Real estate practice

Question 1

The real estate industry is considered to be the largest industry in the United States.

We can say this industry is made up of individuals and companies that acquire, develop, operate, manage, lease, dispose of, sell and market real property.

Real estate professionals perform a wide variety of real estate-related tasks that fall into one of several categories:

Answer 1

Acquisition and development
Investment
Management
Regulation
Removal
Sale or transfer

Real estate salespersons spend the bulk of their time and effort in the last of these categories - sale or transfer.

Question 2

Real Estate and the Economy
How do economic factors relate to real estate?

As with other goods and services in the marketplace, real estate is affected by:

Answer 2

Supply and demand
Pricing
Costs incurred in bringing the properties to market
Value aspects of desire, usefulness, scarcity and ability to pay

Question 3

Real estate is different from other goods and services for several reasons.

Answer 3

Land has special value because it is scarce.
Every piece of property is unlike any other piece. Therefore, it is distinctive in both appeal and value.
If demand in a geographical area drops, the supply (property) cannot be moved to a high demand area.
Property cannot be easily and quickly exchanged for cash. Buyers must be diligent in searching for and finding the “right” piece of property.
Real estate cannot respond quickly to changes in demand. If a geographical area is experiencing high demand, new homes can be constructed only at a certain pace, which may not meet the demand in a timely manner. Conversely, if demand in an area slows, sellers are put in a “wait and see” mode.
Properties are at the mercy of the local economy. If the economy picks up, sales increase. If it slows, sales decrease.

Question 4

The Real Estate Marketplace
The real estate market can vary significantly from one location to another. One area could have an overabundance of lower-priced homes with many more buyers than homes available, making it a sellers’ market in that location. Yet another location could have a number of higher-priced homes for sale and only a few buyers for that price range, making it a buyers’ market in that location.

One thing that helps both buyers and sellers with these differences is the availability of Multiple Listing Services (MLS).

Question 5

A Multiple Listing Service (MLS) is an organization of member brokers who share listing information with one another.

The MLS service usually distributes the information about the listings in print publications and online. Today’s electronic technology has made it possible for brokers to receive the most recent updates on a property, such as a change in price or a change in status from active to sold or withdrawn.

Brokers also receive very specific information, such as actual sale prices for properties and any special conditions of the sale.

Answer 5

The contractual obligations between the brokers of the MLS organization can vary a great deal. However, most organizations state that the commission will be divided between the listing and selling broker when the property sells. The terms of that distribution can vary from broker to broker. The MLS usually requires that a broker register a new listing within a specified amount of time.

Question 6

Most real estate salespersons engage in the business of listing or selling residential property.

Residential property is defined as land or improved property with buildings designed for humans to live in, such as single-family homes, multi-family homes, apartments, vacation homes or condominiums.

However, several other kinds of property exist in the real estate market.

Industrial
Commercial
Agricultural
Special-purpose
Recreational
Investment

Answer 6

Industrial property is land used for industrial purposes, such as warehouses, factories and power plants.

Commercial property refers to income-producing property, such as office buildings, restaurants, shopping centers, hotels and motels, parking lots and stores. Some industrial properties may also fall into this category.

Agricultural property is defined as land used primarily for growing crops or raising livestock, such as farms, pastureland, orchards and timberland.

Special purpose property is property that has a unique use to the persons who own and use it, such as churches, hospitals, schools and government buildings.

Recreational property is land used for leisure activities, such as parks, forests, time-shares and campgrounds.

Investment property is defined as any property that is being held as an investment to generate income or profit. Any residential, commercial or industrial property may be considered an investment property. However, typically, most single-family residences are not considered investment properties, unless they are non-owner occupied.

Question 7

Type of property

Clients

Geography

Business type

Transactions

Auction sales

Mortgage loans

Answer 7

Type of property - An agent can specialize in residential, commercial, industrial or land (lots, acreage or farms) transactions.

Clients - Rather than deal with all types of clients, some agents decide to represent sellers and landlords exclusively or buyers and tenants exclusively.

Geography - In a large market area, it can be difficult to keep track of the specifics on all the properties for sale. Some agents may choose to define a “region” that includes certain streets, subdivisions or collections of neighborhoods.

Business type - A broker or agent could choose to focus exclusively on one type of business client, for example, hospital clients or fast food restaurants.

Transactions - Documents for many types of transactions are unique to that particular transaction. Within an agency, one agent could become a specialist in leases and subleases, another in exchanges, another in options, and yet another in commercial sales.

Auction sales - More and more, properties are being sold at auction. A broker could choose to deal only in auctions.

Mortgage loans - Some licensees act as lenders or agents to make or arrange loans. We’ll talk more about these licensees in a later unit.

Question 8

What economic factors affect the real estate market as well as other goods and services?

How are properties affected by the local economy?

List three kinds of property in the real estate market.

Jim has decided that he will learn all he can about the new subdivisions at the west end of town. Jim has decided to specialize in what area of real estate?

Answer 8

What economic factors affect the real estate market as well as other goods and services?
Supply and demand
Pricing
Costs incurred in bringing the properties to market
Value aspects of desire, usefulness, scarcity and ability to pay

How are properties affected by the local economy?

If the economy picks up, sales increase. If it slows, sales decrease.

List three kinds of property in the real estate market.

Any three of these six: industrial, commercial, agricultural, special purpose, recreational, investment

Jim has decided that he will learn all he can about the new subdivisions at the west end of town. Jim has decided to specialize in what area of real estate?

Geography

Question 9

Here is a list of important things to look for when choosing a broker/firm:

Answer 9

Quality training programs are available in-house and locally.
The broker encourages and supports training.
The broker provides a mentor program and/or office assistance for the licensees.
The firm has a large selection of books, audios, videos and CDs on hand for licensee use.
The office is dedicated to your desired specialty area.
The firm employs a number of successful agents.
The agents have a long history with the firm.
The firm feels like a “good fit” for you.

Question 10

It’s as important for you to interview the broker as it is for the broker to interview you. Be sure you get information about

Answer 10

The costs of being a member of the firm, such as monthly fees.
Who pays what expenses, such as business cards, signs, advertising, MLS fees, association memberships, etc.
Specific requirements for licensees, such as types of insurance coverage.
What training the broker will provide, if any.
How commissions are split, such as straight commission versus percentage splits. Note: We’ll explain more about commission splits on the next screen.
Other benefits the broker may offer, such as paying for seminars or offering a reduced commission to a licensee for a personal home purchase.

Question 11

Many brokers choose to pay the salesperson a percentage share of the commission from a transaction.

Many companies have a payment plan that is “graduated.” In this type of program, a licensee may start out at a lower percentage payment, but then graduate to higher percentage rates as his or her production increases.

Other companies have a 100% commission plan. In this situation, the licensee pays a monthly fee to the company to cover the costs of things like office space, telephones, office equipment and supervision. In return, the agent receives 100% of the commission from any sales he or she negotiates. Most often in these programs, the salesperson is responsible for the costs of advertising and promotion.

Question 12

A salesperson is licensed to perform transactions on behalf of his or her licensed broker. The broker is ultimately responsible for the actions of his or her affiliated licensees. Therefore, the salespersons must perform all activities in the name of the broker.

A salesperson may engage in only those activities assigned by the broker. And the salesperson may receive compensation for performed activities ONLY from the employing broker.

Since the salesperson is acting as the agent of the broker, he or she has no authority to make contracts with or accept compensation from any other party - including another broker, the buyer, the seller or a referral agency.

Question 13

Broker-Salesperson Relationships

An employee
An independent contractor
The difference between the two is an issue of control, as established by income tax laws.

An employee works under the supervision and control of the broker.

An independent contractor is hired to perform certain acts, but the broker cannot control how the salesperson performs those acts.

Answer 13

Employee
If a broker hires a salesperson as an employee, he or she can require the salesperson to follow rules regarding such things as:

Working hours
Office duty
Meetings
Dress code
In addition, the broker must withhold income tax, Social Security tax and Medicare tax from the salesperson’s wages.

Most real estate assistants, both licensed and unlicensed, are considered employees for income tax purposes.

Independent Contractor
On the other hand, if a salesperson is hired as an independent contractor, it is quite a different story.

A broker can tell the independent contractor what to do, but not how to do it. In this case, the broker cannot dictate working hours or require the salesperson to have office duty at specific times or attend meetings.

A salesperson operating as an independent contractor must pay his or her own income tax, Social Security tax and Medicare tax. In addition, the salesperson cannot receive anything from the broker that would make it look like he or she is an employee, such as health insurance or a pension plan.

Most licensees are independent contractors.

Question 14

Tax Issues
Federal tax laws require what’s called the safe harbor test to establish that a person is indeed an independent contractor.

Note: If the IRS does an audit, the agreement will not be worth much if the actions of the broker and salesperson look more like an employer-employee relationship.

Answer 14

The three conditions of the safe harbor test are:

The person must be properly licensed.
Gross income must be based on production and not on hours worked.
A written agreement must exist which clearly states the independent contractor status.
In addition to the above conditions, the broker must supervise the salesperson as an independent contractor and not as an employee.

