LEARNING OBJECTIVES
When you've finished reading this Chapter, you should be able to: 
► identify the role of technologies, personnel, and license laws in the operation of a real estate business.
► describe the various types of antitrust violations common in the real estate industry and the penalties involved with each.
► explain how a broker's compensation is usually determined.
► distinguish employees from independent contractors and explain why the distinction is important.
► define the following key terms: antitrust laws; employee; ready willing, and able; brokerage; independent contractor; buyer; commission; procuring cause; transactional broker.

REAL ESTATE PRACTICE & PRINCIPLES KEY WORD MATCH QUIZ --- CLICK HERE ---
I would encourage you to take this “Match quiz” now as a pre-chapter challenge to see how many of these key words or phrases you are familiar with. At the end of each chapter I recommend that you take the quiz again to reinforce these important keywords. Each page contains four words or phrases and you need to drag and drop the correct definition into the puzzle key. Each page is considered as a question, but there is no scoring and you can return to each chapter quiz as many times as needed to reinforce your memory. 

 ► WHY LEARN ABOUT... REAL ESTATE BROKERAGE?
Real estate is an industry driven by small businesses. Most brokerages are not giant national companies, and even those that are members of large franchises are still small businesses at heart, run locally to serve what is essentially a local market. Like any small business, there are challenges and advantages. To be successful, a licensee has to know not only his or her product, real estate, but also how to run a business. There are financial challenges to running any operation, as well as personnel issues such as how many people to hire and in what capacity. What jobs need to be done, and what kinds of people are needed to do them best? Who are you competing with, and how can you successfully thrive in a marketplace with 5, 10, 20, or more different brokerages all competing for the same piece of the pie? The answers to these questions are not easy ones, but a successful licensee needs to think of himself or herself as a businessperson, not just as an agent.

► THE HISTORY OF BROKERAGE
The nature of real estate brokerage services, particularly those provided in residential sales transactions, has changed significantly in recent years. Through the 1950s, real estate brokerage firms were primarily one-office, minimally-staffed, family-run operations. The broker listed an owner's property for sale and found a buyer without assistance from other brokerage companies. The sale was eventually negotiated and closed. It was relatively clear that the broker represented the seller's interests. The common-law doctrine of caveat emptor ("let the buyer beware") was the rule; buyers were pretty much on their own.

In the 1960s, however, the way buyers and sellers were brought together in real estate transactions began to change. Brokers started to share information about properties they listed, resulting in two brokers cooperating to sell a property. The brokers formalized this exchange of information by creating multiple-listing services (MLSs). The MLS expedited sales by increasing a single property's expo-sure to a greater number of potential buyers. Because it resulted in more sales, the MLS quickly became a widely used industry service. But one thing stayed the same: Both brokers still represented the seller's interest.

While this arrangement benefited sellers, buyers came to question whether their interests were being protected. They began to demand not only accurate, factual information but also objective advice, particularly in the face of increasingly complex real estate transactions. Buyers view the real estate licensee as the expert on whom they can rely for guidance. In short, buyers have begun to seek not only protection but representation as well. Almost all states recognize buyer agency today, and a large percentage of sales contracts are written by buyer agents.
 
► REAL ESTATE LICENSE LAWS
All 50 states, the District of Columbia, and all Canadian provinces license and regulate the activities of real estate brokers and salespersons. While the laws share a common purpose, the details vary from state to state. Uniform policies and standards for administering and enforcing state license laws are promoted by an organization of state license law officials known as ARELLO, the Association of Real Estate License Law Officials.

Purpose of License Laws 
Real estate license laws have been enacted to protect the public by ensuring a standard of competence and professionalism in the real estate industry. The laws achieve this goal by
► establishing basic requirements for obtaining a real estate license and, in many cases, requiring continuing education to keep a license;
► defining which activities require licensing;
► describing the acceptable standards of conduct and practice for licensees; and
► enforcing those standards through a disciplinary system.

The purpose of these laws is not merely to regulate the real estate industry. Their main objective is to make sure that the rights of purchasers, sellers, tenants, and owners are protected from unscrupulous or sloppy practices. The laws are not intended to prevent licensees from conducting their businesses successfully or to interfere in legitimate transactions. Laws cannot create an ethical or a moral market-place. However, by establishing minimum levels of competency and the limits of permitted behavior, laws can make the marketplace safer and more honest.

Each state has a licensing authority—a commission, a department, a division, a board, or an agency—for real estate brokers and salespersons. This authority has the power to issue licenses, make real estate information available to licensees and the public, and enforce the statutory real estate law.

Each licensing authority has also adopted a set of administrative rules and regulations that further define the statutory law. The rules and regulations provide for administering the law and set operating guidelines for licensees. The rules aril regulations have the same force and effect as any law. Both the law and the rules are usually enforced through fines and the denial, suspension, or revocation of licenses. Civil and criminal court actions can be brought against violators in some serious cases.

IN PRACTICE   Each state's real estate license laws and the rules and regulations of its real estate commission or board establish the framework for all of a licensee's activities. It is vital that each licensee have a clear and comprehensive understanding of his or her state's laws and regulations, not only for purposes of the licensing examination, but to ensure that the licensee's practice of real estate is both legal and successful.
 
► REAL ESTATE BROKERAGE
Brokerage is simply the business of bringing parties together. Mortgage brokers match lenders with borrowers; stockbrokers bring together investors and corporations; customs brokers help importers navigate through complex customs procedures. A real estate broker is defined as a person licensed to buy, sell, exchange, or lease real property for others and to charge a fee for these services.

