1 Washington Real Estate Practices CHAPTER 1 Introduction the Law Of

Washington Real Estate Practices

CHAPTER 1

Introduction

The law of agency regulates the relationships, duties, and responsibilities of the licensee to the principals as well as third parties in a transaction.

The common law of agency did not fit very well with the specific needs of buyers and sellers and caused confusion for licensees.

Since the eighties, the National Association of Realtors, local associations, The Federal Trade Commission (FTC) and the Association of Real Estate License Law Officials (ARELLO) have been working on the reform of agency representation.

Agency and the laws that govern the fiduciary relationship have received a lot of attention in real estate over the past few years. Numerous court cases have demonstrated that agency is a confusing issue for buyers, sellers, and licensees alike. For example, a licensee may be a broker or a managing broker and is always representing the managing broker. A principle may be a client or a customer. To further confuse matters, a broker may work with one principle and for another.

The various roles a broker may play in the transaction and the duties owed to the principle mandated that states place more emphasis on training licensees on the laws of agency and make their agency relationship issues clear to the client and customer. Brokers and Managing brokers alike must have a solid understanding of the duties expected of them and the consequences for violating the agency relationship. Washington Law makes it mandatory that licensees give their customers the Law of Real Estate Agency Pamphlet to help explain the role the licensee fills and the duties the licensee owes to the client or customer.

This chapter covers the basic agency concepts and then discusses the larger, more complex issues facing licensees in today's market.

Vocabulary

Agency A contract between an agent and a principal

Licensee One who is authorized to represent and act on behalf of a principal

Business Opportunity Means and includes a business, business opportunity, or goodwill of an existing business, or any one or combination thereof.

Buyer An actual or prospective purchaser in a real estate transaction; or an actual or prospective tenant in a real estate rental or lease transaction, as applicable.

Buyer's Agent A licensee who has entered into an agency relationship with only the buyer in a real estate sales transaction. This includes subagents engaged by a buyer’s agent.

Client A party to the transaction that the licensee represents as a principal and can be the seller, buyer, tenant or landlord

Cooperating broker The managing broker not affiliated with the listing broker who brings an offer on behalf of the buyer

Customer A party to the transaction that the licensee does not represent

Dual agent A licensee who has entered into an agency relationship with both the buyer and seller in the same transaction.

Fiduciary A person entrusted to manage, hold, control or make decisions for another. Real estate managing brokers, managing brokers and brokers are considered by law to be fiduciaries, thus they have a duty to act primarily for the principal's (the person who employed them) benefit and not their own. A fiduciary must act with the highest degree of care and good faith in relations with the principal and on the principal's business. Penalties for failing in fiduciary duties may be quite severe.

General Agent Agent authorized to anything that can be legally delegated to a representative, such as real estate licensees acting as general licensees for the managing broker

Imputed Knowledge Eliminates the common law rule that notice to or knowledge of an agent constitutes notice to or knowledge of the principal.

Law of Real Estate Agency Pamphlet This pamphlet describes the customer's legal rights in dealing with a real estate licensee

Licensee A real estate managing broker, managing broker, or broker

Listing managing broker The managing broker of the listing broker

Listing broker The broker that lists the real property

Material Fact Information that substantially adversely affects the value of the property or a party's ability to perform its obligations in a real estate transaction or operates to materially impair or defeat the purpose of the transaction. The fact or suspicion that the property, or any neighboring property, is or was the site of a murder, suicide or other death, rape or other sex crime, assault or other violent crime, robbery or burglary, illegal drug activity, gang-related activity, political or religious activity, or other act, occurrence, or use not adversely affecting the physical condition of or title to the property is not a material fact.

Power of attorney The right to act on behalf of another person such as signing legal papers

Principal A buyer or seller in the transaction that is being represented by a licensee

Renunciation To abandon a previously held right or duty

Revocation The removal of a power or authority

Selling managing broker The managing broker of the selling broker

Selling broker The broker who brings an offer on behalf of a buyer

Special Agent A licensee who performs specific acts for the principal, such as when a real estate broker lists a property for an owner

Subagent An agent who is engaged to act on behalf of a principal by the principal's agent where the principal has authorized the licensee in writing to appoint subagents

Universal Agent An agent authorized to handle all business matters for the principal

Vicarious Liability Eliminates the common law liability of a party for the conduct of the party's licensee or subagent unless the licensee or subagent is insolvent. Also limits the liability of a managing broker for the conduct of a subagent associated with a different managing broker.

Agency Defined

An agency relationship occurs when one-person (the licensee) acts on behalf of another person (the principle or client). This can be as simple as signing for a Fed Ex delivery on behalf of the business or as complex as a business sale that involves millions of dollars.

Agency and the relationships established are not unique to the real estate career field; they are an essential and integral part of many business arrangements. The laws governing agency are derived from both common law and statutory law. Common law is simply law that has evolved by custom or by court decisions.

Statutory law is enacted by legislatures. Statutory law's intention is to specifically contradict and supersede common law, so if there is a conflict, the legislature rules.

The Reform Act of 1997

The Washington Agency Reform was developed to help all parties understand and benefit from the laws.

Real estate transactions have become increasingly complex involving contract legalities, property values, land use, environmental issues, fair housing, home inspections, types of loans, property condition disclosure and much more.

The increased number of lawsuits filed against brokers each year is often brought about by confusion about agency representation.

When the buyer and seller are unsure about who represents them, they often have expectations of the licensee that are not realistic.

The parties may make a decision based on this type of misunderstanding and litigation may be the result.

Recently many states began passing agency disclosure laws that require real estate licensees to make written disclosure of agency to both the buyer and the seller.

These laws may vary from state to state, but their intent and purpose is to clarify the agency relationships enabling the parties to give informed consent regarding representation.

The Reform Act of 1997 was created to: 1. Interpret the common law of agency as applied to real estate licensees. 2. Form legal presumptions of agency relationships with consumers consistent with natural expectations while retaining flexibility for alternative relationships under appropriate circumstances. 3. Reduce dual agency. 4. Eliminate vicarious liability and imputed knowledge as to consumers.

PRIOR to THE REFORM ACT OF 1997 many buyers thought that “their” licensee was the person who was showing them homes and helping with pre- qualification, when in fact the licensee was the seller’s agent or a sub- licensee for the seller. Now, with THE REFORM ACT OF 1997 the buyer will know who “their” licensee is, and under most circumstances the licensee who is showing them homes and working with is “their” licensee.

"Common Law" of Agency:

Loyalty The licensee must place the interests of the principal above those of him/her self and third parties subject only to the law and ethical respects.

Notice The licensee must notify the principal by passing on all information known to the licensee concerning the principal's property as soon as possible.

Obedience The licensee must obey and carry out in good faith the instructions of the principal, as long as they are legal.

Reasonable care and skill The licensee must be competent in the areas that the areas represented by the licensee. Failure to do so may be interpreted as negligence.

Accounting The licensee is required to account for all funds received on behalf of the principal and hold them in a separate trust account that cannot be commingled with the licensee's funds.

Presentation of Offers All written offers received must be promptly presented to the principal until the principal has accepted an offer.

Verbal offers must also be presented to the seller; however, the seller should not accept a verbal offer until it is reduced to writing.

The licensee may not refuse to accept or present any written offer regardless of the content or licensee's opinion.

The obligations that the licensee has to all third parties, customers or other parties in the transaction include:

• Honesty • Reasonable care and skill • Proper disclosure of material facts

A licensee may represent the:

Seller

Buyer

Both the buyer and seller

None of the parties to the transaction

Real estate licensees are "special" agents meaning that the licensee's duties and authorities are limited to the specific transaction.

Almost all real estate transactions involve:

Listing licensee

Selling licensee

Buyer AND

Seller

It is crucial that the parties, licensees and brokers to a transaction know and understand "agency relationships".

Real estate licensees must be aware of these laws and follow them precisely to reduce the risk of lawsuits AND to protect their clients and consumers.

To understand agency relationship the licensee must be aware of how the agency is created the importance of disclosure of representation and how agency is terminated.

Fiduciary Relationships:

Since agency relationships in real estate almost always involve the exchange of money and/or property, a fiduciary relationship is created (when one party is bound to act in the best interest of another).

Clients or Customers?

The definition of client and customer is critical in determining the type of agency relationship. The extent of services a licensee can offer are determined by the relationship established with either the client or customer. A CLIENT is represented by a licensee who is acting as their agent. CUSTOMERS represent themselves.

A licensee can work for a client or customer. But, an AGENT works for a CLIENT, and can provide services such as professional advice, opinions, negotiations, and guidance in their best interest during the real estate transaction.

Creation of Agency

Licensees must always check their firm's policies before creating any type of relationship, with or without compensation that could be interpreted as an agency relationship. Agency can be created by verbal or written contract, as well as by an IMPLIED agreement.

Even though an agency relationship must be voluntary, it is sometimes created unintentionally or accidentally.

An implied contract can be formed by the actions or the conduct of the parties that may "imply" that there is an agency.

Agency can also be formed by not taking an action, or by allowing the actions of a third party to occur.

The only requirement to create an agency is the consent of BOTH the principal and the licensee.

Express Agreement An agency may be created by:

• Express Agreement • Implied Agreement • Ratification OR • Estoppel

An Express Agency can be: • An oral OR • A written agreement where the principal names their agent and the agent accepts the responsibility.

A written contract is not required to create an agency relationship. If specific oral authorization is given from the principal, an agent may perform acts as a representative of the principal.

In Washington State the agreement must be in writing according to The Statute of Frauds for a broker to sue for a commission on the sale of property.

Implied Agreement Implied agency is usually created when the conduct and words of the licensee and principal show an intention of agency, even though NO oral or written contract exists.

This might happen when a licensee has a written seller’s agent agreement, such as a listing agreement and the licensee tells the buyer that he/she is the seller's agent. But then, the licensee spends days with the buyer looking at homes.

Ratification An agency is created by ratification when the principal is aware that unauthorized

8 actions are being taken and the principal accepts by approving or benefiting from the unauthorized actions giving the acts legitimacy.

A principal may not deny the existence of an agency relationship after accepting the benefits of the agent's "unauthorized" acts.

This is also referred to as agency "after the fact." If a person approves, accepts, or benefits from an unauthorized act - even if the person was not authorized to negotiate on that person's behalf, an agency by ratification has been created.

Example Broker Doug contacts Thomas, a FSBO, about listing. Thomas didn't want to list, but Doug looked for a buyer anyway.

Doug finally found a prospective buyer and brought Thomas an offer containing a provision for Thomas to pay Doug a commission.

At closing, Thomas claims that Doug is not his agent and refuses to pay a commission because he never signed a listing agreement. HOWEVER, Thomas benefited from the action, and approved it by accepting the offer. This is agency by ratification.

Estoppel Agency by Estoppel occurs when a buyer or seller allows a third party to believe another person is their "authorized agent" during a transaction, but then denies that the person was authorized as their "agent after the fact."

A principal is legally barred from using a defense in a lawsuit that contradicts a previously held position.

An agency by Estoppel is usually created to protect a third party from the attempt by a principal to deny the authority of someone acting as their licensee, BUT at the same time the principal has allowed the third party to believe there was an agency relationship.

Example Mike JR has been handling the financial affairs of his father, Mike SR for 17 years. Mike SR tells Mike JR to list his ranch with Ed the Broker. Ed and Mike JR enter into the listing contract and Ed puts a "for sale" sign on the property. Mike SR drives by the sign every day and watches Ed bring people by. Ed, the Broker, writes up an accepted offer on the ranch, but at closing Mike SR says he will not pay a commission because Mike JR had no authority to sign for Mike SR.

HOWEVER, if Ed sues for his commission, the court will probably prohibit Mike SR from denying that Mike JR was his agent, because it was common for Mike

JR to act on behalf of Mike SR, and he allowed Ed the Broker to believe that Mike JR was authorized to sign the listing.

Services That a Licensee Can Provide to a Prospective Purchaser That

Would Establish an Agency Relationship?

Signing a Buyer’s Agency Agreement and Showing a Potential Buyer Some Homes- Agency had been established by the signing of the Buyer’s Agency Agreement

Giving Real Estate Advice about Market Conditions and Actions Which Imply Agency- This implied agency was established by the actions of the parties.

When a Third Party Assumes That You Are a licensee for the Principal and the Principal Does Not Make an Outward Statement to the Contrary – this agency was formed when the principal failed to correct an assumption by a third party.

This is also known as

Agency by Estoppel or as Ostensible Agency.

Writing a Purchase and Sale Agreement for a buyer and stating that you represent the buyer.

Stating to a listing licensee that you represent the buyer

Implied Agency: It is possible to create an agency relationship by the actions of the parties. If a real estate licensee takes on responsibilities that are normally those of an agent, but hasn't signed an agency agreement, the licensee may still be considered an agent via implied agency. By the same token, if the customer asks the licensee for advice or actions that are normally those in agency, then an implied agency could be created. Example: if a buyer wants to buy a licensee’s listing, the buyer could become a customer or a client of the licensee depending on the licensee’s actions.

According to the Revised Code of Washington –RCW 18.86.020 (1) an implied agency would not exist when:

(1) A licensee who performs real estate brokerage services for a buyer is a buyer's agent unless the:

(a) Licensee has entered into a written agency agreement with the seller, in which case the licensee is a seller's agent;

(b) Licensee has entered into a subagency agreement with the seller’s agent, in which case the licensee is a seller's agent;

(d) Licensee is the seller or one of the sellers; or

(e) Parties agree otherwise in writing after the licensee has complied with

RCW 18.86.030(1)(f).

Ethical Duties of the Licensee to All Parties

In all transactions the licensee owes all parties involved certain duties. But when acting as an agent or sub-agent, the licensee owes a greater amount of care and loyalty to the principle than they do to a third party.

A customer is entitled to honesty, fairness, accurate information, and disclosure of material facts pertinent to the property.

A client is entitled to accurate information, advice and alternative actions available to them, and recommendations from the licensee. The best interests of the client should be kept in mind at all times.

These duties may not be changed or eliminated, whether or not the licensee is representing the party:

1. Reasonable skill and care.

2. Honesty and good faith.

3. Present all offers notices and other communications.

4. Disclose all existing material facts known by the licensee and not apparent or readily ascertainable to a party.

5. Account in a timely manner for all money and property received.

6. Provide the Pamphlet on the Law of Real Estate Agency.

7. Disclose in writing to all parties whether the licensee represents the buyer or tenant, the seller or landlord, or none of the parties.

A licensee that has been found to be guilty of breaching any of these duties could be held liable to the injured party in a civil action for damages.

The licensee could also be subject to disciplinary action by the Director of the Department of Licensing.

Disciplinary actions could include suspension or revocation of license fines up to $1000 each offense and/or the completion of a course related to the violation.

Confusion vs. Agency Law

The question of whether or not an agency relationship exists in a real estate transaction is one of material fact – that is, what evidence exists for a judge and/or jury to base a decision on. The courts will look at the circumstances in each case to determine whether the licensee represents the buyer, seller, or both.

Even in the absence of legal formalities or written agreements an agency relationship may still be created and exist. A licensee can be held responsible for this “unintended” or “accidental” agency relationship. Advising a principal on real estate matters may define you as an “agent” for that party.

Legally, if both the licensee and the principal demonstrated actions which authorized the licensee to act on the principals’ behalf and the licensee actually did so, an agency relationship will be deemed to exist. This relationship has legal, economic, and ethical consequences to the firm, broker, seller, and buyer involved in the transaction.

Types of Agents

There are three basic types of agents. These different types depend on the scope of authority that the principal grants to the agent.

Universal Agent

A universal agent has the broadest scope of authority and usually calls for the principal to grant an unlimited power of attorney to the agent.

Because a universal agent is authorized to do anything that can be lawfully delegated to a representative, the courts tend to frown on this arrangement.

Universal agencies in real estate transactions are very rare, and in many states they are illegal.

General Agent

A general agent has a wide scope of authority, but it is limited to a specific range of duties and matters.

The general agent is given the authority to represent the principal in a particular business or legal matter such as the relationship between a real estate broker and the managing broker.

The broker acts as a general agent of the managing broker, who in this case, is the principal. The managing broker authorizes the broker to represent the managing broker's company in the performance of real estate business to handle the principal's matters in specific activities.

The broker has a wide scope of authority, but it is limited to the practice of real estate business.

Special Agent

A special agent has the narrowest scope of authority. This authority is limited to a specific:

· matter

· activity OR

· transaction to perform only certain acts as the agent for the principal.

A real estate broker is usually a special agent who represents the principal in a specific transaction. The real estate broker acts as special agent for the client to negotiate with third parties but not to sign a contract on the seller's or buyer’s behalf.

Although real estate broker can be given a broader scope of authority, because of the increased liability, the broker would likely decline.

Example

Colleen hires broker Simone to list her property.

This listing makes Simone an agent for the principal, Colleen.

Simone is granted the authorization to offer Colleen’s property for sale under specific conditions and to bring offers from prospective purchasers, but Simone does not have the authority to actually sell Colleen’s property or sign a purchase offer for Colleen.

Clients and Customers

The words client and customer are commonly used to describe the parties in the real estate transaction. Either the client or the customer may pay for the services of the real estate broker.

Client

Client is a party to the transaction that the licensee represents as a principal.

The client is usually the person who is being represented as a principal, by another person called an agent licensee, in a fiduciary relationship. The client can be the seller, buyer, tenant or landlord.

Customer

A customer is party to the transaction that the licensee does not represent.

A customer is an individual who purchases property or services.

The real estate broker can only pass on non-confidential information to a customer.

Agency Disclosure Requirements

BEFORE any party to whom services are rendered in a real estate transaction signs any documents, the licensee must give the party a Pamphlet of Real Estate Agency Law.

If the licensee is involved in more than one transaction with the same party, the licensee is required to give the party only one pamphlet.

A written acknowledgment is not required, but it is recommended to write a receipt of the pamphlet in the:

· Purchase agreement

· Listing form or

· Other written agreement

This pamphlet contains information designed to educate the parties regarding laws that took effect January 1997 and must contain portions of THE REFORM ACT OF 1997 including the entire text of sections 1-12 and a cover page with a summary of the law.

While the licensee is required to give only one pamphlet to a client no matter how many transactions they enter into the licensee must give written disclosure of agency in a separate paragraph in each purchase agreement in every transaction.

The disclosure may be made after the agreement is prepared, but it must be made BEFORE signing the agreement.

It is always wise to disclose the agency representation as soon as possible to avoid misunderstandings and potential law suits.

When a licensee is acting as a principal, the following section of law applies:

RCW 18.85.361 Disciplinary action — Grounds. (Effective July 1, 2010.) (21) Buying, selling, or leasing directly, or through a third party, any interest in real property without disclosing in writing that the person is a real estate licensee;

It is essential that the licensee recognize that he/she is subject to licensing law even when acting as a principal in ANY real estate transaction.

RCW 18.85.361 deals with the Grounds for disciplinary action:

RCW 18.85.361

Disciplinary action — Grounds. (Effective July 1, 2010.)

In addition to the unprofessional conduct described in RCW 18.235.130, the director may take disciplinary action against any person engaged in the business or acting in the capacity of a real estate broker, managing broker, managing broker, or real estate firm, regardless of whether the transaction was for the person's own account or in a capacity as broker, managing broker, managing broker, or real estate firm, and may impose any of the sanctions and fines specified in RCW 18.235.110 for any holder or applicant who is guilty of:

(1) Violating any of the provisions of this chapter or any lawful rules made by the director pursuant thereto or violating a provision of chapter 64.36, 19.105, or 18.235 RCW or RCW 18.86.030 or the rules adopted under those chapters or section;

(2) Making, printing, publishing, distributing, or causing, authorizing, or knowingly permitting the making, printing, publication or distribution of false statements, descriptions or promises of such character as to reasonably induce any person to act thereon, if the statements, descriptions, or promises purport to be made or to be performed by either the licensee or his or her principal and the licensee then knew or, by the exercise of reasonable care and inquiry, could have known, of the falsity of the statements, descriptions or promises;

(3) Knowingly committing, or being a party to, any material fraud, misrepresentation, concealment, conspiracy, collusion, trick, scheme, or device whereby any other person lawfully relies upon the word, representation or conduct of the licensee;

(4) Accepting the services of, or continuing in a representative capacity, any broker or managing broker who has not been granted a license, or after his or her license has been revoked or during a suspension thereof;

(5) Conversion of any money, contract, deed, note, mortgage, or abstract or other evidence of title, to the person's own use or to the use of that person's principal or of any other person, when delivered in trust or on condition, in violation of the trust or before the happening of the condition; and failure to return any money or contract, deed, note, mortgage, abstract, or other evidence of title within thirty days after the owner thereof is entitled thereto, and makes demand therefore, is prima facie evidence of such conversion;

(6) Failing, upon demand, to disclose any information within the person's knowledge, or to produce any document, book, or record in the person's possession for inspection by the director or the director's authorized representatives acting by authority of law;

(7) Continuing to sell any real estate, or operating according to a plan of selling, whereby the interests of the public are endangered, after the director has, by order in writing, stated objections thereto;

(8) Advertising in any manner without including the real estate firm's name or assumed name as licensed in a clear and conspicuous manner in the advertisement; except, that real estate brokers, managing brokers, or firms advertising their personally owned real property must only disclose that they hold a real estate license;

(9) Accepting other than cash or its equivalent as earnest money unless that fact is communicated to the owner before the owner's acceptance of the offer to purchase, and such fact is shown in the purchase and sale agreement;

(10) Charging or accepting compensation from more than one party in any one transaction without first making full disclosure in writing of all the facts to all the parties interested in the transaction;

(11) Accepting, taking, or charging any undisclosed commission, rebate, or direct profit on expenditures made for the principal;

(12) Accepting employment or compensation for appraisal of real property contingent upon reporting a predetermined value;

(13) Issuing a report on any real property in which the broker, managing broker, or real estate firm has an interest unless that interest is clearly stated in the report;

(14) Misrepresentation of membership in any state or national real estate association;

(15) Discrimination against any person in hiring or in real estate brokerage service activity, on the basis of any of the provisions of any local, county, state, or federal antidiscrimination law;

(16) Failing to keep an escrow or trustee account of funds deposited relating to a real estate transaction, for a period of three years, showing to whom paid, and other pertinent information as the director may require, such records to be available to the director, or the director's representatives, on demand, or upon written notice given to the bank;

(17) In the case of a firm and its managing broker, failing to preserve records relating to any real estate transaction for three years following the submission of the records to the firm;

(18) Failing to furnish a copy of any listing, sale, lease, or other contract relevant to a real estate transaction to all signatories thereof within a reasonable time following execution;

(19) In the case of a broker or managing broker, acceptance of a commission or any valuable consideration for the performance of any acts specified in this chapter, from any person, except the licensed real estate firm with whom the broker or managing broker is licensed;

(20) To direct any transaction involving his or her principal, to any lending institution for financing or to any escrow company, in expectation of receiving a kickback or rebate, without first disclosing the expectation to his or her principal;

(21) Buying, selling, or leasing directly, or through a third party, any interest in real property without disclosing in writing that the person is a real estate licensee;

(22) In the case of real estate firms, and managing and managing brokers, failing to exercise adequate supervision over the activities of their brokers and managing brokers within the scope of this chapter;

(23) Any conduct in a real estate transaction which demonstrates bad faith, dishonesty, untrustworthiness, or incompetence;

(24) Acting as a vehicle dealer, as defined in RCW 46.70.011, without having a license to do so; or

(25) Failing to ensure that the title is transferred under chapter 46.12 RCW when engaging in a transaction involving a mobile or manufactured home as a broker, managing or managing broker, or firm.

Law of Agency Pamphlet

Under RCW 18.86.030, all licensees must provide a pamphlet on the law of real estate agency to all parties to whom the licensee renders real estate brokerage services, BEFORE the party signs an agency agreement with the licensee, signs an offer in a real estate transaction handled by the licensee, consents to dual agency, or waives any rights, whichever occurs earliest; AND

To disclose in writing to all parties to whom the licensee renders real estate brokerage services, before the party signs an offer in a real estate transaction handled by the licensee, whether the licensee represents the buyer, the seller, both parties, or neither party. The disclosure shall be set forth in a separate paragraph entitled "Agency Disclosure" in the agreement between the buyer and seller or in a separate writing entitled "Agency Disclosure."

The Law of Real Estate Agency

This pamphlet describes your legal rights in dealing with a real estate broker. Please read it carefully before signing any documents.

The following is only a brief summary of the attached law:

Sec. 1. Definitions. Defines the specific terms used in the law.

Sec. 2. Relationships between Licensees and the Public. States that a licensee who works with a buyer or tenant represents that buyer or tenant -- unless the licensee is the listing licensee, a seller's subagent, a dual agent, the seller personally or the parties agree otherwise. Also states that in a transaction involving two different licensees affiliated with the same broker, the broker is a dual agent and each licensee solely represents his or her client -- unless the parties agree in writing that both licensees are dual agents.

Sec. 3. Duties of an Agent Generally. Prescribes the duties that are owed by all licensees, regardless of who the licensee represents. Requires disclosure of the licensee's agency relationship in a specific transaction.

Sec. 4. Duties of a Seller's Agent. Prescribes the additional duties of a licensee representing the seller or landlord only.

Sec. 5. Duties of a Buyer's Agent. Prescribes the additional duties of a licensee representing the buyer or tenant only.

Sec. 6. Duties of a Dual agent. Prescribes the additional duties of a licensee representing both parties in the same transaction and requires the written consent of both parties to the licensee acting as a dual agent.

Sec. 7. Duration of Agency Relationship. Describes when an agency relationship begins and ends. Provides that the duties of accounting and confidentiality continue after the termination of an agency relationship.

Sec. 8. Compensation. Allows managing brokers to share compensation with cooperating managing brokers. States that payment of compensation does not necessarily establish an agency relationship. Allows managing brokers to receive compensation from more than one party in a transaction with the parties' consent.

Sec. 9. Vicarious Liability. Eliminates the common law liability of a party for the conduct of the party's licensee or subagent unless the licensee or subagent is insolvent. Also limits the liability of a managing broker for the conduct of a subagent associated with a different managing broker.

Sec. 10. Imputed Knowledge and Notice. Eliminates the common law rule that notice to or knowledge of a licensee constitutes notice to or knowledge of the principal.

Sec. 11. Interpretation. This law replaces the fiduciary duties owed by a licensee to a principal under the common law, to the extent that it conflicts with the common law.

Broker-Licensee Relationship

Managing Brokers and broker licensees have an agency relationship.

Real estate brokers are usually general licensees of the managing broker.

Managing Brokers contract with their broker licensees to:

· List

· Promote and to

· Market properties and

· Function as authorized representatives of the managing broker.

The managing broker is responsible for the supervision of ALL affiliated licensees and can be held liable for their actions within the scope of their authority.

Nearly all real estate brokers are independent contractors as opposed to employees of the managing broker.

This is usually because the managing broker is not obligated to treat the independent contractor as an employee for federal income tax purposes.

In - House Sales

An in-house sale is a sale between a buyer and the seller that were brought together by licensees working for the same managing broker.

Example

Alexis and Dennis both work for Dynasty Realty. Alexis lists a home in an area where Dennis’ buyers have been looking.

Alexis puts up a sign and places advertising on the new listing. Dennis shows the home to his buyers, and they make a full price offer to purchase it. Alexis presents the offer and it is accepted.

This means that Alexis is the listing licensee and Dennis is the selling licensee. BOTH licensees work for the same managing broker, so this is an in-house transaction.

Managing brokers encourage in-house sales because the managing broker will keep a share of each licensee’s commission rather than a share of only one licensee in a cooperative transaction.

HOWEVER, there is more liability if a dual agency exists.

Licensees may represent their own client as buyer’s agent and seller’s agent individually, making the managing broker the dual agent.

Cooperative Sales

A cooperative transaction would occur if Harold from Falcon Realty brought an offer to Alexis from Dynasty Realty and it were accepted.

The listing licensee Alexis works for Dynasty and the selling licensee works for Falcon Realty.

The listing managing broker of Dynasty would split the commission with Falcon Realty, and then each managing broker would split with their licensee according to their contracts.

The selling managing broker is referred to as the cooperating broker.

IN THE PAST, any member of the Multiple Listing Service (MLS) bringing a buyer for a property listed with the MLS was considered to be the sub-licensee of the seller.

This was called the “unilateral offer of sub-agency".

Because of recent reforms, most listing agreements now refer to other members of the MLS as cooperating licensees.

This means that there is NO agency relationship between the managing brokers or between the selling broker and the principal created by the listing agreement.

The cooperating licensee may decide to represent the seller or the buyer.

HOWEVER, if the selling licensee is not representing the buyer, and is actually representing the seller, this seller’s agency must be disclosed to the buyer and must be in writing within the earnest money agreement.

A pamphlet on the Law of Agency must be given to the buyer PRIOR to signing the offer, so that the buyer will not mistakenly believe that the licensee is the buyer’s representative.

In a cooperative sale, the buyer might easily assume that the continuous face-to- face working relationship has developed into a “buyer agency" when in fact the licensee is the seller’s agent.

This can be very harmful to the buyer, especially if the buyer passes on to the seller’s agents any confidential information.

The seller’s agent has a duty to notify the seller of that confidential information.

In addition, this could be harmful to the seller if the personal contact between the licensee and the buyer creates a tendency of the licensee to “help” the buyer in a manner that would interfere with the licensee’s duties and responsibilities to the seller.

Example

Brad works for Excellent Realty. He has been showing homes that are listed with Excellent Realty to the Lambs every day for two weeks. He and Mr. Lamb have common interests and they enjoy the time together.

Brad does not have a buyer’s agency agreement with the Lambs, but they did discuss it before seeing homes.

Brad told the Lambs that he would be working with them as a representative of the seller.

Brad finds a house that the Lambs love, and they make an offer.

The Lambs tell Brad to make an offer for $175 000, but they really want the house and they are willing to pay $195 000 if they have to.

Brad, as the seller’s agent, has a duty to notify the seller that the Lambs said that they “would pay $195, 000 if they had to".

Brad also gave the Lambs the pamphlet of the Law of Agency and disclosed in writing within the earnest money offer that he was a seller’s agent.

Still, the Lambs felt that a friendship resulted during their search for a home.

Brad should have made it very clear throughout the process, that he had a duty to represent the seller’s best interests.

Brad ALSO should have told the Lambs that if they did not want any confidential information to be given to the seller, they must not disclose it to him.

Keep in mind though, that the selling licensee can still:

1. Write an offer for the buyer

2. Pre-qualify for price range and financing

3. Show homes

4. Present offers and

5. Estimate closing costs

These services may be what the Lambs expected and may often be sufficient to cover the needs of other buyers.

Before showing this home, the licensee must disclose to the purchasers that he/she is the seller’s agent, and as such must pass on any information that would benefit the seller. This means that the purchaser should not discuss anything confidential with the seller’s agent.

Disclosure is the key to preventing serious mistakes that lead to lawsuits.

Sub-agency

A sub-licensee is “an agent of an agent”.

PRIOR to the reform of agency laws, the licensees within the managing broker’s office were usually considered subagents of all of the managing broker’s clients.

In addition, all members of a Multiple Listing Service were also considered to be subagents of the listing licensee and the seller when they brought offers to other brokerages.

MOST MLS’s have eliminated sub-agency because of increased liability for the managing broker and the seller.

Example

In this example Brad still works for Excellent Realty.

He has been showing homes that are listed with many brokerages that belong to the same Multiple Listing Service.

He still works with the Lambs every day for two weeks. He and Mr. Lamb share common interests and they enjoy each other’s company.

The Lambs feel that a friendship has been created and they believe that Brad is looking out for their best interests because of this bond.

The Lambs ask Brad to write an offer on a home listed with Okay Realty.

PRIOR to the Washington Reform Act, Brad would automatically be considered a sub-licensee or representative of the seller, who listed with Okay Realty.

Sub-agency, whether or not the seller authorized the sub-agency has been eliminated by most MLS's.

Real estate brokerages may also have their own policy concerning sub-agency and may or may not allow it as a choice to be cooperating managing brokers.

A “sub-agency” arrangement could possibly occur IF a licensee is helping another licensee by filling in while on vacation OR showing a home at an open house for another licensee.

If this happens, the licensee must notify the potential buyers as soon as possible

BUT IN ANY CASE, PRIOR to signing a purchase agreement so that the buyer does not unknowingly give the licensee confidential information.

Seller Agency

Seller agency is usually created by the written listing agreement and is still the most common type of agency relationship.

The listing agreement is an employment contract where the seller hires the managing broker to bring a ready, willing, and able buyer for the property, in return for a commission.

HOWEVER, a seller agency can also be formed verbally or by the actions or conduct of the parties.

Even though an agency may be created in this manner, the managing broker may not bring suit to collect a commission UNLESS there is a written listing agreement.

The duties of the seller’s agent include ALL of the duties that the licensee owes all parties involved any transaction:

1. Reasonable skill and care

2. Honesty and good faith

3. Present all offers

4. Disclose all existing material facts

5. Account for all money and property received

6. Provide Law of Real Estate Agency Pamphlet

7. Disclose representation of all parties involved

UNLESS additional duties are agreed to in writing, the duties of the seller’s agent are limited to those above PLUS the following:

1. Loyalty to the seller, taking no action that is adverse or detrimental to the seller’s interest in a transaction

2. Disclose any conflicts of interest to the seller in a timely manner

3. Advise the seller to seek expert advice in matters beyond the licensee’s expertise

4. Do not disclose any confidential information from or about the seller even after termination of agency, UNLESS under subpoena or court order.

Make a good faith and continuous effort to find a buyer for the seller's property.

HOWEVER, the licensee is not obligated to seek additional offers if there is an existing contract for a sale.

The seller’s agent may:

· Show alternative properties not owned by the seller to prospective buyers and may list competing properties for sale without breaching any duty to the seller.

Sellers expect their listing agents to represent them, BUT many times the buyer may also be willing to enter into a transaction where the licensee represents only the seller, as long as it is fully disclosed.

Sometimes a buyer will work with a seller’s agent because they want:

· Access to multiple listing inventory

· Honest information and

· Their offers presented without committing to a buyer agency.

· The seller’s agent must give all effort to promote the interests of the seller.

· The seller’s agent may still:

· Fill out offers

· Present offers AND

· Help to secure financing FOR BUYERS because these activities are considered to be in the best interests of THE SELLER.

HOWEVER, this seller’s agency must be represented to the buyer in writing in the earnest money agreement.

A pamphlet on the Law of Agency must be given to the buyer PRIOR to signing the offer so that the buyer will not mistakenly believe that the licensee is the buyer’s representative.

Buyer Agency

In the recent past buyers have asked for and benefited from a buyer agency relationship.

A buyer agency relationship gives the buyers the advantage by having their own licensee to negotiate price and terms and to advise them on confidential matters.

A licensee showing homes cannot be sure of getting paid a commission if the homes being shown are not either listed with the licensee’s brokerage, or if they are not in the Multiple Listing Service.

HOWEVER, if the buyer agrees to pay the buyer’s agent if the seller does not, the buyer’s agent can benefit the buyer by spending the time to search out properties such as:

· “For Sale by Owners”

· Open listings

· Exclusive agency listings

· Repossessed properties and

· Properties in foreclosure

· Divorce OR

· Probate proceedings

A Buyer's agent can advise the buyer on:

· Property value trends

· Cost of repairs

· Heating or cooling costs AND provide a

· Competitive Market Analysis for the buyer

Buyer’s agents can use their detailed knowledge of the real estate market to negotiate on the buyer’s behalf to help the buyer get the best possible price and terms.

The duties of the buyer’s agent include all of the duties that the licensee owes all parties involved any transaction:

1. Reasonable skill and care

2. Honesty and good faith

3. Present all offers

4. Disclose all existing material facts

5. Account for all money and property received

6. Provide Law of Real Estate Agency Pamphlet

7. Disclose representation of all parties in writing

PLUS:

UNLESS additional duties are agreed to in writing, the duties of the buyer’s agent are limited to these PLUS the following:

1. Loyalty to the buyer, taking no action that is adverse or detrimental to the buyer's interest

2. Disclose any conflicts of interest to the buyer in a timely manner

3. Advise the buyer to seek expert advice beyond the licensee’s expertise

4. Do not disclose confidential information from or about the buyer EVEN after agency terminates UNLESS under subpoena or court order.

5. Unless otherwise agreed in writing, after the buyer’s agent has complied with the duties above, the licensee must make a good faith and continuous effort to find a property for the buyer.

The buyer’s agent may:

· Show properties that the buyer is interested in to other prospective buyers, without breaching any duty to the buyer.

HOWEVER, the licensee is not obligated to seek additional properties for the buyer while the buyer is a party to an existing contract to purchase OR to show properties when there is no written agreement to pay the buyer’s agent a commission.

BUT, once the buyer signs an offer to purchase a property, the buyer’s agent may not interfere with this relationship by representing other prospective buyers that may want to compete for the same property.

Most buyers believe that because the licensee is working with them, showing them homes, pre-qualifying, etc., that the licensee is the buyer’s agent.

Under THE REFORM ACT OF 1997 the buyer has a right to presume that the licensee is the buyer’s agent UNLESS:

1. The licensee is the listing licensee (or property manager)

2. The licensee is a subagent of the seller or landlord (see sub-agency)

OR...

3. The licensee has a written agency agreement with both the buyer and the seller.

4. The licensee is the seller (or landlord).

The parties agree otherwise in writing.

Example

Licensee Wendy spends all day showing homes to Mr. Thomas.

Wendy does not show him any of her own listings, or any properties that she herself owns.

She has no written agreement with any other party on these properties. Mr. Thomas presumes that Wendy is representing him.

Wendy is the buyer’s agent in this case, and she must disclose this in writing PRIOR to the signing of the purchase agreement.

This means that buyers should be able to assume that when the licensee is showing them homes that are not listed with that licensee AND rendering real estate services is indeed the buyer’s agent UNLESS there are any of the exceptions listed above.

Listing licensees showing their own listings still represent the seller because of their duty to procure a buyer.

If the licensee has a written agreement with ONLY the seller, then the licensee represents ONLY the seller, even if the licensee also procured the buyer.

This must be disclosed in writing PRIOR to signing the purchase agreement.

The buyer may not presume that the licensee is representing both the buyer and the seller UNLESS there is a written agreement by all parties.

Example

Licensee Wendy spends all day showing homes to Mr. Thomas, showing him only her own listings.

She has a written agreement with the sellers of all of these properties.

Mr. Thomas presumes that Wendy is representing him.

Wendy is not the buyer’s agent in this case because she already has an agency with the seller.

Wendy should disclose this to Mr. Thomas as soon as she begins rendering any type of real estate service to him.

BUT, in any case written disclosure must be made PRIOR to any signing of a purchase agreement.

A written agreement is not required for a buyer agency.

As stated above, the buyer may presume there is a buyer agency UNLESS there are EXCEPTIONS.

Because your managing broker is responsible for your actions, licensees must always be aware of the managing broker’s policy with respect to agency and check with the managing broker PRIOR to entering into a buyer’s agency.

The most common ways to compensate a buyer’s agent:

· Seller-paid fee

· Retainer

· Buyer-paid fee

The party who pays the licensee’s commission is not automatically the principal or the client being represented.

Often, the buyer agency agreement provides that the seller will pay the licensee even though the licensee does not represent the seller.

In this case, the seller pays the listing managing broker, who is allowed to share the commission with a buyer’s agent.

