UNIT 7 - CONTENTS

1. Sound Practices for Contract Preparation and Presentation2. Clauses, Amendments, Completion and Earnest Money3. Common PitfallsUnit Assessment

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CONTRACTS

Chapter 1 covers the basic elements of a contract, types of agreements and the parties involved.

CHAPTER LEARNING OBJECTIVES

Upon completion of this chapter, the student should be able to:• Describe the basic elements of a valid contract• List the main types of contracts most used in residential sales transactions• Understand when it’s appropriate and/or necessary to seek professional/legal

assistance

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CHAPTER 1

SOUND PRACTICES FOR CONTRACT PREPARATION AND PRESENTATION

Introduction

Contracts are an essential part of the transfer of real estate. It is important that you, as the real estate professional, are familiar with these contracts, know how to use them and have the ability to explain the terms contained within these forms.

These forms aid in the development of a legally binding contract between the parties and express the terms, conditions, timeline and promises of the seller and the purchaser.

Should an issue or dispute ever arise between the parties to a contract, these forms and their content will be of the utmost importance in arbitration or in a court of law.

In this course, we will be referring to the contract between the buyer and the seller for the purchase of real property as a Purchase and Sale Agreement (PSA).

Elements of a Valid Contract

For a legal contract to be binding, the following elements must exist:

• Mutual agreement/acceptance: Each and every party involved in the contract must agree to and accept the contract and its components. All parties must recognize and acknowledge that an agreement has been made and duly accepted.

• Consideration: A contract must be mutually beneficial and all parties must recognize and accept the benefits from the contract. These benefits can include money, transfer of ownership, transfer of rights, exchange of services, or anything of value.

• Legally competent parties: In the United States, a person or entity (such as a business, trust or corporation) must be competent and at least 18 years old to enter into a contract. If the party is a business, the person representing the business must also be legally competent and have the authority to act for the business.

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CHAPTER 1 - SECTION 1

SOUND PRACTICES FOR CONTRACT PREPARATION AND PRESENTATION

• Lawful Objective: A legal contract cannot require any party to knowingly break the law. If so, the contract is usually void.

• Written Contract: The Statute of Fraud in most states requires that all real estate contracts be in writing.

Void and Voidable Contracts

Valid Contracts- if a contract has all of the required elements (see elements of a legal contract), then it is valid and enforceable in a court of law. An example of this would be a homeowner (who is usually over the age of 18 and of sound mind) who signs a contract with the appliance store to buy a refrigerator.

Void Contracts - a void contract is not a contract and has no effect in a court of law. Most commonly, a void contract will be missing one or all of the essential elements needed for a valid contract (again, see elements of a legal contract).

Voidable Contracts- a voidable contract is a contract which may appear to be valid, but has some type of flaw which could cause one or both of the parties to void the contract. An example of this would be a contract between an illegal drug dealer and an illegal drug supplier to purchase a specified amount of drugs for a specified amount. Either one of the parties could void the contract since there is no lawful objective and hence missing one of the elements of a valid contract.

Statute of Frauds

What is the Statute of Frauds?

A “statute of frauds” requires that certain types of contracts be in writing and that they must be signed (acknowledged) by all of the parties that will be bound to the contract.

Contracts involving the sale or transfer of real property in most states fall under the statute of frauds law and must be in writing. Real Estate contracts not in writing are not enforceable.

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Its origins come from the English Parliament in the 1600’s.

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Why This is Important for Real Estate Contracts:

Historically, especially when real estate was conducted with a handshake, the opportunities to commit acts of fraud were abundant.

There are some basic reasons why all real estate contracts should fall under this statute:

The purchase or transfer of real property often involves many terms and conditions as well as pricing. Because of this, the need for having these agreements in writing is essential.

Also, there may be many contingencies in the contract which have deadlines for completion. If these deadlines are not met, there can be serious consequences for either party. Again, having these agreements is writing provides clarification for all the parties.

Should there be any dispute between the parties in a contract; the issue may require arbitration or intervention through the courts. Should this arise, an arbitrator or judge could obtain a clearer understanding, of the intentions and promises between the parties by reviewing a written contract stating the specific agreements in the contract.

Purchase and Sale Agreement (PSA)

A Purchase and Sale Agreement is used when a buyer (the offeror) intends to make an offer to the seller (the offeree). Since the Statute of Frauds requires all real estate offers to be in writing in most states, the PSA is used for this purpose. Included in the PSA are all of the terms and conditions of the purchase and the time frames in which certain actions must be performed.

The PSA will typically specify some the following:

• Purchase Price

• Closing Date

• Date of the contract

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• The multiple listing number if it has one

• The full names of all the purchasers

• The common address and county where the property is located

• A legal description• Included items, such as appliances, wood stoves, security systems

• Earnest money and default

• Information about disclosures

• Contingencies

• Information about the title company

• Information about the closing or escrow agent

• Closing date and date of possession

• Offer expiration date

• Service of closing agent for payment of utilities

• Charges and assessments due after closing

• Agency disclosure

• What addenda are attached to the contract?

• Buyer’s address, phone, fax and e-mail address and signature

• Seller’s address, phone, fax and e-mail address and signature

Please take note from the above list that the legal description is in bold type. Without a legal description in most states, a PSA is voidable.

The type of Purchase and Sale Agreement (PSA) that will be used will depend on the property. The various types most commonly used by residential agents are:

• PSA for Single Family Homes

• PSA for Multi-Family Homes

• PSA for Vacant Land (Unimproved property)

• PSA for Condominiums

The PSA is usually completed by the broker working with the buyers, then signed by the buyers and presented to the sellers

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Listing Agreements

When a licensee lists a property for sale, a listing agreement acts as a contract between the seller and the licensee (in actuality between the seller the brokerage). It is like an employment contract in some ways, but it is between a seller and an independent contractor (the licensee).

The listing agreement will normally specify the following items:

• The common address for the property

• The legal description• The length of time of the listing

• The licensee and the brokerage company

• The rate of commission

• Recourse in the event the seller sells the property

• Disclaimer on Distressed Homes

• Authorization to install a key box

• Seller’s warranties and representations regard the right to sell and encroachments

• Seller’s indemnification to hold agent harmless if their representations are incorrect

• Brief information on closing costs

• Permission from the seller to be listed in NWMLS and that their agent can cooperate with other members of the MLS

• Disclaimer regarding insurance

• Broker’s right to market the property

• Brief information on the seller’s disclosure statement

• Consequence and damages in the event of a buyer’s breach

• Attorney’s fees

From the above list, please note that the legal description is in bold type. It is one of the most important components of the listing. Without the legal description in most states, the listing agreement is voidable. This means that either party can cancel the contract. Please make note that the legal description of the property, which can be obtained from the last deed and supplied by the title company, is not the same as the street address.

