Chapter 3 - Real Estate Brokerage

Question 1

Agency

Answer 1

relationship between principal and principal’s agent, which arises out of a contract, either expressed or implied, written or oral, wherein the agent is employed by the principal to do certain acts dealing with a 3rd party

Question 2

Agent

Answer 2

One who acts for and with authority from another called the principal

Question 3

Principal

Answer 3

The employer (pays commission) of the agent, such as a buyer or seller

Question 4

In real estate, who enters into the agency agreement with the client (i.e., buyer or seller)?

Answer 4

The broker enters into the contractual agreement with the client (acting as the agent) and ultimately gets paid

Question 5

Subagent

Answer 5

person upon whom the powers of an agent have been conferred, not by the principal, but by an agent as authorized by the agent’s principal. This authorization allows the subagent to represent and serve the principal’s best interests
EX: real estate salesperson or associate broker working on behalf of their sponsoring broker

Question 6

In real estate, who typically enters into the agency agreement as a subagent?

Answer 6

The real estate agent/salesperson. As a subagent, they are always working first and foremost for the principal, not for the agent/broker.

Question 7

Customer

Answer 7

third party to which an agent/subagent is representing the principal to (i.e., potential buyers). Again, the (sub)agent will always work in the best interests of the principal, but must also be helpful and truthful when working with customers.

Question 8

What duties does an agent owe to the customer?

Answer 8

• -Act fairly and honestly
• -Disclose all known material facts
• -Operate with reasonable skill & care

Question 9

Dual Agency

Answer 9

Agency relationship in which agent acts concurrently for both of the principals (i.e., buyer & seller) in a single transaction. This typically causes conflicts of interest to arise due to the fact that the agent must always act in the best interests of their principals. Because of the complex nature of dual agency, many states have made this agency role illegal.
EX: broker or salesperson simultaneously acting as the agent of both the seller of a property and the buyer of that same property

Question 10

General Agent

Answer 10

Agent with full authority over one property of the principal, such as a property manager. If a general agent carries out illegal activity to benefit the principal, w/o the principal’s knowledge, for example illegally evicting a non-paying tenant, then the principal (i.e., property owner) might still be held liable.

Question 11

Single Agent

Answer 11

Agent who works only for the buyer or seller. The listing agreement will clearly lay out all responsibilities that the broker takes on and agrees that they will only act as the agent for the client (they will not act as an agent for any other competing interest–loyalty will remain undivided with the property owner)

Question 12

Special Agent

Answer 12

An agent with limited authority to act on behalf of the principal, such as real estate brokers or salespeople working under a listing contract. The agent is only authorized by the principal to act on their behalf in carrying out specific activities; if the special agent conducts business that is not covered by the scope of that contract, even if it is to the benefit of the principal, they are no longer acting as the principal’s agent and are solely liable for any damage or associated illegal activity.

Question 13

Universal Agent

Answer 13

Agent who has complete authority over any activity of the principal, for example, a power of attorney

Question 14

What are the legal requirements if entering into dual agency?

Answer 14

In states where it is legal, dual agency must be disclosed in writing. Disclosure usually requires that both principals give written consent that the brokerage will represent the 2 principals, making sure that both principals are fully aware of the arrangement. Undisclosed dual agency, where a broker has an agency relationship with 2 competing principals, but does not inform them of this, is always illegal in every state

Question 15

Designated Sub-Agent

Answer 15

2 different sub-agents within the same brokerage that are assigned to a seller and buyer of the same property in a dual agency relationship. Each sub-agent should treat their principal as though they are the single principal.

Question 16

Express Agency

Answer 16

agency relationship created by oral or written agreement (i.e., listing contract or buyer representation agreement) btwn the principal and the agent.

