Wisconsin REALTORS® Association - Legal Hotline Hottips
Legal Hottips - September 14, 2009 1.) General Real Estate - Miscellaneous Issues Ownership of a unit in a cooperative community is not an interest in real estate. Instead, a consumer who buys a cooperative unit actually purchases a share in the housing cooperative (typically a corporation), similar to a share of stock. In a housing cooperative, the cooperative corporation holds title to the real estate and an owner buys a share in the cooperative, which entitles him or her to occupy a unit. A share in the cooperative is personal property. In other words, owning a unit in a cooperative is like being a shareholder in a corporation which owns an apartment complex where each shareholder has exclusive rights to live in one of the apartments. If the cooperative share offered for sale is personal property, the sale of the cooperative unit will not be a real estate transaction. It will be similar to a commercial transaction where corporate stock is sold instead of selling the actual real estate owned by the corporation. The old Wis. Stat. § 551.02(3)(f) permitted a person licensed as a real estate broker, and whose transactions in securities are isolated transactions incidental to his or her real estate business, to engage in limited transactions that otherwise would require a securities broker-dealer license, such as co-op transactions. However, Chapter 551 of the Wisconsin Statutes was completely revamped effective January 1, 2009 and was made consistent with the 2002 Uniform Securities Act. As a result the exception for real estate brokers was eliminated from the definition of broker dealer in the new Wis. Stat. § 551.102(4) because such an exception did not appear in the uniform law. However, the new definition of broker-dealer does provide an exclusion for “A person excluded by rule adopted or order issued under this chapter.” The new Wis. Admin. Code § DFI-Sec 1.02(2)(f) provides that a broker-dealer does not include, “A person registered as a real estate broker under ch. 452 and whose transactions in securities are isolated transactions incidental to that business.” In other words, it turns out that the exception that used to appear in the securities statutes now appear instead in the administrative code rules for securities. This would appear to restore to real brokers their ability to work in co-op transactions and other isolated securities transactions incidental to real estate practice. A broker should not handle a sale of a cooperative unit unless the broker understands cooperative housing and can act competently. There are no approved forms for selling an interest in a cooperative, so the broker may contact the cooperative or the seller to get an idea of the appropriate documentation that will be needed. The seller may work with the cooperative association, his or her attorney, or the title company to arrange for the drafting of any purchase contract that may be needed, as well as the transfer the cooperative share certificate and the occupancy agreement representing the seller’s interest in the cooperative. A broker may advertise the sale of a cooperative unit in newspaper ads and in other advertising media provided the broker makes it clear that the share in the cooperative is not real estate. MLS advertising also may be allowed under local MLS rules. READ MORE ABOUT IT: 2.) Offer to Purchase - Licensed Purchasers QUESTION: An agent purchased a property and it is deeded in agent's name (transaction has closed). The agent wants to receive a commission. Can the broker pay the agent a commission or an incentive? ANSWER: Under the law of agency, the agent is prohibited from competing with the principal. A licensee can be either a principal or an agent in a transaction, but conflicts of interest occur when a licensee tries to be both. When acting as a buyer of real estate, the licensee is a principal in the transaction and not the agent for anyone. Therefore, the buyer/licensee cannot collect a commission from the seller because the buyer/licensee cannot perform services on behalf of the seller with undivided loyalty when the licensee has his or her own interest as the buyer at stake. It is also inconsistent for a buyer/licensee to act as his or her own agent and collect a commission for representing oneself. Instead, a buyer/licensee can negotiate a buyer's incentive to be paid by the listing broker or the seller. This incentive can be for the amount of the co-broke commission which would otherwise be paid to the selling broker in the transaction. The buyer's incentive should be properly documented in writing before closing, preferably before the offer to purchase is executed. An incentive from the listing broker should be documented in a separate letter or memo because it is a separate agreement between the licensee/buyer and the listing broker. Under the DRL's interpretation of Wis. Admin. Code § RL 24.05(4), the seller also must consent in writing to this incentive no later than the time that the offer is accepted, so a recitation in the offer regarding the incentive from the listing broker to the licensee/buyer may be the most efficient way to meet this requirement and avoid any possible DRL enforcement actions. In this transaction it may have been possible to have set up a buyer’s incentive for the agent, but it would have needed to have been documented in advance, specifically in the offer to purchase. The DRL would likely impose discipline for a violation of Wis. Admin. Code § RL 24.05(4) if any commission or incentive now were to be paid to the agent/buyer without the seller’s informed consent at the time the offer was negotiated. The DRL maintains that it is critical that sellers are aware when licensee/buyers receive monetary benefits in a transaction and have the chance to address the issue should they have any concerns. 