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There are two types of listing agreements depending on the state that you’re in: Exclusive Sale and Listing Agreement and Exclusive Agency Sale and Listing Agreement. Let’s take a closer look at each:

Exclusive Sale and Listing Agreement –allows the broker to earn the listing portion of the commission, no matter who sells the property. Shown below.

Please refer to the chapter on listing agreements to view a listing form.

Exclusive Agency Sale and Listing Agreement – the broker does not earn the listing portion of the commission if the seller produces a sale.

Please note that while a licensee may take the listing, that licensee is an agent for the broker and the broker or brokerage owns the listing.

Conditional Release of Listing

The Conditional Release of Listing is another common contract that residential brokers use. In essence, it rescinds the listing agreement with the condition that the seller will still pay the broker a commission if a future buyer purchases the property and has identified the property through the means of the broker’s advertising or showing within six months.

NOTE: When a listing is rescinded, each party is put back to their original position.

Buyer’s Agreement

Commonly used by residential brokers in most states is the Buyer’s Agreement. There are two types: Buyer’s Agency Agreement and Buyer’s Agreement No Agency:

Buyer’s Agency Agreement- states that a licensee represents the buyer and that the buyer has an obligation to that licensee for commission during the term of the agreement. This agreement is unilaterally cancelable by either party and must be done in writing. If two brokers are ever in a dispute over commission, a buyer agency agreement can be the proof that a particular licensee would be entitled to earn a commission.

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Buyer’s Agreement No Agency-this contract states the licensee does not represent the buyer, even though they may be performing brokerage services for the buyer.

Legal Descriptions

When taking a listing, it is of extreme importance to obtain a full legal description from the last deed and have it initialed by the seller(s). A street or common address is not sufficient and the listing agreement could be voidable.

For a Purchase and Sale Agreement the same holds true, and the full legal description must be initialed by both the buyer and the seller.

Full Legal Description Example:The Grantor Paul S. Post and Mary B. Post, husband and wife

For and in consideration of TEN DOLLARS AND OTHER GOOD AND VALUABLE CONSIDERATION in hand paid, conveys and warrants to Peter D. Sanders and Kim H. Sanders

The following described real estate situated in the county of SNOHOMISH , State of Washington

LOT 14, HAYWOOD HILLS, ACCORDING TO THE PLAT THEREOF RECORDED ON VOLUME 32 OF PLATS, PAGES(S) 121-123, INCLUSIVE RECORDS OF SNOHOMISH COUNTY, WASHINGTON. SITUATED IN THE COUNTY OF SNOHOMISH, STATE OF WASHINGTON

Contracts for Lease Options and Leases

A written contract is required for the sale and lease option of real estate.

In most states, leases for a fixed term must be in writing, and if the term is greater than one year, the landlord’s signature must be notarized. If the lease is for a periodic tenancy (month to month tenancy for example), the law does not usually require a written contract. The exception to this would be when the period is greater than a year.

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Even if a written lease is not required by state law, it is a sound practice to always have a written contract so that there is no confusion regarding the terms of the lease and intentions of the parties.

Assignment and Novation

Assignment - an assignment of a contract is when the interests of the original party (the assignor) are transferred to another party (the assignee). In general, an assignment will be permitted unless there is an express prohibition against assignment in the contract. The new party, (the assignee) assumes primary responsibility for the performance of the contract, and the original party (the assignor) incurs secondary responsibility for the contract.

Certain contracts cannot be assigned since an assignment cannot have any effect on the duties of the other party to the contract, nor can it reduce the possibility of the other party receiving full performance of the same quality. An example of this would be a contract between a patient and a doctor who specializes in a certain field of medicine. The doctor could not assign his contract to another doctor, as it could be detrimental to the patient. This is in contrast to Novation.

Novation – in the first instance, novation is the substitution of a new party into a contract. The original party is relieved of any obligation for the contract. Novation can also be the substitution of original contractual terms for new terms if both parties agree to the new terms.

Appropriate Circumstances to Seek the Assistance of Your Broker When Writing a Purchase and Sale Agreement

You should seek the advice or assistance from your broker anytime you feel that you or the brokerage may be at risk. If you are at risk, most likely your brokerage will be at risk as well. Designated brokers and managing brokers are responsible for the overall supervision and actions of their licensees. The term is referred to as vicarious liability which means that a party (the brokerage) is responsible for the actions of another party (the licensee).

While this list is certainly not exhaustive, the following are some key circumstances when you should consider seeking assistance:

• Unfamiliarity with a specific form

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• Not knowing which form to use in which circumstance

• Unfamiliarity with new or existing real estate laws or legislation

• Problems revolving around communications with the purchaser

• If you are a new licensee

• If the purchaser is requesting contingencies which are unique or ambiguous

• If there is not a preprinted form available to cover a particular circumstance (we will be covering this in greater detail further in this chapter)

• If there is confusion with agency and who you should represent.

• Unique circumstances and unique properties

• Not knowing which addenda should be used in conjunction with a particular offer and particular circumstances

• If you have questions about the handling of the earnest money

• If you are unsure about the computation of time as it relates to the contingencies in the contract.

• If the potential purchasers have questions about the Purchase and Sale Agreement (PSA) that you cannot answer.

HINT: When discussing the details or issues of a transaction with your broker, always let your broker know early in the conversation if you are representing the buyer, seller or both. This will assist your broker in understanding the role of each party and the inherent liabilities to you and to the brokerage.

“Unauthorized Practice of Law” by a Licensee and When a Client Should Seek Legal Advice

A broker should avoid drafting contracts, contract provisions, or legal documents that could be construed as the product of an unlicensed standard form. Also, refrain from drafting custom agreements.

Use only standard forms in the exercise of your duties. Such forms must be reviewed and approved by real estate attorneys. Use extreme caution in adding anything to these standard forms.

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In Cultum v. Heritage House Realtors, the court ruled that licensees need to take great care in writing real estate contracts, use standardized forms and ensure that all additions/addendums are in line with the terms and conditions of the contract, or the licensee can be held liable to for damages and losses.

According to the ruling:

“[An agent] is permitted to complete simple printed standardized real estate forms, which forms must be approved by a lawyer, it being understood that these forms shall not be used for other than simple real estate transactions which arise in the usual course of the [agent’s] business and that such forms will be used only in connection with real estate transactions actually handled by such [agent] as [an agent] and then without charge for the simple service of completing the form.”

