Chapter 16: Real Estate License Law

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ADMINISTRATION OF THE REAL ESTATE LAW

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The Real Estate Law is administered by the Bureau of Real Estate, a division of the California Business and Transportation Agency. The Real Estate Law is part of California's Business and Professionals Code

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REAL ESTATE COMMISSIONER

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The chief officer of the Bureau of Real Estate is the Real Estate Commissioner. The Commissioner is appointed by the Governor and serves at his pleasure

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AUTHORITY

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The Commissioner has the power to adopt, amend, or repeal regulations necessary to enforce the Real Estate Law. These regulations have the force and effect of law, and are intended to give the maximum protection possible to persons who deal with real estate licensees

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ATTORNEY GENERAL

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The Real Estate Commissioner is advised on legal matters by the state Attorney General. However, it is the duty of the district attorney of each county to prosecute those who violate the Real Estate Law

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REAL ESTATE LICENSES

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Licensing is the state's way of controlling a person's competence and professional activities by requiring education, testing and recordkeeping, and by enforcing ethical standards

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WHEN A LICENSE IS REQUIRED

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Anyone who is acting, advertising, or appearing to act as a real estate broker or real estate salesperson must have a real estate license

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DEFINITION OF A REAL ESTATE BROKER

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A real estate broker is a person who does or negotiates to do certain act on behalf of another, for compensation or in the expectation of compensation, including:

a: selling, buying, leasing, or collecting rents from real property or business opportunities;

b: soliciting borrowers or lenders, negotiating loans, or performing services in connection with loans secured by real property or business opportunities; and

c: listing, advertising, or offering real property or business opportunities for sale, lease, exchange, or financing

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DEFINITION OF A SALESPERSON

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A real estate salesperson is a person who is employed by a broker to perform any act that requires a real estate license. A salesperson must work for a broker and cannot act directly for a principal in a real estate transaction. The salesperson is the agent of her broker, not the agent of the principal

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SALESPERSON'S COMPENSATION

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A salesperson may receive compensation only from his own broker; clients and cooperating brokers may not pay the salesperson directly. Clients and cooperating brokers pay the salesperson's employing broker, who then pays the salesperson

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DEFINITION OF AN ASSOCIATE BROKER

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In many cases, a person who is licensed as a broker chooses to work for another broker instead of operating her own brokerage. Usually called an associate broker, this individual has basically the same rights and limitations as a salsperson

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UNLICENSED ASSISTANTS

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An unlicensed assistant may not perform any activities that require a real estate license. This means that an assistant is limited to clerical duties, and should not advise clients, including providing information about the price or condition of a property or about financing options. An unlicensed assistant may write advertising materials, but they must be approved in writing by a broker prior to publication

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BUSINESS ENTITIES

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A real estate license can be issued to a corporation. A corporate officer must be designated to act as broker under the corporate brokerage license. There is no "partnership license," but a partnership may perform acts that require a real estate license if every partner is licensed as a broker

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SPECIAL LICENSES AND ACTIVITIES

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Special real estate licenses are available for particular kinds of license applicants or in special circumstances.

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MORTGAGE LOAN ORIGINATOR

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in order to solicit borrowers or lenders for loans secured by real property, a real estate licensee must also receive a mortgage loan originator endorsement to his real estate license

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WHEN A LICENSE IS NOT REQUIRED

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There are several exceptions to the licensing requirements. These exclude:

Property owners - Persons who are acting on their own behalf with respect to their own property;

Certain employees - Employees of banks, saving and loans, insurance companies, credit unions, or finance companies with respect to real property security transactions;

Attorney in fact - Person acting under a properly executed power of attorney;

Out-of-state brokers - A broker who splits a commission with an out-of-state broker who is not licensed in California; and

Unlicensed referrals - A broker who pays a referral fee to an unlicensed person who introduces a prospective buyer or seller to the broker. (The unlicensed person may provide the introduction only; they cannot perform any other acts that require a real estate license.)

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LICENSE APPLICATION AND TERM

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License applicants must apply for their licenses within one year of the date of passing the exam (not the date of notice of passing the exam). Licenses must be renewed every (4) years

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LATE RENEWAL

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A license that has expired within the previous two years may be renewed without examination at the Commissioner's discretion. The licensee must file a renewal application and pay a late renewal fee

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FICTITIOUS NAMES

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In most circumstances, a real estate broker may obtain a license under a fictitious business name. A fictitious business name statement must be filed with the clerk of the county where the business is located. The statement expires (5) years after it was initially filed

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PUBLISHED NOTICE

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The fictitious business name statement must be published at least once a week for (4) weeks in a newspaper in the county. An affidavit showing the publication must be submitted to the county clerk

