Renew Your Real Estate License...

Transcription

1 Your License to Success Since 1958! Renew Your Real Estate License... Everything you need is included in this book! STAY UP TO DATE WITH THE LATEST CORE LAW AND RULE CHANGES INTRO TO COMMERCIAL REAL ESTATE Could this be your new specialty? BPO ANYONE? THE INS AND OUTS OF VALUATION FOR REAL ESTATE PROFESSIONALS NEW VA FUNDING PROGRAMS HELP OUR HEROES BUY HOMES! PROPERTY INSURANCE Rough weather ahead for Florida homeowners FREE! SPECIAL BULLETIN ON SHORT SALES By Author Ken Harney included in this edition

2 A note from Lori Rodgers Instructor, Technical, & Administrative Support Call Toll-Free Support ADMINISTRATIVE: TECHNICAL: INSTRUCTOR: HELLO & WELCOME Welcome to the newest edition of the Bert Rodgers Schools 14-Hour Real Estate Continuing Education Correspondence Course. Enjoy our NEW format including real life case studies, larger print, and an expanded index. Study the book or e-book to fulfill your continuing education requirements, keep up-to-date with the latest law and rule changes, and learn about the trends impacting your profession. In addition, included in this book is a FREE Special Bulletin on Short Sales by Kenneth Harney. Rely on Bert Rodgers Schools for exclusive content, industry expert authors, and more than 55 years of experience a Florida tradition and your license to success! Warm Regards, Lori Rodgers Special Bulletin on Short Sales by renowned real estate expert and Bert Rodgers Schools author Kenneth Harney is included in this book. See page 101 to discover how you can use this opportunity to expand your market area and provide exceptional service to your customers. [email protected] [email protected] [email protected] THE AUTHORS Randy Schwartz, J.D. REAL ESTATE CORE LAW Module 1 Real Estate License Law, Florida Real Estate Commission Rules, and State and Federal Laws Affecting Real Estate Randy has over 35 years experience as an attorney in the real estate field. He was Bureau Chief for the Real Estate Bureau of the Orlando Office of the Florida Attorney General and served as the General Counsel for the Florida REALTORS for over 20 years. Currently he is in private practice in the Orlando area. Senator Nancy Detert PROPERTY INSURANCE Module 2 Property Insurance in Florida: Recent History and What the Future Holds Elected to the Florida Senate in 2008, Nancy also served in the House from , representing Southwest Floridians. During the last two decades she chaired more than a dozen local and national associations. Nancy has always made K-12 education a priority and is a recipient of numerous awards, including Legislator of the Year from the Florida School Boards Association. John Ruffier, J.D. COMMERCIAL REAL ESTATE Module 3: Introduction to Commercial Real Estate: Could This Be Your New Specialty? John is a commercial real estate attorney with Lowndes, Drosdick, Doster, Kantor & Reed in Orlando, FL. He represents lenders and also works with companies who acquire, develop and sell commercial real estate. In addition, John served as a member of the Florida Real Estate Commission from 2007 to Kenneth Harney FINANCE Module 4 New Financing Options: Veterans, Rural, and State Housing Mortgage Programs Ken is a nationally-syndicated columnist on real estate. In addition to his column, Ken writes for Inman News, an online real estate information service. He served a three-year term as a member of the Federal Reserve Board s Consumer Advisory Council and is the author of two books on mortgage finance and real estate. Francois Gregoire APPRAISAL Module 5 The Real Estate Professional s Role in Property Valuation Appointed by the Governor to the Florida Real Estate Appraisal Board (FREAB) in February, 2000, Frank served eight years, four as Chairman. He is Vice Chairman of the National Association of REALTORS Appraisal Committee and regularly appears as a speaker on appraisal and mortgage related topics. BERTRODGERS.COM

3 14-Hour Real Estate Continuing Education Course Edition 14.3 FREC (Florida Real Estate Commission) Course Approval # Required Continuing Education for Florida Sales Associates, Brokers, and Broker Associates 14-Hour Real Estate Continuing Education Course i

4 Acknowledgements The latest edition of our 14-hour continuing education course is a tribute to the multitudes of Florida real estate professionals who continue to rely upon our school. Since 1958, our family business mission remains the same - providing the highest quality education at an affordable tuition. The result is exclusive material authored by industry experts available only to Bert Rodgers Schools students. A heartfelt thanks to our authors: Randy Schwartz, J.D.; Senator Nancy Detert; John Ruffier, J.D.; Kenneth Harney, and Francois Gregoire. We recognize their expertise and appreciate their ability to effectively communicate the complexities of Florida and federal laws and rules. We would not be able to publish this course and fulfill our students educational needs without the outstanding team of professionals at Bert Rodgers Schools. This edition is dedicated to the memory of Joan Emshoff, a Bert Rodgers Schools Student Service Representative. Joan came to work every morning with a beautiful smile on her face. She truly enjoyed helping our students with their myriad of needs and also enjoyed keeping up with the activities of her co-workers and their families. She is genuinely missed. Finally, Bert Rodgers Schools would like to thank Mark Mazukki of Cre8tive Communications for his cover design of this edition as well as many of our promotions, Julie Wild of Wild Dezign for her typesetting talent, and Dean Brezinsky and his team at Action Printing for their quality print services. Lori J. Rodgers, President Bert Rodgers Schools of Real Estate, Inc. 2012, 2013 All rights reserved, including the right to reproduce this manual or any portion of this manual in any form, or to use it for teaching purposes without the express written consent of the copyright holder. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is provided with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. Bert Rodgers Schools of Real Estate, Inc. shall not be liable in any way for failure to receive and/or grade your answer sheet within any specific time period. It is your responsibility to ensure that you have complied with your license renewal requirements in a timely manner. Bert Rodgers Schools of Real Estate, Inc., recognizes and respects its students privacy. Course records are confidential, and the School does not sell or rent students names or other information to any company or organization. YOUR LICENSE TO SUCCESS is Registered in the U.S. Patent and Trademark Office Cover design: Cre8tive Communications Printed in the United States of America ii Bert Rodgers Schools of Real Estate, Inc.

5 Table of Contents 14-Hour Real Estate Continuing Education Course MODULE 1 Randy Schwartz, J.D. Real Estate Core Law: Latest Law and Rule Changes 1 Module 1 Review 25 Check Comprehension Answer Key 26 MODULE 2 Senator Nancy Detert Property Insurance in Florida: Recent History and What the Future Holds 29 Module 2 Review 40 MODULE 3 John Ruffier, J.D. Introduction to Commercial Real Estate: Could This Be Your New Specialty? 41 Module 3 Review 62 MODULE 4 Kenneth Harney New Financing Options: Veterans, Rural, and State Housing Mortgage Programs 63 Module 4 Review 73 MODULE 5 Francois Gregoire The Real Estate Professional s Role in Property Valuation 75 Module 5 Review 94 Content Updates 95 Module Review Answer Key 97 BONUS: Special Bulletin on Short Sales 101 Index 107 Final Examination Section 113 Online Instructions: How to Use E-Grading 121 Registration Form Instructions 122 Registration Form 123 Note: The Comprehension questions in Module 1 and the Module Review questions throughout the course are optional exercises intended to enhance your knowledge. You are not required to complete these exercises to obtain course credit. The Final Examination does not include material from the Content Updates or the Special Bulletin. 14-Hour Real Estate Continuing Education Course iii

6 Contact Information Bert Rodgers Schools of Real Estate, Inc. P.O. Box 4708, Sarasota, FL Administrative Support Ph: Fax: Technical Support Ph: Instructor Support Ph: ext Accounting Department Ph: ext Registration Forms and Answer Sheets Send completed forms to us by Mail: P.O. Box 4708, Sarasota, FL Fax: Florida Department of Business & Professional Regulation (DBPR) 1940 North Monroe Street, Tallahassee, FL Ph: iv Bert Rodgers Schools of Real Estate, Inc.

7 MODULE 1 Real Estate Core Law: Latest Law and Rule Changes This module satisfies the 3 hours of Core Law required by the FREC. by Randy Schwartz, J.D. Randy has more than 35 years experience as an attorney in the real estate profession. His vast experience includes the positions of Bureau Chief for the Real Estate Bureau of the Orlando Office of the Florida Attorney General and General Counsel for the Florida REALTORS for two decades. Randy was an adjunct professor at UCF and FAMU Law Schools and a member of the Executive Committee of the Real Property Section of the Florida Bar. Randy is the coauthor of the Florida Bar s book, Florida Real Property Sales Transactions. He speaks at local, state, and international conferences on all aspects of real estate regulation and brokerage law. Currently he is in private practice in the Orlando area and serves as Regulatory Consultant for Bert Rodgers Schools. Learning Objectives Upon completion of this module, the learner will be able to: 1. Identify and describe key sections of the license law Chapter 475, F.S. 2. Explain the purpose of the Brokerage Relationship Disclosure Act (BRDA). 3. Describe the structure of the Florida Real Estate Commission (FREC). 4. Identify and interpret key rules of FREC. 5. Explain the legal requirements for operating a real estate brokerage office. 6. Interpret the function and powers of a Community Development District (CDD). 7. Describe the purpose for the energy-efficiency rating, radon gas, Residential Swimming Pool Safety Act, and property tax disclosures. 8. Explain when the lead-based paint, homeowners associations, condominiums, and property condition disclosures are required. 9. Analyze the importance of the Johnson v. Davis case. 10. Explain how military personnel are able to terminate contracts for sale or purchase of real estate any time prior to closing. 11. Describe the Residential Landlord Tenant Act, Chapter 83, Part II, F.S. 12. Explain the proper handling and disposition of deposit money or advance rent as mandated in the Florida Landlord Tenant Act. Bert Rodgers Schools of Real Estate, Inc. 1

8 2 Module 1 Glossary Moral turpitude conduct that is considered contrary to community standards of justice, honesty, or good character Prima facie a matter that appears to be self-evident upon initial observation; the evidence presented to support a legal claim Funds money in hand or available for the payment of a debt, claim, or expense Promulgate the formal act of announcing a statute or rule of court Latent material defect a defect that has a significant adverse impact on the value of a real property and is not observable by a visual inspection PART I: REAL ESTATE LICENSE LAW THE FLORIDA STATUTES Chapter 475, Part I, F.S., is the relevant section of law dealing with real estate matters such as: licensees, real estate business entities, and real estate schools. The following are some of the most important sections of the law that real estate licensees should be familiar with : DEFINITIONS Broker: A licensed person who, for another, and for compensation, or with the intent to receive compensation, acts as an agent for others in the performance of one or more services of real estate; this includes transactions involving business enterprises or opportunities. As set forth in Chapter 475, F.S., the term broker also includes 1) any person who advertises rental property information or lists; 2) any person who is a general partner of a brokerage partnership, or an officer or director of a brokerage corporation; and 3) any person or entity who lists, advertises for sale, promotes, or sells by any means whatsoever one or more timeshare periods per year on behalf of others, except as otherwise provided by law. Broker Associate: A person who is qualified to be issued a license as a broker, but who operates as a sales associate in the employ of another. Sales Associate: A person who performs any act specified in the definition of broker, but who performs such act under the direction, control, or management of another person. Chapter 61J2-6, of the Florida Administrative Code further states that a sales associate or broker associate may only be employed by one broker or by one owner-developer. Fiduciary: A broker in a relationship of trust and confidence between that broker as agent and the seller or buyer s principal. The duties of the broker as a fiduciary are loyalty, confidentiality, obedience, full disclosure, and accounting and the duty to use skill, care, and diligence. Principal: The party with whom a real estate licensee has entered into a single agent relationship. When the terms employ, employment, employer, and employee are used in Chapter 475, they describe the independent contractor relationship that exists between a broker and a sales associate.

9 Use Figure 1.1 to examine the duties owed by a single agent and a transaction broker. Some duties are shared by the different relationships while others are unique to one type of relationship. Single Agent: A broker who represents only one buyer or seller per transaction, as a fiduciary, but not both in the same transaction. Figure 1.1: Duties Performed in Brokerage Relationships Real Estate Core Law: Latest Law and Rule Changes 3 Transaction Broker: A broker who provides limited representation to a buyer, a seller, or both, in a real estate transaction, but does not represent either in a fiduciary capacity or as a single agent. In a transaction broker relationship, a buyer or seller is not responsible for the acts of a licensee. Additionally, the parties to a real estate transaction are giving up their rights to the undivided loyalty of a licensee. This aspect of limited representation allows a licensee to facilitate a real estate Transaction Broker Limited Representation Limited Disclosure cannot use confidential information to the detriment of the other party may represent both the Buyer and Seller in the same transaction a single agent who represents only the Buyer in a given transaction as a fiduciary, owes the Buyer a higher than ordinary degree of care and responsibility represents the Buyer Fairness Honesty Presents all offers* Uses Skill, Care, & Diligence Single Agent Loyalty Obedience Full Disclosure Confidentiality A Fiduciary represents the Seller a single agent who represents only the Seller in a given transaction as a fiduciary, owes the Seller a higher than ordinary degree of care and responsibility *Present all offers and counteroffers in a timely manner, unless directed otherwise in writing by the buyer or seller. COMPREHENSION 1. Transaction brokers provide limited representation, while single agents work with the buyer or seller in a fiduciary capacity. Using the information provided in Figure 1.1, list the duties that both licensees must provide to buyers and sellers.

10 4 Module 1 transaction by assisting both the buyer and the seller, but a licensee will not work to represent one party to the detriment of the other party when acting as a transaction broker to both parties. Designated Sales Associate: In a transaction in which both the buyer and seller are working with the same real estate licensee, a broker may allow different sales associates of the same firm to act as designated sales associates to represent the buyer and seller as single agents. A licensee may operate as a designated sales associate under the following conditions: the request must be made by the buyer AND seller The transaction cannot be for residential real estate the buyer and seller each must have assets of $1 million or more Designated sales associates have the same duties of a single agent including disclosure requirements. No Brokerage Relationship: In a no brokerage relationship, even though a customer is not represented, the following duties are still owed by a real estate licensee: dealing honestly and fairly; disclosing all known facts that materially affect the value of the residential real property that are not readily observable by the buyer; and accounting for all funds entrusted to the licensee. A licensee who has no brokerage relationship with a buyer or seller must fully describe and disclose the relationship in writing to the buyer or seller. The disclosure must be made before the showing of property. The notice required must include certain information prescribed by the state EXEMPTIONS The licensing requirements for Florida real estate brokers, broker associates, sales associates, and schools do not apply to any: person acting as an attorney-in-fact for the purpose of the execution of contracts or conveyances only; as an attorney-at-law within the scope of her or his duties as such; as a certified public accountant, as defined in Chapter 473, within the scope of her or his duties as such; as the personal representative, receiver, trustee, or general or special magistrate under, or by virtue of, an appointment by will or by order of a court of competent jurisdiction; or as trustee under a deed of trust, or under a trust agreement, the ultimate purpose and intent whereof is charitable, is philanthropic, or provides for those having a natural right to the bounty of the donor or trustor. individual, corporation, partnership, trust, joint venture, or other entity which sells, exchanges, or leases its own real property; however, this exemption is NOT available if and to the extent that an agent, employee, or independent contractor paid a commission or other compensation strictly on a transactional basis is employed to make sales, exchanges, or leases to or with customers in the ordinary course of an owner s business of selling, exchanging, or leasing real property to the public. salaried employee of an owner, or of a registered broker for an owner, of an apartment community who works in an onsite rental office of the apartment community in a leasing capacity. person employed for a salary as a manager of a condominium or cooperative apartment complex as a result of any activities or duties which the person may have in relation to the renting of individual units within such condominium or cooperative apartment complex if rentals arranged by the person are for periods no greater than one year. person, partnership, corporation, or other legal entity which, for another and for compensation or other valuable consideration, rents or advertises for rent, for transient occupancy, any public lodging establishment licensed under Chapter 509, F.S. property management firm or any owner of an apartment complex for the act of paying a finder s The required brokerage relationship disclosures in section , F.S., list the duties provided by the licensee. All licensees, including those in a no brokerage relationship, owe the duties of: dealing honestly and fairly, accounting for all funds, and disclosing all known unobservable facts that materially affect the value of the property.

11 Real Estate Core Law: Latest Law and Rule Changes 5 Generally, individuals representing themselves or salaried employees performing duties within the scope of their employment and where a commission is not paid are exempt from Chapter 475, F.S. fee or referral fee to an unlicensed person who is a tenant in such apartment complex provided the value of the fee does not exceed $50 per transaction. Nothing in this subsection authorizes an unlicensed person to advertise or otherwise promote the person s services in procuring or assisting in procuring prospective lessees or tenants of apartment units. For purposes of this subsection, finder s fee or referral fee means a fee paid, credit towards rent, or some other thing of value provided to a person for introducing or arranging an introduction between parties to a transaction involving the rental or lease of an apartment unit. It is a violation of section (1)(h), F.S., and punishable under section , F.S., for a property management firm or any owner of an apartment complex to pay a finder s fee or a referral fee to an unlicensed person unless expressly authorized by this subsection REGISTRATION AND LICENSING OF GENERAL PARTNERS, MEMBERS, OFFICERS, AND DIRECTORS OF A FIRM Each partnership, limited liability partnership, limited liability company, or corporation which acts as a broker must register with the commission and must renew the licenses or registrations of its members, officers, and directors for each license period. However, if the partnership is a limited partnership, only the general partners must be licensed brokers or brokerage corporations registered pursuant to this part. If the license or registration of at least one active broker member is not in force, the registration of a corporation, limited liability company, limited liability partnership, or partnership is canceled automatically during that period of time LICENSING OF BROKER ASSOCIATES AND SALES ASSOCIATES The commission must license a broker associate or sales associate as an individual or, upon the licensee providing the commission with authorization from the Department of State, as a professional corporation, limited liability company, or professional limited liability company. A license will be issued in the licensee s legal name only and, when appropriate, must include the entity designation. This section does not allow a broker associate or sales associate to register or be licensed as a general partner, member, manager, officer, or director of a brokerage firm RENEWAL OF LICENSE; CONTINUING EDUCATION The department will renew a license upon receipt of the renewal application and fee. The renewal application for an active license as broker, broker associate, or sales associate must include proof satisfactory to the commission that the licensee has, since the issuance or renewal of her or his current license, satisfactorily completed at least 14 classroom hours of 50 minutes each of a continuing education course during each biennium of a license period, as prescribed by the commission. The commission may accept as a substitute for such continuing education course, on a classroom-hour-for-classroom-hour basis, any satisfactorily completed education course that the com- COMPREHENSION 2. Secretary Olivia mailed the license renewals to the DBPR for all three general partners of Bamboo Realty one week before the deadline. Unfortunately, the envelope was damaged and they were delayed in the mail. The status of all three broker licenses became involuntarily inactive for five days until they were successfully renewed online. What was the status of the partnership s registration during those five days?

12 6 Module 1 Voluntarily Inactive: Toni experienced some life changing events and needed to leave the real estate profession for a few years. To have the option to return to her career at a later date, she completed the forms as required by the DBPR to change the status of her license from current active to current inactive. According to the Florida Statutes, Toni s license will become voluntarily inactive once the status change forms are processed by the DBPR. Involuntarily Inactive: Connor intended to complete his continuing education requirements by his renewal deadline, but he was busy with his customers and forgot to register for the course. After his renewal deadline passed, he received a letter from the DBPR notifying him that the status of his real estate license was involuntarily inactive. mission finds is adequate to educate licensees within the intent of this section, including an approved correspondence or distance learning course. Approval or denial of a specialty course must be based on the extent to which the course content focuses on real estate issues relevant to the modern practice of real estate by a real estate licensee, including technology used in the real estate industry. However, the commission may not require, for the purpose of satisfactorily completing an approved correspondence or distance learning course, a written examination that is to be taken at a centralized location and is to be monitored. The commission may accept attendance at one legal agenda session of the commission as a substitute for three classroom hours once per renewal cycle. In order to obtain credit, the licensee must notify the division at least seven days in advance of his or her intent to attend. A licensee may not earn any continuing education credit for attending a legal agenda session of the commission as a party to a disciplinary action. Any license that is not renewed at the end of the license period prescribed by the department will automatically revert to involuntarily inactive status. Such license may subsequently be renewed only if the licensee meets the other qualifications specified in section , F.S. Sixty days before the end of the license period and automatic reversion of a license to inactive status, the department will mail a notice of renewal and possible reversion to the last known address of the licensee. The department must adopt rules establishing a procedure for the renewal of licenses at least every four years INACTIVE STATUS A license which has become voluntarily inactive may be renewed pursuant to section , F.S., upon application to the department. The commission must prescribe by rule continuing education requirements, not to exceed 12 classroom hours for each year the license was inactive, as a condition of renewing a voluntarily inactive license. The commission will substitute for such continuing education requirements, on a classroom-hour-for-classroom-hour basis, any satisfactorily completed education course approved in the manner specified in section (1). A person whose license is voluntarily inactive and who renews the license may elect to continue her or his voluntarily inactive status. A licensee may reactivate a license that has been involuntarily inactive for 12 months or less by satisfactorily completing at least 14 hours of a commissionprescribed continuing education course. A licensee may reactivate a license that has been involuntarily inactive for more than 12 months but fewer than 24 months by satisfactorily completing 28 hours of a commission-prescribed education course. Any license that has been involuntarily inactive for more than two years will automatically expire. Once a license expires, it becomes null and void without any further action by the commission or department. Ninety days prior to expiration of the license, the Post-License Education Requirements Before First License Renewal Sales Associates 45 hours Brokers and Broker Associates 60 hours

13 Real Estate Core Law: Latest Law and Rule Changes 7 department will give notice to the licensee. The commission must prescribe by rule a fee not to exceed $100 for the late renewal of an involuntarily inactive license. The department must collect the current renewal fee for each renewal period in which the license was involuntarily inactive in addition to any applicable late renewal fee. The commission must adopt rules relating to voluntarily inactive and involuntarily inactive licenses, and for the renewal of such licenses MULTIPLE LICENSES A licensed broker may be issued additional licenses as a broker whenever it is clearly shown that the requested additional licenses are necessary to the conduct of real estate brokerage business (e.g., one for a main corporation and one for a referral corporation). However, real estate licensees may not be issued additional licenses as a sales associate or as a broker associate. The additional licenses cannot be used in a manner likely to be prejudicial to any person, including a licensee under this chapter. A sales associate or broker associate cannot have more than one registered employer at any one time BROKER TO MAINTAIN OFFICE AND SIGN AT ENTRANCE OF OFFICE; REGISTERED OFFICE OUTSIDE STATE; BROKER REQUIRED TO COOPERATE IN INVESTIGATION Each active broker must maintain an office, which will consist of at least one enclosed room in a building of stationary construction. Each active broker must maintain a sign on or about the entrance of her or his principal office and each branch office, which sign may be easily observed and read by any person about to enter such office. Each sign must contain the name of the broker, together with the trade name, if any. For a partnership or corporation, the sign must contain the name of the firm or corporation or trade name of the firm or corporation, together with the name of at least one of the brokers. At a minimum, the words licensed real estate broker or lic. real estate broker must appear on the office entrance signs. See Figure 1.2. Figure 1.2: Requirements of a Corporation Office Sign JAMES REALTY, INC. Peter James Lic. Real Estate Broker If a broker s registered office is located outside the State of Florida, prior to registering such office or branch office, the broker must agree in writing to cooperate and must cooperate with any investigation initiated in accordance with this chapter or commission rules including, but not limited to, the broker promptly supplying any documents requested by any authorized representative of the department and by personally appearing at any designated office of the department or other location in the state or elsewhere as reasonably requested by the department. If the department sends, by certified mail to the broker at the broker s last known business address as registered with the department, a notice or request to produce any documents or to appear for an interview with an authorized representative of the department and the broker fails to substantially comply with that request or notice, then such failure by the broker is a violation of the license law LICENSE TO EXPIRE ON CHANGE OF ADDRESS A license will cease to be in force whenever a broker changes her or his business address, a real estate school operating under a permit changes its business address, a sales associate working for a broker, or an instructor working for a real estate school changes employer. The licensee must notify the commission of the change no later than 10 days after the change, on a form provided by the commission. When a bro- COMPREHENSION 3. If your license expires on March 31st and you do not complete the renewal requirements on time, what is the status of your license on April 1st?

14 8 Module 1 Counting Days. Days are usually counted as calendar days unless the law, rule, or agreement contains language that states otherwise. Some organizations recognize when a time period ends on a day other than a business day and will allow the last day of the time period to be the next business day. To avoid unwanted consequences, address the issue at the beginning of the time period or when the agreement is written. ker or a real estate school changes the business address, the brokerage firm or school permit holder must file with the commission a notice of the change of address, along with the names of any sales associates or instructors who are no longer employed by the brokerage or school. Such notification will also fulfill the change of address notification requirements for sales associates who remain employed by the brokerage and instructors who remain employed by the school DISCIPLINE The commission may deny an application for licensure, registration, or permit, or renewal thereof; may place a licensee, registrant, or permittee on probation; may suspend a license, registration, or permit for a period not exceeding 10 years; may revoke a license, registration, or permit; may impose an administrative fine not to exceed $5,000 for each count or separate offense; and may issue a reprimand, and any or all of the foregoing, if it finds that the licensee, registrant, permittee, or applicant has: been guilty of fraud, misrepresentation, concealment, false promises, false pretenses, dishonest dealing by trick, scheme, or device, culpable negligence, or breach of trust in any business transaction in this state or any other state, nation, or territory; has violated a duty imposed upon her or him by law or by the terms of a listing contract, written, oral, express, or implied, in a real estate transaction; has aided, assisted, or conspired with any other person engaged in any such misconduct and in furtherance thereof; or has formed an intent, design, or scheme to engage in any such misconduct and committed an overt act in furtherance of such intent, design, or scheme. It is immaterial to the guilt of the licensee that the victim or intended victim of the misconduct has sustained no damage or loss; that the damage or loss has been settled and paid after discovery of the misconduct; or that such victim or intended victim was a customer or a person in confidential relation with the licensee or was an identified member of the general public. advertised property or services in a manner which is fraudulent, false, deceptive, or misleading in form or content. The commission may adopt rules defining methods of advertising that violate this paragraph. The FREC may impose any of the disciplinary actions aforementioned if it finds that the licensee, registrant, permittee, or applicant has: failed to account or deliver to any person, including a licensee under this chapter, at the time which has been agreed upon or is required by law or, in the absence of a fixed time, upon demand of the person entitled to such accounting and delivery, any personal property such as money, funds, deposit, check, draft, abstract of title, mortgage, conveyance, lease, or other document or thing of value, including a share of a real estate commission if a civil judgment relating to the practice of the licensee s profession has been obtained against the licensee and said judgment has not been satisfied in accordance with the terms of the judgment within a reasonable time, or any secret or illegal profit, or any divisible share or portion thereof, which has come into the licensee s hands and which is not the licensee s property or which the licensee is not by law or FREC Disciplinary Actions The commission has several options to discipline a licensee who is guilty of misconduct or for failing to account or deliver any money, document, or thing of value. They may choose: probation, suspension, or revocation of a license. In addition, the FREC may issue a reprimand or a fine.

15 Real Estate Core Law: Latest Law and Rule Changes 9 Escrow Dispute Options If, in good faith, the licensee is unsure of who should receive a disbursement, the licensee must promptly notify the commission and request either: an escrow disbursement order - the commission decides who receives the escrow arbitration - a neutral third party decides the outcome adjudication in court - litigation mediation - the buyer and seller work with a neutral third party to reach a mutually agreeable solution equity entitled to retain under the circumstances. However, if the licensee, in good faith, entertains doubt as to what person is entitled to the accounting and delivery of the escrowed property, or if conflicting demands have been made upon the licensee for the escrowed property, which property she or he still maintains in her or his escrow or trust account, the licensee must promptly notify the commission of such doubts or conflicting demands and will promptly: request that the commission issue an escrow disbursement order determining who is entitled to the escrowed property submit the matter to arbitration with the consent of all parties seek adjudication of the matter in court by interpleader or otherwise, or submit the matter to mediation with the written consent of all parties. The department may conduct mediation or may contract with public or private entities for mediation services. However, the mediation process must be successfully completed within 90 days following the last demand or the licensee must promptly employ one of the other escape procedures contained in this section. Payment for mediation will be as agreed to in writing by the parties. The department may adopt rules to implement this section. If the licensee promptly employs one of the escape procedures contained herein and abides by the order or judgment resulting therefrom, no administrative complaint may be filed against the licensee for failure to account for, deliver, or maintain the escrowed property. Under certain circumstances, which the commission must set forth by rule, a licensee may disburse property from the licensee s escrow account without notifying the commission or employing one of the procedures listed above. For example, the buyer of a residential condominium unit delivers to a licensee written notice of the buyer s intent to cancel the contract for sale and purchase, as authorized by section , F.S., or if the buyer of real property in good faith fails to satisfy the terms in the financing clause of a contract for sale and purchase, the licensee may return the escrowed property to the purchaser without notifying the commission or initiating any of the procedures listed above. The commission may impose punishment if it finds that the licensee, registrant, permittee, or applicant: has failed to deposit money in an escrow account when the licensee is the purchaser of real estate In mediation, a professionally trained neutral third party facilitates a discussion between the buyer and seller. The mediator does not have the ability to render a decision. When mediation is chosen, the buyer and seller each consent to work with a third party to reach a mutually agreeable solution. Any license that has been involuntarily inactive for more than two years will automatically expire. Once a license expires, it becomes null and void. For example, Sales Associate Ali did not renew her license in March of 2012 and again in March of On April 1, 2014, her license status became null and void.

16 10 Module 1 under a contract that requires the deposit money to be placed in an escrow account and to be applied to the purchase price if the sale closes. has been convicted or found guilty of, or entered a plea of nolo contendere to, regardless of adjudication, a crime in any jurisdiction which directly relates to the activities of a licensed broker or sales associate, or involves moral turpitude or fraudulent or dishonest dealing. The record of a conviction certified or authenticated in such form as to be admissible in evidence under the laws of the state will be admissible as prima facie evidence of such guilt. has had a broker s or sales associate s license revoked, suspended, or otherwise acted against, or has had an application for such licensure denied, by the real estate licensing agency of another state, territory, or country. has shared a commission with, or paid a fee or other compensation to, a person not properly licensed as a broker, broker associate, or sales associate under the laws of this state, for the referral of real estate business, clients, prospects, or customers, or for any one or more of the services set forth in section (1)(a), F.S. For the purposes of this section, it is immaterial that the person to whom such payment or compensation is given made the referral or performed the service from within this state or elsewhere; however, a licensed broker of this state may pay a referral fee or share a real estate brokerage commission with a broker licensed or registered under the laws of a foreign state (i.e., a state or government that is not Florida), so long as the foreign broker does not violate any law of this state. is temporarily incapacitated from acting safely and capably as a broker or sales associate for investors or those in a fiduciary relation with her or him because of drunkenness, use of drugs, or temporary mental derangement; but suspension of a license in such a case will be only for the period of such incapacity. ACCOUNT Brokers Maximum Personal Funding Allowance amount Property Management Escrow $ 5,000 Sales Escrow $ 1,000 has failed, if a broker, to immediately place, upon receipt, any money, funds, deposit, check, or draft entrusted to her or him by any person dealing with her or him as a broker in escrow with a title company, banking institution, credit union, or savings and loan association located and doing business in this state, or to deposit such funds in a trust or escrow account maintained by her or him with some bank, credit union, or savings and loan association located and doing business in this state, wherein the funds must be kept until disbursement thereof is properly authorized; or has failed, if a sales associate, to immediately place with their registered employer any money, fund, deposit, check, or draft entrusted to them by any person dealing with her or him as agent of the registered employer. The commission must establish rules to provide for records to be maintained by the broker and the manner in which such deposits will be made. A broker may place and maintain up to $5,000 of personal or brokerage funds in the broker s property management escrow account and up to $1,000 of personal or brokerage funds in the broker s sales escrow account. A broker will be provided a reasonable amount of time to correct escrow errors if there is no shortage of funds and such errors pose no significant threat to economically harm the public. It is the intent of the Legislature that, in the event of legal proceedings concerning a broker s escrow account, the disbursement of escrowed funds not be delayed due to any dispute over the personal or brokerage funds that may be present in the escrow account. is confined in any county jail, post adjudication; is confined in any state or federal prison or mental institution; is under home confinement ordered in lieu of institutional confinement; or, through mental disease or deterioration, can no longer safely be entrusted to competently deal with the public. has failed to inform the commission in writing within 30 days after pleading guilty or nolo contendere to, or being convicted or found guilty of, any felony. has failed in any written listing agreement to include a definite expiration date, description of the property, price and terms, fee or commission, and a proper signature of the principal(s); and has failed to give the principal(s) a legible, signed, true, and correct copy of the listing agreement within 24 hours of obtaining the written listing agreement. The written listing agreement cannot contain a provision requiring the person signing the listing to notify the broker of the intention to cancel the listing after such definite expiration date.

17 Real Estate Core Law: Latest Law and Rule Changes 11 COMPREHENSION 4. A licensee was found guilty of misrepresentation and breach of trust. His fine was $10,000. Why was the fine more than $5,000? has failed, if a broker, to direct, control, or manage a broker associate or sales associate employed by such broker. A rebuttable presumption exists that a broker associate or sales associate is employed by a broker if the records of the department establish that the broker associate or sales associate is registered with that broker. A record of licensure which is certified or authenticated in such form as to be admissible in evidence under the laws of the state is admissible as prima facie evidence of such registration. An administrative complaint against a broker, broker associate, or sales associate must be filed within five years after the time of the act giving rise to the complaint or within five years after the time the act is discovered or should have been discovered with the exercise of due diligence DETERMINATION OF AGENCY OR TRANSACTIONAL BROKERAGE RELATIONSHIP Without consideration of the related facts and circumstances, the mere payment or promise to pay compensation to a licensee does not determine whether an agency or transactional brokerage relationship exists between the licensee and a seller, landlord, buyer, or tenant THE BROKERAGE RELATIONSHIP DISCLOSURE ACT (BRDA) This legislation which was enacted in 1997 to create the role of the transaction broker, allows a licensee to provide limited representation to both parties in the same transaction. It is further explained in sections , F.S THE PURPOSE OF BRDA In order to eliminate confusion and provide for a better understanding on the part of customers in real estate transactions, the Legislature finds that the intent of the Brokerage Relationship Disclosure Act is to provide that: 1. disclosed dual agency as an authorized form of representation by a real estate licensee in this state is expressly revoked; 2. disclosure requirements for real estate licensees relating to authorized forms of brokerage representation are established; 3. single agents may represent either a buyer or a seller, but not both, in a real estate transaction, and; 4. transaction brokers provide a limited form of nonfiduciary representation to a buyer, a seller, or both in a real estate transaction AUTHORIZED BROKERAGE RELATIONSHIPS; PRESUMPTION OF TRANSACTION BROKERAGE; REQUIRED DISCLOSURES There are four types of authorized brokerage relationships a real estate licensee may have with a buyer or seller: Transaction Broker Single Agent No Brokerage Relationship Designated Sales Associate It is presumed that all licensees are operating as transaction brokers unless a single agent or no brokerage relationship is established in writing with a While the duties of authorized brokerage relationships apply in all brokerage activities, the disclosure requirements of BRDA apply only to residential sales.

18 12 Module 1 customer. A licensee may change from one brokerage relationship to another as long as the buyer and seller, or both, gives consent as required by section (3)(c)2, F.S., prior to the change and the appropriate written disclosure of duties is made to the buyer and seller. Whenever a licensee is representing a buyer or seller in a capacity other than a transaction broker or if they are transitioning from one type of authorized relationship to another, the disclosure must be given. It must be made before, or at the time of, entering into a listing agreement or an agreement for representation or before the showing of property, whichever occurs first. The disclosure must be made in writing and fully describe the duties of the specified type of brokerage relationship being entered into CONTRACTS OF UNLICENSED PERSON FOR COMMISSIONS INVALID No contract for a commission or compensation for any act or service is valid unless the broker or sales associate has complied with this chapter in regard to issuance and renewal of the license at the time the act or service was performed VIOLATIONS AND PENALTIES Any person who violates any of the provisions below is guilty of a misdemeanor of the second degree unless the punishment is prescribed in this chapter. A person may not operate as a broker or sales associate without being the holder of a valid and current active license; therefore, any person who violates this paragraph commits a felony of the third degree, punishable as provided in sections or , F.S., or, if a corporation, as provided in section A person licensed as a sales associate may not operate as a broker or operate as a sales associate for any person not registered as her or his employer. A sales associate may not collect any money in connection with any real estate brokerage transaction, whether as a commission, deposit, payment, rental, or otherwise, except in the name of the employer and with the express consent of the employer; and no real estate sales associate, whether the holder of a valid and current license or not, will commence or maintain any action for a commission or compensation in connection with a real estate brokerage transaction against any person except a person registered as her or his employer at the time the sales associate performed the act or rendered the service for which the commission or compensation is due. A broker or sales associate may not place, or cause to be placed, upon the public records of any county, any contract, assignment, deed, will, mortgage, affidavit, or other writing which purports to affect the title of, or encumber, any real property if the same is known to her or him to be false, void, or not authorized to be placed of record, or not executed in the form entitling it to be recorded, or the execution or recording whereof has not been authorized by the owner of the property, maliciously or for the purpose of collecting a commission, or to coerce the payment of money to the broker or sales associate or other person, or for any unlawful purpose. However, nothing in this paragraph will be construed to prohibit a broker or a sales associate from recording a judgment rendered by a court of this state or to prohibit a broker from placing a lien on a property where expressly permitted by contractual agreement or otherwise allowed by law. A person may not operate as a broker under a trade name without causing the trade name to be noted in the records of the commission and placed on the person s license, or so operate as a member of a partnership or as a corporation or as an officer or manager thereof, unless such partnership or corporation is the holder of a valid current registration ADVERTISING BY REAL ESTATE SCHOOLS No person representing a real estate school offering and teaching real estate courses under this chapter COMPREHENSION 5. Which violation of real estate license law is a third degree felony?

