Chapter 1: Introduction to Real Estate Summary
Real estate is affected by:
If the economy picks up, sales increase. If it slows, sales decrease.
A Multiple Listing Service (MLS) is an organization of member brokers who share listing information with one another.
Real Estate Property: Residential, Industrial, Commercial, Agricultural, Special purpose, Recreational and Investment property.
Specialization areas: Type of property, Clients, Geography, Business Type, Transactions, Auction Sales and Mortgage loans.
Keep in mind upon choosing a broker:
Broker-Salesperson Relationships
A salesperson is licensed to perform transactions on behalf of the licensed broker and may receive compensation for performed activities ONLY from the employing broker. The broker is responsible for the licensee's professional actions.
An employee works under the supervision and control of the broker. An independent contractor is hired to perform certain acts, but the broker cannot control how the salesperson performs those acts.
Many brokers require that licensees carry errors and omissions/automobile liability insurances.
Licensee’s written employment agreement must be dated and signed and should clearly:
Planning and Setting Goals:
Devote time to daily activities such as returning phone calls, developing new leads, reviewing new listings, calling potential clients ("National Do Not Call Registry" guidelines), preparing for listing presentations, etc.
Activities which will lead to success as a salesperson:
National Association of REALTORS® (NAR) is the largest and most prestigious real estate organization in the world. NAR requires its members to take a mandatory ethics course every four years.
National Association of Real Estate Brokers (NAREB) is the oldest and largest minority trade association in the United States. Members have the designation of "realtist." A "realtist" must belong to both the local board and the national organization.
National Association of Hispanic Real Estate Professionals (NAHREP) is primarily made up of Hispanic members who meet and work toward real estate goals that are beneficial to the Hispanic population.
Asian Real Estate Association of America (AREAA) is committed to improving success and business opportunities for real estate licensees who serve the Asian American community.
California Association of REALTORS® (CAR) (state division of NAR) allows members to conduct their individual businesses successfully and promotes the preservation of real property rights. CAR offers many seminars and educational opportunities to its members.
Any licensee who is NOT an association member will be referred to simply as a broker or salesperson.
Chapter 2: Ethics, Fair Housing and Trust Accounts Summary
Ethics in Real Estate
Good ethical practices have to do with trustworthiness, honesty, and competence.
Duties to clients outlined in the Code:
Fair Housing Laws
Americans with Disabilities Act (ADA) mandates that persons with disabilities have equal access to jobs, public accommodations, government services, public transportation and telecommunications.
The protected classes of the Federal Fair Housing Act are race; religion; color; national origin; sex; handicap and familial status.
Fair Housing Law prohibits:
Brokers are encouraged to display the Equal Housing Opportunity poster in their offices.
The Fair Housing laws exemptions:
Fair Housing Enforcement
California Fair Housing
Trust Funds
All funds deposited into a trust account must be maintained in that account until the broker disburses those funds according to the instructions of the person who is entitled to receive the funds.
Commingling: if a broker deposits the funds of others in a business or personal account or holds the funds without authorization.
Rules for handling trust funds:
Chapter 3: Agency and Other Mandatory Disclosures Summary
Agency
The word agency defines the basic relationship between a broker and the person represented in a transaction.
In California an agent is defined as a person licensed as a real estate broker. Licensees who work under the supervision of the broker are designated as associate licensees.
An agency relationship is created when a person (principal) delegates to another person (agent) the right to act on his or her behalf in business transactions with third parties.
If the principal in the relationship is the seller, then the broker is the seller's agent. If the principal is the buyer, the broker) is the buyer's agent.
Listing agent - This is the licensee who lists the seller's property. Selling agent - This is the licensee who brings the buyer to complete the transaction.
An agency relationship is based on authorization and mutual consent, not on compensation.
Fiduciary Duties
1. Care
The law expects an agent to do his or her job with care, skill, and diligence:
If the agent represents the seller:
If the agent represents the buyer:
An agent is liable to the principal for any loss that results from carelessness or negligence.
2. Obedience
Requires that the agent act in good faith and obey the principal's directions as outlined in the contract, as long as they are legal.
3. Accounting
An agent must be able to account for all monies, documents and other property he or she receives from the principal; keeping copies of the trust account records for three years.
4. Loyalty
Requires the agent to place the client's interests above those of all others. Confidentiality remains even after a relationship has been terminated.
The agent must disclose material facts about the property.
5. Disclosure
An agent is bound to inform the client of ALL material facts that might affect the client's interests in the transaction.
Single Agency: the agent can represent only one party in a single transaction, exclusively.
Dual agency: representing both parties in the same transaction - the seller and the buyer.
California law allows dual agency if the buyer and seller are informed of the situation and give their written consent.
Agency Disclosure
Licensees use California's Disclosure Regarding Real Estate Agency Relationships form with their clients.
When to disclose:
Any person who is selling a one-to-four-unit property must provide the buyer with a written Real Estate Transfer Disclosure Statement, which describes the condition of the property in detail. The seller must complete it, sign it and provide it to the buyer
If the disclosure is delivered after the execution of the offer to purchase, the buyer has the right to cancel the offer within three days.
Agent's Inspection Disclosure
Environment Hazards
Military Ordinance: if residential property is located within one mile of a former military training site, the seller must inform the potential buyer in writing that the ordinance site may contain ammunition or explosives.
Sex Offender Database: every sales contract must contain a notice with information about sex offenders registered under Megan's Law.
Information not required to be disclosed:
California Disclosures
Right to Rescind
Purchasers in two types of subdivisions have an unqualified right of rescission:
Financing Disclosures
Chapter 4: Prospecting Summary
Prospecting Methods
When you contact owners of expired listings, ask first if they have relisted the property. If they have not, then you can explain how you believe you can successfully sell the property.
Using the Newspaper to Prospect
Using the Internet
Be sure to have your site professionally designed. Sections that would interest potential sellers include:
Sections that would interest buyers include:
Other Sources for Finding Buyers and Sellers: Local Chamber of Commerce, Builders, Open Houses, Friends, Neighbors, Current Sellers and Former Buyers.
