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    • Home
    • About Us
      • Purpose Driven
      • News
      • Real Estate Blog
      • Realtors
      • Success
      • Testimonials
    • Newport Beach
      • Back Bay Homes
      • Balboa Island Homes
      • Balboa Peninsula Homes
      • Balboa Village Homes
      • Corona Del Mar Homes
      • Eastbluff Homes
      • Jamboree - Airport
      • Newport Coast Homes
      • Newport Shores
      • Lido Island Homes
      • Port Streets Homes
      • Spyglass Hill
      • Westcliff Homes
    • Irvine
      • Irvine Real Estate
      • Turtle Ridge
    • Marketing
      • Discovery House
      • Home Launch
      • Sell My Home
      • Selling Process
      • Why Use a Realtor
      • Videos
    • Tools
      • Calculators
      • Interactive
      • Homes For Sale
      • Homeowner Tips
      • Lending
    • Contact

TriVista Real Estate

TriVista Real EstateTriVista Real EstateTriVista Real Estate

(949) 903-2242

  • Home
  • About Us
    • Purpose Driven
    • News
    • Real Estate Blog
    • Realtors
    • Success
    • Testimonials
  • Newport Beach
    • Back Bay Homes
    • Balboa Island Homes
    • Balboa Peninsula Homes
    • Balboa Village Homes
    • Corona Del Mar Homes
    • Eastbluff Homes
    • Jamboree - Airport
    • Newport Coast Homes
    • Newport Shores
    • Lido Island Homes
    • Port Streets Homes
    • Spyglass Hill
    • Westcliff Homes
  • Irvine
    • Irvine Real Estate
    • Turtle Ridge
  • Marketing
    • Discovery House
    • Home Launch
    • Sell My Home
    • Selling Process
    • Why Use a Realtor
    • Videos
  • Tools
    • Calculators
    • Interactive
    • Homes For Sale
    • Homeowner Tips
    • Lending
  • Contact

Real Estate

Real Estate Chapter Conclusions 1-10

Chapter 1: Introduction to Real Estate Summary

Real estate is affected by:

  • Supply and demand.
  • Costs incurred in bringing the properties to market.
  • Value aspects of desire, usefulness, scarcity and ability to pay.

If the economy picks up, sales increase. If it slows, sales decrease.

A Multiple Listing Service (MLS) is an organization of member brokers who share listing information with one another.

Real Estate Property: Residential, Industrial, Commercial, Agricultural, Special purpose, Recreational and Investment property.

Specialization areas: Type of property, Clients, Geography, Business Type, Transactions, Auction Sales and Mortgage loans.

Keep in mind upon choosing a broker:

  • Quality training programs are available in-house and locally.
  • The broker encourages training and provides a mentor program for the licensees.
  • The office is dedicated to your desired specialty area.
  • The firm employs a number of successful agents (long history with the firm).

Broker-Salesperson Relationships

A salesperson is licensed to perform transactions on behalf of the licensed broker and may receive compensation for performed activities ONLY from the employing broker. The broker is responsible for the licensee's professional actions. 

An employee works under the supervision and control of the broker. An independent contractor is hired to perform certain acts, but the broker cannot control how the salesperson performs those acts.

Many brokers require that licensees carry errors and omissions/automobile liability insurances.

Licensee’s written employment agreement must be dated and signed and should clearly:

  • State each person's responsibilities to the other.
  • Discuss the broker's supervision.
  • Describe the licensee's duties.
  • Clarify the licensee's compensation program.

Planning and Setting Goals:

  • Make your goals definite and measurable.
  • Put your goals in writing.
  • Realize that goals are not rigid.

Devote time to daily activities such as returning phone calls, developing new leads, reviewing new listings, calling potential clients ("National Do Not Call Registry" guidelines), preparing for listing presentations, etc.

Activities which will lead to success as a salesperson:

  • Develop your "sphere of influence" by contacting friends, family members, neighbors, past co-workers, etc., and letting them know you are a real estate agent.
  • Preview your company's listings.
  • Spend time learning about other company's listings in your geographic area or your area of specialty.
  • Familiarize yourself with your office's policies and procedures manual.

National Association of REALTORS® (NAR) is the largest and most prestigious real estate organization in the world. NAR requires its members to take a mandatory ethics course every four years.

National Association of Real Estate Brokers (NAREB) is the oldest and largest minority trade association in the United States. Members have the designation of "realtist." A "realtist" must belong to both the local board and the national organization.

National Association of Hispanic Real Estate Professionals (NAHREP) is primarily made up of Hispanic members who meet and work toward real estate goals that are beneficial to the Hispanic population. 

Asian Real Estate Association of America (AREAA) is committed to improving success and business opportunities for real estate licensees who serve the Asian American community. 

California Association of REALTORS® (CAR) (state division of NAR) allows members to conduct their individual businesses successfully and promotes the preservation of real property rights. CAR offers many seminars and educational opportunities to its members. 

Any licensee who is NOT an association member will be referred to simply as a broker or salesperson.


Chapter 2: Ethics, Fair Housing and Trust Accounts Summary

Ethics in Real Estate 

Good ethical practices have to do with trustworthiness, honesty, and competence.

Duties to clients outlined in the Code:

  • Protecting and promoting the interests of the client.
  • Avoiding the concealment of pertinent facts.
  • Informing sellers or purchasers of the licensee's interest in a property.
  • Providing equal, non-discriminatory services to all persons.
  • Being truthful and clear in advertising.
  • Refraining from false or misleading statements about competitors.

Fair Housing Laws

Americans with Disabilities Act (ADA) mandates that persons with disabilities have equal access to jobs, public accommodations, government services, public transportation and telecommunications.

  • Brokers must evaluate whether they need to make physical changes to their office space to comply with the law. 
  • Licensees should inform their commercial and investor clients of the need to have their leases professionally evaluated and their offices inspected for compliance.

The protected classes of the Federal Fair Housing Act are race; religion; color; national origin; sex; handicap and familial status.

Fair Housing Law prohibits:

  • Refusing to sell, rent or negotiate with any person.
  • Stating or advertising that the property is restricted or using discriminatory advertising
  • Denying membership in any multiple listing service (MLS) or any broker's organization.
  • Blockbusting/Panic Selling (making a profit by inducing owners to sell by telling them that persons of a protected class are moving into a neighborhood).
  • Steering (channeling homebuyers toward or away from homes in certain neighborhoods).
  • Redlining (restricting the number of loans in certain areas of a community).

Brokers are encouraged to display the Equal Housing Opportunity poster in their offices.

The Fair Housing laws exemptions:

  • If the owner does not own more than three homes at one time, does not use discriminatory advertising and does not use a real estate agent.
  • Rental of units in an owner-occupied, one-to-four- family dwelling is exempt, if the owner does not use an agent to secure tenants. 
  • Some specific religious organizations/private clubs/senior citizen housing

Fair Housing Enforcement

  • Any person who believes he or she has been discriminated against may file a complaint with HUD within one yearof the alleged act OR file a suit in a state or federal court within two (2) years of the alleged violation.
  • Conciliation: during the investigation period, HUD can attempt to resolve the complaint.

California Fair Housing

  1. Unruh Civil Rights Act
    • Provides protection from discrimination by all business establishments.
    • Housing designated to meet the physical and social needs of senior citizens is exempt from this act.
    • Complaints must be filed within one year of the alleged discrimination.

  1. Fair Employment and Housing Act prohibits:
    • Discrimination in the negotiation or financing of housing.
    • Eviction of a person in retaliation for seeking to uphold the rights under this act.
    • Refusal to reasonably accommodate a handicapped or disabled person.

  1. Housing Financial Discrimination Act (Holden Act) prohibits financial institutions from discriminating in loan activities on various basis.

Trust Funds

All funds deposited into a trust account must be maintained in that account until the broker disburses those funds according to the instructions of the person who is entitled to receive the funds.

Commingling: if a broker deposits the funds of others in a business or personal account or holds the funds without authorization.

Rules for handling trust funds:

  • Trust funds must be deposited within three (3) business days of the broker or the broker's salesperson receiving the funds.
  • The trust account must be a demand (non-interest-bearing) account.
  • A broker may deposit money into the trust account to cover reasonable service charges, but this cannot exceed $200. 
  • Any broker-owned funds must be disbursed from the account within 25 days after deposit.
  • All trust account records must be kept for three (3) years. 

 

Chapter 3: Agency and Other Mandatory Disclosures Summary

Agency

The word agency defines the basic relationship between a broker and the person represented in a transaction.

In California an agent is defined as a person licensed as a real estate broker. Licensees who work under the supervision of the broker are designated as associate licensees.

An agency relationship is created when a person (principal) delegates to another person (agent) the right to act on his or her behalf in business transactions with third parties.

  • Both parties must consent and agree to form the relationship.
  • The relationship is fiduciary- the agent owes certain duties to the principal. 

If the principal in the relationship is the seller, then the broker is the seller's agent. If the principal is the buyer, the broker) is the buyer's agent.

Listing agent - This is the licensee who lists the seller's property. Selling agent - This is the licensee who brings the buyer to complete the transaction. 

An agency relationship is based on authorization and mutual consent, not on compensation.

Fiduciary Duties

1. Care
The law expects an agent to do his or her job with care, skill, and diligence:
If the agent represents the seller:

  • Helping the seller set a realistic asking price and evaluate purchase offers. 
  • Discovering and disclosing facts that affect the seller.
  • Marketing the property and presenting contracts properly.

If the agent represents the buyer:

  • Helping the buyer locate appropriate housing.
  • Evaluating property values and property conditions.
  • Determining financing alternatives.
  • Presenting offers and counteroffers with the buyer's interests in mind.

An agent is liable to the principal for any loss that results from carelessness or negligence.

2. Obedience

Requires that the agent act in good faith and obey the principal's directions as outlined in the contract, as long as they are legal.

3. Accounting

An agent must be able to account for all monies, documents and other property he or she receives from the principal; keeping copies of the trust account records for three years.

4. Loyalty

Requires the agent to place the client's interests above those of all others. Confidentiality remains even after a relationship has been terminated. 

The agent must disclose material facts about the property.

5. Disclosure

An agent is bound to inform the client of ALL material facts that might affect the client's interests in the transaction.

Single Agency: the agent can represent only one party in a single transaction, exclusively.

  • Seller/Buyer Agreement: the agent is accountable only to the seller/buyer (never both at the same time)

Dual agency: representing both parties in the same transaction - the seller and the buyer.

California law allows dual agency if the buyer and seller are informed of the situation and give their written consent.

Agency Disclosure

Licensees use California's Disclosure Regarding Real Estate Agency Relationships form with their clients.

  • The licensee must explain to the client the three types of agent relationships - seller's agent, buyer's agent or dual agent.
  • If the client elects the dual agent option, the agent must have the buyer sign one copy of the form and the seller sign another copy of the form.

When to disclose:

  • The listing agent must provide the disclosure to the seller prior to securing the listing agreement.
  • The selling agent must provide the disclosure to the seller"as soon as practicable" prior to presenting a purchase offer.
  • The selling agent must provide the disclosure to the buyer "as soon as practicable" prior to the execution of the buyer's offer to purchase. 

Any person who is selling a one-to-four-unit property must provide the buyer with a written Real Estate Transfer Disclosure Statement, which describes the condition of the property in detail. The seller must complete it, sign it and provide it to the buyer

If the disclosure is delivered after the execution of the offer to purchase, the buyer has the right to cancel the offer within three days.

Agent's Inspection Disclosure

  • California agents are required to conduct a visual inspection (does not include areas that would be deemed as reasonably or normally inaccessible) of a one-to-four-unit property and disclose the material facts to a prospective buyer.
  • If an agent does not comply, a buyer has two years from the date of possession to file suit.
  • Important things to look for include structural defects,deterioration, water or insect damage.

Environment Hazards 

  • Residential Earthquake Hazards Report is filled by the seller and signed by the buyer as acknowledgement of receipt.
  • The buyer must receive a copy of The Homeowners Guide to Earthquake Safety/Residential Environmental Hazards Guide. Then, the seller is not required to furnish any additional information, unless there is actual knowledge of hazards affecting the property.
  • Natural Hazard Disclosure Statement. The seller must disclose if the property is located in a hazard area

Military Ordinance: if residential property is located within one mile of a former military training site, the seller must inform the potential buyer in writing that the ordinance site may contain ammunition or explosives.

Sex Offender Database: every sales contract must contain a notice with information about sex offenders registered under Megan's Law.

Information not required to be disclosed:

  • Death - are not required to disclose any death that happened on a property more than three years before the offer to purchase was made.
  • AIDS - sellers are prohibited from disclosing that a former occupant ever had AIDS.

California Disclosures

  • Mello-Roos Bond Disclosure authorized the formation of community facilities districts, the issuance of bonds, and the levying of special taxes to finance certain public facilities and services.
  • If the seller fails to provide the notice prior to signing a sales contract or lease, the buyer or tenant has the right to cancel the contract within three days after the receipt of the notice.
  • Subdivision Disclosures: any person intending to offer subdivided lands for sale or lease must apply for and obtain a public report from the Department of Real Estate.
  • Common Interest Subdivision: the owners own/lease an individual unit and have an undivided interest in the common areas of the development.
    • The subdivider or agent must give the buyer the public report and also the Common Interest Development General Information.

Right to Rescind

Purchasers in two types of subdivisions have an unqualified right of rescission:

  • Timeshare buyers have a right to rescind the purchase within seven calendar days after receiving the public report or after signing the purchase contract, whichever is later.
  • Undivided interest buyers have a right to rescind the purchase by midnight of the third calendar day following the day the purchaser executed the offer to purchase.

Financing Disclosures

  • Seller Financing Disclosure. The seller financing arrangements on all one-to-four-unit residences must be disclosed to both the seller and the buyer using the Seller Financing Addendum and Disclosure form.
  • Mortgage Loan Disclosure Statement. Real estate brokers negotiating loans which will be secured by liens on real property must deliver a written MLDS to the borrower within three business days of receipt of the borrower's written loan application.
  • Adjustable Rate Loan Disclosure. A lender offering adjustable-rate residential mortgage loans must provide prospective borrowers with a copy of the Consumer Handbook on Adjustable-Rate Mortgages.
    • The Real Estate Settlement Procedures Act (RESPA):
    • For federally-related loans, the lender must furnish a good faith estimate of closing costs within three days of the loan application and provide a HUD booklet.
    • The lender must provide a written Servicing Disclosure Statement.
    • One business day before the settlement of the loan escrow, the borrower has the right to inspect the proposed HUD-1 Settlement Statement.
  • The Truth in Lending Act requires a creditor to furnish certain disclosures to the consumer before making a contract for a loan. Allows the consumer the right to rescind.
  • Regulation Z requires that creditors make certain disclosures for real property secured loans.
  • Notice of Transfer of Loan Servicing. If a loan is secured by a one-to-four-unit property, the lender must notify the borrower when the loan collection is transferred to another entity.
  • Notice of Adverse Action (Equal Credit Opportunity Act): A lender or creditor who denies an application for credit must provide the applicant with a statement of reasons within 30 days after receiving the completed loan application.
  • Housing Financial Discrimination Act (Holden Act). At the time of the loan application, lenders must notify all prospective borrowers of their rights under the Holden Act and its prohibitions against discriminatory practices by lenders.

 

Chapter 4: Prospecting Summary

Prospecting Methods

  • Knocking on Doors
    • Plan your outings at times when most people are home.
    • See if door-to-door solicitation is allowed and if it requires a permit.
  • Telephone Calls
    • You can make several calls in a short period of time, but people may turn off their phones quickly
    • You can peak the person's interest, but is not as personal as face contact.
  • Direct Mail
    • Offer something valuable to the reader

When you contact owners of expired listings, ask first if they have relisted the property. If they have not, then you can explain how you believe you can successfully sell the property. 

Using the Newspaper to Prospect

  • For Sale by Owner Ads
  • Rental Ads
  • Special Announcements (Weddings; Births; Promotions and Job Transfers)
  • Legal Notices (foreclosures; divorces; bankruptcies; death notices; etc.)  

Using the Internet 

Be sure to have your site professionally designed. Sections that would interest potential sellers include:

  • Lists of successfully sold properties and services you offer specifically for sellers.
  • Getting the highest price.
  • Inspection tips.
  • Improvements that pay off. 

Sections that would interest buyers include:

  • Information on current interest rates.
  • Mortgage loan calculator and information on available loan programs.
  • Financing terms defined. 

Other Sources for Finding Buyers and Sellers: Local Chamber of Commerce, Builders, Open Houses, Friends, Neighbors, Current Sellers and Former Buyers.

Community involvement: the group gets a helping hand for their activities and you get the satisfaction of helping AND the potential for future clients (Churches, Boy/Girl Scouts, The school PTA, Neighborhood associations, Alumni groups).

Good management systems save time and ensure that customers and clients don't fall through the cracks.

Farming is choosing to prospect in an area that is of particular interest to you. A geographical farm can be a neighborhood, a subdivision or an area where the homes share some common characteristics.

Developing a Prospecting Plan

  • Can help you to identify the needs in the marketplace and provide you with a steady stream of potential clients.
  • List all the activities you plan to do to develop and maintain leads. 
  • Keep track of your results so that you can become more effective at attracting both sellers and buyers.

 

Chapter 5: Listing Presentations Summary

Pricing a Property methods:

  • Appraisal
  • Competitive market analysis
    • Properties currently for sale. Gives a clear picture of the asking prices buyers are seeing for similar homes. Asking price is not always a good indicator of the actual selling price of a property.
    • Recently sold property (Include similar properties that have sold within the past three to six months).
    • Expired properties not sold. More recent expiration date, more reliable data. Most often a property fails to sell because of overpricing. 

The Estimated Seller's Proceeds form estimates the amount a seller will net from the sale of the property. 

The Listing Presentation Manual is a support piece to use as reinforcement for what you are saying to the prospective client.

For sellers, the Listing Presentation Manual must address:

  • Benefits of listing a home with an agent.
    • Advice on getting the home ready for sale.
    • Advertising and promotion activities paid for by agents.
    • Qualification of all prospective buyers.
  • Why that listing should be with you and your company.

For buyers:

  • Explanation of the different types of agency and what seller agents do for their clients. How the buyer's agent gets paid his or her fee.
  • Should cover your skills and expertise as well as your firm's. 

 

Chapter 6: Listing Contracts Summary

Listing agreement (must be in writing to be enforceable) creates an agency relationship authorizing a broker to serve as the agent for a principal in a real estate transaction.

  • Open Listing (Buyer or Seller)
    • Non-exclusive unilateral contract authorizing a brok­­­er to serve as the agent for either the sale or the purchase of property.
    • Gives the seller or buyer the right to engage any number of brokers as agents.
    • Only the broker who brings the “ready, willing and able” buyer or finds the right property will receive the commission.
  • Exclusive-Authorization-and-Right-To-Sell (Seller)
    • Broker has the exclusive right to market the property for a specified period of time.
    • If the property sells while the broker has the listing, the seller must pay the agreed upon commission, regardless of who actually procured the buyer.
    • All exclusive listing contracts must contain a definite termination date.
  • Exclusive Agency (Seller)
    • Gives one broker the exclusive right to market and sell the property, while the owner retains the right to find a buyer and sell the property without owing the broker a commission.
  • Net Listing (Seller)
    • An owner sets a minimum amount that he wants to receive from the sale of the property and lets the broker have as commission any amount above the set minimum.
    • Violates the broker's fiduciary responsibility of putting the client's interests above his or her own.
  • Exclusive-Authorization-To-Acquire Property (Buyer)
    • Authorizes the broker to act as the agent of the buyerrather than the seller.
    • Commission is negotiable. Agreement must specify a definite termination date.

Bilateral employment contracts - promise to pay a commission in exchange for the broker's promise to locate a "ready, willing and able" buyer for the seller or a suitable property for the buyer.

California Listing Agreement

California law requires that the sellers receive a copy of the listing agreement at the time the signatures are obtained. A buyer has no need to ever see this agreement.

Paragraph 3 - Listing Price and Terms - unless the terms are specified, a seller is not required to pay a commission when refusing a full price offer unless the offer is all cash.

Paragraph 4 - Compensation to Broker

  • The broker is still entitled to a commission if the seller makes the property unmarketable by any voluntary act during the listing period.
  • Owner is not obligated to pay a commission to any other broker if the property sells within the listing period, except if the property is sold to any of the listed prospective buyers.
  • The safety clause allows the broker to receive a commission if the property is sold within a specified number of days after the listing contract expires.

Paragraph 7 - Seller Representations - awareness of any legal, financial or physical reasons that would affect the seller's ability to sell the property.

Paragraph 11 - Security and Insurance - the broker is not responsible for loss or damage to the property, even with a lockbox present.

Paragraph 12 - Keysafe/Lockbox - people using the lockbox are not insured against theft, damage, vandalism, etc. attributed to lockbox use.

Paragraph 20 - Entire Contract - anything that is not written into this agreement is not part of the agreement.