Broker-Salesperson Relationships
The way the IRS treats a salesperson - as either an employee or an independent contractor - applies to the issues of income tax and withholding obligations. It has nothing to do with the broker’s liability for any wrongful acts performed by the licensee.

The California Code requires that brokers supervise all their salespeople, regardless of their income tax classification. Even though a salesperson may be classified as an independent contractor, the broker is still responsible for the licensee’s professional actions.

Question 15

Because brokers could be held responsible for any wrongful acts performed by a salesperson they employ, many brokers require that licensees carry:

Answer 15

Automobile liability insurance in high amounts, naming the broker as an insured on the policy.
Errors and omissions insurance, covering the broker and salespersons for negligent acts (but not intentional acts).
If a licensee working for a broker is a property manager having access to the money of others, the broker may get a fidelity bond to protect himself or herself from any embezzlement by such a licensee.

It also seems that brokers are not protected from any injury claims that may be made by any of their independent contractors; so it would be wise for brokers to carry workers’ compensation coverage for everyone who works for them. California law requires brokers to carry workers’ compensation insurance for their agents.

Question 16

Written Employment Agreements
Regardless of a licensee’s status as employee or independent contractor, the broker must enter into a written agreement with each salesperson and broker-salesperson.

Answer 16

The agreement must be dated and signed and should clearly:

State each person’s responsibilities to the other.
Discuss the broker’s supervision.
Describe the licensee’s duties.
Clarify the licensee’s compensation program.
Note: It would be wise for a broker to have a standardized contract that has been reviewed by an attorney to be sure it is in compliance with federal law.

Question 17

Planning and Setting Goals - Daily Activities
You should devote some of each day to these and other similar activities.

Answer 17

Returning phone calls.
Developing new leads.
Answering mail and e-mail.
Reviewing new listings.
Checking on sold properties.
Calling potential clients.*
Preparing for listing presentations.
Showing property, if applicable.
* Please consult and comply with the “National Do Not Call Registry” guidelines before making any solicitation calls. You can get information at http://www.ftc.gov.

Question 18

These other activities will contribute to your success as a salesperson; so don’t overlook them.

Develop your “sphere of influence” by contacting friends, family members, neighbors, church members, club members, past co-workers, etc., and letting them know you are a real estate agent.
Preview your company’s listings to become more familiar with the amenities and increase your expertise.
Spend time learning about other company’s listings in your geographic area or your area of specialty.
Familiarize yourself with your office’s policies and procedures manual. If your broker has one, it will probably include information on confidentiality expectations, use of personal assistants, general office procedures, advertising requirements, how to work with clients, what records licensees are required to keep and how to handle both in-office and third party disputes.
Practice filling out the forms your company uses so that you will not falter when working with clients.
Learn how to use all of the machines at your firm - fax machine, copy machine, voice mail system, etc.
Become proficient using the computer, especially for e-mail and MLS searches.

Learn what you need to know about real property taxes and the tax benefits of home ownership.
Make sure you have the proper equipment for success - business cards, a cell phone and a clean and comfortable car, and consider getting a personal digital assistant (PDA).
Equip your car with important items, such as maps, for sale signs, telephone book, extra pens and forms, tape measure, flashlight, small tools, calculator and digital camera.
Look for and attend real estate training sessions and seminars. Many of these are sponsored by professional real estate associations.
Read professional trade magazines and newspapers published by real estate groups.
Attend business-related courses or seminars at a local college or business school.
Research real estate topics on the Internet.

Question 19

Belonging to a trade association can add credibility to you as a real estate professional. Associations exist at the national, state and local levels.

National Association of REALTORS® (NAR)

National Association of Real Estate Brokers (NAREB)

National Association of Hispanic Real Estate Professionals (NAHREP)

Asian Real Estate Association of America (AREAA)

Answer 19

NAR is the largest and most prestigious real estate organization in the world. NAR works for legislation that is favorable to members of the public, and to the industry and it enforces professional standards of conduct through its Code of Ethics. Only members of NAR and its state divisions may use the trademark of REALTOR® when presenting themselves to the public. NAR requires its members to take a mandatory ethics course every four years. Failure to take the course results in suspension from the organization until the training has been completed.

NAREB is the oldest and largest minority trade association in the United States. It was formed in 1947 and is made up primarily of African-American real estate brokers. Members have the designation of “realtist.” NAREB has local boards in most large cities. A “realtist” must belong to both the local board and the national organization. Many “realtists” are also “REALTORS®”.

NAHREP is primarily made up of Hispanic members who meet and work toward real estate goals that are beneficial to the Hispanic population.

AREAA is committed to improving success and business opportunities for real estate licensees who serve the Asian American community.

Question 20

California Association of REALTORS® (CAR)

CAR is the state division of NAR.

Answer 20

This organization describes its purpose as being “to serve its membership in developing and promoting programs and services that will enhance the members’ freedom and ability to conduct their individual businesses successfully with integrity and competency, and through collective action, to promote the preservation of real property rights.”

CAR offers many seminars and educational opportunities to its members. Most successful real estate professionals in California are members of this organization. It would be wise for you to consider becoming a member.

Question 21

Local associations of real estate professionals exist in communities to provide services such as:

Educational materials
Seminars
Multiple listing services
Members may be full members, associates or affiliates.

IMPORTANT NOTE

A real estate licensee is not required to become a member of any of these organizations - local, state or national. Any licensee who is not an association member will be referred to simply as a broker or salesperson.

Question 22

Business and Professional Code, Disciplinary Provisions for Discriminatory Acts, Code Section 125.6. (a)

Regulations of Real Estate Commission

Article 10, Section 6 pgs. 246 - 249
Article 15 pgs. 317 - 322
Business and Professions Code

Section 10145 pg. 35
Section 10148 pg. 38
Section 10176 pg. 68

Question 23

Much of the information incorporated into the professional code of ethics has come from:

Some of the duties to clients outlined in the Code include:

Some of the duties to the public outlined in the Code include:

Answer 23

Three sources:

Federal and state laws which focus on anti-discrimination laws and fair trade practices.
Real estate licensing regulation on the state level dealing primarily with agency issues and disclosures.
Self-regulation by real estate associations that set standards for professional conduct.

Duties to clients:

Protecting and promoting the interests of the client.
Avoiding exaggeration, misrepresentation and the concealment of pertinent facts.
Cooperating with other brokers.
Informing sellers or purchasers of the licensee’s interest in a property.
Accepting commissions.
Handling trust funds.

Duties to the public:

Providing equal, non-discriminatory services to all persons.
Refraining from providing professional services outside the licensee’s field of expertise.
Being truthful and clear in advertising.
Avoiding activities that might constitute the practice of law.
Refraining from false or misleading statements about competitors.

Question 24

Civil rights laws in the real estate industry are designed to create a situation in which persons having similar financial means will have similar choices when attempting to buy, lease, rent, or finance property. The laws are also designed to allow everyone an opportunity to live in the place of his or her choice by creating an open and unbiased market.

Fair Housing law first began with the Civil Rights Act of 1866

Title VIII of the Civil Rights Act of 1968

In 1974, the Housing and Community Development Act

In 1987, a Supreme Court decision expanded the definition of race

And in 1988, the Fair Housing Amendments Act

Answer 24

Civil Rights Act of 1866, which prohibited discrimination in housing based on race.

Title VIII of the Civil Rights Act of 1968 prohibited discrimination in housing based on race, color, religion or national origin. In 1968, the Supreme Court in Jones v. Mayer ruled that discrimination on the basis of race is strictly prohibited. This means there can be NO EXEMPTIONS OR EXCEPTIONS with regard to race.

In 1974, the Housing and Community Development Act added sex to the list.

In 1987, a Supreme Court decision expanded the definition of race to include ancestry.

And in 1988, the Fair Housing Amendments Act added handicap and familial status.

Question 25

Americans with Disabilities Act
Another important piece of legislation that licensees should become familiar with is the Americans with Disabilities Act (ADA), which became effective in 1992.

Brokers should evaluate how this applies to physical changes they might need to make to their office space to accommodate both employees and clients.

In addition, licensees should alert their commercial and investor clients to the existence of the law and the need to have their leases professionally evaluated and their offices inspected for compliance

Answer 25

ADA mandates that persons with disabilities have equal access to jobs, public accommodations, government services, public transportation and telecommunications. It prohibits discrimination in the “full and equal enjoyment of goods and services” provided by public places, including hotels, shopping centers and offices, and it applies to the lease and operation of commercial facilities.

Question 26

Fair Housing Law - Protected Classes

Fair Housing Law - Prohibited Acts

NOTE: Brokers are encouraged to display the Equal Housing Opportunity poster in their offices. If the poster is not displayed, a broker could be held liable and be required to prove that a performed act was not discriminatory.

Answer 26

Protected classes of the Federal Fair Housing Act are:

Race
Religion
Color
National origin
Sex
Ancestry
Handicap
Familial status

Prohibited Acts
Refusing to sell, rent or negotiate with any person.
Changing terms, conditions or services for different individuals as a means of discrimination.
Stating or advertising that the property is restricted.
Telling persons that a property is not for sale or rent when it is.
Denying membership in any multiple listing service (MLS) or any broker’s organization.
Using discriminatory advertising.

