Chapter 16: Real Estate License Laws

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Chapter 16
Real Estate License Laws

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California Department of Real Estate
Issues real estate licenses
Regulates qualifications for licenses based on the Real Estate Law [part of the Business and Professions Code]
Conducts license examinations
Headed by Real Estate Commissioner
Has power to discipline real estate licensees
Brings actions against unlicensed persons
Issues public reports on new subdivisions

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Types of Real Estate Licenses
Real Estate Broker
Real Estate Salesperson
475,000 licensees as of September, 2010
Approximately 31% Brokers
Approximately 69% Salespersons
Down from high of approximately 540,000 in 2008

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Real Estate Broker’s License Requirement
Broker’s license required to receive compensation for representing another person in connection with certain real estate activities
Selling, buying, exchanging real property
Soliciting buyers or sellers or obtaining listings for the sale, purchase, or exchange of real property
Leasing real property
Soliciting, negotiating, or buying or selling loans secured by real property

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Salesperson licenses
Salespersons can perform activities that require a real estate broker’s license, but only when working under the supervision and control of a licensed real estate broker
A salesperson license is activated only after the supervising broker notifies the DRE that the broker has a written agreement with the salesperson that meets DRE requirements

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Broker/Salesperson Relationship
Broker must have a written agreement with each salesperson who works for the broker
must cover supervision, compensation, and duties
example: text pages 196-198
Brokers must supervise salespersons who work for the broker
Only brokers can contract with and represent principals (for example, sellers and buyers)
Salespersons working with a principal do so as agents of their supervising broker
Salespersons can receive compensation only from their broker
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More on the Broker-Salesperson Relationship
Real estate broker must keep the salesperson’s license in the broker’s office
Broker must return license to salesperson within 3 days after employment is terminated
Salesperson always treated as an employee or agent of the broker for DRE supervision purposes
Salesperson can be, and usually is, treated as an independent contractor for purposes of:
Income tax withholding
Social Security and Medicare taxes
Unemployment insurance and unemployment compensation
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Typical Real Estate Salesperson Compensation
A real estate salesperson is typically paid a portion of the commission that the salesperson’s broker earns from the salesperson’s efforts
Example 1: Broker agrees to pay a % of the commission earned by the broker from a listing agreement with a seller solicited by the salesperson
Example 2: Broker agrees to pay a % of the commission earned by the broker under a commission split with a listing broker when the salesperson located the buyer for the listed property
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Exceptions to Licensing Requirement
Persons dealing with their own property

Attorney rendering services for client
Resident apartment managers (only for renting apartments in complex)
Employees of banks, savings banks, credit unions, and insurance companies (only for loans made by their employers)
Mortgage loan brokers licensed by the Department of Corporations (only for loans)
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Penalties for Unlicensed Persons
Penalties imposed on unlicensed person:
Cannot file court action to collect compensation
Criminal penalties of up to $20,000 fine, 6 months jail, or both
Real Estate Commissioner can investigate unlicensed persons, local district attorney prosecutes
Brokers cannot compensate unlicensed persons or salespersons not employed by the broker. Penalties:
Loss of license
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Activities by Unlicensed Employees (Assistants)
Activities that can be performed by an unlicensed employee of a real estate broker under the control, direction, and supervision of the broker:
Assisting with an open house (handing out written information, placing signs, greeting the public)
Preparing a comparative market analysis
Providing written information about loan terms, conditions or qualification requirements
Arranging appointments with non-principals (appraisers, inspectors, etc.)
Meeting non-principals at the property
Preparing advertising
Preparing, delivering, or picking up documents

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Activities by Unlicensed Employees (Property Management)
Activities that can be performed by an unlicensed employee of a real estate broker engaged in residential property management (under the control, direction, and supervision of the broker):
Showing rental units to prospective tenants
Providing or accepting preprinted rental applications
Responding to inquiries from a prospective tenant concerning the completion of the application
Accepting deposits or fees for credit checks
Accepting security deposits and rents
Providing information about rental rates and other terms and provisions of a lease or rental agreement, as set out in a schedule provided by the broker
Accepting signed leases and rental agreements from prospective tenants
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Salesperson License Requirements
An applicant for a real estate salesperson license must:
be at least 18 years old
be a legal U.S. Resident
be honest and truthful
application can be denied for conviction of crime substantially related to qualifications
meet the education requirement
apply for and pass salesperson exam
complete a license application

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Salesperson Education Requirements
To apply for the exam after 10/1/07, an applicant must provide evidence of passing:
Real Estate Principles
Real Estate Practice, and
One elective course from the following list:

Real estate appraisal
Real estate finance
Real estate economics
Property management
Legal aspects of real estate
Business law

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Salesperson Examination
Current Fee: $60
Time allowed: 3 hours, 15 minutes
150 multiple choice questions
Passing rate: 70% (105 correct)
Calculators supplied by DRE for exam

