Legal Aspects of Real Estate Ch. 7; Relationship Agreements

In a CAR Exclusive Buyer Representation Agreement, how many days from the date of the agreement does a buyer have to provide the broker proof that he or she has the financial capability to purchase a property described in the agreement, if it's not written in the agreement?

5

What agreement authorizes a broker to represent a buyer or tenant in the search for a property to rent or purchase?

A buyer agency A buyer agency or tenant representation agreement authorizes a broker to represent a buyer or tenant in the search for a property to rent or purchase.

What type of contract will a new real estate licensee likely first experience?

An employment contract with his or her sponsoring broker

Describe an open listing.

An open listing is a non-exclusive listing that allows a seller to engage a number of different brokers to sell the property. The broker who brings the buyer gets the commission. If the owner sells the property, no commission is owed to any broker.

What agreement authorizes a broker to represent an owner or landlord?

An owner listing

A buyer's agent should clarify the types of services to be offered to the buyer-client.

Assisting in determining favorable financing Providing information relating to market values Giving advice during contract negotiations Structuring the offer to purchase Assisting in related services such as insurance

Real Estate Licensee (Employee)

Broker controls how the agent performs his or her real estate duties. Broker controls the schedule, hours, and workload an agent has. Broker withholds money from paychecks for taxes, social security benefits, unemployment, Medicare, etc. Broker offers health insurance, retirement packages, paid time off, sick days, and other benefits. Broker pays the agent based on his or her amount of time spend working, NOT on the results of his or her work. Broker may reimburse the agent for business expenses.

There are two doffernet types of

CAR Independent Contractor agreements One with an arbitrator option, and one without one 1. Independent Contractor Agreement With Binding Arbitration Option In the binding arbitration agreement, paragraph 12 is titled Agreement to Arbitrate and Dispute Resolution. It has seven sub-headings and states that if mediation does not resolve a dispute, the parties will use confidential, binding arbitration. 2. Independent Contractor Agreement Without Arbitration Unlike the "With Binding Arbitration Option" agreement, paragraph 12 of the form is titled Agreement to Mediate Disputes. This paragraph has a much shorter provision and states the parties agree to mediate disputes in relation to this agreement BEFORE resorting to court action or arbitration.

What are the typical conditions for terminating an independent contractor agreement?

Either party can terminate the agreement at any time with or without cause.

The main listing agreement used between brokers and sellers in California is the California Association of Realtors® Residential Listing Agreement (Exclusive Authorization and Right to Sell). This 5-page agreement addresses a variety of provisions, including:

Exclusive Right to Sell Listing Price and Terms Compensation to Broker, including amount of compensation, when compensation is due, shared compensation, and when compensation is NOT due Multiple Listing Service (MLS) info and considerations of use and non-use Seller Representations/Guarantees Broker and Seller Duties Agency Relationships Security and Insurance Photographs and Advertising Use of Lockbox and Sign Equal Housing Opportunity Attorney's Fees Broker Approval of Agreement Successors and Assigns Dispute Resolution Ownership, title, authority Acceptance and Signatures

The two representation agreements often used between brokers and buyers in California are the California Association of Realtors® Buyer Representation Agreement: Exclusive and the Buyer Representation Agreement: Non-Exclusive. Each contract is four pages and includes the following provisions:

Exclusive or Non-exclusive Right to Represent Agency Relationships Compensation to Broker Internet Advertising Broker Authorization and Obligations Scope of Broker Duty Buyer's Obligation Additional Terms Attorney Fees Entire Agreement Dispute Resolution Acceptance and Signatures Note: The main difference between the two buyer representation agreements is the relationship between buyer and broker, either exclusive or non-exclusive.

Employee or Independent Contractor?

However, don't let the word "employee" fool you. Although all real estate agents are technically called employees of a broker since real estate law requires a licensee to work under a broker, from a tax, compensation, and control perspective a salesperson can either be an independent contractor or an employee in the traditional sense of the word.

Noncompliance Issues (Independent or Employee)

If an IRS audit concludes a salesperson is an employee, the broker will be liable for state and federal unemployment insurance premiums, worker's compensation, and disability insurance. The broker will also have to withhold federal and state taxes, including Social Security taxes. In addition, the broker could incur severe tax penalties as a result of the incorrect classification.