Most listing agreements have a provision that entitles a cooperating managing broker who procures a buyer a portion of the selling managing broker’s commission regardless of whom the cooperating managing broker represents.

Some buyer’s agents demand a nonrefundable up-front payment, or retainer.

Like an attorney fee, this retainer is applied as a credit toward an hourly fee OR to the commission that the broker receives.

A written agreement also creates a buyer’s agency.

PLUS, it has the benefit of providing many potential advantages such as:

1. The right to be paid a commission by the buyer, whether or not the seller is willing to pay commission.

2. The right to a commission if the buyer purchases a property that the licensee showed them.

3. The buyer’s agreement in advance to a dual agency.

An agreement of a minimum fee is not dependent on a seller’s commission.

Example

Licensee Wendy spends all day showing homes to Mr. Thomas.

Wendy shows him some other company’s listings and some “For Sale by Owners”.

Wendy has a written agreement with Mr. Thomas that she is representing him as a buyer’s agent.

Mr. Thomas agrees to pay Wendy a minimum of a 6% sales commission, whether or not the seller pays a commission.

Wendy must disclose to the seller in writing that she will be receiving commission from more than one party PRIOR to the parties signing a written offer to purchase.

Consensual Dual Agency

Under THE REFORM ACT OF 1997, a managing broker who has written agency agreements with both parties may represent both clients.

HOWEVER, all parties must give informed consent in writing PRIOR to signing an agreement, disclosing a change of agency status from seller’s and/or buyer’s agency to consensual dual agency.

PRIOR to signing, both parties must have been given the pamphlet on the Law of Agency disclosing the terms of compensation.

The Code of Ethics of the National Association of Realtors® states that a Realtor may not accept compensation from more than one party, even if permitted by law, UNLESS full knowledge of the compensation is disclosed to all parties to the transaction.

Because your managing broker is responsible for your actions, as an agent you must always check with the managing broker’s policy on dual agency PRIOR to entering this relationship.

In-house transactions can create a situation that involves “dual agency”.

The most common type of dual agency is called pure dual agency.

This commonly occurs when two licensees from the same company are each working with a party of a transaction in common and the listing licensee has a written listing agreement, and the selling licensee has written buyer’s agency.

In PURE DUAL AGENCY, the managing broker has dual agency with both buyer and seller.

Listing and selling agent have an “employment” relationship with the managing broker.

Listing AND selling agent have a dual agency with both buyer and seller.

Because it is natural for the seller to want the highest price and best terms possible, and for the buyer to want the lowest price and most desirable terms possible, the managing broker representing both parties may experience an immediate conflict of interest.

It is important that both parties understand and consent to the dual agency.

Each party must be counseled to keep to themselves any confidential information that may be detrimental if passed on to the other party.

This means that the buyer and seller should not reveal any information to the licensees or the managing broker discussing any situations regarding the transaction.

The duties of the dual agent include all of the duties that the licensee owes ALL parties involved in any transaction:

1. Reasonable skill and care

2. Honesty and good faith

3. Present all offers

4. Disclose all existing material facts

5. Account for all money and property received

6. Provide Law of Real Estate Agency Pamphlet

7. Disclose representation of all parties in

PLUS:

UNLESS additional duties are agreed to in writing, the duties of the dual agent are limited to those above PLUS the following:

1. Take no action that is adverse or detrimental to either party's interest in a transaction.

2. Disclose any conflicts of interest to both parties, in a timely manner.

3. Advise both parties to seek expert advice in matters beyond the licensee’s expertise.

4. Do not disclose any confidential information from or about either party even after termination of agency UNLESS under subpoena or court order.

UNLESS otherwise agreed in writing, the dual agent is not obligated to seek additional offers for the seller while the property is subject to an existing contract for sale.

UNLESS otherwise agreed in writing, the dual agent is not obligated to seek additional properties for the buyer while the buyer is a party to an existing contract to purchase, OR to show properties when there is no written agreement to pay the licensee a commission.

The dual agent may:

· Show alternative properties not owned by the seller to prospective buyers and may list competing properties for sale without breaching any duty to the seller.

· Show properties in which the buyer is interested to other prospective buyers without breaching any duty to the buyer.

Example

Licensee Joel shows Mrs. Clark his listing 1357 Cliff St.

PRIOR to this showing, Joel was representing the seller.

Mrs. Clark wishes to make an offer on the home, but she wants Joel to represent her.

Joel explains that he is the seller’s agent, and is representing ONLY the seller, UNLESS BOTH buyer and seller agree to a dual agency in writing.

Joel further explains that in this case, he would represent NEITHER party, BUT he would be fair and honest in all dealings and would not impart any confidential information to either party.

Mrs. Clark agrees to this. HOWEVER, Joel knows that his managing broker is responsible for his actions, so Joel first checks with his managing broker in respect to the company’s policy.

Joel’s managing broker agrees, making the managing broker a dual agent.

Joel next addresses this issue with Mr. Jones, his seller, and Mr. Jones agrees to a written dual agency and gives up his seller’s representation.

Joel and the managing broker then proceed with the transaction taking care to keep confidentiality on both sides.

Split Agency

In-house transactions can create another situation that involves a type of dual agency.

This is called split agency.

This commonly occurs when two licensees from the same company are each working with a party of a transaction in common.

BUT rather than a dual agency where both licensees represent both parties, the listing licensee has a seller agency and the buyer’s agent has a buyer’s agency.

The managing broker is the “dual agent” who will represent both parties.

The managing broker has a dual agency relationship with BOTH the buyer and the seller.

The listing licensee has a seller’s agency created by the Listing Agreement with the seller.

The listing licensee represents the seller.

The selling licensee has an agency created by the Buyer Agency Agreement with the buyer.

The selling managing broker represents the buyer.

BOTH the listing licensee and the selling licensee have an “employment” relationship with the managing broker.

Under THE REFORM ACT OF 1997, each licensee may represent his or her client.

HOWEVER, the managing broker must be willing to allow this arrangement AND all parties must agree in writing PRIOR to signing a purchase agreement.

It is crucial that the confidentiality of each client is kept.

This means that the managing broker must take care when discussing any situations regarding these clients, so that information is not passed on to the other side.

Because of this possibility, the managing broker may choose to have a policy of pure dual agency (as described in dual agency above) on ALL in-house transactions rather than the “split agency".

Example

Licensee Wendy shows a home to Mr. Thomas.

The home is listed with her company, BUT with another licensee named George. Wendy has a buyer’s agency agreement with Mr. Thomas, and he wants her to represent him in the offer and sale of this home.

George receives an offer from Wendy and he contacts the managing broker for approval of a split agency representation.

The broker agrees with the licensee’s understanding and agreement to use extreme care and caution.

George is the seller’s agent, Wendy is the buyer’s agent, and the managing broker is the dual agent in this case.

Non-Agency Facilitation

A Washington licensee may perform real estate services as a non-licensee facilitator in a transaction. This means that the licensee does not represent either party and no agency is created with either.

The licensee must have a written agreement signed by the buyer to make sure that the buyer does not “presume” that there is a buyer’s agency. A pamphlet on the Law of Agency must first be given to the buyer.

The designation of “facilitator” was developed to eliminate common problems with dual agencies in in-house sales.

The facilitator assists the parties in a transaction by communicating and negotiating between them, without advocating the interests of either party other than the mutual interest of ALL parties.

The facilitator does not act as an agent in transaction and does not owe either party any fiduciary duties.

This means that the facilitator CANNOT negotiate a higher price for the seller OR a lower price for the buyer.

The major disadvantage is that the parties do not have individual representation by their own licensee to work exclusively in their best interest.

It is also possible that despite all disclosures the clients may not understand licensee's duty to treat all parties honestly and to disclose material facts.

OR the party may believe that the licensee is acting only on the best interests of one party, as opposed to working for the mutual benefit of both parties.

The major advantage of this type arrangement is the lack of complexity.

Negotiating on behalf of both parties can eliminate confusion and potential conflict.

When done correctly, the facilitator arrangement results in a non-adversarial atmosphere that brings the parties together to negotiate with the assistance of the facilitator in a mutual understanding.

The facilitator is less likely to be sued for improper representation or for an undisclosed dual agency, which could result in lower Errors and Omissions Insurance costs.

In addition, the parties may benefit by paying reduced fees as a result of fewer services that need to be provided by a facilitator.

The managing broker and the parties to the transaction have no vicarious liability for the acts of the facilitator.

Seller Agency Conflict

The chances of a conflict of interest with seller agency are much rarer than with other types of agencies, but that doesn’t imply that none exist. Let’s look at an example:

John, a licensee with ABC Realty, has a listing with the Smiths and is the seller’s broker. John also has his own home listed for sale at the same time. John’s own home is very similar to the Smith’s. In the course of performing an open house for the Smiths, John meets a potential buyer. John suggests to the buyer that he should view John’s home and tells them that it is a better value and nicer neighborhood. John puts his own best interests before that of the Smiths because he wanted to sell his own home first which is a conflict of interest.

Buyer Agency Conflict

Paige is a buyer’s broker for the Gilberts. Paige tours a home with the Gilberts that appear to match all the Gilbert’s criteria. The home also is priced well under market value. Paige discourages the Gilberts from considering the home by telling them that it is in a heavy crime area. Paige later informs her brother that he should buy this home for an investment and that it was a great value. Paige put her family’s best interest before that of her buyers’ best interest which is a conflict.

Dual Agency Conflict

Jane is a listing broker for the Andersons. Through Jane’s advertising of the Anderson’s property, Jane finds a buyer for the home. She has obtained written permission from both parties to act as a dual agent. After writing the contract and before presenting it to the Andersons, Jane learns from another broker that there will be another offer coming in which may be very attractive. Jane hurries to the Anderson’s home and advises them to sign the first offer where Jane was a dual agent. Jane receives both sides of the commission because she represented both parties. If she had waited to receive the other offer from another broker, she would have only received the listing office portion of the commission. This was a conflict of interest and the sellers may have been able to receive a better offer.

Non-Agency Facilitator Conflict

Maria is writing up an offer for the Gilberts. She has expressed that she is not representing the Jones, both in verbally and in writing. Even though she has done this, the Gilberts really did not understand and thought that Maria was their broker and representing them.

Designated Agency or Split Agency Conflict

Tom, a licensee with ABC Realty has a listing. Pete, another licensee with ABC Realty finds a buyer who would like to purchase this listing. Pete uses a conference room at the brokerage to write up the offer. While doing so, Tom listens in on the conversation that Pete is having with his clients. Tom learns about information which is considered confidential such as the top price that the buyers are willing to pay. Tom relates this information to his sellers. A major

38 conflict of interest exists here.

Disclosure of Material Facts

Under THE REFORM ACT OF 1997, the licensee is required to disclose to all parties any “material facts" known by the licensee that is not apparent or readily ascertainable.

Material facts are anything that the licensee knows about that would:

1. Substantially adversely affect the value of the property

2. Substantially adversely affect a party’s ability to perform its obligations in a real estate transaction

3. Operates to materially impair or defeat the purpose of the transaction

This does not include:

· Acts

· Occurrences OR

· Uses that do not adversely affect the physical condition of the property or the title to the property.

Stigmas or psychological impacts are not material facts, BUT if the licensee knows of them the licensee must answer honestly.

Unless there is a specific agreement to do so, under THE REFORM ACT OF 1997 the licensee owes NO obligation or duty to:

1. Investigate matters that the licensee has not agreed to investigate.

2. Conduct any independent inspection of the property.

3. Conduct an independent investigation of either party’s financial condition.

4. Independently verify the accuracy or completeness of any statement made by either party or any source reasonably believed by the licensee to be reliable.

Licensees are still required to use good judgment as well as reasonable skill and care in handling transactions.

Examples

These are not considered to be material facts that must be disclosed by the licensee:

The previous owner committed suicide on the property.

(not adverse to property value or use)

The sellers are divorcing and must sell quickly.

(not adverse to property value or use)

The sellers are the licensee’s relatives.

(not adverse to property value or use)

The adjacent lot is zoned for a mobile home.

(not adverse to property value or use)

The roof leaked two years ago and has been fixed, and ceiling has been repainted.

(not existing)

NO DISCLOSURE REQUIRED in these cases.

HOWEVER, if asked about any of these conditions the licensee is required to answer honestly but is not obligated to investigate.

Examples

These are considered to be apparent defects that DO not require disclosure by the licensee:

There is a large hole in the roof visible from inside the living room.

(apparent)

The driveway is cracked, and weeds are growing through them.

(apparent)

The carpeting is worn.

(apparent)

The windows are broken.

(apparent)

The kitchen décor needs to be updated.

(apparent)

HOWEVER, if asked about any of these conditions the licensee is required to answer honestly BUT is not obligated to investigate.

Examples

These ARE considered to be material facts that must be disclosed by the licensee:

An old car had been buried in the back yard several years ago

(material defect -could collapse and cause sink hole- if licensee knew must disclose)

The seller filled in and painted over deep cracks in the basement last week.

(seller could be covering material defect- if licensee knows of as cover up must disclose)

The sewer is not connected to the house.

(material defect -adversely affects value and use- if licensee knows must disclose)

Foreclosure papers state that the house will be sold at auction PRIOR to your closing.

(material defect -sale could not be completed- if licensee knew must disclose)

FHA appraisal had been performed 30 days ago and came in low. Your sale is also FHA.

(material defect -sale could not be completed- if licensee knew must disclose)

DISCLOSURE IS REQUIRED in these cases.

These ARE material facts that adversely affect property values and uses and must be disclosed.

The licensing law defines confidential information as follows:

"Confidential information" means information from or concerning a principal of a licensee that:

(a) Was acquired by the licensee during the course of an agency relationship with the principal;

(b) The principal reasonably expects to be kept confidential;

(d) Would, if disclosed, operate to the detriment of the principal; and

(e) The principal personally would not be obligated to disclose to the other party.

Compensation and Agency

There is a misconception in the real estate world that “you are the agent of the person who pays you the fee.” However, an agreement for compensation does not necessarily create an agency relationship.

Commissions can be paid out several ways without creating an agency agreement. By written contract, the seller could agree to pay all the buyer’s brokerage fees, or agree to pay the buyer’s loan discount points, or offer to pay any home inspections fees.

By contrast (and by contract) the buyer could agree to pay the seller’s closing costs or brokerage fees. An agency relationship can exist without regard to who pays the fees, the buyer, the seller, both, or neither, as. Washington law does not base payment of the fee to determine agency.

RCW 18.86.080 specifically states:

(1) In any real estate transaction, the broker's compensation may be paid by the seller, the buyer, a third party, or by sharing the compensation between brokers.

(2) An agreement to pay or payment of compensation does not establish an agency relationship between the party who paid the compensation and the licensee.

(3) A seller may agree that a seller’s agent may share with another broker the compensation paid by the seller.

(4) A buyer may agree that a buyer’s agent may share with another broker the compensation paid by the buyer.

(5) A broker may be compensated by more than one party for real estate brokerage services in a real estate transaction if those parties consent in writing at or before the time of signing an offer in the transaction.

(6) A buyer’s agent or dual agent may receive compensation based on the purchase price without breaching any duty to the buyer.

Imputed Knowledge and Notice

During a real estate transaction, a licensee is required to give notice to buyers and sellers on matters that affect the purchase or marketing of the home.

Examples would be matters such as acceptance or rejection of an offer; withdrawal of an offer or the seller wishes to remove the property from the market.

Time is of the essence in the negotiations of offers and can be especially important if more than one offer is presented.

It is imperative that everyone involved in the real estate transaction knows (and understands) who is representing whom, so that when notifications are required, a court of law can determine if and when the legal notification occurred. Licensees must be careful to prevent disputes over issues of notification to their clients and to other licensees involved in the transaction.

There can be many factors including multiple contingencies in the purchase and sale agreement that must be met before the transaction proceeds to closing. However, once a buyer and seller have agreed upon the terms of the sale and ALL parties have signed the contract, signed copies must be delivered to all parties, or their agents, before it is binding and enforceable.

Many licensees erroneously believe they must give notice directly to the client of the contract in order for the transaction to be legal. In reality, notice to the client’s agent is binding on the principal, even if the information is never conveyed to the principal. Since the agent represents the principal, notifying the agent is regarded as notifying the principal. This is known as imputed notice.

Imputed knowledge is information or facts known by the agent, but not actually conveyed to the client. However, it is deemed that the knowledge of the agent in the transaction is also known (imputed) to the client, since the agent has a fiduciary responsibility to do so. For this reason, the client is considered to have the same information and knowledge as the licensee. Conversely, other parties to the transaction may presume that the principal was made aware of any information pertaining to the sale of the property.

RCW 18.86.100 states:

(1) Unless otherwise agreed to in writing, a principal does not have knowledge or notice of any facts known by an agent or subagent of the principal that are not actually known by the principal.

(2) Unless otherwise agreed to in writing, a licensee does not have knowledge or notice of any facts known by a subagent that are not actually known by the licensee. This subsection does not limit the knowledge imputed to a real estate broker of any facts known by the real estate broker.

The rest of the chapter will focus on the following court case which was appealed all the way up to the Colorado State Supreme Court. While this is a rather complex case to understand, it reviews how the law interprets vicarious liability and imputed notice, in addition to the various agency roles real estate licensees can assume. This case should help tie together agency relationships, common law, statutory law and how complicated agency relationships can be.

Stortroen v. Beneficial Finance Co. of Colorado

Supreme Court of Colorado

736 P.2d 391 (Colo. 1987)

The following is from the official court record. It details the event as it unfolded. I have left the details of the case intact for ease of understanding.

Beneficial Finance Company entered into an “exclusive right to sell” listing agreement with Olthoff Realty to sell property that it owned. Olthoff subsequently listed the property with the local multiple listing service (MLS).

The Stortroens wished to sell their home in Denver in order to purchase a larger residence. The Stortroens sought the assistance of Mary Panio, a broker- associate with Foremost Realty, which had sold the Stortroens their current residence. The Stortroens listed their home for sale with Foremost and relied on Panio to show them a suitable property to buy. Panio consulted the local multiple listing service (MLS) and found the property listed by Olthoff Realty.

In consideration of the services of the hereinafter named real estate broker, I hereby list with said broker, from Oct. 26, 1983, to March 26, 1983 (sic), inclusive, the property described below and I hereby grant said broker the exclusive and irrevocable right to sell the same within said time at the price and on the terms herein stated, or at such other price and terms which may be accepted by me, and to accept deposits thereon and retain same until the closing of, or defeat of, the transaction. I further authorize said broker to list the property with any multiple listing service in which he is a participant, at the broker's expense, and to accept the assistance and cooperation of other brokers. I hereby agree to pay said broker 6% of the selling price for his services (1) in case of any sale or exchange of same within said listing period by the undersigned owner, the said broker, or by any person, or (2) upon the said broker finding a purchaser who is ready, willing and able to complete the purchase as proposed by the owner, or (3) in case of any such sale or exchange of said property withing (sic) 120 days subsequent to the expiration of this agreement to any party with whom the said broker negotiated and whose name was disclosed to the owner by the broker during the listing period.

Panio showed the Stortroens the property listed by Olthoff. After touring the residence, the Stortroens’ asked Panio to prepare and present an offer for $105,000, of which $1,000 was paid as earnest money. The Stortroens' offer was on a document entitled "Residential Contract to Buy and Sell Real Estate" and designated a closing date of March 26, 1984. The contract was contingent upon the sale and closing of the Stortroens' current home, although it provided that the property owned by Beneficial "may remain on the market and in the event of a

47 successful offer to seller, the purchaser has 72 hours to remove contingency on the sale of their home."

Donald Reh, an officer of Beneficial, reviewed the offer with Olthoff and rejected it. Reh drafted a counterproposal offering the property for $110,000. The counterproposal stated: "If this counterproposal is accepted by Purchaser, as evidenced by Purchaser's signature hereon, and if Seller receives notice of such acceptance on or before 9 P.M. 2-3-84, 1984, the said proposed contract, as amended hereby, shall become a contract between the parties." Beneficial submitted the counterproposal through Olthoff to Panio on February 1, 1984.

In the meantime, Carol Ann and Eugene Carelli, (who were defendants and third- party plaintiffs in the district court), were shown the Beneficial property by a licensed real estate salesperson employed by another broker. The Carellis had their licensee prepare an offer of $112,000 for the property and submitted it through their licensee to Olthoff Realty, on the afternoon of Friday, February 3, 1984.

Olthoff informed Reh, the officer of Beneficial who was dealing with the property, of the higher offer and then instructed Carol Carelli and the real estate salesperson to take the offer directly to Reh's office because of the outstanding counteroffer to the Stortroens. When Reh received the Carelli offer, he phoned Olthoff to tell him that he wanted to accept the higher offer and directed him to withdraw the counteroffer to the Stortroens. At approximately 4:30 p.m. on the afternoon of February 3, Olthoff left telephone messages at Panio's office and residence to the effect that Beneficial had withdrawn the counteroffer. After Olthoff informed Reh that he had left these messages, Reh accepted the Carelli offer in writing.

Panio, who was unaware of the Carelli negotiations with Beneficial, took Beneficial's counteroffer to the Stortroens at their home where the Stortroens signed their acceptance at approximately 4:10 p.m. Panio then brought the signed copy back to her office and discovered the withdrawal message left from Olthoff Realty.

At a meeting of the real estate brokers and salespersons at Olthoff's office the following Monday, Panio delivered to Olthoff the counteroffer signed by the Stortroens on February 3, 1984, and a document withdrawing the contingency clause, prepared on February 4, 1984. Although the respective positions of Beneficial, the Stortroens, and the Carellis were discussed, no agreement was reached. The Stortroens subsequently recorded the contract and its modifications with the Clerk and Recorder’s Office. The Carellis refused to close the transaction when the title examination revealed a cloud on the title caused by the Stortroens' recordation, and they moved into the property under a month-to- month lease, until the matter was resolved.

On April 26, 1984, the Stortroens filed a complaint in District Court against Beneficial and the Carellis, alleging breach of a real estate sales contract and seeking a specific performance decree against Beneficial, money damages at the rate of $45 per day from the designated date of closing, which was March 26, 1984, and an order requiring the Carellis to vacate the Beneficial property. The Carellis cross-claimed against Beneficial and added a third-party complaint against Olthoff Realty

The Stortroens and Beneficial executed a written stipulation of facts, and each filed motions for summary judgment. The district court concluded that Panio was the licensee of the Stortroens and that the Stortroens' delivery of the written acceptance of Beneficial's counterproposal to Panio did not constitute notice of acceptance to Beneficial. As a consequence, the court granted the motion for summary judgment on behalf of Beneficial and denied the Stortroens' motion for summary judgment.

The parties then filed a joint motion with the Colorado State Supreme Court, requesting that a decision be made on whether the selling broker, Mary Panio, was acting as an agent of the purchasers, the Stortroens, or as an agent of the seller, Beneficial.

Here is what the Colorado Supreme Court looked at in order to answer that question. This section is purposely detailed and methodical to help you better understand agency relationships. The issue is whether a real estate broker is an agent of the seller or the purchaser in connection with the sale of a home. To answer this question, we must turn to basic principles of agency and contract law for necessary guidance.

"Agency is the fiduciary relation which results when one party (known as the principal) authorizes another party (the licensee) to act as the principal's representative in dealing with third parties. Agency is thus a legal relation having its source in the mutual consent of the parties. The consensual arrangement may but need not amount to a contract. Furthermore, an agency relation may exist even though the parties do not call it an agency and do not subjectively intend that legal consequences flow from their relation. What is critical is that the parties materially agree to enter into a particular relation to which the law attaches the legal consequences of agency, even though those consequences might not have been within the contemplation of the parties at the time of their agreement.

Agents may be classified into two general types. A general agent is "an agent authorized to conduct a series of transactions involving a continuity of service," such as one "who is an integral part of a business organization and does not require fresh authorization for each transaction." Essentially, this means the agent can bind the principal to a contract, as long as it is in the scope of the agency agreement.

A special agent is defined as "an agent authorized to conduct a single transaction or series of transactions not involving continuity of service," meaning the agent cannot bind the principal without the principal’s consent.

Under some circumstances, authority can be further delegated to subagents. A subagent is "a person appointed by an agent empowered to do so, to perform functions undertaken by the licensee for the principal, but for whose conduct the licensee agrees with the principal to be primarily responsible." A subagent is the agent of both the appointing agent and the principal. Notice to an agent given in the course of a transaction which is within the scope of the agency is notice to the principal. So too, notice to a subagent who is under a duty to communicate the notice to the agent is effective to the same extent as if notice had been given to the agent.

In the context of residential real estate transactions, it is a widely accepted rule of agency law that a real estate broker operating under an exclusive listing contract with the seller of the property stands in an agency relationship to the seller (this is Colorado’s interpretation, not necessarily that of Washington State). The seller- broker relationship is a special agency created and defined by the listing agreement between the parties. This agreement describes the property or interest to be sold, the price or range of prices acceptable to the seller, the broker's commission, and the length of time the agreement is binding, and authorizes the broker to find a ready, willing, and able purchaser for the listed property on terms acceptable to the seller.

Because it is customary for a real estate managing broker to employ brokers to deal with prospective purchasers of the listed property, the authority given to the managing broker by the listing agreement will generally include the implied authority to appoint these affiliated brokers as subagents to perform the tasks assigned to the broker by the listing agreement.

The listing agreement may authorize the broker to list the property with a multiple listing service. A multiple listing service is basically an arrangement for brokers in a given locality to pool their listings and split their commissions. Brokers who are members of the multiple listing service submit their listings to a central bureau which then publishes and distributes a catalog of available properties. Under traditional agency principals, a listing contract which authorizes the listing broker to list the property with a multiple listing service permits the listing broker to create a subagency with other members of the multiple listing service. The listing broker’s act of listing the property with the multiple listing service "constitutes an offer of subagency by the listing broker to other (multiple listing service) members to procure a buyer in exchange for a percentage of the sale commission."

This characteristic of sub-agency is important in this case. Please keep in mind this is a Colorado State decision and that other courts may interpret this characteristic differently. Some courts have rejected the characterization of the

50 relationship between the seller of a home and a broker-member of a multiple listing service as one of subagency, primarily on the basis that some aspects of the relationship do not fit the classic description of a consensual fiduciary relation involving one person acting on behalf of and subject to another's control. Indeed, one commentator has not only rejected the proposition that there is an agency relationship between the seller and a broker-member of a multiple listing service but has also advanced the notion that a cooperative sale by a broker-member of a multiple listing service establishes an agency relationship between the purchaser and the selling broker.

The reasoning here is that agency law should reflect the expectations of the parties and that a purchaser of real estate reasonably believes that a selling broker is acting on behalf of and in the interest of the purchaser. While this view undoubtedly has some merit, there are cogent reasons to support the traditional rule that a principal-licensee relationship flows from the seller to the selling ("cooperating") broker in a multiple listing transaction.

The selling broker's role is to use expertise and judgment in promoting the interests of the seller by finding a buyer for the property, and, to this end, the selling broker makes use of information furnished by the seller in the listing arrangement. Upon finding a purchaser for the property, the selling broker becomes entitled to collect the commission from the seller. The basic structure of this business relationship derives from the listing contract between the seller and the listing broker and the agreement between the listing broker and other members of the multiple listing service. There is no such similarly structured relationship between the selling broker and the buyer in the typical residential real estate transaction. The buyer, for example, has no duty to the selling broker to complete his contract with the seller to enable the broker to collect a commission. Furthermore, in the event the seller defaults on a real estate sales contract, the selling broker is under obligation to return to the buyer the full amount of the deposit or down payment received from the buyer.

With the seller-selling agent relationship established, the seller may become liable to the buyer in tort for any misrepresentations of their licensee through the ratification doctrine. Such liability allows the remedy of rescission against the seller. If there is no agency relationship between the seller and the selling broker, but the agency relationship is between the buyer and the selling broker, this remedy of rescission is no longer available to the buyer because the ratification doctrine would not be applicable, and the buyer's only recourse may be a suit against the broker for damages. In such a situation, the finding of agency between buyer and selling broker may be more harmful to the buyer than beneficial because the buyer would lose his action for rescission and restitution against the seller. Furthermore, if the agent breaches his fiduciary duty to his principal, one of the remedies available to the principal is a return of compensation paid. If the selling broker is the agent of the buyer, it could be argued that the buyer did not pay any compensation to the agent, because the

51 agent was paid by the seller through the listing broker. Again, the finding of an agency relationship between the selling broker and the buyer may not enhance the buyer's legal position.

The well-defined relationship that can be traced from the seller to the listing broker and then to the selling broker leads one to conclude that in a typical multiple listing real estate transaction the selling ("cooperating") broker functions as an agent of the listing broker and, consequently, stands in a subagency relationship to the seller.

The listing broker's offer of subagency to other multiple listing service members is an offer for a unilateral contract -- that is, an offer requesting return performance rather than a promise to perform. It is, of course, a fundamental principal of contract law that offers to enter into a contract may not be revoked after acceptance without liability for breach.

A unilateral offer is accepted when substantial performance has been rendered by the offeree. In the context of the multiple listing arrangements, therefore, a broker accepts the unilateral offer by making a demonstrable effort to obtain a purchaser for the property. There can be no question that the actual production of a ready, willing, and able purchaser will constitute acceptance of the sub- agency offer.

Short of this, such acts as contacting potential purchasers about the listed property and showing the property by appointment, especially when considered in combination, can well evince the level of effort required for substantial performance. Of course, the fact that a broker accepts the offer of sub-agency does not preclude the same broker from acting as licensee with respect to the sale of other property, including the property of a prospective purchaser.

Once created, the sub-agency relationship continues until terminated by the expiration of time, the expiration of the listing agreement, the sale of the listed property, the withdrawal of consent by either the listing broker or the seller, or other circumstances which indicate that the principal no longer wishes the subagent to act in accordance with the initial authorization.

A principal's revocation of agency authority terminates only upon notice to the agent.

Our determination that the selling broker acts as a subagent of the seller is not intended to preclude a real estate broker and a prospective purchaser from entering into a written agreement designating the broker as the purchaser's agent for the purpose of locating and purchasing property. However, while general agency principals permit the establishment of an agency relationship through the conduct of the principal and licensee, such an agency relationship cannot arise

52 by implication between a purchaser and a managing broker or broker in the inherently ambiguous circumstances of a residential sale.

The prevailing perception of the broker as an agent of the seller is too firmly imbedded in the real estate business to permit such a finding based on conduct alone. Furthermore, Washington law prohibits a broker from simultaneously representing both the seller and the purchaser in the same transaction unless written disclosure of such dual representation is given to the seller and purchaser and they consent in writing to the dual agency arrangement.

Since the multiple listing service is a fact of life in modern real estate practice, and since a real estate broker operating within a multiple listing service is clearly in a chain of agency to the seller and is prohibited from representing both parties to a real estate sale unless there is a written disclosure of a dual agency and written consent of the parties, the court concluded that a broker who wishes to act as the agent of a prospective purchaser in connection with the purchase of a home must establish that agency by a written agreement with the purchaser.

Written documentation of the agency relationship under these circumstances not only will serve to obviate any uncertainty on the part of the prospective purchaser regarding the authority of the broker to act on the purchaser's behalf in connection with the details of a contemplated purchase but should also remove all doubt on the part of the broker as to their fiduciary obligation to act with loyalty and candor in their relationship with the purchaser. In the absence of any such written agreement a selling broker is considered an agent of the listing broker and subagent of the seller.

When there is a written agency agreement between the broker and the prospective purchaser, then obviously the terms of the agreement, rather than the multiple listing agreement determines the rights and duties of the parties with respect to the agency relationship.

The absence of an agency relationship between the purchaser and the selling broker does not leave the purchaser unprotected in his dealings with the selling broker. A selling broker may be held liable for wrongful acts causing damage to a third person. This principal is recognized in both statutory and decisional law. To protect the public from unscrupulous brokers, the legislature has extensively regulated the real estate profession, and licensed brokers and salespersons are subject to sanctions for various forms of unethical and unprofessional conduct.

Many states (Washington included) have consistently held a licensed broker accountable where the licensee failed to deal fairly and honestly with the purchaser. These obligations exist and are accordingly enforceable notwithstanding the absence of an agency relationship between the purchaser and the selling broker.

The stipulated facts demonstrate that the Stortroens, who wished to sell their home and to purchase a new home in the Denver metropolitan area, sought the assistance of Mary Panio, a broker-associate at Foremost Realty, who had previously assisted them in locating their current home.

Panio consulted the multiple listing service published by Metrolist and discovered in the multiple listing Beneficial's Quay Court property which was listed under Olthoff Realty Company's listing contract with Beneficial. By consulting the multiple listing service, Panio thus became aware of Olthoff Realty Company's unilateral offer of subagency to all members of the multiple listing service, including Panio, to produce a buyer of the beneficial property in exchange for a percentage of the sale commission.

This offer of subagency was expressly authorized by the terms of Beneficial's exclusive listing contract with Olthoff Realty Company. Panio's efforts in showing the home to the Stortroens, assisting them in preparing an offer, and facilitating communication between the Stortroens and Beneficial clearly rose to the level of substantial performance sufficient to constitute Panio's acceptance of the subagency offer extended by Olthoff Realty Company.

The agency relationship flowing to Olthoff Realty Company and through the company to Beneficial is not affected by the fact that the Stortroens had listed their current home in Denver for sale with Foremost Realty on November 4, 1983. The listing agreement executed by the Stortroens and Foremost Realty created a special agency for a single transaction, the sale of their home.

There is no legal impediment to a listing broker's simultaneous entry into special agency relationships with more than one seller. Since the scope of the listing broker's agency is limited by the listing contract, a selling broker's authority would likewise be limited to matters affecting the sale of the real property described in the listing agreement. Thus, although Panio may have been a special licensee to the Stortroens for the sale of their home, she was also a special licensee to Olthoff Realty Company by virtue of the multiple listing service and was a subagent to Beneficial for the sale of the Quay Court property.

Beneficial's counterproposal delivered to Panio for submission to the Stortroens expressly stated that acceptance should be by signature on the face of the instrument and that the counterproposal would become a binding contract if notice of the acceptance was received by the seller on or before 9 P.M. on February 3, 1984. Panio, in accordance with the instructions from her principle, made arrangements with the Stortroens to discuss the counterproposal at their home.

Although Olthoff Realty Company attempted to terminate the agency relationship BEFORE Panio kept that appointment, the revocation was not effective, since a principal's revocation of agency authority terminates only upon notice to the licensee. When Panio received notice of the Stortroens' signed acceptance of Beneficial's counterproposal, therefore, she was acting as a licensee of the listing broker, Olthoff Realty Company, and a subagent of the seller, Beneficial. The notice given to Panio of the Stortroens' acceptance must be imputed to the listing broker and the seller.

The Stortroens' acceptance of Beneficial's counterproposal clearly took place before Beneficial's attempted revocation of that counteroffer. Just as the Olthoff Realty Company's attempted revocation of Panio's agency authority was ineffective due to the lack of notice to Panio, Beneficial's revocation of the counteroffer was not effective because it was never communicated to the Stortroens before their acceptance. When the Stortroens presented Panio with the signed and accepted counterproposal, therefore, a binding contract was formed between the Stortroens and Beneficial for the purchase of the property.

This decision made the Stortroens the prevailing party, reversing the lower court’s decision.

This case, although complex, illustrates the importance of notification. Once all parties have agreed and signed the offer, it becomes a valid, enforceable contract, BUT only when all parties or their licensees have received constructive notice. Had Mary Panio represented the buyers and not the seller through the sub-agency agreement, notice would have been considered valid, effective, and satisfactory when she delivered the contract to Olthoff Realty.

THE STATE OF WASHINGTON’S POSITION ON THIS CASE

This type of agency can open possibilities for law suits and wrong doing. To prevent this from happening in Washington, the DOL has addressed these specific matters because of the ruling in this case.

First and foremost, in the absence of a signed agreement in Washington, it is assumed that the licensee represents the buyer. This begins the moment the licensee provides brokerage services to the client.

Secondly, buyer-agent contracts are not necessary in the State of Washington. A licensee who performs services for a buyer is considered a “buyer’s agent” by statute. (RCW 18.86.080(7)

In the case cited above, Panio would have represented the buyer, and notice would have been considered given.

Review

The law of agency regulates the:

· Relationships

· Duties and

· Responsibilities of the agent to the principals as well as third parties in a transaction.

Over the last decade real estate transactions have become increasingly complex.

In the 1990’s, buyers and sellers must know about contract legalities, property values, land use, environmental issues, fair housing, home inspections, types of loans, property condition disclosure and much more.

THE REFORM ACT OF 1997 was created to

1. Interpret the common law of agency as applied to real estate licensees.

2. Form legal presumptions of agency relationships with consumers consistent with natural expectations while retaining flexibility for alternative relationships under appropriate circumstances.

3. Reduce dual agency.

4. Eliminate vicarious liability and imputed knowledge as to consumers.

An agent is authorized to “represent” another person who is called the principal.

Agency can be created by verbal or written contract as well as by an implied agreement.

Even though an agency relationship must be voluntary it is sometimes created unintentionally or accidentally.

Implied agency can be created when conduct and words show an intention of agency even though no oral or written contract exists.

An agency by ratification is when the principal is aware that unauthorized actions are being taken and the principal accepts by approving or benefiting from the actions.

Agency by Estoppel is when a principal allows a third party to believe another person is their authorized agent during a transaction, but later denies that the person was authorized as their agent.

BEFORE any party signs real estate documents, the licensee must give the party a Pamphlet of Real Estate Agency Law.

Real estate licensees are special agents of the managing broker to list, promote, market properties, and function as authorized representatives of the managing broker.

Subagent is “an agent of an agent.

Seller agency is still the most common type of agency relationship.

A buyer agency relationship gives the buyers the advantage by having their own licensee to negotiate the price and the terms of a sale and provide advice on confidential matters.

Under THE REFORM ACT OF 1997, a managing broker who has written agency agreements with both parties may represent both clients if informed consent to a change of agency status is given in writing PRIOR to signing a purchase agreement.

In house transactions can create another situation that involves a type of dual agency. This is called split agency.

A Washington licensee may perform real estate services as a non-agent facilitator in a transaction.

This means that the licensee does not represent either party and no agency is created with either party.

Under THE REFORM ACT OF 1997, the licensee is required to disclose to all parties any “material facts" known by the licensee that is not apparent or readily ascertainable.

Chapter 2

Introduction

This chapter will describe the three main types of listing agreements. The listing agreement is a contract to employ a managing broker to market the seller’s real property.

The managing broker is paid a commission according to the terms and conditions of the contract.

The listing agreement is an employment contract. The seller agrees to pay the managing broker a commission for finding a ready, willing, and able buyer within the listing period.

Listing agreements are enforceable if:

· They are in writing and signed by a seller

· Properly identify the property

· Provide an agreement to a pay a specific amount or percentage as compensation to the managing broker

In Washington, a listing agreement is not enforceable UNLESS it includes a provision to pay the managing broker a fixed compensation, adequately identifies the property, and is signed by the seller.

In addition, listing agreements include:

· The terms the seller will accept

· The conditions the managing broker MUST meet to earn a commission

· Beginning and expiration dates of the listing period AND

· The seller’s warranty of information

It is important to know and understand the advantages and disadvantages of each type of agreement.

