California Real Estate License Law PDF

California Real Estate 16 License Law Learning Objectives After completing this lesson, students should be able to… Describe the general functions and authority of the Department of Real Estate and the Real Estate Commissioner Su...

California Real Estate 16 License Law Learning Objectives After completing this lesson, students should be able to… Describe the general functions and authority of the Department of Real Estate and the Real Estate Commissioner Summarize the activities that require a real estate license in California Identify the exemptions from the real estate licensing requirement Describe the requirements for obtaining a salesperson’s or broker’s license Explain the license renewal process, including the continuing education requirement List the steps involved in the disciplinary process Recognize the activities and conduct that are grounds for disciplinary action against a li- censee Define trust funds and summarize the requirements for handling them Give an example of commingling trust funds with personal funds Summarize the types of trust fund records and real estate transaction records that a broker is required to maintain Discuss how the Real Estate Law regulates advertising by real estate licensees © 2021 Rockwell Publishing  Principles of California Real Estate Instructor Materials Suggested Lesson Plan 1. Give students Exercise 16.1 to review the previous chapter, “Real Estate Construction, Ownership, and Investment.” 2. Provide a brief overview of Chapter 16, “California Real Estate License Law,” and re- view the learning objectives for the chapter. 3. Present lesson content: Administration of the License Law Real Estate Licenses – When a license is required/not required EXERCISE 16.2 Compensation and the license requirement – License qualifications – License application and term – Miscellaneous license provisions – Special activities and business opportunities Disciplinary Action – Disciplinary procedures – Grounds for disciplinary action – Examples of unlawful conduct EXERCISE 16.3 License law violations – Real Estate Fund Trust Funds – Definition of trust funds – Handling trust funds – Trust accounts – Trust fund records – Advance fees EXERCISE 16.4 Trust funds Documentation Requirements – Document copies – Broker’s review of documents – Broker/salesperson agreements Advertising Regulations – License designation in advertising – First contact solicitation materials 2  Chapter 16: California Real Estate License Law – Internet advertising – Advertising loans and notes – Inducements 4. End lesson with Chapter 16 Quiz. Chapter 16 Outline: California Real Estate License Law I. Administration of the Real Estate Law A. California’s Real Estate Law is intended to regulate the real estate profession and protect the public B. The law is administered by the California Department of Real Estate (DRE) and en- forced by the Real Estate Commissioner 1. The Real Estate Commissioner enforces the law by enacting regulations, investi- gating licensees, and taking disciplinary action for violations of the law II. Real Estate Licenses A. When a real estate license is required 1. Anyone who acts, advertises, or appears to act as a real estate broker or real estate salesperson must have a real estate license 2. A real estate broker is someone who performs certain activities on behalf of an- other person for compensation (or in the expectation of compensation), including: the selling, purchasing, and exchanging of real property or business opportunities; leasing or collecting rents for another person, or buying, selling, or exchanging leases; advertising and listing real property or business opportunities; negotiating the sale or lease of government lands; charging or collecting an advance fee to promote the sale or lease of real property or a business opportunity; performing mortgage loan brokerage activities; and selling, buying, or exchanging loans or securities a. A real estate broker performing mortgage loan brokerage activities requires an MLO endorsement from the DRE b. The broker definition also includes some activities performed when the bro- ker is making or selling loans as the principal in the transaction 3. A real estate salesperson is someone hired by a broker to perform an activity that requires a license a. A salesperson can’t act directly for a principal and cannot accept com- pensation from anyone other than his own broker; must be supervised by responsible broker 4. A broker associate is a licensed broker who chooses to work for another broker 3  Principles of California Real Estate Instructor Materials B. When a license is not required 1. Many exemptions to the licensing requirement exist, including exemptions for: persons acting on their own behalf; corporate officers; persons acting under a power of attorney or court order; attorneys; clerical assistants providing clerical functions only; the manager and employees of motels, hotels, and trailer parks; resident apartment managers; employees of property management companies who are supervised by licensees; and film location representatives a. Real estate assistants don’t need to be licensed, so long as their duties are purely clerical b. Property management assistants can be unlicensed, so long as their duties are clerical or supervised by a licensee EXERCISE 16.2 Compensation and the license requirement C. License qualifications 1. To obtain a salesperson’s license, an applicant must: be at least 18 years old, be honest and truthful, pass the licensing exam, apply on the prescribed form, pay the license fee, be fingerprinted, provide her social security number to the DRE, submit proof of legal residence, and complete nine semester units of education, including Real Estate Principles, Real Estate Practice, and an elective 2. A broker’s license applicant must also have two years of experience as a licensee within the past five years, and must complete 24 semester units of education D. License application and term 1. Applicants must apply within one year of passing the exam 2. Licenses must be renewed every four years; continuing education requirements apply 3. An MLO endorsement expires annually; continuing education requirements apply 4. If a license expires, the licensee has two years to renew without re-taking the exam; after that grace period, the former licensee must begin the licensing pro- cess all over again (including taking the exam) E. Miscellaneous license provisions 1. A real estate broker licensed in California must have a place of business in the state 2. A broker must hold the licenses of her affiliated salespersons; all licenses must remain in the main office 3. If a salesperson quits or is fired, the broker must return her license to her and no- tify the Commissioner; if the salesperson was fired for conduct that was grounds for disciplinary action, the broker must inform the Commissioner 4. When a salesperson transfers to another brokerage, the Commissioner must be notified 5. If a broker’s license is suspended or revoked, the licenses of all of the broker’s salespersons are automatically canceled 4  Chapter 16: California Real Estate License Law 6. When a broker changes his office name or address, he must inform the DRE 7. A broker may use a fictitious name under certain circumstances 8. If a license applicant (or licensee) is delinquent in child support payments, the DRE can only issue the applicant a temporary