117. Real Estate Brokerage

We're going to cover real estate brokerage and some of the things we're going to look at are the function of brokerage and the reason why one would use a broker instead of trying to sell the property on their own. The real estate licensing process is covered in a different audio and so that's separate from what we're going to talk about today. Well we talk about the differences between licensing and industry designations and then we'll look at how commission rates are determined and then we'll look at the types of listing contracts, there's three types of listing contracts and then we'll also describe the different types of agency that comes into play with regard to real estate brokerage. And so getting started here we look at the function of brokerage and the real estate agent or a realtor and know that not all real estate agents are realtor but all realtor are licensed real estate agents. So what that means is if you have a sales agent who was licensed in the state of Texas then they're active and they're an active sales agent, they're an active real estate agent but they're not a realtor yet. If that sales agent joins the local board and in San Antonio that would be the San Antonio board of realtors then they also by joining the San Antonio board of realtors or Sabor become a member of the Texas Association of Riltors or TAR and then also the National Association of Riltors or NAR. And the realtor designation is a trademark held by or owned by the National Association of Riltors and by joining the local board that grants that individual that sales agent, that sales agent, a license to use that trademark, the realtor trademark. And so only sales agents who are a member of a local board are realtors and have the ability to use that term otherwise they're just a licensed sales agent. And so a real estate agent or a realtor if the sales agent is a member of a local board and like I said that includes TAR and NAR is one aspect of the real estate transaction and there are a number of different players that are involved in a real estate transaction. You've got the broker or the sales agent. You've got the mortgage broker or mortgage banker. You've got an appraiser, an inspector, a surveyor, potential trades that come in to take care of issues associated with the property prior to closing. There's a number of different individuals that are involved in that process. And so the real estate agent is one of those individuals and that's involved in a real estate transaction. And then one important aspect of brokerage is the exchange of information and knowledge that brokers and sales agents have through their networking and interaction with other brokers and sales agents. So going to meetings and lunches and conferences and getting industry updates and so they become experts or they are experts in the market where they practice real estate brokerage. And so it's important to understand some of the reasons why a sales agent may want to employ a real estate broker. The real estate broker has paid a real estate commission and that's usually based on the gross sales price. So whatever the property ends up selling for, you have two different prices that could come into play. One is the listing price and then the other is the actual selling price. So those are two different prices. And so the real estate commission is based on that selling price of the property. And what the broker and sales agent bring to the table to earn that commission is their knowledge and expertise and their efficiency in facilitating that transaction, representing the buyer or the seller and facilitating that transaction. The party, the broker and sales agent are going to have specialized knowledge based on their expertise in that market and that industry. And they have access to resources that the general public does not have access to such as MLS. So a seller may want to try and sell a property on their own and that would be called a four-sell by owner transaction. So they may want to try and sell that property on their own. But they don't have access to all of the data. They don't have access to the platform that brings buyers and sellers together that other real estate agents use and representing the buyer in terms of being able to market that property to the broadest spectrum possible. Some other aspects, successful brokers have knowledge in the following areas. So prices and terms of recent market transactions and that's going to come out of MLS. Marketing procedures that have been successful in the past. Legal obligations of buyers and sellers. And part of that's in that are requirements through the transaction such as understanding what forms to use and why and how they're used and how best to market a property and how best to negotiate. All of these factors come into play. Looking at similar properties that are currently listed for sale. Understanding the needs of prospective buyers and also understanding the whole real estate transaction process from start to close. And so a real estate transaction can be a very frustrating and stressful process and what a good real estate agent will do is direct and guide their respective client be at the buyer or the seller through that process and minimize those frustrations and minimize that stress. Without the use of a sales agent in listing a property, the seller may end up with less cash than what they could have earned if they had used a real estate broker. Buyers, if a buyer is looking at a real estate transaction and there's no real estate commission involved, then it's not uncommon for them to think that they're going to produce the purchase price by the real estate commission amount because there's no real estate agent involved. So they think that that buffer that may be in place is not necessary. The asking price by the seller may be too low again because what they think or what is not uncommon is that the property is listed too high because they don't understand the market. And they list the property for what they think it's worth or what they think they want to get for the property and not based on