Listing Packet Forms

  • Seller's Advisory (SA) disclosures that sellers need to think about and do as they market their property.
  • Disclosure Regarding Real Estate Agency Relationships (AD) describes the agency relationships available in California.
  • Seller's Affidavit of Nonforeign Status and/or California Withholding Exemption (AS) deals with an IRS requirement that a buyer may need to withhold income tax if the seller is a "foreign person."
  • Smoke Detector Statement of Compliance (SDS-11). California law requires at least one operable smoke detectorin every single-family dwelling.
  • Water Heater Statement of Compliance (WHS-11). Water heaters need to be strapped, braced or anchored to resist earthquake motion.
  • Notice to Buyers and Sellers - Defective Furnaces in California explains that the Consumer Product Safety Commission has issued a warning for a certain type of horizontal gas-fired attic furnace, manufactured by Consolidated Industries, which has been known to cause fires.
  • Home Warranty Application or Waiver protects the buyer from major failures for up to a year after purchase. (If not interested, seller must sign a waiver indicating the policy was explained and declined.)

 

Chapter 7: Servicing Listing

The primary criticism sellers have about their agents is lack of communication.

Homeowner Tips

  • It’s helpful to give written suggestions to help with marketing. These should include information about the cosmetic aspects of the exterior and interior of the home.
  • If sellers choose to make an improvement that would increase the value of the home more than the cost to do it, you may have to adjust the listing price to reflect that improvement.
  • It’s best for sellers to be "away" when a buyer comes to view the home.

Activity Reports

  • A weekly activity report should include the number of inquiries/showings on the property that week, open houses held, etc.
  • Maintain communication even during weeks when there has been little or no interest in the property

Showings 

  • Sellers should be prepared for an unexpected, last minute call.
  • If someone shows up on the sellers’ doorstep wanting to see the home, they should get the person's name and then call your office immediately.
  • There will be situations when a scheduled showing will not take place.

Advertising Plan

  • Sellers need to know the "schedule" of when their property will be advertised and the methods you'll use to do that advertising.

Preparing for Offers

  • Share a blank copy of the purchase agreement with the sellers.
  • New listings might get quick offers, but that doesn’t mean the pricing is too low. 

Seller Disclosures (completed within the first week after obtaining the listing):

  • Real Estate Transfer Disclosure Statement.
  • Seller's Affidavit of Nonforeign Status and/or California Withholding Exemption.
  • Water Heater Statement of Compliance.
  • Smoke Detector Statement of Compliance.
  • Lead-based Paint and Lead-Based Hazards Disclosure Acknowledgement and Addendum.

Other important information:

  • Get a property profile from the title company.
  • Measure the home's outside dimensions to calculate the approximate square footage and take individual room measurements.
  • Get information on the lot size.
  • See if the property is located in a hazard area. 

Traditional Marketing Tools: For Sale Sign, Rider Strips, Lockbox, Photos, Talking House, Classified Ads and Flyers. 

E-Tools: Multiple Listing Service (MLS), Your and Other Internet Sites, Virtual Tours (with permission from your sellers in writing) and Video Tours.

Home Tours (Office/MLS Tours)

  • It is best if sellers are not at home during the tour.
  • Have some light refreshments for the agents/soft mood music playing in the background if possible.
  • Give each agent a property flier and ask each one to fill out a short evaluation of the home. 

Ancillary Tools

  • Neighborhood Canvass Letter introduces the listing to the residents and asks for their help in locating a buyer.
  • An open house for agents can give you important feedback on your listing as well as get the property in front of more agents. It's especially valuable for properties that are unusual.
  • Public open houses: give each visitor a copy of the property flier and your business card.

Have a client-specific marketing plan for each of your listings. Include some standard tasks, but also some activities that are customized to the particular sellers. 

If you make a change to the price of a listing, use a Modification of Terms form.

Extending the listing – review with the sellers everything you have done to market their property and let them know what other marketing plans or ideas you may have.


Chapter 8: Advertising Summary

Institutional advertising attempts to establish a positive image of the company, its services and its reputation in the minds of the public - aims at increasing sales by informing the public of the company's capabilities.

Product advertising is directed toward the particular properties a company has for sale - one firm's ads are in direct competition with the ads of other firms.

Ads must:

  • Capture the reader's attention - this step is critical. You can't deliver your message to the reader until you've grabbed his or her attention.
  • Arouse interest in your product - pique the reader's curiosity about what you are offering
  • Create a desire for the product - your ad should inspire the readers' confidence in your firm and your product.
  • Prompt the reader to action - such as calling, e-mailing or visiting you or your office

To avoid confusion with their advertising plan, many firms choose to have a single person in the office in charge of:

  • Watching advertising costs, controlling volume, scheduling the advertising that meets the objectives, compiling advertising data and evaluating the effectiveness of the ads placed.

Advertising Laws:

  • Any person who advertises and is not licensed is subject a fine or imprisonment.
  • When advertising on the Internet about real estate services, a licensee must identify the name of the broker.
  • Truth in Lending prohibits bait-and-switch advertising - advertising for a property that an agent doesn't intend to sell just to attract buyers for other properties the agent has for sale.

Advertising Media

The purpose of an advertising medium is to reach the largest number of probable prospects, NOT necessarily the largest number of people.

  • Newspapers - any ad that does not identify the advertiser as a broker is known as a blind ad (illegal in California).
    • Classified Ads are inexpensive, contain words only and are printed in the classified section of the paper.
    • Display Ads are expensive, can contain words/pictures/graphics and are printed outside the classified section of the paper.
    • Classified-Display Ads
    • Press Releases are free advertising 
  • Magazines - helps to attract wealthy clients to their upscale offerings.
  • Shopping Guides are free to the public. Shoppers can pick up copies of the guide at the supermarket or other local retail establishments.
  • Telephone Directories - expensive advertising method, but almost every home in your marketing area will have a copy of the yellow pages.
  • Newsletters are beneficial to agents working in niche markets.
  • Radio substantially increases the number of potential clients you can reach.
  • Television is more expensive, but the increase in the number and popularity of cable stations has put this medium more within the reach of many real estate firms.
  • Internet
    • Real estate sites should include: About Us, Current Listings, Sold Listings, Information for Sellers, Information for Buyers and Contact Us

Personal Advertising - Name Tag, Business Card or Car Signs. 

Evaluating your advertising - you must be able to tell which advertising methods are producing sales for you and your company. 


Chapter 9: Working with Buyers Summary

Home Ownership - Advantages

  • The value of the property can increase over time.
  • As the owner pays down the mortgage, the equity increases
  • Several income tax deductions. 

Home Ownership - Disadvantages

  • Over time, a home could lose value. A home is not a "liquid" asset.
  • The upkeep and maintenance costs could be substantial.
  • Foreclosure due to nonpayment of taxes. 

Home Ownership - Affordability

  • "Can I afford to own property?" Homebuyers must have access to or be eligible for down payment money, money for closing costs and a mortgage loan.
  • Expenses associated with ownership include utilities, trash services, maintenance, insurance, etc.

Telephone Inquiries

Floor Time: periods when agents can take inquiries. When a licensee is on floor duty, any new caller who does not ask for a specific agent by name becomes that licensee's prospect. Important for licensees who are trying to build a client base.

The less information you give, the less chance the caller will find a reason to eliminate the property and the better chance you'll have of getting an appointment to show it. Poorly handled calls result in wasted advertising dollars.

Preparing for Inquiry Calls:

  • Knowing your inventory- Keep copies of your own ads and your office ads from the previous week on your desk for easy reference.
  • Knowing your community- Have a map of the community within easy reach, either on your desk or posted on your office wall.
  • Understanding the responses generated by your different advertising media- Callers who inquire from classified ads and For Sale signs typically buy other properties than the one they initially inquired about.

Guidelines when handling each call from a prospective buyer:

  • Get the caller's name and telephone number.
  • Find out which property the caller is interested in and why.
  • Try to give as little additional information about the property as you can.
  • Set a place to meet your prospect.

Setting the Meeting - ask the prospects to meet you at your office. It gives you the advantages of having office staff available and access to your computer and the MLS listings to research alternative listings.

Problem Calls

  • Won't give his or her name?
    • Tell callers that you have fliers on other properties that may interest them and ask if you can put together and mail a packet. 
    • Inform callers that you send out emails of new listings with pictures.
  • Insists on just an address?
    • Tell them that just seeing the outside could cause them to miss out on all the unique features that they will see only by visiting the property.
    • If the caller insists on doing the drive-by, offer to meet him or her at the property to show the inside.
    • If callers say they already have an agent, tell them you'll be happy to contact the agent and give him or her details about the property.
  • Won't give you an appointment?
    • Ask permission to call the prospect when you find a listing that meets the prospect's criteria.
    • Ask permission to mail the prospect information on other properties that meet his or her criteria.
    • Ask the prospect if you can e-mail him or her information about new listings that come on the market.

Keeping the Prospect - suggest that he or she go through the ads and circle all other properties of interest. Ask the prospect to bring the paper to your meeting so that you can look up information on all the circled properties.

The Buyer Meeting

  • Collect information: demographics, current information, needs and wants and financial information.
  • Qualify the buyers. Determine what your prospect can afford and find properties that fit into that range - have them go through a lender's prequalification
  • Discuss alternative properties
  • Explain some forms. Sign the Disclosure Regarding Real Estate Agency Relationships. Give the buyers a blank copy of your firm's standard purchase agreement

Showing Property

Determine your approach. Know what specific features of each property you want to emphasize when you show it. 

Conducting the showing

  • Plan the route you take from one showing to another.
  • Make positive comments about the neighborhood, attempting to educate the buyers about its unique characteristics.
  • Pointing out recent sales of similarly-priced properties in the neighborhood will increase the buyers' view of you as a successful agent and help solidify their price range.
  • Once inside the home, point out those features that are important to the buyers and de-emphasize those that are not important.
  • Selling the home by asking who, what, where or how questions for each room and feature helps the buyers see themselves in the home.
  • Invite comparisons from one property to another.

Professional courtesy tips when showing property:

  • Knock on the door or ring the doorbell before entering with the lockbox key.
  • Leave the home the way you found it. Never smoke in a seller's home.
  • Double-check that all outside doors are locked before you leave.
  • Always leave your business card at each property, even if the sellers are at home.
  • Avoid making negative comments about a home while you are still inside.

Once you've completed the first round of home showings, take the buyers back to your office if you can.

If they are serious about buying, ask them to contact you about homes they've seen in ads or at open houses. If they are approached by another broker, they should have the broker call you.

 

Chapter 10: Writing the Offer and Closing the Sale Summary

Selling Strategies

  • Knowing Your Product
    • Know everything you can about the available inventory - your and your firm’s listings and comparable properties in the MLS.
    • You also need to know information about the neighborhood, recreational opportunities, schools and community activities. 
  • Communicating Information Effectively
    • Make sure you understand clearly what message you want to get across.
    • Get your facts straight and provide clear information to the prospects.
    • Use visual aids - graphs, charts, photos - to help communicate the message. 
  • Establishing Rapport
    • Get to know your prospects. Ask open-ended questions, rather than closed-ended (yes or no) questions.
    • Listen carefully to everything your prospects say and repeat some specifics back at appropriate times so that they know you have heard what they said.
      • Address the buyers by name and look them in the eye when speaking to them.
      • Don't be judgmental and know when to be quiet and listen.
      • Be patient and allow the buyers time to think and respond to questions.
    • Why Buyers Buy
      • A home provides shelter and security.
      • Buyers want their homes to be in safe areas that are environmentally "healthy."
      • Many buyers see a home as an investment, which provides tax advantages.
      • A home purchase is based just as much on emotion as it is on facts.
      • Picking Up on Buying Signals: Actions, Words and Body Language.
  • Handling Objections
    • View objections as the buyers' attempt to gain more information about the property or a specific feature.
    • Don't discount or dismiss the objection. Give it the consideration it needs before formulating an answer.
    • Delve deeper into the objection by asking more questions.
    • Use the "yes-but" technique to turn a negative into a positive.
    • Asking for the sale (Closing the sale)

Closing Techniques

  • Assumptive close - acting as if the person has already made the decision to buy.
  • Alternative close - offering more than one alternative to the prospects and having them choose.
  • Bonus close - inducement for the sale.
  • Ownership close is similar to the assumptive close, except that you act as if they already own it and you talk about how it will fit into their lives.
  • Standing-room-only close plays on the prospects' fears of losing a property that they may not have an opportunity to buy again.

Regardless of which closing technique you use, you need to ask for the sale.

Writing the Offer - California Residential Purchase Agreement and Joint Escrow Instructions.

Paragraph 2 - Finance Terms

  • Obtaining financing is a contingency unless it is a cash sale or it is stated otherwise.
  • Subparagraph C1 states the requirements for the new first loan, which, if not obtained, releases the buyer from the purchase.
  • Subparagraph G requires the buyer to provide a loan prequalification letter to the seller within a set period of time after the offer is accepted.
  • Subparagraph H requires the buyers to verify that they have the down payment and closing costs within a set period of time after the offer acceptance.

Paragraph 3 - Closing and Occupancy

  • Subparagraph C says that any property that is tenant-occupied will be vacant prior to close unless otherwise agreed in writing.

Paragraph 7 - Conditions Affecting Property

  • Subparagraph B requires the seller to disclose all known material facts and defects of the property.
  • Subparagraph D informs the seller of the buyer's right to inspect the property, and, based on what is discovered, the buyer can either cancel the contract or request the seller make repairs or take other action.

Paragraph 9 - Buyer's Investigation of Property and Matters Affecting Property

  • Buyer right to inspect the property within a specified period and makes the buyer's satisfaction with the property's condition a contingency of the sale.

Paragraph 12 - Title and Vesting

  • Subparagraph C says the seller must disclose anything affecting the title that the seller knows about.

Paragraph 14 - Time Periods; Removal of Contingencies; Cancellation Rights

  • Subparagraph C talks about the seller's right to cancel the agreement if the buyer doesn't meet the set time periods for removing contingencies.

Paragraph 15 - Final Verification of Condition

  • Buyer has the right to do a final inspection of the property to verify that the seller has maintained the property, made any necessary repairs and complied with any other obligations.

Paragraph 16 - Liquidated Damages

  • Buyer agrees to pay the seller if the buyer breaches the contract. Both buyers and sellers must initial this section for it to apply.

Paragraph 17 - Dispute Resolution

  • Any disputes the parties have with a broker are subject to mediation or arbitration only if the broker agrees to such resolution.

Paragraph 28 - Joint Escrow Instructions to the Escrow Holder

  • Subparagraph B states the parties will deliver the agreement to the escrow within 3 business days unless specified otherwise.
  • Subparagraph D provides that the buyer or seller will provide the escrow holder with a copy of any amendments to the agreement within 2 business days after the amendment is executed.

Paragraph 30 - Terms and Conditions of Offer

  • States that if a buyer defaults after acceptance, the buyer may be responsible for the broker's commission.

Paragraph 31 - Expiration of Offer

  • This paragraph states that the offer will terminate if not accepted by the time and date specified in this paragraph. The buyers sign and date the offer here.

Paragraph 32 - Broker Compensation from Seller

  • Here the seller agrees to pay the broker at the close of escrow the compensation set forth in the listing agreement.

Paragraph 33 - Acceptance of Offer

  • The seller warrants that he or she has the authority to sell the property, agrees to the confirmation of agency relationships and authorizes the broker to deliver the signed contract to the buyer to make the offer a valid contract. 


Real Estate

Real Estate Chapter Conclusions 11-17

Chapter 11: From Offer to Closing Summary

Preparing the Presentation 

Avoid telling the price of the offer and giving a presentation over the phone.

Usually the listing agent presents the offer to the sellers. Exceptions:

  • The selling agent may accompany the listing agent to provide backup information or clarify terms
  • If the sellers do not have a listing agent, the selling agent makes the presentation.

Additional documentation to support the offer:

  • Estimated Sellers’ Proceeds If the offer is less than the asking price, prepare a new form based on the offering price.
  • Competitive Market Analysis. If the property has been listed for several months and the market values have fallen, update the CMA.

Handling Multiple Offers

  • You must present all offers together.
  • If you have knowledge of another offer, you must let the sellers know this at the time of your presentation of the current offer.
  • If you know of any verbaloffers, you must inform the sellers of this fact.

Meeting with the sellers

  • Reviewing the Listing
    • Briefly review such things as advertising efforts, open houses, showings, etc. This review helps set the stage for the sellers' reaction to the offer. 
  • Giving Buyer Information
    • Raise the sellers' comfort level that they will be selling their home to people who will really appreciate it and presented a reasonable offer.
  • Presenting the Offer
    • You should go through the offer paragraph by paragraph, answering any questions they have.
    • If the offering price is less than the listing price, you'll need to defend it to the sellers.

Making Recommendations

Once you present an offer, the seller can accept the offer exactly as it is written, reject the offer totally or reject the offer and submit a counteroffer to the buyer for his or her consideration.

Your goal should be to seek the sellers' acceptance rather than a counteroffer.

If you believe for whatever reason that the offer is not in the sellers' best interests, you should not recommend its acceptance. The sellers' best interests take precedence over your commission. 

That a counteroffer is a rejection of the original offer and submitting a counteroffer gives the buyers a way out.

Obtaining Acceptance

Most sellers object to offers based on the offering price. Things to look at in the offer include earnest money amount, type of financing, contingencies and closing/possession date.

Writing Counteroffers - Some common items considered for counteroffer include:

  • Increase in the offering price or earnest money deposit.
  • Change in possession date or terms of a loan to be carried.
  • Placement of limits on liability for certain repairs.
  • Clarification of a seller's right to accept other offers until the counteroffer is accepted.

Important tips to follow when drafting a counteroffer:

  • Amend the acceptance clause of the original purchase offer to refer to the counteroffer.
  • Don't exert pressure on your clients to include something the other party wants.
  • Be sure to date and properly attach any supplements.
  • Make sure the document is signed properly.

Delivering the Counteroffer

  • Any change to the last offer made creates another counteroffer.This process will continue until the buyer and seller reach an agreement or either the buyer or the seller walks away from the negotiation.
  • An offer or a counteroffer may be withdrawn at any time before it has been accepted.

Accepting the Offer

  • This agreement is a legally binding contract between the buyer and the seller. The licensees are not parties to the contract.

The acceptance and formation of a legal contract does not take place until the party who made the offer is notified. Notification is the delivery of a signed copy of the acceptance to the offeror.

Looking Towards Closing

Since the broker doesn't receive the commission until escrow closes, it's important to work diligently to ensure that the closing actually happens.

  • Provide all documentation to the escrow company and check with them each week to get a progress report.
  • Help the buyers with loan applications and supporting documentation.
  • Contact your clients weekly to let them know what's happening and advise them of any problems that need resolving.

 

Chapter 12: Financing: Loan Types Summary

Borrower Fees

  • Loan Origination Fee is typically one percent of the loan amount. It covers the lender's cost for generating the loan.
  • Points are a one-time service charge, paid at closing and usually equal to one percent of the loan amount.
  • Discount Points (Discount Charges) are designed to offset any losses the lender might suffer when selling the loan to the secondary mortgage market. Discount points are a means of raising the effective interest rate of the loan.

Repayment Plans

  • Straight Loan - also known as an interest-only loan, the monthly payments are allocated only to interest. No principal is paid off.
  • Amortized Loan - a borrower makes a periodic payment of principal plus interest - loan is paid off gradually over time. Fully amortized loan - same payment amount every month. Straight amortized loan - different amount with each payment.
  • Adjustable-Rate Mortgage - borrower usually pays the index rate plus a margin. An adjustment period establishes how often the lender can change the rate. Interest rate caps (periodic or overall) limit the amount of interest the borrower can be charged. A payment cap limits how much the monthly payment can increase.
  • Balloon Payment Loan - long-term loan that has one large final payment due when the loan matures (partially amortized loans).
  • Growing Equity Mortgage (GEM) - the growing equity mortgage is a fixed-rate loan in which payments increase by a predetermined amount each year, reducing the outstanding balance of the loan.
  • Reverse Annuity Mortgage (RAM) - with a reverse annuity mortgage, the lender is making payments to the borrower.

Types of Loans

Loan-to-value ratio - the ratio of debt to the value of the property. When talking about mortgages, the value is the sale price or the appraised value, whichever is less.

1. Conventional Loans

Down payment of 20% or more, making the loan 80% or less of the property's sale price.

Conventional loans are typically uninsured. The mortgage itself provides the only security for the loan.

A borrower can get a conventional loan with a lower down payment by insuring the loan through a private mortgage insurance program (PMI). The lender will terminate the PMI payments once the loan has been repaid to a certain level.

2. FHA-Insured Loans

The FHA, overseen by HUD, provides low down-payment loans (high loan-to-value ratio loans) to qualified buyers.

FHA does not build homes or loan money directly. They insure loans made by approved lending institutions.

  • FHA loans can be either fixed-rate loans or one-year-adjustable loans.
  • The borrower must have cash for a down payment and closing costs.
  • The borrower is charged a percentage of the loan as a premium for the insurance.
  • The lender can charge points, and either the borrower or the seller (or both) can pay them.  

3. VA Loans

Available to eligible veterans and their spouses. A VA loan is guaranteed. The VA does not loan the money directly (usually) and the guarantee provides added security for the lender.

A VA loan can be used to purchase, build and improve a home.