There are three basic types of listing agreements:

· Open listing

· Exclusive agency listing

· Exclusive right to sell listing

Vocabulary

Bilateral Contract A contract where both sides MUST perform- a promise for a promise

Due diligence A promise that the managing broker will use effort and diligence to find a buyer

Exclusive agency listing A listing with ONLY one managing broker, who earns a commission if he/she sells the property, BUT may not if the seller sells it him/herself

Exclusive Right to Sell Listing The managing broker has earned a commission on the sale of the property if sold during the listing period, no matter who was the procuring cause

Multiple listing service - MLS A membership of managing brokers that share each other’s listings to increase inventory to show their buyers

Net listing Not legal in Washington - based on a net selling price to the seller, and any amount received over and above is kept as commission to the managing broker

One-party listing A listing where the owner agrees to pay the licensee ONLY if the named party buys the property

Open house A method of prospecting used by licensees to meet buyers and show prospective sellers their professional services

Open listing A non-exclusive listing- Commission paid to the managing broker ONLY if the managing broker is responsible for bringing a ready willing and able buyer

Procuring cause The person who is responsible for directly or indirectly bringing a bona fide offer

Unilateral contract A contract between parties where ONLY one party is obligated to perform

When a real estate firm enters into a listing agreement with a client, it is the first step in a real estate transaction that may grow to encompass many documents and the legally enforceable commitments of parties who may have never known each other prior to the transaction. The firm and managing broker as well as any licensee involved in the transaction have duties to the parties to maintain clear

60 and complete transaction records to protect the parties and enable the transaction to proceed to closing barring some event that causes the termination of the transaction.

RCW 18.85.285 provides that:

(1) Brokers and managing brokers must submit complete copies of their transactions to their firm. The managing broker shall keep adequate records of all real estate transactions handled by or through the firm or firms to which the managing broker is registered. The records shall include, but are not limited to, a copy of the purchase and sale agreement, earnest money receipt, and an itemization of the receipts and disbursements with each transaction. These records and all other records specified by the director by rule are open to inspection by the director or the director's authorized representatives.

The firm, managing broker and licensees in general have a duty to see that adequate records are maintained for all transactions. The file should contain copies of all signed documents of the transaction as well as copies of all information such as receipts identifying expenditures by any parties to the transaction.

Licensees are further required to provide copies to all parties signing documents as follows:

(3) Every real estate licensee shall deliver or cause to be delivered to all parties signing the same, within a reasonable time after signing, purchase and sale agreements, listing agreements, and all other like or similar instruments signed by the parties.

There are three basic types of listing agreements:

· Open listing

· Exclusive agency listing

· Exclusive right to sell listing

The Open Listing

An open listing is an agreement by the seller to pay the managing broker a commission ONLY if the managing broker was the procuring cause of the sale.

The person whose efforts resulted in an agreement between the buyer and seller is the procuring cause.

This means that the managing broker MUST find and bring a ready, willing, and able buyer to the seller.

The seller can list the property with many different managing brokers, BUT ONLY the managing broker that sells the property has earned the commission.

The open listing also allows the seller to directly compete with the managing broker to sell the property.

If the seller sells the property without the help of any managing broker, there is no obligation to pay any commission.

Disadvantages to Managing broker and Seller

The open listing could result in misunderstandings and disputes.

Example

Broker A+ and Broker X have shown the same property to the same prospective buyer. Broker X began working with the buyers a week before Broker A+.

If the buyer then makes an offer to purchase the property through Broker A+, there is a possibility that Broker X could dispute the matter of the procuring cause.

The open listing may not provide enough incentive for effort.

Example

Mrs. Jones wants to sell her ranch. She needs to sell as soon as possible and decides to sign open listing agreements with several managing brokers. She also intends to market the property herself, to other ranchers. Since none of the managing brokers have assurance of a commission, advertising, marketing and promotional efforts may be limited, and the ranch could take longer to sell.

HOWEVER, even though there is no protection with the open listing, the managing broker may benefit from increased calls and inquiries by advertising the property.

Advantages of the Open Listing

The additional calls could bring prospective buyers for the open listing, as well as other listed properties.

Open listings are commonly used in the marketing of large commercial properties.

ALTHOUGH they can be used in residential real estate, licensees very seldom use them in favor of the “exclusive right to sell” listing agreement.

To Earn a Commission for the Open Listing the broker MUST:

· Possess a current real estate license

· Have an agency relationship with the seller

· Find a ready, willing, and able buyer

· Be the procuring cause of the sale

Exclusive Agency Listing

An exclusive agency listing is an agreement made by the seller to list the property ONLY with this managing broker.

The managing broker doesn’t have to compete with other managing brokers, BUT the seller still has the right to sell the property his/herself without owing a commission.

The managing broker doesn’t have to let other managing brokers show, BUT if another managing broker's offer is brought and accepted by the seller, the seller MUST pay the exclusive agency managing broker the commission.

This type of listing has some protection by eliminating competition from other managing brokers, BUT the seller is still directly competing with the managing broker to sell the property.

Advantages and Disadvantages

· Broker MUST still compete with the seller

· May not be required to put listing into MLS

· Broker does not have to compete with other brokers

· Could require a longer marketing time

· Could result in broker keeping BOTH sides of the commission (or none if seller sells)

· May increase advertising and marketing efforts

· Able to cooperate with other brokers

· Seller pays the listing broker and the listing broker shares the commission (usually 50%) the selling broker.

Example

James signs an exclusive agency agreement with WYSIWYG Realty. WYSIWYG advertises the property, and so does the owner.

WYSIWYG Realty does not place this exclusive agency listing into the MLS and begins marketing the property by advertising.

Because the other brokers are not exposed to this listing, WYSIWYG finds a ready, willing, and able buyer themselves, and earns both sides of the commission.

To be paid a commission under an exclusive agency listing the broker MUST:

· Possess a current real estate license

· Have an agency relationship with the seller

· Find a ready, willing, and able buyer

· Prove the procuring cause of the sale was not the seller

· Show that a sale was made OR

· Show that the seller refused to accept an offer at listed price and terms

The broker does not need to prove introduction of buyer or be the procuring cause of the sale.

HOWEVER, this agreement usually contains a clause, which requires the broker to exercise diligence in the effort to locate a buyer.

“One-party” listing

A “one party” listing agreement is ONLY effective for one particular buyer. It is a unilateral contract and is sometimes used when a licensee brings a prospective buyer to a FSBO (for sale by owner), or when a buyer expresses interest in a property that is not listed.

“Net” listing

A net listing is an agreement by the seller to accept a fixed net dollar amount from the closing proceeds. All money above this fixed net is the licensee’s commission - no matter how much!

Net listings can put sellers at a disadvantage. Net listings are not legal in Washington.

When licensees enter into agreements with Buyers to represent the Buyer in the Buyer's search for a property, the same types of agency relationships that may be affected with Sellers through a listing agreement may be formed with Buyers.

Exclusive Buyer Agency Agreement

This type of agreement is, essentially, an "Exclusive Right to Represent" agreement. What that means is the Buyer agrees to use the licensee exclusively to find a suitable property and that the licensee will earn the agreed upon commission regardless of whether the licensee actually finds the property the Buyer purchases within the time frame and terms agreed to in the Agreement.

Exclusive Agency Buyer Agency Agreement

Similar to the Exclusive Buyer Agency Agreement, this is an exclusive contract between the buyer and the licensee. However, this agreement limits the agent’s right to payment. The licensee is entitled to payment only if he or she locates the property the buyer ultimately purchases.

The buyer is free to find a suitable property and contract to purchase it without representation from the licensee and without obligation to pay the licensee.

Open Buyer Agency Agreement

This is a non-exclusive contract between the buyer and the licensee. The licensee is entitled to payment only if he or she locates the property the buyer ultimately purchases.

The buyer is free to find a suitable property without obligation to pay the licensee and to work with any other licensee to find property as well.

A compensation agreement is most often used in For Sale by Owner (FSBO) situations.

The Seller does not have representation from an agent and a Buyer has made an offer with representation from a licensee.

The agreement typically specifies that the Buyer is represented by the licensee, the Seller will pay a commission to the licensee if a transaction closes and that the licensee has the duties that all licensees have to all parties and the duties to Buyer, especially regarding disclosures that are specified in law.

A listing agreement establishes an agency relationship between the Seller and the licensee that is absent with a Compensation Agreement.

Bilateral and Unilateral Contracts

An Exclusive Right to Sell Contract is a “Bilateral” contract.

This means that the seller agrees to pay a commission no matter who sells the property, in return for the licensee’s implied or written agreement to make a diligent effort to find a buyer.

An Open Listing Contract is a “Unilateral” Contract.

This means that the seller agrees to pay a commission, BUT ONLY to the licensee that actually sells the property.

HOWEVER, the licensee is not obligated to use diligence or effort, and it is not a breach of contract if the licensee does nothing at all.

Listing Data Form

The listing form will include a data input form. Although this is not the actual contract, it is an integral part of the listing agreement.

It is important to completely fill in the information so that it can be shared with other licensees in the MLS.

· Address and location

· Occupant’s name and phone number

· Parcel number and legal description

· Listing price

· Financial terms the seller will accept

· Features and amenities

· Number of bedrooms, baths, type of heat, garage, family room, square footage, etc.

· Style of the property

· Directions on showing the property (i.e.; “call first or vacant”)

· Amount of commission

· The commission split to selling broker

· The conditions broker must meet to have earned the commission

· Property taxes

· Remarks – Use lots of remarks to describe the property.

· The licensee’s authorization to represent the seller as a licensee

· The seller’s warranties of accuracy of the information provided by seller

· The duration of the contract with ending date

· Any other conditions material to acceptance of offer

Once the owners have decided to list their property, the licensee will begin to fill out a listing form. The licensee should encourage the seller to review the form and offer to answer any questions the seller may have.

A listing agreement is an employment contract between the seller and the licensee, to find a ready, willing and able buyer.

Even though the listing agreement form can be filled out and signed by the licensee the listing contract is between the seller and the managing broker, not the seller and licensee.

The terms contained in the listing agreement define the rights and responsibilities of the managing broker and seller, and the conditions that the managing broker must meet to earn a commission.

The seller agrees to pay the managing broker a commission, and the managing broker agrees to use due diligence to find a ready, willing, and able buyer during the listing period.

An enforceable listing agreement can be as simple as a written statement that the seller will pay a commission of a certain amount to the managing broker, for finding a buyer for the property.

However, this is not recommended, and nearly ALL managing brokers use formal standardized forms that describe all of the terms of employment.

Managing brokers that belong to a Multiple Listing Service are usually required to use the standard form provided by the MLS.

Basic Elements of a Valid Listing Contract

· Must adequately describe the property to be sold

· Must adequately describe any/all personal property included in the sale.

· Must state the conditions under which the broker has earned the commission

· Must include the terms that the seller is willing to accept

· Must contain an agreement to pay a fixed amount of compensation to the managing broker

· Must be signed by all owners

One of the most effective ways to assure that all owners are on the listing agreement is to open title at a dependable title company and verify ownership. Ultimately, all owners will have to be party to and sign off in some manner to a transaction that will close. The time to verify that all owners are accounted for is right at the start before the property is marketed, buyers are attracted, and contracts are executed.

Washington State’s Basic Requirement

In the State of Washington, these three elements are required for a written listing agreement to be an enforceable contract:

· Adequately identify the property to be sold. A legal description is not required in Washington, but the property must be clearly identified.

· Include a promise to pay a fixed compensation to the managing broker. This can be either a percentage or a fixed dollar amount. Because of this law, net listings are not legal in Washington.

· Must be in writing and signed by a competent seller.

Washington State does not require a specific termination date in listing agreements. Listings with no ending date terminate after a “reasonable” period of time.

One of the most valuable features of exclusive listings is the managing broker’s protection from competition during the listing period, so a specific ending date should be written in the agreement.

Contents of the Listing Form

Washington does not have a standardized listing form, but many different types of listing forms are available through Multiple Listing services and legal form suppliers.

Even though listing forms seem to be very similar in content, they can have very different provisions.

ALL real estate licensees should use ONLY those forms that are pre-approved by their managing broker. In addition to the listing information, the listing contract should clearly state ALL the responsibilities of the managing broker and the owner.

Managing broker’s Authority & MLS

The listing agreement gives the managing broker the “authority” to submit offers, accept earnest money on behalf of the seller, have reasonable access to show the property, place a lock box on the property, act as a dual agent if necessary and cooperate with other managing brokers in to the MLS.

If the managing broker DID not have the authority to accept earnest money on the seller’s behalf, the money would have to be accepted on behalf of the buyer.

This means that when the managing broker accepts funds on behalf of the seller, and if lost or mishandled, it would be the seller’s loss.

Managing brokers that are members of the MLS are usually required to share information on “exclusive right to sell” listings with other member managing brokers.

The MLS members show each other’s listings and help the listing broker sell the property for part of the managing broker's commission. The listing agreement has a clause that gives the managing broker authority to share the listing information by publication and distribution to the other members.

Most MLS forms include disclaimers that the listing information is confidential, and that the MLS is not responsible for verifying the accuracy of the listing information.

Depending on the type of listing agreement, there may also be a requirement that the managing broker use "due diligence" to procure a buyer. This means that the managing broker must commit time and resources and exert effort to locate a ready willing and able buyer.

“Exclusive right to sell” agreements contain this clause, while “open listings” do not.

The listing agreement does not give the managing broker “authority” to sell the owner’s property. Only an executed and recorded power of attorney from the seller to the managing broker would give authority to sell the owner’s property, which is not a common practice.

Seller's Obligation to Pay Commission

The most important responsibility of seller is to compensate the managing broker for meeting the conditions of the agreement.

The commission is usually a percentage of the sales price, but whether it is a percentage or a flat fee, it must be included in the listing agreement.

This amount is ALWAYS negotiable between the seller and the managing broker. The managing broker may charge any amount, and the seller may agree to pay ANY amount of compensation.

Commission amounts are not limited or controlled by state law or regulations.

This clause also specifies when the commission has been earned and when it is to be paid. The managing broker usually receives the commission when the sale is closed.

However, even if there is NO closing, a commission is considered to be earned if the managing broker produced a written offer containing all of the specified terms in the listing from a ready, willing, and able buyer.

Whether the seller accepted the offer OR rejected the offer, the seller would owe the managing broker the commission. The managing broker would ALSO earn a commission IF the buyer and seller enter into ANY mutually binding sales agreement, regardless of terms.

Even though the seller may owe the managing broker compensation, the seller DOES not have to accept ANY offer and the buyer CANNOT take legal action to force seller to accept.

The seller could revoke the listing contract but could still be liable for damages in the form of reimbursement of expenses, OR the entire commission.

The managing broker may be entitled to a commission EVEN IF sale was completed AFTER the listing expired if the buyer was produced during term of listing. This protection is provided by the “extender” clause.

The managing broker is entitled to a commission IF the seller sells the property to a prospect that was exposed to the property by the broker during listing period for a certain period of time after the listing expires.

The extender clause DOES not prevent other brokers from listing the property after it expires, nor does it extend the original broker's listing period.

There is NO commission earned if the offer was verbal or rejected because it contained terms other than those specified in listing, OR if the buyer was not ready and willing and able.

The buyer has the right to withdraw an offer at any time PRIOR to the acceptance. If the buyer withdrew the offer BEFORE the broker could notify the buyer of the seller’s acceptance, the broker would not be entitled to a commission.

The broker is usually entitled to a commission if the seller defaults under terms of the sales agreement.

The listing contains warranties that the seller can perform. If these warranties are proven to be false, managing broker is entitled to commission.

The broker is not entitled if buyer defaults. The broker may be entitled to some part of the earnest money that was forfeited by the buyer, if specified in the listing or earnest money agreement.

It is not default of the buyer if the earnest money language included a contingency for financing, and the buyer was unable to obtain the loan as specified in earnest money agreement.

The managing broker has still earned the commission if the sale CANNOT close because of title defects that the seller cannot clear, or if the seller cannot deliver possession within a reasonable period of time.

The broker is ALSO entitled to the commission if the seller had no legal authority to sell, misrepresented facts, refused to close the sale or if the seller and buyer mutually agreed to rescind the contract.

Broker is ALSO entitled to commission if the seller withdraws the property from the market during the listing period of an exclusive listing.

The Seller's Warranties

· The person signing the listing is the owner OR

· Legally authorized representative of the owner

· The information given about the property is true and accurate

· The property is free of non-disclosed encumbrances

· The title is marketable

· The seller has no knowledge of liens to be assessed

· The property is in good operating condition and free of material defects

· The property is not in violation of any laws or regulations

Termination of Listings

The listing agreement will terminate upon any of these events:

· Bankruptcy of seller or managing broker

· Change in material fact or law making the listing unlawful

· Loss of managing broker's license

· Seller cancels listing because managing broker breached contract duties

· Change in zoning

· Significant change in property value

· Performance of managing broker to procure a buyer

· Managing broker and seller mutually agree to termination

· Resignation or abandonment of listing by managing broker

· Destruction of property

· Seller revokes listing

· Seller becomes mentally incapacitated

· Seller or managing broker dies unless the managing broker has an interest in the seller’s property

· If the managing broker were an officer of a corporation, (as the managing broker), and died, the death would not terminate the listing unless the managing broker could not be replaced.

The death of the licensee would have no effect because listings are contract between the seller and the managing broker, but not the licensee.

Operation of Law In addition to the acts of the parties terminating the agency and listing agreement death of principal or managing broker, the brokerage firm going out of business, managing broker license revocation, and listing licensee transferring to a different brokerage affect listing agreements as well.

Death of Managing broker, Broker, or Principal Unless the licensee has an ownership interest in the property, the death of the licensee or principal terminates the agency relationship.

If the principal dies, the listing agreement is automatically terminated as the property would then become subject to probate under the terms of the will or the administrator of the estate. In the event a principal dies without a will (intestate) the courts decide the how the property will be disposed.

In the event the broker dies, and a managing broker is not appointed, all listings held by the broker terminate upon the brokers death and causes all licenses held by the broker to become inactive. The licensees under the broker must secure new employment under a qualified broker before they can resume selling real

75 estate. Sellers (or principals) must list their property with another qualified brokerage firm.

In Washington, if a managing broker dies, the director may issue a temporary managing broker's permit to a legally accredited representative of the deceased managing broker for a period of up to four months. In the case of a partnership, limited liability partnership, limited liability corporation, or corporation, the same rules apply.

Brokerage Firms Going Out of Business

When brokerages go out of business due to bankruptcy or loss the listing agreement and any agency agreement are automatically terminated by law.

When a principal files bankruptcy listing agreements and agency relationships also terminate by law. The property is usually taken into receivership and becomes part of a federal proceeding that places a cloud on the title.

Broker License Revocation If the managing broker’s license is revoked or suspended due to disciplinary actions, a cease and desist order is usually filed by the Real Estate Commission to halt any real estate activities. The principals must find a new qualified managing broker to list their property through.

Listing Licensee Transfers to Another Qualified Brokerage

Unless otherwise specified in the terms of the agreement, Buyer brokerage agreements cannot be assigned, sold, or otherwise transferred to a different brokerage firm unless express written consent is given by all parties to the original contract.

If a licensee leaves a brokerage firm to work for another brokerage, the listings remain with the original managing broker.

The listing agreement is between the Firm and the principal, not the licensee and the principal. The listing may only be canceled by the original managing broker or the principal for cause.

Listings are between the firm and the principal and remain the property of the firm if the listing agent or designated broker leave the firm

In the case of buyer agreements, it is typical for managing brokers to allow the

76 licensee to take their clients with them to the new firm while maintaining rights of compensation for any signed purchase and sale agreement.

Washington’s Disclosure Law

Washington State requires anyone who sells their residential real estate to give a property condition disclosure statement to the buyers. This form must be given to the buyers within five days after the sale agreement is signed UNLESS the buyer waives right to rescind.

A full disclosure of information, based on the seller’s actual knowledge of the condition of the property, is to be given to the buyer of real property. This disclosure is not to be considered a part of the sales agreement.

It is important to understand that this disclosure contains the representations of the seller ONLY and may not be considered as any representation by the managing broker or licensee.

This disclosure statement is not a warranty.

This means that the seller, licensee, and managing broker are not liable for any errors, inaccuracies, or omissions of which they had no personal knowledge.

Giving this statement to a buyer can prevent a seller from falsely stating that he/she informed the licensee of a material defect or problem, but the licensee DID not disclose it to the buyer.

Although Washington does not require sellers to give the buyers the statement until an agreement is signed, most listing forms will require the seller to prepare a disclosure and provide it to the listing licensee as soon as possible.

They usually include a provision that the seller assumes full liability for the information and will defend and/or hold the licensee harmless against any claims of inaccuracies in the statement.

The licensee MUST not help the seller fill out the statement but should caution the seller to be truthful and to answer “don’t know” rather than to “guess” about an item.

If the seller’s answers indicate that there is a material defect or problem, the seller must write in an explanation.

This form gives authority to the licensee to deliver a copy of the disclosure to other licensees and buyers.

The seller must give the buyer the disclosure statement within five days of the signing of a purchase and sale agreement, UNLESS the parties agree to another time frame, or the buyer specifically waives the right to receive the statement.

Within three business days of receiving the statement, the buyer can both “approve and accept” the disclosure statement or rescind.

By signing, the buyer acknowledges that the seller’s disclosure DOES not relieve the buyer of the responsibly to have inspections done by experts OR to use diligent effort to identify material defects that they knew or should have known about.

There is no legal wording or set of standards that apply to acceptance or rescission of the statement.

This means that if the buyer dislikes ANY information in the seller’s statement, for ANY REASON AT ALL, the buyer can simply rescind.

The seller’s property condition disclosure states the seller’s knowledge of:

· Ownership/Title/Owner Occupancy

· Structural condition

· Water sources /systems

· Environmental /Toxic hazards/ Sewer/septic systems/ utilities

· Mechanical/electrical /plumbing systems /and fixtures

· Homeowner associations or common interests

· Slippage, movement, shifting, fill or other geographical concerns

· Easements and encumbrances

· And other material facts that affect the property

If the seller becomes aware of additional information, problems, or an adverse change takes place prior to closing, the seller can take corrective action.

If the corrective action is taken within three days PRIOR to closing, the buyer has NO right to rescind.

If the seller amends the statement, the buyer has three business days after receiving it to accept the amendment or rescind.

Example

The McDermott’s filled out a seller’s property disclosure form for the Browns, the buyer.

McDermott's licensee gave it to the Browns within 5-days.

The Browns read nothing unacceptable and signed the waiver to rescind.

One week before closing, the McDermott’s found that their septic system was not legally adequate.

McDermott’s gave Browns an amended disclosure statement. Browns had 3 business days to accept or rescind.

The second day the Browns accepted, and the sale closed.

Example

The McDermott’s had the same situation but take corrective action by installing a new system within three days PRIOR to closing.

They do not give the Browns an amended statement, and the Browns have NO right to rescind.

Let’s say that the McDermott’s discovered the problem with the septic system a week before closing, and they give an amended statement. If the Browns have “buyer’s remorse” and want out of the sale they have three business days to accept the amended statement or give their notice to rescind. The agreement is void upon the delivery of the notice, and the buyer is entitled to a refund of their earnest money.

If corrective action was not taken, or if the statement was not amended and given to the Browns, the Browns would have the right to rescind any time PRIOR to the closing date.

Closing dates that fall within the rescission period are extended until the period expires.

If the seller DOES not give the buyer a disclosure statement within the five-day statutory time period, the buyer can rescind the sales agreement at ANY time until closing.

The seller has NO obligation to deliver OR amend the statement, and the buyer has NO right to rescind to request one if new information or a discovery that conflicts with the statement becomes known after closing.

HOWEVER, if defects are found, the buyer may exercise legal remedies against the seller or licensee.

Licensees must make themselves aware of possible problems, and never conceal material defects that are discovered or disclosed by the seller.

The disclosure law describes a residential transaction as any residential dwelling of one to four units including residential, condominium, and residential timeshares.

Example

The McDermott’s have no knowledge of any septic problems and they close the sale with the Browns.

One month later, the septic problem is discovered for the first time. The Browns would have NO right to rescind the sale.

Although licensees DO not have a duty or obligation to inspect the property to discover defects, the disclosure laws do not eliminate the licensee’s liability for fraudulent, wrongful or negligent misrepresentation of defects.

What types of transactions and transfers does it apply to?

Improved Property Disclosures

Sellers of improved property must provide a prospective buyer with a new revision of a Sellers Property Disclosure Statement for improved property (NWMLS Form 17 revision 06/07) for all residential property, including multifamily dwellings up to four units, new construction, condominiums not subject to a public offering statement, certain timeshares and manufactured homes.

Unimproved Vacant Land Disclosures

Sellers of unimproved property must provide a prospective buyer with a new revision of a Sellers Property Disclosure Statement for unimproved property (NWMLS Form 17C revision 06/07) if the property is zoned, in whole or in part, for residential use.

If a property is located in a municipality where no zoning exists, then a disclosure statement will be required.

Exemptions under the new law

Foreclosures are no longer exempt under the new law.

Exemptions to providing a seller’s disclosure statement are now as follows:

A gift or other transfer to a parent, spouse, or child of a transferor or child of any parent or spouse of a transferor;

(2) A transfer between spouses in connection with a marital dissolution;

(3) A transfer where a buyer had an ownership interest in the property within two years of the date of the transfer including, but not limited to, an ownership interest as a partner in a partnership, a limited partner in a limited partnership, a shareholder in a corporation, a leasehold interest, or transfers to and from a facilitator pursuant to a tax deferred exchange;

(4) A transfer of an interest that is less than fee simple, except that the transfer of a vendee's interest under a real estate contract is subject to the requirements of this chapter; and

(5) A transfer made by the personal representative of the estate of the decedent or by a trustee in bankruptcy.

NOTE: If the seller answers “yes” to any of the questions contained in the environmental section of the form, then the buyer cannot waive their right to receive this form (even if you want to).

Student: Open and read Seller Disclosure Form PDF

Environmental Factors That Require Disclosure

As consumers become more health conscious and safety oriented, environmental factors that can affect their homes has become important issues in the real estate field. It not only affects licensees, but appraisers, lending institutions, insurance companies, property managers, and developers as well.

Environmental issues are health issues and when applied to real estate transactions, become real estate issues. It is therefore important that licensees not only provide the seller disclosure statement, but disclose any information based on hazardous substances so buyers can make informed decisions.

Licensees are not experts, nor are they required to have the technical expertise necessary to determine the level or severity of the hazardous substance. However, they must be AWARE of these environmental issues and advise their clients where to find additional information or testing.

No one wants to live in a hazardous or toxic environment. With revitalization projects, stronger legislation regarding the environment and hazardous waste clean-up it is no wonder consumers are seeking answers to environmental hazards more frequently in the real estate transaction. This can affect the desirability, and market value of the property for sale.

Six environmental hazards that may require disclosure in a listing agreement are:

1. Asbestos

2. Lead based-paint and other lead hazards

3. Radon

4. Urea-Formaldehyde

5. Groundwater Contamination

6. Underground Storage Tanks (UST’s)

Asbestos

Asbestos is a mineral that was once used in insulation due to its ability to retain heat and resistance to fire hazards. Asbestos was banned in 1978 due to the microscopic fibers it releases which can result in a variety of respiratory diseases.

The presence of asbestos is not necessarily an immediate health hazard. Asbestos (like lead paint) is only harmful if it is disturbed or exposed, which often occurs when renovating or remodeling a home.

Asbestos is friable, which means as it ages the fibers break down easily into tiny particles. At the point the particles become airborne (either by disturbing the area or exposing the area) they then pose a risk to humans.

Friable asbestos is most prevalent in schools, commercial buildings, and residences built before 1978. If the levels of asbestos reach a dangerous level it may become difficult to rent, lease, finance, sell, or insure.

In residential sales, asbestos is typically found in ducts, heating and hot water tanks, and was sometimes used as a material to cover pipes. Its fire resistance made it desirable to use in floor covering (including linoleum) roofing products, and as exterior siding.

Asbestos can be very costly to remove, and the process requires state licensed professionals and specially formulated products to seal the environment. Self- removal can be extremely dangerous and can further contaminate the environment. Encapsulation is an alternative to removal; however, it can still disintegrate over time. If a person decides to remodel or renovate the home, the asbestos will still need to be dealt with, thus adding to a future cost.

Testing can be conducted to determine the level of asbestos present and provide an accurate disclosure in the sales transaction. Commercial properties may want a more thorough analysis of the problem and consult with a certified inspector trained to identify the materials present that contain asbestos. It is important buyers know the location of any asbestos containing materials, so they know the areas to avoid should they decide to do any future remodeling.

Appraisers should also be made aware of the presence (or possible presence) of asbestos.

Lead Based Paint

Lead was used as a pigment and drying licensee in alkyd oil-based paints. This was paint was used on exterior surfaces as well as interior areas, especially door jams, window sills, and trim.

The federal government estimates that approximately 57 million homes (75% of all housing) built before 1978 contain some form of lead. Lead is found not only in residential homes, but commercial structures and million-dollar mansions as well.

The concern over lead-based paint stems from the health implications lead particles cause in humans. Lead in the body can cause serious damage to the brain, kidneys, nervous system, and red blood cells.

The extent of the damage is largely determined by the length of exposure and the age at which the person is exposed. Children and the elderly are at higher levels of risk for damaging diseases.

The use of lead paint was banned in the United States in 1978. Licensees who are involved in the sale or lease of a property constructed before 1978 face potential liability for any injuries suffered from persons occupying the property.

There is a lot of controversy about the practical approaches for dealing with property that has lead paint present.

Some argue it should be completely removed from the premises, while others argue encapsulation is the best approach.

Others argue that testing should be mandatory so prospective buyers/tenants know the levels and can make informed decisions for themselves based off the testing data. In most states, only licensed and/or certified lead abatement contractors, inspectors and assessors may deal with the removal or encapsulation of lead in the structure.

Currently, no federal or state laws require lead testing to be conducted as a condition of the sale or lease of the property. However, know lead hazards must be disclosed to all parties in the transaction.

In 1996, the EPA and Department of Housing and Urban Development (HUD) enacted final legislation requiring disclosure of the presence of lead-based paint or other lead hazards to the potential buyers or renters.

The Lead-Based Paint Disclosure Form is a required form that must be disclosed to buyers/tenants upon the sale or lease of residential property constructed before 1978. If the current owner does not know if the structure was abated or contains lead paint, it is safe to assume lead is still present.

As part of the Lead Based Paint Hazard Reduction Act, the following requirements are mandated for dwellings constructed before 1978:

· Owners must disclose the presence of any known lead hazards and provide the purchasers/lessees with any relevant records or reports

· The Lead-Based Paint Disclosure form must be a part of all sales contracts or lease agreements regarding residential properties.

· A lead hazard pamphlet must be distributed to all buyers and renters advising them of the hazards of lead-based paints.

· Purchasers must be given 10 days to conduct a lead assessment and allow for any testing on the premises. The contract is not binding until the 10-day period has expired.

· The regulations specifically state that real estate licensees ensure that all parties are made aware of the hazard and comply with the law.

Pamphlets and additional information on lead-based paint is available from the National Lead Information Center at 800-424-5323.

Radon

Radon is defined as a radioactive gas produced by the natural decay of other radioactive substances. Radon is present in all 50 states with the highest concentrations in the Midwest and northeastern United States. When radon dissipates into the atmosphere it not a health concern; however, when radon enters buildings and is trapped high concentrations can cause serious health concerns.

Evidence suggests that radon may be the most underestimated cause of lung cancer for people who smoke and those who do not smoke but spent a lot of time indoors. Radon is odorless and tasteless making it impossible to detect without testing.

Radon is an environmental concern due to more energy efficient homes being constructed with air tight walls and windows which may increase the potential for radon gas accumulation. Once the gas accumulates in the home, efficient heating and ventilation systems can quickly spread the gas throughout the structure.

While home radon kits are available it is best to consult with a professional. A certified independent third party can properly determine the results and will safeguard against tampering.

PROPERTY DISCLOSURE FORMS

More than 35 states suggest or require disclosure of known radon levels. Most of the time property owners will indicate “unknown”. Therefore, buyers should be cautioned not to rely too much on the disclosure forms as a guarantee that there are no problems.

Real estate licensees and managing brokers can be helpful to clients by handing out the EPA’s pamphlet “A Citizen’s Guide to Radon” and educating them about issues and problems raised in the disclosure forms. There is no federal requirement that mandates properties be tested for radon for a contract is enforceable.

A buyer’s agent should try to determine the buyer’s attitude about radon and discuss testing and mitigation issues before showing property and address any concerns before submitting an offer.

Acceptable and Unacceptable Remarks on Radon:

Inappropriate remarks include:

“This house tested safe before, so another test would not be necessary.”

“There is no radon in this home.”

“Radon has never been a problem in this neighborhood.”

“The only people concerned about radon are relocation companies, and we don’t have relocation buyers so there is no need to worry.”

Appropriate advice to give buyers may be:

“Radon can be a concern in this neighborhood as well as any other area. Levels vary from house to house. So, you may want to consult the state health department about testing procedures. Here is some additional information distributed by the EPA you may want to read to help you decide whether or not you want a radon test done on the property.”

Urea Formaldehyde Foam Insulation (UFF)

Urea-formaldehyde was used in construction materials during the 1970’s. Gasses leak out from the UFFI as the product hardens and becomes trapped inside the building. In 1982, the Consumer Product Safety Commission banned the use of UFFI.

The ban was lifted and reduced to a warning disclosure after courts determined there was insufficient evidence linking UFFI to health hazards. Although legal, it is rarely used today due to the negative publicity and consumer concern over the product.

WHAT IS FORMALDEHYDE?

Formaldehyde is a colorless, organic chemical, which usually has strong odor. It is one of the few indoor air pollutants that are measurable. Formaldehyde is commonly used as a preservative (embalming fluid) and as a bonding licensee (used in insulation and pressed wood products).

FORMALDEHYDE HAZARDS

The EPA has classified formaldehyde as a probable human carcinogen. Long term effects of formaldehyde may include skin allergies, respiratory problems (shortness of breath, wheezing, chest tightness) and possible bronchitis (coughing, shortness of breath).

TESTING FOR FORMALDEHYDE

Trained, qualified professionals can provide more detailed information, but do-it- yourself kits are available to provide a ballpark figure of formaldehyde levels. Testing should be done at least 24 hours to assure that the sampling period is representative.

The easiest and least expensive solution is to increase ventilation, by opening opposing windows and doors as frequently as possible. Installing an exhaust fans will also help.

If the homeowner can identify the source of formaldehyde, removing it is best. This works well with paneling, furniture, or carpeting, but may be difficult if the formaldehyde is coming from insulation, particleboard, or sub-flooring.

Groundwater Contamination

SAFE DRINKING WATER

The human body is nearly 66 percent water. We can live for nearly a month without food, but less than a week without water. Water is the single most important element human beings can ingest. People require at least 8 glasses of water per day to assist in the digestion and absorption of food, maintaining proper muscle tone, ridding the body of wastes, and helping to serve as a natural air conditioning system during hotter times of the year.

COMMON WATER CONTAMINENTS AND THEIR HEALTH EFFECTS

Water, in the form of rain, cleanses the air. Rainwater is then further compromised by surface pollutants so that by the time it washes into rivers, lakes, and aquifers it carries with it many chemicals generated by man.

Some of the most common contaminates include:

Nitrates – phosphorus and nitrogen may leach into the water supply from manure and fertilizers.

Lead – primary sources lead pipes and brass faucets

Volatile organic compounds (VOCs) – benzene, industrial and dry-cleaning solvents and other VOCs can leach into the water supply from the soil.

Pesticides – fungicides, insecticides and herbicides can soak into the ground.

Chlorine – added to drinking water to destroy harmful organisms.

Giardia and cryptosporidium – contamination from sewage and animal waste.

PROTECTION

The best protection from water contamination is source protection and regular testing, followed by chlorination and filtration.

Every well should be tested for the presence of VOCs if the well is near an industrial site. The possibility of gasoline, oil spills, exposure to a leaking UST’s, drywells, storm drain, illegal disposal of hazardous material, and chemicals used in a septic system can cause contamination.

WATER TESTING

Water should be tested at least once a year for bacteria, nitrates, and total dissolved solids (TDS) during the spring or summer after a rainy period. These tests should also be done after repairing or replacing an old well or pipes and after installing a new well or pump.

Because water flows from one place to another, contamination can spread far from its source. Once the source of contamination can be identified, it can be treated.

Testing for chloride, sulfate, iron, manganese, hardness, and corrosion should be done at least once every three years. If the home plumbing contains lead materials, brass fittings or lead solder, the water should be tested as soon as

89 possible to ensure the threat of a lead hazard entering the home through the water supply is eliminated.

FEDERAL LAWS

The federal government has passed several laws that protect the water supply beginning with the Safe Drinking Water Act of 1974, which was created to protect public health.

Federal legislation gives states more flexibility in identifying contamination in potable water supplies, more consumer information in an easy to understand format and greater attention to accessing and protecting sources of drinking water.

DISCLOSURE

Property disclosure forms often require the sellers to indicate their water source, such as municipal water supply, well water, or other. When anything other than municipal is indicated, licensees should inquire about well water testing and suggest that this information be made part of the property disclosure.

Buyer licensees should recommend that their buyers have well water analyzed for contaminates before closing. This is especially important if the property is a current or former agricultural or industrial site or known UST’s are located close to the area.

If contaminates are found, options include locating an alternative water supply, or treating the water to remove any contaminates. Remember that the time to negotiate cleanup is before settlement, not after.

Underground Storage Tanks - UST's

THE THREAT

Underground Storage Tanks or UST’s are defined by the EPA as a tank and any underground piping that is connected to it which has 10% of its volume beneath the surface of the ground. Prior to the mid-1980’s most UST’s were made of bare steel which is likely to corrode, permitting the stored chemical to leak and absorb into the soil.

The main concern over UST’s is the ability of the chemical substances to leak and contaminate underground aquifers (i.e. the groundwater sources for our drinking water). While it is expensive to clean contaminated soils it would be catastrophic to try and decontaminate the aquifer.

WHERE ARE UST’s LOCATED?

USTs are typically found in industrial areas where petroleum-based products are used or where former and current gas stations and auto repair facilities are located. They can also be found on military installations, paper mills, wood treatment plants, and food processing plants

However, UST’s are not limited exclusively to industrialized areas. Metal detectors and utility locators have found multiple tanks located on or near residential property. Most of these tanks were used to store fuel oil for heating the residence.

Historically, when a tank filled up with groundwater or started to leak it was abandoned and buried. Overtime, these neglected tanks leaked hazardous substances into the ground which contaminated not only the soil but groundwater as well.

UST TEST METHODS

Three common methods to test for leaks are:

Soil Borings – most often recommended by environmental professionals for real estate transactions.

Tank Integrity Tests – used for semi-annual testing of gas station tanks; not recommended for real estate transactions due to the possibility of inaccurate readings

Soil Vapor Tests – possible not as effective for identifying heating oil as it is for gasoline, which is more volatile.

FEDERAL REGULATION

The primary goal of UST regulation is to protect groundwater. A section of the resource conservation and recovery act (RCRA) required the EPA to develop a comprehensive regulatory program for USTs storing petroleum or hazardous materials. In 1984 the Hazardous and Solid Waste Amendments Act required owners to find leaks and clean them up.

Landowners (usually commercial or industrial based) are required to register their underground tanks and adhere to strict technical and administrative requirements governing:

• Installation • Maintenance

• Corrosion Prevention • Periodic Monitoring • Record Keeping

Owners are also required they have the financial resources to cover damages the leaks may cause and pay for clean-up expenses.

