The buck stops here: Brokers

A real estate broker is the person in the real estate business who’s primarily responsible for various activities on behalf of the public. I admit that sounds pretty vague, so let me explain.

Every state has a state real estate license law, usually just called the state license law. The state license law governs these two primary factors in the real estate business:

• A general list of activities that can be performed only by someone holding a real estate license
• The requirements for obtaining a real estate license

The state license law may specifically address what real estate agents must do during the course of their activities, which includes things like presenting all offers to a seller as soon as possible.

A real estate broker is someone who is authorized by the state to perform a certain list of activities on behalf of someone else and collect a fee for doing so. A broker is often called a real estate agent, which is correct in the sense that the broker acts on behalf of someone else (a client).

The license law provides a list of activities that, if they’re done for another person for a fee, can be performed only by someone having a broker’s license. Although the specific activities may vary from one state to another, the list of activities requiring a broker’s license generally includes negotiating any type of real estate transaction, including sales, leases, and exchanges. A licensed salesperson or associate broker may perform these activities but only under the supervision of a broker. (For more general info on state license law, see “Making it legal: Looking at license law,” later in this chapter.)

You usually can do any of the previously mentioned activities on your own behalf without having a real estate broker’s license. In other words, you can sell your own house by yourself without being licensed. The implication is that you also can help someone else like a family member sell a house themselves without a license as long as you don’t collect a fee, but remember the gift of a fancy restaurant meal can be considered a fee. You definitely need a real estate license if you want to collect fees for your work.

Movin’ on up: Salespeople

A real estate salesperson is someone who either works as an employee for a real estate broker or more typically as an independent contractor paid by commission. (For more about the latter, see “Working as an Independent Contractor,” later in this chapter.) Generally speaking, a real estate salesperson is someone who can do all of the activities that a broker can do on behalf of a client, but must do so under the authority and supervision of a broker. Referring to a real estate salesperson as a real estate agent is somewhat accurate. The salesperson sometimes is viewed as a subagent of the broker but, in fact, has the same obligations as the broker with respect to a client. (See Chapter 4 for more about representation in agency relationships.) In general you become a salesperson first, spend a number of years learning the business, and then become a broker. Of course, you can remain a salesperson for your entire career.

In between: Associate brokers

Some states have an intermediate level of licensing that is called an associate broker. An associate broker has all the qualifications of a broker but doesn’t want to operate his own real estate business. Associate brokers choose to work under the licenses of other brokers just like salespeople. Be sure to find out how your state refers to this level of licensing and what the qualifications are.

Making it legal: Looking at license law

You need to go over your state’s real estate licensing law in detail. Some questions about the law undoubtedly will be on your state exam. Although you need to become familiar with your state’s law in its entirety, pay special attention to the following:

• Qualifications for real estate licensees — broker, associate broker, and salesperson
• Requirements for getting the various licenses
• License fees and other fees associated with licensing
• Continuing education requirements
• Special requirements after you get your license, such as requiring a broker to maintain a place of business
• Exemptions from licensing, such as for attorneys
• Activities that require a real estate license
• Standards of conduct and acceptable practice either with respect to the law and/or a code of ethics
• Enforcement and disciplinary actions for license law and standards violations

Perusing a list of common activities

Typical activities that require a real estate license are

• Listing a property for sale
• Finding buyers for property that is for sale
• Negotiating the sale or purchase of a property
• Negotiating a lease on behalf of a tenant or a landlord
• Representing someone in the exchange of properties
• Buying or selling options (the right to buy a piece of property at some time in the future) on real estate
• Collecting rents for more than one building owner

This list of activities is at best only a partial one. Your state law probably requires a license to perform most, if not all, of these activities; however, license requirements can include more or fewer activities, depending on the state.

Checking out a typical real estate transaction

Because buying and selling houses is the primary business of real estate brokers and salespeople, I want to give you a brief and somewhat generic overview of a typical house sale involving real estate agents. (By “agents” here, I mean either a broker or a salesperson. Remember, however, that the broker is primarily responsible in a transaction, with the salesperson working for her.) I use the word “generic,” because although many elements are common to all simple real estate transactions, transactions can include state and even regional differences in some specific elements.