In most cases, no down payment is required. The VA guarantees both fixed-rate and adjustable rate loans. 

  • Interest rates are negotiable between the lender and the borrower.
  • There is no monthly mortgage insurance premium to pay.
  • Any discount points charged can be paid by either the veteran or the seller.
  • The loan can be prepaid without a penalty.

VA loans are assumable - the original veteran borrower is still liable for the repayment of the loan unless the VA approves a release of liability (does not release the veteran's liability to the lender).

A veteran must apply to the VA for a certificate of eligibility to determine the eligible status and to determine the amount of the loan the VA will guarantee.

The VA requires an appraisal of the property and then issues a certificate of reasonable value (CRV).

4. CalVet Loans

The CalVet loan is actually a land contract. 

The state purchases the property and resells it to the veteran using a contract of sale. The state retains the title to the property until the loan is paid off.

  • CDVA offers below market interest rates.
  • CalVet loans usually have a variable interest rate.
  • There is no prepayment penalty for paying off the loan early.

Other Common Financing Types

  • Purchase Money Mortgage - the buyer borrows from the seller in addition to the lender. The purchase money mortgage is created at the time of the purchase and delivered at the time the property is transferred as part of the sale transaction.
  • Installment Land Sales Contract (contract for deed) - the buyer does not receive legal title until the final payment is made. The seller keeps legal title until the debt is paid in full. The buyer receives equitable title until the debt is fully paid.
  • Lease Purchase - a tenant enters into an agreement to purchase and a lease. The tenant agrees to purchase the property, but operates under the lease until the terms of the purchase agreement are fully satisfied.
  • Lease Option - gives the tenant the right to purchase the property under specific conditions - usually at a predetermined price and within a set period of time.
  • Second mortgage - owner takes out another loan for additional money, after the first mortgage.
  • Blanket Mortgage - covers more than one piece of property. The partial release clause allows the borrower to obtain a release of any individual lot from the lien by repaying a certain part of the loan.
  • Buydown - used to reduce the monthly payment for a borrower during the initial years of the loan.
  • Construction loan - short-term loans to finance the construction of improvements to property. The lender commits to the full amount of the loan, but disburses payments over the life of the construction project. Interest rates are usually higher than on other loans because the risk is greater.
  • Wraparound Loan - allows a borrower who has an existing loan to get another loan from a second lender without paying off the first loan. The second lender issues a new larger loan to the borrower at a higher interest rate. A wraparound mortgage is only possible if the original loan documents allow it.
  • Package Loan - includes all the personal property and appliances that are installed on the property - used in the sale of furnished condominiums.

Other Types of Financing

  • Open-end Loan- expandable loan which gives a borrower a limit up to which he or she may borrow. Each incremental advance must be secured by the same mortgage, and any advances may not exceed the original borrowing limit.
  • Sale and Leaseback- typically used by commercial enterprises to free up money that has been tied up in the real estate to use as working capital in the business. The owner of the real estate sells the property and then leases it back from the buyer.
  • Bridge Loan- short-term loan that covers the period between the end of one loan and the beginning of another.
  • Home Equity Loan - alternative to refinancing. It can be given as a fixed amount or a line of credit. Owners have the ability to borrow against the equity they have built up in their home.
  • Grant Programs (down payment assistance) - provide buyers with a "gift" of money to use toward their down payment or closing costs which never has to be paid back.

 

Chapter 13: Financing: The Process Summary

Loan Sources

Federal Reserve sets monetary policies for the economy. The primary mortgage market originates the loans that are bought, sold and traded in the secondary mortgage market. 

The Federal Reserve System

The Federal Reserve System ("the Fed") is the nation's central bank - stabilizes the economy through the judicious handling of the money supply and credit available in the US.

  • Determines the rate of growth in the money supply and attempts to match the increase with the growth in the economy.
  • Regulates reserve requirements for all institutions offering checking accounts.
  • Sets a discount rate of interest.
  • Engages in open market operations - movement of cash through bonds. 

Primary Lenders

  • Savings Associations - promote thrift and home ownership; invest some of its deposits in residential mortgage loans.
  • Commercial Banks - safe depository and lender of mostly short-term loans. Rely on checking account deposits for their supply of funds to make loans.
  • Fiduciary lenders (savings associations and commercial banks) - fiduciary responsibility to protect the funds of the depositors, which they invest in loans. 
  • Credit Unions - provide short-term installment and home improvement loans to their member depositors.
  • Insurance Companies - supply loans for very large and expensive properties.
  • Investment Groups - joint ventures, such as syndicates, limited partnerships and real estate investment trusts; invest in large real estate projects.
  • Mortgage Bankers - originate loans with their own money and money from their investors.
  • Mortgage Brokers - locate potential borrowers and submit preliminary loan applications to the lenders for approval; do not lend money or service loans. 

Loan Brokerage

Real estate licensees can act as mortgage loan brokers and receive compensation for negotiating loans. 

Requirements - must make certain that the borrower receives a completed loan disclosure statement. CAR has a form for this called the Mortgage Loan Disclosure Statement. Must keep a copy on file for the Commissioner's inspection for three years. 

Restrictions - limits apply only to first trust deeds of under $30,000 or second trust deeds of under $20,000. (Loans above the stated amounts are not subject to these limits.) Maximum commission amounts:

  • First mortgages - 5% of the principal for loans of less than 3 years; 10% for loans of 3 years or more.
  • Second mortgages - 5% of the principal for loans of less than 2 years; 10% for loans of more than 2 years but less than 3; 15% for loans of 3 years or more.

Fees for making the loan cannot exceed 5%, regardless of the size of the loan. 

Secondary Mortgage Market (buys, sells and trades loans) 

Consists of holding warehouse agencies that purchase a number of mortgage loans and assemble them into packages of loans for resale to investors. 

1. Fannie Mae

The Federal National Mortgage Association (FNMA) - government-sponsored agency organized as a private corporation.

  • Buys conventional, FHA and VA
  • Buys mortgages from a lender in exchange for mortgage-backed securities, which then sells.
  • Guarantees payment of all interest and principal on mortgage-backed securities. 

 2. Ginnie Mae

Government National Mortgage Association (GNMA) is a division of HUD.

  • Administers special assistance programs and helps Fannie Mae in its activities.
  • Guarantees payment on Fannie Mae's high-risk, low-yield loans, absorbing the difference between the low yield and the current market rates.
  • Guarantees securities issued by private entities that are backed by a pool of VA and FHA

3. Freddie Mac

Federal Home Loan Mortgage Corporation (FHLMC) is a federal agency.

  • Buys and pools mortgages.
  • Sells bonds in the open market, using the mortgages as security.
  • Does not guarantee payment of Freddie Mac mortgages.  

Financing the Loan – Application

Fannie Mae and Freddie Mac forms (uniform procedures) include borrower information, property information and supporting documents.

If an applicant falsifies any information on the application and the lender denies the loan because of the bad information, the applicant cannot get the application fee refunded.  

Financing the Loan – Underwriting

Underwriting - evaluating a loan application (the lender is assessing the risk of granting the loan to the buyer).

Qualifying the buyer - evaluation of the borrower’s ability to repay the loan; assessing the buyer's income, net worth and creditworthiness.

Qualify the property: Location, area zoning, value range, neighborhood, condition, etc.

Underwriting systems - Fannie Mae - Desktop Underwriter. Freddie Mac - Loan Product Advisor. 

Loan Commitment may be conditioned on the borrower meeting certain conditions, such as the sale of a current residence. But the lender has committed to lending the money. 

Financing the Loan

A mortgage has two parts: debt and security for the debt.

Must sign two documents: the note and the mortgage. The borrower - mortgagor; the lender - mortgagee.

Mortgage - mortgage document; gives the creditor the right to foreclose if necessary (the lien on the property). 

Closing the loan - By the date of the actual closing, the lender has already deposited the amount needed for the mortgage with the escrow agent, along with whatever instructions the lender has for how the funds are to be disbursed. 

Sale of a Note

If the lender used the Fannie Mae/Freddie Mac uniform procedures, the lender can sell the loan in the secondary mortgage market. To sell the loan, the original lender:

  • Signs the note over to a third party investor or other mortgage company.
  • Executes a document called an assignment of mortgage 

Making Payments on the Loan - Responsibilities:

  • Pay real estate property taxes and keep the property repaired.
  • Maintain whatever level of insurance the lender requires.
  • Get the authorizations from the lender for major changes to the property.

If the grace period (for a borrower to correct any problems) expires, the lender would have the right to foreclose on the property. 

Laws Affecting Mortgage Lending 

Truth in Lending and Regulation Z - The Truth in Lending Act is implemented by Regulation Z and requires lenders to disclose to buyers the true cost of obtaining credit, so that borrowers can compare the costs of various lenders

Applies to all loans that are secured by a residence. It does not apply to commercial loans/agricultural loans over $25,000. 

Disclosure - must disclose all finance charges and the annual percentage rate (APR) of the loan.

For home mortgages - the lender must disclose the APR (but is not obligated to disclose the total interest payable over the life of the loan).

Right to Rescind - right to cancel the transaction within three days (does not apply to residential first mortgage loans, but does apply to refinancing and home equity loans). 

Any advertising is subject to Regulation Z disclosure if it contains any of the following:

  • Amount of down payment; specific finance charge; number of installments; period of repayment. 

If an ad includes any of the above items, all of the following must be disclosed:

  • The amount of down payment and terms of repayment.
  • Annual percentage rate and if increase is possible.
  • Total finance charge and number of payments and due dates. 

Penalties are twice the amount of the finance charge. Willful violation is a misdemeanor that is punishable. 

Equal Credit Opportunity Act (ECOA)

Prohibits lenders from discriminating against applicants on several aspects (race, color, sex, marital status, etc.)

Fair Housing Laws

Redlining is the practice of refusing to make a mortgage loan or restricting the number of loans in an area for reasons other than the economic qualifications of the applicant. A lender can refuse to extend a loan only on sound economic grounds 

Real Estate Settlement Procedures Act (RESPA)

Attempts to standardize settlement practices and to ensure that both buyers and sellers understand the costs involved in closing the transaction.

Applies to residential real estate purchases that will be financed by first mortgage loans. RESPA prohibits lenders from paying kickbacks and unearned fees to parties who may have referred the borrower to the lender. 

 

Chapter 14: Escrow and Title Insurance Summary

Escrow - the process in which a disinterested third party holds all money and documents relating to a transaction until all of the terms and conditions of the escrow instructions have been satisfied.

The buyers and the sellers are the persons who decide what the escrow instructions will be. The purchase contract itself serves as the basis for the escrow instructions. 

Escrow agents: Attorneys, Banks, Brokers, Insurance companies, etc. 

The majority of escrows are handled by title insurance companies and independent escrow companies. The remaining are handled by Attorneys and Brokers. 

Brokers as Escrow Agents

  • Cannot delegate any of the escrow duties to another person.
  • Cannot advertise that he or she conducts escrows unless the broker specifies in the advertising that the escrows are in connection with the brokerage business.
  • Prohibited from using fictitious names or corporation names that use the word "escrow."
  • Must put aside any agency relationships with the parties involved and become a neutral depository. 

The Escrow Process

Document most often used is CAR's Residential Purchase Agreement and Joint Escrow Instructions.

  • Select the escrow company
  • Deliver the purchase contract to the escrow holder
  • Open the escrow
  • Complete all items outlined in the escrow instructions
    1. Ordering inspection reports and the title search/insurance
    2. Arranging financing and property insurance

  • Close the escrow - the buyer completes financing arrangements, the seller transfers the title and both the buyer and seller pay the necessary taxes, fees and other charges. 

Title Insurance - a seller is required to deliver a marketable title at closing.

  • A marketable title is so free of defects that the buyer is certain he or she will not have to defend the title.
  • The seller must have Evidence of title - proof of ownership of the property.
  • Title insurance is paid for one time, when the property passes from one owner to another. It stays in effect until the property sells again. 

Title insurance insures the lender (and the property owner for an additional fee). The title insurance company:

  • Examines all records pertaining to the property's recorded history.
  • Reviews risks that might not appear in the public record.
  • Helps the property owner correct any defects.
  • Insures the property against economic loss.

Both the buyer and the lender should have title insurance. Insurance for the buyer ensures a clear title and protects his or her investment. Insurance for the lender protects the lender's interest in the property. 

Preliminary Title Report shows the condition of the title before the loan or sale transaction.

It contains the owner's name and property description, outstanding assessments, covenants, conditions or restrictions and recorded liens or encumbrances that must be removed before a loan can go through.  

Title insurance Policies

California Land Title Association (CLTA) may be issued to a lender only, a buyer only or jointly to lender and buyer (joint-protection standard coverage policy). The buyer and seller negotiate who pays for the CLTA policy. Covers items of record as well as some risks that are not of record, such as:

  • Forgeries or acts of minors and incompetents.
  • Federal estate tax liens and failure of delivery of a prior deed. 

Items not included in a standard CLTA policy include:

  • Defects known to the insured but not disclosed to the title insurer.
  • Easements, encumbrances and liens not shown in the public record.
  • Rights or claims of persons in physical possession of the property.
  • Mining claims, water rights and zoning ordinances.  

American Land Title Association (ALTA) - an extended coverage policy that insures against many of the items excluded in the CLTA standard policy. This policy gives coverage to the lender, not the buyer. Includes a survey or physical inspection of the property. 

No title insurance policy protects against defects known to the insured but not disclosed to the title insurer or Government zoning regulations.  

ALTA-R doesn’t provide extended coverage policy. Title insurance companies recommend it to owners of one-to-four unit, owner-occupied residences. Does not include a survey. CAR's purchase agreement form lists the ALTA-R policy as the preferred title policy choice for residential properties. 

Closing and Settlement

RESPA applies to purchases of residential property; involving first or second mortgages; financed by a federally-related loan. RESPA does not apply to seller-financed loans. Lenders requirements:

  • Within three days of receiving a loan application, a lender must give a copy of a HUD booklet called Settlement Costs and You to the applicant.
  • Within three business days of receiving the application, the lender must give the applicant an estimate of the closing costs that would be expected in the transaction - Loan Estimate.

Closing and Settlement Charges 

RESPA details the costs that the buyer and seller will pay at closing.

  • Requires lenders to use the Closing Disclosure to detail the costs that the buyer and seller will pay at closing.
  • Gives the buyer the right to review the completed settlement statement at least 3 days prior to closing.
  • Prohibits any payment or receiving of fees or kickbacks when a service has not been rendered. 

Referral fees are strictly forbidden for title search/insurance, inspection, survey, appraisal, loan, etc. 

RESPA permits sharing commissions and the payment of referral fees among cooperating brokers or multiple-listing services. The office may charge a fee for the service as long as only the borrower pays the fee. 

Settlement Charges - the closing requires that both the buyer and the seller pay certain fees and expenses to settle the transaction.

  • A debit is money that the buyer or seller needs to pay at closing.
  • A credit is money that the buyer or seller receives at closing, either because it was already paid, it's being reimbursed or there is a promise to pay. 

The escrow agent will subtract the total of the buyer's credits from the total debits and the result will be what the buyer needs to bring to closing. 

Buyer's Side

  • Buyer Expenses - mortgage recording/credit/appraisal fees, title/homeowner’s insurance, survey, PMI etc.
  • Buyer Debits - contract sales price, other expenses (loan origination/closing fee/recording fees).
  • Buyer Credits - earnest money or deposit and loan amount.

Seller's Side

  • Seller Expenses - broker commission, title fees, fees for preparing the deed, etc.
  • Seller's Debits - loan balance, unpaid items due from seller, other expenses, such as closing fees and document preparation.
  • Seller's Credits - contract sales price and items paid for in advance.  

Prorating Items - expenses paid at closing must be prorated or divided proportionately between the buyer and the seller - Taxes, Insurance, Mortgage interest and Utilities. 

For items paid in advance, the buyer will receive a debit and the seller will receive a credit. Other items are those expenses that the seller incurred but have not yet been billed for at the time of closing - paid in arrears. 

The Closing Disclosure - the buyer will see the actual debits and credits for the purchase and know exactly how much money to bring to closing. The seller will know exactly how much he or she will receive at closing.

Closing Disclosure, Page 3 - If the lender has exceeded the estimate in the GFE category the lender has two choices:

  1. The lender can credit the buyer dollar for dollar for the overage, depending upon where the overage occurred.
  2. The lender has 30 days to rebate any dollar amount that exceeds the lenders quote for origination or the 10% tolerance limits for third party service. 

 

Chapter 15: Using Real Estate Assistants Summary 

Unlicensed assistants perform purely administrative tasks, such as directing phone calls, filing documents, preparing certain documents, creating newsletters and maintaining a client database. They may not perform any activity which requires a real estate license.  

Licensed assistants - technically licensed salespersons. Responsibilities:

  • Performing office administration - a good filing system is critical and should include cross-referencing and indexing components.
  • Updating data;
  • Assisting with appointments - an assistant can prepare folders containing all the appropriate documents for an agent to take on listing or selling appointments.
  • Communicating with clients - sending holiday and birthday cards, creating and mailing newsletters.
  • Assisting with technology;
  • Coordinating escrow - an assistant can talk to the escrow officer to find out what documents have been returned and are outstanding or if all contingencies have been removed and if all conditions have been met.

Why become an Assistant

  • Don’t have the personalityit takes to pursue potential clients and persuade them to list or buy property.
  • Lack the confidenceneeded in this overwhelming profession.
  • Finances. Because real estate is commission-based, a licensee might not be able to support his or her family without a steady paycheck coming in.

Getting an Assistant Position – your resume is critical. It should include:

  • Previous job history and Education.
  • People skills - Dealing well with others is critical in real estate.
  • Background in real estate - Stress any real estate experience you have had.
  • Technical skills - typing, filing, telephone work, customer relations, and computer and Internet use.

Part-time Assistants generally work from 20 to 24 hours per week and receive an hourly wage.

Full-time Assistants can expect to work 35-40 hours per week and usually receive a weekly salary, plus benefits.

Independent Contractors pay their own taxes rather than having the broker deduct them. They are supervised only minimally and set their own schedule.

 

Chapter 16: Real Estate Taxation Summary

Property Taxes - assessing and collecting taxes on real property.

The county assessor:

  • Determines the amount of real property taxes (ad valorem taxes) based on the assessed value of the property (real property is reassessed every time it is transferred).
  • The county collector is responsible for collecting these taxes, which are paid annually or semi-annually. 

Proposition 13 - maximum annual tax on real property is limited to one percent (1%) of full cash value or market value, plus a maximum two percent (2%) increase in market value per year. Proposition 13 Exemptions:

  • Proposition 58allows the transfer of property from one spouse to another or to children, without triggering a reassessment.
  • Based on Propositions 60 and 90, homeowners may be permitted to transfer their current Proposition 13 tax base with them if all of the following conditions apply:
  • At least one of the homeowners must be 55 years of age or older.
  • The replacement property must be purchased within two years of the original sale.
  • The new home must be of equal or lesser value if the recordings are simultaneous and in the same county. 

The order in which taxes are processed - California uses a system based on the fiscal year rather than the calendar year. The fiscal year starts on July 1 and ends on June 30. 

Depending on the timing, a seller may have paid none, half or all of the taxes for the upcoming year. 

Buyers will receive one tax bill, which may be followed by one or more supplemental tax bills. 

Change in Ownership Statement - Any person who acquires property subject to taxes must notify the county recorder by filing a change in ownership statement within 45 days of the date of recording. Otherwise, the owner will pay a penalty. 

Exemptions - All government institutions, some not-for-profit educational entities, many churches and charitable organizations are exempt. Exemptions or other types of relief for:

  • Homeowners - Every residence that is owner-occupied as of March 1 is eligible to receive a homeowner's exemption
  • Veterans - A California war veteran is eligible to receive exemption against the assessed value of one property.
  • Seniors - Persons who are 62 years of age or older and who have a household income of $24,000 or less. 

Special Assessments Tax - levied only once and requires voter approval. 

Documentary Transfer Tax - California tax laws allow a city to adopt a documentary transfer tax to apply to the transfer of properties located in the county. The tax is computed on the total price paid for the property, less any assumed loans. 

Income Taxes

Personal Residence

  • Mortgage loan interest- A person can finance up to one million dollars and deduct all of the interest paid out for the year on that loan.
  • Property taxes- These taxes are deductible for both first and second homes.
  • Prepayment penalties- If a client is assessed a prepayment penalty for paying off or drastically reducing a loan amount, he or she can deduct the penalty from income taxes.  

Personal Residence - Capital Gains- A seller can exclude up to $250,000 of any capital gain on the sale. If the sellers are a married couple that files jointly, they can exclude up to $500,000 in gain. This exclusion can be used once every two years. The seller must have lived in the home for two out of the last five years to qualify for the exclusion. 

Personal Residence- A loss on a personal residence cannot be deducted from income taxes. If the client turns the property into income-producing property by renting it, then any loss resulting from that sale would be deductible.  

Income-Producing Property - investors of income-producing property can deduct from their income taxes:

  • Mortgage loan interest- There is no maximum loan amount for investors.
  • Property taxes.
  • Prepayment penalties. 

