com Chapter 12 PART FIVE Real Estate Brokerage and Listing Contracts LEARNING OUTLINE OBJECTIVES Introduction: Brokerage—The Best-Known Type of Real Estate Business After reading this chapter, you will be able to: Real Estate Brokers as Market Facilitators 1 Describe the brokerage function. Economic Rationale for Employing a Broker Law of Agency 2 State three reasons sellers use brokers. Types of Agents Fiduciary Responsibilities 3 Explain the real estate licensing process. Real Estate Agents Problems in Real Estate Agency Relationships and 4 Explain the difference between licensing and Disclosures industry designations.
Transaction Brokers Licensing of Real Estate Brokers and Salespersons 5 Explain how commission rates are Brokerage Licensing Administration determined. How to Obtain a Real Estate License License Law Infractions 6 List and describe three types of listing Designations in Real Estate Sales and Brokerage contracts. The Marketing Function Market Segmentation and Specialization 7 Describe three types of agency relationships Commercial Brokerage in real estate brokerage. Residential Brokerage International Aspects of Brokerage 8 List at least three protective provisions each Listing Contracts for a property owner and broker that should Types of Listing Contracts be included in a listing contract.
Open Listing Exclusive Agency Listing 9 List the ways that a listing contract can be Exclusive Right of Sale Listing terminated. Innovations in Brokerage Buyer Brokerage New Listing Services and “Discount” Brokerage Listing Contract Provisions Termination of a Listing Contract Splitting the Commission www.com 306 Part 5 Brokering and Closing the Transaction Introduction: Brokerage—The Best-Known Type of Real Estate Business Many people think of real estate brokerage as the real estate business. Although we take a much broader view of real estate, we agree that brokerage is one of the largest and most visible parts of the real estate business. Also, most people are more apt to come in contact with real estate brokers or salespeople than other real estate professionals.
Real estate brokerage also tends to be better known than other real estate businesses because it is easier to enter. Educational requirements are not extensive, and capital require- ments are not as high as in other businesses; a small office, a telephone, a computer, and a car may be the only requirements. Although many people enter the business, many also leave it; turnover is high. Yet real estate brokerage is a demanding occupation for those who would succeed.
It requires a great deal of knowledge, skill, and effort. It also can be quite rewarding mone- tarily and personally. As with any other business or profession, however, the price of suc- cess is preparation, dedication to the welfare of customers, and hard work.1 Name three conditions that represent the “price of success” in real estate brokerage.org Real Estate Brokers as Market Facilitators Home page of the National Real estate brokers are intermediaries. They are the catalysts of real estate transactions; they Association of Realtors (NAR), the help make markets work by bringing buyers and sellers together physically and emotionally umbrella organization for the real to create sales and purchases.
Without their services, it would be more difficult and costly estate brokerage industry, and more. to buy and sell properties, and real estate values—at least in some markets—would undoubt- edly be lower. The buyers who value the property most would be less likely to find it. For this service, brokers are paid a fee, usually called a commission.
Commissions are typically paid by sellers, but they may be paid by buyers or—in some unusual situations— by both sellers and buyers.2 Without real estate brokers, real estate values would be lower. Explain this statement. Commissions usually are determined as a percentage of the gross sale price, though other arrangements are possible. For example, an owner and a broker may agree to a net listing, whereby the seller is assured a certain fixed net price for the property and the bro- ker is allowed to retain any amount of the actual sales price above that figure.1 Economic Rationale for Employing a Broker Brokers are employed to sell properties because they can offer expertise and efficiency.
Brokers have specialized knowledge of the real estate market and have developed expertise in selling properties. Furthermore, they spend time and effort in finding buyers for listed properties. Successful brokers have knowledge in the following areas: ∙ Prices and terms of recent market transactions for similar properties. ∙ Marketing procedures that have been successful in the past.
Because the net listing agreement encourages the broker to be less than candid to the seller, it is viewed by some as unethical, and may be prohibited in some places.com Chapter 12 Real Estate Brokerage and Listing Contracts 307 ∙ Legal obligations of buyers and sellers. ∙ Similar properties, prices, and terms currently listed for sale. ∙ Needs of prospective buyers who seek out brokerage firms as sources of properties. ∙ Procedures that buyers and sellers should follow in consummating a transaction (e., how to obtain a title search, financing, insurance, utility services, and the like).
While some property owners attempt to sell their properties themselves to avoid a brokerage commission, they often find they are ill equipped for this task, and they may end up with less cash than if they had employed a broker. Consider the two alternative transac- tions in Exhibit 12-1 for the same property—one without and the other with a broker. The gain to the owner by using a broker is the result of a number of factors. While some owners may believe otherwise, buyers tend to negotiate prices downward by at least a portion of the commission when they know a broker is not involved.
