Chapter Summary: 

License Law Overview

The Bureau has responsibility to license and regulate brokers, residential leasing agents, real estate firms, appraisers, auctioneers, auction firms, home inspectors and home inspector entities.

Real estate license laws are intended to regulate the industry in Illinois for the intention of protecting the public.

It is the duty of the applicant or licensee to inform the Department of any change of address, and those changes must be made either through the Department’s website or by contacting the Department.

Blind advertisement does not include the sponsoring broker’s business name.

Compensation: the valuable consideration given by one person or entity to another person or entity in exchange for the performance of some activity or service.

Confidential information cannot be disclosed unless:

.The client permits the disclosure;

.The disclosure is required by law;

.The information becomes public from a source other than the licensee.

Confidential information is not considered to include material information about the physical condition of the property.

Chapter Summary: 

Real Property Rights

The legal concept of land encompasses:

  • The surface area of the earth
  • Everything beneath the surface of the earth extending downward to its center
  • All natural things permanently attached to the earth or in the ground
  • The air above the surface of the earth extending outward to infinity
  • Minerals and water on or below the earth’s surface

A parcel, or tract, of land is a portion of land delineated by boundaries.

Physical characteristics of land: Immobility, Indestructibility and Heterogeneity.

The Five Economic characteristics of land:

  • Demand
  • Utility
  • Scarcity
  • Transferability
  • Situs

The legal concept of real estate encompasses:

  • Land
  • All man-made structures that are permanently attached to the land

Property is not only the item that is owned but also a set of rights to the item enjoyed by the owner.

Our legal system has four ways of classifying property: real, personal, tangible, and intangible.

The primary way of distinguishing between real and personal property is to determine whether the item is permanently attached to the land or to structures attached to the land.

Conversion of real property to personal property by detaching it from the real estate is called severance. Conversion of personal property to real property by attaching it to the real estate is called affixing or attachment.

Personal property that has been converted to real property by attachment is called a fixture.

Original intention can override the test of movability in determining whether an item is a fixture or not.

If an item is uniquely adapted to the property, it may be deemed real property whether the item is easily removable or not.

If an item is vital to the operation of the building, it may be deemed a fixture, even though perhaps easily removable.

Trade fixtures, or chattel fixtures, are items of a tenant’s personal property that the tenant has temporarily affixed to a landlord’s real property in order to conduct business.

Plants and crops that grow naturally, without requiring anyone’s labor or machinery, are considered real property.

Plants and crops requiring human intervention and labor are called emblements.

Selling the entire bundle of rights is known as Livery of Seisin – “I own it and I have the right to sell it.”

The Doctrine of Prior Appropriation requires that property owners obtain permits for use of water.

Littoral rights attach to the property. Riparian rights concern properties abutting moving water.

If the property abuts a non-navigable stream, the owner enjoys unrestricted use of the water and owns the land beneath the stream to the stream’s midpoint.

The landowner has right to all accretions.

Regulated Aspects – Bundle of rights, legal descriptions, financing, insurance, inheritance, taxation, usage

Federal Regulation grants overall rights of ownership; controls broad usage standards, discrimination

State Regulation governs the real estate business; sets regional usage standards

Local Regulation levies real estate taxes; controls specific usage

Judicial Regulation applies case law and common law to disputes 

Chapter Summary: 

Legal Descriptions

Review

Along with understanding the rights inherent in owning property, the identification of the property itself is necessary through surveys and legal descriptions. A survey is a professional analysis of a property and its location relative to other property. A survey includes the total area of the land with its mapped boundaries and elevation. A benchmark is a survey reference point from which a metes and bounds survey will begin and is a permanent object or location that is easily found.

Legal descriptions are important to a real estate transaction. A legal description is a written description of a particular parcel of land in a way that identifies it as clearly and precisely as possible. A street address is not sufficient for a legal description. The three common legal descriptions currently used in the United States are recorded plat, the Public Land Survey System, and metes and bounds.

Key Terms

Actual survey. Describes the land with its exact boundaries and provides the legal description of the property.

Baselines. Run east and west.

Bearings. Compass directions of a survey line.

Boundary description and survey. Describes the land with its exact boundaries and provides the legal description of the property.

Courses. Describe the direction of a line as it varies from north or south.

Datum. A point, line, or surface against which measurements are made.

Distances. Linear measurements.

Improvement description and survey. Shows the location, size, and dimensions of buildings on a tract of land.

Improvement survey. Shows the location, size, and dimensions of buildings on the tract of land.

Legal description. A written description of property that identifies the subject piece of property as precisely as possible.

Meander line. A boundary that is a navigable river or lake.

Meridians. Run north and south.

Metes and bounds. The oldest method used to describe real property. Metes mean measurements in length (measured in feet) from one monument to another. Bounds refer to the direction.

Point of beginning (POB). The point from which a metes and bounds survey begins.

Public Land Survey System (PLSS). Measures distances and bearings from two imaginary lines that are at right angles to each other.

Recorded plat system. Describes property by identifying the registered lot and then block on a recorded subdivision plat or survey.

Street address. An informal reference that is adequate for social contacts and for delivering mail but is not sufficient for a legal description.

Survey. The professional measurement of a tract of land with its boundaries, contents, and location relative to other property.

Townships. Are six miles by six miles or 36 square miles.

Chapter Summary: 

Ownership and Encumbrances

An undivided interest is an owner’s interest in a property in which two or more parties share ownership. 

If the interest-holder enjoys the right of possession, the party is considered to have an estate in land. If a private interest-holder does not have the right to possess, the interest is an encumbrance. 

Freehold Estates

A freehold estate of potentially unlimited duration is a fee simple estate: an estate limited to the life of the owner is a life estate. 

A life estate is a freehold estate that is limited in duration to the life of the owner or other named person. Upon the death of the owner, the estate passes to the original owner or another named party. Reversionary or remainder interest.

  • Conventional Life Estate – ordinary and pur autre vie.
  • Legal Life Estate – homestead, dower and curtesy, and elective share.

A life tenant has the responsibility to protect the property for the remainderman or the reversionary interest. The life tenant damages or misuses the property, it is known as an act of waste. 

Leasehold Estates

Estate For Years

  • Has a definite beginning and ending date.
  • Does not require notice to terminate at the end of the term.
  • Renewal is not automatic.

Estate From Period-To-Period

  • No definite ending date.
  • Either party may terminate tenancy by giving proper notice to the other party.

Estate at Will

  • Landlord lets you stay without a lease.
  • Notice can be given by either party without warning.
  • Death of either party immediately terminates tenancy.

Estate at Sufferance

  • Holdover tenant is in unlawful possession of the property.
  • The landlord must evict tenant through the courts; cannot lock the tenant out, turn off utilities, or forcibly remove the tenant.

Sole Ownership – If a single party owns the fee or life estate, the ownership is a tenancy in severalty.

Co-ownership:

Tenancy In Common

  • Two or more owners
  • Identical rights
  • Interests individually owned
  • Electable ownership shares
  • No survivorship
  • No unity of time
  • Partition suit

Joint Tenancy

  • Unity of ownership
  • Equal ownership
  • Transfer of interest
  • Survivorship

To create a joint tenancy, all owners must acquire the property at the same time, use the same deed, acquire equal interests, and share in equal rights of possession. 

Termination: Sale of an interest, Bankruptcy, Foreclosure or Partition suit

Tenancy By The Entireties

  • Survivorship
  • Equal, undivided interest
  • No foreclosure for individual debts
  • Termination: Death of either spouse, Divorce, Mutual agreement or Foreclosure.

There is no right of partition: one spouse cannot sell the property without the agreement of the other spouse. 

Estates in Trust

A fee owner (grantor or trustor) transfers legal title to a fiduciary (trustee) who manages the estate for the benefit of the beneficiary. The trust may be created by a deed, will, or trust agreement.

The trustee has fiduciary duties to the trustor and the beneficiary to maintain the condition and value of the property. 

A living trust allows the trustor, during his or her lifetime, to convey title to a trustee for the benefit of a third party. Established by a written agreement appointing a trustee to manage the trustor’s property.

A testamentary trust is structurally and mechanically the same as a living trust, except that it takes effect only when the trustor dies. 

A land trust allows the trustor to convey the fee estate to the trustee and to name himself or herself the beneficiary. Applies only to real property.

  • Beneficiary controls property
  • Beneficiary controls trustee
  • Beneficiary identity not on record
  • Limited term

The beneficiary’s interest in a land trust is personal property. This offers advantages in transferring, encumbering, and probating the beneficiary’s interest. 

Condominiums

Combines ownership of a fee simple interest in the airspace within a unit with ownership of an undivided share, and as a tenant in common, of the entire property’s common elements. 

Unit owners exclusively possess their apartment space, but must share common areas with other owners.

Units can be individually encumbered without interference from other unit owners.

Created by executing and recording a condominium declaration and a master deed. The party creating the declaration is referred to as the developer. 

An owners’ association to enforce the bylaws and manage the overall property. 

Owner responsibilities include maintaining internal systems/property condition and insuring contents of the unit.

Unit owners bear the costs of all other property expenses. An annual operating budget totals the expenses and passes them through as assessments to unit owners.

Cooperatives

One owns shares in a cooperative association, and acquires an apartment building as its principal asset. Along with this stock, the shareholder acquires a proprietary lease to occupy one of the apartment units.

The corporate entity of the cooperative association is the only party with a real property interest. 

In owning stock and a lease, a co-op unit owner’s interest is personal property that is subject to control by the corporation. 

The co-op lease is called a proprietary lease because the tenant is an owner (proprietor) of the corporation that owns the property. The lease has no stated or fixed rent. 

Debts and financial obligations apply to the property as a whole, not to individual units. Should the corporation fail to meet its obligations, creditors and mortgagees may foreclose on the entire property. 

The co-op interest is transferred by assigning both the stock certificates and lease to the buyer. 

A developer creates a cooperative by forming the cooperative association, which subsequently buys the cooperative property. 

An easement is an interest in real property that gives the holder the right to use portions of the legal owner’s real property in a defined way. It is a non-possessory interest in property owned by someone else. May be affirmative or negative.

One cannot own an easement over one’s own property.

An easement pertains to a specified physical area within the property boundaries.

Easement Appurtenant

Gives a property owner a right of usage to portions of an adjoining property owned by another party.

Rights and obligations automatically transfer with the property upon transfer of the dominant or servient estate, whether mentioned in the deed or not.

The servient and the dominant tenement may use the easement area, if it does not unreasonably obstruct the dominant use.

An easement by necessity is granted because of a circumstance of necessity, most commonly the need for access to a property.

  • Must have been a common grantor of the dominant and servient estates.
  • Must be a reasonable necessity for the easement, not just for convenience.

An easement for light and air should be in writing.

Party wall agreements generally provide for severalty ownership of half of the wall by each owner, or at least some fraction of the width of the wall.

Easement in Gross

A personal right that one party grants to another to use the grantor’s real property – dominant or servient estates. May be personal or commercial.

Easements may be created by:

  • Voluntary action
  • Necessity
  • Prescriptive operation of law
  • Grant or reservation
  • Implication
  • Government power of eminent domain (condemnation)

Easements terminate by:

  • Express release of the right by the easement holder
  • Purposeful abandonment by the dominant tenement
  • Condemnation through eminent domain

An encroachment is the unauthorized, physical intrusion of one owner’s real property into that of another. Cause infringements on the rights of the trespassed owner and may diminish the property’s value, particularly when the property is to be sold.

A license is a personal right that a property owner grants to another to use the property for a specific purpose. Licenses are not transferable and do not attach to the land. They cease on the death of either party, or on the sale of the property.

A deed restriction is a limitation imposed on a buyer’s use of a property by stipulation in the deed of conveyance or recorded subdivision plat. They are covenants or conditions.

A developer may place restrictions on all properties within a recorded subdivision plat.

Deed restrictions take precedence over zoning ordinances if they are more restrictive.

Liens

If the owner defaults, the lien gives the creditor the right to force the sale of the property to satisfy the debt.

A recorded lien effectively reduces the owner’s equity in the property in an amount equal to the lien amount.

Effects on Title – If a property is being sold, all liens should be paid in full before the property transfers ownership.

Legal features:

  • Does not convey ownership, with one exception.
  • Attaches to the property.
  • A property may be subject to multiple liens.
  • Terminates on payment of the debt and recording of documents.

Voluntary and Involuntary – If statutory law imposes an involuntary lien, the lien is a statutory lien. If court action imposes an involuntary lien, the lien is an equitable lien.

A general lien is placed against real and personal property owned by a particular debtor. A specific lien attaches to a single item of real or personal property and does not affect other property owned by the debtor.

Superior liens receive first payment from the proceeds of a foreclosure.

All superior liens take precedence over all junior liens regardless of recording date, but the earlier the recording date of the lien, the higher its priority. 

A lienor can change the priority of a junior lien by voluntarily agreeing to subordinate, or lower, the lien’s position in the hierarchy. 

All tax liens other than those for ad valorem, assessment, and estate tax are junior liens. They include: 

  • Federal income tax lien
  • State corporate income tax lien
  • State intangible tax lien
  • State Corporation Franchise Tax Lien

Judgment Lien

  • After paying the debt from the sale proceeds, the debtor may obtain a satisfaction of judgment to clear the title records on other real property that remains unsold.
  • The creditor may obtain a writ of execution. The plaintiff creditor may secure a writ of attachment.
  • Homestead property and joint tenancy estates are exempt from judgment liens
  • They take priority based on the date the judgment is recorded in the county clerk’s office.

Mortgage and Trust Deed Lien

  • If a mortgagor defaults, the lender forecloses and the property is put up for sale to satisfy the debt on the mortgage.
  • The lien is removed when the property is fully paid for.

A vendor’s lien secures a purchase money mortgage, a seller’s loan to a buyer to finance the sale of a property. A vendee’s lien may be placed by a buyer when the seller has not delivered the title after all other terms of the contract have been satisfied.

A municipality may place a utility lien against a resident’s real property for failure to pay utility bills. 

A surety bail bond lien is recorded if the owner can prove that he or she has a net worth of at least twice the amount of the bail. Homestead property cannot be levied against for surety bail bond lien.

If an employer owes back wages to an employee, a wage lien can be set against all real and personal property of the employer. 

Mechanic’s Lien

Secures the costs of labor, materials, and supplies incurred in the repair or construction of real property improvements. 

The priority of a mechanic’s lien dates from the time when the work was begun or completed.

Chapter Summary: 

Title and Title Transfer

Someone who possesses all ownership interests owns legal title to the property. Equitable title is the right to obtain legal title to a property in accordance with a contract between the legal owner and a buyer. 

Receiving actual notice means learning something through direct experience or communication. Constructive notice, or legal notice, is knowledge of a fact that a person could have or should have obtained – recordation of ownership documents in public records (title records). 

Transfer of title – When the transfer uses a written instrument, the transfer is a conveyance.

  • Voluntary Alienation – Public/private grant. A living owner makes a private grant by means of a deed of conveyance. A private grant that occurs when the owner dies is a transfer by will.
  • Involuntary Alienation – Without the owner’s consent. Occurs by the processes of descent and distribution, escheat, foreclosure, eminent domain, adverse possession, and estoppel.

Deeds of Conveyance

It is necessary for the deed to be delivered to and accepted by the grantee for title to pass.

In states that use the Torrens system, title passes only when the deed has been registered on the certificate of title and a transfer certificate has been issued to the new owner. 

Validity

  • Be delivered and accepted.
  • Have a competent grantor and legitimate grantee.
  • Be in writing.
  • Contain a legal description.
  • Contain a granting clause.
  • Include consideration.
  • Be signed by the grantor.
  • Be acknowledged.

A deed without an acknowledgement tends to endanger one’s claim to a property. Recording the deed gives the public constructive notice of the grantee’s ownership. 

Conveyance clauses describe the details of the transfer. Covenant clauses present the grantor’s assurances to the grantee. 

Statutory deeds – the covenants are defined in law and do not need to be fully stated in the deed. 

  • Bargain And Sale Deed – “I own, but won’t defend.”
  • General Warranty Deed – “I own and will defend.”
  • Special Warranty Deed – “I own and will defend against my acts only.”
  • Quitclaim Deed – “I may or may not own, and I won’t defend.”

A special-purpose deed is one tailored to the requirements of specific parties, properties, and purposes. 

  • Personal representative’s deed
  • Guardian’s deed
  • Sheriff’s deed
  • Deed of trust
  • Deed in trust
  • Master deed
  • Partition deed
  • Patent deed
  • Tax deed

State law usually requires payment of a documentary stamp tax on a conveyance of real property. Exemptions include transfers within the immediate family or between government entities.

Wills

A last will and testament takes effect only after the testator’s death. Amendatory – can be changed at any time during the maker’s lifetime.

Commonly, the testator names an executor, or personal representative, to oversee the settlement of the estate. If a minor is involved, the testator may identify a guardian to handle legal affairs on behalf of the minor. 