Unlike owners of personal residences, investors can deduct operating expenses and depreciation of improvements - land cannot be depreciated.  

Depreciating Income - Producing Property - the amount of depreciation must be allocated evenly over the useful life of the property - straight-line depreciation. The depreciation schedule for rented homes and apartments is a minimum of 27.5 years. The schedule for commercial buildings is a minimum of 39 years. 

Sale of Real Property - Capital gains are taxed at a lower rate than ordinary income. Capital losses can be deducted from capital gains. 

Sale of Real Property - Determining Profit or Loss

  • Calculate the "adjusted cost basis" - original purchase price, plus improvements, minus depreciation (not applicable on personal residences).
  • Calculate the "adjusted sale price" - sales price minus any sales expenses.
  • Calculate the gain by subtracting the adjusted cost basis from the adjusted sales price. 

Income taxes are progressive taxes - the rate increases as the amount to be taxed increases. Some taxes are regressive taxes - uses the same rate regardless of income. 

Installment Sales - the buyer makes payments for a property over more than one calendar year.  

Tax-Deferred Exchanges - An exchange is the trade of one property for another. If the transaction qualifies, the exchange is tax-free. A property that is held for productive use can be exchanged or like-kind property - rentals, commercial/industrial property, land. 

The properties must be "like-kind" in nature or character, not in use, quality or grade. 

Tax-Deferred Exchanges - If the properties are not of equal value, one party may receive cash or mortgage relief to "equalize" the transaction. 

Boot - Any cash or relief one party receives in addition to the actual property. The person who receives the boot has a net gain and must pay taxes on it - only partially tax-free. 

Foreign Investment in Real Property Tax Act (FIRPTA)

Requires a buyer to withhold estimated taxes equal to 15% of the sale price (10% for dispositions before February 17, 2016) in any sale of property owned by a foreigner. The IRS keeps this 15% to ensure that any capital gains on the sale are paid. 

Since the broker could be held liable, it's imperative for the broker to:

  • Find out the citizenship of all sellersof residential property that is priced at $300,000 or more.
  • When taking a listing, require a statement of non-foreign status from the seller. 

CAR has a form called the Seller's Affidavit of Non-foreign Status and/or California Withholding Exemption that a seller can sign attesting that he or she is not a nonresident alien. Signing this statement could relieve the broker and buyer of liability for any unpaid taxes. 

CAR also has a form called a Buyer's Affidavit which states that the sales price is less than $300,000 and the home will be used as the buyer's primary residence and should be signed by the buyer. 

If the foreign seller's last known address is outside of California, the buyer may be required to set aside 3.3% of the sales price for the Franchise Tax Board.  

 

Chapter 17: Real Estate Investing Summary

Investors in Real Estate could be interested in supplementing income, reducing taxes, enjoying a property for personal reasons or creating an estate for the family.

  • An investor must have the financial abilityto handle the costs of the investment and not place himself or herself in financial jeopardy.
  • An investor must carefully examine the economic soundness of the investment - doing "due diligence" on the property.

Benefits to Investing

  • Tax Shelter- investors in high tax brackets could benefit from sheltering part of their income by investing in real estate.
  • Other Tax Benefits- capital gains could be deferred through a 1031 exchange or an installment sale.
  • Appreciation - the value of land and property tends to grow over time.
  • Hedge Against Inflation - typically, real estate outpaces the inflation rate. Prices tend to bounce back relatively quickly.
  • Income- the goal of many investment properties is to provide the investor with a good cash flow.
  • Interim Use- some investors purchase properties to generate some small income while waiting for some later, more profitable use.
  • Stability - some properties have a history of producing a stable income for investors.
  • Control and Use- analyzing a property's current use could lead to finding ways to enhance its "highest and best use."
  • Refinancing- An investor could choose to refinance one property to free up funds to purchase another income property.

Investment Risks

  • Capital Outlay- An investor typically needs a large amount of money for a real estate investment.
  • Liquidity- Investment property is not considered to be a very liquid asset.
  • Property Management- Most investors will need to hire a property manager who has the skill and expertise to make the investment a profitable one.
  • Financing- Loans and terms available when the investor is ready to make a purchase may not be favorable.
  • Other Negatives- Property restrictions could have negative effects on the usefulness of a property. Obsolescence and/or poor management could also negatively affect a property.

Financing Investment Properties

  • Savings Banks - Most savings banks deal only in housing loans for single-family residences. They do not currently give loans for commercial buildings.
  • Commercial Banks give high-interest, short-term loans and specialize in interim financing, which is typically a construction loan. They do not like apartment projects because they tie up funds for too long.
  • Life insurance companiesdo not have a restricted geographical lending area; so they have no problem lending on projects that are distant from their home offices.
  • Sellersoften become a good source of financing for land and special purpose projects. A "Seller Carry Back Purchase Money Trust Deed" and a "Contract for Sale" are the instruments used in these financing arrangements.
  • A syndicateis a group of two or more people who combine their financial resources to achieve certain investment objectives. A syndicate is able to acquire real estate that could not be purchased by an individual alone.
    • Limited Partnership are made up of two or more people. One general partner has unlimited liability for the debts and obligations of the group's projects. All other partners have liability that is limited to their capital investment in the project.
    • General Partnership are also comprised of two or more people. All partners have unlimited personal liability for the debts and obligations of the partnership.
    • Corporation is a business entity which is separate and apart from its owners (stockholders). It has a Board of Directors, and the stockholders have liability that is limited to their capital investment.
    • Real Estate Investment Trust (REIT) sells ownership shares. REITs receive special tax considerations and offer high yields to investors.

An investment property should be professionally managed to protect the investment, minimize expenses and maximize profits.

Purchasing Income Property

Analyzing the particular property

Detailed analysis of the property's income and expenses with the focus on the future operating income of the building, with the help of an appraiser:

  • Potential gross income- The total income the property would produce at full occupancy with no deductions for expenses.
  • Vacancy factor- An allowance for vacancies and uncollectible rents.
  • Effective gross income- Potential gross income adjusted for vacancy.
  • Net operating income- Effective gross income minus operating expenses. 

Analyzing the rental market

It is important to look at the property in light of its actual physical location.

A disadvantage today may actually become an advantage a few years down the road.

Studying characteristics of the area

  • Population- Has the population in the area of the property increased or decreased, and will this trend continue?
  • Rental Trends- Are families looking for rental units in this area, and how many apartments are available to satisfy that need?
  • Projected Demands- What is the projected demand for multiple rental units in the proposed area?  

Understanding characteristics of the rental market. 

  • Income characteristics- What is the income range of the types of persons and families that are attracted to the area?
  • Current rental ranges- What are people actually paying for rental units in the area?
  • Current vacancy rates- How many of the existing units in the area are vacant?
  • Rent control- Does the community impose rent control in the area?
  • Distribution of units- How does the type of unit available compare to the types and sizes of families that move into the area? 


Real Estate

Real Estate Chapter Conclusions 18

 

Chapter 18: Business Sale, Property Management and Leasing Summary

Sale of a business

According to California law, any type of business that is for sale is considered a business opportunity.

Components:

  • Sale or lease of the real property.
  • Personal property. Tangible assets - inventory, fixtures, and equipment.
  • Goodwill is an intangible asset that results from the reputation of the business.

Other components of a business opportunity:

  • Bill of Sale - gives title to the personal property involved in the sale.
  • Balance Sheet - shows the financial status of the business.
  • Profit and Loss Statement - shows the profit and loss amounts of the business during a specific period of time. 

Uniform Commercial Code (UCC) - body of law that standardizes a number of business practices. It requires the buyer to:

  • Demand that the seller provide a schedule of all the tangible property involved in the sale.
  • Demand the list of all creditors.
  • Give notice to the creditors of the impending sale.

There are some unique problems involved in selling a business, so a broker would be wise to seek the counsel of an attorney or other experienced business counselor.

Property management

Property management deals with the leasing, managing, marketing and maintenance of property belonging to others. It includes apartments, condominiums, industrial complexes, etc.

Institute of Real Estate Management (IREM)

  • Keep separate accounts for personal funds and client funds and avoid commingling.
  • Carry a bond on all employees who handle client funds.
  • Fully disclose all discounts, commissions and other fees received due to property activity.

Certified Property Manager© (CPM©) for individuals who meet a certain level of education and experience requirements.

Accredited Residential Manager© (ARM©) for resident managers who have a lesser degree of training and on-site experience.

Accredited Management Organization© (AMO©) is reserved for companies who meet certain IREM guidelines and employ at least one CPM©. 

Types of property management

  • Individual property manager - a real estate broker who manages properties for one owner or a number of owners.
  • Individual building manager - usually manages a single large property.
  • Resident manager - lives on the property and may be employed by a real estate broker, a managing agent or an owner to manage a property on a part-time or full-time basis. 

Property management duties

Dual responsibility to the owner and to the tenants of a property.

  • Renting the units promptly at the highest market rent possible.
  • Keeping operational and other costs within budget.
  • Preserving and enhancing the physical value and prestige of the property. 

Specific property management duties:

  • Merchandise the space and collect the rent.
  • Create and supervise maintenance schedules and repairs.
  • Set up payroll system for all employees and supervision.

Additional duties outlined by the DRE include the following:

  • Hire, instruct and maintain satisfactory personnel to staff the buildings.
  • Audit and pay bills.
  • Inspect vacant space frequently.

Setting up rent schedules

Rent levels are determined on the basis of scarcity and comparability of area values. When establishing a rental schedule, a property manager must make a thorough analysis of comparable properties in the neighborhood, which includes:

  • The character of the buildings and amenities of the neighborhood.
  • Economic level, family size and age groups.
  • Trends in population growth and the number of occupants per unit.
  • Availability of transportation, recreation, shopping, churches and schools.
  • Growth and expansion of the community and growth of local industries.
  • Condition of the housing market in terms of inventory on the market, sales price range, new construction and vacancy.

Marketing methods include billboard advertising, brochures and fliers, business cards, ads, etc.

Maintenances and purchasing 

Establish and maintain detailed policies for a building's maintenance and for purchasing supplies and services:

  • Routinely inspect the building and know its current and future maintenance needs.
  • Maintain a list of skilled specialists for repair and maintenance work.
  • Correct the building's repair or maintenance problems as soon as they are discovered.

Ongoing preventive maintenance - to reduce the need for large maintenance expenditures.  

Dealing with tenants - a property manager should set policies which will give tenants the most benefits that they can get while still ensuring a good return to the owner.  

The Property Manager is responsible for the instruction and supervision of each employee. A property manager should provide the owner with monthly account statements and a detailed annual statement.

Property vacancies - the space may be vacant because:

  • Rent is not right - too high or too low for a prospect.
  • Ineffective advertising/Inattentive manager.
  • High vacancy factor in the area.

Property management fees can be a flat monthly amount, a percentage of the gross rents collected or a combination of the two. A property manager can receive additional compensation for renewing leases and for supervising major repairs or alterations.

The management contract

A property manager should have a written contract with the property owner whose property he or she will be managing. The agreement outlines the responsibilities of both parties including:

  • Terms and period of the contract.
  • Policies pertaining to the management of the premises.
  • Management fees.
  • Authority and powers given by the owner to the manager.

Property management records

A property manager should have a working knowledge of accounting procedures and cost accounting. The broker will need to keep complex trust account records and make regular reports to the owner.

Small offices- require simple records

Larger offices -usually require more elaborate record-keeping methods.

Leasehold estates

  1. Estate for Years - continues for a definite fixed period of time.
  2. Estate from Period to Period - lease continues from period to period (periodic tenancy)
  3. Estate at Sufferance - a tenant takes legal possession of the property but then remains on the property without the owner's consent after the lease terminates.
  4. Estate at Will - has no time limit. Can be terminated by either party at any time, with proper notice (30-day notice in California). 

Types of leases

Net Lease: depending on how much additional responsibility the tenant assumes, the lease can be a:

  • Net lease - The tenant pays maintenance and taxes only.
  • Net-net lease - The tenant pays some, but not all, of the maintenance, insurance and taxes.
  • Net-net-net lease - The tenant agrees to pay all taxes, insurance, maintenance and repairs.

Gross Lease: the tenant pays a fixed rent and the owner pays the taxes, insurance and other normal ownership expenses.

Percentage Lease: a lease whose rental is based on a percentage of the monthly or annual gross sales made on the site.

  1. Recapture clause - indicates that if the tenant does not obtain the desired gross sales, the owner has the right to terminate the lease.

Graduated Lease: the rent payments start at a fixed amount but increase as the lease term matures.

Residential leases

Residential lease applications require a significant amount of financial data on a prospect. A manager should:

  • Get a copy of the prospect's last pay stub to verify income.
  • Verify present employment with the current employer.
  • Gather information from current or previous landlords.
  • Make a copy of the prospect's driver's license. 

A manager should collect the same type of information on ALL prospective tenants to avoid the potential of being in violation of the fair housing laws.

Landlord Responsibilities

The tenant expects the landlord (via the property manager) to:

  • Keep the plumbing in good working order.
  • Maintain the condition and safety of the heating and electrical systems.
  • See to it that floors, stairways and railings are clear, safe and in good repair.
  • Maintain pest control.
  • Fix any roof leaks or broken windows promptly. 

If a landlord fails to correct a problem that is within his or her responsibility, a tenant may take any of the following actions:

  • Move out and not be liable for back rent or the unexpired portion of the lease.
  • Refer the problem to mediation, arbitration or small claims court.
  • Give the owner written notification of an emergency situation. May call a professional repair person and deduct the cost from the next month's rent check (up to the amount of one month's rent). Note: A tenant may take this action only twice in any 12-month period. 

The landlord must retain some right of entry into the premises. The landlord may enter a premise only when one of the following conditions exists:

  • An emergency requires the landlord to enter.
  • The tenant gives consent to enter.
  • The landlord enters during normal business hours and only after giving 24 hours' notice to either make repairs or to show the property to prospective tenants, purchasers or contractors.
  • The tenant has abandoned or surrendered the property.
  • The landlord has a court order allowing the entry. 

Tenant responsibilities

  • Keep his or her living unit clean and sanitary.
  • Dispose of all rubbish, garbage and other waste in a sanitary manner.
  • Use fixtures properly and refrain from damaging the property.

A tenant also owes these responsibilities to the landlord:

  • Pay rent on time.
  • Follow the rules and regulations set out by the landlord.
  • Give a 30-day notice when terminating a month-to-month lease.
  • Return all door and mailbox keys when leaving the property.

Lease termination

The landlord may terminate a lease by giving a 30-day notice in writing to the tenant or a 60-day notice to a tenant who has lived in the unit for longer than one year.

It is against the law for the landlord or property manager to:

  • Change locks, intending to lock out the tenant.
  • Remove outside doors or windows.
  • Turn off utilities.
  • Remove a tenant's property or furnishings from the premises without the prior written consent of the tenant.

Any landlord who violates this law can be liable to the tenant in a civil action for either actual damages to the tenant or up to $100 per day for each day or part of a day that the landlord remains in violation of the law. 

Evictions

A landlord can evict a tenant and bring an unlawful detainer action against a tenant for failure to pay rent, violation of the lease agreement or failure to leave after receiving the proper written notice.

The landlord must follow this procedure:

  • Serve the tenant with a three-day notice to either quit the premises or pay the rent due.
  • If the tenant takes no action, the landlord can file the unlawful detainer action in court.
  • The court will award the landlord a judgment and the landlord can authorize the sheriff to evict the tenant.
  • The sheriff serves the eviction notice on the tenant. If the tenant refuses to leave, the sheriff can physically remove him or her from the premises. 

Real Estate Review Part 1

The Real Estate Industry

The real estate industry is considered to be the largest industry in the United States.

We can say this industry is made up of individuals and companies that acquire, develop, operate, manage, lease, dispose of, sell and market real property.

Real estate professionals perform a wide variety of real estate-related tasks that fall into one of several categories:

  • Acquisition and development.
  • Investment.
  • Management.
  • Regulation.
  • Removal.
  • Sale or transfer.

Real estate salespersons spend the bulk of their time and effort in the last of these categories - sale or transfer. If salespersons cannot effectively market properties, the process of moving products through our economy would slow significantly. This slowdown would have a negative effect on the US economy.

What changes have we seen in the real estate profession in the last several years? There are many and they include the following.

  • Salespersons are generally better trained than in the past.
  • Buyers and sellers have indicated that they want professionals who are both educated and experienced in real estate. Having professional designations, such as GRI (Graduate, REALTORS® Institute) or CRS (Certified Residential Specialist) can be important to clients.
  • Smaller offices have merged with larger ones, giving consumers the benefits of economy of scale.
  • Groups of salespersons within a firm have formed teams to work more efficiently with clients.
  • Prospective homeowners are using the Internet to locate properties. Real estate salespersons are also using the internet to their advantage in marketing properties.
  • Many real estate firms are offering affiliated services to clients.
  • The number and variety of loan products have expanded.

The real estate market can vary significantly from one location to another. One area could have an overabundance of lower-priced homes with many more buyers than homes available, making it a sellers' market in that location. Yet another location could have a number of higher-priced homes for sale and only a few buyers for that price range, making it a buyers' market in that location.

One thing that helps both buyers and sellers with these differences is the availability of Multiple Listing Services (MLS).

 

Property Overview

Most real estate salespersons engage in the business of listing or selling residential property.

Residential property is defined as land or improved property with buildings designed for humans to live in, such as single-family homes, multi-family homes, apartments, vacation homes or condominiums.

However, several other kinds of property exist in the real estate market:

  • Industrial.
  • Commercial.
  • Agricultural.
  • Special-purpose.
  • Recreational.
  • Investment.

Let's take a look at each of these types in more detail.

Industrial property is land used for industrial purposes, such as warehouses, factories and power plants.

Commercial property refers to income-producing property, such as office buildings, restaurants, shopping centers, hotels and motels, parking lots and stores. Some industrial properties may also fall into this category.

Agricultural property is defined as land used primarily for growing crops or raising livestock, such as farms, pastureland, orchards and timberland.

Special purpose property is property that has a unique use to the persons who own and use it, such as churches, hospitals, schools and government buildings.

Recreational property is land used for leisure activities, such as parks, forests, time-shares and campgrounds.

Investment property is defined as any property that is being held as an investment to generate income or profit. Any residential, commercial or industrial property may be considered an investment property. However, typically, most single-family residences are not considered investment properties, unless they are non-owner occupied.  

 

Many brokers and salespersons choose to specialize in different areas of real estate. Some of these specialization areas include:

  • Type of property - An agent can specialize in residential, commercial, industrial or land (lots, acreage or farms) transactions.
  • Clients - Rather than deal with all types of clients, some agents decide to represent sellers and landlords exclusively or buyers and tenants exclusively.
  • Geography - In a large market area, it can be difficult to keep track of the specifics on all the properties for sale. Some agents may choose to define a "region" that includes certain streets, subdivisions or collections of neighborhoods.
  • Business type - A broker or agent could choose to focus exclusively on one type of business client, for example, hospital clients or fast food restaurants.

Other areas of specialization include:

  • Transactions - Documents for many types of transactions are unique to that particular transaction. Within an agency, one agent could become a specialist in leases and subleases, another in exchanges, another in options, and yet another in commercial sales.
  • Auction sales - More and more, properties are being sold at auction. A broker could choose to deal only in auctions.
  • Mortgage loans - Some licensees act as lenders or agents to make or arrange loans. We'll talk more about these licensees later in this chapter.

As you can see from the descriptions on these last two screens, the possibilities for specialization in the real estate field are many.

An agent first needs to become proficient in the basic knowledge and skills of the real estate industry, including prices, financing and closings, as well as working with and meeting the needs of clients. Once you master these general skills, you will be equipped to move into whatever area of specialization most suits your talents.
 

Here is a list of important things to look for when choosing a broker/firm:

  • Quality training programs are available in-house and locally.
  • The broker encourages and supports training.
  • The broker provides a mentor program and/or office assistance for the licensees.
  • The firm has a large selection of books, audios, videos and CDs on hand for licensee use.
  • The office is dedicated to your desired specialty area.
  • The firm employs a number of successful agents.
  • The agents have a long history with the firm.
  • The firm feels like a "good fit" for you. 

 

Broker-Salesperson Relationships:

A salesperson is licensed to perform transactions on behalf of his or her licensed broker. The broker is ultimately responsible for the actions of his or her affiliated licensees. Therefore, the salespersons must perform all activities in the name of the broker.

A salesperson may engage in only those activities assigned by the broker. And the salesperson may receive compensation for performed activities ONLY from the employing broker.

Since the salesperson is acting as the agent of the broker, he or she has no authority to make contracts with or accept compensation from any other party - including another broker, the buyer, the seller or a referral agency.  


If a salesperson is hired as an independent contractor, it is quite a different story.

A broker can tell the independent contractor what to do, but not how to do it. In this case, the broker cannot dictate working hours or require the salesperson to have office duty at specific times or attend meetings.

A salesperson operating as an independent contractor must pay his or her own income tax, Social Security tax and Medicare tax. In addition, the salesperson cannot receive anything from the broker that would make it look like he or she is an employee, such as health insurance or a pension plan.

Most licensees are independent contractors. 