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AFFIDAVIT

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An affidavit is a written statement sworn before a notary public. A person who makes a sworn statement under oath is an affiant

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BUSINESS OPPORTUNITIES

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A business opportunity is the sale or lease of a business, typically including inventory, fixtures, lease assignments, and goodwill. Listing a business opportunity or representing a buyer of a business opportunity requires a real estate license, even if there is no real property involved

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BILL OF SALE

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In the sale of a business opportunity, a bill of sale is typically used for the transfer of personal property. If the sale also includes real property, two sales agreements will be used, one for the real property and one for the personal property

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INCLUDED ITEMS

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The bill of sale must contain the names of the transferor and thransferee, the location of the business, and a description of the personal property. The bill of sale does not need to mention any assignment of a leasehold interest

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FRANCHISE AGREEMENT

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A franchise agreement is a common type of business opportunity in which a purchaser (or franchisee) buys the right to sell goods under a brand name and marketing system offered by a franchisor in exchange for a franchise fee

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SALES TAXATION

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Sales of business opportunities involving transfer of personal property are subject to California sales and use taxes. The buyer pays the sales tax to the seller, who in turns pays the state. To begin operating the business, the buyer will have to obtain a seller's permit from the state Board of Equalization. The seller's permit should be displayed in all of the business's locations

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CERTIFICATE OF CLEARANCE

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A buyer of a wholesale or retail business must also obtain a Certificate of Clearance from the state Board of Equalization, certifying that the seller has paid sales tax in full. If not, the buyer may have successor's liability for the seller's unpaid sales taxes and be required to pay them

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BULK SALES

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Business opportunity buyers must comply with the Union Commercial Code, which imposes certain requirements on bulk sales, A bulk sale, not in the ordinary course of the seller's business, of more than half of the seller's inventory

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NOTICE OF INTENT TO BUY

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A buyer planning a bulk sale must notify the seller's creditors by recording a notice of intent to buy with the county recorder, sending a notice of the purchase to the county tax collector, and publishing a notice in the local newspaper. Otherwise, the buyer may become liable to the seller's creditors

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LIQUOR LICENSES

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A sale of a business opportunity may involved a liquor license. During the first five year after the issuance of a liquor license, an on-sale license may be be resold for more than the cost of the initial application. A private club must be in existence for at least one year before it may be issued a liquor license

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DISCIPLINARY ACTION

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The Real Estate Commissioner is empowered to enforce the Real Estate Law by investigating and disciplining licensees who violate its provisions

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DISCIPLINARY PROCEDURES

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If a licensee is found at a hearing to have violated the Real Estate Law, the Commissioner may suspend or revoke the license. Alternatively, the Commissioner may impose a fine. The fine may not exceed $250 for each day the license would have been suspended, up to $10,000

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CRIMINAL OR CIVIL LIABILITY

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The imposition of a fine or other disciplinary penalty by the Commissioner does not protect a licensee from criminal prosecution or liability in a civil suit

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GROUNDS FOR DISCIPLINARY ACTION

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All of the following are among the grounds for disciplinary action under the Real Estate Law

1. Substantial misrepresentation - Making a substantial misrepresentation (deliberately or negligently making a false statement of fact or failing to disclose a material fact to a principal).

2. False promise - Making a false promise that is likely to persuade someone to do or refrain from doing something.

3. Dual agency - Acting as a dual agent without the knowledge of consent of all of the parties involved.

4 Commingling - commingling your own money or property with money or property held on behalf of a client or customer.

5. Lack of termination date - Failing to put a definite termination date in an exclusive listing agreement.

6. Failure to disclose profit in option to purchase - If you have a listing agreement that includes an option to purchase the property, exercising the option without revealing to the principal in writing the amount of profit to be made and obtaining the principal's written consent

7. Fraud or dishonest dealing - Acting in a way, whether specifically prohibited by statue or not, that constitutes fraud or dishonest dealing

8. Failure to use real property transfer statement - Failing to comply with the law that requires a real property transfer disclosure statement in certain transactions

9. Felony conviction - Being convicted of a felony or other crime related to the functions and duties of a real estate license

10. Misuse of "Realtor" designation - Willfully using the term "Realtor" or any trade name of a real estate organization that you are not actually a member of

11. Negligence or incompetence - Performing license activities negligently or incompetently

12. Lack of supervision - As a broker, failing to exercise reasonable supervision over the activities of your salesperson

13. Failure to disclose personal interest - When selling property in which you have a direct or indirect property in which you have or a direct or indirect ownership interest, failing to disclose the nature and extent of that interest to a buyer

14. Failure to notify Commissioner - As a broker, failing to notify the Commissioner in writing of the discharge of any salesperson based on his violation of the license law or regulations

