California Real Estate Practice, 8th Edition PDF

California Real Estate Practice Realty Publications, Inc. CITE THIS READING MATERIAL AS: Realty Publications, Inc. California Real Estate Practice Eighth Edition Cutoff Dates: Legal editing of this book was completed January 2023. Copyright © 2023 by Realty Publications, Inc. P.O. Box 5707, Riverside, CA 92517 All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopy, recording, or any information storage or retrieval system, without permission in writing from the publisher. Printed in the United States of America Editorial Staff Legal Editor/Publisher: Fred Crane Production Manager: Connor P. Wallmark Senior Editor: Carrie B. Reyes Contributing Editors: Oscar M. Alvarez Ashley Collins Amy Perry Implicit Bias Presenter: William Mansfield Access to All: A Fair Housing Game™ Presenter: Summer Goralik Videographers: Jose Melendez Avila Johnny Rojas Quinn Stevenson Lead Programmer: David Toledo Senior Developer: Michael Lovelace Graphic Designer Mary LaRochelle Comments or suggestions to: Realty Publications, Inc., P.O. Box 5707, Riverside, CA 92517 [email protected] Table of Contents i Table of Forms.....................................................................................................................v Glossary..............................................................................................................................563 Table of Quizzes............................................................................................................................. 577 Contents Chapter 1 Brokerage activities: agent of the agent Introduction to agency....................................... 1 Agency Chapter 2 An agent’s perception of riches The employing broker avoids Issues agent deceptions............................................... 13 Chapter 3 Human resources: as managed by brokers The entry and exit of agents................................... 21 Chapter 4 The MLS environment An industry-wide membership misconception............. 31 Chapter 5 Subagency and dual agency Agency and fee sharing concepts............................ 39 Chapter 6 Conflict of interest Professional relationships compromised................... 45 Chapter 7 The agency law disclosure Legislated order............................................. 53 Chapter 8 Listings as employment Authority to act on the client’s behalf........................ 63 Chapter 9 The exclusive right-to-sell listing agreement Listings: When the fee is earned........................................ 81 Employment Chapter 10 The exclusive employment obligations by the Public A fee earned on any sale...................................... 87 Chapter 11 Withdrawal or termination of an exclusive listing A client’s alternatives and a fee earned..................... 95 Chapter 12 The safety clause A fee due after the listing expires.......................... 101 Chapter 13 Greater transparency in marketing Costs for preparing to market a property for sale......... 115 Chapter 14 “For Sale” sign regulations Property owners may display “For Sale” signs.............. 127 ii Real Estate Practice, Eighth Edition Chapter 15 Operating under a buyer’s listing A prerequisite to representation............................ 133 Chapter 16 The buyer’s listing agreement The nurturing and grooming of a buyer’s agent.......... 141 Chapter 17 Sharing fees on a sale Buyer’s agent or cooperating agent?....................... 147 Chapter 18 The breaching buyer pays Broker fee protection preserved in the offer............... 157 Chapter 19 The seller’s interference with fees The breaching seller pays the fee........................... 163 Chapter 20 Due diligence obligations The duty owed to clients.................................... 171 Property Chapter 21 The seller’s agent and the prospective buyer Conditions and General duty to voluntarily disclose........................ 181 Disclosures Chapter 22 Opinions with erroneous conclusions When an opinion becomes a guarantee................... 199 Chapter 23 Condition of property: the owner’s disclosures Mandated on one-to-four residential units................ 213 Chapter 24 Safety standards for improvements Disclosing noncompliant improvements.................. 221 Chapter 25 The home inspection report Transparency by design, not default........................ 227 Chapter 26 Verify property disclosures: retain a home inspector Protecting the prospective buyer.......................... 237 Chapter 27 Natural hazard disclosures by the seller’s agent A unified disclosure for all sales............................. 245 Chapter 28 Structural pest control reports and repairs Pricing and asymmetric information...................... 259 Chapter 29 Environmental hazards and annoyances Noxious man-made hazards................................. 273 Chapter 30 Lead-based paint disclosures Crystal clear transparency................................ 283 Chapter 31 Marketing condominium units Managed housing............................................ 289 Table of Contents iii Chapter 32 Tax aspects advice Analyzing a transaction’s tax aspects....................... 299 Chapter 33 Prior occupant’s use, affliction and death When and when not to disclose............................. 309 Chapter 34 An income property’s operating data Verifiable fundamentals induce viable offers............. 313 Chapter 35 Disclosure on seller carrybacks Advice by agents for risk assessment........................ 325 Chapter 36 Seller’s net sales proceeds estimate Financial consequences of a sale, before taxes............ 337 Chapter 37 Buyer’s estimated acquisition costs The capital to buy real estate................................ 343 Chapter 38 Making an offer The intent to contract........................................ 355 Contract Chapter 39 Acceptance of an offer Time and nature of a response.............................. 371 Law Chapter 40 The counteroffer environment The seller’s objectives face a buyer’s offer.................. 381 Chapter 41 Contingency provisions Conditioning the close of escrow........................... 391 Chapter 42 The elimination of contingencies Occur, approve, waive or exercise........................... 405 Chapter 43 Cancellation excuses further performance Exercising the option to terminate......................... 415 Chapter 44 Time to perform The litigious time-essence provision........................ 425 Chapter 45 Cancellation, release and waiver Known and unknown claims............................... 439 Chapter 46 The seller’s breach Failure to act and act timely................................. 445 Chapter 47 The breaching buyer’s responsibilities First a monetary loss by the seller........................... 459 Chapter 48 Liquidated damages provisions Windfalls and responsibility for losses..................... 469 iv Real Estate Practice, Eighth Edition Chapter 49 Arbitration: the independent beast Lost right to correct a decision gone awry.................. 479 Chapter 50 The purchase agreement Types and variations........................................ 489 Purchase Chapter 51 A seller’s residence in foreclosure Agreement The equity purchase investor scheme....................... 495 Chapter 52 Income property acquisitions Investigating a property’s worth............................ 505 Chapter 53 A formal exchange Structuring a comprehensible transaction................ 511 Chapter 54 Real estate purchase options An irrevocable offer to sell................................... 521 Chapter 55 Vesting the ownership Vesting Possession and transfer of rights........................... 533 and Escrow Chapter 56 Going to escrow The performance of a purchase agreement................ 