license (and may suspend a current license) 9. Licensees must inform the DRE if they have been indicted, charged with a felony, convicted of a crime, or been disciplined by another licensing agency F. Special activities 1. The Real Estate Law has provisions concerning: prepaid rental listing services; mineral, oil, and gas transactions; real property securities dealers; and out-of-state subdivisions G. Business opportunities 1. A business opportunity is the sale or lease of a business, usually including inven- tory, fixtures, lease assignments, and goodwill 2. Listing (or representing the buyer of) a business opportunity requires a real estate license 3. The transfer of personal property in a business opportunity transaction is subject to sales tax 4. If the sale is a bulk sale or if it includes the transfer of an alcoholic beverage li- cense, additional requirements apply III. Disciplinary Action A. Disciplinary procedures 1. The Commissioner must investigate written complaints about real estate licensees (and may investigate a licensee even without a complaint) 2. If it appears that a violation has occurred, the Commissioner can issue a citation, or file an accusation and schedule a hearing 3. The commissioner can issue a citation for uncontested lesser violations; citations may include a fine and/or an order to stop the violation 4. If an administrative hearing is held, an administrative law judge will make a pro- posed decision; the Commissioner then makes a formal decision 5. After the hearing, the Commissioner will decide what punishment to impose, such as license suspension, revocation, or debarment, or a fine; his decision usu- ally may be appealed to superior court 6. In certain circumstances the Commissioner can issue a desist and refrain order, or temporarily suspend a person’s license without a hearing B. Grounds for disciplinary action 1. Under the Real Estate Law, the grounds for disciplinary action include: misrep- resentation; fraud; dishonest dealing; undisclosed dual agency; commingling; making a secret profit; failure to disclose material facts; negligence; selling prop- 5  Principles of California Real Estate Instructor Materials erty without disclosing an ownership interest; placing a blind ad; and failure to supervise salespersons 2. Unlawful conduct that is grounds for disciplinary action include: misrepresent- ing a property’s true value, size, or condition; misrepresenting a relationship with a broker, underestimating closing costs; and misrepresenting information when negotiating a loan EXERCISE 16.3 License law violations C. The Real Estate Fund 1. Licensee fees are credited to the Real Estate Fund a. Some money goes to the Education and Research Account b. Some goes to the Recovery Account, which is used to pay an injured party who wins a court verdict against a licensee who does not have the funds to pay the judgment (the licensee must then repay the funds to have his license reinstated) IV. Trust Funds A. Definition of trust funds 1. Trust funds consist of money or other valuables temporarily entrusted to a licens- ee by clients or customers 2. Examples include good faith deposits and advance fees B. Handling trust funds 1. Failure to handle trust funds properly is violation of fiduciary duties and the li- cense law 2. A broker who receives trust funds must deposit them, within three business days, into: a neutral trust account; the hands of the principal; or the broker’s trust account 3. Under certain circumstances, a broker can hold a buyer’s deposit check uncashed before acceptance 4. Once an offer is accepted, specific rules apply to the handling of the buyer’s de- posit check 5. If ownership of trust funds becomes unclear, the agent may file an interpleader action; a court will decide the rightful owner of funds C. Trust accounts 1. A broker may not commingle funds by mixing trust funds with general business funds 2. A broker’s trust account balance must always equal the total of the balances due to individual clients and customers; an overage or a shortage is a violation 3. The broker’s trust account must be: opened in the broker’s name as licensed; in California; designated as a trust account; non-interest-bearing 6  Chapter 16: California Real Estate License Law 4. The broker may authorize certain people to make trust fund withdrawals, but is ultimately accountable for any trust fund violations D. Trust fund records 1. The broker must keep proper trust fund records using a system that complies with general accounting practices 2. The records must show all trust fund receipts and disbursements, the balance of each trust account, all receipts and disbursements affecting each client/customer’s account, and the balance owing to each beneficiary E. Advance fees 1. Advance fees collected from clients to cover expected expenses or as upfront compensation must be handled like trust funds 2. Advertising for services that have advance fees, and related advance fee agree- ments, must be approved ahead of time by the DRE EXERCISE 16.4 Trust funds V. Documentation Requirements A. A broker is required to keep all of the documents related to a real estate transaction for at least three years B. Licensees must give copies of listing agreements, purchase agreements, contract ad- denda, and property management agreements to the signatories when the documents are signed C. When hiring a salesperson, a broker must use a written broker-salesperson agreement and keep a copy of the agreement on file for three years after the relationship ends VI. Advertising Regulations A. California prohibits blind ads (ads that don’t indicate that the advertiser is a licensee) B. Licensees must include their license number on all first contact materials C. Brokers using internet advertising must ensure that only licensees respond to online inquiries from customers D. Certain restrictions apply when a licensee advertises loans secured by real property E. Inducements must be disclosed F. Licensees must comply with Do Not Call rules of the Federal Trade Commission 7  Principles of California Real Estate Instructor Materials Exercises EXERCISE 16.1 Review exercise To review Chapter 15, “Real Estate Construction, Ownership, and Investment,” have students fill in the blanks in the sentences below with the correct term. Leverage Appreciation Yield Cash flow Equity Sale-leaseback Cash on cash Liquidity 1. The ease with which an asset may be converted into cash is referred to as its ______________. 2. The use of borrowed capital to finance the purchase of real estate or other assets is called ______________. 3. A ______________ is a technique used by property owners as a means of raising capital. 4. The ______________ is that sum of money generated from an income-producing property after all operating expenses and mortgage payments (including principal and interest) have been paid. 5. The excess of a property’s fair market value over the owner’s outstanding debts against the property is known as the ______________. 6. The internal rate of return on the initial equity, based on the cash flow of the property, is known as the ______________ return. 7. Any increase in the value of an asset, due either to inflation or to rising demand, is known as ______________. 