Chapter 8 –
Real Estate Brokerage
Agency Theory

Principal – a person who authorizes another to work for them

Agent – the person empowered to act by and on behalf of the principal

Examples:

Home buyer or seller (principal)/Real estate broker (agent)

Real estate broker (principal)/Real estate salesperson (agent)
Three Levels of Agency
1.
Universal Agency
1.
General Agency
1.
Special Agency
Broker’s Obligations to the Principal
(for brokers representing buyers and sellers)
Any time agency is created, there is a fiduciary relationship established which legally
requires the following from the agent:
1.
Faithful performance
2.
Loyalty to the principal
3.
Protecting the principal’s interest
4.
Reasonable care
5.
Accounting for funds received
6.
No comingling of funds
Broker’s Obligations to Third Parties
1.
Lead-based paint disclosure
2.
Red flags
3.
“As is”
4.
Puffing
Principal’s Obligations to the Agent
1.
Act with honesty
2.
Compensate the agent
3.
Indemnify the agent from loss suffered through no fault of the agent
4.
Duty of performance
Multiple Listing Service

A database of local homes for sale along with details about the property,
selling price, and broker’s commission

Only member brokers can access the database
Cooperating Brokers

In 70% of all sales made through the multiple listing service, the broker who
locates the buyer is not the same broker who listed the property for sale.
The broker who locates the buyer is known as the cooperating broker. Who
is he an agent of?

Middleman Principle – Under this theory the cooperating broker who brings both
parties together represents neither party as an agent.

Dual Agency – When the same broker represents both the buyer and seller in a
transaction, there is dual or divided agency established.
 In 17 states this makes the broker and agent to neither party
 Required disclosure statements establish no agency or disclosed dual agency
Seller Disclosure Statement

A detailed disclosure of property defects (of lack thereof)

24 states recommend but do not require the use of seller disclosure
statements

Over the past 15 years there has been extensive litigation regarding material
misrepresentation and omission in real estate transactions, so a seller
disclosure statement provides a means of insurance against such litigation.
Listing Contracts

Real estate Listing – a contract where a broker is employed to find a buyer or
tenant
Elements of a Listing Contract

Parties involved in transaction (principal and agent)

Description of property

Price and terms of financing the transaction

Broker’s obligations and authority

Seller’s obligations

Compensation for broker

Terms for cooperation with other brokers

Specification of the brokerage arrangement

Conditions for termination
Types of Listing Contracts

Exclusive Right to Sell

Exclusive Agency

Open Listing

Net Listing

Advance Fee Listing

Advance Cost Listing
Completion of the Contract


Procuring Cause – A selling broker can expect a commission if the actions of
the broker caused the seller to find a “ready, willing, and able buyer”

Ready to buy at the seller’s price and terms

Has the financial capacity to purchase
Terminating a contract – contracts can only be terminated prior to the
ending date if by mutual agreement or if the broker is said to have
abandoned the client
Brokerage Commission

The standard commission rate for a broker is 6% of the sales price. This may
be negotiable when you sign the contract. For example, on a very high
priced home a lower commission rate is often negotiated.

The Department of Justice has used this standard commission rate structure
as evidence in its case against the real estate industry for non-competitive
practices and collusion.
Buyer’s Broker

Buyers may want to hire their own broker to assist them in their search and
purchasing process.

Exclusive Authority to Purchase

Brokerage commission is typically split in half between the listing broker and
the buyer’s broker
Bargain Brokers

Flat Fee Brokers – Payment is a fixed dollar amount rather than a percent of
sales price. Usually provide a lesser menu of services than a traditional full
service broker.

Discount Broker – A full service broker who works for a lower commission
rate.

Variable Rate Broker – The listing broker may charge a lower rate for
services but still offers a full 3% to the full service buyer broker.
Rationale for Licensing

Does the public have a vested interest in seeing that real estate salespersons
and brokers have the qualifications of honesty, truthfulness, good
reputation, and real estate knowledge before they are allowed to negotiate
real estate transactions on behalf of others?

It was this concern that brought about real estate licensing laws as we know
them today.

