Real Estate Transactions - Part 1 - Chapters 24-28

Question 1

Distinguish the difference between exclusive and open listing agreements

Answer 1

Despite the application of various listing agreements, all listings fall into one of two general categories:

1 - Exclusive listing under which a broker receives the SOLE right to represent:

• an owner by marketing the listed property for sale or lease and locating a buyer or tenant
• a buyer or tenant by locating property
• the owner or lender to originate a trust deed mortgage.

2. Open Listing, sometimes called a nonexclusive listing does not grant exclusive right to the seller’s broker and their agents to be the sole representative of the client. Open listing is an employment entered into by a broker to render real estate services on a ‘best efforts’ basis under which a fee is due to the broker if they achieve the client’s objectives of the employment before the client or another broker separately first meet the objective, such as the sale or locating of a property.
   Thus an open listing is classified as a unilateral contract.

Question 2

Select between the variations of listing agreements

Answer 2

A variety of listing agreements exist, each employing an authorizing a broker to perform real estate related services under different conditions. The variations usually relate to:
* the extent of the broker’s representation
* the type of services to be performed by the broker and their agents
* the events which trigger payment of a fee
Most listing agreements are for the sale or purchase of a single-family residential property. Others are for residential and commercial income properties such as industrial, motel/hotel, office, farm, or unimproved properties.

Question 3

agency relationship

Answer 3

The relationship created between the client and broker and properly documented by a written listing agreement has two distinct legal aspects.

• and employment relationship
• and agency relationship

The AGENCY relationship describes the scope of activities imposed on the broker by LAW a arising out of the representation authorized by the employment. Agency carries with it the fiduciary duties of loyalty and full disclosure owed by the broker to the client.

Question 4

employment relationship

Answer 4

The relationship created between the client and broker and properly documented by a written listing agreement has two distinct legal aspects.

• and employment relationship
• and agency relationship

The EMPLOYMENT relationship describes the scope of activities the broker and the broker’s agents are to undertake in the employment of a client and authorizes the broker to carry them out by contract.

Question 5

exclusive right-to-sell listing

Answer 5

There are two types of exclusive employment agreements for buyer and selling real estate:

• an Exclusive agency agreement for a seller or buyer
• an Exclusive Right-to-Sell or Right-to-Buy listing agreement

An exclusive right to-sell listing affords a RE broker the greatest fee protection. It is also the MOST COMMONLY used type of employment. It is an agreement employing a broker to act as an agent for the seller of real property in which the seller promises to pay the broker a fee if the property is sold during the period of the employment, whether by the broker, through another broker, or by the efforts of the owner.

Question 6

fiduciary duty

Answer 6

The Fiduciary duty is that duty owed by an agent to act in the highest good faith toward the principal and not to obtain any advantage over their principal by the slightest misrepresentation, concealment, duress or undue influence.

Question 7

full listing offer

Answer 7

A full listing offer describes a buyer’s or tenant’s offer to buy or lease on terms substantially identical to the employment terms in the owner’s listing agreement with the broker.

Question 8

guaranteed sale listing

Answer 8

A Guaranteed Sale Listing is a variation of the exclusive right-to-sell listing in which the broker agrees to buy the property if the property does not sell during the listing period.

This establishes a reverse roll for the seller, not the broker (like in a Option Listing) when the property fails to sell during the listing period. The difference with the guaranteed sale listing is that the SELLER (not the broker) that has the right to exercise the option to sell the house to the broker in the end. The broker’s advantage however is lessened by a DRE regulation which prohibits the inclusion of advance fee provisions in a guaranteed sale listing.

Question 9

listing agreement

Answer 9

A Listing Agreement is a written employment contract between a client and a licensed RE broker. On entering into a listing agreement the broker and their staff are retained and authorized to perform RE transnational services on behalf of the client in exchange for a fee.

Question 10

net listing

Answer 10

A NET Listing is used only with SELLERS, not buyers, and can be structured as either an open or exclusive listing. The net listing is distinguishable from all other listing arrangements due to the way compensation is calculated. In a NET listing, the broker’s fee is NOT based on a percentage of the selling price…. rather the broker’s fee equals whatever amount the buyer pays in excess of the seller’s net figure and closing costs.

Question 11

open listing

Answer 11

An Open Listing, sometimes called a NONEXCLUSIVE listing does not grant exclusive right to the seller’s broker and their agents to be the sole representative of the client. Open listing is an employment entered into by a broker to render real estate services on a ‘best efforts’ basis under which a fee is due to the broker if they achieve the client’s objectives of the employment before the client or another broker separately first meet the objective, such as the sale or locating of a property.
Thus an open listing is classified as a unilateral contract.

