120 Week 4 F /For WIZARD KIM

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Chapter 23: Due diligence obligations 151

After reading this chapter, you will learn:

• the due diligence an exclusively employed broker owes a seller or buyer; and

• the best effort obligation as the broker’s duty to a client under an open listing employment.

Due diligence obligations

Chapter

Every exclusive listing agreement entered into by an agent on behalf of their broker documents an employment which established a client relationship. The employment imposes special agency (fiduciary) duties on the broker and the agent to use due diligence.

Due diligence is a continuous effort by the broker and their agents to meet the objective of the employment.

The promise of due diligence is the consideration a broker and their agents owe their client when rendering services in exchange for employment as the exclusive representative of the client. If the promise to use diligence in the employment is not stated in the exclusive listing agreement, it is a duty implied as existing in the relationship.

The duty owed to clients

due diligence The concerted and continuing efforts of an agent employed to meet the objectives of their client, the agent’s promise given in exchange for the client’s promise to pay a fee.

annual property operating data sheet (APOD)

best effort obligation

due diligence

marketing package

material fact

natural hazard disclosure (NHD)

property profile

seller’s net sheet

Key Terms

For a further discussion of this topic, see Chapter 21 of Real Estate Practice.

Learning Objectives

152 Real Estate Principles, Second Edition

The broker with authority to be the exclusive representative of a client takes reasonable steps to promptly gather all material facts about the property in question which are readily available to the broker or the broker’s agent.

After gathering factual information about the integrity of the property, the broker’s agent proceeds to do every reasonable and ethical thing to pursue, with utmost care, the purpose of the employment.

In contrast to an exclusive listing, a broker and agents entering into an open listing are not committed to render any services at all. The broker and agents only have a best effort obligation to act on the employment.

However, when an agent holding an open listing enters into preliminary negotiations, such as an exchange of property data on inquiry by a third party, a due diligence obligation arises. The due diligence obligation triggered by inquiry requires the client’s broker to provide the utmost care and protection of the client’s best interests in managing that inquiry. Having acted on the open listing, the agent now inspects the property and gathers all readily available information on the property under consideration.

Once the agent actually begins to perform services under an open listing entered into by a buyer or seller, the agent has acted on the employment. Thus, the due diligence standards of duty owed to the client apply to the agent’s future conduct.

Typically, the agent who produces a listing (and thus their broker’s right to a fee) becomes the agent in the broker’s office who is responsible to the broker for the care and maintenance of the client’s file.

On entering into a listing employment, a physical file is set up to house information and document all the activity which arises within the broker’s office due to the existence of the employment.

For example, the file on a property listing for sale is to contain:

• the original listing agreement;

• any addenda to the listing;

• all the property disclosure documents the seller and seller’s agent provide to prospective buyers in the process of marketing the property; and

• an activity sheet for entry of information on all manner of file activity.

Everything that occurs as a result of the client employment is to be retained in the file.

The file belongs to the broker, not the seller’s agent, although it will likely remain with the listing agent until close of a sale on the listed property or the listing expires un-renewed. The agent hands the broker the entire file on close of escrow, usually a condition precedent to payment of the agent’s share of the fee received by the broker.

material fact A fact that, if known, might cause a prudent buyer or seller of real estate to make a different decision regarding what price to offer or demand for a property or whether to remain in a contract or cancel it.

best effort obligation Obligations under an open listing requiring the agent to take reasonable steps to achieve the objective of the client but requiring no affirmative action until a match is located at which point due diligence is required.

Maintaining the client file

Chapter 23: Due diligence obligations 153

Guidelines used to build a file’s content are available in many forms, such as:

• checklists prepared by a broker or their listing coordinator;

• a transaction coordinator’s (TC’s) closing checklist;

• escrow worksheets;

• work authorization forms;

• advance fee and advance cost checklists; or

• income property analysis forms. [See RPI Form 403]

Checklists belong in the file to be reviewed periodically by the agent, office manager, TC or employing broker for oversight, and work to be done in the future to better service the listing and earn a fee.

Following are some — but certainly not all — steps a broker and their agent may undertake to fulfill their employment responsibilities owed to the client. They include:

1. A property profile of the seller’s title from a title company in order to identify all owners needed to list, sell and convey the property. [See Chapter 51]

2. A Transfer Disclosure Statement (TDS), also known as a condition of property disclosure sheet, filled out and signed by the seller. [See RPI Form 304; see Chapter 15]

3. A home inspection report (prepared by a home inspector) paid for by the seller and attached to the TDS before the seller’s agent signs the TDS. [See Chapter 21]

4. A natural hazard disclosure (NHD) on the property from a local agency or a vendor of NHD reports, paid for by the seller, and reviewed and signed by the seller and the seller’s agent. [See RPI Form 314; see Chapter 17]

5. An annual property operating data sheet (APOD) covering the expenses of ownership and any income produced by the property, filled out and signed by the seller, together with a rent roll and copies of lease forms which the owner uses, to be included in the marketing (listing) package only after reviewing the seller’s data. [See RPI Form 352 and 562]

6. Copies of all the Covenants, Conditions and Restrictions (CC&Rs), disclosures and assessment data from any homeowners’ association involved with the property. [See RPI Form 150 §11.9]

7. A termite report and clearance paid for by the seller.

8. Any replacement or repair of defects noted in the home inspection report or on the TDS, as authorized and paid for by the seller.

9. An occupancy transfer certificate (including permits or the completion of retrofitting required by local ordinances), paid for by the seller.

Guidelines and checklists

natural hazard disclosure (NHD) A report provided by a local agency or NHD vendor and used by sellers and seller’s agents to disclose natural hazards which exist on a property held out for sale. [See RPI Form 314]

annual property operating data sheet (APOD) A worksheet used when gathering income and expenses on the operation of an income producing property, to analyze its suitability for investment. [See RPI Form 352]

property profile A report from a title company providing information about a property’s ownership, encumbrances, use restrictions and comparable sales data.

154 Real Estate Principles, Second Edition

10. A statement on the amount and payment schedule for any special district property improvement bonds which are liens on the property (shown on the title company’s property profile).

11. A visual inspection of the property and a survey of the surrounding neighborhood by the seller’s agent to become informed about readily available facts affecting the marketability of the property.

12. Advising the seller about the marketability of the listed property based on differing prices and terms for payment of the price, and for property other than one-to-four residential units, the financial and tax consequences of various sales arrangements which are available by using alternative purchase agreements, options to buy, exchange agreements and installment sales.

13. A marketing package on the property compiled by the seller’s agent and handed to prospective buyers or buyer’s agents before the seller accepts any offer to purchase the property. This consists of copies of all the property disclosures required to be handed to prospective buyers or the buyer’s agent by the seller and seller’s broker.

14. A marketing plan prepared by the seller’s agent and reviewed with the seller for locating prospective buyers. This plan may include distributing flyers, disseminating property data in multiple listing services, newspapers and periodicals, broadcasts at trade meetings attended by buyer’s agents, press releases to radio or television, internet sites, posting “For Sale” signs on the premises, hosting open house events, posting on bulletin boards, mailing to neighbors and using all other advertising media available to reach prospective buyers.

marketing package A property information package handed to prospective buyers containing disclosures compiled on the listed property by the seller’s agent.

