116. The Brokerage Business

All right, we're going to look at the brokerage business and What we will cover is the function and organization of the brokerage business? We'll look at the broker salesperson relationship and then we'll also look at operating a real estate brokerage So starting off with the function and organization of a brokerage what we're going to look at is the core activity of brokerage Who may legally broker real estate the types of brokerage organization and then trade organizations? So if we look at the core activity of brokerage what we look at is one affecting a real estate transaction to broker cooperation three multiple listing service or MLS For the critical brokerage skills five the types and transactions and properties brokerage six brokerage versus trading seven brokerage versus advisory services And so those are the topics we're going to cover so we'll start off with affecting the transaction So when we look at at real estate brokerage the primary function of a broker is procuring a buyer a seller a tenant Or a property on behalf of a client for the purpose of completing a transaction So that's the definition of brokerage. That's the core activity of brokerage So it is procuring a buyer seller tenant or property on behalf of a client for the purpose of completing a transaction and so we will have The broker who lists a property for a client will have a listing agreement the broker who represents a buyer Or a tenant will have a buyer representation agreement or a tenant representation agreement and then in those agreements there's a Commission that is negotiated with the client That the broker will receive for providing brokerage services the services of procuring a buyer seller tenant or property on behalf of the client and this is negotiated and so and one thing There's a misnomer out there if I were to ask you what is the standard real estate commission in state of Texas or in the United States or in San Antonio or or anywhere And if you gave me any number that you would be you would be wrong That would actually be an antitrust violation Violation of federal law so there is no standard commission. There is no standard brokerage commission set by the real estate community by the profession for the commission for real estate services There's a misnomer that that it is 6% and and again if that's if that was the answer then that would be An antitrust antitrust violation. That's what we call price fixing. That's if all the brokerage has got together and said we're going to charge a standard rate for real estate services that would be no different than all of the you know grocery stores getting together and saying we're going to charge the same price for all of our Our goods or that would be like the milk companies or you know any Goods providers getting together and bread, you know, for example saying we're all let's all charge the same price for our our product Because what what the the problem with that is that it has a negative impact on the consumer it affects the consumer So there is no standard real estate commission in San Antonio and Texas or in the United States and Some some agents may say well what I charge for these types of services is 6% Then that's okay because that is what that agent is specifically charging for that type of transaction with that client But another thing to note is that it's not uncommon for those commissions to be negotiated and So if an agent were to look at their effective commission rate for a year I would I would venture to say that most of those are not going to be 6% I think you're going to find many of them Are not 6% because The commission is negotiated with the client Now under broker cooperation. It's not uncommon for two brokers to be involved in a transaction and when we when we look at the term brokerage the real estate brokerage is the business That's you've got you can have a single individual who is the broker operating as a sole proprietor and in Texas real estate agents are required And so we've got we've got two types of licensing and we've got real estate brokers and we have real estate sales agents or sales persons and The broker is as an individual who has met all the education requirements by track by the Texas real estate commission and Has has taken the required courses has passed the exam and has a broker's license and then that broker can operate on his or her own As an individual as a sole proprietor You can also have a broker entity and we'll get into more of this in a little while, but you can also have a broker entity and that's where the Corporation of LLC is the brokerage and we'll talk about how that's that's structured in the little while the But the real estate sales agent is required to be Sponsored by a broker and then the broker's responsibility is to provide supervision and oversight over that sales agent and So the the broker is either as an individual or as the entity is the is the own homes the either the real estate listing or The buyer's rep agreement because that agreement is with the broker not the sales agent and therefore any commissions are paid to the broker And that's actually under Texas law that only the broker can receive the commission then the broker in turn may Will generally have a split with the with the sales agent and Then the broker will end up paying the sales agent, but those funds never go directly to the sales agent and that's required by Texas law So when when you have let's say you have a transaction where You have one broker broker a has listed a property a residential property just a free bedroom to bathhouse So the sales agent went and negotiated that listing agreement And the sales agent has the authority to do that or under under agency law and there should be a written agreement in place that Authorizes this but that that that listing will be taken in the name of the broker So you've got a listing that seller has negotiated the real estate commission on and That that commit that listing agreement is in the broker's name, okay? But then the real estate agent facilitates the that that listing so You know advising the client on what to do what not to do getting the property listed in MLS Respond to any communications from third parties that's either other sales agents or brokers or individuals who are not represented by a broker or a sales agent And then negotiating any contracts and so forth so That's the listing agent side the the buyers rep side You know you've got you've got broker B and you've got a sales agent that's sponsored by a broker B And they have a buyer who is looking for a three bedroom to bathhouse and so that agent Should this doesn't always happen but should enter into a buyer's representation agreement in writing with that That buyer and that agreement just same as the listing agreement is taken in the name of the of the broker and Then that should be in writing so both both of those agreements should be in writing the listing agreement and the buyers rep agreement If in Texas if that agreement for the real estate commission is not in writing Then it's not legally enforceable so you can have you can have an agency relationship that is oral So it's you know the parties verbally agree you know sales agent verbally agrees to represent a buyer for example or represent a list or a seller with a listing but if that agreement is not in writing If the commission agreement is not in writing then it's not enforceable The parties could go all the way through that transaction only to discover that there is no written agreement and then the seller of the buyer says I don't I'm not gonna pay you a commission and there's no way for that listing agent or buyer's rep agent to enforce that commission agreement period So those must be in writing and furthermore the listing agreement really needs to be in writing because there are certain Authorizations in there by the seller to the broker for example putting the property in MLS You know, so where to list the property where not to list the property place in a lock box On the house and where that's to be located put it in a sign in the front yard and then many many many many other things so those are just some of the basics and Then you know one thing would be cooperation between the the seller and the broker and then other third parties, you know that that's contractual in terms of if the seller wants to sell the house It needs to be shown to you know to buyers So, so as part of that, you