A brokerage business may take many forms. It may be a sole proprietorship (a single-owner company), a corporation, or a partnership with another broker. The office may be independent or part of a regional or national franchise. The business may consist of a single office or multiple branches. The broker's office may be located in a downtown highrise, a suburban shopping center, or the broker's home. A typical real estate brokerage may specialize in one kind of transaction or service or may offer an array of services.

No matter what form it takes, however, a real estate brokerage has the same demands, expenses, and rewards as any other small business. The real estate industry, after all, is made up of thousands of small businesses operating in defined local markets. A real estate broker faces the same challenges as an entrepreneur in any other industry. In addition to mastering the complexities of real estate transactions, the broker must be able to handle the day-to-day details of running a business. He or she must set effective policies for every aspect of the brokerage operation: maintaining space and equipment, hiring employees and salespersons, determining compensation, directing staff and sales activities, and implementing procedures to follow in carrying out agency duties. Each state's real estate license laws and regulations establish the business activities and methods of doing business that are permitted.

IN PRACTICE   At each step in a real estate transaction, the broker should advise the parties to secure legal counsel to protect their interests. Although real estate brokers and salespersons may bring buyers and sellers together, and in most states may fill in preprinted blank purchase agreement forms, only an attorney may offer legal advice or prepare legal documents. Licensees who are not attorneys are prohibited from practicing law.

Real Estate Assistants
A real estate assistant (also known as a personal assistant or professional assistant) is a combination office manager, marketer, organizer, and facilitator with a fundamental understanding of the real estate industry. An assistant may or may not have a real estate license, depending on state law. The extent to which the assistant can help the broker or salesperson with transactions is often determined by state license laws. Depending on state law, an assistant may perform duties ranging from clerical and secretarial functions to office management, telemarketing, market strategy development, and direct con-tact with clients and customers. A licensed assistant can set up and host open houses and assist in all aspects of a real estate transaction.

Technology
In addition to assistants, a wide range of technologies is available to help a real estate licensee do his or her job more efficiently and effectively. Computers are a necessary ingredient in any modem real estate brokerage.
 
Licensees can find community and mortgage information on the Internet via services such as America Online, Internet Explorer, and Prodigy. Multiple-listing and homefinder services are available to real estate professionals through their professional associations. Numerous software packages have been designed specifically for real estate professionals. Some of these pro-grams help real estate brokers and salespersons with such office management tasks as billing, accounting, and timekeeping. Other software assists with marketing and advertising properties and services and with designing and producing flyers, business cards, pamphlets, and other promotional materials.

In some states, continuing education requirements can be met through the use of specially designed continuing education software. Real estate Web sites, home pages, and computer networks help licensees keep in touch, and some cable and satellite television channels are dedicated solely to real estate programming for both consumers and professionals.

The Internet has brought tremendous change to the real estate industry. Real estate practitioners and consumers rely heavily on Internet usage for a variety of services. Many real estate agencies have Web sites that provide extraordinary search databases for property and other searches.

The Internet is a powerful tool for consumers in finding information about properties, relocation services, and particular communities. Typically, real estate Web site information is updated daily. Many of the Web sites also have "disclaimers," indicating that the material on their site is solely for informational purposes and that no warranties or representations have been made.

E-mail is yet another powerful tool making communication between real estate agents and consumers much more efficient. Gone are the days of playing phone tag. Instead, sending a quick e-mail message saves both agents and consumers valuable time. A real estate agent should be prepared for consumers who primarily want to communicate through the use of e-mail.

Real estate brokers and salespersons can carry laptop computers with portable modems that link them with their offices or the Web, an MLS, or a mortgage company from virtually anywhere. Portable fax machines, pagers, and cellular phones make licensees available to their offices and clients 24 hours a day. Voice-mail systems can track caller response to advertisements and give callers information about specific properties when the broker or salesperson is unavailable. Yard signs are available that broadcast details about a property on an AM radio band, so drivers passing by can tune in for tempting information. And handheld PDAs (personal digital assistants) help licensees manage time much more effectively. In fact, PDAs can serve many functions, including use as a portable database of an MLS listing and as a place for storing information on prospective buyer's comments on a home, which then can be forwarded to the seller.

All this technology is a great boon to practitioners, but real estate brokers and salespersons must make careful decisions about which technologies best suit their needs. Furthermore, they must keep up with the rapidly changing world of high-tech real estate tools to remain competitive.

IN PRACTICE     Home listings are available to the general public on the Internet, through real estate agency Web sites, and other sites such as CyberHomes (http://www.cyberhomes.com) and NAR (http://www.realtor.com). By accessing these services, potential buyers can preview photographs of properties and narrow their searches by price range, number of bedrooms, amenities, neighborhood, or school district.

Broker – Salesperson Relationship
Although brokerage firms vary widely in size, few brokers today perform their duties without the assistance of salespersons. Consequently, much of the business's success hinges on the broker-salesperson relationship.

A real estate salesperson is any person licensed to perform real estate activities on behalf of a licensed real estate broker. In Tennessee the salesperson license is called an “Affiliate Broker”. The affiliate broker is licensed under a Principal Broker who is fully responsible for the actions performed in the course of the real estate business by all persons licensed under the broker. In turn, all of a salesperson's activities must be performed in the name of the supervising broker. The salesperson can carry out only those responsibilities assigned by the broker with whom he or she is affiliated and can receive compensation only from that broker. As an agent of the broker, the sales-person has no authority to make contracts with or receive compensation from any other party. The broker is liable for the acts of the salesperson within the scope of the employment agreement.