TYPES OF TANKS EXEMPT FROM FEDERAL REGULATION

• Farms and residential tanks holding less than 1,100 gallons of motor fuel used for noncommercial purposes.

• Tanks currently storing heating oil used on the premises

• Tanks on or above the floor in basements or tunnels

• Septic tanks and systems for collecting storm water and waste water

• Tanks which hold less than 110 gallons

• Emergency spill and overflow tanks

It is important to note that the federal laws specifically exempt most farms and residential tanks, although each state has a right to define what a UST is and what needs to be done if there is a spill. Generally, in most states, if petroleum leaks into the environment in detectable amounts, the leak must be reported properly. Failure to report can result in fines or non-acceptance into the state trust fund.

HOW UST’s AFFECT REAL ESTATE LICENSEES

DISCLOSURE

By the end of 1995 over 303,000 USTs had been resisted with the EPA, but only 131,000 had been cleaned up. Disclosure of any known or suspected UST’s must be made to prospective purchasers and lenders.

LIABILITY

Laws dealing with environmental issues are still a relatively new venture. While federal regulation defines compliance standards and liability issues, common law is used in the courts for interpretation. It is therefore important that real estate professionals and third parties to the transaction understand liability issues.

Seller’s often carry the burden to disclose any material facts (real or potential) related to the property. However, courts have shown that innocent landowners can be held responsible for environmental hazards whether they knew about it or not.

Purchasers have even been held liable for damages whether they caused them or not. Lenders are concerned about the default on rate on loans that have environmental hazards located on the property. All too often, cleanup is more expense that the underlying loan and homeowners walk away from the property instead of enduring the expenses of proper clean up.

Real estate license can be held liable for improper disclosure of material facts; therefore, it is imperative that licensees observe neighboring properties to reveal potential hazards including the location of gas stations, manufacturing plants, and even funeral homes.

Licensees are not required to have expertise in the field of environmental hazards; however, since licensees are perceived by the public to be experts on real estate transaction, licensees must be aware of the hazards that exist and where to direct the client for professional assistance.

The first-place step in any real estate listing process is to ask the homeowner about any known or potential environmental hazards. Disclosure forms and your professional guidance in helping the homeowner answer these questions will indicate whether or not a hazard exists.

In some cases, you may discover that the homeowner has corrected any environmental hazards that existed. This can then be turned into a plus for marketing the property. For example, if a homeowner has had an older abated of lead paint or has a recent report of radon levels in the home, potential buyers can be assured that the home is safe and that the homeowners have taken pride of ownership during their tenancy in the property.

The key is disclosure. Environmental hazards or conditions are covered under Washington’s disclosure laws. Just like a licensee can face disciplinary actions for failure to disclosure known material facts, they can also face disciplinary action for failure to disclose a known environmental hazard: even if the seller neglected to disclose the problem.

Determining Real Estate Commissions

A COMMISSION is payment to the managing broker for real estate services rendered. This is usually a percentage of the selling price of the property.

A COMMISSION SPLIT is the arrangement of sharing commissions earned between a sales licensee and sponsoring managing broker, or between the

93 selling managing broker and listing managing broker. This can be paid by the buyer, the seller, or both buyer and seller.

The compensation is specified in the written agreement contract between the licensee and the principal. Generally, the licensee performs a service for the principal and compensated for their services. This compensation is almost always in the form of a commission and is a percentage of the total sales price.

The commission percentage is always negotiable. It is a violation of anti-trust laws to set a commission rate. The brokerage can set a minimum commission standard for the firm however, without being in violation of anti-trust. As long as the commission rate is discussed BEFORE entering into an agency relationship and signing an agreement.

According to RCW 18.86.080 – Compensation:

(1) In any real estate transaction, the broker's compensation may be paid by the seller, the buyer, a third party, or by sharing the compensation between brokers. (2) An agreement to pay or payment of compensation does not establish an agency relationship between the party who paid the compensation and the licensee.

(3) A seller may agree that a seller’s agent may share with another broker the compensation paid by the seller.

(4) A buyer may agree that a buyer’s agent may share with another broker the compensation paid by the buyer.

(5) A broker may be compensated by more than one party for real estate brokerage services in a real estate transaction, if those parties consent in writing at or before the time of signing an offer in the transaction.

(6) A buyer’s agent or dual agent may receive compensation based on the purchase price without breaching any duty to the buyer.

(7) Nothing contained in this chapter negates the requirement that an agreement authorizing or employing a licensee to sell or purchase real estate for compensation or a commission be in writing and signed by the seller or buyer.

RCW 18.85.301 -Sharing commissions – states:

(1) Except under subsection (4) of this section, it is unlawful for any licensed firm, broker, or managing broker to pay any part of the licensee's commission or other compensation to any person who performs real estate brokerage services and who is not a licensed firm, real estate broker, or managing broker in any state of the United States or its possessions or any foreign jurisdiction with a real estate

94 regulatory program.

(2) Except under subsection (4) of this section, it is unlawful for any licensed real estate firm to pay any part of the firm's commission from brokerage services or other compensation to a real estate broker or managing broker not licensed to do business for the firm.

(3) Except under subsection (4) of this section, it is unlawful for licensed brokers or managing brokers to pay any part of their commission from brokerage services or other compensation to any person, whether licensed or not, except through the firm's managing broker.

(4) A commission may be shared with a manufactured housing retailer, licensed under chapter 46.70 RCW, on the sale of personal property manufactured housing sold in conjunction with the sale or lease of land.

RCW 18.85.331 License required -- Prerequisite to suit for commission.

It is unlawful for any person to act as a real estate broker, managing broker, or real estate firm without first obtaining a license therefore, and otherwise complying with the provisions of this chapter.

No suit or action shall be brought for the collection of compensation as a real estate broker, real estate firm, managing broker, or managing broker, without alleging and proving that the plaintiff was a duly licensed real estate broker, managing broker, or real estate firm before the time of offering to perform any real estate transaction or procuring any promise or contract for the payment of compensation for any contemplated real estate transaction.

It is illegal to accept a fee (commission) for the sale of real estate if you are not the licensed broker. Additionally, a broker cannot pay the commission to anyone who is not a licensed salesperson or broker.

Referral fees are paid between brokers when one broker recommends the use of another broker, and the client consummates a transaction as a result of this referral. Referral fees are not commissions and are legal as long as both brokers are licensed.

BROKER’S COMPENSATION

The amount of compensation a broker receives is often negotiated with the managing broker before accepting employment. A managing broker may agree to pay a set salary, or share commissions received from closing a transaction originated by the broker.

In some cases, depending on the circumstances, a broker can receive 100% of the commission. When this is the case, a broker usually pays a monthly “desk fee” to the managing broker and covers their own expenses when listing and advertising properties.

Some companies use a graduated commission split program based on production goals. This provides incentive to produce more and be fairly compensated for it. For example, a managing broker may agree to a 50/50 split up to a certain production mark; 60/40 to another mark; 70/30 to the next mark and so on. For particularly high produces these splits could be as high as 90/10.

Whichever method a broker is compensated by, it is important to remember that only the employing broker can pay it.

DETERMINING COMMISSIONS

Remember, commission are negotiated and included as part of the Listing Agreement. Often a commission is shared between many parties involved in the transaction. For instance, the listing managing broker, the listing broker, the selling managing broker, and the selling broker.

The following example will help you determine how a commission is paid.

Broker Jane while working under Managing broker Doug listed a single-family residence for $245,000. The listing agreement specified a 6% commission rate due upon the sale of the home to a ready, willing, and able buyer.

Meanwhile, Broker Bob working under Managing broker Anne found a buyer for the home. The house sold for $240,000 and the listing Managing broker and selling Managing broker split the commission equally. If the Listing managing broker retained 40% of the commission, how much did the Listing Broker receive in payment?

We first determine the overall commission:

The mathematical formula is Sales Price x Commission Rate = Total Commission

$240,000 (sales price) x .06 (commission rate) = $14,400 (total commission)

We then determine the split between Managing broker DOUG and Managing broker ANNE:

$14,400 (total commission) x .50 (split between brokers) = $7,200 to each Managing broker

The listing Managing broker DOUG retained 40% of $7,200 and paid the rest to Broker JANE.

$7,200 x .6 (JANE'S percentage) = $4320 paid to Broker JANE

$7,200 x .4 (DOUG'S percentage = $2880 retained by Managing broker DOUG

Limiting Licensee Liability

The managing broker should stress the importance of the agent’s duty to represent the seller in an honest and direct manner.

It is not good practice to oversell the property’s attributes or “puff”. Anticipate and identify problems and follow up on any “red flags” that alert you to potential problems.

Keep good records rather than depending on the words or actions of others.

Properties should be well priced and adjusted if priced too high.

Encourage seller and buyer to have property inspected by professionals and recommend that the seller correct ALL defects.

ALWAYS let buyers or sellers choose their own inspectors or contractors.

To help to keep liability at a minimum:

· Keep all parties informed of changes

· Communicate with your managing broker and cooperating licensees

· Attend all risk reduction classes and

· Have a good Error and Omission Insurance Policy

The duties of the seller’s agent include ALL the duties that the licensee owes all parties involved any transaction:

1. Reasonable skill and care

2. Honesty and good faith

3. Present all offers

4. Disclose all existing material facts

5. Account for all money and property received

6. Provide Law of Real Estate Agency Pamphlet

7. Disclose representation of all parties involved

UNLESS additional duties are agreed to in writing, the duties of the seller’s agent are limited to those above PLUS the following:

1. Loyalty to the seller, taking no action that is adverse or detrimental to the seller’s interest in a transaction

2. Disclose any conflicts of interest to the seller in a timely manner

3. Advise the seller to seek expert advice in matters beyond the licensee’s expertise

4. Do not disclose any confidential information from or about the seller even after termination of agency, UNLESS under subpoena or court order.

When contacted by a prospective purchaser, the licensee should take the earliest opportunity to advise the buyer of the licensee's status an agent of the seller and guard against the possibility of actions that would create a dual agency.

The Fair Housing Law makes it illegal to discriminate based on race, color, religion, sex, national origin, familial status, or handicap by:

· Refusing a bona fide offer to rent or sell real estate

· Refusing to negotiate for property

· Refusing to make real property available, when it is for sale or rent

· Altering terms, conditions, or privileges for different potential buyers

or renters

· Deny a Dwelling

· Engage in blockbusting

· Refusing or limiting participation in a MLS or brokers services

· Falsely deny that housing is available for inspection, sale, or rent

· Provide different housing services or facilities

In addition, it is illegal for real estate licensees to discriminate using steering or redlining techniques.

Blockbusting

Blockbusting or panic selling occurs when homeowners are influenced to list or sell their properties by a panic created by “predictions” that property values are about to decline due to the entry of people of a certain race, color.

In other words, blockbusting is a racially discriminatory and illegal practice of coercing a party to sell a home to someone of a minority race or ethnic background, then using scare tactics to cause others in the neighborhood to sell at depressed prices.

Blockbusting allows unscrupulous persons to profit from listing properties or from buying the properties at a low price created by the panic.

Example

A licensee at XYZ Realty discovers that a minority family has just moved into a “white” neighborhood. The licensee immediately begins contacting the owners in the same neighborhood warning that more minority families are planning to buy homes in the neighborhood.

The licensee implies that drug use, theft and violence will spread, and property values will drop as a result. These illegally fabricated stories cause owners to suddenly list their homes with XYZ Realty. XYZ Realty has created panic selling and is guilty of blockbusting.

Steering

Steering is the illegal practice of directing persons to certain neighborhoods according to their race or other characteristic of a protected class, an attempt to influence, maintain or alter the characteristics of neighborhoods.

A licensee is prohibited to lead, channel, negotiate, or direct individuals to specific neighborhoods in an attempt to segregate. Steering can be telling prospective purchasers or renters that they would not be “comfortable” in a certain neighborhood, development, or floor of a building.

Example

ABC Realty has fourteen licensees. The only licensee who is of Asian descent is always directed to handle Asian buyers.

The licensee is encouraged to make these particular buyers “more comfortable” by showing homes in predominately Asian neighborhoods. This practice would make ABC Realty guilty of steering.

Redlining

The term “redlining” comes from past practice by lenders that would outline in red certain areas on a map.

These areas were based on the racial composition of the neighborhoods and lenders refused to make loans in the redline areas.

Redlining is discrimination in residential loans involving the racial composition of the area in which the property is located.

It is illegal for a lender to refuse to give loan information, or apply different terms, interest rates, fees or conditions, based on the racial make-up of an area.

A lender may not refuse to purchase a loan or lower an appraisal based on racial composition of an area.

The Home Mortgage Disclosure Act of 1975 and California Health and Safety Code Sections 35815-35816 prohibits redlining and requires large institutional lenders to file an annual report of their mortgage loans so that they can be categorized by locations making it easier to determine if redlining is practiced.

Example

Buyer Amy makes an application for a loan at O Hara’s Bank, to purchase a home located in the “Newhope Subdivision”.

“Newhope” is a predominantly minority neighborhood.

O’Hara’s Bank rejects the loan based on fear that property values in “Newhope” based on racial makeup of the neighborhood. O’Hara Bank is guilty of redlining.

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Exemptions to the Fair Housing Laws

EXEMPTIONS TO THE FAIR HOUSING LAWS WILL ONLY APPLY IF THE SERVICES OF A REAL ESTATE LICENSEE ARE not USED, AND NO DISCRIMINATORY ADVERTISING IS USED.

Exceptions include the rental or sale of SINGLE FAMILY HOMES by the owner IF: • the owner owns three or less single-family homes at one time • the house is sold or rented without a real estate licensee • Non- owner occupied and owner was not the last occupant prior to sale. This is allowed only once in a 24-month period.

The Law does not apply to the private owner in the sale or rental of a dwelling with up to four units if owner lives in and maintains one of living units as their residence.

The Law does not apply to any multifamily dwelling of 5 or more units, or in dwellings that have up to four units if the owner does not live in one of units.

The Law does not prohibit non-commercial Religious Organizations from limiting sales or rentals of rooms that it owns to its members or giving preference to their members, UNLESS membership is restricted on the basis of race, color, or national origin.

The Law allows private clubs that provide accommodations or lodging as a noncommercial purpose, to limit sales or to give preference to its members, UNLESS membership is restricted on the basis of race, color, or national origin.

HUD has determined housing for elderly is exempt from familial status discrimination, IF it was specifically designed with significant services and facilities for older persons, UNLESS not practicable.

It MUST be occupied solely by persons 62 or older, or at least one person 55 or older in at least 80% of occupied units under a federal, state, or local government program.

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Washington State Laws against Discrimination

Washington State Human Rights Commission

The mission of the Washington State Human Rights Commission is to eliminate and prevent discrimination through the fair application of the law, the efficient use of resources, and the establishment of productive partnerships in the community.

The Washington State Human Rights Commission (Commission) enforces the Law against Discrimination (RCW 49.60). The Commission works to prevent and eliminate discrimination by investigating human rights complaints and providing education and training opportunities throughout the state.

Under the law, everyone has the right to be free from discrimination:

RCW 49.60.030 Freedom from discrimination--Declaration of civil rights.

(1) The right to be free from discrimination because of race, creed, color, national origin, sex, or the presence of any sensory, mental, or physical disability or the use of a trained dog guide or service animal by a disabled person is recognized as and declared to be a civil right. This right shall include, but not be limited to:

(a) The right to obtain and hold employment without discrimination;

(b) The right to the full enjoyment of any of the accommodations, advantages, facilities, or privileges of any place of public resort, accommodation, assemblage, or amusement;

(c) The right to engage in real estate transactions without discrimination, including discrimination against families with children;

(d) The right to engage in credit transactions without discrimination;

(e) The right to engage in insurance transactions or transactions with health maintenance organizations without discrimination: PROVIDED, that a practice which is not unlawful under RCW 48.30.300, 48.44.220, or 48.46.370 does not constitute an unfair practice for the purposes of this subparagraph; and

(f) The right to engage in commerce free from any discriminatory boycotts or blacklists. Discriminatory boycotts or blacklists for purposes of this section shall be defined as the formation or execution of any express or implied agreement, understanding, policy or contractual arrangement for economic benefit between any persons which is not specifically authorized by the laws of the United States and which is required or imposed, either directly or indirectly, overtly or covertly, by a foreign government or foreign person in order to restrict, condition, prohibit, or interfere with or in order to exclude any person or persons from any business

102 relationship on the basis of race, color, creed, religion, sex, the presence of any sensory, mental, or physical disability, or the use of a trained dog guide or service animal by a disabled person, or national origin or lawful business relationship: PROVIDED HOWEVER, That nothing herein contained shall prohibit the use of boycotts as authorized by law pertaining to labor disputes and unfair labor practices.

(2) Any person deeming himself or herself injured by any act in violation of this chapter shall have a civil action in a court of competent jurisdiction to enjoin further violations, or to recover the actual damages sustained by the person, or both, together with the cost of suit including reasonable attorneys' fees or any other appropriate remedy authorized by this chapter or the United States Civil Rights Act of 1964 as amended, or the Federal Fair Housing Amendments Act of 1988 (42 U.S.C. Sec. 3601 et seq.).

RCW 49.60.224 Real property contract provisions restricting conveyance, encumbrance, occupancy, or use to persons of particular race, disability, etc. void--Unfair practice.

(1) Every provision in a written instrument relating to real property which purports to forbid or restrict the conveyance, encumbrance, occupancy, or lease thereof to individuals of a specified race, creed, color, sex, national origin, families with children status, or with any sensory, mental, or physical disability or the use of a trained dog guide or service animal by a blind, deaf, or physically disabled person, and every condition, restriction, or prohibition, including a right of entry or possibility of reverter, which directly or indirectly limits the use or occupancy of real property on the basis of race, creed, color, sex, national origin, families with children status, or the presence of any sensory, mental, or physical disability or the use of a trained dog guide or service animal by a blind, deaf, or physically disabled person is void.

(2) It is an unfair practice to insert in a written instrument relating to real property a provision that is void under this section or to honor or attempt to honor such a provision in the chain of title.

RCW 49.60.225 Relief for unfair practice in real estate transaction--Damages-- Penalty.

(1) When a reasonable cause determination has been made under RCW 49.60.240 that an unfair practice in a real estate transaction has been committed and a finding has been made that the respondent has engaged in any unfair practice under RCW 49.60.250, the administrative law judge shall promptly issue an order for such relief suffered by the aggrieved person as may be appropriate, which may include actual damages as provided by the federal fair housing amendments act of 1988 (42 U.S.C. Sec. 3601 et seq.), and injunctive or other

103 equitable relief. Such order may, to further the public interest, assess a civil penalty against the respondent:

(a) In an amount up to ten thousand dollars if the respondent has not been determined to have committed any prior unfair practice in a real estate transaction;

(b) In an amount up to twenty-five thousand dollars if the respondent has been determined to have committed one other unfair practice in a real estate transaction during the five-year period ending on the date of the filing of this charge; or

(c) In an amount up to fifty thousand dollars if the respondent has been determined to have committed two or more unfair practices in a real estate transaction during the seven-year period ending on the date of the filing of this charge, for loss of the right secured by RCW 49.60.010, 49.60.030, 49.60.040, and 49.60.222 through 49.60.224, as now or hereafter amended, to be free from discrimination in real property transactions because of sex, marital status, race, creed, color, national origin, families with children status, or the presence of any sensory, mental, or physical disability or the use of a trained dog guide or service animal by a blind, deaf, or physically disabled person. Enforcement of the order and appeal there from by the complainant or respondent may be made as provided in RCW 49.60.260 and 49.60.270. If acts constituting the unfair practice in a real estate transaction that is the object of the charge are determined to have been committed by the same natural person who has been previously determined to have committed acts constituting an unfair practice in a real estate transaction, then the civil penalty of up to fifty thousand dollars may be imposed without regard to the period of time within which any subsequent unfair practice in a real estate transaction occurred. All civil penalties assessed under this section shall be paid into the state treasury and credited to the general fund.

(2) Such order shall not affect any contract, sale, conveyance, encumbrance, or lease consummated before the issuance of an order that involves a bona fide purchaser, encumbrancer, or tenant who does not have actual notice of the charge filed under this chapter.

(3) Notwithstanding any other provision of this chapter, persons awarded damages under this section may not receive additional damages pursuant to RCW 49.60.250.

The law does not always clearly state what sort of protections one may have from discrimination. For instance, the federal law barring bias due to familial status has been interpreted to mean it is no longer legal to discriminate against persons because they have children. Also, the Washington state law preventing discrimination due to the presence of a disability also protects the privacy of

104 one's HIV status. For more information, consult one of the specific agencies listed.

To ensure a conviction, or have a reasonable chance at a successful settlement, there must be very clear evidence. The burden of proof usually falls upon the person filing the complaint. Tenants have found that clear documentation and a certain amount of creativity greatly enhance the probability of a successful case. For instance, when a landlord refuses to rent a two-bedroom apartment to a single mother with two children, a call a day later from a friend to the same landlord on behalf of three adults with the same economic situation as the mother will often produce compelling evidence.

Finally, and frequently most frustrating, it is legal for landlords to discriminate for any reason other than the items listed in the table below. It is legal for a landlord to discriminate against a person with blue shoes. It is also legal for landlords to discriminate based on financial status, bad (or no) credit, former or current homelessness, and so on.

Fair Housing: areas and protected classes Area: Protected classes: Enforcement Agency:

United States • race HUD Fair Housing Enforcement • color Center • religion • sex (206)220-5172 • familial status TDD: 1-800-927-9275 • national origin • disability

State of • race Washington • color • national origin • creed • sex • marital status • disability • use of guide dog

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Advertising

In addition to the Fair Housing Act, HUD has published additional guidance regarding advertisement under Section 804 of the Fair Housing Act. In a memorandum dated January 9, 1995, HUD addresses the following issues regarding advertising:

Section 804(c) of the Fair Housing Act prohibits the making, printing and publishing of advertisements which state a preference, limitation or discrimination based on race, color, religion, sex, handicap, familial status, or national origin.

The prohibition applies to publishers, such as newspapers and directories, as well as to persons and entities who place real estate advertisements. It also applies to advertisements where the underlying property may be exempt from the provisions of the Act, but where the advertisement itself violates the Act. See 42 U. S. C. 3603(b).

Publishers and advertisers are responsible under the Act for making, printing, or publishing an advertisement that violates the Act on its face.

Thus, they should not publish or cause to be published an advertisement that on its face expresses a preference, limitation or discrimination based on race, color, religion, sex, handicap, familial status, or national origin. To the extent that either the Advertising Guidelines or the case law do not state that particular terms or phrases (or closely comparable terms) may violate the Act, a publisher is not liable under the Act for advertisements which, in the context of the usage in a particular advertisement, might indicate a preference, limitation or discrimination, but where such a preference is not readily apparent to an ordinary reader. Therefore, complaints will not be accepted against publishers concerning advertisements where the language might or might not be viewed as being used in a discriminatory context.

For example, intake staff should not accept a complaint against a newspaper for running an advertisement which includes the phrase female roommate wanted because the advertisement does not indicate whether the requirements for the shared living exception have been met. Publishers can rely on the representations of the individual placing the ad that shared living arrangements apply to the property in question. Persons placing such advertisements, however, are responsible for satisfying the conditions for the exemption. Thus, an ad for a female roommate could result in liability for the person placing the ad if the housing being advertised is a separate dwelling unit without shared living spaces. See 24 CFR 109.20.

Similarly, intake staff should not file a familial status complaint against a publisher of an advertisement if the advertisement indicates on its face that it is

106 housing for older persons. While an owner-respondent may be held responsible for running an advertisement indicating an exclusion of families with children if his or her property does not meet the "housing for older persons" exemption, a publisher is entitled to rely on the owner's assurance that the property is exempt.

The following is policy guidance on certain advertising issues which have arisen recently. We are currently reviewing past guidance from this office and from the Office of General Counsel and will update our guidance as appropriate.

1. Race, color, national origin. Real estate advertisements should state no discriminatory preference or limitation because of race, color, or national origin. Use of words describing the housing, the current or potential residents, or the neighbors or neighborhood in racial or ethnic terms (i. e., white family home, no Irish) will create liability under this section.

However, advertisements which are facially neutral will not create liability. Thus, complaints over use of phrases such as master bedroom, rare find, or desirable neighborhood should not be filed.

2. Religion. Advertisements should not contain an explicit preference, limitation or discrimination because of religion (i. e., no Jews, Christian home). Advertisements which use the legal name of an entity which contains a religious reference (for example, Rose Lawn Catholic Home), or those which contain a religious symbol, (such as a cross), standing alone, may indicate a religious preference. However, if such an advertisement includes a disclaimer (such as the statement "This Home does not discriminate based on race, color, religion, national origin, sex, handicap or familial status") it will not violate the Act.

Advertisements containing descriptions of properties (apartment complex with chapel), or services (kosher meals available) do not on their face state a preference for persons likely to make use of those facilities and are not violations of the Act.

The use of secularized terms or symbols relating to religious holidays such as Santa Claus, Easter Bunny or St. Valentine's Day images, or phrases such as Merry Christmas, Happy Easter, or the like does not constitute a violation of the Act.

3. Sex. Advertisements for single family dwellings or separate units in a multifamily dwelling should contain no explicit preference, limitation or discrimination based on sex. Use of the term master bedroom does not constitute a violation of either the sex discrimination provisions or the race discrimination provisions. Terms such as "mother-in-law suite" and "bachelor apartment" are commonly used as physical descriptions of housing units and do not violate the Act.

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4. Handicap. Real estate advertisements should not contain explicit exclusions, limitations, or other indications of discrimination based on handicap (i.e., no wheelchairs). Advertisements containing descriptions of properties (great view, fourth-floor walk-up, walk-in closets), services or facilities (jogging trails), or neighborhoods (walk to bus-stop) do not violate the Act. Advertisements describing the conduct required of residents ("non-smoking", "sober") do not violate the Act. Advertisements containing descriptions of accessibility features are lawful (wheelchair ramp).

5. Familial status. Advertisements may not state an explicit preference, limitation or discrimination based on familial status. Advertisements may not contain limitations on the number or ages of children, or state a preference for adults, couples or singles. Advertisements describing the properties (two- bedroom, cozy, family room), services and facilities (no bicycles allowed) or neighborhoods (quiet streets) are not facially discriminatory and do not violate the Act.

Antitrust Laws and Penalties

The purpose of antitrust laws is to protect and encourage fair and honest competition and to prevent monopolies.

In 1890, Congress passed the Sherman Antitrust Act to prohibit anti-competitive conduct all interstate commerce.

The Washington State Constitution prohibits trusts and monopolies that engage in anti-competitive conduct.

The Supreme Court has determined that real estate activities have a significant effect on interstate commerce because of:

· Interstate relocations of persons involving the sale of real estate

· Insurance and transfer of funds involving interstate companies

· Financing and transfer of funds involving interstate banking

· Interstate advertising referrals and information sharing

· Brokerages with offices in several states that compete with individual entrepreneurs

· Franchising of small firms that take advantage of national advertising and relocation services.

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The Sherman Act makes real estate licensees subject to antitrust by designating real estate as a trade defined as a commercial business operating for a profit.

The Sherman Act as well as the Consumer Protection Act makes it unlawful to:

· Monopolize

· Attempt to monopolize OR

· Conspire with others to monopolize any part of any trade or commerce in the state.

It is unlawful for two or more separate entities to plan, or agree to eliminate competition by controlling prices, production levels, or by making derogatory remarks about a competitor to indicate “other licensees won’t do business” with the competitor.

It is also illegal for a single entity to attempt to create a monopoly.

Knowledge, understanding and practice of federal and state anti-trust laws are an important part of the real estate profession.

Real estate is a competitive business by nature, and antitrust laws protect against business activities that could limit fair competition.

Federal and state laws prohibit anyone from boycotting, price fixing or restricting trade in a competitive market.

This means that real estate managing brokers may not CONSPIRE, directly or through Realtor boards or associations, to “fix” commission rates.

Managing brokers cannot agree formally, informally OR innocently, on the rate or amounts of fees or commissions charged or paid.

In addition, managing brokers cannot have informal discussions or make agreements concerning commission amounts or fee schedules.

A managing broker may not avoid taking part in a conspiracy by simply remaining silent during a prohibited discussion between competitors.

To disclaim any connection with a conspiracy, the managing broker must take affirmative action including verbally announcing they the managing broker wants no part of the discussion, leaving the room immediately, AND reporting the conversation to the state or federal government.

Brokerages may establish policies that their licensees are expected to follow.

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It is acceptable for an individual brokerage to instruct their licensees to take listings for above a certain minimum amount of compensation, OR of time, such as 90 days or more.

The licensee may accept a listing for a shorter term or less compensation with the approval of the managing broker.

Example

Gayle gives a listing presentation for Ken who was a “for sale by owner.”

Ken is a demanding seller and the house is a “fixer upper.”

Gayle determines that the house will sell for about $70,000.

Ken says he will list with Gayle for 30 days but will pay a commission of $200.

Gayle’s managing broker’s office policy instructs the affiliated licensees to list properties for 90 days and for a minimum commission of $1, 500.

Gayle asks her managing broker if she may accept a 30-day listing for $200. 00.

Gayle’s managing broker may refuse based on the managing broker’s individual decision not to accept the liability of a listing if the compensation is not acceptable to him/her, OR if the term is too short to effectively market the property.

The managing broker should have a written policy or documentation that shows that the managing broker’s commission rates or commission splits were determined unilaterally.

An explanation might consist of the expense of doing business compared to company's economic condition and liability, along with a notation that the decision was not made or based on the actions or discussions with competitors.

Any documentation relating to commission charged by the managing broker must not be shown to anyone that is not affiliated with the brokerage.

The broker is also responsible for affiliated licensees who take part in an agreement or discussion with other real estate licensees or affiliates from another brokerage in an attempt to “fix commissions.”

Licensees cannot tell a seller that the rate being charged is the “standard rate or about the same as the others.”

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Managing brokers are also prohibited from conspiring with competitors to fix other terms of listing agreements, such as the duration of listing agreements or types of listings to be taken.

Managing brokers are allowed to justify a commission rate that is based on the managing broker’s services.

Using words such as “working together” can lead to conspiracy and should be avoided. Preprinted forms must not have preprinted commission rates or time periods. The licensee must write these terms in blank spaces as negotiated with the buyer or seller.

Example

John, Frank, and Dave are real estate managing brokers. Over lunch they discuss limiting the use of expensive classified advertising. They agree that each of them will not use it. They then discuss eliminating all part time licensees and hiring ONLY full-time licensees. They then decide that if all of them agree not to reimburse licensees for training, they would save money without losing licensees.

EVERY SINGLE PART OF THIS DISCUSSION IS ILLEGAL, and these managing brokers are in violation of the Sherman Law as well as other antitrust laws.

A group boycott is defined as two or more businesses agreeing not to deal with a competitor to effectively force the competitor out of business or to force the competitor to change their method of doing business.

Examples

Two or more managing brokers agreeing not to show homes listed with a managing broker that charges discount commissions.

Two or more managing brokers or MLS acting as if there is conspiracy to boycott a competitor, even if none exists.

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Tying Arrangement

A tying arrangement is an agreement to sell a product only on the condition that the buyer is tied in to buying another product.

It is illegal if two or more separate products or services are “tied together” by contract or course of business.

A “list back” arrangement usually occurs when a builder wants to save the commission when buying a developer’s land so he/she agrees to list the new houses built with the developer’s brokerage and the commission is waived on the sale of land.

If the developer sells a substantial amount of land to the builder involving a large number of new homes the tying arrangement might be illegal.

Usually though, if the developer sells only a few lots, the arrangement would not be illegal.

Managing brokers should have written documentation that forbids the licensees from taking part in any antitrust activity.

The managing broker, as a preventive affirmative defense, should require all affiliated licensees to sign the document and keep it in the managing broker’s file.

Managing brokers should also provide antitrust training and require licensee documentation of their completion of the training.

Penalties

Violations of antitrust laws result in severe penalties including:

· Liability for up to 3 times the plaintiff's actual damages AND attorney’s fees AND prison terms AND court supervision over the violator’s business.

Violations of the Sherman Antitrust Act result in:

· Fines up to $100,000 and imprisoned up to 3 years for individuals.

· Fines up to $1,000,000 for corporations.

Violations of the Washington Consumer Protection Act result in fines of $500,000 for corporations and fines of $100,000 for any other individual.

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In addition, a person injured by violation of antitrust law may sue in Superior Court for an injunction and recovery of costs PLUS up to three times the amount of actual damages.

Review

The three basic types of listing agreements are open, exclusive agency, and exclusive right to sell. The managing broker is entitled to be paid a commission according to the terms of each type of listing.

The listing agreement is an employment contract. The seller agrees to pay the managing broker a commission for finding a ready, willing, and able buyer within the listing period.

Listing agreements are enforceable if:

They are in writing and signed by a seller

Properly identify the property

Provide an agreement to a pay a specific amount or percentage as compensation to the managing broker.

In addition to these required elements, listing agreements should also state

· The terms of sale the seller will accept

· The conditions that the broker must meet to earn a commission

· Beginning and expiration dates of the listing period AND

· The seller’s warranty of the information.

An open listing is an agreement by the seller to pay the managing broker a commission ONLY if the managing broker was the procuring cause of the sale.

An exclusive agency listing is an agreement made by the seller, to list the property ONLY with this particular managing broker.

An exclusive right to sell listing is preferred by most managing brokers, because it provides the most protection for the managing broker and is the type of listing most commonly used.

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With this type of listing contract, the seller agrees to list with just one managing broker. That managing broker has the exclusive right to market the property and submit offers, without competing for the same buyers, with other managing brokers OR the seller.

The listing agreement does not give the managing broker “authority” to sell the owner’s property.

Only an executed and recorded power of attorney from the seller to the managing broker would give the managing broker the actual authority to sell the owner’s property, which is not a common practice.

As of January 1, 1995, Washington State requires ANYONE who sells their residential real estate, to give a property condition disclosure statement to the buyers.

This form must be given to the buyers within five days after the sale agreement is signed unless the buyer waives right to rescind.

This disclosure statement is not a warranty. This means that the seller, licensee, and managing broker are not LIABLE for any errors, inaccuracies, or omissions of which they had NO personal knowledge.

There is no legal wording or set of standards that apply to acceptance or rescission of the statement.

This means that if the buyer dislikes ANY information in the seller’s statement, for any reason at all, the buyer can simply rescind.

Although licensees DO not have a duty or obligation to inspect the property to discover defects, the disclosure laws DO not eliminate the licensee’s liability for fraudulent, wrongful or negligent misrepresentation of defects.

Licensees must make themselves aware of possible problems, and NEVER conceal material defects that are discovered or disclosed by the seller.

The managing broker should stress the importance of the licensee’s duty to represent the seller in an honest and straightforward manner.

It is not good practice to overstate the property’s attributes or “puff” its virtues.

CHAPTER 3 Introduction

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Real estate sales are dependent on the value placed on the property. The most reliable and systematic estimation of a property’s value is the real estate appraisal process.

An appraisal is an educated opinion and explanation of its value based on many different factors and approaches.

The estimated value results are for a specific purpose and valid as of a specific date.

The appraisal could be for the present value of the property, or an estimate of what is was worth, or will be worth as of another date.

Property has many different types of values. The appraiser’s job is to determine the purpose and actual value of the property, without “emotional” influences such as needs and desires or the seller’s memories.

When a buyer applies for a loan, the lender usually requires an appraisal.

The lender uses the appraisal to determine if the property is worth enough to provide sufficient security for the loan amount.

The lender wants to know if the purchaser can afford the loan, BUT they also want to know if the property is worth enough to secure the loan if the buyer defaults.

The estimated opinion of value can be different depending on the purpose or objective.

The purpose of the loan can be for an evaluation to determine tax assessments, rent, exchanges, condemnation, insurance, probate, bankruptcies, etc.

An appraiser can also help to establish a reasonable list price.

The person who hires the appraiser is the client, and the appraiser is the licensee of the client.

This creates an agency relationship between the appraiser and client and ALL agency laws apply.

The appraiser’s job is to follow an “orderly and systematic process” that provides a valid opinion of value.

In order to accomplish this task, it is important to understand what value is, how it is created, and the different factors that can affect it.

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Vocabulary

Appraisal An estimate or opinion of value supported by factual information as of a certain date.

Appraisal Principles Economic concepts used to explain the rationale and process of market behavior. Appraisal principles include anticipation, change, competition, substitution, and supply and demand.

Appraisal Process A systematic step-by-step analysis used by the appraiser to accurately reach an opinion of value. While each appraisal assignment varies according to the purpose of the appraisal and the approach (es) used, a well-done estimate of value will follow some standardized procedure.

Appraisal Report A written report submitted by the appraiser to support and document the opinion of value rendered by the appraiser. The form of the appraisal report can be a letter of valuation, a single page standard form or a more elaborate report.

Appraised Value An estimate of value based on the appraiser's analysis of data within the context of the appraisal problem that the appraiser was employed to solve.

Appraiser An individual who has the experience, training, and legal qualifications to appraise real or personal property. Effective July 1, 1991, appraisers must be state certified or licensed in order to appraise property involving a federally insured or regulated agency.

Competitive Market Analysis Comparison of similar properties in the same or similar area used to determine a reasonable listing price.

Cost Approach A method of appraising property based on the depreciated reproduction or replacement cost (new) of improvements, plus the market value of the site.

Demand The need or desire of the property.

Estimate of Net Proceeds to Seller A written estimate made by the licensee or lender that shows sellers the approximate amount of cash they will receive at closing

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Income Approach A method appraising real estate based on the property’s anticipated future income.

Market Price The amount a person actually paid

Market Value Based on price, terms, relationship of the parties, market time, knowledge

Sales Comparison Approach A means of estimating value by comparing recent sales of comparable properties to the subject property after making appropriate adjustments for any differences. Also known as the market (sales) approach, this method is effective in an active market in which sales comparables can be identified and information collected. The comparable properties selected should be substantially similar to the subject property and should be arms-length transactions.

Scarcity The availability or lack of availability of the property

Transferability The ability to take ownership of the property

Utility The use of the property

Zoning A legal mechanism for local governments to regulate the use of privately owned real property by specific application of police power to prevent conflicting land uses and promote orderly development.

Value

“Value” in general is the relative worth of one thing, expressed in the terms of an acceptable species of exchange (usually money). Applied to a real estate transaction, “value” is the monetary worth of a desired property to a potential purchaser.

Like agency, value can be extremely complex in nature and is still the subject of a great many studies today.

Value as applied to real estate took a long time to become widely accepted in the real estate industry. When trying to understand the principles of value, it is important to realize that all the factors taking into consideration to determine value are dependent upon one another.

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The appraisal process for determining value must be viewed as a unified whole with all factors that can affect the value taken into consideration.

The toughest concept to understand and determine in value is that the value of something is not in the property itself but created by certain external forces and circumstances. These circumstances are known as the “four characteristics of value.

The four characteristics of value are:

· Utility – The use of the property

· Demand – The desire and ability to purchase the property

· Scarcity – The availability, or lack of availability, of the property

· Transferability - The ability to take ownership of the property

Utility

Utility satisfies the wants or needs of potential buyers. For example, a buyer may decide to purchase a piece of waterfront property because they want to construct a home on that site.

