Unit 5 – Brokerage (IL 75-Hour Pre-Licensing) – Comprehensive Notes

Introduction

• The main job of a real estate agent (also called a licensee) is to act in the best interest of their client (the principal).

• In Illinois, agents have a special duty (fiduciary duty) to clients based on agreements like listing agreements (for sellers) or buyer-agency agreements (for buyers).

• If an agent breaks these duties, the client can take legal action.

• While agents usually don't have these special duties to people who aren't their clients (third-party customers), Illinois License Law requires them to:

  • Always treat all customers honestly.

  • Never knowingly or carelessly give false information.

  • Tell customers about any major physical problems with a property that the agent actually knows about and that a careful inspection wouldn't easily find.

• Rules about Liability:

  • Agents can be held responsible if they misrepresent important facts to a buyer or seller, causing them to lose money.

  • An agent can't say "my client told me to lie" as an excuse if they misrepresented something.

  • If a client gives false information and the agent doesn't know it, the agent isn't responsible. But if the agent has a reason to think the information is false, they must check it and correct it if needed.

Sponsored Licensees

• Before May 1, 2012, there were salesperson and broker licenses.

• New rules after April 30, 2011, stopped issuing new salesperson licenses.

• All salesperson licenses ended on May 1, 2012.

• After April 30, 2012, only two types of licenses are issued:

  1. Broker

  2. Managing Broker

• Both types of licensees must work under the supervision of a Sponsoring Broker.

Managing Brokers

• Managing Brokers (MBs) need to meet extra licensing rules.

• A Sponsoring Broker (SB) can also be an MB or can assign MBs to run different office locations.

• Their main jobs include:

  • Supervising all agents working for them.

  • Keeping proper records.

  • Managing employment agreements.

  • Overseeing client money accounts (escrow) and following related laws.

Sponsoring Brokers

• The Sponsoring Broker (SB) is the business entity (like a company, partnership, or LLC) that holds the main real estate license.

• An SB can be "self-sponsored" if they run their own business.

• There can only be one SB for each company or branch office.

• An SB can let others handle certain tasks, such as:

  • Giving out sponsor cards (permits for agents to work).

  • Managing escrow account bookkeeping, if the person is qualified.

  • Signing contracts, as long as it follows company rules.

• But, the SB is ultimately responsible for everything that happens, no matter what they delegate.

Independent Contractor vs. Employee

• Every agent hired (whether employee or independent contractor, IC) must have a written employment agreement.

  • This agreement must be dated, signed, and the agent must get a copy.

• For Employees, the SB must:

  • Withhold Social Security and income taxes.

  • Pay unemployment taxes.

  • May offer benefits like health insurance or retirement plans.

• For Independent Contractors (ICs), the IRS has "safe-harbor" rules. All three conditions below must be met:

  1. The person has an active real estate license.

  2. There's a written agreement saying they are not an employee for federal tax purposes.

  3. $90\%\text{ or more}$ of their income comes from sales (commissions), not from hours worked.

• An employment agreement is also required between an SB and an MB (even if the MB owns the company).

IRS Tax Concerns

• The IRS usually treats real estate agents as statutory non-employees.

• This group includes direct sellers, licensed real estate agents, and some care providers.

• To be a statutory non-employee:

  1. Pay must be based on sales or what they produce, not on how many hours they work.

  2. The contract must clearly state they are not an employee.

• For ICs:

  • They have a flexible schedule.

  • The SB controls what needs to be done, but not how the IC does it.

  • ICs pay their own income and Social Security taxes.

• For Teams:

  • The SB must decide if licensed team members are ICs or employees.

  • Unlicensed team members are usually regular employees (taxes are withheld).

  • Unlicensed assistants rarely qualify as ICs.

Personal Assistants

• Personal assistants can be unlicensed or licensed.

• Unlicensed assistants can do clerical tasks, secretarial work, or answer phones.

• Licensed assistants can host open houses, show properties, and do any activity that a licensed agent can do.

• Licensed assistants must have an employment agreement with the SB and be paid by the SB.

Maintenance of Licenses

• The SB must tell the Illinois Department of Financial and Professional Regulation (IDFPR) in writing the names and license numbers of all Managing Brokers and their office locations.

• Each MB must hold a current, active managing broker license.

Loss of Managing Broker

• If an MB dies or leaves unexpectedly:

  • The company must ask the IDFPR within $15$ days for an extension (up to $60$ days) to keep operating.

  • A legal representative of the MB's estate can operate for $60$ days.

  • Another licensed MB must promise in writing to supervise the office until a permanent replacement is found.

Death of Self-Sponsored Broker

• If a self-sponsored broker dies, a court can appoint someone to only close out the brokerage business.

• This person follows the court's order until the business is closed; the brokerage cannot do new transactions.