8. The ______________ of an investment will tend to decrease as its liquidity and safety increase. Answers: 1. Liquidity 2. Leverage 3. Sale-leaseback 4. Cash flow 8  Chapter 16: California Real Estate License Law 5. Equity 6. Cash on cash 7. Appreciation 8. Yield EXERCISE 16.2 Compensation and the license requirement Discussion Prompt: Clara is an elderly woman who wants to sell her house. Her daughter- in-law, Elise, used to be a real estate agent. “Mom,” she says, “I’ll save you the commission. I’ll take care of selling your house free of charge.” Does Elise need to renew her license to handle this transaction? What if Clara, after the transaction closed, unexpectedly decided to give her daughter-in-law a necklace, a valuable family heirloom, as a present for her assistance with the sale? Would your answer change if the reward was merely dinner at a casual restau- rant that Clara knows Elise likes? Analysis: Someone who engages in real estate activities is required to have a license if she’s acting on behalf of another person either for compensation or in expectation of compensation. So if Elise receives no compensation from Clara, she doesn’t have to have a license. However, Elise would have to refuse the gift of the necklace. She should also refuse the dinner; although that’s fairly negligible compensation, it could nonetheless be considered a license law violation for Elise to accept it. EXERCISE 16.3 License law violations Discussion Prompt: Read through the following scenario and discuss any license law violations you find. Goofus is a salesperson for Acme Realty. Faye, a wealthy widow who wants to sell her home and move into a condo, is about to list her property with him. When Goofus tells Faye his commission rate is 6.75%, she balks and says that the amount seems excessive. Goofus explains that the rate is set by the local MLS and he’s not permitted to charge any less than that. After signing the listing agreement, Faye instructs Goofus to show her home only to potential buyers “whose background is similar to mine and my neighbors’.” She also asks Goofus not to show the home during the evening on weekends. Goofus agrees to follow Faye’s instructions. 9  Principles of California Real Estate Instructor Materials Goofus also wants to sell his own home, which he has almost finished reno- vating. The only work left to be done is fixing the leaky roof. Knowing that the roof work will be completed in the next month or so, Goofus places the following ad in the city newspaper: “Beautiful 2BD, 2BA house, fully renovated. Move-in condition! Desirable location; safe neighborhood. $318,000. Call today! (818) 555-5555.” He receives several calls about the listing and arranges to show the house to a potential buyer named Harrison. Goofus informs Harrison that he is both the property seller and a licensee. Goofus picks Harrison up at the Acme Realty office and drives him back to his house. Harrison is impressed by the landscaping and the upgraded kitchen. He says, “You weren’t kidding—this house really is in move-in condition!” He decides to make a full-price offer on the spot. Goofus fills out a purchase agreement form for both of them to sign, and he accepts Harrison’s check as a good faith deposit. He doesn’t give Harrison a copy of the contract or any other documents. Analysis: The following actions and omissions by Goofus violate the license law and are grounds for disciplinary action. Telling Faye that the commission rate is fixed by the multiple listing service, instead of disclosing that it’s negotiable as a matter of law Agreeing to comply with Faye’s instructions about showing the property only to buyers who share her background (which strongly suggests that she intends to discriminate against anyone of a different race, national origin, or religion) Misrepresenting the condition of his home in the newspaper ad Failing to disclose a latent defect (the leaky roof) to Harrison Failing to give a party a copy of a document he’s just signed. Failing to give a buyer a transfer disclosure statement in a sale of residential property with up to four units Note: Students may have included placing a blind ad (failing to disclose his licensee status and his broker’s name in the ad) on the list of Goofus’s license law violations. However, since he was advertising his own property, that require- ment did not apply. EXERCISE 16.4 Trust funds Read the following True/False questions aloud to students and have them jot their an- swers down on a piece of paper; discuss the answers together. 10  Chapter 16: California Real Estate License Law 1. All trust funds received by a broker must be deposited in a trust account no later than the first banking day after receipt. 2. Trust accounts must be opened in the broker’s name, as licensed, and they must be specifically designated as trust accounts. 3. Illegally mixing trust funds with personal funds is called conversion. 4. Advance fees should always be held in trust for clients. 5. The process of balancing a broker’s trust account records against the bank records is known as reconciliation. 6. Commissions payable to the broker and to other cooperating brokers may be paid directly from the trust account. 7. A broker is allowed to pay a salesperson’s share of a commission directly out of the trust account. 8. A broker states in an advertisement that if a reader agrees to list or buy a property with her, she will give that person $100. This arrangement is an illegal induce- ment. Answers: 1. FALSE. Trust funds must be deposited into a broker’s trust account (or deposited into escrow, or given to the principal, if appropriate) no later than three business days after they are received. 2. TRUE. Any account not designated as a trust account would be presumed to be the broker’s account. The funds in it would be subject to seizure as a result of a lawsuit or other financial problems the broker might have. 3. FALSE. Mixing trust funds with personal funds is called commingling. Conversion is the actual theft of trust funds, converting them to one’s own use. 4. TRUE. An advance fee (a fee paid in advance for unusual expenses associated with a listing, such as special marketing or advertising costs) should be held in trust. 5. TRUE. Balancing trust account records against a bank statement is called reconcili- ation. 6. TRUE. The broker must draw a separate check for each commission after the transaction closes. 7. FALSE. Salespersons’ commissions are handled like other operating expenses. Funds are transferred from the trust account to the broker’s general account, and the commissions are paid from that account. 8. FALSE. A rebate for listing or purchasing property is not illegal, but it is a material fact that must be disclosed. 