Its time to renew your real estate license!

*
This complimentary book contains everything you need to fulfill your continuing education requirements.
Take advantage of the convenience of distance learning.

Study by correspondence with this book or study online at www.BertRodgers.com

 A complimentary 14-hour continuing education course book, mailed to you at no obligation.

Keep this book as a valuable resource during your 2-year license cycle.

Original course materials, a wealth of knowledge from nationally known industry experts Ongoing updates on law and rule changes Instructor, technical, and administrative support... by phone and email Y  our choice of online or correspondence exam grading... select online grading for instant results
and print your course completion report!

Next-day electronic reporting of your education to the DBPR

*According to DBPR records. If this is your FIRST sales or broker license renewal, you must complete POST-LICENSE Education.

Your colleagues rely on Bert Rodgers Schools for quality, convenience, and value! See what they have to say..... Informative, easy to read, and a fabulous reference book. A convenient way to comply with the required hours and keep up with the latest changes. Lillian C., Miami Lakes, FL Thoroughly enjoyed this course... found it very clear in explanation of all issues and laws. Mary L., Sarasota, FL This booklet and its timely arrival in my mailbox could not have been more convenient. Thank you so much! Fabulous service... will tell everyone! Lou Ann S., Naples, FL As always your course was timely and up-to-date. Thanks! Harriette H., Maitland, FL Ive been a broker since 1974 and I find these courses to be very helpful in keeping me current. Keep up the good work. Mark K., Clearwater, FL Your course has helped to increase my knowledge in the real estate industry, especially the changes in the law. Izette G., Miami, FL Took first Bert Rodgers course in 1969. Freddy H., Orlando, FL

Only $ .50

22

941-378-2900 800-432-0320
A Florida Tradition Since 1958 www.bertrodgers.com

14-Hour Real Estate Continuing Education Course i

Floridas Real Estate License

Continuing Education Requirements

What type of continuing education do I need?

For Sales Associates, Brokers, and Broker Associates

S  tate law requires licensees to complete post-license education (45 hours for sales associates, 60 hours for brokers) prior to renewing their license the first time. The penalty for failing to complete postlicense education before the end of your license cycle is severe. If you are a sales associate, your license may become null and void. If you are a broker, your license may revert to sales associate status. R  eal estate licensees must complete 14 hours of continuing education, including 3 hours of Core Law during each 2-year license cycle, subsequent to their first license renewal. When does my license expire? A  ll real estate licenses expire on March 31 or September 30 of even or odd years. Check your renewal notice or current license to verify your license expiration date. When do I need to complete my continuing education? Y  ou may complete the required education any time during the two-year license cycle. What should I do after completing my 14-hour course and final examination? S  ubmit your test for grading and verify you receive a passing score. Y  ou may mail or fax your Answer Sheet to our school OR for faster results take the examination online! When is my education reported to the DBPR? B  ert Rodgers Schools electronically reports our students successful completion of education to the DBPR each business day. Successful completion of your continuing education course with Bert Rodgers Schools includes passing the final examination and payment of the course tuition. Y  our education is reported with the license number and name you provide on the final examination Answer Sheet. If this information is inaccurate, incomplete, or illegible, your education may not be reflected in the DBPRs records and you may face late fees, penalties, and possible disciplinary action against your license. How do I renew my license with the DBPR? A  pproximately 90 days before your license expires you may renew your license online at www.MyFloridaLicense.com/dbpr, by calling the DBPR Customer Contact Center at 850-487-1395, or by returning the renewal notice you receive in the mail. To renew online or by phone, your education must be completed and reported. Renewing by any of the above methods includes the payment of a license renewal fee. Late renewals incur a late fee in addition to the renewal fee.  The DBPR will mail your new license to the address you provided. Allow about 4 weeks for processing. What happens if I do not renew my license before the expiration date? If this is not your first license renewal:  You have a 12-month grace period after your license expiration during which you can complete the 14 hours of continuing education, pay your license renewal fee and late fees to the DBPR, and reactivate their license. When a license is involuntarily inactive, no services of real estate may be performed. Licensees need to take a FREC-prescribed 28-hour course to renew an involuntarily inactive license after the 12-month grace period, but before 24 months have passed. After 24 months the license becomes Null and Void.

ii Bert Rodgers Schools of Real Estate, Inc.

14-Hour Real Estate Continuing Education Course

2012 Edition, Third Printing
Required Continuing Education for Florida Sales Associates, Brokers, and Broker Associates

Directory
Bert Rodgers Schools of Real Estate
1855 Porter Lake Drive, Sarasota, Florida 34240 Tel. 941-378-2900 Fax 941-378-3883 Toll-free 800-432-0320 Instructor, Technical, and Administrative Support Telephone Hours: M-F 8:30 a.m. - 5:15 p.m. Email: TechSupport@BertRodgers.com REinfo@BertRodgers.com www.BertRodgers.com

Florida Department of Business & Professional Regulation (DBPR)

1940 North Monroe Street Tallahassee, Florida 32399 850-487-1395 (Initial license or license renewal questions) Telephone Hours: M-F 8:00 a.m. 6:00 p.m. For additional information, visit the DBPR website: www.MyFlorida.com/dbpr

The DBPR Online Service

www.MyFloridaLicense.com

iv Bert Rodgers Schools of Real Estate, Inc.

Table of Contents
MODULE 1 Randy Schwartz

1 4 - H o u r R e a l E s tat e C o n t i n u i n g E d u c at i o n C o u r s e

Real Estate Core Law: License Law, State and Federal Laws, and the Brokerage Relationship Disclosure Act
MODULE 2 Kenneth Harney

1 37

New Energy Incentives: Gain a Competitive Edge

MODULE 3 Kenneth Harney

Credit Products and Offerings: The Role of the Federal Government

MODULE 4 Kenneth Harney

45 55 69 79

RESPA: Review the Fundamentals and the New Federal Rules

MODULE 5 Kenneth Harney

FHA Programs: Advantages for Borrowers

MODULE 6 Francois Gregoire

Appraising Real Estate: The Effects of the Great Recession

MODULE 7 Ellen Hirsch de Haan

Community Associations: A Primer for Real Estate Professionals 97 Case Study/Progress Test Answer Key Index  Final Exam 
Our Authors

120 122 129

Randy Schwartz

Kenneth Harney

Francois Gregoire

Ellen Hirsch de Haan

14-Hour Real Estate Continuing Education Course v

Acknowledgements
Bert Rodgers Schools of Real Estate, Inc. expresses our gratitude and appreciation to the hundreds of thousands of real estate professionals who have taken our 14-hour course to fulfill their continuing education requirements. James R. Mitchell

In Memoriam
Our dear friend Jim Mitchell passed away in early 2010. This course is dedicated to Jim in memory of the outstanding contributions he made to the real estate profession throughout his career. It was an honor to have him author the Real Estate Core Law portion of our continuing education course for the past ten years. We welcome Kenneth Harney and Randy Schwartz to our family of authors with this edition of the 14-hour continuing education course. Ken is a nationally known real estate expert who writes a weekly column titled the Nations Housing. Randy has over 35 years experience as an attorney in the real estate field. Our students will benefit tremendously from their knowledge and perspective on the changing trends in the real estate profession. Also joining us this time are Francois Gregoire, IFA, RRA, former chair of the Florida Real Estate Appraisal Board and Ellen Hirsch de Haan, B.A., M. ED, J.D., Immediate Past President of the Foundation for Community Association Research. Learn more about Frank and Ellens admirable backgrounds in the Author Spotlight inside the front cover of this book. Finally, Bert Rodgers Schools would like to thank Julie Wild of Wild Dezign for her typesetting expertise and patience, Mark Mazzuki of Cre8tive Communications for his cover design of this edition and his design of our marketing materials, and Wendy Allex of Allex Indexing for indexing services.

Lori J. Rodgers, President

Bert Rodgers Schools of Real Estate, Inc. 2008, 2009, 2010, 2011, 2012 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. Cover design: Cre8tive Communications ISBN: 1-891753-54-1 Printed in the United States of America

vi Bert Rodgers Schools of Real Estate, Inc.

MODULE 1

Real Estate Core Law: License Law, State and Federal Laws, and the Brokerage Relationship Disclosure Act
Learning Objectives
Upon completion of the module, the learner shall be able to:

by Randy Schwartz

1. Define each of the terms in the glossary. 2. Explain the major statutory changes to Chapters 455 and 475, F.S., from 2005 through 2010. 3. Identify and describe recent rule changes to Chapter 61J2, Florida Administrative Code. 4. Identify and describe the regulatory structure and duties of the Florida Real Estate Commission (FREC) and the Division of Real Estate (DRE). 5. Explain how to report unlicensed activity. 6. Identify and describe the education and administrative requirements for renewing a real estate license. 7. Explain the legal requirements for operating a real estate brokerage office. 8. Explain the proper handling and disposition of deposit money or advance rent as mandated in the Florida Landlord and Tenant Act. 9. Identify and describe the proper disposition of a tenants personal property as mandated in the Disposition of Personal Property Landlord Tenant Act. 10. Describe the disclosure requirements regarding lead-based paint, radon gas, energy-efficiency, HIV/AIDS, stigmatized property, and property condition. 11. Compare the 4 types of authorized real estate brokerage relationships. 12. Explain the disclosure requirements for each type of authorized brokerage relationship. 13. Explain the requirements for establishing and maintaining an escrow account. 14. Explain how a real estate broker should respond when confronted by an escrow dispute or good faith doubt about entitlement to escrow funds.

INTRODUCTION
Keeping pace with the changes to the laws that affect real estate and real estate licensees is very demanding in our already hectic and busy lives. This module will discuss the recent changes in the law as well as refresh your memory on some old standards that rarely change. It examines recent statutory and rule changes that affect not just the license law but real estate law in general. In addition, the module discusses how to maintain your license and generally operate within the law on a daily basis. While there have been a few changes in the area of escrow accounts, the module also includes a refresher

on what is expected of both brokers and sales associates. Another part of the module is devoted to laws other than the license law including various types of required disclosure with forms to help you in your practice. Finally, no core law course is complete without a discussion of agency law. The module covers the current status of the Brokerage Relationship Disclosure Act. The forms necessary to implement the requirements of the law are provided at the end of this module. It is hoped that this core law course will not only help satisfy your continuing education requirement, but will also be a resource in your everyday practice. 1

2Module 1

GLOSSARY
Blind advertisement An advertisement in which brokerage services or property for sale or lease is displayed without the name of the brokerage firm so that a reasonable person does not know he or she is dealing with a real estate licensee. Current mailing address The current residential address used by the licensee to receive mail through the United States Postal Service. Fiduciary relationship A fiduciary relationship is one of trust and confidence between the licensee as agent and the seller or buyer as principal. Party The buyer, seller, lessor, or lessee. Pursuant to Rule 61J2-10.028(2), as long as full disclosure is made to all interested parties, a licensee may share some or all of his or her commission with a party to the contract. Point-of-contact Any means by which the brokerage firm or individual licensee may be contacted including mailing addresses, physical street addresses, email addresses, telephone numbers, or facsimile telephone numbers when advertising on the Internet. Residential sales The sale of improved residential property of 4 units or fewer; the sale of unimproved residential property intended for use of 4 units or fewer; or the sale of agricultural property of 10 acres or fewer. Single agency When a licensee represents, as a fiduciary, either the buyer or the seller. As a single agent, a licensee may not represent both buyer and seller in the same transaction. Stigmatized property Property upon which some event producing more of a psychological impact than a physical impact or defect has occurred or is occurring. Property may be stigmatized by events such as murder, suicide, or drug-related arrest, or the property may be considered haunted by ghosts or spirits. Transaction broker A licensee who provides limited representation to a buyer, a seller, or both. A transaction broker does not represent either party in a fiduciary capacity or as a single agent. Trust liability The sum total of all deposits received, pending, and held by a real estate broker at any one point in time.

Part I: Real Estate License Law Statutes, Rules, and Organizational Structure
STATUTORY CHANGES
Highway Safety and Motor Vehicles to issue reproductions of drivers licenses to the DBPR; authorizing the temporary licensure of spouses of active duty service members of the U.S. Armed Forces under certain circumstances; authorizing distance learning courses to satisfy certain licensing and continuing education requirements for real estate brokers and sales associates; prohibiting requirements for centralized examinations to complete such education requirements; authorizing certain members of the FREC to offer, conduct, and teach courses prescribed or approved by the Commission or the Department; and revising the application and fingerprint requirements for real estate broker and sales associate licenses by adding that the application can be signed or electronically

NEW 2010 Changes

Two minor changes to Chapter 475 occurred in the 2010 Legislative session. The Florida Real Estate Commission (FREC) membership was expanded to include the possibility of a real estate school permit holder, chief administrator and/or instructor to serve on the FREC commission. An additional change requires real estate license applicants to submit digital finger prints. HB 713 was signed by the Governor on May 26, 2010, modifying Chapters 455 and 475 F.S. with an effective date of July 1, 2010. The new provisions include authorizing the Department of

Real Estate Core Law3

authenticated; and deleted the reference to fingerprint card and replaced with digital fingerprint data; and added that an administrative complaint must be served by regular and certified mail to the licensees last known address of record and if possible, by e-mail, but if proof of service cannot be obtained, then the Department shall call the last known telephone number and publish for 4 consecutive weeks in a newspaper in the county of licensees last known address of record.

from the date the application is received by the DBPR if the state examination is not taken and passed within that 2 year period. In addition, if an applicant does not take and pass the state examination within 2 years of the successful completion of the pre-license course, then the course will be invalid and must be retaken. Reactivation of involuntarily inactive license. A licensee whose license has been involuntarily inactive for 12 months or less must complete 14 hours of education prior to the license being reactivated. If the license has been involuntarily inactive for more than 12 months but less than 24 months, then the licensee must complete a FREC-prescribed 28-hour course to reactivate the license. Discipline. The maximum fine the FREC may impose was increased from $1,000 to $5,000 for each count or separate offense. It is a violation to fail, as a real estate broker, to direct, control, or manage a broker associate or sales associate employed by the broker. The law presumes that a broker associate or sales associate is employed by the broker if the state license records show that the broker associate or sales associate is registered with the broker. It is a violation to fail, as a broker, to review the brokerages trust accounting procedures to ensure compliance. The DBPR is required to notify a licensees employing broker when a formal complaint is filed against the licensee. Brokerage relationships. The Important Notice portion of the Brokerage Relationship disclosure forms was deleted. The changes are reflected in the disclosure forms at the end of the module. Advance fees. The advance fees reporting statute was deleted from Chapter 475.

NEW 2009 Changes

On June 16, 2009, the governor approved a bill modifying Chapter 455, F.S., Business and Professional Regulation: General Provisions; effective date October 1, 2009. The provisions include: applications for licensure will no longer require a notarized signature; DBPRs representative may appear in criminal proceedings under certain circumstances; and disciplinary action may be taken if a licensee fails to report any prosecution in a court of law or an impaired practitioner fails to complete a treatment program.

2008 Changes
In 2008 the experience requirement for becoming a real estate broker was increased from 12 months as an active licensee in the preceding 5 years to 24 months. The experience requirement is for Florida sales associates as well as out-of-state sales associates and brokers seeking to become a broker in Florida. In response to the increased number of foreclosures and abuses taking place in the marketplace regarding mortgage foreclosure rescues and modifications, the Florida legislature passed the Mortgage Foreclosure Rescue Act. The act was approved by the Governor on May 28, 2008 and became effective October 1, 2008. The bill is generally referred to as the Mortgage Foreclosure Rescue Act and will be discussed in Part II.

FREC RULE CHANGES

Table 1.1 on pages 4 and 5 contains a list of all rule changes that became effective between January 2006 and July 2010. Table 1.1 is an abbreviated summary; for further clarification, consult the text of the full rule (61J2, FAC). www.flrules.org/gateway/Organization. asp?OrgNo=61j2 

2007 Changes
The only change to Chapter 475, F.S., in 2007 was to Section 475.182(1)(a), F.S., which addresses the renewal of a license and continuing education. A licensee may now obtain 3 hours of continuing education credit for attending one legal agenda session of the FREC.

2006 Changes
A few significant changes occurred in the 2006 legislative session. They became effective on July 1, 2006. Application process. An application for licensure as a real estate broker or sales associate expires 2 years

REGULATORY STRUCTURE
This section provides an overview of the regulatory structure of the Department of Business and Professional Regulation (DBPR), the Florida Real Estate Commission (FREC),and the Division of Real Estate (DRE).

4Module 1

Department of Business and Professional Regulation (DBPR)

The DBPR, located in Tallahassee, Florida, regulates over one million professionals and businesses. The DRE is one of 10 divisions that make up the DBPR. The head of the DBPR is the secretary, whose appointment by the governor is subject to confirmation by the senate. The secretary appoints the division directors. The appointment of the director of the DRE is subject to the approval of a majority vote by the FREC. The DBPRs role is to ensure that the professions it regulates and those regulated by the boards and commission under the DBPR provide quality services for the health, safety, and welfare of the people of Florida. www.myfloridalicense.com

www.myfloridalicense.com/dbpr/re/

Florida Real Estate Commission (FREC)

The FREC was created by the Florida State legislature to implement Chapter 475, F.S., through the adoption of rules (Chapter 61J2, Florida Administrative Code [F.A.C.]) fostering the education of licensees and those seeking licensure, examination of applicants for licensure, and the discipline of licensees who violate license laws or rules. The FREC consists of 7 members appointed by the governor and confirmed by the senate. Four members must be licensed brokers who have maintained an active license for 5 years preceding appointment; 1 member must be a licensed sales associate or broker who has maintained an active license for the 2 years preceding appointment; and 2 members must be people who are not nor ever were brokers or sales associates. At least 1 member must be 60 years of age or older. Effective July 1, 2010, a licensed real estate broker or sales associate who holds an active real estate school permit, chief administrator permit,

Division of Real Estate (DRE)

The DRE, located in Orlando, Florida, provides services concerning Chapter 475, F.S. The DRE provides administrative support to both the FREC and the Florida Real Estate Appraisal Board (FREAB).

TABLE 1.1: Summary of Rule Changes January 2006 through January 2011
Rule 61J2-24.001 61J2-24.002 61J2-10.025 61J2-3.009 61J2-24.006 61J2-14.008 61J2-24.003 61J2-3.010 61J2-10.025 61J2-10.029 61J2-10.042 61J2-1.013 61J2-10.030 61J2-14.008 61J2-3.010 61J2-24.001 Effective Date 30-Jan-06 30-Jan-06 04-Jul-06 10-Jul-06 10-Jul-06 14-Jul-06 14-Jul-06 8-Nov-06 5-Feb-07 6-Sept-07 6-Sept-07 20-Nov-07 20-Nov-07 6-Dec-07 25-Dec-07 25-Dec-07 Description Failure to produce records within 5 days of request will result in a penalty of $1,000 to 3 months suspension. Increased Citation fines of several violations; most notable is failure to notify of a change of address of a branch office within 10 days increased from $200 to $1,000. Added phone numbers as a requirement in an advertisement. Clarifies that 3 hours of the 14-hours continuing education must be Core Law. Establishes a Code of Conduct for licensees attending a FREC meeting pursuant to probation. The Sales Contract must have name and address of escrow agent when funds are placed with attorney or title company; must obtain written confirmation funds were received. Minor changes to Notice of Noncompliance rules. Reactivation education requires 28-hour course with an end-of-course exam. Removed phone numbers as a requirement in an advertisement. Repealed advance fee requirements. Repealed the rule regarding the Chairperson of the FREC. Added LLC & PA as registration categories. Deleted from the rule the requirement that a prescribed disclosure be given when attempting to negotiate a lease. Requires escrow agent name, address and phone number when funds placed with attorney or title company; must obtain verification the deposit received. Amended the reactivation education rule. Increased the fines from $1,000 to $5,000; added the guidelines for violations by brokers of failing to supervise or ensure compliance with the escrow rules.

Real Estate Core Law5

Rule 61J2-3.017 61J2-3.016 61J2-1.011 61J2-3.010 61J2-2.029 61J2-1.014 61J2-24.003 Effective Date 27-Apr-08 4-May-08 18-Aug-08 18-Aug-08 18-Aug-08 8-Oct-08 15-June-09 Description Repealed the video classroom viewing requirements. Repealed the video tape quality standards. Deleted that the Commission may conduct seminars and publish and sell a wall certificate of license course syllabus Deleted an exemption for members of the Florida Bar from the license reactivation education requirements. Deleted language that allowed a successful applicant to immediately practice if the employment information was on file. Changed the wording from last known address to licensees address of record. Added that a Notice of Noncompliance without Citation would be issued for a period of 12 months after the effective date of this rule for an initial offense for failing to indicate the name, address, & telephone number of the title company or attorney on the contract; or for failing to provide the Sellers broker, or the Seller when the seller has no broker, within 10 business days of the date the Licensees broker made written request for verification of the deposit with either a copy of the written verification or that no verification was received. Also added that a Notice of Noncompliance will be issued to schools teaching real estate practice for violating 475.451(8). Increased Citation fines of several violations to $500. Added that a second offense of failing to indicate the name, address, and telephone number of the title company or attorney on the contract would be a $200 fine. Added a $500 fine for a second offense for failing to provide the Sellers broker or to Seller if not represented by a broker, within 10 business days of the date the Licensees broker made the written request for verification of the deposit with a copy of the verification or that the licensee did not receive verification of the deposit.

61J2-24.002

20-July-09

61J2-3.015

16-November-09 Deleted redundant language and clarified existing language for sales associate and broker-sales associate. Deleted the provision that up to 25% of licensees will be randomly audited for compliance. 21-February-10 21-June-10 Deleted reference to advance fee requirements. Increased the time frame when the written request must be made for verification of each deposit held by an attorney or title company to 10 business days. Added exemption to written request verification when the seller or sellers agent nominated attorney or title company in writing. Eliminated the fine and penalty for a license issued by mistake; added administrative fines to certain violations; and added separate categories for first violations or second and subsequent violations with different penalty ranges for both. Revised the exemption for prelicensing education for any person who has a degree in real estate that the degree must be a 4 year degree from an accredited institution of higher education. There have been many changes to the disciplinary guidelinesa list of revisions are available on DBPRs website. https://www.flrules.org/gateway/ChapterHome. asp?Chapter=61J2-24 The Florida Real Estate Commission, upon a review of their rules, determined that certain language was found in both the statute and the rule. Due to this redundancy the FREC deleted said rule. Rule was revised to delete the provision that up to 25% of licensees and instructors will be randomly audited for compliance. The Florida Real Estate Commission, upon a review of their rules, determined that certain language was found in both the statute and the rule. Due to this redundancy the FREC deleted said rule. The Florida Real Estate Commission, upon a review of their rules, determined that certain language was found in both the statute and the rule. Due to this redundancy the FREC deleted said rule. Defines Economic Hardship

61J2-23.001 61J2-14.008

61J2-24.001

21-July-10

61J2-3.012

28-July-10

61J2-24.001

21-July-10

61J2-3.011

13-Oct-10

61J2-3.015(2)

13-Oct-10

61J2-3.020(10) 11-Jan-11

61J2-24.004 (2)(d)(e)(f) 61J2-24.006 (2)(c)

11-Jan-11

11-Jan-11

6Module 1

school instructor permit, or any combination of such permits issued by the DBPR may serve on the FREC. Members are appointed to 4-year terms and may serve no more than 2 consecutive terms. www.myflorida.com/dbpr/re/frec.html

best and do not intend to violate the law. However, if the behavior is egregious enough, a licensee may face severe sanctions such as a suspension of license or even revocation. The FRECs duty, among others, is to protect the public.

