Real Estate Regulations
Revised Code of Washington - RCWs - The RCWs are a collection of statutory State laws. These are a group of laws passed by the State legislature, and are called the Revised Code of Washington. The codes dealing with the area of real estate law are Chapter 18 of the RCWs.The RCWs are a collection of statutory State laws. These are a group of laws passed by the State legislature, and are called the Revised Code of Washington. The codes dealing with the area of real estate law are Chapter 18 of the RCWs.
Washington Administrative Code - WACs - In addition to State laws/statutes there are rules and regulations called the Washington Administrative Code or WACs. These are drawn and implemented by the Department of Licensing.
WACs - These administrative rules/regulations will govern professional real estate activity as well. They control the acts of licensed people and how one obtains a real estate license.
Department of Licensing (DOL) - The Director Department of Licensing (DOL) - The government body that controls and enforces the real estate code is known as the Department of Licensing. The State legislature cannot enforce all these rules. They had to create a police force, if you will, to act as a watchdog to make sure the laws are obeyed. That is the job of the Department of Licensing.
To separate from public licensing, the Department of Licensing (DOL) has a second department called the Business and Professional Licensing division. Public licensing would be like your driver's license. Your real estate license is a professional license and under the Business and Professional Licensing division. The real estate division is under the Business and Professional Licensing Division.
Real Estate Division - The Department of Licensing is run by a Governor appointed Director who is in charge of the staff who runs the department. The Director and staff are forbidden by law to have any interest in the real estate profession, obviously, as that would be a conflict of interest.
The Director - The Director has a real estate program administrator who oversees the day-to-day operations of the real estate section, which includes discipline, licensing, education, and community support services. The real estate Director is empowered to issue rules and interpret statutory law. These administrative rules and regulations are called the Washington Administrative Code or WACs. They are not laws, but more like housekeeping rules. To a licensee they might as well be laws, because violations of them could cost you your license. The WACs are created to interpret and carry out the intent of the Code, the Revised Code of Washington or RCWs.
License Required - A real estate license is required if a person, partnership, or corporation acts for another and receives compensation, commission, or promise thereof, if you get paid in any way, for any of the following acts:
Broker License - The broker license is usually the first license someone would obtain. As a broker, the licensee will work through a firm/managing broker as an licensed affiliate. The requirements for this license are:
Individual 18 - A person must be 18 years of age or older and a natural person, not a corporation or partnership.
Honest - You must be honest, truthful, and of good reputation, which may require an affidavit for proof.
Fingerprinting - The requirement for fingerprinting of all applicants has been implemented. This will cause a criminal background check with the FBI and the Washington State Patrol. In addition, fingerprinting is required of all licensees every 6 years of practicing professional real estate.
H. S. Grad - A high school diploma or equivalent is required.
90 Hours - The Real Estate Fundamentals course of at least 60 clock hours and the Real Estate Practices of least 30 hours must be successfully completed prior to the examination application.
70% on Exam - The broker's exam must be successfully completed. The passing score of 70% must be obtained on each of the State and national sections of the examination.
No Residency Requirement - Licensees are not required to reside in the State of Washington (broker must have records here) as a requirement for a license.
Renewal of License - All licenses renew 2 years from the first date of issue. Example: If you apply for a license and qualified, your license will be issued on a date chosen by the DOL. Lets say the DOL issued your first license on Sept 11, 2013. Your license will renew every 2 years on the date of Sept 11 by the DOL.
Recording Title with the County
RECORDING - This means registering a title or lien on property with the County and making the information available to the general public. Recording a title does not guarantee validity of title. Anyone can record anything with the County. It is important to remember a recorded item is not necessarily a valid item.
Ownership of Property
Multiple Requirements - There is no one factor that establishes ownership of real property. This is why an owner buys title insurance. Ownership of property in America is subject to court interpretation.
Deeds/Contracts - A land contract or a deed is not enough to guarantee ownership of property. There have been instances where a con artist sold property to several people and used the identical contract or deed each time.
Possession of Property - The possession of property is not enough in the eyes of the court. Possession by a party could be ruled adverse possession or trespass.
Court Decides - When an ownership question arises, the person who provides the best evidence in a court of law will be judged the owner of the property.
Ownership Rights - The ownership or any other legal right exists whether recorded with the County or not. There are many instances where people obtained a deed to property and never recorded the instrument. Recording helps provide evidence of a recorded item, but it doesn't guarantee the items validity.
Recorded First / First Right - If a person has an equal claim as another owner to a piece of property, the recording aspect comes into play. If they had recorded their legal documents first, their claim will be the better of the two in the eyes of the court. However, this also is not a solid guarantee in today's legal world.
County Recording / Public Record
Public Record - Recording a claim of ownership with the County does make your claim a matter of public record. Any and all persons can obtain the information on file with the County at any time. Some States, such as Washington, require the County auditors to release the ownership information upon request over the phone.
Recording - First In - Recorded documents are "First in time, First in right." The documents have a hierarchy of importance in the eyes of the court. Land records are public records and anyone can review and find the status of recorded claims on a property. These recordings may be valid or they may be invalid. In either case the parties looking up the information are warned of these claims and have no right against a properly recorded claim.
