Why Learn About Brokerage and Agency?
By Dr. Larry Hasbrouck
Real estate is an industry driven by small businesses. Most brokerages are not giant national companies, and even those that are members of large franchises are still small businesses at heart, run locally to serve what is essentially a local market. Like any small business, there are challenges and advantages
To be successful, a licensee has to know not only his or her product (real estate) but also how to run a business. There are financial challenges to running any operation, as well as personnel issues such as how many people to hire and in what capacity. What jobs need to be done, and what kinds of people are needed to do them best? Who are you competing with, and how can you successfully thrive in a marketplace with 5, 10, 20 or more different brokerages all competing for the same piece of the pie? The answers to these questions are not easy ones, but a successful licensee needs to think of him or herself as a businessperson, not just as an agent.
The History of Brokerage
The nature of real estate brokerage services, particularly those provided in residential sales transactions, has changed significantly in recent years. Through the 1950s, real estate brokerage firms were primarily one-office, minimally staffed, family-run operations. The broker listed an owner’s property for sale and found a buyer without assistance from other brokerage companies. The sale was eventually negotiated and closed. It was relatively clear that the broker represented the seller’s interests. The common-law doctrine of caveat emptor (“let the buyer beware”) was the rule; buyers were pretty much on their own.
In the 1960s, however, the way buyers and sellers were brought together in real estate transactions began to change. Brokers started to share information about properties they listed, resulting in two brokers cooperating to sell a property. The brokers formalized this exchange of information by creating multiple-listing services (MLSs). The MLS expedited sales by increasing a single property’’ exposure to a greater number of potential buyers. Because it resulted in more sales, the MLS quickly became a widely used industry service. But one thing stayed the same: both brokers still represented the seller’s interest.
While this arrangement benefited sellers, buyers came to question whether their interests were being protected. They began to demand not only accurate, factual information but also objective advice, particularly in the face of increasingly complex real estate transactions. Buyers view the real estate licensee as the expert on whom they can rely for guidance. In short, buyers have begun to seek not only protection but representation as well.
Real Estate License Laws
All 50 states, the District of Columbia and all Canadian provinces license and regulate the activities of real estate brokers and salespersons. While the laws share a common purpose, the details vary from state to state. Uniform policies and standards for administering and enforcing state license laws are promoted by an organization of state license law officials known as ARELLO (the Association of Real Estate License Law Officials).
Purpose of License Laws
Real Estate license laws have been enacted to protect the public by ensuring a standard of competence and professionalism in the real estate industry. The laws achieve this goal by
- establishing basic requirements for obtaining a real estate license and, in many cases, requiring continuing education to keep a license;
- defining which activities require licensing;
- describing the acceptable standards of conduct and practice for licensees; and
- enforcing those standards through a disciplinary system.
The purpose of these laws is not merely to regulate the real estate industry. Their main objective is to make sure that the rights of purchasers, sellers, tenants and owners are protected from unscrupulous or sloppy practices. The laws are not intended to prevent licenses from conducting their businesses successfully or to interfere in legitimate transactions. Laws cannot create an ethical or a moral marketplace. However, by establishing minimum levels of competency and the limits of permitted behavior, laws can make the marketplace safer and more honest.
Each state has a licensing authority—a commission, a department, a division, a board or an agency—for real estate brokers and salespersons. This authority has the power to issue licenses, make real estate information available to licensees and the public and enforce the statutory real estate law.
Each licensing authority has also adopted a set of administrative rules and regulations that further define the statutory law. The rules and regulations provide for administering the law and set operating guidelines for licensees. The rules and regulations have the same force and effect as any law. Both the law and the rules are usually enforced through fines and the denial, suspension or revocation of licenses. Civil and criminal court actions can be brought against violators in some serious cases.
In Practice
Each state’s real estate license laws and the rules and regulations of its real estate commission establish the framework for all of a licensee’s activities. It is vital that each licensee have a clear and comprehensive understanding of his or her state’s laws and regulations, not only for purposes of the licensing examination, but to ensure that the licensee’s practice of real estate is both legal and successful!
REAL ESTATE BROKERAGE
Brokerage is simply the business of bringing parties together. Mortgage brokers match lenders with borrowers; stockbrokers bring together investors and corporations; customs brokers help importers navigate through complex customs procedures. A real estate broker is defined as a person licensed to buy, sell, exchange or lease real property for others and to charge a fee for these services.