Question 12

option listing

Answer 12

An OPTION listing is normally a variation of the exclusive right-to-sell listing. It’s unique feature is the additional element of a grant to the broker of an OPTION TO BUY the property at a predetermined price if the property does not sell during the listing period. The temptation for or a claim of misrepresentation is quite apparent. The concurrent status of agent and principal (cuz they could buy the prop at the end if it doesn’t sell) is conflict of interest for the broker which is fully disclosed.

Question 13

Appreciate the need for a buyer’s broker to enter into a written employment agreement with their buyer

Answer 13

Most broker’s realize a signed buyer’s listing agreement produces the maximum financial return for the effort, money, and talent an agent invests when representing an individual in buying a property. Without the buyer’s written promise to pay a fee, the broker is entitled to nothing when your buyer ‘goes around’ the broker and acquires property on which the broker provided them with info.

Question 14

Advise a buyer on the benefits of entering into an exclusive right-to-buy listing agreement with a broker

Answer 14

When you enter into an exclusive Right-to-Buy listing agreement you agree to work with them as their exclusive agent. In exchange, you agree to diligently engage yourself to the best of your abilities to do what is necessary to meet their objectives.

Question 15

bilateral employment agreement

Answer 15

When representing a buyer under a written exclusive Right-to-Buy employment agreement, the broker/agents have entered into a BILATERAL Employment Agreement. This agreement obligates the broker and their agents to exercise due diligence to fulfill the client’s real estate objectives in exchange for the promise to pay a fee under various circumstances.

Question 16

unilateral employment agreement

Answer 16

Without an exclusive Right-to-Buy listing, the brokerage duties which exist to locate properties for a buyer are ‘best-effort’ obligations created by an oral (or written) OPEN listing, called a UNILATERAL employment agreement. A best effort obligation requires no affirmative action (diligence) on the part of the brokers… until a match is located.

Question 17

exclusive right-to-buy listing agreement

Answer 17

An exclusive Right-to-Buy listing agreement is a written employment agreement by a broker and prospective buyer of real estate employing and entitling the broker to a fee when property is purchased during the listing period.

Question 18

safety clause

Answer 18

The fee provisions in a buyer’s listing agreement include a SAFETY CLAUSE, which provides added protection against a lost fee for services rendered during the listing period. Under the safety clause the buyer’s broker is entitled to collect a fee if, within an agreed to period after the expiration of the buyer’s listing:

• information specific to the property was provided to the buyer by the buyer’s agent during the listing period
• on expiration of the buyer’s listing, the buyer is handed an itemized list which identifies those properties the buyer’s agent brought to the buyer’s attention needed to ‘perfect’ the brokers right to a fee
• the buyer entered into negotiations with the owner of a registered property
• the safety-period negotiations ultimately resulted in the buyer acquiring an interest in the property.

Question 19

Real Estate Owned (REO) property

Answer 19

A Real Estate Owned (REO) property is property acquired by a mortgage holder through foreclosure.

Question 20

Determine the conduct permitted of a finder

Answer 20

A FINDER providing referral services in CA for a fee may:

• find and introduce parties
• locate parties for referral to others
• be employed by principals or brokers

A FINDER may NOT:

• take part in any negotiations
• discuss the price
• discuss the property
• discuss the terms or conditions of the transaction

A finder who crosses into any aspect of negotiation which leads to the creation of a RE transaction needs a licence as they are both soliciting and negotiating. The finer is subject to a penalty up to $20K or 6 month jail for engaging in brokerage activities w/o a license.

Question 21

Distinguish the exceptions under which referral fees are allowed under the Real Estate Settlement Procedures Act (RESPA)

Answer 21

A broker and their agents are NOT involved in a RESPA transaction when negotiating the sale, lease, or encumbrance of any of the following types of properties:

• apartments with 5 or more units
• commercial building
• agricultural properties
• business opportunities
• vacant land (other then those involving 1-4 unit residential construction loans)
• properties containing 25 or more acres
• leases and rental agreements
• all cash transactions
• seller carryback transactions where no federally-related loan is originated

Finders are also entitled to a fee for referrals under RESPA, depending on the type of business relationship they have to the broker or agent.

• a unlicensed friend or past customer not employed by the customer is NOT entitled to a fee when the transaction contemplated is RESPA-controlled. If RESPA did not control, then the finder is entitled to a fee under CA law if agreed to by the broker.
• a bona fide employee of a broker, such as an Financial Services Representatives (FSR), is not barred from collecting a fee or salary from their employer-broker since employed individuals are exceptions to RESPA
• A person who sells lead lists is also able to legally collect a fee under both RESPA and non-RESPA transactions. Lead lists are considered ‘goods’ and are perfectly legal in CA, as well as under the RESPA exception for goods and services actually furnished/obtained.

Question 22

fee-splitting

Answer 22

While RESPA exeptions allow Fee-splitting activity, DRE regulations require fee splitting to be limited to:

• payments between brokers (who may split the fee vertically with the agents they employ)
• payment by a broker to their employees, licensed or unlicensed.