19 Real Estate Core Law: Latest Law and Rule Changes 13 will make, cause to be made, or approve any statement, representation, or act, oral, written, or visual, in connection with the operation of the school, its affiliations with individuals or entities of courses offered, or any endorsement of such, if such person knows or believes, or reasonably should know or believe, the statement, representation, or act to be false, inaccurate, misleading, or exaggerated. A school cannot use advertising of any nature which is false, inaccurate, misleading, or exaggerated. Publicity and advertising of a real estate school, or of its representative, must be based upon relevant facts and supported by evidence establishing their truth. No representative of any school or institution coming within the provisions of this chapter will promise or guarantee employment or placement of any student or prospective student using information, training, or skill purported to be provided, or otherwise enhanced, by a course or school as an inducement to enroll in the school, unless such person offers the student or prospective student a bona fide contract of employment agreeing to employ the student or prospective student RENTAL INFORMATION; CONTRACT OR RECEIPT; REFUND; PENALTY Each broker or sales associate who furnishes a rental information list to a prospective tenant, for a fee paid by the prospective tenant, must provide such prospective tenant with a contract or receipt. The contract or receipt must contain a provision for the repayment of 75% of the fee to the prospective tenant if the prospective tenant does not obtain a rental. If the rental information list provided by the broker or sales associate to a prospective tenant is not current Figure 1.3: Rental Information Notice NOTICE PURSUANT TO FLORIDA LAW: If the rental information provided under this contract is not current or accurate in any material aspect, you may demand within 30 days of this contract date a return of your full fee paid. If you do not obtain a rental you are entitled to receive a return or 75% of the fee paid, if you make demand within 30 days of this contract date. or accurate in any material respect, the full fee must be repaid to the prospective tenant upon demand. A demand from the prospective tenant for the return of the fee, or any part thereof, must be made within 30 days following the day on which the real estate broker or sales associate has contracted to perform services. The contract or receipt must also conform to the guidelines adopted by the commission in order to disclose material information regarding the service. Any person who violates these provisions is guilty of a misdemeanor of the first degree. In addition to the penalty, the license of any broker or sales associate who participates in any rental information transaction which is in violation of the provisions of section (1), F.S., is subject to suspension or revocation by the commission in the manner prescribed by law. Figure 1.3 is an example of the notice required by F.A.C. 61J BROKERAGE BUSINESS RECORDS Each broker must keep and make available to the department such books, accounts, and records as will enable the department to determine whether such broker is in compliance with the provisions of this chapter. Each broker must preserve at least one legible copy of all books, accounts, and records pertaining to her or his real estate brokerage business for at least five years from the date of receipt of any money, fund, deposit, check, or draft entrusted to the broker or, in the event no funds are entrusted to the broker, for at least five years from the date of execution by any party of any listing agreement, offer to purchase, rental property management agreement, rental or lease agreement, or any other written or verbal agreement which engages the services of the broker. If any brokerage record has been the subject of or has served as evidence for litigation, relevant books, accounts, and records must be retained for at least two years after the conclusion of the civil action or the conclusion of any appellate proceeding, whichever is later, but in no case less than a total of five years as set above AUTHORITY TO INSPECT AND AUDIT Duly authorized agents and employees of the department have the power to inspect and audit in a lawful manner at all reasonable hours any broker or brokerage office licensed under this chapter, for the purpose of determining if any of the provisions of this chap-

20 14 Module 1 ter, Chapter 455, F.S., or any rule promulgated under authority of either chapter is being violated FLORIDA REAL ESTATE COMMISSION (FREC) The commission consists of seven members appointed by the Governor, subject to confirmation by the Senate. Four members must be licensed brokers, each of whom has held an active license for the five years preceding appointment; one member must be a licensed broker or a licensed sales associate who has held an active license for the two years preceding appointment; and two members must be persons who are not, and have never been, brokers or sales associates. At least one member of the commission must be 60 years of age or older. The current members may complete their present terms unless removed for cause. In 2010, the department determined that a licensed real estate broker or sales associate who holds an active real estate school permit, chief administrator permit, school instructor permit, or any combination of such permits issued by the DBPR may serve on the Florida Real Estate Commission (FREC). Members are appointed to four-year terms and may serve no more than two consecutive terms. PART II: FLORIDA REAL ESTATE COMMISSION RULES The Florida Statutes section authorizes the Real Estate Commission to adopt rules pursuant to Chapter 120, Laws of Florida. FREC s rules can be found in Chapter 61J2 of the Florida Administrative Code (F.A.C.). The full list of rules can be found at asp?divid=283. Below find a review of the commission rules that are most relevant to your daily practice of real estate. CHAPTER 61J2-4 PARTNERSHIPS Real estate brokerage partnerships must be registered with the Florida Real Estate Commission. The partnership must contain at least one licensed or registered active real estate broker. In addition, each partner that deals with the public must hold a valid real estate broker license. Under general partnership law, when a general partner dies or withdraws, the partnership is automatically dissolved and a new partnership must be created. However, for FREC purposes, if the business is continued by two or more persons, one of whom is an active real estate broker, the partnership will be able to continue. In this scenario, it is only necessary to cancel, issue, or reissue registration or licenses reflecting the change in the organization. CHAPTER 61J2-5 CORPORATIONS Corporations must have a legal existence with the State of Florida before being registered with the FREC. No registration will be granted or renewed for any corporation if it appears that the individual(s) having control of the corporation has been denied, revoked, or suspended and not reinstated, or if a person having control of the corporation has been convicted of a felony in any court and has not had civil rights restored for at least five years, or if an injunction has been entered against the individual for operating as a real estate licensee without a license. When applying this rule, a person is deemed to be in control of a corporation where such person or spouse, children or member of the household owns or controls, directly or indirectly, more than 40% of the voting stock. All officers and directors of a corporation must be registered with the FREC. An officer or director can be either a real estate broker or member of the general public. However, a real estate sales associate or a broker associate may not COMPREHENSION 6. Who is prohibited from being an officer or director of a real estate corporation?

21 Real Estate Core Law: Latest Law and Rule Changes 15 Gifts and Kickbacks An issue that frequently arises is whether a real estate licensee can give a gift to a member of the general public. Whether this is permissible depends on why the gift is being given. For example, if a real estate licensee refers a buyer to a moving company and in return receives compensation, this kickback or rebate, is permissible if the buyer has been told all the details of this arrangement. A real estate licensee can share part of their commission with a party of the transaction if full disclosure is made to all interested parties. Note that the scenarios above do not allow a real estate licensee to compensate a nonlicensee for the referral of real estate brokerage business. be a director or officer of a real estate corporation. Even though a real estate sales associate or broker associate cannot hold the titles of either director or officer, they are allowed to own 100% of the stock of the corporation. It is important to note that if the corporation only has one active broker and that broker dies, resigns, or is otherwise removed from their position, the corporation has only 14 calendar days to appoint a new broker. During this 14-day period, no new brokerage business may be performed. CHAPTER 61J2-10 BUSINESS OPERATIONS Brokerage Offices A real estate brokerage must have an office. This office may be located in a residential location as long as it is not in violation of local zoning ordinances. A broker may also have a branch office, which is required to be registered with the FREC. While there is no clear cut definition of what constitutes a branch office, a mere temporary shelter, on a subdivision being sold by the broker, for the protection of sales associates and customers and at which transactions are not closed and sales associates are not permanently assigned, is not deemed to be a branch office. The permanence, use, and character of activities customarily conducted at the office or shelter will determine whether it must be registered. Advertising Real estate brokerage advertising must be in a manner in which a reasonable person knows they are dealing with a real estate licensee. All real estate advertising must include the registered name of the brokerage firm. If a licensee s name appears in the advertisement, the name must be shown in the same manner in which it is licensed with the commission. Informally, the FREC has allowed nicknames to appear in advertisements as long as they are not considered to be misleading (e.g., using Bill in leu of William). When advertising on a site on the Internet, the brokerage firm name must be placed adjacent to or immediately above or below the point of contact information. Point of contact information refers to any means by which to contact the brokerage firm or individual licensee including all mailing addresses, physical street addresses, addresses, telephone numbers, and facsimile telephone numbers. CHAPTER 61J2-14 FUNDS ENTRUSTED TO BROKERS - DEPOSITS AND ESCROWS Once the parties have entered into a sales contract, usually the buyer puts down a deposit toward the purchase of real property. If the deposit is to be held in escrow by an attorney or a title company, the sales contract must contain their name, address, and telephone number. Within 10 days of the due date for every deposit specified in the sales contract, the buy- COMPREHENSION 7. When are nicknames allowed to be used in advertising?

22 16 Module 1 er s broker must request in writing that the attorney or title company verify that the deposit was received (unless the seller or the seller s agent selected the attorney or title company to hold the deposit). Ten days after the written request was made, the buyer s broker must provide the seller s broker with a copy of the written verification or written notice that no verification was received. If the seller is not represented by a broker, then the buyer s broker must notify the seller directly in the same manner described above. The FREC allows a broker to place a limited amount of the broker s personal money in the real estate brokerage escrow account. The amount is $1,000 in the sales escrow account and $5,000 in the property management escrow account. A broker is not required to maintain an escrow account; however, if a broker does maintain an escrow account, the brokerage must prepare a monthly reconciliation Table 1.1: Monthly Escrow Reconciliation Statement Required Information Date the reconciliation was undertaken Date used to reconcile the balances Name of the bank(s) Name(s) of the account(s) Account number(s) Account balance(s) and date(s) Deposits in transit Outstanding check identified by date and check number Itemized list of the broker s trust liability Include any other items necessary to reconcile the bank account balance(s) with the balance per the broker s checkbook(s) and other trust account books and records disclosing the date of receipt and the source of the funds. statement. It must then be reviewed, signed, and dated by the broker. The role of the escrow agent may be one of the most important roles that a real estate broker undertakes. Not only is the broker entrusted with the monies of another, but the broker is required to timely deposit the funds in an appropriate institution, maintain the funds until properly instructed as to how and to whom to disburse, and perform the regular reconciliation of the escrow account to ensure the proper accounting of the funds being maintained. If a broker holding funds in their escrow account receives conflicting demands from the parties or if the broker has good faith doubts as to who is entitled to the escrow funds, the broker must follow Chapter 61J , F.A.C., which states: Within 15 business days of receiving the last party s demand or of having good faith doubts, the broker must report in writing the dispute or doubts to the FREC. Within 30 business days of the last demand or of having good faith doubts, the broker must institute a settlement procedure and notify FREC of that action. CHAPTER 61J2-24 DISCIPLINARY MATTERS This chapter contains the disciplinary guidelines that the FREC follows. The guidelines give the FREC wide discretion in imposing penalties. The FREC refers to this section for citation authority. A citation will be issued for violations that are not a substantial threat to the health, safety, and general welfare of the public. The requirements for the notification of noncompliance, mediation, revocation, and probation are also found in this section. CHAPTER 61J2-26 NONRESIDENT LICENSURE An individual does not have to be either a Florida resident or a United States citizen to qualify for a Florida Of all the violations that go before the FREC, improper handling of escrow funds is considered the most serious. When the public has entrusted their money to a broker and the broker mishandles the funds or fails to properly reconcile the account, the FREC does not hesitate to take the appropriate and sometimes harsh action to not only discipline the broker, but to send the message to the licensee community that escrow violations will not be treated lightly.

23 Real Estate Core Law: Latest Law and Rule Changes 17 real estate license. Applicants are expected to be knowledgeable in Florida law, statutes, and administrative rules. They must meet education, experience, and examination requirements comparable to the requirements for Florida resident applicants as prescribed in sections (2), (6), and , F.S. Prior to May 4th 2012, Florida nonresident licensees were required to sign an Irrevocable Consent Form that would allow legal actions against the licensee to commence in any county in the State of Florida where the plaintiff resided. When the governor approved House Bill 693 during the 2012 legislative session, the Irrevocable Consent Form requirement was eliminated. PART III: STATE AND FEDERAL LAWS AFFECTING REAL ESTATE In this section we review state and federal laws such as Community Development Districts, the Residential Swimming Pool Safety Act, contracts with military personnel, and landlord tenant regulations. Various disclosure requirements are addressed including radon gas, lead-based paint, property tax, homeowners associations, condominiums, property conditions, and energy-efficiency. COMMUNITY DEVELOPMENT DISTRICT (CDD) A Community Development District, commonly known as a CDD, is a local special-purpose government authorized under the Uniform Community Development Act of 1980 by Chapter 190 of the Florida Statutes and is an alternative method for managing and financing infrastructure required to support community development. CDDs are legal entities and possess several powers such as: the right to enter into contracts; the right to own both real and personal property; adoption of bylaws, rules, regulations, and orders; the right to sue and be sued; to obtain funds by borrowing; to issue bonds; and to levy assessments. Legal overview of a CDD: A CDD provides a mechanism to finance, construct, and maintain community or subdivision infrastructure improvements. Infrastructure includes water and sewer collection systems, roads, sidewalks, drainage and storm water systems, parks, boardwalks, community areas, landscaping, and wetlands mitigation. A CDD is organized as a special-purpose unit of local government and operates as an independent taxing district. Because a CDD is an independent special district, the governing body establishes their own budget and operates independently of the local governmental entity within the scope of specific and very limited powers. A CDD does not have police powers and cannot regulate land use or issue development orders; those powers reside with the local general-purpose government (city or county). The primary function of a CDD is to issue taxexempt bonds to construct infrastructure such as roads, water and sewer lines, recreational facilities, etc. CDD s are designed to pay for themselves. Theoretically, the cost of growth is allocated proportionately by levying special assessments on the lands which receive the benefit of the improvements. Under ideal circumstances, the CDD provides a more efficient method of paying the operation and maintenance expense of infrastructure and related services. However, there are inherent risks, especially during the recent economic downturn. If a CDD goes into foreclosure or only sells a small percentage of lots, owners could find themselves paying disportionately high fees. CDD s replace HOAs, but have board powers. As is true for all communities, the professionalism of the board members directly contributes to or detracts from the operation and harmony of the neighborhood. Required Disclosure Language Subsequent to the establishment of a district under Chapter 190, F.S., each contract for the initial sale of

24 18 Module 1 a parcel of real property and each contract for the initial sale of a residential unit within the district must include, immediately prior to the space reserved in the contract for the signature of the purchaser, the following disclosure statement in boldfaced and conspicuous type which is larger than the type in the remaining text of the contract: COMMUNITY DEVELOPMENT DISTRICT DISCLOSURE THE (Name of District) COMMUNITY DEVELOPMENT DISTRICT MAY IMPOSE AND LEVY TAXES OR ASSESSMENTS, OR BOTH TAXES AND ASSESSMENTS, ON THIS PROPERTY. THESE TAXES AND ASSESSMENTS PAY THE CONSTRUCTION, OPERATION, AND MAINTENANCE COSTS OF CERTAIN PUBLIC FACILITIES AND SERVICES OF THE DISTRICT AND ARE SET ANNUALLY BY THE GOVERNING BOARD OF THE DISTRICT. THESE TAXES AND ASSESSMENTS ARE IN ADDITION TO COUNTY AND OTHER LOCAL GOVERNMENTAL TAXES AND ASSESSMENTS AND ALL OTHER TAXES AND ASSESSMENTS PROVIDED FOR BY LAW. ENERGY-EFFICIENCY RATING A prospective buyer of a building must be provided with a copy of an information brochure notifying the buyer of the option for an energy-efficiency rating on the building. The brochure must be given at the time of or prior to the buyer s execution of the contract for sale and purchase pursuant to section , F.S. The Department of Community Affairs provides free copies of this brochure. RADON GAS Radon is a naturally occurring radioactive gas that when it has accumulated in a building in sufficient quantities, may present health risks to persons who are exposed to it over time. Levels of radon that exceed federal and state guidelines have been found in buildings in Florida. Additional information regarding radon and radon testing may be obtained from your county health department (Chapter (5), F.S.). RADON GAS A radon disclosure must be provided at the time of, or prior to, the execution of the sale or purchase of any building as well as prior to the execution of a rental agreement for any building. This disclosure is not required for residential transient occupancy provided the occupancy is for 45 days or less in duration. LEAD-BASED PAINT DISCLOSURE Many houses and apartments built before 1978 have paint that contains lead (called lead-based paint). Lead from paint, chips, and dust can pose serious health hazards if not taken care of properly. Federal law requires that individuals receive certain information before renting or buying pre-1978 housing: Landlords must disclose known information on lead-based paint and lead-based paint hazards before leases take effect. Leases must include a disclosure form about lead-based paint. Sellers must disclose known information on leadbased paint and lead-based paint hazards before selling a house. Sales contracts must include a disclosure form about lead-based paint. Buyers have up to ten days to check for lead hazards. Housing excluded from the disclosure requirement: housing built after 1977 (Congress chose not to cover post-1977 housing because the Consumer Product Safety Commission (CPSC) banned the use of lead-based paint for residential use in 1978) zero-bedroom units, such as efficiencies, lofts, and dormitories leases for less than 100 days, such as vacation houses or short-term rentals housing for the elderly (unless children live there) housing for the handicapped (unless children live there) rental housing that has been inspected by a certified inspector and found to be free of lead-based paint foreclosure sales PROPERTY TAX DISCLOSURE A prospective purchaser of residential property must be given the following disclosure summary at or before the execution of the contract regardless of the age of the dwelling. Pursuant to section , F.S.,

25 Real Estate Core Law: Latest Law and Rule Changes 19 it must either be included in the contract or must be provided by the seller. PROPERTY TAX DISCLOSURE SUMMARY BUYER SHOULD NOT RELY ON THE SELLER S CURRENT PROPERTY TAXES AS THE AMOUNT OF PROPERTY TAXES THAT THE BUYER MAY BE OBLIGATED TO PAY IN THE YEAR SUBSEQUENT TO PURCHASE. A CHANGE OF OWNERSHIP OR PROPERTY IMPROVEMENTS TRIGGERS REASSESSMENTS OF THE PROPERTY THAT COULD RESULT IN HIGHER PROPERTY TAXES. IF YOU HAVE ANY QUESTIONS CONCERNING VALUATION, CONTACT THE COUNTY PROPERTY APPRAISER S OFFICE FOR INFORMATION. HOMEOWNERS ASSOCIATION DISCLOSURE A purchaser who is buying in a community that mandates membership in a homeowners association (HOA) must be given a disclosure of said requirement prior to the execution of the contract for sale and purchase. This disclosure must be provided by either the developer or the seller. If the required disclosure is not given to the buyer prior to the execution of the contract, the buyer has the option to void the contract in writing within three days after receipt of the disclosure summary or prior to closing, whichever occurs first. The buyer s right may not be waived by the buyer but terminates at closing. The exact language of the disclosure can be found in Chapter 720, F.S. CONDOMINIUM DISCLOSURE Chapter 718, F.S., requires a developer and a nondeveloper unit owner disclosure prior to the sale of a condominium. While the language of these disclosures vary between a developer and nondeveloper, both require that the disclosure be given prior to the execution of the sales contract. The language of both forms is contained in section , F.S. If a real estate licensee provides to, or otherwise obtains for, a prospective purchaser the documents described in this subsection, the licensee is not liable for any error or inaccuracy contained in the documents. DISCLOSURE OF MATERIAL FACTS Florida law requires real estate licensees to disclose material facts affecting the value of residential property which are not readily observable to the buyer. The information is considered material to the extent that if the information had been disclosed, the sales contract would not have been signed or the terms may have been negotiated differently. Physical material facts that affect the value of residential property can generally be measured monetarily. The court can determine the amount of damages due to a leaky roof or termite infestation, compare it with the purchase price and cost to repair the damages, and then decide whether the value was materially affected. Property Condition - Johnson v. Davis The landmark case in the area of disclosures is the case of Johnson v. Davis, 480 So.2d 625 (Florida 1985). Prior to this case, the rule was caveat emptor, Buyer Beware, which is still the rule in commercial real estate contracts. In Johnson v. Davis, the Supreme Court of Florida held that:...where the seller of a home knows of facts materially affecting the value of the property which are not readily observable and are not known to the buyer, the seller is under a duty to disclose them to the buyer. This duty is equally applicable to all forms of real property, new and used. The Court next held in Rayner v. Wise that the doctrine in Johnson also applied to real estate professionals. This meant that the seller or licensed real estate professional must disclose material facts that affect COMPREHENSION 8. Is an HOA disclosure required prior to closing for all residential property sales within a HOA community?

26 20 Module 1 If a bucket has been placed in the attic to collect rainwater from a leaking roof, it must be disclosed that the roof is leaking. However, if the bucket is placed in the middle of the living room and the buyer can see the rain water going into the bucket from the ceiling, neither the seller nor licensee needs to disclose what is in clear view. the value of the property which are not readily observable and are not known to the buyer. This duty to disclose can also be found in Chapter 475, F.S. The case law does not mandate the manner in which disclosure must take place, whether written, oral, or any specific form. Many real estate professionals choose to use a written form, commonly referred to as the Seller s Disclosure, to satisfy this disclosure requirement. While disclosing a leaking roof is not a hard determination to make, other situations can be more difficult to determine if they are considered an unknown material defect. What if a halfway house is going in across the street? What if the halfway house is going in five houses down? What if it is public record that the property is zoned for this type of occupancy? At this time, these questions have not been addressed by legal decisions. Some might argue that you cannot go wrong with disclosing, but what if the seller tells you not to and you owe the seller a fiduciary duty? In other words, it is not always clear what the legal obligation is in these situations. If you are a member of NAR, you should know this issue was addressed in 2001 in the Standards of Practice 1-9. Currently, the 2012 REALTOR Code of Ethics states, Information concerning latent material defects is not considered confidential information. Remember, in any situation, you always have the option to seek legal counsel. Sinkholes. When there is a nonobservable sinkhole on the property, it is clear that it should be disclosed. Less clear is whether there is a duty to disclose a repaired sinkhole on the property. Correlate this with the situation of a repaired roof leak. It would be uncommon to disclose that in the past the roof leaked, when there is no leak now. The law is unclear about this type of situation. However, Florida law does provide direction when an insurance claim is processed for a sinkhole repair. Section , F.S., requires the professionally prepared sinkhole report and certification to be filed with the clerk of the court: when an insurer has paid a claim; as a precondition to accepting payment for a loss; upon completed foundation repairs or building stabilization. This language implies that verified sinkholes should be disclosed regardless of when they occurred. Stigmatized Property Fortunately, some areas of the law have made it clear what one should disclose and what one should not. Chapter 689, F.S., states that if the property was a site of a homicide, suicide, or death it is not a material fact which must be disclosed. The same can be said for houses considered haunted where a disclosure is not required. Further, according to Florida law, HIV and AIDS status are not material facts that must be disclosed in a real estate transaction. No cause of action arises against a real estate licensee or owner for failure to disclose that the occupant of the property is infected with HIV/AIDS. RESIDENTIAL SWIMMING POOL SAFETY ACT The Residential Swimming Pool Safety Act, Chapter 515, F.S., went into effect in the year It requires certain safety features to be installed on newly constructed homes with swimming pools to prevent A Property Condition Disclosure is often referred to as the Seller s Disclosure and: is required in all residential real property transactions is not required in commercial transactions must disclose material facts that affect value not readily observable to the buyer If the seller asks you not to tell, you may want to consult an attorney.

27 Real Estate Core Law: Latest Law and Rule Changes 21 Sinkholes. Section (2)(c), F.S. (2005), states: The seller of real property upon which a sinkhole claim has been made by the seller and paid by the insurer must disclose to the buyer of such property, before the closing, that a claim has been paid and whether or not the full amount of the proceeds was used to repair the sinkhole damage. drowning of a young child or medically frail elderly person. To pass the final inspection and receive a certificate of completion, a residential swimming pool must meet one of the following safety features: The pool must be isolated from access to a home by an enclosure that meets the pool barrier requirement. There must be an approved safety pool cover. All doors and windows with direct access from the home to the pool must be equipped with an approved exit alarm system with minimum sound pressure ratings. All doors providing direct access from the home to the pool must be equipped with a self-closing, selflatching device with the release mechanism at least 54 inches above the floor. The failure to equip a new residential home and pool with at least one of the above safety features is a second-degree misdemeanor. No penalty will be imposed if the person, within 45 days after arrest or issuance of a summons or a notice to appear, has equipped the pool with at least one safety feature as listed above and has attended a drowning prevention education program. However, the requirement of attending a drowning prevention education program is waived if such program is not offered within 45 days after issuance of the citation. Section , F.S., Information required to be furnished to buyers A licensed pool contractor, on entering into an agreement with a buyer to build a residential swimming pool, or a licensed home builder or developer, on entering into an agreement with a buyer to build a house that includes a residential swimming pool, must give the buyer a document containing the requirements of this chapter and a copy of the publication produced by the department under section that provides information on drowning prevention and the responsibilities of pool ownership. CONTRACTS WITH MILITARY PERSONNEL An active member of the United States Armed Forces, the United States Reserve Forces, or the Florida National Guard, collectively known as service- When do you have to Disclose? CDD... prior to initial sale of real property or a residential unit Energy-Efficiency Rating... prior to contract execution Radon Gas... any building, except in transient rentals less than 45 days Lead-based Paint... on most residential housing built before 1978, see exceptions list Property Tax... on all residential properties HOA... prior to closing and only when membership is mandatory Condominium Association... prior to closing on all condominium units in residential transactions Seller s Disclosure... material facts not readily observable which affect property value Sinkholes... when a claim has been paid by an insurer

28 22 Module 1 member, may terminate a contract to purchase real property, prior to closing, by providing to the seller or mortgagor on the property a written notice of termination under the following circumstances: servicemember is required, by permanent change of station orders, to move 35 miles or more from the location of the property servicemember is released from active duty and the property is more than 35 miles for the member s home of record servicemember receives orders to move into government quarters, or the member becomes eligible to live in government quarters, or servicemember receives temporary duty orders to move more than 35 miles from the location of the property and the temporary duty orders exceed 90 days The notice to the seller or mortgagor canceling the contract must be accompanied by either a copy of the official military orders or a written verification signed by the servicemember s commanding officer. Upon termination of the contract, the servicemember is entitled to a full refund of the deposit within seven days. The law may not be waived or modified by agreement of the parties under any circumstances. Section , F.S., (2003). LANDLORD-TENANT REGULATIONS The Landlord-Tenant Act Chapter 83, F.S., is divided into three sections: Part I: Nonresidential Tenancies Part II: Residential Tenancies Part III: Self-service storage space For the purposes of this section, the discussion concerning landlord-tenant regulations will focus solely on the regulations in residential tenancies. Part II of the Landlord-Tenant Act applies to the rental of dwelling units. It does not apply to the following: residency or detention in a facility, whether public or private, when residence or detention is incidental to the provision of medical, geriatric, educational, counseling, religious, or similar services occupancy under a contract of sale of a dwelling unit or the property of which it is a part transient occupancy in a hotel, condominium, motel, rooming house, or similar public lodging, or transient occupancy in a mobile home park occupancy by a holder of a proprietary lease in a cooperative apartment occupancy by an owner of a condominium unit Disposition of Deposit Money or Advanced Rent Section 83.49, F.S., is one of the more important sections of the Landlord-Tenant Act. When a landlord or his/her agent receives deposit money or advance rent, they must hold the money in one of three manners: Hold the total amount of such money in a separate noninterest-bearing account in a Florida banking institution for the benefit of the tenant or tenants. The landlord cannot commingle such moneys with any other funds of the landlord. Hold the total amount of such money in a separate interest-bearing account in a Florida banking institution for the benefit of the tenant or tenants, in which case the tenant will receive and collect interest in an amount of at least 75% of the annualized average interest rate payable on such account or interest at the rate of 5% per year, simple interest, whichever the landlord elects. The landlord cannot commingle such moneys with any other funds of the landlord. COMPREHENSION 9. When military personnel are required to move more than 35 miles from the location of the property during active duty, what proof is required to terminate a real estate purchase contract?

29 Real Estate Core Law: Latest Law and Rule Changes 23 In most landlord/tenant disputes the burden is on the landlord to keep careful documentation. A meticulous paper trail will help keep potential conflicts to a minimum. Unless the lease states otherwise, section 83.49(5), F.S., does allow the landlord some breathing room when a tenant vacates the premises prior to the expiration of the lease term and fails to give the landlord at least seven days advance written notice to vacate. Failure of the tenant to give such notice shall relieve the landlord of the notice requirement of section 83.49(3)(a), but shall not waive any claim the tenant may have to any part of the security deposit. Post a surety bond with the clerk of the circuit court in the county in which the dwelling unit is located in the amount of the security holdings or $50,000, whichever is less. The landlord must, within 30 days of receipt of advance rent or a security deposit, notify the tenant in writing of the manner in which the landlord is holding the advance rent or security deposit and the rate of interest, if any, which the tenant is to receive and the time of interest payments to the tenant. Upon the vacating of the premises for termination of the lease, if the landlord does not intend to impose a claim on the security deposit, the landlord will have 15 days to return the security deposit together with interest if otherwise required, or the landlord will have 30 days to give the tenant written notice by certified mail to the tenant s last known mailing address of his or her intention to impose a claim on the deposit and the reason for imposing the claim. The notice must contain a statement in substantially the following form: NOTICE OF CLAIM This is a notice of my intention to impose a claim for damages in the amount of $ upon your security deposit, due to. It is sent to you as required by Chapter 83.49(3), F.S. You are hereby notified that you must object in writing to this deduction from your security deposit within 15 days from the time you receive this notice or I will be authorized to deduct my claim from your security deposit. Your objection must be sent to (landlord s address). As referred to in section (1)(d), F.S., when facing conflicting demands on money in escrow, a real estate broker is required to notify the Florida Real Estate Commission. However, section prevails over conflicting provisions in Chapter 475 and permits licensed real estate brokers to disburse security deposits and deposit money without having to comply with the notice and settlement procedures contained in section (1)(d). Termination of Rental Agreement by a Servicemember Any servicemember may terminate his or her rental agreement by providing the landlord with a written notice of termination to be effective on the date stated in the notice that is at least 30 days after the landlord s receipt of the notice if any of the following criteria are met: the servicemember is required, pursuant to a permanent change of station orders, to move 35 miles or more from the location of the rental premises the servicemember is prematurely or involuntarily discharged or released from active duty or state active duty the servicemember is released from active duty or state active duty after having leased the rental premises while on active duty or state active duty status and the rental premises is 35 miles or more from the servicemember s home of record prior to entering active duty or state active duty after entering into a rental agreement, the servicemember receives military orders requiring him or her to move into government quarters or the servicemember becomes eligible to live in and opts to move into government quarters the servicemember receives temporary duty orders, temporary change of station orders, or state active duty orders to an area 35 miles or more from the location of the rental premises, provided such orders are for a period exceeding 60 days, or

30 24 Module 1 the servicemember has leased the property, but prior to taking possession of the rental premises, receives a change of orders to an area that is 35 miles or more from the location of the rental premises Prohibited Provisions in Rental Agreements A provision in a rental agreement is void and unenforceable to the extent that it purports to waive or preclude the rights, remedies, or requirements set forth in Chapter 83, F.S. COMPREHENSION 10. The tenant moved out of Landlord Karen s unit on October 15, Shower tiles were damaged and need to be replaced. By what date must Karen mail her Notice of Claim on the security deposit to the tenant? 11. Does the notice requirement change if the tenant vacated the premises prior to the expiration of the lease term and did not give at least seven days written notice of vacating?

31 Real Estate Core Law: Latest Law and Rule Changes 25 Module 1 REVIEW CORE LAW You are not required to answer the module review questions to complete the 14-hour course. They are intended to help prepare you for the Final Examination. Choose the best response to each question. The answer key is found in the back of the book. 1. Community Development Districts (CDDs) do not possess the right to: a. enter into contracts. b. own both real and personal property. c. regulate land use. d. obtain funds by borrowing. 2. Any person who operates as a real estate licensee without a valid active license is guilty of a: a. first degree misdemeanor. b. second degree misdemeanor. c. second degree felony. d. third degree felony. 3. In a mandatory homeowners association the required disclosure must be provided by the: a. developer or seller. b. broker or sales associate. c. mortgage company. d. closing agent. 4. A fiduciary duty is owed by: a. a transaction broker. b. a single agent. c. all real estate licensees. d. all parties in a real estate transaction. 5. The rule of caveat emptor, or buyer beware: a. no longer exists. b. is the rule in commercial transactions. c. requires sellers to disclose nonobservable material defects. d. requires full disclosure by real estate licensees. 6. The FREC has how many members? a. 4 b. 5 c. 6 d A broker who owns a brokerage firm and a referral company may be issued upon request: a. dual licenses. b. blanket permits. c. multiple operations permits. d. multiple licenses. 8. At least one member of the Florida Real Estate Commission must be how old? a. 60 b. 62 c. 65 d A real estate license is required when acting as a/an: a. attorney in fact for the purpose of the execution of contracts. b. individual selling their own real property. c. salaried employee for an owner of an apartment community who works on site. d. leasing agent who is paid on a transactional basis. 10. Under the license law, it is presumed that all licensees are operating as: a. single agents. b. transaction brokers. c. broker associates. d. seller s agents. Note: Edition 14.3 was published in June, Any changes to laws and rules that occur after this course was published will not affect the Module Review questions and Final Examinations. Check our website for updates to our course material.

32 26 Module 1 Module 1 COMPREHENSION ANSWER KEY 1. Transaction brokers provide limited representation, while single agents work with the buyer or seller in a fiduciary capacity. Using the information provided in Figure 1.1, list the duties that both licensees must provide to buyers and sellers. Single agents and transaction brokers must be: fair and honest; use skill, care, and diligence; and present all offers and counteroffers in a timely manner unless directed otherwise in writing by the buyer or seller. 2. Secretary Olivia mailed the license renewals to the DBPR for the three managing partners of Bamboo Realty one week before the deadline. Unfortunately, the envelope was damaged and they were delayed in the mail. The status of all three broker licenses became involuntarily inactive for five days until the renewals were successfully processed. What was the status of the partnership s registration during those five days? The partnership was canceled automatically during that period of time. The license or registration of at least one active broker member must be in force. 3. If your license expires on March 31st and you do not complete the renewal requirements on time, what is the status of your license on April 1st? If you miss the renewal deadline, your license status becomes involuntarily inactive the first day of the next license period. 4. A licensee was found guilty of misrepresentation and breach of trust. His fine was $10,000. Why was the fine more than $5,000? The commission can impose a fine up to $5,000 per offense. Two separate offenses would amount to a $10,000 fine. 5. Which violation of real estate license law is a third degree felony? A person who operates as a broker or sales associate without a valid or current license is committing a third degree felony. 6. Who is prohibited from being an officer or director of a real estate corporation? A sales associate or broker associate may not be an officer or director of a real estate corporation. 7. When are nicknames allowed to be used in advertising? The FREC permits nicknames to be used in advertising as long as they are not misleading; however, the licensee s last name must appear as it is licensed with the commission. 8. Is an HOA disclosure required prior to closing for all residential property sales within a HOA community? If the homeowners association mandates membership, then the HOA disclosure is required prior to closing for all residential sales. 9. When military personnel are required to move more than 35 miles from the location of the property during active duty, what proof is required to terminate a real estate purchase contract? In order to terminate a real estate purchase contract or rental agreement, the servicemember must provide either a copy of the official military orders or a written verification signed by the servicemember s commanding officer.

33 Real Estate Core Law: Latest Law and Rule Changes 27 Module 1 COMPREHENSION ANSWER KEY 10. The tenant moved out of Landlord Karen s unit on October 15, Shower tiles were damaged and need to be replaced. By what date must Karen mail her Notice of Claim on the security deposit to the tenant? To comply with the notice requirement Landlord Karen must mail her notice by November 14th, which is within 30 days of the tenant s departure. 11. Does the notice requirement change if the tenant vacated the premises prior to the expiration of the lease term and did not give at least seven days written notice of vacating? If the tenant vacated the premises prior to the expiration of the lease term and did not give at least seven days written notice of vacating, the landlord does not have to follow the 30-day notice requirement. However, the tenant is still owed whatever is due from the balance of the security deposit.

