Real Estate Broker Pre-exam Review Book

Published by Wisconsin REALTORS® Association 4801 Forest Run Road, Madison, Wisconsin 53704 Copyright of Course Materials © 2013 by Wisconsin REALTORS® Association Second Edition Credits for Course Book Jennifer Lindsley Production Assistance by: Chris Dregne, Member Products Specialist WRA Nichole Mickelson, Business Services WRA About the Course Book Author Jennifer Lindsley is the Director of Training and Staff Attorney for the Wisconsin REALTORS® Association (WRA). Jennifer is a licensed broker and member of the Real Estate Educators Association. She earned her J.D. from the University of Wisconsin Law School and her B.A. from Portland State University in Portland, Oregon. 1.0

The information and materials contained in this product are provided exclusively for educational purposes and are solely intended to be statements of general legal principles. The information and materials are not to be construed, interpreted, relied upon or used as legal advice in any fashion, including but not limited to use in litigation, arbitration, ethics matters or other administrative proceedings. Individuals seeking legal advice should obtain private legal counsel and should not rely upon the information and materials contained herein.

Contents PART I TRANSACTION DOCUMENTS

PART II DUTIES AND ETHICS

-1Contracts

-4Consumer Protection

The Law of Conveyance...…............................…...1 Elements of a Contract……............................……1 Parties to a Contract………...........................…….1 Creating Binding Contracts…..................................2 Validity and Status of Contracts……………….…....3 Courts and Contract Law..….............................……..3 Drafting Contracts and Contingencies...…………....3 Ending the Contractual Relationship ....…………..…..4

Education..........................................……….23 Agency...........................…………………………23 Legal Practice ..........................................................25 Advertising............................................................25 Inspection..........................…..………………….......25 Broker Disclosure…....................................…...…26 Seller Disclosure.......................................……....26 Additional Disclosure Obligation.......……………....28 Insurability Disclosure Issues..............................32 Drafting and Presentation of Written Proposals.......33 -2Scope of Licensure and Competency.........……...33 Approved Forms Disclosure of Compensation and Interests........…...33 Tie-in Arrangements…...…....................…...........34 The Forms Process……….....................…….....7 Fair Housing and the Americans with Department of Safety and Professional Services…..7 Disabilities Act..........................................................34 The Real Estate Examining Board………..………...7 The Authorized Practice of Law................................8 -5Using Approved Forms…….....................................8 Agency Agreements………..........................………8 Duties to Other Brokers Offers to Purchase.........…….......................………12 WB-44 Counter-Offer..............................…………..15 Disclosure of Agency Status…..........................43 WB-46 Multiple Counter-Proposal…..………………15 Negotiation Through Broker….........................44 WB-40 Amendment to Offer to Purchase….……15 Written Proposals.....……….........................…44 WB-41 Notice Relating to Offer to Purchase...…15 Contacting Represented Parties......................45 WB-45 Cancellation Agreement and Relocation Companies…......….........................46 Mutual Release.........................................................16 Commissions........................…………………..46 Material Facts........................................................47 False Information.............................……………47 -3Permission for Subagency.............................….47 Transfer of Earnest Money..............................47 Other Transaction Documents Using Other Transaction Forms............................19 Agency Disclosure………................................……..19 Real Estate Condition/ Disclosure Reports..................19 Addenda....……………….............................19 State Bar Forms …..………...........................…......20 Property Management Forms.............................…20 Other States’ Forms…………….................................20 Uniform Commercial Code Forms ............................20

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-6Business Ethics Referral Fees and Party Incentives …….……..51 Competent Practice and Providing Competent Services................................................…………….51 Complaints to the DSPS.............................…..52 Dispute Resolution..……............................………52

Contents PART III MANAGEMENT -7Business Management Registering with the DSPS........................….....57 Form of Business...................................…….......57 Insurance.......…………........................…....…59 Advertising and Marketing……..............................60 Budgets and Financial Planning..............................62 Commissions.................................................……...62

-8Financial Management

PART IV SPECIALTY AREAS -10Specialty Properties Residential Rental Properties…........................99 Property Management..........................……...100 Condominiums....................……………..........105 Vacant Land............................………………....106 Commercial Properties…..........................……....106 Business Opportunities…......................…......107 Agricultural Properties........................………….108 Historic Properties……......................……….…108 Auctions…………………....................…........…108 Mobile Homes..............................……………...109 Time-shares………………..................................109

Trust Accounts……………................................…..69 -11Escrow..............................………..............................73 Trust Fund Disbursements..................................73 Financing Property Management and Trust Funds..................74 Trust Accounting…………............................……75 Valuation of Property……...........................………113 Preparing for Closing……................................……...76 The Lending Process…………..........................114 Closing Statements....................................................79 Sources of Financing…….......................……...115

-9Office Management Personnel………..…................................……..85 Licensure.....…………..….............................….87 Notifying the DSPS...…....................................…..88 Renewal of License..................................................89 Policy Manual..............................................…..90 Availability of Rules.....................................…..90 Professional Services..........................................90 Record Retention................................................91 Broker Supervision..............................................91 Misrepresentation..........................................92 Broker Risk Reduction..........................................93 Americans with Disabilities Act...............................93 Transition Planning.................................................95

-12Alternative Transfers Exchanges.................................…….......……121 Options.......................……………......…..…...122 Bill of Sale........................………………..…122 Foreclosures..........................………………...….123 Short Sales........................……………....…….124 Cooperatives………..........................................125 Installment Sales.......................................…..125

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Contracts

ontracts

govern the real estate transaction. Whether it is a contract between a broker and a client or a contract between a buyer and a seller, without contracts, a real state transaction could not occur. Parties rely on contracts to control their relationship.

THE LAW OF CONVEYANCE A conveyance is written document evidencing a real estate transaction. The law of conveyance applies to leases over one year and transactions where an interest in land is created, alienated, mortgaged, or assigned. It does not apply to interests in land transferred by act or operation of law, by will, by nonprobate transfer on death, or for leases of one year or less. To comply with the law of conveyances, a real estate transaction must be evidenced by a written document that identifies the parties, identifies the land, the interest being conveyed, is signed by the parties, and is delivered. If the property is a homestead, it must be signed by both spouses. A homestead is a married couple’s dwelling and at least one-fourth acre of land surrounding the dwelling and not more than forty acres.

ELEMENTS OF A CONTRACT An agreement is an understanding between parties to behave in a certain way but it lacks some essential contractual element. A contract is a legally binding agreement between parties that creates obligations that a court could enforce against the parties. Real estate contracts in Wisconsin, whether between a buyer and a seller or a broker and a client, must be in writing. A contract begins with an offer from one party to another and acceptance of the offer by the other party. Parties to a contract must have the capacity to contract, which means the parties possess the ability to understand the consequences of their actions. Parties must have a meeting of the minds, which means that the parties agree on the terms, conditions, and subject matter of the contract. A contract must have consideration, which is something of value that a party gives to another party in exchange for a promise.

PARTIES TO A CONTRACT A contract can only bind the parties to that contract and cannot be used to create duties and obligations for third parties. The parties to a real estate agency contract such as a listing agreement or a buyer agency agreement are the broker and the client. The parties to an offer to purchase are the buyer and the seller. Parties must have authority to sign contracts. When one party is signing on behalf of another party or an entity such as a corporation or a nonprofit association, the signing party must have authority from the other party or the entity. Brokers are not responsible for determining the validity of a party’s authority to sign on behalf of another but brokers should instruct parties that they will have to furnish documentation authorizing a party to sign on behalf of another person. When working with multiple parties in a transaction, such as when there are multiple owners selling a property or multiple buyers making a purchase, a broker must determine which parties’ signatures are needed on an agency agreement or a conveyance document.

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CREATING BINDING CONTRACTS To create binding contracts, parties must complete steps according to the terms of the contract to bind the other party to its terms. Parties must sign a contract for it to be valid. A signature is a person’s name or mark made by the person or at the direction of that person. When a person signs a contract, that is evidence of the person’s intent to agree with the terms of the contract. A digital signature is a unique, digital code that attaches to an electronically sent message or document that identifies the sender of the document. An electronic signature is a symbol, sound, or process that a person attaches to a document with the intent that it serve as the person’s signature. An electronic signature can be the person’s typed name, a scanned image of a handwritten signature, a personal identification number used to transmit documents, or clicking an acceptance button on a particular website. An electronic signature is not encrypted and might not identify the true sender of a document. Acceptance and Binding Acceptance Acceptance and binding acceptance are both events that change the status of a contract and the parties’ rights and obligations under the contract. The Wisconsin offers to purchase define acceptance as “when all Buyers and Sellers have signed one copy of the Offer, or separate but identical copies of the Offer.” Binding acceptance is when a “copy of the accepted Offer is delivered to the Buyer on or before” the buyer’s deadline for binding acceptance. A party can withdraw an offer until binding acceptance. Once parties have binding acceptance, the offer becomes a contract for sale. Time is of the Essence and Deadlines If a contract provision is “of the essence,” it means that it is of such importance that if the responsible party does not meet it, the party will be in breach. A party can make time of the essence applicable to some, none, or all of the dates and deadlines in a contract. The default is that time is of the essence to all dates and deadlines unless the parties choose otherwise. If time is not of the essence, then performance must be within a reasonable time. Reasonable time is not defined and in the event of a dispute, it would be up to a court to decide whether a party performed within a reasonable time. Delivery Delivery is something that a party to a contract achieves by performing actions dictated by the contract. Achieving delivery correctly is important because it triggers additional rights and obligations under the contract such as starting deadlines or preventing a party from withdrawing. Most of the Wisconsin offers now permit a buyer to choose from personal, fax, commercial mail, U.S. Mail, or e-mail delivery. A buyer can choose one or more forms of delivery by which a buyer is willing to receive documents and notices related to the contract. E-mail Delivery Parties can use e-mail to deliver documents related to the transaction. Consumers need to comply with two sources of law where the property or sale proceeds will be used for personal, family, or household purposes. 1. E-Sign, which is the federal law addressing electronic commerce and requiring consumer electronic consent; and 2. E-Commerce, which is the Wisconsin law addressing electronic commerce. To comply with the laws, a consumer must be able to receive e-mails, open attachments, receive required federal disclosures, agree to and confirm system requirements, provide e-mail addresses, and return consent to electronic documents electronically.

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Fax A party must include a fax number and mark the optional provisions box by that choice. Fax delivery occurs when a party sends the document, not when the other party receives it. Personal Personal delivery is the default method of delivery in the Wisconsin offers to purchase. A party does not have to choose anything to make it a part of the document. Personal delivery occurs when the recipient has the document in hand. Commercial Delivery or U.S. Mail A party chooses commercial delivery or U.S. Mail by checking the optional provision box in front of the election. Delivery occurs when the document is sent as long as the sender pre-pays the fees or charges them to an account.

VALIDITY AND STATUS OF CONTRACTS Valid contracts contain all the essential elements and, for real estate contracts, are in writing. The status of contracts refers to whether a contract is enforceable, unenforceable, void, or voidable. An enforceable contract is one that a party could take to a court and the court could craft a remedy that would force the parties to perform according to the terms of the contract. An unenforceable contract is one that if brought before a court, the court could not craft a remedy to force the parties to perform according to the terms of the contract. A void contract has no legal effect. A contract may be void because it is technically defective, illegal, or against public policy. A voidable contract is valid and enforceable but one of the parties can void it. If one party breaches a contract, the non-breaching party can often choose to void the contract by rescinding it. Only the non-breaching party can rescind a voidable contract. If the non-breaching party chooses to ignore the breach, the party who is in breach does not have a right to void the contract.

COURTS AND CONTRACT LAW There is almost no “black-and-white” contract law. The way a court will interpret a contract depends entirely on the circumstances of that case. Brokers must be careful not to give legal advice because of the uncertainty of how a court will interpret a contract. Courts try to determine the intent of the parties and craft a remedy that will achieve the parties’ intents. Courts give greater weight to a party’s specific terms than pre-printed provisions. The drafter of a contract must be clear when drafting terms because courts construe ambiguous terms against the drafter.

DRAFTING CONTRACTS AND CONTINGENCIES To properly draft a contract, a broker must use the correct form, complete it thoroughly and unambiguously, in a manner that expresses the intent of the parties, and make sure all the necessary parties sign the document. A contingency is an event that may or may not occur. Poorly drafted contingencies that do not provide a measurable performance standard may prevent a court from enforcing the contract. Standard contingencies in the residential offers to purchase include financing, home inspection, and closing of a buyer’s property contingencies. Other offers like the vacant land and the commercial offer have additional contingencies like proposed use, map, environmental evaluation, and document review.

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ENDING THE CONTRACTUAL RELATIONSHIP Completion of the Contract Completion of a contract ends the contractual relationship. All parties satisfy their various contractual obligations and the contractual relationship is over. Rescission Rescission means undoing the contract to the effect that the parties are restored to the position before they executed the contract. Both parties must agree to rescind a contract. Neither party has any rights or obligations resulting from the contract and there is no relationship between the parties. Termination Either party can unilaterally terminate a contract by giving notice to the other party and delivering it according to the terms of the contract. Brokers must make sure that broker-employees and salespeople understand that they do not have the authority to terminate contracts without the supervising broker’s permission. Modification A broker can terminate a contractual relationship by modifying a contract. Modification requires the consent of both parties. Usually when modifying a contract to terminate the contractual relationship, the modification is to the expiration date. The contractual relationship is over and, unless the parties stated otherwise in the amendment, the listing broker retains rights to protected buyers. Death of a Party The death of a party will terminate a contractual relationship based on an agency agreement. The untimely death of a broker-employee or salesperson does not terminate an agency contract because the contract is between the client and the employing broker. Not all contractual relationships terminate with the death of a party. The death of a buyer or seller does not terminate a sales contract and leases do not terminate at the death of a party. Operation of Law Operation of law, such as a city exercising eminent domain or a party going into bankruptcy, can terminate a contractual relationship. Default and Breach Defaulting on terms and breaching a contract can terminate a contractual relationship. Deciding when a party is in breach of contract and has defaulted on the terms is often a matter for a court to decide. Broker-employers should educate broker-employees and salespeople not to make the decision as to whether a party is in breach. Brokers and salespeople should never conclusively tell buyers and sellers that the other party is in default on the terms of a contract but if a buyer or seller thinks the other party is breaching the contract, the broker or salesperson can direct the party to the section in the offer that addresses default and recommend that the party seek legal counsel for a review of the party’s options. The offers to purchase include standard remedies for default that a buyer or seller can consider if the other party breaches the contract but a buyer’s or a seller’s remedies are not limited to those found in the offers to purchase. If another remedy is available, a buyer or a seller can pursue that instead of one of the pre-printed default remedies presented in the offer.

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Answer the following questions. If you need to, refer to the previous summary. 1. To which transactions does the law of conveyance apply? To which transactions does it not apply?_______

________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ _______________________________________________________________________

2. What is a homestead for purposes of the law of conveyances?



________________________________________________________________________

3. What must be present for a valid conveyance?_________________________________ ________



________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ 4. Name the elements of a valid contract. ______________________________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ 5. What are the requirements for a valid real estate contract? __________________________________

________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________

6. What is the difference between acceptance and binding acceptance?___________________________

________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________

____ ________________________________________________________________________ ________________________________________________________________________

7. What must a broker first achieve before a broker can let a party include e-mail as a form of delivery?

_____________________________ ________________________________________________________________________ ________________________________________________________________________

8. What is the difference between a void and a voidable contract?

9. When should a broker give advice about the status of a contract?_____________________________ 10. Why does a court give greater weight to a party’s specific contract terms rather than pre-printed provisions?

________________________________________________________________________ _______________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________

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__________________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________

11. What should be addressed in a contingency in an offer?

________________________________________ ________________________________________________________________________ ________________________________________________________________________

12. What does it mean if parties rescind a contract?

__________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________

13. What should a broker do if a broker wants to terminate a contract before the expiration date?

14. Why do brokers need to be careful about giving advice on the status of contracts when another party appears to be in breach? _______________________________________________________

________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________

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2 A

Approved Forms

pproved forms

permit brokers and salespeople to help consumers navigate real estate transactions. Not all states provide approved forms for real estate licensees and consumers to use in real estate transactions. The use of approved forms by licensees in real estate transactions may save consumers additional expenses from hiring other service providers for the transaction.

THE FORMS PROCESS

Wisconsin creates approved forms for licensees to use in transactions. The forms process involves the Department of Safety and Professional Services (DSPS) and the Wisconsin Real Estate Examining Board (REEB).

Department of Safety and Professional Services

The DSPS is the Wisconsin administrative agency that has the authority to regulate many occupations, including the practice of real estate. The DSPS has the authority to issue administrative rules and regulations in the performance of its duties.

Real Estate Examining Board

The REEB is composed of five Wisconsin real estate licensees and two non-licensee public members appointed by the Governor and approved by the Senate for staggered 4-year terms. Members cannot serve more than two terms. The REEB has the authority to grant and issue licenses, approve real estate forms, and create and approve continuing and pre-license education requirements. The REEB appoints members to the Real Estate Curriculum and Examinations Council. The Council is advisory to the REEB. The REEB also promulgates and interprets rules related to the practice of real estate. The REEB reviews complaints and decides appropriate disciplinary measures for violations. Sanctions for License Violations The REEB investigates complaints of licensee misconduct and law or rule violations. If the REEB finds that the complaint results in a finding of wrongdoing, the REEB can sanction and discipline a licensee including: 1. 2. 3. 4.

Letter of warning or reprimand; Suspension, limitation, or revocation of license; Forfeiture of up to $1000; and Requirement to attend an educational course.

The REEB approves forms for use in Wisconsin real estate practice. The state-approved forms undergo revisions to update language, fix errors, and address changes to the practice of real estate in Wisconsin. The REEB releases the forms with an optional use date and a mandatory use date. This allows licensees to begin using the form as soon as the optional use date and all licensees must use it as of the mandatory use date.

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The authorized practice of law

Drafting contracts such as offers to purchase and agency agreements is the practice of law. The Wisconsin Supreme Court prohibits the practice of law without a license. The Wisconsin Supreme Court, through case law and rule, and the State of Wisconsin, through statute and administrative rule, have awarded real estate licensees a limited ability to practice law by completing approved forms.

Using approved forms

An approved form is a form prepared or approved by the Department, prepared by a governmental agency for use in programs administered by the agency, and property management agreements between brokers and property owners if the forms were prepared by the broker, the broker’s attorney, or the property owner. For brokers, approved forms include forms created by the Wisconsin State Bar. To use a form means to complete it by filling in the blanks or modifying it as necessary to accomplish the intent of a party. If a broker has additional information to include on a form, the broker must use the blank lines provided on the approved forms or use addenda. Licensees can insert contingencies and other provisions as necessary to modify approved contracts to accomplish the intent of the parties. Licensees can cross out provisions on approved forms to reflect the agreement of a party to a transaction provided that the deleted provisions remain legible. When lining out preprinted provisions, licensees must take care to ensure that the original provision remains legible. White-out and thick marker pens are not acceptable options. If a form does not exist for a particular purpose, a licensee, acting as an agent or a party can use contractual forms drafted by a party or an attorney, if the name of the drafter is imprinted on the form before the licensee uses it.

Agency agreements WB-1 Residential Listing Contract - Exclusive Right to Sell The WB-1 Listing Contract is the basic model for most Wisconsin listing contracts including the Vacant Land, Farm, and Condominium. Although each listing contract has its own nuances, all follow the basic structure established in the WB-1. The approved form is an exclusive right to sell listing, giving the broker the exclusive authority to sell the property. There are other legal types of listing contracts, such as the exclusive agency listing and the open listing, but no separate form exists for these. Instead, the WB-1 must be modified if the broker and the seller want to create one of these alternative listing types. Property Description (lines 2-4) A street address if often adequate to describe the property. If it is not, a broker must include an additional description either in the blanks of the form or in an addendum. The additional description must describe the property sufficiently so that it is clear what is being marketed and sold. Items Included and Not Included in List Price (lines 6-14) The real property and any fixtures are automatically included in the sale and items of personal property are not. Fixtures are defined generically and by example at lines 199-210. Excluded fixtures and included personal property are listed in this section. Marketing (lines 15-22) A broker’s marketing plan is included on lines 17-18 and any special seller financing terms or incentives are listed on lines 19-20.

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Approved Forms - 2

Occupancy (lines 23-25) The seller gives occupancy to the buyer at closing and the property should be in broom swept condition. Cooperation, Access to Property or Offer Presentation (lines 26-33) A broker must cooperate with all buyers and persons assisting buyers unless it is contrary to the written instructions of the seller. If a seller gives a broker instructions contrary to this provision, those instructions should be documented in this section. Exclusions (lines 34-39) A previous listing broker’s protected buyers are excluded from the listing. In addition, the broker could agree to exclude other buyers for a given period of time. Commission (lines 40-58) This section establishes the fee to be paid by a seller to a broker and the circumstances under which the broker would earn a commission. Compensation to Others (lines 59-60) The compensation being offered to cooperating brokers is documented in this section. If there are exceptions, such as when policy letters with other companies change the amount being offered through a multiple listing service, the exceptions should also be detailed. Extension of Listing (lines 61-65) The listing contract is automatically extended for one year for any “Protected Buyer,” a term that is defined at lines 220-229. The broker is required to submit a full list to the seller of all such buyers known to the broker if a request is made by the seller or a subsequent listing broker. The full list would consist of those buyers that were manually protected as well as those that are automatically protected. Termination of Listing (lines 66-73) An agent cannot terminate the agreement, amend the commission amount, or shorten the term of the listing without permission from the broker-employer. Early termination of the contract by either the seller or the listing broker must be in writing and delivered according to the terms of the contract. Seller Cooperation with Marketing Efforts (lines 74-80) Authorization is given to the broker to use a multiple listing service, the internet, and a lockbox. The seller agrees to notify the broker about any buyer or other agent who contacts the seller directly regarding the property. Leased Property (lines 81-85) Obligations under any rental agreements are not cancelled by the sale of the property. A seller of a rented property can obtain releases from tenants transferring lease obligations to the new owner. Broker Disclosure to Clients (lines 86-163) The mandatory broker disclosure to client information is contained in the listing contract. The broker must make sure that the seller understands that, although the broker is an agent of the seller, the broker owes duties to all parties in a transaction. This section explains single agency, multiple representation with designated agency, and multiple representation without designated agency. The seller must initial on line 129, 130, or 131 to choose single agency, multiple representation with designated agency, or multiple representation without designated agency. Real Estate Condition Report and Seller Representations (lines 164-173) The seller is agreeing to complete a condition report and affirming that the seller has no notice or knowledge of defects affecting the property. If the seller wants to sell the property “as-is,” without making any representations about the property condition, this section must be modified.

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Open House and Showing Responsibilities (lines 174-182) Sellers are responsible for minimizing risks related to open houses. Cooperating brokers, appraisers, and inspectors may enter the property without the listing broker and buyers may attend inspections and may photograph or videotape the property. Delivery (lines 193-198) Three methods of delivery of documents or written notices between the seller and the broker are authorized by the standard contract: personal delivery; mail or commercial delivery to the addresses written on lines 265, 271 and 277; and facsimile transmission to the fax numbers written on lines 267, 273 and 279. Fixtures (lines 199-210) This section defines fixtures and provides a caution to the seller to address rented items and fixtures the seller does not want to include in the transaction. Protected Buyer (lines 220-229) This section lists the categories of buyers that are eligible for protection and the methods that are used to protect those buyers. A protected buyer is a buyer who submitted an offer, negotiated directly with the seller, or attended an individual showing for which a broker can extend the term of the broker’s listing for one year. Buyers that submitted offers or negotiated directly with the seller are automatically protected. Brokers must list individual showings to protect them. Many brokers list all three classes of protected buyers on the list given to a seller. Earnest Money (lines 234-241) If an accepted offer fails to close and the seller retains the earnest money, the broker has a right to be reimbursed for advances made on behalf of the seller and to keep up to one-half of the remaining earnest money as a commission for the failed transaction. Signature Section (lines 263-280) Signatures in this section indicate that the seller and broker have agreed to the terms of the contract and give the broker the authority to market the seller’s property. All blanks should be fully completed, identifying the brokerage company’s formal legal name, together with full and complete addresses and fax numbers for both parties.

WB-36 Buyer Agency/Tenant Representation Agreement

The WB-36 Buyer Agency Agreement is used to create the agency relationship between a broker and a buyer or a tenant. Authorization (lines 1-5) The buyer is hiring the broker to assist in locating a property and also to negotiate the purchase or lease of a property. The standard form creates an exclusive agency relationship. Warning Note to Buyer (lines 6-9) If a buyer works with a listing broker or a seller directly, the buyer may be responsible for the full broker’s fee, even if the buyer’s broker did not participate in the transaction. Purchase Price Range (line 10) The price range indicated on this line is the range of properties that will be the subject of the broker’s search on behalf of buyer. Excluded Properties (lines 11-20) A buyer may exclude properties where the buyer is working directly with the owner, with another agent, or properties that are protected under a previous buyer agency contract. A buyer can also exclude classes of properties and create the search parameters for the contract.

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Compensation (lines 21-34) The payment structure is detailed here, together with the buyer’s consent to or rejection of an owner or an owner’s agent paying the broker directly. The standard form provides that the broker earns compensation even if the buyer does not involve the broker in the transaction. Broker’s Duties (lines 35-42) The broker agrees to use the broker’s professional knowledge, skills and efforts to assist buyer. If the agent has made specific promises to the buyer regarding special marketing, such as a specialized mailing to a buyer’s desired area, those promises should be documented here. Earnest Money (lines 43-48) If an accepted offer fails to close and the earnest money is disbursed to the buyer, the broker has the right to be reimbursed for advances made on behalf of the buyer. Non Discrimination (lines 49-51) Brokers should not assist the buyer in searching for properties based upon any search criteria that would violate fair housing laws or ordinances. Broker Disclosure to Clients (lines 52-122) The mandatory broker disclosure to client information is contained in the buyer agency agreement. It is the same language that is in the listing contract. The broker owes duties to all parties in a transaction. This section also explains single agency, multiple representation with designated agency, and multiple representation without designated agency. The buyer must initial on line 94, 95 or 96 to consent to single agency, multiple representation with designated agency, or multiple representation without designated agency. Confidentiality Notice to Client (lines 109-122) If a buyer wants to give permission to disclose potentially confidential information, such as a prequalification letter from a lender accompanying an offer to purchase, the permission is documented in this section. Non-exclusive Relationship (lines 131-134) This section gives the broker permission to represent other buyers who are looking for property. Delivery (lines 158-163) Methods of delivery of documents or written notices between the buyer and the broker authorized by the standard contract are personal delivery, commercial or U.S. Mail delivery to the addresses written on lines 220, 226 and 232, and fax transmission to the fax numbers on lines 222, 228 and 234. Failure to properly complete these lines results in personal delivery becoming the only available method of delivery, unless the parties added an additional delivery method, such as e-mail. Term of the Agreement (lines 193-196) The beginning and end dates of the agreement are inserted here, and a selection made as to whether or not the purchase or lease of a property will end the agreement before its stated expiration date. Extension of Agreement Term (lines 205-210) The contract is automatically extended for one year for “protected” properties. This section enumerates the categories of properties that are eligible for protection and the methods that the parties use to protect them. If a buyer or anyone acting on behalf of the buyer submitted an offer on a property, it is automatically protected. Any other properties a broker wants to protect must be described in writing and the broker must provide the list to the buyer within three days after the expiration of the agency agreement.

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Signature Section (lines 217-235) Signatures in this section indicate that the buyer and broker have agreed to the terms of the contract, and give the broker the authority to begin working on behalf of the buyer. All blanks should be fully completed, identifying the brokerage company’s formal legal name, together with full and complete addresses and fax numbers for both parties.

Offers to purchase

WB-11 Residential Offer to Purchase The WB-11 Residential Offer to Purchase provides the model for other offers, including the Vacant Land, Farm, and Condominium. Although each of these Offers has its own nuances, all follow the basic structure established in the WB-11. General Information (lines 1-13) The contract identifies the agency status of the agent drafting the offer, identifies the buyer, describes the property, states the purchase price being offered and details the amount and timing of the earnest money, if any. Inclusions and Exclusions (lines 14-22) A buyer lists personal property the buyer wants included and fixtures the buyer wants excluded. Acceptance and Binding Acceptance (lines 23-30) Acceptance is defined and the buyer includes a deadline for binding acceptance. Binding acceptance means that the offer has been signed by all the parties and delivered back to the party who made the offer. Offer deadlines running from acceptance are measured from the date of signature, not the date of delivery. Delivery (lines 34-54) Five delivery methods are authorized in the preprinted form: personal; fax; commercial mail; U.S. mail; and e-mail. The agent preparing the offer should determine if any of the methods are not acceptable to the buyer making the offer and strike the unacceptable methods. Utilizing e-mail delivery requires both the buyer and the seller to provide consent electronically to the use of electronic documents and signatures in the transaction. Personal Delivery/Actual Receipt (lines 55-56) Personal delivery to or actual receipt by one buyer or seller is all that is required. Occupancy (lines 57-60) The seller is required to remove all items of personal property from the property, other than those listed as inclusions and to leave the property in “broom swept condition.” Actual Receipt (lines 62-63) Actual receipt means that the party must personally have it in the party’s possession. Place of Closing (lines 116-117) The date of closing is entered in this section. The seller selects the place of closing. Closing Prorations (lines 118-139) Prorations are calculated as of the day prior to closing. Parties choose the method for proration. If proration based on last year’s bill is not representative of the anticipated bill for the current year, a different proration method should be selected. In addition, parties can chose to re-prorate but the caution warns parties that the broker is not responsible for re-prorating taxes.

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Leased Property (lines 140-143) The buyer takes the property subject to the rights and lease obligations with existing tenants. The seller is liable under the terms of any rental agreement unless released by the tenant or tenants. Rental Weatherization (lines 144-147) Unless exempt, the responsible party must comply with the Rental Weatherization standards. Property Condition Provisions (lines 159-164) If the buyer has already received a seller’s real estate condition report, the date of the report is inserted here, together with any other conditions that the buyer is aware of that are not mentioned in the report. Before accepting the offer, the seller should review the conditions affecting the property or transaction at lines 64-114. Deadlines (lines 174-181) This section describes how to calculate deadlines based upon days, business days, or hours from a given event. Fixtures (lines 185-195) The definition matches that used in the WB-1 Listing Contract. Fixtures includes items meeting the general definition of a fixture and the specific items listed here. Other items may also be fixtures. If there is any doubt, parties should be specific about items to be included or excluded from the transaction. Buyer’s Pre-closing Walk-through and Property Damage Between Acceptance and Closing (lines 202-215) A buyer has a right to do a walk-through within 3 days prior to closing to confirm that the property condition has not changed substantially and that any agreed-upon repairs have been completed. If the property is damaged before closing, the rights and duties of the parties are detailed in this section. Financing Contingency (lines 216-256) If the offer is contingent on a buyer obtaining financing, the buyer describes the desired financing in this section and includes a deadline for the provision of a written loan commitment to the seller. If a buyer delivers a written loan commitment accompanied by the buyer’s written direction for delivery, the financing contingency is satisfied. If financing is unavailable, the seller may have the option of financing the transaction. Offers not Contingent on Financing (lines 257-263) If the financing contingency is not selected, this provision is automatically a part of the offer. A buyer must provide proof of funds to the seller within 7 days of acceptance. Appraisal Contingency (lines 264-269) A buyer can make an offer contingent on an appraisal of the property valuing the property equal to or greater than the agreed upon purchase price. Distribution of Information (lines 272-277) The parties authorize the brokers to provide information about the transaction to others who need the information to conclude the transaction and to appraisers researching comparable sales. Default (lines 278-297) If a party breaches the contract, the non-breaching party’s rights are summarized in this section. Any questions about rights and obligations resulting from a breach of contract should be referred to legal counsel.