549 Complete the required Implicit Bias and interactive training online. Implicit Bias Implicit Bias and Federal and state fair housing law in the context of explicit and implicit bias Fair Housing Access for All: A Fair Housing Game™ A blending of video, animation, text, and voice in an engaging interactive experience that puts you directly into the shoes of transaction participants Table of Contents v No. 103 Form Name Buyer’s Listing Agreement 142 Page Table of 107 Listing Package Cost Sheet 117 Forms 119 Compensation Disclosure in a Real Estate Transaction 173 120 Modification of Listing Agreement 109 121 Release and Cancellation of Employment Agreement 70 Full 122 Identification of Prospective Buyers 106 Forms 123 Identification of Qualifying Properties 143 123-1 Demand for Payment of a Fee 104 130 Authorization to Inspect and Prepare a Home Inspection Report 229 132 Authorization to Structural Pest Control Operator 270 133 Authorization to Provide Services 123 150 Purchase Agreement 492 160 Offer to Grant an Option 525 180 Counteroffer 385 181 Cancellation of Agreement 442 181-1 Notice to Perform and Intent to Cancel 431 182 Waiver of Contingency 407 183 Notice of Cancellation 421 184 Rejection of Offer 373 269 Property Inspection — Buyer’s Request for Repairs 241 270 Final Walk-Through Inspection 242 300 Financial Disclosure Statement 326 305 Agency Law Disclosure 56 310 Good Faith Estimate of Seller’s Net Sales Proceeds 339 311 Good Faith Estimate of Buyer’s Acquisition Costs 350 352 Annual Property Operating Data Sheet (APOD) 319 460 Affidavit of Death 545 504 Agent’s Income Data Sheet 14 519 Affiliated Business Arrangement Disclosure Statement 151 527 Conflict of Interest 47 vi Real Estate Practice, Eighth Edition 102 Seller’s Listing Agreement 83 Partial 104 Loan Broker Listing 67 Forms 135 Request for Homeowner Association Documents 296 150 Purchase Agreement 160, 434 156 Equity Purchase Agreement 499 159 Purchase Agreement — Commercial Income Property 508 161 Standard Option to Purchase 527 300-1 Financial Disclosure Statement — Land Sales Contract 331 300-2 Financial Disclosure Statement — Lease Option Sale 329 304 Transfer Disclosure Statement (TDS) 192, 214 314 Natural Hazard Disclosure Statement 249 401 Escrow Instructions 558 403 Sales Escrow Worksheet 555 521 Transaction Coordination Sheet (Seller’s Agent) 28 Chapter 1: Brokerage activities: agent of the agent 1 Chapter 1 Brokerage activities: agent of the agent After reading this chapter, you will be able to: Learning understand an employing broker’s responsibility to continually oversee the real estate activities of the agents they employ; Objectives appreciate the office policies, procedures, rules and systems a broker implements to comply with their duties owed to clientele and others; and discuss how licensee status relates to labor regulations, taxation and issues of liability. clients licensed activities Key Terms independent contractor listing agreement (IC) As brokerage services became more prevalent in California in the mid-20th century and the public demanded greater consistency and competence in Introduction the rendering of these services, the state legislature began standardizing and to agency regulating: who is eligible to become licensees and offer brokerage services; the duties and obligations owed by licensees to members of the public; and the procedures for soliciting and rendering services while conducting licensed activities on behalf of clientele. Collectively, the standards set the minimum level of conduct expected of a licensee when dealing with the public, such as competency and honesty. The key to implementing these professional standards is the education and training of the licensees. 2 Real Estate Practice, Eighth Edition Individuals who wish to become real estate brokers are issued a broker license by the Department of Real Estate (DRE) only after completing extensive real estate related course work and meeting minimum experience requirements. On receiving the license, brokers are presumed to be competent in skill listing agreement A written employment and diligence, with the expectation that they will conduct themselves in a agreement used by manner which rises above the minimum level of duties owed to clientele brokers and agents and other members of the public. when an owner, buyer, tenant or lender retains a broker to For these reasons, the individual or corporation which a buyer or seller, render real estate landlord or tenant, or borrower or lender retains to represent them in a real transactional services estate transaction may only be a licensed real estate broker. as the agent of the client. [See RPI Form 102 and 103] To retain a broker to act as a real estate agent, the buyer or seller enters into an employment contract with the broker, called a listing agreement. Brokers are in a distinctly different category from sales agents. Brokers are Broker vs. authorized to deal with members of the public to offer, contract for and sales agent render brokerage services for compensation, called licensed activities. Sales agents are not.1 A real estate salesperson is strictly an agent of the employing broker. Agents cannot contract in their own name or on behalf of anyone other than their employing broker. Thus, an agent cannot be employed by any person who is a member of the public. This is why an agent’s license needs to be handed to the employing broker, who retains possession of the license until the agent leaves the employ of the broker.2 Only when acting as a representative of the broker may the sales agent perform brokerage services which only the broker is authorized to contract clients for and provide to others, called clients.3 Members of the public who retain brokers and Further, a sales agent may only receive compensation for the real estate agents to perform real estate related services. related activities from the employing broker. An agent cannot receive compensation directly from anyone else, e.g., the seller or buyer, or another licensee.4 Thus, brokers are the agents of the members of the public who employ them, while a broker’s sales agents are the agents of the agent, the individuals who render services for the broker’s clients by acting on behalf of the broker.5 As a result, brokers are responsible for all the activities their agents carry out within the course and scope of their employment.6 1 Calif. Business and Professions Code §10131 2 Bus & P C §10160 3 Grand v. Griesinger (1958) 160 CA2d 397 4 Bus & P C §10137 5 Calif. Civil Code §2079.13(b) 6 Gipson v. Davis Realty Company (1963) 215 CA2d 190 Chapter 1: Brokerage activities: agent of the agent 3 When a broker employs a sales agent to act on behalf of the broker, the broker Responsibility is to exercise reasonable supervision over the activities performed by the agent. Brokers who do not actively supervise their agents risk having their for licenses suspended or revoked by the DRE.7 continuous Here, the employing broker’s responsibility to the public includes: supervision on-the-job training for the agent in the procedures and practice of real estate brokerage; and continuous policing by the broker of the agent’s compliance with the duties owed to buyers and sellers. The sales agent’s duties owed to the broker’s clients and others in a transaction are equivalent to the duties owed them by the employing broker.8 The duties owed to the various parties in a transaction by a broker, which may be carried out by a sales agent under the employing broker’s supervision, oversight and management, include: the utmost care, integrity, honesty and loyalty in dealings with a client; and the use of skill, care, honesty, fair dealing and good faith in dealings with all parties to a transaction in the disclosure of information which adversely affects the value and desirability of the property involved.9 To ensure a broker’s agents are diligently complying with the duties owed The to clientele and others, employing brokers need to establish office policies, procedures, rules and systems relating to: employing soliciting and obtaining buyer and seller listings and negotiating real broker’s estate transactions of all types; management the documentation arising out of licensed activities which may affect the rights and obligations of any party, such as agreements, disclosures, reports and authorizations prepared or received by the agent; the filing, maintenance and storage of all documents affecting the rights of the parties; the handling and safekeeping of trust funds received by the agent for deposit, retention or transmission to others; advertisements, such as flyers, brochures, press releases, multiple listing service (MLS) postings, etc.; agents’ compliance with all federal and state laws relating to unlawful discrimination; and the receipt of regular periodic reports from agents on their performance of activities within the course and scope of their employment.10 7 Bus & P C §10177(h) 8 CC §2079.13(b) 9 CC §2079.16 10 California Department of Real Estate Regulations §2725 4 Real Estate Practice, Eighth Edition One method a broker uses to implement the requirement for supervision of employed agents is to develop a business model. So intended, the broker outlines the means and manner by which agents produce and service listings, and how purchase agreements are negotiated and closed. The creation of a plan for office operations logically starts by establishing categories for itemizing administrative and licensed activities, then a written presentation of the conduct required of agents to achieve the broker’s objectives for each item. [See Figure 1] Business Categories of business and licensed activities include: and licensed administrative