Chapter 6 - Practice of Real Estate and Disclosures Flashcards
Trust Account Management
Trust account management
Funds belonging to others which a broker and their agents handle when acting as agents in a transaction are called trust funds.
Trust funds generally include:
- rent and security deposit collected under a property management agreement
- good faith deposit tendered by a buyer with an offer to purchase
- fees and costs handed to the broker in advance of their performance of agreed to services
- loan payments and funds on contract collection and Loan brokerage
- trust funds may also be in the form of any monetary or other personal property of value.
Trust funds are held by Brokers for safekeeping and are kept separate from the Brokers personal funds. Record-keeping and accounting requirements are imposed on Brokers when they receive transfer or disburse trust funds.
Monies collected on behalf of a client need to be deposited no later than 3 BUSINESS DAYS after receipt. A broker may maintain a maximum of $200 in the account to offset Bank fees.
The commingling of client funds with other client monies is one of the primary causes of licensee disciplinary action. Similarly, conversion occurs when a licensee uses the clients funds for their own purposes. Note having $200.01 in the account would be considered commingling.
Any employee may be authorized by the broker to withdraw money from the trust fund. If the authorized person is not licensed, they need to have a Fidelity bond for an amount equal to what they can access.
A trust account Ledger must be maintained even when client funds are not cashed but transferred to Escrow or title companies. Ledgers and Trust accounts are to be balanced monthly.
If a broker owns an apartment building, the monies from this property are to be handled separately from that of the clients and not deposited in a client trust account.
Fair Housing Laws
Fair housing laws - think eliminate hate in 68.
Most FAIR HOUSING laws come from the 1968 Civil Rights Act consisting of the:
- Federal Fair Housing Act (FFHA)
- Federal Open Housing Law.
The 13th Amendment of the United States Constitution is the foundation of much of the fair housing laws.
Discrimination against an individual is prohibited by the FFHA in:
- the sale, rental or advertisement of a residence
- offering in performing broker services
- making loans to buy build repair or improve a residence
- the purchase of real estate loans
- appraising real estate
A residence held out for sale, lease or refinance is defined to include:
- any building or structure occupied or designed to be occupied as a residence by one or more families
- any vacant land offered for sale or lease for the construction of a residential building or structure.
Discriminatory Actions of a broker or sales agent covered under the FFHA are actions taken against individuals based on that individuals:
- race or color
- national origin
- religion
- sex or sexual orientation or gender
- familial status or
- handicapped.
Under the Americans with Disabilities Act (ADA), an employer may not discriminate against a qualified person with a disability who seeks employment based on that person’s disability. Ada requires various amenities added two new construction, but generally does not require changes to existing buildings.
Many questions on the state exam will be asked about discrimination and what is ethically and legally correct. Consider the PROTECTED GROUPS covered by the laws, and recognize that the public policy goal is to have a colorblind society that treats all people the same.
These are some of the key points and terms concerning discrimination:
- REDLINING - A lender or insurance company refusing to do business with in a geographic area
- STEERING OR CHANNELING - a licensee attempting to show prospective buyers and tenants only properties they deem appropriate, rather than what the client wants to see
- BLOCKBUSTING and PANIC SELLING - an attempt to influence sales or rentals of real estate by exploiting the prejudices of property owners in a neighborhood. For example, a licensee attempting to secure a listing to sell a residential property by telling the seller the neighborhood demographics are changing, and they need to sell now before the change occurs
- IMPLICIT DESCRIMINITORY PRACTICES - those which are not openly discriminatory, but result in discriminatory effects
- complaints must be filed with the Department of Housing and Urban Development (HUD) within ONE YEAR of the discriminatory Act and
- victims of housing discrimination can enforce their rights by filing civil court cases in federal court, state or local courts or by filing a complaint with the HUD.
NOTE - Civil cases involve conflicts between people or businesses, typically over money. Cases usually involve personal injury, property damage, defamation (damaging someone’s reputation), breach of contract, and landlord and tenant disputes.
Additional California Fair Housing laws include:
- The Fair Employment and Housing Act - RUMFORD Act - think Ronald McDonald House - which prohibits discrimination in supplying housing accommodations and is overseen by the Department of Fair Employment and housing
- The Housing Financial Discrimination Act (Holden Act) which protects against discrimination in lending practices, think of the Holden Act is holding a bag of money, this means Lending.
