A real estate broker is a party who acts as an intermediary between sellers and buyers of real estate and attempts to find sellers who wish to sell and buyers who wish to buy. In the United States, the relationship was originally established by reference to the English common law of agency with the broker having a fiduciary relationship with his clients. Estate agent is the term used in the United Kingdom to describe a person or organization whose business is to market real estate on behalf of clients.
In the US, real estate brokers and their salespersons (commonly called “real estate agents”) assist sellers in marketing their property and selling it for the highest possible price under the best terms. When acting as a Buyer’s agent with a signed agreement (or, in many cases, verbal agreement), they assist buyers by helping them purchase property for the best possible price under the best terms. Without a signed agreement, brokers may assist buyers in the acquisition of property but still represent the seller and the seller’s interests.
In most jurisdictions in the United States, a person is required to have a license in order to receive remuneration for services rendered as a real estate broker. Unlicensed activity is illegal, but buyers and sellers acting as principals in the sale or purchase of real estate are not required to be licensed. In some states, lawyers are allowed to handle real estate sales for compensation without being licensed as brokers or agents.
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In the past, when brokers (and their agents) only represented sellers, the term “real estate salesperson” may have been more appropriate than it is today, given the different ways that brokers and their agents can help a buyer through the process rather than simply “sell” him or her a property. Legally however, the term ‘salesperson’ is still used in many states to describe a real estate agent.
Real estate education: In order to become licensed, most states require that an applicant take a minimum number of classes before taking the state licensing exam. Such education is often provided by real estate brokerages as a means to finding new agents.
Today in many states, the real estate agent (acting as an agent of the broker with whom he/she is employed) is required to disclose to prospective buyers and sellers who represents whom. See below for a broker/agent’s relationship to sellers and their relationship to buyers.
While some people may refer to any licensed real estate agent as a real estate broker, a licensed real estate agent is a professional who has obtained either a real estate salesperson’s license or a real estate broker’s license.
In the United States, there are commonly two levels of real estate professionals licensed by the individual states, but not by the federal government:
Real estate salesperson: When a person first becomes licensed to become a real estate agent, he/she obtains a real estate salesperson’s license from the state in which he/she will practice. To obtain a real estate license, the candidate must take specific coursework (of between 40 and 90 hours) and then pass a state exam on real estate law and practice. In order to work, salespersons must then be associated with (and act under the authority of) a real estate broker.
Many states also have reciprocal agreements with other states, allowing a licensed individual from a qualified state to take the second state’s exam without completing the course requirements, or, in some cases, take only a state law exam.
Real estate broker: After gaining some years of experience in real estate sales, a salesperson may decide to become licensed as a real estate broker. Commonly more course work and a broker’s state exam on real estate law must be passed. Upon obtaining a broker’s license, a real estate agent may continue to work for another broker in a similar capacity as before (often referred to as a broker associate or associate broker) or take charge of his/her own brokerage and hire other salespersons (or broker) licensees. Becoming a branch office manager may or may not require a broker’s license. Some states such as New York allow licensed attorneys to become real estate brokers without taking any exam. In states, such as Colorado, there are no “salespeople”, as all licensees are Brokers.
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* Agency relationship: Traditionally, the broker provides a conventional full-service, commission-based brokerage relationship under a signed listing agreement with a seller or “buyer representation” agreement with a buyer, thus creating under common law in most states an agency relationship with fiduciary obligations. The seller or buyer is then a client of the broker. Some states also have statutes which define and control the nature of the representation.
Agency relationships in residential real estate transactions involve the legal representation by a real estate broker (on behalf of a real estate company) of the principal, whether that person or persons is a buyer or a seller. The broker (and his/her licensed real estate agents) then becomes the agent of the principal.
* Non-agency relationship: where no written agreement nor fiduciary relationship exists, a real estate broker (and his agents) works with a principal who is then known as the broker’s customer. When a buyer, who has not entered into a Buyer Agency agreement with the broker and buys a property, then that broker functions as the sub-agent of the seller’s broker. When a seller chooses to work with a transaction broker, there is no agency relationship created.
Some state Real Estate Commissions, notably Florida’s after 1992 (and extended in 2003) and the Colorado’s after 1994 (with changes in 2003), created the option of having no agency nor fiduciary relationship between brokers and sellers or buyers. The transaction broker assists buyers, sellers, or both during the transaction without representing the interests of either party. They may be then regarded as customers.
