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Ch. 2: Real Estate Brokers

 Real estate brokers perform the critical task of finding the parties for the deal; they play the role of transactional
intermediary in the market for property sale and exchange. Once the parties are found, the broker continues to
facilitate the transaction by assisting the parties with matters such as k negotiation, inspections, and financing.
The primary service brokers offer though is market info—they provide guidance about properties and the terms
at which prospective participants are willing to deal.
o Primary functions: bringing together parties for a transaction; assist w/ k nego; assist w/ property
inspections; assist w/ financing arrangements; provide mkt info
 Regulation/Licensure
o All 50 states regulate the business of real estate brokerage
 A state administrative agency is responsible for enforcing the laws pertaining to brokers (called
“real estate commission” or “dept. of real estate”)
 2 levels of licenses:
 1) Broker – “full” license- can work as EE of brokerage or can hang his own shingle
 2) Salesperson – can act as broker only under the supervision of a licensed broker
 Realtor – technically means NAR (natl asso of realtors) member but is often used as a synonym
for broker or salesperson
 Income
o Brokers make a living by collecting commissions, which is a percentage of the sales price (typically 4-7%)
 Flat fees and payment on an hourly basis for time spent can be used but rarely are
o Instead of using a broker, some homeowners try to sell on their own- FSBO – for sale by owner
 Cons: seller might not be able to find buyer and if they do they might agree to less advantageous
terms than if they had a broker
o The brokers client is usually the seller. However, brokers can also represent buyers and even both
buyers and sellers at the same time
o Listing- k where property owner hires a broker to sell his property (best if in writing- some states require
it)
 4 types of listing agreements: (between seller and broker)
 1) open listing (nonexclusive listing) – broker earns commission if he procures a ready,
willing and able buyer
o if seller gets more than 1 broker, first broker to get buyer gets commission
o if seller gets buyer w/o help of broker then broker gets no commission
o ** almost unheard of today
 2) exclusive agency – the broker is the exclusive agent; the agreement contains a
promise by the seller not to engage another broker during term
o if another broker finds buyer, exclusive agent broker still gets commission BUT
o if owner finds buyer on his own then exclusive agent broker gets no commission
 3) exclusive right to sell agreement (exclusive listing) – seller is obligated to pay
commission if any buyer purchases the property during the term; it’s the most
protective of the broker’s expectation of getting commission
 4) net listing – commission isn’t specified as a %, rather seller agrees to pay broker all
amounts received in excess of a set price. The broker typically has discretion w/ respect
to setting the listing price and will seek to sell at a higher price and pocket the diff (less
common)
o ex) seller is to receive a net price of $300,000, and the broker might set an initial
asking price of $330,000
o Multiple Listing Service (MLS)- almost all listings in the MLS are exclusive right to sell listings
 Listing broker- the broker who enters into the listing agreement with the seller
 Property owner/sellers agent
 Selling broker or Cooperating broker – broker who is a member of MLS whose customer buys
the property of the listing broker. Selling broker is known as the listing broker’s subagent, who is
engaged by the listing broker to perform the task of dealing w/ the prospective buyer and
showing the buyer a number of properties that may suit his needs. (sometimes the buyers
broker)
 MLS agreements require that the listing broker and the selling broker split commission
o Even tho over 40% of homebuyers use internet sources to gather info and start a home search, 90%
still use a broker to purchase the property
 Ppl want a lot of help, advice, and hand-holding when making a home purchase, which is likely
to be the biggest single investment a person makes in their lifetime
 Problem 2A
o Facts: Steven and Sarah bought a two bedroom home 3 yrs ago in Denver. They have out grown their
home and wish to upgrade to a newer, more expensive home in Cedar City. They decide to hire a broker
in Denver to sell their house and will look for another broker in Cedar City to facilitate their home search
and purchase.
o Answer:
 I would advise Steven and Sarah to enter into an open listing w/ more than one broker in Denver
so that way they can sell their house in Denver ASAP. Under an open listing agreement they only
have to pay commiss to the broker who procures a buyer and if they find their own buyer they
don't have to pay commiss to any of them.