Considering independent brokerages and national franchises

The vast majority of real estate agents are employed as salespersons working for independent brokers. An independent broker may have more than one office and be affiliated with a multiple listing system, which enables brokers to share information about properties that are for sale. (For more on multiple listing systems, check out Chapter 4.) Many independent brokers have chosen to affiliate themselves with national franchises. These arrangements vary from a fair amount of control and standardization from the franchise’s headquarters to an extremely independent operation in which the local broker pays a fee to maintain an affiliation with the national franchise. The benefits of franchise affiliations often are related to the nationwide exposure they provide through major advertising. Franchises frequently provide specialized training programs they require their salespeople to complete.

Of course, you definitely need a real estate license to work at a brokerage.

Checking out corporations (in and out of the real estate world)

The sole purpose of some companies is to buy properties and then lease them out. These are real estate investment companies working for themselves. They may build on and then hold their properties or buy properties with existing structures. These companies may need people to locate properties to invest in (see Chapter 17), or they may need property managers (see “Taking care of business: The duties of a property manager,” later in this chapter). As long as you’re working for the company and managing properties it owns, you may not legally need a license to do the work; however, you need to find out whether any of your state’s regulations require a license under those circumstances. On the other hand, if the company provides real estate property management services to other people or companies, a license is more likely to be required.

In addition, large corporations, particularly those with significant space or location needs, sometimes hire in-house real estate people. These jobs can involve leasing office or retail space for the company or buying land to locate company facilities. Depending on the company, you may find yourself leasing office space for a new company operation, buying a piece of property to locate a new gas station or fast-food restaurant, or negotiating with someone for an oil/gas lease. Although real estate training is good background for these jobs, a real estate license more than likely is unnecessary from a legal perspective. A company may, however, want you to have a license as part of your qualifications.

Building business with builders

When you’re working with a builder, your job may range from finding land for the builder to build on to selling the houses or other buildings the builder may construct. The main distinction that determines whether you need a license when working with a builder is whether you’re working for that one builder as an employee, in which case you most likely do not need a license. You most likely need a license when working for one or more builders for a fee as an independent contractor (not as an employee).

When working with a builder, you may find yourself as an on-site salesperson. You may be spending plenty of time at the building site, showing people new homes or helping them select a design and special features or options for the new home the builder will build for them.

Going into government

Local, county, and the federal government often employ people to perform real estate services including maintaining records, selling surplus property, buying property for various purposes, and obtaining easements. As a government employee, you would most likely be exempt from needing a real estate license. Governments can hire real estate agents from time to time. In this case a license would be required.

Note that government jobs that deal with real estate are fairly specialized and not widely available.

Appreciating appraising

Appraising is a field that’s related to but distinct from a career in real estate brokerage. Although the knowledge you gain in coursework and experience as a broker or salesperson is useful in appraising, a separate license and education are required to become an appraiser. An appraiser’s job is to estimate the value of a piece of real estate in a variety of circumstances. The vast majority of appraisals are done for mortgage-loan purposes. Lenders hire appraisers to estimate the values of properties as a basis for the loans that the lenders extend to buyers.

You can get more information about the appraisal career field at www.appraisalfoundation.org. For more on appraising property in general, see Chapter 14.

Homing in on home inspections

Many buyers have the homes they’re considering inspected by home inspectors before buying them. Although you don’t need a real estate license to be a home inspector, some states provide for the licensing of home inspectors. You can get more information about this career field at the International Association of Certified Home Inspectors (U.S.) website at www.nachi.org.

Taking care of business: The duties of a property manager

The duties of a property manager generally are defined as maximizing income and maintaining or increasing the overall value of the property being managed. I tell you more specifically here about how a property manager is responsible for the financial and physical condition of the building and cover a manager’s duties in actually renting out a property’s units or floor space and handling insurance.