Demand

This is the combination of the desire and ability to purchase the property. Obviously, someone must desire to own something in order to pay anything for it. Do not confuse desire with utility. A home certainly has usefulness, but the fact that the carpets and fixtures are dated and the home needs several repairs may not make it desirable to a potential buyer.

Desire alone does not establish demand; it must be combined with the ability to actually purchase property. This power to purchase is usually measured through economic conditions such as inflation, unemployment rates, and local wages. The relationship between economic conditions and desirable property in a given area has a tremendous impact on the value of real estate.

For example, real estate in Seattle is worth more than comparable real estate in Yakima, because the strong employment and higher wages in Seattle create a higher demand for housing in that area. Economically speaking, the Seattle area is more desirable for jobs and increased wages due to its proximity to those jobs.

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The employment and wages generated create the purchasing power needed to buy the property and create value.

Scarcity

Even if an item has utility and demand it will not have value if it is overabundant. This is a key concept in the theory of supply versus demand. The more there is of something the less it is worth. Inversely, the less there is of something that is in demand, the more it is worth.

For example, the waterfront property mentioned in the previous section. Waterfront property is almost always valued higher than non-waterfront property because of its scarcity. If all homes had water frontage, it would be in abundance and not command higher prices.

Transferability

Transferability is the ability to take ownership of the property. If the seller cannot transfer ownership to the buyer, value does not exist. Remember, value by definition, presumes an exchange of property. Therefore, transferability is essential for property to have value.

Value versus Price and Cost

The terms value, price, and cost are often used interchangeably with one another; however, they each have distinct meanings when it comes to the appraisal process.

Value, as discussed, is what property is worth theoretically under certain circumstances. Price is the actual amount paid for the property. Therefore, value is a theoretical concept whereas price is a realistic fact.

Cost refers to the production of an item, as opposed to price and value which refer to an exchange of items. In appraisal terms, cost is the sum of the money that was required to build, improve, or develop the land.

For example, a homeowner purchased supplies and materials to finish an unfinished basement and add a bathroom in the home. The cost of the repairs totaled $12,000. The value of the home is likely to increase since the improvements offer additional finished living space and adds desirable amenities (a bathroom) to the house. The $12,000 cost to make improvements will increase the value and cost of the home.

There are many types of costs associated with the appraisal process. We will briefly cover 3 basic types:

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· Direct and Indirect Costs

· Development and Construction Costs

· Replacement and Reproduction Costs

Direct Costs

Expenditures made in the improvement of property to include labor, and material.

Indirect Costs

These are other costs incurred in the process such as Contractor’s overhead, permit fees, and financing costs.

Development Costs

This is the cost to create a project, such as a housing subdivision.

Construction Costs

This is the cost to build an improvement in the subdivision, such as a home.

Development costs may include construction costs for individual improvements.

For example, these are the costs associated with the creation of a single family residential home:

$35,000 building lot

$10,000 site preparation and utilities

$85,000 construction cost

$3,000 loan interest

Using the above example, the construction cost for the home is $85,000. The development cost for the entire project is $133,000.

Replacement and Reproduction Costs

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In the world of the appraiser there a definite distinction between replacement costs and reproduction costs. These terms are not synonymous and should not be used interchangeably.

Replacement Cost

This is the cost to replace the existing dwelling creating a substitute building of equivalent function, and utility using current methods, materials, and techniques.

Reproduction Costs

These are the costs to create an exact replica of the building the same materials and construction methods as the original building.

Reproduction differs from replacement in that replacement requires the same functional utility for a property, whereas reproduction creates an “exact replica” so that it “looks” identical to the original building.

Types of Value

We have introduced many different types of value. The list is by no means complete either. But in order to carry out the orderly process of the appraisal, it is important to distinguish between the different types of value and establish a Standard of Value for the appraiser to estimate.

The types of values that may be estimated in a real estate appraisal report are:

· Market value

· Investment Value

· Value in use

· Insurance Value

· Assessed Value

Market Value

This is the most common estimate in real estate appraisals. Market value refers to the price in terms of cash or its equivalent upon which a willing buyer and a willing seller will agree, where neither is under any undue pressure and both are

121 typically motivated, have adequate knowledge, and are acting in their own best interest.

In other words, it is the amount of money most likely to be paid for real estate at a given date in a fair and reasonable open market transaction.

As mentioned in the definition above, several conditions must be present for a transaction to be fair and reasonable:

1. The buyer AND seller must have adequate knowledge as to the condition of the market and the subject property.

2. The buyer AND sellers must act reasonably, and in their own self-interest without undue pressure or duress.

3. The property must have been exposed to the market for a reasonable period of time

4. No extraordinary circumstances are present in the transaction such as unusually low financing rates or seller concessions.

Market value is an ideal standard which is very seldom achieved in real-world real estate markets; nevertheless, this is ordinarily the objective of most appraisals.

While market value is what a property should bring, Market price is the amount actually paid for the property. Even though the price actually paid for the property could be equivalent to the value, it could also be greater or less than market value.

If a buyer says that they purchased a property below market value, or over market value, once the factors above are taken into account, the price they paid - market price - is the market value.

The market value of a property is not in control of the seller or the licensee.

ONLY the buyers control value.

Investment Value

This is defined as what a property is worth to an investor with specific goals. Investors often call for this type of estimate to determine their return on

122 investment (ROI) for a specific business opportunity. Because this value is determined using investor stated goals it is clearly a “subjective” opinion of value. Thus, the market value approach is based on “objective” measures to determine value. The market value approach is a more accurate and valid approach to a property’s value.

Value in Use

This is an estimated value of property that is used for a specific purpose. This is often the case in commercial or industrial properties. For example, a manufacturer may have its production factory located close to its supplier’s warehouse. If the supplier where to close its operations or relocate to a different area, the value of the factory to the manufacturer would diminish since the cost of shipping materials to the factory would be higher.

This contrasts market value because the market does not set the value of the property, the use does. In the scenario above, “use value” could also be affected by the climate of the business operations.

Insurance Value

This is the value of property as defined by the specific terms of an insurance policy. It is the reimbursable value.

Assessed Value

Assessed value it the worth or value of a piece of property as determined by the taxing authority for the purpose of levying an ad valorem (property) tax. The assessed value of property is normally based on some percentage of market value. Property may be assessed at full market value or, as is more commonly the case, assessed at less than market value.

Property is not usually assessed annually, although a factor is usually added to help increase the tax base and revenue.

To determine the assessed value, an appraiser must estimate the market value and apply a percentage called an assessment ratio as specified by the taxing authority. The formula looks like this:

Market Value X Assessment Ratio = Assessed Value

FORCES AFFECTING VALUE

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As mentioned earlier, value is affected by the forces of supply and demand in the marketplace. The forces of supply and demand are in turn affected by several external factors. These factors can affect the market value of a property adversely, and are frequently broken down into four categories by economists:

1. Social

2. Economic

3. Political

4. Environmental

Social Factors

These are characteristics, standards of living, preferences, and comfort zones of people looking to purchase in a certain market. These factors affect value in varying degrees and can change over time. For example, a once desirable neighborhood could become less desirable and thus less valuable as it ages, or as famous people move out of the area, or as population declines etc.

Recreational amenities, churches, educational needs, and cultural activities can also be a driving force behind social factors. Below is a list of typical social factors that can affect and change value.

1. Prestige

Some areas have a greater desirability than other areas to live in. For example, movie stars or prominent local citizens make the area they live in highly desirable, thus driving up costs.

2. Recreation

Properties located around recreational areas are normally more desirable than areas which are not. For example, houses located next to a golf course.

3. Culture

Properties in close to communities which offer art, museums, libraries, shopping, live music, or theater tend to be worth more than those properties lacking these amenities.

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4. Family Orientation

Neighborhoods and areas which offer superb schools have an overabundance of activities for children and are child friendly areas normally attract higher prices. This usually becomes an important consideration for families with small children.

5. Homeowner Restrictions

Covenants, conditions, and restrictions can enhance or diminish property values in certain areas. This condition is subject to change over time and can be desirable at one point in time and undesirable at a future point in time.

Economic Factors

Economic factors affecting real estate values usually involve the availability of money. As fiscal spending tightens money becomes scare and the interest on borrowing money goes up. Inversely, as the money belt is loosened (so to speak) more money is available and interest rates come down. This affects purchasing, new construction, investment, and lending within the real estate industry.

Additionally, these economic factors have a tendency to affect employment rates, wages, construction costs, and generally drive up the cost of living expenses. The following list includes a few examples of economic factors that can affect property value.

1. The Local Economy

Wages, unemployment rates, and growth affect the values of property within the area.

2. Interest Rates

The general rule of thumb with interest rates is, as long-term rates drop, homes become more affordable for buyers and spur growth in the housing market for purchases, new construction, and refinances. The inverse is true when long term rates rise. Less people can afford homes and the housing market slows. Since most of our economy revolves around the housing market, this has the ability to affect long term growth, the gross domestic product, and inflation.

3. Rents

Rents and interest rates can be related to one another in terms of inspiring home ownership. For example, when rents rates are high, it can encourage home ownership. When rents rates are low, it becomes more affordable to rent and housing sales decline.

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4. Parking

A lack of parking space can adversely affect values. Cases show in commercial transactions that businesses without adequate parking are valued less than those businesses with plenty of parking for its customers. This is also the case in residential sales as well, where on and off-site parking affect the desirability and the value of the property.

5. Corner Influence

This affects commercial property one way, and residential property another when valuating the property. For commercial businesses being located on the corner is more valuable that property located in the middle of the block. The main reason is that corner businesses are more likely to get noticed by foot traffic and passers-by. Corner spots also provide for greater signage exposure and if it happens to be located by a traffic light it will increase the value even more.

By contrast, residential lots located on the corner have more traffic that passes by, more noise, and less privacy that houses located in the middle of the block. Therefore, the values of corner lots in residential areas are generally less desirable driving down its value.

Political Factors

Government influence and intervention in the economic realm can affect values within a specific area. For example, trade policies, taxes, the financial markets, and local political policies controlling rent or growth all affect value.

1. Taxes

The higher the property tax the lower the demand. While lower property taxes do not always result in a greater demand for a particular property, it does increase the value of the property.

2. Zoning

Zoning laws should always be consulted if you are planning to use the property for anything other than a single-family residence. How a property is zoned can materially affect its value, and it also determines how the property can or cannot be used.

Commercial zoned property is worth more than residential zoned property.

3. Rent Control

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When the government places rent control limits on certain areas that are less than the current market value, the value of the property declines. The more severe the control, the more it will affect the value.

4. Building and Health Codes

When property is used for investment this can be a real issue affecting the value. Older buildings require more maintenance and are usually outdated when it comes to code requirements and health codes. New permits and repairs could become very costly to bring a building up to its “code”. Like zoning laws, these codes should be looked into before purchasing property for investment.

Environmental Factors

Environmental factors are those factors which affect the physical environment, either man made or natural, and influence the value of an area. Some areas have restrictions against development due to wetlands or endangered species in the area. Other areas are affected by poor climate, air quality and water quality which can have an adverse effect on value. The following is a list of some environmental factors which can affect value.

1. Location

How many times have you heard the saying the three factors which affect value are location, location, location. Essentially all of the examples given in this section deal with location. Where the property is located in relation to amenities, environmental hazards, government controls, and social settings all affect the property’s value.

2. Climate

Rain, snowfall, hurricanes, earthquakes, and temperature can affect recreational desirability’s and quality of life, which in turn will have an effect on value.

3. Soil

If you are a farmer this is a very important consideration. Also, lead or other poisons in the soil can affect value. Typically, residences located close to industrial areas have a lower value than those further out. The resulting pollution that can leak into the soil amongst other hazards drive the values in these areas down.

4. Water Quality

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The availability and quality of water plays an enormous impact in the development of raw land to residential neighborhoods. It is also a concern and consideration in commercial development.

Difference Between Appraisers and Real Estate Licensees

Not all opinions of value are conducted by appraisers. Often, a real estate licensee helps a seller to arrive at a competitive market price for the property, or they help a buyer determine if the asking price is competitive with like properties in the area. This has to be determined at times without the aid of a formal appraisal report for the property.

It is therefore imperative that real estate licensees understand the fundamental principles of valuation so they can accurately provide a Comparative Market Analysis (CMA) for their sellers and/or buyers. By understanding the appraisal process, the real estate licensee can avoid the potential pitfalls of the property’s pre-closing appraisal report.

CMA’s and Appraisals

A C.M.A. (Comparative Market Analysis) is a comparison of the prices of property recently sold properties currently on the market, and properties that did not sell during a specific time frame. This report is used to estimate the value of a property to determine a fair listing price. It is the real estate licensee’s opinion of value.

An appraisal, in short, is a professional estimate or opinion of value from an independent person trained to provide an unbiased estimate supported by factual information as of a certain date.

The CMA is not as comprehensive or technical as an appraisal is, and may be biased by a licensee's anticipation to get the listing. A CMA should not be represented as an appraisal, but as a tool to help the licensee arrive at fair market value of a property.

The CMA - Comparative Market Analysis

An appraisal is usually ordered after the actual sale of the property, BUT a real estate licensee's expert advice is valuable and important to sellers to determine a realistic listing price.

C.M.A., Comparative Market Analysis is an estimate of value of a property to determine a fair listing price. It is the real estate licensee’s opinion of value.

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The analysis includes recent sales of similar properties as well as properties that are currently available for sale. It will also show listings of properties that were recently exposed to the market BUT failed to sell.

Preparing the CMA

The CMA should show how many days the property was marketed before it sold or was taken off the market. This gives sellers a good overall picture of what buyers are willing to pay, as well as letting the seller see the competition and the results of overpricing.

Overpricing a property usually results in it not selling at all, or ONLY after lowering the price below the market.

Under-pricing property can result in the loss of hundreds, or thousands of dollars.

A real estate licensee can also help sellers maximize their profit by offering advice on many easy, inexpensive improvements or repairs that can increase a property's value.

C.M.A.’s are most commonly used in the evaluation of residential property for the purpose of marketing.

The C.M.A. is not designed to be as comprehensive or technical as an appraisal, BUT they are similar to an appraiser’s market data approach.

The real estate licensee’s use of a well-prepared C.M.A can also provide valuable assistance in relocation.

For instance, if a person is transferred to an unfamiliar city many miles away, the licensee can provide a list of recently sold homes as well as available homes, to help the transferee become more familiar with the area’s values.

The licensee can also include valuable information on schools, employment, attractions, shopping centers, fire and police protection, transportation and economy

The CMA is a comparison of similar properties in similar areas with comparable features, used to help the seller establish market value.

It is actually an informed opinion of what a property will sell for.

Sellers often interview two or three real estate licensees before making a final decision.

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They will usually ask the licensees about their production, marketing plans, past clients and recent sales in the area.

Some sellers might base their decisions on these things, but sellers usually list with a licensee that they like and trust.

Licensees that are:

· Professional

· Caring

· Prepared and

· Knowledgeable licensees are often favored over winners of top production awards!

A professional listing presentation will include an inspection of the property, research and facts, and a plan to effectively market and sell the property.

The licensee will:

· Present the sellers with a competitive market analysis

· Discuss services

· Review the listing agreement AND

· Discuss the seller’s estimated net proceeds

Begin by gathering information to evaluate the neighborhood.

Check on the zoning, schools, parks, and septic or sewer systems, gas, electricity, cable, water etc.

ALSO check records for easements, encroachments, road maintenance agreements, etc.

The Title Company can provide plat maps and printouts of legal descriptions, easements, restrictions, assessed value, property taxes, lot and structure size, parcel number, year built, owner's and taxpayer's full names and other helpful information.

Check MLS data for comparable sales in the same area as well as active listings that will be competing with your subject property.

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Include the data on homes that were listed but failed to sell within the listed period.

Check the sales and listing activity on the seller’s block and surrounding area.

These homes may not compare to your subject property and might otherwise be left out of your CMA.

However, these are the seller’s neighbors and their children's friends' homes.

Even though the houses may not be similar, the seller will naturally be more comfortable and confident with a licensee that is knowledgeable about their neighborhood.

The Three Approaches to Value

Real property has many different types of uses and values.

Owner occupied, residential property can be valued subjectively, or “emotional valuation”, or objectively, by using the “market approach” appraisal.

Rental homes, apartment buildings and commercial buildings and land that are used for income are usually appraised using an “income approach” or “gross multiplier” method of appraisal.

Real property is also used for speculation, investment and other special purposes. These properties are sometimes difficult to appraise using a market or income approach.

When there is no recent market history or income, it is obvious that the market approach or income approach cannot be used.

The method used in these cases would be the “cost” or “replacement” approach.

There are many different reasons to appraise property and each has its own purpose. The purpose of the appraisal can influence the appraiser to use a certain approach.

The most commonly used methods are the sales comparison approach, the cost approach, and the income approach. When possible, the appraiser will use all three approaches and reconcile the results to arrive at opinion of value.

In some situations, it may be better to use ONLY the method that seems most practical.

The appraiser may determine how many methods to use.

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There are properties where a method cannot be used, such as vacant land that cannot be appraised by the cost approach.

The sales comparison would be better, or if it were producing a crop, the income approach might be used.

A property such as a fire station MUST be appraised by the cost method.

It cannot be appraised by the income method because it generates no income, and a market does not exist for this type of property to use a sales comparison approach.

The Market Data Approach

The market data approach or sales comparison approach is the most widely used approach in the evaluation of residential property. It is also used whenever possible in the appraisal of other types of real estate.

Recent sale prices of comparables are good indicators of what informed buyers will pay AND what sellers have accepted.

The value is estimated by comparing the subject property (the property being appraised) with similar properties that have recently sold. These properties are called “comparable sales” or “comps”.

Because no two properties are exactly alike, each comparable property is analyzed for similarities and differences to the subject property.

Adjustments are then made for the differences in the features and amenities found in the subject property compared to the features and amenities of the comparable properties.

Finding legitimate comparables and making the proper adjustments is critical to using the sales comparison approach.

During the adjustment process, the sales price of the comparable property is adjusted up or down to reflect the differences in value of the subject property.

The adjustment in price is ALWAYS made to the comparable properties and NEVER to the subject property.

Detailed information describing physical characteristics, date of sale, financing concessions made by the seller or buyer, location of the comparables, and ANY conditions that could have influenced the sale MUST be considered.

The principle factors which the adjustments must be made for are:

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Property Rights

If the property is held in less than a fee simple estate an adjustment must be made on the appraisal report. This includes but is not limited to land leases, ground rents, deed restrictions, easements, and encroachments.

Financing

The loans terms must be taken into consideration and adjustments must be made for differences in loans types and loan terms. For example: the property is owner financed or partially owner financed versus a 30-year fixed rate mortgage.

Condition of Sale

If the property is being sold as part an estate settlement, foreclosure proceeding, divorce sale, or distressed sale adjustments are made for the motivational conditions affecting the sale.

Date of Sale

If a sudden economic change has occurred between the date the comparable sold and the date of the appraisal, this must be taken into consideration and adjusted appropriately.

Location

The comparable properties should be within close proximity to the subject property. Because different neighborhoods can bring different desirability factors thus affecting the value of the property, an adjustment must be made for any properties location.

Physical Characteristics

The condition of the property, upgrades, additional baths or living spaces, in ground pool, square footage, and age of the property compared must be adjusted on the appraisal report as needed.

The appraiser makes adjustments to compensate for the above differences and then translates this data into an estimate of the market value.

The appraiser MUST use a high degree of skill, knowledge, and judgment in adjusting the values of comparable properties.

The appraiser will use the data from three or more comparable sales to evaluate a residential property.

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The mathematical formula for the sales comparison approach is:

SUBJECT PROPERTY VALUE = COMPARABLE SALES +/- ADJUSTMENTS

Example

An appraiser identifies a comparable property in the same neighborhood as the subject property that recently sold. The properties physical characteristics are similar except the subject property has two bathrooms and the comparable has three. The comparable recently sold for $219,000. The appraiser analyzes current market data and determines the extra bathrooms add $8,000 to the value of the property. The appraiser then makes an adjustment by subtracting the value of the extra bathroom from the sold price of the comparable and arrives at a value of $211,000 for the subject property.

When adequate data on closely comparable properties is available, the market approach is considered the most reliable of the three approaches in appraising properties for residential homes.

The process for the Sales Comparison Approach is as follows:

Inspect the property

The appraiser thoroughly inspects the interior and exterior of the subject property. Measurements, sizes, quality, quantity and condition of the improvements and the land are used as the basis for comparing the subject property to the comparable properties.

Find valid comparables

The appraiser will search for three or more comparable properties that have recently sold. Sometimes there will not have been comparable recent sales, so the appraiser may have to use older data.

If all available data is old, the appraiser will include an explanation in the appraisal report that the age could affect the value, and that an adjustment was/was not included in the final evaluation.

Sometimes there will be no recent sales at all that are comparable sales. This usually happens when appraising a custom-built home or unusual property, such an historical mansion.

When no comparables are available the market approach cannot be used.

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Appraisers get their information on recent sales from the MLS, recorder’s office, title companies, courthouse files, land from contacting local real estate brokers and licensees.

The appraiser usually makes a visual inspection of each comparable. As noted above, these comparable properties MUST be from the same or similar area as the subject or an adjustment must be made to the value.

Adjust the comparables

The appraiser will then analyze the data and use typical adjustment factors (discussed above) for each difference in the comparable properties to the subject property.

It is crucial that the appraiser uses very similar properties and properly adjusts by increasing or decreasing the comparable properties according to the property’s features and amenities.

The next step is to determine the value and prepare the written report

This form is the “appraisal report.” The adjusted comparable values are shown and compared to the subject.

This report shows the appraised value of the property as of a certain date and for a certain purpose.

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Example of Sales Comparison Approach to Value

Subject A B C D E Property Sales Price N/A $186,500 $176,000 $194,000 $186,000 $183,500 Financing N/A Conventional Conventional Cash Conventional Closing None Known None Known None Known Costs – concessions $1,500 Date of Sale N/A 02/15/05 01/12/05 02/06/05 03/10/05 03/19/05 Location Residential Residential Poorer + Residential Residential/Art Residential 3,400 +1,000 Age 6 yrs 9 yrs 8 yrs 12 yrs 3 yrs 15 yrs Size of Lot 0.25 Acres 0.24 Acres 0.53 Acres + 0.22 Acres 0.19 Acres 0.65 Acres 2,000 +2,500 View Mountains Mountains Mountains Mountains Mountains Mountains Design 4 Level 4 Level 4 Level 4 Level 4 Level 4 Level Style Condition Average Average Average Average Average Average

Basement & 588 SF 645 SF Bsmt 615 SF Bsmt 600 SF 693 SF Bsmt - 548 SF Finished Bsmt Bsmt $800 Bsmt Rooms Below 484 SF Fin 0 SF Fin Grade 530 SF Fin 470 SF Fin 693 SF Fin - 465 SF Fin $800 Garage/Carport 2 Car 2 Car 2 Car Garage 3 Car 2 Car Garage 3 Car Garage Garage Garage - Garage - 2,000 2,000

Net 0 + $5,400 - $2,000 - $1,600 - $1,000 Adjustments Adjusted Value $ 186,500 $181,400 $192,000 $185,400 $182,500

Note that the value of a feature present in the subject but absent from the comparable is added to the sales price of the comparable; and that value of a feature present in the comparable but absent from the subject property is subtracted from the comparable. Adjust +/- to the comparable property, and not the subject property.

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Appraisers use a complex formula to adjust for differences between the subject property and comparables. Other factors may be taken into consideration along with the market indicators revealed in the appraiser’s research. Because the values of comparables A and D are close an appraiser might determine the market value of this property is $186,000.

Also note how different financing terms affect the market value of the property. Comparable E includes concessions for closing costs. Because the sellers contributed $1,500 towards closing costs the price of the home is decreased when compared to the subject property. The contribution of closing costs is built into the sales price of the home; therefore, the true market value of the home would be $1,500 less than the sold price.

The Cost Approach

The replacement cost approach is the method of evaluating vacant land alone.

Next, the cost of all materials and labor are estimated to reproduce the building and all improvements exactly as the property exists at the time of the appraisal.

Subtract the depreciation of the building and improvements. Depreciation is defined as the difference between the cost of the property and any improvements (when new) and its current value.

Then TOTAL the depreciated building, improvements and the land.

This method could be used in high demand areas where there is an inadequate supply of new homes, or where there are FEW or NO available building lots.

The replacement approach is based on the assumption that a new building is worth more than an existing building, and that the price to replace the property would be in the upper ranges.

HOWEVER, there are many cases where the older buildings would have a higher value than a newly constructed building. This could occur in an area of historical property.

The formula for determining the Cost Approach is:

PROPERTY VALUE (PV) = REPRODUCTION COST OF IMPROVEMENTS (RCI) – DEPRECIATION (D)+ THE VALUE OF THE LAND(L)

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Using the Cost Approach requires that the appraiser perform a separate valuation of the land. Then the appraiser must estimate the Reproduction Cost of the Improvements and subtract any depreciation. This determines the value of the property. It is important to note that the estimated reproduction cost is as of the date the valuation is performed.

Example:

Value of the Land = $35,000

Reproduction Cost of Improvements $95,000

Depreciation = $12,500

PV= $95,000 (RCI) - $12,500 (D) + $35,000

PV = $82,500 (95,000 – 12,500) + $35,000

PV = $117,500

In this example, the total value of the property is $117,500

Replacement and Reproduction

Replacement cost and Reproduction cost are not the same.

Replacement value is the estimate of the current cost to build another building, with the same amenities, size and with the same use.

Reproduction value is the estimated cost of building a replica.

This means building an exact duplicate of the subject building, just the way it was originally constructed, at the current price of the labor and using the same materials.

Sometimes reproduction and replacement CAN be the same. This is often true when the subject property is new construction.

Reproduction cost is often used when the subject has “historical” or “cultural value”.

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The ornate workmanship as well as materials used in earlier days, are often much more expensive than used today, BUT to “reproduce” the structure, these important factors MUST be considered.

The cost to reproduce a structure can be prohibitive, and usually DOES not reflect the current market value.

The Cost Approach Consists of Five Steps:

1. Inspect the subject property

An on-site inspection MUST be made of the buildings and all improvements.

The measurements, sizes, as well as quality and condition will be the basis for calculating an accurate replacement cost and the accrued depreciation.

2. Value the Land

An appraisal of the land itself is completed. This can often be done by the comparison method. Land is not subject to depreciation. However, in rare instances land can lose its value due to down zoned urban parcels, misused farmland, or improperly developed land.

3. Estimate Replacement or Reproduction Cost for Building & Improvements

The four methods used to estimate the replacement or reproduction costs of the buildings and improvements are:

1. Square Foot

2. Quantity Survey

3. Unit-In-Place

4. Index Method

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Square Foot Method

This is the most common and easiest way to estimate replacement.

The appraiser measures the square feet of each floor from the outside. The appraiser then determines the average cost per square foot of recently built comparable structures.

Then the appraiser multiplies the average cost per square foot times the number of square feet in the subject property. When there are no recent sales the appraiser will use the cost of materials and labor.

Formula:

Square feet of the subject property x average cost per square foot of similar homes

(minus the land value)

= estimated cost of replacing improvements

Quantity Survey Method

This method involves very detailed estimations of the quantity, quantity, and price of specific materials (such as lumber, brick, mortar etc.) as well as the cost of labor for each type of job.

The materials are then added to the indirect costs of producing the structure (for example, surveys, building permits, environmental impact statements, etc.) to arrive at the total cost of the structure. This is a highly accurate method BUT is costly and time consuming.

Because of the time involved in arriving at the figures, this method is usually reserved for appraising historical buildings or other buildings that do not have comparables such as fire stations, libraries etc.

Unit-in-Place

This method uses the cost to replace specific components, such as electrical, plumbing, roof, siding, insulation and foundation.

The appraiser totals all estimates to figure replacement cost of the building.

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Formula:

Cost of roofing number per square feet

+ cost of concrete per cubic yard

+cost of framing per square foot, etc.

= replacement

Index Method

This method estimates building costs by multiplying the original cost of the property by a percentage factor to adjust for present day construction costs. This method does not take into consideration individual property variables and should only be used in conjunction with one of the other methods.

4. Identify and Deduct Accrued Depreciation

Once the appraiser estimates the replacement cost of the building as though it was new, the appraiser MUST subtract for depreciation. In real estate appraising, depreciation is any decrease in value.

The appraisal of property assumes that a new property is worth more than a used property, because of depreciation or decrease in value. For appraisal purposes (as opposed to tax purposes) depreciation is divided into three classes according to its cause.

1. Deferred Maintenance

2. Functional Obsolescence

3. External Obsolescence

Deferred maintenance or physical deterioration are wear and tear defects where the depreciation can be either curable, or incurable.

· Curable means the cost of correction can be recovered in sales price. For example, if a house needs painting, or if the carpet is worn, and replacing it results in an increase in value equal to or greater than the cost.

· Incurable means it is impossible or too expensive to correct. For example, if a house has cracks in the foundation or worn roof and the cost to replace these defects is not economically feasible to repair because the cost of the repair does not warrant any return on investment.

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Functional Obsolescence is a loss of value in real estate arising from functional problems, such as inadequate use, age, poor floor plan, or outdated design. These can also be curable or incurable.

· Curable if cost of correction can be recovered in sales price for example, outmoded plumbing can be replaced. Poor room design may be redefined at little to no cost if the layout allows for this. A bedroom located next to the kitchen could be converted to a family room.

· Incurable if impossible or too expensive to correct. For example, a commercial office building that does not have air conditioning installed. The cost of this upgrade would be greater than the value of the building.

External obsolescence refers to the decline of the area. These are conditions outside the control of the owner and are considered incurable because it is caused by external factors.

· Noise

· Traffic

· Decline

· Zoning changes OR

· Safety hazards

Estimating depreciation is a difficult part of the replacement cost appraisal that requires a great deal of skill and experience on the part of the appraiser.

5. Add Land Value & Compute

The value of the land is then added to the depreciated value of the structure and improvements.

The land can be estimated by comparing recent sales of similar lots to the subject lot, which is the market approach.

The appraiser totals the land value with the depreciated improvement value and prepares a final report of the subject property value as of a certain date.

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Example of Cost Approach to Value

Subject Property Address: 123 Anyplace Street

Valuation of Land: Lot size 65’ x 225’ @ $500 per front foot = $ 32,500

Site Improvements: driveway $4,000

TOTAL $36,500

Building Valuation: Replacement Cost Method

3,200 sq. ft. @ $65 per sq. ft. = $208,000

Less Depreciation:

Physical Depreciation

Curable

(painting) $5,500

Incurable (structural deterioration) $9,900

Functional Obsolescence $2,700

External Depreciation 0

TOTAL - $18,100

Depreciated Value of Building $189,900

Value using Cost Approach Method $226,400

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Income Approach

The income approach is a method appraising real estate based on the property’s anticipated future income. Essentially, it takes the present value of the rights to future income. This can be based on net or gross income.

This method uses income generated by the investment property to determine value. The rule of thumb is, the greater the income, the greater the value. Typically this method is used to appraise income producing properties such as apartment buildings, office buildings, strip malls etc.

The Income Approach utilized five steps:

1. Estimate Potential Gross Income (PGI) b

2. Determine the Effective Gross Income (EGI)

3. Deduct Net Operating Income (NOI)

4. Apply Pre-Tax Cash Flow and “Cap Rates”

5. Estimate the property’s value

1. Estimate Potential Gross Income (PGI)

This is the total amount of revenue the property is capable of producing while operating at full capacity and without taking any deductions for depreciation or taxes for one full year.

For example, rental rates for 3-bedroom apartments in the area are $825 per month. The building an investor is looking at purchasing currently rents 3- bedroom apartments for $825 per month. The apartment building has 15 three- bedroom rental units; therefore, the Potential Gross Income is $12,275 per month or $148,500 per year.

Keep in mind this does not include vacancy factors, loan interest, taxes, insurance, or maintenance expenses. It is strictly the potential income the apartment is capable of producing at full capacity.

Rent is generally the main component used to determine Potential Gross Income. However, the appraiser will carefully look at the marketability and

144 volatility of the current market rental rates and make assumptions based on those factors.

For example, the current rental rate the property is receiving may not reflect rental rates in the area. This can be the case in long term leases and leases which are about to expire.

Appraisers will use what is known as Scheduled Rent in the case of long term leases. This is rent which is called for under the current lease. Let’s say an investor is looking at purchasing a building that is currently used as a bar. The proprietors are five years into a ten-year lease. The current market rent of the bar is $2,500 per month; however, under the current terms of the lease, the rent is locked in at $1,400 per month for the next five years. In this case, the appraiser would use the $1,400 per month (Scheduled Rent) as the gross income as opposed to $2,500.

Conversely, if the lease is about to expire, the property is currently vacant, it is occupied by the owner, or otherwise not subject to rental income, the appraiser will use current market rents as a basis for valuation. Current Market rents, as the name indicates is what a potential tenant would rent the property for under the present conditions.

Let’s take a look at an owner occupied four-plex. Three of the units are rented at $600 per month and the owner lives in the fourth unit. The owner is looking at selling the property and a market analysis reveals that current market rents for similar properties are $700 per month. In this case an appraiser would use the scheduled rents of $600 per month on the three rented units and $700 per month market rent for the unit occupied by the owner. Total Potential Gross Income is $2,500 per month (600 x 3 + 700).

2. Determine Effective Gross Income (EGI)

Earlier discussed that the Potential Gross Income did not include allowances for vacancy factors, rent loss, taxes, insurance etc. The Effective Gross Income (EGI) takes vacancy factor and rent loss into consideration. It does not take into consideration taxes or insurance expenses. The vacancy factor and rent loss allowance is then deducted from the Potential Gross Income.

The EGI is usually expressed as a percentage of the gross. It can be an extremely complicated formula to arrive at and appraisers must use extensive knowledge and experience to arrive at this percentage. For our purposes we will only consider lease histories, area vacancy factors, and area bad debt payments.

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Example: An apartment building has Potential Gross Income of $2,500 per month. The appraiser has determined that based on past rental histories, the bad debt and vacancy factor of the apartment amounts to 9% of the Potential Gross. The formula to arrive at the Effective Gross Income is:

PGI – Allowances for vacancy and rent loss = EGI

Using our example from above: $2,500 - $225 = $2275

Sometimes the Potential and the Effective Gross Income is the same. This can be the case when apartment units (for example) have long term leases and excellent payment histories.

3. Deduct Annual Net Operating Income (NOI)

Net Operating Income is income from a property or business after the operating expenses have been deducted. Income taxes and financing expenses (interest and principal payments) are considered debt and not counted as part of the operating expenses.

Net Operating Incomes are different for every situation. Even if the investment property is similar to another property, the differences in operating expenses will result in different NOI’s.

Operating Expenses Operating expenses are the periodic expenses incurred while operating an income-producing property other than debt service and income taxes. The expenses are directly related to the level of occupancy and usage of the building. So as occupancy rates increase so do operating expenses. These expenses normally include management fees, maintenance, ground maintenance, utilities, supplies, legal fees, accounting fees, and other such costs. These expenses when subtracted from the effective gross income equal net operating income. For appraisal purposes, operating expenses are generally divided into two categories:

1. Fixed Expenses 2. Variable expenses Fixed expenses are those expenses that do not fluctuate regardless of occupancy rate. These expenses must be paid whether the property is leased, rented, or vacant. Typical examples are property taxes and hazard/fire insurance. Variable expenses are those expenses that vary depending on the occupancy rate. Typical examples are utilities, water, sewer, garbage, management fees, and maintenance.

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4. Apply Pre-Tax Cash Flow and “Cap Rates” Pre-Tax Cash Flow Pre-Tax Cash Flow is the amount of income available to the investor (purchaser) after paying the debtor (lender) and before paying income taxes. This figure is arrived at by subtracting the principle and interest payments from the net operating income. Pre-Tax Cash Flow = Net Operating Income – Principle and Interest Payments For example, an apartment complex has a net operating income of $60,000 per year, and mortgage payments of $42,000 per year. The Pre-Tax Cash Flow equals $60,000 - $42,000 or $18,000. This is the cash available to the invested after paying the lender. As the statement indicates, only cash expenses are deducted. Depreciation is not a cash expenses and is therefore not deducted in this step.

Capitalization Rates For an investor to arrive at a decision to purchase investment property they typical want to receive a Rate of Return (ROI) that makes the investment worthwhile. This rate of return is referred to as a capitalization rate or “cap rate” for short. The appraiser normally determines this rate by comparing the relationship between the earnings (NOI) and the sales price of comparable properties that have recently sold. It is then expressed as a percentage relationship between the earnings and the cost of an investment in short, it converts income to value. The formula can be expressed as: Income Value = Rate For example: A comparable investment opportunity produces an annual net income of $26,000 and sold recently for $204,500. Using the formula from above, the cap rate can be expressed as $26,000 $204,500 = 12.7% cap rate

So an investor would earn 12.7% on their investment.

The formula and its variations can be reworked to determine different variables. For example: To determine Value Income (I) Cap Rate(R) = Value (V) $23,000 (I) 12% (R) = $191,667 $23,000(I) 10% = $230,000 There is an inverse relationship between rate (R) and value (V). As the rate goes down, the value goes up.

GROSS RENT/INCOME MULTIPLIERS Multipliers will help you arrive at the same determination of value that cap rates do. They are reciprocals of one another, meaning instead of dividing to find the value, you would multiply instead. Essentially, Gross Rent/Income Multipliers relate the sales price of a property to

147 its income in order to determine value. The multipliers can be derived from either monthly or annual gross income as long as the factor is applied consistently for all properties being evaluated. Residential properties normally use GROSS RENT MULTIPLIERS (GRM) to determine value. This is because rental income is usually the only form of income the property produces. Commercial real estate normally uses GROSS INCOME MULTIPLIERS (GIM) to determine value, because it takes concessions and other forms of income into consideration as well as rent. The formula looks like this: One to Four Residential Units:

Sales Price (P) Gross Rent (I) = Gross Rent Multiplier (GRM) A duplex recently sold for $115,000 with a gross monthly rental income of $1,200. The GRM is computed as follows: $115,000 (P) $1,200(I) = 95.8 GRM

Five or more residential units and commercial property Sales Price (P) Gross Income (I) = Gross Income Multiplier (GIM) A commercial apartment complex recently sold for $699,000 with a gross monthly income of 3,900 (I) including concessions and laundry facility income. The GIM is computed as follows:

$699,000 (P) $3,900 (I) = 179.23 This is not the most reliable method for comparison or determination of value as it does not take into consideration operating expenses. When using this method, the appraiser assumes that the subject property and comparables all have similar operating expenses.

5. Estimate Value By applying the capitalization rate to the annual net operating expenses (NOI) the appraiser arrives at the property’s estimated value.

It is important to note in this exercise that the Income Approach is using the method to determine the value of the SUBJECT PROPERTY. Comparable properties are not included as it is outside the scope of this lesson. To learn more about applying the income approach to comparable properties see A+ Institutes 30 hour course on Appraisals.

Example of Income Capitalization Approach to Value

Potential Gross Annual Income Market Rent (100% capacity) $120,000 Less estimated vacancy and collection losses (6%) - $7,200 Effective Gross Income $112,800

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Expenses: Taxes $14,400 Insurance $2,000 Maintenance $6,500 Repairs $1,400 Legal Fees $1,700 Advertisement $600 Management $3500 TOTAL EXPENSES $30,100 Annual Net Operating Income $82,700

Cap Rate = 11% 82.7 Capitalization of annual net income: .11

Estimated Value using the Income Approach = $751,818

Net Proceeds

Next to the licensee’s estimate of value, sellers are most interested in an estimate of their net proceeds.