Independent contractor versus employee. The employment agreement between a broker and a salesperson should define the nature, obligations, and responsibilities of the relationship. Essentially, the salesperson may be either an employee or an independent contractor. State license laws generally treat the sales-person as the employee of the affiliate broker, regardless of whether the sales-person is considered to be an employee or an independent contractor for income tax purposes. Whether a salesperson is treated as an employee or an independent contractor affects the structure of the salesperson's responsibilities and the broker's liability to pay and withhold taxes from the salesperson's earnings.

A broker can exercise certain controls over salespersons who are employees. The broker may require an employee to follow rules governing such matters as working hours, office routine, attendance at sales meetings, assignment of sales quotas, and adherence to dress codes. As an employer, a broker is required by the federal government to withhold Social Security tax and income tax from wages paid to employees. The broker is also required to pay unemployment compensation tax on wages paid to one or more employees, as defined by state and federal laws. In addition, employees might receive benefits such as health insurance, profit-sharing plans, and worker's compensation.

A broker's relationship with a salesperson who is an independent contractor is very different. As the name implies, an independent contractor operates more independently than an employee, and a broker may not exercise the same degree of control over the salesperson's activities. While the broker may control what the independent contractor does, the broker cannot dictate how to do it. The broker cannot require the independent contractor to keep specific office hours or attend sales meetings. Independent contractors are responsible for paying their own income and Social Security taxes and receive nothing from brokers that could be construed as an employee benefit, such as health insurance or paid vacation time. As a rule, independent contractors use their own materials and equipment.

The Internal Revenue Service often investigates the independent contractor/employee situation in real estate offices. Under the qualified real estate agent category in the Internal Revenue Code, meeting the following three requirements can establish an independent contractor status:

1. The individual must have a current real estate license.
2. He or she must have a written contract with the broker that specifies that the salesperson will not be treated as an employee for federal tax purposes.
3. At least 90 percent of the individual's income as a licensee must be based on sales production and not on the number of hours worked.

IN PRACTICE     A broker should have a standardized employment agreement drafted and reviewed by an attorney to ensure its compliance with federal law. The broker should also be aware that written agreements carry little weight with an IRS auditor if the actions of the parties contradict the provisions of the contract. Specific legal and tax questions regarding independent contractors should be referred to a competent attorney or accountant.

Broker’s Compensation
The broker's compensation is specified in the contract with the principal. License laws may stipulate that a written agreement must establish the compensation to be paid. Compensation can be in the form of a commission or brokerage fee (computed as a percentage of the total sales price), a flat fee, or an hourly rate. The amount of a broker's commission is negotiable in every case. Attempting, however subtly, to impose uniform commission rates is a clear violation of state and federal antitrust laws (discussed later in this Chapter). A broker may, however, set the minimum rate acceptable for that broker's firm. The important point is for broker and client to agree on a rate before the agency relationship is established. A commission may be any percentage of the sales price that the market will bear. Brokers in different parts of the country and in different kinds of real estate charge commissions ranging from less than 5 percent to more than 8 percent.

A commission is usually considered earned when the work for which the broker was hired has been accomplished. Most sales commissions are payable when the sale is consummated by delivery of the seller's deed. This provision is generally included in the listing agreement. When the sales or listing agreement specifies no time for the payment of the broker's commission, the commission is usually earned when
► a completed sales contract has been executed by a ready, willing, and able buyer;
► the contract has been accepted and executed by the seller; and ? copies of the contract are in the possession of all parties. 

To be entitled to a sales commission, an individual must be
► a licensed broker,
► the procuring cause of the sale, and
► employed by the buyer or seller under a valid contract.

To be considered the procuring cause of a sale, the broker must have started or caused a chain of events that resulted in the sale. A broker who causes or completes such an action without a contract or without having been promised payment is a volunteer and may not legally claim compensation. Many other factors affect a broker's status as procuring cause. For instance, if the agent abandons the transaction, he or she may not be able to return and claim to have been the procuring cause. In all cases, the key is determining who really sold the property. Procuring cause disputes between brokers are usually settled through an arbitration hearing conducted by the local board or association. Disputes between a broker and a client may go to court, however.

Once a seller accepts an offer from a ready, willing, and able buyer, the broker is entitled to a commission. A ready, willing, and able buyer is one prepared to buy on the seller's terms and ready to take positive steps toward consummation of the trans-action. Courts may prevent the broker from receiving a commission if the broker knew the buyer was unable to perform. If the transaction is not consummated, the broker may still be entitled to a commission if the seller
► a had a change of mind and refused to sell,
► has a spouse who refused to sign the deed,
► had a title with uncorrected defects,
► committed fraud with respect to the transaction,
► was unable to deliver possession within a reasonable time,
► insisted on terms not in the listing (for example, the right to restrict the use of the property), or
► had a mutual agreement with the buyer to cancel the transaction.

In general, then, a broker is due a commission if a sale is not consummated because of the principal's default.

In most states, it is illegal for a broker to pay a commission to anyone other than the salesperson licensed with the broker or to another broker. Fees, commissions, or other compensation cannot be paid to unlicensed persons for services that require a real estate license. "Other compensation" includes tangible gifts, such as a new television, or other premiums, such as a vacation. This is not to be confused with referral fees paid between brokers for leads. Referral fees are legal as long as both individuals are licensed.