DBPR Online
The DBPR has created a website where you can perform many of the regulatory functions online. The site is currently divided into 2 types of services: user and public. www.myfloridalicense.com  User Services. The User Services site is a passwordprotected site. Anyone with a license issued by the DBPR can register for a Quick Access Account that creates a personal account accessible only with a user name and password. The services available to a licensee registered as a user include renewing a license online, maintaining a license, maintaining a personal profile, making payments, and viewing messages the DBPR has sent to all users. One of the DBPRs stated goals is to provide licensees as well as members of the public access to information, and to provide licensees the ability to manage their license, 24 hours a day, 7 days a week. Public Services. The Public Services site allows anyone to search for a licensee, apply for a license, file a complaint, or access all of the DBPR and DRE forms necessary to accomplish any task. The DRE has a separate Forms Center site where only those forms necessary to perform any task for the FREC or FREAB are maintained. www.myflorida.com/dbpr/re/forms.html

Notice of Noncompliance
Pursuant to Section 455.225(3), F.S., an initial violation of the license law may be deemed to be a minor violation for which a notice of noncompliance may be issued. A violation is considered a minor violation if it does not: demonstrate a serious inability to practice the profession result in economic or physical harm to a person adversely affect the public health, safety, or welfare or create a significant threat of such harm Each board regulated by the DBPR, including the FREC, is required to establish by rule those violations that are considered minor violations as defined above. The FREC implemented the statute and a list of violations for which a notice of noncompliance shall be issued in Rule 61J2-24.003, F.A.C. There is no fine, only corrective action. Once the notice of noncompliance is issued, the licensee has 15 days to take corrective action. Failure to do so may result in regular disciplinary proceedings being instituted. The notice of noncompliance may only be issued for an initial offense of a listed minor violation by the Department. If the minor violation is timely corrected, the matter is closed with no adverse action against the licensee.

Citations
In 1991, Section 455.224, F.S., was enacted requiring each regulatory board, including the FREC, to adopt rules permitting the issuance of a citation. A citation imposes immediate disciplinary action without need for a hearing, and is considered to be a step above the notice of noncompliance. If the licensee chooses to accept the citation then the licensee must abide by the required disciplinary action within the next 30 days. If the licensee chooses to reject the citation then the matter will proceed through the normal disciplinary and investigative proceedings that result in a hearing for the licensee. The FREC implemented the citation program with Rule 61J2-24.002, F.A.C., listing the violations for which a citation may be issued. The basis for identifying which violation may be considered for a citation is

DISCIPLINARY ACTIONS
Although a violation of the license law is generally not intended, a few licensees each year find themselves having committed a violation due simply to oversight, carelessness, or a lack of knowledge of the expected behavior. When a violation does occur, depending on the specific violation and the severity of the actions of the licensee, the DBPR, the DRE, and the FREC may deal with the violation in one of several ways: notice of noncompliance, citation, or regular disciplinary proceedings. The following sections will discuss each of these areas. The FREC is aware of the abundance of regulations and realizes that most licensees are simply trying their

Real Estate Core Law7

whether or not the violation poses a substantial threat to the public health, safety, and welfare. A typical disciplinary action for a citable violation is an administrative fine. The citation is required to be issued within 6 months after a complaint is filed. A citation, once issued and accepted by the licensee, becomes a final order of the FREC and the action becomes a part of the disciplinary record of the licensee.

license education prior to the first renewal, his or her license becomes null and void. The licensee may obtain a sales associates license by completing 14 hours of continuing education within 6 months of the expiration of the brokers license. To operate again as a broker, the licensee must retake the broker prelicense course and pass the end-of-course exam as well as the state examination.

Disciplinary Guidelines
Pursuant to Section 455.2273, F.S., the regulatory boards are required to adopt a rule establishing the range of penalties for each type of violation. The FRECs Disciplinary Guideline rule is found in Rule 61J2-24.001, F.A.C. The disciplinary guidelines are designed to provide a reasonable and meaningful notice to the licensee of the likely penalty that may be imposed for each type of violation. The penalties include a reprimand, probation, administrative fine not to exceed $5,000 per count, suspension of license not to exceed 10 years, or a revocation of license. The law does allow the FREC to deviate from the listed penalty in the event of a specific finding of mitigating or aggravating circumstances.

Continuing Education
To maintain the license after the first renewal cycle, licensees must satisfactorily complete 14 hours of continuing education during each successive 2-year license period. The 14 hours must consist of 3 hours of core law and 11 hours of specialty courses approved by the FREC. Licensees may complete the 14 hours through distance learning, correspondence, or classroom courses. Three hours may be obtained one time per renewal cycle by attending one legal agenda session of the FREC.

License Renewal
The DBPR mails a renewal notice to each licensee at his or her last known address 6090 days before the end of the 2-year license period. To properly renew a license, licensees must satisfactorily complete the 14-hour continuing education course (or post-license course, if applicable) and send back the renewal form and fee to the DBPR before the end of the license period. Licensees may also renew their licenses online or by telephone (850) 487-1395 with the DBPR. The DBPR will not accept online renewal payments more than 90 days before the end of the license period. www.myfloridalicense.com It is the brokers responsibility to ensure that all licensees registered with the broker have a valid and current license which includes successfully completing the 14-hour continuing education course or postlicense course and timely mailing the renewal form and fee to the DBPR [Rule 61J2-24.001(3)(y)]. In the event a license is renewed without the required continuing education course having been successfully completed, the licensee will be sent a deficiency letter. This letter will inform the licensee that the required continuing education was not completed prior to renewal. Licensees should not send in the course completion slip with their renewal, but keep the slip to show proof of compliance. The DBPR has divided the licensee population into 4 renewal cycles. Each cycle, or license period, is 2 years.

MAINTAINING THE LICENSE

This section discusses post-license and continuing education and the process of license renewal. Effective July 1, 2002, distance learning was added by the legislature as a method by which required education could be delivered. The distance learning rules allow the education to be taken in classroom or through distance learning.

Post-License Education
Prior to the first license renewal, brokers and sales associates are required to complete post-license education pursuant to Section 475.17(3) and (4), F.S. A sales associate is required to satisfactorily complete 45 hours and a broker must satisfactorily complete 60 hours of post-license education. Each course has an end-of-course examination. If a sales associate fails to satisfactorily complete the post-license education prior to the first renewal, his or her license becomes null and void. Such sales associates must reinitiate the license process by completing the 63-hour pre-license course and passing the endof-course exam as well as the state examination. If a broker fails to satisfactorily complete the post-

8Module 1

Group 1  licenses expire on September 30 of even years Group 2  licenses expire on March 31 of odd years Group 3  licenses expire on September 30 of odd years Group 4  licenses expire on March 31 of even years

States Postal Service. A licensee is required to notify the DRE of a change in the current mailing address within 10 days of the change (Rule 61J2-10.038). When a broker changes his or her business address or a sales associate changes employers, the license becomes invalid. The licensee must notify the FREC within 10 days of the change and request a reissue (Section 475.23, F.S.). Forms are available online. myflorida.com/dbpr/re/forms.html.

Inactive License Types

There are 2 types of inactive status, but in either case, a licensee may not perform any real estate services while in the inactive status. Voluntary inactive. An individual who maintains a current license status but does not perform real estate services may request and receive a voluntary inactive status. Inactive individuals must meet the continuing education requirements, pay renewal fees, and renew the license to remain current. A licensee may remain voluntary inactive indefinitely. Involuntary inactive. Licensees who do not renew on time, and/or fail to complete the 14 hours of continuing education become involuntary inactive. To reactivate, in addition to any education requirements, late fees must be paid as well as the renewal fee. Licensees who failed to complete the 14 hours of continuing education with a license status of involuntary inactive for 12 months or less may reactivate by completing the 14 hours. A license that has been involuntary inactive for at least 12 months but less than 24 months may be reactivated by satisfactorily completing a FREC-prescribed 28-hour course. (Section 475.183(2)(a), F.S.) An individual may remain involuntary inactive for only 2 years. At the end of the 2-year period, the license will be null and void without any further action by the FREC, the DRE, or the DBPR.

NONRESIDENT APPLICANTS
An applicant for licensure as a real estate broker or sales associate is not required to be a resident of the state of Florida.

Mutual Recognition
In 1994, the Florida Legislature added Section 475.180, F.S., titled Nonresident Licensees. Previous to this section being added, an out-of-state real estate licensee was required to fully complete the educational, experience, and examination requirements before operating as a licensee in Florida. With the addition of Section 475.180, F.S., the FREC is authorized to enter into written agreements called mutual recognition with the real estate commissions of other states that will recognize the educational and experience requirements of that state when they are comparable to or superior to that of Florida. The outof-state applicant is required to take only a Florida law examination consisting of 40 questions. A grade of 75% or higher is required to pass the examination. The written agreements with the other real estate commissions also offer the same licensure opportunities for Florida licensees in those states. The FREC currently has mutual recognition agreements with the real estate commissions of 9 states: Alabama, Arkansas, Connecticut, Georgia, Indiana, Mississippi, Nebraska, Oklahoma, and Tennessee. Contact the appropriate real estate commission for information regarding fees and examination requirements. Alabama Real Estate Commission 1201 Carmichael Way Montgomery, AL 36106-3672 (334) 242-5544 Arkansas Real Estate Commission 612 South Summit Street Little Rock, AR 72201-4740 (501) 683-8010

Change of Name, Address, or Employer

In the event of a name change, such as through marriage or divorce, the licensee must notify the DBPR and request reissuance of the license. For a reissue, the licensee must complete Form DBPR- RE-10 and forward it to the DBPR along with a copy of the document(s) wherein the licensees name is legally changed (Rule 61J2-9.007). Pursuant to Section 455.275(1), the DRE requires each licensee to maintain his or her current mailing address on file. The current mailing address is defined as the current residential address used by the licensee to receive mail through the United

Real Estate Core Law9

Connecticut Real Estate Commission 165 Capitol Ave. Hartford, CT 06106-1630 (860) 713-6050 Georgia Real Estate Commission International Tower 229 Peachtree Street, NE, Suite 1000 Atlanta, GA 30303-1605 (404) 656-3916 Indiana Real Estate Commission 402 W. Washington Street, Room W072 Indianapolis, IN 46204 (317) 234-3009 Mississippi Real Estate Commission P.O. Box 12685 Jackson, MS 39236 (601) 932-6770 Nebraska Real Estate Commission 1200 N Street, Suite 402 P.O. Box 94667 Lincoln, Ne 68509-4667 (402) 471-2004 Oklahoma Real Estate Commission 2401 NW 23rd Oklahoma City, OK 73107 (405) 521-3387 Tennessee Real Estate Commission 500 James Robertson Parkway, Suite 180 Nashville, TN 37243-1151 (615) 741-2273 The FREC requires nonresident licensees who qualify for licensure in Florida through mutual recognition to complete the same post-license and continuing education hours required for Florida resident licensees.

Upon the filing of an application for licensure, any applicant who is not a resident of the State of Florida is required to file an irrevocable consent to jurisdiction which provides that the applicant, once the applicant is licensed, consents to being sued in Florida and that service of process may be made by delivering the process or pleading to the Director of the DRE. If a licensee who is a resident of Florida becomes a resident of another state, the licensee is required to notify the DBPR within 60 days of becoming a nonresident and must comply with the nonresident requirement by filing the irrevocable consent to jurisdiction form discussed above. Failure to do so will result in disciplinary action against the licensee.

BUSINESS AND OFFICE OPERATIONS

This section discusses business and office operations, including brokerage firms and registration, office and sign requirements, advertising, commissions, referral fees, records, and personal assistants.

Brokerage Firms and Registration

A real estate broker can choose to operate in one of several ways: as a sole proprietorship, corporation, partnership, limited partnership, limited liability company (LLC), or limited liability partnership (LLP) (Section 475.15, F.S., and Rule Chapters 61J2-4 and 61J2-5). To operate as a sole proprietor, a broker simply submits a form to the DRE and follows the office and sign rules detailed later in this section. To operate as a business entity formed or authorized to do business in the State of Florida, the following rules apply. Note: People are licensed and business entities are registered. A broker associate or sales associate may organize as a professional corporation, LLC, or a professional LLC. The license may only be issued in the legal name of the licensee with the appropriate entity designation (i.e., P.A. or LLC). The law further clarifies that a broker associate and sales associate may not be an officer, director, partner, member or manager of a brokerage firm (Section 475.161, F.S.). Corporations. The corporation must be organized according to Florida law or be a foreign corporation authorized to do business in Florida. To qualify the corporation as a registered real estate brokerage, the licensed real estate broker must be an officer and/or a director of the corporation. Sales associates or broker associates are not permitted to be officers or directors of brokerage corporations. However, anyone can own the stock, with the following exceptions. A person may not own more than 40% of the voting stock if he or she has:

Nonresident Requirements
An applicant for a Florida real estate brokers license must satisfy the experience requirement to be eligible for licensure as a broker. The basic requirement is that the applicant has been an active sales associate for at least 24 months in the previous 5 years. For a nonresident, the applicant for a brokers license can use as experience the applicants time as either a broker or a sales associate in another state. The basic requirement is the same24 months as an active broker or sales associate in the previous 5 years. With this type of experience, a nonresident applicant can become a Florida broker without the need to first become a Florida sales associate.

10Module 1

had a license revoked or suspended and not reinstated been convicted of a felony in any court, and civil rights have not been restored for at least 5 years had an injunction entered for operating as a real estate licensee without a license In the event that a brokerage corporation has only one active broker and that broker dies, resigns, or is otherwise removed from that position, the vacancy must be filled within 14 calendar days. No new business may be accepted; and only ongoing business may be serviced. Until a new broker is appointed and registered with the DRE, the registration of the corporation is canceled, the license status of all other licensees becomes involuntarily inactive, and the brokerage firm must close its doors, conducting no business at all until the broker position is filled. To register a corporation with the DRE, a Real Estate Corporation Package must be filed along with a copy of the certificate from the secretary of states office (Chapter 475.15, F.S., and Rule 61J2-5). www.myflorida.com/dbpr/re/forms.html Partnerships. A brokerage partnership can be formed as either a general partnership or a limited partnership (Chapter 475.15, F.S.). To be qualified as a brokerage, the partnership must have a licensed broker as one of its partners. If it is a limited partnership, only the general partners must be licensed as active brokers or registered as brokerage corporations (Chapter 475.15, F.S., and Rule 61J24.007). The rules regarding the loss of the broker in a corporation also apply to partnerships (Rule 61J24.009). Limited liability companies and partnerships. Although the FREC has yet to implement administrative rules governing the formation and operation of limited liability companies (LLC) and limited liability partnerships (LLP), the DRE has developed the following registration provisions: If the LLC is a manager-managed company, then the manager must be a licensed real estate broker. If the LLC is a member-managed company, then any one of the members can be the qualifying broker.

in a building of stationary construction (Chapter 475.22(1), F.S.). A brokerage office may be located in the brokers residence if that complies with local zoning ordinances. It is the brokers responsibility to learn the applicable zoning regulations (Rule 61J2-10.022). As a result of federal case decisions affecting other state real estate commissions, the real estate license law now allows a Florida brokerage office to be located outside the State of Florida. The broker must agree in writing to cooperate with any investigation by the DBPR, DRE, or FREC and must promptly supply any requested documents. In addition, the broker is required to personally meet with an investigator either in Florida or elsewhere as reasonably requested. If the DBPR or the DRE sends a notice or request by certified mail to the brokers last known mailing address and the broker fails to comply with such notice or request, then the broker is in violation of the license law and is subject to the penalties of Chapter 475.25, F.S. (Chapter 475.22(2), F.S.). Branch office. When a broker conducts business at some location other than the registered principal office, the other location must be registered as a branch office. If, in the judgment of the FREC, the business conducted at a place other than the principal office is of such a nature that public interest requires, the office must be registered as a branch office. If the name or advertising of a broker is displayed in a location other than the principal office in such a manner as to lead the public to reasonably believe that the other location is owned or operated by the broker, that location must be declared a branch office (Chapter 475.24, F.S., and Rule 61J2-10.023). In general, the permanence, use, and character of activities customarily conducted at a location determine its status as a branch office (Rule 61J210.023(2)). For instance, a temporary shelter in which no transactions are closed and no sales associates are permanently assigned is not deemed to be a branch office. Sales associates must be registered from and work out of an office maintained and registered in the name of the broker or employer. However, sales associates may be registered from the principal office but work at branch offices (Rule 61J2-10.022). A fee is required for the registration of each branch office. If a broker closes a branch office but reopens at the same location within the same license renewal period, no fee is required. If a broker closes a branch office and simultaneously opens a branch office at a different location, then a fee is required (Rule 61J210.023(3)). Signs. Every broker is required to maintain a sign on

Brokerage Office and Sign Requirements

There are specific requirements for maintaining an office, a branch office, and office signs. Office. Each active broker is required to maintain an office that consists of at least one enclosed room

Real Estate Core Law11

or about the entrance of the principal office as well as at all branch offices. Signs must be positioned to be easily seen by any person entering the office. Signs are required to be posted on either the exterior or the interior entrance area of the office (Chapter 475.22, F.S.). Each office entrance sign must contain the name of the broker as registered with the FREC, as well as the trade name, if any. For a partnership or corporation, the sign must also include the name of the partnership or corporation or trade name of such entity. If the partnership or corporation has more than one broker, the name of only one broker need appear. In addition, each sign must display the words Licensed Real Estate Broker. The word Licensed may be abbreviated to Lic., no other abbreviations are allowed. There is no longer a minimum size requirement for the letters on the sign. If the broker maintains a registered office in his or her residence, the office entrance sign is not required to be posted on the front door or outside the home. The sign may be posted on the exterior of the door to the actual office.

that the licensee display the license type. However, if the licensee is a member of a private trade association, that association may enforce a code of ethics that may impose standards and rules over and above the FREC requirements. The FREC does not regulate the use of telephone numbers in advertisements. Therefore, licensees may use either office or personal telephone numbers without qualifying them as such. The FREC has additional guidelines for Internet advertising. The FRECs rule requires that the brokerage firms name or trade name be placed immediately above, below or adjacent to the point-of-contact information. Point-of-contact is defined as any means by which the brokerage firm or individual licensee may be contacted, including mailing address(es), physical street address(es), email address(es), telephone number(s), or fax number(s). All other FREC advertising requirements apply to Internet advertisements as well (Rule 61J2-10.025(3)). A blind advertisement is defined as an advertisement in which brokerage services or property for sale or lease is displayed without the name of the brokerage firm so that a reasonable person does not know he or she is dealing with a real estate licensee. If a licensee is selling his or her own real property and is doing so on a personal basis and not through the licensees brokerage firm, then there are no disclosure requirements. In such a situation, the licensee may place an advertisement in the same manner that any other private citizen would. There is a common belief that the license type must be disclosed such as owner/ broker or owner/licensee on a yard sign or in a newspaper advertisement when the licensee is selling property as a private citizen. This is not a legal requirement. A licensee may wish to display his or her license type, however, to prevent other licensees from seeking the listing, but that is a personal choice for the licensee. Pursuant to Rule 61J2-10.027, a licensee is not permitted to use an identification or designation of a trade association or organization unless the licensee is entitled to use such identification or designation. At one time, a licensee was required to obtain the consent of a seller prior to placing a sold sign on the property; that is no longer true. Rule 61J2-10.035, which regulated sold signs, was repealed effective in October 2002, due to a lack of statutory authority for the rule. If you are a member of a professional trade association, be aware of the associations code of ethics or code of conduct that may still prohibit the activity as a member of the trade association. Finally, it is a violation of Chapter 365.1657, F.S., to send unsolicited advertising material via a fax

Advertising
Any time a real estate licensee advertises his or her services or a property for sale or lease, the advertisement must contain certain information and conform to a specific standard. Advertising includes yard signs, newspaper and magazine ads, mail outs, business cards, billboards, benches, Internet ads, or any other medium or vehicle by which services or property are displayed. All advertising must include the name of the brokerage firm as it is registered with the FREC. It must be displayed in such a manner that a reasonable person would know that he or she is dealing with a real estate licensee. In addition, no real estate advertisement placed or caused to be placed by a licensee shall be fraudulent, false, deceptive, or misleading in form or content (Chapter 475.25(1)(c), F.S., and Rule 61J210.025). A licensee is not required to place his or her personal name in an advertisement. However, when the licensees name does appear, as a minimum requirement, the last name as registered with the FREC must appear. The licensee may use a nickname or initials for the first name and is not required to display the first and/ or middle name as registered with the FREC (Rule 61J2-10.025(2)). There is no requirement for a licensee to display his or her license number or the registration number of the brokerage firm. In addition, there is no requirement

12Module 1

transmission. This includes advertising for any real property, goods, or services. The state, through the attorney general, may bring an action to impose a civil fine and for injunctive relief. The fine is $500 per violation of Chapter 365.1657, F.S.; each transmission counts as a separate violation.

the listed property is procured, the broker should pay the former sales associate directly if the broker agreed in advance to pay the sales associate a commission on the listed property becomes inactive after working with a prospective buyer but before a contract for sale is procured, the sales associate is due no commission since the sales associates license was not active at the time of contract for sale when the fee was earned registers with another broker after working with a prospective buyer but before a contract for sale is procured, the sales associate may be paid only through the current employing broker registers with an owner-developer after working with a prospective buyer but before a contract for sale is procured, the sales associate can be paid directly by the former employing broker One should note that these interpretations are not rules; therefore they may be subject to change. Finally, it is permissible to share a commission with an unlicensed person who is a party to the contract (sale or lease). A party is defined as the buyer, seller, lessor, or lessee. Pursuant to Rule 61J2-10.028(2), as long as full disclosure is made to all interested parties, a licensee may share some or all of his or her commission with a party to the contract.

Commissions
For a real estate licensee to earn a real estate commission or other type of valuable consideration, the licensee is required to have a valid, current, and active real estate license. The critical factor is generally not when the commission is paid; the relevant factor is when the commission is earned in relation to the license status. Therefore, a licensee may earn a commission while properly and actively licensed and subsequently have the license suspended or revoked and still be paid the commission. A sales associate must always be registered with a broker or owner-developer to be eligible to earn a commission, and must be paid by and in the name of the broker or owner-developer (Chapter 475.42(1) (d), F.S.). The exception to this basic rule is found in a declaratory statement issued in January 1999 by the FREC, Case Number FREC D5-98-02 (and filed as DS-9904 by the DBPR on February 17, 1999, with a final order number of BPR-99-01088). The statement declares that a real estate broker may provide written permission to a closing agent authorizing the closing agent to pay the sales associate directly. The written authorization must identify the transaction, the sales associate(s), and the specific amount to be disbursed to each sales associate. In 1994 the FREC reviewed various situations involving the payment of commissions to sales associates and then issued the following interpretation. If a sales associate: becomes inactive, registers with another broker, or registers with an owner-developer after a contract for sale has been procured but before the real estate transaction closes, the broker under whom the contract for sale was procured can pay the former sales associate directly becomes inactive, registers with another broker, or registers with an owner-developer after being involved in a transaction in which the brokerage commission was earned at the time the contract for sale was procured, the broker should pay the former sales associate directly becomes inactive, registers with another broker, or registers with an owner developer after procuring a listing contract but before a contract for sale of

Referral Fees
A Florida broker may share a commission or fee with a foreign broker so long as the foreign broker is registered or licensed as a broker in his or her state or country, and the foreign broker has not violated any Florida law (Chapter 475.25(1)(h), F.S.). If a foreign country does not have a license law, then the Florida broker may treat each citizen of that country as if he or she is a broker. The prohibition against the foreign broker acting as a broker in Florida still applies.

Commercial Real Estate Sales Commission Lien Act

A real estate broker who enters into a written brokerage agreement with an owner for the sale of the owners commercial real estate will have the right to place a lien upon the owners net proceeds. The lien does not attach to any interest in real estate. The Sales Act only applies to brokerage agreements entered into on or after October 1, 2005. The basic requirements for establishing the lien are: The broker shall disclose to the owner at or before the time he executes the brokerage agreement the brokers lien rights. The disclosure shall be in substantially the following form:

Real Estate Core Law13

The Florida Commercial Real Estate Sales Commission Lien Act provides that when a broker has earned a commission by performing licensed services under a brokerage agreement with you, the broker may claim a lien against your net sales proceeds for the brokers commission. The brokers lien rights under the act cannot be waived before the commission is earned (Section 475.703(5), F.S.).

mercial real estate to a bona fide purchaser. Within 7 days after recording the lien notice, the broker must deliver a copy to the owner. The recorded lien will be effective for 2 years except for a renewal commission in which case the lien will be effective for 10 years. There are provisions for extending the lien. To enforce the brokers lien rights to collect the commission in the event the owner does not pay the commission, the broker must foreclose on the lien in the same manner as a mortgage foreclosure.