Furthermore, the asking price may be lower to begin with because a seller who does not employ a broker has access to fewer prospective buyers. And sellers may waste time with unqualified buyers. In other words, an owner-seller must usually rely on a “thinner” market than a broker, and the selling time may be longer.3 Name five areas in which an expert real estate broker has special knowledge. Careful readers of Exhibit 12-1 may agree with these points, but may also realize that by ignoring his or her time in the calculation, the owner would be ahead not to use a broker.
But even though the owner’s time is not a cash cost, it normally should be counted, since he or she must typically take time off from a job or give up other valuable or pleasurable activities. Owners also subject themselves to greater legal risks, financial risks, and poten- tial frustration because they are less aware of the pitfalls of selling property than brokers who specialize in this activity. The net result is that sellers who employ brokers often end up better economically than sellers who do not employ brokers. If this were not so, most owners would not use brokers, and the number of brokerage firms would decline dramatically.4 What is a cost of selling a property that tends to be overlooked by prospective “for-sale-by-owners”? Exhibit 12-1 Transactions with and without a Real Estate Broker Without Broker With Broker Price $190,000 $200,000 Owner’s marketing costs $1,500 — Time of owner (60 hrs.) 3,000 4,500 — Commission (6 1/2%) — 13,000 Proceeds to owner $185,500 $188,000 www.com 308 Part 5 Brokering and Closing the Transaction Law of Agency Real estate brokers and salespersons traditionally have operated under the law of agency, which gives a broker or salesperson the right to act for a principal in trying to buy or sell a property.
In acting for another person, brokers automatically fell into the category of agents, which means the broker must “stand in the shoes” of the principal. Thus, a broker must look out for the best interests of the principal and can do nothing to compromise a principal’s interests, position, or bargaining power. In most states, statutory law has inter- vened recently to alter the agency status of brokers, as we explain later. To understand the changes, it is necessary to first understand agency.5 An agent’s relationship to a principal is characterized by what phrase? Types of Agents In general, agency relationships can have three different breadths.
The broadest scope of authority is the universal agent, to whom a principal delegates the power to act in all mat- ters that can be delegated in place of the principal. A general agent is delegated by the principal to act within the confines of a business or employment relationship. An insurance agent, for example, may be a general agent of the insurance company if the agent can sign contracts that bind the company, supervise employees of the company, and in other ways carry out the business of the company. Similarly, a property manager is a general agent if he or she can rent apartments, collect rents, handle tenant relations, supervise maintenance, and perform accounting functions, but is not an employee of the property owner.
Further, as discussed later, a salesperson in a real estate brokerage firm is a general agent of the firm’s owning broker. A special agent is authorized by the principal to handle only a spe- cific business transaction or to perform only a specific function. Under traditional agency, the real estate broker acts in the capacity of a special agent in representing the buyer or the seller to purchase or dispose of a property. Fiduciary Responsibilities Agents have a fiduciary relationship with their principals.
This relationship, by legal tra- dition, carries several special responsibilities. As fiduciaries, agents must observe the fol- lowing duties: 1. Confidentiality—Never betray confidential information about their principals, their financial status, or their motivations. Obedience—Follow the instructions of their principal to the limits of what is legal.
If agents regard the orders of the principal to be legal but unethical, they should with- draw from the relationship rather than disobey. Accounting—Keep the principal informed about financial aspects of their assignment. Loyalty—Never subordinate the best interest of their principal to the interests of others. Disclosure—Be completely open and honest with their principals.
Skill and Care—Represent the interests of their principals to the best of their abil- ity—in the same way they would represent themselves, acquiring and applying the necessary skills, knowledge, and information about relevant laws and regulations, the market, and subject property. It may be helpful to note that the first letter of the duties spell “COALDS.com Chapter 12 Real Estate Brokerage and Listing Contracts 309 A principal in a fiduciary relationship also has duties. These are to be open, honest, and fair with the agent. This implies also that the principal will cooperate with the agent in providing information about the property (e., repair and expense records and defects) when requested by the agent.
When the agent has successfully completed the task assigned (the sale of the property), the agent is entitled to prompt payment for services rendered.6 The broker traditionally has what kind of relationship to the princi- pal? What are the six duties owed the principal? Real Estate Agents www.org/ An agency relationship traditionally was created between a seller and a broker when both mempolweb.nsf/pages/ parties agreed to a listing contract. Such a contract may be written or oral, and it estab- code lishes the rights and duties of each party. In most listing contracts the sellers agree to make NAR code of ethics. the properties available for purchase at a specified price for a specified period of time (e.
They also agree to pay the broker a specified fee or a certain percentage of the selling price when the broker finds a buyer who is “ready, willing, and able” to pur- chase the property, or upon closing of the transaction. Brokers usually agree to use their best efforts to try to sell the property on terms acceptable to the sellers. (A detailed listing contract, Exhibit 12-6, is discussed later.7 What are the three basic types of agency relationships? Which of these refers to a broker’s relationship to a principal? An agency relationship also can exist between a buyer and a broker.