensing Laws
Additionally, the designated broker must also maintain real estate trust
account ledger records as well as real estate trust account reconciliation
records. (Reference: Chapter 400, Sections 2(7) and 2(8))
As we discussed in Chapter One, a real estate brokerage may be examined
for compliance with licensing laws at regular intervals or as necessary for
investigation of a complaint. In addition, according to Chapter 400, Section
4:
The commission is responsible for specifying which records must be
maintained to establish complete and adequate records, including retention
schedules. A good rule of thumb to consider is that all real estate brokerage
records regarding brokerage-related written communication from agency
to buyer, seller, other licensees; lenders, inspectors, others; advertising,
inspection reports, surveys, covenants ( information that is material to the
transaction) must be maintained in accordance with Maine law and the
commission’s rules and regulations. (Reference: 32 MRSA § 13184 and
It is important to maintain these records on an ongoing and consistent
basis as they are required to be open for inspection by the director or the
director’s authorized representative at the agency’s place of business during
generally recognized business hours.
According to Chapter 410, Section 13, a licensee is required to provide
original or true copies of all documents to the designated broker within five
calendar days of execution of the document or record. In other words, these
documents are required to be in the custody and control of the designated
broker within five days after they have been executed. Perhaps it would be
prudent to consider whether or not anyone is reviewing these documents
during the pendency of the transaction and after its conclusion?
A TECHNOLOGICAL CONSIDERATION
•
•
Are you, or affiliated licensees, using
technology such as texting or instant
messaging for substantive communication
without printing (or having the ability to
print) those conversations for inclusion in
the transaction file? Is this a risk you wish to
expose your brokerage to?
Has this technological innovation been
addressed in your agency policy? Should it
be?
Electronic Records
Electronic records are allowed in real estate brokerage record keeping.
According to Chapter 400, Section 3 (Record Retention Schedules:
Electronic Format):
“Real estate brokerage records may be maintained in electronic
format, as defined by MRSA Chapter 1051. An electronic record means
a record generated, communicated, received or stored by electronic
means. Such electronic records must be in a format that has the
continued capability to be retrieved and legibly printed. Upon request
of the director, printed records shall be produced.”
“The designated broker shall produce for inspection by an authorized
representative of the commission any document or record reasonably
necessary for investigation or audit in the enforcement of 32 MRSA
Chapter 114 and in enforcement of the rules promulgated by the
commission. Failure to submit such documents or records as requested
by the director shall be grounds for disciplinary action. The examiner
shall notify the agency of the results of such office examination and may
file a complaint.”
Maintaining and Controlling Real Estate Licenses
The designated broker is responsible for displaying the agency’s real estate
license. The real estate agency license is the only license which must be
displayed. (Reference: 32 MRSA § 13181)
The license of each broker, associate broker and sales agent must be kept
in the custody and control of the designated broker as well. The designated
broker’s control of these licenses does not imply that the designated broker
can prevent an affiliated licensee from choosing to leave the real estate
agency, but it remains the duty of the designated broker to have custody of
all affiliated licensee’s license by knowing where the license is at all times,
and knowing if the license is active and has not expired.
It is the designated broker’s responsibility to ensure that the real estate
agency and designated broker licenses are current. This is quite important
as the suspension, revocation or expiration of a real estate agency or
designated broker license automatically suspends every license issued to
affiliated licensees. (Reference: 32 MRSA § 13182)
The reality is the expiration of real estate agency
or designated broker license means that no
one affiliated with that agency can legally
conduct real estate brokerage services or receive
compensation for real estate brokerage services.
(32 MRSA § 13004)
Handling of Information from an Operational
Perspective
As a designated broker, one must properly manage the manner in which
information is shared, disseminated and archived within the office. Written
policy manuals should be given to each licensed and unlicensed employee
and these policy manuals should address this very relevant issue. It is in the
best interest of the real estate brokerage agency to consistently discuss these
office policies (by way of office meetings, memorandums or even private
meetings) to help avoid or prevent potential serious consequences from
happening within the real estate brokerage agency.
The following detailed exercises are part of the qualifying education program
the “Designated Broker Course”. These exercises may be helpful to you
38
within your regular course of business or as an effective training tool that can
be applied in your brokerage’s meetings. See Page 44 for the “Designated
Broker Course Exercises”.
or aspects of identified real property” and further defines a real estate
appraiser as “a person engaging in real estate appraisal activity for a
fee or other valuable consideration.”
“In addition, the company policy must also include the procedures intended
to prevent any mishandling of information through both formal and
informal sharing of information within the real estate brokerage agency,
the arrangement of agency office space and the personal relationships of
affiliated licensees who are representing buyers and sellers with adverse
interests.” (Chapter 400, Section 1 (4))
§14004 of the Appraisal Licensing Act EXEMPTS Brokers and Associate
Brokers from the requirement to hold an appraiser license under certain
specific standards as follows:
When undermanaged, the formal and informal sharing of information within
the regular course of business in a real estate brokerage is often the root cause
of the mishandling of information. This is quite serious as this mishandled
sharing of information can potentially cause an undisclosed dual agency in
the representations of clients. (32 MRSA § 13280(2))
Therefore, the designated broker is responsible for adopting a set of written
procedures to be followed with regard to the formal and informal sharing
of information within their own office to help avoid potential conflicts of
interest. The reality is internal controls in your office are a necessity to
prevent the mishandling of information; which may ultimately safeguard
against potential liability and may legally allow you, as the designated broker
to sidestep superfluous risk.
By clearly communicating your objectives to your staff, a well-designed
policy manual will help attain your company’s goals. A well designed written
manual will also help to avoid problems and misunderstandings in the work
place; provide fairness and predictability operationally; and help recruit the
best sales associates.
Controlling how information is disseminated in a real estate brokerage is a
multi-layered responsibility for a designated broker. The following are suggested
topics to consider when, as a designated broker, you are either creating, updating
or otherwise editing your company’s written policy manual.
Fundamental Operational Duties of a
Designated Broker
In order for a real estate brokerage to run smoothly, a designated broker
must set rules and procedures in the workplace to ensure effective
implementation and adherence among each and every employee in the
brokerage, both licensed and unlicensed.
In order for a real estate brokerage to run efficiently, a Designated Broker should
strive to become an effective problem solver. This can often be simplified by
applying a proven and effective ‘problem solving model.’ If you are faced with a
challenging office problem, you might find the resolution to this issue becomes
quite clear when you choose to apply the following ‘Problem Identification and
Resolution Sample Model.’
See Page 54 for the ‘Problem Identification and Resolution Sample Model’.
BROKER PRICE OPINION - Opinion of Value for a Fee
A written opinion of value (for a fee) is typically referred to as a Broker
Price Opinion (BPO). A BPO is an industry term for a brokerage service
offered by a real estate agency for compensation.
The Real Estate Appraiser License Act defines an appraisal as
“an analysis, opinion or conclusion prepared by a real estate appraiser
related to the nature, quality, value or utility of specified interests in,
1.
2.
3.
The appraisal/opinion of value has not been prepared for
federally related transactions and,
A disclaimer in bold print must be included in the appraisal/
opinion of value in a prominent location.
Any opinion or appraisal of market value rendered under this
section must contain the following language in bold print in a
prominent location:
This opinion or appraisal was prepared solely for the client,
for the purpose and function stated in this report and is
not intended for subsequent use. It was not prepared by a
licensed or certified appraiser and may not comply with the
appraisal standards of the uniform standards of professional
appraisal practice.” [1999, c. 185, §5 (NEW).]
The use of the term “BPO” is real estate nomenclature – in other words, it
is an industry-specific term. An opinion of value or a CMA provided for a
fee triggers appraisal law requirements as well as other important issues.
The 7 Parts of a BPO
To remain compliant with Maine Law and MREC rule, it is imperative that
these BPO guidelines be followed:
1. Presentation of Real Estate Brokerage Relationships Form- A
BPO presentation must begin with the presentation of the real
estate brokerage relationship disclosure form.
2. A BPO is considered to be a “Client level brokerage service”
and it therefore requires a written brokerage agreement to
remain compliant with 32 MRSA § 13177-A;
3. A BPO can only be performed by an Associate Broker/Broker
level licensee [32 MRSA § 14004(2) – Appraisal Statute];
4. A Written disclaimer (as noted above) is required to provided to
remain compliant with 32 MRSA § 14004(2);
5. A BPO may not be provided if a known conflict will or does exist
where the broker or associate broker, or any other licensee licensed
with that agency is to receive a fee on that transaction – 32 MRSA
§ 13251-A; and,
6. A BPO must be delivered to the designated broker within 5 days
of execution [Chapter 410 Section 13(2)].
7. The BPO is considered a brokerage services for which
compensation (to the agency) is received (32 MRSA § 13001(2).
The following scenarios exemplify some of the potential pitfalls a
designated broker may encounter with regards to a Broker Price Opinion:
Scenario #1
An affiliated licensee in your brokerage receives an email request to
complete a BPO (or “drive-by appraisal) from a mortgage broker/
lender on a property which has been listed and is currently under
contract by another licensee affiliated with the agency. What are the
potential issues, if any?
Within this scenario there exists a blatant conflict of interest. A BPO
prepared for a client (which is the lender in this case) and brokerage
services performed for seller or buyer (listing/brokerage representation
agreement) cannot occur within the same transaction. (See Item #5
under BPO) The stated prohibition is not only limited to the same
affiliated licensee – it is for any affiliated licensee in the brokerage.
39
Scenario #2
What if, in the above scenario, the property is listed with another
licensee affiliated with the agency but is not under contract – does that
make a difference?
Yes, the agreement must be provided to the designated broker within
5 days.
»» Should referrals be addressed in the real estate agency policy?
Yes. A comprehensive, well-designed written policy should be included
in the policy manual and of course communicated clearly and often to
affiliated licensees.
Absolutely not.
Scenario #3
Is an affiliated licensee required to the return payment of the fee for a BPO
completed prior to listing the same property within the same brokerage?
No. The listing is a new transaction and therefore, no conflict of interest exists.
Scenario #4
Do you, as the designated broker have systems in place for affiliated
licensees to determine if a BPO request would trigger a conflict of
interest?
Internet Advertising
Most real estate buyers use the internet when preliminarily searching for
a home. So advertising online is most prudent. However, despite the fact
it’s relatively easy to do and has little cost compared to print advertising, internet advertising cannot be treated casually. There are rules and laws that
you must obey when advertising real estate on the Internet.
Therefore, Given The Above, Ask Yourself, As A Designated Broker,
The Following:
If your answer is no, why not?
Do you have a written and well-communicated policy for Internet
Advertising?
Scenario #5
If your answer is yes:
Can affiliated licensees receive payment directly for those Opinions of
Market Value (BPOs, CMAs) they have done?
* How is this issue monitored in your office?
* What are consequences of non-compliance?
* Do you offer training?
No. Licensees may only receive compensation for real estate brokerage
activities from the agency with which they are affiliated with.32 MRSA
§ 13067(8)
If your answer is no:
Given the potential consequences and risk, why do you not have a
policy in place for internet advertising?
Referrals
Referral business is simply a significant part of any successful real estate
brokerage company. And, although referral business is often a consistent
source of potential income and profit, referrals can also be fraught with
potential risk. Here are some situations a designated broker should be
cognizant of:
DID YOU KNOW?
As the designated broker, you can be asked to produce
a list of registered domain names as part of documents
reviewed during a brokerage office audit by the Real
Estate Commission?
#1- An affiliated licensee takes a call for a buyer referral and subsequently
signs an agreement that a buyer-side referral fee will be paid.
As the designated broker, what potential issues exist with the above
scenario?
»» Does the person referring the buyer hold an active license? Is a license
necessary?
Yes. A referral is real estate brokerage activity that is performed by an
affiliated licensee on behalf of an agency. A referral is actually a real
estate agency to another real estate agency agreement. 32 MRSA §
13001(2) (C)
»» What is the amount of the referral fee being paid to the agency? Can
affiliated licensee make the decision?
Yes, if the affiliated licensee has been authorized by the designated
broker to make the decision, but ask yourself, is this authorization
potentially risky.
»» Is the designated broker aware of all agency referral agreements? Is it
important?
40
Property Disclosure
Maine law requires all real estate brokerage companies and their affiliated
licensees (“licensee”) to perform certain basic duties when dealing with
a buyer or seller. The provision of a property disclosure is a requirement
under Maine law.
Therefore, it is imperative that you ask yourself: As the designated broker,
do you review property disclosures for transactions in your brokerage?
As noted in Chapter One, property disclosures are one of the primary reasons
for complaints received by the MREC. Consequently, the designated broker
should:
•
Review disclosures for accuracy and completeness which could reduce
the liability of all parties.
•
Remember that the property disclosure should be considered
a “living” document that is updated as changes in the property
are discovered.
•
Know that the licensee is ultimately responsible for updating the
property disclosure. Although sometimes referred to as the “Seller’s
Property Disclosure” in actuality, it is the licensee’s duty to obtain
and provide the required disclosures and to not knowingly provide
consumers with incorrect information which could be perceived as
misrepresentation.
•
Make sure their affiliated licensees are aware that an investigation may
be required to provide the required disclosures.
•
Determine IF and how property disclosure requirements may differ if
the client is the seller or buyer.
Here are two examples to consider:
#1 - An affiliated licensee shows a property that has been listed with
your agency for some time and during a showing notices water in the
basement. The Licensee notifies the seller who reports that it has never
happened before and offers the explanation that it must be happening
because of the unusually warm weather causing the snow to melt
too quickly. The Seller then instructs the licensee to not disclose the
moisture. What should the licensee do?
The Licensee must modify the property disclosure to include the newly
discovered information.
#2 - You are the listing agent for a house scheduled to close in three
days. At the supermarket you run into a licensee affiliated with the
agency that previously had the house listed. He congratulates you on
the impending sale and mentions it was under contract while listed
with his agency but heard the sale fell apart due to several issues with
the property. He mentions there were rotten sills, a flooded basement
and a failing septic system. The seller did not mention any of these
problems and the buyer opted out of a building inspection. How should
the licensee handle this situation?
Discuss this new information with the seller-your client, and then
investigate further if need be – and disclose what you learned in writing
to all parties:
»» Notice of material defect may occur at any point during the
transaction. Licensees are obligated to disclose material defect at
any time –including three days before closing!
Review the difference between material defects vs. material fact:
»» Material defect – a defect in the physical condition of the property.
Disclose to clients and customers.
»» Material fact – a fact that relates to the transaction and its existence
is so substantial and important that it will influence the client to
whom it is imparted.
Earnest Money Deposit
As a designated broker, it is a certainty that you know the definition of an
earnest money deposit is a deposit of money given up front to indicate a
sincere intention to complete a transaction. And, that the selling brokerage
is responsible for holding this earnest money deposit in a trust account until
closing, or the time the transaction is cancelled. However, consider the
following scenario:
agreeing to disbursement. Although at present, the release of these
funds may be undisputed at the time it is possible that this could change
in the future.
What if the Seller refuses to sign authorization to release earnest money
deposit?
It is imperative that licensees communicate with their buyer clients
upfront to set expectations appropriately. At the outset, review the
terms of the transaction to determine if:
»» Is it in the buyer’s best interest to put down a large deposit if it has
not been required by the terms of the agreement?
»» Have the sellers been advised that the purchase and sale agreement
contains a buyer-friendly contingency which may allow the buyer
to withdraw from the transaction at any point within the time
period specified? Setting expectations may avoid a “frustrated/
disappointed” seller from refusing to sign the release. (Reference:
Chapter 400 Section 2(10)).
Delegation Of Authority
As noted in Chapter One, a designated broker can delegate responsibility
to others, but this delegation by no means shifts the ultimate responsibility
from the delegated broker. So, as a designated broker, if you are advised
that a seller client calls an affiliated licensee and, after a highly charged
conversation about the seller’s dissatisfaction with the licensee’s
representation to date, the affiliated licensee tells the seller client the listing
is terminated. What are the potential issues?
The licensee cannot terminate the listing agreement because the listing
agreement is with the real estate agency, not the affiliated licensee.
Can a designated broker authorize affiliated licensee to terminate
agreements?
Yes – but you should consider what the pros and cons might be?
Who should make the decision about terminating a brokerage agreement?
Prudently, the designated broker should make this decision.
An affiliated licensee tells his clients he is leaving the agency and they need
to request a termination of the brokerage agreement so they can list with
him at the new real estate agency. What are the potential issues?
The Termination of a licensee’s affiliation should be discussed when
a licensee is hired and it is also a good business practice to include a
termination policy in your independent contractor agreement.
Disclosed Dual Agency Policy
As discussed in Chapter One of this course, disclosed dual agency is allowed
in Maine; however, all parties must provide informed written consent of the
dual agency. The consequences for mishandling a disclosed dual agency are
significant so as a designated broker answer the following:
A buyer notifies the seller’s agent of an unsatisfactory inspection within
the time-frame provided in the contract’s “investigation contingency.”
What is the process you must follow to release the buyer’s earnest
money deposit relative to the above situation?
What is your real estate agency policy on disclosed dual agency? What
does it mean to agree to a disclosed dual agency?
Pursuant to Chapter 400 Section 2(9)], earnest money may be released
when parties to contract have authorized the release, in writing,
The buyer/seller is agreeing:
1. to accept limited representation from a licensee also representing
a party in the transaction with adverse interests and;
41
the licensee may disclose any information relevant to the
transaction gained from one client to the other (except confidential
negotiating strategy, motivation or ability to accept less than
asking price or pay more than offered).32 MRSA § 13275(1)
are prohibited by law. According to statute, “Advertising must be free from
deception and shall not misrepresent the condition of the real estate, terms
of the sale or purchase, real estate brokerage agency policies, or real estate
brokerage services.” (Reference: Chapter 410, Section 1 (7))
Is there a material fact the seller will not want disclosed (e.g. abutting
property use/DOT plan for bypass, etc.)?
Remember, as the designated broker, it is your responsibility to establish
and effectively communicate an office policy to ensure that you meet your
responsibilities of:
1. reviewing managing and overseeing an affiliated licensee’s
registration of a domain name for a website which will promote real
estate brokerage services, or the sale or purchase of real estate through
the agency
2. Authorizing and reviewing the development or uploading to the internet
of a website (social media) that promotes real estate brokerage services
or the sale or purchase of real estate through the agency. (Chapter 400,
Sections 1(1)(H)(I)
2.
If yes, as the licensee you need to explain to the seller that as a disclosed
dual agent you are required to disclose material facts (information that
may influence a client’s decision to buy/sell not related to the physical
condition of the property) to both clients. It is unlikely that a seller will
check “yes” to disclosed dual agency consent if the seller is aware of a
disclosed dual agent’s duties to both clients.
What does it mean to not allow disclosed dual agency?
A Licensee may only represent one party in the transaction. Depending
on company policy, a licensee may work with one party as a customer
or refer one client to another licensee or agency.
Can clients change their decision to allow or not allow disclosed dual agency?
Yes. Their consent or withdrawal of consent, of a disclosed dual agency
must be in writing.
Responsibilities with Regard to Advertising and
Internet Usage
Advertising by Real Estate Brokerage Agencies
All forms of advertising for real estate brokerage services including
advertising the sale or purchase of real estate or promotion of real estate
brokerage services conducted by mail, telephone, the internet, business
cards, signs, television, radio, magazines, newspapers, and telephone
greetings or answering machine messages must include the trade name
of the real estate brokerage as licensed by the Commission. The licensed
trade name of the real estate brokerage must be prominently displayed in
all advertising materials, no matter what form. (Reference: Chapter 410,
Section 1 (4-A))
The designated broker may also authorize an advertisement that includes
the name, telephone number, slogan, logotype or photo of an affiliated
licensee or group or team of affiliated licensees as part of the brokerage
services being offered by the real estate brokerage agency. However, these
activities must be presented in conjunction with the licensed real estate
brokerage agency those licensees are affiliated with. The affiliated licensee
or group or team of affiliated licensees may not independently engage in
real estate brokerage. (Reference: Chapter 410, Section 1 (4-A))
It’s also important to note that written permission from the owner of a
property is required before a real estate brokerage agency or its affiliated
licensees can advertise any real estate for sale.(Reference: Chapter 410,
Section 1 (5))
Additionally, although a real estate brokerage agency or its affiliated
licensees may advertise the availability of real estate which is exclusively
listed for sale by another real estate brokerage agency, the licensee or real
estate brokerage agency must obtain prior written consent of the designated
broker who has been authorized by the owner of the property prior to
advertising the property. (Reference: Chapter 410, Section 1 (6))
Finally, deceptive advertising practices and misrepresentation in advertising
42
Because, ultimately, it is you (acting as the designated broker) who is responsible for all advertising that is generated from your agency.
Managing Affiliated Licensee’s Registration of
Domain Name for Website
As we’ve discussed previously, the designated broker is responsible for
supervising all activities of affiliated licensees and unlicensed persons affiliated with the agency, as well as the day-to-day operation of the real estate
brokerage agency. This supervision includes establishing policies and procedures that enable the designated broker to review, manage and oversee a
variety of activities, including domain names and websites.
According to Chapter 400, Section 1 (Responsibilities of Designated
Broker) (1) (H & I):
“The supervision includes, as a minimum, the establishment of policies
and procedures that enable the designated broker to review manage and
oversee the following:
H. The registration of any domain name for a web site in order to promote real estate brokerage services or the sale or purchase of real
estate through the agency; and
I. The development or uploading to the internet of a web site that
promotes real estate brokerage services or the sale or purchase of
real estate through the agency.”
•
Does your real estate brokerage’s written policy
manual seek to manage and oversee domain names
in place?
•
If not – why?
Summary
Chapter Two has provided a detailed analysis as to the operational
requirements expected of a designated broker in the state of Maine. In
doing so, Chapter Two identified how a designated broker must properly
open, and maintain a trust account including how to appropriately retain
records for trust account(s) used by their real estate brokerage company.
A designated broker is further tasked with the responsibility of maintaining
complete and accurate records of all real estate brokerage activity conducted
on behalf of the real estate agency. This record-keeping responsibility is
quite comprehensive and includes the financial aspects of the brokerage
firm as well as the maintenance required to appropriate manage and control
the licenses of those a designated broker is responsible for.
Chapter Two concludes with very specific guidance as to how a designated
broker is required to manage the flow of information within their office as
well as addresses the rules and regulations a designated broker must follow
with regards to advertising, domain names and advertising.
43
Core Course for Designated Brokers – I
Exercises
► Business Plan
 Create an organizational chart for your company
 Choose a form of ownership and why
 Layout floor plan sketch to ensure compliance with law and rules (confidentiality &
ADA)
 Develop pro forma budget for start-up costs and monthly budget
 Importance of Independent Contractor Agreement; issues not addressed in
agreement
► Licensing the Office
 Research proposed trade name for sample company to determine that it is not
misleading
 Download and complete license application for sample company
► Designated Broker Job Description
 Outline what brokerage forms company will use with consumers
 Outline policies and procedures that enable DB to review, manage and
oversee activities required in Chapter 400(1) 1-5 (e.g. checklists)
 Describe a system for interviewing new licensees for your company
 List steps to introduce new licensees to the company
 Describe the DB’s tasks when a licensee leaves the company
 Supervision of licensed and unlicensed assistants to licensees
 Supervision of website advertising
► Policy Manual
 List mandatory and optional topics to be addressed in your company policy manual
 Outline procedure to respond to a notice of complaint investigation from MREC staff
 Critique an unclear or incomprehensible policy
► Trust Account
 Outline the requirements of establishing and maintaining a legally compliant real
estate trust account
 Describe the steps involved in making deposits and withdrawals compliant with law,
rule and company policy
 Describe the steps involved if a seller refuses to release an earnest money deposit to
a buyer
► Monitoring Compliance/Training
 Outline procedure to confirm your affiliated licensees are properly licensed
 Describe possible contents of a personnel file
 Identify sources of law, rule and practice changes
 Outline subject areas and timing of a training program for newly licensed
licensees, experienced licensees and unlicensed staff.
► Risk Management
 Outline the major risks to a company and your ongoing procedures to limit
the risks arising from transactions
 How will you limit procuring cause disputes with other companies?
 Identify what is covered by errors and omissions insurance; how is cost of claim
resolved if issue not covered?
 Outline a personal safety policy
 How do you establish a record that client refused advice?
44
Page1 of2
► Problem Identification and Resolution
► Financing
► Other Laws
► Ethics
Apply problem-solving model to seller and buyer issues
Use model to address an ethical dilemma
 Identify the issues of an offer written as cash when buyer intends to get home
equity loan
 Loan officer qualifies buyer for loan that is not best alternative for buyer; what
are licensees’ responsibilities to customer/ client
 Outline potential issues of money paid outside of closing
 Seller wants to sell a lot cut from a larger lot, what issues/steps are
involved
 Shoreland property converted to year-round use, what issues/steps are
involved
 Identify ethical dilemmas for clients and customers
► Initial Contact to Under Contract
 Verbal terms were not made part of written listing agreement, i.e. “will tear up
the agreement if you are unhappy”. A change to any term of buyer/seller listing
agreement must be in writing and signed by buyer/seller.
 Suspension vs. termination – do client and agent understand the status of the
agreement?
 Appointed agent is no longer acting as the appointed agent for a client but the
affiliated licensee remains with the company. Should a written termination of
appointed agent role should be prepared and signed by client?
 The designated broker is the appointed agent and another affiliated licensee is
not designated to fulfill the duties imposed by c. 410(8)(1)(B). Identify potential
issues
 Can a Disclosed Dual Agent do a Comparable Market Analysis (CMA) for buyer? If
so, is a copy provided to Seller?
 Appointed Agency office – confidentiality issues during office meetings and
caravans
 Complete a sample addendum and amendment to a contract (financing,
extension of contract, etc.)
 Selling licensee receives property disclosure on bank owned property – all items
marked “unknown”
 Designated Broker must have a policy to review, manage and oversee the
advertising/promotion or real estate. Write a sample policy.
► Under Contract to Closing
 Buyer wants a price reduction after inspections. Seller does not respond, now
what?
 Title problem arises – contract allows 30 days to fix
 Walk-through issue noticed a short time prior to closing
 Deed to be conveyed is incorrect
 Outline potential issues of buyer taking occupancy prior to closing
 Outline potential issues with escrow agreements (government financing)
Page2 of2
45
Real Estate Associate Broker
Qualifying Education
Documented Field Experience Form
TosatisfactorilycompletetheRealEstateAssociateBrokercourse,studentsmust
passacourseconsistingofaminimumof60classroomhoursofstudywithagrade
of75orhigheranddemonstratehands-onexperienceasevidencedbycompletion
ofthetrainingtasks(Sections1–6)inthisformanddocumentedbythe
designatedbrokerormentor(s)*assignedbythedesignatedbroker.Itisestimated
thatcompletionofthetaskswillrequireaminimumof40hoursoftraining.To
satisfactorilycompletetheAssociateBrokercourse,thestudentwillberequiredto
returnthecompletedandsignedFieldExperienceFormtothecourseinstructorfor
approval.
Pleasenote:DesignatedBrokersmayhaveadopteddifferentoradditional
procedures,policies,brokerageformsorinformationthanfoundinsomeorallof
thesections.Forexample,Section1isintendedtoorientthesalesagenttothereal
estatecompany’spolicies,officestructureandprocedures.Theinformation
includedinthisSectionshouldnotbeviewedasmandatoryforallrealestate
companies.Itisexpected,however,thatthedesignatedbrokerormentor(s)will
providetrainingasidentifiedineachofthetrainingtasks.
*Amentorisselectedbythedesignatedbrokerandmaybeanotherlicenseewithin
therealestatecompany,companymanagerorotherpersonwithinthecompany
withexpertiseinthetasktobecompletedoratrainerengagedbythedesignated
brokertoofferin-housetrainingexclusivelytoassistthesalesagentofthat
companytocompletetherequiredtasks.
Anoteaboutforms:ExceptfortheRealEstateBrokerageRelationshipsForm
(Form3),theMaineRealEstateCommissiondoesnotprovideformsforthe
practiceofrealestatebrokerage.Anyreferencetoformsinthisdocument
recognizesthatmostDesignatedBrokersprovidecertainformsfortheaffiliated
licenseestouseintheconductoftheirbusiness.YourDesignatedBrokerwill
likelyprovideyouwithvariousformsandwillreviewtheirproperusewithyou
duringthistraining.
SalesAgentName: ________________________________________ LicenseNumber: _________________________________________ Maine Real Estate Commission Field Experience Form #05/06
46
REVISED 01/18/2008
Page 1 of 8
SalesAgentName: ________________________________________ LicenseNumber: _________________________________________ Section 1: Real Estate Office Orientation
A. Policy and Procedures Manual
ReviewthefollowingwithDesignatedBrokerorOfficeManager:
BrokerageRelationshipPolicies
Commissionschedule
Cooperationandcompensation
Feeschedule
RealEstatetransactionforms
Referrals
Policiesonconfidentiality
Officehours
InsuranceIssues
Anti-Trust
ErrorsandOmissions
Retentionofdocuments
Auto
AdvertisingPreparation
Equipmentownedbyagentinoffice
“DoNotCall”list
FairHousing
Other
Date Completed______________________ Certified by_________________________
(Designated Broker or mentor)
B. Independent Contractor Agreement (or employment agreement if
applicable)
Taximplications
ReferencetoPolicyManual
Authoritytobindtheagency
Departure/Terminationprocedures
C. Office equipment, forms, personnel and policies
Officepersonnel&jobdescriptions
Operationofofficeequipment
Officefilesandforms
Copier
Howlistingsareprocessed
Phone
Checklistforcompletelistingfiles
Fax
Howundercontractsareprocessed
DesignatedBroker’spolicieson
Checklistforundercontractfiles
communicationintheoffice:
Answeringinquiriesandphoneetiquette
Maildistribution
Howtoanswerphone
Electronicmail
“DoNotCall”policies
Officeopening&closingprocedures
Other
Maine Real Estate Commission Field Experience Form #05/06
REVISED 01/18/2008
Page 2 of 8
47
SalesAgentName: ________________________________________ LicenseNumber: _________________________________________ Section 2: Taking a listing
A. Getting Property Information
1.AtRegistryofDeeds,learnhowtoperformthefollowingtasks:
A.GetaCopyoftheDeed
B.ReadtheDeed
C.GetaCopyoftheRecordedPlan,ifany.
D.Getacopyofrecordedcovenants/restrictions,ifany.
2.AttheTownHall,learnhowtoperformthefollowingtasks:
A.Gototaxofficeandgetacopyofthetaxmap.
B.Getacopyofthetaxcard.
C.Checkforsquarefootage.
D.Checkfortaxexemptions.
E.GototheCodeEnforcementOffice
F.GetacopyoftheCodeEnforcementFile
Arethereanyapparentdiscrepanciesbetweenpropertyandcodefile?
G.GetacopyofHHE200(planforsepticsystem)ifonfile.
H.Notewhereprivatewellislocated,ifapplicable.
3.Ifpropertyispartofanassociation(condominium,roadmaintenance
association,etc.),knowwheretogetcopiesof:
A.RoadMaintenanceAgreement
B.DeclarationofCondominium
C.AssociationBy-Laws
D.RulesandRegulations
4.Othersourcesofinformation–companydataform
5.Viewtheentireproperty,frombasementtoattic
6.AsktheSellerforMaineRealEstateCommissionrequiredpropertydisclosures:
A.PrivateWaterSupply
B.PrivateWasteDisposalSystem
C.PublicorQuasi-PublicSystem
D.HeatingSystem
E.HazardousMaterials
7.AsktheSelleraboutanymaterialdefectsinthephysicalconditionoftheproperty.
8.AsktheSelleraboutthepresenceofleadpaintorlead-basedpainthazards.
DateCompleted______________________ Certifiedby_________________________
(DesignatedBrokerormentor)
48
REVISED 01/18/2008
Page 3www.McKissock.com/MERE
of 8
SalesAgentName: ________________________________________ LicenseNumber: _________________________________________ B. Developing the Listing Packet for listing presentation
1.PlanyourpresentationandlistthepointstocoverwiththeSeller.
2.ReviewyourpresentationwithyourDesignatedBroker.
3.YourlistingpacketfortheSellermayincludesomeorallofthefollowing:
PersonalInformation
SampleAdvertising
CompanyInformation
SampleMarketingPlan
4.Forms:
RealEstateBrokerageRelationshipForm#3
LeadPaintandProtectYourFamilyfromLeadinYourHome
5.DisclosureRequirements(formsmaybecompanyspecific):
LeadPaint
Arsenicbrochure
PropertyDisclosureForm
6.SamplePurchaseandSaleAgreement
7.EstimatedSellersNetSheet
8.ListingAgreement
9.MaineRealEstateCommissionOfferandCounterOfferGuidelines
10.Appropriatebrochuresandmarketinginformation
Preparingthepropertyforsale
FairHousingbrochure
Pricingforbestprice
C. Prepare for Meeting the Seller
1.DevelopaCMA(ComparativeMarketAnalysis)fortheSeller
2.HaveallListingformsprepared,including:
ListingAgreementsPropertyDisclosureForm
LeadPaintDisclosureformifpropertybuiltbefore1978(orperyour
company’spolicies.
AnyotherdocumentsyouwillpresenttoSeller
3.Proofreadallformstobesuretherearenomistakes.
4.ReviewPropertyMarketingPlanwithDesignatedBrokerormentor.Someorallof
thefollowingtoolswillbepresentedtotheseller:
MultipleListingservice(if WebsitesforpropertiesAdvertising
yourcompanyparticipates)
PublicOpenHouses
BrokerOpenHousesandBrokerCaravans
Brochures
MailingsSignsOther
5.ReviewshowingprotocolwithDesignatedBrokerormentor,whichmayinclude:
Lockboxes
Settingupappointments
Keys(considersecurityofkeys)
Feedbacktolistingagents
Besuretosecuretheproperty
FeedbacktoSellers
6.ReviewyourlistingpresentationwithDesignatedBrokerormentor.Besureyoucan
explaineverylineonallagreements.
REVISED 01/18/2008
Page 4 of 8
49
SalesAgentName: ________________________________________ LicenseNumber: _________________________________________ D. Meeting with the Seller
1.PresentCMA(ComparativeMarketAnalysis)
2.PresentMarketingPlan(whichmayincludeanyorallofthefollowing):
MultipleListingservice
Websitesforproperties
Advertising
PublicOpenHouses
BrokerOpenHouses
Brochures
BrokerCaravans
Signs
Mailings
Other
3.Signingofforms(whichformsarenecessary?)
ListingAgreement–bepreparedtoexplaineveryline.
PropertyDisclosureForm–signatureofSellerifrequiredbyCompanyPolicy
DisclosedDualAgency
AppointedAgency
LeadPaintBrochure
ArsenicBrochure
ShowingInstructions:Lockbox?ListingAgentpresentatallshowings?
E. Office Procedures for New Listing
ProcessNewlisting
Companysubmitspropertytomultiplelistingservice,website,otheradvertising.
Setupcompanylistingfileandshowingprocedures.
Proofreading
Licenseeisresponsibleforaccuracyofdisclosuresandinformation
Becarefuloftaxes,acreage,squarefootage,etc.
ExecutingtheMarketingPlanfornewlisting
MultipleListingservice
Websitesforproperties
Advertising
PublicOpenHouses
BrokerOpenHouses
Brochures
BrokerCaravans
Signs
Mailings
Other
SetupscheduleforcommunicationwithSeller
Somesellerscomplainthatthelistinglicenseenevercontactsthem.Contactthe
Selleronanagreed-uponscheduleandbyamethodoftheseller’schoosing(i.e.
mail,phone,email,inperson).
50
REVISED 01/18/2008
Page 5 of 8
SalesAgentName: ________________________________________ LicenseNumber: _________________________________________ Section 3: Working With a Buyer
A. Develop a Buyer Presentation
WorkwithyourDesignatedBrokerormentortodevelopabuyerpresentationpacketof
informativematerials.Thispacketisdesignedtogivebuyersconfidencethattheyare
workingwithacompetentprofessional.Materialsmayinclude:
MaineRealEstateCommissionOfferandCounterOfferGuidelines
Pamphlet:ProtectingYourFamilyfromLeadinYourHome.
SamplePurchaseandSaleAgreement
Anexplanationofhowyoufindhomesforbuyers
Anexplanationoftheimportanceofprequalification/preapprovalforfinancing
FairHousingBrochure ArsenicBrochure
Other
Thefollowingdocumentsmayalsobeincluded:
YourResume
CompanyInformation
MarketingBrochures
B. Buyer counseling session
Youwilllikelytake45minutestoanhourandahalfduringthisfirstmeetingwithbuyerto
explainhowtheindustryworks,whattheyneedtoconsiderwhilelookingforahomeand
whatservicesyoucanoffer.UsetheBuyerPackettoguideyourpresentation.
PresentRealEstateBrokerageRelationshipForm#3
DecidewhetheryouwillbeaBuyerAgentorTransactionBroker
Bepreparedtodiscussorderingand/orpayingforthefollowinginspections:
Generalbuildinginspection
AirQuality
Arsenic-treatedwood
Chimneyinspection
Mold
Zoning
EnvironmentalScan
LeadPaint
FloodPlain
WaterQualityandQuantity
Pools
Insurance
SewageDisposal
Pests
CodeConformance
ExplainhowyouwillusetheMultipleListingServicetofindtheirproperty(ifapplicable)
Setupacommunicationschedule.
DiscussOpenHouses
DiscussFSBO’s(ForSaleByOwners).
Discusshowmuchbuyerscanaffordandwhattheirneedsare.
Filloutbrokerageagreementifappropriate
Makearrangementstohavebuyerpre-qualified/preapproved.
REVISED 01/18/2008
Page 6 of 8
51
SalesAgentName: ________________________________________ LicenseNumber: _________________________________________ C. Communicate Regularly with Buyer.
Atleastonceperweek,orasagreeduponwiththeBuyer.Abandonmentor
Estrangementcandefeataclaimofprocuringcause.Discussprocuringcausewithyour
DesignatedBrokerormentor.
Section 4: Making the Offer
A. Preparing the Purchase and Sale Agreement and Writing up Offers:
ReviewPurchaseandSaleagreementwithDesignatedBrokerormentor
BeabletoexplainthevariousparagraphsandtermsusedinthePurchaseand
SaleAgreement.
Befamiliarwithallcompanycontractformsandaddenda
Beabletoexplainyourcompanypolicyregardingdraftingcontingencies.
Knowagencyguidelinesforhandlingearnestmoney
B. Writing an Offer:
Writefirstoffer.
ReviewMaineRealEstateCommissionOfferandCounterOfferguidelineswithbuyers
Conductnegotiationsandputpropertyundercontract.
C. Presentation of Offers and Counter Offers:
Understandwhattodowithoffersreceivedonunfamiliarforms.
Section 5: Under Contract to Closing
A. Monitor contingencies and key dates in the contract
Developsystemfortrackingkeydates
Inspections
FinanceTerms
Draftalettertoclientregardingtimeframes
ApplicationforFinance
FinanceApproval
SecureInsurance
Appraisal
Other
Appraisal
Inspections
Other
52
REVISED 01/18/2008
Page 7 of 8
SalesAgentName: ________________________________________ LicenseNumber: _________________________________________ B. Prepare for closing:
CommunicatewithTitlecompanyregardingclosing
Discusstitleinsurancewithbuyer
Makesureyourbuyer/sellerisreadyforclosing
ReviewSettlementStatementbeforeclosing
Draftalettertoclient/customeraweekbeforeclosingwithchecklist
Section 6: Record Keeping
A. Possible or Suggested Company requirements for complete transaction files
ForBuyers:
BrokerageAgreement,ifappropriate
Deed
PurchaseandSaleAgreement
PropertyDisclosure
LeadPaintDisclosure
SettlementStatementifavailable
PropertyBrochure
HomeWarranty
OtherDocumentsrelevanttothetransaction
ForSellers:
BrokerageAgreement,ifappropriate
Deed
PurchaseandSaleAgreement
PropertyDisclosure
LeadPaint
SettlementStatementifavailable
PropertyBrochure
HomeWarranty
Unacceptedoffersandfallthroughcontracts
OtherDocumentsrelevanttothetransaction
Maine Real
Estate Commission Field Experience Form #05/06
REVISED 01/18/2008
Page 8 of 8
53
Problem Identification and Resolution
Sample Model for Effective Problem Solving
•
•
•
•
•
•
•
Define the problem and issues
 Be clear about what the problem is.
 Is it legal, ethical, professional or moral?
 Different stakeholders may have different views of what the issues
are.
 Listen to each person with the intent to understand and not evaluate.
Identify the stakeholders and their interests
 Who is affected by the outcome of this problem?
 Interests are the needs that are satisfied by any given solution.
 How are the stakeholders affected by the problem?
 This is the time for active listening to understand the complete
problem.
List the possible options.
 Brainstorm or Green Light the options creatively.
 Do not become attached to any one option
 At this stage do not evaluate the options.
Evaluate the options.
 What are the pluses and minuses of each option?
 How are the stakeholders affected by each option?
 Separate the evaluation of options from the selection of options.
Eliminate any options that are not feasible.
 What's the best option, in the balance?
 The best solution is the one that satisfies everyone’s interests.
 Is there a way to combine a number of options together for a more
satisfactory solution?
Make a commitment to the choice, put it in writing.
 Agree on the solution and put it in writing.
 The written solution will help the parties to review the details as
agreed upon, and the implications of the decision.
Implement, monitor and evaluate the decision.
 Identify who will you monitor compliance and follow-through.
 Identify any problems that were experienced with the decision.
 Incorporate the decision into the Policy Manual if appropriate.
 Use this experience as a case study for the office if appropriate.
54CoreCourseforDesignatedBrokers–
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1.
An affiliated licensee is providing advice and other clientlevel services without a signed brokerage agreement. Is the
affiliated licensee complying with Maine agency law?
a. Yes – a licensee is always required to give advice to anyone
who seeks their help
b. Yes – providing client-level services is the best way to gain a
customer confidence even if the brokerage agreement has not
been signed.
c. No – a licensee should not give a client-level advice until the
brokerage agreement has been executed.
d. No – a licensee should never give client-level services.
2.
The operational responsibilities of a designated broker include
all but:
a. Disseminate regulatory information
b. Remind affiliated licensees to attend local networking events
c. Review documents, manage and authorize advertising
d. Manage real estate brokerage finances
3.
Affiliated licensees are required to keep designated
brokers informed of all activities conducted on behalf of
_____________.
a. The sales agent
b. The buyer
c. The brokerage agency
d. The seller
4.
It is unlawful for any person or entity to engage in real estate
brokerage without: _________.
a. A valid Driver’s License
b. A college diploma
c. A current real estate brokerage license
d. None of the above
5.
Affiliated licensees CANNOT provide _________________
without a written brokerage agreement?
a. Coffee
b. Directions to their office
c. Opinions of market value
d. Opinions about financial markets
6.
Ultimately, the designated broker is responsible for any and
all violations by any licensed or unlicensed persons acting on
their agency’s behalf:
a. All answers shown are correct.
b. Only if the designated broker had prior knowledge and did
not take reasonable action to prevent the violation.
c. The designated broker permitted or authorized a person to
engage in activity for which that person was not properly
licensed.
d. The designated broker failed to exercise a reasonable degree
of supervision over employees and independent contractors
commensurate with their qualifications and experience.
7.
Each real estate agency for the sole purpose of depositing all
earnest money deposit must maintain:
a. A savings account
b. A money market account
c. A trust account
d. A certificate of deposit
8.
Real Estate Brokerage advertising must be free from
________________ and not misrepresent the condition of the
real estate, terms of the sale or purchase, real estate brokerage
agency policies or real estate brokerage services.
a. Personal phone numbers of affiliated licensees
b. Deception
c. Coupons
d. Authorized team names
9.
An earnest money deposit shall not be utilized prior to a
closing for selling or buying expenses (such as a title fee,
survey, etc.) unless:
a. the buyer or seller agree to it orally
b. the closing attorney sends an email
c. the title company demands payment one day before closing
d. agreed to in writing by all parties in the transaction
10. When a dispute arises in connection with a trust account the
designated broker must:
a. Notify each party in writing
b. Keep all parties informed of any actions regarding the deposit
c. None of the answers shown are incorrect
d. Both answers shown are correct
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Real Estate Safety:
Protect Yourself During a Showing
3 CE Credit Hours (Approval # TT233C735CC)
As a real estate agent, you are placed in a position of special trust. Your clients expect you to deliver the best skill and care as a part of
your fiduciary duties. You counsel your clients on strategy, help them complete mounds of paperwork, and sometimes even advise them
on home staging. With all of this going on, it’s easy to forget about your clients’ personal safety or the safety of their belongings. Your
clients are counting on YOU to know the common risks associated with a real estate transaction and the best practices for minimizing
those risks.
Chapters:
•
•
•
•
Chapter One: Introduction
Chapter Two: Working with Seller Clients: Getting a Home Ready to Sell
Chapter Three: Working with Seller Clients: Conducting the Showings
Chapter Four: Working with Buyers with Safety in Mind
•
•
•
•
•
•
Identify common items that are vulnerable to theft during property showings
Explain to seller clients the safeguards to implement prior to taking photos and showings
List some pros and cons of using a lock box on a listing
Conduct a showing or open house, and property close up afterward
Explain safety tips for issues that commonly come up before and during a showing
Discuss the required disclosures and items that buyers should investigate
“When I was a multi-million salesperson and manager, you covered the multitude of problems that occurred in transactions.
GOOD CLASS.”
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~ Waneta
Chapter One:
Introduction
Fiduciary Duties
As a real estate professional, you are placed in a position of special trust.
Most of us already know that and take great care to provide fiduciary duties
to our clients in the transaction. We counsel our clients on strategy, help
them complete mounds of paperwork, and sometimes even advise them on
home staging. How many of us think about our client’s personal safety and
the safety of their belongings during this process?
Think about it; you are providing fiduciary duties of:
Care: you show reasonable care for your clients in the transaction.
This could very well include their safety.
Obedience: you obey your clients’ wishes. Most would wish to keep
themselves and their belongings safe.
Loyalty: being loyal to the client means placing their interests above
your own. You are their guardian in this transaction.
Disclosure: you disclose facts that are relevant to the transaction–and
safety for buyers and sellers may be an extremely important disclosure!
(Think: lead paint, registered sex offenders registry)
Accounting: for funds and documents, which could include escrow
funds for radon systems and lead paint disclosures.
Confidentiality: a licensee keeps important information confidential,
thereby keeping their clients safe from its misuse.
There is no question that having a fiduciary relationship with a client means
that the client is counting on YOU to know the common risks and safety
precautions that should be applied in a real estate transaction. Let’s delve
into this subject and talk about some things that don’t frequently come up in
other education and training classes.
Note!
Please note: safety of the real estate licensee is also of great concern! This
course addresses the safety of the client, but a licensee is advised to learn
how to keep themselves safe during showings. Please read up on licensee
safety, contact your local Board of Realtors, and/or contact your local police
department for tips on staying safe. The North Carolina Real Estate Safety
Council (a joint effort from the NC Real Estate Commission, and the NC
Association of Realtors) has an excellent guide for real estate licensees.
Chapter Two:
Working with Seller
Clients: Getting a Home
Ready to Sell
Many people think that a real estate agent’s most difficult task is preparing
a listing for a Multiple Listing Service or handling paperwork. These
certainly are highly detailed and often challenging tasks, but there is so
much more that goes on before a home is listed, in order to make the home
more marketable and to help protect the seller and the seller’s possessions.
In this chapter, we will talk about safeguarding valuables and medications
during the showing of a home. Making sellers aware of the vulnerabilities
in showing a home without the assistance of a real estate licensee is also
crucial. The importance of screening buyers prior to showings will also
be covered.
Safety First: Before a Showing
Have you ever taken a look at a property listing or the property itself and
found yourself focusing on the contents, rather than the building? Maybe
you like the artwork, the furniture, or the electronics. People generally don’t
look at listings and pick out the valuables, but there are individuals in our
society who do just that.
Sellers should be counseled on protecting their valuables before photographs
are taken and home showings are conducted. Some items should be hidden
from plain sight, while others may be better off shredded, moved to another
location or placed in a safe deposit box at a nearby bank. Sellers should
be told that hiding valuables in the home does not protect them. Buyers
frequently open cupboard doors and look in freezers, in closets and under
beds. Some may go further and look in dressers, even though they shouldn’t.
If a seller truly values something and moving it wouldn’t be a disruption
to their daily lives, valuables should be moved to the home of someone
trusted, or better yet, placed in a safe deposit box until the home is no longer
being shown. Some homeowners invest in a fire-proof lock box. While a
lock box is a good way to protect valuables and documents in a fire, these
boxes are often small enough to be removed from the property. A skilled
robber can get into one with enough time, especially if the box is in his
possession. Remember the expression: “an ounce of prevention is worth a
pound of cure.” A little forethought could prevent a major hardship!
As a person held in special trust, the real estate licensee should be careful
when photographing a home not to include valuables in the photos.
Things that should not be left out in plain sight include:
• Jewelry
• Antiques
• Medications
• Cash and checks
• Bills with account numbers
• Bank statements that include images of cleared checks
• Spare keys
• Photos that are too personal
• Personal documents such as Social Security Cards and Passports
• Briefcases, purses, computer bags
• Small electronics, such as iPods, iPads, and laptops.
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Jewelry
Spare Keys
Imagine this: you are a seller, trying to sell your home, and you list it with a
competent real estate licensee. The licensee does an excellent job marketing
the home and many potential buyers have viewed the home. One weekend,
your listing agent holds an open house, and it is a huge success! A large
number of buyers come to see the home, so many that the listing agent can’t
be in every room with every buyer during the open house. You come home
after everyone has gone, very happy with the exposure that your home has
gotten, only to find out that someone has been in your jewelry box! Almost
everything has been taken! How could this have happened?
Spare Keys need to be secured as well. They should not be hanging from
a hook by a door or placed in a “junk drawer.” Spare keys should never be
hidden in common places, like under a doormat, under planters, just inside
a garage, or in obvious, magnetic hide-a-key places. Hidden spare keys are
often a good idea, but think like a burglar and put keys in a place that is not
obvious. Perhaps a trusted neighbor can hold on to a spare key, if necessary.
According to an article in the Chicago Sun-Times, in 2012, a seller client
described the unthinkable: $162,000 worth of jewelry was stolen during
an open house in Highland Park, a neighborhood in Chicago. What did the
seller do? She sued the real estate firm that had the listing. The seller stated
that the listing brokerage had sole control over the home when the jewelry
was stolen, thus they were responsible for the loss.
Photos that are too personal should be packed away. This is a common
suggestion when staging a home. Homes generally sell better when buyers
can envision themselves living in the home, which is difficult if pictures of
another family are scattered around the house. There is another, perhaps
more important reason to take down those family snapshots. Children
and young women are statistically more vulnerable to predators. In order
to reduce this sinister risk, people looking at a listing online or in person
should not know what the residents of the home look like.
Could this have been prevented? What is the best thing to do with jewelry?
Jewelry is incredibly easy to sell or pawn. Advise the client to secure
jewelry in a locked safe or safe deposit box. In the event that jewelry is
stolen, contact police immediately and call around to local jewelers and
pawn shops.
Photos
Social Security Cards and Passports
Consider: Has one of your clients ever had a piece of jewelry stolen during
a showing or open house? If yes, consider what you could have done to help
prevent that from happening.
Personal documents, such as Social Security Cards and Passports, are prime
targets of identity theft. Are those documents in a file cabinet? Are they in
a fire-proof lock box or in a file box marked “Family Documents”? These
documents are often overlooked and so easy to move to a secure location,
like a safe deposit box. These documents are also the easiest way for a thief
to successfully steal an identity and ruin a person’s credit or worse!
Antiques
Antiques may be more difficult to move off sight, but they should not be
ignored, especially small items that can be tucked into a pocket or purse.
Medications
Medications can be more difficult to secure, if they are needed on a daily
basis. Every year, pharmacies report break-ins and stolen medications. The
National Community Pharmacist Association estimated that there were 686
prescription drug robberies in pharmacies in 2010. That is an 81% increase
from 2006 (NCPA, 2012).
The prevalence of prescription drug theft from homes is not known because
many people do not report those thefts to the police. Think about how much
easier it is for a thief to steal medications from a home that is listed for sale!
Pain medication is of particular concern, but every medication should be
secured prior to each showing. Sellers should NOT simply place medications
in a medicine cabinet or linen closet. Those are the first places many people
would look. Luckily, medications are generally small in size and can simply
be placed in a bag and taken with the seller before a showing.
Cash and Checks
Cash and Checks may seem like an obvious thing to avoid leaving out,
but what about bills or bank statements? Many people leave cash laying
around and don’t think it is a big deal. As a real estate licensee, you serve
your clients well by suggesting that cash, checks, bills and bank statements
be locked in a safe, taken off sight, or shredded. Bank statements may not
have account numbers printed on them, but copies of cancelled checks may
be included in a statement. A thief can obtain routing numbers and account
numbers from those images. Credit card bills frequently include account
numbers, and someone adept at identity theft or account theft could easily
charge up a fortune, even without the expiration date or security code.
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Briefcases, Purses, and Computer Bags
Don’t forget about briefcases, purses and computer bags, especially
designer brands. Many high-end bags can fetch a good price on auction
websites, even if they are used.
Small Electronics
Small electronics, such as iPods, iPads, tablets, and laptops, should
be locked up. Although many of these items can be password protected
and have tracking software built in, that will not stop them from being
stolen. Passwords can be reset and tracking software can be disabled by
a skilled thief. These electronic devices are actually designed that way. If
a consumer owns one of these devices and forgets the password, usually
a skilled information technology specialist can reset the password in a
matter of minutes. As far as tracking software, that can be disabled and
registration can be reset. These small electronics are highly marketable and
often contain very personal information, such as passwords, social security
numbers, and credit card information.
Breakables
Finally, breakables should be safeguarded. They may be worthless to a
thief, but valuable to a family. Think about the vase that your daughter
made in 3rd grade art class. What if a clumsy buyer knocked it over? Many
buyers have children who come on showings and children are more prone
to accidents. When securing a home, keep an eye out for those precious
artifacts, even if they are worthless on the market.
Suggestion
Provide sellers with a pre-listing checklist. Advise them to move valuables
they do not need on a daily basis to a secured location, like a trusted family
member’s house, or better yet, a safe deposit box at a bank. Things that
should be moved include:
• Jewelry
• Antiques
• Medications
• Cash and checks
• Bills with account numbers
• Bank statements that include images of cleared checks
• Spare keys
• Photos that are too personal
• Personal documents, such as Social Security cards and passports
home. Once he gained entry into the home, he proceeded to sexually assault,
kidnap, and otherwise threaten the residents, generally young women.
