CHAPTER 5
REAL ESTATE BROKERAGE OPERATIONS
Chapter Overview
In all states, active real estate
brokers are required to open and maintain an office. Because real estate
brokerage firms may be organized in several different ways and because
licensees do business with businesses organized in various ways, it is
important to the broker and to the general public that they understand the
types of legal business entities that may be encountered. Furthermore, brokers
receive money, funds, checks, deposits, drafts and advance fees during the
normal course of doing business, and they must therefore be subject to
regulation governing such monies held in trust.
This chapter explains many of the
influences affecting the day-to-day operation of a real estate office.
Statutory requirements spell out office and branch office regulations as well
as rules governing signs, advertising, record keeping and conduct. The broker’s
role as an expert and the proper handling of escrow funds, advance fees, fees
for rental information or rental lists and compensation are discussed in
detail. The various forms of business entities that may be encountered and that
are permitted to engage in real estate brokerage activities are described.
Learning Objectives
Upon completion of this chapter, the
student should be able to:
1. Identify the requirements for a broker’s office(s).
2. Explain what determines whether a temporary shelter must be registered as a branch office.
3. List the requirements related to sign regulation.
4. List the requirements related to the regulation of advertising by real estate licensees.
5. Explain the term immediately as it applies to earnest money deposits.
6. Describe the four settlement procedures available to a broker who has received conflicting demands or who has a good-faith doubt as to who is entitled to disputed funds.
7. List the rule requirements for the handling of advance fees.
8. Explain the rule regarding the advertisement of rental property information or lists or negotiation of rentals.
9. Describe the obligations placed on a salesperson who changes employers.
10. Contrast the features of the various types of business organizations.
Key Terms
advance fee
arbitration
blind advertisement
commingle
conversion
corporation
deposit
earnest money
escrow (trust) account
escrow disbursement order (EDO)
general partnership
good-faith doubt
interpleader
kickback (rebate)
limited liability company
limited liability partnership
limited partnership
mediation
ostensible
partnership
point of contact
information
policy manual
sole proprietorship
Teaching Outline
I. Brokerage Offices
A. All active brokers must maintain an office, at least one room in a permanent building
1. Primary office is the broker’s principal office
2. Maintain books, records, files, etc.
3. Registered with DBPR
4. Salespersons may not open their own offices
5. Salespersons may be registered from principal office or branch office
B. Branch offices
1. May have additional offices
2. Each branch office must be registered
3. Use and character of a temporary shelter determines need to register
4. Registrations not transferable to other locations
5. Salespersons who work majority of time out of a branch office should be so registered
C. Signs
1. A sign must be displayed at or near the exterior or interior of the entrance to the principal office and all branch offices
2. Prescribed format of office signs
a. Sign must contain the words “Licensed Real Estate Broker” or “Lic. Real Estate Broker”
b. In the case of a partnership, a corporation, limited liability company, or limited partnership, the sign must also include the name of the business and the name of at least one of the active brokers
c. If the sign contains names of salespersons and broker-salespersons, it must include their license status
d. Letters must be at least one inch high on exterior signs
e. Letters must be at least one-half inch high on interior signs
II. Advertising
A. Must make status as a broker clear
1. Requirements apply to business letterhead stationery and business cards
2. Blind ads are prohibited—advertising that fails to disclose the licensed name of the brokerage firm
3. Licensed name of brokerage firm required; last name as registered, if personal name used
4. When advertising on a site on the Internet, the name of the brokerage firm must appear adjacent to or immediately above or below the point of contact
5. Salespersons may not advertise in their own names; but their names may appear in addition to their broker’s name
B. Telephone “cold calling” restraints
1. No solicitation list
2. Licensees may call in response to a for-sale-by-owner sign
3. Licensees may contact clients and customers with whom they have had previous business relationships
III. Escrow or Trust Accounts
A. An escrow account is an account for the deposit of money held by a third party in trust for another
1. Checks made out to the salesperson personally should be immediately endorsed and include the words “For Deposit Only to the (name of the escrow account)”
2. Earnest money may be in the form of cash, currency, or any medium of exchange or securities to be converted into money
3. Timeliness of deposits
a. “Immediately” for salespersons—not later than the end of the next business day