NOTE: Many brokerages have polices which strictly prohibit licensees from writing in additional clauses in the contract without management approval. As a licensee, it is imperative that you understand your brokerage’s policies regarding this.

Check for Understanding Question: You are writing up a Purchase and Sale Agreement for your buyer client. Your client may be exposed to a pay cut or lay off due to some union negotiations. Conversely, he may be eligible for a promotion and a pay increase depending on the union settlement. Your client has written three very detailed paragraphs on this situation and would like it to be a contingency to the contract so that he may not be bound to complete the purchase if certain circumstances should arise. He would like this verbiage to be added to the standard form as an addendum. As the buyer’s broker, what is the best course of action that you can take?

A. Encourage the buyer to have their attorney review the Purchase and Sales Agreement and the verbiage that he would like to include

B. Attach a copy of your client’s hand written contingency to the contract and label it Exhibit “A”

C.Rewrite the contingency into the body of the contract

D.Submit the offer to the seller without the contingency and without the buyer’s knowledge

The correct answer is A.

As a licensee, you are prohibited from giving tax or legal advice. As such, any time an issue arises regarding these matters, you should advise your client to seek professional advice.

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When Your Client Should Seek Legal Advice

The following is a list, while not exhaustive, of some circumstances when you may suggest that your client seek legal advice:

• When your managing broker or designated broker suggests that it is necessary

• When there are serious misunderstandings or issues between buyer and seller

• When any party to the transaction is threatening a lawsuit

• When the issue involves serious legal ramifications

• When either party breaches the contract

• If you suspect fraud, negligence, misrepresentation or concealment is involved

• When any serious complications arise which are beyond your scope of knowledge

• When there is an unusual circumstance where a buyer may want to include certain verbiage in a contract

• When your client is at serious legal risk

• When you and your brokerage are legally at risk

• When an important major mistake has been made and needs to be rectified

• When a client breaches a contract

• When major complications arise from the title of a property

• When the offer requires additional written language which is beyond the frame work of the preprinted forms

NOTE: It is very important to seek the advice of an attorney, who specializes in real estate matters, and not an attorney who practices in any other specialty of law.

TIP: Ask the attorney to do a “Conflict of Interest” check as soon as possible to determine if there is any conflict with this attorney being able to represent you. A conflict of interest can arise when the attorney has had any dealings with the opposing party or may have even represented the opposing party in the past.

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Chapter 2 deals with additional contact concerns related to clauses, amendments, completion and earnest money.

CHAPTER LEARNING OBJECTIVES

Upon completion of this chapter, the student should be able to:• Define subject to and contingency clauses• Define and give examples of Amendments and Addendums• Explain the various ways contracts can be completed or terminated• Describe the proper handling of earnest money

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CHAPTER 2

CLAUSES, AMENDMENTS, COMPLETION AND EARNEST MONEY

Contingency and Subject to Clauses in a Purchase and Sale Agreement

In some states, the terms “contingent” and “subject to” are often used interchangeably in a Purchase and Sale Agreement. The more precise definitions are explained below:

Definition of “Subject to”:

“Subject to” can also refer to something that goes along with or “runs with” a property when it is purchased. Examples of this would be a purchase of a property subject to an existing easement or subject to an encroachment. It usually refers to a pre-existing condition.

Definition of Contingency:

A contingency or subject to clause in a contract states that an event must occur for the contract to continue. If the event does not happen, then the contract is not continued and the buyer’s earnest money is usually refunded.

Example of a written clause using “Subject to”:

“Buyer agrees to purchase this property subject to the existing easement in favor of the property to the north”

Example of a written clause with a contingency:

“This offer is contingent upon Aunt Sue’s approval of this contract, within three business days after mutual acceptance of this offer. If purchaser does not give notice to the seller or the seller’s agent of approval with three business days after mutual acceptance, then this offer shall become void.” It must be in writing.

Amendments and Modifications

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CHAPTER 2 - SECTION 1

CLAUSES, AMENDMENTS, COMPLETION AND EARNEST MONEY

AmendmentsAmendments are additions to the main Purchase and Sale Agreement which cover specific or unique circumstances. They are commonly referred to as addenda.

Many of these addenda become contingencies to the contract.

A contingency is a provision in a real estate contract that specifies that the contract would cease to exist upon the occurrence or non-occurrence of a certain event. A contingency should be clearly written, concise and have a definite time limit. As a real estate professional, it will be your duty toward your client to watch these time lines very carefully and act within their limits. Many of the contingency forms essentially state that silence construes acceptance, meaning that if the buyers do not respond within the time period specified, then you have waived the contingency.

A contract could be contingent on many items, but some of the most commonly used in residential real estate are:

• Inspection Addendum• Financing Addendum• Optional Clauses Addendum• Homeowner Insurance Addendum• An addendum to address what personal property was included in the sale.• Possession Addendum (if not at the time of closing)

Inspection AddendumAn inspection addendum usually covers an inspection of the property and deals with structural issues, some pest infestations, underground residential heating oil tanks and on-site sewage disposal systems.

As a result of this inspection, the buyer can approve of the inspection, terminate the transaction, request additional inspections or ask the seller to perform repairs or modifications. The seller may agree to perform the requested repairs/modifications or refuse. The buyer retains the right to proceed or terminate the contract.

Financing AddendumWhen an offer is contingent upon the buyer obtaining financing, certain items may be specified such as:

• Type of loan that the buyer will acquire• Percentage of down payment• Time frame to make application, if they have not already done so• Time frame for a loan commitment

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• Consequence of an appraisal being less than the sale price• Closing costs that the seller will pay for the buyer • Homeowner insurance contingency

Optional Clauses AddendumAn optional clause addendum addresses such items as:

• Square footage, lot size and encroachments• Title insurance• Grounds maintenance• Items left by the seller• Utilities• Insulation for new construction• Leased property• Homeowner’s association review board• Other

Feasibility Contingency AddendumA feasibility addendum will often accompany an offer to purchase vacant land or commercial property. The buyer will be given a certain amount of days to perform an independent study of the property, which might include:

• Building or development moratoria• Flood Zones• Wetlands and shorelands restrictions• Roads• Water• Sewer• Other utilities• Capacity Charges• Assessments

Homeowner (Hazard) Insurance AddendumHomeowner’s (hazard) insurance is important for almost all residential properties. Not only is it good risk management for the homeowner, but most lenders require it as a means of reducing their own risk.