Constructive Notice - A recording gives the entire world "Constructive Notice" of a possible valid claim on a specific piece of property.
Actual Notice - The owner is also protected by "Actual Notice." "Actual Notice" interest is when ownership is not recorded, but the other parties know or believe the interest might exist.
"3" Things Required - When a person buys property the buyer expects to accomplish 3 things. All purchasers are expected to:
Constructive Notice vs. Actual Notice
Joe's Right - Joe only has the legal right to sue Harry for fraud.
Better - Pete has the better right to ownership and possession in this case.
Proper Recording - Joe's recording is proper. He has the ownership and possession right because he took advantage of providing better evidence.
No Ownership - Pete has no right of ownership or possession or action against Joe as he failed to protect his legal right by "notifying the world". He did not record his purchase of the property. He gave no Constructive Notice.
Pete's Right - Pete only has the legal right to sue Harry for fraud.
Unrecorded Sales - The point of these examples is the problems that can ensue with an unrecorded sale. The sale may still be valid between the parties to that sale as long as there is actual notice. An unrecorded sale may not be valid against subsequent purchasers who record first without notice.
The Seller's Closing Statement
Seller's Closing Statement - The following are the general rules on the seller's closing statement.
Normal Credits - Credit entries are any values or payments paid "into" escrow. In the case of the seller, the sale price of the house would be a credit entry. Any payment of costs paid by seller into escrow would be a credit entry.
Selling Costs - The seller is responsible to pay for the selling costs of the property. The seller does not have to make any payments during the sales period. When the property is sold, the costs will be taken out of the net sales proceeds. In most sales, the only sales cost is the selling broker's commission. (debit to the seller)
Commission - Realize that the commission only applies to the value of the real property that was sold; house, land, outbuildings, etc. The sale of the personal property does not pay a commission. (debit to the seller)
Legal Fees - In today's real estate world, only a lawyer can legally draw up contracts, deeds, and mortgages. Since lawyers are only allowed to do this, the costs have gone up considerably. The legal costs ordered by the seller would be paid for by the seller. A debit entry on the closing statement. (debit to the seller)
Clear Liens - When paying off the liens on the seller's property, there are costs to clear the liens on the property. This is necessary in providing a marketable title for the buyer.
Delinquencies : If there are delinquent taxes or assessments on the property, the seller must pay for these costs. The government entities do not allow new owners to assume the delinquent payments. They are paid at closing. This is a debit entry to the seller.
Late Fees : If the seller was late/behind on the water and sewer charges, they must be paid at the time of closing so that the buyer can begin afresh with the utility responsibilities. (debit to the seller)
Outstanding Judgments : If there is an outstanding judgment on the property such as a mechanic's lien, this must be paid to clear the encumbrances and provide marketable title. (debit to the seller)
No Priority - The escrow officer places no priority on the payment of encumbrances/liens on the property. The only time priority comes into play is when the property is being foreclosed on from lack of debt payments.
Debtor Stops Sale - A debtor can stop the voluntary sale of the proceeds if the proceeds are not enough to pay off all the liens. This can be done by a creditor if they properly filed claim against the property.
Filed (recorded) Claims - The filed claims against the property will show on a title search. The escrow officer will then notify these lien holders of the impending sale.
Debits And Credits
Balance Sheets RULES - The buyer has their own balance sheet. The seller has their own balance sheet. Each will have different figures at the bottom. Each will put in differing amounts of money. Each will receive differing amounts of value. EACH balance sheet will have credit entries and debit entries. Each balance sheet will have its total debits and credits BALANCING out at the bottom.
Credits - When the buyer or seller pays money into escrow (pay escrow), or an item of value such as the house, it is a credit entry.
Seller's Closing Statement - The following general rules would appear on the seller's closing statement regarding debit (pay off) entries.
The Buyer's & Seller's Amounts Must Balance
Balance - As you have seen, the amount of value placed into the transaction by the buyer must equal the amount of value that the buyer takes out of the transaction. The amount of value placed into the transaction by the seller must equal the amount of value that the seller takes out of the transaction. This is your Debit and Entry System.
Buyer - The buyer's credits (value put in) must equal the buyer's debits (value taken out). The buyer put in $180,805 (credits) and took out $180,805 (debits).
Seller - The seller's credits (value put in) must equal the seller's debits (value taken out). The seller put in $180,180 of value (credits) and took out $180,180 of value (debits).
Buyer and Seller Balances - The buyer and seller's balances will rarely match. The buyer is usually putting more money into the transaction because of insurance premium and inspection costs.
Proving the Calculations - First of all, the buyer's balance and seller's balance have no relationship to each other. You never mix the buyer's numbers with the seller's numbers. In proving the buyer's numbers and the seller's separate numbers, we use the "Cash-in, Cash-out Method." We only consider those items that were cash items that came in from outside the transaction or the cash that is leaving the transaction. We do not use offsetting debits and credits. They are not considered when proving the calculations. Here is a hypothetical credit and debit situation for the buyer:
" Cash-in Items": $15,000 (E/M deposit) + $120,505 (loan) = $135,505
" Cash-out Items": $175 (Prop Taxes) + $500 (Escrow) + $330 (Title Ins) + $134,500 (Real Property) = $135,505
Balance Statement -These Credit and Debit figures balance out for the buyer and are correct. The same would be done with the seller's figures that would be completely different from the buyer's figures.