Question 23

finder

Answer 23

A FINDER is an unlicensed individual who locates, identifies, and refers potential clients to broker, agents or principals in exchange for the promise of a fee.

Question 24

finder’s fee

Answer 24

A FINDER’S FEE is the fee paid to an individual who located, identified, or referred a client to a broker, agent or principal. Generally, a finder’s fee is a lump sum amount or percentage of the fee received by the broker on a closed transaction due to the finder’s referral. Only ‘sound economics’ control the amount of the fee a broker, agent or principal should pay the finder for a lead. Also no limit is placed on the volume of referral business conducted by a finder. Finders are NOT allowed to collect advanced fees.

Question 25

Real Estate Settlement Procedures Act (RESPA)

Answer 25

The Real Estate Settlement Procedures Act (RESPA) is legislation prohibiting brokers from giving or accepting referral fees if the broker or their agent is already acting as a transaction agent in the sale of a one-to-four unit residential property which is being funded by a purchase assist, federally-related consumer mortgage.

RESPA’s goal is to prohibit activity which artificially drives up the cost buyers and sellers pay for services needed to close a sale. Artificial costs include duplicate fees charged for services implicitly covered by the provider’s basic fee. Double Dipping is the concern.

To satisfy RESPA, the employment of a finder needs to be under an agreement where the employee-finder is obligated to report to the broker every prospect located of the sort the broker is looking for.

Question 26

Describe the multiple functions of a purchase agreement form

Answer 26

A buyer’s agent uses the purchase agreement to:

• prepare and submit a written offer
• prepare and submit a counteroffer
• on acceptance, purchase agreement becomes a binding written contract btwn buyer and seller
• purchase agreement must be clear, concise, and complete to prevent misunderstandings
• purchase agreement included ‘boilerplate’ CHECKLIST outlining all provisions that might be needed in a likely transaction
• conventional financing arrangements and conditions a prudent buyer considers are tightly worded for easy selection.

Question 27

Identify the various types of purchase agreements

Answer 27

Various purchase agreements comprise provisions necessary to negotiate the sale of a particular type of property. There are THREE basic categories of purchase agreements. They are for:

• one to 4 unit residential property sales transactions
• other than 1-4 unit residential property sales transactions, such as for residential and commercial income properties and owner-occupied business/farming properties.
• land acquisition transactions

Question 28

Understand the sections and provision that make up a purchase agreement

Answer 28

The sections of the purchase agreement include:

• Identification (sect 1-2)
• Price and terms (sect 3-9)
• Acceptance and performance (sect 10)
• Property Conditions (sect 11)
• Closing conditions (sect 12)
• Notice of supplemental property tax (sect 13)
• Notice regarding gas and hazardous liquid pipelines (sect 14)
• Brokerage and Agency (sect 15)
• Signatures (sect 16)

Question 29

equity purchase (EP) agreement

Answer 29

An equity purchase (EP) agreement is the document used to negotiate the sale of an owner-occupied residence-in-foreclosure to an investor.

Question 30

purchase agreement

Answer 30

A purchase agreement is the primary document uses as a checklist to negotiate a real estate sales transaction between a buyer and seller.

Question 31

Identify the arrangements in which an agency confirmation provision is mandated

Answer 31

The AGENCY CONFIRMATION PROVISION states the existance or nonexistance of each broker’s fiduciary agency with the various parties to the transaction. Each broker identifies the party they are acting on behalf of as their agent in the transaction. Thus, one broker does not state the agency relationship of any other broker involved in the transaction.

Question 32

Properly use the agency confirmation provision in transactions that require it

Answer 32

The agency relationship of brokers and their agents to their principals is required to be disclosed to all parties in a TARGETED TRANSACTIONS. This includes the sale, exchange or long-term lease of one to four unit residential property, commercial property, mobilehome and more. This relationship is disclosed in the AGENCY CONFIRMATION PROVISION located in all written negotiations to purchase or lease and lease agreements.

Question 33

agency confirmation provision

Answer 33

The agency confirmation provision is a provision in all purchase agreements and counteroffers disclosing the agency of each broker in the transaction.

Question 34

associate licensee

Answer 34

By statute, the agent employed by a broker is defined as an associate licensee - an agent of the agent, not an agent of the client.

Agents work on behalf of the broker. The client is technically the client of the broker… the agent is the middle man.

Question 35

double-end

Answer 35

A broker is said to have ‘Double-Ended’ a deal when only one broker is involved and is paid a fee. When a transaction is Double-Ended, no cooperating buyer’s broker is involved with whom they split the fee.

In other words, a Double Ended deal is when the seller’s agent receives the entire fee in the real estate transactions, there being no buyer’s agent for fee splitting.