Making a profit by inducing owners to sell by telling them that persons of a protected class are moving into a neighborhood (known as blockbusting, panic peddling or panic selling).
Channeling homebuyers toward or away from homes in certain neighborhoods (also called steering) .
Giving different terms for loans to buy or repair, or denying a loan altogether.
Restricting the number of loans in certain areas of a community (also known as redlining).

Question 27

The Federal exemptions to the 1968-88 laws are:

note: There are absolutely no exemptions, exceptions or excuses for racial discrimination.

Answer 27

The sale or rental of a single family home by an owner is exempt if the owner does not own more than three homes at one time, does not use discriminatory advertising and does not use a real estate agent.
Rental of units in an owner-occupied, one-to-four- family dwelling is exempt, as long as the owner does not use an agent to secure tenants

Religious organizations may restrict housing to members of the same religious organization. Non-profit religious organizations can add a surcharge to the sale or rental of a property to a person that does not belong to their religious group, as long as the membership in the group is not limited by race, color or national origin.
Private clubs may restrict rental or occupancy of their dwellings to members only, as long as the dwellings are not commercially operated. However, the club may not discriminate in its membership requirements.
Senior citizen housing is exempt if the residents are at least 62 years old or 80% of the units are occupied by at least one person 55 or older

Question 28

Fair Housing Enforcement
The federal Fair Housing Act is administered by the Office of Fair Housing and Equal Opportunity under the direction of the secretary of Housing and Urban Development (HUD).

Any person who believes he or she has been discriminated against may file a complaint with HUD.

When HUD receives a complaint, it will start an investigation.

During the investigation period, HUD can attempt to resolve the complaint by so called conciliation.

If the case goes to an administrative hearing, HUD attorneys will litigate the case for the person filing the complaint.

An Administrative Law Judge (ALJ) will consider and decides that discrimination occurred, the respondent can be ordered:

In addition to or instead of filing a complaint with HUD, a person may file a suit in a state or federal court.

If the court finds that discrimination has occurred, the person filing the complaint may be entitled to:

Answer 28

Any person who believes he or she has been discriminated against may file a complaint with HUD within one (1) year of the alleged act. HUD can also initiate a complaint on its own.

When HUD receives a complaint, it will start an investigation. Within 100 days, HUD will determine if there is reasonable cause to charge discrimination or it will dismiss the complaint.

During the investigation period, HUD can attempt to resolve the complaint by getting assurance from the person against whom the complaint was filed that he or she will remedy the alleged violation. This is called conciliation.

If the case goes to an administrative hearing, HUD attorneys will litigate the case for the person filing the complaint. That person may intervene in the case and choose to be represented by his or her own attorney.

An Administrative Law Judge (ALJ) will consider evidence from both the complainant and the respondent. If the ALJ decides that discrimination occurred, the respondent can be ordered:

To compensate for actual damages, including humiliation, pain and suffering.
To provide injunctive or other equitable relief; for example, to make the housing available to the complainant.
To pay the Federal Government a civil penalty to vindicate the public interest. The maximum penalties are $16,000 for a first violation and $65,000 for a third violation within seven years.
To pay reasonable attorney’s fees and costs.

In addition to or instead of filing a complaint with HUD, a person may file a suit in a state or federal court within two (2) years of the alleged violation.

If the court finds that discrimination has occurred, the person filing the complaint may be entitled to:

Injunctive relief
Actual damages
There is no cap on punitive damages

Question 29

California Fair Housing
California also has some fair housing laws and regulations that deal with discrimination.

Unruh Act

Rumford Fair Housing Act

Note: Before any remedies would be awarded, the aggrieved party would have to waive all rights under the Unruh Act.

Holden Act

Financial institutions, such as banks and credit unions, are subject to the Unruh Civil Rights Act and housing Financial Discrimination Act, also known as the Holden Act,

Answer 29

The Unruh Civil Rights Act provides protection from discrimination by all business establishments in California, including housing and public accommodations. The Unruh Civil Rights Act protects people from being discriminated against because of their sex, race, color, religion, ancestry, national origin, disability, medical condition, marital status or sexual orientation.

Housing designated to meet the physical and social needs of senior citizens is exempt from this act.

The Unruh Act provides for remedies which could include out-of-pocket expenses, a cease and desist order, or damages for emotional distress. Court-ordered damages may include a maximum of three times the amount of actual damages, but not less than $250.

Persons who believe they have experienced discrimination may file a complaint, which must be filed within one year of the alleged discrimination.

The Fair Employment and Housing Act (also known as the Rumford Fair Housing Act) prohibits:

Discrimination in the sale, rental, lease, negotiation or financing of housing based on race, color, religion, sex, marital status, familial status, disability, national origin, ancestry, sexual orientation or source of income.
Eviction of a person in retaliation for seeking to uphold the rights under this act.
Refusal to reasonably accommodate a handicapped or disabled person.
Exemptions to this act include owner-occupied housing with no more than one boarder and some non-commercial, religious, fraternal and charitable housing.

Remedies for violations could include:

Injunctions
Actual or punitive damages
Civil penalties

Holden Act
Prohibits financial institutions from discriminating in loan activities on the basis of race, color, religion, marital status, national origin, ancestry or sex. Financial institutions are also prohibited from discriminating based on a neighborhood’s make-up (redlining).

Violations of the Holden Act may be filed with the California Secretary of Business, Transportation and Housing, who must investigate the complaints and take remedial action as required by law.

Question 30

California Code of Conduct - Discriminatory Practices

The discriminatory practices based on race, color, sex, religion, ancestry, handicap, marital status or national origin that California prohibits include the following activities, some of which we discussed earlier under the federal law.

Answer 30

Refusing to negotiate for the sale, rental or financing.

Refusing or failing to show, rent, sell or finance.

Discriminating against any person in the sale or purchase, collection or payments or performance of services in connection with contracts or loans.

Discriminating in the terms, conditions or privileges of sale, rental or financing.

Discriminating in processing applications or referring prospects to other licensees because they belong to a protected class.

Representing real property as not available for inspection, sale or rental.

Processing an application more slowly or otherwise delaying a transaction.

Making an effort to encourage discrimination in the showing, sale, lease or financing of property.

Refusing to assist another licensee in negotiating a sale, rental or financing.

Making an effort to obstruct, retard or discourage a purchase, lease or financing in a certain neighborhood.

Performing acts or making statements which express or imply a limitation, preference or discrimination.
Coercing, intimidating, threatening or interfering with a person’s enjoyment of a property or retaliating against someone who filed a fair housing complaint.
Soliciting sales, rentals or listings restrictively.

Maintaining restrictive waiting lists.

Seeking to discourage or prevent transactions because of the presence or absence of members of a protected class.

Making an effort to discourage or prevent a sale or rental through the representation of actual or alleged community opposition.

Representing desirability of particular properties.
Refusing to accept listings.

Agreeing not to show property.

Advertising or causing advertising to be done in a manner that indicates discrimination.

Using wording that indicates preferential treatment
Selectively advertising in a way that will cause discrimination.

Maintaining different pricing, rent, cleaning or security deposit structures for different groups.

Financing in a discriminatory manner.

Discriminating in prices.

Discriminating when providing management services.

Discriminating against owners, occupants, visitors or guests.

Making an effort to encourage discrimination among other licensees or their employees.

Establishing or implementing discriminatory rules in multiple listing and other services.

Assisting anyone who intends to discriminate.

The California Code also prohibits panic selling, also called blockbusting, In other words, a licensee cannot induce someone to sell by telling him or her that persons of a certain protected class are moving into the neighborhood.

Question 31

Trust Funds
When a client gives a broker a deposit for the purchase of a property, the broker must do one of these things.

If a broker deposits the funds of others in a business or personal account or holds the funds without authorization, he or she would be guilty of commingling – a license law violation – and could be subject to disciplinary action.

However, a broker is permitted to hold an uncashed check at the buyer’s request before an offer is accepted or at the seller’s request after the offer is accepted.

The California Code outlines several important rules for handling trust funds.

Answer 31

The broker must do one of these things

Give the funds to the broker’s principal.
Deposit the funds directly into escrow.
Deposit the funds into his or her trust account.
All funds deposited into a trust account must be maintained in that account until the broker disburses those funds according to the instructions of the person who is entitled to receive the funds.

The California Code outlines several important rules for handling trust funds.

Trust funds must be deposited within three (3) business days of the broker or the broker’s salesperson receiving the funds.
The trust account must be a demand (non-interest-bearing) account. However, under certain conditions, the funds could be kept in an interest-bearing account at the written request of the owner of the funds as long as the broker or the broker’s licensee does not benefit from the interest.
A broker may deposit money into the trust account to cover reasonable service charges on the account, but this amount cannot exceed $200.

Any broker-owned funds, such as earned commissions, must be disbursed from the account within 25 days after deposit.
The broker must maintain a record of the receipt and disbursal of all the funds in the account, including interest, if applicable.
Trust accounts must be reconciled monthly, except in months when there was no activity.
The account must be available for inspection by the real estate commissioner.
All trust account records must be kept for three (3) years.