There can be times when a buyer may be refused insurance on a particular property. This may be due to an unsatisfactory CLUE report. This is an acronym for Comprehensive Loss

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Underwriting Exchange. It is a compilation of all insurance claims. The CLUE may be a report on a particular person or on a property.

Personal Property or Fixtures Included in the Sale AddendumAll personal property and trade fixtures which are included in the sale should be clearly specified in the purchase and sale agreement. There are a number of ways to do this:

Possession Addendum (If possession is not at the time of closing)In many circumstances, the date of possession is not the closing date. Usually this is because the seller will need to close their current home and receive the net proceeds from this home before they can purchase their next home. Even in an ideal situation where both homes close concurrently, the homeowner will need time to move to the next home.

There are also circumstances where the seller will need extra time to move for various other reasons.

An addendum should be drawn up and attached to the Purchase and Sale Agreement which addresses all of the following:

• Length of the possession period by the seller• Which party will insure the home during the “possession” period (this is usually the buyer

through their homeowner’s insurance)• What charge, if any, will be paid by the seller for this “possession” period?

TIP: Insurance coverage is important. All parties should make sure that the property is insured during this time.

Another situation could arise where a buyer may want to take possession prior to closing, especially on a vacant home. This situation should be avoided if at all possible for the following reasons:

• There’s always a chance that a buyer may move into a property, discover some unknown undesirable fact and not want to proceed with the transaction.

• The insurance liability is extremely high. Should one of the buyer’s movers injure themselves, the seller may have to bear the liability.

• Should the transaction fail to close, the buyer already has possession of the property. Should the buyer refuse to leave, the seller may be forced to proceed with an eviction process.

TIP: Before writing an addendum for early possession, always consult with your manager first. There is also risk of liability for you as a licensee and for your brokerage

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ModificationsA contract is said to be fully acknowledged once it has been signed by both parties (purchaser and seller). This constitutes a legally binding contract and is also known as mutual acceptance. Changes to the contract after mutual acceptance can only be made if both the buyer and the seller agree to the changes. Both parties must either sign or initial and date the changes.

When changes are made, it is important to notify and re-copy those parties who may already have a copy of the contract. These parties may include:

• The buyer• The seller• The listing broker’s transaction file and their brokerage’s transaction file• The buyer’s broker’s transaction file and their brokerage’s transaction file• The closing agent (escrow)• The lender

Case Study Buyer and seller have mutual acceptance on a contract. Buyer realizes that they have plans to be out of town for a wedding during the closing and possession time. Buyer wishes to extend the closing date for one week. Seller, on the other hand, has purchased another home and intends to close the new home concurrently with their existing home. Seller refuses to extend the closing date. The seller has the legal right to do so.

Attaching Additional Pages and Addenda to the ContractThere are circumstances that arise where something changes during a transaction. The need for additional paperwork may be desired. Again, it must be remembered, that any additions to the contract after mutual acceptance can only be made if both parties agree. If changes, additions or deletions are made, both parties must initial or sign and date the item or clause that has been changed, added or deleted. It is illegal to make any change to a contract without the agreement and initials of both parties.

Importance of Notifications

A notification can consist of:• An offer• A counter offer• A rejection of an offer• An acceptance of an offer• A removal of a contingency in the contract• Addenda to the contract

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• Resale or public offering statements• Homeowners’ association documents • Disclosures• Title reports• Forms which were agreed to be supplied by the buyer, seller or third parties • Etc.

All notices must be in writing. At least one of the buyers must sign a notice given to a seller. At least one seller must sign a notice given to the buyer. Exceptions to this may be certain notices obtained through third parties and original offers.

Notices delivered to the broker of either party are deemed as notices accepted by their client.

Notices are important because throughout the statewide form for the Purchase and Sale Agreement, many time limits are specified for when notices must be delivered. “Time is of the Essence.”

You, as the real estate professional, are responsible for making sure that these time deadlines are met by both of the parties to the transaction and also that of third party providers.

Original Copies and Facsimiles

Presenting Offers and Counter Offers The three basic methods in which offers and counter offers are presented are in person, by fax or by e-mail. It is important to note that permission to fax or e-mail must be stated in the contract and agreed to by all of the parties.

Here is an example of verbiage in a Purchase and Sale Agreement contract excluding e-mail transmission:

“Facsimile and E-mail Transmission. Facsimile transmission of any signed document, and retransmission of any signed facsimile transmission, shall be the same as delivery of an original. At the request of either party, the parties will confirm facsimile transmitted signatures by signing an original document. E-mail transmission of any document or notice shall not be effective unless the parties to this Agreement otherwise agreed to in writing.”

Additional verbiage is required if the parties wish to transmit via e-mail. A clause, such as the following could be added to the contract before the parties sign to allow for e-mail transmission:

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“E-mail transmission of any signed document and retransmission of any e-mailed document shall be the same as delivery of the original.”

It is very important to make sure that this verbiage is included in the contract if the parties wish to transmit via e-mail or fax.

Let’s look at some advantages of each method:

Presenting Offers and Counter-Offers in Person With Original Copies:Presenting offers in person has some major advantages. First, a broker can get a feel for the reaction of the other party to whom they are presenting through the observation of body language. Second, a broker will also have the opportunity to provide any clarifications or answer any questions that the other party may have. Third, the broker will have the opportunity to show their enthusiasm and sincerity and communicate the strengths of their clients. Finally, the broker will have the advantage of working with clean original documents.

The disadvantage is that all parties (buyer’s broker, listing broker and sellers) will have to schedule a common time to meet. With busy schedules, out of town sellers or a seller who travels for business, this can be quite challenging. The cost of fuel can be a disadvantage for a meeting, especially if any of the brokers or the sellers must travel a long distance to meet.

Presenting Offers and Counter-Offers Via Facsimile (fax): Presenting offers via fax has some advantages since fax machines are in almost every office and in most homes. Transmission is fast and an offer can be received by the listing broker within minutes.

The disadvantage of fax transmittal is that after a few generation of faxing, the document can be of very poor quality and difficult to read.

Most fax machines can be programmed so that a fax journal is produced after each transmittal. This journal will show the time, number of pages that have been successfully transmitted and the receiving fax number. It will not serve as proof as to the contents of the transmittal. If your fax machine is not set up for individual journals after each transmittal, look into the possibility of programming it to do so. This journal should be kept with each transmittal in the real estate transaction file.

Presenting Offers and Counter-Offers Via E-mail:Presenting offers via e-mail has a major advantage. Each e-mail shows the date and contents of entire transmittal, although it does not show if the e-mail was received/read.

