Change By Blake Hegeman and Andrew Kantor
On July 1, Virginia’s real estate agency law changes — this is the law that governs how Realtors® and their clients do business together. The changes are far from monumental, but they are going to impact some of your more common client interactions.
There are three notable changes to the law:
Many Realtors® are already meeting these requirements; most of these changes simply put longstanding best practices into law. But VAR had specific reasons for advocating for the new law. • It informs the consumer. The law helps keep consumers fully informed about the real estate services they’ll receive and the nature of their relationship with the licensee. It removes ambiguity, and puts everyone on the same page. • It mitigates Realtor® liability. The new law protects licensees by ensuring they provide full disclosure to the people they work with — and that the nature of the brokerage relationship is clear, unambiguous, and in writing. This can reduce a lot of consumer confusion — and the potential for lawsuits. • It discourages opportunistic dual agency. The law is intended to make sure that licensees who practice dual agency are fully informing consumers about the risky nature of that relationship. 1 Brokerage agreements must now be in writing. 2 Disclosures when acting as a dual agent (in certain situations) must be clearer and more comprehensive. 3 All residential real estate licensees must take a three-hour course on these changes. (Those who certify that they engaged only in commercial transactions are exempt.)
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Brokerage agreements So if you’re used to working with buyer clients on a handshake basis, and providing the brokerage agreement later in the game (e.g., when an offer is made, or when you submit a contract), you’ll have to treat the process more formally. Specifically, starting July 1, before you do any real estate-related licensed activity, you’ll have to have your client sign VAR form 450/460 — Exclusive/NonExclusive Right to Represent Buyer Agreement — or whatever equivalent form your company adopts. (A brokerage agreement is required for seller representatives as well, but this is typically fulfilled by the listing agreement.) So what do we mean by “licensed activity” that requires a brokerage agreement? The law requires that once an agent and a buyer have agreed to work together to purchase real estate, they must put their agreement in writing before the agent can begin to actually perform any licensed activity. Licensed activity means doing anything for a consumer you represent that only someone holding a real estate license is permitted to do. Some examples (and this is obviously not a comprehensive list): • Showing a property to a prospective client. • Giving any opinions or advice about a property’s condition or what repairs to make or ask for. • Negotiating rent, security deposit, or other lease provisions. Before you engage in any of these (or other, similar activities with the intended outcome of bringing together a buyer and a seller), you must have your client sign a brokerage agreement.
The most significant change is fairly simple and straightforward: Brokerage agreements must now be in writing. Further, they must be signed as soon as you engage in any kind of “licensed activity” on your clients’ behalf. In other words, anything that requires you to have a real estate license.
Where there’s flexibility • Duration. A signed agreement doesn’t have to be a long-term contract — it can be for a month, a week, a day, or even to show a single property. • Duties. The agreement can stipulate that you are acting as a standard agent, a limited-services agent, or an independent contractor. (See the glossary for details.) • Exclusivity. Brokerage agreements do not have to be exclusive. What must be included in a brokerage agreement Your brokerage agreement must contain, at an absolute minimum, the following: • A schedule of services you will provide. (Your brokerage may already have standard language for this section.) • A list of fees, if any — and how and when they will be paid. • The duration of the agreement; if this is omitted, the law assumes it’s for 90 days. Traditionally, some agents have waited until later in the client relationship to ask for a signed agreement, even to the point of including it with documents at closing. But best practices have always suggested you provide this sooner and in writing. And as of July 1, the law requires it as well. VOLUME 19 ● ISSUE 3
Brokers: Be on the lookout for new, shortened versions of buyer-broker agreements, too!
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Enhanced disclosure of dual agency When an unrepresented person is interested in a property you have listed, you might be tempted to keep the entire transaction in the firm and represent both sides.