Question 32

Agency and Other Mandatory Disclosures

Law Reading Assignments:

CA Civil Code Section

Section 1102.1 - 1102.6
Section 1103 (Article 7)
Section 1710.2
Section 2079.1 - 2079.15
Section 2937
Section 2956 -2963

Business and Professions Code

Section 10176 pg. 68
Section 11018.1 - 11018.6 pg. 139

California Health and Safey Code

Section 35800

Question 33

The word agency defines the basic relationship between a broker and the person he or she represents in a transaction.

A huge body of common and statutory law controls the rights and duties of agents with regard to their clients. The general law of agency applies to all business transactions. In addition, each state’s licensing laws directly affect the agency relationship among licensees, clients and the public.

Even though agency law is separate from contract law, the two often come together in interpreting relationships between licensees and the persons they represent.

Note: Even though the term “agent” is often used interchangeably with the terms licensee, broker or salesperson, in California an agent is defined as a person licensed as a real estate broker. Licensees who work under the supervision of the broker are designated as associate licensees.

Question 34

An agency relationship is created when a person (buyer or seller), also called the principal, delegates to another person, called the agent, the right to act on his or her behalf in business transactions with third parties.

Several principles govern that relationship.

Answer 34

Both parties must consent to the relationship.
Both parties must agree to form the relationship.
The relationship is fiduciary - meaning the agent owes certain duties to the principal.

Question 35

If the principal in the relationship is the seller, then the broker (or the associate licensee representing the broker) is the seller’s agent. Conversely, if the principal in the relationship is the buyer, the broker (or the associate licensee representing the broker) is the buyer’s agent.

We’ll discuss the forms that agents use to create these relationships later in this unit.

Other agent terms that are frequently used include:

Listing agent - This is the licensee who lists the seller’s property.
Selling agent - This is the licensee who brings the buyer to complete the transaction.

Question 36

An agency relationship is based on authorization and mutual consent. It is not based on compensation.

Answer 36

Compensation can be negotiated - as in a listing agreement. An agency relationship can exist that defines no compensation - as in the case of a buyer’s agency agreement, where the agent gets compensation from the seller, not his buyer client.

The agency relationship is not determined by who pays the commission. In the past, in most residential transactions, the seller was responsible for paying the commission to the broker. But since the advent of the buyer agency agreement, other arrangements are becoming more common. The seller and buyer could agree to share the responsibility of paying his or her own agent.

Question 37

Legal Implications

The state licensing law imposes statutory requirements on licensees acting as agents, which obligate them to perform in ways that protect their clients’ interests in real estate transactions.

Answer 37

In other words, entering into an agency agreement is a legal action, which could make an agent legally liable if he or she violates the duties owed to the client.

An agent has a responsibility to inform the client of any facts or information that could affect the client’s position in a transaction.

Question 38

Fiduciary Duties
An agency relationship imposes fiduciary duties on both the client and the agent, but mostly in the agent. These duties are both moral and ethical, but also legal - they are the law of agency.

Answer 38

The duties that the agent owes his or her principal are:

Care
Obedience
Accountability
Loyalty
Disclosure or Notice

These are often referred to by the acronym COALD or COALN

Question 39

The law expects an agent to do his or her job with a reasonable degree of care, skill and diligence. Since the principal hires an agent because of his or her expertise in the field, the principal expects the agent to use that expertise on the principal’s behalf.

If the agent represents the seller, exercising care and skill includes:

Helping the seller set a realistic asking price.
Discovering and disclosing facts that affect the seller.
Presenting contracts properly.
Marketing the property effectively.
Helping the seller evaluate purchase offers.

If the agent represents the buyer, exercising care and skill includes:

Helping the buyer locate appropriate housing.
Evaluating property values and property conditions.
Determining financing alternatives.
Presenting offers and counteroffers with the buyer’s interests in mind.
If an agent fails to exert reasonable efforts to represent his client’s interest, the agent could be found guilty of negligence in court. An agent is liable to the principal for any loss that results from carelessness or negligence.

Question 40

Fiduciary Duties - Obedience
Obedience requires that the agent act in good faith and obey the principal’s directions as outlined in the contract, as long as they are legal.

For example, an agent may follow the principal’s instructions stating that the home may not be shown on Sundays. However, an agent may not follow any directives that violate Fair Housing laws or that instruct the agent to conceal a defect in the property.

If a directive is illegal and the agent cannot get the client to remove it from the contract, the agent should withdraw from the relationship.

Question 41

Fiduciary Duties - Accounting
An agent must be able to account for all monies, documents and other property he or she receives from the principal.

Under California law, a broker is required to handle and account for trust funds following the guidelines we covered in an earlier unit.

This includes keeping copies of the trust account records for three (3) years.

Question 42

Fiduciary Duties - Loyalty
The duty of loyalty requires the agent to place the client’s interests above those of all others, including his or her own. An agent must negotiate agreements without considering the amount of compensation he or she will receive.

Confidentiality about the principal’s affairs is an important aspect of loyalty.

If the agent represents the seller, he or she may not disclose without the seller’s express permission such things as:

Client’s willingness to accept an offer lower than the asking price.
Client’s anxiousness to sell.
However, the agent must disclose material facts about the property.

If the agent represents the buyer, he or she may not disclose without the buyer’s express permission such things as:

Client’s willingness to pay more than asking price.
Client’s need or desire to move quickly.
Note: The duty of confidentiality extends beyond the termination of the relationship. No personal information gained during the term of the agreement can ever be disclosed to another party. Confidential information must always remain confidential.

Question 43

Fiduciary Duties - Disclosure
An agent is bound to inform the client of all material facts that might affect the client’s interests in the transaction. This includes both the facts that the agent knows and those that the agent should have known. This rule became case law in California in 1984 with the Easton v. Strassburger decision.

An agent is responsible for discovering anything that might be deemed important to his client in making an informed decision, whether or not they are favorable to the client’s position. An agent could be held liable for damages if he or she failed to disclose such information.

California requires agents to conduct a competent and diligent inspection of property they list and disclose the results to buyers. We’ll discuss this requirement in greater detail later in this unit.

An agent for a seller has a duty to disclose such things as:

Purchase offers.
Who the prospective purchasers are and if the agent has a relationship with them in any way.
Ability of the purchaser to complete the transaction.
Ability of the purchaser to offer a higher price.
Purchaser’s intention to resell the property for a profit.
An agent for the buyer has a duty to disclose such things as:

Deficiencies in the property.
Any contract provision of financing terms that don’t suit the buyer’s interests.
How long the property has been listed.
Why the seller is selling.

Question 44

Agency Relationships - Dual Agency
However, California law allows dual agency if the buyer and seller are informed of the situation and give their written consent.

Before signing written disclosure forms giving permission for dual agency, both the buyer and the seller must get enough information to make an informed choice as to whether or not they really want to enter into this arrangement.

For example, Sally enters into a buyer’s agency agreement with Walt. At some point during the relationship, Sally becomes interested in one of Walt’s listings. Walt must then disclose to both parties that he has agency relationships with both of them. If both parties agree to move forward, they sign an agreement to that effect and a dual agency is created.

Sometimes a dual agency is created unintentionally or through careless behavior by an agent.

For example, listing agent Hal shows one of his listings to a prospective buyer, Gail. Gail is very excited and obviously interested in making an offer, but she cannot meet the seller’s asking price. Hal suggests to Gail that he might be able to persuade the seller to accept her offer. This action on Hal’s part could lead Gail to believe that Hal is her advocate.

An action like this could create an implied agency with Gail and violate Hal’s duties of loyalty to his seller. In this situation, neither party has been informed of the situation, resulting in an undisclosed or divided dual agency.

Undisclosed dual agency is a violation of license law and could ultimately result in a lawsuit for damages or disciplinary action by the commission.

Question 45

Designated Agency

In order to avoid the potential conflict of interest that dual agency can present, some states allow designated agency. Designated agency means that a broker, with the written consent of the principal, may designate one or more licensees to act exclusively as the agent of the seller or landlord, and designate one or more licensees to act exclusively as the agent of the buyer or tenant in the same transaction.

Transaction Broker

A transaction broker is not an agent for either party. These licensees work as facilitators or intermediaries to assist the buyer and seller in the property transfer. Even though they owe no fiduciary responsibilities to their customers, they are obligated to disclose known material defects in the property.

Note: Neither of these agency relationships is recognized in California.

Question 46

Disclosures
In our discussion about fiduciary duties, we said that licensees are required to inform the client of all material facts, which are those facts that would affect the client’s interests in the transaction.

Disclosure helps to build good relationships between the licensees and their principals and serves to protect the principals. Full disclosure also satisfies California disclosure laws.

Certain disclosures in California are mandated - meaning the information is required by law to be passed from one party to another. Some of these disclosures are required for agents; others are required for principals in the transaction.