The broker must deliver to the owner and closing agent a commission notice within thirty days after a commission is earned and at least one day before the closing. The Statute contains a suggested commission notice (Section 475.705, F.S.). If the owner does not dispute the commission notice within 5 days after the closing, the owner will be deemed by law to have confirmed the commission and the closing agent is required to pay the commission to the broker from the owners net proceeds.

Brokerage Records
A broker is required to maintain and make available to the DBPR such books, accounts, and records that may enable the DBPR to determine whether the broker is in compliance with Chapter 475, F.S. Examples of such books and records include contracts, listing agreements, lease agreements, disclosures, and escrow account/bank records. The broker must preserve at least one legible copy of all books, accounts, and records for at least 5 years from the date of receipt of any escrowed property or, in the event no funds are entrusted to the broker, at least 5 years from the date of execution of a listing agreement, purchase agreement, lease agreement, or any other written or verbal agreement engaging the services of the broker. If the brokerage records become the subject of civil litigation, the records must be maintained for at least 2 years after the conclusion of the civil litigation or appellate proceeding, but in no case less than a total of the 5 years stated previously (Chapter 475.5015, F.S., and Rule 61J2-14.012).

Commercial Real Estate Leasing Commission Lien Act

A real estate broker who enters into a written brokerage agreement with an owner for the leasing of the owners commercial real estate will have the right to place a lien that attaches to the owners interest in the commercial real estate. Unlike the Sales Act which is a lien that attaches to the owners net proceeds and not the real estate, the lien established under the Leasing Act is a lien on the real property. The Leasing Act only applies to brokerage agreements entered into on or after October 1, 2005. The basic requirements for establishing the lien are as follows: The broker shall disclose to the owner at or before the time the owner executes the brokerage agreement the brokers lien rights. The disclosure shall be in substantially the following form:
The Florida Commercial Real Estate Leasing Com mis sion Lien Act provides that when a broker has earned a commission by performing licensed services under a brokerage agreement with you, the broker may claim a lien against your interest in the property for the brokers commission. The brokers lien rights under the act cannot be waived before the commission is earned (Section 475.803(6), F.S.).

Unlicensed Activity
It is a third degree felony to operate as a licensee without being the holder of a valid and current active license, unless otherwise exempt from the licensing requirements. Prior to July 1, 2003, the offense was a second-degree misdemeanor. In todays real estate market, unlicensed activity is an ongoing problem. You can help prevent this illegal practice and protect the integrity of your profession by reporting instances of unlicensed activity to the DBPR (Section 475.42(1) (a), F.S.). The FREC maintains a website with data on all licensed professionals. This site can be used to report unlicensed activity or to file a complaint. www.myfloridalicense.com

The broker must record a lien notice in the public records of the county or counties where the commercial real estate is located no later than the earlier of 90 days after the tenant takes possession of the leased premises or, in the case of a renewal commission, 90 days after the broker performs the additional services for the renewal commission or the date on which the owner, who is obligated to pay the commission, records in the public records a deed transferring the owners interest in the com-

Personal Assistants
Brokers and sales associates commonly use personal assistants. Personal assistants may be licensed or unli-

14Module 1

censed, which, in turn, dictates what they may do and how they are paid. In order to perform brokerage activities for the licensee, a personal assistants license must be registered with the same broker. Any compensation earned by the personal assistant for performing brokerage activities must be paid by the broker. Compensation not connected with brokerage activities may be paid directly by the licensee to the personal assistant. A list of activities an unlicensed personal assistant may perform can be found online. myfloridalicense.com/dbpr/re/documents/ Permissibleactivitiesrev092009.pdf 

since 1994. This section reviews the current state of brokerage disclosure in Florida. The Florida brokerage disclosure law is known as the Brokerage Relationship Disclosure Act (BRDA) and is found in Chapters 475.2701 through 475.2801, F.S. While the duties of the authorized brokerage relationships apply in all brokerage activities, the disclosure requirements of BRDA apply only to residential sales. In Chapter 475.278(5)(a), F.S., residential sales are defined as the sale of: improved residential property of 4 units or fewer unimproved residential property intended for use of 4 units or fewer agricultural property of 10 acres or fewer Further, the disclosure requirements of BRDA do not apply to the following situations (Chapter 475.278(5) (b)1 and 2, F.S.): when a licensee knows that the potential seller or buyer is represented by a single agent or a transaction broker when an owner is selling new residential units built by the owner and the circumstances or setting should reasonably inform the potential buyer that the owners employee or single agent is acting on behalf of the owner, whether because of the location of the sales office or because of office signage or placards or identification badges worn by the owners employee or single agent nonresidential transactions the rental or leasing of real property, unless an option to purchase all or a portion of the property improved with 4 or fewer residential units is given a bona fide open house or model home showing that does not involve eliciting confidential information, the execution of a contractual offer or an agreement for representation, or negotiations concerning price, terms, or conditions of a potential sale unanticipated casual conversations between a licensee and a seller or buyer which do not involve eliciting confidential information, the execution of a contractual offer or agreement for representation, or negotiations concerning price, terms, or conditions of a potential sale responding to general factual questions from a potential buyer or seller concerning properties that have been advertised for sale situations in which a licensees communications with a potential buyer or seller are limited to providing general factual information, oral or written,

Recovery Fund
The maximum amount a claimant may be awarded from the Real Estate Recovery Fund increased from $25,000 to $50,000. In addition, the aggregate amount of claims against a licensee rose from $75,000 to $150,000 (Section 475.484(1)(b) and (4), F.S.).

Rental Information
Each broker or sales associate who furnishes a rental information list to a prospective tenant for a fee paid by the tenant shall provide such prospective tenant with a written contract or receipt agreement containing the following provision in type size 10 point bold or larger:
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 of 75% of the fee paid, if you make demand within 30 days of this contract date.

Each contract or receipt agreement shall be contained on one side of one page not larger than 8 x 11 inches. The type size of the balance of the terms of the contract shall be in a size not smaller than 8 point type. Each licensee shall furnish to the DBPR a copy of the current contract or receipt agreement within 30 days of use of such agreement (Rule 61J2-10.030).

BROKERAGE RELATIONSHIP DISCLOSURE ACT (BRDA) Disclosure Requirements

Since the passage of Floridas first agency relationship disclosure law in 1988, the law of brokerage disclosure had been in what appeared to be a constant state of flux. It has been through myriad changes primarily

Real Estate Core Law15

about the qualifications, background, and services of the licensee or the licensees brokerage firm auctions appraisals dispositions of any interest in business enterprises or business opportunities, except for property with 4 or fewer residential units

Transaction Broker
A transaction broker is a licensee who provides limited representation to a buyer, a seller, or both. A transaction broker does not represent either party in a fiduciary capacity or as a single agent (Chapter 475.01(1)(l), F.S.). Since July 1, 2003, it is presumed all real estate licensees are operating as transaction brokers unless a single agency or a no brokerage relationship is established in writing (Chapter 475.278, F.S.). The disclosure form was required to be given, despite the transaction broker presumption. This requirement expired on July 1, 2008 (Chapter 475.278(1)(b) and (2)(b), F.S.) and the transaction broker disclosure form is no longer required or recommended. Duties of a transaction broker are: 1. dealing honestly and fairly 2. accounting for all funds 3. using skill, care, and diligence in the transaction 4. disclosing all known facts that materially affect the value of residential real property and that are not readily observable to the buyer 5. presenting all offers and counteroffers in a timely manner, unless a party has previously directed the licensee otherwise in writing 6. limited confidentiality, unless waived in writing by a party. This limited confidentiality prevents disclosure that the seller will accept a price less than the asking or listed price, that the buyer will pay a price greater than the price submitted in a written offer, the motivation of any party for selling or buying property, that a seller or buyer will agree to financing terms other than those offered, or of any other information requested by a party to remain confidential 7. any additional duties that are mutually agreed to with a party As mentioned previously, a transaction broker may represent the buyer or seller, or both parties in the same transaction. When representing both, the parties give up their rights to the undivided loyalty of the licensee. The licensee will facilitate the transaction by assisting both parties, but may not work to represent one party to the detriment of the other party.

AUTHORIZED BROKERAGE RELATIONSHIPS

There are 4 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 A licensee may not be a dual agent. Dual agency was revoked in Florida as an authorized brokerage relationship when BRDA was first enacted in 1997. In its place, the legislature created the role of transaction broker that allows a licensee to provide limited representation to both parties in the same transaction. A real estate licensee must give a specific type of written disclosure to the buyer or seller on a form prescribed by the legislature and at a designated time in the formation of the relationship to establish a single agent or no brokerage relationship. A licensee must also be mindful of the duties and responsibilities that go along with each type of relationship and must act accordingly at all times. The failure of a licensee to timely give appropriate disclosure forms will subject the licensee to disciplinary action by the FREC. Not only would the sales associate be held responsible but so could the broker. In addition to disciplinary action by the FREC, the failure to make the disclosure or to abide by the duties of a particular type of relationship may also subject the licensee to civil liability. A seller or buyer who feels that the licensee has not performed the duties and responsibilities as required by law and who has suffered damages as a result may bring a civil suit seeking payment for those damages. Be mindful of the overriding purpose of the timely disclosure of a brokerage relationship: to place the consumer on notice as to how the licensee is working with the consumer and the minimum duties the consumer can expect as a result of that relationship. The following sections describe authorized brokerage relationships.

Single Agent
Single agency is when a licensee represents, as a fiduciary, either the buyer or the seller. As a single agent, a licensee may not represent both buyer and seller in the same transaction. Single agency is a fiduciary relationship, one of trust and confidence between the

16Module 1

licensee as agent and the seller or buyer as principal (Chapter 475.01(1)(f) and (k), F.S.). Duties of single agent are: 1. dealing honestly and fairly *2. loyalty *3. confidentiality *4. obedience *5. full disclosure 6. accounting for all funds 7. skill, care, and diligence in the transaction 8. presenting all offers and counteroffers in a timely manner, unless a party has previously directed the licensee otherwise in writing 9. disclosing all known facts that materially affect the value of residential real property and are not readily observable *Note: Duties 2 through 5 are fiduciary duties. The duties of a single agent must be fully described and disclosed in writing to a buyer or seller in the Single Agent Notice Disclosure Notice as required by Chapter 475.278(3)(c), F.S. This disclosure is found at the end of the module. The disclosure may be used as a separate document or included as part of another document, such as a listing agreement. The disclosure 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. If the disclosure is incorporated into other documents, it must be of the same size type or larger than other provisions of the document and must be conspicuous in its placement. The first sentence of the notice must be printed in uppercase and boldface type.

tion broker. The disclosure, as with other disclosures, may be a separate document or be included as part of another document. If it is part of another document, the disclosure must be of the same size type or larger than the rest of the document and must be conspicuous in its placement. The first sentence on the disclosure must be in uppercase and boldface type. See the end of the module for the Consent to Transition to Transaction Broker Disclosure Notice. The transition disclosure is the one disclosure that must be signed or initialed by the party (or parties). Failure to obtain the proper signature or initial is a violation of the license law, and the relationship may well be viewed in a civil action as a violation of single agency duties or even as an undisclosed dual agency. As a side note, while it is strongly recommended that the other disclosures be signed, there is no specific statute that mandates signing.

No Brokerage Relationship
It is commonly thought that a party in a transaction must be represented by a licensee as either a single agent or as a transaction broker. Similarly, it is commonly thought that when the licensee is showing his or her own listing, the relationship between that licensee and the potential buyer is required to be transaction brokerage. The assumption that a licensee must work as either a single agent or transaction broker is untrue. A buyer or seller may work with a licensee in a no brokerage relationship. Chapter 475.278(1), F.S., specifically states that this part [BRDA] does not require a customer to enter into a brokerage relationship with any real estate licensee. As such, a licensee may work with one party as either a single agent or a transaction broker and work with another party in a no brokerage relationship. To take it one step further, the licensee may work with both parties at the same time in no brokerage relationships. Duties of a licensee in a no brokerage relationship are: 1. dealing honestly and fairly 2. disclosing all known facts that materially affect the value of residential real property and which are not readily observable to the buyer 3. accounting for all funds entrusted to the licensee According to this statute, to operate with a party without being either a single agent or transaction broker, the No Brokerage Relationship Notice found at the end of the module is used. The same written disclosure requirements as for the single agent broker notice apply to this notice except this notice is given prior to showing property.

Transition to Transaction Broker

Chapter 475.278(3)(c)2, F.S. allows a licensee representing a party as a single agent and who is requested or desires to represent the other party in the same transaction to transition from single agency to transaction broker. As stated in the previous section, to represent both parties in the same transaction, the licensee must do so as a transaction broker. To convert or transition from single agent to the role of transaction broker, the licensee must first obtain the written consent of the party represented by the licensee as a single agent. The Consent to Transition to Transaction Broker disclosure must be provided any time before the licensee is to act as a transac-

Real Estate Core Law17

Designated Sales Associate

In a transaction other than a residential sale as defined in Chapter 475.278(5)(a), F.S., in which the seller and buyer each have assets of $1 million or more, the buyer and seller may request the broker to designate different sales associates to act as single agents for each buyer and seller in the same transaction. The designated sales associate shall have the duties of a single agent as outlined previously and is required to provide to his or her respective party the Single Agent Notice. The parties themselves are required to disclose that their assets meet the dollar threshold amount to take advantage of this section. The broker does not represent either party and is available to each designated sales associate for advice or assistance without disclosing confidential information to the other party. The required disclosure follows.

DESIGNATED SALES ASSOCIATE Florida law prohibits a designated sales associate from disclosing, except to the broker or persons specified by the broker, information made confidential by request or at the instruction of the customer the designated sales associate is representing. However, Florida law allows a designated sales associate to disclose information allowed to be disclosed or required to be disclosed by law and also allows a designated sales associate to disclose to his or her broker, or persons specified by the broker, confidential information of a customer for the purpose of seeking advice or assistance for the benefit of the customer in regard to a transaction. Florida law requires that the broker must hold this information confidential and may not use such information to the detriment of the other party (Chapter 475.2755, F.S.).

CASE STUDIES: PART I

The case study is followed by review questions. You are not required to answer the case study questions to complete the 14-hour course. Choose the best response (a., b., c., or d.) to each case study question below. The answers to the case study questions are found in the back of the book.

CASE STUDY ONE

Many real estate licensees will, in an effort to help themselves be recognized in the competitive business of real estate, engage in various types of marketing initiatives. One such method of marketing is to do a direct mailing to residents in a certain neighborhood, subdivision, or other geographic area. The direct mailing may be used to announce a new listing or a listing that has sold and will generally contain additional real estate information. Many times the licensee doing the direct mailing will live in or near the targeted area. Several sales associates, who were operating as a team within a brokerage office, did a direct mailing to a particular community in which 2 of the sales associates lived; the mailing was used to show new listings in the community. The return address that was used on the mailing was the home address of one of the sales associates in the community. As it happened, an investigator with the DBPR, DRE lived in this community and received the direct mailing. The investigator determined that the return address was the home address of a sales associate and when the investigator checked online

he discovered the address was not registered as a branch office of the broker. The DBPR, DRE took the position that the use of a return address other than the registered address of the brokerage office was holding the location out as a place where brokerage business was conducted, in this case the sales associates home, and was thus a branch office. Since the sales associates home was not registered as a branch office, the DBPR, DRE issued a citation in the amount of $200 to the sales associates broker, who is responsible for registering a branch office, for failing to register the location as a branch office (Rule 61J2-24.002 (2)(h)).

QUESTIONS
1. A real estate broker is required to register a location as a branch office when:

a. the brokers name is displayed in a location in a manner to lead the public to believe the location is operated by the broker. b. a sales associate makes phone calls, sends emails, and sends and receives faxes from home.

18Module 1

c. the broker stores books and records at a particular location. d. the location is a temporary shelter where transactions are not closed.
2. A citation is:

The sales associate was able to show that he had timely completed the continuing education but failed to renew his license. The sales associate was fined $500 by the FREC plus the costs of investigation. The broker implemented a procedure to ensure that all licensees were properly licensed, registered with the broker, and had taken the required education. The broker was fined $1,000 by the FREC plus the costs of investigation.

a. a notice of noncompliance. b. a private reprimand. c. an immediate imposition of disciplinary action without a hearing. d. the recognition by the FREC of good behavior by a broker.

QUESTIONS
1. A broker is responsible to ensure that a licensee who is registered with the broker: a. has posted a copy of the license in a conspicuous place. b. has timely mailed in the renewal form and fee to the DBPR. c. is carrying the wallet card at all times. d. is filing income tax statements. 2. When disciplining a licensee the DBPR or the FREC is least likely to issue a/an: a. citation. b. notice of noncompliance. c. administrative fine pursuant to the disciplinary guidelines. d. letter of guidance.

CASE STUDY TWO

It is not unusual for investigators with the DBPR, DRE to review real estate advertisements in the classified section of a newspaper or in a publication to ensure that the advertisements placed by real estate licensees are in compliance with the license law. Investigators will also check the license status of the names that appear in the advertisements. At random, an investigator checked the license status of a sales associates name that appeared in an advertisement and discovered that the sales associates status was inactive. A complaint was docketed by the DBPR investigator, the matter was investigated, and formal charges were filed against the sales associate for operating without a current, active, and valid license. (Section 475.42(1)(a)) Because the broker is responsible, the sales associates broker was also charged with employing a sales associate who did not have an active license. (Section 475.42(1)(c))

Part II: State and Federal Laws Affecting Real Estate

This section discusses state and federal laws such as the Florida Landlord and Tenant Act, lead-based paint and radon disclosures, energy-efficiency ratings, stigmatized property, property condition, homeowners association disclosure, swimming pool safety, and the statute regarding disclosure of HIV/AIDS. The Florida Residential Landlord and Tenant Act applies to the rental of dwelling units. It does not apply to the following: residency or detention in a facility when residence or detention is incidental to medical, geriatric, educational, counseling, religious, or similar services occupancy under a contract of sale of a dwelling unit 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

LANDLORDTENANT REGULATIONS
Chapter 83, F.S., is the Florida Landlord and Tenant Act. The act is divided into 3 parts: Part I applies to nonresidential tenancies; Part II applies to residential tenancies; Part III applies to self-service storage space. This section focuses on Part II, known as the Florida Residential Landlord and Tenant Act.

Real Estate Core Law19

occupancy by an owner of a condominium unit (Chapters 83.41 and 83.42, F.S.) Chapter 83.49, F.S., controls the proper handling and disposition of deposit money or advance rent. Deposit money is not limited to security deposits; it also includes damage deposits, advance rent deposits, pet deposits, or any contractual deposit agreed in written or oral form by the landlord and tenant (Chapters 83.43(11) and (12), and 83.49(1), F.S.). Whenever money is deposited or advanced by a tenant pursuant to a rental agreement, the landlord or the landlords agent shall do one of the following: Hold the total amount in a separate noninterestbearing account in a Florida banking institution for the benefit of the tenant. The funds cannot be commingled with any other funds held by the landlord. Hold the total amount in a separate interest-bearing account in a Florida banking institution for the benefit of the tenant. The tenant shall receive 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. These funds cannot be commingled with other funds held by the landlord. 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 pay the tenant interest at the rate of 5% per year, simple interest. With the posting of a bond, the funds can be commingled with other funds held by the landlord (Chapter 83.49(1)(a)-(c), F.S.). However, be aware that the FREC has never authorized a real estate broker to post a bond. Chapter 475.25(1)(k), F.S., requires the broker to maintain rental deposit funds in escrow.

a claim on the security deposit, the landlord must do so within 30 days by sending written notice via certified mail to the tenants last known address. Florida law requires the notice to 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 (landlords address).

If the landlord should fail to make the claim within the 30-day period, he or she forfeits the right to impose a claim on the security deposit. Effective July 1, 2001, the period in which the landlord may make a claim was extended from 15 days to 30 days. In practice, the landlord must make the decision whether to return the deposit or make a claim within 15 days of the tenant vacating the premises. If the landlord decides to return the deposit, it must be done within the initial 15 days; if the landlord, within the first 15 days, decides to make a claim on the deposit, he or she has an additional 15 days to send the written claim to the tenant. If the landlord makes a timely claim and the tenant fails to object within 15 days of receipt of the landlords written claim, then the landlord may deduct the amount of the claim from the deposit. The balance, if any, must be returned to the tenant within 30 days of the date of the notice of claim.

Disposition of Security Deposits

Within 30 days of receipt of the advance rent or security deposit, the landlord is required to notify the tenant in writing of the manner in which the funds are being held, the rate of interest, if any, and the time of the interest payments to the tenant. In addition, the written notice shall state the name and address of the depository where the funds are being held and must include a copy of the provisions of Chapter 83.49(3), F.S., which address claims on the security deposit (Chapter 83.49(2), F.S.). If the landlord does not intend to impose a claim on the security deposit, the landlord is required to return the deposit within 15 days of the date the tenant vacates the property. If the landlord intends to make

Disposition of the Tenants Personal Property

In 2001, the threshold dollar amount for the disposition of the tenants personal property was amended. Specifically, Chapters 715.10715.111, F.S., are known as the Disposition of Personal Property Landlord and Tenant Act. This act provides an optional procedure for disposing of the tenants personal property that remains on the premises after the tenancy has terminated or expired and the premises have been vacated through eviction, surrender, abandonment, or other means. When personal property remains on the premises, the landlord shall give written notice to the tenant (and any other person the landlord believes to be the owner of the personal property) as follows (Chapters 715.104, 715.105 and 715.106, F.S.):

20Module 1

a description of the property the cost of reasonable storage, if any notice that the property will be sold at a public sale after notice of the sale, if the property is not claimed by a certain date notice that the property may be sold, kept, or destroyed if the property is believed to be worth less than $500 The timeframe to offer the property for sale or otherwise shall not be fewer than 10 days if the notice is personally delivered or 15 days if mailed. The $500 threshold amount for destroying or retaining the property is an amendment effective July 1, 2001. Previously, the dollar amount was $250. However, pursuant to Chapter 83.67(5), F.S., the landlord is not required to comply with the above requirements for the storage or disposition of the tenants personal property if the following disclosure is given to the tenant in the rental agreement or in a written agreement separate from the rental agreement. The disclosure must be in substantially the following form:
BY SIGNING THIS RENTAL AGREEMENT, THE TENANT AGREES THAT UPON SURRENDER, ABANDONMENT, OR RECOVERY OF POSSESSION OF THE DWELLING UNIT DUE TO THE DEATH OF THE LAST REMAINING TENANT, AS PROVIDED BY CHAPTER 83, FLORIDA STATUTES, THE LANDLORD SHALL NOT BE LIABLE OR RESPONSIBLE FOR STORAGE OR DISPOSITION OF THE TENANTS PERSONAL PROPERTY.

notice. A copy of the official document or signed verification must accompany the notice of termination. Upon termination of the rental agreement, the tenant is liable for the rent due, prorated to the effective date of the termination. If a tenant terminates the rental agreement 14 or more days prior to occupancy, no damages or penalties of any kind are due. The provisions of this section of law may not be waived or modified under any circumstances.