Saying yes: The property management agreement

The basis for the relationship between a property manager and a property owner is a contract called the property management agreement. Although every agreement is unique, particularly with respect to the details of duties, responsibilities, and payments, certain elements need to be specifically addressed in any property management agreement, including:

• Who: The parties to the agreement (both the property owner and the property manager) need to be clearly identified. In any partnership situation, both partners need to sign. The appropriate corporate officer needs to sign for a corporation.
• Where: The property to be managed needs to be clearly identified at least by its address and possibly by legal description. You can check out the specifics of legal description in Chapter 9. If any elements of the property are not to be managed by the property manager, they need to be identified. For example, if a building has a large empty piece of land next to it that is leased as a parking lot for use by an adjacent building, the owner may not want to have you manage that lot.
• How long: The term or length of the agreement needs to be stated. Owners tend to want a short time frame; managers want a longer one. A minimum of one year is the general recommendation, because that gives managers a chance to show their skills and recoup some of their initial expenses in setting up a management program for the building.
• What — manager’s duties: The manager’s duties need to be clearly defined and stated. All parties to the agreement need to know whether the manager will collect rents, pay bills, contract for maintenance, and so on. (For more, see “Taking care of business: The duties of a property manager,” earlier in this chapter.)
• What — manager’s authority as an agent: A property manager usually is considered a general agent. As a general agent, the manager usually has authority over a range of activities on behalf of the owner. The extent of this authority needs to be spelled out in the agreement. For example, the agreement needs to flesh out whether the manager has the final word in setting rent rates or must first check with the owner for final approval.
• What information and when — reporting: The principal form of communication between a property owner and a manager are the periodic reports prepared by the manager. The timing and content of these reports are negotiable and vary with the type and complexity of the building being managed. Monthly reports are typical and can contain a variety of income, expense, vacancy, expiring leases, and maintenance information.
• Who pays what — allocation of expenses: This part of the agreement states which costs, if any, are paid out of the manager’s fees rather than from the income of the building. For example the manager may be responsible for the costs of advertising, especially if the manager receives an extra bonus for new leases.
• How much — the fee: The fee for any management agreement is completely negotiable, but it’s usually based on one or more of the following:
  • Commission on new leases
  • Fixed fees
  • Percentage of the gross (before expenses are deducted) or net (after expenses are deducted) income from the building
  • A combination of any two or three of the first three
• What the landlord wants: A clear statement of the owner’s objectives for owning the building can be made part of the management agreement or addressed in some other written format, such as a letter of understanding between owner and property manager. Regardless of how the owner’s objectives are handled, the manager must have a clear idea whether the owner is seeking long- or short-term profits or other financial objectives from his investment. Furthermore, it’s equally as important for the manager to adequately meet the owner’s objectives without compromising her honesty or ethics.

Keeping an eye out: Supervision

State laws may vary, but in general, a broker is required to supervise the people who work for her. This extremely specific requirement makes the broker responsible for the actions of salespeople who work for her. This responsibility extends to violations of the state licensing laws, fair housing laws, and illegal or fraudulent activities. The extent of liability and punishment is, of course, determined by state licensing officials, and in the case of criminal or civil actions, by the courts.

The type of questions you’re likely to get on this subject fall into these two categories:

• What your state law has to say about brokers’ responsibilities with respect to supervising their salespeople.
• The expectation that you’ll know most of the important points of the state licensing law with which you and your salespeople are expected to comply. (See “Making it legal: Looking at license law,” earlier in this chapter.)

Although this material may be information you found out about when pursuing your salesperson’s license, you still need to review the specific information that applies to your state’s broker’s exam.

Teach me! Training

Brokers are expected to provide training to their salespeople. Most states require prospective salespeople to receive formal training through prelicensing courses before they can get a salesperson’s license. Even though this training gives you the basic background and the minimum amount of knowledge that the state requires you to have to work as a real estate agent, it often does not cover the day-to-day real world activities of an agent. Brokers are expected to provide that day-to-day type of training. After you get your salesperson’s license, you can stay a salesperson forever. In most states, however, if you want to become a broker, you’re required to gain some hands-on experience.

