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Regulation of the Real Estate Profession

Throughout the United States, the real estate profession is r igorously

regulated. Each state has a real estate l icense law that sets forth not only

l icensing requirements but also the legal responsibi l i t ies that real estate

agents must fulf i l l in their day-today work. This chapter discusses typical

requirements of real estate l icense laws and how the laws are administered

and enforced. I t also explains how antitrust laws affect real estate agents.

Real Estate Licensing

We’ll begin by looking at the l icensing of real estate agents, including the

purpose of l icensing, the administrat ion of l icense laws, the circumstances in

which a l icense is required, the var ious types of l icenses, and the

qualif icat ions required for a l icense.

The Purpose of Licensing

A common way of regulat ing an industry or profession is to require its

members to be l icensed. The government can use educat ional requirements

and test ing to ensure that l icense appl icants meet a basic standard of

competence in their f ield. And because a l icense can be suspended or

revoked, l icensing makes it easier for the government to exercise control

over how professional act ivit ies are conducted.

Real estate transact ions are legal ly complex and involve large su ms of

money, and i t general ly isn’t possible to discern the true condit ion or value

of real estate simply by looking at it . As a result , real estate agents are in a

posit ion to do considerable harm if they don’t know what they’re doing, or if

they act dishonest ly. Requir ing real estate agents to be l icensed helps

protect the publ ic f rom incompetent and unethical agents.

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Administration of Real Estate License Laws

In each state, the legislature has enacted a statute that provides for the

l icensing of real estate agents and the regulat ion of their act ivit ies. This

statute, commonly referred to as the real estate l icense law, authorizes the

creation of a state agency to issue l icenses and implement the other

provisions of the law. Depending on the state, the agency may be cal led the

Department of Real Estate, the Real Estate Commission, the Real Estate

Divis ion of the Department of Licensing, or something similar.

The real estate l icensing agency is headed by an of f icial who may be

cal led the Real Estate Commissioner or the Executive Director. For

simplic ity’s sake, we’l l refer to this of f icial as the director. In most states,

the director is appointed by the state governor. The director’s qual if icat ions

typical ly must include a certain number of years as a real estate broker, or

equivalent exper ience in the real estate industry.

Essent ial ly, the director’s job is to implement and enforce the provisions

of the real estate l icense law in such a way as to provide the greatest

possible protect ion to members of the publ ic who deal with real estate

l icensees. The director is given broad powers to accomplish this end,

including the author i ty to:

adopt and amend administrat ive regulat ions necessary for the

implementat ion of the real estate l icense law statute;

investigate non-l icensees al leged to be performing act ivit ies for which

a l icense is required;

screen and qual ify appl icants for a l icense;

investigate complaints against l icensees; and

hold formal hearings to decide issues invol ving l icensees or l icense

applicants, and, af ter such a hearing, suspend, revoke, or deny

a l icense.

There is usual ly a commission (called the Real Estate Commission, the

Advisory Commission, or the Real Estate Board) that advises the director on

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the polic ies and functions of the real estate l icensing agency. The members

of the commission may be appointed by the director or by the state

governor. In some states, a certain number of posit ions on the commission

are reserved for members of the general publ ic, and the rest are held by real

estate brokers.

In most states, every year the commission is required to hold a specif ied

number of meetings that are open to the public. At these meetings, real

estate agents and members of the publ ic are given the opportunity to

comment on the topics under discussion and raise other issues concerning

the real estate profession.

When a Real Estate License is Required

A real estate l icense law must establish the types of act ivit ies for which a

real estate l icense is required. These act ivit ies typical ly include:

sel l ing, buying, or exchanging real estate;

negotiat ing for the sale, purchase, or exchange of real estate; and

l ist ing or advert is ing real estate for sale or exchange.

In some states, a real estate l icense is also required for the negotiat ion,

sale, or purchase of loans secured by real estate; the sale or purchase of

real estate securit ies (such as t imeshare interests); and/or property

management act ivit ies, such as leasing and col lect ing rents f rom real estate.

In addit ion, some states require a real estate l icense for the sale of business

opportunit ies, s ince the sale of a business sometimes involves a transfer of

real estate or the assignment of a lease.

Whatever act ivit ies are covered by the l icense law, a real estate l icense

is general ly required only when someone engages in those act ivit ies:

1. on behalf of another person, and

2. for compensation or in the expectat ion of compensat ion.

