Chapter 3 Part 1: Real Estate Agency Notes

Agency in Real Estate Transactions

Overview

• Agency involves a broker representing a seller, a buyer, or both in a real estate transaction.

• The broker can choose which party to represent.

Classifications of Agents

Special Agent

• Represents someone one time in one area.

• Example: A broker representing a seller in the sale of a property.

• The agency ends when the transaction closes.

• Also referred to as a single agent, as the broker represents only the seller in this instance, which would be called a single agency.

General Agent

• Represents someone on an ongoing basis in several areas.

• Examples: A salesperson representing a broker, or a property manager representing an owner.

Attorney in Fact vs. Power of Attorney

• Power of Attorney: A document authorizing someone to sign on another's behalf.

• Attorney in Fact: The person who receives the power of attorney.

Creation of Agency Relationships

Expressed Agency

• All parties clearly state their intentions, typically in writing.

• Example: Signing a listing contract with a seller.

Implied Agency

• Created by someone's actions.

• Example: An agent implying they represent a buyer without a written agreement.

Ostensible Agency

• Similar to implied agency; it appears an agency relationship exists due to actions.

Fiduciary Duty

• Key concept: Fiduciary means highest loyalty and trust.

• An agent has a fiduciary obligation to their client (principal), acting in the client's best interest.

Basic Agency Relationship

• The principal (client) employs the agent.

• The agent has a fiduciary obligation to the client.

• Client has authority to hire agent, gives instructions, and has responsibility.

• Agent must follow instructions, only do the assignments given, and report back.

Examples

Sports Agency

• A football player (principal) hires an agent to represent him.

Real Estate Agency

• Seller (client) hires a broker (agent).

• Buyer as Client: A buyer can also employ a broker.

• Broker Employing Salesperson: The broker is the principal, and the salesperson is the agent.

Subagency

• Two different real estate companies, but both represent the seller (client).

• The buyer is merely a customer.

• The listing broker is an agent of the seller.

• Selling broker (XYZ Realty) co-ops as a subagent of the seller.

• Subagency is less common today as buyers prefer to be clients.

Dual Agency

• A broker represents both the seller and the buyer in the same transaction.

• Requires prior permission and informed consent from both parties.

• Dual agency laws vary by state.

Law of Agency Duties

Client vs. Customer

• A client has a signed written agency relationship.

• A customer does not.

Duties to a Client (Principal)

1. Care: Agent owes knowledge and skill.

2. Obedience: Agent must follow instructions.

3. Accounting: Agent is accountable for earnest money and actions.

4. Loyalty: Agent must act in the client's best interest.

5. Full Disclosure: Agent must disclose any material information.

6. Confidentiality: Agent must keep confidential information private forever.

Duties to a Customer

1. Fairness: Treat all customers fairly.

2. Honesty: Cannot lie.

3. Accuracy: Primarily disclosure of material facts.

• Acronym: FHA (Fair, Honest, Accurate)

• Stigmatized Property: Property where a murder or suicide occurred.

National Do Not Call List

• Prohibits unsolicited business calls to those on the list.

CAN SPAM Act

• Requires commercial emails to have an opt-out provision.

Real Estate Brokerage Compensation

• Commissions are always negotiable; there is no standard rate.

• Compensation can be a percentage of the sale price or a flat fee.

Money Flow

• The seller pays the commission to the listing broker, who then shares with the salesperson.

• A salesperson can only be paid by their own broker.

Salesperson Compensation

• The broker pays the salesperson a percentage of the commission (negotiable).

• Salesperson is typically an independent contractor.

• 1099 form is provided at year-end.

• Salesperson can also be an employee (broker withholds taxes, W-2 form).

Commission Sharing

• A broker cannot share commission with unlicensed individuals.

• Referral fees must go between brokers.

Cooperative Commission Split

• Member brokers in a multiple listing service (MLS) agree to cooperate and sometimes share commission.

Sherman Antitrust Laws

• Brokers cannot collude to charge the same commission rate (price fixing).