Types of Will

  • Witnessed
  • Holographic
  • Approved
  • Nuncupative

Validity

  • Testator be of legal age and mentally competent.
  • Testator indicate that the will is the “last will and testament”.
  • The will be signed.
  • Completion of the will be witnessed and signed by the witnesses.
  • The will be completed voluntarily, without duress or coercion.

A probate settles a decedent’s estate, whether the person has died testate (having left a valid will) or intestate. Probate of real property occurs under jurisdiction of courts in the state where the property is located, regardless of where the deceased resided.

If the will does not name an executor, the court will appoint an administrator to fulfill this role. 

Possible channels of probate deliberation, depending on whether there is a will and heirs: testate proceeding, intestate with heirs, and intestate without heirs. 

Involuntary Title Transfer

Laws of Descent – Involuntary alienation occurs when a title-holder dies without a valid will. 

Property that has been abandoned for a statutory period may escheat to the state or county.

A property owner who fails to fulfill loan obligations or pay taxes may lose an estate through foreclosure.

Various government and public entities can transfer private property to the public sphere by the power of eminent domain. 

An adverse possessor is someone who uses another’s property without the knowledge of the owner, or with the knowledge of an owner who fails to take any action over a statutory period of time. To claim legal title, the adverse possessor must: 

  • Be able to show a claim of right or color of title as reason for the possession.
  • Have notorious possession.
  • Maintain a consistent claim of hostile possession
  • Occupy the property continuously for a statutory period of time.
  • In some states, pay taxes.

Estoppel prevents a person from claiming an interest that is inconsistent with the person’s previous statements or acts. 

Title Records

Contain a history of every parcel of real estate in the county. Important purposes: 

  • Public notice
  • Buyer protection
  • Lienholder protection

Chain of title refers to the succession of property owners of record dating back to the original grant of title from the state to a private party. To remove the clouded title, an owner may need to initiate a suit to quiet title, which clears the title record of any unrecorded claims.

Abstract of title is a written, chronological summary of the property’s title records, and other public records affecting rights and interests in the property. 

  • Recording System – Each state prescribes procedures for recording in public title records: forms, proper execution, acknowledgment, and witnessing.

The Torrens System – Title passes only when the conveyance has been duly registered on the title certificate itself. Encumbrances likewise have no legal effect until they are recorded. 

Title Evidence – To demonstrate marketable title to a buyer, a seller must show that the title is free of: 

  • Doubts about the identity of the current owner.
  • Defects.
  • Claims that could affect value.
  • Undisclosed or unacceptable encumbrances.

The principal forms of evidence the owner can use to support these assurances: 

  • Torrens certificate – also acts as a deed of conveyance; title and encumbrances are recorded on the certificate.
  • Title insurance policy – indemnifying the policy holder against losses from title defects; the insurer’s “guaranty.”
  • Attorney’s opinion of the title abstract – a written statement from an attorney stating an opinion of marketability based on examination of the title abstract.
  • Title certificate – a statement of the condition of title as of the date of the certificate.

Chapter Summary: 

Land Use and Environmental Controls

Goals of Land Use Control

  • Preservation of property values
  • Promotion of the highest and best use of property
  • Balance between individual property rights and the public good
  • Control of growth to remain within infrastructure capabilities
  • Incorporation of community consensus into regulatory and planning activities

Public Land Use Control

At the state level, the legislature enacts laws that control and restrict land use. At the local level, county and city governments control land use through the authority known as police power – zoning.

Governments have the right to own real property for public use and welfare. A municipality may annex property adjacent to its existing property. It may force property owners to sell their property through eminent domain. 

Zoning

The Constitution grants the states the legal authority to regulate, and the states delegate the authority to counties and municipalities through enabling acts.

Zoning ordinance is enacted by the local government to specify land usage for every parcel within the jurisdiction. They implement the master plan by regulating density, land use intensity, aesthetics, and highest and best use.

The zoning ordinances of local planners must be clear in import, apply to all parties equally, and promote health, safety, and welfare of the community in a reasonable manner.

Local governments enforce zoning ordinances by issuing building permits to those who want to improve, repair, or refurbish a property. 

Types of Zones

  • Residential zoning regulates density and values and aesthetics. Some areas adopt buffer zones.
  • Commercial zoning regulates the location of office and retail land usage – intensity of usage.
  • Industrial zoning regulates intensity of usage, type of industrial activity and environmental consequences.
  • Agricultural zoning restricts land use to farming, ranching, and other agricultural enterprises.
  • Public zoning restricts land use to public services and recreation.
  • Planned unit development zoning restricts use to development of whole tracts that are designed to use space efficiently and maximize open space.

Zoning Board of Adjustment

If the board rejects an appeal, the party may appeal the ruling further in a court of law. 

  • A nonconforming use clearly differs from current zoning. An illegal nonconforming use is one that conflicts with ordinances that were in place before the use commenced.
  • A zoning variance allows a use that differs from the applicable ordinance for a variety of justifiable reasons.
  • A special exception grant authorizes a use that is not consistent with the zoning ordinance in a literal sense, yet is clearly beneficial or essential to the public welfare and does not materially impair other uses in the zone.
  • Amendment – A property owner may petition the zoning board for an outright change in the zoning of a particular property. Often involves public hearings.

Building codes allow the county to protect the public against the hazards of unregulated construction. 

If the work complies, a certificate of occupancy is issued, clearing the property for occupation and use. 

Eminent domain allows a government entity to purchase a fee, leasehold, or easement interest in privately owned real property for the public good and for public use, regardless of the owner’s desire to sell.

  • The government agency must demonstrate that the project is necessary, that the property is necessary for the project, and that the location offers the greatest public benefit with the least detriment.

A deed restriction places limits on the use of the property. A quitclaim deed can terminate a private deed restriction.

A deed condition may restrict certain uses of a property. If a condition is violated, ownership reverts to the grantor. These conditions create a defeasible fee estate.

The declaration of a subdivision, Planned Unit Development, condominium, and commercial or industrial park contains private use restrictions. An injunction prevents the owner from using a property in a way that is contrary to the recorded restrictions.

A private party cannot extinguish a declaration restriction by agreement or quitclaim deed.

Environmental Controls

Air Quality – significant threats: 

  • Asbestos
  • Carbon monoxide
  • Formaldehyde
  • Lead
  • Mold
  • Radon

Soil and Water Quality – problems subject to controls: 

  • Dioxins
  • Lead and mercury
  • MTBE, Methyl Tertiary Butyl Ether
  • PCB, Polychlorinated Biphenyl
  • Underground Storage Tanks (USTs)
  • Wetlands

 Other Ambient and Natural Conditions:

  • Electromagnetic Fields (EMTs)
  • Noise
  • Earthquake and flood hazards

For their own protection, licensees should: 

  • Be aware of potential hazards.
  • Disclose known material facts.
  • Distribute the HUD booklet.
  • Know where to seek professional help.

Environmental disclosures:

  • Lead
  • Asbestos
  • Radon
  • Mold
  • Methamphetamine
  • Wells
  • Septic Systems

The Illinois Residential Real Property Disclosure Act requires that sellers provide purchasers with a written seller disclosure of property condition prior to the purchaser signing an offer to purchase. 

Delivery is effective when the prospective buyer receives and acknowledges the report.

If the Report discloses a material defect and is received after acceptance of an offer or counter-offer by the buyer, the buyer may terminate the contract without liability within 3 business days.

Licensees are not required to reveal that a property is, in fact, a stigmatized property.

Before the time of closing, the seller must supplement the prior disclosure with a written supplemental disclosure on becoming aware of any error or omission in that disclosure.

Chapter Summary: 

Agency Laws

Agency is governed by two kinds of law:

  • Common law – Societal rules and court decisions
  • Statutory law – Laws and rules enacted by legislatures and other governing bodies

An agent may be classified as a universal, general, or special agent.

Brokerage is based on special agency. The principal hires a licensed broker to procure a ready, willing, and able buyer or seller.

In Illinois, a written document is not needed to create an agency relationship.

However, all exclusive brokerage agreements, including all exclusive listing agreements and exclusive buyer brokerage agreements, must be in writing.

  • Any brokerage agreement not containing a provision for automatic expiration will be void.
  • A licensee is allowed to enter into a net listing agreement.
  • A licensee is prohibited from interfering with the agency relationship of another licensee in order to obtain a referral fee.

Licensees are only authorized to fill in blanks and make the appropriate deletions on already-printed form contracts used in the real estate industry.

If the document is accepted and signed by the seller, it becomes a contract of sale.

Fiduciary Duties in Illinois

  • Disclosing all material facts.
  • Obeying direction if the directions do not contradict law or public policy.
  • Providing a timely accounting of all monies and property.
  • Acting in a manner that promotes the client’s best interests rather than those of the licensee.
  • Exercising skill and care.
  • Maintaining confidentiality – even after the agency relationship ends.

A licensee or a principal may legally receive a rebate or an incentive for giving a referral, but only if it is associated with their own transaction.

It is also legal for a licensee to offer gifts to gain business.

Licensees may refer business to other entities that they have an interest in, provided they make written disclosure of that fact.

Licensees may not pay referral fees to unlicensed people who are not principals to the transactions.

A licensee is required by law to treat all customers honestly and not intentionally provide them with false information.

Offers of a sub-agency through the MLS are not allowed in Illinois.

The statute of limitations for bringing an action for damages is 2 years in most cases.

A licensee purchasing any interest must disclose licensed status.

Compensation does not create an agency relationship.

  • Must be a licensed managing broker or affiliated under one.
  • Must have been employed by the principal under a valid contract.
  • Must have been the procuring cause of the sale.

Compensation must be paid to a licensee only by his sponsoring broker.

A licensee must disclose to a client all sources of compensation associated with the transaction received by the licensee from a third party. 

The commission is earned when the following activities have occurred:

  • The broker has produced a ready, willing and able buyer.
  • The buyer has signed an offer to purchase.
  • The seller has accepted the offer.
  • Buyer and seller have received signed copies of the agreement.

The broker is still entitled to receive the commission if the transaction does not complete due to the seller’s default.

The broker will be entitled to receive the commission if he performs according to the terms of the contract, even if the buyer:

  • Decides against making the purchase
  • Makes a direct purchase of a for sale by owner property
  • Chooses to purchase a property through another broker

Chapter Summary: 

Agency Relationships

Three types of agency:

  1. Express agency – the parties involved formally express the intention to form an agency relationship and they outline the terms and conditions of that agreement.
  1. Implied agency – formed when the actions of the parties indicate that they have mutually consented to an agency.
  1. Agency ratification and estoppel (Ostensible agency) – arises by the actions of the parties involved, rather than by a written agreement

Agency is always between the designated agent and the client. The contractual relationship is between the managing broker and the client. 

When a licensee meets a customer regarding a property that is a potential for negotiations, he must tell that person whom he is representing in the first substantial discussion. 

A designated agent is a person who is authorized by the managing broker to act as the agent of a specific principal in a transaction. Designated agency is standard in Illinois.

The Act requires that at the beginning of the agency relationship:

  • The client receives documentation in writing that a designated agency relationship exists.
  • The written confirmation shows the name of the designated agent.

Dual agency must be disclosed to both the buyer and the seller, or landlord and tenant. Both parties must agree in writing. A Dual Agency Consent Agreement is required in the event of dual agency in Illinois.

A licensee is not representing a consumer if he is just performing informative or clerical acts for that consumer and provides proper written notice to the consumer.

An agency relationship is terminated by performance, expiration of the agreement term, termination of the relationship by mutual agreement of the parties, or termination of the relationship by one party with proper notice.

After termination, the broker is responsible for:

  • Accounting for all moneys and property;
  • Maintaining the confidentiality.

Active fraud is an intentional misrepresentation of a material fact for the purpose of gaining an unfair or dishonest advantage over another person. 

Passive fraud is an intentional nondisclosure of a material fact.

An agent may intentionally defraud a buyer by misrepresenting or concealing facts.

The client could be responsible for what the agent does. 

Puffing is a non-factual statement or opinion made to enhance the desirability of a property.

The key to disclosure deals with the issue of did the licensee know or should have known pertinent information that might impact the transaction.

Due to the potential liability, a licensee should seek legal advice when dealing with stigmatized properties.

Disclosure of sexual offenders – refer a buyer client to the public record.

Chapter Summary: 

Agency Coupled with Interest

Agency coupled with an interest:

  • An agent having possession of the property of his principal and possessing legal rights against interference by third parties
  • The agent is given an estate or interest in the property
  • The agent has an interest in the property regarding which he is acting on the principal’s behalf

In an agency relationship where the licensee holds interest in the property, that interest remains part of the agency. 

An agency coupled with an interest may also be referred to as a power coupled with an interest or a power given as security.

The licensee holds some legal right to the property that is covered by the agency arrangement. These rights continue until that interest ends.

The agency usually cannot be revoked by the principal before the expiration of the interest and is not terminated by the death.

A principal cannot terminate an agency coupled with interest before its expiration. Death, incapacity or bankruptcy of the principal will not end an agency coupled with an interest.

In Illinois, the agent would be unable to use dual agency when marketing the property.

Chapter Summary: 

Distinguishing Client and Customer

A client is a person who

  • Signs a listing contract with the licensee
  • Has agency representation and is represented by a brokerage

A customer is a person who

  • The licensee is working with in a transaction
  • May be representing him or herself in the transaction

A consumer is a person who

  • Is seeking general information from a licensee
  • Has no agency representation or transaction pending

A licensee is considered to be representing a consumer unless there is a written agreement between the sponsoring broker and the consumer stating that there is a different relationship.

If a consumer is already exclusively-listed with another broker, a discussion may only take place:

  • When the consumer initiates the contact
  • When the current broker fails to provide within 10 days the type and expiration date of the brokerage.

The agency relationship established between the licensee and the principal puts in place a set of statutory duties that a licensee owes to the principal. An agent/client relationship is one of utmost trust. 

The duties that the licensee owes his principal include:

  • Care (Reasonable care)
  • Obedience
  • Accounting
  • Loyalty
  • Disclosure or Notice

A licensee could be held liable if he failed to disclose facts that he knows or should have known.

The licensee can offer advice and counsel to his principal to guide the principal in future actions.

A licensee cannot give legal advice unless he has a separate license to do that. In Illinois, it is prohibited to provide both broker and legal services to a client.

The licensee can impart factual knowledge to a customer, but the licensee does not provide advice and counsel to the customer.

In essence, the licensee works for the principal and with the customer.

Licensees do have certain obligations to customers, even though they do not represent them. In general, they owe a third party: 

  • Honest dealing
  • Reasonable care and skill
  • Proper disclosure

Chapter Summary: 

Seller Agency Duties and Disclosures

Before a licensee signs a listing agreement with a seller, he must give the seller an agency disclosure.

No later than beginning to work as a designated agent on the consumer’s behalf, a licensee must inform the consumer in writing:

  • That a designated agency relationship exists.
  • The name or names of his designated agent or agents.

The listing agreement will also state what a licensee can and cannot do for clients when the parties agree to a dual agency relationship.

Checking “yes” in the paragraph is not a guarantee that the seller will ultimately agree to dual agency.

A licensee acting in a dual agency capacity in a transaction must obtain a written confirmation from the licensee’s clients of their prior consent for the licensee to act as a dual agent in the transaction. 

Duties of action to protect the client:

  • The first action duty is care.
  • The second action duty is obedience.
  • The third action duty is disclosure.

The three duties of protection are designed to keep the seller protected from the information-seeking of the other party to the transaction. 

  • The duty of confidentiality will cause the licensee to respond to questions in a way that will keep the buyer/customer interested in the property without giving away facts that would be detrimental to the seller-client.
  • The second duty to protect the client is accounting.
  • The third duty of protection is loyalty.

Confidentiality is the only fiduciary duty that continues beyond the agency relationship.

Chapter Summary: 

Property Condition Disclosure Report

The Residential Real Property Disclosure Act requires that when a seller signs the standard listing agreement, he must prepare a disclosure document. 

The licensee must never complete the disclosure forms. 

The Residential Real Property Disclosure Act applies to any transfer of residential real property, with some exceptions.

  • Under a court order
  • From a mortgagor to a mortgagee by deed
  • From one co-owner to other co-owners.
  • Pursuant to testate or intestate succession.
  • Legal descendants of the sellers.
  • Governmental entity.

If a material defect is disclosed, the prospective buyer has a 3 business-day right of rescission.

When a seller lists a problem on this disclosure form, he is not obligated to repair the problem. 

The seller must disclose material defects of which he has actual knowledge.

The Act does not obligate the seller to make any specific investigation or inquiry in an effort to complete the disclosure statement. 

As of 2010, disclosure of a meth lab on a property is included on the disclosure form.

Under certain circumstances, the seller is not liable for any error, inaccuracy, or omission of any information delivered in the property condition report.