Answer 46

California Disclosures
Some of the more common disclosure forms that you need to be familiar with include:

Disclosure Regarding Real Estate Agency Relationships
Real Estate Transfer Disclosure Statement
Agent’s Inspection Disclosure
Residential Earthquake Hazards Report
Natural Hazard Disclosure Statement
Lead-Based Paint Disclosure

Question 47

Agency Disclosure
Our earlier discussion about agency relationships revealed that an agent (broker) can enter into a single or dual agency relationship with a client. This relationship must be in writing.

Licensees will use California’s Disclosure Regarding Real Estate Agency Relationships form with their clients.

Click on this link to see and print a copy of the form.
Disclosure Regarding Real Estate Agency Relationships*

The licensee must clearly and thoroughly explain to his or her prospective client the three types of agent relationships available - seller’s agent, buyer’s agent or dual agent.
Once the client fully understands these terms and the duties associated with each, he or she can decide which relationship will work best to meet his or her needs.
The client and licensee will confirm the receipt of the disclosure by signing the form.
Note: If the client elects the dual agent option, the agent must have the buyer sign one copy of the form and the seller sign another copy of the form.

Question 48

Agency Disclosure - When to Disclose
California Code defines these rules for providing the agency disclosure.

The listing agent must provide the disclosure to the sellerprior to securing the listing agreement.
The selling agent must provide the disclosure to the seller “as soon as practicable” prior to presenting a purchase offer.
If the selling agent does not deal directly with the seller, the listing agent may deliver the form prepared by the selling agent to the seller (or the selling agent can mail it via certified mail).
The selling agent must provide the disclosure to the buyer “as soon as practicable” prior to the execution of the buyer’s offer to purchase.

Question 49

Real Estate Transfer Disclosure Statement
Any person who is selling a one-to-four-unit property must provide the buyer with a written disclosure statement that describes the condition of the property.

This Real Estate Transfer Disclosure Statement is a two-page statement that includes the following sections:

Part A - Identifies the items contained in the home and whether or not they are operational.
Part B - Describes any significant defects or malfunctions in the home.
Part C - Identifies miscellaneous items such as known environmental hazards, easements or encroachments, improvements or alterations to the property, zoning or neighborhood concerns.
Click on this link to see and print a copy of this form.
Real Estate Transfer Disclosure Statement*

* Note: Reprinted with permission, CALIFORNIA ASSOCIATION OF REALTORS®. Endorsement not implied.

The buyer must receive a copy of this disclosure statement prior to the execution of an offer to purchase, delivered as follows:

If there is only one agent involved in the transaction, that agent is responsible for the delivery.
If there are two agents, the selling agent is responsible for delivery.
If the seller has not completed a property disclosure statement, the buyer should be informed in writing that he or she has the right to receive this disclosure.

Important Note: If the disclosure is delivered after the execution of the offer to purchase, the buyer has the right to cancel the offer within three days after delivery in person (or five days if delivered by mail) by writing a notice of termination and delivering it to the seller or the seller’s agent.

Answer 49

Real Estate Transfer Disclosure Statement Exemptions
Several situations are exempt from this disclosure rule. The exemptions include the following transfers.

Requiring a public report
Pursuant to a court order
By default or foreclosure
By a fiduciary administering a decedent’s estate
From one co-owner to one or more other co-owners
Between spouses or blood relatives
Between spouses in a divorce
By the state Controller
As a result of failure to pay property taxes
To or from any government entity

Question 50

Agent’s Inspection Disclosure
As we discussed earlier in this unit, California agents are required to conduct a competent and diligent visual inspection of a one-to-four-unit property and disclose the material facts to a prospective buyer.

The inspection does not include areas that would be deemed as reasonably or normally inaccessible.

The agent reports the results of the inspection on the Agent’s Inspection Disclosure. This form is actually page 3 of the Real Estate Transfer Disclosure Statement. Section III of the form must be completed if the seller is represented by an agent. Section IV is completed only if the agent who brings the offer is not the seller’s agent.

There are no exemptions allowed under this rule. If an agent does not comply, a buyer has two (2) years from the date of possession to file suit.

Answer 50

One of the problems with the Agent’s Inspection Disclosure is that it does not cover very specific areas, leaving agents to guess at what they should inspect. It’s a good idea to use the Seller’s portion of the Real Estate Transfer Disclosure Statement as a guide in doing your inspection.

Important things to look for include:

Structural Defects - Look for things like cracks in foundations, inside or outside walls or around doors and windows. Structural damage might also be the culprit if floors are bulging or creak excessively or if doors don’t close correctly.
Deterioration - Look for things like warping floors or porches, rotting or cracked windows and doors, or the wearing away of concrete or mortar.

Other important items to inspect for include:

Water Damage - Look for stains on ceilings, evidence of mold, rotting wood, peeling inside paint, rust or mildew stains or problems with the roof.

Insect Damage - Look for the telltale signs of ants or termites, such as piles of wood shavings or “tunnels” of mud that move across concrete to wood or from the ground to a wooden surface.
Remember that the agent must also disclose other items that can influence the buyer’s decision to purchase the property, such as proximity to an earthquake fault or location in a flood plain.

It would be wise for agents to learn everything they can about a property and its surrounding area to help ward off any potential future liability for nondisclosure.

In 1993, the California Seismic Safety Commission published a booklet titled The Homeowner’s Guide to Earthquake Safety to help buyers, sellers and agents become familiar with the issues surrounding earthquake safety in California.

The booklet contains a form called the Residential Earthquake Hazards Report, which the seller fills out and signs and is subsequently signed by the buyer as acknowledgement of receipt. The form has seven questions which will help determine the home’s earthquake weaknesse

Question 51

The California Association of REALTORS® published a Combined Hazards Book, which contains three books in one:
•The Residential Environmental Hazards Guide - includes a toxic mold update. ◦Protect Your Family From Lead In Your Home - Prepared by the Federal Environmental Protection Agency and required for any homes built prior to 1978. ■The Homeowners Guide to Earthquake Safety - includes the gas shutoff valve update.

The California Civil Code states that if the buyer receives a copy of The Homeowners Guide to Earthquake Safety, the seller and seller’s agent are not required to furnish any additional information, unless they have actual knowledge of hazards affecting the property. The information in the booklet will be considered adequate information for the buyer.

Question 52

Commercial Earthquake Hazards
Sellers of commercial property must give prospective buyers a copy of the booklet Commercial Property Owner’s Guide to Earthquake Safety, which covers the legal requirement for selling commercial property in California.

The California Civil Code states that if the buyer receives a copy of Commercial Property Owner’s Guide to Earthquake Safety, the seller and seller’s agent are not required to furnish any additional information, unless they have actual knowledge of hazards on or affecting the property. The information in the booklet will be considered adequate information for the buyer.

Question 53

Natural Hazard Disclosure Statement
California Civil Code requires that a seller and his or her agent disclose information about the property with regard to the issue of natural hazards.

The Natural Hazard Disclosure Statement lists the items that the seller must disclose.

Click on this link to see and print a copy of this form.
Natural Hazard Disclosure Statement*

The seller must indicate if the property is in one or more of these areas.

Special flood hazard area (designated by Federal Emergency Management Area)
Area of potential flooding
Very high fire hazard zone
State fire responsibility area (Wildland area that may contain substantial forest fire risks and hazards)
Earthquake fault zone
Seismic hazard zone
Note: The seller must disclose the above information if either the seller or the agent has actual knowledge about the hazard or if information about the property’s location in a hazard area is on a map or contained in a list that is available in the office of the county recorder, county assessor or county planning agency.

Question 54

Environment Hazards Disclosure
California mandates that prospective homeowners be informed about environmental hazards that are located on or affect residential property.

The Real Estate Transfer Disclosure Statement that we talked about on an earlier screen addresses the issue of environmental hazards in Part C.

The California Civil Code states that if the buyer receives a copy of the Residential Environmental Hazards Guide, the seller and seller’s agent are not required to furnish any additional information, unless they have actual knowledge of environmental hazards on the property. The information in the booklet will be considered adequate information for the buyer.

Question 55

Lead Based-Paint Disclosure
The federal government requires that owners of homes built prior to 1978 provide to a prospective buyer a booklet entitled Protect Your Family from Lead in Your Home.

The California publication Combined Hazards Book contains this booklet and therefore meets the federal requirement.

Sellers or landlords of residences built prior to 1978 must fill out, sign and provide to the prospective buyer or tenant the Lead-Based Paint and Lead-Based Paint Hazards Disclosure form regardless of whether or not the owner knows if lead-based paint was ever used on the property.

Question 56

When must a licensee provide an agency disclosure to a prospective client?

The listing agent must provide the disclosure to the seller prior to securing the listing agreement.
The selling agent must provide the disclosure to the seller “as soon as practicable” prior to presenting a purchaseoffer.
The selling agent must provide the disclosure to the buyer”as soon as practicable” prior to the execution of the buyer’s offer to purchase.

What is the Real Estate Transfer Disclosure Statement and who is responsible for providing it?

It is a statement that describes the condition of the property in detail. The seller must complete it, sign it and provide it to the buyer, but there is a section on page three of the form that the seller’s agent (if there is one) must complete and sign.