Disadvantages of e-mail transmission involve signatures. Until electronic signatures are more commonly used, a contract that has been e-mailed must first be printed out, then signed and then scanned to allow for the re-transmittal. As with faxes, multiple generations of this type of

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transmittal may lessen the quality of the document and cause it to be illegible. As discussed earlier, e-mails do not show proof of receipt.

Completion, Rescission, Termination and Discharge of a Contract

How A Contract Can Be Discharged Or Terminated

Agreement Between The PartiesIn this situation both parties may agree to discharge the contract because of:

Cancellation When both parties to the contract decide to terminate the agreement

Rescission When a contract is cancelled and both parties are returned to their original position Novation When the contract has been substituted for a new contract

Full Performance When all of the parties have performed their obligations under a contract, then a contract is discharged. This is known as full performance or completion.

The Issues with canceling a contractAs stated earlier, a contract is legally binding. If the buyer or the seller chooses to cancel a contract, they could be found guilty of a breach of contract which is also known as a default. If a buyer defaults, they could lose their earnest money or be sued by the seller for non-performance or damages. This remedy is usually defined in the Purchase and Sale Agreement. If the seller defaults, there is a possibility that the buyer could sue for damages.

Default (Breach) And the Rights of Both PartiesA breach of contract is when one or both of the parties fail to perform according to the terms and conditions of the contract. If there has been a material breach (meaning that the breach was important to one of the parties), then the other party may be able to take court action.

There are four legal remedies for a breach of contract which include:• Specific Performance

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• Liquidated Damages• Compensatory Damages• Rescission

Let’s take a look at the remedies in more depth:

Specific Performance This is a legal action where the court orders the party who breached the contract to perform according to the contract. In the circumstance of a Purchase and Sale Agreement, the seller would be obligated to sell the property as promised and deliver the deed to the buyer, and the buyer would be obligated to purchase the property as promised. Specific performance, as a remedy may not always be possible.

Case StudyJohn and Sally had a contract with the Coemer Company, a retailer, to purchase an air conditioner. The manufacturer of this specific model air conditioner went out of business and the Coemer Company could not deliver the unit as per the contract. In this case, a remedy of specific performance would not be possible since this particular model of air conditioner was no longer available.

Liquidated Damages When both parties to a contract agree in advance to a dollar amount that will compensate the other party in the event of a breach, this is considered liquidated damages. This amount must be set forth in writing. There are two important points to remember about liquidated damages: First, it limits the amount that the non-breaching party can recover. Second, it makes it easier for the non-breaching party to recover these damages since they were agreed to in writing in advance.

In a Purchase and Sale Agreement (PSA) contract, it is common that the parties will agree to the amount of earnest money being offered as liquidated damages.

Compensatory Damages The most common remedy for a breach of contract, given that there was not a liquidated damages clause, is compensatory damages. This compensates the other party for the financial loss that they incurred because of a breach of contract. The amount awarded is usually intended to place the non-breaching party in a financial position that they would have been placed in if the breaching party had performed as per the terms of the contract.

Rescission A rescission takes place when a contract has been cancelled and each party is returned to their original position.

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If a Purchase and Sale Agreement were to be rescinded, the buyer would forfeit the right to purchase the property and the seller would refund the earnest money to the buyer. A rescission could result from the agreement of the parties or by court order.

Earnest Money and Proper Handling

When a buyer extends an offer to purchase property, the buyer will make a good faith deposit, called an earnest money deposit. This demonstrates that they are serious about the purchase of the home and their offer is bona fide. Also, some buyers will make larger earnest money deposits in order to make their offer more attractive and desirable to the seller.

After the offer is accepted, the earnest money deposit becomes part of the contract and is deposited into an escrow account at the selling licensee’s brokerage or into a trust account held by the closing agent (escrow). If the buyer defaults on any portion of the Purchase and Sale Agreement, they may have to forfeit the deposit to pay for damages incurred by the seller, such as having the property off the market and the fact that the seller may have had other potential buyers that are no longer interested.

Forms of Earnest MoneyEarnest money may be in many different forms, but let’s take a look at three which are acceptable:

• Personal Checks - This is usually the most common form of earnest money deposit since most people carry check books with them and there is no need to make a visit to a financial institution to obtain a money order or cashier’s check.

• Cashier’s Check or Money Order - The disadvantage is that a financial institution must be open when the earnest money is being remitted. Most financial institutions have limits on the amount allowed for money orders.

• Promissory Note- This is a note signed by the buyer guaranteeing that they will deposit the earnest money at some specified future date. This form of earnest money might be used when a buyer expects to receive some net proceeds from the sale of a property soon, but doesn’t have the cash on hand at the moment. The buyer is referred to as the maker and the recipient is referred to as the holder.

Check Your Understanding of the MaterialA note that is signed by the buyer which states that they will deposit earnest money at some future date is referred to as what?

A. Note to depositB. Promise to depositC. Promissory noteD. Promise to re-pay

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This is a note signed by the buyer guaranteeing that they will deposit an earnest money at some specified future date. This form of earnest money might be used when a buyer expects to receive some net proceeds from the sale of a property soon, but doesn’t have the cash on hand at the moment. The amount and the date that the amount is due should be specified. The correct answer is “C”.

NOTE: Cash is an acceptable form of earnest money, but most brokerages discourage this because the funds are more difficult to document.

Proper Handling of Earnest MoneyBoth the listing broker and the selling broker are required to adhere to strict policies and procedures surrounding the handling of funds held for others. Violations and mishandling of these funds may result in civil suits, criminal proceedings and disciplinary action by the State. The result could be a monetary fine and/or suspension or revocation of the brokerage or broker’s real estate license.

Usually, the broker representing the buyer will be responsible for collecting the earnest money. This deposit must be collected and deposited according to the terms of the Purchase and Sale Agreement. The funds must be deposited in the selling broker’s trust account or in a trust account held by the closing agent (escrow). A receipt for the deposit is usually required by state law and should be placed in the transaction folder.

These deposits must be kept in a separate trust account and are not allowed to be commingled with any other funds.

Let’s look at some examples of earnest money being handled improperly and the adverse or detrimental impact it could have on a buyer or a seller in a real estate transaction.

The buyer’s broker does not collect the earnest money or does not collect the full amount. In this scenario, the seller may not have all or any compensation should the buyer default. And the buyer may be in default if the Purchase and Sale Agreement contract stated that a specified amount was to be deposited to a trust account on a certain date.