34 28 Module 1 ~ NOTES ~

35 MODULE 2 Property Insurance in Florida: Recent History and What the Future Holds by Senator Nancy Detert Nancy was elected to the Florida Senate in 2008 after serving in the Florida House from , and represents Southwest Florida. She has worked as a mortgage broker and has served as the legislative chair of the Florida Association of Mortgage Brokers in Nancy has also served on the Sarasota County School Board and was selected as Legislator of the Year for the Florida School Boards Association three times, most recently in The recipient of numerous awards for her leadership and continuous commitment to public service, Nancy works tirelessly to improve the quality of life for her constituents. Learning Objectives Upon completion of this module, the learner will be able to: 1. Discuss the history that led to the development of Citizens Property Insurance Corporation in Florida. 2. Cite two concerns with the present allocation of Citizens Property Insurance policies. 3. Identify the factors that make it difficult for private insurers to compete with Citizens Property Insurance rates. 4. Compare how replacement cost value and actual cash value can affect the insured s ability to rebuild after a property loss. 5. Describe three goals behind the insurance changes made by Senate Bill Consider how surplus and capital reserve requirements impact insurance premiums. 7. Explain how prior sinkhole claims have negatively impacted insurers in Florida. 8. Determine the significance in providing the definition of structural damage in section , F.S. 9. Identify who can initiate sinkhole testing. 10. Discuss the legislative intent for revisions in the sinkhole law. 11. Hypothesize the costs of self-insuring in comparison to current insurance choices. Bert Rodgers Schools of Real Estate, Inc. 29

36 30 Module 2 INTRODUCTION AND HISTORY Flood, drought, hurricanes, sinkholes, oh my! Florida is famous for weather-related problems and weatherrelated problems can cause insurance problems. Consequently, the cost of insurance is one of the primary concerns of buyers when they come to Florida. Anyone working in the sale or financing of real estate must be able to address the legitimate concerns of the public when it comes to the cost of homeowners insurance. To do that, it helps to be familiar with the history of the insurance problems that besiege our state. Florida has one of the largest coastlines in America and some of the most beautiful beaches in the world. For the past four decades Florida has consistently been among the fastest growing states in the U.S. Many people buying real estate in the Sunshine State want to live as close to the beach as possible. As our state grows, more and more people fill the coastal communities. Prior to Andrew, we had not had a significant hurricane for 20 years. However, when Hurricane Andrew hit south Florida in August 1992, it caused $25 billion dollars in damage that not only affected homeowners but also homeowners insurance companies. Small companies went out of business, leaving their clients stranded while large insurance companies such as Allstate, State Farm, and Nationwide petitioned the state for massive premium increases to help cover their losses. By 2004, after paying the enormous costs of Hurricane Andrew, many insurance companies were either hesitant to write insurance in Florida or withdrew entirely from the state. Homeowners were already dealing with a rise in insurance rates and cuts in coverage. Then, Floridians became familiar with names like Charley, Frances, Ivan, Jeanne, Dennis, and Wilma as hurricanes crisscrossed the state. The sheer enormity of claims filed as a result of this unusual spate of storms resulted in large insurance companies dropping policyholders while others joined the exodus that began during the aftermath of Andrew. Real estate became somewhat challenging to sell in Florida because, as all real estate licensees and lenders know, the only thing worse than expensive insurance is no insurance at all. Banks will not close on a loan without proof of insurance. Citizens Property Insurance Corporation was implemented as the solution to the problem. From its inception in 2002, Citizens was billed as the insurance company of last resort so that all Floridians, no matter where they lived, would have access to property insurance. However, as more and more homeowners were dropped by existing firms, Citizens evolved from the insurance company of last resort to the largest insurance company in the state. Because Citizens was and is a tax-payer funded insurance company, new problems arose. Potentially every Florida resident could be on the hook for claims. In this module you will learn about the challenges facing our state as we strive to establish financially sound sources of coverage for existing residents as well as the thousands of buyers who want to own a piece of paradise. One only has to read a newspaper to recognize there is a great deal of confusion and anxiety about property insurance. The Palm Beach Post published an article in June of 2011 about a man who was shocked to see the annual premium on his homeowners policy go from $1,092 to $2,715 a 149% increase in one year. The Post quotes the man as saying, Did the end of the world happen or something? In the same article, another man is quoted as saying, Since the three sister hurricanes (Frances, Jeanne, and Wilma) it has been a nightmare trying to keep this house insured. The Tampa Tribune shines another light on the problem with a story they published in December, When Joe bought his house for $109,000 he thought he got a really good deal. His insurance agent suggested that a policy for $139,000 would give him good coverage with a little cushion. But, Citizens would only offer Joe a $237,000 policy which they felt was the replacement cost of the dwelling. I feel strong-armed. I feel abused and beaten down, said Joe. Many Florida residents have experienced a similar scenario. For the past five years, the real estate market as a whole has been sluggish. Housing prices are now affordable, but insurance is not. In today s economy, it now costs more to replace a home than it does to buy an existing one and therein lies the rub. Unless changes are made, property insurance could end up trumping property taxes in terms of the increasing cost of home ownership. UNDERSTANDING THE COST OF INSURANCE Because of the population growth in our state, Florida insurance laws are complex and constantly chang-

37 Property Insurance in Florida: Recent History and What the Future Holds 31 ing. While insurance formulas are somewhat akin to a foreign language to most of us, plowing through the details is necessary to answer the question that we all ask: Why is property insurance in Florida so expensive? In 1993, to protect its citizens, Florida law established certain minimum surplus and capital requirements for property and casualty insurers to provide insurance coverage in the state. Surplus is the reserve an insurer has available to pay claims and is a critical component in measuring the financial strength of a company. An insurer s reserve is the remainder after a company s liabilities are subtracted from its assets. It is the financial cushion that protects insurers in case of an unexpectedly high number of claims. We can all agree that Florida has experienced more than its share of hurricanes since Because circumstances have changed and costs have risen, particularly for residential property insurers, increased minimum surplus requirements for insurance companies were deemed necessary. The rating agency, A.M. Best, red flagged the problem in 2009 by downgrading nine insurers that sold homeowners insurance in Florida. Demotech, another company that rates some of the smaller insurers in Florida, withdrew its rating from six insurers. Two such small insurers were ordered into receivership. As per section , F.S., receivership means the placement of an insurer under the control of a receiver pursuant to a delinquency proceeding. A receivership is usually implemented to assist with the liquidation or rehabilitation of an insurer. In February of 2010, the Florida Office of Insurance Regulation determined that the existing level of surplus was not sufficient to support the business plans of residential property insurers in Florida. Numerous reasons were cited in calling for change: Reinsurance costs continue to rise. The rates charged by reinsurers have increased and the amount of reinsurance being purchased by most insurance companies has also increased. Reinsurance costs vary but currently average at least 30% of an insurer s written premium. Reinsurance is bought by insurance companies to help insure them against having a greater loss than they can afford but the rate charged to insurance companies is not regulated by the Office of Insurance Regulation. Changes to the Florida Hurricane Catastrophe Fund (FHCF) have resulted in increases in reinsurance costs to residential property insurers in Florida; therefore insurers will need to purchase more reinsurance from the private market. Noncatastrophe losses are increasing. Even in years with no hurricanes, property writers are experiencing increased losses. This may be due to the current economy. Fraudulent and inflated claims are being filed and are expected to increase if the economy worsens. A sudden rash of sinkholes that have swallowed homes and cars. State Funded Reinsurance The Florida Hurricane Catastrophe Fund (FHCF), also known as CAT Fund, is a state run mandatory reinsurer which provides reimbursements to insurers writing residential property insurance in the state. Created in November of 1993, the FHCF was also a result of a special legislation session following Hurricane Andrew. A fee collected by the FHCF is included in every automobile, watercraft, and homeowners policy whether written by Citizens Property Insurance Corporation or a private insurer to help maintain the reinsurance fund. The FHCF is intended to cover any losses that the state-run insurance company or any other small private insurer cannot pay. The fund may or may not be sufficient to pay all of the claims from a major hurricane or any other natural disaster that could potentially hit one or more of Florida s high-risk coastal areas. Therefore, the law allows assessments to be made across a broad base of insurance lines to pay losses when the FHCF balance is insufficient to do so. Legislators continue to suggest changes to the structure of this program. Florida s Insurance Premium Rating System Insurance premiums are determined by a complicated rating system. Rating factors can include variables such as construction type, protection devices, code enforcement, credit scores, and breeds of household pets. In order to raise rates, companies must seek approval from the Office of Insurance Regulation. Florida has a rate filing process for property and casualty insurers and provides rating standards for these insurers. The rating law applies to property, casualty, and surety insurance and prohibits rates that are excessive, inadequate, or unfairly discriminatory. The law outlines what constitutes excessive or unfair rate increases: Excessive Rate It is likely to produce a profit from a Florida business that is unreasonably high in relation to the risk

38 32 Module 2 involved or if expenses are unreasonably high in relation to the services rendered. The rate structure established by a stock insurance company provides for replenishment of surpluses from premiums, when the replacement is attributable to investment losses. In other words, they cannot raise the rate because their company lost money in the stock market. Inadequate Rate It is clearly insufficient to sustain projected losses and expenses in the class of business to which it applies. Discriminatory Rate The rating plan fails to clearly and equitably reflect consideration of the policyholder s participation in a risk management program. The application of premium discounts, credits, or surcharges among the risks do not bear a reasonable relationship to the expected loss and expense experience among the various risks. Replacement Cost Insurance Coverage In addition to the condition of the property, the types of replacement coverage can affect insurance premiums. There are two basic ways that property insurance losses can be adjusted: replacement cost value (RCV) or actual cash value (ACV). Replacement cost value is the cost to replace an item or structure at the same location with another item or structure of comparable material and quality used for the same purpose. Actual cash value is the depreciated value of the property being replaced or repaired. Current law requires that companies issuing homeowners insurance policies must offer policyholders an option for replacement cost coverage. The law provides that if a loss is insured for replacement cost, the insurer must pay the replacement costs without deducting for depreciation in value. Until 2005, under the replacement cost policy an insurer could make an initial payment based on an actual cash basis and require the customer to complete the repair before the insurer paid the balance of the full replacement cost. Following multiple hurricanes, regulators began to receive complaints from homeowners who were given the actual cash value but could not afford to pay the balance necessary to make the repairs or replacements on their damaged homes. These policyholders had paid premiums for replacement cost coverage but were only given actual cash value benefits. In 2005, the Florida Legislature passed new laws that disallowed this deceptive business practice. CITIZENS PROPERTY INSURANCE CORPORATION In 2002, the Florida legislature created a not-for-profit, tax-exempt, governmental entity to provide insurance for homeowners in coastal or high risk areas who could not otherwise obtain or afford coverage through private insurance companies. The resulting ease-of-access for coverage under this program has created a new dilemma in our hurricane-prone state. The initial rates for Citizens insurance were low and the majority of the coverage was along the coastline; however, the potential risk was, and remains, spread among residents statewide. Citizens was created by the merger of two existing property insurance associations: The Florida Residential Property and Casualty Joint Underwriting Association (FRPCJUA) and the Florida Windstorm Underwriting Association (FWUA). The FRPCJUA Table 2.1 County Policies Total Premium Total Exposure Miami-Dade 274,148 19% $812,517,949 27% $110,885,518,758 22% Broward 212,365 15% $504,955,535 17% $78,708,049,948 15% Pinellas 150,249 10% $281,085,257 9% $48,094,411,318 9% Palm Beach 145,529 10% $365,020,846 12% $63,990,740,469 13% Hillsborough 81,244 6% $126,944,317 4% $22,596,790,979 4% Remaining ,137 41% $943,777,466 31% $184,244,458,445 36% Counties Total 1,460,672 $3,034,301,370 $508,519,969,917 Source: Citizens Property Insurance Corporation

39 Property Insurance in Florida: Recent History and What the Future Holds 33 provided full coverage personal and commercial residential property insurance in all counties of Florida while the FWUA provided personal and commercial residential property wind-only coverage in designated areas. Citizens Property Insurance Corporation was implemented as the state run program offering insurance to owners of properties who were turned down by private insurance companies. It was billed as the insurance company of last resort. Instead, as of October 2011, the Citizens Property Insurance Company provided coverage to over 1.4 million policyholders and extended approximately $508 billion of property insurance to Floridians. As of that date, nearly 20% of the state s population was insured by the state run company. The bad news was that 58% of all policyholders were located in the five most highrisk coastal counties as evidenced by table 2.1. Currently, the Citizens Property Insurance Corporations book of business is divided into three separate accounts: Personal Lines Account: Personal residential, multi-peril policies including homeowners, mobile homes, dwelling fire, tenants, condominium unit owners. Commercial Lines: Commercial residential, multiperil policies including condominium associations, apartment building and homeowners association policies as well as commercial nonresidential, multi-peril and wind coverage located outside of the coastal high risk areas. Coastal Account: Wind-only and multi-peril policies for personal residential, commercial residential, and commercial nonresidential risks located in eligible coastal high risk areas. An applicant for coverage with Citizens Property Insurance Corporation is eligible even if the applicant has an offer of coverage from an insurer in the private market as long as the premium in the private sector is 15% more than Citizens would charge FLORIDA LEGISLATION IMPACTING INSURANCE It has long been the goal of state legislators to relieve the State of Florida from the burden of being in the insurance business. Therefore, most insurance rules were written for the purpose of encouraging private insurance companies to take policyholders away from the state run insurance company. However, because of the significant losses sustained during the 2004 and 2005 hurricane seasons, private insurers have been reluctant to expand their policy writing in Florida. As a result, Citizens had to take the overflow and increase their number of policyholders. Earlier legislation required Citizens, using a very complex formula, to reduce its high risk, wind-only coverage by 25% no later than December 1, Reports indicated that Citizens was not going to be able to meet the deadline. Private insurers writing the other peril/nonwind coverage had to face the choice of either eliminating the existing coverage or including the windstorm coverage that was dropped by Citizens. Senate Bill 408 made changes to Citizens in an effort to remedy this situation and this new legislation was approved by the Governor on May 17, The aspects that impact professionals in the real estate industry the most are discussed below: 1. Changed the name of the Citizens high risk account to the coastal account in order to remove the negative connotation. 2. Repealed the requirement to reduce the high-risk area after December 1, The bill also repealed a requirement to reduce the high-risk area after February 1, Required Citizens to offer sinkhole coverage, but after February 1, 2012, the coverage is extended only to the main structure of the house. 4. Prohibited Citizens from levying a regular assessment until it has levied the full amount of the policyholder surcharge. The surcharge is an assessment that is levied to provide resources for Citizens to pay claims when catastrophic events have depleted Citizen funds. The surcharge is payable upon cancellation, termination, renewal, or issuance of a new policy within 12 months after the imposition of the surcharge or the period of time necessary to collect the surcharge. Beginning January 1, 2012, the Citizens Property Insurance Corporation requires agents to obtain from applicants for coverage a signed Acknowledgment of Potential Surcharge and Assessment Liability form. The form details that Citizens policyholders are subject to a policyholder surcharge of up to 45% of premium and emergency assessments. Citizens policies issued or renewed on or after January 1, 2012, which cover sinkhole loss, may not include coverage for losses to appurtenant struc-

40 34 Module 2 tures, sidewalks, decks, or patios that are caused by sinkhole activity. Citizens policies must exclude such coverage using a notice of coverage change, which may be included with the policy renewal. Limits for Claims and Statute of Limitations Senate Bill 408 placed time limits for bringing a hurricane or sinkhole claim and created a statute of limitations for bringing a breach of contract property insurance action in court. The bill made numerous changes to laws related to property insurance, primarily residential property insurance. These changes included: Windstorm or hurricane claim must be given to the insurer within three years after the hurricane first makes landfall or the windstorm causes covered damage. An initial, supplemental or reopened sinkhole claim must be given to the insurer within two years after the policyholder knew or reasonably should have known about the sinkhole loss. A five year statute of limitations for bringing an action for the breach of a property insurance contract that runs from the date of loss. Florida Hurricane Catastrophe Fund In 2011, the law required the Florida Hurricane Catastrophe Fund (CAT Fund) to provide reimbursement for all incurred losses, including amounts paid as fees on behalf of the policyholder. However, a number of specified losses were excluded from payment. Surplus Requirements As previously described, surplus is the company s assets minus its liabilities. The 2011 legislative changes raised the surplus requirements for insurers transacting residential property insurance that are not a wholly owned subsidiary of an insurer located in another state. For a new insurer, the surplus requirement was raised from $5 million to $15 million. An existing insurer that holds a certificate of authority before July 1, 2011, must have a surplus of at least $5 million until June 30, 2016; from July 1, 2016 until June 30, 2021, a surplus of at least $10 million; and on or after July 1, 2021, a surplus of at least $15 million. Public Adjusters Another component to rising insurance costs is public adjusters. Public adjusters are defined as persons, other than licensed attorneys, who, for compensation, prepare or file an insurance claim form for an insured or third-party claimant in negotiating or settling an insurance claim on behalf of the insured. They are employed exclusively by a policyholder who has sustained an insured loss and their responsibilities include inspecting the loss site, analyzing damages, assembling claim support data, reviewing the insured s coverage, determining current replacement costs, and conferring with the insurer s representatives to adjust the claim. Public adjusters are licensed by the Department of Financial Services and must meet specified age, residency, examination, and surety bond requirements. As of 2011, Florida had approximately 2,600 licensed public adjusters. Prior to 2011, public adjusters were not allowed to charge a fee unless a written contract was executed prior to the payment of a claim. Adjusters were prohibited from charging more than 20% of the insurance claims payment on nonhurricane claims. These fee caps applied only to residential property insurance policies and condominium policies. Because of the opportunities for fraud in this category, public adjusters are highly regulated legislative updates addressed issues relating to this key component of the insurance industry with Senate Bill 408. The 2011 law limited public adjuster fees related to reopened or supplemental claims to a maximum of 20% of the reopened or supplemental claim payment. The bill also limited public adjuster fees to 20% of an insurance claim payment made by the insurer more than one year after events that are the subject of a declaration of a state of emergency by the governor. A public adjuster fee related to a policy issued by Citizens Property Insurance Corporation may not exceed 10% of the additional amount actually paid in excess of the amount originally offered by the insurer on the claim. Public adjusters are prohibited from making deceptive or misleading advertisements or solicitations. Written solicitations must include a disclaimer notifying the consumer that a solicitation is being made. A public adjuster contract related to a property and casualty insurance claim must contain the full name

41 Property Insurance in Florida: Recent History and What the Future Holds 35 of the public adjuster and public adjusting firm, the business address, license number, and other specified information. Prompt notice of a property loss claim from the public adjuster to the insurer is mandated; it must include the public adjuster s employment contract. The public adjuster must also ensure that the insurer has access to inspect the property, can interview the insured directly about the loss and claim, and allow the insurer to obtain information necessary to investigate and respond to the claim. The insurance company s adjuster or other persons acting on the insurer s behalf must provide at least 48 hours notice before scheduling an inspection of the property or a meeting with the claimant. The insurer also must allow the public adjuster to be present during the insurer s inperson meetings with the insured. The law also required licensed contractors to be licensed as a public adjuster in order to adjust a claim on behalf of the insured. Rate Standards Property insurance rate filings were required to be submitted via the file and use method until May 1, In a file and use rate filing the insurer must receive approval from the Office of Insurance Regulation before implementing the insurer s proposed rate. Residential property insurers are authorized to make a separate rate filing limited solely to an adjustment of its rates for reinsurance and financing products used as a replacement for reinsurance. The rate filing may not result in a premium increase of more than 15% for an individual policyholder and must be approved or disapproved by the Office of Insurance Regulation within 45 days. The Office of Insurance Regulation retains the authority to deny the filing if the proposed rate is excessive, inadequate, or unfairly discriminatory. An insurer may make only one such filing per 12-month period. The procedure created by the 2011 legislation expanded a provision in a previous law that authorizes a 10% rate increase per policyholder that is solely based on reinsurance that replaces Temporary Increase in Coverage Limits (TICL) reinsurance from the Florida Hurricane Catastrophe Fund. Senate Bill 408 specified that the sworn certification of a property insurance rate filing is not rendered false if the insurer provides the Office of Insurance Regulation with additional information pursuant to a request from the Office. The insurer s actuary responsible for providing the additional information must provide an additional sworn certification. Notice of Cancellation The 2011 legislation revised the notice of cancellation, nonrenewal, or termination requirements for personal lines, commercial lines, and residential property insurance policies. At least 120 days notice must be given to a named insured whose residential structure has been insured by the insurer or its affiliate for at least five years. The previous requirement was 180 days notice for the cancellation, nonrenewal, or termination of such policies. Unchanged from 2010, policies that have been in effect for less than five years are required to have a 100-day notice of nonrenewal. The law authorizes the nonrenewal of a policy that covers both a home and a motor vehicle for any reason applicable to either the property or motor vehicle insurance, as long as the insurer provides 90 days notice of the nonrenewal. The notice of cancellation requirement for a Citizens policy that has been assumed by an authorized take-out company is reduced to 45 days. A take-out company is an insurer that has been approved by the Florida Office of Insurance Regulation to remove policies from Citizens Property Insurance Corporation. Senate Bill 408 also authorized an insurer to cancel or nonrenew a property insurance policy if the Office of Insurance Regulation found that the early cancellation was necessary to protect the best interests of the public or policyholders. The Office may base its finding upon the financial condition of the insurer, the insurer s lack of adequate reinsurance coverage for hurricane risk, or other relevant factors. The nonrenewal may be conditioned upon the insurer being placed under administrative supervision or to the appointment of a receiver. Notice of Change in Policy Terms 2011 law authorized insurers to renew a property and casualty insurance policy under different policy terms by providing to the policyholder a written Notice of Change in Policy Terms instead of a written Notice of NonRenewal. The Notice must be titled Notice of Change in Policy Terms, give the insured written notice of the change, and be enclosed with the written notice of renewal premium. The insured is deemed to have accepted the change in policy terms upon the insurer s receipt of the premium payment for the renewal policy. If the insurer fails to provide

42 36 Module 2 the Notice of Change in Policy Terms the original policy terms remain in effect. Replacement Cost Coverage Senate Bill 408 modified how insurers must pay dwelling or personal property losses on a replacement cost basis. For a dwelling loss, the insurer must initially pay the actual cash value, minus the deductible. Subsequently, the insurer must pay any amounts necessary to make repairs as work is performed. If a total loss of a dwelling occurs, the insurer must pay the entire replacement cost coverage without holdback of depreciation in value pursuant to the Valued Policy Law. For personal property losses insured on a replacement cost basis, the insurer must offer two claim payment options. The first option requires the insurer to pay the replacement cost without holdback of depreciation, regardless of whether or not the insured replaces the property. The second option allows the insurer to limit the initial payment to the actual cash value of the personal property to be replaced. To receive payment from the insurer for the full replacement value of the personal property, the insured must provide a receipt for the replaced property to the insurer. A policy authorizing the insurer to require replacement of personal property prior to paying the full replacement cost must provide the policyholder with a premium credit or discount and the insurer must provide clear notice of the payment process before the policy is bound. SINKHOLE AND CATASTROPHIC GROUND COVER COLLAPSE INSURANCE We have all seen dramatic photos of cars and even entire houses being swallowed by sinkholes. This is a relatively rare occurrence and restricted to certain counties. Sinkhole insurance claims, however, have suddenly skyrocketed. Sinkhole insurance claims have increased substantially both in number and cost over the past two decades and dramatically over the last several years adding to the rise in Florida property insurance premiums. Licensed geologists in Florida agree there is no geological explanation for the significant increase in sinkhole claims being reported to insurers. The drastic increase in sinkhole claims is affecting the financial stability of both Citizens Property Insurance Corporation and private insurers and making residential property insurance increasingly unaffordable or unavailable for consumers. The Citizens sinkhole claims frequency more than doubled between 2006 and In 2009, Citizens incurred over $84 million in sinkhole losses yet obtained only $19.6 million in earned premiums to cover those costs. Private insurers have also seen their sinkhole claims and costs rise by double and triple digits over the past few years. According to data submitted by 211 property insurers to the Office of Insurance Regulation, their reported claims increased from 2,360 in 2006 to 6,694 in Total sinkhole claim costs for these insurers amounted to approximately $1.4 billion for the same period. Representatives from the Office of Insurance Regulation believe that a major driving force for the significant increase in sinkhole claims is that many policyholders may be incentivized to file such claims because they can keep the cash proceeds from the claim instead of making repairs to their home or land. The failure of sinkhole claimants to make repairs or stabilize land has concerned property appraisers in several counties, particularly in Hernando and Pasco counties. The Hernando Property Appraiser has estimated that since 2005, the county has lost $173 million in total market value due to claimants not repairing their homes. Numerous revisions and clarifications to the laws governing sinkhole and catastrophic ground cover collapse insurance were included in the Senate Bill 408. The 2011 legislation authorized insurers to restrict catastrophic ground cover collapse and sinkhole loss coverage to the principal building as defined in the insurance policy. The bill also allowed an insurer to require a property inspection prior to issuing sinkhole loss coverage. The bill clarified that additional living expense coverage is only available pursuant to a sinkhole loss if there was structural damage to the covered building. The 2011 law changed the definition of sinkhole loss, primarily by creating a statutory definition of structural damage in section , F.S. A sinkhole loss is defined in statute as structural damage to the covered building, including the foundation, caused by sinkhole activity. The law created a detailed definition of structural damage for purposes of determining whether a sinkhole loss has occurred. The definition specifies five distinct types of damage that consti-

43 Property Insurance in Florida: Recent History and What the Future Holds 37 tute structural damage. Each type of damage is tied to standards contained in the Florida Building Code or used in the construction industry. Accordingly, in order for the policyholder to obtain policy benefits for sinkhole loss, the insured structure must sustain structural damage, as defined by the bill, which is caused by sinkhole activity. Investigation of Sinkhole Claims Coverage for sinkhole loss is only available if structural damage is present and if the structural damage was caused by sinkhole activity. Senate Bill 408 created a substantially new process for an insurer s investigation of a sinkhole claim. The process is as follows: Initial Inspection & Structural Damage Deter mination: Upon receipt of a claim for sinkhole loss, the insurer must inspect the policyholder s premises to determine if there has been structural damage which may be the result of sinkhole activity. This inspection will often require the insurer to retain a professional engineer to evaluate whether the insured building has incurred structural damage as defined by statute. Sinkhole Testing Initiated by the Insurer: The insurer is required to engage a professional engineer or professional geologist to conduct sinkhole testing, if the insurer confirms that structural damage exists and is either unable to identify a valid cause of the structural damage or discovers that the structural damage is consistent with sinkhole loss. If coverage is excluded under the policy even if sinkhole loss is confirmed, then the insurer is not required to conduct sinkhole testing. Notice to the Policyholder: Senate Bill 408 maintained the requirement that the insurer must provide written notice to the policyholder detailing what the insurer has determined to be the cause of damage (if the determination has been made) and a statement of the circumstances under which the insurer must conduct sinkhole testing. The policyholder must also be notified of his or her right to demand sinkhole testing and the circumstances under which the policyholder may incur costs associated with testing. Authorization to Deny Sinkhole Claim: Insurers may continue to deny the claim upon a determination that there is no sinkhole loss. Policyholder Demand for Sinkhole Testing: The bill specified that the policyholder may demand sinkhole testing in writing within 60 days after receiving a claim denial if the insurer denies the claim without performing sinkhole testing and coverage would be available if a sinkhole loss is confirmed (i.e., the claim denial was not issued due to policy conditions or exclusions of coverage and instead was based on the failure of the loss to meet the definition of sinkhole loss). However, if the policyholder requests such testing, it must pay the insurer 50% of the sinkhole testing costs up to $2,500. If the requested testing confirms a sinkhole loss, the insurer must reimburse the testing costs to the policyholder. Payment of Sinkhole Claims The insurer continues to be required to pay to stabilize the land and building and repair the foundation upon the verification of a sinkhole loss. Payment will be made to conduct such repairs in accordance with the recommendations of the professional engineer retained by the insurer under the law. The bill also clarifies that the insurer is required to give notice to the policyholder regarding payment of the claim. The insurer may limit payment to the actual cash value of the sinkhole loss not including below-ground repair techniques until the policyholder enters into a contract for the performance of building stabilization repairs. The law requires the contract for belowground repairs to be made in accordance with the recommendations set forth in the insurer s sinkhole report, and entered into within 90 days after the policyholder receives notice that the insurer has confirmed coverage for sinkhole loss. The time is tolled if either party invokes neutral evaluation. Stabilization and all other repairs to the structure and contents must be completed within 12 months after the policyholder enters into the contract for repairs unless the insurer and policyholder mutually agree otherwise, the claim is in litigation, or the claim is in neutral evaluation, appraisal, or mediation. If a covered building suffers a sinkhole loss or catastrophic ground cover collapse, the insured must repair such damage in accordance with the insurer s professional engineer s recommended repairs. However, if repairs cannot be completed within policy limits, the insurer has the option to either pay to complete the recommended repairs or tender policy limits. Prohibition Against Rebates The policyholder is prohibited from accepting a rebate from a person performing sinkhole repairs. If the poli-

44 38 Module 2 cyholder does receive a rebate, coverage under the insurance policy is rendered void and the policyholder must refund the amount of the rebate to the insurer. Furthermore, a person who offers a rebate commits insurance fraud punishable as a third degree felony (up to five years imprisonment), Chapter , F.S. (up to a $5,000 fine), and Chapter , F.S. (for a habitual felony offender up to 10 years imprisonment with no eligibility for release for five years). Nonrenewal of Policy Due to Sinkhole Claims The circumstances that allow an insurer to nonrenew a policy on the basis of filing a sinkhole claim were modified. The policy may only be nonrenewed if the insurer makes payments for sinkhole losses that equal or exceed policy limits for damage to the covered building, or if the policyholder does not repair the structure in accordance with the engineer s recommendations. Sinkhole Testing Reports The bill requires a sinkhole testing report to verify whether the structural damage to the covered building has been identified within a reasonable professional probability. Filing of Reports with the Clerk of Courts In addition to filing the sinkhole testing report with the Clerk of Court after paying a sinkhole loss claim, the law requires the insurer to also file the neutral evaluator s report (if any), a copy of the certification indicating that stabilization has been completed (if applicable), and the amount of the claim payment. The policyholder must file a copy of any sinkhole report prepared on behalf of the policyholder as a precondition to accepting a sinkhole loss payment. Certification of Proper Completion of Sinkhole Repairs Once building stabilization or foundation repairs of a sinkhole loss are completed, the professional engineer responsible for monitoring the repairs must issue a report to the property owner detailing the repairs performed and certifying that the repairs were performed properly. The professional engineer must file with the Clerk of Court a copy of the report and certification, the legal description of the real property, and the name of the county Clerk of Court. Neutral Evaluation of Disputed Sinkhole Claims When a sinkhole claim is disputed, a neutral evaluation must determine causation (i.e., whether a sinkhole loss has occurred and, if so, whether the observed damage was caused by sinkhole activity). The neutral evaluation must include: all methods of stabilization and repair both above and below ground, the costs for stabilization and all repairs, and all information needed to determine whether a sinkhole loss has been verified. After the evaluation report is completed, an opinion is rendered on all disputed matters. The neutral evaluator must be provided with information necessary to perform his or her duties. The bill requires that the neutral evaluator must be allowed reasonable access to the interior and exterior of the insured structures to be evaluated or for which a claim has been made. The policyholder must provide the neutral evaluator with all reports initiated on behalf of the policyholder that confirm a sinkhole loss or dispute the insurer s sinkhole testing report. Such materials must be provided prior to the neutral evaluator s physical inspection of the property. The 2011 law revised the periods for conducting the neutral evaluation. The parties are provided 14 business days to agree to a neutral evaluator. If an agreement cannot be reached, the Department of Financial Services (DFS) will appoint a certified neutral evaluator. The neutral evaluator has 14 business days after the referral to notify the parties of the date, time, and place of the neutral evaluation conference an increase from five business days in current law. The neutral evaluator s report must be provided to the parties within 14 days after the completion of the neutral evaluation conference. A court proceeding related to the neutral evaluation must be stayed until five days after the filing of the neutral evaluator s report with the court. If the neutral evaluator is not qualified to determine a disputed issue, he or she may enlist the assistance of another certified neutral evaluator, a professional engineer or professional geologist who is not a certified neutral evaluator, or a licensed general contractor to provide an opinion on that issue. Such person may be disqualified for cause in the same fashion as a neutral evaluator. The neutral evaluator may also request that the entity that performed the sinkhole investigation perform additional and reasonable testing that the neutral evaluator deems necessary. If the insurer agrees to comply with the neutral evalu-

45 Property Insurance in Florida: Recent History and What the Future Holds 39 ator s report, payments will be made in accordance with the terms of the applicable insurance policy and the law. The 2011 law also made the following changes related to the neutral evaluation process: specifies that neutral evaluation does not invalidate an insurance policy s appraisal clause allows the parties to disqualify a neutral evaluator for cause based on specified familial or professional relationships requires admission of the neutral evaluator s oral testimony and full report in any action, litigation, or proceeding related to the claim specifies that the actions of the insurer in neutral evaluation are not a confession of judgment or an admission of liability deems neutral evaluators agents of the Department of Financial Services and grants them immunity from lawsuits Legislative Intent The 2011 law stated that the clarifications and revisions to the previous law were intended to reduce the number and cost of sinkhole claims and disputes, increase reliance on scientific or technical determinations relating to sinkhole claims, and ensure that repairs are made in accordance with scientific and technical determinations and insurance claims payments. CONCLUSION Hurricanes, sinkholes, fraud, and the Legislature s desire to keep insurance rates low and affordable have created an ongoing challenge for the state and its citizens. By keeping Citizens insurance premiums artificially low, many of the state s private insurance companies have become non-competitive. Citizens Property Insurance Corporation has become the largest carrier in the state instead of the insurance company of last resort. High-risk hurricane areas were originally identified by following our Florida coastline until Frances and others crisscrossed the state hitting almost every county. One interior town was hit twice in the same season by two different hurricanes! Sinkholes were thought to be isolated to specific areas of the state. The focus on sinkholes has changed from where they may occur to how the claims and repairs are handled with regard to the insurer, insured, and its impact on the local county. Insurance carriers are the companies consumers love to hate. It seems as though they collect high premiums and almost never have to pay a claim. Conversely, there has not been a rush for homeowners to take the risk themselves by self-insuring. The continued demand for better insurance options pushes legislators to tweak current laws in an attempt to encourage the large financially sound insurers to assume the risk of insuring Florida homeowners. Insurance can be confusing, sometimes unfair, and filled with land mines. Paying careful attention to your insurance choices can help prevent your dream home from becoming a money pit. Taking time to wade through the details of homeowners insurance, Citizens insurance, and sinkhole coverage, allows you and your customers to be better prepared for unexpected perils. To download a free consumer guide explaining homeowners insurance policy options from the Florida Department of Financial Services, visit: Guides/Property/docs/InsuringYourHomeEnglish.pdf or call their consumer helpline at: For more information on Citizens Property Insurance Corporation go to:

46 40 Module 2 Module 2 REVIEW INSURANCE You are not required to answer the module review questions to complete the 14-hour course. They are intended to help prepare you for the Final Examination. Choose the best response to each question. The answer key is found in the back of the book. 1. An insurance premium which is clearly insufficient to sustain projected losses and expenses is: a. inadequate. b. excessive. c. discriminatory. d. exclusive. 2. The cost to replace an item or structure at the same location with another item or structure of comparable material and quality used for the same purpose is: a. actual cash value. b. replacement cost value. c. replicated cost value. d. approximate cash value. 3. Senate Bill 408 made several changes to the insurance laws that affect real estate professionals. These changes did not include: a. repealing the February 2015 deadline to reduce high-risk coverage. b. requiring Citizens to offer sinkhole coverage. c. placing time limits for bringing a hurricane or sinkhole claim. d. planning for the dissolution of Citizens. 4. The Florida Hurricane Catastrophe Fund is referred to as the: a. CAT Fund. b. SCAT FUND. c. Relief Fund. d. Flood Fund. 5. Damages caused by Hurricane Andrew in August 1992, amounted to: a. $5 million. b. $10 million. c. $15 billion. d. $25 billion. Note: Edition 14.3 was published in June, Any changes to laws and rules that occur after this course was published will not affect the Module Review questions and Final Examinations. Check our website for updates to our course material.

47 MODULE 3 Introduction to Commercial Real Estate: Could This Be Your New Specialty? by John Ruffier, J.D. John is a commercial real estate attorney with Lowndes, Drosdick, Doster, Kantor & Reed in Orlando, FL. He represents lenders and works with companies who acquire, develop and sell commercial real estate. He graduated from Vanderbilt University and the University Of Florida College Of Law. John has been recognized as Best of the Bar by the Orlando Business Journal and as Florida Legal Elite, 2007, by Florida Trend Magazine. In addition, John served as a member of the Florida Real Estate Commission from 2007 to Learning Objectives Upon completion of this module, the learner will be able to: 1. Evaluate how the corporate structure of the buyer or seller impacts the commercial transaction. 2. Distinguish between Fee Ownership and Commercial Condominium. 3. Explain the differences between the four types of commercial property spaces. 4. List five types of commercial property users. 5. Critique the description provided for the three grades of office space. 6. Consider how a letter of intent can affect both the buyer and the seller. 7. Compare the similarities between a property condition assessment and a home inspection. 8. Determine when to use a pre-closing or a post-closing covenant. 9. Interpret how a representation, warranty, and covenant are used in a commercial purchase or lease contract. 10. Discuss a minimum of four items that should be included in an estoppel agreement. 11. Outline the details that comprise the four types of rent. 12. Explain the importance of negotiating how common area maintenance (CAM) charges are determined in a tenant lease. Bert Rodgers Schools of Real Estate, Inc. 41

48 42 Module 3 COMMERCIAL REAL ESTATE CUSTOMERS AND THE TYPES OF PROPERTIES THEY CHOOSE The residential buyer and the commercial buyer are completely different customers, each having their own unique needs. Whereas a residential buyer may be concerned with school districts and the bells and whistles offered in a home, commercial buyers are concerned with access roads, traffic, and parking. Just as residential and commercial buyers have differing concerns, commercial buyers themselves differ greatly depending on the type of space they are seeking. Zoning, utility needs, property grades, and the competitive environment are only a few of the issues that can affect the suitability of a commercial space for a customer. Real estate licensees must be prepared to address a broad range of issues when representing commercial customers. CORPORATE STRUCTURE OF COMMERCIAL BUYERS AND SELLERS For a variety of tax and liability reasons, commercial real estate buyers and sellers are seldom individuals. For this reason, when representing a buyer or seller of commercial real estate, it is important to make sure that whoever is signing on behalf of the buyer or seller actually has the authority to bind the entity he or she is signing for. Corporations Corporations are formed with shares of stock representing the ownership interests. Such stock can be privately held or publicly traded. When buying, selling, or renting commercial real estate to or from a corporation, it is important to be sure that the representative of that corporation has the authority to act on behalf of the corporation and that the transaction is conducted in accordance with the corporation s governing rules, called bylaws. Limited Liability Companies Limited liability companies are structured to allow ownership interests in the company to be divided up as membership interests held by the owners or by the single owner. The rules for running a limited liability company are set by the company s operating agreement which should spell out who has authority to act for the company. Some limited liability companies are member-managed, which means that one or more of the owners can act on behalf of the company as a member. This type of structure requires a careful reading of the operating agreement to make sure such authority exists. Alternatives to the member-managed structure designates a single member as the managing member or the company designates a party as the manager of the company, in whom authority to act is vested. As with a corporation, it is essential to make certain that whoever is acting on behalf of a limited liability company in fact holds this authority. Partnerships Partnerships are made up of at least two parties and governed by a partnership agreement. If there is no general partner, then all partners should be required to sign any document on behalf of the partnership. TYPES OF COMMERCIAL OWNERSHIP Fee ownership Condominiums Fee Ownership Versus Commercial Condominiums Commercial properties are most commonly bought using a standard fee ownership model. However, in recent years commercial condominiums have become increasingly popular. Commercial condominiums are similar to residential condominiums with shared common expenses and rules on the use of common space. When representing a principal who is potentially acquiring a commercial condominium, a licensee should assist their buyer with the standard due diligence of investigating the condominium association, determining who controls the maintenance of common areas, how much is kept in reserves, and the amount of monthly condominium fees. PROPERTY TYPES Outparcels In-line space Free-standing

49 Introduction to Commercial Real Estate: Could This Be Your New Specialty? 43 Typically located on the outskirts of larger commercial developments, outparcels are stand-alone lots. Common users are financial institutions and restaurants. They are usually self-contained with respect to parking and all zoning issues. Cross-access easements with the larger development they abut are not uncommon. Depending on the development, an outparcel may be subject to common area maintenance charges. Very often, when part of a larger business or shopping center, there are restrictions on the development of the outparcel such as height limitations and building design guidelines. Commercial space that shares common walls with other commercial space is called in-line space and is also referred to as a strip mall. Because of the shared common walls, in-line space is usually leased, unless it is part of a condominium. In-line spaces have shared parking with other in-line occupants. When considering this type of space, it is important to investigate whether the existing or planned occupant mix is one that meshes well with your customer s intended use. Also, research the parking requirements of existing, planned, and permitted tenants to determine if sufficient parking will be available for your customer s business. A free standing commercial space is simply a fee simple or leased building. It can be an outparcel or its own independent structure. TYPES OF COMMERCIAL USERS AND THEIR UNIQUE NEEDS Office Retail Restaurant Industrial Development Office Space Buyers or renters looking for office space want to find a location that meets their current needs and, especially if they are buying, offers the possibility of future expansion. An ideal space will be in a location that is convenient for clients or customers and staff to access. Also, where office space is shared in a building with other tenants or unit owners, buyers or renters must consider if the various uses are compatible with their business operation. Retail Space Retail space, like residential space, is chosen based upon three things: location, location, and location! Retail buyers or renters typically are looking for an area that has good foot and car traffic to increase visibility. Ease and availability of parking as well as general traffic flow are key factors which encourage shoppers to visit a retail space. Restaurant Space Similar to those looking for retail space, restaurant buyers or renters want a good location. Parking for a restaurant is even more important than with retail, as restaurants tend to need lots of parking spaces at specific times of the day (e.g., breakfast, lunch, and dinner). In addition, restaurant locations are unique in that they have very specific needs for kitchen space which can make finding the right space more challenging. Industrial Space Completely different from the other types of spaces, industrial space will depend much more on the intended industrial use and whether local zoning regulations will permit such use. Important considerations can be the proximity to major traffic arteries and whether or not road sizes are sufficient to handle tractor-trailers. Development Properties Buyers who are looking to develop or redevelop property also present a unique set of challenges. Depending on the type of development or redevelopment being considered, zoning and construction requirements can play a large role in whether a site is suitable for the buyer s intended project. COMMERCIAL PROPERTY GRADES Class A Class B Class C Office Space As one would expect, there is a variety of property types to meet the unique needs of different commercial property users. Although there are no firm definitions, space grades are typically described as being in Class A, Class B, or Class C.

