Real Estate open book

1 CHAPTER
1.1 HisToRY Consumer surveys indicate that the biggest shortcoming among real estate professionals is a general failure to communicate effectively with clients, customers, and each other. For communication to be effec- tive there must be a common language and common understanding of terms and concepts. Most students taking a course in California Real Estate Practice have been exposed to many new terms and con- cepts during their study of real estate principles. Terms and their precise meanings have a tendency to change over time. Because real estate, like other professions, is a work in progress, it is imperative that every licensee stay current with the nuances in terms and usage in the industry.

We feel obligated to clarify some of the more prevalent misunder- standings that have come into common usage. Such clarification will aid all licensees in communicating with each other and with consumers.

It is important that we establish and agree on the primary purpose of the real estate professional. Why do we do what we do? Some, who have worked in this industry for years, are not clear about why they are in this business. Many believe they are here solely to “make money.” Of course, they can’t mean that literally because “making money” is a function reserved to the U.S. Mint. What they really mean is that they are in this business to “earn money.” The definition of the word “earn” is “to gain or get in return for one’s labor or service.” Com- pensation follows service. It seems such a small point, but it is critical that every licensee understand the sequence of events: service, then compensation. Our purpose is service and the fee received is a by- product of the labor or service provided.

Now we must ask, if our purpose is service and our goal is earn- ing money, what is the purpose of the Bureau of Real Estate and the licensing structure? Is there a common goal here that can be integrated

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4 CHaPTER 1 Starting Your Real Estate Career

harmoniously? The common goal is consumer protection. If every licensee were to embrace the goal of providing service that facilitates the sale or purchase of property while protecting the clients’ and cus- tomer’s interests, we would have the ultimate in harmonious relation- ships. By using the knowledge gained through the licensing process to protect the interest of the client, the licensee will also have protected the parties to the transaction, themselves, their broker, and the reputa- tion of the industry as a whole. Now there’s a win/win combination.

What constitutes service to one licensee may not fit the definition of service to another. This variation in the definition of “service” is the variable that makes it such a challenge for all licensees to provide identical service to every consumer.

Reality and consistency are as elusive in the world of real estate as in any other. This field is in a constant state of change. The value of the land, as well as the needs of the people who live on it, may be differ- ent today than yesterday. Values and customer needs vary constantly. Because of this, licensees need to be aware of the changing needs of buyers and sellers and the necessity for flexibility in their services and marketing practices. For example, because each property and each buyer are unique, accurate pricing or appraising is more an art form than an exact science. No two properties are identical. Even adjoining properties offer different benefits and burdens.

Strength or weakness in the real estate marketplace is determined by “perceived value” that, in turn, creates supply and demand. Some of the reasons for the broad range of perceived values that exist today are: • Buyer and seller knowledge – The Internet gives buyers and sellers

access to a vast amount of real estate information; however, even if sales data is available, it may be misinterpreted by either buy- ers, sellers, or both. The inability to interpret the data can often lead buyers and sellers to overpay or underprice the homes they buy or sell. The GIGO (garbage in, garbage out) rule applies to real estate marketing as well as to computers. Providing accurate information to clients and customers along with proper interpre- tation of the data is one of the most important consumer protec- tion services offered by the knowledgeable licensee.

• Motivation – Motivation has a major influence on the seller’s asking price, the price offered by the buyer, and the price finally accepted by the seller. A particular home may meet all of a buyer’s needs, but any number of motives may cause that buyer to offer a premium well above the seller’s asking price. Another buyer may be less motivated or only mildly interested in the same home and

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51.1 History

may offer less than the seller’s asking price. Sometimes the moti- vation to accept employment in another city is strong enough to cause the seller to accept less for her home than, say, a seller whose motivation for selling is to purchase a larger, more expen- sive home. For many sellers, getting the highest price for their home may not be their primary goal, just as for many buyers pay- ing the absolute lowest price may not be their primary goal.

• Product differentiation – No property is exactly like another. Even in tract homes with exactly the same floor plan there are differences such as location (one backs up to a busy highway while another is on a quiet street), amenities (one has a remodeled kitchen while another has the original kitchen including dated tile), total area, architectural style, maintenance, external influences such as bark- ing dogs, and/or a stunning view. The appraiser factors all of these variables into an analysis of what the property is worth, but the appraiser’s conclusion is still only an estimate of value that is valid only on that date and at that time. The actual price a property is sold for is generally set by a seller’s acceptance of a buyer’s specific offer. The sellers can ask any price that they want, but if no buyer is willing to accept the property on the terms and conditions set by the seller the property remains unsold.

• The ability of the real estate licensee – Most buyers and sellers rely on information provided by a real estate professional. Even the For Sale by Owner needs the pricing information from the Multiple listing service (Mls) in order to price her property com- petitively. On occasion a licensee will agree to represent a seller whose property is in an area or of a type where the licensee has no experience or knowledge. When this happens, the licensee may suggest an asking price or range that is inappropriately high or low that may have the effect of underpricing or discouraging interest by overpricing. Although most licensees are interested in selling property (not just listing property), there are a few who may purposely suggest an unobtainably high selling price in order to beat the competition for the listing. This is clearly a violation of the national association of REalToRs® (naR) Code of Ethics as well as laws relating to misrepresentation.