15. Mobile home irregularities - Committing fraud in an application for the registration of a mobile home, failing to provide for the delivery of a properly endorsed certificate of ownership of a mobile home from the seller to the buyer, or participating in the sale or disposal of a stolen mobile home

16. Blind ads - Failing to include a license designation and your employing broker's name in advertisements ("blind ads")

17. Failure to notify parties of selling price - As a broker, failing to notify the buyer and seller, in writing, of the property's selling price within one month after the sale closes, unless escrow issues a closing statement

18. Illegal compensation - Accepting compensation for referring a customer to any of these types of companies: escrow, pest control, home warranty, or title insurer

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RECOVERY ACCOUNT

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When an injured party gets a civil judgement (or arbitration award) against a licensee based on the licensee's intentional fraud, misrepresentation, or conversion of trust funds, misrepresentation, or conversion of trust funds, the injured party may apply to the state Recovery Account for payment of the judgement.

1. Payment Amounts - The Recovery Account will pay up to $50,000 for losses in a single transaction, and up to $250,000 for all losses caused by one licensee.

2. Effect on licensee - Once payment is made from the Recovery Account on a licensee's behalf, her license is automatically suspended suspended as of the day of payment. The license can't be reinstated until the amount disbursed from the Recovery Account is fully repaid, with interest

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TRUST FUNDS

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Trust funds are money or other things of value received by a broker or salesperson on behalf of a principal or any other person, and which are held for the benefit of others in the performance of any acts for which a real estate license is required.

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FORM OF TRUST FUNDS

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Trust funds may be cash, a check, a promissory note, or any other item of personal property.

1. Good faith deposit - the most common example of trust funds is the good faith deposit that a buyer gives to the broker along with the buyer's offer to purchase real property. If a broker acts as a property manager, rents may be kept in a trust account.

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TRUST FUND HANDLING

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The trust funds must be deposited no later than three business days following the receipt of the funds. If the funds are deposited directly into escrow or the hands of the principal rather than into the broker's trust account, the transfer must still be noted in the broker's trust funds records.

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EXCEPTION

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When a broker receives a deposit check from a buyers, the broker may hold the check uncashed before the buyer's offer is accepted if two conditions are met.

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CHECK NO NEGOTIABLE BY LICENSE

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The check is not negotiable by the licensee, or the buyer has given written instructions that the check is not to be deposited or cashed until the offer is accepted; and

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SELLER IS INFORMED

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The seller i informed (before or when the offer is presented) that the check is being held

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CHECK TO THIRD PARTY

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If the principal gives a check directly to a third party, such as a title company, without it ever passing through the broker's hands, the broker does not need to enter that into trust fund records

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OWNERSHIP OF FUNDS

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Before acceptance, the funds belong to the buyer and must be handled according to her instructions. After acceptance, ownership is not so clear-cut and the funds must be handled as follows:

a) Check held by broker - a check held uncashed by the broker before acceptance of the offer may continue to be held uncashed only on written authorization from the seller

b) Check given to seller - The check may be given to the seller only if both parties so provide in writing

c) Refund - No part of the deposit money can be refunded without the express written permission of the seller

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INTERPLEADER

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If a transaction falls through after the good faith deposit faith deposit has been deposited into escrow or a broker's trust account, there may be a dispute over the money; the buyer and seller may each feel entitled to it. In this situation, the escrow agent or broker who holds the funds

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TRUST ACCOUNTS

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The primary reason for maintaining a separate account for trust funds is to avoid commingling, which means mixing trust funds with personal funds. A broker must never put trust funds into her general account, or put her own funds into a trust account, even if careful records are kept.

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CONVERSION

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Commingling should not be confused with conversion, which is the actual misappropriation of a party's funds for the broker's own purposes. Conversion is a basis for theft charges under the California Penal Code. (A broker may also face theft charges for removing a piece of personal or real property, or for defrauding another person of money, labor, or real or personal property.)

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FUND PROTECTION

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The prohibition against commingling makes it more difficult for a broker to "borrow" trust funds. It also protect trust funds from any legal action that many be taken against the broker. If trust funds were in the broker's general account, a creditor with a judgement against the broker might be able to seize the trust funds along with the broker's own funds.

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RECONCILIATION

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The process of comparing the trust fund balance to the sum of individual transactions is called reconciliation. When reconciled, the trust account balance must equal the total of the balances due to individual clients and customers. Reconciliation must be performed at least once a month.