50 44 Module 3 The premier grade of office space is Grade A or Class A. Such space typically means a new or newly renovated building in a prime location within a city that offers first-class furnishings and amenities. The Urban Land Institute at describes Class A office property as the office buildings that you see in the heart of the financial district with lots of brass and glass fixtures and huge expensive lobbies. Class A office space appeals to high-end users such as law firms and financial companies. This high quality also comes with the highest per square foot price. Grade B or Class B office buildings are less posh than Class A space either because they were not built to the same standard of quality and amenities or perhaps they were once Class A space, but have not been maintained at that level of quality. Class B space is usually located in secondary locations outside of the downtown corridor. Lower market rates make Class B space popular because companies get more bang for their buck. Typically, Class B users are companies that need a lot of space, but do not necessarily need to impress visitors with a Class A setting. Grade C or Class C office space is functional space that typically coincides with low rents. Class C space is often older and less well-maintained than Class B space. The Building Officers and Managers Association (BOMA) describes Class C grade as space for tenants requiring functional space at rents below the average for the area. Retail and Restaurant Similar to office space, retail and restaurant locations are also referred to by grade. Although a less formal and standard system than with office space, retail and restaurant location grades are driven by traffic and visibility. An example of a Class A location is a corner space at a busy intersection, whereas a Class B location may be near that intersection, but further down the street. Industrial/Warehouse The needs of the customer will determine the type of industrial or warehouse space needed. Customers are likely to have very specific needs with respect to ceiling heights, loading dock space, and power supply. The proximity to major traffic arteries is often important as well. COMMERCIAL REAL ESTATE ASSOCIATIONS AND CERTIFICATIONS There are numerous associations focused on the commercial real estate market that offer networking and educational opportunities. Because of the everchanging trends in selling and leasing commercial space, being part of an organization that provides members with education on these current trends and practices is the key to a licensee s success. Building Owners and Managers Association International (BOMA) An international association comprised of over 16,500 members who either own or manage more than nine billion square feet of commercial properties. BOMA was founded in 1907 and includes the voices of state and local BOMA associations through a 119 member board of governors. Four general categories of membership allow for the addition of companies or individuals that provide products or services with a direct interest in the commercial real estate industry. BOMA International s mission is to enhance the human intellectual and physical assets of the commercial real estate industry through advocacy, education, research, standards, and information. Commercial Real Estate Women Network (CREW) Founded in 1989, CREW Network is a business networking organization dedicated to supporting the achievements of women in commercial real estate. Its 8,000 members represent nearly every discipline within the industry and are located in 74 major markets across North America. CREW Network seeks to influence the success of the commercial real estate industry by focusing on fulfilling four key initiatives: business development, leadership development, industry research, and career outreach. Florida REALTORS Commercial Alliance The Florida REALTORS have a subset known as the Commercial Alliance which publishes a free quarterly newsletter called Perspective Many local REALTOR groups also have a sub-group devoted to commercial real estate, including each of the following which have

51 Introduction to Commercial Real Estate: Could This Be Your New Specialty? 45 received Commercial Services Accreditation from the National Association of REALTORS : Central Florida Commercial Association of REALTORS : REALTORS Association of the Palm Beaches: REALTOR Association of Greater Fort Lauderdale: Melbourne Area Association of REALTORS : REALTOR Association of Greater Miami & the Beaches: Florida Association of REALTORS : Pensacola Association of REALTORS : Florida Gulfcoast Commercial Association of REALTORS : Greater Tampa Association of REALTORS : National Association of Industrial and Office Properties (NAIOP) With 56 chapters nationwide, NAIOP is the leading commercial real estate development organization for owners, investors, developers, and related professionals in the office, industrial, and mixed-use real estate industry. NAIOP is comprised of more than 15,000 members in North America and advocates for responsible commercial real estate development and effective public policy. It provides advocacy, education and business opportunities, and connects its members through its network. NAIOP s sister organization, the NAIOP Research Foundation, is one of the industry s leading think tanks dedicated to conducting research assessing the trends, economic viability, and the current and future needs of our communities. More information about this association can be found at: The Purchase Contract: Key Components and How They Affect the Seller and Buyer Florida s Statute of Frauds requires that any contract for the sale of real estate must be in writing or it is unenforceable. Thus, verbal agreements are unenforceable. In the gray area between verbal agreements and signed purchase contracts are letters of intent. It is common for commercial transactions to begin with a letter of intent. Letters of intent typically contain language which states they are nonbinding; meaning that while the letter of intent sets forth the general agreed-upon deal terms between the parties, both sides recognize until a formal purchase agreement is negotiated and signed, neither party is bound by the terms. However, some letters of intent can be made binding if there is consideration (e.g., placement of a deposit), or they contain limiting binding language that requires an action or inaction from one or both parties (e.g., for a specific number of days the seller agrees not to entertain any new offers). Although it is not a purchase contract, any letter of intent should be carefully reviewed to make sure that the parties understand their obligations. All purchase contracts should include basic items such as: the purchase price, escrow deposit, financing terms, inspection periods, and closing date. However, to meet the needs of commercial customers and their unique properties, contracts should include components that will address the specific needs of each party and each transaction one size does not fit all. One seller may require certain actions to be completed six months after the closing date, while another seller may need to limit access to the property to prevent interference with an active business. Buyers may ask for extended or multiple inspection periods for targeted issues or they may negotiate terms that are conditional upon a zoning change approval. It is important to examine each component of the commercial purchase contract carefully so that you are aware of how it will impact your customer as the seller or the buyer. A letter of intent is not a component of the purchase contract. The contents and language in the letter determine whether or not it is binding.

52 46 Module 3 An important distinction between residential and commercial purchase contracts is the property condition disclosure requirement. In residential transactions, Florida law requires real estate licensees to disclose those material facts which affect the value of residential property and are not readily observable to the buyer. In commercial purchase contracts, the approach to property condition follows the rule of caveat emptor. Black s Law Dictionary defines caveat emptor as let the buyer beware....a purchaser must examine, judge, and test for himself. In commercial transactions, the buyer is responsible to act with due diligence to ensure that the property satisfies his or her expectations. As the real estate licensee, you should be aware of each of your customer s level of expertise as well as their expectations and be able to direct them to the appropriate specialists who can find the answers they need. Due diligence is the careful or attentive activity expected from a reasonable and prudent person under a particular circumstance and in regards to their own concerns. It is important to note that the due diligence language appears in many components of the commercial contract, regardless of the customer s role. Whether your customer is the buyer, seller, landlord, or tenant, he or she cannot depend on the opposite party to deliver pertinent information. Each party has a duty to investigate and take precautions to protect their own best interest. THE ESCROW DEPOSIT In a commercial contract, the escrow deposit can also be referred to as an earnest money deposit and functions similar to that on a residential contract. It is meant to be large enough to assure the seller that the buyer is serious about purchasing the property. On the other side, the buyer wants to tie up the least amount of money and put down the smallest deposit possible. If a potential buyer balks at putting up a large initial deposit, the seller could offer that he split it into two parts. The first installment should be required at signing and the second installment should be required at the end of the due diligence period. Escrow deposits should be refundable in the event the purchaser discovers matters during inspections that make the property unsuitable for purchase. If the contract includes financing, licensing, or permitting concerns, then the deposit should also be fully refundable upon the failure to obtain any of the conditional items. Once the initial inspection period ends, the deposit should become nonrefundable, unless the seller is in default under the contract. In commercial transactions the price point is much higher than in most residential transactions; therefore, escrow deposits are commonly placed into an interest-bearing account. The buyer should receive a credit against the purchase price for any interest earned on the deposit. The buyer will need to provide a taxpayer or business federal identification number and execute an IRS W-9 Form for the party holding the escrow deposit before funds can be placed into an interest-bearing account. This tax reporting requirement and current low interest rates lead some buyers to forgo placing deposits into an interest-bearing account unless either the amount of the deposit or the length of time it will be held translates into a potentially significant amount. CONTINGENCIES Although some contingencies may be inevitable for example the buyer needs permitting or zoning approvals for a change in use or major renovation the goal of the seller is to limit contingencies as much as possible on any transaction. Requiring the buyer to complete certain tasks by specific dates (e.g., buyer will submit a rezoning application within three days from the effective date of this contract) offers a certain level of protection to the seller. Time period deadlines limit the buyer from using contingencies as an excuse to cancel the contract and collect its deposit. The buyer s goal is to have sufficient contingencies so as to make certain of its decision to move forward under the contract before the earnest money deposit becomes nonrefundable. The inspection period provides a limited amount of time to satisfy many of the buyer s concerns, but a buyer may not want to spend money on certain due diligence items until later in the process. For instance, a buyer may not want to expend funds for permitting or rezoning until the property inspections, title, and survey confirm that there are no problems all of which may require the entire inspection period. Since sellers are wary of excessive contingencies in a contract, it may be important to provide an explanation as to why time extensions beyond the inspection period are necessary. Additionally, the contract can be drafted in a way that allows certain contingencies to expire, so the seller knows the buyer is proceeding in good faith. Financing Similar to residential contracts, commercial buyers

53 Introduction to Commercial Real Estate: Could This Be Your New Specialty? 47 Financing contingencies are often used as an easy way out of the contract for commercial buyers, so it is important to include obligations for buyers to make every effort to obtain funding in a timely manner. should consider including a financing contingency as part of the contract. The financing contingency typically expires at the same time as the due diligence contingency, but the contingency expiration can also be negotiated between the parties. If a seller has particularly advantageous financing in place on a property, such as a low interest rate and a cooperative lender, the buyer may entertain assuming an existing mortgage. Contract negotiations can include a reduction of the purchase price by the amount of any financing assumed. If an agreement is made that includes assuming a mortgage, the buyer will need to be approved by the existing lender and the seller will want to be released from any liabilities or obligations under the existing loan as of the sale. Ideally, a buyer will have cash or financing in place when the contract is executed and a financing contingency will not be required. Regrettably, this is the exception far more than the rule. While a financing contingency is not uncommon, you should always try to limit the financing contingency period when representing a seller and require that the buyer make a reasonable effort towards obtaining financing. A seller does not want to find out that their property has been unnecessarily tied up by a buyer who never had a realistic chance of getting the money needed to purchase the property. Purchasers want broad financing contingencies so that they have the flexibility to obtain financing which includes pricing and terms that best meet their needs. A purchaser s goal should be to shop with several lenders and avoid seeking financing from any specific lender, so they are able to obtain the best deal possible. Inspections While it is expected that the buyer will want to make inspections of the property, a wise seller will include conditions to the inspections. First, the contract should require that the buyer agree to be responsible for repairing any and all damage that occurs to the property as a result of the inspections. Second, the contract should require that the buyer and any vendor entering into the property provide proof of hazard insurance, typically $1,000,000, to cover any injuries or damage that occur as a result of inspection activities. Third, if there is an ongoing business at the property, the seller will want to limit the timing of such inspections to after business hours whenever practicable, and at the very least, done in a way to minimize disruption to business activities or existing tenants. Purchasers will want the longest inspection period possible and the right to terminate the contract during the inspection period for any or no reason at all. A purchaser requires as close to unfettered access to a property as possible to conduct physical inspections. Further, if the property contains books and records that the purchaser will want to review, the contract should provide specifically for access to those materials as well as for the seller to make employees available to answer questions that arise from the review of such records. Appraisal The property must appraise out at sufficient value to meet both the buyer s expectations and the requirements of any lender. Without an appraisal contingency the buyer could potentially become contractually obligated to purchase property at a higher price than the current market value. Permitting and Licensure If a property cannot be licensed or permitted to meet the purchaser s plans for the property, then the property has no value. Accordingly, purchasers should be certain that the contract provides all the time necessary to conduct investigations with local authorities and, if possible, acquire the licenses that will be needed to make any changes to the use or structure upon acquisition. While this contingency is not unreasonable, the seller has an interest in making the buyer specify which permits it will need and the time required for making applications and obtaining those permits. As with a financing contingency, the buyer should be required to make a good faith and timely effort to obtain any

54 48 Module 3 Time period extensions are often negotiated between the seller and buyer for an additional monetary cost or condition of value. required permits. Ideally, the timing for permitting will coincide with the due diligence period, but often it requires a longer time period. Extensions If a buyer wants to extend an inspection, contingency period, or the closing date on the contract, then the seller has a reasonable expectation that the buyer pay for such right. The best situation for the seller is an extension fee that is in addition to and not applied toward the purchase price. However, if a buyer balks at the fee, an addition to the earnest money deposit will provide the seller with some comfort that the buyer remains serious about the deal without increasing the purchase price. REPRESENTATIONS AND WARRANTIES The seller wants to give as few representations and warranties as possible, because each one represents added risk to the seller to be in default under the contract or to provide a basis for the buyer to ask for a price concession at any later date. To the extent they are inevitable; representations and warranties should be limited to the specific knowledge of identified parties such as Seller John has actual knowledge of or to the best of seller s knowledge. Specific knowledge does not mean constructive or implied knowledge. While such limitations are not ideal for the buyer, they can still be effective as long as the individuals identified (e.g., the portfolio manager) have knowledge about the property. The buyer wants to obtain as many representations and warranties as possible, with each one stated as broadly as possible. Representations and warranties should focus on matters which a buyer could not easily discover during due diligence, (e.g., threats of condemnation or lawsuits), or which are of high importance like environmental regulation compliance. It is not unreasonable for a seller to refuse to make representations and warranties when the prospective buyer could reasonably discover the same information while conducting its due diligence inspections. Corporate Status Because corporate sellers are more regulated than individuals, on a commercial deal with a non-individual buyer it is important to obtain assurances with respect to matters that could potentially invalidate a contract. What follows are the standard corporate representations and warranties that should be included in any commercial contract where the buyer or seller is not an individual. Good standing. Each non-individual buyer and seller should give a representation and warranty that it is duly and properly formed in its state and is currently in good standing with that state. An entity that is not properly formed or is not in good standing cannot legally enter into a binding contract. There are a number of things that can cause an entity to fall out of good standing including something as simple as failing to file an annual report. The Florida Department of State website can easily be checked to confirm that a Florida company is active and in good standing. Authority. Commercial transactions are often based on contracts entered into by corporate entities. If so, each party should include a representation or warranty that the person executing the contract on the party s behalf is duly authorized and entitled to enter into the contract on behalf of the corporate entity and to bind the corporate entity. In some cases, buyers will require that final approval of a deal be contingent upon approval by a board of directors or committee within a company. In that case the contract should set forth a deadline for the approval to be obtained and a provision to notify the buyer when the approval is obtained. Title or Use These representations and warranties are for the benefit of a prospective buyer. They serve to reassure them about certain due diligence concerns that might affect the buyer s willingness to acquire the property or the price to be paid. No rights of first refusal. Buyers want assurance

55 Introduction to Commercial Real Estate: Could This Be Your New Specialty? 49 that no third party has acquisition rights that might trump the purchase contract. Contract language should force the seller to disclose up-front if there are any rights of first refusal in existence. The need for a waiver or termination of an existing right of first refusal could delay closing or, if exercised, terminate the contract. A buyer will want any such agreement waived before it expends significant funds on due diligence. Existing tenants. The seller should be required to disclose to the prospective buyer whether or not any third parties have tenancy rights to the property. Depending on the particulars of a transaction, existing tenants can be a benefit or a negative factor. If a tenant or tenants are in place, the prospective buyer will need to conduct additional due diligence to verify the status of the tenant s lease term and willingness to vacate the premises if the buyer desires to occupy the space. If the buyer is looking for investment properties, a tenant with a long-term lease would be an asset. Notice of violations. Sellers are rarely willing to represent or warrant that there are no violations of law or code with the property being conveyed. Definitive statements of that nature require the buyer to have performed due diligence and leaves open the possibility of unknown matters which could trigger a violation of a representation or warranty and result in a default of the purchase contract. The first fallback position for a purchaser is to limit the representation to the reasonable knowledge of the seller. If a seller will not agree to that, the second fallback position is a representation or warranty stating that the seller has not received any written notice of violations from any governmental entities. This limits the scope of knowledge for the seller and still provides some assurances for the prospective buyer. COVENANTS Prospective purchasers prefer to include agreements that require the seller to covenant to take or refrain from taking some action during the contract period or following closing. These covenants are used to ensure that the seller s or buyer s actions do not harm business operations or interfere with the use of the property. While a property belongs to the seller to do with as they like until closing, it is reasonable for the buyer to require the seller to continue operating the property in the ordinary course of business, including its normal schedule of cleaning and maintenance. Pre-Closing Covenants Covenants are often confused with representations and warranties. Representations and warranties are assurances regarding past actions regarding the property; whereas, a pre-closing covenant is a promise of action or inaction on the part of the seller from the date of contract through closing. Before title transfers, it is important for a buyer to make sure the seller promises to act in certain ways, or refrain from acting in certain ways, so the value and condition of the property being acquired is maintained. Maintenance. All sellers should covenant to maintain the property s physical condition in the same manner as of the date of the contract. This assures that the seller does not allow the property to deteriorate during the period between contract execution and closing. Continuing operations. If real property is being acquired as part of a business that is also being sold, the seller should covenant to continue its operations in the ordinary course of business while the contract is pending. For instance, an ice cream shop would be required to continue staffing, operate during normal business hours, and maintain all other normal routines. This assures that when the property and business are acquired, customers have not been lost and the value of the property is not diminished. If the property transfer involves a significant amount of rental income, the prospective buyer and seller should agree on how tenant issues, new tenants, and renewal of leases are to be handled during the period between contract execution and closing. Notice of gap matters. Commercial contracts often have lengthy periods of time between the contract execution and closing, so it is important that the seller have a covenant to notify the prospective buyer of any material changes to the property and/or the business from the date that the representations and warranties were made. Post-Closing Covenants In some instances, a prospective purchaser may want to guard against certain post closing business activities that the seller may want to engage in. Because it can limit a seller s freedom to act, it requires the seller to assess future plans before agreeing to any such act or absence of action. When a business is being purchased in conjunction with real property, there are two common post-closing covenants.

56 50 Module 3 Covenant not to compete. The seller promises not to open up a competing business within a certain distance for a stated period of time. The courts frown on this type of restriction on commercial activity which means that any covenant not to compete must be reasonable in scope or there is a risk it will be unenforceable. Non-solicitation of employees. The success of a business is often a result of its best employees, so it is common to have a covenant that prohibits a seller from approaching current employees of the business located at the property and attempting to hire them away. Indemnity. The seller will always want to minimize the extent of its post-closing indemnification obligations to the purchaser. The time for making a postclosing indemnification claim should be limited to no longer than one year following closing, as sellers have a right to expect an ending point for the deal to be done. Additionally, claims are limited to the documented costs of the actual loss. Before indemnification can be sought, the current trend is to require that indemnification claims reach a certain financial threshold, referred to as a floor for a single claim and a bucket for multiple claims, to discourage nuisance claims for minor losses. Finally, sellers are wise to seek a monetary limit or cap to their indemnification obligations. If your seller has good leverage, you should seek to negotiate a contract with a short window for claims to be made, a high bucket, and a low cap. The buyer will want the longest indemnification period possible and should not settle for less than the standard time period, which is one year. The amount of the available indemnity is as important as the ability of a seller to pay. If a seller is an entity that will distribute all of its funds to owners and dissolve following closing, the buyer will not have anyone from which to seek indemnification. In such a case, the buyer should require that a portion of the closing funds equal to the indemnification cap be set aside in escrow with the closing agent until the indemnification period expires. SURVIVAL OF REPRESENTATIONS, WARRANTIES, AND COVENANTS It is important to assure the contract specifically permits any representations, warranties, and covenants, and remedies to survive the closing. Without such language, courts will deem them no longer in effect once the closing occurs and the contract has effectively terminated. Further, a commercial contract should specifically identify the remedies for both parties in case of a breach of representations, warranties, or covenants. Remedies for Breaches of Representations and Warranties Breaches of representations and warranties typically result in a monetary loss to the purchaser that can be quantified and recovered through a lawsuit, and the seller typically agrees to indemnify the buyer against losses caused by breaches of representations and warranties. After taking possession of the property and/or business, any breaches of these provisions are likely to come to light reasonably quickly. A welldrafted commercial contract will contain a provision setting forth a procedure for making and settling this type of claim. Typically, the parties try to resolve it among themselves and then, if unsuccessful, submit the dispute to arbitration. If the seller is not likely to have assets following closing to satisfy claims (e.g., the real property or business being sold constitutes a seller s chief assets) it is important to require a portion of closing proceeds, some funds, or even a letter of credit be set aside to cover such claims for a certain period of time. Remedies for Breaches of Covenants It is unusual to resolve the breach of a post-closing covenant through monetary means, because it is difficult to quantify. For instance, how do you determine the costs resulting from a business that opened up in violation of a noncompete agreement? Instead, the remedy for a covenant violation is the right to seek an injunction from a court of law preventing the breach of the covenant. This remedy should be specifically permitted under the contract and ideally provide that the costs to enforce the action be borne by the party breaching the covenant. CLOSING COSTS While there are common practices it is important to remember that everything, including closing costs, is negotiable. Title In Florida, the cost of an owner s title insurance policy is commonly paid for by the seller; however, in South Florida it is customary for title insurance to be paid for by the buyer. The cost of any lender s policy and any endorsements sought for either insurance policy

57 Introduction to Commercial Real Estate: Could This Be Your New Specialty? 51 is usually the responsibility of the purchaser. Some of these title endorsements can be very expensive, such as the Florida Form 9 Comprehensive Endorsement which costs 10% of the title premium amount. It is important that the contract is clear on who is responsible for each specific item. Recording Costs The seller pays the cost of recording the deed of conveyance in Florida. The standard rate in Florida for recordation is $10 for the first page and $8.50 for each additional page. Documentary Stamp Tax The seller pays the costs of recording the deed to convey commercial property and pays the transfer tax. The rate is the same as with residential property: $0.70 per $100 in value. CLOSING TIMING Typically, commercial contracts will include a clause that requires closing to occur no later than a set number of days following the end of the inspection period. The language in the clause provides flexibility for the parties to close sooner if both sides choose to do so. However, when sellers have to coordinate a loan payoff with an existing lender, it important that the closing date be firm. In this event, when a buyer wants to extend the closing date, sellers will often require additional escrow funds or even a nonrefundable extension fee to compensate for having to extend closing and possibly incur additional expenses. NEW CONSTRUCTION When representing a buyer of raw land or a property that will be redeveloped, there are a unique set of issues that the buyer will need to investigate in order to determine if the property is suitable. Zoning If the property is not currently zoned for the purchaser s desired use, then the contract must be contingent upon the purchaser receiving approval of the change or being satisfied that the zoning change can be obtained prior to closing. Parking Requirements Most municipalities or counties will have use-based restrictions on property parking. A developer should always look into the parking requirements for an intended development and determine its impact on the site design. Excessive parking requirements may make a site unsuitable for an intended use. Setbacks A property may have a setback restriction that is determined by local zoning codes, declarations, or other recorded documents. Setbacks are a portion of the property starting at the property line and moving inward a minimum distance upon which no improvements can be constructed or to a maximum distance that improvements must be constructed. In some urban settings zoning codes may require that improvements be constructed all the way to the property line. A commercial buyer will want to be sure that any applicable setback does not interfere with planned development or re-development of the property. Drainage A commercial property developer needs to know whether or not its property has sufficient drainage. If located in an urban area, the developer should make sure there is adequate sewer capacity for the intended use. In a rural area, the developer should determine if the property needs to drain onto adjacent properties or if the property serves as drainage for another property. When drainage flows from one property to another, it is important to know if easement rights exist to allow for that drainage. Impact Fees For new development, most cities and counties now impose impact fees based upon the intended use. Impact fees are intended to compensate the government for the added strain that new development will put on existing roadways and utility systems. If a seller has already paid impact fees, called holding impact fee credits, and is willing to transfer the credits as part of the sale, then the property has added value. If the fees will have to be paid, then a developer who is considering the purchase of a property will want to take that cost into consideration when negotiating the purchase price. EXISTING FACILITIES When representing the purchaser of an existing commercial facility, there are several key elements that should be examined during the due diligence period to make sure the property meets a customer s needs.

58 52 Module 3 Access An ideal property will have good vehicular access that is clearly marked. If access requires passage over an adjoining property, the buyer will want to make sure the passage cannot be closed off or limited by any rights attached to the adjoining properties. Parking A buyer wants to be certain that there is sufficient parking for its needs. If parking is shared with other properties, then who is responsible for maintaining the parking? Are there any rules or limitations affecting the use of parking? Do any third parties have rights to park on the property that might impair the customer s parking? Are there any high-traffic uses such as gyms or movie theaters that might create parking space shortages? These questions should be investigated prior to making an offer on the property. Environmental Assessment A reputable firm should be hired to conduct a Phase I Environmental Assessment of the property during due diligence in order to make sure there is no existing contamination on the property. Another benefit to this inspection is establishment of a baseline of the property s environmental condition in the event there is contamination from an off-site source in the future. Property Condition Assessment The services of a commercial property inspector should be utilized to do a property assessment report. Just like a home inspection, the property condition report will determine if there are any deficiencies with the physical condition of the property, as well as provide an estimation of the useful life of major components. A property condition report should also address whether the building is compliant with the Americans with Disabilities Act, a key concern in our litigious society. Again, as with residential property, the results of a property condition assessment can require a re-negotiation of the purchase price. Title Commitment A commercial property is far more likely to have third-party rights with respect to a property, as well as mortgage liens, equipment liens, and construction liens. A title commitment is absolutely vital for commercial properties. Survey In conjunction with the title commitment, a survey offers the best assessment of the state of the property on its own and in relation to its surroundings. A survey shows any encroachments onto your customer s property or from your customer s property onto adjacent properties, access, square footage of the building, and many other components of the property. MULTIPLE OWNER PROPERTIES When a commercial property is part of a larger development, there are additional due diligence considerations that must be taken into account when determining the suitability of the property for a customer. Although fences make great neighbors, in multi-tenant properties there are rarely fences; a neighbor s business could potentially impact your customer s business. Potential purchasers should become familiar with the nearby businesses and take their possible impacts into consideration early in the process. Covenants, Conditions, and Restrictions Multi-tenant properties are often governed by recorded declarations containing covenants, conditions, and restrictions. If declarations exist, it is essential that your customer carefully reviews them in order to be certain they do not negatively impact the desired use of the property. Some possible declarations are: Exclusive uses. In shopping centers and similar properties, tenants often negotiate exclusive use rights. The purchaser must be certain that no such restrictions prevent the intended use of the property or unduly limit the potential future uses of the property should a change in use be desired. Similarly, where a landlord or seller controls adjacent or nearby properties, your customer may want the ability to negotiate use restrictions in its favor to prevent nearby properties from being used for competing purposes. Architectural restrictions. In order to maintain a common façade or continuity to a multiple owner development, there may be development and architectural requirements and restrictions that not only affect the cost of construction for a customer, but also the look of the property. There may be very clear standards and guidelines, or they may be very loose. Often, an architectural review committee made up of various property owners has the authority to approve or deny plans. If a customer has a time-sensitive project, then the time for approval by such a committee needs to be taken into consideration when analyzing the desirability of a potential property.

59 Introduction to Commercial Real Estate: Could This Be Your New Specialty? 53 Common Area Maintenance (CAM) Expenses Properties that share common signage, sidewalks, parking areas, and other amenities are often subject to CAM agreements, under which parties share in the expense of keeping the amenities in good condition. If a property is subject to CAM charges, it is important for purchasers to examine who is responsible for maintaining the common areas and how the maintenance costs are determined. Unit owners or tenants are typically responsible for a pro-rata share of common area expenses based upon a calculation of unit owner/tenant square footage compared against the total area covered by the CAM agreement. Occasionally, a provision will allow for a property to opt-out of all or part of the CAM expense, which is an option many purchasers or tenants seek when it is available. Contributions for Advertising Some shopping centers require contributions for marketing or advertising the center, although, these requirements are less common today. Most unit owners and tenants try to avoid being obligated to an advertising agreement and prefer to be responsible for their own marketing. If such contributions are mandatory, then a unit owner or tenant will want to ensure that certain parameters exist on how the funds can be spent. Operational Requirements Shopping centers thrive on activity, and as such there are often specific days of the week and hours during which stores are required to be open for business. Be certain that your potential buyer or tenant is willing to meet such requirements and is prepared for the consequences if they do not. Association Fines and Liens Associations are often given the ability to place fines and liens against properties that violate covenants and restrictions or are not current on their assessments. This can be beneficial in that it encourages tenants and owners to comply with their obligations under the covenants, conditions, and restrictions. However, your prospective buyers and tenants will want to make sure that the association is limited in its authority and ability to place any such financial burden. ESTOPPEL CERTIFICATES If there is an association in place or organization with some element of control or ability to affect a property, it is wise to seek an estoppel certificate from the association or organization during the time period when the buyer can receive full refund of the earnest money deposit. The certificate should state that the property is in compliance with all rules and regulations, the amount of any assessments for the current year, and the payment status of the property with respect to those assessments. When a property is not a stand-alone and is part of a larger development or if the property contains tenants, there are important specific obligations that can be placed on the seller to assist with the buyer s due diligence. Estoppel Certificates from Associations If a property is subject to an association, the certificate should state the following: the amount and frequency of any assessments whether the assessments are paid through the date of the estoppel or the amount due at closing the current or intended use is permitted and does not violate any association rules there are no current violations of association rules Estoppel Certificates from Tenants If a property is being acquired with existing tenants in place, the buyer will definitely want an estoppel from each tenant. A tenant estoppel should state the following: the attached copy of the lease is true, correct, and complete the lease is in full force and effect the term of the lease, the expiration date, and any renewal rights the rental amounts due for the remainder of the term the rent has been paid through x date the amount of any security deposit there are no defaults on the part of the landlord or tenant under the lease, or if there are, what defaults exist the tenant claims no right to offset rent under the lease

60 54 Module 3 KEY COMPONENTS OF A LEASE: THE LANDLORD S AND THE TENTANT S POINTS OF VIEW Landlords are usually property owners or investors who are in the leasing business to make a profit. Commercial leases normally begin with the components that make the most impact on the lessor s bottom line the rental income. Commercial tenants lease space for their businesses which also operate to make money. Therefore, rent is one of the first clauses in the lease contract followed by the lease term and deposits. After those items, the lease contract morphs into a unique document that is shaped by the specific needs of both parties, with the final conditions usually favoring the more effective negotiator. Next, we discuss the most common lease components. INITIAL CONSIDERATIONS Before entering into a lease, the initial inquiry should focus on the intended use of the space. There are several use-related concerns that should be analyzed such as: zoning, existing use guarantees, damage to the property, and options for expansion. Is the Intended Use Permitted Under Zoning? Just because a space is currently used for a purpose similar to how the customer intends to use the space, it is still essential to confirm that the use is permitted. An existing use may simply not have been noticed by local authorities who will take notice when there is a change in the business, or the current user of the space could be operating under a special permission, which the new tenant will need to obtain as well. Most leases contain a clause requiring the tenant to abide by all applicable laws and regulations, including zoning. Is the Use Permitted Under any Exclusive Use Guarantees Granted to Other Tenants? In a multi-tenant space, landlords will often promise other tenants that they will have the exclusive use of the shopping center for their type of business. For instance, a pet store would not want a second pet store in the same shopping center competing with it for customers. By the same token, your customer will not want to go into a space where there is an existing nearby competing use. During lease negotiations, it is reasonable to ask the landlord for an exclusive use in the shopping center, or on any property owned by the landlord within a certain radius from the leased property. Will the Use Damage the Property or Cause Excessive Wear and Tear to the Property? Security deposits are intended to provide landlords the ability to pay for repairs or unpaid expenses incurred by the tenant upon termination of the lease. Although lease provisions may include additional conditions indicating when the security deposit may be applied, the deposit amounts are rarely sufficient to reimburse the landlord for damages caused by misuse or neglect. Landlords should inquire into the types of activities conducted by the prospective tenant and how those activities will affect the property. If the tenant is relocating an existing business, a look into their leasing history is highly recommended. Does the Space Allow for Expansion? If your customer s business does extremely well, he may want the ability to expand into adjacent space or relocate to a larger space within a multi-tenant space. If the tenant is spending significant funds renovating When representing a landlord, be careful not to state that a use is permitted unless you have confirmed the facts with the local zoning authorities.

61 Introduction to Commercial Real Estate: Could This Be Your New Specialty? 55 In today s market, most landlords require tenants to make electronic deposits directly into a rental account via automatic bank draft. or upgrading existing space, it is particularly wise for the tenant to pre-negotiate expansion rights with the landlord. RENT Of course, the reason a landlord leases property in the first place is to receive a return in the form of rent. There are several types of rent in commercial real estate and you should discuss with your principal which form is appropriate for the type of business that will occupy the space. Since rent is the biggest expense of leasing commercial space, the tenant will need to be clear on what is and is not included in rent and be prepared to pay or provide a reason for not paying some particular types of rent. Base Rent Base rent is the main return paid to a landlord for rental of the property. The landlord will expect the rent paid in advance on a regular basis (e.g., monthly) and without any prompting or notice to the tenant that rent is due. In today s market, most landlords require tenants to make electronic deposits directly into a rental account via automatic bank draft rather than accept payment by check to avoid the risks of lost checks or return checks because of insufficient funds. Most tenants want a built-in grace period, typically five days, so if rent is due on the first of every month, it is not late unless it is paid after the fifth. To allow for administrative error, tenants commonly ask that the landlord be required to provide written notice to the tenant for nonpayment of rent prior to claiming a default under the lease. The ability of a tenant to demand these concessions will depend on the tenant s creditworthiness and reputation. Percentage Rent In some cases, landlords and tenants negotiate whether or not the landlord will share in business profits in exchange for a reduced base rent. Percentage rent is relatively rare and tenants should not agree to this as a matter of course. When percentage rent is included in the lease terms, the additional funds are only paid after the tenant has reached a pre-determined amount of income, rather than from the first dollar of income. The tenant must have the ability to cover expenses and receive some profit before the landlord begins to share in the success. Additional Rent Commercial tenants are required to pay sales tax on rent. In addition, commercial landlords expect the tenants to pay for other impositions such as property taxes and CAM charges. These additional rent amounts are collected either with base rent or on separate schedules depending what the item is and how it is calculated according to the lease. Additional rent is a standard component of commercial leases. Prospective tenants should consider these additional costs when determining if the total rent expense is feasible. Square Footage-Based Rent If rent is calculated based on a price per square foot, be certain to confirm how that square footage is determined. Measure the space so you know that the square footage being charged is actual usable square footage at the property. Landlords may have a different perspective when determining square footage, so it is incumbent on the tenants to be certain they are not being overcharged. SECURITY DEPOSIT The landlord s need for a security deposit is tenantdriven. If the tenant is a nationally-known chain with financial strength, then a security deposit is usually not required particularly if the parent company is the tenant or guarantees the tenant s obligations There are not any Florida Statutes governing the handling of commercial security deposits. The language in the lease will control how the deposit is applied, if depleted funds must be refurbished, and when the remainder of the deposit is returned to the tenant.

