Broker Pre-License Flashcards (Unit 1)

Sometimes an agency relationship is terminated even though the parties may not wish it to happen, in other words involuntarily. Some reasons why an agency relationship may terminate in this way include:

- Death or incapacity of either party - if the contract does not pass to heirs or assigns - Agent abandonment - Condemnation of the property - Destruction of the property through fire, vandalism or natural disaster - Renunciation by the client - Breach of the contract - Bankruptcy - Revocation of the agent's license

Unless other arrangements have been mutually agreed to in writing, once the relationship has been terminated, the licensee is no longer considered the principal's agent. As such, the licensee does not owe any further duties to the principal, except for the following:

Accounting: The licensee must account for all moneys and property received during the relationship. Confidentiality: The licensee must not disclose confidential information he or she obtained during the relationship.

Handling Cooperative Sales

Although several of a broker's properties may be sold in-house, in the majority of cases, a cooperating broker finds the buyer or tenant. For this reason it is important to clarify early in the transaction whether the cooperating broker is A broker's agent working in cooperation with the listing agent A buyer's (or tenant's) agent A broker's agent working in cooperation with the buyer's (or tenant's) agent Whenever an agent takes a listing, the agent should be sure to let the seller or landlord know that some of the agents who bring buyers or tenants to see the property will actually be working as representatives of that buyer or tenant. To protect the client's interests, the agent can tell the client that he or she would be happy to attend any showings done by a buyer's agent, if the seller would like that to happen. With regard to compensation in cooperative sales, the listing broker will be the person who handles the commission splits for the transaction.

Buyer/Tenant Agency

Buyer If an agent enters into an agency agreement with a buyer, the agent becomes the buyer's agent. This is also known as buyer brokerage. The buyer is the principal or client. Any sellers whose property is viewed by the buyer are customers. In this arrangement, the agent is accountable only to the buyer. A buyer's agent is required to disclose to the listing broker that he or she is representing the buyer. If there is no listing broker, the agent must make the disclosure to the seller. Tenant A broker can enter into an agency relationship with a tenant. The tenant could employ the broker to locate property that will meet his or her specific needs. The tenant is the principal. The broker owes fiduciary duties to the tenant in this arrangement, just like any other agency relationship. It is very common for a broker to represent tenants in their search for office space or retail space.

Buyer Client

If a buyer decides that he or she wants client-level services, the buyer will sign a document known as an exclusive right to represent agreement. This agreement outlines the broker's obligations to the client and also the client's obligations to the broker. Using this document, the buyer and the broker specify the terms under which they will be working.

Principal - Subagent Relationship

If a cooperating broker accepts the offer of subagency, that broker is then working through the listing broker and is the subagent of the seller. As a subagent of the seller, the cooperating broker has the same fiduciary responsibilities to the seller as does the listing broker and his or her affiliated licensees. In other words, the cooperating broker is working for the best interests of the seller, NOT for the best interests of any prospective buyers to whom he or she may show the property.

Blanket Unilateral continued

In today's real estate world, however, placing a listing in the MLS does not create a blanket unilateral offer of subagency. Although listing a property in the MLS may permit subagency, it does not automatically create it or require it. The assumption is often made that when the broker places a listing, he or she is offering subagency on the seller's behalf and that any cooperating licensee who tries to find a buyer for the property is a subagent of the seller. However, this is merely an assumption. A seller can agree to accept or reject the option of subagency when he or she signs the listing contract. Even if the seller chooses to allow the broker to offer subagency, a cooperating broker may reject the offer and work as the buyer's broker or agent. Since a buyer's agent CANNOT be the subagent of the listing broker and seller, any licensee acting as a buyer's agent must make their agency status known to the listing broker before showing the property. This is important in order to avoid any misperceptions or wrongful assumptions. So, can brokerage be conducted without the unilateral offer of subagency? It can - by both using the MLS to make the blanket offer of subagency AND offering compensation to any cooperating brokers working as agents for the buyers.