- The Unruh Civil Rights Act which prohibits discrimination in business, think of it, don’t be RUde in business.
Truth in Advertising
Truth in Advertising
A licensee’s name and license number needs to be contained in all of their advertising intended to be the first point of contact with a potential client, including business cards.
Advertisements may not be misleading. Examples of misleading advertisements include:
- the failure to State material facts about the condition of the property or
- publishing a map that causes people to believe a property is closer to area amenities such as shopping and transportation than it actually is.
PUFFING refers to the exaggeration of a property feature that becomes misleading when a reasonable person perceives it as an absolute fact.
A BLIND ADVERTISING is an ad that neither names the broker nor states a licensed agent is involved.
BUYER GIFTS, such as movie tickets or wine, are permissible so long as they are:
- available to everyone and
- any obligation, such as attending a presentation, is clearly disclosed.
- the IRS allows for a $25 allotment for buyer gifts.
Record Keeping requirements
Record keeping requirements
The business and professions code requires records to be kept for 3 years, 3 years. Records include:
* copies of all listings
* trust account ledgers
* purchase agreements an
* all documents used in connection with a transaction.
Electronic records are permitted so long as they are non erasable, “write once, read many” (WORM) format. Be sure to back it up! The hard copies must be made available to the Department of Real Estate upon request.
Agency Supervision
Agent supervision
A broker is responsible for the actions of licensees working under their license. In order to demonstrate proper supervision, Brokers need to implement a combination of training and oversight.
The risks taken by a broker and their agents expose the broker to liability caused by an:
- error
- omission or
- misunderstanding brought about by the activities of the broker or their agents.
All acts carried out by a broker or their agents present the possibility that a client or other party will be injured financially.
It is the risk of causing these losses which the broker needs to control. Thus, Brokers need to maintain a risk Reduction Program to keep claims from clients and others under control.
As a buffer against liability, a broker can purchase negligence Assurance, called errors and omissions insurance, or more simply, E & O Insurance. With the payment of a premium, E & O Insurance protects Brokers from the full cost of Defending against a negligence claim made by a client or others.
Permitted activities of unlicensed sales assistants
Permitted activities of unlicensed sales assistants
Real estate licensees often hire unlicensed assistants to perform non-discretionary administrative activities. An unlicensed assistant may not perform any activity for which a real estate license is required. Thus, AN UNLICENSED ASSISTANT CANNOT COMMUNICATE PRICE AND TERMS with potential clients.
An unlicensed assistant May write up documents including contracts and comparative market analysis (CMAs), so long as they are reviewed by the broker. They may also post an open house provided they do not answer questions regarding the price and terms.
As with an office receptionist, they may take telephone calls but need to transfer the call to a licensed agent once it is determine the call is in response to a sign or advertisement. Further, they may not induce anyone to use their employee broker services, or make any solicitation regarding a specific property, transaction or product.*
Any unlicensed person may locate prospective buyers, sellers, borrowers, tenants or landlords for referral to a broker Services as an unlicensed finder for a fee.
Finders need to be hired under written contracts of employment. These employment contracts will delineate the finders responsibilities and limit their conduct activities permitted by regulations for their unlicensed statuses. Finders may be compensated by:
- a salary
- a percentage fee or
- a lump sum basis per closing
DRE jurisdiction and disciplinary actions
DRE jurisdiction and disciplinary actions
The California legislature created the Department of Real Estate (DRE) to oversee, regulate, administer and enforce the real estate law. Prior to July 2018, the DRE was known as the California Bureau of Real Estate (CalBRE) and was contained within the Department of Consumer Affairs. Most of the laws that relate to real estate practice are contained in the Business and Professions Code.
The chief officer of the DRE is the REAL ESTATE COMMISSIONER. The Real Estate Commissioners principal responsibility is to enforce all the real estate laws pertaining to real estate licensing and the Subdivided Lands Law.
The commissioner ensures that real estate licensees and members of the public dealing with licensees receive maximum protection.