 Cant tell the buyer that they are willing to accept a lower price than the asking price
 If they wanted to sell it without a broker I would tell them that it is possible to sell their Denver
house FSBO (for sale by owner) but that it might be difficult to find a buyer quick enough to fit
with their timeline and they could run into the problem of agreeing to less advantageous terms
than if they hired a broker. Even today, 90% of homebuyers still use a broker to purchase
property.
 A. Brokers’ Duties to Clients
o Relevant Law: The broker-homeowner relationship is governed chiefly by the law of contracts and the
law of agency.
o Fiduciary Relationship: The broker is a fiduciary, so he owes the client the fiduciary duties of loyalty,
confidentiality and disclosure
 Loyalty- broker should do his utmost to protect client and advance his interests
 Broker is charged with the duty of obtaining a sufficient sales price
 Confidentiality- broker cant disclose to 3Ps info gained about the clients objectives and the
property w/o clients consent
 Disclosure- broker must disclose to client all info gained that is material to his position or
interests
o To whom are the brokers duties owed?
 Usually the seller
 Sometimes complicated tho
 1) bc of Dual agency- the broker lawfully represents both buyer and seller, and is
permissible in most states as long as the broker discloses the dual agency to both parties
who consent
o More than 40 states require a written disclosure
o Cons: potential conflicting duties of loyalty, disclosure and confidentiality you
cant help either party strategize at all or provide any real expertise to either
party- they are essentially just a receptacle of information from both parties;
 2) broker helps buyer get financing (acts as buyers agent) while he is clearly the sellers
agent for the primary duty of selling the property
 3) when a listing broker and selling broker are both involved.
o Listing broker is sellers agent
o Selling broker helps buyer look at houses so buyer thinks selling broker is on his
side when really, under the traditional rule, the selling broker is also the sellers
agent
 Selling broker is listing broker’s subagent
 Criticism of traditional subagency rule:
o 1) buyer can be misled into thinking selling broker is
their agent
o 2) buyers deserve representation at the critical stage of
selecting a property and negotiating the terms of the
P/A
 Alternative to the formation of an agency relationships w/ seller & buyer  Transaction
brokerage (aka nonagency brokerage)
 Broker acts as a facilitator, intermediary or middleman by selling his services but has no
formal agency relationship w/ buyer or seller. By avoiding the creation of fid duties, the
broker should not become an advocate for, or give advice to, either party.
o Pro: risk reduction
o Some states have a statutory presumption that ur broker is a transaction broker
unless overcome by a writing expressly establishing an agency relationship
o Problem 2B
 If sarah and Brandi entered into a written agreement expressly establishing an agency
relationship, then Brandi, as the broker, is the Sarah’s agent, not Kevins. As Sarah’s agent, she
owes sarah the fiduciary duties of loyalty, confidentiality and disclosure. As part of her duty of
loyalty, Brandi must do whatever she can to advance Sarahs interest, which includes obtaining a
sufficient sales price. She also owes Sarah the duty of disclosure, which requires her to disclose
to Sarah Kevin’s offer, even though its below asking price because that is information that could
be material to Sarah’s interests.
 If Sarah thinks her asking price is reasonable, then Brandi would violate her duty of loyalty if she
sells it to Kevin for 35K under asking price, as she isn’t furthering Sarah’s interests. However, if
Sarah is desperate to sell, the $340k would be a sufficient sales price even though its $35k under
asking because it covers her loan balance, so Brandi wouldn't violate her duty of loyalty in this
scenario.
 Idk if it matters whether the brokerage agreement is an open listing, exclusive agency or an
exclusive listing??
 Idk if Brandi violates her duty of loyalty by showing Kevin other condos w/in his price range??