Subagent Obligations

Obligations to the Seller As we mentioned earlier, the subagent owes the same fiduciary responsibilities to the seller as the listing agent owes to the seller. They must always be working for the seller's best interests and not for the interests of their buyer customers. Obligations to the Buyer Even though subagents are working for the seller, they must also deal honestly and ethically with all their buyer customers. In addition, subagents are bound to disclose any pertinent information that may affect the value of the specific property they are showing their buyers.

Seller/Landlord Agency

Seller If the agent enters into an agency agreement with the seller, the agent becomes the seller's agent. The seller is the principal or client. Any buyers who want to view the property are customers. In this arrangement, the agent is accountable only to the seller. The buyer in the transaction either is representing himself or is being represented by a cooperating agent from another firm. The listing agreement is the document that creates the seller agency. This is an example of express agency as we have discussed previously. Seller agency could also be created through the actions of the seller and the broker prior to the signing of - or in the absence of - any written agreement, but this type of implied agency is not a recommended course of action. Landlord A broker can enter into an agency relationship with a landlord. The landlord could employ the broker to: Market a property for rent to tenants Manage a property under a property management agreement In either of these cases, the landlord is the principal. The broker owes fiduciary duties to the landlord in this arrangement, just like any other agency relationship. The broker and the landlord will enter into a written listing agreement or property management agreement to detail the services the broker will perform.

There are five common types of agency relationships that exist:

Single agency Seller/Landlord agency Buyer/Tenant agency Consensual dual agency Subagency

Advantages to buyers having an agent versus a broker:

Tailored buyer agreement Access to a larger market - Most brokers limit their property searches to homes that are either listed in-house or listed in the local MLS. But when a buyer is willing to pay a commission to the broker, the broker is willing to look for and show a wider range of available properties. These properties could include: Properties with open listings Properties with low or unattractive selling commissions"For Sale by Owner" (FSBO) properties ForeclosuresProbate sales Sales by trusts and pension plans Stronger negotiating strategy - Since the broker is now looking at the transaction strictly from the perspective of the buyer, the buyer is in a stronger negotiating position. This is especially important in a FSBO situation, since the seller is not represented by a broker and the buyer may feel that the seller chose this route because there is something wrong with the property.

"The Law of Agency"

The law defining agency relationships

There is a negative side however.

The seller as the principal is liable for the actions not only of the listing broker, but also of any subagents. So increasing the number of agents who work for the seller also increases the seller's exposure to any potential liability caused by a subagent. Therefore, it's important for the listing broker to explain to sellers that they can be held responsible for the conduct of any of the authorized subagents, many of whom they will not have met and whose actions they cannot control.

A listing agreement

a contract between an owner or owners of residential real property and an agent, by which the agent has been authorized to sell or lease the residential real property or to find or obtain a buyer or lessee for the property.

A tenant

a lessee in a residential real property transaction. This includes a person who executes an offer to lease residential real property from a landlord through an agent, or who has engaged the services of an agent with the objective of entering into a residential real property transaction as a lessee.

A designated sales agent

a licensed real estate salesperson or associate broker, working under the supervision of a real estate broker, who has been assigned to represent a client when a different client is also represented by such real estate broker in the same transaction.

A landlord's agent

a listing agent who acts alone, acts in cooperation with a listing agent, or acts as a landlord's subagent to find or obtain a tenant for residential real property.

A listing agent

a person who has entered into a listing agreement with a seller or landlord and will act as the agent of the seller or landlord for compensation.

Agent

a person who is empowered by contract (or action) to represent the interest of someone called a Principal.

A subagent

an "agent of an agent." A broker who brings the buyer to the listing agent is a subagent of the listing broker. Licensees who work for the listing broker or for the selling (cooperating) broker are the subagents of their respective brokers.