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EXCEPTIONS

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There are two exceptions to the commingling rule:

a) Service charges - The broker may have up to $200 of personal charges on the trust account for paying service charges on the trust account.

b) Commissions - A broker may be entitled to deduct his commission from trust funds. If so, the broker should promptly transfer the commission out of the trust account into his general account.

i. Timing - A broker may not deduct his commission from a trust fund until after the transaction has closed.

ii. Personal obligations - A broker should never pay personal obligations out of the trust account, even if the payments are a draw against the broker's commission. An earned commission should be transferred to the broker's general account before it can be used to pay personal obligations.

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TRUST FUND RECORDS

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It is very important to keep proper records of all trust funds, including trust fund checks that are held uncashed, trust funds that are sent directly to escrow, and trust funds that have been released to the owner.

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ACCOUNTING SYSTEM

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Whatever accounting system is used, it must show:

a) Chronological accounting - All trust fund receipts and disbursements in chronological order,

b) Balances - The daily balance of each trust account based on all recorded transactions,

c) Receipts and disbursements - The balance owing to each beneficiary based on recorded transactions.

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ADVANCE FEES

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Advance fees are also considered trust funds. These fees that a seller may pay in advance to defray costs associated with a listing, such as unusual marketing and advertising expenses. They must be deposited into a trust funds, not commingled with the broker's funds, and not withdrawn until actually spent on a client's behalf. Advance fee agreements and be approved by the Bureau of Real Estate at least ten days before an agreement with a client is signed

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RECORDKEEPING

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In addition to trust fund records, the Bureau of Real Estate requires brokers to keep all copies of all documents connected with a real estate transaction, such as listings, purchase and sale agreements, and transfer disclosure statements

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THREE YEARS

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These documents must be kept for at least three years, beginning with the date of closing (or the date of listing, if the transaction doesn't close). They must be made available for inspection by the Commissioner.

1. Exceptions - Real property security statements and certain loan disclosure statements must be kept for four years

2. Electronic media - A broker may retain records on electronic media in a non-erasable format. The electronic records only need to be kept for three years, but the broker must give paper copies of the records at this own expense to the Bureau of Real Estate upon request

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BROKER/SALESPERSON AGREEMENTS

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Whenever a broker hires a real estate salesperson, there must be a written agreement that documents their employment relationship. The Bureau of Real Estate requires the broker to keep the agreement on file at the broker's office and retain the agreement for three years after the relationship is terminated

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ADVERTISING

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Any violation of state rules against false advertising is a misdemeanor as well as a violation of the Real Estate Law

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BLIND ADS

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The most important rule that brokers and salespersons must be aware of is the prohibition against blind ads. An advertisement published by licensee must include the name of the broker submitting the ad or give some other indication that it was placed by a licensee

1. Exception for licensee's own property - This rule does not apply when a license advertises her own property for sale, since a license is not required to sell one's own property.

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ONLINE ADVERTISING

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A broker who advertises on the Internet must put into place procedures to make sure that, if a prospective client makes an inquiry, only a real estate license will respond.

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ADVERTISING LOANS AND NOTES

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Any advertisement for loans secured by real property must receive prior approval from the Bureau of Real Estate before it's published

1. Prohibitions on ads for loans - An ad for a loan may not:

a) Contain vague terms - Use a phrase like "guaranteed" without explaining how the loan is secured;

b) Suggest phone approval - Imply that a loan can or will be approved over the telephone;

c) Imply government endorsements - Imply that any government agency has endorsed the licensee's business activities; or

d) Use misleading terms - Imply that loans are available on terms more favorable than those generally available in the community, unless the advertiser can show that those terms would be available without undisclosed restrictions or conditions

2. Prohibitions on ads for notes - An ad concerning resale of promissory notes may not guarantee a yield on a note other than the interest rate specified in the note, unless it also includes the amount of the discount (i.e, the difference between the outstanding note balance and the sales price of the note).

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INDUCEMENTS

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if attendance at a sales presentation is required to receive a gift, that requirement must be disclosed in an advertisement or solicitation. Any other conditions for receiving gifts or prizes must also be disclosed. if an inducement is given to one of the parties in a transaction (such as a buyer's agent giving part of his commission to a buyer), that is a material fact that must be disclosed to all parties

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COMMONLY USED TYPES OF ADVERTISING

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Brokerages typically advertise through classified ads in newspapers, direct mailings, "for sales" signs, and multiple listing services. Brokerages rarely use display ads because of the expense involved

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DESK COST

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Desk cost is a brokerage's operating cost per salesperson. it is calculated by dividing the firm's operating expenses by the number of salespersons

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100% BROKERAGE

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In a 100% brokerage, a salesperson is able to keep all of his commission but must pay a desk fee to pay the firm's operating costs

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BUSINESS LICENSE TAX

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A brokerage may need to pay a business license tax based on its gross receipts