Agent Jim needs to do a visual inspection of his listing. What kinds of things should he be looking for?

Structural defects, deterioration, water damage and insect damage.

Why should agent Grace give her client a Combined Hazards Book?

This book contains three booklets which meet the seller’s and agent’s requirements for disclosure of earthquake hazards, lead-based paint and other environmental hazards.

Question 57

Other Mandatory Disclosures
Military Ordnance

California Code requires that if a seller knows that his or her residential property is located within one mile of a former military training site, the seller must inform the potential buyer in writing that the ordnance site may contain ammunition or explosives.

Sex Offender Database

California requires that every sales contract or lease contain a notice which states that information about sex offenders registered under Megan’s Law is available to the public on an Internet web site maintained by the Department of Justice at www.meganslaw.ca.gov. Depending on the offender’s criminal history, the database information will include the offender’s current address or the community and zip code in which he or she resides.

Question 58

Disclosures Not Required
Some information is not required to be disclosed.

Death

Sellers or their agents are not required to disclose any death that happened on a property more than three years before the offer to purchase was made. It would be wise to disclose any unnatural deaths that happened within the past three years or to answer truthfully any direct question about a death posed by the prospective buyer regardless of how long ago it occurred.

AIDS

Sellers or their agents are not required to disclose that a former owner or occupant ever had AIDS or died from it.

Question 59

Mello-Roos Bond Disclosure
The Mello-Roos Community Facilities Act of 1982 authorized the formation of community facilities districts, the issuance of bonds, and the levying of special taxes to finance certain public facilities and services. The bonds are issued for streets, sewers and the like in new developments.

The seller of a one-to-four-unit residential property subject to a Mello-Roos bond must make a good faith effort to obtain a disclosure notice from the district concerning the special tax. The seller must give the notice to a prospective buyer.

If the seller fails to provide the notice prior to signing a sales contract or lease, the buyer or tenant has the right to cancel the contract within three days after the receipt of the notice.

Question 60

Subdivision Disclosures
Any person intending to offer subdivided lands for sale or lease must apply for and obtain a public report from the Department of Real Estate.

The public report discloses to prospective buyers pertinent facts about a subdivision. The report may include information about utilities and water, roads, soil and geologic conditions, title, zoning and use, hazards and any financial arrangements for completion of the subdivision.

Purchasers must sign a receipt indicating that they have received and accepted the report before they enter into the purchase transaction. The subdivider must keep the receipt for three years.

Question 61

Common Interest Subdivision
A common interest subdivision is one in which the owners own or lease an individual lot or unit and have an undivided interest in the common areas of the development. Examples of common interest subdivisions include planned developments, stock cooperatives, condominiums or community apartment projects.

When selling lots or units in a common interest subdivision, the subdivider or agentmust give the buyer the public report and also a statement called Common Interest Development General Information.

This statement explains what ownership in a common interest development means with regard to such things as mandatory membership in the association, rights and remedies under the governing documents, payment of assessments, ownership and use of the recreational facilities, responsibilities and powers of the governing body, voting rights and other rights belonging to the members/owners.

When selling or leasing lots in a common interest subdivision requiring a public report prior to the offering, the subdivider or agent must make the following documents available to the prospective buyer or lessee before the execution of an offer to purchase or lease.

The declaration of covenants, conditions, and restrictions
The articles of incorporation and bylaws for the association
Any other instrument which establishes or defines the common, mutual, and reciprocal rights and responsibilities of the owners or lessees of interests in the development
The current budget, including estimated reserves and related financial statements of the association
A statement prepared by the governing body of the association regarding any outstanding delinquent assessments and related charges levied by the association against the subdivision interest the prospective buyer or lessee is considering buying or leasing
All of the above documents must be delivered to the prospective buyer or lessee prior to close of escrow.

Question 62

Right to Rescind
Previously in this unit when discussing various types of disclosures, we have mentioned that under certain circumstances, a buyer may have the right to rescind (or cancel) a contract. These are known as rescission rights.

Purchasers in two types of subdivisions have an unqualified right of rescission.

Timeshare buyers have a right to rescind the purchase within seven (7) calendar days after receiving the public report or after signing the purchase contract, whichever is later.
Undivided interest buyers have a right to rescind the purchase by midnight of the third calendar day following the day the purchaser executed the offer to purchase.

Question 63

Financing Disclosures
Seller Financing Disclosure

Due to complaints that were filed about difficulties that arose with seller financing, California enacted laws to protect potential buyers involved in seller carryback loans.

The seller financing arrangements on all one-to-four-unit residences must be disclosed to both the seller and the buyer using the Seller Financing Addendum and Disclosure form. The units do not need to be owner-occupied for the rule to apply.

When a seller is carrying back a note, the disclosure requirement falls to the person who is “arranging the credit.” This is usually the real estate agent or possibly an attorney who is involved in the transaction

When there is more than one arranger of credit, the agent who brought the purchase offer - the selling agent - is the one responsible for making the disclosure, unless it is otherwisestipulated in writing.

This disclosure must be made before any note is executed. The seller, buyer and arranger must all sign the disclosure. The seller and buyer must receive copies of the signed disclosure and the arranger must keep a copy on file for three years.

Question 64

Mortgage Loan Disclosure Statement

Any real estate broker who solicits or negotiates loans on behalf of borrowers or lenders which will be secured directly or collaterally by liens on real property must deliver a written mortgage loan disclosure statement (MLDS) to the borrower within three business days of receipt of the borrower’s written loan application.

Adjustable Rate Loan Disclosure

A lender offering adjustable-rate residential mortgage loans must provide prospective borrowers with a copy of the most recent Federal Reserve Board publication called Consumer Handbook on Adjustable-Rate Mortgages.

Question 65

Real Estate Settlement Procedures Act

The Real Estate Settlement Procedures Act (RESPA) requires that borrowers receive various disclosures regarding the proposed loan transaction.

For federally-related loans, the lender or mortgage broker must furnish a good faith estimate of closing costs within three days of the loan application and provide a booklet published by the Department of Housing and Urban Development (HUD).
The lender or mortgage broker must provide a written Servicing Disclosure Statement which indicates whether he/she expects that someone else will be servicing the loan. This disclosure must be given at the time of the loan application or within three business days.
One business day before the settlement or the anticipated close of the loan escrow, the borrower has the right to inspect the proposed HUD-1 Settlement Statement which must be given to the borrower on or before settlement.
RESPA also requires that borrowers receive disclosures about business relationships that may exist among lenders/creditors and settlement service providers

Question 66

Truth in Lending Act and Regulation Z

The Truth in Lending Act requires a creditor to furnish certain disclosures to the consumer before making a contract for a loan.

Regulation Z requires that creditors make certain disclosures for real property secured loans. The disclosures include:

Amount financed
Finance charge
Annual percentage rate
Total of payments
Payment schedule
Truth in Lending allows the consumer the right to rescind the contract until midnight of the third business day following the completion of the loan.

Question 67

Notice of Transfer of Loan Servicing

If a loan is secured by a one-to-four-unit property, the lender must notify the borrower when the loan collection is transferred to another entity.

Notice of Adverse Action - (Equal Credit Opportunity Act)

A lender or creditor who denies an application for credit must provide the applicant with a statement of reasons or a written notification of the applicant’s right to obtain such a statement, within 30 days after receiving the completed loan application.

Housing Financial Discrimination Act (Holden Act)

At the time of the loan application, lenders must notify all prospective borrowers of their rights under the Holden Act and its prohibitions against discriminatory practices by lenders.

Question 68

California Real Estate Law Disclosure Chart
To help members understand the complex disclosure requirements in California, the California Association of REALTORS® has compiled and published the California Real Estate Law Disclosure Chart.

Question 69

What required disclosure is a result of Megan’s Law?

California requires that every sales contract or lease contain a notice which states that information about sex offenders registered under Megan’s Law is available to the public on an Internet web site maintained by the Department of Justice.

Which disclosures are NOT required to be made when selling residential property?

Natural deaths, unnatural deaths occurring more than three years prior to the sale and information about residents having AIDS or dying from AIDS.

What is a public report and when must it be provided?

A public report is a statement from the Department of Real Estate that discloses to prospective buyers pertinent facts about a subdivision. Purchasers must sign a receipt indicating that they have received and accepted the report before they enter into the purchase transaction.

What does the Real Estate Settlement Procedures Act require of lenders?

That they provide a good faith estimate of closing costs within three days of the loan application; that they let the borrower know in writing if they expect someone else to service the loan; that they give the HUD-1 Settlement Statement to the buyer at or before settlement and allow the borrower to inspect the statement one business day before closing.

Question 70

Prospecting
What do we mean by prospecting?

Prospecting is actively looking for and finding prospects - those owners who may be interested in selling their property or potential buyers who are interested in purchasing property.

Prospecting is critical to your success in the real estate business; so it’s an ongoing task. Therefore, it’s important to develop strategies that will work for you in your efforts to find and interest potential customers and clients.

A number of prospecting techniques exist. Some will feel comfortable to you from the start; others will take some “getting used to”; still others you may try out and eventually decide to drop from your repertoire. Whatever the case, realize that you will need a positive attitude and a variety of techniques at your disposal to keep a steady stream of prospects available.