Escrow, Closing, And Recording Escrow
Escrow - An English word that means the "quote; scroll;" or the list of things that is to be done. Therefore, escrow is the necessary process in order to close a real estate transaction. The escrow officer will take the Purchase and Sale Agreement and make sure the buyer and seller can deal with each other on a fair basis. Escrow will be collecting necessary documents to close the transaction.
Escrow Process - It allows the buyer and seller to close the transaction with an independent and disinterested party working on their behalf. The escrow officer will collect the necessary documents, signatures, government forms, etc. and make sure that the dealings are fair to both parties.
Buyer to Deliver - The buyer or buyer's agent is to deliver the earnest money to the escrow officer and the necessary forms for the financing the loan commitment. If assuming the seller's debt instrument, the buyer must have signed acceptance of the loan assumption. Also, there must be additional cash that was stated in the Earnest Money Provision of the Purchase and Sale Agreement.
Seller to Deliver - The seller is to provide a deed or contract to the property. The seller must also deliver a statement that all encumbrances are paid or to be paid by escrow and that they will not be assumed by the buyer.
Represents Buyer & Seller
Dual Agency - The escrow officer is an agent for both the buyer and the seller. The officer is to deal fairly on behalf of each. Escrow will have fiduciary capacity on behalf of the buyer and seller. All fiduciary information cannot be released to other parties FOREVER. Escrow must represent both parties fairly and cannot receive instructions from any other party. The officer cannot receive instructions from just one party. Escrow must follow the instructions that both the buyer and seller came up with together. Escrow it neutral to both parties.
Mutual Instruction Changes - The escrow officer can only make changes to escrow instructions that were made by mutual agreement between the buyer and the seller in writing.
Accounting - The escrow officer must give an inclusive, clear, and precise accounting of all the necessary funds, costs, taxes, payments, etc. in writing to both the buyer and the seller.
Arms Length - The escrow officer may not invade the privacy of the principals and ask unnecessary questions. Escrow must only ask proper and pertinent questions necessary to close escrow. In short, the escrow officer must only ask for information that escrow needs to follow to carry out the P/S instructions.
Principal's Privacy - The escrow officer must always maintain the principals' privacy even after the transaction has closed. Escrow must follow instructions and give out only that information that is required by law. In today's information world, the fiduciary capacity of handling a person's personal information is imperative and forever.
Advantages And Problems With The Escrow Process
Advantages of Escrow - Escrow provides a number of advantages to both the buyer and the seller.
Fiduciary - Escrow is an objective process that has a neutral caretaker of the necessary funds and documents in closing a transaction.
Professional Services - Escrow provides a professional level of completion that will have an impact as long as the buyer owns the transferred property.
Clouds - An escrow officer can recognize "clouds on title" and make them technically correct. Escrow provides the procedure for "clearing clouds" and allowing delivery of a marketable title to the buyer. This would include knowing how to remove any encumbrances recorded on the property.
Instructions Followed - The escrow officer assures that all buyer and seller instructions will be followed and carried out.
Information - The primary document to obtain the instruction is the P/S agreement. The Purchase and Sale document is often called the "Agreement to Sell." It has that heading at the top of it. Since it provides the instructions for escrow, the instructions should be clear, precise, and complete.
Improper Information - If any areas of the sale are not covered properly, there will be "gray" areas. This includes areas that are not properly stated or understood by all parties. This constitutes a situation of "no agreement." This creates a voidable contract situation.
Correction - If an unclear area arises during the escrow process, escrow will explain the problem to the buyer and seller. This would require the buyer and the seller to establish a new agreement or amendment signed by both parties.
Ratification - The buyer and the seller would have to ratify the new agreement. The document must be in writing and mutually agreed to in order to save the transaction. If this is not done properly, the original P/S agreement would be deemed a void contract and the sale voided.
Escrow Closing a Transaction
Closing - Closing is also called "Title Closing," "Settlement," or "Escrow Closing." This is the final stage of escrow.
Final Meeting - Closing is simply a meeting at which the sale is finalized. All the documents and cash are distributed properly between the buyer and the seller. This takes the P/S agreement from an " executory contract" to an " executed contract." The P/S agreement begins as an executory contract in that the buyer and the seller must execute specified requirements in order to complete the contract. When escrow closes, the contract of sale is completed and the transfer is then executed. This finalizes the sale.
Closing Costs - Escrow prepares and fully explains the actual closing costs. It will show that the costs are consistent with escrow instructions, local custom, and good business practice. The seller will get their copy and the buyer will get their copy. The final statement gives a complete breakdown of every cost associated with the transfer of ownership.
Closing Statement - The statement of costs that the buyer and seller receive is called the closing statement. The entire costs and payments of the event are summarized on the buyer's and seller's closing statement. Each gets a separate accounting of what values escrow received from them (credits) and amounts paid out by escrow (debits) on their own closing statement. They will show the debits - money received out of escrow and their costs paid out by escrow. Their closing statement will show the credits - the money or value that they paid into escrow.