generally have a broker that represents the seller, so broker A, and then a broker that represents the buyer, broker B. And then there's a system in place to where the under MLS to where the, in the listing agreement with the seller that's been negotiated, I think that's been negotiated, is that that agent agrees to split a commission with the buyer's agent, if the buyer procures a buyer for that transaction. Okay? And so, so then we have MLS rules that govern that transaction that says if, if the property is listed in MLS, then the listing agent agrees to split their commission with the buyer's rep agent, and that's 50/50. So whatever, whatever commission is stated in MLS, so if that commission was 5%, then the agreement is that the selling agent generally will receive 2.5% and the buyer's rep agent then would receive 2.5%. Sometimes the commission may be 5%, or 5, I mean 5.5% and the agreement is that the, in MLS it says that the buyer's rep agent will receive 3%, so what that means is the listing agent will receive 2.5%. Okay? So whatever is stipulated in MLS is what the parties have agreed on. And what's clean about that is that in a commercial transaction it's different and much different. It's the same process, but we don't have the same rules in place. So the, in a commercial transaction, the listing agent will enter into a contract with the seller. And then if there's a buyer's rep agent, then that buyer's rep will even attend it. Let's say a tenant situation, either one that, you know, for, let's say you've got an owner rep that has listed an office space and an office building for rent. And, and so that, that broker has negotiated that listing agreement to rent that space with the owner. And so let's say that that's 4%. Or let's say, let's say that's 6%. Okay? Let's say that is 6% in this scenario. And, and so then you've got a tenant rep. So you've got a broker that is representing a tenant that wants to rent a space and an office building. Well, now in a commercial transaction, that broker must negotiate a contract with the owner's rep agent. And so now they have to enter into contractual relationship. And sometimes that's where negotiation takes place in terms of what that split's going to be. Sometimes there is a common practice in certain communities in terms of how that is split. So for example, what you often find is that the owner's rep will receive 2%, and the tenant rep will receive 4%. But it also depends on the market, depends on the supply and demand. There's a number of factors that come into play. So again, there's no, there's no set, you know, there's no absolute structure in place. But if that tenant rep agent were to not get an agreement signed by the owner's rep agent, then the owner's rep come back and say, "I'm not going to pay you a commission." And then if that is not in writing and signed by the party against him enforcement of SOAP, then it's not enforceable. Okay? So there's two systems. They're similar, but then they're also different at the same time. And so, but you know, oftentimes you've got both parties that are represented by a broker. There are other times which are not uncommon where the buyer or the tenant is not represented. And in that case, there's no commission paid to that party. I could go off on a whole another hour of conversation or lecture on, you know, if the buyer came in and said, "I want 3% credit, what would have been paid to a buyer's rep agent, credit against the sales price or against repairs or something else?" That can happen, but that's a whole another conversation. And so that's outside the bounds of what I'm covering here. And so, in many cases, you've got a broker's cooperation where both parties are represented. And then you've got MLS. So the multiple listing service. Okay? And so the multiple listing service is, you know, and there's the broker cooperation comes into effect with MLS, as I mentioned. But then MLS or the multiple listing service is an organization. And that's, you know, each board of realtors has its own multiple listing service. And then what we're starting to see is a lot more collaboration between boards or starting to see where MLS covers, you know, more than just a city or a single county. And so the multiple listing service is where, you know, brokers subscribe and then also a sales agent subscribe to the multiple listing service. And this is where properties are listed. And so there's information available, MLS, it's not available to the public. And so there's rules, there's a set of rules in terms of, you know, if sales agent or broker is a subscriber to MLS and they enter to a listing with a seller, how, you know, how quickly that listing must be entered in MLS and, you know, a number of other rules that come into play. So, but this is where properties are listed. And this is where agents have access to information on these properties that the public is not going to have access to. There's also to certain disclosures that are also included in, you know, the MLS. And so, you know, broker who ends up listing a property in MLS has certain responsibilities, you know, in relation to the clients for D-Shareed Duty in relation to listing that, listing that property in the MLS. And then as I mentioned, you know, getting the listing agreement in writing and signed by the client is important because those elements of that D-Shareed Duty will be in that listing agreement. Under critical brokerage skills, you know, we look at, it's a business. And I think what, what a lot of sales agents really don't comprehend is it's really easy. There's a low barrier to entry to getting your real estate license. So, it's really easy to, you know, and very, very inexpensive, at least in Texas, to get your real estate license. If you wanted to, you could get your license in less than a month and it would cost you less than, oh, I'm going to say just ballparking, just as a bare minimum, give me a second, I'm going to run a calculation here real quick. This is just, this is just general, but probably about 2250, 2250 cents for the first year. And then that, that, that includes the education. That includes joining a board of, board of realtors and the initiation fee. That includes, or the application fee. That includes joining MLS and the first year dues and the initiation fee into MLS. And so then after that, you know, you don't have your education expense. You don't have the initiation fee. So then you're probably looking at about 1200 bucks at a bare minimum plus plus you've got, oh, you've got your, your continued education courses and you can get that for anywhere from free to 50 bucks even. So you're looking at maybe 1200, 50 bucks in a second, you know, that is bare minimum. But that doesn't include, you know, your cell phone and travel transportation, signs, business cards, you know, website, market materials, you know, slew of other things. But what we're looking at is in terms of running a business, you can run a business pretty lean as a real estate agent, as a real estate sales agent. And so, that's, while it's very inexpensive and it's low barrier to entry, I mean, it doesn't cost much. It doesn't take a lot of time. You know, there's not a lot of hurdles to get through. Is that, that agent, that sales agent is once they get that license, is there a sole proprietor or once they're sponsored by brokers, they get their license and they're sponsored by broker, they're a sole proprietor. They just started a business. And so there's all the aspects of running a business, operating a business that come into play. And so part of that includes, you know, administration, includes marketing, it includes accounting, it includes bookkeeping, you name it. But then it also includes things like lead generation, which means obtaining a client listing or obtaining a buyer, you know, procuring buyers, market in a listing. So how you go about marketing a listing depending upon the term. depending upon the type of property that it is. Facilitating the closing of transaction. So that's negotiating the contract. And then depending upon whether you're representing the buyer, the seller, there's different elements that come into play. In terms of that checklist that's required to facilitate that transaction all the way through closing. You know, managing the business, marketing the business, you know, putting together marketing materials. I mean, you name it. There's a laundry list of items that come into play. In terms of