rules, covering a description of the general business operations of the brokerage office, such as office routines, phone activities management, sign usage, budgetary allocations for agent-support activities (advertising, farming, etc.), agent interviews, goal setting and licensed activities daily work schedules; Dealing by DRE licensees with procedural rules, encompassing the means and methods to be used by members of the public agents to obtain measurable results (listings, sales, leases, mortgages, to offer, contract for and render real estate etc.); brokerage services for substantive rules, focusing on the documentation needed when compensation. producing listings, negotiating sales, leases or mortgages and fulfilling the duties owed by the broker to clientele and others; compliance checks, consisting of periodic (weekly) and event-driven reports (a listing or sale) to be prepared by the agent, and the review of files and performance schedules by the broker, office manager or assistants, such as listing or transaction coordinators; and supervisory oversight, an ongoing and continuous process of training agents and managing their activities which fall within the course and scope of their employment. The rules and procedures established by the broker to meet their responsibility to manage and oversee the conduct of their agents when acting on behalf of the broker needs to be agreed to in writing between the broker and the employed agents. A written employment contract details the duties of the sales agent and the agent’s need to comply with an office manual which contains the broker’s policies, rules, procedures and other conduct the broker deems necessary to fulfill their responsibility for supervision. Also, the written employment agreement needs to spell out the compensation the agent is to receive for representing the broker in soliciting and negotiating listings, purchase agreements, leases and financing.11 The (not so) Most sales agents receive compensation from their brokers based on a negotiated percentage of contingency fees received by the brokers for independent completed sales, leases or mortgages solicited, negotiated or processed by the contractor agents. 11 DRE Regs. §2726 Chapter 1: Brokerage activities: agent of the agent 5 Within each category of activity covering the broker’s management of their agents’ conduct for Figure 1 producing, servicing and negotiating listings and sales, is a list of items to be considered. Forming a Administrative Business Model E& O insurance institutional advertising hours/agents’ work workers’ compensation franchise affiliation schedules insurance trade organization business cards automobile insurance membership storage of documents binder MLS subscriptions (3 years) general comprehensive employment contracts office meetings/ business insurance with sales agents attendance agent policy manual (on agent pay, advances, agent contribution to procedural, substantive and escrow expenses and compliance disbursements bank trust accounts activities) production goals general business bank new agent phone/floor-time accounts qualifications and coverage interview procedures Organizational Procedures forms to be used e-mail content servicing buyers use of coordinators public record inspection (listings, property use of office equipment servicing property profiles, broadcasts, use of affiliated services listings (MLS, signs, wants, showings, ads, property qualifying, check lists, use of controlled profiles, open houses, etc.) businesses correspondence, client lists and follow- attorney inquiry/ showings, check lists, up referral to broker rents, etc.) trust fund handling (deposit and log) Substantive Activities taking property preparing offers FSBO submission listings (addenda and (documents/disclosures of offers (fee disclosure check lists, and addenda checklists, arrangements, listings, deposits, property duty checklists, advice dual agency, etc.) profiles, further on use of arbitration, preparation of approvals, fee setting, forfeiture, escrow, title, documents, use of seller profiles, etc.) misc. provisions, fee attorneys, added provisions, etc.) provisions Compliance pay contingent on file trust fund logs periodic schedule of report due audit and completeness reports dates listing logs transaction listing reports other events which logs sales reports trigger notices or reports to management Supervision continuous daily instructions on disciplined, or lax oversight propriety of acts within and allowing great constant follow-up the course and scope of discretion on compliance with employment use of assistants to procedures and degree of enforcement provide oversight substantive activities being tight and 6 Real Estate Practice, Eighth Edition Whether the broker withholds state and federal income tax on payment of an agents’ compensation depends on the type of employment agreement independent the broker and agent enter into, i.e., an independent contractor (IC) or contractor (IC) employee-employer (EE) agreement. [See RPI Form 506] A type of employment arrangement used by a real estate broker A sales agent licensed by the DRE and employed by a broker under an when hiring licensed independent contractor agreement and paid based on the broker’s receipt of sales agents and a contingency fee will not be treated as an employee for purposes of income other brokers as their supervised employees tax withholding or payroll contributions.12 to avoid employer contributions and The chief advantage for a real estate broker to use an IC agreement is withholdings for income taxes. the simplification of the bookkeeping process. An IC agreement avoids withholding for income taxes or Medicare and social security benefits from the agent’s fee while also avoiding employer contributions. In turn, the broker files a 1099 report with the Internal Revenue Service (IRS) naming each agent and stating the fee amount each received as an employee of the broker under a contingent-fee, IC agreement. To further simplify disbursement of the agent’s share of the fee, some brokers instruct and authorize escrow to disburse to the agent the amount of fees due the agent from the broker. These fees accrue to the broker on the close of a sales escrow. However, this “through system” of payment leaves the broker without adequate records for 1099 and workers’ compensation reporting and audits. Business For sales agents entering into an IC agreement, they report their fees received from their broker as business income (Schedule C). In turn, the agent expenses income all the business-related costs of operations incurred while acting within the course and scope of their employment with the broker. It does not matter what degree of control the broker actually exercises over the agent’s activities, none or enough to satisfy DRE supervisory requirements or total oversight as needed for first year licensees. However, even though the agreement is called an “independent contractor” agreement — an arrangement designed solely for income tax reporting purposes — the agent is an agent of their employing broker and definitely not a separate operator independent of their broker. When testing the conduct of an agent while engaged in real estate related activities, the IC provision in the broker-agent employment agreement cannot and does not change the agent’s classification as an agent of the broker under California real estate and labor laws.13 Thus, brokers who use an IC agreement are not to delude themselves to believe that somehow the agent may permissibly act independent of the broker, no supervision required. 