Setting office policy: Rules are rules

Formulating and periodically updating an office policies and procedures manual is a suggested means of at least partially fulfilling your training and supervision obligations as a broker. This manual is distributed to all employees along with training in the policies and procedures of the brokerage. Because most salespeople work as independent contractors (see the next section), the policy and procedures manual needs to rely on words like suggested and recommended rather than must. The subjects contained in an office policy manual can range from dealings with attorneys and other professionals to record keeping, using supplies, and attending sales meetings.

The price isn’t right: Price fixing

First of all no rule says that a real estate agent must be paid on a commission basis. Just to be sure you’re clear on this, a commission generally is a percentage of the final sale price of the property that usually is paid upon completion of the sale. (See “Understanding How a Real Estate Broker/Salesperson Gets Paid” earlier in this chapter for more.) Pay by commission is a common practice across the United States, but has never been established as a requirement by any government or private agency.

No such thing as a standard commission exists. No state that I know of sets commission rates. No local real estate board or other association of real estate agents has the authority to set commission rates or create any standardized fees for services. In fact, any attempt among real estate agents to create a standardized fee schedule is and has been viewed as violating federal antitrust laws. The fact that many brokerages in a particular area charge the same commission is a matter of competition and individual business decision.

The Sherman Antitrust Act, which is a federal law that prohibits activities that are considered to be in restraint of trade and therefore against consumer interest, forbids any type of price fixing in any industry. In simple terms, what that means is that if I own an appliance store and you own an appliance store, we can’t get together once a month and decide that we’re both going to charge the same price for a washing machine.

In the real estate industry, antitrust laws essentially have been taken one step further as a result of a famous court decision in a case called United States versus Foley. The result of this case determined that even if no actual consultation occurred between individuals about price fixing, the mere discussion among competitors of prices for services is considered an invitation to fix prices and therefore violates antitrust law. As a result, the industry operates on the principle that discussing fees between brokers is illegal unless the brokers are cooperating on the same deal. Fees may be discussed in-house between brokers and salespeople and brokers, salespeople, and clients. In other cases, the courts determined that local boards of realtors can’t dictate, recommend, or publish rate schedules.

Bad break: Market allocation

The Sherman Antitrust Act also has a provision against market allocation that affects real estate professionals. Market allocation is an agreement among competitors to divide the market in some way.

Consider two brokers, for example, who own their own brokerages and meet and agree that one of them will handle all the listings west of Main Street and the other will handle all the listings east of Main Street. Add to the mix two other brokers who meet and agree that one will handle only houses worth more than $300,000 and the other will handle only houses under that price. All four brokers have violated the Sherman Antitrust Act’s provision against market allocation.

Feeling shunned: Group boycotts

Group boycotts — when competitors get together and agree not to do business with someone — violate the Sherman Antitrust Act.

Say X Brokerage and Y Brokerage don’t like the way Z Brokerage does business. They meet and agree not to make any referrals to Z Brokerage. The X and Y brokerages have just violated the Sherman Antitrust Act prohibition against group boycotts. However, an individual broker can decide not to do business with another broker because he believes the other broker acts unethically. It’s getting together as a group to boycott that’s against the law.

What’s your condition? Tie-in arrangements

Any requirement to buy one product or service on condition that you buy another product or service is called a tie-in arrangement or tying agreement and is an antitrust violation.

Say I am a broker who owns a property that a builder wants to buy. As part of the sale, I require that the builder relist the property with me (list back) when he sells it. Because I required the builder to list the property with me as a condition of my selling it to him, I broke the law.

1. A salesperson paid an hourly wage and expected to be in the office from 8 a.m. until 2 p.m. to answer phones is probably a(n)

(A) independent contractor.

(B) employee.

(C) contract agent.

(D) associate broker.