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Entire Contract (lines 298-300) The contract represents the entire agreement of the parties. Statements in data sheets and prior offers are not considered part of the agreement unless specifically referenced in the contract. Closing of Buyer’s Property Contingency (lines 304-311) If the contract is contingent on the buyer selling other property, that property should be described here. The “bump” clause should detail any actions that the buyer must take if the seller provides a notice to the buyer. Secondary Offer (lines 312-317) This is a discretionary secondary offer contingency. Since the preprinted offer contingencies are optional, a buyer who wants to receive priority as a secondary buyer must include an additional contingency. Time is of the Essence (lines 318-324) All dates and deadlines are of the essence unless otherwise stated. If time is not of the essence, performance must be within a reasonable time of a date or deadline. Conveyance of Title (lines 326-339) A seller conveys title with a warranty deed. A trustee conveys title with a trustee’s deed and a personal representative conveys title with a personal representative’s deed. If a buyer is aware of additional easements or restrictions such as shared driveways, wells, or utility transmission easements, the buyer lists them in this section. Title Evidence, Gap Endorsement, Provision of Merchantable Title, and Title Not Acceptable for Closing (lines 340-359) A seller agrees to provide title insurance with a gap endorsement in a timely manner unless otherwise agreed to by the parties. The buyer then decides if the title is acceptable for closing. Earnest Money (lines 369-394) Earnest money is paid to, and held in trust by the listing broker, if the property is listed. The listing broker must handle the trust funds in compliance with the trust account regulations, which may conflict with the expectations of the parties. Parties who want a different earnest money arrangement should consult an attorney. Inspections and Testing (lines 395-409) The seller agrees to allow inspectors into the property when access is necessary to satisfy a contractual contingency. Buyers and licensees may also attend. An inspection does not include an appraisal or testing except for testing for leaking carbon monoxide, testing for leaking LP gas or natural gas used as a fuel source. If a buyer wants to include additional tests, the buyer must include those as separate contingencies. The buyer agrees to provide copies of any written inspection reports to the seller, even if buyer is not giving a notice of defects. Inspection Contingency (lines 410-433) This contingency calls for an inspection by a Wisconsin registered home inspector. If the buyer wants a different inspector, the buyer must include that as a separate provision. If an inspection reveals defects, a buyer can give a notice of defects to the seller by the deadline stated at line 421. A buyer can propose an amendment to see if a seller will agree to certain provisions such as amending the purchase price but an amendment does not replace a notice of defects. Defect is defined at lines 182-184 and does not include those items the nature and extent of which buyer was aware of before submitting the offer.

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Addenda (line 434) If addenda are part of the offer, the addenda should be identified on this line. Signature Section (lines 443-462) The agent drafting the offer should include the agent’s name and the license or trade name of the employing broker. All buyers should sign and date the form. If earnest money accompanies the offer, the drafting agent should complete the receipt section, acknowledging receipt of the money on behalf of the listing broker. If the offer is accepted, all sellers sign and date the form. If the offer is countered or rejected, the seller initials to indicate the action.

WB – 44 Counter-Offer

Parties use counter-offers when negotiating the terms of a contract before acceptance and binding acceptance. A counter-offer is a rejection of a previous offer and the creation of a new offer. Each counter-offer is a new offer that incorporates the unchanged terms of the original offer and the new terms in the counter-offer. If a counter-offer is accepted, the contract will consist of the original offer as modified by the terms of the final accepted counter-offer. Terms and conditions stated in intervening counter-offers are not included. Counter-offers are numbered sequentially.

WB – 46 Multiple Counter-Proposal

The WB – 46 Multiple Counter-Proposal presents a viable legal method to continue negotiations with all buyers. Sellers can use the WB – 46 to issue distinct non-binding proposals to each buyer suggesting the terms a seller would prefer in the buyer’s offer. Different proposals may go to different buyers. Buyers will not know the terms of counter-proposals submitted to other buyers. A seller may receive more than one accepted counter-proposal back, at which time the seller would consider which proposal was more attractive. A seller could accept the best offer and let the other offers die or could counter them as secondary offers.

WB – 40 Amendment to Offer to Purchase

Once there is an accepted offer, an amendment is the proper form to use to modify any of the terms and conditions of the offer. Acceptance and binding acceptance are defined in the WB – 11 Residential Offer to Purchase. An offer is accepted even if it is subject to contingencies for home sale, inspection, or short sale lender approval. An amendment is used when parties want to modify the terms of an accepted offer. An amendment has no effect on an offer unless all parties agree. An amendment must be signed and delivered back to the originating party within the time allowed. If the party declines to sign an amendment, the amendment has no effect on the accepted offer and the offered amendment will expire by the passage of time. In this case, a party proposed a change but without mutual agreement, the offer remains as it was before. To reject an amendment, a party documents rejection on line 42 of the WB – 40.

WB – 41 Notice Relating to Offer to Purchase

This notice is used when a party has the right or duty to notify the other party of an event, such as acceptance of a secondary offer, the discovery of a defect in an inspection, or to waive a contingency. The party is not changing the terms of the contract by giving such notice. The WB – 41 Notice is used when one party gives a notice that does not require the other party’s agreement. The WB – 41 Notice Relating to Offer to Purchase includes the following language relating to the withdrawal of a notice: “Withdrawal Warning: Once delivered, a Notice cannot be withdrawn by the Party delivering the Notice without the consent of the Party receiving the Notice.”

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WB – 45 Cancellation Agreement & Mutual Release

The Cancellation Agreement & Mutual Release (CAMR) provides that the parties release all rights and interest in the contract and directs the broker to disburse the earnest money. A CAMR is intended to be used in a purchase transaction though the actual use of the form is more extensive, such as for the release from an agency agreement. The CAMR refers to the “Parties.” “Parties” are identified in the underlying agreement. The CAMR states that the parties agree that the agreement “be cancelled and the Parties hereby release all of their right, title, and interest in and to the Agreement, and any and all claims arising out of the transaction.” A party signing the CAMR is releasing all claims against the other party and will not be able to sue the other party regarding any matter relating to the agreement and the transaction. By using a CAMR, the parties authorize a broker holding transaction trust funds to disburse the specified amounts to the named persons at the stated addresses. A party should not sign a CAMR if the party wants to retain the right to sue the other party. The following forms have been prepared and are currently approved by the Department: WB-1 Residential Listing Contract – Exclusive Right to Sell WB-2 Farm Listing Contract – Exclusive Right to Sell WB-3 Vacant Land Listing Contract – Exclusive Right to Sell WB-4 Residential Condominium Listing Contract – Exclusive Right to Sell WB-5 Commercial Listing Contract – Exclusive Right to Sell WB-6 Business Listing Contract – Exclusive Right to Sell WB-8 Time Share Listing Contract WB-11 Residential Offer to Purchase WB-12 Farm Offer to Purchase WB-13 Vacant Land Offer to Purchase WB-14 Residential Condominium Offer to Purchase WB-15 Commercial Offer to Purchase WB-16 Offer to Purchase - Business With Real Estate WB-17 Offer to Purchase - Business Without Real Estate WB-24 Option to Purchase WB-25 Bill of Sale WB-26 Timeshare Contract (Sale by Developer) WB-27 Time Share Contract (Resale by Non-Developer) WB-35 Simultaneous Exchange Agreement WB-36 Buyer Agency/Tenant Representation Agreement WB-37 Residential Listing Contract - Exclusive Right to Rent WB-40 Amendment to Offer to Purchase WB-41 Notice Relating to Offer to Purchase WB-42 Amendment to Listing Contract WB-44 Counter-Offer WB-45 Cancellation Agreement & Mutual Release WB-46 Multiple Counter-Proposal WB-47 Amendment to Buyer Agency/Tenant Representation Agreement

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Answer the following questions. If you need to, refer to the previous summary. ______________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________

1. What is a benefit of real estate brokers using approved forms?

2. What are the duties of the Real Estate Examining Board?__________________________________

________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________

_________________________________________________ ________________________________________________________________________

3. What does it mean to use a form?

________________________________________________ ________________________________________________________________________

4. When can a licensee practice law?

______________________ ________________________________________________________________________

5. What kind of contract does a WB-1 create between a seller and a broker?

______________ ________________________________________________________________________

6. How many days does a broker have to provide a seller with a list of protected buyers?

______________________________________ _______________________________________________________________________

7. What is the state approved form for buyer agency?

_____________________________________ _______________________________________________________________________

8. If a property is listed, who holds the earnest money?

_____________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________

9. What does a broker strike when completing an offer to purchase for a buyer-customer?

_____________ ________________________________________________________________________ ______________________________________________________________________

10. Which party is responsible for expenses that accrue to a property on the day of closing?

11. When you are taking your state licensing exam, what do you do if you forget the definition of business days?

________________________________________________________________________ ________________________________________________________________________

12. Does the listing contract or the offer to purchase control what items will be included or excluded in real estate transactions? __________________________________________________________

________________________________________________________________________

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_______________________ ________________________________________________________________________ ________________________________________________________________________

13. _What must a broker include when delivering a buyer’s loan commitment?

_______________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________

14. What is the purpose of the Distribution of Information section in an offer?

________________ ________________________________________________________________________ _______________________________________________________________________

15. If a buyer includes a home inspection contingency, what tests can a buyer conduct?

_________________________________________ ________________________________________________________________________ ________________________________________________________________________

16. What is the effect of a WB-44 Counter-Offer?

______________________________ ________________________________________________________________________ _______________________________________________________________________

17. What can a seller do with a WB-46 Multiple Counter-Proposal?

18. What do parties use to change offer terms after they have an accepted offer?_____________________

________________________________________________________________________

____________ ________________________________________________________________________

19. How many parties need to agree to issue a WB-41 Notice Relating to Offer to Purchase?

20. Why might a broker not use a WB-45 Cancellation and Mutual Release Agreement to terminate a listing with a client? __________________________________________________________________

________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________

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3

Other Transaction Documents

O

ther transaction documents

include agency disclosure forms, real estate condition reports, addenda, state bar forms, leases, other states forms, and Uniform Commercial Code (UCC) forms. These include forms that are not state-approved forms or are state-approved forms such as the UCC forms but do not have the “WB” identification number.

USING OTHER TRANSACTION Documents

When a broker is dealing with forms that are not state-approved forms, the broker needs to pay attention to what it means to use a form. Under the administrative rules, to “use a form” is to fill in the blanks to achieve the intent of the parties. Brokers can sign non-approved forms and even negotiate their terms but a broker cannot “use” the form within the meaning of Wisconsin law and cannot fill in the blanks. When using an unapproved document in a transaction, a broker must comply with agency disclosure and should review the form to make sure it complies with Wisconsin law and to note the presence or absence of important broker protections such as protected buyers or properties.

Agency DISCLOSURE

Agency disclosure to clients is most often achieved by using a state-approved listing contract or buyer agency agreement. The WB-8 Time Share Listing Contract that does not contain the state mandated broker disclosure of agency to client language. If using a time share listing or a non-approved listing contract, a broker must use a separate agency disclosure document. Brokers must provide a separate form to achieve the state mandated broker agency disclosure to customers.

REAL ESTATE CONDITION/disclosure REPORTS

Anyone selling a residential property with one to four dwelling units or vacant land must complete a real estate condition or disclosure report and provide it to a buyer within 10 days of accepting an offer. Sellers of commercial property do not have to complete a real estate condition report. A broker must ask all sellers about the condition of the property and ask that the seller respond in writing. There is not a stateapproved real estate condition report.

ADDENDA

Addenda come in two varieties. There are drafted addenda and pre-printed addenda. Drafted Addenda A licensee may draft addenda with provisions necessary for a transaction, subject to office policy. Pre-prepared Addenda Pre-prepared addenda may be included as additions with an approved form and must comply with license law rules. A licensee may use a pre-prepared addendum containing provisions that relate to the information that would be filled in on the blanks on a state-approved form, or that modify or supplant the optional secondary offer provisions or the optional contingencies for financing, sale of buyer’s property or inspection that are set forth in the state-approved offer, exchange, or option forms. A broker or a broker’s attorney may prepare this addendum.

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A licensee may use a pre-prepared addendum that supplants or alters the printed provisions of a stateapproved form that are not optional. The addendum must be drafted by an attorney who is identified on the addendum and there cannot be blanks, fill-in, optional, or multiple-choice provisions in the addendum other than spaces for the signatures of the parties and for incorporating the addendum by reference into an approved form. If an addendum rewrites provisions of an approved form that are not optional, it must be drafted by an attorney. How to Use Addenda Incorporate all addenda by reference and relate the approved form and the attached addenda to one another. An addendum does not need to be initialed or signed to be a part of an approved form but having parties initial or otherwise acknowledge it may minimize the potential for disputes.

STATE BAR FORMS REEB 16.03 includes State Bar forms as approved-forms, but only for Wisconsin real estate brokers. An individual who has a salesperson license cannot use State Bar forms. The Wisconsin State Bar produces deeds, mortgages, mortgage notes, truth-in-lending disclosures, land contracts, release of mortgage, satisfaction of mortgage, assignment of mortgage, and assignment of land contract forms.

Property Management forms

If a property manager is showing rental units and providing information but is not signing or negotiating the terms of a lease for an owner, the property manager does not need a real estate license. The property manger must have a real estate license to negotiate or sign for the property owner. Listing Contracts A property owner uses the WB-37 Residential Listing Contract - Exclusive Right to Rent to hire a broker to find a tenant for a residential property. The WB-37 is not mandatory for commercial leases but the broker and the property owner can use the WB-37 in a commercial situation as long as the parties modify it accordingly. Leases Wisconsin does not have state-approved leases. Brokers acting as property managers will consult with the property owner to determine the form of lease that the property owner wants to use. Property Management Agreements A broker, a broker’s attorney, or the property owner can draft a property management agreement between a broker and a property owner. The WB-37 and a property management agreement may overlap if they both authorize the broker to advertise vacancies, take tenant applications, qualify and approve tenants, receive earnest money and security deposits, execute leases on behalf of the owner, and collect rents.

OTHER STATES’ FORMS

Brokers can also use other states’ real estate forms as long as the broker is competent to do so. A broker might consider negotiating a referral fee if confronted with a transaction that would require the use of another state’s form and refer the transaction to an out-of-state colleague rather than risk incompetent practice.

Uniform Commercial code (ucc) FORMS

A transaction will involve UCC forms if it is a sale that includes business personal property and the seller retains a security interest in the business personal property. UCC forms are approved forms but they are complicated and should generally be left to the parties’ attorneys. If a broker intends to draft UCC forms,the broker should check with the broker’s errors and omissions insurance carrier to see if this is a covered act.

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Other Transaction Documents - 3

Answer the following questions. If you need to, refer to the previous summary. ________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________

1. What concerns should a broker have when signing an unapproved listing contract?

_______ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________

2. When would a broker need to use a separate document for broker agency disclosure to a client?

_____ ________________________________________________________________________ ________________________________________________________________________

3. When would a broker need to use a separate document for broker agency disclosure to a customer?

___________________________________ ________________________________________________________________________ ________________________________________________________________________

4. Who has to complete a Real Estate Condition Report?

_______________________________________ ________________________________________________________________________

5. _Who can complete a real estate condition report?

___________________________________ ________________________________________________________________________ ________________________________________________________________________

6. How does a broker include an addendum with an offer?

___________________________________________________ _______________________________________________________________________

7. _Who can use State Bar Forms?

8. What form must a broker use if a property owner wants to hire the broker to look for tenants for a property?

_______________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________

__________________________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________

9. When can a broker use other states’ forms?

____________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________

10. _In what kind of transaction would a broker encounter UCC forms?

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4 C

Consumer Protection

onsumer protection is the goal of regulating real estate practice in Wisconsin. Wisconsin

requires anyone who does any of the acts found in the definition of a broker to obtain a real estate license. This allows the state to make sure that those who assist consumers in real estate transactions have completed the licensing education, passed the state exam, satisfied the licensing requirements, and comply with biennial license renewal and continuing education. The state performs this role through the Department of Safety and Professional Services (DSPS), which relies on the Real Estate Examining Board (REEB) to review license applications, approve education, and issue discipline when warranted. When a consumer makes a complaint to the DSPS regarding the practices of a real estate licensee, the REEB reviews the complaint and issues discipline if it is warranted. The purpose of discipline is to ensure competent practice and consumer protection.

Education

One of a broker’s most important roles when working with consumers is education. Brokers know the rules and steps that parties must follow in a transaction because of their education and training and it is a broker’s duty to help educate buyers and sellers about their place in the transaction. Whether a broker is working with a client or a customer, a broker has an obligation to make sure that parties understand what is happening in a transaction and understand their obligations related to that transaction. A broker has an obligation to make sure that parties are not violating fair housing laws and may need to educate buyers and sellers about these laws to prevent violations. Parties will often want brokers to provide legal, tax, or zoning advice. Providing parties with the resources they need to find the answers to questions that are beyond the scope of a broker’s license will permit the broker to provide good customer services but not provide services for which the broker is not licensed.

Agency

A broker must be able to explain agency relationships to parties. Many people, especially buyercustomers, do not understand the role of a broker in a real estate transaction. Consumer confusion related to agency relationships is one of the biggest sources of complaints about brokers to the DSPS. To avoid complaints, brokers must be sure that consumers understand agency relationships. Pre-agency Wisconsin agency law permits brokers and consumers to engage is pre-agency. Pre-agency is the stage in a real estate relationship where a broker and a consumer are discussing the neutral, informational aspects of a transaction or potential transaction but the parties have not decided whether to have an agency relationship. During pre-agency, a broker can provide neutral information to a consumer but cannot engage in negotiations. A broker can provide market information and show properties to a consumer during pre-agency. A broker in pre-agency owes the duties to all parties in a transaction and cannot provide information and advice contrary to the interests of a party to the current or prospective transaction.

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REAL ESTATE broker

Agency Disclosures A broker must provide agency disclosures to clients and customers. The disclosure serves to inform the parties about the broker’s role in the transaction and the broker’s duties to the various parties. The language that a broker must provide to comply with agency disclosure is mandated by state law. Brokers must request acknowledgment of agency disclosure from customers and clients if the property contains one to four dwelling units. Broker Disclosure to Customers A broker must provide the disclosure prior to any negotiations. Negotiations occur when a broker provides anything other than neutral or objective information to a party. Writing an offer is negotiation and a broker must discuss agency with the buyer before writing the offer. If the buyer chooses to be a customer, the broker must give agency disclosure. Broker Disclosure to Clients A broker must provide disclosure to a client before or at the time of entering into an agency contract. Because most of the state-approved agency agreements contain agency disclosure, a broker does not have to use a separate form to provide agency disclosure. If a broker is using the time-share, business, or seller-provided listing contract, the broker must use a separate form to provide agency disclosure. When a broker offers a limited service brokerage option, one of the services that may not be part of the package is negotiation. When a party waives a broker’s duty of negotiation, the party is usually waiving the broker’s obligation to present written proposals related to the transaction. If a seller has a limited service agency contract with a broker, buyers may submit offers directly to the seller and sellers might even be responsible for drafting their own counter-offers as part of the negotiation process. A party can waive a broker’s duty to negotiate only if certain requirements are met. When a broker has a buyer agency agreement with a buyer, the broker has additional agency disclosure duties that the broker owes to the seller and listing agent. The buyer’s broker must disclose the agency relationship with the buyer at first contact, a showing of the property, or any other negotiation with the seller or listing broker.

Agency Relationships

A broker’s agency agreement with a party must be in writing, describe the property, state the price, state the compensation amount, and must be signed by the person agreeing to pay the commission. A broker cannot mislead a consumer about the benefits the consumer might realize by using the broker’s services. When a client signs an agency agreement, the client must select a form of agency relationship. Clients can choose from single agency, multiple representation with designated agency, and multiple representation without designated agency. Single Agency Single agency is when a broker represents only one client in a transaction. If a seller or a buyer chooses single agency when executing the agency contract, it means that the broker cannot represent the other party in a transaction. To choose single agency, a client initials the line in the agency contract that states that the client rejects multiple representation. Multiple Representation A multiple representation relationship is when a broker represents two or more clients in the same transaction. Both clients must consent to a broker representing multiple parties in a transaction and a broker must provide full written disclosure. Both the listing and buyer agency agreements contain the mandatory disclosure and provide clients with the opportunity to consent to a multiple representation relationship. A client can withdraw consent to multiple representation relationships at any time.

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Consumer Protection - 4

There are two forms of multiple representation relationships: multiple representation without designated agency or multiple representation with designated agency. Multiple Representation without Designated Agency In a multiple representation relationship without designated agency, a broker takes a neutral position and acts as a facilitator between the buyer and the seller. The broker does not provide advice or opinions that would advantage one side over the other. Multiple Representation with Designated Agency In a multiple representation relationship with designated agency, the broker represents both the seller and the buyer but assigns an agent to each party. Each client receives negotiation services from their designated agent even if the negotiation services place the interests of one of the broker’s clients ahead of the other. Subagency A subagent is an agent of another broker in the transaction but is not that broker’s employee. A subagent negotiates for a person who is not the broker’s client. A subagent must provide agency disclosure that lists the broker’s duties to the party with whom the subagent is working. A subagent would use a broker disclosure to customer form to provide agency disclosure. Clients must consent to subagency and provide consent in the agency agreement. Licensees are required to cooperate with other licensees but if subagency has not been authorized by a client, a licensee will be acting legally and ethically by refusing to work with other licensees if it would create subagency. A subagent owes the duties to all persons as well as the duty of loyalty to the principal broker’s client.

Legal practice

Brokers have the limited ability to practice law that permits brokers to draft approved forms on behalf of the parties to a transaction. Providing legal advice and opinions about parties’ rights and obligations is the unauthorized practice of law and is prohibited. Brokers can provide explanations of the terms of contracts and explain the transaction process to parties. Brokers cannot charge a separate fee for completing an approved form.

Advertising

An advertisement must contain the broker’s name, unless it is an advertisement for a tenant for personallyowned property. Advertisements must be honest and not deceptive. Brokers cannot advertise without the consent of the owner and must advertise at a price agreed upon by the seller.

INSPECTION

Broker Inspection When listing a property, a listing broker shall perform a reasonably competent and diligent property inspection and ask the owner about the condition of the structure, mechanical systems and other relevant aspects of the property. The broker must ask for a written response. The duty to inspect is not limited to just listing brokers. All brokers have a duty to inspect the property for readily observable material adverse facts. Listing brokers must do so before executing the listing contract and all other brokers must inspect prior to or during a showing. The standard of care a licensee is to use when conducting the inspection is that of a reasonably prudent person who has the knowledge, skills, and training required for licensure. Third-Party Inspections If a buyer wants a third-party inspection, the buyer must include it in the offer. The extent, details, and costs of the inspection should be contained in the offer to purchase.

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REAL ESTATE broker

“As-is” Properties A seller can sell a property “as-is.” This generally means that the seller does not intend to complete a real estate condition report. When a seller sells a property “as-is,” brokers still must comply with their inspection duties.

Broker disclosure

Broker Disclosure Obligations A broker must disclose material adverse facts, even if disclosure is contrary to the instructions of a party. Brokers must also disclose information that suggests a material adverse fact, such as finding out that a party does not intend to close a transaction as agreed to in the offer to purchase. Brokers must disclose all material facts to a client but not other parties’ confidential information or information that cannot otherwise be disclosed under law. A broker may need to consult with an attorney to determine whether a fact or information is materially adverse. Broker Disclosure Not Required A broker cannot disclose information that would result in violating fair housing laws. A broker cannot disclose information related to buyers and sellers if that information is related to the buyer’s or the seller’s membership in a protected class. Brokers do not have to disclose the presence of adult family homes, community based residential facilities, or nursing homes. Brokers do not have to disclose if a property was the sight of a “stigmatizing” act or occurrence. This refers to whether the property was the sight of a crime or some other event that might cause people to view the property negatively even though the event did not affect the structure or condition of the property. Brokers do not have to disclose information that is contained in reports prepared by third parties as long as the reports are provided to the parties. A broker must review the reports and if information in the report contradicts a broker’s knowledge of the property, the broker must disclose this in writing to all parties in a timely fashion. Sex Offender Registry Brokers must disclose information related to registered sex offenders if a party requests it. A broker who provides the party with the Department of Corrections’ website and telephone number and information about Wisconsin’s sex offender registry in writing does not have to disclose information about registered sex offenders. This information in contained in the state-approved agency agreements and offers to purchase.

Seller disclosure

A listing broker asks a seller for a written response to the broker’s inquiry about the condition of the seller’s property when taking the listing. The buyer, with an offer to purchase, asks if the seller has any notice or knowledge of items comprising the offer’s definition of “conditions affecting the Property or transaction.” When taking any listing, including commercial, the listing broker is required to inspect the property and ask the seller to respond in writing to the inquiry. Real Estate Condition Report Chapter 709 of the Wisconsin Statutes requires sellers of property containing one to four dwelling units and sellers of vacant land to complete a real estate condition report to give to buyers. This requirement applies to both broker-assisted transactions and for-sale-by-owner properties. Sellers of other properties, such as commercial, still must disclose known defects and conditions affecting their property but Chapter 709 does not require that they complete a real estate condition report. Many sellers, even if not required, fill out a real estate condition report.

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Consumer Protection - 4

Chapter 709 does not apply to: 1. Real estate which has not been inhabited, such as new construction or property converted from commercial or other use. 2. Transfers exempt from the real estate transfer fee, such as gifts between husband and wife or between parent and child, tax sale, foreclosure sales, condemnations and transfers by will, descent, or survivorship. 3. Transfers by personal representatives, trustees, conservators, and other fiduciaries appointed by or subject to supervision by a court, but only if those persons have never occupied the property. A seller completes a real estate condition report based on the seller’s own knowledge of the property. A seller could use reports from third-party qualified inspectors to supplement the information in the report. A seller must disclose known defects when completing the form and amend the condition report if the seller receives information that would change a response. A seller must provide a completed condition report to a buyer no later than 10 days after accepting an offer to purchase or risk rescission of the buyer’s offer. A buyer can rescind an offer if the seller does not provide the report by the deadline or provides an incomplete report. A buyer has two business days to rescind and must rescind in writing. If a seller accepts an offer and provides a report that discloses a defect of which the buyer was not already aware, the buyer may have a right to rescind the offer. There is not a state-approved form for a real estate condition report. Waiver of Rights If a seller does not want to provide a real estate condition report and does not want a buyer to have the right to rescind the offer, the seller can ask a buyer to waive the buyer’s right to rescind. A party cannot usually waive a consumer protection right granted by law but a buyer can waive, in writing, the right to receive the report. “As-is” Sales Sellers may want to sell property “as-is.” An “as-is” sale puts the buyer on notice that the buyer should do a thorough inspection of the property because the seller will not be providing information about its condition. Selling a property “as-is” does not result in waiver of liability for a seller if: 1. The seller concealed a known defect; 2. The seller prevented the buyer from conducting a thorough inspection; or 3. The seller knew of a latent defect. A latent defect is one that could only be discovered under certain conditions, which were not in existence when the buyer inspected. If a seller wants to sell “as-is,” the listing agent must modify the portions of the listing contract where the seller is making condition representations and where the seller is agreeing to complete a condition report. Brokers must comply with their inspection and disclosure obligations when dealing with an “as-is” seller. Condominium Disclosure Requirements When a condominium seller completes a real estate condition report, the seller is commenting on the condition of the unit, common elements, and limited common elements to which the seller has access. A seller must also include an executive summary, a condominium addendum with the seller’s condition report, and the condominium disclosure documents that a seller provides to a buyer after accepting an offer. There are not a state-approved forms for a condominium seller’s real estate condition report, the executive summary, or a condominium addendum.

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REAL ESTATE broker

Executive Summary Brokers do not prepare the summary. The declarant or the association prepares the summary, which should provide a plain, clear-language guide to the condominium documents. Condominium Addendum to the Seller’s Real Estate Condition Report The condominium addendum supplements the seller’s condition report. The seller completes the condominium addendum with very basic information, including the unit address and description, contact information for the seller or the listing agent, association management information, and budget and condominium maintenance fee information. Buyer’s Rescission Rights A seller must provide condominium documents within 10 days of accepting a buyer’s offer and at least 15 days before closing. These deadlines are found in the WB-14 Condominium Offer to Purchase. After a buyer receives the condominium documents, the buyer has five business days to rescind in writing. If a seller does not provide the documents by the deadline, the buyer has five business days to rescind in writing. If the seller provides incomplete documents, the buyer has five business days to request the missing documents. If the seller fails to provide them within five business days of the buyer’s request, the buyer has five business days to rescind based on the missing documents. If a buyer does not request missing documents or rescind within five business days, the documents are deemed satisfactory and the buyer will have no further right to rescind based on condominium disclosure documents.

Additional disclosure obligations

EPA Lead-Based Paint Disclosure Rules The disclosure requirements apply to the sale or rental of target housing. Target housing is residential properties constructed before 1978. It also includes properties for which the building permit was issued before January 1, 1978. Owner’s Responsibilities A property owner must disclose to a buyer, or if it is a rental property, the tenant, whether the seller has any knowledge of lead-based paint (LBP) or LBP hazards on the property and to provide copies of any reports or records available to the owner pertaining to LBP or LBP hazards. The property owner must also disclose this to the listing broker. The owner must also provide the buyer or tenant with a copy of the EPA pamphlet entitled Protect Your Family From Lead in Your Home. In a sale transaction, the seller must also provide the buyer with the opportunity to conduct a leadbased paint inspection or risk assessment if the buyer wishes to do so. A rental property owner does not have to provide this opportunity to a tenant. Broker’s Responsibilities The listing broker must inform the owner of the owner’s obligations under the law and ensure the owner’s compliance with the obligations. The listing broker must also inspect the property for material adverse facts. Cooperating agents, other than buyer’s agents paid solely by the buyer, share the listing broker’s responsibilities. Brokers must make sure that sellers comply with the disclosure laws.

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Consumer Protection - 4

Renovations and Remodeling Renovators and remodelers must provide a warning to occupants and owners of target housing before beginning work that will create a LBP hazard. The law covers almost any trade or occupation that could engage in work that would disturb painted surfaces that may contain LBP. It also covers the owner of the property and the owner’s employees when they engage in this type of work. Use Value Assessment of Agricultural Land Under the use value assessment, farmland is assessed based upon its agricultural productivity rather than its potential for development or fair market value. If the use of agricultural land assessed under the use value system is changed to a non-agricultural use, the current owner must pay a fee based on the number or acres removed from agricultural use. Sellers must disclose whether the property has been assessed under the use value system, whether the owner has been assessed a charge for changing the property’s use, and whether the owner has been assessed a penalty that has been deferred. The conversion charge amount is a per-acre charge based upon the number of acres taken out of agricultural production. The dollar amount per acre will vary based upon the size of the parcel involved and the county in which the parcel is located. To view current penalties for taking property assessed under this system out of agricultural use, go to the Wisconsin Department of Revenue’s website section on the use value conversion charge. Storage Tank Disclosure Issues Fuel storage tans are regulated by the DSPS. The DSPS maintains a database of registered tanks and provides information for property owners and for real estate licensees dealing with property where storage tanks are located. Underground Storage Tanks (UST) All underground fuel oil and gasoline tanks are regulated by the administrative code. All residential underground heating fuel tanks 1,100 gallon capacity or greater must have a tightness test every two years. If the tank does not successfully pass the tightness test an investigation must be conducted and the problem corrected. This may involve the removal of the tank and remediation of any contamination. Upon completion of a purchase of the property, the new owner must initiate a change-of-ownership with the DSPS. Tanks that are no longer in use must be closed. Closure means removing the tank from the ground after cleaning out any liquids or sludge. If removal of a tank would damage the structural integrity of a building or where hardships would occur, the DSPS may waive removal in favor of abandonment in place. Site assessments at the time of removal are required, except for heating oil tanks of 4,000 gallons or less and farm and residential fuel tanks. Tank removals must be performed under the observation of a neutral third party who would report any leak observed during the removal. Residential Aboveground And Basement Fuel Oil Storage Tanks Residential aboveground storage tanks (AST) abandoned and no longer in service must be permanently closed. An AST is considered to be abandoned if regular product transfers are not made to and from the AST. Product transfers must be made at least once every 180 days for motor fuel ASTs and at least once a year for heating oil ASTs before the AST is considered to be in use and not abandoned. Exceptions are made for oil ASTs used for emergency and backup fuel and overflow ASTs. If an abandoned AST is present on the property, the owner should hire a certified cleaner/remover who shall notify a DSPS authorized agent at least 30 days prior to beginning permanent closure. An exception to the AST closure requirements allows aboveground and in-basement heating oil tanks located at one and two-family dwellings to be closed without the services of a certified tank cleaner/remover. This does not remove the responsibility for giving proper notification prior to the tank removal and removing the AST in conformance with DSPS requirements.