Answer 70

a number of prospecting approaches exist. Let’s take a look at these three.

Knocking on Doors
Telephone Calls
Direct Mail

Expired Listings
Expired listings are a good source of potential listings. When you contact owners of expired listings, ask first if they have relisted the property. If they have not, then you can provide them with information about yourself and your company and explain how you believe you can successfully sell the property.

There are several reasons why properties do not sell.

Agents do not market correctly.
The price is not right.
The property doesn’t present well - needs repairs or “cleaning up.”
You can assess why you think a property did not sell, decide on the approach you would take and present that approach to the owners. If your approach sounds good, the owners will be more likely to give you the listing.

Using the Newspaper to Prospect
Newspapers are a good source of prospective customers and there is a wide variety of papers to choose from. Many newspaper publishers in large cities have smaller “regional” weekly editions of their papers in addition to the regular daily editions.

Many communities have “ad sheet” papers full of display and classified advertising, which range in size from a few pages to booklets of 40 pages or more.

Newspapers are published for small groups of people like condominium owners or owners of manufactured or mobile homes. Ethnic groups have their own newspapers.

All of these publications are sources to help you develop leads.

Question 71

FSBO Ads
Many owners think that they will save several thousand dollars in commissions by selling their homes themselves. Some have had bad experiences with former agents; so they have decided to take a different route. You can show them ways that working with an agent will be in their best interests.

Once you have established a list of FSBOs to contact, you can take any of the approaches we talked about earlier - face contact, telephone call or direct mail - whichever method works best for you.

A particularly good approach for FSBOs is to develop and offer a “kit,” which contains all of the information and forms an owner would need when selling the property. You can suggest a meeting with the owners to review the forms.

As you know, the volume and complexity of the forms can be overwhelming. Often when a licensee has completed the review, the owners see that selling the property themselves is not as easy as it might have seemed and are more than willing to consider the alternative of listing the property.

If this is not the case, you can offer to make yourself available to answer future questions about any of the forms or disclosures. Typically owners will call with questions, giving you additional opportunities to build rapport with them. If they learn they can rely on you, you may eventually get the listing anyway.

Question 72

Rental Ads
Oftentimes single-family homes are advertised for rent when the owner has tried to sell the home - with or without an agent - and the effort was unsuccessful.

We all know that most people cannot afford to own more than one residence unless the ownership is for investment purposes. So many owners are forced to rent in order to get income to pay the mortgage on the property.

Rental Wanted ads are also a good source of leads. People who are looking to rent can often be shown how easy it would be for them to purchase instead. This is particularly true if the potential renter is a “transferee” from another location who was a former homeowner. Most former owners make unhappy renters.

Question 73

Special Announcements
Special announcements in the features section of the newspaper are good places to find leads.

Wedding Announcements

More and more frequently, young couples just starting out are choosing to buy rather than rent. Also, if either or both of the partners were living at home before the marriage, there might be an opportunity to discover if the parents are ready to “downsize.”

If the newlywed couple is an older couple who owned separate homes, not only is there an opportunity for a new purchase as a couple, but there may also be an opportunity for the sale of either or both of the “pre-wedding” homes.

Birth Announcements

Is this the first child of a couple currently living in an apartment? Is it a second or third child of a current homeowner? If so, maybe the family needs a bigger home.

Promotions and Job Transfers

The kind of promotion that would generate a newspaper notice usually indicates a substantial salary increase and maybe the desire for a newer home that reflects the change in status.

A job transfer could signal the need to sell a current property.

Question 74

Legal Notices
Most newspapers have a section containing notices of legal actions. Some communities even have a separate paper dedicated to legal notices only.

So what kinds of legal notices could potentially provide leads?

Foreclosures - A quick sale could help ward off the foreclosure.
Divorces - Since California is a community property state, many homes in a divorce may have to be sold to divide the assets.
Bankruptcies - Often people involved in a bankruptcy want to relocate and start fresh.

Death Notices - Family members may need to sell a home to settle an estate.
Probates - People who inherit property may wish to “cash out.”
Building Permits - If a person is building a new home, he or she may have one to sell at a future date.
Code Violations - If making repairs will be a costly or overwhelming endeavor, the owner may be anxious or willing to sell.
Tax Delinquencies - This kind of notice could indicate an owner in financial difficulty. Selling might be a good option.

Question 75

What do you need to check if you want to conduct a door-to-door canvass in a neighborhood?

To see if door-to-door solicitation is allowed and if it requires a permit.

Name one advantage and one disadvantage of telephone contacts. (See answers on screens 6 and 7.)

Advantage - Can make several calls in a relatively short period of time.

Disadvantage - Many homeowners are turned off by phone solicitations and may hang up quickly.

What is a good approach to use when contacting the owner of an expired listing?

Find out why the listing did not sell and approach the owners with a plan that will address that issue and correct it for a successful sale.

What are the major areas of newspaper leads?

FSBO ads
Rental ads
Special announcements
Legal notices

Question 76

Using the Internet
Most sites have searches that will accept the visitor’s home preference criteria and then find current company listings as well as any external Multiple Listing Service listings that meet the criteria.

Many sites have links from a standard photo to a gallery of additional photos, detailed property information, and sometimes virtual tours.

Some sites generate potential leads by allowing visitors to register to receive information about new listings or to receive tip sheets on various aspects of buying or selling.

Using your site to “sell yourself” can help generate new leads for you. It’s important to have pages on your site that contain information that will interest both buyers and sellers.

Sections that would interest potential sellers include things like:

Lists of successfully sold properties
List of services you offer specifically for sellers, such as a free competitive market analysis
Staging a home for sale
Curb appeal list
Getting the highest price
Inspection tips
Improvements that pay off

Sections that would interest buyers include:

Your current listings
List of services you offer specifically for buyers, such as help in finding a lender
Information on current interest rates
Loan application checklist
Mortgage loan calculator
Information on available loan programs
Home buyer checklist
Getting pre-qualified
Closing cost information
Financing terms defined

Question 77

Other Sources for Finding Buyers and Sellers
You can get leads to potential buyers and/or sellers from:

Local Chamber of Commerce - Ask if the chamber will let you know when they get inquiries from persons who may be relocating to the area.

Builders - They need real estate professionals to help market their properties, but they can also give you leads to clients that must sell their existing home before they can purchase the new one.

Open Houses - The people that you meet while hosting an open house can become future clients - either sellers who must sell their current home before they can purchase another or buyers who aren’t interested in the home you’re hosting, but are still looking to buy.

Friends - Personal friends, acquaintances and people that you routinely do business with (doctors, grocers, automotive repair people, etc.) can be future clients. As we mentioned in an earlier unit, develop your “sphere of influence” by contacting everyone you know to tell them you’re in real estate.

Neighbors - Again, make sure you let all your neighbors know you’re in real estate. Send letters; hand out your business cards; talk to the parents of your children’s friends. Then when a neighbor or a neighbor’s family member is looking to buy or sell, it will be your sign that goes up in the yard and not another agent’s.

Current Sellers - When you get a listing, find out what your sellers plan to do. They could easily become buyer clients if they want to purchase another home in the area.

Former Buyers - When you get a new listing, check with any former buyer clients in that area to see if they have friends, relatives or acquaintances that might be interested in purchasing the property

Question 78

Community Involvement
Another important way to generate leads is through community involvement. This can be a win-win situation for both you and the community groups you serve. The group gets a helping hand for their activities and you get the satisfaction of helping AND the potential for future clients.

Organizations you could become involved with include:

Churches
Boy Scouts or Girl Scouts
Educational groups
The school PTA
Chamber of Commerce
Recreational clubs
Neighborhood associations
Alumni groups

Question 79

Developing a Prospecting Plan
Here are some examples of tasks you can put in your prospecting plan.

Conduct one open house each week.
Check the Sunday paper each week for FSBO ads and make contact on Monday.
Check the rental ads in the Wednesday supplement each week and make contact on Thursday.
Have lunch once a week with someone who can provide or has provided a lead.
This is just a short list of examples. Your list could and should be much longer. As you work your plan, you can evaluate the effectiveness of your activities. Drop the ones that don’t work and expand the ones that do.

The important thing is to keep track of your results so that you can become more effective at attracting both sellers and buyers.

Question 80

What kind of newspaper ad could you place to solicit a listing?

An ad that is looking for a specific kind of home for one of your buyer clients.

List four sections of an Internet website that might be of particular appeal to prospective buyers.

Your current listings
List of services you offer specifically for buyers, such as help in finding a lender
Information on current interest rates
Mortgage loan calculator
(See screen 26 for other correct answers.)

How can a builder help you generate leads?

Builders can refer to you their customers who need to sell their current homes.

Why is it important to have a written prospecting plan?

It will keep you on track and provide a guideline for deciding what parts of the plan need to be changed or expanded.

Question 81

Pricing a Property
It is up to a seller to decide what he or she wants to set as the asking price for his or her property. However, since most sellers don’t have all the information they would need to make an informed decision, they usually depend on the expertise of the agent to help them arrive at a reasonable price.