A copy of the actual Disclosure Act must be printed on or be included with the Residential Real Property Disclosure Report form.

If the seller fails or refuses to provide the disclosure document prior to the transference of the residential real property, the buyer has the right to terminate the contract.

If, prior to closing, the seller has actual knowledge of an error, inaccuracy, or omission in any prior disclosure document after delivery to a buyer, that seller must provide a written supplemental disclosure. 

Chapter Summary: 

Material Defects, Disclosures, and Misrepresentation

A material fact is some piece of information that is so important that the parties to the negotiations might change their mind about completing the transaction if they had that information.

All licensees are required to let sellers and buyers know of any material fact that would affect their decisions. 

Physical Disclosures:

  • Structural Defects
  • Building Code Violations
  • Foundation Problems
  • Previous Flooding
  • Electrical Problems
  • Plumbing Problems

A licensee is not considered liable for false information provided to him by the client, if the licensee did not know the information was false. 

Stigmatized Properties:

  • Violent crime or death
  • Illegal drug manufacturing
  • Gang-related activities
  • HIV or the AIDS virus.

A licensee cannot disclose this information, even if he or she knows it, because that would be considered discrimination and is prohibited by law.

Law enforcement agencies are required by Megan’s law to make information to the public available regarding sex offenders in their areas.

When someone makes a mistake, it is not fraud because a mistake is not something done intentionally. 

Misrepresentation is created when a licensee makes a misleading or false statement that is accepted as fact from a customer or client and then the person is damaged by relying on that information. 

Agents should not copy information from an MLS sheet or rely on any information gained from the internet concerning a property. 

The Deceptive Trade Practices Act is a federal law that watches over business, including real estate, to make sure that fraud and misrepresentation do not take place as companies provide products and services. DTPA exists to protect the public.

The term as is really should not be used by licensees in advertising, MLS remarks, or comments to potential buyers.

Chapter Summary: 

Listing – Seller and Property Qualification

Asbestos can become harmful when it becomes old and starts to disintegrate. It can also become harmful during a remodeling project when it is damaged or removed. 

Homeowners and potential homeowners should be aware of potential sources for carbon monoxide in the home. Carbon monoxide can be detected by a unit similar to a smoke alarm. Every home should be equipped with at least one of these detectors. 

If there is a private well on the property, the homeowner or potential homeowner should be advised to have the water tested by a health or private laboratory at least once a year to check for groundwater contamination.

If a licensee suspects that a property was a drug manufacturing site, the property should not be sold or leased until an investigation is done and the possible health hazards have been disclosed to the potential buyers. 

The EPA and HUD say that approximately seventy-five percent of homes built before 1978 contain some lead-based paint.

It is the responsibility of the sellers, landlords, and their agents to provide information about the potential presence of lead-based paint to the prospective buyers or lessees before sale or lease. 

If a licensee is aware of any mold problems in a home, he or she should disclose that information as a latent defect.

The licensee should also disclose any knowledge of flooding or water damage, since those kinds if incidents can start mold growing. In many cases, mold grows where it can’t be seen – inside walls or ductwork. 

Because radon cannot be seen or smelled, it’s impossible to sense the presence of radon without testing for it. It might be a good practice to encourage potential buyers to get a radon test on a home they are interested in purchasing.

The greatest potential hazard from a leaking underground storage tank is that the petroleum or other hazardous substance it contains can seep into the soil and contaminate groundwater.

Urea formaldehyde foam insulation (UFFI) is a thermal insulation material that is no longer used because of formaldehyde gas emission. In homes, the most significant sources of formaldehyde are likely to be pressed wood products.

It is very common for homes to be built on or close to the top of a cliff. If the soil is unstable, this could spell disaster after a heavy rainfall.

Torrents of rain could cause landslides that could result in foundation damage to the home or worse. 

Any property located in a floodplain may be cause for concern. Licensees should check for any evidence of flood damage, especially along the foundation or in the basement.

If a licensee lists a property in a flood plain, he should be sure to disclose that fact as a latent defect. 

Subsidence is the collapse of the ground into underground cavities. It would be wise for developers or builders to get maps from government agencies to show where old mines are located before they attempt any new construction projects. 

Earthquakes are potentially the most destructive of the geological hazards. Contractors can do seismic retrofitting, as it is called, to increase a home’s value and appeal to potential buyers. 

It is the licensee’s responsibility to:

  • Recognize any potential hazards and disclose actually known hazards.
  • Recommend that sellers obtain expert advice from an attorney

Chapter Summary: 

Listing – Pricing, Financing and Seller Equity

An appraisal is an opinion or estimate of the value of a property as of a specific date. 

A comparative market analysis is an analysis of opinion regarding pricing, marketing, or financial aspects relating to a specified interest or interests in real estate.

Broker Price opinion means an estimate or analysis of the probably selling price of a particular interest in real estate.

A seller is trying to find out the property’s fair market value.

The use value of a property is the value the property holds for the owner. 

. Income 

. Appreciation 

. Use 

. Tax benefits 

The exchange value of a property results from comparing the property to other similar properties on the open market. This is the type of value that real estate agents are concerned with. 

It can be said that the market value of a property is the highest price a buyer is willing to pay and the lowest price the seller will accept, under these conditions:

. The market is open and competitive.

. Buyer and seller are fully aware of market conditions and acting with no undue pressure.

. The sale is a cash transaction.

. The property has a marketable title.

The market value of a property is an opinion of the value of a property based on analyzing data collected about the property. 

The selling price of a property is the actual sales price

The most important task a broker needs to perform with the seller-client is to give a market analysis of what the property is worth.

. Falls under the category of opinion. 

. The market analysis should be shared with a seller during the listing meeting.

The CMA should not be given to a buyer until there is agency agreement between the buyer and the broker. 

The seller certainly has the right to establish the listing price for the property. 

The most common reason a property fails to sell is because it was overpriced.

The licensee should prepare the seller’s net estimate using the listing price as the estimated selling price. 

Alternative forms of financing:

. Installment sales contract (Contract for Deed)

. Lease purchase

. Option to buy 

At the end of the period, the buyer pays the seller the full purchase price and the seller deeds legal title to the buyer.

An Installment Sales Contract (contract for deed) offers a means for a marginally-qualified buyer to acquire property.

Benefits to Seller

. Facilitates a sale that might otherwise be impossible.

. May give the seller certain tax benefits.

In a lease purchase arrangement, the tenant agrees to purchase the property, but operates under the lease until the terms of the purchase agreement are fully satisfied.

An option to buy places the buyer under no obligation to purchase the property – a unilateral agreement.

A renter with a lease with option to buy can accumulate down payment funds while paying rent to the landlord. 

Chapter Summary: 

Listing – Distressed Properties

When dealing with distressed sales, the goal of the licensee is to seek the best outcome possible for homeowners to avoid the misfortune of foreclosure. 

Prior to jumping into the deep waters of a short sale, licensees should familiarize themselves with some optional strategies a seller might consider.

  • Reinstatement – Paying the total amount owed by a specific date in exchange for the lender agreeing not to foreclose.
  • Forbearance – An agreement to reduce or suspend payments for a short period of time.
  • Repayment Plan – An agreement to resume making monthly payments with a portion of the past due payments each month until they are caught up.
  • Claim Advance – If the loan is insured, the property owner may qualify for an interest-free loan from the guarantor to bring the account current.
  • Loan modification – The lender may agree to change the terms of the original loan to make the payments more affordable.
  • Refinance – The homeowner may be able to refinance the loan with another lender.
  • Deed-in-lieu of foreclosure – The lender may allow the homeowner to “give back” the property.

Before a seller seeks a short sale remedy, the seller needs to be able to answer “yes’ to all the following questions:

  • Has the home’s market value dropped?
  • Is the mortgage in or close to default status?
  • Can the seller prove that a hardship exists?
  • Is the seller void of assets?

There are no “hardship” requirements for a conventional sale.

Buyers are more comfortable dealing with a conventional sale because there is just one decision maker. 

Short sales oftentimes have deficiency judgments and tax implications.

Locking in an interest rate on a conventional home is much easier.

The lender is likely to be more receptive when it is able to recoup a greater share of loss from a prior guaranteed loan arrangement. 

These situations are not considered as hardships:

  • Bad purchase decisions.
  • A chronic history of seeking and exceeding higher credit limits.
  • Buying another home because the current home does not meet the owner’s needs.

Increase in the number of family members.

Before you decide to take a short sale listing:

  • Do you have the experience and skill necessary to complete a short sale?
  • Are other professionals also representing the seller?
  • How many lenders are involved?
  • What types of loans does the seller hold?

For a short sale to be accepted by the lender, a number of documents must be on file – the packet.

  • Financial Statement signed and dated
  • Hardship letter
  • Most recent paycheck stubs for all parties
  • Income tax returns

As part of the consulting process:

  • Sellers can be current on their mortgage payments and still seek a short sale.
  • A seller may be asked to sign a promissory note to pay back the difference of the loan in a short sale.
  • Any portion of the loan that is forgiven may be considered income and must be reported for tax purposes.
  • Completing a short sale may have an adverse impact on the seller’s credit score.
  • The brokerage is not allowed to advertise the property as distressed. The MLS may require a short sale disclosure.
  • The short sale contract is between the buyer and seller.

Clients must be vigilant and forewarned of scams operating in the marketplace. Property owners need to avoid doing business with any company that:

  • Guarantees to stop or reverse the foreclosure process.
  • Promises that the seller can buy back the property following the transfer of title.
  • Requires an upfront fee.
  • Instructs the seller not to contact the lender.
  • Requires the homeowner to execute a power of attorney.

Chapter Summary: 

Listing – Agreement and Compensation Issues

Most listing agreements are bilateral – the owner hires the broker and promises to pay a commission in exchange for the broker’s promise to locate a ready, willing and able buyer or tenant. 

Listing agreements must be in writing to be enforceable. All listing agreements must contain a definite termination date.

Under the exclusive right to sell, the broker has the exclusive right to market the property for a specified period. If the property sells while the broker has the listing, the seller must pay the agreed-upon commission, regardless of who actually procured the buyer (who was the procuring cause).

The exclusive agency gives a broker the right to market and sell a property for a specified time period, while the owner retains the right to find a buyer and sell the property without owing the broker a commission. 

An open listing (nonexclusive or general listings) allows the property owner to list with as many brokers as they like – unilateral contact.

. Only the one broker who brings the ready, willing and able buyer to the seller or who finds the right property for a buyer will receive the commission.

. A buyer could make a purchase himself without having to pay any commission to any broker.

In a net listing, an owner sets a minimum amount that he wants to receive from the sale of the property and lets the brokerage firm have as commission any amount above the set minimum.

Net listings are not illegal in Illinois, but they are discouraged. 

Most multiple listing services  provide for the expression of the commission to be paid by the listing brokerage firm to the selling brokerage firm upon the sale of each of the listed properties.

Many multiple listing contracts both authorize and obligate the listing broker to submit the listing to the MLS within a specified period of time, so that it will be available for the other members.

Due to the popularity of the Internet, many brokers showcase their listings on their own web pages.

Every listing agreement should be in writing and have at least these four components:

  1. An identification of the property
  1. A promise of compensation to the broker
  1. The specifics of that compensation
  1. Names and signatures of the owners

The agreement is actually a contract between the managing broker and the seller.

Once the listing agreement has been completely filled out and signed, the seller must receive a copy of the document at the time the signatures are obtained.

Since the listing agreement is a valid contract once all parties have signed it, it can only be modified with the written consent of all the parties.

If the broker dies, loses his license, or the firm goes out of business, all the broker’s listings will terminate.

If the listing agent transfers to another firm, the listing agreement will stay with the original broker.

Chapter Summary: 

Listing – Disclosure Forms

Disclosure documents must be completed by the seller or seller’s attorney or power of attorney. 

It is the seller’s responsibility to deliver the written disclosure statement before the signing of a written agreement that would require the prospective buyer to accept a transfer of the residential real property. 

The licensee must disclose any material facts about the physical condition of the property or the transaction about which the licensee has actual knowledge.

A licensee is not considered liable for false information provided to him by the customer, if the licensee did not know the information was false.

Stigmatized property does not require disclosure by law. 

If a child is found to have been poisoned in a property, Illinois may require the owner to perform abatement (permanent elimination of the lead hazard).

The Illinois Department of Health has a Lead Program which licenses lead paint inspectors, lead risk assessors, lead abatement contractors, lead supervisors, and lead workers. 

The Residential Lead-Based Paint Hazard Reduction Act of 1992 set procedures for disclosing the presence of lead-based paint when selling properties built before 1978.

  • Sellers must disclose in writing any information about known lead paint in the home.
  • Agents who take listings of homes built prior to 1978 must have their sellers fill out a disclosure form about their knowledge.

The Illinois Radon Awareness Act outlines the seller’s disclosure requirements regarding the presence of radon on the property. The seller must provide the buyer with:

  • Radon Testing Guidelines for Real Estate pamphlet
  • The Illinois Disclosure of Information on Radon Hazards form.

A variety of testing methods are available:

  • Charcoal Canisters
  • Electret Ion (E-perms) Chambers – passive devices.
  • Continuous Radon Monitors – active devices.

The Act requires acknowledgement the purchaser to initial each of the following which applies:

  • Purchaser has received copies of all information the seller indicated was provided.
  • Purchaser has received the IEMA approved Radon Disclosure Pamphlet.

New construction is not exempt.

All buyers with HUD-backed sales contracts must sign a Radon Gas and Mold Notice and Release Agreement.

Illinois homes are required to have at least one carbon monoxide alarm in operating condition within 15 feet of every room used for sleeping purposes. 

Chapter Summary: 

Marketing Period Communications and Counseling

The primary criticism sellers have about their agents is lack of communication. 

Once you have secured the listing, let your sellers know what to expect in the first few days.

  • Tell the sellers they will be receiving a letter from your broker.
  • Before you leave the house, if the sellers have given you written permission, you’ll want to install a lockbox.
  • Meet with the sellers a day or two after the listing appointment to go over your specific marketing plan with them.

Some tips for the exterior include:

  • Keep grass and shrubs trimmed.
  • Repair fencing and repaint if needed.

Some tips for the home interior include:

  • Keep the home neat and “picked up.”
  • Declutter closets.

An important part of your seller communication is a weekly activity report. 

Advertising:

  • For-Sale Sign
  • Flyers
  • Classified Ads
  • Multiple Listing Service (MLS)
  • Your Internet Site
  • Home Tours

All advertising done for a property is also subject to fair housing laws.

Tell the sellers that if someone shows up on the doorstep wanting to see the home, they should get the person’s name and then call your office immediately so an agent can come to do the showing.

An open house for agents can give you important feedback on your listing as well as get the property in front of more agents. It’s especially valuable for properties that are unusual.

With any open house or home tour, encourage the sellers to have their home in the best possible condition – clean and uncluttered.

  • Have each visitor sign in and let you know why they came.
  • Be sure to give each visitor a copy of the property flyer and your business card.

The sellers may respond negatively to suggestions about a price modification, but they don’t want to see their homes on the market for a long stretch with no activity and little chance of a sale.

Schedule a meeting with your sellers a few weeks before the listing is set to expire. 

Organize your presentation to cover:

  • A brief review of what has happened over the life of the listing
  • Information about the buyers
  • The offer itself

Take a few minutes to review what has happened over the life of the listing.

Make sure this part of the presentation is brief, because the sellers will be anxious to hear the offer. 

Be sure that when you talk about the buyers you say nothing that could be a violation of fair housing laws.

Make sure your sellers fully understand every provision of the offer. Provide a copy of the offer to every seller present at the meeting.

Remember to advise the sellers that price is not the only important option. 

If you believe that the offer you are presenting is a reasonable and fair offer, your goal should be to seek the sellers’ acceptance rather than a counteroffer.

A counteroffer is in effect a rejection of the original offer and submitting a counteroffer gives the buyers a way out. 

Often sellers are tempted to counter the offering price with the original asking price. This is not a good idea. 

Once an offer is accepted, a contract is legally formed. The person who made the offer must receive notice of the acceptance.

Keep in mind that many deals fail during escrow, so paying attention during this period can reap great rewards.

Chapter Summary: 

Buyer Agency Duties and Disclosures

No later than beginning to work as a designated agent on the consumer’s behalf, a licensee must inform the consumer in writing:

  • That a designated agency relationship exists.
  • The name or names of his designated agent or agents.

A licensee acting in a dual agency capacity in a transaction must obtain a written confirmation from the licensee’s clients of their prior consent. 

Duties of action to protect the client:

  • The first action duty is care.
  • The second action duty is obedience.
  • The third action duty is disclosure.

The duties of protection are designed to keep the seller protected from the information-seeking of the other party to the transaction. 

  • The duty of confidentiality will cause the licensee to respond to questions in a way that will keep the buyer/customer interested in the property without giving away facts that would be detrimental to the seller-client.
  • The second duty to protect the client is accounting.
  • The third duty of protection is loyalty.