Credits/Debits - Each statement will show the total debits (money paid out by escrow) on one side of the column and the credits (money or value that escrow received) on the other side of their column. The debits and the credits must balance out on each of the closing statements. The buyer and the seller are given their own balance sheet and explanation of the money they paid into escrow (credits) and the money taken/received out of escrow as well as the costs that were paid out by escrow on their behalf (debits).
RESPA Procedure - There is no universal law on the use of debits and credits. Escrow officers can utilize systems of accounting of their choice, but it must be clear and concise. The closing statement forms, however, must be uniform and the same under what is called the Federal Real Estate Settlement Procedures Act (RESPA). This way a person in New York can read a closing statement drawn by an escrow officer in Oregon.
P/S Rules - The Purchase and Sale agreement prevails above all aspects of the escrow procedure. The debit and credit accounting must follow the P/S agreement instructions to the letter unless the P/S agreement is ruled illegal.
Local Practice and Law - The closing procedure will be influenced by the local escrow practices and/or the statutory laws of the applicable State. Local regulation mainly pertains to certain items such as VA points and maximum closing costs that are allowed.
Earnest Money Provisions
Under the Statute of Frauds, all Purchase and Sale & Earnest Money agreements must be in writing.
Contract Elements - All Purchase and Sale agreements must meet all elements of a valid contract. There must be an offer and acceptance, consideration by all parties, the parties must be competent, and the contract must have legal purpose. In this section we will zero in on the offer and acceptance aspects.
Offer and Acceptance - The offer in real estate is made by the buyer. The buyer begins the formation of a contract by making an offer to buy the seller's/owner's property.
The Offer - The buyer in making an offer to the seller will be clarifying the ownership of the property, the condition of the title, and any encumbrances that have been placed on the property.
Consideration - The buyer promises to buy the property if certain conditions are met. It is important there is no controversy that is placed on the Purchase and Sale agreement. This will be a major document used to close the transaction. It is up to the licensee working with the seller and the firm to make sure that everything is done correctly.
Escrow Instructions - The Purchase and Sale agreement with Earnest Money provisions will give the escrow officer the instructions on how the escrow is to be handled.
Elements of a Purchase and Sale Agreement
Every offer (every Purchase and Sale agreement) should include the following information:
Names - The name of the buyer and the date the offer was made. It also must specify the expiration date of the offer.
Earnest Money Amount - The amount of capital put down on the property and the form of earnest money such as cash, demand note, securities, land, etc. is stated in the agreement. This deposit (earnest money) when given by a buyer and shows a good faith offer. However, a deposit is not required.
Earnest Money Checks - All checks received as earnest money from a buyer shall be made payable to the real estate firm as licensed and placed in the firm's trust account. However, if it is mutually agreeable to all involved principals, the check can be made out to the invovled escrow company named in the purchase and sale agreement. A copy of this mutual agreement must be retained/kept by the real estate firm.
Legal Description - There has to be a clear understanding as to what property is being sold.
Personal Property - If there is any personal property that is to be included in the sale, it should state that a Bill of Sale will be given at closing.
Price of Property - The purchase and sale must have the purchase price of real and personal property and the amount to be paid at the delivery of a deed (closing).
Down Payment - It must show the total down payment (earnest money) that was given by the buyer to the seller's broker on behalf of the seller.
Financing - The Purchase and Sale agreement must specify the amount and terms of financing the purchase. This will determine whether the financing method will be acceptable. The offer is usually subject to the buyer obtaining loan for the purchase. If the buyer cannot obtain financing, the buyer is off the hook and gets their earnest money back.
Liens - There has to be a statement that the buyer is advised of any liens to be assumed by the buyer after closing escrow.
Escrow Date - The agreement must state where and when the escrow closing will take place. This is important because this will determine the proration of costs, the closing procedures, and the possession date by the buyer.
Title - Finally, the purchase and sale agreement with earnest money provisions will determine how the title will be conveyed. The buyer could specify to convey as a fee simple estate, tenants in common, joint tenants, etc.
Buyer's Agent Writes the Offer/Agreement
The broker for the buyer will write up the offer with the buyer. This is why it is important for you to understand the Purchase and Sale Agreement. You must fill out the agreement clearly and in detail. The P & S Agreement is usually on a pre-printed form that allows you to fill in the property information.
Buyer's Offer taken to the Seller
Seller's Acceptance - The licensee for the seller does not accept the offer. The licensee cannot independently negotiate terms. If at all possible, all offers must be presented to the seller in person. All offers must be presented no matter how ridiculous.
In Writing - All acceptances must be in writing (Statute of Frauds) and presented back to the buyer.
Role of Licensee - The licensee is to protect the interests of their client. This would be the seller or the buyer depending on whom the broker is representing. Also, the licensee is to look after and protect their employing firm/Designated broker.
Writing a P & S Agreement - The licensee working with the buyer has the following responsibilities when writing up an offer for a buyer.
Large E/M Deposit - The licensee for the buyer should attempt to get as large an earnest money deposit as possible for the seller. If there is more than one offer coming forward, you want your client's (buyer's) offer to look the best. It is very important to show the value amount and in what form the deposit will be; cash, demand note, securities, check, etc.