Salesperson’s Compensation
The amount of compensation a salesperson receives is set by mutual agreement between the broker and the salesperson. A broker may agree to pay a fixed salary or a share of the commissions from transactions originated by a salesperson. In some cases, a salesperson may draw from an account against earned shares of commissions. Some brokers require salespersons to pay all or part of the expenses of advertising listed properties.

Some firms have adopted a 100 percent commission plan. Salespersons in these offices pay a monthly service charge to their brokers to cover the costs of office space, telephones, and supervision in return for keeping 100 percent of the commissions from the sales they negotiate. The 100 percent commission salesperson pays all of his or her own expenses including desk fees or office space..

Other companies have graduated commission splits based on a salesperson's achieving specified production goals. For instance, a broker might agree to split commissions 50/50 up to a $25,000 salesperson's share; 60/40 for shares from $25,000 to $30,000; and so on. Commission splits as generous as 80/20 or 90/10 are possible, however, particularly for high producers.

However the salesperson's compensation is structured, only the employing broker can pay it. In cooperating transactions, the commission must first be received by the employing broker and then paid to the salesperson, unless otherwise permitted by license laws and agreed to by the employing broker.

SHARING COMMISSIONS
A commission might be shared by many people: The listing broker, the listing salesperson, the selling broker, and the selling salesperson. Drawing a diagram can help you determine which person is entitled to receive what amount of the total commission.

Transactional Brokerage
A transactional broker (also referred to as a nonagent, facilitator, coordinator, or contract broker) is not an agent of either party. A transactional broker's job is simply to help both the buyer and the seller with the necessary paperwork and formalities involved in transferring ownership of real property. The buyer and the seller negotiate the sale without representation.

The transactional broker is expected to treat all parties honestly and competently, to locate qualified buyers or suitable properties, to help the parties arrive at mutually acceptable terms, and to assist in the closing of the transaction. Transactional brokers are equally responsible to both parties and must disclose known defects in a property. However, they may not negotiate on behalf of either the buyer or the seller, and they must not disclose confidential information to either party. Transactional brokerage is legal only in a few states.

► ANTITRUST LAWS
The real estate industry is subject to antitrust laws. At the federal level, the Sherman Antitrust Law provides specific penalties for a number of illegal business activities. Each state has its own antitrust laws as well. These laws prohibit monopolies and any contracts, combinations, and conspiracies that unreasonably restrain trade—that is, acts that interfere with the free flow of goods and services in a competitive marketplace. The most common antitrust violations are price-fixing, group boycotting, allocation of customers or markets, and tie-in agreements.

Price Fixing
Price-fixing is the practice of setting prices for products or services rather than letting competition in the open market establish those prices. In real estate, price-fixing occurs when competing brokers agree to set sales commissions, fees, or management rates. Price-fixing is illegal. Brokers must independently determine commission rates or fees for their own firms only. These decisions must be based on a broker's business judgment and revenue requirements without input from other brokers.

Multiple-listing organizations, Boards of REALTORS® and other professional organizations may not set fees or commission splits. Nor can they deny membership to brokers based on the fees the brokers charge. Either practice could lead the public to believe that the industry not only sanctions the unethical practice of withholding cooperation from certain brokers but also encourages the illegal practice of restricting open-market competition.

The broker's challenge is to avoid even the impression of price-fixing. Hinting to prospective clients that there is a "going rate" of commission or a "normal" fee implies that rates are, in fact, standardized. The broker must make it clear to clients that the rate stated is only what his or her firm charges.
 
Group Boycotting
Group boycotting occurs when two or more businesses conspire against another business or agree to withhold their patronage to reduce competition. Group boycotting is illegal under the antitrust laws.

FOR EXAMPLE     Valerie and Nick, the only real estate brokers in Potterville, agree that there are too many apartment-finder services in town. They decide to refer all prospective tenants to the service operated by Valerie's niece rather than handing out a list of all providers, as they have done in the past. As a result, Valerie's niece runs the only apartment-finder service in Potterville by the end of the year.
I
Allocation of customers or markets involves an agreement between brokers to divide their markets and refrain from competing for each other's business. Allocations may be made on a geographic basis, with brokers agreeing to specific territories within which they will operate exclusively. The division may also occur by markets, such as by price range or category of housing. These agreements result in reduced competition.

Finally, tie-in agreements (also known as tying agreements) are agreements to sell one product only if the buyer purchases another product as well. The sale of the first (desired) product is "tied" to the purchase of a second (less desirable) product.

FOR EXAMPLE  Dan, a real estate broker, owns a vacant lot in a popular area of town. Bill, a builder, wants to buy the lot and build three new homes on it. Dan refuses to sell the lot to the builder unless Bill agrees to list the improved lot with Dan so that Dan can sell the homes. This sort of list-back arrangement violates antitrust laws.

Penalties
The penalties for violating antitrust laws are severe. For instance, under the Federal Sherman Antitrust Act, people who fix prices or allocate markets may be subject to a maximum $100,000 fine and three years in prison. For corporations, the penalty may be as high as $1 million. In a civil suit, a per-son who has suffered a loss because of the antitrust activities of a guilty party may recover triple the value of the actual damages plus attorney's fees and costs.