11  Principles of California Real Estate Instructor Materials Chapter 16 Quiz 1. Owen approaches Broker Bob with a prop- 5. A seller’s agent misrepresents information erty he wants to sell. Bob is interested in the about a property to a potential buyer. The agent property himself, so they agree to a listing ar- is subject to: rangement that gives Bob the right to purchase A. civil action by the potential buyer the property within the first two months of B. criminal prosecution the listing period. Three weeks pass, and Bob C. disciplinary action by the Real Estate Com- decides to buy the land. Before doing so, what mission must he do? D. All of the above A. Tell Owen of any outstanding offers from other prospective purchasers 6. Hoping to sell her property quickly, an owner B. Obtain Owen’s written consent as to the pays her agent a fee for additional marketing amount of profit Bob anticipates making and advertising. This “advance fee”: C. Give Owen any material information he has regarding the property A. is illegal D. All of the above B. is permitted as long as it does not exceed $500 C. may be deposited into the agent’s general 2. When a bulk sale occurs, the buyer must give operating account notice by: D. must be deposited into a trust account A. recording a notice of intent to buy with the county clerk 7. Amy, a salesperson, helps the Parks find a B. sending notice to the county tax assessor property to buy. The Parks sign a purchase C. publishing notice in the newspaper of gen- contract that makes the sale contingent on hav- eral circulation ing the property approved by the buyers’ Uncle D. All of the above Pete, who is financing the deal as a favor to his nephew. Amy assures the Parks there won’t 3. The buyer of a business obtains a Certificate of be any trouble getting the property approved. Clearance in order to protect herself from: However, shortly thereafter, Amy learns that A. “successor’s liability” to the seller Uncle Pete is out of the country and no one B. “successor’s liability” to the state knows when he’ll be back. Amy’s actions were: C. unsecured creditors A. unethical D. secured creditors B. unlawful C. lawful D. beneficial 4. Rebecca pays Henry to help her with the sale of her home. Because Henry does not have a real estate license, he has violated the real 8. According to the Real Estate Commissioner’s estate license law and is subject to prosecution Regulations, every broker must: by the: A. maintain a trust account A. county district attorney B. maintain trust records, including receipt B. Real Estate Advisory Commission and disbursement journals C. local police C. keep a trust ledger D. state attorney general D. hold client funds in the same account as broker funds 12  Chapter 16: California Real Estate License Law 9. Broker Barb places a newspaper ad stating that 13. Angela, Bruce, Cory, and Dale purchase an any seller who lists or buys a property through apartment building together. The sale is negoti- her will receive a $100 credit towards the bro- ated by Broker Eric. When the four buyers learn ker’s commission or purchase price. This is: that Eric fraudulently misrepresented important A. illegal, because a broker is not permitted to information about the property, they sue him offer a credit to a seller and win a judgment of $60,000. Because Eric B. illegal, because a broker is not permitted to is insolvent and cannot pay the judgment, the offer a credit to a buyer buyers apply to the real estate Recovery Ac- C. illegal, because a broker cannot compensate count for reimbursement. How much will each a non-licensee for performing acts requir- buyer receive? ing a real estate license A. $12,500 D. legal B. $15,000 C. $20,000 D. $60,000 10. In a dual agency relationship, the agent owes fiduciary duties to both the buyer and the seller. Therefore, a dual agency is permissible: 14. What sort of license does a loan correspondent A. under no circumstances need? B. if the buyer consents A. He must be licensed by the Department of C. if the seller consents Business Oversight D. if both the buyer and seller consent B. He must be licensed by both the DRE and Department of Business Oversight C. No license is needed if he arranges loans 11. All of the following acts by a salesperson would only on behalf of the savings institution that constitute theft except for: employs him A. unauthorized signature of another person’s D. He must be licensed by the DRE name B. entering a listing property and removing a fixture 15. On June 1, a buyer made an offer on a property C. defrauding a client by misrepresenting and gave the broker a good faith deposit that information was dated June 30. The buyer asked the broker D. removing a portion of the security for a to hold the check until June 30. The broker mortgage with the intent to defraud the should: mortgagee A. hold the check and inform the seller about the date on the check when presenting the offer 12. A broker wants to conduct business under a B. deposit the check within one business day name different from that on her license. She of receipt files a fictitious business name statement with C. turn the check over to the escrow agent the clerk of the county in which her brokerage is immediately located. When must the statement be renewed? D. deposit the check within three business days A. Every year of receipt B. Every two years C. Every five years D. Never, as the statement is valid indefi- nitely 13  Principles of California Real Estate Instructor Materials Answer Key 1. D. These acts are required if a broker de- not be necessary if client funds are cides to exercise a listing agreement’s passed on to principals or escrow option to purchase. agents within three business days. Trust records, however, must be kept 2. D. If the buyer fails to give notice proper- regardless of how long the funds are in ly, he may become liable to the seller’s the hands of the broker. creditors. 9. D. This offer does not violate the license 3. B. Without a Certificate of Clearance law or regulations. A broker may share (also called a clearance receipt), the her commission with anyone, as long as buyer will be liable to the state for any this fact is disclosed. unpaid seller’s sales tax. 10. D. A dual agency is lawful only where the 4. A. Each county’s district attorney is re- buyer and seller have been informed of sponsible for prosecuting violations of the situation and have consented to it. the license law. 11. A. This is forgery, not theft. 5. D. All three of these actions may be appropriate where an agent has com- 12. C. A fictitious business name statement mitted misrepresentation. expires five years after it is filed. 6. D. Advance fees may be paid by the seller 13. A. Although the judgment is for $60,000, in advance for unusual marketing and the Recovery Account only pays up to advertising expenses. These funds $50,000 per transaction. The $50,000 should be held in a trust account. will be split equally among the buyers, so each will receive $12,500. 7. B. Amy made an unlawful misrepresen- tation when she said that there would 14. C. A loan correspondent is a person who be no trouble getting the property ap- acts as an intermediary in the second- proved. While the misrepresentation ary market for real estate loans. An was presumably unintentional and re- exemption from the license law is sulted only from her negligence in not made for employees of financial insti- investigating the transaction, it was tutions with respect to real property still a false statement that was relied securities transactions. on by the buyers. She could be sub- ject to discipline by the Real Estate 15. A. A broker may hold an uncashed check Commissioner. before acceptance. After acceptance, the broker will need the written autho- 8. B. A trust account and trust ledger may rization of the seller in order to hold the check uncashed. 