Renewals

• When the IDFPR sends renewal forms, the MB/SB must tell the agent:

  • In person within $7$ days or by registered/certified mail (or other delivery needing a signature) within $10$ days.

• Renewal forms for agents who aren't supervised must be sent back to the IDFPR right away.

Change of Address

• Managing Brokers must tell the IDFPR on business letterhead within 24 hours of any business address change for all their offices.

Advertising

• Since May 1, 2012: Managing Brokers whose names are on file with the Division must clearly state "Managing Broker" in all advertising that includes their name.

• Brokers who are not named MBs cannot imply that they are.

Supervision

• A Managing Broker must provide reasonable supervision to:

  • Licensees and unlicensed assistants in the offices they manage.

• Their duties include:

  • Putting the Sponsoring Broker's rules and procedures into practice.

  • Training agents and assistants.

  • Helping with real estate deals.

  • Supervising special client money accounts (escrow) that they're responsible for.

  • Overseeing all advertising.

  • Making sure everyone follows federal and state laws.

• The Sponsoring Broker (SB) is ultimately responsible for all agents working for them and for all client funds in escrow.

Termination of Sponsorship

• When an agent leaves a sponsoring broker:

  • The agent must get their license from the SB/MB; the SB signs and dates the termination.

  • The SB must send a copy of the termination to the IDFPR within 2 days or face penalties.

  • The agent's license becomes inactive until they find a new sponsoring broker.

• Changing Brokers:

  • The new SB gives the agent a 45-day sponsor card (a temporary permit).

  • A copy of the sponsor card, the original endorsed license, and a fee are sent to the IDFPR within 24 hours.

Policies & Procedures Manual

• This is a written document that describes how the real estate company operates.

• Benefits:

  • Makes relationships and duties clear.

  • Helps prevent conflicts.

  • Builds confidence and provides guidance.

• It must explain how to handle unexpected issues.

• The Real Estate License Act requires this manual to cover:

  • Agency rules (who represents whom).

  • Fair housing, non-discrimination, and anti-harassment policies.

  • Client confidentiality.

  • Advertising rules.

Broker Compensation

• How much an agent is paid is defined in the client contract and must be in writing by law.

• Payment can be: a percentage of the sale price, a flat fee, or an hourly rate.

• The amount is negotiable; companies agreeing on standard rates is illegal (antitrust violation).

• The SB can set a minimum commission rate for their own company.

• Only a licensed MB or SB can directly receive a commission; they then share it with the agents working for them.

• Cooperative commission: The broker who lists the property pays the broker who sells it, based on the amount advertised in the Multiple Listing Service (MLS).

• Commission is generally earned when:

  1. A sales contract is signed by a buyer who is ready, willing, and able to buy.

  2. The seller accepts and signs the contract.

  3. All parties have copies of the signed contract.

• To be eligible for commission, an agent must be licensed, be the "procuring cause" (meaning they caused the sale), and be working under a valid contract.

  • Procuring cause means a series of actions (like open houses, ads, showings) that lead directly to the sale.

  • A ready, willing, and able buyer is someone who meets the seller's terms and is prepared to complete the deal.

• A broker can still earn commission if the seller backs out for listed reasons (e.g., changes mind, has a bad title, commits fraud).

• In Illinois, the actual closing of the sale is usually what courts consider proof that the commission was earned.

Sales Force Compensation

• The commission split or salary for agents is agreed upon in their employment contract.

• Expenses (like advertising) can be charged to the agent, as specified in the agreement.

• It's illegal for an SB to pay commission to:

  • Anyone not licensed under the same SB.

  • Any unlicensed person.

• Giving "other compensation" (like TVs or vacations) to unlicensed people for sending leads is also illegal.

• Legal: Referral fees can be paid between different licensed Sponsoring Brokers.

• An agent can create a solely-owned corporation to receive their pay (they must file a certificate with the IDFPR; this corporation isn't licensed, has one shareholder, and can't advertise or sponsor other agents).

• All money coming in and going out of the office must be handled by the SB.

Commissions & Disclosures

• Sponsoring Brokers (SB) must tell clients about:

  • How they share commission with other brokers.

  • If they are getting paid by both the buyer and the seller (dual compensation).

  • Any referral fees they receive that are more than $1\%$.

  • All sources of payment from third parties.

Commission Structures

• $100\%$ commission plans: The agent pays a fixed desk fee, keeps all their commissions, and covers all their own expenses.

• Graduated splits: The more sales an agent makes, the higher percentage of the commission they keep.

• Co-op transactions: The listing SB pays the selling SB, and then each SB pays their own agent based on their split agreement.

• A former SB can directly pay earned commission to a former agent even after the agent has left.

• Agents must tell clients to get legal advice; agents are not allowed to practice law.

Commission Math

• Sales price is always treated as $100\%$ of the value.

