March 18 Chapter 7 — Real Estate Law

March 18 Chapter 7 - Real Estate Law - Felde Book - Robert Rooks 1

• Real Estate Law is upheld under POLICE POWER which is the power of the state to enact laws to promote the order, safety, health, morals and general welfare of the public. Real estate law or licensing law is found in the business and Professions Code of California State Law. March 18 Chapter 7 - Real Estate Law - Felde Book - Robert Rooks 2

1. Two Major Classifications of Licenses Real Estate Broker – a person (natural or legal) who for a compensation or in expectation of a compensation, does or negotiates to do one or more of the following acts for another or for others: A. March 18 Chapter 7 - Real Estate Law - Felde Book - Robert Rooks 3

1. Real Estate Broker 2. Real Estate Licensee March 18 Chapter 7 - Real Estate Law - Felde Book - Robert Rooks 4

Real Estate Brokers and Licensees Do the following; 1. Offers to sell, buy, solicit sellers or buyers for, solicit or obtain listings of, or negotiates the purchase, sale, or exchange of real property, mineral, oil and gas property, a business opportunity or mobilehome (not recreational vehicles) if mobilehome has been registered under Part 2 of Division 13 of Health and Safety Code. March 18 Chapter 7 - Real Estate Law - Felde Book - Robert Rooks 5

2. Either does or offers to lease or rent, collect rents, or negotiate the sale, purchase or exchange of leases on real property, mineral, oil and gas property, or a business opportunity. Does not apply to manager of a hotel, motel, trailer park; resident manager of apartment building or complex or employees of that manager, or employees of property management firm who perform limited management acts while under the supervision of a broker or qualified salesperson. March 18 Chapter 7 - Real Estate Law - Felde Book - Robert Rooks 6

3. Either does or offers to assist in filing application for purchase or leave of, or in locating or entering upon government owned lands, or government owned mineral, oil and gas property. (Land Locators). March 18 Chapter 7 - Real Estate Law - Felde Book - Robert Rooks 7

4. March 18 Solicits borrowers or lenders for or negotiates loans; collects payments or performs services for borrowers, lenders, or note owners in connection with loans on real property, or mineral, oil and gas property, or on a business opportunity. Chapter 7 - Real Estate Law - Felde Book - Robert Rooks 8

5. Either does or offers to sell, buy or exchange a real property sales contract, or a promissory note owners in connecting with loans on real property, on mineral, oil and gas property, or on a business opportunity. March 18 Chapter 7 - Real Estate Law - Felde Book - Robert Rooks 9

6. Issues or sells, solicits prospective sellers or purchasers of, solicits or obtains listings of, or negotiates the purchase, sale, or exchange of an Interest in real estate syndicate formed as a partnership, joint venture or unincorporated association of 100 or less interests. March 18 Chapter 7 - Real Estate Law - Felde Book - Robert Rooks 10

7. Buying, selling or exchanging promissory notes or real property sales contracts secured by real property liens, or makes collections or performs services on notes or contracts. “In the Business” in this instance means: a. Acquiring for sale of, eight or more notes or contracts in one calendar year. b. Making collections on more than ten loans per year or in amounts exceeding $40, 000 per year. March 18 Chapter 7 - Real Estate Law - Felde Book - Robert Rooks 11

8. Claiming, demanding, charging, receiving or collecting an “advance fee” to promote this sale or lease of real property or business opportunity. March 18 Chapter 7 - Real Estate Law - Felde Book - Robert Rooks 12

B. Real Estate Salesperson A natural person employed by a real estate broker to do one or more of the preceding acts for compensation or in expectation of compensation. March 18 Chapter 7 - Real Estate Law - Felde Book - Robert Rooks 13

C. Exceptions The following are not required to hold a real estate license: 1. Anyone who is dealing with his or her own property. 2. Anyone holding a duly executed power of attorney from the owner. Called Attorney-in-fact. Should be recorded for real estate transactions. Can do all acts on behalf of owner except: a. Convey homesteaded property. b. Mortgage property to themselves. c. Sell to themselves. March 18 Chapter 7 - Real Estate Law - Felde Book - Robert Rooks 14

Exceptions continued 3. An attorney-at-law in performing duties on behalf of a client as their attorney. 4. Any receiver, trustee in bankruptcy or any person acting under an order of any court. 5. Any trustee selling under a deed of trust foreclosure. 6. When loans are concerned, any employee of a bank, savings and loan association, credit union or insurance company. March 18 Chapter 7 - Real Estate Law - Felde Book - Robert Rooks 15

Exceptions continued 7. Any stenographer, bookkeeper, receptionist, telephone operator or other clerical help in carrying out their job as such. 8. Appraisers. 9. An officer of a corporation or general partner of a partnership when selling or purchasing corporate or partnership property provided the officer or partner receives no special compensation. March 18 Chapter 7 - Real Estate Law - Felde Book - Robert Rooks 16

D. Salesman When the word salesman is used in the law and regulations, it means “salesperson”. A licensee, however, may refer to himself or herself as a “salesperson”, “salesman” or “saleswoman”. March 18 Chapter 7 - Real Estate Law - Felde Book - Robert Rooks 17

California Department of Real Estate A. Real Estate Commissioner – Chief Executive of the Department and Chairman of the Real Estate Advisory Commission. Appointed by the Governor. Duties: 1. Investigate complaints against licensees. a. District attorney prosecutes law violation in his or her own county. 2. Regulate the sale of subdivisions. 3. Screen and qualify applicants. March 18 Chapter 7 - Real Estate Law - Felde Book - Robert Rooks 18