14  Chapter 16: California Real Estate License Law PowerPoint Thumbnails Use the following thumbnails of our PowerPoint presentation to make your lecture notes. Principles of California Real Estate Lesson 16: California Real Estate License Law © 2021 Rockwell Publishing 1 Administration of Real Estate Law California’s Real Estate Law is administered by the California Department of Real Estate (DRE). ⚫ Chief officer of DRE is Real Estate Commissioner. © 2021 Rockwell Publishing 2 Administration of Real Estate Law Real Estate Commissioner: ⚫ appointed by Governor ⚫ may not engage in real estate activities or have interest in real estate firm ⚫ must have been real estate broker actively engaged in business in California for 5 years (or related experience) © 2021 Rockwell Publishing 3 15  Principles of California Real Estate Instructor Materials Administration of Real Estate Law Commissioner’s powers and duties: ⚫ grants and denies licenses ⚫ enforces Real Estate Law ⚫ issues rules and regulations to implement law ⚫ regulates sale of subdivisions and business opportunities ⚫ investigates non-licensees performing real estate activities ⚫ holds disciplinary hearings on license violations © 2021 Rockwell Publishing 4 Administration of Real Estate Law California attorney general provides legal advice to Commissioner regarding Real Estate Law. ⚫ Violations of Real Estate Law are prosecuted by district attorney of county in which they occur, not by state attorney general. © 2021 Rockwell Publishing 5 When License is Required Anyone who is acting, advertising, or appearing to act as real estate broker or salesperson must have real estate license. © 2021 Rockwell Publishing 6 16  Chapter 16: California Real Estate License Law When License is Required Definition of a broker Real estate broker: Person who does, or negotiates to do, certain (real estate-related) acts on behalf of another person, for compensation or promise of compensation. ⚫ Real Estate Law describes broad range of activities brokers may perform. © 2021 Rockwell Publishing 7 When License is Required Broker activities Selling, buying, or exchanging real property or business opportunity. Leasing or collecting rents from real property or business opportunity; or buying, selling, or exchanging leases on real property or business opportunity. © 2021 Rockwell Publishing 8 When License is Required Broker activities Soliciting prospective sellers, buyers, or tenants, or listing real property or business opportunity for sale or lease. Locating or filing application for the purchase or lease of state or federal lands. © 2021 Rockwell Publishing 9 17  Principles of California Real Estate Instructor Materials When License is Required Broker activities Collecting advance fee to promote the sale or lease of real property or business opportunity by advertising or listing it, by obtaining financing, or in some other way. © 2021 Rockwell Publishing 10 When License is Required Broker activities Soliciting borrowers or lenders or negotiating loans secured by liens on real property or business opportunities, or collecting payments or performing other services in connection with such loans. ⚫ Brokers must obtain separate mortgage loan originator (MLO) endorsement before engaging in these activities in connection with residential mortgage loans. © 2021 Rockwell Publishing 11 When License is Required Broker activities An MLO endorsement is: ⚫ obtained through Nationwide Mortgage Licensing System and Registry; requires its own prelicense and continuing education ⚫ a requirement for a real estate license to receive compensation from lender or mortgage originator (even if only performing non-loan real estate brokerage activities) © 2021 Rockwell Publishing 12 18  Chapter 16: California Real Estate License Law When License is Required Broker activities Selling, buying, or exchanging real property securities, land contracts, or promissory notes secured by liens on real property or business opportunities, and performing services for holders of contracts or notes. © 2021 Rockwell Publishing 13 When License is Required Broker activities Engaging as principal in business of making or selling loans secured by real property, defined as: ⚫ buying, selling, or exchanging eight or more land contracts or promissory notes secured by real property, or making eight or more real estate loans within one year. ⚫ Note that this refers to broker who is acting on her own behalf. © 2021 Rockwell Publishing 14 Types of Licenses Salesperson’s license Salesperson: Someone who’s hired by broker to do one or more real estate activities allowed under law. ⚫ Can engage in real estate activities only under control and supervision of responsible broker. ⚫ Cannot act for principal directly. © 2021 Rockwell Publishing 15 19  Principles of California Real Estate Instructor Materials Types of Licenses Broker associate Licensed broker who works for another broker rather than starting her own brokerage is sometimes called broker associate. ⚫ No separate “broker associate’s license.” ⚫ Broker associates and salespersons may be referred to as “affiliated licensees” or “associate licensees.” © 2021 Rockwell Publishing 16 Types of Licenses Business entities Real estate license can be issued to corporation: ⚫ if one corporate officer is designated to act as broker for corporation, and ⚫ that person meets qualifications for broker’s license. © 2021 Rockwell Publishing 17 Types of Licenses Penalties for unlicensed activities Penalty for acting without license includes: ⚫ fine of up to $20,000 and/or 6 months prison for individuals ⚫ fine of up to $60,000 for corporation © 2021 Rockwell Publishing 18 20  Chapter 16: California Real Estate License Law When License Not Required Law provides exceptions to licensing requirement for persons. These include: 1. Person buying or leasing property: ⚫ for himself, or ⚫ on behalf of group to which he belongs (such as partnership or corporation). © 2021 Rockwell Publishing 19 When License Not Required 2. Attorney in fact authorized by power of attorney. 3. Attorney providing legal services to client. 4. Person acting under court order (such as receiver in bankruptcy). 5. Trustee under a deed of trust. © 2021 Rockwell Publishing 20 When License Not Required 6. With respect to mortgage loan activities, representative or employee of: ⚫ financial institutions, insurance companies, pension funds, or credit unions ⚫ federally approved housing counseling service ⚫ cemetery authority ⚫ licensed finance lender or residential mortgage lender or servicer © 2021 Rockwell Publishing 21 21  Principles of California Real Estate Instructor Materials When License Not Required 7. With respect to business opportunities, mortgage loans, or securities, licensed securities broker-dealer. 8. Person performing purely clerical duties and not discussing price, terms, or condition of property. 9. Manager of hotel, motel, or trailer park, or employee of manager. © 2021 Rockwell Publishing 22 When License Not Required 10. Resident apartment manager or employee of the manager. 11. Employee of property management company, supervised by licensee working for the company. 