Fee-for-Services
The Internet has revolutionized the real estate profession in many ways. One of the more notable impacts of the Internet is that it has allowed buyers and sellers to have tremendous access to information about real estate, housing, financing, and legal issues. This has prompted a radical shift in the average consumer to be much more knowledgeable about real estate matters. With knowledge and information, a consumer is more innovative and independent. The advent of the Internet has also meant that the consumer is privy to information immediately. Consumers now want instant access to real estate information.

The successful licensee will understand and encourage consumers' innovation. In the process, it is critical for the licensee to identify what services he or she can provide and underscore the value of those services. While emphasizing the services that a licensee provides, it may be important for the licensee to think of him or herself as a consultant. While consumers are more independent, real estate expertise is almost always needed.

It may be important for licensees to be more flexible and open to seeing their occupation as a "bundle of services" that can be unbundled. Note that unbundling fee-for-services is different from discounted real estate services. Fee-for-services is the arrangement where the consumer decides which services he or she needs and works with and pays the licensee solely for those services. Discounted real estate services is the arrangement where a consumer receives all of the real estate services, but at a discounted price.

Communicating with consumers and identifying their real estate needs are key. Licensees provide an array of valuable services that consumers can pick and choose from. A knowledgeable and independent consumer public can seem threatening to a licensee; however, the licensee has the opportunity to emphasize the value and variety of real estate services offered, for varying fees.

FOR EXAMPLE     Chris wants to buy a house without contracting with a licensee but needs help writing an offer. Chris asks Sally, a broker friend of hers, to write an offer to purchase. Sally consults with Chris, writes the offer to purchase, and charges Chris a set fee for her service.

► SUMMARY
Real estate license laws and regulations govern the professional conduct of brokers and salespersons. The license laws are enacted to protect the public by ensuring a standard of competence and professionalism in the real estate industry.

Real estate brokerage is the act of bringing people together who wish to buy, sell, exchange, or lease real estate and charging a fee or commission for the service.

Technology has significantly changed the way that brokerage offices are man-aged and operated. The Internet, e-mail, cell phones, and PDAs play pivotal roles.

The broker's compensation in a real estate sale may take the form of a commission, a flat fee, or an hourly rate. The broker is considered to have earned a commission when he or she procures a ready, willing, and able buyer for a seller.

A broker may hire salespersons to assist in this work. The salesperson works on the broker's behalf as either an employee or an independent contractor.

Federal and state antitrust laws prohibit brokers from conspiring to fix prices, engaging in boycotts, allocating customers or markets, or establishing tie-in agreements.

Licensees need to emphasize the value and variety of services they provide and be open to different arrangements with customers, such as a fee-for-service arrangement.


RELATED STATE OF TENNESSEE LAWS, RULES, and REGULATIONS

With a Principal Broker's license one may open and operate a real estate business. The broker may, hire those holding a broker’s license and affiliate broker licenses. However, the managing (principal) broker is ultimately responsible for the actions of all brokers and affiliated licensees licensed under his/her firm’s name.

FAQ’s about Office Licenses
What licenses are required before a broker can open an office?
A person planning to open real estate office must hold a principal (managing) broker’s license and must also obtain a real estate firm license.

How does a corporation or partnership receive a real estate license?
A partnership, association, or corporation may be granted a firm license. At least one member, called the principal broker, has to hold a broker's license.

How many licenses must a branch office have?
At the minimum. a branch office must have at least two licenses: a broker's license and a branch office license. There can be any number of licensees affiliated with the office, or there could be just one broker.

Is there any rule regarding the sign on the office?
The law and the rules of the Tennessee Real Estate Commission
require that the principal broker display a sign outside the place of business stating he or she is engaged in the real estate business. There is no requirement regarding the size of the lettering on the sign.

FAQ’s about Advertising Rules
Can an owner use a lottery to sell his or her property?
The selling of chances (lotteries) by a real estate brokerage firm is illegal in Tennessee. In essence. lotteries create an opportunity to collect moneys that exceed the value of the property being purchased. To avoid any appearance of impropriety and to protect the public from unscrupulous sales practices, the temptation to sell chances is removed by Commission rule.

What is a blind ad? Is it legal in Tennessee?
In Tennessee a blind ad is one in which a brokerage firm or listing agent includes just his or her own name, a post office box number, or a telephone number to bait readers into believing that the advertised property is offered by a private party. This unscrupulous practice is illegal.

All brokers, when advertising real estate, must use their regular business name and unmistakably indicate that the advertising party is a real estate broker and not a private party. Real estate advertising must be honest. It should never be misleading. deceptive, or intentionally misrepresent any property terms, values, or policies and services of the brokerage.

Are there any special rules for advertising on the Internet?
TREC essentially states that all rules pertaining to advertising also pertain to Internet advertising, “regardless of [the advertising's] nature and the medium in which it appears.” Certain acts are unlawful including those acts that are misrepresentations and constitute misleading or untruthful advertising. All advertising must be under the direct supervision of the principal broke. Principal brokers are responsible for the advertising by all persons with their firm.

Individuals and firms are not permitted to advertise in such a way on the Internet as to lead anyone to believe that they are licensed in Tennessee when in fact, they are not.

What about multiple-listing service (MLS) offerings on the internet?
When a licensee's Web site is able to access MLS listings, other than via a link to a new Web site, that may or may not belong to the owner of the Web site, the following requirements must be met to satisfy Commission Rule 1260-2-.(2)(d). As with all advertising, the firm name and telephone number of the owner of the Web site must appear on each page of the Web site.