Figure 1

Form 310

Good Faith Estimate of Seller’s Net Proceeds

Chapter 23: Due diligence obligations 155

15. A seller’s net sheet prepared by the seller’s agent and reviewed with the seller each time pricing of the property is an issue. Issues may include obtaining a listing, changing the listed price, reviewing the terms of a purchase offer or when substantial changes occur in charges or deductions affecting the net proceeds from a sale since the net sheet discloses the financial consequences of the seller’s acceptance of a purchase agreement offer. [See Figure 1, RPI Form 310]

16. Informing the client of the listing agent’s sales activities by weekly due diligence communications advising what specifically has been done during the past several days and what the seller’s agent expects to do in the following days, as well as what the seller may do in response to comments taken by the seller’s agent from buyers and their agents, and to changes in the real estate market.

17. Keeping records in a client file of all communications, activities and documents generated due to the listing.

All records of an agent’s activities on behalf of a client during the listing period are retained by the agent’s broker for three years.1

The three-year period for retaining the buyer’s or seller’s activity file for CalBRE review begins to run on the closing date of a sale or from the date of the listing if a sale does not occur.

The records will be made available for inspection by the Commissioner of Real Estate or their representative, or for an audit the Commissioner may order.

1 Bus & P C §10148

seller’s net sheet A document prepared by a seller’s agent to disclose the financial consequences of a sale when setting the listing price and on acceptance of a buyer’s price in a purchase offer. [See RPI Form 310]

Duty to CalBRE to keep records

156 Real Estate Principles, Second Edition

Employment in a client relationship imposes special agency (fiduciary) duties on the broker and the agent to use due diligence in meeting the client’s objectives. The promise to use due diligence on behalf of the client is the consideration a broker and their agents owe their client when rendering services in exchange for employment as the exclusive representative of the client.

In contrast to an exclusive listing, a broker entering into an open listing is not committed to render any services at all. The broker and agents only have a best efforts obligation to act on the employment.

On entering into a listing employment, a physical file is set up to house information and document all the activity which arises within the broker’s office due to the existence of the employment. All records of an agent’s activities on behalf of a client during the listing period are retained by the agent’s broker for three years.

In a real estate transaction, brokers and their agents first ascertain who among the principals involved is their client. If not a client, the person is a customer with whom the broker might be directly negotiating or who is represented by another broker. If the person is a customer and not a client, the duty owed this individual is a general duty to deal fairly and honestly.

annual property operating data sheet (APOD) ................... pg. 153 best effort obligation ................................................................ pg. 152 due diligence ............................................................................... pg. 151 marketing package .................................................................... pg. 154 material fact ................................................................................ pg. 152 natural hazard disclosure (NHD) .......................................... pg. 153 property profile .......................................................................... pg. 153 seller’s net sheet ......................................................................... pg. 155

Chapter 23 Summary

Chapter 23 Key Terms

Quiz 5 Covering Chapters 18-23 is located on page 610.

Chapter 24: Listings as employment 157

After reading this chapter, you will be able to:

• distinguish the differences between exclusive and open listing agreements; and

• select between the variations of listing agreements.

Listings as employment

Chapter

A listing agreement is a written employment contract between a client and a licensed real estate broker. On entering into a listing agreement, the broker and their staff are retained and authorized to perform real estate related services on behalf of the client in exchange for a fee.1 [See RPI Form 102 and 103]

The client retaining a broker might hold an ownership interest in real estate, which the client seeks to sell, lease or encumber as collateral for trust deed financing.

Conversely, the client soliciting the services of a broker might be seeking to acquire an interest in real estate as a buyer, tenant or trust deed lender.

1 Calif. Civil Code §1086(f)

listing agreement A written employment agreement used by brokers and agents when an owner, buyer, tenant or lender retains a broker to render real estate transactional services as the agent of the client. [See RPI Form 102 and 103]

Authority to act on the client’s behalf

agency relationship

employment relationship

exclusive right-to-sell listing

fiduciary duty

full listing offer

guaranteed sale listing

listing agreement

net listing

open listing

option listing

Key Terms

Learning Objectives

For an additional discussion of the materials presented in this chapter, see Chapter 8 of Real Estate Practice.

158 Real Estate Principles, Second Edition

The person employed by a client to provide real estate services in expectation of compensation will always be a licensed real estate broker. Likewise, if a dispute arises with a client over the client’s failure to pay a fee, only the broker employed in writing (a listing) signed by the client may pursue collection.

A real estate agent employed by the broker may have obtained the listing, but the agent did so acting on behalf of the broker. The agent has no independent right to enforce the listing agreement.

The agent of a broker has a right to a fee on transactions based on the agent’s written employment agreement with the broker, not under the separate listing agreement with the client. Through the broker-agent employment agreement, the agent is entitled to a share of the fees actually received by the broker on transactions in which the agent participates.

A licensed agent represents a broker acting as an agent of the broker. As the broker’s agent, the agent performs on behalf of the broker (as well as the client) all the activities the broker has been retained by the client to provide. Further, an agent providing real estate related services on behalf of a client may not do so independently of their broker. Thus, an agent employed by a broker is referred to as “the agent of the [client’s] agent.”2

The listing agreement sets the scope of the services the broker is authorized to perform while representing the client. The listing also authorizes the broker to serve as the client’s representative in the negotiation of a real estate transaction with others.

Further, the listing contains the client’s promise to pay a fee. This promise is given in exchange for the broker’s promise to use diligence in the broker’s efforts to meet the client’s objectives.

The relationship created between the client and the broker and properly documented by a written listing agreement has two distinct legal aspects:

• an employment relationship; and

• an agency relationship.

The employment relationship established on entering into a listing agreement specifies the scope of activities the broker and the broker’s agents are to undertake in the employment and authorizes the broker to carry them out by contract.

On the other hand, the agency relationship is imposed on the broker by law as arising out of the representation authorized by the employment. Agency carries with it the fiduciary duties of loyalty and full disclosure owed by the broker (and their sales agents) to the client. [See RPI Form 305; see Chapter 2 and 28]

2 CC §2079.13(b)

Right to a fee

Employed to act as an

agent

employment relationship The scope of activities the broker and the broker’s agents are to undertake in the employment of a client.

agency relationship The scope of activities imposed on the broker by law as arising out of the representation authorized by the employment.

Chapter 24: Listings as employment 159

As a fiduciary, the broker’s and agents’ conduct under the employment are equated to the conduct required of a trustee acting on behalf of a beneficiary. This fiduciary duty, also called agency, survives the termination of the contractual employment relationship.3

Also, an oral agreement to perform brokerage services on behalf of a client imposes an agency law obligation on the broker and agents to act as fiduciaries. However, the client’s oral promise to pay a fee does not entitle the broker to enforce collection of the fee due from the client.

A fee agreement employing a broker to purchase or sell real estate, lease a property for over one year, or arrange trust deed financing is controlled by the rules of contract law.

Thus, before a broker can enforce their right to collect a fee, the fee agreement is to be:

• in writing; and

• signed by the client.4

A variety of listing agreements exist, each employing and authorizing a broker to perform real estate related services under different conditions. The variations usually relate to:

• the extent of the broker’s representation;

• the type of services to be performed by the broker and their agents; and

• the events which trigger payment of a fee. [See RPI Form 102 and 103; see Figure 1, RPI Form 104]

Most listing agreements are for the sale or purchase of single-family residential property. Others are for residential and commercial income properties such as industrial, motel/hotel, office, farm or unimproved properties.

Despite the application of various agreements to the type of property described in the listing, all listings fall into one of two general categories:

• exclusive; or

• open.

Under an exclusive listing, a broker receives the sole right to represent:

• an owner by marketing the listed property for sale or lease and locating a buyer or tenant;

• a buyer or tenant by locating property; or.

• the owner or a lender to originate a trust deed mortgage.