As noted by the South Broward Board of Realtors, Inc. in a letter to State of Florida legislative committees:
“The Transaction Broker crafts a transaction by bringing a willing buyer and a willing seller together and assists with the closing of details. The Transaction Broker is not a fiduciary of any party, but must abide by law as well as professional and ethical standards.” (such as NAR Code of Ethics)
The result was that in 2003, Florida created a system where the default brokerage relationship had “all licensees …operating as transaction brokers, unless a single agent or no brokerage relationship is established, in writing, with the customer” and the statute required written disclosure of the transaction brokerage relationship to the buyer or seller customer only through July 1, 2008.
In both Florida and Colorado’s case, dual agency and sub-agency (where both listing and selling agents represented the seller) no longer exist.
Dual or limited Agency
Dual agency occurs when the same brokerage represents both the seller and the buyer under written agreements. Individual state laws vary and interpret dual agency rather differently.
Many states no longer allow dual agency. Instead, Transaction Brokerage (see above) provides the Buyer and Seller with a limited form of representation, but without any fiduciary obligations (see Florida law). Buyers and sellers are generally advised to consult a licensed real estate professional for a written definition of an individual state’s laws of agency, and many states require written Disclosures to be signed by all parties outlining the duties and obligations.
* If state law allows for the same agent to represents both the buyer and the seller in a single transaction, the brokerage/agent is typically considered to be a Dual Agent. Special laws/rules often apply to dual agents, especially in negotiating price.
* In some states (notably Maryland), Dual Agency can be practiced in situations where the same brokerage (but not agent) represent both the buyer and the seller. If one agent from the brokerage has a home listed and another agent from that brokerage has a buyer-brokerage agreement with a buyer who wishes to buy the listed property, Dual Agency occurs by allowing each agent to be designated as “intra-company” agent. Only the broker himself is the Dual Agent.
* Some states do allow a broker and one agent to represent both sides of the transaction as dual agents. In those situations, conflict of interest is more likely to occur.
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Since each state’s laws may differ from others, it is generally advised that prospective sellers or buyers consult a licensed real estate professional.
* Comparative Market Analysis – an estimate of the home’s value compared with others. This differs from an appraisal in that property currently for sale may be taken into consideration (competition for the subject property).
* Exposure – Marketing the real property to prospective buyers.
* Facilitating a Purchase – guiding a buyer through the process.
* Facilitating a Sale – guiding a seller through the selling process.
* FSBO document preparation – preparing necessary paperwork for “Sale By Owner” sellers.
* Full Residential Appraisal – but only, in most states, if the broker is also licensed as an appraiser.
* Home Selling Kits – guides to how to market and sell a property.
* Hourly Consulting for a fee, based on the client’s needs.
* Leasing for a fee or percentage of the gross lease value.
* Property Management.
* Exchanging property.
* Auctioning property.
* Preparing contracts and leases.
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The sellers and buyers themselves are the principals in the sale, and real estate brokers (and the broker’s agents) are their agents as defined in the law. However, although a real estate agent commonly fills out the real estate contract form, agents are typically not given power of attorney to sign the real estate contract or the deed; the principals sign these documents. The respective real estate agents may include their brokerages on the contract as the agents for each principal.
The use of a real estate broker is not a requirement for the sale or conveyance of real estate or for obtaining a mortgage loan from a lender. However, once a broker is used, the settlement attorney (or party handling closing) will ensure that all parties involved be paid. Lenders typically have other requirements, though, for a loan.
Services provided to both buyers and sellers
In addition to the services to sellers and buyers described below, most real estate agents coordinate various aspects of the closing.
Real estate brokers (and their agents) typically do not provide title service such as title search or title insurance, do not conduct surveys or formal appraisals of the property such as those required by lenders, and do not act as lawyers for the parties, although they may “coordinate” these activities with the appropriate specialists. Some real estate brokers may be associated with loan officers who may help to finance buyers to make their purchase.
Regardless of whether a real estate agent assists sellers or buyers of real estate, negotiation and financing skills are important.
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Services provided to seller as client
Upon signing a listing contract with the seller wishing to sell the real estate, the brokerage attempts to earn a commission by finding a buyer for the sellers’ property for highest possible price on the best terms for the seller. In Canada, most provinces’ laws require the real estate agent to forward all written offers to the seller for consideration or review.
To help accomplish this goal of finding buyers, a real estate agency commonly does the following:
* Listing the property for sale to the public, often on a Multiple Listing Service, in addition to any other methods.
* Based on the law in several states, providing the seller with a real property condition disclosure form, and other forms which may be needed.
* Preparing necessary papers describing the property for advertising, pamphlets, open houses, etc.
* Generally placing a “For Sale” sign on the property indicating how to contact the real estate office and agent.
* Advertising the property. Advertising is often the biggest outside expense in listing a property.
* In some cases, holding an Open house to show the property.