b. “Immediately” for brokers—not later than the end of the third business day
4. Funds may be placed in an interest-bearing or non-interest-bearing escrow account with a Florida-based title company having trust powers, a commercial bank, a credit union, a savings association or, if designated in the sale contract, with a Florida attorney
a. Postdated checks—get permission of seller to accept
5. Accurate records must be maintained and made available for audit by FREC or DBPR at any reasonable time; period required to preserve—5 years
B. Disposition of escrow deposits
1. Earnest money deposits must be placed immediately in an escrow account
2. Commingle—mixing of escrow money with the broker’s personal funds or business funds. Allowed up to $200 to open and maintain account
3. Conversion—unauthorized control or use of another person’s personal property
4. Conflicting claims or a good-faith doubt on funds in escrow
a. Three situations in which a good-faith doubt exists
b. Broker must promptly notify FREC in writing, within 15 business days, and within 30 business days after the last demand: (MALE)
(1) Obtain the written consent of all parties to submit the dispute to Mediation
(2) Obtain the consent of all parties to submit the dispute to Arbitration
(3) By Litigation in a court of law, or
(4) Request that FREC issue an Escrow disbursement order (EDO) stating who is entitled to the escrow funds
c. If a licensee promptly employs one of the above escape procedures and acts legally, no complaint may be filed against him or her
C. Advance fees
1. At least 75% of all advance fees collected must be placed in a separate advance fee trust account or advance fee escrow account
2. Advance fees may not be commingled with any other escrow account or personal funds
3. Reconcile the account monthly and produce accounting records upon demand to DBPR—prepare a report if no activity during period containing a copy of the bank statement
4. To withdraw funds from an advance fee trust account, broker must first furnish the principal with a statement itemizing expected expenditures; can withdraw funds if funds are to be used for the benefit of the principal, not for broker overhead expenses
5. Broker must furnish each principal an accounting each quarter
6. Broker must furnish a separate accounting when listing contract is performed (also to FREC on demand); remaining funds must be returned to principal when the listing expires or within 18 months, whichever is shorter
7. The advance fee requirements do not apply to auctioning real property if in advance to the auction the broker and seller have entered into a written agreement providing for anticipated expenses to be incurred and paid
8. Penalties for violations
a. Misdemeanor of first degree
b. Triple (treble) damages for misapplied funds plus reasonable attorney’s fees
IV. Rental Lists and Rental Companies
A. Anyone who advertises rental property information or lists is acting as a broker
1. Must provide a contract or receipt to tenant; agreement must follow FREC guidelines; copy must be sent to DBPR within 30 days of first use
2. Conditions to be stated in contract or receipt include
a. If prospective tenant does not obtain a rental, 75% of fee must be refunded
b. If information provided to the tenant is not current or accurate, 100% of fee is to be repaid
c. Tenant must request refund or notify broker within 30 days of contract
3. Advertising rental property information or lists that are not current or are materially inaccurate is a first degree misdemeanor
V. Broker’s Role as an Expert
A. Brokers are supposed to possess expert knowledge
1. Customers may rely on material statements of real estate broker
2. Opinions of title and questions about title—see an attorney
3. Broker may not exaggerate, conceal or misrepresent
VI. Broker’s Commission
A. Antitrust laws (prohibit price fixing)
1. Amount of commission is negotiable, and it is arrived at by agreement between the broker and principal
2. All commissions and all listings are legally the property of the broker
3. Advise principals and all affected parties prior to accepting a “kickback” or “rebate”
4. Broker’s liens (and legal judgments)
5. Salespersons and cooperating brokers may not directly receive a commission from the principal in a transaction
6. Policy manual
VII. Change of Employer
A. Must notify FREC—10 days
1. Must include information about old and new employment
2. May not divert customers from old to new employer
3. Obligations do not end with termination
4. May not take original or duplicate copies of records from old employer
VIII. Membership in Organizations—May Not Imply Membership in Any Organization Unless Actually a Member
IX. Types of Business Entities That May Register
A. Sole proprietorships
1. One-owner business
2. Can register as a broker
3. May use own name or a fictitious name as a trade name once registered with the Commission
4. May be dissolved by:
a. No longer doing business and notifying the Commission
b. Expiration of license
c. Court order
d. Death of owner
B. Partnerships
1. A general partnership is an association of two or more persons for the purpose of jointly conducting business, each being responsible for all the debts incurred in the business