3 CC §2079.16

4 CC §1624(a)(4)

fiduciary duty That duty owed by an agent to act in the highest good faith toward the principal and not to obtain any advantage over their principal by the slightest misrepresentation, concealment, duress or undue influence.

Types of listing agreements

Exclusive listings

A real estate agent employed by the broker may have obtained the listing, but the agent did so acting on behalf of the broker. The agent has no independent right to enforce the listing agreement.

The relationship created between the client and the broker and properly documented by a written listing agreement has two distinct legal aspects:

• an employment relationship; and

• an agency relationship.

2 CC §2079.13(b)

Right to a fee

Employed to act as an

agent

employment relationship The scope of activities the broker and the broker’s agents are to undertake in the employment of a client.

agency relationship The scope of activities imposed on the broker by law as arising out of the representation authorized by the employment.

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Exclusive listings require an agent to use diligence in their efforts to fulfill the client’s objectives to locate a buyer, tenant or lender for the property. An exclusive listing has a specified period of employment set by an expiration date of the employment, such as 90 or 180 days after its commencement.

If an expiration date is not included in an exclusive listing, the broker faces suspension or revocation of their license by the California Bureau of Real Estate (CalBRE).5

5 Calif. Business and Professions Code §10176(f)

Figure 1

Form 104

Loan Broker Listing

For a full-size, fillable copy of this or any other form in this book that may be used in your professional practice, go to realtypublications.com/forms

Chapter 24: Listings as employment 161

Two types of exclusive employment agreements for buying and selling real estate exist:

• an exclusive agency agreement for a seller or buyer; and

• an exclusive right-to-sell or right-to-buy listing agreement.

Both types of exclusive listings establish the broker and their agents as the sole licensed real estate representatives of the client (seller or buyer). However, they are distinguished by whether or not the broker has any right to a fee when the property is sold or located solely by the efforts of the client.

Under an exclusive agency agreement’s fee provision, the broker does not earn a fee when the client, acting independently of any other broker and the client’s broker, accomplishes the objective of the employment, i.e., selling the listed property or locating and buying the property sought.

Conversely, under an exclusive right-to-sell/buy agreement’s fee provision, the broker earns a fee no matter who during the listing period produces the buyer or locates the property sought under the listing, be it the client, another broker or other representative of the client, or the client’s broker.

An exclusive right-to-sell listing affords a real estate broker the greatest fee protection. It is also the most commonly used type of employment. This listing employs the broker as the sole agent to act on behalf of the owner to market the property and negotiate any sale with all potential buyers and their agents. The broker is entitled to a fee regardless of who procures the buyer.

Under an exclusive right-to-sell agreement, the owner relinquishes their right to list the property with other brokers or defeat entitlement of the seller’s broker to compensation by selling the property themselves or removing it from the market.

An owner of real estate, on entering into an exclusive right-to-sell listing agreement, grants a broker the right to locate a buyer for the property prior to the expiration of the period of employment specified in the listing agreement. The broker is entitled to the fee agreed to in the listing agreement if, during the listing period:

• the property is sold on any terms, no matter who produces the buyer; or

• the broker or their agent presents the seller with a bona-fide offer from a ready, willing and able buyer on terms sought by the seller under the listing, or on other terms accepted by the seller.6

Exclusive right-to-sell listings give a broker and their agents the greatest incentive to work toward attaining the client’s goal of locating a buyer. The seller’s broker does not compete with the client to sell the property; they work together to achieve the sale.

6 CC §1086(f)(1)

Exclusive variations

Exclusive right-to-sell listings

exclusive right-to- sell listing An agreement employing a broker to act as agent for the seller of real property in which the seller promises to pay the broker a fee if the property is sold during the period of the employment, whether by the broker, through another broker or by the efforts of the owner. [See RPI Form 102]

162 Real Estate Principles, Second Edition

A seller of real estate enters into an exclusive listing agreement with a broker to sell a property within, say, a three-month period. The listing includes a fee provision which contains a termination-of-agency clause entitling the broker to a full fee if the seller terminate the broker’s employment, without good cause, prior to expiration of the listing period. [See RPI Form 102 §3.1(c)]

The broker’s listing agent promptly commences a diligent marketing effort to properly present the property for sale and locate a buyer who is willing to acquire the property. However, during the listing period and before a buyer is located, the seller terminates the agency by cancelling the listing.

The broker makes a demand on the seller for a full listing fee, claiming the termination-of-agency clause in the fee provision of the listing calls for payment of a fee as earned when the seller prematurely terminates the agency. The seller claims the broker is not entitled to a full brokerage fee, but only to money losses based on an accounting for their time, effort and costs incurred to market the property since a seller may legally terminate a broker’s agency at any time.

Is the broker entitled to collect a full fee from the seller upon the seller’s exercise of their legal right to terminate the agency?

Yes! While a seller may terminate the broker’s agency at any time, the seller cannot both terminate the agency during the listing period and avoid payment of a fee if a termination-of-agency clause exists. The termination- of-agency clause in the listing agreement couples the permissible cancelling of the listing with the obligation to pay a fee.

When a seller, by word or by conduct, clearly indicates they no longer desire to sell the property, the agent prepares a Release and Cancellation of Employment Agreement form for the seller to review and sign. [See Form 121 accompanying this chapter]

The release and cancellation agreement may call for immediate payment of the full brokerage fee agreed to in the listing in exchange for mutually agreeing to cancel the listing agreement.

Alternatively, it may call for payment at a later date when the property is sold, placed again on the market, exchanged, optioned, refinanced (if the broker was retained to arrange new financing) or leased to anyone within a specified time period (for example, one year) after the date of the agreement. A compromise might be the payment of a partial fee with the balance due if the property is sold during the cancellation period.

This release and cancellation agreement is also used when a buyer wants to cancel an exclusive right-to-buy listing. On cancellation, the broker is deprived of the opportunity acquired under the listing to earn a contingency fee.

Termination of agency by

the seller

Documenting the

cancellation

Chapter 24: Listings as employment 163

For brokers and their agents, an exclusive right-to-buy listing creates a positive collaborative activity which is to be matched up to agents who list and market property for sale. A buyer’s listing agreement employs the broker and their agents to locate qualified properties to be purchased by the buyer represented under an exclusive right-to-buy listing.

As with an exclusive right-to-sell listing, the right-to-buy variation has provisions for a brokerage fee to be paid by the buyer, if not the seller, when the buyer acquires property during the listing period of the type described in the buyer’s listing.

Exclusive right-to-buy listings

Form 121

Lease and Cancellation of Employment Agreement

164 Real Estate Principles, Second Edition

Also, the exclusive right-to-buy listing provides greater incentive for brokers and their agents and imposes a duty to work diligently and continuously to meet their buyers’ objectives.

The buyer benefits under an exclusive right-to-buy listing due to the greater likelihood the broker will more likely find the particular type of property sought. Brokers have continuous access to all available properties and will investigate and qualify properties as suitable before they are presented to the buyer, and will advise the buyer on the pros and cons of each property presented.

A buyer’s broker locating properties listed by other brokers does not become a dual agent or lose their status as the buyer’s exclusive agent merely because the broker works with seller’s brokers. The fee received by a buyer’s broker is typically paid by the seller, directly or through the seller’s broker, and does not create a dual agency.

A broker who seeks out and locates properties at the buyer’s request negotiates the purchase terms as the buyer’s agent regardless of who pays the fee (which is nearly always paid by the seller from the proceeds of the sales price paid by the buyer).

The exclusive agency listing is a hybrid of the open and the exclusive listings. The variation is rarely used by brokers as a practical matter and seems best suited to academic discussion.