There are two common ways of doing this: designated agency and disclosed dual agency. Both relationships require a written agreement signed by all parties. For designated agency, that’s VAR form 103; for dual agency use VAR form 101 (for residential) or 102 (for commercial) — or your company’s equivalent. Of the two, designated agency —when a principal or supervising broker assigns different licensees within the firm to represent exclusively the seller and buyer, respectively — has far fewer pitfalls. Dual agency is a much more controversial — and difficult — relationship, and it comes with significant limitations to the services you are legally allowed to provide either client. Because of that, starting July 1 the agency law will require you to provide those clients with new, specific language that more clearly explains those limitations. These are called “enhanced disclosures.” • Dual agents, for example, are prohibited from advising either party as to the merits of specific terms, offers, or counteroffers. • Dual agents can’t advise a buyer client about the suitability of the property or its condition (except the disclosures required by law for seller representatives). • Dual agents can’t advise either party in any dispute that might later arise relating to the transaction. Get a better understanding of dual agency in Virginia from Roanoke broker (and agency guru) Steve Hoover: VARealtor.com/agencyhistory
In short, both clients receive a reduced service level, but usually with no reduction in fee. (The only exceptions to these rules are commercial transactions, and certain situations in which existing clients come together.) These limitations are not new. Further, it’s long been the law in Virginia that licensees were required to explained to clients who contemplating a dual-agency relationship that the services and representation they’d receive would be diminished. However, industry leaders, educators and regulators have been concerned for some time that in practice, many agents were not disclosing these caveats as clearly and thoroughly as they should. The enhanced disclosure requirements that take effect July 1 are intended to assure full and accurate disclosure. There will be one major exception to the requirement to give the “new” disclosure of the consequences of dual agency to your clients. You may continue to use the more limited form of agency disclosure (the one found in current VAR Form 100) when a current seller client and a current buyer client — with whom you already have pre-existing brokerage agreements — come together in a transaction.
Words and phrases and clauses With the new agency law, there are some terms you might hear every now and again, and some others where it’s crucial to understand the difference.
Ministerial duties: The new agency law still allows you to represent your client and treat the other unrepresented party as a customer; the Virginia Real Estate Board Regulations allow you to perform ministerial duties for a customer (even for a fee, if you negotiate one). VREB regulations define ministerial acts as “those routine acts which a licensee can perform for a person which do not involve discretion or the exercise of the licensee’s own judgment.” Some examples of ministerial acts you can do for a customer include: • Filling in the blanks of a contract while strictly following the customer’s instructions; (Note that advising about the terms of the contract is reserved for your client and goes beyond the definition of a ministerial act.) • Delivering offers and counters; and • Holding the escrow deposit in your firm account. Independent contractor v. limited-services agent: A standard agent has a list of mandatory duties outlined in the Virginia Code; an example is “[r]receiving a and presenting in a timely manner written offers and counteroffers to and from the seller and purchasers, even when the property is already subject to a contract of sale.” When a client does not want a Realtor® to perform all these duties, you have the option of being either a limited-services agent or an independent contractor. The differences are small but critical. A limited-service agent performs, not surprisingly, limited services — only those services requested by the client. In effect, it’s taking the list of everything a fullservice agent does and subtracting duties that the client isn’t interested in. It requires a written brokerage agreement that meets the following criteria: 1. It discloses that the licensee is acting as a limitedservices representative. 2. It provides a list of the specific services that the licensee will provide to the client. 3. It provides a list of the specific statutory duties of a
standard agent that the limited-services representative will not provide the client. 4. It includes this language (or its equivalent): By entering into this brokerage agreement, the undersigned do hereby acknowledge their informed consent to the limited service representation by the licensee and do further acknowledge that neither the other party to the transaction nor any real estate licensee representing the other party is under any legal obligation to assist the undersigned with the performance of any duties and responsibilities of the undersigned not performed by the limited service representative. Another form of representation is that of an independent contractor or non-agent. This is created by a written brokerage agreement that specifically states that the real estate licensee is acting as an independent contractor and not as an agent. (This has nothing to do with your tax status or relationship with your broker, even though the terms are the same.) The agreement must also state the obligations an independent contractor has, and which have been agreed to by the parties. (VAR is developing a form specifically for use when a Realtor wants to act as an independent contractor, tentatively titled “Independent Contractor Agreement,” which will also be available in VAR’s Standard Forms Center before July 1, 2012.)