Additionally, for Web pages displaying "thumbnails" of multiple listings, a disclaimer must be displayed indicating that some or all of these listings may not belong to the firm whose Web site is being visited. (A thumbnail is a summary of a listing that contains no more than five selection criteria describing the properly.) If any information regarding the listing agent is given in the thumbnail, however the listing firm's name and telephone number must also be displayed.

Finally for Web pages displaying a detailed listing with more than the thumbnail descriptions, the listing firm's name and telephone number must be displayed and clearly identified as such.

Are there special requirements for a real estate office to advertise on the Internet?
Tennessee requires that the firm's name, as registered with the Commission,
and telephone number be displayed on each page of the firm's Web site
(abbreviations not permitted).

What rules must an individual licensee follow when advertising on the Internet?
All advertising must be in the name of the broker and supervised by the broker. It must not be misleading, misrepresent, or be untruthful. Each page, or screen, controlled by the affiliate licensee must also display the name of the broker.

Under what circumstances may a brokerage place a For Sale sign?
A broker may place a For Sale sign on a property only with current written authorization from the owner Tennessee requires that the name of the firm be the same size as or larger than that of any licensee affiliated with the firm. The sign must include the firm's name and telephone number.

FAQ’s about Trust Accounts
What is trust money, and what can a broker do with it?
Trust money is money that belongs to someone else. Each broker must maintain a separate escrow account for the purpose of holding any funds that may be received in his or her fiduciary capacity. that is, deposits, earnest money, or the like Every Tennessee-based real estate brokerage firm that expects  handle funds belonging to others must maintain a common trust account identified by the words escrow or trust account.

The Director of the Division of Regulatory Boards or the authorized representatives may. at all reasonable hours, examine and copy such book accounts, documents, or records as necessary to determine whether a license has properly maintained and disbursed funds from escrow or trustee accounts. Failure to permit the examination is grounds for the Commission to suspend or revoke a license.

Where can trust funds be located?
Only vacation lodging services companies and time-share firms are require to place the funds only in federally insured depository institutions. Real estate firms may place their escrow accounts in state banks.

How soon must trust funds be deposited?
Trust money or earnest money must he promptly deposited into an escrow or trustee account as soon as the offer is accepted. "Promptly" has been interpreted to mean 72 hours or three business days. An exception is permitted if the parties of the offer indicate a different time frame with a statement such a "Earnest money to be deposited by

The clock does not start ticking until the offer has been accepted. However, before obtaining the last signature, it is customary to keep earnest money checks in the transaction file of the listing broker.

Our office has the listing, and another office is working with the buyer How do we handle the earnest money?
In the case or a cooperative sale the listing broker may elect to close the transaction and have the buyer’s agent make the earnest money check payable to the listing firm's trust account. Tennessee law does not specifically state which real estate company must hold the earnest money deposit. It does state  "Brokers are responsible at all times for deposits and earnest money accepted by them or their affiliate brokers, regardless of whether such funds are actually held by' some other person or firm.

This could be interpreted to mean the selling broker should hold the funds because the selling company receives the earnest money deposit from the buyer. However in Tennessee, it is local custom that determines which company, selling or listing holds the money.

If cash is received by a cooperative buyer's agent, the buyer's agent can either convert it to a money order or deposit the cash into the buyer’s broker's trust account and then issue a check to the listing company's trust account. The reason for he rule is to leave a paper trail to properly account for the cash received.

The buyer wants to use a postdated check. Another buyer wants to use a diamond ring toward earnest money What are the rules?
In Tennessee. postdated checks or anything other than cash or an immediately cashable check are not to be accepted as earnest money unless that fact is communicated to the seller before the acceptance of the offer and is so stated in the offer to purchase.

What are the rules governing a trust account?
Tennessee neither requires nor prohibits interest-bearing escrow accounts. If interest is earned, the broker must follow the guidelines established by Commission policy statement.

Money in the trust account can earn a lot of interest Who gets the interest?
The licensee must indicate to the owner of the funds that his or her deposit will be placed in an interest-bearing escrow account. Even though the licensee deposits the funds, the licensee does not own the funds or the interest earned until such moneys are properly disbursed to the licensee. The licensee and payor must indicate in writing how the interest should be disbursed. The
licensee must keep a detailed and accurate accounting of the precise sum of the interest earned for each separate deposit.

What is commingling of funds and why is it illegal?
By definition, commingling is mixing of personal funds with those belonging to other people. The problem with excess personal funds in the broker's trust account is simple. If the broker commingled personal funds into this account and the Internal Revenue Service froze the broker's accounts, then the trust account would be frozen, too.

The same thing could happen if a sole proprietor owned the brokerage and suddenly died after commingling personal funds into the trust account. The commingled brokerage trust account could end up in probate. In either event, all closings would be tied up for a considerable length of time.

What happens to unclaimed trust funds?
Unclaimed trust funds are paid to the treasurer of the state of Tennessee.

What may not be paid directly out of the trust account?
It should be noted that the broker should never use the trust account as his or her business operating account or for personal uses. Monies that may not be disbursed directly from this account include salaries and normal business or operational expenses. The broker can pay company commissions or commissions to other companies from the trust account.

What is the procedure for disbursing trust funds?
Funds may be immediately returned if an offer to purchase, sell, rent, lease, exchange. or option is rejected or withdrawn.

As a general rule, no funds can be disbursed from the trust account prior to the closing without the informed written consent of all the parties, usually at the closing of the transaction.