• Terms – Because most real estate purchases are financed, there is interdependency between real estate values and the availability of low-cost financing. When interest rates are low, financing is not usually an issue with most buyers. When rates rise, however, an astute seller can get a higher price for a property by offer- ing below market financing, although it’s necessary to become

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6 CHaPTER 1 Starting Your Real Estate Career

familiar with all of the risks associated with doing so. This financ- ing can be in the form of a first or second loan or a seller credit to the buyer for all or part of the buyer’s closing costs. The availability of purchase money from lenders is a critical factor in the viability of markets worldwide. There are specific forms that must be used with seller financing; be sure to familiarize yourself with them.

There are also times when different rules apply to different segments of the real estate marketplace. Different price ranges may have different supply/demand rules in play at the same time, even in the same mar- ketplace: homes in the lower price range may be selling briskly while nearby higher priced homes are taking a long time to sell because of lower demand.

The Mls provides current information on competitive pricing in the marketplace. This allows a licensee to more accurately assess a given property’s comparable market value and then to convey that informa- tion to the client or customer so they can make a better decision about the listing or offering price for a given property.

As a licensee, you must be able to clearly explain the services you offer. You must be able to show the seller/buyer how your service can be of benefit.

Before dispelling and clarifying a few of the more prevalent myths currently embraced by many consumers and professionals alike, we need to define a few basic terms. Here are a few definitions from the California Business and Professions Code (BPC) to aid in a common understanding of this discussion:

• BPC 10011 “Licensee,” when used without modification, refers to a person, whether broker or salesman, licensed under any of the provisions of this part.

• BPC 10131 A real estate broker within the meaning of this part is a person who, for compensation or in expectation of compensa- tion, regardless of the form or time of payment, does or negoti- ates to do one or more of the following acts for another or others: a. Sells or offers to sell; buys or offers to buy; solicits prospec-

tive sellers or purchasers of; solicits or obtains listings of; or negotiates the purchase, sale, or exchange of real property or a business opportunity.

b. Leases or rents or offers to lease or rent, or places for rent, or solicits listings of places for rent, or solicits for prospective ten- ants, or leases on real property, or on a business opportunity, or collects rents from real property or improvements thereon, or from business opportunities.

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71.2 Facts and Myths

c. Assists or offers to assist in filing an application for the pur- chase or lease of, or in locating or entering upon, lands owned by the state or federal government.

d. Solicits borrowers or lenders for or negotiates loans or collects payments or performs services for borrowers or lenders or note owners in connection with loans secured directly or collaterally by liens on real property or on a business opportunity.

e. Sells or offers to sell, buys or offers to buy, or exchanges or of- fers to exchange a real property sales contract, or a promissory note secured directly or collaterally by a lien on real property or on a business opportunity, and performs services for the holders thereof. (Broker’s definition continues in B&PC 10131.1-6)

• BPC 10132 Salesman Defined: A real estate salesman within the meaning of this part is a natural person who, for a compensation or in expectation of a compensation, is employed by a licensed real estate broker to do one or more of the acts set forth in Sec- tions 10131, 10131.1, 10131.2, 10131.3, 10131.4, 10131.5, and 10131.6 (Busi ness and Professions Code 10130, per Califor- nia Bureau of Real Estate 2014 Real Estate Law Book, pp. 24–28, Jan. 1, 2014)

1.2 faCTs anD MYTHs Because our legal system relies to such a large extent on English com- mon law, it is important to know that the word “property” did not refer to the actual dirt but rather to the “bundle of rights” which the owner enjoyed. These include the right to:

• Possess • Use • Encumber • Transfer • Exclude others

English courts distinguished between lawsuits over land itself (the “real” thing) and those suits that could award only monetary damages. One brought “real action” to recover “real property” (real estate) and personal action to recover “personal property”—an “estate” being the ownership interest or bundle of rights, not the actual land itself.

Myth number one: California real estate salespersons sell real estate. After all, that is what it says on the license. This myth has been the cause of much misunderstanding between buyers, sellers, and licen- sees. The real estate licensee has only two things to sell, and neither is real

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estate. Real estate licensees sell time and knowledge to people who need assistance with real estate issues.

Think about it. The actual seller of real property is the owner, not the licensee. The broker acts on behalf of the seller to bring a buyer who is ready, willing, and able to purchase the property on the terms and conditions specified by the seller, or on such other terms and con- ditions the seller finds acceptable, and the licensee acts to find such a person on behalf of the broker. Per the listing contract, the seller is the “principal” and the broker is the “agent” acting on her behalf. It is the employing broker (agent) who, by law, is the only one allowed to receive compensation for effecting the sale or transfer of real property (BPC 10131). Because the broker/agent is the only one authorized by law to collect a fee for real estate services, the licensee (those licen- sees, broker associates, or salespersons) working under the supervision of the employing broker/agent must be employed by a licensed bro- ker, and therefore their compensation must be paid only through that employing broker—never directly from buyers, sellers, or others.

The logical progression is as follows: The property owner or buyer (the principal) hires an “agent” (broker) to represent her in the sale or purchase of property. That broker hires a licensed real estate sales- person (the licensee) to represent her in dealings with the public. The licensee is never the direct representative of the principal; the licen- see always represents the broker who represents the client. In other words, the broker is the “agent” of the principal. The licensee is the “agent of the agent.” Licensees have misunderstood their relationship to the client by referring to them as “my client;” they are not the licen- see’s clients, they are clients of the broker. The licensee’s client is the broker. This concept becomes critically important when the licensee decides to change broker affiliations. Listings taken by a licensee in the name of the employing broker/agent, as well as the buyers being represented directly, through a Buyer Representation Agreement or, indirectly, through a Calif. Purchase Agreement belong to the broker. When any other disposition occurs, it is because the broker and licen- see have negotiated an alternate agreement.