12. Film location or outdoor advertising representative. © 2021 Rockwell Publishing 23 Summary Administration of Real Estate Law Department of Real Estate Real Estate Commissioner Broker Salesperson Broker associate When license not required © 2021 Rockwell Publishing 24 22  Chapter 16: California Real Estate License Law License Qualifications Salesperson To obtain salesperson’s license, applicant must: ⚫ be at least 18 years old ⚫ be honest and truthful ⚫ pass state exam and pay license fee ⚫ be fingerprinted, provide social security number, and proof of legal presence in U.S. ⚫ complete 3 courses (9 semester units) © 2021 Rockwell Publishing 25 License Qualifications Broker For broker’s license, applicant must: ⚫ be at least 18 years old ⚫ be honest and truthful ⚫ pass state exam and pay license fee ⚫ be fingerprinted, show social security number, and proof of legal presence ⚫ have at least 2 years of experience as salesperson in last 5 years, or equivalent ⚫ complete 8 courses (24 semester units) © 2021 Rockwell Publishing 26 License Application and Term Applying for a license Applicant must apply for license within one year after date of passing exam (not the date notice was received). © 2021 Rockwell Publishing 27 23  Principles of California Real Estate Instructor Materials License Application and Term Renewing a license License valid for 4 years. Licensee renews by: ⚫ completing continuing education requirements ⚫ submitting application ⚫ paying renewal fee © 2021 Rockwell Publishing 28 License Application and Term Late renewal License expires if licensee misses 4-year renewal deadline. ⚫ Grace period: License can be renewed within 2 years after expiration if late penalty is paid. © 2021 Rockwell Publishing 29 License Application and Term Late renewal After 2-year grace period ends: ⚫ all license rights are lost ⚫ former licensee would have to retake state exam and apply for new license © 2021 Rockwell Publishing 30 24  Chapter 16: California Real Estate License Law License Application and Term Renewals Real estate license can’t be renewed unless licensee has fulfilled continuing education requirements. ⚫ Salespersons and brokers must complete at least 45 hours of continuing education (over 4 years), with certain courses specified depending on whether it is first renewal or subsequent renewal. ⚫ Forms documenting attendance at courses must accompany renewal application. © 2021 Rockwell Publishing 31 Summary License Qualifications/Application/Term Salesperson’s license Broker’s license License application and term Expiration and renewal Continuing education © 2021 Rockwell Publishing 32 Other License Provisions Brokerage offices Broker licensed in California must have place of business in state. ⚫ Separate licenses issued for any branch offices. ⚫ Broker must notify DRE of any location changes within one business day. ⚫ Broker may appoint branch manager with written contract and delegate supervisory responsibilities to manager. © 2021 Rockwell Publishing 33 25  Principles of California Real Estate Instructor Materials Other License Provisions Brokerage offices Licenses of broker and any affiliated licensees must be kept at main office. ⚫ If affiliated licensee quits or is terminated, broker must return license within three business days and notify DRE within ten days. ⚫ If licensee is terminated for conduct constituting grounds for disciplinary action, broker must notify DRE. © 2021 Rockwell Publishing 34 Other License Provisions Brokerage offices If broker’s license is suspended or revoked, all salespersons’ licenses are automatically canceled. If broker’s license expires, all salesperson’s licenses are placed on non-working status. © 2021 Rockwell Publishing 35 Other License Provisions Fictitious names Broker may conduct business under fictitious name if broker: ⚫ files fictitious name statement with county clerk ⚫ publishes notice in newspaper at least once a week for four weeks ⚫ submits affidavit (written statement sworn before notary public) proving publication © 2021 Rockwell Publishing 36 26  Chapter 16: California Real Estate License Law Other License Provisions Fictitious names Fictitious name may not be misleading, previously used, or include name of salesperson instead of broker. © 2021 Rockwell Publishing 37 Other License Provisions Child support delinquency If licensee (or license applicant) is delinquent in child support payments, DRE may suspend license (or issue temporary license). © 2021 Rockwell Publishing 38 Other License Provisions Prosecution or disciplinary action Licensee must notify DRE within 30 days if he is: ⚫ is indicted, ⚫ is charged with felony, ⚫ is convicted of crime or misdemeanor, or ⚫ has license suspension/revocation in another state. © 2021 Rockwell Publishing 39 27  Principles of California Real Estate Instructor Materials Special Activities Real property securities dealer Real property securities dealer: Person who sells real property securities. ⚫ Must have real estate broker’s license, unless licensed as securities broker- dealer. © 2021 Rockwell Publishing 40 Business Opportunities Business opportunity: Sale or lease of a business, typically including inventory, fixtures, and goodwill. ⚫ Listing a business opportunity, or representing buyer, requires real estate license, even if no real property involved. ⚫ If shares of stock involved, agent may also need securities license. © 2021 Rockwell Publishing 41 Business Opportunities Franchise agreements Franchise agreement: Purchaser (franchisee) buys right to sell goods under franchisor’s brand name and marketing system, in exchange for franchise fee. ⚫ Franchise may be sold by real estate licensee, securities licensee, or any person registered with Commissioner of Business Oversight. © 2021 Rockwell Publishing 42 28  Chapter 16: California Real Estate License Law Business Opportunities In sale of business opportunity, bill of sale is typically used. ⚫ If sale involves real property and personal property, two sales agreements may be used. Escrow is typically used in sale of business opportunity. ⚫ Two separate escrows may be used if both personal and real property sold. © 2021 Rockwell Publishing 43 Business Opportunities Sales tax Sales of business opportunities are subject to state sales tax, because they involve transfer of personal property. A buyer of wholesale or retail business should obtain Certificate of Clearance from state, certifying that seller’s sales taxes have been paid. ⚫ Otherwise buyer may have successor’s liability for unpaid sales taxes. © 2021 Rockwell Publishing 44 Business Opportunities Bulk sales Bulk sale: Sale, not in the ordinary course of business, of more than half of seller’s inventory. ⚫ Uniform Commercial Code imposes requirements on bulk sales. © 2021 Rockwell Publishing 45 29  Principles of California Real Estate Instructor Materials Business Opportunities Bulk sales Before bulk sale occurs, buyer must: ⚫ notify seller’s creditors of plans by recording notice of intent to buy with county recorder ⚫ send notice to county tax collector ⚫ publish notice in newspaper If notice requirements aren’t met, buyer may become liable to seller’s creditors. © 2021 Rockwell Publishing 46 Business Opportunities Liquor licenses Sale of business opportunity may involve a liquor license. ⚫ On-sale liquor license is one that may, subject to approval, be transferred from person to person, or to different premises. ⚫ During first 5 years after issuance of liquor license, on-sale license may not be resold for more than cost of initial application. © 2021 Rockwell Publishing 47 Summary Special Activities/Business Opportunities Fictitious business name Real property securities dealer Business opportunity Franchise agreement Sales tax Bulk sale Liquor licenses © 2021 Rockwell Publishing 48 30  Chapter 16: California Real Estate License Law Disciplinary Action Commissioner may take disciplinary action against licensee who violates Real Estate Law. Steps involved may include: ⚫ commissioner’s investigation ⚫ citation ⚫ written accusation ⚫ administrative hearing © 2021 Rockwell Publishing 49 Disciplinary Procedures Commissioner’s investigation Commissioner must investigate all verified written