California: Real Estate Practice ..

Multiple Listing Service

A Multiple Listing Service (MLS) is an organization of member brokers who share listing information with one another. The contractual obligations between the brokers of the MLS organization can vary a great deal. However, most organizations state that the commission will be divided between the listing and selling broker when the property sells. The terms of that distribution can vary from broker to broker. The MLS usually requires that a broker register a new listing within a specified amount of time. The MLS service usually distributes the information about the listings in print publications and online. Today's electronic technology has made it possible for brokers to receive the most recent updates on a property, such as a change in price or a change in status from active to sold or withdrawn. Brokers also receive very specific information, such as actual sale prices for properties and any special conditions of the sale.

Fiduciary Duties

An agency relationship imposes fiduciary duties on both the client and the agent, but mostly in the agent. These duties are both moral and ethical, but also legal - they are the law of agency. The duties that the agent owes his or her principal are: Care Obedience Accountability Loyalty Disclosure or Notice These are often referred to by the acronym COALD or COALN. Let's discuss each one in detail.

Fair Housing Law - Protected Classes

Based on the laws described on the previous screens, we can see that the protected classes of the Federal Fair Housing Act are: Race including Ancestry Religion Color National origin Sex Handicap Familial status

Trade Associations - State

California Association of REALTORS® (CAR) CAR is the state division of NAR. This organization describes its purpose as being "to serve its membership in developing and promoting programs and services that will enhance the members' freedom and ability to conduct their individual businesses successfully with integrity and competency, and through collective action, to promote the preservation of real property rights." CAR offers many seminars and educational opportunities to its members. Most successful real estate professionals in California are members of this organization. It would be wise for you to consider becoming a member. Click here to visit the NAR Home Page Click here to visit the CAR Home page

Natural Hazard Disclosure Statement

California Civil Code requires that a seller and his or her agent disclose information about the property with regard to the issue of natural hazards. The Natural Hazard Disclosure Statement lists the items that the seller must disclose. Click here to view and print a copy of the Natural Hazard Disclosure Statement*. The seller must indicate if the property is in one or more of these areas: Special flood hazard area. (designated by Federal Emergency Management Area) Area of potential flooding. Very high fire hazard zone. State fire responsibility area. (Wildland area that may contain substantial forest fire risks and hazards) Earthquake fault zone. Seismic hazard zone. Note: The seller must disclose the above information if either the seller or the agent has actual knowledge about the hazard or if information about the property's location in a hazard area is on a map or contained in a list that is available in the office of the county recorder, county assessor or county planning agency. * Note: Reprinted with permission, CALIFORNIA ASSOCIATION OF REALTORS®. Endorsement not implied.

Agency Disclosure - When to Disclose

California Code defines these rules for providing the agency disclosure: The listing agent must provide the disclosure to the seller prior to securing the listing agreement. The selling agent must provide the disclosure to the seller "as soon as practicable" prior to presenting a purchase offer. If the selling agent does not deal directly with the seller, the listing agent may deliver the form prepared by the selling agent to the seller (or the selling agent can mail it via certified mail). The selling agent must provide the disclosure to the buyer "as soon as practicable" prior to the execution of the buyer's offer to purchase.

Check Your Understanding

Print this screen, answer the questions and then advance to the next screen to see the answers. Give an example of a specific short-term goal. What do you need to remember about making phone calls to potential clients? What is meant by the term "sphere of influence"? What are members of NAR required to do? Give an example of a specific short-term goal. Anything specific and measurable such as: I will schedule 2 practice listing presentations with an experienced co-worker next week. I will attend the 2-hour seminar about using e-mail that the local board is sponsoring on Friday morning. What do you need to remember about making phone calls to potential clients? Check into and follow the National Do Not Call guidelines. What is meant by the term "sphere of influence"? People that you know or have known that could be potential clients - family, friends, former co-workers, church associates, etc. What are members of NAR required to do? Attend mandatory ethics training every four years.

Check Your Understanding

Print this screen, answer the questions and then advance to the next screen to see the answers. What economic factors affect the real estate market as well as other goods and services? How are properties affected by the local economy? List three kinds of property in the real estate market. Jim has decided that he will learn all he can about the new subdivisions at the west end of town. Jim has decided to specialize in what area of real estate?

Commercial Earthquake Hazards

Sellers of commercial property must give prospective buyers a copy of the booklet Commercial Property Owner's Guide to Earthquake Safety, which covers the legal requirement for selling commercial property in California. The California Civil Code states that if the buyer receives a copy of Commercial Property Owner's Guide to Earthquake Safety, the seller and seller's agent are not required to furnish any additional information, unless they have actual knowledge of hazards on or affecting the property. The information in the booklet will be considered adequate information for the buyer.

Real Estate Transfer Disclosure Statement Exemptions

Several situations are exempt from this disclosure rule. The exemptions include the following transfers: Requiring a public report. Pursuant to a court order. By default or foreclosure. By a fiduciary administering a decedent's estate. From one co-owner to one or more other co-owners. Between spouses or blood relatives. Between spouses in a divorce. By the state Controller. As a result of failure to pay property taxes. To or from any government entity.

Agency Relationships

Single Agency In a single agency relationship, the agent can represent only one party in a single transaction. He or she owes fiduciary duties to one principal. All other parties to the transaction receive services as customers, not clients. 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. Seller Agreement 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. Buyer Agreement If the agent enters into an agency agreement with the buyer, the agent becomes the buyer's agent. 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.

Disclosures Not Required

Some information is not required to be disclosed. Death Sellers or their agents are not required to disclose any death that happened on a property more than three years before the offer to purchase was made. It would be wise to disclose any unnatural deaths that happened within the past three years or to answer truthfully any direct question about a death posed by the prospective buyer regardless of how long ago it occurred. AIDS Sellers or their agents are prohibited from disclosing that a former owner or occupant ever had AIDS or died from it under the Federal Fair Housing Act.

California Disclosures

Some of the more common disclosure forms that you need to be familiar with include: Disclosure Regarding Real Estate Agency Relationships Real Estate Transfer Disclosure Statement Agent's Inspection Disclosure Residential Earthquake Hazards Report Natural Hazard Disclosure Statement Lead-Based Paint Disclosure Let's look at these disclosures in more detail.

More California Disclosures

Some other disclosure situations that you may want to become familiar with include: Mello-Roos Community Facilities Act Subdivision Disclosures Common Interest Subdivision Let's examine each of these topics in more detail.

Property Overview

Special purpose property is property that has a unique use to the persons who own and use it, such as churches, hospitals, schools and government buildings. Recreational property is land used for leisure activities, such as parks, forests, time-shares and campgrounds. Investment property is defined as any property that is being held as an investment to generate income or profit. Any residential, commercial or industrial property may be considered an investment property. However, typically, most single-family residences are not considered investment properties, unless they are non-owner occupied.

Agency Relationships - Other Types

Designated Agency In order to avoid the potential conflict of interest that dual agency can present, some states allow designated agency. Designated agency means that a broker, with the written consent of the principal, may designate one or more licensees to act exclusively as the agent of the seller or landlord, and designate one or more licensees to act exclusively as the agent of the buyer or tenant in the same transaction. Transaction Broker A transaction broker is not an agent for either party. These licensees work as facilitators or intermediaries to assist the buyer and seller in the property transfer. Even though they owe no fiduciary responsibilities to their customers, they are obligated to disclose known material defects in the property. Note: Neither of these agency relationships is recognized in California.

Agency Relationships - Dual Agency

Dual agency means representing both parties in the same transaction - the seller and the buyer. For example, if John signs a buyer's agency agreement with salesperson Tim and then John becomes interested in a home that is listed by Tim's broker, the broker becomes a dual agent. Being a dual agent is extremely difficult, if not impossible. Since an agent owes fiduciary duties to the principal, a dual agency situation puts the agent in the middle of a situation where he or she has to balance the interests of two principals. The interests of each client could be vastly different, if not completely opposite. The confidential information of one client may be vital to the bargaining position of the other. What if the seller tells the agent that he is willing to take $5,000 less than the asking price? This is key information for the buyer, but can the agent share it? Even the fairest and most careful of agents would have extreme difficulty representing the interests of both parties fully and equally.

Seller Financing Disclosure

Due to complaints that were filed about difficulties that arose with seller financing, California enacted laws to protect potential buyers involved in seller carryback loans. The seller financing arrangements on all one-to-four-unit residences must be disclosed to both the seller and the buyer using the Seller Financing Addendum and Disclosure form. The units do not need to be owner-occupied for the rule to apply. When a seller is carrying back a note, the disclosure requirement falls to the person who is "arranging the credit." This is usually the real estate agent or possibly an attorney who is involved in the transaction. When there is more than one arranger of credit, the agent who brought the purchase offer - the selling agent - is the one responsible for making the disclosure, unless it is otherwise stipulated in writing. This disclosure must be made before any note is executed. The seller, buyer and arranger must all sign the disclosure. The seller and buyer must receive copies of the signed disclosure and the arranger must keep a copy on file for three years.

Fair Housing Law - Prohibited Acts

Fair Housing Law prohibits a number of activities in real estate. These activities include: Refusing to sell, rent or negotiate with any person. Changing terms, conditions or services for different individuals as a means of discrimination. Stating or advertising that the property is restricted. Telling persons that a property is not for sale or rent when it is. Denying membership in any multiple listing service (MLS) or any broker's organization. Using discriminatory advertising. Fair Housing Law also prohibits these activities: Making a profit by inducing owners to sell by telling them that persons of a protected class are moving into a neighborhood (known as blockbusting, panic peddling or panic selling). Channeling homebuyers toward or away from homes in certain neighborhoods (also called steering). Giving different terms for loans to buy or repair, or denying a loan altogether. Restricting the number of loans in certain areas of a community (also known as redlining). NOTE: Brokers are encouraged to display the Equal Housing Opportunity poster in their offices. If the poster is not displayed, a broker could be held liable and be required to prove that a performed act was not discriminatory.

