In Most parts of the U.S. a Person Must Have a License to Sell Real Estate for Another
In Stockton, a real estate broker is a term which describes a party who acts as an intermediary between sellers and
buyers of real estate (or
real property as it is known elsewhere) and attempts to find
sellers who wish to sell and buyers who wish to buy. In the United States, the relationship was originally established by reference to the English common law of agency with the broker having a fiduciary relationship with his clients.
Real estate brokers and their salespersons (commonly called "real estate agents" or, in some states, "brokers") assist sellers in
marketing their property and selling it for the highest possible price under the best terms. When acting as a Buyer's agent with a signed agreement (or, in many cases, verbal agreement, although a broker may not be legally entitled to his commission unless the agreement is in writing), they assist buyers by helping them purchase property for the lowest possible price under the best terms. Without a signed agreement, brokers may assist buyers in the acquisition of property but still represent the seller and the seller's interests.
In most jurisdictions in the United States, a person is required to have a license in order to receive remuneration for services rendered as a real estate broker. Unlicensed activity is illegal, but buyers and sellers acting as principals in the sale or purchase of real estate are not required to be licensed. In some states,
attorneys are allowed to handle real estate sales for compensation without being licensed as brokers or agents.
The difference between salespersons and brokers
Before the Multiple Listing Service was introduced in 1967, when brokers (and their agents) only represented sellers, the term "real estate salesperson" may have been more apt than it is today, given the various ways that brokers and agents now help buyers through the process rather than merely "selling" them a property. Legally, however, the term "salesperson" is still used in many states to describe a real estate agent.
Real estate education: In order to become licensed, most states require that an applicant take a minimum number of classes before taking the state licensing exam. Such education is often provided by real estate brokerages as a means to finding new agents.
Today in California and many
other states, the real estate agent (acting as an agent of the broker with whom he/she is employed) is required to disclose to prospective buyers and sellers who represents whom. See below for a broker/agent’s relationship to sellers and their relationship to buyers.
While some people may refer to any licensed real estate agent as a real estate broker, a licensed real estate agent is a professional who has obtained either a real estate salesperson's license or a real estate broker's license.
In the United States, there are commonly two levels of real estate professionals licensed by the individual states, but not by the federal government:
Real estate salesperson (or, in some states, Real estate broker)
When a person first becomes licensed to become a real estate agent, he/she obtains a real estate salesperson's license (or some states use the alternative term, "broker") from the state in which he/she will practice. If you want to obtain a real estate license, the candidate must take specific coursework (of between 40 and 90 hours) and then pass a state exam on real estate law and practice. In order to work, salespersons must then be associated with (and act under the authority of) a real estate broker.
Many states also have reciprocal agreements with other states, allowing a licensed individual from a qualified state to take the second state's exam without completing the course requirements, or, in some cases, take only a state law exam.
Real estate broker (or, in some states, qualifying broker):
After gaining some years of experience in real estate sales, a salesperson may decide to become licensed as a real estate broker (or Principal/qualifying broker) in order to own, manage or operate his/her own brokerage. In addition, some states allow college graduates to apply for a broker license without years of experience. College graduates fall into this category once they have completed the state required courses as well. California allows licensed
attorneys to become brokers upon passing the broker exam, without having to take the requisite courses required of agent. Education in lieu of experience Commonly more course work and a broker's state exam on real estate law must be passed. Upon obtaining a broker's license, a real estate agent may continue to work for another broker in a similar capacity as before (often referred to as a broker associate or associate broker) or take charge of his/her own brokerage and hire other salespersons (or broker) licensees. Becoming a branch office manager may or may not require a broker's license. Some states such as
New York allow licensed attorneys to become real estate brokers without taking any exam. In some states, such as
Colorado, there are no "salespeople", as all licensees are brokers.
A Realtor is a real estate professional, usually a broker or salesperson, who is a member of the
National Association of Realtors (NAR). There are 1.3 million Realtors, mostly in the US, and an additional 1 million licensed real estate agents who are not members of NAR and cannot use the term "Realtor". However, note that the US Bureau of Labor Statistics claims only about 600,000 working brokers/salespersons.
Agency relationships with clients versus Non-Agency relationships with customers
Agency relationships in residential real estate transactions involve the legal representation by a real estate broker (on behalf of a real estate company) of the principal, whether that person or persons is a buyer or a seller. The broker (and his/her licensed real estate agents) then becomes the agent of the principal.