LEAD-BASED PAINT DISCLOSURE

In 1992, Congress passed the Residential LeadBased Paint Hazard Reduction Act that directed the Environmental Protection Agency (EPA) and the Department of Housing and Urban Development (HUD) to jointly issue regulations requiring the disclosure of known lead-based paint or lead-based paint hazards on the sale or lease of real property built before 1978. The jointly issued regulations became effective September 6, 1996, for owners of more than 4 dwelling units, and December 6, 1996, for owners of 4 or fewer dwelling units. The regulations apply to the sale or lease of any housing constructed before 1978, called target housing. The use of lead in paint was banned in 1978. The following types of dwellings have been excluded from the disclosure requirements: housing built in 1978 or later housing for the elderly or persons with disabilities (unless children less than 6 years of age reside in such housing) zero-bedroom units such as studio apartments, efficiencies, and dormitories short-term leases for 100 days or less foreclosure sales housing that has been declared lead-free by a certified inspector or risk assessor Before the purchaser or lessee is obligated under any contract to purchase or lease target housing, regulations require that the seller or lessor disclose certain information. The seller or lessor is not obligated to conduct any evaluations or removal of lead-based paint. However, the following information must be disclosed: EPA-approved lead hazard information pamphlet, EPA 747-K-99-001, Protect Your Family from Lead in Your Home presence of any known lead-based paint and/or hazards and any available records or reports certificate and acknowledgment of disclosure

Tenancies with Members of the Armed Forces

When any member of the United States Armed Forces, United States Reserve Forces, or the Florida National Guard (referred to hereafter as member) is required to move 35 miles or more from the location of the rental premises pursuant to permanent change of station orders or when the member is prematurely or involuntarily discharged or released from active duty, the member may terminate his or her rental agreement. The termination is made by providing the landlord a written notice of termination to be effective on a date stated in the notice that is at least 30 days after the landlords receipt of the notice. The notice must contain a copy of the official military orders or a written verification signed by the members commanding officer. If a member dies during active duty, an adult member of his or her immediate family may terminate the rental agreement by sending written notice to the landlord; the termination may then become effective at least 30 days after the landlords receipt of the

Real Estate Core Law21

In the case of a sale, the purchaser is given 10 days (or another agreed-upon time period) to conduct a risk assessment or inspection for the presence of leadbased paint and/or lead-based paint hazards. The seller, lessor, or agent must retain a copy of these certifications for not less than 3 years from the date of sale or commencement of the lease period. Finally, the federal regulations make the real estate licensee responsible for ensuring compliance of the seller or lessor in issuing the required disclosures and notices.

Internet lead-based paint information website. www.epa.gov/lead

Lead Warning Statement

Every purchaser of any interest in residential real property on which a residential dwelling was built prior to 1978 is notified that such property may present exposure to lead from lead-based paint that may place young children at risk of developing lead poisoning. Lead poisoning in young children may produce permanent neurological damage, including learning disabilities, reduced intelligence quotient, behavioral problems, and impaired memory. Lead poisoning also poses a particular risk to pregnant women. The seller of any interest in residential real property is required to provide the buyer with any information on leadbased paint hazards from risk assessments or inspections in the sellers possession and notify the buyer of any known lead-based paint hazards. A risk assessment or inspection for possible lead-based paint hazards is recommended prior to purchase.

Federal Lead-Based Paint Renovation, Repair, and Painting Program

Due to risks associated with common renovation activities, the EPA issued a rule on April 22, 2008, aimed at preventing lead poisoning. Under the rule, beginning April 22, 2010, contractors performing renovation, repair, and painting projects that disturb lead-based paint in homes, child care facilities, and schools built before 1978 must be EPA-certified and must follow specific work practices to prevent lead contamination. Child-care facilities are defined as residential, public or commercial buildings where children under age 6 are present on a regular basis. The rule does not apply to minor maintenance or repair activities where less than 6 square feet of leadbased paint is disturbed in a room or where less than 20 square feet of lead-based paint is disturbed on the exterior. Window replacement is not considered minor maintenance or repair. Owner occupants and/or tenants must be provided a pamphlet entitled, Renovate Right: Important Lead Hazard Information for Families, Child Care Providers, and Schools before any renovation, repair, or painting is performed. Owners of properties who perform the work themselves in rental housing or child care facilities must be EPA certified, as well. The renovator (contractor or owner of property) must provide the pamphlet and maintain proof of delivery by a signed disclosure. The rule does not cover homeowners working on their own home. Contractors must use lead-safe work practices by containing the work area, minimizing dust, and cleaning up thoroughly. Effective July 6, 2010, owner occupants of homes built prior to 1978 can no longer optout of having their contractors follow lead-safe work practices. Prior to this change, owner-occupants were able to certify that no child 6 or younger or pregnant women were living in the home and then their contractors did not need to follow lead-safe work practices. To receive the lead pamphlets or for further information on the lead-based paint disclosure requirements, the renovation rule, or lead-based paint in general, call (800) 424-LEAD or access information on the

RADON GAS
The Florida Radon Protection Act, effective January 1, 1989, requires, among other things, a disclosure regarding radon gas. Notification must be provided on at least one document, form, or application at the time of, or prior to the execution of, a contract for sale and purchase or a rental agreement for any building. Residential transient occupancy is exempted from notification provided it is for the duration of 45 days or less. The required radon gas statement is as follows:
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 404.056(5), F.S.).

ENERGY-EFFICIENCY RATING
A prospective buyer of real property must be provided with a brochure describing the option for an energy-efficiency rating if any buildings are located on the property. The brochure must be given at the time of, or prior to, the purchasers execution of the contract for sale and purchase (Chapter 553.996, F.S.). The brochure is prepared by the Department of Community Affairs (DCA). To obtain further infor-

22Module 1

mation, licensees may call the DCA at (877) 352-3222 or go online. www.dca.state.fl.us/

the buyer. Information is considered material to the extent that if the information had been disclosed, the sales contract would not have been signed. Physical defects can generally be measured monetarily. For example, 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.

HIV/AIDS
According to Florida legislation, whether an occupant of real property may be infected with human immunodeficiency virus (HIV) or has been diagnosed with acquired immune deficiency syndrome (AIDS) is not a material fact that must be disclosed in a real estate transaction. In addition, no cause of action arises against the real property owner, the owners agent, a person licensed under Chapter 475 F.S., or the agent of the transferee for failure of the owner or agents to disclose to the transferee that the occupant was infected with HIV or diagnosed with AIDS (Chapter 689.25(1) and (2), F.S.).

Property ConditionJohnson v. Davis

While there is no statutory law in Florida that mandates the disclosure of the condition of residential property by a seller to a buyer, the 1985 Florida Supreme Court case of Johnson v. Davis, 480 So.2d 625 (Florida 1985) requires:
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.

CONTRACTS WITH MILITARY PERSONNEL

Effective July 1, 2003, a member of the United States Armed Forces, the United States Reserve Forces, or the Florida National Guard (collectively known as 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: member is required, by permanent change of station orders, to move 35 miles or more from the location of the property member is released from active duty and the property is more than 35 miles from the members home of record member receives orders to move into government quarters, or the member becomes eligible to live in government quarters, or member receives temporary duty orders to move more than 35 miles from the location of the property and the temporary duty orders exceed 90 days Upon termination of the contract, the member is entitled to a full refund of the deposit within 7 days. The law may not be waived or modified by agreement of the parties under any circumstances (Chapter 689.27, F.S.).

With the Johnson decision, the previous commonlaw doctrine of caveat emptor, or buyer beware, in the sale of residential real property in Florida was abolished. In addition, subsequent case law has applied the disclosure requirements to the agent of the seller. Specifically, the Raynor v. Wise court case of 1987 expanded the responsibility for disclosure of known material facts to real estate licensees. The courts also hold that a buyer has a duty to investigate via inspections and other means to determine facts that could influence the buyer to offer less money or reconsider the purchase. Latent defects affect the propertys value, but are not readily observable. The case law does not mandate the manner in which the disclosure of the defects must be made or the format or form upon which it must be made. It simply requires that a disclosure be made. However, since Johnson, most real estate firms and private trade associations have developed written forms upon which it is requested that the seller remark on the condition of virtually every aspect of the property. This form, commonly referred to as the sellers disclosure, in turn is shared with the buyer or the buyers representative so as to comply with the dictates of the Supreme Court. The disclosure requirement of Johnson only applies to residential property; it does not apply to commercial property. An example of a latent defects clause follows:
Seller specifically acknowledges and understands that if Seller knows of facts materially affecting the value of the property, whether said facts are readily

DISCLOSURE OF MATERIAL FACTS

Florida law requires that real estate licensees disclose those material facts that affect the value of residential real property that are not readily observable to

Real Estate Core Law23

observable or not, the Seller is under a duty to disclose these facts to the buyer and to the real estate licensee. Seller represents that Seller does not know of any material facts which affect the value of the property other than those which the buyer can readily observe or which are known by or have been disclosed to buyer. Homeowners Association Contract Disclosure Language If the Disclosure Summary required by Chapter 720.401, F.S., has not been provided to the prospective purchaser before executing this contract for sale, this contract is voidable by buyer by delivering to seller or sellers agent or representative written notice of the buyers intention to cancel within 3 days after receipt of the Disclosure Summary or prior to closing, whichever occurs first. Any purported waiver of this voidability right has no effect. Buyers right to void this contract shall terminate at closing.

Although a latent defects clause requires a seller to indicate his or her knowledge of his or her duty, the clause alone usually does not provide an opportunity for the seller to elaborate about what he or she knows about the property.

Stigmatized Property
Stigmatized property had an event that produces more of a psychological impact than a physical impact. Property may be stigmatized by events such as murder, suicide, or drug-related arrest, or the property may be considered haunted by ghosts or spirits. Stigmatized property also includes those premises on which a famous person may have once lived. Effective July 1, 2003, Chapter 689.25(1) F.S., is amended to provide that the fact a property was the site of a homicide, suicide, or death is not a material fact which must be disclosed in a real estate transaction. In addition, the failure to disclose such information may not be the basis for a civil lawsuit (Chapter 689.25(1) and (2), F.S.).

COMMUNITY DEVELOPMENT DISTRICT (CDD)

A Community Development District (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 possess several powers as a legal entity, such as: the right to enter into contracts; the right to own both real and personal property; adopt by-laws, rules, regulations, and orders; the right to sue and be sued; to obtain funds by borrowing; to issue bonds; and 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, and 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, its governing body establishes its own budget and operates independently of the local governmental entity within the scope of its 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 tax-

HOMEOWNERS ASSOCIATION DISCLOSURE

Effective June 23, 2004, the Homeowners Association Disclosure Law was amended to require disclosure only when the purchaser will be obligated to be a member of a homeowners association. Therefore, a purchaser who is buying in a community which mandates membership in a homeowners association in order to live in the community is to be given the statutory required disclosure form and disclosure language prior to the execution of the contract for sale and purchase. In addition, the law was moved to Chapter 720 from Chapter 689. The disclosure must be provided by either the developer or a seller who is not a developer. If the required disclosure summary is not given to the buyer prior to the execution of the contract, the buyer will have the option to void the contract in writing within 3 days of receipt of the disclosure summary or prior to closing, whichever occurs first. The required disclosure summary may be found at the end of this module. In addition, there is a separate paragraph that must be included in the contract or the contract is voidable by the buyer up to the time of closing. The contract language must be in conspicuous type and state as follows:

24Module 1

exempt bonds to construct infrastructure such as roads, water and sewer lines, recreational facilities, etc. The end result is that a CDD pays for itself and the cost of the growth is allocated proportionately by levying special assessments on the lands which receive the benefit of the improvements. A CDD also provides a more efficient method of paying the operation and maintenance expense of infrastructure and related services. CDDs are common in the State of Florida: there are 503 CDDs in the state (Community Affairs).

CONDOMINIUM DISCLOSURE
Chapter 718.503(2), F.S., requires a non-developer selling a condominium to give a written disclosure to the buyer. The statutory disclosure language is found at Chapter 718.503(2)(c)1 and 2. Effective January 1, 2009, a prospective purchaser of a condominium unit from a non-developer seller is to be given a Condominium Governance Form created by the DBPR Division of Florida Condominiums, Timeshares and Mobile Homes. The form will include a description of the condominiums board of directors role, the rights of owners to speak at board meetings, and the responsibilities of the owner to pay assessments and otherwise abide by the condominium documents. The form may be found at the Divisions website. www.myfloridalicense.com/dbpr/lsc 

RESIDENTIAL SWIMMING POOL SAFETY ACT

The Residential Swimming Pool Safety Act (Chapter 515, F.S.) requires certain safety features on residential pools to prevent drowning of a young child or medically frail elderly person. The safety features are mandatory pursuant to the Florida Building Code. 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, self latching device with the release mechanism no lower than 54 inches above the floor. The failure to equip a new residential pool with at least one of the above safety features is a seconddegree misdemeanor. A licensed pool contractor entering into an agreement to build a residential swimming pool, or a licensed home builder or developer entering into an agreement to build a home that includes a residential swimming pool, must give the buyer a document containing the requirements of the act and a copy of a publication produced by the Department of Health. The Florida Building Code goes further and now requires that suction inlets be equipped with entrapment protection devices that will prevent a young child or medically frail elderly person from becoming trapped by the force of a suction device in the pool.

PROPERTY TAX DISCLOSURE

Since January 1, 2005, a prospective purchaser of residential property must be given a written disclosure that a change in ownership may trigger a reassessment of the property, which could result in higher property taxes. The disclosure must be given at or before the execution of the contract for sale and purchase. It must be in the contract or, if given separately, be incorporated into the contract. The disclosure summary, found at Section 689.261(1), F.S., must be in a form substantially similar to the following:
PROPERTY TAX DISCLOSURE SUMMARY BUYER SHOULD NOT RELY ON THE SELLERS 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 APPRAISERS OFFICE FOR INFORMATION.

HOME INSPECTIONS, MOLD ASSESSMENTS, AND MOLD REMEDIATION

In 2007, 2 new laws were passed establishing licensing requirements for home inspectors, mold assessors, and mold remediators. The law for home inspectors is found at Sections 468.83 to 468.8324, F.S., and the

Real Estate Core Law25

CASE STUDIES: PART II

The case study is followed by review questions. You are not required to answer the case study questions to complete the 14-hour course. Choose the best response (a., b., c., or d.) to each case study question below. The answers to the case study questions are found in the back of the book.

CASE STUDY ONE

The broker secured a tenant giving the tenant the Lead-Based Paint Pamphlet, Protect Your Family From Lead in Your Home, due to the fact the house was built before 1978. About a month after the tenant moved in, the tenant notified the broker of what sounded like a leak in a pipe in the bathroom. The broker sent out a plumber who did determine there was a leak and a portion of the wallboard measuring more than 7 square feet needed to be removed to repair the leak.

CASE STUDY TWO

A real estate licensee listed a home for sale. As is usual, the licensee had the sellers fill out and sign a property disclosure form disclosing all the defects of the house including anything negative that may affect the value of the property. The sellers disclosed only some minor items. A few days before closing, the buyers walked through the house. During the walkthrough a rain storm struck and water began gushing in around the window frames. This had not been disclosed on the property disclosure sheet. The buyers refused to close and the sellers sued for the deposit. The court ruled that the seller of residential property had a duty to disclose all latent defects that affect the value of the property but are not readily observable.

QUESTIONS
1. The pamphlet Renovate Right: Im port ant Lead Hazard Information for Families, Child Care Providers, and Schools is required to be given to the tenant because: a. more than 6 square feet are to be disturbed in the house to perform the repair. b. the house was built later than 1978. c. the repair was a non-emergency. d. the brochure is not required to be given because it was given at the time the tenant rented the unit. 2. Who is re quired to provide the tenant the pamphlet prior to the repair? a. The owner b. The plumber c. The broker d. No one. The tenant must obtain the pamphlet directly from the EPA.

QUESTIONS
1. The duty of a real estate licensee to disclose facts materially affecting the value of the property that are not readily observable to a buyer is required by: a. the case of Johnson v. Davis. b. Chapter 475. c. the rules of the FREC. d. the case of Raynor v. Wise. 2. The duty to disclose latent defects under the Johnson v. Davis case applies to what type of property? a. commercial b. residential c. all types of property d. industrial

26Module 1

law for mold assessors and mold remediators is found at Sections 468.84 to 468.8423. Both laws include a grandfather clause providing that the requirements for licensure do not become effective until July 1, 2010. The DBPR will not enforce the licensing requirements until July 1, 2011. The new laws will require specific education, a state examination, and continuing education and provides for disciplinary action against the licensee for violations of the laws. One of the more significant parts of the home inspector law is that a home inspector or home inspection company may not perform repairs on the home from the time of the home inspection until closing. This will prevent the home inspector and inspection company from repairing or offering to repair a home that they inspected. The law for mold assessors and remediators is similar in that a mold assessor may not perform any remediation on the property for one year after the assessment was performed. Please refer to our website for more information on state and federal laws affecting your profession, and

related professions. This information is provided for your knowledge but is not a part of this course and will not be the subject of any test questions.

Mortgage Foreclosure Rescue Act

On October 1, 2008, Section 501.1377, generally referred to as the Mortgage Foreclosure Rescue Act, became effective. This law is in part a response to the increased number of foreclosures and abuses in the marketplace regarding mortgage foreclosure rescues. The law requires that certain disclosures be made in writing to the person to be assisted and that all agreements be in writing in a specified size and allowing for the customer to cancel the agreement. The law prohibits any money being paid up front for the services. The law applies to anyone attempting to assist a homeowner as he or she takes steps to stop, avoid or delay foreclosure proceedings. It was designed to inform homeowners so they can make the appropriate decisions.

Part III: Escrow Accounts

The law in Florida does not require a broker to maintain an escrow account simply because he or she has a brokers license. If the parties agree to have a third party, such as a lawyer, title company, or another broker hold the escrow deposit, then the broker is relieved of all the responsibilities associated with maintaining escrow accounts. If the broker does maintain an escrow account, it is important for the broker to understand the requirements for maintaining an escrow account. with a title company or an attorney, the licensee who prepared or presented the sales contract must indicate on that contract the name, address, and telephone number of the escrow agent (title company or attorney). Within 10 business days after each deposit is due under the sales contract, the broker must make a written request to the escrow agent to provide written verification of receipt of the deposit. The broker must, within 10 business days of the date the broker made the written request for verification of the deposit, provide the sellers broker with either a copy of the written verification, or, if no verification is received by sellers broker, written notice that he or she did not receive verification of the deposit. If the seller is not represented by a broker, then the broker will notify the seller directly in the same manner (Rule 61J2-14.008). Note: This rule was updated effective June 21, 2010, providing brokers additional time after the deposit (10 business days, not 3) to request written verification. If the seller or sellers agent nominates in writing the title company or attorney as escrow agent, then the written request to verify funds is not required.

RECEIPT OF ESCROW FUNDS

When a sales associate or broker associate receives any deposit in connection with any real estate transaction, he or she is required to deliver the deposit to their broker no later than the end of the next business day. Saturday, Sunday, and legal holidays are not considered business days. Brokers have until the end of the third business day following receipt of escrow funds by the sales associate or broker associate to deposit the funds in an escrow account (Rules 61J214.008(3), 61J2-14.009, and 61J2-14.010). Note: The 3-business day time frame for brokers begins the day the sales associate or broker associate receives the escrow funds. When an escrow deposit is placed or to be placed

ESCROW ACCOUNT REQUIREMENTS

The escrow account maintained by a broker must be in a banking institution, credit union, title company

Real Estate Core Law27

having trust powers, or savings associations located and doing business in Florida (Chapter 475.25(1)(k), F.S.). The broker must be a signatory on all escrow accounts. If the brokerage firm has more than one broker, then one broker may be designated as the signatory [Rule 61J2-14.010(1)]. Being a signatory does not necessarily mean that the broker must sign off on checks negotiated from the escrow account; this function may be delegated to one or more persons. However, the broker or brokers remain responsible for the contents of the account. A real estate broker may maintain up to $5,000 of personal or brokerage funds in a property management account and up to $1,000 in the sales escrow account (Chapter 475.25(1)(k), F.S.). A real estate broker may be disciplined for failing to review the brokerages trust accounting procedure to ensure compliance. If escrow errors are found during an audit and there is no shortage of funds and the errors pose no significant threat to the public, the broker is to be given a reasonable time to correct the escrow errors (Section 475.25(1)(d)1 and (k), F.S.).

The broker is also required to review, sign, and date the monthly reconciliation. If the total trust liability and the bank balances do not agree, the broker is required to describe or explain in the reconciliation the reason for the overage or shortage and any corrective action taken [Rule 61J2-14.012(1)-(3)]. If the overage is caused by the allowable overage of broker funds, it still must be described although no corrective action is required.

INTEREST-BEARING ACCOUNTS
A broker is permitted to maintain escrow funds in an interest-bearing escrow account, provided the broker satisfies the following requirements. The broker must: obtain the written permission of all parties to the transaction designate the party who is to receive the interest designate the time the earned interest must be disbursed obtain insurance for the account and place funds in a depository located and doing business in Florida The broker is permitted to be the party designated to receive the interest. To disburse the funds from the interest-bearing account to the designated party (except the broker), the broker must first transfer the principal and interest to a non-interest-bearing escrow account to stop the interest from accruing and then disburse the funds to the designated party. If the broker is the designated party, only the principal is transferred to the non-interest-bearing escrow account, and the interest is transferred directly to the brokers operating account (Rule 61J2-14.014).

ESCROW ACCOUNT RECONCILIATION

At least once monthly, the broker is required to perform a written reconciliation of the escrow account(s) he or she maintains. The reconciliation consists of comparing the brokers total trust liability with the reconciled bank balance(s). The trust liability is defined as the sum total of all deposits received, pending, and held by the broker at any one point in time. The minimum information required in the monthly reconciliation includes: 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 checks identified by date and check number itemized list of the brokers trust liability any other items necessary to reconcile the bank account balance(s) with the balance recorded in the brokers checkbook(s) and other trust account books and records disclosing the date of receipt and the source of the funds

ESCROW DISPUTES OR GOOD FAITH DOUBTS

If a broker holding funds in his or her 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 has specific statutory and administrative rule requirements to follow: Within 15 business days of receiving the last partys demand or of having the 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 the good faith doubts, the broker must institute a settlement procedure and so notify the FREC. The broker may choose one of the following settlement procedures:

equest from the FREC an order of disburser ment otherwise known as an escrow disbursement order (EDO)

28Module 1

 ubmit the matter to arbitration with the consent s of all parties ubmit the matter to mediation with the written s consent of all parties If the mediation is not concluded within 90 days, the broker must institute an alternate settlement procedure), or eek adjudication of the matter in court such as s through an interpleader action

ESCROW ACCOUNTS IN GENERAL

In general terms, the role of an 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. In addition, the broker is responsible to ensure that each sales associate properly handles and delivers the funds to the broker or to a consumer. If the buyer has not made the deposit stated on the contractual offer, the licensee needs to inform the listing agent or seller. Of all the violations that go before the FREC, the handling of escrow funds is considered the most important. 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. As previously stated, brokers are not required to maintain an escrow account. But once the decision is made to hold an account, the broker and all sales associates need to faithfully follow the rules for maintaining an escrow account.

A broker who employs one of the escape procedures in a timely manner and abides by the determination is protected from the filing of an administrative complaint against the broker (Chapter 475.25(1)(d)1, F.S., and Rule 61J2-10.032). There are 3 exceptions to the requirement for notification and settlement procedures: landlord-tenant funds (Chapter 83.49(3)(d), F.S.) residential condominium purchase in which the buyer delivers in a timely fashion written notice to the licensee the buyers intent to cancel the contract, pursuant to Chapter 718.503, F.S (Chapter 475.25(1) (d)1, F.S.) situations in which the buyer in good faith fails to satisfy the terms in the financing contingency clause in the contract (Chapter 475.25(1) (d)1, F.S.) For the first item the broker decides whether the tenant or the landlord receives the funds. If one of the other bulleted items occurs, the broker may return the deposit to the buyer without notifying the Commission or instituting a settlement procedure.

CASE STUDIES: PART III

The case study is followed by review questions. You are not required to answer the case study questions to complete the 14-hour course. Choose the best response (a., b., c., or d.) to each case study question below. The answers to the case study questions are found in the back of the book.