just running the broker, or either the broker's business, or the sales agent's business, realty business. So, you know, client hires the broker and depending upon if it's a listing or a buyer's rep, or an owner rep on a rental or a tenant rep, that all of a sudden there's a marketing plan that should be put in place in terms of marketing either to that marketing, that listing or marketing to that buyer to, you know, to find a property. And then going through the whole process, in terms of what we call pre-closing, all the pre-closing activities, you know, which take you all the way up to closing. And then the title company takes over from there. And then sometimes there's post-closing issues. Sometimes there's issues that arise during the closing process that had to be taken care of. And so there's a significant amount of organization and business management that come into play with operating a real estate business. The types of transactions and properties are brokered. So, there are all different types of properties out there. There's the selling side, the buying side, the owner's rep side for renting, the tenant rep side for renting. And then we've got residential, we've got office, retail, industrial, multifamily. And then even within that there's different subsets. You know, so there's certain agents on, you know, the commercial side that, you know, that they may say, "I do multifamily transactions up to 10 million." You know, or 5 million to 10 million. That's my sweet spot. And you've got other agents to say, "I do multifamily projects, 20 million on up." And that's because there's different type of clients in each of those tranches. And so there's different expectations, there's different requirements. There's a, you know, there's just, it's a different business within each of those tranches. And you've got individuals that say, you know, what you generally don't find is real estate agents that say, "I just do commercial." There's a post recently where, on a national Facebook group, where an agent was asking about listing a hotel. And, you know, what should they do? And I think it also said they primarily did residential. And so, you know, a lot of the comments coming from brokers or agents who are knowledgeable in that area said, "You don't need to get involved with this. You don't need to refer to somebody or, you know, or co-broker or somebody that can help you with this, but even like hotels, that is such a subset of commercial real estate, such a niche area that, you know, as a real estate agent, unless you can work with somebody, you shouldn't touch that. So that's just an example of, you know, how, you know, there are real estate agents or brokers that specialize in certain types of real estate. And then also in terms of, there's really three elements that when we look at competency, which is important, you know, we look at the type of real estate, we look at the price range of real estate, as I mentioned, and same thing with Plotter Residential, you know, as a brand new agent, you know, you're not going to start listing million dollar houses. You know, that's one, you've got to know what you're doing, too. That's a different type of customer. You know, unless you know how to meet the needs of that customer, you probably need to get your feet wet and just getting involved with real estate sales in general. But then the third, so we've got in terms of competency, we've got property type, we've got the price range, and then we also have geography. And so real estate brokers and agents who are licensed in Texas can translate, you know, visit, they can practice real estate anywhere in the state of Texas. But that doesn't mean they should. And that's because the, with, with, you know, real estate is really controlled and affected by the local community, you know, by a local ordinance, its local laws, etc. And so unless you're knowledgeable in that market, you know, you could end up getting your client into trouble. So it's better to just refer that transaction to a broker that is competent in that area. There's brokerage versus trading. And the distinction between brokerage and trading for one's own account is, is important. And in terms of whether an individual must be licensed for that activity. And so to be considered real estate brokerage and agent's activity must be conducted on behalf of another person with the expectation of receiving compensation. Okay. And so if you're, if you're buying a selling your own real estate, you know, you're representing yourself, then there's no expectation of compensation. And you don't have to be licensed. Brokage versus advisory services. So, so brokerage is distinct from the practice of rendering real estate advisory services. So, a licensed broker acting as a consultant for a fee, usually is not working to affect a particular transaction. Since the objective is not transaction oriented or transaction oriented, then that activity is not really going to be considered real estate brokerage. So, for example, maybe performing a market analysis. So, if you're, you know, perform managing real estate, if it's on the residential side, then the individual must be licensed. If you're representing a owner on the multifamily side. So, for example, a property manager or the leasing agents with a multifamily project that are working for the owner, they do not need to be licensed. But that's dictated by Texas law. So, even though fee consultant is not brokerage in the strictest sense, you know, real estate consultants who offer advisory services to the public must have a real estate license in most states. Because so, for example, if you're performing a market analysis and you're not a debut to employee, then that's going to be classified as a real estate brokerage under Texas law. So, you know, like a CMA or BPO, a broker price opinion. And so, even though generally, it looks like it's non-transaction oriented that you're still going to be required to have a real estate license in the state of Texas for providing those services. When we look at who may legally broker real estate, we'll look at the real estate license laws and then also the types of entities that exist out there. So, all states in the United States have licensing requirements for individuals wanting to be engaged in the real estate brokerage. And so in Texas, that's going to be the Texas Real Estate Commission. That's the agency that's responsible for administering the real estate laws, brokerage laws in the state of Texas. And so, some of the elements that come into play are the education requirements. So, in Texas, it's required the individuals required to have six courses. Passing a background check, passing a fingerprint check, getting a fingerprint taken electronically or digitally, and then passing an exam. And then once that individual passes the exam, then they are classified as an inactive sales agent. And then they can be become sponsored by a broker. And once they're sponsored by a broker, then they are an active sales agent. Most real estate sales agents in the state of Texas are going to be classified as sole proprietors. And that's that they're operating a business under their own name. Now, they may have a DBA, you know, doing business ads or assume name, or assume name certificate file, but they're still going to be classified as a sole proprietor. So, they're not going to be a legal entity. Some of the issues though with that is that there is unlimited liability, you know, for any debts or any, you know, monetary liabilities that are associated with the business. And so, that's one issue that comes into play. The problem though in Texas is that in order for a sales agent to have an entity that is used for the brokerage business to receive commissions, the law in Texas says that only the broker can receive commissions. And so, the way it's structured in Texas, under Texas laws, if a sales agent wanted to use, let's say, an LLC, wanted to use an LLC, as part of their business to receive real estate commissions. So the way it would work is you've got a commission split. Half of it goes to the listing broker, half of it goes to the buyer's rep broker in this scenario. And then the, let's say we're working with the buyer's rep, so the buyer's rep has an agreement with their broker in terms of that split. So let's say that's 80/20, okay? So that means the agent would receive 80% of that 50% of the commission and then the broker would receive the 20%. And they'll