- Agency relationship: Traditionally, the broker provides a conventional full-service, commission-based brokerage relationship under a signed
listing agreement with a seller or "buyer representation" agreement with a buyer, thus creating under common law in most states an agency relationship with fiduciary obligations. The seller or buyer is then a client of the broker. Some states also have statutes which define and control the nature of the representation.
- Non-agency relationship: where no written agreement nor fiduciary relationship exists, a real estate broker (and his agents) works with a principal who is then known as the broker’s customer. When a buyer, who has not entered into a Buyer Agency agreement with the broker and buys a property, then that broker functions as the sub-agent of the seller’s broker. When a seller chooses to work with a transaction broker, there is no agency relationship created.
Some state Real Estate Commissions, notably
Florida's after 1992 (and extended in 2003) and
Colorado's after 1994 (with changes in 2003), created the option of having no agency nor fiduciary relationship between brokers and sellers or buyers. Having no more than a facilitator relationship, transaction brokers assists buyers, sellers, or both during the transaction without representing the interests of either party who may then be regarded as customers.
As noted by the South Broward Board of Realtors, Inc. in a letter to State of Florida legislative committees:
"The Transaction Broker crafts a transaction by bringing a willing buyer and a willing seller together and assists with the closing of details. The Transaction Broker is not a fiduciary of any party, but must abide by law as well as professional and ethical standards." (such as NAR Code of Ethics)
The result was that in 2003, Florida created a system where the default brokerage relationship had "all licensees …operating as transaction brokers, unless a single agent or no brokerage relationship is established, in writing, with the customer" and the statute required written disclosure of the transaction brokerage relationship to the buyer or seller customer only through July 1, 2008.
In both Florida and Colorado's case, dual agency and sub-agency (where both listing and selling agents represented the seller) no longer exist.
Dual or limited agency
Dual agency occurs when the same brokerage represents both the seller and the buyer under written agreements. Individual state laws vary and interpret dual agency rather differently.
Many states no longer allow dual agency. Instead, "transaction brokerage" provides the buyer and seller with a limited form of representation, but without any fiduciary obligations (see Florida law). Buyers and sellers are generally advised to consult a licensed real estate professional for a written definition of an individual state's laws of agency, and many states require written Disclosures to be signed by all parties outlining the duties and obligations.
- If state law allows for the same agent to represent both the buyer and the seller in a single transaction, the brokerage/agent is typically considered to be a Dual Agent. Special laws/rules often apply to dual agents, especially in negotiating price.
- In some states (notably Maryland), Dual Agency can be practiced in situations where the same brokerage (but not agent) represent both the buyer and the seller. If one agent from the brokerage has a home listed and another agent from that brokerage has a buyer-brokerage agreement with a buyer who wishes to buy the listed property, Dual Agency occurs by allowing each agent to be designated as “intra-company” agent. Only the broker himself is the Dual Agent.
- Some states do allow a broker and one agent to represent both sides of the transaction as dual agents. In those situations, conflict of interest is more likely to occur, typically resulting in the loss of advocacy for both parties.
Types of services that a broker can provide
Since each state's laws may differ from others, it is generally advised that prospective sellers or buyers consult a licensed real estate professional.
These services are also changing as a variety of
real estate trends re-engineer the industry.
- Comparative market analysis (CMA) - an estimate of the home's value compared with others. This differs from an appraisal in that property currently for sale may be taken into consideration (competition for the subject property).
- Exposure - Marketing the real property to prospective buyers.
- Facilitating a Purchase - guiding a buyer through the process.
- Facilitating a Sale - guiding a seller through the selling process.
- FSBO document preparation - preparing necessary paperwork for "Sale By Owner" sellers.
- Full Residential Appraisal - but only, in most states, if the broker is also licensed as an appraiser.
- Home Selling Kits - guides to how to market and sell a property.
- Hourly Consulting for a fee, based on the client's needs.
- Leasing for a fee or percentage of the gross lease value.
- Property Management.
- Exchanging property.
- Auctioning property.
- Preparing contracts and leases. (Not in all states.)
The sellers and
buyers themselves are the principals in the sale, and real estate brokers (and the broker's agents) are their agents as defined in the law. However, although a real estate agent commonly fills out the
real estate contract form, agents are typically not given power of attorney to sign the real estate contract or the
deed; the principals sign these documents. The respective real estate agents may include their brokerages on the contract as the agents for each principal.
The use of a real estate broker is not a requirement for the sale or conveyance of real estate or for obtaining a mortgage loan from a lender. However, once a broker is used, the settlement attorney (or party handling closing) will ensure that all parties involved be paid.
Lenders typically have other requirements, though, for a loan.