62 56 Module 3 under the lease. However, if a tenant is an unknown entity with significant financial resources, a landlord is wise to obtain a security deposit. Unlike with residential leases, there are no Florida Statutes governing the handling of commercial security deposits, so the language in the lease will control the parties obligations with respect to one another. Accordingly, security deposit clauses in commercial leases should, at the most basic level, specify both how a security deposit is held (e.g., interest-bearing account or noninterest-bearing). Wise landlords will set forth when a security deposit can be applied to expenses such as nonpayment of rent or repairs caused by tenant actions when the tenant is obligated to refurbish any depleted funds. Tenants will want to try to limit the ability of the landlord to apply the security deposit. For instance, the landlord should not be able to unilaterally use security deposit funds to make repairs that are a tenant obligation unless the tenant has had the opportunity to do so first. The tenant should make certain that the lease contains provisions setting forth a specific procedure and time limit for the landlord to assert a claim against the security deposit, a process for dealing with any disputed claim, and a deadline by which the security deposit must be returned. TERM OF THE LEASE If the duration of the lease is not specified in the body of the lease, then a tenancy at will is created under Florida law and the duration of the lease will be for a period equal to how rent is paid (e.g., monthly, quarterly, annually) until one of the parties terminates the lease with proper notice. Under section 83.03, F.S., (Termination of tenancy at will; length of notice) the amount of notice required varies depending upon the length of the tenancy: If the tenancy period is year-to-year, then notice must be given not less than three months prior to the end of any annual period. If the tenancy is from quarter-to-quarter, then notice must be given not less than 45 days prior to the end of any quarterly period. If the tenancy is from month-to-month, then notice must be given not less than 15 days prior to the end of any monthly period. If the tenancy is from week-to-week, then notice must be given no less than seven days prior to the end of any weekly period. If the tenant fails to give proper notice, they will be required to pay the next rent installment. For example, Tenant ZZZ pays rent on the fifth of each month. On June 27, the tenant gives notice that they will vacate the premises on July 5th. According to Florida Law, Tenant ZZZ owes rent for the entire month of July, because they did not give notice to vacate a full 15 days before the established rent payment date. PARKING The landlord and the tenant need to be sure that there is sufficient parking at the property for the leased use. Most zoning codes set the number of parking spaces required based upon the use, so when leasing space both parties should be mindful of how a prospective tenant s use may affect the need for additional parking. High volume parking from tenants such as gyms and restaurants could cause parking shortages at certain times. A parking shortage could then affect the desirability of other lease space in a multi-tenant property and limit the landlord s ability procure additional tenants. A prospective tenant in a multipletenant space may want to ask for designated parking spaces to ensure sufficient parking for customers. TENANT IMPROVEMENT ALLOWANCES In some cases, landlords are often asked to contribute funds for the tenant s build-out of the space, particularly if the space is in raw condition, meaning unimproved but for drywall and utility connections. This is typically done when a tenant is making substantial improvements to the space that will have a residual benefit to the landlord. The landlord will want the tenant to pay these costs and then be reimbursed either through a direct repayment or a rent credit over the term of the lease. Depending on the amount of work required and the cost, the tenant may negotiate for progress payments as construction moves forward to ease the financial burden. Landlords should only release funds to the tenant or provide a rent credit once the improvements have been completed and the tenant has provided proof of payment and lien waivers from all contractors. MAINTENANCE Maintenance of the property is a key concern of both landlords and tenants. It is essential in a commercial leasing situation that the parties are clear as to which party is responsible for each particular item of maintenance. The breakdown of each party s maintenance obligations should be identified in writing in the body of the lease. Maintenance costs can impact the landlord s return on its investment, so it is in the landlord s

63 Introduction to Commercial Real Estate: Could This Be Your New Specialty? 57 It is essential that all parties in a commercial leasing transaction understand which party is responsible for each particular item of maintenance. interest for the tenant to be responsible for as much maintenance as possible. Either the form of the lease or the provisions in the lease itself can help address these issues. Triple-Net Leases A tenant with a triple-net lease is essentially responsible for all costs associated with the building taxes, insurance, and maintenance. This type of lease is usually found in stand-alone buildings and is common among larger commercial tenants. A tenant entering into a triple-net lease must factor the long-term maintenance costs of the facility into its cost projections to determine if the space is suitable for its needs. Common Area Maintenance (CAM) Charges In a multi-tenant property, the property maintenance, insurance, and tax expenses are usually paid by the landlord, but reimbursed by tenants through CAM charges. This allows the landlord to control the overall upkeep of the property, while having each tenant contribute its pro-rata share of such costs. The lease may also allow the landlord to hire a third-party management company to run the property and in addition, to cover the costs of that management within the CAM charges. For tenants, it is important that the formula for allocating costs be set out and fair. The most common allocation of costs is based on the relative square footage of each tenant. However, some landlords give anchor tenants reduced or no CAM charges as an inducement for locating in a center, which then shifts the CAM burden to smaller tenants. Many tenants also try and negotiate a limit on year-toyear increases in common area maintenance. Finally, the tenant needs to be certain that it has a remedy in the event the landlord or management company is not meeting its CAM obligations. UTILITIES In commercial leases, tenants are typically expected to be responsible for the costs related to utility service to the property. In multi-tenant spaces, the ideal situation for a landlord is to have separate utility meters for each space so that tenants can directly enter into agreements with the local utility and pay the utility costs directly. However, if a multi-tenant space has shared utilities, then the landlord needs to consider how to allocate such expenses. This may require standardized hours of operation, lighting, heating and cooling allowances, and the like in order to make sure that no one tenant uses excessive utilities to the detrimental cost of the others. For example, a tenant with lots of computer equipment would be a high-energy user both for the computers themselves and for the air-conditioning needed to offset the heat that the computer systems emit. An unfair allocation of expenses can create unhappy tenants, which then requires more time and attention from the landlord to rectify the situation. Dumpsters The cost of trash pickup is another expense that the landlord will pass on to its tenants. As with utility costs, tenants who make less use of a shared dumpster space may chafe at the notion of sharing equally in such costs or in the unavailability of dumpster space for their own trash needs. Further, if a tenant s use requires specialized or more than normal trash pickup, the landlord will want to pass on the additional dumpster expense. Tenants want to be sure that dumpster costs are allocated fairly. Grease Traps Many restaurants require the installation of a grease trap that must be serviced on a regular basis. Because this use is specific to the business, the landlord will expect the tenant to bear the expense of both installation and regular maintenance. If a grease trap is shared between tenants in multi-unit complex, the tenant will want to make sure that heavy users take on a greater portion of the burden. ASSIGNMENT/SUBLETTING From the landlord s perspective, it has entered into a lease with a specific tenant and thus has no obligation to agree to the assignment or subletting of a leased space to another party. However, the landlord should

64 58 Module 3 The landlord can require an additional security deposit as a condition to approving an assignment or sublease. allow itself the flexibility of permitting assignment or subletting, as there can be benefits. If a tenant is struggling and wishes to assign the space to another party, the landlord can require an additional security deposit as a condition to approving an assignment or sublease. Both the existing tenant and the proposed assignee or sub-tenant should remain liable for rental obligations under the lease. If the sub-tenant is paying the tenant more rent than is owed to the landlord, the landlord can demand a share of those sublease profits. However, there are situations when a wise tenant will pre-negotiate assignment or sublease permission. First, in the event the tenant s business is acquired by or merges with another company, the actual tenant named in the lease may be replaced by a new, but related entity. This is a situation where a landlord should not object to an assignment to a related or parent company. Second, when the tenant provides a replacement tenant who meets criteria and the assignment is not detrimental to the landlord, it should be agreeable to both parties. The pre-negotiated criteria are typically based on financial standing and business experience. The replacement tenant must then apply to sublet the space. A final key consideration is whether or not to release the original tenant as a guarantor of the space upon an assignment of the lease or a sublease. With an assignment to an approved assignee or a replacement guarantor, the landlord should release any existing guarantor. As long as the original tenant is bound to the terms of his lease and he legally remains in control of the space, the release of his guarantee is much less common. EVENTS OF DEFAULT The language in a commercial lease dealing with tenant defaults and the timing for the cure of tenant defaults must be crystal clear. If a tenant knows it is going to default under a lease, the tenant will want to negotiate a mutual termination of the lease. Assisting with the smooth transition of the property to a new tenant can potentially minimize damages and reduce the claims sought by the landlord against the existing tenant. Base and Additional Rent Payment Default Most tenants will want a typical grace period of three to five days after base rent is due to make payment. However, if a tenant fails to pay base rent and additional rent when due, then it should be an automatic default under the lease. More aggressive tenants will want the landlord to provide notice of nonpayment and then have a number of days to make payment after that notice. For the tenant, the notice is protection against defaulting under the lease terms due to clerical errors or slow mail. Alternatively, landlords view the notice requirement as a nuisance that sends them chasing a tenant for rent. A fair compromise is where the landlord agrees to provide notice for a limited number of times, or no more than twice in a 12 month period, after which, notice is no longer required. Other Monetary Obligation Payment Defaults When a tenant is given a notice of nonpayment for the failure to pay monetary obligations other than base rent or additional rent, it is standard procedure to allow the tenant five to ten days from the date of the notice to submit payment. However, the landlord can once again limit the number of times that notice and a right to cure must be given in these circumstances. Bankruptcy If a tenant voluntarily files for bankruptcy or is involuntarily placed into bankruptcy, most leases provide a limited amount of time, typically 90 days, for the tenant to obtain a discharge from the bankruptcy. Because the bankruptcy court has the power to let a tenant out of a lease, it is important to ascertain the tenant s intentions as soon as the landlord learns of the bankruptcy filing. Failure to Maintain Insurance A tenant s lapse in coverage or canceled insurance can have a potentially catastrophic financial impact on the owner of a property and should be an immediate default of the lease terms. In this case, no cure period is appropriate. Even a single day without the

65 Introduction to Commercial Real Estate: Could This Be Your New Specialty? 59 A tenant s failure to maintain current business operations in a lease that includes a go dark restriction would constitute a default even when rent has been paid. required insurance puts the landlord at risk. As a result, tenants who are responsible for keeping insurance in place must be certain that they do not run afoul of these types of provisions. Go Dark When a tenant closes for business for an extended period of time during the course of a lease it is referred to as go dark. Some leases provide that the tenant remain in active operation of the property and the failure to operate constitutes a default, even when the rent payment is current. Tenants often believe as long as they are paying rent they should not be put in default for not operating. However, when percentage rent is a component of the lease, an inactive business will have a negative effect on the landlord s anticipated return on investment. A compromise is often for the landlord to have a right to recapture the space in exchange for releasing the tenant from the lease. As a protective measure, tenants should include language stating that temporary closures for things like renovation or post-casualty restoration do not trigger this type of provision. Change in Use The landlord should have the ability to terminate the lease if the tenant has changed the use without the landlord s consent. Alternatively, tenants will want the defined use of space to include a broad category so that it can change or modify its use without being placed into default. REMEDIES TO DEFAULT There are several remedies available to landlords and tenants when the opposite party defaults under the lease and fails to cure its default within any applicable cure period. Depending on the extent of the defaulting party s obligations under the lease, the harmed party will want a mechanism for enforcing those obligations. When a landlord who has defaulted does not have an office on-site, the tenant should have an obligation to provide written notice to the landlord and provide for ample time to cure. If the sign in a retail center is damaged and the landlord s office is off-site, the tenant should notify the landlord, giving them opportunity to repair the sign rather than arranging for repair and sending the bill to the landlord. Landlord defaults tend to require larger-scale cures. The customary time period for a landlord to cure any default is a minimum of 30 days. Language is often added to provide such additional time as reasonably required, so long as landlord has commenced the cure within 30 days and diligently pursues such cure to completion. Tenant defaults must also be given a reasonable time to cure. Termination Under a tenant default, the landlord should have the right to terminate the lease and re-take possession of the property. If the landlord fails to cure, the tenant may also want the right to terminate the lease and be released from its obligations. Damages The lease should provide that, following an uncured event of default, the landlord has the right to collect damages incurred by tenant s default. This often includes the balance of the lease payments owed under the lease as if it continued on to completion, although discounted to present value. Alternatively, tenants often ask for compensation in the event of damages, and most landlords resist adding this language to a lease. Allowing for damages gives tenants the ability to claim a wide variety of potential damages the landlord must then disprove. Lease Holdover If a tenant refuses to vacate the property at the end of a lease term, the landlord is entitled under section 83.06, F.S., to demand double rent from the tenant for each rental period until the tenant vacates. In many commercial leases, the landlord and tenant negotiate a holdover rate that is higher than existing rent but less than the double rent permitted by statute. These pre-negotiated holdover provisions should be avoided because they create uncertainty as to the existing tenant s right of possession and impair the landlord s ability to place a new tenant in the space.

66 60 Module 3 Early Friday evening a water line ruptures in a commercial plaza causing flooding at the entrance to a tenant s busy restaurant. With the landlord unreachable, the tenant must act quickly and hire a plumber to stop the water flow that is preventing customers from entering his restaurant. This tenant would benefit by having the right of self-help included in his lease. Right of Recapture A landlord should make sure the lease allows for a right of recapture when a tenant has vacated the space, but continues to pay rent on time. After giving the tenant the right to become active again, the landlord may retake the property and release the tenant from its lease obligations. Lien for Rent Section 83.08, F.S., provides the landlord the ability to place a lien against the tenant s personal property located on the premises. Excluded items include: beds, bedclothes, and personal apparel. If a tenant defaults under the lease and the landlord obtains a judgment against the tenant, the landlord is permitted to sell the personal property and use the proceeds to satisfy the judgment against the tenant. Self-help There are some situations where the tenant needs the ability to provide self-help and remedy landlord defaults itself. These are instances where the default creates a situation that must be immediately remedied in order to prevent potential harm to the public or the tenant s inventory. In those cases, the tenant should have the ability to seek remuneration or compensation from the landlord. This can be problematic for the landlord, because most times selfhelp revolves around repairs to the physical structure of the property where the landlord is not in control of the cost or the quality of the work. LEASE EXECUTION A lease is considered a transfer of an interest in real property. For it to be enforceable under Florida law, the lease must be signed in the presence of two attesting witnesses. However, if two parties behave in a manner to indicate that the agreement was intended to be binding (e.g., through the use of the space and payment of rent), most courts will uphold the validity of a lease, even without witnesses. CONCLUSION Commercial real estate transactions contain many of the common components of residential transactions such as purchase or lease amounts, deposits, and time periods, but they also include variables that lead to unique negotiations. These variables are approached differently in each transaction depending on the type of commercial user or the corporate structure of the buyer, seller, landlord, or tenant. Factors such as existing conditions or new construction can add road blocks and necessitate longer time periods to complete the exchange of property. The due diligence component of a commercial transaction can lead to multiple contingencies or additional representations and warranties specific to the property, each having a dramatic impact of the success of the transaction or the customer s future business operations. Having a knowledge base of these variables will enable you to confidently direct your customers to the appropriate experts to get the results you need. Note: Edition 14.3 was published in June, Any changes to laws and rules that occur after this course was published will not affect the Module Review questions and Final Examinations. Check our website for updates to our course material.

67 Introduction to Commercial Real Estate: Could This Be Your New Specialty? 61 CASE STUDY ONE A client is interested in acquiring an existing commercial strip center that is fully leased and contains a restaurant, a clothing store, and a small architect s office. The seller/landlord has provided copies of each of the leases and given a representation that the uses all comply with zoning requirements. The purchase price is $500,000 and the seller/landlord has agreed to put $100,000 into an escrow account for six months to cover any post-closing claims of violations of his representations and warranties. Are tenant estoppel certificates needed when the seller/landlord has provided copies of the leases? Yes. Although leases ideally provide all the terms agreed to by the landlord and tenant, amendments may have been made in the past and not provided, or the tenant might believe there is an understanding not reflected by the lease. Thus, an estoppel certificate will confirm that the documents submitted to the buyer reflect all lease terms, both written and implied. Further, an estoppel certificate confirms the rent is current and will identify any disputes that may exist. Does the buyer need to research the zoning of the property if the strip center is fully leased, the seller/landlord has given a representation that the uses comply with zoning, and has escrowed $100,000? Yes. First, the amount escrowed by the seller/landlord is not enough to cover the client s potential loss if for some reason the entire strip center is not zoned for the current use. More importantly, even if the current uses are allowed under zoning, the buyer needs to know what other uses are permitted to 1) accurately determine the value of the property and 2) effectively market the property when vacancies arise. CASE STUDY TWO A potential tenant has a chain of six seafood restaurants and desires to lease 6,000 square feet of space within a 80,000 square foot commercial center. The center has an annual common area maintenance budget of $300,000, which is assessed a pro-rata basis. What type of covenant should the tenant request from the landlord? The tenant should request an exclusive use lease covenant, ensuring that the landlord will not lease space in the shopping center to another restaurant serving primarily seafood. A general restaurant prohibition would not be commercially reasonable or even desirable restaurants generally benefit from the presence of other restaurants. What factors should the landlord consider in making this decision? The landlord s first step is to consider the bargaining power of the tenant. A tenant with a chain of restaurants is in a better position than a tenant with a single location, but is not as strong as a large national chain. The second step is to consider the amount of space being leased in the center; in this instance, the tenant wants to lease 7.5% of the commercial center not an insignificant amount. What will be the client s annual CAM expense, based on the annual maintenance budget? $22,500/year. The assessment is pro-rata and the client will occupy 7.5% of the overall center, so the annual CAM expense can be calculated by multiplying the annual budget by the percentage of space occupied: $300,000 x.075 = $22,500.

68 62 Module 3 Module 3 REVIEW COMMERCIAL You are not required to answer the module review questions to complete the 14-hour course. They are intended to help prepare you for the Final Examination. Choose the best response to each question. The answer key is found in the back of the book. 1. A new customer has a small start-up business with a limited budget. The most appropriate grade of commercial office space is Class: a. A. b. B. c. C. d. D. 2. A customer with specific facility requirements in respect to ceiling heights, loading dock access, power supply, and proximity to major traffic arteries would benefit most by leasing or buying a/an: a. retail/restaurant. b. industrial/warehouse. c. small office building. d. unit strip mall. 3. What conditions would make a letter of intent binding on the parties? a. negotiated but not signed b. signed by two witnesses c. copies distributed to both parties d. in writing and either contains limited binding language or consideration given 4. Information found in an estoppel certificate from a tenant would include: a. the landlord is in good standing with the state. b. the rental amounts due for the remainder of the lease term. c. total combined monthly rent from all tenants in the building. d. the existence or nonexistence of any special zoning allowances. 5. A tenant-at-will has been given proper notice of termination and is now refusing to vacate. By statute, what is the maximum amount the landlord can charge the tenant in holdover rent going forward? a. half the rent b. one-third of the rent c. one and a half times the rent d. double the rent 6. Typically the types of rent in commercial real estate do not include: a. additional rent. b. base rent. c. security rent. d. percentage rent. 7. Stand-alone lots located on the outskirts of large commercial developments are referred to as: a. outparcels. b. in-line space. c. vacant land. d. parking lots. 8. One item usually included in a pre-closing covenant is a: a. covenant not to compete. b. nonsolicitation of employees. c. notice of gap matters. d. remedy for breach. 9. In commercial transactions, documentary stamp taxes: a. are paid by the buyer. b. are the same rate as residential property. c. are negotiable. d. are waived for non-profit organizations. 10. Which is true regarding inspections in relation to buyers of commercial property? Commercial buyers: a. will want the longest inspection period possible. b. should have limited access to the property. c. typically forgo the inspection process. d. should not be permitted to speak to employees regarding property records.

69 MODULE 4 New Financing Options: Veterans, Rural, and State Housing Mortgage Programs by Kenneth Harney Ken is a nationally-syndicated real estate columnist for the Washington Post Writers Group. His column, the Nation s Housing, appears in cities across the country and has received numerous professional awards. He also writes for Inman News, an online real estate information service. Ken has served as both a member of the Federal Reserve Board s Consumer Advisory Council and the U.S. Department of Housing and Urban Development s Working Group on Computerized Loan Originations. Learning Objectives Upon completion of this module, the learner will be able to: 1. Name three sources of mortgage money other than Freddie Mac, Fannie Mae, and FHA. 2. Identify who is eligible for the VA loan guaranty program. 3. Illustrate the key differences between the loan default program insurance in an FHA loan and a VA loan. 4. Discuss how the local (county) loan limit guarantee has changed since its inception. 5. Explain how borrowers can check their eligibility for a VA loan. 6. Recall five advantages of VA loans over the big three mortgage loan programs. 7. State the conditions that allow VA loans to be assumed. 8. Analyze the differences in VA funding fees among first time users, second time users, and National Guard or Reservists. 9. Interpret the VA policy regarding closing costs for a first time loan versus a refinanced loan. 10. Describe the VA approach to credit history and thin credit files. 11. Discuss the conditions set forth by the VA when evaluating borrowers who have declared bankruptcy or who have experienced foreclosures in the past. 12. Identify the key document a veteran needs to apply for a VA loan. 13. Determine who offers VA loans. 14. Explain the differences among the four types of USDA loans presented. 15. Identify which government loan program has no maximum purchase price or maximum loan limit. 16. Examine the standard debt-to-income ratios for most USDA loans. 17. Define who is eligible for USDA loans in Florida and how an eligible borrower goes about finding out that information. 18. Interpret how USDA defines the maximum income limits for qualified borrowers for USDA loans and where to get this information. 19. Propose the type of borrower that might get a repair and rehabilitation loan from USDA. 20. Outline the requirements to qualify for a Florida Housing Finance Loan. Bert Rodgers Schools of Real Estate, Inc. 63

70 64 Module 4 INTRODUCTION Although Fannie Mae, Freddie Mac, and FHA mortgage activities dominate the marketplace and are used by the vast majority of home purchasers, there are three other specialized sources of mortgage money that can provide problem-solving financing not only for consumers, but also for the real estate professionals seeking to assist them. These niche programs such as the Veterans (VA) Home Loans, Rural Development, and Florida State Housing often provide superior terms and lower down payment requirements for homebuyers who fit the specific profiles the programs serve. Real estate professionals who want to have command of the full range of mortgage options available to their customers need to be familiar with the basics of all three. VETERANS (VA) HOME LOANS Among the federal government s major programs, the VA Home Loan Guaranty program is overshadowed by the larger and better known Federal Housing Administration (FHA). But at a time when FHA loan volume is declining, the VA program has been growing rapidly. It is an important financing option in states and local markets with significant concentrations of retired or active military, such as Florida. For homebuyers who have VA eligibility, a VA loan is usually the most attractive mortgage available. It offers generous provisions including: zero down payments, flexible underwriting, and an intensive loan servicing approach that keeps foreclosures and serious delinquencies lower than FHA and even nongovernmental, conventional market programs. What is the VA Program? The VA mortgage program was created by Congress in the Servicemen s Readjustment Act of 1944, popularly known as the G.I. Bill of Rights. The idea was to provide a tangible economic benefit to members of the military returning from duty posts in World War II. Like the Federal Housing Administration, which had been created 10 years before, the VA program relied from the beginning, and still does, on the participation of private mortgage lenders. Unlike the FHA s insurance model, however, the VA program never offered lenders a 100% guarantee against all losses on a mortgage that went into default and foreclosure. Instead, the VA s program provides lenders a partial guarantee against losses. In its first year, the program guaranteed the first 50% of losses on any loan that went bad, up to a maximum of $2,000. That was considered inadequate even by 1944 standards when house prices were a small fraction of what they are today. The following year, Congress raised the maximum guarantee amount to $4,000. This began a series of increases and changes over the next two decades. Today the VA guarantees 25% of the local (county) loan limit, as set by the VA, and maximum loan amounts sometimes range well into the six figures or even higher. Who is Eligible? The VA home loan program is a benefit for active and retired members of the U.S. Armed Forces (e.g., Army, Navy, Marines, Coast Guard, and National Guard). There are limitations on eligibility based on length of service and the nature of the discharge. Would-be applicants should always determine their specific eligibility status by applying online to the VA s website at purchaseco_eligibility.asp. Here are some general rules regarding eligibility: Veterans of the Gulf War and subsequent conflicts must have completed 24 months of continuous active duty service or the full period (at least 90 days) for which they were called to active duty, and be discharged under conditions other than dishonorable. Persons currently on active duty are eligible once they complete at least 90 days of continuous service. Post Viet Nam War veterans must have seen active duty after August 4, 1964 and prior to May 8, 1975, received a discharge other than dishonorable, and served at least 90 days of active duty unless they were discharged early for a service-connected disability. Veterans of earlier years of conflict, such as the Korean War and World War II, have different eligibility rules, which are available at the website above. Surviving spouses of veterans may also be eligible for VA home loans, provided they are: the unmarried surviving spouse of a veteran who

71 New Financing Options: Veterans, Rural, and State Housing Mortgage Programs 65 lost his or her life as the result of active service or a cause connected to that service, or the surviving spouse of a veteran who died while on active duty or from a service-related cause, who then remarried after attaining the age of 57, or the spouse of an active duty veteran who is listed as missing in action or as a prisoner of war for at least 90 days. A key point on eligibility: In many cases a veteran may use his or her eligibility more than once to buy or refinance a house. Eligibility may be restored if the previous home has since been sold or refinanced to a conventional or non-va loan. Beyond that, some potential VA borrowers may be entitled to partial eligibility as the result of increases in the VA loan limit over the years. It is essential to check precisely what eligibility status a veteran may enjoy, given some of the complexities involved. ELIGIBLE USES OF VA FINANCING A VA loan can be used to buy an existing house, condo, or cooperative unit; refinance an existing mortgage; build a new home; and buy a manufactured home and lot. Because the program is designed to assist veterans to attain home ownership, borrowers must certify that they will occupy the property as their principal residence no later than 60 days following the closing. ADVANTAGES AND KEY FEATURES OF THE VA PROGRAM For service-eligible borrowers, the VA s mortgage program combines features that often make it the most attractive option available. The potential benefits are examined below. Zero Down Payments Unlike FHA, which requires a minimum 3.5% down payment, VA loans require no cash from the applicant up front. According to the VA, more than nine out of ten (91%) of veterans take advantage of this unique feature. Flexible Underwriting Since the VA home loan guaranty program is considered an entitlement, unlike conventional or FHA loans, originating lenders are expected to be as flexible as possible in evaluating applicants. For example, although the VA s posted total debt-to-income (DTI) ratio ceiling is 41% (i.e., monthly mortgage plus other debt payments cannot exceed 41% of monthly gross income), lenders frequently approve higher ratios. The VA also is more generous than conventional financing sources on so-called seller concessions, where a home seller agrees to contribute money at settlement toward the VA home buyer s closing and escrow expenses, thereby sweetening the deal. The VA allows up to 4% of the sales price in seller s contributions. Credit The program also is generous and flexible on credit issues, although no loans can be approved if there is doubt that the veteran will be able to handle the monthly payments on the loan, as demonstrated by past performances on debts. Energy Improvements Unlike conventional mortgage programs, the VA allows inclusion of funds for energy-efficiency improvements (e.g., new thermal windows, insulation in the roof and walls, and new doors) in the amount the veteran can borrow. The current limit on additional funds for energy improvements is $6,000. Assumability VA mortgages can be assumed; they can be taken over by another veteran or nonveteran borrower. When a veteran assumes the loan from a VA borrower, the eligibility of the home seller can be restored. The new borrower, however, must provide full documentation that he or she is qualified to handle the debt and generally must pay a fee for the privilege, which is currently set at 0.5% of the outstanding loan balance. APPRAISALS Real estate professionals should note that the VA consistently has required full appraisals of properties as part of the qualification process. They maintain a restricted, revolving panel of appraisers nationwide to provide accurate valuations. The appraiser must note all deficiencies observed in the property and may require repairs or inspections prior to the closing. All VA appraisals are reviewed by the agency itself which is a huge difference between the VA and the conventional or FHA marketplace, and as a result the pro-

72 66 Module 4 cess takes longer than most other valuations. This additional time element should be factored into estimates of the contract-to-closing date provided to buyers or sellers by real estate professionals. MORTGAGE MAXIMUMS Unlike most other financing programs, the VA does not set a specific loan limit for applicants. However, federal law limits the amount of guarantee the agency can extend to private lenders, which tends to discourage loans far above the maximum guaranty amount. For example, through the end of 2011, the VA was limited to a 25% guaranty of the principal amount on loans up to $417,000. However, the VA has established higher limits in counties with elevated housing costs. For most of Florida, the $417,000 limit has been standard since 2008; only Monroe County had a slightly higher limit. This means that a lender could make a zero down payment loan to an eligible veteran up to the $417,000 standard limit and still be guaranteed reimbursement of 25% of that ($104,250) in the event of a serious default or foreclosure. For updated loan maximums in Florida counties, real estate professionals and their customers can check online at asp. Be aware that some lenders may be willing to make significantly larger mortgages to eligible veterans, provided the borrower makes a down payment the lender considers acceptable. VA FUNDING FEE Unlike the FHA and private mortgage insurers who work with Fannie Mae and Freddie Mac, the VA does not charge ongoing fees for guaranteeing (insuring) home loans. The agency does charge what it calls a one-time funding fee to help defray the costs of the program. The fee may be paid in cash or included in the loan amount and financed over time. Funding fees vary by loan type and eligibility status of the veteran seeking the loan. Here are current fees: For first-time users making down payments of less than 5%, veterans must pay 2.15%. For those putting down between 5% and 10%, the fee drops to 1.5%; and for those putting down 10% or more, the fee is 1.25%. For veterans using their eligibility for a second time or more and making a down payment less than 5%, the fee is 3.3% through October 1, 2013, and is scheduled to drop to 1.25% after that date. Veterans putting down at least 5% but less than 10% must pay a fee of 1.5%, and those putting down 10% or more, 1.25%. Note: National Guard and Reservists are charged slightly higher funding fees. Check with private lenders to determine current charges. CLOSING COSTS VA applicants seeking mortgages to purchase homes must pay all closing costs up front for title insurance, recordation, hazard insurance, and taxes. Refinancers can roll these costs into the loan amount provided the total loan does not exceed the value of the underlying property. VA UNDERWRITING REQUIREMENTS Like any mortgage program, the VA requires that borrowers demonstrate they have sufficient income to afford the monthly payments and retire the full principal balance over time. During the application process, the lender will examine the home buyer s source of income, past employment record, and the employer s confirmation of continued employment. The VA requires verification of two full years of employment, usually established through W-2s. Underwriters must analyze the projected or likely continuity of income through the first three years of the mortgage. If the borrower intends to retire during this period, the anticipated retirement plan and Social Security income must be factored into the estimates. Any interruptions in employment history are likely to be flagged by underwriters for further explanation. Extended periods of unemployment are likely to be problematic, but periods of time devoted to employment-relevant education may be counted toward the two-year requirement. Credit History Though lenders are likely to pull credit reports and scores, generally the VA takes a sympathetic approach to evaluating credit histories of veterans. If an applicant has not been late on any major credit accounts within the past 12 months, normally underwriters will accept that as evidence the borrower maintains generally good credit behavior. Even if there are late payments or other derogatory items in the applicant s credit history, underwriters are supposed to probe for extenuating circumstances that led to the problem. Thin Files The VA recognizes that many veterans have not had the time or opportunity, especially those posted abroad, to develop the sort of detailed credit histories

73 New Financing Options: Veterans, Rural, and State Housing Mortgage Programs 67 that most nonveterans have accumulated. So-called thin-file applicants with minimal numbers of credit account tradelines are not rejected out of hand; instead, the VA instructs underwriters to search for alternative indicators of creditworthiness that are not collected by the national credit reporting agencies. These include rental payments, utilities, phone and cable TV, student loans, child support, and others. Bankruptcies Even if an applicant has filed for bankruptcy, which is a severe credit event that remains visible in national credit reporting agencies for at least seven years, the VA allows underwriters to consider an application from a veteran under certain conditions. First, the bankruptcy must have been discharged no less than two years from the date of loan application. Second, the applicant must provide an explanation of the circumstances surrounding the bankruptcy filing. Finally, the applicant must have a strong credit history, a solid employment history, and stability of income to make monthly loan payments following the bankruptcy. Prior Foreclosures Generally VA underwriting does not permit approval of applications from veterans who have experienced a foreclosure during the preceding two years. However, if there were extenuating circumstances, such as a serious medical problem connected with the veteran s service that affected employment or household income, the applicant can cite them and the underwriter must consider those facts when making a loan decision. HOW VETERANS APPLY FOR A VA MORTGAGE The essential first step is to obtain a Certificate of Eligibility (COE) either online or by submitting VA Form The VA maintains a special website for this purpose at purchaseco_certificate.asp. Alternatively, applicants can obtain a hard copy COE from the Atlanta Regional Loan Center, Attn: COE, P.O. Box , Decatur, GA For hard copy COEs, the veteran should present a copy of his or her discharge papers or DD Form 214 Certificate of Release or Discharge from Active Duty to the VA. Active duty veterans should obtain and submit to the VA Eligibility Center a statement of service signed by an appropriate military official. As a practical matter, most lenders active in the VA program can guide interested veterans through the application process. Since virtually all major banks and mortgage companies and many small local lenders participate in VA lending, starting the process should not be difficult. There are numerous web-based lenders who advertise their specialties in VA home mortgages. Once a loan application is filled out, the loan officer will submit a request for an appraisal of the property to be financed or refinanced to the VA s appraisal system. Once the appraisal is completed and supports the loan amount sought by the veteran, the transaction can proceed to closing. USDA RURAL DEVELOPMENT LOAN PROGRAMS Even with little publicity, the U.S. Department of Agriculture s (USDA) program has been growing fast. Loan volume is up more than 400% since The main reason for this rapid expansion is the program s significant advantages over most Fannie Mae and Freddie Mac conventional loan options, and even those of the FHA. USDA s Rural Housing consists of several different types of mortgage financing for moderate income homebuyers. The two most popular are the guaranteed housing loans and direct housing loans. Specialized financing also exists for rehabilitation and repairs and low-cost loans for people with very low incomes who normally could not qualify to buy their own dwelling. Although the name often misleads people into thinking the USDA Rural Housing loans are available solely to farmers, the program extends far beyond that into suburban and exurban small towns on the periphery of large metropolitan areas in Florida and around the U.S. GUARANTEED HOUSING LOANS By far the best known of the programs, guaranteed loans from USDA through participating private lenders, offer a combination of attractive features for purchasers who have little or no cash for a down payment or closing expenses.

74 68 Module 4 Advantages of the Guaranteed Housing Loans The potential benefits are examined below. No cash requirements. No cash down is needed and no cash reserves are required. This greatly expands the potential pool of qualified applicants. No maximum purchase price for houses and no maximum mortgage limit. As long as the house is located in an area designated as eligible for guaranteed housing loans, and the buyer s income does not exceed 115% of the local area median, the permissible loan amount is 100% of the appraised value of the house plus an upfront guarantee fee of about 2% of the price of the property. Generous credit underwriting criteria. There is no minimum credit score and nontraditional credit histories in expenses such as rent, utilities, cell phone, and cable bills are accepted either in place of or to supplement traditional credit bureau histories. Regardless, lenders will require documentation of total household income, income sources for each member of the household, and assets and liabilities. As a rough guide, many lenders expect applicants to have a FICO score of at least 640. Debt-to-income ratios are flexible. The standard rule is 29% of gross household income for monthly mortgage payments and 41% of household income for total recurring debts. If an applicant can demonstrate that there are compensating factors, such as readily available assets that can be tapped, these maximums can be raised. Low fees. Under a policy change made during 2011, the USDA began charging upfront guarantee fees of 2% (technically the percentage is 1.97%) of the loan amount to be paid at closing, and an ongoing annual fee of 0.3% of the remaining principal balance. The upfront fee can be rolled into the original loan balance at closing; the annual fee is paid along with principal and interest on a monthly basis. Applicant Eligibility Criteria There are two key requirements that limit the number of buyers who can potentially obtain a mortgage through the guaranteed loan program: First, borrowers must be planning to buy or build a home in a community that has been designated as a USDA Rural Area. Most counties in Florida contain at least some areas that qualify. To check whether a property is located in an eligible area, you can go online to the agency s specialized website for this purpose at The mapping function shows where loans may be available in each county. Second, the borrowers must have household incomes that do not exceed the maximums allowed under USDA rules. These income ceilings differ from county to county, and by family size. They can also be found at under income limits for guaranteed loans. As an example, a family with up to four members buying property in an eligible community within the Orlando-Kissimmee metropolitan area could have an annual income of $74,750 in The same family buying in the higher-income Ft. Lauderdale metropolitan area could have income of $91,050. If the property was located in the Florida Keys, in Monroe County, the maximum income cutoff would be $102,800. Note that these ceilings are revised periodically, making it important for borrowers and their professional advisers to check this website before proceeding with an application. How to Apply Homebuyers seeking guaranteed rural housing mortgages can simplify the process by contacting a lender or mortgage broker who already participates in the USDA program and may offer expert guidance. Most major lenders are approved to participate in Florida, according to the agency. Information is also available through local Rural Development offices in Florida and the state headquarters: NRCS-RD-FSA State Office, 4440 NW 25th Place, Suite 200, Gainesville, Florida See page 73. DIRECT HOUSING LOANS Though there are strict income ceilings to qualify, some homebuyers may find that applying for a USDA Direct Housing Loan may be advantageous. Unlike the agency s guaranteed loan programs, where private lenders provide mortgage money carrying insurance against loss, direct loans use government funds and are obtained through local USDA Rural Development offices. Loans require no down payment but must be used to purchase, build, or repair a single family home that the borrower intends to occupy. The property must be located in a community that has been designated for USDA rural development financing. See Income Requirements Applicants must have either low or very low incomes.