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Someone who’s sell ing or leasing her own property, or buying property on

her own behalf , does not need a l icense t o do so.

Exemptions. A l icense law typical ly has a number of specif ic exemptions

f rom its requirements. For example, it may not be necessary to have a real

estate l icense if you’re:

an attorney engaged in the pract ice of law;

a partner or corporate off icer act ing on behalf of a business

organizat ion, with respect to property owned, leased, or to be

purchased or leased by the organization;

act ing under a recorded power of attorney f rom the owner of

the property;

act ing under court order (as in the case of an executor, a receiver in

bankruptcy, or a trustee); or

merely performing clerical functions.

In some states, real estate agents may hire an unlicensed real estate

assistant to help them with their work. This is general ly allowed under the

cler ical exempt ion, the last one l isted above. The l icense law determines

what k inds of tasks may be delegated to an unlicensed assistant. For

example, an unl icensed assistant might be al lowed to give certain object ive

information about property (such as the property’s address) to members of

the publ ic, but not al lowed to discuss terms of sale or the condit ion of

the property.

In states where property managers are required to have real estate

l icenses, an exemption is typical ly made for resident managers, who l ive in

the apartment complexes where they lease units and col lect rents.

Also, for certain types of transactions, it may not be necessary to have a

real estate l icense if you’re l icensed by another agency. For example, in

most states, a l icensed secur it ies dealer would not be required to have a

real estate l icense in addit ion to a secur it ies l icense in order to handle a

transaction involving real estate secur it ies.

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Types of Licenses

Most states issue two types of real estate l icenses: a broker’s

l icense and a salesperson’s l icense. Some states also of fer an associate

broker’s l icense.

Broker’s License . A broker’s l icense authorizes the l icensee to engage in

any of the act ivit ies for which a real estate l icense is required.

A broker’s l icense may be issued to an individual or to a corporation. For

a corporate l icense, it ’s usual ly necessary for at least one corporate of f icer

to be appointed to act as the designated broker for the corporation. The

designated broker may have to be individual ly l icensed as a broker.

Someone who is l icensed as a broker may choose to work for another

broker instead of operating his own brokerage. Such a broker is of ten cal led

an associate broker . Some states issue a separate type of l icense for

associate brokers; in other states, associate brokers have an ordinary

broker’s l icense. In either case, an associate broker may be author ized to do

certain things that a salesperson cannot, such as managing a branch of f ice

of a brokerage.

Salesperson’s License . A salesperson’s l icense author izes the l icensee to

engage in any of the act ivit ies for which a real estate l icense is required, but

only under the supervis ion and control of a l icensed broker.

This means that a real estate salesperson cannot act direct ly for a

principal (a sel ler or buyer) in a real estate transact ion. A l ist ing agreement

or buyer agency agreement is not a contract between the pr incipal and the

salesperson who works with the principal; i t ’s a contract between the

principal and the salesperson’s employing broker.

Furthermore, a salesperson may receive compensation only f rom her own

employing broker. Principals and cooperating brokers are not al lowed to pay

a salesperson direct ly. Instead, they pay the salesperson’s employing

broker, who then pays the salesperson (see Chapter 1).

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In some states, al l of the l icensees who work for a broker may be referred

to as that broker’s affil iated licensees . The term encompasses l icensees

who have their own broker’s l icense or an associate broker’s l icense, as wel l

as those who have a salesperson’s l icense.

Special Licenses or Permits. For certain types of act ivit ies, a state may

require a special l icense or permit in addit ion to a real estate l icense. For

example, a l icensed real estate broker might be required to obtain a special

permit in order to broker a sale of oi l or mineral r ights separate f rom land, or

in order to sel l t imeshare interests.

Qualifications for a License

Although the qual if icat ions for a real estate l icense vary f rom state to

state, there are certain requirements tha t apply in near ly every state. An

applicant for a salesperson’s l icense typical ly must be at least 18 or 19

years old, have completed one or more basic real estate courses (such as

real estate principles), and have passed a writ ten examinat ion. A high

school diploma or the equivalent is required in some states, but not

in others.

For a broker’s l icense, the

applicant general ly must have taken

addit ional real estate courses and

passed another exam. In addit ion, a

broker’s l icense appl icant is

commonly required to have a certain

number of years of experience as a

real estate salesperson, and this

may have to be recent experience

(for example, within the past f ive

years). In some states, other work

exper ience that is deemed to be equivalent can be substituted for

exper ience as a real estate salesperson. A col lege degree in real estate

may also be considered an acceptable substitute.