Services provided to both buyers and sellers
In addition to the services to sellers and buyers described below, most real estate agents coordinate various aspects of the closing.
Real estate brokers (and their agents) typically do not provide title service such as title search or
title insurance, do not conduct surveys or formal
appraisals of the property such as those required by
lenders, and do not act as lawyers for the parties, although they may "coordinate" these activities with the appropriate specialists. Some real estate brokers may be associated with loan officers who may help to finance buyers to make their purchase.
Regardless of whether a real estate agent assists
buyers of real estate, negotiating skills and
knowledge of financing options are important.
Real estate brokers and sellers
Services provided to seller as client
Upon signing a listing contract with the seller wishing to sell the real estate, the brokerage attempts to earn a commission by finding a buyer for the sellers' property for highest possible price on the best terms for the seller. In Canada, most provinces' laws require the real estate agent to forward all written offers to the seller for consideration or review.
To help accomplish this goal of finding buyers, a real estate agency commonly does the following:
Wright Realtors Yard Sign
- Listing the property for sale to the public, often on a
Multiple Listing Service, in addition to any other methods.
- Based on the law in several states, providing the seller with a real property condition disclosure form, and other forms which may be needed.
- Preparing necessary papers describing the property for advertising, pamphlets, open houses, etc.
- Generally placing a "For Sale" sign on the property indicating how to contact the real estate office and agent.
- Marketing the property. Marketing is often the biggest outside expense in listing a property.
- In some cases, holding an Open house to show the property.
- Being a contact person available to answer any questions about the property and to schedule showing appointments
- Ensuring buyers are prescreened so that they are financially qualified to buy the property; the more highly financially qualified the buyer is, the more likely the closing will succeed.
- Negotiating price on behalf of the sellers. The seller's agent acts as a fiduciary for the seller. This may involve preparing a
standard real estate purchase contract by filling in the blanks in the contract form.
- In some cases, holding an
earnest payment check in
escrow from the buyer(s) until the
closing. In many states, the closing is the meeting between the buyer and seller where the property is transferred and the title is conveyed by a deed. In other states, especially those in the West, closings take place during a defined
escrow period when buyers and sellers each sign the appropriate papers transferring
title, but do not meet each other.
The "listing" contract
Several types of listing contracts exist between broker and seller. These may be defined as:
In this type of Agreement, the broker is given the exclusive right to market the property and represents the seller exclusively. This is referred to as
seller agency. However, the brokerage also offers to co-operate with other brokers and agrees to allow them to show the property to prospective buyers and offers a share of the total real estate commission.
An alternative form, "Exclusive Agency", allows only the broker the right to sell the property, and no offer of compensation is ever made to another broker. In that case, the property will never be entered into an MLS. Naturally, that limits the exposure of the property to only one agency.
This is an Agreement whereby the property is available for sale by any real estate professional who can advertise, show, or negotiate the sale. Whoever first brings an acceptable offer would receive compensation. Real estate companies will typically require that a written agreement for an open listing be signed by the seller to ensure the payment of a commission if a sale should take place.
Although there can be other ways of doing business, a real estate brokerage usually earns its commission after the real estate broker and a seller enter into a
listing contract and fulfill agreed-upon terms specified within that contract. The seller's real estate is then listed for sale, frequently with property data entered into a
Multiple Listing Service (MLS) in addition to any other ways of advertising or promoting the sale of the property.
In most of North America, where brokers are members of a national association (such as
NAR in the United States or the Canadian Real Estate Association), a listing agreement or contract between broker and seller must include the following: starting and ending dates of the agreement; the price at which the property will be offered for sale; the amount of compensation due to the broker and how much, if any, will be offered to a co-operating broker who may bring a buyer. Without an offer of compensation to a co-operating broker (co-op percentage or
flat fee), the property may not be advertised in the MLS system.
Net Listings: Property listings at an agreed-upon net price that the seller wishes to receive with any excess going to the broker as commission are not legal in most, if not all, states.
In consideration of the brokerage successfully finding a satisfactory buyer for the property, a broker anticipates receiving a commission for the services the brokerage has provided. Usually, the payment of a commission to the brokerage is contingent upon finding a satisfactory buyer for the real estate for sale, the successful
negotiation of a purchase contract between a satisfactory buyer and seller, or the settlement of the transaction and the exchange of money between buyer and seller.
In North America commissions on real estate transactions are negotiable. Local real estate sales activity usually dictates the amount of commission agreed to. Real estate commission is typically paid by the seller at the closing of the transaction as detailed in the listing agreement.