But probably not!!
o Rangel v. Denny
 Sellers hired Dowling as their broker and the broker told them to notify him if any prospective
buyers contacted them. When prospective buyers (PBs) contacted them they notified the broker
and asked the broker to provide a prospective buyers k, but broker refused, stating that he
didn't represent the prospective buyers. So, the Sellers drafted their own k for the buyers to buy
the house, 40 acres of land and 20MA for $396k.
 Sellers then moved out and signed a 6-mo apt lease as well as a lease for biz space for seller to
carry on her biz as a barber.
 Buyers couldn't get financing and so they backed out (stating they couldn't get financing bc
lender wouldn't accept the appraisal of the house)
 Sellers then sued Broker and Buyers for negligence and breach of K
 Analysis
 The precise duties owed by the broker are determined by examining (1) the nature of
the task the broker undertakes to perform and (2) the agreements between
broker/buyer and/or broker/seller
 Sellers argue Broker breached their duty of loyalty by failing to negotiate the sale, failing
to produce a contract that was approved by the Lousiana Real Estate Commission,
failing to review all purchase offers, failing to follow up on remaining details of sale,
failing to discuss financing alternatives w/ the buyer, and failed to successfully close the
sale.
 * the main breaches of this duty were when (1) the broker didn't complete a P/A
between seller and buyer and (2) when broker failed to tell the sellers not to move out
until buyer got financing
o Problem 2C
 Vinnie wants to get a broker to buy a home, but not necessarily any broker he engages would
technically be a “buyers broker” bc the broker represents the seller if already engaged by the
seller and owes them fiduciary duties. In this scenario, the broker has no obligations to Vinnie as
the buyer.
 Alternatively, Vinnie can get a transaction broker (who still wont owe fid duties to him OR the
seller) and do dual representation
 If a broker is doing dual representation then he will accept a lower commission (like 4%)
because then he’s not splitting it w another broker
 Or he can get a buyers broker w/ a written agreement est an agency relationship and in this
case, the broker owes Vinnie the duties of loyalty disclosure and confidentiality and is truly on
“Vinnie’s side”
 B. Brokers Duties to Nonclients (3Ps)
o Disclosures that materially can affect the sale of property are an obligation on the part of the seller
(Holmes v. Summer)
 In most jdx, there is a duty to disclose any material info that could not be otherwise located thru
diligent research (how do you know what is material?)
 Holmes v. Summer
 Issue: whether the brokers representing the Seller of residential property have a duty to
the buyers to disclose the fact that it is overencumbered and cannot in fact be sold to
them at the agreed-upon price unless either the lenders agree to short sales (i.e. a sale
of real estate where the net proceeds from sale is < debts secured by liens on the
property) or the seller depositsa whopping $392k in cash into escrow to cover the
shortfall
 even tho the sellers agent owes them fiduciary duties and generally doesn't owe such
duties to the buyer, the seller and the seller’s agent owes the buyer the affirmative
(NOT fiduciary) duties of: care, honesty, GF, fair dealing, and disclosure
o brokers have a duty to disclose physical defects and other matters that don't
pertain to physical defects, but that otherwise affect the desirability of the
purchase (e.g. debt on property far exceeds sale price, neighborhood nuisance,
murders on property, violation of building codes or regulations)
 this holding doesn't convert the sellers fiduciary into the buyers fiduciary tho!!!!
 C. Broker’s Right to a Commission
o D/R: The Broker earns his commission when he produces a customer who is ready, willing, and able to
purchase upon acceptable terms to the owner/seller. (But is typically DUE to be paid upon closing.)
(favors broker)
 Court interpretation: the broker finishes his undertaking prior to closing, when he presents his
client, the owner, with an acceptable written offer to purchase.