California Department of Real Estate Continued 4. Hold formal hearings within terms of Administrative Procedure Act (legal procedures used to discipline licensees). a. Serves accusation and statement of issues to licensee affected. b. Accusation must be filed within three years of most acts. If act involved fraud, misrepresentation or a false promise, can be filed within one year after discovery or within three years of act but not more than 10 years from the date of the act. March 18 Chapter 7 - Real Estate Law - Felde Book - Robert Rooks 19

California Department of Real Estate Continued 5. Make rules and regulations which become part of the California Administrative Code. Commissioner’s Regulations have “force and effect” of law. 6. Enforces provisions of Real Estate Law – State Attorney General is the legal adviser. March 18 Chapter 7 - Real Estate Law - Felde Book - Robert Rooks 20

B. Real Estate Advisory Commission Consists of Commissioner and ten other members who are appointed by the Commissioner. 1. Six members must be licensed real estate brokers. Four are public members. 2. Everyone, except Commissioner, serves without any compensation other than expenses. 3. All records of the Commission are open to inspection by the public during regular office hours. March 18 Chapter 7 - Real Estate Law - Felde Book - Robert Rooks 21

Types of Licenses The Department of Real Estate issues the following types of licenses: A. Individual Broker’s License - Authorizes broker to conduct brokerage business for his or her own personal account. 1. Office must be maintained by broker (personal residence can be used as office) 2. Broker’s license and Salesperson’s licenses must be available for inspection. 3. Need not display sign on premises. March 18 Chapter 7 - Real Estate Law - Felde Book - Robert Rooks 22

Types of Licenses continued B. Corporation License – Requires one officer to be duly licensed as a broker. 1. A salesperson can be an officer of a licensed corporation, providing supervising broker is officer and director of corporation. March 18 Chapter 7 - Real Estate Law - Felde Book - Robert Rooks 23

Types of Licenses continued C. Partnerships - License may be issued in lawfully registered fictitious business name of partnership. AT least one partner must be licensed broker. 1. Partnership may consist of two brokers, broker and salesperson, or broker and nonlicensee. 2. All activity must be conducted throuh brokerlicensed partner. March 18 Chapter 7 - Real Estate Law - Felde Book - Robert Rooks 24

Types of Licenses continued Salesperson License – Issued to individual that is employed by broker. Must be under control and supervision of broker. 1. Salesperson cannot act as independent agent. 2. All legal actions must be filed through broker. 3. Must have written agreement with broker. 4. License must be on file at broker’s main office. 5. Licensed broker may work as salesperson but must have written agreement with employing broker agreeing not to operate independently on his or her own license. March 18 Chapter 7 - Real Estate Law - Felde Book - Robert Rooks 25

Types of Licenses continued Branch Office – License required for each additional location when broker operates more than one office in more than one location. When you get your broker’s license, and you are operating at more than one location, if you are in doubt, get a branch license for that location. March 18 Chapter 7 - Real Estate Law - Felde Book - Robert Rooks 26

Types of Licenses continued Fictitious Business Name – A licensed broker, corporation or partnership may operate under a fictitious name (a “DBA”: Doing Business as) if approved by the Commissioner, Commissioner may refuse if name: March 18 Chapter 7 - Real Estate Law - Felde Book - Robert Rooks 27

Types of Licenses continued Fictitious Business Name continued; 1. Is misleading or would constitute false advertising. 2. Implies a partnership or corporation when one does not exist. 3. Includes the name of a salesperson. 4. Is in violation of the law. 5. Is a name which has been used by a person whose license has been suspended or revoked. March 18 Chapter 7 - Real Estate Law - Felde Book - Robert Rooks 28

Restricted, Suspended, Revoked or Cancelled License 1. Restricted License – A probationary license. Often issued in lieu of suspension or revocation after hearing by Commissioner. License may be restricted: a. By term b. To employment by a particular broker, if a salesperson. c. By conditions to be observed in exercise of the privileges granted. d. If a salesperson has not completed 2 required real estate courses within 18 months after issuance of license. March 18 Chapter 7 - Real Estate Law - Felde Book - Robert Rooks 29

2. Suspended License Temporary loss of license. a. Restricted license may be suspended immediately without hearing. b. Original salesperson license is automatically suspended if licensee has not completed 2 required real estate courses within 18 months of issuance. c. Licensee may penalty in lieu of suspension of up to $250 per day not to exceed $10, 000. March 18 Chapter 7 - Real Estate Law - Felde Book - Robert Rooks 30

Types of Licenses continued Revoked License - Loss of license for unlimited period of time. License cannot be revoked without a hearing. Cancelled License - Status of salesperson’s license if that person quits, is fired by Broker or if Broker dies. Not cancelled in true sense as license continues to run for 4 year term. Licensee cannot work without a broker. As soon as licensee gets a designated broker, they are back in business. March 18 Chapter 7 - Real Estate Law - Felde Book - Robert Rooks 31

H. Mineral, Oil and Gas Brokers License The DRE no longer issues any new M. O. G. licenses. 1. The License Law now permits a licensed real estate broker or salesperson to engage in M. O. G. transaction without any special license or permit. 2. A broker who holds a M. O. G. brokers license may continue to renew his or her license but no new licenses are issued. March 18 Chapter 7 - Real Estate Law - Felde Book - Robert Rooks 32