Fair Housing Law - Important Federal Legislation

Fair Housing law first began with the Civil Rights Act of 1866, which prohibited discrimination in housing based on race. Title VIII of the Civil Rights Act of 1968 prohibited discrimination in housing based on race, color, religion or national origin. In 1968, the Supreme Court in Jones v. Mayer ruled that discrimination on the basis of race is strictly prohibited. This means there can be NO EXEMPTIONS OR EXCEPTIONS with regard to race. In 1974, the Housing and Community Development Act added sex to the list. In 1987, a Supreme Court decision expanded the definition of race to include ancestry. And in 1988, the Fair Housing Amendments Act added handicap and familial status. Fair Housing Links: California Department of Fair Employment and Housing US Department of Housing and Urban Development (HUD) - Fair Housing and Equal Opportunity

Independent Contractor - Tax Issues

Federal tax laws require what's called the safe harbor test to establish that a person is indeed an independent contractor. The three conditions of the safe harbor test are: The person must be properly licensed. Gross income must be based on production and not on hours worked. A written agreement must exist which clearly states the independent contractor status. In addition to the above conditions, the broker must supervise the salesperson as an independent contractor and not as an employee. Note: If the IRS does an audit, the agreement will not be worth much if the actions of the broker and salesperson look more like an employer-employee relationship.

Fair Housing Enforcement - Other Remedies

In addition to or instead of filing a complaint with HUD, a person may file a suit in a state or federal court within two (2) years of the alleged violation. If the court finds that discrimination has occurred, the person filing the complaint may be entitled to: Injunctive relief Actual damages There is no cap on punitive damages

Disclosures

In our discussion about fiduciary duties, we said that licensees are required to inform the client of all material facts, which are those facts that would affect the client's interests in the transaction. Disclosure helps to build good relationships between the licensees and their principals and serves to protect the principals. Full disclosure also satisfies California disclosure laws. Certain disclosures in California are mandated - meaning the information is required by law to be passed from one party to another. Some of these disclosures are required for agents; others are required for principals in the transaction. The most recent California Association of REALTORS® forms for purchasing, listing and leasing include the mandatory disclosures. However, if you use outdated forms or forms that are national rather than California-specific, you could miss some important disclosure requirements. Note: You are not exempt from disclosing just because a form you used was outdated or incomplete. Please be sure to use the latest approved forms for California.

Property Overview

Industrial property is land used for industrial purposes, such as warehouses, factories and power plants. Commercial property refers to income-producing property, such as office buildings, restaurants, shopping centers, hotels and motels, parking lots and stores. Some industrial properties may also fall into this category. Agricultural property is defined as land used primarily for growing crops or raising livestock, such as farms, pastureland, orchards and timberland.

Trade Associations - Local

Local associations of real estate professionals exist in communities to provide services such as: Educational materials Seminars Multiple listing services Members may be full members, associates, or affiliates. IMPORTANT NOTE A real estate licensee is not required to become a member of any of these organizations - local, state or national. Any licensee who is not an association member will be referred to simply as a broker or salesperson.

Areas of Specialization

Many brokers and salespersons choose to specialize in different areas of real estate. Some of these specialization areas include: Type of property - An agent can specialize in residential, commercial, industrial or land (lots, acreage or farms) transactions. Clients - Rather than deal with all types of clients, some agents decide to represent sellers and landlords exclusively or buyers and tenants exclusively. Geography - In a large market area, it can be difficult to keep track of the specifics on all the properties for sale. Some agents may choose to define a "region" that includes certain streets, subdivisions or collections of neighborhoods. Business type - A broker or agent could choose to focus exclusively on one type of business client, for example, hospital clients or fast food restaurants.

Commission Plans

Many brokers choose to pay the salesperson a percentage share of the commission from a transaction. Many companies have a payment plan that is "graduated." In this type of program, a licensee may start out at a lower percentage payment, but then graduate to higher percentage rates as his or her production increases. Other companies have a 100% commission plan. In this situation, the licensee pays a monthly fee to the company to cover the costs of things like office space, telephones, office equipment and supervision. In return, the agent receives 100% of the commission from any sales he or she negotiates. Most often in these programs, the salesperson is responsible for the costs of advertising and promotion.

Other Mandatory Disclosures

Military Ordinance California Code requires that if a seller knows that his or her residential property is located within one mile of a former military training site, the seller must inform the potential buyer in writing that the ordinance site may contain ammunition or explosives. Sex Offender Database California requires that every sales contract or lease contain a notice which states that information about sex offenders registered under Megan's Law is available to the public on an Internet web site maintained by the Department of Justice at www.meganslaw.ca.gov. Depending on the offender's criminal history, the database information will include the offender's current address or the community and zip code in which he or she resides.

Residential Earthquake Hazards Report

More recently, The California Association of REALTORS® published a Combined Hazards Book, which contains three books in one: The Residential Environmental Hazards Guide - includes a toxic mold update. Protect Your Family From Lead In Your Home - Prepared by the Federal Environmental Protection Agency and required for any homes built prior to 1978. The Homeowners Guide to Earthquake Safety - includes the gas shutoff valve update. The California Civil Code states that if the buyer receives a copy of The Homeowners Guide to Earthquake Safety, the seller and seller's agent are not required to furnish any additional information, unless they have actual knowledge of hazards affecting the property. The information in the booklet will be considered adequate information for the buyer.

MLDS and Adjustable Rate Loan Disclosure

Mortgage Loan Disclosure Statement Any real estate broker who solicits or negotiates loans on behalf of borrowers or lenders which will be secured directly or collaterally by liens on real property must deliver a written mortgage loan disclosure statement (MLDS) to the borrower within three business days of receipt of the borrower's written loan application. Adjustable Rate Loan Disclosure A lender offering adjustable-rate residential mortgage loans must provide prospective borrowers with a copy of the most recent Federal Reserve Board publication called Consumer Handbook on Adjustable-Rate Mortgages.

Property Overview

Most real estate salespersons engage in the business of listing or selling residential property. Residential property is defined as land or improved property with buildings designed for humans to live in, such as single-family homes, multi-family homes, apartments, vacation homes or condominiums. However, several other kinds of property exist in the real estate market: Industrial Commercial Agricultural Special-purpose Recreational Investment Let's take a look at each of these types in more detail.

Fiduciary Duties - Obedience

Obedience requires that the agent act in good faith and obey the principal's directions as outlined in the contract, as long as they are legal. For example, an agent may follow the principal's instructions stating that the home may not be shown on Sundays. However, an agent may not follow any directives that violate Fair Housing laws or that instruct the agent to conceal a defect in the property. If a directive is illegal and the agent cannot get the client to remove it from the contract, the agent should withdraw from the relationship.

Independent Contractor

On the other hand, if a salesperson is hired as an independent contractor, it is quite a different story. A broker can tell the independent contractor what to do, but not how to do it. In this case, the broker cannot dictate working hours or require the salesperson to have office duty at specific times or attend meetings. A salesperson operating as an independent contractor must pay his or her own income tax, Social Security tax and Medicare tax. In addition, the salesperson cannot receive anything from the broker that would make it look like he or she is an employee, such as health insurance or a pension plan. Most licensees are independent contractors.

Planning and Setting Goals

Once you have found the broker you are comfortable with and have been hired into the brokerage firm, it's important to take the time to make your work plan and set your goals for success. As we said earlier, the statistics for success in real estate are not good and you want to be sure you don't end up being one of the failure statistics! Setting realistic goals is a high priority. It's wise to set: Long-term goals - Where do I want to be five to ten years from now? Intermediate goals - How do I see my career progressing from year two to year five? Short-term goals - What specific things will I do in my first year? For example: How many contacts will I make per week? How many listings will I get each month? What training sessions will I attend? Make your goals definite and measurable. It's critical for your goals to be both realistic and attainable. That means deciding that you will get "three new listings a month," rather than that you will get "more listings." Put your goals in writing. It's much easier for you to prioritize your tasks and evaluate your progress if your goals are in writing Realize that goals are not rigid. As you move through your career, your talents and interests may change; so you can adjust your goals to match those changes. It's also important to set daily and weekly work objectives. These objectives should be steps that lead directly to meeting your short term goals. Managing your time effectively is vital to your success. Every day you should review your previous day's productivity and decide which tasks wasted your time and could be eliminated and which tasks were beneficial and could be repeated or expanded. Build on your success from day to day. You should devote some of each day to these and other similar activities: Returning phone calls. Developing new leads. Answering mail and e-mail. Reviewing new listings. Checking on sold properties. Calling potential clients.* Preparing for listing presentations. Showing property, if applicable. * Please consult and comply with the "National Do Not Call Registry" guidelines before making any solicitation calls. You can get information at donotcall.gov. These other activities will contribute to your success as a salesperson; so don't overlook them: Develop your "sphere of influence" by contacting friends, family members, neighbors, church members, club members, past co-workers, etc., and letting them know you are a real estate agent. Preview your company's listings to become more familiar with the amenities and increase your expertise. Spend time learning about other company's listings in your geographic area or your area of specialty. Familiarize yourself with your office's policies and procedures manual. If your broker has one, it will probably include information on confidentiality expectations, use of personal assistants, general office procedures, advertising requirements, how to work with clients, what records licensees are required to keep and how to handle both in-office and third party disputes. Practice filling out the forms your company uses so that you will not falter when working with clients. Learn how to use all of the machines at your firm - fax machine, copy machine, voice mail system, etc. Become proficient using the computer, especially for e-mail and MLS searches. These activities are also important: Learn what you need to know about real property taxes and the tax benefits of home ownership. Make sure you have the proper equipment for success - business cards, a cell phone and a clean and comfortable car, and consider getting a personal digital assistant (PDA) if you don't have a "Smart Phone". Equip your car with important items, such as GPS or maps, for sale signs, telephone book, extra pens and forms, tape measure, flashlight, small tools, calculator and digital camera. Look for and attend real estate training sessions and seminars. Many of these are sponsored by professional real estate associations. Read professional trade magazines and newspapers published by real estate groups. Attend business-related courses or seminars at a local college or business school. Research real estate topics on the Internet.