Real estate brokers who work with lenders may not receive any compensation from the lender for referring a client to a specific lender. To do so would be a violation of a (US) federal law known as the
Real Estate Settlement Procedures Act (RESPA). All lender compensation to a broker must be disclosed to all parties. A commission may also be paid during negotiation of contract base on seller and agent.
With the sellers’ permission, a lockbox is placed on homes that are occupied and, after arranging an appointment with the home owner, agents can show the home. When a property is vacant or where a seller may be living elsewhere, a lockbox will generally be placed on the front door. The listing broker helps arrange showings of the property by various real estate agents from all companies associated with the MLS.
The lockbox contains the key to the door of the property and the box can only be opened by licensed real estate agents (often only with authorization from the listing brokerage), by using some sort of secret combination or code provided by the brokerage or the issuer of the lockbox.
Shared commissions with co-op brokers
If any buyer's broker (or any of his/her agents) brings the buyer for the property, the buyer's broker would typically be compensated with a co-op commission coming from the total offered to the listing broker, often about half of the full commission from the seller. If an agent or salesperson working for the buyer's broker brings the buyer for the property, then the buyer's broker would commonly compensate his agent with a fraction of the co-op commission, again as determined in a separate agreement. A discount brokerage may offer a reduced commission in the event no other brokerage firm is involved and no co-op commission is paid out.
If there is no co-commission to pay to another brokerage, the listing brokerage receives the full amount of the commission minus any other types of expenses.
Potential points of contention for agents
Real estate commissions are becoming a point of controversy.
Home values in many areas have quadrupled over the past 20 years. This may be contributing to the increased number of licensed agents and growing competition between them. The number of real estate agents in areas tends to rise when home values do, and the productivity of existing agents goes down.
Another controversy exists around how commissions paid to real estate agents are disclosed to buyers and the effect additional seller incentives may have on the negotiation process and final purchase price.
If a listing agent sells a property for any amount above the listed price, he in turn will make additional income. In theory, this will motivate him/her to get top dollar price for his client, the seller. However, if the agent representing the buyer attempts to obtain a lower sales price for his client, then he/she would make a lower commission. Thus, it could be considered to be in the agent's best interest to advise his client to purchase the property at a higher price. Although not very likely since the difference in the commission is very little and the agent would not want to
jeopardize the deal.
According to economist Steven Levitt in his 2005 book Freakonomics, in practical terms, there is rarely a great enough difference between the listing (asking) price and the negotiated selling price to make a significant difference between the commissions generated on each side, and certainly hardly enough to justify an agent failing in his fiduciary duty to obtain the best terms for his/her client. However, when an agent is selling their own property, there exists a greater incentive to sell for a higher price and this is seen in examining historical home sale prices.
Another potential conflict of interest exists when a listing agent in a very active real estate market has incentive to sell properties quickly at unnecessarily low prices in order to benefit from a high volume of sales.
Real estate brokers and buyers
Services provided to buyers
With the increase in the practice of buyer brokerage in the US, especially since the late 1990s in most states, agents (acting under their brokers) have been able to represent buyers in the transaction with a written "Buyer Agency Agreement" not unlike the "Listing Agreement" for sellers referred to above. In this case, buyers are clients of the brokerage.
Some brokerages represent buyers only and are known as Exclusive Buyer Agents (EBAs). Consumer Reports states "You can find a true buyer's agent only at a firm that does not accept listings" The advantages of using an Exclusive Buyer Agent is that they avoid conflicts of interest by working in the best interests of the buyer and not the seller, avoid homes and neighborhoods likely to fare poorly in the marketplace, ensure the buyer does not unknowingly overpay for a property, fully informs the buyer of adverse conditions, encourages the buyer to make offers based on true value instead of list price which can sometimes be overstated, and works to save the buyer money. A buyer agency firm which commissioned a study found EBA purchased homes were seventeen times less likely to go into
A real estate brokerage attempts to do the following for the buyers of real estate only when they represent the buyers with some form of written buyer-brokerage agreement:
Due to the importance of the role of representing buyers' interests, many brokers who seek to play the role of client advocate are now seeking out the services of Certified Mortgage Planners, industry experts that work in concert with Certified Financial Planners to align consumers' home finance positions with their larger financial portfolio(s).
In most states, until the 1990s, buyers who worked with an agent of a real estate broker in finding a house were customers of the brokerage, since the broker represented only sellers.
- Find real estate in accordance with the buyers needs, specifications, and cost.
- Takes buyers to and shows them properties available for sale.
- When deemed appropriate, pre-screens buyers to ensure they are financially qualified to buy the properties shown (or uses a mortgage professional to do that task).