Clear and Accurate - Your Designated broker will certainly appreciate it when you complete the forms clearly and accurately. It is important that you take your time and do a good job. If the offer is not clear and accurate, it is not a proper offer. Also, accuracy is important because the P & S form will specify how escrow is to be handled.
Write all Offers - It is required that a licensee write up every offer that is made by a buyer no matter how ridiculous. Make sure that the buyer understands that the offer must be in writing as required by law.
Exception - If a buyer wants to present an illegal offer (such as a discriminatory offer) the licensee does not have to write it up or present the offer. In fact, the licensee should not be part of such an offer.
"Brokerage service contracts" include, but are not limited to agreements between principals as well as agreements between principals and their brokers. Brokerage Service contracts include purchase and sale agreements, lease or rental agreements, listings, options, agency agreements, or property management agreements.
We will begin by looking at the brokerage service contract called the listing agreement between the seller and the listing brokerage firm.
LISTING AGREEMENT - BETWEEN SELLER AND LICENSED REAL ESTATE FIRM
The first step to receiving a commission is to have a written listing agreement with the seller. This is a contract between the licensed real estate firm and the seller (the principal).
Commission - To insure that a commission will be paid for the sale of a specific piece of property, a firm must prove that a written listing agreement was present. The listing agreement between the seller/principal and the listing firm. The firm always owns listings. A lot brokers find this out when they leave to another firm. The current firm decides to keep the listing. You as the broker might say, "the seller is my client and it's my listing!" The firm owns the listings, now the firm might let you take the listing with you; review the employment contract before leaving... The listing agreement does the following:
Example: Open Listing - The seller will pay a commission only if the firm brings the buyer. The seller can sell their own home and any licensed broker can bring a buyer forward and obtain the commission. This type of listing has no promise of commission to the listing broker, but the seller is giving up part of their rights to sell and promises to pay in certain cases. In Washington, open listings are not allowed.
Listing Rule - If the firm is not motivated by a listing commission, it's unlikely the firm will spend advertising dollars and work hard to sell the property.
Types of Listings
The following pages will show the different types of listing agreements that a seller (principal) and the firm (designated broker) can enter into.
Listing Rule - The more likely the firm is to receive a commission, the more likely the firm will spend time on promotion and advertising.
Open Listing - An open listing is exactly that. All licensed brokers in the State as well as the owner have the right to sell the property . The listing is OPEN. A commission is only paid to a broker that sells the property. No commission is paid to any other Designated broker's regarding the listing.
No Commission - The owner does not have to pay a commission if the owner sells the property himself/herself.
Unilateral - This is our unilateral (one-sided) contract that we discussed earlier. The designated broker is not required to perform. The designated broker simply promises to try to find willing and able buyers. The seller must perform and pay a commission if the firm/Designated broker finds that buyer.
Net Listing -. These are agreements, but they are not truly a type of listing. This is basically a way of stating the commission terms. The firm and the seller establish a minimum price (seller's net). The problem is that the firm receives any amount in excess of a minimum price.
Restrictions - For this reason, some States restrict the firm's commission right to no more than a "reasonable and customary" commission.
Termination of a Listing Agreement
When a sale is not consummated during the period specified on the listing agreement, the listing agreement will expire.
No Commission - The seller is not required to pay a commission to a firm if a listing agreement has terminated. Termination of the agreement would occur under the following situations and no commission is due.
Mutual Rescission - If both parties (mutual) agree to return to their original position (rescission) and not have a contractual relationship, the listing agreement is terminated by mutual rescission. The seller and the firm agree to terminate.
Expiration - When the expiration date specified on the listing agreement has reached the stated time and no subsequent sale to a customer of the firm occurs in the future.
Abandonment - If the listing firm fails to perform and abandons all efforts to find a willing and able buyer.
Destruction - If the property is destroyed and title was not yet transferred, the sale is not complete. The destruction of the property does not bind the firm and seller to further obligations under the listing agreement.
Personal Aspect - The death, insanity, or bankruptcy of the firm or the seller allows the listing agreement to be terminated. The seller and broker agreed to do business under "Personal Aspect" and are not required to do business with anyone else without permission.
Loss of License - If the firm loses their license, the seller cannot continue business with that firm. The listing agreement is terminated.
Fraud - If a brokerage or one of the affiliated licensees commits misrepresentation, concealment, or fraud, the seller/principal can terminate the listing agreement.
An appraiser is hired to estimate fair market value of the principal's property. This can be done for the purpose of selling the property, to obtain a loan, or as we discussed in the previous chapter, to determine the rate of rent if it is based on market value. Appraisers have fiduciary capacity in that they will determine the economic outcome of their clients by their work efforts.
Written Report - The appraiser will make a written report on the value of the principal's property. This report could be viewed by many different financial entities involved with the property such as the owner, mortgage broker, banker, property manager, tenant, etc. The important factor is that an appraisal by an appraiser is an opinion of value.
Fee - The appraiser's fee is based on the amount of services provided the principal. As we discussed earlier in the course, there are several different types of appraisal methods that can be completed. If a principal/owner desires 3 different forms, the fee will be larger. If a principal wants a full blown appraisals on 4 different locations there will be a larger fee.