Agent's Inspection Disclosure

One of the problems with the Agent's Inspection Disclosure is that it does not cover very specific areas, leaving agents to guess at what they should inspect. It's a good idea to use the Seller's portion of the Real Estate Transfer Disclosure Statement as a guide in doing your inspection. Important things to look for include: Structural Defects - Look for things like cracks in foundations, inside or outside walls or around doors and windows. Structural damage might also be the culprit if floors are bulging or creak excessively or if doors don't close correctly. Deterioration - Look for things like warping floors or porches, rotting or cracked windows and doors, or the wearing away of concrete or mortar.

Areas of Specialization

Other areas of specialization include: Transactions - Documents for many types of transactions are unique to that particular transaction. Within an agency, one agent could become a specialist in leases and subleases, another in exchanges, another in options, and yet another in commercial sales. Auction sales - More and more, properties are being sold at auction. A broker could choose to deal only in auctions. Mortgage loans - Some licensees act as lenders or agents to make or arrange loans. We'll talk more about these licensees in a later unit. As you can see from the descriptions on these last two screens, the possibilities for specialization in the real estate field are many. An agent first needs to become proficient in the basic knowledge and skills of the real estate industry, including prices, financing and closings, as well as working with and meeting the needs of clients. Once you master these general skills, you will be equipped to move into whatever area of specialization most suits your talents.

Agent's Inspection Disclosure

Other important items to inspect for include: Water Damage - Look for stains on ceilings, evidence of mold, rotting wood, peeling inside paint, rust or mildew stains or problems with the roof. Insect Damage - Look for the telltale signs of ants or termites, such as piles of wood shavings or "tunnels" of mud that move across concrete to wood or from the ground to a wooden surface. Remember that the agent must also disclose other items that can influence the buyer's decision to purchase the property, such as proximity to an earthquake fault or location in a flood plain. It would be wise for agents to learn everything they can about a property and its surrounding area to help ward off any potential future liability for nondisclosure.

Agency Disclosure

Our earlier discussion about agency relationships revealed that an agent (broker) can enter into a single or dual agency relationship with a client. This relationship must be in writing. Licensees will use California's Disclosure Regarding Real Estate Agency Relationships form with their clients. Click here view and print a copy of the Disclosure Regarding Real Estate Agency Relationships* form. The licensee must clearly and thoroughly explain to his or her prospective client the three types of agent relationships available - seller's agent, buyer's agent or dual agent. Once the client fully understands these terms and the duties associated with each, he or she can decide which relationship will work best to meet his or her needs. The client and licensee will confirm the receipt of the disclosure by signing the form. Note: If the client elects the dual agent option, the agent must have the buyer sign one copy of the form and the seller sign another copy of the form. * Note: Reprinted with permission, CALIFORNIA ASSOCIATION OF REALTORS®. Endorsement not implied.

Right to Rescind

Previously in this chapter, when discussing various types of disclosures, we have mentioned that under certain circumstances, a buyer may have the right to rescind (or cancel) a contract. These are known as rescission rights. Purchasers in two types of subdivisions have an unqualified right of rescission: Timeshare buyers have a right to rescind the purchase within seven (7) calendar days after receiving the public report or after signing the purchase contract, whichever is later. Undivided interest buyers have a right to rescind the purchase by midnight of the third calendar day following the day the purchaser executed the offer to purchase.

Check Your Understanding

Print this screen, answer the questions and then advance to the next screen to see the answers. From whom may a salesperson receive compensation for performed activities? What is the major difference between an employee and an independent contractor? What kinds of insurance do brokers normally require of their employees? What should a licensee's written employment agreement contain? From whom may a salesperson receive compensation for performed activities? ONLY from the employing broker What is the major difference between an employee and an independent contractor? The issue of control - A broker can control the what and the how of an employee. A broker can control the what, but not the how of an independent contractor. What kinds of insurance do brokers normally require of their employees? High limits of automobile insurance with the broker named as an insured. What should a licensee's written employment agreement contain? Each person's responsibilities to the other The broker's supervision The licensee's duties The licensee's compensation program

Legal Implications

The state licensing law imposes statutory requirements on licensees acting as agents, which obligate them to perform in ways that protect their clients' interests in real estate transactions. In other words, entering into an agency agreement is a legal action, which could make an agent legally liable if he or she violates the duties owed to the client. An agent has a responsibility to inform the client of any facts or information that could affect the client's position in a transaction.

Common Interest Subdivision

A common interest subdivision is one in which the owners own or lease an individual lot or unit and have an undivided interest in the common areas of the development. Examples of common interest subdivisions include planned developments, stock cooperatives, condominiums or community apartment projects. When selling lots or units in a common interest subdivision, the subdivider or agent must give the buyer the public report and also a statement called Common Interest Development General Information. This statement explains what ownership in a common interest development means with regard to such things as mandatory membership in the association, rights and remedies under the governing documents, payment of assessments, ownership and use of the recreational facilities, responsibilities and powers of the governing body, voting rights and other rights belonging to the members/owners. When selling or leasing lots in a common interest subdivision requiring a public report prior to the offering, the subdivider or agent must make the following documents available to the prospective buyer or lessee before the execution of an offer to purchase or lease: The declaration of covenants, conditions, and restrictions. The articles of incorporation and bylaws for the association. Any other instrument which establishes or defines the common, mutual, and reciprocal rights and responsibilities of the owners or lessees of interests in the development. The current budget, including estimated reserves and related financial statements of the association. A statement prepared by the governing body of the association regarding any outstanding delinquent assessments and related charges levied by the association against the subdivision interest the prospective buyer or lessee is considering buying or leasing. All of the above documents must be delivered to the prospective buyer or lessee prior to close of escrow.

Broker-Salesperson Relationships

A salesperson is licensed to perform transactions on behalf of his or her licensed broker. The broker is ultimately responsible for the actions of his or her affiliated licensees. Therefore, the salespersons must perform all activities in the name of the broker. A salesperson may engage in only those activities assigned by the broker. And the salesperson may receive compensation for performed activities ONLY from the employing broker. Since the salesperson is acting as the agent of the broker, he or she has no authority to make contracts with or accept compensation from any other party - including another broker, the buyer, the seller or a referral agency. A broker can hire a salesperson as: An employee An independent contractor The difference between the two is an issue of control, as established by income tax laws. An employee works under the supervision and control of the broker. An independent contractor is hired to perform certain acts, but the broker cannot control how the salesperson performs those acts. Let's look at each of these in more detail.

Agency Relationship

An agency relationship is created when a person (buyer or seller), also called the principal, delegates to another person, called the agent, the right to act on his or her behalf in business transactions with third parties. Several principles govern that relationship: Both parties must consent to the relationship. Both parties must agree to form the relationship. The relationship is fiduciary - meaning the agent owes certain duties to the principal. If the principal in the relationship is the seller, then the broker (or the associate licensee representing the broker) is the seller's agent. Conversely, if the principal in the relationship is the buyer, the broker (or the associate licensee representing the broker) is the buyer's agent. We'll discuss the forms that agents use to create these relationships later in this chapter. Other agent terms that are frequently used include: Listing agent - This is the licensee who lists the seller's property. Selling agent - This is the licensee who brings the buyer to complete the transaction. An agency relationship is based on authorization and mutual consent. It is not based on compensation. Compensation can be negotiated - as in a listing agreement. An agency relationship can exist that defines no compensation - as in the case of a buyer's agency agreement, where the agent gets compensation from the seller, not his buyer client. The agency relationship is not determined by who pays the commission. In the past, in most residential transactions, the seller was responsible for paying the commission to the broker. But since the advent of the buyer agency agreement, other arrangements are becoming more common. The seller and buyer could agree to share the responsibility of paying his or her own agent.

Fiduciary Duties - Disclosure

An agent is bound to inform the client of all material facts that might affect the client's interests in the transaction. This includes both the facts that the agent knows and those that the agent should have known. This rule became case law in California in 1984 with the Easton v. Strassburger decision. An agent is responsible for discovering anything that might be deemed important to his client in making an informed decision, whether or not they are favorable to the client's position. An agent could be held liable for damages if he or she failed to disclose such information. California requires agents to conduct a competent and diligent inspection of property they list and disclose the results to buyers. We'll discuss this requirement in greater detail later in this chapter. An agent for a seller has a duty to disclose such things as: Purchase offers. Who the prospective purchasers are and if the agent has a relationship with them in any way. Ability of the purchaser to complete the transaction. Ability of the purchaser to offer a higher price. Purchaser's intention to resell the property for a profit. An agent for the buyer has a duty to disclose such things as: Deficiencies in the property. Any contract provision of financing terms that don't suit the buyer's interests. How long the property has been listed. Why the seller is selling.

Fiduciary Duties - Accounting

An agent must be able to account for all monies, documents and other property he or she receives from the principal. Under California law, a broker is required to handle and account for trust funds following the guidelines we covered in an earlier chapter. This includes keeping copies of the trust account records for three (3) years.

Americans with Disabilities Act

Another important piece of legislation that licensees should become familiar with is the Americans with Disabilities Act (ADA), which became effective in 1992. ADA mandates that persons with disabilities have equal access to jobs, public accommodations, government services, public transportation and telecommunications. It prohibits discrimination in the "full and equal enjoyment of goods and services" provided by public places, including hotels, shopping centers and offices, and it applies to the lease and operation of commercial facilities. Brokers should evaluate how this applies to physical changes they might need to make to their office space to accommodate both employees and clients. In addition, licensees should alert their commercial and investor clients to the existence of the law and the need to have their leases professionally evaluated and their offices inspected for compliance. Click here to view the government's official page for the ADA.

Subdivision Disclosures

Any person intending to offer subdivided lands for sale or lease must apply for and obtain a public report from the Bureau of Real Estate. The public report discloses to prospective buyers pertinent facts about a subdivision. The report may include information about utilities and water, roads, soil and geologic conditions, title, zoning and use, hazards and any financial arrangements for completion of the subdivision. Purchasers must sign a receipt indicating that they have received and accepted the report before they enter into the purchase transaction. The subdivider must keep the receipt for three years.