This means that they want to know how much cash they will get at closing after the money is paid, and all the expenses have been deducted.

Licensees typically use a “net proceeds from” to arrive at the seller’s estimate.

Although this amount can be only an “estimate”, it is possible to calculate a fairly accurate figure.

Each approach measures value differently so each evaluation of the same property can be different. Appraisals are usually ordered to determine:

1. What a typical buyer would pay in cash to purchase the property, used when a person is buying or selling a property.

2. Financing - Loan - Credit Value

For loan commitment purposes. Important if the lender is forced to repossess and sell the property in case of default.

3. Damage and Insurance Value

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Cost to replace the property in case of a casualty loss, usually done prior to writing or renewing a casualty policy.

4. Inheritance and Estate Tax Value

For IRS, inheritance, and tax calculation purposes

5. Condemnation Value /Eminent Domain Value

“Fair and just compensation" where the government is buying property from an unwilling seller.

6. Ad Valorem Tax Value

Real estate property tax calculation purposes

7. Liquidation Value

The value of assets if sold under a forced sale or auction.

8. Investment Decisions

Reconciliation

The final step in the appraisal process is called the reconciliation. Reconciliation is the process of weighing and adjusting the values received from the cost approach, income approach, and cost comparison approach to arrive at an estimated value of the subject property being appraised

Appraisers generally prefer to use all three appraisal approaches whenever possible as indications of value

The results of the three approaches are called “value indicators”.

They ONLY give indications of what the property is worth and will be used to help determine the final estimates.

HOWEVER, because sometimes data is unavailable, or the approach is not applicable, the method may not be included in the evaluation.

The estimate of value is based on the MOST appropriate and reliable approach based on the specific purpose of the appraisal.

The final estimate of value is weighed against the other approach values as indicators of value. Ideally, these values are in the same ranges.

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The Appraisal Report Form

Residential property appraisals are usually completed on a preprinted form called the URAR, Uniform Residential Appraisal Report.

The completed form will include:

· The date of the appraisal

· A description of the subject property

· The purpose of the appraisal

· Supporting data

· Conditions

· The appraised value

· Appraiser's signature, certification, license or other credentials

As we have learned, the Value of a Property is somewhat of a “proof of the pudding is in the eating “proposition.

Value is the amount that a property commands with a willing buyer and a willing seller. Also known as Fair Market Value.

Fair market value is the price a buyer will pay and a seller will accept for a property under reasonable and ordinary conditions. Neither the buyer of the seller is under any pressure to complete the transaction.

Fair market value is often being sought for widely differing reasons:

A home is being priced for sale

A property is involved in a divorce settlement

The home is tied up in an estate

Eminent domain is being exercised by the government

A home is being re-financed

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The two most effective ways to determine fair market value are a comparative market analysis and a real estate appraisal.

Often, however, a seller's wishes come into play and the desired Price for the Property exceeds what the Value may reasonably be expected to be.

It is important to consider the suggesting of a listing price in light of several factors:

Owner's Wishes

Market Conditions

Time to Sell

Owner's Wishes

Does the owner want/need to sell solely or primarily to achieve a goal that is unrealistic - purchasing a more expensive home using proceeds from the sale, paying off debts, or avoiding a foreclosure if a certain price can be obtained.

Market Conditions

Market conditions play an important role in pricing and marketability. There are some specific considerations when analyzing the current market conditions: General State of the Economy – this might include inflation, employment, the stock and bond markets etc. The Availability of Money - types of loans being offered and interest rate Competition – the amount of homes, both resale and new construction that are currently on the market Supply and Demand – If there is a plentiful supply and low demand, prices tend to fall. Conversely, if there is a low supply and high demand, prices tend to rise. Consumer Confidence – consumer confidence in the economy, elections, employment, the stock and bond markets etc. play a huge role in market conditions in real estate.

Financing terms and their effect on pricing and marketability

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When money is easier to obtain, more buyers have the opportunity to purchase which can lead to an increase in sales and higher prices.

Case Study

Let’s look at the above situation in terms of an analogy of an auction:

If an auction is held during good economic times, a greater number of people will participate, there will be more activity and bidding and the auctioneer will most likely command higher prices for the items being auctioned.

When interest rates are low, a buyer can qualify for a more expensive home than if interest rates are higher. This affordability factor can allow more potential buyers to consider a greater number of homes. With more buyers looking at homes, the effect on the seller may be a greater sales price.

While interest rates play an important role, they are not the only factor in terms of obtaining financing. Loan programs and their availability are also key factors.

The availability of loans is often dominated by the secondary market. The secondary market purchases loans from the primary market (those who originate the loans). If the secondary market is strong, primary lenders are able to offer a greater number of loan programs to the consumer. A greater amount of available loan programs usually equates to more potential buyers in the market place. Thus, prices of homes may rise. Conversely, a limited amount of loan options can lead to less potential buyers and prices can fall. Here are some of the loan programs that you should consider (and you should research their availability)

Conventional financing Government financing (FHA, VA) Loam programs for 1st time buyers Jumbo loans Interest only loans ARM’s (adjustable rate mortgages) Down payment assistance programs Second Mortgages (Equity term loans and equity lines of credit)

Another important form of financing which could favorably affect the market value of a home would be seller financing. In this situation, the seller will grant a loan to the buyer for all of part of the purchase price. This is known as a purchase money mortgage. There can be many advantages or disadvantages of this type of financing for the buyer or the seller. The advantages of the seller offering this type of financing are:

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Those who may not have the down payment for a conventional mortgage may be potential buyers

Those who have credit score which are too low to obtain a regular mortgage may be candidates.

Those who do not show sufficient income to qualify for a mortgage may be potential buyers.

A greater number of potential buyers equates to the possibility of the seller receiving a greater price for their property.

Time to Sell Does the seller have a need to sell in a certain time frame? Are there deadlines for other actions such as relocation, debt payment, or replacement home purchase contingencies that affect the time to obtain a closed sale? It may be necessary to price the property at a discount from FMV to obtain offers to meet the timeframe.

The greatest likelihood of a closed sale is a price at or below what the CMA or appraisal indicates the Value of the property is - that price at which a willing buyer is most likely to consummate a transaction - taking into account the unique requirements of the seller. The listing licensee serves his client best to suggest pricing that reflects what the market tells the licensee can be achieved in the sale about the property.

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Review

Real estate sales are dependent on the value placed on the property. The most reliable and systematic estimation of a property’s value is the real estate appraisal process

An appraisal is an educated opinion and explanation of its value based on many different factors and approaches

Essentially, the appraiser’s job is to follow an “orderly and systematic process” that provides a valid opinion of value

The four characteristics of value are:

· Utility – The use of the property

· Demand – The desire and ability to purchase the property

· Scarcity – The availability, or lack of availability, of the property

· Transferability - The ability to take ownership of the property

The types of values that may be estimated in a real estate appraisal report are:

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· Market value

· Investment Value

· Value in use

· Insurance Value

· Assessed Value

Market value is the most common estimate in real estate appraisals. Market value refers to the price in terms of cash or its equivalent upon which a willing buyer and a willing seller will agree, where neither is under any undue pressure and both are typically motivated, have adequate knowledge, and are acting in their own best interest.

In other words, it is the amount of money most likely to be paid for real estate at a given date in a fair and reasonable open market transaction.

Investment Value is defined as what a property is worth to an investor with specific goals. Investors often call for this type of estimate to determine their return on investment (ROI) for a specific business opportunity. Because this value is determined using investor stated goals it is clearly a “subjective” opinion of value. Thus, the market value approach is based on “objective” measures to determine value. The market value approach is a more accurate and valid approach to a property’s value

Value in Use is an estimated value of property that is used for a specific purpose. This is often the case in commercial or industrial properties. For example, a manufacturer may have its production factory located close to its supplier’s warehouse. If the supplier where to close its operations or relocate to a different area, the value of the factory to the manufacturer would diminish since the cost of shipping materials to the factory would be higher

Insurance value is the value of property as defined by the specific terms of an insurance policy. It is the reimbursable value

Assessed value is the worth or value of a piece of property as determined by the taxing authority for the purpose of levying an ad valorem (property) tax.

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A C.M.A. (Competitive Market Analysis) is a comparison of the prices of property recently sold, properties currently on the market, and properties that did not sell during a specific time frame

The CMA, Comparative Market Analysis, or Competitive Market Analysis is used to make a determination of a realistic listing price for a property.

Most sellers feel that the licensee’s ability to help establish a realistic listing price is worth the commission.

The CMA is not as comprehensive or technical as an appraisal is and may be biased by a salespersons anticipation to get the listing. A CMA should not be represented as an appraisal, but as a tool to help the salesperson arrive at fair market value of a property

The C.M.A. is not designed to be as comprehensive or technical as an appraisal, BUT they are similar to an appraiser’s market data approach.

Recent sale prices of comparables are good indicators of what informed buyers will pay AND what sellers have accepted

The replacement cost approach is the method of evaluating vacant land alone

Next, the cost of all materials and labor are estimated to reproduce the building and all improvements exactly as the property exists at the time of the appraisal.

Subtract the depreciation of the building and improvements. Depreciation is defined as the difference between the cost of the property and any improvements (when new) and its current value.

Then TOTAL the depreciated building, improvements and the land.

This method could be used in high demand areas where there is an inadequate supply of new homes, or where there are FEW or NO available building lots.

The replacement approach is based on the assumption that a new building is worth more than an existing building, and that the price to replace the property would be in the upper ranges

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This method uses income generated by the investment property to determine value. The rule of thumb is, the greater the income, the greater the value. Typically, this method is used to appraise income producing properties such as apartment buildings, office buildings, strip malls etc.

Next to the licensee’s estimate of value, sellers are most interested in an estimate of their net proceeds.

This means that they want to know how much cash they will get at closing after the money is paid, and all the expenses have been deducted.

Licensees typically use a “net proceeds form” to arrive at the seller’s estimate.

Although this amount can be only an “estimate”, it is possible to calculate a fairly accurate figure.

Chapter 4

Introduction

Everyone has his or her own thoughts, ideas, and memories regarding home ownership.

Some people feel that it may be too much of a commitment to maintenance, payments, and liquidity of the asset.

Others enjoy the advantages that home ownership provides, such as security, pride, and freedom to do what one wants with the property.

One of the most important benefits is the pride that owning a home can bring.

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Ownership allows the privacy and freedom that cannot be found in renting or leasing from a landlord.

Residential Property Marketing Plan

Pricing the Property

Pricing the property is critical. The key to pricing is to maximize the number of qualified buyers who see the property based on the initial listing price. If the property is priced too high, many of the potential buyers may never see it. Setting a realistic price from the start helps facilitate a quick sale at the best price to the seller. It has been shown that an over-priced home may sell much later and for much less than it would have had it been priced right from the start. Start with an accurate COMPARATIVE MARKET ANALYSIS Develop a suggested listing price based on recent sales in your area, market conditions and the uniqueness of your property.

Preparing the Property for Sale

Curb Appeal Give buyers a good first impression of the property. The property should appeal to a potential buyer driving by your house. Consider planting some colorful flowers or adding some plants to fill out the landscaping. Trim lawn and bushes, pull weeds and remove refuse from the property. Sweep walkways and clean entryways of any accumulated dirt, leaves or spider webs. Make certain that the front door and door handle are clean – no handprints or smudges. Make Small Repairs If potential buyers notice little things that are not fixed, then they may believe that there are many other problems with the house that they are unaware of. Paints and Carpets Unless the property is a true "Fixer-Upper" or has been recently painted or carpets replaced consider painting the interior and replacing the carpets in the property. Faded walls and stained or worn carpets reduce a home’s appeal. These two improvements give homes a quick rejuvenation that is appealing to many buyers.

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Clean Out the Closets, Garage and Other Storage Areas Remove all unnecessary accumulations from closets and the garage. If closets are full and contain important, necessary items, consider moving them into temporary off-site storage. Staging Consultation If the property contains excess furniture that will give it a crowded feeling, and most do, remove it. Some firms offer or can arrange for a professional staging consultant to assist in repositioning or removing furniture and other household items in a manner that will help present the property in a favorable manner. Sometimes minor redecorating is helpful if certain elements of the property are dated. Let the Sun in and Turn All the Lights On Open all shades, shutters and drapes to give the property maximum exposure to sunlight. Turn every light on in the house, even during the day. Be sure to replace all burned out bulbs and to repair or replace broken light fixtures. Three is a Crowd Most buyers prefer privacy when being shown through a house. Whenever possible, licensees should show potential buyers the property. Remove pets. Not all buyers look favorably on having cats, dogs, birds or other animals at the home. Being alone with their licensee will allow buyers to feel more relaxed when discussing the potential of buying the property

Offering the Property

Multiple Listing Service (MLS) Place the property on the local MLS. With up to 70% of homebuyers starting their search for property on the Internet, the MLS is a highly effective way to expose the property to the most potential buyers. Open Houses BROKER'S OPEN HOUSES This exposes the property to the Realtors® in your area. To facilitate this, we will hold broker's open houses. Consider holding it the first week listed on the MLS

160 as it will be coming up on the new listings "hot" lists. Distribute full color property brochures professionally designed to show and describe the property. Consider providing catered food for the licensees to eat while they discuss the great qualities of the property. PUBLIC OPEN HOUSE Hold public open houses, per discussions with the Seller. There are pros and cons to Open House. It is often said that Open House are mostly for the benefit of the licensee in generating contacts. Open houses allow the public in to the home to gain information about it not available otherwise. Signs

Post a distinctive and visible For Sale sign in front of the property prominently displaying your direct phone number. The office phone number is less effective in getting quick contact with any prospective buyers from the signage. This notifies neighbors and passerby that the property is for sale. Weekly Newspaper Ads Advertisements can be placed in local newspapers. Magazine Ads Many local, regional or targeted magazines provide opportunity for o marketing the property. Some of these magazines target a local audience while others are geared toward the luxury buyers and target the national and international markets. Internet Advertise on the Internet as a featured property. Website landing pages can be the destination for many types of advertising that drives traffic to the landing page. Social networking sites, marketing sites such as Craig's list, real estate industry sites, blogs and bulletin boards with posted articles can all present unique opportunities for reaching buyers. Virtual Tour Virtual tours provide buyers searching for properties online with a 360° view of each of the rooms in the property as well as outside areas. This advanced technology allows buyers a more detailed view of the property than traditional photographs alone and is an effective marketing tool allowing prospective buyers to view the property. Most virtual tours will not only be made available on our website but may be viewed on any of the numerous websites of other cooperating real estate brokers and real estate websites. Color Photos

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High-quality digital color photographs should be taken of the property and used, as applicable, to create color brochures and post cards for your property as well as be displayed on the internet and in the pages of periodicals for advertising purposes. Direct Mail Campaigns Mailers include color brochures or postcards featuring color photos. Direct mail is sent to specific areas and targets potential buyers of your home. Potential buyers are targeted by geography, income and other relevant demographics. A review of our Marketing Plan reveals many areas where costs will be incurred by the licensee in marketing a property. In some cases, a Seller may reimburse the licensee for some of these costs but infrequently in unsuccessful marketing efforts.

Common Costs Incurred

Internet Service Provider fees Internet Domain Name registration costs Internet Web page development Web Page Search Engine placement fees or commissions Web Page hosting costs Brochure and Flyer printing Photography Advertising Fees Magazines Newspapers TV and other media Signs Lockboxes Staging fees Open House costs - Food, etc. Postage Virtual Tour Company fees

Open House can be an important tool for marketing your listings.

BROKER'S OPEN HOUSES

In order to sell a property, it must be exposed to the licensees in your local and surrounding areas. To accomplish this, hold a broker's open houses. Hold it in conjunction with your home's first week listed on the MLS and take the steps necessary to see that it is ready to be shown at that time. Notify as many licensees as possible by distributing flyers at brokerage offices or via e-mail distribution contact lists. The most important thing you hope to accomplish is to expose the property to a licensee who has a buyer ready, willing and able.

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Distribute full color property brochures professionally designed to show and describe the listing. You may want to provide food or a nominal but useful give away item as an additional attraction for the licensees to eat while they discuss the great qualities of the listing. These may drive additional traffic to the listing but unfortunately, do little to provide that crucial buyer element.

PUBLIC OPEN HOUSE

A public open house can be an effective way to show your listing to many potential buyers. You can get a large number of buyers through your listing in a short period of time. Be sure to employ the marketing checklist in the first chapter to assure the property is ready to be shown. As the old saying goes, "You never get a second chance to make a first impression". This is particularly important in real estate marketing as flaws exposed can never be "unexposed". Weekends are the most effective times for open house. Plenty of advertising is important to notify the public. Place signs in strategic places to direct traffic clearly to the location. At least three signs may be necessary to catch traffic on arterials and get them to the location as well as the sign at the location. Arrive early to be sure the home is ready and that you have been able to communicate with the Seller and get them on their way out of the home in advance of arriving viewers. Hold public open houses, per discussions with the Seller. There are pros and cons to the Public Open House. It is often said that Open Houses are mostly for the benefit of the licensee in generating contacts. Open houses allow the public in to the home to gain information about it not available otherwise.

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Review

The factors that influence home ownership are very diversified.

One of the most important benefits is the pride that owning a home can bring.

Ownership allows the privacy and freedom that cannot be found in renting or leasing the landlord’s house or apartment.

There are four main types of buyers:

· First-time homebuyers

· Buyers moving to larger home

· Buyers moving to smaller home

· Recreation homebuyer and retirees

It can be extremely satisfying to work first-time homebuyers, BUT they can also be a challenge.

First time buyers may have a limited amount of cash for a down payment and they may not have built up enough established credit to get a home loan.

Homebuyers who are moving to a larger or more expensive home usually have more knowledge of how a real estate transaction works.

Because this is not their first real estate purchase they most likely have a clear picture of the home they want to buy, and more funds (usually from their current home’s equity) for the purchase of the new home.

Buyers moving to a smaller home may no longer want or need the financial or maintenance demands of a large family home.

Recreational or second homebuyers are usually looking for a home that offers not ONLY a house, BUT recreation and entertainment as well. Often these buyers have retired and now want a different lifestyle.

Pre-qualifying can also help your buyers to prioritize their “needs” with their “wants”.

There may be times when the buyers' expectations exceed his/her ability to purchase.

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This can usually be overcome by PRIORITIZING by the buyer and CREATIVITY by the licensee.

By practicing “active listening” the real estate licensee can gain a better understanding of features that are most important to the buyer.

The licensee should carefully listen for clues when the buyer describes the type of home they want.

Chapter 5

It is important that ALL offers be in writing and presented to the owner “as expeditiously as possible”. A licensee does not have the right withhold or refuse to present an offer to the property owner.

The failure to present an offer could lead to a civil suit in which the licensee can be sued for tortuous interference.

Vocabulary

Buyers’ Remorse Buyers often have a sense of remorse after contracting to buy a home. Many factors can create buyers’ remorse; however, it usually subsides in a few days and the buyers are thrilled with their new investment.

Counteroffer A rejection of an offer to buy or sell, with a simultaneous substitute offer.

Fiduciary Duty A duty to act primarily for the principal's (the person who employed them) benefit and not their own. A fiduciary must act with the highest degree of care and good faith in relations with the principal and on the principal's business. 'The penalties for failing in fiduciary duties may be quite severe.

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Home Inspection A professional service available to homebuyers normally undertaken prior to the transfer of title to the property. Quite often, particularly in the case of older homes, a buyer will make an offer contingent upon an inspection of the property being done by a qualified person and if the property does not pass the minimum inspection requirements, the offer is voidable. Home inspection services charge from one hundred to several hundred dollars, with the fee normally paid by the buyer.

Home Inspector A person who inspects real estate for the purpose of determining whether or not the property meets minimum structural and code standards. Such persons normally have engineering and or building backgrounds and are employed on a fee basis.

Multiple Offers When more than one offer has been received on the same property. As a licensee, you have a duty to present all offers in an expeditious manner.

Negotiation Process The process of bargaining that precedes an agreement. Successful negotiation generally results in a contract between the parties.

Personal Assistant A combination of officer manager, marketer, organizer and facilitator with a fundamental understanding of the real estate field. May be licensed or unlicensed. If unlicensed, duties are limited to office work.

Seller’s Objections Concerns sellers have over price and terms of the sale which is usually emotionally driven.

Structural Pest Inspector A licensed inspector through the Washington State Department of Agriculture who conducts a complete inspection of wood destroying organism (WDO).

Tort A wrongful act that is neither a crime nor a breach of contract, but that renders the perpetrator liable to the victim for damages.

Wood Destroying Organism (WDO) Inspections Complete wood destroying organism (WDO) inspections are done for the purpose of determining evidence of infestation, damage, or conducive conditions as part of the transfer, exchange, or refinancing of any structure.

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In today's real estate environment, a licensee's first question on the list to a potential buyer should probably be "Do you have a pre-approval letter?" The pre-approval letter from a reliable lender or mortgage broker is an indispensable tool in providing the most efficient and productive service to a buyer.

The most important advantage a pre-approval letter represents is that you are likely to have a better negotiating position with a seller. Sellers will prefer an offer from a pre-approved buyer because the seller knows the buyer is (1) serious enough about purchasing a home that they have taken the time and effort to obtain a pre-approval letter; (2) are qualified financially to obtain the financing they need to close the transaction; and (3) the buyer is offering on the seller's home knowing that it is a home they can afford. A pre-approval letter may be an important factor or even a deciding on in a multiple offer situation.

Other advantages of the pre-approval letter are:

(1) The licensee knows the top of the range of home prices for the buyer and can tailor property searches to be most efficient; (2)The buyer knows an amount that can be borrowed based on the individual circumstances of the buyer and the current mortgage market; and (3) A pre-approval letter provides an opportunity to obtain a Good Faith Estimate from the lender or mortgage broker as well, which will provide information on what to expect for closing costs and the effect they may have on any offer that may be structured.

All of these tools can make any offer prepared more competitive and likely to be accepted than one produced with no pre-approval letter foundation.

PRESENTING OFFERS

First and foremost, it is important that ALL offers be in writing and presented to the owner “as expeditiously as possible”. A licensee does not have the right to withhold or refuse to present an offer to the property owner.

Under RCW 18.86.030 a licensee must “present all written offers, written notices and other written communications to and from either party in a timely manner, regardless of whether the property is subject to an existing contract for sale or the buyer is already a party to an existing contract to purchase…” Additionally WAC 308-124D-030 states: “a real estate licensee shall perform all acts required of the licensee by a real estate agreement as expeditiously as possible. Intentional or negligent delays in such performance shall be considered detrimental to the public interest in violation of RCW.” A licensee who fails to present an offer is subject to license suspension, revocation, or fines.

The failure to present an offer could also lead to a civil suit in which the licensee

167 can be sued for tortuous interference. This is defined as any act which results in damage to another individual. As such, a seller may consider a licensee’s failure to present all offers as expeditiously as possible a tortuous interference with their ability to sell the property.

Under agency laws, a licensee has a fiduciary duty to help their clients negotiate contracts. This duty includes Obedience (finding a buyer), Loyalty (putting the clients interest above all others, including your own), Disclosure ( disclosure all material facts about the property not specifically excluded by statutes), Confidentiality (not revealing a client’s personal information), Accounting (all monies are accounted for and applied correctly to the transaction including earnest monies, rental deposits etc., and a complete and accurate accounting of these funds is made available to the client), and Reasonable care and due diligence. The fiduciary duties are best remembered by the acronym OLD CAR.

Not presenting an offer is a breach of your fiduciary duties. Unless specifically instructed in writing by the owners, all offers and back up offers must be presented.

If an offer is not accepted by the seller, the owner’s interest is best served by giving notice of its unacceptability by proposing a substitute offer on a written form. This is known as the counteroffer. Once the potential buyer receives the counteroffer, they have a choice of accepting the offer, rejecting the offer, or proposing another counteroffer. This cycle continues until either an agreement is reached, or the parties reject all counteroffers and walk away.

Effective Representation

Remember it is unethical and violation of law to recommend an offer be accepted for the sake of earning a commission. If the offer to purchase is not in the best interest of the principal taking into consideration current market values, property, and the client’s needs, you have a duty to inform them of this information.

If the offer is clearly not in the best interests of the owners, the licensee must inform them. This is part of the licensee’s fiduciary duties to the client. The less knowledgeable the owner is about real estate practices the greater the responsibility it is of the licensee to inform and advise.

It would be unusual for a licensee to recommend an offer be outright rejected without countering. However, it could be the case when an offer is clearly frivolous ($10,000 offer on a $200,000 home) or in a case where it is apparent the buyers are trying to take unconscionable advantage of the seller.

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If the offer received is fair, it may be best to accept rather than a counteroffer. Another part of fiduciary responsibilities is to inform the sellers of the impact a counteroffer has on the purchase agreement. A counter offer REJECTS the buyer’s offer and gives the offeror a way out of the purchase if they are having buyer’s remorse before a signed deal. Once the offer is rejected, the owners have lost their right to acceptance and the offer is a dead.

It is the intent of this chapter to offer the basics of presenting an offer. For detailed information on the sales process, see A+ Institutes course on Listing and Sales Agreements.

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Negotiating Agreements

Responsibilities of licensees in Negotiating Agreements is defined in WAC 308- 124D-020. It states in part:

“The real estate licensee shall be responsible for negotiating the agreement between seller and purchaser as follows:

(1) All written offers shall be presented to the seller for acceptance or refusal. A copy of the agreement shall be delivered to the purchaser immediately following the purchaser's signing.

(2) A copy of the offer to purchase shall be delivered to the seller immediately following seller's signing and acceptance of purchaser's offer.

(3) A copy of the agreement to purchase bearing the signature of the seller(s) shall be delivered to the purchaser as proof that the purchaser's offer was accepted.

(4) A legible copy of the agreement to purchase shall be retained in each participating real estate broker's files.”

Increasingly, property sales may include a short sale activity with an underlying lender or lenders. The Value of the property may not be enough to fully pay off loans that are held against the property. In this case, the concept of "negotiating the agreement" as defined in WAC 308- 124D-020 is far exceeded by the legal ramifications of the decisions and actions required of a seller. The licensee's authorized functions of assisting parties in filling in blanks on standard forms is inadequate.

The understanding that a SHORT SALE is centered around a NEGOTIATION with the lender holding a lien on the property is crucial to the licensee. In 2001, The Washington State Supreme Court adopted General Rule (GR) 24. This rule defines the practice of law and includes NEGOTIATION of legal rights or responsibilities on behalf of another entity or person(s). If a licensee or another third party, possibly hired by a licensee, NEGOTIATES a short sale, they may be practicing law without a license. This arises because a licensee or other third party NEGOTIATING with the homeowner’s lender on their behalf is NEGOTIATING the legal rights and responsibilities that pertain to the homeowner’s loan agreement with the bank.

A licensee should recognize that any person NEGOTIATING on behalf of the homeowner must be licensed to practice law. A licensee should not engage or refer third parties as "short sale negotiators" who are not licensed to provide legal services.

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A number of other Washington laws may be applicable when dealing with homeowners who require loan modification services in order to sell their property. The Washington Debt Adjusting Act (RCW 18.28), the Credit Services Organization Act (RCW 19.134), the Mortgage Broker Procedures Act (RCW 19.146), the Distressed Property Conveyance Act (RCW 61.34), and the Consumer Protection Act (RCW 19.86) all impose various obligations on those providing a service which is regulated by any of these laws. The obligations may include licensing and conduct standards which have not been met by a licensee or a third-party loan modification service provider or short sale negotiator. In some cases, attorneys are not even permitted to provide the services unless they are also properly licensed.

It is illegal to share commissions or legal fees with loan modification or short sale service providers unless they are also properly licensed as real estate licensees or attorneys.

Multiple Offers

As already stated, ALL written offers received by the listing licensee must be presented to the seller for acceptance, counteroffer, or refusal. The seller MUST be allowed to view all offers in order to determine which offer is the best for the SELLER.

Licensees should advise their buyers that other offers may be presented while the seller is considering the first offer. Licensees should be aware of the fact they not only must present all written offers, but they have a duty to present all verbal offers too, even though they are not binding on the principle. In some circles the myth arises that the person who writes the offer first is the one who is considered first. Washington State has no such policy or law. There is no advantage to writing up an offer and presenting it first.

The licensee's first duty is to the principle, not the brokerage firm or for personal gain. All offers should be presented in a non-prejudicial manner so that the owners can make a decision that is right for them. You may, however, suggest that the owners obtain loan pre-qualifications from all offerors in order to avoid accepting an offer from a party that cannot obtain financing and rejecting an offer from a buyer who has their finances in order.

Order of precedence becomes important only AFTER an offer has been accepted by the seller.

Example:

Seller X is presented with an offer from Buyer B. After the Seller's Licensee has presented the offer for consideration, the sellers decide to accept the offer and sign the contract. Later that evening another offer to purchase is presented to the

171 sellers by the listing licensee. The Seller is contractually obligated to follow through with the previous acceptance or they could be sued for breach of contract and performance. However, the seller may wish to accept this offer as a backup offer in case the first offer does not proceed to closing. It is important that their order of precedence be clearly identified so as not to create confusion or problems.

Backup Offers and Dual Contracts

A Backup Offer as mentioned earlier is a secondary offer on the property in case the first offer falls through.

A Dual Contract refers to two different contracts from the same buyer on the same property. One of the contracts is used to purchase the property and the other contract is used for financing purposes. The purpose of this type of transaction is to enable the buyer to obtain a larger loan on the property than would otherwise be possible. For example: A buyer and seller agree to sell the home for $120,000. The listing contract on one states $120,000 and the other contract has a sales price of $150,000. The extra equity is then transferred to the buyer, thus deceiving the lender of the true sales price of the property.

This type of practice is illegal in the state of Washington and the brokerage firm can be brought up on fraud charges in addition to other disciplinary actions.

There may be times during a negotiation or at some other step in the processing of a real estate transaction that a licensee is unsure of the appropriate way to deal with a situation. By all means, err on the side of more caution than less. This is the time to consult with your Managing broker or Managing Broker in a branch office situation and get assistance.

You should consider consulting with your designated or managing broker when:

You feel that you or the brokerage is at risk You feel that an issue is outside your area of knowledge You need help filling out standardized forms Any party is threatening a lawsuit Unusual circumstances arise (such as the death of a seller) A client’s expectation of service has not been met A transaction is falling apart and you need help in keeping it together Another licensee is in violation of real estate license law There is any conflict that you may need assistance with One party breaches a contract A particular circumstance requires an addendum to be attached to the contract and there is not a standard form

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Home Inspections

A HOME INSPECTION SERVICE is a professional service available to homebuyers normally undertaken prior to the transfer of title to the property. Quite often, particularly in the case of older homes, a buyer will make an offer contingent upon an inspection of the property being done by a qualified person and if the property does not pass the minimum inspection requirements, the offer is voidable. Home inspection services charge a fee to conduct the inspection. The fee is normally paid by the buyer.

Home Inspection is a real estate related profession that allows the practitioner to combine their interest in real estate with their experience in the construction industry or engineering field.

A professional home inspector will conduct a thorough visual inspection of the properties, structure, site conditions, foundation and framing, exterior finishes (including roof coverings, gutters, wall sheathings, siding, windows, doors and other structures on the property such as a garage), plumbing systems, heating and air-conditioning systems, electrical systems, insulation, interior walls, ceilings, floor coverings and finishes, and energy efficiency of the home.

Additionally, a licensed inspector may perform radon tests, and advise on lead- based paint conditions, or recommend further testing. The inspector takes this information and compiles an analytical report detailing the condition of the home. This report can be a valuable tool in a negotiation or as a sales technique depending on the condition report.

In light of recent mold and lead based paint concerns, more and more purchasers are relying on a home inspection to help them make a purchase decision. Many offers are written contingent upon an acceptable home inspection.

As a licensee it is important to make your client understand that you are only required by law to make a visual inspection of the property for obvious red flags. Red flags are defined as obvious defects that indicate a problem (for example, stained ceiling tiles may indicate past or present water problems either with the plumbing or the roof).

Because disclosure laws can be severe for misguided or unintentional information you pass on to your client, it is recommended that if they have any concerns over the property (especially if it is an older property) that you advise them to have a home inspection conducted.

As a licensee, you are obligated to report any obvious red flags that could

173 indicate a problem to the purchaser regardless of whether or not they are disclosed in the Sellers Disclosure Form. However, you are only required to visually inspect reasonably assessable areas.

To help protect yourself in the area of inspection disclosure many licensees rely on one of three techniques:

1. Have a prospective purchaser pay for a home inspection. As mentioned above the inspector will examine the property and verify and defects already disclosed and possibly identify others that are not on the list. The inspector will also ensure the home is in compliance with structural and building code standards. Additionally, the inspector can estimate what repairs will cost so the buyer can factor this in the selling price. 2. Have the seller invest in a home protection plan, which pays for repairs of named items in the disclosure during a specified period after the sale (typically they are yearlong plans). 3. Have the seller provide a Pest Control Report (this will be discussed in detail below).

The licensee is still responsible for inspecting the property whether the above techniques are utilized or not. The licensee also retains liability for any undisclosed defects they are aware of but are not included on the Disclosure form

In certain areas where pests can be a problem for homeowners, a seller or buyer may want to pay for a Structural Pest Inspection. These differ from Home Inspections in two significant ways:

1. Home Inspectors are required to be licensed in the State of Washington. 2. In order to conduct an inspection and report on Wood Destroying Organisms (WDO) the person must be licensed through the Washington State Department of Agriculture (WSDA) as a Pest Inspector.

A home inspector that is also licensed as a pest inspector can perform both functions for you.

Structural Pest Inspectors

The WSDA regulates pest inspectors under RCW 15.58 and WAC 16-228.

RCW 15.58.445 states:

It is unlawful for any business to conduct complete wood destroying organism inspections without having obtained a company license from the director (of Agriculture)

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Additionally, RCW 15.58.030 defines "Complete wood destroying organism inspection" as an inspection for the purpose of determining evidence of infestation, damage, or conducive conditions as part of the transfer, exchange, or refinancing of any structure in Washington State. Complete wood destroying organism inspections include any wood destroying organism inspection that is conducted as the result of telephone solicitation by an inspection, pest control, or other business, even if the inspection would fall within the definition of a specific wood destroying organism inspection.

Any WDO inspection conducted by any person pursuant to the sale, exchange, or refinancing of real property or, as a result of telephone solicitation by an inspection, pest control, or other business, must be a complete WDO inspection and must be performed by individuals required to be licensed.

Inspectors must make a thorough inspection of accessible areas that are not specifically excluded in the report. Inspectors will not be required to place themselves into a position or gain access to any portion of a structure that may cause physical injury or otherwise imperil their health and safety. Access to structures should be restricted to the use of accepted methods and practices.

Substructure crawl areas must be inspected when accessible. Inaccessibility of substructure crawl areas due to inadequate clearance, the presence of ducting or piping, foundation walls, partitions or other such conditions that block access must be explained in the inspection report and annotated on the report diagram. The report findings must state that inaccessible substructure crawl areas may be vulnerable to infestation by WDOs and should be made accessible for inspection.

Limits of inspections:

Complete WDO inspections will identify conditions present at a subject property at the time of an inspection. Inspectors are not required to report on any WDO infestation or other condition that might be subject to seasonal constraints or environmental conditions if evidence of those constraints or conditions is not visible at the time of the inspection.

Insect Infestations

Carpenter ants and subterranean termites are believed to be the most damaging of all insects to a home. Both insects attack wooden frames and structures internally and leave few visible signs of the infestation on the surface. Their presence is virtually impossible to detect. Undetected and untreated infestation will make the structure unsound over a period of time.

Some signs a licensee can look for to detect WDO’s are wood shavings on the floor, droppings that look like sawdust or “mud tubes” which lead from the ground into a wood frame. These can also be caused by other pests too, so if in doubt

175 advise the buyer or seller to have a Structural Pest Inspection performed on the residence.

Often, property needs to be evaluated by a Buyer before a final decision to close can be made. A buyer may be reluctant to undertake any evaluation without knowing he has a price certain and the right to acquire title by proceeding to closing on agreed terms and conditions. Options are sometimes used to secure such rights. An amount of money is paid to a property owner for the right to acquire the property at a specified price on or before a certain date in the future.

At times, this arrangement cannot fully provide for the needs of a buyer. In these cases, a purchase and sale agreement form can be used with contingencies to the closing spelled out in an addendum. The addendum is used to express the buyer's specific requirements for evaluation in the form of Contingencies. The Contingencies must be satisfied according to the terms spelled out in the addendum, or the Buyer will not be obligated to close. The buyer may have the choice to terminate the agreement or to proceed to closing by "waiving" any objection to an unsatisfied contingency.

The Buyer makes a Good Faith Deposit on the price of the property to demonstrate to the Seller that he has intent and capacity to close the sale if the buyer's evaluation activities convince him to do so.

There is no "set" amount for a Good Faith Deposit as it is negotiated by Buyer and Seller but often is between two and four percent of the purchase price of the property. Market conditions will likely influence the amount of a deposit with a higher percentage likely in a seller's market or where the unique nature of the property may dictate. A licensee should recommend an amount that will demonstrate a sincere commitment to evaluating the property and not just an exercise to control property for a period of time.

A good faith deposit is trust funds and must be handled in accordance with licensing law in all instances.

The agreement must contain all the elements of a valid contract and should spell out all the requirements for closing. If anything is lacking, the contract could be ambiguous and unenforceable. The agreement should be prepared with the expectation that a closing will take place. Standard forms should be used. Any requirement for a complex expression of a contingency or requirement should be referred to an attorney for drafting.

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Discrimination in the Finance of Housing

In Mortgage Lending: No one may take any of the following actions based on race, color, national origin, religion, sex, familial status, or handicap:

• Refuse to make a mortgage loan • Refuse to provide information regarding loans • Impose different terms or conditions on a loan • Discriminate in appraising property • Refuse to purchase a loan or • Set different terms or conditions for purchasing a loan.

In Addition: It is illegal for anyone to:

• Threaten, coerce, intimidate or interfere with anyone exercising a fair housing right or assisting others who exercise that right • Advertise or make any statement that indicates a limitation or preference based on race, color, national origin, religion, sex, familial status, or handicap. This prohibition against discriminatory advertising applies to single-family and owner-occupied housing that is otherwise exempt from the Fair Housing Act.

Implications for Licensees

Real estate licensees are largely responsible for creating and maintaining the open housing market. Real estate Managing brokers, Managing Brokers and Brokers are the real estate experts. The reputation of the industry cannot afford the perception that licensees are not committed to the practice of fair housing laws. Consequences for violation of fair housing laws are stiff and suspension or revocation of licenses is common action in these cases.

HUD requires that their fair housing posters be displayed in brokerages or any other place of business where real estate is offered for sale or rent. This sends the message that the business is aware of and committed to equal and fair opportunity in housing.

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Penalties for Violations of the Fair Housing Laws

Juries and judges view FAIR HOUSING cases that concern discrimination against families with children so seriously, that real estate licensees absolutely cannot assume the risk of severe penalties of potential violations.

Errors and Omission insurance does not cover cases that involve fair housing. Managing brokers, and every licensee licensed under the managing broker, must know these laws and practice these laws to the letter every single day and with every single contact, with ABSOLUTELY NO EXCEPTIONS.