Buyer’s broker collected the funds but did not deposit them. The same is true as in the above scenario. In addition, when a broker “holds” an earnest money, the chances of the check becoming lost or stolen increase exponentially.

Communication Regarding the Status of Earnest Money and Summary

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As we stated earlier, a licensee has the duty to properly handle all earnest monies. Many sellers might assume that the earnest money has been collected and deposited as specified in the contract. Care should be taken by the buyer’s broker to collect and deposit the monies as agreed upon. Proper documentation to prove that the funds have been handled properly is essential. Communicating the status of funds to the seller’s broker is a sound practice. The seller’s broker should also require documentation as to the status of these funds.

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Chapter 3 we discuss some basic things you need to be concerned with in order to avoid common contractual pitfalls associated Fair Housing, communications and landlord/tenant issues.

CHAPTER LEARNING OBJECTIVES

Upon completion of this chapter, the student should be able to:• Describe the Fair Housing Act of 1968• Give Examples of Discrimination in Housing Discuss Common Pitfalls Encountered by

Real Estate Licensees

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CHAPTER 3

COMMON PITFALLS

Fair Housing Laws as They Pertain to the Showing of Property and Presenting of Offers

It is important for real estate professionals at all times, and especially when showing property and presenting offers, to be aware of the Fair Housing Laws. Awareness of the law can aid in preventing illegal acts of discrimination.

A real estate broker should understand and be cognizant of a term called steering. This is an illegal act of discrimination where a real estate broker will show properties in certain neighborhoods with a certain ethnic mix to buyers of the same ethnicity.

Example of discriminatory behavior in showing homes.John is a buyer’s broker for Susan. Susan is Caucasian. John planned a tour of homes for Susan based on all Caucasian neighborhoods. He did not take into consideration what Susan could afford or the locations that Susan had said she was interested in. Further, he informed Susan before the tour that he was sure that she would not want to see any homes in neighborhoods that were not predominantly white. This is a prime example of steering which is illegal.

Example of discriminatory behavior when presenting an offer.The buyer’s broker, Janet, made an appointment with the seller and the seller’s broker to present an offer she had written for her buyer earlier that day. During the presentation of the offer, Janet told the sellers that she thought both they and their neighbors would be impressed with the buyer since she was also Jewish. This is a prime example of discrimination.

Background for the Fair Housing Act of 1968In 1968, Congress passed the Fair Housing Act. This law, which is administered by the Department of Housing and Urban Development (HUD), protects consumers from discrimination related to almost all housing arrangements within the United States. In the sale or rental of any housing, the law prohibits discrimination based on the following protected groups:

• Race• Color• National origin

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CHAPTER 3 - SECTION 1

COMMON PITFALLS

• Religion• Gender• Familial status• Disability

Fair Housing also includes the discrimination in the obtaining or access to real estate finance (mortgage lending):

• The refusal to offer mortgage loans to persons in a protected group.• The refusal to provide information regarding loans to persons in a protected group. • The setting of different loan terms or conditions for persons in a protected group, such as

different interest rates, points, or fees, or additional documentation.• The use of different criteria in the appraisal of a property owned by persons in a protected

group or properties being sold to persons in a protected group.• The refusal to grant a loan where the borrower is in a protected group or the setting of

different terms or conditions for purchasing a loan where the borrower is in a protected group.

In addition, it is illegal for anyone to:• Threaten, coerce, intimidate or interfere with anyone exercising a fair housing right or

assisting others who exercise that right. • Advertise or make any statement that indicates a limitation or preference based on race,

color, national origin, religion, sex, familial status, or handicap. This prohibition against discriminatory advertising applies to single-family and owner-occupied housing that is otherwise exempt from the Fair Housing Act.

Even though many licensees are not Realtors, the Realtors Article 10 of the Code of Ethics sums it up well.

Article 10 of the Code of Ethics and Standards of Practice of the National Association of Realtors® states that:

“Realtors® shall not deny equal professional services to any person for reasons of race, color, religion, sex, handicap, familial status, or national origin sexual orientation or gender identity. Realtors® shall not be parties to any plan or agreement to discriminate against a person or persons on the basis of race, color, religion, sex, handicap, familial status, national origin, sexual orientation or gender identity. (Amended 1/14)”

“Realtors®, in their real estate employment practices, shall not discriminate against any person or persons on the basis of race, color, religion, sex, handicap, familial status, national origin, sexual orientation or gender identity.” (Amended 1/14)”

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Importance of Communication with All Parties in a Transaction and Common Pitfalls” That May be Encountered by Licensees

In a typical transaction, there may be many professionals involved. Let’s take a look at some of the most common:

• Seller and their broker• Buyer and their broker• The closing company (escrow)• The lender• The appraiser• The title insurance company• A structural or pest inspector • The management company of a homeowner’s association

As a real estate professional, your role is to play “ring leader” to all of the professionals involved and ensure that there is clear communication among all of you. This communication may be in the form of phone calls, facsimile, e-mail, mail or in person.

There are usually many terms and conditions in a contract and many of them have very specific timelines in which they must be accomplished. Because of the many terms, events and the number of professionals that are involved, clear communication is essential.

Very often, certain events must happen in a sequential manner, so that one event must happen before another can take place. This is where communication is of key importance. Often times a party must be notified that a prior event has taken place, so they can then perform their role in the transaction.

Because of the amount of communication and time involved in a transaction, many licensees hire transaction coordinators. A transaction coordinator’s main role is to communicate with all of the various professionals associated with a transaction, ensure that actions are being completed in a timely manner and that everything is running smoothly. The transaction coordinator may also have the role of communicating the status to the co-op agent, the closing agent, the lender or the clients.

Let’s take a look at a few examples.

Example #1The lender Jane, feels that it is wise to hold off on ordering the appraisal until after the buyer has performed a structural inspection and a pest inspection (even though there is a substantial lead time for ordering the appraisal). Her reasoning is if the property fails the structural

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inspection, and the buyers choose not to purchase, they will not have to pay for an appraisal which was ordered. In this situation, it would be crucial for the buyer’s broker to inform the lender, in a very timely manner, the structural inspection was completed and there were no issues so that the lender could order an appraisal.

Example #2A wind storm causes a tree to fall on a property that is under contract and in escrow. The tree caused major damage to the house, the detached garage, roof, fence and the cement retaining wall. The sellers are insured against the damage. The fallen tree damage requires workmanship from the following persons: a carpenter, electrician, dry wall contractor and retaining wall specialist. Because of the coordination with all of the different contractors, the process will take a lot of time and closing of the transaction will be delayed. The sellers tell their broker about the accident. Their broker, the listing broker, fails to inform the buyer’s broker of this incident. In this circumstance it was crucial for the listing broker to communicate the status of the repairs with the buyer’s broker in a timely manner.