Listing agents can hang “Do Not Inquire Within” riders on the For Sale
signs. They can also recommend that sellers do NOT show their home to
buyers who have not been pre-screened, which protects the clients from the
unthinkable (as seen in New Hampshire), and it saves the sellers time and
hassle. Oftentimes, buyers who are not working with a real estate licensee
are not serious about purchasing property. Others do not have a realistic
idea of how much home they can afford. The recent case of the “Real Estate
Rapist” in New Hampshire is reason enough to want all potential buyers
screened before a showing! Sellers should be cautioned about showing
property themselves. The simple act of making an appointment with a real
estate licensee is a significant deterrent to those who may want to steal from
or harm home sellers.
• Briefcases, purses, computer bags
• Small electronics, like iPods, iPads, tablets, and laptops
• Breakables
Consider: Are there any items that we missed? What else should be a part
of this checklist that we did not go over?
Example
You have been asked to list a beautiful home in a prestigious neighborhood
in your market area. The home is decorated impeccably, and you know it
will generate a great deal of interest.
When you first view the home, you notice the lovely office, with a wellmarked filing cabinet (one drawer says, “Family Documents”). On the desk
are a variety of electronics--a tablet, a laptop--and a few small collectables.
Further down the hall, you come to the master suite with an amazing walkin closet. The closet has an organization system with a jewelry rack that is
laden with gold and diamond jewelry. There are hooks that hold an array of
high-end handbags as well. It shows nicely.
Moving on to the master bath, you find wonderful storage. There are many
cabinets and drawers, some containing medications, while others have fine
linens and makeup.
While the actual percentages change from time to time and among market
areas, studies show 80–90% of sellers who attempt to sell their homes
themselves end up listing with an real estate agent (US News and World
Report, 2008; National Association of Realtors, 2012). Common reasons
sellers end up listing with a real estate licensee are market exposure,
knowing how to price correctly, and seller frustration with buyers who are
not pre-screened, pre-qualified or pre-approved for financing, and generally
not serious about buying. Most buyers who are truly ready to buy a home
will approach a real estate licensee.
Before screening potential buyers, you should ask your principal or
managing broker if there is a safety/screening protocol for your office. Part
of your job as a real estate licensee is to take as much time and stress out of
the selling experience as possible. If a buyer approaches you, you should
do the following:
1.
Ask if they working with another agent.
2.
Ask if they have been pre-approved for financing and with whom.
3.
Know the person you are taking into your client’s home. If
possible, meet them in your office first and have them fill out an
identification form. Photocopy their driver’s license and note the
make, model, and license plate number of their car.
4.
Get a full name and phone number. Call the number to verify it is
not false. Put the name in an internet search, and if possible, try
to verify that it is real.
5.
Let someone in your office know when you are going to the
listing and when you will be back. If a person is planning to rob
the home, they may compromise your safety too.
6.
Attend a showing with another agent. Perhaps one of you can stay
in the car with cell phone in hand.
7.
Trust your instincts! If something doesn’t feel right, you should
protect your client and simply decline a showing.
As you walk through the home, you admire the beautiful photography. The
lovely family who currently own the home has 2 beautiful young children.
If the home looks well-staged, do you make any suggestions? How would
you broach the subject of home safety?
Comments: Handing the sellers a checklist is a good start. If it is preprinted, then it gives the feeling that securing valuables and taking down
personal photos is a normal matter of course. Discussing the checklist will
drive home the point. In some areas, having a professional home-stager can
add to the credibility of how important it is to secure valuables and take
down personal photos. A home-staging consultation may be surprisingly
affordable and may be a nice service that the listing agent can provide.
Importance of Screening Buyers before a Showing
In 2006, a Maine man was convicted in New Hampshire on 5 felony
counts of sexual assault, plus criminal threatening, kidnapping, and several
misdemeanors. The man was named “The Real Estate Rapist” in local
newspapers because he approached residents of homes that were listed by
real estate brokerages, instead of contacting a listing agent or licensee. One
of his victims was a 19-year-old woman. The Real Estate Rapist knocked on
doors that had For Sale signs in the yard and asked the residents to view the
If a buyer has a difficult time with any of the things listed above, perhaps
they are not serious about buying a home. Going through these steps will
likely screen out predators and thieves, as well as the “tire-kickers” and
nosey neighbors. It simply protects your client, who is your principal. You
must do what you can to keep your principal and their home safe, even
if it means turning away someone who may or may not be serious about
purchasing the property. A serious buyer should not have a problem with
any of the aforementioned steps. Think about how many times you show
your driver’s license--when you cash a check, buy alcoholic beverages or
cigarettes, or use a credit card. Driver’s licenses are copied to test drive a car
or adopt a pet from a shelter, and people usually have to provide a name and
phone number when having a pizza delivered! A home is a MUCH bigger
purchase than most cars, pets, and certainly pizzas.
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If the buyer is working with another licensee, tell the buyer to contact the
licensee. If a licensee contacts you, ask for the buyer’s name. Also, ask if the
buyer is a buyer client (under an agency agreement), or a buyer customer
(without an agency agreement). Has the other agent verified their identity?
This is yet another layer of protection; plus, having another agent involved
increases the safety for you, your client, and their belongings.
Example
A buyer calls you and asks to see one of your listings as soon as possible.
You go through your list of questions:
•
Is he working with another agent? (No)
•
Where have they been pre-approved for financing? (Nowhere –
he says he has plenty of money)
•
Will he meet you in your office first so you can get a copy of
his driver’s license? (No, he wants to meet you at the house. He
doesn’t have time to meet you before a showing).
•
Will the buyer fill out an identity form? (No, that is ridiculous; he
has NEVER had to do anything like that in previous transactions).
This buyer becomes increasingly agitated and insistent on seeing the house
without bothering with any of these formalities. You have a very uneasy
feeling about this situation.
Consider: What should you do? We will go over a suggested response
on the next page, but take some time and consider how you would/should
respond in this situation.
Example - Resolution
This exact situation happened to a number of licensees within a brokerage.
All the agents who talked to this buyer felt uneasy about his aggressiveness.
The managing broker was alerted to the situation, called the police and
emailed all licensees, warning them not to take a call from that number, and
if they did, to politely decline a showing. Most of the agents (including the
author of this course!) had been contacted by this buyer regarding many
of the listings held by the brokerage. No one knows what would have
happened if one of the agents ignored their inner voice and conducted a
showing for this individual. We all want to provide the best service for the
seller clients. Sometimes this includes refusing to show a property to a
buyer who doesn’t seem legitimate. Let your managing or principal broker
know about situations such as this and trust your instincts.
Summary
In this chapter, we covered some of the more common household items
that should be protected prior to listing a property (before photographs
are taken and before any showings). Such items include jewelry, antiques,
medications, cash and checks, bills with account numbers, bank statements
that include images of cleared checks, spare keys, photos that are too
personal, personal documents, such as Social Security cards and passports,
briefcases, purses, computer bags, and small electronics, like iPods, iPads,
and laptops. We also talked about the importance of screening buyers prior
to showings. Real estate licensees should design their own checklists to be
used consistently.
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Chapter Three:
Working with Seller Clients:
Conducting the Showings
In this chapter, we will talk about showing the property. Should the showings
be assisted (with the listing agent present) or is a lock box a better idea?
What are some pros and cons of using a lock box for unassisted showings
and some benefits of accompanying buyers? Next there will be tips for
protecting vacant homes from theft, vandalism, fraud and squatters. We will
address ideas of what to do with pets, and how to close up after a showing,
specifically, making sure doors and windows are locked, and heat and lights
are turned down. Finally, we will share safety tips on hosting an open house. To Lock Box or Not to Lock Box?
Lock boxes are a wonderful convenience. Different regions of the country
have different customs when listing homes. In some areas, it is customary
to have listing agents conduct showings most of the time, while in other
areas it is rare for a listing agent to be present during a showing. Lock boxes
may be the norm in some places–either Supra Boxes or combination boxes-while other brokerages may prefer to hold a key in the office for buyers’
agents to pick up.
What is the best way to keep a listed home secure? In an ideal situation,
a sales team would be present to show the property. Buyers would be
thoroughly screened prior to a showing and not allowed to be alone in any
room. The ideal situation, however, is not always possible, so let’s discuss
the pros and cons of different types of lock boxes.
Technologies like the Supra Systems have many wonderful features. The
showing agent must subscribe to the service to get a special key. Their
information is made available to the listing agent, and the system records
when and who enters the property. The advantages are obvious, and that
is why such systems are so popular. The downside is that many real estate
licensees do not subscribe to these services, so they need to find another
way to enter the property. Records can become inconsistent and the listing
agents often consider a simple combination lock box instead.
A combination lock box does solve the issue of licensees who do not
subscribe to a key system, but once the combination is out, it is not possible
to determine who viewed a property or when they viewed it. Some buyers’
agents may be careless and write the combination on a listing sheet, which
they may in turn give to a buyer or discard for anyone to pick up.
Having either type of lock box visible from the street can make a home
more vulnerable to vandalism. In Pennsylvania, several homes were broken
into when thieves cut lock boxes off of front doors. The lock boxes where
smashed and the criminals entered the homes with the keys. They then
proceeded to take copper pipes from the empty houses
Some brokerages may have a person on duty who distributes keys to agents
working with buyers. Having this person sign out a key may help keep track
of who views the property, but keys can be lost, returned in an untimely
fashion and perhaps even copied. There is no doubt that assisted showings
help to keep homes, possessions, and keys safer, but having a key in a lock
box or available through an office makes scheduling the showings much
easier. What are the priorities of your seller?
Vacant Homes
What about vacant homes? There is virtually nothing to worry about in that
type of listing, right?
With vacant homes, especially empty ones, it is true that the items discussed
in chapter 1 may not be an issue. There is no need to advise sellers to secure
belongings that are not in the home. However, that does not mean that the
home is invulnerable to theft and other pitfalls. Every year, vacant homes
are subjected to theft, fraud, and squatters. With the popularity of online
classified ads, there is a new phenomenon of fraud. Much of this can be
accomplished easily if a home is not closely monitored.
What can a seller of a vacant home do to protect their home from
burglary and vandals?
•
Call the home owner’s insurance company and ask about vacant
home policies (and perhaps purchase the extended coverage–
most homeowners policies will cover only 30 days after the home
is vacated)
•
If possible, take pictures of the home before furniture is moved
out. Pictures of an empty home in the MLS can attract mischief
•
Ask a neighbor to park their car in the driveway
•
Ask neighbors to keep an eye on the home
•
Have the Post Office hold or forward mail. Check the mailbox
and front steps regularly for mail and flyers
•
Put a lamp on a timer, so it will turn on and off like someone is
still living in the home
•
Install motion detector lights and/or a security system
•
Make sure snow, leaves, or other debris is cleared away regularly
•
Check in on the home regularly
across the country are riddled with reports of items stolen from vacant
homes, such as copper pipes, furnaces, gas fireplace inserts, and appliances.
There is vacant home insurance that can be purchased, and it may be a very
good idea for sellers to invest in that protection.
Conducting a Showing
Even after the buyer(s) have been carefully screened, there is work licensees
can do to help keep seller clients and their possessions safe.
Whenever possible licensees should show property in-person and in teams.
This is especially important when going to a home without close neighbors
and/or with an unfamiliar buyer. While female agents may be statistically
more vulnerable to assault crimes, male agents have fallen victim, too.
When showing property it is helpful to be at the property before the buyer,
so you can adjust the heat or AC. Turn on lights and make sure the home is
presentable. A few extra minutes could make a big difference if the home
has dirty dishes in the sink, clothes on the floor, or a dead mouse in the
dining room! Oftentimes, the property owner prefers to reduce energy
bills by keeping heat or air conditioning turned down. Comfortable room
temperatures can make buyers feel better about a home, and the listing
agent won’t be distracted, thinking about rushing around to do things like
this when they should be focused on the buyers. Being early to a showing
allows a licensee to make the home more comfortable to show and causes
fewer distractions during the showing, which allows the licensee to better
protect the seller’s possessions. They can also protect the seller’s money by
being sure to turn down/off everything that was turned up/on!
There are ways to show properties that can minimize this risk to the seller’s
home and to the licensee. To start, always let the buyer walk into a room
first and never let them get between you and the door. When going into a
basement or attic, wait on the stairs or decline to enter the space altogether.
A cell phone in hand may help, as can pepper spray (check to make sure it
is legal in your area). Pepper spray comes in many containers that do not
raise alarm, such as a pen.
Consider: What do you think? What method(s) work best? Which methods
do you like to do most? What others did we miss?
Much like the recommendations with open houses, it is a good idea to meet the
neighbors and ask that they keep an eye out for anything out of the ordinary.
What Can Happen if a Vacant Home is Not
Closely Monitored?
What to Do with Pets
If an unethical person is able to obtain a key to a vacant home that is for
sale, they can easily show the home to would-be renters. It may be easy
to collect deposits and take off with the money. A home that is not closely
monitored is much more susceptible to rental fraud.
Craig’s List advises potential renters about this type of scam on their
website: http://www.craigslist.org/about/scams. These scams occur when
a property is posted for rent, when in fact, it is not. The person posting
the rental may have nothing to do with the property but collects security
deposits, first and last month’s rent, application fees, and more. While a
court may not find the seller liable for damages in this case, it would be
prudent to advise sellers about this possibility and suggest that they make
the home look inhabited (at least when photos are taken), so it is less inviting
to this type of scam. Avoiding the use of a combination lock box in vacant
homes may also be good advice.
In 2012 in Sarasota, Florida, there was a rash of rental scams in vacant
homes. Renters paid cash deposits, only to find they could not access the
home on moving day. The people posing as the landlords could not be found.
Vacant homes that are empty are also more exposed to theft. Police blotters
What is the best thing to do with pets? Many property owners enjoy the
company of their pets–dogs, cats, birds-- but where should these pets be
during a showing? What if they get out or are frightened or excited and
cause damage? If possible, it is a good idea for the owner of the property to
take the pets with them during a showing. Sometimes that is not possible,
so there are some options to consider. The pet owners know the pets best,
and should make the ultimate determination. Should the pet wander freely?
This may be alright for pets, such as cats, if they are allowed outside or
will not try to escape. Dogs can be placed in a dog run outside or a kennel
inside. Some pets may themselves be vulnerable to theft, so keeping the
furry family members safe is a top concern, too.
Accompanying the Buyer
Accompanying the buyer during a showing may be one of the most
important things a listing agent can do to ensure the safety of the seller
and their belongings! Thieves and assailants are far less likely to commit
crimes if their faces are known. If possible, bring a sales team member to
showings. Having two people at a showing helps, if multiple buyers want
to go in multiple directions. The listing agents can follow them to answer
questions and make sure they don’t steal or damage anything.
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Keep your phone with you and have a secret code that others know in
case you suspect something suspicious. For example: “I’m at the Main St.
house and … the flowers are blooming… the new floor looks great… the
neighbors came by…,” some phrase that your colleague will understand
means you need assistance quickly. Using a code means you won’t add any
additional risk to the situation.
Damage to a Property
Theft is highlighted in this course, but how many buyers will damage a
property to get a better look at something? They may want to know if there
is hardwood under the carpeting or if there is rot behind a piece of trim.
Something may look loose, and a buyer may want to jiggle it a little. Buyers
have been known to move appliances, scratching floors and damaging
gas or water lines. Even licensees who represent the buyer should not let
this sort of behavior occur. It is much better to ASK the seller if there is
hardwood under the carpet then to rip up a corner!
Lock the Door Behind You
In some neighborhoods, you may want to lock the door behind you once
you are inside to prevent others from entering the home after you. A For
Sale sign in the front yard can invite crime into a home. Seeing a strange car
in the driveway may let a would-be thief or attacker gain easy access into a
home. The person gaining access to the home may wish to cause physical
harm to the occupants, to steal, or to squat. Such persons may quietly sneak
in, unlock a window and sneak out, with the intention of coming back later.
Locking the door behind you can help prevent this from happening.
Doors and Windows
On that note, many buyers will want to open doors and windows. This is
perfectly acceptable if they wish to see how something operates or to check
if a door or window sticks or is easy to lock. As a real estate licensee, it is
your job to make a final check after a showing to ensure all the doors and
windows are locked or left in a state preferred by the seller.
Example
During a home inspection in a multi-family home, the home inspector
inadvertently locked all the doors and windows, including a deadbolt lock
on an apartment door. The listing agent knew that the tenants did not have
a key to the deadbolt, only to the door knob. She didn’t bother to check the
doors because she knew the tenants would return to the home soon after the
inspection.
How to Host an Open House
During an open house, the listing agent may not have the opportunity to
screen every potential buyer who comes in the door. Many of the people
who view an open house may not even be potential buyers. Nosey neighbors,
curious drivers and possible criminals may also stop by the home. What can
a listing agent do to minimize the risk to the seller and their belongings?
There are many things we can do.
First, introduce yourself to neighbors and let them know you will be hosting
an open house. They will likely pay attention to people coming and going.
This may not only help identify a thief, but it may actually deter theft if it is
obvious that there are neighbors looking on. It may help market the house,
too. Having caring neighbors can be a wonderful thing!
Warn sellers that they are liable if a person gets injured while viewing
their home. Ask if the sellers have liability coverage in their home owners
insurance policy. They should also pay attention to hazards, such as loose
carpeting, wobbly stairs, areas that have low ceiling height and poor
lighting, or sidewalks that may be icy.
When people arrive, jot down the make, model, color, and license plate
number of the cars, as well as a basic description of the individuals. Place
yourself in a spot that is right by the front door and ask viewers to sign in.
This information could prove important if a crime does occur. It could also
be useful information to your sellers. They may want to know if a scheduled
showing resulted from the open house.
Whenever possible, get help from other licensees in your office. Position
agents on each floor to help answer questions more easily AND to protect
the seller’s belongings. Thieves often work in teams–one distracts, while
the other takes the valuables. It is more difficult to pull off that kind of theft
when more than one agent is on duty.
Summary
This chapter covered showing the property, including some pros and
cons of using a lock box for unassisted showings and some benefits of
accompanying buyers. There were also tips for protecting vacant homes
from theft, vandalism, fraud and squatters, followed by ideas of what to do
with pets and how to close up after a showing. Finally, safety tips on hosting
an Open House were shared.
To recap:
•
Call the home owner’s insurance company and ask about vacant
home policies and perhaps purchase the extended coverage--most
homeowners’ policies will cover only 30 days after the home is
vacated
When the tenants returned, they could not open their door, so they broke
a storm window in the living room. Unfortunately, they could not get the
living room window open, so they proceeded to the basement, where they
kicked a window in, causing a few hundred dollars’ worth of damage.
Luckily, the seller did not mind paying for the repair, but the listing agent
could have easily prevented the damage.
•
If possible, take pictures of the home before furniture is moved
out. Pictures of an empty home in the MLS can attract mischief
•
Ask a neighbor to park their car in the driveway
•
Ask neighbors to keep an eye on the home
While checking that doors and windows are shut and locked (or left as the
property owner desires), it is a good idea to check the heat, air conditioning
and lights. Buyers and home inspectors may turn these things on excessively
to see how they work. How would you like to return home to find it 90
degrees in the dead of winter? Or even 90 degrees in the middle of the
summer?! Buyers may turn on heating and cooling systems to see if forced
hot air systems irritate their allergies. There are many reasons why these
systems may be activated. It is your job as a licensee to set them back to the
levels the property owners prefer.
•
Have the Post Office hold or forward mail. Check the mailbox
and front steps regularly for mail and flyers
•
Put a lamp on a timer, so it will turn on and off like someone is
still living in the home
•
Install motion detector lights and/ or a security system
•
Make sure snow, leaves, or other debris are cleared away regularly
76
•
Check in on the home regularly
•
Keep a phone with you and have a secret code word that alerts
other agents if you feel endangered.
Hosting an Open House:
•
Introduce yourself to neighbors and let them know you will be
hosting an open house
•
Warn sellers that they are liable if a person gets injured while
viewing their home
•
When people arrive, jot down the make, model, color, and license
plate number of each car, and a basic description of the individuals
viewing the home
•
Place yourself in a spot that is right by the front door and ask
viewers to sign in
•
Whenever possible, get help from other licensees in your office
and position agents on each floor
Chapter Four:
Working with Buyers with
Safety in Mind
Disclaimer
A licensee’s duty to a buyer as a buyer agent is slightly different in every
state. Licensees should keep up on the laws and rules in their states. This
document is meant to highlight examples of some of those duties, it is not
intended to be an all-inclusive list. Terms of a brokerage agreement and
company policy must also be taken into consideration. In this chapter, we
move to the other side of the transaction and talk about keeping buyers
and their assets safe, starting with meeting the buyer and disclosing the
difference between agency and non-agency relationships. We will examine
overlooked issues, such as leaving the buyer’s car in a safe place and safely
showing a property. Next, we will do a brief overview of disclosures and
safeguards, such as inspections. Buyers should be alerted to future safety
in the property and should conduct their due diligence with respect to
the sex offender registry and crime statistics for the neighborhood. They
should also consider obtaining title insurance, homeowners insurance,
and flood insurance. Finally, buyers should change the exterior door locks
immediately after taking possession of a property.
One theme that runs through this chapter is disclose and refer. As a real estate
licensee, you must disclose material defects to all buyers, be they clients
(with an agency agreement), or customers (without an agency agreement).
For clients, you must disclose material facts as well, for example if you
know a concrete manufacturing plant is being built across the street. As a
real estate licensee, you are a professional in the real estate transaction. That
does not mean you are an industrial hygienist, law enforcement officer, or
real estate lawyer. For technical questions, always refer your buyer to an
expert in the field who can give the buyer the best answer and protect you
from liability.
While you might want to save your buyers money, remember their health
and safety are priceless.
Learning Objectives
Upon completion of this chapter, you will be able to:
•
Explain safety tips for issues that commonly come up before and
during a showing
•
Discuss the required disclosures and items that buyers should
investigate
Fiduciary Duties
Buyers are exposed to significant risks when shopping for a home. Many
of these risks must be disclosed because of federal regulations (such as
lead paint disclosures), or state regulations (such as asbestos or radon).
Recall from Chapter 1 the Fiduciary Duties that all real estate licensees are
required to provide to their clients:
Care: you show reasonable care for your clients in the transaction, which
could very well include their safety.
Obedience: you obey your clients’ wishes--most would wish to keep
themselves and their belongings safe.
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Loyalty: you are loyal to the client, which means placing their interests
above your own. You are their guardian in this transaction.
Disclosure: you disclose facts that are relevant to the transaction, and safety
for buyers and sellers may be an extremely important disclosure! (think:
lead paint, registered sex offender registry, etc...).
Accounting: you deal with funds and documents, which could include
escrow funds for radon systems, or lead paint disclosures.
Confidentiality: you keep important information confidential, thereby
keeping your clients safe.
Chapters 1 and 2 covered how these duties apply to a seller client. Do
you see how they are just as applicable to the buyer-client? Both sides of
a transaction face risks. It is our job as licensees to disclose, advise and
protect our clients from common risks in accordance with the law and our
fiduciary duties.
Before the Showing - Agency and Non-Agency
Before the showing, get to know your buyer. Does your state have a
brokerage relationship disclosure? It is vital that the buyer know the
difference between agency and non-agency relationships when working
with a real estate licensee. An agency relationship helps to protect the
buyer. When an agency relationship exists, the licensee keeps the buyer’s
willingness to pay, motivations, buying strategies, and personal information
confidential. This type of relationship also means the interests of the buyer
are placed above the interests of the licensee. In short, having an agency
relationship with a buyer adds a significant level of safety and protection
for the buyer. Make sure the buyer knows that the seller’s agent acts in
the best interest of the seller, and that they should avoid sharing personal
information with that licensee. Only an agency relationship will require that
personal information be kept confidential.
Before the Showing - Financing Pre-Approval
It is also wise to have the buyer pre-approved for financing, if it required for
the purchase of the property. How does this keep the buyer safe, you ask? It
keeps them safe from falling in love with a property that is out of their price
range or from losing a home they want because another buyer presented
an offer that included a commitment letter from a lender, thus making that
offer stronger. Pre-approved financing could also save the buyer from losing
an earnest money deposit, if they cannot get financing before a contractual
financing deadline.
Before the Showing - The Buyer’s Car,
the Licensees Car
When going out on showings, it is common that the buyer leaves his car and
ride in the real estate licensee’s car. However, you must consider the safety
of the buyer’s car when it is left. It is in a safe neighborhood? If you leave
or return to the car in the dark, is the parking area well lit? Is there a place to
park the car where it is less likely to be hit by another car door or shopping
cart? Making these sorts of parking suggestions will show the buyer-client
that you are trying to keep them safe through the entire transaction.
If a licensee drives buyers in their car, it is wise to protect the buyers by
having good insurance coverage. Do you have liability coverage or just
collision? Collision may protect your car, but what about the passengers?
Make sure your coverage insures passengers in the event of an accident.
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At the Showing
Next, when viewing a home, it is vital that the buyer knows the listing agent
represents the seller. They should never divulge personal information that
may affect their bargaining position in a sale. Most consumers are unaware
of confidentiality rules.
Locking Doors
When viewing a home, take note of the neighborhood. Should the doors be
locked once everyone is inside the home? With foreclosures, short sales and
vacant homes, many of them could be “winterized,” with electricity and
heat turned off to save money and prevent pipes from bursting. If a property
is winterized, set up a showing during daylight hours. It is difficult to see the
details of the property when viewing it with a flashlight.
Disclosures
A variety of hazards are common in different parts of the country. Each
state has its own list of mandatory property disclosures. These disclosures
may include:
•
Water Supply System (type, location, any malfunctions, date of
water test, problems)
•
Insulation
•
Heating System (type, age, company that serviced, date of
service, annual fuel consumption, malfunctions)
•
Waste Water Disposal System (type, size, location, malfunctions,
date of instillation, date of service, name of servicer, more info
needed for systems within shoreland zones)
•
Hazardous Materials
• Asbestos
• Lead-based Paint
• Radon
• Underground Oil Storage Tanks
•
Other Material Defects
Consider: What other hazards are there? Are there any on this list that are
unique to your area?
Hazards of Special Interest: Lead
According to Colorado State University (Fact Sheet number 9.538), more
than 75% of homes built before 1978 contain lead paint. According to
UL, that figure jumps to 87% for homes built before 1940. Lead paint can
contribute to nervous system and kidney damage, learning disabilities,
diminished bone and muscle growth, behavioral issues and even death. It is
especially dangerous for children 6 years and younger.
Lead paint is the only federally mandated property disclosure. Sellers,
landlords and real estate licensees must ensure that buyers and renters receive
a lead paint disclosure AND the lead paint pamphlet from EPA/HUD, if the
property is for sale or rent as housing and was built before 1978.
It is vitally important to inform your buyers of the hazards of lead paint.
Email the above PDF file and ask for confirmation of receipt and/or obtain
paper copies from EPA, HUD, or your local Board of REALTORS®.
Hazards of Special Interest: Radon
Radon is another deadly hazard that is prevalent in much of the country (to
see if radon is common in your area, see the QR code). Radon is a natural
gas that results from the breakdown of radioactive materials commonly
found in soil and rocks. It is invisible and odorless, and tends to accumulate
in basements and lower levels over time. Radon can also be present in
water. It is estimated that radon is second only to cigarette smoking as a
contributor to lung cancer in the United States.
The Environmental Protection Agency recommends taking action if Radon
exceeds 4 pCi/L in the air. The EPA has proposed guidelines for areas with
radon in the water that ranges from 300 pCi/L to 4,000 pCi/L, depending on
the source of water.
It is important to warn your buyers of the dangers of radon, recommend that
they test for it, and let them know that radon can be mitigated in most situations.
Home Inspections
Most licensees know the importance of home inspections and readily provide
buyer clients with a list of reputable inspectors. Oftentimes, however, the
buyer may under-inspect or decline the inspections all together.
When potential issues become apparent, getting a professional opinion
is generally a good idea. The next few pages will contain some common
examples of transactions that would have benefited from a home inspection.
Home Inspections: New Construction
Your buyers are thrilled to find a newly-constructed home that suits their
needs. Why should they have a home inspection when the home is brand
new? It is in perfect condition, right?
any event, it is a good idea to refer the buyer to an expert. The 1985 home
may have salvaged doors, windows, or fireplace mantles that contain lead
paint. Real estate licensees are not industrial hygienists. Refer the buyer to
a licensed or certified inspector.
Home Inspections: The Additional Items #2
Let’s say you are showing a home that was built in 1905 and is on public
sewer. The listing agent insists that any sewage issues are the responsibility
of the town and there is no need to have an inspection.
Consider: Is the listing agent correct? Is there really no need for an
inspection? What do you think?
The Additional Items #2 Suggestion
While it is true that the sewer line is maintained by the town, what about
the line that goes from the home to the street? Most likely that is the
responsibility of the home owner. You may want to call and ask an expert if
inspection is warranted. If a sewage line is old, it may have deteriorated and
replacing it could be expensive!
Crime Rates
Safety is a concern for most people, though not all buyers will research the
safety of an area they are considering buying in. Some buyers will ask if a
neighborhood is safe or do research online, while others won’t think about
the issue until it is too late. Real estate agents are not law enforcement
officers. It is not a good idea to take on the liability of making safety
statements. Refer buyers to key websites and the local police department.
Consider: What do you think? Should the house be inspected? If so, for
what reasons? One list in particular may be of interest to buyers--the Sex Offender
Registry. Each state maintains their own registry. Let the buyer look up the
information for them to ensure they know where to locate the information if
they want to check it later. New Construction Suggestion
Protecting the Buyer’s Earnest Money Deposit
It is true that the property probably had the municipal building inspector
out to sign off on the home during the various stages of construction,
but the building inspector may be looking for particular safety and code
requirements. There are many things that a municipal building inspector is
not responsible for inspecting, such as water quality from a well or radon
levels in the basement. Building inspectors are human and may simply miss
material defects, especially if the builder is actively trying to hide them!
A basic home inspection should be recommended even if the home is new
construction.
Home Inspections: The Additional Items
Your buyers may have requested a basic home inspection but now wonder
about the add-on items, which can be expensive. Should they get the home
inspected for lead paint? Should they do additional water tests for radon or
heavy metals? Should the septic system be inspected? If the home is on a
public sewer, should the line be inspected?
Consider: What do you think? Should they add on the other items to be
inspected? Which ones are more vital? What factors play into the decision?
The Additional Items Suggestion
The first question to consider is how common is the issue in the area or
with that type of construction? For example, if the home was built in 1850,
lead paint is a common occurrence, but not so for a home built in 1985. In
Purchasing property, especially a home, can be a very emotional experience.
Negotiations can be emotionally taxing, so it is the job of the licensee to
be the voice of reason, the buffer, and sometimes the peacemaker. Many
transactions are completed with a minimum of negotiations, but some
are fraught with haggling over price, repairs, timelines, and other details.
Prepare your buyer for the possible scenarios so they do not come as a
surprise. Make sure they know when their earnest money deposit will be
returned and when they risk losing it due to certain transactional issues.
Current Market Conditions
This section refers to buyer-clients only. Licensees should not give advice
on market values after the initial solicitation of agency services, if the
licensee acts as a transaction broker, facilitator, or non-agent (i.e., no
agency agreement).
Buyers frequently make poor decisions because they hear misleading
information about market conditions. They may hear that it is a “buyer’s
market.” which makes them think that making purchase offers significantly
lower than the list price is an ideal strategy. While that strategy may work
in some cases, it may also lead to insulted sellers who will then refuse
to negotiate or will not counter-offer with their lowest acceptable price,
both of which could ultimately harm your buyer’s chances of purchasing a
property at the best possible price. On the other hand, if buyers hear they
are in a “seller’s market,” they may feel unnecessary pressure to offer more
than market value for a property.
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As a real estate licensee, you have the best tools to assist your buyer-clients
(remember, you should not give price recommendations to customers, just clients).
What are the best tools to assist your buyer-clients, you may ask?
Facts!
• Show your buyer-client examples of recent sales that are comparable
to their ideal property
• Calculate the ratio of sale price to list price of recent sales in their
target market: Is it 90%? 95%? 102%?
• When looking at these facts, also note the Days on Market, Original
List Price, and any special circumstances, such as a short-sale or
foreclosure, of the recent sales.
Arm your buyer-client with facts so they know what the current market
conditions are and what they can expect in their search for the best property.
Keep your buyer safe from overpaying and safe from losing a property they
really want to buy.
Example
You are working for a newly-married, young couple as their buyer agent.
They are looking for their first home. Of course, they want their dream
home, but after many, many (many!) showings, you hope they get a sense
of the market and find a home that suits their needs.
The buyers eventually find a home that they fall in love with and wish to
make an offer. While investigating the home, you see that it has been on
and off the market every year for the last 5 years without selling. You also
notice that 3 homes on the road have gone through foreclosure and sold for
50-75% less than the list price of the home in question. When you run a
CMA on the property, your estimate indicates that it is overpriced by 20%.
buffer for more experts to come in or for contractors to give estimates?
When should all documentation for financing be in? When should the buyer
ensure the property is insurable? When will the appraisal, title search, and
other applicable work be done? The licensee must keep track of all these
things for their buyer-clients. In addition, they should remind the buyer to
have utilities switched over on or soon after the closing date. Many utility
companies will charge more if utilities are turned off, then turned on, rather
than a simple name change.
What if everything is going smoothly, until a significant undisclosed material
defect is uncovered in the home inspection? Depending on the purchase and
sales agreement, the buyer may have three choices, but MUST execute
their choice BEFORE the last day specified for that particular inspection, or
they waive their right for a remedy. A buyer may wish to consult with a real
estate attorney to design or better understand a legal contract.
Here are the three common choices in a typical Purchase and Sales
Agreement:
1.
Buyer can declare the purchase contract to be null and void and
receive his or her earnest money deposit back.
2.
Buyer can ask the seller to remedy the defect, by repairing it,
reducing the purchase price, or receiving cash back at closing.
3.
Buyer can accept the property “as-is” and execute the contract
as planned.
The licensee should stay aware of the terms and any Purchase and Sales
Agreement. In some states, it is common to allow the seller to declare
the contract null and void if the buyer requests a remedy to a defect. It
is important to be cognizant of the terms of the agreement when making
recommendations to buyer-clients. Consider: What should you do? Example - Resolution
Hopefully, you have already talked to your buyer-clients about the market
conditions. This property may be at risk of appraising low. Warn your
buyers that they may lose their deposit if the appraisal comes in low and the
financing contingency deadline has passed.
It may be tempting to let the buyers proceed with the transaction without
warning them. It may feel like they will never find an acceptable property.
Nevertheless, be aware of your duty to care for your clients and keep their
earnest money deposit safe. Equip your buyers with the facts and advise
them as best as you can. Once you show the facts and give your advice,
the ultimate decision is up to your buyers--”agents advise, clients decide.”
If your advice encourages your buyers to keep looking, that may work out
best for you in the long run! Clients appreciate agents who actively work
to keep them safe. They will be more likely to recommend you to others in
the future.
It is a good idea to show your buyer a copy of the Binder or Purchase and
Sales Agreement used by your brokerage. Perhaps it is a standardized form
available from your state’s Association of REALTORS®. It could also be
a form specially designed for the brokerage or one drawn up by attorneys
for the transaction in question. In any event, it is important to go over the
terms of a typical Purchase and Sales Agreement ahead of time, so the buyer
is aware of the terms and conditions, timelines, and contingencies. The
licensee should refer the buyer to an attorney if there are any questions or if
the buyer wants advice on certain contingencies in a contract.
The licensee is also responsible for keeping the buyer on track. How many
days should the buyer have for inspections? (Note: it is a federal law that
10 days must be allowed for lead paint inspections). Should there be a
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Protection after Closing - Insurance
Most lenders require buyers to obtain homeowners insurance when
purchasing property with the help of mortgage funds. Buyers are well
advised to talk to an insurance agent to assess their particular insurance
needs. There are basic, broad, and multi-peril policies, among others. Every
property is different and every property owner is different. It is best to refer
the buyer to an insurance professional rather than advise them yourself.
However, you should alert the buyer to the need for homeowners insurance
and the potential need for other insurance, like flood insurance. A flood
certification may be required by the lender. If the buyer is a cash buyer,
you may want to advise him to look into flood certification for his own
protection.
An often overlooked insurance issue is the existence of past claims on a
property. Scan this code for an article that details the risk buyers may face
in this scenario.
There is a database of claims that insurance companies can access to see
if a property has a history of claims. This was of particular concern in
Texas when a series of water-related and mold claims prompted insurance
companies to deny coverage on certain properties. In other cases, a property
may be uninsurable because it has older electric wiring (knob and tube, or
60 amp fuses). Buyers would do well to make sure the property is insurable
well before closing.
Real estate licensees frequently get questions about Title Insurance. Most
lenders require that the buyer make a one-time payment for title insurance to
cover the lender. It is up to the buyer to decide if it is worth it to cover them.
Many buyers will ask their real estate agent if title insurance is worthwhile.
Remember two things: 1) The safety of your client is priceless, and 2) Real
estate licensees are not title insurance experts. Let the buyers know that it
is usually a good idea to purchase title insurance, and that they should talk
to a title company for the best advice. Protection after Closing - Change
the Locks!
How many sets of keys exist for the property the buyers just purchased?
Why guess? There could be many sets of keys in the hands of many people.
Here are a few common examples of individuals who may have keys to a
newly-purchased home:
•
The previous owners (or the owners before them)
•
People who rented the home a few years ago
•
A few neighbors who have keys in case of emergency or because
they walked a dog that used to live there
•
Contractors who worked on the house
•
Family and friends of the previous owners
•
The listing agent
•
Another buyer-agent who forgot to return the key
It may be surprisingly inexpensive to have locks re-keyed. Another option that
may add a little style (and safety) to the newly-purchased home is to purchase
new door knobs and/or deadbolt lock sets from a local hardware store.
Summary
In this chapter, we covered safety concerns for buyers and their assets.
From the first meeting, the buyer must be made aware of the difference
between agency and non-agency relationships. We also went over some
often overlooked issues, such as leaving the buyer’s car in a safe place and
safely showing a property. Next, we did a brief overview of disclosures
and safeguards, such as checking crime rates, having inspections done,
obtaining certain kinds of insurance (title insurance, homeowners insurance,
and flood insurance), and changing exterior door locks immediately after
taking possession of a property.
One theme that runs through this chapter is disclose and refer. While you
might want to save your buyer money, remember their health and safety are
priceless!
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or complete your assessment online at www.McKissock.com/VARE.
1. Real Estate Licensees are experts in:
a.
b.
c.
d.
Home inspection
Real estate law
Title insurance
None of the answers shown
2. What is the most important reason that breakables
should be secured prior to a showing?
a. They are valuable for reselling purposes
b. They may have tremendous sentimental value
c. They distract the buyer from envisioning himself in the
home
d. They are vulnerable to being broken by a clumsy buyer
3. In what way(s) does a Supra lock box provide home
security for listings?
a. Can be unlocked from a brokerage office
b. Collects data on who enters a home and when
c. Releases a warning sound when someone attempts to
physically remove the lock box without authorization
d. All of the answers shown
4. Most lenders require what type of insurance that is
paid in a one-time payment?
a.
b.
c.
d.
Homeowners’ insurance
Renters’ insurance
Title insurance
Mortgage insurance
5. Vacant and empty homes frequently run the following
type(s) of risk(s) to the sellers:
a. There are no significant risks to sellers when the homes are
empty
b. Copper pipes may be stolen
c. Appliances may be stolen
d. Both copper pipes AND appliances may be stolen
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6. How does pre-approved financing protect a buyer?
a. Prevents the buyer from falling in love with a property out
of his price range
b. Provides protection from losing a home to another buyer with
the same offer who has a commitment letter from a lender
c. Reduces the risk of losing earnest money if financing
cannot be completed before the contract deadline
d. All of the answers shown
7. To prepare for closing, what recommendations should
a buyer-agent provide to the buyer?
a. Investigate title insurance
b. Change the locks immediately after the close
c. Register the deed at the county courthouse immediately
after the close
d. To investigate title insurance AND change the locks after
the close
8. Why is it a bad idea to display family photos during a
showing?
a. Photos with children or young women provide a target for
predators
b. Buyers don’t want to see who lives there
c. Photos give the home a cluttered look
d. Photos are often stolen from homes
9. Is it okay for spare keys to be left on a hook or in a
“junk drawer” when showing a home?
a.
b.
c.
d.
No. They clutter the home’s appearance.
No. They can easily be stolen.
Yes. They provide a “homey” appeal.
Yes. If they are clearly labeled.
10. The EPA suggests taking action if the Radon levels in
a home exceed:
a.
b.
c.
d.
4 pCi/L
40 pCi/L
100 pCi/L
400 pCi/L
A Day in the Life of a Buyer Agent
3 CE Credit Hours (Approval #CA233C732CC)
This course begins by touching briefly on the fiduciary duties before moving on to things you might consider doing for you buyer client. Things such as: assisting
your client in determining preferences and timeline, going over the potential issues that may arise throughout the buying process, locating suitable properties, as
well as constructing and submitting an offer.
Chapters:
•
•
•
Chapter One: Agency and Fiduciary Relationships
Chapter Two: Finding the Best Properties
Chapter Three: Conducting the Real Estate Transaction
•
•
•
•
•
•
•
•
•
Distinguish between a customer and a client
Discuss the full scope of the fiduciary duties
Differentiate among the different types of buyer agency representation
Determine the Buyer’s Preferences and Timeline
Discuss the Process and Possible Issues in Buying Property
Locate Suitable Properties and Conduct a Professional Showing
Construct an Offer
Submit the Offer
Summarize the procedures from Contract to Closing
“Very easy to understand. Time sensitive to my needs and schedule.” ~ Timothy
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Chapter One:
Agency and the Fiduciary
Relationship
discussions may be made over the telephone, through faxes, and by other
means, so faxing, mailing, or emailing of the form may be necessary.
Real estate licensees generally earn their income through commissions from
sales. In this industry, the source of the commission does not necessarily
come from the customers or clients that the licensee is working with/for. The
source of the commission does not affect the services that licensee provides.
Introduction:
Customer vs Client: What is the Difference?
In this chapter, we will go over the definition of the Fiduciary Relationship.
We will differentiate between a customer and a client (no-agency or
agency). We will then talk about different forms of agency in the scope of
representing the buyer; specifically, the differences between buyer agency,
seller agency, disclosed dual agency, Transaction broker and sub-agency and
self-representation.
So… what is the difference between a customer and a client? Which
services are appropriate? Can their status change?
Upon completing of this section, students will be able to:
•
Distinguish the difference between a customer and a client
•
Understand the full scope of the fiduciary duties
•
Differentiate between different types of buyer agency representation.
Keywords:
•
•
•
•
•
•
•
•
•
•
Customer
Client
Consumer Information Statement (CIS)
Transaction Broker
Buyer Agent
Fiduciary Duties
Sub Agent
Seller Agent
Disclosed Dual Agent
Self-Representation
The purchase of real property is often the single largest purchase a person
will make in their lifetime. When assisting a buyer with this purchase, real
estate licensees shoulder a tremendous responsibility, fraught with liabilities
and risk. These liabilities may be civil and/or criminal, depending on the
scope of the issue. Whether you are working for a client or with a customer,
a minimum of professional service is always required. Licensees should
remember that property purchases are among the most significant life
decisions that a consumer will make. With the proper care and an eye toward
professional conduct, the process of buying property can be tremendously
beneficial for both buyer and licensee.
The first step in the buyer process (by regulation) is to go over the Consumer
Information Statement which you are required to present before: Any
discussion at which a buyer’s/tenant’s motivation or financial ability to buy
is discussed.
It is not required that the CIS be signed by the parties as to their
acknowledgement of receipt of the CIS or by the presenting agent s to the
declaration of business relationship. However your broker may have an
office policy that does require a signature.
Traditionally, the discussion of the buyer’s motivation and/or financial
situation, was made in person; however email and the Internet are changing
that. Many of us have discussed their motivations or financial situation with
consumers through email before ever meeting in person, so be sure to have
this form available on paper and electronically. Also be aware that these
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If there is no agency agreement, the consumer is a customer. Real
estate licensees work with customers all the time. Licensees who
work with customers are called Transaction Brokers, Facilitators,
Non-agents or Sub-agents. They do not represent buyer, and may
represent the seller, but they do assist in conducting the transaction.
A licensee works with a customer: there are no fiduciary duties owed to a
customer, but there is a minimum level of service:
• Known material defects must be disclosed
• The customer must be treated fairly and honestly
• There must be an accounting of all funds received and dispersed
• Licensees must comply with all state and federal laws
Without an agency agreement, a licensee may not provide a buyer advice
about market value, advocate for the buyer, or advise them in any way other
than how to conduct a basic real estate transaction.
Example:
Betty the buyer approaches you, asking for help locating and purchasing a
home. Of course, you show her the Consumer Information Statement (CIS),
but she doesn’t want to sign an agency agreement until she gets to know you
better. As it turns out, Betty falls in love with the first property you show her
and wants to put in a purchase offer. Again, you offer to represent Betty as a
buyer agent, but again, she declines.
What information do you give to Betty? What research, advice, advocacy
should you offer?
Estate and Inheritance Tax Liens
In this case, there is no agency relationship, but a minimum level of service
is required.
DO these things:
• Disclose the known flooding issues in the basement
• Be honest and fair when dealing with Betty
• Keep careful track and account for the earnest money Betty gives to you
• Follow the law
• Handle the paperwork
• Give a list of professionals needed in the transaction (home inspectors, lenders, etc.)
DO NOT do these things:
• Give advice on the offer price
• Give advice if a counter offer comes back
• Advocate for Betty when talking to the sellers or their agents
If Betty would like these services, she may enter into an agency agreement.
An agency agreement comes with the full suite of Fiduciary Duties.
Fiduciary Duties
When a Real Estate licensee enters into a contract with a consumer, that
consumer becomes a Client. Licensees work for clients, who are owed the
full range of fiduciary duties. A Fiduciary Relationship is one of special trust.
This relationship is similar to one of a doctor or psychologist and patient, a
religious minister and parishioner, or an attorney and client. What are the
specific duties owed to clients when in an agency relationship? Help them
not to sweat the transaction by offering COLDD AC (it’s so strong that they
shiver enough in the cold):
C is for the skillful Care you offer your client.
O is for lawful Obedience to the client.
L is for Loyalty to the client (above even yourself).
D is for Disclosure of material facts relevant to the transaction.
D is for timely Diligence in handling documents, funds, and research.
A is for Accounting of all funds.
C is for Confidentiality of information that may potentially harm your client
– now and always.
Let’s recap:
What is the difference between a customer and a client?
Licensees work with customer, providing a minimum level of service, and
for clients, providing the full range of Fiduciary Duties.
What services are appropriate?
Customers should be treated fairly and honestly, material defects should be
disclosed to them, all moneys must be accounted for, and the licensee must
always follow the law.
Clients get the minimum level of service, plus the COLDD AC fiduciary duties
(Care, Obedience, Loyalty, Disclosure, Diligence, Accounting, and Confidentiality).
Can the customer/client status change during the course of the transaction?
Usually yes. Your status as a transaction broker can change to agent at any
time during the transaction.
Note: In many states, it is a violation of state license rules to solicit a client
of another real estate licensee (this is also a violation of NAR code of ethics). However, if a buyer who is under an agency agreement approaches you, you
may speak with them and even discuss entering into an agency agreement
once their current agreement terminates. It is a good idea to ask all buyers
if they are working with another agent before you start to work for or with
them.
Without an agency agreement, a licensee may not provide a buyer advice
about market value, advocate for the buyer, or advise them in any way other
than how to conduct a basic real estate transaction.
Once a licensee establishes an agency relationship, there are a number of
things that can happen. Often the agency relationship will be a buyer or seller
agency. Often times, however, the brokerage or the licensee is representing
the other side in the transaction. In other situations, the licensee may want
to represent him or herself. No matter how the licensee represents the buyer,
the seller is still due a minimum of service. Below is a brief summary of
how to handle a number of different agency scenarios that frequently occur.
Types of Agency
Buyer and Seller Agency
If the brokerage represents only one side of a real estate transaction, they are
in a single agency situation. In this case, the other side in the transaction is
represented by another brokerage, or perhaps the other side is not under an
agency agreement. The other party in the transaction is still due the minimum
level of service and professionalism.
Disclosed Dual Agency
What if your buyer client is interested in one of your listings? Can you
represent the buyer and the seller in a transaction?
You may be allowed to represent both sides of a transaction if your dual
agency relationship is fully disclosed and authorized by both the buyer
and the seller. This situation poses unique challenges because of the
confidentiality responsibility. Specifically, a dual agent cannot disclose
the seller’s willingness to take a price lower than the list price. Licensees
may not disclose if the buyer is willing to pay a price higher than the offer
price. In addition, the licensee may not disclose any negotiating strategy, or
the motivation of the seller to sell the property – unless they are explicitly
authorized to do so (in writing is best).
The licensee in a dual agency situation also faces a challenge of being
fair and balanced. There can be no preference shown for either side – no
advocacy, and no advice on sales price. If any information (other than the
exceptions above) is provided to one side, it should be provided to the other
side as well.
In some states, dual agency exists if the buyer and seller are represented
by licensees within the same firm (This is the case in New Jersey). In this
case, all licensees who hang their license within that firm may technically
represent all clients. Check with your state licensing agency and principal
broker for clarification on what is allowed in your state and firm.
Transaction Broker
New Jersey’s license law does not require licensees to work as “Agents”
when providing service. A transaction broker works with buyer or seller
or both in the sales transaction without representing anyone. A transaction
broker does not promote the interests of one party over those of the other
party to the transaction.
Licensees with such a firm would be required to treat all parties honestly
and to act in a competent manner, but they would not be required to keep
confidential any information. A transaction broker can locate qualified
buyers for a seller or suitable properties for a buyer. They can then work
with both parties in an effort to arrive at an agreement on the sale or rental
of real estate and perform tasks to facilitate the closing of a transaction. A transaction broker primarily serves as a manager of the transaction,
communicating information between the parties to assist them in arriving at
a mutually acceptable agreement and in closing the transaction, but cannot
advise or counsel either party on how to gain an advantage at the expense of
the other party.
What if your buyer client is interested in one the listings within your
brokerage?
You will need to have them sign an informed consent to dual agency.
Sub Agency
In New Jersey, if you are not a buyer’s agent or Disclosed Dual Agent, you
are a subagent of the seller.
All of a Broker’s sales associates are subagents of the broker’s listings
unless they have a have a buyer agency agreement, then they are required
to have a dual agency agreement for any home shown that is listed by that
brokerage. All cooperating agents that are not buyer agents (have a buyer
agency agreement) in the broker’s Multi Listing Service, are sub agents to
the listing broker unless:
• The listing broker & seller do not allow for sub agency
• It is advertised as not allowing for sub agency (usually shown in the MLS listing.
In these cases, an agent working with buyers that do not have an agency
agreement with a buyer is in violation of the rules set by the seller and the
listing agent can refuse to pay a commission to a sub agent.
Example:
If a buyer wants to see a listing that is listed with another broker and you
have presented them with the CIS and they do not want to be represented by
you, you can show them the house. However, your fiduciary duties are to the
seller and anything you say, the seller, the listing broker and your broker can
85
be held responsible. This is why many listing brokerages do not allow sub
agency as part of their policy. The risk is too great.
Self-Representation
What if you want to buy a property for yourself?
It is legal for a real estate licensee to purchase their own properties either
representing themselves, or without an agency agreement. As a licensee, you
must disclose the fact that you have a license to the seller in writing before
presenting a purchase offer. It is also a good idea to talk to your principal
broker before entering into an agency agreement with yourself – or working
without an agency agreement. Alert your principal broker if you are entering
into an agency agreement with another licensee as well (which many
licensees do if the type of property falls outside their area of expertise).
Your broker is responsible for your actions whether you represent yourself
in an agency agreement, another licensee represents you, or if you make a
purchase without an agency agreement. Your brokerage may have specific
guidelines for self-representation.
Note that licensees should disclose this fact to buyers and sellers before
entering into a sales agreement – on either side of the transaction.
The Seller
If a licensee is not working on the seller side, they still owe the seller a
minimum level of service, regardless of if the seller is being represented or
not. The seller must be treated honestly and fairly. Further, the buyer’s agent
may not knowingly give false information regarding the buyer’s financial
ability to purchase the property. The buyer’s agent can perform ministerial
acts for the seller (like handling paperwork) without violating the buyer
agency agreement. In fact, they can also help with professional services
necessary to complete the transaction. A good rule of thumb is to provide
the seller with the same level of professionalism as you would any customer
you are working with.
Summary
Real estate licensees work with customers. In this situation, there is no
agency agreement, but a minimum level of service is required. On the other
hand, licensees work for clients. A client is a consumer with an agency
agreement. They enjoy the full fiduciary relationship with the licensee.
Fiduciary duties are COLDD AC: Care, Obedience, Loyalty, Disclosure,
Diligence, Accounting, and Confidentiality.
Buyers’ agents can be a “buyer’s agent only” if the brokerage only represents
the buyer side of the transaction Occasionally, a licensee may have a buyer
client who is interested in one of their listings (in which the seller is also a
client of this licensee). Dual agency is allowed if it is properly disclosed and
consent has been given from both sides in writing.
In some states, if the buyer and seller in a transaction are each represented
by different licensees within a brokerage, an appointing broker can appoint
one licensee to each client. This is known as appointed/designated agency.
Sub agency is when the agent is not representing the buyer in an agency
relationship and is not the listing broker. Remember, that a listing broker
(and seller) can choose not to allow sub agents to show or participate in the
sale of a home. And agents working with buyers should check the MLS
prior to working with buyers that do not want to be represented in an agency
relationship.
Self-representation can be tricky. The licensee’s designated broker is liable
for actions taken by the real estate licensee – even if the licensee is not in an
agency agreement with their brokerage. Also, in many cases, your Errors
and omission insurance may not cover you in a self-representation situation.
The seller is due a minimum level of service, even if they are on the opposite
side of the transaction.
Here is a short example to help you determine what type of agency (if any)
and what level of service to provide:
An informed buyer comes from a position of strength and is more likely to
make good decisions. Real estate professionals help to build that strength.
Buyer Barry contacts you and asks you to show him some homes for sale.
You and Barry enter into an agency agreement that will last for 6 months.
You find a beautiful home that fits everything that Barry wants in a home.
Indeed, Barry sees the home and wishes to place a purchase offer on it.
The seller of this home has listed it with another licensee in your office and
is providing 100% of the commission that will be split between the listing
agent and you.
Things that can help to determine the buyer’s preferences and timeline
include listening to their preferences, helping them get pre-approved for
financing, and going over market conditions.
So…. is Barry a customer or a client?
What kind of representation are you offering to Barry?
• No Agency?
• Single Agency?
• Dual Agency?
• Appointed/Designated Agency?
What kind of representation are you offering to the Seller?
• No Agency?
• Single Agency?
• Dual Agency?
• Appointed/Designated Agency?
What services do you provide to the seller?
• Nothing?
• Minimum level of service?
• Full Fiduciary Duties?
In this case, the buyer is a client. Since another agent represents the seller,
you are a buyer’s agent, or a dual agent. Even though the seller is paying the
commission and represented by a licensee in your office, you still owe him
or her the minimum level of service (but nothing more).