I. Prepaid Rental Listing Service Special license which allows licensee to collect a fee for supplying a prospective tenant with a list of available rentals. 1. Does not permit licensee to negotiate leases or do any other type of real estate activity. 2. Each location must have this special license except a real estate broker may provide this service without a special license if done at his or her regular real estate brokerage office by a real estate licensee. 3. Each location must be bonded for $10, 000. March 18 Chapter 7 - Real Estate Law - Felde Book - Robert Rooks 33

IV. Changes and Transfers Current residence address of all licensees must be on file with Commissioner. Broker must also have address of principal place of business and branch office(s), if any. A. Change of Business Name or Address – Broker must notify Commissioner in writing by next business day of any change. The address on the face of the License is changed by broker. B. Transfer of Salesperson’s License – The following is required: 1. Former broker notifies Sacramento immediately (within 5 days) and surrenders license to salesperson. 2. New broker notifies Sacramento in writing immediately (within 5 days). 3. Salesperson amends license to show new employer and gives new employer their license for filing at main office. March 18 Chapter 7 - Real Estate Law - Felde Book - Robert Rooks 34

C. Discharge of Salesperson When discharge is for violation of real estate law, the employing broker must immediately file a certified written statement of the facts. If discharge for other reasons, merely notifies Commissioner of termination. March 18 Chapter 7 - Real Estate Law - Felde Book - Robert Rooks 35

D. Death of Broker The death of a broker automatically cancels all licenses of salespersons employed by deceased broker. Salesperson may transfer to a new employing broker. All listings, and sales are terminated. For this reason, many brokers operate as corporations. If the broker dies, the corporation has up to 30 days to find a new designated broker. None of the transactions are terminated. March 18 Chapter 7 - Real Estate Law - Felde Book - Robert Rooks 36

V. Types of Violations There are two basic types of “thou shalt nots” sections of the real estate law. A. B. March 18 Section 10176 of Business and Professions Code Section 10177 of the Business & Professions Code Chapter 7 - Real Estate Law - Felde Book - Robert Rooks 37

A. Section 10176 of Business & Professions Code 1. Misrepresentation – Failure to disclose material facts which should be told to principal. False statement of fact. 2. False Promise - Promising to do something in the future as an inducement, which is usually impossible to perform. March 18 Chapter 7 - Real Estate Law - Felde Book - Robert Rooks 38

A. Section 10176 of Business & Professions Code 3. Continued Misrepresentation – Continued failure to disclose material facts or making false promises. 4. Divided Agency - Failure to inform all principals that he or she is acting as agent for more than one party in a transaction (receiving commission from both buyer and seller). Can result in loss of all commission if both principals are not informed. March 18 Chapter 7 - Real Estate Law - Felde Book - Robert Rooks 39

A. Section 10176 of Business & Professions Code 4. Divided Agency - Failure to inform all principals that he or she is acting as agent for more than one party in a transaction (receiving commission from both buyer and seller). Can result in loss of all commission if both principals are not informed. March 18 Chapter 7 - Real Estate Law - Felde Book - Robert Rooks 40

A. Section 10176 of Business & Professions Code 5. Commingling - Mixing the funds of the principal with broker’s own monies. Not to be confused with Conversion (misappropriation) which is the spending or using of the principal’s funds. 6. Definite Termination Date - Failure to specify a definite and final termination date on any exclusive listing. (An open listing is not an exclusive listing and needs no date. ) March 18 Chapter 7 - Real Estate Law - Felde Book - Robert Rooks 41

A. Section 10176 of Business & Professions Code 7. Secret Profit - Licensee purchases through a “dummy buyer” without the full knowledge and consent of principal, with the intent to resell at a higher price. Usually referred to as a “double escrow” for the benefit of the agent. 8. Listing With An Option - Failure to notify and obtain written consent of the principal when exercising option while at the same time representing the principal as an agent. Does not affect licensee if acting as an optionee only and in no capacity as an agent. March 18 Chapter 7 - Real Estate Law - Felde Book - Robert Rooks 42

A. Section 10176 of Business & Professions Code 9. Dishonest Dealing - “Catch All” section to pick up other violations not specified above. March 18 Chapter 7 - Real Estate Law - Felde Book - Robert Rooks 43

B. Section 10177 of Business & Professions Code 1. Obtaining License By Fraud – Licensee makes misstatement of facts in license application and procures license by fraud, misrepresentation, or deceit. 2. Convictions - Allows denial of license after conviction of felony or misdemeanor involving moral turpitude. March 18 Chapter 7 - Real Estate Law - Felde Book - Robert Rooks 44

B. Section 10177 of Business & Professions Code 3. False Advertising - Provides for disciplinary action against licensees for false advertising in subdivision sales or general property sales. 4. Violations of Other Sections -A “catch all” section giving Commissioner authorization to proceed against a licensee for violation of any section of the Real Estate Law or Commissioner’s Regulations. March 18 Chapter 7 - Real Estate Law - Felde Book - Robert Rooks 45

B. Section 10177 of Business & Professions Code 5. Misuse of Trade Name - Prohibits use of term “Realtor”, “Realist”, or any trade name or insignia of membership in any real estate organization of which licensee is not a member. 6. Conduct Warranting Denial - Permits denial of license if applicant fails to be honest, truthful and of good reputation. March 18 Chapter 7 - Real Estate Law - Felde Book - Robert Rooks 46