 

Federal tax laws require what's called the safe harbor test to establish that a person is indeed an independent contractor.

The three conditions of the safe harbor test are:

  • The person must be properly licensed.
  • Gross income must be based on production and not on hours worked.
  • A written agreement must exist which clearly states the independent contractor status.

In addition to the above conditions, the broker must supervise the salesperson as an independent contractor and not as an employee.

Note: If the IRS does an audit, the agreement will not be worth much if the actions of the broker and salesperson look more like an employer-employee relationship.

The way the IRS treats a salesperson - as either an employee or an independent contractor - applies to the issues of income tax and withholding obligations. It has nothing to do with the broker's liability for any wrongful acts performed by the licensee.

The California Code requires that brokers supervise all their salespeople, regardless of their income tax classification. Even though a salesperson may be classified as an independent contractor, the broker is still responsible for the licensee's professional actions.  

 

Planning and Goals Setting:

Make your goals definite and measurable.

It's critical for your goals to be both realistic and attainable. That means deciding that you will get "three new listings a month," rather than that you will get "more listings."

Put your goals in writing.

It's much easier for you to prioritize your tasks and evaluate your progress if your goals are in writing

Realize that goals are not rigid.

As you move through your career, your talents and interests may change; so you can adjust your goals to match those changes.

 

California Association of REALTORS® (CAR)

CAR is the state division of NAR. This organization describes its purpose as being "to serve its membership in developing and promoting programs and services that will enhance the members' freedom and ability to conduct their individual businesses successfully with integrity and competency, and through collective action, to promote the preservation of real property rights."

CAR offers many seminars and educational opportunities to its members. Most successful real estate professionals in California are members of this organization. It would be wise for you to consider becoming a member. 

 

Ethics:

Much of the information incorporated into the professional code of ethics has come from three sources.

  • Federal and state laws which focus on anti-discrimination laws and fair trade practices.
  • Real estate licensing regulation on the state level dealing primarily with agency issues and disclosures.
  • Self-regulation by real estate associations that set standards for professional conduct.

 

Fair Housing:

Fair Housing law first began with the Civil Rights Act of 1866, which prohibited discrimination in housing based on race.

Title VIII of the Civil Rights Act of 1968 prohibited discrimination in housing based on race, color, religion or national origin.

In 1968, the Supreme Court in Jones v. Mayer ruled that discrimination on the basis of race is strictly prohibited. This means there can be NO EXEMPTIONS OR EXCEPTIONS with regard to race.

In 1974, the Housing and Community Development Act added sex to the list.

In 1987, a Supreme Court decision expanded the definition of race to include ancestry.

And in 1988, the Fair Housing Amendments Act added handicap and familial status.

 

Another important piece of legislation that licensees should become familiar with is the Americans with Disabilities Act (ADA), which became effective in 1992.

ADA mandates that persons with disabilities have equal access to jobs, public accommodations, government services, public transportation and telecommunications. It prohibits discrimination in the "full and equal enjoyment of goods and services" provided by public places, including hotels, shopping centers and offices, and it applies to the lease and operation of commercial facilities.

Brokers should evaluate how this applies to physical changes they might need to make to their office space to accommodate both employees and clients.

In addition, licensees should alert their commercial and investor clients to the existence of the law and the need to have their leases professionally evaluated and their offices inspected for compliance. 

 

The Fair Housing laws allow for exemptions in some areas. However, please note: There are absolutely no exemptions, exceptions or excuses for racial discrimination.

The Federal exemptions to the 1968-88 laws are listed below:

  • The sale or rental of a single family home by an owner is exempt if the owner does not own more than three homes at one time, does not use discriminatory advertising and does not use a real estate agent.
  • Rental of units in an owner-occupied, one-to-four- family dwelling is exempt, as long as the owner does not use an agent to secure tenants.

The federal Fair Housing Act is administered by the Office of Fair Housing and Equal Opportunity under the direction of the secretary of Housing and Urban Development (HUD).

Any person who believes he or she has been discriminated against may file a complaint with HUD within one (1) year of the alleged act. HUD can also initiate a complaint on its own.

When HUD receives a complaint, it will start an investigation. Within 100 days, HUD will determine if there is reasonable cause to charge discrimination or it will dismiss the complaint.

During the investigation period, HUD can attempt to resolve the complaint by getting assurance from the person against whom the complaint was filed that he or she will remedy the alleged violation. This is called conciliation. 

 

In addition to or instead of filing a complaint with HUD, a person may file a suit in a state or federal court within two (2) years of the alleged violation.

If the court finds that discrimination has occurred, the person filing the complaint may be entitled to:

  • Injunctive relief.
  • Actual damages.
  • There is no cap on punitive damages. 

 

The Fair Employment and Housing Act (also known as the Rumford Fair Housing Act) prohibits:

  • Discrimination in the sale, rental, lease, negotiation or financing of housing based on race, color, religion, sex, marital status, familial status, disability, national origin, ancestry, sexual orientation or source of income.
  • Eviction of a person in retaliation for seeking to uphold the rights under this act.
  • Refusal to reasonably accommodate a handicapped or disabled person.

Exemptions to this act include owner-occupied housing with no more than one boarder and some non-commercial, religious, fraternal and charitable housing.

Remedies for violations could include:

  • Injunctions.
  • Actual or punitive damages.
  • Civil penalties.

Note: Before any remedies would be awarded, the aggrieved party would have to waive all rights under the Unruh Act. 

 

California Code of Conduct

The California Code has expanded on the list of activities that are considered discriminatory conduct, and we will list them on the next several screens.

The discriminatory practices based on race, color, sex, religion, ancestry, handicap, marital status or national origin that California prohibits include the following activities, some of which we discussed earlier under the federal law:

  1. Refusing to negotiate for the sale, rental or financing.
  2. Refusing or failing to show, rent, sell or finance.
  3. Discriminating against any person in the sale or purchase, collection or payments or performance of services in connection with contracts or loans.
  4. Discriminating in the terms, conditions or privileges of sale, rental or financing.
  5. Discriminating in processing applications or referring prospects to other licensees because they belong to a protected class.

More prohibited activities include the following:

  1. Representing real property as not available for inspection, sale or rental.
  2. Processing an application more slowly or otherwise delaying a transaction.
  3. Making an effort to encourage discrimination in the showing, sale, lease or financing of property.
  4. Refusing to assist another licensee in negotiating a sale, rental or financing.
  5. Making an effort to obstruct, retard or discourage a purchase, lease or financing in a certain neighborhood.
  6. Performing acts or making statements which express or imply a limitation, preference or discrimination.
  7. Coercing, intimidating, threatening or interfering with a person's enjoyment of a property or retaliating against someone who filed a fair housing complaint.
  8. Soliciting sales, rentals or listings restrictively. 

 

More prohibited activities include the following:

  1. Maintaining restrictive waiting lists.
  2. Seeking to discourage or prevent transactions because of the presence or absence of members of a protected class.
  3. Making an effort to discourage or prevent a sale or rental through the representation of actual or alleged community opposition.
  4. Representing desirability of particular properties.
  5. Refusing to accept listings.
  6. Agreeing not to show property.
  7. Advertising or causing advertising to be done in a manner that indicates discrimination.
  8. Using wording that indicates preferential treatment
  9. Selectively advertising in a way that will cause discrimination.

More prohibited activities include the following:

  1. Maintaining different pricing, rent, cleaning or security deposit structures for different groups.
  2. Financing in a discriminatory manner.
  3. Discriminating in prices.
  4. Discriminating when providing management services.
  5. Discriminating against owners, occupants, visitors or guests.
  6. Making an effort to encourage discrimination among other licensees or their employees.
  7. Establishing or implementing discriminatory rules in multiple listing and other services.
  8. Assisting anyone who intends to discriminate. 

 

The California Code also prohibits panic selling, which they define as "soliciting sales or rental listings, making written or oral statements creating fear or alarm, transmitting written or oral warnings or threats, or acting in any other manner so as to induce or attempt to induce the sale or lease of real property through any representation, express or implied, regarding the present or prospective entry of one or more persons of another race, color, sex, religion, ancestry, marital status or national origin into an area or neighborhood. "

In other words, a licensee cannot induce someone to sell by telling him or her that persons of a certain protected class are moving into the neighborhood. 

 

Trust Funds

When a client gives a broker a deposit for the purchase of a property, the broker must do one of these things:

  • Give the funds to the broker's principal.
  • Deposit the funds directly into escrow.
  • Deposit the funds into his or her trust account.

All funds deposited into a trust account must be maintained in that account until the broker disburses those funds according to the instructions of the person who is entitled to receive the funds.

If a broker deposits the funds of others in a business or personal account or holds the funds without authorization, he or she would be guilty of commingling -- a license law violation -- and could be subject to disciplinary action.

However, a broker is permitted to hold an uncashed check at the buyer's request before an offer is accepted or at the seller's request after the offer is accepted. 

 

The California Code outlines several important rules for handling trust funds:

  • Trust funds must be deposited within three (3) business days of the broker or the broker's salesperson receiving the funds.
  • The trust account must be a demand (non-interest-bearing) account. However, under certain conditions, the funds could be kept in an interest-bearing account at the written request of the owner of the funds as long as the broker or the broker's licensee does not benefit from the interest.
  • A broker may deposit money into the trust account to cover reasonable service charges on the account, but this amount cannot exceed $200.

The California Code also outlines these trust fund rules:

  • Any broker-owned funds, such as earned commissions, must be disbursed from the account within 25 days after deposit.
  • The broker must maintain a record of the receipt and disbursal of all the funds in the account, including interest, if applicable.
  • Trust accounts must be reconciled monthly, except in months when there was no activity.
  • The account must be available for inspection by the real estate commissioner.
  • All trust account records must be kept for three (3) years. 

 

An agency relationship is created when a person (buyer or seller), also called the principal, delegates to another person, called the agent, the right to act on his or her behalf in business transactions with third parties.

Several principles govern that relationship:

  • Both parties must consent to the relationship.
  • Both parties must agree to form the relationship.
  • The relationship is fiduciary - meaning the agent owes certain duties to the principal.

If the principal in the relationship is the seller, then the broker (or the associate licensee representing the broker) is the seller's agent. Conversely, if the principal in the relationship is the buyer, the broker (or the associate licensee representing the broker) is the buyer's agent.

Other agent terms that are frequently used include:

  • Listing agent - This is the licensee who lists the seller's property.
  • Selling agent - This is the licensee who brings the buyer to complete the transaction.

An agency relationship is based on authorization and mutual consent. It is not based on compensation.

Compensation can be negotiated - as in a listing agreement. An agency relationship can exist that defines no compensation - as in the case of a buyer's agency agreement, where the agent gets compensation from the seller, not his buyer client.

The agency relationship is not determined by who pays the commission. In the past, in most residential transactions, the seller was responsible for paying the commission to the broker. But since the advent of the buyer agency agreement, other arrangements are becoming more common. The seller and buyer could agree to share the responsibility of paying his or her own agent.

The state licensing law imposes statutory requirements on licensees acting as agents, which obligate them to perform in ways that protect their clients' interests in real estate transactions.

In other words, entering into an agency agreement is a legal action, which could make an agent legally liable if he or she violates the duties owed to the client.

An agent has a responsibility to inform the client of any facts or information that could affect the client's position in a transaction. 


An agency relationship imposes fiduciary duties on both the client and the agent, but mostly on the agent. These duties are both moral and ethical, but also legal - they are the law of agency.

The duties that the agent owes his or her principal are:

  • Care
  • Obedience
  • Accountability
  • Loyalty
  • Disclosure or Notice

These are often referred to by the acronym COALD or COALN.

The law expects an agent to do his or her job with a reasonable degree of care, skill and diligence. Since the principal hires an agent because of his or her expertise in the field, the principal expects the agent to use that expertise on the principal's behalf.

If the agent represents the seller, exercising care and skill includes:

  • Helping the seller set a realistic asking price.
  • Discovering and disclosing facts that affect the seller.
  • Presenting contracts properly.
  • Marketing the property effectively.
  • Helping the seller evaluate purchase offers.

If the agent represents the buyer, exercising care and skill includes:

  • Helping the buyer locate appropriate housing.
  • Evaluating property values and property conditions.
  • Determining financing alternatives.
  • Presenting offers and counteroffers with the buyer's interests in mind.

If an agent fails to exert reasonable efforts to represent his client's interest, the agent could be found guilty of negligence in court. An agent is liable to the principal for any loss that results from carelessness or negligence.   

 

Obedience requires that the agent act in good faith and obey the principal's directions as outlined in the contract, as long as they are legal.

For example, an agent may follow the principal's instructions stating that the home may not be shown on Sundays. However, an agent may not follow any directives that violate Fair Housing laws or that instruct the agent to conceal a defect in the property.

If a directive is illegal and the agent cannot get the client to remove it from the contract, the agent should withdraw from the relationship.

An agent must be able to account for all monies, documents and other property he or she receives from the principal.

Under California law, a broker is required to handle and account for trust funds following the guidelines we covered in an earlier chapter.

This includes keeping copies of the trust account records for three (3) years.
 

The duty of loyalty requires the agent to place the client's interests above those of all others, including his or her own. An agent must negotiate agreements without considering the amount of compensation he or she will receive.

Confidentiality about the principal's affairs is an important aspect of loyalty.

If the agent represents the seller, he or she may not disclose, except to the broker, without the seller's express permission such things as:

  • Client's willingness to accept an offer lower than the asking price.
  • Client's anxiousness to sell.

However, the agent must disclose material facts about the property.

If the agent represents the buyer, he or she may not disclose, except to the broker, without the buyer's express permission such things as:

  • Client's willingness to pay more than asking price.
  • Client's need or desire to move quickly.

Note: The duty of confidentiality extends beyond the termination of the relationship. No personal information gained during the term of the agreement can ever be disclosed to another party. Confidential information must always remain confidential. 

 

Single Agency

In a single agency relationship, the agent can represent only one party in a single transaction. He or she owes fiduciary duties to one principal. All other parties to the transaction receive services as customers, not clients.

A broker who offers single agency may choose to represent either buyers or sellers exclusively. If a firm chooses to represent sellers only, then all buyers who come to that firm are considered customers. If a firm chooses to represent buyers only, then the sellers of the homes that firm shows are the customers.

Seller Agreement

If the agent enters into an agency agreement with the seller, the agent becomes the seller's agent. The seller is the principal or client. Any buyers who want to view the property are customers. In this arrangement, the agent is accountable only to the seller.

Buyer Agreement

If the agent enters into an agency agreement with the buyer, the agent becomes the buyer's agent. The buyer is the principal or client. Any sellers whose property is viewed by the buyer are customers. In this arrangement, the agent is accountable only to the buyer.  

 

An agent is bound to inform the client of all material facts that might affect the client's interests in the transaction. This includes both the facts that the agent knows and those that the agent should have known. This rule became case law in California in 1984 with the Easton v. Strassburger decision.

An agent is responsible for discovering anything that might be deemed important to his client in making an informed decision, whether or not they are favorable to the client's position. An agent could be held liable for damages if he or she failed to disclose such information.

California requires agents to conduct a competent and diligent inspection of property they list and disclose the results to buyers. We'll discuss this requirement in greater detail later in this chapter.

An agent for a seller has a duty to disclose such things as:

  • Purchase offers.
  • Who the prospective purchasers are and if the agent has a relationship with them in any way.
  • Ability of the purchaser to complete the transaction.
  • Ability of the purchaser to offer a higher price.
  • Purchaser's intention to resell the property for a profit.

An agent for the buyer has a duty to disclose such things as:

  • Deficiencies in the property.
  • Any contract provision of financing terms that don't suit the buyer's interests.
  • How long the property has been listed.
  • Why the seller is selling.

 

Designated Agency

In order to avoid the potential conflict of interest that dual agency can present, some states allow designated agency. Designated agency means that a broker, with the written consent of the principal, may designate one or more licensees to act exclusively as the agent of the seller or landlord, and designate one or more licensees to act exclusively as the agent of the buyer or tenant in the same transaction.

Transaction Broker

A transaction broker is not an agent for either party. These licensees work as facilitators or intermediaries to assist the buyer and seller in the property transfer. Even though they owe no fiduciary responsibilities to their customers, they are obligated to disclose known material defects in the property.

Note: Neither of these agency relationships is recognized in California.  

 

Dual agency means representing both parties in the same transaction - the seller and the buyer.

For example, if John signs a buyer's agency agreement with salesperson Tim and then John becomes interested in a home that is listed by Tim's broker, the broker becomes a dual agent.

Being a dual agent is extremely difficult, if not impossible. Since an agent owes fiduciary duties to the principal, a dual agency situation puts the agent in the middle of a situation where he or she has to balance the interests of two principals. The interests of each client could be vastly different, if not completely opposite.

The confidential information of one client may be vital to the bargaining position of the other. What if the seller tells the agent that he is willing to take $5,000 less than the asking price? This is key information for the buyer, but can the agent share it?

Even the fairest and most careful of agents would have extreme difficulty representing the interests of both parties fully and equally.

However, California law allows dual agency if the buyer and seller are informed of the situation and give their written consent.

Before signing written disclosure forms giving permission for dual agency, both the buyer and the seller must get enough information to make an informed choice as to whether or not they really want to enter into this arrangement.

For example, Sally enters into a buyer's agency agreement with Walt. At some point during the relationship, Sally becomes interested in one of Walt's listings. Walt must then disclose to both parties that he has agency relationships with both of them. If both parties agree to move forward, they sign an agreement to that effect and a dual agency is created. 

 

Disclosures

Disclosure helps to build good relationships between the licensees and their principals and serves to protect the principals. Full disclosure also satisfies California disclosure laws.

Certain disclosures in California are mandated - meaning the information is required by law to be passed from one party to another. Some of these disclosures are required for agents; others are required for principals in the transaction.

The most recent California Association of REALTORS® forms for purchasing, listing and leasing include the mandatory disclosures. However, if you use outdated forms or forms that are national rather than California-specific, you could miss some important disclosure requirements.

Note: You are not exempt from disclosing just because a form you used was outdated or incomplete. Please be sure to use the latest approved forms for California.

California Disclosures

Some of the more common disclosure forms that you need to be familiar with include:

  • Disclosure Regarding Real Estate Agency Relationships
  • Real Estate Transfer Disclosure Statement
  • Agent's Inspection Disclosure
  • Residential Earthquake Hazards Report
  • Natural Hazard Disclosure Statement
  • Lead-Based Paint Disclosure

Agency Disclosure

Our earlier discussion about agency relationships revealed that an agent (broker) can enter into a single or dual agency relationship with a client. This relationship must be in writing.

Licensees will use California's Disclosure Regarding Real Estate Agency Relationships form with their clients.

  • The licensee must clearly and thoroughly explain to his or her prospective client the three types of agent relationships available - seller's agent, buyer's agent or dual agent.
  • Once the client fully understands these terms and the duties associated with each, he or she can decide which relationship will work best to meet his or her needs.
  • The client and licensee will confirm the receipt of the disclosure by signing the form. 
  • Note: If the client elects the dual agent option, the agent must have the buyer sign one copy of the form and the seller sign another copy of the form.

 

Natural Hazard Disclosure

California Civil Code requires that a seller and his or her agent disclose information about the property with regard to the issue of natural hazards.

The Natural Hazard Disclosure Statement lists the items that the seller must disclose.

The seller must indicate if the property is in one or more of these areas.

  • Special flood hazard area. (designated by Federal Emergency Management Area)
  • Area of potential flooding.
  • Very high fire hazard zone.
  • State fire responsibility area. (Wild-land area that may contain substantial forest fire risks and hazards)
  • Earthquake fault zone.
  • Seismic hazard zone.

Environment Hazards Disclosure

California mandates that prospective homeowners be informed about environmental hazards that are located on or affect residential property.

The Real Estate Transfer Disclosure Statement that we talked about on an earlier screen addresses the issue of environmental hazards in Part C.

The California Civil Code states that if the buyer receives a copy of the Residential Environmental Hazards Guide, the seller and seller's agent are not required to furnish any additional information, unless they have actual knowledge of environmental hazards on the property. The information in the booklet will be considered adequate information for the buyer.

Lead-Based Paint Disclosure

The federal government requires that owners of homes built prior to 1978 provide to a prospective buyer a booklet entitled Protect Your Family from Lead in Your Home.

The California publication Combined Hazards Book contains this booklet and therefore meets the federal requirement.

Sellers or landlords of residences built prior to 1978 must fill out, sign and provide to the prospective buyer or tenant the Lead-Based Paint and Lead-Based Paint Hazards Disclosure form regardless of whether or not the owner knows if lead-based paint was ever used on the property.

 

Other Mandatory Disclosures

Military Ordinance

California Code requires that if a seller knows that his or her residential property is located within one mile of a former military training site, the seller must inform the potential buyer in writing that the ordinance site may contain ammunition or explosives.

Sex Offender Database

California requires that every sales contract or lease contain a notice which states that information about sex offenders registered under Megan's Law is available to the public on an Internet web site maintained by the Department of Justice at www.meganslaw.ca.gov. Depending on the offender's criminal history, the database information will include the offender's current address or the community and zip code in which he or she resides.