12 Internal Revenue Code §3508 13 Gipson, supra Chapter 1: Brokerage activities: agent of the agent 7 Consider a sales agent who is employed by a broker under an IC agreement. Agent The broker gives the agent total discretion in handling of clientele and documentation of listings and sales. imposes As risk management, the IC agreement includes a provision calling for the liability on agent to hand the broker a binder for liability insurance coverage for the broker agent’s car, naming the broker as an insured. The IC agreement also requires all documents and funds received on listings and sales to be entered into and taken in the name of the broker, and all advertising and business cards to identify the agent as acting for the broker as an associate licensee. One day, while the sales agent is driving to list a property, the agent collides with another vehicle, injuring the driver. The driver makes a demand on the agent’s broker to pay for the driver’s money losses incurred due to the agent’s negligence. The broker rejects the demand, claiming the agent is an independent contractor, not an agent (much less an employee) of the broker, and thus the broker has no liability for the losses inflicted on the driver by the agent. The driver claims the broker is liable for their losses since the agent is a representative of the broker and was acting within the course and scope of their employment when the injuries occurred. Can the driver injured by the agent’s negligence recover their money losses from the agent’s broker? Yes! The sales agent is the agent of the broker as a matter of law, without concern for the type of employment agreement they have entered into. In spite of the IC employment agreement allowing total discretion to the agent in the conduct of handling of listings and sales, the agent is continuously The IC: an subject to supervision by the broker. Sales agents are agents of the broker, agent of the without regard to the tax purpose of their employment agreement. The injury presented in the prior scenario occurred while the agent was acting within broker the course and scope of their agency with the broker. Thus, the broker cannot escape liability for their agent’s negligence.14 The broker who hires agents who use their own vehicles to conduct brokerage activities by going to and from appointments, meetings and properties needs to be a named insured on the agent’s car insurance policy as a matter of the broker’s risk management. The employing broker also needs to maintain general comprehensive business liability insurance and professional liability coverage (errors and omissions insurance). Claims of tortious conduct of all sorts may arise out of listings and sales transactions solicited and negotiated by their agents and coverage is needed to defend or pay these claims. In part, supervision is critical to the reduction of the broker’s exposure to risks of liability for their sales agents’ failure to inspect, disclose, advise and care for clients. 14 Gipson, supra 8 Real Estate Practice, Eighth Edition Unemployment For the purposes of administering real estate law, a sales agent is considered both an agent and an employee when acting within the course and scope of insurance employment with a broker.15 benefits However, as with state and federal income tax withholding, an agent is not always treated as an employee. For example, licensed real estate sales agents, as well as associated brokers, are excluded employees for purposes of the California Unemployment Insurance Law. Even though a sales agent is considered both an agent and an employee under California real estate law, a broker does not have to contribute to the state unemployment insurance fund on behalf of the agent. In turn, the agent cannot collect unemployment benefits from the state if terminated from the employ of the broker. Receipt of compensation by a licensed real estate agent under an employment agreement, paid as a contingency fee for closing transactions, is the only test required for the broker to avoid paying unemployment benefits. When the agent is paid a contingency fee, not an hourly wage, the agent will be denied unemployment benefits regardless of the level of supervision and control the broker exercises over the agent’s real estate related activities.16 A sales agent is entitled to payment of minimum hourly wages from a broker Minimum if the agent is classified as an employee by California labor laws. This labor wage law classification is unrelated to tax law treatment. A labor law employee comes about due to the broker’s conduct, including constant supervision exclusion and total control over the agent’s means, manner and mode of engaging in activities requiring a real estate license. However, as agents of their broker, most agents by the nature of daily scheduling for appointments, property viewings and document preparation have a high level of discretion and control over when they conduct different aspects of their business. This is especially true of the hours spent outside of their broker’s office. Typically, the agents’ time in the office spent at the desk, or on the phones or floor, rarely take up more than one day a week, usually less than 20% of the time spent on real estate related listings and sales. Little additional time is spent in the office at staff meetings. As a result, agents are rarely considered employees, except for the public policy purpose of judging their conduct as a licensee under California real estate law. As an outside salesperson who regularly works more than half of their time away from their place of employment, selling items or obtaining contracts for services, a real estate sales agent is excluded from collecting a minimum wage from their broker.17 15 Grand, supra 16 Calif. Unemployment Insurance Code §650 17 Calif. Labor Code §1171 Chapter 1: Brokerage activities: agent of the agent 9 Consider an agent who is employed by a broker under an IC agreement. The An employee broker does not have a policy manual, training program or any requirements as to what forms to use and what duties are to be fulfilled by the agent (a under the dereliction of the broker’s duties of supervision). Once a month, the agent reports to the broker by preparing and presenting a transaction log noting the labor law listings and sales activity the agent has been involved in during the month. After several months of employment and no sales, the broker terminates the agent. During the employment, the broker disbursed funds to the agent as an advance draw against fees yet to be earned by the agent. Any amounts not reimbursed are payable to the broker on termination. Thus, by agreement, the broker calls due the amounts advanced and unpaid, and makes a demand on the agent for payment at the time of termination. The agent claims they are entitled to an offset since they are an employee of the broker and thus entitled to a minimum wage in amounts which exceed the advances received from the broker. The agent makes a demand on the broker for unpaid wages at the minimum rate per hour worked. To be due an hourly wage, the agent needs to demonstrate that the actual working relationship with the broker was more than just an agent of the broker employed as required by real estate law, but that of an employee under the labor code. To continue the previous example, the agent has to demonstrate that the Means, relationship while employed by the broker included total control by the broker over every means, manner and mode of conduct used by the manner and agent to carry out licensed activities on behalf of the broker, such that the agent was nearly without discretion to make decisions and operate on their mode of own. conduct Here, the broker’s supervision and management of the agent by implementing policies and procedures for the negotiation of real estate transactions were nearly nonexistent. While the sales agent was an agent of the broker, the sales agent was not under common law control of the broker as a servant hired to perform as directed under constant supervision. Thus, the sales agent was not an employee for the purposes of the labor law, and was not entitled to receive a minimum wage.18 Further and separately, the issue of being an employee excluded from collecting a minimum wage based on the agent’s classification as an outside salesperson was not of concern in the previously discussed example.19 However, even if the broker had controlled an agent’s activities, hours, scheduling and production of listings and sales, the agent still would have been outside the office more than half of the hours spent working for the broker. Thus, an agent who spends half of their working time outside the 18 CC §2079.13(b); Lab C §1171; Grubb & Ellis Company v. Spengler (1983) 143 CA3d 890 19 Grubb & Ellis Company, supra 10 Real Estate Practice, Eighth Edition office while classified as an employee under the labor law is definitely excluded from collecting a minimum wage due to their labor law status as an outside salesperson. For purposes of workers’ compensation insurance law, the relationship Workers’ between a broker and their employed agents is that of an employer and compensation their employees. As a consequence, all real estate brokers in California have to provide workers’ compensation insurance coverage for their sales coverage for agents.20 employees A broker who is unlawfully uninsured or forces agents to carry their own workers’ compensation insurance faces: a stop order from the Department of Industrial Relation’s Division of Labor Standards Enforcement (DLSE), preventing the broker from conducting business until proof of insurance is offered up; civil penalties and fines up to $100,000; and reimbursement claims from current and former agents for premiums they paid.21 For a broker who employs one or more agents, the broker is required to be covered by workers’ compensation insurance, in addition to any business, vehicle and professional liability insurance (errors and omissions coverage). The insurance coverages provide the broker with a financial safety net against agent-imposed liability by shifting the risk of loss to the insurance companies. Thus, the well supervised real estate brokerage business, as owned and managed by a broker who runs a properly conducted operation with concern for inherent risks, provides an enduring professional environment in which their sales agents will flourish. 