Code of Ethics
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In every US State and in the District of Columbia, real estate agents and brokers must be licensed to practice real estate, that is, to provide real estate brokerage and sales services for compensation. However, the licensing requirements in each state differ. Prospective agents should contact the real estate licensing commission in the state in which they wish to work to verify exact licensing requirements.
Any person who for compensation, or the promise of compensation, lists or offers to list, sells or offers to sell, buys or offers to buy, negotiates or offers to negotiate either directly or indirectly for the purpose of bringing about a sale, purchase, or option to purchase, exchange, auction, lease, or rental of real estate, or any interest in real estate, is required to hold a valid real estate license.
Basically, a person must be licensed in the state within which he or she negotiates a sale or purchase of a real property. In some cases a real estate broker may sell an out of state property without a license in the state where the property is located so long as he or she conducts the negotiations entirely within the borders of his or her own state. Some state laws also permit a broker in one state to split a commission with a broker licensed in another state as long as each conducts negotiations only within the state where he is licensed. State laws vary widely in this area and so each state’s law should be consulted before any action is taken.
Typical state eligibility for licensing requires an individual to be at least 18 years of age, a high school graduate, and to pass a written examination. The examination is more comprehensive for brokers than for agents. It includes questions on basic real estate transactions and laws affecting the sale of property in that state. Most states require candidates for the general sales license to complete between 30 and 90 hours of instruction. In addition, most states require continuing education for license renewal. State licenses typically must be renewed every one or two years, usually without re-examination but with verification that a minimum number of hours of continuing education courses have been completed.
A large number of agents and brokers have some college training. College courses in real estate, finance, business administration, marketing, statistics, economics, law, and English are helpful. Over 1,000 universities, colleges, and junior colleges in the United States offer courses in real estate. At some, a student can earn an associate or bachelor's degree with a major in real estate; several offer advanced degrees. Many local real estate associations that are affiliated with the National Association of REALTORS® sponsor courses covering the fundamentals and legal aspects of the real estate field. Advanced courses in mortgage financing, property development and management, and other subjects are also available through various national affiliates of the National Association of REALTORS®. Many REALTORS® pursue professional designation programs to receive training in specialized areas such as appraisal, commercial, property management, international, etc. The Certified International Property Specialist (CIPS) designation is awarded to individuals who complete a course of study and provide evidence of experience and expertise in international real estate matters.
Each state has its own licensing laws and regulations. Although all states' laws permit issuance of a license to a nonresident, the various requirements for continuing licensure of nonresidents often make obtaining and maintaining a nonresident's license impractical and, in fact, create a barrier to licensure. According to the Association for Real Estate License Law Officials (“ARELLO”), only a small number of states allow license nonresidents without additional education and examination. Some states will waive education and examination requirements if they have a written reciprocal agreement with the nonresident applicant's state of residence, but recently many states have cut back the number of reciprocal agreements with other states and so this option is only available in limited instances. Most states require that nonresident applicants meet all of the same requirements that residents must meet even though they have met substantially similar requirements in their state of residence. For more information on state licensure law and license reciprocity, please contact ARELLO
Real Estate Regulations:
In the United States, the legislature of each state has the authority to enact laws to protect the public interest from unqualified real estate practitioners and also to create a real estate commission. The real estate commission’s duties include the licensing and regulation of real estate brokers and salespersons, and creating rules implementing the statutes enacted by the legislature. Normally, two entities work together to implement all requirements of the state license requirements for the real estate industry.
The state real estate commission usually involves five to nine members who primarily deal with adopting rules and regulations to implement the license law from the state legislative agency. The commission may also be involved in enforcement of the regulations and disciplining licensees who violate them. Some of the members are licensees from the real estate community and others are non-licensed members of the general public. The state real estate department or real estate division manages all real estate licensees in the state on a daily basis. In addition, the staff in the department may be involved in the investigation of alleged malpractice or audits of broker trust fund accounts. For a listing of state real estate regulation agencies in the United States, please visit ARELLO.
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The political and economic stability, an inventory of investment-grade properties on the market, an environment that does not discriminate against foreign investment, attractive risk-return ratio, and tax incentives are the main factors that attract foreign investors to the United States.
Foreign investors have typically invested in major metropolitan areas, such as New York, Boston, San Francisco, and Washington, D.C. However, they are beginning to expand into other areas, including suburbs, where they have experience and familiarity with the market.
