Real Estate 101 – Key Terms Buyers and Sellers Should Know

So, you’ve decided to make that leap and become a home owner rather than a renter. Or maybe it’s time to trade up that first home for something larger to accommodate your growing family. Either way, choosing the right real estate agent relationship and being knowledgeable on the key terms is crucial to successfully purchasing or selling your first home.

The first step is to understand the three types of representation offered by real estate brokers: single agent; transaction broker; and non-brokerage. The non-brokerage representation is most commonly used for owners who are selling their houses on their own (For Sale By Owner or FSBO). Occasionally, a real estate sales person may contact a seller to request permission to show the property to a potential buyer. If the seller agrees, and the buyer makes an offer that is accepted, the firm will receive a commission agreed on between the seller and the broker. Before showing the house, the seller signs a non-brokerage agreement, and it is only valid for that one particular buyer. Another use for this relationship is when the seller finds a buyer, but chooses to have a brokerage firm handle the paperwork of the sale.

Transaction broker representation is the most commonly used, and in the state of Florida, it is the presumed relationship unless otherwise requested. The sales associate offers limited representation to both the seller and/or the buyer. This is ideal for both parties because the brokerage company can list the selling property and show it as well to prospective buyers. If the brokerage firm lists and sells the house, the broker receives commission from both parties involved. Limited confidentiality mandates that the sales associate cannot disclose to the buyer the minimum amount the seller is willing to take, nor can she disclose to the seller the maximum amount the buyer is willing to offer. This ensures both parties’ best interests are protected. Basically, the brokerage firm will provide leads and information in selling or buying a home, but will not provide advice on the negotiation process to either buyer or seller.

Single agent representation is when the brokerage firm is the sole agent for either the seller or the buyer, but not both. If the single agent contract is with the seller, the brokerage firm may list the home, but not show it to prospective buyers. If contracted with the buyer, the firm may not show their single agent contracted properties for sale. In this relationship, two brokerage firms must handle the sales/purchase contract -one for the buyer and one for the seller. The firm is loyal to the party contracted with, and will assist in the negotiation process to ensure their client receives the best deal possible. This relationship may be changed at any time upon signing the consent to transition to transaction broker notice. This type of representation is the least commonly used because of the limitations imposed on all involved parties.

There are some exceptions to these relationship disclosure requirements. The most notable is at “open houses” or model home showings. As long as the sales associate does not ask for confidential information, take any contractual offers or enter into negotiations concerning the purchase of the property, then no representation relationship needs to be established.

Besides the type of representation contract, there is one more contract real estate brokers will present sellers and buyers with. Concerning sellers, there are four types of listing contracts to choose from: open listing; exclusive-agency listing; exclusive-right-of-sale listing; and net listing. The most advantageous one for the seller is the open listing which allows the property owner to list the home with multiple brokers, as well as sell the property on his own. Whoever sells the property first is entitled to the commission. If the home is sold by the owner, then no commission is necessary.

The exclusive-agency listing contract still allows the owner to sell the home, but limits the seller to select only one brokerage firm to represent her. Again, if the property is sold by the owner, then no commission is necessary unless the buyer was referred to the seller by the broker.

The exclusive-right-of-sale contract is the most advantageous to the broker. Regardless if the owner or broker sells the home, the listing broker is entitled to commission. Both exclusive-agency and exclusive-right-of-sale listings are usually submitted to a multiple listing service (MLS). The MLS allows all REALTOR member brokers access to a published list of homes for sale regardless of which brokerage firm they are employed with. Whichever firm sells the home will share the commission with the listing firm.

Any of the listing contracts can also be a net listing. The seller and broker agree on a minimum sale amount for the property. Once the proceeds and costs of the sale are settled, the broker retains, as commission, any money collected over the agreed on purchase price. Net listings are illegal in nearly all states due to the potential for abuse and fraud. However, some states still allow this type of listing contract, so it’s best to check first for the regulations in your particular state.

Buyers will be presented with a buyer brokerage agreement which contracts the broker as the employee of the buyer. This contract typically includes the beginning and ending dates of the agreement; type of property the buyer is interested in purchasing; both the buyer’s and broker’s obligations; retainer and compensation information; type of brokerage relationship (non-brokerage, transaction broker, or single agent); and the terms for early termination and dispute resolution of the contract. It’s important for both buyers and sellers to be aware of the early termination section so as not to be possibly liable for damages.

Generally, a listing contract or buyer brokerage agreement is terminated once the contract terms have been met -meaning a house has been sold or purchased. Other reasons include mutual agreement between both parties to terminate the relationship; contract term expiration; death of any involved party before a property is bought or sold; destruction of property (such as fire or natural disaster) or condemnation of property by eminent domain (government involuntarily takes property for public use); bankruptcy of buyer or seller; and lastly, the buyer or seller revokes the broker relationship. Again, especially concerning sellers, this type of termination might include damages such as advertising expenses owed to the broker for marketing the property.