say the same applies over on the listing agent side. Well, the broker can receive those funds because that's what's allowed in their Texas law. And then the broker ends up making a distribution to the sales agent, that 80% to the sales agent. And that goes directly to the sales agent. Well, the sales agent wanted to form an entity like an LLC to receive that commission. Then in Texas, what they would have to do is form their form an LLC, then that LLC would have to apply to be a broker. And then they would have to get a, so any, any broker entity is going to have what's called a designated officer or a designated broker. And that is going to be an individual who is a broker. So let's say the broker in this case is an LLC. So they found an application and they are a broker entity. And then you have a broker who is the designated officer, designated broker for that broker entity. So they get 20% of that commission. But now the agent wants to form an LLC to operate their business and then to receive the commission. So they would have to do the same thing. They would have to file the LLC and then they would have to file an application for that LLC to be a broker entity. And then they would have to find a designated broker to be the, they'd have to find a broker to be the designated broker of their broker entity. And then they would be the owner. And if the broker, if the designated broker does not own 10% or more of that entity, then the agents are going to be required to get a million dollar ENO insurance policy, which they're going to need anyway because then likely the ENO insurance policy of their broker is not going to cover their broker entity. So if what I just said is really confusing that it is, it's way too complicated. And I think with the number of real estate agents we have in the state of Texas, that we should really simplify this process to allow real estate agents, sales agents to form an entity to operate their business. So the entity is not going to exempt them from personal liability or from professional liability. But if they were to enter into any kind of contracts, things like that, that's where having an entity would be beneficial to them. So next we're going to talk about the entities. And we'll start off with the corporation. And this is the for-profit corporation. So for-profit corporation is owned by the shareholders. There's boarded directors, the shareholders vote and appoint the boarded directors, the directors in turn appoint the officers. And then the officers manage the day-to-day affairs of the corporation. In Texas, you can have a corporation, a for-profit corporation that has one owner, one shareholder, one director, but it must have a president and secretary and that shareholder and director can also be the president and secretary. There's one of the benefits of a corporation is that it has a perpetual existence, which means that upon the death of a shareholder, or a share director, the corporation continues into existence, which is not the case with a sole proprietorship upon the death of a sole proprietor or if the sole proprietor says, I don't want to do business anymore, that's the end of the sole proprietorship. Now the assets of that business, of that sole proprietorship can be sold, but not the business itself, whereas the stock and corporation can be transferred from one shareholder to another, and then you have new ownership. Another thing, the corporation can be taxed in one of two ways. There's the C corporation, which has double taxation, and that's where the corporation is taxed based on its profits and then the shareholders are taxed based on their dividends, and so that's where the double taxation comes into play. Corporation can also be classified for tax purposes as a subchapter, S corporation or sub-s corporation, and that's where all the profits pass through to the shareholders, and so it's taxed more like a partnership. It's not taxed, it's taxed similar to a partnership, but it's not a partnership taxation structure. So, liability to shareholders is limited to the extent of their investment in the corporation, which means that the corporation sued, that they're not gonna be sued personally or individually, unless the corporation is pierced, and that's gonna happen if the shareholders using the corporation or the corporate structure to commit fraud, but otherwise there's a wall in place that effectively insulates that shareholder from their personal liability. So, judgment credit is not gonna go after the shareholder. And so, that's one of the big benefits of a corporation is that limited liability. Another is the perpetual existence. Another is the corporate structure, where you have some organization between the shareholders, the board of directors and the officers in terms of management of that entity, and then you also have the two forms of taxation. So, a corporation can be a broker, and the way that would work is the entity, the corporation would file, and Texas would file a broker entity application, and that entity is going to need a broker, an individual broker, who is the designated broker, or we also refer to that individual as the designated officer of that corporation, of that broker entity, and then that broker entity would in turn sponsor the sales agents. So, that is a viable choice for real estate brokerage in Texas. We have the nonprofit corporation, and the nonprofit corporation does not have any owners, does not have any shareholders, there are no profits distributed to anybody, other than for the charitable purposes of that organization, and if the corporation dissolves, then those assets of the corporation must go to, either the federal state government or another charitable organization. So, a nonprofit organization is not going to be utilized as a real estate brokerage. We also have the general partnership, and the general partnership, oh, oh, and let me backtrack. So, for the for-profit and nonprofit corporation, those entities would need a file certificate formation with the Secretary of State and the State of Texas, as part of the requirements for forming that entity. So, once the Secretary of State approves that certificate formation, then that entity is a valid legal entity in the state of Texas. If that entity, that corporation wanted to do business in other states, then the real estate brokerage wanted to do business in other states. One option is to file a new entity in each state where it's going to do business or make it maintain one entity, which would be the Texas entity, and then we need to register that entity in the state where it's going to do business. And in Texas, we would file an application for registration to do that. And so, you're not forming a new entity. You're just using that same entity, but that gives that entity authority to transact business in that state. And the benefit of that is that if the entity, if the corporation did not do that, then that corporation could be sued in that state where it's doing business, but would not have the right as a quote unquote person to sue others like Sua, a debtor, for example, in that state. So, it's important to have that registration filed in that state where it's going to do business. So, general partnership is a business structure. It is not a legal entity, per se. There's nothing to file to form that structure. Other than that general partnership would need to file and assume names are difficult, because more likely than not, the general partnership is going to be operating under name other than the name of the general partners. But one of the distinct things that makes a general partnership, a general partnership is that you have a for-profit business consisting of two or more owners who've agreed to share the business profits. And, That that right there is what makes a general partnership a general partnership Otherwise if you just had two individuals who were owning Assets or owning real estate for example, then that would be classified as a tendency in common, but where it is for Going concern where profits will be shared then that kicks it over to a You know going concern a business Which makes that a general partnership so general partnership is going to have two or more Partners While there's no formalities that are required a general partnership should have a general partnership agreement Or a partnership agreement it does not have to and if it doesn't then you look to state law To determine what rights the partners