Broker-Salesperson Relationship

It is the broker who is ultimately responsible for the salesperson's business related actions. Thus, it is both the broker and the broker's agents who owe fiduciary responsibilities to clients. a new real estate licensee will likely experience first is a broker-salesperson agreement. California law requires a broker to have a written employment agreement with every licensee who works for the broker. The agreement must be signed by both parties. brokers should: Have written relationship agreements with every licensee working in their office Enforce their company's Policy and Procedure Manual Take an active role in the supervision of their licensees

How does a net listing create a conflict of interest for a broker?

It violates the broker's fiduciary responsibility of putting the client's interests above his or her own.

What is a database of properties for sale and is available for all real estate agents and brokers?

MLS

What does a provision discussing employee benefits typically state in an independent contractor agreement?

No benefits such as health insurance, retirement, sick days, paid-time off, etc. are provided to the agent.

Some key points to consider in buyer's broker agreements would include:

Some key points to consider in buyer's broker agreements would include: Role of the agent Conflicts of interest Termination date and reasons for termination Exclusivity of representation Compensation

Employee or Independent Contractor? (cont.)

The Internal Revenue Service (IRS) will automatically consider a real estate agent working under a broker an employee, unless there is a written agreement between the parties that clearly states the agent is working as an independent contractor.

List three characteristics of licensees who are independent contractors? (Additional correct answers on page 4.)

The agent controls his or her schedule, hours, and workload The broker cannot control HOW the agent performs his or her real estate duties. The broker does NOT withhold any money from the agent's paycheck

Real Estate Licensee (Independent Contractor)

The agent controls his or her schedule, hours, and workload. The broker cannot control HOW the agent performs his or her real estate duties. The broker does NOT withhold any money from the agent's paycheck. This means the agent is responsible for paying applicable taxes and benefits to the federal, state, and local governments. The broker does NOT offer any company benefits, including health insurance, retirement plans, vacation days, sick days, etc. The agent is paid based on his or her results, not effort or time spent working on real estate activities. Thus, an agent only receives a paycheck when he or she closes real estate sales. The agent covers all of his or her business expenses, including advertising, marketing, transportation, etc. Most real estate agents are independent contractors. This is typically easier for a broker and requires less paperwork for the brokerage. However, remember the main trade-off to hiring independent contractors over employees is the amount of control brokers have over the agents in their offices.

procuring cause agent.

The agent who ultimately caused the buyer to purchase the home and earned the commission

Although it's usually easier for brokers to hire licensees as independent contractors rather than employees, what is the trade-off?

The amount of control brokers have over their licensees

Net Listing

The broker agrees to sell the property in order to achieve a net price to the owner, and anything which is received above the net price is the broker's commission. A net listing is prohibited by the licensing law in many states. For example, Seller John tells Broker Bill that he wants $100,000 from the sale of his home. Broker Bill sells the home for $125,000, so Bill gets a $25,000 commission. Net listings are generally viewed as unprofessional and unethical, and they are illegal in many states, although not in California. While in this type of situation the seller is getting what he or she wants for the sale, it creates a conflict of interest for the broker. It essentially violates the broker's fiduciary responsibility of putting the client's interests above his or her own.

Broker-Buyer Representation Agreements

The buyer's agent should mention the potential need for the buyer to consult with other expert advisors, such as CPA, attorney, etc.

What is the main difference between the two CAR Independent Contractor Agreements?

The main difference between the two CAR Independent Contractor Agreements is how disputes between the parties regarding terms of the agreement will be resolved.

What are the conditions of the IRS safe harbor test?

The person must be a qualified (properly licensed) real estate agent. Compensation paid to the real estate agent for services performed must be based on production, not hours work. A written agreement must exist between the independent contractor and the broker stating that the contractor will not be treated as an employee for income tax purposes.

What provision of an independent contractor agreement allows an agent to enter into agency agreements on behalf of the broker?

The provision that addresses the agent's authority

In order to qualify as an independent contractor, the IRS requires what's called the safe harbor test to establish that a person is truly acting as an independent contractor and not an employee.

The three conditions of the safe harbor test are: The person must be a qualified (properly licensed) real estate agent. Compensation paid to the real estate agent for services performed must be based on production, not hours work. A written agreement must exist between the independent contractor and the broker. This agreement must outline the services to be performed by the contractor and must explicitly state that the contractor will not be treated as an employee for Federal tax purposes. Note - This three-point test clarifies if an agent is an independent contractor or employee for tax purposes ONLY. It does not cover whether an agent is an employee or independent contractor under other state or federal laws relating to worker's compensation, unemployment, state income tax, federal fair housing, or civil tort liability.