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For either a broker’s l icense or a salesperson’s l icense, there are usual ly

some addit ional requirements concerning honesty. An appl icant may be

required to provide references f rom acquaintances who are wi l l ing to attest

to his honesty and truthfulness. An appl icant wil l be asked about cr iminal

convict ions, and the state may perform a background check; a l icense might

not be issued if the applicant was convicted of a felony within a certain

number of years prior to the appl icat ion.

In a growing number of states, a l icense applicant is required to be

f ingerprinted. An appl icant may also have to submit proof that he is in the

United States legal ly.

Licensees from Other States. When a person who is already l icensed as a

real estate salesperson or broker in one state applies for a l icense in

another state, she may not have to fulf i l l al l of the usual requirements for

l icensing. For example, in states that have a two-part real estate

examination, divided into a national or general section and a state section,

the out-of-state l icensee may have to take only the state section.

Moreover, some states have reciprocity agreements with ce rtain other

states. For instance, if State A and State B have a reciprocity agreement,

someone who has a real estate l icense in State A may be el igible for a

l icense in State B without taking the l icensing exam. (And, of course, the

same rule appl ies to someone l icensed in State B who wants to become

licensed in State A.) Taking this principle even further, some states wil l

issue a l icense to a person who is l icensed in any other state, without

requir ing him to take the exam.

License Renewal

A real estate l icense wil l expire if i t is not renewed per iodical ly.

Depending on the state, renewal may be required every year, or every two,

three, or four years. The l icensee must pay a renewal fee and, in most

states, must also submit proof that he has fulf i l led a cont inuing education

requirement (see below).

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In at least a few states, a real estate l icense cannot be renewed if the

l icensee’s name appears on a l ist of people who are delinquent on their chi ld

support payments.

Late Renewal. Someone whose l icense has expired can no longer legal ly

engage in real estate act ivit ies. States general ly allow for late renewal upon

payment of a penalty in addit ion to the renewal fee. I f an expired l icense is

not renewed within a specif ied per iod, however, the former l icensee ma y no

longer be al lowed to renew it . To become licensed again, she may be

required to fulf i l l al l of the standard requirements for l icensing, including

passing the current examination.

Inactive Status. A l icensee who plans to take a break f rom real estate

act ivit ies but does not want her l icense to lapse may have the option of

applying for inactive status. State law determines the length of t ime a

l icensee can remain on inactive status and the requirements for reactivat ing

a l icense.

Continuing Education. A large majority of states have a cont inuing

educat ion requirement for real estate l icensees. In those states, a l icense

cannot be renewed unless the l icensee has fulf i l led the continuing education

requirement. Continuing education is intended to help real estate l icensees

become more knowledgeable and keep up with changes in the law and other

developments in their f ield.

The number of required course hours varies f rom state to state, as do the

courses that can be accredited for continuing education. Commo n examples

include real estate pract ices, appraisal, f inance, fair housing, agency,

and ethics.

Disciplinary Action

Any law designed to regulate a profession wi l l fail i f i ts provisions are

ignored by members of the profession. So the director of a state ’s real

estate l icensing agency is empowered to enforce the real estate l icense law

by investigat ing and discipl ining l icensees who violate its provisions.

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Disciplinary Procedures. General ly, the director of the real estate l icensing

agency is required to investigate the act ions of a l icensee when someone

submits a complaint. The director also has the power to investigate a

l icensee even when no formal complaint has been made. I f the investigation

shows that a violat ion of the l icense law may have occurred, the director

must prepare a statement of charges against the l icensee and schedule an

administrat ive hear ing to look into the matter. The l icensee must be given a

certain amount of advance notice of the charges and the hear ing date.

There is usual ly a s tatute of l imitat ions for violat ions of the l icense law,

so that an accusat ion must be f i led within a certain number of years af ter an

al legedly unlawful act was committed. I f the act involved f raud or

misrepresentat ion, the l imitat ions per iod typical ly does not begin unt i l the

injured party discovers the problem.

At the hear ing, an administrat ive law judge hears the test imony of

witnesses under oath. The accused l icensee may appear at the hear ing with

or without an attorney. The administrat ive law judge decides whether a

violat ion of law occurred.