3.) Listing Contracts - Exclusive Agency QUESTION: How does a broker modify an exclusive right to sell listing contract to make it an exclusive agency listing contract? ANSWER: In an exclusive agency listing, the property is listed with only one listing broker, but the seller retains the right to sell the property by him or herself without owing a commission to the broker. To modify the 2008 WB-1 Residential Listing Contract-Exclusive Right to Sell to produce an exclusive agency listing, the following items should be modified or deleted: 1) delete he phrase “right to sell” from the title and line 1 of the Listing and insert in its place the word “agency,” 2) add a provision under Additional Provisions on lines 242-250 to the effect that “Broker's commission is not earned based on lines 40-49 of the Commission section if the offer accepted, option granted or exchange agreement entered into by Seller is with a purchaser procured by Seller;” and 3) delete the words “by Seller” from line 46 in the Commission section. The broker, perhaps with the assistance of an attorney, may wish to review the other provisions in the WB-1 to see if other modifications may be helpful. Often in an exclusive agency listing, the broker remains obliged to draft the offer and other necessary paperwork and close the transaction, even though the broker is providing these services for free because the seller found the buyer. To avoid this outcome, the listing broker may wish to draft the listing to provide that he or she will be paid a reduced commission amount instead of no commission if the seller procures the buyer. This would be an exclusive right-to-sell, variable rate listing contract. 4.) Contract Issues & Forms - Binding Acceptance QUESTION: The offer was written on Saturday and the counter-offer was received with only one seller’s signature. The buyers signed the counter-offer and retuned it with an amendment saying that the offer was binding. Are these documents enough to create a legally binding contract? ANSWER: Per the terms and conditions of the WB-11 Residential Offer to Purchase, acceptance occurs when all buyers and sellers sign an identical copy of the offer. Binding acceptance occurs when that accepted offer is timely delivered by one of the authorized delivery methods. It would appear acceptance has not occurred because the counter-offer did not include all of the required signatures. Although an amendment could be modified to continue negotiations between the parties, a counter-offer is the appropriate form to use to create a binding contract. The parties may consult with legal counsel regarding the enforceability of the offered documents. 5.) Landlord/Tenants - Security Deposits QUESTION: The broker also owns rental properties. Several years ago, the DRL auditors asked the broker to take security deposits out of the real estate trust accounts, which the broker did. The broker has been setting up individual accounts for each tenant with their security deposit, the broker being like a trustee, and tenants’ Social Security numbers on the accounts so the interest would go to them. Now the bank is indicating this is a problem for them. What is the best way to handle security deposits? ANSWER: Rental application deposits, security deposits and rent may be deposited into one of the following three accounts, regardless of whether the owner is a third party owner or a real estate licensee: 1. A traditional non interest bearing trust account, in other words, the regular trust account with which licensees are historically familiar. 2. An interest bearing trust account if the broker obtains the written consent of the parties for whom the funds are being held. This authorization must specify how and to whom the interest will be paid. No interest may be paid to or provided in any way for the benefit of the broker. This type of account will be needed for brokers in communities which require that interest be paid on security deposits. 3. The rental owner's account. “Owner's account” is defined as an account maintained by the rental property owner for the deposit and disbursement of the owner's funds. A broker may deposit rental application deposits, security deposits and rent into the owner's account as long as these checks are payable to the one or more of the owners or to the owner's account. Wis. Admin. Code § RL 18.031(4) provides, “SECURITY DEPOSITS. A licensee having an ownership interest in a rental property shall either place security deposits related to that property in a real estate trust account or shall provide in a lease for security deposits to be held in an account maintained in the name of the owner or owners.” Debbi Conrad |