Agency Issues - Part 1 - Chapters 1-3 Flashcards
Understand an employing brokers’s responsibility to continually oversee the real estate activities of the agents they employ
To ensure a greater degree of consistency and competence in the rendering of brokerage services, California law regulates:
- who is eligible to become licensees and offer brokerage services
- the duties and obligations licensees owe to members of the public and
- the procedures for soliciting and rendering services while conducting licensed activities.
Only licensed brokers are authorized to provide brokerage services to members of the public. Sales agents are representatives of the licensed broker, and render brokerage services on the brokers behalf.
When a broker employs a sales agent, the broker is to exercise REASONABLE SUPERVISION over the activities performed by the agent. Brokers who do not actively supervise their agents risk having their licenses suspended or revoked by the California Department of Real Estate.
Appreciate the office policies, procedures, rules, and systems a broker implements to comply with their duties owed to clientele and others
The duties owed to the various parties in a transaction by a broker, which may be carried out by a sales agent under the employing broker supervision, oversight, and management, include:
- the utmost care, Integrity, honesty and loyalty in dealings with a client and
- the use of skill, care, honesty, Fair dealing, and good faith in dealings with all parties to a transaction in the disclosure of information which adversely affect the value and desirability of the property involved.
One method a broker uses to implement the requirement for supervision of employed agents is to develop a BUSINESS MODEL. So intended, the broker outlines the means and manner by which agents produce and service listings and how purchase agreements are negotiated and closed. The creation of a plan for office operations logically starts by establishing categories for itemizing administrative and licensed activities, then a written presentation of the conduct required of agents to achieve the brokers objectives for each item.
Categories of business and licensed activities include:
- ADMINISTRATIVE RULES - outlining General business operations office routines phone management sign usage budgetary allocations agent interviews goal setting daily work schedules
- PROCEDURAL RULES - outlining the means and methods to be used by agents to obtain measurable results, listings sales leases mortgages Etc.
- SUBSTANTIVE RULES - focusing on the documentation needed when producing listings negotiating sales leases or mortgages
- COMPLIANCE CHECKS- consisting of periodic weekly and event-driven reports
- SUPERVISORY OVERSIGHT- an ongoing and continuous process of training agents and managing their activities
Discuss how licensee status relates to labor regulations, taxation, and issues of liability
Most sales agents receive compensation from their Brokers as Independent Contractors IC based on a negotiated percentage of contingency fees received by the brokers for completed sales, leases, mortgages solicited, negotiated or processed by the agents.
However, even though the agreement is called an “Independent Contractor” agreement, the agent is an agent of their employing broker and not a separate operator independent of their broker.
For the purpose of administering real estate law, a sales agent is considered both an agent and an employee when acting within the course and scope of employment with a broker. However, as with state and federal income tax withholding, and agent is not always treated as an employee. For example, licensed real estate sales agents, as well as associated brokers, are excluded employees for purposes of the California UNEMPLOYMENT INSURANCE LAW. In this case the broker does not contribute to the State Unemployment Insurance Fund and an agent cannot collect unemployment benefits from the state.
Finally receipt of compensation by a licensed real estate agent under an employment agreement, paid as a CONTINGENCY FEE for closing transactions, is the only test required for the broker to avoid paying unemployment benefits. When the agent is paid a contingency fee not an hourly wage, the agent will be denied unemployment benefits regardless of the level of supervision and control the broker exercises over the agents real estate related activities
A sales agent is entitled to payment of minimum hourly wages from a broker if the agent is classified as an employee by California labor laws. However, given the nature of the business agents are rarely considered “employees”. To be due an hourly wage, the agent needs to demonstrate that the actual working relationship with the broker was more than just an agent of the broker employed as required by real estate law, but that of an employee under the labor code.
As an outside sales person who regularly works more than half of their time away from their place of employment, a real estate sales agent is excluded from collecting a minimum wage from their broker. However, all real estate brokers in California have to provide workers compensation insurance coverage for their sales agents.
clients
CLIENTS are members of the public who retain brokers and agents to perform real estate-related services. Only when acting as a representative of the broker may the sales agent perform brokerage services which only the broker is authorized to contract for and provide to other, called clients.
Further, a sales agent may only receive compensation for the real estate related activities from the employing broker. An agent cannot receive compensation directly from anyone else… e.g., the seller or buyer or another licensee.
Thus, brokers are the agents of the members of the public who employ them, while a broker’s sales agents are the agents of the agent, the individuals who render services for the brokers clients by acting on behalf of the broker.
As a result, brokers are responsible for all the activities their agents carry out within the course and scope of their employment.
independent contractor
AN INDEPENDENT CONTRACTOR is a type of employment arrangement used by a real estate broker when hiring licensed sales agents and other brokers as their supervised employees to avoid employer contributions and withholdings for income tax purposes.
The chief advantage for a real estate broker to use an independent contractor IC agreement is the simplification of the bookkeeping process. An IC agreement avoids withholding for income taxes or Medicare and Social Security benefits from the agent’s fee, while also avoiding employer contributions.
In turn, the broker files a 1099 report with the internal revenue service IRS naming each agent and stating the fee amount each received as an employee of the broker under a contingent fee independent contractor agreement.
licensed activities
LICENSED ACTIVITIES are any dealings by DRE licensees with members of the public to offer, contract for and render real estate brokerage services for compensation.
listing agreement
A LISTING AGREEMENT is a written employment agreement used by Brokers and agents when an owner, buyer, tenant or lender retains a broker to render real estate transactional services as the agent of the client. To retain a broker to act as a real estate agent, the buyer or seller enters into an employment contract with the broker, called a listing agreement.