have in that partnership There are some issues based on which state law that is being applied as to What happens to that general partnership upon the death dissolution or bankruptcy of one of the general partners? Because that could create a dissolution of the general partnership One of the general partnership is taxed as a partnership So all the profits pass through profits and losses pass through to the general partners based on their Proportion and ownership share in that general partnership and then the one of the biggest issues is The unlimited liability of the general partners just like with a sole proprietorship But then also the joint several liability of the partners. So what that means is if there's any assets to go after then that are non-exempt then those are subject to a chat attachment by a judgment creditor and The other issue is if you have say you've got four partners in a general partnership and only one Individual has non-exempt assets to go after and the others do not then the judgment creditor is going to go after those assets Now the general partners may have an agreement that stipulates that they will agree to dimify each other and share all losses equally But that's an agreement between the general partners and the judgment creditor doesn't care about that So the unlimited liability and the joint several liabilities is a major concern with the general partnership as a while a General partnership can be utilized for a real estate brokerage It's probably advisable to not do so without seeking the advice of counsel on a in a CPA another form of Business structure is the limited partnership and limited partnership consists of limited partners and a one or more general partners and the limited partners in a limited partnership look more like a ship their holder in a corporation where they have limited liability and their liabilities is subject to the extent of their investment in that limited partnership But that for the most part there's shielded for many personal liability the general partner assumes all the liability and the general partner Is responsible for the day-to-day actions of that limited partnership and so you can have one or more individuals as a general partner But the problem there is just with them just like a general partnership is you have unlimited liability and then potential potentially joint several liability and so generally what you see is the general partner of The limited partnership will be a limited liability company another LC so that further insulates any personal liability to wonder to to an individual so the limited partnership can't it's it It requires a certificate of formation in Texas to be filed with the Secretary of State to form the legal entity and then just like with the Corporation that that entity would file a broker entity application the limited partnership has You have to look to determine what law is being applied to determine if there's if there can be a dissolution event Associate of the limited partnership limited partnership should have a partnership agreement and that also dictates what Ownership interest and then what distribution rights that the general partner has in the unlimited partnership the limited partnership is Tax like a partnership. So there's pass through Providence and losses to the limited partners and Yeah, an unlimited partnership could be utilized as a broker entity for real estate business the another form of business entity That you may see is the limited liability company or the LLC and it's kind of a cross between a corporation and a partnership And it can be structured in a number of ways so from a Ownership standpoint the owners are called members and a In an LLC it can be member managed which looks more like a partnership or it can be manager managed What's look which looks like more a board of directors in a corporation? it It can be taxed by default if it's if there's two or more individuals by default is tax like a partnership So you have passed through a province and losses to the members You but you can also tax that LLC like a corporation You can also tax it like a sub S corporation or it can also be a disregarded entity So if you have one individual who is the owner that owner could elect to have it taxed like a Corporation like a sub S corporation or be treated as a disregarded entity which means that The profits and losses show up on that individual schedule C so there is no Corporate filing for that entity and in Texas if you have Since we're a community property state if you have a husband and wife that are the owners in an LLC They can elect for that LLC to be taxed like a partnership like a corporation a C corp like an S corp Or as a disregarded entity because then in that case they would be treated as one owner because Texas is a community property state So there's there's a lot of flexibility with the LLC There's continuity as perpetuity with the LLC we've talked about the management structure the tax structure and the You know you can either be Operate more like a corporation or operate more like a partnership and the members Have limited or have limited liability just like the shareholders in a corporation or the limited partners in limited partners and so an LLC can be utilized as a Brokering to T in the state of Texas some other forms of entity structures that you may see But that or not would not be utilized as a as a real estate brokerage so real estate business But you would where you find them in real estate transactions one will be the joint venture and a joint venture is a partnership That is formed for a specific purpose a specific business purpose So you might have a real estate developer and a general contractor coming together forming a joint venture to Work on a real estate development project and then once that project is completed then that's the end of the joint venture We also have real estate investment trusts. This is a Corporation that is formed to see the legal formation process But it is identified as a REIT and as a result it receives special tax treatment because Because it's a REIT but as a result it must make a distribution of of a certain percentage of profits And that's generally 95% or more of the profits to the shareholders and then it avoids the double taxation Another form of ownership you may see as a cooperative and this is a non-profit association or a non-profit corporation that owns The may own real estate for example and so you have members of that cooperative that then have certain rights in that real estate and so Another example of a cooperative if you go for example if you go north of San Antonio we have GVTC and that offers Telephone internet and cable and then we have pertenalis electric co-op which offers electric services throughout the hill country and Both of those are cooperatives. So if you want For example internet service then you become a member of GVTC Which is a co-op or if you want electric service you become a member of pertenalis electric cooperative and then you you pay for the services you receive But then you can also receive a dividend From well, I don't think pertenalis has ever paid a dividend, but GVTC would Back to the members and so Those are some examples of where you may see other The cooperative used in other areas. So the types of brokerage organizations. So You know so in addition to the business entity structure that we've talked about so the corporation limited partnership LLC, Silver Prideership. There are also different types of brokerage organizations. And so one is an independent brokerage. That's a brokerage that is not affiliated with any franchise or doesn't have any connection with any other business. So you see a lot of real estate brokerages that are independent brokerages. And this can be on the local, state, regional, national level. But generally you're going to see it on the local level. Another form of, or another type of brokerage is the franchise. And so a franchise brokerage is a company. And that company enters into a franchise agreement or a licensing agreement with the franchise or and then as a result, receives certain benefits in exchange for compensation. And so this is where you see the branded names such as color Williams or Remax, Century 21, companies like that that those are franchises. So they're franchisee that pays a fee and as a result they get a share market share. And then they may get some other benefits associated with that franchise agreement. So one