COURTSIDE NEWSLETTER
TO: MEMBERS AND AFFILIATES OF THE ASSOCIATION OF REALTORS®
FROM: JOHN V. GIARDINELLI and SYLVIA J. SIMMONS,
ASSOCIATION COUNSEL
In our first article of 2007, we discuss two topics on which we receive recurring questions – the use of the real estate license number and conditional offers of compensation, and we report on a new scam related to the Do-Not-Call rules.
Use of Real Estate License Number
Brokers and agents want to know where and when they must display their DRE license number, i.e. on the business cards, on their advertisement materials, and on their websites. The answer depends on what type of real estate business is being conducted.
Real Estate Sales & Property Management
Real estate licensees who engage in the business of property sales and management are not currently required by the DRE regulations or California law to use their DRE license number on business cards or other advertising materials.
Real Estate Mortgage
The California Business and Professions Code provides that a licensed real estate broker must display his or her DRE license number on all advertisements where there is a solicitation for borrowers or potential investors. Business cards that do not contain an advertisement for borrowers or investors would not have to state the DRE license number.
Conditional Offers of Compensation
We continue to receive questions regarding conditional offers of compensation in the Multiple Listing Service (MLS). A “conditional offer of compensation” occurs when the amount of compensation offered to cooperating brokers in a listing submitted to the MLS varies based on the performance or nonperformance of certain activities. Contingent offers of compensation are not allowed by the Model MLS Rules of the National Association of Realtorsâ (N.A.R.) and the California Association of Realtorsâ (C.A.R.). Local Associations of Realtorsâ represented by our firm maintain their MLS Rules consistent with the requirements of C.A.R. and N.A.R.
The N.A.R. Model MLS Rules, provide as follows:
Section 5 Compensation Specified on Each Listing
The listing broker shall specify, on each listing filed with the multiple listing service, the compensation offered to other multiple listing service participants for their services in the sale of such listing. Such offers are unconditional except that entitlement to compensation is determined by the cooperating broker’s performance as the procuring cause of the sale (or lease) or as otherwise provided for in this rule.
The C.A.R. Model MLS Rules, provides as follows:
7.12 Unilateral Contractual Offer; Subagency Optional. In filing a property with the MLS, the broker participant makes a blanket unilateral contractual offer of compensation to the other MLS broker participants for their services in selling the property. … [A]nd the offer of compensation must be stated in one, or a combination of, the following forms: (1) a percentage of the gross selling price; or (2) a definite dollar amount. The amount of compensation offered through the MLS may not contain any provision that varies the amount of compensation offered based on conditions precedent or subsequent or on any performance, activity or event. Furthermore, the MLS reserves the right to remove a listing from the MLS database that does not conform to the requirements of this section. …..”
The only exception to the basic prohibition against conditional offers of compensation is lender approval in the case of short sales or court approval in the case of probate sales, provided that information of the conditional offer is fully disclosed by the listing broker through the MLS prior to presentation of an offer by a cooperating broker.
Various circumstances result in listing brokers wanting to qualify the payment of the compensation offered to the cooperating broker. Here are some common examples:
Conditional Compensation on Showing Property:
Brokers and agents become frustrated and seek ways to avoid paying the total commission offered in the MLS to the selling agent who has engaged in uncooperative or deceptive conduct. A client might meet with the listing agent without disclosing that the client has another agent. In some cases, that other agent has actually advised the clients to affirmatively lie about representation. As a result, the listing agent wastes time working with the client, and then has to pay the offered commission to another agent as the “procuring cause.” This practice encourages listing brokers to want to offer to compensate the cooperating broker more if the cooperating broker shows the property to the buyer than if the cooperating broker does not show the property to the buyer.
To accomplish that, agents place listings in the MLS that contain something similar to the following: “SO-3%.” Under the remarks section, they will put something to the effect, “…if I show the property first, I will pay 1½%...” This practice constitutes a contingent offer of compensation and is a violation of the MLS Rules. The N.A.R. has issued an opinion stating that the limitation “by showing it first” is an invalid condition and is not a part of the exception found in Rule 4.12.1, which is the only valid exception to the requirement that offers of compensation offer either a percentage of the gross selling price or a definite dollar amount.