Can't Predetermine Value - An appraiser cannot be subject to a "predetermined building value" placed on them by the principal. There are many instances when an owner will say to an appraiser "I need the value to come in at around $180,000" or something like this. As we just discussed, an appraisal is utilized by many different people such as the owner, mortgage broker, banker, property manager, tenant, etc.
Fiduciary Capacity - The appraiser has fiduciary capacity as to estimating fair market value to all people who view the appraisal.
Inflated/Deflated - To inflate or deflate the value of the principal's property would be a breach of fiduciary capacity. Someone is going to be injured by an improper appraisal. An inflated value would injure the financial institutions providing a loan. There have been instances in a divorce when a spouse wants the value of the house to be deflated when settling up assets with the other spouse. In either case this would be a breach of fiduciary capacity and the appraiser cannot participate in a "predetermined value" request.
Fee Rate - The fee charged by an appraiser is to be based on the amount of time and effort expended by the appraiser. It is not to be based on a percent of the value of property. This is hard for the general populous to understand, but it is true. An appraiser would have to charge the same fee for a multi-million dollar home as a $100,000 if the same amount effort was expended for each.
Reasoning - If appraisers based their fee on the value of the property the State and the financial community feels it would be an invitation to over-value the property to increase the fee.
Fair Value - The State and the financial community want a value that is true above all else.
Selling / Buying Commercial Real Estate
Business Brokerage or Business Chance Brokerage - This is the licensee handling the sale of commercial businesses. Most States do not require a special license for a licensee to handle the sale of businesses. There is certainly more knowledge necessary, but not a special license.
Buying/Selling Businesses - When working with a buyer or seller of a business, there are more things to consider than real estate property. There is current clientele, goodwill or reputation, inventory, furnishings, supplies, current employee abilities, etc.
No License Required/No Real Property - There are instances where the business that is being sold owns no land/ real property. The business only rents space so that it can write off the entire cost of obtaining floor space. The business only owns personal property (chattel fixtures) such as equipment, furniture, inventory, etc.
License Required - Land/Real Estate - In order for broker of the owner to sell the business that owns the land, the broker needs a normal real estate broker or managing broker's license. This is required if the broker is charging compensation for handling the sale of the business.
Dangerous Appraisal - The most dangerous appraisal for commercial property is a RETAIL STORE. An appraiser gains financial information from the selling owner. Past history has shown that some owners "cook the books" in order to sell at a good price.
CAREFUL : There is no such thing as a Business Chance Broker's License. State exams are notorious for using this type of licesne to trick students.
Uniform Commercial Code (UCC) - Bulk Transfer
Uniform Commercial Code - UCC - The 50 States have banded together and formed the UCC to standardize the commercial transactions of selling personal property, stock, merchandise, and fixtures of a business. The reason for the UCC is as follows:
Debtor Requirements - The debtor must file a SECURITY AGREEMENT with County Clerk and Secretary of State regarding those items purchased on credit. The filing of this security agreement gives constructive notice that a lien has been placed on the personal property purchased by the business. By doing this, the seller of the business has given constructive notice of any and all potential purchasers of the business that there is a lien on the personal property.
Buyer's Duty To Creditors Of The Business - The buyer of a business has specific duties that are to be followed under the Bulk Transfer regulations of the State:
Example: Z is buying a clothing store from H. H must file a Security Agreement with the County and State that has a list of all the creditors of the store. Z must then contact each creditor at least 10 days prior to the sale. If a creditor doesn't want to work with Z, the creditor can attach the assets of the business within that 10 day period.
No Affidavit or Notice - If there was no affidavit filed with the County or notification was not sent to the creditors, the buyer is in hot water. The filing must be given to those creditors who properly filed a Security Agreement or were listed on the affidavit.
Void Sale - The sale of the business property is void as to creditor's rights. The creditors can come in at any time and take title to the property the creditor owned and did not receive payment for.
No Title - The purchaser has not acquired good title to any of the business personal property that was part of the sale. The creditors have title to their goods and can seize them at any time.
Attachment - The assets are subject to attachment for payment of debts. The creditors can come in at any time within a 6 month period and grab the personal property unless the new buyer/owner pays for the goods.
Statute of Limitations - No action can be taken by a creditor against the sale of personal property after a 6 month period. This begins from the date the buyer takes possession of goods. However, the 6 month statute of limitations period does not apply if the sale was concealed from the county and public.
Landlord - Legal Exposure
The landlord and owner have other factors that can enter into a lease arrangement with a tenant.
Liability Exposure - The landlord has legal liability for bodily injury or property damage to any person lawfully on the premises.
Bodily Injury - This would be damages to a person's body caused by the premises of the landlord.
Lease - Option to Buy
Besides providing living quarters under a lease arrangement, the owner and landlord can provide other factors under a lease agreement. This can include the sale of the property to the tenant.
Option to Purchase - The owner/landlord can include in the lease agreement that the tenant has the right to purchase the property within an agreed upon time period.
State Exam Factor - The exam will often times zeros in on the fact where this is the only contract where a person goes from a freehold to a non-freehold estate under one legal document. The owner goes from landlord to tenant under the sales agreement.
