Legal and Regulatory Considerations

Impacting REALTORS®

This presentation is intended to be a general overview of relevant & topical matters that impact you as REALTORS®.

This is the “30,000 foot view” of a small but important handful of legal, regulatory, legislative & business trends that may very well be impacting many of you. Most of these topics could be stand-alone topics on their own.

Why 10 Things? It makes for a nice list and is about the extent of my attention span. There are many more issues that may impact you daily. This list is NOT intended to be comprehensive!

Why these 10 Things? I assembled this list from a variety of sources including recurring questions from the CAR Legal Hotline, recent State and Federal regulations, monitoring industry trends, developments at the Colorado Real Estate Commission, and a STRONG desire to pick topics that wouldn’t bore you!

This list is in no particular order of importance… so you can’t just fall asleep until the end!

Paragraph 4.7 of the CREC Contract to Buy & Sell

was obliterated and we are left with a subtle little

“WARNING”:

There are essentially 2 things that REALTORS® cannot do when it comes to seller financed transactions:

1. You may NOT “accept a residential mortgage loan application.”

When representing a Seller, don’t accept or process anything from the buyer that could be considered a “loan application.” This would include loan terms, credit information, etc.

2. You may NOT “offer or negotiate the terms of a residential

mortgage loan.”

Don’t convey loan terms/potential loan terms or negotiate loan terms/potential loan terms to the Seller or its agent on behalf of Buyer.

This puts agents/brokers in an awkward position.

So…

Prepare your Seller at the time of listing. In the event of a potential Seller

Carry transaction, you can add language to the Additional Provisions: Seller

acknowledges that Broker shall not advise Seller as to Seller financing

requirements or exemptions. In addition, Broker shall not be expected to

accept loan applications on behalf of Seller or negotiate potential financing

terms with potential buyers. While not necessary, language like this

initiates an early conversation with your Seller client regarding seller

financing. It sets their expectations for what you can and cannot do on their

behalf.

Refer Seller to Paragraph 4.7 of the Purchase Contract and encourage them to

consult an attorney or licensed mortgage loan originator early in the process

(before contract!).

If Seller financing comes up during or after contract, point them to an attorney or mortgage loan originator. Force them to carry on any loan negotiations directly with each other (rather than through the agents) and try to do so without “losing control of the transaction.”

Paragraph 5.2 of the CREC Contract to Buy & Sell provides Buyers with VERY broad, subjective rights with respect to their consideration of a New Loan.

Many Sellers (and even REALTORS®!) confuse this section as being a Lender’s Approval/Disapproval of a Buyer and their eligibility for a loan. It is this!

But it is also the Buyer’s opportunity to analyze every aspect of the financial commitment they are making.

Do they like the loan? Can they afford the loan? Is the interest rate too high? Too low?

BUYERS SOLE SUBJECTIVE DISCRETION!! PREPARE YOUR SELLER CLIENTS.

October 3, 2015 – HUD1, Good Faith Estimate & TILA Disclosure go away and they are replaced with new Loan Estimate and Closing Disclosure.

This change is the result of Dodd Frank and new Consumer Finance Protection Bureau (CFPB) regulations. The intent is to make the process more clear and consumer friendly for the Buyer.

The new disclosures are going to have a significant impact on closing process. The new Closing Disclosure must be received (and acknowledged) by the Buyer at least 3 business days BEFORE closing.

Any changes to interest rate or loan product? • Require ANOTHER 3 day disclosure!

Any changes to personal property or other inclusions? Any significant changes based on walk-through or late inspection

resolution? • Likely not, unless it has impact on loan product or rate lock.

Potential Chain of Closing ISSUES!

PREPARE - Have Clients (Buyers) prepared to close 7 days prior to scheduled closing.

COMMUNICATE – Make sure you keep communications tight between parties, lenders, title company and other third parties (buyers/sellers in “chain”).