- Negotiates price and terms on behalf of the buyers and prepares standard real estate purchase contract by filling in the blanks in the contract form. The buyer's agent acts as a fiduciary for the buyer.
Today, state laws differ. Buyers and/or sellers may be represented. Typically, a written "Buyer Brokerage" agreement is required for the buyer to have representation (regardless of which party is paying the commission), although by his/her actions, an agent can create representation.
- Find real estate in accordance with the buyers’ needs, specifications, and affordability.
- Take buyers to and shows them properties available for sale.
- When deemed appropriate, prescreen buyers to ensure they are financially qualified to buy the properties shown (or uses a
mortgage professional to do that task).
- Assist the buyer in making an offer for the property.
The impact of globalization on real estate brokers' activities
Globalization has had an immediate and powerful impact on real estate markets, making them an international working place. The rapid growth of the Internet has made the international market accessible to millions of consumers. A look at recent changes in homeownership rates illustrates this. Minority homeownership jumped by 4.4 million during the 1990s, reaching 12.5 million in 2000, according to the Fannie Mae Foundation. Foreign direct investment in U.S. real estate has increased sharply from $38 billion in 1997 more than $50 billion in 2002 according to Census data.
Most local real estate agents view the foreign market as a significant revenue potential and may have already worked with international clients in their local market, new immigrants or more sophisticated investors from different cultures and from other countries. For example, they are providing value-added services to an overseas relocation employee figure out which inoculations his or her children will need as well as the steps needed to register a car in the United States. Real estate brokers want to keep central to the transaction, protect the best interests of their members and address the unique needs of each multicultural global client by acquiring specialized training and designations. (See below for more)
In 2007 the Mexican Association of Real Estate Professionals in Mexico, AMPI, and the NAR, National Association of Realtors in the US, signed a bilateral contract for international real estate business cooperation. Also at the local level, many other state and local associations are helping other countries achieve the same result. For instance, in New Mexico, a historically multicultural state, under the RANM, Realtor Association of New Mexico and the President’s Advisory Council, is looking into forming an ambassador association to help a foreign country into signing a bilateral agreement with the NAR. In New Mexico, there are 4500 licensed real estate professionals and only 14 or 15 CIPS designees, out of whom, only 6 speak a language other than English.
A person may attend a pre-license course (often 60 actual hours) and be tested by the state for a real estate agent's license. Chapters of Alison Rogers' book Diary of a Real Estate Rookie describes the author's experience taking a 75-hour pre-license course in New Jersey and a 75-hour pre-license course in New York. Upon passing, the new licensee must place their license with an established real estate firm, managed by a broker. Requirements vary by state but after some period of time working as an agent, one may return to the classroom and test to become a broker. Brokers may manage or own firms. Each branch office of a larger real estate firm must be managed by a broker.
States issue licenses for a multi year period and require real estate agents and brokers to complete continuing education prior to renewing their licenses. Many states recognize licenses from other states and issue licenses upon request to existing agents and firms upon request without additional education or testing however the license must be granted before real estate service is provided in the state.
Several notable groups exist to promote the industry and to assist members who are in it.
The National Association of Realtors (NAR) is the largest real estate organization and one of the largest trade groups anywhere. Their membership exceeds one million. NAR also has state chapters as well as thousands of local chapters. Upon joining a local chapter, a new member is automatically enrolled into the state and national organizations. When the principals of a firm join, all licensed agents in that firm must also belong. An advantage of membership is access to the local Multiple Listing Service (MLS) (sometimes county-wide, sometimes broader in coverage, which exists for the benefit of members and which provides access following the payment of additional dues to the local system.
The Realtor Political Action Committee (RPAC) is a separate entity, and also the lobbying arm of NAR. In 2005, they were considered the largest PAC in the United States. According to realtor.org, RPAC is the largest contributor of direct contributions to federal candidates.
The National Association of Exclusive Buyer Agents is a group of agents and brokers who work in firms that represent buyers only. They assist in locating exclusive buyer agents for home buyers through the website www.naeba.org .
The National Association of Real Estate Brokers (NAREB) was founded in 1947 as an alternative for African Americans who were excluded from the dominant NAR. Both groups allow members to join without regard to race. However, NAREB has historically been an African American-centric group with a focus on developing housing resources for intercity populations.
Compensation has traditionally been based on a percentage of the sales price, split between the buying and selling brokers, and then between the agent(s) and his/her real estate agency. While a split based on the percentage received by the broker is generally normal, in some brokerages agents may pay a monthly "desk fee" for office costs, monthly fee, etc. and then retain 100% of the commission received.