Under an exclusive agency listing, the client employs the broker as their sole agent, as in an exclusive listing. Also, the broker is entitled to a fee on any transaction in which the broker, a finder or another broker produces a buyer. (A finder is an unlicensed agent with no authority to negotiate.)

However, under the exclusive agency listing, an owner retains the right to sell the property to any buyer the owner locates without becoming obligated to pay the broker a fee. This is the same for a buyer under an exclusive agency listing who finds the property on their own.

As with open listings, brokers are reluctant to spend much time and energy under exclusive agency arrangements.

An open listing, sometimes called a nonexclusive listing, does not grant exclusive rights to the seller’s broker and their agents to be the sole representative of the client. This is true whether the client is a buyer, tenant, borrower, seller, landlord or lender. Also, the client may enter into open listings with as many brokers as they chose to without becoming obligated to pay more than one fee.

A brokerage fee under an open listing to sell real estate is due a broker only if the broker or agent procures a ready, willing and able buyer and presents the owner with an offer from the buyer to purchase the listed property.

Exclusive agency

variations

Open listings

open listing An employment entered into by a broker to render real estate services on a best-efforts basis under which a fee is due to the broker if they achieve the client’s objective of the employment before the client or another broker separately first meet the objective, such as the sale or locating of a property.

Chapter 24: Listings as employment 165

The terms contained in the offer submitted by the broker will be substantially the same as the terms sought by the owner under the listing to earn a fee whether or not the seller accepts it, called a full listing offer. If other terms are offered by a buyer and accepted by the owner, the broker earns their fee.

For a broker to be entitled to a fee under an open listing, the broker or agent needs to present the offer to the owner before the property is sold to some other buyer located by another broker or the owner. Also, the offer will be submitted before the listing expires or is revoked by withdrawal of the property from sale or by the termination of the agency.7

The broker employed under an open listing is not obligated to use diligence in their efforts to locate a buyer. The broker only has a best-effort obligation since the broker does not “accept” the employment until they locate a buyer interested in the property. Thus, an open listing is legally classified as a unilateral contract.

However, the agency duties of a fiduciary exist at all times under an open listing. Further, on locating a buyer the broker will perform their due diligence efforts to make disclosures and close the transaction.

The first broker to submit an offer during this open listing period from a ready, willing and able buyer to purchase property on the listed terms, or on other terms accepted by the owner, has earned the agreed fee. None of the other brokers holding open listings from the owner are entitled to a fee.

On the other hand, an open listing allows the owner to market the property themselves. Thus, the owner may compete against the seller’s brokers to locate buyers. If the owner locates a buyer, the owner does not become obligated to pay a fee under any open listing.

A broker may also represent a buyer to locate property under an open listing agreement. A broker assisting a buyer to locate a suitable property among multiple listing service (MLS) listings held by other brokers will at least consider asking the buyer to sign an open listing if the broker chooses not to solicit an exclusive representation.

An open listing does not need to contain an expiration date, unlike an exclusive agency or exclusive right-to-sell/buy listing which is to have an expiration date.

The owner revoking an open listing that contains an expiration date owes a fee to the broker if:

• the owner closes a sale with a prospective buyer located by the broker before the listing is revoked; or

• the owner revokes the listing in an attempt to escape payment of the agreed fee.8

7 CC §1086(f)(3)

8 Heffernan v. Merrill Estate Co. (1946) 77 CA2d 106

full listing offer A buyer’s or tenant’s offer to buy or lease on terms substantially identical to the employment terms in the owner’s listing agreement with the broker. [See RPI Form 556]

A unilateral contract

Cancellation of an open listing

166 Real Estate Principles, Second Edition

Conversely, an open listing without an expiration date may be terminated by the owner at any time without becoming obligated to pay a fee. Also, no fee is due under an open listing on:

• the good-faith withdrawal of the property from the market; or

• the premature termination of the employment before the broker has submitted a full listing offer.9

However, an open listing may contain a provision calling for the owner to pay the seller’s broker a set amount, at an agreed time, for services other than procuring a buyer, such as the preparation of disclosure documents.

A net listing is used only with sellers, not buyers, and can be structured as either an open or an exclusive type of listing. The net listing is distinguishable from all other listing arrangements due to the way compensation is calculated.

In a net listing, the broker’s fee is not based on a percentage of the selling price.

Instead, the seller’s net sales price (excluding brokerage fees and closing costs) the seller is to receive on closing is stated in the listing agreement. The broker’s fee equals whatever amount the buyer pays in excess of the seller’s net figure and closing costs.

However, the broker will disclose to the seller the full sales price paid by the buyer and the amount of the broker’s residual fee before the seller accepts an offer on a net listing. Failure to disclose to the client those benefits the broker receives on a transaction leads to loss of the entire fee.10

Net listings tend to be unpopular with the CalBRE and consumer protection organizations. They have been outlawed in some states.

Net listings are particularly prone to claims from buyers and sellers that the broker has been involved in misrepresentations and unfair dealings. These claims are generally based on an improper valuation of the property at the time of the listing or a failure to disclose the fee received by the broker when the property sells.

If the seller thinks the broker’s fee is excessive, the seller is likely to complain they were improperly advised about the property’s fair market value when employing the broker or pricing changes since then.

An option listing is normally a variation of the exclusive right-to-sell listing.

9 Tetrick v. Sloan (1959) 170 CA2d 540

10 Bus & P C §10176(g)

Net listings

net listing A type of listing in which the agent’s fee is set as all sums received exceeding a net price established by the owner.

Claims of misrepresentation

and unfair dealings

Option listing variation

option listing A variation of the exclusive right-to- sell listing in which the seller grants the broker an option to buy the property at a predetermined price, if the property does not sell during the listing period. [See RPI Form 102 §10]

Chapter 24: Listings as employment 167

Its unique feature is the additional element of a grant to the broker of an option to buy the property at a predetermined price, if the property does not sell during the listing period.

The broker wears two hats when holding an option listing: one as an agent for the seller, the other as a principal acting for the broker’s own account.

The temptation for or a claim of misrepresentation is quite apparent. The concurrent status of agent and principal is a conflict of interest for the broker which is fully disclosed. But as a result of the conflict, the seller’s broker might fail to market the property as aggressively as they might otherwise do, with a view toward buying it themselves and reselling it at a profit. Likewise, the broker might neglect to inform the seller about all inquiries into the listed property by potential buyers.

As always, brokers are required to disclose any outstanding offers or other factors affecting the seller’s decision to sell when the broker exercises the option.11

The broker’s exercise of a purchase option contained in a listing agreement requires the broker to disclose to the seller the full amount of the broker’s earnings (profit) and obtain the seller’s written consent to the earnings before or on the broker’s exercise of the option.12

A guaranteed sale listing is distinct from a regular, exclusive right-to-sell listing. It is the broker who grants an option to their seller to sell, called a put. The seller is given the right to call on the broker to buy the property at a predetermined price if the property does not sell during the listing period.

Thus, the guaranteed sale listing establishes a reverse role for the seller from the option listing when the property fails to sell during the listing period.

The difference with the guaranteed sale listing is that the seller, not the broker, has the right to exercise the option by accepting the broker’s promise to buy the listed property.

As with the option listing, the broker may tend not to work the listing vigorously when the price they will pay under the guarantee is much lower than the amount the seller will net on a sale at current market prices. Thus, the broker stands to acquire the property at a bargain price if it does not sell during the listing period.

In practice, if a buyer is not produced during the listing period, a desperate seller may have no choice but to sell to the broker since the seller delegated complete control to the broker to locate a buyer.