Client v. customer: You have a client when you have formed a brokerage relationship with someone — that means you’ve agreed to perform licensed activity for that consumer (licensed activity is performing services that only someone holding a real estate is permitted to do). Once you’ve agreed to perform the licensed activity, you must sign a brokerage agreement designating you as the person’s agent or representative. A customer is someone who is not represented by his or her own agent. You cannot give advice to a customer about the property or the transaction. If you already represent a client in the transaction, you have a legal obligation to represent the interests of your existing client only. For example, you may present an offer or perform other ministerial duties (see above) for the buyer customer, but your legal obligation remains with the seller.
Working with unrepresented parties If you already represent a client in the transaction — say, you’re hosting your seller’s open house, or you get a call based on your yard sign — you need to disclose this in writing as soon as you begin any substantive discussion about the property with someone who isn’t your client. VAR has created a new form, the Disclosure of Brokerage Agreement for Unrepresented Parties, for this very purpose. The idea is to inform the interested party that you’re there as the seller’s representative, and thus speaking with you is like speaking with the seller. (It’s a good idea to bring completed copies of this form to any open house you’re hosting.) Note that if the potential buyer already has an agent you don’t need to provide the form, but you’ll want to get in touch with that agent as soon as practicable. Therefore, one of the first questions you should always ask is whether a potential buyer client is represented by another licensee. If not, you must disclose any brokerage relationship you have with a party to the transaction before you begin a substantive discussion about a specific property.
That can be with a prospective buyer, seller, landlord, tenant — anyone who isn’t your client and who is not represented by another licensee. But what is a “substantive discussion”? Two common categories of substantive discussions include conversations about: • Pricing: If a prospective purchaser at an open house asks you if the seller is willing to reduce the sale price — that is a substantive discussion; and • Repairs: If a prospective purchaser asks you if the seller is willing to agree to paint the house as part of the contract — that is substantive. Ultimately, it is up to the licensee to determine when a conversation turns substantive. “Is that a sugar maple?” Not substantive. “Will the seller remove that maple tree?” Substantive. At the same time, before you begin to solicit otherwise confidential information from a prospective buyer — “Where do you work?” or “How much were you looking to spend?” for instance — you must present the disclosure form.
Mandatory three-hour class Starting July 1, in order to renew their licenses real estate agents in Virginia must take a three-hour course on the provisions of the agency statute and the changes made in the legislation.
Check with your local association or real estate school to find where you can take this course, or browse through the large database of classes compiled at VARealtor.com/agency to find one near you. Just be sure it’s listed as “Approved 3 hours CE/PL RSA.” When should you take the course? If your current license expires July 31, 2012 or later, you can take the agency course any time between now and your renewal date. (In fact, if your license expires in July 2012, you’ll need the course quickly.) However, if your license expires June 30, 2012 or earlier, you should wait to take the course until after you have renewed your license and your next licensing cycle begins. (You may also take the course now to be sure you’re familiar with the law’s requirements, but you’ll need to take it again, for credit, in your next license cycle.)
With all the publicity being given to these changes to the agency law, it’s easy to lose sight of a simple fact: Not that much is changing. In fact, for many Realtors®, the only difference will be switching to using the new forms. (See Forms Factor, page 19.) The “new” agency law simply codifies longstanding best practices — what should have been standard operating procedure all along. It protects Realtors® by ensuring they inform their clients quickly and clearly about the nature of what can be a complex relationship. And it protects consumers by giving them the confidence to know up front what to expect from their Realtor®. ●
What can you do right now?
V A R’s Agency Center Visit VAR’s new, growing, and comprehensive site for all things related to the changes to the agency law:
VARealtor.com/agency. You’ll find a frequently updated list of agency courses throughout the Commonwealth, Q&As on the law, help for navigating transactions, video presentations, a new version of the consumer-oriented A Realtor®’s Role (included in this issue!) and more.
Don’t miss our free webinar on the new agency law: Tuesday, June 12, 10 a.m., featuring attorneys and educators from NVAR, RAR, and VAR. See the new forms, get real-world examples of disclosure conversations and brokerage agreements, and learn about the resources available. Register today at VARealtor.com/agency.