* Being a contact person available to answer any questions about the property and to schedule showing appointments
* Ensuring buyers are prescreened so that they are financially qualified to buy the property; the more highly financially qualified the buyer is, the more likely the closing will succeed.
* Negotiating price on behalf of the sellers. The seller’s agent acts as a fiduciary for the seller. This may involve preparing a standard real estate purchase contract by filling in the blanks in the contract form.
* In some cases, holding an earnest payment cheque in escrow from the buyer(s) until the closing. In many states, the closing is the meeting between the buyer and seller where the property is transferred and the title is conveyed by a deed. In other states, especially those in the West, closings take place during a defined escrow period when buyers and sellers each sign the appropriate papers transferring title, but do not meet each other.
The “listing” contract
Several types of listing contracts exist between broker and seller. These may be defined as:
* Exclusive Right to Sell
In this type of Agreement”, the broker is given the exclusive right to market the property and represents the seller exclusively. However, the brokerage also offers to co-operate with other brokers and agrees to allow them to show the property to prospective buyers and offers a share of the total real estate commission.
* Exclusive Agency
An alternative form, “Exclusive Agency”, allows only the broker the right to sell the property, and no offer of compensation is ever made to another broker. In that case, the property will never be entered into an MLS. Naturally, that limits the exposure of the property to only one agency.
* Open Listing
This is an Agreement whereby the property is available for sale by any real estate professional who can advertise, show, or negotiate the sale. Whoever first brings an acceptable offer would receive compensation. Real estate companies will typically require that a written agreement for an open listing be signed by the seller to ensure the payment of a commission if a sale should take place.
Although there can be other ways of doing business, a real estate brokerage usually earns its commission after the real estate broker and a seller enter into a listing contract and fulfill agreed-upon terms specified within that contract. The seller’s real estate is then listed for sale, frequently with property data entered into a Multiple Listing Service (MLS) in addition to any other ways of advertising or promoting the sale of the property.
In most of North America, where brokers are members of a national association (such as NAR in the United States or the Canadian Real Estate Association), a listing agreement or contract between broker and seller must include the following: starting and ending dates of the agreement; the price at which the property will be offered for sale; the amount of compensation due to the broker and how much, if any, will be offered to a co-operating broker who may bring a buyer. Without an offer of compensation to a co-operating broker (co-op percentage or flat fee), the property may not be advertised in the MLS system.
In consideration of the brokerage successfully finding a satisfactory buyer for the property, a broker anticipates receiving a commission for the services the brokerage has provided. Usually, the payment of a commission to the brokerage is contingent upon finding a satisfactory buyer for the real estate for sale, the successful negotiation of a purchase contract between a satisfactory buyer and seller, or the settlement of the transaction and the exchange of money between buyer and seller.
In North America a commission in the 5% to 7% range is considered “standard” for residential real estate and is typically paid by the seller at the closing of the transaction. Commissions are negotiable between seller and broker. The commission could also be paid as flat fee or some combination of flat fee and percentage, particularly in the case of lower-priced properties, vacant lots, or other unusual real estate. The details are determined by the listing contract.
However, some brokers charge as much as 10% while others will offer services for 1%. Fee-for-service or flat-fee real estate brokerages are also increasing in popularity. This is not, however, the norm throughout the world. In Australia, for example, listing agents are paid 1% and very few buyers use an agent. If they do, they pay out-of-pocket.
Out of the commission received from the seller, the broker will typically pay any expenses incurred to do the work of trying to sell the listed properties, such as advertisements, etc.
Real estate brokers who work with lenders may not receive any compensation from the lender for referring a client to a specific lender. To do so would be a violation of a (US) federal law known as the Real Estate Settlement Procedures Act (RESPA). All compensation to a broker must be disclosed to all parties.
With the sellers’ permission, a lockbox is placed on homes that are occupied and, after arranging an appointment with the home owner, agents can show the home. When a property is vacant or where a seller may be living elsewhere, a lockbox will generally be placed on the front door. The listing broker helps arrange showings of the property by various real estate agents from all companies associated with the MLS.
The lockbox contains the key to the door of the property and the box can only be opened by licensed real estate agents (often only with authorization from the listing brokerage), by using some sort of secret combination or code provided by the brokerage or the issuer of the lockbox.
Lockboxes come in two varieties – mechanical and electronic. Mechanical lockboxes utilize a combination dial or special mechanical key and are readily purchased at local home improvement centers or over the internet. Mechanical lockboxes offer the most basic protection of the homeowner’s key and therefore expose the most risk of unmonitored or potentially unauthorized access to the home during the sales process. The risk stems primarily from an agent forgetting to change the combination after each sale. The frequency of use of mechanical lockboxes by agents has steadily declined due to the availability of more secure electronic lockboxes.