would be marketing. They get national marketing. So you're driving down the road and you see a Remax billboard. So you've got corporate that is paying for that marketing. You've also potentially maybe you've got training programs, standard operating procedures. Referral system is important. We see this on both the residential and the commercial side. You got the advertising as I mentioned so that can be local, statewide or national. And then you have the name. And so to some agents that's important to be associated with that name because they think that they're getting some value from that. And we also have commercial and residential brokerages. So residential brokerages generally will, you've got residential brokerages that generally represent buyers and sellers. So on the listing side and then the buyers rep side, they may also engage in leasing. They may engage in property management. There are certain brokerages that say no property management at all. We don't do any property management. And then you've got, you know, that includes anything from land to houses to condos, town homes, you name it. On the commercial side, we've got commercial industrial, I mean we've got commercial but we have office retail industrial and multi-family. And generally what you see is that commercial agents will or brokerages, especially the smaller brokerages, will tend to have agents that specialize in certain areas. And so that's more on those agents themselves. When you go up to the larger brokerages, then they provide a full service. They do everything but they're also larger and then they can be statewide, they can be regional, they can be national, they can be global. And then at that instance you've got individuals within that brokerage that are performing a specific function within that brokerage. And so you'll have, that's where you'll have specialized divisions, so to speak, within that brokerage. You've got transaction specialized brokerages. So these are brokerages that focus on a specific type of transaction. So you've got a lot of the, what you'll see, the franchises where they are predominantly residential. Now they've started moving into the commercial area but generally most people associate, when you hear the name remax, for example, people think residential. When you hear the name color Williams, I think residential. When you hear the name like CBRE, that's a global commercial roller-stake brokerage. You know, Christmas, Wakefield, JLL, Jones, Lamell, Salt, names like that. So there's an association with that name in terms of the type of transaction that that brokerage engages in. And then you've got some brokerages that specialize on the buyer side, some specialized on the listing side. But like I said, generally that you're going to see that with the agents themselves in terms of what their specific model is. And then we have trade organizations that come into play. And so we start off with the National Association of Realtors. And then in Texas we have the Texas Association of Realtors. And then you have your local board. And in San Antonio, that's going to be the board of realtors or the San Antonio board of realtors. And so those board of realtors are based on, you know, their geographically throughout Texas and some may encompass a city or one county and some may carry over to multiple counties or multiple cities. If we look at those broker salesperson relationship next, we'll look at the legal relationships, the salesperson's employment status, obligations and responsibilities, and then agent compensation. So if we look at the legal relationships, so you have a broker who has a brokerage license and that broker in turn sponsors sales agents. And then those sales agents are classified as active, their license is active. So they're an active sales agent. And the agent has certain authority to act on behalf of the broker. And generally that should be outlined in an agreement that is in writing and signed by both parties that grants that agent the authorization. So for example, to enter into listing agreements or bars or rep agreements in the name of the brokerage. Those agreements will be in the name of the brokerage. Those are owned by the brokerage. But you know, an agreement between the broker and the sales agent then authorizes that the ability for that sales agent to do that. The broker can also limit the agent's authority or scope of authority. And so for example, to say we don't do any property management within this brokerage. So as a sales agent you can't do any property management. Or you can't engage in certain transactions unless you've got additional education and some experience or maybe some mentoring in order to do that. So that way you have an agent that's not engaging in activities that could create risk or liability for themselves and the brokerage. Some of the things to note though is that salesperson should not ever bind a client to a contract although based on language and emails that is possible and there's some case law out there on that. And so that's very important for that agent to make sure they never cross the line to where either their language in their emails or their text messages or by action to where they have bound their client to a contract. And a salesperson can also never receive compensation directly from a client. Only the broker can receive the compensation and the broker in turn pays the sales agent. And then a salesperson cannot accept a listing or a buyer's rep agreement that is not in the name of the broker. So as I've mentioned the broker owns those agreements. Salesperson's employment status. So in most cases the salesperson is classified as an independent contractor and that is the case in Texas and that's actually in the law in Texas. There are other states such as California where agents can be classified as employees. And so that really creates an issue in terms of how that brokerage or how that business is structured. So in Texas sales agents are independent contractors. However, there can be some instances where an agent may be a W2 employee and a 1099 independent contractor. And so for example if the broker were to tell an agent, "Hey, I need to hire somebody to monitor the front desk." And so if you want to do that part time, I'll pay you to do that part time and then you can do brokerage part time. So in that case the administrative work would be on the W2 side, the real estate brokerage would be on the 1099 side. And the other thing is that it's important, it's very important for the broker to make sure that they never cross the line with their agents by engaging in actions that would kick those sales agents from a 1099 status over to a W2 employee status. And so for example, because a sales agent is an independent contractor, they set their own hours, they determine for the most part what they're going to do. You know, again the broker can limit that scope of authority. But they determine what they're going to do. They determine how much money they're going to make. They determine how they're going to market. you know, the. themselves in their business. So effectively they are a brand new business. And I think that's something that we need to work on because I think most agents really don't grasp that concept of you're starting a business and just like with, you know, if you were to start a restaurant for example, I mean you've got to go for everything from A to Z to get that restaurant up and running. And so a lot of times you've got individuals that get their real estate license and just never grasp the concept that they're starting their own business and that it's more than just sitting around and it's willing to thumbs and hoping you get a listing or a buyer's rep agreement. So, but going back to what I was going to say in terms of crossing that line, if a real estate broker were to require an agent to show up, you know, every day you have to be at your desk at 8 o'clock every day and you can't leave until 5 and, you know, I've got quotas to where you have to make so many phone calls each day or you know, send out so many email communications each day and you have to attend training, you know, once or twice a week. That then starts to look more like an employee. And so even though there's a 1099 agreement in place, you know, an impending contractor agreement in place with that sales agent by those actions that an employee looks or that sales agent looks like an employee and so that could create some liability