Community involvement: the group gets a helping hand for their activities and you get the satisfaction of helping AND the potential for future clients (Churches, Boy/Girl Scouts, The school PTA, Neighborhood associations, Alumni groups).
Good management systems save time and ensure that customers and clients don't fall through the cracks.
Farming is choosing to prospect in an area that is of particular interest to you. A geographical farm can be a neighborhood, a subdivision or an area where the homes share some common characteristics.
Developing a Prospecting Plan
Chapter 5: Listing Presentations Summary
Pricing a Property methods:
The Estimated Seller's Proceeds form estimates the amount a seller will net from the sale of the property.
The Listing Presentation Manual is a support piece to use as reinforcement for what you are saying to the prospective client.
For sellers, the Listing Presentation Manual must address:
For buyers:
Chapter 6: Listing Contracts Summary
Listing agreement (must be in writing to be enforceable) creates an agency relationship authorizing a broker to serve as the agent for a principal in a real estate transaction.
Bilateral employment contracts - promise to pay a commission in exchange for the broker's promise to locate a "ready, willing and able" buyer for the seller or a suitable property for the buyer.
California Listing Agreement
California law requires that the sellers receive a copy of the listing agreement at the time the signatures are obtained. A buyer has no need to ever see this agreement.
Paragraph 3 - Listing Price and Terms - unless the terms are specified, a seller is not required to pay a commission when refusing a full price offer unless the offer is all cash.
Paragraph 4 - Compensation to Broker
Paragraph 7 - Seller Representations - awareness of any legal, financial or physical reasons that would affect the seller's ability to sell the property.
Paragraph 11 - Security and Insurance - the broker is not responsible for loss or damage to the property, even with a lockbox present.
Paragraph 12 - Keysafe/Lockbox - people using the lockbox are not insured against theft, damage, vandalism, etc. attributed to lockbox use.
Paragraph 20 - Entire Contract - anything that is not written into this agreement is not part of the agreement.
Listing Packet Forms
Chapter 7: Servicing Listing
The primary criticism sellers have about their agents is lack of communication.
Homeowner Tips
Activity Reports
Showings
Advertising Plan
Preparing for Offers
Seller Disclosures (completed within the first week after obtaining the listing):
Other important information:
Traditional Marketing Tools: For Sale Sign, Rider Strips, Lockbox, Photos, Talking House, Classified Ads and Flyers.
E-Tools: Multiple Listing Service (MLS), Your and Other Internet Sites, Virtual Tours (with permission from your sellers in writing) and Video Tours.
Home Tours (Office/MLS Tours)
Ancillary Tools
Have a client-specific marketing plan for each of your listings. Include some standard tasks, but also some activities that are customized to the particular sellers.
If you make a change to the price of a listing, use a Modification of Terms form.
Extending the listing – review with the sellers everything you have done to market their property and let them know what other marketing plans or ideas you may have.
Chapter 8: Advertising Summary
Institutional advertising attempts to establish a positive image of the company, its services and its reputation in the minds of the public - aims at increasing sales by informing the public of the company's capabilities.
Product advertising is directed toward the particular properties a company has for sale - one firm's ads are in direct competition with the ads of other firms.
Ads must:
To avoid confusion with their advertising plan, many firms choose to have a single person in the office in charge of:
Advertising Laws:
Advertising Media
The purpose of an advertising medium is to reach the largest number of probable prospects, NOT necessarily the largest number of people.
Personal Advertising - Name Tag, Business Card or Car Signs.
Evaluating your advertising - you must be able to tell which advertising methods are producing sales for you and your company.
Chapter 9: Working with Buyers Summary
Home Ownership - Advantages
Home Ownership - Disadvantages
Home Ownership - Affordability
Telephone Inquiries
Floor Time: periods when agents can take inquiries. When a licensee is on floor duty, any new caller who does not ask for a specific agent by name becomes that licensee's prospect. Important for licensees who are trying to build a client base.
The less information you give, the less chance the caller will find a reason to eliminate the property and the better chance you'll have of getting an appointment to show it. Poorly handled calls result in wasted advertising dollars.
Preparing for Inquiry Calls:
Guidelines when handling each call from a prospective buyer:
Setting the Meeting - ask the prospects to meet you at your office. It gives you the advantages of having office staff available and access to your computer and the MLS listings to research alternative listings.
Problem Calls
Keeping the Prospect - suggest that he or she go through the ads and circle all other properties of interest. Ask the prospect to bring the paper to your meeting so that you can look up information on all the circled properties.
The Buyer Meeting
Showing Property
Determine your approach. Know what specific features of each property you want to emphasize when you show it.
Conducting the showing
Professional courtesy tips when showing property:
Once you've completed the first round of home showings, take the buyers back to your office if you can.
If they are serious about buying, ask them to contact you about homes they've seen in ads or at open houses. If they are approached by another broker, they should have the broker call you.
Chapter 10: Writing the Offer and Closing the Sale Summary
Selling Strategies
Closing Techniques
Regardless of which closing technique you use, you need to ask for the sale.
Writing the Offer - California Residential Purchase Agreement and Joint Escrow Instructions.
Paragraph 2 - Finance Terms
Paragraph 3 - Closing and Occupancy
Paragraph 7 - Conditions Affecting Property
Paragraph 9 - Buyer's Investigation of Property and Matters Affecting Property
Paragraph 12 - Title and Vesting
Paragraph 14 - Time Periods; Removal of Contingencies; Cancellation Rights
Paragraph 15 - Final Verification of Condition
Paragraph 16 - Liquidated Damages
Paragraph 17 - Dispute Resolution
Paragraph 28 - Joint Escrow Instructions to the Escrow Holder
Paragraph 30 - Terms and Conditions of Offer
Paragraph 31 - Expiration of Offer
Paragraph 32 - Broker Compensation from Seller
Paragraph 33 - Acceptance of Offer
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:
Additional documentation to support the offer:
Handling Multiple Offers
Meeting with 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:
Important tips to follow when drafting a counteroffer:
Delivering the Counteroffer
Accepting the Offer
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.