I f the evidence presented at the hear ing substant iates the charges

against the l icensee, the director has the power to suspend or revoke his

l icense. In some cases, the director also has the power to impose a f ine

instead of , or in addit ion to, suspending or revoking the l icense. The

l icensee general ly has the r ight to appeal the formal decision to a tr ial- level

state court.

Imposit ion of a f ine or other discipl inary penalty by the director does not

protect a l icensee from criminal prosecution or f rom liabi l i ty in a civi l suit

based on the same incident.

In a situat ion that involves an ongoing violat ion of the l icense law, the

director typical ly is empowered to request a court to issue a cease and

desist order , which orders the l icensee to stop the i l legal conduct

in question.

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Grounds for Discipl inary Action. A state’s real estate l icense law

includes a l ist of the grounds for suspending, revoking, or denying a l icense.

I t is this l ist of acts or omissions that sets the minimum standards for a

l icensee’s conduct.

The grounds for disciplinary act ion may range from extremely serious to

relat ively minor matters. The following l ist is a sampling of actions and

conduct that are typical ly grounds for discipl inary act ion aga inst a real

estate l icensee.

1. Making a substantial misrepresentat ion (del iberately or negl igently

making a false statement of fact, or fail ing to disclose a mater ial fact

to a principal).

2. Acting in any way that constitutes f raud or dishonest deal ing .

3. Acquir ing or renewing a l icense by f raud, misrepresentat ion, or deceit .

4. Being convicted of a felony or a misdemeanor involving

moral turpitude.

5. Commingl ing your own money or property with money or property you

received or are holding on behalf of a client or customer. (See the

discussion of trust funds later in this chapter.)

6. Performing l icensed activit ies negl igently or incompetent ly.

7. As a broker, fail ing to exercise reasonable supervis ion over the

act ivit ies of your af f i l iated l icensees.

8. Employing or compensating an unlicensed person for any act that

requires a l icense.

9. Acting as a dual agent without the knowledge or consent of all of the

part ies involved. (See Chapter 9.)

10. When sel l ing property in which you have a di rect or indirect ownership

interest, fail ing to disclose the nature and extent of that interest to

a buyer.

11. Making a secret prof it—prof it ing on a transaction without disclosing

the prof it to your principal.

12. As a seller’s agent, fai l ing to disc lose to the seller the nature and

extent of any direct or indirect interest in the property that you expect

to acquire as a result of the sale.

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13. As a seller’s agent, wi l l ful ly fai l ing to present a wr it ten of fer to

purchase to the sel ler.

14. As a buyer’s agent, fai l ing to disclose to the buyer the nature and

extent of any direct or indirect ownership interest you have in property

that the buyer is considering purchasing.

15. As a buyer’s agent, fai l ing to disclose to the buyer any famil ial ,

business, or other relat ionship you have with the owner of property

that the buyer is considering purchasing.

16. Violat ing any state or federal fair housing or civi l r ights law.

17. Willfully disregarding or violat ing any provision of the real estate

l icense law.

Keep in mind that in a part icular state, a few of the act ions we’ve l isted

may not violate the l icense law, and many other act ions may be violat ions

even though they aren’t l isted here.

Real Estate Recovery Funds. A state uses the threat of l icense suspension

or revocat ion to prevent unscrupulous conduct by real estate l icensees.

However, suspending a real estate l icense af ter the fact does not help

someone who lost money because of a l icensee’s unlawful act ions. Of

course, the injured party has a r ight to sue the l icensee in a civi l court, but

what if the l icensee has no money or other assets? In that case, a civi l

judgment would be worthless.

In some states, an injured party in a situation l ike this can turn to the

state real estate recovery fund. This is a fund maintained specif ically for

reimbursing members of the publ ic who have been injured by a l icensee’s

act ions or omissions in a real estate transaction, and who have no other

recourse against the l icensee. A recovery fund is usual ly funded with a

port ion of the l icense applicat ion and renewal fees collected by the state’s

real estate l icensing agency.

Here’s how a recovery fund typically works. When someone obtains a

civil judgment or arbitrat ion award against a l icensee based on the

l icensee’s intent ional f raud, misrepresentat ion, misappropr iat ion of trust

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funds, or other serious misconduct, the injured party can apply to the

recovery fund for payment of the judgment. He usual ly must be able to show

that the l icensee has no money or assets that cou ld be seized to pay

the judgment.

