Real Estate Finance, Spring 2009, Craig-Taylor
1. The Role of the Professional and the Real Estate Transaction
2. Role of the Real Estate Broker
a. MLS – Multiple Listing Service
i. A service that brokers subscribe to where they can list properties and browse properties that other agents have listed
ii. When a sale is made, the listing agent receives the commission.
1. However, the agreement through the MLS is that if another broker brings the buyer to the listing agent – then the listing agent will split their commission with that agent
b. What is the difference between a Broker and an Agent?
i. Broker – The firm that oversees the actions of the sales agents they employ
1. Must have more education than a sales agent
2. Definition – a person acting for another for compensation in the negotiation or attempted negotiation of the sale, purchase, exchange or rental of any interest in real property
ii. Listing Agent – the agent that assists the seller in listing on the MLS (multiple listing service – database of property listings)
iii. Cooperative Agent – the agent which actually brings the buyer to the seller
1. Browses MLS for buyers – then takes the buyer around town to find houses
2. Writes and gets the contract signed
3. Has a much closer relationship with the buyer
4. Functions as a sub-agent for the listing agent — essentially working for the seller
a. In practice, most cooperative agents seem to be working for the buyer
i. Often this is believed by both the cooperative agent and the buyer
b. Legally, they are still technically considered an agent of the seller – which means that their duties are greater towards the seller than to the buyer
5. Agency relationship (fiduciary responsibility) is created through the listing agreement.
a. Special Agency – agency for a particular task, specific to perform a certain duty
i. Duty – To find a ready, willing and able purchaser of this property – and potentially close the deal
ii. Broker is then subject to duties of loyalty, honesty and full disclosure to his principal (seller)
1. Loyalty
a. Should be more loyal to the seller
b. No self-dealing without disclosure
2. Disclosures
a. Duty to tell the seller anything they know about the buyer that is material (due diligence)
3. Skilled Representation
c. Factors to Consider When Choosing *Whether or Not* to Use a Broker (consider all together)
i. Personal Time
1. Do you have time to show the house to the potential buyers?
2. Consider the temperature of the market
a. Are sales good right now?
ii. Expertise / Legal protection
1. Covenants, restrictions, restraints, use, etc…
2. Subscription to MLS service
3. Paperwork – do they know how to do it?
4. Agent’s ability to reach broader body of potential buyers (probably better than seller’s own ability)
iii. Salesmanship ability
1. Do you know how to present the property in a way that will sell?
2. Do you know how to guard yourself from giving too much information away to prospective buyers?
iv. Cost
1. Is it worth the money you would save on commission to do it yourself?
2. Discount brokers – term sounds negative, but is actually pretty helpful in the market
a. Pay a flat rate to list your house
b. You are presented with a menu – you can order a la cart
c. Determine what part you need assistance with
i. Marketing
ii. Documents
iii. Negotiating
d. Factors to Consider When Choosing a Broker (consider all together)
i. Find someone who has experience
1. Did they come to you with an established marketing plan to propose?
2. Look at their listing prices versus their ultimate sales prices
3. Do they have a comparative market analysis to show you? (a document that tells you what other houses in your neighborhood have sold for)
ii. Find someone who has knowledge of your neighborhood
1. Knowledge of local schools, when stores close, local bakery, etc…
iii. Evaluate the reputation of the broker/ company
iv. Find someone they feel comfortable with
1. Will the broker spend the time they want with them
2. Find someone who is willing to accept questions, and will frequently contact you with updates
3. Do they feel comfortable truly discussing their “desires” out of the transaction?
a. Comfortable saying that I want to live in “this kind” of neighborhood?
v. Ultimately decide on the one who will best represent them in the transaction
e. Should a Party Insist on a Writing?
i. Yes – so that all parties are fully aware of the responsibilities and their rights
ii. Be wary of a realtor that does not require a writing
1. Not very professional
2. They could attempt to later come in and insist that there were an oral agreement
3. Lack of writing could be perceived as a listing agreement of an indefinite term (dangerous)
4. Could be a Tactic
a. It may appear easier to the client (a layperson)… create sense of comfort.
f. Types of Listing Agreements
i. Open – Seller only pays commission to the broker who is the procuring cause of sale
1. If owner sells by self – then no commission at all
2. Advantages of Open –
a. Only pay commission if there is a sale – and only pay to the procuring cause (the broker that caused)
b. Gives them flexibility to work with other brokers who may be able to get them a better deal
c. Property may sell quicker – because more competition to make the sale
3. Disadvantages of Open
a. The open broker may be so quick to find a sale – just to ensure that they procure the commission – that they don’t actually find the best sale for you.
