Chapter 10: Practice of Real Estate Comprehensive Study Notes

Overview of Real Estate Practice

The section on Real Estate Practice accounts for approximately $13\%$ of the Salesperson Exam, equating to roughly $10$ questions.
Learning Objectives: - Explain the purpose and operation of trust (escrow) accounts, including types of money held and agent responsibilities for earnest money. - Identify names and years of major federal fair housing laws and relevant case studies. - Identify discriminatory behaviors in advertising, client interaction, and general business practices. - Understand potential consequences for violating fair housing laws. - Identify fair housing regulators, prohibited activities, and legal exemptions. - Identify laws and guidelines related to communication, advertising, and solicitation. - Identify considerations for online advertising and technology-related issues. - Determine appropriate actions regarding ethics, due diligence, and practicing within a license scope. - Identify acts that constitute misrepresentation.

Trust and Escrow Accounts: Agent Responsibilities

Definition: Real estate escrow accounts (trust accounts) hold money on behalf of others. These funds include: - Earnest money deposits. - Rental security deposits. - Other funds or assets held in trust.
Account Separation: The escrow account must be kept strictly separate from the broker's general operating account.
Earnest Money Handling: Earnest money funds must be deposited into the proper trust account after the seller accepts the purchase offer, following the timeline established by state law.
Specific Nature of Funds: Earnest money is specific to the purchase contract for which it is written; buyers must submit separate funds for each offer they make.
Regulatory Compliance: Agents and firms must follow all state regulations regarding trust monies to avoid the following: - Commingling: This occurs when escrow funds are mixed with personal or brokerage firm funds. - Conversion: This involves using escrow funds for anything other than their intended purpose.
Escrow Agents: A neutral third party—which can be a person or an entity such as a title company, broker, escrow officer, or attorney—who oversees funds until both buyer and seller satisfy contractual obligations.
Disbursement Rules: - Funds are disbursed when all parties (including the lender) are satisfied that all conditions are met. - If a transaction does not close, the agent requires written directions from both parties to disburse funds. - In the absence of an agreement, state laws dictate fund handling.

Prohibited Conduct: Blockbusting, Steering, and Redlining

Blockbusting: Convincing homeowners to sell or rent homes below market value based on fear-mongering regarding nearby demographic changes that might negatively impact property values. This violates fair housing laws.
Steering: The act of guiding prospective buyers or tenants toward or away from a location based on demographics involving protected classes. Subtle opinions on the quality of schools or "good neighborhoods" can be interpreted as steering. To avoid this, agents should show a variety of homes meeting the client's needs and let the client decide.
Redlining: An illegal practice where financial institutions or insurers deny creditworthy applicants loans or housing insurance in specific geographical areas based on demographics. It is essentially an unwillingness to lend against properties in certain areas, effectively drawing a "red line" on a map regardless of the applicant's personal qualifications.

Federal Fair Housing Laws and Protected Classes

Purpose: Federal fair housing laws protect citizens from discrimination in transactions such as financing, appraisals, advertising housing, providing brokerage services, and selling or renting housing or residential lots.
Seven Protected Classes: - Race - Color - Religion - National origin - Sex - Disability - Familial status
Prohibited Acts Based on Discrimination: - Refusing to sell or rent a house. - Coercing, threatening, intimidating, or interfering with housing rights. - Indicating a preference or limitation in advertising. - Offering different terms, conditions, or privileges.

Historical Timeline of Legislation

The Civil Rights Act ( $1866$ ): Prohibits housing discrimination based on race or color. It protects the rights to buy, sell, convey, inherit, and possess property. There are NO exceptions to this act.
Title VIII of the Civil Rights Act ( $1968$ ): Added national origin and religion as protected classes.
Housing and Community Development Act ( $1974$ ): Added sex as a protected class.
Equal Credit Opportunity Act (ECOA) ( $1974$ ): Forbids lenders from discriminating against applicants for any reason other than ability to repay. Protected classes under ECOA include race, color, religion, national origin, sex, marital status, or income source. Lenders must respond to applications within $30$ days and provide reasons for rejection.
Fair Housing Amendments Act ( $1988$ ): Added familial status and disability. It provides remedies to victims and requires "reasonable accommodations" to property rules/policies for disabled access. Familial status covers persons under $18$ living with parents/guardians, pregnant women, and those in the process of taking custody of child(ren).
Housing for Older Persons Act ( $1995$ ): Allows senior housing facilities to refuse families with minor children if specific requirements are met.
Note: States may have additional protected classes (e.g., marital status, sexual orientation, mental disabilities).

Exemptions and Specialized Acts

Private Clubs: May restrict housing to members only as long as they do not offer housing to the general public.
Religious Organizations: May restrict residency to members if the religion does not discriminate against protected classes for membership.
Mrs. Murphy Exemption: Applies to dwellings with $4$ or fewer rental units where one unit is owner-occupied. To be exempt from the federal Fair Housing Act, the owner must not use discriminatory advertising or use a real estate agent.
Americans with Disabilities Act (ADA): - Prohibits discrimination in commercial and public programs/services. - Disability is defined as a physical or mental impairment substantially limiting one or more major life activities. - ADA Standards for Accessible Design (SAD) apply to new constructions and remodeling of public accommodations. - Apartments built before $1990$ : Community spaces must be ADA compliant. - Apartments built after $1990$ : All public spaces must be fully accessible. - Business owners must make a "reasonable effort" to resolve barriers (e.g., ramps/lifts).