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REAL ESTATE broker

Land Use A flood plain is land that has been or may be covered by flood water during a regional flood. “Regional flood” means a flood statistically determined to be representative of large floods known to have generally occurred in Wisconsin and that may be expected to occur on a particular water body, based on similar physical, rainfall, and runoff characteristics once in every 100 years. There is also a 500-year zone. Shorelands are lands within the following distances from the ordinary high-water mark of navigable waters: 1,000 feet from a lake, pond or flowage and 300 feet from a river or stream, or to the landward side of the flood plain, whichever is greater. Wetlands are an area where water is at, near, or above the land surface long enough to be capable of supporting aquatic or hydrophytic vegetation and that has soils indicative of wet conditions. It is not the broker’s responsibility to determine if a property falls into one or more of these categories. A broker should disclose to parties in a transaction involving a property adjacent to or near water that the property may be in a floodplain or subject to wetland or shoreland zoning regulations. These property characteristics may require additional permits and reviews. Radon Radon is a naturally occurring, odorless radioactive gas. It comes from the breakdown of uranium in soil, rock, and water. The gas may be found in new and existing construction including homes, offices, and schools. Radon is believed to be the second-leading cause of lung cancer in the United States. Radon issues can often be fixed with simple and affordable venting techniques. Testing is the only way to determine the presence and amount of radon. A radon test should be taken at the lowest living level in a regularly used room like a living room or bedroom but not a kitchen or bathroom. When including a radon test contingency in an offer, parties should consider performance of radon mitigation, completion schedule, and payment for mitigation performed. Testing is not required by law or regulated. Lead The source of lead in the drinking water of most Wisconsin homes is usually lead pipes or solder in the plumbing or lead-service lines connecting buildings to street water mains. As water passes through the pipes and across soldered connections, lead will dissolve into the water. Lead concentrations vary greatly depending on the corrosiveness of the water, the type and age of the plumbing materials used in the house, and the length of time that the water stands in the pipes. Levels of dissolved lead in drinking water may decrease as the plumbing ages and mineralization and oxidation occur inside the pipes creating a barrier between the water and the lead. Lead poses a greater hazard to young children, infants, and fetuses than to adults. Excessive levels of lead can damage the brain, kidneys, nervous system, red blood cells, and reproductive system. The degree of harm is directly related to the level of lead in the blood.

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Consumer Protection - 4

Asbestos Asbestos refers to six naturally occurring minerals that are combined with a binder to produce a variety of products including insulation, sound and fire proofing materials, floor coverings, and other construction materials. Asbestos-containing material (ACM) includes: • Material or product containing more than 1% of asbestos; and • Materials meeting the definition of suspect ACM, which includes vermiculite insulation and any untested materials used in or on building com­ponents with the exception of metal, glass, wood, and fiberglass. Repair consists of sealing or covering the ACM. This may necessitate the use of certified asbestos workers for any projects disturbing or impacting the insulation unless the project is: • A homeowner performing asbestos abatement or activities on the homeowner’s own singlefamily, non-rental residential property that is occupied or intended to be occupied solely by the owner and the owner’s family; • Operations and maintenance work involving disturbing or removing no more ACM than would fit in a single glove bag or a disposal bag no larger than 60 inches by 60 inches properly filled and sealed; or • Backhoe operators using the backhoe to demolish or remove a facility when ACM is allowed to remain. Consequences for Rental Property Owners Many building materials may con­tain asbestos, such as slate shingles, floor tiles, blown-in insulation, window glazing, and caulk. These and other similar materials must be tested or assumed to contain asbestos before disturbing or removing. If the apartment renovations or main­tenance activities include disturbing, replacing, or removing any of these known or suspect materials in any type of building, the rental owner or management company must be a certified asbestos company and use only workers certified in asbestos abatement or hire a certified asbestos company to remove these materials. Pesticides Lead arsenate Lead arsenate was used as a pesticide on apple and cherry orchards from the late 1800s to the mid 1900s. It is a compound containing both lead and arsenic. Both may be present in soil around trees to which the pesticide was applied. In addition to the soil around trees, orchard operators typically used an area of the property for mixing and preparing the pesticide for application to the trees and this area may be contaminated. Lead arsenate does not break down and is not very mobile. It may still be found in soil today even though it has not commonly been used for over 50 years. Concentrations of lead arsenate can vary considerably on a property because it was most effective when applied individually to trees. Higher concentrations tend to occur where the former trees stood; lower concentrations appear between the former tree sites. WRA – ADP Lead/ Arsenic Pesticide Addendum The WRA’s Lead/ Arsenic Pesticide Addendum prompts the seller to disclose any information about use of the property as an orchard prior to 1960 and about any use of lead or arsenic-based pesticides. Licensees should use this addendum or another similar form with sites that have been orchards.

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REAL ESTATE broker

Atrazine Atrazine is a popular herbicide that has been used for over 25 years to control weeds in Wisconsin cornfields. Groundwater contamination from atrazine is due to runoff from farm fields, agricultural spills, or improper disposal of unwanted or unused products. In areas where corn has been planted, contaminated wells usually contain some level of atrazine, which makes testing for atrazine a good indicator of other potential contamination due to herbicides and pesticides. The Wisconsin Department of Agriculture, Trade and Consumer Protection (DATCP) is responsible for protecting Wisconsin’s groundwater from pesticide, herbicide, and fertilizer contamination. Methamphetamine Methamphetamine or “meth” is a man-made amphetamine that is produced and sold illegally in the form of pills, powder, or chunks. Meth is produced in makeshift labs set up in homes, apartments, hotel rooms, mobile homes, or other buildings. Although the ingredients used to produce meth are readily available, many of the chemicals used in the “cooking” process can be harmful. The • • •

following are signs that meth may have been manufactured in a property: Yellow discoloration on walls and other surfaces; Taped-off smoke detectors; Symptoms such as burning eyes, an itchy throat, or a metallic taste in the mouth while in the property; • Strong odors similar to solvent, cat urine, or ammonia; or • Presence of security cameras or other surveillance equipment.

If the seller does not disclose the property’s history, licensees should generally disclose the current or prior presence of a meth lab on the premises as information suggesting the possibility of a material adverse fact and recommend that the parties obtain expert assistance to inspect or investigate. A buyer could contact local law enforcement or the health department to see if a property has a history of being used for methamphetamine production. When listing a property formerly used as a meth lab, a broker can contact local law enforcement or the local public health department and request any reports from the seizure and clean up of the lab. If reports are obtained, they can be provided to parties as a disclosure document.

Insurability Disclosure Issues

Insurance coverage may be difficult to find or expensive. Home buyers need to know about the insurability of their property. Properties that are “high-risk,” such as properties in floodplains or those with an environmental problem will be even more difficult to insure. Buyers will need to consider whether the property they are considering is insurable, what kind of coverage is available, and whether they will be able to afford the premium and deductible. Real estate licensees are not insurance experts but brokers must urge buyers to consult with a homeowners insurance provider early on in the process. This should happen at the same time the buyer is looking for mortgages and obtaining pre-qualification letters. Buyers need to learn about the risks commonly excluded from homeowners insurance policies and about any property conditions that may need to be addressed to make the property insurable. Whether a property’s insurability is a material adverse fact that a broker must disclose is will depend on the facts and circumstances of the transaction.

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Consumer Protection - 4

DRAFTING AND presentation of written proposals

Brokers must present written proposals to parties in a fair and truthful manner, discussing the pros and cons of each proposal. Written proposals include any written document provided by one party to another during a transaction such as offers, options, counter-offers, amendments, notices, and rental agreements. A broker must present all offers to a seller unless contrary to the seller’s instructions. Brokers must draft written proposals exactly and precisely to reflect the details of a transaction. Confidentiality of Offers A broker may, but is not required to, disclose to potential buyers that a seller has accepted an offer, accepted an offer subject to contingencies, or accepted an offer that has a bump clause. A licensee is prohibited from disclosing any terms of a submitted or accepted offer other than that an accepted offer may be subject to contingencies and may contain a bump clause. A licensee cannot tell a potential secondary buyer, for example, that the primary offer is for $2,000 less than the listing price. An agent is not required to tell a buyer if other offers have been submitted. If a licensee offers to tell a buyer upon submission of other offers, that licensee has created a duty to provide this information to the buyer.

Scope of license and competency

One of a broker’s most challenging roles can be to recognize the limits of what a real estate license permits a broker to do and recognize the limits of the broker’s competency. Consumers see real estate licensees as experts in all areas connected to a real estate transaction including taxes, zoning, construction standards, and home inspections. To minimize a broker’s liability and protect consumers, brokers must be able to limit the kind of information and advice they provide to consumers. This means referring consumers to other service providers such as tax attorneys or the local zoning board when consumers ask questions that fall outside of the scope of providing real estate services. Brokers must be willing to refer transactions to colleagues if the broker is not competent to engage in the transaction.

Disclosure of compensation and interests

Agency law prohibits an agent from competing with a principal because an agent cannot perform services on behalf of the agent’s client with undivided loyalty if the agent also has an interest in the transaction. Brokers can participate in transactions where the broker has an interest in limited situations where there is written disclosure of the broker’s interest and written consent from the parties to the transaction. A broker acting in a real estate transaction may not accept compensation related to the transaction from anyone other than the broker’s client, principal broker, or broker-employer without prior written consent from all parties in the transaction. A party can give consent in an agency agreement, an offer to purchase, or another written document. Family Members Brokers acting as agents in a transaction cannot act on the broker’s own behalf and cannot act for a member of the broker’s immediate family without the prior written consent of all parties. A broker also cannot act on behalf of any firm, other organization, or business entity in which the broker has an interest without the prior written consent of all parties. The broker shall obtain consent in an offer to purchase, option, lease, or other transaction document. Immediate family includes parents, step­parents, grandparents, foster parents, children, stepchildren, grandchildren, foster children, brothers and their spouses, sisters and their spouses of a licensee or a licensee’s spouse, the spouse of a licensee, aunts, and uncles, sons-in-law or daughters-in-law of a licensee, or a licensee’s spouse.

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REAL ESTATE broker

Referral Fees Brokers may not receive referral fees unless prior to or at the time of the referral, the broker discloses the potential for compensation in writing. The broker must say that the broker might receive compensation for the referral or that the broker has an interest in the person or entity providing services. Licensees do not need to disclose referral fees for real estate services between licensees. Principal in a Transaction A listing broker cannot pay compensation or an incentive to a licensee who is acting as a buyer in a transaction without prior written consent from the seller. When acting as principals in transactions rather than as agents, brokers cannot earn commissions. To address this, when purchasing property, brokers may include incentives in an offer to purchase requesting that the listing broker or the seller pay the broker what the broker would have earned if the broker could earn a commission on the transaction. Disclosure of Status A licensee acting as a principal in a real estate transaction shall disclose in writing the licensed status and intent to act in the transaction as a principal at the earliest of first contact with the other party, a showing of the property, or any other negotiation with the seller or listing broker.

Tie-in arrangements

 rokers generally cannot enter into tie-in arrangements, where the broker will only provide services to a B seller or a buyer if the party agrees to obtain other services through the broker. Brokers can enter into tie-in agreements if the broker is selling or controlling the sale of vacant land and requires a buyer to use a specific builder to develop it if: 1. The builder owns a bona fide interest in the real estate and there is full disclosure; or 2. The licensee is the builder or the builder owns the real estate, personally or by a commonly controlled corporation and whose business is selling improved property and not vacant land and there is full disclosure; or 3. The agreement to sell if the buyer uses one or more specific builders is a bona fide effort to maintain development quality or architectural uniformity and the licensee does not receive compensation from the contractor for the agreement.

Fair Housing and the Americans with Disabilities Act Federally protected classes: Color Race Religion National origin Sex Disability Familial status

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State protected classes under Section 106.50, Wis. Stats.:

Color Age Race Sexual orientation Religion Ancestry National origin Marital status Sex Disability Familial status Lawful source of income Status as a victim of domestic abuse, sexual assault, or stalking

Consumer Protection - 4

Local Fair Housing Laws Counties and municipalities in Wisconsin are allowed to adopt local fair housing ordinances. The ordinances may add protected classes in addition to those protected under federal or state law. Many such ordinances have been adopted and real estate licensees must be aware of any additional classes protected under local ordinances covering the licensee’s practice area. Sanctions for Violations Real estate licensee discipline Civil fines and damages Court costs and attorney’s fees Testers and Fair Housing Organizations U.S. Department of Housing and Urban Development (HUD) State of Wisconsin Department of Workforce Development (DWD) Local fair housing organizations Private individuals Conduct Prohibited by Fair Housing Laws Discrimination – Failing or refusing to provide equal services because of a person’s membership in a protected class. Blockbusting – Attempting to obtain listings by instilling fear in the property owner that the property’s value is about to decrease because a member of a protected class is entering into the area. Steering – Showing properties to a consumer only in those geographic areas when the licensee believes the consumer “belongs” or would “fit in,” because of the consumer’s membership in a protected class. Advertising – Placing advertisements that an “ordinary reader” would believe to be seeking or precluding persons based upon membership in a protected class. The intent of the licensee writing the advertisement is not important – it is the perception presented to the “ordinary reader” that matters. Permissible Discrimination Under Fair Housing Laws 1. Discrimination based on age or family status with respect to housing for older per­sons. Housing may qualify as housing for older persons when at least 80% of the dwelling units are occupied by at least one person 55 years of age or older, and policies are published and procedures are adhered to that demonstrate an ­intent by the owner or manager to provide housing for persons 55 years of age or older. 2. E  xacting different or more stringent terms or conditions for financing housing based on the age of the individual applicant for financing if the terms or conditions are reasonably related to the individual applicant. 3. The development of housing designed specifically for persons with disabilities in relation to such housing. 4. Refusing to provide housing to an individual whose tenancy would constitute a direct threat to the safety of other tenants or persons employed on the property or whose tenancy would result in substantial physical damage to the property of others, if the risk of direct threat or damage cannot be eliminated or sufficiently reduced through reasonable accommodations. The property owner must be able to demonstrate a pattern of this behavior.

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REAL ESTATE broker

5. R  equiring that a person who seeks to buy or rent housing supply information concerning family, marital, financial, and business status but not concerning race, color, disability, sexual orientation, ancestry, national origin, or religion. 6. Requiring that a person who seeks to buy or rent housing for older persons supply information concerning age for the purpose of verifying compliance with that type of housing. 7. Advertising for roommates may indicate the desired gender of the tenant sought in situations where there are shared living areas or where the advertising is for a dormitory at an educational institution. This exception does not apply if the rental is for separate units in a single or multifamily dwelling. 8. Referencing a protected class in an advertisement if advertising is part of an affirmative marketing program designed to attract persons who would not ordinarily be expected to apply for housing. 9. R  efusing to rent owner-occupied housing to a person with a service animal if an owner or an immediate family member occupying the property is allergic to the animal. The person with the allergy must be able to demonstrate it with a certificate signed by a physician that states that the owner or family member is allergic to the type of animal the individual possesses. Occupancy Standards The Federal Fair Housing Act permits local and state governments and the federal government to establish “reasonable” occupancy limitations for housing units. Occupancy standards should be based upon “reasonable” criteria, such as size of the unit, heat, or water limitations. For example, HUD guidance has stated that an occupancy policy of two persons per bedroom, as a general rule, is reasonable under the act. Wisconsin Administrative Code states that every sleeping room shall be at least 400 cubic feet of air space for occupants 12 and older and at least 200 cubic feet of air space for occupants under the age of 12. Advertising Brokers, publishers, advertisers, and multiple listing services are responsible if they make, print, or publish an advertisement that violates fair housing laws. HUD provides guidelines for advertising property or services related to housing. 1. Race, color, national origin. Real estate advertisements should not state a discriminatory preference or limitation on account of the protected classes. For example, using racial or ethnic terms such as “white family home” or “no Irish” to describe housing, current or potential residents, or the neighbors or neighborhood would create liability under fair housing laws. 2. Religion. Advertisements should not contain an explicit preference, limitation, or discrimination on account of religion. For example, stating “Lutherans only” or “no Catholics” in an advertisement would be a violation of the law. Advertisements that use the legal name of an entity that contains a religious reference, such as “Roselawn Catholic Home” or those that contain a religious symbol standing alone may indicate a religious preference and violate fair housing laws unless the advertisement also includes a disclaimer stating that the property will not discriminate on the basis of race, color, religion, national origin, sex, handicap, or familial status. Advertisements containing descriptions of properties such as “apartment complex with chapel” or “kosher meals available” that do not state a preference for persons likely to make use of those facilities do not violate fair housing law.

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Consumer Protection - 4

Including secularized terms or symbols such as Santa Claus or the Easter Bunny that relate to religious holidays or using phrases such as “Merry Christmas” or “Happy Easter” are not violations of fair housing advertising laws. 3. Disability. Real estate advertisements should not contain explicit exclusions, limitations, or other indications of discrimination based on ability, such a “no wheelchairs.” Advertisements describing attributes like “jogging trails” or “fourth-floor walk-up” do not violate the act. Describing prohibited conduct such as “no smoking” or “no alcohol” does not violate the act. Advertisements that describe accessibility features such as ramps and lower counters are not violations of fair housing law. 4. Familial status. Advertisements may not state an explicit preference, limitation, or discrimi­nation based on familial status. Advertisements may not contain limitations on the number or ages of children, or state a preference for adults, couples, or singles. Advertisements describing the property as “two bedroom, cozy, family room” or “quiet streets” do not violate fair housing law. For more information about fair housing and advertising, go www.hud.gov. Fair Housing Complaints The Office of Fair Housing and Equal Opportunity (FHEO) investigates complaints filed with HUD. HUD provides the respondent with an opportunity to agree to a remedy to the complaint. If HUD and the respondent reach a suitable agreement, HUD does not take any further action. If HUD has reasonable cause to believe that a respondent has breached the agreement, HUD will recommend the attorney general file suit seeking additional remedies and enforcement action. If HUD and the respondent cannot reach an agreement remedying the complaint, the FHEO determines whether reasonable cause exists to believe that the respondent engaged in discriminatory housing practices. If FHEO finds reasonable cause, they notify the parties of the reasonable cause, HUD’s determination of possible discrimination, and schedule a hearing before an administrative law judge. Either the complainant or respondent can terminate the administrative proceeding by elevating the matter to litigation in federal court. If a party chooses to litigate the matter in federal court, the Department of Justice takes over HUD’s role as counsel seeking resolution of the charge on behalf of aggrieved persons, and the matter proceeds as a civil action. If a complainant ­cannot afford an attorney, the court may appoint an attorney to litigate the case. A court can award actual and punitive damages and attorney’s fees and costs. Complaint Processing Under Wisconsin Law 1. Complaints must be in writing, state the facts, and be filed within one year of the alleged discriminatory act taking place. 2. At any time after a complaint is filed alleging discrimination, the Department of Workforce Development (DWD) may file a petition seeking a temporary injunction or restraining order against the respondent. 3. The DWD shall commence proceedings with respect to a complaint before the end of the 30th day after receipt of the complaint. If the DWD is unable to complete the investigation within 100 days, it shall notify the complainant and respondent in writing of the reasons. 4. The court may allow a prevailing complainant reasonable attorney fees and costs. The Equal Rights Division of DWD may also refer a fair housing complaint against a person holding a Wisconsin real estate license to the DSPS for enforcement action. Potential DSPS discipline could include education, reprimand, forfeiture, and license revocation, suspension, or limitation.

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REAL ESTATE broker

Establishing Office Procedures Regarding Fair Housing Laws

Brokers should institute office procedures to ensure all employees are complying with fair housing laws and to protect the broker from potential claims of discrimination. Topics for Broker Compliance Practices and Procedures 1. Executing agency contracts. 2. Keeping lists of available properties and practices for sharing with consumers. This can avoid having a licensee tell a consumer a property is sold or unavailable if the property is still available, which could lead to a claim of steering. 3. Uniform qualifying procedures for prospective buyers and tenants. A broker could create uniform prospect cards so that salespeople ask all prospective buyers and sellers the same questions. 4. Handling questions at showings or open houses. 5. Marketing and advertising guidelines. 6. Procedures for handling compromising situations and suspected discrimination. 7. Record-keeping procedures.

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Consumer Protection - 4

Answer the following questions. If you need to, refer to the previous summary. ____________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________

1. Why does the state require licensing of real estate professionals?

2. What is the purpose of discipline issued by the Department of Safety and Professional Services? ________

________________________________________________________________________ ________________________________________________________________________ _______________________________________________________________________

______________________________ ________________________________________________________________________ _______________________________________________________________________

3. What is one of a broker’s most important roles in a transaction?

___________________________________________ ________________________________________________________________________ ________________________________________________________________________

4. Describe a broker’s role during pre-agency.

______________________________ ________________________________________________________________________

5. In what transactions must a broker provide agency disclosure?

___________________________________ _______________________________________________________________________

6. At what point must a broker provide agency disclosure?

_______________________________________ ________________________________________________________________________ ________________________________________________________________________ _______________________________________________________________________

7. When can a broker waive the duty of negotiation?

__________________ ________________________________________________________________________ _______________________________________________________________________

8. When must a buyer’s agent disclose buyer agency to a seller or a listing broker?

______ ________________________________________________________________________ ________________________________________________________________________ _______________________________________________________________________

9. Before a broker represents both the seller and the buyer in a transaction, what must the broker do?

_____________________ ________________________________________________________________________ _______________________________________________________________________

10. _How does a client withdraw consent to multiple representation relationships?

_________________________________________ ________________________________________________________________________ _______________________________________________________________________

11. _What are a subagent’s duties in a transaction?

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REAL ESTATE broker

12. When can a broker use approved forms? _____________________________________________

________________________________________________________________________ _______________________________________________________________________

_____________________________ ________________________________________________________________________ ________________________________________________________________________

13. What must a broker include in all advertisements for a property?

___________________ ________________________________________________________________________ ________________________________________________________________________ _______________________________________________________________________

14. What does a broker have to do when taking a listing for a commercial property?

_________________________________________ ________________________________________________________________________ ________________________________________________________________________

15. When can a buyer inspect a seller’s property?

16. How does a broker decide if information is a material adverse fact or suggests a material adverse fact that must be disclosed? ___________________________________________________________

________________________________________________________________________ ________________________________________________________________________

17. By when must a seller provide a buyer with a real estate condition report? _______________________

________________________________________________________________________ _______________________________________________________________________

_____________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________

18. What disclosure documents does a seller of a condominium have to provide to a buyer?

19. Who is responsible for ensuring seller compliance with the lead-based paint disclosure law?___________

________________________________________________________________________ ________________________________________________________________________

20. When is a property owner assessed a penalty under the use value assessment of agricultural land? ______

________________________________________________________________________ ________________________________________________________________________ _______________________________________________________________________

21. Why does a broker need to know about property conditions such as underground storage tanks, radon, and shoreland zoning? ___________________________________________________________

________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________

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Consumer Protection - 4

___________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________

22. What are signs that a property may have been the sight of methamphetamine production ?

___________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________

23. When can a broker restrict a cooperating broker’s showing of a listed property?

24. Why must a broker be careful to recognize the scope of the broker’s license and the extent of a broker’s competency? _______________________________________________________________

________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________

_________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________

25. When can a broker receive referral fees from another party who is not a real estate licensee?

26. What are the potential sanctions for violating fair housing laws? ___________________________________ _______________________________________________________________________________________ _______________________________________________________________________________________ _______________________________________________________________________________________

41

REAL ESTATE broker

42

5 D

Duties to Other Brokers

uties to other brokers

guide the professional relationships between real estate practitioners. Whether a broker is part of a large network of associated professionals or a sole proprietor, there are statutes and rules that govern how brokers behave toward each other. A broker’s duties to other brokers dictate how the broker presents offers, refers parties, shares commissions, interacts with another broker’s customer or client, and engages in subagency.

DISCLOSURE OF AGENCY STATUS

Brokers owe other brokers the duty of disclosing a broker’s role in a transaction. If the transaction involves a property to be used principally for one to four family residential purposes, a buyer’s broker must disclose the agency relationship with the buyer to the seller or listing broker at the earlier of first contact, a showing, or any other negotiation. The law only requires disclosure of buyer agency status when the transaction involves a property with one to four dwelling units but there is no prohibition that a broker provide this disclosure in all transactions where the broker is acting as a buyer’s agent. An agent who begins working with a buyer in a pre-agency role and later converts that relationship to buyer agency must remember to make that disclosure for any future contacts, including contacts relating to properties from the earlier pre-agency phase. Brokers must also be sure to provide new agency disclosures to clients or customers when a previous disclosure becomes incomplete, misleading, or inaccurate. Brokers have additional agency disclosure obligations when working with parties who are not represented or parties who are represented by a broker but the broker is not engaged in the negotiations for some reason. When a buyer is represented by a broker, the negotiations would be conducted between the buyer’s broker and the listing broker but if, for any reason, the listing broker and the buyer negotiated directly, the listing broker must provide the buyer with agency disclosure as a customer of the listing broker. If the seller is not represented or if the listing broker is not a part of the negotiations for some reason, the buyer’s broker must provide agency disclosure to the seller as a customer. A subagent of a principal broker must provide agency disclosure to a customer but the subagent does not have to provide agency disclosure to the principal broker’s client. A principal broker provides agency disclosure to the principal broker’s clients but does provide it to the customers of the principal broker’s subagent. Copies of Broker Disclosure Forms When acting as a subagent, a cooperating broker is an agent of the listing broker and should provide a copy of the agency agreement given to the subagent’s buyer-customer if the principal broker requests it unless doing so would violate a duty owed to all parties, such as the duty of confidentially. An agent acting as a buyer’s broker, however is not required to provide a copy of agency disclosure to the listing agent. An agent acting as buyer’s broker is not a subagent and not an agent of the listing broker. Because the agency disclosure provided to a buyer-client by a buyer’s broker is contained in the buyer agency agreement, the buyer’s broker should not provide this to the listing broker because this is a confidential agency agreement between the buyer and the buyer’s broker.

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REAL ESTATE broker

Negotiation through broker

When a broker knows a party is represented by another broker, the broker must conduct negotiations through that broker. This applies to both listing and buyer’s brokers. The only exceptions to this are when the broker consents to another broker contacting the client directly or the absence of the broker or other similar circumstances compel direct negotiations with the party. Consent A listing broker may consent to a buyer’s broker presenting offers directly to a seller. A broker may encounter this when a seller hires a listing broker under a limited services agency agreement. If one of the features of the limited services listing was that the seller agreed to waive a broker’s duty of negotiation, the contract between the listing broker and the seller may also call for the seller to receive offers directly from other brokers. This would be a situation where a buyer’s broker could negotiate directly with a seller even though the seller had an unexpired listing contract. A seller could also contact a buyer’s broker or a cooperating broker directly and that broker would not be violating the rules requiring negotiation through the broker. Absence of Broker or Other Similar Circumstances The administrative rule does not specify how long a broker needs to be absent for this exception to apply and it does not elaborate on what might constitute “other similar circumstances.” A broker will have to decide whether the broker’s individual circumstances fit in this exception to the requirement that the broker negotiate through the represented party’s broker. If the represented party’s broker disagrees and thinks contacting the client directly was inappropriate, the brokers may find themselves engaged in some sort of dispute resolution process. A Buyer’s Agent’s Exclusive Right to Negotiate The rules do not prohibit a broker from contacting a buyer with a buyer agency agreement unless the buyer agency agreement has given the buyer’s broker the exclusive right to negotiate and the other broker knows this. This is a significant difference between the standard listing contract forms and the standard buyer agency agreement form. While the listing contracts grant an exclusive right to sell to the listing broker, the buyer agency agreement does not grant an exclusive right to negotiate to the buyer’s broker. A listing broker does not have an obligation to ask buyers if they have given their broker the exclusive right to negotiate. Professional courtesy, however, means that most listing brokers will ask buyers if they are working with a broker. By asking buyers if they are or have been working with a broker, either as a customer or as a client, a listing broker can avoid issues related to procuring cause and commission disputes. A listing broker will also further the regulatory goal of consumer protection by asking buyers if they are working with a broker. An unmodified WB-36 buyer agency agreement states that a buyer will owe the buyer’s broker’s success fee even if the buyer’s broker is not involved in the buyer’s procurement of a property covered by that agreement.

Written proposals

Brokers must draft and present all written proposals to parties in a transaction unless contrary to the instructions of the party, which should be documented in the agency contract. Normally this is done through a party’s broker, if a party is represented. Brokers do not withhold written proposals pending a party’s action on previously presented proposals. Brokers have a duty to present written proposals in an objective and unbiased manner informing clients and customers of the advantages and disadvantages of all submitted written proposals.

44

Duties to Other Brokers- 5

Real Estate Licensee as Principal in a Transaction When a licensee is participating in a transaction as a seller or a buyer, the licensee must disclose licensed status at first contact with the other party. When the licensee is a buyer, the licensee should confirm disclosure of licensee status by including it in an offer to purchase. A real estate licensee cannot submit an offer on a property listed with the licensee’s employing broker if there is a pending offer and the licensee knows the terms of the pending offer. Licensees who want to write offers on properties listed with the licensee’s broker-employer should check with the broker-employer because the broker-employer may have additional procedures and policies for submitting an offer on an inhouse listing. Notifying Parties of Actions on a Written Proposal Licensees shall promptly inform their clients and customers whether the other party has accepted, rejected, or countered their written proposal. A licensee shall immediately provide a written statement to the other party’s broker that includes the date and time when the written proposal was presented when such a statement is requested by the other party or the other party’s broker. A licensee shall immediately provide a written statement to the other party’s broker that includes the date and time when the written proposal was rejected or had expired without acceptance when such a statement is requested by the other party or the other party’s broker. Disclosure of Existing Offers A listing broker does not have to disclose to cooperating brokers that there are other offers on a property. A broker can disclose this information but is not required to do so. A broker may want to discuss disclosure of existing offers with a seller as part of the discussion on marketing strategies. The broker cannot disclose the terms of the offers. Disclosure of Accepted Offers A broker can disclose to cooperating brokers that a seller has accepted an offer but is not required to do so. The broker can only disclose certain terms of the offers. A broker can disclose that the seller has accepted an offer, that the offer is subject to contingencies, and that the offer is subject to contingencies with a bump clause. Rights of First Refusal When a seller has given another party a right of first refusal on a property, a broker must disclose this in writing, in a timely manner, to all parties seeking to acquire an interest in the property. A right of first refusal is an agreement between the seller and some other third party. The agreement usually gives the third party the right to purchase the seller’s property ahead of all other buyers if the seller decides to sell the property. Unlike an option to purchase, a right of first refusal is usually granted to a party before the property owner ever decides to sell the property. A right of first refusal may be given when family members want to keep a property in the family or it could be executed between unrelated parties.

Contacting represented parties

Once a broker is aware that a consumer has signed an agency contract with a broker, the broker cannot attempt to interfere with that contract. A broker can also contact represented parties to offer services that are not covered by an existing contract.