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Salesperson License Application
After passing the exam, DRE will send a license application to the applicant
Applicant must return completed application and return it with:
the license fee (currently $245)
proof of legal residence
a live scan request (fingerprint request)
first get fingerprinted at a participating live scan service provider (separate fee)
a list of live scan service providers is available from a link on the DRE website
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Combination Application
Applicant can file a combination exam/license application
Must pay both fees (license fee not refundable)
Must submit all license documents (proof of legal residence, live scan request, evidence of education requirements)
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Broker’s License Requirements
At least 18 years old
Legal U.S. Resident
Meet education requirement (8 courses)
Meet experience requirement
Apply for and pass brokers exam
Complete license application
Pay application fee: currently $300
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Broker Education Requirements
Required Courses
Real estate practice
Real estate appraisal
Real estate finance
Legal aspects of real estate
Real estate economics or general accounting

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Brokers License: Experience Requirement
Two years full-time real estate sales experience or its equivalent
Full time = 40 hours per week
Part-time experience credited pro rata
Example: 4 years of experience at 20 hours per week
No credit for less than 10 hours per week
Examples of equivalent experience: title or escrow officer, appraiser, loan officer, contractor
Exceptions to experience requirement:
Four year degree: no experience required
As interpreted by DRE, degrees can be in any major
Technically, requires “specialization” in real estate
Member of California Bar
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Broker’s Examination
Fee: $95
Time allowed: 5 hours (2 sessions)
200 multiple choice questions
Passing rate: 75% (150 correct)
Calculators permitted, except:
no printing capacity
no alphabetic keyboard
no cell phone calculators

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License Renewals
Brokers and Salespersons both must renew their licenses every 4 years
Current license renewal fees:
Salesperson: $245
Broker: $300
Must meet continuing education requirement

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Continuing Education: First Renewal
Before renewing a salesperson license issued on or after 10/1/07, or renewing a broker license, licensee must complete 45 clock hours of CE, which must include:
3 hours each on ethics, agency, trust fund handling, fair housing
3 hours in risk management
18 hours consumer protection
18 hours consumer protection or consumer service
Salespersons licensed before 10/1/07 need complete only the 15 clock hours on ethics, agency, trust fund handling, fair housing on first renewal
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Continuing Education: Broker and Salesperson Subsequent Renewals
45 clock hours of CE required
a 6 hour course that includes ethics, agency, trust fund handling, fair housing, or
3 hours each in ethics, agency, trust fund handling, fair housing
3 hours in risk management
18 hours consumer protection
Balance of 45 hours in either consumer protection or consumer service
Renewals after 7/1/2011 require an 8-hour course that includes ethics, agency, trust fund handling, fair housing, and risk management
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Other License Activities
Real estate licensees can represent others for compensation in transactions involving:
Registered mobile homes (manufactured housing)
Minerals, oil, and gas transactions
Real estate loans
Special endorsement required for residential real estate loans
Business opportunities

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Real Estate Loan Transactions
Effective January 1, 2011, DRE brokers and salespersons who originate residential real estate loans must obtain a loan originator endorsement to their licenses
Loan originator is anyone who takes a residential mortgage loan application or offers or negotiates terms of a residential mortgage loan for compensation or gain
Residential real estate loans covered by new law are loans secured by 1-4 unit residential property
The Secure and Fair Enforcement Mortgage Licensing Act (SAFE Act) requires that loan originators be licensed at the state level and have a unique identifier number

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Loan Originator Licensing and Registration Requirements
Loan originator licensing requires:
A minimum of 20 clock hours of prelicensing education, including:
Three hours on federal law and regulations
Three hours on ethics, which must include instruction on fraud, consumer protection, and fair lending issues
Two hours on lending standards for the nontraditional mortgage product marketplace
A criminal background check
Passing a prelicensing examination
Loan originators must register with the Nationwide Mortgage License System and Registry and obtain a unique identifier number
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Loan Originator Endorsement Terms and Continuing Education
Loan originator license endorsements are valid for terms of one year, ending on December 31, and must be renewed each year
Continuing education requirements are a minimum of 8 hours of education approved by the Nationwide Mortgage Licensing System and Registry, which must include at least:
3 hours of Federal law and regulations
3 hours of ethics, including fraud, consumer protection, and fair lending issues
2 hours of lending standards for nontraditional mortgage products

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Business Opportunities
Defined: The sale or lease of the business and goodwill of an existing business enterprise or opportunity
Examples of business opportunities:
Retail stores
Restaurants and bars
Manufacturing facilities
Automobile service business
Printing shops
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Business Opportunity Transactions
The business may include:
Personal property
inventory, equipment, trade fixtures, accounts receivable
Assignment of a lease
Real property
value of expected continued patronage by the customers of the business