The Department of Housing and Urban Development (HUD) through its Office of Fair Housing and Equal Opportunity enforces the Fair Housing Law.

A person who believes they have been injured by discrimination may file a complaint with the Human Rights Commission within six months of the alleged act.

Permitted and Unlawful Acts for Unlicensed Personal Assistants

Personal Assistants play an increasing role in today’s real estate business and can be an invaluable asset when it comes to handling non-sales related tasks for licensees.

A Real Estate or Personal Assistant is simply a person who assists either the licensee in a real estate transaction. They would be the equivalent of a loan processor in the mortgage field. Their duties are extremely limited, if they are unlicensed, and the scope of their position is regulated by State Guidelines.

Assistants can either be licensed or unlicensed, and may work for a managing broker, managing broker or a broker. If they are unlicensed the duties of a personal assistant are limited to secretarial/office type of performances. Licensed assistants can directly assist in all aspects of the real estate transaction.

Responsibility for Assistants

Ultimately the managing broker is responsible for activities performed by personal assistants; however, if the assistant works for a broker, both the managing broker and broker share the legal responsibility. The broker has a duty to protect the managing broker from illegal activities and should therefore be familiar with the duties a personal assistant can perform with or without a real estate license.

When we talk about licensed assistants it essentially refers to the assistant holding an active broker's license. Washington has two types of licenses for real estate professionals: Managing Broker and Broker.

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A managing broker who serves as a real estate firm's managing broker has his license registered with the Department of Licensing as a Managing broker and his license is so endorsed by the DOL. There is no such thing as a personal assistant license. If the assistant is performing any duties of a licensee (negotiating deals, showing property) they must hold a managing broker's or broker's license.

Activities an Unlicensed Personal Assistant May Perform

In September of 1999 the Washington Real Estate Commission adopted guidelines for the duties an unlicensed assistant may and may not perform.

Unlicensed assistants who work under the direct instructions and supervision of a licensee may perform the following tasks and duties:

1. May be a greeter at open houses/model units and distribute pre-printed promotional literature and provide security. 2. May act as a courier in delivering documents, picking up keys, or similar services. 3. Perform clerical duties such as typing, answering the telephone, forwarding calls, and scheduling appointments for licensees. 4. Submit forms and changes to multiple listing services. Obtain status reports on loan progress and credit reports, etc. 5. Follow-up on loan commitments after a contract has been negotiated; and pick up and deliver loan documents. 6. Obtain public information from sources like government offices, utility companies, title companies, etc. 7. Write and place advertising. 8. Make keys, install lock boxes, and place/remove signs on property. 9. Gather information for comparative market analysis. 10. Transport people to properties and/or around areas of interest but may not show, answer questions, or interpret information regarding property, price or condition. 11. Perform accounting and collection functions such as collecting rents, recording and depositing earnest moneys, security deposits, rental funds and/or computing commission checks. 12. Order or perform items of repair and/or maintenance. 13. Provide information pertaining to the characteristics of real estate or a business opportunity and the terms or the conditions of a transaction only if that information is prepared in writing and approved in advance by a licensee

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Unlicensed assistants shall not:

1. Engage in any conduct which is "used, designed or structured" to procure prospects. 2. Show properties, answer questions, or interpret information regarding property, price, or condition. 3. Interpret information regarding listings, titles, financing, contracts, closings or other information relating to a transaction. 4. Conduct telemarketing or telephone canvassing to schedule appointments in order to seek clients. 5. Fill in legal forms or negotiate price and/or terms. 6. Perform any act which requires a real estate license under RCW 18.85 or the administrative rules in 308-124 WAC.

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REVIEW

The failure to present an offer could lead to a civil suit in which the licensee can be sued for tortuous interference.

There are many ways to structure and present offers. The main point to remember is that you want to always represent your client’s best interest without biases and maintain a professional demeanor to all parties and licensees involved in the transaction.

Always try to show the buyers in a positive light. One that makes the sellers feel comfortable with them and that the buyers really appreciate their home

Remember it is unethical and violation of law to recommend an offer be accepted for the sake of you earning a commission. If the offer to purchase is not in the best interest of the principle taking into consideration current market values, property, and the client’s needs you have a duty to inform them of such information

If the offer received is fair, work towards an acceptance rather than a counteroffer. A lot of times licensees recommend a counteroffer when it is not necessarily in the owner’s best interest

Licensees should advise their buyers that other offers may be presented while the seller is considering the first offer.

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In some circles the myth arises that the person who writes the offer first is the one who is considered first. Washington State has no such policy or law. There is no advantage to writing up an offer and presenting it first.

A backup offer is a secondary offer on the property in case the first offer falls through.

Dual contracts are illegal in the state of Washington and the brokerage firm can be brought up on fraud charges in addition to other disciplinary actions

A HOME INSPECTION SERVICE is a professional service available to home buyers normally undertaken prior to the transfer of title to the property

Assistants can either be licensed or unlicensed, and may work for a managing broker, managing broker, or a broker. If they are unlicensed the duties of a personal assistant are limited to secretarial/office type of performances. Licensed assistants can directly assist in all aspects of the real estate transaction

Unlicensed assistants may not

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Engage in any conduct which is "used, designed or structured" to procure prospects.

Show properties, answer questions, or interpret information regarding property, price, or condition.

Interpret information regarding listings, titles, financing, contracts, closings or other information relating to a transaction.

Conduct telemarketing or telephone canvassing to schedule appointments in order to seek clients.

Fill in legal forms or negotiate price and/or terms.

Perform any act which requires a real estate license under RCW 18.85 or the administrative rules in 308-124 WAC

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CHAPTER 6

Introduction

The ultimate goal of the licensee is to bring together a ready, willing and able buyer and seller, to begin the actual selling process.

Most real estate sales begin with a written contract between the parties that states the agreed price, terms, and ALL conditions of the sale.

This written contract is called the purchase and sale agreement, BUT it may ALSO be called an earnest money agreement. In order to be a valid contract, the purchase and sale agreement MUST contain ALL of the required elements.

It is important that the real estate licensee has a thorough understanding and knowledge of the proper preparation of the purchase agreement.

Once the conditions and requirement of the purchase and sale agreement have been met, the property is conveyed from the seller to the buyer at the closing, OR settlement.

Although most transfers of property result from a sale between a seller and a buyer, property can be ALSO be conveyed by other voluntary methods, OR involuntary methods. The transfer of real property is called alienation.

Vocabulary

Accession Additions to property made by deposits of soil OR other natural causes OR man- made cause, such as adding fixtures

Addendum An addition to the earnest money agreement (Addenda – plural)

Adverse Possession Acquiring title to the land by actual, open, notorious, hostile, exclusive and continuous possession, for required statutory time period

Alienation The transfer OR conveyance of ownership (title) of real property, to another person or entity, as when selling OR gifting

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Avulsion Sudden tearing away OR removal of land by water

Bump clause A clause used when the seller receives a second offer to purchase that requires the first buyer to either waive OR conclude the contingency “to sell buyer's existing home” OR rescind the contract

Closing Also called settlement, the final accounting of ALL documents, recording and the disbursement of funds

Codicil A change in a will OR other document

Contingency clause A contract clause that states that something MUST occur by a specific date, OR the contract will be void

Dedication Conveying property to the public without receiving consideration

Erosion Loss of land due to water, wind OR other natural causes

Earnest money The good faith money that the buyer deposits to be applied to the purchase price at closing, OR forfeited as liquidated damages to seller, if the buyer defaults

Patent The first grant of conveyance in a chain of title issued to a private owner by the government

Purchase and sale agreement A receipt for earnest money and a binding contract between the buyer and seller of real property

Reliction Water receding from the high-water mark, making new uncovered ground into adjoining land

Subject To A real estate transaction in which the grantee (purchaser) takes over the existing mortgage payments from the grantor (seller) but assumes no personal liability on the mortgage. When a mortgage is taken subject to, the purchaser can walk away from the mortgage and lose nothing but the equity already invested. If,

185 however, the purchaser assumes the mortgage, he or she becomes personally liable for any deficiencies occurring in a foreclosure sale. In both situations the original borrower is liable to the lender unless specifically released in a novation.

"Time is of the essence" clause Clause used to make meeting the deadlines in the contract a legal obligation

Title Title is not a document. It is the ownership of property with ALL of its rights

Title

The document used to transfer “title”, OR “ownership rights” is called a “deed”, BUT “title” itself is not a document.

A person, who owns property, has “title” to the property. “Title” means “ownership”

When a person has title to property they have “ownership rights”. The deed is the document that describes the physical boundaries of property, BUT it does show the appurtenances that come with it.

Appurtenances are the rights that come with ownership of the property.

There are many ways to convey OR transfer the ownership of property. Before we discuss the purchase and sale agreement, we will first describe the other methods of transferring title.

Alienation of Title

Alienation is the conveyance OR transfer, whether voluntary OR involuntary.

It is the opposite of the acquisition of property.

Acquisition of property is when a person receives ownership of property

Alienation is when a person gives up ownership

When a person alienates a property, they give up title to it.

Alienation can be voluntary OR involuntary.

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Voluntary alienation is transfer of ownership by:

· Sale

· Gift

· Or will

Involuntary alienation exists when property is transferred without the consent of the owner, by operation of law compelling the owner to give up title without consent.

Forfeiture

Forfeiture is the loss of an owner’s property to the government because it was used in the commission of a crime.

This could include crimes involving the manufacturing OR sale of drugs, in which the monetary gains from the illegal activity contributed to the purchase of the property.

Dedication

Dedication can be a gift of property to the public by an individual when there is NO consideration.

An example would be if a developer donated some land for a public use. The developer could dedicate the property by describing it in the plat, in a deed, OR in a will.

A statutory dedication is when the local government requires the developer to dedicate land for public streets in a proposed subdivision plan.

If the local government abandoned the public use of the land, it would revert to the developer (OR other owner).

Common law dedication of property is when an owner allows the public to use the owner’s property for a specific extended period of time.

Eminent domain

Eminent domain is the government's right to take property for public use.

The government OR an authorized private entity (such as a utility company) can acquire title to private property for a public use, BUT fair and just compensation MUST be paid to the property owner.

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The owner may be awarded "compensatory damages" for the value of real property that was taken.

If ONLY part of an owner’s property is taken, the amount of compensation will be for that part ONLY.

The owner may ALSO be entitled to "severance damages" for the loss in value to the portion left, as "consequential damage" for the loss of usefulness of the surrounding property.

If taking part of a property, OR adjacent property causes extreme damage, the owner may demand an "inverse condemnation".

If the owner can prove the damage, the owner may be entitled to the fair market value of the remaining property.

HOWEVER, property owners are not entitled to compensation for any loss of use of their property IF the land use is restricted because of zoning changes.

Condemnation Proceedings

Condemnation is the process that the government uses to take private property by eminent domain.

Once it is determined that the property is needed for a public purpose, the government can purchase it from the owner.

The owners can refuse to sell their property to the government under eminent domain IF they file a condemnation lawsuit and win.

BUT, if the owner CANNOT prove that the compensation is unfair, OR that the use was not for the public, the court will order the property to be transferred to the government.

Adverse Possession

Adverse possession is a method where an otherwise “non-owner” of a property can acquire ownership of a property by taking actual, open, notorious, hostile and continuous possession of property, for as little as seven years, OR ten years depending on the required statutory time period.

IF each and every requirement above has been met, the Statute of Limitations gives the true owner ten years to begin action to recover possession and/or ownership of the real property.

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The statutory period is reduced to ONLY seven years if the adverse occupant is in actual, open, notorious possession under a claim of ownership made in good faith, AND the occupant has paid ALL taxes assessed on the property.

This means that the occupant could claim that title was conveyed under a written conveyance, BUT for some reason the title was defective, OR the claim was by some operation of the law from another person.

Actual possession means that the occupant used the property as an owner. Possession and use could include building and/or living on the property.

It could ALSO include evidence of:

· Landscaping

· Adding plants/shrubs

· Trees

· Fencing AND

· Grazing

The possession MUST have been exclusive and could not have ever been shared with the owner, neighbors, OR the public.

The property MUST have been under the exclusive control of the adverse possessor for the entire statutory period.

HOWEVER, the same person does not have to occupy the property during the statutory period.

“Tacking” is when the claimant might be able to “tack” the duration of possession of the previous adverse possessor IF they were the successors OR heirs of the claimants.

The possession MUST have been open and notorious so that an owner would know OR reasonably have known.

The adverse possession MUST have been hostile by the making of claims of ownership, and by rejecting any claim of any other owner.

This does not mean any type of physical conflict has to occur to be considered hostile.

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HOWEVER, if the owner has EVER given the adverse possessor permission to occupy land possession, it is not considered hostile.

This is true even if the owner gave permission at one time, and then later withdrew it.

In fact, the owner simply giving permission to use the property can terminate adverse possession any time during the statutory period.

The true owner can ALSO terminate the claim by taking over ownership rights and actual possession before the end of the statutory period.

The owner can ALSO start legal action against the occupant such as a "quiet title action" to obtain a judicial decree quieting title, OR by a court order to obtain a quitclaim deed from the former occupant.

This type of lawsuit could determine the credibility of such claims and bring about a decision as to ownership rights.

A judicial decree would give clear title.

The WORST thing an owner can do, (if he/she suspects that someone is trying to take adverse possession), is to do nothing.

The true owner MUST take action to protect their property from loss by adverse possession.

If NO ACTION is taken, and the required statutory period has ended, the owner will lose title and the new possessor will gain title.

Adverse possession CANNOT be claimed if the true owner’s property has simply been used, even if the USE was open, notorious, and hostile for continuous ten years.

Ongoing use could result in a claim to obtain a permanent, irrevocable right to use property by an easement by prescription.

This could occur by a person using a neighbor’s driveway for ten years. The neighbor is not actually possessing BUT is continuously using it.

If the true owner gives permission, OR otherwise reasserts ownership with in the required time period, the claim for an easement by prescription could ALSO be terminated.

The government can ALSO take private property by adverse possession, BUT not over land held by federal government, for public purposes.

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Property can ALSO be transferred OR conveyed by the death of an owner.

If a joint tenant dies, the interest in the property automatically passes to the surviving owners.

When ownership is held by tenants in common, if a tenant in common dies, the interest in the property may be willed to someone else OR pass on to the deceased tenants heirs.

In community property states, the real property owned OR purchased by either spouse is community property and title will automatically pass to the surviving spouse.

If a husband OR wife dies WITHOUT a written community property agreement and no valid will, the property will pass to surviving spouse.

If there is a valid will that names anyone other than the remaining spouse, ONLY one half of the property belongs to the surviving spouse and the other half may be willed to a different beneficiary.

If the husband and wife had a community property agreement, ALL real property will automatically be transferred to the remaining spouse, even though there may be a valid will.

Only separate property may be willed.

In a life estate, the duration of the estate is based on a certain person's life. When the person dies (whose life was the basis for the duration of the life estate), the ownership of the property will automatically revert to the grantor, OR it will pass on to the remainder-man.

Probate

Probate is the court process taken whether the person left a will OR died without leaving will.

When a person dies without leaving a will, the person has died "intestate”. If a person leaves a will, the person died “testate”.

In probate, the deceased's assets are accounted for and the claims of legal creditors are paid. Then the remainder of the estate is distributed according to the will, OR if there is no will, according to state law.

The “executor” named by the deceased in the will distributes the deceased’s estate.

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The real property is transferred by devise. Personal property passes by "bequest".

A will is a document drawn by a person who intends it to be a "testament" of the deceased’s desires as to how to dispose of the deceased’s property.

Usually, the will MUST be made by a competent person over 18 years old, in writing, and signed by witnesses.

Some states allow a handwritten will to be considered valid.

In Washington, these “holographic” wills are considered legal if the testator wrote it while living in a state that did consider the will to be valid, and then moved to Washington without making another will.

A change in a will is called a "codicil". Wills can be changed at any time during a person’s life.

Operation of Law

A partition suit can be brought by a co-owner of a property, to force the other owners to buy out the co-owner, allows the co-owner to buy out the other owners, OR to sell the property to terminate their interest.

A divorce decree could ALSO be much like a partition suit because it may transfer property from both spouses to one, OR order the property to be sold, and the proceeds divided according to the decree.

An execution sale may force the transfer of property to pay off creditors in a bankruptcy OR judgment of foreclosure.

Accession

Property can ALSO be transferred by physical actions caused by natural OR man-made causes.

A natural, physical action that creates the addition of property is “accession”. Accession can occur through accretion, alluvion, reliction, erosion and avulsion.

Alluvial soil is the addition of property by the gradual deposit of soil through natural causes. The process of the accretion of soil is called alluvion.

Reliction is when water gradually recedes from the normal high-water mark and uncovers land that becomes the property of the adjoining riparian owner.

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Erosion is actually the opposite of accretion. It is the loss of soil due to natural causes, such as water currents OR wind.

Avulsion is the sudden ripping OR removal of property by water action. Although the owner has the right to reclaim lost land within the original boundary lines, if no action is taken it then becomes a part of the property on which it was deposited.

Man-made accession would be an attachment of fixtures.

Requirements for Valid Deed

A deed is a written instrument that is used to convey title. Title is not an instrument OR a document at all. Title is the term used for “ownership”.

The deed is the written evidence that, unlike a contract, does not require that the grantee is competent, nor does it require an offer and acceptance OR any consideration.

A valid deed requires that it is:

· In writing

· Contains a granting clause

· Describes the property

· Identifies the grantor and grantee

· Signed by grantor AND involves a

· Competent grantor and existing grantee

In Writing

The real estate licensee MUST not HELP OR ASSIST the client by filling in any blanks on the forms and MUST not ADVISE the client in selecting the type of statutory deed form to use.

To do so would be an illegal practice of law.

If the client has questions OR concerns regarding deeds, the decision should be made ONLY after obtaining competent legal advice.

Any changes OR modifications made to a form should ONLY be done by the client, with the assistance of an attorney.

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Granting Clause

The grantor MUST indicate a transfer of interest to the grantee by using words such as, "grants", "conveys", "transfers", OR "releases".

The indication of this transfer MUST be for the present time, rather than a future date.

A habendum clause sometimes follows a granting clause if there is a definition OR a limit to the quantity of the estate being conveyed.

This habendum clause will begin with "to have and to hold "; HOWEVER, it usually used ONLY when the estate being transferred is not a fee simple.

The deed may ALSO contain:

· Covenants

· Conditions AND

· Deed restrictions

· Restrictions can include requiring that the grantee DO something OR not do something that concerns the estate.

The restriction may be in the deed itself, OR in a separate instrument with a reference to it.

If a restriction OR a covenant is violated: the grantee may be

· Required to remedy the violation

· Be sued for damages, OR

· Face an injunction

A condition is a qualification on which the estate is granted.

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This means the conveyance is “only as long as”, OR “provided that”, the grantee DO something.

If violated, a reverter clause will cause the grantee to lose title, which will then revert back to the grantor.

Adequate Description

A street address is not necessary in the deed.

A legal description such as lot and block, government survey, OR metes and bounds are usually used.

An insufficient description of the property could make the deed void.

Exceptions OR reservations may ALSO describe the conveyance by allowing the grantor to withhold parts of the property as an exception, OR reserve some of the property OR property rights being conveyed with a reservation.

These exceptions and reservations stay in effect even if the grantee sells property. The ONLY person who can remove the exceptions OR reservations is the original grantor, heirs OR successors.

Identifies the Grantor and the Grantee

The actual names of the grantors and the grantees MUST be used. "Et al”, meaning "and others", OR “et tux”, meaning "and spouse", are not acceptable.

If a corporation is the grantor OR grantee, the name of the corporation may be used, BUT the shareholders need not be named.

If the grantor OR grantee is an unincorporated group, the name of the trustee OR the members may be used.

Marital status is not required, and misspelled names will not make the deed invalid if the parties can be identified.

If a person has used more than one name, ALL names ever used should be shown and signed by the person conveying the property (grantor).

ALL owners MUST sign.

If the grantor is illiterate, the grantor may sign with a mark in the presence of two witnesses.

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A person with written power of attorney, recorded in the county in which property located may ALSO sign for the grantor.

When the grantor is a corporation the authorized officer would sign.

When the grantor is a trust OR unincorporated group, the trustee, OR a person with written authority for the group may sign.

The deed is void if

· Signature is forged OR

· Unauthorized OR

· If ALL owners don't sign

The deed does not need to be dated to be valid.

The date of the deed is presumed to be the date of delivery and it becomes effective as of that date.

Delivered to the Grantee

The grantee MUST be a real person OR business entity, capable of accepting delivery that exists at the time of delivery.

It does not matter if the grantee is competent OR not, and it does not need the grantee’s signature.

The deed does not convey title UNTIL it is delivered by the grantor and accepted by grantee.

Although the deed does not have to be recorded, it is wise to do so.

A deed can be delivered by the grantor giving the deed to the grantee, OR the grantor could establish escrow instructions to deliver it.

There could be conditions imposed by the grantor to deliver the deed upon some occurrence, BUT as long as the grantor has given up control to the escrow licensee, it CANNOT be taken back and delivery is valid.

The delivery is effective even if the grantor dies while the deed is in the possession of the escrow licensee.

HOWEVER, if the grantor:

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· Signs deed and puts it away, OR

· Allows a third party to keep it with understanding that it can be returned to grantor upon request, NO delivery exists.

The intention of grantor MUST be delivery. The deed itself CANNOT be transferred OR assigned OR given to another person OR entity.

If the deed has been delivered, the ONLY way the grantee may transfer title would be to prepare a new deed and sign it as the grantor.

The grantee does not have to take any action to show acceptance. UNLESS the grantee rejects the deed, it is presumed to be accepted.

Competent Grantor

A deed is invalid if the grantor was legally incompetent when the deed originated.

The deed is void if the grantor was declared mentally incompetent OR if the grantor died PRIOR to delivery.

The deed is voidable if the grantor was a minor OR if the grantor was competent at the origination, BUT not competent at time of the delivery.

Property may be conveyed by a minor OR by a person that is not competent IF a:

· Court-appointed guardian OR

· Conservator conveys it for the person

Example

Harry wants to give his friend Suzy a view lot. Harry has his attorney write a deed of conveyance that reads:

"I, Harry Gray (grantor), convey to Suzie Trophy (grantee), the real property described as Lot 21, Block 54, Sunrise Heights Addition, Spokane, Spokane County, Washington".

Harry then delivers the deed to Suzie. Harry is of legal age and is competent.

The conveyance is valid.

Types of Deeds

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When a property is sold, gifted OR otherwise transferred, there is usually an agreement by the seller to provide:

· Marketable title

· Free of undisclosed encumbrances AND a

· Standard coverage title insurance policy

There will ALSO be a clause that will describe the type of deed to be used to convey title at closing.

At OR before closing, the seller will ALSO to pay ALL encumbrances and/or any liens that the buyer is not assuming.

Any other encumbrances that are to remain after closing MUST be disclosed in the purchase agreement.

Types of deeds have different warranties that describe the condition of title being conveyed. The deed itself does not “warrant” the condition of building OR structures.

Warranty Deed

Most often the buyer will demand that the seller give the buyer a warranty deed.

The warranty deed provides greatest protection for the grantee, BUT it ALSO creates the greatest liability for grantor.

The warranty deed is most desirable form for the buyer.

The warranty deed protects the buyer with covenants, OR “warranties”.

Even though these covenants are not usually written in the warranty deed, the fact that a warranty deed is used implies that they exist.

There are five covenants:

1. The covenant of seisin means that at time of conveyance, the grantor had an indefeasible fee simple estate. Seisen OR “color of title” means that the grantor has a reason to believe he OR she has ownership.

2. The covenant of the right to convey means that the grantor is the owner OR is authorized to act on behalf of the owner, with a fee interest, with no conditions restricting title, and that the owner has right to transfer the ownership to another person.

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3. The covenant against encumbrances warrants that at time of delivery of deed, the property was free of ALL encumbrances unless they are written in the deed.

4. The covenant of quiet enjoyment means that the grantor warrants that the grantee will have quiet and peaceful enjoyment of property and is protected by any legal claims of ownership by third parties. The grantor warrants that claims of liens OR a superior claim to the property will not disturb the grantee.

5. The covenant of warranty means that the grantor will be responsible to defend title and reimburse the grantee for loss from lawful claims against any superior claims that existed when the property was transferred. This warranty extends back and is not limited to the time period of the grantor's ownership and does not expire with the death of the grantee.

Special Warranty Deeds

The special warranty deed is actually a limited warranty deed.

The warranty deed implies five covenants, BUT the special warranty deed expresses in writing the limits of the covenants by protecting against defects, except as specifically written into the special warranty deed.

The special warranty deed ALSO allows the grantor to add provisions and other covenants.

The grantor limits OR extends certain warranties by specifying them in writing in the deed.

The special warranty deed contains the same statutory covenants and will still convey after-acquired title rights, BUT, unlike the warranty deed, it protects ONLY against encumbrances that were by OR suffered by the grantor during the time period that the grantor had ownership.

ONLY the warranty deed will protect against undisclosed encumbrances placed on property while grantor was not the owner.

The grantor does not warranty any defects that existed BEFORE the grantor held title.

Trustees, executors, OR entities such as corporations often use the special warranty deed. This is because these entities would not have the authority OR knowledge of PRIOR events to make further warranties.

Special warranty deeds are often used when the buyer is purchasing the property on a land contract over a period of time.

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The seller retains legal title to the property while the buyer makes installments, so the seller would not be wise to warrant against the acts of the purchaser UNTIL the balance is paid in full.

Quit Claim Deed

The quit claim deed offers the grantee the least amount of protection of ALL deeds. It ONLY “quits the claim”, that the grantor held whether OR not the claim of the grantor is valid.

The quit claim has ONLY the warranty that whatever interest the grantor had, is now transferred to the grantee.

The grantor is not held to any warranties.

ANY and ALL legal OR equitable interest that the grantor may have had at time of executing the quit claim deed will be transferred to the grantee.

The quit claim deed does not imply that the grantor has an interest.

In fact it may convey no ownership rights at all.

It ONLY releases any claims of grantor to rights to the grantee.

The quit claim deed is commonly used to correct a minor defect OR "cloud" on a title, such as a removal of an easement, encumbrance OR name change, to secure a clear title report.

Rather than containing a “granting clause” OR “conveyance”, it will include a “release” OR “remise” of interest.

The quit claim deed has the same validity and priority based on the date of recording as warranty deeds.

A quit claim deed will not transfer any rights a grantor may acquire in the future.

Other Deeds

· Trustee's deed conveys title to property sold at trustee's sale from default of deed of trust

· Sheriff's deed conveys title sold at sheriff’s sale under foreclosure OR judgment

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· Deed in lieu of foreclosure, OR voluntary foreclosure is when a Borrower gives deed to lender to avoid foreclosure

· Mining deed transfers mineral rights

The Unauthorized Practice of Law

A real estate licensee can fill in the blanks of a standard purchase and sale agreement form and obtain the signatures of the parties in a typical a transaction.

The licensee is not allowed to charge a separate fee in addition to the commission for completing the forms.

Although filling in the blanks IS practicing law, when done according to the guidelines, it is not considered to be an illegal practice of law.

ONLY a real estate licensee may legally complete the form for another person.

An unlicensed assistant OR employee may not complete an earnest money OR purchase agreement.

It is legal for a buyer and seller to get together and write his OR her own agreement. HOWEVER, it is not advised.

· It is not legal for an unlicensed person, who is not a principal to the transaction, to write OR prepare an agreement on behalf of the parties.

The real estate licensee’s authorization is limited to the preparation of routine purchase and sale agreements using standard “fill in the blanks” forms.

Attorneys with real estate law expertise almost always write the provisions contained in these original forms.

These forms MUST be plain, simple, standardized forms that are approved by the managing broker. The licensee may not draft these forms.

The transaction MUST be in the usual course of the normal brokerage business. When the licensee is filling out these forms, the licensee is held to the same standard of care that is demanded of an attorney.

If the transaction is beyond the expertise of the licensee, OR involves complicated legal issues, the licensee should advise the parties to seek legal advice.

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If a licensee prepares a contract improperly the licensee would be liable for any damages caused to either party.

Licensees are NEVER advised to go beyond filling in the blanks and preparing simple, brief addenda and other simple forms.

Problems often occur when the licensee inserts complicated written clauses into the form to make it conform to a special use OR condition OR gives interpretations of the pre-written form.

The real estate licensee can be prosecuted for simply giving legal advice, whether accurate OR not.

The unauthorized practice of law by a person who is not member of the state bar is guilty of a misdemeanor, which is a criminal offense.

The Director of Licensing could ALSO suspend OR revoke the licensee's real estate license.

Example

Ken wants to sell his house. Barb wants to buy it.

They get together and prepare a purchase agreement and they each sign it. It closes.

This is legal.

Let’s now suppose that Ken wants to sell his house and Barb wants to buy it. Barb asks her friend, Skippy, who took a real estate class four years ago, to write up the sale agreement. Skippy writes up the contract between Ken and Barb.

This is illegal.

Ken wants to sell his house and Barb wants to buy it. Ken calls Bruce the licensee, to list the house and sell it to Barb. Bruce is not familiar with residential sales, so he calls his friend Madge to help him write it up. Madge is ALSO licensed, BUT she charges Barb $250 for writing up Bruce’s transaction.

Madge’s action is illegal.

Ken calls Bruce to list his house. Bruce sells the house to Barb, BUT during the transaction Barb asks Bruce how this sale will affect her divorce settlement. Bruce advises Barb to go ahead with the sale because it won’t affect the settlement because she is not yet divorced.

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Bruce is guilty of the illegal practice of law.

Purchase and Sale Agreement Forms

The real estate purchase and sale agreement with earnest money provision may ALSO be called an, "earnest money receipt", "purchase and sale agreement", "earnest money agreement", "offer to purchase and contract to sell", and other titles.

No matter what it is called, this instrument functions as a receipt of the earnest money deposit, and when accepted, as a contract between the buyer and the seller.

Washington does not have a “standard” purchase and sale agreement form that is used by all real estate licensees.

There are many types of forms available through:

· Multiple listing services

· Office suppliers

· Professional organizations AND

· Legal form publishers

Some forms include specific directions for filling in each blank and space. Licensees should understand ALL aspects of the form that the managing broker uses.

To avoid complications, licensees MUST use the correct form for the intended purpose.

For instance, a purchase and sale agreement form that is written and intended for residential sales should not be used for bare land, commercial, OR other types of sales.

Besides using ONLY the correct form, the licensee should ALWAYS fill in ALL blanks and spaces.

Rather than leaving any space blank, the licensee should write in the appropriate information OR "N/A,” meaning non-applicable.

ALL lines OR spaces for initials OR signatures OR boxes for choices MUST be checked off and OR filled in.

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NO blanks should be filled in after the sale has occurred.

The purchase and sale agreement, OR earnest money agreement, is much more than a receipt for a deposit OR a preliminary agreement to purchase.

Once it is properly executed and accepted by ALL parties, it is a legally binding contract that holds the buyer and the seller to the original terms of the agreement until closing.

NEITHER party may make ANY changes OR additions without the written consent of the other.

In most cases the buyer gives the seller an earnest money deposit with their offer.

The real estate licensee is authorized to deposit the earnest money into the managing broker’s trust account on behalf of the seller.

The purpose of the deposit is to show good faith to the seller.

The earnest money agreement OR purchase and sale agreement is the buyer's receipt of the deposit, AND an offer to purchase.

The offer is written on a purchase and sale agreement form, and the buyer signs it.

The offer is then presented to the seller for acceptance, a counter offer OR rejection.

If the seller accepts the buyer's offer, WITHOUT any changes, the seller signs the agreement, which becomes a binding contract.

If the seller makes ANY changes whatsoever, it becomes a counter-offer to the purchaser.

OR, the seller could simply reject the offer.

Although the essential elements required for a valid enforceable contract are basic, most purchase and sale agreements contain very detailed descriptions of the transaction.

Making sure that each and every detail is made absolutely clear, in writing, in the purchase and sale agreement, can prevent many potential disputes.

The purchase and sale agreement should contain ALL of the conditions and time frames that MUST be met to enable the sale to close.

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These conditions can include giving the buyers a certain amount of time to arrange for a certain type of a loan, OR to obtain a title search, make inspections of the property, etc.

It can ALSO allow for the seller to complete any repairs required by the lender, pay outstanding liens, etc.

The Purchase & Sale Agreement

The purchase and sale agreement is a contract intended to protect the parties of the transaction by providing legal recourse in case either party defaults. In the case of default, either party has the right to sue for specific performance.

This means that if one party did not go through with the transaction, through no fault of the other party, the court could order the defaulting party to go through with the sale OR could award monetary damages to compensate for losses resulting from the breach of contract.

Key Provisions

The Statute of Frauds requires every real estate purchase and sale agreement to be in writing. To be an enforceable contract the earnest money agreement MUST contain:

· An offer and acceptance between competent parties

· Consideration (promise to sell, for promise to buy)

· Identification of the buyers and sellers

· Legal purpose

· An adequate description of the property

· Total price and terms

· Liens OR encumbrances buyer will assume

· Any conditions OR contingencies in writing

· Date of possession

· Date of closing

· Type of deed and condition of title

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General provisions

· Notices are to be written, signed, and delivered to the party OR representing broker

· That notice to selling broker is considered to be notice to purchaser whatever the agency relationship

· Method of giving and receiving notices

· An agreement if faxes can be used

· An agreement that ALL agreements will be in writing to prevent alleged verbal agreements

· An agreement to pay reasonable attorney fees in case of a dispute

Responsibility for Information

The agreement should contain a “Responsibility for Information” provision that acknowledges that licensees are not the source of the seller’s property information.

Washington law says that the licensee has no duty to independently investigate information OR to inspect the property UNLESS the licensee agrees to do so.

The earnest money MUST ALSO show the date that the offer was written. This is different than the acceptance date and is used as a reference.

Identification of Buyer and Seller

The parties to the purchase and sale agreement MUST have the capacity to contract.

This means that the buyer and the seller MUST be of the age of majority, and mentally competent, OR the contract will be voidable OR void.

To create a binding contract the buyer and the seller MUST be clearly identified.

The buyer MUST ALSO have the authorization to sign to avoid future problems that could come from an owner’s death, OR incompetence.

When the real estate licensee prepares an offer to purchase, it is important that the offer is written legibly.

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The purchaser's complete and proper names should be used, including middle initials, and Jr., Sr., I, II, etc.

The person's legal status should ALSO be used, such as:

Robert J. Smith, an unmarried person,

Patrick D. Land and Patricia T. Land, husband and wife

Washington law requires both the husband and wife to sign in any purchase of community property.

The real estate licensee CANNOT ask if the parties are legally married OR know for certain if the property is community property, so the licensee should obtain the signatures of BOTH spouses.

Or, when the purchaser is a legal entity, the corporation and the d.b.a. MUST be used.

Example: Fantastic Enterprises, a Washington corporation, d.b.a., Curlie’s Hair Salon.

When the owner is a corporation, partnership, OR other entity, legal authority MUST be established to sign the contract.

Documentation of legal authority to sign on behalf of the entity MUST be given to the closing attorney OR escrow licensee PRIOR to closing.

HOWEVER, it is not the responsibility of the closing attorney OR escrow licensee to validate the authorization.

If there is any question as to the authorization, the buyer should contact his or her own attorney before signing the contract.

The name of the entity, as well as ALL names of ALL general partners, including spouses, the address and the state in which the entity was formed OR incorporated should ALSO be written in the contract.

ALL persons and OR entities that will have an ownership interest in the property MUST sign the contract.

If a buyer were to be an owner, BUT does not sign the contract, the non-signing buyer would not be able to enforce the contract.

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The licensee should advise the purchaser to seek legal and tax advise if they don’t know OR have not yet decided how to take title, OR which legal relationship to use, such as joint tenancy, corporation, tenants in common, etc.

Advising the purchaser how to take title is an illegal practice of law.

Earnest Money Deposit

Most often the buyer will give the licensee earnest money in the form of a check, which MUST be turned over to broker immediately.

UNLESS otherwise agreed in writing, earnest money MUST be deposited within 24 hours of receipt, into a trust account as specifically stated in the earnest money agreement.

This is most often the selling managing broker’s pooled trust account.

When the earnest money is $5,000 OR LESS, it would be kept in the pooled trust account, with the interest from the account paid to the state Housing Trust Fund.

If the check is $5,000, OR MORE, then the parties may decide to have it deposited into a separate trust account, with the interest paid either to the party as specified in the agreement.

If the agreement is accepted, the earnest money becomes part of the purchase price.

If the seller rejects the offer, the earnest money is returned to the buyer.

If the earnest money is returned to the buyer, the buyer should sign and date a receipt and the managing broker should keep the receipt in transaction file.

The amount of the earnest money deposit MUST be written in BOTH numbers and spelled out in writing.

The form of earnest money MUST be clearly stated, such as cash OR check and, if in a promissory note, a copy of the executed original note should be attached.

Notes MUST have an actual day, month and year when the note is due and payable. It may ALSO be due “upon acceptance”, OR some other negotiation.

The note should NEVER be “due at closing” which provides almost no protection for the seller.

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Notes are not favored and should not be used when a buyer does not have sufficient cash to make a deposit.

If the note is payable to the managing broker, and buyer does not pay the note by the due date, the managing broker MUST immediately notify the seller.

If personal property is taken as earnest money, the property MUST be described, and verification MUST be made that the purchaser holds title to property pledged.

There is no “standard” amount of earnest money that is appropriate. The amounts seem to vary according to local customs BUT can be any amount that is agreeable by BOTH parties.

The buyer should consider placing a substantial amount down as earnest money, so the seller will see that this is an offer from a willing and able buyer.

For instance, if a buyer was making an offer on a property for $300,000, and made deposit of $100.00 earnest money, the seller may not consider the buyer to be serious about the purchase OR might think the buyer is not qualified to close.

Property Description

The purchase and sale agreement contains blanks to fill in, to identify the county, and the street address. It ALSO has a larger blank for the legal description. A complete legal description should always be used.

A street address is NEVER adequate. Over time, various uses of the land may occur and the street address is a location device for an improvement on a property but not for the property itself on a permanent basis. Improvements may be razed, and parcels of various legal descriptions combined and uses changed such that an address that at one time located an improvement may cease to exist.

If the space is not large enough for the complete legal description, an addendum should be marked “exhibit A” and referenced and attached to the agreement.

It is best to photocopy the legal description onto the addendum from an original instrument. It is a good idea to check the legal description with tax records OR title company information.

The legal description MUST be accurate to convey the correct property, including easements and other property rights.

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Where title has been opened as part of the listing agreement, it is common for some title companies to provide an "Exhibit A" consisting of the complete legal description with signature spaces for Buyer and Seller

Price and Payment

The total price in writing and numbers, including the earnest money deposit and mortgage loans OR liens that the buyer will assume, MUST be stated in the agreement.

The method of payment can be by the purchaser taking out a loan, OR by paying ALL cash at closing, OR by the seller financing some OR ALL of the purchase price, OR by a combination of many methods.

The method of payment MUST be specifically described, and the dollar amounts MUST add up to the total purchase price.

Lender Financing

Many times the property will be paid for by lender financing. Many times sales are contingent upon the purchaser’s ability to obtain a mortgage loan.

Example

Earnest money of $2,000 (two thousand dollars) has been deposited into the selling managing broker’s trust account and will apply to the purchase price at closing.