45

REAL ESTATE broker

RELOCATION COMPANIES

When a person has to move due to employment, the person’s employer or the person may hire a relocation company to assist with the transfer. Employers often employ the relocation company directly on behalf of their employees. Working with a relocation company can often create a transaction that differs from the broker’s usual course of business. Referral Fees When a broker is dealing with a seller or buyer who is moving into or out of the broker’s market area, the broker should to ask the party whether the move is employment-related, whether the party is receiving benefits through a relocation company, and whether that relocation company requires the use of a particular broker or company. A relocation company may expect a broker to pay referral fees to the company as part of the transaction. Use of Relocation Company Forms A relocation company may present unapproved forms for a broker to use. A listing broker can sign a listing contract provided by a relocation company but cannot fill in the blanks or modify the form. The same limitations apply to a broker working with a buyer and a relocation company; the broker can assist a buyer completing a state-approved offer to purchase but if the relocation company uses an offer to purchase that is not a state-approved form, the broker cannot assist the buyer in completing that form. The buyer can complete the form independently or with the assistance of an attorney. Verbal Negotiations and Acceptance Relocation companies may verbally accept an offer a broker submits for a buyer but will not supply a signed, accepted offer until the buyer does some other act, such as completing a home inspection and waiving that contingency. The risk to the buyer is that the buyer expends money and time attempting to perform according to the relocation companies requirements and then have the relocation company never deliver an written, accepted offer.

Commissions

A broker’s obligation to other brokers with regards to commissions can be a matter of contractual agreement between the brokers. These agreements dictate what happens during a transaction that occurs under a current listing contract or buyer agency agreement. Extension of Listing, Protected Buyers, and Protected Properties The state-approved agency contracts include protected buyer and protected property provisions. Protected buyers and properties are not a matter of state law but a contractual provision found in the state-approved agency contracts. The listing broker can protect buyers who submitted offers, negotiated directly with the seller, or who attended individual showings. To protect those buyers and extend the listing, the broker must deliver the list of protected buyers to the seller with three days of the expiration of the listing. In the case of a buyer agency agreement, the broker must submit the list of protected properties to the buyer within three days after the expiration of the agency agreement. The process for a second broker to deal with a protected buyer or property is clear; if the buyer or property was properly protected by the former broker, the former broker is entitled to the commission, even if it is the second broker that facilitates the transaction. The protected buyer provisions protect that first broker’s right to the commission. The former broker’s decision of sharing the commission with a co-broker can be significantly less clear and there are no statutes or administrative rules that brokers can rely on to arrive at a conclusive decision for who is entitled to the co-brokerage commission.

46

Duties to Other Brokers- 5

Material facts

Brokers have a duty to disclose all material adverse facts to all parties in a transaction. When a broker finds a material adverse fact that has not previously been disclosed, the broker must disclose it too all parties in writing and in a timely fashion. There is not a state-approved form for disclosure of material adverse facts. Material adverse facts are not strictly related to the condition of the property but include all material adverse facts about the transaction. A broker only owes the duty to disclose material facts to a client. Material adverse facts are all the negative and important facts about a property but material facts can be positive facts about a property.

False information

A broker must disclose information that suggests material adverse facts. This may put a broker in a challenging position of disclosing information a client represented as true but the broker knows or thinks is false. For example, a seller could fill out a real estate condition report and state that the property is not subject to shoreland zoning regulations but the seller’s property is on a lake. A broker does not have to investigate and determine whether the seller’s property is subject to shoreland zoning regulations but the lake front nature of the property is information that suggests a material adverse fact, which a broker would have to disclose, even if contrary to a seller’s instructions.

Permission For Subagency

A broker must always obtain a client’s permission before engaging a subagent. The state-approved agency agreements have consent as a default provision in the contract. If a client does not want the broker to engage subagents, the broker must modify the contract to reflect this. Brokers are required to cooperate with other brokers unless contrary to a client’s instructions. To avoid any charges of discrimination or antitrust violations, a broker would want to make sure these restrictions are included in the agency agreement. Professional courtesy also dictates that if a client is prohibiting a broker from engaging subagents in a transaction, the broker would explain this to other brokers unless a seller prohibited disclosure of the prohibition. Most clients authorize their brokers to engage subagents because it increases the likelihood of a successful transaction.

Transfer of earnest money

The state-approved offers to purchase state that the listing broker holds the earnest money for a transaction if the property is listed. If it is not listed, the buyer’s agent holds it and if no broker is involved, the seller holds it. Parties can always agree to some other arrangement but normally, the listing broker holds the funds. If a buyer submits an offer to a cooperating broker with earnest money, the cooperating broker has 24 hours to give it to the listing broker.

47

REAL ESTATE broker

Answer the following questions. If you need to, refer to the previous summary. __________________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________

1. What sources create a broker’s duties to other brokers?

_____ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________

2. In what transactions must a buyer’s broker disclose the broker’s agency relationship with the buyer?

___________________________________ ________________________________________________________________________ ________________________________________________________________________

3. To whom must a subagent provide agency disclosure?

________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________

4. When should a cooperating broker provide proof of agency disclosure?

__________________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________

5. When can a broker contact a represented party directly?

_________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________

6. What disclosures must a broker make when acting as a principal in a transaction?

______________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ _______________________________________________________________________

7. What are a broker’s duties to notify parties of action on a written proposal?

___________________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________

8. What can a broker disclose about an offer to a buyer?

48

Duties to Other Brokers- 5

9. Why does a broker have to provide written disclosure that a seller’s property is subject to a third party’s right of first refusal? ______________________________________________________________

________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________

______________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________

10. When can a broker contact a party with an unexpired agency agreement?

11. If a broker is going to use a listing contract provided by a relocation company, what does the broker need to do? _____________________________________________________________________

________________________________________________________________________ ________________________________________________________________________

_________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________

12. Why should a broker ask a buyer or a seller if they were under a previous agency agreement?

____________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________

13. How long does a cooperating broker have to deliver earnest money to the listing broker?

49

REAL ESTATE broker

50

6 B

Business Ethics

usiness ethics

are a combination of legal standards, personal ethics, moral standards, company policies, and observance of industry codes. Ethics for real estate licensees are made up of state statutes, Department of Safety and Professional Services (DSPS) rules, and self-imposed rules and values. Business ethics refers to the values, morals, decisions, and business judgments that are beyond the minimum standards set by the legal system. Every Wisconsin licensee is accountable to the standards established by Wisconsin state statutes and the DSPS’s administrative code provisions and licensees can face discipline for violation of ethical guidelines. Broker-employees and salespeople also follow office policies that set the standards for business practices within that office. Office policies usually address use of vehicles, e-mail delivery, use of electronic transactions, codes of ethics, social media policies, credit rules, and other office procedures. A broker-employer’s office policies set a higher standard for broker-employees and salespeople than is established by state law and industry codes. .

Referral fees and party incentives

Unlicensed individuals cannot receive compensation from a licensed broker for an act of real estate practice. Brokers can pay referral fees to other Wisconsin licensees or non-Wisconsin real estate professionals who are regularly and lawfully engaged in the real estate brokerage business in another state, territory, or possession of the United States or a foreign country. Brokers may offer incentives to a party to induce the party to work with the real estate licensee. For example, licensees can offer potential customers or clients incentives such as storage spaces or moving trucks to induce the consumer to use the licensee’s services. Incentives must be clearly defined and be in writing to avoid any potential problems with fee-splitting.

Competency

All brokers must practice with an accurate assessment of the broker’s own competency and should never engage in transactions in which the broker is not competent. When a broker is presented with a transaction for which the broker lacks competency, the broker usually will address the situation by referring the transaction to another broker who is competent or negotiating an arrangement with another competent broker to provide assistance in the transaction. Brokers can also consult attorneys or other outside service providers for assistance in transactions. Brokers must identify the party who assisted the broker and document that party’s assistance in the transaction. Competent practice means protecting the public and preventing fraud. Licensees are obligated to protect the public against fraud, misrepresentation, and unethical practices. Brokers need to know about real estate laws, public policies, and current market conditions to assist, guide, and advise consumers engaged in real estate transactions. Brokers are held to a high standard for what constitutes competent practice. Brokers are not expected to be experts in all aspects of a real estate transaction but a competent licensee will have the ability to refer customers and clients to other professionals when the issue is beyond the scope and knowledge of a real estate licensee.

51

REAL ESTATE broker

Complaints to the Department of Safety and Professional Services

The DSPS enforces professional standards for all Wisconsin licensees. Consumers or other licensees may bring violations of professional standards to the attention of the DSPS. Forms for registering complaints are available on the DSPS website. Wis. Admin. Code SPS 2 Procedures for Pleading and Hearings is the process the DSPS uses for receiving and processing complaints for violations of DSPS rules. The purpose of discipline is to protect the public, rehabilitate the credential holder, and deterrence. The DSPS Complaint Process When a consumer or another licensee registers a complaint with the DSPS, the Division of Enforcement receives the cases. A board of screening panel and Division of Enforcement staff determine if the complaint warrants investigation. If it does not, the Division of Enforcement closes the case. The Division of Enforcement opens cases on complaints that have merit and require further investigation. Investigation is the second stage in the case handling process. The Division of Enforcement investigator and an attorney develop an investigative plan. Investigating staff gather necessary evidence. A case advisor is consulted when professional expertise is required. The case advisor is presented with the evidence and it is discussed. Cases that do not warrant professional discipline are closed. Cases that confirm violations proceed to legal action. When a complaint warrants legal action, Division of Enforcement prosecuting attorneys review the results of the investigation and, when appropriate, pursue disciplinary action. Cases may be resolved by stipulation agreements, informal settlement conferences, or administrative warnings. A case advisor will be asked for assistance on matters involving professional expertise. The next step is an administrative hearing. The hearing is a formal legal process with legally binding results if no satisfactory resolution was arrived at during the legal action phase. A Division of Enforcement attorney litigates the case before an administrative law judge. The administrative law judge issues a proposed decision, which is reviewed by the REEB. If a violation is found, the REEB may impose discipline including reprimand, or limitation, suspension, and revocation of license.

Dispute Resolution

Disputes can arise over commission issues, contractual problems, client relationships, employment arrangements, or procuring cause. Not all disputes will require court litigation to settle the dispute and alternative dispute resolution methods may save the cost and time involved in litigation and could lead to a friendlier resolution to disputes. Wisconsin law does not require that any real estate professional use an alternative dispute resolution method and civil court remains a possibility for any licensee with legal disputes. Consumers can choose to pursue alternative dispute resolution methods to resolve problems with real estate licensees but consumers can elect any available method of dispute resolution including civil litigation. Disputes may arise between buyers and sellers, brokers and clients, and between brokers and other brokers. Alternative Dispute Resolution Alternative dispute resolution usually refers to any method of resolving a dispute that does not involve going to a formal court proceeding. It can include negotiation, arbitration, mediation, or some other process agreed upon by the parties.

52

Business Ethics - 6

Negotiation Negotiation is a resolution method that involves the parties directly attempting to settle the dispute through a discussion of possible outcomes. When a broker becomes aware of a potential compensation dispute, careful consideration should be given to making contact with the other side and having an open and honest discussion about the situation. Many times, neither side will have a complete understanding of the facts surrounding the situation, and communication early on may lead to a workable solution. Mediation Mediation is a voluntary attempt to bring about a peaceful settlement or compromise between disputants through the objec­tive intervention of a neutral party. A party can withdraw consent to mediation and attempt a different method of dispute resolution at any time. Mediation may be conducted by a private service offering mediation for a fee or by any party agreed upon by the disputing parties. It is not conducted by a Wisconsin court. Many issues arising out of real estate transactions have a basis in miscommunication or lack of communication. Parties mutually agree to engage in mediation and either party can choose to abandon the process at any time and seek a different method of resolving the conflict. Mediation can be a successful way for parties to share their views and concerns in a non-adversarial way. In mediation, a neutral mediator helps the parties evaluate their positions, explore options, and give flexibility in constructing resolutions. Resolutions will be reduced to written settlement agreements. Mediation may be quicker and less costly than arbitration. Advantages of Mediation as a Dispute Resolution Tool The mediation process is voluntary and thus consensual. The parties decide the case only if they choose to settle. The mediation process is “win-win” in the sense that each party comes away from a mediation agreement with something, as contrasted to an arbitration hearing in which there is a “winner” and “loser” and one party may leave the case with nothing. If the parties reach an agreement in mediation, the deposits of the parties are returned. Mediation is a more informal process than an arbitration hearing. While arbitration is confidential, mediation has fewer “outsiders” (e.g. panelists) involved and thus fewer persons will know of the dispute. Because mediation is a consensual process rather than an adjudicative process, there is a greater likelihood of preserving relationships between the parties for future benefits and business of the parties. Arbitration Arbitration may be a faster and less expensive process than litigation and decisions are made by a panel of real estate profes­sionals or another third party as agreed upon by the parties in dispute. Before parties engage in arbitration, there must be an arbitrable issue, such as a dispute over fees or services.

53

REAL ESTATE broker

Whether parties agree to submit to binding or non-binding arbitration will depend on any terms agreed to in contracts, the dispute, and the preferences of the parties. The arbitrator can be one person or a panel of individuals depending on the terms of arbitration agreed to by the parties. Professional arbitration services can be hired for a fee but parties could agree to have any person serve as the arbitrator in a dispute. Most of the details of an arbitration will be determined by: 1. An arbitration agreement that was entered into prior to the dispute such as may be contained in an agency agreement or an employment agreement; 2. A court order in the case of court ordered arbitrations; 3. The terms dictated by the parties when agreeing to arbitrate the dispute; and 4. The complexity and nature of the disagreement between the parties. Parties may or may not be represented by attorneys. As in civil litigation, witnesses can be called to testify but in an arbitration proceeding, they may not be compelled to attend. Witnesses called to appear in court are subpoenaed and can be found in contempt of court for failing to appear. In an arbitration proceeding, a called witness can choose not to appear and not face any sanctions.

Civil litigation

Civil litigation is the most costly and time-consuming choice to resolve disputes. Courts are notorious for having long waiting periods and generally, parties are represented by counsel to assure compliance with the rigorous rules of evidence. Comparison of Available Dispute Resolution Methods This chart provides a comparison of mediation, arbitration, and civil litigation. Items addressed are cost, time, solutions, closure, and the affect on the relationship.

.

54

Mediation

Arbitration

Civil Litigation

Low cost

Moderate cost

Expensive

Little delay

Moderate delay

Considerable delay

Maximum range of solutions

Win/lose

Win/lose

Parties control outcome

Arbitrators control outcome

Court controls outcome

Uncertain closure

Definite closure

Definite closure

Maintain/improve relationship

May harm relationship

May harm relationship

Business Ethics - 6

Answer the following questions. If you need to, refer to the previous summary. _________________________________________________ ________________________________________________________________________ ________________________________________________________________________ _______________________________________________________________________

1. _What makes up business ethics?

2. In addition to statutes and administrative rules, what guides standards for business practices within an office? ___________________________________________________________________

________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ ____________________________________________ ________________________________________________________________________ ________________________________________________________________________

3. To whom can a broker pay referral fees?

________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________

4. If a broker is going to offer party incentives, what should the broker do?

_______ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________

5. If a broker engages the assistance of an attorney in a transaction, what else must the broker do?

______________ ________________________________________________________________________ ________________________________________________________________________

6. What entity enforces professional standards for all real estate licensees in Wisconsin?

__________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ _______________________________________________________________________

7. What is the purpose of discipline from the Department of Safety and Professional Services?

____________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________

8. _How may cases before the Division of Enforcement be resolved?

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REAL ESTATE broker

_________________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________

9. What are some methods of alternative dispute resolution?

__________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________

10. Why might parties choose alternative dispute resolution methods rather than going to court?

56

7 B

Business Management

usiness management

is an additional component to the operation of a successful real estate practice. Many brokers and salespeople will work for an employing broker and may not need to know the upper-level planning and operational strategies that an employing broker will use in the day-to-day operations of the business. Even if a broker does not plan to open an independent practice, either as an individual or as a business entity, every broker must understand the basics of managing a real estate practice. Brokers need this information to competently manage their own transactions and to work with other real estate professionals within and outside of their employing broker’s practice. Understanding the basics of business management will provide brokers insight into how the real estate office operates and how to coordinate successful transactions with other brokers.

Registering with the Department of safety and professional services If a broker is going to operate as an individual broker, the broker must notify the Department of Safety and Professional Services (DSPS) that the broker intends to engage in real estate practice in Wisconsin. If a broker is going to operate as a business entity, the broker must notify the DSPS of the name under which the broker will do business and apply for a license for the business entity. Forms for notifying the DSPS of employment, license applications, and other licensing forms are available on the DSPS website. Some forms require remittance of a fee. An independent broker or a broker intending to operate as a business entity cannot begin practicing until properly licensed. A broker-employer can mean an individual broker who employs salespeople or other brokers as brokeremployees to provide services to the broker or it can mean a business entity that employs other licensees to provide real estate services.

Form of business

A broker should obtain professional advice and assistance from attorneys, accountants, and other business advisers before selecting a business structure. Each business model has its own advantages and disadvantages and a broker must decide what model will serve the broker’s goals for the practice.

Forms of Ownership Sole proprietorship: A sole proprietorship is an unincorporated business owned solely by one person. All business debts, liabilities, and legal obligations are the personal responsibility of the broker sole proprietor. Because the business is not structured as a separate entity, business income and expenses are reported on the owner’s personal income tax return. A broker operating as a sole proprietor is not protected from liability and all the broker’s personal assets are available for satisfying claims against the broker. Partnership: A general partnership is an association of two or more people to create a for-profit business for co-owners. Each partner is personally liable for the debts and legal obligations of the partnership. Partners may delineate their respective rights and duties through a partnership agreement. Although a partnership is not a taxable entity, it files a separate tax return.

57

REAL ESTATE Broker

A partnership does not provide liability protection for the partners. The debts and liabilities of the partnership may become the responsibility of the individual partners if the insurance or assets of the partnership are not sufficient to pay them. The state does not require registration of a partnership. Partnerships must comply with trade law, trade name, and unfair competition regulations. Corporation: To create a corporation, the shareholders must file articles of incorporation with the Wisconsin Department of Financial Institutions (DFI). A corporation is a separate entity that can sue or be sued, purchase or sell real estate or personal property, and make contracts and guarantees. Unlike a partnership, a corporation pays taxes as a taxpayer. Because of this, shareholders’ earnings are subject to “double taxation,” which means that the corporation pays income tax and then the shareholder pays tax on the earnings of the corporation distributed to the shareholder in the form of dividends or capital gains distributions. Generally, shareholders are not personally liable for the debts and obligations of the corporation and their liability is limited to the amount of their investment in the corporation. S corporation: An S corporation is a corporation that has filed an election with the Internal Revenue Service to be treated as a partnership for income tax purposes. Shareholders in a S corporation have the liability protection of a regular corporation but do not experience “double taxation.” Income and losses flow through the corporation to the shareholders. S corporations can be complicated to set up and operate. Limited liability company (LLC): An LLC is a hybrid organization that blends some attributes of a corporation and a partnership. The structure permits participants to join together to engage in business and establishes a liability shield to protect members from liability for the debts and obligations of the LLC, which may only be collected from the LLC’s income and assets. LLCs provide flexibility to let members determine how they will share profits, income, and equity. If properly organized, LLC income may be taxed to members at their individual tax rates, similar to income taxation of partners in a partnership. An LLC can offer members the liability protection of a corporation and the “pass-through” tax advantages of a partnership. Limited liability partnership (LLP): An LLP is a general partnership with an added layer of liability protection. A partner in an LLP is not personally liable for all partnership debts and is limited to liability for damages or injuries caused by the partner’s own negligence or wrongful behavior or by a person acting under a partner’s supervision. Business Entity Licenses Brokerage firms established as a business entity, such as an LLC, corporation, or a partnership rather than as a sole proprietorship, must obtain a separate broker license from the DSPS for the entity. A business entity must have at least one business representative licensed as a broker. A business representative is a director, manager, member, officer, owner, or partner of a business entity. A business entity’s license must be renewed every biennium, just like an individual’s real estate license. Trade Names Brokerages can operate under a trade name, which is defined in REEB 23.03 as being a name other than the name appearing on the broker’s license, under which the broker advertises or does business. Brokers must register trade names with the DSPS before doing business under the trade name. Change of Business Form If a business entity changes from one form to another, the broker must apply for a new license for the entity. The broker cannot operate under the new entity until the DSPS issues a license to the new entity.

58

Business Management - 7

Brokerage Business Models Once a broker decides what structure the broker wants to use for the business, the broker must decide what model the broker wants to use for the business. Brokers may want to limit their business to certain kinds of transactions, certain consumers, of even specific properties. Service Areas • Full service residential sales • Limited service residential sales • Commercial/retail sales and leasing • Industrial sales and leasing • Property management • Condominium management Agency Offerings • Traditional agency - representing buyers and sellers • Single agency - only buyer agency or only listings/ subagency • Multiple representation with designated agency • Multiple representation without designated agency Property Specializations • Condominiums • Luxury homes • Vacation or second homes • Farms • Vacant land • Investment property Client Specialization • First-time buyers • Retirees •

Investors

Insurance

Errors and Omissions Insurance Errors and omissions insurance, often called E&O insurance, provides comprehensive professional liability insurance coverage for real estate salespersons and brokers. E&O insurance provides coverage for errors and omissions of real estate brokers and agents in providing advice or other services to their customers or clients. The purpose of the insurance is to protect brokers and agents against liability claims or lawsuits for damages caused by errors or omissions. Wisconsin law does not require a broker, agent, or business entity providing brokerage services to carry E&O coverage. A broker may require agents to carry coverage as a condition of employment, or brokers with franchise relationships may be required to have coverage as a condition of the franchise agreement. E&O insurance will defend a broker in a lawsuit, even if the claim is frivolous or unjustified. Depending on the broker’s individual errors and omissions policy, the insurance company may defend the claim, and pay any settlement or judgment against the insured broker up to the limits of liability stated in the policy. Personal transactions by agents are usually excluded from coverage. A broker must be aware of what the policy will and will not cover before purchasing a policy. Most E&O insurance policies provide coverage on a claims-made basis rather than on an occurrence basis. Coverage for claims made during the life of the policy for acts that occurred prior to the establishment

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of the insurance protection is called tail insurance. Some claims-made policies exclude tail coverage completely, some provide limited tail coverage for acts that occurred within a specified time before the policy was created, and others provide full tail coverage for prior acts. When reviewing the E&O policy, a broker should note what triggers the need to open a file with the insurance provider. Generally any verbal or written demand for money or service is enough to initiate a call to a broker’s E&O agent. Unlike other forms of insurance, there is no negative impact for filing a report. Taking action to resolve an issue without contacting the insurance provider can increase a broker’s liability and create more exposure to risk if a consumer decides to sue. When a broker needs to renew a policy, the broker should ask everyone in the company to report any inquires, claims or threats, and when in doubt, contact the E&O carrier. Business Owner’s Insurance A business owner’s insurance policy is designed to provide coverage in such areas as property damage, general liability, automobile liability, and many other areas. Additional information about these types of policies can be found in a publication provided by the Wisconsin Commissioner of Insurance and titled “Consumer’s Guide to Insurance For Small Business Owners.”

Advertising and Marketing

Cold Calling, Faxing, and E-mailing Calls to a consumer’s residence or cell phone that encourage purchase, rental, or investment in property, goods or services are regulated. Brokers placing these calls should check whether the phone number is on the Do Not Call Registry. Penalties for violating federal no-call law include fines of up to $11,000 per violation, private actions seeking damages of $500 plus possible attorney fees and costs, and disciplinary actions from the DSPS. A “telephone solicitation” is defined by the Department of Agriculture, Trade and Consumer Protection (DATCP) as an unsolicited telephone call that encourages the consumer to purchase property, goods or services, or a call that is part of a plan or scheme to encourage the consumer to buy property, goods or services. Brokers who allow or require cold calling will need to comply with DATCP’s telephone solicitation registration requirements and fees. The Junk Fax Prevention Act and rules regulate faxes sent without the recipient’s prior consent that advertise the commercial availability or quality of any property, goods, or services. The law does not apply to faxes sent in ongoing transactions. To send an unsolicited fax advertisement regarding properties or services, brokers must have permission, which can be written, electronic, or verbal, or must have an established business relationship, or personal relationship with the recipient. When sending unsolicited faxes, brokers must include clear and conspicuous opt-out instructions on the cover sheet or first page of the fax indicating that the recipient has the right to opt out of future unsolicited fax advertisements. The opt-out message must provide a domestic telephone number and fax number where the recipient may send an opt-out request and a cost-free means for opting out if the phone and fax numbers involve a charge. A cost-free opt-out mechanism includes a local or toll-free telephone number or e-mail address. The sender’s failure to comply within 30 days is illegal. The federal CAN-SPAM Act applies to all solicited and unsolicited commercial e-mails, defined as “any electronic mail message the primary purpose of which is the commercial advertisement or promotion of a commercial product or service.” This includes e-mails that promote or sell a product or service for a fee, such as association e-mails announcing seminars or products for sale and broker e-mails offering properties or brokerage services.

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CAN-SPAM requires all commercial e-mails to include: 1. A legitimate return e-mail address and a valid physical postal address; 2. A clear and conspicuous notice of the recipient’s opportunity to opt-out of any future commercial e-mail; 3. A mechanism or an active e-mail address that the recipient may use to ask not to receive further e-mail; 4. A clear and conspicuous notice that the message is an advertisement or a solicitation; and 5. Clear notice in the subject heading if a message includes pornographic or sexual content. The FTC has issued rules to help determine whether the primary purpose of e-mail is commercial and subject to the Act. E-mails sent out by a broker generally fall into one of the following categories: Pure advertisements: If the e-mail is solely an advertisement for a commercial product or service, it must comply with CAN-SPAM. A broker’s e-mail message that only promotes brokerage services or newly listed properties to prospective clients and customers or to other brokers must comply with CAN-SPAM. Brokers can “cold message” consumers who have not opted out as long as they include the required elements in the e-mail. Pure information: Agents’ newsletters without advertisements are not covered by the Act. Transactional or relationship messages: E-mail to a client or customer regarding an ongoing transaction or the broker’s agency relationship with a client are transactional or relationship messages that are not subject to the Act. Under the new rules, a transaction or relationship message may also contain an advertisement as long as the commercial material does not appear in the subject line or at the beginning of the message. Mixed message: Mixed message e-mails with both commercial and non-commercial content will be considered commercial if the subject line indicates a commercial message or if the predominant content is commercial under a “net impression” standard. 1. Is the advertisement at the beginning of the message? 2. What percentage of the message is commercial? 3. Do color, graphics, type size, and style focus on the commercial content? 4. Sidebars, graphics, and other methods of setting parts of advertisements within the e-mail and the identity of the sender are also factors to be considered. Under CAN-SPAM, there is no safe harbor or exemption for failing to comply, other than a limited exception if the sender experiences technical difficulties while processing opt-outs. The penalty for violation of CAN-SPAM is $250 per violation.

Advertising Identification of the Broker The advertising rules are designed to ensure that consumers responding to advertisements know they are contacting a real estate licensee and the name of the brokerage company responsible for the advertisement. Agents may place their own advertisements to market listings or to attract consumers. Brokers remain responsible for the content in those advertisements and should monitor them to confirm compliance with the advertising rules and with fair housing requirements. All agents of a broker, whether salespeople or broker-employees must include the name of the broker-employer in all advertisements. A broker-employee’s or a salesperson’s advertisement for a tenant for personally owned rental property does not need to contain the name of the person’s employing broker. A licensee advertising for the sale of personally owned property or the solicitation of property to purchase must disclose licensed status clearly in the advertisement.

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Data in Advertising Placement of data in advertisements can create liability for the broker. Brokers should identify the sources of property measurements and other attributes whether they appear in newspapers, on television or radio, on data sheets, MLS information and remarks, web sites, or other media platforms. This will clarify to those viewing the information that the broker is not making a claim about the size of the property but is just reporting what another source provided. Brokers may use general disclaimers in their advertisements, such as “information contained herein was provided by seller and other third parties and has not been verified by the broker unless otherwise stated.” General disclaimers of this type may not provide protection in all cases and, even if using a general disclaimer, a broker should also identify the source of the information.

Budgets and Financial Planning

A broker’s revenue can come from many sources including sales of company listings, sales of co-broker listings, property management fees, and ancillary services such as home warranty sales or title insurance. Out of the revenue, the broker will have to pay expenses that include the costs of operating the business. These include payments to employees and independent contractors, commission payments to cooperating brokerages, expenses of operating the business, depreciation on real estate and equipment, all supplies, and fees paid to others. These expenses can generally be categorized as fixed or variable. Fixed Costs: Fixed costs include licensing fees, office and equipment rental fees, insurance, and wages and benefits to certain employees whose employment is not dependent on the volume of business that the broker does. Variable Costs: A broker’s variable costs rise or fall with the broker’s business volume. Variable costs include commissions, property advertising, and fees paid to settlement agents, such as for preparation of closing documents, or other settlement services. A broker’s income is the amount of revenue that is remaining after the broker pays expenses but before the broker pays income taxes on the amount. A broker’s profit is the amount of income left over after the broker pays income taxes on the earned income. A broker’s budget will be an itemized plan of projected income and expenses for a future period in time. When a broker first opens a brokerage business, the broker will use a “start-up budget.” This is a special type of budget, created at the beginning of a new business to estimate the start-up costs of the business and the amounts necessary to carry the ongoing expenses of the business until it begins to generate revenue.

Commissions

Cooperation and Offers of Compensation Cooperation means giving information about the property, establishing access for showings, presenting offers and working to bring the transaction to a closing. Compensation means paying a co-broker for assisting in a transaction. Listing brokers are not required to compensate cooperating brokers unless they have made a specific offer of such compensation, and unless the cooperating broker performs in such a way as to comply with the performance standards of the offer of compensation.