Question 17

Implied Agency

Answer 17

Agency that exists as a result of the actions of the parties, rather than through any stated agreement. It can arise accidentally; one party might believe a relationship exists whereas the other is unaware.
EX: helping a friend market their property and find a buyer, but your friend not feeling like they owe you any sort of commission at closing for your “help”

Question 18

Ostensible Agency

Answer 18

a specific kind of implied agency, but instead of the principal or agent believing that an agency relationship exists, it is a third party that believes an agency relationship exists.
A person who has been given the appearance of being an employee or acting (as an agent) for another (principal), which would make anyone dealing with the ostensible agent reasonably believe s/he was an employee or agent

Question 19

How do you Terminate an Agency Relationship? (7)

Answer 19

1. Full Performance: Ending the agency relationship by full performance or completion of the transaction–once the closing is completed and the job was well done, then the house has been sold (or bought), the apartment rented, or commercial space leased and the agent has been paid their commission.
2. Destruction or Condemnation of the Property: Ending the agency relationship due the property being destroyed by weather, “acts of God”, accidents, negligence, etc. or condemned by the government.
3. Expiration of the Listing Contract
4. Mutual Agreement of the Parties
5. Breach of Contract
6. Operation of Law: Law supersedes an agency relationship (i.e., property is seized as a tax asset by the IRS)
7. Death or Incapacity of Either Party

Question 20

Fiduciary

Answer 20

person in a position of trust and confidence, as between principal and broker; broker as fiduciary owes certain loyalty which cannot be breached under the rules of agency

Question 21

Fiduciary Duty

Answer 21

legal and ethical responsibilities an agent owes to their principal–to act in the highest good faith toward the principal and not to obtain any advantage over the latter by the slightest misrepresentation, concealment, duress, or pressure

Question 22

Loyalty

Answer 22

An agent’s duty to place the client’s interest above those of all others, including the agent’s own self-interest

Question 23

Obedience

Answer 23

This fiduciary relationship obligates the agent to act in good faith at all times, obeying the client’s instructions in accordance with the contract

Question 24

Reasonable Care

Answer 24

The degree of caution and concern for the safety of him/herself and others an ordinarily prudent and rational person would use in the circumstances. This is a subjective test of determining if a person is negligent, meaning s/he did not exercise reasonable care

Question 25

Confidentiality

Answer 25

An agent is obligated to safeguard his/her principal’s lawful confidences and secrets. Therefore, a real estate broker must keep confidential any information that may weaken a principal’s bargaining position. The duty of confidentiality precludes a broker who represents a seller from disclosing to a buyer that the seller can, or must, sell a property below the listed price. Conversely, a broker who represents a buyer is prohibited from disclosing to a seller that the buyer can, or will, pay more than what has been offered for a property.
The duty of confidentiality does not include an obligation by a broker who represents a seller to withhold known material facts about the condition of the seller’s property from the buyer, or to misrepresent the property’s condition. To do so constitutes misrepresentation and may impose liability on both the broker and/or the seller.

Question 26

What Fiduciary Duties does an agent owe to their principal? (6)

Answer 26

OLD CAR:
O - Obedience: agent must obey all legal instructions from principal and do so in a prompt & efficient manner
L - Loyalty: agent can only act in the best interests of the principal, excluding even the agent’s own interests
D - Disclosure: agent must disclose all pertinent information to the principal (EX: adverse material facts & accurate market info)
C - Confidentiality: agent must protect the principal’s confidences & secrets, unless it is unlawful to do so
A - Accountability: agent is obligated to account for/answer any property or money the principal entrusts to the agent (EX: safeguard trust or escrow funds)
R - Reasonable Care/Skill/Diligence: agents should only offer/perform services for which they have an expertise; agents are required to meet the standards of skill, care, and diligence in all of their transactions
Cannot be waived or eliminated

Question 27

Price Fixing

Answer 27

Prohibited by antitrust laws, 2+ people from the “same side” agreeing to buy or sell at a certain price, eliminating the marketplace effects of supply and demand

Question 28

Group Boycotts

Answer 28

Prohibited by antitrust laws, companies getting together and agreeing to not do business with certain individuals/businesses with the intent of eliminating competition or enforcing business practices that are more favorable to themselves.