Confidentiality is the only fiduciary duty that continues beyond the agency relationship.  

Chapter Summary: 

Buyer Representation Agreement and Compensation Issues

There are three common types of buyer agency agreements:

  1. Exclusive buyer agency agreement – the buyer is legally bound to compensate the brokerage firm when the buyer purchases any property of the same type as described in the agreement.
  1. Exclusive-agency buyer agency agreement – the brokerage firm is entitled to payment only if the designated agent or another brokerage company actually finds the property that the buyer purchases.
  1. Open buyer agency agreement – a buyer can enter into similar agreements with an unlimited number of other designated agents.

If the brokerage firm receives compensation from more than one party in the transaction, that licensee must disclose that fact in writing to all the involved parties.

Buyers need to realize that if they see a FSBO that meets their needs and they want to see it, you will have to try to negotiate your commission directly from the seller.

Checking “yes” in the dual agency paragraph is not a guarantee that the seller will ultimately agree to dual agency.

Some of the provisions contained in a buyer representation agreement include:

. The Parties

. The Term

. Compensation

. Minimum Services

. Buyer’s Designated Agent

. Agent’s Duties

. Limitations of the Agent’s Duties

. Buyer’s Duties

. Limitation on Broker’s Liability

. Dual Representation

Chapter Summary: 

Qualifying Buyer Needs

Buyers fall into several main categories:

  • First-time buyers – They are afraid of the responsibility and unknowns associated with buying a house.
  • Upsizing or downsizing buyers – The upsizers are probably looking for their dream home. The downsizers may be leaving their dream home.
  • Relocation buyers – They will know nothing about the area and will need your help to decide which neighborhood is right for them.
  • Investors – They do not care about the warm and fuzzy features of a property; they care about the bottom line.

Always separate the buyer’s needs from his or her wants. Using a buyer’s needs analysis form can help the buyer narrow down and categorize property features.

When you first meet with a buyer, how you handle that contact is important in securing him or her as a client.

  • Establish a good rapport by finding some common ground.
  • Be sincere and friendly and genuinely listen to what the prospect is telling you.
  • Find the buyer’s emotional needs and address those first.
  • Discuss practical needs last.

Information to collect:

  • Property Type
  • Motivation
  • Urgency

It’s important to find out the buyers’ motivation and urgency. 

Make changes to the buyer’s list based on their feedback and not on what you think would be best for them.

Chapter Summary: 

Buyer Financial Qualification

Buyers can find out how much of a loan they can qualify for in one of two ways:

  1. Pre-qualification – This process is informal. It can be done by a real estate agent or by a lender.
  1. Pre-approval – This is a formal process that only a lender can do and it requires filling out a loan application.

Lenders qualify buyers using qualifying standards or loan underwriting standards.

Underwriting will determine whether a borrower and property meet the minimum requirements established by the lender, the investor, or the secondary market.

To qualify for a mortgage loan, a borrower must meet the lender’s qualifications in terms of income, debt, cash, and net worth. The borrower must demonstrate sufficient creditworthiness to be an acceptable risk.

When an underwriter is looking at an applicant’s income, he must decide how much of the applicant’s income is stable and if the applicant has enough stable income to make the monthly payment.

Income is considered stable if it comes from a consistent and reliable source.

  • The income ratio establishes the borrower’s capacity to pay by limiting the percent of gross income a borrower may spend on housing costs.
  • A debt ratio is calculated based on all of the monthly obligations the borrower has, including those items or payments the borrower must make for other debts.

The information about the borrower’s net worth is important to the lender as it gives an indication of the borrower’s ability to keep up the payments on the loan in the event that the borrower would lose his or her job.

The underwriter will examine the assets and liabilities section of the borrower’s application very carefully. 

A borrower’s payment history is the most important part of the credit report. 

It is important for the lender to determine the market value of a particular piece of property at any given point in time. 

Each piece of property must be inspected and appraised carefully to get a proper estimate of its fair market value. 

Chapter Summary: 

Showing Properties

When you receive calls on your own listings, the most important thing to remember is to get an appointment with the caller. When the call comes in, ask the caller how he found the property.

The main thing to remember when someone calls about a listing is to get as much information you can in the shortest time possible.

The primary purpose of the first meeting with prospective buyers is to pre-qualify them.

Organization is the key to successful showings.

  • Be sure to spend a sufficient amount of time with the buyers to find out what they really are looking for.
  • Listen to them carefully, ask probing questions, and understand who they are and what they need.

Before you show any properties, determine your approach. Make notes about what specific features of each property you want to emphasize when you show it.

Try to show no more than 3 or 4 properties at a time.

When showing a property:

  • Try to address any objections at the time the buyers raise them.
  • Stand on the side of small rooms to help them look bigger.
  • Emphasize important features, but don’t oversell them.

It’s just as important to sell the neighborhood as it is to sell the home. 

Selling the home by asking who, what, where or how questions for each room and feature helps the buyers see themselves in the home.

Once you’ve completed the first round of home showings, take the buyers back to your office to discuss and give feedback on the homes you visited with them.

Chapter Summary: 

Preparing Buyer’s Offer

After you have shown the properties and the buyers have made a selection, you must get the buyers to actually make an offer.

Last minute objections about a property are good because they are signs the buyer is ready to submit an offer. The first thing you should do is acknowledge the buyer’s concerns. 

You can attempt to minimize a buyer’s objection if the property has most of the features the buyer is seeking in a home.

Some tried and true sales techniques to close the deal include:

  • Proceed as if the buyer has decided to make an offer.
  • Give the buyer a choice between two possibilities, both of which assume a purchase.
  • Use an inducement.
  • It’s the last shirt on the rack.
  • Use third party verification.
  • Ask the right question.

You need to spend whatever time is necessary to review the real estate sales contract in detail with the buyer. It is okay if the buyer wants an attorney to review it.

Never advise a client on how to take title to a property.

You play a key role in giving advice to your buyer client in the following areas:

  • Pricing
  • Amount of earnest money and down payment
  • Personal and real property issues
  • Warranties
  • Legal description
  • Closing date
  • Contingencies
  • Addenda/riders
  • Inspections
  • Final walk-through

Take time to go over the entire offer with the listing agent to be sure he understands exactly what the buyers are offering before the listing agent makes the presentation to the sellers. 

If a licensee acting as a designated agent receives contemporaneous offers from two or more clients, that agent must provide written disclosure to all clients.

Chapter Summary: 

Buyer Counseling – Closing Costs

The primary attendees at the closing are the:

  • Buyer – Pays for the property and receives clear title.
  • Seller – Conveys the property and receives payment.
  • Closing agent – Prepares all the documents that need to be signed.

The closing process:

  • The mortgage loan, if any, is closed.
  • Any existing liens on the property are satisfied.
  • The buyer pays the purchase price for the property.
  • Each party pays all the appropriate fees.
  • The seller delivers the title.

The settlement statement is a detailed accounting of the transaction that is prepared before closing by the closing agent.

The settlement statement has a list of the debits and credits for both the buyer and the seller. 

Seller closing costs:

  • Loan fees
  • Broker commission
  • Attorney fees
  • Recording Expenses
  • Satisfy Existing Liens
  • Title Expenses
  • Survey Fees
  • Co-op and Condo Fees

The real estate transfer tax is a tax imposed on any deed or instrument which conveys interest in real property.

  • The amount of the tax is $.50 per $500 of taxable consideration.
  • The tax is paid by purchasing tax stamps from the county recorder.

Either the buyer or the seller can pay the local taxes, so be sure to check with the particular municipality in which the property resides. 

The licensee must use a form called the Real Estate Transfer Declaration to show the amount of taxable consideration that was used to determine the transfer taxes. It includes:

  • A description of the property
  • The manner of conveyance
  • The type of financing used

The following deeds are exempt from transfer tax:

  • Those which convey real estate from or between government entities
  • Those held by charitable, religious, or educational institutions
  • Those securing debts
  • Partitions and Tax deeds

A land trustee must record a facsimile of the assignment of beneficial interest, as specified in the Land Trust Recordation and Transfer Tax Act.

Condominiums have special maintenance fees due to the homeowner’s association – assessments.

In Illinois, the seller usually pays for the owner’s title insurance policy. 

Buyer closing costs:

  • Appraisal and credit report fees
  • Inspections
  • Lender fees
  • Recording fees
  • Transfer tax (Local)
  • Title insurance
  • Tax and insurance reserves
  • Attorney fees
  • Private Mortgage Insurance (PMI), if applicable
  • Special fees, such as coop or condo fees

When dealing with a distressed property, closing delays are more common than with regular properties.

Chapter Summary: 

Buyer Counseling – Pre and Post Closing Issues

Prior to the actual closing of the sale between the buyer and the seller, certain preliminary steps must be taken.

It is the job of the brokers for both the sellers and the buyers to keep track of the dates for each activity.

The seller is responsible for providing a title report or abstract to the buyer as part of the due diligence process prior to closing.

The broker might want to recommend three attorneys with whom the broker has established a good working relationship and whom the broker knows will provide good service.

During the inspection period, the buyer will most certainly want to order a property inspection.

  • The buyer should order the report early in the process.
  • The broker should have a list of inspectors handy to provide to the buyer.

Never give the buyers the name of just one specific company.

Frequently, something comes up during the period between offer-acceptance and closing that will require renegotiation of some of the terms of the contract.

  • Items found during the inspection.
  • Failure of financing contingency.
  • Appraisals that come in lower than the contract price.

Renegotiation Situations

  • Renegotiation of Inspection Items
  • Changes to Agreed-Upon Dates
  • Delays Caused by Title and Survey Matters

Whenever a buyer wants to renegotiate the contract, you will have to prepare an amendment to the contract in order for any changes to be effective. The amendment will have to be in writing and executed by both parties.

Most homeowners polices also have what’s called a coinsurance clause, which requires that the homeowner have insurance that is equal to 80% of the home’s replacement value. This does not include the price of the land.

Factors that will determine whether the company will issue a policy:

  • Current condition of the property.
  • Claim history on that property.
  • Owner’s claim history.
  • Owner’s credit history.

Flood insurance is not included in a basic homeowners policy.

Each home has an insurance record of its own and if the buyers are unaware of the claims history of the home they wish to purchase, they could find themselves in a very bad situation.

The Comprehensive Loss Underwriting Exchange (CLUE) Report is a database used by insurance companies that provides five to seven years of prior claim information on properties. It is not available to insurance companies until after closing.

The final walk-through of a property occasionally produces something that ends up being settled at the closing table. Items found during the walk-through are most easily handled by an exchange of cash.

Chapter Summary: 

General Requirements for Licensees

The General Assembly determined that the citizens of Illinois have a right to know who is representing parties in a real estate transaction. 

. Each licensee must disclose, in writing, status as a licensee to all parties.

. RESPA prohibits real estate licensees from receiving a referral fee from any entity associated with the real estate transaction.

. All sources of compensation related to the transaction received by the licensee from a third party must be disclosed.

. If a licensee refers a client to a third party in which the licensee has greater than a 1% ownership interest, the licensee must disclose that fact to the client at the time of making the referral.

. Licensees are required to disclose, in writing, contemporaneous offers.

A licensee acting in a dual agency capacity in a transaction must obtain a written confirmation of the clients’ prior consent for the licensee to act as a dual agent in the transaction.

In a dual agency situation:

. Disclose all latent material defects in the property that are known to the Licensee.

. Help the buyer or tenant to arrange for property inspections.

. Help the buyer compare financing alternatives.

In a dual agency situation, do not divulge:

. The price or terms the seller or landlord will take.

. The price or terms the buyer or tenant is willing to pay.

Copies of all disclosures, whether electronic or in paper, must be retained by the sponsoring broker.

Chapter Summary: 

Disclosures and Consents

The General Assembly determined that the citizens of Illinois have a right to know who is representing parties in a real estate transaction. 

  • Each licensee must disclose, in writing, status as a licensee to all parties.
  • RESPA prohibits real estate licensees from receiving a referral fee from any entity associated with the real estate transaction.
  • All sources of compensation related to the transaction received by the licensee from a third party must be disclosed.
  • If a licensee refers a client to a third party in which the licensee has greater than a 1% ownership interest, the licensee must disclose that fact to the client at the time of making the referral.
  • Licensees are required to disclose, in writing, contemporaneous offers.

A licensee acting in a dual agency capacity in a transaction must obtain a written confirmation of the clients’ prior consent for the licensee to act as a dual agent in the transaction.

In a dual agency situation:

  • Disclose all latent material defects in the property that are known to the Licensee.
  • Help the buyer or tenant to arrange for property inspections.
  • Help the buyer compare financing alternatives.

In a dual agency situation, do not divulge:

  • The price or terms the seller or landlord will take.
  • The price or terms the buyer or tenant is willing to pay.

Copies of all disclosures, whether electronic or in paper, must be retained by the sponsoring broker.

Chapter Summary: 

Licensed Versus Unlicensed Activities

Anyone who performs the following tasks for compensation must have a license:

. Sells, lists, purchases, exchanges, rents or leases

. Deals in options

. Assists or directs in a transaction

. Advertises as being in the business of real estate

A residential leasing agent license is a limited scope license.

The following entities are exempt from holding a license:

. Attorney at law or power of attorney

. Resident manager

. Government official performing official duties

Minimum services:

. Accept delivery of and present to the client offers and counteroffers;

. Assist the client in developing offers, counteroffers, and notices;

. Answer the client’s questions.

Brokers and Managing Brokers who are not lawyers are only authorized to fill in blanks and make the appropriate deletions on already-printed form contracts used in the real estate industry.

A rental finding service must enter into a written contract with the person for whom services are to be performed, and deliver to the individual a copy of the contract.

This contract must include:

. The term of the contract.

. The total amount to be paid for the services.

. A statement regarding the refund or non-refund of the fee paid in advance.

. The type of rental unit desired, the geographical area requested, and the rent the prospective tenant is willing to pay.

. A statement requiring the licensee to refund all fees paid if the contract is null and void for any reason.

A listing for a rental unit, which has not been available for rent for over 2 days, is considered prima facie proof of not being current.

Chapter Summary: 

Disciplinary Actions

Grounds of discipline:

  • Conviction of, plea of guilty or nolo contendere, to a felony or misdemeanor.
  • Inability to practice with reasonable judgment, skill or safety as a result of physical illness.
  • Conducting real estate business in a retail establishment if not separated from the main retail business in a separate and distinct area.
  • Acting for more than one party in a transaction without written notice to all parties.
  • Representing a broker other than the sponsoring broker.

The Department may take disciplinary action for failure to maintain and deposit in a special escrow account, separate from personal accounts, all escrow monies belonging to others.

The account must be noninterest-bearing. 

Additional grounds for discipline:

  • Failure to make available to the Department all escrow records and related documents within 24 hours of a request by the Department
  • Commingling the money or property of others with his/her own property or money.
  • Using a blind ad.

The Department may take disciplinary action for offering guaranteed sales plans. A licensee must:

  • Provide the details and conditions of the plan in writing.
  • Evidence of sufficient financial resources to satisfy the commitment.

The Department may take disciplinary action for:

  • Inducing any party to substitute a new contract.
  • Acting as the attorney in the same transaction in which the attorney is acting as a broker or salesperson.
  • Offering free merchandise or services if the conditions are not disclosed in the same ad.

Unprofessional conduct:

  • Failure to act in the best interests of a client.
  • Purchasing of the property through an intermediary in order to conceal the purchase by the licensee.
  • Taking unfair advantage of age disability or lack of understanding of the English language.
  • Obstructing an inspection, audit, investigation, examination or disciplinary proceeding.

The Department may refuse to issue or renew or may suspend the license of any person who:

  • Fails to file a tax return or pay Illinois taxes
  • Is in default on a school loan
  • Is more than 30 days delinquent in child support payments

The Real Estate Administration and Disciplinary Board of IDFPR will initiate the investigation of anyone regulated by the license act in Illinois.

  • The Secretary has the authority to appoint any Illinois Licensed attorney.
  • If the Secretary believes that substantial justice has not been done, then he/she may order a rehearing.
  • The IDFPR has the authority to seize the license of anyone who has not surrendered it to the IDFPR.

The IDFPR can choose to skip the hearing and just negotiate a disciplinary consent order with the accused.

On conviction of a second or subsequent offense, the violator will be guilty of a Class 4 felony.

All fines and penalties collected by the Department are deposited in the Real Estate Recovery Fund. 

The statute of limitations regarding the IDFPR taking disciplinary action against licensees in violation of the license act may only happen if the action is begun within 5 years of when the violation occurred.

Agency violations have a 2-year statute of limitations for civil actions.

The IDFPR has to keep an index of all its formal decisions related to licensees.

At least once every other month, the IDFPR must prepare a summary report of all final disciplinary actions taken since the last report.

The Department may contract with licensees meeting Department-established qualifications to serve as peer review advisors for complaints and alleged violations of the Act.