Real Estate Transfer Disclosure Statement

Any person who is selling a one-to-four-unit property must provide the buyer with a written disclosure statement that describes the condition of the property. This Real Estate Transfer Disclosure Statement is a two-page statement that includes the following sections: Part A - Identifies the items contained in the home and whether or not they are operational. Part B - Describes any significant defects or malfunctions in the home. Part C - Identifies miscellaneous items such as known environmental hazards, easements or encroachments, improvements or alterations to the property, zoning or neighborhood concerns. Click here to view and print a copy of the Real Estate Transfer Disclosure Statement*. * Note: Reprinted with permission, CALIFORNIA ASSOCIATION OF REALTORS®. Endorsement not implied. The buyer must receive a copy of this disclosure statement prior to the execution of an offer to purchase, delivered as follows: If there is only one agent involved in the transaction, that agent is responsible for the delivery. If there are two agents, the selling agent is responsible for delivery. If the seller has not completed a property disclosure statement, the buyer should be informed in writing that he or she has the right to receive this disclosure. Important Note: If the disclosure is delivered after the execution of the offer to purchase, the buyer has the right to cancel the offer within three days after delivery in person (or five days if delivered by mail) by writing a notice of termination and delivering it to the seller or the seller's agent.

Agent's Inspection Disclosure

As we discussed earlier in this chapter, California agents are required to conduct a competent and diligent visual inspection of a one-to-four-unit property and disclose the material facts to a prospective buyer. The inspection does not include areas that would be deemed as reasonably or normally inaccessible. The agent reports the results of the inspection on the Agent's Inspection Disclosure. This form is actually page 3 of the Real Estate Transfer Disclosure Statement. Section III of the form must be completed if the seller is represented by an agent. Section IV is completed only if the agent who brings the offer is not the seller's agent. There are no exemptions allowed under this rule. If an agent does not comply, a buyer has two (2) years from the date of possession to file suit.

Fair Housing Laws

As we said, real estate licensees have an ethical responsibility to their clients and customers. When it comes to Fair Housing laws, their responsibility is a legal one as well. Civil rights laws in the real estate industry are designed to create a situation in which persons having similar financial means will have similar choices when attempting to buy, lease, rent, or finance property. The laws are also designed to allow everyone an opportunity to live in the place of his or her choice by creating an open and unbiased market. Fair Housing laws on the federal, state and local levels affect every aspect of a real estate transaction. Let's take a look at these laws in more detail.

Trade Associations - National

Belonging to a trade association can add credibility to you as a real estate professional. Associations exist at the national, state and local levels. National Association of REALTORS® (NAR) NAR is the largest and most prestigious real estate organization in the world. NAR works for legislation that is favorable to members of the public, and to the industry and it enforces professional standards of conduct through its Code of Ethics. Only members of NAR and its state divisions may use the trademark of REALTOR® when presenting themselves to the public. NAR requires its members to take a mandatory ethics course every four years. Failure to take the course results in suspension from the organization until the training has been completed. National Association of Real Estate Brokers (NAREB) NAREB is the oldest and largest minority trade association in the United States. It was formed in 1947 and is made up primarily of African-American real estate brokers. Members have the designation of "realtist." NAREB has local boards in most large cities. A "realtist" must belong to both the local board and the national organization. Many "realtists" are also "REALTORS®." Other national organization include: National Association of Hispanic Real Estate Professionals (NAHREP) NAHREP is primarily made up of Hispanic members who meet and work toward real estate goals that are beneficial to the Hispanic population. Asian Real Estate Association of America (AREAA) AREAA is committed to improving success and business opportunities for real estate licensees who serve the Asian American community.

California Fair Housing

California also has some fair housing laws and regulations that deal with discrimination: Unruh Act Rumford Fair Housing Act Holden Act Let's take a look at each of these. The Unruh Civil Rights Act provides protection from discrimination by all business establishments in California, including housing and public accommodations. The Unruh Civil Rights Act protects people from being discriminated against because of their sex, race, color, religion, ancestry, national origin, disability, medical condition, marital status or sexual orientation. Housing designated to meet the physical and social needs of senior citizens is exempt from this act. The Unruh Act provides for remedies which could include out-of-pocket expenses, a cease and desist order, or damages for emotional distress. Court-ordered damages may include a maximum of three times the amount of actual damages, but not less than $250. Persons who believe they have experienced discrimination may file a complaint, which must be filed within one year of the alleged discrimination. The Fair Employment and Housing Act (also known as the Rumford Fair Housing Act) prohibits: Discrimination in the sale, rental, lease, negotiation or financing of housing based on race, color, religion, sex, marital status, familial status, disability, national origin, ancestry, sexual orientation or source of income. Eviction of a person in retaliation for seeking to uphold the rights under this act. Refusal to reasonably accommodate a handicapped or disabled person. Exemptions to this act include owner-occupied housing with no more than one boarder and some non-commercial, religious, fraternal and charitable housing. Remedies for violations could include: Injunctions Actual or punitive damages Civil penalties Note: Before any remedies would be awarded, the aggrieved party would have to waive all rights under the Unruh Act. Financial institutions, such as banks and credit unions, are subject to the Unruh Civil Rights Act that we talked about previously. In addition, the Housing Financial Discrimination Act, also known as the Holden Act, prohibits financial institutions from discriminating in loan activities on the basis of race, color, religion, marital status, national origin, ancestry or sex. Financial institutions are also prohibited from discriminating based on a neighborhood's make-up (redlining). Violations of the Holden Act may be filed with the Department of Financial Institutions under the Division of Business Oversight who must investigate the complaints and take remedial action as required by law.

Financing Disclosures

California has quite a number of broker and lender financing disclosures. In this section of the unit, we will discuss: Seller Financing Disclosure Mortgage Loan Disclosure Statement Adjustable Rate Loan Disclosure Real Estate Settlement Procedures Act Truth in Lending Act and Regulation Z Notice of Transfer of Loan Servicing Notice of Adverse Action Housing Financial Discrimination Act To get more detailed information about California's financing disclosures, visit the Bureau of Real Estate website at http://www.dre.ca.gov/.

Environment Hazards Disclosure

California mandates that prospective homeowners be informed about environmental hazards that are located on or affect residential property. The Real Estate Transfer Disclosure Statement that we talked about on an earlier screen addresses the issue of environmental hazards in Part C. The California Civil Code states that if the buyer receives a copy of the Residential Environmental Hazards Guide, the seller and seller's agent are not required to furnish any additional information, unless they have actual knowledge of environmental hazards on the property. The information in the booklet will be considered adequate information for the buyer.

Chapter Conclusion

Chapter 1: Introduction to Real Estate Summary Real estate is affected by: Supply and demand. Costs incurred in bringing the properties to market. Value aspects of desire, usefulness, scarcity and ability to pay. If the economy picks up, sales increase. If it slows, sales decrease. A Multiple Listing Service (MLS) is an organization of member brokers who share listing information with one another. Real Estate Property: Residential, Industrial, Commercial, Agricultural, Special purpose, Recreational and Investment property. Specialization areas: Type of property, Clients, Geography, Business Type, Transactions, Auction Sales and Mortgage loans. Keep in mind upon choosing a broker: Quality training programs are available in-house and locally. The broker encourages training and provides a mentor program for the licensees. The office is dedicated to your desired specialty area. The firm employs a number of successful agents (long history with the firm). Broker-Salesperson Relationships A salesperson is licensed to perform transactions on behalf of the licensed broker and may receive compensation for performed activities ONLY from the employing broker. The broker is responsible for the licensee's professional actions. An employee works under the supervision and control of the broker. An independent contractor is hired to perform certain acts, but the broker cannot control how the salesperson performs those acts. Many brokers require that licensees carry errors and omissions/automobile liability insurances. Licensee's written employment agreement must be dated and signed and should clearly: State each person's responsibilities to the other. Discuss the broker's supervision. Describe the licensee's duties. Clarify the licensee's compensation program. Planning and Setting Goals: Make your goals definite and measurable. Put your goals in writing. Realize that goals are not rigid. Devote time to daily activities such as returning phone calls, developing new leads, reviewing new listings, calling potential clients ("National Do Not Call Registry" guidelines), preparing for listing presentations, etc. Activities which will lead to success as a salesperson: Develop your "sphere of influence" by contacting friends, family members, neighbors, past co-workers, etc., and letting them know you are a real estate agent. Preview your company's listings. Spend time learning about other company's listings in your geographic area or your area of specialty. Familiarize yourself with your office's policies and procedures manual. National Association of REALTORS® (NAR) is the largest and most prestigious real estate organization in the world. NAR requires its members to take a mandatory ethics course every four years. National Association of Real Estate Brokers (NAREB) is the oldest and largest minority trade association in the United States. Members have the designation of "realtist." A "realtist" must belong to both the local board and the national organization. National Association of Hispanic Real Estate Professionals (NAHREP) is primarily made up of Hispanic members who meet and work toward real estate goals that are beneficial to the Hispanic population. Asian Real Estate Association of America (AREAA) is committed to improving success and business opportunities for real estate licensees who serve the Asian American community. California Association of REALTORS® (CAR) (state division of NAR) allows members to conduct their individual businesses successfully and promotes the preservation of real property rights. CAR offers many seminars and educational opportunities to its members. Any licensee who is NOT an association member will be referred to simply as a broker or salesperson. Now it's time for your first quiz. Good luck! Click here if you would like to open this summary as a pdf, which you can then print or save to your device: Chapter 1 Summary