reality of how the market is doing. Seller who tries to sell the property themselves as I mentioned may not have access to the number of prospective buyers that would be available if the property was put into MLS, placed in MLS. And then the sellers who are not experienced in the role estate transaction process can end up wasting a lot of time. They don't have those efficiencies in place. They don't understand how to qualify buyers. A good buyer's rep on the other side will have pre-qualified their buyer and it would have said expectations for that buyer in terms of what to expect and what's reasonable and what's not. So a real estate agent operates under and a broker operates under the laws of agency. And we've got three different types of agency that come into play. We've got universal agency. We have general agency and we have special agency. And a universal agency situation. This is the broadest scope of authority between two individuals and generally what you have is the principal and the agent and the agent acts on behalf of the principal. But an example of a universal agent situation would be a husband and wife to where if one of the spouses goes to the grocery store and wants to buy groceries and spends money on the debit card or credit card, they don't have to have a written scope in terms of what they can and can't do. what they're authorized or not authorized to do, or they don't necessarily have to call it a permission because of the fact that it's a universal agency relationship and they can act for one another. And a general agent relationship is where the principle has delegated to the agent, the ability to make decisions within the scope of that agent's authority. And generally we see the general agency relationship and an employer employee relationship situation. And in that situation, the employee does not have to, if their job is to, let's say their job is to, they're in sales. So when they go to make a sale, they have the ability to sign off on a contractor agreement binding the company for that sale. They don't have to call and get permission for every single transaction, otherwise that would just hold up to the flow of things. And so they can still only operate within their scope of authority. And so that's going to be limited based on their job description and their responsibilities and duties. But that's an example of a general agency relationship. A special agent is authorized by the principle of handling specific business transactions or to perform specific functions. And that's what a real estate agent or real estate broker does. The agent is representing the seller, then their job is to list the property and follow what the seller's objectives are in relation to the sale of that property. They can't, the agent or broker can't make up their own, can't make their own decisions outside of that scope. Otherwise, they would be in breach of their duty. And then likewise on the buyer's agent side, there are the same duties that apply to the one representing the buyer in a buyer's agency situation. And so as part of that special, that special agency, there's a fiduciary duty that comes into play. And a fiduciary duty is the highest duty owed to another individual. I'm looking something up, so I know there's a little bit of a low there. And so the fiduciary, the elements of fiduciary duty of a fiduciary duty are, or of the fiduciary duty, are care, obligation, loyalty, accountability, disclosure, and confidentiality. And the way I remember that is Cola DC, care, obligation, loyalty, accountability, disclosure, and confidentiality. And those are the duties that are owed by the agent to the principal under a fiduciary duty relationship. And so when we look at care, that is making the best decisions for the client, for the principal, based on the information that the agent has on hand. And so the agent has a duty to go out and make sure that they've got the knowledge necessary and the resources and the data to help that client make reasonably informed decisions. So the duty of care. Duty of obligation is to only carry out the obligation of the principal, if, and that's in terms of, Celar or the buyer tells the agent, this is what I want you to do, then that is what the agent is supposed to do. That's the scope of authority that they have been given and they're not supposed to act beyond that. So care, obligation, loyalty, no self-dealing, and always place in the interest, place in the interest of the client or the principal above, always above that of the agent's interest. So care, obligation, loyalty, accountability, is being able to answer or to account for the agent being able to account for financial decisions made on behalf of the principal or the client. Disclosure is always keeping the client informed, so no admission or commission in terms of information that's related to the client. So always disclosing information, relevant information to the client and not withholding any information. And then confidentiality is keeping private matters confidential, not disclosing information that would harm the client or the principal. In addition to the fiduciary duty, agents in Texas also operate under the five cannons of ethics that are outlined in the Texas Administrative Code and these were adopted by Trek, the Texas Real State Commission. And they are fidelity, the first one is fidelity, the second is integrity, the third is competency, the fourth is consumer information, and then the fifth is discrimination, non-discriminatory practices. And so when you dive into to each of these five cannons, the first one we start off with fidelity and that's representing the interest of the client, so that's the obligation, that's one of the elements of fiduciary duty. The agent's position should be cleared to all parties and that's disclosure. The agent should treat other parties to a transaction fairly. The real estate agent must be faithful and observant to the trust placed in the agent. So again, that's obligation and be scrupulous and meticulous in performing the agent's functions. So that's the duty of care. And then placing no personal