B. Section 10177 of Business & Professions Code 7. Blind Advertising- Failure to disclose party is licensee acting as agent. Abbreviations “Agt” or “Bkr” are acceptable. The main thing is that the public realizes they will be calling a professional licensee. a. All salesperson’s cards, etc. , must show broker’s name, and salespersons license number. b. Classified rental ads need only show phone number or address of property. March 18 Chapter 7 - Real Estate Law - Felde Book - Robert Rooks 47

B. Section 10177 of Business & Professions Code 8. Broker Supervision - Failure to exercise reasonable supervision over the activities of his or her salespersons. This includes establishing systems and policies to review documents, approval of all advertising, handling of trust funds, and all other real estate office practices. March 18 Chapter 7 - Real Estate Law - Felde Book - Robert Rooks 48

B. Section 10177 of Business & Professions Code 9. Record Keeping - Failure to retain records for 3 years, copies of all listings, deposit receipts, (accepted and rejected) cancelled checks, trust records and other related documents. Period shall run from: a. Date of closing of the transaction, or b. If transaction is not consummated, from date of listing. March 18 Chapter 7 - Real Estate Law - Felde Book - Robert Rooks 49

B. Section 10177 of Business & Professions Code 10. Brokers or licensees, are not allowed to receive compensation for referral of customers to any escrow company, structural pest control firm, or title insurance company. March 18 Chapter 7 - Real Estate Law - Felde Book - Robert Rooks 50

VI. REAL ESTATE FUND In California part of the licensee fee goes to the Real Estate Research and Recovery Fund. These are comprised of Two (2) accounts. A. Education and Research – Money given to University of California, State Colleges and Community Colleges to foster real estate education. B. Recovery Account Covers uncollectible court judgments against licensees. Limited to the following amounts: 1. $20, 000 for each claimant but not to exceed $20, 000 for all claimants in any one transaction. 2. Not to exceed $100, 000 for multiple transactions of any one licensee. March 18 Chapter 7 - Real Estate Law - Felde Book - Robert Rooks 51

VII. License Qualifications A. Broker Applicant must be: 1. At least 18 years of age. 2. Have had two years full time experience or equivalent, and have passed 8 college level real estate oriented courses. 3. Be honest and truthful. 4. Pass an examination of 200 multiple choice questions. Passing grade 75%. 5. Have fingerprints electronically taken and transmitted to Department of Justice 6. Pay license fee. March 18 Chapter 7 - Real Estate Law - Felde Book - Robert Rooks 52

B. Salesperson Applicant must be: 1. At least 18 years of age. 2. Make application on a form prescribed by the Commissioner. 3. Be honest and truthful. 4. Have completed a college level 3 unit course in Real Estate Principles. March 18 Chapter 7 - Real Estate Law - Felde Book - Robert Rooks 53

B. Salesperson continued 5. Pass an examination of 150 multiple choice questions. Passing Grade 70%. 6. Have fingerprints electronically taken and transmitted to Department of Justice. March 18 Chapter 7 - Real Estate Law - Felde Book - Robert Rooks 54

B. Salesperson continued 7. Either prior to filing application or within 18 months of issuance of new license, complete 2 additional college level, 3 unit courses in real estate subjects. One of these courses must be Real Estate Practice. New License is automatically suspended if required courses are not completed within 18 months. 8. During the 4 year licensure period, all new licensees must also complete four 3 hour continuing education courses in Agency, Ethics, Trust Fund Handling and Fair Housing. March 18 Chapter 7 - Real Estate Law - Felde Book - Robert Rooks 55

Continuing Education With the exception of a new 4 year salesperson’s license, no license can be renewed unless licensee shows proof that he or she has completed 45 hours of instruction in DRE approved courses. 1. The 45 hours must include 3 hours of Ethics, 3 Hours of Agency, 3 hours of Trust Fund Handling, and 3 hours of Fair Housing, 18 hours of the continuing education must be designated as Consumer Protection (CP), the balance can be Consumer Service (CS) subjects, or Consumer Protection (CP) subjects. March 18 Chapter 7 - Real Estate Law - Felde Book - Robert Rooks 56

Continuing Education Continued Continuing Education #1 Continued On the second and subsequent renewal, a six hour survey course on Ethics, Agency, Trust Fund Handling and Fair Housing can be substituted for the 4 separate courses. (FATE-R Courses) March 18 Chapter 7 - Real Estate Law - Felde Book - Robert Rooks 57

D. Residency There are no residency requirements for brokers or salespersons in California. Non resident brokers or salespersons must file an “irrevocable consent” allowing Commissioner, through the California Secretary of State, giving the State of California permission to serve licensee with court summons if legal action is filed against licensee. March 18 Chapter 7 - Real Estate Law - Felde Book - Robert Rooks 58

Citizenship All license applicants must show proof of U. S. citizenship or legal presence in the U. S. before an original or renewal license can be issued. Photocopy of birth certificate is most common for U. S. citizens. Various forms of proof available for legal aliens. March 18 Chapter 7 - Real Estate Law - Felde Book - Robert Rooks 59

Fees Examination Reschedule Exam Once More than Once 4 Year License Salesperson who Completed 3 Courses Fingerprint Processing Broker $ 50. 00 $ 20. 00 $ 30. 00 $165. 00 Salesperson $ 25. 00 $ 15. 00 $ 30. 00 $145. 00 $ 56. 00 $120. 00 $ 56. 00 Prepaid Rental Listing Service - First location $100, $25 for each additional location March 18 Chapter 7 - Real Estate Law - Felde Book - Robert Rooks 60