for that broker as an employee and on the tax side as well. And so while brokerages may offer training, they can tell their agents we would like you to come to training, we can't force you to come to training. You know, it's in your best interest if you come because you're going to learn you're going to get something out of it, it's going to make you a better sales agent. And so that's why it's important to make sure that the broker never does anything that kicks that independent contractor, that sales agent from independent contractor status over to W2 employee status. So as a result, the independent contractor is responsible for, again, everything setting their hours, determining how much they're going to make, how they're going to market themselves in their property, responsible for payment of all their taxes. That's a big one. And you know, and then determine what they're going to do on training and education, you know, to make themselves better. So, but the broker needs should have a written agreement between the broker and the independent contractor and then the broker should also have a broker policy manual as well that provides context for that independent contractor relationship status. In terms of obligations, you know, if we look at the sales agents, duties and responsibilities, sales agent generally will, you know, work diligently to sell, you know, obtain listings and sell those properties to find buyers and represent those buyers, abide by the broker's policies, fulfill their fiduciary duties, owe to their client. And then they're going to have to provide their own transportation and then their own resources as well to further their business operations. There's also ethical standards. If there are a member of the local board and then the Texas Association Realtors and National Association Realtors, there are, there's a code of ethics that come into play. On the broker side, in terms of the broker's obligations, the broker will provide a platform for marketing the property, you know, making the brokerage's listings available, providing training, providing office support, maybe a space to meet with clients, conference room, a copier, a file storage, and, you know, maybe clerical or administrative support, the broker will pay out the commissions to the agent based on that independent contractor agreement and then also conform to the ethical standards that are imposed on the sales agent as well. When we look at agent compensation, so, you know, generally you have an employee who will receive wages and then the employee is responsible for, for, for part of the taxes that are owed and then the employer is responsible for the other portion of the taxes. Will with the independent contractor status, all of that falls, all that liability falls on to the sales agent and so, you've got the sales agent responsible for paying all of their own expenses and including maybe some expenses that are imposed by the broker. So for example, there could be a des fee, there could be a fee for copies, there could be a fee for administrative support, things like that. When we look at the commission split, there's generally two sides to the commission. Part of the commission goes to the listing broker and the other part goes to the buyer's rep broker and then the listing broker is going to have its commission split with its agent and then the buyer's rep broker is going to have its commission split with its agent and so the broker will receive that commission generally from the title company and then can pay out the commission split to the sales agent. I've said this already but the only the broker can receive the commission. However, the broker can authorize the title company to pay the sales agent's commission directly to the sales agent and so what that does is it speeds up the process so instead of that check coming into the brokerage and then having to deposit that check and maybe waiting for it to clear based on the size of that check and then making a distribution to the sales agent, the broker can authorize the title company to make the distribution of that sales agent's commission directly to the sales agent and so the title company would then cut four checks or wire funds. However, however, the parties want that the funds distributed but one check to the listing broker, one check to the listing sales agent, one check to the buyer's rep broker and one check to the buyer's sales agent but that would be by authorization by the broker to the title company. Generally, you'll see anywhere from usually what you'll see on residential is a 80/20 split, sometimes a 70/30 and then some brokerages have a policy where the commissions cap out after a certain dollar amount to where the agent keeps 100% of that commission. Generally, you're looking at about two million or more in sales at that point and then again, it's always negotiated to sometimes you'll see a graduated scale and on the commercial side, it's not uncommon to see a 50/50 split especially for sales agent starting off and then maybe you build out your own team or if you generate enough business, then you've got more leverage to negotiate that commission's split. In terms of operating the real estate brokerage, we look at obtaining listings, marketing listings, pre-closing activities, managing information, the policy manual, as I've mentioned, advertisement regulations and then antitrust laws. There's actually a class that Trek requires brokers to take, any broker that is going to be sponsoring other sales agents and then also sales agents who are going to be supervising other sales agents and then also team leaders but there's a class called broker responsibility which basically follows provisions from the Texas Administrative Code which governs the operation side of the business. If we look at, for example, if we look at obtaining listings, this is one way to generate income. You've got buyers that are generating leads and that could be a whole class in and of itself on lead generation but generating leads to obtain these listings. That's one way to generate business for the brokerage. If you look at the listing steps, so we engage in prospecting or farming, trying to obtain those listings and then meeting with the seller, the prospective seller, entering into the agreement, determining the price for that property by running comps, putting together a listing presentation and then negotiating the listing agreement with the seller, between the seller and the broker. If we look at prospecting, this is an activity, any activity that's designed to generate listing prospects and then we would do the same on the buyer's website as well. means of lead generation of trying to obtain new sellers. And so one of the easiest ways in terms of generating leads is through family, friends, current clients and past clients and through referrals. And then there's many other ways. There's advertising, there's SEO marketing, there's email distribution lists, there's putting the IDX on your website. That's where you got an MLS feed. And then after so many searches, then you've got to fill out some information for that broker. And then they end up using that information to make a contact to that perspective, seller or buyer. You've got mailings that are targeted, certain neighborhoods. So you've got direct marketing, you've got advertisements in publications such as on the baseball field or school program, things like that. So there's all sorts of means of marketing, the business or prospecting or lead generation to obtain new listings. When you look at pricing the property, this is where the sales agent will run comps. They're going to see a man analysis, comparative market analysis. By generally looking at at least three other comparable properties, making adjustments to those properties based on the subject property. And that ties into square footage of the property, age, condition, upgrades, location of that property compared to the other properties, size of the lot maybe could come into play, you know, number of bedrooms, number of garages. So one of the goals is to make the least amount of adjustments as possible. But so the agent will run a CMA to determine the price for that property. But what an agent cannot do is engage in appraisal. And only appraisers, license and Texas can conduct an appraisal. And so that's an appraisor as someone who's had additional education and then has experience. And then there's a method, a methodical process that