Advanced Real Estate Practices

Objectives

Upon completion of this section, the student should be able to

• Describe the structure of the real estate brokerage firm and the relationship between the broker, the managing broker, and the designated broker/firm.

• Describe the duties and obligations of the licensee to the firm and vice versa, and summarize the managing broker's supervisory duties toward licensees.

• Describe what to do when problems or conflicts arise between the broker and the managing broker or with the firm itself.

The Structure of the Real Estate Brokerage Firm

On July 1, 2010, Washington State became a “broker only” state for real estate licensees. There is no longer an “agent” classification. The new classifications are as follows: Designated Broker, Managing Broker, and Broker.

Terms

Designated Broker

“Designated Broker” is the title of the person recognized by the state and the Multiple Listing Services (MLS) as the responsible member of the brokerage. This person is ultimately responsible for the actions of all licensees within the firm. The person holding this title may also have certain voting rights at the local MLS and authorization to sign certain documents. When a licensee leaves a brokerage, the designated broker is responsible for signing their license and returning it to the Department of Licensing in Olympia. There is only one designated broker per brokerage. Branch offices of a brokerage will be required to have a managing broker. The nomenclature for this classification has not changed from the previous classification.

Managing Broker

“Managing Broker” is the title of a person who may be managing a brokerage, branch office, or licensee with the credentials to manage an office, even if they are not currently doing so. The managing broker is responsible for the supervision of their licensees.

Branch Manager

A branch manager is a managing broker responsible for the affiliates of a branch office. A brokerage must have more than one office to have a branch office. A brokerage with a single office is not considered a “branch.” There is one designated broker for all of the branch offices. A branch manager is usually considered a member (not a subscriber as licensees are considered) by most MLS and has voting rights in the MLS. 

Like a designated broker, a branch manager has the duty and authority to:

• Supervise affiliated licensees;
• Hire affiliates;
• Terminate and “sign off” on licensees’ real estate licenses.

Broker

“Broker” encompasses all other licenses not listed above, previously called “agent.” 

Independent Contractor or Employee

This distinction is important for federal income tax purposes and affects the relationship between a designated broker and a licensee. According to the Internal Revenue Service (IRS), the courts have considered many facts in deciding whether a worker is an independent contractor or an employee. These considerations fall into three main categories. The remainder of this section was taken directly from the IRS website.

Behavioral Control

These facts show whether there is a right to direct or control how the worker does the work. A worker is an employee when the business has the right to direct and control the worker. The business does not have to control how the work is done – as long as the employer has the right to direct and control the work. For example,

receiving extensive instructions on how work should be done suggests that you are an employee. 

Instructions can cover a wide range of topics, for example:

• How, when, and where to do the work
• What tools or equipment to use
• What assistants to hire to help you with the work
• Where to purchase supplies and services

If you receive less extensive instructions about what should be done, but instead about how it should be done, you may be an independent contractor. For instance, instructions about time and place may be less important than directions on how the work is performed.

Training: If the business provides you with training about required procedures and methods, this indicates that the business wants the work done in a certain way, suggesting that you may be an employee.

Financial Control

These facts show whether there is a right to direct or control the business part of the work. 

For example:

• Significant Investment: If you have a significant investment in your work, you may be an independent contractor. While there is no precise dollar test, the investment must have substance. However, a significant investment is not necessary to be an independent contractor.

• Expense: If you are not reimbursed for some or all business expenses, you may be an independent contractor, especially if your non-reimbursed business expenses are high.

• Opportunity for Profit and Loss: If you can realize a profit or incur a loss, this suggests that you are in business for yourself and may be an independent contractor.

Relationship of the Parties

These facts illustrate how the business and the worker perceive their relationship. For example:

• Employee Benefits: If you receive benefits, such as insurance, pension, or paid leave, you may be an employee. However, you could be either an employee or an independent contractor if you do not receive benefits.

• Written Contracts: A written contract may show what you and the business intend. This may be very significant if it is difficult, if not impossible, to determine status based on other facts.

