New State Laws Assist, Confuse Professionals
Two major new California laws that will change the way real estate licensees and appraisers do business after Jan. 1 are creating some confusion along with expected future benefits.
A bright young principal of a Southern California realty firm took several courses on the new law affecting licensees but then admitted that because of its complexities, he still didn’t understand it.
Even so, he said, “Many people I’ve spoken to think it’s the best thing that’s happened legislatively because it will protect the broker.”
At the same time, proponents of the new law say it will protect home buyers and sellers. The law applies to residential real estate--single-family homes up to four-unit complexes.
William Pfeiffer, vice president and general counsel of the California Assn. of Realtors--which sponsored the legislation, said, “Basically, the new law was designed to provide consumers with a mandatory disclosure form that outlines various agency options available in a real estate transaction and explains the ramifications of each relationship.”
The form defines who represents the parties in a real estate deal and outlines the responsibilities as well as the rights of real estate agents in transactions.
By requiring buyers and sellers to sign the form, the law also protects agents and brokers. As the bright realty firm principal explained it, “As long as there are disclosures up front, there is no way buyers can come down the road and say they didn’t know that certain brokers were representing them.”
Because of the disclosure clause, a broker who only represents the buyer shouldn’t have to worry about getting a commission, he added.
The law stipulates that disclosure forms must be provided as soon as “practicable.” That means, Pfeiffer said, before sellers enter into a listing agreement and before buyers sign a purchase offer.
The disclosure form shows that the seller or buyer knows what licensees are representing them.
The law deals with the complicated and long-disputed subject of “agency,” or who represents whom in a transaction. The topic has been what Pfeiffer describes as “a source of debate, both within the industry and in the courts.”
“Dual agency,” in which a licensee can act for both buyer and seller, has been the most controversial agency type, with attorneys raising the question: “If we can’t represent both sides in a lawsuit, how can real estate brokers represent both sides in a real estate deal?”
Industry leaders have countered that unlike a lawsuit, a real estate transaction is not adversative and that dual agency, a widely practiced type of representation in real estate offices, has worked despite its having the greatest risk of liability.
Prompted Lawsuits
The question of agency, dual and otherwise, prompted so many lawsuits that real estate associations as well as government regulators began studying the issue about three years before James A. Edmonds Jr. took office in 1983 as California’s real estate commissioner.
Since then, he said, there has been nationwide interest in agency disclosure, with Hawaii already adopting a law similar to California’s.
Twenty-three states already have laws or rules relating to agency and real estate, and California has had a law for some time stipulating that a dual-agency deal cannot be performed without the knowledge and consent of both the buyer and the seller.
This law also applies to commercial/industrial transactions, which are exempt from the new law, primarily because of heavy lobbying.
A companion law, however, requires all real estate licensees to complete a three-hour continuing education course in agency as part of the existing 45-hour continuing education program required for license renewal, as of last July.
Educating Members
The California Assn. of Realtors also prepared the booklet, “Agency Legislation Compliance Manual, an Office Policy Guide for Realtors,” which is available, with sample disclosure forms, from local boards of real estate.
Local boards are also educating their members, and the Beverly Hills board is no exception.
It has had several seminars on the new law, but Jeff Hyland, its president, agreed that there still is some confusion. “Why is a good question,” he said, “because there is no difference (in the law or in practice) than there was before, except that after Jan. 1 the agency relationship must be in writing.”
Confusion also surrounds a new law that will affect real estate appraisers.
Known as the Certified Real Estate Appraisal Statute or Lancaster-Montoya Appraisal Act, it will require certain standards and guidelines whenever a certified real estate appraisal is prepared.
Edmonds said, “Some non-designated appraisers (those without professional designations) seem to think that (according to the law) a certified appraisal is needed before a loan can be closed, and this isn’t true.”
Lending institutions might require certified appraisals, however, and if they do, the appraisals must meet the standards of the new law, which was a response to recent difficulties faced by banks and savings and loans.
Came Under Fire
Edmonds, a designated appraiser himself (he is a member of the American Institute of Real Estate Appraisers), explained in a bulletin:
“Over the past several years, real estate appraisals and appraisers have increasingly come under fire as one of the causes of the instability of financial institutions around the country due to the acceptance or use of negligently or fraudulently prepared appraisals for loans secured by real property. As a result, there has been a clamor to do something about the situation.”
Ronald Buss, president of the institute’s Southern California chapter, called the new law “a step in the right direction, but a very small step.”
The law outlines criteria to be used in a certified appraisal, he acknowledged, “but it doesn’t say anything about the quality of those ingredients. It doesn’t include any educational requirements to show that the person has the ability to perform that appraisal.”
Educational Provision
Buss wouldn’t be surprised if some legislation is passed in California during the next year that would be more stringent, following an example prompted by the institute and passed into law in Louisiana. It requires minimum educational requirements and testing of appraisers and the establishment of a foundation to set up uniform appraisal standards.
“There is some movement for legislation in ‘88, tied to a carry-over bill,” Edmonds said, and while it isn’t yet mandated by law, his department is “trying to get major users of appraisal services to require certified appraisal reports using the standards in our new law.”
As for licensing appraisers, which some appraisal groups have suggested and Capitol Hill has been studying, Edmonds said, “I doubt that it will be considered in California for another year.” He has suggested that state legislators wait and see how the new appraisal law works.