that individual runs through to determine the apprais value of the property. And then we have the listing presentation and negotiation agreement that hopefully results in a assigned agreement. And so the listing presentation is the opportunity to meet with the seller and present the agent's marketing plan, you know, their background, their expertise, the strength of their brokerage. And then also walk through the process of a real estate transaction. And if they represent the seller, then they would be from the seller's perspective. And then negotiate the listing agreement. And then hopefully that results in a assigned agreement. Under marketing listings, you know, we've got the marketing plan, selling the prospect and then obtaining offers. And so in relation to the marketing plan, so after the parties have signed the listing agreement, then the sales agent will begin working on the marketing plan for the property. And that's going to, you know, be dependent upon the objectives of that seller, the type of property, you know, and what they've agreed to. In terms of what they're trying to accomplish. And so that agent will then work on that marketing plan for that seller. And then in terms of selling the prospect, so when you've got a prospect, so potential buyer, then the agent then can respond directly to that agent or also to the other company. Other agents sit there, that mean not their agents, the prospective buyers agent. But part of that process is if, like so for example, if they get a part of that is responding to requests for showings, although we've automated that process through the centralized showing service. You know, we're viewing any, you know, asking for feedback, reviewing feedback, determining if there's anything else that needs to be done with that property to make it more marketable. You know, we're viewing if there's any offers that come in assessing those offers based on not just the offer price, but also the type of financing, the strength of that prospective buyer. You know, are they asking for concessions? You know, what is the, what is the strength of that offer so the agent will help the seller to understand that. And so then in terms of obtaining offers, if you have a buyer that's interested in purchasing property, then that offer will be made. And generally what you're going to see is the price, the down payment, the closing date, financing requirements, any concessions, and you know, any other requests that come into play with that offer. One thing to note is that that agent has a fiduciary duty, the listing agent has a fiduciary duty to the seller. So, you know, and the agents that I know take that seriously, you know, they don't look at it and go, oh, you know, just take this one, you know, because in the back of their mind they're going, okay, I need this commission. It is, you know, they are looking out for the seller, if they're representing the seller or the buyer, if they're representing the buyer, looking out for their best interest. And so the agent will present that offer and has a duty to present that offer to the seller. And so in some instances there are multiple offer situation to where a number of offer sure assessed at one time. In terms of the pre-closing activities, this is going to differ based on whether the party is the seller or the buyer. But if the general you're going to see a lot more work come into play on the buyer's agent side. So, making sure the financing is in order. You know, any documents that the lender requests are being tendered. Scheduling, you know, ordering and scheduling the inspection, reviewing the inspection report with the buyer and then making any repair request to the seller and negotiating those. If there's a survey that needs to be ordered, making sure the survey is ordered, reviewing the survey, reviewing both parties will review the title commitment with their respective clients. So there's a number of things that go on during the pre-closing activity process. If there's a lot of its effective communication is important here. And then we look at a couple of other items in terms of the broker's responsibilities as part of the representation. So the broker, it's been a point which state you're in. The broker may handle monies for escrow. Now only the broker can have an escrow account in Texas. That's by law. The broker can give sales agents access to that trust account, but sales agents cannot have a trust account in their own name. And the broker is ultimately responsible for any funds that are in that account. So there's a lot of liability there. We generally, you know, unless you're doing property management, we generally tender those funds directly to the title company and let the title company hold those funds in escrow. So the agent should never have to do that in Texas. Comingling is where that's a huge no-no. And that's a fancy word or I think the rated G version of the word theft. And that's where an agent would take the money that doesn't belong to them, put it into their own account. So now you can't identify which money is which and then the agent starts spending that money. And we see cases of this where the agent is doing, for example, the agent is doing property management on their own. They're not supposed to be doing property management. Their broker is not aware that they're doing property management. And they start taking the rent checks and putting them into their own checking account. And they're behind on some bills. So this allows them to get caught up. And the owner of the rental property keeps contacting the agent saying, hey, I haven't got any checks and the agents, you know, making up stories. Oh, I put them in the mail. And I guess they just haven't got there. I'll send you another check. And you know, this goes on for a couple months. And then finally, the owner files a complaint with track and trick starts investigating and is determined that that agent has been combingling funds and then spending that money. And that's where. the act of conversion comes into place. So, combing green is mixing those funds and then the conversion is actually taking those funds and then spending them. The broker is also responsible for managing data. The broker must retain records of the transactions for a certain timeframe and that's under state law. The broker is responsible for making sure that their client's data is protected. So, we have what's called non-public information. That's gonna be names, addresses, credit card numbers, checking account numbers, you know any account numbers. Then anything else that the clients would not want to be made public. And so, the broker is responsible for managing that data. The broker, as I've mentioned, is also responsible for having a policy manual. And so, the policy manual is generally gonna follow the provisions of chapter 535 that takes us administrative code that outlines the operations of the brokerage. And so, that's where the rules, the brokerage rules and regulations and policies come into play. Advertising is an important factor making sure that advertising is not misleading. So, the broker is responsible for the advertising. And so, there should be a review process for all advertisements that go out. There's the Telephone Consumer Protection Act that regulates unsolicited telemarketing phone calls. And this is where we have the do not call list. And so, this is one thing that is not adhered to all the time that should be. I think people are tired of telemarketing calls and that includes calls from real estate agents that have not been authorized. We also have the CAN spam act, which is the controlling the assault of non-solicited emails. And so, it bans sending unwanted emails, email commercial messages to wireless devices and then allowing for an opt out provision. But we all know how that works. We also have antitrust laws. We've got the Sherman Antitrust Act, which prohibits the restraint of business operations through monopolies. And then we also have the Clayton Antitrust Act. Which reinforces the Sherman Antitrust Act, but also broadened it. And so, this is to eliminate anti-competitive practices. So, such as price fixing. So, that's where we can't say there's a standard real estate commission in San Antonio or Texas or the United States. That would be a violation. That's an antitrust violation. And that's where that comes into play. So, I'll go ahead and stop here and that will conclude our review of the brokerage business.