When Commission is Earned

• Upon producing a buyer who is ready, willing, and able.

• Even if the closing doesn't happen, the commission is technically earned.

Failure to Pay Commission

• If the seller backs out for no valid reason, the brokerage company has earned the commission.

• The listing broker can sue the seller for the commission.

• Errors and omissions insurance can cover salespersons and office staff.

Property Management

• Owners of apartment complexes, shopping centers, and absentee owners typically need property managers.

Property Management Agreement

• Between the owner and the property manager.

• Includes duties, property description, and manager's salary.

• Does not normally address vacancy rate.

Residential vs. Commercial Property Manager

• Commercial property managers need to be more aware of expansion needs for tenants.

Protecting from Embezzlement

• Owners may require a surety bond (fidelity bond).

Functions of a Property Manager

• Collecting rent, paying bills, renting units, and maintenance.

• Giving a list of three or four contractors to make sure that the owner can make an intelligent decision.

• Not responsible for major renovations or appraisals for resale.

Property Management Budget

• Includes operating expenses like utilities, maintenance, taxes, and insurance.

• Vacancies are not considered operating expenses.

Reserve Account

• A savings account to replace long-life items (roofing).

Settlement Procedures

Closing

• Involves the seller, buyer, and closing agent.

Responsibilities

• Title validity is the seller's responsibility.

Closing Statement

• Lists final closing costs for both seller and buyer.

Debits and Credits

• Debit: The person owes money.

• Credit: The person receives money.

Closing Statement Items

• Sales Price: Debit to the buyer, credit to the seller.

• Loan Balance: Debit to the seller.

• Accrued Interest: Debit to the seller.

• Broker's Commission: Debit to the seller.

• Earnest Money: Credit to the buyer only.

• Buyer's Loan: Credit to the buyer only.

• Prepaid Interest: Debit to the buyer.

• Loan Origination Fee: Debit to the buyer.

• Discount Points: Debit to the buyer (typically).

• Appraisal: Debit to the buyer.

• Survey: Debit to the buyer.

• Mortgage Tax: Debit to the buyer.

• Inspections: Debit to the buyer.

• Closing Fee: Debit to the buyer (negotiable).

• Prorated Taxes: Credit to the buyer, debit to the seller.

• Prepaid Insurance: Debit to the buyer, credit to the seller.

• Recording Fees: Debit to the buyer.

• Title Expenses: Debit to the seller.

• Purchase Money Mortgage: Credit to the buyer, debit to the seller.

• Transfer Taxes: Debit to the seller.

Prorations

• Costs are paid for an entire year, but the sale closes mid-year.

• Accrued Expenses: Debts built up but not paid (e.g., real estate taxes).

• Prepaid Expenses: Paid in advance but not used up (e.g., insurance).

Steps in Proration Arithmetic

1. Decide who owes (seller or buyer).

2. Debit the one who owes.

3. Figure the time frame that is owed for.

4. Break down the cost into days.

5. Multiply the days times the daily amount.

6. Credit the other party for the same amount.

• Use 30-day months (360-day year) unless otherwise specified.

• Seller is responsible for the closing date.

Proration Example

• A seller paid 450 for a one-year insurance policy on January 1. Closes july 15

• The buyer assumed the policy, show the entry on the closing statement

Timeline

• January 1 - December 30

Timeline of Owed

• The timeframe owed is from the 15th of July through December 30.

Finding Timeframe

• Subtract the earlier date from the later date to come to 5 months 15 days.

Converting Timeframe to Days

• 5 \text{ months} * 30 \text{ days per month} = 150 \text{days} + 15 \text{ extra days } = 165 \text{ days}

Breaking the Cost into Days

• \frac{450}{360} = 1.25 \text{per day}

Multiplying the Days Owed by the Daily Amount

• \text{1.25 per day} * 165 = 206.25

Adding Debits and Credits

• Debit the buyer and credit the seller the exact dollar amount of 206.25.