Advantages to the Buyer - The buyer has the advantages of ownership and has an immediate tenant under the agreement. Besides this obvious advantage, the buyer will also enjoy the following:
Tax Sheltered Income - In that the building is a commercial venture, the buyer will be able to deduct from income the depreciation of the building and normal expenses that can be deducted from current income. The income is therefore a tax shelter.
Appreciation - Usually owned property will experience appreciation of value. The buyer would enjoy this from owning real property.
Sale and Leaseback - Owner Becomes A Tenant
Sale Lease Back - With commercial real estate, the seller might want to obtain the value of the property, but retain the possession of the property. The owner would sell the property to a buyer and agree to lease the property from the buyer. When an owner agrees to sell and lease the property back, there are other considerations:
Tax Deductible - When making payments on an owned building, the payments are not deductible. When making lease payments on a building, the cost is a tax deductible expense.
Depreciation Expenses Taken Over Time – When a business takes a yearly depreciation expense on a building, this lowers the Cost Basis for the building tax wise.
Above Example: If the depreciated building of $200,000 was sold 20 years later for $2,000,000, the profit would be $1,800,000. With a tax rate of 25%, the capital gains tax would be $450,000.
Types of Commercial Leases
Leasehold Estate - An estate right is the right of possession. When a tenant signs a lease they are entitled to possession (a leasehold estate) of the property specified on the lease agreement.
Consideration - A lease is a contract. Under contract law each party has to give consideration/value to the other. The tenant pays rent. The landlord gives possession of the specified (address) location on the lease.
There are quite a number of different types of leases. Most people are only familiar with the leasing of space, but there are leases for the air, ground, etc. What we are going to do now is look at the all the different types of real estate leases.
Named for Use - Most leases are named for the type of use that the tenant will enjoy during the lease period. The interesting aspect of these types of leases is that the lease is named for type of use the tenant will enjoy.
Residential Lease - This is a lease that allows the tenant to live within the specified premise for residential purposes.
Commercial Lease - This is a lease that allows the tenant to pursue retail, wholesale, and/or industrial pursuits within the specified premise on the lease agreement. The lease would specify the specific form of commercial venture that the tenant would be able to pursue.
Roof Top Lease - This is a lease that allows exactly what the name implies, the leasing of a roof top only. This is mainly used for the placing of signs on the roof by another business.
Besides sales, a licensee can have other fiduciary responsibilities to clients. These aspects are as follows:
Property Management - This is when a licensee or non-licensee provides management services for a principal/owner. The property management aspect mainly pertains to managing commercial property such as shopping malls, apartments, condominium complexes, etc. on behalf of the owner(s).
Licensed - In Washington the property manager of client properties needs to have a real estate license. This is when they are holding themselves open to the general public to provide management expertise for a fee. The key is charging a fee. The reason for this need for a license follows the same general rules as used for selling real estate. In some States licensed property managers are separate from those licensees involved in the sale of real estate; Licensing Rules.
Fiduciary Capacity - A property manager holds a fiduciary capacity to the owner of the property. The property manager is an agent of the owner and the owner is the principal under a management contract.
Owner's Objectives - The property manager must seek to meet the owner's investment objectives regarding the property. As you will discover during your career, each owner has their own priorities regarding theirproperty. It is up to the property manager to live up to these objectives. Some examples of owner objectives include the following:
Property Management by an Agent
If a licensee takes an active role in the management of the principal's (owner's) property, the following responsibilities would have to be met:
Operation of the Building - The property manager takes over the day-to-day management of the property. This would include normal maintenance of the building, executing leases with the tenants of the building, and handling evictions of tenants who do not pay their rent or do not follow the tenant guidelines set down by the agent.
Marketing - A good property manager is continually marketing the leasing of the building. The goal is to have the entire building leased out/rented up. Marketing by the property management would include the establishing of tenant promotions, signage/visible promotions such as balloons, the placing of ads in the local paper, etc.
Investment Planning - A good property manager will establish a long term program/plan in regard to the principal's property. Major concerns regarding a long range plan for the property would include the following:
The Management Contract
The contract between the property manager and the principal defines the specific agency power of the property manager. This will specify the agency powers that the principal delegates to the property manager.
In Writing - Under Washington laws, the property management contract must be in writing. All leases and contracts through a licensee are to be in writing regardless of length. For the property manager's sake the contract and leases should be.
Property Management Contract - The property management contract should contain the name of owner and property manager. The contract should require periodic reports to the owner as a means of regular communication. There should be a legal description of the property that is to be managed. The contract should also specify the means and the rate of compensation.
Authority - The contract should define and show the limit of the broker's authority. The authorized authority would specify the limited power the property manager would have for: leasing, collecting rents, terminating tenancies, and evicting tenants. The contract would also define the handling of security deposits. States have laws regarding the handling of tenant deposits. Most require them to be placed in a trust account during the tenancy period. The property manager would also need to know what powers are granted by acting on behalf of the owner in legal actions, collections, and suing for damages. I think you can see that all these powers should always be in writing so there are no mix ups on the part of the property manager.