Real Estate Recovery Fund 

  • The aggrieved person must have a valid judgment confirming the wrongful act.
  • The courts may not award interest.
  • The IDFPR must be notified in writing by the aggrieved person within 7 days of filing a grievance.

The following rules apply to judgments:

  • The IDFPR must receive written notice of any valid court judgment within 30 days.
  • The IDFPR must receive 20 days’ written notice for any supplementary actions.
  • All proceedings must be complete before a claimant can receive recovery from the fund.
  • The licensee and any other parties in any way responsible for the loss have to be named in the lawsuit.

Once a payment is made by the IDFPR, the license of the offending broker or salesperson is automatically terminated, and he may not try to restore the status of his license until he has repaid in full all the money to the fund, plus interest.

A discharge in bankruptcy does not mean a person escapes his liabilities and penalties.

  • For a suit that may result in recovery from the fund, the suit must be begun within 2 years of the alleged violation.
  • If at any point, the Fund falls under $750,000, the Fund is used to raise the level to a minimum fund balance of $800,000.

Chapter Summary: 

Fair Housing

Fair Housing

  • The Civil Rights Act of 1866 prohibited discrimination in housing based on race.
  • Title VIII of the Civil Rights Act of 1968 prohibited discrimination in housing based on race, color, religion or national origin.
  • In 1968, the Supreme Court in Jones v. Mayer ruled that discrimination on the basis of race is strictly prohibited.
  • In 1974, the Housing and Community Development Act added sex to the list.
  • In 1987, a Supreme Court decision expanded the definition of race to include ancestry.
  • And in 1988, the Fair Housing Amendments Act added handicap and familial status.

In addition to the classes protected under the federal laws, Illinois has added these classes:

  • Age
  • Ancestry
  • Marital status
  • Military status
  • Unfavorable discharge from military service
  • Sexual orientation
  • Order of protection status
  • Unfavorable discharge from military service in connection with employment, real estate transactions, access to financial credit, and the availability of public accommodations

Local jurisdictions can add additional classes to protect against discrimination.

Fair Housing Law prohibits:

  • Steering – channeling customers toward or away from homes and neighborhoods.
  • Blockbusting – using fear of ethnic change to induce owners to sell.
  • Redlining – refusing to make loans in a certain neighborhood.

Brokers are encouraged to display the Equal Housing Opportunity poster in their offices.

There are no exemptions for racial discrimination. 

The Fair Housing Act allows for exemptions:

  • A building with no more than four units and the owner is living in one of the units.
  • A single-family home.
  • Religious organizations
  • Private clubs

Any person who believes he has been discriminated against may file a complaint with HUD within 1 year. 

Within 30 days, HUD will determine if there is reasonable cause to charge discrimination or it will dismiss the complaint. 

A conciliation agreement must protect both the person filing the complaint and the public interest.

HUD attorneys will litigate the case for the person filing the complaint. An Administrative Law Judge (ALJ) will consider evidence from both the complainant and the respondent.

A person may file a suit in a state or federal court within 2 years. 

Americans with Disabilities Act (ADA)

  • Owners of small businesses that serve the public must remove physical barriers that are readily achievable, which means easy to accomplish without much difficulty or expense.
  • If a client is planning to build a new facility or modify an existing one, he needs to consult the ADA Standards for the specific requirements.

Any advertising that describes the property would be considered acceptable, while advertising that describes buyers could be considered discriminatory, especially if the buyers are from a protected class. 

If you are asked about protected class characteristics of the buyers, you must tell the seller it is inappropriate for you to give out such information.

Chapter Summary: 

RESPA and Fair Financing Laws

Real Estate Settlement and Procedures Act (RESPA)

Closings that must comply with TRID include any closed end-loan secured by real property, including unimproved property. 

According to the TRID rule, lenders must provide:

  • A copy of the booklet Your Home Loan Toolkit.
  • A Loan Estimate of settlement costs at the time of loan application or within three business days.
  • A Closing Disclosure at least three days before closing.

RESPA specifically prohibits any payment or receiving of fees or kickbacks when a service has not been rendered. 

RESPA permits sharing commissions and the payment of referral fees among cooperating brokers or multiple-listing services.

A real estate firm may offer a computerized loan origination system that:

  • Provides a prospective borrower information about mortgage loan products
  • Prequalifies a borrower
  • Initiates a loan application process for a fee

Loan servicers must provide borrowers with an annual escrow statement which summarizes all inflows and outflows in the prior 12-month period.

The Truth in Lending Act is implemented by Regulation Z – requires lenders to disclose to buyers the true cost of obtaining credit, so that borrowers can compare the costs of various lenders. 

Regulation Z applies to all loans that are secured by a residence. It does not apply to:

  • Commercial loans
  • Agricultural loans over $25,000

The lender must disclose all finance charges and the annual percentage rate (APR) of the loan. 

In most cases the borrower has a right to cancel the transaction by notifying the lender within three days. This does not apply to residential first mortgage loans, but does apply to refinancing and home equity loans.

Any advertising is subject to Regulation Z disclosure of it contains any of the following items. 

  • Amount or percentage of down payment
  • Installment payment or amount
  • Specific finance change
  • Number of installments
  • Period of repayment
  • Indication that there is no charge for credit

If an ad includes any of the above items, all of the following items must be disclosed:

  • The amount or percentage of down payment
  • Terms of repayment
  • Annual percentage rate and if increase is possible
  • Total finance charge
  • Total number of payments and due dates

The Equal Credit Opportunity Act (ECOA)

  • ECOA expects a lender to base lending decisions on an individual’s income, net worth, job stability and credit rating.
  • Lenders are required to inform an applicant who was rejected of the reasons for the denial, in writing and within 30 days

The Community Reinvestment Act was passed to prevent redlining and to encourage banks and thrifts to help meet the credit needs of all segments of their communities.

The Home Mortgage Disclosure Act requires that lenders report statistical information each year to insure that lenders are not restricting loans to certain individuals.

The Fair Credit Reporting Act requires that lenders:

  • Keep all credit information confidential.
  • Obtain authorization from a consumer in order to seek the customer’s credit information.
  • Reveal the sources of the credit information to the consumer.

Chapter Summary: 

Antitrust Laws

A violation of an antitrust law occurs when:

  • There is a monopoly, a contract, a conspiracy or a combination of such.
  • The existence of the monopoly or conspiracy creates a restraint of trade.
  • The restraint of trade unreasonably restricts competition and functions against the public interest.

The Sherman Antitrust Act is the principal federal statute that covers competition and is one of the most important pieces of antitrust legislation.

Antitrust laws are state and federal laws designed to maintain and preserve business competition. Antitrust laws prohibit:

  • Price Fixing – Collusion between or among members of a particular trade to maintain prices at a set level.
  • Group Boycotts – Agreements between or among members of a particular trade that would prevent other members from fair participation in the trade’s activities.
  • Market Allocation – Agreements between or among members of a trade to avoid doing business in specific market areas.
  • Tie-in Arrangements – Arrangements that requires a buyer to purchase additional or unrelated products or services when making a product purchase.

Penalties for violating the act can add up to the millions and prison time could also be enforced for EACH offense of the act.

The Clayton Antitrust Act was designed to cover restraints on interstate trade or commerce that are not covered under the Sherman Act.

If the suits are successful, the individuals can recover three times the damages incurred plus court costs and attorneys’ fees. 

The Federal Trade Commission has the power to judge whether particular trade practices are unfair.

Chapter Summary: 

Advertising and License Laws

Advertising includes any information available to the public, whether in print, via the Internet, or through any other medium.

A broker’s business name and franchise affiliation must be included in all ads. Ads without the broker’s name are illegal blind ads.

The broker is responsible for supervising all advertising, in any media, of any service for which a license is required.

Advertising must not be misleading, fraudulent, or deceptive. Puffing is permitted, but fraud is not.

Internet advertising of property must include:

. Licensee’s and sponsoring broker’s name

. Company name and address

. Geographic location of property

All licensees, including brokers, must periodically review advertising and marketing information on their site and insure that it is correct and not misleading.

Advertising that describes buyers could be considered discriminatory, especially if the buyers are from a protected class.

Compliance with antidiscrimination laws is critical when doing advertising.

A broker should have the Equal Opportunity Poster displayed prominently in all of his or her offices.

Words that are not generally recognized as being discriminatory can be, so it’s important to become familiar with those phrases that you should avoid.

. Discriminatory words – no wheelchairs, able-bodied persons only, no deaf, or no handicapped parking

. Non-discriminatory words – fourth-floor walk-up, walk-in closets, wheelchair ramp 

Chapter Summary: 

Laws Affecting Marketing

Real estate licensees and their firms must comply with the rules that are outlined in some federal laws.

CAN-SPAM Act prohibits sending unwanted commercial” e-mail messages to wireless devices without express prior authorization.

  • Any person found guilty of violating the CAN-SPAM Act may be fined for such a violation as required by the FTC.

The Do-Not-Call List addresses the regulation of unsolicited telemarketing phone calls. 

  • Consumers can place their home phone number, wireless phones included, on the national Do-Not-Call list which prohibits future solicitations from telemarketers.

Junk Fax Prevention Act allows unsolicited faxes to be sent to individuals and businesses having an established business relationship.

Fair and Accurate Credit Transactions Act (FACTA) is legislation which regulates confidential consumer credit information. 

Chapter Summary: 

Issues Affecting Market Value

Market value may be defined as the highest price a buyer would pay and the lowest price a seller would accept for a property at a given time and given certain conditions in a particular marketplace.

The usual definition of market value includes the following assumptions about transaction conditions:

  • The market is open and competitive.
  • The property is exposed in the market for a reasonable period of time.
  • Both buyer and seller are fully aware of market conditions.

Price usually refers to the final selling price; it is not the preliminary asking price of the seller nor the initial bidding price of the purchaser. 

Economic Principles 

  • Supply and demand – properties on the market and demand for property interact in a cycle to affect price and value.
  • Utility – property use that people in a marketplace are willing to pay for.
  • Transferability – quality of title, ease of transfer of ownership rights.
  • Anticipation – future benefits expected over a holding period.
  • Substitution – buyer will pay no more for one property than for a comparable and available substitute.
  • Contribution – change in market value of a property due to a particular improvement.
  • Change – fluctuations in market conditions affect benefits.
  • Highest and best use – must be legally permissible, physically possible, financially feasible, and maximally productive.
  • Conformity – conformity in form and use to surrounding properties produces maximal income and value.
  • Progression and regression – increase (progression) or decrease (regression) of value due to quality of adjacent properties.
  • Assemblage – combining properties to create a value greater than the sum of the parts.
  • Subdivision – dividing a property to create a value greater than that of the single property.

Trends and agent should track and report to clients if value of a listing is affected:

  • Properties on the market.
  • Number of transactions.
  • Average-time-on-the-market trends.
  • Average price trends and the sold trends.

Ownership Benefits

  • Income – from leases; investors will buy an income stream.
  • Appreciation – general rise in sale prices in a market will increase market value of a particular property; realizable as profit when sold.
  • Use – different uses have different benefits and different resulting impacts on market value.
  • Tax benefits – tax law may give preferred treatment to gains, losses, depreciation, tax liability, expenses.

Chapter Summary: 

Selecting and Adjusting Comparables

Selecting Comparables

To qualify as comparable in an appraisal, the property must:

  • Resemble subject in size, shape, design, utility, location;
  • Have sold recently (usually within six months);
  • Have sold in arm’s-length transaction.

FNMA and other secondary market organizations may establish guidelines for comparables.

CMAs use pending sales and active and expired listings, as well as recent sales.

Recently Sold Properties

  • The more recent the sale, the more reliable the indication of comparable value; aim for past three-six months.
  • Best predictor of market value of seller’s property – also shows original listing price, days on market

Pending Sales

  • Offer accepted but transaction not yet closed; may be pending for 30-60 days.
  • Not as reliable as sold property because final sales price is not known, only the listing price.

Active Listings

  • Show level and intensity of competition, but not real price information.

Expired Listings

  • Show that asking price was too high; can be used to set upper limit of price range.
  • Expired listing that was relisted and sold provides good indication of price for seller’s property.

Distressed Properties

  • Use if truly comparable, but recognize limitations: transactions take longer than normal, many do not complete, post-transaction fix-up costs may not be reflected in sales price.

Adjusting Comparables

  • Only the price of the comparable can be adjusted.
  • Adjustments are additions or subtractions applied to a comparable based on value contribution of a feature the comparable has or lacks.
  • If comparable is better, make a deduction; if comparable is inferior, make an addition.

Factors for Adjustment

  • Time of sale
  • Location
  • Physical characteristics
  • Transaction characteristics

Suggesting Range and Price

  • One comparable is considered more reliable if: fewer adjustments; smaller adjustments; smaller total adjustment.
  • Listing agent suggests a range of prices after weighting the comparables, allows seller to select a price.

Chapter Summary: 

Financing Principles

The process of securing a loan by pledging a property without giving up ownership of the property is called hypothecation.

States differ in their interpretations of who owns mortgaged property.

  • Those that regard the mortgage as a lien held by the lender against the property owned by the borrower are lien-theory states.
  • Those that regard the mortgage as a conveyance of ownership from the mortgagor to the mortgagee are title-theory states.

A mortgage is a legal document stating the pledge of the borrower (the mortgagor) to the lender (the mortgagee).

A deed of trust conveys title to the property in question from the borrower (trustor) to a trustee as security for the loan.

A borrower who executes a promissory note is the maker or payer of the note.

  • The lender is the payee. All parties who have an interest in the property should sign the note.
  • Negotiable instrument – the payee may assign it to a third party.

A satisfaction piece will be issued to put on record in the county where the property is located.

After a mortgage note has been paid in full, the lender must execute a document called a satisfaction of mortgage. When a deed of trust is used, the satisfaction piece is a deed of reconveyance.

Essential clauses:

  • Acceleration Clause: If a borrower defaults on the loan, the lender can call the entire balance due and payable immediately.
  • Alienation Clause (due on sale): prevents sale of the property without lender’s approval.
  • Prepayment Clause: allows the lender to charge extra interest if the loan is paid off before the normal completion date.
  • Defeasance Clause: provides for a satisfaction piece to be issued when the mortgage has been paid in full.
  • Borrower’s Right to Reinstate after Acceleration: If the buyer is in default, the buyer is entitled to the opportunity to reinstate his loan after the bank has issued notice to him of his default.
  • Hazardous Substances
  • Taxation and Insurance Clauses

The financial components of a mortgage loan:

  • Principal is the capital amount borrowed, on which interest payments are calculated.
  • Interest is a charge for the use of the lender’s money. The interest rate is a percentage applied to the principal to determine the amount of interest due. • Rates may be fixed or variable.
  • Disclose an Annual Percentage Rate (APR)
  • Usury is the charging of excessive interest rates on loans.
  • Compound Interest. The interest paid on the original principal and on the accrued and unpaid interest that accumulates as the debt matures.
  • A payment that includes the principle, interest, taxes, and insurance.
  • Points. A discount point is one percent of the loan amount.
  • Term is the period of time over which the loan must be repaid.
  • Payments.

The primary mortgage market is made up of lenders who originate loans. They make the money available directly to borrowers.

  • Savings associations
  • Commercial banks
  • Credit unions

The secondary market consists of buying and selling of mortgages that were created in the primary market.

Fannie Mae – Originally Federal National Mortgage Association (FNMA)

  • To stabilize and provide a secondary market for residential mortgages.
  • Originally bought FHA mortgage packages, now all types.
  • A borrower’s monthly mortgage or debt to loan ratio payments cannot exceed a specific amount of the monthly income.
  • Any loan made that has a loan-to-value ratio of more than 80% must carry PMI.
  • Funds from gifts may be used as all or part of the 20% down

Ginnie Mae – Government National Mortgage Association (GNMA)

  • Buys loan packages of all types to make capital available to lending institutions.
  • Handles the housing assistance and loan management functions originally managed by Fannie Mae.

Freddie Mac – Federal Home Loan Mortgage Corporation (FHLMC)

  • To establish a reliable secondary market for the sale of conventional mortgages by and for S&L’s.
  • Freddie Mac sells mortgage-participation certificates (PCs) and guaranteed-mortgage certificates (GMCs).
  • Any loan made that has a loan-to-value ratio of more than 80% must carry PMI.
  • Funds from gifts may be used as all or part of the 20% down payment.

Chapter Summary: 

Financing Aternatives

A conventional mortgage loan is a permanent long-term loan that is not FHA-insured or VA-guaranteed. The risk to a lender is greater.

The Federal Housing Administration (FHA) does not lend money, but insures permanent long-term loans made by others.

