Chapter 4 AGENCY AND ITS RESPONSIBILITY 83

I. AGENCY OVERVIEW Agency – is the authority (or power) to act for or in place of another, a principal (person who hires), in a specified act for a stated period of time. 83

A. Agent, Principal, and Third Party 1. Agent - One who acts for and with authority from another, called the principal. 2. Principal - A person who hires or employs an agent to work for him or her. 3. Third Party - The other person in a contractual negotiation, other than the principal and his or agent

In California, any person in real estate who is acting in return for compensation from others must have a Department of Real Estate (DRE) license to: a. Sell or offer to sell. b. Buy or offer to buy. c. Solicit prospective buyers or sellers. d. Negotiate the purchase, sale, loan, or exchange of business opportunities or real estate. e. Negotiate leases and collect rents. Department of Real Estate - License Status Inquires 87

B. Law of Agency Applies whenever one person represents another in a business transaction (acts as an agent). Broker must comply with California Real Estate Law. 88

C. Responsibilities of Agency Because the real estate broker is an agent, the California Civil Code defines his or her duties and responsibilities: a. Agent must inform principal of all facts pertaining to handling of the principal's property. b. Agent may not gain any monetary interest in the property without the principal's prior consent. c. Agent may not use principal's property to his or her own advantage. 88

1.Fiduciary relationship to the principal a. Honest and truthful - disclose all material facts b. Utmost care - owes the principal loyalty and good faith c. Integrity - Accounting for actions d. Loyalty e. Obey - lawful instructions f. No secret profits 89

2. Truthful relationship to the third parties a. Honest - Disclose material facts b. Reasonable skill and care c. Fair dealing d. Good faith 89

D. Listing and Selling Agents Listing Agent - obtains listing agreement to sell a particular property and must always represent at least the seller. Selling Agent - negotiates the sale of a property. Listing and Selling Agent (same person) - can represent both the buyer and seller as long as permission and consent has been obtained from both parties. 88

II. REAL ESTATE AGENCY RELATIONSHIP DISCLOSURE 90

A. Agency Disclosure Law The Real Estate Agency Relationship Disclosure Act became law in The law (Civil Code) requires each agent with whom you have more than a casual relationship to provide you with (and fully explain) a Disclosure Regarding Real Estate Agency Relationships Form. 90

The client (buyer or seller) must be informed, understand, and decide as soon as is practicable if their agent represents: a. the seller/owner (seller’s agency), b. the buyer (buyer’s agency), or c. both the seller and buyer (dual agency).  This requires the consent of all parties involved in the transaction. 90

The only requirement is that the listing broker must at least represent the seller. This law applies to all residential sales of from one to four units. 90

III. LISTINGS AND THE MULTIPLE LISTING SERVICE (MLS) 93

A. Listing Agreements - A contract to employ a broker, legally referred to as an agent, to sell or lease a property for the seller. All real estate listings must be in writing in order to collect a commission. 93

There are 6 basic types of listings: 1. Open Listing 2. Exclusive Agency Listing 3. Exclusive Right to Sell Listing 4. Net Listing (rare) 5. Option Listing 6. Oral Listing (not discussed here) 94

1. Open Listing (Unilateral, Non-Exclusive Contract) - Merely an authorization to sell a property. May be given to any number of brokers. Owner may find own buyer and pay no commission. Usually no time limit. Few brokers use this type of listing. 94

2. Exclusive Agency Listing - Only the listing broker is entitled to a commission a. Owner may still find buyer and pay no commission. b. Only one broker eligible to sell property. c. Definite termination date required by law. 95

3. Exclusive Right To Sell Listing - Only the listing broker has the right to sell. a. Preferred by most brokers. b. Broker or salesperson entitled to a commission if property sold within listing period even if owner finds own buyer. c. Definite termination date required by law. 95

4. Net Listing Commission consists of that amount in excess of a specific predetermined price set by the seller. Must be used with another listing Seldom Used 98

5. Option Listing (Reserved by Broker) An OPTION LISTING gives the listing broker the right to purchase the property. A broker with an option listing MUST disclose to prospective buyers that he is acting as a principal, and present all offers to the seller. 99