interest above that of the interest of the client, so that's the duty of loyalty. So that's the element of fidelity. And the next one we have is integrity, which an agent is responsible or has the obligation to exercise integrity in the discharge of the license holders' responsibilities, including the employment of prudence and caution. So that's care. And in order to avoid misrepresentation by commission or omission, so making sure that there's full disclosure to the client. And if we look at the definition of integrity, it's doing what you say you're going to do. Right. Competency is the third one. And this is where real estate agents require to stay informed on market conditions and to be informed on national, state, and local issues in the development and developments in the real estate industry and to exercise judgment and care. And then we have consumer information and that is a disclosure by the agent to the principal in terms of the Texas Real Estate Commission maintains two recovery funds that in the event that there's harmed into a consumer and there's no recourse against the broker or the sales agent that there's a recovery fund available that could provide some recourse to a consumer that's harmed by a broker or sales agent's actions. And then when we get into non-discriminatory practices, that's where we talk about not only in terms of representing clients, but that also comes into play in terms of advertising and then also on the lending side as well. In Texas, we have the listing or the sales agents, listing the listing agreement and that is the listing agent, that sales agent is the listing agent. And then what we have is the buyer's representation and that is the agent that represents the buyer. Some states have dual agency or subagency. Subagency is still a possibility in Texas but it's really not employed anymore and we do not have dual agency. What we do have is the intermediary relationship that comes into play and that's where it's gonna depend upon the broker's policy, but if you have a transaction where you've got a sales agent that lists a property for sale and then a prospective buyer contacts that sales agent says owned by this piece of property, if the broker's policy allows for the intermediary relationship and then allows for the appointment of that agent to both represent both the buyer and the seller now, then effectively what that does is it turns that sales agent into a facilitator and really limits what advice or negotiations that sales agent can do. What we see more, it's more common in the intermediary relationship is where, where you've got one agent in an office in a brokerage that has a property listed. And another agent in that same office procures a buyer. And so because they're in the same office and under that same brokerage, we have an intermediary relationship that needs to take place. And so there needs to be disclosure to both parties. They need to sign off on agreeing to the intermediary relationship agreement. And so if the broker ends up appointing a listing agent to represent the seller and the other agent to represent the buyer, then they can still represent those clients as if they were in separate offices. And so they have full fiduciary duty to represent both clients and the interest of those clients. And that's what we have in Texas is the intermediary relationship agreement. As I mentioned, the real estate commission is, the Texas real estate commission is a state agency. And that state agency interprets state licensing laws and interprets the rules and regulations that have been set by the state. And so in Texas, that's the Texas real estate commission. And the commission staff carries out the day-to-day business of administering the license law. And so that relates to individuals getting their license and then also administrative matters related to sales agents who already have their license. One thing real estate brokers and sales agents can purchase his errors and emissions insurance. And this is professional liability insurance that provides some recourse that if a broker or sales agent effectively messes up in a transaction and there's harm to the consumer, that the errors and emissions insurance may pay out on a claim in that matter. Under the state licensing laws, we look at some of the requirements, already looked at the five canons in Texas, but then there are some other laws that limit the sales agent or brokers unethical or fraudulent or dishonest activities. And some of those examples are mishandling of trust money. So the example of that is combing glee money. That's where you take somebody else's money and you put it into your own checking account. And that's a big no-no. And that does happen. And those agents that do that either lose their license or there is some administrative penalties that is assessed against those agents. And properly handling the fees and that includes paying commissions to individuals who are not licensed and that's against the law in Texas and in other states. In order to split a commission, real estate commission, the other individual must be licensed. Here to provide or disclose and require information, misrepresentation and fraud. And if there's a lawsuit that is filed against a broker or real estate agent, that is typically going to be the number one item is misrepresentation and fraud. And in generally improper business practices, offering terms other than those specified by the client. And so we've talked about the National Association of Realters. That is the national organization that is an advocacy group for all real estate agents on the national level. And then we have the Texas Association of Realters, which is the advocacy group on the state level. And then on the local level, we have the local board of realters. Let's see what else I have here. So we talked about the real estate commission is the fee that is paid to the brokers, that to represent buyers and sellers in the real estate transaction. And the real estate agent acts as a special agent to the principal in a real estate transaction. So we've got the universal agency, the