The total purchase price is $148,950. (One hundred forty-eight thousand nine hundred fifty dollars.)

To be paid as follows:

All cash at closing, including earnest money as receipted above, by purchaser applying and obtaining a (conventional/FHA/VA, etc.) loan, paying the balance in full at closing.

Assumption of an Existing Loan

Another method of payment is by the purchaser assuming an existing loan and paying the difference in cash at closing.

Example

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Earnest money of $2,000 (two thousand dollars) has been deposited into the selling managing broker’s trust account and will apply to the purchase price at closing.

The total purchase price is $148,950. (One hundred forty-eight thousand nine hundred fifty dollars.)

To be paid as follows:

The purchaser will assume the seller's existing mortgage of $110,000 (one hundred ten thousand dollars).

The earnest money, as receipted above, will apply to the balance of $38,950 (thirty-eight thousand nine hundred fifty dollars) which will be paid in cash at closing.

Seller Financing

When seller financing is used, the terms are not standardized, as in lender financing.

This will require MORE expertise and caution on the part of the real estate licensee.

Because the purchase and sale agreement does not specify the terms for seller financing, the terms MUST be written into the body of the purchase and sale agreement.

The use of the Seller Financing Addendum is strongly recommended.

The essential terms of seller financing include:

· The principal amount

· The rate of interest

· The date interest begins

· The essential terms of seller financing include:

· The amount of payments

· The date payment is due

· Where payment is to be paid

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· Balloon payments, if any

· Final payment date(s)

· Pre-payment penalties, if any

· Due on sale OR encumbrance provisions

· Grace period

· Default interest rate provision

Example

Earnest money of $2,000 (two thousand dollars) has been deposited into the selling managing broker’s trust account and will apply to the purchase price at closing.

The total purchase price is $148,950. (One hundred forty-eight thousand nine hundred fifty dollars.)

To be paid as follows:

The purchaser will pay $48,950 (forty-eight thousand nine hundred fifty dollars) including the receipted earnest money, in cash at closing.

The balance of $100,000, (one hundred thousand dollars) to be paid in accordance to the Seller Financing Addendum attached, and referred to as exhibit “A.”

The licensee will fill in the blanks of the Seller Financing Addendum to show the:

· Interest rate

· Amount of payments, and ALL OTHER

· Terms AND

· Conditions of the contract

This addendum is an integral part of the earnest money agreement and a copy of the entire agreement MUST be given to ALL parties of the transaction.

Other possible types of financing include the assumption of an existing contract, taking a property "Subject to" the existing financing, wrap around mortgage, OR seller financing with underlying loan combination.

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If any of these types of financing are used, copies of the assumed OR “subject to” instruments MUST be attached.

Suggested Earnest Money Receipt and Agreement Language

Cash Sale

Earnest money as receipted above. The full balance of the purchase price plus required costs to close will be payable at the time of closing.

Conventional Loan

Earnest money as receipted above. The sale is conditioned on the buyer applying for and obtaining a _____ year ______% conventional loan at an interest rate not to exceed ______% per annum paying the seller in full. The buyer will pay by cash or cashier’s check the balance of the down payment, closing costs, loan cost and reserves as required by the lender. (If the seller will be paying any of buyer's costs or points you need to note this).

FHA 203B Loan (standard FHA loan)

Earnest money as receipted above. The balance due the seller will be paid for by buyer applying for and obtaining a maximum (or the appropriate loan percentage) FHA 203b loan. Buyers will pay their own allowable loan costs. Purchase will pay the balance of funds required to close the transaction by cash or cashier’s check at closing, including the establishment of a reserve account.

FHA ARM Loan

Earnest money as receipted above. The balance due the seller will be paid by buyer applying for and obtaining a maximum (or the appropriate loan percentage) FHA ARM loan. Buyer will pay the balance of funds needed to complete this transaction by cash or cashier’s check at the time of closing, including the establishment of a reserve account.

FHA-VA Loan

Earnest money as receipted above. The balance due the seller will be paid by buyer applying for and obtaining a maximum (or the appropriate loan percentage) FHA Veterans loan. Buyer will pay their allowable loan costs. Buyer agrees to pay the balance of the funds needed to complete this transaction by cash or

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VA Loan

Earnest money as receipted above. The balance due the seller will be paid by buyer applying for and obtaining a maximum (or the appropriate loan percentage) Veterans Administration loan. Buyer will pay their allowable loan costs. The earnest money deposit may be applied toward the buyers prorates and the establishment of a reserve account. Buyer will pay any funds required to close this transaction by cash or cashier’s check at the time of closing. Seller will pay all of the closing licensees fee as required by the VA (Be sure to clarify whether the VA funding fee will be paid at closing or added back to the loan. If buyer is a disabled veteran the fee may be waived).

NOTE: It is also allowable for the seller to pay all or part of the buyers closing costs, loan costs, reserve account, and other prepaid items. Paying all buyers costs is sometimes called a “double zero down” loan. You may further secure your sale if you add language requiring the buyer to finance FHA-VA if straight VA financing is not available.

Deed of Trust or Real Estate Contract

Earnest money as receipted above. $______cash down payment at the time of closing. The balance will be paid by buyer executing a note in favor of the seller, secured by a deed of trust on the subject property (if using a real estate contract add that in place of the “Note/Deed of Trust” language) payable at $______or more per month at buyers option, including interest at the rate of ______% per annum on the diminished balance. (Be sure to note any balloon payments.) Monthly (or quarterly, annual, etc.) payments are due on the ______day of the month, with the first payment due 30 days after closing, until the balance including interest is paid in full. Buyer will name the seller as an additional insured (except on land sales) on the hazard insurance policy in an amount at least equal to the diminished contract balance until the entire contract is paid in full. Buyer will pay taxes and insurance premiums promptly as they come due and will provide evidence of such to the escrow licensee (or seller).

NOTE: It is always advisable to use an escrow licensee on contract or deed of trust sales.

Real Estate Contract Over an Existing Obligation (Wrap Contract)

Earnest money as receipted above. $______cash at the time of closing. The balance of the purchase price will be payable on a contract (or note/deed of trust, see above) payable at $______or more per month at buyer’s option, including interest at the rate of ____% per annum on the diminished balance.

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The first payment is due ___ days after the closing date. Monthly (or quarterly, annual, etc.) payments are due on the ____day of each and every month until the balance is paid in full. It is understood that there is an underlying obligation on the subject property, which provides for the payment of taxes, insurance and/or assessments. Buyer will name the seller as an addition insured on the hazard insurance policy in an amount at least equal to the diminished contract balance until the contract is paid in full. Should the reserve requirements on the underlying obligation be increased during the life of this contract, any increase in costs shall require a like increase in the monthly payment indicated above. At the time this contract balance is equal to the underlying obligation balance, the buyer upon paying the seller for the value of the reserve account will be entitled to have the escrow account closed and the deed delivered and will then assume the underlying obligation.

Side Contract with A Mortgage/Contract to Be Assumed

Earnest money as receipted above. The buyer agrees to assume the existing underlying obligation which has an approximate balance of $______, with present monthly payments of $______including interest at the rate of ______% per annum on the diminished balance, according to its terms and conditions. A copy of this instrument will be/is being provided to buyer. Mortgage/contract is to be current at the time of closing, with buyer assuming responsibility for the first payment due following closing. Buyer will reimburse the seller for the reserve account, if any. The remaining balance due will be payable on a contract/deed of trust bearing interest of _____% on the deferred balance with monthly payments of $______or more per month at buyer’s option. Monthly payment is due on or before the ______day of each and every month until paid in full.

NOTE: Be sure that in the body of the standard form you note that title is being passed subject to the assumption of the existing encumbrances, identify the escrow licensee, the approx. balance of the obligation, and the interest rate and payment currently charged on the obligation.

Assumption of an Existing Mortgage or Contract

Note: Be sure to state whether the assumption is to be formal or simple.

The difference between the sales price and the mortgage/contract balance is to be paid at the time of closing, less the earnest money deposit receipted above. Mortgage/contract is to be current at the time of closing with buyer assuming responsibility for the first payment falling due after the closing date. The buyer agrees to assume the existing obligation according to its present terms and conditions. The approximate balance of the obligation is $______drawing interest at the rate of ____% per annum on the diminished balance. Buyer will reimburse the seller for the reserve account, if any.

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New Construction-All In One The buyer agrees to deposit $______earnest money with the lender. The balance of the purchase price shall be paid in the following manner: (1) Seller of the lot will deliver to the lender financing the transaction title to the same. The lender is instructed to pay the balance due on the lot purchase at such time as the deed to the lot is recorded in favor of the lender for security purposes, and (2) the balance of the construction loan per a draw schedule to be established between the buyer, lender, and builder, and (3) the balance, if any, by cash or cashier’s check from buyer on the mutually agreed schedule.

New Construction-Presale or Spec Earnest money as receipted above. The buyer will apply for and obtain a/an (FHA, FHA-VA, Conventional, etc.-see above) loan paying the seller in full. Buyer agrees to pay loan costs and reserves as required by lender. Sale is contingent on buyer receiving and approving the following: (1) plot plan, (2) house plans, specifications, and materials list, and (3) cost breakdown. Builder will obtain all necessary building, utility, and heath permits required by local, state, or federal requirements. The standard 1-year builders warranty will be provided to buyer.

Points to Remember • All offers are required to be submitted to the seller until one has been accepted. • A purchaser may withdraw an offer at any time before the seller has accepted it. • It is necessary that the buyer sign the acknowledgment indicating that they have been notified that the seller has in fact accepted their offer. Although it is not legally required that the buyer sign this acknowledgment for the contract to be binding as long as some form of oral or written notice has been given, it is certainly the preferred method to prove notification to the buyer of the seller's acceptance. • Be sure to mention any personal property items that are to be transferred to buyer as a part of the sale. Many items are noted in the standard language potion of the purchase agreement but be sure that all negotiated items are included (such as drapes and /or window coverings, appliances, etc.). • Full disclosure is required when the buyer or the seller is a licensed real estate licensee or an officer, employee, or associate licensed to a corporation licensed as a real estate company. Be sure to insert the following statements into the purchase agreement: • Buyer/seller acknowledge that buyer/seller is a licensed real estate licensee in the State of Washington. • Buyer/seller acknowledges that the principals of the buyer/seller are licensed real estate licensees in the State of Washington. • Make sure that if there are any contingencies that you get signed addenda removing them per the dates required in the purchase agreement. • Be sure the seller's property disclosure statement (sometimes called a property condition checklist) is signed by all parties or waived in writing. • Be sure to attach any and all addenda, acknowledgments, or notices signed by

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Contingencies

Most offers to purchase will be binding ONLY if certain conditions are met. These conditions are called "contingency clauses" OR simply "contingencies”.

The MOST COMMON is the financing contingency.

Most buyers do not have the entire purchase price available in cash, so the purchaser may make an offer that is “contingent upon the purchaser obtaining financing”.

Another common contingency is for the sale and closing of the purchaser’s present home.

There are ALSO other types of contingencies that are a part of the purchase and agreement.

These contingencies apply to the condition of title, inspections, and damage to, OR destruction of the property, etc.

When a contract contains a contingency clause, the contract is enforceable ONLY IF the contingency is met.

If the contingency is not met, the contract is terminated, and the buyer will usually be entitled to the return of the earnest money deposit.

The parties are required to make a reasonable effort to meet the contingency.

For instance, the buyer MUST apply for financing, OR the seller MUST order the required inspections.

The contingency CANNOT be at the total discretion of ONLY ONE party.

There MUST be some real motivation for the party to fulfill the condition so that the contract will become binding.

If the controlling party is not obligated to meet the condition, the contract is considered to be an “illusory contract.”

Example

Jessica sells her house to Steve.

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Steve and Jessica enter into a purchase and sale agreement, contingent upon Steve’s obtaining and approving plans for a new swimming pool.

Steve has complete discretion to accept swimming pool plans, OR not. Jessica has no right to make Steve accept pool plans, so the contract is considered to be illusory.

The party who would have benefited from it if it had been met can usually waive a contingency clause.

Example

Jessica sells her house to Steve.

Steve agrees to buy the house, contingent upon a satisfactory termite inspection.

A few days later, Steve decides he wants the house, no matter what, and waives his right to have the termite inspection.

Jessica could not waive the termite inspection, but Steve could if he wanted to because Steve would have had the benefit of the inspection.

It is common for pre-printed forms to have spaces to fill in for various types of contingencies.

To prevent misunderstandings, ALL contingencies should include:

· A clear written description of the contingency

· Written directions of what MUST be done to meet the contingency

· Method of notification that condition is met or waived

· Specific date that contingency MUST be met or waived

· What happens if the contingency is not met OR waived in time?

The real estate licensee should ALWAYS use a pre-written, approved form for contingencies rather than attempting to write a complicated provision.

Contingencies should be brief and simple, OR completed by an attorney.

Writing lengthy OR complex contingencies can constitute the illegal practice of law.

Financing Contingency

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Because very few buyers are prepared to pay ALL cash at closing, most offers to purchase real property are written to be contingent on the purchaser obtaining a loan.

This means that the sale will not go through UNLESS the purchaser is able to get the type of loan that is described in the offer.

Maybe the purchaser has no more than 10% of the offered sale price to use as a down payment.

The purchaser would offer to purchase the property IF the lender will make a loan of 90% of the sale price.

The lender will have to consider the purchaser’s ability to repay the loan, as well as the value of the property that will be used to secure the loan.

The purchase and sale agreement will contain blanks within the finance contingency clause for the purchaser to describe the type of loan that the purchaser will apply for.

The financing contingency clause should contain the following:

· Amount of the loan

· Interest rate

· Amortization period

· Who pays loan costs and other fees

· How many days for buyer to make written loan application

· Time limit for purchaser‘s written commitment from lender

Most financing contingency clauses will require a written appraisal of the property.

If the appraisal shows that the property value is lower than the sale price, the buyer is allowed to pay the difference in cash OR terminate the transaction.

The financing contingency clause can ALSO require the seller to order inspections of the property and to comply with any work requirements.

The purchaser MUST make a good faith effort, as stated in the offer, to obtain the type of loan described in the agreement.

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The selling licensee should ask for evidence that the purchaser is pre-approved, OR at least pre-qualified to obtain the loan, so that the prospective purchaser does not waste the seller’s time.

Pre-qualified means that the purchaser has given information to the lender, BUT the information has not yet been verified.

This is usually a preliminary step to making an offer.

The lender can then determine, “based on the information that the purchaser provided”, that the purchaser may qualify for a loan up to a certain amount.

Pre- approved usually means that the lender has verified the information and the lender has approved the purchaser for the loan of a certain amount, subject ONLY to a few conditions, such as the appraisal of the seller's house.

The lender should provide a certificate of pre-approval for the purchaser.

When a sale is contingent upon financing, if the buyer is unable to obtain a loan according to the terms that are described in the offer, the purchaser can be released from the agreement and the earnest money deposit will usually be refunded.

Contingency on Sale of Buyer's Home

Sometimes a purchaser will make an offer to buy a home, BUT the purchaser MUST first sell his/her existing home.

OR, the purchaser makes an offer on a home, and has already sold his/her existing home, BUT the sale has not yet closed.

This results in a very common contingency in the purchaser's offer to buy a home.

The purchaser may make an offer to purchase a home that is contingent upon the purchaser entering into a purchase and sale agreement, OR “successfully closing the sale of the purchaser’s property”.

If a seller accepts an offer to purchase, that is contingent upon the sale of the purchasers existing home, the seller will usually require that this contingency be met in a short and specific amount of time.

The seller will usually want to continue to market the home and be able to accept other offers if the purchaser has not yet satisfied the contingency.

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This way, the seller would not lose a potential sale if the purchaser were unable to perform.

HOWEVER, sometimes a purchaser will enter into a purchase and sale agreement that is contingent on financing.

The purchaser’s existing home has sold, and the purchaser is planning to use the proceeds from the sale of the existing home for the down payment on the new home.

In order for the purchaser to qualify for the loan, the existing home sale MUST close.

Even if the purchaser has made an offer contingent upon financing, there may ALSO be the hidden contingency, which is the successful closing of the purchaser’s home.

If this is the case, the contingency should be clearly described in writing to avoid misleading the seller into believing that the ONLY contingency is based on obtaining a loan.

The purchaser’s sale could ALSO be contingent upon some type of condition and could possibly fall apart.

OR, the purchaser’s buyer could rescind, become incapacitated OR even die.

The seller MUST be informed of the actual circumstances, so that time will not be wasted on a sale that may not close.

It is wise to keep in mind that even when the contingency is the sale of the purchaser’s existing home, the sale will ALSO be conditioned on the funding of the sale, on OR before the closing date of new home.

If, through no fault of purchaser, the sale fails to close by that date, the agreement becomes null and void and purchaser may be refunded the earnest money deposit.

The time frames for the satisfaction of this type of contingency are ALSO important.

Although the purchaser will naturally want as much time as possible to find a buyer at the highest possible price for the existing house, the seller will normally want the transaction to close as soon as possible.

Enough time should be allowed for the purchaser to find a buyer and close the transaction, PRIOR to the closing date of the seller’s house.

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Continued Marketing and Bump Clauses

It may be more likely for a seller to accept a contingent offer IF the seller has the right to continue to market the house.

Most pre-printed purchase and sale agreement forms now provide for "continued marketing" of the property until the contingency is either satisfied OR waived, AND a “bump clause”.

The bump clause allows the seller to keep the home on the market until the contingency is satisfied.

With this clause, the seller can accept another offer if the first buyer does not satisfy OR waive the condition OR perform in the allowed time.

The bump clause is most often used when there is no real way to determine if the purchaser will be able to satisfy the contingency clause on time.

It is difficult, if not impossible, to predetermine how long it will take to sell and/or close the sale of the purchaser’s house.

If another purchaser makes an offer BEFORE the first purchaser has removed their contingency and the seller wants to accept it, the first purchaser will have to either satisfy OR waive the contingency, OR the agreement will terminate.

The purchaser is usually given a “bump clause” for a specific amount of time to either meet OR waive the contingency if a second offer is made.

This should ONLY be about 1-3 days.

UNLESS the purchaser can perform WITHOUT selling the existing home, the purchaser should not waive the contingency.

When the contingency is satisfied OR waived, the purchaser MUST give notice to the seller and the seller no longer has the right to continue marketing the house.

The seller may HOWEVER, accept backup offers until closing.

Example

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Bill makes an offer to purchase Rose’s property.

The purchase and sale agreement are contingent upon Bill accepting an offer to sell his existing home, located at 1234 North Road.

In the contingency clause it states that Bill will notify Rose, in writing, within 30 days after Rose’s acceptance of the agreement, of an accepted written offer to sell his home for a price and on terms to provide sufficient net proceeds to complete the transaction.

It ALSO states that Rose is allowed to continue to market her home until Bill meets OR waives his contingency, and that Bill will have a 2 day “bump clause”.

If Rose receives a second offer that she wants to accept, Bill will be given 2 days from the time Rose gives him notice, to either remove the contingency by satisfying it OR waiving it, OR Rose can accept the other offer.

Bill now has 30 days to enter into a purchase and sale agreement.

If Bill fails to provide Rose with the notice of his accepted sale within 30 days, OR if Rose receives another offer and Bill does not remove his contingency within 2 days of notice, the purchase and sale agreement becomes null and void, and Bill’s earnest money deposit will be refunded.

Assumption Contingency

Some offers will contain a contingency that the existing loan is freely assumable, OR that the lender will allow the purchaser to assume the existing loan based upon the purchaser’s qualifications.

When the purchaser is assuming the seller’s existing loan, the seller should require that the lender release the seller from any further obligation.

Copies of the loan documents and a loan assumption package should be ordered.

Inspection Contingencies

An appraiser can require an inspection contingency such as a pest inspection if there are indications such as wings, sawdust OR other signs of termites OR other pests.

Real estate licensees should avoid vague descriptions of inspection contingencies that can simply require that they meet with "satisfactory" test results.

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The word “satisfactory” is vague and can cause problems because the “satisfaction” is at the buyer’s discretion.

If the buyers simply say that they are not satisfied, even though the inspection was clean, their lack of satisfaction may be ALL they need to terminate the agreement.

It is always wise to describe exactly what would be satisfactory in writing, such as “repairs may not exceed $1,000”.

This written standard should be specific enough to satisfy both the purchasers’ needs and give the sellers adequate instructions to remove the contingency.

Maybe the purchaser does not want to buy a house that has ever had lead paint.

Even if the inspection states that the house is safe, and ALL lead paint has been covered OR removed, if the buyer simply does not want a house that has ever had any lead paint, and if the inspection reveals any past OR present lead paint, the purchaser may terminate the agreement.

The inspection contingency should contain the following:

· Who orders and pays for inspection

· When disapproval notice is due

· Method of giving notice of disapproval

· Seller’s remedy /option to make repairs OR terminate

· Time limit for purchaser’s re-inspection of repairs

· Who will get earnest money, if refunded

It is important to inform the seller that IF an inspection discloses any building code violations OR other problems, public authorities could require corrections, NO MATTER WHAT conditions of the contract contained.

Other Contingencies

Other contingencies can be anything that the parties wish to include in the transaction. Some examples could be:

· The purchaser obtaining a survey of the property

· Work exchanged for down payment

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· The seller showing boundaries to the purchaser

· The determination of the value of timber from the property

· A well test

· Participation in a 1031 tax free exchange

· A perk test for a septic system

· Or any condition the buyer and seller want to base their sale upon.

Title

The seller MUST provide marketable title at closing.

Title is considered to be marketable as long as there are no encumbrances OR that the buyer knows about and accepts any encumbrances and the encumbrance does not materially affect the value of property OR the intended use.

The purchaser's intended use MUST be determined, and the title commitment should be ordered as soon as possible.

Any documentation, such as CC&R's, restrictions and easements should be provided to the purchasers as quickly as possible.

Buyer is usually given a few days to review the title report and approve the condition of title.

Unless the buyer is assuming the existing loan OR mortgage OR taking the property “subject to” an existing loan, the seller MUST pay off the existing encumbrances to clear title on or before closing.

Title Insurance

It is customary for the seller to pay for standard owner’s title policy.

The purchase and sale agreement provides for a standard coverage policy and the parties should specify the name of the title insurance company to be used.

The standard title policy should not contain exceptions OR exclusions other than the standard exceptions pre-printed on the form, and any encumbrances OR defects in title that were stated in the purchase agreement.

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The purchase and sale agreement ALSO includes a provision for additional homeowner's protection and inflation protection endorsements.

Some title companies automatically include these endorsements.

These endorsements are applicable ONLY for one to four-unit owner-occupied properties.

This additional protection endorsement covers:

· Lack of legal access

· Enforced removal of the structure

· Unrecorded mechanic's OR materialmen's liens

· Violations of zoning ordinances

· Interference with use due to encroachment over adjacent land

· Violation of recorded covenants, conditions OR restrictions

· Sometimes against unrecorded taxes OR assessment liens

The homeowner's inflation endorsement increases coverage to keep up with inflation, to a specified amount that is in relation to the original face amount of the policy.

If for some reason title is not insurable, and CANNOT be made to be insurable before closing, the buyer could terminate the agreement and their earnest money could be refunded.

HOWEVER, the buyer ALSO has the right to waive the defects and purchase property with title in its present condition.

The buyer would be responsible for the expense of ordering an extended coverage policy, unless otherwise agreed.

Conveyance

Upon conveyance, title is to be free of any encumbrances OR defects, except those noted in the purchase and sale agreement.

The use of a warranty deed warrants that the seller has the right to pass title.

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When the sale is on a real estate contract BOTH parties must agree as to the type of conveyance instrument to be used, and a copy should be attached to the agreement.

When the agreement involves the transfer the seller’s interest, the seller will give the purchaser an assignment of contract and deed allowing buyer to receive title when the contract is fulfilled.

This is called "after-acquired title".

Included items

This clause is intended to avoid disputes as to what stays and what will be taken with the seller at closing.

The paragraph of included items usually lists items such as window coverings, air conditioning unit, wall to wall carpet, built-in appliances, trees and shrubs, etc.

These attached items are typically considered to be fixtures, which are part of the real property included in the sale.

IF any of these items are to be taken by the seller at closing, they MUST be listed within the purchase and sale agreement, OR on an attached addendum.

If other items are included in the sale, that are normally personal property such as refrigerators, washers, dryers, OR furniture items they MUST be listed in the included items blank, OR elsewhere in the purchase and sale agreement, to prevent misunderstandings over these items.

Seller's Disclosure Statement

The Seller's Property Disclosure Statement contains general information provided by the seller, as well as known material defects.

The seller has usually prepared a Seller's Property Disclosure Statement at the time of listing the property for sale.

If not, the real estate licensee should require the seller to provide one to the purchaser as soon as possible, preferably PRIOR to making an offer

Purchaser's Investigation Agreement

Purchaser’s Inspection and Investigation Agreement is contained in the purchase and sale agreement.

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This agreement is a contingency that allows the purchaser to investigate the possible discovery of any "material" items and conditions.

The purchaser has the right to inspect the property and investigate matters concerning the property for an agreed amount of time, which is typically about ten days.

If the purchaser discovers undisclosed material defects, the seller has the right to correct the conditions within an agreed amount of time OR the purchaser has the right to terminate the agreement.

Purchaser's Inspection and Investigation Agreement contains a list of some specific items that the purchaser MUST independently determine, as well as a statement that the licensees do not warrant the seller’s representations.

HOWEVER, the information that the seller provided in marketing the property is considered material for purposes of the purchaser.

It does not relieve the purchaser of the obligation to inspect the property OR mean that the seller OR licensees are not obligated to disclose known material defects OR those that they reasonably should discover.

Radon Gas and Lead Based Paint

These items are subject to specific disclosure requirements in different areas of the country.

Radon is becoming a more important issue because home construction in recent years has become more “airtight”.

The possible presence of lead-based paint in houses constructed OR before 1978 requires specific disclosure imposed under Washington law.

Limited Warranty Plan

The “implied warranty of habitability” means that new construction is fit to occupy and utilize as a residence.

Any other specific warranty MUST be specified in writing.

If the buyer OR seller wishes to purchase a home warranty, it should specify the type of warranty and who will pay for the warranty.

Assignment

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A purchaser may not automatically have the right to assign the accepted offer to another.

If the purchaser wants the right to assign the agreement, a written specific provision MUST be made.

If the purchaser wants to assign his/her position and does not have a written provision to do so, the purchaser MUST receive the seller’s consent to the assignment; HOWEVER, the consent CANNOT be unreasonably withheld.

Agency Disclosure Washington law requires a purchase and sale agreement to include the written disclosure of the agency relationship in the "Agency Disclosure" paragraph.

The licensee(s) MUST inform BOTH the buyer and the seller as to which party the licensee is representing. The initial disclosures may be oral OR written BEFORE the offer is prepared for the purchaser.

It MUST be confirmed in writing in a separate paragraph in the purchase and sale agreement before the purchaser signs and BEFORE presenting the offer to the seller for acceptance.

New Construction The purchase and sale agreement will contain a space for information on new construction that is required by federal regulations.

Closing and Possession

The purchase and sale agreement should contain the name of the closing attorney OR escrow licensee and the date for the final settlement OR closing.

The closing attorney OR escrow licensee is responsible for making sure that ALL conditions are met so that closing can take place.

Conditions and terms can include:

· Approval of inspections

· Title insurance

· Pay off of liens, and

· Preparing document, etc.

On the day of closing, proceeds are disbursed to the seller, the deed is delivered to the buyer, and ALL documents are recorded.

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The real estate licensee should stay in touch with the lender to better estimate a realistic closing date.

It is important to know about how much time it will take to meet ALL of the terms and conditions of the contract.

Time may be required for title insurance, appraisals, inspections, loan approval, and other possible terms of the contract.

The purchase and sale agreement contains two blanks for potential closing dates.

The first date is the actual closing date that was agreed upon by BOTH parties for settlement of the transaction.

The second is the termination, OR “drop dead” date.

If the transaction is not closed by this date, it is no longer a contract.

The transaction MUST be closed by the first date unless the transaction CANNOT be closed by that date, due to delays that are beyond the control of the parties.

The second date is not simply an extension.

If there are NO delays, beyond the control of the parties, and documents are ready to sign by the first date, the second date does not apply and signing MUST take place.

Unless the buyer and seller decide otherwise, possession of the property is normally transferred to the buyer at closing.

Possession may not be the same day as closing.

Sometimes the seller may need a little extra time to move out OR make some repairs for the new owner. This should be agreed to in writing in the purchase and sale agreement.

Early possession can cause many potential problems and is usually discouraged.

The seller will usually want an agreement that the property is to be maintained in its present condition until closing.

If early possession MUST be taken, a rental agreement subject to the Washington's Residential Landlord Tenant Act is strongly recommended.

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The rental agreement should show the amount of daily "rent" for every day that the purchaser has early possession.

In addition, the seller should keep their homeowner’s insurance in effect and let their insurance licensee know about the early possession to make sure that there is coverage.

The purchaser should ALSO obtain renter’s insurance during the early possession rental period.

Example

On May 4th, Sally writes a sale agreement conditioned upon her buyer Joe obtaining a FHA loan.

The lender tells Sally that it’s been taking 4 weeks for approval, and Sally has found that it usually takes about six business days after approval for the closing attorney to write the documents and close.

Sally suggests a closing date no sooner than 45 days from May 4th, and ALL parties agree and sign.

Sally allows 5 additional business days as the second closing date in case closing is delayed due to circumstances beyond the control of the parties.

Closing Costs and Pro-rations

The purchase and sale agreement should state which party is responsible for paying the closing attorney fee. It is typical for BOTH parties to split the costs at closing.

The real estate licensee should provide his/her client with an estimate of their closing costs, OR have the lender provide a good faith estimate.

The good faith estimate should include other items, such as:

· Loan costs

· Title insurance

· Prorations of taxes and insurance, etc.

When seller financing is used, the real estate licensee should suggest the use an escrow company to accept and disburse ALL payments from the purchaser to the seller.

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Making payments through an escrow company should be advised and encouraged.

FIRPTA

Foreign Investment in Real Property Tax Act OR FIRPTA is a federal law that will sometimes apply to a transaction when the seller is not a U.S. citizen.

FIRPTA requires the closing attorney OR the buyer to withhold a specific percentage (usually 10%) of the sales price from the seller and give the money to the Internal Revenue Service.

Although many residential transactions are exempt from FIRPTA, MOST purchase and sale agreements include a provision concerning compliance with this law.

Casualty Loss and Material Alteration

A necessary contingency issue is casualty loss.

The provision addresses destruction OR "material" damage, such as the home burning down after the conditions of the sale are executed BUT before the sale closed.

Normally until closing occurs, most of the risk of loss is with the seller, even if the purchaser has early possession.

An EXCEPTION would be made if the purchaser intentionally caused the damage OR permitted it to happen.

For instance, if the home was burned down OR the property was damaged PRIOR to the closing, the buyer probably would not have to go through with the sale.

Repairable damage probably would not allow the purchaser to terminate.

Time is of the Essence Most purchase and sale agreements contain "time is of the essence”. This means that the dates for performing and completing ALL conditions of the contract items are legally required and MUST be exact.

If the closing is set for a specific date and the closing does not take place on OR by that exact date the contract is void.

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Failure to meet any of the deadlines is a breach of contract. EITHER party may waive this clause to allow the other party to perform after the deadline, BUT unless there is a waiver, meeting ALL deadlines is considered to be an essential part of fulfilling the purchase and sale agreement.

Default This clause addresses the seller's remedies in case the buyer defaults. The purchase and sale agreement usually states that the seller would be entitled to keep the earnest money deposit without proving a loss if the buyer defaults.

In this case, the earnest money would be the ONLY remedy and the seller loses the right to sue the buyer for additional damages OR for specific performance.

HOWEVER, Washington law allows no more than 5% of the property's sales price to be treated as liquidated damages.

If a buyer deposits more than 5% of the sale price as an earnest money deposit, the seller could not keep any amount in excess of 5%.

The liquidated damages provision is contained in the purchase and sale agreement and MUST be initialed by BOTH the buyer and the seller.

If EITHER party does not initial the liquidated damages provision, it CANNOT be enforced and the seller retains the right to sue the buyer for additional damages. BOTH parties MUST agree to the automatic forfeiture of earnest money, OR both MUST agree not to allow the automatic forfeiture, OR there is no mutual acceptance. If the parties CANNOT agree as to who is entitled to the earnest money deposit in the case of default, the managing broker can interplead the funds into court.

Earnest money deposits are the responsibly of the managing broker. Real estate licensees should NEVER give their opinion OR make ANY decision OR make prediction of what action the managing broker will take regarding the forfeiture OR refunding of earnest money.

Offer and Acceptance

The purchase and sale agreement provides a space to write in a date by which the seller MUST accept the offer.

Any time PRIOR to acceptance, the purchaser may withdraw the offer, no matter how long the seller had to accept.

HOWEVER, IF the purchaser withdraws the offer prior to acceptance, notice of the withdrawal MUST be delivered to the seller OR the listing managing broker before it becomes effective.

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How the notice is to be communicated should ALSO be specified. If the seller does not accept the offer PRIOR to the deadline, the offer terminates, and the licensee will refund the earnest money deposit to the buyer.

The Presentation of Offer and Acceptance

Real estate licensees are required by law to submit ALL offers to the seller, even if the offer seems to be unreasonable.

It is the seller’s decision whether to accept, reject OR counter the offer.

It is not the real estate licensee’s decision to make, even if the licensee believes the seller would not accept.

The seller gives acceptance by agreeing to ALL terms and conditions by signing the agreement.

When the seller makes a change to the offer of any type, the seller MUST initial the change and the offer MUST be returned to the purchaser as a counteroffer.

The counter offer MUST give a time and date for the purchaser’s acceptance.

If the purchaser accepts the changes, the purchaser MUST initial each change. If the purchaser accepted ALL changes, and initialed them ALL, the counter offer would be accepted.

If the purchaser made any changes, the purchaser would have to initial those changes as well, and this would result in another counter offer, BUT to the seller this time.

Then the offer would have to be taken back the seller for acceptance, rejection OR another counter offer.

When ONLY a few changes are made, OR a few dates OR numbers need to be changed, the licensee can make the changes to the original offer and have the changes initialed.

When more changes are made, OR when more details are added OR changed it is MUCH BETTER to use a separate counteroffer form.

Countering can go on and on until there is an acceptance OR rejection.

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EVERY change MUST be initialed and should ALSO be dated, and a new time and date for acceptance by the other side should be included.

The selling licensee should contact the listing licensee so that the listing licensee can present it to the seller.

Many times the selling licensee will want to accompany the listing licensee to present the purchaser’s offer and be available to answer the seller’s questions about the buyer’s financial ability.

Once the selling licensee has made the presentation, the selling licensee should leave so that the sellers can talk privately with their licensee.

The selling licensee may choose to present the most positive aspects of the offer first, to prevent a negative reaction and to be sure that the strongest points will be considered in the decision.

If the seller likes some of the terms of the offer, BUT will not accept others, the seller might be MORE LIKELY to make a counter offer rather than reject the entire offer.

BOTH sellers and purchasers expect some negotiation to take place, and most offers do turn into counter offers.

Most initial offers are countered OR rejected because of:

· A low price

· The closing date

· Items to be included in the sale

· Finance terms

As soon as any change is made and initialed, the parties MUST be given a copy of the document.

This means that the buyer MUST be given a copy of the offer as soon as it is signed, and the seller MUST get a copy of any counteroffer as soon as it is signed.

BOTH parties MUST be given a copy of the final accepted offer as soon as it is signed.

Making counter offers, especially when there are many, can create emotional distress for the buyer, seller and the licensees.

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When conducting negotiations, it is important that the licensees work together to prevent OR reduce any hurt feelings OR hostility that might arise between the parties.

Commission Agreement

MOST purchase and sale agreement forms contain an agreement to pay the real estate managing broker the commission.

This clause is especially important if the seller did not sign a listing contract.

If there is NO listing contract, the commission will be paid as agreed in writing in the purchase and sale agreement.

This could happen when a licensee writes an offer:

· For a purchaser on a FSBO, (for sale by owner)

· On a property that was not submitted to the MLS, OR if the

· Other licensees were not affiliated with the MLS

The provision for a commission MUST be in writing and signed by the parties.

Many licensees still write in the commission, even though a listing exists, but it is unnecessary.

Receipt

When the offer is accepted, the licensee should have the purchaser sign the last receipt.

Although the last receipt is not technically required, it is a form of notice that the contract was delivered, and it may prevent any accusations that changes were made without the purchaser’s knowledge AFTER signing the original offer.

It ALSO fulfills the requirement to give the purchaser a copy of the accepted offer, which is now an agreement.

Notice to Seller, Purchaser and Managing broker

This clause gives notice to the parties that they should seek legal advice if they do not fully understand any provisions.

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Real estate licensees MUST not provide legal advice.

Addendum Clause

The purchase and sale agreement should contain a clause OR paragraph titled "Additional Provisions" OR “Addendum” to clearly indicate that there are attachments and additions to the agreement that ALSO contain terms and conditions of the contract.

It is good practice to note the existence of addenda on the first page OR in the body of the purchase and sale agreement.

Once the buyer and the seller have accepted and signed the purchase and sale agreement, the agreement can ONLY be changed OR modified in writing.

The parties who signed the original agreement are required to ALSO sign any addendum OR amendment for it to be enforceable.

Termination of Purchase and Sale Agreement

The termination of the purchase and sale agreement will occur upon the completion of ALL duties by ALL parties to the transaction.

Once ALL terms and conditions have been met, the agreement is terminated.

The agreement can ALSO be terminated by partial performance of the obligations.

This happens when one party partially performs BUT does not complete ALL of the terms OR conditions, AND other party waives completion of performance.

Termination can occur if one party makes a substantial performance, BUT the performance was not exactly as the contract required if the other party agrees OR if the parties negotiate a monetary compensation.

If BOTH parties agree to rescind, the agreement will be terminated and ALL consideration will be refunded.

If the parties agree to cancel, the agreement is terminated, BUT without the refund of consideration.

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Other ways to terminate the agreement:

· Impossibility of performance

· Default or breach of contract

· Operation of law, bankruptcy or expiration of the Statute of Limitations

Remedies for Breach of Purchase & Sale Agreement

The consequences of terminating can include:

· Rescission

· Damages

· And specific performance

Damages can be in the form of liquidated damages, which is a predetermined amount to be paid in the event of as breach, OR in the form of compensatory damages that cover the actual amount of the loss and are determined by the court.

Compensatory damages MUST be proven and a reasonable attempt MUST have been made lessen the amount of loss.

An action for specific performance will require a legal procedure brought by either party to enforce terms of contract.

Specific Performance is an action to force the defaulting party to perform.

Specific performance is usually not a remedy unless money damages would not be sufficient as a substitute for the performance.

If the purchaser sues for specific performance and wins, the court will require the seller to deliver title to the buyer.

Arbitration and mediation is sometimes included as a provision in the contract as a method to resolve the dispute.

In arbitration, the arbitrator serves as a judge, and arrives at a decision that will be binding on the parties.

In mediation, a third party works with the conflicting parties to help them come to an agreement OR resolution.

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Mediation is less formal, and usually less costly, BUT the mediator CANNOT make a binding decision.

A party can seek an injunction, when there is strong evidence that the other party may cause irreparable harm to the wronged party.

The court order may forbid the party to act in a manner that would be harmful to the other party.