Disclosures Not Required

Some information is not required to be disclosed.

Death

Sellers or their agents are not required to disclose any death that happened on a property more than three years before the offer to purchase was made. It would be wise to disclose any unnatural deaths that happened within the past three years or to answer truthfully any direct question about a death posed by the prospective buyer regardless of how long ago it occurred.

AIDS

Sellers or their agents are prohibited from disclosing by federal fair housing law that a former owner or occupant ever had AIDS or died from it.

Some other disclosure situations that you may want to become familiar with include:

  • Mello-Roos Bond Disclosure.
  • Subdivision Disclosures.
  • Common Interest Subdivision.

The Mello-Roos Community Facilities Act of 1982 authorized the formation of community facilities districts, the issuance of bonds, and the levying of special taxes to finance certain public facilities and services. The bonds are issued for streets, sewers and the like in new developments.

The seller of a one-to-four-unit residential property subject to a Mello-Roos bond must make a good faith effort to obtain a disclosure notice from the district concerning the special tax. The seller must give the notice to a prospective buyer.

If the seller fails to provide the notice prior to signing a sales contract or lease, the buyer or tenant has the right to cancel the contract within three days after the receipt of the notice.

Any person intending to offer subdivided lands for sale or lease must apply for and obtain a public report from the Department of Real Estate.

The public report discloses to prospective buyers pertinent facts about a subdivision. The report may include information about utilities and water, roads, soil and geologic conditions, title, zoning and use, hazards and any financial arrangements for completion of the subdivision.

Purchasers must sign a receipt indicating that they have received and accepted the report before they enter into the purchase transaction. The subdivider must keep the receipt for three years.

 

California Code defines these rules for providing the agency disclosure:

  • The listing agent must provide the disclosure to the seller prior to securing the listing agreement.
  • The selling agent must provide the disclosure to the seller "as soon as practicable" prior to presenting a purchase offer.
  • If the selling agent does not deal directly with the seller, the listing agent may deliver the form prepared by the selling agent to the seller (or the selling agent can mail it via certified mail).
  • The selling agent must provide the disclosure to the buyer "as soon as practicable" prior to the execution of the buyer's offer to purchase.

Any person who is selling a one-to-four-unit property must provide the buyer with a written disclosure statement that describes the condition of the property.

This Real Estate Transfer Disclosure Statement is a two-page statement that includes the following sections:

  • Part A - Identifies the items contained in the home and whether or not they are operational.
  • Part B - Describes any significant defects or malfunctions in the home.
  • Part C - Identifies miscellaneous items such as known environmental hazards, easements or encroachments, improvements or alterations to the property, zoning or neighborhood concerns.

 

California agents are required to conduct a competent and diligent visual inspection of a one-to-four-unit property and disclose the material facts to a prospective buyer.

The inspection does not include areas that would be deemed as reasonably or normally inaccessible.

The agent reports the results of the inspection on the Agent's Inspection Disclosure. This form is actually page 3 of the Real Estate Transfer Disclosure Statement. Section III of the form must be completed if the seller is represented by an agent. Section IV is completed only if the agent who brings the offer is not the seller's agent.

There are no exemptions allowed under this rule. If an agent does not comply, a buyer has two (2) years from the date of possession to file suit.

One of the problems with the Agent's Inspection Disclosure is that it does not cover very specific areas, leaving agents to guess at what they should inspect. It's a good idea to use the Seller's portion of the Real Estate Transfer Disclosure Statement as a guide in doing your inspection.

Important things to look for include:

  • Structural Defects - Look for things like cracks in foundations, inside or outside walls or around doors and windows. Structural damage might also be the culprit if floors are bulging or creak excessively or if doors don't close correctly.
  • Deterioration - Look for things like warping floors or porches, rotting or cracked windows and doors, or the wearing away of concrete or mortar.

Other important items to inspect for include:

  • Water Damage - Look for stains on ceilings, evidence of mold, rotting wood, peeling inside paint, rust or mildew stains or problems with the roof.
  • Insect Damage - Look for the telltale signs of ants or termites, such as piles of wood shavings or "tunnels" of mud that move across concrete to wood or from the ground to a wooden surface.

Remember that the agent must also disclose other items that can influence the buyer's decision to purchase the property, such as proximity to an earthquake fault or location in a flood plain.

It would be wise for agents to learn everything they can about a property and its surrounding area to help ward off any potential future liability for nondisclosure. 

 

In 1993, the California Seismic Safety Commission published a booklet titled The Homeowner's Guide to Earthquake Safety to help buyers, sellers and agents become familiar with the issues surrounding earthquake safety in California.

The booklet contains a form called the Residential Earthquake Hazards Report, which the seller fills out and signs and is subsequently signed by the buyer as acknowledgement of receipt. The form has seven questions which will help determine the home's earthquake weaknesses.

More recently, The California Association of REALTORS® published a Combined Hazards Book, which contains three books in one:

  • The Residential Environmental Hazards Guide - includes a toxic mold update.
  • Protect Your Family From Lead In Your Home - Prepared by the Federal Environmental Protection Agency and required for any homes built prior to 1978.
  • The Homeowners Guide to Earthquake Safety - includes the gas shutoff valve update.

The California Civil Code states that if the buyer receives a copy of The Homeowners Guide to Earthquake Safety, the seller and seller's agent are not required to furnish any additional information, unless they have actual knowledge of hazards affecting the property. The information in the booklet will be considered adequate information for the buyer.

Sellers of commercial property must give prospective buyers a copy of the booklet Commercial Property Owner's Guide to Earthquake Safety, which covers the legal requirement for selling commercial property in California.

The California Civil Code states that if the buyer receives a copy of Commercial Property Owner's Guide to Earthquake Safety, the seller and seller's agent are not required to furnish any additional information, unless they have actual knowledge of hazards on or affecting the property. The information in the booklet will be considered adequate information for the buyer. 

 

When discussing various types of disclosures, we have mentioned that under certain circumstances, a buyer may have the right to rescind (or cancel) a contract. These are known as rescission rights.

Purchasers in two types of subdivisions have an unqualified right of rescission:

  1. Timeshare buyers have a right to rescind the purchase within seven (7) calendar days after receiving the public report or after signing the purchase contract, whichever is later.
  2. Undivided interest buyers have a right to rescind the purchase by midnight of the third calendar day following the day the purchaser executed the offer to purchase. 


Real Estate Review Part 2

Practice Course Review

TILA/RESPA Integrated Disclosure Rule (TRID)

TRID requires that borrowers receive various disclosures regarding the proposed loan transaction.

  • For federally-related loans, the lender or mortgage broker must furnish a Loan Estimate of closing costs within three days of the loan application and provide a booklet published by the Department of Housing and Urban Development (HUD).
  • The lender or mortgage broker must provide a written Servicing Disclosure Statement which indicates whether he/she expects that someone else will be servicing the loan. This disclosure must be given at the time of the loan application or within three business days.
  • At least three business days before the settlement or the anticipated close of the loan escrow, the borrower must receive a copy of the Closing Disclosure.

RESPA also requires that borrowers receive disclosures about business relationships that may exist among lenders/creditors and settlement service providers.

Truth in Lending Act and Regulation Z

The Truth in Lending Act requires a creditor to furnish certain disclosures to the consumer before making a contract for a loan.

Regulation Z requires that creditors make certain disclosures for real property secured loans. The disclosures include:

  • Amount financed
  • Finance charge
  • Annual percentage rate
  • Total of payments
  • Payment schedule

Truth in Lending allows the consumer the right to rescind the contract until midnight of the third business day following the completion of the loan.

Notice of Transfer of Loan Servicing

If a loan is secured by a one-to-four-unit property, the lender must notify the borrower when the loan collection is transferred to another entity.

Notice of Adverse Action - (Equal Credit Opportunity Act)

A lender or creditor who denies an application for credit must provide the applicant with a statement of reasons or a written notification of the applicant's right to obtain such a statement, within 30 days after receiving the completed loan application.

Housing Financial Discrimination Act (Holden Act)

At the time of the loan application, lenders must notify all prospective borrowers of their rights under the Holden Act and its prohibitions against discriminatory practices by lenders.

 

What do we mean by prospecting?

Prospecting is actively looking for and finding prospects - those owners who may be interested in selling their property or potential buyers who are interested in purchasing property.

Prospecting is critical to your success in the real estate business; so it's an ongoing task. Therefore, it's important to develop strategies that will work for you in your efforts to find and interest potential customers and clients.

A number of prospecting techniques exist. Some will feel comfortable to you from the start; others will take some "getting used to"; still others you may try out and eventually decide to drop from your repertoire. Whatever the case, realize that you will need a positive attitude and a variety of techniques at your disposal to keep a steady stream of prospects available.
 

Knocking on doors in a neighborhood can be a beneficial way to obtain good leads. If you use a friendly, non-threatening approach, many homeowners will be willing to provide the information you're looking for.

Tips for successful face contact include:

  • Plan your outings at times when most people are home. These days, that's probably early evening (before dark) or on Saturday morning.
  • Plan trips to neighborhoods where retired persons live. They are often home during the day and are usually more willing to talk, especially if they have few visitors. They can be a wealth of information about the neighborhood.

Other tips include:

  • Use the approach that you have a client looking to buy in that neighborhood. Ask the owners if they have been thinking of selling or know anyone who is. By portraying your buyer in an attractive light, the owners may be more interested in helping out. Note: Always use one of your actual buyers. NEVER make up a buyer.
  • Use a reverse telephone directory to get the names of residents so that you can address them by name.
  • If it feels more comfortable, visit the neighborhoods with a co-worker. It can help keep you motivated to do what is often a hard task.

Note: Some communities prohibit door-to-door solicitation; so be sure to check if it's allowed or if it requires a permit.  

 

Direct mail is an important tool in obtaining leads. But direct mail campaigns must be carefully planned, since there is no face or voice contact with the recipients prior to their receiving the piece.

Here are some tips for a successful mail campaign:

  • Plan very carefully what you want your piece to say. It must grab the person's attention enough to result in some action. Your introductory sentence is critical. If it has the right "hook," the reader will likely read the whole thing.
  • Offer something valuable to the reader, such as a free estimate of the home's value.

More tips:

  • Tell the reader that you plan to call at a later date. That will get the reader thinking of how he or she will respond when you call.
  • Put your mailing in an envelope. Don't use a self-folding mailer, which tends to look like "junk" mail and will be quickly tossed.
  • Address the envelope by hand instead of using a label. It looks more personal.
  • Use an attractive first-class stamp. Don't "meter" the mail.
  • Keep track of your responses so that you will know what to change in the future to make your mailings more successful. 

 

Expired listings are a good source of potential listings. When you contact owners of expired listings, ask first if they have re-listed the property. If they have not, then you can provide them with information about yourself and your company and explain how you believe you can successfully sell the property.

There are several reasons why properties do not sell.

  • Agents do not market correctly.
  • The price is not right.
  • The property doesn't present well - needs repairs or "cleaning up."

You can assess why you think a property did not sell, decide on the approach you would take and present that approach to the owners. If your approach sounds good, the owners will be more likely to give you the listing. 

 

Newspapers are a good source of prospective customers and there is a wide variety of papers to choose from. Many newspaper publishers in large cities have smaller "regional" weekly editions of their papers in addition to the regular daily editions.

Many communities have "ad sheet" papers full of display and classified advertising, which range in size from a few pages to booklets of 40 pages or more.

Newspapers are published for small groups of people like condominium owners or owners of manufactured or mobile homes. Ethnic groups have their own newspapers.

All of these publications are sources to help you develop leads.

So how can you use the newspapers to generate leads? Look for things like:

  • For Sale by Owner (FSBO) Ads.
  • Rental Ads.
  • Special Announcements.
  • Legal Notices.

 

Rental Ads

Oftentimes single-family homes are advertised for rent when the owner has tried to sell the home - with or without an agent - and the effort was unsuccessful.

We all know that most people cannot afford to own more than one residence unless the ownership is for investment purposes. So many owners are forced to rent in order to get income to pay the mortgage on the property.

Rental Wanted ads are also a good source of leads. People who are looking to rent can often be shown how easy it would be for them to purchase instead. This is particularly true if the potential renter is a "transferee" from another location who was a former homeowner. Most former owners make unhappy renters.

Special announcements in the features section of the newspaper are good places to find leads.

Wedding Announcements

More and more frequently, young couples just starting out are choosing to buy rather than rent. Also, if either or both of the partners were living at home before the marriage, there might be an opportunity to discover if the parents are ready to "downsize."

If the newlywed couple is an older couple who owned separate homes, not only is there an opportunity for a new purchase as a couple, but there may also be an opportunity for the sale of either or both of the "pre-wedding" homes.

Birth Announcements

Is this the first child of a couple currently living in an apartment? Is it a second or third child of a current homeowner? If so, maybe the family needs a bigger home.

Promotions and Job Transfers

The kind of promotion that would generate a newspaper notice usually indicates a substantial salary increase and maybe the desire for a newer home that reflects the change in status.

A job transfer could signal the need to sell a current property.
 

Legal Notices

Most newspapers have a section containing notices of legal actions. Some communities even have a separate paper dedicated to legal notices only.

So what kinds of legal notices could potentially provide leads?

  • Foreclosures - A quick sale could help ward off the foreclosure.
  • Divorces - Since California is a community property state, many homes in a divorce may have to be sold to divide the assets.
  • Bankruptcies - Often people involved in a bankruptcy want to relocate and start fresh.

Other legal notices that could generate leads include:

  • Death Notices - Family members may need to sell a home to settle an estate.
  • Probates - People who inherit property may wish to "cash out."
  • Building Permits - If a person is building a new home, he or she may have one to sell at a future date.
  • Code Violations - If making repairs will be a costly or overwhelming endeavor, the owner may be anxious or willing to sell.
  • Tax Delinquencies - This kind of notice could indicate an owner in financial difficulty. Selling might be a good option. 

 

Web Sites

Having your own Internet site has almost become a necessity in the real estate world. You should have your web address printed on all your business cards, and you can use it in your advertising and any direct mail marketing you do.

Be sure to have your site professionally designed. This is not the place to cut corners. Websites are becoming more sophisticated every day. You need to browse several sites to see what other real estate companies are offering and to get a feel for how to make your site better than the competition.

Using your site to "sell yourself" can help generate new leads for you. It's important to have pages on your site that contain information that will interest both buyers and sellers.

Sections that would interest potential sellers include things like:

  • Lists of successfully sold properties.
  • List of services you offer specifically for sellers, such as a free competitive market analysis.
  • Staging a home for sale.
  • Curb appeal list.
  • Getting the highest price.
  • Inspection tips.
  • Improvements that pay off.

 

Developing a Prospecting Plan

Since prospecting is so critical to your success, it's not something that should be a "hit or miss" proposition. While prospecting cannot guarantee sales, it can help you to identify the needs in the marketplace and provide you with a steady stream of potential clients.

When we discussed setting goals in an earlier chapter, we talked about how important it is to write down what you plan to accomplish so that you can monitor your progress and make changes as needed.

The same is true for prospecting. Just as you set career goals for yourself, set prospecting goals to help keep you on track. A good prospecting plan will list all the activities you plan to do to develop and maintain leads.

Here are some examples of tasks you can put in your prospecting plan:

  • Conduct one open house each week.
  • Check the Sunday paper each week for FSBO ads and make contact on Monday.
  • Check the rental ads in the Wednesday supplement each week and make contact on Thursday.
  • Have lunch once a week with someone who can provide or has provided a lead.

This is just a short list of examples. Your list could and should be much longer. As you work your plan, you can evaluate the effectiveness of your activities. Drop the ones that don't work and expand the ones that do.

The important thing is to keep track of your results so that you can become more effective at attracting both sellers and buyers.

 

Pricing a Property

It is up to a seller to decide what he or she wants to set as the asking price for his or her property. However, since most sellers don't have all the information they would need to make an informed decision, they usually depend on the expertise of the agent to help them arrive at a reasonable price.

The two common methods that can help determine a reasonable asking price for a property are:

  • Competitive market analysis (CMA). -- also referred to as a comparative market analysis
  • Appraisal.

In either case, a seller is trying to find out the property's fair market value - which is the most probable price a property should bring in an open and competitive market. 
 

Competitive Market Analysis

When doing a competitive market analysis, an agent does a comparison of properties that are similar to the seller's property in location, size, style, age and amenities. The agent looks at:

  • Prices of properties currently on the market.
  • Prices of recently sold properties.
  • Properties that were listed and did not sell.

Most of the data needed to do a thorough analysis can be downloaded from a multiple listing service very quickly. Some services even include pictures of the subject properties in the download. You can obtain additional information from company records, other brokers, county records, and appraisers and title companies -- although compiling the data from those sources will take more time than an MLS download. 

 

When examining current for-sale properties, be sure to choose properties that are as close to the subject property in size, amenities, etc. as possible, so that the owners will be more likely to accept the data and your suggestions for a realistic asking price.

Looking at properties that are currently for sale gives the sellers an idea of what the competition is asking for their homes. It gives them a clear picture of the asking prices buyers are seeing for similar homes. However, it's important for the owners to realize that asking price is not always a good indicator of the actual selling price of a property. Often properties currently for sale have inflated asking prices that few buyers would be inclined to pay.

This list of properties should include similar properties that have sold within the past three to six months. The more recent the sale, the more reliable the data.

You should include a minimum of three properties in this category. If you don't have enough data, you'll have to increase your time frame. But keep in mind that the further back you go, the less reliable the data becomes and the more "adjusting" you'll have to do to account for changes in the market over that time period.

This list shows the actual sales price for the property. This data should have the most impact on what the subject property is realistically worth in the current market. 

 

Sellers will welcome an estimate of what they will net from the sale of their home. That will keep them from having any unexpected surprises.

You should prepare the estimate using the listing price as the estimated selling price. Then do an estimate of all the costs the owners are apt to incur. It's better to overestimate the costs just a bit, so that if there ARE any surprises, they will be pleasant ones.

The California Association of REALTORS® has a form that is an excellent one to use for this task. It's called the Estimated Seller's Proceeds form. It's easy for a seller to understand and very complete.

Note: If the seller changes the listing price or an offer comes in that is different from the listing price, you will need to complete a new Estimated Seller's Proceeds form. 

 

When trying to obtain a listing agreement, either from an owner to sell a property or from a buyer to act as his or her agent, you are in reality participating in an interview to sell the skills and expertise of yourself and your company.

Having a listing presentation manual is a valuable tool when conducting such interviews. It will make your presentation to the potential client look much more professional, as well as help you process through your presentation effectively.

Note: There are software programs available that can help with the preparation of a presentation manual. You can get more information at the Realty Tools, Inc. website - http://www.realtytools.com.

The manual you prepare for sellers will be different from your manual for buyers, but they may have some of the same pages of information. Three-ring binders containing documents housed in sheet protectors make nice manuals which can be updated easily as needed.

Each of your manuals should contain sections that address:

  • Why the person should enter into a listing agreement.
  • Why the listing agreement should be with you and your company.

Note: A presentation manual is NOT a substitute for a good verbal presentation. It's a support piece to use as reinforcement for what you are saying to the prospective client.

Once you have addressed these issues, it's time to talk to the owners about the benefits of listing a home with an agent.

You can have a bulleted list that covers such benefits as:

  • Advice on getting the home ready for sale.
  • Advertising and promotion activities paid for by agents.
  • Assistance with completing required forms and disclosures.
  • Qualification of all prospective buyers.
  • Multiple listing service advantages.
  • Advice on offers and counteroffers.
  • Help during the escrow period.

 

As with the presentation manual for sellers, the second section of your manual for buyers should cover your skills and expertise as well as your firm's. Again, it's a good idea to have a short résumé in your manual, as well as a copy to leave with the buyer.

To cover what your firm has to offer, you could include any or all of the following items:

  • A picture of your office and the licensees.
  • Information about your specialty areas (if applicable).
  • Documents showing your affiliations with real estate organizations.
  • A picture of the REALTOR® trademark to use as a backdrop to your explanation of what it means.
  • Press releases about your company.
  • Your plan for finding the buyer a home.
  • Services offered to buyers.
  • A profile of the buyer's requirements for a home.

 

Listing Agreements

The listing agreement is a legally-binding contract that creates an agency relationship authorizing a broker to serve as the agent for a principal in a real estate transaction.

Most listing agreements are bilateral employment contracts - meaning that a buyer or seller promises to pay a commission in exchange for the broker's promise to locate a "ready, willing and able" buyer for the seller or a suitable property for the buyer.

Listing agreements must be in writing to be enforceable. Oral listings do not afford a broker any legal protection. If the listing agreement is not in writing, a broker could not collect his or her commission if the seller refused to pay.

The most common types of listings are:

  • Open Listing (Buyer or Seller).
  • Exclusive-Authorization-and-Right-To-Sell (Seller).
  • Exclusive Agency (Seller).
  • Net Listing (Seller).
  • Exclusive-Authorization-To-Acquire Property (Buyer).

An open listing is a non-exclusive contract, authorizing a broker to serve as the agent for either the sale or the purchase of property. With this type of listing, a broker is not under the same obligation to perform as with other listing agreements; so an open listing is often considered to be a unilateral contact.