75 New Financing Options: Veterans, Rural, and State Housing Mortgage Programs 69 Low income is defined as between 50% and 80% of the area median income. Very low is defined as less than 50% of median. Limits also vary by county, the number of dependents in the household, and can be found at the income and area eligibility site above. During 2013, the limit for very low income households of four persons was set at $30,800 for the Cape Coral - Ft. Myers metro area. In Monroe County, the limit was set at $43,350. To qualify for the loan amount needed to buy, build, or renovate a house, the applicant s total monthly maximum payments for principal, interest, taxes, and insurance (PITI) cannot exceed 29% of household income for a very low income direct loan. The maximum PITI is 33% for a low income qualifying loan amount. Credit History Requirements The USDA expects applicants to have acceptable credit histories and prefers FICO credit scores of 640 and above for streamlined processing. Dwelling Requirement As in other USDA programs, the agency wants the houses it finances to be modest for the area, not McMansions. It specifically rules out houses with inground swimming pools or income-producing land or buildings associated with the house. Homes constructed less than one year before application must be inspected and approved by the Rural Housing Service or come with 10-year warranty plans in order to qualify for zero down payments. Without either of these, buyers are limited to receiving up to 90% financing or providing a 10% down payment. First-time purchasers seeking direct loans must complete an approved consumer education program about purchasing and maintaining a home, prior to the loan closing. RURAL REPAIR AND REHABILITATION LOANS AND GRANTS For very low income homeowners, USDA provides financial assistance for repairs and upgrades intended to make a house safe and sanitary and to remove health hazards such as lead-based paint. Loans of up to $20,000 at 1% interest for 20 years are available to qualified borrowers. Outright grants of money are also available up to $7,500 for homeowners 62 years or older. For borrowers who can afford to pay part of the cost, combined loan-grants are available up to $27,500. FLORIDA HOUSING FINANCE CORPORATION MORTGAGES FOR HOMEBUYERS Like many other states, Florida runs its own housing programs aimed at first-time buyers and renters who have moderate incomes. Florida s Housing Finance Corporation offers a variety of loans and assistance, which include single-family, 30-year fixed rate mortgages at low interest rates through a network of approved private lenders. There are significant restrictions on eligibility based on borrowers incomes and the price of the house they want to buy. The program also requires that applicants undergo a six-to-eighthour education course on personal finance, credit, and home ownership; and it requires they have FICO scores of at least 620. There are currently three main first-time buyer loan options: Florida First, Florida Military Heroes, and First Florida Conventional. FLORIDA FIRST This is a tax-exempt bond financed program restricted to first-time purchasers. A first-time buyer is defined as someone who has not owned a home during the previous three years. Any applicant who qualifies on income, credit, and purchase price generally will also be qualified for the agency s down payment and closing cost assistance feature described below. Eligible properties include new or resale single family detached homes, townhouses, duplexes, and condominiums. Maximum allowable sales prices and current 30-year fixed interest rates are set by the agency county-by-county and can be accessed at housing.org. To illustrate, a purchaser who wants to buy a home in Orange County, and has four members in his or her household, is capped at $81,480 in annual income. The same applicant is restricted to buying a home in Orange County with a maximum price of $326,538. FLORIDA MILITARY HEROES As the name suggests, this loan program is restricted to active or retired military personnel. Generally, it car-

76 70 Module 4 ries the lowest interest rates available from the state agency. Applicants must document their service, plus qualify on income and home purchase price, using the county-by-county feature listed above. All eligible borrowers also qualify for down payment and closing cost assistance if needed. FLORIDA FIRST CONVENTIONAL These are 30-year conventional market fixed-rate mortgages that are funded by mortgage bonds. They come with the same income and property price restrictions as above and are eligible for down payment and closing cost assistance. See page 73. DOWN PAYMENT ASSISTANCE To help moderate income families with two of the biggest obstacles to home ownership, the down payment and closing costs, the Florida Housing Finance Corporation offers two forms of aid. Florida Assist Up to $7,500 in down payment cash is available, but borrowers must have incomes well below the standard maximums. For example, in Orange County a household of three would not qualify with an annual income exceeding $70,200. CASE STUDY ONE CASE STUDIES USDA Rural Housing Loan Compared with FHA and Conventional Loans The Haggerty family sought to buy a modest-cost home in a small community located outside a major Florida metropolitan area. They found a three-bedroom, $125,000 house and signed a purchase contract. However, they were uncertain about which type of mortgage would be the most advantageous for them. With help from their real estate professional, they shopped local and national lenders for quotes and ultimately came up with the following three options: a conventional mortgage (eligible for sale to Fannie Mae or Freddie Mac), a USDA guaranteed rural housing loan, and a Federal Housing Administration-insured loan. The prevailing interest rate at the time was 5% and the Haggerty s sought quotes for 30-year fixed rate mortgages. Cash to close amounts included prepaid expenses, applicable down payments, and settlement fees. Here is how the three loan types stacked up. Conventional Down Payment (20%) $ 25, Total Loan Amount $ 100, Monthly Payments Principal and Interest $ Taxes $ Hazard Insurance $ Total Monthly Payments $ Total Cash to Close $ 30, USDA Guaranteed Housing Loan Down Payment $ Total Loan Amount (including 2% Guarantee Fee) $ 127, Monthly Payments Principal and Interest $ Taxes $ Hazard Insurance $ USDA Guarantee Fee $ Total Monthly Payments $ Total Cash to Close $ 5,500.00

77 New Financing Options: Veterans, Rural, and State Housing Mortgage Programs 71 Homeownership Assistance for Moderate Income Program (HAMI) Eligible borrowers can obtain up to $5,000 in loan funds to help with down payments or closing costs. This program is generally for families whose incomes are above the Florida Assist income ceiling, but below the standard maximums and are families that would also qualify for the First Time Homebuyer Program. To find the annual income limits in this program for each county go to HomebuyersRenters/FTHB/First+Time+Homebuy er+program+income+limits.htm. SPECIAL STATE PARTNERSHIPS WITH REAL ESTATE PROFESSIONALS The Florida Housing Finance Corporation conducts three-hour training sessions on affordable housing for professionals around the state who wish to be familiar with the agency s programs. Interested real estate licensees can visit for more information. The website also lists all participating lenders who specialize in Florida Housing loan programs; these lenders are excellent sources of information for licensees. FHA-Insured Mortgage Down Payment (3.5%) $ 4, Total Loan Amount $ 120, Monthly Payments Principal and Interest $ Taxes $ Hazard Insurance $ Mortgage Insurance $ Total Monthly Payments $ Total Cash to Close $ 9, Analysis Though the lowest monthly payment for the Haggerty family among the three alternatives would be the conventional loan, the required cash outlay up front is beyond their resources. The FHA s smaller down payment at 3.5% reduces the upfront costs, but the ongoing mortgage insurance premiums raise the monthly payment to the highest of the three. The USDA rural housing loan, by comparison, requires no down payment and is less costly on a monthly basis than FHA. The main drawback for the USDA program is its severely restricted eligibility standards. Had the house the Haggerty family wanted to buy been located closer to the central city, in a more populous community, they would not have been able to qualify for the mortgage. Case Study One Questions 1. When comparing the total monthly payment among the three loans, the FHA loan is the highest. Which line item is not included in the Conventional and USDA Guaranteed Loan payment, and factors into the higher FHA total monthly payment? a. interest rate b. mortgage insurance c. hazard insurance d. down payment 2. What is the major upfront barrier to home buyers obtaining a USDA rural housing loan, assuming they qualify financially? a. lenders charge higher interest rates b. the required monthly payments are high c. choosing a USDA-eligible property d. paying the loan s 2% guarantee fee (Answers: page 74)

78 72 Module 4 CASE STUDY TWO VA Guaranteed Loan Compared with FHA-insured Loan Russ Granger returned to his wife and young son from two tours of Army duty in Iraq and wanted to buy a home in South Florida. He found two nice places, both with a price of approximately $200,000. In order to compare the financing pros and cons of a VA loan, for which he was certified eligible, and an FHA mortgage, Russ asked a local loan originator to run the numbers for 30-year term, fixed market rate loans at 4%, and zero points. Different assumptions are made about the sellers willingness to participate in the financing and the availability of gifts from relatives he could use to assist with the down payment. The results are below. VA Loan Down Payment $ Principal and Interest Monthly $ Hazard Insurance $ Taxes $ Total Monthly Payment $ 1, Closing Costs, Prepaids, and VA Funding Fee (2.125%)** $ 8, Cash to Close ** $ **Seller concessions include all closing fees, prepaids, and VA funding fee FHA Loan Down Payment (3.5%) $ 7, Upfront FHA Fee (1 % into loan amt) $ 1, Principal and Interest Monthly $ Hazard Insurance $ Taxes $ Mortgage Insurance (1.15%) monthly $ Total Monthly Payment $ 1, Cash to Close (down payment, prepaids, taxes, and settlement fees)*** $ 7, ***Seller concessions cover all closing costs and prepaids Analysis Both VA and FHA offer Russ and his family affordable solutions, but with some key differences. The most obvious is FHA s minimum down payment which is 3.5%, whereas the VA s down payment is zero. Both programs allow significant seller contributions or concessions covering closing and loan costs; but, the bottom line is the VA offers a superior deal for veterans such as Russ with less money out of pocket up front and lower monthly payments. The key limitation, of course, is also obvious. Most homebuyers do not have VA eligibility. For nonveteran buyers with limited cash available for a down payment, an FHA loan will often be an attractive substitute. Case Study Two Questions 1. If the Grangers choose the FHA loan instead of the VA alternative, the interest rate on the loan would be: a. higher. b. lower. c. the same. d. double. 2. After analyzing Case Study Two, the VA loan is the better option, because the: a. buyer can use seller concessions. b. term of the loan is shorter. c. loan fees are less. d. down payment is less. (Answers: page 74)

79 New Financing Options: Veterans, Rural, and State Housing Mortgage Programs 73 Module 4 REVIEW FINANCE You are not required to answer the module review questions to complete the 14-hour course. They are intended to help prepare you for the Final Examination. Choose the best response to each question. The answer key is found in the back of the book. 1. Eligibility for a VA loan is limited to only: a. service members of certain branches of the US Armed Forces. b. retired service members of the US Armed Forces. c. active duty and retired members of the US Armed Forces with limitations. d. married veterans of the US Armed Forces. 2. A VA loan requires a down payment of: a. 0%. b. 3.5%. c. 5%. d. 10%. 3. Properties financed with VA loans require appraisals to be completed by appraisers who are: a. real estate licensees. b. bank approved. c. approved by the DBPR. d. on the VA restricted panel. 4. What loan program has no maximum purchase price and no maximum mortgage limit? a. FHA b. USDA c. Florida First d. Florida First Conventional Housing 5. Qualified homeowners with very low income may be eligible for rural repair and rehabilitation combined loans and grants up to a maximum amount of: a. $27,500. b. $32,000. c. $35,000. d. $42,000. To locate a local rural development office in Florida and apply for a Guaranteed Housing Loan, go to: Florida First Conventional Mortgage rates and other details can be accessed at Note: Edition 14.3 was published in June, Any changes to laws and rules that occur after this course was published will not affect the Module Review questions and Final Examinations. Check our website for updates to our course material.

80 74 Module 4 Case Study One Module 4 CASE STUDY ANSWERS 1. When comparing the total monthly payment among the three loans, the FHA loan is the highest. Which line item is not included in the Conventional and USDA Guaranteed Loan payment, and factors into the higher FHA total monthly payment? b. mortgage insurance 2. What is the major upfront barrier to home buyers obtaining a USDA rural housing loan, assuming they qualify financially? c. choosing a USDA-eligible property Case Study Two 1. If the Grangers choose the FHA loan instead of the VA alternative, the interest rate on the loan would be: c. the same. 2. After analyzing Case Study Two, the VA loan is the better option, because the: d. down payment is less. ~ NOTES ~

81 MODULE 5 The Real Estate Professional s Role in Valuation by Francois Gregoire Frank is a second generation REALTOR, Broker, and Appraiser. He is a licensed real estate broker, a State-Certified Residential Appraiser, and Appraisal Instructor. Frank was appointed by the Governor to the Florida Real Estate Appraisal Board (FREAB) in February, 2000 and served for eight years, four as Chairman. In addition, he is past Vice Chairman of the National Association of REALTORS Appraisal Committee. As president of Gregoire & Gregoire, Inc., a Residential Real Estate Appraisal firm based in St. Petersburg, Frank is active in the valuation of one to four family residential properties for a wide variety of clients. He is frequently retained as a consultant and expert witness by clients for civil cases. The Florida Real Estate Appraisal Board and Florida Real Estate Commission utilize his expert witness services in the prosecution of complaints against Florida real estate and appraisal licensees. Learning Objectives Upon completion of this module, the learner will be able to: 1. Describe the history of Florida s regulation of appraisal services. 2. Articulate the types of valuation services and products real estate licensees are permitted to provide. 3. Explain how the Interagency Appraisal and Evaluation Guidelines are used by real estate licensees. 4. Determine the minimum content of an evaluation. 5. Define value and price. 6. Evaluate the difference between price and value. 7. Explain valuation methodology and three approaches to value. 8. Select content requirements for valuation reports. 9. Identify the sources of comparable property data. 10. Evaluate the adjustment process. 11. Extract adjustments by using paired sales. 12. Evaluate the purpose and importance of contingent and limiting conditions. 13. Consider the statutory and administrative code requirements applicable to valuation services and reports. 14. Examine the four important aspects of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Bert Rodgers Schools of Real Estate, Inc. 75

82 76 Module 5 INTRODUCTION The burst of the housing bubble caused a disruption in the real estate market of a magnitude unprecedented in recent generations. The dramatic decrease in the price and value of residential real estate is unfamiliar territory for many bankers, mortgage lenders, and real estate professionals and is proving to be ruinous to many owners of residential real property. Property owners, real estate brokers, and sales associates have been bombarded with a host of challenges many of them related to the price and/ or value of real estate. Real estate professionals face daily confrontations about price and value with buyers, sellers, lenders, underwriters, asset managers, short sale negotiators, bankers, and appraisers. The substantial inventory of underwater residential properties and lender acquired real estate presents a real challenge to the task of tying the price or value of a parcel to a reliable dollar figure. There is good news for the real estate professional with the emergence of new and nontraditional business opportunities. Among the prospects is the ability for real estate licensees to hone their skills, diversify their professional practice, and supplement their income by providing valuation services to an ever broadening range of customers. The volume of short sales, sales of bank and lender owned real estate, and loan modifications in recent years has increased the demand for real property valuations. The market has determined that one size does not fit all and an appraisal is not necessary or appropriate for each and every situation. In many instances, customers and user groups have determined that valuation products provided by real estate brokers and sales associates are often an acceptable alternative to appraisals. Uncertainties and instability in the real estate market will likely ensure a significant demand for nonappraisal valuations for the foreseeable future. The purpose of this module is to provide an understanding of the types of valuation services real estate licensees are permitted to provide in Florida along with sections of Florida law imposing compliance. The module includes information about important amendments to federal law with an effect on real estate licensees involved in the preparation of valuation products and reports. PART 1: REAL ESTATE LICENSEE VALUATION SERVICES AND PRODUCTS Long before specific licensing and certification requirements for real property appraisers were mandated by the federal government and enacted by the legislature, the practice of valuation of real property was regulated in Florida. Appraisal was among the services of real estate identified in Chapter 475, F.S. Individuals providing appraisal services were required to be licensed real estate brokers or sales associates prior to When Chapter 475, F.S., was amended in 1989 and again in 1990 to create the Florida Real Estate Appraisal Board and require the licensing and certification of real estate appraisers for federally related transactions, the legislature did not include language to eliminate the ability of real estate brokers and sales associates to provide appraisal services. In later years, an amendment was passed to require real estate licensees providing appraisal services to comply with the Uniform Standards of Professional Appraisal Practice (USPAP), but exceptions were preserved. Exemption from USPAP compliance was provided for specific valuation services provided by brokers and sales associates. Compliance with USPAP is not required, and does not apply to a real estate broker or sales associate who, in the ordinary course of business, performs a comparative market analysis, gives a broker price opinion, or gives an opinion of value of real estate. To utilize the exemption, the comparative market analysis, broker price opinion, or opinion of value of real estate cannot be referred to as an appraisal. A corresponding exemption is stated in Chapter 475, Part II, F.S. COMPARATIVE MARKET ANALYSIS (CMA) Often abbreviated as CMA, the Comparative Market Analysis is an estimate of the competitive listing price or probable selling price of a property. In most instances, the CMA is prepared by the licensee for a potential seller or buyer of the property, rather than

83 The Real Estate Professional s Role in Valuation 77 for a third party. It provides an estimate of the competitive listing price or probable selling price of a property. The CMA is used to assist a potential seller in pricing their property competitively or by a potential buyer in formulating their offer to purchase. Usually CMA s do not include data and analysis of the general, broad real estate market, and instead they focus on the immediate, local neighborhood. The CMA typically includes information and data related to: current, competitive, active listings sold properties listings that have expired Due to the user s (buyer or seller) familiarity with the property, it is common to provide only an abbreviated description of the subject property in the CMA. Competitive listings, sales, and expired listings are also presented in an abbreviated manner. In most situations, the real estate licensee does not generate a direct fee or payment for preparation of the CMA. The CMA is often prepared by the licensee in anticipation of obtaining a listing, preparing a purchase and sale agreement, or negotiating a sale. Compensation to the licensee is in the form of a commission earned for a closed transaction. BROKER PRICE OPINION (BPO) Commonly referred to by the acronym BPO, the Broker Price Opinion refers to the method and the form a real estate licensee uses to develop and report the estimate of value or the probable selling price of a parcel of real property. The estimate of price or value is submitted as part of a BPO report that includes local and regional real estate market information, a neighborhood analysis, and a description of the subject property. The description of the subject property includes detailed information about the size, age, construction, quality, condition, and utility of the improvements, and a description of the location and site. The value or price estimate is developed by the sales comparison approach. The sales comparison approach includes information about comparable sales and/or listings. The BPO is most often prepared by the real estate professional because of a request made by a customer or party other than the current owner or prospective buyer of the property. The customer groups are widely varied and may use the BPO for various purposes. Among these are: distressed loans ongoing due diligence/disposition Real Estate Owned (REO) disposition short sale loan modifications pre-foreclosure secondary market establish portfolio price for buyer or seller as part of a mortgage portfolio loan origination home equity loan home equity line of credit appraisal review appraisal supplement quality control fraud prevention Private Mortgage Insurance (PMI) removal employee relocation Depending on the use and customer preferences, the BPO may or may not require an interior and exterior inspection of the subject property. The preparer of the BPO is compensated for providing the service and the BPO report. Obtaining a listing of the property is a possibility, but not the primary purpose of the service. The recently enacted Dodd-Frank Act provides that in the case of the purchase of a consumer s principal dwelling, BPOs may not be used as the primary basis to determine the value of a piece of property for the purpose of loan origination of a residential mortgage loan secured by that piece of property. EVALUATION The Interagency Appraisal and Evaluation Guidelines (Guidelines) are issued by the Office of the Comptroller of the Currency (OCC), the Board of Governors of the Federal Reserve System (FRB), the Federal Deposit Insurance Corporation (FDIC), the Office of Thrift Supervision (OTS), and the National Credit Union Administration (NCUA), collectively known as the Agencies. The Guidelines use the term evaluation to describe a nonappraisal valuation. The term refers to a nonappraisal valuation report used by an institution regulated by the Agencies for loanrelated decision making. The minimum standards for individuals preparing evaluations are stated in the Guidelines, as are the minimums for evaluation content. Evaluations may

84 78 Module 5 be used to support a lending decision in cases where an appraisal is not required. Among these are certain transactions with a transaction value equal to or less than $250,000, some loan renewals and refinances, loan workouts, debt restructurings, and loan assumptions. The decision to use an evaluation in lieu of an appraisal is made by the banking institution. The preparer of the evaluation is compensated for providing the service and the evaluation report. The purpose of an evaluation does not include obtaining a listing of the property. The Guidelines state that an evaluation should contain sufficient information detailing the analysis, assumptions, and conclusions to support the banking institution s credit decision. As a minimum, the evaluation should: identify the location of the property provide a description of the property and its current and projected use provide an estimate of the property s market value in its actual physical condition, use and zoning designation as of the effective date of the evaluation (the date that the analysis was completed), with any limiting conditions describe the method used to confirm the property s actual physical condition and the extent to which an inspection was performed describe the analysis that was performed and the supporting information used in valuing the property describe the supplemental information considered when using an analytical method or technological tool (such as an Automated Valuation Model) indicate all source(s) of information used in the analysis, as applicable, to value the property, including: external data sources (such as multiple listing service, market sales databases, and public tax and land records) property-specific data (such as previous sales data for the subject property, tax assessment data, and comparable sales information) evidence of a property inspection photos of the property description of the neighborhood, or local market conditions include information about the preparer such as the name and contact information, and signature of the preparer The minimum content of an evaluation requires an estimate of the market value of the property. Use of a form or presentation of a report expressing merely an estimate of sales or list price is not acceptable as an evaluation. A valuation method that does not provide an estimate of the property s market value or sufficient information and analysis to support the value conclusion is not acceptable as an evaluation. For example, a valuation report that provides only a suggested sales or list price, such as some BPOs, cannot be used as an evaluation because, among other things, it does not provide a property s market value. Likewise, information on only immediate neighborhood housing conditions and trends, such as provided in a CMA, does not contain sufficient information on a specific property needed for the bank s decision making. As such, a CMA is not acceptable as an evaluation. The information obtained from BPOs and CMAs, while insufficient for an evaluation, may be of use in developing an evaluation. Non-appraisal Valuations CMA prepared for a potential seller or buyer provides an abbreviated description of the property focuses on the immediate local neighborhood used to provide a competitive listing price BPO requested by the current owner or prospective buyer provides a detailed description of the subject property includes local and regional market information used to develop an estimate of value of a parcel of real estate Evaluation usually prepared for a third party adheres to established minimum standards may include information obtained from a CMA or BPO in its development requires an estimate of the property s market value and sufficient information and analysis to support the value conclusion

85 The Real Estate Professional s Role in Valuation 79 The Interagency Appraisal and Evaluation Guidelines are available for review at this link: regulations/laws/rules/ html. PRICE OR VALUE? Regardless of the service or product provided by the real estate broker or sales associate, the underlying purpose is to develop an estimate of price or value, and convey that estimate and other requested and necessary information to the customer. Based upon their anticipated use of the report, the customer will determine if the price or value is appropriate. Licensees must understand the expectations of the customer and recognize that the terms price and value are not interchangeable. Price The quantity of one thing which is exchanged for another is the price. It is commonly understood as the amount of money paid, asked, or offered for a good or service where a sale is contemplated. Price is the amount of money the buyer and seller have agreed to in the purchase and sale agreement. Although price is a fact, a real estate licensee may provide an estimate of different types of pricing: suggested list price suggested offer price Value The amount of money for which something is exchangeable is the value. The quantity of one thing which can be obtained in exchange for another is an expression of value. Value is also defined as a fair return or equivalent in goods, services, or money for something exchanged. At times, value is referred to as the monetary worth of some good, service, or asset. Definitions The customer and the preparer of the appraisal, BPO, CMA, or evaluation should reach an understanding is the purpose of the assignment to estimate price or value? The failure to reach an agreement on this point may result in a report of no use to the customer, and one that fails to generate any income for the licensee. In addition, there must be an agreement on the definition of price or value used. Today there are a wide variety of pre-printed CMA and BPO forms. Publishers include Fannie Mae, Freddie Mac, banks, asset managers, management companies, relocation companies, and real estate form suppliers. Dependent on the anticipated use of the report and the publisher, some are designed for price estimates, and others are meant for value estimates. In some cases, price and value estimates are broken down based on as is or as repaired, and by imposed or expected marketing time restrictions (e.g., 30 day, 90 day, 180 day). Even if the customer specifies the form report to be used, it is important to communicate with the customer and reach an agreement with respect to the type of estimate to develop and report. Very few of the pre-printed forms for CMAs and BPOs include a definition of price or value. The exceptions are those used for relocation companies. For your protection, to assure meeting the expectations of the customer, and to avoid misunderstandings and potential liability, it is important to reach an understanding with the customer on the definition to be used and any conditions or marketing time restrictions expected. Below are several examples for consideration. Market Value The most probable price that a property should bring in a competitive and open market under all conditions requisite to a fair sale with the buyer and seller each acting prudently, knowledgeably, and assuming the price is not affected by undue stimulus is called the market value. Implicit in this definition is the consummation of a sale as of a specified date and the passing of title from seller to buyer under conditions whereby: buyer and seller are typically motivated both parties are well informed or well advised, and each acting in what he or she considers his or her own best interest a reasonable time is allowed for exposure in the open market payment is made in terms of cash in U.S. dollars or in terms of financial arrangements comparable thereto the price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale (Source: FDIC) Fair market value. The price that property would sell for on the open market is the fair market value (FMV). It is the price that would be agreed on between a willing buyer and a willing seller, with neither being required to act and both having reasonable

86 80 Module 5 If the comparable property has a characteristic or feature superior to that of the subject, the adjustment to the comparable sale is negative. On the other hand, the adjustment is positive if the attribute or element of the comparable sale is inferior to that of the subject. The adjustment may be expressed as a percentknowledge of the relevant facts. (Source: Internal Revenue Service) Anticipated sales price. The price at which a property is anticipated to sell in a competitive and open market is known as the anticipated sales price, assuming an arm s length transaction whereby: the analysis reflects the subject property as is and is based on its present use as a residential dwelling both buyer and seller are typically motivated; both parties are well-informed or well-advised and acting in what they consider their best interests payment is made in cash or its equivalent a reasonable marketing period, not to exceed 120 days and commencing on the date of appraisal (inspection), is allowed for exposure in the open market the analysis assumes an adequate effort to market the subject property (Source: Most likely sales price. Most likely sales price is the negotiated value agreed to by both buyer and seller on the offer-to-purchase contract reflecting reasonable marketing time, not to exceed 120 days. (Source: Worldwide ERC ) Fair market price. The most probable price, as of the date of inspection or other specifically defined date, in terms equivalent to cash, unaffected by special or creative financing or sales concessions, for which the property should sell after reasonable exposure in a competitive market under all conditions requisite to a fair sale with buyer and seller each acting prudently and for self-interest and assuming neither is under undue duress is called the fair market price, also known as Market Price. (Source: BPO Standards Board National Association of BPO Professionals) The above is by no means an exhaustive or complete list. Licensees should examine the order or engagement letter for the valuation service and product for specific instructions relating to the type of price or value to be estimated. PART II: METHODOLOGY THE VALUATION PROCESS Because real estate markets are not centralized and single family markets in particular are extraordinarily local, a formal process has evolved for the valuation of real property. The process includes several methods or approaches to develop an opinion of price or value. Even when the valuation report is prepared by a real estate broker or sales associate rather than a licensed or certified appraiser, the most common approaches utilized in the valuation of single family residential property are: sales comparison approach cost depreciation approach income approach Sales Comparison Approach The sales comparison approach is the method most familiar to real estate licensees, the easiest to understand, and the most applicable to the valuation or pricing of one-to-four family residential properties. This approach has as its basis the principle of substitution; an individual is unlikely to pay any more for a property than the price necessary to acquire a reasonably similar substitute property. In other words, the value of a property tends to be set by the price that would be paid to acquire a substitute property of similar utility and desirability within a reasonable amount of time. In the application of the sales comparison approach, a direct comparison is made between the property being valued or priced (subject property) and comparable properties which have recently sold. To measure the market reactions of typical buyers and sellers, the value or price of the subject property is inferred from the selling prices of comparable properties and the listed price of current, active, comparable listings. The inference is made by comparing the comparable properties to the subject property and making adjustments to the comparable for the differences. The value difference must be measurable and significant enough to affect market behavior.

87 The Real Estate Professional s Role in Valuation 81 age of the sales price or a specific dollar amount. The amount of adjustment may be determined in a number of ways. Among the several methods, paired sales, cost analysis, and capitalization of rent loss or gain are used to derive individual adjustments for differences. To be effective, there must be sufficient market activity and relatively recent sales of properties similar to the subject in location, construction, age, condition, size, physical characteristics, utility, and amenities. A less reliable indication of value is developed by the sales comparison approach in markets with few transactions and property conveyances. Shortcomings inherent in the sales comparison approach include the difficulty in making adjustments for subjectively valued characteristics such as design, appeal, and view. The sales comparison approach is the method most often required in the preparation of CMAs and BPOs. An evaluation will likely include the sales comparison approach as well. In addition to sales of similar properties, CMAs typically include a comparison of the subject property to current, active, competitive listings of properties in the area, along with a description and comparison to listings that recently expired from the multiple listing service. Users of BPO reports usually require a comparison of the subject property to current, active listings. Most preprinted and proprietary BPO forms include space for comparable listings and request comments about the volume of bank and lender owned inventory. Cost Depreciation Approach The cost depreciation approach (also called cost approach) is also based on the principle of substitution. In this case an individual is not likely to pay more for a property than it would cost to acquire a suitable site and construct an equally desirable building on it. In most situations, the cost depreciation approach will tend to set the upper limit of value. The application of the cost approach requires an estimate of the value of the subject site as though vacant. Usually this is accomplished by the sales comparison approach. In the absence of comparable vacant land sales, alternative methods, such as extraction or allocation, are utilized. The current replacement or reproduction cost of the existing improvements is estimated next. Replacement cost is the cost to construct a building similar to the subject utilizing current materials and methods. Reproduction cost is that required to replicate the subject improvements in every detail; a reproduction of the subject improvements. A cost service or manual is used to develop the construction cost estimates. As an alternative, construction costs may be obtained from builders and contractors. If the improvements are not new or nearly new, accrued deprecation is deducted from the replacement or reproduction cost. Accrued depreciation is the loss in value due to any and all causes physical deterioration, functional obsolescence, and external obsolescence. Physical deterioration is a loss in value due to physical wear and tear. The basic structure of the improvement and components, such as the roof, plumbing, floor coverings, and heating and air conditioning systems, lose value over time due to use and the elements. A loss in value due to shortcomings or overcapacity is functional obsolescence. Shortcomings may be due to poor workmanship, an inefficient floor plan, unconventional architecture, or inadequate closet space. Excessively high ceilings, over-improved kitchens, or super-adequate size or construction are examples of functional obsolescence due to overcapacity. Circumstances beyond the boundaries of the subject property can influence marketability, price, and value negatively. If the subject property is located in proximity to an incompatible use, a source of noise, odors, or hazards, the value may be affected by external obsolescence. Poor economic conditions, limited sources of financing, or exorbitant property taxes could also be considered external obsolescence. Recognition of these external influences on value is important as they are also considered in the development of the sales comparison approach. After the replacement or reproduction cost is estimated and accrued depreciation is deducted, the difference is the depreciated cost of the improvements. This represents an indication of the present value of the existing improvements. The estimated value of the site as though vacant and the value of the site improvements is added to the depreciated cost of the improvements to give the appraiser an indication of value by the cost depreciation approach. The cost approach can produce a reliable indication of price or value for proposed, new, and nearly new residential properties. When the improvements are subject to significant depreciation, an accurate estimate of accrued depreciation is difficult to obtain and the indication of price or value is less reliable.

88 82 Module 5 It is rare for a customer to expect a CMA or BPO report to include the cost approach. However, many of the BPO forms in wide use, including those published by Fannie Mae and Freddie Mac, require the licensee to describe and report deferred maintenance and repairs (e.g. severely deteriorated exterior paint) required to make the subject property marketable. Additionally, the customer often expects the real estate licensee to provide estimates of the cost to complete the recommended repairs. Knowledge of construction and repair costs is necessary to correctly and accurately complete the report. Income Approach The income approach is based on the premise that the value of the property is equal to the value of the income stream the property is capable of generating. Although this approach is most applicable to properties bought and sold primarily for their ability to produce income, a variation of the approach is applicable to one-to-four family residential property the gross rent multiplier. The gross rent multiplier (GRM) is the ratio between the actual monthly or annual rent of a property and its actual sales price. It is calculated by dividing the actual sales price by the actual rent. This calculation is done for several properties comparable to the subject property. A GRM is developed and applied to the estimated market rent for the subject property to provide an indication of price or value. To produce a reliable indication of value, there must be a sufficient pool of sales of property rented at the time of sale and a reliable estimate of the market rent for the subject property. As with the cost approach, it is not likely a customer expects a CMA or BPO report to include the income approach. Use of a GRM may assist the real estate professional in determining the dollar amount of an adjustment to make to comparable properties for differences with the subject property. PART III: THE REPORT Unlike real property appraisal forms, there is little standardization of CMA, BPO, and evaluation forms. The wide variety of customers using nonappraisal valuations and the extensive range of potential uses prompt many users to develop proprietary forms and reports. Real estate licensees may also have the option to use one of the many online or web-based report generating programs. The only hints towards standardization are BPO forms developed and published by Fannie Mae and Freddie Mac, but even these mortgage giants have developed separate forms. Completion of a sample BPO report is not part of this module, but a sample Freddie Mac Broker s Price Opinion form is included for information purposes. See form on next page. Another area of ambiguity relates to the standards and requirements for development of the CMA or BPO. Only the evaluation has specific content requirements defined by government agencies the Interagency Appraisal and Evaluation Guidelines. No generally accepted standards and guidelines exist for CMAs and BPOs. One set of standards the Broker Price Opinion Standards & Guidelines (BPOSG) has been developed by the BPO Standards Board and published by the National Association of BPO Professionals. Although similar in concept to the national standards for appraisals (USPAP), the BPOSG have been recognized by only one state real estate regulatory agency. Other than the Mississippi Real Estate Commission, the BPOSG have not been mandated by other government agencies recognized by the State of Florida or the FREC. The BPOSG are required and used by only a handful of companies. For reference, the BPOSG are available online at: The lack of standard forms and generally accepted standards and guidelines require real estate licensees to pay close attention to the characteristics of the customer, and the particular instructions and requirements specified in their valuation request or the engagement letter.

89 The Real Estate Professional s Role in Valuation 83 Freddie Mac BROKER S PRICE OPINION Freddie Mac Loan # Exterior /Curb Side Inspection Date Servicer Loan # Interior Interior Access Denied Reason BPO # BPO Firm Name Broker Phone SUBJECT PROPERTY DESCRIPTION Property Address Unit # City County State Zip Is property currently listed for sale with a real estate firm? Name of Listing Broker, Salesperson or Firm Phone Yes No Property Type: Townhouse SFD 2 Fam 3 Fam 4 Fam Condo Mfg Home Condo Fee $ Occupant: Owner Tenant Vacant Estimate of repairs needed for subject property Interior: Exterior: Painting $ Painting $ Structural $ Structural $ Appliances $ Landscaping $ Utilities $ Roof $ Carpet/Floors $ Windows $ Other $ Other $ Cleaning/Trash Removal $ Do you recommend repairs? Yes No Repairs Total: $ Overall Property Condition: Excellent Good Fair Poor Are there any items that require IMMEDIATE attention/action? Yes No Title/Legal Issues? Yes No Do any environmental issues affect the value of the property? Yes No If yes to any of the above, please explain: NEIGHBORHOOD Property Values: Increasing Stable Declining Predominant Occupancy Owner Tenant Marketing Time: Under 3 Mos. 3-6 Mos. Over 6 Vacancy Rate 0-5% 5-10% 10-20% 20% + Mos. No. of Active Listings in Neighborhood: Price Range of Active Listings in Neighborhood:$ to $ COMMENTS VALUE ESTIMATION Probable Sale Price 90-Day Marketing Time 120-Day Marketing Time 180-Day Marketing Time As Is As Repaired Property should be listed: As Is: As Repaired: Anticipated Seller-Paid Financing Costs: $ COMMENTS: (Describe your marketing strategy and reasons for As Is/As Repaired recommendations) PREPARED BY: Signature Date

90 84 Module 5 COMPETITIVE LISTINGS ITEM SUBJECT COMPARABLE NO. 1 COMPARABLE NO. 2 COMPARABLE NO. 3 Address Proximity to Subject Current List Price $ $ $ $ Current List Date Original List Price $ $ $ $ Original List Date VALUE ADJUSTMENTS (Use the following codes for the adjustments: S=Superior E=Equal I=Inferior U=Unknown) DESCRIPTION DESCRIPTION DESCRIPTION ADJ DESCRIPTION ADJ DESCRIPTION ADJ Above Grade Room Count Total # of Rooms Bdrm Baths Total # of Rooms Bdrm Baths Total # of Rooms Bdrm Baths Total # of Rooms Bdrm Baths Gross Living Area Location Site/Lot Size Design and Appeal Age (number of yrs. since house was built) Overall Condition Garage/Carport Porch, Patio Deck, Pool, Fence Sq. Ft. Overall Rating/Est.$ Value of Adjustments Indicate Property Most Comparable to Subject (Check One) COMMENTS: Sq. Ft. Code Sq. Ft. Code Sq. Ft. Code CLOSED SALES ITEM SUBJECT COMPARABLE NO. 1 COMPARABLE NO. 2 COMPARABLE NO. 3 Address Proximity to Subject Original List Price $ $ $ $ List Price When Sold $ $ $ $ Sales Price $ $ $ $ Sales Date Days on Market VALUE ADJUSTMENTS (Use the following codes for the adjustments: S=Superior E=Equal I=Inferior U=Unknown) DESCRIPTION DESCRIPTION DESCRIPTION ADJ DESCRIPTION ADJ DESCRIPTION ADJ Above Grade Room Count Total # of Rooms Bdrm Baths Total # of Rooms Bdrm Baths Total # of Rooms Bdrm Baths Total # of Rooms Bdrm Baths Gross Living Area Sales or Financing Concessions Location Site/Lot Size Landscaping Design and Appeal Age (number of yrs. since house was built) Overall Condition Garage/Carport Porch, Patio Deck, Pool, Fence Sq. Ft. Overall Rating/Est.$ Value of Adjustments Indicate Property Most Comparable to Subject (Check One) COMMENTS: Sq. Ft. Code Sq. Ft. Code Sq. Ft. Code

91 The Real Estate Professional s Role in Valuation 85 CMA MINIMUM CONTENT CMAs are prepared to advise potential sellers and buyers, and are generally not prepared for third parties, or for direct compensation. The content will vary according to the knowledge of the party. No minimum content is described in Chapter 475, Part I, F.S. or in Chapter 61J2, Florida Administrative Code (rules of the FREC). BPO MINIMUM CONTENT In contrast, BPOs are prepared for a customer or party other than the current owner or prospective buyer, and may be used in a variety of ways. The customer or user of the BPO report, unlike the user of a CMA, has not seen and is not familiar with the subject property, and expects the licensee to not only provide an opinion of price or value, but to present important factual information about the real estate market activity, the neighborhood, and the subject property and improvements. Although no specific minimum content is required by Chapter 475, Part I, F.S. or in Chapter 61J2, Florida Administrative Code, to make the BPO meaningful to the user, assume the reader knows nothing about the market, location, or property, and paint a picture in support of your price or value opinion by including as a minimum: Identification of the Subject Property Describing the subject property by street address is sufficient in most cases, although some customers may require the use of a legal description and parcel identification number. The identification of the subject property should include the city, county, and state. Describe the property location as being within or outside the boundaries of an incorporated community. The identification of the subject property should include a description of the property rights evaluated (e.g., fee simple, leasehold). Disclose if the subject property is offered for sale. If the property is listed, state the listed price, under what terms the property is offered for sale, the name of the listing agent, the brokerage company, and contact information. Date Prepared and Effective Date Prices and values are time sensitive and subject to change. Customers must know the effective date of the price or value estimate to enable their decision making. Because some BPOs are used for fraud detection and prevention, and to evaluate the accuracy of valuations prepared by other individuals, it is becoming more common for real estate professionals to receive a request for a retrospective opinion of value or price what the property was worth one-to-five years ago. In such instances, identification of the effective date is a significant factor. Defined Value or Price The purpose of the BPO will be to provide an estimate of value or price. The terms have different meanings to individuals. To avoid misunderstandings and to meet the needs of the customer or user of the BPO, include the appropriate definition in the report. Intended User State the name of the intended user of the BPO. The intended user is the customer that ordered the BPO, or the party named as intended user in the instructions for completion of the report. Knowing the intended user allows the licensee to tailor the content of the report to their needs. Basis for Opinion of Price or Value The BPO report should include information and data that serve as the basis for the opinion of price or value stated in the report. This includes a description of the market in general, the regional market, and the immediate market area of the subject property. The description could: include comments about the unemployment rate and prospects for changes in employment and the local economy. provide answers to questions about supply and demand. (Is there balance, an oversupply, or shortage of available listings or comparable properties?) provide an explanation of how the subject property is affected when the type of inventory of competing listings in the area or neighborhood has an effect on the opinion of price or value. The customer is depending on the preparer of the BPO to disclose if there are competing listings offered as short sales or bank owned properties, or if the opposite is true. The basis for the opinion of price or value should also include a disclosure of trends discovered through research. Provide information and supporting data about the absorption rate, changes in the level of inventory, demand, prices, and values. Disclose if the number of distressed offerings or sales is increasing or decreasing.