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MLS: When listing a property in a multiple listing service, the listing broker makes a blanket, unilateral offer of cooperation and compensation to other MLS participants. The listing broker specifies on each listing whether cooperation and compensation is being offered to subagents, buyer’s brokers, or both. The offer to compensate is accepted by a broker who becomes the procuring cause of the sale or lease. The MLS offer of compensation between a listing broker and a cooperating broker is unilateral. A listing broker’s offer of compensation through the MLS does not create a contract with potential cooperating brokers. The contract is only formed when a cooperating broker accepts the terms of the contract by procuring cause in a successful transaction. Compensation specified on listings published by the MLS will be either a percentage of a property’s gross selling price or a specific dollar amount. Policy letters: A policy letter is a communication from one broker to one or more other brokers, establishing the terms and conditions upon which the broker is offering cooperation and compensation. A broker uses policy letters to establish the terms and conditions of cooperative relationships in any transaction. A broker may use a policy letter to offer compensation, modify an MLS offer of compensation, or address other terms and conditions of cooperation. Individual compensation agreements: Brokers often use policy letters to create long-term cooperation and compensation agreements with other brokers but there may be individual transactions that call for a compensation agreement. For these situations, a broker can use an individual compensation agreement. A cooperating broker acting as a subagent should always establish a compensation agreement before beginning any efforts to assist in marketing the property to buyers. A cooperating broker who will be functioning as a buyer’s agent should discuss with the buyer-client whether a compensation agreement with the listing broker should be sought. The listing broker may have little incentive to agree to the cooperating broker’s compensation proposal once the listing broker has an offer in hand. Compensation through offers to purchase: A buyer can request that a buyer’s agent’s fees are paid by a seller using an offer to purchase. A buyer could submit an offer where the seller credits the buyer an amount at closing and the buyer pays the buyer’s broker or a buyer could request that the seller pay the buyer’s broker directly. A buyer could use either of these options with a forsale-by-owner property or a property listed with a broker. If a buyer wants the buyer’s broker to be paid directly by the seller, the buyer must give consent in the buyer agency agreement. A buyer cannot use an offer to purchase to obligate a listing broker to pay the buyer’s broker’s fee. The listing broker is not a party to the purchase contract and to be bound by a contract, a person must be a party to that contract. Referral agreements: Referral fees between brokers are another source of revenue for real estate professionals. Brokers can refer buyers, sellers, rental property owners, or tenants to other brokerage companies when the consumer is looking for services outside of the broker’s market area or range of services. Brokers can also agree to pay other brokers for the receipt of a referral from them. A broker can pay a referral fee to a Wisconsin licensee or to a licensee from another state if the licensee is regularly and lawfully engaged in the real estate brokerage business. Based on those two different standards, a broker can pay a referral fee to any Wisconsin licensee, even if the licensee is not actively practicing real estate. This is the only instance when a Wisconsin real estate salesperson can receive a fee related to real estate practice if the salesperson is not working for a supervising broker. A broker can only pay a referral fee to an out-of-state licensee if the licensee is

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actively practicing real estate. A broker who agrees to pay a referral fee to an out-of-state licensee should confirm that the licensee is eligible to receive the fee under Wisconsin law before agreeing to pay the fee. A referral agreement between brokers should be documented in writing. Earning Compensation and Performance Standards Procuring cause: Procuring cause is not a universal standard of performance in all real estate transactions. Procuring cause is the uninterrupted series of events that results in a successful transaction. It is an attempt to determine who and what events caused a successful transaction. A successful transaction means a sale that closes or a lease that is executed. There is no one act that determines procuring cause and it can only be determined by a full, knowledgeable consideration of all the facts of the case. Procuring cause is the automatic standard only in MLS transactions. If a property is not listed in the MLS or if the potential cooperating broker is not an MLS participant, then the listing and cooperating brokers must affirmatively select procuring cause if they want it to be the applicable standard. Other performance standards: When procuring cause is not the automatic performance standard for a transaction, brokers must decide what standard to use. Brokers should include the performance standard in the cooperation agreement. Many brokers do include “procuring cause” as the performance standard even when it is not automatic. Antitrust Section 1 of the Sherman Act prohibits contracts, combinations, and conspiracies that restrain trade and section 2 of the Act prohibits monopolization or attempts to monopolize commerce. Conspiracy requirement: A conspiracy exists whenever two companies act according to a joint agreement. A conspiracy to restrain trade does not occur when actions were independently taken by one broker as a result of an internal office management decision. Restraint of trade requirement: A restraint of trade occurs when the agreement between the companies has a limiting effect on competition within the real estate market in which the companies work. The limitation may affect other real estate companies, sellers, sales agents, buyers, newspapers, title companies, or other real estate service providers. Compensation and price fixing: There is no such thing as an innocent agreement among competing real estate companies about the commissions or fees they charge or pay. Price fixing agreements are considered “per se” violations, which means that antitrust laws do not allow any justification, excuse, or defense for a price fixing agreement. Group boycotts: A group boycott is when competitors work together to exert pressure on a third party by collectively withholding or inducing others to withhold goods, services, or patronage essential to the economic survival of the third party. The third party could be a competitor, customer, or supplier. If two or more offices agree to refuse to do business with a real estate service provider, the two are engaging in a group boycott. Broker’s Commission Liens Brokers can file commission liens to secure payment of commissions or other compensation that a broker earns pursuant to the terms of a written commission or compensation agreement for commercial real estate transactions. Commercial real estate is all real estate except property that contains one to eight dwelling units, undeveloped property zoned for residential purposes, and agricultural property. A broker can file a lien for a commission earned from commercial real estate listing contracts, commercial buyer agency agreements, tenant representation agreements, and commercial lease listing or property management agreements.

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To preserve the right to file a lien, a broker must provide notice of a broker’s right to file a lien using the following statutorily mandated language, to the person who will owe the commission or compensation: Notice: A broker has the authority under section 779.32 of the Wisconsin Statutes to file a broker lien for commissions or compensation earned but not paid when due against the commercial real estate, or the interest in the commercial real estate, that is the subject of this agreement. The broker must record a Notice of Interest with the register of deeds at least 30 days prior to closing and no later than 30 days after the closing documents are recorded. The notice remains valid for up to 24 months from the date of recording. A broker must mail a copy of the commission lien to the property owner or acquirer within 72 hours of recording. To file a lien in lease and property management transactions, a broker must include a notice of broker lien rights in all agency agreements, lease listing contracts, property management agreements, and tenant representation agreements. The broker must record the commission lien no later than 90 days after the commission is earned or the broker receives notice that the commission is earned. A broker must mail a copy of the commission lien to the property owner or acquirer within 72 hours of recording.

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Answer the following questions. If you need to, refer to the previous summary. ____________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________

1. Who must register with the Department of Safety and Professional Services?

________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________

2. What does a broker do if the broker wants to operate as a business entity under a trade name?

__________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________

3. _What are some of the forms of ownership a broker can use to provide services?

___________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________

4. What is an advantage and a disadvantage to doing business as a corporation?

_________________________________ ________________________________________________________________________ ________________________________________________________________________

5. When can a broker begin operating as a business entity?

___________________________ ________________________________________________________________________ _______________________________________________________________________

6. When can a broker begin operating under a new form of business?

____________________________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________

7. _What is errors and omissions insurance?

_____________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________

8. When should a broker contact the broker’s errors and omissions insurance?

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_____________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________

9. What laws does a broker need to follow when cold-contacting a consumer?

___________________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________

10. _How must a broker’s name appear in advertisements?

______________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________

11. What must a broker do when including property data in an advertisement?

________________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________

12. _What is the difference between a fixed and a variable cost?

______________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________

13. What is the difference between an offer of cooperation and an offer of compensation?

_______________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________

14. When are listing brokers required to compensate co-brokers?

__________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________

15. How will a broker specify an offer of compensation to a broker in the multiple listing service?

____________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________

16. How does a broker make an offer of compensation to other MLS participants?

_____________________________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________

17. When does a broker use policy letters?

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________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________

18. When is procuring cause the standard of performance in a transaction?

_______________________ ________________________________________________________________________ ________________________________________________________________________

19. How can a buyer’s broker receive compensation from the listing broker?

____________________________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________

20. _To whom can a broker pay referral fees?

21. When procuring cause is the performance standard in a compensation agreement, what does procuring cause mean?_______________________________________________________________

________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________

__________________________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________

22. _How do parties determine procuring cause?

_________________________________________ ________________________________________________________________________ ________________________________________________________________________

23. How does a broker avoid anti-trust violations?

__________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________

24. What justification can a broker use to defend an act that resulted in price fixing?

_______________________________________________________ ________________________________________________________________________ ________________________________________________________________________

25. What is a group boycott?

26. What must a broker include in agency agreements to preserve the broker’s right to file a commission lien in commercial transactions? _______________________________________________________

________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________

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8

Financial Management

inancial management

is an area of a broker’s practice where there is no tolerance for error. Failure to properly manage finances related to transactions could result in the loss of a broker’s license. To practice competently, brokers need to know the rules regulating trust accounts, a broker’s role when parties want to use escrow for transaction finances, and a broker’s role at closing. One of the most common causes for broker discipline from the Department of Safety and Professional Services (DSPS) is mismanagement of trust accounts or failure to follow correct trust account procedures. Brokers are responsible for the actions of their agents, which includes broker-employees, salespeople, and all other office personnel.

Trust Accounts

REEB 18 Trust Accounts provide rules for brokers for managing and supervising real estate trust accounts. The rules address how brokers must hold money related to property management, trust account deposits and signatories, disbursing from trust accounts, and other rules for holding trust funds. The rules address bookkeeping, including how a broker can use electronic records for trust account bookkeeping. Violation of Rules According to REEB 18.14, a broker who fails to comply with the trust account rules “shall be considered to have demonstrated incompetency to act as a real estate broker in a matter as to safeguard the interest of the public” and will be subject to disciplinary action from the DSPS by the Real Estate Examining Board (REEB). Trust Account Definitions REEB 18.02 defines real estate trust account.

REEB 18.02(5) “Real estate trust account” means an account for real estate trust funds main-

tained at a depository institution from which withdrawals or transfers can be made without delay, subject to any notice period required that the depository institution is required to observe by law, and includes: (a) Interest-bearing common trust accounts established for client funds; (b) Non-interest bearing real estate trust accounts maintained for real estate funds other than client funds; and (c) Interest-bearing real estate trust accounts maintained for real estate trust funds other than client funds. There are three kinds of real estate trust accounts that a broker might have. A broker’s trust account for holding client funds will always be the interest-bearing real estate trust account, also called an IBRETA. There are two other trust accounts a broker might use but a broker will only use them for holding non-client funds. One account is interest bearing and the other is not. If a broker is holding client funds, there is only one kind of account that broker may use to hold those funds and that is the IBRETA account. It earns interest and only holds client funds. If a broker is holding non-client 69

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funds, then the broker can put them in a real estate trust account that earns interest or a real estate trust account that does not earn interest. Whether the broker has to use an account that does or does not earn interest to hold the non-client funds will depend on the parties and the nature of the non-client funds. A broker must hold real estate trust funds, which are made up of client funds and non-client funds, at a depository institution. A depository institution is defined in Wisconsin statutes at section 452.13(1)(b) as “a bank, savings bank, savings and loan association or credit union that is authorized by federal or state law to do business in this state and that is insured by the federal deposit insurance corporation or by the national credit union share insurance fund.” The federal deposit insurance corporation is more commonly referred to as the FDIC and it provides insurance for deposits consumers make in banks up to a limit. The national credit union share insurance fund provides a similar protection for customers of credit unions. Real estate trust funds refers to all depositable items a broker receives from clients and non-clients in the course of the broker’s real estate practice. Real estate trust funds include all earnest money and other sums paid or received with respect to a licensee’s personal transactions. It does not matter whether the property is listed with the licensee’s company. If, when selling or purchasing real estate as a principal, a broker receives payment of some kind related to the transaction, the payment is real estate trust funds and must be deposited in a real estate trust account. Client funds are a category of real estate trust funds. REEB 18.02(1) “Client funds” refers to section 452.13(1) of the Wisconsin statutes for the definition of client funds. All funds that a broker, or a broker’s employee, receives from a client or any other person that are related to a conveyance are client funds. A conveyance is when an interest in land is created, alienated, mortgaged, or assigned and any lease for longer than one year. Everything else that a broker or a broker’s employee receives in connection to a transaction that is not governed by the law of conveyances are real estate trust funds but not client funds. Number of Trust Accounts A broker may have as many trust accounts as the broker needs to operate the real estate business. REEB 18.032 “Number of real estate trust accounts” permits a broker to “maintain more than one real estate trust account, including more than one interest-bearing common trust account for client funds, if the broker notifies the department of these accounts, as required in REEB 18.035.” Opening and Closing a Trust Account A broker must open a trust account if the broker receives real estate trust funds. If a broker does not regularly engage in sales transactions, the broker may not need to open a trust account as long as the broker modifies any offers to purchase to provide that someone else hold the earnest money. A broker can close an account if the account does not hold real estate trust funds. A broker must notify the DSPS when opening, closing, or changing an account using the forms provided by the DSPS. Account Designation REEB 18.034 “Account designation” instructs a broker to “name the broker’s real estate trust account with the name appearing on the broker’s license or with a trade name submitted to the department under REEB 23.03 and shall include the words “trust account” in the name of the account.” A broker must also “imprint the name of the real estate trust account on real estate trust account checks, share drafts or drafts.” The broker satisfies the requirements of REEB 18.034 as long as the account bears the broker’s name as it appears on the license or with a registered trade name and the words “trust account.”

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Duty to Notify DSPS Brokers have a duty to notify the DSPS when opening, closing, or changing an a real estate trust account. A broker provides certification of the account and consent to examination and audits of the account by the DSPS or the Department of Administration if it is an IBRETA account. The forms a broker must use to notify the DSPS and provide certification and authorization are on the DSPS website. Authorization to Sign Trust Account Checks REEB 18.04 “Authorization to sign trust account checks” permits brokers to designate signing authority on trust account checks to any other person as long as the person is at least 18 years old. The person does not need a real estate license. Hiring another party to administer a broker’s trust account or giving another person signing authority on the broker’s trust account checks does not alleviate a broker’s responsibility for ensuring full compliance with trust account rules. Personal Funds in Trust Accounts A broker can only deposit real estate trust funds in real estate trust accounts and cannot commingle the broker’s personal funds or any other funds in the trust account except that REEB 18.10 “Commingling prohibited” permits a broker to deposit up to $300 of the broker’s personal funds in the real estate trust account. The broker’s personal funds must be specifically identified and can only be used to cover service charges relating to the trust account. If a depository institution notifies a broker that they have made a service charge against the account for which there were not sufficient broker personal funds to cover the charge, the broker has 10 business days to deposit sufficient personal funds to cover the service charge. Non-Depositable Items A broker cannot hold non-depositable items except for promissory notes. If parties want to pledge non-depositable items, the broker should refer them to an attorney to draft an agreement regarding the item. Brokers can hold promissory notes but promissory notes are not depositable and would not go in a trust account. A broker holds them with the client file and reflects them accordingly in the broker’s bookkeeping system. Branch Office Trust Account Administrative rules formerly required an on-site supervising broker at any branch office apart from the broker’s main office. The rules were amended to remove references to branch offices. A broker no longer needs to staff each branch office with an on-site supervising broker. A single broker can supervise more than one physical location. REEB 18.12 “Branch office trust account” is reminiscent of the old requirement that branch offices operated as satellites of a broker’s main office, each with an on-site supervising broker. In the event that a broker maintains a branch office that has one or more separate real estate trust accounts that are separate from the supervising broker’s main trust account, the broker must maintain a separate bookkeeping system for each branch office that has a separate real estate trust account. Interest Earned on Client Funds A broker must deposit all client funds in an interest bearing common trust account (IBRETA) according to REEB 18.031 “Deposits and types of accounts.” The Department of Administration is the beneficial owner of any interest earned on the account, minus any service charges. The interest from these accounts is calculated by the depository institution and annually remitted, no later than February 1st, to the Department of Administration for use in homeless assistance programs. At no time may the broker or any party remove or use the interest.

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Proper Trust Fund Handling A broker must deposit all real estate trust funds within 48 hours of receipt. If the broker receives funds on a day before a holiday or another day when the broker’s depository institution is closed, the broker must deposit the funds within the next two business days of the depository institution. If a broker receives trust funds that the broker cannot deposit, the broker has one business day to forward the funds to the payee or return the funds to the payor. Receipt for Earnest Money Received by Broker A broker should issue a receipt when a buyer includes earnest money with an offer and REEB 18.05 “Receipt for earnest money received by the broker” requires a broker to “indicate on the offer to purchase the receipt of earnest money received from a buyer at the time the offer is drafted.” If a buyer pays earnest money at a later time, the broker should not sign the receipt on the offer but should instead, give a separate receipt to the buyer. The original receipt may be given to the buyer and the broker can retain a duplicate in the transaction file. A broker should never issue a receipt for funds unless the broker actually receives them. Insufficient Funds Checks If a broker deposits a check in the broker’s trust account that is returned due to insufficient funds, the broker should immediately notify the client. Unless otherwise directed by the client, the broker may attempt to collect the funds by resubmitting the check to the bank. If these efforts are unsuccessful, the client should be notified so that the client can decide what action should be taken with respect to the contract. Transfer of Trust Funds Between Brokers REEB 18.08 requires cooperating brokers to transfer the earnest money or other trust funds to the listing broker within 24 hours of the transfer deadline stated in the offer, option, exchange agreement or lease. This rule, however, has little relevance because the earnest money payment provisions in the approved offers to purchase and other forms now provide for earnest money checks to be payable to, and held in the trust account of the listing broker. Upon receipt of an earnest money check payable to the listing broker, the cooperating agent may deliver the check with the offer. If the cooperating agent is faxing the offer, the agent can send a photocopy of the check and follow up by mailing the check or otherwise promptly delivering the check to the listing broker. Upon receipt of an earnest money check, payable to the listing broker with an offer, a cooperating agent may acknowledge receipt of the earnest money check on the offer.

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Escrow

Wisconsin brokers cannot draft escrow agreements and are not part of the escrow process. Escrow is property or a document delivered to a third party to be held for another party. Escrow can also refer to the process of holding a document or property until it is delivered to the person to whom it was promised. An escrow agreement is instructions parties give to a third party who is holding escrow items or documents. Parties may also use escrow to hold earnest money. If the parties to a real estate transaction want to keep interest earned from their real estate trust funds, the broker cannot hold the funds and the broker cannot help the parties set up this account. Brokers must deposit all client funds they receive from sales transactions, such as earnest money and down payments, in an interest-bearing common trust account (IBRETA) for the benefit of the Wisconsin Department of Administration and the homeless. If parties want the interest, the parties can have a third party hold the funds and use an escrow agreement to address custody of the funds. After-closing Escrow Agreements If parties to a contract want to or need to set up an escrow account to hold after closing funds, REEB 18.07 “After closing escrow agreements” permits a broker to draft the agreement “if a form for this purpose has been approved by the department for use by licensees pursuant to REEB 16.03.” The department has not approved a form for drafting after closing escrow agreements, which means that a broker cannot draft after closing escrow agreements. If the parties need to escrow funds for afterclosing obligations, the parties or an attorney must draft the agreement.

Trust Fund Disbursements

The rules for disbursing trust funds from a broker’s trust account apply to all funds but they are most often applied to disbursements of earnest money. The rules in REEB 18.09 correspond with the earnest money disbursement provisions in the approved offer to purchase forms. Written Disbursement Agreement The parties may produce and sign a written disbursement agreement directing the broker to disburse the earnest money according to the agreement. Parties can use the WB-45 Cancellation Agreement and Mutual Release or some other written instruction to the broker, drafted by the parties or an attorney, and signed by both parties. When a transaction fails to close and the parties do not produce a signed, written disbursement agreement, the broker holding the earnest money should not do anything for at least 60 days after the scheduled closing date. The broker also may continue to do nothing and allow the parties to find a way to resolve the earnest money dispute themselves or through their attorneys. Party’s Court Action A broker may disburse the earnest money as directed by the order of a court hearing the parties’ earnest money dispute. Under REEB 18.09(1)(d), the parties may go to court at any time and the broker can disburse the earnest money according to a court order. For the court to have proper jurisdiction to order the broker to disburse, the broker will be made a party to the lawsuit as a defendant. Disbursement By Law A broker may also disburse earnest money pursuant to law. This refers to the statutory requirements such as the condominium law or the seller disclosure law for the return of the buyer’s earnest money. In the case of a disbursement made as required by law, the broker must give the parties a 30-day prior written notice by certified mail of the broker’s intent to disburse if the broker has knowledge that either party disagrees with the disbursement.

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Attorney Opinion A broker can obtain an attorney opinion directing the broker’s disbursement. The attorney cannot represent any of the parties to the contract and the opinion should be in writing. The broker also must give the parties at least 30 days written notice by certified mail of the broker’s intent to disburse if the broker has knowledge that either party disagrees with the disbursement. The broker may deduct up to $250 from the earnest money for the legal fees for the attorney’s opinion. Interpleader A broker can seek the assistance of a neutral attorney and file an interpleader action. An interpleader action is a lawsuit brought by the custodian of money or property when the custodian is not certain who is rightfully entitled to the funds or property. The interpleader action names the competing parties, usually the seller and the buyer, and forces them to litigate their respective claims. The broker normally participates in the action only to the extent of starting the action and paying the earnest money into the court or as the court directs. The broker may deduct up to $250 from the earnest money for the legal fees for filing an interpleader action. Specific Contract Provision If the parties have included a provision in the contract or an addendum that directs the broker to make a disbursement, the broker may disburse provided that the broker’s authority is clear. The broker must first give the parties at least 30 days prior written notice by certified mail of the broker’s intent to disburse if the broker has knowledge that either party disagrees with the disbursement. Unclaimed Funds A broker may hold the money indefinitely. After five years, it becomes abandoned property under Chapter 177 of the Wisconsin Statutes. Commission Disbursement After a transaction is consummated or terminated, the broker has 24 hours in which to remove the earned commission or fees according to REEB 18.09 (3). This general rule applies to commissions earned under sales or lease transactions. There is an exception for fees a broker earns as a property manager. A broker who holds property management funds in a trust account must disburse any earned property management fees on a regular monthly basis unless it is otherwise agreed in a written property management agreement.

Property Management Trust Funds and Alternatives Property Management and Rental Accounts A broker deposits non-client real estate trust funds in one of three types of accounts:

1. Non-interest bearing real estate trust account for non-client funds. Non-client funds such as security deposits and rent may be deposited in a non-interest bearing real estate trust account. 2. Interest-bearing real estate trust account for non-client funds. Non-client real estate trust funds from rental transactions may be deposited in an interest bearing trust account. A broker must obtain written direction for disbursement of interest from the party or parties for whom the broker is holding the funds. The authorization must specify how and to whom the broker is to disburse interest earned on the real estate trust funds. The broker cannot receive the interest from this account and it cannot be used for the benefit of the broker. 3. Rental owner’s account. A broker can deposit non-client funds from property management and leasing activities into the rental property owner’s account. An “owner’s account” is an account maintained by the rental property owner for the deposit and disbursement of the owner’s funds. A broker may deposit rental application deposits, security deposits and rent into the owner’s account if the checks are payable to the owner or to the owner’s account.

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When a real estate licensee owns a rental property, REEB 18.031(4) requires the licensee/property owner to “either place security deposits related to that property in a real estate trust account or shall provide in the lease for security deposits to be held in an account maintained in the name of the owner or owners.”

Trust Accounting

Bookkeeping System REEB 18.13 requires each broker to maintain a bookkeeping system in the office to record the receipt, deposit, and disbursement of real estate trust funds. A broker’s bookkeeping system consists of the forms and records a broker uses with the broker’s real estate trust account. These documents will include deposit slips, monthly statements, and trust account checks. The bank or other depository institution where a broker maintains a real estate trust account will normally send out a monthly statement showing deposits received and disbursements made. A broker will rely on the monthly statements when completing the broker’s statutorily required monthly reconciliation of the account. A broker’s deposit slips will be imprinted with the broker’s trust account number and submitted with deposits to the real estate trust account. A broker’s trust account bookkeeping system must include procedures and records to ensure that the broker is holding the proper amount of funds, that the broker can identify the individual owner of the funds, and the amount being held on behalf of the owner. A broker’s trust account bookkeeping system must consist of the following four activities: 1. Posting daily entries in the journal; 2. Posting journal entries to the ledgers; 3. Preparing a monthly trial balance and account reconciliation; and 4. Broker review of the reconciliation and other records.

A broker keeps a journal like a personal checkbook by entering all receipts and disbursements in the cash journal in chronological order. A broker only makes an entry when there has been a receipt or disbursement of funds. Each entry must be accurate, precise, and complete because these are permanent records, subject to the review at any time by the DSPS, and comprise the foundation for the broker’s other accounting records. The ledger separately shows the receipts and the disbursements for each particular transaction. A broker records each entry from the journal on the ledger page representing the specific transaction to which the entry pertains. A broker uses a ledger to sort out the chronological entries from the journal and records each entry according to the transaction. Each sale, rental, or other kind of real estate transaction will have a separate ledger page showing the receipts and disbursements pertaining to that transaction. The ledger also contains a separate page showing the personal funds the broker deposits in the trust account to cover any service charges. If the broker receives a promissory note, the broker does not make a journal entry for the note but records it in the appropriate ledger page for that transaction. The running balance does not show the amount of the promissory note because the broker did not receive actual funds. A broker’s written monthly reconciliation shall include the ending account statement balance, the date and amounts of the deposits in transit, the check numbers and amounts of checks written but not paid by the bank or other depository institution as of the ending date shown on the account statement to be reconciled, and the reconciled account statement ending balance. The reconciliation will list all outstanding deposits and checks. The broker must reconcile the account statement with both the journal and the ledger.

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When reviewing an account, a broker should pay attention to outstanding items in the trust account such as funds retained beyond the agreed-upon release date or checks disbursed to parties that have not yet cleared a broker’s account. If necessary, a broker should take action to remedy the outstanding items. Most brokers use some sort of bookkeeping software to maintain trust account records. To find a program that complies with the requirements of the trust account rules, a broker should consult with a technical service provider to be sure that all of the required elements of REEB 18.13(6) will be met by the program.

Preparing for Closing

The role of the broker in the closing of the transaction is to assist the parties in meeting their contractual responsibilities. The broker or brokers participating in the transaction will work with the seller and the buyer and settlement service providers such as the title insurance company to coordinate the closing details. Deadlines and Contingencies of the Offer A broker needs to be aware of these deadlines and contingencies in an offer and help parties comply with them or attempt to extend the deadlines through the use of an amendment if necessary. Evidence of Title Merchantable title is title that is acceptable to the buyer. The standard terms in a Wisconsin offer require a seller to provide evidence of merchantable title to the buyer by providing a title insurance policy. The title insurance commitment shall be provided to the buyer or buyer’s attorney not less than three business days before closing, with the effective date of the commitment not more than 15 days old at the time of delivery. The title insurance commitment shall show the seller’s title to the property to be merchantable subject only to liens that will be paid out of the closing proceeds. The broker typically orders the title insurance, and should do so early enough to allow the above deadlines to be met. The basic function of title insurance is to guarantee marketable title. An owner’s title insurance policy insures the owner or other named insured against loss or damage up to the stated amount of the policy. Title insurance helps protect against things such as errors in public records, hidden defects not disclosed by the public records, or title examination errors. In addition, the policy also covers costs and attorney’s fees that a party would have to spend defending a claim against the title. Schedule A Schedule A shows the basic information about the property and transaction. It names the proposed insured, the current title holders, the amount of the title insurance to be issued and the legal description of the property involved in the transaction, often with the street address. It also states an effective date, which is the date up to which the title insurance company was able to examine recorded documents. This date will often be several weeks or more prior to the date that the title insurance commitment is delivered to the parties. Exceptions to Insured Title A title insurance provider will only issue a policy after a careful examination of the public records. Title insurance policies contain exceptions for the categories of title problems that cannot be discovered by a review of the record. The title insurer will not insure against loss or damage or pay costs and attorneys fees arising from any of the matters stated in the exceptions to the policy, which are contained in Schedule B of the title insurance policy.

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Schedule B-1 - Requirements for Closing Schedule B-1 of the title commitment lists the title company’s requirements to issue the owner’s or lender’s title insurance policy. Typical requirements include: 1. Payment of the policy premiums; 2. A deed from the seller of record to the buyer, who is the proposed insured; 3. A mortgage from the buyer to the lender; 4. Payment and release of any outstanding mortgages held by the seller of record; and 5. Satisfaction of any tax liens, judgments, or other claims against the seller of record. Schedule B-2 - Standard Title Insurance Commitment Exceptions The exceptions contained in Schedule B-2 include the standard, boilerplate exceptions that appear in most title commitments. A party can usually clear and remove one or more of the standard title exceptions from any given title commitment by tendering adequate documentation to the title insurance provider. 1. Construction Lien Exception - Owner’s Affidavit as to Liens and Possession This title commitment exception refers to “Any lien or right to lien for services, labor, or material imposed by law and not shown by public record.” A party can remove a construction lien exception if the seller completes an owner’s affidavit indicating either that no work has been done on the subject property during the six months prior to closing, or work has been done by named contractors who have furnished lien waivers that are attached to the affidavit. If work has been completed on the subject property in the six months prior to closing, the seller should furnish lien waivers from the general contractor and all subcontractors. 2. Parties in Possession Exception - Owner’s Affidavit as to Liens and Possession The title insurance commitment also has a standard exception for “Rights and claims of parties in possession not shown by the public records.” This exception is for possessory interests arising from unrecorded land contracts, leases, adverse possession, or other sources that are not of record. If the owner’s affidavit indicates that there are no parties in possession, the insurance provider may remove this exception. 3. Exception for Easements - Owner’s Affidavit as to Liens and Possession, Survey This title exception addresses unrecorded easements or claims that are not shown by the public record. The title company will remove this exception if the owner’s affidavit shows that no other party is using of any portion of the property without a recorded interest and if a current survey map reveals no apparent easements in the field. 4. Exception for Encroachments, Boundary Disputes, Etc. - Survey Map Another standard exception is for encroachments, overlaps, boundary line disputes, and any other matters that would be disclosed by an accurate survey and inspection of the premises. The title insurance provider may remove this exception if the party provides a current survey that shows no boundary issues. 5. Exception for Post-Effective Date Liens and Encumbrances - Gap Endorsements This standard exception excludes title insurance coverage for title issues such as defects, liens, encumbrances, adverse claims or other matters first appearing in the public records or attaching subsequent to the effective date of the title commitment but before the date the insured records the deed. The period of time from the effective date of the title insurance commitment shown on Schedule A to the date that the new deed is recorded is known as the “gap.” The standard exception means that the title insurance company will not insure against any claims that arise during the gap period.

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To clear the gap exception, a buyer can have the seller purchase a “gap endorsement” from the insurance provider. A seller does not have to pay for this endorsement unless the buyer includes it as part of the offer. 6. Special Assessments Exception - Special Assessments Letters This standard exception excludes coverage for special taxes or assessments, if any, payable with the taxes levied or to be levied for the current and subsequent years. A buyer can clear this exception by providing special assessment letters from the municipality. Special assessment letters are letters from a municipality stating that there are not currently any special assessments on the subject property. 7. Additional Exceptions Depending upon the property, the insurer may also include exceptions for: easements affecting the property; mortgages affecting the property; the rights of the public relating to roads, highways and rights-of-way; title and public rights to filled-in lands, submerged lands and lands below the ordinary high water mark; riparian rights; other liens and encumbrances not otherwise eliminated; and lack of authorized ingress and egress. Anticipating Title Defects A listing broker can ask a seller to respond to questions that a title insurance provider will include in a standard owner’s affidavit. The seller and the listing broker can identify the title issues that the seller can resolve before closing and the issues that the seller will list as exceptions to the seller’s warranty of title evidenced by the seller’s warranty deed. The listing broker should also obtain a listing report from the title insurance company. Document Preparation for Closing Parties execute and transfer many documents at closing. A seller usually provides a deed, a transfer return form, special assessment letters, a certificate of compliance for rental weatherization, lien waivers, affidavits, payoff statements, and other items. A buyer will have many documents to sign from lenders, insurers, and other settlement service providers. A broker can prepare many of these documents but it is customary in Wisconsin closings to have a title insurance company or an attorney prepare these items for the parties. Brokers still need to be familiar enough with the documents to give general explanations to the parties. The seller is responsible for providing the documents necessary to convey title to the buyer. For a typical transaction, a seller will provide the following documents to transfer ownership: 1. Deed. This document transfers ownership of the real estate from the seller to the buyer. The deed should be signed by all owners of record. In addition, the signature of a non-titled spouse may be necessary if the property being conveyed is the homestead of either spouse. The deed must be properly signed and either authenticated or acknowledged. 2. Transfer Tax Return. This document shows the sale price of the property and the amount of the transfer fee which will be due, together with other information about the transaction. The seller is responsible for the payment of the transfer fee, which will be deducted from the seller’s proceeds. 3. Affidavit of Liens and Possession. This is a sworn statement from the seller, indicating whether any work has been done on the property by contractors within the preceding six-month period. It also provides information about any tenants who may be renting the property. If work has been done, the seller must itemize what type of work was done, and provide the contractor information. As previously mentioned, lien waivers should be obtained from any such contractors, as well as the material providers if applicable.

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4. Bill of Sale. This document transfers ownership of any personal property included in the transaction from the seller to the buyer.

Closing Statements

Some brokers prepare closing statements for their transactions and others have an attorney or the title company prepare them. Regardless of the who prepares the documents, brokers need to understand the steps to preparing a closing statement. When presenting an offer to a seller, the seller often wants the broker to provide an estimation of what the seller will net if the seller accepts the offer. To provide the estimation, the broker must have a fundamental understanding of closing statements. The closing statement shows the financial details of the transaction. The closing statement should be prepared as far in advance of the closing as possible so that copies of the closing statement can be sent to all parties for review prior to closing. A closing statement usually consists of two parts. The first part shows the details of the amount that a buyer needs to bring to closing to pay what the buyer owes the seller. The amount is determined by subtracting credits and prorations from the purchase price. The amount the buyer brings to closing plus earnest money already paid represent the seller’s proceeds. The second part of the closing statement lists disbursements from a seller’s proceeds. Disbursements may include: 1. Title insurance premium; 2. Broker’s commission; 3. Wisconsin Real Estate Transfer Fee; 4. Mortgage and judgement payoff amounts; 5. Recording fees to record documents to release liens; 6. Special assessments; 7. Delinquent taxes; and 8. Unpaid utility and repair bills, which could result in liens on the property if unpaid. Income and Expense Proration: Taxes, Municipal Utility Bills, Fuel, Rents, and Insurance Proration is how sellers and buyers allocate the responsibility for income and expenses of a property. In a residential transaction, the parties often use the past year’s tax amount to prorate current tax responsibility. To prorate taxes, parties take the last know bill and divide it by the number of days in the billing period. The resulting daily amount is multiplied by the number of days that have elapsed from the prior bill to the date prior to closing. The typical tax proration will divide last year’s tax bill by 365, or 366 if it was a leap year, and then multiply the daily amount by the number of days in the year prior to closing. The proration amount is then given as a credit to the party who will end up paying the entire bill. In the case of real estate taxes, the buyer receives a credit for this amount. Parties use this same method to prorate final readings on utility services, rents in the case of pre-paid rents received by the seller, or insurance premiums for insurance assumed by the buyer. Mortgage Payoffs The payoff statement may include the principal balance owed by the seller as well as interest to a given date, other fees, such a fee for calculating the payoff, and a “per diem,” which is a daily interest amount due if the seller does not pay the lender by a given deadline.