Enforcement and Complaints

Regulators: The U.S. Department of Housing and Urban Development (HUD) enforces ADA for public housing. The Office of Fair Housing and Equal Opportunity (OFHEO), a HUD subdivision, enforces the Fair Housing Act and ADA.
Filing a Complaint: Aggrieved parties (including agents) have up to $1$ year after the alleged discrimination to file. Agents cannot file on behalf of others.
Process: A specialist reviews the complaint to see if a violation exists. Investigation includes gathering evidence and notifying the violator.
Consequences: Violators may face lawsuits, compensatory damages, attorney fees, civil penalties, and license suspension or revocation.

Truth in Advertising and Misrepresentation

Discriminatory Advertising: Prohibited by HUD. Includes using exclusive language, images, or specific publications that exclude protected classes.
Misrepresentation: A false statement, photo, or ad that a reasonable buyer would rely on. Can lead to voidable contracts. - Negligent Misrepresentation: Seller or agent makes a false statement they should have known was false. - Fraud/Intentional Misrepresentation: Knowingly making false statements, such as the omission of a material fact.
Federal Trade Commission (FTC) Act: Protects against deceptive ads. Penalties include cease-and-desist orders, corrective advertising, and monetary remedies.
Puffing: Overstating or exaggerating aspects of a property ("the best view in the world"). Viewed as opinion rather than fact/misrepresentation; legal but often seen as disingenuous.
Confidentiality: Agents must avoid posting online information that puts clients at risk from criminals. Data must be disposed of securely.

Real Estate Agent Employment

Broker Supervision: Salespersons must operate under a broker.
Employees: - Adhere to firm rules (hours, processes). - Firm deducts income taxes, pays unemployment/worker's compensation. - Compensated based on time worked.
Independent Contractors: - Set own hours and pay own expenses. - Must complete a W-9 for the IRS. - Tax benefits: Can deduct business expenses. Broker does not pay social security, medicare, or unemployment. - Relationship must be established via a written agreement. - Firms must avoid providing tools/materials, benefits, or requiring set hours to maintain this status.

Scope of Practice and Due Diligence

Due Diligence: Researching laws and regulations; follows the duty of "reasonable skill and care."
Communication: Opinions should not be confused with facts. Avoid absolute words like "guarantee."
Unauthorized Practice of Law: Agents must use attorney-prepared forms. Drafting own contract language or instructing clients on legal review is out of scope and has legal implications.
Salesperson Scope: - Guiding clients through buying/selling/leasing. - Market research and Comparative Market Analysis (CMA). - Advertising and open houses. - Listing homes on MLS. - Negotiating and preparing offers.
Refer to a Specialist for: Legal advice, financial/tax advice, lending, insurance, home inspections, appraisals, warranties, repairs, staging, and school zoning information.

Job Duties and Compliance

Job Tasks: - Administrative: Emails, scheduling, drafting documents. - Research: Market trends, property searches, market analysis. - Marketing: Networking, promotional materials, online presence management.
Unlicensed Assistants: Can only perform clerical tasks (e.g., scheduling, making copies). They CANNOT be paid on a per-transaction commission basis nor host open houses/showings.
Do-Not-Call (DNC) Registry: - Part of the Federal Telephone Consumer Protection Act. - Prohibits calls before $8$ a.m. or after $9$ p.m. - Prohibits robo-calls and calls to cell phones. - Exclusion Period: For past clients, agents have an $18$ -month exclusion from the last transaction date. Beyond this, written permission is required. - Penalties: Violations can exceed $\$40,000$ per call. Firms may face $10$ years of court-ordered supervision.

Agent Roles

Listing Agent: Represents sellers (CMA, marketing, MLS, showings, negotiating for seller).
Buyer's Agent: Represents buyers (identifying properties, coordinating inspections, negotiating for buyer).
Dual Agent: Represents both parties. Often involves one agent or two agents from the same brokerage. Prohibited in some states.
Transaction Agent: A facilitator/neutral party helping with paperwork; does not represent either side.
Realtor: A member of the National Association of Realtors (NAR) bound by a code of ethics.

Antitrust Laws and Violations

Key Legislation: - Sherman Act ( $1890$ ): Prevents monopolies and restraint of trade. - Clayton Act ( $1914$ ): Prohibits mergers that create monopolies. - FTC Act ( $1914$ ): Investigates and penalizes violators.
Violations: - Price Fixing: Agreement among competitors to stabilize prices. - Market Allocation: Dividing the market to avoid competition. - Tie-in Arrangements: Conditional service delivery based on using another specified provider. - Group Boycotting: Conspiring to not do business with a particular party. - Per Se Violations: Inherently illegal acts (like bid-rigging) where no additional inquiry is needed to impose penalties.
Penalties: Individuals can face $\$1$ million fines and $10$ years in prison. Corporations can be fined up to $\$100$ million. Penalties can be increased to twice the gain or loss in some cases.