Chapter Conclusion

Chapter 2: Ethics, Fair Housing and Trust Accounts Summary Ethics in Real Estate Good ethical practices have to do with trustworthiness, honesty, and competence. Duties to clients outlined in the Code: Protecting and promoting the interests of the client. Avoiding the concealment of pertinent facts. Informing sellers or purchasers of the licensee's interest in a property. Providing equal, non-discriminatory services to all persons. Being truthful and clear in advertising. Refraining from false or misleading statements about competitors. Fair Housing Laws Americans with Disabilities Act (ADA) mandates that persons with disabilities have equal access to jobs, public accommodations, government services, public transportation and telecommunications. Brokers must evaluate whether they need to make physical changes to their office space to comply with the law. Licensees should inform their commercial and investor clients of the need to have their leases professionally evaluated and their offices inspected for compliance. The protected classes of the Federal Fair Housing Act are race; religion; color; national origin; sex; handicap and familial status. Fair Housing Law prohibits: Refusing to sell, rent or negotiate with any person. Stating or advertising that the property is restricted or using discriminatory advertising Denying membership in any multiple listing service (MLS) or any broker's organization. Blockbusting/Panic Selling (making a profit by inducing owners to sell by telling them that persons of a protected class are moving into a neighborhood). Steering (channeling homebuyers toward or away from homes in certain neighborhoods). Redlining (restricting the number of loans in certain areas of a community). Brokers are encouraged to display the Equal Housing Opportunity poster in their offices. The Fair Housing laws exemptions: If the owner does not own more than three homes at one time, does not use discriminatory advertising and does not use a real estate agent. Rental of units in an owner-occupied, one-to-four- family dwelling is exempt, if the owner does not use an agent to secure tenants. Some specific religious organizations/private clubs/senior citizen housing Fair Housing Enforcement Any person who believes he or she has been discriminated against may file a complaint with HUD within one yearof the alleged act OR file a suit in a state or federal court within two (2) years of the alleged violation. Conciliation: during the investigation period, HUD can attempt to resolve the complaint. California Fair Housing Unruh Civil Rights Act Provides protection from discrimination by all business establishments. Housing designated to meet the physical and social needs of senior citizens is exempt from this act. Complaints must be filed within one year of the alleged discrimination. Fair Employment and Housing Act prohibits: Discrimination in the negotiation or financing of housing. Eviction of a person in retaliation for seeking to uphold the rights under this act. Refusal to reasonably accommodate a handicapped or disabled person. Housing Financial Discrimination Act (Holden Act) prohibits financial institutions from discriminating in loan activities on various basis. Trust Funds All funds deposited into a trust account must be maintained in that account until the broker disburses those funds according to the instructions of the person who is entitled to receive the funds. Commingling: if a broker deposits the funds of others in a business or personal account or holds the funds without authorization. Rules for handling trust funds: Trust funds must be deposited within three (3) business days of the broker or the broker's salesperson receiving the funds. The trust account must be a demand (non-interest-bearing) account. A broker may deposit money into the trust account to cover reasonable service charges, but this cannot exceed $200. Any broker-owned funds must be disbursed from the account within 25 days after deposit. All trust account records must be kept for three (3) years. Good luck on your Chapter 2 quiz! Click here if you would like to open this summary as a pdf, which you can then print or save to your device: Chapter 2 Summary

Chapter Conclusion

Chapter 3: Agency and Other Mandatory Disclosures Summary Agency The word agency defines the basic relationship between a broker and the person represented in a transaction. In California an agent is defined as a person licensed as a real estate broker. Licensees who work under the supervision of the broker are designated as associate licensees. An agency relationship is created when a person (principal) delegates to another person (agent) the right to act on his or her behalf in business transactions with third parties. Both parties must consent and agree to form the relationship. The relationship is fiduciary- the agent owes certain duties to the principal. If the principal in the relationship is the seller, then the broker is the seller's agent. If the principal is the buyer, the broker) is the buyer's agent. Listing agent - This is the licensee who lists the seller's property. Selling agent - This is the licensee who brings the buyer to complete the transaction. An agency relationship is based on authorization and mutual consent, not on compensation. Fiduciary Duties 1. Care The law expects an agent to do his or her job with care, skill, and diligence: If the agent represents the seller: Helping the seller set a realistic asking price and evaluate purchase offers. Discovering and disclosing facts that affect the seller. Marketing the property and presenting contracts properly. If the agent represents the buyer: Helping the buyer locate appropriate housing. Evaluating property values and property conditions. Determining financing alternatives. Presenting offers and counteroffers with the buyer's interests in mind. An agent is liable to the principal for any loss that results from carelessness or negligence. 2. Obedience Requires that the agent act in good faith and obey the principal's directions as outlined in the contract, as long as they are legal. 3. Accounting An agent must be able to account for all monies, documents and other property he or she receives from the principal; keeping copies of the trust account records for three years. 4. Loyalty Requires the agent to place the client's interests above those of all others. Confidentiality remains even after a relationship has been terminated. The agent must disclose material facts about the property. 5. Disclosure An agent is bound to inform the client of ALL material facts that might affect the client's interests in the transaction. Single Agency: the agent can represent only one party in a single transaction, exclusively. Seller/Buyer Agreement: the agent is accountable only to the seller/buyer (never both at the same time) Dual agency: representing both parties in the same transaction - the seller and the buyer. California law allows dual agency if the buyer and seller are informed of the situation and give their written consent. Agency Disclosure Licensees use California's Disclosure Regarding Real Estate Agency Relationships form with their clients. The licensee must explain to the client the three types of agent relationships - seller's agent, buyer's agent or dual agent. If the client elects the dual agent option, the agent must have the buyer sign one copy of the form and the seller sign another copy of the form. When to disclose: The listing agent must provide the disclosure to the sellerprior to securing the listing agreement. The selling agent must provide the disclosure to the seller"as soon as practicable" prior to presenting a purchase offer. The selling agent must provide the disclosure to the buyer "as soon as practicable" prior to the execution of the buyer's offer to purchase. Any person who is selling a one-to-four-unit property must provide the buyer with a written Real Estate Transfer Disclosure Statement, which describes the condition of the property in detail. The seller must complete it, sign it and provide it to the buyer If the disclosure is delivered after the execution of the offer to purchase, the buyer has the right to cancel the offer within three days. Agent's Inspection Disclosure California agents are required to conduct a visual inspection (does not includeareas that would be deemed as reasonably or normally inaccessible) of a one-to-four-unit property and disclose the material facts to a prospective buyer. If an agent does not comply, a buyer has two yearsfrom the date of possession to file suit. Important things to look for include structural defects,deterioration, water or insect damage. Environment Hazards Residential Earthquake Hazards Report is filled by the seller and signed by the buyer as acknowledgement of receipt. The buyer must receive a copy of The Homeowners Guide to Earthquake Safety/Residential Environmental Hazards Guide. Then, the seller is not required to furnish any additional information, unless there is actual knowledge of hazards affecting the property. Natural Hazard Disclosure Statement. The seller must disclose if the property is located in a hazard area Military Ordinance: if residential property is located within one mile of a former military training site, the seller must inform the potential buyer in writing that the ordinance site may contain ammunition or explosives. Sex Offender Database: every sales contract must contain a notice with information about sex offenders registered under Megan's Law. Information not required to be disclosed: Death - are not required to disclose any death that happened on a property more than three years before the offer to purchase was made. AIDS - sellers are prohibited from disclosing that a former occupant ever had AIDS. California Disclosures Mello-Roos Bond Disclosure authorized the formation of community facilities districts, the issuance of bonds, and the levying of special taxes to finance certain public facilities and services. If the seller fails to provide the notice prior to signing a sales contract or lease, the buyer or tenant has the right to cancel the contract within three days after the receipt of the notice. Subdivision Disclosures: any person intending to offer subdivided lands for sale or lease must apply for and obtain a public reportfrom the Bureau of Real Estate. Common Interest Subdivision: the owners own/lease an individual unit and have an undivided interest in the common areas of the development. The subdivider or agent must give the buyer the public reportand also the Common Interest Development General Information. Right to Rescind Purchasers in two types of subdivisions have an unqualified right of rescission: Timeshare buyers have a right to rescind the purchase within seven calendar daysafter receiving the public report or after signing the purchase contract, whichever is later. Undivided interest buyers have a right to rescind the purchase by midnight of the third calendar day following the day the purchaser executed the offer to purchase. Financing Disclosures Seller Financing Disclosure. The seller financing arrangements on all one-to-four-unit residences must be disclosed to both the seller and the buyer using the Seller Financing Addendum and Disclosure form. Mortgage Loan Disclosure Statement. Real estate brokers negotiating loans which will be secured by liens on real property must deliver a written MLDS to the borrower within three business days of receipt of the borrower's written loan application. Adjustable Rate Loan Disclosure. A lender offering adjustable-rate residential mortgage loans must provide prospective borrowers with a copy of the Consumer Handbook on Adjustable-Rate Mortgages. The Real Estate Settlement Procedures Act (RESPA): For federally-related loans, the lender must furnish a good faith estimate of closing costs within three days of the loan application and provide a HUD booklet. The lender must provide a written Servicing Disclosure Statement. One business day before the settlement of the loan escrow, the borrower has the right to inspect the proposed HUD-1 Settlement Statement. The Truth in Lending Act requires a creditor to furnish certain disclosures to the consumer before making a contract for a loan. Allows the consumer the right to rescind. Regulation Z requires that creditors make certain disclosures for real property secured loans. Notice of Transfer of Loan Servicing. If a loan is secured by a one-to-four-unit property, the lender must notify the borrower when the loan collection is transferred to another entity. Notice of Adverse Action (Equal Credit Opportunity Act): A lender or creditor who denies an application for credit must provide the applicant with a statement of reasons within 30 days after receiving the completed loan application. Housing Financial Discrimination Act (Holden Act). At the time of the loan application, lenders must notify all prospective borrowers of their rights under the Holden Act and its prohibitions against discriminatory practices by lenders. Now it's time for a quiz. Good luck! Click here if you would like to open this summary as a pdf, which you can then print or save to your device: Chapter 3 Summary