When You Are an Employee

Your employer must withhold income tax and your portion of social security and Medicare taxes. Your employer is also responsible for paying social security, Medicare, and Federal Unemployment Tax Act (FUTA) taxes on your wages. Your employer must give you a Form W-2, Wage and Tax Statement, showing the amount of taxes withheld from your pay. Under the Tax Cuts and Jobs Act, effective for tax years beginning in 2018, employees can no longer deduct unreimbursed employee business expenses as a miscellaneous itemized deduction on Schedule A. That deduction was suspended and remains unavailable for employees.

When You Are an Independent Contractor

The business may be required to give you Form 1099-NEC, Nonemployee Compensation, to report what has been paid to you. The IRS reinstated Form 1099-NEC beginning with tax year 2020 to report broker commissions and other nonemployee compensation, while Form 1099-MISC now covers other income types such as rents and royalties. Under the Self-Employment Contributions Act (SECA), you are responsible for paying your own income tax and self-employment tax. The business does not withhold taxes from your pay. You need to make estimated tax payments during the year to cover your tax liabilities. You may deduct ordinary and necessary business expenses on Schedule C of your income tax return.

Factors to Consider When Selecting Your Brokerage Affiliation

Choosing a brokerage affiliation can be difficult. There are many aspects to consider that can be a key to your success as a real estate professional. Here is a list of considerations to explore in greater detail:

• A brokerage's reputation
• The owner's or designated broker's reputation
• Training
• Communication between you and the managing broker
• Support
• The brokerage's market share of listings
• Staffing
• Agent retention
• Commission splits, desk fees, corporate fees, and transaction fees
• Errors and omissions insurance
• Brokerage's website and available technology
• Location and accessibility of brokerage about your market and your home 
• Business model
• Brokerage affiliations
• Miscellaneous fees
• The brokerage's policies and procedures
• Community involvement

A Brokerage’s Reputation

People want to do business with firms in the community who are reputable. This is especially true in the real estate arena, where many people buy or sell their largest asset. A brokerage’s reputation in the community can be the key to its continued success as a business, and licensees who are affiliated with a reputable firm gain from this association.

The Owner’s or Designated Broker’s Reputation

Real estate is a people business. The owner’s or designated broker’s reputation is closely tied to the brokerage's reputation. You can get some information about the designated broker in a few ways. The best way is to ask other people in the industry for their opinions. These might include:

• Other real estate brokers
• Mortgage professionals,
• Title company representatives
• Escrow (closing) agents

Another source of information can be the Washington State Department of Licensing, Real Estate Division. They can inform you of any complaints or disciplinary action for a particular broker.

Training

Training is essential for all real estate licensees, especially new licensees. The real estate field is very volatile and constantly changing. It is crucial for you, as a licensee, to keep up with current legislation and changes so that you can effectively represent your clients. Some changes may come from the federal, state, local, or brokerage level. 

Other changes may occur because of market conditions or the availability of financing. You will want to know the following about a brokerage’s training program:

• Do they have a training program and, if so, how often and on what topics?
• Is there a charge for the training?
• Is the training schedule compatible with your schedule?
• Does the firm offer any training specifically designed for new licensees?
• Can you receive continuing education clock hours for any training?
• Where is the training being held?

Communication Between You and the Managing Broker

Each real estate transaction comprises a unique set of variables and unique parties in the transaction. Even long time veterans in the real estate industry frequently experience new circumstances. 

Getting the assistance that you need, when you need it, is important for performing the job correctly and being successful as a real estate professional.

A managing broker or mentor is extremely valuable when you need assistance and advice. Good, clear, concise communication with that person is essential.

Support

Most real estate transactions have one licensee representing the seller and another representing the buyer. These licensees are known as “co-op licensees” as they cooperate on selling a property. If difficulties arise between the co-op licensees, it’s important to belong to a brokerage that will support you and assist in resolving any difficulties.

Support from your brokerage is also extremely valuable should you, as a licensee, be accused of violating federal, state, or local real estate laws.