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After listening to the buyer we discuss the process and possible issues in
buying property, including going over the purchasing process, talking about
things that may be issues, such as items that may appear in the mandatory
disclosures. Suggested purchase strategies and communication expectations
were also covered.
Remember how to locate suitable properties and conducting a professional
showing. We started with suggestions on how to locate properties, making
sure the properties are available, how to conduct a showing, what further
steps to take when a buyer expresses interest, and finally, which inspections
to consider (and their costs) before making an offer.
Construct and submitting an offer to purchase real property is something
every licensee should know. Price is not the only influential factor when
crafting an offer. Sellers may also be interested in closing dates, closing
costs, contingencies, and financing approvals.
Certain things can be done to make the offer stronger. Dealing with multiple
offers can be tricky, and so can a situation where two buyer clients of the
same licensee are interested in the same property.
During closing, keeping track of time and making sure buyers and service
providers complete their tasks by the deadlines specified in the purchase and
sales agreement is one of the most important things a real estate licensee
can do for the consumer. When a transaction goes smoothly, everyone wins.
Chapter Two:
Finding the Best Properties
Once you establish an agency or non-agency relationship (which may, of
course change), you then determine what level of service to provide (minimal
level or full fiduciary). Let’s set out a set of guidelines to follow that will
help you – and ultimately the buyer – find the most suitable properties.
In this chapter, we will get to work. It is the job of the licensee to help their
buyers identify the best properties for purchase. In order to identify those
properties, there is much to be done prior to generating a list of appropriate
properties, then locating the ones that seem like the best fit, and of course,
the showings. Buyers may need guidance obtaining pre-approval for a
mortgage, understanding current market conditions, identifying their most
important preferences for their ideal property, and becoming aware of
material defects. Once the best properties are identified, licensees need to
help buyers with their offers for purchase, negotiations, and inspections.
As the real estate professional, the licensee is tasked with helping their buyers
save time and headaches by narrowing in on the best properties on the market.
Licensees also assist their buyers through the entire offer, negotiation and
closing process. While the following chapter presents guidelines to better
serve buyers, it is important to tailor a plan to the needs of the individual
buyer, work within brokerage policies, and keep the principal broker aware
of issues as they come up.
Upon completing this section, students will be able to:
• Determine the Buyer’s Preferences and Timeline
• Discuss the Process and Possible Issues in Buying Property
• Locate Suitable Properties and Conducting a Professional Showing
Keywords:
Pre-qualification
Pre-approval
Market Conditions
Preferences
For Sale By Owners (FSBOs)
Multiple Listing Service (MLS)
Steering
Material Defects
Mandatory Disclosures
Due Diligence
Inspections
Deed
Deed Encumbrances
Survey
A licensee’s job starts well before the negotiations – or even the first showing.
Whether dealing with a customer or a client, we need to make sure that the
buyer is looking at properties that best fit their size and style goals, while
reasonably falling within their ability to pay. The following guidelines are
a starting point to show the buyer the knowledge, skills, and experience of
a real estate licensee. Knowing these steps will save the consumer (and the
licensee) time and frustration in the long run.
Determine Buyer’s Home Preferences and Timeline
A good licensee is one who is knowledgeable and competent, an effective
communicator and negotiator, and one with a full understanding of how
to conduct real estate sales transactions. Before licensees can display their
skills, they need to start by listening. What type of property does the buyer
want? When do they want to close? What special considerations do they
have? Many buyers don’t have a solid idea of what they want – and that
is OK too. It is most important to match the desires of the buyer with the
properties that best match what they want and can afford.
A good place to start is with the search terms in the local MLS database:
• Town(s)
• Type of Property: Land, Single Family, Multi-Family, Condominium, Mobile Home, or Commercial
• Number of Bedrooms
• Number of Bathrooms
• Age of Home
• Lot size
• Square Footage of building
• Waterfront (if yes, what type: ocean, lake, river, etc)
• Garage
In addition, ask for preferences of architectural style:
• Cape Cod
• Colonial
• Bungalow
• Split Entry
• Saltbox
• Contemporary
• Ranch
• Etc.
Ask about special interests:
• First floor master bedroom
• Accessibility needs
• Are there allergy sufferers? (if so, perhaps
they want to avoid forced hot air, carpet, homes
with moisture issues, and so on)
• Energy Efficiency
• Etc.
Review pre-approval process and Help buyer client to
determine price range
Does your buyer need financing? Most do. There is a definite difference
between a buyer being pre-qualified and pre-approved for a mortgage. Prequalification can be done by the buyer, a real estate licensee, or a lender.
It is simply evaluating the debt to income ratio and establishing a rough
estimate of the buyer’s ability to obtain financing. Debt to income ration
simply looks at monthly gross income (income before taxes), and monthly
debt that the buyer will pay for at least the next 10 months. Many banks and
lending institutions have “mortgage calculators” on their webpages. While
this is a useful tool, buyers needing financing are generally better served if
they are pre-approved prior to their property search.
Pre-approval involves the buyer selecting a lender, completing paperwork
and usually providing documentation, such as a couple years of tax returns,
a few months of paystubs and bank statements, as well as official records of
any investments they may hold. Being pre-approved for a mortgage provides
many benefits to the buyer:
• It tells them exactly how much financing they are eligible to receive,
and thus their price limits for purchase. Many buyers may start with
an unrealistic price range if not pre-approved.
• It makes their purchase offer(s) much stronger. In fact, many sellers
will ask for a “commitment letter” from a lender upon receiving a
purchase offer. It shows a level of seriousness that buyer who are not
pre-approved do not possess.
• It saves precious time in the transaction if the lender has the
87
necessary documentation and forms.
• Getting pre-approved may introduce your buyer to special financing
programs that they may otherwise not know about. This can change
the criteria in their property search.
• It may give you an opportunity to show your value in recommending
a few lenders with good reputations.
Tip: If you are suggesting lenders, home inspectors, attorneys, or any other
service provider, it is a good idea to recommend at least 3 It is a violation of
most state and federal law to require contracts or combinations in real estate
because it restricts the free-flow of trade. The buyer must be able to choose
their own service provider, and by giving them choices, this is made clear.
Offering choice also protects you, the licensee because the buyer is selecting
the service provider. If your favorite lender has an off day and does a terrible
job, you may become liable if you recommended only that lender. Offering
choice in service providers is good for everyone.
A good way to begin the conversation about financing is by asking, “Which
lender has pre-approved you?” In asking this way, it sends a message that
the buyer should be pre-approved before they begin to look at properties. If
they are not pre-approved, it is the job of the licensee to explain how it is
in the buyer’s best interest to get pre-approved before searching for suitable
properties in earnest.
Example:
Buyer Bert wants a 5 bedroom home, with at least 3,500 square feet in a
prime waterfront area. He is confident that he can find what he wants with
his $50,000 a year income.
He calls you one Saturday morning, asking to see a $2,000,000 listing that
afternoon. Bert knows that it is a buyer’s market right now, so he expects you
to negotiate hard and get him a deal.
Think about how to approach this buyer and his goals.
- Start by going over different types of agency representation.
- What are the required attributes in a property?
- Does Bert need financing?
- If so, has he been pre-approved?
- What is a realistic price range for Bert?
- When would Bert like to close?
- Look at comparable and set realistic expectations
- Go over the buying process
With this basic information, licensees can demonstrate the usefulness of
their training, skills and experience. Buyers will be better informed on what
to expect, making for a smoother transaction.
Give buyer client an overview of current market conditions
This section refers to buyer clients only. Licensees should not give advice on
market values after the initial solicitation of agency services, if the licensee acts
as a transaction broker, facilitator, or non-agent (i.e. no agency agreement).
Buyers frequently make poor decisions because they hear misleading
information about market conditions. They may hear that it is a “buyer’s
market”, which makes them think that making purchase offers significantly
lower than list price is an ideal strategy. While that strategy may work in some
cases, it may also lead to insulted sellers who will then refuse to negotiate,
or will not counter-offer with their lowest acceptable price – both of which
could ultimately harm your buyer’s chances of purchasing a property at the
best possible price. On the other hand, if a buyer hears they are in a “seller’s
market”, then they may feel unnecessary pressure to offer more than market
value for a property
As a real estate licensee, you have the best tools to assist your buyer clients
(remember, you should not give price recommendations to customers).
What are the best tools to assist your buyer clients, you may ask? Facts!
• Show your buyer client examples of recent sales that are comparable
to their ideal property.
• Calculate the ratio of sale price to list price of recent sales in their
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target market: is it 90%? 95%? 102%?
• When looking at these facts, also note the Days on Market, Original
List Price, and any special circumstances (like being a short-sale or
foreclosure) of the recent sales.
Arm your buyer client with facts so they know what the current market
conditions are, and what they can expect in their search for the best property.
Example:
Here is a common example that many of us are far too familiar with:
You are working for a newly married, young couple as their buyer agent.
They are looking for their first home. Of course, they want their dream home,
but after many, many (many!) showings, they get a sense of the market and
find a solid home that is priced fairly and suits their needs.
What happens next??? You guessed it!
Both sets of parents want to see the home. The parents notice many items
that aren’t brand new and want to get the best deal possible for their children.
They pressure the young couple to make an offer 25% below list price. They
also want the sellers to pay a few thousand dollars in closing costs, replace
the roof, install a new furnace, and repave the driveway. These terms fall
well below the average for the target market.
What should you do?
Hopefully, you have already talked to your buyer clients about the market
conditions. They know that the average home in their target area sells for
93% of list price (much higher than 75%). Be sensitive to the buyers’ needs.
It may be tempting to go over the situation with the buyers’ parents, but do
be aware of your fiduciary duty of confidentiality! Even if the parents are
providing some money toward the purchase of the property, you signed an
agency agreement with the young couple. If the parents are not named in
the agency agreement, then you must be careful not breach your duty of
confidentiality. Also be aware of your duty to obey your clients.
It is your job to make your buyers aware of market conditions. Make them
aware that the seller may become offended with the offer and may not wish
to negotiate any further. Equip your buyers with the facts, and advise them
as best as you can.
Once you show the facts and give your advice, the ultimate decision is up
to your buyers. “Agents advise, clients decide”. Some clients will heed your
advice; others may have to lose a home or two before they trust in your
expertise (and who knows – maybe the sellers are motivated enough to
negotiate or accept the offer!)
We have covered some basic topics that will help in the search for a suitable
property. So far, we have covered listening to the buyer to find their
preferences and timeline, the importance of getting buyers pre-approved
if they need financing, and determining their price range, going over current
market conditions, so buyers know what to expect. Now that the buyers
have been armed with the facts, let’s prepare the buyers for the process of
buying and some common issues that occur.
Discuss the Process and Possible Issues in Buying Property
If buying a property were as simple as buying a bag of groceries, then there
would be no need for real estate licensees. As a licensee, you have gotten
specialized training, and have the experience and/or support to direct your
buyer with the complex process of purchasing real property. Explaining the
process of buying property should be shared with both clients and customers.
It is considered part of the minimum level of service.
What should you tell your buyers?
• What is a reasonable timeline from purchase offer to closing?
• How should they handle the negotiating process?
• What actions should the buyers being doing – and when?
• What if there are issues uncovered in the home inspection?
• Are there any expenses they should be prepared to pay outside of closing?
Familiarize buyer with the process of buying a property
You and/or your principal broker have likely seen many, many transactions.
How long does it take for an average transaction of this type? Keep in mind
things like inspections, appraisals, and financing. If the property is land, be
sure to work in plenty of time to get appropriate approvals from the town or
city (and sometimes state too!). If the property is a short-sale or a foreclosure,
be sure to prepare your buyer for an undetermined timeline. Don’t be afraid
to ask your broker, the lender, and/or town officials.
Purchasing property, especially a home, can be a very emotional experience.
Negotiations can be emotionally taxing and it is the job of the licensee to
be the voice of reason, the buffer, and sometimes the peacemaker. Many
transactions are completed with a minimum of negotiations. Others are
fraught with haggling over price, repairs, timelines, etc. The licensee has
the power to set expectations and to take all the back and forth negotiation
in stride. A few reassuring words can mean the difference between a smooth
transaction and a traumatizing one. Prepare your buyer for the possible
scenarios so they do not come as a surprise.
It is a good idea to show your buyer a copy of the Binder or Purchase and
Sale Agreement used by your brokerage. Perhaps it is a standardized form
available from your state’s Association of REALTORS®. It could also be a
form specially designed for the brokerage, or one drawn up by attorneys for
the transaction in question. In any event, it is important to go over the terms
of a typical Purchase and Sales Agreement ahead of time so that the buyer is
aware of the terms and conditions, timelines, contingencies, etc.
The licensee also is responsible to keep the buyer on track. How many days
should the buyer have for inspections? (note: it is a federal law that 10 days
must be allowed for lead paint inspections). Should there be a buffer for
more experts to come in, or for contractors to give estimates? When should
all documentation for financing be in? When will the appraisal, title search,
and other applicable work be done? The licensee must keep track of all these
things for their buyer clients. In addition, be sure to remind them to have
utilities switched over on or soon after the closing. Many utility companies
will charge more if utilities are turned off, then turned on, rather than a
simple name change.
What if everything is going smoothly, until a significant undisclosed material
defect is uncovered in the home inspection? Depending on the purchase and
sales agreement, buyer may have three choices, but MUST execute their
choice BEFORE the last day specified for that particular inspection, or they
waive their right for a remedy. A buyer may wish to consult the advice of a
real estate attorney to design or better understand a legal contract.
Here are the three choices in a typical purchase and sales:
1) Buyer can declare the purchase contract to be null and void and receive
his or her earnest money deposit back.
2) Buyer can ask the seller to remedy the defect, by repairing it, reducing the
purchase price, or receiving cash back at closing.
3) Buyer can accept the property “as-is” and execute the contract as planned.
The licensee should stay aware of the terms and any Purchase and Sales
Agreement. In some states, it is common to allow the seller to declare
the contract Null and Void if the buyer requests a remedy to a defect. It
is important to be cognizant of the terms of the agreement when making
recommendations to buyer clients.
Finally, buyers should be aware of the expenses involved with closing a
real estate transaction. Federal legislation included in RESPA (Real Estate
Settlement Procedures Act) requires lenders to estimate closing costs for
buyers. Costs not included in these estimates can come as a shock to buyers
if not explained.
The first cost not outlined in lender estimates is the real estate sales
commission. It is customary that the seller pays commission for both sides
of the transaction, but that is not always the case. Is the buyer liable for
commission if the seller does not pay (or does not pay enough)? What if the
property is a For Sale by Owner (FSBO), and not listed in the Multiple
Listing Service (MLS)?
The Multiple Listing Service is a data clearinghouse that posts property for
sale and specifies compensation to brokerages that assist in the transaction.
While there is no single MLS provider, the most common providers are
owned or affiliated with the state’s Association of REALTORS®.
Example:
You are working with a set of buyer clients who are relocating from out of
state. They are flying in for the weekend and want to see 50 listings in the
area. 50 listings is a very ambitious goal for one weekend, so you ask them
to narrow down their list. They buyers are unable to choose, so they leave it
up to you to decide which listings to show.
Looking through the listings, you see one that offers a generous selling agent
bonus. The commission rates among the listings vary widely. Some listings
you are quite familiar with (in fact, one is your listing). Some listings are
turn-key condition; others may be priced to sell.
Which properties do you show?
Suggested Answer: while it is often difficult to narrow down a list of potential
properties, your fiduciary duties direct you to be loyal to the client above
yourself. Use your skill to care for your client and choose the properties you
think will match their wishes as closely as possible. You may show your own
listing(s) if both sides consent in writing to dual agency. Let your loyalty to
your client dictate the listings you show. Selling bonuses and commissions
should not enter into your decisions.
Mandatory Property Disclosures
A variety of different hazards are common in different parts of the country.
Each state has their own list of mandatory property disclosures. These
disclosures may include things such as:
- Water Supply System (type, location, any
malfunctions, date of water test, problems)
- Insulation
- Heating System (type, age, company that
serviced, date of service, annual fuel
consumption, malfunctions)
- Waste Water Disposal System (type, size,
location, malfunctions, date of instillation,
date of service, name of servicer, more info
needed for systems within shoreland zones)
- Hazardous Materials
o Asbestos
o Lead-based Paint
o Radon
o Underground Oil Storage Tanks
- Other Material Defects
Hazards of Special Interest: Lead and Radon
According to Colorado State University (Fact Sheet number 9.538), more
than 75% of homes built before 1978 contain lead paint. According to
UL, that figure jumps to 87% for homes built before 1940. Lead paint can
contribute to nervous system and kidney damage, learning disabilities,
diminished bone and muscle growth, behavioral issues and even death. It is
especially dangerous for children 6 years and younger.
Lead paint is the only federally mandated property disclosure. Sellers,
landlords and real estate licensees must ensure that buyers and renters
receive a lead paint disclosure AND the lead paint pamphlet from EPA/HUD
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(http://www.epa.gov/lead/pubs/leadpdfe.pdf) if the property is for sale or
rent as housing and was built before 1978.
It is vitally important to inform you buyers of the hazards of lead paint!
Email the above PDF file and ask for confirmation of receipt and/or obtain
paper copies from EPA, HUD, or your local Board of REALTORS®.
Radon is another deadly hazard that is prevalent in much of the country
(to see if radon is common in your area, see this map: http://www.epa.gov/
radon/zonemap.html). Radon is a natural gas that results from the breakdown
of radioactive materials commonly found in the soil and rocks. It is invisible,
and odorless. It tends to accumulate in basements and lower levels over time
and can also be present in water. It is estimated that radon is the second only
to cigarette smoking as a contributor to lung cancer in the United States.
The Environmental Protection Agency recommends taking action if Radon
exceeds 4 pCi/L in the air. They have proposed guidelines for areas with
radon in the water, which range from 300 pCi/L to 4,000 pCi/L, depending
on the source of water.
It is important to warn your buyers of the dangers of radon, recommend that
they test for it, and also let them know that radon can be mitigated in most
situations.
Design a purchase strategy based on the specific needs and
wants of buyer
Every buyer is different, and each one has their own priorities. It is important
to discover the top priorities of the buyer so that the search process is as
efficient as it can be. Top priorities may be the price, the condition of the
home (fixer-upper or turn-key), specific amenities, location, time of closing,
energy efficiency, etc.
When assisting a buyer in finding their ideal property, be sure to treat
everyone with the same level of respect and professionalism. Even if a
licensee believes they are helping, steering is illegal. Steering is the act
of directing a buyer (or renter) to specific neighborhoods based on certain
characteristics. These characteristics or “protected classes” include: race,
color, national origin, religion, sex, familial status or handicap. In addition
to steering to or away from neighborhoods, the Fair Housing Act prohibits
the following actions:
• Refuse to rent or sell housing
•Refuse to negotiate for housing
•Make housing unavailable
•Deny a dwelling
•Set different terms, conditions or privileges for
sale or rental of a dwelling
•Provide different housing services or facilities
•Falsely deny that housing is available for
inspection, sale, or rental
•For profit, persuade owners to sell or rent
(blockbusting) or
•Deny anyone access to or membership in a
facility or service (such as a multiple listing
service) related to the sale or rental of housing.
So what if a buyer who is clearly part of an ethnic group wants to live in an
ethnic area? The licensee may NOT steer them, or treat the any differently,
however, if the buyer requests to see housing in that neighborhood, by all
means – honor their request!
If the licensee gets a clear idea of the buyer’s top priorities, he or she can
better help make an informed decision. Buyers often purchase property
based on their emotional response. Things like furniture, clutter, and
general cosmetics of a home can influence buyers to make poor decisions.
Sometimes telling a buyer to walk away from a property is the best thing a
buyer’s agent can do!
If the buyer is most interested in price, signing them up for an Internet Data
Exchange (IDX) feed. This can be accomplished through internet service
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providers, or by the licensee checking the property listings every day for the
buyer. Even in a falling market, buyers may need to act fast if a below-value
property comes on the market.
They key to a good purchase strategy is to really listen to the buyer and
discover their most important priorities.
Example:
The Bernardo family have just moved from Italy and wish to buy a house
and start their new life in the US. They are learning English quickly, but still
struggle sometimes. You know that there is a part of town known as “Little
Italy” and immediately think they would be happiest in that neighborhood.
The family asks about a house in a neighborhood known as Little
Switzerland, but you tell them they would be happier elsewhere. You insist
that they see the houses in Little Italy first (and maybe you tell them that the
Little Switzerland house is under contract, just to save their feelings).
Is this OK?
Comments: NO, this is not OK! Maybe the family wanted to immerse
themselves in a new culture. It is not legal to steer the family to one
neighborhood, or tell them that a home is not available, when in fact it is.
If the family specifically asks to see housing in Little Italy, then definitely
take them there. Otherwise, do not treat them differently than any other
buyer.
Determine Communication Method and Schedule
Communication goes hand in hand with the purchasing strategy. How do
the buyers want to hear from their agent (email; text; phone; fax; personal
contact)? When do the buyers want to hear from the licensee (anytime; after
6:00 PM; weekends only)? Will the licensee be unavailable at any time?
Setting expectations is important for professional service. Purchasing
property is a significant life event for many buyers. Regular communication
and setting expectations can help to ease concerns, make the buyers feel
more comfortable, and help the transaction move more smoothly.
Knowing what the buyer wants is only part of the process of getting buyers
ready to purchase a property. After listening to their wants, the licensee should
then do the talking and inform the buyer about the process and possible
issues. In this section, we covered the buying process, the purchase and sales
agreement, as well as stigmatized properties and mandatory disclosures. We
finished up by designing a purchasing strategies and setting expectations for
communication. After all this work, we are now ready to start the search for
suitable properties!
Locating Suitable Properties and Conducting a Professional
Showing
Locating properties that match buyer’s criteria
This part is easy – right? Just check the MLS!
That tactic may be appropriate for customers who have not entered into an
agency agreement. Customers are due a minimum level of service, which
does not involve significant research.
Buyer clients, on the other hand warrant more. The MLS may be an
excellent place to look for suitable property, but the search should not end
there. Classified ads in newspapers and on websites, such as www.craigslist.
com may be examined. There may be For Sale By Owner signs posted
in target neighborhoods. For buyers with very specific preferences, the
real estate licensee may approach owners who do not currently have their
property for sale. Other sources may yield good results, such as foreclosure
notices and upcoming tax sales. Finally, licensees should use their sphere
of influence to keep an ear out for appropriate properties – which may come
from unexpected sources.
Determine if desired properties are still available
Just because a property is posted for sale, does not mean it is still available.
Most MLS systems have guidelines or rules about changing the listing
status. Still, there may be listings that state they are current, when in fact
they are under agreement for purchase. The same is true of other properties
that appear to be available for sale.
Discovering the actual status of a property that is for sale can be found through
a quick phone call or email. If the listing agent of seller has not responded
to an inquiry within a reasonable period of time, it is important to follow up.
The licensee must work in the best interest of their buyers. In extreme cases,
a call to the listing agent’s principal broker may be appropriate (for example
if 3 messages left over the course of 3 days have not been returned, and no
alternative information on showings is available).
If the property is indeed still available for sale, ask to set up a showing during
a time convenient for the buyer. Confirm the appointment with the buyer.
Also confirm the appointment with the listing agent or seller if appropriate.
A listing packet should be made available to the buyer before or during the
first showing of the property. A good listing packet will include: the MLS
descriptions (or similar if not in the MLS), the required property disclosures
(state mandated and federally mandated lead paint). Other documents may or
may not appear in the listing packet, such as the Deed, the Tax Assessment
Card, the Tax Map (and/or survey if available), and any related documents
such as Condominium Documents, Neighborhood Covenants, or other
Encumbrances referred to in the Deed. If any of these documents are
missing, request at least the mandatory ones from the listing agent or seller.
For buyer clients, it is useful to obtain the optional document if there is
expressed interest in the property. For buyer customers, it is appropriate to
inform them about the documents and where to get them (do not conduct
research for buyer customers).
concerns to be investigated (don’t simply rely on the buyer client to ask a
question, i.e. the buyer may not have owned a property with a septic system
or well; zoning or other property restriction information). Due Diligence is
important!
Here is a partial list of items that help to inform good decisions:
• Property disclosure
• Deed/Deed restrictions
• Plan Book
• Boundary Survey (if disclosure indicates a boundary survey has been
completed, obtain copy of survey- not all ‘surveys” are boundary
surveys.)
• Market analysis
• How long property on the market/price reductions
• Association Rules/Other restrictions
• Road Type (public, private, association)
• Zoning
• Taxes
• Proposed development/changes in the neighborhood
Inform buyers about available websites – local
information
• Schools
• Crime
• Demographics of Town
Consider Inspections
Finally, there will be much information that is not available through public
domains. Now is the time to remind buyers of some basic inspections to
consider, such as the home inspection; septic inspection, water and air quality
testing, title insurance, etc. These inspections could be costly, so buyers need
to be informed about them before making an offer.
The Showing
The showing is often the most fun part of a property search. It is an
opportunity to learn more about the buyers’ preferences, and it helps the
licensee to become more familiar with their target market. There is almost
always something positive to come out of a showing, even if the buyer does
not wish to pursue the property.
As a real estate professional, there are a few important principles to showing
property. First, attend the showings with your buyers – whether they are
customers or clients. Picking up on verbal and non-verbal cues is important
to finding the best property.
Respect the buyer by allowing them to enter a room before you. Respect the
property being shown. If the listing agent or seller is not present, but sure
everyone wipes their feet before entering (it may be a good idea to remove
shoes upon entering a building). Leave the property as you found it: turn off
lights, close closet doors and cabinets, and do not let the buyer damage the
property. It may be tempting to pull up carpeting to see if there is hardwood
underneath, or pull off molding to see if it is rotting. It is never appropriate
to damage a property that you have been entrusted with. Finally, make sure
doors and windows are locked when you leave.
If the first property isn’t a good fit for the buyer, keep trying. According
to the Office of Housing and Urban Development, the average homebuyer
looks at 15 homes before making a purchase offer (http://portal.hud.gov/
hudportal/HUD?src=/program_offices/housing/sfh/buying/buyhm).
This
number is likely to be higher for first time homebuyers, or markets with
large inventories, or buyers who are new to the area. The key is to continue
viewing properties until buyer selects one.
When a Buyer Expresses Interest in a Property
As mentioned before, purchasing a property – especially a home -- is an
important and emotional decision. If the buyer has selected a property to
purchase, licensees need to make sure they have the information needed to
make an informed choice.
If the buyer is interested in making an offer, develop a list of questions and
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Chapter Three:
Conducting the Real Estate
Transaction
Upon completing this chapter, student will know:
• How to Construct an Offer
• Submitting the Offer
• Under Contract to Closing
Keywords:
Comparable Properties
Days on Market
Offer
Inspections
Counter Offer
Acceptance
Competing Offers
Negotiation
Under Contract
Financing
Availability of Property Insurance
Appraisal
Title Search
HUD Settlement Statement
Closing
Maybe the buyer just started looking, or they may have been looking for a
long, long time. Once the ideal property is found, licensees can really show
their worth. Many buyers (and sellers) who try to go through a transaction
without the assistance of a licensed real estate professional find themselves
lost in the complications of contracts, inspections, legal procedures, and
needed services. The licensee is their tour guide through this complicated
trip fraught with time limits, risk, and liabilities. When dealing with high
valued assets like real estate, it is often worth the time and expense of getting
and expert’s advice!
Constructing An Offer
Remember the difference between a customer and a client?
The difference stands out in this section and it is worth repeating here.
Buyer customers (those without an agency agreement)
• Receive the minimum standard of service.
• Do treat them fairly and honestly
• Do perform ministerial acts, such as handling
paperwork and explaining the process of
purchasing real property
• Do provide a list of service providers needed
in the transaction (lenders, home inspectors, attorneys, title companies, etc).
• Do Not give advice on property value
• Do Not advocate for the customer
Buyer clients (with an agency agreement)
• Receive the full suite of fiduciary duties
(Care, Obedience, Loyalty, Disclosure,
Diligence, Accounting, and Confidentiality)
• Do give advice on property value
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• Do advocate for the client
Hopefully both types of buyers are familiar with the buying process before
constructing an offer. The following is a detailed description for helping
buyer clients.
Helping Buyer Clients Design an Offer
Remember: the agent advises, the client decides.
Constructing an offer is an art. It is a careful balance between price, terms,
contingencies and timeframe. The real estate licensee needs to make the
buyer aware of the market and the most important factors when constructing
an offer in order to reach an acceptable agreement with the most favorable
terms. Licensees should go over a number of factors with their buyers,
such as comparable properties, number of days on market, closing
dates, requests to sellers to pay closing costs, and timeliness and types of
inspections, financing, property insurance, and repairs (if any). For land
that the buyer wishes to build upon, there may be a whole assortment of time
sensitive plans, applications, and approvals (be sure to work closely with
your principal broker if you don’t have experience with building lots).
Comparable Properties
Before putting an offer together, it is useful to pull a set of recent sales
of comparable properties to the property your buyers wish to purchase.
Also look at properties that are currently on the market. These will help
give a sense of fair market value. Since no two properties are exactly alike,
allowances need to be made in order to come up with a good price in each
specific case. Some things to think about when comparing properties are:
• Is the neighborhood more or less ideal than the comparable properties?
• What are the structural conditions?
• What are the cosmetic conditions?
• Is there a size difference in the building or land?
• How many bedrooms and bathrooms are in the comparable properties?
• Are there different amenities?
•Were any of the comparable properties distressed? (short sales, foreclosures, estate sales)
Also look at the number of Days on Market of the property your buyer
wishes to purchase; is that number significantly different than the comparable
properties?
Next, comes the careful weighing of factors that go into the offer price. The
offer should be low enough to win the buyers a good deal, but high enough
that the sellers will not be insulted. It is also important to look at the inventory
on the market and the interest that has been shown in the property. How much
competition does your buyer face from other buyers?
All of these items must be carefully considered in order to deliver a
reasonable offer price.
Example:
Many buyers think that giving a “low-ball” offer will result in the lowest
sales price. Let’s try to see this from a possible seller’s point of view.
Seller Stuart has lived in his home for many years. He has spent most of his
weekends improving, updating and caring for his home, which is also full of
memories. It was difficult for Stuart to put his home on the market, he loves
it so much. After much discussion and research, Stuart instructs his agent to
list the property at $280,000, a fair price.
Along comes buyer Pinchpenny, who wants a deal. Pinchpenny’s buyer
agent informs him that the average home sells for 97% of list price in this
market. Despite the advice, Pinchpenny offers $225,000 and says, “What
does it hurt to ask?”
This offer is about 20% below list price. How does that make Seller Stuart
feel? Would he want to negotiate with someone who clearly does not see the
value of this cherished home?
What do you think the likely response would be from Seller Stuart?
What have you seen in practice?
Pinchpenny runs the risk of:
• Stuart rejecting the offer and refusing to negotiate, or
• Stuart coming back with very little taken off of the list price
From Stuart’s point of view, Pinchpenny may not look like a reasonable
negotiator.
Let’s say Stuart counter offers with $278,000 ($2,000 off list price).
Pinchpenny may come back with $227,000 ($2,000 above original offer
price). They are still quite far apart in price.
In comes Reasonable Ronny, another buyer. After conferring with his buyer’s
agent, Ronny offers $265,000 (about 5% off list price).
Seller Stuart can only negotiate with one buyer at a time. However, when
a counter offer is presented, it in effect rejects the previous offer, thus
releasing the previous offer or from their obligation. More on that later in
the chapter…
Legal considerations aside (for a moment), who is more likely to end up with
a lower ultimate sales price? Remember: property sales can be emotional –
for the buyer AND the seller. A little sensitivity can result in big gains for
your client.Timing
Price isn’t the only key term in the purchase and sales agreement. The closing
date is often significant as well. Is the buyer flexible with the closing date?
That can work in the buyer’s favor and it may be worth asking the seller or
their agent about their most desirable closing timeframe.
It is a good idea to ask the listing agent or seller about their ideal closing
date. Treat this question carefully, however. Some properties become more
desirable to buyers if there is serious interest. It may be best to ask this
question very close to the time of presenting an offer. Try not to let your
buyer’s interest motivate other buyers to act on the same property!
Timing is a vital component to other considerations too. When should all
documentation be submitted to the lender? How long should the buyer have
to inspect the deed, deed restrictions, and association documents, obtain
property insurance, and conduct inspections? (more on inspections later) If
the property is a building lot, a foreclosure, or a short sale, timing may not be
as clear. Ask questions, speak with your principal broker and solicit advice
from experts!
Other Financial Considerations
Do the buyers want the sellers to pay some of their closing costs? Be sure to
check with the buyer’s lender to make sure the request does not exceed the
allowable amount.
Are there any obvious defects that the buyer wishes to have corrected –
rather than taking it into account with the purchase price?
Example:
Sally the seller was offered a job out of state. She moved and quickly placed
her home on the market. Unfortunately, a storm caused a large tree branch to
fall on the garage, causing some serious damage. Your buyer wishes to make
a purchase offer on the house, but asks for your advice on how to deal with
the garage damage.
her and recommend inspections and perhaps a few contractors who could
quickly give estimates to repair the damage.
Speaking of inspections, when asked if they are worthwhile, what is a good
response? YES!
Inspections may not uncover all potential defects, but they frequently
uncover major issues and/or give the buyer peace of mind.
Inspections
Inspections are a vital part of making a good purchase decision. Requesting
inspections may make the offer less attractive to a seller, but the tradeoff is
often worthwhile because the risk and expense of unknown material defects
can be devastating. Even if a property is new, a basic home inspection offers
valuable information to the buyer wanting to make an informed purchase.
As with other service providers, the buyer should always have choice in
order to provide for the free flow of trade and to find a good fit for the
buyer’s needs. If the buyers wish to have the licensee recommend a home
(or any other) inspector, it is wise to recommend at least 3 different service
providers. Choice is power.
Here is a list of some inspections the buyer way wish to have:
• General Building
• Sewage Disposal
• Lead Paint
• Pests
• Coastal Shoreland Septic
• Water Quality
• Radon (in air and/or water)
• Asbestos
• Square Footage
• Energy Audit
• Chimney
• Smoke/CO detectors
• Mold
• Arsenic Treated Wood
• Environmental Site Assessment
• Lot size/acreage
• Code Conformance
• Zoning
• Other
In addition to the buyer being interested, the following inspections may be
required by the lender:
• Survey/Mortgage Loan Inspection
• Insurance
• Flood Plain
• Structural engineer’s report
Note: Buyers must be allowed at least 10 days to inspect for lead-based paint.
This is a federal law enforced by the Environmental Protection Agency and
the Office of Housing and Urban Development (42 U.S.C. § 4852d). Sellers
may not legally refuse to let buyers inspect for lead paint.
Submitting the Offer
Should the buyer ask for cash back at closing to repair the garage?
Should the buyer include an inspection contingency to investigate the issue further?
Should the buyer simply go forward with the transaction just as she otherwise would?
Before submitting the offer, let’s go over a few legal notes:
• According to each state’s Statute of Frauds, all offers and counter
offers for real property must be in writing in order to be enforceable.
• If under an agency agreement the licensee must keep all terms of the
offers and counter offers confidential.
• Real estate licensees are not attorneys. Have a list of respected real
estate attorneys handy in case your buyer has legal questions. Do not
engage in the unauthorized practice of law!
Any of the above options could be the best for your buyer. Have a talk with
As with all other documents, once the buyer has signed the purchase and
Should the buyer ask that the garage be fixed prior to closing?
Should the buyer adjust the offer price to account for the repair?
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sales agreement, give them a copy of it right away! It doesn’t matter that the
seller has not signed or countered on the offer. The buyer should have a copy
of everything they sign – right when they sign it.
It is also a good idea to have the buyer sign multiple copies of the purchase
and sales agreement. This sends a signal that the offer is strong and it affords
the opportunity to let all parties have original signatures.
Next, whether you are working for a buyer customer or client, the licensee
must submit the offer in a timely manner. While there may or may not be a
definitive time limit in each state (such as 24 hours), it is in everyone’s best
interest to submit the offer as soon as possible.
Original copies may not be possible, or may delay or complicate the offer
process. Most states have adopted a version of the Uniform Electronic
Transaction Act, which upholds the validity of electronic contracts IF both
parties agree to conduct the transaction through electronic means. For a
complete list of states that have adopted this law, see http://www.ncsl.
org/issues-research/telecom/uniform-electronic-transactions-acts.aspx. Conducting a transaction through electronic means such as emails and faxes
may seem like a good idea, but be aware that the legal implications become
complicated when diverging from the purchase and sales agreement. What
if there is a counter offer contained in a simple email, and not on a formal
purchase and sales agreement? It is best to avoid confusion and stick to the
formal documents.
Things a Buyer can do to Make their Offer Stronger
Obviously, price, contingencies, and flexibility on closing dates are
quintessential components of a purchase offer. There are however, other
elements that can make an offer strong. These things can help the chances of
an offer being accepted:
• Ask the listing agent to present the offer directly to the seller. If there is no
listing agent, then the licensee should try to present the offer directly
• Include the earnest money deposit check with the offer.
• Include a commitment letter from the lender to show that financing is in
place
• In many parts of the country, a personal letter from the buyer is included.
This may make a difference if there are competing offers.
What if There are Competing Offers?
Which offer will the Smiths pursue? Regardless of the Smiths preferences,
they can only negotiate with one buyer at a time.
Let’s say you are in an agency agreement with buyer Aiden. What should
you tell him?
Maybe you should tell him to make his offer full price or forget it!
Maybe not. Remember – agents advise, clients decide. Aiden’s ability to
close quickly may make his lower offer the most attractive!
Let Aiden know that he can:
• Make a better offer
• Withdraw his offer in order to avoid competitive bidding
• Withdraw his offer in order to pursue another property
• Do nothing; he can keep his offer the same and hope for the best
If Aiden decides to withdraw his offer, he should do so in writing.
What if another buyer client is interested in the same
property?
It is entirely possible that two buyer clients of the same licensee may be
interested in the same property. This places the licensee in a difficult position.
While both clients are due fiduciary duties, the licensee may not give
preference to one client over another. In this case, they may not give price
or strategy advice, and they may not advocate for either client. Information
must be kept confidential, and it should be disclosed to both buyers that the
licensee is representing two buyers interested in the same property. If the
licensee does not feel comfortable in this role, he or she may ask a buyer if
they would like to be referred to another agent.
Negotiating The Offer
All offers must be in writing to be enforceable (Statute of Frauds). All
counter-offers must be in writing to be enforceable. Everything in real estate
should be in writing to best protect the consumers.
It is nice when a seller accepts an offer as presented from a buyer. That is not
always the case, so a licensee
should prepare their buyer for the possibility of a counter offer.
Example:
What are common reasons for a seller to submit a counter offer?
The seller may think:
• The price in the offer was too low
• The closing date was not ideal
• The earnest money was not enough
• Too many inspections were requested
• Too many closing costs were requested
• Too much money was ask for at closing
• Too many repairs were requested
• The timeline for a response was too soon
• …among others.
The buyers may be surprised by a counter offer, however at that point they
can choose to:
• Accept the counter offer
• Counter the counter offer
• Reject the counter offer and walk away from
the property
Buyer Aiden puts in an offer for $475,000, and wishes to close in 3 weeks.
If the buyers decide to write up another offer (the second counter offer in this
case), they are rejecting the seller’s counter offer. This means the seller then
has an opportunity to:
Competing offers can make for an exciting, stressful, and anxious time for
the buyer. Make buyers aware of the possibility of a competing offer. Note
that the seller does not have to disclose the existence of another offer. If they
do make known the existence of another offer, sellers do not have to reveal
the price, terms or conditions of the other offer. What is a buyer to do?
If the buyer becomes aware of a competing offer, ask them to think about the
value of this property to them. They may want to revise their offer to be their
highest and best offer. They should keep in mind that price is only one factor
in the seller’s decision. Other terms, such as closing dates and concessions
may play powerful roles in the strengths of the competing offers.
Regardless of the strengths and weaknesses of the competing offers, the
seller can only negotiate ONE offer at a time until there is a binding contract.
The Smiths are sellers in the historic section of town. They listed their home
for $500,000, which is a fair market price.
Buyer Beatrice puts in a full price offer, but has a contingency that her home
must sell first. Her home is under contract, contingent upon a satisfactory
home inspection. Beatrice has a closing date in 60 days and specifies that the
contract is contingent upon the sale of her home.
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• Accept the counter offer
• Counter the counter offer
• Reject the counter offer and walk away from the buyers.
This can be confusing, but it is essential to know which party is obligated to
the purchase and sales agreement, when. Sellers can only negotiate with one
buyer at a time. Buyers can only negotiate with one seller at a time (unless
they wish to own more than one property!)
Example:
Seller Sarah has her house listed for $329,000.
Buyer Bonnie views the home, and wishes to make an offer. Bonnie and her
buyer’s agent write up a purchase and sales agreement for $319,000, closing
in 45 days, and asking the seller to pay $8,000 of Bonnie’s closing costs.
Bonnie submitted an offer to Sarah. Bonnie is bound to the terms this offer,
unless Sarah rejects it. Bonnie also may withdraw the contract before Sarah
responds (but should do so in writing to protect herself). Sarah is not yet
bound to a contract.
Sarah counter offers a price of $322,000, closing in 30 days, and does not
wish to pay any of Bonnie’s closing costs.
Sarah has submitted a counter offer to Bonnie. Sarah is bound to the terms
of this counter offer unless Bonnie rejects it, or she withdraws the contract
before Bonnie responds. Bonnie is no longer bound to a contract.
Bonnie counter offers with a price of $327,000, closing in 30 days, and asks
again for Sarah to pay $8,000 toward closing costs.
Bonnie has submitted a counter offer to Sarah. Bonnie is bound to the terms
of this counter offer unless Sarah rejects it, or Bonnie withdraws the contract
before Sarah responds. Sarah is no longer bound to a contract.
Sarah accepts the counter offer from Bonnie.
Both Sarah and Bonnies are now bound to the terms of the purchase and
sales agreement.
Knowing who is bound to the contract at what point is imperative if one
party wishes to cease negotiations and entertain another option. Keeping
everything in writing, on proper forms is important to keep the negotiating
positions clear.
Under Contract to Closing
Whew! Acceptance!
Finally under contract. Does that mean the licensee’s work is done???
Nope. The licensee needs to make sure the buyer is on track. They must work
to keep the following time sensitive tasks in order:
• Financing
• Inspections
• Availability of Property Insurance
• Appraisal
• Title Search
Hopefully by now, the buyer has been pre-approved for a mortgage and the
lender is working on securing all the necessary approvals and underwriting.
If the buyer has not yet applied for financing, and they need it, there is a
likely short deadline for them to obtain approvals. Remind them to set up
an appointment with a lender. Provide them with a list of reputable lenders
if it is helpful.
It is important that the buyer (and sometimes the buyer’s agent) keep in
regular contact with the lender to make sure they are on time and have all the
necessary documentation.
Inspections
A number of inspections may have been outlined in the purchase and sales
agreement. Buyers may or may not choose to conduct those inspections (cost
is often a factor). It is your job to keep your buyer on time, or they risk losing
their right to remedy issues they may uncover. They may even lose the right
to inspect if the time limit expires.
As soon as an offer has been accepted by both buyer and seller, the buyer
should be reminded of the inspection deadline and given a list of inspectors
that fit the investigations they wish to undertake. Unless otherwise specified
in the purchase and sales agreement, the buyer is responsible for their own
due diligence, and thus is responsible for hiring and paying the inspectors.
When keeping an eye on the time limits for inspections, remember that
inspections AND estimates, AND the requests for remedy must be concluded
prior to the deadline in order for the buyer to have a choice of remedy in
the case of a significant issue. The buyer is responsible for completing the
inspections and bringing in whichever contractors they wish to generate
estimates. If this work is accomplished before the inspection deadline(s),
then the buyer has three choices when dealing with significant undisclosed
material defects:
1) They can declare the purchase and sales agreement Null and Void and
receive their earnest money deposit back.
2) They can request remedy by the seller either fixing the defect, reducing
the sales price, or providing cash back at closing (within the allowed limits
of the lender), or
3) They can accept the defect and continue with the contract as planned.
If the buyer choses the first or second option, they need • Local craft or work of art
• Personalized house number, or door knocker
• Gift certificate for house cleaning services
Follow Up
While the transaction may have been closed and commissions paid, it
is a nice idea to check with the buyers a day or two after closing. Don’t
forget them around the holidays and tax time! Mail a copy of the HUD
Settlement Statement just before tax time – there may be some substantial
tax deductions itemized on the settlement statement and your buyers will
appreciate your thoughtfulness if they cannot locate their copy for the HUD
Settlement Statement.
Greeting cards are a special touch around the holidays or New Year. It lets the
buyers know that their agent still cares. Buyers may also remember to share
the contact information of their favorite agent if a friend is in the market!
Summary:
Real estate licensees work with customers. In this situation, there is no
agency agreement, but a minimum level of service is required. On the other
hand, licensees work for clients. A client is a consumer with an agency
agreement. They enjoy the full fiduciary relationship with the licensee.
Fiduciary duties are COLDD AC: Care, Obedience, Loyalty, Disclosure,
Diligence, Accounting, and Confidentiality.
Buyers’ agents can be single agents if the brokerage only represents the
buyer side of the transaction.
Occasionally, a licensee may have a buyer client who is interested in one
of their listings (in which the seller is also a client of this licensee). Dual
agency is allowed if it is properly disclosed and consent has been given from
both sides in writing.
In some states, if the buyer and seller in a transaction are each represented
by different licensees within a brokerage, an appointing broker can appoint
one licensee to each client. This is known as appointed/designated agency.
Self-representation can be tricky. The licensee’s designated broker is liable
for actions taken by the real estate licensee – even if the licensee is not in an
agency agreement with their brokerage.
The seller is due a minimum level of service, even if they are on the opposite
side of the transaction.
An informed buyer comes from a position of strength and is more likely to
make good decisions. Real estate professionals help to build that strength.
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Things that can help to determine the buyer’s preferences and timeline
include listening to their preferences, helping them get pre-approved for
financing, and going over market conditions.
After listening to the buyer we discuss the process and possible issues in
buying property, including going over the purchasing process, talking about
things that may be issues, such as items that may appear in the mandatory
disclosures. Suggested purchase strategies and communication
expectations were also covered.
Remember how to locate suitable properties and conducting a professional
showing. We started with suggestions on how to locate properties, making
sure the properties are available, how to conduct a showing, what further
steps to take when a buyer expresses interest, and finally, which inspections
to consider (and their costs) before making an offer.
Construct and submitting an offer to purchase real property is something
every licensee should know. Price is not the only influential factor when
crafting an offer. Sellers may also be interested in closing dates, closing
costs, contingencies, and financing approvals.
Certain things can be done to make the offer stronger. Dealing with multiple
offers can be tricky, and so can a situation where two buyer clients of the
same licensee are interested in the same property.
During closing, keeping track of time and making sure buyers and service
providers complete their tasks by the deadlines specified in the purchase and
sales agreement is one of the most important things a real estate licensee
can do for the consumer. When a transaction goes smoothly, everyone wins.
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Select the best answer for each question and mark your answers on the Answer Sheet (last page of
book) or complete your assessment online at www.McKissock.com/MERE.
1. Buyer’s don’t really need to get pre-approved for a mortgage before
searching for property.
a. True: They’ll already have a good sense of what they can afford.
b. False: It’s illegal to look at properties without pre-approval.
c. True: There is plenty of time to assemble documentation once an offer is accepted.
d. False: The buyer will have a better sense of what they can afford and sellers are more likely to take the offer seriously.
2. Which of the following should you not do at a showing?
a. Wipe your feet or leave shoes at the door.
b. Lead buyers around and give opinions on rooms, etc., to help them decide.
c. Lock the doors after leaving.
d. Let the buyers make their own judgments.
3. When a client is looking for a lender or an inspector, provide at least
three choices because:
a. Buyers must be able to choose their own service providers.
b. People like options. However, it wouldn’t hurt to tell them which is your favorite.
c. It’s required by law.
d. It’s a nice thing to do.
4. MLS stands for:
a. Major Listing Services
b. Multiple Listing Service
c. Metropolitan Listing Service
d. Multiple Listing Sales
5. Which of the following should you consider when setting up a
purchase strategy with a buyer client?
a. Price
b. Home condition
c. Location
d. All of the above
6. Properties with disclosed material defects should be:
a. Accepted as is. The buyer must realize that no property will be perfect.
b. Inspected by a contractor to get a cost estimate on the repair.
c. A sign that the buyer should walk away.
d. Seen as a challenge and an opportunity for the buyer to work on home improvement skills.
7. The single best strategy for formulating an offer is:
a. Pick a number that is 20% below current comps.
b. Let the buyer’s enthusiasm be your guide.
c. Make sure there will be cash back at closing.
d. There is no “single best strategy” for forming offers.
8. Before a licensee presents an offer on a property, the buyer should:
a. Get pre-approved for financing.
b. Pay for a title search.
c. Conduct a home inspection
d. Schedule an appraisal.
9. Inspections aren’t a good idea when:
a. They might dissuade a seller.
b. Actually, they’re always a good idea.
c. The property seems to be in good condition.
d. The buyer wants to limit expenses.
10. A licensee’s fiduciary duty of confidentiality expires when:
a. The sale is complete and the title is clear.
b. The offer is accepted
c. It never expires. Confidentiality must always be maintained.
d. The agency agreement expires.
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How to Work with Real Estate Investors - Part 1
3 CE Credit Hours (Approval #IN233C734CC)
If you’ve ever thought about increasing your business by working with investor clients this course is
for you! Whether the property is a small rental house or a big shopping center, there are specific skill
sets, terminology and experience required to give these types of clients the reasonable skill and care
that is to be expected of a real estate agent. You’ll be guided through the process of evaluating an
investment property. You will learn how to use an Investment Property Worksheet to calculate the
cash flow, income tax savings, depreciation and rate of return for a rental property. In addition the
instructor will coach you through a real world case study that involves assisting an investor who is
interested in purchasing an investment property. The process will be simple and fun! The worksheet and information
presented in this course will serve you throughout your entire real estate career.
Chapters:
•Chapter One - Why Invest in Real Estate?
•Chapter Two - Buying a “Money Machine”
•Chapter Three - Case Study - Uncle Louie
•Chapter Four - Case Study - Rental House
•Chapter Five - Pay All Cash for the Rental House
•Chapter Six - Depreciation
•Chapter Seven - Return on Equity
•Chapter Eight - Frequently Asked Questions
•Communicate effectively with investor clients.
•Recognize the importance of using professional advisors (attorneys, accountants, and so on).
•Define the four financial benefits of an investment property.
•Calculate cash flow before tax.
•Calculate principal reduction.
•Determine the effect of depreciation on taxable income.
•Combine the four financial benefits to determine rate of return.
•Explain the ramifications and methods of depreciation.
•Calculate annual return on equity.
•Explain the difference between appreciation and inflation.
“Wow, packed with information. I learned so much from this course. I'm ready to invest in real estate!”
~ Kirsten
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Suggestion for Navigating This Course
Throughout this course, you will see QR codes (Quick Response Codes)
that will allow you to view additional material on your smart phone.
These codes give you access to videos that transform this course into a
multimedia presentation. If you prefer to read the text, you can ignore the
QR codes. If you feel that you will learn best by watching the videos, all
you need is a QR code reading app on your smart phone.
This course also comes with a worksheet that will not only help you in
taking this course, but will also provide you with a valuable tool that you
can use with your investor clients.
There is a copy of this worksheet in this book. You
can also get a digital copy of this worksheet (and the
Course Materials) by either scanning this QR code
(check your phone’s downloads after scanning) or by
entering this URL into your web browser: http://goo.
gl/qiru1w.
• Define the four financial benefits of an investment property.
• Calculate cash flow before tax.
• Calculate principal reduction.
• Determine the effect of depreciation on taxable income.
• Combine the four financial benefits to determine rate of return.
• Explain the ramifications and methods of depreciation.
• Calculate annual return on equity.
• Explain the difference between appreciation and inflation.
Introduction
“Never count on making a good sale.” - Warren Buffet
Meet Your Instructor
Thank you for joining us for McKissock’s online course titled, “How to
Work with Real Estate Investors - Part 1.”
Your instructor is Tom Lundstedt, who has entertained and enlightened
audiences throughout the United States on this important and profitable
subject.
• Tom has first hand experience in the world of investment real
estate, as an investor, broker, trainer, sales manager and speaker.
That’s a quote from Warren Buffet, one of the most successful investors
of all time. It’s great advice not only for people who invest in the stock
market, but also for people who invest in real estate. The point is you have
to buy right. You have to know what you’re doing. You can’t just buy an
investment property and hope it will go up in value by the time you sell.
The strategy should be to buy a property that makes good business sense
from the beginning. If it does go up in value over time, that’s great! But,
even if it doesn’t go up in value, it’s still a good business.
Here’s a key point: our focus in this course is on real estate investors not
real estate speculators. There’s a huge difference! Wise investors know
they’re buying a business when they acquire a rental property. It has to be
analyzed prior to the purchase and must make financial sense. A speculator often buys a property without analyzing the numbers (or even knowing how to analyze the numbers) and hopes it’ll increase in value in the
future. That’s asking for trouble!
• In recognition of his expertise The National Association of
REALTORS® has awarded Tom the prestigious CCIM designation
which stands for Certified Commercial Investment Member.
Real estate investing is such an exciting topic. But it’s also misunderstood. Many real estate agents don’t feel confident when dealing with
investors. That’s a shame. They’re missing out on a huge percentage of
potential transactions.
• Additionally, he has a degree in Business from the University of
Minnesota.
You, however, are taking a big step forward by taking this course. Besides
completing hours of continuing education (which is very important), this
course will help you provide top quality service to your investor clients.
• Prior to entering the world of real estate, Tom was a Major League
Baseball player for the Chicago Cubs and Minnesota Twins. Disclaimer
We’re confident you’ll find this program enjoyable and informative.
Course Objectives:
Now, before we go any further, I’ve got to put in a disclaimer. We’re
going to discuss some important tax and financial issues and I want
to make it clear right up front that I’m not engaged in rendering legal,
accounting or other professional services. Everyone’s situation is unique,
so please – before you take any action – be sure to check with the proper
professionals.
Upon completion of this course, you will be able to:
• Communicate effectively with investor clients.
• Recognize the importance of using professional advisors
(attorneys, accountants, and so on).
Keep in mind, you’re not the accountant, you’re not the attorney. Leave
that stuff to the professionals. By knowing the material in this program,
you’ll be able to “talk the talk.” Once the attorneys and the accountants
in your town realize how knowledgeable you are, it’s likely you’ll get
some good referrals because they have clients who want and need good
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investment properties. A good accountant, a good attorney, and a good
real estate agent –that’s the best financial team in the world!
Chapter One:
Real estate investing involves numbers. There’s no way around it. However, the examples and case studies in this program are designed to
keep things simple. Be sure to have your trusty calculator by your side. Let the calculator do the numbers so you can concentrate on the concepts.