Chapter 12: Financing: Loan Types Summary
Borrower Fees
Repayment Plans
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.
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.
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.
Other Common Financing Types
Other Types of Financing
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.
Primary Lenders
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:
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.
2. Ginnie Mae
Government National Mortgage Association (GNMA) is a division of HUD.
3. Freddie Mac
Federal Home Loan Mortgage Corporation (FHLMC) is a federal agency.
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:
Making Payments on the Loan - Responsibilities:
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:
If an ad includes any of the above items, all of the following must be disclosed:
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
The Escrow Process
Document most often used is CAR's Residential Purchase Agreement and Joint Escrow Instructions.
Title Insurance - a seller is required to deliver a marketable title at closing.
Title insurance insures the lender (and the property owner for an additional fee). The title insurance company:
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:
Items not included in a standard CLTA policy include:
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:
Closing and Settlement Charges
RESPA details the costs that the buyer and seller will pay at closing.
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.
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
Seller's Side
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:
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:
Why become an Assistant
Getting an Assistant Position – your resume is critical. It should include:
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:
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:
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:
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
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:
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
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:
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.
Benefits to Investing
Investment Risks
Financing Investment Properties
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:
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
Understanding characteristics of the rental market.
Chapter 18: Business Sale, Property Management and Leasing Summary
Sale of a business
According to California law, any type of business that is for sale is considered a business opportunity.
Components:
Other components of a business opportunity:
Uniform Commercial Code (UCC) - body of law that standardizes a number of business practices. It requires the buyer to:
There are some unique problems involved in selling a business, so a broker would be wise to seek the counsel of an attorney or other experienced business counselor.
Property management
Property management deals with the leasing, managing, marketing and maintenance of property belonging to others. It includes apartments, condominiums, industrial complexes, etc.
Institute of Real Estate Management (IREM)
Certified Property Manager© (CPM©) for individuals who meet a certain level of education and experience requirements.
Accredited Residential Manager© (ARM©) for resident managers who have a lesser degree of training and on-site experience.
Accredited Management Organization© (AMO©) is reserved for companies who meet certain IREM guidelines and employ at least one CPM©.
Types of property management
Property management duties
Dual responsibility to the owner and to the tenants of a property.
Specific property management duties:
Additional duties outlined by the DRE include the following:
Setting up rent schedules
Rent levels are determined on the basis of scarcity and comparability of area values. When establishing a rental schedule, a property manager must make a thorough analysis of comparable properties in the neighborhood, which includes:
Marketing methods include billboard advertising, brochures and fliers, business cards, ads, etc.
Maintenances and purchasing
Establish and maintain detailed policies for a building's maintenance and for purchasing supplies and services:
Ongoing preventive maintenance - to reduce the need for large maintenance expenditures.
Dealing with tenants - a property manager should set policies which will give tenants the most benefits that they can get while still ensuring a good return to the owner.
The Property Manager is responsible for the instruction and supervision of each employee. A property manager should provide the owner with monthly account statements and a detailed annual statement.
Property vacancies - the space may be vacant because:
Property management fees can be a flat monthly amount, a percentage of the gross rents collected or a combination of the two. A property manager can receive additional compensation for renewing leases and for supervising major repairs or alterations.
The management contract
A property manager should have a written contract with the property owner whose property he or she will be managing. The agreement outlines the responsibilities of both parties including:
Property management records
A property manager should have a working knowledge of accounting procedures and cost accounting. The broker will need to keep complex trust account records and make regular reports to the owner.
Small offices- require simple records
Larger offices -usually require more elaborate record-keeping methods.
Leasehold estates
Types of leases
Net Lease: depending on how much additional responsibility the tenant assumes, the lease can be a:
Gross Lease: the tenant pays a fixed rent and the owner pays the taxes, insurance and other normal ownership expenses.
Percentage Lease: a lease whose rental is based on a percentage of the monthly or annual gross sales made on the site.
Graduated Lease: the rent payments start at a fixed amount but increase as the lease term matures.
Residential leases
Residential lease applications require a significant amount of financial data on a prospect. A manager should:
A manager should collect the same type of information on ALL prospective tenants to avoid the potential of being in violation of the fair housing laws.
Landlord Responsibilities
The tenant expects the landlord (via the property manager) to:
If a landlord fails to correct a problem that is within his or her responsibility, a tenant may take any of the following actions:
The landlord must retain some right of entry into the premises. The landlord may enter a premise only when one of the following conditions exists:
Tenant responsibilities
A tenant also owes these responsibilities to the landlord:
Lease termination
The landlord may terminate a lease by giving a 30-day notice in writing to the tenant or a 60-day notice to a tenant who has lived in the unit for longer than one year.
It is against the law for the landlord or property manager to:
Any landlord who violates this law can be liable to the tenant in a civil action for either actual damages to the tenant or up to $100 per day for each day or part of a day that the landlord remains in violation of the law.
Evictions
A landlord can evict a tenant and bring an unlawful detainer action against a tenant for failure to pay rent, violation of the lease agreement or failure to leave after receiving the proper written notice.
The landlord must follow this procedure:
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:
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.
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:
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:
Other areas of specialization include:
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:
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:
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.
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 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:
The Fair Employment and Housing Act (also known as the Rumford Fair Housing Act) prohibits:
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:
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:
More prohibited activities include the following:
More prohibited activities include the following:
More prohibited activities include the following:
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:
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:
The California Code also outlines these trust fund rules:
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:
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:
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:
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:
If the agent represents the buyer, exercising care and skill includes:
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:
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:
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:
An agent for the buyer has a duty to disclose such things as:
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:
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.
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.
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:
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:
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:
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:
Other important items to inspect for include:
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 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:
TILA/RESPA Integrated Disclosure Rule (TRID)
TRID requires that borrowers receive various disclosures regarding the proposed loan transaction.
RESPA also requires that borrowers receive disclosures about business relationships that may exist among lenders/creditors and settlement service providers.