VIII. Trade and Professional Associations: A. National Association of Realtors 1. Realtor - Trade name, use of which is limited to its members. 2. Code of Ethics – A moral science established by NAR to guide its members in business. March 18 Chapter 7 - Real Estate Law - Felde Book - Robert Rooks 61

B. California Association of Realtors – State organization comprised of local boards. C. National Association of Realtors – National organization of predominately black real estate brokers, who formed the organization in 1947 during period of discriminatory practices. D. Institute of Real Estate Management (IREM) 1. Membership limited to individuals only 2. CPM – Certified Property Manager; professional designation of a member. E. American Institute of Real Estate Appraisers (AIREA) 1. MAI – Member, Appraisal Institute; professional designation of a member. March 18 Chapter 7 - Real Estate Law - Felde Book - Robert Rooks 62

Trust Fund Records A true record must be kept of all trust funds which pass through a broker’s hands. A. Trust Funds – Money or things of value received by the broker or the salesperson on behalf of the principal or any other person, in the performance of any act for which a license is required and not belonging to the broker but being held for the benefit of others. Includes: 1. Un-cashed checks held according to principal’s instructions. 2. Cash, personal notes, pink slips, etc. , taken as deposit. 3. Any form of advance fee. March 18 Chapter 7 - Real Estate Law - Felde Book - Robert Rooks 63

B. Trust Fund Bank Account The broker who does not immediately place all funds entrusted to him or her by the principal or others in a neutral escrow depository or in the hands of the principal must maintain a trust fund account with some bank or other recognized depository and place all such entrusted funds therein upon receipt. March 18 Chapter 7 - Real Estate Law - Felde Book - Robert Rooks 64

1. Withdrawals Licensee must be designated as trustee and account must provide for withdrawal without previous notice. Broker and following persons when authorized by broker, may make withdrawals: a. Salesperson employed by broker. b. Corporate officer of licensed real estate corporation. c. Bonded unlicensed employee of broker. March 18 Chapter 7 - Real Estate Law - Felde Book - Robert Rooks 65

2. Broker’s Personal Funds Broker is allowed to have personal funds in trust account for two reasons: a. Cover service charges – can have up to $200 in account. b. Earned commissions – cannot remain more than 30 days in account. Property managers earned commissions are included in rent receipts and they usually draw them out at a convenient later date. March 18 Chapter 7 - Real Estate Law - Felde Book - Robert Rooks 66

3. Records Broker must keep the following records. a. One fro funds not placed in broker’s trust account. b. One for funds placed in broker’s trust account. c. A formal trust cash receipt journal and a formal trust cash disbursement journal will suffice for items “a” and “b” above. e. Separate record for each beneficiary or transaction. ( A formal trust ledger or similar record. ) March 18 Chapter 7 - Real Estate Law - Felde Book - Robert Rooks 67

4. Checks a. Should be numbered. b. Cancelled ones retained for three years. c. Voided checks should be retained. March 18 Chapter 7 - Real Estate Law - Felde Book - Robert Rooks 68

5. Reconciliation Comparing bank’s accounting statement with broker’s records. If broker discovers an overage, money should be kept in the account and broker should try and find the owner. March 18 Chapter 7 - Real Estate Law - Felde Book - Robert Rooks 69

C. Commingling Failure to deposit or place trust funds received (1. ) In a neutral depository, or (2. ) The hands of the principal, or (3. ) Into a trust fund account no later than 3 business days following their receipt. 1. Written instructions from offeror to hold an uncashed check for a specified time permits broker to hold check provided broker advises offeree. This avoids problems of buyer who withdraws an offer and demands a return of money when the deposit check has not cleared broker’s or offeree’s account. March 18 Chapter 7 - Real Estate Law - Felde Book - Robert Rooks 70

D. Negligence Failure to deliver a check to named payee, payee’s principal or agent within next 3 business days. Uncashed checks may be held when instructed to do so. March 18 Chapter 7 - Real Estate Law - Felde Book - Robert Rooks 71

X. Transactions In Trust Deeds and Real Property Sales Contracts The Real Estate Law places rigid controls over licensees when they engage in the sale of notes secured by trust deeds, negotiate real estate loans or engage in other related loan activity. These controls do not apply to loans or notes created in a sale or exchange that was handled by the licensee as the agent. The law controls three general areas of activity: A. Sale of ordinary trust deeds or contracts B. The negotiation of loans. C. Sale of a series of notes or a partial interest in a series of notes. March 18 Chapter 7 - Real Estate Law - Felde Book - Robert Rooks 72

A. Ordinary Trust Deeds and Real Property Sales Contracts ARTICLE 5 This section of the law applies to the licensee who negotiates new loans; buys or sells existing loans, either as an agent or as a principal; or who make collections on loans, either as an agent or as a principal. March 18 Chapter 7 - Real Estate Law - Felde Book - Robert Rooks 73

1. Acceptance of Loan Funds Broker may only accept funds in advance from a prospective buyer or lender when the funds are to be used to purchase specific loans which the broker has written authorization to negotiate or sell, or which the broker owns. March 18 Chapter 7 - Real Estate Law - Felde Book - Robert Rooks 74

2. Retention of Funds Broker cannot hold funds collected on notes or sales contracts for more than 60 days unless given written authorization to do so. March 18 Chapter 7 - Real Estate Law - Felde Book - Robert Rooks 75