Correct answer: (B). A person required to work certain hours and paid an hourly wage is usually considered an employee. An independent contractor is allowed to work her own hours and is usually paid for her productivity by commission. An associate broker is not a status of employment but rather a licensing level. I made up the term “contract agent.”

2. A division of a community along geographic lines for purposes of listing homes for sale by two salespeople working for the same broker is

(A) market allocation in violation of antitrust laws.

(B) legal.

(C) a tie-in arrangement.

(D) an in-house boycott that is illegal.

Correct answer: (B). The allocation prohibition is between two brokers not within one brokerage, which makes the situation in the question completely legal.

3. Broker Bob will not give any referrals to Broker Jane because he believes she acts unethically. He tells no one about this. He

(A) is violating the antitrust law regarding group boycotting.

(B) is entitled to his opinion but needs to have checked with his local Board of Realtors first.

(C) is violating no antitrust law.

(D) needs to refer business to her because he has no proof of her behavior.

Correct answer: (C). No group is involved here. As long as no fair housing or civil rights laws are being violated, an individual generally is permitted to do business with whomever he or she wants.

4. Who sets the commission rate in a real estate brokerage office?

(A) The state real estate commission in each state

(B) The local Board of Realtors

(C) No mandatory rates are in effect, but rates need to follow the published rate schedule.

(D) The broker who owns the business

Correct answer: (D). Antitrust laws state that no group of brokers can get together to set rates or publish fee schedules, and states don’t set them, either. Answer (D) is the common and legal practice in the industry.

5. Broker Helen allows her dentist to use her vacation condominium for a week for free to thank him for sending her a person who listed a house with her. Helen

(A) did nothing wrong.

(B) violated license law.

(C) violated the antitrust prohibition about tie-in arrangements.

(D) should have checked with the state real estate commission first.

Correct answer: (B). State license laws generally prohibit the payment of fees or gifts to non-licensed individuals as part of a real estate transaction. So Helen did something wrong, it’s not an antitrust violation, and there’s nothing to check because it is a license law violation.

6. A property manager is employed by the XYZ Real Estate Investment Company to manage its properties. The manager

(A) most likely does not need a real estate license.

(B) most likely needs a real estate license.

(C) does not need a real estate license if the owner of the company has one.

(D) needs a license only to collect the rents.

Correct answer: (A). Check your local state for the specific regulations, but generally an employee of a single company managing its own real estate need not have a license.

7. Property managers are usually considered

(A) special agents.

(B) general agents.

(C) universal agents.

(D) contractual agents.

Correct answer: (B). A general agent handles a range of activities on behalf of a client. Special agents handle only one activity like selling a piece of property, and universal agents act on behalf of a client in all real estate matters (I cover these two categories in Chapter 4). I made up contractual agents.

8. What type of insurance secures against employee theft of rent collected?

(A) Workers’ compensation

(B) Surety bond

(C) Liability

(D) Business interruption

Correct answer: (B). Workers’ compensation insures against employee injury. Liability insurance insures against injury to a member of the public injured on the property. Business interruption insurance (also called rent loss insurance) provides payments to the landlord when rents can’t be collected due to some disaster like a fire. Surety bonds insure against an employee’s dishonest acts (like the one in the question).

9. The amount of compensation received by a property manager is

(A) set by the local real estate board.

(B) set by the local property owner’s association.

(C) a matter of individual negotiation.

(D) always based on a percentage of gross rents.

Correct answer: (C). This is the same as setting commission rates. It’s all negotiable.

10. Because of the independent contractor status of most real estate salespeople, a broker

(A) should not bother with a policies and procedures manual.

(B) is not responsible for his salesperson’s actions.

(C) is responsible for his salesperson’s actions only with respect to fair housing law violations.

(D) need not withhold Social Security taxes unless they are employees.

Correct answer: (D). One of the distinguishing features of independent contractor status is that the broker doesn’t have to withhold payroll taxes or Social Security payments. That doesn’t relieve the broker of his responsibility for his salesperson’s actions. All of the other answers are therefore wrong.