 Exceptions:
 (1) Conditions in the K for Sale
o express conditions that, if not satisfied, give 1 or both parties the right to close
due to exceptions to the D/R
o if the sale fails due to an unsatisfied condition, the right to commission ends
 (2) Express Closing Term in the K
o some sellers expressly mandate that closing is required for a commission to be
paid
o Minority Rule (NJ, Oregon): In a minority jdx, closing is a required step to earn a commission even if not
included in the agreement;
 UNLESS a failure to close is caused by the seller’s wrongful default or interference, then the
commission is payable
 Hillis v. Lake (reread this case)
 After the sellers could not produce certification that the contamination had been
cleaned up, the sellers repurchased the property and discharged the mortgage
 The agents brought an action against the sellers to recover their commissions
 The court held that the conditions for payment of a broker's commission were not met
because no closing occurred.
o “When a broker is engaged by an owner of property to find a purchaser for it,
the broker earns his commission when (a) he produces a purchaser ready, willing
and able to buy on the terms fixed by the owner, (b) the purchaser enters into a
binding k with the owner to do so, and (c) the purchaser completes the
transaction by closing the title in accordance with the provisions of the k”
 Here, the seller didn't do anything wrong to prevent the sale so the broker doesn't get
the commission
o Problem 2D
 Facts: Ted and Karen Troop (sellers) list their house to sell with Brandy (broker). On 1/10, they
sign an exclusive listing agreement, with a term of 4 mo, a selling price of $380 and a
commission of 5%. On 2/23, Brandy presents a k from Sam (buyer) for $358k, along w/ a check
fro $5k of earnest money made payable to a local title co. Sellers accept k and sign it, but the
sale doesn't close. In which of the following situations has Brandy earned a commission? If
Brandy has earned a commission, when is it payable?
 Deposit vs. Earnest Money
o if a deposit is classified as a deposit its really just a prepayment of the purchase
price. If 1 party backs out, the other party can sue the other party for specific
performance and make the buyer buy or the seller sell the house
o if a deposit is classified as earnest money it precludes specific performance by
either party (if buyer backs out, the seller gets to keep the earnest money. If
seller backs out, the seller has to return the earnest money to the buyer + some
additional $)
 Answer
 Under the majority rule, the broker would have earned his commission in all 4
circumstances, because she produced a customer who is ready, willing, and able to
purchase upon acceptable terms to the owner/seller (i.e. she presented her client, the
owner, with an acceptable written offer to purchase.) This commission is DUE to be paid
on closing (i.e. the date that would have been the closing).
o In part B though, there is an argument that this buyer was ready and willing to
buy the property, but not ABLE to buy the property bc he cannot get a loan at all
(if he could get a loan, just under unfavorable terms then this would be
different). SO it is at least arguable that the Broker would not be entitled to
commission under the majority rule or minority rule in this instance
 Under the minority rule, closing is required to earn a commission, even if not included in
the agreement, unless a failure to close is caused by the seller’s wrongful default or
interference, then the commission is payable.
o In part A, the transaction failed bc the Buyer changed his mind, which is not
caused by the seller’s wrongful default or interference, so the commission is not
payable to the Broker in this instance.
o In part B, the transaction failed because Buyer has poor credit history even
though he has a high paying job and was turned down for a loan. A buyer poor
credit history is not caused by the seller’s wrongful default or interference, so
the commission is not payable to the Broker in this instance.
o In part C, the transaction failed bc the Sellers change their mind about selling
and negotiate a rescission w/ buyer, which provides for the return of his earnest
+ buyers give Seller an additional $2k. Here, the failure to close is cause by the
seller’s wrongful default—they decided they didn't want to sell anymore, so the
commission is payable to the broker in this instance. It is payable to Broker upon
rescission???