complaints against licensees, and may also initiate investigation on her own (without formal complaint). If it appears that a violation has occurred, the Commissioner may either: ⚫ issue citation without formal hearing ⚫ file accusation and schedule hearing © 2021 Rockwell Publishing 50 Disciplinary Procedures Citation Citations are appropriate for lesser violations where facts aren’t contested. May include: ⚫ fine of up to $2,500 ⚫ order directing licensee to stop violation © 2021 Rockwell Publishing 51 31  Principles of California Real Estate Instructor Materials Disciplinary Procedures Accusation If investigation warrants formal action, Commissioner files accusation and schedules administrative hearing. Accusation: Written statement of charges. ⚫ Must be filed within 3 years of alleged violation (more time if charge involves fraud, misrepresentation, or false promise). © 2021 Rockwell Publishing 52 Disciplinary Procedures Administrative hearing Hearing conducted by administrative law judge. ⚫ Judge makes proposed decision after hearing testimony. ⚫ Commissioner accepts or rejects proposed decision when making his final decision. © 2021 Rockwell Publishing 53 Disciplinary Action Sanctions If accusation proved, Commissioner may: ⚫ suspend or revoke license, or ⚫ impose fine of up to $250 for each day license would have been suspended. ⚫ Maximum fine: $10,000 © 2021 Rockwell Publishing 54 32  Chapter 16: California Real Estate License Law Disciplinary Action Appeal Disciplined licensee may: ⚫ petition for reconsideration from Commissioner, and/or ⚫ appeal Commissioner’s decision to superior court. © 2021 Rockwell Publishing 55 Disciplinary Action Prosecution and civil liability Licensee disciplined by Commissioner may also face: ⚫ criminal prosecution by county prosecutor ⚫ civil suit by an injured party © 2021 Rockwell Publishing 56 Grounds for Disciplinary Action Grounds for disciplinary action include—but are not limited to—any of following violations. © 2021 Rockwell Publishing 57 33  Principles of California Real Estate Instructor Materials Grounds for Disciplinary Action Misrepresentation: Deliberately or negligently making false statements or failing to disclose material facts to principal. False promise: Making false promise that is likely to persuade someone to do or refrain from doing something. © 2021 Rockwell Publishing 58 Grounds for Disciplinary Action False advertising or running blind ads. ⚫ Blind ad: Advertisement placed by real estate licensee that does not include licensee designation and broker’s name. © 2021 Rockwell Publishing 59 Grounds for Disciplinary Action Acting as dual agent without consent of both parties. Commingling general funds with trust funds. Failing to put definite termination date in exclusive listing agreement. Failing to disclose compensation in a transaction (secret profit). Fraud or dishonest dealing. Willfully or repeatedly failing to use real property transfer disclosure statement. © 2021 Rockwell Publishing 60 34  Chapter 16: California Real Estate License Law Grounds for Disciplinary Action Being convicted of felony or misdemeanor involving moral turpitude. Willfully using any trade name of real estate organization that you are not member of. Performing licensee activities negligently or incompetently. As broker, failing to exercise reasonable supervision over salespersons. Failing to disclose personal interest in property to buyer. © 2021 Rockwell Publishing 61 Grounds for Disciplinary Action As broker, failing to notify Commissioner of discharge of any salesperson based on violation of license law. Mobile home irregularities, including fraud in application for registration of a mobile home. As broker, failing to notify parties of selling price. Illegal compensation for referring customer to escrow, pest control, home warranty, or title insurance companies. © 2021 Rockwell Publishing 62 Real Estate Fund All license fees go to state treasury, and are then credited to Real Estate Fund. Portions of Real Estate Fund are earmarked for: ⚫ the Education and Research Account ⚫ the Recovery Account © 2021 Rockwell Publishing 63 35  Principles of California Real Estate Instructor Materials Real Estate Fund Recovery account Recovery Account is used to reimburse parties injured by real estate agent’s: ⚫ fraud ⚫ misrepresentation ⚫ deceit ⚫ conversion of trust funds © 2021 Rockwell Publishing 64 Recovery Account Requirements Injured party must: ⚫ obtain civil judgment (or arbitration award) against agent, and ⚫ show that agent has insufficient funds or assets that can be seized to pay judgment or award. © 2021 Rockwell Publishing 65 Recovery Account Limitations Recovery Account will pay: ⚫ up to $50,000 for any one transaction ⚫ up to $250,000 for any one licensee Agent’s license suspended until amount paid out is repaid to Recovery Account, with interest. © 2021 Rockwell Publishing 66 36  Chapter 16: California Real Estate License Law Summary Disciplinary Action Disciplinary procedures Grounds for disciplinary action Sanctions Real Estate Fund Recovery Account © 2021 Rockwell Publishing 67 Trust Funds Trust funds: Money or other valuables received by licensee and held on behalf of client or customer. ⚫ May be cash, check, promissory note, or any other item of personal property. © 2021 Rockwell Publishing 68 Trust Funds Funds that real estate brokers hold in trust for clients: ⚫ good faith deposits ⚫ tenant security deposits ⚫ collected rents ⚫ advance fees Advance fees: Fees seller pays in advance for expenses associated with a listing. © 2021 Rockwell Publishing 69 37  Principles of California Real Estate Instructor Materials Trust Accounts Separate from general account Broker must maintain one or more trust accounts to keep trust funds separate from broker’s own money. Trust accounts should be: ⚫ opened in broker’s name as licensed ⚫ specially designated as trust accounts © 2021 Rockwell Publishing 70 Handling Trust Funds Funds should be deposited in trust account no later than third business day after they’re received. Broker may pass check directly to escrow agent, or to principal, without putting it in trust account. ⚫ Check should still be recorded in broker’s trust fund records. © 2021 Rockwell Publishing 71 Handling Trust Funds If principal gives check directly to third party, such as title company, without it ever passing through broker’s hands, broker does not need to enter it into trust fund records. © 2021 Rockwell Publishing 72 38  Chapter 16: California Real Estate License Law Handling Trust Funds Receipt by salesperson When trust funds are given to salesperson, salesperson should immediately: ⚫ deliver funds to her broker, or ⚫ as directed by broker, deliver funds to broker’s trust account, escrow account, or to principal. © 2021 Rockwell Publishing 73 Handling Trust Funds Good faith deposits Exception to rule: Good faith deposit check can be held uncashed until buyer’s offer is accepted, so long as: ⚫ check is not negotiable by licensee or buyer has given written instructions not to deposit or cash check until acceptance, and ⚫ seller is informed that check is being held. © 2021 Rockwell Publishing 74 Handling Trust Funds Good faith deposits Before seller accepts offer: ⚫ good faith deposit belongs to buyer ⚫ must be returned to buyer if he demands it © 2021 Rockwell Publishing 75 39  Principles of California Real Estate Instructor Materials Handling Trust Funds Good faith deposits After offer