CASE STUDY ONE

A complaint was filed by a tenant against a broker alleging that the broker had failed to return a security deposit. During the course of the investigation, an audit was performed by the DBPR investigator of all the brokers escrow accounts. The audit revealed that there was an overage in the sales escrow account of $1,376; a shortage in the security deposit account of $654.16; and a shortage of $10,577.42 in the rental distribution account. The shortage in the rental distribution account was due to the broker paying for repairs regardless of the owners balance. The overage in the sales account was explained as commissions not yet disbursed. (The overage was above the

$1,000 allowed to be maintained in a sales escrow account.) The broker was unable to explain the shortage in the security deposit account. The investigator returned a month later to reaudit the accounts. The commissions in the sales account had been removed and the account balanced. The broker had deposited funds to cover the shortages in the rental accounts and both accounts balanced. The broker had been performing the reconciliations but had not taken corrective action regarding the overage and shortages. The broker and his company were charged with failing to properly perform the reconciliations as

Real Estate Core Law29

he had not taken or noted the corrective action and with failing to maintain funds in escrow. The matter went before the FREC on a stipulated settlement. The settlement consisted of a 30-day suspension, a fine of $2,500, 6 months probation with the condition that the 30-hour broker management course be taken and a reprimand for the company. The broker appeared and readily admitted his mistakes and the actions he had taken to ensure it will not occur again. The FREC approved the settlement. Ironically, the allegations by the tenant were dismissed.

seller agreed to return the deposit to the buyer. A release of deposit was signed by the buyer and seller and sent to the sales associates broker. The broker had no record of the deposit or the contract. The broker investigated and discovered that the sales associate had never turned in the contract or deposit; the deposit check was simply placed in the file. The broker had the sales associate return the check to the buyer. (The broker then terminated the sales associate). Upon receipt of the original check, the buyer, recognizing that the deposit had never been placed into escrow, filed a complaint with the DBPR. Following an investigation, during which time the broker was able to show he knew nothing of the contract or deposit, the sales associate was charged with failing to immediately deliver a deposit to her broker. The matter went before the FREC on an informal hearing. The FREC ordered the sales associate to pay a fine of $1,000, placed her on probation for one year and required her to take the 45-hour post license course.

QUESTIONS
1. When must the escrow account reconciliation be performed? a. at least quarterly b. at least once monthly c. at least once every 6 months d. only if requested by a DBPR investigator 2. The amount allowed to be maintained in the sales escrow account is a balance up to: a. $1,000. b. $5,000. c. $7,000. d. $10,000.

QUESTIONS
1. A sales associate who receives a deposit on a contract must deliver the deposit to the broker in what period of time? a. 3 business days b. upon acceptance of the offer c. one business day d. as instructed by the buyer 2. A broker entrusted with escrow funds, may place the funds in: a. the operating account. b. a personal bank account. c. a safe deposit box. d. a Florida credit union.

CASE STUDY TWO

A buyer approached a sales associate about purchasing a property. Following negotiations, an offer was made indicating that there was a deposit of $5,000 which was being held by the sales associates broker. The offer was accepted by the seller. The contract was contingent upon financing. The buyer timely applied for financing and after having used due diligence, was denied the loan. The

CONCLUSION
There have been numerous and significant changes in many regulatory areas that govern real estate and real estate-related activities. The changes in Chapters 455 and 475, F.S., are especially important to Florida real estate licensees. Focus special attention on the disclosures real estate licensees must provide, especially those related to the Brokerage Relationship Disclosure Act. The other major area of importance is escrow accounts. Whenever a complaint is filed against a broker, that brokers escrow account is audited. Florida real estate licensees must remain abreast of these requirements and changes to the requirements to ensure compliance and avoid complaints and possible disciplinary action. Careful reading of this module should contribute to this end.

30Module 1

M odul e 1 P r o g r e s s T e s t
You are not required to answer the progress test questions to complete the 14-hour course. They are intended to help prepare you for the Final Exam. Choose the best response to each question. The answers are found in the back of the book.
1. The maximum amount the FREC may fine a licensee per offense is: a. $1,000. b. $2,500. c. $5,000. d. $10,000. 2. A real estate sales associate may organize and operate as what type of business entity? a. limited liability partnership b. professional corporation c. corporation d. charitable organization 3. The presumption of transaction brokerage became effective in what year? a. 2003 b. 2005 c. 2006 d. 2008 4. The maximum fine that may be imposed with a notice of noncompliance is: a. $200. b. $500. c. $1,000. d. There is no fine. 5. The FREC has mutual recognition agreements with how many other states? a. 0 b. 9 c. 15 d. 49 6. A broker is required to maintain records for at least: a. 6 months after the transaction closes. b. 5 years from the execution of a listing. c. 8 years from execution of a contract. d. 10 years after the transaction closes. 7. Chapter 83, F.S., is also known as the: a. Brokerage Relationship Disclosure Act. b. Property Disclosure Act. c. Florida Landlord and Tenant Act. d. Property Tax Disclosure Act. 8. When a tenant vacates the rental property, within what period of time must the security deposit be returned if the landlord does not intend to make a claim? a. 30 days b. 25 days c. 21 days d. 15 days 9. A disclosure for lead-based paint must be made on a home built before: a. 1977. b. 1978. c. 1992. d. 1996. 10. The Transaction Broker Notice is no longer required as of what date? a. July 1, 2008 b. July 1, 2005 c. July 1, 2003 d. July 1, 2001 11. A single agent has what type of duties? a. limited fiduciary b. fiduciary c. statutory d. common law 12. A designated sales associate represents a buyer or seller in what capacity? a. authorized dual agency b. no brokerage relationship c. transaction broker d. single agent 13. Who is/are the required signatories on the escrow account? a. all of the brokers b. the office manager c. at least one of the brokers d. a person authorized by FREC 14. Escrow accounts must be rec onciled at least: a. monthly. b. quarterly. c. every 6 months. d. annually. 15. An escrow dispute is required to be reported to FREC in what period of time? a. 30 calendar days b. 30 business days c. 15 calendar days d. 15 business days

Real Estate Core Law31

DISCLOSURE OF INFORMATION ON LEAD-BASED PAINT AND/OR LEAD-BASED PAINT HAZARDS

Lead Warning Statement Every purchaser of any interest in residential real property on which a residential dwelling was built prior to 1978 is notified that such property may present exposure to lead from lead-based paint that may place young children at risk of developing lead poisoning. Lead poisoning in young children may produce permanent neurological damage, including learning disabilities, reduced intelligence quotient, behavioral problems, and impaired memory. Lead poisoning also poses a particular risk to pregnant women. The seller of any interest in residential real property is required to provide the buyer with any information on lead-based paint hazards from risk assessments or inspections in the sellers possession and notify the buyer of any known lead-based paint hazards. A risk assessment or inspection for possible lead-based paint hazards is recommended prior to purchase.

Sellers Disclosure
(a) Presence of lead-based paint and/or lead-based paint hazards (check (i) or (ii) below): ___ (i) Known lead-based paint and/or lead-based paint hazards are present in the housing (explain): ____________________________________________________________________________________ ___ (ii) Seller has no knowledge of lead-based paint and/or lead-based paint hazards in the housing. (b) Records and reports available to the seller (check (i) or (ii) below): ___ (i)  Seller has provided the lessee with all available records and reports pertaining to lead-based paint and/or lead-based paint hazards in the housing (list documents below): ____________________________________________________________________________________ ____________________________________________________________________________________ ___ (ii)  Seller has no reports or records pertaining to lead-based paint and/or lead-based paint hazards in the housing.

Purchasers Acknowledgment (initial)

___ (c) Purchaser has received copies of all information listed above. ___ (d) Purchaser has received the pamphlet Protect Your Family from Lead in Your Home. ___ (e) Purchaser has (check (i) or (ii) below): ___ (i) r eceived a 10-day opportunity (or mutually agreed upon period) to conduct a risk assessment or inspection for the presence of lead-based paint and/or lead-based paint hazards; or ___ (ii)  waived the opportunity to conduct a risk assessment or inspection for the presence of leadbased paint and/or lead-based paint hazards.

Agents Acknowledgment (initial)

___ (f)  Agent has informed the seller of the sellers obligations under 42 U.S.C. 4852d and is aware of his/her responsibility to ensure compliance.

Certification of Accuracy
The following parties have reviewed the information above and certify, to the best of their knowledge, that the information they have provided is true and accurate.

___________________________ ________________ __________________________ ________________

Seller
(Sign and PRINT name)

Date

Seller

(Sign and PRINT name)

Date

___________________________ ________________ __________________________ ________________

Purchaser Agent
(Sign and PRINT name)

Date

Purchaser Agent

(Sign and PRINT name)

Date

___________________________ ________________ __________________________ ________________

(Sign and PRINT name)

Date

(Sign and PRINT name)

Date

32Module 1

DISCLOSURE OF INFORMATION ON LEAD-BASED PAINT AND/OR LEAD-BASED PAINT HAZARDS FOR TARGET HOUSING RENTALS AND LEASES
Lead Warning Statement Housing built before 1978 may contain lead-based paint. Lead from paint, paint chips, and dust can pose health hazards if not managed properly. Lead exposure is especially harmful to young children and pregnant women. Before renting pre-1978 housing, lessors must disclose the presence of known leadbased paint and/or lead-based paint hazards in the dwelling. Lessees must also receive a federallyapproved pamphlet on lead poisoning prevention.

Lessors Disclosure (a) Presence of lead-based paint and/or lead-based paint hazards (check (i) or (ii) below):
___ (i) Known lead-based paint and/or lead-based paint hazards are present in the housing (explain): ____________________________________________________________________________________ ___ (ii) Lessor has no knowledge of lead-based paint and/or lead-based paint hazards in the housing. (b) Records and reports available to the seller (check (i) or (ii) below): ___ (i)  Lessor has provided the lessee with all available records and reports pertaining to lead-based paint and/or lead-based paint hazards in the housing (list documents below): ____________________________________________________________________________________ ____________________________________________________________________________________ ___ (ii)  Lessor has no reports or records pertaining to lead-based paint and/or lead-based paint hazards in the housing.

Lessees Acknowledgment (initial) ___ (c) Lessee has received copies of all information listed above.
___ (d) Lessee has received the pamphlet Protect Your Family from Lead in Your Home.

Agents Acknowledgment (initial)

___ (f)  Agent has informed the lessor of the lessees obligations under 42 U.S.C. 4852d and is aware of his/her responsibility to ensure compliance.

Certification of Accuracy The following parties have reviewed the information above and certify, to the best of their knowledge, that the information they have provided is true and accurate.
___________________________ ________________ __________________________ ________________
Lessor Date Date Date Lessor Date Date

___________________________ ________________ __________________________ ________________

Lessee Agent Lessee Agent

___________________________ ________________ __________________________ ________________

Date

Real Estate Core Law33

CONFIRMATION OF RECEIPT OF LEAD PAMPHLET

I have received a copy of the pamphlet Protect Your Family from Lead in Your Home, which informs me of the potential risk of the lead hazard exposure from renovation activity to be performed in my dwelling unit. I received this pamphlet before the work began. ________________________________________________________________
Printed name of recipient

______________________
Date

________________________________________________________________
Signature of recipient

SELF-CERTIFICATION OPTION (for tenant-occupied dwellings only) For tenant-occupied dwellings, if the lead pamphlet was delivered but a tenant signature was not obtainable, you may check the appropriate item below.
_____  Refusal to signI certify that I have made a good faith effort to deliver the pamphlet Protect Your Family from Lead in Your Home to the rental dwelling unit listed below at the date and time indicated and that the occupant refused to sign the confirmation of receipt. I further certify that I have left a copy of the pamphlet at the unit with the occupant. _____  Unavailable for signatureI certify that I have made a good faith effort to deliver the pamphlet Protect Your Family from Lead in Your Home to the rental dwelling unit listed below and that the occupant was unavailable to sign the confirmation of receipt. I further certify that I have left a copy of the pamphlet at the unit by sliding it under the door. ____________________________________________________________
Printed name of person certifying lead pamphlet delivery

__________________________
Attempted delivery date and time

____________________________________________________________
Signature of person certifying lead pamphlet delivery

____________________________________________________________ ____________________________________________________________ ____________________________________________________________

Unit Address

Note Regarding Mailing Option: As an alternative to delivery in person, you may mail the lead pamphlet to the owner and/or tenant. Pamphlet must be mailed at least seven days before renovation begins. (Document this action with a certificate of mailing from the post office.)

34Module 1

DISCLOSURE SUMMARY FOR

______________________________________________________________________ [NAME OF COMMUNITY] 1.  As a purchaser of property in this community, you WILL be obligated to be a member of a homeowners association. 2.  There have been or will be recorded restrictive covenants governing the use and occupancy of properties in this community. 3. You WILL be obligated to pay assessments to the association. Assessments may be subject to periodic change. If applicable, the current amount is $________ per _____. You will also be obligated to pay any special assessments imposed by the Association. Such special assessments may be subject to change. If applicable, the current amount is $______ per ______. 4. You MAY be obligated to pay special assessments to the respective municipality, county, or special district. All assessments are subject to periodic change. 5.  Your failure to pay special assessments or assessments levied by a mandatory homeowners association could result in a lien on your property. 6. There MAY be an obligation to pay rent or land use fees for recreational or other commonly used facilities as an obligation of membership in the homeowners association. If applicable, the current amount is $__________ per ____________. 7.  The developer may have the right to amend the restrictive covenants without the approval of the association membership or, the approval of the parcel owners. 8.  The statements contained in this disclosure form are only summary in nature, and, as a prospective purchaser, you should refer to the covenants and the association governing documents before purchasing property. 9.  These documents are either matters of public record and can be obtained from the record office in the county where the property is located, or are not recorded and can be obtained from the developer. _________________________________________________________ ___________________________ PURCHASER DATE _________________________________________________________ ___________________________ PURCHASER DATE

Real Estate Core Law35

SINGLE AGENT NOTICE

FLORIDA LAW REQUIRES THAT REAL ESTATE LICENSEES OPERATING AS SINGLE AGENTS DISCLOSE TO BUYERS AND SELLERS THEIR DUTIES.
As a single agent, _______________________________________ (insert name of Real Estate Entity and its Associates) owe to you the following duties: 1. Dealing honestly and fairly; 2. Loyalty; 3. Confidentiality; 4. Obedience; 5. Full disclosure; 6. Accounting for all funds; 7.  Skill, care, and diligence in the transaction; 8.  Presenting all offers and counteroffers in a timely manner, unless a party has previously directed the licensee otherwise in writing; and 9.  Disclosing all known facts that materially affect the value of residential real property and are not readily observable. ___________________________________________ _________________________________________

Signature Date ___________________________________________ ________________________________________ Signature Date

36Module 1

CONSENT TO TRANSITION TO TRANSACTION BROKER

FLORIDA LAW ALLOWS REAL ESTATE LICENSEES WHO REPRESENT A BUYER OR SELLER AS A SINGLE AGENT TO CHANGE FROM A SINGLE AGENT RELATIONSHIP TO A TRANSACTION BROKERAGE RELATIONSHIP IN ORDER FOR THE LICENSEE TO ASSIST BOTH PARTIES IN A REAL ESTATE TRANSACTION BY PROVIDING A LIMITED FORM OF REPRESENTATION TO BOTH THE BUYER AND THE SELLER. THIS CHANGE IN RELATIONSHIP CANNOT OCCUR WITHOUT YOUR PRIOR WRITTEN CONSENT. As a transaction broker, ____________________________ (insert name of Real Estate Firm and its Associates), provides you a limited form of representation that includes the following duties: 1. Dealing honestly and fairly; 2. Accounting for all funds; 3. Using skill, care, and diligence in the transaction; 4.  Disclosing all known facts that materially affect the value of residential real property and are not readily observable to the buyer; 5.  Presenting all offers and counteroffers in a timely manner, unless a party has previously directed the licensee otherwise to the buyer; 6.  Limited confidentiality, unless waived in writing by a party. This limited confidentiality will prevent disclosure that the seller will accept a price less than the asking or listed price, that the buyer will pay a price greater than the price submitted in a written offer, of the motivation of any party for selling or buying property, that a seller or buyer agree to financing terms other than those offered, or of any other information requested by a party to remain confidential; and 7.  Any additional duties that are mutually agreed to with a party. Limited representation means that a buyer or seller is not responsible for the acts of the licensee. Additionally, parties are giving up their rights to the undivided loyalty of the licensee. This aspect of limited representation allows a licensee to facilitate a real estate transaction by assisting both the buyer and 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. _____________________ I agree that my agent may assume the role and duties of a transaction broker.

FLORIDA LAW REQUIRES THAT REAL ESTATE LICENSEES WHO HAVE NO BROKERAGE RELATIONSHIP WITH A POTENTIAL SELLER OR BUYER DISCLOSE THEIR DUTIES TO SELLERS AND BUYERS. As a real estate licensee who has no brokerage relationship with you, ____________________________ (insert name of Real Estate Firm and its Associates) owe to you the following duties: 1.  Dealing honestly and fairly; 2.  Disclosing all known facts that materially affect the value of residential real property and which are not readily observable to the buyer; and 3.  Accounting for all funds entrusted to the licensee. ___________________________________________ ___________________________________________ Signature Date

NO BROKERAGE RELATIONSHIP NOTICE

MODULE 2

New Energy Incentives: Gain a Competitive Edge

by Kenneth Harney

Learning Objectives
Upon completion of the module, the learner shall be able to: 1. Discuss the types of renewable energy systems for which there are federal energy tax credits. 2. Name the federal legislation which most recently extended and enhanced tax credits for homeowners and non-residential property owners. 3. Name the IRS form used for federal energy tax credits. 4. List the 5 key qualifiers for a solar water heating system tax credit. 5. Discuss the advantages of retrofitting homes with solar photovoltaic systems. 6. Explain the key limitation for wind turbines to qualify for a tax credit. 7. Understand what kinds of improvements can combine federal, state, and local tax credits and incentives. 8. Explain the basic principle of geothermal or geo-exchange heat pump systems. 9. Discuss the role ENERGY STAR plays in receiving a federal tax credit. 10. Define what the term U-Factor represents for windows and glass doors. 11. Explain the Solar Heat Gain Coefficient (SHGC). 12. Describe the U-factor and SHGC minimal standards for windows qualifying for a federal energy tax credit. 13. Explain which tax credit programs allow the inclusion of installation costs and which do not. 14. Discuss what kinds of insulation qualify for tax credits. 15. Explain the 3 functional areas of federal tax benefits in commercial buildings. 16. Discuss the building standard used to judge all renovated commercial buildings to qualify for a federal tax incentive for energy efficient improvements. 17. List the kinds of renewable energy improvements for which owners of investment or business properties may qualify. 18. Discuss the kinds of property tax exemptions available in Florida for energy efficiency improvements. 19. Explain the Florida state rebate program for certain solar installations. 20. List the specific kinds of solar installations that qualify for the state rebate program. 21. Discuss where property owners may be able to obtain low cost financing for energy-efficient appliances and systems within the State of Florida.

37

38Module 2

INTRODUCTION
Energy efficiency and renewable energy are among the most important topics for home, commercial, and investment property owners today. Yet many real estate professionals are not familiar with government financial incentives now available at the federal, state, and local levels for property owners who seek to upgrade their existing properties or buy new, greencertified houses. Professionals who make the effort to learn about and master the eligibility requirements to qualify for these incentives will gain a competitive edge. They will also be in a position to use tax credits and other benefits personally, and to save on income taxes and energy consumption costs.

ufacturers should be able to certify for homeowners whether the product or system they are considering buying meets or exceeds federal requirements to qualify for a credit. Homeowners should retain all invoices for materials and labor connected with their tax-credit eligible improvements, as well as all manufacturers certifications or other documentation. The IRS does not require that documentation accompany claims for the credits, however, in the event of an audit, the IRS may ask to see documentation. Taxpayers can claim their credits using IRS Form 5695, which can be downloaded at the IRS website. www.irs.gov

FEDERAL TAX CREDITS FOR HOMEOWNERS

During 2008 and 2009, the federal government greatly expanded its efforts to promote energy efficiency and conservation in dwellings and commercial real estate. In early 2009, Congress passed the American Recovery and Reinvestment Act. That legislation, popularly known as the Economic Stimulus Bill, extended and enhanced a number of federal tax incentives for homeowners and investment and commercial property owners. Some of the tax credits for energy efficiency provided in the legislation were effective through 2010, and were subsequently modified and extended by Congress through December 2011. The most generous credits, for investments in alternative energy systems for houses, already extend through 2016 and are likely to play key roles in homeowners housing choices in the coming years. Energy guzzling houses, just like clunker cars, will command lower prices and less attention from buyers than those that minimize energy expenses. Federal energy tax credits for homeowners fall into 2 broad categories: Credits for renewable energy systems such as solar panels, geothermal heat pumps, solar water heaters, small wind energy generators, and fuel cells. The credits cover up to 30% of the cost of the system, plus labor and installation expenses, with no set maximum on the size of the allowable credit. Credits for energy efficiency improvements to existing houses of up to 10% of the products cost, to a maximum of $500. The $500 limit applies to the aggregate (total) of expenditures made for energy efficiency improvements during the tax year. The IRS tax credit rules require that each product or installation for which a credit is claimed must meet minimum conservation or efficiency standards, as detailed below. Some of the standards and ratings may sound highly technical, but most retailers and man-

Credits for Renewable Energy Systems

Federal credits for renewable energy installations are more generous and authorized for longer than those available for energy efficiency improvements. This reflects Congress view that over the long term, green homes and buildings should be encouraged to use alternative sources of energy production to supplement, or replace, traditional carbon fuel-based sources. Solar energy systemssolar water heaters. Current rules allow tax credits, with no maximum dollar limit, up to 30% of the total installed cost of solar water heating systems. There are several key requirements that these systems must meet: At least half of the energy generated by the hot water system must come from the sun. Homeowners may only make claims based on the solar water system equipment itself, not on costs associated with the entire water heating system of the house. The system must be certified by the Solar Rating and Certification Corp (www.solar-rating.org). The entire system must be placed in service (i.e., ready and available for use in the house) before December 31, 2016. Solar heaters serving pools or hot tubs are not eligible for the credit. Credit amounts that go unused by the homeowner in a single tax year may be carried over to offset tax liabilities in future years. Solar-energy photovoltaic (solar electric) systems. Photovoltaic installations on existing homes are among the fastest-growing uses of federal tax credits. Homeowners can retrofit homes by incorporating integrated arrays of solar cell roof tiles, and sometimes can generate enough electricity to power much of the homes needs.

New Energy Incentives: Gain a Competitive Edge 39

Solar photovoltaic systems are eligible for credits up to 30% of the total cost, including labor and installation, without a dollar limit. The system must provide electricity for the home, and meet all applicable electrical code and fire requirements. It must be placed into service no later than Dec. 31, 2016. Carryovers of unused credits to future tax years are permitted. Wind turbines for residential power. Smallcapacity wind turbines can qualify for credits up to 30% of the total installed costs, including labor, with no set dollar maximum. The key limitation is that the turbine must carry a nameplate capacity of no more than 100 kilowatts. The credit can be carried forward to future years. Residential wind turbines typically require local approvals on noise levels, height, and possible environmental side effects, and in some dense urban areas may not be permitted or feasible under any circumstances. Some resort areas restrict turbines when the siting is judged to unduly impact migrating bird populations. Some states supplement federal credits with incentives of their own. (Florida programs are discussed later in this module.) To qualify for federal credits, turbines must be placed in service by December 31, 2016. Geothermal heat pumps. Qualified geothermal or geo-exchange heat pump systems use the ground or ground water as a thermal energy source to heat a home or as a thermal energy sink to cool a home. Tax credits are available for up to 30% of the cost of a geothermal system, including labor and installation, with no dollar limit on the cost of the equipment or the size of the credit. To be eligible, the system must meet ENERGY STAR criteria (www.energystar. gov), as well as specific efficiency ratings for closed loop, open loop, and direct expansion heat pumps. The equipment must be placed in service no later than December 31, 2016. Credits may be carried forward to future tax years. Note: ENERGY STAR is a joint federal program run by the Environmental Protection Agency (EPA) and the U.S. Department of Energy. It is designed to promote greater use of energy-efficient products and practices for the residential and business sectors. Its website is a treasure trove of information on everything from individual products to federal and state tax credits and rebates. Its ratings and certifications are the key qualifying factors for some tax credits. Residential fuel cells and microturbines. Among the most cutting-edge renewable energy technologies, residential fuel cells and microturbines are integrated systems comprised of a fuel cell stack assembly and components that convert fuel into electricity using electrochemical means. Though they take a variety of forms, after producing electricity and heat to

provide energy for other needs within a home these systems recover and reuse the heat of their own combustion process. Some even meter back electricity to local grid systems. Tax credits are available for up to 30% of the total costs, including labor and installation, up to a limit of $500 per 0.5 kilowatt of capacity. To be eligible, systems must have a minimum capacity of 0.5 kilowatts, and a minimum efficiency of 30%. Installations must be in place by December 31, 2016. Carryovers of unused credits are permitted.