This type of listing gives the seller or buyer the right to engage any number of brokers as agents. With an open listing, all contracted brokers can market the property or search for property at the same time. But only the one broker who brings the ready, willing and able buyer to the seller or who finds the right property for a buyer will receive the commission.

In addition, with an open listing, a seller could sell the property himself or herself and a buyer could make a purchase himself or herself without having to pay any commission to any broker.

Open listings are rare, since they offer the least assurance that the broker will receive compensation for his or her efforts.

 

An exclusive agency agreement gives one broker the exclusive right to market and sell the property, while the owner retains the right to find a buyer and sell the property without owing the broker a commission. The seller must pay a commission only if the home is sold by the broker or an authorized agent or subagent of the broker.

In other words, if Broker Bill sells the property, he gets the commission. But if owner Jim sells his own property, Bill gets no commission.

A net listing is not technically a type of listing agreement. In a net listing, an owner sets a minimum amount that he wants to receive from the sale of the property and lets the broker have as commission any amount above the set minimum.

For example, Seller John tells Broker Bill that he wants $100,000 from the sale of his home. Broker Bill sells the home for $125,000, so Bill gets a $25,000 commission.

While in this type of situation the seller is getting what he or she wants for the sale, it creates a conflict of interest for the broker. It essentially violates the broker's fiduciary responsibility of putting the client's interests above his or her own.

Net listings are generally viewed as unprofessional, but legal in California. Net listings are illegal in many states.

Exclusive Authorization to Acquire Property (Buyer)

This listing agreement is similar to the exclusive-authorization-and-right-to-sell listing brokers have with sellers, which we will go over in detail in this chapter. However, this agreement authorizes the broker to act as the agent of the buyer rather than the seller.

When legally becoming an agent for the buyer, the broker owes the same duties and responsibilities to the buyer as a listing agent owes to a seller. The commission is negotiable and, as with exclusive seller listing agreements, this agreement must also specify a definite termination date.

If a buyer chooses to compensate the broker, the broker is more apt to show all types of available properties, including FSBOs, foreclosures, probates and other available but unlisted properties.

Click this link to see and print a copy of this form.
Buyer-Broker Agreement*

 

The California Association of REALTORS® listing agreement is probably the one that you will use most frequently. Since it is a legal, binding contract, it's important that you understand it and can fill it out correctly.

Depending on the details of a particular transaction, the wording you use on the form may vary. However, the listing contract contains several basic components.

Click on this link to the Residential Listing Agreement*. Print off a copy to look at as we go over the listing form by paragraphs.

* Note: Reprinted with permission, CALIFORNIA ASSOCIATION OF REALTORS®. Endorsement not implied.

Paragraph 1 - Exclusive Right to Sell

This section is where you put the name of the owner, the name of the real estate office that is obtaining the listing, the beginning and ending dates of the listing period and the physical address of the property, including city and county. In some situations, you may need to attach a signed copy of a legal description. If you are a salesperson, you should write your broker's name in this section. You will sign the form at the bottom of page 3.

Paragraph 2 - Items Included and Excluded

This is the section to list any personal property that may be included as part of the sale or any real or personal property that is being excluded from the sale. This will avoid later misunderstandings.

Paragraph 3 - Listing Price and Terms

This is the section to indicate the asking price for the property. There is also space to indicate any financing terms, such as loan assumption, down payment amount, all cash, etc. Note that unless the terms are specified, a seller is not required to pay a commission when refusing a full price offer unless the offer is all cash.

Paragraph 4 - Compensation to Broker

This paragraph has several subparagraphs. Subparagraph A is the place to fill in the mutually agreed upon commission the seller will pay the broker. It can be a percentage or a specific amount, although percentage is preferred because it will adjust according to the actual sales price.

 

Paragraph 4 - Compensation to Broker

Subparagraph A-2 is known as the safety clause. Here the broker and sellers agree to a specific number of days after the listing expiration during which the broker may still receive a commission. This clause is enforceable if the owner, or his or her new agent, sells the property to a buyer whose name appears on a list of persons to whom the original broker showed the property during the listing period. This list must be given to the owner within three calendar days after the listing expiration.

Subparagraph A-3 states that the broker is still entitled to a commission if the seller makes the property unmarketable by any voluntary act during the listing period.

Subparagraph B states that if a party other than the seller prevents the completion of the sale, the commission due will be the lesser of the commission due under paragraph 4A or one-half of the damages recovered by the seller, after the seller has deducted all expenses.

Paragraph 4 - Compensation to Broker

Subparagraph C provides for any additional compensation to the broker, such as advertising fees or MLS fees. Note: Some brokers charge a document preparation or transaction fee. If that's the case, those charges should be clearly indicated here.

Subparagraph D indicates that the broker has informed the seller of the firm's policy of dealing with cooperating brokers and how the commissions are divided.

Subparagraph E indicates that the seller will have escrow pay the broker's commission directly from the sale proceeds.

Subparagraph F is the owner's warranty that he or she is not obligated to pay a commission to any other broker if the property sells within the listing period, except if the property is sold to any of the listed prospective buyers. If one of the listed buyers makes the purchase, the current broker will not receive compensation and is then not obligated to represent the seller in the transaction.

Paragraph 5 - Ownership, Title and Authority

This section warrants that the owners are the only title-holders of the property and therefore have authorization to sell it.

Paragraph 6 - Multiple Listing Service

This section states that the broker will provide the transaction terms to the Multiple Listing Service, unless the seller signs a form to withhold the listing.

Paragraph 7 - Seller Representations

This section indicates that the seller is unaware of any legal, financial or physical reasons that would affect the seller's ability to sell the property. If the seller becomes aware of any such reasons, the seller must notify the broker immediately.  
  

Paragraph 8 - Broker's and Seller's Duties

In this section, the broker agrees to use due diligence to achieve the purpose of the listing agreement. The seller agrees to consider all good faith offers on the property, to make the property available for showings, to take responsibility for all information the seller provides to the broker and to hold the broker harmless for any claims resulting from the information given to or withheld from the broker.

Paragraph 9 - Deposit

This section authorizes the listing agent to accept and hold any deposits on the seller's behalf which will be applied to the purchase price.

Paragraph 10 - Agency Relationships

This section explains that the broker represents the seller. The broker will not represent the buyer; however, if the listing agent finds a buyer, it may be necessary for the broker to act in the capacity of a dual agent. This section also informs the seller that the broker represents other sellers. Agency relationship must be confirmed prior to or concurrent with the execution of a purchase agreement.

Paragraph 11 - Security and Insurance

This section states that the broker is not responsible for loss or damage to the property, even with a lockbox present. The seller must take steps to safeguard any valuables and obtain insurance to cover the risks.

Paragraph 12 - Keysafe/Lockbox

This section defines a lockbox and states that persons using the lockbox are not insured against theft, damage, vandalism, etc. that could be attributed to lockbox use. There is a box for the seller to check if he or she does not want a lockbox used.

Paragraph 13 - Sign

In this section the seller checks a box if he or she does not want a sign on the property.

Paragraph 14 - Equal Housing Opportunity

This section states that the property is offered in compliance with all anti-discrimination laws.

Paragraph 15 - Attorney Fees

This section states that the loser of a suit or arbitration of any disagreement must pay the associated costs. 

Paragraph 16 - Additional Terms

This section provides space for any agreement or terms not covered by any other section, such as a seller paying for a termite report.

Paragraph 17 - Management Approval

This section states that if an associate licensee entered into this agreement, the broker has a right to cancel within 5 days.

Paragraph 18 - Successors and Assigns

This section states that the agreement is binding on the seller and the seller's successors and assigns.

Paragraph 19 - Dispute Resolution

Subparagraph A says that the broker and the seller agree to mediate any disputes that arise from this agreement before taking any other action.

Subparagraph B explains arbitration, but arbitration will not be executed unless both the broker and seller have initialed the appropriate spaces at the end of the paragraph. Do not try to explain this paragraph to the sellers. If they do not understand it or don't know how to proceed, advise them to consult an attorney. This paragraph also describes those types of matters that would be excluded from arbitration.

Paragraph 20 - Entire Contract

This section states that this agreement supersedes all previous discussions, negotiations and agreements between the seller and the broker. Therefore, anything that is not written into this agreement is not part of the agreement.

Signature Section

All the sellers must sign and date the agreement and provide their addresses, and other available information. You must then fill in your firm's name, sign your name directly below and then provide other information about the firm.

California law requires that the sellers receive a copy of the listing agreement at the time the signatures are obtained.

Note: If the owner is married, both spouses should sign the agreement, even if the property is held in the name of only one of the spouses. Because of California's community property laws, a buyer might have difficulty suing for specific performance if both seller signatures are not on the listing agreement.
 

The California Association of Realtors® has many standardized forms that will make the compilation of a listing packet much easier. Here is a list of forms that you should include, with a brief explanation of each.

Completed Residential Listing Agreement (RLA)

This is the listing agreement form we explained in detail on the previous screens of this unit. A buyer has no need to ever see this agreement.

Seller's Advisory (SA)

This form talks about some things regarding disclosures that sellers need to think about and do as they market their property.

Disclosure Regarding Real Estate Agency Relationships (AD)

This disclosure describes the agency relationships available in California - Seller's agent, Buyer's agent and Dual agent. We covered this form in the earlier chapter on mandatory disclosures.

Seller's Affidavit of Non-foreign Status and/or California Withholding Exemption (AS)

This form deals with an IRS requirement that a buyer may need to withhold income tax if the seller is a "foreign person." A seller may need to consult a tax advisor for help filling out the form. The buyer should also get a copy of this form. 

Smoke Detector Statement of Compliance (SDS-11)

California law requires at least one operable smoke detector in every single-family dwelling. Many local requirements are stricter. This form, signed by the seller, states that the home is in compliance with CA law.

Water Heater Statement of Compliance (WHS-11)

This mandatory seller disclosure deals with the law requiring water heaters to be strapped, braced or anchored to resist earthquake motion. It's important to check local ordinances for stricter requirements.

Lead Based Paint and Lead-Based Paint Hazards Disclosure, Acknowledgment and Addendum (FLD-11)

This disclosure deals only with properties built prior to 1978. We covered this disclosure in a previous unit.

Natural Hazards Disclosure Statement (NHD) and Combined Hazards Book

California requires the disclosure of several natural hazards. As we explained in the earlier chapter on mandatory disclosures, providing this booklet fulfills many of these disclosure requirements.

Estimated Seller's Proceeds (ESP-11)

This form estimates what the seller can expect to walk away with after the sale. We discussed this form in the chapter on listing presentations.

Notice to Buyers and Sellers - Defective Furnaces in California

This is not a standard form, but one that the broker should create to give to sellers. It explains that the Consumer Product Safety Commission has issued a warning for a certain type of horizontal gas-fired attic furnace, manufactured by Consolidated Industries, which has been known to cause fires.

The form should have a place for signatures of both the sellers and the buyers, acknowledging receipt of the form and their understanding of the warning and what it implies.

Having clients sign this form may help to relieve brokers of any responsibility if a problem arises in the future.
 

Communication

It might seem logical that the major dissatisfaction sellers have with real estate agents is failing to sell the property during the listing period. However, the truth is that the primary criticism sellers have about their agents is lack of communication. Sellers often complain that once the listing agreement is signed, the agent "puts a sign on the lawn" and then "disappears."

Their home becomes one of dozens of properties on the market that may be shown occasionally. A business card gets left on a table to show that someone came through, but the owners often don't get feedback on how the showing went.

Owners can feel cheated or resentful when the person who so eloquently presented the reasons why he or she should get their listing seems to be so unavailable once the papers have been signed.

One of the reasons that owners may start having these negative feelings is because the agent did not adequately prepare them for what would be happening during the first days of the listing period and beyond.

During the first few days, you are doing multiple property marketing tasks - preparing flyers and ads, getting the property information into the MLS, etc. - which your sellers may not be fully aware of. While you are "busy being busy," your sellers are home waiting for the onslaught of prospective buyers, which usually doesn't happen in the first days.

With a little planning and forethought, you can make your sellers feel like partners in the selling process, while keeping the lines of communication open and flowing.

Once you have secured the listing, let your sellers know what to expect in the first few days.

  • Tell the sellers they will be receiving a letter from your broker. Most brokers send a "thank you for listing with our firm" letter to new clients to introduce themselves and to invite the sellers to call the broker directly if any problems arise.
  • Meet with the sellers a day or two after the listing appointment to go over your specific marketing plan with them. At this meeting, go through the home again to re-familiarize yourself with its features and make note of any particular suggestions you might have.
  • Give the sellers some tips, ideas or suggestions on what they can do to help market the property. Let them know that selling their home is a team effort. 

 

Homeowner Tips

Some tips for the exterior include:

  • Keep grass and shrubs trimmed.
  • Repair fencing and repaint if needed.
  • Place blooming flowers on the patio or near the front door.
  • Check condition of the finish on the front door and trim. Redo if peeling or worn.
  • Place lawn furniture attractively.
  • Make any roof repairs that may be necessary.
  • If there are outdoor pets, make sure pet area is clean and neat.

Some tips for the home interior include:

  • Keep the home neat and "picked up."
  • Be sure floors, bathrooms, kitchen and appliances sparkle.
  • Be careful about cooking "aromas" - avoid vinegar and fried food smells; but blueberry muffins, home-baked bread or chocolate chip cookies can create the right atmosphere.
  • Repair leaky kitchen or bathroom faucets.
  • Clean carpets.
  • Make sure rooms are well lit - either through natural lighting or higher watt light bulbs.
  • De-clutter closets.
  • Remove excess furniture to make rooms look bigger.
  • Straighten and de-clutter the garage and basement. Move items to storage if necessary.

Some companies specialize in producing forms and materials that you can copy or print for use in presentations or share with clients. One such company is Realty Tools, Inc. You can visit their website at http://www.realtytools.com. 

 

An important part of your seller communication is a weekly activity report. Many licensees prefer to send a monthly report because it looks like there has been more activity. But again, frequent communication with your sellers is critical; so the weekly contact is best.

Let your sellers know that your weekly report will include, as applicable:

  • Number of inquiries on the property that week.
  • Number of showings.
  • Advertising done that week.
  • Open houses held.
  • Number of open house visitors.
  • Comments made by other agents or prospective buyers.

You can also send along copies of any ads you placed that week, a copy of the MLS pages, copies of pages from any websites where the property has been listed and information about any e-mails that you sent to promote the home.

Note: It's critically important to maintain communication with your sellers, even during weeks when there has been little or no interest in the property.  

 

Seller Disclosure

The sellers are responsible for filling out several disclosures that will be passed on to prospective buyers. We explained these disclosures:

  • Real Estate Transfer Disclosure Statement - Ask your sellers to fill out this form as soon as possible. If the form exposes problems that you believe would be best fixed before a sale takes place, explain your position to the sellers and ask them to address those issues.
  • Seller's Affidavit of Non-foreign Status and/or California Withholding Exemption.
  • Water Heater Statement of Compliance.
  • Smoke Detector Statement of Compliance.
  • Lead-based Paint and Lead-Based Hazards Disclosure Acknowledgement and Addendum.

Get these completed disclosures from the sellers within the first week after obtaining the listing. 

 

Traditional Tools

For Sale Sign

Always carry at least one sign with you and put up the sign as soon as you leave the house after obtaining the listing. If you are putting up a temporary lawn sign, let the sellers know when you will bring the larger, more permanent sign.

Rider Strips

These strips attach to the For Sale sign. Attach a strip with your cell phone number to the stake below the main portion of the sign. If you have rider strips that note the home's special features, attach it to the stake above the sign.

Lockbox

Before you leave the house at the end of the listing meeting, install a lockbox. The lockbox holds the key to the home. Agents can access the lockbox either by using a special lockbox key or with an electronic keycard. Install the lockbox on the doorknob, a metal railing or some other stationary object.

Photos

You'll need several good photos of the home, both inside and outside. Using a good digital camera, take the photos as soon as possible after you get the listing so you can start using them in flyers, ads and mailings. You'll also want them for your Internet site.

Talking House

Although not yet considered "traditional," some signs contain a radio transmitter that broadcasts a message about the home using an AM or FM radio frequency. Potential buyers can pull up in front of the home and listen to the message on their car radio. If you plan to use this tool, record a thoughtful and careful message and install the sign within a couple of days of taking the listing.

Classified Ads

Prepare several good classified ads so you can avoid repetition when you're on a tight deadline. Also prepare an open house ad and an ad that can be used in a home buyer's guide, if your firm uses that as an advertising venue. We'll talk more about what constitutes a good ad in the chapter on Advertising.

Flyers

Also called property briefs, these print pieces describe the home's features. They contain at least one photo, sometimes several. They should also include an Internet address where potential buyers can get more information about the property.

Leave a large supply of flyers at the home so that each visitor can pick one up. You can use the flyers in several other ways:

  • Place in information boxes or tubes attached to the For Sale sign.
  • Distribute at open houses.
  • Deliver to agents from other offices.
  • Distribute to your own firm's agents.
  • Mail out in response to telephone or e-mail inquiries. 

 

E-Tools

Multiple Listing Service (MLS)

Groups of brokers often join together to form a cooperative listing service, usually called a multiple listing service. Any member who belongs to this service sends the information on each of his or her listings to a central location for the MLS. An MLS employee then compiles the information and distributes it to everyone who is a member of the MLS. The information is usually made available on the Internet, but sometimes it's distributed on computer disk.

Participation in the MLS increases the sales inventory available to licensees. Any member of the MLS can sell any property listed in the MLS. With MLS sales, the listing broker and the selling broker share the commission, based on a predetermined percentage split.

Send the information on your new listings to the MLS as soon as possible so that other agents will have the information quickly. Once the listing is uploaded to the MLS, print a copy and send it to your sellers as part of your weekly activity report.

Your Internet Site

Place your new listing on your own or your company's Internet site as soon as possible after getting the listing. As with the MLS, as soon as the information on the property has been uploaded to your site, print off a copy and send it to the sellers with the weekly activity report.

Note: We discussed some of the things Internet sites contain in the chapter on Prospecting. We'll cover more about the Internet in the chapter on Advertising.

Other Internet Sites

A popular Internet site is http://www.realtor.com, which belongs to the National Association of REALTORS®. NAR maintains this site as a place for buyers all across the country to find suitable properties. Brokers can post at least one picture and a detailed description of each of their properties on this site. There are limitations however; so you need to contact NAR for specifics on how to upload information to their site.

Also, local real estate boards may have sites you can use to post information on your listings. 

 

Forms of Advertising

Advertising is the promotion to the public of a product or service. Advertising is critical to the real estate industry. For many firms, it's the only way to let potential buyers and sellers know that they exist.

Real estate firms engage in two forms of advertising:

  • Institutional.
  • Product.

Let's take a look at each type.

Institutional advertising (sometimes called corporate advertising) attempts to establish a positive image of the company, its services and its reputation in the minds of the public. This form of advertising aims at increasing sales by informing the public of the company's capabilities.

In addition, groups of brokers may engage in this form of advertising (and share the costs) in an attempt to raise the public's overall opinion of the real estate industry.

Product advertising is directed toward the particular properties a company has for sale. With this form of advertising, one firm's ads are in direct competition with the ads of other firms. 

Real Estate Review Part 3

Newport Beach Real Estate Review

Knowing When and What to Advertise

Real estate offices have far too many listings to advertise all at the same time; so it's important to decide which listing to advertise and when. These decisions can't be made in a vacuum. It's important for each agent to understand the marketing/advertising goals of the firm at any given point and to follow the strategy that will help meet both the firm's and the agent's objectives.

To help with this, many firms choose to have a single person in the office in charge of:

  • Watching advertising costs.
  • Controlling volume.
  • Scheduling the advertising that meets the objectives.
  • Compiling advertising data.
  • Evaluating the effectiveness of the ads placed.

The individual agents are still responsible for writing the ads; the designated advertising person just manages the advertising effort to eliminate confusion.

Forms of Advertising

One important thing to remember when choosing an advertising medium is that the purpose is to reach the largest number of probable prospects, NOT necessarily the largest number of people. And you want to do this at the lowest possible cost.

A number of media choices for advertising are available:

  • Newspapers.
  • Magazines.
  • Shopping guides.
  • Telephone directories.
  • Signs.
  • Outdoor ads.
  • Direct mail.
  • Direct e-mail.
  • Newsletters.
  • Promotional items.
  • Radio and TV.
  • Internet.

In addition to the methods we have just discussed, there are many more ways to advertise.

Personal Advertising

  • Name Tag - This is very important. If you are a REALTOR®, make sure your name tag says so. Also include any professional designation, such as GRI.
  • Business Card - Don't take your card for granted. Make it unique so that it will stand out from the rest. Make sure it has your picture.
  • Car Signs - These magnetic signs are inexpensive and get results. Be sure the signs include your name, your firm's name and logo and your phone number.

Other forms of advertising you can use include video clips or photo ads that run at movie theaters, a promotional video of yourself and your services that plays on your website, or an electronic message board. Almost any kind of advertising that you can imagine and afford can be done! 

 

Evaluating your Advertising

It's very important to evaluate the effectiveness of the advertising methods you have put in place. You must be able to tell which advertising methods are producing sales for you and your company. It does little good to put money into advertising if you can't tell how well each method is working.