PLAN – Consider adding days to transaction (1-2 weeks more for Closing Period).

What do REALTORS® typically earn in a transaction?

Commission – what brokers receive for performing a “brokerage function” which would include negotiating the purchase, sale, lease or exchange of a property. Under Colorado law, you MUST be licensed to receive a fee for performing any “brokerage function.”

What do REALTORS® occasionally give to their clients?

Rebates – There is one category of unlicensed people with whom a broker may pay a referral fee/split commission: A party to the transaction. Because an unlicensed buyer or seller is permitted to perform “brokerage functions” on their own behalf, they may receive a rebate of any commissions earned. Be careful, this will likely screw up a loan if the Buyer is receiving a rebate.

Business Gifts – A business gift to a client after closing their transaction is acceptable (it may even be “gratuitous”). How about a business gift to an unlicensed friend for “sending you a deal”? Be very careful and use discretion! Do not let a business gift that is intended to develop business be construed as a “Thank You” (which might end up being a “referral” or “kickback.”)

What do REALTORS® typically pay in a transaction?

Referral Fee – what brokers may pay to other licensed (in Colorado or other states) individuals for making introductions of business, assisting with business, etc.

With VERY limited exceptions, you may NOT pay a referral fee to an unlicensed individual under any circumstances. Since the vast majority of transactions are governed by RESPA (and Commission Rule E-22), referral fees are prohibited because they unnecessarily “increase the cost of a settlement service…”

Paragraph 29 of the CREC Contract to Buy & Sell is the easily skipped over Good Faith provision. It applies to every other aspect of the contract and states:

It is an expectation that both the Buyer and the Seller act honestly and keep their respective promises without taking unfair advantage of the other party or holding the other party to an impossible standard.

Good Faith is implied in most contracts (including

listing agreements) and it is an express provision in the Contract to Buy & Sell.

Make sure your client is aware of the provision!

Hot Seller’s market and your Buyer want to get a property “tied up?”

Put 2 properties under contract at one time?

Blow off loan application or other due diligence?

Make wholly unreasonable inspection demands or merely with intent to impact Seller Property Disclosures?

Bad Faith is VERY difficult to prove but it could impact an earnest money dispute or other law suit.

The growth, possession and use of marijuana is now a Constitutional Right in the State of Colorado.

• In the United States, it is still…. “illegal!”

• Only allowed by a Federal “position.”

Property Insurance policies deny coverage for “illegal” activities.

Consider implications of existing insurance, financing and other agreements!

Conflict between State and Federal Drug Law? Federal Law wins.

Loan/mortgage documents typically restrict “illegal” activities.

HOAs have restrictions against “illegal” activities. Lease documents allow eviction for “illegal” activities.

Property Managers/Landlords: Broad authority and an obligation to enforce your rights and any activities that take place on your property. Enforce an “illegal activities” clause in any existing leases. New leases, you may want to address it (prohibit OR allow). If you are specifically permitting it, you want to retain broad,

unilateral termination rights in the event of a change in the Federal position.

Buyer Representation: Property Inspections – consider grow facilities, electrical wiring, plumbing, mold, insurance claims, etc.

Seller Representation: Seller Property Disclosure, access for showings, staging home (removal of grow facilities), fixtures/inclusions, etc.

How do you really secure your commission in a transaction?

Working “inside” your own MLS – your commission agreement is effectively each party’s respective membership in the MLS and the Rules and Regulations that you agreed to as part of your membership. It is typically not necessary to obtain a separate writing.

Working “outside” your own MLS – if you are bring a buyer to a property that is either not listed at all OR not listed on your MLS, you need to get a separate writing (commission agreement) to help secure your right to payment.

Commercial transactions – regardless of the property type or location, these are typically not covered by any MLS Rules and Regulations. You need to get a separate writing!