3. Written Authorization The broker must have written authorization from the principal if they are to make collections for others on notes or sales contracts. (this is true of rents or other funds as well) March 18 Chapter 7 - Real Estate Law - Felde Book - Robert Rooks 76

4. Recording New Loans If a broker negotiates a new loan, trust deed must be recorded before the loan funds are dispersed. If lender authorizes early release of funs, a written recommendation to record must be given to the lender, by the broker, within ten days of the release of these funds. March 18 Chapter 7 - Real Estate Law - Felde Book - Robert Rooks 77

5. Assignment When a note or sales contract is sold, the assignment must be recorded within ten working days or written recommendation to record given to the purchaser. March 18 Chapter 7 - Real Estate Law - Felde Book - Robert Rooks 78

6. Misleading Advertising Misleading advertising is strictly prohibited. Any ad implying a specific yield in excess of the interest is misleading unless the interest rate and the discount rate are shown separately in the advertisement. March 18 Chapter 7 - Real Estate Law - Felde Book - Robert Rooks 79

7. Inducements Brokers cannot offer gifts to potential clients to generate loan business. March 18 Chapter 7 - Real Estate Law - Felde Book - Robert Rooks 80

8. Investor Protections Any broker who, in any one calendar year, is likely to negotiate any combination of 20 or more new loans or sell 20 or more existing loans, all of which total in the aggregate $2, 000 or more, must do each of the following: a. Submit and have approved by the DRE all advertising. b. File a report, of the review by a public accountant, of trust fund financial records. c. File a trust fund status report each year. d. Provide a disclosure statement to each person making a loan or purchasing a loan. March 18 Chapter 7 - Real Estate Law - Felde Book - Robert Rooks 81

B. Negotiation of Loans (Article 7) The following restrictions apply to HARD MONEY loans (loans where funds are advanced by lenders on new notes and not just an extension of credit by a seller) arranged by a broker for a fee. Law only applies to first trust deeds of less than $30, 000 and junior loans of less than $20, 000. (Exception would be with #4 below) March 18 Chapter 7 - Real Estate Law - Felde Book - Robert Rooks 82

1. Interest No limitation. Real Estate loans made or arranged by a real estate broker are exempt from the Usury Law. March 18 Chapter 7 - Real Estate Law - Felde Book - Robert Rooks 83

2. Maximum Commissions First Trust Deeds Under $30, 000 Less than 3 Years – 5% 3 Years or over - 10% March 18 Junior Trust Deeds Under $20, 000 Less than 2 years – 5% 2 Years, but less than 3 – 10% 3 Years or more – 15% Chapter 7 - Real Estate Law - Felde Book - Robert Rooks 84

3. Maximum Costs and Expenses Broker must keep expenses within reason. Expenses may be fees for appraisal, escrow, title insurance, notary, etc. . Total expenses (excluding title charges and recording fees) cannot exceed: a. Loan of $7, 800 or less – Actual expenses but not more than $390. b. Loan between $7, 800 and $14, 000 – Actual expenses but not more than 5% of loan amount. c. Loans over $14, 000 – Actual expenses but not more than $700. March 18 Chapter 7 - Real Estate Law - Felde Book - Robert Rooks 85

4. Mortgage Loan Disclosure Statement On all loans negotiated by a broker (except loans from conventional lender in which broker limits commission to 2% or less), broker must prepare and present to borrower a statement showing all particulars of the loan. Statement must also be given to borrower when broker is loaning own funds or using broker – controlled funds. a. Form must be approved by the Real Estate Commissioner. b. Form must be signed by borrower before signing other loan documents. c. Copy must be kept by broker for three years. d. Interest cannot commence until lender has deposited funds in escrow or made them available to borrower. March 18 Chapter 7 - Real Estate Law - Felde Book - Robert Rooks 86

5. Balloon Payments A Balloon Payment is defined as any one payment that is greater than twice the smallest installment. Hard Money installment loans of less than three years cannot have a balloon payment. Hard Money installment loans on owner-occupied single family dwellings, duplexes, condominium or cooperative units, with a term of six years or less cannot have a balloon payment. March 18 Chapter 7 - Real Estate Law - Felde Book - Robert Rooks 87

6. Exclusive Agreements employing a broker/licensee to negotiate a real estate loan shall be limited to a term of not more than 45 days. March 18 Chapter 7 - Real Estate Law - Felde Book - Robert Rooks 88

7. Borrower’s Liability If a loan cannot be consummated due to borrower's failure to disclose existing liens, borrower may be liable for all costs and expenses and one-half the commission due had the loan been consummated. March 18 Chapter 7 - Real Estate Law - Felde Book - Robert Rooks 89

8. Credit Life Insurance Borrower cannot be required to purchase as a condition of the loan, Credit Life Insurance. March 18 Chapter 7 - Real Estate Law - Felde Book - Robert Rooks 90

9. Late Charges cannot exceed 10% of any installment due. Lender can charge $5. 00 minimum late fee. Ironically, payments made within 10 days of scheduled due date are not considered “late”. March 18 Chapter 7 - Real Estate Law - Felde Book - Robert Rooks 91

10. Prepayment Penalty Loans secured by a single-family, owner occupied dwelling can have a prepayment penalty imposed. The prepayment penalty cannot exceed 5 years. Or, according to real estate law, the prepayment penalty cannot last for more than 5 years, and then with the following limitations: a. Borrower can pay up to 20% of unpaid balance in any 12 month period without penalty. b. Penalty cannot exceed 6 month’s advance interest on amount prepaid in excess of 20%. March 18 Chapter 7 - Real Estate Law - Felde Book - Robert Rooks 92