Truth in Lending Act and Regulation Z
The Truth in Lending Act requires a creditor to furnish certain disclosures to the consumer before making a contract for a loan.
Regulation Z requires that creditors make certain disclosures for real property secured loans. The disclosures include:
Truth in Lending allows the consumer the right to rescind the contract until midnight of the third business day following the completion of the loan.
Notice of Transfer of Loan Servicing
If a loan is secured by a one-to-four-unit property, the lender must notify the borrower when the loan collection is transferred to another entity.
Notice of Adverse Action - (Equal Credit Opportunity Act)
A lender or creditor who denies an application for credit must provide the applicant with a statement of reasons or a written notification of the applicant's right to obtain such a statement, within 30 days after receiving the completed loan application.
Housing Financial Discrimination Act (Holden Act)
At the time of the loan application, lenders must notify all prospective borrowers of their rights under the Holden Act and its prohibitions against discriminatory practices by lenders.
What do we mean by prospecting?
Prospecting is actively looking for and finding prospects - those owners who may be interested in selling their property or potential buyers who are interested in purchasing property.
Prospecting is critical to your success in the real estate business; so it's an ongoing task. Therefore, it's important to develop strategies that will work for you in your efforts to find and interest potential customers and clients.
A number of prospecting techniques exist. Some will feel comfortable to you from the start; others will take some "getting used to"; still others you may try out and eventually decide to drop from your repertoire. Whatever the case, realize that you will need a positive attitude and a variety of techniques at your disposal to keep a steady stream of prospects available.
Knocking on doors in a neighborhood can be a beneficial way to obtain good leads. If you use a friendly, non-threatening approach, many homeowners will be willing to provide the information you're looking for.
Tips for successful face contact include:
Other tips include:
Note: Some communities prohibit door-to-door solicitation; so be sure to check if it's allowed or if it requires a permit.
Direct mail is an important tool in obtaining leads. But direct mail campaigns must be carefully planned, since there is no face or voice contact with the recipients prior to their receiving the piece.
Here are some tips for a successful mail campaign:
More tips:
Expired listings are a good source of potential listings. When you contact owners of expired listings, ask first if they have re-listed the property. If they have not, then you can provide them with information about yourself and your company and explain how you believe you can successfully sell the property.
There are several reasons why properties do not sell.
You can assess why you think a property did not sell, decide on the approach you would take and present that approach to the owners. If your approach sounds good, the owners will be more likely to give you the listing.
Newspapers are a good source of prospective customers and there is a wide variety of papers to choose from. Many newspaper publishers in large cities have smaller "regional" weekly editions of their papers in addition to the regular daily editions.
Many communities have "ad sheet" papers full of display and classified advertising, which range in size from a few pages to booklets of 40 pages or more.
Newspapers are published for small groups of people like condominium owners or owners of manufactured or mobile homes. Ethnic groups have their own newspapers.
All of these publications are sources to help you develop leads.
So how can you use the newspapers to generate leads? Look for things like:
Rental Ads
Oftentimes single-family homes are advertised for rent when the owner has tried to sell the home - with or without an agent - and the effort was unsuccessful.
We all know that most people cannot afford to own more than one residence unless the ownership is for investment purposes. So many owners are forced to rent in order to get income to pay the mortgage on the property.
Rental Wanted ads are also a good source of leads. People who are looking to rent can often be shown how easy it would be for them to purchase instead. This is particularly true if the potential renter is a "transferee" from another location who was a former homeowner. Most former owners make unhappy renters.
Special announcements in the features section of the newspaper are good places to find leads.
Wedding Announcements
More and more frequently, young couples just starting out are choosing to buy rather than rent. Also, if either or both of the partners were living at home before the marriage, there might be an opportunity to discover if the parents are ready to "downsize."
If the newlywed couple is an older couple who owned separate homes, not only is there an opportunity for a new purchase as a couple, but there may also be an opportunity for the sale of either or both of the "pre-wedding" homes.
Birth Announcements
Is this the first child of a couple currently living in an apartment? Is it a second or third child of a current homeowner? If so, maybe the family needs a bigger home.
Promotions and Job Transfers
The kind of promotion that would generate a newspaper notice usually indicates a substantial salary increase and maybe the desire for a newer home that reflects the change in status.
A job transfer could signal the need to sell a current property.
Legal Notices
Most newspapers have a section containing notices of legal actions. Some communities even have a separate paper dedicated to legal notices only.
So what kinds of legal notices could potentially provide leads?
Other legal notices that could generate leads include:
Web Sites
Having your own Internet site has almost become a necessity in the real estate world. You should have your web address printed on all your business cards, and you can use it in your advertising and any direct mail marketing you do.
Be sure to have your site professionally designed. This is not the place to cut corners. Websites are becoming more sophisticated every day. You need to browse several sites to see what other real estate companies are offering and to get a feel for how to make your site better than the competition.
Using your site to "sell yourself" can help generate new leads for you. It's important to have pages on your site that contain information that will interest both buyers and sellers.
Sections that would interest potential sellers include things like:
Developing a Prospecting Plan
Since prospecting is so critical to your success, it's not something that should be a "hit or miss" proposition. While prospecting cannot guarantee sales, it can help you to identify the needs in the marketplace and provide you with a steady stream of potential clients.
When we discussed setting goals in an earlier chapter, we talked about how important it is to write down what you plan to accomplish so that you can monitor your progress and make changes as needed.
The same is true for prospecting. Just as you set career goals for yourself, set prospecting goals to help keep you on track. A good prospecting plan will list all the activities you plan to do to develop and maintain leads.
Here are some examples of tasks you can put in your prospecting plan:
This is just a short list of examples. Your list could and should be much longer. As you work your plan, you can evaluate the effectiveness of your activities. Drop the ones that don't work and expand the ones that do.
The important thing is to keep track of your results so that you can become more effective at attracting both sellers and buyers.
Pricing a Property
It is up to a seller to decide what he or she wants to set as the asking price for his or her property. However, since most sellers don't have all the information they would need to make an informed decision, they usually depend on the expertise of the agent to help them arrive at a reasonable price.
