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 the 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 the goal of finding buyers, a real estate agency commonly does the following:[citation needed]

  • Lists the property for sale to the public, often on an MLS, in addition to any other methods.
  • Provides the seller with a real property condition disclosure (if required by law) and other necessary forms.
  • Prepares necessary papers describing the property for advertising, pamphlets, open houses, etc.
  • Places a “For Sale” sign on the property indicating how to contact the real estate office and agent.
  • advertises the property.
  • Holds an open house to show the property.
  • Serves as a contact available to answer any questions about the property and schedule showing appointments.
  • Ensures that buyers are pre-screened and financially qualified to buy the property. (Sellers should be aware that the underwriter for any real estate mortgage loan is the final say.)
  • Negotiates price on behalf of the sellers.
  • Acts as a fiduciary for the seller, which may include preparing a standard real estate purchase contract.
  • Holds an earnest payment cheque in escrow from the buyer(s) until the closing if necessary. In many states, the closing is the meeting between the buyer and seller where the property is transferred and the titleis 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:

  • Exclusive right to sell

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 cooperate 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.

  • Exclusive agency

Exclusive agency allows only the broker the right to sell the property, and no offer of compensation is ever made to another broker. In this case, the property will never be entered into an MLS. Naturally, this limits the exposure of the property to only one agency.

  • Open listing

The property is available for sale by any real estate professional who can advertise, show, or negotiate the sale. The broker/agent who 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 payment of a commission if a sale takes 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.

In most of North America, 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;
  • how much, if any, of the compensation will be offered to a cooperating broker who may bring a buyer (required for MLS listings).

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 illegal in most, if not all, states.[citation needed]

Brokerage commissions

In consideration of the brokerage successfully finding a 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 buyer for the real estate, the successful negotiation of a purchase contract between the buyer and seller, or the settlement of the transaction and the exchange of money between buyer and seller. The median real estate commission charged to the seller by the listing (seller’s) agent is 6% of the purchase price. Typically, this commission is split evenly between the seller’s and buyer’s agents, with the buyer’s agent generally receiving a commission of 3% of the purchase price of the home sold.

In North America, commissions on real estate transactions are negotiable, there are new breed of marketplaces that facilitate the process of negotiation.[11] Local real estate sales activity usually dictates the amount of agreed commission. Real estate commission is typically paid by the seller at the closing of the transaction as detailed in the listing agreement.

The difference between salespersons and brokers

Before the Multiple Listing Service (MLS) was introduced in 1967, when brokers (and their licensees) only represented sellers, the term “real estate salesperson” may have been more appropriate than it is today, given the various ways that brokers and licensees 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 licensee.

Real estate education

To become licensed, most states require that an applicant take a minimum number of classroom hours before taking the state licensing exam. Such education is often provided by real estate firms or by education companies, either of which are typically licensed to teach such courses within their respective states. The courses are designed to prepare the new licensee primarily for the legal aspects of the practice of real estate and to pass the state licensing exam.

Once licensed, the licensee in most states is initially designated a salesperson and must work under a broker’s license. Some other states have recently eliminated the salesperson’s license and instead all licensees in those states automatically earn their broker’s license.

A salesperson must place their license under a managing broker. Typically there may be multiple licensees holding broker’s licenses within a firm but only one broker or the firm itself, it the managing or principal broker and that individual or firm is then legally responsible for all licenses held under their license.

The term agent is not to be confused with salesperson or broker. An agent is simply a licensee that has entered into an agent relationship with a client. A broker can also be an agent for a client. It is commonly the firm that has the actual legal relationship with the client through one of their sales staff, be they salespersons or brokers.

In all states, the real estate licensee must disclose to prospective buyers and sellers the nature of their relationship within the transaction and with the parties. See below for a broker/licensee relationship to sellersand their relationship to buyers.

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, they obtain a real estate salesperson’s license (some states use the term “broker”) from the state in which s/he will practice. To obtain a real estate license, the candidate must take specific coursework (between 40 and 90 hours) and pass a state exam on real estate law and practice. To work, salespersons must be associated with (and act under the authority of) a real estate broker. In Delaware, for example, the licensing course requires the candidate to take 99 classroom hours in order to qualify to sit for the state and national examination. In each successive year thereafter, the license holder must participate in continuing education in order to remain abreast of state and national changes.

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 their own brokerage. In addition, some states allow college graduates to apply for a broker’s 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 an agent. 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 allow licensed attorneys to become real estate brokers without taking any exam. In some states, there are no “salespeople” as all licensees are brokers.[3]

In the United States, Realtor(r) (capitalized) is a registered trademark of the National Association of Realtors (NAR). There are 1.3 million Realtors, mostly in the United States, and an additional 1 million licensed real estate agents who are not members of NAR and cannot use the trademarked title of “realtor”.[4] However, the U.S. Bureau of Labor Statistics claims only about 600,000 working brokers/salespersons.[5]

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Agency relationships with clients versus non-agency relationships with customers

  • Relationship: Conventionally, the broker provides a conventional full-service, commission-based brokerage relationship under a signed listing agreement with a seller or a “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 that define and control the nature of the representation.

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(s) is a buyer or a seller. The broker and his licensed real estate salespersons (salesmen or brokers) then become the agents of the principal.

  • Non-agency relationship: where no written agreement or fiduciary relationship exists, a real estate broker and his sales staff work with a principal who is known as the broker’s customer. When a buyer who has not entered into a Buyer Agency agreement with the broker buys a property, 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.

Transaction brokers

Some state Real Estate Commissions – notably Florida’s[6] after 1992 (and extended in 2003) and Colorado’s[7] after 1994 (with changes in 2003) – created the option of having no agency or fiduciary relationship between brokers and sellers or buyers. Having no more than a facilitator relationship, transaction brokers assist 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:[8]

“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”[9][10] and the statute required written disclosure of the transaction brokerage relationship to the buyer or seller customer only through July 1, 2008.

In the case of both Florida[10] and Colorado,[7] dual agency and sub-agency (where both listing and selling agents represent the seller) no longer exist.

Designated Agency

The most recent development in the practice of real estate is “designated agency” which was created to permit individual licensees within the same firm, designated by the principal broker, to act as agents for individual buyers and sellers within the same transaction. In theory therefore, two agents within the same firm act in strict fiduciary roles for their respective clients. Some states have adopted this practice into their state laws and others have decided this function is inherently problematic, just as was dual agency. The practice was invented and promoted by larger firms to make it possible in theory to handle the entire transaction in house without creating a conflict of interest within the firm.

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, 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 an “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.