C. Sale of Series of Notes or Undivided Interests in a Note Until 1998, fell under the Corporation’s Code, a permit was required for what was considered the sale of a security. The Department of Real Estate now regulates the sale of a series of notes secured directly by an interest in the same real property or the sale of undivided interest in notes. March 18 Chapter 7 - Real Estate Law - Felde Book - Robert Rooks 93

1. Notice to Commissioner Broker must notify Commissioner within 30 days after first transaction or of any material change in first notice. March 18 Chapter 7 - Real Estate Law - Felde Book - Robert Rooks 94

2. Type of Notes Permitted To Be Sold a. b. c. Real property securing notes must be located in California Notes cannot contain a subordination clause Notes cannot be “promotional notes”, a “promotional note” is one of a series secured by liens on separate parcels in a subdivision. Only includes trust deed notes that are less than three years old and were executed on: 1. Unimproved property 2. Improved property after construction but before first sale of property, or 3. Improved property as means of financing first purchase but are subordinate or may become subordinate. March 18 Chapter 7 - Real Estate Law - Felde Book - Robert Rooks 95

3. Other Restrictions & Requirements a. Notes can be sold by or through a broker. b. Notes cannot be sold to more than 10 persons. c. Purchaser cannot invest more than 10% of his or her net worth nor more than 10% of adjusted gross income shown on last income Tax Return. d. Purchaser must sign statement confirming qualifications. (Broker must keep copy for 4 years). e. Current market value of property securing debt must be established by broker or appraiser. f. Copy of appraisal must be delivered to purchaser upon request. March 18 Chapter 7 - Real Estate Law - Felde Book - Robert Rooks 96

4. Servicing The Notes Broker or other qualified entity must have written agreement obligating broker or entity to service notes. Servicing includes: a. Collecting payments on notes. (Must be deposited in trust account). b. Transmit payments to investors within 25 days. c. Foreclose in event of default. March 18 Chapter 7 - Real Estate Law - Felde Book - Robert Rooks 97

5. CPA Audit Servicing agent must have trust account inspected at least every 3 months if during 3 consecutive months. a. Amount exceeds $125, 000 or b. Number of payees exceed 120 March 18 Chapter 7 - Real Estate Law - Felde Book - Robert Rooks 98

D. Time Shares and Qualified Resort Vacation Clubs Anyone offering an interest in a Time-Share located outside of California or an interest in a Qualified Resort Vacation Club regardless of location, must obtain a permit from the Real Estate Commissioner. 1. Other Factors: a. Seller need not be a broker b. Seller need not post a bond c. No appraisal is required March 18 Chapter 7 - Real Estate Law - Felde Book - Robert Rooks 99

XI. Mobilehomes Real estate licensee may act as agent in the sale of a mobilehome (not recreational vehicles) provided mobilehome is registered under Part 2 of Division 13 of the Health and Safety Code. No real estate broker may have his or her office where two or more mobilehomes are displayed or offered for sale unless the broker is also licensed as a mobilehome dealer. March 18 Chapter 7 - Real Estate Law - Felde Book - Robert Rooks 100

A. It Is Unlawful for Licensee 1. To advertise home unless it is in place on a rented or leased lot in a mobilehome park or on a site zoned for mobilehomes. 2. To advertise or imply that mobilehome is new. 3. To continue running advertisements after 48 hours of notice that mobilehome is no longer available for sale, lease or exchange. March 18 Chapter 7 - Real Estate Law - Felde Book - Robert Rooks 101

A. It Is Unlawful for Licensee continued 4. To add to the selling price, the licensing or transfer fee due the State unless buyer and seller agree to prorate the fee or licensee paid to avoid late penalty. 5. To make any representation that mobilehome can be transported on highway when it does not comply with Vehicle Code requirements. 6. To advertise or imply that no down payment is required when one is in fact required. 7. Not to endorse, date and deliver or cause to deliver certificate of ownership or certificate of title to new owners. March 18 Chapter 7 - Real Estate Law - Felde Book - Robert Rooks 102

B. Licensee May Be Disciplined For 1. Using false name or concealing any material fact in the application for the mobilehome registration. 2. Failing to provide for delivery of certificate of ownership or certificate of title to buyer. 3. Dealing with a stolen mobilehome. 4. Giving the State a bad check. March 18 Chapter 7 - Real Estate Law - Felde Book - Robert Rooks 103

C. Mobilehome A structure transportable under permit in one or more sections, designed and equipped to contain not more than two dwelling units to be used with or without a foundation system. 1. Mobilehomes must be registered with the California Department of Housing and Community Development (HCD). 2. Document used to transfer title is Certificate of Title. 3. Certificate of Title issued to registered owner or lienholder by HCD. March 18 Chapter 7 - Real Estate Law - Felde Book - Robert Rooks 104

March 18 Chapter 7 - Real Estate Law - Felde Book - Robert Rooks 105

1. A salesperson employed as a salesperson by a licensed real estate broker is considered to be which of he following under the Real Estate Law? a. A special agent b. An independent contractor c. An employee d. A sub-agent March 18 Chapter 7 - Real Estate Law - Felde Book - Robert Rooks 106

