Chapter 30 - Real Estate Law and Real Estate Agents

For identification, California merchants ask
check writers for their real estate license.
Not everyone in California has a driver's license.
Dennis G. Blair

Real property versus personal property

All property is either real property or personal property. Buying real estate requires knowing the difference. For example, such items as rosebushes, fences and satellite dish antennas may appear to be real property but may in fact be personal property.

Real property is primarily land and that which is attached to it. In the case of the above-mentioned items, they may be real property or personal property depending on their method of attachment to the land and depending on the intention of the owner. These factors are considered by courts in case of dispute.

Typically, the only time these questions become an issue is when a property is sold and the buyer takes possession, only to discover a hole where the prize-winning rosebush and its buried container were removed, the portable split-rail fence has been loaded and hauled off, the satellite receiver has been unbolted and removed from the site.

There is only one certain item that will prevent misunderstanding about what will and will not remain with the real property—a written contract, spelling out what is included in the sale price. My advice is this: have your agent write and attach to the sales contract a personal property addendum listing all items of personal property that you would like to have stay with the property and especially list all items that are in the gray area between personal and real property. These include but are by no means limited to antennas or satellite dishes, window coverings, bedspreads that match window coverings, fireplace inserts, freestanding dishwashers, built-in refrigerators, chandeliers and other special light fixtures, stained-glass windows, ceiling fans, window air conditioners and mailboxes on posts in old milk cans. If in doubt, list it.

Laws of agency

Agents

The basic law of agency is that an agent owes the principal (in real estate that has usually been the seller) a fiduciary responsiveness founded on trust and confidence. The agent must at all times act in the best interests of the principal. The agent has an obligation to disclose all known facts which the principal may use to make a decision. The agency relationship between seller and agent is established by the listing contract.

Buyer’s agents are becoming more common. A buyer can retain a real estate broker to find a suitable property. The buyer agrees to pay a fee to the broker upon performance. The terms of the agreement should be in writing to eliminate misunderstanding and to be enforceable. A buyer’s broker may not receive compensation from the seller without the buyer’s permission and only upon full disclosure to the buyer.

Agency laws are finally changing to resolve the long-standing question of how an agent could be a subagent of the seller through the multiple listing agreement and still represent the buyer effectively. On January 1, 1995, Illinois real estate law created the presumption that licensees are the agent of the consumer with whom they are working. The Chicago Association of Realtors president, Sid G. Woods said that, &ldquoThis means that when a buyer goes to an agent to find a property, that agent will be truly representing the buyer, and not acting as a subagent for the seller.” I would expect other states to follow the example of Illinois.

Conflict of interest

Until all states change their laws, in most cases a real estate agent, through the listing agreement, is legally working for the seller. Some believe this means that the buyer is on his own and is likely to be mistreated by the agent. Let’s examine this.

First, in most states there are laws that require full disclosure to buyers of all known conditions that affect the value of the property. That’s right, no secrets. If the basement becomes a swimming pool every spring, the seller must disclose that fact to the agent and the agent must disclose it to the buyer. If the roof leaks, if the well runs dry every September, if the neighbor is a retired general who drives a Sherman tank up and down the road early every morning, if the dishwasher dances into the middle of the kitchen every Thanksgiving evening, these conditions must be reported to the buyer. If they are not, both the seller and the agent may be liable for damages. Judges take a dim view of willful nondisclosure and even have the power to set a sale aside, in addition to damages and criminal penalties. And the agent could lose his or her real estate license.

While the agent gets paid by the seller (with money from the buyer), guess who really makes the deal work or not? The buyer. And in most cases the agent gets not one dollar until the transaction is successfully completed. So an agent is highly motivated to help everybody get what they want, so that the sale closes and the commission gets paid. Also, after the transaction is closed, the buyer/owner is now a prospective future seller for the agent. Keenly aware of this from the beginning, it is understandable that the agent wishes to impress the buyer.

A full-time agent who has operated in an area for a year or two and who enjoys a good reputation in the community is succeeding in a demanding business by helping people get what they want. As to the information source of reputations, sellers often leave the area; buyers are the &ldquoreputation community.”