20 Lab C §§3200 et seq 21 California Department of Real Estate Bulletin, Fall 2004, Page 10 Chapter 1: Brokerage activities: agent of the agent 11 To ensure a greater degree of consistency and competence in the Chapter 1 rendering of brokerage services, California law regulates: Summary who is eligible to become licensees and offer brokerage services; the duties and obligations licensees owe to members of the public; and the procedures for soliciting and rendering services while conducting licensed activities. Only licensed brokers are authorized to provide brokerage services to members of the public. Sales agents are representatives of the licensed broker, and render brokerage services on the broker’s behalf. When a broker employs a sales agent, the broker is to exercise reasonable supervision over the activities performed by the agent. Brokers who do not actively supervise their agents risk having their licenses suspended or revoked by the California Department of Real Estate (DRE). The duties owed to the various parties in a transaction by a broker, which may be carried out by a sales agent under the employing broker’s supervision, oversight and management, include: the utmost care, integrity, honesty and loyalty in dealings with a client; and the use of skill, care, honesty, fair dealing and good faith in dealings with all parties to a transaction in the disclosure of information which adversely affects the value and desirability of the property involved. Most sales agents receive compensation from their brokers as independent contractors based on a negotiated percentage of contingency fees received by the brokers for completed sales, leases or mortgages solicited, negotiated or processed by the agents. However, even though the agreement is called an “independent contractor” agreement, the agent is an agent of their employing broker and not a separate operator independent of their broker. As an outside salesperson who regularly works more than half of their time away from their place of employment, a real estate sales agent is excluded from collecting a minimum wage from their broker. However, all real estate brokers in California have to provide workers’ compensation insurance coverage for their sales agents. 12 Real Estate Practice, Eighth Edition clients...................................................................................................pg. 2 Chapter 1 independent contractor (IC)......................................................... pg. 6 Key Terms licensed activities.............................................................................pg. 4 listing agreement..............................................................................pg. 2 Quiz 1 Covering Chapters 1-6 is located on page 578. Chapter 2: An agent’s perception of riches 13 Chapter 2 An agent’s perception of riches After reading this chapter, you will be able to: Learning estimate the potential income and expenses an agent will likely experience when employed by a broker; and Objectives evaluate competing brokerage firms for suitability with an agent’s professional goals and expectations. net operating income (NOI) sales goal Key Terms (employment) Consider an individual who receives an original salesperson license from The the Department of Real Estate (DRE). The newly licensed agent contacts a real estate broker in response to an advertisement soliciting agents to join employing the broker’s office. The agent interviews the broker, and others, in an effort to find a suitable office environment to work in. broker avoids agent Eventually, the agent selects the office they feel is most able to provide the training and guidance they need to earn a living in real estate sales. deceptions During an agent interview, the broker addresses the question of earnings. The agent is told the employment relationship with the broker will be under an independent contractor (IC) agreement with workers’ compensation coverage provided by the broker. [See RPI Form 506] No income tax withholding or employer contributions exist, such as for: social security; Medicare; or unemployment insurance. 14 Real Estate Practice, Eighth Edition Form 504 Agent’s Income Data Sheet Page 1 of 2 Further, the broker explains the agent needs cash reserves or income from other sources to meet their living and business expenses for six to nine months. Several months will pass before income will be forthcoming from closings in which the agent will have participated. The brokerage office does not make monthly advances against future fees. To assist the agent in an analysis of potential earnings, an income and expense data worksheet is prepared by the agent. The agent enters the approximations made by the broker for the various expenses a typical agent may experience during their first year with the brokerage office. [See Form 504 accompanying this chapter] Chapter 2: An agent’s perception of riches 15 Form 504 Agent’s Income Data Sheet Page 2 of 2 The agent uses the worksheet to further analyze income, expenses, cash reserves and the sales goal they determine are necessary to provide an acceptable after-tax income for personal living expenses. As a prerequisite to an agent’s use of an income and expense data worksheet, the agent needs to collect income data during an interview with a prospective Data broker, including: underlying the price range of property the agent is most likely to list and sell; an income the number of sales the agent is likely to close in that price range during the first year; analysis 16 Real Estate Practice, Eighth Edition the gross broker fees generated by the number of sales during the first year; and the share of the gross broker fees the agent will receive under the fee- sharing schedule offered by the broker. The likely gross fees the broker is to receive and the agent’s share of those fees are entered on the worksheet as a result of the interview. [See Form 504 §§1 and 2] sales goal Ultimately, the sales goal set by the agent is reflected in the amount of after- The amount of after- tax income the agent seeks for themselves. [See Form 504 §11] tax income agents and brokers intend to earn as a result of their Until the worksheet is filled out accurately, projecting fees to be received real estate licensing by the agent, estimating expenses to be incurred and attempting to set sales activities. volume goals or probable after-tax earnings is an uneducated guess. The agent’s The volume of real estate sales closed by new agents during their first year in the business is a “numbers game.” Only a low percentage of all sales efforts personal role come to fruition in the form of fees received from closings. Thus, the type of person attracted to real estate sales needs to have an innate curiosity and enthusiasm for estimating and forecasting income and expenses if they are to succeed. A prospective agent who is discouraged or daunted by the exercise of completing a worksheet is unlikely to be a prime candidate for employment in the real estate business. The broker Brokers, by experience, tend to be more organized than agents. Brokers who employ agents are also better able to anticipate the income and expenses an steps agent will incur than recently licensed agents. It is the broker who is best forward, with able to draw a conclusion about an agent’s future with the broker’s office, not an agent new to the world of real estate sales or who has been languishing in information another office due to inadequate or nonexistent planning and organization. A broker’s primary objective when hiring agents is to increase the gross broker fees received by the office without a disproportionate increase in operating expenses. For the broker to make hiring a productive endeavor, the broker needs to organize an agent selection and evaluation plan to avoid the turnover of agents who remain with the office for only a short period of time. Long-term employment of agents contributes to a favorable industry-wide reputation for the broker, and provides a return to the broker for the time and energy invested with each agent during the employment process and the agent’s start-up period. Energy, money, time and enthusiasm all wane fast when the turnover