Answer: To make money! Since the best way to learn is by doing, you’ll be able to practice what
you’re learning by doing Case Studies. Please print out the pdf titled
“Course Materials.” It contains the Case Studies and Investment Property
Worksheets we’ll use later in this program.
Why Invest in Real Estate?
That’s true, but there are a lot of different investments
where you can make money: stocks, bonds precious
metals, certificates of deposit and good old savings
accounts, to name a few.
Not just real estate. How does real estate compare to other investment
alternatives?
All investment alternatives have their own set of plusses and minuses. And these plusses and minuses need to be considered before investing. Things such as risk, appreciation potential, liquidity (meaning how fast
could you convert your investment to spend-able cash) and how much
management is required. These things should all be considered.
Even within the real estate world, there are investment alternatives: rental
houses, duplexes, apartment buildings, shopping centers and so forth. Fortunately, the concepts you learn in this program will apply to almost
all investment properties – from rental houses to skyscrapers.
While it’s not part of our direct discussion here, you might take some time
and give some thought to how you would compare real estate to other
investment choices. The interesting thing is each individual investor,
based on their personal knowledge and experience, views the investment
alternatives differently. For example, what’s risky to one person might
seem safe to another.
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Chapter Two:
Buying a “Money Machine”
Buying a property as an investment is very different than buying a house
to live in. With an investment property what you’re really buying is a “money
machine.” And the investment value of the money machine is determined
by how much money it produces. If you went to a shopping mall to buy
a money machine the first questions you’d ask the sales clerk would be,
“How much money does this money machine produce?” and “How fast
does it produce it?”
Like any machine, an investment property is made up of parts. Each part
plays an important role in making the machine work efficiently. If one
part fails, the entire machine might go kaput! The same is true with an
investment property. Income, Expenses & Financing
An investment property has three main parts: income, expenses and
financing. Each part is important. You can’t change one part without
affecting the entire money machine. If the income changes, the investment
value of the property changes. If the expenses change, the investment
value of the property changes. Or if the financing changes, guess what? Say it with me: the investment value of the property changes.
These benefits are the reasons why people invest in real estate. We’ll be
discussing each of these benefits in detail throughout this program.
Cash Flow Before Tax
The first financial benefit is cash flow before tax. Once you collect the
rent, then pay your operating expenses and loan payments, there ought
to be some income left over. All investment real estate has income –
unfortunately, it’s not always positive income! So, be careful and always
run the numbers before you buy. You don’t want to invest in a money
machine that loses money.
Principal Reduction
The second financial benefit is principal reduction. Any loans on
the property are paid down with rent collected from the tenants. The
tenants are essentially buying the property for the owner. I’ll bet you
know someone who has rented the same property for many years. For
one reason or another, they don’t want to buy. Well, surprise! They are
buying the property – for the owner!
Income Tax Savings
The third financial benefit is income tax savings. Let’s say you buy
an investment property that generates positive cash flow. Is that cash
flow taxable? Yes, that money is income received from the tenants. The
property also produces principal reduction. Is the principal reduction
taxable? Yes, it’s just another form of income that came from the tenants. So, the first two benefits, cash flow and principal reduction, are both
taxable. But, here’s the good news: they can both be sheltered from
income tax by depreciation. We’ll go into detail about that later.
Let’s talk about each part – one at a time:
Appreciation
Income - The income is money received from the tenants. The most
obvious type of income is rent. Keep in mind, there might be periods
where there are no tenants and the property is vacant. We’ll make an
allowance for that. Besides rent, there might be other income from things
like garages, pop machines, washer/dryer, and so on.
The fourth financial benefit is appreciation. Appreciation means
“increase in value.” We all know someone who owns a property that’s
worth a lot more than they paid for it years ago. It didn’t happen overnight,
but over the years.
Expenses - There are a number of costs involved in owning an investment
property, such as property tax, repairs, insurance, utilities, management
and so on.
Financing - Unless the property is bought with all cash, there’s going to
be a loan involved. The interest rate, the term and the payments are all
important factors.
Income, expenses and financing – these are the three parts of the
machine. They work together to produce the financial benefits of owning
a rental property. Financial Benefits
Once we know the income, expenses and financing, we’re ready to flip
the “on” switch and see what financial benefits the money machine
actually produces. There are four possible financial benefits: cash flow
before tax, principal reduction, income tax savings and appreciation. These four benefits are what the money machine actually produces. www.McKissock.com/MERE
Mini Summary
To summarize, buying an investment property is like buying a money
machine. We need to understand the parts that make up the money
machine: income, expenses and financing. Once we know the parts, we
can use them to calculate and analyze the financial benefits.
When to Analyze a Property
Point number one: I can’t emphasize this too strongly: the time to gather
and analyze all this information is before you buy the property. Or, as a
real estate agent, before you list an investment property!
Speaking of listing, I’ll bet you know real estate salespeople who’ve
taken a listing on an investment property without really knowing how
all this works. Or, maybe you know someone who’s taken a listing on an
investment property and based the price on how much the seller wanted.
What the seller wants has nothing to do with the investment value of the property.
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Grade School Math
Point number two: Analyzing investment property involves working
with some numbers – but don’t panic. You might be thinking, “Yikes! I’m not good with numbers. In fact, I hate numbers!” But don’t worry
– analyzing a property does not necessarily mean memorizing a bunch
of complicated formulas. Most of the math is simple: add, subtract,
multiply and divide – you learned it in grade school!
Plus, we’re going to use a terrific Investment Property Worksheet that
will act as a “road map” to help you through the process. It’ll be fun, and
profitable, I promise.
Being able to understand these benefits and communicate them will
enable you to “talk the talk” and work confidently and effectively with
investment buyers and investment sellers.
Chapter Three:
Case Study - Uncle Louie
In this section, we’ll work together on a hypothetical
Case Study. The numbers we’ll use are kept simple on
purpose. Don’t freak out if the rents, expenses, prices
and so forth in our examples don’t match those found in
your particular market. It’s impossible to make
examples fit every market. Just get the concept. Once
you know how all this works, you can apply these
concepts anywhere: big city, small town; big property,
small property; and everything in between.
Picture this, at a family wedding reception you’re sitting
next to your favorite Uncle, Louie. Louie knows you’re in the real estate
business so he tells you he’s about to make an offer on a small apartment
building using some money he recently inherited. The property seems
like a good opportunity, especially since the listing agent just announced
a $20,000 price reduction.
You say, “Whoa there, Uncle Louie – there’s more to real estate investing
than that. First you need to analyze the property and see if it makes
financial sense.” Louie says, “Help me!”
Let’s help Uncle Louie. Earlier, you printed out the pdf titled “Course
Materials.” Please refer to it now. Go to the page titled “Uncle Louie Investment Property Worksheet”.
Overview of the Worksheet
This Worksheet is a terrific tool. It’ll serve you well long after you’ve
completed this course. Let’s start with an overview of the Worksheet to
give you an idea how it’s laid out. It has four major areas, identified by
black bars.
The first area, “Property Information,” deals with the property itself: purchase cost, cash invested, financing and depreciation.
The second area covers “Income & Expenses.”
The third area is used to calculate “The Four Financial Benefits.”
And lastly, the bottom area covers various “Rates of Return.”
Importance of Accurate Numbers
Now, go back to the very top of the Worksheet and look at the paragraph
that begins, “This form is designed to assist in estimating the first year
benefits of a real estate investment.”
Notice the words “first year.” If you’re buying a property, the most
important numbers are this year’s. Sometimes people do five-year and
ten-year projections on real estate.
If you’re a commercial appraiser, you know that you’re sometimes
required to do a five-year projection with an internal rate of return. In my
opinion – and it’s just my opinion – you can take those projections and
flush ‘em. Why? Because they’re based on assumptions and they’re only
as good as the assumptions you make. You can make the return whatever
you want, if you use crazy enough assumptions.
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So, it’s the current numbers that really matter.
I’ve heard many sellers say, “Yeah, my income is this, but it could be
much higher –therefore pay me this big price.” No way! If you paid the
higher price based on potential increased income, you’d have to go to
the work of raising the income – just to get the investment value of the
property up to what you paid. If you’re going to do that work, you should
profit, not the seller.
Schedule E
When analyzing a property, we want to use realistic, current numbers. One way to help verify the numbers is to make the transaction contingent
on seeing the seller’s Schedule E – that’s the tax form where the income
and expenses are reported to the Internal Revenue Service, affectionately
known as the IRS.
You want to do everything you can think of to get accurate numbers. If
not, you’ll have a classic case of “garbage in, garbage out.”
You want to do everything you can think of to get accurate numbers. If
not, you’ll have a classic case of “garbage in, garbage out.”
The agent tells you the cost of the property is $585,000. After checking
with a few lenders, you learn that there is financing is available at 7%
interest, amortized over thirty years with $126,000 cash invested.
Let’s use the Investment Property Worksheet to help Uncle Louie analyze
this property. Remember, we’re doing this before he buys. As we go through the Case Study, the numbers will pop up on your video
screen. It’ll really help you if you fill in your copy by hand at the same time.
Property Information
The first line of the Worksheet is purchase cost, so fill in $585,000.
Next we enter $126,000, the amount of Uncle Louie’s cash investment.
The line below that is for financing. Louie’s going to get a loan. The
difference between the purchase cost and Louie’s cash invested is
$459,000, so that’s the amount that goes on the financing line.
On the next space to the right, the rate is 7%.
To the right of that, we enter the P & I (which stands for principal and
interest payment). If you’re not sure how to calculate principal and interest payments, don’t
worry. I’ll calculate the financing for you throughout this program. By
using a financial calculator, we can calculate the monthly principal and
interest payment to be $3,054. (It’s actually a few cents less but I’m
rounding to the nearest dollar to make things simple.)
The second financing line on the Worksheet is left blank. It’s there in
case there was a 2nd mortgage, or other financing. In Louie’s case we
don’t have that.
Depreciation
The next five lines deal with depreciation. This depreciation area is asking
us to allocate our cost into four categories: land, personal property,
building, and land improvements. This is important because, according
to the IRS rules, each of these categories is depreciated over a different
number of years.
We’ll go into detail about these four categories later, as well as the steps
to actually calculate depreciation. But for now, rather than getting into all
the details, let’s just make an assumption for the sake of completing Uncle
Louie’s analysis. Assume Louie’s total first year depreciation is $29,000. Where did I get the $29,000? It’s a rough estimate just for the sake of
this Case Study. However, later, when I show you how depreciation is
actually calculated, I think you’ll agree it’s a realistic number.
Inspecting Louie’s Property
Okay, back to Uncle Louie. You agree to meet the next day and inspect
the property. Prior to the meeting you contact the listing agent, who has
a good reputation, and you’re confident the numbers he gives you are
accurate and realistic. www.McKissock.com/MERE
Income and Expenses
Next, let’s look at the Income & Expenses area.
First, an important point: When you “talk the talk” with investors, it’s
very important to use correct terminology. Real estate investing has its’
own language. “Income” is a good example because there are several
different types of “income” within an investment property. They all mean
different things. But don’t worry, the Worksheet makes it easy.
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Annual Rent
We start by considering annual rent. The annual rent is the total amount of
income Louie would collect if every unit in the building was rented every
day of the year at full price. It’s the total possible income. It also includes
income from things like garages, washer/dryers, pop machines and so on. You’ve got to study your market to know what the local rents are. There
are several ways to do this. You could talk to property managers; you could
talk with investors. You might actually visit similar properties or look
at the “for rent” section of the newspaper (if there still are newspapers!). Anything you can think of to get accurate information about actual, realistic
market rents. Remember: garbage in = garbage out.
In this case let’s say the annual rent totals $89,550. That’s the total possible
income, if every unit was rented every day of the year at full price. What are the odds of that? Probably not very good. I know this is
unbelievable, but sometimes there are no tenants! And even if there are
tenants, sometimes there’s no what? Rent. Just ‘cause you’ve got tenants
doesn’t mean you’ve got rent!
Vacancy and Credit Losses
Therefore, it’s necessary to subtract an allowance for vacancy and credit
losses. Again, you have to study your market for current conditions. In
our example let’s assume the vacancy rate is 10%. Ten percent of $89,550
is $8,955; that’s the amount that’s entered on the vacancy line.
Gross Operating Income
Notice the Worksheet gives directions. It says annual rent, less the
vacancy, equals gross operating income. By subtracting the vacancy
from the annual rent we get $80,595 gross operating income. The gross
operating income is the amount Louie would actually collect, after
vacancy and credit losses.
In Uncle Louie’s case, let’s just assume the total operating expenses for the
year would be $36,260, so enter that on the total operating expenses line.
Here’s an important thing to remember: annual operating expenses do
not include principal and interest payments on the loan. Those items are
handled separately.
Operating Expense Ratio
It’s a good idea to calculate something called the “operating expense ratio”
even though it’s not shown on the Worksheet. To do this, you divide the
operating expenses by the gross operating income to get a ratio. This ratio
is a guideline as to whether the operating expenses are realistic for this
type of property in your market. The operating expense ratio will vary
from market to market and from property type to property type, so you
should do some homework to know what a realistic operating expense
ratio would be in your market. You might check with an accountant who
works with investors, or a professional property management company
in your town.
In Louie’s case the operating expenses of $36,260 divided by the gross
operating income of $80,595 gives us an operating expense ratio of
approximately 45%. This means that 45 cents of every dollar Louie
collects goes toward operating the property. He’s got 55 cents left over to
pay his loan payments and to pay himself.
The Four Financial Benefits
Now that we’ve entered all this information on the Worksheet, the
question is, “What do we do with it?” That’s where the next area, The
Four Financial Benefits, comes into play.
In Roman numeral I, we figure the cash flow. Enter the gross operating
income of $80,595 that we calculated above. Then (notice the Worksheet
shows us what to do), we subtract the total operating expenses of $36,260. So Louie might be thinking, “All right! I’m going to take $80,595 and
book a cruise around the world.” But – hang on – Louie’s got plenty of
uses for that gross operating income before he can think about doing any
cruising. So we have to keep going.
Net Operating Income
Annual Operating Expenses
$80,595 - $36,260 = $44,335
Remember Louie’s not speculating; he’s investing in real estate. He’s
buying a business and there are operating expenses involved in running a
rental real estate business. That’s the next line on the Worksheet: annual
operating expenses.
Annual Debt Service
Operating expenses include such things as: property tax, utilities,
insurance, advertising, repairs and maintenance, management fees, and
so on. They’re listed on the Worksheet. Once again – do everything you can think of to get accurate information. Some sellers, when negotiating with a potential buyer, overstate their
income and understate their operating expenses. That’s why buyers often
make the purchase contract contingent on verifying the numbers on the
seller’s Schedule E. Schedule E is where an unscrupulous seller would
do the opposite or might do the opposite: understate the income and
overstate the expenses.
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The result is $44,335 and that’s called net operating income. The net
operating income is often abbreviated as “NOI.”
Next, Louie has to pay is his annual debt service. Debt service is just
a fancy phrase that means loan payments. To calculate the annual debt
service, we simply multiply the monthly loan payment times 12. Louie’s
monthly loan payment of $3,054 times twelve equals $36,648 and that’s
what’s entered on the annual debt service line.$3,054 x 12 = $36,648
Cash Flow Before Tax
The Worksheet now tells us to subtract the annual debt service from
the NOI and the result is $7,687. That’s Louie’s cash flow before tax. Louie’s first financial benefit, the cash flow, would be $7,687.
Okay, here’s a question for you: Is that cash flow of $7,687 taxable? What do you think? The answer is yes, it’s taxable. Why? Because it
came from the tenants. The IRS rules say, “If the money comes from your
tenants, it’s taxable.”
Here’s another question for you: Is Louie’s principal reduction of $4,666
taxable? Think about it. The $4,666 that paid down the loan came from
the tenants. Therefore, what’s the IRS say about money that comes from
the tenants? Yes, it’s taxable.
Even though the cash flow is taxable, it can be totally sheltered from
income tax by the depreciation. We’ll cover that in detail in a few minutes.
But, just like the cash flow, the principal reduction can be completely
sheltered if there’s enough depreciation.
All Dollars are not Created Equal
Before we move on, here’s a really, really important concept: all dollars
are not created equal! They may all look the same, but they’re not. They’re all treated differently by the IRS. If you earn a dollar from your
job, you have to pay federal and, depending on where you live, state
income tax on that dollar. Plus, you’d have to pay Social Security tax (or
Self-Employment tax). All those taxes probably eat up 40%, or more, of
every dollar. That’s 40 cents out of every dollar you earn.
But what if that dollar came, not from a job, but from rental property cash
flow? Now a different set of IRS rules apply. A dollar of cash flow can
be sheltered from income tax and is exempt from Social Security tax (or
Self-Employment tax). Therefore, a dollar of cash flow is better than a
dollar from a job. Be sure to point this out to your investor clients!
In Louie’s case, depending on his tax bracket, he’d have to earn somewhere
around $13,000 from his job to equal $7,687 of tax sheltered cash flow.
Principal Reduction
Let’s move to Roman numeral II and figure Louie’s second benefit,
principal reduction.
The annual debt service, which we’ve already calculated, is $36,648. (Remember that was Louie’s monthly principal and interest loan payment
multiplied by 12) and that number is entered on the first line of Roman
numeral II. From that, we subtract this year’s interest which I’ve calculated for you
to be $31,982 (rounded to the nearest dollar). Where did that come from
you say? Well, I amortized the loan for you using a financial calculator. Amortize
Here’s an important tidbit: “Amortize” is a three syllable word. It’s
not a-mor-a-tize, or a-motor-ize. It’s am-or-tize. It’s the second most
mispronounced word in the real estate business. What’s the first? Reali-tor! The word is not Real-i-tor; it’s REALTOR®. Next time you hear
someone in the real estate business say they’re a real-i-tor look ‘em right
in the eye and tell ‘em they ought to have their head examined . . . by a
doc-i-tor!
Okay, $31,982, that’s the amount that goes on the Interest line.
By subtracting the interest from the annual debt service, the result is the
principal reduction of $4,666. At the end of the first year, the loan balance
would be $4,666 less than at the start. That’s Louie’s second benefit.
Where did this principal reduction come from? It came from the rent
paid by the tenants. The loan is being paid down with rent collected from
tenants. The tenants are essentially buying the property for the owner.
Mini Summary
Before we move on, let’s summarize what we’ve learned so far for Uncle
Louie. If he buys the property he’d be investing $126,000 of his own
money and borrowing $459,000. His first benefit would be $7,687 cash
flow in his pocket. In addition, the second benefit would be $4,666
principal reduction. The principal reduction is not money in his pocket
yet. He doesn’t get that money until he sells or refinances. It’s a benefit,
just not a current benefit.
Tax Savings
Using Roman numeral III, we can calculate Louie’s third financial benefit: tax savings. Before filling in any of the blanks, just take a look at the steps. You start
with the net operating income. Then you get to subtract the interest and
depreciation. The result is the taxable income. That’s what the IRS cares
about.
Let’s work through it for Louie. Enter the net operating income, which
we calculated in Roman numeral I to be $44,335. From that, we get to
subtract the interest Louie paid, which is the $31,982.
Depreciation
Now – drum roll please – here comes the big one: Louie gets to subtract
depreciation. Depreciation is a “non-cash” deduction, which means
it’s merely an accounting entry, not an actual “out-of-pocket” expense. Depreciation is also known as “cost recovery.” The IRS tax rules allow
the owner of investment property to depreciate their cost over a number
of years. Earlier in the depreciation area near the top of the Worksheet, we made
the assumption that Louie’s total depreciation is $29,000 for the first year. We’ll go into more detail about depreciation later. But for now, enter
$29,000 on the total depreciation line in Roman numeral III.
Taxable Income
Notice the steps: net operating income, minus interest, minus depreciation. In this case it’s $44,335 NOI, minus $31,982 interest, minus $29,000
depreciation. Doing that calculation results in taxable income of negative
$16,647. That’s the amount that goes on the taxable income line of the
Worksheet. Louie’s taxable income from this property is a negative
$16,647. Remember, Louie actually has $7,687 cash flow in his pocket. Plus, he’s
got $4,666 in principal reduction. By adding those first two benefits
together he’s really ahead $12,353. However, he gets to report to the IRS
a loss of $16,647.
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What caused that loss of $16,647? Depreciation. Depreciation, which
is a non-cash, “paper” item, reduced Louie’s taxable income from the
property to a negative amount. That negative $16,647 taxable income
from the property can be used to offset $16,647 of Louie’s earnings from
other sources, such as his job. The same would be true for most people
who invest in real estate. However, there are exceptions.
Tax Savings
In order to figure the actual amount of income tax Louie would save, you
multiply negative $16,647 by his tax bracket. The higher the tax bracket,
the more Louie would save. The lower the tax bracket, the less he would
save. Let’s assume that including both the federal and state, Louie is in a
35% tax bracket. Enter 35% on the tax bracket line. Then, multiply 35%
times negative $16,647 and that equals negative $5,826.
Tax Paid vs. Tax Saved
Appreciation
The fourth financial benefit of owning investment real estate is
appreciation (or increase in value). When you’re analyzing a rental
property, my advice would be to assume zero appreciation. An investment
property should make financial sense without any appreciation. The
appreciation should be frosting on the cake, and I hope the frosting is
thick, thick, thick. But the cake ought to taste good even without frosting!
Mini Summary
Take a minute to think about what you’ve accomplished so far: You’ve gathered
raw data about a specific investment property. You’ve used the Investment
Property Worksheet to calculate the four financial benefits. Bravo!
Rates of Return
A negative number in this case may sound a little confusing, but it’s
actually good! Think of it as paying a negative $5,826 in tax. In other
words, Louie is saving income tax in the amount of $5,826.
The next big question: Is this property a good deal for Uncle Louie? How
does he decide if it’s a wise investment?
The way to handle this on the Worksheet is whenever your taxable
income is negative, circle the word “SAVED.” That makes your answer
a positive number. The $5,826 is positive to Louie because it’s tax he
didn’t have to pay. That’s his third benefit.
Different people use different approaches when deciding whether or not
a property makes financial sense for them. We’ll discuss the four most
common approaches. They’re found in the area of the Worksheet labeled
Rates of Return.
What if you were explaining all this to Uncle Louie and he says, “Hey,
wait a minute, negative $16,647 taxable income – I’m not buying this
property to lose money.” You’d say, “Good, you’re not losing any money.” Louie just gets to tell the IRS that he lost money.
When Louie does his tax return for the year and the IRS wants to know
how he did on his investment property, he gets to report a loss $16,647. Actually, he made money in the form of cash flow and principal reduction,
but because of the depreciation, which is a non-cash expense, he gets to
tell the IRS he lost $16,647 – without really losing the money.
Now Louie’s starting to get excited. But he says, “That depreciation sounds
great, but why can’t I use the entire $29,000 depreciation? Why just
$16,647?” Here’s the answer: Louie does get to use the entire $29,000. Every dollar of depreciation shelters a dollar of income, starting with
income from the property. The depreciation first shelters the $7,687 cash
flow, then it shelters the $4,666 principal reduction. They’re completely
tax sheltered. And Louie still has $16,647 of unused depreciation left over. This leftover depreciation creates the paper loss. And, for most people
this loss can be used to shelter income from their job or other sources. The $16,647 loss doesn’t save Louie $16,647 in tax; it saves the tax he
would have paid on $16,647. That’s the third benefit.
The tax savings are in addition to the tax-sheltered cash flow and principal
reduction.
Why did I say most people can use the leftover depreciation to shelter
their income? Well, as you know, tax law is never simple and there are
rules called “passive loss rules” which govern when a real estate tax loss
can be applied. These rules are beyond the scope of this course, so be
sure to ask your good tax manager how your unique situation is affected. Also, be extra sure to ask about the special “exception for real estate
professionals.” You’ll love it!
With Appreciation
The first approach is “return on investment with appreciation.” In
Uncle Louie’s case, however, we’re assuming the appreciation is zero, so
this approach is not applicable.
Without Appreciation
The second approach is “return on investment without appreciation.” For Uncle Louie, this is the one we’ll focus on. It’s calculated by adding
up all the benefits, then dividing by the cash invested.
As the Worksheet shows, we add up Louie’s benefits: cash flow before
tax of $7,687, plus principal reduction of $4,666, plus the tax saved
$5,826, which total $18,179. The property gives Uncle Louie $18,179
in total benefits for the first year. How much of his own money would
he be investing? $126,000. Therefore, divide the $18,179 by Louie’s
investment of $126,000 to arrive at a rate of return of approximately
14.4%. That’s 14.4% before any appreciation.
Is that good or bad? That’s for Uncle Louie to decide. He might think
14% looks pretty good compared to money in the bank. But you really
can’t compare real estate to money in the bank. You’ve got to compare
real estate to other real estate. It’s important that he compare this real
estate investment to other possible real estate investments. That’s easy to
do by using the Worksheet.
Capitalization Rate
The third approach is capitalization rate, or cap rate as it’s more commonly called.
The cap rate is calculated by dividing the net operating income by the pur-
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chase cost. In our case it would be the net operating income of $44,335
divided by the cost of $585,000. That equals 7.6%. This property produces a 7.6% cap rate.
Now the cap rate is certainly a valid measurement. However, it has a
weakness. It does not directly take into account the financing. This is
because the cap rate is based on the net operating income (NOI), which
does not take into account the loan. Cap rate assumes you pay cash for
the property. One way to think of cap rate is that it’s a measurement of how much cash
flow an investor would receive if they paid all cash for the property and
didn’t have a mortgage.
Cap rates are used frequently by the big guys. I mean the really big guys
– like insurance companies and pension funds – because they usually pay
all cash. Their cap rate would be the rate of return on their investment.
Even for investors who don’t pay all cash, cap rate can be very useful. It’s
a great way to compare two or more properties. The cash on cash return ignores the principal reduction, tax savings and
appreciation. It just focuses on cash flow as the important benefit. The
idea being that, yes the other benefits are nice, but cash flow is the most
important.
Cash on cash is more important today than ever before. In the old days,
investors were sometimes willing to buy property with negative cash on
cash returns because they counted on the tax benefits (which used to be
much greater than they are today); or they counted on the appreciation to
compensate for the negative cash flow. But now, the tax benefits have been watered down and appreciation is
uncertain. So, today a property usually has to produce a significant cash
on cash return to make it worthwhile. The cash on cash returns will vary
depending on the type and location of the property. Study the recent sales
in your market to see what cash on cash returns are necessary to attract
investment money into real estate. Cap Rate vs. Interest Rate
Here’s another great way to use cap rate: Think of the cap rate as a
measurement of how strong the property is – in this case 7.6%. Then,
think of the interest rate as a measurement of how strong the loan is – in
this case 7%.
If you were going to invest in real estate, wouldn’t you want the property
to be stronger than the loan? Of course. So a good way to quickly
measure a property is to compare the cap rate to the interest rate. If the
cap rate is greater than the interest rate, it means the property is stronger
than the loan. That’s a good sign. But if the reverse is true, and the cap
rate is lower than the interest rate, it means the loan is stronger than the
property. That’s a red light. Stop!
Doesn’t that make sense? You want the cap rate to be higher than the
interest rate. The higher the better – you always want the property to be
stronger than the loan. If the interest rate on the loan is greater than the
cap rate you’re just asking for trouble.
Adjustable Rate Loan
Here’s a big heads up - be very careful if you’re buying an investment
property with an adjustable rate loan. The property’s rate of return might
look good measured against the initial interest rate on the loan. But what
if interest rates rise in the future and the loan adjusts to a higher interest
rate? That could send the rate of return on the property right down the
tubes. If you’re going to buy with an adjustable rate loan, it’s a good idea
to analyze the property using the upper limit interest rate on the loan, not
the initial interest rate.
Cash on Cash
And finally, the fourth approach is called cash on cash. The cash on cash
return is an even better measurement than cap rate because it does take
into account the financing. Cash on cash is a measure of how much cash
flow an investor earns, compared to the cash they invest. Cash earned
measured against cash invested…cash on cash.
To calculate cash on cash, you divide the cash flow by the amount of cash
invested.
In Louie’s case, we would divide the cash flow of $7,687 by the cash
investment of $126,000 to arrive at a cash on cash return of about 6.1%. www.McKissock.com/MERE
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Chapter Four:
Case Study - Rental House
The best way to make sure you understand these
concepts is for you to do a Case Study on your own. Don’t worry, this next Case Study is broken down into
bite-size pieces and we’ll review your answers for each
piece before you go on to the next, to make sure you’re
on track.
Let’s put you in the role of an investor who’s thinking of buying a rental
house. Take a look at your pdf “Course Materials,” the page titled,
“Rental House Case Study.” Let’s read it together:
From the $13,200 annual rent, we subtract the vacancy. The vacancy is
one entire month, or $1,100, so $1,100 is entered on the vacancy line. By subtracting the vacancy from the annual rent we arrive at gross
operating income of $12,100. The gross operating income is the actual
amount of income you’d collect, after the vacancy.
Next, the operating expenses. Remember the operating expenses include
everything except the loan payments. In the real world you’d itemize
each individual expense, but for the sake of simplicity, we’re assuming
the expenses on this rental house total $3,654 so that’s what you enter on
the total operating expenses line.
The Four Benefits
Okay, so what?
Assumptions
You’re considering the purchase of the following rental house but you
know that you must analyze the numbers before you make your decision.
Purchase cost: $120,000
Cash invested: $25,000
Financing: $95,000 @ 6%. P & I = $570.00 per month.
Rent: $1,100 per month X 12 = $13,200
Vacancy: One month vacant
First year operating expenses: $3,654
Total first year depreciation: $5,080
First year interest: $5,668
Purchase date: January
Appreciation: Zero
Remember earlier in this course, we said a rental property is a money
machine? What you’ve done so far in this Case Study is identify the main
parts of this money machine: income, expenses and financing.
Now let’s get to the good stuff. It’s time for you to figure out how much
money this money machine produces.
Use your Worksheet to calculate the four financial benefits.
Cash Flow
Let’s review your work, starting with Roman numeral I: You subtract the
operating expenses from the gross operating income to get net operating
income (NOI) of $8,446. Since you’re investing $25,000 cash and borrowing $95,000, your loan
payments would be $570 per month. Therefore, your annual debt service
would be $6,840. ($570 per month times 12.)
Tax bracket: 30% (combined State and Federal)
By subtracting the debt service from the net operating income, you arrive
at cash flow before tax of $1,606. Property Information
Therefore, this property would generate a positive cash flow of $1,606. Is that cash flow taxable? Yes, but it can be sheltered if we have enough
depreciation. We’ll determine that in a couple minutes.
Now, here’s your chance to prove how much you’ve learned. Turn to
the next page in your Course Materials; it’s a blank Investment Property
Worksheet titled, “Rental House.” Start by filling in the property
information area. Principal Reduction
• The purchase cost is $120,000 and the cash invested is $25,000.
• The financing amount is $95,000 at 6% interest with principal and
interest payments of $570 dollars per month.
Let’s move on to Roman numeral II, the principal reduction. The annual
debt service, which we’ve already calculated, is $6,840.
From that we subtract the interest that was given in the case study as
$5,668. By subtracting the interest from the total debt service the result is
principal reduction of $1,172. Income & Expenses
At the end of the first year the loan balance would be $1,172 less than at
the start. Where did this principal reduction come from? It came from the
rent paid by the tenants. Is this principal reduction taxable? Yes, but, like
the cash flow, it can be sheltered if we have enough depreciation. We’ll
determine that in Roman numeral III right now.
Next, it’s time for you to work on the “Income & Expenses Area.” The
annual rent totals $13,200; that’s $1,100 per month times 12. Tax Paid or Saved
• The total depreciation for the first year is a given: $5,080.
In Roman numeral III you figure the taxable income and the resulting tax
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paid or saved. Start with the net operating income that you calculated
above to be $8,446. From that, subtract the interest paid, $5,668, and the
depreciation of $5,080. If you make these calculations, you arrive at a
taxable income of negative $2,302.
Remember, even though the taxable income is a negative number it
doesn’t mean you lost money. You just get to report to the IRS a loss
of $2,302. In this example you actually made $1,606 in cash flow, plus
you have $1,172 in principal reduction. But because of the depreciation,
which is a non-cash expense, you get to report to the IRS a loss of $2,302
– without really losing the money.
For most people, this paper loss of $2,302 can shelter $2,302 of income
from other sources, such as their job. It doesn’t save you $2,302 in tax; it
saves you the tax you would have paid on $2,302.
Now, why did I say most people can use this loss to shelter their income? Remember, earlier, I mentioned the passive loss rules. These rules
govern when and how a real estate tax loss can be applied. These rules
are complicated, so be to sure to ask your good tax manager how they
impact your unique situation. Also, be extra sure to ask about the special
exception for real estate professionals.
To figure the actual amount of income tax you’d save, multiply the
negative $2,302 taxable income by your 30% tax bracket. The result is
a negative $691. A negative number in this case is not bad – it’s actually
good for you! Think of it as a negative $691 tax: you pay a negative tax. That means you save $691 in income tax.
So the way to handle this on the Worksheet is – whenever your taxable
income is negative, circle the word “SAVED” – and make your answer a
positive number. The $691 is positive to you; it’s tax you don’t have to pay.
Appreciation
Okay, on to Roman numeral IV: Appreciation. Remember, in our
example we’re assuming no appreciation. An investment property should
make financial sense without any appreciation. The appreciation should
be frosting on the cake. I hope the frosting is extra thick, but the cake
ought to taste good even without the frosting. So there’s a zero on the
appreciation line.
Now, look what you’ve done. Using the income, expenses and financing,
you’ve calculated the four financial benefits of owning this property. There aren’t many people in the real estate business who can do what you
just did. Way to go!
In Roman numeral I, you arrived at the cash flow before tax of $1,606. In Roman numeral II, you calculated principal reduction to be $1, 172. In Roman numeral III, you calculated income tax savings of $691. The
appreciation, in Roman numeral IV, we’re assuming is zero.
Rates of Return
Now it’s time for you to take this information and translate it into the
various rates of return found in the bottom area of the Worksheet. The
first, return on investment with appreciation, you can skip because we’re
assuming no appreciation.
Return on Investment with Appreciation
Okay, let’s review the rates of return together. The first is return on
investment with appreciation which we skipped because your appreciation
is assumed to be zero.
Return on Investment Without Appreciation
The second approach is, return on investment without appreciation. You
add up all your financial benefits then divide by your cash investment. So, it’s cash flow before tax of $1,606, plus the principal reduction of
$1,172, plus tax savings of $691. That all adds up to your total benefits
of $3,469. Divide the $3,469 by your cash investment of $25,000 to
arrive at a rate of return of approximately 13.9%. That’s 13.9% before
any appreciation!
Is 13.9% a good rate of return or bad rate of return in your market? You
don’t know. To find out, you should do the Worksheet on other similar
rental houses in your town to see what their rate of return would be. Then
compare.
Capitalization Rate
To determine the capitalization rate, you divide the net operating income
by the cost. In our case it would be the net operating income of $8,446
divided by the cost of $120,000 which equals a cap rate of approximately
7%. We said earlier that the cap rate is certainly a valid measurement, but
it has a weakness. It does not directly take into account the financing. It’s based on the net operating income, which doesn’t include the debt
service. But it’s a good way to compare different properties.
Also, notice that the cap rate is 7% and the interest rate on the loan is 6%. That’s good! It means the property is stronger than the loan.
Cash on Cash
Now, let’s do Cash on Cash. To calculate cash on cash, divide the cash
flow before tax by the amount of cash invested. Think of it as “cash earned
on cash invested.” In our case, divide the cash flow of $1,606 by the
investment of $25,000 to arrive at a cash on cash return of approximately
6.4%.
The cash on cash return is an even better measurement than cap rate
because it does take into account the financing. Cash on cash is a measure
of how much cash flow an investor earns, compared to the cash they
invest. The cash on cash return ignores the principal reduction, tax savings
and appreciation. It just focuses on cash flow as the most important
benefit. The idea is: yes, the other benefits are nice, but cash flow is most
important.
The next three – return on investment without appreciation, capitalization
rate, and cash on cash – I’d like you to calculate on your own. www.McKissock.com/MERE
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Chapter Five:
Pay All Cash for the
Rental House
Here’s a little curveball on the rental house you just
analyzed: Let’s say you’re thinking about paying all
cash for the property. Someone told you that would
make your rate of return even better. Let’s do the
Worksheet and find out.
The cost is still $120,000.
But now the cash invested, is not $25,000 any more. It’s $120,000
because you’re not getting a loan.
The financing lines are blank.
The depreciation is not affected by paying cash; it’s still $5,080.
What about the income and expenses area? Is that affected by a cash
purchase? No, the annual rent is still $13,200.
The vacancy is still $1,100. The gross operating income remains $12,100.
What about the total operating expenses? No change. That number
remains $3,654.
Next, let’s calculate the four financial benefits. In Roman numeral I,
calculate the cash flow before tax.
Things start out the same. The gross operating income is still $12,100. 30% of the taxable income would be $1,010. You owe the IRS $1,010.
Roman numeral IV is still zero; we’re assuming no appreciation.
Rate of Return
Let’s use the Worksheet to calculate your rate of return on investment
without appreciation. We add up your benefits: cash flow which is
$8,446, plus the principal reduction of zero, plus the tax saved. But in
this case there is no tax saved; you have to pay $1,010 in tax. The IRS
is going to reach into your pocket and take $1,010. So we subtract that
amount.
$8,446 cash flow, plus zero principal reduction, minus $1,010 tax paid,
equals $7,436 in net benefits. And what would you be investing to get
those benefits? $120,000 cash. So divide $7,436 net benefits by $120,000
cash invested and you get a 6.2% rate of return. That’s a 6.2% rate of
return on your $120,000 cash invested.
Think about this: same property, same tenants, same income, same
expenses. If we financed the purchase our rate of return is 13.9%. But if
we pay cash the return falls to 6.2%.
Does this mean don’t ever pay cash? Of course not. But it does mean you
should always analyze the purchase before you buy.
Here’s something to think about: If you really do have $120,000 to invest,
rather than investing it all in one property and earning 6.2%, you might
be better off getting financing and buying several properties. There’s no
right or wrong answer. But it would be a good idea for you to at least
consider your options before you decide.
Depending on goals, risk tolerance, available financing, possible
other investments, and so on, some people would say, “I’m just more
comfortable paying cash. I couldn’t sleep at night if I had a mortgage.” Others might say, “I want to earn the highest rate of return possible. I
wouldn’t be able to sleep at night knowing I was earning 6.2% when I
could be earning 13.9%.”
It’s your decision – you’ve got to decide what’s more important to you –
money or sleep!
Minus, the operating expenses which are still $3,654. Take a Deep Breath
Therefore, the net operating income remains the same, $8,446.
Before we go on let’s take a deep breath and reflect on what we’ve covered. Look how much you’ve learned:
But now, when we get to annual debt service, things start to change.
There’s no loan to pay, so the annual debt service is zero.
Doing the math, $8,446 net operating income minus zero debt service
results in cash flow before tax of $8,446! You’re thinking, “Wow! That’s
way better than the $1,606 cash flow we came up with before.” But hang
on, you’re not done with the Worksheet yet.
Let’s keep going. Roman numeral II, principal reduction, would be all
zeroes since there’s no loan.
But what about the IRS? Look at Roman numeral III.
The net operating income is still $8,446, minus the interest which is zero,
minus the depreciation of $5,080. Making this calculation, the result is
taxable income of a positive $3,366. Not negative like before. Positive.
What does that mean? Well, the IRS would say, “You’re now making
money . . . so, we’re now taking money.” You have to pay tax now. So
on the Worksheet, circle tax PAID. For someone in a 30% tax bracket,
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• How to analyze an investment property before you buy it, or
before you list it.
• The four financial benefits of investing in real estate and how to
calculate them.
• Different rates of return, including capitalization rate and cash
on cash.
• How to analyze an all cash purchase and compare it to financing
the property.
Congratulations! But, we’re not done yet. So far, each time we’ve
completed the Worksheet, the depreciation amount has been a given. I
said we’d talk about the depreciation details later. Well, it’s later.
Chapter Six:
Depreciation
It’s time to go into more detail about depreciation. As
just accounting. Depreciation is also known as “cost
recovery.” Depreciation can be used to shelter a
property’s cash flow and principal reduction. Any left
over depreciation can possibly shelter income from
other sources. Allocate Costs into Categories
The IRS tax rules allow owners of investment property to depreciate their
cost over a number of years. The specific number of years depends on
how the cost is allocated. There are usually four distinct categories and
it’s important to allocate into each. The four categories: land, personal
property, building, and land improvements.
There are several possible ways to make these allocations. They include:
• Use the property tax assessor’s ratio for land and building
• Make an itemized list of the personal property and of the land
improvements
• Have an appraisal done
• Have a cost segregation study done by an engineering firm
• Negotiate each of these items in the purchase contract. That’s
what many experienced investors do.
Using Depreciation Percentages to Calculate
Depreciation Amount
To calculate the actual dollar amount of depreciation, you use percentages
provided by the IRS. These percentages change depending on how many
years you’ve owned the property.
This chart shows the first year IRS percentages for a residential investment property bought and placed into service in January. I’ve rounded
off the percentages to two decimal places, just to keep things relatively
simple.
First Year - Residential Properties
Category- Depreciation Percentage
Land- 0
Personal property- 20.00%
Residential building- 3.48%
Land improvements- 5.00%
Let me show you how to use these percentages to calculate the actual
depreciation amount. It sounds complicated, but it’s really pretty simple
if you use the Investment Property Worksheet.
Let’s pretend you’re buying an apartment complex for a cost of $300,000. Your $300,000 is not just buying a building. There’s also land, personal
property and, most likely, land improvements included in your $300,000
cost.
So, in the depreciation portion of the Worksheet, assume we’ve allocated
our categories as follows:
•
The land is $60,000, so that number is entered in the land cost
space.
The reason these allocations are important is each of the four categories is
depreciated over a different number of years:
•
On the next line, assume the personal property cost is $25,000.
Category- Number of Years
•
The building cost is $190,000.
•
And the land improvements are $25,000.
•
These four categories add up to the $300,000 cost.
Number of Years per Category
Land- Not depreciable
Personal Property- 5 years in a residential investment property (appliances, carpet, furniture, etc.) Building- 27.5 years for a residential rental building, 39 years for a nonresidential rental building
Land Improvements- 15 years (parking lot, landscaping, fence, etc.)
The land cannot be depreciated so that’s easy. There’s no depreciation
on land.
Personal property, such as appliances, carpet and furniture, are depreciated
over 5 years in a residential investment property.
The building depreciation depends on what type of building it is. For a
residential investment building, such as a rental house or an apartment
building, it’s 27.5 years. For a non-residential investment building, such
as an office building or shopping center, it’s 39 years.
And finally, land improvements, such as parking lots, landscaping, fence,
and so on, are depreciated over 15 years.
Cost
Percentage
Depreciation
Land Cost $60,000 Personal Property Cost $25,000 x 20.00% = $5,000
Building Cost (Residential) $190,000 x 3.48% = $6,612 Land Improvement Cost $25,000 x 5.00% = $1,250 Total Depreciation $300,000 $12,862
Next, simply multiply each category by the appropriate percentage. Personal property is 20%, residential building is 3.48% and land
improvements is 5%. By making those calculations, and adding the
results, we get a total first year depreciation of $12,862. That’s the
depreciation number you’d use when calculating this property’s taxable
income.
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Common Mistake - Only Two Categories
Before we finish our discussion of depreciation, let me point out a common mistake many real estate investors make. They buy a property but
only divide their cost into two categories, not four. They only divide
into land and building and fail to consider personal property and land
improvements.
What if you did that with the $300,000 property we just worked on? Look
what happens:
Cost
Percentage Depreciation
Land Cost $60,000 Personal Property Cost 0 x 20.00% = 0 Building Cost $240,000 x 3.48% = $8,352 Land Improvement Cost 0 x 5.00% = 0 Total $300,000 $8,352
The land is still $60,000 but all the remaining cost, $240,000, is allocated
to the apartment building. That makes a big difference. After doing the
calculations, we get total depreciation of only $8,352.
Allocating into four categories gave us depreciation of $12,862. Allocating into two categories gave us only $8,352. A difference of more
than $4,500 – that’s huge!
So the big lesson here is: you’re costing yourself money if you don’t
include personal property and land improvements in your allocations.
Chapter Seven:
Return on Equity
In this program we’ve primarily concentrated on
analyzing a property before you buy (or before you
list). But it’s also important to analyze the property
every year after you’ve bought it. Here’s why: an
important, powerful concept called return on equity.
I’m just going to introduce it here – to start you thinking about it. We go
into it in much more detail in my McKissock course titled, “How to Work
with Real Estate Investors - Part II”
Assume an investor named Matt bought a rental house sixteen years ago. Matt invested $10,000 and borrowed the rest. He was smart and did the
pre-purchase analysis. The cash flow, principal reduction and tax savings
added up to net benefits of $1,400 that first year. By dividing the net
benefits by the $10,000 investment, Matt’s rate of return was 14% ($1,400
divided by $10,000). Not bad – plus, the property was appreciating in
value. He’s an investment genius!
Fast forward sixteen years: Today, Matt’s cash flow and principal
reduction are still positive. However, much of the depreciation has
been used up over the years. There’s no longer enough depreciation to
completely shelter the cash flow and principal reduction (let alone shelter
income from other sources). Instead of having a loss that saves tax, Matt
now has to pay tax.
In order to calculate his net benefits, Matt adds his cash flow plus
principal reduction, then subtracts the tax he has to pay. If he divides the
current net benefits by his original $10,000 investment, the rate of return
probably still looks good.
But here’s the key point: Matt’s investment is not the $10,000 he originally
invested sixteen years ago. Instead, his investment is the amount he could
get out of the property if he disposed of it today. For the sake of this example, assume Matt’s loan has been paid down
significantly over the years and the property has increased in value. Let’s
say he could sell the rental property today and walk out of the closing with
net proceeds of $80,000. If that’s the case, Matt doesn’t have $10,000
invested, he has $80,000 invested. If he divides his current net benefits by $80,000, his return on equity is
probably very low. As equity grows, return on equity usually falls.
Matt should ask himself, “Could my $80,000 equity do better if it was
invested in a different property?” If the answer is “yes,” he should move
his equity. 1031 Exchange
The best way to move equity is by doing a 1031 Exchange. Exchanging
allows investors to move their net equity from one property to another
without paying tax.
If Matt wants to retain his membership in the “investment genius” club,
he’ll exchange his equity into a different property. That will re-boot his
rate of return. 112
A successful investor’s goal is to maintain the highest possible rate of
return throughout their investing lifetime. This is accomplished by
wisely moving equity.
A REALTOR® who had attended one of my seminars called me recently. He was proud to report that after the seminar he had explained return on
equity to an investor who owned seven properties free and clear. After the
REALTOR® demonstrated that the return on equity was only 4.2%, the
investor listed all seven properties and exchanged them into two larger
ones that produced a much higher rate of return. That REALTOR® proved the power of return on equity!
Chapter Eight:
Frequently Asked Questions
All right! We’re rounding third, heading for home. By
now, I hope you feel more confident about investment
real estate than you did before you started this program.
We’ve covered a lot of material but, before we
conclude, I’d like to mention a few last related items. These are frequently asked questions and they’re not
in any particular order of importance.
Can a Person Use Their Retirement Account to
Invest in Real Estate?
That’s a great question. Let’s talk about it. At a break in one of my
live seminars a woman from the audience told me she had $200,000 in
her retirement account. When I congratulated her she said, “Don’t be
impressed, I had $300,000 a few years ago!”
Her retirement account, like many others’, has suffered as a result of
investment choices. She went on to tell me she wished she had bought
real estate instead of “investing in an IRA.” She was amazed when I told
her she could have her cake and eat it too ––– or rather, have her IRA and
real estate too! Let me explain.
First and foremost: A retirement account is not an investment! It’s simply
a special account that holds your investments. It can hold many types of
investments, such as mutual funds, stocks, bonds, and real estate. When I told the woman that her retirement account could own real estate
she said, “But I asked the company that administers my account if my
IRA could own real estate, and they said ‘no.’” Whoa! Instead of merely saying “no,” the person she talked with should
have added three important words: “not with us.”
Let’s get this straight: retirement accounts can own real estate. Of course
there are special rules and regulations that govern how this works and
those rules are strictly enforced. The rules would take an entire separate
seminar to explain so we won’t get into all the details here. I just want
you to know it’s do-able.
Picture a truck with the words “MY RETIREMENT ACCOUNT” painted
on the doors. In the back of the truck, you load whichever allowable
investments you choose. As you picture this, ask yourself, “Is my retirement truck on its way to becoming a big, heavy-duty monster truck or will
I end up with a little, wimpy mini-pickup?”
If you or your clients are interested, and you can see the huge potential,
be sure to follow-up on your own and learn the details of how to use a
retirement account to buy and sell real estate. Think of the millions of
dollars that are sitting in the retirement accounts of your potential clients. Educate yourself then get out there and help them take advantage of a
great opportunity!
What is Recapture?
The focus in this program has been primarily on buying investment real
estate. But what happens when you sell? There’s an important thing to
consider, it’s known as “recapture.” Recapture is an accounting term, not
a zoological term. And it becomes very important if and when you sell.
When you buy a rental property the IRS says, “Climb on the depreciation
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bus and ride it as long as you own the property.” But when you sell, you
jump off the depreciation bus. Then, the bus turns around and runs you
over. The depreciation deductions you enjoyed during your ownership
are taxed back when you sell. They become part of your gain and are taxable. When you sell, your gain includes the appreciation and the depreciation. The entire ‘preciation family – ah and duh -– go into your gain.
But the good news is there are several methods and strategies to reduce or
eliminate recapture which we’ll cover in my McKissock program “How
to Work with Real Estate Investors - Part 2.” If I Buy a Rental Property Which Has Already
Been Depreciated By the Previous Owner, Do I
Get to Depreciate it Too?
Yes! Each owner gets to depreciate the property. You might be thinking,
“Gee, how many times can the thing wear out?” Well, don’t even think
of it as wearing out.
What About My State Tax Laws?
The rules we’ve talked about are federal tax laws and your state laws may
have some differences. Be sure to check your particular state laws before
you invest in real estate.
What About Financing?
There’s no question that financing is more difficult to obtain than it used
to be, but it’s still available. In many cases the financing will spell the
difference between a property performing well or going down the drain. Be careful if the financing involves an adjustable rate mortgage. The initial interest rate might be okay but what if interest rates rise and suddenly
the income from your property cannot service the debt at the higher rate? You could be the best property owner in America and still get wiped out
because of the interest rates over which you have no control.
Think of it as cost recovery. Each owner gets to recover their cost.
What About Balloon Payments?
Combination Properties - What if I Have an Investment Property That is Part Residential and
Part Non-Residential?
Be careful if you’re obtaining a short-term loan with a balloon payment. Sometimes people say they’ll just refinance the balloon when it comes
due – but the big question is “at what rate?” Because of market conditions, you could be forced to refinance at a higher rate – and that could
wipe you out.
A good example would be a building on Main Street that is a bakery
on the lower level – can you smell the donuts? – and four apartments
upstairs. What type of property is that? The rules say that, in order to
be a residential rental property, 80% or more of the income must come
from the apartments. Therefore, if less than 80% of the income comes
from the apartments, the building would be non-residential. Remember
we said that residential rental buildings are depreciated differently than
non-residential rental buildings? Residential, 27 ½ years; non-residential,
39 years.
What are the Passive Loss Rules?
We mentioned this before but it’s important enough to repeat. There are
rules called “passive loss rules” which govern when a real estate tax loss
can be applied. These rules are beyond the scope of this course, so be
sure to ask your good tax manager how your unique situation is affected. Also, be extra sure to ask about the special “exception for real estate
professionals.” You’ll love it!
How Does Inflation Affect Property Values?
Some people think inflation causes appreciation in real estate. Actually,
inflation and appreciation are two different things. It’s quite possible to
have inflation in the economy and the value of a property goes down. Conversely, it’s possible to have no inflation and the value of a property
might go up.
Think of a rental property as a money machine. Its’ value will go up as the
amount of money it produces goes up. That isn’t necessarily dependent
on inflation. Appreciation and inflation are two different things.
What About Reserve for Replacements?
The longer you own a property it’s likely that certain items will need to
be replaced. So it’s a good idea to keep part of your cash flow and tax
savings in reserve to be used to pay for future replacements.
Politicians Talk About Making Changes to the
Tax Laws. How Often Will Changes be Made
Last, But not Least, People Always Say to Me,
That Affect Rental Property?
“I Love This Stuff, Where do I Learn More?
That’s a good question! Nobody can predict the answer. That’s why
I can’t stress enough the importance of a good tax manager. By tax
manager I mean someone who’ll help you understand the tax implications
of real estate investing; not merely prepare your tax return. Most people
don’t have a tax manager; they have a tax preparer they see once a year
on April 14th. And the tax preparer tells them how much tax they owe! That’s not what I’m talking about. I’m talking about seeing your good
tax manager throughout the year to plan ahead and manage your unique
tax situation proactively. A good tax manager will save you much more
money than they cost you.
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Well, I don’t recommend late night cable TV infomercials. Instead, on
your screen is a list of some very good resources:
McKissock.com “The Power of Exchange: Discover the Value of 1031
Tax-Deferred Exchanges”
IRS.gov
• Schedule E
• Publication 925: Passive Activity and At Risk Rules
• Publication 527: Residential Rental Property
TomLundstedt.com
NAR Accreditations
• Certified Commercial Investment Member (CCIM)
Summary
Okay, that’s it. You did it! Here’s hoping you feel much more confident
about your ability to work with – and help – investor clients. I bet you do.
In this course, you’ve learned many things, including:
• How income, expenses and financing are the key parts of an
investment real estate money machine.
• You’ve learned how these key parts work together to produce the
four financial benefits of owning an investment property.
• You’re now able to use the Investment Property Worksheet
to analyze any rental property, big or small, and know why it’s
important to do that before you buy or list.
• This Worksheet should serve as a powerful tool when working
with investors in the future.
• You’re able to “talk the talk” using basic investment terminology
like gross operating income, net operating income, vacancy rate,
depreciation, cap rate, cash on cash and so on.
• And, speaking of cap rate and cash on cash, you know how to
calculate various rates of return and use them to compare different
properties.
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1. Wise real estate investors know they:
6. As equity grows, return on equity usually:
2. A real estate investment can be thought of as a
"money machine." The three main parts of the
money machine do NOT include:
7. Recapture:
a. Are buying a business.
b. Should analyze the property prior to purchasing.
c. Should buy property that makes good financial sense from
the beginning.
d. All of the above.
a.
b.
c.
d.
Income
Expenses
Financing
Landscaping
a.
b.
c.
d.
Doubles
Triples
Decreases
Stays the same
a. Is an accounting term.
b. Is important when an investment property is sold.
c. Involves taking back the depreciation deductions that were
taken during the ownership period.
d. All of the above.