Ethics in Real Estate

High ethical standards in real estate are very important - more important than in some other transactions in which the consumer may be more familiar with the service being performed. It is critical that a broker and his or her agents act in the best interests of both the client and any third parties to a transaction. Ethics have nothing to do with legality. Laws tend to set minimum standards for acceptable behavior. Ethics tends to deal with what is right. An act can be legal, but unethical. Good ethical practices have to do with trustworthiness, honesty, and competence. Much of the information incorporated into the professional code of ethics has come from three sources: Federal and state laws which focus on anti-discrimination laws and fair trade practices. Real estate licensing regulation on the state level dealing primarily with agency issues and disclosures. Self-regulation by real estate associations that set standards for professional conduct. Members of the National Association of REALTORS® (NAR) follow a very strict code of ethics. Many state real estate commissions have included principal sections of this code in the rules and regulations that govern the conduct of the licensees in their particular states. The formal Code of Ethics and Standards of Practice set forth by NAR calls for professionals to observe the "Golden Rule" and to conduct themselves and their real estate business in accordance with certain standards. These standards address licensees' duties to their clients and duties to the public. Some of the duties to clients outlined in the Code include: Protecting and promoting the interests of the client. Avoiding exaggeration, misrepresentation and the concealment of pertinent facts. Cooperating with other brokers. Informing sellers or purchasers of the licensee's interest in a property. Accepting commissions. Handling trust funds. Some of the duties to the public outlined in the Code include: Providing equal, non-discriminatory services to all persons. Refraining from providing professional services outside the licensee's field of expertise. Being truthful and clear in advertising. Avoiding activities that might constitute the practice of law. Refraining from false or misleading statements about competitors. Below is a link to the Code of Ethics in its entirety so that you can print it or read it online. It's in PDF format. NAR Code of Ethics and Standards of Practice Practicing ethical behavior is a good business practice. If you meet the needs of your clients, you will feel good about yourself and it will propel you to continue to keep your clients' best interests at heart. If you are ethical, your clients will be loyal and send referrals your way. Most successful real estate professionals will tell you that their business has grown through referrals from past clients - and the ultimate return of those clients when they are looking for their next homes. Being ethical results in earning the trust of your customers and clients. This, in turn, results in long-term success.

Real Estate and the Economy

How do economic factors relate to real estate? As with other goods and services in the marketplace, real estate is affected by: Supply and demand. Pricing. Costs incurred in bringing the properties to market. Value aspects of desire, usefulness, scarcity and ability to pay. However, there are some aspects of real estate that make it different from other goods and services.

Agency Relationships - Dual Agency

However, California law allows dual agency if the buyer and seller are informed of the situation and give their written consent. Before signing written disclosure forms giving permission for dual agency, both the buyer and the seller must get enough information to make an informed choice as to whether or not they really want to enter into this arrangement. For example, Sally enters into a buyer's agency agreement with Walt. At some point during the relationship, Sally becomes interested in one of Walt's listings. Walt must then disclose to both parties that he has agency relationships with both of them. If both parties agree to move forward, they sign an agreement to that effect and a dual agency is created. Sometimes a dual agency is created unintentionally or through careless behavior by an agent. For example, listing agent Hal shows one of his listings to a prospective buyer, Gail. Gail is very excited and obviously interested in making an offer, but she cannot meet the seller's asking price. Hal suggests to Gail that he might be able to persuade the seller to accept her offer. This action on Hal's part could lead Gail to believe that Hal is her advocate. An action like this could create an implied agency with Gail and violate Hal's duties of loyalty to his seller. In this situation, neither party has been informed of the situation, resulting in an undisclosed or divided dual agency. Undisclosed dual agency is a violation of license law and could ultimately result in a lawsuit for damages or disciplinary action by the commission.

Employee

If a broker hires a salesperson as an employee, he or she can require the salesperson to follow rules regarding such things as: Working hours Office duty Meetings Dress code In addition, the broker must withhold income tax, Social Security tax and Medicare tax from the salesperson's wages. Most real estate assistants, both licensed and unlicensed, are considered employees for income tax purposes.

Residential Earthquake Hazards Report

In 1993, the California Seismic Safety Commission published a booklet titled The Homeowner's Guide to Earthquake Safety to help buyers, sellers, and agents become familiar with the issues surrounding earthquake safety in California. The booklet contains a form called the Residential Earthquake Hazards Report, which the seller fills out and signs and is subsequently signed by the buyer as acknowledgement of receipt. The form has seven questions which will help determine the home's earthquake weaknesses.

Check Your Understanding

Print this screen, answer the questions and then advance to the next screen to see the answers. What required disclosure is a result of Megan's Law? Which disclosures are NOT required to be made when selling residential property? What is a public report and when must it be provided? What does TRID require of lenders? What required disclosure is a result of Megan's Law? California requires that every sales contract or lease contain a notice which states that information about sex offenders registered under Megan's Law is available to the public on an Internet web site maintained by the Department of Justice. Which disclosures are NOT required to be made when selling residential property? Natural deaths, unnatural deaths occurring more than three years prior to the sale and information about residents having AIDS or dying from AIDS. What is a public report and when must it be provided? A public report is a statement from the Bureau of Real Estate that discloses to prospective buyers pertinent facts about a subdivision. Purchasers must sign a receipt indicating that they have received and accepted the report before they enter into the purchase transaction. What does the TRID require of lenders? That they provide a copy of the booklet, "Your home loan toolkit" to every person at the time of application for a loan, a Loan Estimate of closing costs within three days of the loan application; that they let the borrower know in writing if they expect someone else to service the loan; that they give the Closing Disclosure to the buyer at least three business days before settlement.

Check Your Understanding

Print this screen, answer the questions and then advance to the next screen to see the answers. When is an agency relationship created? What exception exists to the duty of obedience when working with a client? An agent's fiduciary responsibilities to a client usually end when the transaction closes. This is not true of which duty? Amanda calls broker Tim to schedule a showing of one of his listings. Amanda loves the home and wants to make an offer. What should Tim do next? When is an agency relationship created? An agency relationship is created when a person (the principal) delegates to another person (an agent) the right to act on his or her behalf in business transactions with third parties. What exception exists to the duty of obedience when working with a client? An agent is not bound by the duty of if the principal's directions are not legal. An agent's fiduciary responsibilities to a client usually end when the transaction closes. This is not true of which duty? Confidentiality. This duty extends beyond the termination of the relationship. No personal information gained during the term of the agreement can ever be disclosed to another party except the broker. Amanda calls broker Tim to schedule a showing of one of his listings. Amanda loves the home and wants to make an offer. What should Tim do next? Tim must disclose to Amanda his agency relationship with the seller and get her written permission for a dual agency arrangement. He must also inform the seller of his agency relationship with Amanda and get the seller's written permission for the dual agency arrangement. If both parties agree to dual agency, they can proceed. If not, Amanda will have to find other representation.

Check Your Understanding

Print this screen, answer the questions and then advance to the next screen to see the answers. When must a licensee provide an agency disclosure to a prospective client? What is the Real Estate Transfer Disclosure Statement and who is responsible for providing it? Agent Jim needs to do a visual inspection of his listing. What kinds of things should he be looking for? Why should agent Grace give her client a Combined Hazards Book? When must a licensee provide an agency disclosure to a prospective client? The listing agent must provide the disclosure to the seller prior to securing the listing agreement. The selling agent must provide the disclosure to the seller "as soon as practicable" prior to presenting a purchase offer. The selling agent must provide the disclosure to the buyer" as soon as practicable" prior to the execution of the buyer's offer to purchase. What is the Real Estate Transfer Disclosure Statement and who is responsible for providing it? It is a statement that describes the condition of the property in detail. The seller must complete it, sign it and provide it to the buyer, but there is a section on page three of the form that the seller's agent (if there is one) must complete and sign. Agent Jim needs to do a visual inspection of his listing. What kinds of things should he be looking for? Structural defects, deterioration, water damage and insect damage. Why should agent Grace give her client a Combined Hazards Book? This book contains three booklets which meet the seller's and agent's requirements for disclosure of earthquake hazards, lead-based paint and other environmental hazards.

Check Your Understanding

Print this screen, answer the questions and then advance to the next screen to see the answers. Which California fair housing law(s) apply to financial institutions? Define panic selling. Broker Sam receives a deposit check from a client, along with the purchase contract. How long does he have to deposit it into his trust account? How much of his own money can broker Jake keep in a trust account and not be considered guilty of commingling? Which California fair housing law(s) apply to financial institutions? Both the Unruh Civil Rights Act and the Holden Act. Define panic selling. Panic selling is soliciting a listing or inducing someone to sell by telling him or her that persons of a certain protected class are moving into the neighborhood. Broker Sam receives a deposit check from a client, along with the purchase contract. How long does he have to deposit it into his trust account? Sam has three business days to deposit the check, unless the buyer authorizes him to hold the uncashed check until the offer is accepted. How much of his own money can broker Jake keep in a trust account and not be considered guilty of commingling? Up to $200 to use for service fees on the account

Check Your Understanding

Print this screen, answer the questions and then advance to the next screen to see the answers. Why is it important for licensees to understand the Americans with Disabilities Act? Alex Jones owns a duplex and lives in one unit. He refuses to rent the other unit to families with children. What would you say about Alex's actions? If a person feels like he or she has been discriminated against, how long does that person have to file a complaint? Salesperson Sally tells her senior citizen buyers that the home they want to view is located in a neighborhood with several small children and loud teenagers. She tells them they would not be comfortable in this home and she shows them a list of homes in other neighborhoods she thinks would be more appropriate. What would you say about Sally's behavior? Why is it important for licensees to understand the Americans with Disabilities Act? Brokers must evaluate whether they need to make physical changes to their office space to comply with the law. Licensees should inform their commercial and investor clients of the need to have their leases professionally evaluated and their offices inspected for compliance. Alex Jones owns a duplex and lives in one unit. He refuses to rent the other unit to families with children. What would you say about Alex's actions? Alex is within the guidelines of the Fair Housing Act since he is the owner of a dwelling that has fewer than four units, one of which is owner-occupied. If a person feels like he or she has been discriminated against, how long does that person have to file a complaint? With HUD - within one year of the alleged act. In state or federal court - within two years of the alleged act. Salesperson Sally tells her senior citizen buyers that the home they want to view is located in a neighborhood with several small children and loud teenagers. She tells them they would not be comfortable in this home and she shows them a list of homes in other neighborhoods she thinks would be more appropriate. What would you say about Sally's behavior? Sally is guilty of steering, which is prohibited by Fair Housing laws.