The Brokerage’s Market Share of Listings

The brokerage’s market share of listings may be a very important barometer of the success of its affiliates. Its affiliates' success may reflect on the management and staff. Information on a brokerage’s market share of listings can usually be obtained from your local MLS. 

Staffing

Your client’s perception of your brokerage directly reflects how they will perceive you. A professional staff can be key in how the public views you and your firm. 

Ask questions about the availability of staff and the professionalism of the staff in the following areas:

• Answering phones and directing calls to the proper persons
• Directing walk-in traffic to the proper persons
• Keeping business machines operating smoothly
• Efficient ordering of office supplies
• Professional demeanor and attire
• IT professionals who can keep computers and other technology running smoothly.

Agent Retention

When a brokerage has many licensees who have been with the firm for a long time, this may be an indication that the licensees are very satisfied with the management, support, and staffing of the brokerage. There are usually reasons why brokerages have a high or low turnover rate. Ask about the average time licensees have been affiliated with a brokerage. 

Commission Splits, Desk Fees, Corporate Fees, and Transaction Fees   

Being a real estate professional infers that you are in business for yourself. Most licensees are independent contractors. Costs and fees are an important part of budgeting for your business. Ensure you fully understand all the fees a brokerage will charge and their commission structure. Let's take a look at some of the typical commissions and fees.

Commission Splits

Sometimes referred to as a "traditional" brokerage; these firms will split a commission with their affiliated licensees. The following are examples:

Example: 

ABC Realty has a 70/30 split for all licensees' commissions. For every commission dollar that a licensee earns, the agent will receive 70% and the brokerage will receive 30%.

Example: 

XYZ Realty has a 50/50 split for all licensees' commissions until the licensee earns a total of $50,000 commission within a calendar year. After the licensee has earned more than $50,000 within that calendar year, they keep 100% of their commission until the calendar year is complete. At the beginning of the next calendar year, the licensee returns to the 50/50 split, repeating the cycle.

Desk Fees

Many brokerages do not have a commission split. Instead, they charge their licensees a flat monthly rate to be affiliated with the brokerage. The fee is not related to the licensee's production. 

Example: 

John is a licensee with NWQ Real Estate, a desk fee brokerage. NWQ charges John $950 per month to be affiliated with their firm. In November, John earned $21,000 in commissions. His fee to the brokerage that month was $950. The following month, John earned no commission; however, his December brokerage fee was still $950.

Example: 

Betty pays a desk fee of $550 per month plus a transaction fee of $150 per closed transaction. She closed three transactions in July. Her fees in July were $550 + (3 x $150 = $450) = $1,000

Brokerages Which Offer a Desk Fee or Split Commission Choice

Some brokerages will offer a choice of a commission split or desk fee. Most new brokers will choose a commission split at first until they increase their client base and commissions.

Corporate Fees

Corporate fees, usually charged by the larger franchise brokerages, are a percentage of the total gross commission earned before the split with the brokerage or the payment of a desk fee. This percentage can vary drastically, but a range of 5-7% is most common.

Transaction Fees

Most brokerages charge a fee for each transaction that has been completed. This fee, charged to the licensee, may be used to reimburse the brokerage for Errors and Omissions (E&O) insurance, Business and Occupation (B&O) tax, Labor and Industry (L&I) tax, or for processing the transaction.   

Errors and Omissions (E&O) Insurance

Brokerages in Washington State are not required to carry Errors and Omissions (E&O) insurance. This coverage is optional. E&O insurance protects the brokerage and its licensees from mistakes and errors made when transacting in the real estate business. The insurance is intended to cover events where a client holds you and the brokerage responsible for a service you provided, failed to provide, or did not have the expected or promised results.

Some E&O policies will also include the defense expenses for attorney fees within the limit of liability. In today's litigious society, here in the United States, this protection can be invaluable. Even if you prevail in a suit, the litigation is both time-consuming and expensive. The coverage on these policies varies greatly, as do the associated deductibles.