There may be l imits on how much money can be paid out of the recovery

fund to a single appl icant, for losses in a single transact ion, and for losses

caused by one l icensee. In most cases, when payment is made from the

fund, the l icense of the l icensee involved is automat ical ly suspended or

revoked ( if i t hasn’t been already) and can’t be reinstated unless the

l icensee repays the fund in full.

The Broker/Salesperson Relationship

In every state, the real estate l icense law includes provisions concerning

the employment relat ionship between brokers and their af f i l iated l icensees.

Affiliation with a Broker

A real estate salesperson must be af f i l iated with a broker in order to

engage in act ivit ies for which a real estate l icense is required. In some

states, a salesperson must submit proof of aff i l iat ion before her l icense wil l

be issued.

Some states require a broker to have a writ ten employment agreement

with each af f i l iated l icensee. Even if a wr i t ten contract is not required by

state law, it ’s usual ly to the advantage of both part ies to have one. Also, a

wr it ten contract is necessary to establ ish an aff i l iated l icensee’s status as

an independent contractor for tax purposes (see Chapter 1).

Brokers are typical ly required to keep the l icense cert if icates of aff i l iated

l icensees in their custody. There may also be a requirement for each l icense

cert if icate to be displayed in the of f ice where the l icensee works.

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Supervisory Responsibilities

Brokers are responsible for supervis ing the ir af f i l iated l icensees, and

failure to do so is grounds for discipl inary act ion. The l icense law may

specify certain supervisory responsibi l i t ies, such as reviewing contracts and

other documents prepared by an af f i l iated l icensee.

In some states, when an aff i l iated l icensee is f ined or has his l icense

suspended or revoked, the broker wi l l also be subject to discipl inary act ion,

unless the broker is able to show that she was not direct ly involved in the

unlawful conduct and handled the matter proper ly. For example, the broker

may be required to show that she reported the matter to the real estate

l icensing agency immediately upon learning of it .

Of course, in addit ion to discipl inary act ion, a broker may face civi l

l iabil i ty for losses caused by the misconduct of an aff i l iated l icensee. In

other words, a broker may be sued by a client or customer based on an

aff i l iated l icensee’s act ions. (See Chapter 9.)

Termination of Affiliation

The relat ionship between a broker and an aff i l iated l icensee can be

terminated at any t ime by either party. I f an aff i l iated l icensee quits or is

discharged, the broker is general ly expected to notify the real estate

l icensing agency that the aff i l iat ion has terminated. The broker may also be

required to report the circumstances tha t led to the terminat ion.

In some states, the broker is required to return a terminated l icensee’s

l icense cert if icate to the real estate l icensing agency. The agency wi l l issue

a new cert if icate when the l icensee becomes aff i l iated with another broker.

In other states, the l icense cert if icate can be transferred direct ly f rom the

old broker to the new broker.

In addit ion to providing for situations in which aff i l iat ion is intentional ly

terminated, each state’s l icense law addresses what wi l l happen to the

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l icenses of aff i l iated l icensees i f their broker’s l icense expires or is

suspended or revoked, or if the broker dies.

Regulation of Business Practices

A state’s real estate l icense law governs many of the day - to-day business

pract ices of brokers and their a ff i l iated l icensees. There are usual ly

provisions concerning brokerage off ices, the handl ing of transactions,

recordkeeping, trust funds, and advert is ing.

Brokerage Offices

A real estate broker is general ly required to maintain an of f ice in the

state where she is l icensed. The real estate l icensing agency must be

informed of the locat ion of the off ice and immediately not if ied of a change of

address. In some states, the l icense law specif ical ly requires a broker’s

off ice to be open to the publ ic.

Location and Signage. Many states al low a broker’s of f ice to be located in

the broker’s home, as long as that doesn’t violate appl icable zoning laws or

restr ict ive covenants. Wherever an of f ice is located, there may have to be a

conspicuously placed sign ident ifying it as a real estate brokerage off ice.

Business Names. There are of ten rules about the names that brokers can

give their businesses. For example, a real estate broker might be al lowed to

obtain a l icense under a f ict it ious business name, if the business nam e is

proper ly registered in accordance with state law. However, the real estate

l icensing agency general ly has the power to reject a name that could be

misleading or confusing to the publ ic.