Question 29

Market Allocation

Answer 29

Prohibited by antitrust laws, businesses making agreements to not compete with each other, ultimately promoting price setting and driving away competition

Question 30

Tie-in Agreements

Answer 30

Prohibited by antitrust laws, an offer to sell a desirable property depends on the purchase of a much less desirable property

Question 31

When is a broker paid?

Answer 31

Once the broker finds a buyer who is “ready, able, and willing” to buy, they can legally be paid most often through a commission, calculated based on a negotiated percentage of the final sales price. But they’re typically paid once the sale goes through and closes.

Question 32

Does the broker usually keep the entire commission they’re paid?

Answer 32

Not usually–the broker will typically split it with other brokers (depending how the contract was written)

Question 33

How is a real estate salesperson paid?

Answer 33

paid by his/her sponsoring broker. It is illegal to collect commissions/fees directly from a client or from a brokerage that does not hold your license. Most often, a salesperson has an agreement with their sponsoring broker about what percentage of a commission they will get

Question 34

Independent Contractor

Answer 34

A person who provides services to another under terms specified in a contract. According to the IRS, an independent contractor is NOT an employee and must pay their own expenses, such as travel, tools/supplies, & marketing expenses as well as remit their own taxes to the government. In real estate, the sponsoring broker cannot set the work hours, work location, work activities, or pay a salary to the real estate salesperson.

Question 35

What if a real estate salesperson is considered an employee of the brokerage?

Answer 35

The Broker must withhold taxes from their paychecks, pay social security taxes, and provide health insurance

Question 36

What is the work relationship between a real estate salesperson and broker?

Answer 36

independent contractor relationship–salespeople are not employed by the broker/brokerage, but are instead considered self-employed. Real estate salespeople contract with the broker to provide services.

Question 37

Cooperating Broker

Answer 37

broker who works with the listing broker or designated agent to facilitate the transaction–typically locating the buyer and participating in the negotiation that brings 2 parties together (sharing in the commission split too)

Question 38

What types of disclosures are required for conflicts of interest?

Answer 38

Disclose any relationships concerning conflicts of interest in writing so that all related parties in the transaction can consent to this relationship–transparency is KEY!
EX: you’re the agent but also the seller, buying a property but don’t tell the seller that you’re a licensed agent, acting on behalf of a family member or on behalf of a firm/group you have an interest in

Question 39

When there’s a conflict, ______ supersede common law.

Answer 39

When there’s a conflict, statutory obligations supersede common law. But for areas there’s no conflict or where there aren’t any licensing regulations, common law can’t be ignored and will always apply as well as legal obligations.

Question 40

Multiple Representation w/o Designated Agency

Answer 40

firm and all agents would represent both sides of the transaction, having an obligation of remaining neutral and would not be able to put the interest of 1 party over another.

Question 41

What are the 2 types of disclosures that are mandatory for licensees to use and provide?

Answer 41

1. Disclosure to the customer (i.e., listing presentation or taking buyer out to see property)
2. Disclosure to the client (i.e., buyer’s agreement or listing agreement)
   When interacting with the other party in the transaction, you must state your relationship.

Question 42

Material Adverse Fact

Answer 42

condition/occurrence that a competent licensee generally recognizes will significantly and adversely affect the value of the property, significantly reduce the structural integrity of improvements to real estate, or present a significant health risk to occupants of the property. These instances will affect the party’s decision to enter into a contract/agreement concerning a transaction or would affect the party’s decision about the terms of such a contract/agreement.

Question 43

What are the specific requirements in order for a real estate agency contract to be valid in WI?

Answer 43

• -Must be in writing, verbal contracts are not valid
• -Description of the real estate
• -Price of the property to be sold or purchased
• -Commission/Fees to be paid by the client
• -Duration of the agreement
• -Signatures of appropriate parties