Real Estate

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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? 

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. 

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*