Buyer's agent

an agent who contracts to locate residential real property for a buyer or who finds a buyer for a property and presents an offer to purchase to the seller or seller's agent and negotiates on behalf of the buyer.

A tenant's agent

an agent who contracts to locate residential real property for a tenant or who finds a tenant for a property and presents an offer to lease to the landlord or landlord's agent and negotiates on behalf of the tenant.

A dual or limited agent

an agent who is acting as a buyer's agent and a seller's agent or as a tenant's agent and a landlord's agent in the same transaction.

A single agent

an agent who represents only one person in the transaction, either the buyer or the seller. The other party to the transaction would be the single agent's customer.

A seller's agent

listing agent who acts alone, acts in cooperation with a listing agent, or acts as a seller's subagent to find or obtain a buyer for residential real property.

"Fiduciary Relationship"

one of utmost trust and loyalty.

A seller

the transferor in a residential real property transaction. This includes an owner who lists residential real property for sale with an agent, whether or not a transfer results, or who receives an offer to purchase residential real property.

First Contact does not include:

- A bona fide "open house" or model home showing that does not involve getting confidential information, the execution of an offer or an agreement for representation, or negotiations concerning price, terms or conditions of a potential sale. - Unanticipated causal encounters between a licensee and a seller or buyer that do not involve getting confidential information, the execution of an offer or an agreement for representation, or negotiations concerning price, terms or conditions of a potential sale. - Responding to general factual questions from a prospective buyer or seller concerning properties that have been listed for sale. - Situations in which a licensee's communications with a customer are limited to providing general factual information, oral or written, about the qualifications, background, and services of the licensee or the licensee's brokerage firm. In any of the situations listed above, the first contact occurs when the communications between the licensee and the prospective buyer or seller proceed in any way beyond these conditions or limitations described above.

Termination of Agency:

- Performance, which means the licensee has performed the tasks set forth in the agency agreement -that is, helped the buyer find a home for purchase or helped the seller find a ready, willing, and able buyer to purchase his or her home. - Expiration of the agreement term, which is stated in writing when the relationship is initiated. - Termination of the relationship by mutual agreement of the parties. - Termination of the relationship by one party, in which case the terminating party must provide notice to the other party that he or she is terminating the relationship. Note: This type of termination does not affect either party's rights under their contract.

Provisions that govern the actions of the broker acting as a dual agent:

- The broker must not knowingly say anything or do anything which might place one party at a disadvantage, disclose confidential information or personal confidences of one party to the other party, including motivation to sell/buy, negotiating strategy, or any other information a party specifically instructs the broker in writing not to disclose, unless such disclosure is required by law. - The broker must not, without prior express written consent of the owner, disclose to the buyer that the owner might accept a price less than the listing price, or accept terms less favorable to the owner than is indicated in the listing agreement, and the broker must not, without the prior express written consent of the buyer, disclose to the owner that the buyer may be willing to pay a higher price, or accept terms less favorable to the buyer than those indicated in the buyer's last written offer. - The broker must endeavor to be impartial between the parties and must not represent the interests of either the owner or the buyer to the detriment of the other party. The broker is obligated to inform each party of facts the broker knows which likely could affect the party's decision to permit the broker to represent both owner and buyer. Owner/seller and buyer are not required to consent to dual agency.

When broker represents both owner and buyer

A real estate broker can legally be the agent of both the owner and the buyer but only with the knowledge and written consent of both parties. Indiana designates an agent who is representing both the seller and the buyer or the landlord and the tenant in a consensual dual agency as a limited agent. If a buyer represented by a broker wants detailed information about, or to see, a property of an owner who is also being represented by the same broker, the broker must make every reasonable effort to remain impartial to both parties. In these circumstances, the broker immediately becomes a dual, or limited, agent. The owner and buyer both must acknowledge that, prior to such circumstances, the broker either acted as representative of the owner or of the buyer. In those separate roles, the broker may have obtained information, which, if disclosed, could harm the bargaining position of the party providing such information to the broker.