As a means of enforcing licensing and subdivision laws, the commissioner promulgates rules and regulations addressing conduct of persons falling within the real estate law activities. The regulations are a part of the California Code of Regulations known as Title 10.
The DRE may fine, suspend or revoke a license. Legal actions such as fraud are dealt with by the JUSTICE DEPARTMENT.
The commissioner also has authority over developers through the Subdivided Lands Law.
The DRE does not hear commission disputes, which are settled by civil lawsuits.
Licensing, continuing education requirements and procedures
Licensing continuing ed requirements and procedures
To engage in the business of real estate as a real estate broker or agent, a person first obtains a real estate license issued by the DRE.
A real estate broker is a person who, for compensation or in expectation of compensation, engages in:
- negotiating the sale, purchase or exchange of real estate, leases or business opportunities
- soliciting listings from buyers or sellers
- leasing or renting, or offering to lease or rent, property on behalf of an owner or tenant
- collecting rent from Real Estate or business opportunities
- assisting in the purchase or lease of property owned by the state or federal government
- negotiating real property sales contracts or loans to be secured by real estate or business opportunities on behalf of lenders or Borrowers
- negotiating the sale or purchase of mobile homes
To be eligible for a broker or sales license, the applicant needs to
- be at least 18 years old
- be honest and truthful
- provide proof of legal residence in the United States
- make the application on the proper form prescribed by the DRE
- complete the mandatory education and
- pass the qualifying exam.
A real estate broker and real estate sales license is valid for four years from the date of issuance noted on the license certificate. Every TWO YEARS a licensee needs to complete THREE HOURS of Ethics education. Then, every FOUR years, all real estate brokers and sales agents need to complete at least 45 hours of continuing education to renew a license issued by the DRE.
The continuing education requirements for license renewal were legislated to help maintain and improve the level of competence of real estate brokers and agents.
The 45 hours of DRE approved Continuing Education real estate agents and Brokers need to complete consist of:
* AFTER courses - these are 5 mandatory 3-hour courses, totaling 15 hours in these subjects:
Agency
Fair housing
Trust funds
Ethics
Risk management, known collectively as AFTER
- CONSUMER PROTECTION courses - a minimum of 18 hours of consumer protection courses and
That equals 33 hours… the remaining 12 hours
* the remaining clock hours needed to complete the 45 hours under the categories of either consumer protection or consumer service (like prop mgmt, MLO, foreclosure).
If the licensee fails to renew prior to their expiration date, they enter a 2-year Grace period. they may not practice real estate when their license is expired. licensees can renew for a late fee.
California Real Estate Recovery Fund
California real estate Recovery Fund
The real estate Recovery Fund, also known as the Consumer Recovery Account, is available to individuals who have obtained a final court judgement against a real estate licensee for losses caused while acting as an agent and are unable to recover the Judgment from the licensee.
The judgement needs to be based on:
- fraud, misrepresentation or deceit
- conversion of trust funds or
- criminal restitution.
Recovery from the fund is limited to $50,000 for one transaction and $250,000 for any one licensee.
A licensee’s license will be suspended and will not be reinstated until the licensee repays any amounts paid from the real estate Recovery Fund to satisfy a judgment against them, plus interest.
General ethics
General Ethics
Ethics are a set of values which guide a licensees Behavior towards others. Ethical and legal guidelines are covered in the business and professions code.
For the purpose of taking a state exam, presume that any question that asks whether it is illegal or unethical should be presumed to be illegal.
Recognize that unusual contracts between clients and licensees, such as NET LISTINGS and listings with OPTONS TO PURCHASE, require a greater amount of transparency, full disclosure, on the part of the licensee. Note the optionor is bound by contract to sell, however the optionee is not bound by contract to buy.
A Net Listing is a lawsuit waiting to happen.
Pocket listing is holding a signed listing contract rather than submitting it for exposure to the general public on the multiple listing service, MLS, are unethical unless explicitly authorized by the seller. Fiduciary duty requires a maximum effort to advertise a property on behalf of the cellar. To hold the listing without releasing it on the MLS creates a conflict of interest since the salesperson’s purpose for doing so is to receive both sides of the commission.