What is an important thing to remember about the enforceability of listing agreements?

They must be in writing to be enforceable

Independent Contractor Agreement

While many brokers in California choose to use the California Association of Realtors® (CAR) Independent Contractor Agreement forms, there is no requirement to use these forms. Thus, any broker can create his or her own brokerage independent contractor agreement forms. Therefore it's important to keep in mind that agreements may vary in length, style, and tone.

What is the major difference between an exclusive right to sell listing and an exclusive agency listing?

With exclusive right to sell, the broker has the exclusive right to market the property and receive a commission regardless of who procures the buyer. With exclusive agency, the owner retains the right to find a buyer and sell the property and owe the exclusive broker no commission.

Under Agency Relationships, in a CAR Residential Listing Agreement, if a buyer is found through the broker or associate at the brokerage, the seller agrees to allow the broker to act as

a dual agent. If a buyer is found through the broker or associate at the brokerage, the seller agrees to allow the broker to act as a dual agent. All disclosures must be provided if this situation were to occur.

listing agreement

a legally-binding contract that creates an agency relationship authorizing a broker to serve as the agent for a principal in a real estate transaction.

Open Listing Agreements

a non-exclusive contract, authorizing a broker to serve as the agent for either the sale or the purchase of property. With this type of listing, a broker is not under the same obligation to perform as with other listing agreements, so an open listing is often considered to be a unilateral contract. only the one broker who brings the ready, willing and able buyer to the seller or who finds the right property for a buyer will receive the commission. any real estate can market someone's property Another potentially negative situation arises when licensees from two competing brokers negotiate with the eventual purchaser of the property, leading the way for a dispute over which licensee was actually the procuring cause.

buyer agency or tenant representation agreement

authorizes a broker to represent a buyer or tenant in the search for a property to rent or purchase.

owner listing

authorizes a broker to represent an owner or landlord The most common agreement used with sellers is an Exclusive Right to Sell.

Every real estate transaction involves

bringing together a buyer and a seller or a landlord and a tenant.

Exclusive Right to Sell Agreement

broker has the exclusive right to market the property for a specified period of time. If the property sells while the broker has the listing, the seller must pay the agreed upon commission, regardless of who actually procured the buyer (who was the procuring cause). This means that even if the seller himself finds the buyer with no help from the broker, the seller still owes the broker the commission. gives the broker the greatest assurance that he or she will receive compensation for his or her marketing efforts All exclusive listing contracts must contain a definite termination date.

Buyer's agents have an affirmative duty to their clients to thoroughly investigate and completely disclose all facts that rely on a buyer's decision to buy.

buyer's agent is held to the same standard of performance in dealing with the buyer that the listing broker is held to in dealing with the seller. A buyer could sign an exclusive buyer agreement with one agent, but the second agent who closes the transaction, depending on circumstances, could end up earning the commission. Creating an agency relationship will not prevent claims filed asserting procurement by another licensee.

The most widely used listing agreement is the

exclusive right to sell. The most widely used listing agreement is the exclusive right to sell listing agreement.

Exclusive Agency Agreement

gives a broker the right to market and sell a property for a specified time period, while the owner retains the right to find a buyer and sell the property without owing the broker a commission. The seller must pay a commission only if the home is sold by the broker or an authorized agent or subagent of the broker. This type of agreement is exclusive in the sense that the property is listed with only one broker. All exclusive listings dates have have a termination date that cannot be extended.

Most listing agreements are bilateral employment contracts

meaning that the owner hires the broker and promises to pay a commission in exchange for the broker's promise to locate a "ready, willing and able" buyer or tenant for the owner.

exclusive buyer representation agreement

similar to an exclusive right to sell agreement and gives a broker the right to exclusively search for a home for a buyer and represent the buyer in the purchase. Brokers prefer exclusive agreements since they offer more assurance that the broker will receive compensation for his or her efforts. Agents know that an exclusive-right-to-sell or exclusive-right-to-buy agreement provides better control over the transaction. Regarding California licensing laws and the common law, the buyer's agent is held to a higher standard of skill and care in working with the buyer than is a subagent of the seller or the seller's listing agent, who works with the buyer on a customer basis.

Listing agreements must be in

writing to be enforceable. Oral listings do not afford a broker any legal protection. If the listing agreement is not in writing, a broker could not collect his or her commission if the seller refused to pay.