  • The FHA determines how much mortgage insurance must be provided and charges the borrower an appropriate mortgage insurance premium (MIP).
  • The FHA reimburses the lender for losses due to default by the borrower.
  • The property must be appraised by an FHA-approved appraiser.
  • The FHA has set maximum loan amounts for over 80 regions.
  • The minimum down payment for an FHA-loan is based on the lower of the appraised value or the sales price.
  • Thirty years is the maximum length of the repayment period.
  • The borrower has the right to pay off the loan at any time without penalty, provided the lender is given prior notice.
  • No loans for investment or non-owner-occupied properties originated after the latter date are assumable.
  • The lender and borrower negotiate the interest rate on an FHA-loan without any involvement by FHA.
  • The lender may charge discount points, a 1% loan origination fee, and other such charges.

VA-Guaranteed Loans

  • The VA reimburses the lender for losses up to the guaranteed amount if foreclosure sale proceeds fail to cover the loan balance.
  • The property must be appraised by a VA-approved appraiser.
  • The VA usually requires no down payment, although the lender may require one.
  • The VA does not limit the loan amount, but does limit the amount it will guarantee.
  • A veteran must apply for a Certificate of Eligibility
  • The maximum loan term for one- to four-family residences is 30 years. For loans secured by farms, the maximum loan term is 40 years.
  • The loan may be paid off early without penalty.
  • Loans originated before March 1, 1988, are freely assumable.
  • Lender and borrower negotiate the interest rate for all VA-insured loans.
  • The lender may charge discount points, origination fees of up to 1%, and other reasonable costs.

The US Department of Agriculture Rural Housing Service (RHS) has various programs to aid low-to-moderate-income rural residents to purchase, construct, repair, or relocate a dwelling and related facilities.

  • Direct Loan Program
  • Guaranteed Loan Program

Amortization provides for gradual repayment of principal and payment of interest over the term of the loan.

  • With a fully amortized loan, the borrower has the same payment amount every month.
  • With a straight amortized loan, the borrower pays a different amount with each payment.

Balloon loans are partially amortized loans. 

Negative amortization causes the loan balance to increase over the term.

The most common fixed-rate loans are 30-year mortgages.

Adjustable rate mortgages (ARMs) allow the lender to change the interest rate at specified intervals and by a specified amount.

  • Index
  • Margin
  • Calculated Rate, or Note Rate
  • Initial Rate
  • Adjustment Period
  • Mortgage Payment Adjustment Period
  • Interest Rate Caps
  • Payment Cap
  • Negative Amortization Cap

The first, or senior, loan generally has priority over any subsequent loans.

With a graduated payment mortgage, the payments at the beginning of the loan term are not sufficient to amortize the loan fully, and unpaid interest is added to the principal balance.

A pledged account mortgage is a type of graduated payment mortgage under which the owner/borrower contributes a sum of money into an account that is pledged to the lender.

In an interest-only loan, periodic payments over the loan term apply only to interest owed, not to principal.

A buydown loan entails a prepayment of interest on a loan.

The seller may provide some or all of the financing for the buyer’s purchase.

  • With a purchase money mortgage, the borrower gives a mortgage and note to the seller to finance some or all of the purchase price of the property.
  • In a wraparound loan arrangement, the seller receives a junior mortgage from the buyer, and uses the buyer’s payments to make the payments on the original first mortgage.
  • Under a contract for deed, the seller retains title and the buyer receives possession and equitable title while making payments under the terms of the contract.

Special Purpose Loans

  • A home equity loan can be given as a fixed amount or as a line of credit for the homeowner to borrow against as the need arises.
  • A package loan finances the purchase of real estate and personal property.
  • A construction loan finances construction of improvements.
  • A bridge loan is used to cover a gap in financing between short-term construction financing and long-term permanent financing.
  • In a participation loan the lender participates in the income and/or equity of the property, in return for giving the borrower more favorable loan terms than would otherwise be justified.
  • A permanent loan is a long-term loan that “takes out” a construction or short-term lender.
  • In a reverse annuity mortgage, a homeowner pledges the equity in the home as security for a loan which is paid out in regular monthly amounts over the term of the loan.
  • A blanket mortgage is secured by more than one property.
  • An open-end loan allows the borrower to “expand” the mortgage to increase the debt to the original amount.
  • Sale and Leaseback – The owner of the real estate sells the property and then leases it back from the buyer.

Chapter Summary: 

Financial Underwriting

Loan origination is the process of loan application and loan processing, up to and including the disbursal of funds

The initiation of the application process occurs when the lender receives the completed application package from the applicant. 

Loan underwriting is the lender’s process of assessing risk in giving a loan

  • Evaluating the borrower’s ability to repay the loan
  • Appraising the value of the property offered as security
  • Determining the terms of the loan

The principal risks are that the borrower will default on repayment of the loan, and that the borrower will damage the value of the property as security. 

The relationship of the loan amount to the property value, expressed as a percentage, is the loan-to-value ratio, LTV.

The Equal Credit Opportunity Act (ECOA) requires a lender to evaluate a loan applicant on the basis of that applicant’s own income and credit rating.

The income ratio establishes borrowing capacity by limiting the percent of gross income a borrower may spend on housing costs.

  • Monthly gross income x income ratio = monthly housing expense.

The debt ratio considers all of the monthly obligations of the income ratio plus any additional monthly payments the applicant must make for other debts.

  • Monthly gross income x debt ratio = monthly housing expense + monthly debt obligations

A lender looks beyond income and debt ratios to assess an applicant’s income stability. 

  • Employment at the present job
  • Secondary income to continue on a regular basis
  • Educational level, training and skills, age

If some of a borrower’s cash for the down payment comes as a gift from a relative or friend, a lender may require a gift letter from the donor stating the amount of the gift and lack of any requirement to repay the gift.

An applicant’s net worth shows a lender the depth of the applicant’s cash reserves, the value and liquidity of assets, and the extent to which assets exceed liabilities.

A lender must obtain a written credit report on any applicant who submits a completed loan application.

  • Outstanding debts
  • Payment behavior
  • Legal information of public record

The lender gives the applicant a written notice of the agreement to lend under specific terms – loan commitment. 

  • Firm commitment – a straightforward offer to make a specific loan at a specific interest rate for a specific term.
  • Lock-in commitment – an offer to lend a specific amount for a specific term at a specific interest rate.
  • Conditional commitment – offers to make a loan if certain provisions are met.
  • Take-out commitment – offers to make a loan that will “take out” another lender’s loan.

Regulation Z applies to all loans secured by a residence. It does not apply to commercial loans or to agricultural loans over $25,000.

  • Requires lenders to disclose all finance charges as well as the true Annualized Percentage Rate (APR) in advance of closing.
  • A borrower has a limited right to cancel the credit transaction, usually within 3 days of completion.

Any type of advertising to offer credit is subject to requirements of full disclosure if it includes: 

  • Down payment percentage or amount
  • An installment payment amount
  • Specific amount for a finance charge
  • Specific number of payments
  • Specific repayment period
  • Statement that there is no charge for credit

Willful violation of Regulation Z is punishable by imprisonment of up to a year and/or a fine determined by the Fed and CFPB. 

Equal Credit Opportunity Act prohibits discrimination in extending credit based on race, color, religion, national origin, sex, marital status, age, or dependency upon public assistance. 

Real Estate Settlement and Procedures Act (RESPA)

Closings that must comply with TRID include any closed end-loan secured by real property, including unimproved property. 

According to the TRID rule, lenders must provide:

  • A copy of the booklet Your Home Loan Toolkit.
  • A Loan Estimate of settlement costs at the time of loan application or within three business days.
  • A Closing Disclosure at least three days before closing.

RESPA specifically prohibits any payment or receiving of fees or kickbacks when a service has not been rendered. 

RESPA permits sharing commissions and the payment of referral fees among cooperating brokers or multiple-listing services.

The Consumer Financial Protection Bureau (CFPB) which administers RESPA requires lenders to use a specific form to disclose settlement costs to the buyer.

The Department of Housing and Urban Development (HUD) requires lenders to use a specific form to disclose settlement costs to the buyer. 

  • A lender must provide a good faith estimate of costs within 3 days of receiving the loan application.
  • A lender must also provide a buyer with a copy of the HUD information booklet concerning closing costs and procedures.

National Flood Insurance Act – borrowers of “federally-related loans” must obtain flood insurance if property is in designated flood-hazard area 

Chapter Summary: 

Loan Estimate and Closing Disclosure

For closed-end credit transactions secured by real property, the creditor is required to provide the consumer with good-faith estimates of credit costs and transaction terms on the Loan Estimate form.

The Loan Estimate must be delivered within three business days of loan application

Page 1 of the Loan Estimate details:

  • Identifying information
  • Loan Terms
  • Projected Payments

Page 2:

  • Loan Costs
  • Other Costs
  • Calculating Cash to Close

Page 3:

  • Comparisons
  • Other Considerations
  • Confirm Receipt

For loans that require a Loan Estimate and that proceed to closing, creditors must provide a final disclosure reflecting the actual terms of the transaction called the Closing Disclosure.

The creditor is generally required to ensure that the consumer receives the Closing Disclosure no later than three business days before consummation of the loan.

The Closing Disclosure form must be delivered to the parties to the transaction at least three days prior to the closing date.

Page 1

  • Closing information
  • Transaction information
  • Loan information
  • Loan Terms
  • Projected Payments

Page 2

  • Column 1 – Description of the costs.
  • Column 2 – Costs paid by the borrower.
  • Column 3 – Costs paid by the seller.
  • Column 4 – Costs paid by others.

Page 3

  • Calculating Cash to Close
  • Summaries of Transactions: • Due from the borrower at closing.
  • Paid already by or on behalf of borrower at closing.
  • Due to seller at closing.
  • Due from seller at closing.

Page 4

  • Assumption
  • Demand feature
  • Late payment
  • Negative amortization
  • Partial payments
  • Security interest
  • Escrow account

Page 5

  • Loan Calculations
  • Other Disclosures
  • Contact Information
  • Confirm Receipt

Chapter Summary: 

Foreclosure, Redemption and Bankruptcy

The order of payment in a foreclosure is as follows:

  • First, the cost of the sale
  • Second, any special assessment taxes and general
  • Third, the first mortgage
  • Fourth, whatever is recorded next

Illinois is a judicial foreclosure state.

Strict foreclosure, the original form of foreclosure, involves a lawsuit filed by the lender against the borrower.

  • First, the lender must give an appropriate notice to the delinquent borrower.
  • Next, the lender prepares and records the paperwork.
  • Then, the court orders the borrower to pay the mortgage debt by a certain date.
  • If the debt is not paid in full by the deadline, the lender automatically gains full title to the property with no obligation to sell the property.

Non-Judicial foreclosure requires the lender to give the borrower a notice of default (NOD) and of intent to sell the property in a form prescribed by state statutes. 

  • If the borrower fails to cure the default or use other legal means to stop the sale, the lender may conduct a public auction.
  • The highest bidder receives unencumbered title to the property.
  • There is no redemption right in non- judicial foreclosure.

Judicial foreclosure allows the sale of the mortgaged property under the supervision of the court, with the proceeds going first to satisfy the mortgage, then other lien holders, and finally the borrower if any proceeds are left.

If a borrower has failed to meet loan obligations in spite of proper notice and applicable grace periods, the lender can accelerate the loan, or declare that the loan balance and all other sums due on the loan are payable immediately.

In the foreclosure suit, a lis pendens gives public notice that the mortgaged property may soon have a judgment issued against it. This notice enables other lienholders to join in the suit against the defendant.

The court’s writ of execution authorizes an official, such as the county sheriff, to seize and sell the foreclosed property.  

After public notice of the sale, the property is auctioned to the highest bidder.

The right to redeem property between the time of the default and the foreclosure sale is called the equitable right of redemption.

A borrower in default in Illinois may exercise equitable right of redemption to avoid losing a mortgaged property provided the right is exercised within 7 months after the date of service on the borrower or after first publication date, whichever is later. 

If the right is invoked, the foreclosure sale does not occur. 

A borrower may remain in possession of the property for 30 days after a judgment is entered, but owes rent to the holder of the certificate of sale.  

There is no statutory right of redemption in Illinois. 

Illinois mortgagors have statutory right of reinstatement, if not redemption.

  • The borrower may exercise statutory right of reinstatement for 90 days after service of summons or publication date.
  • The statutory right of reinstatement may be exercised only once every 5 years.
  • If reinstatement occurs, the lender must dismiss the suit and the mortgage continues in effect as if no foreclosure had been undertaken.

If the default is not cured by equitable right of redemption or statutory right of reinstatement, the judicial foreclosure will move forward. This leads to a judicial sale, also called a sheriff’s sale.

The winning bidder receives a certificate of sale, not a deed.

The lender may be able to get a personal judgment against the borrower for what is left unpaid – deficiency judgment.

As an alternative to foreclosure, the lender may accept a deed in lieu of foreclosure from the borrower. With this option a borrower voluntarily deeds collateral property in exchange for a release from all obligations under the mortgage. 

  • The immediate release from personal indebtedness.
  • The borrowers may receive more generous terms.
  • The borrowers’ credit is hurt less.

The advantages to the lender include: 

  • A reduction in the time and cost of a repossession
  • Lower risk of borrower revenge in terms of the property’s condition

Once bankruptcy proceedings are underway, a court-appointed trustee or receiver takes control of the assets and liquidates them to pay claims against the debtor. The debtor is discharged from liability on debts then owed, except for some that are exempted.

  • Chapter 7, the most common type is based on an income means test; the debtor must basically be unable to repay most or all of the debts.
  • Chapter 13 reorganizes debts. The debtor makes full or partial payments in accordance with a repayment plan. This solution allows creditors to receive at least some payment.

Some of the key exemptions in Illinois law are:

  • Homestead exemption– for state allowed amounts of the value of the debtor’s home
  • One motor vehicle up to of state determined value
  • Tools the debtor needs to conduct his or her profession
  • Alimony and child support

The voluntary bankruptcy process begins with filing a petition.

  • In a Chapter 7 bankruptcy, the trustee then sells the nonexempt property, distributes the proceeds to creditors, and the court grants the discharge.
  • In a Chapter 13 bankruptcy, the bankruptcy trustee then holds a meeting with the creditors to work out a repayment plan.

After the discharge is granted, creditors cannot make any further collection attempts.

Some Results

  • Bankruptcy generally does not extinguish liens against the debtor’s property.
  • Bankruptcy of either party to a listing agreement terminates the agreement.
  • Once a person has declared bankruptcy, there is a limited ability to file again.
  • A person filing for either Chapter 7 or 13 bankruptcy must go through credit counseling.

Chapter Summary: 

Predatory Lending and Mortgage Fraud

A predatory lender is one who literally “preys” on customers who may fall into the “B,” “C” or “D” lending categories, particularly those who do not speak English, are poorly educated or are elderly.

Predatory lending practices can leave victims homeless and defeated, stripped of self-respect and hope, their credit ruined.

When lenders provide loans to unqualified homebuyers, those lenders are giving subprime loans. 

The major problem with a balloon payment loan is that the borrower has to come up with a large sum of money at the end of the term.

Loan flipping generally refers to repeated refinancing of a mortgage loan within a short period of time with little or no tangible net benefit to the borrower.  

Once a borrower consolidates other loans with his home payments, the borrower could actually lose the home for not having enough money to pay off a credit card or make the car payment.

There should never be any exchange of money under the table or any deals on the side in a loan transaction. 

Examples of mortgage fraud include:

  • Occupancy fraud
  • Income and employment fraud
  • Failure to disclose liabilities
  • Appraisal fraud
  • Fraud for profit
  • Cash-back schemes
  • Shotgunning
  • Undisclosed kickback
  • Silent mortgage
  • Loan fraud
  • Earnest money fraud

Chapter Summary: 

Credit Scores and FICO

The three national credit bureaus – Equifax, Experian and TransUnion.  

A credit report contains the following information:

  • Personal
  • Account histories
  • Public information
  • Inquiries
  • Alerts
  • Consumer statement
  • Summary

The Fair and Accurate Credit Transactions Act (FACTA) gives consumers the right to one free copy of their credit report per year from each of the three bureaus.

A consumer who finds an error in a credit report is entitled to write the credit bureau that issued the report and ask for an investigation. 

If a dispute remains unresolved, the consumer is entitled to have a statement of the dispute included in the credit file and in future reports. 

A loan applicant’s credit score is used to set interest rates, loan amounts, and other costs of a loan.

  • It provides lenders with a measure of risk in issuing a loan.
  • Basically, the higher the credit score, the lower the risk.

Some banks have begun to reduce their reliance on FICO scoring.

Consumers can purchase a copy of their credit scores when requesting a free annual credit report or by contacting the credit bureaus directly. 

Credit scores are based on five factors in an applicant’s credit history:

  1. Payment history
  1. Credit utilization
  1. Length of credit history
  1. Recent inquiries
  1. Types of credit

Other factors that can negatively affect the FICO score:

  • Money owed because of a court judgment.
  • One or more recently opened consumer finance credit accounts.