accepted: ⚫ broker may hold check only with seller’s written authorization (usually in purchase agreement) ⚫ no part of deposit can be refunded without seller’s written permission © 2021 Rockwell Publishing 76 Handling Trust Funds Good faith deposits If transaction fails to close, and parties dispute who is entitled to deposit: ⚫ Broker (or escrow agent) files interpleader action and turns funds over to court. ⚫ Court decides which party gets deposit. © 2021 Rockwell Publishing 77 Handling Trust Funds Commingling Commingling: Illegally mixing trust funds with other funds. ⚫ Licensee must never put trust funds into firm’s general account, or her funds into trust account, even if careful records kept. Conversion: Appropriating client funds for licensee’s own purposes. ⚫ Conversion is basis for theft charges. © 2021 Rockwell Publishing 78 40  Chapter 16: California Real Estate License Law Handling Trust Funds Commingling Funds in trust account should always equal broker’s trust fund liability. ⚫ Shortage or overage are both violation of Real Estate Law. Exception: Broker may keep up to $200 of her own funds in trust account to pay bank’s service charges. © 2021 Rockwell Publishing 79 Trust Accounts Commingling If broker is owed commission from trust funds, she may withdraw it directly from trust account. ⚫ Broker cannot make any other withdrawals from trust account for either personal or business reasons. © 2021 Rockwell Publishing 80 Trust Accounts Commingling Rule against commingling makes it difficult for broker to dip into trust funds for her own benefit. It also protects trust funds from any legal action that may be taken against broker. ⚫ If trust funds were in broker’s general account, creditor with judgment against broker might seize the trust funds. © 2021 Rockwell Publishing 81 41  Principles of California Real Estate Instructor Materials Trust Accounts Reconciliation Reconciliation: Process of comparing trust fund balance to sum of individual transactions. ⚫ When reconciled, trust account balance must equal total of balances due to individual beneficiaries (clients and customers). © 2021 Rockwell Publishing 82 Trust Accounts Withdrawals Broker may not deduct her commission from trust fund until after transaction closes. Once earned commission is transferred to broker’s general account, money may be used to pay obligations, such as salesperson’s commission. © 2021 Rockwell Publishing 83 Trust Fund Records Broker’s records must include: ⚫ all trust fund receipts and disbursements ⚫ balance of each trust account ⚫ all receipts and disbursements affecting each client or customer’s account ⚫ balance owed to each client or customer Receipts and disbursements must be in chronological order. © 2021 Rockwell Publishing 84 42  Chapter 16: California Real Estate License Law Trust Fund Records Trust fund records must be kept for at least 3 years after date of closing (or listing date, if transaction didn’t close). Records are subject to inspection by Commissioner. © 2021 Rockwell Publishing 85 Trust Fund Records Advance fees Advance fees must be handled as trust funds. Salesperson/broker must obtain prior approval from DRE for: ⚫ advertising, and ⚫ advance fee agreement. © 2021 Rockwell Publishing 86 Documentation Requirements Generally, broker must keep real estate transaction documents for at least 3 years after closing date (or listing date, if sale doesn’t close). They must be available for inspection by Commissioner. © 2021 Rockwell Publishing 87 43  Principles of California Real Estate Instructor Materials Documentation Requirements Three-year requirement applies to: ⚫ listing and buyer representation agreements ⚫ deposit receipts ⚫ rent collection receipts ⚫ bank deposit slips ⚫ canceled checks and supporting papers ⚫ agency disclosure statements ⚫ transfer disclosure statements ⚫ property management agreements © 2021 Rockwell Publishing 88 Documentation Requirements Records that must be kept for 4 years: ⚫ disclosure statements given to non- institutional lenders or trust deed purchasers ⚫ real property security statements © 2021 Rockwell Publishing 89 Documentation Requirements Broker-salesperson agreement Broker-salesperson agreement must be: ⚫ in writing ⚫ kept on file at broker’s office ⚫ retained for at least three years after relationship is terminated © 2021 Rockwell Publishing 90 44  Chapter 16: California Real Estate License Law Advertising Regulations False advertising and other violations of advertising laws are: ⚫ grounds for disciplinary action under Real Estate Law ⚫ misdemeanors (under California law) © 2021 Rockwell Publishing 91 Advertising Regulations Licensee designation An advertisement published by real estate agent must include licensee designation: ⚫ some indication in ad that advertiser is licensee Ads without this designation are illegal, unless licensee is advertising his own property. © 2021 Rockwell Publishing 92 Advertising Regulations First contact solicitation materials Licensee must include license ID number in any solicitation materials intended to be first point of contact with consumers (potential clients or customers). Includes: ⚫ business cards and stationery ⚫ advertising fliers © 2021 Rockwell Publishing 93 45  Principles of California Real Estate Instructor Materials Advertising Regulations Online advertising Broker who advertises on the internet must establish procedures to make sure that a real estate licensee responds to all inquiries from prospective clients resulting from ad. © 2021 Rockwell Publishing 94 Advertising Regulations Loans and notes Ads for loan may not: ⚫ use phrase like “guaranteed” or “safe” without supporting statement of fact ⚫ imply that the loan: ⚫ can be approved over the telephone ⚫ is endorsed by a government agency ⚫ has better terms than are actually available © 2021 Rockwell Publishing 95 Advertising Regulations Loans and notes Ads for promissory note: ⚫ can’t promise yield or return different from rate specified on note, unless it also reveals note rate and discount at which note is being sold. ⚫ Discount: Difference between outstanding note balance and sales price of note. © 2021 Rockwell Publishing 96 46  Chapter 16: California Real Estate License Law Advertising Regulations Inducements If attendance at sales presentation or compliance with other conditions is required in order to receive gift or prize, those terms must be disclosed. If inducement is given to one party in a transaction, this must be disclosed to all parties. ⚫ Note: Inducements are always forbidden as part of loan transactions. © 2021 Rockwell Publishing 97 Other Brokerage Topics Desk cost Desk cost is brokerage’s operating cost per salesperson. ⚫ It is calculated by dividing firm’s operating expenses by the number of salespersons. In 100% brokerage, salesperson keeps all of his commissions but must pay desk fee to pay for firm’s operating costs. © 2021 Rockwell Publishing 98 Other Brokerage Topics Company dollar The company dollar is money left over for brokerage firm to pay its operating expenses after all commissions have been paid. ⚫ Brokerage may need to pay business license tax based on its gross receipts. © 2021 Rockwell Publishing 99 47  Principles of California Real Estate Instructor Materials Summary Trust Funds/Documentation/Advertising Trust account Good faith deposit check Commingling Documentation requirements Advertising regulations Prohibited practices © 2021 Rockwell Publishing 100 48