The broker’s advantage, however, is lessened by a BRE regulation which prohibits the inclusion of advance fee provisions in a guaranteed sale listing.13

11 Rattray v. Scudder (1946) 28 C2d 214

12 Bus & P C §10176(h)

13 Bureau of Real Estate Regulations §2970(b)(5)

guaranteed sale listing A variation of the exclusive right-to- sell listing in which the broker agrees to buy the property if the property does not sell during the listing period.

Guaranteed sale variation

Conversely, an open listing without an expiration date may be terminated by the owner at any time without becoming obligated to pay a fee. Also, no fee is due under an open listing on:

• the good-faith withdrawal of the property from the market; or

• the premature termination of the employment before the broker has submitted a full listing offer.9

In a net listing, the broker’s fee is not based on a percentage of the selling price.

Net listings tend to be unpopular with the CalBRE and consumer protection organizations. They have been outlawed in some states.

An option listing is normally a variation of the exclusive right-to-sell listing.

9 Tetrick v. Sloan (1959) 170 CA2d 540

10 Bus & P C §10176(g)

Net listings

net listing A type of listing in which the agent’s fee is set as all sums received exceeding a net price established by the owner.

Claims of misrepresentation

and unfair dealings

Option listing variation

168 Real Estate Principles, Second Edition

A listing agreement is a written employment contract between a client and a licensed real estate broker. The listing agreement creates an employment relationship and an agency relationship between the client and broker.

There are several variations of listing agreements, each classified as either open or exclusive listings. An open listing does not grant exclusive rights to the seller’s broker to be the sole representative of the client. Conversely, an exclusive listing gives the broker the sole right to represent the client. The broker discloses all offers and the status of potential offers to the seller under any type of listing agreement.

agency relationship ................................................................. pg. 159 employment relationship ...................................................... pg. 158 exclusive right-to-sell listing ................................................ pg. 161 fiduciary duty ............................................................................ pg. 159 full listing offer .......................................................................... pg. 165 guaranteed sale listing ............................................................ pg. 167 listing agreement ...................................................................... pg. 157 net listing .................................................................................... pg. 166 open listing ................................................................................ pg. 164 option listing ............................................................................. pg. 167

Chapter 24 Key Terms

Quiz 6 Covering Chapters 24-30 is located on page 611.

Chapter 24 Summary

As always, the broker is to disclose all offers and the status of potential offers during the listing period and at the time the seller exercises their option to sell to the broker.

Other listing variations contain provisions for the broker to:

• obtain a tenant for a landlord;

• lease a property for a tenant;

• arrange a mortgage on behalf of a borrower who owns real estate or holds a trust deed note; and

• find a borrower for a lender seeking to make such a mortgage.

Unimproved real estate, business opportunities and mobile homes can also be the subject of the employment. All of these employment variations can be used with the open or exclusive type of listing agreements.

Other listings

Chapter 25: Operating under a buyer’s listing 169

After reading this chapter, you will be able to:

• appreciate the need for a buyer’s broker to enter into a written employment agreement with their buyer; and

• advise a buyer on the benefits of entering into an exclusive right- to-buy listing agreement with a broker.

Operating under a buyer’s listing

Chapter

Real estate services have great value to members of the public. This is evident by the fact that nearly all buyers and seller use an agent to assist them to meet their real estate objective. Often, members of the public are allowed to exploit the time and talent of agents without payment. Prospective buyers learn what they need to know about MLS properties, and fail to return when they decide to buy.

So, when you counsel a potential buyer before giving advice or commencing efforts to locate qualifying properties, ask the buyer to enter into a written

bilateral employment agreement

exclusive right-to-buy listing agreement

real estate owned (REO) property

safety clause

unilateral employment agreement

Learning Objectives

A prerequisite to representation

Key Terms

For a further discussion of this topic, see Chapter 15 of Real Estate Practice.

170 Real Estate Principles, Second Edition

commitment retaining you to work with them as their exclusive agent. In exchange, you agree to diligently engage yourself to the best of your abilities to do what is necessary to meet their objectives.

An exclusive right-to-buy listing agreement is used by brokers and their agents to prepare and submit to prospective buyers their offer to render services on their behalf as the buyer’s real estate agent. Under it, you are employed to locate property sought by the buyer in exchange for the buyer’s assurance you will be paid a fee when the buyer acquires the type of property they seek. [See Form 103 accompanying this chapter]

A buyer who refuses to enter into a written listing agreement with a broker and their agent demonstrates a clear intention the buyer does not want them as their representative. What this unlisted buyer likely wants is an agent to act as a locator or finder of properties, providing valuable information without any obligation to compensate them for the assistance. Possibly, the buyer has not yet committed themselves to buy a property; “just looking, thank you very much.”

Without the buyer’s written promise to pay a fee, you’re entitled to nothing when your buyer “goes around” you and acquires property on which you provided them with information.

Without the buyer’s written promise, no fee has been earned which is collectable from anyone, unless you arranged a fee-sharing agreement with the seller’s broker documenting the buyer as your client, a condition which presents other risks. [See Figure 1, RPI Form 105]

Various working relationships and compensation arrangements may be struck between a prospective buyer and their agent.

Writings, by their nature, are intended by all who enter into them to be enforced. This includes a signed buyer’s listing calling for payment of a fee when the buyer’s objective of acquiring property is met.

Editor’s note — All assurances of a brokerage fee on a real estate transaction are required by contract law (Statute of Frauds) to be in writing and signed by the person who agreed a fee will be paid, regardless of whether the fee will be paid by that person or by another party to the transaction.1

The following situations demonstrate the various likelihoods of collecting a fee for assisting a buyer:

1. No listing exists. Neither the seller nor the buyer has formally employed a broker. Usually, the seller acting without a broker is an experienced real estate investor, subdivider, land speculator, real estate owned property (REO) lender or other well-seasoned owner capable of negotiating a real estate transaction without representation.

1 Phillippe, supra

The exclusive right-to-buy

The fee- payment bargain

real estate owned (REO) property Property acquired by a mortgage holder through foreclosure.

exclusive right- to-buy listing agreement A written employment agreement by a broker and a prospective buyer of real estate employing and entitling the broker to a fee when property is purchased during the listing period. [See RPI Form 103]

Chapter 25: Operating under a buyer’s listing 171

2. A “one-shot” seller’s listing exists. A buyer is willing to make an offer through an agent who located an unlisted property (and other properties) at the buyer’s request and brought it to the buyer’s attention. [See RPI Form 103-1] The agent fails to have the buyer enter into an exclusive right-to-buy listing. Before preparing and submitting an offer from the buyer, the

Form 103

Buyer’s Listing Agreement

172 Real Estate Principles, Second Edition

agent solicits the seller for and obtains a “one-shot” right-to-sell listing containing a promise to pay a fee. On getting the listing, the agent prepares and submits an offer from the buyer.

3. Customer turned client. An agent employed by a broker in an office with numerous listed properties is contacted by a prospective buyer. The buyer is exposed to all the relevant “in-house” listings, none of which are of immediate interest to the buyer. Having exhausted the in-house inventory of property for sale by clients, the agent may choose to see the buyer off. Or, the agent might better consider making arrangements with the buyer to locate qualifying properties listed by other brokers and unlisted properties (For Sale By Owners (FSBOs)), and present them to the buyer. If the buyer agrees, the agent is to locate qualifying properties, the agent

Figure 1

Form 105

Fee Sharing Agreement

For a full-size, fillable copy of this or any other form in this book that may be used in your professional practice, go to realtypublications.com/forms

Chapter 25: Operating under a buyer’s listing 173

needs to first ask for and obtain a signed buyer’s listing agreement. If the agent is to be assured payment of a fee when the buyer acquires property, the buyer needs to enter into a buyer’s listing agreement.