Applicants can improve a sub-par FICO score by:

  • Paying bills on time
  • Keeping credit card balances low and limiting number of open accounts

Chapter Summary: 

Listing Agreements

Most listing agreements are bilateral – the owner hires the broker and promises to pay a commission in exchange for the broker’s promise to locate a ready, willing and able buyer or tenant. 

Listing agreements must be in writing to be enforceable. All listing contracts must contain a definite termination date.

Under the exclusive right to sell, the broker has the exclusive right to market the property for a specified period. If the property sells while the broker has the listing, the seller must pay the agreed-upon commission, regardless of who actually procured the buyer (who was the procuring cause).

The exclusive agency gives a broker the right to market and sell a property for a specified time period, while the owner retains the right to find a buyer and sell the property without owing the broker a commission. 

An open listing (nonexclusive or general listings) allows the property owner to list with as many brokers as they like – unilateral contact.

  • Only the one broker who brings the ready, willing and able buyer to the seller or who finds the right property for a buyer will receive the commission.
  • A buyer could make a purchase himself without having to pay any commission to any broker.

In a net listing, an owner sets a minimum amount that he wants to receive from the sale of the property and lets the brokerage firm have as commission any amount above the set minimum.

Net listings are not illegal in Illinois, but they are discouraged. 

Most multiple listing services provide for the expression of the commission to be paid by the listing brokerage firm to the selling brokerage firm upon the sale of each of the listed properties.

Many multiple listing contracts both authorize and obligate the listing broker to submit the listing to the MLS within a specified period of time, so that it will be available for the other members.

Due to the popularity of the Internet, many brokers showcase their listings on their own web pages.

Every listing agreement should have at least these four components:

  1. An identification of the property
  1. A promise of compensation to the broker
  1. The specifics of that compensation
  1. Written document with signatures of the seller or sellers

The agreement is actually a contract between the managing broker and the seller.

Once the listing agreement has been completely filled out and signed, the seller must receive a copy of the document at the time the signatures are obtained.

Since the listing agreement is a valid contract once all parties have signed it, it can only be modified with the written consent of all the parties.

If the broker dies, loses his license, or the firm goes out of business, all the broker’s listings will terminate.

If the listing agent transfers to another firm, the listing agreement will stay with the original broker.

Chapter Summary: 

Property Management Agreements

A property manager must understand that the owner is interested in the highest return from the property and the tenants want the best value for their money.

In general, a property manager is responsible for:

  • Renting the units promptly at the highest market rent possible
  • Keeping operational and other costs within budget
  • Preserving and enhancing the physical value and prestige of the property

If the person or company is working for more than one owner, that person or company should have a real estate license.

There are several types of property managers:

  • An individual property manager is usually a real estate broker who manages properties for one owner or a number of owners.
  • An individual building manager usually manages a single large property.
  • A resident manager lives on the property and may be employed by a real estate broker, a managing agent or an owner to manage a property on a part-time or full-time basis.
  • A real estate asset manager acts as the property owners’ agent and adviser for the property.

The property management agreement should be signed and dated by the parties.

  • Identification of the Parties
  • Property Description
  • Duration of the Agreement
  • Definition of Manager Responsibilities
  • Definition of Owner Responsibilities
  • Extent of Authority
  • Accounting Responsibilities
  • Insurance and Risk Management
  • Reporting Requirements
  • Management Fee
  • Agreement Termination

A property manager is usually a general agent because of the authority vested in him by the principal.

The property manager’s first responsibility is to realize the maximum profit on the property that is consistent with the owner’s instructions.

A property manager should establish three types of budgets for each rental project.

  1. Operating budget – This annual budget includes the income and expenses for ongoing operations.
  1. Capital reserve budget – A plan to finance long-term outlays. It includes variable and capital expenses.
  1. Stabilized budget – A forecast of income and expenses that can be projected over a short period of time, usually five years.

There are basically three types of maintenance.

  1. Preventive maintenance is a schedule of planned maintenance actions aimed at the prevention of breakdowns and failures.
  1. Corrective maintenance involves the repair or replacement of components which have failed or broken down.
  1. Construction involves remodeling, interior redecorating or new capital improvements.

The property manager must set up and maintain proper records, making regular reports, called property management reports, to the owner that are easily understandable and that cover all operations.

A property manager should provide the owner with:

  • Monthly account statements
  • Delinquent accounts
  • A detailed annual statement

Several organizations offer training courses for property managers.

  • IREM offers both educational and professional programs in property management.
  • BOMA promotes the interests of the real estate industry through various programs.

Chapter Summary: 

Purchase Agreements

A valid contract is one that is legally enforceable by virtue of meeting certain requirements of contract law.

A void contract is an agreement that does not meet the tests for validity, and therefore is no contract at all. If a contract is void, neither party can enforce it.

A voidable contract is one which initially appears to be valid, but is subject to cancellation by a party to the contract who is believed to have acted under some kind of disability.

Contracts may be also be classified as being:

  • Oral or written
  • Express or implied
  • Unilateral or bilateral
  • Executed or executory

A contract is valid only if it meets all of the following criteria.

  • Competent parties
  • Mutual agreement
  • Lawful objective
  • Consideration
  • In writing

Termination of a contract may occur for:

  • Performance
  • Infeasibility
  • Mutual agreement
  • Operation of Law

A real estate contract that is not a personal contract for services can be assigned to another party unless the terms of the agreement specifically prohibit assignment. 

The damaged party may elect the following legal remedies:

  • Rescission
  • Forfeiture
  • Suit for damages
  • Suit for specific performance

Sometimes a contract does not accurately reflect the intentions of the parties because of some mechanical or clerical error in the document. When this happens a legal action called a reformation is necessary to correct or modify the contract. 

The mutual consent needed for a contract to be valid is reached through the process of offer and acceptance.

When a counteroffer is made, the original offer terminates and the counteroffer in effect becomes a new offer.

The earnest money deposit is not required to make the contract valid, but shows that the buyers are serious about their offer.

A typical rider in a real estate contract is a contingency rider for an inspection or one that deals with the buyers’ need to sell their current residence. 

A time is of the essence rule is stated in most purchase and sale agreements.

Installment sales contract

  • During the period, the vendor retains legal title and the vendee acquires equitable title.
  • At the end of the period, the buyer pays the vendor the full purchase price and the vendor deeds legal title to the vendee.

Like an option, a contract for deed offers a means for a marginally qualified buyer to acquire property. A buyer may avoid conventional down payment and income requirements required by institutional lenders.

A contract for deed serves two primary purposes for a seller.

  • First, it facilitates a sale that might otherwise be impossible.
  • Second, it may give the seller certain tax benefits.

An option to buy places the optionee under no obligation to purchase the property.

A renter with a lease with option to buy can accumulate down payment funds while paying rent to the landlord.

A right of first refusal is the right of a person to have the first opportunity to purchase or lease a property.

Letters of intent are generally not binding and unenforceable.

You use an amendment to change an existing contract. 

All changes to the original contract should have a paper trail of signed amendments by all parties in the transaction.

Chapter Summary: 

Earnest Money and Escrow

An earnest money deposit is not required for a contract to be valid.

Sponsoring brokers who are responsible for earnest money deposits for property sales must establish escrow accounts in which to deposit the funds they have been given. 

. An escrow account must be non-interest bearing.

. If an interest-bearing account is required, the sponsor broker must indicate in writing who will be receiving the interest from the account.

. A sponsoring broker may maintain more than one escrow account, but it is not necessary to open a special escrow account for each earnest money deposit received.

. All escrow accounts must be maintained at a federally-insured depository.

. Commingling is an illegal act in which a real estate licensee places client or customer funds with his own personal funds.

. All licensees should immediately give earnest money checks to their sponsoring broker.

. Earnest money must be deposited by the next business day of receipt by the broker.

When a transaction has consummated or terminated, the sponsoring broker must disburse the funds according to the terms of the contract.

. No earlier than the day of the transaction

. Not later than the next business day after the transaction is consummated or terminated

Only the sponsoring broker or authorized agent is permitted to withdraw funds from the escrow account.

If an interpleader action is filed by the sponsoring broker, and the broker is so authorized by the real estate contract, he may withdraw from the escrow account the amount of money needed to reimburse the sponsoring broker for costs and reasonable attorney’s fees.

Funds become unclaimed in either of these circumstances:

. Five years have passed.

. Six months have elapsed since the sponsoring broker has received a written demand from one of the principals or the principal’s authorized agent.

Each sponsoring broker who accepts earnest money must maintain a bookkeeping system that complies with sound accounting principles.

Each sponsoring broker must keep a Master Escrow Account Log identifying all escrow bank account numbers and the name and address of the bank where the escrow accounts are located.

The sponsoring broker must keep a journal for each escrow account. This journal must show the chronological sequence in which funds are received and disbursed by the sponsoring broker. 

The sponsoring broker will maintain a ledger for each transaction.

Monthly Reconciliation Statement

. The sponsoring broker must reconcile each escrow account that he maintains, within ten days after he receives the monthly bank statement.

. The sponsoring broker must keep the documentation of the reconciliation for at least 5 years.

Additional rules that apply to escrow records:

. Except as otherwise provided by law, the broker must keep copies of all escrow money instruments received from a principal.

. A sponsoring broker must keep all escrow records for 5 years. 

. If escrow records are lost, the sponsoring broker must report the loss to the Division within 48 hours.

. A sponsoring broker may delegate the bookkeeping duties.

. A sponsoring broker may transfer escrow moneys needed for a particular closing to that transaction’s closing agent up to 2 business days prior to the scheduled closing date.

No sponsored licensee may maintain his own escrow accounts. 

No office is permitted to transmit escrow moneys to another office.

A property manager must maintain all security deposits in an escrow account for the duration of the lease, unless the tenant waives this requirement in writing. If such a waiver is included in the lease, it must be in bold print. 

If the sponsoring broker makes a change to an escrow account, the broker must submit a new form to the Division within 10 days of the change.

Updated information shall not be required each time a new escrow account is opened for an individual transaction when the account falls under an umbrella account that has already been identified.

Chapter Summary: 

Presenting and Negotiating Offers

It’s critical to include all the buyers’ terms in the original purchase and sale agreement, because once the document is signed by both buyers and sellers, it becomes a binding contract. 

An offer with many contingencies could cause the sellers to worry that the transaction will have many bumps along the way and may not close smoothly – if at all.

Buyers who have been pre-approved by a lender are more attractive prospects to the sellers, so their offer could be given greater weight.

You can fill in the blanks on all the standard, approved forms and associated addenda, but you cannot charge a separate fee for performing this service.

Once you have reviewed the entire document with the buyers, have them sign and date it and give them a copy immediately.

When writing the purchase and sale agreement, there may be some areas that could pose questions.

. Property Description 

. Payment Method 

. Contingencies or Other Special Arrangements 

There may also be occasions when your broker will want you to get the advice of an attorney.

. Your broker is unavailable and you have a pressing question.

. The buyers are requesting special terms that are not addressed.

. The buyers want to include a legal document.

If you are the selling agent, take time to go over the entire offer with the listing agent to be sure he understands exactly what the buyers are offering.

If you do go to the presentation meeting, you must disclose your agency status to the sellers.

By law, you must present all offers you receive as soon as possible.

Sellers cannot accept an offer over the phone, but they can certainly reject one. 

Before you go to the appointment, you may want to prepare additional documentation to support the offer.

. Complete a worksheet that will estimate the seller’s net.

. Do another comparative market analysis.

When you receive an offer of a property, you need to set up a meeting with the sellers to present it. Organize your presentation to cover:

. A brief review of what has happened over the life of the listing

. Information about the buyers

. The offer itself.

Be sure that when you talk about the buyers, you say nothing that could be a violation of fair housing laws.

Remember to advise the sellers that price is not the only important option. 

. Proposed closing date

. Proposed possession date

. Contingencies

If you believe that the offer you are presenting is a reasonable and fair offer, your goal should be to seek the sellers’ acceptance rather than a counteroffer.

A counteroffer is a rejection of the original offer and the beginning of a new offer.

Once an offer is accepted, a contract is legally formed. Both parties are bound to complete the contract.

Here are some important tips to follow when drafting a counteroffer.

. Don’t exert pressure on your clients to include something the other party wants.

. When changing important terms, rewrite the whole paragraph so it will be clear.

. Be sure to date and properly attach any supplements.

. Make sure the document is signed properly.

The counteroffer becomes a new offer and the buyers have no obligations under the original offer.

An offer is not a valid contract until it has been accepted and the person who made the offer is notified of the acceptance. The acceptance must be in writing.

If the party wants a change in terms, you’re looking at a counteroffer, not an acceptance. 

Once the purchase and sale agreement becomes a valid contract, no changes can be made to it without the written consent of both the buyers and the sellers.

If the buyers and sellers mutually agree that they want to cancel the purchase and sale contract, they may do so at any time.

Chapter Summary: 

Closing the Transaction

The three primary objectives of closing on a property are:

  1. Provide the buyer a marketable title.
  1. Give the seller the purchase price.
  1. Handle any other items which need to be addressed between the two parties.

In a face-to-face closing, the aforementioned issues are resolved during a single meeting involving all the parties and their attorneys, while in an escrow closing, the parties may never meet.

The Real Estate Settlement and Procedures Act (RESPA) requires that the parties to certain transactions receive the correct figures pertaining to their closing costs.

RESPA specifically prohibits any payment or receiving of fees or kickbacks when a service has not been rendered. 

Disclosures before Closing

  • Affiliated Business Arrangement Disclosure
  • Closing Disclosure

Disclosures at Closing

  • Settlement Statement
  • Initial Escrow Statement

Disclosures after Closing

  • Annual Escrow Statement
  • Servicing Transfer Statement

In Illinois, licensees are prohibited from completing formal closing statements.

Closing Regulations

  • All parties should receive complete and accurate statements.
  • In a co-broker transaction, the brokers for the buyer and the seller must retain legible copies of both the buyer’s and seller’s signed closing statements.

The closing statement is a detailed accounting of the transaction that is prepared before closing by whoever will be the closing agent.

  • A debit is money that the buyer or seller needs to pay at closing.
  • A credit is money that the buyer or seller receives at closing, either because it was already paid, it’s being reimbursed, or there a promise to pay.

Prepaid expenses are those that were paid for in advance, so the buyer will owe the seller part of the payment.

Accrued expenses are those expenses that the seller incurred but have not yet been billed for at the time of closing. These items are paid in arrears.

The 12 month/30 day method calculates the amounts due based on a 360-day year and a 30-day month.

  • Identify an item and the amount needing to be prorated.
  • Divide by 12 to get the monthly rate. Divide by 30 to get a daily rate.
  • Multiply the monthly rate by the number of months the seller owned the property before closing to get the months-amount due. Do the same for the number of days.
  • Add the two amounts to get the prorated amount for the seller.
  • Subtract the seller’s prorated amount from the starting amount to get the buyer’s prorated amount.

The 365-day method calculates the amounts on the basis of a 365-day year.

Illinois also allows the calculation of prorations using a third method called the statutory month variation method.

  • The yearly charge is divided by 12 to determine a monthly amount.
  • The monthly charge is then divided by the actual number of days in the month in which the closing occurs.
  • The final number is the daily charge for that month.

In Illinois, real estate taxes are paid in arrears; that means the taxes are paid in the year after they become a lien. 

If a lender discovers that any part of a loan application or a purchase contract is false (and was done so deliberately), the borrower or the agent could be liable for fines or jail time. 

  • Undisclosed kickback
  • Silent mortgage
  • Loan fraud

Chapter Summary: 

Leases and Security Deposits

A lease is both an instrument of conveyance and a contract between principal parties to uphold certain covenants and obligations.

Leasehold estates are distinguished from freeholds by their temporary nature.

Estate for Years

  • Has a definite beginning and ending date.
  • Not necessary to give notice to the landlord to terminate.
  • No automatic renewal. When this type of lease is over, it’s over.
  • Commonly used with commercial leases and some apartment leases.

Estate from Period to Period

  • Requires proper notice to terminate – 30 days, 60 days or whatever is agreed to in the lease.
  • No definite ending date.

Estate at Will

  • Has no time limit. Can be terminated by either party at any time, with proper notice.
  • The possession is given with permission but there is no agreement about the rent.

Estate at Sufferance

  • This estate is created when a tenant takes legal possession of the property but then remains on the property without the owner’s consent after the lease terminates.
  • A tenant who doesn’t leave when the lease expires is called a holdover tenant.

Tenant’s rights:

  • Exclusive possession and occupancy
  • Exclusive use
  • Quiet enjoyment
  • Profits from use

Tenant’s obligations:

  • Pay the rent on time
  • Maintain the property’s condition
  • Comply with the rules and regulations of the building

Landlord’s rights:

  • Receive rent
  • Re-possess the property following the lease term
  • Monitor the tenant’s obligations to maintain the premises

Landlord’s obligations:

  • Provide the necessary building support and services
  • Maintain the condition of the property

The landlord may sell, assign, or mortgage the leased fee interest.