92 86 Module 5 Absorption rate is the number of sales in an area or market category per month. When compared to the current inventory, it helps determine the relationship between supply and demand. Trends in marketing time may also provide a basis for the value or price opinion. Examination of this data will also assist in the event the request is for an estimate of price or value based upon a specific or maximum time on the market. An example of market conditions and trends description is provided below. (Please note the numbers are relevant to a specific property and should not be considered applicable to other properties or neighborhoods.) As of the effective date of this report, the regional multiple listing service indicates there are approximately 140 active listings of single family residences within the neighborhood boundaries described. These range in price from $25,000 to $299,900. Although some listings have been on the market for over one year, the average time on the market is under three months. About 70 of these listings are under contract or pending sale after an average of about 70 days on the market. Over 66% of the listings are offered as short sales or bank owned properties. Over 80% of the listings classified as active with contract or pending sale are offered as short sales or bank owned properties. Of the active listings not classified as active with contract or pending sale, over 50% are offered as short sales or bank owned properties. There have been 210 sales of single family residences reported by the regional multiple listing service in this neighborhood over the last 12 months. These range in price from $22,000 to $325,000. The average time on the market for the 210 sales reported by the regional multiple listing service is 135 days. Over 55% of the sales were offered as short sales or bank owned properties. These include 54 short sales and 62 sales of bank owned properties. Examination of single family residential sales data for this area indicates that the median listed price for single family residences in this area has been stable over the last year. In the most recent quarter the median listed price was $79,900. The median sales price in this area has increased slightly over the past 12 months. In the most recent quarter the median sales price was $74,000. The absorption rate has been relatively steady over the past year at units per month. The number of active listings is up slightly in the most recent quarter. Of the 140 active listings, only 12 are similar to the subject in age and size. These range in price from $119,900 to $299,900. The average time on the market for these active listings is just over four months. Over the past 12 months the regional multiple listing service reported 12 sales of single family residences similar to the subject in age and size in this area. These range in price from $75,000 to $205,000. The average marketing time for sold listings similar to the subject in age and size over the past 12 months is just over four months. Examination of single family residential sales data for residences similar to the subject in age and size in this area indicates that the median listed price and median sales price in this area has been stable over the last 12 months. In the most recent quarter, the median listed price for residences in this area similar to the subject in age and size is $154,200 and the median sales price is $145,000. The number of listings of residences in this area similar to the subject in age and size has increased slightly over the last two quarters. Although the absorption rate is relatively stable at one-half to 1.3 units per month, demand continues to lag supply in this area. Competition from short sales and bank owned properties is not as pronounced for listings of properties similar to the subject in age and size, but still represents about 25% of the active listings. The availability of financing and the type of financing obtainable has an influence on the marketability of the subject property. Financing alternatives are part of the basis for the opinion of price or value, and may be important to certain customer groups, particularly lenders in possession of the property or about to take possession through foreclosure. A description of the subject property will be a significant component in the basis of the opinion of price or value. The level of detail in the description will depend on the type of report (CMA, BPO, or evaluation) and the customer instructions. It may be as simple as filling check boxes on a form, or may involve a narrative description. The age and type of construction of the

93 The Real Estate Professional s Role in Valuation 87 improvements should be part of the description. The opinion of price and value will depend, to a significant extent, on the size of the improvements, the number of bedrooms and bathrooms, and the number and type of auxiliary structures such as garages, patios, and porches. Another significant component to consider and disclose is the condition of the improvements and the mechanical equipment. A description and presentation of comparable sales and listings, and completion of the sales comparison approach to value or price are some of the most important elements to provide a basis for the opinion of price or value. It is not likely the cost approach or income approach will be included as a basis for the value or price opinion. The development of an approach other than the sales comparison approach is beyond the scope of nearly all BPO assignments. SELECTION OF COMPARABLE SALES Regardless of the type of valuation report being prepared, a major factor will be the selection of comparable sales and development of the sales comparison approach. In the case of BPO reports, the customer may have specific requirements that limit the use of certain properties or require the use of comparable properties sold under specific conditions. For instance, a customer may request the licensee to base the opinion of price or value on an analysis of sales of bank owned or real estate owned (REO) properties only. This requirement might exist if the subject property is bank owned or about to be foreclosed. Comparable sales and listings are those worthy of comparison with the subject property. They should be competitive with the subject property and have the same highest and best use. Comparable sales and listings should be similar to the subject in location, size, design construction, age, physical characteristics, and amenities. To ensure the current market influences are reflected, the date of sale for comparable sales should be recent, if possible within three to six months. Active listings should be offered under the same or similar terms to those of the subject property. Sources of Comparable Sales and Listings The local or regional multiple listing service is obviously an important source of listing and sales information. Other sources to consider include: county property appraiser (e.g., property assessment records) clerk of the circuit court (e.g., recorded deeds and mortgages) listing agents buyer agents broker s office transaction files title companies Internet resources (e.g., craigslist.org, zillow.com, trulia.com, REALTOR.com) The preparer of the report should believe the data sources are reliable. Any discrepancies in specifics of the property or transaction between the data sources should be resolved and explained in the report. Users of a licensee provided valuation report often have more than one completed. An explanation of discrepancies in reported data will help avoid requests for additional information and revisions after the initial report is delivered. Elements of Comparison The use of the sales comparison approach, as noted above, involves a direct comparison of the subject property with sales and listings of similar properties. It may be appropriate in some valuation assignments to make a one-on-one comparison, but in most situations, the comparison is made on the basis of individual elements. The elements of comparison are characteristics of the transaction or property that cause the price paid to vary. Among them are: transactional financing terms concessions conditions of sale market condition property characteristics location view size site living area bedrooms bathrooms auto storage construction quality design and appeal functional utility age condition updates amenities and extras patio, porch, deck fence pool, spa

94 88 Module 5 The actual elements of comparison will be apparent with a reference to the BPO form specified by the customer. The characteristics of the subject property are listed in a comparison grid. Each of the comparable sales and/or listings is also described in the grid to facilitate making adjustments for differences with the subject. Adjustment Technique Adjustments are made to the comparable sale or listing. The purpose of the adjustment is to make the comparable sale or listing equal to the subject property. The adjustment should be made for differences with the subject property that are measurable, reasonable, and significant enough to affect market behavior. The adjustment to the comparable sale or listing is negative if the element of comparison is superior to or better than the same element of the subject property. If the element of comparison is inferior to or less valuable than the same element of the subject property, the adjustment is positive. After the adjustments to the comparable sales and listings are made, the sum is applied to the sales price or listing price of the comparable. The result is an indication of the value of the subject property. Determining Amount of Adjustment Adjustments are made to the comparable sales and listings on the basis of the value difference between the element of comparison of the comparable property and the subject property. The real estate licensee s knowledge and experience may serve as a basis for some of the adjustments, but use of one or more adjustment extraction methods may be necessary to prove the value difference recognized by the market. Market reaction to differences in elements of comparison can be measured by use of paired sales, cost analysis, and capitalization of rent differences. The most appropriate method for use in a BPO is paired sale analysis. In an analysis of paired sales, a comparison is made of properties with nearly identical characteristics, with the exception of one element of comparison. If there is a difference in the sales price between the properties, the price difference can be allocated to the element of comparison, and is an indication of the market reaction or value of that element. Example One Assume the sales of two nearly identical single family residences in the same subdivision. The first sold in late January of the current year for $210,000. The financing terms of the sale were cash. The second single family residence is one block away from the first and sold in early January of the current year for $213,000. The terms of the sale involved a conventional loan and the seller contributing $5,000 to the buyers mortgage loan closing costs. There are no other significant differences between the residential properties. The difference in sales price is $3,000. Although the amount of the sales concession is $5,000, the value of the concession is $3,000. An analysis of market data demonstrates the adjustment for a $5,000 payment of mortgage loan closing costs added only $3,000 to the sale price. The adjustment for such a concession apparent in a comparable sale transaction is a subtraction of $3,000. To extract an adjustment for an element of comparison that is a physical characteristic, the process is the same. Example Two Sale number one is a single family residence that sold in February of the current year. It has 1500 square feet of living area, three bedrooms, two bathrooms, and a two-car garage. The sales price was $180,000. Across the street is sale number two. This 1500 square foot, threebedroom, two-bathroom residence sold in late January for $177,500. Sale number two has a one-car garage. The terms of each sale are similar, and no concessions were made by the seller in either transaction. The difference in sales price is $2,500 and can be attributed solely to the difference in garage size. An analysis of market data demonstrates that the value of one garage space is $2,500. If the subject property has a two-car garage and the comparable property has an inferior one-car garage, the adjustment to the comparable sale for that element of comparison would be an addition of $2,500. Reconciliation After the comparisons and adjustments are made to the comparable sales and listings, each will provide an indication of the value or price for the subject property. Providing the properties used for comparison are

95 The Real Estate Professional s Role in Valuation 89 similar to the subject with respect to transactional and physical characteristics, and the adjustments are accurate and appropriate, the indications of value should fall within a relatively narrow range. Reconciliation is the process of using judgment, knowledge, and experience to determine which of the comparable properties provides the best indication of value for the subject property. Considered in the reconciliation process is the degree of similarity each comparable has with the subject property and the reliability of the underlying data concerning the property. After weighing the indications of value for reasonableness, reliability, and similarity, the preparer develops an opinion of price or value according to the definition used in the assignment. EXHIBITS AND ADDENDA In addition to the form BPO report, many customers and users require exhibits to support the information, data, and analysis. Some customers are not interested in additional information, but the BPO will convey a much clearer picture of the property and market with the addition of meaningful and descriptive information and graphics. Photographs Real estate valuation reports present a more complete depiction of the subject property when photographs are included. As a minimum, a front view photograph of the subject property is appropriate. The photograph will be more useful to the customer if taken from an angle to provide a view of the front and at least one side of the residence. If not discouraged or prohibited by the customer, an additional front view photograph from the opposite angle will result in a more complete representation of the property. The instructions or conditions of the valuation assignment may prohibit notification of the property owner or occupant. If not prevented by the terms of the valuation agreement, photographs of the rear of the improvement should be included using the same front view technique to show the sides of the residence. A street scene photograph will show the customer or user some of the characteristics of the area, and how the residence fits into the neighborhood. The photograph will be more useful to the reader of the report if taken to include a section of the subject improvements in the frame. To verify the actual inspection of the property and to ensure the correct property is the subject of the BPO, provide a photograph of the house numbers from the mailbox or the front of the residence. When the subject property exhibits deferred maintenance, missing equipment, or significant damage, photographs will not only document the findings, but convey a thousand words worth of description to the reader with very little effort. If an interior inspection of the subject property is required by the customer, it is common to include a request for interior photographs of the subject property. Photographs of all rooms, including bathrooms and inside laundry/utility rooms should be provided as part of the BPO report. The most useful photographs show at least two walls and the floor of a room. For most urban areas of Florida, aerial photographs are widely available. These may be obtained from a county property appraiser s web site, the multiple listing service, or one of several Internet mapping sites. An aerial photograph can assist the customer and user of the report in visualizing the property and the proximity to neighborhood services and thoroughfares. Maps Location and plat maps provide important information to the customer and reader of the report. Considering the user of the report may be in another state, a map showing the location of the subject property may be helpful to their understanding of comments made about the location and proximity to transportation and supportive services. Marking the location of the comparable sales and listings on a location map demonstrates their proximity to the subject property, and if true, how the comparable properties are affected by the same neighborhood influences as the subject property. CONTINGENT AND LIMITING CONDITIONS Contingent and limiting conditions are absent from many of the pre-printed and proprietary BPO forms. It may be necessary to develop the BPO based upon some assumptions and these should be clearly disclosed in the BPO report. In addition, the preparer might be obligated to impose some limitations by virtue of office policy, professional affiliations, errors and omissions insurance requirements, and other factors. As such, the real estate professional should consider including the statement The BPO (Broker s Price Opinion) that appears in the report is, at a minimum, subject to the following conditions: and one or more of the following statements.

96 90 Module 5 The BPO is not an appraisal and is not purported to comply with the Uniform Standards of Professional Appraisal Practice (USPAP); Appraisal Standards under the Title XI of the Financial Institutions Reform, Recovery, and Enforcement Act; Appraisal Standards of the Federal Financial Institutions Regulatory Agencies; or FNMA/FHLMC Appraisal Guidelines. The broker is not responsible for matters of a legal nature that affect either the property being evaluated or the title to it. The broker assumes that the title is good and marketable and, therefore, does not render any opinions about the title. The property is evaluated as though under responsible ownership. The broker is not required to give testimony or appear in court because he or she performed a BPO of the property in question, unless specific arrangements to do so have been made prior to the broker s engagement. Unless otherwise specifically noted in the report, an interior inspection of the subject property has not been completed. Unless otherwise stated in the report, the broker has assumed that there are no adverse conditions, hidden or apparent (e.g., the presence of hazardous wastes or toxic substances) that would make the property more or less valuable and makes no guarantees or warranties, express or implied, regarding the condition of the property. The broker will not be responsible for any such conditions that do exist or for any engineering or testing that might be required to discover whether such conditions exist. The report is not an environmental assessment of the property. The broker obtained the information, estimates, and opinions that were expressed in the report from sources that he or she considers to be reliable and believes them to be true and correct. The broker does not assume responsibility for the accuracy of such items. Unless otherwise noted, this BPO is based on the as is condition of the subject. If, however, the report and BPO conclusions are subject to satisfactory completion of repairs or alterations, the broker assumes that completion of the improvements will be performed in a workmanlike manner. The broker must provide his or her prior written consent before the customer may distribute the report s conclusions and details about the property value, the broker s identity and professional designations, references to any professional organizations, or the firm with which the broker is associated to anyone other than the borrower, the mortgagee or its successors and assigns, or the mortgage insurer; except that the lender/customer may distribute the property description section of the report only to data collection or reporting service(s) without having to obtain the broker s prior written consent. Unless otherwise noted, the broker has not in spected the exterior of the properties listed as comparables in this report. The broker has not author ized anyone to make a change to any item in the report; therefore, if any change is made to the report, the broker will assume no responsibility for it. I have no present or prospective interest in the property that is the subject of this report, and I have no present or prospective personal interest or bias with respect to the participants in the transaction. I did not base, either partially or completely, my analysis and/or estimate of market value in the BPO report on the race, color, religion, sex, handicap, familial status, or national origin of either the prospective owners or occupants of the subject property or of the present owners or occupants of the properties in the vicinity of the subject property. PART IV: COMPLIANCE WITH CHAPTER 475, PART I, F.S. Of equal importance to meeting the expectations of the customer is ensuring the services provided are in compliance with Florida law and rules of the Florida Real Estate Commission (FREC). USPAP As noted above, appraisal is one of the services of real estate included in the definition of a broker in Chapter 475, Part I, F.S., and licensed real estate brokers and sales associates are legally permitted to provide appraisals in Florida. The statute imposes specific requirements on a real estate licensee when appraisal services are provided and the FREC may impose discipline if the licensee has violated any standard for the development or communication of a real estate appraisal or other provision of the Uniform Standards of Professional Appraisal Practice. In

97 The Real Estate Professional s Role in Valuation 91 the absence of detailed knowledge of the Uniform Standards of Professional Appraisal Practice, providing real estate appraisal services is an invitation for trouble. According to Chapter 61J , the FREC disciplinary guidelines specify a fine of $250 to $1,000 and a 30-day suspension for the first offense of violating the Uniform Standards of Professional Appraisal Practice. In the event of a second and/or subsequent offense, the penalty jumps to a fine of $1,000 to $5,000 and suspension to revocation of the license. Chapter 475, Part I provides that compliance with the Uniform Standards of Professional Appraisal Practice is not required when real estate brokers and sales associates, in the ordinary course of business, perform a comparative market analysis, broker s price opinion, or provide an opinion of the value of real estate. The caveat is that the service or report may not be referred to as an appraisal. Although not specifically required in Chapter 475, F.S., or in the rules of the FREC, many users of CMAs or BPOs require the report to include a statement that the report is not an appraisal. COMPENSATION Although brokers are permitted to collect compensation for valuation services directly from the customer or the agent of the customer, a broker associate or sales associate may not collect money in connection with a real estate brokerage service except in the name of their employer and with the express consent of their employer. Although the fees for valuation services such as appraisals, CMAs, and BPOs may be significantly less than commissions many real estate licensees are accustomed to, they are nonetheless fees for real estate brokerage services. These fees must not be considered side income, unrestricted by the rules of the FREC. It is important that all fees for valuation services be collected in the name of the employer. The FREC disciplinary guidelines published in Chapter 61J specify a fine of $250 to $1,000 and suspension to revocation for the first offense of a sales associate collecting money in connection with a real estate transaction except in the name of the employer. A second and/or subsequent offense calls for a fine of $1,000 to $5,000 and suspension to revocation of the license. FRAUD, MISREPRESENTATION, AND NEGLIGENCE In any real estate service provided by licensees, fraud, misrepresentation, concealment, false promises, false pretenses, and culpable negligence are violations of Chapter 475, Part I. Conspiring with another person or assisting another in such conduct is also a violation of the license law. The opportunity for such misconduct when providing valuation services is abundant. Borrowers, lenders, buyers, sellers, and other parties to a transaction are often not shy in applying pressure on real estate professionals to shade the value or price opinion in their favor, particularly when facing bankruptcy, foreclosure, or financial calamity. Keeping the disciplinary consequences in mind is important. For violations of Chapter 475, Part I related to fraud, misrepresentation, concealment, false promises, false pretenses, and culpable negligence, the FREC disciplinary guidelines published in Rule 61J specify fines of $1,000 to $2,500 and a 30-day suspension to revocation for the first offense. Second and/or subsequent violations call for fines of $2,500 to $5,000 and a six-month suspension to revocation of the license. RECORDKEEPING One additional aspect of Chapter 475, Part I, often overlooked by real estate licensees involved in providing valuation services, is the requirement to maintain records and to maintain those records for the time specified. Because the statute is specific, the applicable section is reproduced below Brokerage business records. Each broker shall keep and make available to the department such books, accounts, and records as will enable the department to determine whether such broker is in compliance with the provisions of this chapter. Each broker shall preserve at least one legible copy of all books, accounts, and records pertaining to her or his real estate brokerage business for at least five years from A real estate licensee may prepare an appraisal only if the appraisal is in conformance with the Uniform Standards of Professional Appraisal Practice (USPAP). If the licensee does not have detailed know ledge of USPAP, preparing an alternate type of valuation service is a better option.

98 92 Module 5 the date of receipt of any money, fund, deposit, check, or draft entrusted to the broker or, in the event no funds are entrusted to the broker, for at least five years from the date of execution by any party of any listing agreement, offer to purchase, rental property management agreement, rental or lease agreement, or any other written or verbal agreement which engages the services of the broker. If any brokerage record has been the subject of or has served as evidence for litigation, relevant books, accounts, and records must be retained for at least two years after the conclusion of the civil action or the conclusion of any appellate proceeding, whichever is later, but in no case less than a total of five years as set above. Disclosure documents required under and shall be retained by the real estate licensee in all transactions that result in a written contract to purchase and sell real property. It is important to note that the broker must maintain records, and make them available to the Department of Business and Professional Regulation (DBPR) to enable the DBPR to determine compliance with license law. Included among the records to be maintained are any written or verbal agreements engaging the services of the broker. In this electronic age, it is easy to overlook this statutory requirement to maintain records. Many of the requests for valuation services, particularly those for BPOs, are received in the form of s or text messages. Valuation reports are often prepared by real estate licensees utilizing electronic and web-based platforms. Reports are then delivered electronically. In some cases, these platforms do not create a paper report or even an electronic file capable of being maintained by the preparer. For their protection, as well as compliance with license law, licensees must generate a record of the service and the report. The broker must maintain the record of service and the report. Maintaining a record of information considered, but not included in the report, may be useful when it is necessary to defend the decisions made and the opinions and conclusions stated in the report. Customers are known to obtain several different types of valuations and multiple reports on some parcels. In the case of discrepancies and differences of opinion, the customer may ask questions about why certain comparable sales or listings were not included in the original report. The real estate professional will save time and money by having the information on file. If the report has been the subject of or served as evidence for litigation, the broker s records must be retained for two years from the conclusion of the action or proceeding and, in any circumstances, no less than five years. Keep in mind if an appraisal, CMA, or BPO prepared by a real estate licensee is used in a bankruptcy or foreclosure proceeding, it may be subject to the additional two-year record retention requirement specified in the statute. The failure to maintain records is dangerous for several reasons. In the absence of records the real estate professional cannot prove the service was provided and cannot document and prove the results of their work. Without records, the broker is at a loss to demonstrate compliance with Chapter 475, Part I, and is subject to discipline by the FREC. If your failure to keep and make available records prevents the DBPR to determine compliance with the statute, a fine of $250 to $1,000 and suspension to revocation for the first violation can be issued according to the FREC disciplinary guidelines. A second and subsequent violation calls for a fine of $1,000 to $5,000 and a 90-day suspension to revocation of the license. PART V: THE DODD-FRANK ACT One of the landmark pieces of legislation passed by the 111th Congress is the Dodd-Frank Wall Street Reform and Consumer Protection Act. Nearly every aspect of financial services is affected in some way, and this includes real estate appraisals and valuations prepared by individuals other than licensed and certified appraisers. With over 800 pages of text, it is beyond the scope of this module to cover the content of the bill in detail. There are four aspects of the bill worth noting here. 1. BROKER PRICE OPINIONS The use of broker price opinions as the primary basis to determine the value of a property for the purpose of the origination of a residential mortgage loan is prohibited by amendments to the Financial Institutions

99 The Real Estate Professional s Role in Valuation 93 Reform Recovery and Enforcement Act (FIRREA) in the Dodd-Frank bill. In addition, the amendment provides the first federal definition of broker price opinion. BROKER PRICE OPINION DEFINED. For purposes of this section, the term broker price opinion means an estimate prepared by a real estate broker, agent, or sales person that details the probable selling price of a particular piece of real estate property and provides a varying level of detail about the property s condition, market, and neighborhood, and information on comparable sales, but does not include an automated valuation model, as defined in section 1125(c). 2. HOME VALUATION CODE OF CONDUCT (HVCC) One of the most anticipated and long awaited results of the Dodd-Frank bill is the sunset of the HVCC. The HVCC helped to disrupt many of the established procedures for appraiser selection and retention. The implementation of the HVCC caused a considerable amount of confusion in the real estate brokerage community, and contributed to what seems to be an ever growing rift between appraisers and real estate brokers and sales associates. 3. appraiser INDEPENDENCE STANDARDS The downside to the sunset of the HVCC mandated by the Dodd-Frank legislation is Appraiser Independence Standards have been incorporated into federal law by the amendments to the Truth in Lending Act in the same bill. While the idea of appraiser independence is a good one, and supported by most people in the real estate profession, the standards imposed are nearly identical to the provisions contained in the HVCC. The agencies, described and defined above, have the responsibility of drafting regulations implementing the appraiser independence requirements. In the meantime, both Fannie Mae and Freddie Mac have adopted Appraiser Independence Requirements. These requirements must be followed for the origination of mortgage loans intended to be sold to Fannie Mae or Freddie Mac. The Fannie Mae appraiser independence requirements are at this link: Answers to frequently asked questions about Freddie Mac appraiser independence requirements are available at the link below: appraiser_independence_faq.html 4. equal CREDIT OPPORTUNITY ACT AMENDMENT This section of the Dodd-Frank bill includes amendments affecting borrowers, real estate licensees involved in preparing BPOs and evaluations, and state certified real estate appraisers. The amendment requires the creditor (lender) to furnish the borrower with a copy of any and all written appraisals and valuations prepared in connection with a loan secured by a first mortgage lien on a residence. The appraisals and valuations must be provided to the borrower not later than three days prior to the closing of the loan. The amendment further defines valuation to include any estimate of the value of a dwelling developed in connection with a creditor s decision to provide credit, including those valued pursuant to a policy of government sponsored enterprise or by an automated valuation model, a broker price opinion, or other methodology or mechanism. As a result of this language, questions concerning the borrower s access to BPOs and evaluations prepared by brokers and sales associates are answered; and the answer is yes, they do have a right to a copy of the report(s). CONCLUSION Changes in the real estate profession have been fast and furious over the last few years. Everyone involved in real estate, from practitioners to owners, has experienced challenges due to the momentous shift from what was considered to be reality. Reactions to the challenge of change vary, but the most effective response comes from the late management expert Peter F. Drucker: The entrepreneur always searches for change, responds to it, and exploits it as an opportunity. relatedsellinginfo/appcode/pdf/air.pdf

100 94 Module 5 The Real Estate Professional s Role in Valuation 94 Module 5 REVIEW VALUATION You are not required to answer the module review questions to complete the 14-hour course. They are intended to help prepare you for the Final Examination. Choose the best response to each question. The answer key is found in the back of the book. 1. The cost required to replicate the subject improvements in every detail is: a. reproduction cost. b. comparative cost. c. replacement cost. d. depreciated cost. 2. CMA s do not include: a. current competitive active listings. b. sold properties. c. expired listings. d. broad real estate market data. 3. The process of determining which of the comparable properties provides the best indication of value for the subject property is referred to as: a. standardization. b. characterization. c. reconciliation. d. estimation. 4. The loss in value due to any and all claims is: a. accrued depreciation. b. accrued deterioration. c. functional deterioration. d. physical depreciation. 5. The sales comparison approach to the valuation of residential property is based on the: a. cost depreciation approach. b. principle of substitution. c. principle of depreciation. d. income approach. 6. The minimum content found in a BPO does not include: a. description of the subject property. b. names of previous owners. c. estimated value or price. d. intended user. 7. Compliance with the Uniform Standards of Professional Appraisal Practice (USPAP) is mandatory when performing a/an: a. CMA. b. BPO. c. opinion of value. d. appraisal. 8. Compensation for valuation services and reports provided by real estate licensees must be collected in the name of the licensee s: a. employer. b. customer. c. seller. d. buyer. 9. When valuation reports are prepared using a web based program, the records must be retained for at least: a. 10 years. b. 7 years. c. 5 years. d. 2 years. 10. According to the Equal Credit Opportunity Act, appraisals and valuations must be provided to the borrower no later than: a. 3 days prior to the closing. b. 5 days prior to the closing. c. 7 days after the closing. d. 10 days after the closing. Note: Edition 14.3 was published in June, Any changes to laws and rules that occur after this course was published will not affect the Module Review questions and Final Examinations. Check our website for updates to our course material.

101 Content Updates Module 2 Updates: Property Insurance in Florida In 2011, Senate Bill 408 relieved Citizens Insurance of approximately 200,000 policies. Two years later, the legislature again addressed the task of reducing the number of Citizens policyholders and worked to create a program that would actively seek private insurance companies to offer competitive residential risk policies to Florida s property owners. Their efforts resulted in the creation of Senate Bill The bill was signed by Governor Scott on May 29th and became effective on July 1, Legislative Changes To Citizens Insurance The most significant change was the creation of the policyholder eligibility clearinghouse program. Referred to as the clearinghouse, this program operates as a unit within Citizens. The clearinghouse actively facilitates policy offers from private insurers to replace current Citizens policies that are due for renewal or for applicants who are ineligible for a policy from Citizens. To assist private insurers with extending policy offers, details in the insurance laws address agent commissions, usage of Citizen forms, and other agent and insurance license issues related to the program. Additional legislative changes under Senate Bill 1770 include: renaming the CAT Fund; increased regulations for public insurance adjusters; a reduction in Citizens maximum amount of coverage revised; insurance ineligibility on specified structures; increased membership to the Citizens Board of Governors; created a surcharge and assessment disclosure requirement; established the Office of the Inspector General at Citizens; and, added the requirement of annual reports for the CAT Fund and Citizens. Real estate licensees will find the following changes most relevant: Section , F.S. Renames the Florida Hurricane Catastrophe (CAT) Fund to the State Board of Administration Finance Corporation. Section , F.S. Prohibits a public adjuster from receiving compensation from any source over the statutory fee caps and applies disciplinary provisions to those who violate the law through any maneuver, shift, or devise. Requires the public adjuster to meet or communicate with the insurer in an effort to reach an agreement. Section , F.S. Reduces the maximum amount of coverage on residential property and single, residential condominium units from $2 million to $1 million for the first year of implementation. Citizen s maximum policy limit further reduced by $100,000 each year, until the maximum coverage is $700,000 by January 1, Provides an allowable exception if the Office of Insurance Regulation determines that there is not a reasonable degree of alternative private insurance carriers in the area. Prohibits Citizens from covering structures that are constructed after July 1, 2013, and are built seaward of the coastal construction line. Allows the Governor of Florida to appoint a consumer representative to the Citizens Board of Governors, in addition to the two existing appointments. Clarifies that a private company s offer of coverage that is within 15% of Citizens rate for a new policy, or equal to or less than the renewal rate, would make the policyholder ineligible for coverage with Citizens. Requires Citizens to disclose potential surcharge and assessment liabilities with each renewal notice. Bert Rodgers Schools of Real Estate, Inc. 95

102 96 Content Update Establishes an Office of Inspector General at Citizens to be appointed by the Financial Services Commission. This is to insure accountability, integrity and efficiency. Requires Citizens to prepare an annual report on Citizens loss ratio for non-catastrophic losses on a statewide and county basis, available for public inspection by January 15th of the following calendar year. Section , F.S. Establishes the Citizens clearinghouse by January 1, This allows Citizens, and insurance agents who sell Citizen products, to place homeowners with authorized companies that have comparable products. Clarifies the 45-day notice of non-renewal applies to policies that are ineligible for Citizens coverage pursuant to the clearinghouse program. Section , F.S. Requires the CAT Fund and Citizens submit to the Legislature and Financial Services Commission an annual Probable Maximum Loss (PML) Report no later than February 1 of each year. The annual report shall identify their probable maximum losses, financing options, and potential assessments.

103 14-Hour Real Estate Continuing Education Course 97 Module review ANSWER KEY Module 1 Real Estate Core Law 1. Community Development Districts (CDDs) do not possess the right to: c. regulate land use. 2. Any person who operates as a real estate licensee without a valid active license is guilty of a: d. third degree felony. 3. In a mandatory homeowners association the required disclosure must be provided by the: a. developer or seller. 4. A fiduciary duty is owed by: b. a single agent. 5. The rule of caveat emptor or buyer beware: b. is the rule in commercial transactions. 6. The FREC has how many members? d A broker who owns a brokerage firm and a referral company may be issued upon request: d. multiple licenses. 8. At least one member of the Florida Real Estate Commission must be how old? a A real estate license is required when acting as a/an: d. leasing agent who is paid on a transactional basis. 10. Under the license law, it is presumed that all licensees are operating as a: b. transaction broker. Module 2 Property Insurance in Florida 1. An insurance premium which is clearly insufficient to sustain projected losses and expenses is: a. inadequate. 2. The cost to replace an item or structure at the same location with another item or structure of comparable material and quality used for the same purpose is: b. replacement cost value. 3. Senate Bill 408 made several changes to the insurance laws that affect real estate professionals. These changes did not include: d. planning for the dissolution of Citizens. 4. The Florida Hurricane Catastrophe Fund is referred to as the: a. CAT Fund. 5. Damages caused by Hurricane Andrew in August 1992, amounted to: d. $25 billion.

104 98 Bert Rodgers Schools of Real Estate, Inc. Module review ANSWER KEY Module 3 Introduction to Commercial Real Estate 1. A new customer has a small start-up business with a limited budget. The most appropriate grade of commercial offices space is a Class: c. C. 2. A customer with specific facility requirements in respect to ceiling heights, loading dock access, power supply, and proximity to major traffic arteries would benefit most by leasing or buying a/an: b. industrial/warehouse. 3. What conditions would make a letter of intent binding on the parties? d. in writing and either contains limited binding language or consideration given 4. Information found in an estoppel certificate from a tenant would include: b. the rental amounts due for the remainder of the lease term. 5. A tenant-at-will has been given proper notice of termination and is now refusing to vacate. By statute, what is the maximum amount the landlord can charge the tenant in holdover rent going forward? d. double the rent 6. Typically the types of rent in commercial real estate do not include: c. security rent. 7. Stand-alone lots located on the outskirts of large commercial developments are referred to as: a. outparcels. 8. One item usually included in a pre-closing covenant is a: c. notice of gap matters. 9. In commercial transactions, documentary stamp taxes: b. are the same rate as residential property. 10. Which is true regarding inspections in relation to buyers of commercial property? Commercial buyers: a. will want the longest inspection period possible. Module 4 New Financing Options 1. Eligibility for a VA loan is limited to only: c. active duty and retired members of the US Armed Forces with limitations. 2. A VA loan requires a down payment of: a. 0%. 3. Properties financed with VA loans require appraisals to be completed by appraisers who are: d. on the VA restricted panel. 4. What loan program has no maximum purchase price and no maximum mortgage limit? b. USDA 5. Qualified homeowners with very low income may be eligible for rural repair and rehabilitation combined loans and grants up to a maximum amount of: a. $27,500.

105 14-Hour Real Estate Continuing Education Course 99 Module review ANSWER KEY Module 5 The Real Estate Professional s Role in Property Valuation 1. The cost required to replicate the subject improvements in every detail is: a. reproduction cost. 2. CMA s do not include: d. broad real estate market data. 3. The process of determining which of the comparable properties provides the best indication of value for the subject property is referred to as: c. reconciliation. 4. The loss in value due to any and all claims is: a. accrued depreciation. 5. The sales comparison approach to the valuation of residential property is based on the: b. principle of substitution. 6. The minimum content found in a BPO does not include: b. names of previous owners. 7. Compliance with the Uniform Standards of Professional Appraisal Practice (USPAP) is mandatory when performing a/an: d. appraisal. 8. Compensation for valuation services and reports provided by real estate licensees must be collected in the name of the licensee s: a. employer. 9. When valuation reports are prepared using a web based program the records must be retained for at least: c. 5 years. 10. According to the Equal Credit Opportunity Act, appraisals and valuations must be provided to the borrower no later than: a. 3 days prior to the closing.

106 100 Bert Rodgers Schools of Real Estate, Inc.

107 Bonus Material: Special Bulletin on Short Sales Bert Rodgers Schools is delighted to bring you this non-credit Special Bulletin to keep you up to date on this developing set of opportunities. Relevant information about Fannie Mae and Freddie Mac programs is identified to enhance your professional skills outside FREC s educational requirements. Because this FREE Special Bulletin is not part of our 14-hour course, our module reviews and final examinations do NOT contain questions about this additional material. You can rely on Bert Rodgers Schools throughout your career for timely, exclusive content that will keep you up-to-date on the latest laws and rules as well as new trends in our fast-paced industry. Educating Florida professionals since 1958, Bert Rodgers Schools is your license to success! Warm Regards, Lori Rodgers, President 14-Hour Real Estate Continuing Education Course 101

108 SPECIAL BULLETIN ON SHORT SALES 102 Bert Rodgers Schools Your License to Success Since 1958! SPECIAL BULLETIN ON SHORT SALES By Kenneth Harney Short sales, where lenders agree to accept less than the full amount owed by borrowers, have been increasing steadily for years. But thanks to a new program from Fannie Mae and Freddie Mac, they are about to boom. Traditionally, short sales have involved extended periods of delinquency, with borrowers failing to make payments for months. Sometimes their mortgage servicers have urged them to stop making payments, because banks rules require delinquency before they will even consider a short sale. Recently the regulator that oversees Fannie and Freddie the Federal Housing Finance Agency announced that as of Nov. 1, 2012, both companies would begin approving short sales for underwater homeowners who are current on their payments and can show that they face an imminent hardship. Since the two companies combined own an estimated 3.7 million underwater loans nationwide that are underwater and current on payments thousands of them in Florida the new program from Fannie and Freddie is expected to generate a major increase in short sales. That increase, in turn, should offer important opportunities not only for homeowners who want to rid themselves of their negative equity positions, but also for real estate professionals who seek to assist them and have the necessary familiarity with short sale procedures. Every short sale will generate at least one new home purchase maybe even two down the road as the short sellers eventually qualify for another home mortgage and substantial potential commission revenues for Florida real estate professionals who recognize the program as a valuable new tool to help resolve the foreclosure mess. Bert Rodgers Schools is delighted to bring you this Special Bulletin to keep you up to date on this developing set of opportunities. Note: Final examination Post Office questions Box 4708, do not contain Sarasota, information FL from the bonus material

109 Bonus Material - Special Bulletin on Short Sales 103 THE BASICS The new Fannie-Freddie program covers all mortgage loans evaluated for a short sale on or after Nov. 1, That does not mean loans originated after that date, but those where a proposal for a short sale has been presented to the mortgage servicer. There is no termination date for eligibility, but to be eligible the loan must be owned or guaranteed as part of a mortgage securitization by Fannie or Freddie. You can readily determine this by having the homeowner visit either Fannie s lookup site ( or Freddie s ( FHA and VA have not announced similar programs to date, and thus loans backed by those agencies are not eligible for special short sale assistance. ELIGIBILITY Hardships. Underwater homeowners who are fully paid up on their mortgages must be facing some form of significant hardship in order to qualify for a new short sale approval. Among the permissible hardships: Unemployment A reduction in income due to circumstances beyond the borrower s control. For example, elimination of overtime pay or a reduction in regular work hours An increase in housing expenses beyond the borrower s capacity to afford. Urgent and costly repairs, such as replacement of a roof, might be an example. Divorce or separation Death of a borrower or a primary or secondary wage earner Serious illness or long-term disability A disaster either natural or man-made that affects the borrower s home or workplace An employment relocation/transfer of more than 50 miles from the borrower s current home; or a notice of permanent change of station for members of the military. Business failure Other. A financial hardship that is not covered above. This wide range of hardships opens the door to short sales for large numbers of homeowners who never thought they would qualify for any federal program. DOCUMENTATION OF HARDSHIPS The borrower/owner must be able to document the hardship in most cases, though not all. For example, in the case of a serious illness, a doctor s certification, medical bills, etc. will be needed. Documentation of unemployment, however, is not required. All applicants will need to fill out Form 710, the Uniform Borrower Assistance Form, which should be available through the loan servicer or can be downloaded from Fannie Mae at APPLICATION PACKAGE While the new Fannie-Freddie program has instituted key changes broadening eligibility, the application procedure is much like any other type of short sale. When a real estate licensee has identified a homeowner who fits the expanded criteria, has listed the property and obtained an offer, the next step is putting together the application package. 2 Bert Rodgers Schools of Real Estate Note: Final examination questions do not contain information from the bonus material.

110 104 Bert Rodgers Schools Individual servicers and banks may have their own version of an acceptable package, but typically sellers and their representatives will need to include the following somewhere in the mix: A Third Party Authorization. Before the servicer can speak with a real estate licensee, lawyer or other person representing the homeowner/ seller, the seller generally needs to fill out and sign an authorization form specifying the representative s name, firm, contact information and the like. An executed Fannie-Freddie Form 710, which provides key income, employment, information about the borrowers and the property, and indicates the reason for the short sale request. Though the Form 710 includes a check-the-box description of the hardship claimed by the seller plus required documentation, some servicers might still ask to see a traditional hardship affidavit. An executed real estate listing agreement documenting date, term, commission and other data. An executed purchase contract. A 4506-T or EZ short form request to IRS for a tax return transcript covering the prospective purchaser. PROS AND CONS FOR BORROWERS The expansion of short sales to borrowers who are current on their loans clearly is good news for underwater owners who see no light at the end of the negative equity tunnel. What is important for these individuals to know, however, is that since they have stayed out of delinquency, they may be eligible not only for a Fannie-Freddie short sale, but also may be able to buy a new house in a much less time than they imagined. FHA, for instance, may be willing to finance them within months provided they can show that genuine hardships led to their short sale and they were not delinquent at the time of the transaction. Even Fannie Mae and Freddie Mac may be willing to finance them again within months so participating in the new program not only can get them out of negative equity, but later get them into a new house, building positive equity again. There are some aspects of the Fannie-Freddie short sale program that some owners may find troubling. Chapter 702, Florida Statutes, allows loan investors to pursue deficiency judgments by filing a lawsuit when the full balance due on a mortgage is not paid. Fannie and Freddie are both aware of this in fact most states allow lenders to seek recovery of deficiencies and as a result have built into their new program a waiver feature. In cases where the short sellers have sufficient assets to allow them to make a contribution toward reducing the unpaid balance through either a cash payment or a promissory note, Fannie and Freddie expect sellers to do so as part of the agreement for a short sale. Say an underwater borrower wants to do a short sale where the deficiency to the investor Fannie or Freddie would be $100,000. If that borrower has significant savings or other assets, the program requires them to agree to some form of contribution out of those assets. Under Fannie Mae s guidelines, servicers are instructed to pursue contributions of 20 percent of the borrower s cash reserves. If, for example, your customer has $50,000 in cash reserves, Fannie would seek $10,000 in cash as part of the short sale deal. In situations where your customer has minimal reserves, the contribution would take the form of an interest-bearing promissory note. Another concern that some owners might have involves the credit scoring treatment of short sales. Both Fair Isaac Inc., developer of the widely used FICO credit scoring system, and VantageScore, the scoring company created by the three national credit bureaus, treat short sales as virtually identical to foreclosures and deeds-in-lieu-of-foreclosures. Both systems hit borrowers with huge point penalties 150 to 200 points in the case of FICO after a short sale. Sharply lower scores, in turn, can seriously affect short sellers ability to qualify for rental apartments, new credit cards and even employment. SPECIAL BULLETIN ON SHORT SALES 3 Note: Final examination questions do not contain information from the bonus material.