2. A licensed real estate salesperson in California may only lawfully receive a commission from the: a. Escrow holder b. Broker c. Seller d. Buyer March 18 Chapter 7 - Real Estate Law - Felde Book - Robert Rooks 107

3. When a real estate broker is charged with “conversion”, it most generally involves: a. Client’s funds b. Subdivision Reports c. Exchanges d. Misrepresentation March 18 Chapter 7 - Real Estate Law - Felde Book - Robert Rooks 108

4. A corporation can only engage in the real estate brokerage business when the officer action for the corporation is: a. A duly licensed salesperson b. An attorney c. A licensed broker d. The president of the corporation March 18 Chapter 7 - Real Estate Law - Felde Book - Robert Rooks 109

5. The Real Estate Law is found in the: a. Business & Profession Code b. Civil Code c. Statute of Frauds d. Commercial Code March 18 Chapter 7 - Real Estate Law - Felde Book - Robert Rooks 110

6. A real estate broker must retain copies of all his or her listings, offers, cancelled checks and other documents executed by him or her for a period of: a. One year b. Three years c. Four years d. Ten years March 18 Chapter 7 - Real Estate Law - Felde Book - Robert Rooks 111

7. A licensed real estate broker would not be disciplined for a violation under Section 10176 of the California Real Estate Law for: a. Acting for both parties in a transaction with the consent of both. b. Making any substantial misrepresentation c. Making false promises d. Making a secret profit March 18 Chapter 7 - Real Estate Law - Felde Book - Robert Rooks 112

8. When a real estate licensee negotiates the sale of a note secured by a deed of trust, it is the broker’s responsibility to have the trust deed: a. Reinstated b. Reconveyed c. Subordinated d. Assigned March 18 Chapter 7 - Real Estate Law - Felde Book - Robert Rooks 113

9. The maximum commission allowed a loan broker who negotiates on a second trust deed of $4, 500 for a term of five years is: a. 5% b. 10% c. 15% d. Any amount March 18 Chapter 7 - Real Estate Law - Felde Book - Robert Rooks 114

10. A real estate broker hires a secretary who does not have a real estate license. If the secretary receives a fixed salary, the secretary may legally? a. b. c. d. March 18 Quote selling prices Negotiate leases Solicit listings from prospective sellers Type real estate contracts for the broker’s selling staff Chapter 7 - Real Estate Law - Felde Book - Robert Rooks 115

11. Under the real estate law, the Real Estate Commissioner is permitted to adopt regulations for the administration and enforcement of the law. Duly adopted regulations: a. b. c. d. March 18 Have the same effect as the Real Estate Law Become a part of the California Administrative Code Both A and B are correct Must be approved by the California Legislation Chapter 7 - Real Estate Law - Felde Book - Robert Rooks 116

12. Once the Mortgage Loan Disclosure Statement has been signed by the borrower as required by law, it must be retained by the broker for: a. 1 Year b. 2 Years c. 3 Years d. 4 Years March 18 Chapter 7 - Real Estate Law - Felde Book - Robert Rooks 117

13. Which of the following is required before an individual can offer an out-of-state timeshare project for sale in California: a. A permit from the Real Estate Commissioner b. An appraisal c. A soils’ report d. A securities license March 18 Chapter 7 - Real Estate Law - Felde Book - Robert Rooks 118

14. All California Real Estate Laws are created by: a. The Constitution b. Acts of the legislature c. The Real Estate Commissioner d. The Department of Real Estate March 18 Chapter 7 - Real Estate Law - Felde Book - Robert Rooks 119

15. When the Real Estate Commissioner wishes to proceed against a licensee for a suspected violation of the Real Estate Law the Commissioner must first serve the real estate licensee with: a. A complaint b. A demurrer c. A statement of issues and an accusation d. A securities license March 18 Chapter 7 - Real Estate Law - Felde Book - Robert Rooks 120

16. Before an applicant will be issued a California Real Estate Salesperson’s License, the applicant must be: a. A high school graduate b. A resident of California c. At least 21 years of age d. None of the proceeding March 18 Chapter 7 - Real Estate Law - Felde Book - Robert Rooks 121

17. Under certain circumstances the Real Estate Law requires a person to have a real estate broker’s license when he or she, acting as a principal, personally negotiates the sale of his or her own property. This would be the case if it involved the sale of: a. 10 notes secured by trust deeds b. Lots in a California subdivision c. Four single-family homes d. Business opportunities March 18 Chapter 7 - Real Estate Law - Felde Book - Robert Rooks 122

18. Once the license of a real estate broker has been suspended, his or her salespersons can: a. Collect past due rents b. Be paid commissions earned before the broker’s license was suspended c. Finalize all transactions which they had started before the license suspension d. Secure listings if they date them prior to the suspension date March 18 Chapter 7 - Real Estate Law - Felde Book - Robert Rooks 123

19. A licensed real estate salesperson may not sell a mobilehome unless it is: a. Placed on a permanent foundations system b. Located in a mobilehome park c. At least one year old d. Registered under Part 2 of Division 13 of the Health and Safety Code March 18 Chapter 7 - Real Estate Law - Felde Book - Robert Rooks 124

20. Misuse of the term “Realtor” is: a. A violation of the California Real Estate Law b. A felony offense c. Unethical but not illegal d. Only unethical in California March 18 Chapter 7 - Real Estate Law - Felde Book - Robert Rooks 125

March 18 Chapter 7 - Real Estate Law - Felde Book - Robert Rooks 126