4. A buyer’s listing agreement exists. The agent’s broker is employed by the buyer in a signed exclusive right-to-buy listing agreement to represent the buyer by locating and negotiating the purchase of suitable property of the type sought by the buyer. A seller of suitable property may or may not have signed a seller’s listing agreement with another broker. Either way, the buyer’s broker controls the amount and destiny of their fee to be paid when their buyer buys.

Special agency duties are owed to a buyer when a broker and their agents undertake to locate property on the buyer’s behalf. The duty to the buyer first arises when the broker:

• enters into an exclusive right-to-buy agreement with the buyer; or

• presents property information to an unlisted buyer who they have agreed to assist by locating qualifying properties suitable to the buyer.

When representing a buyer under a written exclusive right-to-buy employment agreement, the broker (and their agents) has entered into a bilateral employment agreement. Such an employment obligates the broker, through their agents, to exercise due diligence by way of a constant and continuing search to locate qualifying properties, while keeping the buyer informed of their progress.

Without an exclusive right-to-buy listing, the brokerage duties which exist to locate properties for a buyer are best-effort obligations created by an oral (or written) open listing, called a unilateral employment agreement. A best-effort obligation requires no affirmative action (diligence) on the part of the broker’s office to locate property.

However, under a buyer’s listing, be it a written exclusive or oral open, the act of delivering property information to the buyer they are assisting obligates the broker and agents to use due diligence in their efforts to:

• gather readily available data on the property under review;

• assist in the analysis and consequences of the property data gathered; and

• advise the buyer regarding the property and any proposed transaction in a conscientious effort to act honestly, and to care for and protect the buyer’s best interests.

When acting as the buyer’s agent regarding the acquisition of a particular property, due diligence includes:

• disclosing facts about the integrity of the property; and

Agency duties owed to buyers

unilateral employment agreement An oral or written employment agreement obligating the broker to use their best-efforts to fulfill the client’s real estate goals without imposing a due diligence duty on the broker until a match is located, commonly called an open listing.

bilateral employment agreement A written exclusive employment agreement obligating the broker to exercise due diligence to fulfill the client’s real estate objectives in exchange for the promise to pay a fee under various circumstances.

174 Real Estate Principles, Second Edition

• recommending investigative activity which the agent knows might influence the buyer’s conduct in negotiations.

Without an exclusive employment with a buyer on whose behalf the agent is locating properties, the agent is reduced to a mere “locator” or “finder.” Worse, the buyer’s agent is burdened with affirmative agency duties of utmost care and protection owed their buyer when reviewing properties listed with other brokers even if they are not acting under a written exclusive right-to- buy listing agreement with that buyer.

An exclusive right-to-buy agreement contains the same operative provisions found in exclusive right-to-sell agreements. [See Form 103]

In exchange for the broker’s promise to use due diligence while rendering services to comply with their end of the employment bargain, the buyer promises in the exclusive right-to-buy listing agreement to pay the broker a specific fee.

Fees are either a fixed dollar amount or a percentage of the price paid, but may be set as an hourly rate. Fixed and percentage fees are contingent fees.

Provisions for payment of a

fee

Real estate marketing evolves as technology improves. Social networking through the internet has sparked a relatively new approach some agents are using to reach potential clients. From posting pictures and videos of properties on YouTube to advertising on Facebook, agents are reaching out to the world’s population through the use of the internet.

For agents, one of the most appealing aspects of using social networking websites to conduct business is the fact most are entirely free. This form of free advertising allows agents to keep clients — be they past, present or potential —informed through quick status updates (or “Tweets” if using Twitter).

Homebuyers are able to follow the updates of an agent if they so choose, and receive notifications whenever an update is made – effectively allowing those who this technology to reach out to untold numbers of owners, buyers, lenders and tenants, all at once.

Another important aspect of social networking sites to consider is the access it grants to friends, family and acquaintances. If an agent does not solely use their internet page as a means of advertising, but instead uses it as their own personal page, then their family and friends, both past and current, can be plugged-in to the life of the agent, and will be far more prone to contact them or give their name as a reference when they or others need to be represented in the real estate market.

The internet has evolved into a very powerful tool readily at the disposal of all agents and brokers. They cannot only advertise and network on these newly available sites, but they can inform their friends and followers about the current status of the real estate market in a more efficient manner. Providing useful, interesting and relevant market information via their tweets and status updates, agents can demonstrate their own authority and prowess.

Marketing for new buyers and sellers through technology

Chapter 25: Operating under a buyer’s listing 175

They are earned when the buyer enters into a binding purchase agreement during the (buyer’s) listing period to acquire the type of property described in the buyer’s listing.

However, buyers, like sellers, often do not enter into a purchase agreement during the period of employment. Thus, on expiration of the listing, the buyer’s broker has not earned a fee. An event triggering payment of the promised fee has not yet occurred.

The fee provisions in a buyer’s listing agreement include a safety clause which provides added protection against a lost fee for services rendered in regard to specific properties during the listing period. [See Form 103-1 §5.1(c)]

Under the safety clause, the buyer’s broker is entitled to collect a fee if, within an agreed-to period after the expiration of the buyer’s listing:

• information specific to the property was provided to the buyer by the buyer’s agent during the listing period;

• on expiration of the buyer’s listing, the buyer is handed an itemized list which identifies those properties the buyer’s agent brought to the buyer’s attention needed to perfect the broker’s right to a fee [See RPI Form 123];

• the buyer entered into negotiations with the owner of a registered property; and

• the safety-period negotiations ultimately resulted in the buyer acquiring an interest in the property.

The buyer under a listing agreement promises to pay a full brokerage fee on the acquisition of property. However, in practice the buyer will nearly always close the purchase without directly paying the promised brokerage fee. It is the seller who typically pays the fee the buyer has promised their agent.

Further, when the property purchased is listed with another broker, the buyer’s broker will typically accept a lesser amount for their fee than the fee amount the buyer agreed to pay under the buyer’s listing.

Can the broker enforce the fee arrangement in the buyer’s listing and recover the balance of the agreed-to fee from the buyer when the buyer’s broker accepts a lesser fee from the seller or the seller’s broker?

No! The buyer’s obligation to pay the brokerage fee is fully satisfied when the buyer’s broker agrees to accept a fee from the seller or the seller’s broker, which is nearly always the case. [See Form 103§4.2]

safety clause A provision in an exclusive listing agreement earning the broker a fee during an agreed safety period after expiration of the employment for marketing efforts with identified buyers, tenants or property, if the client sells the listed property to an identified buyer or purchases or leases an identified property during the safety period. [See RPI Form 102 §3.1(d), 103 §4.1(c) and 110 §3.1(d)]

Buyer’s liability for the brokerage fee

176 Real Estate Principles, Second Edition

Most brokers realize a signed buyer’s listing agreement produces the maximum financial return for the effort, money and talent an agent invests when representing an individual interested in buying property. Without the buyer’s written promise to pay a fee, the broker is entitled to nothing when your buyer “goes around” the broker and acquires property on which the broker provided them with information.

All assurances of a brokerage fee on a real estate transaction are required by contract law to be in writing and signed by the person who agreed a fee will be paid, regardless of whether the fee will be paid by that person or by another party to the transaction.

bilateral employment agreement ......................................... pg. 173 exclusive right-to-buy listing agreement ........................... pg. 170 real estate owned (REO) property .......................................... pg. 170 safety clause ................................................................................ pg. 175 unilateral employment agreement ...................................... pg. 173

Chapter 25 Summary

Chapter 25 Key Terms

Quiz 6 Covering Chapters 24-30 is located on page 611.