“Common Pitfalls” That May be Encountered by LicenseesMistakes do happen. Let’s explore some of the more common mistakes made by real estate licensees.

Unfamiliarity with FormsForms are one of the most important aspects of real estate. These forms, when filled out and signed by both the buyer(s) and seller(s), represent a legally binding contract between the parties. The statute of frauds states that all real estate contracts in most states must be in writing. Should a dispute arise between the parties, a court of law will place more weight on the written contract than on parol (oral) evidence.

Use only standard forms in the exercise of your duties. Such forms must be reviewed and approved by real estate attorneys. Use extreme caution in adding anything to these standard forms.

Your broker or manager can be an important resource for assistance with filling out forms. Some brokerages offer in-house training for their licensees. Also some multiple listing associations offer courses for filling out forms and on changes to existing forms and new forms. Some real estate schools offer courses both on-line and live lecture on filling out forms.

Your clients will depend on you, as their real estate professional, to not only fill out the forms correctly but to have the ability to explain all clauses in these forms should they have questions before signing.

Not Establishing a System

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It is important to establish a system or series of steps that you should take to carry out certain real estate actions. By establishing a system, you can use these individual steps as a checklist to make sure you haven’t missed anything.

Landlord Tenant Issues and File Storage

Many states have statues and codes which deal with the relationship of a landlord and tenant. These laws or provisions, along with the terms of a lease, govern the relationship and agreement between the landlord and the tenant. In most cases the provisions of the laws cannot be waived by the tenant or the landlord.

These laws also impose certain restrictions and provide remedies if one party fails to carry out a duty. The remedies include eviction, a reduction of rent, self-help repairs, the right to sue for money damages, and an award of attorneys' fees to the prevailing party. 

Other local codes and ordinances may also be imposed. Further information on local ordinances is usually available from the city council.

A lease is both a contract and a conveyance. As a contract the lease specifies the terms and conditions such as the duration of the tenancy, the amount of rent and the responsibilities of the parties. As a conveyance, a lease conveys possession from the landlord to the tenant.

The major provisions of a lease might include the following:

Rental AgreementsWhile not always required to be in writing, it is a safe habit to always have this contract in writing to avoid misunderstandings, and it should contain all of the terms agreed to by the landlord (lessor) and the tenant (lessee).

Rental agreements for furnished dwellings should contain a detailed inventory of furniture or other personal property, along with a description and condition of each individual item.Just because something is agreed to in a lease does not necessarily mean it is enforceable by the landlord. Some clauses may be illegal, such as a waiver of rights.

Rental PrecautionBefore renting property, a tenant should inspect the dwelling to be sure it is in acceptable condition. Before moving in, a list should be compiled of all existing defects or damages, with both the landlord and tenant signing and keeping a copy of this list. Any commitments made by the landlord (such as a promise to perform repairs) should be written directly into the lease.

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Rent IncreaseIf there is a lease for a specified period of time, rent may not be changed during that period. In the case of a periodic tenancy (such as month-to-month rental agreement), the rules, including the rent, may be changed upon 30 days notice. This notice must be in writing. Rent increases cannot be in retaliation for a tenant's assertion of their legal rights. The landlord may charge a late payment fee if the rental agreement provides for the charging of a late fee.

Termination of TenancyIf a landlord seriously violates their obligations under the rental agreement, a tenant may be able to terminate the tenancy without liability.

A landlord must follow very specific procedures to terminate a tenancy as dictated by state or local law.

Requirements for DepositsA landlord may require a deposit to ensure that the tenant treats the dwelling properly and complies with the terms of the rental agreement. Deposit requirements cannot be discriminatory, nor may a deposit be increased to retaliate against a tenant who asserts their legal rights. A nonrefundable fee cannot be called a "deposit." A refundable damage or security deposit must be distinguished from nonrefundable fees for cleaning or pets.

Landlord ObligationsThe landlord must provide and maintain the rental property, and must comply with the rules of the rental agreement. The landlord (or their representative) must be accessible to the tenant and must:

• Keep the premises up to code• Maintain the structural components• Provide a reasonable program for control of pests• Provide necessary facilities to supply heat, electricity, and hot and cold water• Provide reasonably adequate locks• Maintain appliances furnished with the rental unit• Comply with any duties imposed by local laws.

Tenant ObligationsThe tenant must:

• Pay rent on time as agreed upon• Keep the premises clean • Not damage or permit damage to the unit;• Properly dispose of garbage

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• Properly use appliances• Restore the property to its initial condition, except for normal wear and tear at the end of

the rental term• Comply with the rental agreement.

If the tenant fails to perform their duties, the landlord may seek to evict the tenant. If a tenant fails to maintain the premises, the landlord may:

• Evict the tenant.• Make repairs and bill the tenant.• Sue the tenant for damages or to force compliance with the rental agreement.

InsuranceIn most states, unless the rental agreement provides otherwise, the tenant has no obligation to insure the dwelling. However, tenants should consider purchasing renter's insurance on personal property and liability insurance for claims by third parties (such as guests) for personal injuries occurring on the premises, since the landlord's insurance covers only the property itself.

Right of EntryWith tenant consent and notice from the landlord, a landlord has a right of entry to inspect the property, perform repairs, supply necessary or agreed services, or show the property to potential tenants. Entry is limited to reasonable times, and two days' notice of intent to enter is required. A landlord may enter the premises without the tenant's consent if an emergency or abandonment occurs or if the landlord obtains a court order. A landlord may not abuse his or her right of access to the property to harass a tenant.

Eviction The action by a landlord to remove a tenant from a rental unit is known as an eviction or an "unlawful detainer" in most states. Some local housing codes define "just cause" for an eviction and outline procedures that must be followed.

In an eviction based on nonpayment of rent, a tenant may assert any claim for money owed the tenant by the landlord. The tenant's claim (sometimes known as an equitable defense or setoff) must be related to the tenancy, such as the tenant's payment of a gas bill that was the landlord's responsibility under the rental agreement. In eviction actions strict rules and procedures must be observed.

Generally, a legal eviction process involves:• Proper notice. Before evicting a tenant, the landlord must serve the required eviction

notices using proper procedures.• Filing of a lawsuit. If the tenant fails to move out, a lawsuit must be filed to evict the tenant.

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• Entitlement to a court hearing. If the tenant disputes the reasons for the eviction, the tenant is entitled to a court hearing.