Estimate the potential income and expenses an agent will likely experience when employed by a broker
A new sales agent seeking employment with a broker may use an INCOME AND EXPENSE DATA WORKSHEET to analyze income, expenses, cash reserves and the sales goal they need to meet to provide an acceptable after-tax income.
Established brokers are better able to anticipate the income and expenses an agent will incur. Thus, a broker’s full disclosure of the agents likely income and expenses leads to realistic expectations of income by the agent.
An employing broker needs to inform a prospective agent about the operating expenses the agent will likely to incur while employed by the broker. The agent needs to have a vehicle, computer, and instruments and materials required for transactions involving real estate sales, leasing or financing. The agent also needs to pay multiple listing service MLS fees to become a part of the market.
Evaluate competing brokerage firms for suitability with an agent’s professional goals and expectations
If an agent later seeks to negotiate higher fee splits or relocate to a new brokerage office, they are best served completing an OPERATING DATA WORKSHEET to assess their current operating conditions and compare them with prospective brokerages. Comparative shopping allows the agent to request employment changes or relocate based on the current marketplace.
net operating income (NOI) (employment)
An agent’s NET OPERATING INCOME (NOI) (EMPLOYMENT) is the net revenue generated by an agency employment, calculated by subtracting business operating costs from the expected income from fees generated from sales, leasing or financing transactions.
An explanation of the net operating income from sales the agent is to expect they will receive cannot be overlooked and needs to be discussed with the agent by the broker. Without these disclosures, an analysis of the agents long-term potential with the office has not taken place. These types of disclosures will help avoid either a termination of employment or dissatisfaction over lost expectations by the agent.
Thus, a realistic and relatively accurate disclosure of income expenses and the initial investment an agent is to make on entering the employ of the broker:
- reduces the office turnover of agents
- reduces the brokers investment of time and energy hiring and training the agents
- produces a sales staff whose income expectations are met based on their ability to attain the sales goals each have set for themselves.
sales goal
A SALES GOAL is the amount of after-tax income agents and brokers intend to earn as a result of their real estate licensing activities. As a prerequisite to an agent’s use of an income and expense data worksheet, the agent needs to collect income data during an interview with a prospective broker including:
- the price range of property the agent is most likely to list and sell
- the number of sales the agent is likely to close in that price range during the first year
- the gross broker fees generated by the number of sales during the first year and
- the share of the gross broker fees the agent will receive under the fee sharing schedule offered by the broker.
The likely gross fees the broker is to receive and the agents share of those fees are entered on the worksheet as a result of the interview.
Ultimately, the sales goal set by the agent is reflected in the amount of after-tax income the agent seeks for themselves.
Until the worksheet is filled out accurately, projecting fees to be received by the agent, estimating expenses to be incurred and attempting to set sales volume goals or probable after-tax earnings is an uneducated guess.
Recognize the market equilibrium of approximately 1.5 active agents for every active broker
In a stable market, a natural equilibrium develops between active real estate agents and brokers. This ratio has historically found balance at approximately 1.5 active agents for every active broker.
In 2006, following the peak of the boom, there were a total of 2.6 active agents for every active broker. The high number of agents accompanied an inflated market, with unsustainable prices and little sense fundamentally.
After a protracted period of inflated agent population, the ratio began its downward trajectory towards historic norms bottoming at 1.6 in mid-2014 and now with an average of 1.75 active agents for every active broker in mid-2015.
However, due to rising home prices, the ratio began to increase again, currently at an average of 2.0 active agents for every active broker in 2019. Expect discouraged agents to slowly drop out of the active population as home price increases continue to slow in 2019. The number of brokers will begin to stabilize following the next economic recession, expected around 2020 to 2021.
Track agent and broker licensing and renewal trends through oscillations in the market cycle
California demographics, and the extremely low ongoing demand by occupying home buyers, point to a return of “excitement” in the field of real estate. It will be up to the Department of Real Estate (DRE) to maintain agent to broker ratios and protect society from any adverse licensee conduct from overpopulating the industry with licensees. To do so, they will need to tighten up the agent licensing exam before 2016 to harness in a too-permissive passing rate.
Anticipate the effect a return to core economic principles and real estate fundamentals have on broker and agent licensing
When viewed in the context of disappearing short-term agents, economic reality is forcing continued consolidation onto employing brokers to:
- close their least productive branch offices
- release the weakest office managers and under-performing agents
- attempt to locate agents who generate business
- upgrade office locations and cut rent expenses by taking advantage of office vacancies and ever lower rent
- develop new profit centers with office divisions for escrow, finance, homeowner tenant Insurance, Property Management, syndication and other brokerage services
- require agents to “get back on the street” and off the cell phones, gather property information and smoke out buyers to generate leads and sales.
Identify the functions of a successful brokerage office
To operate a successful brokerage office, the broker needs to employ viable agents. Brokers or their administrative assistants and managers need to learn to supervise and police the business-related conduct of their agents.
Supervisory conduct by brokers and managers include:
- analysis of the agents income and expenses
- setting the fees the agent needs to become financially viable
- setting production goals to meet the income target (clients and closings)
- establishing the agents routines and activities likely to increase the agents productivity (overseeing time spent working for the broker) and
- insistence that compliance reports be prepared and submitted periodically to the office manager (weekly progress report) and on critical events (client employment, closings)
Without an administrative structure to verify the brokers agents are conducting themselves as intended, the broker is exposed to an unnecessary risk of loss. Further, all acts carried out by a broker or their agents present the possibility that a client or other party will be injured financially.
Risks are best limited by choosing activities which can be conducted with more certainty of a favorable result when relied on by the client or others in real estate transactions. Thus, Brokers need to maintain a Risk Reduction Program to keep claims from clients and others under control.