The two common methods that can help determine a reasonable asking price for a property are:
In either case, a seller is trying to find out the property's fair market value - which is the most probable price a property should bring in an open and competitive market.
Competitive Market Analysis
When doing a competitive market analysis, an agent does a comparison of properties that are similar to the seller's property in location, size, style, age and amenities. The agent looks at:
Most of the data needed to do a thorough analysis can be downloaded from a multiple listing service very quickly. Some services even include pictures of the subject properties in the download. You can obtain additional information from company records, other brokers, county records, and appraisers and title companies -- although compiling the data from those sources will take more time than an MLS download.
When examining current for-sale properties, be sure to choose properties that are as close to the subject property in size, amenities, etc. as possible, so that the owners will be more likely to accept the data and your suggestions for a realistic asking price.
Looking at properties that are currently for sale gives the sellers an idea of what the competition is asking for their homes. It gives them a clear picture of the asking prices buyers are seeing for similar homes. However, it's important for the owners to realize that asking price is not always a good indicator of the actual selling price of a property. Often properties currently for sale have inflated asking prices that few buyers would be inclined to pay.
This list of properties should include similar properties that have sold within the past three to six months. The more recent the sale, the more reliable the data.
You should include a minimum of three properties in this category. If you don't have enough data, you'll have to increase your time frame. But keep in mind that the further back you go, the less reliable the data becomes and the more "adjusting" you'll have to do to account for changes in the market over that time period.
This list shows the actual sales price for the property. This data should have the most impact on what the subject property is realistically worth in the current market.
Sellers will welcome an estimate of what they will net from the sale of their home. That will keep them from having any unexpected surprises.
You should prepare the estimate using the listing price as the estimated selling price. Then do an estimate of all the costs the owners are apt to incur. It's better to overestimate the costs just a bit, so that if there ARE any surprises, they will be pleasant ones.
The California Association of REALTORS® has a form that is an excellent one to use for this task. It's called the Estimated Seller's Proceeds form. It's easy for a seller to understand and very complete.
Note: If the seller changes the listing price or an offer comes in that is different from the listing price, you will need to complete a new Estimated Seller's Proceeds form.
When trying to obtain a listing agreement, either from an owner to sell a property or from a buyer to act as his or her agent, you are in reality participating in an interview to sell the skills and expertise of yourself and your company.
Having a listing presentation manual is a valuable tool when conducting such interviews. It will make your presentation to the potential client look much more professional, as well as help you process through your presentation effectively.
Note: There are software programs available that can help with the preparation of a presentation manual. You can get more information at the Realty Tools, Inc. website - http://www.realtytools.com.
The manual you prepare for sellers will be different from your manual for buyers, but they may have some of the same pages of information. Three-ring binders containing documents housed in sheet protectors make nice manuals which can be updated easily as needed.
Each of your manuals should contain sections that address:
Note: A presentation manual is NOT a substitute for a good verbal presentation. It's a support piece to use as reinforcement for what you are saying to the prospective client.
Once you have addressed these issues, it's time to talk to the owners about the benefits of listing a home with an agent.
You can have a bulleted list that covers such benefits as:
As with the presentation manual for sellers, the second section of your manual for buyers should cover your skills and expertise as well as your firm's. Again, it's a good idea to have a short résumé in your manual, as well as a copy to leave with the buyer.
To cover what your firm has to offer, you could include any or all of the following items:
Listing Agreements
The listing agreement is a legally-binding contract that creates an agency relationship authorizing a broker to serve as the agent for a principal in a real estate transaction.
Most listing agreements are bilateral employment contracts - meaning that a buyer or seller promises to pay a commission in exchange for the broker's promise to locate a "ready, willing and able" buyer for the seller or a suitable property for the buyer.
Listing agreements must be in writing to be enforceable. Oral listings do not afford a broker any legal protection. If the listing agreement is not in writing, a broker could not collect his or her commission if the seller refused to pay.
The most common types of listings are:
An open listing is a non-exclusive contract, authorizing a broker to serve as the agent for either the sale or the purchase of property. With this type of listing, a broker is not under the same obligation to perform as with other listing agreements; so an open listing is often considered to be a unilateral contact.
This type of listing gives the seller or buyer the right to engage any number of brokers as agents. With an open listing, all contracted brokers can market the property or search for property at the same time. But only the one broker who brings the ready, willing and able buyer to the seller or who finds the right property for a buyer will receive the commission.
In addition, with an open listing, a seller could sell the property himself or herself and a buyer could make a purchase himself or herself without having to pay any commission to any broker.
Open listings are rare, since they offer the least assurance that the broker will receive compensation for his or her efforts.
An exclusive agency agreement gives one broker the exclusive right to market and sell the property, while the owner retains the right to find a buyer and sell the property without owing the broker a commission. The seller must pay a commission only if the home is sold by the broker or an authorized agent or subagent of the broker.
In other words, if Broker Bill sells the property, he gets the commission. But if owner Jim sells his own property, Bill gets no commission.
A net listing is not technically a type of listing agreement. In a net listing, an owner sets a minimum amount that he wants to receive from the sale of the property and lets the broker have as commission any amount above the set minimum.
For example, Seller John tells Broker Bill that he wants $100,000 from the sale of his home. Broker Bill sells the home for $125,000, so Bill gets a $25,000 commission.
While in this type of situation the seller is getting what he or she wants for the sale, it creates a conflict of interest for the broker. It essentially violates the broker's fiduciary responsibility of putting the client's interests above his or her own.
Net listings are generally viewed as unprofessional, but legal in California. Net listings are illegal in many states.
Exclusive Authorization to Acquire Property (Buyer)
This listing agreement is similar to the exclusive-authorization-and-right-to-sell listing brokers have with sellers, which we will go over in detail in this chapter. However, this agreement authorizes the broker to act as the agent of the buyer rather than the seller.