111 Bonus Material - Special Bulletin on Short Sales 105 Huge point penalties seem unduly harsh for owners who take advantage of Freddie s and Fannie s new program. By definition, they have not missed mortgage payments and in fact appear to be responsible users of credit. Their main bad luck is that they bought houses in areas that were hit hard during the housing bust. So how will the scoring models treat these owners? At the time of this bulletin, discussions were underway between the Federal Housing Finance Agency and the credit bureaus with the objective of lessening the scoring burden on participants in the new Fannie-Freddie program. If those discussions are productive, your customers can expect a smaller hit to their scores after a short sale. If they are not productive, however, you need to warn customers up front that their FICO and Vantage scores will be much lower after the transaction. There is a third potential downside for some borrowers those who have large second liens on their properties. Though Fannie and Freddie have set a $6,000 limit on the amount that second lienholders can obtain from the proceeds of a short sale, some banks are seeking payments from sellers outside the transaction itself $10,000, $15,000 and more as a one-time payment toward the second lien debt balance as the price of their approval of the sale. Some customers may find these demands onerous. Beyond all this, there are tax questions that need to be considered, such as whether the IRS could seek income taxes on the unpaid/forgiven balances. Fortunately, Congress resolved this issue for the calendar year 2013 by extending the Mortgage Debt Relief Act through December 31, For specific questions regarding your customer s situation, consult a tax professional. HOW REAL ESTATE LICENSEES CAN MAKE THE MOST OF THE NEW FANNIE-FREDDIE PROGRAMS For real estate licensees who are already active in short sales, the new programs should widen your potential marketplace of potential sellers, and increase your commission income. For real estate licensees who have some familiarity with the program but are not highly specialized in short sales, the Fannie-Freddie program can open avenues to new business. Among the strategies you might consider: Prospecting for underwater owners. In areas where home values are still well below where they were in , there may be significant numbers of owners current on their loans who might benefit from a short sale to get out from under their debt albatross. These are people who feel they cannot list their homes today because they would be forced to sell at a big loss. As a result, they are locked on the sidelines, unable to sell and unable to move to a different house. It is your challenge to locate them and see whether they might be interested in learning more about the new program. Banks and mortgage lenders often know of situations where borrowers have begun discussions with servicers about possible modifications to their mortgages, even though they have still not defaulted. Some banks or servicers may be willing to share these leads. Others may even be selling or renting lists to real estate licensees who they know may be interested in contacting these owners about the new short sale program. You need to let such lenders and servicers know of your interest. THE BOTTOM LINE: Most underwater borrowers who are current on their loans and remember, 80 percent of them are probably have no knowledge of the new Fannie-Freddie program. Real estate licensees more than any other group or profession are in a position to be agents of education, spreaders of the good news, about what may be an important, even life-changing, opportunity for these owners. It is definitely worth your consideration. 4 Bert Rodgers Schools of Real Estate Note: Final examination questions do not contain information from the bonus material.

112 106 Bert Rodgers Schools

113 Index 107 INDEX A absorption rate, 86 access, 52 accrued depreciation, 81 actual cash value (ACV), 32 additional rent, 55, 58 address, change of, 7 8 adjudication, 9, 10 administrative complaints, 9, 11 advance rent, advertising, 12 13, 15, 53 anticipated sales price, 80 appraisals, 47, Appraiser Independence Standards, 93 arbitration, 9 architectural restrictions, 52 assignment, associations: commercial real estate, estoppel certificates from, 53 fines and liens, 53 homeowners, 19, 26 assumability, 65 audit, authority, 13 14, 48 authorized brokerage relationships, 11 automatic default, 58 B bankruptcy, 58, 67, 91, 92 base rent, 55, 58 BOMA (Building Owners and Managers Association International), 44 BPO (Broker Price Opinion), 76, 77, 78, 82, 85, branch office, 7, 15 broad real estate market, 77 brokerage business records, 13 brokerage offices, 7, 15 brokerage partnerships, 14 brokerage relationship, Brokerage Relationship Disclosure Act (BRDA), 11 brokerage services, 91 broker associates, 2, 5 Broker Price Opinion (BPO), 76, 77, 78, 82, 85, brokers, 2, 7, 10, 14, 23, 90 See also specific topics bucket, 50 builders, 21, 81 Building Owners and Managers Association International (BOMA), 44 business days, 16, 38 business operations, 15 buyer beware, 46 C calendar days, 8, 15 CAM (common area maintenance), 53, 57, 61 cancellation, notice of, 35 cap, 50 capitalization of rent gain, 81, 88 capitalization of rent loss, 81, 88 cash, 47, 65, 66, 67, 68, 70 cash reserves, 68 cash value, 32, 36, 37 CAT Fund, 31, 34 caveat emptor, 19, 46 CDD (Community Development District), 17 18, 21 cease to be in force, 7 certificate of authority, 34 Certificate of Eligibility (COE), 67 certification of proper completion of sinkhole repairs, 38 change in use, 46, 52, 59 change of address, 7 8 child support, 67 Citizens Property Insurance Corporation, 32 34, 39 claims, 20, 37, 39 file, 34, 36, 38 Class A, Class B, Class C, Clerk of the Court, 20, 38 closing costs, 50 51, 66 closing timing, 51 CMA (Comparative Market Analysis), 76 77, 78, 85 coastal accounts, 33 coastal counties, 33 COE (Certificate of Eligibility), 67 commercial condominiums, 42 commercial lines, 33, 35 commercial property inspector, 52 commercial real estate, assignment/subletting, associations and certifications, closing costs, closing timing, 51 contingencies, corporate structure of buyers and sellers, covenants, default, events of, default, remedies to, escrow deposit, 46 estoppel certificates, 53 existing facilities, initial considerations, lease execution, 60 leases, maintenance, 49, 53, multiple owner properties, new construction, 51 parking, 56 property types, 42 45

114 108 Index purchase contract, rent, 55 representations and warranties, security deposit, 55 56, 58 survival of representations, warranties, and covenants, 50 tenant improvement allowances, 56 term of lease, 56 title or use, utilities, 57 Commercial Real Estate Women (CREW) Network, 44 commissions, 4, 5, 10, 12, 15, 77 common area maintenance (CAM), 53, 57 Community Development District (CDD), comparable property, 80, 82, 85, comparable sales, Comparative Market Analysis (CMA), 76 77, 78, 85 compensation, 91 compliance, condominium disclosure, 19 condominiums, 42 confidentiality, 2, 8, 20 conflicting demands, 9, 16, 23 consideration, 4, 45, 79 contamination, 52 contingencies, 46 48, continuing education, 5 6 continuing operations, 49 contracts, 12, 13, 21 22, contributions for advertising, 53 cooperation in investigation, 7 corporate registration, 5 corporate status, 48 corporate structure, corporations, 14 15, 42 cost analysis, 81, 88 cost approach, cost depreciation approach, counting days, 8 covenant not to compete, 50 covenants, 49 50, 52 credit history, 65, 66, 67, 69 credit reports, 66 CREW (Commercial Real Estate Women) Network, 44 D damages, 59 days: business, 16, 38 calendar, 8, 15 counting, 8 debt-to-income ratios, 68 default: events of, remedies to, deferred maintenance, 82, 89 deficiencies, 52, 65 Department of Business and Professional Regulation (DBPR), 92 Department of Financial Services (DFS), 34, 38, 39 deposits, 15 16, 22 23, 46 depreciated cost, 81 depreciation, designated sales associates, 4 determination of agency or transactional brokerage relationship, 10 development properties, 43 DFS (Department of Financial Services), 34, 38, 39 Direct Housing Loans, directors, 5 discipline, 8 11, 16 disclosure: brokerage relationship, 12 Community Development District, condominium, 19 homeowners association, 19 lead-based paint, 18 material facts, property condition, 20 property tax, radon gas, 18 seller s, 12 discriminatory rate, 32 documentary stamp tax, 51 documentation, 23 Dodd-Frank Wall Street Reform and Consumer Protection Act, down payment assistance, down payments, 65, 68 drainage, 51 due diligence, 46, 52 dumpsters, 57 E earnest money deposit, 46 electronic deposits of rent, 55 eligibility: USDA Guaranteed Housing Loans, veterans (VA) home loans, 64 65, 71 eligibility status, 64 65, 66 employees, 2, 50 employers, 2 employment, 2 employment history, 66, 67 energy-efficiency rating, 18 energy improvements, 65 environmental assessment, 52 Equal Credit Opportunity Act, 93 escrow account, 16 escrow deposit, 46 escrow disbursement, 9 escrow dispute options, 9 escrow funds, 16, 46 estoppel certificates, 53 evaluation, events of default, excessive rate, exclusive use, 52, 54 exemptions, 4 5 exhibits and addenda, 89 existing commercial facilities, existing tenants, 49

115 Index 109 expansion, space for, extensions, 48 external obsolescence, 81 F facts, material, fair market price, 80 fair market value (FMV), Federal Housing Administration (FHA), 64, 65, 66, 67 fees late, 55 ownership, 42 felonies, 10, 12, 14, 38 FHA (Federal Housing Administration), 64, 65, 66, 67 FHCF (Florida Hurricane Catastrophe Fund), 31, 34 fiduciary, 2 file and use method, 35 financial threshold, 50 financing, Florida Housing Finance Corporation, USDA loans, veterans (VA) home loans, financing contingencies, finder s fee, 4 5 fines, 8, 38, 53, 91, 92 first refusal, right of, first-time buyers, 69 five years, 11, 13, 14, 35, 38, floor, 50 Florida Assist, 70 Florida Department of Financial Services (DFS), 34, 38, 39 Florida Department of State, 5, 48 Florida First, 69 Florida First Conventional, 70 Florida Housing Finance Corporation, Florida Hurricane Catastrophe Fund (FHCF), 31, 34 Florida Military Heroes, Florida Office of Insurance Regulation, 31, 35, 36 Florida Real Estate Appraisal Board (FREAB), 76 Florida Real Estate Commission (FREC), 8, 14 Florida REALTORS Commercial Alliance, 44 Florida Residential Swimming Pool Safety Act, Florida residents, 17, 30 FMV (fair market value), foreclosures, 17, 18, 64, 66 67, 86 87, fraud, 90 FREAB (Florida Real Estate Appraisal Board), 76 FREC (Florida Real Estate Commission), 8, 14 free-standing commercial space, 43 functional obsolescence, 81 funding fee, 66 funds, 2, gifts, 15 go dark, 59 good standing, 48 grace period, 55, 58 Grade A, 44 Grade B, 44 G Grade C, 44 grants, 69 grease traps, 57 gross rent multiplier (GRM), 82 Guaranteed Housing Loans, H HAMI (Homeownership Assistance for Moderate Income Program), 71 high risk areas, 31, 32, 33, 39 high volume parking, 56 holdover, 59 home builders, 21, 81 homeowners association disclosure, 19 Homeownership Assistance for Moderate Income Program (HAMI), 71 Home Valuation Code of Conduct (HVCC), 93 I impact fee credits, 51 impact fees, 51 inactive status, 6 7 inadequate rate, 31, 32 income approach, 82 income requirements, indemnification, 50 independence requirements, 93 industrial space, 43, 44 in-line space, 43 inspect, authority to, inspections, 47 insurance: failure to maintain, mortgage, 77 title, See also property insurance insurance claims, 20, 34, 36, 37, insurance companies, 30, 31, 32, 33, 35, 39 insurance fraud, 38 insurers, 30 39, 50 51, 77 intended user, 85 Interagency Appraisal and Evaluation Guidelines, interest-bearing accounts, 22, 46, 56 investigation, cooperation in, 7 involuntarily inactive, 6 in writing, Johnson v. Davis, kickbacks, 15 J K L Landlord-Tenant Act, latent material defects, 2 lead-based paint disclosure, 18 lease execution, 60

116 110 Index lease expiration, 23 lease holdover, 59 leases, lenders, 47, 50 51, 64 69, 71 letters of intent, 45 licensed real estate brokers, 7, 14, 23, 90 license expiration, 7 8 licensing of broker associates and sales associates, 5 lien for rent, 60 liens, association, 53 limited binding language, 45 limited liability companies, 42 limited representation, 3, 11 limits for claims and statute of limitations, 34 listings, 77, 80, 81, 85 89, 92 litigation, 13, 37, 39, 91 loan application, 67, 68 loan origination, 77 loans, low income, 69 loyalty, 2, 3 M maintenance: commercial real estate, 49, 53, common area, 53, 57 deferred, 82, 89 maps, 89 Market Price, 80 market value, material facts, maximum fine, 8, 38, 91, 92 median income, 69 mediation, 9 member-managed limited liability companies, 42 military personnel, 21 22, mishandling of funds, 16 misrepresentation, 91 moderate income, 71 moral turpitude, 2 mortgage insurance, 77 most likely sales price, 80 multiple licenses, 7 multiple owner properties, mutually agreeable, 9 N National Association of Industrial and Office Properties (NAIOP), 45 negligence, 91 new construction, 51 no brokerage relationship, 4 noncompete covenant, 50 noninterest-bearing accounts, 22, 56 nonrenewal, notice for, 35 nonrenewal of policy due to sinkhole claims, 38 nonresident licensure, non-solicitation of employees, 50 notice, rental information, 13 notice for nonrenewal, 35 notice of cancellation, 35 Notice of Change in Policy Terms, notice of gap matters, 49 notice of violations, 49 notice to terminate, 22, 23 notice to vacate, 23, 56 null and void, 6, 9 O obedience, 2 Office of Insurance Regulation, 31, 35, 36 officers, 5, 14 office signs, 7 office space, one-time funding fee, 66 open market, 79, 80 operating, 11 12, 14, 42, 49, 54, 59 operational requirements, 53 operations, 49, 59 opinion of value, 76, 85 outparcels, 42, 43 ownership, corporation, 42 P paired sales, 81, 88 parking, 51, 52, 56 partnerships, 5, 14, 42 party of the transaction, 15 penalties, 12, 13 percentage rent, 55, 59 permitting and licensure contingency, personal funds, 10 personal lines account, 33, 35 Phase I Environmental Assessment, 52 photographs, 89 physical deterioration, 81 point of contact information, 15 policyholders, 30, post-closing covenants, pre-closing covenants, 49 presumption of transaction brokerage, price, 79, 85 prima facie, 2 primary business address, 7-8 principals, 2 principle of substitution, 80, 81 private insurers, 31, 33, 36 prohibitive provisions in rental agreements, 24 promises, 8, 11, 13, 49 50, 54, 91 promulgate, defined, 2 property condition, 19 20, 52 Property Condition Disclosure, 20 property insurance: about, 30 Citizens Property Insurance Corporation, cost of, sinkhole and catastrophic ground cover collapse insurance, Florida legislation impacting, property management, 4 5

117 Index 111 property tax disclosure, public adjusters, purchase contract, Q qualified buyers/borrowers, 65, 68, 69 R radon gas, 18 radon gas disclosure, 18 rates, property insurance, rate standards, 35 RCV (replacement cost value), 32 real estate advertisement, 15 real estate appraisals, 47, real estate schools, advertising by, rebates, 15, recapture, right of, 60 receipts, 13 receivership, 31 reconciliation, recording costs, 51 recordkeeping, referral, 15 corporation, 7 fee, 4-5 refunds, 13 registered office outside state, 7 reinsurance, 31 remedies, 50, remuneration, 60 renewal of license, 5 6 rent: additional, 55, 58 advance, base, 55, 58 capitalization of gain/loss, 81, 88 commercial real estate, 55 electronic deposits of, 55 lien for, 60 percentage, 55 square footage-based, 55 rental agreements, prohibitive provisions in, 24 rental information list, 13 rental information notice, 13 replacement cost, 81 replacement cost coverage, 32, 36 replacement cost value (RCV), 32 representations, 49, 50 reproduction cost, 81 requirements: continuing education, 5 6 credit history, 69 income, independence, 93 licensing, 5, 7 8 office signs, 7 operational, 53 parking, 43, 51 surplus, 34 underwriting, 65, zoning, 51, 54 See also disclosure reserves, 42 Residential Swimming Pool Safety Act, residential transient occupancy, 4, 18, 21, 22 restaurant space, 43, 44 restrictions, architectural, 52 retail space, 43, 44 revolving panel, 65 right of first refusal, right of recapture, 60 Rural Repair and Rehabilitation Loans, 69 S salaried, 4, 5 sales associates, 2, 5 sales comparison approach, security deposit claim, 23 security deposits, 55 56, 58 self-help, 60 Seller s Disclosure, 20 Senate Bill 408, servicemembers, 21 22, setbacks, 51 single agents, 3, 4, single family residence, 68, 69, 80 82, 86, 88 sinkhole and catastrophic ground cover collapse insurance, sinkhole claims, 37, sinkhole damage, 36 37, sinkhole loss, sinkholes, 20, 21 sinkhole testing reports, 38 square footage-based rent, 55 state-funded reinsurance, 31 stigmatized property, 20 strip malls, 43 structural damage, student loans, 67 subject property, 85 subletting, substitution, principle of, 80, 81 surcharge, 33 surplus, 31 surplus requirements, 34 surveys, 52 T take-out companies, 35 tenancy, 49, 56 tenancy at will, 56 tenant improvement allowances, 56 tenants: estoppel certificates from, 53 existing, 49 termination, 22, 23 24, 59 term of lease, 56 thin-file applicants, 66 67

118 112 Index third degree felony, 10, 12, 38 title commitment, 52 title insurance, title or use, traffic arteries, 43, 44 transactional basis, 4 transaction broker, 3-4 transaction files, 13 triple-net leases, 57 U underwriting, 65, 66 67, 68 undivided loyalty, 3 unfairly discriminatory, 31, 32, 35 Uniform Standards of Professional Appraisal Practice (USPAP), Urban Land Institute, 44 USDA loans, Direct Housing Loans, Guaranteed Housing Loans, Rural Repair and Rehabilitation Loans, 69 use, change in, 59 USPAP (Uniform Standards of Professional Appraisal Practice), utilities, 57 V vacancy, 81 vacate, 23, 49, 56, 59, 60 VA financing/loans. See veterans (VA) home loans valid, 12, 14 VA Loan Guarantee Eligibility Center, 67 valuation, about, 76 compliance with law, Dodd-Frank Act, methodology, real estate licensee valuation services and products, report, valuation report, value, 79, 85 very low income, 68, 69 veterans (VA) home loans, about, 64 advantages and features of, 65 application process, 67 appraisals, closing costs, 66 eligibility for, eligible uses of, 65 funding fee, 66 mortgage maximums, 66 underwriting requirements, 65, violations, 12, 49 voluntarily inactive, 6 voting stock, 14 warehouse, 44 warranties, 48, 49, 50 wear and tear, excessive, 54 zoning, 51, 54 W Z

119 Final Examination Section EXAM 1 The following pages include: Final Examination Guidelines and Instructions page the Final Examination 30 examination questions and answer choices, pages Online Instructions how to use e-grading page 121 Registration Form Instructions submit by mail, fax, or page 122 registration Form student information, answer sheet, and payment information, page 123 License Renewal Checklist page Hour Real Estate Continuing Education Course 113

120 Part I: FREC Guidelines Final Examination Guidelines and Instructions 1. According to Florida Administrative Code, 61J ,(1)(a), all active or inactive sales associates, broker associates, and brokers must complete a minimum of 14 hours of instruction during each license renewal period, excluding the first renewal period of their current license. 2. Is this your first license renewal? Sales associates, broker associates, and brokers must complete post-license education during their first license renewal period. Call our school for more information: The Florida Real Estate Commission (FREC) has approved this final examination for 14 hours of real estate continuing education (including the mandatory 3-hour Core Law update) for sales associates, broker associates, and brokers. The FREC course approval # expires September 30, FREC Rule 61J regulates the format of final examination questions. This rule states: The 14-hour course examination consists of 30 multiple choice questions with four answer choices each. There is only one correct answer for each question. The examination questions may not follow the order of the material. A minimum of 21 questions must be at application level which means students must apply the knowledge they have acquired during the course to answer the questions correctly. Grading Policy Questions Missed Grade % Re-Exam A passing score is 80% or higher. You must answer a minimum of 24 questions correctly to attain satisfactory course completion. Students who have failed the final examination must complete a different examination from the one the student previously failed. FREE re-exams are available if you do not pass the Final Examination on your first attempt. 114 Bert Rodgers Schools of Real Estate, Inc.

121 14-Hour Real Estate Continuing Education Course Final Exam Section 115 Part II: Exam Instructions This information will help you achieve your best possible score. Please read it BEFORE completing the final examination. 1. Review the FREC Guidelines on the previous page. 2. If you need assistance while taking the Final Examination, contact our Instructor via at or by phone , ext After answering all 30 questions, choose one of our convenient methods to submit your completed final examination: Mail, fax, or Registration Form Instructions are on page 122. Online E-Grading Instructions are on page 121 or at Be sure the exam number on your Registration Form or E-Grading Exam matches the exam number you completed (i.e., those with exam 1 questions will purchase exam 1 e-grading). Helpful Test-Taking Tips Read each question carefully and identify the learning objective that is being tested. Review ALL of the answer choices then eliminate those you know are incorrect. Some application level questions may have two answer choices that are similar but only one is correct. Choose the BEST answer. Keep a record of your responses by marking your answer next to each exam question. This is an open-book exam. Use the index in the back of the book or the search feature in the e-book to look up key terms and check your answers. Unanswered questions are scored as incorrect. If you are unsure of an answer, use the answer choices to turn the question into a true or false statement. Looking at the question differently may remind you of something you have read. Instructor support is available during office hours at [email protected] or ext. 502.

122 Final Examination 1 1. Broker Mendoza plans to open his first real estate office. He should know that of all the violations that are heard by the FREC, the one considered most serious is: a. office sign requirements. b. mishandling of escrow funds. c. false or misleading advertisements. d. change of address requirements. 2. Broker Nancy is facilitating a residential real estate transaction and receives conflicting demands for the escrow deposit. The buyer and seller each consent to work with a third party to reach a mutually agreeable solution. Next, Nancy should notify the commission and: a. request an escrow disbursement order. b. submit the matter to arbitration. c. seek adjudication in court. d. submit the matter to mediation. 3. Sales Associate Amy won the lottery on February 10, 2012, and decided to retire from her real estate career. On April 1, 2012, her license became involuntarily inactive. If Amy does not renew her license by March 31, 2014, the status of her license will be: a. voluntarily inactive. b. null and void. c. active. d. involuntarily inactive. 4. Alan and Marnie are buying a new home that includes a swimming pool from Sunshine Home Builders, Inc. The Florida Residential Swimming Pool Safety Act requires they receive documents from the: a. appraiser. b. home builder. c. title company. d. lender. 5. Broker Michael operates a property management company. The maximum amount of personal funds he is permitted to maintain in his property management escrow account is: a. $5,000. b. $1,000. c. $200. d. $0. 6. Broker Bob has the listing on Patti s home. Bob wants to give Patti a percentage of his commission at closing. Even though Patti does not have a real estate license, he can do this because: a. gifts and kickbacks are not regulated. b. only he and Patti know about the gift. c. Patti is a party to the transaction and all parties have been informed. d. licensees may share commissions with anyone.

123 14-Hour Real Estate Continuing Education Course Final Examination The broker of Treeline Realty resigned yesterday. She was the only active broker registered with the firm. In order to accept new business, the vacancy must be filled within how many days? a. 3 business days b. 7 calendar days c. 10 business days d. 14 calendar days 8. Sales Associate Cody listed a commercial building that was constructed in When he finds a buyer, which disclosure should he provide? a. Radon Gas Disclosure b. Lead-Based Paint Disclosure c. Homeowners Association Disclosure d. Stigmatized Property Disclosure 9. Erik, a servicemember with the United States Marine Corps, entered into a contract for the purchase of real property. Prior to closing he received orders to change duty stations. The duty station is 35 miles away. Erik: a. is required to honor the contract. b. can terminate the contract because he is a member of the military. c. can terminate the contract by providing written notice and proof of his military orders. d. cannot terminate the contract unless the duty station is 100 miles away. 10. Broker Randy has violated the license law and was found guilty of five separate administrative complaints. The maximum fine the FREC may impose is: a. $5,000. b. $10,000. c. $15,000. d. $25, William Smith is a licensed sales associate. In a real estate advertisement he placed, interested parties are instructed to contact Bill Smith. What, if any, violations have occurred? a. he improperly used a nickname b. no violation has occurred c. misrepresentation d. fraud 12. Broker Associate Brad owes loyalty, confidentiality, and obedience to seller Angelina. Brad is a: a. transaction broker. b. single agent. c. designated sales associate. d. no brokerage associate. Instructor support is available. See page 115 for details.

124 118 Final Examination The broker for Extreme Commercial Real Estate, Inc. has appointed two of her sales associates to work with a buyer and seller in the same transaction as single agents. This scenario best describes which brokerage relationship? a. transaction broker b. designated sales associate c. no brokerage relationship d. single agency 14. Broker Eduardo changed his primary business address. He has 10 days to notify the commission of the change or his license will: a. remain unaffected. b. become voluntarily inactive. c. become involuntarily inactive. d. cease to be in force. 15. Broker Associate Renee has a buyer who lives in a large rural town in Florida. To learn if the buyer qualifies for a USDA loan in the county where she lives, Renee s first step should be to: a. determine the amount of cash reserves the buyer has for a down payment. b. contact the VA Loan Guarantee Eligibility Center. c. find out the average income for the buyer s family size in that city. d. locate a property that is eligible for a USDA loan. 16. Veteran Anita wants to apply for a VA loan in Anita s credit report shows she had a discharged bankruptcy in Anita s: a. explanation of the bankruptcy is not required. b. weak credit history will be overlooked. c. bankruptcy must have been discharged for two years before applying. d. solid employment history is enough to be approved. 17. Sales Associate Kelli has an executed sales contract on a house being financed with a VA loan. The VA requires a full appraisal as part of the qualification process and the appraiser must be: a. selected from a randomly chosen panel of state appraisers. b. required to overlook excessive deficiencies in the property. c. an employee of the Department of Veterans Affairs. d. on the VA s restricted, revolving panel of approved appraisers. 18. Susan, the owner of Sunshine Cupcakes, hired Broker Jodi to help her lease a retail location. Broker Jodi should advise Susan to: a. negotiate for exclusive use rights. b. paint her storefront blue. c. pass out coupons for a free cupcake to all existing tenants. d. not open until noon on weekends. Instructor support is available. See page 115 for details.

125 14-Hour Real Estate Continuing Education Course Final Examination Clooney s Call Center is looking for a significant amount of space to accommodate its numerous employees. They will not need to impress visitors. The most appropriate grade of commercial office space for this business is Class: a. A. b. B. c. C. d. D. 20. Dillon is selling his car repair business. In the purchase contract he has promised not to open up again for at least one year. Dillon has agreed to a: a. right of first refusal. b. covenant not to compete. c. financing contingency. d. representation or warranty. 21. The financial threshold for a single indemnification claim is referred to as a: a. cap. b. bucket. c. floor. d. covenant. 22. Which type of rent is not typically used in commercial leases? a. additional rent b. base rent c. square footage-based rent d. weekly rent 23. While preparing a BPO for a single family residence, Sales Associate Mollie determines the building structure has severely deteriorated exterior paint. This is an example of: a. deferred maintenance. b. functional obsolescence. c. depreciated cost. d. external obsolescence. 24. The price that a property would sell for on the open market is: a. anticipated sales price. b. fair market price. c. fair market value. d. most likely sales price. Instructor support is available. See page 115 for details.

126 120 Final Examination Compliance with the Uniform Standards of Professional Appraisal Practice (USPAP) is not required when: a. appraisals are prepared by licensed real estate brokers. b. the appraisal is for a federally related transaction. c. the appraisal will be used as the primary basis to determine the value of a loan. d. a real estate licensee provides an opinion of value. 26. A real estate licensee may be asked to prepare a BPO for a number of reasons. Due to a recent change in federal law, the BPO may not be used as the primary basis to determine property value for the purpose of: a. loan modification. b. employee relocation. c. loan origination. d. short sale decision making. 27. Effective 2011, insurance companies are required by law to have a surplus of funds in order to pay claims. The law requires the surplus to be raised incrementally until it reaches which amount? a. $10 million b. $15 million c. $20 million d. $25 million 28. Senate Bill 408 required Citizens Insurance to provide sinkhole coverage. After February 1, 2012, this coverage became limited to the: a. main structure of the house. b. house and any pool including the pool cage. c. house and any decks or patios. d. house and any sidewalks or driveways. 29. Citizens Insurance was created by the Florida Legislature in: a b c d A consumer is eligible for a policy with Citizens Property Insurance Corporation if: a. they have been turned down by two private companies. b. the property is in a high-risk area. c. the private insurer s premium is at least 15% higher. d. they are insuring investment property. Instructor support is available. See page 115 for details.

127 E-grading is a fast and convenient way to submit your exam online. It is recommended to those who are comfortable navigating the internet and making online purchases. If you prefer to submit your exam by mail, fax, or , please see the Registration Form Instructions on page 122. PAY YOUR EXAM TUITION ONLINE We recommend that you answer all of the final examination questions before paying your tuition. 1. Go to and click on Real Estate. Next, click on Continuing Education. Then, click on 14-Hr CE. 2. Scroll down the page and click on the exam number that matches the final examination you completed. (i.e., those with exam 1 questions will purchase exam 1 e-grading). Click Add to Cart and choose Express Checkout. 3. Login or Create a Student Account. 4. Complete your purchase by entering your payment information in the Shopping Cart. SUBMIT YOUR ANSWERS ONLINE Online Instructions: How to Use E-Grading 1. To open your exam, click Launch. 2. Read How to Use E-Grading. Figure 6.1 Image of E-Grading Exam 3. Input your answers. See figure Click on Submit Answers and your score will be calculated. 5. To complete your final exam, click on the green EXIT COURSE box. See figure 6.2 Important: Figure 6.2 Results Screen E-Grading Exam Review and print your Course Completion Report from the Transcripts menu item. Be sure your license number and Profile information is correct. Please contact us for corrections. Bert Rodgers Schools uses the information you provide to electronically report your education to the DBPR. Education is reported the next business day. 14-Hour Real Estate Continuing Education Course 121

128 Registration Form Instructions: Mail, Fax, or Submission STUDENT INFORMATION Using black ink, print your license number, name, and contact information on the Registration Form. We use this information to report your education to the DBPR. If you have more than one license number, use your primary number. If you don t know your license number, contact the DBPR at and click on: VERIFY A LICENSE. Your license number is seven digits or less (not the AC#). ANSWER SHEET After answering all 30 questions on the final examination, transfer your answers to the Answer Sheet. Use black ink and mark only one choice per question. If you mark more than one answer or do not mark any answer on the Answer Sheet, you will not receive credit for that question. If you make a mistake on the answer sheet, place an X over the wrong answer; then, bubble in and circle the correct answer. A passing score is 80% or higher; a minimum of 24 correct answers. If you do not pass your A B C D exam the first time, we offer FREE re-exams. Example of a changed answer. PAYMENT INFORMATION Tuition Course tuition of $25, valid until Dec. 31, 2014, includes the following services*: exam grading, FREE re-exams, electronic reporting to the DBPR, and exam results by mail. Certificate of Achievement Celebrate your success! Order your personalized Certificate of Achievement suitable for framing, for only $5. Priority Services Go to the front of the line! Mail, fax or your Registration Form to us, choose Same-Day or Next-Day Service* and we will fax or your Course Completion Report. To ensure timely processing, add our domain to your safe senders list. *All services are reliant on students providing accurate and legible information. Method of Payment Include your check, money order, or credit card information. A signature is required with credit card payments. Review the license renewal checklist on the back of the Registration Form. SUBMIT YOUR FINAL EXAM Send us your completed Registration Form: Fax Mail P.O. Box 4708, Sarasota, FL [email protected] E-Grading See page 121 for e-grading (online) instructions. 122 Bert Rodgers Schools of Real Estate, Inc.

129 1. A B C D 7. A B C D BERT RODGERS SCHOOLS 2. A REGISTRATION B C D 8. A FORM B C D 14-Hr Real Estate Continuing Education FINAL Course EXAM PH: , Fax: A B C D 9. A B C D [email protected] ANSWERS 4. A B C D 10. A B C D See Instructions on page 122. Print clearly using black ink on all items. Example: 5. A B C D 11. A B C D Student Information A B C D 6. A B C D 12. A B C D Enter your primary SL or BK license number. 1. A B C D 7. A B C D 13. A B C D SL 2. A B C D 8. A B C D 14. A B C D Sales Associate broker or broker Associate Yes, I want to receive Law FINAL EXAM 3. A B C D 9. A B C D and Rule 15. Updates A B from C Bert D or BK ANSWERS Rodgers 4. A B C D 10. A B C D 16. Schools A B via C . D Fill in your license # - 7 digits or less (not the AC#) Example: 5. A B C D 11. A B C D 17. A B C D Name A B C D 6. A B C D 12. A B C D 18. A B C D Address City/State/Zip 1. A B C D 7. A B C D 13. A B C D 19. A B C D 2. A B C D 8. Phone A B C D 14. A B C Fax D 20. A B C D FINAL EXAM 3. A C D 9. A C D 15. A FINAL C D EXAM B 21. A B C D Answer Sheet ANSWERS ANSWERS Exam 1 4. A B C D 10. A B C D 16. A B C D 22. A B C D 5. Use Ablack Bink to Cfill in Dthe correct 11. answer A Bchoice. C D 17. A Example: B C D 23. A B C D A B FREC C DCourse Approval # (Edition 14.3) expires September 30, A B C D 12. A B C D 18. A B A C B D C D 24. A B C D A A A A A A B B B B B B C C C C C C D D D D D D A A A A A A B B B B B B C C C C C C D D D D D D A A A A A A B B B B B B C C C C C C D D D D D D A A A A A A B 1. B 2. B 3. B 4. B 5. B 6. CA CA CA CA CA CA DB DB DB DB DB DB C25. DA C26. DA C27. DA C28. DA C29. DA C30. DA B B B B B B C C C C C C D D D D D D 7. A B C D 13. A B C D 19. A B C D 25. A B 7. CA DB C D Payment Information 8. A B C D 14. A B C D 20. A B C D 26. A B 8. CA DB C D Example: x Example: A B C D 9. A 14-Hour C D Correspondence 15. A Course C D Tuition includes electronic 21. A reporting C D to the DBPR. 27. A B 9. CA DB C D 10. Course A B tuition C is valid D until 16. Dec. A 31, B C D 22. A B C D 28. A B 10. $25.00 CA DB C D $ Order A your B personalized C D 17. Certificate A B of CAchievement D 23. A B C D 29. A B 11. $5.00 C A D B C + D $ Priority 12. A B Services C D 18. Choose A one: B C D 24. A B C D 30. A B 12. C A D B C D Same-Day Priority Service (In by 3 PM EST, M-F, results the same business day) $ $ 13. A B C D 19. A B C D 25. A B C D 13. A B C D or or 14. A C D Next-Day Priority Service 20. A (In by C D 5 PM EST, M-F, 26. A results the C D 14. A B C D next business day) $ $ Send 15. A B C D Priority or Fax to: 21. A B C D 27. A B C D 15. A B C D To 16. receive A an , C add D our domain 22. A B C D 28. to Ayour safe senders C Dlist. Total 16. A B C Purchase D $ *All services are reliant on students providing accurate and legible information. 17. A B C D 23. A B C D 29. A B C D 17. A B C D Method of Payment 18. A B C D 24. A B C D 30. A B C D 18. A B C D Please make your check or money order payable to Bert Rodgers Schools. If using a credit card, please sign below. 19. Check A # B C D 25. Money A Order B C MC D Visa Amex Discover 19. A B C D 20. A B Credit Card C D 26. A B C D 20. A B Expiration C D Number 21. A B C D 27. A B C D 21. Date Aof Card B C D (Month) (Year) 22. A B C D 28. A B C D 22. A B C D 23. A B C D 29. A B C D 23. A B C D Cardholder Signature (Required) 24. A B C D 30. A B C D 24. A B C D 25. A B C D 25. A B C D A B C D A B C D

130 Ph: Fax: Thank you for relying on Bert Rodgers Schools of Real Estate! Please help us serve you better by taking a few moments to share your thoughts about your Bert Rodgers Schools experience. I look forward to your comments. Sincerely, Lori J. Rodgers, President Which topic(s) did you enjoy the most? Do you have suggestions for topics in the next edition? Describe your experience with Bert Rodgers Schools: License Renewal Checklist Complete your continuing education requirements any time during your two-year license period. Send us your completed Registration Form by fax , - [email protected], or mail - P.O. Box 4708, Sarasota, FL You must achieve a passing score on the final examination. Verify that your name and license number are correct on the Course Completion Report. We use this information to report your education to the DBPR. Education is reported the next business day. Check your DBPR account at to ensure that you have satisfied your continuing education requirements for the CURRENT license period. It may take up to three business days from the date your education is reported by Bert Rodgers Schools for it to be visible in your DBPR account. Pay your license renewal fee to the DBPR. To pay online, log into or set up your DBPR account at www. MyFloridaLicense.com. The DBPR mails your new license when all renewal requirements are fulfilled.

131 Education is always a good investment! More than a MILLION licensed professionals have relied on Bert Rodgers Schools for their education. With content you won t find anywhere else, convenient online classes, exceptional customer service and more than 55 years of experience Bert Rodgers Schools is your license to success! For more information on courses, contact Student Services or visit our website today! Online Courses, Products, and Textbooks COURSES 14-Hour Real Estate Continuing Education Course 18 or 20-Hour CAM Continuing Education Course The two courses above are available online or correspondence 28-Hour Reactivation Course 63-Hour Sales Associate Pre-license Course Sales Associate State Exam Prep Course 45-Hour Sales Associate Post-license Course 72-Hour Broker Pre-license Course Broker State Exam Prep Course Mutual Recognition for Real Estate Sales Associates PRODUCTS Certificate of Achievement Frameable Quality PASS Proven Audio Self Study CD TEXTBOOKS FREE 18 or 20-Hour CAM Continuing Education Course Book FREE 14-Hour Real Estate Continuing Education Course Book 28-Hour Reactivation Course Resource Book 63-Hour Sales Associate Pre-license Textbook 63-Hour Sales Associate Pre-license Study Guide Sales Associate State Exam Prep 45-Hour Sales Associate Post-license Textbook 45-Hour Sales Associate Post-license Study Guide 72-Hour Broker Pre-license Textbook 72-Hour Broker Pre-license Study Guide Broker Pre-license State Exam Prep Book Florida Real Estate License Law Review The Language of Florida Real Estate Reference Guide Bert Rodg A FLORIDA TRA For pricing, special programs and additional online courses, including appraisal and mortgage loan originator pre-license and continuing education, visit our website at: BertRodgers.com Bert Rodg EDUCATING PROF Post Office Box 4708 Sarasota, FL Bert Rodger School A FLORIDA TRADITION SINCE 1

132 Welcome to a Florida Tradition. Bert Rodgers Schools Your License to Success Since 1958 Florida Real Estate Professionals Rely Upon Bert Rodgers Schools Because I love having a hard copy book available for future reference. Janice D., Clearwater, FL I took the Bert Rodgers course because of the great selection of industry experts. Sue G., Miami, FL I have found, without exception, that the information you provide has been my primary source of reference while working through many issues and areas of real estate. Thank you for being by my side the past 30 years. D. Hunt, Panama City, FL I am a Broker Associate and a licensed Real Estate Instructor. I always recommend Bert Rodgers RE CE courses to my students. It not only helps keep us up to date with the law and financial matters, it always contains additional info that is pertinent to today s real estate market. Bert W., St. Petersburg, FL Thank you for the 14-hour continuing education e-book. I am reading it on my android tablet with an app called ezpdf Reader and it reads nicely and even flips the pages like reading a book. I have renewed my license through Bert Rodgers for twenty-something years of renewals and couldn't be happier. Vicki P., Orlando, FL