Financing Disclosures

Real Estate Settlement Procedures Act and TILA/RESPA Integrated Disclosure Rule (TRID) The Real Estate Settlement Procedures Act (RESPA) requires that borrowers receive various disclosures regarding the proposed loan transaction. TRID requires the following: For federally-related loans, lenders must give a copy of the booklet, "Your home loan toolkit" to every person at the time of application for a loan. The lender or mortgage broker must furnish a Loan Estimate of closing costs within three days of the loan application and provide a booklet published by the Consumer Financial Protection Bureau (CFPB) called Your home loan toolkit. The lender or mortgage broker must provide a written Servicing Disclosure Statement which indicates whether he/she expects that someone else will be servicing the loan. This disclosure must be given at the time of the loan application or within three business days. At least three business days before the settlement or the anticipated close of the loan escrow, the borrower must receive a copy of the Closing Disclosure form which details all the closing costs. RESPA also requires that borrowers receive disclosures about business relationships that may exist among lenders/creditors and settlement service providers.

Real Estate and the Economy

Real estate is different from other goods and services for several reasons: Land has special value because it is scarce. Every piece of property is unlike any other piece. Therefore, it is distinctive in both appeal and value. If demand in a geographical area drops, the supply (property) cannot be moved to a high demand area. Property cannot be easily and quickly exchanged for cash. Buyers must be diligent in searching for and finding the "right" piece of property. Real estate cannot respond quickly to changes in demand. If a geographical area is experiencing high demand, new homes can be constructed only at a certain pace, which may not meet the demand in a timely manner. Conversely, if demand in an area slows, sellers are put in a "wait and see" mode. Properties are at the mercy of the local economy. If the economy picks up, sales increase. If it slows, sales decrease.

Fair Housing in Practice - Your Responsibility

Real estate transactions are the livelihood of the real estate industry and communities view licensees as their real estate "experts." Along with the opportunity to profit from real estate transactions comes the responsibility - both legal and social - to ensure that everyone's civil rights are protected. Licensees must be particularly obvious in their efforts where fair housing is concerned. Not only does the reputation of the industry depend on it, but the consequences for violations are serious. A licensee could lose substantial income if his or her license is suspended or revoked. Given that anyone may file a discrimination complaint, it is wise for licensees to avoid any appearance of discriminatory behavior whatsoever. It's a good idea for brokers and salespersons to adopt policies and procedures that ensure "equal treatment" for everyone with whom they deal. If a practice is not performed consistently or if people are affected differently by the practice, someone could view it as discriminatory.

Written Employment Agreements

Regardless of a licensee's status as employee or independent contractor, the broker must enter into a written agreement with each salesperson and broker-salesperson. The agreement must be dated and signed and should clearly: State each person's responsibilities to the other. Discuss the broker's supervision. Describe the licensee's duties. Clarify the licensee's compensation program. Note: It would be wise for a broker to have a standardized contract that has been reviewed by an attorney to be sure it is in compliance with federal law.

Choosing a Broker

Statistics show that several new licensees no longer practice real estate after the first year. And some of those who are still practicing are not making a good income after their first year. For this reason, it's important that you spend time and effort in choosing your first broker/employer. You may be anxious to start working as soon as you get your license, but keep in mind that it's just as important for you to find the right broker as it is for the broker to find the right salesperson for his or her firm. When "shopping" for a broker, there are several things you need to look for. Let's take a look at what these things are. Here is a list of important things to look for when choosing a broker/firm: Quality training programs are available in-house and locally. The broker encourages and supports training. The broker provides a mentor program and/or office assistance for the licensees. The firm has a large selection of books, audios, videos and CDs on hand for licensee use. The office is dedicated to your desired specialty area. The firm employs a number of successful agents. The agents have a long history with the firm. The firm feels like a "good fit" for you. It's as important for you to interview the broker as it is for the broker to interview you. Be sure you get information about: The costs of being a member of the firm, such as monthly fees. Who pays what expenses, such as business cards, signs, advertising, MLS fees, association memberships, etc. Specific requirements for licensees, such as types of insurance coverage. What training the broker will provide, if any. How commissions are split, such as straight commission versus percentage splits. Note: We'll explain more about commission splits on the next screen. Other benefits the broker may offer, such as paying for seminars or offering a reduced commission to a licensee for a personal home purchase. All of this information plays a key role in helping you make your decision.

California Code of Conduct - Discriminatory Practices

The California Code has expanded on the list of activities that are considered discriminatory conduct, and we will list them on the next several screens. The discriminatory practices based on race, color, sex, religion, ancestry, handicap, marital status or national origin that California prohibits include the following activities, some of which we discussed earlier under the federal law. Refusing to negotiate for the sale, rental or financing. Refusing or failing to show, rent, sell or finance. Discriminating against any person in the sale or purchase, collection or payments or performance of services in connection with contracts or loans. Discriminating in the terms, conditions or privileges of sale, rental or financing. Discriminating in processing applications or referring prospects to other licensees because they belong to a protected class. More prohibited activities include the following: Representing real property as not available for inspection, sale or rental. Processing an application more slowly or otherwise delaying a transaction. Making an effort to encourage discrimination in the showing, sale, lease or financing of property. Refusing to assist another licensee in negotiating a sale, rental or financing. Making an effort to obstruct, retard or discourage a purchase, lease or financing in a certain neighborhood. Performing acts or making statements which express or imply a limitation, preference or discrimination. Coercing, intimidating, threatening or interfering with a person's enjoyment of a property or retaliating against someone who filed a fair housing complaint. Soliciting sales, rentals or listings restrictively. More prohibited activities include the following: Maintaining restrictive waiting lists. Seeking to discourage or prevent transactions because of the presence or absence of members of a protected class. Making an effort to discourage or prevent a sale or rental through the representation of actual or alleged community opposition. Representing desirability of particular properties. Refusing to accept listings. Agreeing not to show property. Advertising or causing advertising to be done in a manner that indicates discrimination. Using wording that indicates preferential treatment Selectively advertising in a way that will cause discrimination. More prohibited activities include the following: Maintaining different pricing, rent, cleaning or security deposit structures for different groups. Financing in a discriminatory manner. Discriminating in prices. Discriminating when providing management services. Discriminating against owners, occupants, visitors or guests. Making an effort to encourage discrimination among other licensees or their employees. Establishing or implementing discriminatory rules in multiple listing and other services. Assisting anyone who intends to discriminate. The California Code also prohibits panic selling, also called blockbusting, which they define as "soliciting sales or rental listings, making written or oral statements creating fear or alarm, transmitting written or oral warnings or threats, or acting in any other manner so as to induce or attempt to induce the sale or lease of real property through any representation, express or implied, regarding the present or prospective entry of one or more persons of another race, color, sex, religion, ancestry, marital status or national origin into an area or neighborhood. " In other words, a licensee cannot induce someone to sell by telling him or her that persons of a certain protected class are moving into the neighborhood.

Fair Housing Exemptions

The Fair Housing laws allow for exemptions in some areas. However, please note: There are absolutely no exemptions, exceptions, or excuses for racial discrimination. The Federal exemptions to the 1968-88 laws are listed below. The sale or rental of a single family home by an owner is exempt if the owner does not own more than three homes at one time, does not use discriminatory advertising and does not use a real estate agent. Rental of units in an owner-occupied, one-to-four- family dwelling is exempt, as long as the owner does not use an agent to secure tenants. These exemptions also apply: Religious organizations may restrict housing to members of the same religious organization. Non-profit religious organizations can add a surcharge to the sale or rental of a property to a person that does not belong to their religious group, as long as the membership in the group is not limited by race, color or national origin. Private clubs may restrict rental or occupancy of their dwellings to members only, as long as the dwellings are not commercially operated. However, the club may not discriminate in its membership requirements. Senior citizen housing is exempt if the residents are at least 62 years old or 80% of the units are occupied by at least one person 55 or older.

Mello-Roos Community Facilities Act

The Mello-Roos Community Facilities Act of 1982 authorized the formation of community facilities districts, the issuance of bonds, and the levying of special taxes to finance certain public facilities and services. The bonds are issued for streets, sewers and the like in new developments. The seller of a one-to-four-unit residential property subject to a Mello-Roos bond must make a good faith effort to obtain a disclosure notice from the district concerning the special tax. The seller must give the notice to a prospective buyer. If the seller fails to provide the notice prior to signing a sales contract or lease, the buyer or tenant has the right to cancel the contract within three days after the receipt of the notice

Real Estate Settlement Procedures Act

The Real Estate Settlement Procedures Act (RESPA) requires that borrowers receive various disclosures regarding the proposed loan transaction. For federally-related loans, the lender or mortgage broker must furnish a good faith estimate of closing costs within three days of the loan application and provide a booklet published by the Department of Housing and Urban Development (HUD). The lender or mortgage broker must provide a written Servicing Disclosure Statement which indicates whether he/she expects that someone else will be servicing the loan. This disclosure must be given at the time of the loan application or within three business days. One business day before the settlement or the anticipated close of the loan escrow, the borrower has the right to inspect the proposed HUD-1 Settlement Statement which must be given to the borrower on or before settlement. RESPA also requires that borrowers receive disclosures about business relationships that may exist among lenders/creditors and settlement service providers.

Fiduciary Duties - Loyalty

The duty of loyalty requires the agent to place the client's interests above those of all others, including his or her own. An agent must negotiate agreements without considering the amount of compensation he or she will receive. Confidentiality about the principal's affairs is an important aspect of loyalty. If the agent represents the seller, he or she may not disclose except to their broker without the seller's express permission such things as: Client's willingness to accept an offer lower than the asking price. Client's anxiousness to sell. However, the agent must disclose material facts about the property.