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Business Opportunity Sales
Sales prices often determined by review of financial statements for business
income statement – shows profit and loss for a specified period of time (for example, 1 year)
balance sheet – shows assets, liabilities, and owner’s equity at a specified point in time
Value may be based on asset value, a multiple of the business net income, or both
Business sales may have two escrows – one for transfer of personal property, one for real property
Bulk sale – a sale of more than ½ of the business inventory and equipment
Business must give bulk sales notice to creditors before completing the sale
Notice is recorded, published in newspaper, and mailed to county tax collector
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Trust Funds
Trust funds are funds received by a licensee that belong to another person
Examples: earnest money deposits from buyer, rents and security deposits from tenants
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Handling Trust Funds
Broker must, within 3 business days after receipt of trust funds:
Give trust funds to broker’s principal
Deposit trust funds in escrow
Deposit trust funds in the broker’s trust fund account
Exception: Buyer may instruct broker to hold deposit check until buyer’s offer is accepted if seller is informed
3 business day rule applies once offer is accepted

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Trust Funds: Broker’s Duties
Broker must:
Keep a separate account for trust funds
Keep only trust funds in the trust account
Exception: Up to $200 to cover bank charges
Mixing trust funds and broker funds is a violation called commingling
Allow withdrawals from the trust fund account on signature of the broker, a salesperson or broker with whom the broker has a written agreement, or a bonded employee
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Trust Fund Accounts
Trust Fund Accounts must:
be designated as a trust account in the name of the broker, as trustee;
be maintained with a bank or other FDIC-insured depository located in California; and
Be a non-interest-bearing demand (checking) account
Exception for separate interest-bearing account set up for an individual beneficiary upon the request of that beneficiary
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Trust Fund Account Records
Trust fund accounts must:
be balanced daily
be reconciled with bank statements monthly
be kept in columnar form with specified information
Date of deposit, amount received, from whom received, date of disbursement, check number, etc.
have a separate record for each beneficiary or transaction
be kept for at least 3 years
be available for inspection by the DRE
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Trust Fund Violations
Seven of the ten most common violations found in DRE audits of real estate brokers involve improper trust fund handling:
Failure to maintain trust fund records or failure to maintain records in columnar form
Failure to maintain, in columnar form, a separate record of trust funds for each beneficiary or transaction
Failure to reconcile trust accounts monthly
Trust fund shortages
Failure to deposit trust funds within 3 business days
Improper withdrawals from trust fund accounts
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Advertising: Real Estate Law and Commissioner’s Regulations
Violations of Real Estate Law and DRE regulations
Using false advertising
Failing to disclose in advertisements that the ad is by an agent (called a “blind ad”)
terms broker, agent, Realtor, abbreviations bro., agt., or other similar terms or abbreviations ok
Using the term Realtor® if not a member of the National Association of Realtors®
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First Solicitation Materials
Licensees must disclose their license numbers on all solicitation materials intended to be the first point of contact with consumers
and on real property purchase agreements
First solicitation materials includes:
Business cards
Advertising flyers
Websites controlled by the licensee
Emails intended to solicit business
First solicitation materials do not include:
For sale signs
Radio and television ads
Print advertisements in newspapers and magazines
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Real Estate Violations: Acts Performed as a Licensee
False Promise
Undisclosed Dual Agent
also called “divided agency”
Mixing trust funds with other funds
Definite Termination Date
Secret Profit
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Real Estate Violations: Other Conduct
Placing a blind ad
Obtaining license by fraud
Conviction of crime involving moral turpitude
examples: fraud, embezzlement
Negligence or incompetence
Failure by broker to supervise licensees
Other dishonest conduct
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DRE Investigation and Adjudication
DRE may investigate licensees based on written complaints or on its own
If investigation determines possible violations, DRE starts formal hearing
DRE files an Accusation if they believe there are grounds for suspending or revoking a license
Case heard by Administrative Law Judge
Evidence and testimony presented
ALJ makes proposed decision
Commissioner accepts or rejects decision and determines penalty
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Discipline of Real Estate Licensees
If a licensee violates the Real Estate Law, the Real Estate Commissioner has power to:
Suspend the license
Revoke the license
Impose fines up to $10,000 in lieu of a suspension
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Real Estate Recovery Fund
A portion of license fees are deposited into the Real Estate Recovery Fund
Persons damaged by fraud, misrepresentation or conversion by a real estate licensee can apply for payments from the recovery fund
Requirements to receive payment from fund:
Sue licensee in court and get judgment
Make a good faith attempt to collect judgment
Limits on recovery:
$50,000 per transaction
$250,000 against one licensee
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Real Estate Trade Organizations
National Association of Realtors
Only members can call themselves Realtors
Realtor and the block R logo are registered trademarks of the National Association of Realtors 
National Association of Real Estate Brokers
Only members can call themselves Realtists 
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Trade Organization Membership
Members agree to comply with codes of ethics
Membership benefits:
Publications and forms
Legal updates
Lobbying efforts
Group benefit plans (health insurance, etc.)
Group discounts