Example: John Clement is the sole propr ietor of a brokerage

business. He decides to cal l the business Acme Home Sales. He

registers the business name as required by state law. Af ter

determining that no other broker is using a similar name, the real

estate l icensing agency issues a l icense to “John Clement, d.b.a.

Acme Home Sales.” (The “d.b.a.” stands for “doing business as.”)

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I f Clement wanted to cal l his business the Realty Inst itute, the

l icensing agency might not al low him to do so, on the grounds that

the name creates the misleading impression that the business is an

academic or research inst itut ion.

Branch Offices. License laws specify the procedures for establ ishing and

managing branch off ices of a brokerage. In most states, there is no l imit on

the number of branch off ices a broker can have, as long as every branc h

off ice is l icensed or registered with the real estate l icensing agency. As a

general rule, each of f ice must have a branch manager, who must be l icensed

as a broker or an associate broker.

Two Businesses in the Same Office . I t ’s not unusual for a real estate

broker to be involved in other business act ivit ies that are related to, or at

least not in conf l ict with, real estate brokerage. The l icense law may have

rules concerning what types of businesses can be run out of the same off ice

as a brokerage business, and the broker may be required to implement

var ious measures to keep the businesses separate. For example, the broker

might have to maintain a separate f i l ing system for each business, instead of

combining their records.

Dual-State Brokers . There may be an except ion to the general rules

regarding brokerage off ices for dual -state brokers—brokers who are also

act ively l icensed in another state. I f such a broker has an of f ice that ’s open

to the publ ic in State A, then State B won’t necessar ily require the broker to

have an off ice in State B as wel l. However, the broker wi l l usual ly be

required to keep all records of a real estate transaction in the state where

the property is located.

Handling Transactions

A real estate l icense law typical ly includes rules that govern how

licensees serve their cl ients and customers in a real estate transact ion, f rom

the negotiat ion of the purchase agreement through the closing. Here are

some examples.

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Negotiations. When involved in negotiat ions between a seller and a buyer,

a l icensee must present al l wr it ten communications ( including offers and

counterof fers) f rom one party to the other.

Document Copies. In most states, a l icensee is responsible for giving the

part ies to a transact ion a copy of every document they sign. The copy

usual ly must be provided at the t ime the signature is obtained.

Expeditious Performance. When a l icensee agrees to undertake certain

tasks on behalf of the part ies to a transaction (for example, ordering

inspect ions), he is general ly obl igated to perform those tasks expedit iously—

that is, in a t imely and eff icient manner. An intentional or negligent delay

may be grounds for discipl inary act ion.

Closings. The l icense law may specify the circumstances in which a real

estate broker can serve as the clos ing agent in a transact ion. For example,

in some states a broker can handle closing only for a transaction in which

she is already providing brokerage services, and may not charge a fee

(separate f rom an ordinary brokerage commission) for closing services.

Recordkeeping

A broker is generally required to keep a copy of all documents connected

with a real estate transaction. Depending on the type of transaction, this

might include a l ist ing agreement, a purchase agreement, escrow

instruct ions, agency disclosure statements, a sel ler disclosure statement,

sett lement statements, a lease, and/or a property management agreement. I t

might also include trust fund records, which we wil l discuss short ly.

The documents must be kept for a period of t ime specif ied in the

l icense law, such as three years f rom the closing date. They general ly

must be available for inspection by the real estate l icensing agency.

I f there is suf f icient cause, the agency may audit the records of one or

more transactions.

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Trust Funds

Throughout the country, the most common reason for discipl inary act ion

against real estate l icensees is the mishandl ing of trust funds , money

temporari ly entrusted to a broker by cl ients or customers. A state’s l icense

law is typical ly very specif ic about how trust funds are to be handled, and

i t ’s imperat ive for l icensees to be thoroughly acquainted with those rules.

Avoiding Commingling. The purpose of the rules concerning trust funds is

to help prevent a broker f rom making improper use of the funds. To

accomplish this, the rules prohibit a broker f rom commingling—mixing trust

funds together with the broker’s own money.

In most states, a broker is required to maintain one or more trust

accounts (somet imes cal led escrow accounts) for funds held on behalf of

cl ients and customers. Trust funds must always be deposited into a trust

account, and not into one of the broker’s general business accounts or

personal accounts. Conversely, the broker’s own money must not be placed

in a trust account maintained for clients or customers.