A brokerage business may take many forms. It may be a sole proprietorship (a single-owner company), a corporation or a partnership with another broker. The office may be independent or part of a regional or national franchise. The business may consist of a single office or multiple branches. The broker’s office may be located in a downtown high-rise, a suburban shopping center or the broker’s home. A typical real estate brokerage may specialize in one kind of transaction or service or may offer an array of services.
No matter what form it takes, however, a real estate brokerage has the same demands, expenses and rewards as any other small business. The real estate industry, after all, is made up of thousands of small businesses operating in defined local markets. A real estate broker faces the same challenges as an entrepreneur in any other industry. In addition to mastering the complexities of real estate transactions, the broker must be able to handle the day-to-day details of running a business. He or she must set effective policies for every aspect of the brokerage operation; maintaining space and equipment, hiring employees and salespersons, determining compensation, directing staff and sales activities and implementing procedures to follow in carrying out agency duties. Each state’s real estate license laws and regulations establish the business activities and methods of doing business that are permitted.
In Practice
At each step in a real estate transaction, the broker should advise the parties to secure legal counsel to protect their interests. Although real estate brokers and salespersons may bring buyers and sellers together, and in most states may fill in preprinted blank purchase agreement forms, only an attorney may offer legal advice or prepare legal documents. Licensees who are not attorneys are prohibited from practicing law.
Real Estate Assistant
A real estate assistant (also known as a personal assistant or professional assistant) is a combination office manager, marketer, organizer and facilitator with a fundamental understanding of the real estate industry. An assistant may or may not have a real estate license, depending on state law. The extent to which the assistant can help the broker or salesperson with transactions is often determined by state license laws. Depending on state law, an assistant may perform duties ranging from clerical and secretarial functions to office management, telemarketing, market strategy development and direct contact with clients and customers. A licensed assistant can set up and host open houses and assist in all aspects of a real estate transaction.
Technology
In additional to assistants, a wide range of technologies is available to help a real estate licensee do his or her job more efficiently and effectively. Computers are a necessary ingredient in any modern real estate brokerage. Community and mortgage information are accessible on the Internet via services such as America Online, Internet Explorer and Prodigy. Multiple-listing and homefinder services are available to real estate professionals through their professional associations. Numerous software packages have been designed specifically for real estate professionals. Some of these programs help real estate brokers and salespersons with such office management tasks as billing, accounting and timekeeping. Other software assist with marketing and advertising properties and services and with designing and producing flyers, business cards, pamphlets and other promotional materials.
In some states, continuing education requirements can be met through the use of specially designed continuing education software. Real estate web sites, home pages and computer networks help licensees keep in touch, and some cable and satellite television channels are dedicated solely to real estate programming for both consumers and professionals.
Real estate brokers and salespersons can carry laptop computers with portable modems that link them with their offices or the web, an MLS or mortgage company from virtually anywhere. Portable fax machines, pagers and cellular phones make licensees available to their offices and clients 24 hours a day. Voice mail systems can track caller response to advertisements and give callers information about specific properties when the broker or salesperson is unavailable. And yard signs are available that broadcast details about a property on an AM radio band, so drivers passing by can tune in for tempting information.
All this technology is a great boon to practitioners, but real estate brokers and salespersons must make careful decisions about which technologies best suit their needs. Furthermore, they must keep up with the rapidly changing world of high-tech real estate tools to remain competitive.
Broker-Salesperson
Although brokerage firms vary widely in size, few brokers today perform their duties without the assistance of salespersons. Consequently, much of the business’s success hinges on the broker-salesperson relationship.
A real estate salesperson is any person licensed to perform real estate activities on behalf of a licensed real estate broker. The broker is fully responsible for the actions performed in the course of the real estate business by all persons licensed under the broker. In turn, all of a salesperson’s activities must be performed in the name of the supervising broker. The salesperson can carry out only those responsibilities assigned by the broker with whom he or she is affiliated and can receive compensation only from that broker. As an agent of the broker, the salesperson has no authority to make contracts with or receive compensation from any other party. The broker is liable for the acts of the salesperson within the scope of the employment agreement.
