FSBUs, Lenders, and Limited Representation Brokers

Posted on January 2, 2013 by AAR

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Real estate, as everyone knows, is a very hot market in Arizona these days, and there are any number of people looking for ways to “get a piece of the action.” Sometimes the procedures used are legal and sometimes they are not. One recent trend involves lenders who target “for sale by unrepresented seller” (FSBUS) properties for the purpose of holding open houses (where lender signage is displayed at the property and prospective buyers are met by the loan officer/non-owner). This is promoted as a marketing assist for the owners and the lender hopes to finance the purchaser.

The Department of Real Estate’s position is that a lender who is holding open houses and meeting prospective buyers for FSBUS is engaged in conduct that constitutes the practice of real estate and requires a real estate license. A.R.S.§ 32-2122(D) states “[a]ny act, in consideration or expectation of compensation, which is included in the definition of a real estate… broker, whether the act is an incidental part of a transaction or the entire transaction, constitutes the person offering or attempting to perform the act of a real estate broker… within the meaning of this chapter.” A.R.S.§ 32-2101(47) defines real estate broker as “… a person, other than a salesperson, who, for another and for compensation: (i) [a]ssists or directs in the procuring of prospects, calculated to result in the sale, exchange, leasing or rental of real estate or timeshare interests.” There may be other applicable portions of A.R.S. § 32-2101(47), as well, but in any event the lender is performing a service to facilitate the sale of the property of another in anticipation of compensation, which is real estate activity and requires licensure.

Another issue concerns brokerages that approach FSBUS for a “listing” that amounts to charging a flat fee to place the property on the Multiple Listing Service (“MLS”). The owners/sellers agree to pay the MLS-offered co-broke and agrees that the “listing” brokerage does not represent the owners. The owners/sellers are “on their own” unless they agree to pay additional fees for additional services. Arizona statutes do not prohibit “limited service listings,” where the seller pays the listing broker a flat fee to place the property in the MLS and agrees that the listing broker will perform no other services.

Although there are no statutes or rules that prohibit a real estate broker from limiting the service that the broker provides to a buyer or seller, A.A.C. R4-28-1101(A) states that “[a] licensee owes a fiduciary duty to the client and shall protect and promote the client’s interests.” Assuming that the seller in a limited service listing is in fact a “client” as that term is used in the Rule, the Rule can be interpreted to apply only to the extent of any written agreement between the broker and client on the services to be provided. Further, although A.A.C. R4-28-802(B) requires a broker to promptly submit all offers to the broker’s client, the broker may be released from this duty if otherwise provided in the listing agreement.

In regards to the buyer’s broker who wants to submit an offer to the seller, A.A.C. R4-28-1102, which states: “[e]xcept for owner listed properties, negotiations shall be conducted exclusively through the principal’s broker or the broker’s representative unless: 1. [t]he principal waives this requirement in writing, and 2. [n]o licensed representative of the broker is available for 24 hours” is an issue. However, the sellers and the limited service broker can satisfy this Rule by providing a written waiver (preferably in the listing agreement) and indicating (preferably in the MLS) that no licensed representative is available to present/negotiate the offer. If the waiver and indication that no licensed representative is available is not stated in the MLS, the buyer’s broker should ask the seller or listing agent for written confirmation prior to commencing negotiations.

Although a broker can limit the services the broker provides to a client, a broker cannot limit the regulatory authority of the Department of Real Estate. Therefore, a “limited service broker” is required to comply with all real estate statutes and rules, including A.R.S.§ 32-2151.01(A), which requires that “[e]ach licensed employing broker shall keep records of all real estate…transactions handled by or through the broker.”

Although lenders and brokers are licensed to perform certain functions, there are limitations and requirements governing their activities, and these limitations must be considered while developing new and innovative approaches to service the growing real estate market. A general rule to consider is, if in doubt, check it out. Contacting the Department of Real Estate for advice prior to implementing a new process may avoid problems and ease transitioning into untested waters.

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