Agent motivation

Real estate licensees live with the pressure of uncertain income, as do all who are paid only by commission. Let’s be candid—like anyone who works for a living, an agent wants to be paid. So the agent wants to make the deal work. The agent wants the buyer to make an offer that the seller will accept. If the buyer makes a low offer, then the agent wants the seller to either accept it or to make a counteroffer that the buyer will accept. A good agent will continue to write counteroffers rather than accept rejections as long as the seller wants to sell and the buyer wants to buy. The agent will continue to do everything legally possible to help the seller and buyer find agreement and complete the sale. That’s how agents get paid.

Real estate agents

Real estate agent is a generic term used to describe anyone who, for a commission, lists, sells, exchanges, rents or leases real property. This generally means brokers and salespersons licensed by the state in which they do business. Brokers can conduct business on their own; salespersons must work under the supervision of a broker, who is responsible for their actions. A salesperson may be an employee or an independent contractor in the view of the IRS.

Each state sets its own licensing requirements for education and continuing education for salespersons, and education, experience and continuing education for brokers. Required salesperson education ranges from none in Maine, Montana, New Hampshire, Rhode Island and Vermont, to 180 classroom hours in Texas. Broker experience (as a salesperson) requirements range from none in Wisconsin to five years in Delaware.

Persons exempt from real estate agent licensing laws include property owners dealing with their own property, lawyers conducting a transaction as an incidental part of their duties as an attorney, trustees and receivers in bankruptcy, legal guardians, administrators and executors handling an estate, government agency employees dealing in agency business and persons operating under powers of attorney.

Realtors®

As of early 2010 there are about 1.3 million Realtors, mostly in the US, and an additional 1 million licensed real estate agents who are not members of NAR and cannot use the term "Realtor®". The US Bureau of Labor Statistics reports that about 600,000 are actually working brokers or salespersons. Not all real estate agents are Realtors. Realtors are licensed agents who belong to the National Association of Realtors (NAR) and subscribe to a strict code of ethics. This is not to say that Realtors are inherently more ethical than non-Realtors, but NAR provides an extra layer of protection for the public, namely the local real estate board’s ethics and arbitration committee and the hearings it conducts. Hearings are available at low or no cost to any seller or buyer who believes a Realtor has done them wrong. During my years as ethics and arbitration committee chairman and as board president I monitored many such hearings. My experience is that Realtors tend to hold their peers to a higher standard than does the public. Realtors are highly motivated to upgrade their image. Complainants therefore receive fast and fair justice—always faster and oftentimes fairer than with the courts, which is where the public must go for justice with a non-Realtor.

Ethics hearings address questions of conduct; arbitration hearings adjudicate money matters. Ethics hearings are most commonly brought by one Realtor against another. Arbitrations typically settle client complaints against a Realtor regarding financial matters, although Realtor versus Realtor is not uncommon. A court of law will uphold the decision of a properly conducted arbitration hearing. If you ever feel you have been wronged by a Realtor, do not hesitate to register a complaint with the local real estate board. A complaint must be in writing.

Country real estate agents are less likely to be Realtors than city agents because of distance considerations. I do not downgrade country agents for not being Realtors if there is no real estate board within a reasonable driving distance. I bought my ideal country home using a non-Realtor.

As in any profession, education, experience, ability and integrity are the qualities of excellence. For the first months I was in real estate, I expected someone to notice my naiveté and ask me how long I had been an agent. No one ever did. They should have. Country real estate agents typically do not handle as many transactions per year as their city cousins, so experience does not equate on a year-for-year basis.

Part-time agents

From extensive personal experience I am biased against part-time agents. Of the many part-time agents I have known, only one was top-notch. When part-time agents are at their regular jobs they are not available to take care of their clients’ business. Some part-time agents partner with another agent who covers for them when they are not available. As with doctors and dentists who have others cover for them while they are on vacation, this does not provide optimal personal service for the client, and it is very hard for the backup person to know all details of each case or transaction. Part-time agents rarely handle a high volume of sales, which is the only way to gain and maintain a high level of competence in this profession. My recommendation is to work with an experienced full-time agent.

Of course even some full-time agents are not worth their salt. Others are invaluable. What you want is a professional person who is very knowledgeable about properties, financing, laws, contracts, conditions, values and procedures in your target area.