Independent contractor versus employe
The employment agreement between a broker and a salesperson should define the nature, obligations and responsibilities of the relationship. Essentially, the salesperson may be either an employee or an independent contractor. State license laws generally treat the salesperson as the employee of the affiliate broker, regardless of whether the salesperson is considered to be an employee or an independent contractor for income tax purposes. Whether a salesperson is treated as an employee or an independent contractor affects the structure of the salesperson’s responsibilities and the broker’s liability to pay and withhold taxes from the salesperson’s earnings.
A broker can exercise certain controls over salespersons who are employees. The broker may require an employee to follow rules governing such matters as working hours, office routine, attendance at sales meetings, assignments of sales quotas and adherence to dress codes. As an employer, a broker is required by the federal government to withhold Social Security tax and income tax from wages paid to employees. The broker is also required to pay unemployment compensation tax on wages paid to one or more employees, as defined by state and federal laws. In addition, employees might receive benefits such as health insurance, profit-sharing plans and worker’s compensation.
A broker’s relationship with a salesperson who is an independent contractor is very different. As the name implies, an independent contractor operates more independently than an employee, and a broker may not exercise the same degree of control over the salespersons’ activities. While the broker may control what the independent contractor does, the broker cannot dictate how to do it. The broker cannot require the independent contractor to keep specific office hours or attend sales meetings. Independent contractors are responsible for paying their own income and Social Security taxes and receive nothing from brokers that could be construed as an employee benefit, such as health insurance or paid vacation time. As a rule, independent contractors use their own materials and equipment
The Internal Revenue Service often investigates the independent contractor/employee situation in real estate offices. Under the qualified real estate agent category in the Internal Revenue Code, meeting three requirements can establish an independent contractor status:
- The individual must have a current real estate license.
- He or she must have a written contract with the broker that specifies that the salesperson will not be treated as an employee for federal tax purposes.
- At least 90 percent of the individual’s income as a licensee must be based on sales production and not on the number of hours worked.
In Practice
A broker should have a standardized employment agreement drafted and reviewed by an attorney to ensure its compliance with federal law. The broker should also be aware that written agreements carry little weight with an IRS auditor if the actions of the parties contradict the provisions of the contract. Specific legal and tax questions regarding independent contractors should be referred to a competent attorney or accountant.
FACTORS INDICATING CONTROL
NOTE: These factors are only possible indicators of a worker’s status. Each case must be determined on its own facts, based on all the information. |
EMPLOYEE |
INDEPENDENT CONTRACTOR |
Is the worker required to comply with employer instructions about when, where and how work is to be performed? |
Yes |
No |
Is the worker required to undergo training? |
Yes |
No |
Does the worker hire, supervise and pay others to perform work for which he or she is responsible? |
No
|
Yes |
Must the worker’s job be performed during certain set hours? |
Yes |
No |
Must the worker devote full time to the job? |
Yes |
No |
Must the work be performed on the employer’s property? |
Yes |
No |
Must tasks be performed in a certain order set by the employer? |
Yes |
No |
Is the individual required to submit regular written or oral reports to the employer? |
Yes |
No |
Is payment by the hour, week or month? |
Yes |
No |
Is payment in a lump sum? |
No |
Yes |
Are the worker’s business and travel expenses paid by the employer? |
Yes |
No |
Does the employer furnish the tools and materials required for the job? |
Yes |
No |
Does the worker rent his or her own office or working space? |
No |
Yes |
Will the worker realize a profit or loss as a result of his or her services? |
No |
Yes |
Does the individual work for more than one firm at a time? |
No |
Yes |
Does the worker make his or her services available to the general public? |
No |
Yes |
Does the employer have the right to fire the worker? |
Yes |
No* |
Does the worker have the right to quit the job at any time, whether or not a particular task is complete? |
Yes |
No |
Commission
The broker’s compensation is specified in the contract with the principal. License laws may stipulate that a written agreement must establish the compensation to be paid. Compensation can be in the form of a commission or brokerage fee (computed as a percentage of the total sales price), a flat fee or an hourly rate. The amount of a broker’s commission is negotiable in every case. Attempting, however subtly, to impose uniform commission rates is clear violation of state and federal antitrust laws (discussed later in this chapter). A broker may, however, set the minimum rate acceptable for that broker’s firm. The important point is for broker and client to agree on a rate before the agency relationship is established. A commission may be a percentage of the sales price that the market will bear. Brokers in different parts of the country and in different kinds of real estate charge commissions ranging from less than 5 percent to more than 8 percent.