8. Buying real estate with your retirement account:
3. To calculate the capitalization rate, you:
a.
b.
c.
d.
Divide the operating expenses by the square footage.
Add the income and operating expenses.
Divide the net operating income by the purchase cost.
Call the assessor.
4. Which of the following is not true about cash flow?
a. It is taxable.
b. It can be sheltered by depreciation.
c. It's calculated by subtracting annual debt service from net
operating income.
d. It's always positive.
a. Is possible, but is never done.
b. Is not possible.
c. Involves special rules and regulations that are strictly
enforced.
d. None of the above.
9. NOI stands for:
a.
b.
c.
d.
Net optional interest
Net outcome inspected
Net operating income
Not only income
10. Depreciation is also known as:
5. Land is:
a.
b.
c.
d.
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Depreciated over 10 years.
Not depreciable.
a.
b.
c.
d.
Cost recovery
Cost discovery
Cost delivery
Cost trajectory
Navigating a Hot Sellers' Market
4 CE Credit Hours (Approval #LL233C730CC)
As a real estate agent, you are placed in a position of special trust. Your clients expect you to deliver
the best skill and care as a part of your fiduciary duties. You counsel your clients on strategy, help
them complete mounds of paperwork, and sometimes even advise them on home staging. With all of
this going on, it’s easy to forget about your clients’ personal safety or the safety of their belongings.
Your clients are counting on YOU to know the common risks associated with a real estate transaction
and the best practices for minimizing those risks.
Chapters:
•Chapter One: Identifying Hot Seller’s Markets
•Chapter Two: Listing in a Hot Seller’s Market
•Chapter Three: Working with Buyers
•Chapter Four: The Contract
•Identify the characteristics of a hot seller’s market and gain a basic understanding of the composition of the real estate industry and current trends and demographics that are fueling this market
•Recognize the modifications to marketing and prospecting in this type of market necessary for success
•Understand lending and appraisal considerations in this type of market
•Effectively compete for listings
•Prepare the best possible listing presentation
•Create the most effective marketing tools and present the listing in its most attractive format in MLS and other media.
•Develop effective prospecting techniques for identifying properties for both homeowners and investors
•Educate buyers on the quirks and dynamics of the hot seller’s market including dealing with rejection without losing confidence or the licensee losing clients
•Write and present contracts that enhance the buyer’s chances of acceptance
•Incorporate language and presentation techniques that help get the buyer’s contract accepted
•Evaluate and review offers in the most effective manner for the seller including dealing with multiple offers
•Learn to effectively use counter proposal and backup strategies for making sure the deal closes or the client’s interests are best promoted
“The material was well organized and certainly covered all the difficulties and opportunities that can arise in
a hot sellers market. The way to deal with various contingencies was well covered.”
~ Paul
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8. Stockton-Lodi, CA: 48 days
9. San Diego: 51 days
10. Austin-San Marcos, TX: 52 days
Chapter One:
Identifying Hot Sellers'
Markets
Overview
In this chapter, we will learn to identify the characteristics of a “hot” seller’s
market and why it requires different approaches by licensees representing
sellers and buyers as well as an overall understanding of the real estate
market and trends. Market conditions vary widely in different geographic
locations and the scope of this course is designed to provide direction
for those lucky (or unlucky) enough to be working in this environment.
Understanding the need for different actions and the timing issues that are
so critical may mean the difference between success and failure of a licensee
and his client in achieving the best outcome possible. Working with lenders
and appraisers in this market presents unique challenges and opportunities.
Housing statistics will be presented to demonstrate the significance of this
particular type of market and better understand the connection between
housing and the general economy.
Learning Objectives
Upon completion of this Chapter; students will be able to:
•
Identify the characteristics of a hot seller’s market and gain a basic
understanding of the composition of the real estate industry and current
trends and demographics that are fueling this market
•
Recognize the modifications to marketing and prospecting in this type
of market necessary for success
•
Understand lending and appraisal considerations in this type of market
Market Conditions Favoring a “Hot” Sellers'
Market
The two major market conditions that must be present for this unique
market are:
1. Lack of Sufficient Inventory
2.
Strong market demand
It is not enough to have one of these conditions without the other. A strong
inventory linked with strong demand will certainly have upward pressure
on prices but if the market is stable, both sellers and buyers will compete on
an even playing field and more traditional marketing and prospecting tactics
will usually work in this environment. The most often used benchmark in the
industry for measuring inventory is the number of days on the market. Realtor.
com recently released their list of the 10 markets with the lowest number of
days homes sat on the market:
1. Denver: 25 days
2. Oakland, CA: 27 days
3. San Jose, CA: 31 days
4. San Francisco: 33 days
5. Seattle-Bellevue-Everett, WA: 38 days
6. Boulder-Longmont, CO: 42 days
7. Anchorage, AK: 43 days
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Lower days on market are a strong indication of a “Hot” market as buyers
are often competing for properties as soon as they hit the market (and
sometimes before).
Rising prices are clearly linked to lowest number of days on market. Here
are the top ten from the same study:
1. Stockton-Lodi, CA (+42.7%)
2. Las Vegas (+24.1%)
3. Houston (+23.1%)
4. Reno, NV (+22.9%)
5. Denver (+20.7%)
6. Riverside-San Bernardino, CA (+19.7%
7. Sacramento (+19.3%)
8. Boulder-Longmont, CO (+19.3%)
9. San Diego (+17.7%)
10. Austin-San Marcos, TX (+17.3%)
While prices are rising overall nationally, there are areas where prices are
declining:
•
Fayetteville, NC (-8.0%)
•
Fort Myers-Cape Coral, FL (-6.0%)
•
Shreveport-Bossier City, LA (-5.0%)
•
Akron, OH (-3.9%)
•
Chattanooga, TN (-1.3%)
•
Cedar Rapids, IA (-0.6%)
•
New Haven, CT (-0.5%)
The top five metropolitan areas where inventory has actually grown the
most are:
1. Minneapolis-St. Paul (+64%)
2. Phoenix-Mesa (+39%)
3. Ventura, CA (+32%)
4. Boise City, ID (+31%)
5. Bakersfield, CA (+30%)
Conversely the metro areas with inventory shrinkage largely align with
rising prices and days on market:
•
Stockton-Lodi, CA (-38%)
•
Boulder-Longmont, CO (-34%)
•
Houston (-32%)
•
Las Vegas (-28%)
•
New York (-27%)
Why are inventories so low? The Wall Street Journal recently listed these
causes of low inventory:
•
Many homeowners are underwater
•
Others don’t have enough equity to “trade up”
•
Everyone wants to buy at the bottom but few want to sell
•
More purchases from investors…
•
Banks have been slower at foreclosing
The first two causes are somewhat self-correcting as prices rise but the third
is a perfect catch-twenty-two as sellers want to sell in a hot market but do
not want and may not be able to afford to buy up in that same market. The
effect that investors have on fueling a hot market cannot be overstated:
They do not require long loan processing periods, they often do not require
an appraisal and sometimes even waive an inspection and they are out in the
market in force as the lower inventory and economic factors means more
households will be renting.
Nationwide, the numbers are favoring a hot seller’s market according to
HouseHunt.com:
•
•
93% of all communities report rises in prices. While they are not all
hot sellers markets, this is significant and to a greater or lesser extent,
makes the study of this course relevant to most licensees in the business.
Repeat buyers comprise 77% of the market versus just 23% first time
homebuyers. This is a nationwide problem as first timers are being
priced out of the market as affordable housing is diminishing in
alarming numbers, particularly in the hot markets. Cash buyers and
investors have a huge advantage over the first time homebuyer and
numbers reflect this trend
•
The percent of homes achieving or exceeding the asking price is an
astonishing 91%.
•
Listings receiving multiple offers are also a staggering 86%.
•
Markets with more buyers than sellers are 54% with 24% of markets
reporting more sellers than buyers and 22% of markets in balance
between buyers and sellers.
•
Tight inventories rule in 72% of all markets.
According to the National Association of Realtors, the following represents
a snapshot of the real estate industry as to its composition and outlook at
the present time:
•
66% of all firms expect growth in the next year
•
81% of brokerages specialize in residential real estate
•
84% of all firms are independent, non-franchised
•
81% of firms have one office and two full-time agents
•
7% of firms have 4 or more offices and an average of 92 agents
•
Sales come from referrals – 35%; repeat clients – 30%; website – 10%
and social media – 5%
•
The biggest single concern (59%) is that Millennials lack the ability to
buy homes in supportive numbers due to low wages, a slow job growth
market and excessive debt to income ratios.
It is important to understand the importance of housing to the overall
economy and how changes affect economic growth. The National
Association of Home Builders reports that in the second quarter of 2014,
housing’s share of gross domestic product (GDP) was 15.5%. How does
housing contribute to GDP?
•
Residential fixed Investment (RFI). This is the measure of the home
building and remodeling industries contribution to GDP and includes
new construction of single family and multifamily structures, residential
remodeling, production of manufactured housing and important to our
industry broker’s fees. In the second quarter the RFI was 3.1% of the
economy and experienced the second highest quarterly gain since
2008. Clearly the economic rebound is tied closely to housing.
•
The other measure of impact of housing on GDP is the value of housing
services which essentially is the money paid in rent, including imputed
rent for owner occupants. The total for the second quarter for housing
services was 12.4%.
If you add the two components together, you can see how housing
contributes between 17% and 18% toward economic growth.
Clearly the prospects for a hot seller’s market are increasing with economic
recovery and the resurgence of the real estate market. However the lack
of inventory and limits on buyer’s ability to purchase homes is of great
concern and poses a threat to the continued upward spiral of prices. In
fact a new study by John Burns Consulting focusing on the monumental
student loan debt (now at 1.1 trillion dollars) has a crippling effect on
young potential homebuyer’s ability to purchase homes. Some interesting
findings reveal:
•
Households under age 40 with at least $250 monthly in student loan
debt = 5.9 million. Each $250 in student loan debt translates roughly
into $44k less in mortgage debt that can be afforded. With prices rising,
it is not surprising that many of these households have been priced out
of the market.
•
The loss in sales to the housing industry is about 414,000 annually,
which represents approximately 8% of all home sales and translates
into an $83 billion loss in sales.
A CBS study in 2014 once again cites the Millennials as a problem in
housing. In addition to their crushing student loan debt, they aren’t forming
as many new households as were previous generations and are not buying
as many homes as their parent’s generation did at the same age. Other
notable findings include:
•
Job growth is still hindering reals estate development recovery.
•
Developers are looking at prospects in the Northeast, Sunbelt (Florida,
Texas and Arizona) and the Northwest (Northern California, Oregon
and Washington) as the strongest growth areas.
•
Multi-family rentals have probably peaked and have come close to
filling the demand created by households unable to or uninterested in
buying their own homes.
•
Condominiums have not been a major part of the recovery as few are
being built. It is possible that many of the multi-family rentals built
recently will be ripe for conversion in the future.
•
While inventory driving much of the hot seller’s market, it may have
bottomed out and there are far fewer distressed properties coming on
the market.
•
There is little interest in traditional suburban growth as developers are
more interested in filling the demand for more urban-minded project
which are located near amenities and public transportation.
So while the market seems to be on an upward spiral, we must be aware
of deep underlying issues and demographics that could undermine the
euphoria that many in the industry and several sellers lucky enough are
feeling now.
Has the robust seller’s market peaked? The National Association of
Realtors in September 2014 announced that “after four consecutive months
of gains, existing-home sales slipped in August as investors paying in cash
retreated from the market”. Lawrence Yun, NAR chief economist says
sales activity remains stronger than earlier in the year, but fell last month as
investors stepped away. “There was a marked decline in all-cash sales from
investors.” “On the positive side, first-time buyers have a better chance
of purchasing a home now that bidding wars are receding and supply
constraints have significantly eased in many parts of the country.” “As long
as solid job growth continues, wages should eventually pick up to steadily
improve purchasing power and help fully release the pent-up demand for
buying.” Is this a temporary hitch or is the housing market returning to
some semblance of balance? Additional data suggests that we are not done
with the hot seller’s market:’
•
Median existing home price (all types) is $219,000, marking the 30th
consecutive month of year-over-year price gains
•
Total housing inventory declined 1.7% to 2.31 million existing homes
available for sale
•
All cash sales were 23% of all sales in August, dropping for 2nd straight month
•
Investors purchased 12% of homes down from a high of 17% a year
prior. 64% of investors paid cash
•
First time homebuyers remained at less than 30%
•
Distressed homes (foreclosures and short sales) at 8%, down from 12%
a year ago
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•
Average days on market 53 days, 40% of homes sold in less than a
month
•
Regional sales activity:
»» Northeast up 4.7%
»» Midwest up 2.5%
This is an unfortunate by-product of a hot seller’s market and one that may
ultimately cost communities significantly.
Licensee Preparation and Strategy
»» South down 4.2%
»» West down 5.1%
It would appear that while there may be a slight dialing down of the
temperature, the hot seller’s market will be a market force for many in the
industry for the foreseeable future.
The Landscape of a Hot Sellers' Market
Everyone in the business working with buyers or sellers in this type of
market recognizes that they are in a unique time and place. There is a frenzy
and excitement that accompanies every showing or listing call. The sense of
urgency is very strong and both buyers and sellers need constant attention.
Local news media likes to hype up the action by showing frustrated
buyers looking at the 15th home they have missed out on. Enterprising (or
desperate) brokerages are advertising drastically reduced commissions.
‘Coming Soon’ signs appear on fix and flips in the early stages of rehab or
the estate sale that is still in probate. Title companies are busy once again
as are lenders and inspectors although the volume is not what it was in the
boom days when inventory was also up.
New construction though has lagged behind. There are many reasons for
this which will be explored in greater detail later. The fact is that a new
home is simply not an option for the majority of buyers today.
Marketing by sellers and home prospecting by buyers has changed
significantly in the hot seller’s market. New technology has greatly
enhanced the ability of buyers, sellers and licensees as well as lenders and
title companies to communicate and interact in electronically producing
and transmitting contracts and other data necessary for the transaction.
Electronic signatures, where permissible further enhance the speed and
convenience of contract writing and negotiating.
A significant negative effect that this market has is it can all but eliminate
affordable owner occupied housing in many areas. Many non-profit and
housing authority developers have sustained this market by producing and
rehabbing affordable housing inventory and using public and private leverage
to subsidize or enhance the financial affordability of homeownership. The
distressed housing inventory provided a steady stream of inventory that
could be reprocessed and put back into service with new homeowners at
the helm. In fact, most government and many private lenders with housing
foreclosure housing stock would offer discounts to non-profits and housing
authorities to buy their homes for rehab and resale. Federal, state and local
government funds were regularly set aside for mortgage assistance, closing
cost assistance and development grants or below market loans to induce
and support low cost housing production. Several events have transpired
to derail the affordable homeownership movement that gained so much
ground in recent years:
•
Rising prices – obviously this is simply a factor of the math as the
income required to qualify for a mortgage is not rising as fast as
housing prices
•
Competition for public funds – traditional sources of leverage to
write down the costs of homeownership through HUD or state and
local government housing finance entities is being diverted to other
projects as single family homeownership opportunities are reduced.
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Those licensees lucky enough to have listings or the ability to attract
listings have the cat bird’s seat in this market. That does not mean however
that their job is any easier, in fact for the following reasons, it may be harder
in this market:
•
Increased competition for listings – there are fewer homes available
in the hot seller’s market and licensees fiercely competing for listings
as working the buyer’s side is decidedly more difficult
•
Discount brokerage competition – this is probably not a phenomenon
and will be a factor into the future as the industry is constantly changing
and evolving
•
Seller expectations may not be realistic – real estate professionals
need to temper the good market news with reality for their seller clients
that it takes more than putting up a sign and putting the home on MLS
and the internet to get the best price and terms
•
Difficult navigation through the offer and acceptance process –
multiple offers, dealing with banks and other institutional property
owning sellers in a highly charged competitive atmosphere is daunting
and requires skill and the right temperament to keep clients on the right
track for success
We will look into the specifics of the listing experience in the next chapter to
offer strategies for dealing with the dynamics of this “Hot” Seller’s Market.
Licensees working with buyers have a much more difficult environment
in which to function. Working the demand side when supply is so short
requires determination, preparation and persistence and the ability to keep
things light and amicable when the client may be thwarted many times in
their hunt for the American dream. In Chapter 3, we will deal with specific
actions which will enhance the buyer’s chances of success.
Lender and Appraiser Considerations
Increased demand tends to make lenders more competitive for your
buyer’s business. It is of paramount importance to make sure the buyer
is using the right lender for the transaction. Pick lenders that have a good
reputation, offer pre-approvals and advance underwriting of income/
credit if possible, reasonable processing times and are fully accessible to
the participants in the transaction. Everything else being equal, the listing
agent’s opinion of the strength of the loan qualifications and confidence
in the lender’s ability to meet deadlines could be the deciding factor in
deciding which offer to accept. The lender selected should be able to
communicate effectively with the listing agent to verify that the terms of
the contract are reasonable and can be met.
If the buyer has already chosen a lender and the licensee is not familiar with
that company or loan officer, it would be a good idea to make a connection
and verify the same information the listing agent is very likely to check
and get a sense as to that individual’s level of experience and competence.
Recommending a switch may not be a bad idea if the confidence level in
this company or LO is not high. If the selling agent is not confident it is
almost a given that the seller’s broker will have the same concerns. This
can get sticky particularly if the buyer is using a lender because of a family
relationship or referral from a good friend or colleague.
The lender should have the capacity to keep up with current transactions and
have a well-trained and experienced processing staff. Many will keep the
participants in the transaction up to date with weekly or periodic updates on
the status of the loan file processing. Key dates are less likely to be missed
if everyone is up to date. However, it is still the responsibility of the buyer’s
agent to stay on top of the entire transaction including the loan. This should
be everyone’s standard practice but in a hot seller’s market, not staying
on top can have disastrous results for the buyer. There may be a back-up
contract which only the seller and their agent are aware of which might be
a better offer for the seller in any number of ways (source of funds, strength
of buyer, dates, possession, etc.). A failure to meet a date by the buyer on
any contractual obligation could result in termination of the contract and
replacement by the back-up buyer. Being a day late on getting something
like an inspection resolution agreement signed and communicated back to
the seller’s agent may in some states automatically trigger a termination.
Other issues related to the lender that must be constantly monitored
include the appraisal. New regulations do not allow the lender to pick the
appraiser directly and while most appraiser are conscientious about meeting
contractual dates, they are not the party most affected by missing the date,
even by a day. This is an area that communication again comes into play.
The lender should communicate to the selling agent who the appraisal
assignment was made to and it should be confirmed that the appraiser
makes contact with the listing agent and that the appraiser has committed to
completion by a certain date within the timeframe of the contract. Likewise,
the lender needs to communicate back to the selling broker if there are
appraisal conditions which must be met before closing and if the valuation
is sufficient to support the price.
Underwriting is the next critical phase of the loan process. There should
be no surprises here but it is common for an underwriter to come back with
conditions that while may seem minor and insignificant, can cause a delay
in meeting the loan conditions deadline. With the inspection objection
deadline missed, it may provide a seller a way out if they have another
buyer in the wings. A good loan officer will have enough underwriting
knowledge and a relationship with their underwriting staff that allows
for advance evaluation of issues that can be show stoppers or require
documentation that may in some instances require several days to obtain.
Closing and funding are the last two critical steps; they are either the time
for everyone to get together (unless the transaction not table-funded) and
congratulate one another on a job well done or it can be the most tense time
depending on the participants and how the transaction has been handled.
A glitch in funding might seem insignificant but it may keep a buyer from
being given possession (with the moving truck parked outside of course)
or in the most extreme of situations, be a breach of the contract allowing a
termination. Again a good or great lender is so important to the success of
the transaction and reflects directly on the licensee responsible to liaison
with that person.
With multiple offers and competition among buyers, the reality of a sales
price significantly higher than the initial listed price is becoming more
common. The licensees on both sides of the transaction need to be aware of
the restrictions placed on lenders and appraisers, especially after the debacle
of 2008-09. Historical data always lags behind as appraisers must use sold
data. This does not mean however that the astute appraiser will limit their
evaluation to closed sales. Two factors can be taken into consideration:
Demand evidenced by multiple offers – if a listing broker can produce
evidence that the property received multiple offers, some hopefully over
the asking price, an appraiser can take that demand into consideration
even if the last recorded closed sale would not tend to support that value.
Properties under contract that can also be verified as to the contract price
can help to support increased value. The Appraisal Institute has recently
issued guide notes which state: “… a critical step in a market value opinion
is analysis of market trends. This suggests that beyond a single-pointin-time value opinion, an appraisal might include an opinion regarding
whether the value is sustainable. To make such predictions regarding future
value trends requires a solid understanding of real estate market cycles.”
Many government backed, private and even seller based loan products
are currently available and each has features which should be carefully
considered in determining the type of financing to be used by the buyer.
Review
In this chapter, we examined the factors creating a hot seller’s market as
being lack of inventory linked with rising prices together with strong
market demand along with the causes of low inventory and a measurement
of strong geographic markets – namely days on market and decrease in
inventory. We also learned to recognize the landscape of the market and the
need for increased diligence and preparation as well as flexibility on the
part of the licensee. Selection of the right lender is important in assuring
contract acceptance as well as meeting contractual obligations and dates.
Appraisals can be problematic in a market experiencing rapidly increasing
values but appraisers do have the flexibility to consider data other than
historical only.
A study by Bankrate.com cites important trends and changes in the
regulation landscape of mortgage lending that are of interest and have a
direct effect on the hot market’s ability to maintain itself:
•
While interest rates remain low, the Federal Reserve is not as inclined
to keep them artificially low and rates are expected to creep up towards
5% by the end of 2014.
•
Underwriting has loosened somewhat, particularly on loans that are
not sold in the secondary market such as Jumbo loans.
•
Credit score requirements are being slightly reduced by Fannie Mae,
Freddie Mac and FHA.
•
QM – lenders are subject to the Consumer Financial Protection
Bureau’s Qualified Mortgage Rule which offers some degree of
protection from law suits. Some lenders are now venturing out beyond
the QM qualified loans and offering more creative products as their
comfort level goes up on the protected loans.
•
FHA has announced its HAWK program which will reduce up front
and monthly mortgage insurance premiums on insured loans as well
as a permanent reduction after 18 months of payments to first time
homebuyers who agree to participate in Homeownership Counseling
programs.
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Chapter Two:
Listing in a Hot Sellers'
Market
Competition is fierce and the successful captor of the listing will usually be
the one who can satisfy these seller inquiries:
•
How long have you been in business (especially in this geographic
area)? Experience is probably the first requirement looked at by sellers.
That doesn’t mean that rookies cannot compete but they will have to
work harder and probably demonstrate that they have access to more
experienced mentors or partners in the business.
•
What is your capacity? In other words – what are your days off and
vacation plans? This might seem invasive but sellers want to know
that their business is your most important business and that you will
be around to work it 24/7. Demonstration of workload sharing with
partners or assistants can help satisfy this requirement
•
How many listing do you have? Again they don’t really care if you
have other listings and in fact nothing sells like success but they will
want you to demonstrate that you have the capacity to give them the
attention they demand.
•
Are you a full time or part time agent? As with experience, a part time
agent can demonstrate expertise and capacity by bringing in their
“team” (broker and company resources)
Overview
In this chapter, we will concentrate on activities performed by licensees
in conjunction with the listing process. Competing for listings and
comprehensive listing presentation preparation are more important in this
highly competitive market. The golden goose is the seller and most of them
are aware of their newly elevated status. Insight into the expectations and
hopes of the seller is crucial to creating a relationship between licensee
and client that will produce the desired outcome for both parties, namely a
smooth, profitable transaction. There are many pitfalls and preparing and
avoiding them are important in making sure the highest net is achieved with
the lowest frustration rate. Specific marketing strategies including the best
MLS exposure tactics will be examined.
Learning Objectives
Upon completion of this Chapter, students will be able to:
•
Effectively compete for listings
•
Prepare the best possible listing presentation
•
Create the most effective marketing tools and present the listing in its
most attractive format in MLS and other media.
Preparation for the Listing Presentation
Before a seller makes the decision to list their property, they have a vast array of
choices in selecting a brokerage firm and licensee to represent them. Whether
they come from farming, sphere of influence or referral, the seller is likely to
have a high expectation of getting top dollar for their property and will hold
whomever they choose to a very high standard. It is very likely that they have
been bombarded with marketing materials through the mail or online or the
media. Virtually every seller checks the major internet real estate sites to get an
estimate of value for their property check out the competition and search for a
broker. While we all know these are at best a starting point, the general public
probably won’t differentiate between information garnered on these sites and
more reliable data coming from MLS. It is the licensee’s job to provide the
most accurate and pertinent data available for the seller to arrive at the highest
and most likely price which can be achieved.
Sellers have a number of alternatives in selecting their method of marketing
their homes:
•
Traditional full service real estate brokerages
•
Discount real estate brokerages
•
For Sale by Owner (FSBO)
•
Limited service listing only services
Fortunately, the FSBO alternative has gained little ground and is all but
absent in the hot seller’s markets. The lack of exposure and daunting legal
and logistical requirements of a real estate transaction has put most sellers
within the reach of real estate licensees if they know their markets and how
to convince sellers that they are the best choice.
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Here is what our industry suggests to consumers as “12 Questions to
Ask When Choosing Your Real Estate Agent” published by the National
Association of Realtors
1. How long have you been in residential real estate sales? Is it your
full-time job? – While experience is no guarantee of skill, real
estate, like many other professions is mostly learned on the job.
2. What designations do you hold? – Designations such as GRI and
CRS, which require that agents take additional, specialized real
estate training, are held only by about ¼ of real estate practitioners.
3. How many homes did you and your real estate brokerage sell last
year? – By asking this question, you’ll get a good idea of how
much experience the practitioner has.
4. How many days did it take you to sell the average home? – How
did that compare to the overall market? The Realtor you interview
should have these facts on hand, and be able to present market
statistics from the local MLS to provide a comparison.
5. How close to the initial asking prices of the homes you sold were
the final sales prices? – This is one indication of how skilled the
Realtor is at pricing homes and marketing to suitable buyers. Of
course, other factors also may be at play, including an exceptionally
hot or cool real estate market.
6. What types of specific marketing systems and approaches will you
use to sell my home? – You don’t want someone who’s going to
put a For Sale sign in the yard and hope for the best. Look for
someone who has aggressive and innovative approaches, and
knows how to market your property competitively on the Internet.
Buyers today want information fast, so it’s important that your
Realtor is responsive.
7. Will you represent me exclusively, or will you represent both
the buyer and the seller in the transaction? – While it’s usually
legal to represent both parties in a transaction, it’s important to
understand where the practitioner’s obligations lie. Your Realtor
should explain his or her agency relationship to you and describe
the rights of each party.
8. Can you recommend service providers who can help me obtain a
mortgage, make home repairs, and help with other things I need
done? – Because Realtors are immersed in the industry, they’re
wonderful resources as you seek lenders, home improvement
companies, and other home service providers. Practitioners should
generally recommend more than one provider and let you know if
they have any special relationship with or receive compensation
from any of the providers.
9. What type of support and supervision does your brokerage office
provide to you? – Having resources such as in-house support staff,
access to a real estate attorney, and assistance with technology can
help an agent sell your home.
10. What’s your business philosophy? – While there’s no right answer
to this question, the response will help you assess what’s important
to the agent and determine how closely the agent’s goals and
business emphasis mesh you your own.
11. How will you keep me informed about the progress of my
transaction? How frequently? – Again, this is not a question with
a correct answer, but how you judge the response will reflect your
own desires. Do you want updates twice a week or do you prefer
not to be bothered unless there’s a hot prospect? Do you prefer
phone, e-mail, or a personal visit?
12. Could you please give me the names and phone numbers of your
three most recent clients? – Ask recent clients if they would work
with this Realtor again. Find out whether they were pleased with
the communication style, follow-up, and work ethic of the Realtor.
never forget your fiduciary responsibility. Even if you reduce the
commission for a double ended deal, the highest net proceeds is the
seller’s only goal and you don’t want to cut off any portion of the
market without exposure to your seller’s listing. Advance notice to the
market if it is done to increase exposure is usually fine and can help
foster competition when the home is placed on the market. Don’t make
promises you cannot always keep by agreeing to let interested prospects
know when the home is available and don’t make it your priority to
collect buyers not working with other licensees as a side benefit of the
listing. One method of dealing with “Coming Soon” prospects is to
refer them to your website to watch for the listing to appear or perhaps
indicate a period of time during which showings will commence and a
cut off for submitting offers. As always, the goal should be maximum
exposure and creating an atmosphere of competition and sense of
urgency for buyers. The same applies for “Under Contract” or “Sold”
riders. They may be good for the licensee’s advertising but might inhibit
calls that could prove valuable if the contract fails before closing.
Even with all the bases covered, savvy sellers will also want a guarantee that
their house will sell and while most licensees can’t provide a written buyout or other guarantee, a termination clause after what the seller considers
a reasonable period of time might be the option to consider inserting in the
listing agreement to provide a little piece of mind.
Because the market is hot and competition may be fierce, the licensee should
put together the most thorough and comprehensive package to present
at the listing appointment. Be prepared to thoroughly explain the market
conditions and show what is happening in the seller’s own neighborhood.
Previewing the competition may help avoid the seller concluding that
his home is worth the same or more than the neighbor’s down the street
because it is the same model and they both bought it at the same time. If
you have seen both and there have been major improvements or upgrades
in the other home, you can steer your seller to a more appropriate price for
theirs. If the seller is intent on achieving an unrealistic price, show them
what it will take to get there – a remodeled kitchen, new siding or whatever
will close the gap. Alternatively, a seller who cannot or chooses not to make
improvements can still be successful in this market so long as the property
is priced reflective of its condition and location.
Some concepts to consider presenting to a seller at the listing presentation:
•
Hire a professional inspector to go through the home just as the buyer
will do. Learn what issues will likely come up and deal with the most
important before putting the home on the market. Offer to share the
inspection with prospective buyers. Many buyers will rush to make
offers but may develop remorse when it comes time for their inspection
and they find several flaws in the house they just overbid the asking
price for by thousands. If the report is really thorough and professional,
and recommendations have already been addressed, the buyer will be
more inclined to waive the inspection contingency up front.
•
Staging and Photographs – according to the Wall Street Journal, 9 out
of 10 buyers start their home search on the internet. The most important
marketing tool on the internet is the presentation of photographs. Poor
quality photos of the best staged home will not help buyers connect
with the home. Every room should be photographed as well as the
front, back and sides of the home. Neutral colors are not always the
best recommendation as bright and sometimes dark colors help make a
room standout in the photos. We have always told sellers to de-clutter
and remove personal items but often a buyer will connect with a home
in which it looks like real people live (personal items OK – clutter still
bad). If a home is cluttered and or is not really clean by most standards,
the best advice an agent can give is to be honest and show what buyers
will object to and make recommendations to correct.
•
•
Consider moving options. If the seller needs to buy another house
and cannot purchase without the proceeds of the sale of their present
home and wants to have a contingency for the seller to locate and close
on their replacement home, suggest that they consider how that will
eliminate a substantial number of buyers from the pool. Some buyers
may have been looking for months unsuccessfully and will not be
willing to wait for the seller to have the same luck. To get top dollar, it
may well be worth the cost of temporary housing and storage.
Coming Soon. There may be a temptation to place the coming soon
sign on listings before they are placed in MLS, perhaps to allow for
renovation, improvements or cleaning, etc. Make certain that this
is discussed with the seller thoroughly and that they understand the
possible ramifications and approve in writing on the listing contract.
Double ending a transaction in this market may seem irresistible but
•
Repairs and Home Improvements. Rarely will home improvements
generate the extra value that they cost in the short run. However, buyers
expect the major home components to be in good condition and if
not, the price could be dinged accordingly. Therefore, it is always a
good idea to recommend that deficiencies be corrected before listing
the home. Of course the major systems, heating, A/C, roofing, sewer,
plumbing and electrical should not pose any obstacles to sale. If the
home is located in an older neighborhood, especially if there are or have
been large trees nearby, consider recommending that a sewer scope be
performed to determine if there are any issues. Yes, the buyer will likely
want a sewer scope but if it is already done and you provide a copy of
the report and/or visual record, it will demonstrate you are concerned
about your home’s condition. If there is a problem, of course it is better
to address it up front rather than react at the time of inspection objection.
The same is true for the roof. Inspectors will usually recommend a roof
inspection and certification. Again this could be obtained before listing
and any discovered deficiencies corrected. The furnace and A/C are the
other major items that should be inspected and certified if possible. If
your seller has all this done and otherwise maintains the house and has
it presented for showings well, this home will stand out and even if
there is competition, buyers will respond to the homes which require
less work on their part and the result will likely be higher offers. Either
way it is a small price to pay to know your strengths and weaknesses
up front.
Seller Expectations and Goals
A study by NAR asked buyers what is the most important service provided
by a real estate professional was. Their priorities reveal a lot about what
agents need to focus on in order to attract sellers:
1. Find a buyer 28% – no surprise here as that is the ultimate point of
listing one’s home for sale.
2. Sell the home within a specified period of time 27% - presumably
quicker rather than slower
3. Price the home correctly 17%
4. Recommend ways to fix up the home to sell for more 12%
5. Help with the paperwork and handle inspection and closing
functions 7%
6. Negotiate the deal 5%
Most licensees spend the majority of their actual time on work that is only
valued by 12% of sellers as their top priority, negotiating the deal and then
handling everything that happens afterwards. Clearly the majority at 55%,
are goal oriented and fixated on their only goal: to sell their home. Even
pricing correctly and presenting the home in its best light takes a back seat
to the outcome. While there is no question that our technical proficiency
and knowledge of navigating the maze that is the real estate transaction, is
important and necessary for survival, the prize is the sale and everything
leading up to and after the fact is less important to the seller. Therefore the
emphasis should be on demonstrating that we are capable of helping the
seller achieve his goal. This isn’t rocket science but the lesson is clear but
subtle. Sellers want to know that we can help them achieve their goal in a
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time frame that they expect. In a hot market, there will be even less focus
on the mundane (to sellers anyway) activities that the licensee practices
every day. Since the results are based on the competence of the licensee
in performing all the tasks undertaken, it is important to develop the skills
necessary to get the job done and to be able to communicate effectively
and stay focused on results.
Sellers are usually acutely aware of the dynamics of the market but
perceptions may not align with reality. It is the licensee’s task to educate
and set realistic goals for success. Many will simply expect the property
to hit the market and multiple offers will flow in. If the home is priced
incorrectly or doesn’t present itself in the best possible light, savvy albeit
sometimes desperate, buyers won’t reward sloppy preparation with their
best offer. Even in the hottest markets, there are homes that languish on
the market far beyond the area averages and become “stale.” Tarnished
listings won’t attract the new buyers as the question always comes up: why
has it been on the market so long? Even buyers caught up in the frenzy
of competing for homes in desirable locations may try to renegotiate at
inspection and there is always the specter of a low appraisal hanging out
there unless the transaction has been prepared and packaged for success.
There is also the almost unavoidable seller acknowledgement to them
when their home goes under contract immediately: “that was quick,
maybe I am paying the real estate brokers and agents too much”. There
is no question, this has helped spawn the new or reconstituted discount
brokerage business offering low percentage or often fixed dollar amount
listing broker and selling broker fees. While casting no aspersions on such
operations, there is no substitution or replacement for the professional,
full service, dedicated and competent licensee tirelessly working in the
seller’s best interests exclusively regardless of the length of time the house
is on the market. The real work goes into the preparation for listing and
managing the transaction successfully for the positive outcome everyone
expects.
Marketing and MLS Strategies
Everyone knows that you only get one chance to make a good first
impression and nowhere is that more true than in a hot seller’s market.
Licensees and buyers alike who are hunting for a home are poised to
pounce on every prospect that hits the market. Most licensees and virtually
all buyers are continually checking their favorite MLS or website for
new homes. The new listing that is well-written, crisp and thoroughly
enhanced with good quality photos will generate the maximum interest
and result in showings early. The sloppy licensee who sticks the listing
on without photos or carefully crafted remarks is doing the seller a great
injustice. Buyers want every ounce of data available about the homes they
are looking at. The first impression of an incomplete or poorly presented
listing is that there must be something wrong or at best that this is just an
ordinary property with nothing special to attract the right buyer. Won’t
Last is not the two word phrase that will automatically sell this home. Fill
up every space available under remarks and complete all fields including
room dimensions and descriptions. Take the time to have the complete and
accurate information in the MLS at the first entry. Don’t use catch phrases
and clichés. Be original, accurate and thoughtful in your composition. This
is writing that really counts – get it right the first time! Have a colleague or
friend who is a wordsmith help out in exchange for a free lunch.
Discuss with the seller the merits and a disadvantage of limiting the initial
marketing time to a specified number of days with all offers due by a
certain date. This certainly can have the effect of hyping demand but may
also turn off other potential buyers.
Printed material should be ordered and prepared well in advance so as
to be available in sufficient quantities the day the listing hits the market.
What a shame if you paid for 100 high quality brochures and the home
was shown only 10 times before going under contract. Each buyer got
your best marketing shot when putting together their offers with their
broker or agent.
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Open Houses are still an effective marketing tool. They provide the
entire pool of buyer’s access to the home even if their buyer’s agent is
not available and provide a comfortable viewing experience without the
formality of a showing. More exposure usually results in more offers.
About.com has suggestions for holding successful open houses:
•
Advertise online with colorful, descriptive language. Also post
internet listings everywhere.
•
Map open house signs
•
Use balloons on signs
•
Post directional signs at nearest busy intersection and all corners
nearby
•
Point arrows in the right direction (really?)
•
Remove vehicles from driveway and in front of house if possible
•
Open all drapes, blinds and window coverings
•
Don’t put spices on stove to simmer without offering cookies and do
not use air fresheners as many people are allergic to synthetic odors
•
Turn on every light in the house
•
Turn on soft music on each floor
•
Have available color flyers filled with pictures and reasons for a buyer
to purchase this home
•
Have financing flyers available to help buyers calculate monthly
payments
•
Consider refreshments or snacks
•
Use seasonal photos if appropriate to show the home at another time of
the year (unless it is summer now and your listing is in North Dakota)
•
Have pertinent documents that may be available for inspection
such as: inspection reports, appraisals or comps, major repairs and
warranties, blueprints for additions or future possible improvements
•
Be upbeat, cheery and great each buyer who enters the home. Find out
what the buyers are looking for and, if possible, show them why your
home fits those requirements
•
Ask for feedback. Ask each buyer what they thought of your home
and would they consider buying it. Agents and sellers are hesitant to
ask for a buyer’s opinion, so just go ahead and ask
This may seem like overkill in a hot seller’s market but a well-timed and
well-staged and produced open house may be attended by dozens of people
who may or may not be computer matches as prospects for some other agent
but may, if impressed, be willing to make that offer. As this was intended
as a general primer for open houses anywhere, it might be suggested that in
the hot seller’s market, the licensee dial back the sales pitch, unless actively
prospecting for buyers, and just be a friendly host giving buyers a chance
to see the home. The agents working with these buyers will appreciate the
fact that their buyers get the chance to see this home under ideal conditions.
Do not overlook the safety concerns in light of recent attacks on real estate
agents and make sure that you have a partner or at the very least make
sure that someone else knows your location and schedule and you have an
emergency plan.
Don’t overlook the electronic social media revolution. Sellers are aware of
Facebook, Twitter, Craig’s list, Pinterest, YouTube, etc. Have these options
included in your inventory of tools and if necessary consult an expert in
the field if you don’t feel qualified (pretty much any 20-something will
probably know how to connect you).
Here are some social media tips from Social Media Today geared toward
the social marketers seeking to work with people in the real estate industry:
•
Pay attention to long-term marketing. Real estate agents are in for the
long haul and their business may ebb and flow
•
Social media is a soft sale process. Real estate agents need to learn to
add value as being a gateway. People do not want to be sold.
•
Most agents are not experts at creating content – their skills tend toward
people and marketing skills
•
The high price tag of real estate requires telling an ongoing story
Of course not every listing will sell immediately with multiple cash offers
over the asking price and a smooth and quick closing achieved. The listing
agent needs to constantly monitor the action and provide feedback, update
market analysis, scope out the competition and be prepared for a course
correction if needed. Obvious but important indicators of something wrong
are:
•
No one comes
•
Lots of showings but not offers
•
Multiple feedback that the price is too high or the house needs…
•
Above average days on market
You may not be able to save every listing but with constant and good
communication, you should be able to offer your professional advice as to what
steps should be taken to right the ship and achieve your common goals.
Chapter Three:
Working with Buyers
Overview
In this chapter, the emphasis will switch from the seller to the buyer and we
will explore the need for a new approach to and techniques for prospecting
for homes along with tips for successful showings. The most important
element of course is the contract; the licensee will learn some useful tips
for enhancing their client’s chances for success in having their contract
accepted and learning from rejection.
Learning Objectives
Upon completion of the Chapter, students will be able to:
•
Develop effective prospecting techniques for identifying properties for
both homeowners and investors
Review
•
This chapter featured useful listing strategies including comprehensive
market analysis, extensive listing preparation and consideration
of pre-sale inspection, careful attention to staging and high quality
photos. We learned to prepare for moving strategies and pre-listing
marketing. Dealing with seller expectations and educating the seller on
the need to get it right the very first time to achieve the highest net price
by careful preparation were explored. Finally the need to accurately
and comprehensively prepare all marketing material and MLS data in a
timely manner was discussed. Social Media has changed the landscape for
real estate as well as most industries.
Educate buyers on the quirks and dynamics of the hot seller’s market
including dealing with rejection without losing confidence or the
licensee losing clients
•
Write and present contracts that enhance the buyer’s chances of
acceptance
Buyer Expectations and Motivation
Buyers who don’t keep up with the real estate market in these hot seller’s
zones may not appreciate the drama and fervor of competing with other
buyers, often multiple other buyers, for the same home. They will learn
quickly. It is the licensee’s task to educate and guide them through the
murky waters of this fluid market without losing sight of their goals and
without becoming unduly discouraged and frustrated both with the market
and with their agent or broker. Despite the best efforts, this endeavor is not
for the faint of heart and some buyers will be lost in the shuffle.
Buyers may not really be buyers and if they are merely taking a peek
at “what’s out there,” you are probably wasting your time and theirs by
showing homes that won’t be there when they truly are ready to buy, if ever.
Unless you need practice opening lock boxes and learning routes to new
areas, your time might be better spent on truly motivated and ready buyers.
How will you know if your client is motivated? They will be:
•
Already be pre-qualified or pre-approved (a major distinction we will
examine shortly)
•
Have their down payment saved or otherwise identified and made
available to them
•
Spend a major portion of their day on the internet looking for homes
•
Feel the sense of urgency to act quickly when a good prospective
homes is available
They may not be willing or able to spend thousands over the asking price
and may need to scale back their must have list. This is a difficult concept
to accept if you are the buyer and you know what you can afford and you
find out that the listings initially in your range often move out of range once
offers are received and the competition begins. Balancing expectations and
reality is a hard tight rope to walk but the licensee must become adept at
deflecting negative feelings that are bound to come up as reality sets in for
the buyer.
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There are several mistakes buyers make according to Trulia in a hot market
environment. The licensee should be sensitive to try to guide buyers into
making rational and financially sound decisions not based on knee-jerk
reaction to a market over which they have little control.. Buyers will often
demonstrate some of the following:
•
Act out of desperation. Urgency is good, desperation, not so much.
When a home is lost in a competition the buyer should try to remember
that other homes will become available, that there is no perfect home
anyway and each experience at attempting a buying strategy will
improve the buyer’s (and their agent’s) skill at the whole process
•
Hesitate to act. Early in the process of looking for a home, buyers
will often delay decisions to buy or even make offers because they feel
that they lack sufficient data, experience or exposure to other homes.
“Never buy the first home you look at” may or may not be good advice.
Conversely, there are buyers who love every home they see and want
to make an immediate offer.
•
Ignorance of the market. Most buyers are not totally in tune with
the wild side of real estate these days until they jump in. The more
understanding the licensee can impart to their clients as to why the
market is the way it is and what strategies tend to work best, the more
equipped buyers will be to make the right decisions for them and
ultimately achieve success.
•
Financial ignorance or foolhardiness in reaching beyond one’s means
or comfort level happens when buyers lose sight of their financial
plan and how housing fits in. Budgeting should be the first step before
purchasing a home and
•
Overpaying for a home beyond what is reasonable and in accordance
with personal parameters set up. The buyer’s agent should always run
comps and discuss the specific market conditions present at the time. A
maximum should be set.
Refining the Showing and Prospecting
Process
Most MLS systems provide instant access and notifications to new listings
and it is strongly encouraged to set up prospects in this manner. It doesn’t
mean you have to call or e-mail your client at 11:00PM with a new listing.
There are usually two options available: direct e-mails from MLS to client
or filter through licensee. It is a personal choice which you can make based
on your knowledge of your client’s situation. The key is to get new or
changed listings that match your parameters sent out as soon as possible,
within reason. You can be assured the buyer is looking on their own as well
and you want to try to keep the role of gate keeper if you can.
With regard to parameters set up, unless you have specific, inflexible
conditions set out by your client, be flexible when setting up the prospect
so as not to miss “close” listings. Most buyers are willing to bend a little
more in the hot seller’s market.
Always encourage buyers to attend as many open houses as they would like
to. It is not a control thing; buyers cannot be controlled anyway. It is a team
effort that results in successful offers and closings.
Timing is critical. If you can, be willing to preview listings for buyers who
cannot get off work or otherwise are unavailable but are interested in a
property. There are situations where “sight unseen” contracts may be the
only way to compete when the seller has set up a rigid deadline and your
buyer is unavailable. There are always outs once you determine the home is
not “the one” so long as your dates permit it.
Learn to direct focus and not waste time once it has been determined
that the property you are showing is not the one.. Consider approaching
owners of homes your buyer has identified as a style, area, school district,
etc. that is very desirable to them and who don’t have their homes listed.
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While this may be interpreted as a play to get a listing, if your letter or
note (handwritten is not a bad idea), accurately conveys the strong desire
of your client to own a home like the current owner’s, perhaps a history of
unsuccessful offers made (may backfire however if the owner is interested
but wants to have more exposure to see if better offers are out there), and a
description of the buyer’s specific parameters to see if this house is a viable
candidate. Perhaps an offer to charge a reduced commission to represent the
buyer and handle the transaction might spur some interest.
Working with Residential Investors. Licensees may find themselves
representing investors searching for properties in a hot seller’s market. If
so, they can take advantage of this situation by working hard to represent
their clients in achieving their investment goals which could in turn create a
rewarding long term relationship which could prove lucrative. There are at
least two basic types of investors active in these markets: fix and flippers
and portfolio investors.
It may seem counterproductive for a fix and flip investor to try to compete in
a hot market with rising prices, when their goal is to acquire for less and sell
for more. It’s true that in a down market, with many distressed properties
available, the pickings are considerably riper. However the fact that the hot
market has a low inventory and prices are rising, in an inducement to take
a chance and try to buy and add enough value to ride the rapid appreciation
train and make some money. The non-professional investor who gets into
the market to make a quick buck on a flip may or may not get lucky and
pick the right property in the right neighborhood exactly the right time or
fall flat on their face. The successful flipper must have an arsenal of tools:
•
Market savvy – the licensee may not even have the experience or foresight
to see what the client possesses in the way of a sense of entrepreneurialism
but together they can become an effective team. A background in
construction and/or real estate development cannot hurt.
•
Non risk aversion gene – this is not a game for children or amateurs
and risks cannot be avoided. The investor needs to have the financial
and emotional resources to withstand surprises (rarely good ones) in
encountering physical or market obstacles.
•
Financial capacity – cash talks but more cash talks louder. The benefit
of access to liquidity is a huge plus in competing for homes, getting the
best contractors and marketing teams to achieve a successful fix and
flip. Many times private capital is involved.
Hooking your star to a successful team provides opportunity for the
licensee to profit from multiple transactions on the same property as well
as develop skills and resources to possibly take advantage of situations
that arise in their personal investment scheme and become a partner or
player themselves. These are the investors you hate to compete against
when you are working with a homeowner because of their flexibility and
capacity. Putting together the offer package with all the clout and power
these investors can muster is fun and usually profitable. Again the emphasis
should be on becoming part of the team and anticipating opportunities in
the market place. It won’t be a long term relationship if you fall behind your
client in enthusiasm and forward thinking.
The portfolio investor is an entirely different animal. Anyone can make the
decision to invest in real estate for many different reasons:
•
Retirement
•
Wealth building
•
Education costs for children or grandchildren
•
Housing for family members
•
Possibly even as a full time vocation
Likewise the housing vehicles take on many forms:
•
Single family homes or condominiums
•
Small Multi-family structures (usually 1-4 units)
•
Large apartment or mixed use buildings
Working with these types of investors usually requires a more businesslike
approach to your relationship. The investment is usually not as personal
as it would be for someone buying their own home but the same skill and
ingenuity is required to achieve success for the client. The licensee needs
to acquire a high level of expertise in the type of investment the client is
searching for particularly if it involves multiple units. The topic of property
management will likely come up and the licensee should check with their
broker to see if that is a permitted activity under the brokerage rules and
policies. The decision to embark on this path should be carefully researched
and not made lightly. Again, working with portfolio investors can help put
the licensee on a team that if successful at first, may be replicated for future
deals.
best ways to make this happen is to have a pre-approval by a reputable lender.
The lender letter should indicate that the buyer is been approved and that the
“commitment” if you can get wording that strong is only subject to collateral
approval. The lender should be of good reputation in the market and readily
available to confirm the details and timing of the loan process. Writing a contract
with a 20 day loan approval can be hurt if the lender tells the listing broker that
it will take 40 days. There is no reason why a solid loan commitment cannot
compete on nearly equal footing with a cash offer, particularly if the contract is
carefully crafted.
•
Dates – You should check with the seller’s broker in advance of writing the
offer to determine what set of dates will work best for the seller and try to mold
your offer to incorporate as much of the seller’s needs and possible. While the
seller will want to see the minimum time necessary for contingency removal
for inspection, appraisal and loan conditions, they may or may not want a quick
close, particularly if another home needs to be secured. While sellers are not
always best advised to offer their home with a replacement home contingency,
if there is an option for a lease-back or delayed possession by the buyer, this may
provide a comfort level which may be very attractive to the seller.
•
Inspection – It may be tempting to overlook some obvious flaws that are
important to the buyer when writing the contract and plan to address them
on the inspection but by identifying and requesting that they be addressed in
the contract puts everything (obvious to the buyer as an issue). For instance, a
roof clearly damaged or worn out will likely be a major issue to the buyer and
therefore should be addressed in the contract. This way the seller will have more
time to determine if there are insurance remedies available and to get estimates
on the work needed. Some might argue to obtain an inspection prior to writing
the offer and there are certainly merits in doing this but unless the prize is so
important to the buyer, the cost should also be taken into consideration. Also,
not every seller will permit intrusive examinations of their homes without the
benefits of a contract and earnest money on deposit. If the buyer is in a position
to waive the inspection contingency, make sure that this decision is not taken
lightly. In the heat of the competition, buyers may want to do anything to
position their offer above others but there may be a risk of a major flaw which
would render the home far less desirable. One suggestion if there is some doubt
about any of the homes uninspected or unknown components is to write the
contract with the inspection still in play but clearly state that the only negative
outcome of the inspection would be the buyer’s termination of the contract.
Two weeks into the transaction and a seller learns that the buyer will terminate
due to a cracked heat exchanger that was unknown to both parties, how many
sellers will at that point agree to replace the furnace and go on with the contract
knowing that most buyers will ask for a new furnace now plus the seller may be
in a compromised safety position.
•
Appraisal – while it may give a buyer an advantage to waive the appraisal
contingency in a cash deal, the lender, if involved will make their credit granting
decision based on the appraised value of the collateral without regard to the
contract. This can get sticky when a buyer waives the appraisal contingency but
then is unable to obtain the loan because the appraisal came in low. Therefore
if truly waiving an appraisal when a loan is involved, language must be used
that clearly states what happens in the event that the lender’s appraisal comes
in below the price. Obviously the seller will want a commitment from the buyer
that additional funds will be put down. It is the buyer’s agent’s job to make sure
that if this is the strategy to be employed in the contract that the buyer is both
willing and able to meet the contractual requirements.
•
“The Story” – sellers are people and they are interested in knowing why
someone is interested in buying their home and who they are. Obviously fair
housing issues should always be at the top of the licensee’s priorities and
communicated to their clients when appropriate and not be breached in any
form of communication with others involved in the transaction. Buyers are
increasingly interested in presenting not just their offer but also their story
of this journey and why the seller should consider their circumstances. There
is every reason to believe that these stories can help sway a seller on the
fence between accepting one of multiple offers. Buyers should be given the
opportunity to tell their story in their own words, again with oversight for fair
housing and other legal considerations. Some of the circumstances that might
help convince a seller of the merits of a particular buyer’s offer include: “I grew
up in this neighborhood and would love to return to raise my children here…”;
“We have always admired your front garden and commented on how well your
home is maintained just the way we would keep it…”; “ I am a new teacher at
the high school in the neighborhood and would love to live in this close to work
and amongst the kids I will be teaching…”; “We have been saving for 4 years to
own our own home and have completed homebuyer education courses and feel
Accelerated Contract Writing
Hopefully technology has caught up to your market and you have caught
up to technology. Contract writing software especially if coupled with
electronic signature capability has taken real estate out of the dark ages
when contracts were signed on the back of your trunk and driven to the
listing company. Having a template with your client’s basic information
and date set can make contract writing a matter of minutes, especially if
your MLS is linked with the contract software and electronic delivery to
the other brokerage.
As mentioned in a previous chapter, seller’s agents should be encouraged
to divulge the important details of other offers received, with the seller’s
permission of course. Communication between both licensees is beneficial
to the buyer and the seller both.
When a seller is presented with multiple offers or even if your offer is the
only one, here are some considerations which you should discuss with your
buyer in advance to see if they can be used to the buyer’s advantage in
getting the home desired:
•
•
Price – you cannot assume that every home will go over the asking price and
should perform your due diligence in determining market value. What a shame
to offer five thousand over a home already priced ten thousand over market.