The following eight covenants are essential in a lease.

  • Capacity to contract
  • Demising clause
  • Description of the premises
  • Clear statement of term
  • Specification of rent and how it is to be paid
  • In writing
  • Signatures
  • Delivery

Chapter Summary: 

Independent Contractor Agreements

A broker can hire a sales associate or broker associate as:

. An employee works under the supervision and control of the broker.

. An independent contractor is hired to perform certain acts, but the broker cannot control how the licensee performs those acts.

The main difference between the two is an issue of control, as established by income tax laws.

Facts that provide verification of the level of control and independence fall into three categories:

. Behavioral

. Financial

. Type of Relationship

A broker can tell the independent contractor what to do, but now how to do it. 

When negotiating a contract:

. What are the start-up costs?

. Who pays the expenses?

. What is the commission schedule?

The IRS requires the safe harbor test to establish that a person is indeed an independent contractor.

. The person must be a properly licensed real estate agent.

. Gross income must be based on production and not on hours worked.

. A written agreement must exist. 

The broker can choose to pay the broker a salary or a percentage share of the commission from the transaction.

If a licensee lists and sells a property, he or she will receive a share of both the listing and selling side commissions.

Every broker is required, by law, to have a written employment or independent contractor agreement with every sponsored licensee. It must include:

. Supervision

. Duties

. Compensation

. Duration

. Termination 

Chapter Summary: 

Residential Appraising

An appraisal is an unbiased estimate of the nature, quality, value or utility of an interest in or aspect of identified real estate and related personalty as of a certain date. 

A comparative market analysis is not an appraisal. CMAs are done by real estate licensees.

Appraisals are done to determine value.

Investment value is the amount of the return on an investment that an income-producing property will produce.

Insured value is the face amount a casualty or hazard insurance policy will pay in case a property is deemed unusable.

Use value of a property is the value the property holds for the owner. Several factors contribute to this value.

  • Income
  • Appreciation
  • Use
  • Tax benefits

Mortgage value is the value the lender places on a property as collateral for the loan, especially in the event of a foreclosure. 

Other types of value include:

  • Exchange value – The value that results from comparing the property to other similar properties on the open market.
  • Reproduction value – The value based on the cost of constructing a precise duplicate of the subject property’s improvements, assuming current construction costs.
  • Replacement value – The value based on the cost of constructing a functional equivalent of the subject property’s improvements, assuming current construction costs.
  • Salvage value – The nominal value of a property that has reached the end of its economic life.
  • Assessed value – The value of a property as estimated by a taxing authority as the basis for ad valorem taxation.
  • Condemned value – The value set by a county or municipal authority for a property which may be taken by eminent domain.
  • Depreciated value – A value established by subtracting accumulated depreciation from the purchase price of a property.
  • Rental value – An estimate of the rental rate a property can command for a specific period of time.

Evaluation looks at a number of economic principles that influence the value of a property.

  • Supply and demand – properties on the market and demand for property interact in a cycle to affect price and value.
  • Transferability – quality of title, ease of transfer of ownership rights.
  • Diminishing Return –a result of continuing to add improvements to a property when those improvements will have no effect on increasing the value of the property.
  • Anticipation – future benefits expected over a holding period.
  • Substitution – buyer will pay no more for one property than for a comparable and available substitute.

Evaluation looks at a number of economic principles that influence the value of a property (continued):

  • Contribution – change in market value of a property due to a particular improvement.
  • Change – fluctuations in market conditions affect benefits.
  • Highest and best use – must be legally permissible, physically possible, financially feasible, and maximally productive.
  • Conformity – conformity in form and use to surrounding properties produces maximal income and value.
  • Progression and regression – increase (progression) or decrease (regression) of value due to quality of adjacent properties.
  • Assemblage – combining properties to create a value greater than the sum of the parts.
  • Subdivision – dividing a property to create a value greater than that of the single property.

Market value may be defined as the highest price a buyer would pay and the lowest price a seller would accept for a property at a given time and given certain conditions in a particular marketplace.

  • The market is open and competitive.
  • The property is exposed in the market for a reasonable period of time.
  • Both buyer and seller are fully aware of market conditions.

The market value is an opinion of the value of a property based on analyzing data collected about the property. 

The market price is the actual sales price. 

There are basically two types of costs:

  1. Direct costs are also called hard costs. This includes the cost of labor and materials.
  1. Indirect Costs are the costs that support a given project.

When getting ready to do a CMA, a licensee will do the following:

  • Collect and analyze information about the seller’s property.
  • Choose comparable properties in the area.
  • Compare the seller’s property to the comparables and do some adjusting to the value of the comparables.
  • Estimate a reasonable and realistic selling price for the seller’s property.

When collecting information about the seller’s property for analysis, the licensee should focus on:

  • The neighborhood
  • The home site
  • Existing property improvements

Recently Sold Properties

  • The more recent the sale, the more reliable the indication of comparable value; aim for past three-six months.
  • Best predictor of market value of seller’s property – also shows original listing price, days on market

Pending Sales

  • Offer accepted but transaction not yet closed; may be pending for 30-60 days.
  • Not as reliable as sold property because final sales price is not known, only the listing price.

Active Listings

  • Show level and intensity of competition, but not real price information.

Expired Listings

  • Show that asking price was too high; can be used to set upper limit of price range.
  • Expired listing that was relisted and sold provides good indication of price for seller’s property.

Other Considerations:

  • Buyer Appeal
  • Market Position
  • Assets
  • Drawbacks
  • Area Market Conditions
  • Recommended Terms
  • Market Value Range

When doing the residential market analysis, the licensee has a number of responsibilities.

  • Competence
  • Diligence
  • Documentation
  • Effective communication

When a site is unimproved, studies are usually done to determine its highest and best use and its ultimate ability to be sold.

When doing a site valuation, the developer looks at the total usable square footage of the parcel.

The sales comparison approach 

Since no two properties are exactly alike, the appraiser must compare the similarities and differences among the properties and then make adjustments to the sales prices of the comparable properties to account for the differences.

If the comparable is better than the subject property, some amount is deducted from the sale price of that home. 

Appraisers make the adjustments based on these criteria.

  • Date of Sale
  • Location
  • Physical Characteristics
  • Transaction Characteristics
  • Sale Conditions

The sales comparison approach is deemed to be the most reliable for appraisals of single-family homes. 

The cost approach is most reliable for properties that were built recently.

The cost approach attempts to estimate either the property’s replacement cost or reproduction cost.

The cost approach has five steps:

  1. Estimate the value of the land as if it were vacant and available for its highest and best use.
  1. Estimate the cost of improvements – either replacement or reproduction cost.
  1. Estimate the accrued depreciation that results from physical deterioration, functional obsolescence or external obsolescence.
  1. Subtract the depreciation total from the estimated cost of improvements.
  1. Add the land value to the depreciated cost to get the total estimated value of the property.

When computing the reproduction or replacement cost of a building:

  • Unit Comparison Method (Square-Foot Method)
  • Unit-In-Place Method
  • Quantity Survey Method
  • Index Method

To determine depreciation, many appraisers use the breakdown method.

Appraisers tend to use the straight-line method to estimate accrued depreciation because it is easier than the breakdown method, but it’s also less precise.

The straight-line method is also called the economic age-life method and assumes that depreciation occurs at a steady rate over the economic life of the property. This method is primarily useful when estimating depreciation from physical deterioration.

Appraisers use the income approach to estimate the value of properties that produce income, usually from rent paid on leases. 

The downside is that it is often difficult to determine an appropriate capitalization rate and the needed information about income and expenses can be hard to find.

The income approach has five steps.

  1. Estimate the potential gross income.
  1. Estimate the effective gross income.
  1. Estimate the net operating income.
  1. Select a capitalization rate.
  1. Apply the capitalization rate.

Preparing the CMA

The licensee will use the differences in those factors to make small adjustments to either the sale price or the listing price of the comparables. 

The licensee will determine an estimated value for specific home features and will either add or subtract those values from the sale or listing price of the comparables. 

If a comparable lacks a feature that the seller’s property has – for example, the comparable has one less bathroom than the seller’s property – the licensee will add the value of the feature to the price of the comparable. 

The licensee should give the seller a listing range and then the seller can set the price to whatever he or she feels comfortable with within that range. 

The use of a CMA form could go a long way in correcting any misconceptions the sellers might have about market values in their neighborhood.

Chapter Summary: 

Property Management Relationships and Responsibilities

Under Illinois law, there must be a written property management agreement between the property owner and the broker in a property management relationship.

A management agreement is a binding contract that establishes the manager’s legal authority over the operation of a given property.

The number one responsibility of the agent is, in all activities, to strive for the highest return on the property in the manner that is according to what the principal has instructed.

Every written property management agreement must:

  • State the owner’s purpose for hiring the property manager.
  • State what type of reports, and at what frequency, the manager must provide these to owners.
  • Specify the handling of the property manager’s expenses.
  • State the amount of fee or commission to be paid and when.

You may not standardize fees in the marketplace via price-fixing or other illegal acts.

It is best not to form a management agreement that will be valid for less than one full year.

Property management contracts also will include:

  • The authority to pay operational expenses, mortgage payments, taxes, insurance, and other costs;
  • The power to provide all management services;
  • The requirement to submit monthly statements;

It is the responsibility of the licensee to give to the owner a legible copy of every written agreement at the time the signature of the owner is obtained. The licensee’s broker must keep a copy.

Property manager’s duties:

  • Loyalty, Confidentiality, Honesty
  • Reasonable Care and Skill
  • Performance Appraisals

The good tenant:

  • Pays the rent on time, every time.
  • Takes care of the property and treats it as if he owns it.
  • A good tenant is unobtrusive, does not disturb neighbors or complain too much.

Finding Good Tenants:

  • Check the tenant’s rental history.
  • Verify the employment history.
  • Obtain their financial information – sign a confidentiality agreement.
  • Pull a credit report.

If the credit report shows a negative score and the landlord rejects the applicant as a result, the Fair Credit Reporting Act mandates that the landlord notify the person and inform them of the bad report. 

Tenant Red Flags:

  • Past criminal convictions
  • Repeated late payments
  • Too much debt
  • No financial cushion
  • Instability

Tenant Relations Issues

  • Beware of renting to friends and relatives; they will pressure you to relax the rules for them.
  • Do not develop a romantic relationship with a tenant or employee.
  • You are not responsible for complaints about loud noise or domestic disturbance.
  • If a tenant damages the property, the tenant needs to repair it at his or her expense.
  • If a tenant makes a late payment, call and ask why it is late and remind the tenant that there is no grace period for paying the rent on time.

Keeping Good Tenants

  • Avoid raising the rent when it comes time to renew.
  • Keep the property in excellent repair and cosmetically appealing condition.
  • Pay attention to issues raised by good tenants and respond to maintenance requests promptly.
  • Do not interfere in their lives

One way to keep good tenants happy is to allow them to make changes to the unit. 

You must develop a core of dependable, reasonably priced contractors. Beware of the low-ball bid; lower is not always better. 

  • Using trustworthy recommendations
  • Investigating contractor backgrounds
  • Ensuring they are licensed and bonded

Chapter Summary: 

Legal Considerations

Discrimination based on the following reasons is prohibited:

  • Race or color
  • National origin
  • Religion
  • Sex
  • Familial status
  • Handicap

Licensees can be exposed to discrimination liability by applying different standards to different parties in the areas of:

  • Housing availability
  • Professional services
  • Qualifying information

In certain circumstances, the Act exempts

  • Owner-occupied buildings with no more than four units
  • Single-family housing sold or rented without the use of a broker
  • Housing operated by organizations and private clubs that limit occupancy to members.

If an owner chooses to discriminate in housing, he must:

  • Not use a real estate professional
  • Not discriminate in advertising

Licensees should keep detailed records of all transactions and rentals in order to defend themselves against possible discrimination complaints.

According to the Illinois Human Rights Act, it is considered a civil rights violation for anyone to discriminate based on race, color, religion, national origin, ancestry, age, sex, marital status, physical disability, military service or familial status.

No one can be discriminated against in real estate in Illinois for being blind, hearing-impaired, or having a guide or support dog.

If the owner of any housing does either of the following acts, it is a civil rights violation:

  • Requires that the tenant not have children under 18 living with him;
  • Inserts a condition in the lease that ends the lease if a child under 18 is ever in the family living in the property.

Exceptions to the Illinois Human Rights Act:

  1. Private owners of single family homes
  1. Reasonable federal, state and local restrictions regarding the number of occupants.
  1. Religious organizations
  1. Private rooms in private homes
  1. Rental properties may allow discrimination based on sex in the event of roommates who share a common bathroom or bedroom.
  1. Housing for older persons

Illinois law generally requires a written eviction notice. The landlord must serve the tenant with the written notice before filing a court case.There are two exceptions to this:

  • A lease can waive the right to notice, as seen in the case of Frocks v. Ziff;
  • If the lease sets a fixed time for its expiration, then no written notice is required.

Local ordinances can also require written notice, as is the case in Chicago.

If the tenant gets the notice, improper service may be waived. 

The contents of such a notice must be as follows:

  • Premises Described
  • Notice of Termination
  • Certificate of Service

The following dates must be noted, as well:

  • Date of Service
  • Date of Termination

Even after the tenancy is terminated, the landlord still must proceed with a court order for the eviction. It is the termination of the tenancy that gives the landlord the right to file a court action seeking eviction. 

Under Illinois law, until the full notice period given for the notice runs, the landlord cannot file in court for an eviction action.

Landlord’s 5-Day Eviction Notice – A five-day notice is given for nonpayment of rent. It must state the amount of rent due and give five days for the tenant to pay the rent.

  • The notice must give a definite amount of rent as due and owing.
  • If the tenants can pay the rent due, they should tender the money.

A 10-day notice is given for violating any lease provision.There is no right to cure a 10-day notice under state law, though it can be cured under some local ordinances.

  • The notice to quit must state the nature of the lease violation; and that the tenancy is terminated.
  • The violation cited must be a violation of the lease, not a side agreement.
  • The Illinois Supreme Court has permitted the tenant to cure by tendering the rent within the 10-day period.

In the case of a month-to-month tenancy, the landlord may terminate it at any time by giving a 30-day notice. The landlord does not need to give any reason for terminating the tenancy.

Regarding annual leases, landlords are required to give a minimum of 60 days’ notice of the termination of a year-to-year lease, and no more than six months’ notice under Illinois law. 

Do not attempt to change or edit standard clauses in a lease, or prepare new clauses.

The property management escrow account is for the purpose of handling current rents, paying rents and commissions, and other third party deposits.

  • Security deposits must be deposited by the next business day after a lease is signed, and this must be recorded in the journal and ledger.
  • The account must be in a non-interest-bearing account, unless the property is residential with 25 or more units.
  • The owners of income property are not required to have escrow accounts for their tenants’ security deposits, even if the owner has a broker’s license.

Advertisements containing descriptions of properties (apartment complex with chapel), or services (kosher meals available) are not violations of the Act. 

Advertisements containing descriptions of properties (great view, fourth-floor walk-up, walk-in closets), services or facilities (jogging trails), or neighborhoods (walk to bus-stop) do not violate the Act.

Advertisements describing the conduct required of residents (“non-smoking,” “sober”) do not violate the Act.

Advertisements containing descriptions of accessibility features are lawful (wheelchair ramp).

Americans with Disabilities Act (ADA)

  • Title I of the ADA prohibits discrimination in all employment practices.
  • Under Title III of the Act, discrimination in commercial properties is prohibited.

A public accommodation is a private entity that owns, operates, leases, or leases to, a place of public accommodation.

Private clubs and religious organizations are exempt from the ADA’s title III requirements for public accommodations.

Housing need not be made available to a person who is a direct threat to the health or safety of others or who currently uses illegal drugs. 

Chapter Summary: 

Real Estate Calculations

Review

As a real estate licensee, you will need an understanding of the math principles and calculations that are used in real estate transactions. Since many people have been away from math for a while, a brief review of math basics including terminology, decimals, percentages, measurements, conversions, and formulas is provided.

Then problem-solving techniques along with practice problems are presented for calculating commissions, interest and loans, discounts on notes, prorating costs, and for calculating cost and selling price. Capitalization and investment problems are discussed as well as calculating area.

Key Terms

Annual. Taking place once per year.

Biannual. Taking place twice per year.

Biennial. Happening once every two years.

Bimonthly. Happening every 2 months.

Decimal. The period that sets apart a whole number from a fractional part of that number.

Dividend. A number to be divided by another number.

Divisor. A number by which another number is divided.

Interest. The amount charged for the use of money.

Monthly. Something that takes place every month.

Principal. The amount of money borrowed.

Proration. The process of making a fair distribution of expenses, through settlement, at the close of the sale.

Rate. The percentage of interest charged on the principal.

Semiannual. Something that happens twice per year at 6-month intervals.

Semimonthly. Happening twice a month.

Time. The duration of a loan.