Chapter 26: Finders: a nonlicensee referral service 177

After reading this chapter, you will be able to:

• determine the conduct permitted of a finder; and • distinguish the exceptions under which referral fees are allowed

under the Real Estate Settlement Procedures Act (RESPA).

Learning Objectives

Finders: a nonlicensee referral service

Chapter

Three classes of real estate agents have been established in California:

• licensed brokers;

• licensed sales agents; and

• unlicensed finders. [See Form 115 accompanying this chapter]

A finder working for a principal is distinguished from a licensed broker working for a principal.

Licensed brokers and sales agents owe fiduciary duties to the principals they represent. Fiduciary duties require licensees to perform on behalf of their client with the utmost care and diligence.

An unlicensed finder has no such fiduciary duty. A finder’s function as an “agent” is limited to soliciting, identifying, and referring potential real estate clients or participants to brokers, agents or principals in exchange for the promise to be paid a fee.

Agency relationships in real estate transactions

fee-splitting

fiduciary duty

finder

finder’s fee

Real Estate Settlement Procedures Act (RESPA)

Key Terms

For a further discussion of this topic, see Chapter 20 of Real Estate Practice.

178 Real Estate Principles, Second Edition

Limitations are placed on the conduct of a finder. A finder lacks legal authority to participate in any aspect of property information dissemination or other transactional negotiations.1

Although not licensed by the California Bureau of Real Estate (CalBRE) or accepted as members of a real estate trade association, finders are authorized by state codes to solicit prospective buyers, sellers, borrowers, lenders, tenants, or landlords for referral to real estate licensees or principals. Thus, they provide leads about individuals who may become participants in real estate transactions.

A finder providing referral services in California for a fee may:

• find and introduce parties;

• solicit parties for referral to others;2 and

• be employed by principals or brokers. [See Form 115]

A finder may not:

• take part in any negotiations;3

• discuss the price;

• discuss the property; or

• discuss the terms or conditions of the transaction.4

A finder who crosses into any aspect of negotiation which leads to the creation of a real estate transaction needs a real estate license as they are both soliciting and negotiating. Unless licensed, an individual who enters into negotiations (supplying property or sales information) cannot collect a fee for services rendered — even if they call it a finder’s fee. Also, the finder is subject to a penalty of up to $20,000 and/or a six-month jail term for engaging in brokerage activities without a license.5

In addition, a broker who permits a finder or anyone else in their employ (or their agents’ employ) to perform any type of “licensed” work beyond solicitation for a referral, may have their license suspended or revoked.6

The Real Estate Settlement Procedures Act (RESPA) prohibits brokers from giving or accepting a referral fee if the broker or their agent is already acting as a transaction agent in the sale of a one-to-four unit residential property which is being funded by a purchase-assist, federally-related loan. However, there are two major exceptions.7

1 Calif. Business and Professions Code §§10130 et seq.

2 Tyrone v. Kelley (1973) 9 C3d 1

3 Bus & P C §10131(a)

4 Spielberg v. Granz (1960) 185 CA2d 283

5 Bus & P C §§10137, 10139

6 Bus & P C §§10131, 10137

7 12 United States Code §2607(a); 24 Code of Federal Regulations §3500.14(b)

Soliciting to place or refer

a match

finder An unlicensed individual who solicits, identifies and refers potential clients to brokers, agents or principals in exchange for the promise of a fee. [See RPI Form 115]

RESPA limits authority to

split fees

Real Estate Settlement Procedures Act (RESPA) Legislation prohibiting brokers from giving or accepting referral fees if the broker or their agent is already acting as a transaction agent in the sale of a one-to-four unit residential property which is being funded by a purchase-assist, federally-related consumer mortgage.

Chapter 26: Finders: A nonlicensee referral service 179

A broker and their agents are not involved in a RESPA transaction when negotiating the sale, lease, or encumbrance of any of the following types of properties:

• apartment buildings with five or more units;

• commercial buildings;

• agricultural properties;

• business opportunities;

• vacant land (other than those involving one-to-four unit residential construction loans);

• properties containing 25 or more acres;

• leases and rental agreements;

• all-cash transactions; and

• seller carryback transactions where no federally-related loan is originated.8

A broker and their agents need to develop methods for generating business. If not, their business model will produce insufficient numbers of clientele to provide enough earnings to keep them from being driven out of the real estate brokerage profession.

Many methods for finding and soliciting clientele exist. The source of clients most often discussed is the referral. In fact, agents not employed by media/ franchise brokers are said to live by referrals alone.

Brokers also cooperate among themselves, as in broker-to-broker referrals between different segments of the brokerage community. For example, a property manager refers a homebuyer to an MLS sales agent, or an MLS agent refers a prospective tenant to a property manager.

Brokers and agents in single family residence (SFR) sales rarely develop a client base of homebuyers large enough to sustain a decent standard of living from sales fees generated solely by transactions handled on behalf of these prior clients. Thus, a business model for finding and locating clients on a regular basis needs to include sources other than clients personally located by the broker.

Many methods exist to generate new clients. Advertising through printed and electronic/digital media to solicit clients is fundamental promotion and expected by all.

On the other hand, finding and locating a client becomes a more focused and arduous task when a broker’s business model expands beyond exclusive use of media, into the time consuming but rewarding task of personally soliciting clients.

8 12 USC §2606(a)(1); 24 CFR §3500.5(b)(1)

Business development and RESPA

Fees through personal solicitation

Limitations are placed on the conduct of a finder. A finder lacks legal authority to participate in any aspect of property information dissemination or other transactional negotiations.1

A finder providing referral services in California for a fee may:

• find and introduce parties;

• solicit parties for referral to others;2 and

• be employed by principals or brokers. [See Form 115]

A finder may not:

• take part in any negotiations;3

• discuss the price;

• discuss the property; or

• discuss the terms or conditions of the transaction.4

1 Calif. Business and Professions Code §§10130 et seq.

2 Tyrone v. Kelley (1973) 9 C3d 1

3 Bus & P C §10131(a)

4 Spielberg v. Granz (1960) 185 CA2d 283

5 Bus & P C §§10137, 10139

6 Bus & P C §§10131, 10137

7 12 United States Code §2607(a); 24 Code of Federal Regulations §3500.14(b)

Soliciting to place or refer

a match

finder An unlicensed individual who solicits, identifies and refers potential clients to brokers, agents or principals in exchange for the promise of a fee. [See RPI Form 115]

RESPA limits authority to

split fees

180 Real Estate Principles, Second Edition

Licensed agents place themselves directly between their employing broker and the prospective client when:

• the employing broker “refers” clients directly to their agent;

• an agent takes “floor time” to solicit new clients who call in response to media advertising and the “brand name” the broker has established;

• an agent canvasses a neighborhood or section of the community in a classic on-going farming operation to find and solicit new clientele (for their broker, but brand themselves in the process); or,

• an agent extends their reach to potential buyers and sellers of SFRs by inducing both licensed and unlicensed individuals to be “team members” who locate and solicit clientele for the agent (and the broker), activities which are permitted by both RESPA and CalBRE regulations.

The employment of unlicensed finders/locators of buyers and sellers will extend the agent’s business to bring earnings to a level sufficient to sustain their sought-after standard of living. This is permissible. State and federal regulations on this arrangement are straightforward and compliance is relatively easy.

These regulations address the relationship between:

• the finder/locator and the broker/agent; and

• members of the public and finders/locators acting on behalf of brokers/ agents.