Funds may be disbursed on the filing of an interpleader action in a court of competent jurisdiction or on the order of a court of competent jurisdiction.

In the event of a dispute over the return or forfeiture of any earnest money or escrow deposit held by the broker, that broker is required to hold the deposit in the trust account until he or she receives written consent from both parties.

What procedures must the broker follow when the buyer and seller disagree as to how the earnest money should be distributed?
Under certain conditions, the broker is authorized to release disputed earnest money without written consent. One example is when the broker is in receipt of a final judgment of the court directing the disposition of the deposit or when there is a final decision of a binding alternative dispute resolution. Another example is when a civil action is filed to determine the disposition of the earnest money, at which time the broker may seek court authorization to pay the deposit to the court (an interpleader action).

How soon do buyers get their earnest money back when they withdraw their offer before it was accepted?
Obviously, a written release is not required when a seller rejects an offer or, before notification of acceptance. buyers withdraw their offer. In both events, the earnest money is returned to the buyer without delay. In Tennessee, it is customary for licensees to keep earnest money checks in their transaction files until offer acceptance. If the offer does not result in a contract, the earnest money check is simply returned to the buyer or tenant.  If the buyer and seller agree, just before closing, to rescind the contract; and the broker feels that he or she did, in fact, earn the commission.

Can the broker take his or her money from the earnest money directly out of the trust account?
No: the broker may not take his or her fees directly from the trust account. Should a transaction fail to consummate, the broker under no circumstances is entitled to withhold any portion of the earnest money even though a commission has been earned.

For example, sellers accept an offer for the sale of their home accompanied by a $2,000 earnest money cheek. After acceptance, the buyers asked the sellers to let them out of the contract because of an unexpected job transfer. The owners agreed and told the buyers they could have their earnest money back, too. In this ease, when the sellers accepted the buyers' offer, a commission was earned. However, the listing broker may not hold the buyers and sellers earnest money hostage. The broker must return the earnest money as directed and look to the sellers for compensation for services rendered.

Is there any other information about keeping proper records of the trust account?
Brokerage firms in Tennessee are not required to maintain a two-journal record-keeping (trust account) system. All that Tennessee requires is the name of the depositor, the date of the deposit, the date of the withdrawal and payee of the funds. The TREC may add requirements to this list but has not done so.  The records must be kept for three years from the consummation of the transaction

May property management funds, that is, security deposits, be handled differently?
No; property management funds are treated in the same way.

Are there any special rules regarding tenants security deposits?
Property management trust accounts require individual ledger accounts for each tenant. These individual ledgers must identity each tenant's rental unit and security deposit, and must show all receipts and disbursements together with check number and date.

License Law Enforcement Overview
This chapter covers how the Tennessee Real Estate Commission (TREC) considers violations of license law or rule. Generally, after proper disciplinary hearings, TREC exercises its control over licensees through public reprimands, reeducation, fines, and the denial, suspension, or revocation of licenses.

TREC also requires an added protection to provide compensation to a consumer who suffers monetary damage as a result of a licensee's error or negligence. Each active licensee is required to purchase errors and omissions insurance, which is similar to malpractice insurance.

FAQ’s about License Law Enforcement
Does TREC have any authority over someone who is engaging in activities that require a real estate license?
Until 1998, TREC had no authority over unlicensed persons who were engaged in real estate activities. Only the state courts has this authority. If convicted by a state court, it was a class B misdemeanor under state law. For practicing real estate without a license, the unlicensed person could be jailed, fined, and made to pay back up to three times any money received. The trial judge determined the amount to be paid back.

As of 1998 TREC can punish unlicensed persons. TREC may impose a $1,000 fine per transaction.

Is a violation of Tennessee license law a misdemeanor or a felony?
Practicing without a license is a class B misdemeanor.

Under what circumstances may TREC investigate licensees?
TREC is allowed to investigate the actions of any licensee or applicant on its own motion and/or on the receipt of a verified written complaint. TREC will investigate after notifying the licensee or applicant and receiving his or her response.

In connection with an investigation, the Commission is authorized by Tennessee law to subpoena books, papers, records, and even witnesses. TREC is given authority to conduct hearings, and if the licensee is found guilty, his or her license may be revoked or suspended. Witnesses who fail to cooperate may be found guilty of contempt of court.