Even if the appraisal clause comes to your rescue, your buyer may have wasted
an inspection fee and crucial time, not to mention missing out on other homes
more appropriately priced. So you do your job and determine that the home is
basically priced in line with the comps. If you are able and prepared to offer over
the asking price, you must consider whether or not it is likely that the home will
appraise and whether or not your buyer is able and willing to pay the difference
if it does not appraise and the seller is not willing to come down. Listing brokers
have gotten savvy about this and when confronted with substantially over
priced offers, would be well advised to write a clause eliminating the appraisal
objection and loan objection as it relates to appraised value. This is a slippery
slope and the chapter on Lending and Appraisal Considerations will go into
more detail and hopefully offer insights useful to the licensee. There are other
factors that can often mitigate or partially offset the price and they are discussed
below:
Source of funds – it goes without saying that a cash offer will usually beat
a loan contingent offer every time but not necessarily. To take maximum
advantage of the built in head start a cash offer has, it should also take into
consideration the seller’s other needs and motivations. A quick close may be
very desirable but the seller may not be able to move quickly – a generous
lease back provision can help overcome this. Sticking an insurance approval
contingency two days from closing which is twenty days out effectively give the
buyer a free out and keeps the home off the market for 18 days. Listing brokers
won’t usually miss this obvious ploy but it can create animosity and hurt the
buyer’s prospects, especially when competing with multiple offers. Likewise
an appraisal contingency on a cash offer dilutes the positive forces in play. If
you are fortunate enough to have a cash buyer, make sure that your offers are
carefully thought out and discussed with the buyer well in advance so that you
can have a template that puts their offer at the front of the line. If the buyer is
obtaining a loan, the contract should be written in terms protecting the buyer
and at the same time giving the seller good reasons to accept it. One of the
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that we are now ready to become responsible homeowners and we fell in love
with your lovely home the first time we saw it and would appreciate it if you
would give us this opportunity…”; “We have missed out on many opportunities
to buy our dream home but this home must have been waiting for us to come
along…”. If a story is used, it should be true and heartfelt and not scripted. Your
buyers will do a much better job of writing it than you ever could so just give
them the opportunity.
Dealing with and Learning from Rejection
Despite your best efforts, it is not unlikely that you and your buyers will
face rejection in your quest to buy a home. It won’t always make sense to
them and they may blame you for not advising them better on writing the
best offer. It is important to accept the disappointment and deal with it on a
positive note and move on while gaining some insight which will be helpful
the next time an offer is to be presented. It is important to realize that each
opportunity is unique and that a different set of factors will come into play
each time. Property values will be rising and expectations may need to
be scaled down or be willing to pay the price. If an offer is rejected in
favor of another offer, there is nothing wrong with asking the listing agent
for particulars. Even if they won’t share the price, they may be willing to
disclose other factors that helped make up the seller’s mind: a lender that
wouldn’t return a call, no copy of the earnest money, a stronger lender
letter, poorly worded clauses, dates too far out or whatever the case may
be. Sometimes these are obstacles you can overcome in the next offer. All
you can offer your client is to provide the maximum amount of information
and data about a property, discuss strategy and presentation and put your
best foot forward.
Obviously dates are often very important but equally important
components may be such seemingly insignificant situations such
as: an earnest money deposit less than asked for; financing terms
presented in the contract but not offered by the seller (FHA loan vs.
cash only); a weak lender letter or one from a lender that the buyer, or
more likely, the listing agent does not like or has had a bad experience
with or even a sloppy, poorly prepared or presented contract.
Being prepared in advance in order to take advantage of opportunities as
they present themselves is good advice and keeps the client engaged and
pro-active. Having a contract template is a good idea as is access to earnest
money checks and other documentation required to be submitted with the
offer.
Review
This chapter presented techniques for channeling buyers through a highly
charged and often competitive environment while keeping a positive
attitude and focused on clear goals. Being well prepared with excellent
documentation and a strategy for each attempted home purchase is
important. We learned that pricing, while the most important factor, can
be mitigated with favorably presented inspection, appraisal and loan
condition terms. A cover story can also be compelling. Buyers and their
licensees can learn much from rejection and develop better skills for
negotiating a better deal on a better home. Working with investors can be
a very rewarding experience for the licensee.
Understanding the reasons the offer was rejected can help the licensee and
buyer better prepare for the next offer. About Home has listed its 5 top
reason for contract rejection:
1.
The price offered is lower than the listing price. This is true
especially if the listing is new and the seller and their broker believe
they have arrived at the market price (even if they bumped it a little).
A low offer, even by a small margin, can be taken by the buyer as
insulting. In fact, they may not even respond. In many states, an
offer not meeting sellers published requirements does not have to be
responded to.
2.
The buyer’s agent does not make a good impression on the listing
agent/seller. We all know agents who are aggressive, pushy and
otherwise not pleasant to work with, in otherwise non-professional.
This cannot help but spill over into the contract presentation phase
when the listing broker vents their frustration over dealing with the
agent. The buyer will pick up on that and likely share the negative
feelings about this individual.
3.
Variable commissions. The listing agent represents another
competing buyer. With the use of open houses, internet ads and other
marketing techniques employed by the listing agent, it is possible that
they will be successful in capturing a buyer for their listing who is not
represented by another licensee. In this case there may be a clause in
the listing agreement that the commission paid will be less than the
full commission authorized. For example if the listing calls for a 7%
commission with 4.2% paid to the listing company and 2.8% paid
to the selling company but if the property is sold without a selling
company involved, that the commission shall be reduced to 5%, all
of which goes to the listing company. This results in a 2% savings for
the seller which could be a significant amount and just enough to tip
the scales in the event of a multiple offer scenario. Of course, unless
the listing agent is only treating the buyer as a customer, this can be
fraught with peril for the agent working both sides.
4.
The offer did not meet the seller’s specific needs. Other than price,
the seller has a set of goals that they want met in the transaction.
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Chapter Four:
The Contract
Overview
In this chapter, the contract itself will be considered in detail both from
the perspective of the buyer and the seller. Negotiating a transaction for
either side may be influenced by market conditions and learning how to
best promote the interests of the client is the paramount concern.
Writing the Buyer’s Contract
The last chapter dealt with the basic components of the deal:
1. Price
2. Source of Funds
3. Dates
4. Inspection
5. Appraisal
Our goal here is to briefly navigate the mechanics of successful contract
writing and presentation to maximize chances for acceptance once the
outline of the deal is conceptualized.
Learning Objectives
Communication is always a key to developing a relationship with the
other broker and ultimately the seller. If a buyer has a strong interest in a
property, it is a good idea to communicate that to the listing agent prior to
writing a contract. This will serve two purposes:
Upon completion of the Chapter, students will be able to:
•
Establish the initial rapport between agents. Since the initial contact
is to inform the seller’s agent of interest and learn any facts that may
be of benefit, everyone is usually friendly at this point and both parties
should appreciate and make the most of the contact. Asking about the
seller’s situation and how best to incorporate language and dates to
help the seller can go a long way to improving the buyer’s chances.
It is amazing how much some licensees will divulge in a casual
conversation. Just make sure that you do not disclose too much about
the buyer that might be used against them at some point. Sellers want to
know about the buyers and how much they want to buy their property
and why (if some of the reasons are that it is so well maintained or
landscaped so beautifully). Establishing a link even at this early stage
certainly cannot hurt the buyer’s chances. Complementing the listing
broker on their success in achieving and marketing this listing so
well (if indeed they did) might be a good idea so long as it is sincere.
Transactions are so much easier when the agents for each side like each
other and have mutual respect for their professionalism.
•
Scope out the competition. Have you ever written up a contract and
e-mailed it only to find out that another offer had already been accepted
half an hour before? What a colossal waste of everyone’s time! You
may also find out that a “final and best” period has been established
and deadlines have been set up for accepting and reviewing offers. It
is always a good idea in these situations to ask the listing agent to tell
you as much as they are allowed by their client to divulge. Many listing
agents will automatically take a defensive position and tell prospective
selling agents that they cannot disclose how many or what the nature
of their offer(s) are when in fact, unless the listing contract specifically
prohibits the listor from providing this information, it is most likely
in the seller’s best interests to spill most of the beans. Why on earth
would a seller instruct their agent not to tell another agent that they
have an offer of $200,000 with a loan contingency when that selling
agent might just have a buyer who would be willing to offer $210,000
cash in this situation if they knew the facts?
•
Incorporate language and presentation techniques that help get the
buyer’s contract accepted
•
Evaluate and review offers in the most effective manner for the seller
including dealing with multiple offers
•
Learn to effectively use counter proposal and backup strategies for
making sure the deal closes or the client’s interests are best promoted
Seller and Buyer Goals and Contract Strategies
There are three main areas where buyers and seller have the exact opposite
goal. The art of writing the contract is to craft a document that achieves
a high enough score on each goal meter to be acceptable to both parties.
Nobody said this would be easy and changing market conditions will
always affect negotiating positions.
Sellers want to sell, physically leave and cash out of the property while
buyers want to close and take physical possession of the property. The
contract must be as unambiguous as possible and create the path to
achieving this goal for both parties with as little controversy as possible.
Sellers want to achieve the highest price possible and of course buyers want
to pay as little as possible. The dynamics of a hot seller’s market dictate
that the seller may have the higher degree of power here. Additionally,
where options exist to renegotiate or alter the deal financially or otherwise,
the seller wants little or no flexibility and the buyer wants the maximum
degree of flexibility through issues such as inspection, appraisal and loan
availability. Again with the seller seeming to be on top in the hot seller’s
market, the balance tends to shift to the seller once again.
Finally, sellers do not want buyers to have outs and buyers want as many
outs as possible. Real estate contracts in most states provide a number
of contingencies designed to give buyers the right to obtain what they
contracted for or terminate the contract without risk of losing earnest money.
When is it prudent to suggest waiver of some or all of these contingencies
to a buyer in order to have a chance at contract acceptance? That is not an
easy question in a hot seller’s market and the buyer’s tolerance for risk and
exposure will need to be balanced with their desire to buy and own.
The contract is the playing field and it is the single most important document
that a licensee will ever prepare. How it is presented and communicated is
of almost equal importance. Together, content and presentation is all both
parties have to reach the decisions as to whether or not to buy from and sell
to this particular party.
Sample clauses: Not intended for duplication. These are general
suggestions for enhancement of buyer’s chances of acceptance and should
be considered for inclusion with specific language tailored for each
transaction. Of course full agreement with the buyer is necessary before
writing in any modifying language.
•
Buying “As Is” – Insert dates for inspection and resolution but under
additional provisions, consider adding clause such as “Buyer agrees to
purchase property in its “As Is” condition. No inspection objection will
be submitted. Buyer reserves the right to terminate contract no later
than Inspection Objection deadline”.
•
Waiving Inspection Contingency – Strike dates and consider language
in additional provisions to the effect that: “Buyer specifically waives
section xxx of contract providing for property objection and resolution.
Buyer will not terminate contract for considerations contained in this
section but retains right to terminate for other permitted contractual
obligations of seller that are not met”.
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•
Waiving Appraisal Contingency with loan involved – strike dates
and propose in additional provisions that: “Buyer specifically waives
section xxx of contract providing for a property appraisal and objection
to said appraisal. Buyer further agrees that any additional down
payment required by lender as a result of any appraisal commissioned
by lender shall be paid at closing by buyer and further that buyer has
good funds sufficient to perform obligation of down payment. Seller
will permit lender’s appraiser access to property for purposes of said
appraisal”
offers and remaining viable after the dust has settled. It is important to use
dates that are fluid and tied to a final contract execution date and not fixed
and therefore useless in a matter of days.
•
Price Escalation – If the buyer is willing to go to a maximum offer of
X, but doesn’t want to overbid if not necessary consider: “In the event
that seller receives multiple offers, Buyer hereby agrees to increase
price offered in this contract to $_____ over the highest offer otherwise
acceptable to seller with a maximum price not to exceed $_____. Seller
agrees to provide documentation of competing offers with names and
addresses redacted”
As a listing agent, the review process should be carefully discussed with
the client at the time of listing and reviewed periodically depending on the
market and specific circumstances that may arise. Many sellers in a hot
market may have unrealistic expectations that their home will sell fast and
high. Whether or not it does, depends on the licensee’s expertise and ability
to present the best options for their client. The strength of an offer is made
up of many components:
•
Lease back or delayed possession – If it has been identified that the
seller requires or wishes to have additional time to stay in the property
after closing a clause like this might be considered for additional
provisions: “Seller and Buyer hereby agree that Seller shall execute
a lease acceptable to buyer providing for a rental period of ____ days
after closing. The agreed rent for the term is $_____ payable in advance
out of seller’s proceeds at closing.” There should also be provisions
if desired for security deposit, payment of utilities and insurance
provision during lease back. Check with the lender if applicable to
make sure that these provisions are acceptable. There will likely be a
maximum time period that the lender will allow the buyer not to be in
possession and occupancy of the property. Also check with both hazard
insurance companies to determine if additional riders will be necessary
to accommodate this provision and what if any cost will be involved.
•
Price
•
Timing issues
•
Contingencies
•
Source and strength of funding
Presenting the Buyer’s Contract
Again, in this market, time is absolutely of the essence. Two issues to
address regarding timing are: time and manner of presentation and time
allowed for response. There is nothing wrong in presenting an offer at any
time. If the buyer feels their offer will be attractive to the seller, get it in
as soon as possible, even when still viewing the home if you are prepared.
Confirm the availability and find out if there are buttons for the seller worth
pushing and submit your completely documented offer. Yes, the listing
broker may want to wait for more offers to come in but unless specifically
instructed otherwise by his client, he is obligated to present all offers in
a timely manner. Inform the listing agent that your client has instructed
you to do everything you can to have their offer presented immediately.
Again if you have a compelling story, don’t be shy to communicate it.
Despite all efforts to the contrary, you may be competing on a bank owned
property where the decision is made out of state. There may be specific
addendums to complete and a timeline for submission and review. You are
not going to change the protocol no matter how much your buyer want
this house. Offers may even be required to be submitted online. Make sure
you follow the instructions completely and don’t give the overworked nonpersonally invested employee making decisions any opportunity to reject
one more offer on a technicality. Also stay in touch with the bank’s local
representative or listing company and don’t overlook the merits of a backup
offer.
Regarding the response time to build in a contract, unless specifically
governed by a seller’s requirement for all contract reviews to be done at a
particular point in time, and perhaps in spite of that requirement, consider
a couple of alternative. Short fuse - if your offer is strong and coupled
with a short response time for the seller to act, the bird in the hand scenario
may be effective. How many times has the first offer turned out to be the
best? The deadline can always be extended to keep the offer alive if the
original time passes with no response. Do make sure in this situation that
you extend that date or you eliminate the possibility of a straight contract
acceptance without a counter and all the uncertainty that can accompany
that scenario. The other alternative to consider is no fuse. If your offer is
open ended, you create the possibility of surviving the initial onslaught of
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Seller’s Options for Contract Review
It is possible to create a strictly objective matrix to review offers that does
not includes subjective factors such as:
•
The buyer’s story and subsequent motivation
•
The environment in which the transaction is operating, i.e. friendly and
open discussions between agents and principals vs. an antagonistic or
competitive playing field.
•
Non -quantifiable factors such as perceptions, biases or intuitive
feelings
•
The overall reasonableness of the transaction and the likelihood of a
successful conclusion
Only the seller can decide if the listing agent is permitted to disclose the
existence and/or substance of other offers to selling agents and the timing in
which offers will be presented. These decisions should not be made based
on the convenience for the listing broker or staff.
It is important to make sure that during communication with the listing
agent, the licensee adheres to the requests and requirements that are posted
with the listing or by the agent. For instance if on-line disclosures are
available, it would be a very good idea to download them and make sure
they are executed and submitted with the offer. Any convenience you can
provide to the listing agent will make you look like a professional and easy
to work with.
Multiple Offer Strategies
Again the seller should have been consulted and advised of the possibility
of multiple offers during the listing process and a strategy devised for
dealing with this possibility. Many licensees seem to have adopted the
prevalent bank strategy of giving competitive offers a “final and best” shot
at the deal. This may actually hinder cultivation of the best set of offers as
it can intimidate buyers who may be strong in tangible and intangible assets
but not willing to offer a price which may prove to be untenable. A better
approach may be to simply deal with offers as they come in. If an offer
is otherwise acceptable but short on price, consider a short fused counter
to see if the buyer is willing to come up on price. Again with the seller’s
permission, it may be to the seller’s advantage to openly communicate the
essence of offers received to brokers submitting offers. This seems fair and
equitable and should go a long ways toward creating an environment of
trust and working toward mutual goals of successful closing.
Counter Proposal Strategies for Sellers
The counter is the great equalizer for the seller. Unless a perfect offer comes
in, the counter gives the seller the opportunity to fine tune the transaction
to what they believe will be their best outcome. Of course there is an
inherent risk that by countering, the original offer is no longer on the table
and susceptible to withering from buyer remorse or animosity toward the
seller for a perceived snub. By keeping the response times short, sometimes
minutes or very few hours, you retain the ability to continue to deal with
other offers and cultivate better terms for your seller. Again communications
between agents is very important in keeping the tone friendly and open. If
possible call the agent you are countering as a courtesy. Sometimes e-mails
are overlooked, sent to spam or just lost. No transaction is effective unless
offer, acceptance and communication is present. Offers and counter offers
may be revoked. You won’t be very popular with the agent with whom you
revoke a counter offer before acceptance and communication of acceptance
in favor of a better offer that came in late but they will understand that
your fiduciary responsibility is to your client. Electronic contracts, if used
properly, can almost eliminate the delay in communication as instant
notification of signatures is transmitted. If you are up to it and your seller
agrees, there may be situations where multiple counter offers can be sent
out simultaneously. In most states, the first response and communication of
response will prevail but there are inherent pitfalls to this scenario: Unless
the counters go out at exactly the same time, one may be accepted before all
the counters have been sent out and received. The possible solution would
be to prepare multiple e-mails and send them all as close to simultaneously
as possible or to specify the earliest time that an accepted counter could
be effective. California provides a seller ratification signature line on the
counter so that in order to be effective, the counter is not effective until the
seller re-signs the ratification.
Sample clauses – again not intended for duplication. These are areas which
the seller with guidance from licensee, might want to include in a counter
proposal. Any of the clauses listed previously in the buyer’s section of this
chapter may of course be re-engineered as clauses for a counter. In addition,
the seller after careful consultation with licensee might authorize any of the
following provisions to be inserted:
•
Highest and best – if multiple offers were received and the seller
wishes to give all parties the opportunity to modify their contracts in
order to be more competitive, language such as the following might
be considered in a separate communication to offering buyers: “Seller
is in receipt of multiple offers on this property and hereby extends the
following offer to Buyer: Buyer’s offer will stand as presented unless
written notification is received before _____________, that Buyer
wishes to modify any terms of said offer. This modification may take
the form of a new contract superseding the original submission or a
written or electronically transmitted notification of modified terms from
the Buyer or Buyer’s agent”. Timing is essential here as original offers
may expire before the modification date/time specified. The seller might
want to consider this and the fact that some buyers will not choose to
engage in a competitive exercise and may even question the existence
of multiple offers particularly if an otherwise acceptable offer may be
jeopardized by this action. Lenders selling foreclosed property have
turned the highest and best exercise into standard practice. Whether or
not it is a good strategy, is up to the seller with input from the licensee.
Backup Offer Strategies
A buyer unsuccessful in making an offer, may be quick to move on despite
disappointment over losing out but the buyer’s agent and the seller’s agent
might be well advised to try to negotiate a backup.
Advantages to the buyer:
•
The transaction is pre-negotiated, no further bargaining will be
necessary
•
Competition is eliminated. If worded properly, the backup takes
effect upon the occurrence of a prior contract failure and the buyer
immediately steps into position if all conditions are met (which should
include an option out if desired)
Advantages to the seller:
•
A backup is a great negotiating chit in dealing with issues arising on the
first contract such as unreasonable inspection objections or failure to
meet contractual dates and milestones. If using the backup as a threat,
the seller and his agent should be fully prepared to go through with the
action of replacing the contract and would be well advised to consult
with the backup buyer to determine if they are still interested and able
to convert to active.
•
Convenience of what should be a smooth transition to a new buyer
in the event of a contract failure and substitution through the backup
process.
A well-written backup will provide a safety net for the buyer and seller
yet allow each to pursue immediate goals. Many agents do not promote
the use of back-up contracts for whatever reasons but they should always
be considered when discussing options with buyers particularly if the
property is highly sought after and the unsuccessful bidder is ready willing
and able to perform in the event of a failure of the prior contract. There
will be several critical points in the transaction where the opportunity to
prevail over a faltering contract may be possible: inspection, appraisal,
loan approval, closing and funding. While it would probably not be cost
effective to pursue dual processing at the same time there is a prior effective
contract, there might be situations when it makes sense. Let’s just surmise
that the prior offer is actually considerably below market and that the backup buyer has offered more and is willing to invest the cost of an inspection
and appraisal unless of course they are a cash buyer and are willing to
forego both options, in which case there is no real financial exposure. The
seller will of course have an incentive to pull the plug on the first offer at
any opportunity afforded. Inspection is the first opening and if the prior
buyer has inspection objections, the seller will of course refuse to cooperate
hoping the buyer will not withdraw their objection and the contract will
terminate. Different states may impose different timelines in which a buyer
automatically terminates with no action by the seller. The listing broker
would be well advised not to disclose the existence of the backup offer to
the prior buyer’s agent who would advise their client and any objection,
unless too serious to overlook, would be likely be waived. Of course by
the same token, it would be wise of the listing broker to share the prior
buyer’s concerns over the inspection so that the backup buyer can make
the determination as to whether they will exercise their ability to replace
the first offer with the known deficiencies. The better alternative would
probably be for the backup buyer to have their own inspection or at least
bring in a professional to advise on the objectionable issue. The next
opening will likely be the appraisal in which case the same scenario can be
played out. If the appraisal comes in low and the buyer cannot or will not
agree to continue the contract at the original price, the door is wide open for
the back-up buyer to come in. Of course the back-up would be concerned
that the value may not really be there and question the price being paid
on the backup. Often there are non-financial considerations that come into
play here: a desire to be in a specific location or neighborhood because of
personal considerations such as being next door to an elderly parent or next
to a rehab facility that a family member needs for daily physical therapy
and so on. The final opportunity can come at closing and will likely be a
technical issue which can provide the opening. A funding delay is the most
likely situation and care should be taken to make sure that any contract
termination is done in accordance with the contract and local law. An
attorney might be best employed to advise in this situation. It is tempting to
a listing broker who has a backup in place to use that as leverage with the
primary buyer but unless the terms and strength of the contract is similar,
that could be a breach of fiduciary responsibility to the seller to divulge the
existence of such a backup contract.
After the contract is negotiated and finalized, the work of the licensees on
both sides has really just begun. It has been demonstrated that a transaction
in a hot seller’s market is a volatile entity and is fraught with peril. The
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importance of continuing to communicate with all parties is crucial.
Dates must be carefully observed and met. Inspection and appraisal
issues may be handled differently depending on the strength of each
party in the transaction. Flexibility may be necessary in dealing with the
sometimes volatile situations which arise during the course of the real
estate transaction.
Review
This chapter focused on the mechanics of the contract documents
including counter proposal and backup contracts. The need for
communication between agent and principal as well as between agents
is paramount. Competition is natural in this unique market and can be
dealt with effectively by seller and buyer alike. Developing effective
strategies for dealing with multiple offers and counter proposals will
increase the likelihood of success by buyers and sellers alike. Diligence
and professionalism are necessary for both licensees in the transaction
to demonstrate and practice.
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.
Please Note: There is a 85% passing score for each course. Online
questions may differ from the questions in this book.
1. The two major market conditions that are present
in most hot seller’s markets are:
a.
b.
c.
d.
Strong inventory and a surplus of buyers
Lack of inventory and strong market demand by buyers
Weak builder inventory and tight lender underwriting
Lower than normal ratio of investors to owner occupants
2. Metropolitan areas with the lowest days on market
are largely concentrated in:
a.
b.
c.
d.
Areas recovering from the highest foreclosure rates
Texas, Colorado and the west coast
Mid-Atlantic states
Areas with the least restrictive covenants
3. What are some of the causes of low inventory?
a.
b.
c.
d.
4.
Homeowners with mortgage balances lower than property value.
Investors flooding the market
Faster bank foreclosures
Less restrictive underwriting
Which is not a seller’s alternative
their homes?
a.
b.
c.
d.
in deciding how to sell
Discount brokerages
Traditional full service real estate brokerages
For sale by owner (FSBO)
Your brother who just passed his real estate exam
5. Factors contributing to making the best first
impression of a home on the internet are:
a. High quality photos highlighting the homes best features only
b. High quality photos featuring complete views of every room
and all exterior elevations
c. Dynamic marketing remarks using key catch phrases and
creating the sense of urgency to move quickly as a buyer
d. Timing the listing to appear on Friday.
6. Consider the following when discussing a “Coming
Soon” marketing campaign:
a. It is all right to use advance marketing as a prospecting tool
for buyers
b. Double ending the transaction is acceptable so long as the
seller pays a reduced total commission
c. Use of advanced marketing techniques such as a Coming
Soon sign should be approved in writing by the seller in the
listing contract
d. All of the above answers are correct.
7. Which is not a sign of a motivated buyer?
a. They will be pre-qualified for financing
(if needed)
b. Down payment will be arranged
c. Exhibit a sense of urgency and be able to act quickly
d. They will want to wait for the “perfect” house
8. Technology in prospecting is:
a. Greatly improved and the best tool an agent has to keep up
with the market
b. Available to buyers directly and thus reduces the time that
needs to be spent prospecting
c. Not sophisticated enough to replace the old techniques
d. Only available at a great investment into hardware
9. Negotiating a transaction for either party may be
influenced by:
a.
b.
c.
d.
Market conditions
Which brokerage you are affiliated with
Time of the year
Weather
10. ____ is always a key to developing a relationship
with the other agent.
a.
b.
c.
d.
A gift
Communication
Lunch
Honesty
133
A Home Buyer’s Guide to Credit Scores
2 CE Credit Hours (Approval #FI233C724CC )
The best time to plant a tree was 20 years ago. The next best time is now.
~Chinese Proverb
This Chinese proverb rings true about credit reports too. Ideally, a homebuyer has been preparing to buy a home for years:
saving a healthy down payment, eliminating debt, and boosting their credit score as much as possible. Unfortunately, many
buyers in the market have not had the opportunity to do such things, so what can they do now?
Being able to counsel people on improving their financial standing can not only improve your service to current clients, it
can be used as a marketing tool to attract and help new clients!
Chapters:
•Chapter One: All About Credit Reports
•Chapter Two: Credit Scores
•Chapter Three: Understanding the Full Cost of Home Ownership
•Identify the four basic types of credit
•Discuss how FICO® credit scores are calculated and how they impact consumers
•Identify specific actions that will either improve or hurt a credit score
•Estimate the potential closing costs for a homebuyer
“What every Licensee should know and be familiar with if they are involved in handling Rental Applications.
Excellent course, easy to understand and apply when working with clients.”
~ Beverly
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The Credit Report
Chapter One:
All About Credit Reports
Keep in mind, you are not your client’s financial advisor, but you are in
a unique position to know what is ahead for them. While you should not
advise them on financial strategies, you certainly can provide them with
tools and knowledge to make their own decisions. This course will help you
to better assist your clients by providing them with information that will be
beneficial in the home buying process.
Overview
In this chapter, we will cover credit reports. What is contained in a credit
report? Which companies produce these reports? How can a consumer
obtain a copy of his or her reports? Can credit reports be used to help protect
against identity theft? These are common questions that will be addressed
in this chapter. Keywords
•
Credit Report
•
Identity Theft
•
Revolving Credit
•
Installment Loans
•
Finance Company Accounts
•
Mortgage Loans
•
Opt Out
•
Credit Inquiries Learning Objectives
Upon completion of this chapter, the student will be able to:
•
Identify the four basic types of credit
The credit report is the basis upon which potential borrowers are assessed.
This can affect interest rates offered, possible extra points a mortgage
borrower may have to pay, and even if the potential borrower can be
approved for a loan at all.
Anyone with a social security number or tax ID in the United States has the
right to download one free credit report from each of the three big credit
bureaus once every 12 months. Many websites will offer “free credit reports”,
but they usually require credit card information and will enroll the user in
a credit monitoring service complete with recurring monthly charges until
the consumer cancels. Figuring out how to cancel this service is often very
difficult and time consuming.
This is why in 2003 the Fair and Accurate Credit Transactions Act (FACT)
was enacted to allow consumers to access their free credit reports, once a
year, with no strings attached. Anyone can go to www.AnnualCreditReport.com to instantly download
their free credit reports. If web connections or internet security is a concern,
consumers have the options of calling or mailing a form to the Annual
Credit Report Service: (877) 322-8228
You can mail a copy of this form to:
Annual Credit Report Request Service
P.O. Box 105281
Atlanta, GA 30348-5281 Identity Theft
Identity theft is the act of obtaining key information from an individual
for the purpose of using his or her credit to make purchases or steal money.
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Identity thieves can obtain personal information a number of ways,
including:
•
Taking credit card bills and bank statements from trash cans
•
Stealing wallets or individual credit cards
•
Reading credit card numbers over a person’s shoulder as they hold their
card out for a purchase
•
Employees of a store stealing information
•
Email “phishing” in which an individual sends out many emails asking
people to verify an account. They may be asked for login IDs and
passwords, social security numbers, home address, phone numbers, etc.
•
Thieves can take credit card offers from mailboxes, apply for the card,
then take the card from the mailbox (or simply checking mailboxes for
envelopes with cards)
•
Taking boxes of bank checks from mailboxes
•
Sophisticated hackers can break into retailers’ electronic files and steal
information, as what happened to the retail chain Target in late 2013 People can help protect their information with a few easy steps, including:
•
Obtain the free credit reports once a year from all three Reporting
Bureaus
•
Ask to pick up checks and bank cards directly from the bank
•
Be careful when holding credit cards, so the numbers are not visible
•
Shield the number pad when entering PIN numbers
•
Check bank and credit card statements regularly to see if there are
unusual charges
•
Shred credit card bills and bank statements before throwing them away
•
Opt Out of credit card offers by going to this website: www.
optoutprescreen.com, or call (888) 567-8688
•
Keep the number of credit and debit cards to a minimum
•
Do not carry social security cards and unnecessary credit cards in a wallet
•
Place all important documents in a safe or lock box
Case Study: Target
During a period from November 27 through December 15, 2013, hackers
were able to obtain access to Target’s digital records (Target, 2013). These
hackers were able to get credit card numbers including expiration dates
and verification codes, debit card information, names and addresses. This
information was then sold to other thieves on the internet. Unscrupulous
people could obtain victims’ credit card information for less than $100, then
charge against the card until the card holder or Credit Company discovered
the fraudulent charges and cancelled the card.
In response to this incident, Target offered 12 months of credit monitoring
for free (including credit reports from all three bureaus). In this case,
consumers did nothing reckless. The retailer had excellent internet security,
and yet hackers were still able to break in and take the information.
Target was extremely proactive in letting consumers know about the
infraction. In other cases, victims of identity theft may not know for some
time. Many thieves do not make outrageous charges. They may simply
charge gas and groceries, which may go unnoticed for a long time. Anatomy of a Credit Report
Credit reports are assembled and maintained by three major credit reporting
bureaus:
•
Experian: www.experiean.com
•
TransUnion: www.transunion.com
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•
Equifax: www.equifax.com There are a few other credit reporting bureaus, but they are not used nearly
as frequently as these three titans. These credit bureaus collect information
about a person’s credit history: credit cards, auto loans, student loans,
mortgages, judgments, and so on. They maintain this credit history for
years, but the last two years (24 months) is the timeframe of the most
importance.
Of particular interest are the following sources of credit:
Revolving Credit: Credit Cards and Retail Accounts (store credit cards)
Installment Loans: Loans with regular payments, like car loans or student
loans
Finance Company Accounts: These are high-interest loans that are
generally offered to high-risk borrowers. These types of accounts are also
commonly offered to consumers who wish to finance furniture, appliances,
elective medical procedures, etc. They may have zero-interest “same as
cash” offers if paid in full within X months. If a borrower does not pay in
full, the interest rates are significantly higher than market rates. Having this
type of credit is not generally seen as a favorable item on a credit report.
Mortgage Loans: First mortgages and larger home equity loans One important benefit from obtaining the free credit reports once a year is
to check to see if any identify theft occurred. Are there credit accounts that
were opened fraudulently? Are credit balances higher than expected? Have
there been credit inquiries from organizations unknown to the individual? Sample Credit Report
Taking a look at a sample credit report from www.Experian.com shows
many things that can appear on a credit report. The credit bureaus are highly
accurate, but there may be some inaccuracies or inconsistencies in credit
reports, so it is a good idea to obtain all three of the free reports once a year
to verify that the information is correct and to check to see if there has been
identity theft. The top of the report contains the name and contact information of the
subject individual. Next is a section on Potentially Negative Items. This
may include late credit items, bankruptcy, liens, and court judgments. This
section shows the source and amount of indebtedness.
Ideally, there would be nothing in this section, but if there is, it is in the best
interest of this individual to get these items paid. Next are Accounts in Good Standing. Having some debt is not necessarily a
bad thing on a credit report. Being able to manage some debt in a responsible
way establishes a credit history. This section lists all sources of credit going
back 5 years or more. Many of these accounts may be closed, but will still
appear on the credit report. For open accounts, the Credit Limit, Current
Balance, and 24 months of Payment History will be listed. As stated earlier,
the last 24 months are very important months on a credit report. Late
payments over the last 24 months are included, and coded as 30 Days Late,
60 Days Late, or Over 90 Days Late. Items are generally reported late once
the grace period after the due date has passed.
If a mortgage borrower has the opportunity to spend 2 years improving his
or her credit report, one key component is to make sure he or she pays at
least the minimum payment on time for every account he or she has.
Also included on the report is a History of Credit Inquiries. There are many
instances where companies will wish to check a credit history. Sometimes
these credit checks are directly authorized by the individual; other times, a
person has no idea that his or her credit has been checked. The credit checks
are divided into two sections to reflect this. The first section contains credit
checks directly authorized by the individual. This happens when someone
applies for store credit, or a loan, or even fills out an application to rent
housing and authorizes the landlord to do a credit check.
On the other hand, sometimes companies do credit checks without the
individual’s knowledge. This may commonly occur if an individual does
not “opt out” of special offers.
The last section has the contact information on file for the individual,
along with his or her employer, and a section for the individual to make a
statement about anything on the credit report.
Credit reports give a detailed account of a person’s credit history and current
standing. In the past, creditors would look at an entire report to make their
own judgments on the credit worthiness of a credit applicant. Looking at
the sample credit report, you may have noticed that it looks completely
different than what your report may look like. There is so much variation
from person to person, it is difficult to have consistent standards when
deciding on whether to grant credit or not. Credit scores were developed
to calculate a more consistent measure of credit worthiness. They are not
included in a credit report (and will be covered in the next section). Wrap-Up
This chapter covered the basics of a Credit Report, and how to obtain a free
report from each of the three major reporting bureaus once a year. Next, we
discussed the dangers of Identity Theft and how to minimize the chances
of it happening. Credit reports are useful tools to check for identity theft
and for monitoring the basic types of credit (Revolving Credit, Installment
Loans, Finance Company Accounts, and Mortgage Loans). Finally, an easy
way to Opt Out of credit offers was covered, along with other ways to
minimize Credit Inquiries. Chapter Two:
Credit Scores
Overview
Given the length and variability of credit reports, there was a demand
for a more consistent, more efficient way to measure credit worthiness.
Thankfully, there is now a set of Credit Scores. These scores take all the
information in a credit report, put it into an algorithm, and compute a credit
score number, making credit assessments much more simple.
In this chapter, we will cover Credit Scores. What do they mean? How
many different scores are commonly available? How are they calculated?
What can a consumer do to raise his or her credit score?
Keywords
•
Credit Score
•
FICO Score
•
Credit Ratio
•
Revolving Credit
•
Installment Loans
Learning Objectives
•
Discuss how FICO® credit scores are calculated and how they impact
consumers
•
Identify specific actions that will either improve or hurt a credit score
The Credit Score(s)
Most consumers have a Credit Report that is pages and pages long. In
addition to the length of the credit report, there is a great deal of variation
from person to person in terms of what appears on the report. It was clear
that having a way to evaluate consumers’ credit worthiness in an easier way
would be of great use to many creditors, employers, landlords, insurers,
lenders, etc. FICO did just that, by generating a number to represent a
consumer’s credit worthiness. We call this The Credit Score. What is FICO?
FICO: Fair Isaac Corporation. This is a publicly traded corporation that
provides software that utilizes information in a credit report to calculate
credit scores.
There are a number of different credit scores available, but FICO scores are
used by over 90% of creditors in the United States. FICO actually calculates 49 different credit scores. The different scores are
designed to suit different needs. For example, the score used to assess if a
consumer should be granted a $500 store credit card is different than that
used when deciding to grant a car loan, which is different than what is used
by a mortgage lender. Each credit reporting bureau has its own method of
calculating scores (although they are very similar to one another). The way
scores are calculated are also updated frequently, so it doesn’t take long for
so many different scores to be available. www.McKissock.com/MERE
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The basic FICO® credit score is the one most frequently used. This is the
consumer credit score which is most used by credit card companies. This is
also the score that consumers see if they request a credit score. This score ranges from 300 – 850, with 300 being high risk/poor rating, and
850 being low risk/excellent rating. More specifically, the scores are grouped into ranges for Excellent, Good,
Average, Poor, and Bad.
Americans have better credit scores than people in this group. Things that
people commonly do to end up in this category are to open up new credit
accounts. Perhaps these people like to save 15% off their first purchase
at a department store, or they wish to take advantage of low introductory
rates for balance transfers on credit cards. These people may have large
debt loads from car loans or student loans. They may also have too many
credit cards and/or have high balances on those cards. Being late or missing
minimum payments may also contribute to these lower scores. 580 – 619: Poor
FICO Scale
720 – 850: Excellent
It is estimated that slightly less than 50% of the population has an excellent
credit score. This is a group of people who have generally been at their
current job (or current line of work) for more than 2 years. These people
pay at least the minimum payments on their debts on time every month.
These people generally carry a balance of less than 30% of their available
revolving credit (i.e. credit cards), and they do not open new credit accounts
frequently, or have many credit inquiries. 680 – 719: Good
This group contains about 10% of Americans who likely have a combination
of factors listed in the “Average” categories. This group of people may have
a very difficult time obtaining credit for car loans and mortgages. Below 580: Bad
This group contains the bottom 10% of the population. This group likely
has a combination of factors described in the “Average” group, plus a
foreclosure or bankruptcy on their report. Most credit issues can be cleaned
up over time; however, foreclosures and bankruptcies tend to damage credit
scores for many years, if not permanently. As of this writing, the graph on the right (from myfico.com) represents the
most recent distribution of basic FICO® credit scores across the United
States. The average (mean) FICO® score in the United States in 2012 was 689.
Luckily, for most Americans, it is possible to increase their credit score with
a few easy steps. Some credit scores can go up quickly, while others may
take a little more time to resolve. We will cover these steps a little later, but
first it is useful to know WHY we may want to increase our credit scores. How Do Credit Scores Affect Consumers?
Credit scores affect consumers in so many ways. Landlords, employers,
and creditors frequently look at these scores for their current and potential
customers. Having a favorable credit score could mean the difference
between being offered desirable rental housing, job, or loan… or not.
For the real estate licensee, a buyer’s credit score can be crucial to
determining which properties the buyer can afford. Credit scores can affect
the loan amount, interest rates, required down payments, and if a potential
buyer can be approved for a conventional mortgage at all.
The following example was taken from www.myfico.com and reflects 30year fixed mortgage rates on a $300,000 loan based on Jan. 31, 2014 market
rates.
Example:
$300,000 loan, 30-Yr fixed mortgage
This group contains approximately 15% of the population. These people
may be doing almost everything right, but have a lowered score because
of one or more minor issues. Perhaps one of their credit cards has a high
balance. They may have been late on a payment in the last 2 years, or may
have had a number of recent credit inquiries.
620 – 679: Average
It is interesting that this group is called average. About 65 – 80% of
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FICO® score
APR
Monthly payment
760-850
3.917%
$1,418
700-759
4.139%
$1,456
680-699
4.316%
$1,487
660-679
4.530%
$1,525
FICO® score
APR
Monthly payment
640-659
4.960%
$1,603
620-639
5.506%
$1,704
As can be seen here, a borrower with a poor credit score would pay $286 a
month more than a borrower with an excellent credit score on a $300,000 loan!
National averages show that lenders may charge more than 1.5% additional
interest as a risk premium to those individuals with lower credit scores. What if a married couple is applying for a mortgage loan together? What
if one spouse has an excellent score, and the other has an average score?
If two individuals are applying for a joint mortgage loan, which credit score
will be the one used to calculate the interest rate? improved, he or she may be able to borrow more money for a lower interest
rate and less money down on a property. Taking a few steps to improve a
credit score can be well worth it! Anatomy of a Credit Score
Now that we see how important credit scores are to real estate borrowers,
you may be asking how these seemingly magical credit scores are
calculated. The simple answer is that no one knows exactly how they are
calculated. The credit bureaus and FICO® keep that information top secret,
like the formula to Coca Cola, or what’s in the Special Sauce on a Big Mac.
We know what the ingredients are; we just don’t know the precise amounts
of each.
This is what we do know (according to myfico.com): The higher score
The lower score
An average of the two scores
Neither score, as mortgage rates are the same for all borrowers As a real estate licensee, you are probably hoping that a) is the correct
answer, but have a feeling that b) is the correct answer. Mortgage lenders
have become much more adverse to risk over the last few years. They will
generally weigh the lower credit score much more heavily and base their
mortgage rates on the score that is lower of the people applying jointly for
a loan.
Takeaway: Refer to the example above. By providing knowledge to your
clients on how to raise their FICO® score (let’s say from a 675 to 700),
you could help them save $70 a month and .4% interest on the loan. That’s
pretty powerful considering you are already helping them find their dream
home! This could be one more tool that you could add to develop raving
fans out of your clients. Mortgage Interest and the Debt-to-Income
Ratio
Staying with the above example, we know that lenders base their preapproval amounts on the debt-to-income ratio:
Minimum Monthly Payments on Debt ÷ Monthly Gross Income =
Debt-to-Income Ratio
This critical ratio shows the borrower’s ability to take on more debt.
Mortgage lenders generally will not lend more than what would constitute
28% of a person’s monthly gross income. If there is other debt, mortgage
lenders will generally not originate a loan that causes a borrower’s total
debt-to-income ratio to exceed 36% (mortgage plus other debts).
As shown in the table previously, a person’s monthly mortgage payment
on a given property can vary dramatically based on his or her credit score.
The borrowers with higher credit scores are charged a lower mortgage rate,
which means their monthly payment is lower for any given loan amount.
People with a FICO® score above 760 can borrow up to $360,000 and have
their monthly payment be the same as an individual with a FICO® score
below 640 who borrows $300,000.
In other words, people with better credit scores can borrow more money
with a lower interest rate than those with less desirable credit scores. People
with excellent credit scores may be able to afford a more expensive property
than those with the same income, but lower credit scores.
In addition to that, banks may require larger down payments from those
individuals who are seen as a credit risk. If a borrower’s credit score were
When looking at these categories, keep in mind that the last 2 years (24
months) is the most critical period of time. Information dating back many
years is kept on a credit report, and foreclosures and bankruptcies can
damage credit from anywhere between 7 years and permanently. For most
credit events, the previous 24 months is the period of time that is used in
order to calculate a credit score.
We are going to be looking at each one of these factors a little more closely
on the next few pages. Payment History - 35% of Credit Score
This category is weighted the most heavily and includes factors such as:
•
Did the amounts paid at least cover the minimum monthly payments?
•
Are accounts up to date?
•
Were there “slow pays”? (payments past due dates)
•
Were there missed payments? With revolving credit, the minimum monthly payment must be paid on time
each month. Unlike some loans, borrowers cannot make a double payment
one month, and then skip the next. If a consumer is not able to make the
minimum monthly payment on time every month, it is a good idea to call
the credit company and try to set up a better payment plan.
Amounts Owed - 30% of Credit Score
“Amounts owed” is a complex set of criteria. The actual dollar figure owed
is only one facet of this portion of the credit score. While the total amount
owed is certainly important, a critical component of this category is the
Credit Ratio. Simply stated, credit ratio is the credit balance divided by
the credit limit:
Credit Balance ÷ Credit Limit = Credit Ratio
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For example, if a consumer had a $5,000 credit limit, and held a $2,000
balance, his or her credit ratio would look like this:
2,000 ÷ 5,000 = .4, or 40%
Credit Ratio
•
<30% = Low Risk (Ideal)
•
30-49% = Medium Risk
•
50-75% = High Risk
•
100% or more = Very High Risk Length of Credit History - 15% of Credit Score
What if a consumer has more than one credit card? What if the credit card
does not have a pre-set limit? What if the consumer has “maxed out” one
credit card, but has zero balances on other cards?
These are common questions that are difficult to answer without knowing
the exact formulas used by the credit reporting bureaus. Many experts
deduce that not only does the overall credit ratio matter, but also the
individual credit ratios.
For example, if a consumer has a retail account for a local department store
that has a ratio of 95%, it could significantly impair a credit score; even if
the credit limit for this one account is $500, but the consumer has a total of
$25,000 of available credit and an overall credit ratio of 10%.
Let’s look at two different consumers with similar credit accounts, but
different distribution of balances:
Charles
Charlene
Visa
2000/5000=40%
200/10000=2%
Master Card
3000/5000=60%
100/5000=0.5%
Sears
10/1000=1%
1020/1000=102%
Total Balance
$5,010
$1,320
Available Credit
$11,000
$16,000
Overall Credit
Ratio
5010/11000=45.5% 1320/16000=8.25%
Average of
Credit Ratios
33.70%
34.80%
Comparing Charles and Charlene, we see two different borrowers. Despite
the fact that Charles has charged 45% of his total available credit, Charlene
may have a similar average credit ratio! Charlene owes less and has a
higher amount of available credit, she has used all of the available credit
(plus a little more) on her Sears card. This one small card pulls the average
of all credit ratios up - even though Charlene has used only 8.25% of her
total available credit.
Why would one small card make the “Average of credit ratios” look slightly
worse than someone who has a higher balance on multiple cards? The fact
that Charlene has a high credit ratio on one card shows that Charlene may
not be able to handle credit wisely.
It is unclear how having credit cards with no pre-determined limits affects
these ratios. They do factor in, but it is hypothesized that the current balance
may be used as the credit limit in calculating credit ratios.
Some people may wish to reduce the number of open credit cards and cancel
some they no longer wish to use. Consumers should be very careful about
closing accounts that have positive balances. If such an account is closed,
then the credit limit immediately goes to $0, which will affect the credit
ratio, making it appear that the consumer is over his or her credit limit on that
account.
Another important factor is the number of open accounts.
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Saving 10 or 15% off a purchase for opening a retail credit card may sound
good; however, doing so hurts credit scores – having a small number of
accounts can help to build a credit history. Having more than 3-5 open
accounts shows that the borrower may be a serious credit risk. Even if the
open accounts have small or zero balances, too many open credit accounts
is harmful to a credit score. How long has the consumer had credit accounts? How old is the average
account? How old is the newest account?
If a consumer frequently opens and closes credit accounts, it is detrimental
to their credit score. To optimize this category, credit accounts should be 5
years old or older. Taking advantage of an introductory credit card offer to
transfer balances may save money, but it could hurt a credit score.
Consumers may need to take out new loans to buy a car or finance dental
braces requiring new accounts to be opened. If at all possible, consumers
interested in maximizing their credit score are best off attempting to keep
longstanding credit cards open, rather than ditching them for new accounts.
More about new credit cards is covered in the next section.
Rather than rushing to open a new credit card with a low introductory
interest rate, try calling credit card companies that have open accounts to
negotiate interest rates. It has been estimated that credit card customers pay
hundreds of dollars on average to acquire a new customer. Companies may
be willing to go to great lengths to keep existing customers! A quick phone
call may result in a reduced interest rate, or even matching a 0% balance
transfer offer!
New Credit - 10% of Credit Score
This category not only includes new accounts, but also includes the number
of credit inquiries, even if no new account is opened.
Some of the more popular ways people unknowingly hurt their credit scores
include:
•
Opening up retail store credit to get introductory offers (like 10% off
first purchase)
•
Shopping around for loans on homes or cars
•
Mailing in “pre-approved” credit offers
•
Applying to rent numerous apartments that request a credit check
(landlords must obtain written permission before pulling a credit report)
Any time a new credit account is opened or a credit inquiry occurs, a
consumer’s credit score is reduced. Types of Credit Used - 10% of Credit Score
This category is a delicate balance (pun intended).
In order to maximize a credit score, the consumer should have experience
with a diverse mix of the different types of credit, but he or she should not
have high balances in any one account, or overall.
The types of credit available include:
•
Revolving Credit: Credit Cards and Retail Accounts (store credit cards)
•
Installment Loans: loans with regular payments, like car loans or
student loans
•
Finance Company Accounts: these are high-interest loans that are
generally offered to high-risk borrowers. These types of accounts are also
commonly offered to consumers who wish to finance furniture, appliances,
and elective medical procedures. They may have zero-interest “same as
cash” offers if paid in full within X months. If a borrower does not pay in
full, the interest rates are significantly higher than market rates. Having this
type of credit is not generally seen as a favorable item on a credit report.
•
Mortgage Loans: Includes first mortgages and larger home equity
loans Chapter Three:
Understanding the Full
Cost of Home Ownership
Specific Events that Reduce Credit Scores
Overview
So many extremely responsible people have credit scores that may not
accurately reflect their credit worthiness. We may unwittingly do some of the
following things that may ultimately hurt our credit scores:
Many buyers are savvy enough to listen to their lender with respect to their
monthly PITI payments (PITI = Principal, Interest, Taxes, and Insurance).
However, this amount is not the complete picture. Properties need regular
maintenance. Utility costs are usually significant, and it is vital to be
prepared for a major expense, like needing a new roof, furnace, septic
system, and so on. •
Open new credit card accounts to transfer balances to lower rate cards
•
Close old accounts so that the average age of open accounts is less than
5 years
•
Apply for a few loans, hoping to shop around for the best rate
•
Open retail credit accounts to receive discounts
•
Keep overall credit balances low, but have one account with a high
credit ratio
•
Close a credit card account before paying off the balance in full
•
Have many open credit accounts – even if they have zero or low
balances
•
Not making payments on time -- skipping a month, paying late, or
paying less than the minimum monthly payment
•
Allowing a disputed charge go to collections, rather than correct it Specific Actions to Improve Credit Scores
Here are some ways to improve a credit score: •
Be sure to make at least the minimum monthly payments on time every
time
•
Do not let credit accounts go to a collection department or be sold to a
collection company
•
Limit the number of open credit accounts to between 3 and 5 accounts
•
Keep credit balances low (or zero) on all open accounts
•
Try to keep old credit card accounts open
•
Keep credit inquiries to a minimum
•
Do not close credit accounts until the balances are paid off in full
Wrap-Up
This chapter covered the basics of FICO® credit scores. We covered the
range of possible credit scores and how they can affect a borrower’s monthly
payment. Credit scores are calculated by evaluating Payment History,
Amounts Owed, Length of Credit History, New Credit, and Types of Credit
Used. This chapter wrapped up with some common events that may lower a
credit score and some tips on how to improve a credit score. A prepared buyer is one who knows exactly where he or she currently
stands, how to get where he or she is going, and what costs to expect along
the way. This chapter is broken up into 3 parts: 1.
2.
3.
Getting a handle on current finances
Being ready to pay closing costs
Estimating a reasonable budget for home ownership
Learning Objectives
•
Estimate the potential closing costs for a homebuyer Getting a Handle on Current Finances
So many people understand the concept of property ownership and know
that the property they wish to purchase (be it a home or investment
property) may be more expensive than their current situation. Too many
people hope that cutting back on restaurant meals, entertainment, and those
oh-so-yummy double macchiatos will enable them to comfortably afford
the property they wish to buy. Significant investments, such as real estate purchases, come with risks.
Does the buyer’s budget REALLY afford them the opportunity to buy the
property they want? Should they be looking at something more modest?
Perhaps they don’t realize that they could comfortably afford something
more expensive than they originally thought. Getting a full understanding of spending patterns is crucial to assessing the
affordability of a new property purchase. Tracking spending is much easier to talk about than to actually do. Some
people are very good at using accounting software, building spreadsheets,
or keeping good notes. Even the best spreadsheet can miss key items, so
there are a number of services designed to track spending. The key is to find
one that will securely link all accounts. The property buyer may have an account with a bank that offers spending
tracking services. The account holder may simply need to enter information
on other accounts (such as loans and credit cards). Track Spending and Create Budgets
The key to online spending tracking sites is to find one that will link all
accounts while providing a high level of security and functionality. Many
banks offer this service to their account holders. Some banks’ tracking
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applications are easier than others. In the last few years, a number of user-friendly websites have evolved
to meet the growing demand to know where our money goes. National
Public Radio recently did a feature on these sites: http://www.npr.
org/2011/05/18/136394339/sites-that-help-track-your-spending-andsaving. Here is a list of sites discussed in the feature:
•
www.mint.com
•
http://money.strands.com
•
www.buxfer.com An internet search will offer a number of other, similar financial tracking and
budgeting resources. The sites all have different strengths and weaknesses, so
reading about which fits a person’s individual needs is important.
Mint
For this course, there will be a quick overview of www.mint.com to show
the usefulness of spending tracking and budgeting. This site is free, but will
show ads and offers to those who sign up. 1. Step 1: Open an online account
2. Step 2: Gather all account information including bank accounts, credit
cards, and loans
3. Step 3: Enter information on the accounts
4. Step 4: Login to the site to manually edit transactions that are not
categorized
5. Step 5: Set monthly budget for spending categories such as groceries,
gas, rent/mortgage, utilities, etc.
6. Step 6: Watch the online account closely for a month or so
7. Step 7: Gain a deeper understanding of how money is spent and saved These sites try to make this process interesting and fun.
For example, if a mint.com user enters account information on retirement
accounts, automobile values, and even real estate owned, mint.com will
calculate their net worth. Real estate values are updated regularly through
www.zillow.com (they are not formal appraisals, just rough estimates).
Another benefit of mint.com and similar sites is that they may seamlessly
link to tax software, making tax preparation a little easier (turbo tax in the
case of mint.com). After Financial Tracking
Once someone understands his or her spending patterns, it is easier to make
adjustments in order to set goals, such as paying off credit card debt and
saving for a down payment and closing costs on a property.
Being Ready to Pay Closing Costs
Closing costs may come as a big shock to many property buyers. According
to www.bankrate.com, average closing costs across the United States range
from $2,119 in Wisconsin to $2,919 in Hawaii. These rates are simply the
loan origination and processing fees. They do not include home inspections,
property tax, and insurance escrows, recording fees, title searches, and deed
preparation (among others). A recent article in Zillow.com describes common closing costs: http://www.
zillow.com/wikipages/List-of-Closing-Costs-and-Fees/
A common rule of thumb is that closing costs are often about 5% of the
purchase price of the property. This varies greatly and the best way to
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estimate closing costs is to apply for a mortgage and obtain the required
Truth in Lending Statement, which will itemize the closing costs. Closing costs do not include earnest money deposits or down payments.
These should be budgeted separately and vary widely depending on buyer and
seller preferences and mortgage loan products. Some require more than others. Estimating a Reasonable Budget for Property Ownership
All too often, property buyers don’t have a full sense of a property’s
ownership costs until they have taken ownership of it.