Subagency Advantages and Disadvantages

Advantages It is an easy way for the cooperating broker to share in the commission. It does not require any written agreement from the buyer. Disadvantages It can be too easy for the subagent to act like a buyer's agent and run the risk of undisclosed dual agency. We'll discuss the definition of undisclosed dual agency and its consequences a bit later in this unit. Both the seller and the listing broker are liable for the actions of the subagents. The subagent owes fiduciary responsibilities to the listing broker and to a seller the subagent doesn't really know. Problems can come up if a licensee acts as a subagent with a buyer customer and a buyer's agent with another buyer on the same property.

Buyer Customer

Even though a real estate firm specializes in buyer brokerage, the firm can still accept listings from sellers. In those cases, the sellers would be the firm's clients. If a buyer expresses interest in one of the firm's listings, the broker must disclose his or her agency status with the seller at which point the buyer can choose to receive customer-level service when dealing with properties that are listed by that firm. Most buyer brokerage firms will define as part of their company policy whether they are willing to deal with buyers as customers or whether they will only take on buyers as clients.

Single Agency

In a single agency relationship, the agent can represent only one party - either the buyer or the seller - in a single transaction, but never both. He or she owes fiduciary duties to one principal and can provide advice to that client. All other parties to the transaction receive services as customers, not clients. In other words, the licensee owes honesty and fair dealing to those customers. A broker who offers single agency may choose to represent either buyers or sellers exclusively. If a firm chooses to represent sellers only, then all buyers who come to that firm are considered customers. If a firm chooses to represent buyers only, then the sellers of the homes that firm shows are the customers. A broker can enter into a single agency agreement with a: Seller Buyer Landlord Tenant

There are some definite advantages to the seller allowing the use of subagents.

In addition to the seller's listing broker and his or her affiliated licensees, the seller will potentially have the efforts of all the members of the MLS working on his or her behalf. With all these people working for the seller, it's conceivable to think that the property will sell much faster.

MLS and Blanket Unilateral Offer

Most residential properties are listed in the local MLS. This is important to sellers, since listing in the MLS will give the sellers the opportunity for their properties to be seen by large numbers of licensees who are MLS members. The more agents who see the listing, the more potential buyers will have the chance to view the property. Because so many licensees belong to the MLS, it is a good way to offer subagency and arrange to allocate the commission. Early in its history, the multiple listing service was simply a system put in place to distribute information about various listings. However, in the 1970s the National Association of REALTORS® (NAR) wrote guidelines that prompted the MLS to rewrite their regulations. The new regulations stipulated that if a seller gave permission to a broker to submit the property to the MLS, the seller was authorizing the broker to make a blanket unilateral offer of subagency to all the other members of that MLS. The acceptance of this unilateral blanket offer came in the form of a cooperating broker showing the property and bringing a purchase offer from the buyer. So in effect, any agent that showed the listed property automatically became a subagent of the listing broker and the seller.

A buyer's agent can receive compensation in a number of ways.

Retainer Some brokers, more so in commercial than in residential transactions, negotiate their agency agreement to state that they will receive a non-refundable up-front retainer fee. This helps the broker screen out buyers who may not really be serious about buying. In this type of situation, at closing the retainer is credited to the amount of commission the buyer owes and the broker receives the balance. Seller-Paid Fee Since as we learned earlier the payment of compensation does not determine the agency relationship, there is no legal reason that the buyer must pay the compensation in the buyer agency relationship. As a matter of fact, the most common compensation arrangement is the traditional commission arrangement between the listing broker and the cooperating broker. In this arrangement the seller pays the commission, which is split between the listing agent and the buyer agent, and the buyer pays nothing. Alternatively, the buyer can agree that his or her buyer's agent will receive a certain percentage of the purchase price or a flat fee. If the commission split from the listing broker is equal to or greater than this agreed upon amount, the buyer pays nothing. If the split is less than the agreed upon amount, the buyer pays the difference at closing. Buyer-Paid Fee In this arrangement, the buyer pays his or her buyer broker directly upon the closing of the property purchase. When this arrangement is in place, the buyer agent will inform the seller and the listing broker that compensation will be direct and the buyer agent will refuse the offer of a commission split for the cooperating sale.