When legally becoming an agent for the buyer, the broker owes the same duties and responsibilities to the buyer as a listing agent owes to a seller. The commission is negotiable and, as with exclusive seller listing agreements, this agreement must also specify a definite termination date.
If a buyer chooses to compensate the broker, the broker is more apt to show all types of available properties, including FSBOs, foreclosures, probates and other available but unlisted properties.
Click this link to see and print a copy of this form.
Buyer-Broker Agreement*
The California Association of REALTORS® listing agreement is probably the one that you will use most frequently. Since it is a legal, binding contract, it's important that you understand it and can fill it out correctly.
Depending on the details of a particular transaction, the wording you use on the form may vary. However, the listing contract contains several basic components.
Click on this link to the Residential Listing Agreement*. Print off a copy to look at as we go over the listing form by paragraphs.
* Note: Reprinted with permission, CALIFORNIA ASSOCIATION OF REALTORS®. Endorsement not implied.
Paragraph 1 - Exclusive Right to Sell
This section is where you put the name of the owner, the name of the real estate office that is obtaining the listing, the beginning and ending dates of the listing period and the physical address of the property, including city and county. In some situations, you may need to attach a signed copy of a legal description. If you are a salesperson, you should write your broker's name in this section. You will sign the form at the bottom of page 3.
Paragraph 2 - Items Included and Excluded
This is the section to list any personal property that may be included as part of the sale or any real or personal property that is being excluded from the sale. This will avoid later misunderstandings.
Paragraph 3 - Listing Price and Terms
This is the section to indicate the asking price for the property. There is also space to indicate any financing terms, such as loan assumption, down payment amount, all cash, etc. Note that unless the terms are specified, a seller is not required to pay a commission when refusing a full price offer unless the offer is all cash.
Paragraph 4 - Compensation to Broker
This paragraph has several subparagraphs. Subparagraph A is the place to fill in the mutually agreed upon commission the seller will pay the broker. It can be a percentage or a specific amount, although percentage is preferred because it will adjust according to the actual sales price.
Paragraph 4 - Compensation to Broker
Subparagraph A-2 is known as the safety clause. Here the broker and sellers agree to a specific number of days after the listing expiration during which the broker may still receive a commission. This clause is enforceable if the owner, or his or her new agent, sells the property to a buyer whose name appears on a list of persons to whom the original broker showed the property during the listing period. This list must be given to the owner within three calendar days after the listing expiration.
Subparagraph A-3 states that the broker is still entitled to a commission if the seller makes the property unmarketable by any voluntary act during the listing period.
Subparagraph B states that if a party other than the seller prevents the completion of the sale, the commission due will be the lesser of the commission due under paragraph 4A or one-half of the damages recovered by the seller, after the seller has deducted all expenses.
Paragraph 4 - Compensation to Broker
Subparagraph C provides for any additional compensation to the broker, such as advertising fees or MLS fees. Note: Some brokers charge a document preparation or transaction fee. If that's the case, those charges should be clearly indicated here.
Subparagraph D indicates that the broker has informed the seller of the firm's policy of dealing with cooperating brokers and how the commissions are divided.
Subparagraph E indicates that the seller will have escrow pay the broker's commission directly from the sale proceeds.
Subparagraph F is the owner's warranty that he or she is not obligated to pay a commission to any other broker if the property sells within the listing period, except if the property is sold to any of the listed prospective buyers. If one of the listed buyers makes the purchase, the current broker will not receive compensation and is then not obligated to represent the seller in the transaction.
Paragraph 5 - Ownership, Title and Authority
This section warrants that the owners are the only title-holders of the property and therefore have authorization to sell it.
Paragraph 6 - Multiple Listing Service
This section states that the broker will provide the transaction terms to the Multiple Listing Service, unless the seller signs a form to withhold the listing.
Paragraph 7 - Seller Representations
This section indicates that the seller is unaware of any legal, financial or physical reasons that would affect the seller's ability to sell the property. If the seller becomes aware of any such reasons, the seller must notify the broker immediately.
Paragraph 8 - Broker's and Seller's Duties
In this section, the broker agrees to use due diligence to achieve the purpose of the listing agreement. The seller agrees to consider all good faith offers on the property, to make the property available for showings, to take responsibility for all information the seller provides to the broker and to hold the broker harmless for any claims resulting from the information given to or withheld from the broker.
Paragraph 9 - Deposit
This section authorizes the listing agent to accept and hold any deposits on the seller's behalf which will be applied to the purchase price.
Paragraph 10 - Agency Relationships
This section explains that the broker represents the seller. The broker will not represent the buyer; however, if the listing agent finds a buyer, it may be necessary for the broker to act in the capacity of a dual agent. This section also informs the seller that the broker represents other sellers. Agency relationship must be confirmed prior to or concurrent with the execution of a purchase agreement.
Paragraph 11 - Security and Insurance
This section states that the broker is not responsible for loss or damage to the property, even with a lockbox present. The seller must take steps to safeguard any valuables and obtain insurance to cover the risks.
Paragraph 12 - Keysafe/Lockbox
This section defines a lockbox and states that persons using the lockbox are not insured against theft, damage, vandalism, etc. that could be attributed to lockbox use. There is a box for the seller to check if he or she does not want a lockbox used.
Paragraph 13 - Sign
In this section the seller checks a box if he or she does not want a sign on the property.
Paragraph 14 - Equal Housing Opportunity
This section states that the property is offered in compliance with all anti-discrimination laws.
Paragraph 15 - Attorney Fees
This section states that the loser of a suit or arbitration of any disagreement must pay the associated costs.
Paragraph 16 - Additional Terms
This section provides space for any agreement or terms not covered by any other section, such as a seller paying for a termite report.
Paragraph 17 - Management Approval
This section states that if an associate licensee entered into this agreement, the broker has a right to cancel within 5 days.
Paragraph 18 - Successors and Assigns
This section states that the agreement is binding on the seller and the seller's successors and assigns.
Paragraph 19 - Dispute Resolution
Subparagraph A says that the broker and the seller agree to mediate any disputes that arise from this agreement before taking any other action.