PITI Payments
Of course, buyers who are approved for mortgage loans are given an estimate
of their PITI payment (PITI: principal, interest, taxes, and insurance). PITI
payments tend to be relatively stable, but do go up over time as taxes and
insurance premiums increase. Utilities
Property disclosures often have utility estimates for heating and cooling.
It is often wise to call the fuel provider directly to verify these amounts.
Buyers should be aware that buildings that have been vacant prior to sale
may have been winterized, or kept at a temperature that is not comfortable
for habitation, so actual heating and cooling costs could be much higher.
Many fuel companies are willing to provide a few years’ worth of usage
amounts and it usually doesn’t hurt to ask! Electricity costs vary dramatically from resident to resident. Some people
are very good at conserving energy and “phantom loads” (energy drawn
when appliances are plugged in, but not in use). Other building residents
may leave lights, air conditioning, and other electronics running much more
frequently. Water and Sewer
Some properties are on public water and sewer. A trip to the local municipal
offices can help to get these costs. Having public water and sewer does not
mean that the municipality will pay to maintain the entire systems. Pipes
within the building(s) and out to the street are usually owned by the property
owner. If a buried pipe needs replacement, that can be a significant expense. Other properties may be on private well and/or private sewer (septic,
cesspool, etc.). In the case of private water and sewer, a thorough inspection
can help to estimate the operation costs and likelihood that the system may
need extensive repairs or replacement in the near future. Unexpected Expenses
As mentioned above, a good home or building inspection is vital to
anticipating future maintenance expenses. Keep in mind that these
inspectors are usually not contractors, so it is often useful to follow up
with contractor estimates after a home inspection is complete. In new
construction, many buyers assume that the building is in top condition, with
no inherent flaws. Building inspections on new construction frequently
uncover issues. Just because a building is new does not mean a building
inspection is unwarranted. Home inspectors may not see everything (they do not have x-ray vision),
so having an emergency account for unanticipated expenses is important. Curtain Costs
Rarely does a property buyer take possession of a property and use it as is.
There are usually “curtain costs.” These are costs incurred by a new owner
in order to make a property comfortable for his or her needs. Of courWse,
curtains are a common curtain cost, but much more expensive items are
also in this category, such as washers and dryers, lawn mowers, area rugs,
furnishings, landscaping, and so on. This is a category which is easy to
overlook when budgeting!
Emergency Savings
With real estate ownership, expensive maintenance and repairs are
commonplace. In an ideal situation, an emergency fund should be in place
before the sale. These funds can be used for unexpected emergencies, like a
backed-up septic system, as well as for hardships, like loss of a job. Financial gurus like Dave Ramsey suggest an emergency fund of $1,000,
plus 3-6 months of expenses, while Suze Orman suggests an emergency
fund of 8 months’ worth of income. Regardless of which financial advisor you listen to, most will suggest an
emergency fund to keep a property owner out of foreclosure. Pulling it all Together
Combining the system to track spending with a solid estimate on property
ownership costs will give buyers a realistic sense of affordability and brace
them for the costs they may face. Many financial tracking tools include a
function to budget. Once the full property ownership costs are estimated,
the buyer can add a “goal” to his or her spending account. Many real estate
professionals suggest that homebuyers should estimate the full cost of home
ownership. If these costs are more than they are currently spending to rent,
the buyers should put the excess into a savings account and live that way
for a while. The same principle holds true for people buying other types of
property as well (such as vacation or investment property).
Taking the following steps will help the property buyer have a solid
foundation on which to build his or her investments:
1. Boost credit scores
2. Track spending
3. Collect realistic costs of property ownership
4. Budget for the change in expenses
Summary
This chapter was short, but very important. Too many buyers think they
have a full understanding of their income and spending, when they could
use more thorough information. Today, there are wonderful financial
tracking tools that are eye-opening even to the most budget-minded person.
Combining this information with a credible estimate of closing costs and
a complete forecast of ownership costs can help a buyer become truly
prepared for property ownership. The final step is to add additional costs
of the property ownership with monthly financial tracking to see if the
purchase is money-wise. www.McKissock.com/MERE
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.
1. A person’s FICO score is actually ______ scores,
each with a specific purpose.
6. One of the most important things that everyone
should do is _________.
2. In order to be considered as having "bad" credit,
a person must have a general FICO credit score of
______ or below.
7. The highest credit score available is _____.
a.
b.
c.
d.
a.
b.
c.
d.
9
29
39
None of the answers shown
580
600
610
618
3. Homebuyers with excellent credit often obtain
interest rates ____ those buyers with poor credit.
a.
b.
c.
d.
The same as
Significantly lower than
Higher than
Significantly higher than
a.
b.
c.
d.
a.
b.
c.
d.
Buy a home
Track spending habits
Not worry about spending as long as one can afford it
Only worry about “Big Ticket” spending
800
850
900
950
8. Appropriate uses for a family’s emergency fund
would be to _________.
a.
b.
c.
d.
Take a vacation
Pay for a new water well
Buy new furniture
Finish the basement in their home
4. What can damage a person’s credit score?
9. Payment history represents approximately _____
of the total credit score, while the amount owed
represents approximately ______.
5. When buying a home, a borrower with excellent
credit can often afford a _______ home with
________ payments.
10. In calculating the debt-to-income ratio of a
borrower looking to finance the purchase of a new
home, the income is based upon ______ .
a.
b.
c.
d.
a.
b.
c.
d.
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Late payments
Too many open accounts
High balances on existing accounts
All of the answers shown
More expensive / higher payments
Less expensive / lower payments
More expensive / lower payments
Larger / higher payments
a.
b.
c.
d.
a.
b.
c.
d.
30% / 35%
35% / 30%
40% / 30%
30% / 40%
Total income after taxes
Gross income
Net income
Any of the answers shown
Know The Code: Your Guide To The Code Of Ethics
3 CE Credit Hours (Approval #FI233C725CC)
Did you know that the National Association of REALTORS® Code of Ethics is over 100 years old? Though the real estate
market has evolved a lot since 1913, one aspect that has not changed is that home buyers continue to select professionals
who hold themselves to a high ethical standard. Familiarity with the Code of Ethics will allow you to build stable and lasting relationships with your clients. Your instructor will provide you with an overview of the Code of Ethics and Standards
of Practice of the National Association of REALTORS® as it applies to the profession of real estate. Additionally, your
instructor will enhance your understanding of ethical behavior by providing you with sample scenarios and common illegal
practices to guide the practical decision-making of licensees.
Chapters:
•Chapter 1: What is Ethics?
•Chapter 2: Duties to the Public (Articles 10-14)
•Chapter 3: Duties to Realtors ® (Articles 15-17)
•Chapter 4: Complaint Process, Enforcement and Pathways to Professionalism
•Define “ethics” and differentiate among “principles” and “values” as well as business/professional and personal ethics and understanding who governs ethics for Realtors®
•Review the structure of the Code and be able to discuss the Preamble and the Golden Rule
•Describe key concepts of Articles 1-9 of the NAR Code of Ethics
•Recognize who enforces the Code of Ethics and how the complaint process works
•Distinguish between mediation and arbitration
•Identify key parts of Pathways to Professionalism
“It was quick and easy.” ~ Justin
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Chapter One
What Is Ethics?
The final distinction to be made on this topic is between business and
personal ethics. Though the ethical framework exercised in private decisions
certainly influences professional behavior, there is again a clear difference
which needs some review.
Chapter Overview
Personal ethics reflect general expectations of any person in any society, while
business ethics reflect required behavior within the context of a professional
practice. The following are sample criteria for each set:
The first chapter in our Code of Ethics course will examine what exactly the
term “ethics” means and how it relates to values and principles, standards,
regulations and laws. Chapter One will also include information about the
history of the National Association of REALTORS® (NAR) Ethics Code and
the structure of the Code as it exists today. We’ll also review the Preamble and
the Golden Rule along with Articles 1-9, Duties to Clients and Customers,
and review some case studies and examples related to those Articles.
Learning Objectives
• Define “ethics” and differentiate among “principles” and “values”
• Review the structure of the Code and be able to discuss the Preamble
and the Golden Rule
• Describe key concepts of Articles 1-9 of the NAR Code of Ethics
What is Ethics?
Before we get into the bulk of this course, it is first necessary to understand what
the term "ethics" actually implies. Many associate the term with "principle" or
"value;" however, there are important differences among the three.
Merriam Webster defines the terms as the following:
Principle: a comprehensive and fundamental law, doctrine, or assumption
Value: something (as a principle or quality) intrinsically valuable or desirable
Ethic: dealing with what is good and bad and with moral duty and obligation
In other words, principles are intellectual and immutable, values are
emotional and can change, and ethics are behaviors and actions. See the
difference?
Business ethics is a form of applied ethics or professional ethics that examines
ethical principles and moral or ethical problems that arise in a business
environment. It applies to all aspects of business conduct and is relevant to
the conduct of individuals and entire organizations.
The next issue we need to examine is where ethics stand in regard to
standards, regulations, and laws. Let’s take a quick glance at the definitions
of each.
Laws: legal documents setting forth rules governing a particular kind of activity
Regulations: the principles or conditions that customarily govern;
authoritative rules
Standards: the ideal in terms of which something can be judged; a basis for
comparison; a reference point against which other things can be evaluated
Ethics: the principles of right and wrong that are accepted by an individual
or social group; a system of principles governing morality and acceptable
conduct
As you can see, the order in which these terms are presented corresponds
to the continuum of concrete to abstract thought. Defining ethics is clearly
more complex than defining laws, therefore, we can deduce that adhering
to ethical conduct is more complex than adhering to laws. After all, can
everyone agree on what is right and what is wrong? Absolutely not! However,
everyone can agree on whether a law has been broken or not – the lines
separating legal and illegal behavior are very bold.
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Personal ethics
• Concern for the well-being of others
• Respect for the autonomy of others
• Trustworthiness and honesty
• Willing compliance with the law
• Being fair
• Refusing to take unfair advantage
• Doing good
• Preventing harm
Business ethics
• Impartiality and objectivity
• Openness and full disclosure
• Confidentiality
• Due diligence and duty of care
• Fidelity to professional responsibilities
• Avoiding potential or apparent conflict of interest
The National Association of REALTORS®
Most professions have internally enforced codes of practice or codes of ethics
that members of the profession must follow to prevent exploitation of the
client and to preserve the integrity of the profession. This is not only for the
benefit of the client but also for the benefit of those belonging to the profession.
Disciplinary codes allow the profession to define a standard of conduct and
ensure that individual practitioners meet this standard by disciplining them
from the professional body if they do not practice accordingly. This allows those
professionals who act with conscience to practice in the knowledge that they
will not be undermined commercially by those who have fewer ethical qualms.
It also maintains the public’s trust in the profession, encouraging the public to
continue seeking their services.
In most states, real estate professionals are governed by a hierarchy of codes
and regulations. The most general are state and federal codes, both criminal
and civil, which apply to the general population. Next, there are a number of
voluntary professional organizations which regulate real estate activity by their
membership, who have, as we discussed above, internally enforced codes of
ethics.
However, this has not always been the case. Prior to 1900, there was no licensing
of real estate practitioners and speculation and exploitation was rampant in the
industry. Caveat emptor (buyer beware) governed transactions and real estate
was a tough game to play!
The National Association of REALTORS®, commonly referred to as NAR,
was founded in 1908 in Chicago, Illinois. Under the name of The National
Association of Real Estate Exchanges, the 120 founding members' objective was
"to unite the real estate men of America for the purpose of effectively exerting a
combined influence upon matters affecting real estate interests."
Before changing the group's name to The National Association of Real Estate
Boards in 1916, the Code of Ethics was adopted in 1913 with the Golden Rule at
its foundation to establish professional standards of conduct for the business. In
1949, REALTOR® was approved by the Patent and Trademark Office.
The formal name of the organization was changed one final time in 1974 to
its current title and has since become a substantial trade association with over
850,000 members, 54 State Associations and more than 1,500 local Associations.
The Code of Ethics and Standards of Practice of the National Association of
REALTORS® (Code of Ethics) is the cornerstone of the National Association
of REALTORS® ethics training. It guides Realtors® and also shows the public
the level of commitment, education, and dedication to their profession that
each member of NAR possesses. The NAR Code of Ethics lies at the heart of
being a Realtor®. Since its adoption in 1913, the Code has promoted timehonored principles that are generally defined as:
• Loyalty to clients
• Fiduciary duty to clients
• Cooperation with competitors
Truthfulness in statements and advertising and non-interference in exclusive
relationships that other Realtors® have with their clients
Realtor® (or Realtor-Associate®) members who violate the Code of Ethics
can be subject to sanctions by their local Association through procedures
established by NAR.
Origins of the Code of Ethics
The National Association of REALTORS® was
originally founded as the National Association of
Real Estate Exchange in Chicago on May 12, 1908.
The video to the right provides an overview of the
Code of Ethics origin. The video covers material
that you will be quizzed on later.
Structure of the Code
The Code of Ethics provides a comprehensive view of unethical situations
and is structured according to three sections with articles and standards of
practice. The articles are general statements supported by standards which
outline specific behaviors. Overall, the NAR Code of Ethics:
• Protects the buying and selling public
• Promotes a competitive real estate marketplace
• Enhances the integrity of the industry
• Is your promise of performance
• Is your promise of professionalism
The first section of the Code of Ethics is the preamble, followed by three
major sections:
• Duties to clients and customers
• Duties to the Public
• Duties to Realtors®
The Code’s 17 Articles are broad statements of ethical principles while the
Standards of Practice support, interpret, and amplify the Articles under
which they are included.
It’s important to note that only violations of the Articles themselves can result
in disciplinary action. Realtors® may not be found in violation of a Standard
of Practice, only its foundational Article. Standards of Practice may however
be cited in support of an alleged violation of an Article.
Scan this code for a printable poster to hang in your
office or provide quick reference.
The Preamble
The Preamble to the Code of Ethics is its inspirational foundation because its
principles are ideals toward which Realtors® should strive:
• Honesty
• Integrity
• Fairness
• Moral conduct in business relations
The Preamble is aspirational in nature; it cites the ideals by which Realtors
should aspire to conduct their business. It describes subjective ideas rather
than measurable standards.
The Preamble begins with the inspiring words of "Under all is the land..." These
words represent the all-encompassing nature of the field, as land is the foundation
of many aspects of society. As one of society's most important commodities,
the foundation of land accounts for simple necessities such as food and shelter,
as well as more complex aspects such as economy and prosperity. Overall,
the profession of real estate is very important from the ground up, literally!
The Preamble sets forth aspirational concepts from which the Code of Ethics
has been formed. The Preamble cannot be cited as the basis for disciplinary
action, as it is “aspirational” and describes subjective ideals, not measurable
standards. The Code itself provides the measurable standards by which
disciplinary action can be taken.
The Golden Rule
When reading the full text of the NAR Code of Ethics, one can readily
determine that the Golden Rule is a core element of its foundation. As stated
in the final paragraph of the Preamble, the entire code refers to the simple
premise of "whatsoever ye would that men should do to you, do ye even so to
them."1 In other words, treat others like you would like to be treated.
Now let’s take a look at each of Articles 1-9, “Duties to Clients and Customers.”
Where applicable, text taken in its entirety from the NAR Code of Ethics
document will be italicized.
1 Matthew 5:37, King James Version of the Bible, 1611
Article 1
Article 1 discusses Realtors®'s fiduciary duties to their client. To “protect
and promote” the client’s interest is to focus on what’s best for the client you
represent while being honest with all parties.
Article 1
When representing a buyer, seller, landlord, tenant, or other client as an agent,
Realtors® pledge themselves to protect and promote the interests of their client.
This obligation to the client is primary, but it does not relieve Realtors® of their
obligation to treat all parties honestly. When serving a buyer, seller, landlord,
tenant or other party in a non-agency capacity, Realtors® remain obligated to
treat all parties honestly. (Amended 1/01)
Article 1 clearly states that a Realtor® must protect and promote the interests
of the client, and that this obligation is primary. However, in all cases and at
all times, Realtors® also have a duty to treat all parties honestly. This includes
parties who are not represented by the Realtor®.
The Standards of Practice included in this Article further amplify the
Standards by which Realtors must abide. We’ll list all of them below and
review some of them in detail.
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• Standard of Practice 1-1
Realtors®, when acting as principals in a real estate transaction, remain
obligated by the duties imposed by the Code of Ethics. (Amended 1/93)
The duties imposed by the Code of Ethics encompass all real estate-related
activities and transactions whether conducted in person, electronically, or
through any other means.
The duties the Code of Ethics imposes are applicable whether Realtors®
are acting as agents or in legally recognized non-agency capacities
except that any duty imposed exclusively on agents by law or regulation
shall not be imposed by this Code of Ethics on Realtors® acting in nonagency capacities.
As used in this Code of Ethics, “client” means the person(s) or entity(ies)
with whom a Realtor® or a Realtor®’s firm has an agency or legally
recognized non-agency relationship; “customer” means a party to a
real estate transaction who receives information, services, or benefits
but has no contractual relationship with the Realtor® or the Realtor®’s
firm; “prospect” means a purchaser, seller, tenant, or landlord who is not
subject to a representation relationship with the Realtor® or Realtor®’s
firm; “agent” means a real estate licensee (including brokers and sales
associates) acting in an agency relationship as defined by state law or
regulation; and “broker” means a real estate licensee (including brokers
and sales associates) acting as an agent or in a legally recognized nonagency capacity. (Adopted 1/95, Amended 1/07)
When acting as listing brokers, Realtors® shall continue to submit to the
seller/landlord all offers and counter-offers until closing or execution of a
lease unless the seller/landlord has waived this obligation in writing.
Realtors® shall not be obligated to continue to market the property after an
offer has been accepted by the seller/landlord. Realtors® shall recommend
that sellers/landlords obtain the advice of legal counsel prior to acceptance
of a subsequent offer except where the acceptance is contingent on the
termination of the pre-existing purchase contract or lease. (Amended 1/93)
Realtors®, acting as agents or brokers of buyers/tenants, shall submit to
buyers/tenants all offers and counter-offers until acceptance but have no
obligation to continue to show properties to their clients after an offer
has been accepted unless otherwise agreed in writing. Realtors®, acting as
agents or brokers of buyers/tenants, shall recommend that buyers/tenants
obtain the advice of legal counsel if there is a question as to whether a
pre-existing contract has been terminated. (Adopted 1/93, Amended 1/99)
Realtors®, in attempting to secure a listing, shall not deliberately mislead
the owner as to market value.
The obligation of Realtors® to preserve confidential information (as
defined by state law) provided by their clients in the course of any agency
relationship or non-agency relationship recognized by law continues after
termination of agency relationships or any non-agency relationships
recognized by law. Realtors® shall not knowingly, during or following the
termination of professional relationships with their clients:
Why do you think an agent would ever want to mislead an owner as to the
market value of their property? Do you think that in an effort to obtain a
listing, agents may recommend a list price higher than what they really feel
the market will support, because they know that is what the seller wants to
hear and the agent wants to obtain the listing? Do you think it’s possible that
a licensee could recommend a price lower than what he or she felt was true
market value in an attempt to sell a property quickly and perhaps even to one
of that agent’s own clients? In any of these cases, this would have been a clear
violation of Article 1.
Let’s continue on with the list of Standards of Practice for Article 1.
Realtors®, when seeking to become a buyer/tenant representative, shall not
mislead buyers or tenants as to savings or other benefits that might be
realized through use of the Realtor®’s services. (Amended 1/93)
Realtors® may represent the seller/landlord and buyer/tenant in the same
transaction only after full disclosure to and with informed consent of both
parties. (Adopted 1/93)
Realtors® shall submit offers and counter-offers objectively and as quickly
as possible. (Adopted 1/93, Amended 1/95)
Let’s look at Standard of Practice 1-6 in a little more detail.
As we all know, situations can arise which legitimately prevent an offer from
being presented immediately (seller is out of town with no access to email,
148
etc.), but have you ever been in a situation where your offer was not presented
in a timely manner for no valid reason? And then you discovered that the
seller had accepted another offer, written by the listing agent? If the listing
agent was, in fact, found to be in violation of Article 1 by failing to present
offers objectively and as quickly as possible, she could face disciplinary
action. We will discuss what can be involved in disciplinary action later in
this course.
1. reveal confidential information of clients; or
2. use confidential information of clients to the disadvantage of clients; or
3. use confidential information of clients for the Realtor®’s advantage or
the advantage of third parties unless:
a. clients consent after full disclosure; or
b. Realtors® are required by court order; or
c. it is the intention of a client to commit a crime and the information
is necessary to prevent the crime; or
d. it is necessary to defend a Realtor® or the Realtor®’s employees or
associates against an accusation of wrongful conduct.
Information concerning latent material defects is not considered confidential
information under this Code of Ethics. (Adopted 1/93, Amended 1/01)
Realtors® shall, consistent with the terms and conditions of their real
estate licensure and their property management agreement, competently
manage the property of clients with due regard for the rights, safety and
health of tenants and others lawfully on the premises. (Adopted 1/95,
Amended 1/00)
Realtors® who are employed to maintain or manage a client’s property
shall exercise due diligence and make reasonable efforts to protect it
against reasonably foreseeable contingencies and losses. (Adopted 1/95)
When entering into listing contracts, Realtors® must advise sellers/
landlords of:
1. the Realtor®’s company policies regarding cooperation and the amount(s)
of any compensation that will be offered to subagents, buyer/tenant agents,
and/or brokers acting in legally recognized non-agency capacities;
2. the fact that buyer/tenant agents or brokers, even if compensated by
listing brokers, or by sellers/landlords may represent the interests of
buyers/tenants; and
3. any potential for listing brokers to act as disclosed dual agents, e.g.,
buyer/tenant agents. (Adopted 1/93, Renumbered 1/98, Amended 1/03)
When entering into buyer/tenant agreements, Realtors® must advise
potential clients of:
1. the Realtor®’s company policies regarding cooperation;
2. the amount of compensation to be paid by the client;
3. the potential for additional or offsetting compensation from other
brokers, from the seller or landlord, or from other parties;
4. any potential for the buyer/tenant representative to act as a disclosed
dual agent, e.g., listing broker, subagent, landlord’s agent, etc., and
5. the possibility that sellers or sellers’ representatives may not treat the
existence, terms, or conditions of offers as confidential unless confidentiality
is required by law, regulation, or by any confidentiality agreement between
the parties. (Adopted 1/93, Renumbered 1/98, Amended 1/06)
Fees for preparing appraisals or other valuations shall not be contingent
upon the amount of the appraisal or valuation. (Adopted 1/02)
Realtors®, in response to inquiries from buyers or cooperating brokers shall,
with the sellers’ approval, disclose the existence of offers on the property.
Where disclosure is authorized, Realtors® shall also disclose, if asked,
whether offers were obtained by the listing licensee, another licensee in the
listing firm, or by a cooperating broker. (Adopted 1/03, Amended 1/09)
Realtors® shall not access or use, or permit or enable others to access or
use, listed or managed property on terms or conditions other than those
authorized by the owner or seller. (Adopted 1/12)
We won’t go into these in any detail, just remember you’re responsible for
understanding them and following them.
Let’s examine a case study related to Article 1 taken from the NAR website.
Case Study
Case #1-15: Obligation to Advise Client on Market Value
(Originally Case #2-1. Revised and transferred to Article 7 as Case #7-19 May,
1988. Transferred to Article 1 November, 1994.)
Client A went from his hotel to REALTOR® B’s office and advised that he
formerly lived in the community, and had kept his home as an income property
after he moved away. The house had been vacant for several months and he
had decided to sell it. He asked if REALTOR® B could drive him to look at it. As
they inspected it, Client A stated that he would be happy to get $80,000 for it.
REALTOR® B listed it at that price and after a few days it was sold to Buyer C.
Six months later, Client A was in town again. Hoping to recover a box of old
photographs he had left in the attic, he called on Buyer C, whom he had met
at settlement. When he arrived he found that Buyer D then lived in the house.
He expressed some surprise that Buyer C had sold it so soon, and learned that
Buyer D paid $140,000 for it. Astonished, Client A then made some inquiries as
to market values and learned that he had grossly under-priced his house when
listing it with REALTOR® B. He went to the Board of REALTORS® office and
filed a complaint against REALTOR® B charging him with unethical conduct in
not having advised him as to the property’s fair market value.
At the hearing, REALTOR® B’s defense was that he had not been asked to put
a price on the house, but had accepted agency on the basis of a price set by the
client; that the client had stated he “would be happy” to get $80,000 for it; that
he was glad to get a listing that would move quickly in the market; that he had
done nothing unethical since he had not bought it himself; and that while he
had honestly pointed out to the buyer that the house was a bargain, he had
made no effort to induce relatives or business associates to buy it.
On questioning, he conceded that after looking at the house with Client A, he
realized the property was being listed at about half its fair market value, but
insisted that was his client’s business; that different owners have different reasons
for selling and pricing their property, but acknowledged that Client A had not
indicated that he needed a quick sale or that he would make any price concession.
The Hearing Panel pointed out that brokers have no hesitation in advising
clients that properties are overpriced when this is the case, and they are
obligated to be equally candid in providing their best judgment to clients when
properties being offered for sale are obviously underpriced.
The panel concluded that in view of the wide discrepancy between the owner’s
asking price and the property’s market value, which REALTOR® B conceded
was apparent to him, it was REALTOR® B’s obligation as an agent to advise
his client that the house was worth considerably more, especially since it was
apparent that Client A had been away from the community for years and
was out of touch with local values. The Hearing Panel found REALTOR® B in
violation of Article 1.
Article 2
Articles 2 – 9 continue with “Duties to Clients and Customers.” As before,
we will review a few of the Standards of Practice included in these Articles in
detail. Remember though, as a Realtor®, it is your responsibility to be familiar
with and abide by all of them. Article 2 deals with disclosure of pertinent or
material facts. Property condition disclosures are vital. Make sure property
defects and adverse factors are disclosed to the buyer or tenant.
Article 2
Realtors® shall avoid exaggeration, misrepresentation, or concealment of
pertinent facts relating to the property or the transaction. Realtors® shall not,
however, be obligated to discover latent defects in the property, to advise on
matters outside the scope of their real estate license, or to disclose facts which
are confidential under the scope of agency or non-agency relationships as
defined by state law. (Amended 1/00)
Realtors® shall only be obligated to discover and disclose adverse factors
reasonably apparent to someone with expertise in those areas required
by their real estate licensing authority. Article 2 does not impose upon
the Realtor® the obligation of expertise in other professional or technical
disciplines. (Amended 1/96)
(Renumbered as Standard of Practice 1-12 1/98)
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Article 3
(Renumbered as Standard of Practice 1-13 1/98)
Realtors® shall not be parties to the naming of a false consideration in any
document, unless it be the naming of an obviously nominal consideration.
Factors defined as “non-material” by law or regulation or which are
expressly referenced in law or regulation as not being subject to disclosure
are considered not “pertinent” for purposes of Article 2. (Adopted 1/93)
Article 2 is all about disclosure. Clearly, Realtors® must disclose “pertinent
facts” relating to the property or the transaction. According to Article
2, however, a Realtor® is NOT obligated to discover latent defects in the
property, to advise on matters outside the scope of their real estate license, or
to disclose confidential information. A very important issue to remember is
to not advise on matters outside the scope of your real estate license!
Perhaps you are showing a property and both you and your buyers notice
some cracks in one of the interior walls. As this could be a significant issue,
you discuss the cracks with the client. It could be very simple for you to
say something as seemingly innocent as “settlement cracks are common in
homes this age.” But that little seemingly insignificant phrase could result in
some huge ramifications. Unless you are a structural engineer, you should
NOT be offering your opinion on cracks in the walls. There are many case
histories where agents have been found liable because their clients “believed”
that they were experts in something outside of the scope of their real estate
license. Don’t do it.
Case Study
Case #2-7: Obligation to Determine Pertinent Facts
(Revised Case #9-13 May, 1988. Transferred to Article 2 November, 1994.)
REALTOR® A, a home builder, showed one of his newly constructed houses to
Buyer B. In discussion, the buyer observed that some kind of construction was
beginning nearby. He asked REALTOR® A what it was. “I really don’t know,”
said REALTOR® A, “but I believe it’s the attractive new shopping center that
has been planned for this area.” Following the purchase, Buyer B learned that
the new construction was to be a bottling plant and that the adjacent area was
zoned industrial.
Charging that the proximity of the bottling plant would have caused him
to reject purchase of the home, Buyer B filed a complaint with the Board of
REALTORS® charging REALTOR® A with unethical conduct for failing to
disclose a pertinent fact. The Grievance Committee referred the complaint for
a hearing before a Hearing Panel of the Professional Standards Committee.
During the hearing, REALTOR® A’s defense was that he had given an honest
answer to Buyer B’s question. At the time he had no positive knowledge
about the new construction. He knew that other developers were planning an
extensive shopping center in the general area, and had simply ventured a guess.
He pointed out, as indicated in Buyer B’s testimony, that he had prefaced his
response by saying he didn’t know the answer to this question.
The Hearing Panel concluded that Buyer B’s question had related to a pertinent
fact; that REALTOR® A’s competence required that REALTOR® A know the
answer or, if he didn’t know the answer, he should not have ventured a guess,
but should have made a commitment to get the answer. The Hearing Panel
also noted that although REALTOR® A had prefaced his response with “I don’t
know,” he had nonetheless proceeded to respond and Buyer B was justified in
relying on his response. REALTOR® A was found to have violated Article 2.
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Article 3 deals with cooperation with other brokers. It’s important to note
that “cooperation” is not about being polite and is not a synonym for
“compensation.” Cooperation is defined as sharing information about listings
and making listings available for showings.
Article 3
Realtors® shall cooperate with other brokers except when cooperation is
not in the client’s best interest. The obligation to cooperate does not include
the obligation to share commissions, fees, or to otherwise compensate
another broker. (Amended 1/95)
Realtors®, acting as exclusive agents or brokers of sellers/ landlords,
establish the terms and conditions of offers to cooperate. Unless expressly
indicated in offers to cooperate, cooperating brokers may not assume
that the offer of cooperation includes an offer of compensation. Terms of
compensation, if any, shall be ascertained by cooperating brokers before
beginning efforts to accept the offer of cooperation. (Amended 1/99)
Any change in compensation offered for cooperative services must be
communicated to the other Realtor® prior to the time that Realtor® submits
an offer to purchase/lease the property. After a Realtor® has submitted an
offer to purchase or lease property, the listing broker may not attempt
to unilaterally modify the offered compensation with respect to that
cooperative transaction. (Amended 1/14)
Standard of Practice 3-2 does not preclude the listing broker and
cooperating broker from entering into an agreement to change cooperative
compensation. (Adopted 1/94)
Realtors®, acting as listing brokers, have an affirmative obligation to
disclose the existence of dual or variable rate commission arrangements
(i.e., listings where one amount of commission is payable if the listing
broker’s firm is the procuring cause of sale/lease and a different amount
of commission is payable if the sale/lease results through the efforts of
the seller/landlord or a cooperating broker). The listing broker shall, as
soon as practical, disclose the existence of such arrangements to potential
cooperating brokers and shall, in response to inquiries from cooperating
brokers, disclose the differential that would result in a cooperative
transaction or in a sale/lease that results through the efforts of the seller/
landlord. If the cooperating broker is a buyer/tenant representative, the
buyer/tenant representative must disclose such information to their client
before the client makes an offer to purchase or lease. (Amended 1/02)
It is the obligation of subagents to promptly disclose all pertinent facts to
the principal’s agent prior to as well as after a purchase or lease agreement
is executed. (Amended 1/93)
Realtors® shall disclose the existence of accepted offers, including offers with
unresolved contingencies, to any broker seeking cooperation. (Adopted
5/86, Amended 1/04)
When seeking information from another Realtor® concerning property
under a management or listing agreement, Realtors® shall disclose their
Realtor® status and whether their interest is personal or on behalf of a
client and, if on behalf of a client, their relationship with the client.
(Amended 1/11)
Realtors® shall not misrepresent the availability of access to show or inspect
a listed property. (Amended 11/87)
Realtors® shall not provide access to listed property on terms other than
those established by the owner or the listing broker. (Adopted 1/10)
The duty to cooperate established in Article 3 relates to the obligation to
share information on listed property, and to make property available to
other brokers for showing to prospective purchasers/tenants when it is in
the best interests of sellers/landlords. (Adopted 1/11)
Article 3 sets the standards of cooperation in the real estate industry.
The real estate business is one of the few professions that require that
you cooperate with your own competition! This cooperation is, however,
the foundation for the Multiple Listing Service (MLS), and benefits the
consumer as well as the licensee.
One thing to be aware of is that “cooperation” does not mean “compensation.”
As stated above, in Standard of Practice 3-1, "Terms of compensation, if any,
shall be ascertained by cooperating brokers before beginning efforts to accept
the offer of cooperation.” Offers of compensation are typically made by and
to members within a local MLS. This means that if you are not a member
of that MLS, there is no guarantee of compensation from the listing broker.
Article 3 Case Study
Case #3-4: Cooperation Not Mandatory
(Reaffirmed Case #22-4 May, 1988. Transferred to Article 3 November, 1994.)
Client A called on REALTOR® B to list a small commercial property. In
stipulating the price at which he wished to list the property, Client A explained
that he was aware that it was a relatively low price, but he wanted a quick sale
and, he added, a higher price could benefit very little at that time because of
certain tax considerations. He told REALTOR® B that a number of prospective
buyers had spoken to him about the property within the past year. He gave their
names to REALTOR® B and said he felt sure that among them there would be
a ready buyer at the price. He told REALTOR® B that he wanted the property
submitted to them first.
The next day, REALTOR® C, who had unsuccessfully solicited the listing and
learned that the property was listed exclusively with REALTOR® B, called
REALTOR® B to ask that he be accepted as a cooperating broker.
REALTOR® B told REALTOR® C that because of unusual circumstances the best
service to his client did not require cooperation; that a prospective buyer was at
that time seriously considering the property; and that under the circumstances
he preferred not to invite cooperation.
REALTOR® C complained to the Board of REALTORS® charging REALTOR® B
with a violation of Article 3 by refusing to cooperate. Pursuant to the complaint
a hearing was scheduled before a Hearing Panel of the Board’s Professional
Standards Committee.
During the hearing, REALTOR® B outlined fully the circumstances under which
the property had been listed by him, and maintained that the interest of Client
A would not be advanced by acceptance of cooperation by REALTOR® C. The
panel concluded that REALTOR® B’s reasons for not accepting cooperation in
this instance were valid and that his action did not constitute a violation of
Article 3.
Article 4
Article 4 is fairly self-explanatory. Realtors® are required to disclose any
personal interest (theirs or any member of their immediate families, or
business entity they are a part of) in any property, whether selling or buying.
These disclosures must be in writing and be provided prior to the signing of
any contract.
Article 4
Realtors® shall not acquire an interest in or buy or present offers from
themselves, any member of their immediate families, their firms or any
member thereof, or any entities in which they have any ownership interest,
any real property without making their true position known to the owner
or the owner’s agent or broker. In selling property they own, or in which
they have any interest, Realtors® shall reveal their ownership or interest in
writing to the purchaser or the purchaser’s representative. (Amended 1/00)
Standard of Practice 4-1
For the protection of all parties, the disclosures required by Article 4 shall
be in writing and provided by Realtors® prior to the signing of any contract.
(Adopted 2/86)
Case #4-3: Disclosure of Family Interest
REALTOR® A listed Client B’s home and subsequently advised him to accept an
offer from Buyer C at less than the listed price. Client B later filed a complaint
against REALTOR® A with the Board stating that REALTOR® A had not
disclosed that Buyer C was REALTOR® A’s father-in-law; that REALTOR® A’s
strong urging had convinced Client B, the seller, to accept an offer below the
listed price; and that REALTOR® A had acted more in the interests of the buyer
than in the best interests of the seller.
At the hearing, REALTOR® A defended his actions stating that Article 4 of the
Code requires disclosure when the purchaser is a member of the REALTOR® ’s
immediate family, and that his father-in-law was not a member of REALTOR®
A’s immediate family. REALTOR® A also demonstrated that he had presented
two other offers to Client B, both lower than Buyer C’s offer, and stated that, in
his opinion, the price paid by Buyer C had been the fair market price.
REALTOR® A’s defense was found by the Hearing Panel to be inadequate. The
panel concluded that Article 4 forbids a REALTOR® to “acquire an interest in”
property listed with him unless the interest is disclosed to the seller or the seller’s
agent; that the possibility, even remote, of REALTOR® A’s acquiring an interest
in the property from his father-in-law by inheritance gave the REALTOR® a
potential interest in it; that REALTOR® A’s conduct was clearly contrary to the
intent of Article 4, since interest in property created through a family relationship
can be closer and more tangible than through a corporate relationship which is
cited in the Code as an interest requiring disclosure. REALTOR® A was found
to have violated Article 4 for failing to disclose to Client B that the buyer was
his father-in-law.
Article 5
Article 5 is also self-explanatory and is related to the disclosure requirements
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discussed in Article 4 above. Article 6 reminds Realtors® that they are not to
receive any commission, rebate or any other type of payment based on the
transaction without full disclosure to that client as to what that payment is
for and receiving permission to receive said payment. Article 7 is also related
to compensation and disclosure – a Realtor® may not receive compensation
from more than one party without disclosure to all parties and informed
consent of the Realtor®’s client or clients.
Article 5
Realtors® shall not undertake to provide professional services concerning
a property or its value where they have a present or contemplated interest
unless such interest is specifically disclosed to all affected parties.
Case #5-1: Contemplated Interest in Property Appraised
(Reaffirmed Case #12-2 May, 1988. Transferred to Article 5 November, 1994.)
Seller A and Buyer B were negotiating the sale of an apartment building, but
couldn’t agree on the price. Finally, they agreed that each would engage an
appraiser and they would accept the average of the two appraisals as a fair price.
Seller A engaged REALTOR® C as his appraiser, and Buyer B engaged
REALTOR® D. Both REALTORS® were informed of the agreement of the
principals. The two appraisal reports were submitted. The principals averaged
the two valuations and made the transaction at the price determined.
Six months later, it came to the attention of Seller A that REALTOR® C was
managing the building that he had appraised. Upon making further inquiries
he learned that REALTOR® C had, for several years, managed five other
buildings owned by Buyer B, and that he had been Buyer B’s property manager
at the time he accepted the appraisal assignment from Seller A.
At this point Seller A engaged REALTOR® E to make an appraisal of the
building he had sold to Buyer B. REALTOR® E’s valuation was approximately
30% higher than that arrived at six months earlier by REALTOR® C.
These facts were set out in a complaint against REALTOR® C made by Seller
A to the local Board of REALTORS®. The complaint charged that since
REALTOR® C was an agent of Buyer B; since he managed all of Buyer B’s
properties; since he had become manager of the property he had appraised for
Seller A in connection with a sale to Buyer B; and since he had not disclosed
his relationship to Buyer B, he had acted unethically, and in the interest of his
major client had placed an excessively low valuation on the property he had
appraised for Seller A.
At the hearing, Seller A also brought in a witness who stated that he had heard
Buyer B say that he had made a good buy in purchasing Seller A’s building
because Seller A’s appraiser was his (Buyer B’s) property manager.
Buyer B, appearing as a witness for REALTOR® C, disputed this and protested
that he had paid a fair price. He substantiated REALTOR® C’s statement that
management of the building formerly owned by Seller A was never discussed
between them until after it had been purchased by Buyer B.
It was concluded by the Hearing Panel that whether or not management of
the building was discussed between Buyer B and REALTOR® C prior to its
purchase by Buyer B, REALTOR® C had a logically contemplated interest in it as
a property manager in view of the fact that he had served as property manager
for all other properties owned by Buyer B. In view of this contemplated interest,
he was bound by the terms of Article 5 to disclose this interest to his appraisal
client, Seller A. He had failed to do this, and so was found in violation of
Article 5 of the Code of Ethics.
Article 6
Article 6
Realtors® shall not accept any commission, rebate, or profit on expenditures
made for their client, without the client’s knowledge and consent.
When recommending real estate products or services (e.g., homeowner’s
insurance, warranty programs, mortgage financing, title insurance, etc.),
Realtors® shall disclose to the client or customer to whom the recommendation
is made any financial benefits or fees, other than real estate referral fees, the
Realtor® or Realtor®’s firm may receive as a direct result of such recommendation.
(Amended 1/99)
Realtors® shall not recommend or suggest to a client or a customer the
use of services of another organization or business entity in which they
have a direct interest without disclosing such interest at the time of the
recommendation or suggestion. (Amended 5/88)
Case #6-4: Acceptance of Rebates from Contractors
REALTOR® A, who managed a 30-year-old apartment building for Client B,
proposed a complete modernization plan for the building, obtained Client B’s
approval, and carried out the work. Shortly after completion of the work, Client
B filed a complaint with the Board of REALTORS® charging REALTOR® A with
unethical conduct for receiving rebates or “kickbacks” from the contractors who
did the work.
At the hearing, Client B presented written statements from the contractors to
substantiate his charges.
REALTOR® A defended himself by stating that he had carried out all work
involving the preparation of specifications, solicitation of bids, negotiations with
the contractors, scheduling work, and supervising the improvement program;
that he had presented all bids to the owner who had authorized acceptance of
the most favorable bids; and that he and Client B had agreed on an appropriate
fee for this service.
REALTOR® A also presented comparative data to show that Client B had
received good value for his money.
After all of the contracts were signed and the work was under way, REALTOR®
A found that his fee was inadequate for the time the work required; that he
needed additional compensation but didn’t want to add to his client’s costs;
and that when he explained his predicament to the contractors and asked for
moderate rebates, they agreed.
Questioning by panel members revealed that the contractors felt that since they
were being asked for rebates by the man who would supervise their work, they
felt that they had no choice but to agree.
The Hearing Panel concluded that REALTOR® A was in violation of Article 6
of the Code of Ethics and that if he had miscalculated his fee with Client B, his
only legitimate recourse would have been to renegotiate this fee with Client B.
Article 7
Article 7
In a transaction, Realtors® shall not accept compensation from more than
one party, even if permitted by law, without disclosure to all parties and the
informed consent of the Realtor®’s client or clients. (Amended 1/93)
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Case #7-1: Acceptance of Compensation from Buyer and
Seller
(Adopted as Case #8-3 May, 1988. Transferred to Article 7 November, 1994.)
Buyer A engaged REALTOR® B to locate a small commercial property. Buyer A
explained his exact specifications indicating that he did not wish to compromise.
They agreed that if REALTOR® B could locate such a property within Buyer A’s
price range, he—the buyer—would pay a finder’s fee to REALTOR® B.
Two weeks later, REALTOR® B called Buyer A to advise that Seller C had
just listed a property with him that met all of Buyer A’s specifications except
that the listed price was a bit higher than Buyer A wanted to pay. Buyer A
inspected the property and liked it, but said he would adhere to his original
price range. REALTOR® B called Buyer A three days later to say that Seller
C had agreed to sell at Buyer A’s price. The sale was made and REALTOR® B
collected a commission from Seller C and a finder’s fee from Buyer A which was
not disclosed to Seller C, REALTOR® B’s client.
Several weeks later, Seller C learned about the finder’s fee that REALTOR® B had
collected from Buyer A and filed a complaint with the Board of REALTORS®
charging REALTOR® B with duplicity and unprofessional conduct. The
complaint specified that when REALTOR® B had presented Buyer A’s offer at
less than the listed price, he, the seller, was reluctant to accept it, but REALTOR®
B had convinced him that the offer was a fair one and not likely to be improved
upon in the current market; and that REALTOR® B had dwelt at length on
certain disadvantageous features of the property in an attempt to promote
acceptance of the offer. The complaint charged that REALTOR® B had actually
been the agent of the buyer while holding himself out as the agent of the seller.
Further, Seller C asserted that REALTOR® B had never mentioned that he was
representing the buyer or intended to be compensated by the buyer.
At the hearing, REALTOR® B’s defense was that he had served both buyer and
seller faithfully; that he had not accepted Seller C’s listing until after he had
agreed to assist Buyer A in locating a property; and that in his judgment the
listed price was excessive and the price actually paid was a fair price.
A Hearing Panel of the Board’s Professional Standards Committee, which
heard the complaint, concluded that REALTOR® B had acted in violation
of Article 7 of the Code of Ethics. His efforts to represent the buyer and the
seller at the same time, and the fact that he intended to be compensated by
both parties, should have been fully disclosed to all parties in advance.
Article 8
Article 8 mandates that Realtors® may not co-mingle any trust monies and must
keep a separate account in an appropriate financial institution for those funds.
Article 8
Realtors® shall keep in a special account in an appropriate financial institution,
separated from their own funds, monies coming into their possession in trust for
other persons, such as escrows, trust funds, clients’ monies, and other like items.
was subject to the sale of his current residence. REALTOR® A presented the
offer to Seller B who accepted it. REALTOR® A then inadvertently deposited
the earnest money check in his personal checking account. Since Buyer C’s offer
was contingent on the sale of his current home, Seller B’s house remained on
the market.
A week later, REALTOR® A received another offer to purchase Seller B’s house
from another broker and presented it to the seller as a back-up offer. Buyer C
was informed about this new offer and reluctantly concluded that he would
be unable to waive the sale contingency or proceed with the purchase of Seller
B’s house. He then asked REALTOR® A for his $5,000 check back. REALTOR®
A explained that he had mistakenly deposited Buyer C’s check in his personal
bank account which had been attached since he received Buyer C’s offer, and he
was temporarily unable to refund the deposit to Buyer C.
Buyer C filed a complaint with the Board of REALTORS®, which was received
by the Grievance Committee. The Grievance Committee concluded that the
complaint warranted a hearing and referred it to the Professional Standards
Committee.
At the hearing, REALTOR® A explained that his bank account had been
unexpectedly attached following the loss of a civil suit which he was appealing;
that his deposit of Buyer C’s check in his personal account was a simple error
in handling deposit slips; that he was arranging for the prompt release of his
account; and that everything would be straightened out in three or four days,
which should not be of great inconvenience to Buyer C.
It was the conclusion of the Hearing Panel that REALTOR® A was in violation
of Article 8 of the Code of Ethics for having failed to put Buyer C’s earnest
money deposit in a special account separate from his personal funds.
Article 9
Article 9 is about the importance of getting everything in writing. Sometimes
buyers and sellers have different notions of what should be included or excluded
from the sale or lease. Always make sure these inclusions and exclusions are
written into the transaction documents so that the parties are not relying
on flyers, brochures, disclosure statements, or MLS listing information.
Representations made in marketing literature are far less enforceable than
provisions included in a purchase contract, if there is a dispute.
Article 9
Realtors®, for the protection of all parties, shall assure whenever possible that all
agreements related to real estate transactions including, but not limited to, listing
and representation agreements, purchase contracts, and leases are in writing in
clear and understandable language expressing the specific terms, conditions,
obligations and commitments of the parties. A copy of each agreement shall
be furnished to each party to such agreements upon their signing or initialing.
(Amended 1/04)
•Standard of Practice 9-1
For the protection of all parties, Realtors® shall use reasonable care to ensure
that documents pertaining to the purchase, sale, or lease of real estate
are kept current through the use of written extensions or amendments.
(Amended 1/93)
Case #8-1: Failure to Put Deposit in Separate Account
(Revised Case #18-1 May, 1988. Transferred to Article 8 November, 1994.
Revised November, 2001.)
REALTOR® A, a listing broker, obtained a signed offer to purchase, together
with Buyer C’s check for $5,000 as an earnest money deposit. Buyer C’s offer
When assisting or enabling a client or customer in establishing a
contractual relationship (e.g., listing and representation agreements,
purchase agreements, leases, etc.) electronically, Realtors® shall make
reasonable efforts to explain the nature and disclose the specific terms of
the contractual relationship being established prior to it being agreed to by
a contracting party. (Adopted 1/07)
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Example
Realtor® Anne represented Client Bob, the seller and Realtor® Chris
represented Client Diane, the buyer. Realtor® Chris showed Client Diane
Client Bob’s property and after reviewing the MLS listing, presented an offer
which was accepted by Realtor® Anne on behalf of Client Bob. At that time
Realtor® Chris verbally confirmed with Realtor® Anne that everything on the
property disclosure sheet in the MLS was correct as to what was included in
the sale. After that conversation, Realtor® Anne remembered that Client Bob
had said he wanted to keep the draperies but neglected to amend the MLS
listing information or the property disclosure statement in writing.
The transaction proceeded uneventfully but when Client Diane moved into
the home, she discovered that all of the draperies, which had been indicated
as included on the MLS listing, had been taken by the seller.
If the seller wouldn’t return the draperies and have them re-installed, who
would be potentially at risk for an ethics complaint under Article 9?
Fortunately, in this case (which actually happened to the author), the seller
returned the draperies and had them re-installed to the buyer’s satisfaction
so all was well.
But it’s important to note that Realtor® Anne actually was in violation of
Article 9 and could have been disciplined for neglecting to disclose this
fact in writing and making sure all parties to the transaction had received
properly executed copies of the revised documents.
Summary
We started this chapter by examining the word “ethics,” what it means, and
how it relates to values and principles, standards, regulations and laws. We
also briefly reviewed some history of the NAR Ethics Code and the structure
of the Code as it exists today. We took a brief look at the Preamble and the
Golden Rule. The remainder of the Chapter covered Articles 1-9, Duties to
Clients and Customers, including case studies and examples related those
Articles.
Chapter Two
Duties To The Public
(Articles 10-14)
Chapter Two of this course will review Articles 10-14 of the NAR Ethics
Code. These articles deal with a Realtor®’s duties to the public. We’ll review
Article 10 which deals with not denying professional services to any member
of a protected class. We’ll also discuss Article 11 which prohibits Realtors®
from performing services outside of their field of competence. We’ll take
a look at Article 12 which deals with truth in advertising and marketing.
We’ll also review Article 13 which reminds Realtors® that they are not
lawyers and should not ever give legal advice. Finally, we’ll review Article 14
which reminds Realtors® that they are required to make full disclosure of all
pertinent facts if charged with unethical practice. In each case, we’ll review
the Article, the Standards of Practice and a case study which illustrates
important principles in each Article.
Learning Objectives
Article 10
Article 10 mandates that Realtors® may not deny professional services on the
basis of race, color, religion, sex, handicap, familial status, national origin,
sexual orientation, or gender identity. Remember the Golden Rule? Do unto
others as you would have others do to you and treat every single client fairly
and equally.
Article 10
Realtors® shall not deny equal professional services to any person for reasons
of race, color, religion, sex, handicap, familial status, national origin, sexual
orientation, or gender identity. Realtors® shall not be parties to any plan or
agreement to discriminate against a person or persons on the basis of race, color,
religion, sex, handicap, familial status, national origin, sexual orientation, or
gender identity. (Amended 1/14)
Realtors®, in their real estate employment practices, shall not discriminate
against any person or persons on the basis of race, color, religion, sex, handicap,
familial status, national origin, sexual orientation, or gender identity.
(Amended 1/14)
When involved in the sale or lease of a residence, Realtors® shall not
volunteer information regarding the racial, religious or ethnic composition
of any neighborhood nor shall they engage in any activity which may
result in panic selling, however, Realtors® may provide other demographic
information. (Adopted 1/94, Amended 1/06)
When not involved in the sale or lease of a residence, Realtors® may
provide demographic information related to a property, transaction, or
professional assignment to a party if such demographic information is
(a) deemed by the Realtor® to be needed to assist with or complete, in a
manner consistent with Article 10, a real estate transaction or professional
assignment and (b) is obtained or derived from a recognized, reliable,
independent, and impartial source. The source of such information and
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any additions, deletions, modifications, interpretations, or other changes
shall be disclosed in reasonable detail. (Adopted 1/05, Renumbered 1/06)
Realtors® shall not print, display or circulate any statement or advertisement
with respect to selling or renting of a property that indicates any preference,
limitations, or discrimination based on race, color, religion, sex, handicap,
familial status, national origin, sexual orientation, or gender identity.
(Adopted 1/94, Renumbered 1/05 and 1/06, Amended 1/14)
As used in Article 10 “real estate employment practices” relates to employees
and independent contractors providing real estate-related services and
the administrative and clerical staff directly supporting those individuals.
(Adopted 1/00, Renumbered 1/05 and 1/06)
Article 10 and its Standards of Practice reiterate the duty never to discriminate
against any protected class. It also provides guidelines by which we should address
demographic questions and provides guidance with regard to non-discrimination
in advertising. Article 10 also extends the requirement of non-discrimination to
real estate employment practices.
Case #10-1: Equal Professional Services by the REALTOR®
(Reaffirmed May, 1988.)
A minority couple called on REALTOR® A and expressed interest in purchasing
a home in the $130,000 to $145,000 price range with at least three bedrooms,
a large lot, and located in the Cedar Ridge area of town. Being familiar with
Cedar Ridge through handling of numerous listings in that area, REALTOR®
A explained that houses in Cedar Ridge generally sold in the price range from
$180,000 to $220,000. The couple thereafter indicated that they would like to see
“what was available” within their economic means. After further discussion with
the couple concerning their financial circumstances and the maximum price
range they could afford, REALTOR® A concluded that the couple could not afford
more than $137,500 as an absolute maximum. The couple was then shown
homes which met the criteria they had described to REALTOR® A. However,
although REALTOR® A discussed with the couple the amenities and assets of
each of the properties shown to them, they expressed no interest in any of the
properties shown. A few days later, the minority couple filed charges with the
Secretary of the Board, charging REALTOR® A with a violation of Article 10
of the Code Ethics, alleging that REALTOR® A had violated the Article by an
alleged act of racial steering in his service to the minority couple.
The Secretary promptly referred the complaint to the Grievance Committee,
which conducted a preliminary review and referred the complaint back to the
Secretary, instructing that a hearing be arranged before a Hearing Panel of the
Professional Standards Committee. REALTOR® A was duly noticed and provided
with an opportunity to make his response to the complaint.
At the hearing, the minority couple elaborated upon their charge of the alleged
racial steering by REALTOR® A, telling the Hearing Panel that they had
specifically expressed an interest in purchasing a home in the Cedar Ridge area,
but were not shown any homes in Cedar Ridge. REALTOR® A responded by
producing written records documenting the housing preference of the couple as
they had described it to him, including price range and demonstrating that he
had shown them a number of listings that met the requirements as expressed by
them, although admittedly none of the properties shown were located in Cedar
Ridge. However, REALTOR® A explained that he had advised the minority
couple that there were no listings available in Cedar Ridge falling within the
price range expressed by them. Further, REALTOR® A produced listing and sales
information concerning numerous homes in Cedar Ridge which confirmed an
average sales price of $180,000 to $220,000. REALTOR® A told the Hearing
Panel that he had, in fact, offered equal professional service to the minority
couple by showing them properties which met the criteria they had presented
to him. He pointed out to the Hearing Panel that the couple was charging him
with “racial steering” which presumably they were relating to the denial of equal
professional service. REALTOR® A stated, “If there were listings in Cedar Ridge
in the $130,000 to $145,000 price range with at least three bedrooms and a large
lot, and I had refused to show them such listings, then they might have a point in
their charge. But there are no such listings available now, nor have there been at
any time since the original development of the Cedar Ridge area five years ago. I
could not show them what did not and does not exist.”