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Transfer Fee A seller must pay the Wisconsin Real Estate Transfer Fee, unless the parties agree to a different arrangement. The fee is .3% of the sale price rounded up to the nearest $100. For example, to calculate a transfer fee on a property that sold for $123,675.00, round the sale price up to $123,700.00 before calculating the fee. For a property with a sale price of $222,220, round the sales price up to the nearest $100, which is $222,300, before calculating the fee. Title Evidence The standard provisions in an offer to purchase assign responsibility for cost of the title insurance policy as title evidence to the seller. The cost of a title insurance policy depends on the purchase price. Recording Fees A seller is responsible for the cost of recording any documents necessary to clear title, such as a satisfaction of mortgage. The seller’s lender will often include the recording fee in the payoff statement amount. If not, it must be charged separately on the closing statement. It is the buyer’s responsibility to pay the cost of recording the deed, as well as any documents for the buyer’s mortgage. Attorney Fees If the seller has agreed to have the broker retain an attorney to prepare the closing documents and to pay for this service, the fee is typically deducted from the seller’s proceeds on the closing statement. Commission The standard listing contract calls for payment of the commission upon closing. This amount is typically deducted from the seller’s proceeds on the closing statement. Governmental Requirements for Closing Agents Most brokers do not serve as closing agents. A closing attorney, title company, or representative from the lender may serve as a closing agent. If the broker is going to be the closing agent and handle the paperwork and funds, the broker must be aware of any government requirements that may apply. The requirements change periodically and may include a duty to file a Form 1099-S with the IRS, or to compare the names of the buyers and sellers with governmental lists of known or suspected terrorists or money-laundering organizations.

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Answer the following questions. If you need to, refer to the previous summary. ________________________________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________

1. What is a real estate trust account?

_________________________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________

2. What are the different kinds of trust accounts?

____________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________

3. What is the difference between client funds and non-client funds?

________________________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________

4. _How many trust accounts does a broker need?

_____________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________

5. When does a broker need to notify the DSPS with regards to the broker’s trust account?

____________________________________ ________________________________________________________________________ ________________________________________________________________________

6. What should a broker do with non-depositable items?

_____________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________

7. Can a broker hold personal funds in the broker’s trust account?

____ ________________________________________________________________________ ________________________________________________________________________

8. Who owns the interest earned on a broker’s interest bearing real estate trust account for client funds?

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_____________________ ________________________________________________________________________ ________________________________________________________________________

9. How long does a broker have to deposit finds in the broker’s trust account?

_______________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________

10. What should a broker do if the broker receives funds that the broker cannot deposit?

__________________________ ________________________________________________________________________ ________________________________________________________________________

11. If a transaction closes, how does a broker disburse earnest money?

___________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________

12. How do parties direct a broker to disburse earnest money if the transaction does not close?

_____ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________

13. What can a broker do if the parties do not provide a broker with a written disbursement agreement?

______________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________

14. How long does a broker have to withdraw commission or fees from the trust account?

___________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________

15. Where does a broker deposit funds a broker receives as a property manager?

16. Who is entitled to the interest earned from an interest bearing real estate trust account for non-client funds?

________________________________________________________________________ _______________________________________________________________________ ________________________________________________________________________ ____________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________

17. What four activities must a broker’s bookkeeping system include?

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_____________________ ________________________________________________________________________ ________________________________________________________________________

18. What form of title evidence is required by the Wisconsin offers to purchase?

_______________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________

19. What are the standard exceptions to a title insurance policy?

_________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________

20. Why does a broker need to know how to prepare closing statements?

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Office Management

O

ffice management

addresses the day-to-day workings of a brokerage office. Each brokeremployer will develop a management strategy to facilitate smooth office operations and provide exceptional customer service. As long as the broker observes the state and federal laws that govern aspects of office management, there is not one correct way to manage an office.

PERSONNEL

One of the first considerations a broker will need to address when opening a brokerage is how many and what types of employees the broker will need. If the broker is going to operate independently and not employ other brokers or salespeople, the broker may still need to employ personal assistants and have an attorney, accountant, and tax advisor as part of the network of service providers a broker uses to run the business. A broker may also want to employ other brokers and salespeople as part of the brokerage. For all employment considerations a broker makes, the broker must be aware of employment discrimination laws and state laws that require a broker to carry a worker’s compensation policy. Equal Opportunity The Civil Rights Act of 1964 prohibits employment discrimination based on a person’s membership in a protected class. Protected classes for employment discrimination purposes include race, sex, creed, religion, color, national origin, age, disability, genetic information, and military history. Other protected classes can be added by statute and brokers must stay aware of changes to federal employment law. Wisconsin has additional protected classes including sexual orientation, marital status, ancestry, arrest or conviction record, pregnancy or childbirth, and use of lawful products. As with the federal classes, Wisconsin may add to the scope of protected classes so brokers must stay aware of developing state employment discrimination law. The U.S. Equal Employment Opportunity Commission is the federal agency charged with investigating complaints and enforcing federal employment discrimination law and the Wisconsin Department of Workforce Development investigates complaints and enforces state employment discrimination law. Both agencies maintain web sites that provide up-to-date information and policies for brokers to use to ensure that they are not participating in employment discrimination. Employees and Independent Contractors Whether a person is an employee or an independent contractor may depend on the legal purpose of classifying that person. If a broker employs assistants, brokers, or salespeople, the broker will have to comply with Wisconsin’s law requiring employers to have a worker’s compensation policy. There is sometimes confusion on this issue because broker-employees and salespeople working for a broker may be independent contractors for tax purposes. The status as an independent contractor for income tax purposes does not control whether a broker needs a worker’s compensation policy for assistants, broker-employees, or salespeople. The Wisconsin Department of Workforce Development has consistently interpreted the relationship between broker-employers and brokeremployees and salespeople as an employer-employee relationship for purposes of Wisconsin’s Worker’s Compensation law, even when the broker-employees and salespeople consider themselves independent contractors for income tax purposes. If a broker has questions about whether the broker needs to carry a worker’s compensation policy, the broker can consult an employment law attorney or contact the Wisconsin Department of Workforce Development, Worker’s Compensation Division.

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There is not a state-approved independent contractor agreement that broker-employers must use for broker-employees and salespeople. Each broker may have a different independent-contractor agreement that structures that broker’s relationship with contracted licensees. For the real estate industry, IRS regulations have a provision for real estate agents to be treated as independent contractors for tax purposes even if the broker retains control over the agents’ actions. Under the “qualified real estate agent” category in the Internal Revenue Code, the following tests must be met to enable the broker to treat the agent as an independent contractor: 1. The individual must have a current real estate license; 2. Ninety percent or more of the individual’s income as a licensee must be commission based, not based on salary or hourly pay; 3. The individual must have a written contract with the broker, which must state that the salesperson will not be treated as an employee with respect to the services performed by the salesperson as a real estate agent for federal tax purposes. The determination of whether a real estate agent is an employee or independent contractor is important for several reasons. Federal and state income tax generally must be withheld from wages paid to employees, but not from compensation paid to independent contractors. FICA payments must be withheld and matched for employees, but not for independent contractors. Failure to comply with these tax responsibilities or an incorrect classification of an employee as an independent contractor can result in the assessment of back taxes, interest, and penalties against the broker-employer. Assistants A broker can employ personal assistants to provide administrative and clerical services and to provide activities that constitute real estate practice. Unlicensed When a broker hires a person to perform administrative or clerical activities, the person does not need a license and can be employed by the broker-employer or can be employed directly by a brokeremployee or a salesperson. A broker-employer, broker-employee, or salesperson can hire a person with a real estate license to perform duties that do not require a license. In this case, even though the person holds a real estate license, because the person was hired to perform only unlicensed activities, the person is considered an unlicensed personal assistant. A broker may hire an unlicensed personal assistant to assist broker-employees and salespeople with writing copy for advertisements, scheduling appointments, or preparing mass mailings. A brokeremployer is responsible for the actions of any unlicensed personal assistants, whether employed directly by the broker-employer, a broker-employee, or a salesperson. If a salesperson or a brokeremployee is going to hire an unlicensed personal assistant, REEB 17.12 requires the broker-employer to enter into a written agreement with the broker-employee or the salesperson who is hiring the unlicensed personal assistant. The agreement should include the details of the assistant’s duties and how the assistant will be compensated and supervised. Licensed When the assistant is going to engage in real estate practice, such as showings and open houses, the broker-employer must hire the licensed personal assistant. A personal assistant whose job responsibilities will include real estate practice must have a real estate license and must be employed by the broker-employer rather than a broker-employee or a salesperson.

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LICENSURE

Section 451.01(2) of the Wisconsin statutes defines the term “broker.” The following activities require a broker’s license: (a) For another person, and for commission, money, or other thing of value, negotiates or offers or attempts to negotiate a sale, exchange, purchase, or rental of, or the granting or acceptance of an option to sell, exchange, purchase, or rent, an interest or estate in real estate, a time share, or a business or its goodwill, inventory, or fixtures, whether or not the business includes real property. (b) Is engaged wholly or in part in the business of selling or exchanging interests or estates in real estate or businesses, including businesses’ goodwill, inventory, or fixtures, whether or not the business includes real property, to the extent that a pattern of sales or exchanges is established, whether or not the person owns the real estate or businesses. Five sales or exchanges in one year or 10 sales or exchanges in 5 years is presumptive evidence of a pattern of sales or exchanges. (bm) For another person, and for commission, money, or other thing of value shows real estate or a business or its inventory or fixtures, whether or not the business includes real property, except that this paragraph does not include showing a property that is offered exclusively for rent. (h) For another person, and for commission, money, or other thing of value, promotes the sale, exchange, purchase, option, rental, or leasing of real estate, a time share, or a business or its goodwill, inventory, or fixtures, whether or not the business includes real property. This paragraph does not apply to a person who only publishes or disseminates verbatim information provided by another person. Exceptions to Definition 1. Court appointed fiduciaries, such as personal representatives, guardians, and receivers; 2. Public officers performing their official duties, such as a sheriff at a foreclosure sale; 3. Attorneys licensed to practice in this state while acting within the scope of their license; and 4. Custodians, janitors, employees or agents of the owner or manager of a residential building, provided they do not actually negotiate the lease with prospective tenants.

Eligibility to Obtain a License

Any individual age 18 or older with a fair knowledge of the English language is eligible to earn a real estate license after completing the mandatory education and testing requirements established by the rules. The salesperson license requires completion of a 72-hour pre-license program approved by the state and the successful completion of the salesperson exam. An applicant can also satisfy the educational requirement by showing completion of ten semester hour credits in real estate or real estate related law courses at an accredited institution of higher education. The broker license requires completion of a 72-hour pre-license program approved by the state and the successful completion of the broker exam. The applicant must also either be licensed as a salesperson or have successfully completed the salesperson’s course and exam. An applicant can also satisfy the education requirement by showing completion of 20 semester hour credits in real estate or real estate related law courses at an accredited institution of higher education, or that the applicant is licensed to practice law in Wisconsin. A person who wants to act as a time-share salesperson does not receive a real estate license but submits an application to the REEB for a certificate of registration. A certificate of registration is not a real estate license but allows the person to transact business as a time-share salesperson if employed by a licensed broker. The broker-employer certifies that the person is competent to act as a time-share salesperson for the broker and a time-share salesperson can only assist a broker to sell, offer, or attempt to negotiate an initial sale or purchase of a time share. The time-share salesperson cannot participate in any other real estate transactions.

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Non-residents as Licensees Individuals who are not residents of Wisconsin may apply for a Wisconsin real estate license after completing the education and examination requirements for the desired license. A non-resident licensee must also file an irrevocable consent with the DSPS to be sued in Wisconsin. Specifically, the non-resident licensee agrees to be sued in any court of Wisconsin in which a cause of action arises or where the plaintiff lives. This consent makes the non-resident licensee subject to the jurisdiction of Wisconsin courts. Ineligibility to Obtain a License The goal of making real estate practice a licensed and regulated profession is to safeguard the public. The REEB will not grant licenses to applicants who do not demonstrate competency to conduct real estate practice in a way that safeguards the public. The REEB will not automatically reject applicants with a conviction record but will analyze the nature of the crime and its relationship to the practice of real estate and safeguarding the public. Section 440.12 of the Wisconsin statutes requires the DSPS to deny an application for an original license or for a renewal if the applicant owes delinquent taxes. Under section 440.13, the same results could occur to an applicant who is delinquent in paying family support.

Notifying the Department of safety and professional services

Every person a broker-employer hires to perform licensed real estate services must obtain and retain a real estate license. The broker-employer is responsible for ensuring that all agents working for the broker are properly licensed. REEB 17.04 requires a licensee who wishes to engage in real estate practice as an employee of a broker-employer to notify the DSPS of the name of the broker-employer. The licensee must notify the DSPS with the Notice of Real Estate Employment Form, which is available from the DSPS website. Notice of the Employment Status REEB 17 of the Administrative Code, “Licensure and Supervision of Employees,” describes the obligations of brokers and licensees to notify the DSPS of employment status and changes to either license or employment status. REEB 17.04 requires licensees to notify the DSPS when the licensee will be working for a broker-employer. REEB 17.05 requires a licensee to notify the DSPS if the licensee is transferring employment from one broker to another broker-employer. REEB 17.06 requires a licensee to notify the DSPS when the licensee terminates employment with a broker. Although these requirements are imposed upon an individual licensee, REEB 17.07 makes the broker-employer responsible for making sure that licensees comply with the rules. Change of Employment REEB 17.05 states that a licensee who wants to transfer employment from one broker-employer to another shall submit a transfer application to the DSPS, together with the required fee. The licensee may begin working for the new broker-employer once the licensee has delivered or mailed the notice and the fee to the DSPS. Termination of Employment If a licensee no longer works for a broker-employer, REEB 17.06 requires the licensee to send written notice of the termination to the DSPS within 10 days after terminating employment. This section also applies if a salesperson or a broker-employee is working for a broker-employer who loses licensed status, either temporarily or permanently. If the DSPS temporarily suspends or permanently revokes a broker-employer’s license, all of the licensees working for that broker become unemployed, must stop practicing real estate as agents of that employing broker, and need to file a notice with the DSPS of termination of employment.

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Similarly, if a broker-employer fails to comply with the license renewal requirements, whether it is for an individual license or a license for a business entity, all of the broker-employer’s agents become unemployed and need to notify the DSPS of termination of employment. These requirements also apply if a broker-employer chooses to stop practicing real estate. The salespeople working for a broker who loses licensed status for any reason, whether it is voluntary or involuntary, must immediately stop practicing real estate and cannot engage in any other transactions until employed by a new employing broker. There is no “winding-up” or grace period, even if the salesperson was not at fault. In the case of broker-employees, the broker-employee can continue to practice real estate as a licensed broker but must notify the DSPS of termination of employment with the former broker. Change of Name or Address REEB 23.02 requires licensees who change their name or address to notify the DSPS in writing within 30 days of the change.

Renewal of License CE Requirement

Every real estate license in Wisconsin expires on December 14th of every even-numbered year. Wisconsin real estate licensees must complete 18 hours of continuing education to be eligible for license renewal. Successful completion of the required continuing education may be accomplished by taking six Wisconsin-approved courses worth three credit-hours each. Licensees must take four mandatory and two elective courses and pass an examination for each course. A licensee, when submitting a license renewal application, must show completion of 18 hours of Wisconsin-approved continuing education. To apply for license renewal by December 14, a licensee must submit the course name, the course provider, and the date of successful completion of each continuing education course completed. REEB 17.07 places the burden on the broker-employer to confirm that every broker-employee and salesperson has a valid license when beginning to work for the broker-employer and also confirm that every broker-employee and salesperson has completed the biennial renewal requirement. Failing to confirm initial licensure and renewal is a common reason for the DSPS to discipline a broker-employer. The DSPS may deny an application for renewal if the applicant has become delinquent on taxes or family support, has been convicted of a crime, or has not completed continuing education requirements. Before a broker-employer permits broker-employees or salespeople to continue practicing after the license expiration date, the broker-employer should confirm that the DSPS has renewed the license. A broker-employer could ask the agent for copy of the renewed license or check the licensee’s status on the DSPS website. If the licensee cannot confirm that the DSPS has renewed the license, the brokeremployer should not permit the licensee to engage in real estate practice. If a licensee fails to renew a license, the formerly licensed person cannot engage in any real estate transactions until the license is properly renewed. This usually means that the person has to complete the previous biennium’s continuing education requirements, apply for renewal, and pay a late fee. The person should not engage in any real estate transaction until the person confirms that the DSPS has approved the renewal of the license.

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Criminal Conviction of Licensee According to REEB 24.17, if a licensee is convicted of a crime, the licensee shall send a copy of the complaint or other information describing the nature of the crime and the judgment of conviction to the DSPS within 48 hours after the judgement of conviction. The board will review it to determine whether the circumstances of the crime are substantially related to the practice of a real estate broker or salesperson. Working for More Than One Brokerage A licensee may want to practice in more than one area of real estate. REEB 17.03 prohibits a salesperson from engaging in real estate unless the salesperson works for a broker-employer. The salesperson can work for only one broker-employer at a time and cannot conduct real estate outside of the employment with the broker-employer. A person with a broker’s license can practice independently and does not need to work for another broker. Additionally, a person with a broker’s license can work for a broker-employer but can also operate independently with written permission from the broker-employer. The broker must avoid conflicts of interest with the broker-employer and generally, the broker-employer and the brokeremployee will have a clear, written agreement setting the boundaries for when the broker-employee is practicing under the broker-employer and when the broker-employee is practicing independently. The agreement will often address how to identify and separate earnings from the respective practices as well as covering issues such as insurance and liability concerns.

Policy Manual

Wisconsin Administrative Code section REEB 17.08 requires a broker-employer to provide all licensed employees with a written statement of procedures under which the office and employees shall operate with respect to handling leases, listing contracts, offers to purchase, and other documents relating to transactions. This “written statement of procedures” is commonly referred to as a broker’s policy manual. The administrative rules do not provide additional guidance as to what should be in the broker’s policy manual other than a statement of procedures for handling transaction documents. It will be up to each broker-employer to determine what other information should be in the policy manual but at a minimum, it must provide instructions to employees on handling transaction documents. It is the responsibility of the broker-employer to keep the policy manual up-to-date to reflect legal and policy changes and to make sure all agents of the broker-employer have access to the manual.

Availability of Rules

Broker-employers must make sure that all licensees have access to the rules that regulate real estate practice. The broker must have the rules readily available, which may mean a hard copy at every licensee’s desk, or it may mean a link the DSPS’s website where the DSPS maintains a section for the rules and statutes that regulate real estate practice. No matter how a broker-employer chooses to comply with this section, it is important that the broker-employer makes sure that all licensees know where the rules are located and how to access them.

PROFESSIONAL SERVICES

A transaction may require hiring attorneys, accountants, tax professionals, home inspectors, or title insurance providers. These other professionals are not employees of the broker-employer. Brokers and their agents should never discourage a party from seeking outside professional assistance in a transaction.

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RECORD RETENTION

The rules governing a broker’s responsibility for records dictate when a broker must provide copies of documents and closing statements to parties and cooperating brokers and the length of time that a broker must retain records. The length of time a broker must keep documents is measured from the time the transaction closes or if the transaction does not close, from the date of the listing. A broker must keep documents three years from the date a transaction closes and if the transaction does not close, three years from the date of the listing. There is nothing in the rules that prohibits a broker from keeping documents longer than three years if there is any reason to do so. Copies of Documents The administrative rules require brokers to promptly provide copies of documents to parties. The rules do not define promptly and do not provide guidance for how to comply with this requirement when conducting transactions electronically. Promptly may mean giving a hard copy immediately to a customer or client who is in the office, sending a copy by e-mail as soon as the broker and the seller execute the document, or sending a copy by e-mail once the broker returns to the office. Electronic Documents The administrative rules do not provide guidance on what a broker must do if a broker wants to keep documents electronically. Because the administrative rules do not give affirmative guidance for a broker who wants to store files electronically, a broker can design any sort of electronic storage system that will allow the broker to comply with the rules. The rules require that the broker must make the records available to the DSPS for inspection and copying.

Broker Supervision

Wisconsin law requires a broker to supervise agents working for the broker. The regulations governing real estate brokers establish the broker’s duty to supervise licensed employees. Brokers have a duty to provide assistance and written guidance to the licensees. Supervision includes, but is not limited to: 1. Reasonably reviewing transaction documents, including trust account records, prior to the closing of the transaction; 2. Providing all agents with written procedures for handling listing contracts, offers to purchase and other documents relating to transactions; 3. Providing all licensees with reasonable access to a supervising broker for consultation regarding real estate practice issues; and 4. Having the DSPS rules available in all offices for the use of licensees. A broker’s review of documents and records must be reasonable. The rules do not define how often or how quickly a broker must review for it to be reasonable. Reasonable may depend on the employee. “Reasonable review” means the timely review of a document or record to detect and correct errors, which include ambiguous, omitted, or incomplete portions of a document or record, or incorrect words, numbers, phrases, legal descriptions, terms or conditions. “Reasonable review” does not include the detection and correction of an error that is not apparent on the face of the document or record, unless the supervising broker knows or has reason to know of the error. Brokers must provide employees with reasonable access to a supervising broker to consult on real estate practice issues. “Reasonable access” is a broad term but it means that a broker must provide licensed employees with someone who can answer practice questions and that the licensed employees are aware of the procedure for discussing practice questions with a supervising broker.

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When a broker does business as a business entity, the business-entity must delegate supervision responsibilities to a supervising broker. All broker-employers can delegate supervision of licensed employees to one or more supervising brokers. The broker-employer can delegate all authority to a supervising broker or brokers or can delegate different supervisory elements to different supervising brokers. A delegation of supervisory duties must: 1. Be in writing and signed by or on behalf of the delegating broker-employer; 2. Identify the duty or duties delegated; and 3. Be signed by the supervising broker to whom the delegation is made.

Supervision of Agents: Respondeat Superior Modifications

The doctrine of respondeat superior, which means “let the master answer” applies to the relationship between a principal and an agent. The doctrine of respondeat superior would make a listing broker responsible for the wrongful acts of the listing broker’s agents and subagents, even if the listing broker did not participate in the wrongful conduct or know that is was occurring. Wisconsin law modifies the application of respondeat superior in the context of real estate by section 452.139 of the Wisconsin Statutes. This section limits the general application of respondeat superior to the real estate agency relationship. A broker is responsible for acts of the broker’s employees but not responsible for the wrongful acts of subagents unless the broker knew or should have known of the subagent’s wrongful acts.

Misrepresentation

Wisconsin law recognizes three classes of misrepresentation: intentional misrepresentation; negligent misrepresentation; and strict liability. To claim misrepresentation, a person must be able to show certain elements. There are three elements common to the three forms of misrepresentation recognized under Wisconsin law. Those elements are: 1. There must be a statement made by the agent as a fact; 2. The fact represented in the statement must be untrue; and 3. The plaintiff must have reasonably believed the statement to be true, relied upon it, and was injured as a result. Intentional Misrepresentation To make a claim of intentional misrepresentation, a plaintiff must show the three common elements and show that the licensee knowingly made an untrue statement or made a statement recklessly without caring whether it was true and with the intent to deceive the buyer into acting on the misrepresentation. Negligent Misrepresentation To make a claim of negligent misrepresentation, the plaintiff must show the three common elements and that the licensee failed to exercise reasonable care in making a misrepresentation or that, as a professional licensee, the agent does not have the ability to meet the minimum competence level established for the industry. Under negligent misrepresentation, a licensee may believe the statement the licensee made to be true but it is negligent misrepresentation if a plaintiff can show that the licensee failed to use reasonable care to determine the veracity of the statement or that the licensee, by believing the statement to be true, does not meet the minimum competence level for a real estate licensee.

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Strict Responsibility Strict responsibility is a category of misrepresentation that has profound implications for Wisconsin real estate licensees. In adopting the strict responsibility standard, Wisconsin courts have moved from a standard of “let the buyer beware” to a standard where a licensee does not need to intentionally or negligently misrepresent information to a party to be found liable for damages. Strict responsibility stands for the principle that as between an innocent buyer and an innocent broker, public policy dictates that the broker should pay for losses due to misrepresentation. In addition to the three common misrepresentation elements, a plaintiff claiming “strict responsibility” must show: 1. The licensee made a statement as a fact based on the licensee’s own knowledge or made a statement where the licensee should have known the truth or untruth of the statement; and 2. The licensee has an economic interest in the transaction.

BROKER RISK REDUCTION

The laws and rules that regulate real estate practice in Wisconsin are designed to protect consumers in transactions. Brokers must make sure that their broker-employees and salespeople complete continuing education before the renewal date. Continuing education can be an opportunity for brokers to review office policies with employees and make sure employees are clear on the fundamentals of real estate practice such as agency, disclosure obligations, and ethics. Brokers should encourage employees to upgrade their knowledge of real estate practice, which will increase the licensee’s skills and decrease a broker’s risk from licensee malpractice. Licensees can receive ongoing training by obtaining designations, attending conferences, participating in professional organizations, and attending live and distancelearning courses designed to review the basics or teach new concepts. The topics may be real estate specific such as a course on agency or could be skill related such as a course on networking, customer service skills, or using technology to increase efficiency.

Americans with Disabilities Act (ADA)

Protected Groups Under the ADA The ADA’s definition of a person with a disability includes individuals who have a physical or mental impairment that substantially limits one or more of their major life activities. The ADA protections also apply to individuals who “have a record of having a disability” or are “regarded as having a disability.” The ADA also protects persons who associate with a person with a disability. General Requirements for Public Accommodations The ADA sets baseline standards to help guarantee that individuals with disabilities or individuals under the protection of the ADA have access to public accommodations. A broker’s office is a place of public accommodation. Specifically the ADA states “No individual shall be discriminated against on the basis of disability in the full and equal enjoyment of the goods, services, facilities, privileges, advantages, or accommodations of any place of public accommodation by any person who owns, leases, (or leases to), or operates a place of public accommodation.” The federal regulation interpreting that law extends the same requirement to a “private entity who owns, leases (or leases to), or operates a place of public accommodation.” Between the federal statutes and the federal rule, both individual brokers and brokers who operate as a business entity are covered by the provisions of the Americans with Disabilities Act. This means that a broker’s office is a place of public accommodation where everyone should able to access the full and equal enjoyment of the goods, services, privileges, advantages, or accommodations that a broker would provide.

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Commercial Facilities Commercial facilities are those facilities that are intended for non-residential use by a private entity and that have operations that affect commerce. Typical “commercial facilities” are factories, warehouses, office buildings, and other places where employment may occur, such as a real estate office. Leased Facilities Title III’s prohibition against discrimination applies to any person who owns, leases, (or leases to), or operates a place of public accommodation. This includes subleases, management companies, or any other entity that owns, leases, (or leases to), or operates a place of public accommodation, even if the operation is only for a short time. Both rental property owners and tenants are responsible for complying with the ADA. Removal of Architectural Barriers From Public Accommodations Public accommodations must remove all architectural and communication barriers, including barriers that are structural in nature, in existing facilities if such removal is “readily achievable.” “Readily achievable” means that it can be easily accomplished and carried out without much difficulty or expense. If a place of public accommodation can demonstrate that removal of a barrier is not readily achievable, the place of public accommodation must make its goods, services, facilities, privileges, advantages, or accommodations available through alternative methods, if those methods are readily achievable. The following are additional examples of how a broker can comply with the ADA where removal of barriers is not readily achievable: 1. 2. 3. 4.

Providing home appointments; Retrieving merchandise from inaccessible shelves or racks for consumers; Relocating activities to accessible locations; or Meeting a consumer at the door to pick up or drop off transaction documents.

If a broker cannot readily achieve removal of barriers, a broker can offer up any alternative solution that will allow a person access to the broker’s services as long as the alternative does not diminish the level of service that the broker can offer. Alterations If alterations are made that could affect the usability of any commercial facility or a facility used in providing public accommodations, the alterations must make that portion of the facility readily accessible and usable by individuals with disabilities. If full compliance with these provisions is impossible, the facility must provide the maximum feasible accessibility in its alterations. Paths of Travel When alterations are made to an area that contains a primary function of the facility, the path of travel to the altered area and the bathrooms, telephone, and drinking fountains serving the altered area must also be made readily accessible. Those alterations that provide the greatest use of the facility should be performed first, in the following order: 1. Accessible entrance; 2. Accessible route to the altered areas; 3. At least one accessible rest room for each sex or a single accessible unisex rest room; 4. Accessible telephones; 5. Accessible drinking fountains; and 6. Additional accessibility elements such as parking, storage, and alarms.

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A primary function of the facility is defined as “a major activity for which the facility is intended.” Alterations to the path of travel that are disproportionate in cost and scope to the overall alteration are not required. Path of travel costs will be considered disproportionate if they exceed 20% of the total cost of the alteration considering the following costs: 1. 2. 3. 4.

Costs Costs Costs Costs

of of of of

making an entrance and route accessible; making rest rooms accessible; providing accessible telephones; and relocating inaccessible drinking fountains.

Historic Preservation Alterations made to properties eligible for listing in the National Register of Historic Places or that are designated as historic under state or local law are subject to various specific provisions throughout the ADA. Real Estate Brokers and the ADA A broker must comply with the ADA and make sure the broker’s office complies with the accessibility requirements of the ADA. This includes both public offices and a home office if the broker delivers real estate services to consumers in the home office. Brokers must make sure that all clients and customers have access to the services that a broker provides and must make reasonable efforts to accomplish accessibility. When brokers are working with buyers who are shopping for a property that is subject to the ADA, the broker can refer buyers to appropriate authorities, such as a local building inspector, to determine what modifications might be necessary to bring a property in compliance with the ADA and other applicable construction standards.

Transition planning

A brokers should develop a transition plan. An effective transition plan will address expected and unexpected disruptions in a broker’s business. A broker’s transition plan should address what the broker’s response will be in the case of a disaster such as a flood, fire, or technological failure. Trust Accounts A broker should create a plan for handling trust accounts. If a broker is going to close a business or transfer it to another broker, the person who has the authority to conduct trust account transactions must reflect this transfer. The name on the trust account and the way in which the brokerage is set up will determine what a broker needs to do to make sure a successor can access the accounts. A broker’s transition plan should include basic information about the number of trust accounts a broker uses, for what purpose the broker uses the accounts, where they are located, who has authorization to conduct transactions on those accounts as well as information about where bookkeeping records are kept, what system a broker used to back-up those records, and how to access records. Transfer of Contracts Whether a broker is operating as an independent broker or as a business entity, a broker should plan for transferring contracts if a broker chooses to end practice or can no longer practice. In the case of a broker that operates as a business entity, because the contract, such as a listing contract or a buyer agency agreement will be with the business entity, the retirement, termination, or departure of an individual broker will not affect the agency agreements but a broker’s succession plan should include information about who takes over responsibility for those contracts, how to notify clients of the change, and what methods a broker can use to provide clients with alternatives in case the client objects to a new licensee servicing the contract. A broker operating as a sole-proprietor or a partnership should also plan for transferring contracts.