of talented agents in an office is due to the failure of unrealistic expectations held by the agents. Chapter 2: An agent’s perception of riches 17 A broker’s full disclosure — upfront and prior to employment — covering the agent’s likely income and expenses, and why the fee sharing and expenses allocations are reasonable, leads to a realistic expectation of income by the agent. Monthly and quarterly sales goals may then be set at levels designed to meet projected earnings if the agent is employed by the broker. To control the agent’s interview and get long-term results, the broker needs Estimating to initiate the income and expense discussion, not wait until the prospective agent takes charge by raising the question of earnings. Earning a living is the the initial crux of entering the profession. cash To be ready for an interview with a prospective agent, the broker needs to investment prepare a worksheet by estimating the expenses the agent is most likely to incur. Also, the broker needs to estimate the initial cash investment the prospective agent is required to make to cover one-time, nonrecurring expenditures and the carrying costs for a period of time necessary to get a proper start in real estate sales. [See Form 504 §10] Once the operating expenses, nonrecurring costs and carrying costs to be incurred by the typical agent have been established — based on the broker’s history with their present agents — what remains is the difficult task of anticipating an agent’s gross fees from sales that will most likely close during the first year of employment. A couple of approaches for estimating future fees are apparent. For one, the broker may project a range of gross broker fee amounts, varying from the Forecasting earnings generated by a high producer to those of a low producer during gross fees their first year with the office. The various gross broker fee projections — ranging from low, medium to high — may be entered on separate copies of to set the income and expense worksheet. The agent’s expenses estimated for the expectations, first year are included in the worksheets. and goals Thus, the prospective agent’s after-tax income can be calculated based on various levels of sales. Another approach for the interview is to discuss the range of gross broker fees an agent can generate, without the broker first entering a projection of fees on the income and expense worksheet handed to the agent. Thus, the agent is left to enter and calculate the income they either believe they can produce or want to produce to attain the after-tax income they seek. Reviewed by the broker and the prospective agent under either approach, or a combination of approaches, the worksheet becomes both a budget and a sales goal for the agent. With an open-minded review of the pros and cons of income sharing and expense allocation, the broker encourages the agent to set attainable production goals. 18 Real Estate Practice, Eighth Edition At the same time, the broker confirms whether the prospective agent has the financial capacity to carry their personal and business expenses during the start-up period with the office before the fees from closings start to roll in. Steps a An employing broker informs a prospective agent about the out-of-pocket operating expenses the agent is most likely to incur while employed by broker takes the broker. Also, the agent needs to have a vehicle, computer and materials to inform required for transactions involving real estate sales, leasing or financing. Agents need to pay multiple listing service (MLS) fees to become part of the market. An explanation of the net operating income (NOI) from sales the net operating agent is to expect they will receive cannot be overlooked by the broker. income (NOI) (employment) Without these disclosures, an analysis of the agent’s long-term potential The net revenue generated by an with the office has not taken place. agent’s employment, calculated by These types of disclosures will help avoid either a termination of employment subtracting business or dissatisfaction over lost expectations. operating costs from the expected income from fees generated Thus, a realistic and relatively accurate disclosure of income, expenses and from sales, leasing or the initial investment an agent is to make on entering the employ of the financing transactions. broker: reduces the office turnover of agents; reduces the broker’s investment of time and energy hiring and training agents; and produces a sales staff whose income expectations are met based on their ability to attain the sales goals each have set for themselves. Selecting a After a few years of employment in the business of real estate sales, efficient agents generally want to earn more for the time they spend: broker by listing properties and buyers; comparative locating buyers and properties; and shopping engaging in all the activities surrounding a real estate sales transaction. Before walking into the broker’s or manager’s office with a demand for the office to cover more expenses and give the agent a larger share of the broker fees, the agent is to first conduct comparative shopping to determine how other brokers share expenses and fees with their agents. The first step for the agent interested in renegotiating their current employment arrangement with a broker or moving to another broker’s office is to prepare a worksheet on their current operating conditions. The worksheet details: what fees the agent has generated; the share of the fees the agent received; the operating expenses paid by the agent and the net income; and the after-tax income experienced during the past 12-month period. Chapter 2: An agent’s perception of riches 19 If the exercise goes no further, the worksheet may act as a budget or a basis for forecasting the next 12 months. Further, the variables controlling the amount of income and expenses may be analyzed, adjusted and projected to set sales goals the agent wants to attain during the next 12 months. The second step is to distinguish the agent’s current arrangement with their broker from the earning opportunities available with other acceptable brokerage offices. The comparative analysis is accomplished by preparing a worksheet for each prospective office. Information for the worksheet may be gathered from interviews with those brokers or their managers, or agents in those offices who have a handle on their income and expense arrangements with their broker. On completion of the worksheet for each office, a comparison shows the distinctions and parallels between the different offices. Armed with comparisons reflected by the data on the worksheets, the agent seeking to renegotiate fee splits and the allocation of expenses with their An informed current broker are able to structure their request for specific changes based comparison on the market place of employing brokers. Alternatively, the agent seeking to change offices uses the worksheet to make the same comparisons and size up prospective brokerage offices. Ultimately, the agent hopes to negotiate an income and expense sharing arrangement which satisfies the agent and provides a better opportunity for greater earnings — expectations realized based on comparison shopping and the agent’s past sales history. However, timing is important. The period during which the agent begins negotiations with their current broker or schedules interviews with other brokers can affect their results. For instance, at the height of a booming market, a broker is more willing to increase a productive agent’s share of the fees since the broker’s current overhead is already covered without the fees from additional sales. The agent’s advantage of a better fee split and cost allocation carries over into the inevitable slowdown in sales which follows every boom. Conversely, a new agent entering an office during a recessionary period just prior to an upswing in sales benefits from a broker’s attention to the care and training of new agents. Also important is the invaluable assistance of experienced agents in the office who have a little extra time on their hands. The extra time afforded by a slower market allows agents to assist others, a bonding process important for a successful future in real estate sales in the following years. 