• Example Calculations:

  • To find commission: $\text{Sales price} \times \text{Commission rate} = \text{Commission}$ (e.g., \225,000 \times 6\% = \$13,500$).

  • To find sales price from commission: $\dfrac{\text{Commission}}{\text{Commission rate}} = \text{Sales price}$ (e.g., $\dfrac{\$13,500}{7\%} = \$192,857$).

  • To find commission rate: $\dfrac{\text{Commission}}{\text{Sales price}} = \text{Commission rate}$ (e.g., $\dfrac{\$8,200}{\$164,000} = 5\%$).

  • To find net to seller: $\text{Sales price} \times (100\% - \text{Commission rate})$ (e.g., \125,000 \times (100\% - 8\%) = \$115,000$).

New Age Brokerage (Social Media & Internet)

• Websites like Facebook, LinkedIn, YouTube, and Twitter are useful for marketing.

• SBs must create rules in their policies and agreements for online activity:

  • Explain risks (like posts being permanent, legal responsibility).

  • Get client permission before using their information on social media.

• Real Estate License Act & Internet advertising rules:

  • Must say if they plan to sell or share consumer information.

  • Cannot use misleading website addresses (URLs), website frames, or keywords.

• REALTOR extregistered Code of Ethics: Requires presenting a true picture; information must be current.

Antitrust Laws

• The real estate industry must follow federal and state antitrust laws.

• The Sherman Antitrust Act forbids agreements or combinations that reduce competition.

• Common illegal actions:

Price Fixing

• When competing companies agree on standard commissions or fees, it's illegal.

• Each company must independently decide its own fees.

• Even hinting at a "going rate" breaks the law; agents must always say that fees are negotiable and specific to their company.

Group Boycotting

• Two or more businesses working together to avoid doing business with a competitor is illegal.

Allocation of Customers/Markets

• When competitors divide up geographic areas, price ranges, or types of housing.

• This reduces competition and is illegal.

Tie-in Agreements

• Selling a desired product or service only if the buyer also buys another product or service.

• The Sherman Act has very serious penalties:

  • For individuals: up to $\$1$ million fine and $10$ years in prison.

  • For corporations: up to $\$100$ million fine.

Penalties (Antitrust)

• Fines and prison terms are the same as mentioned above.

• Private individuals or companies can sue for treble damages (meaning 3 times the actual losses) plus attorney fees.

Do Not Call Registry

• This is a list managed by the Federal Trade Commission (FTC) for consumers who don't want telemarketing calls.

• It applies to calls made across state lines to sell goods or services.

• Exemptions: calls for political reasons, charities, debt collection, or surveys.

• Agents can call:

  • People they have an existing business relationship with: up to $18$ months after their last transaction.

  • Consumers who have recently inquired or applied: up to $3$ months.

Access Requirements

• Sellers and telemarketers must register and use the registry only to avoid calling people on the list.

• Even if a company doesn't make cold calls, they must have a do-not-call policy.

• To comply with "Safe Harbor" (and prove it if needed):

  1. Have written procedures.

  2. Train staff.

  3. Monitor and enforce the policy.

  4. Keep a company-specific do-not-call list.

  5. Check the national registry every $31$ days and keep records of it.

  6. Any violations must be accidental.

• Violations can result in fines per call.

The CAN-SPAM Act (2003)

• This law governs commercial emails.

• It doesn't apply to transactional or relationship emails (non-promotional).

• Requirements:

  1. No fake or misleading email headers.

  2. No deceptive subject lines.

  3. Provide a clear way to opt-out (unsubscribe); must honor requests quickly.

  4. Identify the email as an advertisement and include a valid physical mailing address.

• Additional Prohibitions: Don't collect email addresses illegally, don't guess email addresses, don't set up automated accounts, don't send emails through unauthorized computers.

• The Illinois Electronic Mail Act adds state rules.

The Junk Fax Prevention Act (2005)

• Sending unwanted commercial faxes is generally illegal unless:

  • There's an Established Business Relationship (EBR) or the person gave written permission.

• Provisions:

  • No time limit on an EBR.

  • Must include a free, 24/7 way to opt-out (info on the first page).

  • Faxes can be sent to numbers obtained through an EBR before July 9, 2005.

  • For numbers acquired later, you need consent or proof the source was validated.

• 2008 FCC clarifications:

  • Buying lists is okay if reasonable effort was made to ensure compliance; but the sender is still responsible for any errors.

  • Web-based opt-out is allowed.

State License Law (General)

• All $50$ states plus Washington D.C. license and regulate real estate professionals.

• Goals: To protect the public, and ensure agents are competent and professional.

• Achieved by:

  • Setting licensing and continuing education (CE) requirements.

  • Defining what activities require a license.

  • Setting standards for how agents should act and practice.

  • Enforcing rules through a disciplinary system.

• Objective: To protect the rights of buyers, sellers, renters, and property owners.

Audio Presentation

• A 24-