Until 1917, no state required real estate agents to be licensed. Anyone who
wanted to be an agent could simply hang up an agent’s sign.
Licensee

A person who, for compensation or promise of compensation, lists or offers
to list, sells or offers to sell, buy or offers to buy, negotiates or offers to
negotiate either directly or indirectly for the purpose of bringing about a
sale, purchase or option to purchase, exchange, auction, lease, or rental of
real estate, or any interest in real estate

Is required to hold a valid real estate license.
More on Licensees

Some states also require real estate licenses for persons offering their
services such as appraisers, property managers, mortgage bankers,
apartment locators, or rent collectors.

Exemptions: property owners dealing with their own property, attorneys
conducting real estate transactions as part of their duties as an attorney for
a client, other trustees or executors acting on behalf of an estate, etc.
License Types

Real Estate Broker


Real Estate Salesperson


A person or legal entity licensed to act independently in conducting
real estate brokerage business.
A person employed by a broker to list, negotiate, sell, or lease real
property for others.
Real Estate Sales Associate

Either a salesperson or broker employed by a broker. This is an
employment arrangement but not a licensing category.
Qualifications for Licensing

Examination

Education

Continuing Education
Licensing Procedure

Application with fee

Character references (loyalty, honest, truthfulness)

Examination date will be set by the state real estate commission. Frequency
of exams varies by state.

If applicant passes the exam, pays license fee and license is mailed to
applicant. Upon receipt the applicant can begin operating as a salesperson
or broker.
Non-resident Licensing

In general, a person must be licensed in the state in which he negotiates. A
sale can be brokered in another state as long as the negotiations are done in
the state in which the salesperson/broker is licensed.

Non-resident license - a license given by some states to out-of-state brokers,
particularly when the broker is located close to the state line.

License reciprocity - one state honors another state’s license (full and
partial).
Non-resident Licensing

Notice of consent - when a broker operates outside of his home state, he
must file notice with the secretary of state. This permits the secretary of
state to receive legal summonses on behalf of the nonresident broker.

Moving to another state? Most states will give credit for the education and
licensing time in another state when you go to move and start up a real
estate business in a new resident state.
Licensing the Business Firm

A broker can operate as a sole proprietorship under his name or a fictitious
business name. A broker can also operate in partnership with other brokers
or as a corporation. If operating as a corporation, its CEO or President or
some other designated officer must act as the licensed broker responsible
for managing the firm.

A broker who expands by opening branch offices must have a licensed
broker managing each branch location.
Licensing in Mississippi

Mississippi Real Estate Commission

http://www.mrec.ms.gov/
Broker Affiliation

Training

Compensation

Support

Franchise offices
Independent Contractor

Paid only if a sale produces a commission and is responsible for income
taxes and social security.
REALTOR®

Registered trade name

Member of NAR and not synonymous with real estate agent
Minimum Service Requirements
Minimum Service Requirements

According to the Department of Justice, there are 21 states with minimum
service requirements.

States with non-waivable MSRs: Alabama, Illinois, Indiana, Iowa, Missouri, District
of Columbia, Kansas, Texas, Utah, Idaho, Oregon, Washington, West Virginia

States with waivable MSRs: Delaware, Florida, Nevada, New Mexico, Ohio,
Pennsylvania, Tennessee, Wisconsin
Minimum Service Requirements
Accept delivery/present offers
Answer questions
Assist communications/negotiations
Provide access to listed properties
Accept deposits
Promote best interests of client
Disclose all adverse material facts
Use reasonable skill/care/good faith
Provide advice to client
Continuous good faith effort to find buyer
unless otherwise agreed
Present written contract with all terms
and condiitons
AL
X
X
DC
X
IA
X
X
X
X
X
ID
X
X
X
X
X
X
IL
X
X
X
IN
X
X
X
KS
X
X
X
X
X
X
MO
X
X
X
OR
X
TX
X
X
UT
X
X
X
WA
X
WV
X
X
X
X
X
X
X
X
X
X
Minimum Service Requirements

Goodwin, Johnson, Zumpano (Journal of Real Estate Finance and Economics,
2010) looks at the effect of discount brokerage in a sample of over 11,700
properties between January 1, 2006 and July 20, 2007 in Montgomery,
Alabama.

The study found that sellers using discount brokers had a trade-off between
a 2% higher sales price and a 20.5% longer time on market. Using a discount
broker also lowered the probability of finding a match between a buyer and
seller in a given marketing period.