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Pending Transactions Real estate licensees are required to protect the public in the practice of real estate and one of the most important things a real estate professional can do to protect the public is have a transition plan to address pending transactions in case a broker cannot fulfill the broker’s obligations in the transaction. The broker may be holding property or documents in trust for the parties and a broker’s inability to fulfill the broker’s obligations should not result in harm to the parties such as financial loss, a failed transaction, or a potential lawsuit depending on who the broker is representing. Consult an Attorney A broker should consult an attorney to draft a transition plan. The attorney can help the broker decide how to address finances, employees, contracts, pending transactions, and many other business aspects that require decisions in the event that a broker chooses to stop practicing or is unable to practice, whether permanently or temporarily. The plan should address who is responsible for taking over the broker’s day-to-day operations, how to proceed in the event of a disaster, and most importantly, how to protect a broker’s clients and customers from harm as a result of the broker’s inability to fulfill obligations.

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Answer the following questions. If you need to, refer to the previous summary. ________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________

1. What federal agency investigates claims of employment discrimination?

________________ ________________________________________________________________________ ________________________________________________________________________

2. What must a broker carry even if the broker’s agents are independent contractors?

____________________________________ ________________________________________________________________________ ________________________________________________________________________

3. What tasks can an unlicensed personal assistant do?

_______________________________________ ________________________________________________________________________ ________________________________________________________________________

4. Who can employ a licensed personal assistants?

________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________

5. What are the requirements to apply for a broker’s license in Wisconsin?

______________________ ________________________________________________________________________ ________________________________________________________________________

6. What must a non-resident do to receive a real estate license in Wisconsin?

_______________________________ ________________________________________________________________________ ________________________________________________________________________ _______________________________________________________________________

7. What does a licensee have to do when changing employers?

_________________ ________________________________________________________________________ ________________________________________________________________________

8. Who is responsible for making sure a broker’s salespeople are properly licensed?

9. How many days does a licensee have to notify the Department of Safety and Professional Services of termination of employment? ________________________________________________________

________________________________________________________________________

_____________________________ ________________________________________________________________________ ________________________________________________________________________

10. What must a licensee do before renewing a real estate license?

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_____________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________

11. What must a broker make available to all licensed employees?

__________________________________ _______________________________________________________________________ _______________________________________________________________________

12. For how long does a broker need to retain documents?

______________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________

13. What are a broker’s supervision responsibilities?

___________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________

14. How can a broker delegate supervision responsibility?

___________________________________________ _______________________________________________________________________ _______________________________________________________________________

15. What are the forms of misrepresentation?

____________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________

16. Who is responsible for making sure a broker’s office complies with the ADA?

___________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________

17. At a minimum, what should a broker consider when doing transition planning?

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Specialty Properties

S

pecialty properties

is broad, imprecise way to capture all those transactions other than the standard sale of a house from a seller to a buyer. Residential home sales drive the industry. Real estate brokers know that media reports on home sales, foreclosures, days that homes are on the market, and other real estate statistics are based on residential transactions. Brokers also know that this information influences how consumers see the real estate market and the industry. Reports of home sales being down or up determine whether consumers believe the market to be a “seller’s market” or a “buyer’s market.” When consumers think about real estate professionals, they often picture a standard residential transaction though most brokers agree that there is no such thing as a standard residential transaction. Brokers can consider adding transactions involving specialty properties to their current practice or even specializing and focusing practice around one type of specialty property.

Residential rental properties

Sales Characterizing the sale of a residential rental property depends on the number of units in the property. The standard residential offer to purchase permits the parties to navigate the transaction in the same way as a standard residential sale. As the number of units in the property increases, it become less like a residential transaction and more like a commercial transaction. The property may contain both residential and commercial uses. The forms a broker uses to list the property and the forms a buyer uses to make an offer will depend on the use of the property. When a form does not exist that specifically suits a particular transaction, the broker should use the form that is the best fit and modify it accordingly. When a broker or salesperson is the owner of a residential rental property, the licensee must comply with advertising, disclosure, and trust account rules. A licensee must advertise in the name of the employing broker unless advertising for a tenant for a personally-owned rental property. A licensee does not need to disclose licensed status when advertising for tenants in personally-owned property but a licensee can disclose licensed status. Rental Weatherization Under Wisconsin’s rental weatherization program, buyers will not be able to record a deed unless the transfer fee return shows that the transaction either complies with, or is exempt from, the requirements of SPS 367 Rental Unit Energy Efficiency. Generally, if a buyer will occupy the residence as a primary residence within 60 days of closing, the transaction is exempt. Parties negotiate responsibility for weatherization in an offer to purchase. If the transfer is not exempt, the parties should negotiate in the offer to purchase who will be responsible for compliance. This will typically involve an inspection by a certified weatherization inspector, who will determine if the property is in compliance or if items need to be corrected to bring the property into compliance. After compliance is achieved, the inspector will issue a certificate of compliance. Once the certificate is issued, it is valid for future transactions, unless it is revoked. For this reason, the certificate should be presented with the deed to be recorded in the public records.

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REAL ESTATE broker

Property Management

Persons who are paid or otherwise compensated to rent property and negotiate and sign leases for the owner fall within the definition of a broker under Wis. Stat. § 452.01(2). This statute states that a broker includes “any person who for another, and for commission, money or other thing of value, negotiates or offers or attempts to negotiate a sale, exchange, purchase or rental of an interest or estate in real estate.” This definition includes persons negotiating the terms of a rental interest in real estate. No license, however, is required for the custodian, employee, rental agent or property manager who merely coordinates maintenance services, shows residential rental units to prospective tenants, gives out basic information, takes rental applications, accepts rental deposit checks, and facilitates the owner’s and tenant’s execution of a lease. WB-37 Residential Listing Contract - Exclusive Right to Rent The WB-37 Residential Listing Contract - Exclusive Right to Rent is used when a property owner hires a real estate broker to lease the owner’s property. The form is mandatory for leasing residential property. It is optional for use with lease listings for commercial or industrial properties. Licensees who are paid to negotiate leases and provide other brokerage services for rental property owners need an appropriate agency agreement giving them authority to act on behalf of the owner. The WB37 authorizes the broker to advertise, secure a lease, and handle the rental funds. For commercial properties, licensees may use rental listing contracts drafted by a party or an attorney, provided that the name of the drafter is imprinted on the form. An agent who has a property listed for sale must still enter into a rental listing if the owner decides that the agent should find a tenant for the property. An exclusive right to sell listing like the WB-1 Residential Listing Contract does not give a licensee the authority to rent the property, and the WB37 does not give the broker the right to sell the property. Listing a residential property both for sale and lease simultaneously requires both a WB-1 and a WB-37. Any attempt by a broker to avoid the requirement to use both forms by altering one form would not only violate license law but could jeopardize the legal rights of the broker in the transaction. Property Management Agreements When a residential property owner contacts a broker for assistance with leasing a property, the first issue to address is whether the property owner wants the broker to serve as a rental agent or as a property manager. Property managers usually procure tenants, execute leases, and handle the dayto-day operations of the rental property. A broker uses a property management agreement to structure the relationship with the rental property owner. It can be prepared by the property owner, the broker, or an attorney. The WB-37 and a property management agreement will usually overlap to the extent that they both authorize the agent to advertise vacancies, take tenant applications, qualify and approve tenants, receive earnest money and security deposits, execute leases on behalf of the owner, and collect rents. A property management agreement will also typically require the broker to perform management and maintenance duties in addition to the task of leasing the rental units. Rental agents and property managers may not provide brokerage services without an agency agreement. Broker Inspections and Disclosures License law requires brokers to comply with inspection and disclosure obligations. These duties remain in effect any time a licensee engages in real estate practice, whether that practice involves sale or rental. A licensee must perform the visual inspection of property required by REEB 24.07, and must ensure that any actual or possible material adverse fact is properly disclosed. A broker must provide agency disclosure to a client to the property owner and agency disclosure to a customer to tenants if the broker is negotiating with the tenant on behalf of the rental property owner.

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Rental and Management of Target Housing The rental of target housing triggers the duty to comply with the Lead-Based Paint (LBP) disclosure requirements of federal law. Target housing is housing built before 1978 or where the building permit was issued before 1978. An owner must also disclose knowledge of LBP and testing results of a property with a copy of the EPA LBP brochure. The broker must also inspect the property and disclose any material adverse facts, including the presence of chipping, peeling or flaking paint or paint dust. A property owner must test loose paint to determine if the paint contains lead unless the owner treats it as if it contains lead and remediates the condition. An owner or agent can be liable if the contractor hired to perform the work does not make the appropriate disclosures or does not do the remediation properly. Renovators and remodelers must provide a warning to occupants and owners of target housing before beginning work that will create a LBP hazard. The requirement applies to any trade or occupation that could engage in work that would disturb painted surfaces that may contain LBP. It also covers the owner of the property and the owner’s employees when they engage in this type of work. A broker who manages target housing and hires a contractor to do any work which will disturb a painted or varnished surface should make sure that the contractor is complying with this requirement. Landlords or contractors may not be aware of this law and may not be making the appropriate disclosures to affected tenants. Failure to comply with the disclosure requirements could result in liability not only for the landlord or contractor, but also for the brokerage company that hired the contractor. It could also cause the tenant to be exposed to LBP hazards, creating potential liability for both the contractor and the broker. Trust Accounting for Property Management Rental application deposits, security deposits, and rents received by a broker are real estate trust funds. They are not client funds and may be deposited in one of three different types of accounts. 1. Traditional non-interest bearing trust account. Non-client funds such as security deposits and rent may be deposited in a traditional non-interest bearing trust account. 2. Interest-bearing trust account for non-client funds. Non-client funds from rental transactions may also be deposited in an interest bearing trust account. The parties must provide written authorization to the broker specifying how the parties will receive the interest. 3. Rental owner’s account. Non-client funds from property management and leasing activities may also be deposited into the rental owner’s account. An owner’s account is an account maintained by the rental property owner for the deposit and disbursement of the owner’s funds. Tenants should make checks payable to the owner, not to the broker. Special Rules for Licensee Rental Property Owners REEB 18.031(4) provides that a licensee having an ownership interest in a rental property shall place security deposits related to that property in a real estate trust account or shall provide in the lease for security deposits to be held in an account maintained in the name of the owner. If a broker owns rental property, the broker must hold security deposits in the broker’s trust account or obtain written permission in the lease to hold the funds in the broker’s owner’s account. Residential Rental Law Wisconsin law governing the property owner-tenant relationship is detailed in Chapter 704 of the Wisconsin Statutes, together with the regulatory code provisions of Chapter ATCP 134. Licensees who are owners, rental agents or managers of rental property must remain mindful of the fair housing laws and ordinances in effect, as well as the Americans with Disabilities Act. This section will highlight some of the requirements of the property owner-tenants rules. Licensees who own or manage residential rental units should become familiar with the requirements of Wis. Stat. Chapter 704 and ATCP 134.

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Rental Agreements The rental agreement, rules and regulations established by the property owner shall be furnished to the tenant for the tenant’s inspection before the rental agreement is entered into and before any earnest money or security deposits are accepted from the prospective tenant. The tenant shall receive copies of the rental agreement, rules and regulations as established by the property owner at the time of the agreement. ATCP 134.03(2)(a) requires that, immediately after accepting earnest money or a security deposit, the property owner shall provide the tenant or prospective tenant with a written receipt for the deposit stating the nature of the deposit and its amount. The receipt is not required when payment is made by check bearing a notation stating the purpose for which the payment was given, unless requested by the tenant. Disclosures ATCP 134.04 (1) requires a property owner to disclose to the tenant in writing the name and address of the property owner or the property owner’s authorized agent unless the rental unit is in an owner-occupied building containing no more than 4 dwelling units. The disclosure must be made at the time of or before executing the rental agreement. ATCP 134.04 (2) requires that, before entering into a rental agreement, or accepting earnest money or a security deposit from the prospective tenant, the property owner shall disclose: 1. Any uncorrected building code or housing code violations. 2. Conditions affecting habitability that the property owner knows or could know on basis of reasonable inspection including: • The dwelling unit lacks cold or hot running water; •

Heating facilities serving the dwelling unit are not in safe operating condition;

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The dwelling unit is not served by electricity or the service is in an unsafe condition; Structural or other conditions in the dwelling unit or premises that constitute a substantial hazard to the health and safety of the tenant;

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The dwelling unit is not served by plumbing facilities in good operating condition;and

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The dwelling unit is not served by sewage disposal facilities in good operating condition.

Earnest Money Deposits A property owner may request an earnest money deposit in return for considering a rental application or holding a dwelling unit for a prospective tenant. Before accepting an earnest money deposit, the property owner must identify the specific dwelling unit being held for the prospective tenant. When a property owner receives an earnest money deposit from a rental applicant, the owner must return the full deposit if: 1. The property owner rejects the application or refuses to enter into the rental agreement; 2. Applicant withdraws the rental application before the property owner’s acceptance; or 3. The property owner fails to approve the tenant’s application by the end of the third business day after accepting the earnest money or another later date to which the tenant agrees in writing. The later date cannot be more than 21 calendar days after the property owner accepts the deposit. A property owner who receives earnest money from a rental applicant shall do one of the following if the parties enter into a rental agreement: 1. Apply the deposit as rent or as a security deposit; or 2. Return the earnest money to the tenant.

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A property owner may withhold funds from a properly accepted earnest money deposit if the tenant fails to enter into a rental agreement after being approved for tenancy, unless the property owner significantly altered the rental terms previously disclosed to the prospective tenant. A property owner may also withhold from an earnest money deposit an amount sufficient to compensate the property owner for actual costs and damages incurred because of the tenant’s failure to enter into a rental agreement. A property owner may not withhold for lost rents unless the property owner has made a reasonable effort to mitigate the loss. Credit Check Fee A property owner can require a prospective tenant to pay the property owner’s actual cost up to $20 to obtain a consumer credit report. The owner may charge the fee only if the report is obtained from a national consumer credit reporting agency. The property owner shall notify the prospective tenant of the charge before requesting the consumer credit report and shall provide a copy. The property owner may not require the prospective tenant to pay a fee for a consumer credit report if the prospective tenant gives the property owner a credit report, from a national consumer credit reporting agency that is not more than 30 days old. Tenant Inspection Rights ATCP 134.06(1) requires a property owner to notify a tenant in writing that the tenant may inspect the unit and notify the owner of any preexisting damages or defects or request a list of physical damages or defects, if any, charged to the previous tenant’s security deposits. The property owner must notify the tenant of this right before accepting a security deposit from the tenant or converting an earnest money deposit into a security deposit. The property owner may require a tenant to make the request of previous damages and charges in writing. Check-in Sheet A property owner must provide a new residential tenant with a check-in sheet. The tenant will have seven days from the date the tenant commences occupancy to complete and return it to the landlord. The check-in sheet must contain an itemized description of the condition of the premises at the time of check−in. The tenant has seven days from the date the tenant commences occupancy to complete the check-in sheet and return it to the property owner. A property owner does not have to provide this to renewing tenants. Repair Promises Under ATCP 134.07, if a property owner promises to make specific repairs or improvements, the property owner must specify the intended completion date or time period. If the repair promises are made before entering into the initial rental agreement, the promises must be in writing. The property owner must complete repairs on time, or explain any unavoidable delays. Unauthorized Entry A property owner must give at least 12 hours notice before entering a unit unless the tenant consents to earlier entry. The property owner has the right to enter the unit to inspect, make repairs, or show the premises. The property owner may enter the premises without giving the 12-hour notice when there is a health or safety emergency or the tenant is absent and the property owner reasonably believes that entry is necessary to protect the premises from damage.

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Prohibited Practices A property owner may not: 1. Advertise or rent premises which have been condemned for human habitation; 2. Enforce or attempt to enforce, an automatic lease renewal unless the tenant receives separate written notice within 15-30 days prior to the renewal date; 3. Exclude, forcibly evict or constructively evict a tenant because the tenant has reported a rule or housing code violation, joined or attempted to join a tenant association, or asserted any right specifically guaranteed to tenants by law; 4. Fail to deliver possession to a new tenant at the time agreed upon in the rental agreement, except for reasons beyond the property owner’s control; 5. Exclude, forcibly evict or constructively evict a tenant from a dwelling unit, other than by an eviction procedure specified under Chapter 799 of the Wisconsin Statutes; or 6. Hold or seize a tenant’s personal property, except as authorized under section 704.05(5), or in a written lien agreement between the property owner and tenant. Notices Terminating Tenancies The notice that a party uses to terminate a tenancy depends on the reason for the termination. If a month-to-month tenant fails to pay rent when due, the property owner can give a written 5-day notice to the tenant or a written 14-day notice. The 5-day notice, often called the “quit or pay” notice, requires the tenant to either pay the delinquent rent or vacate the premises. The 14-day notice requires the tenant to vacate. For a non-paying tenant with a lease term of less than one year or year-to-year lease, the property owner must start with the 5-day “quit or pay” notice unless the tenant has been given a previous 5-day notice within the past year. If the property owner has already issued a 5-day “quit or pay” notice to the tenant within the past year, the property owner can issue a 14-day notice requiring a tenant to vacate for the next instance of delinquent rent. If a tenant is breaching a lease in a way other than failing to pay rent or if the tenant is creating a nuisance under section 823.11 of the Wisconsin Statues, the property owner must follow the notice requirements found in section 704.17 of the statutes. If one of the parties wants to end the rental relationship, section 704.19 states that the party may give written notice to the other party of the termination. The notice must state a termination date, which must be at least 28 days in the future and be at the end of a rental period. The parties can modify this procedure in the rental agreement. Security Deposits A property owner must return the full amount of the security deposit, less any amounts properly withheld within 21 days after any of the following: 1. If the tenant vacates on the date the rental agreement terminates, the date on which the rental agreement terminates; 2. If the tenant vacates the premises before the termination date of the rental agreement, the date on which the tenant’s rental agreement terminates or, if the property owner re-rents the premises before the tenant’s rental agreement terminates, the date on which the new tenant’s tenancy begins; 3. If the tenant vacates the premises after the termination date of the rental agreement, the date on which the landlord learns that the tenant has vacated the premises; 4. If the tenant is evicted, the date on which a writ of restitution is executed or the date on which the landlord learns that the tenant has vacated the premises, whichever occurs first. 104

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A property owner must make the security deposit check payable to all tenants who are parties to the rental agreement unless the tenants designate a payee in writing. When multiple tenants are renting a property, most property owners will request that the tenants designate a payee at the time the tenants execute the lease or rental agreement to facilitate the later return of the security deposit. Security deposits may be withheld for any of the following reasons: 1. Tenant damage, waste or neglect of the premises. 2. Unpaid rent for which a tenant is legally responsible. 3. Payment that a tenant owes under the rental agreement for utility service. 4. Unpaid mobile home parking fees. Security deposits may not be withheld for normal wear and tear. This means a property owner cannot withhold money from a tenant’s security deposit for routine carpet cleaning. Tenant Remedies Property owners who violate the Wisconsin rental laws can face a variety of legal consequences. The tenant may choose to invoke a private remedy, involving a lawsuit against the property owner. A tenant who seeks a private remedy may be able to recover twice the amount of the loss, together with costs and attorney’s fees. DATCP could also begin legal action to obtain an injunction to stop the prohibited behavior or an order of restitution. DATCP or any district attorney may commence a civil forfeiture action against a property owner who violates ACTP 134. The court may impose civil forfeitures of up to $10,000 per violation. A property owner who violates ATCP 134 may be fined up to $5,000 or sentenced up to a year in jail, or both. DATCP may ask a district attorney to initiate a criminal prosecution.

Condominiums

A broker and the parties use different forms, sellers have some additional disclosure obligations, and buyers have slightly different rescission rights when the transaction involves a condominium. Condominium refers to a form of ownership, not a dwelling style. Parties can own any variety of property in condominium form including boat slips in a marina, space in an airplane hanger, or even vacant parcels. When dealing with condominiums as dwellings, a broker uses a WB-4 Residential Condominium Listing Contract to list the unit and a buyer uses the WB-14 Residential Condominium Offer to Purchase. A sellers of a condominium must comply with seller disclosure obligations and provide condominium documents to prospective buyers from whom the seller has accepted an offer. The required condominium documents are found in Chapter 703 of the Wisconsin Statutes. They include the declaration, bylaws, articles of incorporation, a budget, and an executive summary. Executive Summary The executive summary gives a potential buyer an index to the disclosure materials. There is not a state-approved executive summary form. A representative from the condominium association should prepare the summary, which should identify the unit and include the name and address of the condominium association, a description of parking, pet rules, whether the unit can be rented, reserve account information, and other information necessary for a buyer to navigate the condominium documents. A condominium seller must include a copy of the executive summary following the index in the condominium disclosure materials and must attach a copy as an addendum to the seller’s condition report.

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Condominium Addendum to the Seller’s Condition Report Sellers of condominiums must include a condominium addendum with the seller’s condition report. There is not a state-approved condominium addendum to the condition report. The addendum should supplement the seller’s information in the condition report with the unit address and description, seller contact information, and association management information. Condominium Documents A seller should provide a cover sheet, an index, and a table of contents for the condominium documents. The executive summary should be included right after the index. The seller must provide the condominium documents within 10 days of accepting an offer and no later than 15 days before closing. A buyer may rescind an offer to purchase a condominium unit, without stating any reason and without liability, within five business days following receipt of the condominium documents. If the buyer receives condominium disclosure documents that are missing one or more required documents, the buyer has five business days to either rescind the offer in writing or to request the missing documents. If the buyer does not rescind or request the missing documents, the documents are deemed satisfactory and the buyer does not have a right to rescind based on the condominium documents.

Vacant land

When listing a piece of vacant land, a broker uses the WB-3 Vacant Land Listing Contract-Exclusive Right to Sell. As with a residential listing, a broker is required to make an inspection of the property. A seller of vacant land also must complete a disclosure report detailing the seller’s knowledge of the property’s condition. There is not a state-approved form for a seller’s vacant land disclosure report. A seller has 10 days to provide the disclosure report to the buyer after accepting the buyer’s offer. If the seller does not provide a report, the buyer has two business days to rescind the offer. If the report discloses a defect of which the buyer was not aware or if the report is not complete, the buyer has two business days to rescind the offer. WB-13 Vacant Land Offer to Purchase The WB-13 provides many pre-printed standard contingencies that a buyer might want to use when making an offer on a parcel. A buyer may still need the assistance of an environmental expert, an attorney, or a developer to consult with when drafting the terms of the offer. Each transaction will require a careful review to see which contingencies a buyer needs to include in the offer and whether the pre-printed contingencies are sufficient or whether the buyer needs to use additional addenda to draft an effective offer.

Commercial properties

Commercial real estate means any real property other than real property containing 8 or fewer dwelling units, real property zoned for residential purposes that does not contain any buildings or structures, or real property that is zoned for agricultural purposes. Commercial property includes things like warehouses, factories, sports arenas, and shopping malls. Commercial transactions must be distinguished from business transactions. When a business opportunity is being sold, a broker uses a business listing and a buyer uses a business offer. Business sales involve the sale of the business’s assets but do not necessarily involve real property. A commercial transaction will involve the sale of real property alone and not include business assets. For example, the sale of a supper club is a business transaction if it includes the kitchen equipment, furniture, liquor inventory, accounts receivable and payable, a transfer of the liquor and restaurant licenses, and the goodwill of the club name. It is a commercial transaction if it involves only the sale of the supper club building and lot.

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The distinctions between a commercial and a business transaction are not always so clear. If a buyer intends to use a property for a purpose other than its current use, it is probably a commercial transaction. If assets like licenses, leases, equipment, inventory, and accounts are included, it is probably a commercial transaction. When listing a commercial property, a broker uses the WB-5 Commercial Listing Contract - Exclusive Right to Sell. This listing is similar to other listing contracts. It contains the necessary broker disclosure to client language and allows the seller to select from single agency, multiple representation with designated agency, or multiple representation without designated agency. When selling a commercial property, the law does not require a seller to complete a real estate condition report. Brokers must still obligated to ask a seller about the condition of the property and ask that the seller respond in writing. Brokers must comply with their REEB 24.07 inspection duties and inspect the property for readily observable material adverse facts. The listing contract includes an affirmation from the seller that the seller has the authority to convey the property. If an individual owns the property, the individual has the right to convey it. If a corporation, non-profit, partnership, LLC, or some other business entity owns the property, whether the seller has the right to convey it will depend on the form of business entity and the seller’s relationship to that entity. If the seller is a business entity, the seller agrees to provide the broker, within 10 days of the date of the listing, with documents showing that the sale of the property has been authorized by the entity. A buyer writing an offer on a commercial property uses the WB-15 Commercial Offer to Purchase. This form is similar in structure and content to the WB-11 Residential Offer to Purchase but contains items specific to commercial transactions such as providing estoppel letters and a proposed use contingency. Estoppel letters are letters from tenants of a commercial property certifying facts about the tenancy. The letters usually include information about rents, security deposits, and lease expiration dates. Attorneys usually draft estoppel letters for commercial transactions. Brokers do not draft the letters for parties. The offer also includes a document review contingency, environmental contingency, and other contingencies that will be important in a commercial transaction.

Business Opportunities

A business transaction involves the sale of a business opportunity or an ongoing business. Business transactions will include business assets such as inventory, equipment, furniture, accounts receivable, goodwill, trade names, licenses, and personal property. Business sales may or may not include real property. If the business transaction does include real property, the licensee must comply with the licensee’s inspection and disclosure obligations, which require the licensee to inspect the property for readily observable material adverse facts and ask the seller to respond in writing to the licensee’s inquiry of the condition of the property. As with a commercial property, the law does not require the seller to complete a real estate condition report but the listing broker must still ask the seller to respond in writing about the condition of the property. If the seller will not complete a real estate condition report, the licensee should modify the listing contract to strike out language indicating that a real estate condition report is attached. When listing a business, whether it includes real property or not, the listing broker uses the WB-6 Business Listing Contract - Exclusive Right to Sell. When a buyer writes an offer on a business, the buyer will use either the WB-16 Offer to Purchase - Business with Real Estate or the WB-17 Offer to Purchase - Business without Real Estate.

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Agricultural Properties

The sale of farms can be complex, as the sale often involves livestock, equipment, growing crops and real estate. Due to the complexity and a broker’s market, a broker may specialize in agricultural properties and farms. To list a farm, a seller and a broker use a WB-2 Farm Listing Contract - Exclusive Right to Sell. This listing contract is similar to the other state-approved listing contracts with differences to account for the nature of the property. For example, the definition of “Fixture” includes perennial crops, crop irrigation systems, barn cleaners, and other farm equipment. The “Fixture” section of the listing also includes a note to a seller to address annual crops, which are not fixtures and not part of the purchase price unless the parties agree otherwise. A buyer uses a WB-12 Farm Offer to Purchase to write an offer for a farm. Because of the complexity that a farm transaction may involve, the pre-printed terms of the WB-12 might not fit every situation but buyers can modify the form or use addenda as needed to draft the appropriate offer for their transaction. Because the nature of a farm can be so varied, the WB-12 Farm Offer to Purchase is a mixture of provisions drawing upon the best of the residential, vacant land and commercial offers with references to agricultural issues sprinkled throughout.

Historic properties

Historic properties do not involve specific listing contracts or offers like commercial, business, or agricultural properties but historic properties have their own unique considerations that brokers must be aware of when engaging these transactions. Whether a broker can specialize in historic properties or make it a part of the broker’s practice will depend on the broker’s market. Some cities and towns have entire districts devoted to historic properties where others may only have a few. Having a property listed in a historic register can have economic benefits for owners by increasing property values and providing significant tax breaks. A broker who specializes in historic properties can help parties understand the facts about owning a historic property and the potential benefits. Benefits of owning a historic property may include recovering a percentage of rehabilitation costs as a tax credit for pre-approved rehabilitation projects. Brokers do not need to be experts in the tax advantages to owning a historic property but having a general understanding of the potential tax implications can help brokers refer parties to resources such as the Wisconsin Historical Society or the Department of Revenue for additional information.

Auctions

Selling property by auction is an alternative to listing it with a broker. An auction has predetermined time frames for marketing and holding the auction. A seller can choose to have an “absolute” or a “reserve” auction. Absolute means that no matter what bids are received, the seller accepts the highest bid. A reserve means that the seller has a minimum amount that must be offered before the seller will agree to sell. A seller can have the option of choosing the highest bid even if the reserve as not met. Properties sold at auction may be bank-owned properties, investor-owned properties purchased in bulk, or even new properties. Sellers are attracted to auctions because they are quick, efficient, public and generally set a valid market price. Auction properties are almost always sold in “as-is, where-is” condition. A prospect should inspect a property before bidding on it. Most auction companies hold open houses before the auction and provide a bidder’s package to prospective bidders. The bidder’s package normally includes the contract that will be used by the winning bidder to purchase the property. Prospects can take the contract to their attorney for review before the auction. The bidder’s package may also contain copies of a home inspection report, a survey, floor plans, and a title report. The winning bidder will have approximately 30-45 days after acceptance to secure funding and close.

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Wisconsin requires auctioneers to be registered after passing an exam. Registered auctioneers may “call an auction” for the sale of real estate but cannot draft the necessary real estate forms unless they also hold a real estate license. Auctioneers can not negotiate with prospective buyers other than conducting the auction and cannot distribute information about the real estate or conditions affecting the real estate unless that information was provided by the owner or the owner’s agent. A broker cannot call an auction unless the broker is also a registered auctioneer. A broker that holds a real estate license and is a registered auctioneer can call the auction and prepare the paperwork for the parties as long as the broker continues to observe all the broker’s real estate duties and obligations such as inspection and agency disclosure.

Mobile homes

Mobile homes are real estate if they are set upon a foundation, on land owned by the mobile home owner, and are connected to utilities. If a mobile home is real estate, a broker can use the standard state-approved listing contracts and offer to purchase used in a residential transaction. If the mobile home does not have all three elements required to be considered real property, the mobile home is a vehicle, which is personal property. This means that to sell the mobile home, the person must have a license as a mobile home dealer. If a person sells more than one in a year, the person needs to be licensed as a dealer. State rules permit a real estate broker to assist in the sale of one mobile home each year without holding a mobile home dealer license. Although the broker could assist in the marketing of the mobile home, there would be no approved forms appropriate for use by the broker in documenting the sale agreement.

Time-Shares

To list a time-share, a broker uses a WB-8 Time Share Listing Contract. The WB-8 does not contain the state mandated broker agency disclosure language. If a broker is using this listing contract, a separate form providing broker disclosure of agency language must be provided to the person listing the timeshare. To purchase a time-share, a buyer uses a WB-26 if purchasing from the developer or a WB-27 if purchasing it from a non-developer.

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Answer the following questions. If you need to, refer to the previous summary. ____________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________

1. In what kind of real estate transactions can a real estate licensee participate?

___ ______________________________________________________________________ ______________________________________________________________________ ________________________________________________________________________ 3. Where do parties negotiate responsibility for rental weatherization? ___________________________ ________________________________________________________________________ ________________________________________________________________________ 2. When a state-approved form does not exist for a broker’s transaction, which form does the broker use?

___________ ________________________________________________________________________

4. What form does a broker use to have the authority to look for tenants for a property owner?

_______________________________ ________________________________________________________________________ ________________________________________________________________________

5. Who can draft a broker’s property management agreement?

6. What are the three types of accounts a broker as property manager can use to deposit rents and security deposits? _________________________________________________________________

________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________

7. What must a licensed rental property owner do to be able to hold security deposits in the licensee’s personal account? _________________________________________________________________

________________________________________________________________________ ________________________________________________________________________ _______________________________________________________________________

_________________________ ________________________________________________________________________ ________________________________________________________________________

8. When must a property owner provide a tenant with a check-in sheet?

___________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________

9. What charges can a property owner withhold from a tenant’s security deposit?

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10. How many days does a seller of vacant land have to provide a buyer with a vacant land disclosure report?

________________________________________________________________________ _______________________________________________________________________ ________________________________________________________________________

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11. What properties are commercial real estate?