You need to implement a method to track each of your ad types and determine if the cost is justified by the amount of business the ads are bringing in. Many firms assign a code to be printed at the bottom of a newspaper ad or print piece. Another technique is to use a specific telephone number for a type of ad, so all calls that come in on that number are tied to those ads.

Many firms use a telephone log that is maintained by the receptionist or the person on floor duty. When a call comes in, the person taking the call gathers information about where the caller saw the ad and enters the information into the log. These figures will help you ascertain the impact of the current advertising campaign so that you can make appropriate adjustments.

California has a number of laws that govern real estate advertising. Several of these laws are outlined in the Business and Professions Code. Let's look at each of these laws.

  • Any person who advertises as if he or she is a broker and is not licensed is subject a fine and/or imprisonment in the county jail for a term not to exceed six months. If the violator is a corporation, the fine can be more substantial.
  • Any officer or employee who knowingly advertises a false statement concerning any land or subdivision is subject to a fine of up to $1,000 and/or imprisonment in the county jail for up to one year. If the person is a licensee, he or she could also be subject to license suspension or revocation.
  • Any advertisement published by a licensee that offers assistance in filing an application for the purchase or lease of government land must indicate the name of the broker and the state in which he or she is licensed. 

 

Additional Business and Professions Code laws include:

  • Any ad published, circulated or distributed in a newspaper or periodical or by mail pertaining to an activity which requires a real estate license must have a designation that the person placing the ad is performing acts which require a license.
  • No licensee may advertise, print, display, publish, distribute, televise or broadcast any false or misleading statements regarding rates, terms or conditions for making, purchasing or negotiating loans or real property sales contracts or allow anyone else to do so.
  • No licensee may advertise an offer of a gift to any purchaser, borrower or lender as an inducement for making a loan or purchasing a promissory note secured directly by a lien on real property or a real property sales contract.

The California Business and Professions Code law, which addresses mobile home advertising, prohibits a licensee from performing any of the following activities:

  • Advertising a mobile home that is not in an established mobile home park or is being sold without land.
  • Failing to withdraw an advertisement of a mobile home for sale within 48 hours after receiving notice that it has been removed from the market.
  • Advertising or representing a used mobile home as being new.
  • Indicating that a mobile home is capable of traveling on California highways if it does not meet the proper requirements.
  • Advertising that no down payment is required on a mobile home sale when, in fact, a down payment is required.
  • Failing to cause the proper endorsement, dating and delivery of the certificate of ownership or title to the person lawfully entitled to it.

The Real Estate Commissioner has also adopted regulations regarding advertising:

  • When advertising or disseminating information on the Internet about real estate services, a licensee must identify the name of his or her broker. If the person disseminating the information is not licensed in California, there must be a legend on the site which states: "These services are not available to persons located within the State of California."
  • Use of the terms broker, agent, REALTOR®, loan correspondent or the abbreviations bro. or agt. in an ad are deemed sufficient identification to be in compliance with the Business and Professions Code. 

 

Home Ownership

People buy property for a variety of reasons. Some reasons are based on finances; others are psychological. Some people purchase a home to live in; others purchase property for investment purposes; others do both. But whatever the motivation, the housing market offers a wide variety of property types from which to choose.

Some common types of housing accommodations include:

  • Single family residence.
  • Apartment building or complex.
  • Condominium.
  • Cooperative.
  • Mobile or manufactured home.
  • Modular home.

When a person makes a home purchase, he or she becomes eligible for several potential advantages:

  • The value of the property can increase over time, allowing the owner to realize a profit when he or she sells the property. The amount of that profit will depend on a number of factors including the type of property, its location and the economic conditions that prevail in the marketplace when the property is actually sold.
  • As the owner pays down the mortgage, the equity increases. Equity is defined as the paid-off share in the property that the owner actually owns.
  • The owner can take advantage of several income tax deductions.

On the other hand, some potential disadvantages of home ownership also exist:

  • Over time, a home could lose value through functional, economic or social obsolescence.
  • The upkeep and maintenance costs could be substantial.
  • A home is not a "liquid" asset. If the homeowner needed to sell and was fortunate enough to get a quick contract, the transfer of title could take some time. Thirty days is usually the shortest escrow period a homeowner could hope for.
  • Foreclosure due to nonpayment of taxes or inability to make the mortgage payments happens all too frequently these days. 

 

Home Ownership Affordability

With all the housing options available, it would seem that everyone should own or be able to own property. But the desire to own is only one small part of the picture. The most important factor for a prospective property owner is the answer to the following question:

"Can I afford to own property?" 

First-time homebuyers must have access to or be eligible for:

  • Down payment money.
  • Money for closing costs.
  • A mortgage loan.

Note: In determining if a prospective home buyer can afford to purchase a property, many lenders use a formula. A typical formula says that the monthly mortgage payment plus a prorated amount for taxes and insurance should not be more than 28%* of a person's gross (before tax) monthly income.

* This is a common percentage rate for the formula calculation. However, some lenders use other rate guidelines for determining affordability.

In addition to the cost of the actual purchase of the property, a homeowner is responsible for a number of additional expenses associated with that ownership. Some of these expenses include:

  • Utilities.
  • Trash services.
  • Sewer service.
  • Maintenance.
  • Repairs.
  • Real estate taxes.
  • Property insurance.

With the issue of affordability in mind, it's important that your buyers are qualified so that you can avoid showing them property that is beyond their means. A qualified buyer is one who is serious about wanting to make a purchase and has shown some evidence that he or she is financially able to buy a home within a specified price range.

 

Inquiries

A number of advertising methods are available to attract buyers. Most buyer contacts that result from your newspaper advertising, signs and website listings are typically telephone calls.

Many offices have what is called "floor time," which consists of periods of time when agents can take inquiries, usually on a rotational basis. When a licensee is on floor duty, any new caller who does not ask for a specific agent by name becomes that licensee's prospect. Floor time is particularly important for licensees who are trying to build a client base. So when you have floor time, you need to be well prepared for handling those calls.

These first buyer contacts are critical. Poorly handled calls result in wasted advertising dollars. So you want to be sure that you can turn the call into an appointment that will position you for a future sale.

Being prepared for handling calls includes:

  • Knowing your inventory - Keep copies of your own ads and your office ads from the previous week on your desk for easy reference. Know which properties in your company's inventory and the MLS are comparable enough to each of those ads to be good alternate suggestions for the caller. Comparable properties would be those with similar characteristics that are priced at a maximum of 15-20% higher or lower than the advertised property. The list of comparable properties is often called a "switch sheet."
  • Knowing your community - Have a map of the community within easy reach, either on your desk or posted on your office wall. When someone is calling in from a For Sale sign, you can be pretty certain the caller likes that particular style of home and is interested in that particular area.
  • Understanding the responses generated by your different advertising media - Callers who inquire from classified ads and For Sale signs typically buy other properties than the one they initially inquired about. Callers inquiring about properties on the Internet are more targeted on the particular property they're calling about, given the more detailed descriptions and gallery of photos available in that medium.

Using an incoming call register, log all phone calls you take, including the date and time of the call. Follow these guidelines when handling each call from a prospective buyer:

  • Get the caller's name and telephone number.
  • Find out which property the caller is interested in and why.
  • Try to give as little additional information about the property as you can. Repeat what's in the ad, plus just a bit more. The less information you give, the less chance the caller will find a reason to eliminate the property and the better chance you'll have of getting an appointment to show it. 

 

Qualify the Buyer

The process of correlating the buyer's needs and wants with his or her actual financial capacity to buy is called qualifying the buyer. You need to determine what your prospect can afford and then find those properties that fit into that range.

The best way to qualify your buyers is to have them go through a lender's prequalification process. It will save time and energy and potentially save the buyers from embarrassment and disappointment if they can't afford a property they really like.

In addition, it's important for buyers to understand that sellers tend to choose a qualified buyer over an "unknown," especially when they receive multiple offers in a "hot" market.

If your buyers agree to be pre-qualified by a lender, the process can be completed relatively quickly. You can fax a completed prequalification form to the lender, give the pertinent information over the phone or send it via Internet.

If you send the information off before you go to a showing, you will have the response back by the time you return (or in some cases immediately). Once you take this step, the prospects will view themselves more as "buyers" and not just "lookers." Also, when buyers have placed their trust in you to help them complete this step, it's less likely they will seek out the help of another agent.

Some first-time buyers may balk at the idea of dealing with a lender so soon in the process. They may feel it's too much pressure or more commitment than they are ready to make. Rather than alienate them if they refuse the prequalification suggestion, give them some idea of what salary it generally takes to purchase a home in the price range in which they're looking.

As a REALTOR®, you can ask some probing questions to help you determine a buyer's capacity to make a purchase. For example, you could ask:

  • How soon does the buyer want to buy?
  • How much savings have been earmarked for a down payment?
  • Where does the prospect work (if talking with a couple, do they both work and where)?
  • Does the prospect currently rent or own?
  • If a renter, how much is the monthly rent payment?
  • Will the buyer need the equity from a currently-owned home to purchase a new one? 

 

Showing Property

Before you show any properties, you must be well prepared.

First, determine your approach. After selecting the properties you will show, visit each one (if you have not already done so). Map out the best route from one property to another, keeping in mind the location of schools, parks, shopping malls and other neighborhood features that may interest your buyers.

Make notes about what specific features of each property you want to emphasize when you show it. Some agents like to drive the prospects into the home's driveway to create the sense of "coming home." Other agents like to park across the street from the home to demonstrate the "curb appeal."

Note: If after seeing the exterior of the home the prospects decide that they would rather not view it, drive off and call the owners immediately to let them know you will not be doing the showing.

Many agents prefer to show no more than 3 or 4 properties at a time. This cuts down on confusion for the buyers and allows the agent to get specific feedback on the buyers' likes and dislikes of each of the viewed homes.

However, there may be circumstances that dictate the need to show more than just 3 or 4 properties. For example, if the prospects have flown in from out of town to view property, you'll need to show as many homes as possible in the time you have. You can minimize confusion by giving the buyers fliers with photos of each property you show. Also it helps to schedule breaks between the showings of every 3 to 4 properties. Use this time to have a cup of coffee and get the buyers' feedback on the homes they just viewed while it's still fresh in their minds

Plan the route you take from one showing to another. It's just as important to sell the neighborhood as it is to sell the home. If feasible, drive by those neighborhood features that you know will interest the buyers.

Make positive comments about the neighborhood, attempting to educate the buyers about its unique characteristics. Ask the buyers questions to help sell the neighborhood's features. For example, if the parents told you that their son Johnny is avid in sports, ask Johnny what sports he plays as you drive by the new sports complex.

Sometimes it's helpful to point out recent sales of similarly-priced properties in the neighborhood. It will increase the buyers' view of you as a successful agent and help solidify their price range. 

 

In the chapter on disclosures, we discussed the Truth in Lending Act and Regulation Z. We outlined the disclosures creditors are required to furnish to consumers before entering into a loan contract.

Truth in Lending also prohibits what's called bait-and-switch advertising. Bait-and-switch is advertising property or credit terms for a property that an agent doesn't intend to sell or that is actually not available just to attract buyers for other properties the agent has for sale. This type of advertising is a federal offense.

As you might remember, we covered a great deal about Fair Housing Law in a previous unit. We saw that the Civil Rights Act of 1968 prohibits housing discrimination. In addition, it prohibits discriminatory advertising. Discriminatory advertising is advertising that indicates a preference, limitation or discrimination based on race, color, religion, handicap, sex, familial status or national origin.

It can be a challenge to create advertising that does not use some discriminatory words or phrases. Words that are not generally recognized as being discriminatory can be; so it's important to become familiar with those phrases that you should avoid.

In 1995, the Department of Housing and Urban Development (HUD), which enforces fair housing laws, sent some guidelines to its staff to help them when investigating allegations of discrimination. The memo addressed some words and phrases which are not acceptable to use and others which, if used, would not constitute a violation or be considered discriminatory.

The HUD memo addressed only a small set of possibilities, but it seems to indicate that the staff should not move complaints forward if the ads appeared reasonable and did not favor or disfavor a protected group.

 

Once inside the home, point out those features that are important to the buyers and de-emphasize those that are not important. Remember, very few homes have all the features a buyer wants.

If the buyers have brought their children along, involve them in the showing by asking questions like, "Which bedroom would be yours, Sally?" If the buyers have brought friends or extended family members along, treat them as allies in the sales process.

Don't "state the obvious" with comments like, "This is the kitchen." Instead, make comments and ask questions that will sell the features of the kitchen. For example, point out that the kitchen has 27 spacious cabinets and a large pantry or ask a question like, "Would you use these slide-out drawers for spices or kitchen utensils?"

Selling the home by asking who, what, where or how questions for each room and feature helps the buyers see themselves in the home.

A helpful technique when showing property is to invite comparisons from one property to another. For example, ask questions such as:

  • "Did you like the workshop in the garage of the last home or does this home's basement workshop suit you better?"
  • "Did you like the double vanity in the last home's master bath or would you prefer having the whirlpool this home offers?"

These kinds of questions help surface what is really important to the buyers and get them prepared for making that big decision.

Other things to keep in mind when showing property include:

  • Remember that the features you like about a property may not be the same as what the buyers like.
  • Buyers usually follow the agent through the home; so plan how you will proceed through the rooms.
  • Try to address any objections at the time the buyers raise them.
  • Stand on the side of small rooms to help them look bigger.
  • Emphasize important features, but don't oversell them or you could be minimizing the attraction of alternative properties.
  • Don't rush your buyers; let them take their time. Generally, the longer buyers stay at a home, the more interest they have in it.
  • Begin and end your tour in the room with the most desirable feature for your buyers. This is a good place to close the sale. 

 

Selling Strategies

There is a wealth of information about sales techniques in the marketplace - books, audiotapes and CDs, seminars and courses. Most resources describe in great detail a set of selling steps. Each author puts a little different spin on the basics to try to make it his or her own.

Regardless of what method you use, there are some important aspects of selling that are embedded in every approach. Selling always involves and depends on:

  • Knowing your product.
  • Communicating information effectively.
  • Establishing rapport with the buyer.
  • Identifying and handling objections.
  • Asking for the sale.

It can't be stressed enough just how important it is to know everything you can about the available inventory. This inventory includes not only your listings and your firm's listings, but also comparable properties in the Multiple Listing Service.

Not only must you know the features of the properties that may be of interest to a particular buyer, but you also need to know information about:

  • The neighborhood.
  • Recreational opportunities.
  • Schools.
  • Community activities.

In most situations we communicate best with those persons who share our interests and with whom we have similar backgrounds and goals. That's why we get along so well with our friends!

But agents deal with a wide variety of prospects, and making an instant connection with a prospect happens only occasionally. When dealing with prospects, it's important to:

  • Make sure you understand clearly what message you want to get across.
  • Get your facts straight and provide clear information to the prospects.
  • Avoid using confusing jargon and terms.
  • Use visual aids - graphs, charts, photos - to help communicate the message. 

 

Establishing a Rapport

Get to know your prospects. Buying a home is a very emotional process; so it's critical for you to understand the buyers' motivations.

The best way to learn about your buyers is to ask open-ended questions, rather than closed-ended (yes or no) questions. An open-ended question gets buyers talking about their needs, wants, and desires and gives you the opportunity to collect critical information.

For example, ask, "What features are you looking for in your next kitchen?" rather than "Do you want an eat-in kitchen?"

Listen carefully to everything your prospects say and repeat some specifics back at appropriate times so that they know you have heard what they said.

There are several things that can be helpful in establishing rapport with your buyers. Here are some tips to follow:

  • Be open.
  • Address the buyers by name.
  • Look buyers in the eye when speaking to them.
  • Don't be judgmental.
  • Stay upbeat and use humor occasionally.
  • Be patient and allow the buyers time to think and respond to questions.
  • Always be respectful.
  • Be sensitive to the buyers' mood.
  • Know when to be quiet and listen.
  • Don't project your likes and dislikes onto the buyers.
  • Relax and be yourself. 

 

Why Buyers Buy

Everything you do with your prospects is in preparation for getting them to make an offer. So it's important to understand why people buy property. There are a number of reasons:

  • A home provides shelter and satisfies the need for survival.
  • A home provides security and offers the owner a place to invite and entertain family and friends.
  • Owners want to provide desirable opportunities for their families in the form of good schools, recreation and convenient shopping.
  • Buyers want their homes to be in safe areas that are environmentally "healthy."
  • Many buyers see a home as an investment that will appreciate over time and give them some future financial rewards.
  • Home ownership provides certain tax advantages that appeal to buyers.

Your buyers will look at all of the factual information about a property - number of rooms, size of lot, special amenities, etc. - and even though a property may appear to meet all of their stated needs, the decision to buy will most likely be based on their emotional needs. Facts will make buyers think that a property is a good fit for them, but emotion is what will motivate them to buy.

Emotional reasons buyers purchase property include such things as safety, security, pride, comfort, status and trust in the agent representing them.

If you watch carefully and ask probing questions when showing homes to your buyers, you can observe what emotional needs the buyers have and be able to choose properties that will fit those emotional needs.

Picking Up on Buying Signals

As you get more familiar with your buyers and their emotional needs, you'll start to pick up on signals the buyers send that indicate they may be ready to buy. These signals, along with some examples, include:

  • Actions - Buyers request a second showing on a home or want to take pictures or measurements before they leave.
  • Words - A buyer asks about a closing date or wants details on closing costs. Or the buyers start talking about how their furniture will fit into the rooms.
  • Body language - Buyers signals each other with a smile or become wide-eyed when seeing a special feature. Or they move closer to you so they can get a better view.

When you notice a signal, take advantage of it and ask for the sale. 

 

Handling Objections

When working with your buyers, be ready to handle any objections they may raise about properties.

  • View objections as the buyers' attempt to gain more information about the property or a specific feature. Objections can help you determine what the buyers are thinking.
  • Don't discount or dismiss the objection. Give it the consideration it needs before formulating an answer.
  • Delve deeper into the objection by asking more questions. For example, if a buyer says the price of a property is too high, ask why and then ask what the buyer thinks would be a fair price. If you determine it's reasonable, you could suggest that the buyer make an offer at that price.
  • Use the "yes-but" technique to turn a negative into a positive. For example, if a buyer objects to a property being too close to a major highway, you could say, "Yes, but just think how much more quickly you can get to work."

Asking for the Sale

Asking for the sale is another term for closing the sale. Closing the sale means getting the buyers to make an offer. If you have worked with your buyers consistently and effectively, closing the sale should take place smoothly and naturally. Don't ever try to pressure your prospects into signing an offer before they are ready or it will mean problems down the road.

Once you have identified a property that your buyers seem excited about and you have addressed any objections they may have had, you can attempt to close the sale. Focus your attention on talking about the things the buyers like or that they feel are important.  

 

Closing Techniques

There are a number of closing techniques that you can use when the time is right. Here are some common ones:

  • Assumptive Close.
  • Alternative Close.
  • Bonus Close.
  • Ownership Close.
  • Standing-Room-Only Close.

Assumptive close means acting as if the person has already made the decision to buy. This technique is a natural when a buyer shows one of those buying signals we talked about earlier. For example, if the buyer says, "Could we close by March 1?" your reply would be, "Would you like to close by March 1?"

The alternative close works by offering more than one alternative to the prospects and having them choose. For example, you could pose this question: "If the seller is willing to replace the patio door, would you prefer a sliding door or an atrium style?"

The bonus close offers an inducement for the sale. For example, "If you buy now, the seller is willing to leave all of the appliances, including the washer and dryer." Note: Use this close carefully and always be sure to have the seller's approval beforehand.

The ownership close is similar to the assumptive close, except that you act as if they already own it and you talk about how it will fit into their lives. For example: "So where will you set up all your power tools?" or "Which one of the children gets the basement bedroom with the private entrance?"

The standing-room-only close plays on the prospects' fears of losing a property that they may not have an opportunity to buy again. A good example of this is the situation of the last home in a development being for sale. Once this home is sold there may not be any more being built by that developer for that price. Note: Use this technique only if what you say is true. People tend to be distrusting of "scare" tactics, especially if they have been shown to be untrue in the past. 

 

Closing the Sale

Regardless of which closing technique you use, you need to ask for the sale. Many buyers will buy if the agent just asks them. As you gain more experience in getting offers, it will become easier for you to know the appropriate time to ask.

Not every closing technique will work with every buyer. If you try a particular closing and it doesn't work, take a step back and talk about the benefits of the property again. Try to schedule another showing of the property and then try another closing technique.

Sometimes all a buyer needs is a little more time to make the decision; so don't assume that if your first attempt at closing didn't work, you've failed. Regroup and try again!

Writing the Offer

Once your prospects have agreed to make an offer, it's time to do the paperwork. If you gave the prospects a copy of a blank form at your initial meeting, the process of filling things out should go smoothly.

Many California agents use CAR's purchase contract form titled California Residential Purchase Agreement and Joint Escrow Instructions. Because this form is so widely used, we'll take the time to go over each of its sections.

Click on this link to print a copy of the form.
California Residential Purchase Agreement*

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