CREC Rule F-2 – “Broker may not insert personal provisions or personal disclaimers in favor of the broker in the Additional Provisions.” This would include commission considerations! Additional Provisions is for negotiated business points to benefit/obligate the PARTIES to the transaction.

Exception! Check Paragraph 7.3 of your Exclusive Right to Buy Agreement. If the “Seller May Pay. Buyer IS Obligated To Pay” box is checked, you can since a contractual mandate that the Seller pay the Buyer commission is a negotiated position that benefits the Buyer.”

Simple legal document that you can prepare

(you are a party to the document). Buyer

Seller

Property Address

Condition of payment (Closing)

Who pays?

How much?

Signature of Payor

What is procuring cause? According to the National Association of REALTORS® procuring cause is: “the uninterrupted series of causal events that leads to a successful transaction.”

What does this mean? Ultimately, Procuring Cause is a “FACT based” analysis of the specific events in a transaction to determine who should be paid a commission. There are no definitive “rules.” Only “guidelines” to follow based on the facts.

When and How were the parties first introduced and Who introduced them?

Was there an offer of compensation made through MLS or other writing?

Were there any other written agreements between the parties (agency, exclusive)?

Was there an “uninterrupted series of events” that lead to the sale? If not, how/why was it interrupted and for how long?

Was there conduct by the broker that could reasonably be construed as abandonment or neglect of the party?

Was the entry of a new broker into the transaction a violation of any written agreements between the Parties?

Was the parties decision to enter into a transaction the result of broker’s effort or information?

Is there evidence of bad faith on behalf of any of the parties (brokers, buyer, seller, etc.)?

Did the new broker initiate a separate, independent series of events that ultimately lead to a successful transaction?

Get all of your agreements in writing!

Memorialize your actions and keep good records!

What is syndication?

The process by which brokers syndicate (distribute) listings to a wide variety of websites, apps and other 3rd party services.

Syndication vs. IDX IDX = brokers advertising other people’s listings. Governed by explicit Rules and Regs.

Syndication = brokers advertising their own listings. May be picked up by thousands of different sites and governed by no agreement or widely varying agreements.

You own your listing agreement and your consent is REQUIRED for third parties to advertise your property!

That said….

As with all forms of media, once it is “out there,” it is “out there!”

Stale Information Price reductions Active/Inactive/UC/Sold

Inaccurate Information

Price Number of beds/baths/sf It is a reflection of YOU!

Listing does not reflect broker, company name, proper contact info, etc.

Potential CREC Violations

Google it! When you have active (or even inactive) listings, google your property addresses and see what pops up!

Pay attention to syndication agreements! When you agree to syndication, make sure you understand who owns and controls the data. What is the syndicator’s right you post it? What is your right to withdraw it?

Make sure your clients are aware of the benefits and pitfalls of syndication when you discuss your marketing of their property at the inception of the relationship!

If you have entered into an agency agreement with your client as “agent” (as opposed to transaction broker), you have a fiduciary obligation to your client.

Fiduciary duties are THE highest duties known in the law

Duty of Confidentiality – broker is obligated to keep confidential any information which might weaken the client’s bargaining position if revealed. (Client needs to sell home ASAP!)

Duty of Disclosure – broker is obligated to disclose all relevant and material information to the Client. (Other party needs to sell the house ASAP!)

Duty of Loyalty – you must act at all times SOLELY in the best interests of the client. This is to the exclusion of all other interest…. Including the broker’s own interest. (How much is the commission?)

Duty of Obedience – broker is obligated to promptly and efficiently follow all lawful instructions of the Client related to the subject of the agency. (Take the house off the market.)

Duty of Reasonable Care & Diligence – broker is obligated to use reasonable care and diligence in pursuing the Client’s affairs. (Sure! I can sell that multi-family investment property!)

Accounting – broker is obligated to account for all money or property belonging to the Client that is given to broker. (Get an Earnest Money receipt!)

For More Information visit:

http://www.coloradorealtors.com/legal-hotline/