Why I recommend using an agent

Agents are valuable not only for their specialized knowledge and experience but because they are third parties, emotionally removed from the egos, desires and fears of the principals. Agents who specialize in a given field will always be more knowledgeable and effective than sellers or buyers who try to represent themselves. Buyers and sellers are emotionally involved and may damage or destroy a transaction due to temperament. Athletes, movie stars, writers, attorneys and many others use agents to represent them on important matters. A buyer who represents himself may not have a fool for a client but he will likely have unprofessional representation.

Real estate agents are experts in real estate transactions in their area. They know local values, financing, escrow procedures, laws, customs and who best provides all the needed inspections and services. Agents are strongly motivated to have a successful transaction and are experts in making that happen.

You may feel I recommend using an agent because I am an ex-Realtor. Although I had nearly eight years’ full-time experience as a real estate agent, including six years as broker of my own office at the time, I used an agent to handle the purchase of the property that is now my permanent home—the most important real estate transaction of my life. I did so for all of the above reasons. And, in case you are wondering, I neither asked for nor received any special consideration or commission referral fee. I did, however, write the purchase contract.

How to choose an agent

Judging integrity is like guessing the weight of an elephant—it’s easy to be fooled by presence. Therefore ask many people in your target area who is good and who is not. Certain names will recur in both categories.

Ask for recommendations from escrow officers and bank loan officers. You are likely to be in an area where you know no one. Certain criteria are useful. Is the agent a Realtor? Does she subscribe to a multiple listing service? Not all rural areas have one, but if there is one and an agent does not use the service, that agent cannot show you all of the listings available in the area. How long has he been in real estate? Is she full-time? Ask for an estimated purchase cost sheet—if the agent hems and haws, excuse yourself and go on to the next office. Ask about local financing, title and escrow customs. Ask how the agent feels about being the sellers’ agent and serving you at the same time. Ask for a list of the buyers’ names and phone numbers for the last five closed transactions. Call some of them and ask for their feelings about how the agent handled their transaction. Glowing recommendations from past clients are indicative of competence but are not a guarantee; those transactions may have been much simpler.

Observe how agents handle themselves. Careful interviewing is a sign of a professional agent, as the process saves everybody’s time. Good agents will take the time to clearly understand what you want and what you wish to pay. If you will need a loan to finance your purchase, they will determine your qualifications, either themselves or through a loan agent who will take your information. Agents will make a list of appropriate properties to show you and will call for appointments with the owners—at the same time making sure that the property is still available and price, terms and conditions have not changed.

Don’t go out looking at properties with an agent you are not comfortable with—for any reason. Looking at country property is time- and fuel-consuming. Although you are not legally obligated to stay with a particular agent, once that agent has spent considerable time, energy and fuel showing you properties, you are both going to feel pretty bad if the relationship abruptly ends. Make sure you are satisfied with an agent’s qualifications before looking at listings. If the vibes are bad, state honestly that you’d like to interview other agents.

Take your time and use your very best judgment choosing an agent. Do not feel obligated to agents just because they have spent time talking to you. Like any professional, an agent needs to earn your respect and support. Once you decide on an agent, treat him or her with the same respect that you desire and that you would give to any other professional.

Open listings—a country condition

In my experience, country agents operate similarly to city agents but differently in one practice that is notable. For sound reasons many city brokers and multiple listing services will not accept open listings. Country agents often do.

An open listing is a nonexclusive listing given by a seller to one or several real estate brokers. A commission is paid only to the broker procuring a buyer, and the seller reserves the right to sell the property with no obligation to any broker. Unscrupulous sellers sometimes try to cheat brokers out of a commission by dealing directly with potential buyers brought to the property by the broker. This act is called &ldquogoing around the broker.” Brokers cannot justify spending time and advertising dollars on a listing that may be sold any day by another broker or the seller, with no compensation to the first broker. In spite of these dangers, in many rural areas agents regularly take open listings, especially in those areas without a multiple listing service.

Open listings and the lack of a multiple listing service (MLS) create a negative condition for buyers. Under such conditions, buyers must visit several brokers to be sure they are aware of all available properties, which can be very time-consuming. There is no way around it; if you find that in your target area agents do not have or belong to an MLS then you will have to use multiple agents to be sure of seeing all available properties.