general agency and the special agency. And a real estate agent is a special agent to either the buyer or the seller, depending upon who they're representing. Brokers and agents are required to adhere to certain responsibilities when representing a buyer or seller. And those are known as the fiduciary duties. To care obligation, the loyalty, accountability, disclosure and confidentiality. One thing, there's a distinction between a broker, the definition of a broker and the definition of an agent. And so generally speaking, the broker provides supervision for license sales agent. So broker sponsors the agent and provides supervision for that agent, provides mentoring, provides an office, desks, takes care of the day-to-day operations of the real estate practice. And the broker and only the broker can own a trust account. The agents in Texas are not allowed to own a trust account or open a trust account. Real estate agents and brokers in Texas are not authorized to draft legal documents. That would be the unauthorized practice of law. So what we do have is promulgative forms. And those are forms that have been adopted by Trek by the Texas Real Estate Commission for use by real estate agents. And they are available to the public, but they always recommend that you work with a professional when using those forms. And then the real estate broker owns and operates the business, the overall business, the brokerage business. So what sales agents do is they enter, they negotiate listing agreements and contracts for the sale of real estate. All 50 states have licensing laws that regulate persons or companies that are engaged in the real estate brokerage, in real estate brokerage. And these are known as the real estate commissions. And so in Texas that is the Texas Real Estate Commission. And there's a distinction to be made between Trek as a state agency and then tar as a trade association. So Trek is a state agency, tar as a trade association. And Trek has the ability to adopt rules and regulations. Whereas the Texas Association realtors does not. Trek cannot engage in lobbying activities, but tar can, in AR and tar both do. And they both have their political action committees. Both have adopted ethics. And I mentioned earlier, the Texas Administrative Code for Trek, we have the five canons of ethics. And tar has its own code of ethics that realtors must abide by. Trek has promulgative forms. Tar also has forms, but those forms are for voluntary use. Trek cannot give legal advice. Tar does have a legal hotline and they do have a staff attorney that can answer legal or ethical questions that realtors have. So there's a distinction between tar as a trade association and then Trek as a state agency that oversees the brokerage in licensing laws. As I mentioned, one thing that agents can purchase, have our brokers can purchase is errors in missions insurance. And this is to provide a form of insurance to protect the broker or the agent if they're sued. And then their damages as a result of that lawsuit. Typically going back to real estate commissions, the real estate commission, there is no standard real estate commission in the state of Texas or in any state. We can't say that there is otherwise there will be a violation of federal law. But generally what we see on average is a real estate commission between five and six percent. There are real estate commissions that are lower than that. But generally what you see is real estate commissions negotiated between five and six percent. There are three types of listing agreements. The first is the open listing agreement. The second is the exclusive agency listing and the third is the exclusive right of sale. So you need to make sure you know those three. The open listing is an agreement to where the owner can list that property with multiple brokers and whichever broker sells that property gets paid the real estate commission. That type of listing agreement or this type of listing agreement is not that common but you generally see it used with the may be higher in properties or properties where the seller is trying to reach a broader base, maybe throughout the U.S. The exclusive agency listing is a listing agreement with a broker. The broker always owns those listing agreements, not the sales agent, but the broker. But the sales agent affects that listing agreement by representing the party, by representing the client. But in exclusive agency listing agreement, it requires a seller to pay a commission to the broker if the property is sold by anyone other than by the owner. So if the owner sells the property, then the owner is not required to pay a commission. But if there's a listing agent or if there's another broker involved that procures a buyer, then the seller is required to pay a real estate commission. The third one is the exclusive right of sale. And with this listing agreement, the owner is responsible for paying a real estate commission regardless of who sells the property. And this is the most common form that you see, a form of listing that you see with residential properties. And it's the only one that is allowed in MLS in the multiple listing service. So if you're going to put a property in MLS, it has to be an exclusive right of sale listing. We talked about the six fiduciary obligations. So make sure you're familiar with those. So care, obligation, loyalty, accountability, disclosure, and confidentiality. And then what each one represents, the definition for each one. Yeah, so make sure you're familiar with loyalty and accountability and obligation or the textbook also refers to it as obedience, so obedience or obligation. So that concludes real estate brokerage and the elements related to real estate commissions and listing agreements and the difference between the Texas Real Estate Commission and the National Association of Realtors, Texas Association of Realtors and the local board. We also talked about the different forms of agency. And the Real Estate Commission, different types of listings. So Indie and O insurance, errors and emissions insurance. So that concludes this overview. [BLANK_AUDIO]