The prohibit ion against commingl ing makes it more dif f icult for a broker

to “borrow” trust funds, intentionally or accidental ly. I t also protects trust

funds from legal act ion against a broker. I f trust funds were placed in a

broker’s general account, a judgment creditor might be able to seize those

funds along with the broker’s own funds.

Trust Account Requirements. The l icense law typical ly includes detai led

requirements for brokers’ trust accounts. For instance, the law might require

a trust account to be opened in the broker’s name as it appears on the

broker’s l icense, in a recognized f inancial inst itut ion in the state where the

broker is doing business. The account may have to be specif ical ly

designated as a trust account, with the broker as trustee.

I f the l icense law allows trust accounts to be interest -bearing accounts,

there are usually rules concerning the disposit ion of the interest earned. For

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example, in many states the accruing interest must belong to the cl ient or

customer, not to the broker, unless otherwise agreed.

The license law typical ly also has rules concerning payment of the bank’s

service charges for a trust account. In some states, a broker is al lowed to

keep a l imited amount of her own money in a trust account to cover the

service charges. In other states, that is prohibited; the broker must arrange

for trust account service charges to be withdrawn from his general account.

Identifying Trust Funds. Somet imes a l icensee mishandles t rust funds

simply because he doesn’t realize that they are trust funds. The most

common example of trust funds in a real estate transaction is the good faith

deposit (earnest money) that a buyer tenders to a seller with an offer to

purchase. (See Chapter 8.) Tenant security deposits held by a proper ty

manager on behalf of a property owner are trust funds, as are rents

col lected by the property manager. So are any other funds belonging to a

cl ient or customer that are temporari ly in a broker’s custody pending del ivery

to a principal or payment to a th ird party.

Example: A seller gives money to a broker in advance to cover the

cost of advert is ing the property. In most states, the broker must

treat this money in accordance with the rules for trust funds unti l

the broker actually uses it to pay for the ad vert ising.

Handling Trust Funds. In most states, af ter accepting trust funds f rom a

cl ient or customer, a broker is general ly supposed to do one of three things

with the funds:

1. del iver them direct ly to a principal,

2. turn them over to an attorney or an escrow agent to hold in trust ( in

escrow), or

3. deposit them into a t rust account maintained by the broker.

Which of these three act ions is appropriate depends on the si tuation and

on any specif ic instruct ions given by the cl ient or customer. For ex ample, if

a property manager col lects a rental payment f rom a tenant, the

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management agreement might direct the property manager to give the

payment direct ly to the property owner. A buyer ’s deposit , on the other

hand, is usual ly held in trust by an attor ney, an escrow agent, or a broker

and not del ivered to the sel ler unti l the transact ion closes. This is general ly

governed by the terms of the purchase agreement.

Whichever of the three act ions is appropriate, it usually must be done

within a short t ime af ter the funds come into the broker’s possession. The

specif ic deadl ine is set in the l icense law. For example, some states require

trust funds to be given to a principal, placed in escrow, or deposited into a

broker’s trust account on the next business day af ter receipt; other states

al low 48 or 72 hours af ter receipt.

I f a client or customer gives

trust funds to an aff i l iated

l icensee instead of direct ly to a

broker, the l icensee is usually

required to turn the funds over to

her broker as soon as possible.

Alternatively, if so directed by the

broker, the l icensee may del iver

them to a principal, have them

placed in escrow, or deposit them

into the broker trust account by

the appl icable deadl ine.

Buyers’ Deposits . Some states have special rules for handling a buyer ’s

deposit . When a broker receives a deposit check f rom a buyer, the broker

may be al lowed to hold the check without deposit ing it unt i l the seller

accepts or rejects the buyer ’ of fer. If the offer is rejected, the check can be

returned to the buyer. If the offer is accepted, the broker must deposit the

check into the trust account (or give it to an escrow agent) by the applicable

deadl ine, unless the sel ler gives writ ten instruct ions to keep holding

it uncashed.

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Disbursing Trust Funds. In general, trust funds deposited in a broker’s

trust account must remain there unt i l they are withdrawn and disbursed

pursuant to instruct ions f rom the owner of the funds. While the owner of

trust funds is usual ly easy to ident ify, it should be noted that the ownership

may change as the real estate transaction progresses. For example, the

ownership of a buyer ’s deposit varies depending on whether or not the

buyer ’s of fer has been accepted. Before acceptance, the deposit belongs to

the buyer and must be handled according t o his instruct ions. Af ter

acceptance, however, ownership is not so clear -cut. The deposit can’t be

del ivered to the sel ler unti l the transaction closes or the seller otherwise

becomes entit led to i t (because the buyer has defaulted); in the meantime,

however, it usually can’t be returned to the buyer without the sel ler ’s

express writ ten permission.