What are some of the reasons that can trigger an investigation?
TREC is charged with protecting the interests of the public. Consequently, the Commission has jurisdiction over actions by a licensee that can harm the consumer in a real estate transaction. There are 21 violations listed in the law that can result in disciplinary action.
     1. Making any substantial and willful misrepresentation
     2. Making any promise of a character likely to influence, persuade, or induce any person to enter into any contract or agreement when the licensee could not or did not intend to keep such promise
     3. Pursuing a continued and flagrant course of misrepresentation or making false promises through affiliate brokers, other persons, any medium of advertising, or otherwise
     4. Misleading or untruthful advertising, including use of the term "REALTOR"' by a person not authorized to do so, or using any other trade name or insignia or claiming membership in any real estate association or organization of which the licensee is not a member 5. Failing within a reasonable time to account for or to remit any moneys coming into the licensee's possession that belong to others
     6. Failing to preserve records relating to any real estate transaction for three years following its consummation
     7. Acting for more than one party in a transaction without the knowledge and consent in writing of all parties for whom the licensee acts
     8. Failing to furnish a copy of any listing, sale, lease, or other contract relevant to a real estate transaction to all signatories thereof at the time of execution
     9. Using or promoting the use of any real estate listing agreement form, real estate sales contract form, or offer to purchase real estate form that fails to specify a definite termination date
     10. Inducing any party to a contract, sale, or lease to break such contract for the purpose of substituting a new contract, where such substitution is malicious or is motivated by the personal gain of the licensee 11. Acceptance of a commission or any valuable consideration by an affiliate broker for the performance of any acts specified in this chapter from any person except the licensed real estate broker with whom the licensee is affiliated
     12. Being convicted in a court of competent jurisdiction of this or any other state or in a federal court of forgery, embezzlement, obtaining money under false pretenses, bribery, larceny, extortion, conspiracy to defraud, or any crime or any similar offense or offenses, or pleading guilty or nolo contendere to any such offense or offenses
     13. Violating any federal, state, or municipal law prohibiting discrimination in the sale or rental of real estate because of race, color, religion, sex, or national origin
     14. Violating any provision of this chapter, any rule duly promulgated and adopted thereunder, or the terms of any lawful order entered by the commission
     15. If a broker licensee, failing to exercise adequate supervision over the activities of any licensed affiliate brokers
     16. If a broker licensee, failing to timely complete administrative measures required by the Commission on the transfer or termination of any affiliate broker employed by the broker
     17. Paying or accepting, giving, or charging any undisclosed commission, rebate, compensation, profit, or expenditures for a principal
     18. Failing to disclose to an owner the licensee's intention or true position if the licensee, directly or indirectly through a third party, purchases for himself or herself or acquires or intends to acquire any interest in or any option to purchase property that has been listed with the licensee's office to sell or lease
     19. Engaging in the unauthorized practice of law
     20. Any conduct, whether of the same or a different character from that specified above, that constitutes improper, fraudulent, or dishonest dealing
     21. Violating any provision of the Tennessee Time-Share Act, as set forth in title 66, chapter 32, part l, or any rule duly promulgated thereunder

How does TREC determine when and if to follow up on a complaint?
The licensee (applicant) is sent a letter from TREC along with a copy of the complaint. The licensee (or applicant) must then respond within ten days from the date the letter and complaint were received. After receipt of the response, TREC will investigate the matter.

Under what circumstances may the investigating committee decide not to hold a hearing?
After the investigation, TREC will determine if a hearing is to be held. If so, the licensee, or applicant, will be notified of the time and place. If TREC determines that there was no probable cause that warrants discipline, a letter is sent and the case is closed. Reasons for refusing to set a hearing include the triviality of the allegation, insufficient evidence, effort to solve on a local level, lack of clarity of the issue, and lack of jurisdiction.

Recall that the mission of the Commission is to protect the public. Thus, Commission rules do not authorize the Commission to consider or conduct hearings involving disputes over fees or commissions between cooperating brokers, salespersons, and other brokers.

How does the Commission decide on holding a hearing?
In determining the appropriate action, the investigating committee considers not only the severity of the violation and the sufficiency of evidence but also the possibility that the problem could be better resolved by other means available to the parties, without Commission involvement. The Commission discusses the clarity of the laws and rules that support the alleged violation, the clarity of the Commission's jurisdiction, whether the violation is likely to recur, and the record of the licensee.

Can the respondent request a different hearing date?
Written requests for a continuance may be considered if such request is received within a reasonable time before the scheduled hearing. An exception may be made in the case of an unanticipated emergency.

How may testimony be taken before the hearing?
Testimony may be taken by deposition, compelling any involved party to appear and depose in the same manner as witnesses are compelled to appear and testify in civil cases.

What are the legal effects of the hearing and possible disciplinary actions?
TREC's decision could exonerate the licensee. If TREC determines that a violation has occurred, it has the authority to reprimand, suspend, or revoke an existing license or to refuse a license to the applicant.

TREC also may downgrade a broker to affiliate broker status. TREC may also assess a civil penalty not to exceed $1,000 per violation, and each day constitutes a violation.

What happens if the respondent does not appear?
The hearing will be held without the licensee. The licensee will be bound by the decision as if he or she had been there. In other words, the licensee loses the right to cross-examine witnesses and to present his or her defense.

Is there any possibility of an appeal?
Judicial review of the Commission's action may be sought though the Tennessee Administrative Procedures Act.

FAQ’s about Suspended or Revoked Licenses
What are the immediate effects of a suspended or revoked managing brokers license?

The broker is responsible for the activities of all licensees. The revocation of the broker's (brokerage) license automatically places on "inactive" status the license of every licensee employed by the broker by virtue of their employment. These licensees may return to real estate activities only when "hired" by another managing broker, or another broker must be brought in as principal, or managing, broker.

A suspended or revoked license must be returned to the Commission, and as of the effective date, the right to engage in activities that require a license is terminated. Note, though that during the penalized period the holder of a suspended or revoked license is allowed to receive compensation earned prior to the effective date of the suspension or revocation.

Another good video. The real estate industry is subject to antitrust laws. At the federal level, the Sherman Antitrust Law provides specific penalties for a number of illegal business activities. These laws prohibit monopolies and any contracts, combinations, and conspiracies that unreasonably restrain trade—that is, acts that interfere with the free flow of goods and services in a competitive marketplace. The most common antitrust violations are price-fixing, group boycotting, allocation of customers or markets, and tie-in agreements. You can rest assured there will be something on the PSI Real Estate Exam about this.