Subparagraph B explains arbitration, but arbitration will not be executed unless both the broker and seller have initialed the appropriate spaces at the end of the paragraph. Do not try to explain this paragraph to the sellers. If they do not understand it or don't know how to proceed, advise them to consult an attorney. This paragraph also describes those types of matters that would be excluded from arbitration.
Paragraph 20 - Entire Contract
This section states that this agreement supersedes all previous discussions, negotiations and agreements between the seller and the broker. Therefore, anything that is not written into this agreement is not part of the agreement.
Signature Section
All the sellers must sign and date the agreement and provide their addresses, and other available information. You must then fill in your firm's name, sign your name directly below and then provide other information about the firm.
California law requires that the sellers receive a copy of the listing agreement at the time the signatures are obtained.
Note: If the owner is married, both spouses should sign the agreement, even if the property is held in the name of only one of the spouses. Because of California's community property laws, a buyer might have difficulty suing for specific performance if both seller signatures are not on the listing agreement.
The California Association of Realtors® has many standardized forms that will make the compilation of a listing packet much easier. Here is a list of forms that you should include, with a brief explanation of each.
Completed Residential Listing Agreement (RLA)
This is the listing agreement form we explained in detail on the previous screens of this unit. A buyer has no need to ever see this agreement.
Seller's Advisory (SA)
This form talks about some things regarding disclosures that sellers need to think about and do as they market their property.
Disclosure Regarding Real Estate Agency Relationships (AD)
This disclosure describes the agency relationships available in California - Seller's agent, Buyer's agent and Dual agent. We covered this form in the earlier chapter on mandatory disclosures.
Seller's Affidavit of Non-foreign Status and/or California Withholding Exemption (AS)
This form deals with an IRS requirement that a buyer may need to withhold income tax if the seller is a "foreign person." A seller may need to consult a tax advisor for help filling out the form. The buyer should also get a copy of this form.
Smoke Detector Statement of Compliance (SDS-11)
California law requires at least one operable smoke detector in every single-family dwelling. Many local requirements are stricter. This form, signed by the seller, states that the home is in compliance with CA law.
Water Heater Statement of Compliance (WHS-11)
This mandatory seller disclosure deals with the law requiring water heaters to be strapped, braced or anchored to resist earthquake motion. It's important to check local ordinances for stricter requirements.
Lead Based Paint and Lead-Based Paint Hazards Disclosure, Acknowledgment and Addendum (FLD-11)
This disclosure deals only with properties built prior to 1978. We covered this disclosure in a previous unit.
Natural Hazards Disclosure Statement (NHD) and Combined Hazards Book
California requires the disclosure of several natural hazards. As we explained in the earlier chapter on mandatory disclosures, providing this booklet fulfills many of these disclosure requirements.
Estimated Seller's Proceeds (ESP-11)
This form estimates what the seller can expect to walk away with after the sale. We discussed this form in the chapter on listing presentations.
Notice to Buyers and Sellers - Defective Furnaces in California
This is not a standard form, but one that the broker should create to give to sellers. It explains that the Consumer Product Safety Commission has issued a warning for a certain type of horizontal gas-fired attic furnace, manufactured by Consolidated Industries, which has been known to cause fires.
The form should have a place for signatures of both the sellers and the buyers, acknowledging receipt of the form and their understanding of the warning and what it implies.
Having clients sign this form may help to relieve brokers of any responsibility if a problem arises in the future.
Communication
It might seem logical that the major dissatisfaction sellers have with real estate agents is failing to sell the property during the listing period. However, the truth is that the primary criticism sellers have about their agents is lack of communication. Sellers often complain that once the listing agreement is signed, the agent "puts a sign on the lawn" and then "disappears."
Their home becomes one of dozens of properties on the market that may be shown occasionally. A business card gets left on a table to show that someone came through, but the owners often don't get feedback on how the showing went.
Owners can feel cheated or resentful when the person who so eloquently presented the reasons why he or she should get their listing seems to be so unavailable once the papers have been signed.
One of the reasons that owners may start having these negative feelings is because the agent did not adequately prepare them for what would be happening during the first days of the listing period and beyond.
During the first few days, you are doing multiple property marketing tasks - preparing flyers and ads, getting the property information into the MLS, etc. - which your sellers may not be fully aware of. While you are "busy being busy," your sellers are home waiting for the onslaught of prospective buyers, which usually doesn't happen in the first days.
With a little planning and forethought, you can make your sellers feel like partners in the selling process, while keeping the lines of communication open and flowing.
Once you have secured the listing, let your sellers know what to expect in the first few days.
Homeowner Tips
Some tips for the exterior include:
Some tips for the home interior include:
Some companies specialize in producing forms and materials that you can copy or print for use in presentations or share with clients. One such company is Realty Tools, Inc. You can visit their website at http://www.realtytools.com.
An important part of your seller communication is a weekly activity report. Many licensees prefer to send a monthly report because it looks like there has been more activity. But again, frequent communication with your sellers is critical; so the weekly contact is best.
Let your sellers know that your weekly report will include, as applicable:
You can also send along copies of any ads you placed that week, a copy of the MLS pages, copies of pages from any websites where the property has been listed and information about any e-mails that you sent to promote the home.
Note: It's critically important to maintain communication with your sellers, even during weeks when there has been little or no interest in the property.
Seller Disclosure
The sellers are responsible for filling out several disclosures that will be passed on to prospective buyers. We explained these disclosures:
Get these completed disclosures from the sellers within the first week after obtaining the listing.
Traditional Tools
For Sale Sign
Always carry at least one sign with you and put up the sign as soon as you leave the house after obtaining the listing. If you are putting up a temporary lawn sign, let the sellers know when you will bring the larger, more permanent sign.
Rider Strips
These strips attach to the For Sale sign. Attach a strip with your cell phone number to the stake below the main portion of the sign. If you have rider strips that note the home's special features, attach it to the stake above the sign.