Creating a subagency

Subagency is created by the agreement of the people who are involved in the transaction. It may be created by a written agreement (recall our discussion of express agency in the preceding unit). Or it may be created by words or actions as in our previous discussion of implied agency. Often subagency is created within the structure of the local multiple listing service (MLS), although that does not have to be the case. If it is created within the MLS, it is not automatic. A seller can choose whether or not subagency will be offered for his or her transaction. Also, a cooperating broker can choose to work with a buyer as a principal (be the buyer's broker) and thereby reject the offer of subagency. Although subagency can be created within the MLS structure, it can also be offered outside the MLS system. Some types of property are not required to be listed in the MLS, such as commercial property or vacant land. When this is the case, a broker can decide to invite just a few brokers to help find buyers for the property, inviting the brokers to "cooperate" in the transaction and share the commission. Even though the broker may invite some number of other brokers to act as subagents in a particular transaction, only the subagent who actually procures a buyer will share in the commission.

Any broker who is not the listing broker is known as the selling or cooperating broker, but exactly who does the selling broker represent?

The selling broker can either be the seller's subagent or the buyer's broker. That decision must be made and communicated to the buyer. If the cooperating broker is deemed to be the seller's subagent, then that broker owes fiduciary responsibilities to the seller. If on the other hand, the cooperating broker is the buyer's broker, than he or she owes fiduciary responsibilities to the buyer.

In-House Sales

When a seller (or a landlord) lists a property with a broker, that client expects that everyone employed in that firm will do all they can to find a buyer (or tenant) for the property. So not only the listing agent, but also all the other associates will be working for the principal. Often, brokers prefer to sell their own in-house listings because they can maintain more control over the transaction and potentially get the full commission. The broker really has just two options in such a situation: - The broker can treat the buyer (or tenant) strictly as a customer, being sure the buyer (or tenant) understands that the firm is employed by the seller (or landlord) and working for the seller's (landlord's) best interests. - If the buyer (tenant) wants client representation from the broker, the broker must inform both parties of the potential for dual agency, and then can broach the idea of either consensual dual agency or designated agency.

Subagency

a subagent is a real estate agent that the listing broker appoints with the seller's permission to perform activities on behalf of the seller. The seller grants this permission in the written listing agreement.

Buyer

a transferee in a residential real property transaction. This includes a person who executes an offer to purchase residential real property from a seller through an agent, or who has engaged the services of an agent with the object of entering into a residential real property transaction as a transferee.

First Contact

means the beginning (commencement) of the initial meeting or communication between a licensee and a seller or buyer except in situations where the licensee knows that the potential buyer or seller is represented by a single agent or transaction broker.

Residential real property

property improved by a one-to-four family dwelling used or occupied, or intended to be used or occupied, wholly or partly, as the home or residence of one or more persons.

The agency relationship is governed by

statutory law, meaning the laws that are currently on record in the country, and common law, meaning procedures that have been established by precedent of cases that have gone before.

A landlord

the lessor in a residential real property transaction. This includes an owner who lists residential real property for lease with an agent, whether or not a lease results, or who receives an offer to lease residential real property.

When first contact occurs during a telephone conversation or any other communication in which the licensee is unable to provide the required Notice of Nonrepresentation,

the licensee must provide an oral notice and thereafter provide the required Notice of Nonrepresentation at the time of the first face-to-face contact, execution of a brokerage relationship agreement, or execution of a contractual agreement for purchase or sale, whichever comes first.