A commission is usually considered earned when the work for which the broker has hired has been accomplished. Most sales commissions are payable when the sale is consummated by delivery of the seller’s deed. This provision is generally included in the listing agreement. When the sales or listing agreement specifies no time for the payment of the broker’s commission, the commission is usually earned when
- a completed sales contract has been executed by a ready, willing and able buyer;
- the contract has been accepted and executed by the seller; and
- copies of the contract are in the possession of all parties.
To be entitled to a sales commission, an individual must be
- a licensed broker,
- the procuring cause of the sale and employed by the buyer or seller under a valid contract
To be a procuring cause, the broker must have started a chain of events that resulted in a sale.
To be considered the procuring cause of a sale, the broker must have started or caused a chain of events that resulted in the sale. A broker who causes or completes such an action without a contract or without having been promised payment is a volunteer and may not legally claim compensation. Many other factors affect a broker’s status as procuring cause. For instance, if the agent abandons the transaction, he or she may not be able to return and claim to have been the procuring cause. In all cases, the key is determining who really sold the property. Procuring cause disputes between brokers are usually settled through an arbitration hearing conducted by the local board or association. Disputes between a broker and a client may go to court, however.
Once a seller accepts an offer from a ready, willing and able buyer, the broker is entitled to a commission. A ready, willing and able buyer is one prepared to buy on the seller’s terms and ready to take positive steps toward consummation of the transaction. Courts may prevent the broker from receiving a commission if the broker knew the buyer was unable to perform. If the transaction is not consummated, the broker may still be entitled to a commission if the seller
- had a change of mind and refused to sell,
- has a spouse who refused to sign the deed,
- had a title with uncorrected defects,
- committed fraud with respect to the transaction,
- was unable to deliver possession within a reasonable time,
- insisted on terms not in the listing (for example, the right to restrict the use of the property) or had a mutual agreement with the buyer to cancel the transaction
In general, then, a broker is due a commission if a sale is not consummated because of the principal’s default.
In most states, it is illegal for a broker to pay a commission to anyone other than the salesperson licensed with the broker or to another broker. Fees, commissions or other compensation cannot be paid to unlicensed persons for services that require a real estate license. “Other compensation” includes tangible gifts, such as a new television, or other premiums, such as a vacation. This is not to be confused with referral fees paid between brokers for leads. Referral fees are legal as long as both individuals are licensed.
Salesperson’s Compensation
The amount of compensation a salesperson receives is set by mutual agreement between the broker and the salesperson. A broker may agree to pay a fixed salary or a share of the commissions from transactions originated by a salesperson. In some cases, a salesperson may draw from an account against earned shares of commissions. Some brokers require salespersons to pay all or part of the expenses of advertising listed properties.
Some firms have adopted a 100 percent commission plan. Salespersons in these offices pay a monthly service charge to their brokers to cover the costs of office space, telephones and supervision in return for keeping 100 percent of the commissions from the sales they negotiate. The 100 percent commission salesperson pays all of his or her own expenses.
Other companies have graduated commission splits based on a salesperson’s achieving specified production goals. For instance, a broker might agree to split commissions 50/50 up to $25,000 salesperson’s share; 60/40 for share from $25,000 to $30,000; and so on.
Commission splits as generous as 80/20 or 90/10 are possible, however, particularly for high producers.
However the salesperson’s compensation is structured, only the employing broker can pay it. In cooperating transactions, the commission must first be received by the employing broker and then paid to the salesperson, unless otherwise permitted by license laws and agreed to by the employing broker.
Transactional Brokerag
A transactional broker (also referred to as a nonagent, facilitator, coordinator or contract broker) is not an agent of either party. A transactional broker’s job is simply to help both the buyer and the seller with the necessary paperwork and formalities involved in transferring ownership of real property. The buyer and the seller negotiate the sale without representation.