All employees of a broker need to be hired under written contracts of employment. This includes licensed agents, administrative staff and finders. Written contracts are entered into to delineate the responsibilities each has undertaken. Provisions limit their conduct to what regulations allow for their licensed or unlicensed status.

These employments, the finder included, are not casual relationships since a fee is paid by the broker. Casual relationships the broker/agent develop with friends, neighbors, past clientele, social contacts, are a word-of-mouth network of good will and “viral adverts” which generate referrals for which no fee is paid.

Employed individuals generate business for the broker/agent and thus are paid. However, the employed finder is limited to locating and soliciting new clientele for the broker/agent.

RESPA’s goal is to prohibit activity which artificially drives up the cost buyers and sellers pay for services needed to close a sale. Artificial costs include duplicate fees charged for services implicitly covered by the provider’s basic fee. Double dipping is the concern.

RESPA, like conditions stated in a title insurance policy, initially sets out a blanket rule as the starting point for arriving at the final conditions. RESPA’s

State and federal

regulations

Fee sharing by a broker

under RESPA

Chapter 26: Finders: A nonlicensee referral service 181

opening statement of purpose holds that no referral fee can be paid or received by a settlement service provider (broker/escrow/lender) who will be rendering transactional services in exchange for compensation in a RESPA sale (concurrent origination of mortgage financing as part of a one-to-four unit residential sale).

Likewise, a title insurance policy’s initial statement proclaims no encumbrance of any type exists on the title being insured. The policy provisions then proceed to list exclusions, exceptions, and conditions which nearly neuter the initial general statement.

Here too, RESPA codes provide several exceptions allowing fee sharing by a broker in a mortgage financed home sale. These exceptions permit the broker to conduct orderly business development for their brokerage income which does not violate the RESPA principle of avoiding double dipping (referrals among providers within a sales transaction) or surcharges.

Two RESPA exceptions go to the heart of sourcing new clientele and sharing fees by brokers:

• referral fees paid to or received from other brokers, known as a horizontal disbursement from one broker to another, but only if neither brokers is involved as a loan broker or lender in the home sale transaction;9 and

• fees paid by the broker to the broker-employed licensed sales agents or unlicensed finders, known as a vertical disbursement within the broker’s office, not paid to providers or third parties connected home sale transaction.10

While both of these exceptions to RESPA permit payment of fees under federal law, CalBRE regulations limit the conduct of these individuals when actually rendering services for a fee permitted by RESPA.

While the RESPA exceptions allow fee splitting activity, CalBRE regulations require fee splitting to be limited exclusively to:

• payments between brokers (who then may split the fee vertically with agents they employ); or

• payments by a broker to their employees, licensed or unlicensed.

Thus, while RESPA allows agents and finders who are employed by a broker to receive fees from the broker for generating business, CalBRE regulations and statutory/case law set forth the limits of conduct each type of employee may undertake with the clientele.

To satisfy RESPA, the employment of a finder needs to be under an agreement where the employee-finder is obligated to report to the broker every prospect located of the sort the broker is looking for. The employee-finder’s sole purpose is to generate business for their broker and the finder does not have the freedom, by contract, to refer a prospect to just any broker.11 [See Form 115]

9 24 CFR §3500.14(g)(1)(v)

10 24 CFR §3500.14(g)(1)(vii)

11 24 CFR §§3500.2(b), 3500 Appendix B, examples 11 and 12; Zalk v. General Exploration Co. (1980) 105 CA3d 786

CalBRE further limitations

fee-splitting When fees made to a broker are split vertically with employed agents or split horizontally among other brokers.

182 Real Estate Principles, Second Edition

Three classes of finders with different expectations for a referral fee exist under RESPA:

• friends or past customers who pass on tips to brokers and/or sales agents;

• individuals who sell “lead lists” to brokers; and

• bona fide employees of brokers who generate business for their employing broker, classified as financial services representatives (FSRs).12

Finders are also entitled to a fee for referrals under RESPA, depending on the type of finder they are.

A friend or past customer type of unlicensed finder who is not under contract and thus not employed by a broker is not entitled to a finder’s fee when the transaction contemplated is RESPA-controlled. If RESPA did not control, this type of finder would be entitled to a fee under California law if agreed to by a broker.

A bona fide employee of a broker, such as an FSR, is not barred from collecting a fee or salary from their employer-broker since employed individuals are exceptions to RESPA.

A person who sells lead lists is also able to legally collect a fee under both RESPA and non-RESPA transactions. Lead lists are considered “goods” and are perfectly legal in California, as well as under the RESPA exception for goods and services actually furnished.13

Generally, a finder’s fee is a lump sum amount or a percentage of the fee received by the broker on a transaction which is closed due to the finder’s referral. Only sound economics control the amount of the fee a broker, agent or principal should pay a finder for a lead. Also, no limit is placed on the volume of referral business conducted by a finder.

Further, while brokers may collect advance fees from principals, finders may not. Advance-fee operators, masking themselves as finders for principals, sometimes collect fees “up front,” a prohibited activity for an unlicensed individual.14

A finder is entitled to a fee as an unlicensed individual if the finder solicits, locates, places, introduces, or delivers up names of prospective clients to a broker or principal.15

12 24 CFR §3500 Appendix B, example 12

13 24 CFR §3500.14(g)(1)(iv); see BRE Real Estate Bulletin, Spring 2006

14 Bus & P C §10131.2

15 Tyrone, supra

Entitlement to a fee under

RESPA

The finder’s fee bargain

finder’s fee The fee paid to an individual who solicited, identified or referred a client to a broker, agent or principal. [See RPI Form 115]

Entitlement to a fee under California law

Chapter 26: Finders: A nonlicensee referral service 183

A finder’s fee agreement entered into between a finder and a principal regarding the finder’s referral services needs to be evidenced in a writing signed by the principal who employed the finder. If not, the finder cannot enforce their fee agreement with the principal.16 [See Form 115]

16 Calif. Civil Code §1624(a)(4)

Form 115

Finder’s Fee Agreement

184 Real Estate Principles, Second Edition

A finder’s function as an “agent” is limited to soliciting, identifying, and referring potential real estate clients or participants to brokers, agents, or principals in exchange for the promise of a fee. A finder lacks legal authority to participate in any aspect of property information dissemination or other transactional negotiations.

The employment of unlicensed finders/locators of buyers and sellers is one method a broker or their agents may use to extend business to bring earnings to a level sufficient to sustain the agent’s sought-after standard of living.

To satisfy RESPA, the employment of a finder needs to be under an agreement where the employee-finder is obligated to report to the broker every prospect located of the sort the broker is looking for. Finders are also entitled to a fee for referrals under RESPA, depending on the type of business relationship they have to the broker or agent.

Chapter 26 Summary

fee-splitting ................................................................................. pg. 181 fiduciary duty ............................................................................. pg. 177 finder ............................................................................................. pg. 178 finder’s fee ................................................................................... pg. 182 Real Estate Settlement Procedures Act (RESPA) ............... pg. 179

Chapter 26 Key Terms

Quiz 6 Covering Chapters 24-30 is located on page 611.

However, the principal’s use and benefit of a finder’s referral under an oral finder’s fee agreement, such as closing a sale with an individual referred by the finder, will substitute for a written agreement.17

Conversely, oral fee agreements between a broker (or their agents) and a finder are enforceable. No written agreement is required between a broker (or their agents) and a finder. However, a writing memorializes the agreement as documentation against memories to the contrary, and is in conformance with CalBRE regulations. [See Form 115]

17 Tenzer v. Superscope, Inc. (1985) 39 C3d 18