The two common methods that can help determine a reasonable asking price for a property are:

Competitive market analysis (CMA) – also referred to as a comparative market analysis
Appraisal
In either case, a seller is trying to find out the property’s fair market value - which is the most probable price a property should bring in an open and competitive market.

Let’s take a more detailed look at how a competitive market analysis is done.

Question 82

Competitive Market Analysis
When doing a competitive market analysis, an agent does a comparison of properties that are similar to the seller’s property in location, size, style, age and amenities. The agent looks at

Prices of properties currently on the market
Prices of recently sold properties
Properties that were listed and did not sell
Most of the data needed to do a thorough analysis can be downloaded from a multiple listing service very quickly. Some services even include pictures of the subject properties in the download. You can obtain additional information from company records, other brokers, county records, and appraisers and title companies – although compiling the data from those sources will take more time than an MLS download.

Question 83

Properties Currently for Sale
When examining current for-sale properties, be sure to choose properties that are as close to the subject property in size, amenities, etc. as possible, so that the owners will be more likely to accept the data and your suggestions for a realistic asking price.

Looking at properties that are currently for sale gives the sellers an idea of what the competition is asking for their homes. It gives them a clear picture of the asking prices buyers are seeing for similar homes. However, it’s important for the owners to realize that asking price is not always a good indicator of the actual selling price of a property. Often properties currently for sale have inflated asking prices that few buyers would be inclined to pay.

Recently Sold Property
This list of properties should include similar properties that have sold within the past three to six months. The more recent the sale, the more reliable the data.

You should include a minimum of three properties in this category. If you don’t have enough data, you’ll have to increase your time frame. But keep in mind that the further back you go, the less reliable the data becomes and the more “adjusting” you’ll have to do to account for changes in the market over that time period.

This list shows the actual sales price for the property. This data should have the most impact on what the subject property is realistically worth in the current market

Expired Properties Not Sold
This is the list of similar properties that failed to sell. Just like the list of recently sold properties, the more recent the expiration date is, the more reliable the data becomes for comparison purposes.

Most often a property fails to sell because of overpricing. Your data may show that the asking prices of these homes were significantly higher than the selling prices of the homes on the recently-sold list. This is powerful information to share with a potential seller. You can use this information to support your suggestions for a more realistic listing price. You can also argue that setting an asking price that is too high will waste valuable time in securing the sale for the owners.

Question 84

Estimated Seller Proceeds
Sellers will welcome an estimate of what they will net from the sale of their home. That will keep them from having any unexpected surprises.

You should prepare the estimate using the listing price as the estimated selling price. Then do an estimate of all the costs the owners are apt to incur. It’s better to overestimate the costs just a bit, so that if there ARE any surprises, they will be pleasant ones.

The California Association of REALTORS® has a form that is an excellent one to use for this task. It’s called the Estimated Seller’s Proceeds form. It’s easy for a seller to understand and very complete.

Note: If the seller changes the listing price or an offer comes in that is different from the listing price, you will need to complete a new Estimated Seller’s Proceeds form.

Question 85

What is a competitive market analysis?

A comparison of properties that are similar to the seller’s property in location, size, style, age and amenities

When looking at homes currently for sale, what is important for a prospective seller to know about asking price?

Asking price is not always a good indicator of the actual selling price of a property.

When preparing a competitive market analysis, what categories of homes should an agent research?

Properties currently for sale
Recently sold properties
Expired properties not sold

What is a good method for estimating what a seller will net from the sale of the property?

Obtain and complete the Estimated Seller’s Proceeds form, which estimates all of the costs involved in the sale and subtracts that amount from the estimated selling price.

Question 86

The Listing Presentation
When trying to obtain a listing agreement, either from an owner to sell a property or from a buyer to act as his or her agent, you are in reality participating in an interview to sell the skills and expertise of yourself and your company.

Having a listing presentation manual is a valuable tool when conducting such interviews. It will make your presentation to the potential client look much more professional, as well as help you process through your presentation effectively.

Note: There are software programs available that can help with the preparation of a presentation manual. You can get more information at the Realty Tools, Inc. website - http://www.realtytools.com.

Question 87

Listing Presentation Manual
The manual you prepare for sellers will be different from your manual for buyers, but they may have some of the same pages of information. Three-ring binders containing documents housed in sheet protectors make nice manuals which can be updated easily as needed.

Each of your manuals should contain sections that address:

Why the person should enter into a listing agreement.
Why the listing agreement should be with you and your company.
Note: A presentation manual is NOT a substitute for a good verbal presentation. It’s a support piece to use as reinforcement for what you are saying to the prospective client.

Question 88

Listing Presentation Manual for Sellers
Most people who want to sell a property are concerned with how much it will cost them to do so. For that reason, many owners start out with the idea in their heads that it will be more cost-effective to try to sell the property themselves.

They often don’t realize all of the benefits associated with listing the property with an agent. So it’s your job to make them aware of those benefits.

Even though most owners choose not to do a For Sale By Owner (FSBO), when making your presentation you should approach them as if that were the choice they were seriously considering.

The beginning of your presentation manual for sellers should address the question of who saves money when an owner sells on his own.

Even though owners believe that if they sell themselves they will be saving a hefty commission, the reality is that most buyers who contact FSBOs expect to get a bargain.

Often buyers view FSBO homes as distress sales, so they offer prices that are much lower than what an owner would reasonably accept.

In addition, sellers must realize that even though they usually pay the agent’s commission when listing their home, those funds are coming from what the buyer is bringing to closing and not directly from the seller’s pocket.

Another area the presentation manual should address is the kind of buyer that may be attracted to FSBO homes.

As we mentioned, buyers who look at FSBOs are often looking for a bargain. In addition, they may not even be qualified for a loan. A seller could get an offer and enter into a contract only to have the deal fall through because the buyer couldn’t secure financing.

Another issue to examine is one of safety. When owners show their own homes, they allow strangers into their homes, not knowing if these buyers are seriously looking to buy, just looking for decorating ideas or “casing” the home for a future “visit.”

Answer 88

Once you have addressed these issues, it’s time to talk to the owners about the benefits of listing a home with an agent.

You can have a bulleted list that covers such benefits as:

Advice on getting the home ready for sale
Advertising and promotion activities paid for by agents
Assistance with completing required forms and disclosures
Qualification of all prospective buyers
Multiple listing service advantages
Advice on offers and counteroffers
Help during the escrow period

Question 89

The second part of your presentation addresses the question of why the prospective clients should choose you and your firm to list their property.

You must build a rapport with them that demonstrates you as a caring and problem-solving individual and your firm as experienced, trustworthy and capable of doing the job for them.

Make sure you listen to what the owners say and answer any questions they may have carefully and thoughtfully. Do not be condescending in any way or you may be paving the way for the next agent who comes along.

This portion of your presentation should cover your skills and expertise as well as your firm’s. It would be a good idea to have a short resume in your manual, as well as a copy to leave with the owners.

To cover what your firm has to offer, you could include any or all of the following items:

A picture of your office
A group picture of all the licensees
Information on your multiple listing service
Information about your specialty areas (if applicable)
Documents showing your affiliations with real estate organizations
A picture of the REALTOR® trademark to use as a backdrop to your explanation of what it means
Press releases about your company
Information on your advertising budget and/or your advertising successes
Your overall marketing plan
Special services you offer sellers
A list of customer references

Question 90

Listing Presentation Manual for Buyers
The presentation manual for obtaining a buyer’s listing agreement should start out with explanations of the different types of agency: seller agency, buyer agency and dual agency.

When potential buyer clients understand what seller agents do for their clients, the buyers should easily recognize the importance of having their own representation when shopping for a home.

Buyers also need to comprehend the issues surrounding how you as their agent will receive your fee. You should explain that brokers who use multiple-listing services split their commissions with the cooperating agents; so your fee will be coming from the seller as part of the “commission split” arrangement.

Answer 90

As with the presentation manual for sellers, the second section of your manual for buyers should cover your skills and expertise as well as your firm’s. Again, it’s a good idea to have a short resume in your manual, as well as a copy to leave with the buyer.

To cover what your firm has to offer, you could include any or all of the following items:

A picture of your office and the licensees
Information about your specialty areas (if applicable)
Documents showing your affiliations with real estate organizations
A picture of the REALTOR® trademark to use as a backdrop to your explanation of what it means
Press releases about your company
Your plan for finding the buyer a home
Services offered to buyers
A profile of the buyer’s requirements for a home

Question 91

As with the presentation manual for sellers, the second section of your manual for buyers should cover your skills and expertise as well as your firm’s. Again, it’s a good idea to have a short resume in your manual, as well as a copy to leave with the buyer.

To cover what your firm has to offer, you could include any or all of the following items:

A picture of your office and the licensees
Information about your specialty areas (if applicable)
Documents showing your affiliations with real estate organizations
A picture of the REALTOR® trademark to use as a backdrop to your explanation of what it means
Press releases about your company
Your plan for finding the buyer a home
Services offered to buyers
A profile of the buyer’s requirements for a home