B. Listing Agreement Copies Give copy when signed Couples who are considered “one legal person” receive one copy 99

C. Multiple Listing Service (MLS) - An association of real estate brokers and salespeople who mutually share listings and sales. 1. Subagents and Cooperating Brokers - A licensed broker or salesperson upon whom the powers of an agent have been conferred, not by the principal, but by the agent with the principal’s authorization. 99

D. Multiple Listing Services on the Internet California Association of Realtors 101

E. Cooperating Brokers - A non-listing broker (subagent) who also works to sell the listed property. Agreements between brokers and salespeople must be in writing. 101

IV. COMMISSIONS 101

Commission - A COMMISSION in real estate is a fee paid, usually as a percentage, to a broker/agent as compensation for his services. The broker must provide a buyer who is ready, willing, and able to buy. The commission rate is entirely negotiable (usually 6% to 10%)

Commission - (cont.) A commission can be earned even if the seller backs out. If there are several brokers or salespeople trying to sell the same property, the agent who is the procuring cause of the sale earns the commission. 1. If more than one broker or salesperson is involved, each gets a percentage which is spelled out in the listing agreement 104

V. TRANSFER DISCLOSURE STATEMENT 104

A.The Easton Decision (Easton vs. Strassburger) Greatly extended the liabilities of brokers engaged in residential real estate sales. a. This court case established the need for agents to visually inspect the property for “red flags” and disclose the findings to their clients. 104

B. Real Estate Transfer Disclosure Statement - Identifies items of value attached to the structure or land and states whether these items are operational. 106

Sequence of filling in and signing the transfer disclosure statement form: 1. The Transfer Disclosure Statement form should be filled out and signed completely by the seller at the time of listing the property. Since the seller is the one most familiar with the property, he or she must be encouraged to be forthright and honest about all known defects. 2. The seller’s agent makes a visual, diligent inspection of the property, fills out the Transfer Disclosure Statement, and signs at the same time the seller lists the property for sale

(cont.) 3. The buyer should receive a copy of the Transfer Disclosure Statement and sign that he or she has received it before making a written offer. 4. The buyer’s agent must also visually inspect the property, fill out the appropriate section of the statement, and sign it. 5. If the buyer fails to receive the Transfer Disclosure Statement form prior to signing the contractual offer (Deposit Receipt), he or she has the right to cancel, after receipt of the Transfer Disclosure Statement, for any reason (three days if delivered by hand or five days if mailed). A written notice of termination must be delivered to the seller or to the seller’s broker

Caution - The requirement for a Transfer Disclosure Statement from the seller does not eliminate the liability of brokers to visually inspect the property under the Easton Decision.

VI. BROKER’S RESPONSIBILITIES 110

A.Trust Accounts (Other People’s Money) A broker accepting a money deposit (and instructions) is required to: a. give it to the principal; b. place it in a trust account; or c. give it to the escrow company. Deposits other than the initial deposit (usually around $200) to start the account are never the personal property of the broker. Commingling - the mixing together of the funds of a principal and a licensee. Conversion - the unlawful misappropriation and use of a client’s funds by a licensee. 110

B. Transaction File - The file or folder (all documents) kept for three years by the broker for each real estate transaction in which the broker or his or her salespeople participated. 110

B. Salespeople May be Independent Contractors or Employees Independent Contractor - sells final results rather than time. Physical conduct is not subject to the control of the broker (sets own hours). 111

Agents must pay their own: a. Federal income tax b. State income tax c. Social security d. Disability insurance e. Workman's compensation (unless broker pays) f. Federal unemployment insurance g. State unemployment insurance

D. Written Broker-Associate Contracts As required by the Real Estate Commissioner’s Regulations, brokers must have a written contract with each licensed member of the sale’s staff. A copy of this contract must be retained by all parties for three years from the date of termination. 112

E. DRE Notification - When a salesperson chooses to leave the employ of a broker, that broker must notify the DRE within 10 days. When a salesperson transfers a license to a new broker, that broker must notify the DRE within 5 days of the new employment. 112