The transactional broker is expected to treat all parties honestly and competently, to locate qualified buyers or suitable properties, to help the parties arrive at mutually acceptable terms and to assist in the closing of the transaction. Transactional brokers are equally responsible to both parties and must disclose known defects in a property. However, they may not negotiate on behalf of either the buyer or the seller, and they must not disclose confidential information to either party
Sharing Commissions
A commission might be shared by many people: the listing broker, the listing salesperson, the selling broker and the selling salesperson. Drawing a diagram can help you determine which person is entitled to receive what amount of the total commission.
ANTITRUST LAWS
The real estate industry is subject to antitrust laws. At the federal level, the Sherman Antitrust Law provides specific penalties for a number of illegal business activities. Each state has its own antitrust laws as well. These laws prohibit monopolies, but also any contracts, combinations and conspiracies that unreasonably restrain trade—that is, acts that interfere with the free flow of goods and services in a competitive marketplace. The most common antitrust violations are price-fixing, group boycotting, allocation of customers or markets and tie-in agreements.
Antitrust violations include
- Price-fixing,
- Group boycotting,
- Allocation of customers,
- Allocation of markets and
- Tie-in agreements.
Price-Fixing Price-fixing is the practice of setting prices for products or services rather than letting competition in the open market establish those prices. In real estate, price-fixing occurs when competing brokers agree to set sales commissions, fees or management rates. Price-fixing is illegal. Brokers must independently determine commission rates or fees for their own firms only. These decisions must be based on a broker’s business judgment and revenue requirements without input from other brokers.
Multiple-listing organizations, Boards of Realtors® and other professional organizations may not set fees or commission splits. Nor can they deny membership to brokers based on the fees the brokers charge. Either practice could lead the public to believe that the industry not only sanctions the unethical practice of withholding cooperation from certain brokers but also encourages the illegal practice of restricting open-market competition.
The broker’s challenge is to avoid even the impression of price-fixing. Hinting to prospective clients that there is a “going rate” of commission or a “normal” fee implies that rates are, in fact, standardized. The broker must make it clear to clients that the rate stated is only what his or her firm charges.
Group Boycotting
Group boycotting occurs when two or more businesses conspire against another business or agree to withhold their patronage to reduce competition. Group boycotting is illegal under the antitrust laws.
FOR EXAMPLE V and N, the only real estate brokers in Potterville, agree that there are too many apartment-finder services in town. They decide to refer all prospective tenants to the service operated by V’s niece rather than handing out a list of all providers, as they have done in the past.
As a result, V’s niece runs the only apartment-finder service in Potterville by the end of the year.
Allocation of Customers or Markets
Allocation of customers or markets involves an agreement between brokers to divide their markets and refrain from competing for each other’s business. Allocations may be made on a geographic basis, with brokers agreeing to specific territories within which they will operate exclusively. The division may also occur by markets, such as by price range or category of housing. These agreements result in reduced competition
Tie-in Agreement
Finally, tie-in agreements (also know as tying agreements) are agreements to sell one product only if the buyer purchases another product as well. The sale of the first (desired) product is “tied” to the purchase of a second (less desirable) product.
FOR EXAMPLE D, a real estate broker, owns a vacant lot in a popular area of town. B, a builder, wants to buy the lot and build three new homes on it. Drefuses to sell the lot to the builder unless B agrees to list the improved lot with D so that D can sell the homes. This sort of list-back arrangement violates antitrust laws.
Penalties
The penalties for violating antitrust laws are severe. For instance, under the Federal Sherman Antitrust Act, people who fix prices or allocate markets may be subject to a maximum $100,000 fine and three years in prison. For corporations, the penalty may be as high as $1 million. In a civil suit, a person who has suffered a loss because of the antitrust activities of a guilty party may recover triple the value of the actual damages plus attorney’s fees and costs.
SUMMARY
Real Estate license laws and regulations govern the professional conduct of brokers and salespersons. The license laws are enacted to protect the public by ensuring a standard of competence and professionalism in the real estate industry.
Real estate brokerage is the act of brining people together who wish to buy, sell, exchange or lease real estate and charging a fee or commission for the service.
Real estate assistants and technologies are changing the way that brokerage offices are managed and operated.
The broker’s compensation in a real estate sale may take the form of a commission, a flat fee or an hourly rate. The broker is considered to have earned a commission when he or she procures a ready, willing and able buyer for a seller.
A broker may hire salespersons to assist in this work. The salesperson works on the broker’s behalf as either an employee or an independent contractor.