2. Created only by contract (written, oral or implied)
3. Two or more persons who agree to share profits and losses
4. Partnership as a real estate broker
a. Partnership must be registered
b. At least one partner must be a licensed active broker
c. All partners who deal with the public must be licensed active brokers
d. All others must be registered
e. If the license or registration of at least one active broker member is not in force, the registration of the partnership is canceled automatically during that period of time
f. Salesperson or broker-salesperson cannot be general partner
g. FREC rules involving partner changes
h. Ostensible (or quasi) partnerships are illegal
5. Limited partnership is created by a written instrument filed with Secretary of State
a. Must have one or more general partners and one or more limited partners
b. All general partners must be licensed or registered as in a general partnership
c. Salesperson or broker-salesperson cannot be a general partner in firm in which employed, but may be a limited partner
C. Limited liability partnership
1. Protection from personal liability for acts of another partner or by an employee, agent, or representative of the limited liability partnership
D. Corporations
1. Artificial person created by law
2. Must file charter with Florida Secretary of State (as do “foreign” corporations)
3. Managed by a board of directors acting through executive officers
4. Control requirements
5. Corporation as a real estate broker
a. At least one officer or director must be licensed as an active broker
b. All officers and directors who deal with the public in brokerage transactions must be licensed active brokers
c. All other officers and directors must be registered
d. Salesperson or broker-salesperson cannot be a director or officer
e. Salesperson or broker-salesperson can be a stockholder
6. Chapter 475, F.S., does not make a distinction between profit and nonprofit corporations
E. Limited Liability Companies (LLCs)
1. Provides protection from personal liability for business debts
2. IRS treats LLCs as a partnership for tax purposes
3. Not subject to Florida’s corporate income tax
X. Trade Names
A. Definition: A fictitious name that may be any name except the actual name or trade name of another FREC licensee or registrant
1. Individual, partnership or corporation real estate broker may use a trade name
2. Name must first be entered on FREC records
3. Only one trade name
B. Florida Fictitious Name Act—real estate brokers are exempt; however, brokerage corporations, partnerships, limited partnerships, limited liability corporations, and limited liability partnerships must comply
XI. Business Arrangements and Entities That May Not Register as Brokers
A. Corporation sole
1. An ecclesiastical or church organization
B. Joint venture (Joint adventure)
1. A temporary form of business arrangement
2. Used when two or more individuals combine efforts to complete a single business transaction or a fixed number of transactions
3. Salesperson cannot join with brokers to form real estate joint ventures
C. Business trust
1. Formed to engage in transactions involving its own property
2. Title to real property is acquired in the name of a trustee or group of trustees
3. Cannot be registered as a broker
4. Must employ licensees unless sales personnel are on salary and receive no additional compensation for sales
D. Cooperative association
1. Recognized as commercial organization
2. Cannot be registered as a broker
E. Unincorporated association
1. Organized to accomplish noncommercial common purpose; for example, neighborhood association
2. Can incur liabilities
3. Cannot be registered as a broker
4. Exercise caution when real estate matters are involved
Discussion Questions
1. What constitutes “timeliness” in depositing earnest money into an escrow account?
2. What requirements must be met before a broker
may withdraw funds from an “advance fee trust account”?
3. What are the principal differences between
independent contractor and employee status for a salesperson?
4. What actions are required of a real estate
salesperson when he or she changes employers?
Classroom Exercises
1. Assume the role of a broker who has advertised
for new sales associates. The students play the role of recently licensed salespersons.
Allow the students to ask questions regarding independent contractor versus
employee status, commission percentages, incentives and plateaus, handling of
advertising, sign placement, floor time, policy manual or whatever is
appropriate to the lesson material.
2. Simulate a situation in which the students
work for you as their broker. They receive an earnest money deposit from a
prospective purchaser, and the check is made out to them or is postdated.
Discuss the actions to be taken.
3. Both the buyer and the seller lay claim to the
buyer’s deposit, which you are holding. Ask the students what courses of action
are open to them as the broker involved. Show them a copy of a blank escrow
disbursement order once this exercise reaches the appropriate point to do so.
4. Discuss the pros and cons of organizing a real
estate brokerage firm as a corporation versus a partnership.
5. Ask the class to describe a situation that
could result in the creation of an ostensible partnership.