Electronic lockboxes increase the level of security because agents wishing to show a property must have a valid electronic key to open the box. The electronic key must be renewed or refreshed at regular intervals by the agent otherwise the key deactivates itself preventing access to the lockbox contents. Electronic keys can range from credit card sized smart cards to a separate electronic box. In addition to greater security, electronic lockboxes typically record all key access activity internally. This access log can be downloaded and reviewed by the listing agent to determine the date, time and person accessing the lockbox. Electronic lockboxes also offer a host of other features such as controlling allowed showing times, homeowner privacy modes, special showing restrictions etc.
Shared commissions with co-op brokers
If any buyer’s broker (or any of his/her agents) brings the buyer for the property, the buyer’s broker would typically be compensated with a co-op commission coming from the total offered to the listing broker, often about half of the full commission from the seller. If an agent or salesperson working for the buyer’s broker brings the buyer for the property, then the buyer’s broker would commonly compensate his agent with a fraction of the co-op commission, again as determined in a separate agreement. A discount brokerage may offer a reduced commission in the event no other brokerage firm is involved and no co-op commission is paid out.
If there is no co-commission to pay to another brokerage, the listing brokerage receives the full amount of the commission minus any other types of expenses.
Potential points of contention for agents
Real estate commissions are becoming a point of controversy. Home values in many areas have quadrupled over the past 20 years. This may be contributing to the increased number of licensed agents and growing competition between them. The number of real estate agents in areas tends to rise when home values do, and the productivity of existing agents goes down. The rewards have increased, but so have the demands of clients and business risks faced by agents. In North America, agents have had to become familiar with marketing through the internet as well as traditional print and other media. Additionally the law is complicated with issues such as defects in housing, grow houses and other issues of which the agent is the front line defense for his client. There is more liability than ever in advising buyers and sellers.
Another controversy exists for the commissions to real estate agents. If a listing agent sells a property for any amount above the listed price, he in turn will make additional income. In theory, this will motivate him/her to get top dollar price for his client, the seller. However, if the agent representing the buyer attempts to obtain a lower sales price for his client, then he/she would make a lower commission. Thus, it could be considered to be in the agent’s best interest to advise his client to purchase the property at a higher price.
In practical terms, there is rarely a great enough difference between the listing (asking) price and the negotiated selling price to make a significant difference between the commissions generated on each side, and certainly hardly enough to justify an agent failing in his fiduciary duty to obtain the best terms for his/her client.
Another potential conflict of interest exists when a listing agent in a very active real estate market has incentive to sell properties quickly at unnecessarily low prices in order to benefit from a high volume of sales.
In any case, agents who create satisfied clients and develop subsequent referrals are likely to do far better in the long run.
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Services provided to buyers:
* Buyers as clients
With the increase in the practice of buyer brokerage in the US, especially since the late 1990s in most states, agents (acting under their brokers) have been able to represent buyers in the transaction with a written “Buyer Agency Agreement” not unlike the “Listing Agreement” for sellers referred to above. In this case, buyers are clients of the brokerage.
Some real estate brokerages choose only to represent buyers in an exclusive buyer’s agency relationship and do not take “listings” from sellers.
A real estate brokerage attempts to do the following for the buyers of real estate only when they represent the buyers with some form of written buyer-brokerage agreement:
* Find real estate in accordance with the buyers needs, specifications, and cost.
* Takes buyers to and shows them properties available for sale.
* When deemed appropriate, prescreens buyers to ensure they are financially qualified to buy the properties shown (or uses a mortgage professional to do that task).
* Negotiates price and terms on behalf of the buyers and prepares standard real estate purchase contract by filling in the blanks in the contract form. The buyer’s agent acts as a fiduciary for the buyer.
Due to the importance of the role of representing buyers’ interests, many brokers who seek to play the role of client advocate are now seeking out the services of Certified Mortgage Planners, industry experts that work in concert with Certified Financial Planners to align consumers’ home finance positions with their larger financial portfolio(s).
* Buyers as customers
In most states, until the 1990s, buyers who worked with an agent of a real estate broker in finding a house were customers of the brokerage, since the broker represented only sellers.
Today, state laws differ. Buyers and/or sellers may be represented. Typically, a written “Buyer Brokerage” agreement is required for the buyer to have representation (regardless of which party is paying the commission), although by his/her actions, an agent can create representation.
* Find real estate in accordance with the buyers’ needs, specifications, and affordability.
* Take buyers to and shows them properties available for sale.
* When deemed appropriate, prescreen buyers to ensure they are financially qualified to buy the properties shown (or uses a mortgage professional to do that task).
* Assist the buyer in making an offer for the property.
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