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What services should consumers expect from a real estate brokerage? A number of states have begun taking legal and legislative action to answer this question.
Spurred on by feedback from consumers and real estate licensees, states are looking to solve some of the problems presented by the growing number of brokerages offering "limited-service" listing agreements. These agreements, in which the listing broker offers no services other than placement of the listing in the multiple listing service, have left many real estate professionals in an ethical quandary.
On the Consumer Front
Homesellers who employ these limited-service brokerages are essentially representing themselves in the transaction. Often, when they encounter difficulties in the transaction process (such as an uncertainty regarding how to handle multiple offers), they ask the buyer's broker for free advice.
Real estate professionals say they frequently are asked to assist the sellers in completing the transaction. To do so could leave them exposed to claims of dual agency. On the other hand, choosing not to assist the sellers places the transaction in jeopardy.
States have taken different approaches to this issue and state Realtor associations have been active in helping create license law and legislative changes.
In Illinois, the legislature adopted a statute defining what constitutes an "exclusive brokerage agreement." In Texas, the Real Estate Commission has proposed regulations defining the minimum level of services a consumer can expect to receive from a licensee. Although Michigan law has been interpreted as setting forth the minimum requirements for a listing agreement, the state Realtor association has also begun the process of creating legislation similar to the Illinois statute. Other state associations have also expressed an interest in creating similar legislation.The following is a summary of the activities undertaken to date.
Illinois statute defines service
Illinois enacted a statute in August 2004 setting forth the minimum level of services a real estate professional must offer to a consumer with whom the real estate professional enters into an exclusive brokerage agreement. An exclusive brokerage agreement (either an "exclusive right to sell" or "exclusive agency") is required for entry of a listing into most MLSs. The genesis of the statute in Illinois was that the state real estate commission was receiving complaints from consumers who had entered into limited-service listing agreements. During the transaction process, they felt abandoned.
"Our intent is to protect consumers and to increase the professionalism in the industry," says Greg St. Aubin, director of governmental affairs at the Illinois Association of REALTORS, which backed the bill.
In Illinois, all exclusive brokerage agreements need to specify that the sponsoring broker -- through one or more sponsored licensees -- must provide, at a minimum, the following services:
- Accept delivery of, and present to the client offers and counteroffers to buy, sell, or lease the client's property or the property the client seeks to purchase or lease.
- Assist the client in developing, communicating, negotiating, and presenting offers, counteroffers, and notices that relate to the offers and counteroffers until a lease or purchase agreement is signed and all contingencies are satisfied or waived.
- Answer the client's questions relating to the offers, counteroffers, notices, and contingencies. The failure of a broker to provide such services would constitute a violation of the state's license laws.
As the law is still very new, it is too early to measure its effect on the Illinois real estate industry.
Proposed Texas regulations on service
The Texas Real Estate Commission has proposed administrative rules defining the minimum level of service a consumer could expect to receive from a real estate broker. In 2002, the commission had originally proposed amendments to its regulations because Texas has a law that prohibits licensees from negotiating with sellers who are party to an exclusive agency agreement (which most of the limited-service agreements were). Because of this law, licensees in the state were being put in an uncomfortable situation of having to either potentially violate Texas law or risk the transaction.
While the commission's initial attempt to amend its regulations was halted (due to procedural defects in the process of adopting the changes), the commission restarted these efforts in 2004 after studying the issue further. The proposed regulations require a licensee to:
- Accept and present all offers/counteroffers.
- *Assist client in developing, communicating, and presenting all offers and counteroffers.
- Answer the client's questions relating to the offers and counteroffers.
The proposed regulations also prohibit a broker who is party to an exclusive agency agreement from authorizing another broker to negotiate directly with the seller. Finally, a broker can deliver an offer or counteroffer to the seller only if he does not discuss, or attempt to discuss, the terms or conditions of the offer with the seller. Also, the broker representing the seller must consent to the delivery.
At the commission's request, the state Attorney General reviewed the proposed rules and determined that since the Texas statutes give the commission the power to define "negotiate," the commission has the authority to enact the rules.
"This is purely a consumer issue that has nothing to do with commissions or fees," says George Stephens, TAR's 2003 chairman. "Whether a broker is charging a flat fee or a commission, he or she should be required at deliver at least those three services."
The Commission's next meeting is scheduled for Feb. 21, 2005, at which time the Commission will consider its next step in this process.
Other activity to define service
The Michigan Association of REALTORS has interpreted existing Michigan case law defining a listing agreement as including services that require a real estate license, meaning that an agreement to simply place a listing in the MLS and provide no additional services is not a listing agreement. The Michigan Association has also begun working on legislation similar to the Illinois statute.
The Missouri Association of REALTORS backs new legislation introduced on Jan. 5 that would require all exclusive brokerage agreements to specify that licensees would provide certain services, such as accepting and presenting clients' offers and counteroffers, assisting clients in negotiations; and answering clients' questions relating to offers, notices, and contingencies.
Other state associations have expressed an interest in drafting similar legislation for consideration by their state lawmakers.
Illinois and Texas have taken the lead in addressing concerns raised by consumer groups and licensees over limited-service listing agreements. It is expected that other state associations will draft similar legislation in the near future.
- F.P. Maxson is an associate counsel in NAR's legal department and editor of the online newsletter, Letter of the Law on nar.realtor.