b. Broker wont work as hard for you – because you are not a guaranteed customer
c. Could be confusing to have multiple agents working in your affairs – and constantly contacting you
ii. Exclusive Agency – (probably the best) Seller contracts with broker to be the exclusive agent acting on the sale
1. If another broker is the procuring cause, the broker with the exclusive agency must be paid a commission, as well as the broker who was the procuring cause
2. If owner sells by self – then no commission
3. Do not abbreviate this as “exclusive” because easily confused with “exclusive right to sell”
4. Advantages of exclusive –
a. Seller knows agent would be dedicated to the sale (instead of being worried that they would lose the listing)
b. Seller can procure the sale themselves and don’t have to pay commission
iii. Exclusive Right to Sell – Same as exclusive agency agreement, except the broker will be paid even if it is the seller who procures the sale
1. Advantages – Broker will work really hard for you
2. Disadvantages – Still owe agent a commission if owner procures the sale
iv. General Notes:
1. Sales through MLS are typically either Exclusive Agency or Exclusive Right to Sell
2. All types of listing agreements ordinarily have an express termination date
g. What Factors/Terms are Most Important in the Agreement?
i. Commission – standard is 6%, but still may be able to alter somewhat
1. What else is tied to the commission?
2. How the person gets paid (does the money come out of proceeds at closing?) – and WHEN they have earned the commission
a. There is a difference between bringing a ready, willing and able buyer to the table – and when the transaction actually closes
3. May also include a “bonus” to the commission when you need to sell fast
4. Also FYI – the cooperating agent is the one who does more work. If you negotiate the commission down – make sure that the cooperating agent still gets 3% (or so) – because that will help push cooperating agents to bring potential buyers to you
ache part”
ii. You have to provide copies of all kinds of documents to prove that you are going to be able to repay the loan
1. W2s, taxes
2. Proof that you have money for a down payment
a. They want to go back a few months to see that you have had this money for a while – and that it was not just a recent gift (where you may have to pay it back to someone)
iii. Stated Income Loans – I promise I make $50,000/year.
1. I stated it. They took me at my word. (Dangerous!)
2. These loans are becoming less available
3. Now underwriters want you to prove your income – and that you have maintained that income for a period of time (to show that your income is stable)
iv. Credit – they also want to look at your credit (income/credit ratios)
1. They are being much more strict on the credit scores – and now won’t even consider anyone below a certain number
c. Must be very careful as to what we put in the contract – because we are trying to find an able buyer!
i. Prudent buyer’s agents try to encourage their clients to get pre-qualified for a loan. Find out what cost of house they can afford – before beginning to show them houses
1. The buyer’s agent then takes them to homes that they can qualify for. If they are prequalified and in your range – then they are able.
ii. Dobbs Test – The Prevailing View (+) consummation of the sale
1. Everything as above – and a completed transaction
5. The Role of the Attorney
a. Your goal in the transaction is to help your client freely acquire, transfer, finance, develop, lease, and otherwise use real property
i. You are helping your client learn about the property they want to acquire:
1. Does the seller actually own it?
2. Are there any encumbrances?
3. Is there access to main roads?
4. What is that brown liquid leaking from those 55 gallon drums out back?
ii. You want to protect your client’s interest in the transaction
1. Record Title – do they have the actual title to transfer it to you?
2. Marketable Title – just because you have title to a property – if you don’t have access to the parcel – it is probably not marketable
a. Also – if the zoning does not allow for the use they want – then there may not be a market for the title
b. ABA, Special Committee on Residential Real Estate Transactions – the Lawyer’s Proper Role-
c. Brokerage Contract – the listing agreement (open, exclusive agency, exclusive right to sell)
d. Preliminary Negotiations – A great deal of trouble could be avoided if both the buyer and seller consulted their own attorneys during negotiations
e. Commitment for Financing – Is a good idea for a buyer to pre-qualify so that they know how much house they can afford (tailors their search)
i. However, many lenders will not pre-qualify, and would rather the buyer bring in a signed purchase contract – so they can base their lending decision not only on the ability of buyer to pay back, but also based on the quality of the house (in case it ends up their asset one day)
ii. Commitment contract between lender and buyer is usually prepared by lender’s attorney