Lockbox
Before you leave the house at the end of the listing meeting, install a lockbox. The lockbox holds the key to the home. Agents can access the lockbox either by using a special lockbox key or with an electronic keycard. Install the lockbox on the doorknob, a metal railing or some other stationary object.
Photos
You'll need several good photos of the home, both inside and outside. Using a good digital camera, take the photos as soon as possible after you get the listing so you can start using them in flyers, ads and mailings. You'll also want them for your Internet site.
Talking House
Although not yet considered "traditional," some signs contain a radio transmitter that broadcasts a message about the home using an AM or FM radio frequency. Potential buyers can pull up in front of the home and listen to the message on their car radio. If you plan to use this tool, record a thoughtful and careful message and install the sign within a couple of days of taking the listing.
Classified Ads
Prepare several good classified ads so you can avoid repetition when you're on a tight deadline. Also prepare an open house ad and an ad that can be used in a home buyer's guide, if your firm uses that as an advertising venue. We'll talk more about what constitutes a good ad in the chapter on Advertising.
Flyers
Also called property briefs, these print pieces describe the home's features. They contain at least one photo, sometimes several. They should also include an Internet address where potential buyers can get more information about the property.
Leave a large supply of flyers at the home so that each visitor can pick one up. You can use the flyers in several other ways:
E-Tools
Multiple Listing Service (MLS)
Groups of brokers often join together to form a cooperative listing service, usually called a multiple listing service. Any member who belongs to this service sends the information on each of his or her listings to a central location for the MLS. An MLS employee then compiles the information and distributes it to everyone who is a member of the MLS. The information is usually made available on the Internet, but sometimes it's distributed on computer disk.
Participation in the MLS increases the sales inventory available to licensees. Any member of the MLS can sell any property listed in the MLS. With MLS sales, the listing broker and the selling broker share the commission, based on a predetermined percentage split.
Send the information on your new listings to the MLS as soon as possible so that other agents will have the information quickly. Once the listing is uploaded to the MLS, print a copy and send it to your sellers as part of your weekly activity report.
Your Internet Site
Place your new listing on your own or your company's Internet site as soon as possible after getting the listing. As with the MLS, as soon as the information on the property has been uploaded to your site, print off a copy and send it to the sellers with the weekly activity report.
Note: We discussed some of the things Internet sites contain in the chapter on Prospecting. We'll cover more about the Internet in the chapter on Advertising.
Other Internet Sites
A popular Internet site is http://www.realtor.com, which belongs to the National Association of REALTORS®. NAR maintains this site as a place for buyers all across the country to find suitable properties. Brokers can post at least one picture and a detailed description of each of their properties on this site. There are limitations however; so you need to contact NAR for specifics on how to upload information to their site.
Also, local real estate boards may have sites you can use to post information on your listings.
Forms of Advertising
Advertising is the promotion to the public of a product or service. Advertising is critical to the real estate industry. For many firms, it's the only way to let potential buyers and sellers know that they exist.
Real estate firms engage in two forms of advertising:
Let's take a look at each type.
Institutional advertising (sometimes called corporate advertising) attempts to establish a positive image of the company, its services and its reputation in the minds of the public. This form of advertising aims at increasing sales by informing the public of the company's capabilities.
In addition, groups of brokers may engage in this form of advertising (and share the costs) in an attempt to raise the public's overall opinion of the real estate industry.
Product advertising is directed toward the particular properties a company has for sale. With this form of advertising, one firm's ads are in direct competition with the ads of other firms.
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:
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:
In addition to the methods we have just discussed, there are many more ways to advertise.
Personal Advertising
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.
Additional Business and Professions Code laws include:
The California Business and Professions Code law, which addresses mobile home advertising, prohibits a licensee from performing any of the following activities:
The Real Estate Commissioner has also adopted regulations regarding advertising:
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:
When a person makes a home purchase, he or she becomes eligible for several potential advantages:
On the other hand, some potential disadvantages of home ownership also exist:
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:
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:
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:
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:
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:
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:
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:
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:
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:
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:
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:
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:
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:
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.
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 means acting as if the person has already made the decision to buy. This technique is a natural when a buyer shows one of those buying signals we talked about earlier. For example, if the buyer says, "Could we close by March 1?" your reply would be, "Would you like to close by March 1?"
The alternative close works by offering more than one alternative to the prospects and having them choose. For example, you could pose this question: "If the seller is willing to replace the patio door, would you prefer a sliding door or an atrium style?"
The bonus close offers an inducement for the sale. For example, "If you buy now, the seller is willing to leave all of the appliances, including the washer and dryer." Note: Use this close carefully and always be sure to have the seller's approval beforehand.
The ownership close is similar to the assumptive close, except that you act as if they already own it and you talk about how it will fit into their lives. For example: "So where will you set up all your power tools?" or "Which one of the children gets the basement bedroom with the private entrance?"
The standing-room-only close plays on the prospects' fears of losing a property that they may not have an opportunity to buy again. A good example of this is the situation of the last home in a development being for sale. Once this home is sold there may not be any more being built by that developer for that price. Note: Use this technique only if what you say is true. People tend to be distrusting of "scare" tactics, especially if they have been shown to be untrue in the past.
Closing the Sale
Regardless of which closing technique you use, you need to ask for the sale. Many buyers will buy if the agent just asks them. As you gain more experience in getting offers, it will become easier for you to know the appropriate time to ask.
Not every closing technique will work with every buyer. If you try a particular closing and it doesn't work, take a step back and talk about the benefits of the property again. Try to schedule another showing of the property and then try another closing technique.
Sometimes all a buyer needs is a little more time to make the decision; so don't assume that if your first attempt at closing didn't work, you've failed. Regroup and try again!
Writing the Offer
Once your prospects have agreed to make an offer, it's time to do the paperwork. If you gave the prospects a copy of a blank form at your initial meeting, the process of filling things out should go smoothly.
Many California agents use CAR's purchase contract form titled California Residential Purchase Agreement and Joint Escrow Instructions. Because this form is so widely used, we'll take the time to go over each of its sections.
Click on this link to print a copy of the form.
California Residential Purchase Agreement*
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