 Does it matter whether the sellers rescinded in good faith or in bad
faith? NO Hillis says “due to a wrongful act OR interference” so it
appears that motivations for deciding not to close don't matter (you
could always try to argue about it though)
o In part D, the transaction failed bc the title search discloses an easement on the
property, to which Buyer objects. If the Sellers knew about this easement and
didn't disclose it and it was so material that it really affects the value or
desirability of the property you could argue that the Sellers interfered with the
transaction and then the Broker would be entitled to commission. However,
 D. Brokers and Lawyers
o Unauthorized Practice of Law  When has a Realtor crossed the line into practicing law without a
license? Three tests are commonly used to determine this:
 (1) Contract vs. Conveyances Test
 The Broker may prepare the contract of sale or earnest money contract between the
parties and other ancillary documents, such as a loan application or escrow instructions,
but may not prepare closing instruments that convey interest in land. (conveyance =
deed, interest in land (like a servitude interest), mortgage deed of trust (a deed of trust
is the word some states use for mortgage)
 (2) Simple-Complex Test (I think OK follows this rule)
 If the transaction is simple, a Broker is permitted to select standard-form instruments
and assist the parties in filling in the blanks.
 The Broker cannot furnish documents for a complex transaction or an unusual feature of
a simple transaction, such as creation of an easement.
 (3) Incidental Test
 Broker drafting of instruments is authorized if it is incidental to the Broker's business
and the party pays no separate charge for this service.
 Problem 2E
 Buyer asks whether there are any covenants or restrictions on the property. Listing
broker responds and yes, haven’t you seen them and hands her a copy of the recorded
neighborhood covenants. Buyer asks whether she can put a swimming pool in the
backyard. How should the brokers respond?
o The brokers should be safe and advise the client to go talk to a lawyer (even if
the covenant literally says “no pools”) but it would probably be okay if this were
so clear as “no pools” (if it said “no big pools” then that would be more
ambiguous and more likely to tell them to go get a lawyer)
 Does it matter whether the selling agent is a subagent, representing the seller or a
buyers broker representing buyer?
o He didn't answer this
 Is it different if buyer said she had heard of a lot of homes having mold problems and
she hasn't had a mold inspection and asks if its too late and what she should do?
o In this case, the brokers can probably tell her whether it is too late or not but
shouldn't go like super far into giving her advice as to what she should do.
(buyer’s broker should give this advice)
o Lawyers Acting as Brokers
 Attorneys are exempt from licensing requirements in nearly all states from regulation on buying
and selling real estate
 In some states the exemptions scope varies
 In most states, the exemption is limited to brokerage services that are incidental to the
attorney’s law practice (and also exclude them from collecting a commission for the brokerage
services)
 In Re Roth
 Disciplinary action for an attorney who attempted to earn commission on a real estate
transaction for which he also served as the attorney for a prospective buyer of that real
estate
 Takeaway: Attorney cannot receive both legal fees and broker commissions for the
same deal (potential conflict of interest) – you can act as both an attorney and a broker
but you cant get compensated for both
 Problem 2F
 I would advise that they should retain an attorney bc attorneys add value that brokers
cannot. Lawyers are usually not involved in residential transactions bc real estate
brokers use standardized P/As (as they are here) and complete according to the parties
negotiations. But, the broker cannot advise them in their negotiations (unless she is the
buyers broker) and the terms would likely be very seller-friendly. Additionally, if the
buyers wanted to add any clauses to the standardized P/A, a broker cannot do that bc
that would likely be an unauthorized practice of law.
 Although hiring an attorney can add value, brokers can fill in simple k forms, assist
buyers in the selection of a mortgage and often prepare most or all of the closing
documents, so the residential market is competitive for lawyers unless the lawyer has a
niche with very wealthy clients.
 As a client, the lawyer owes their clients fiduciary duties.
 Problem 2G
 Facts: real estate lawyer not licensed as a broker.
 What do we need to know about the exemption for lawyers?
o If the statute is a complete exemption or a partial exemption
 It sounds like a complete exemption  which is good for her
o Under a partial exemption the lawyers broker activities are qualified to practices
that are incidental to the lawyers services
o We need to know what state we are in