F. Agents Who Buy and Sell for Their Own Account When transferring or selling his or her own property, the broker must: a. disclose the fact that he or she is a licensed real estate professional to all involved in the deal. b. state this fact in all written contracts. c. inform your own broker, most brokers have their own requirements. 116

G. Power of Attorney - An acknowledged, written authorization of one person to act for another. General Power of Attorney - allows the person so authorized to perform any act the principal could perform. Attorney in Fact - under a “general” power of attorney, is an agent who may have the power to transact all of a principal’s business. 116

Power of Attorney - (cont.) Special Power of Attorney - allows the person so authorized to perform only a specific act. Attorney in Fact - under a “special” power of attorney, has the authorization to perform only a specific act. If not otherwise expressed in writing, the agent is allowed to delegate parts of his or her authority under three circumstances: a. The act to be performed is purely mechanical, such as typing a form, or b. The agent isn't qualified to perform the act, such as notarizing a document, or c. It is customary to delegate the task in that business or locality, such as cooperating with other brokers in selling or buying properties. 116

H. Torts by An Agent - Any civil injury or wrong committed on a person or his property. 117

I. Misrepresentation of a Material Fact Misrepresentation - an untrue statement made by a broker to influence the outcome of a sale. “Puffing” is a statement of opinion (not fact) that exaggerates a property’s benefits. Three types: 1. Innocent Misrepresentation 2. Negligent Misrepresentation 3. Fraudulent Misrepresentation 117

1. Innocent Misrepresentation - False statements that are not known to be false at the time they are made. Do not usually warrant legal liability. May cause a rescission of the contract (restoring everything to the original owner). 118

2. Negligent Misrepresentation Statements believed to be true but made without reasonable grounds, which are in fact false. The broker or salesperson involved is liable. It is considered a form of deceit. 118

3. Fraudulent Misrepresentation False statements made with full knowledge that they are false. The contract is voidable. The broker or salesperson is liable for fraud. 118

J. Secret Profit – An illegal payment to a broker or salesperson which violates the fiduciary relationship. 118

K. Warranty of Authority Express Warranty - a written listing exists between the seller and broker. Implied Warranty - given to a broker if he or she merely shows the property with the seller's consent. 118

L. Disclosure of AIDS and Death An occupant’s death from AIDS or AIDS- related illness, or any other contagious disease, is a highly emotional issue. By law, sellers, brokers, and landlords have no liability for failure to disclose a prior occupant’s death or its cause after 3 years. 119

VII. REQUIRED AGENT DISCLOSURES—SUMMARY (1 to 4 Unit Residential Sales) 119

A. Visual Inspection B. Disclosure of Agency Relationship C. Disclosure of the Negotiability of Real Estate Commissions D. No Disclosure Required for Manner/Occurrence of Death; Affliction of Occupant with AIDS 119

VIII. TERMINATION OF AGENCY 120

A. Reasons for Termination: 1. The expiration of the agency (listing) (usually the case). 2. Destruction of the property. 3. Death or incapacity of either the broker or seller. 4. Agreement by both the broker and seller. 5. Renouncement of listing agreement by the broker (may be subject to damages for breach of contract). 6. Revocation of listing agreement by the seller (may be liable for the commission). 7. Close of Escrow. 121

IX. A BROKERAGE MUST BE RUN LIKE A BUSINESS 122

A company dollar is the dollar a broker receives after all salespersons’ commissions have been paid. A gross dollar is all the income that is received by the office before paying out commissions. 122

A. One-Stop Shopping: When the real estate market goes “soft”, some brokerage firms diversify by being involved in multiple facets of property transactions, including escrow and title services, property management, and mortgage brokerage. 122

Chapter 4 - Summary Agency Express agreement Implied agreement Ratification Estoppel Agents Listing/Selling Fiduciary Duty Independent Contractors Employees Listing Open Exclusive Exclusive right to sell Net listing MLS Real Estate Commissions Transfer Disclosure Statement Deposit receipt No commingling Power of Attorney Attorney in fact Misrepresentation Innocent Negligent Fraudulent No secret profits 123