Generally, the central (federal) government's involvement in U.S. land law is very limited, mainly in the sensitive resources, industries, and federal and state owned real properties, and land comprising territories. Federal laws in bankruptcy, environmental, securities, and income tax also have impact to real property transactions. Following the terrorist attacks in 2001, money laundering statutes have also affected transactions involving foreign investors, particularly cash deals. But for the most part, American land law is state law.
Each state has its own statute and/or regulation that govern foreign real estate or land ownership. State laws are divided into certain roughly identifiable categories in terms of governing foreign ownership. Approximately eighteen states have legislation or adopted constitutional amendments to remove common law disabilities on alien ownership of land. For example, the statutes in Nevada expressly allow nonresident aliens to hold, take and enjoy real property on the same terms as resident aliens, and also allow nonresident corporations to do so on the same terms as domestic corporations. In other seven or eight states, there is no express restriction on foreign ownership and therefore by implication none exists.
Some states may have limitations on alien ownership in terms of acreage or size. In Wisconsin, the limit is set to 640 acres for a nonresident alien unless it is acquired by devise or inheritance or as a collection of a debt. Others may have restrictions on the length of ownership, e.g., a maximum of five years' ownership in Nebraska is allowed. For more information, please refer to "Foreign Investment in U.S. Real Estate, A Comprehensive Guide," Section of Real Property, Probate and Trust Law, American Bar Association, Timothy E. Powers, or contact legal counsel.
Due to the complexity of foreign ownership in the U.S., it is advisable that anyone seeking to invest in U.S. properties seek assistance from a legal professional.
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Land Registration System
Ownership of American real property passes under state laws by voluntary delivery of transfer documents, as in the case of sale, or by operation of law, as in the case of inheritance. The various state land registration systems may cause some confusion as the sponsoring governmental body which maintains the office in which documents are recorded simply provides an archive where an interested person may determine the quality of title to a particular parcel of real property. Constructive notice of ownership can be given to the world at large by recording an instrument of ownership transfer, such as a deed. Recording a valid and duly delivered deed, lease, mortgage or other instrument of transfer prevents a third party from falsely claiming to be a legitimate purchaser from the owner. However, the recording may not help whereas document is void due to forgery or failure of delivery. The Statute of Frauds, a version of which is in effect in every state, requires that there is written evidence of the essential elements of transactions effecting land transfers in order to validate them.
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Other industry professionals
The following professionals, in addition to real estate agents, may be involved in a real estate transaction. Please note that a buyer or seller may not necessarily choose to employ all of the professionals listed below in a real estate transaction.
- Lenders (banks, mortgage loan brokers) - A lender provides funds necessary to complete a transaction and may provide other assistance to a home buyer with finance related issues
- Attorney - An attorney may be involved in contract preparation, related document inspection, closing document reviewing, closing/settlement, and any other legal issues arising from the transaction
- Appraisers - An appraiser is usually involved in evaluating the value of a property in order to determine whether the property qualifies for financing
- Inspectors - An inspector examines the property in an effort to identify hidden defects or problems that the buyer may not have noted or is incapable of identifying
- Notaries - Notaries notarize documents, that is, they witness and affirm the authenticity of signatures on the documents.
- Title companies - Title companies provide title insurance to a real property, and may also provide closing or escrow services.
- Accountants - Accountants help buyers or seller recognize and solve tax and finance-related issues
Surveyors - A surveyor measures land and charts its boundaries, improvements, and relationship to the property surrounding it. A survey is often required by the lender to determine the exact property boundaries of the property and assure that the correct legal description of the property is given in the deed.
In some states, lawyers may be allowed to provide real estate services. Although lawyers, notaries, or other professionals may not necessarily be required in real estate transactions, it is in a client's best interest to get expert help from those professionals, since real estate investment probably is the largest financial investment in a person's lifetime.
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A real estate agent plays a key role helping his clients and customers in the process of selling and purchasing real properties. Current statistics indicate that approximately 75% of all home sale transactions involve the services of a REALTOR®, or a member of the National Association of REALTORS®. All REALTORS® agree, as a condition of membership, to abide by the REALTORS® Code of Ethics.
Traditionally, real estate licensees represented the seller and received a commission for selling the real estate. The agent/agency provided services ranging from evaluating and pricing the property, marketing it through various means, negotiating the price, assisting in the resolution of issues that may arise during the listing, and closing the sale. “Buyer representation” is now the norm in most transactions. The buyer's representative receives a portion of the commission earned by the seller's (listing) agent. In addition to helping the buyer identify a suitable property, the buyer’s representative also will represent the buyer during negotiations with the seller. As with all agency relationships, it is important, and may be required by law, for each agent to disclose which party or parties he is representing to all other parties involved in the transaction.