20 Real Estate Practice, Eighth Edition Chapter 2 A new sales agent seeking employment with a broker may use an income and expense data worksheet to analyze income, expenses, cash Summary reserves and the sales goal they need to meet to provide an acceptable after-tax income. Established brokers are better able to anticipate the income and expenses an agent will incur. Thus, a broker’s full disclosure of the agent’s likely income and expenses leads to realistic expectations of income by the agent. An employing broker needs to inform a prospective agent about the operating expenses the agent is likely to incur while employed by the broker. The agent needs to have a vehicle, computer and instruments and materials required for transactions involving real estate sales, leasing or financing. The agent also needs to pay multiple listing service (MLS) fees to become part of the market. If an agent later seeks to negotiate higher fee splits or relocate to a new brokerage office, they are best served completing an operating data worksheet to assess their current operating conditions and compare them with prospective brokerages. Comparative shopping allows the agent to request employment changes or relocate based on the current market place. Chapter 2 net operating income (NOI) (employment)............................ pg. 18 sales goal......................................................................................... pg. 16 Key Terms Quiz 1 Covering Chapters 1-6 is located on page 578. Chapter 3: Human resources: as managed by brokers 21 Chapter 3 Human resources: as managed by brokers After reading this chapter, you will be able to: Learning track agent and broker licensing and renewal trends though oscillations in the market cycle; Objectives anticipate the effect recessions have on broker and agent licensing; and implement strategies to operate a successful brokerage office and keep claims from clients and others under control. risk reduction program Key Terms Recessions are the best times to learn the most about real estate. Hiring newly- Everything is stressed, tightened to their limits, and displayed in slow motion minted real to best witness and absorb. estate agents Thus, a tense orchestration of participants, property, government, transactions, agreements, ancillary services, income, wealth, demographics, and similar in a recession real estate fundamentals exist. Recoveries are, by their nature, diametrically opposed. Everything becomes relaxed, tension disappears, and learning becomes a casualty. Everything gets a universal lift and everything is successful, like ships riding a virtuous incoming tide. In the recovery paradigm, what’s to go wrong with all this effortless synergy? 22 Real Estate Practice, Eighth Edition For 2023 and the immediate future, welcome to an enhanced learning environment made available only by a recession. Now is the instructive period of a business cycle which positions talented, recent licensees to max out the good times in the recovery phase of a business cycle. Recessions build and stay in power for the highly alert among us. And, in turn, sets up the longevity necessary to compile experience to competently advise consumers of real estate services. The Before an individual may act as a real estate agent and showcase a home in the flatlands, valleys or hills to earn a living – salary or fee – they first need prospective to become a salesperson licensed by the California Department of Real Estate (DRE). Once licensed, a real estate broker may hire them to work in agent their brokerage as their agent. and their To become licensed, the aspiring agent needs to pass the state licensing exam supervising administered by the DRE. Prior to applying for the state exam, the DRE broker requires the aspiring agent to complete three real estate courses provided by private schools whose courses are DRE approved or public institutions. The prospective agent who passes the state exam may become a salesperson — more commonly called a sales agent or simply an agent – in contrast to an individual licensed as a broker. Once licensed, the sales agent is employed by a broker. Thus, the agent will perform services in real estate transactions as the representative leashed to their broker for supervision – all mandated by state codes and regulations. In this way, the agent is the agent of the agent – their employing broker. Higher need Any fees for services an agent performs in transactions are always paid to their employing broker. The agent may be involved in transactions to render for broker services on behalf of their broker which generate fees such as: supervision leasing and property management; mortgage financing and trust deed notes; sales of interests in real estate, business opportunities and previously- owned mobilehomes. The employing broker who neglects to supervise an agent puts themselves and the agent at risk of a DRE licensing and sanctions review depending on the level of neglect. As the 2023 recession approaches, brokers need to consider a higher level of supervision and oversight of their agents — including broker-associates — to prevent any misconduct by their staff. During recessions, oversight generally becomes less demanding of the broker’s time since prudent employing brokers fire the non-productive agents on their staff, leaving fewer agents to manage. Chapter 3: Human resources: as managed by brokers 23 Figure 1 CA Original Broker and Sales Agent Licenses Issued Quarterly Misconduct by agents during recovery periods, circa 2013 to 2021, are generally neutralized and thus “covered” by the increasing value of the real estate interest acquired or encumbered in a transaction. In stark contrast, the inevitable loss of property value in a recession is no longer available to offset the losses incurred due to agent errors and transgressions. Instead, it is about the dollar value lost. Thus, the broker, the agent and their errors and omissions (E&O) insurance carrier will be covering collectible losses incurred by participants in transactions caused by the agent during the recession. During the real estate recovery and transition into a virtuous half cycle, The entry of members of the public become aware real estate has the very obvious potential of being a lucrative occupation. agents Motivated to switch professions as a source of greater earnings, these aspiring agents pile into courses to obtain a license. [See Figure 1] Of this optimistic cohort, approximately half complete their pre-licensing courses, pass the state exam and proudly emerge as a licensed agent. As always, the ripple effect of the wake created by the ever-greater pace of a recovery into boom time excesses becomes, descriptively, a recession – the other half cycle of real estate activity. It is then that the rush to enter the real estate profession peaks and enthusiasm for entering the profession quickly wanes, as it began in Q2 2022. In June 2022, there were 223,381 active agents. However, a total of 308,093 individuals held DRE agent licenses — meaning 27.5% were inactive. The cycle of Compared to the more stable period of January 2020 with 204,392 active sales agent agents out of a total of 286,270 licensed as agents — meaning 28.6% were inactive. [See Figure 2] licensing 24 Real Estate Practice, Eighth Edition Figure 2 California Active Real Estate Brokers and Agents When the 2023 recession passes and a recovery begins – likely around 2026 – the pace of new licensees will be about 40% of the peak experienced in Q2 2022. It happens in every regular business cycle, just as in 2000-2003 with its premature stimulus and 2007-2011 with its delayed stimulus. Rather than just providing brokerage services to other individuals, the superfluous agents —active and inactive — often turn to speculating in real estate as principals or syndicators. Thus, they often operate as insiders participating as a principal to locate property for family members, acquaintances, and for themselves to buy for their own account. In the recessionary market, anticipate a rapid market adjustment in a return to core economic fundamentals. Consider the supply of inventory for sale or lease. Inventory will only stabilize when the demand by end user-occupants puts a stop to further buildup of inventories. Meanwhile, sales prices decline, a dead-cat bounce of activity from returning speculators and startups runs it short course, followed by several months to build up buyer confidence before buyers and tenants activity starts to shrink inventory. Additionally, data indicating an end to a recession will be a return to rent-to- income and mortgage-to-income ratios in the residential markets at a third of gross income. The pandemic period created a seismic tsunami-style distortion, a three- Pandemic year flood-and-drain event in real estate user demand and pricing. While distortions COVID triggered the pandemic, the market conditions driving the pandemic demand and pricing were: low inventory of property for sale or lease; a low level of construction starts; massive business closing and job losses; and offsetting fiscal and monetary stimulus; Chapter 3: Human resources: as managed by brokers 25 Riding the pandemic distortions, by