Energy Efficiency Improvements

Exterior windows and doors, including sliding glass doors and skylights. Tax credits up to 30% of the cost are available for qualifying improvements purchased and installed after June 1, 2009 and up to 10% of the cost if installed during 2011. Windows installed during 2011 are limited to a $200 maximum credit. They must conform to 2 key energy-efficiency standards, and must be certified by the National Fenestration Rating Council (NFRC). Homeowners and real estate professionals do not need to become energy experts to figure this all out. The ENERGY STAR website states that the NFRC is the only federally recognized organization for determining the energy performance of windows, doors, and skylights. Look for the NFRC label which lists the manufacturer, describes the product, provides a source for additional information, and includes ratings for one or more energy performance characteristics. Qualifying high-efficiency doors, windows, and skylights must have U-factors and Solar Heat Gain Coefficients (SHGCs) of 0.30 or under. What do these 2 ratings mean and why should homeowners care? Here is how NFRC defines the ratings: U-Factor is the measurement for how well a window or glass door prevents heat from escaping from the interior of the house. U-Factor ratings generally range between 0.20 and 1.20. The lower the U-value number, the greater a windows or glass doors resistance to heat flow to the exterior, and the more effective it is in insulating. To qualify for the federal tax credit, U-factors must be at the far low end of the scale (i.e., highly efficient). Solar Heat Gain Coefficient (SHGC) measures how well a window, glass door, or skylight blocks heat caused by sunlight. It is expressed by a number value between 0 and 1. The lower a windows solar

40Module 2

heat gain coefficient, the less solar heat it allows into the interior of the house. Again, the federal standard of 0.30 or below requires a highly efficient product to qualify. Roofingasphalt and metal. Homeowners are eligible for credits of up to 10% of the cost of the materials, but not installation costs, to a maximum of $500. The materials must meet the standards of the 2009 International Energy Conservation Code (IECC), and be rated for a useful life of at least 5 years or come with a 2-year warranty from the manufacturer. Insulation. The maximum credit for insulation is 10% of the material costs, up to $500. Labor and installation expenses are not eligible. To qualify for the credit, the insulation material must meet efficiency standards set by the International Energy Conservation Code, and be expected to have a 5-year useful life, or come with a 2-year warranty from the manufacturer. Retail sellers of insulation should be able to provide documentation on whether a specific insulation product qualifies for the credit. Note: The main purpose of the insulation must be to retain or keep out heat or cold. Products or installations that offer insulation as a side-benefit are not eligible. For example, exterior siding for a house that also provides insulation does not qualify, whereas a vapor barrier does.

and other buildings except low-rise residential properties. See www.ashrae.org for additional information. Federal tax deductions of up to $1.80 per square foot are available to building owners who install energyefficient equipment and systems that save at least 50% of projected annual energy costs across all 3 building components. Buildings that save a percentage of projected annual energy costs for 1 of the 3 componentsbuilding envelope (10% energy savings), lighting (20%), and heating and cooling (20%)may be eligible for a smaller deduction of $0.60 per square foot. Detailed guidance on claiming deductions, including certifications of improvements, can be found in IRS Revenue Bulletin 2006-52 and IRS Notice 2008-40 available on the IRS website. www.irs.gov/irb/

Tax Credits for Commercial Real Estate Renewable Energy Improvements

Like homeowners, investment or business property owners can obtain tax credits of up to 30% of the installed cost of eligible solar and wind energy systems, without dollar limits. Equipment for solar tax credits include those that: generate electricity to heat or cool the property or provide hot water provide interior illumination for the building All equipment must be in place by December 31, 2016. Commercial property owners also are eligible for 30% credits on wind turbines that have a nameplate capacity of no more than 100 kilowatts, and that are installed and functional by December 31, 2016.

TAX INCENTIVES FOR COMMERCIAL AND INVESTMENT REAL ESTATE

Owners of commercial real estate also have access to significant federal tax incentives for making energyefficiency improvements. The incentives are available for existing buildings that are renovated or retrofitted, and newly constructed buildings. Though the tax benefits are intended primarily for real estate owners, commercial property tenants who pay for energy improvements may be eligible as well. The primary building components eligible for federal tax benefits in commercial buildings are: heating, cooling, and water heating systems interior lighting equipment building envelope improvements (e.g. energy efficient doors and windows, insulation in the roof and exterior walls) To qualify, the renovated property must meet the ASHRAE 90.1-2001 building standard, and be placed in service no later than December 31, 2016. ASHRAE refers to the American Society of Heating, Refrigeration and Air-conditioning Engineers; the ASHRAE 90.1 standard is that groups detailed technical requirements for energy efficiency in commercial

Fuel Cells and Microturbines

For fuel cells, tax credits are available for 30% of the installed cost, up to $3,000 per kilowatt of electricity that can be produced. To be eligible, the fuel cells must have an efficiency rating of at least 30% and a capacity of at least 0.5 kilowatt. For microturbines, tax credits are available for up to 10% of the installed cost, up to $200 per kilowatt. Systems must have at minimum a 26% efficiency rating and a capacity of 2000 kilowatts or less, and be placed in service by December 31, 2016.

New Energy Incentives: Gain a Competitive Edge 41

FLORIDA & LOCAL INCENTIVES FOR ENERGY EFFICIENCY

Homeowners and commercial property owners located in Florida can take advantage of a variety of state and local programs that provide financial incentives for energy efficiency in real estate. Often they can be used to supplement federal tax credits or tax deduction incentives. Note, however, that in some cases these programs are subject to appropriations and authorizations by the state legislature, and may be oversubscribed or unavailable at any given time.

in recent years, causing new applicants to be placed on waiting lists. The program also depends upon a reauthorization by the legislature, so check with the Florida Energy and Climate Commission to determine its current status. www.myfloridaclimate.com

Florida Utility Rebates and Loan Programs

Florida has an unusually large number of localized rebate and loan programs for energy efficiency offered by local power companies. Among the most notable: Gainesville Regional Utilities offers low interest energy efficiency loan program, which provides 3% fixed rate financing for approved installations of high efficiency central air conditioners, solar electric photovoltaic systems, and ENERGY STAR refrigerators. The City of Tallahassee Utilities offers lowinterest rate loans to help homeowners finance 28 different energy-conserving installations, including photovoltaic systems (up to $20,000) and solar water heating systems (up to $10,000). Some of these also qualify for federal tax credits. Orlando Utilities Commission Residential Solar Loan Program. Low interest rate loans are available for solar photovoltaic systems and solar water heaters. Maximum loan amount is $7,500 for solar hot water and $20,000 for a photovoltaic system. Loans can be repaid over time as fixed installments on customers monthly utility bills. For solar installations, see the OUCs Solar Information packet. More than 20 utility companies around the state, including Florida Public Utilities, Gulf Power, Florida Power and Light, Tampa Electric, and Fort Pierce Utilities Authority, offer homeowners and commercial customers rebates for installing approved energy efficient equipment. Information is available directly from the utilities.

Property Tax Exemptions

If Florida home or commercial property owners install what the state government defines as a renewable energy source device, the Florida Department of Revenue will exempt that equipment from property taxes up to the combined original cost of the equipment plus the installation cost. To qualify, renewable energy devices must have been installed after January 1, 2009 (Chapter 196.175, F.S.). There is currently no statutory expiration date for the property tax exemption program. Note: the exemption does not include any costs of replacing, removing, or improving existing parts of the structure in the course of installing the new equipment. Under the program, a renewable energy source device means any of the following equipment which:
collects, transmits, stores or uses solar energy, wind energy, or energy derived from geothermal deposits; solar energy collectors; storage tanks and other storage systems, excluding swimming pools used as storage tanks; rock beds; thermostats and other control devices; heat exchange devices; pumps and fans; roof ponds; freestanding thermal containers; pipes, ducts, refrigerant handling systems, and other equipment used to interconnect such systems; windmills, wind-driven generators; power conditioning and storage devices that use wind energy to generate electricity or mechanical forms of energy; pipes and other equipment used to transmit hot geothermal water to a dwelling or structure from a geothermal deposit. [Chapter 196.012 (14), F.S.]

Resources
The Internal Revenue Service www.irs.gov www.irs.gov/irb/ ENERGY STAR at energystar.gov American Society of Heating, Refrigeration and Air-Conditioning Engineers www.ashrae.org 2009 International Energy Conservation Code changes www.ckcog.com/Documents/IECC%20Changes. pdf

State Rebate Program for Solar Installations

Florida also has a program for home and commercial property owners providing limited rebates on solar photovoltaic systems, solar pool heating equipment, and solar water heating installations. Maximum rebates for solar water heaters are $500 and for solar pool heaters the rebate ceiling is $100. Note however, that this has been such a popular program that it has outrun its legislative appropriations

42Module 2

National Fenestration Rating Council (NFRC). nfrc.org Florida Energy and Climate Commission www.myfloridaclimate.com Gainesville Utilities: 800-818-3436 www.gru.com City of Tallahassee Utilities: 850-891-4968 Orlando Utilities Commission: 407-423-9100 Ext. 2086 or www.ouc.com

New Energy Incentives: Gain a Competitive Edge 43

M odul e 2 P r o g r e s s T e s t
You are not required to answer the progress test questions to complete the 14-hour course. They are intended to help prepare you for the Final Exam. Choose the best response to each question. The answers are found in the back of the book.
1. The limit for federal tax credits for energy efficiency improvements of existing homes is: a. no limit. b. 50% of the cost of the item. c. up to 30% of the product cost with a cap of $500. d. $200 per improvement. 2. The renewable energy resource federal tax credit program expires in: a. 2010. b. 2015. c. 2016. d. 2020. 3. Federal tax credits require that the energy generated by solar water heaters: a. must be 24/7. b. must be at least half from the sun. c. be tied into the electricity grid. d. be used only for pools and hot tubs. 4. Federal tax credits for doors and windows require: a. an expenditure of at least $1,500 to qualify. b. triple insulated windows. c. at least 2 windows be installed. d. both low U-factors and low solar heat gain coefficients. 5. Tax credits are available for up to what percentage of the cost of a qualified geothermal system including labor and installation? a. 30%. b. 35%. c. 40%. d. 50%.

44Module 2

MODULE 3

Credit Products and Offerings: The Role of the Federal Government

Learning Objectives
Upon completion of the module, the learner shall be able to: 1. Identify the first and primary federal statute that protects consumers on credit. 2. Name the federal agency that oversees the Truth in Lending Act. 3. Explain Reg Z. 4. Identify the 6 key items on a Truth in Lending disclosure form. 5. Explain the difference between the APR and the interest rate on a note.

by Kenneth Harney

6. List some of the key items in prepaid finance charges listed on a Truth in Lending disclosure form. 7. Explain the difference between closed end and open-ended credit. 8. Describe types of financing that are exempt from making Truth in Lending disclosures. 9. Discuss the rescission rights under the Truth in Lending lawwhich transactions have them, which do not. 10. Explain the most important change in the Truth in Lending Act and changes to Reg Z regarding the timing on Truth in Lending disclosure forms. 11. Discuss when the rights of rescission and waiting periods can be waived. 12. Explain how the timing of a real estate settlement can be affected by the new disclosure requirements the 3 day7 day rule. 13. Discuss the triggering terms included in the Truth in Lending Act that affect the wording of advertising for closed end credit offers. 14. Explain the liability for violating Truth in Lending advertising rules. 15. Discuss the types of firms covered by the Fair Credit Reporting Act. 16. List the 6 key consumer rights in the Fair Credit Reporting Act. 17. Explain the identity theft provisions in the Fair and Accurate Credit Transactions Act. 18. Discuss options for correcting inaccurate credit reports. 19. Explain the rules that apply to landlords under the Fair Credit Reporting Act. 20. List the 8 key areas of discrimination covered by the Equal Credit Opportunity Act. 21. Explain consumers rights if their application for credit is denied. 22. List the requirements of landlords under the Equal Credit Opportunity Act. 23. Explain the importance of the Credit Repair Organizations Act for creditors. 24. Identify what a Credit Repair Organization must provide consumers before they contract for any services.

45

46Module 3

INTRODUCTION
There is no other financial product that so personally affects all of us as credit. Can we qualify for it? At what price and on what terms? Can we use it responsibly? Can we repay it on time? Credit is the lifeblood of the U.S. economy. Mortgages provide the pathway to buying a home, one of the traditional keys to accumulation of household net worth. Credit cards are in virtually every adults and many teenagers wallets. The availability of credit determines whether we can buy or lease a car, finance our kids college educations, buy a better computer or a flatscreen TV. Credit files and credit scores, maintained by private companies, not the government, may affect our ability to rent an apartment, get a job, or even qualify for an insurance policy. They frequently determine not only how much we can borrow, but the interest rate and fees we pay. Knowledge of the basic federal laws regulating credit is essential, especially for real estate and mortgage professionals whose clients look to them for advice. Over the past 20 years, the federal government has been tasked with overseeing creditincluding making sure it is marketed fairly, without deception or bias, and without harming consumers. State governments have enacted laws and regulations as well, but the statutory powers given to federal agencies by Congress cover every person, in every state.

The TILA disclosure form breaks down credit transactions into key component features designed to give applicants a better grasp of what theyre signing up for, and allows them to directly compare quotes from competing lenders: Annual Percentage Rate Prepaid Finance Charges Finance Charge Amount Financed Total of Payments Payment Schedule The Annual Percentage Rate. Commonly known as the APR, it is the cost of the loan in percentage terms taking into account various loan charges of which interest is only one such charge. It is the note rate plus other charges rolled in, expressed as an annual percentage rate. It is the effective interest rate being charged for the transaction. The APR should never be confused with the note rate. Other charges that are used in calculation of the Annual Percentage Rate are: Private Mortgage Insurance (PMI), Mortgage Insurance Premium (MIP), and prepaid finance charges (loan discount, origination fees, prepaid interest, and other credit costs). The APR is calculated by spreading these charges over the life of the loan, which results in a rate higher than the interest rate shown on the mortgage or deed of trust note. If interest were the only finance charge in the transaction, then the interest rate and the APR would be identical. Prepaid finance charges. These are certain charges made in connection with the loan which must be paid by the borrower upon the close of the loan. Examples include the loan origination fee, points or loan discounts, PMI, FHA MIP, and tax service fees. Some loan charges are specifically excluded from the prepaid finance charge such as appraisal and credit report fees. Prepaid finance charges are totaled and then subtracted from the loan amount (the face amount of the deed of trust or mortgage note.) The net figure is the amount financed, as explained below. Finance charge. This is the amount of interest, prepaid finance charges, and certain insurance premiums (if any) that the borrower will be expected to pay over the life of the loan. Amount financed. The amount financed is the loan amount applied for, less the prepaid finance charges. For example, if the borrowers note is for $200,000 and the prepaid finance charges total $10,000, the amount financed would be $190,000. The amount financed is the number on which the APR is based. Total of payments. This figure represents the sum

KEY FEDERAL CREDIT STATUTES Consumer Credit Protection Act

Congress enacted the first consumer-oriented law regarding credit in 1968, appropriately titled the Consumer Credit Protection Act. The act set up a statutory framework of uniform disclosures, limits on advertising, and tools to facilitate comparisons of competing credit offers. It is the granddaddy of all subsequent Congressional legislation in the field.

Truth in Lending Act (TILA)

The Truth in Lending Act is Title I of the original Consumer Credit Protection Act. It is best known for its mandatory, uniform disclosures of the key terms and costs associated with credit transactions, including all mortgages, home equity credit lines, and credit cards. The disclosure must be provided to all loan applicants by a creditor or loan officer within 3 business days of submitting an application. The Federal Reserve Board has overseen the Truth in Lending Act since its inception, but that responsibility shifts to the new Consumer Financial Protection Bureau as of July 21, 2011. The Act continues to be referred to commonly in the lending industry as Reg Z.

Credit Products and Offerings: The Role of the Federal Government 47

of all payments made toward principal, interest, and mortgage insurance in the case of a home loan application. Payment schedule. The dollar figures in the payment schedule represent principal, interest, plus PMI. The figures will not reflect taxes and insurance escrows or any temporary buydown payments contributed by the seller.

Mortgage Disclosures Improvement Act (MDIA) changes to Reg Z

Effective July 30, 2009, all mortgage applicants including those financing second homesmust receive their up-front TILA disclosure statement no later than three business days following the lenders receipt of the application. See the Federal Truth In Lending Disclosure Statement on the next page. Remember the 3 day7 day rule: If at any time before the closing, the APR changes by more than 0.125% (one eighth of a percent), the creditor must re-disclose (i.e., must issue an amended TILA disclosure and wait an additional 3 business days before the closing). So-called quickie closings are prohibited by the MDIA/TILA provisions. No closing of a home loan may occur within 7 days after the consumers receipt of the early TILA disclosure. Loan applicants may waive the 3 day and 7 day waiting periods if they have a bona fide personal emergency, but only after receiving an accurate TILA disclosure. The 2009 MDIA changes to TILA are important not only to lenders and settlement agencies, but for real estate professionals as well since the timing of closings is now dependent upon the Truth in Lending Act, not simply the preferences of the homebuyers, sellers, or the licensee. Failure to follow the rules can open loan transactions to future legal challenge.

TYPES OF CREDIT TRANSACTIONS COVERED BY TILA DISCLOSURES

The Truth in Lending Act covers most types of personal loans made by organizations or persons who extend credit as a regular part of their business. Such loans may be either closed end, (such as mortgages or auto loans with a stated date by which all the payments are due) or open-ended credit, (such as credit cards or home equity lines of credit [HELOCs]). Commercial, business, and agricultural credit transactions are not subject to TILA. Who must provide disclosures under Reg Z? Any person or organization is a lender under TILA if he, she, or it has made more than 5 loans secured by residential property during the prior 12 months, or more than 5 loans during the current calendar year. Note: Seller financing in connection with real estate generally is exempt from Reg Z unless the seller of the property regularly engages in the business of making loans. For example, if Brad and Betty Reynolds offer their house for sale with a carryback or seller takeback note, they would not be required to provide TILA disclosures. However, if they were in the business of selling houses with takeback financing on a regular basis, they would.

2010 Dodd-Frank Amendments to TILA

Under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, additional changes were made to TILA affecting home mortgages: (1) T  ILA now requires mortgage lenders and servicers to provide monthly statements to borrowers during each billing cycle, including the principal balance due, the current mortgage interest rate on the loan, any payment reset information pertinent to the loan, any prepayment penalties or late fees associated with the loan, plus telephone and email contact information for the servicer.

Rescission Rights Under TILA

For certain loan transactions involving principal residences as collateral, Reg Z gives borrowers a 3-day cooling-off or rescission period within which to cancel the transaction rights. See Table 3.1.

Table: 3.1 Three Day Right of Rescission Required Under TILA

Yes 1. Helocs (Home Equity Lines of Credit) 2.  Refinancing of principal residence with a new lender No 1. Principal home purchase 2.  Refinancing of principal residence with the original lender 3.  Purchase and financing of a second home or vacation property

48Module 3

Credit Products and Offerings: The Role of the Federal Government 49

(2) F  or high cost (subprime) mortgages, TILA now prohibits balloon payments of two times the regular payment or more; prepayment penalties, plus late fees that exceed 4 percent of the payment that is past due.

If an advertisement for closed end credit uses a triggering term, it must also include the following: the amount or percentage of the down payment the terms of repayment the APR More generalized advertising statements, such as easy monthly payments or low down payment terms available, are not triggering terms and do not require additional disclosures. Other mandates related to advertising and TILA compliance include: Clear and conspicuous disclosures. All advertising disclosures required by the Truth in Lending Act must be made clearly and conspicuously. In other words, they cannot be hidden away in small unreadable type and they must be reasonably understandable. Actually available credit. Only credit or lease terms that are actually available to the consumer may be advertised. Bait and switch credit or lease promotions are prohibited. No advertisement may state that a specific installment payment or a specific low down payment can be arranged unless the creditor is prepared to make such a loan on those terms. Advertising finance rates. If an advertisement shows the finance charge as a rate, that rate must also be stated as an APR, even if it is the same as the simple interest rate. For real estate financings especially, it is important to advertise the APR accurately (i.e., including any points and mortgage insurance premiums that may make the APR higher than the loans base interest rate). Liability for violations. Advertisers who fail to comply with TILAs rules can be subject to significant civil penalties and even criminal prosecution in extreme cases. Individual consumers may sue for damages and punitive awards and attorneys fees. Marketers offering financing terms are always well advised to double check that their ads comply with the triggering terms of the law and fully disclose everything that TILA mandates.

Consumer Financial Protection Bureau (CFPB)

Title X of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 created a new federal regulatory oversight agency with vast legal powers in the consumer credit, banking and mortgage arenas. The bureau, which is designed to function as an independent entity within the Federal Reserve, with a director appointed by the President subject to Senate confirmation, has an official start-up date of July 21, 2011. After that date, regulatory oversight of the following key credit statutes shifts to the new bureau: The Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Fair Debt Collection Practices Act and the Truth in Lending Act.

General Requirements for Advertising Products Covered by TILA

The Truth in Lending Act covers not just lenders. It reaches out to anyone who advertises specific credit terms as part of an offering of real estate or other property for sale. For example, a real estate broker or home builder who advertises certain specific financing terms in connection with a listing for sale may be covered. The APR and the amount or percentage of the required down payment must be included if an advertisement for closed end credit mentions: specific interest rate payment amounts length of the loan finance charge For closed end credit such as most mortgages, the key triggering termsrequiring disclosure of the APR and other key loan featuresinclude the following: The amount of the down payment, expressed either as a dollar amount or percentage. For example, only 10% down, or $5,000 down. The amount of any payment, either a dollar amount or percentage. For example, monthly payments of $565. The number of payments or the period of repayment. For example, 48 months to pay, or 30 year mortgage.

THE FAIR CREDIT REPORTING ACT (FCRA)

Responding to the rapid growth of credit reporting agencies and the commercial use of credit reports, Congress added the FCRA as Title IV of the Consumer Credit Protection Act in 1970. The key goal was to make credit reporting and consumer credit files as accurate and fair as possible. The law covers not only the national credit repositories (Equifax, Experian, and TransUnion) but also extends to all local

50Module 3

and regional credit reporting agencies (known in the industry as resellers), collections and investigations agencies, and specialized companies that sell information about consumers medical and rental histories. Like the Truth in Lending Act, the FCRA reaches out to cover many other activities as well. Direct mail or online advertising that uses credit file information, prescreened offers of products or services that are based on credit reports or score, as well as employers, insurance companies, and landlords who make decisions affecting consumers based on credit data are subject to FCRA regulations.

negative information cannot be more than 7 years old, except for bankruptcies, which can remain on file for up to 10 years. Negative information notices. When a creditor submits negative account information to one of the national credit repositories, it must provide consumers with a one-time notice of that fact. Creditors planning to submit delinquency or other negative information may inform consumers in advance about their intent. These notices can be included as part of a regular billing statement, or sent separately. If a consumer is denied a loan, an insurance policy, or employment, the consumer must be informed of his or her right to a free credit report from the agency providing the negative information. Creditors, mortgage loan officers, and others must inform consumers when credit file information has materially affected the price of the credit they are offered, for example, raising the interest rate or fees. Furnishing inaccurate information to credit bureaus. Creditors and others are prohibited not only from submitting information on consumers to repositories that they know to be inaccurate, but also any information the creditor or furnisher knows or has reasonable cause to believe is inaccurate.