The Hearing Panel concluded that REALTOR® A had properly met his obligation
to offer equal professional service and was not in violation of Article 10.
Article 11
Article 11 states that Realtors® may not provide services outside of their field
of competence without disclosing it to the client. For instance, a residential
real estate agent with no commercial real estate experience may not provide
commercial real estate services without first informing the client of his or her
lack of expertise.
Article 11
The services which Realtors® provide to their clients and customers shall
conform to the standards of practice and competence which are reasonably
expected in the specific real estate disciplines in which they engage; specifically,
residential real estate brokerage, real property management, commercial and
industrial real estate brokerage, land brokerage, real estate appraisal, real
estate counseling, real estate syndication, real estate auction, and international
real estate.
Realtors® shall not undertake to provide specialized professional services
concerning a type of property or service that is outside their field of competence
unless they engage the assistance of one who is competent on such types of
property or service, or unless the facts are fully disclosed to the client. Any
persons engaged to provide such assistance shall be so identified to the client
and their contribution to the assignment should be set forth. (Amended 1/10)
When Realtors® prepare opinions of real property value or price they must:
1. be knowledgeable about the type of property being valued,
2.have access to the information and resources necessary to formulate an
accurate opinion, and
3. be familiar with the area where the subject property is located unless lack
of any of these is disclosed to the party requesting the opinion in advance.
When an opinion of value or price is prepared other than in pursuit of a
listing or to assist a potential purchaser in formulating a purchase offer, the
opinion shall include the following unless the party requesting the opinion
requires a specific type of report or different data set:
1. identification of the subject property
2. date prepared
3. defined value or price
4. limiting conditions, including statements of purpose(s) and intended user(s)
5. any present or contemplated interest, including the possibility of
representing the seller/landlord or buyers/tenants
6. basis for the opinion, including applicable market data
7. if the opinion is not an appraisal, a statement to that effect
8. disclosure of whether and when a physical inspection of the property’s
exterior was conducted
9. disclosure of whether and when a physical inspection of the property’s
interior was conducted
10. disclosure of whether the Realtor® has any conflicts of interest (Amended
1/14)
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The obligations of the Code of Ethics in respect of real estate disciplines
other than appraisal shall be interpreted and applied in accordance with
the standards of competence and practice which clients and the public
reasonably require to protect their rights and interests considering the
complexity of the transaction, the availability of expert assistance, and,
where the Realtor® is an agent or subagent, the obligations of a fiduciary.
(Adopted 1/95)
When Realtors® provide consultive services to clients which involve advice
or counsel for a fee (not a commission), such advice shall be rendered in
an objective manner and the fee shall not be contingent on the substance
of the advice or counsel given. If brokerage or transaction services are to be
provided in addition to consultive services, a separate compensation may be
paid with prior agreement between the client and Realtor®. (Adopted 1/96)
The competency required by Article 11 relates to services contracted for
between Realtors® and their clients or customers; the duties expressly
imposed by the Code of Ethics; and the duties imposed by law or regulation.
(Adopted 1/02)
Article 11 defines clear standards for competent practice. A Realtor® is bound
to provide real estate services in areas in which they are competent. Obviously,
this is to uphold the reputation of the profession and to serve the public with
integrity. In addition, if a Realtor® is working in an area outside of his or her
expertise, he or she is required to fully disclose this lack of expertise to the
client, or engage the assistance of someone who is competent in that area.
Case #11-1: Appraiser’s Competence for Assignment
REALTOR® A sold a light industrial property to Buyer B, a laundry operator.
Several months later, Buyer B engaged REALTOR® A’s services to appraise the
property and to supply an appraisal report for use in possible merger with
another laundry.
REALTOR® A carried out this appraisal assignment and submitted his report.
Buyer (now Client) B was dissatisfied with the report feeling that the valuation,
in comparison with the market price that he had paid was excessively low.
Client B then engaged an appraiser specializing in industrial property, and
after receiving the second appraisal report, filed a complaint with the Board
of REALTORS® charging REALTOR® A with incompetent and unprofessional
service as an appraiser.
At the hearing, questioning established that REALTOR® A could cite no
other industrial property appraisal he had made, and that his appraisal
experience had been limited exclusively to residential property. The hearing
also established that when the client proposed the appraisal, REALTOR® A had
readily accepted the assignment and that he had at no time disclosed the extent
and limitations of this appraisal experience with his client.
REALTOR® A was found by the Hearing Panel to be in violation of Article 11.
Article 12
Article 12 is about always presenting a “true picture” in your advertising,
marketing and other representations. Realtors must always adhere to truth
in advertising and marketing, and must disclose their professional status
in advertising. It’s important to note that this Article applies to not just
traditional marketing but also to social media, texting, email, etc. Make sure
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to review Standard of Practice 12-5 for guidance on the right way to present
your identity as a real estate professional in social media venues.
Article 12
Realtors® shall be honest and truthful in their real estate communications
and shall present a true picture in their advertising, marketing, and other
representations. Realtors® shall ensure that their status as real estate
professionals is readily apparent in their advertising, marketing, and other
representations, and that the recipients of all real estate communications
are, or have been, notified that those communications are from a real estate
Professional. (Amended 1/08)
Realtors® may use the term “free” and similar terms in their advertising
and in other representations provided that all terms governing availability
of the offered product or service are clearly disclosed at the same time.
(Amended 1/97)
Realtors® may represent their services as “free” or without cost even if
they expect to receive compensation from a source other than their client
provided that the potential for the Realtor® to obtain a benefit from a third
party is clearly disclosed at the same time. (Amended 1/97)
The offering of premiums, prizes, merchandise discounts or other
inducements to list, sell, purchase, or lease is not, in itself, unethical even
if receipt of the benefit is contingent on listing, selling, purchasing, or
leasing through the Realtor® making the offer. However, Realtors® must
exercise care and candor in any such advertising or other public or private
representations so that any party interested in receiving or otherwise
benefiting from the Realtor®’s offer will have clear, thorough, advance
understanding of all the terms and conditions of the offer. The offering of
any inducements to do business is subject to the limitations and restrictions
of state law and the ethical obligations established by any applicable
Standard of Practice. (Amended 1/95)
Realtors® shall not offer for sale/lease or advertise property without
authority. When acting as listing brokers or as subagents, Realtors® shall
not quote a price different from that agreed upon with the seller/landlord.
(Amended 1/93)
Realtors® hall not advertise nor permit any person employed by or affiliated
with them to advertise real estate services or listed property in any medium
(e.g., electronically, print, radio, television, etc.) without disclosing the
name of that Realtor®’s firm in a reasonable and readily apparent manner.
This Standard of Practice acknowledges that disclosing the name of the
firm may not be practical in electronic displays of limited information
(e.g., “thumbnails”, text messages, “tweets”, etc.). Such displays are exempt
from the disclosure requirement established in this Standard of Practice,
but only when linked to a display that includes all required disclosures.
(Adopted 11/86, Amended 1/11)
Realtors®, when advertising unlisted real property for sale/lease in which
they have an ownership interest, shall disclose their status as both owners/
landlords and as Realtors® or real estate licensees. (Amended 1/93)
Only Realtors® who participated in the transaction as the listing broker or
cooperating broker (selling broker) may claim to have “sold” the property.
Prior to closing, a cooperating broker may post a “sold” sign only with the
consent of the listing broker. (Amended 1/96)
The obligation to present a true picture in representations to the public
includes information presented, provided, or displayed on Realtors®’
websites. Realtors® shall use reasonable efforts to ensure that information
on their websites is current. When it becomes apparent that information
on a Realtor®’s website is no longer current or accurate, Realtors® shall
promptly take corrective action. (Adopted 1/07)
Prospect A observed a sign on a vacant lot reading: “For Sale—Call 330-5215.”
Thinking he would be dealing with a For Sale by Owner, he called the number
on the sign. He was surprised and offended that the lot was exclusively listed
by REALTOR® A, and the telephone number on the sign was the home number
of REALTOR-ASSOCIATE® B in REALTOR® A’s office.
Prospect A filed a complaint against REALTOR® A and REALTORASSOCIATE® B alleging a violation of Article 12 of the Code of Ethics.
At the hearing, REALTOR® A stated that he permitted REALTOR-ASSOCIATE®
B to put up the sign. REALTOR-ASSOCIATE® B’s defense was that the sign was
not a “formal” advertisement, such as a newspaper advertisement, business
card, or billboard, to which he understood Article 12 to apply.
The Hearing Panel determined that the sign was an advertisement within the
meaning of Article 12; that its use violated that Article of the Code; and that both
REALTOR® A and REALTOR-ASSOCIATE® B were in violation of Article 12.
Realtor® firm websites shall disclose the firm’s name and state(s) of licensure
in a reasonable and readily apparent manner.
Article 13
Websites of Realtors® and non-member licensees affiliated with a Realtor®
firm shall disclose the firm’s name and that Realtor®’s or non-member
licensee’s state(s) of licensure in a reasonable and readily apparent manner.
(Adopted 1/07)
Realtors® may not give legal advice, and must advise clients to seek legal
counsel when applicable.
Realtors®’ obligation to present a true picture in their advertising and
representations to the public includes Internet content posted, and the
URLs and domain names they use, and prohibits Realtors® from:
1. engaging in deceptive or unauthorized framing of real estate brokerage
websites;
2. manipulating (e.g., presenting content developed by others) listing and
other content in any way that produces a deceptive or misleading result;
3. deceptively using metatags, keywords or other devices/methods to direct,
drive, or divert Internet traffic; or
4. presenting content developed by others without either attribution or
without permission, or
5. to otherwise mislead consumers. (Adopted 1/07, Amended 1/13)
Realtors® intending to share or sell consumer information gathered via the
Internet shall disclose that possibility in a reasonable and readily apparent
manner. (Adopted 1/07)
Realtors® shall not:
1. use URLs or domain names that present less than a true picture, or
2. register URLs or domain names which, if used, would present less than a
true picture. (Adopted 1/08)
The obligation to present a true picture in advertising, marketing, and
representations allows Realtors® to use and display only professional
designations, certifications, and other credentials to which they are
legitimately entitled. (Adopted 1/08)
Article 13
Realtors® shall not engage in activities that constitute the unauthorized practice
of law and shall recommend that legal counsel be obtained when the interest of
any party to the transaction requires it.
Case #13-1: Preparation of Instrument Unrelated to Real Estate Transaction
(Reaffirmed Case #17-1 May, 1988. Transferred to Article 13 November, 1994.
Client A dropped in to see his friend, REALTOR® B, who had recently provided
professional services to Client A’s company. Client A said the company was
sending him on business to the Far East; that the trip would involve a good
deal of air travel in remote areas; and that he would like to leave a power of
attorney with his wife while he was gone “just in case.” He asked REALTOR® B
if he would prepare a power of attorney for him and REALTOR® B said, “It’s a
simple document. I’ll be glad to prepare one for you,” and did.
This action came to the attention of the Grievance Committee of the Board
of REALTORS®, which, after review, filed a complaint with the Board’s
Professional Standards Committee, charging REALTOR® B with a violation of
Article 13 of the Code of Ethics.
REALTOR® B’s defense was that he understood Client A’s request to be
essentially for a real estate service since from his general knowledge of Client
A’s personal affairs, he knew that Client A could have no reason for giving his
wife a power of attorney except to put her in a position to act in real estate
transactions. He contended that because his preparation of a legal document
was directly related to real estate matters, he had rendered real estate, not legal,
services to Client A.
It was the judgment of the Hearing Panel that REALTOR® B’s defense was
without merit; that by preparing the power of attorney, he had engaged in the
practice of law in violation of Article 13 of the Code.
Article 14
Case #12-1: Absence of Name on Sign
Realtors® must make full disclosure of all pertinent facts if charged with
unethical practice. In addition, they may not obstruct any proceedings in
any way, or intentionally impede the Board’s investigative or disciplinary
(Reaffirmed Case #19-3 May, 1988. Transferred to Article 12 November, 1994.
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proceedings by filing multiple ethics complaints based on the same event or
transaction.
Article 14
If charged with unethical practice or asked to present evidence or to cooperate
in any other way, in any professional standards proceeding or investigation,
Realtors® shall place all pertinent facts before the proper tribunals of the Member
Board or affiliated institute, society, or council in which membership is held and
shall take no action to disrupt or obstruct such processes. (Amended 1/99)
Realtors® shall not be subject to disciplinary proceedings in more than one
Board of Realtors® or affiliated institute, society, or council in which they
hold membership with respect to alleged violations of the Code of Ethics
relating to the same transaction or event. (Amended 1/95)
Realtors® shall not make any unauthorized disclosure or dissemination
of the allegations, findings, or decision developed in connection with an
ethics hearing or appeal or in connection with an arbitration hearing or
procedural review. (Amended 1/92)
Realtors® shall not obstruct the Board’s investigative or professional
standards proceedings by instituting or threatening to institute actions for
libel, slander, or defamation against any party to a professional standards
proceeding or their witnesses based on the filing of an arbitration request,
an ethics complaint, or testimony given before any tribunal. (Adopted
11/87, Amended 1/99)
A hearing of the Grievance Committee’s complaint was held before a Hearing
Panel of the Professional Standards Committee. At the hearing, REALTOR®
A again stated that it was his intention to respond specifically and factually
to the charge of violating Article 1 if the complaint came before an ethics
Hearing Panel and at that time he would submit all pertinent facts, including
the document in question.
It was the conclusion of the Hearing Panel that REALTOR® A’s defense against
the charge of violating Article 14 was not valid; and that the Grievance
Committee could require advance submission of specific documents to
the Grievance Committee based on the Board’s professional standards
procedures which authorized the Grievance Committee to request specific
documents to enable the Grievance Committee to make determinations
whether complaints warranted hearing. The panel found REALTOR® A in
violation of Article 14 and directed him to give the requested documentation
to the Grievance Committee in connection with its review of the charge of
violating Article 1.
Summary
Chapter Two of this course covered Articles 10-14 of the NAR Ethics Code
– the articles that define a Realtor®’s duties to the public. First, we reviewed
Article 10 which deals with not denying professional services to any member
of a protected class. We then discussed Article 11 which prohibits Realtors®
from performing services outside of their field of competence. We also
reviewed Article 12 which deals with truth in advertising and marketing.
We took a look at Article 13 which reminds Realtors® that they are not
lawyers and should not ever give legal advice. Finally, we reviewed Article 14
which reminds Realtors® that they are required to make full disclosure of all
pertinent facts if charged with unethical practice. In each case, we reviewed
the Article, the Standards of Practice and a case study which illustrated
important principles in each Article.
Realtors® shall not intentionally impede the Board’s investigative or
disciplinary proceedings by filing multiple ethics complaints based on the
same event or transaction. (Adopted 11/88)
Article 14 and its Standards of Practice provide the guidelines for
disciplinary action related to the violation of the Code of Ethics. We will
discuss the disciplinary procedure in detail later in this course.
Case #14-1: Establishing Procedure to be Followed in Handling Complaints
Revised November, 1996. Revised November, 2001.)
A Board of REALTORS® received a complaint from REALTOR® A’s client
charging REALTOR® A with a violation of Article 1 of the Code of Ethics.
The complaint was referred to the Chairperson of the Board’s Grievance
Committee, who sent a copy of it to REALTOR® A with a request that he
respond and provide a specific document about the matter to the Grievance
Committee for its preliminary review.
REALTOR® A responded with a denial of the charge, and a statement that he
would appear at any hearing on the appointed date and would, at that time,
present all pertinent facts. He went on to indicate that on the advice of legal
counsel he was unwilling to place the requested document in the hands of the
Grievance Committee in advance of any hearing.
The Grievance Committee then initiated its own complaint charging
REALTOR® A with a violation of Article 14 for refusing to place the requested
document before a proper tribunal.
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Chapter Three
Three: Duties To Realtors®
(Articles 15-17)
Duties to Realtors® is the third and final section of the Code of Ethics. Articles
15-16 set forth the Standards of Practice Realtors® are required to follow in
dealing with fellow Realtors® and our brokerages. Article 17 sets forth the
manner in which disputes or alleged violations of the Code must be handled.
Learning Objectives
Article 15
Realtors® must not knowingly or recklessly make false or misleading
statements about other real estate professionals, including filing false
or unfounded ethics complaints or knowingly or recklessly publishing,
repeating, or republishing false or misleading statements made by others.
Article 15
Realtors® shall not knowingly or recklessly make false or misleading
statements about other real estate professionals, their businesses, or their
business practices. (Amended 1/12)
Realtors® shall not knowingly or recklessly file false or unfounded ethics
complaints. (Adopted 1/00)
The obligation to refrain from making false or misleading statements about
other real estate professionals, their businesses, and their business practices
includes the duty to not knowingly or recklessly publish, repeat, retransmit,
or republish false or misleading statements made by others. This duty
applies whether false or misleading statements are repeated in person, in
writing, by technological means (e.g., the Internet), or by any other means.
The obligation to refrain from making false or misleading statements
about other real estate professionals, their businesses, and their business
practices includes the duty to publish a clarification about or to remove
statements made by others on electronic media the Realtor® controls once
the Realtor® knows the statement is false or misleading. (Adopted 1/10,
Amended 1/12)
Case #15-1: Knowing or Reckless False Statements About
Competitors
(Adopted Case #23-1 November, 1992. Transferred to Article 15 November, 1994.)
REALTOR® A operated a residential brokerage firm in a highly competitive
market area. He frequently used information from the MLS as the basis for
comparative ads and to keep close track of his listing and sales activity as well
as his competition.
One day, while reviewing MLS data and comparing it to a competitor’s ad,
REALTOR® A noticed that REALTOR® Z had used a diagram to demonstrate
his market share, contrasting it with those of several other firms. The ad showed
that REALTOR® A had listed 10% of the properties in the MLS over the past
three months.
REALTOR® A thought this was low. His analysis of MLS data showed his market
share was 11%. REALTOR® A filed an ethics complaint against REALTOR® Z
citing Article 15 of the Code of Ethics in that REALTOR® Z’s “obviously understated
market share claim” was a “misleading statement about competitors.” REALTOR®
A’s complaint was considered by the Grievance Committee which determined that
an ethics hearing should be held.
At the hearing, REALTOR® Z testified he had always been truthful in his
advertising and that all claims were based in fact. He produced an affidavit
from the Board’s MLS administrator which indicated that a programming
error had resulted in miscalculations and, after careful recomputation,
REALTOR® A’s market share over the past three months had been 10.9%. The
administrator’s statement noted that this was the first time that information
related to REALTOR® A’s listings or sales had been misstated on the system.
“I relied on information from the MLS. It’s always been accurate and I had
no reason to even suspect it was wrong last month,” said REALTOR® Z in his
defense.
The Hearing Panel agreed with REALTOR® Z’s logic, noting that a REALTOR®
should be able to rely on generally accurate information from reliable sources.
They reasoned that if, on the other hand, the MLS had shown REALTOR® A
having, for example, 1% of the market, then REALTOR® Z’s reliance on the
information would have been “reckless” because REALTOR® A had generally
had a 10–15% market share and a reasonable conclusion would have been that
the information from the MLS was seriously flawed.
The Hearing Panel concluded that REALTOR® Z’s comparison with his
competitors, while slightly inaccurate, was based on usually accurate and
reliable information and had been made in good faith and while technically
“misleading,” had not been “knowing” or “reckless”. REALTOR® Z was found
not to have violated Article 15.
Article 16
There are many descriptive Standards of Practice for Article 16 but really it
all boils down to Realtors® may not work outside of the exclusive agreements
with their clients and they may not “poach” clients through direct solicitation,
regardless of the medium of that solicitation.
Article 16
Realtors® shall not engage in any practice or take any action inconsistent with
exclusive representation or exclusive brokerage relationship agreements that
other Realtors® have with clients. (Amended 1/04)
Article 16 is not intended to prohibit aggressive or innovative business
practices which are otherwise ethical and does not prohibit disagreements
with other Realtors® involving commission, fees, compensation, or other
forms of payment or expenses. (Adopted 1/93, Amended 1/95)
Article 16 does not preclude Realtors® from making general announcements
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to prospects describing their services and the terms of their availability
even though some recipients may have entered into agency agreements or
other exclusive relationships with another Realtor®. A general telephone
canvass, general mailing or distribution addressed to all prospects in a given
geographical area or in a given profession, business, club, or organization,
or other classification or group is deemed “general” for purposes of this
standard. (Amended 1/04)
Article 16 is intended to recognize as unethical two basic types of
solicitations:
First, telephone or personal solicitations of property owners who have
been identified by a real estate sign, multiple listing compilation, or other
information service as having exclusively listed their property with another
Realtor® and
Second, mail or other forms of written solicitations of prospects whose
properties are exclusively listed with another Realtor® when such
solicitations are not part of a general mailing but are directed specifically
to property owners identified through compilations of current listings, “for
sale” or “for rent” signs, or other sources of information required by Article
3 and Multiple Listing Service rules to be made available to other Realtors®
under offers of subagency or cooperation. (Amended 1/04)
Article 16 does not preclude Realtors® from contacting the client of another
broker for the purpose of offering to provide, or entering into a contract
to provide, a different type of real estate service unrelated to the type of
service currently being provided (e.g., property management as opposed to
brokerage) or from offering the same type of service for property not subject
to other brokers’ exclusive agreements. However, information received
through a Multiple Listing Service or any other offer of cooperation may not
be used to target clients of other Realtors® to whom such offers to provide
services may be made. (Amended 1/04)
Realtors® shall not solicit a listing which is currently listed exclusively
with another broker. However, if the listing broker, when asked by the
Realtor®, refuses to disclose the expiration date and nature of such listing,
i.e., an exclusive right to sell, an exclusive agency, open listing, or other
form of contractual agreement between the listing broker and the client,
the Realtor® may contact the owner to secure such information and may
discuss the terms upon which the Realtor® might take a future listing or,
alternatively, may take a listing to become effective upon expiration of any
existing exclusive listing. (Amended 1/94)
The fact that a prospect has retained a Realtor® as an exclusive representative
or exclusive broker in one or more past transactions does not preclude other
Realtors® from seeking such prospect’s future business. (Amended 1/04)
The fact that an exclusive agreement has been entered into with a Realtor®
shall not preclude or inhibit any other Realtor® from entering into a similar
agreement after the expiration of the prior agreement. (Amended 1/98)
Realtors®, prior to entering into a representation agreement, have an
affirmative obligation to make reasonable efforts to determine whether the
prospect is subject to a current, valid, exclusive agreement to provide the
same type of real estate service. (Amended 1/04)
Realtors®, acting as buyer or tenant representatives or brokers, shall
disclose that relationship to the seller/landlord’s representative or broker at
first contact and shall provide written confirmation of that disclosure to
the seller/landlord’s representative or broker no later than execution of a
purchase agreement or lease. (Amended 1/04)
On unlisted property, Realtors® acting as buyer/tenant representatives or
brokers shall disclose that relationship to the seller/landlord at first contact
for that buyer/tenant and shall provide written confirmation of such
disclosure to the seller/landlord not later than execution of any purchase or
lease agreement. (Amended 1/04)
Realtors® shall make any request for anticipated compensation from the
seller/landlord at first contact. (Amended 1/98)
Realtors®, acting as representatives or brokers of sellers/landlords or as
subagents of listing brokers, shall disclose that relationship to buyers/
tenants as soon as practicable and shall provide written confirmation of
such disclosure to buyers/tenants no later than execution of any purchase
or lease agreement. (Amended 1/04)
Realtors® shall not solicit buyer/tenant agreements from buyers/ tenants
who are subject to exclusive buyer/tenant agreements. However, if asked by
a Realtor®, the broker refuses to disclose the expiration date of the exclusive
buyer/tenant agreement, the Realtor® may contact the buyer/tenant to secure
such information and may discuss the terms upon which the Realtor® might
enter into a future buyer/tenant agreement or, alternatively, may enter into
a buyer/tenant agreement to become effective upon the expiration of any
existing exclusive buyer/tenant agreement. (Adopted 1/94, Amended 1/98)
When Realtors® are contacted by the client of another Realtor® regarding
the creation of an exclusive relationship to provide the same type of service,
and Realtors® have not directly or indirectly initiated such discussions, they
may discuss the terms upon which they might enter into a future agreement
or, alternatively, may enter into an agreement which becomes effective upon
expiration of any existing exclusive agreement. (Amended 1/98)
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All dealings concerning property exclusively listed, or with buyer/tenants
who are subject to an exclusive agreement, shall be carried on with the
client’s representative or broker, and not with the client, except with the
consent of the client’s representative or broker or except where such dealings
are initiated by the client.
Before providing substantive services (such as writing a purchase offer or
presenting a CMA) to prospects, Realtors® shall ask prospects whether they
are a party to any exclusive representation agreement. Realtors® shall not
knowingly provide substantive services concerning a prospective transaction
to prospects who are parties to exclusive representation agreements, except
with the consent of the prospects’ exclusive representatives or at the direction
of prospects. (Adopted 1/93, Amended 1/04)
Realtors® are free to enter into contractual relationships or to negotiate
with sellers/landlords, buyers/tenants or others who are not subject to an
exclusive agreement but shall not knowingly obligate them to pay more
than one commission except with their informed consent. (Amended 1/98)
In cooperative transactions Realtors® shall compensate cooperating Realtors®
(principal brokers) and shall not compensate nor offer to compensate,
directly or indirectly, any of the sales licensees employed by or affiliated
with other Realtors® without the prior express knowledge and consent of the
cooperating broker.
Realtors®, acting as subagents or buyer/tenant representatives or brokers,
shall not use the terms of an offer to purchase/lease to attempt to modify
the listing broker’s offer of compensation to subagents or buyer/tenant
representatives or brokers nor make the submission of an executed offer to
purchase/lease contingent on the listing broker’s agreement to modify the
offer of compensation. (Amended 1/04)
Realtors®, acting as subagents or as buyer/tenant representatives or brokers,
shall not attempt to extend a listing broker’s offer of cooperation and/or
compensation to other brokers without the consent of the listing broker.
(Amended 1/04)
Realtors® shall not use information obtained from listing brokers through
offers to cooperate made through multiple listing services or through other
offers of cooperation to refer listing brokers’ clients to other brokers or to
create buyer/tenant relationships with listing brokers’ clients, unless such
use is authorized by listing brokers. (Amended 1/02)
Signs giving notice of property for sale, rent, lease, or exchange shall not be
placed on property without consent of the seller/landlord. (Amended 1/93)
Realtors®, prior to or after their relationship with their current firm is
terminated, shall not induce clients of their current firm to cancel exclusive
contractual agreements between the client and that firm. This does not
preclude Realtors® (principals) from establishing agreements with their
associated licensees governing assignability of exclusive agreements.
Case #16-2: Respect for Agency
Client A gave a 180-day exclusive right to sell listing of a commercial property to
REALTOR® B, specifying that no “for sale” sign was to be placed on the property.
REALTOR® B and his sales associates started an intensive sales effort which,
after three months, had produced no offer to buy. But it had called attention
to the fact that Client A’s property was for sale. When REALTOR® C heard of
it, he called on Client A, saying that he understood that his property was, or
soon would be, for sale, and that if Client A would list the property with him
exclusively he felt confident that he could provide prompt action. Client A said
the property was exclusively listed with REALTOR® B under a contract that still
had about 90 days to run.
“In that case,” said REALTOR® C, “you are bound for the next 90 days to
REALTOR® B. I have a really outstanding organization, constantly in touch
with active buyers interested in this class of property. I am in a position to
render you an exceptional service, and I will plan to call you again in 90 days
or so.”
The property remained unsold during the term of REALTOR® B’s listing
contract. REALTOR® C called again on Client A, and obtained his assurance
that he would sign an exclusive listing of the property upon expiration of the
listing contract.
When REALTOR® B called on Client A on the last day of the listing contract to
seek its renewal, Client A told him of REALTOR® C’s two visits. “I was impressed
by REALTOR® C’s assurance of superior service” Client A told REALTOR® B,
“and in view of the fact that my listing with you produced no definite offer in
the 180-day period, I have decided to give REALTOR® C a listing tomorrow.”
REALTOR® B filed a complaint with the Grievance Committee of the Board,
outlined the facts, and charged that REALTOR® C’s conduct had been
inconsistent with Article 16 of the Code of Ethics.
The Grievance Committee referred the matter to the Professional Standards
Committee.
At the conclusion of the hearing, the panel found that REALTOR® C had
violated Article 16 by failing to respect the exclusive agency of REALTOR® B.
The panel’s decision advised that REALTOR® C’s original contact with Client A,
made at a time when he had no knowledge of REALTOR® B’s exclusive listing,
was not in itself unethical, but that as soon as he learned of REALTOR® B’s
status as the client’s exclusive agent, he should have taken an attitude of respect
for the agency of another REALTOR®, and refrained from any effort to get the
listing until after the expiration date of the original contract.
REALTOR® C’s attitude of regarding the client’s relationship with REALTOR® B
as a kind of misfortune, of presenting his own service as superior to REALTOR®
B’s, and of suggesting to the client that, having a better capacity to serve him,
he could wait until REALTOR® B’s listing had expired, was, the panel said,
contrary to the respect for another REALTOR®’s exclusive agency required by
Article 16.
The Hearing Panel’s decision further advised REALTOR® C that he would have
conducted himself in accord with Article 16 if, upon learning of REALTOR®
B’s status as exclusive agent, he had expressed his willingness to cooperate with
REALTOR® B in the sale of Client A’s property.
Article 17
Article 17 states that Realtors® agree to arbitration in the case of a violation
of the Code of Ethics and agree to be bound by any resulting agreement or
award.
Article 17
In the event of contractual disputes or specific non-contractual disputes as
defined in Standard of Practice 17-4 between Realtors® (principals) associated
with different firms, arising out of their relationship as Realtors®, the Realtors®
shall mediate the dispute if the Board requires its members to mediate. If the
dispute is not resolved through mediation, or if mediation is not required,
Realtors® shall submit the dispute to arbitration in accordance with the policies
of the Board rather than litigate the matter.
In the event clients of Realtors® wish to mediate or arbitrate contractual disputes
arising out of real estate transactions, Realtors® shall mediate or arbitrate those
disputes in accordance with the policies of the Board, provided the clients agree
to be bound by any resulting agreement or award.
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The obligation to participate in mediation and arbitration contemplated by
this Article includes the obligation of Realtors® (principals) to cause their firms
to mediate and arbitrate and be bound by any resulting agreement or award.
(Amended 1/12)
The filing of litigation and refusal to withdraw from it by Realtors® in an
arbitrable matter constitutes a refusal to arbitrate. (Adopted 2/86)
Article 17 does not require Realtors® to mediate in those circumstances when all
parties to the dispute advise the Board in writing that they choose not to mediate
through the Board’s facilities. The fact that all parties decline to participate in
mediation does not relieve Realtors® of the duty to arbitrate.
Article 17 does not require Realtors® to arbitrate in those circumstances when
all parties to the dispute advise the Board in writing that they choose not to
arbitrate before the Board. (Amended 1/12)
Realtors®, when acting solely as principals in a real estate transaction, are not
obligated to arbitrate disputes with other Realtors® absent a specific written
agreement to the contrary. (Adopted 1/96)
Specific non-contractual disputes that are subject to arbitration pursuant
to Article 17 are:
1. Where a listing broker has compensated a cooperating broker and
another cooperating broker subsequently claims to be the procuring cause
of the sale or lease. In such cases the complainant may name the first
cooperating broker as respondent and arbitration may proceed without
the listing broker being named as a respondent. When arbitration occurs
between two (or more) cooperating brokers and where the listing broker
is not a party, the amount in dispute and the amount of any potential
resulting award is limited to the amount paid to the respondent by the
listing broker and any amount credited or paid to a party to the transaction
at the direction of the respondent. Alternatively, if the complaint is brought
against the listing broker, the listing broker may name the first cooperating
broker as a third-party respondent. In either instance the decision of the
hearing panel as to procuring cause shall be conclusive with respect to all
current or subsequent claims of the parties for compensation arising out
of the underlying cooperative transaction. (Adopted 1/97, Amended 1/07)
2. Where a buyer or tenant representative is compensated by the seller or
landlord, and not by the listing broker, and the listing broker, as a result,
reduces the commission owed by the seller or landlord and, subsequent to
such actions, another cooperating broker claims to be the procuring cause of
sale or lease. In such cases the complainant may name the first cooperating
broker as respondent and arbitration may proceed without the listing
broker being named as a respondent. When arbitration occurs between two
(or more) cooperating brokers and where the listing broker is not a party,
the amount in dispute and the amount of any potential resulting award is
limited to the amount paid to the respondent by the seller or landlord and
any amount credited or paid to a party to the transaction at the direction of
the respondent. Alternatively, if the complaint is brought against the listing
broker, the listing broker may name the first cooperating broker as a thirdparty respondent. In either instance the decision of the hearing panel as to
procuring cause shall be conclusive with respect to all current or subsequent
claims of the parties for compensation arising out of the underlying
cooperative transaction. (Adopted 1/97, Amended 1/07)
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3. Where a buyer or tenant representative is compensated by the buyer or
tenant and, as a result, the listing broker reduces the commission owed by
the seller or landlord and, subsequent to such actions, another cooperating
broker claims to be the procuring cause of sale or lease. In such cases the
complainant may name the first cooperating broker as respondent and
arbitration may proceed without the listing broker being named as a
respondent. Alternatively, if the complaint is brought against the listing
broker, the listing broker may name the first cooperating broker as a thirdparty respondent. In either instance the decision of the hearing panel as to
procuring cause shall be conclusive with respect to all current or subsequent
claims of the parties for compensation arising out of the underlying
cooperative transaction. (Adopted 1/97)
4. Where two or more listing brokers claim entitlement to compensation
pursuant to open listings with a seller or landlord who agrees to participate
in arbitration (or who requests arbitration) and who agrees to be bound by
the decision. In cases where one of the listing brokers has been compensated
by the seller or landlord, the other listing broker, as complainant, may name
the first listing broker as respondent and arbitration may proceed between
the brokers. (Adopted 1/97)
5. Where a buyer or tenant representative is compensated by the seller or
landlord, and not by the listing broker, and the listing broker, as a result,
reduces the commission owed by the seller or landlord and, subsequent
to such actions, claims to be the procuring cause of sale or lease. In such
cases arbitration shall be between the listing broker and the buyer or tenant
representative and the amount in dispute is limited to the amount of the
reduction of commission to which the listing broker agreed. (Adopted 1/05)
The obligation to arbitrate established in Article 17 includes disputes
between Realtors® (principals) in different states in instances where,
absent an established inter-association arbitration agreement, the Realtor®
(principal) requesting arbitration agrees to submit to the jurisdiction of,
travel to, participate in, and be bound by any resulting award rendered
in arbitration conducted by the respondent(s) Realtor®’s association, in
instances where the respondent(s) Realtor®’s association determines that an
arbitrable issue exists. (Adopted 1/07)
Case #17-1: Obligation to Submit to Arbitration
Revised November, 1995. Revised November, 2001.)
REALTOR® A and REALTOR® B had been engaged in a cooperative transaction
that resulted in a dispute regarding entitlement to compensation. Rather than
requesting arbitration before the Board of REALTORS®, REALTOR® A filed
suit against REALTOR® B for payment of the compensation he felt REALTOR®
B owed him. Upon receiving notification of the lawsuit, REALTOR® B filed a
request for arbitration with the Board, which was reviewed by the Grievance
Committee and found to be a mandatory arbitration situation. REALTOR® A
was advised of the Grievance Committee’s decision, but refused to withdraw
from the lawsuit. Thereupon, REALTOR® B filed a complaint with the Board
charging a violation of Article 17 as supported by Standard of Practice 17-1.
REALTOR® A was directed to be present at a hearing on the complaint before
the Board of Directors. Evidence that REALTOR® B had sought REALTOR® A’s
agreement to submit the dispute to arbitration was presented at the hearing.
REALTOR® A defended his action in filing the suit and refusing to submit to
arbitration by asserting that under laws of the state, the Board of REALTORS®
had no authority to bar his access to the courts or to require him to arbitrate his
dispute with REALTOR® B.
The Board of Directors concluded that REALTOR® A was correct as to his legal
right and as to the Board’s lack of any right to prevent him from filing a suit. It
was pointed out to REALTOR® A, however, that the Board of REALTORS® is
a voluntary organization, whose members accept certain specified obligations
with respect to their relations with other REALTORS®, and that if he wished to
continue as a member of the Board he would be obliged to adhere to the Board’s
requirements as to arbitration.
Because REALTOR® A would not withdraw the litigation, the Board of Directors
concluded that REALTOR® A was in violation of Article 17 for refusing to
arbitrate in a mandatory arbitration situation. However, it was noted that if
REALTOR® A had filed litigation against REALTOR® B, and had REALTOR®
B then requested arbitration with the Grievance Committee determining
that an arbitrable issue of a mandatory nature existed, REALTOR® B might
have successfully petitioned the court to remand the matter to the Board for
arbitration, and there would have been no finding of a violation of Article 17
since the Board’s arbitration process would have been ultimately complied with.
Summary
Duties to Realtors® is the third and final section of the Code of Ethics. We
reviewed Articles 15-16 which covered the Standards of Practice Realtors®
are required to follow in dealing with fellow Realtors® and our brokerages.
We also reviewed Article 17 which sets forth the manner in which disputes
or alleged violations of the Code must be handled.
The Code of Ethics and Standards of Practice provide guidance to Realtors®
on how to interact ethically with their clients, the public, and other Realtors®.
It provides very specific guidelines to follow within the industry, as well as
remedies for violations of the Code. It is a Realtor®’s duty to know and abide
by the code of Ethics, and to follow the disciplinary solutions included in
the Code when dealing with a possible violation or dispute. This provides
a strong framework for the industry and helps to maintain professionalism
and respect.
Chapter Four
Complaint Process,
Enforcement And Pathways
To Professionalism
In this chapter, we will review who enforces the Code of Ethics and Standards
of Practice and we’ll examine the process, from filing a complaint, to how
complaints are handled and the Committees overseeing the enforcement
process, to the discipline that may be issued, and the differences between
mediation and arbitration. We’ll also examine the content of NAR’s Pathways
to Professionalism document.
Learning Objectives
• Recognize who enforces the Code of Ethics and how the complaint
process works
• Distinguish between mediation and arbitration
• Identify key parts of Pathways to Professionalism
Enforcement
The Code of Ethics and Standards of Practice provide specific guidelines by
which Realtors® must conduct their business. The National Association of
REALTORS® (NAR) creates and amends the Code of Ethics; however, NAR
does not provide the enforcement of the Code.
Either the local or state Association of Realtors® provides for the enforcement
of the Code. That obligation includes providing mediation services and
conducting arbitration hearings. However, it’s important to note that
Associations do not determine whether the law or real estate regulations have
been violated. Those decisions can only be made by the regulatory authorities
or courts.
For the purpose of this chapter, the term “Association” will refer to the state
or local Association of Realtors® which handles the enforcement of the Code.
In the industry, both ethics violations and monetary disputes can be brought
under Code enforcement. We will look at the differences between ethics and
arbitration disputes and follow the process as it relates to each.
Ethics and Arbitration
An ethics complaint deals with questions concerning whether an Article
of the Code has been violated by a Realtor®. This could be considered a
“conduct” complaint.
A monetary complaint is an arbitration request. In accord with Article 17 of
the Code of Ethics, one agrees to arbitrate monetary disputes with Realtors®
of other firms rather than litigate.
Ethics Complaint
Anyone can file an ethics complaint – a member of the public or a Realtor®.
When an ethics complaint is filed, it first goes to the Grievance Committee,
which is comprised of Realtors® appointed by the Association President.
The purpose of the Grievance Committee is to determine if the complaint
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involves a potential violation and whether the complaint was appropriately
filed. In essence, this is a “screening process.” If the Grievance Committee
finds that there is a potential violation, and that the complaint has been
appropriately filed, the complaint then goes to a hearing panel of the
Professional Standards Committee. If the answer to either of those criteria is
“no,” the case is dismissed.
It’s important to note that an ethics complaint must be filed within 180 days of
when the facts of the complaint could have been known by the complainant
with reasonable diligence.
The Professional Standards Committee holds the actual hearings on the cases
that are reviewed by and moved forward from the Grievance Committee. The
Professional Standards Committee is also made up of Realtors® who have been
appointed by the Association President. The hearing panel of the Professional
Standards Committee determines if a violation has actually occurred.
The hearing panel must provide the respondents with a due process hearing.
Some samples of due process are:
• Advance notification of the nature of the complaint
• Adequate time to prepare a defense
• The right to present witnesses, testimony, and evidence
• The right to cross-examine the complainant and complainant’s witnesses
• The right to legal counsel
• An impartial panel of peers
• Access to an appeal process
The hearing panel must find that there is “clear, strong, and convincing”
proof that a violation occurred in order to find a Realtor® in violation of the
Ethics Code.
After the hearing, the panel will meet privately to determine if a violation
of the code was proven by clear, strong, and convincing evidence. If the
respondent is found to be violation of the Ethics Code, then the hearing panel
will determine the discipline to be recommended. It’s important to note that
the Professional Standards Committee cannot take any action against the
Realtor®’s license. License suspensions, terminations, etc., are governed by
the state licensing authority, not NAR.
The types of authorized discipline that may be issued by NAR are:
• Letter of Warning
• Letter of Reprimand
• Education Requirements
• Fine not to exceed $5,000
• Probation for one year or less
• Suspension for not less than 30 days, or more than one year
• Expulsion from membership for a period of one to three years
• Suspension or termination of MLS privileges
• In addition, an administrative processing fee may be imposed (not to
exceed $500).
Arbitration
As we discussed previously, arbitration refers to a money claim, rather than
a conduct claim. In this case, the complaint being filed is called a “Request
for Arbitration.”
For a dispute to qualify for arbitration, it must include three conditions:
1. The dispute must be a contractual dispute or a non-contractual dispute
as specified in Standard of Practice 17-4.
2. The dispute must be between Realtors® associated with different
firms. (If the dispute is between Realtors® in the same firm, arbitration is
voluntary, and all parties must agree to the arbitration.)
3. The dispute must have arisen out of the parties’ relationship as Realtors®,
meaning that typically, only real estate related disputes are arbitrated.
Just as with an ethics complaint, the Grievance Committee will first review
the request for arbitration.
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It’s important to note that a request for arbitration must be filed within 180
days of the closing of the transaction, or 180 days from when the facts of the
request could have been known with the exercise of reasonable diligence,
whichever is later.
The Grievance Committee must insure that the procedural issues are correct,
as well as determine “if the allegations in the request for arbitration are taken
as true on their face, is the dispute related to a real estate transaction and is
it properly arbitrable, i.e., is there some basis on which an award could be
based?”
As with the ethics complaints we discussed previously, if the Grievance
Committee finds that there is a basis for arbitration, the case moves forward
to the Professional Standards Committee for a hearing with a hearing panel.
The hearing panel then determines which party is entitled to the disputed
funds by conducting a full due process hearing, as described earlier. The
prevailing party must prove they are entitled to the disputed funds by a
“preponderance” of the evidence (more likely than not). An arbitration
award can be enforced by the courts.
If the Grievance Committee finds there is no basis for arbitration, then the
case is dismissed.
Mediation
Mediation is a voluntary process in which a trained neutral party (mediator)
assists disputing parties to come to a mutually acceptable resolution to
their dispute. Every Association must provide mediation services to their
members. As a reminder, many disputes can be resolved through mediation
before ever going to arbitration or litigation. Mediation can be an excellent
way to avoid either of these.
Respect for the Public
This is a list of professional courtesies for use by Realtors® on a voluntary
basis. While the Code of Ethics and Standards of Practice of NAR establishes
objective, enforceable ethical standards governing the professional conduct
of Realtors®, it does not address issues of courtesy or etiquette. Based on
input from many sources, the Professional Conduct Working Group of
the Professional Standards Committee developed the following list of
professional courtesies for use by Realtors® on a voluntary basis. This list is
not all-inclusive, and may be supplemented by local custom and practice.
Pathways to Professionalism
Respect for the Public
1. Follow the "Golden Rule”: Do unto others as you would have them
do unto you.
2. Respond promptly to inquiries and requests for information.
3. Schedule appointments and showings as far in advance as possible.
4. Call if you are delayed or must cancel an appointment or showing.
5. If a prospective buyer decides not to view an occupied home, promptly
explain the situation to the listing broker or the occupant.
6. Communicate with all parties in a timely fashion.
7. When entering a property ensure that unexpected situations, such as
pets, are handled appropriately.
8. Leave your business card if not prohibited by local rules.
9. Never criticize property in the presence of the occupant.
10. Inform occupants that you are leaving after showings.
11. When showing an occupied home, always ring the doorbell or
knock—and announce yourself loudly before entering. Knock and
announce yourself loudly before entering any closed room.
12. Present a professional appearance at all times; dress appropriately
and drive a clean car.
13. If occupants are home during showings, ask their permission before
using the telephone or bathroom.
14. Encourage the clients of other brokers to direct questions to their
agent or representative.
15. Communicate clearly; don’t use jargon or slang that may not be
readily understood.
16. Be aware of and respect cultural differences.
17. Show courtesy and respect to everyone.
18. Be aware of—and meet—all deadlines.
19. Promise only what you can deliver—and keep your promises.
20. Identify your REALTOR® and your professional status in contacts
with the public.
21. Do not tell people what you think—tell them what you know.
Respect for Property
1. Be responsible for everyone you allow to enter listed property.
2. Never allow buyers to enter listed property unaccompanied.
3. When showing property, keep all members of the group together.
4. Never allow unaccompanied access to property without permission.
5. Enter property only with permission even if you have a lockbox key
or combination.
6. When the occupant is absent, leave the property as you found it
(lights, heating, cooling, drapes, etc.) If you think something is amiss
(e.g. vandalism), contact the listing broker immediately.
7. Be considerate of the seller's property. Do not allow anyone to eat,
drink, smoke, dispose of trash, use bathing or sleeping facilities, or
bring pets. Leave the house as you found it unless instructed otherwise.
8. Use sidewalks; if weather is bad, take off shoes and boots inside
property.
9. Respect sellers’ instructions about photographing or videographing
their properties’ interiors or exteriors.
Respect for Peers
1. Identify your REALTOR® and professional status in all contacts with
other REALTORS®.
2. Respond to other agents' calls, faxes, and e-mails promptly and courteously.
3. Be aware that large electronic files with attachments or lengthy faxes may
be a burden on recipients.
4. Notify the listing broker if there appears to be inaccurate information on
the listing.
5. Share important information about a property, including the presence of
pets, security systems, and whether sellers will be present during the showing.
6. Show courtesy, trust, and respect to other real estate professionals.
7. Avoid the inappropriate use of endearments or other denigrating language.
8. Do not prospect at other REALTORS®' open houses or similar events.
9. Return keys promptly.
10. Carefully replace keys in the lockbox after showings.
11. To be successful in the business, mutual respect is essential.
12. Real estate is a reputation business. What you do today may affect your
reputation—and business—for years to come.
(Revised 11/13)
Pathways to Professionalism
flooding water running through the house, onto the carpeting, flowing into
several rooms. The agent holding the open house explained that apparently the
toilet was leaking, but he didn’t want to turn off the water because he wasn’t
sure if that is what the agent or homeowner would want. So, he let it run, called
no one, and escorted attendees around sloshing through the water.
Needless to say, the listing agent was very upset. How should this situation have
been handled? A simple, immediate phone call to the listing agent at the first
sign of trouble would have saved a lot of trouble, mess, and ill will. Mitigating
the damage would have been prudent, by turning off the source of the water
leak, but first and foremost, the listing agent should have been notified instantly.
Another scenario: an agent is showing a home to a prospective buyer and sets
off the home’s security system. Although the system codes have been provided,
she cannot turn it off. What should she do? Immediately call the listing agent,
of course! Keep in mind that many security systems are monitored, and if
police respond to the alarm, quite often the homeowner is charged. So, waiting
to call the listing agent could result in a dispute over unexpected charges from
the “false” alarm.
Another common occurrence: Upon showing a property, you notice that all
of the window treatments are closed, and you know that the home will show
so much better with all of the blinds and draperies open to let the light in and
show off the views. So, you proceed to open all of the window treatments,
knowing that it shows better (and to help educate the seller), and you leave
them open. Later that day, you receive an irate phone call from the listing agent
(or the seller), upset at the additional cost of cooling the home with all window
treatments open. The seller is upset that their property has been tampered with,
and the listing agent’s relationship with that seller is suddenly compromised. It
is imperative that you leave the home exactly as you found it.
It is quite common, while showing properties, to get behind your projected
time schedule, or to have your buyer decide to make an offer on a property
and not wish to see the rest of the properties that you had scheduled, or
perhaps more commonly, to drive up to a property that you have scheduled
to show and your buyer doesn’t like it from the outside and doesn’t want to
go in. Is it really necessary to call the sellers with whom you have scheduled
showings with to let them know that your timeframe has changed or that the
buyer won’t be looking at their property today?
Yes, it is imperative that you do! Sellers get very, very upset when they have
cleaned their property, put the pets out, planned on getting out of the house,
or prepared in some way for your showing, and you don’t show up, don’t
show up within the timeframe that was agreed upon, and don’t call. It is
disrespectful of the sellers, and it paints a very unprofessional picture of
all Realtors®. These kinds of “innocent” acts cause the public to dislike the
profession as a whole. In addition, you never know if your buyer may change
her mind. If she should wish to see and ultimately write an offer on one of
those properties of a seller to whom you were disrespectful, you may have
alienated the very person with whom you will be negotiating.
Summary
In this chapter, we reviewed the enforcement of the NAR Code of Ethics and
Standards of Practice and we examined the process, from filing a complaint,
to how complaints are handled and the Committee's oversight of the
enforcement process, to the discipline that may be issued. We also looked
at the differences between mediation and arbitration. We also examined the
content of NAR’s Pathways to Professionalism document.
Although the items included in Pathways to Professionalism may seem
elementary, these simple courtesies are often overlooked, and neglecting any
of them can be cause for ill will, ruined reputations, and failed transactions.
Here are some situations which could have turned out differently if the
suggestions in Pathways to Professionalism had been followed.
An agent allowed another agent to hold their listing open. A couple of hours
into the open house, the listing agent decided to stop by to see how the open
house was going. Upon entering the property, the listing agent was faced with
165
.
1. What is the primary difference between ethics and
standards?
a. Ethics are a system of principles governing morality,
standards are legal documents setting forth rules
governing a particular kind of activity.
b. Ethics are a system of principles governing morality,
standards are a reference point against which other
things can be evaluated.
c. There is no difference, the terms are used
interchangeably.
d. None of the above.
2. What is a core element of the NAR Code of Ethics?
a.
b.
c.
d.
Caveat emptor.
The Golden Rule.
Do No Harm.
All of the above.
3. Prior to the founding of the organization now
known as NAR, what statement could it be said
governed transactions?
a.
b.
c.
d.
For the public good.
The Golden Rule.
Caveat emptor.
To each their own.
4. What year was the term REALTOR® approved by
the Patent and Trademark Office?
a.
b.
c.
d.
1975
1949
1908
1916
5. Which of the following are sections of the Code of Ethics?
a.
b.
c.
d.
166
Duties to the Public.
Duties to their Broker.
Duties to the Real Estate Profession.
All of the above.
6. How many Articles are included in the Code of
Ethics?
a.
b.
c.
d.
18
17
20
21
7. At what time in the buying or selling process must
a Realtor® disclose any personal interest in a
property?
a.
b.
c.
d.
Prior to the signing of any contract.
After the offer has been accepted.
After the transaction has been completed.
None of the above.
8. Which of the following are considered to be a
protected status?
a.
b.
c.
d.
Race
Religion
Sexual Orientation
All of the Above
9. Which of the following items should be included in
an opinion of value or price according to Standard
of Practice 11-1?
a.
b.
c.
d.
Identification of subject property
Date prepared
Defined value or price
All of the above
10. Which Article prohibits making false or
misleading statements about other real estate
professionals?
a.
b.
c.
d.
Article 10
Article 15
Article 3
Article 7
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Maine Core Course for Brokers & Associate Brokers - I Pg 27
1.
2.
3.
4.
5.
aО bО cО dО
aО bО cО dО
aО bО cО dО
aО bО cО dО
aО bО cО dО
6. 7. 8. 9. 10.
1.
2.
3.
4.
5.
aО bО cО dО
aО bО cО dО
aО bО cО dО
aО bО cО dО
aО bО cО dО
6. 7. 8. 9. 10.
1.
2.
3.
4.
5.
aО bО cО dО
aО bО cО dО
aО bО cО dО
aО bО cО dО
aО bО cО dО
aО bО cО dО
aО bО cО dО
aО bО cО dО
aО bО cО dО
aО bО cО dО
6. 7. 8. 9. 10.
aО bО cО dО
aО bО cО dО
aО bО cО dО
aО bО cО dО
aО bО cО dО
6. 7. 8. 9. 10.
aО bО cО dО
aО bО cО dО
aО bО cО dО
aО bО cО dО
aО bО cО dО
aО bО cО dО
aО bО cО dО
aО bО cО dО
aО bО cО dО
aО bО cО dО
aО bО cО dО
aО bО cО dО
aО bО cО dО
aО bО cО dО
aО bО cО dО
aО bО cО dО
aО bО cО dО
aО bО cО dО
aО bО cО dО
aО bО cО dО
6. 7. 8. 9. 10.
Pg 133
aО bО cО dО
aО bО cО dО
aО bО cО dО
aО bО cО dО
aО bО cО dО
Pg 82
A Home Buyer's Guide to Credit Scores
Pg 97
Know The Code: Your Guide To The Code Of Ethics Pg 166
1.
2.
3.
4.
5.
1.
2.
3.
4.
5.
aО bО cО dО
aО bО cО dО
aО bО cО dО
aО bО cО dО
aО bО cО dО
aО bО cО dО
aО bО cО dО
aО bО cО dО
aО bО cО dО
aО bО cО dО
Maine Real Estate CE Assessment Answer Sheet - 2016 Edition
6. 7. 8. 9. 10.
1.
2.
3.
4.
5.
aО bО cО dО
aО bО cО dО
aО bО cО dО
aО bО cО dО
aО bО cО dО
1.
2.
3.
4.
5.
Pg 69
aО bО cО dО
aО bО cО dО
aО bО cО dО
aО bО cО dО
aО bО cО dО
1.
2.
3.
4.
5.
How to Work with Real Estate Investors - Part 1 Pg 116
6. 7. 8. 9. 10.
6. 7. 8. 9. 10.
Pg 144
aО bО cО dО
aО bО cО dО
aО bО cО dО
aО bО cО dО
aО bО cО dО
aО bО cО dО
aО bО cО dО
aО bО cО dО
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aО bО cО dО
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Maine Real Estate Professionals

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