An underlying issue is whether or not the agent who “showed the property first” is the procuring cause. An arbitration claim may exist between the participants as to who is entitled to a commission. If the buyer’s agent acted in a manner that is in violation of either the Code of Ethics (e.g., Article 16) or the MLS Rules, that agent may be brought up on grievance charges. For example, interfering with someone else’s agency, misleading another agent, or asking a client to lie to a listing broker, could all be grounds for action. Unfortunately, members do not avail themselves of these remedies regularly, which is one reason that this conduct continues.
Procuring cause guidelines have been approved by both N.A.R. and C.A.R., and are available through the C.A.R. website, a local Association, or upon request, in writing, to Association Counsel.
Offering a Bonus to Close by Date Certain
Although the offer of compensation in the MLS may not be conditioned on performance of specified conduct, such as closing by a stated date, an invitation may be placed in the appropriate MLS filed for cooperating brokers to contact the listing broker for terms of additional compensation that may be available. Additionally, an offer could be made outside the MLS by the listing broker or by the seller to pay a bonus if escrow closes by the stated date or for a full price offer.
Sliding Scale Compensation
C.A.R.’s position is that an offer of compensation in the MLS may be calculated by a formula or sliding scale, without violating the prohibition against conditional offers. Sliding scale compensation is typically used on extremely high priced properties and is not common. An example of a “sliding scale” is: Sale price is $10m; Commission is: 3% on the first $3m, 2% on the next $2m, 1.5% on the next $2m, and ½% on the remainder. How the compensation is reflected in the MLS listing field may be problematic since many MLSs accommodate only a fixed amount of a percentage.
Auctions
There is increased interest in the use of auctions to sell properties. This raises multiple issues, including how to identify in the MLS listing that the property is being sold at auction, how to state the “sale price” which is unknown (opening bid, reserve bid, or range price), and conditions placed on the cooperating broker to attend an open house to obtain a bidding package and/or to be present at the auction with the buyer.
The MLS is defined in the California Civil Code, Section 1087, as a facility of cooperation of agents through which agents establish legal relationships regarding listed properties. The MLS is not an advertising or announcement service. Listings in the MLS must comply with the MLS Rules, including Section 7.12 which requires that each listing contain a blanket unilateral offer of compensation. If the cooperating broker has to appear at an open house, or register before participating in the sale, or go through a third party to present the offer, that constitutes a contingency other than acceptance of the offer by the seller and violates the MLS Rules.
As with other changes in technology and the real estate market that have generated new business models and marketing practices, auctions present challenges to the real estate professional that may require modifications to the MLS Rules.
Builders Requirements
A common practice of real estate developers who build and sell new homes, is to require the cooperating agent to appear with the buyer when first viewing the property. This may violate the conditional offer of compensation prohibition, as discussed above.
Do-Not-Call Rules
One of the requirements of the federal do-not-call law is that anyone who initiates a “telemarketing” call to a residential or cell phone must have a written policy for maintaining a do-not-call list, regardless of whether the call is based on written permission, personal relationship or established business relationship. The definition of “telemarketing” is very broad. Because most real estate brokers and agents do make such calls “for the purpose of encouraging the purchase or rental of, or investment in, property goods, or services,” they must comply with the do-not-call rules by maintaining a policy and keeping a list. [Those who have an N.A.R. password can get a sample “Do Not Call Policy” at www.realtor.org/letterlw.nsf/pages/1106dncalert?OpenDocument&Login .]
The rules require the policy to be available upon demand. This has created an opportunity for some people to extort money from brokerages. C.A.R. recently reported about a scheme that is targeting real estate brokerages based on the do-not-call policy. It is explained as follows: A person who has no prior dealings with the brokerage, telephones the office and asks to be put on the do-not-call list and that a copy of the office’s policy for maintaining a do-not-call list be mailed to him within 5 days. If the policy is not received within that time, he threatens to sue the brokerage. Of course, the scam is that he will settle the claim for about $5,000. This should provide additional encouragement for all brokerages to comply with the rules.
Coming Soon
Next month’s article will bring you up-to-date on the events of the January C.A.R. meetings.