A conflict of interest arises when a broker or their agent, acting on behalf of a client, has a competing professional or personal bias which hinders their ability to fulfill the fiduciary duties they have undertaken on behalf of their client.
In a professional relationship, the Brokers Financial objective of compensation for services rendered is not a conflict of interest.
However, fees and benefits derived from conflicting sources must be DISCLOSED to the client. This includes compensation in the form of:
- professional courtesies
- familial favors and
- preferential treatment by others towards the broker or their agent, for example use my commission towards their closing costs.
Technology
Technology.
Modern technology has allowed for more efficient record-keeping, documentation and marketing to be done by computer and through the internet.
Licensees need to remember the time requirements for the storage of Records 3 years and the need to be able to recover that data if required by courts or by a DRE audit. Brokers also need to recognize their responsibility for approving and supervising any internet marketing.
Property management
Property Management
The management of client properties requires a broker license. A broker has the authority to act as a property manager by virtue of their DRE license alone. There is no special Property Management license or endorsement required under California law.
For any exam questions concerning the relationship between the property manager and the Tenant, many of the fair housing principles discussed above apply.
A property manager has authority to take possession and control of income-producing real estate and manage its leases, rents, expenses, mortgage payments and accounting in expectation of a fee is established in a PROPERTY MANAGEMENT AGREEMENT. The property management agreement sets out the specific rights, responsibilities and expectations of the property manager and the landlord, and includes authorized activities, performance standards and expense limitations.
Compensation for the manager can be a flat rate or a percentage of monies collected. Compensation can never be a kickback or discount on material or Services paid by the owner.
A SECURITY DEPOSIT is security for the tenants default on obligations agreed to and the rental or lease agreement. The maximum security deposit equal two months rent for an unfurnished rental and three months rent for a furnace rental unit. No other consideration affects the maximum amount that can be demanded.
After a tenant has surrendered the unit, the property manager has 21 DAYS to return any unused deposit along with an explanation of how the monies were used. They have 15 days to contact them back, and 21 days to give their money back.
Commercial/Industrial/Income Properties
Commercial – industrial – income properties
While most real estate licensees are involved in residential property Sales and Leasing, no additional licensing requirements exist for the sale or leasing of commercial, industrial or income-producing properties.
Specialty areas
Specialty areas
A business opportunity is the sale or lease of the operations and Goodwill of an existing business Enterprise or opportunity. The arranging of a sale or purchase of a business opportunity is governed by the DRE. to receive a fee for the sale of a business opportunity, it is necessary to hold a real estate license unless the person receiving the fee is licensed as a Securities broker or dealer by California or the United States.
The sale of a business opportunity May consist of two transactions
- the sale of the business, including inventory, trade fixtures and Goodwill/ clientele ( classified as personal property, once again Goodwill and clientele are classified as personal property.
- the sale of the real property itself, whether a fee or leasehold interest, including the building and land.
The documents used in the sale of a business include:
- bill of sale - bill of sale is a legal document that transfers the ownership of an asset to a second party in exchange for value.
- Uniform Commercial Code Financing Statement (UCC-1) for the personal property and
- a deed for the transfer of the real property.
The transfer of more than one half of the business inventory of materials or goods to a person other than a customer of the business is called a BULK SALE.
In the sale of a retail business, other considerations exist, such as the buyers request for a certificate of clearance from the State Board of Equalization (SBOE) to assure the sales tax has been paid up to the close of escrow. Other considerations include approvals by government agencies and building departments, as well as acquisition of City business permits and permits by the Alcohol Beverage Control (ABC) in regards to alcohol licenses.
Franchises are business opportunities, as in the right to conduct business using the franchisor’s business plan.
An escrow is required if the business opportunity includes a liquor license.
Mobile homes have a unique legal status, being either real estate or personal property.
A mobile home, also known as a manufactured home, is a structure:
- at least 8 feet in width, 40 feet in length or more than 320 sq ft when transported in one or more sections
- built on a permanent chassis
- designed to be used as a dwelling with or without a permanent foundation.
A mobile home that meets the requirements and is attached to a permanent foundation loses its personal property status and becomes real property since it is now a permanent fixture or an improvement to the real estate.
The broker handling the sale of a mobile home that is considered real estate conduct themselves as they would on the sale of any type of Real Estate.