Exclusive listings

Exclusive listings come in two flavors: exclusive agency and exclusive right to sell. An exclusive agency listing means that the seller agrees to pay a commission to the listing broker even if another broker provides the buyer. In that case, the listing and selling brokers usually split the commission according to their prior agreement. Exclusive agency listings allow sellers to sell their property and not owe a commission. An exclusive right to sell listing is where the seller agrees to pay the listing broker a commission no matter who sells the property, including the seller. The advantage to the broker is obvious. The advantage to the seller is that the broker will spend money on advertising, will submit the listing to the MLS and will generally expend all possible effort to sell the property because of the certainty of getting paid if successful.

FSBOs

If you happen to find a property for sale by owner (FSBO, pronounced fizzbow) and you wish to buy it, I recommend that you use an agent to draw the contract according to the terms you dictate, to advise you on financing and to recommend termite, structural and other inspectors if you want them, appraisers, surveyors, lenders, escrow agents and title companies. Negotiate a fee with the agent, to be paid from escrow upon successful closing of the transaction. Have the agent type up a simple agreement stating what services will be provided and the fee you will pay. Once you both sign, it is an enforceable contract. Get a copy.

If you choose to act as your own agent

Educate yourself. Learn the language of real estate; start with the glossary in this book. Study real property descriptions (U.S. Survey method, metes and bounds and lot and block, all of which may be used for country property), rights-of-way and easements, title insurance and title opinions, escrow procedures and customs, types of financing and instruments used with each, mechanic’s liens, appraisers and methods of appraisal, surveys, and inspections—health inspections of wells and septic systems, soil tests, structural inspections, termite inspections, energy-efficiency inspections, etc.

Know that all matters pertaining to real estate contracts, agreements and understandings are rarely enforceable unless they are in writing, so study contract law and learn to write contracts. Basic contract forms are available but rarely include room for the appropriate conditions and addendums often needed in country property transactions.

Expect your real estate education to take time. If you are willing to spend the time educating yourself, if you learn the customs and procedures appropriate to your target area, and if you intend to pay cash for your property then you will only be restricted by your available time, ego, patience and competence.

Be sure to have the property appraised by a licensed appraiser. This will probably cost between $250 and $500 but is the most reliable estimate of value you can get without using an agent familiar with area values.

Expect real estate agents to be uncooperative—they are not keen on helping novices who are cutting into their business. You will probably have to find properties that have not been listed, which means that most properties will not be available to you. You will likely be limited to FSBOs and properties you find yourself the same way real estate agents do, by making a lot of phone calls.

Expect something to go wrong. If you would like to know most of what can go wrong, spend some time talking to an experienced escrow officer. She (most often female) can turn your hair gray with real estate horror stories.

On using a lawyer to help with a real estate transaction

I am biased against lawyers being involved in most residential and rural land real estate transactions because of my experiences where they caused deals to be lost through their insistence on some contract condition that caused one of the principals to back out of the deal, or because they caused needless delays.

Some lawyers specialize in real estate and are competent to help buyers or sellers in their area. Unless they are very active in real estate, lawyers are rarely knowledgeable about property values, and price is usually the most important factor in any real estate transaction. I have expressed my feelings above on the subject of part-time real estate agents; lawyers who occasionally handle real estate transactions belong in the same category.

Lawyers are good for reviewing contracts that an unrepresented buyer or seller has written. In their effort to protect their client they tend to unnecessarily complicate contracts. In real estate transactions, time is of the essence. Lawyers sometimes cause transactions to be delayed and made more difficult by taking too long to do their work. And they add to the cost of the transaction.

Lawyers are not supposed to act as real estate agents except as an incidental part of their work for a client, for instance as part of their duties as trustees or executors/executrixes. In my opinion, lawyers who want to be real estate agents should first obtain a real estate license. Then they should handle a large number of real estate transactions each year so they stay informed as to local values and conditions.

George Washington was a surveyor.
He took the exact measure of the British
and surveyed himself out about the most valuable
piece of land in America at that time, Mount Vernon.
George could not only tell the truth but land values.
Will Rogers
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