When entering into a Property Management Contract, the contract should always define the following areas:
Expenses - The contract should define and limit the broker's authority for ordering and paying for operating expenses. Establishing a budget is the usual contractual requirement. This way the broker can normally order and pay for "normal" operating expenses that we discussed earlier. The contract will usually specify those expese areas that the broker must gain the owner's approval before paying:
Example: The cost of painting the building or putting a new roof on the structure.
Normal Expenses - The broker may usually order and pay for an expense from the operating budget if they have the following characteristics:
Fee Amount - The management fee charged by the property manager is usually a percentage of the operating income. The percentage amount will vary depending on the size of the property and the required services of the manager. The fee should be stated in the management contract.
Client First - A good property manager should never be concerned with how a decision will affect their fee. The concern should be how the decision will affect the owner's investment needs. Remember, a broker should always be thinking in terms of their "fiduciary capacity" as a broker of the principal/owner. If decisions meet the owner's investment needs, the fee will take care of itself.
Real Estate Agency Law
Agency Law- One party delegates the transaction of some lawful business or power to another which is usually a seller and or a buyer. When dealing with a third person that is not part of an agency arrangement, that party is called a customer. When a broker begins working with a seller, the licensee is known as the seller's agent. If a broker begins working with a buyer, the broker is known as the buyer's agent. If a broker is representing a buyer and a seller in a transaction, the broker is known as a dual agent. In any of these three scenarios the broker is representing a principal/client (seller/ buyer) and is therefore an agent of that principal/client. A "customer" is any party that the broker deals with/negotiates with on behalf of their client/principal.
Creates a Fiduciary Relationship - A fiduciary is one that is authorized to represent the interests of another in legal proceedings. A broker represents the seller or the buyer or both in a real estate transaction. A licensee therefore functions as a fiduciary.
Principal - This is the one being represented by an broker. In the real estate industry the principal is also known as "the client." This is usually, but not always, the one who will pay the broker for their services.
Broker - This is the entity who acts in a fiduciary capacity in behalf of the principal. In Washington the firm is an agent of a principal. The designated broker for the firm is an the agent of a principal. The affiliated broker of the firm is an agent of the principal. The principal being represent by all three agents could be a seller or a buyer or both. Usually, the affiliate broker of a firm enters into an agency agreement for the firm with a principal seller, buyer, or both.
Sub-Agent - Other affiliate brokers who are authorized by the broker to work in behalf of the principal. The principal must approve the use of sub (additional) agents.
Principal Reliance - The principal relies on the broker to protect their interests in a real estate transaction. This reliance can be expressed in a written or oral agency contract.
Beginning Agency Law - In order for an agency relationship to exist, the principal must have delegated responsibilities to the broker in regard to performance of REAL ESTATE BROKERAGE SERVICES on behalf of the principal. In other words, the principal must contractually stipulate that the broker is to provide the normal real estate services on behalf of the principal.
Express Contract - This is a contract that is expressed between the principal and the broker; between the client and the licensee.
Written or Oral Agreement - Agency contracts can be an oral agreement or a written contract. The State of Washington require the agency contract with a seller to be in writing. This is the Listing Agreement. Brokers of the buyer don't always have a written Buyer's Agency contract. If not in writing, the buyer's agent has an oral contract. Each licensee is required to inform their position of agency representation to all informed parties.
Broker Limits - An agency contract in the real estate industry is a limited contract. The agency contract limits the broker's action to those powers specifically agreed to in the contract. The agency powers are limited to powers within the real estate area. This is also known as a special agency relationship.
No General Agency Power - A real estate license does NOT have a general power of attorney in behalf of the principal. They cannot sign documents in behalf of their clients.
Types of Agency
When a principal/client enters into an agency contract with a licensee, the agency agreement will establish the powers that the principal is granting the broker. The licensee cannot exercise any powers beyond those granted under the agency agreement. The following are examples of the different types of agency.
"Universal Agency" - A written agreement where the broker has the actual power to sign legal documents for their principal. This is normally formed for people who are incapacitated physically or mentally. In regard to real estate, the broker under this agreement can act as if they were that person. The broker would have General Power of Attorney on behalf of the principal/client. This is rarely done, but if the principal were living abroad, the principal could give the broker universal agency power to allow sale of the property in question.
"General Agency" - This is similar to universal agency but it does involve a power of attorney designation. General agency includes all business affairs of the principal, but not personal aspects. A general agency would have the power to bind their principal on business and real estate matters.
"Specific Agency" (Special Agent) - This agency relationship gives the broker representative power, but it is limited to only one specific business activity outlined in their agency agreement. This is the form of agency that licensees are involved with regarding the principal's needs.
Firm - Normally, the firm and its designated broker does not have power of attorney nor does the designated broker need it. The client is capable of taking care of themselves, but needs help in one specific area; real estate.
Affiliate Broker - Affiliate brokers that are licensed with a firm legally, represent the principal that the broker works on behalf of the principal as the principals agent with real estate negotiations with customers.
Listing Agreement - The listing agreement creates specific agency. It only states "I will pay you a commission if you find a ready, willing and able buyer." The listing agreement does not give the firm of its designated broker the right to accept and bind the sale or to sign legal documents on behalf of the principal.
The study of system of rules which a particular country or community recognizes as regulating the actions of its members and which it may enforce by the imposition of penalties.