• Sheriff's involvement. If the tenant loses the court hearing, the sheriff would then be ordered to physically evict a tenant and remove the property in the unit. Only the sheriff, not the landlord, can physically remove a tenant who does not comply with an eviction notice and only after an unlawful detainer lawsuit has been filed.

• Liability for attorneys' fees. In an eviction dispute, the successful party is entitled to recoup costs and attorney fees.

Prohibited EvictionLandlords are generally prohibited from locking a tenant out of the premises, from taking a tenant's property for nonpayment of rent (except for abandoned property under certain conditions), or from intentionally terminating a tenant's utility service. Various penalties exist for violating these protections. Retaliatory evictions are also illegal. A landlord may not terminate a tenancy or increase rent or change other terms of the rental agreement to retaliate against a tenant who asserts his or her rights under the Landlord-Tenant Act or reports violations of housing codes or ordinances.

Settlement of DisputesThe landlord and tenant may agree to arbitration, asking a neutral party to settle the dispute. The process is usually quick and inexpensive, with the administrative fee shared equally unless otherwise allocated by the arbitrator. Landlord-tenant problems can also be resolved through informal mediation. In mediation, a third person intervenes between two disputing parties in an effort to reach an agreement, compromise or reconcile. Intended to settle a dispute quickly and inexpensively, mediation can be requested by either a landlord or tenant and may be available without charge from a city or a county.

Sales Which Have Contracts That Have Special CircumstancesSome real estate transactions will have special circumstances. Let’s explore some of these special cases and discuss how to handle them.

A Pending Divorce Action There may be a situation when a buyer will want to purchase real property prior to a pending divorce becoming final. If a buyer is involved in a divorce action, the party in the divorce who is not purchasing the property should supply a quit claim deed for the property to be purchased. This allows the purchasing party to purchase the property as his or her sole property and not have to be concerned that the former spouse to be will claim an interest in the newly purchased property. This is usually a requirement of the lender as well. If the former spouse to be is unwilling to sign a quit claim deed, then the purchasing party should consult with an attorney prior to signing any purchase and sale agreement.

There are also times when a couple may want to sell a property prior to a pending divorce becoming final. Both spouses must sign the purchase and sale agreement.

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Partnership or Corporation As a Purchaser or Seller A partnership or corporation may have one or more persons within the organization that is authorized to sign legal documents. As the broker for the buyer or the seller, you should always ask for proof of authorization to sign legal documents. This proof may be in the form of a partnership agreement, articles of incorporation, or an attorney drafted document acknowledged by all the parties or officers of the organization.

Builder or Seller’s Guarantees There are many circumstances where a builder or a seller may provide a guaranty or home warranty for the property that is being sold.

A home warranty is a type of insurance policy which covers limited items in the home (usually major appliances), for a specific period of time (usually one year). The policy may be purchased by the seller, buyer or even their agent. Since 60%-65% all real estate transactions involve disclosure issues (and a huge percentage of these involve many of the items covered under these polices), this is a very wise purchase for a seller. It also is an extra incentive for the purchaser and may make the property easier to sell.

Guarantees usually come in the form of a promise to do something for the purchaser such as replace a roof or fix a hand rail.

For any of the above issues, it is important to make sure that all agreements are in writing.

Pending Foreclosure ActionCheck with your individual state as to the implications of property in a foreclosure action

A Sale Pending Personal BankruptcySome states have an act called the Homestead Act that exempts a limited amount of equity in a home against foreclosures and judgment liens. The purpose of the homestead exemption is to protect the family members from having to evict their home. In some cases, the bankruptcy court may need to approve of the sale.

Real Estate brokers should take extra precautions to ensure that the court has given permission to the homeowner to sell.

Sales Involving Estates If a deceased person dies without leaving a legal will, this person is said to have died intestate. At this point, the courts will appoint an heir to act as the personal representative (PR) for the estate. If there are no known heirs, then the estate will be transferred to the state. This is known an escheat.

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If the deceased died having a legal will, known as testate, then contained in the will are the specifics about the appointed personal representative (PR) of the estate and disposition of the personal and real property of the decedent.

In most states, if the estate is solvent (its assets exceed its liabilities) then the personal representative (PR) usually is awarded “non-intervention powers” which gives the personal representative the power to negotiate, sign and dispose of real and personal property of the estate without direct court intervention or supervision.

In the case where the estate is not solvent (its liabilities exceed its assets) then the PR most likely will not be entitled to a non-intervention order and the PR must seek prior court approval for the disposition of the estate.

When dealing with an estate sale, make sure that proof of an authorized signature for the PR is furnished and that the estate is solvent. Documents produced by the attorney for the estate are the best method of obtaining this information.

Case StudyAunt Sue died testate and her will specified that her niece Marla would be the PR for the estate. Her other niece, Betty, thought that she was sure of Aunt Sue’s wishes and agreed to sell Sue’s home to some nice neighbors down the street. Betty signed a purchase and sale agreement with the prospective purchasers. It did not contain Marla’s signature. The contract was void because Betty did not have the authority to sell the home or sign the contract. Both the listing agent and the buyer’s agent should have required proof of authorization to sign the contract.

Two Methods of Organizing Business Files and ContractsBusiness files and records can be stored either in paper form or electronically. There are advantages and disadvantages to both:

Paper Form

Advantages• Paper files can usually be easily accessed even in the event of a power outage

Disadvantages• Paper files can take up a greater amount of space and unless they are locked up are not

as secure in regards to confidentiality.• Paper files are at risk in a natural disaster or fire

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Electronic form

Advantages• Electronic files can be accessed by multiple users at one time from their personal

computers.• There is greater security with electronic files if passwords are managed correctly• Less prime office space is taken up when files are managed electronically• Access to files can be obtained off site and at any time• Files can be backed up and data can be stored off site in the event of a fire or natural

disaster

Disadvantages• Power outages could prohibit access to the files• Paper files will have to be scanned to be able to store them electronically• Software to manage data electronically can be expensive and personnel will need to be

trained on its use

Case StudyABC Realty Investments uses a software system to electronically store all of their current and past listings and transactions. When affiliates turn in paperwork, the documents are scanned and stored electronically. ABC Realty Investments still keeps copies of the paperwork but stores them in the basement of the brokerage where the square footage is less expensive, thus freeing up prime office space. Licensees are given limited access to their files only on this software for privacy issues. Licensees can view all of the documents in their files from any computer, anywhere.

Check your understandingUse this link to open a short unit quiz:https://www.bookwidgets.com/play/97KLS

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