________________________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________

12. What items will be included in a business sale?

___________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________

13. What does a broker need if a broker wants to conduct an auction?

______________________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________

14. When is a mobile home considered real property?

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Financing

F

inancing

plays a part in most real estate transactions. Some buyers do not need to obtain financing to purchase a property but most buyers, whether residential or commercial, need to borrow money from a lender, liquidate an investment, or obtain financing through a government program to purchase property. Sellers need to understand the financing process so they can understand terms of offers and the advantages or disadvantages to accepting offers with various financing terms. Brokers can help both buyers and sellers by being aware of the impact financing has on a transaction and being able to provide an overview for parties of the financing world as it connects to real estate transactions. Brokers will also be fundamental in helping both buyers and sellers understand the valuation process so that sellers can have a realistic expectation of how much to ask for property and buyers can understand why a property is listed for a particular amount.

Valuation of Property

There are several methods real estate professionals use to analyze a property’s value, and depending on who is making the assessment of value, there may be many different opinions of a property’s value. Determining the value of commercial or investment properties or vacant land will depend on may other factors that are beyond the scope of this course. Comparative Market Analysis When evaluating a property’s market value, real estate professionals will compare the subject property to comparable properties. The comparable properties will include active, pending and expired properties. An active property is currently listed and a pending property is one where the seller has accepted an offer and the parties are just waiting for the closing date. An expired property is one that was listed but did not sell during the term of the listing contract. A broker will perform a comparative market analysis for a seller to arrive at a probable market value. A market analysis compares similar properties that have recently sold to a subject property using information that is available to the public as well as information from local multiple listing services if the broker has access to that information. The broker’s comparative market analysis will account for differences between the subject property and the properties used for comparison. It can give a seller a starting place for determining what a seller wants to use as a list price and also give a seller an idea of how much the seller should be willing to negotiate between the list price and what a buyer offers for a property. Brokers will compare the subject property to a recently sold comparable property and adjust the price for any dissimilarities. Broker Price Opinions Depending the property, a broker may provide a broker price opinion instead of or in addition to a comparative market analysis. Consumers and even other real estate licensees may use “broker price opinion” interchangeably with “comparative market analysis” but they are different valuations of a property. Both provide an estimation of the probable selling price of a property and both must be conducted by licensed real estate professionals. An individual homeowner is more likely to use a traditional comparative market analysis when beginning the process of determining a listing price. A lender might start with a broker price opinion when the lender needs to determine an estimated value for a property. A broker price opinion is similar to an appraisal but is performed by a real

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estate broker rather than a licensed appraiser. A party may use a broker price opinion instead of an appraisal where the expense and time needed for an appraisal is not necessary for the party seeking the opinion. Appraisals An appraisal is conducted by a licensed appraiser and is used in the lending process to ensure that the value of a home is equal to or greater than its purchase price. An appraiser is an independent party trained and certified to provide an unbiased estimate of a property’s value. Lenders typically hire appraisers to provide an independent opinion of the property’s value so the lender can determine if the property will sell for at least the amount borrowed in the case that a buyer defaults on the loan obligations. Brokers and appraisers contribute similar services to a transaction but their roles are not identical. Neither a broker by a comparative market analysis or a broker price opinion or an appraiser by an independent appraisal create value but both develop opinions of value based on the current performance of the real estate market. The biggest difference between a broker’s valuation and the appraiser’s appraisal is objectivity. Brokers and sellers both have an interest in what they determine to be the market value for a property. Appraisers do not have an interest in the value of the property.

The Lending Process

Most buyers need to obtain lending to purchase a property. The terms of the financing, the source of the financing, and whether a buyer needs to make an offer contingent on receipt of financing will vary among transactions. Brokers need to be able to provide sellers and buyers with an overview of the lending process so that the parties can plan the transaction and observe deadlines. Finding a Lender Lender options include banks, credit unions, savings and loan institutions, mortgage companies, or state and federal loan sources. A buyer’s satisfaction with a lender will depend on interest rates, purchasing points, closing costs, location of the lender, and whether the lender will issue a loan according to the buyer’s needs. Mortgage brokers are firms or individuals who match borrowers with lenders. Borrowers using a mortgage broker pay for the service provided by the mortgage broker. Mortgage brokers accept loan applications from borrowers and submit them to lenders. Mortgage brokers do not generate or service loans for borrowers but may receive compensation from lenders from matching borrowers to lending sources. Obtaining a Mortgage Pre-qualification is the process of a buyer who is seeking to borrow funds providing a lender with information about the buyer’s worthiness for a loan. A buyer seeking pre-qualification should be prepared to submit information about income, debts, and assets. Pre-qualification can help buyers understand what size, features, and price they can reasonably afford in a home. Pre-approval is where a lender commits to financing a purchase up to a certain amount. Pre-approval is not guaranteed financing. A borrower must still apply for a mortgage. Lenders compare a buyer’s financial profile to the amount the buyer wants to borrow. Comparison will include looking at a buyer’s: 1. Income; 2. Debts; 3. Assets; and 4. Credit history.

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Lenders will measure a buyer’s debt-to-income ratio, which is a buyer’s monthly income compared to monthly debts. Lenders will examine a buyer’s credit report. Borrowers can request free credit reports once annually from the main credit reporting agencies. Buyers will consider the following mortgage features: 1. Prepayment penalties; 2. 3. 4. 5. 6. 7. 8. 9.

Additional fees; Annual percentage rates’ Finance charges; Points paid to a lender to obtain a lower interest rate on a loan; Number and dollar amount of each payment; Payment due date; Collateral; and Total dollar amount of payments.

Sources of Financing

Buyers generally obtain financing for a real estate transaction in the form of conventional financing, a non-conforming loan, a government-sponsored lending source, or seller financing. Each lending relationship has different eligibility guidelines, interest rates, and terms. Buyers who plan on financing a transaction with a loan should contact the lending source early in the home-buying process because it can take a long time. Brokers are not responsible for finding financing for a buyer but knowing about the various sources of financing may help a broker provide a buyer with information needed to explore eligibility for available financing. Conventional Financing Banks, credit unions, and savings and loans provide conventional financing. A conventional loan is for 80% of the purchase price of a property and a buyer has the other 20% of the purchase price in cash for a down payment. A conventional loan is secured by the real estate and the promissory note is secured by the borrower’s ability to pay. The lender uses the appraisal of the property and the borrower’s credit worthiness to estimate the risk of lending. If a borrower has less than 20% down, the lender will usually require private mortgage insurance. A borrower pays a premium for private mortgage insurance and the lender is insured for part of the borrowed amount. The private mortgage insurance has separate underwriting guidelines and borrowers pay a monthly fee as long as the insurance is in place. Borrowers can usually request that a lender remove the private mortgage insurance once the borrower has 25% equity in the property. The premium is based on the amount of money a borrower has for the down payment. To obtain a mortgage loan, a buyer pays financing charges including an origination fee, which is what a lender charges to cover the costs of issuing the loan. Origination fees vary depending on the lender. A mortgage contract is the lender’s lien on the property and the borrower’s promissory note. The terms of a borrower’s loan might include a ­prepayment penalty, which is a charge a lender imposes on a borrower who pays off a mortgage early. Lenders often charge prepayment penalties for only a portion of a loan term and may waive the penalty if the buyer is obtaining a new loan or a new property with the same lender or is refinancing the current loan. The buyer’s mortgage contract will contain a defeasance clause, which requires a lender to remove the lender’s lien from a borrower’s property when the borrower repays the loan. A lender removes the lien by recording a ­satisfaction of mortgage in the public records.

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A mortgage agreement will usually contain an acceleration clause that permits the lender to demand the entire balance due if the borrower defaults on the loan term. Many credit card agreements and car loans also have this feature. Mortgage loans payments are based on amortization of the loan, which means it is a loan paid off over time. A mortgage loan may have a fixed or an adjustable rate. Other Loans from Conventional Sources A balloon loan is a short-term loan with payments amortized over a period longer than the term of the loan. A borrower’s final payment is a balloon payment. A balloon payment is larger than other payments and satisfies the debt in full. The interest rate on a balloon loan may be lower than for a conventional fixed or adjustable rate loan, which makes it attractive to borrowers. Balloon loans benefit lenders because borrowers often refinance before the balloon payment is due and the lender earns fees originating and financing the new loan. A reverse mortgage is a Housing and Urban Development (HUD) loan program that allows older homeowners to withdraw equity from their homes in the form of monthly payments from a private lender to the homeowner. Reverse mortgages are only available for homeowners age 62 and older and the property must be the homeowner’s principal place of residence. The homeowner retains title to the property. Borrowers must obtain lending counseling before a lender can provide a reverse mortgage. Reverse mortgages may be appropriate for borrowers who have equity resources in a home but have limited income due to retirement or other conditions creating a fixed income. The borrower must repay the loan if the borrower sells the home, moves out of the home, breaches the mortgage terms, or dies, in which case the borrower’s estate repays the loan. A bridge loan is a second mortgage on a unsold home to pay for a down payment on a new home. A buyer might apply for a bridge loan when a buyer wants to close on a new property but has not yet sold an existing property and lacks the funds to make a down payment on the new property. Bridge loans are common in real estate transactions. Seller Financing Sellers may consider financing the sale of property when lending conditions are preventing buyers from obtaining financing from more traditional sources such as banks, credit unions, and savings and loans. When a seller provides financing, the seller is a secured creditor for unpaid installments from the buyer and the sold property provides the security to back the financing. Two common forms of seller financing are the land contract and a purchase money mortgage. Land Contracts A land contract is seller-financing where a buyer/vendee makes installment payments for the purchase price of the property to a seller/vendor over the term of the contract. This is also known as an installment contract or a contract for deed. Land contracts can be short term where the payment amounts are amortized over a long period but the buyer makes a final balloon payment. Land contracts can also be long term where a buyer makes identical monthly payments over a term of years. A party does not have to record a land contract for the contract to be valid but to protect against third party claims, parties should record land contracts. Attorneys, brokers, and parties to a transaction can draft land contracts. Remedies for buyer default on a land contract: 1. Voluntary termination. 2. Quiet title action. 3. Sue the buyer for the unpaid purchase price. 4. Sue the buyer for foreclosure by sale. 5. Strict foreclosure.

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Seller Provided Mortgage A seller can lend money to a buyer for the purchase price of the property and receive a promissory note and a mortgage from the buyer to evidence the debt and secure the payments on the note. The buyer pays installments to the seller in the same way a buyer would pay a monthly mortgage payment to a financial institution in the case of a conventional loan. A buyer receives the deed and title to the property at closing. If a buyer defaults on a seller provided mortgage, the seller must follow the foreclosure process like a conventional lender would in the case of borrower default. A purchase money mortgage is another version of seller-financing where a seller provides a loan to the buyer for a portion of the purchase price rather than as a full mortgage on the property. The seller holds a mortgage from the buyer, which is usually a second mortgage to the lender-held first mortgage. A buyer may use a purchase money mortgage to make up the difference between the buyer’s down payment and the amount of the lender-held first mortgage. The buyer receives legal title at closing. The Secure and Fair Enforcement Mortgage Licensing Act of 2008 (SAFE Act) The SAFE Act required states to enact legislation in accordance with the SAFE Act’s nationwide standards for mortgage loan originators. This meant modifications to Chapter 224 of the Wisconsin Statutes. The statutes define the following terms: 1. Residential mortgage loan as “any loan primarily for personal, family, or household use that is secured by a lien, mortgage, or equivalent security interest, on a dwelling or residential real property located in this state.” 2. A dwelling is “a residential structure or mobile home which contains one to four family housing units, or individual units of condominiums or cooperatives.” 3. Residential real property is defined as “real property on which a dwelling is constructed or intended to be constructed.” 4. Mortgage loan originator is defined as “an individual who, for compensation or gain, takes a residential mortgage loan application or offers or negotiates the terms of a residential mortgage loan.” After consultation with the Wisconsin Department of Financial Institutions (DFI), the WRA has confirmed that if a seller is selling a personal residence using seller provided financing, the seller and the licensee negotiating the transaction do not qualify as mortgage loan originators under the definition and therefore, do not need to obtain licensure as mortgage loan originators. DFI has indicated that they will analyze a transaction using the following basic tests to determine if a party needs to obtain licensure as a mortgage loan originator: 1. If the property is the seller’s residence, then it is an exempt transaction and neither the seller nor the broker needs a mortgage loan originator or other mortgage license. 2. If the property is not the seller’s residence and the buyer is not purchasing the property for the buyer’s residence, then neither the seller nor the broker needs a mortgage loan originator or other mortgage license. 3. If the property is not the seller’s residence and the buyer is purchasing the property to be used as the buyer’s residence, then the seller and the broker need to have a mortgage loan originator or other mortgage license.

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Government Financing Some buyers may qualify for funding through government financing. Government financing may refer to direct lending to a borrower from a federal or state agency but more commonly, it refers to government-backed financing from a conventional lender. A federal or state government may insure or guarantee funds that a lender issuing to a borrower. The lender incurs less risk because of the government insurance or guarantee and may be more willing to lend to a borrower who might not otherwise be eligible for conventional financing. Government financing program eligibility guidelines and the funding process vary with the program and licensees should direct buyers with government financing questions to participating lenders. Federal Housing Administration Loans The Federal Housing Administration (FHA) provides mortgage insurance to private lenders who lend to borrowers who might not be eligible for conventional financing. The borrower’s ineligibility for conventional financing often stems from a lack of a 20% down payment, which does not prohibit eligibility for an FHA loan. The Department of Housing and Urban Development (HUD) operates the FHA loan program. FHA does not directly issue loans to borrowers but provides insurance to private lenders that extend the credit to eligible buyers. The insurance protects the lender against potential loss if the borrower defaults on the loan. Lenders can charge an FHA insurance premium and once a borrower builds sufficient equity in the property, the borrower does not have to carry the insurance. FHA will generally require an appraisal before agreeing to provide insurance for lending on a property. The FHA also allows funds to go towards the cost of an independent third-party home inspection. FHA interest rates are set by the open market and an FHA lender can charge points. FHA has regulations that set the standards for the type and construction of buildings and the cost of repairs is generally negotiable between the buyer and the seller. FHA allows up to 100% of the closing costs to be financed with the loan. Veterans Administration Loans Veterans Administration loans are a product of the GI Bill of Rights, which Congress enacted in 1944. VA loans provide veterans with low-interest loans for the purchase or construction of homes, mobile homes, or condominiums. VA loans are guaranteed, which means if a borrower defaults, the lender forecloses, and there is a remaining deficiency, the VA will compensate the lender for losses incurred in the foreclosure and the subsequent sale of the property up to the limit of the guarantee. VA loans can be assumable loans. If a loan is assumable, a buyer can assume a seller’s mortgage loan. The buyer acquires title to the seller’s property and agrees to become ­personally liable for the terms and conditions of the existing mortgage. A buyer may choose to assume a seller’s existing loan if current interest rates are higher than the interest rate on the seller’s mortgage. Whether a mortgage contract permits another party to assume the loan will depend on the terms of the loan agreement. Most mortgage agreements contain a “due on sale” clause, which requires a borrower to repay a loan in full before the borrower can transfer title to the property. If a mortgage contains a due on sale clause, another party cannot assume the terms of that mortgage. To be eligible for a VA guaranteed loan, the applicant must be a veteran with a Certificate of Eligibility. The Certificate of Eligibility sets the maximum loan guarantee amount to which the veteran is entitled. A borrower will pay origination fees and the VA will conduct an appraisal and a Certificate of Reasonable Value for the property stating the current market value based on the appraisal. A VA loan must be for a veteran’s primary residence.

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United States Department of Agriculture (USDA) Rural Development Loans The USDA’s Rural Development program is a federal lending program under the Department of Agriculture. Rural Development offers assistance to aid low-income and moderate-income rural residents ­purchase, construct, repair, or relocate a dwelling and related facilities. A borrower must qualify financially and if a borrower’s income increases above eligibility limits, the borrower will have to refinance the purchase through a different source. Rural Housing provides two categories of loans, USDA Rural Housing Guaranteed Loans and USDA Rural Housing Direct Loans. For guaranteed loans, a private lender issues and services a 30-year loan and the USDA guarantees 90% of the loan in the case of borrower default. Under the terms of the program, an individual may borrow up to 100% of the appraised value of the home, which eliminates the need for a down payment. Applicants for loans may have an income up to 115% of the median income for the area. Applicants must not have access to adequate housing but must be able to afford the mortgage payments, including taxes and insurance, and have reasonable credit histories. For a USDA Rural Housing Direct Loans, the USDA issues the loan directly to the borrower. Most eligible borrowers must have income below 80% of the median income level for the community. To be eligible, an applicant must be without access to adequate housing and be able to afford the mortgage payments including taxes and insurance. Eligible borrowers can use the loans to purchase a home, build, repair, renovate or relocate a home, or to purchase and prepare construction sites for new construction.

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Answer the following questions. If you need to, refer to the previous summary. ______________________________ ________________________________________________________________________ ________________________________________________________________________ ______________________________________________________________________

1. What are three methods used to determine a property’s value?

__________________________________________________ _______________________________________________________________________

2. Who can complete an appraisal?

___________________________ ________________________________________________________________________ ________________________________________________________________________

3. What is the difference between pre-qualification and pre-approval?

__________________________________________________ ________________________________________________________________________ ________________________________________________________________________

4. What is conventional financing?

_______________________________________ ________________________________________________________________________ ________________________________________________________________________

5. _How does a lender satisfy a defeasance clause?

____________________________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ _________________________________________________________________________

6. What are some forms of seller financing?

________________________________________________________ ________________________________________________________________________ _______________________________________________________________________

7. What is a bridge loan?

______________________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ _______________________________________________________________________

8. What are some sources of government financing?

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Alternative Transfers

Alternative transfers

refers other ways that ownership is transferred from one party to another where there is not a traditional sale of a piece of property from a seller to a buyer. The transfers may be less common than a standard residential transaction such as with exchanges or they may be a step in a sale transaction as in the case of an option to purchase. With the case of foreclosures and short sales, the transfer occurs involuntarily as a result of distressed circumstances for the property owner. Bills of sale transfer personal property as part of a real estate transaction but it is actually a separate transfer from the transfer of the real property from the seller to the buyer. Purchasing ownership in a cooperative is a stock transaction and installment sales most often take the shape of a land contract though parties could negotiate a different installment plan such as a rent-to-own arrangement using a lease with an option.

Exchanges

An exchange is a tax planning tool where a property owner can exchange one piece of property for another and defer payment of the tax that would normally be due from the income realized from the sale of the property. To qualify for the tax benefit, the property that is exchanged and the property that is received must be held for productive use in a trade, business, or for investment. Exchanges are also called 1031 Exchanges, which refers to the section of the Internal Revenue Code that permits the exchanges and lists the rules. The property exchanged must be “like-kind,” which refers to the kind or class of property such as an exchange of investment property for business property. An exchange of a personal residence for a business is not an exchange of “like-kind” property and would not qualify for the tax benefit. There are two primary types of exchanges permitted under section 1031 of the Internal Revenue Code: the simultaneous like-kind exchange and the deferred or delayed exchange of like-kind real estate, often referred to as a Starker exchange. The distinguishing feature of each is the timing of the actual real estate transfer. Both exchanges permit parties to defer the payment of capital gains taxes due as a result of income realized from the transfer. To execute an exchange, the parties use a WB-35 Simultaneous Exchange Agreement, which is the state-approved form for exchanges. The exchange agreement is designed for use in simultaneous exchange transactions. The form provides a tax warning to the parties that is included in the tax qualification contingency. The exchange agreement warns that an exchange transaction may have significant tax consequences and urges the parties to seek their own tax advice. The tax qualification contingency allows a party to make the exchange transaction contingent upon receiving a written opinion from a qualified tax advisor that the transaction meets the requirements of an IRC § 1031 like-kind exchange. The qualified tax advisor may be an attorney, CPA, or other professional designated by the parties. If the written opinion states the transaction does not qualify for § 1031 benefits, it will fail. The parties may need to include a real estate condition report as part of the transaction. If it is a commercial or industrial property, the party can complete a real estate condition report but the law does not require it. If it is a property containing one to four residential dwelling units or a parcel of vacant land, the seller must complete a real estate condition or disclosure report. A listing broker must ask all sellers to comment on the condition of the property and ask that the seller respond in writing.

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A broker earns a commission under a listing contract when a seller exchanges or enters into a binding exchange agreement for all or part of the property. A broker should not assume competency to participate in an exchange. Exchanges can be complicated and a broker should make encourage parties to consult with tax professionals to ensure a proper exchange.

Options

An option is a contract where a seller agrees to sell the property if a buyer decides to buy it. If a buyer exercises an option, the seller is must sell the property according to the terms of the option. A buyer is not obligated to exercise the option. Parties can negotiate whether an option will be recorded and whether a party can assign the option rights. An option to purchase is an agreement to keep open, for a period of time, an offer to sell or lease real property. An option gives a buyer time to resolve questions of financing, title, or zoning before committing to purchase the property. A buyer may use an option to collect several parcels of land for development. A buyer usually pays the seller an option fee for the seller’s agreement not to sell the property for the term of the option. The option fee is usually not refundable if the buyer does not exercise the option. If the buyer exercises the option, the option fee is usually applied toward the purchase price of the property. A broker earns a commission only if a buyer chooses to exercise the option unless the seller and the listing broker have negotiated other terms. When a seller enters into an option with the buyer, the broker does not earn a commission, but the terms of the listing contract state that the broker earns a commission if the seller enters into an option and the buyer executes it, even if the buyer executes it after the termination of the listing contract.

Bill of sale

A bill of sale is a document used to transfer title to personal property. The WB–25 Bill of Sale is the stateapproved form that brokers should use for this purpose. The WB–25 warrants free and clear title to the personal property, except for any liens and encumbrances that are made exceptions to the warranty. It does not provide any warranties regarding the condition of the personal property. If such warranties are desired, the parties must provide for them in the contract. Personal property transferred as part of a real estate or business opportunity closing should be conveyed at closing by a bill of sale. If a schedule of personal property has been prepared as part of an offer to purchase, as in a rental property offer, a business offer, or a commercial offer, the parties can attach it to the WB-25 and reference it in the form. Although the use of a bill of sale is generally straightforward, lenders may be concerned with the inclusion of personal property in the purchase price. Lenders may ask brokers to write a residential offer to purchase, or to amend an accepted offer to purchase, to indicate that the personal property, such as appliances, are “left at the convenience of seller,” “are left without monetary consideration,” or “are of no value.” Some brokers may include one of these phrases or a similar phrase in their standard office addendum. Many lenders insist that it is legal to use this language in offers to purchase. The use of these phrases may be fraud or lead to a distortion and misstatement of the purchase price. Because a bill of sale transfers ownership of the property as soon as the document is given to the other party, a seller should not provide a buyer with a bill of sale until closing. If a seller provides a bill of sale to a buyer before closing and for some reason the parties do not close, the ownership of the personal property has already been transferred to the buyer even though the transaction did not close.

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Foreclosures

Foreclosure is the legal proceeding to terminate a borrower’s interest in property, initiated by the lender, either to gain title or force the sale of the property to satisfy the borrower’s unpaid debt. It is the process by which a bank takes a property from a defaulted borrower. Foreclosure law is state specific and the process for a mortgage foreclosure is established by Chapter 846 of the Wisconsin Statutes. A mortgage is a lien on a property. Liens are a claim or a charge on a property for payment of some debt, obligation, or duty. Liens are not ownership interests in the property and may originate from mortgages, taxes, judgments, unpaid construction costs, child support obligations, condominium or homeowner association fees, or other debts of the property owner. Most creditors will wait between 90 – 180 days after a property owner stops paying before filing a foreclosure action against the owner. During this time, the mortgage holder will attempt to communicate options and work with the owner to correct the delinquency and if they cannot resolve the issue, the mortgage holder will issue a formal notice of default on the terms of the note or mortgage. The notice will include a reinstatement payoff amount, which is the amount necessary to bring the account back into good standing. The amount will include all back payments, interests, and penalties to date. It is not the entire balance of the loan and differs from the owner’s redemption rights in the foreclosure process. If the lender continues with the foreclosure process, they will file a summons and complaint, which initiates the foreclosure lawsuit in circuit court. The summons notifies the defendant that a lawsuit has been filed and provides instructions to the defendant for filing an answer to the complaint. Most defendants receive only 20 days to file an answer to the complaint. The complaint will allege the factual basis for the foreclosure along with important information such as notice of the acceleration clause, entire balance amount due, type of property, whether property is currently owner-occupied, leased, abandoned, request for deficiency judgment or waiver of deficiency, and the requested redemption period. The foreclosure complaint may list parties in addition to the defaulting property owner. Additional parties may include a second mortgage holder, a junior lien holder, and spouses. The additional parties will be named in the complaint by the foreclosing party because the foreclosing party is asking the court to foreclose against all defendants whose rights, titles, and interests in the property are subordinate to the plaintiff’s interests. The complaint will usually state named defendants’ interests in the property and whether those interests are superior or subordinate to the plaintiff’s claim. The lender will then file a lis pendens, which is a notice of a pending lawsuit, at the register of deeds office in the county where the property is located. It is filed at the same time as the summons and complaint. The lis pendens gives notice to subsequent purchasers or lien holders that a foreclosure lawsuit against the property is pending and their interests may be barred. Most defendants fail to appear or fail to present a valid defense in foreclosure actions. If a defendant fails to appear or does not present a valid defense, the mortgage holder will obtain a judgment of foreclosure. The court’s judgment of foreclosure will establish the accelerated amount due, which continues to incur costs and interest throughout the process, the redemption period, and whether the lender may seek a deficiency judgment after the sale of the property. The redemption period is the time the court establishes for a debtor to pay the balance, costs, and attorney’s fees due under the debt obligation. The length of the redemption period depends on whether the property is a homestead or investment and whether the lender has agreed to waive a deficiency judgment. After the conclusion of the redemption period, if the property owner was not able to redeem, the sheriff will sell the property at a sheriff’s sale. The sheriff’s sale is usually held at the county courthouse and is open to the public. A high bidder at a sheriff’s sale must have 10% of the purchase price down at the time

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of the sale with the remainder due within 10 days of confirmation of the sale. The court then holds a confirmation hearing to confirm the sheriff’s sale. The judge has discretion to confirm or deny the bid price. If the bid amount is not enough to satisfy the judgment amount and confirmation of the sale will result in a deficiency judgment. There is no presumption that the bid amount constitutes fair value. The court will not confirm a sale that will result in a deficiency judgment until the court is satisfied that the bid amount constitutes fair value. The court will receive and approve a sheriff’s deed to transfer the property to the new owner. Property owners in Wisconsin can sell or redeem the property up to the confirmation sale.

Short sales

Brokers should not provide legal or tax advice but can inform prospective clients about potential alternatives to foreclosure. While not always likely, a seller facing potential foreclosure could always attempt to refinance, ask for a loan modification, use reserved assets to pay past-due amounts, or engage in a short sale. A lender may agree to a deed in lieu of foreclosure, where the owners can voluntarily give the property back to a mortgage holder and the mortgage holder does not pursue the foreclosure. Mortgage holders generally require that the seller try to sell the property for its fair market value for at least 90 days before considering this option. A deed in lieu of foreclosure may not be an option if there are second mortgages or other liens on the property due to title issues created by the additional liens. A short sale is the sale of a property where the proceeds from the sale will not satisfy all of the liens on the property and closing expenses, including a broker’s commission. A seller facing a short sale is referred to as being “upside down” in the property because if sold, the seller would still owe more on the property than is expected to be realized from a sale. A seller attempting a short sale will have to work with all lien holders to get them to accept less than the lien amount and release the lien on the property so that clear title can be given to the new buyer. When determining whether to take a listing in distress, a broker should prepare a net sheet on the property that details the estimated proceeds and expenses. Listing agents should verify lien information on a property with a “search and hold” by a title company to see what liens do appear on record. Sellers must understand the process of a short sale as well as what documentation and evidence of hardship a lender will require prior to permitting the short sale. Sellers must review mortgage agreements and advise the listing agent of any prepayment penalties that exist in the agreement. If the seller is already in a foreclosure action, the listing agent must evaluate the situation to determine if there is enough time to market the property and close on a short sale before a confirmation hearing. Sellers considering a short sale must understand the income tax liability that may be incurred due to the amount of debt forgiven and that a short sale will negatively affect the seller’s credit even if it prevents a foreclosure action. The short sale application process is paper driven and to help facilitate the sale, sellers must make sure all required documents are received by the loss mitigation department. Brokers may also need to prepare an accurate and complete comparative market analysis for submission to the lender. Brokers should get seller authorization to market the property and disclose that the seller is willing to engage in a short sale transaction. If a seller cannot negotiate with lenders or lien holders to permit the seller to retain an agreed upon commission for the listing broker, the seller may ask the broker to reduce or postpone receipt of the commission to minimize the seller’s shortage. Listing brokers cannot allow a deficient commission payment to stop a transfer or a closing. If a broker becomes aware that the broker’s commission will not be paid as a result of the lender’s terms for the short sale, the broker cannot stop the seller from transferring the property and proceeding with the closing of the transaction.

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Cooperatives

Cooperative ownership permits owners to purchase corporate stock in a corporation that owns a building. The stock owner leases the unit from the corporation. A cooperative owner does not own the unit like a condominium owner but rather owns stock in a corporation, which holds the building as the corporation’s main asset. The lender issues the mortgage to the corporation rather than to the group of tenants. The tenants are responsible for their share of the cooperative’s expenses, which is paid in the form of a monthly lease payment or rent. Voting in a cooperative is usually one vote pre unit. Cooperatives usually require board of director’s approval of any transfers of stock and leases to new owners. A Wisconsin real estate license does not permit a licensee to sell stock because it is not real property but if the sale of stock in a cooperative ownership building is incidental to the licensee’s real estate practice, the licensee can participate in the transfer.

Installment sales

Generally installment sales refers to land contracts though buyers and sellers could agree to any sort of installment arrangement. Land Contracts Brokers can draft a land contract using the State Bar of Wisconsin Form 11 Land Contract. Parties should be referred to an attorney to establish the terms of a land contract and if parties want to use a form or contract other than the State Bar form, a broker cannot draft it. Salespeople cannot use State Bar forms and brokers must make sure they are competent to draft the from for the transaction. A broker earns a commission when the seller and the buyer have an enforceable contract. Equitable title transfers to the buyer and the seller owes the broker a commission. Because the seller does not receive the entire purchase price at closing, the seller may not have the funds to pay the broker’s commission. A buyer usually pays a down payment or an initial payment on the land contract at or before closing. If a buyer’s down payment on a land contract is not enough to pay the entire listing broker’s commission, the seller and the broker may negotiate other arrangements. A seller may offer to pay part of the commission at closing and the remaining portion in installments as the buyer makes payments to the seller. A broker may want to include these provisions in the listing contract or amend the listing contract to reflect arrangements for an extended payment of a listing broker’s commission. Lease with Option to Purchase A seller and a buyer could create a different installment arrangement using a lease with an option to purchase. A lease with an option to purchase may be an arrangement a seller offers to a buyer who could potentially qualify for financing in the after some financial restructuring by the buyer. A lease with an option to purchase creates a “rent to own” arrangement. During the initial lease phase, the seller and the buyer enter into a lease agreement for the property. This gives the potential buyer time to rebuild credit history, save for a down payment, or otherwise stabilize the buyer’s financial picture. If a buyer is able to improve creditworthiness, the buyer would then apply for financing and exercise the option. The option to purchase creates a continuing promise to sell. If a buyer exercises an option to purchase and purchases the property according to the terms of the option, this creates an enforceable purchase contract.

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REAL ESTATE broker

Answer the following questions. If you need to, refer to the previous summary. ______________________________________ ________________________________________________________________________ ________________________________________________________________________

1. What is the state-approved form for an exchange?

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2. How does a buyer purchase the right to purchase property for a period of time?

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3. How does a party transfer personal property to another party?

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4. What is foreclosure?

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5. What is a short sale?

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6. What does a cooperative owner own?

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7. What are two examples of installment sales?

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