There are two methods available to determine market value for properties: appraisal and comparative market analysis. Ideally, it’s best to have both done. An appraisal is conducted by a state licensed appraiser who follows the guidelines of the Uniform Standards of Professional Appraisal Practice (USPAP). They analyze past sales, calculate the cost to reproduce properties, and determine future worth income properties might produce.

A comparative market analysis (CMA) is conducted by a real estate broker or sales associate. They research recent sales of similar properties, listing prices of current properties for sale, and listings that just expired. This assists sellers in determining reasonable listing prices for their areas, and assists buyers in deciding how much to offer when purchasing properties. However, a comparative market analysis is not an appraisal; rather a marketing tool, and should not be construed as anything other that that.

Moving on to what information can be disclosed in the sale or purchase of real property. A broker is mandated by law to fully disclose any information that will materially affect the value of a property, regardless of the type of representation provided to either the buyer or seller. If the seller notifies his broker that the roof is leaking, but that fact is not readily apparent, the broker is still obligated by law to notify all potential buyers. However, federal fair housing laws do restrict disclosing some information that is not considered as materially affecting the property value. This includes if someone died, committed suicide, or was murdered on the property or if someone with HIV/AIDS or other contagious disease resided there.

This leads in to the definitions of misrepresentation and fraud. Sales associates can not make false promises or misrepresentations in order to sell a home. Misrepresentation is when a sales associate leaves out known information or misstates a fact that will affect the material value of a property. Misrepresentation can inevitably lead to charges of fraud. Fraudulent behavior occurs when a sales associate failed to disclose the known information when she knew or should have known that the statement was false; the involved party relied on this information in deciding to make the purchase, and then incurred damages as a result of this misstatement.

Fraudulent behavior also includes offering to sell properties covered by a mortgage that includes other properties; pushing a buyer to purchase a property with the promise that the owner will repurchase the property at any future time; and selling a property through a lottery, drawing or other scheme where the purchase is determined by chance.

Once the type of broker relationship has been established, and the listing or buyer brokerage agreements have been signed, it’s time to begin the actual process of showing or searching for properties. During this process, it’s crucial to understand what can be considered a permanent fixture. One of the most common disputes between buyers and sellers concerns what stays and what goes on a property. The test for whether an item is a permanent fixture or not is this: if it was permanently attached to or made part of the property and if removal of the item will result in damage to the property, then the item is considered a permanent fixture. Examples include bath tubs, fences, specialty lighting, custom items designed specifically for the home (custom drapes, hurricane shutters), and possibly even doorbells. Optional fixtures may include appliances such as the refrigerator, stove, washer or dryer. Any optional or permanent item can be negotiated between the buyer and seller, but the intent to remove or include them must be clarified between both parties and listed in the sale/purchase contract. This eliminates any doubts and possible litigation over breach of contract.

While touring homes, buyers should also inquire on whether any easements; encroachments; deed restrictions; or restrictive covenants are attached to the property. An easement is when someone else has the right to use the property for a specific use. Easements are varied but some examples may include when a neighbor must cross part of the owner’s property to access a lake; when a landlocked neighbor must cross the other’s property to access their own; when the utility company must access the land to maintain their equipment; or when part of the land has been used continuously (after 20 years) for some specific purpose such as a school bus stop.

An encroachment is when someone uses part of an owner’s property without permission. The most common example is when a neighbor builds a fence or garage that includes a piece of the other’s land. After seven years, this encroachment becomes an implied easement, and may not be removed.

Deed restrictions are imposed by the property owner and only affect that particular property. They are used to control future uses of the property such as no business may be set up on the property which includes the sale of alcoholic beverages.

Restrictive covenants are imposed by the developer and affect the whole subdivision. They are put in place to protect the market value of all properties in the subdivision, and can be perpetual or temporary. Examples of restrictive covenants include whether garages or additional buildings may be added to the property; or whether boats or recreational vehicles can be parked within view of the street.

Easements, encroachments, deed restrictions and restrictive covenants will affect the new owner’s use and control of the property, so buyers should ask the broker on whether any of these exist before entering into contract negotiations. The broker will either have, or be able to locate, this information easily.

With so many terms to learn, it may seem overwhelming at first to go out there and sell or purchase your first home. That’s why buyers and sellers should do their research and choose the right brokerage firm to represent them. The size of the firm is not necessarily a factor in making this decision, but rather how knowledgeable their employees are of the area being sought, how much expertise they have concerning contractual and title information, and of course how they treat you as a customer.

The most important tip I can leave you with is this – choose a broker that you trust and feel comfortable with. One who is capable of answering any and all questions you may have with complete honesty -even if it’s not the answers you were hoping for. Taking the time to select the firm that is a right fit for you will make the whole process of selling or buying your first home go as painlessly as possible. So, now that you know some of the key real estate terms, get out there and find your broker. Happy hunting!