the time we hit the end of 2022, the active agent-to-broker ratio swelled to an average of 2.4 active agents for every active broker. This ratio has steadily climbed since bottoming at 1.9 agents per broker in 2012. With the volume of sales and leasing and the pricing of property and rents fast declining going into 2023, expect the current flock of agents to be underemployed for the lack of need for their services and the resulting reduced incomes. Many have and will become discouraged, dropping out of the active licensee population as unemployed by a broker. First as non- productive agents which inefficient brokers will allow to hang their license with the broker. Then as unemployed-inactive agents who eventually let their license expire without renewing in 2024-2026. Though many agents and brokers will appear active in DRE reports, a significant percentage of them will earn most or all their income outside of the brokerage business. Most new sales agents enter the world of real estate sales, leasing, and Challenges mortgage services with little understanding about real estate matters, limited agency training, and no practical experience in brokering transactions. for boomtime To remedy this lack of comprehensive experience needed to advise clients on licensees real estate transactions, agents need better education and training beyond what is covered in the mandatory pre-licensing courses. This increased need for pragmatic training includes: property investigations and disclosure training to develop an understanding about the costs of owning property to advise clients what consequences the transaction they are contemplating will bring to bear; training in financials, such as profit and loss statements and balance sheets; instructions on the economy of the real estate cycles; and a two-year apprenticeship as part of a team employed by the broker before they handle negotiations and documentation in a transaction unattended by a supervisor. The DRE needs to consider implementing research for a study and report on the type and duration of apprenticeship training needed to permit a licensee to operate on their own, without a team member present, when dealing with clients. For the DRE, it is a matter of their consumer protection oversight, especially in homebuyer transactions funded by mortgage borrowing. Hundreds of thousands of California families lost their homes over the past decades due simply to unsustainable mortgage debt incurred in a transaction Consequences negotiated by an agent. For mortgage lenders to get away with improper of improper mortgage lending does not eliminate a buyer’s broker’s agency duty owned to their buyer to advise their buyer about fully foreseeable financial trouble. training 26 Real Estate Practice, Eighth Edition It is likely that some 400,000 homes will be foreclosed on in the coming four to five years due solely to the negative equity which will develop for all mortgaged purchases made in the past four or five years. An agent with proper training in personal finance and real estate cycles may advise their client of the consequences obtained by home debt arrangements being built into a transaction to fund the closing and put a stop to most improperly structured purchases. When the deficiency in licensee training is not corrected, buyer lawsuits are the result. Tracking Without an administrative structure to verify the broker’s agents are conducting themselves as intended, the broker is exposed to an unnecessary agent risk of loss. Continuous oversight and policing limit unilateral changes, compliance distortions and deviations from agent conduct acceptable to the broker. with policy Oversight requires: the commitment of financial and human resources to report unacceptable conduct; the holding of training meetings; and the maintenance of client files. In a word: continuing management. Further, all acts carried out by a broker or their agents present the possibility that a client or other party will be injured financially. This includes investigations, inspections, negotiations, the giving of advice and the preparation of disclosures and contracts. It is the risk of causing these losses which the broker needs to control. Risks Reducing the are best limited by choosing activities which can be conducted with more risk certainty of a favorable result when relied on by the client or others in real estate transactions. Thus, brokers need to maintain a risk reduction program to keep claims from clients and others under control. risk reduction program Steps necessary to establish a risk reduction program include: Office procedures implemented and All activities exposing the broker to liability are identified based on actively overseen by a whether the activity risks causing the client or others to be injured broker to mitigate risk of liability by ensuring financially. the broker’s employees Each identified activity is broken down into its component parts, i.e., conduct themselves as the broker expects. all of the acts and events that comprise the activity, which need to be eliminated or performed properly to avoid causing a loss to a client, others or the broker. An evaluation is undertaken into what types of loss a client, others or the broker might experience if the broker or their agents engage in the identified activity, or a modified or alternative version of the activity. Chapter 3: Human resources: as managed by brokers 27 Brokerage activities are chosen and procedures adopted to set parameters for the agent’s conduct, based on whether they fall within the broker’s comfort zone for an acceptable level of exposure to liability. Agent compliance with authorized activities is tracked, coupled with ongoing remedial training and dispute resolution conduct for claims made by clients and others. By January 1, 2020, employing brokers with five or more employees were required to provide at least two hours of sexual harassment prevention training to all supervisory employees and at least one hour of training to all nonsupervisory employees. Supervisory conduct by brokers and managers includes: Policing of analysis of the agent’s income and expenses; business- setting the fees the agent needs to become financially viable; related setting production goals to meet the income target (clients and closings); conduct establishing the agent’s routines and activities likely to increase the agent’s productivity (overseeing time spent working for the broker); and insistence that compliance reports be prepared and submitted periodically to the office manager (weekly progress report) and on critical events (client employment, closings). [See RPI Forms 520 through 523-1; see Figure 3] Further, the broker obligation to clients and the DRE is to be actively involved in the agent’s fulfillment of the duties the broker owes to clients with whom the agent has contact. Thus, the agent knows from the beginning just what level of production is expected by the broker as a requisite for remaining with the office. Also, the broker will be demonstrating their expectation that the sales agent maintain a competitive attitude about assisting owners and buyers that do deals. Further, the office environment created will promote a greater probability of producing purchase agreements and closings, the results needed to succeed. The training may be completed: Protecting with other training; employees in a group or individually; and in shorter segments, if the segments meet the time requirement. Employers also need to provide this training to: seasonal employees; temporary employees; and employees hired to work for fewer than 6 months. 28 Real Estate Practice, Eighth Edition Figure 3 TRANSACTION COORDINATION SHEET (SELLER'S AGENT) - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - PAGE 2 OF 4 — FORM 521 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Property Listing Through Expiration or Close of Escrow (COE) Outside Reports/Docs Internal Reports/Docs Itemized Listing, Marketing, and Closing Activities: Check Items Date Date Date Needed Ordered/ Date Sent LISTING TAKEN: (continued) Form 521 Received Returned Requested NOTE:This form is used by a seller's agent and their transaction coordinator when managing employment by a seller and diligently marketing the property and locating a buyer, to review a checklist of activities for consideration, identify those Flyer designed, printed, delivered to property tasks completed and note those remaining to be performed. Seller's signed approval for flyer DATE: , 20. Prepared by. Thank you letter — Seller FACTS: Property address "For Sale" sign ordered Transaction Seller's agent CalBRE # Listed price $ , Transaction Coordinator:

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