Fair Housing Enforcement

The federal Fair Housing Act is administered by the Office of Fair Housing and Equal Opportunity under the direction of the secretary of Housing and Urban Development (HUD). Any person who believes he or she has been discriminated against may file a complaint with HUD within one (1) year of the alleged act. HUD can also initiate a complaint on its own. When HUD receives a complaint, it will start an investigation. Within 100 days, HUD will determine if there is reasonable cause to charge discrimination or it will dismiss the complaint. During the investigation period, HUD can attempt to resolve the complaint by getting assurance from the person against whom the complaint was filed that he or she will remedy the alleged violation. This is called conciliation. If the case goes to an administrative hearing, HUD attorneys will litigate the case for the person filing the complaint. That person may intervene in the case and choose to be represented by his or her own attorney. An Administrative Law Judge (ALJ) will consider evidence from both the complainant and the respondent. If the ALJ decides that discrimination occurred, the respondent can be ordered: To compensate for actual damages, including humiliation, pain and suffering. To provide injunctive or other equitable relief; for example, to make the housing available to the complainant. To pay the Federal Government a civil penalty to vindicate the public interest. The maximum penalties are $11,000 if the respondent has not been adjudged to have committed any prior discriminatory housing practice, $27,500 if the respondent has been adjudged to have committed one other discriminatory housing practice during the previous 5-year period and an amount not exceeding $55,000 if the respondent has been adjudged to have committed 2 or more discriminatory housing practices during the previous 7-year period. To pay reasonable attorney's fees and costs. For more information about penalties for violations of the Federal Fair Housing Acts visit the Department of Justice website at www.justice.gov/crt/fair-housing-act-2.

Lead Based-Paint Disclosure

The federal government requires that owners of homes built prior to 1978 provide to a prospective buyer a booklet entitled Protect Your Family from Lead in Your Home. The California publication Combined Hazards Book contains this booklet and therefore meets the federal requirement. Sellers or landlords of residences built prior to 1978 must fill out, sign and provide to the prospective buyer or tenant the Lead-Based Paint and Lead-Based Paint Hazards Disclosure form regardless of whether or not the owner knows if lead-based paint was ever used on the property.

Fiduciary Duties - Care

The law expects an agent to do his or her job with a reasonable degree of care, skill, and diligence. Since the principal hires an agent because of his or her expertise in the field, the principal expects the agent to use that expertise on the principal's behalf. If the agent represents the seller, exercising care and skill includes: Helping the seller set a realistic asking price. Discovering and disclosing facts that affect the seller. Presenting contracts properly. Marketing the property effectively. Helping the seller evaluate purchase offers. If the agent represents the buyer, exercising care and skill includes: Helping the buyer locate appropriate housing. Evaluating property values and property conditions. Determining financing alternatives. Presenting offers and counteroffers with the buyer's interests in mind. If an agent fails to exert reasonable efforts to represent his client's interest, the agent could be found guilty of negligence in court. An agent is liable to the principal for any loss that results from carelessness or negligence.

The Real Estate Industry

The real estate industry is considered to be the largest industry in the United States. We can say this industry is made up of individuals and companies that acquire, develop, operate, manage, lease, dispose of, sell and market real property. Real estate professionals perform a wide variety of real estate-related tasks that fall into one of several categories: Acquisition and development Investment Management Regulation Removal Sale or transfer Real estate salespersons spend the bulk of their time and effort in the last of these categories - sale or transfer. If salespersons cannot effectively market properties, the process of moving products through our economy would slow significantly. This slowdown would have a negative effect on the US economy.

The Real Estate Marketplace

The real estate market can vary significantly from one location to another. One area could have a scarcity of lower-priced homes with many more buyers than homes available, making it a sellers' market in that location. Yet another location could have a larger number of higher-priced homes for sale and only a few buyers for that price range, making it a buyers' market in that location. One thing that helps both buyers and sellers with these differences is the availability of Multiple Listing Services (MLS).

Broker-Salesperson Relationships

The way the IRS treats a salesperson - as either an employee or an independent contractor - applies to the issues of income tax and withholding obligations. It has nothing to do with the broker's liability for any wrongful acts performed by the licensee. The California Code requires that brokers supervise all their salespeople, regardless of their income tax classification. Even though a salesperson may be classified as an independent contractor, the broker is still responsible for the licensee's professional actions. Because brokers could be held responsible for any wrongful acts performed by a salesperson they employ, many brokers require that licensees carry: Automobile liability insurance in high amounts, naming the broker as an insured on the policy. Errors and omissions insurance, covering the broker and salespersons for negligent acts (but not intentional acts). If a licensee working for a broker is a property manager having access to the money of others, the broker may get a fidelity bond to protect himself or herself from any embezzlement by such a licensee. It also seems that brokers are not protected from any injury claims that may be made by any of their independent contractors; so it would be wise for brokers to carry workers' compensation coverage for everyone who works for them. California law requires brokers to carry workers' compensation insurance for their agents.

Agency Law

The word agency defines the basic relationship between a broker and the person he or she represents in a transaction. A huge body of common and statutory law controls the rights and duties of agents with regard to their clients. The general law of agency applies to all business transactions. In addition, each state's licensing laws directly affect the agency relationship among licensees, clients and the public. Even though agency law is separate from contract law, the two often come together in interpreting relationships between licensees and the persons they represent. Note: Even though the term "agent" is often used interchangeably with the terms licensee, broker or salesperson, in California an agent is defined as a person licensed as a real estate broker. Licensees who work under the supervision of the broker are designated as associate licensees.

Agency Law

The word agency defines the basic relationship between a broker and the person he or she represents in a transaction. A huge body of common and statutory law controls the rights and duties of agents with regard to their clients. The general law of agency applies to all business transactions. In addition, each state's licensing laws directly affect the agency relationship among licensees, clients and the public. Even though agency law is separate from contract law, the two often come together in interpreting relationships between licensees and the persons they represent. Note: Even though the term "agent" is often used interchangeably with the terms licensee, broker or salesperson, in California an agent is defined as a person licensed as a real estate broker. Licensees who work under the supervision of the broker are designated as associate licensees. The basic principles of agency law have remained mostly unchanged for hundreds of years. The practice of real estate, however, has changed dramatically in recent years, especially in the residential market. States continue to enact new laws that govern the relationships between brokers and clients, forcing brokers to reevaluate how they deal with their clients and the public. Some questions brokers are dealing with include: Will our firm represent only sellers? Will our firm represent only buyers? How will our firm interact with other brokers? As a result, the brokerage business continues to change as brokers try to enhance the services they offer to their clients.

California Real Estate Law Disclosure Chart

To help members understand the complex disclosure requirements in California, the California Association of REALTORS® has compiled and published the California Real Estate Law Disclosure Chart. When we discuss purchase contracts in a later chapter, you will see that the contract itself addresses and includes many of the required disclosures.

Financing Disclosures

Truth in Lending Act and Regulation Z The Truth in Lending Act requires a creditor to furnish certain disclosures to the consumer before making a contract for a loan. Regulation Z requires that creditors make certain disclosures for real property secured loans. The disclosures include: Amount financed Finance charge Annual percentage rate Total of payments Payment schedule The lender provides this information on the Loan Estimate form that must be given to the borrower within three days of the loan application. Truth in Lending allows the consumer the right to rescind the contract until midnight of the third business day following the completion of the loan. More Financial Disclosures Notice of Transfer of Loan Servicing If a loan is secured by a one-to-four-unit property, the lender must notify the borrower when the loan collection is transferred to another entity. Notice of Adverse Action - (Equal Credit Opportunity Act) A lender or creditor who denies an application for credit must provide the applicant with a statement of reasons or a written notification of the applicant's right to obtain such a statement, within 30 days after receiving the completed loan application. Housing Financial Discrimination Act (Holden Act) At the time of the loan application, lenders must notify all prospective borrowers of their rights under the Holden Act and its prohibitions against discriminatory practices by lenders.

Changes in the Real Estate Market

What changes have we seen in the real estate profession in the last several years? There are many and they include the following: Salespersons are generally better trained than in the past. Buyers and sellers have indicated that they want professionals who are both educated and experienced in real estate. Having professional designations, such as GRI (Graduate, REALTORS® Institute) or CRS (Certified Residential Specialist) can be important to clients. Smaller offices have merged with larger ones, giving consumers the benefits of economy of scale. Groups of salespersons within a firm have formed teams to work more efficiently with clients. Prospective homeowners are using the Internet to locate properties. Real estate salespersons are also using the internet to their advantage in marketing properties. Many real estate firms are offering affiliated services to clients. The number and variety of loan products have expanded.

Check Your Understanding-Answers

What economic factors affect the real estate market as well as other goods and services? Supply and demand Pricing Costs incurred in bringing the properties to market Value aspects of desire, usefulness, scarcity and ability to pay How are properties affected by the local economy? If the economy picks up, sales increase. If it slows, sales decrease. List three kinds of property in the real estate market. Any three of these six: industrial, commercial, agricultural, special purpose, recreational, investment Jim has decided that he will learn all he can about the new subdivisions at the west end of town. Jim has decided to specialize in what area of real estate? Geography

Trust Funds

When a client gives a broker a deposit for the purchase of a property, the broker must do one of these things: Give the funds to the broker's principal. Deposit the funds directly into escrow. Deposit the funds into his or her trust account. All funds deposited into a trust account must be maintained in that account until the broker disburses those funds according to the instructions of the person who is entitled to receive the funds. If a broker deposits the funds of others in a business or personal account or holds the funds without authorization, he or she would be guilty of commingling -- a license law violation -- and could be subject to disciplinary action. However, a broker is permitted to hold an uncashed check at the buyer's request before an offer is accepted or at the seller's request after the offer is accepted. The California Code outlines several important rules for handling trust funds: Trust funds must be deposited within three (3) business days of the broker or the broker's salesperson receiving the funds. The trust account must be a demand (non-interest-bearing) account. However, under certain conditions, the funds could be kept in an interest-bearing account at the written request of the owner of the funds as long as the broker or the broker's licensee does not benefit from the interest. A broker may deposit money into the trust account to cover reasonable service charges on the account, but this amount cannot exceed $200.