This information is currently being compiled.
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Property Marketing Systems
Generally, there are three levels of real estate markets in the United States: National, Regional, and Local. A variety of marketing devices and techniques exist in the real estate market such as multiple listing systems, national or international systems of exposure, real estate company and franchise networking, and advertising including: classified, real estate magazines, newspapers, brochures and flyers, signage, Internet, open houses, and more.
A Multiple Listing Service (“MLS”) is a cooperative arrangement where a group of brokers pool all of their listings and offer to compensate other brokers in the group if they produce a ready, willing and able buyer for a listed property. It is a proprietary marketing system that may only be accessed by its broker members who make their own exclusive listings available to other brokers and gain access to other brokers' listed properties as well.
In most markets, brokers belonging to the MLS are required to file new listings with the MLS within a specific, fairly short period of time, usually 48 hours after they are obtained. Any member of the MLS can show and attempt to sell the property. Some MLS's contain virtually all types of properties including residential and commercial, while other may be restricted to one or the other of those property types.
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In most states in the United States, it is illegal for a broker to pay a commission to anyone other than a salesperson licensed with the broker or to another broker licensed in the same state. However, this is not to be confused with referral fees paid between brokers in different state for leads. Referral fees are generally legal, as long as both individuals are licensed in their respective states and are not simply an attempt to disguise the payment of a commission.
One system that usually involves referrals is a relocation transaction. This is a transaction that involves a company moving an employee to another location. The company agrees to bear the costs associated with the sale of the employee's current home and the purchase of another one pursuant to the employer's relocation policy. The company often retains a relocation management company to administer its policy and manage the proper application of the policy for the relocating employees. The employee is told that the employer's relocation expense benefits are available through the designated relocation company, which, in turn, registers the employee with the approved brokers in both the departure and destination areas. The relocation company is paid a referral fee if a commission is generated from this referral. If everything goes well, it is a very efficient and beneficial business relationship to all parties. The brokers within the approved network receive referrals they may not have had otherwise. Employers can recoup or reduce the costs of relocating employees and relocation companies legitimately collect referral fees for the services they provide. In some instances, however, employees may not fully understand the procedures and inadvertently involve a broker not approved by the relocation company. Disputes may then arise regarding payment of a commission to such a broker, or the amount of the commission to be paid.
Affinity Groups/ Relationships:
Affinity groups are organizations or entities whose members (for example, employees, alumni, customers, etc.) receive benefits or special services by virtue of their membership in the group. These benefits may include discounted real estate brokerage fees, or other services related to a real estate transaction. Affinity groups use a variety of mechanisms to distribute benefits to their members, such as receiving a percentage of the brokerage commission paid on each referral. There are numerous variations on these programs.
One of the significant legal issues concerning affinity groups is the question of who may receive a portion of a real estate commission or a referral fee. Some states allow commissions/fees to be shared with principals (i.e. the buyer and seller). The issues raised by affinity group real estate benefits are very complicated and must be handled carefully.
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Relationship of Buyer/Seller to Practitioner
Traditionally, the relationship formed between real estate brokers and their clients was an agency relationship. Generally, an agency relationship is one where a principal (such as a buyer or seller of real estate) gives the agent legal power to transact matters of all types on the principal's behalf. The agent has fiduciary obligations to his or her principal and must be faithful to the principal. In addition, the agent must safeguard the principal's confidential information, demonstrate loyalty to the principal, excise reasonable care and diligence, exhibit competence, act in the principal's best interest, be accountable for handling all paperwork and funds promptly, and execute other duties as specifically outlined in the listing contract or buyer's agency contract.
There are now various types of broker-client relationships including, but not limited to agency, and each state in the United States determines which are allowed and the respective governing laws and regulations.
States also began to address various forms of agency and other brokerage relationships through state statutes and regulations. A dual agent represents both the seller and buyer, and can be an individual or a brokerage company. Disclosed dual agency is legal in most states, provided both parties give informed consent to the arrangement. A buyer agency relationship is established by signing a contract or agreement stating that the agent is legally representing the buyer. The buyer agent may receive a flat fee or a share of the commission, or both, based on the terms of the agency agreement. To protect consumers’ interests, most of the states in the United States have either statutes or regulations in place requiring disclosure of agency relationships, including many that also specifically state the rights and obligations of parties in real estate agency and other types of brokerage relationships. Some statutory or regulatory schemes require a detailed agency disclosure statement at the initial interview that defines a licensee's general duties to the consumer; prescribe the various types of brokerage relationships and the duties owed to consumers; and/or establish the concept of "designated agency" and "transaction broker." These laws clarify up front who works for whom in a real estate transaction and inform consumers of the options for service available. As a result they enable buyers, sellers, lessors and lessees to make informed decisions.