The rules for buying, selling, registering and encumbering mobile homes that are not considered real property differ from the rules for real estate sales
The government agency responsible for the registration of mobile homes is the California Department of Housing and Community Development (HCD). Mobile homes are registered with the HCD, unless the mobile home is considered real estate.
At the time of the original registration of the mobile home, the HCD creates a permanent title record for the mobile home. The real estate licensee can only handle sales of a mobile home subsequent to the original registration.
Transfer Disclosure Statement (TDS)
Transfer disclosure statement
The seller of a 124 unit residential property completes and delivers to a prospective buyer a statutory form called a Transfer Disclosure Statement (TDS), more generally called a Condition of Property Disclosure Statement.
The state-mandated disclosure form requires the seller to state all known material facts affecting the property’s value and desirability. The seller’s mandated use of the TDS requires it to be prepared with honesty and in good faith, whether or not a seller’s agent is retained to review its content.
Further, the listing agent is expected to make a thorough inspection of the property and report honestly what is observable. The licensee may not fill out the sellers portion of the form.
The TDS is required even when the property is being sold “as is” or when the property is sold by the owner without an agent, known as a For Sale By Owner (FSBO).
Transactions which is exempt the seller (but not the seller’s agent) from preparing and delivering the statutory TDS to the buyer include transfers:
- by court order, such as probate, eminent domain or bankruptcy
- buy judicial foreclosure or trustee sale
- on the resale of real estate owned property acquired by a lender on a deed-in-lieu of foreclosure, or by foreclosure
- from co-owner to co-owner
- from parent to child
- from spouse to spouse, including property settlements resulting from a dissolution of a marriage
- tax sale
- buy a reversion of unclaimed property to the state and
- from or to any government agency.
A buyer has 2 years, 2 years, to bring an action against a licensee for failure to disclose a known material fact.
If the TDS is belatedly delivered to the buyer, the buyer has:
* 3 DAYS AFTER PERSONAL DELIVERY or
* 5 DAYS AFTER MAILED DELIVERY
to terminate the offer in writing.
Natural Hazard Disclosure Statement (NHD)
Natural Hazard disclosure statements
Natural hazards come with a location of a parcel of real estate, not with the man-made aspects of the property.
The existence of a hazard due to the geographic location of a property affects its desirability, and thus it’s value to prospective buyers. Hazards, by their nature, limit a buyer’s ability to develop the property, obtain insurance or receive disaster relief.
Whether a seller lists the property with a broker or markets the property themselves, the seller must disclose to prospective buyers any natural hazards known to the seller, including those contained in public records.
To unify and streamline the disclosure by a seller and in turn the seller’s agent, for a uniform presentation to buyers concerning natural hazards which affect property, the California legislature created a statutory form entitled The Natural Hazard Disclosure Statement (NHD).
Locations where property might be subject to Natural hazards include:
- special flood Hazard areas, a federal designation
- potential flooding and inundation areas
- very high fire hazard severity zones
- Wildland fire areas
- earthquake fault zones
- seismic Hazard zones
Actual use of the NHD Statement by sellers and their agents is MANDATED on the sale of all types of properties, with some sellers, but not agents, being excluded. The Natural Hazard Disclosure handed to a prospective buyer is unrelated to the environmental hazards and physical deficiencies in the soil or property improvements. These hazards are disclosed by use of the Transfer Disclosure Statement.
Disclosure of material facts affecting property value
Disclosure of material facts affecting property value
This is primarily accomplished through the delivery of the Transfer Disclosure Statement (TDS) and the Natural Hazard Disclosure Statement.
The buyer is also to receive copies of the following booklets:
1* Environmental Hazards: A Guide for Homeowners, Buyers, Landlords and Tenants, on all 1 to 4 residential units
2* Protect Your Family from Lead in Your Home, on all pre-1978 1 to 4 residential units and
3* The Homeowner’s Guide to Earthquake Safety, on all pre-1960 1 to 4 residential units.
Further, if a property was built prior to 1978, the buyer must also receive a copy of the Federal Lead-Based Paint (LBP) Disclosure. Lead-based paint is any surface containing at least 1.0 mg per square centimeter of lead, or .5% lead by weight.