Key Provisions
Under the FCRA, all consumers have the right to: 1. See what is in their credit file by submitting a written request to any of the national credit repositories. 2. Get a free credit report from each repository every 12 months (www.annualcreditreport.com) or in writing or when a consumer has been denied a loan or a job based on credit information. 3. Dispute incomplete, out of date, or inaccurate information. 4. Be assured that their credit files are open to only those with a valid business purpose. 5. Be notified whenever negative credit file information is used against them or raises their cost of credit materially. After January 1, 2011, credit applicants who are offered materially disadvantageous interest rates or terms because of derogatory information in their credit files are entitled to a free credit report. This will allow consumers to examine their credit files for erroneous or outdated information. 6. Limit prescreened offers of credit or insurance based on credit file information.

FCRA Requirements for Landlords

Many landlords use one or more forms of consumer credit or tenant screening reports to evaluate applications. If landlords use credit reports in tenant screening, they are required to follow special rules enforced by the Federal Trade Commission: Provide applicants with an adverse action notification if they deny the application or charge a higher rent because of credit reporting information or a report from a tenant-screening agency. The notice must include the name and contact number of the credit reporting agency that provided the information and a statement that the credit agency did not make the decision to take the adverse action. The landlord must notify the consumer that he or she has the right to dispute the accuracy of the agencys files and to receive a free credit report within 60 days. Landlords who fail to comply with these rules face potential legal action. The FCRA allows individuals to sue landlords for damages in federal courts, not local, and to seek punitive damages from landlords in cases of deliberate violations of the law. In addition, the FTC may bring suit against landlords, and seek substantial civil penalties.

Accuracy of Credit Reports

Credit reporting agencies are required to provide credit scores to consumers who request them, along with the specific factors that have negatively affected a consumers score. If consumers dispute incomplete, out of date, or inaccurate information in their files, credit bureaus are required to investigate the issues raised by the consumer within 30 days and remove or correct the information immediately if found to be inaccurate. If the repository finds accurate information, it may add an explanatory statement from the consumer regarding the account information. Most

Credit Products and Offerings: The Role of the Federal Government 51

THE FAIR AND ACCURATE CREDIT TRANSACTIONS ACT (FACTA)IDENTITY THEFT

Following Congress passage of the Fair and Accurate Credit Transactions Act (FACTA) in 2003, and the issuance of formal regulations by the Federal Trade Commission during the following several years, consumers also have significant protections in the area of identity theft: One call fraud alert notifications. Once one of the national credit repositories has received a request for a fraud alert to be placed on a consumers file, the bureau must inform the other repositories of this fact. Trade line blocking. Credit bureaus must block fraudulent trade linesaccounts set up by identity thievesand not report them as part of a consumers credit files. Consumers must file identity theft complaints with a local law enforcement agency before the bureaus are required to block trade lines. Prohibition of sale of debts caused by identity thieves to collection agencies. No one may sell a delinquent debt account where the debt is the result of identity theft once a trade line block has been placed on the account, and the credit bureau has been informed of the block.

Prohibited Acts under ECOA

Creditors and others may not: 1. Discourage an applicant from applying because of the applicants color, race, religious affiliation, national origin, sex, marital status, age, or receipt of public assistance. 2. Consider any of these prohibited factors in determining whether to grant credit. However, creditors may consider an applicants immigration status to determine whether the person has the right to stay in the U.S. long enough to repay the debt. 3. Impose different terms or conditions, like a higher interest rate, higher fees, or require a co-signer on the note or lease, based on any of the prohibited factors. 4. Ask an applicant for credit whether he or she is widowed or divorced. A creditor may use only these terms: married, unmarried, or separated. 5. Ask for information about your spouse, except if the spouse is a co-applicant and will be allowed to use the account; or if the applicant is relying on a spouses income or on alimony or child support payments to qualify for the loan. 6. Ask about an applicants plans for having or raising children. 7. Discount household income because of an applicants sex or marital status. For example, a creditor cannot count a mans salary at 100% and a womans at 75% to project future income. A creditor is not permitted to assume that a woman of childbearing age will stop working at some point to raise children. 8. Refuse to consider reliable alimony, child support, or separate maintenance payments. But a creditor may ask to see proof of such income.

EQUAL CREDIT OPPORTUNITY ACT (ECOA)

The Equal Credit Opportunity Actalso known as ECOAis Title VII of the Consumer Credit Protection Act. It prohibits discrimination in granting, pricing credit, or underwriting of credit on the basis of: race color religion national origin sex marital status age because the applicant receives public assistance Creditors may ask about these subjects in some situations, but under no circumstances can they base their decision to make available, or withhold credit, or price it differently on any of these factors. ECOA regulates organizations and persons who regularly extend credit (e.g., banks, mortgage companies, retail stores). Anyone who participates in the decision to grant or set terms for credit must comply with the law, including all real estate brokers who help arrange financings.

Other consumer rights under ECOA

Applicants for credit are guaranteed the right to: Know exactly why their application was rejected. The creditor must answer the consumers request within 60 days. Explanations must be specific, not generalized. For example, an acceptable explanation would be that your income was insufficient for this loan program. An unacceptable explanation would be you didnt meet our standards for this program. Learn why your credit account was closed or why the terms of the account were made less favorable,

52Module 3

except in situations where your payments have been delinquent or you have not used the account for a lengthy period. This ECOA issue has surfaced recently as many homeowners found their equity credit lines reduced or even canceled, and credit card holders have found their limits lowered. If the creditors actions are not based on prohibited factors and adhere to its contract with the consumer, there is no ECOA challenge.

matters or advising them on how to raise credit scores. CROA prohibits false and misleading statements, as well as fraud by credit repair organizations (CROs). It also bans payments of fees to such organizations before any promised services are fully performed. CROs cannot misrepresent their ability to remove derogatory, accurate information from credit files or raise credit scores. They may not make any statement on a consumers behalf which is untrue or misleading regarding the consumers creditworthiness or credit capacity, whether to a lender or to a credit reporting agency.

CREDIT REPAIR ORGANIZATIONS ACT (CROA)

We all see advertisements from companies who claim they can clean up consumers credit files, rid them of derogatory information, even foreclosures and bankruptcies. Often these firms charge hundreds or thousands of dollars for their services. But in fact, consumer credit files cannot legally be scrubbed of accurate, negative information by credit repair firms, law firms, or others. The Credit Repair Organizations Act (CROA) sets strict rules for companies and individuals claiming to be able to clean up credit files. It is administered by the Federal Trade Commission. However, the law does not prohibit consumer counseling agencies from assisting or educating consumers about their credit

Mandatory Disclosure Statement

Before contracting for services, a CRO must provide a written disclosure informing consumers of their rights to dispute all inaccurate information in their credit files by contacting the credit bureau directly. The disclosure must also explain that no credit repair organization has the legal right to have accurate, current, and verifiable information removed from any credit report. Consumers may not waive their right to receive this disclosure in advance. CROs that break the law are subject to significant damage and punitive claims.

Credit Products and Offerings: The Role of the Federal Government 53

M odul e 3 P r o g r e s s T e s t
You are not required to answer the progress test questions to complete the 14-hour course. They are intended to help prepare you for the Final Exam. Choose the best response to each question. The answers are found in the back of the book.
1. When a consumer applies for a closed end loan, the lender must respond in three days with a/an: a. offer of credit. b. Truth in Lending disclosure statement. c. request for additional information. d. request for an application fee. 2. The Annual Percentage Rate: a. reflects simple interest. b. includes mortgage insurance and prepaid finance charges. c. includes the down payment. d. includes taxes and insurance charges. 3. TILA disclosures cover: a. seller financed loans. b. credit card transactions. c. personal and business loans. d. mortgages and auto loans. 4. The right of rescission under TILA applies to: a. refinancing of a principal residence with a new lender. b. principal home purchases. c. refinancing a principal residence with the original lender. d. purchase of a second home or vacation property. 5. The Fair Credit Reporting Act: a. requires borrowers to know their credit scores. b. allows anyone to check on a consumers credit score. c. allows consumers to dispute incorrect information in their credit files. d. requires TILA disclosure forms.

54Module 3

MODULE 4

RESPA: Review the Fundamentals and the New Federal Rules

Learning Objectives
Upon completion of the module, the learner shall be able to:

by Kenneth Harney

1. Explain 2 basic categories of problems the Real Estate Settlement Procedures Act (RESPA) was created to address. 2. Name the agency responsible for enforcing RESPA rules. 3. List the 2 major disclosures and documents regulated by RESPA. 4. Explain what kinds of loans are regulated by RESPA. 5. Understand what a thing of value is in the context of RESPA rules. 6. Explain why referral fees are prohibited by RESPA. 7. Understand the RESPA prohibitions against fee-splitting and unearned fees. 8. List the 4 categories of payments allowed under RESPAs Section 8 (c). 9. Define a legitimate Affiliated Business Arrangement (AfBA). 10. List the 3 key standards for AfBAs. 11. List the 4 tests HUD uses to determine if an affiliated business is legitimate. 12. Discuss the penalties for violating RESPA rules. 13. Discuss when triple damages are called for under RESPA. 14. Explain who provides the GFE to the consumer and when. 15. Explain the 2 basic elements of every GFE. 16. Cite how long the terms listed in the GFE are available to the consumer. 17. Identify which feature of a mortgage cannot be locked in by the GFE. 18. List the 2 key tolerances that are provided for in the GFE. 19. List the 4 areas for which there is no set tolerance level in the GFE. 20. Explain how yield-spread premiums are disclosed on the HUD-1. 21. Discuss how title insurance premium splits are identified on the revised HUD-1. 22. Discuss where the split of commission amounts between the listing and selling offices is disclosed on the HUD-1. 23. Explain how to estimate certain settlement service fees on the HUD-1. 24. Discuss the importance of providing consumers with a choice of settlement service firms. 25. Explain what areas RESPA governs with respect to loan servicers.

55

56Module 4

INTRODUCTION
The Real Estate Settlement Procedures Act (RESPA) extends to many activities performed in connection with the purchase, financing, and closing on a residential property, including realty brokerage, loan origination, credit, title insurance, appraisals, hazard and flood insurance, mortgage servicing, and property tax services.

RESPA covers most federally related mortgage loans on 1-to-4 unit residential properties involving first or subordinate liens from banks and other lending institutions at the state or national level, mortgage companies, Fannie Mae, Freddie Mac, the FHA, and VA. RESPA does not cover commercial, agricultural, or business real estate purchases or financings. Neither does it cover all-cash transactions where there is no mortgage, nor carryback financings where the property seller provides the mortgage money. Though the law consists of numerous sections, the key portions that most vitally affect real estate and mortgage professionals relate to referral fees and mandatory disclosures.

HISTORY
RESPA was signed into law in 1974 following Congressional hearings that documented widespread problems experienced by consumers when they purchased houses or applied for mortgages. The problems fell into 2 categories: Under-the-table kickbacks among title insurance agents, real estate brokers, escrow and settlement companies, lawyers, mortgage companies, and others for referrals of business which raised the costs of home purchase and mortgage transactions for consumers. Lack of consumer understanding of many aspects of the home purchase and financing process, from mortgage terminology to closing procedures and fees. There were no uniform disclosures or explanations of charges around the country. This made homebuyers and refinancers vulnerable to overcharges and abuses in connection with what was often the largest purchase of their lives. RESPA is primarily a consumer-protection statute, and since its inception has been enforced by regulations developed by the U.S. Department of Housing and Urban Development (HUD). As of July 21, 2011, however, regulatory oversight for RESPA will be shifted out of HUD and transferred to the Consumer Financial Protection Board created by the DoddFrank Wall Street Reform and Consumer Protection Act of 2010. Though RESPA regulates the payment of certain fees, it does not set fees or govern pricing of real estate or settlement services. It does, however, define nationally uniform disclosures and documents, including the Good Faith Estimate (GFE), the HUD-1 settlement statement, and consumer information booklets designed to explain the mortgage and real estate process. It provides detailed rules relating to referral fees and compensation arrangements among settlement service providers. Note: The GFE and HUD-1 disclosures, along with rules relating to their use, were significantly revised in 2008 and 2009, with all changes taking final effect January 1, 2010. Earlier forms of the HUD-1 and GFE should not be used in transactions during 2010 and beyond.

REFERRAL FEES AND KICKBACKS (SECTION 8)

Section 8 of RESPA generally prohibits kickbacks and referral fees among settlement service providers. Section 8 consists of 4 subsections that all real estate professionals dealing with home sales must know, referral fees, fee splitting and unearned fees, exceptions, and RESPA penalties.

Section 8 (a): Referral Fees

RESPA bans the giving or accepting of a fee, kickback, or any thing of value in exchange for referrals of settlement service business under an agreement or understanding, whether in writing, oral, or otherwise. What is a thing of value under RESPA? HUDs definition of thing of value includes not just moneyit extends to discounts on goods or services; increases in commissions; gifts; dividends; distributions of partnership profits; franchise royalties; opportunities to participate in money-making programs or contests; increased equity in a parent or subsidiary entity; special bank deposits; services of any type at special prices or rates; leases or rental payments that are based on the amount of business referrals; trips; and tickets to performances. Some of the most prominent recent RESPA legal settlements with real estate brokerages and title companies have involved arrangements in which real estate brokers allegedly received dinners, free tickets to concerts and sports events, free trips to resorts, and other things of value that were tied to business referrals. HUD also has focused on office space rental arrangements whereby referral participants allegedly received or provided rooms or desks at rental rates below prevailing market rates. The rules say that the difference between fair market rental charges and what was actually paid is the thing of value prohibited by RESPA. HUD generally does not pursue individuals or com-

RESPA: Review the Fundamentals and the New Federal Rules 57

panies who provide each other token gifts at holidays or birthdays, or distribute small promotional items such as pens and calendars. However, it does take a strict view of any thing of value that appears to be tied to referrals of business or the volume of referrals. For example, persons who provide larger dollar volumes of business receive more valuable gifts, services, tickets, etc. To protect yourself against potential litigation or fines, the rule is simple: Do not accept or give a nything no matter how smallthat can be construed as a thing of value in compensation for referrals of business.

are not considered kickbacks. Payments to: attorneys title companies tax service companies lenders and others for actual services performed Affiliated Business Arrangements (AfBAs). RESPA also allows joint ventures and partnerships among various professionals structured to meet the laws affiliated business guidelines. For example, many real estate brokerages have created joint ventures with mortgage lenders and title insurance agencies. When homebuyers ask about mortgage financing or settlement, they receive information about the real estate brokers affiliates, typically along with the names of alternative service providers. From the brokers point of view, not only do affiliates provide additional revenue sources, but a way to ensure basic quality levels of services, turnaround times, and adherence to deadlines. In some cases, affiliated businesses are able to offer homebuyer clients lower costs as well. However, consumer groups, unaffiliated mortgage professionals, and others have complained that too often homebuyers are steered to affiliated businesses that do not provide lower prices compared with unaffiliated competitors in the marketplace. HUD is very concerned that the consumers needs be met and has strict rules regarding AfBAs. HUDs key standards for AfBAs: Compensation received by joint venture or partnership participants may only take the form of a return on an ownership interest. Compensation cannot be based on the volume or value of business referrals made to the joint venture or partnership. For example, a real estate broker who created a joint venture with a title insurance agency, and put up 10% of the initial capital, may not receive 50% of the profits from the venture or receive fees tied to the amount of title business the broker referred to the venture. Disclosure and timing: When referring a client to an affiliated business, the person making the referral must disclose the nature of the relationship to the client in writing at or before the actual referral is made. The disclosure, which must be separate from any other disclosure, must explain the ownership and financial interest in the venture, and provide an estimate of the charges the venture makes for its services. The disclosure form must be signed and dated by the client. Required use: The client cannot ever be required to use the services offered by the affiliate. For example, a real estate broker should not tell a homebuyer

Section 8 (b): Fee Splitting and Unearned Fees

When Congress passed RESPA, one of the targets was the splitting of fees among real estate settlement and mortgage participants. Frequently the fee splits involved charges imposed on consumers where no specific services were rendered to justify the charge. For example, a mortgage lender might mark up the actual cost of an appraisal, a credit report, or Fed Ex courier service fee to the consumer and split the addon with a real estate licensee who referred the client to the lender. To deal with such practices, Section 8 (b) of RESPA prohibits the giving or receiving of any portion, split, or percentage of any charge in connection with a mortgage loan transaction, unless the charge is for services actually performed on behalf of the consumer. HUD has taken the position that any unearned markup constitutes a violation of Section 8 (b), even if only one participant actually receives the full addon amount. The industry generally has argued that Section 8 (b) requires at least 2 participants in a markup to break the law. Federal appellate courts in 6 circuits have been divided on this issue, with half supporting HUDs interpretation, and half disagreeing. Absent a final resolution by the U.S. Supreme Court, HUD continues to enforce Section 8 (b) nationwide according to its interpretation. As a result, at least until the Supreme Court rules otherwise, the best practice for real estate professionals is: Assume that mark-ups of fees, or any charges where minimal or no services are rendered to the consumer, are violations of Section 8 (b) in the eyes of RESPA regulator, HUD.

Section 8 (c): Exceptions

There are many forms of payments of fees for services rendered among real estate, title, and mortgage professionals that are expressly allowed by RESPA and

58Module 4

that the firm only deals with an affiliated mortgage lender and effectively compel the buyer to use that firm. Affiliated business participants may encourage clients to use a subsidiarys services by offering discounts on pricing, but those discounts must be bona fide, true savings. For example, a home builder is not permitted to offer $10,000 of upgrades or free closing costs only to customers using the builders mortgage and title subsidiaries if, in fact, the alleged savings had been incorporated into the price of the house without the consumers knowledge. Affiliated business test real or sham. Over the years, HUD has reached out-of-court settlement agreements and levied financial penalties against real estate brokers, title insurance companies, mortgage professionals, and other organizations that created shell or sham subsidiaries for no other purpose than to kick back fees to participants for their referrals. HUDs RESPA regulations have established baseline tests to determine whether an affiliated business is a legitimate enterprise, or whether it exists to cloak what are in reality ongoing kickbacks and referral fees that violate the law. Under HUD policy, an affiliated business must: be sufficiently capitalized to handle the business services it purports to provide. No partner or joint venture member may borrow its upfront capital contribution to the business from another partner in the venture. be adequately managed, whether by its own officers or by staff provided by one of the joint ventures partners. In the latter case, however, that staff must be compensated for its services at fair market costs. provide substantial services that are typical or characteristic of the industry in which it competes. If the affiliated business is a mortgage professional enterprise, for example, it should not only take loan applications but provide services that are customary in that industry, such as compiling applicants financial information, ordering verifications of deposit (VODs) and employment (VOEs), helping to guide the borrower through the loan application and credit process, ordering or arranging for appraisals, ordering legal documents, and taking part in the loan closing. maintain separate office space and business identity apart from any of the joint venture participants. AfBAs should have separate and discrete phone book listings, websites, advertising, marketing logos, and even graphics and signage. It should be clear to consumers that the venture is in business on its own, and not simply a conduit that receives all or the vast proportion of its business directly from the partners. In fact, affiliated businesses should always

make an effort to market their services beyond their partners. HUD rules also prohibit affiliates from contracting out essential functions of the business to a joint venture partnerin effect relying on that partner for the main activity of the business, but splitting profits among all participants in the venture. In short, the business should be real, competitive, and visible in the marketplace.

Section 8 (d): RESPA Penalties

RESPA violations may result in fines up to $10,000, prison sentences of up to 12 months, or combinations of both. The law also provides for triple damages in the event of convictions (i.e., payment of 3 times the amount of the value of the specific settlement services that were overcharged). Consumers may sue real estate and other professionals for alleged violations, provided they file suit within a year of the violation.

RESPA Enforcement
HUD maintains a separate office for RESPA investigations, and in recent years has also made extensive use of outside contractorsprimarily former Treasury, FBI, and financial regulatory agency personnelto conduct investigations of alleged RESPA violations. HUDs RESPA office also works with state financial regulatory agencies and attorneys general to further its reach in gathering and investigating complaints. Many of the hundreds of complaints the RESPA office receives annually originate from individuals in the real estate brokerage, title insurance, and mortgage lending industries, who see competitors or colleagues receiving unfair advantages or compensation from kickbacks and sham AfBAs. The RESPA office contact information is: Director, Office of RESPA US Dept. of Housing and Urban Development Room 9154, 451 7th St. S.W. Washington, D.C. 20410

RESPA DISCLOSURES
Virtually all homebuyers receive Good Faith Estimates (GFEs) and the HUD-1 uniform settlement statement mandated by the RESPA laws and HUD. The GFE provides the consumer a detailed overview of the types of closing costs and lender-related fees that will be charged during the transaction. The HUD-1 details the actual costs at the end of the process, and is typically received just before the closing. Consumers get the GFE at the beginning and the HUD-1 at the end of the process of buying a home. Under the revised RESPA rules effective January 1, 2010, the 2 forms have been coordinated to work

RESPA: Review the Fundamentals and the New Federal Rules 59

more effectively together than they had in earlier versions. The direct linkage of terms and cost categories facilitate direct comparisons by the consumer of the GFE (before) estimates and the final changes on the HUD-1 (after). Once the Consumer Financial Protection Board assumes regulatory oversight of RESPA and the Truth in Lending Act on July 21, 2011, it is expected to develop a shorter version of the current GFE and to combine it with a revised version of the TILA disclosure that all mortgage applicants receive within three business days of the loan application.

closed in the GFE must not change, although HUD rules allow some exceptions in the event of changed circumstances involving the property or the borrower.

Key GFE Changes

Several key changes to the GFE made by HUD for 2010 and beyond are especially noteworthy. The GFE refers to estimates of charges, but HUD wants lenders and others to provide as accurate as possible estimates up front. The days of eleventhhour surprises on fees at settlement should be over. HUD has created 3 different categories of transaction fees that will allow little or no tolerance for change between the GFE stage and the HUD-1. Zero tolerance. These include origination charges, points or loan discount charges; and local transfer taxes. All of these should be known to the lender at the time of application, or can be determined quickly. They should not change from the application stage to closing. 10% tolerance. These are fees that are either more difficult to pin down exactly up front, or that occasionally may change slightly for a variety of reasons over the course of a transaction. Among these are: Required services the borrower can shop for when the borrower selects a provider identified by the lender. An example is a recommended title agent that provides not only insurance policies but closing services as well. Settlement services required by the lender but where the lender selects the service provider (e.g., appraisal or flood certification). Local government recording charges. No set tolerance level. These include: services provided by a vendor selected by the applicant calculations of up-front escrow deposits homeowner insurance policy premiums daily interest charges on the loan

REVISED GFE
Compared with previous versions of the GFE, the 2010 revision is far more consumer-friendly. (See revised GFE at end of module). In fact it was designed expressly to make complicated loan settlement practices and charges more understandable, and to encourage and facilitate shopping for lower fees. Page 3 of the revised GFE includes a shopping chart with space to compare up to 4 sets of loan quotes and fees from competing lenders.

Good Faith Estimate (GFE)

www.hud.gov/offices/adm/hudclips/forms/ files/1-gfe.pdf  The GFE typically is completed by the mortgage lender or broker business and provided to the consumer at the time of application or within 3 business days of receipt of the application. Its contents cover the financial features of a homebuyers transaction. Advising real estate licensees about representing clients/customers in reviewing GFEs is a slippery slope. The GFE describes: loan terms and fees, such as interest rate, mortgage insurance costs if any, the initial mortgage payment amount, whether the note rate is fixed or variable, and whether the loan includes either a prepayment penalty or lump-sum balloon payment at the end an estimate of total settlement costs, such as title insurance, origination fees, loan discount points, appraisal, flood certification, tax service fees, transfer taxes, homeowner insurance premiums, initial escrow deposit amount, and recordation charges After an applicant has been provided a GFE, the loan amount and estimated loan fees must remain available for up to 10 business days. The interest rate quote, however, may vary with market changes unless locked by agreement between the lender and the applicant. Failure to provide a GFE to an applicant is a violation of Section 5 of RESPA. Generally the loan terms dis-

Yield-Spread Premiums
The revised GFE requires yield-spread or back-end premiums charged by mortgage professionals to be disclosed as a credit or charge (points) for the specific interest rate chosen. This new federal rule is controversial among mortgage professionals who feel it confuses consumers.