I f a transaction falls through af ter the buyer’s deposit has been placed in

escrow or a broker’s trust account, there may be a dispute over the money;

the buyer and the seller may each feel entit led to it . In this s ituation, the

escrow agent or broker who holds the funds in trust may f i le an interpleader

act ion, turning the matter over to a court. The court wi l l decide which party

is the r ightful owner of the funds.

Personal Property. In the unusual event that a cl ient or customer entrusts a

broker with an item of personal property, the item generally must be treated

in accordance with the rules for trust funds. For example, depending on the

property in question, i t might be appropriate for the broker to keep it in a

safe deposit box at a bank; in that case, the broker might be required to

place it in a separate safe deposit box, not in the one that the broker uses

for her own papers and belongings.

Trust Fund Records. I t ’s very important to keep proper records of all trust

funds, including trust fund checks that are held uncashed, trust funds that

are sent direct ly to escrow, and trust funds that have been released to the

owner. Thorough trust fund records enable a broker to prevent overdraf ts

and prepare accurate accountings for clients. A state’s l icense law of ten

includes detai led requirements for trust account records.

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Conversion. Of course, in spite of al l of the rules concerning trust accounts,

i t ’s st i l l possible for a broker to misappropriate trust funds. This may be

referred to as conversion ; the broker has converted the funds to his own

use. Conversion can be the basis for a civi l suit by the owner of the trust

funds; the broker may be required to make rest itut ion (return the funds), and

also pay damages to compensate for losses that resulted f rom the

conversion. Conversion can also be the basis for cr iminal charges against

the broker. I t is an extremely ser ious violat ion of the l icense law, of f iduciary

duties, and of professional ethics.

Advertising and Promotions

In most states, the real estate l icense law includes some provisions

concerning advert is ing. Real estate l icensees also need to be aware of other

laws that regulate advert is ing, not just those that pertain specif ically to

real estate.

False Advertising. False advert is ing is usual ly a violat ion of the l icense

law. In some states, it is expl ic it ly l isted as grounds for disciplinary act ion;

in other states, it falls within the prohibit ion against f raud or

misrepresentat ion. False advert is ing may also be a violat ion of other state

and federal laws.

Blind Ads. Some license laws prohibit real estate l icensees f rom placing

bl ind ads. A blind ad is one that fails to include the name of the broker that

the l icensee who placed the ad works for, and/or fails to indicate that the ad

was placed by a l icensee. The rule against bl ind ads may or may not apply

when a l icensee advert ises her own property for sale.

Internet Advertising. In some states, real estate l icensees who advert ise or

provide information about real estate services on the Internet are required to

comply with a rule concerning contact with individual customers. There may

have to be procedures in place to ensure that only a real estate l icensee (or

someone exempt f rom the l icensing requirement) responds to inquir ies f rom

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customers or otherwise communicates direct ly with individual

customers onl ine.

Inducements. Sometimes a real estate l icensee offers a gif t , pr ize, or

rebate to encourage the recipient to attend a sales presentat ion. This is

sometimes cal led an inducement . In some states, if attendance at a sales

presentat ion is required to obtain a gif t , that must be disclosed in the

advert isement or sol icitat ion. Any other condit ions for receiving inducements

must also be disclosed. Also, if an inducement is given to one of the part ies

in a transaction, that may be considered a material fact that must be

disclosed to al l of the part ies.

Do Not Call Registry. Real estate l icensees who solicit business by making

“cold cal ls” to strangers must comply with the Federal Trade Commission’s

telemarketing rules. I t ’s against the law to make this type of cal l to someone

whose name appears on the National “Do Not Cal l” Registry, so l icensees

must check the regis try before placing calls (persons who engage in ongoing

telemarketing must check the registry at least once every 31 days). There

are also “Do Not Emai l” and “Do Not Fax” registr ies. (Rockwell, 240-254)

Cited Material:

Real Estate Principles . Bellevue, WA: Rockwell Publishing, 2014. . Pr int.