Generally, seller’s agents are not required to voluntarily disclose information to a potential buyer regarding a prior occupant whose death, from any cause, occurred on the real estate more than three years prior to the purchase offer, or who was afflicted with HIV or Aids. However, if a death on the property for some reason adversely affects the market price of the property, it must be disclosed.
However, on Direct inquiry by a buyer or the buyer’s agent about death on the property, the seller’s agent must disclose their knowledge of any deaths on the real estate, no matter when they occurred. And intentional concealment of a death after a buyer makes a direct inquiry is a breach of the seller’s agent general duty and the buyer’s agent’s agency duty.
Need for inspection and obtaining/verifying information
Need for inspection-obtaining-verifying information.
A seller’s agent owes a duty to the prospective buyer to conduct a reasonably diligent visual inspection of the property for defects which adversely affect the value of a listed property. The seller’s agent notes on the TDS any defects observable or known to the seller’s agent that are not already noted by the seller or are inconsistent with the sellers disclosures. The TDS is handed to prospective buyers as soon as practicable, putting the buyer and the buyer’s agent on notice of physical defects in the property which are observable are known to the seller or the seller’s broker and their agents.
All property information received from a seller is reviewed by the seller’s agent for inaccuracies or untruthful statements. , a seller’s agent need not investigate the sellers claims any further before using the information to market the property so long as they are not known to the agent to be false.
An agent can hire a home inspector to generate a Home Inspection Report (HIR) used to prepare the seller’s TDS, releasing the seller’s agent of liability. However, if the seller or seller’s agent is aware of material fact that is not reported by the inspector, neither is relieved of liability. Further, use of an HIR by the seller’s agent in preparation of the TDS does not relieve the agent from conducting their mandatory visual inspection.
Reports
Reports
There is a wealth of information for both consumers and licensees available through the DRE website. In the upper right hand corner above the search bar, the publication’s tab provides access to a full library of Publications and reports produced by the agency.
These Publications are categorized by:
- consumer Publications
- licensee / examinee Publications
- subdivision Publications.
Examinees are advised to review the DRS reference book - a real estate guide, which provides a helpful discussion of real estate principles and basic matters of practice. This date publication is an excellent resource for the purpose of preparing for the licensing exam.
Servicing diverse populations
Servicing Diverse Populations
Ultimately, fair housing and civil rights laws require agents to treat everyone the same, essentially being color-blind, without recognition of ethnicity, gender, or sexual preference. All exam questions of this nature are rooted in the same public policy objectives.
abandonment
Abandonment - a unilateral termination of a tenancy by forfeiture, meaning the tenant no longer is in the property- delivered by the landlord based on notices from the landlord.
advertising
Advertising - communication of marketing materials by licensees, such as property Flyers, classified ads or first Contact brochures.
Americans with Disability Act (ADA)
Americans with Disabilities Act (ADA) - Federal Regulations prohibiting an employer from discriminating against a qualified person based on a disability.
anti-trust
Antitrust - state and federal regulations that are designed to promote Fair competition in the marketplace.
blockbusting
Blockbusting - the prohibited practice of a real estate licensee inducing a property owner to list their property for sale in response to a change taking place in the neighborhood demographics.
bulk sale
Bulk sale - the transfer of more than one half of the inventory of a business’s materials or Goods to a person other than the business’s customers.
certificate of clearance
Certificate of clearance - a document certifying a property has been cleared of all infestations and all repairs necessary to prevent infestations have been completed.
Also from the State Board of Equalization (SBOE) which shows that an owner of a business has paid their sales and use tax.
commingling
Commingling - the mixing of personal funds with client or third-party funds held in trust.
commission
Commission - Most real estate agents make money through commissions. These are payments made directly to real estate brokers for services rendered in the sale or purchase of a property. A commission is a percentage of the property’s selling price, although it can also be a flat fee.
common area
Common area - an entire common interest subdivision, except the separate interest therein.
comparative market analysis (CMA)
Comparative Market Analysis (CMA) - a worksheet used by an agent to prepare an estimate of a property’s value for review with a property owner for the purpose of a listing presentation. The analysis represents the value of property for sale based on price has recently paid for similar properties.