A recent trend has been to replace the traditional common law agency duties that a licensee owes to his/her client with statutorily-defined duties. Usually, these statutes will refer to the licensee as a “transaction broker”. The traditional common law fiduciary duties which an agent owes to its principal, and which historically have governed the relationship between real estate licensees and their clients, are: loyalty, obedience, disclosure, confidentiality, reasonable care and diligence, and accounting. While some of these laws expressly state that a licensee acting in the capacity of that state's version of a non-agency relationship with a consumer is not an agent (and therefore would not owe the fiduciary duties), usually the licensee still owes some of the traditional fiduciary duties to his/her client.
In general terms, a "sales contract" in real estate is a written agreement providing for the buyer's agreement to pay a specified sum in exchange for the designated property, subject to specific terms and conditions, accepted and signed by both buyer and seller. Real estate sale agreements are often required to have particular provisions specified by local or state law. Sales contracts provide for the eventual transfer of title, the legal right to ownership of land, to real property. The contract's purpose is to provide the rules governing the parties' rights and obligations during the time between the agreement to transfer real property and the actual transfer of title. The statute of frauds requires that contracts for the real estate be written to be enforceable. A proposed contract is an "offer" until it is accepted by both parties. The required elements of any valid real estate contract consist of (1) Names of the parties; (2) Description of the property; (3) Selling price and other materials terms of the sale; (3) Date for transfer of title to the property (5) Signatures of the parties.
This information is currently being compiled.
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In the United States, real estate agents typically are paid on a commission basis, rather than on the basis of a salary. They get paid only after the property search is over, the contract negotiated and the transaction complete. The commission is usually divided between two brokers since most of the transactions involve two brokers, one that produces the buyer and the other that markets the property and otherwise assists the seller. Under the typical arrangement, the seller pays a commission to his agent, who then offers and pays a portion of that commission to the agent working for the buyer. The buyer commonly pays nothing to his agent directly. While each commission is negotiated separately by the broker and clients, surveys of brokerages has found that commissions average around 5%.
As noted, listing brokers and salespeople typically split the brokerage fee with the agent working with or for the buyer. The split also is not established and each listing broker sets the split he offers to other brokers, although "even" 50-50 splits are not uncommon. Sellers may be more able to negotiate a lower commission rate for more expensive homes, or in highly competitive markets, than in other circumstances. In reality, the exact commission-sharing arrangement may be determined by several factors, including whether the commission is for a listing, a sale, or both; the listing solicited by the salesperson or assigned by his/her brokerage's management; and whether it is a particularly difficult transaction or simple transaction.
Commissions are earned by the broker or brokerage firm, which then pays a portion of that commission to the agent involved in the transaction. Some brokerage firms employ a 100% commission arrangement, whereby the salesperson receives the entire amount of the commission earned by the firm in exchange for the agent paying to the broker a flat fee each month for the use of the company's resources and/or facilities. Although some companies may charge an additional fee for each transaction, the basic principle is to allow salespeople to keep nearly all the commission income they produce. A common form of extra compensation is the bonus plan whereby a bonus is paid to highly productive salespeople at the end of the year.
Each state has its own laws and regulations that govern payment of real estate commissions, but most states prohibit the sharing of commission fees with any unlicensed person or entity. In recent years, several states have enacted rules or legislation to allow the sharing of a commission with an unlicensed practitioner from outside the US, if the country in which the practitioner works has no licensing body.
Escrow is a legal device that assists in the completion of a transaction, including delivery of the deed to the buyer and the sale price to the seller. An escrow account or arrangement can be created by a separate contract or within the sales contract itself. Before the title to the real property can be transferred, a deed is delivered by the seller to the escrow agent, and the buyer delivers the sale price also to the escrow agent. When the escrow agent is satisfied that the deed and the sale price provided are acceptable, he delivers the deed to the buyer and the sale proceeds to the seller. He may first record the deed with the local government agency responsible for recording documents. The escrow fund is usually held by a service provider in an escrow account to protect the buyer's interests. Several states have created their own rules to regulate escrow services due to the complexity of escrow issues. For instance, some states require service providers, under certain circumstances, to pay interest on escrow accounts to mortgagors. Other states may have restrictions on the establishment and maintenance of escrow accounts such as how much can be held in an escrow account.
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