60Module 4

Yield-spread premiums are rebates or payments to mortgage professionals from lenders, based on delivery of loans carrying interest rates above the lowest par rate the loan applicant is qualified to receive. A par rate is an interest rate that does not cost the mortgage professional any money nor does it pay any money (YSP). As an example, a mortgage professional might offer an applicant a 6.5% rate when the par rate is 6%. The broker might receive a $2,000 yield-spread premium from the lender, which must now be disclosed on page 2 of the GFE.

HUD-1 SETTLEMENT STATEMENT

Like the revised GFE, the revised HUD-1 statement must be used in 2010 and beyond and is intended to be more consumer friendly and understandable. (See revised HUD-1 at end of module.) For example, page 3 contains a section that compares the fees on the final settlement sheet with the fees on the GFE, in the 3 categories of zero tolerance, 10% tolerance, and no limit on changes. For a HUD-1 Settlement Statement see: www.hud.gov/offices/adm/hudclips/forms/ files/1.pdf  The new HUD-1 also uses terms similar to those on the GFE, and even indicates the line item number on the GFE where the original estimated charge may be found. It also discloses (on lines 1107 and 1108) how the title insurance premiums are being split between the title agent and insurance underwriter. In the past, many consumers were unaware of the often large percentage of their insurance premiums going to compensate the title agent, rather than pay for the coverage. Of special note to real estate brokers and licensees, the revised HUD-1 does not require listing the commission rate charged for the sales transaction, but does require disclosure of the dollar amount of the commission split between the listing and selling offices (lines 700-704).

Industry Reactions to Revised GFE

As with any major change to a longstanding federal financial disclosure form, the revised GFE has attracted criticism from lenders and others during the past year. Though the criticism has not caused HUD to revise the GFE, the complaints are useful for real estate professionals and others to know about so that they may guide clients appropriately. Among the top features attracting criticism:  The sales price of the house does not appear anywhere in the three pages of the revised GFE, unlike the previous version.  The total funds needed to close the transaction are not adequately disclosed. This can cause home buyers to be uncertain about exactly how much they will need to bring to settlement.  The total monthly payment disclosure consists solely of principal, interest and mortgage insurance, omitting estimated property taxes and hazard insurance costs both of which are important for borrowers to take into account in advance.  The GFE does not disclose the type of mortgage the borrower has applied for.  There is no place for the borrowers signature indicating receipt and acceptance of the GFE. Also during the GFEs first year of use, many lenders and settlement service providers have begun to bypass the official disclosure form and issue unofficial estimates of costs before delivering the official GFE. They do this to avoid the tolerance requirements and penalties in the rules. However, since lenders unofficial, upfront estimates are not guaranteed, as they would be with the real GFE, they may present dangers for consumers who assume these upfront estimates are what they can count on at the settlement table. Real estate professionals should be prepared to help their clients distinguish between the unofficial estimates and the official GFE.

AVERAGING CHARGES FOR SETTLEMENT SERVICE FEES

As part of its revisions to RESPA, HUD is now allowing service providers to charge consumers averaged fees for items where the exact cost was not known at the time of the GFE, but where a rough range of typical costs for the service is known. For example, courier fees may vary somewhat from transaction to transaction, and local government recordation charges may vary based on the number of pages of documents. In such cases, lenders or brokers can fill in an estimate based on the actual costs of multiple transactions closed during a recent period, ranging from 1 to 6 months. Averaging of fees previously was prohibited by HUD, and led to litigation and settlements with companies who routinely used such estimates on their HUD-1s. Note that Chapter 494, F.S., the Florida mortgage law, requires the exact charge to be disclosed on the HUD-1.

HUD FAQS ON GFE AND HUD-1

HUD maintains an extensive set of frequently asked questions about RESPA that can be extremely helpful

RESPA: Review the Fundamentals and the New Federal Rules 61

to industry professionals as well as consumers. w w w. h u d . g ov / o ff i c e s / h s g / ra m h / r e s / resindus.cfm  FAQs about the revised GFE and HUD-1 rules also are available at the HUD website. www.hud.gov/offices/hsg/ramh/res/respa rulefaqs.pdf 

OTHER SECTIONS OF RESPA Section 9: Seller-required title insurance

Primarily aimed at home builders who have affiliated business ties with title insurance agencies, this section prohibits any seller from requiring a buyer to use a particular title company. Buyers may sue for 3 times all fees charged if a violation is proved.

Section 10: Loan servicing rules

These rules govern the conduct of loan servicers, prohibiting them from charging excessive amounts to be maintained by borrowers in escrow accounts. Section 10 also regulates disclosures on transfers of servicing accounts from one company to another, establishes rules for disclosure of servicing practices of the lender, and requires annual escrow account statements.

62Module 4
OMB Approval No. 2502-0265

Good Faith Estimate (GFE)

Name of Originator Originator Address Originator Phone Number Originator Email Borrower

Property Address Date of GFE

Purpose

This GFE gives you an estimate of your settlement charges and loan terms if you are approved for this loan. For more information, see HUDs Special Information Booklet on settlement charges, your Truth-in-Lending Disclosures, and other consumer information at www.hud.gov/respa. If you decide you would like to proceed with this loan, contact us. Only you can shop for the best loan for you. Compare this GFE with other loan offers, so you can find the best loan. Use the shopping chart on page 3 to compare all the offers you receive. 1. The interest rate for this GFE is available through . After this time, the interest rate, some of your loan Origination Charges, and the monthly payment shown below can change until you lock your interest rate. 2. This estimate for all other settlement charges is available through 3. After you lock your interest rate, you must go to settlement within period) to receive the locked interest rate. days before settlement. 4. You must lock the interest rate at least . days (your rate lock

Shopping for your loan Important dates

Summary of your loan

Your initial loan amount is Your loan term is Your initial interest rate is Your initial monthly amount owed for principal, interest, and any mortgage insurance is Can your interest rate rise? Even if you make payments on time, can your loan balance rise? Even if you make payments on time, can your monthly amount owed for principal, interest, and any mortgage insurance rise? Does your loan have a prepayment penalty? Does your loan have a balloon payment?

$ years % $ per month %. The first change will be in c No c Yes, it can rise to a maximum of $ c No c Yes, the first increase can be in and the monthly amount owed can rise to $ . The maximum it can ever rise to is $ . c No c Yes, your maximum prepayment penalty is $ c No c Yes, you have a balloon payment of $ due in years.

c No c Yes, it can rise to a maximum of

Escrow account information

Some lenders require an escrow account to hold funds for paying property taxes or other property-related charges in addition to your monthly amount owed of $ . Do we require you to have an escrow account for your loan? c No, you do not have an escrow account. You must pay these charges directly when due. c Yes, you have an escrow account. It may or may not cover all of these charges. Ask us.

Summary of your settlement charges

A Your Adjusted Origination Charges (See page 2.) B Your Charges for All Other Settlement Services (See page 2.) A + B Total Estimated Settlement Charges

$ $

$
Good Faith Estimate (HUD-GFE) 1

RESPA: Review the Fundamentals and the New Federal Rules 63

Understanding your estimated settlement charges

Your Adjusted Origination Charges

1. Our origination charge This charge is for getting this loan for you.

2. Your credit or charge (points) for the specic interest rate chosen c The credit or charge for the interest rate of % is included in Our origination charge. (See item 1 above.) c You receive a credit of $ for this interest rate of %. This credit reduces your settlement charges. c You pay a charge of $ for this interest rate of %. This charge (points) increases your total settlement charges. The tradeoff table on page 3 shows that you can change your total settlement charges by choosing a different interest rate for this loan.

A
Some of these charges can change at settlement. See the top of page 3 for more information.

Your Adjusted Origination Charges

Your Charges for All Other Settlement Services

3. Required services that we select These charges are for services we require to complete your settlement. We will choose the providers of these services. Service Charge

4. Title services and lenders title insurance This charge includes the services of a title or settlement agent, for example, and title insurance to protect the lender, if required. 5. Owners title insurance You may purchase an owners title insurance policy to protect your interest in the property. 6. Required services that you can shop for These charges are for other services that are required to complete your settlement. We can identify providers of these services or you can shop for them yourself. Our estimates for providing these services are below. Service Charge

7. Government recording charges These charges are for state and local fees to record your loan and title documents. 8. Transfer taxes These charges are for state and local fees on mortgages and home sales. 9. Initial deposit for your escrow account This charge is held in an escrow account to pay future recurring charges on your property and includes all property taxes, all insurance, and other . 10. Daily interest charges This charge is for the daily interest on your loan from the day of your settlement until the first day of the next month or the first day of your normal mortgage payment cycle. This amount is $ per day for days (if your settlement is ). 11. Homeowners insurance This charge is for the insurance you must buy for the property to protect from a loss, such as fire. Policy Charge

B Your Charges for All Other Settlement Services A + B Total Estimated Settlement Charges

Good Faith Estimate (HUD-GFE) 2

64Module 4

Instructions
Understanding which charges can change at settlement
This GFE estimates your settlement charges. At your settlement, you will receive a HUD-1, a form that lists your actual costs. Compare the charges on the HUD-1 with the charges on this GFE. Charges can change if you select your own provider and do not use the companies we identify. (See below for details.)
These charges cannot increase at settlement: The total of these charges can increase up to 10% at settlement: These charges can change at settlement:

Our origination charge Your credit or charge (points) for the specific interest rate chosen (after you lock in your interest rate) Your adjusted origination charges (after you lock in your interest rate) Transfer taxes

Required services that we select Title services and lenders title insurance (if we select them or you use companies we identify) Owners title insurance (if you use companies we identify) Required services that you can shop for (if you use companies we identify) Government recording charges

Required services that you can shop for (if you do not use companies we identify) Title services and lenders title insurance (if you do not use companies we identify) Owners title insurance (if you do not use companies we identify) Initial deposit for your escrow account Daily interest charges Homeowners insurance

Using the tradeoff table

In this GFE, we offered you this loan with a particular interest rate and estimated settlement charges. However: If you want to choose this same loan with lower settlement charges, then you will have a higher interest rate. If you want to choose this same loan with a lower interest rate, then you will have higher settlement charges.

If you would like to choose an available option, you must ask us for a new GFE.
Loan originators have the option to complete this table. Please ask for additional information if the table is not completed.
The loan in this GFE The same loan with lower settlement charges The same loan with a lower interest rate

Your initial loan amount Your initial interest rate 1 Your initial monthly amount owed Change in the monthly amount owed from this GFE Change in the amount you will pay at settlement with this interest rate How much your total estimated settlement charges will be
1

$ % $ No change No change $

$ % $ You will pay $ more every month Your settlement charges will be reduced by $ $

$ % $ You will pay $ less every month Your settlement charges will increase by $ $

For an adjustable rate loan, the comparisons above are for the initial interest rate before adjustments are made.

Using the shopping chart

Use this chart to compare GFEs from different loan originators. Fill in the information by using a different column for each GFE you receive. By comparing loan offers, you can shop for the best loan.
This loan Loan 2 Loan 3 Loan 4

Loan originator name Initial loan amount Loan term Initial interest rate Initial monthly amount owed Rate lock period Can interest rate rise? Can loan balance rise? Can monthly amount owed rise? Prepayment penalty? Balloon payment?

Total Estimated Settlement Charges

If your loan is sold in the future

Some lenders may sell your loan after settlement. Any fees lenders receive in the future cannot change the loan you receive or the charges you paid at settlement. Good Faith Estimate (HUD-GFE) 3

RESPA: Review the Fundamentals and the New Federal Rules 65

OMB Approval No. 2502-0265

A.

Settlement Statement (HUD-1)

B. Type of Loan
6. File Number: 1. 4. FHA VA 2. 5. RHS Conv. Ins. 3. Conv. Unins. 7. Loan Number: 8. Mortgage Insurance Case Number:

C. Note: This form is furnished to give you a statement of actual settlement costs. Amounts paid to and by the settlement agent are shown. Items marked (p.o.c.) were paid outside the closing; they are shown here for informational purposes and are not included in the totals. D. Name & Address of Borrower: E. Name & Address of Seller: F. Name & Address of Lender:

G. Property Location:

H. Settlement Agent: Place of Settlement:

I. Settlement Date:

J. Summary of Borrowers Transaction

100. Gross Amount Due from Borrower 101. Contract sales price 102. Personal property 103. Settlement charges to borrower (line 1400) 104. 105. Adjustment for items paid by seller in advance 106. City/town taxes to 107. County taxes 108. Assessments 109. 110. 111. 112. 120. Gross Amount Due from Borrower 200. Amounts Paid by or in Behalf of Borrower 201. Deposit or earnest money 202. Principal amount of new loan(s) 203. Existing loan(s) taken subject to 204. 205. 206. 207. 208. 209. Adjustments for items unpaid by seller 210. City/town taxes to 211. County taxes 212. Assessments 213. 214. 215. 216. 217. 218. 219. 220. Total Paid by/for Borrower 300. Cash at Settlement from/to Borrower 301. Gross amount due from borrower (line 120) 302. Less amounts paid by/for borrower (line 220) 303. Cash From To Borrower ( ) to to to to

K. Summary of Sellers Transaction

400. Gross Amount Due to Seller 401. Contract sales price 402. Personal property 403. 404. 405. Adjustments for items paid by seller in advance 406. City/town taxes to 407. County taxes 408. Assessments 409. 410. 411. 412. 420. Gross Amount Due to Seller 500. Reductions In Amount Due to Seller 501. Excess deposit (see instructions) 502. Settlement charges to seller (line 1400) 503. Existing loan(s) taken subject to 504. Payoff of first mortgage loan 505. Payoff of second mortgage loan 506. 507. 508. 509. Adjustments for items unpaid by seller 510. City/town taxes to 511. County taxes 512. Assessments 513. 514. 515. 516. 517. 518. 519. 520. Total Reduction Amount Due Seller 600. Cash at Settlement to/from Seller 601. Gross amount due to seller (line 420) 602. Less reductions in amount due seller (line 520) 603. Cash To From Seller ( ) to to to to

The Public Reporting Burden for this collection of information is estimated at 35 minutes per response for collecting, reviewing, and reporting the data. This agency may not collect this information, and you are not required to complete this form, unless it displays a currently valid OMB control number. No confidentiality is assured; this disclosure is mandatory. This is designed to provide the parties to a RESPA covered transaction with information during the settlement process.

66Module 4
L. Settlement Charges
700. Total Real Estate Broker Fees

Division of commission (line 700) as follows: 701. $ 702. $ 703. Commission paid at settlement 704.
800. Items Payable in Connection with Loan

to to

Paid From Borrowers Funds at Settlement

Paid From Sellers Funds at Settlement

801. Our origination charge 803. Your adjusted origination charges 804. Appraisal fee to 805. Credit report to 806. Tax service to 807. Flood certification 808.
900. Items Required by Lender to Be Paid in Advance

(from GFE #1) (from GFE #2) (from GFE A) (from GFE #3) (from GFE #3) (from GFE #3) (from GFE #3)

802. Your credit or charge (points) for the specific interest rate chosen $

901. Daily interest charges from 902. Mortgage insurance premium 903. Homeowners insurance 904.
1000. Reserves Deposited with Lender

to for for

@$ years to

/day

(from GFE #10) (from GFE #3) (from GFE #11)

months to

1001. Initial deposit for your escrow account 1002. Homeowners insurance 1003. Mortgage insurance 1004. Property taxes 1005. 1006. 1007. Aggregate Adjustment
1100. Title Charges

(from GFE #9)

months @ $ months @ $ months @ $ months @ $ months @ $

per month per month per month per month per month

$ $ $ $ $ $

1101. Title services and lenders title insurance 1102. Settlement or closing fee 1103. Owners title insurance 1104. Lenders title insurance 1105. Lenders title policy limit $ 1106. Owners title policy limit $ 1107. Agents portion of the total title insurance premium 1108. Underwriters portion of the total title insurance premium
1200. Government Recording and Transfer Charges
$

(from GFE #4)

(from GFE #5)

$ $

1201. Government recording charges 1202. Deed $ 1203. Transfer taxes 1204. City/County tax/stamps 1205. State tax/stamps 1206.
1300. Additional Settlement Charges

(from GFE #7)

Mortgage $ Deed $ Deed $

Releases $
(from GFE #8)

Mortgage $ Mortgage $

1301. Required services that you can shop for 1302. 1303. 1304. 1305.
1400. Total Settlement Charges (enter on lines 103, Section J and 502, Section K)

(from GFE #6)

$ $

RESPA: Review the Fundamentals and the New Federal Rules 67

Comparison of Good Faith Estimate (GFE) and HUD-1 Charges Charges That Cannot Increase Our origination charge Your credit or charge (points) for the specific interest rate chosen Your adjusted origination charges Transfer taxes HUD-1 Line Number # 801 # 802 # 803 #1203 Good Faith Estimate HUD-1

Charges That in Total Cannot Increase More Than 10% Government recording charges # 1201 #1201 #1201 #1201 #1201 #1201 #1201 #____ Total Increase between GFE and HUD-1 Charges

Good Faith Estimate

HUD-1

$123456

or

Charges That Can Change Initial deposit for your escrow account Daily interest charges Homeowners insurance #1001 # 901 # 903 #1201 #1201 #1201 $ 2 /day

Good Faith Estimate

HUD-1

Loan Terms
Your initial loan amount is Your loan term is Your initial interest rate is Your initial monthly amount owed for principal, interest, and and any mortgage insurance is $ Principal Interest Mortgage Insurance Can your interest rate rise? No. Yes, it can rise to a maximum of XXX%. The first change will be $ years % includes

on [DATEDATE] and can change again every [DATEDATE] after [DATEDATE] . Every change date, your interest rate can increase or decrease by XXX%. Over the life of the loan, your interest rate is guaranteed to never be lower than XXX% or higher than XXX%. Even if you make payments on time, can your loan balance rise? Even if you make payments on time, can your monthly amount owed for principal, interest, and mortgage insurance rise? No. No. Yes, it can rise to a maximum of $[AMOUNT]. Yes, the first increase can be on and the monthly amount

owed can rise to $[DATEDATE]. The maximum it can ever rise to is $[DATEDATE].

Does your loan have a prepayment penalty? Does your loan have a balloon payment?

No. No.

Yes, your maximum prepayment penalty is $[AMOUNT . Yes, you have a balloon payment of $[AMOUNT] due in

XXX years on [DATEDATE]. Total monthly amount owed including escrow account payments You do not have a monthly escrow payment for items, such as property taxes and homeowners insurance. You must pay these items directly yourself. You have an additional monthly escrow payment of $[AMOUNT] that results in a total initial monthly amount owed of $[AMOUNT]. This includes principal, interest, any mortgage insurance and any items checked below: Property taxes Flood insurance Homeowners insurance

Note: If you have any questions about the Settlement Charges and Loan Terms listed on this form, please contact your lender.
Previous editions are obsolete Page 3 of 3 HUD-1

68Module 4

M odul e 4 P r o g r e s s T e s t
You are not required to answer the progress test questions to complete the 14-hour course. They are intended to help prepare you for the Final Exam. Choose the best response to each question. The answers are found in the back of the book.
1. RESPA protects consumers from: a. lenders charging high interest rates. b. illegal kickbacks by real estate professionals. c. competing settlement services. d. overcharging in all-cash transactions. 2. What is a thing of value in the context of the RESPA rules? a. a Good Faith Estimate b. an affiliated business c. compensation in the form of gifts or cash for a referral of a real estate buyer to a settlement service d. a yield spread premium 3. An Affiliated Business Arrangement: a. allows you to legally take kickbacks. b. must provide substantial and legitimate services on a competitive basis. c. gives you rent-free office space. d. can offer incentives for referrals of business. 4. The Good Faith Estimate (GFE): a. must be delivered at settlement. b. is the same as a HUD-1 statement. c. describes loan terms and fees and estimates settlement costs. d. covers seller-required title insurance. 5. Origination charges by lenders or brokers fall under which tolerance category level created by HUD? a. zero tolerance level b. 5% tolerance level c. 10% tolerance level d. no set tolerance level

MODULE 5

FHA Programs: Advantages for Borrowers

by Kenneth Harney

Learning Objectives
Upon completion of the module, the learner shall be able to: 1. Identify who created the Federal Housing Administration (FHA), and when and for what purposes. 2. List which Federal cabinet department now has jurisdiction over the FHA. 3. List the advantages for a borrower using FHA versus conventional financing. 4. Explain how FHA loans are funded. 5. List the 2 types of insurance premiums charged for FHA loans, and how they differ in amount. 6. Identify the different types of FHA lenders and how to locate them. 7. Name and list the purposes of FHAs main mortgage program. 8. Explain the FHA maximum mortgage limits and how to determine what they are for different market areas. 9. Identify the FHA down payment minimum. 10. List the FHA rules governing down payment gifts for borrowers. 11. Explain the FHA limits on seller contributions to borrower loan costs and settlement fees. 12. List maximum loan to value ratios for FHAs major programs. 13. List borrower eligibility criteria for Section 203(b) insurance. 14. Identify the 3 different categories of borrowers permitted by FHA. 15. Explain FHA restrictions on flipping of properties. 16. Explain how FHAs TOTAL system for evaluating applications functions. 17. Identify the key criteria used by FHA in manual underwriting of applications. 18. List the 4 acceptable sources of down payment cash for an FHA single family loan. 19. Explain how FHAs appraisal rules function. 20. Explain how FHA handles refinancings. 21. List the maximum annual premium to be paid on a loan if the upfront mortgage premium is rolled into the mortgage. 22. Discuss the key criteria and restrictions for FHA financing of condo units. 23. Explain the rules governing cancellation of FHA insurance premiums during the loan term. 24. Explain how FHAs 203(k) rehabilitation loan program works and who it is designed to serve. 25. List the types of improvements allowed under the streamlined version of the 203(k) program. 26. Explain how to finance energy-conservation improvements using FHA insurance. 27. List the eligibility rules for the HECM reverse mortgage program for seniors. 28. Explain how FHA insures lenders participating in its HECM program. 29. List FHAs manufactured home and lot insurance program requirements. 69

70Module 5

INTRODUCTION
From the 1990s through about 2005, real estate professionals viewed the Federal Housing Administrations (FHA) mortgage insurance programs as bureaucratic, overly-strict, and out-of-date technologically compared with conventional, private mortgage industry competitors. FHAs market share fell from the 12% to 13% range in the mid-1990s to less than 2% in 2005. Today, the situation is starkly different. FHA commands a large and growing market share an estimated 30 percent of all loans in 2010 and a 75 percent share of first-time buyers in some local markets. The agency has overhauled its controversial appraisal rules that once required home sellers to correct minor property defects prior to closing, and has greatly speeded up its loan processing turnaround times. Real estate and mortgage professionals who are not familiar with FHAs programs and rules today are at a severe competitive disadvantage when it comes to serving their clients.

First-time homebuyers with modest incomes and only small amounts of cash for down payments and settlement expenses. Buyers with higher-than-typical debt-to-income ratios, and credit scores that are considered marginal or unacceptable by conventional mortgage market standards. Buyers who need to make repairs to properties after acquiring them, and are seeking financing for the repairs plus the cost of the property itself. FHA guidelines allow for leniency when evaluating consumers credit backgrounds. The FHA credit guidelines are more lenient than conventional guidelines. Today most conventional loans conform to Fannie Mae and Freddie Mac guidelines because most conventional loans are sold in the secondary mortgage market to these institutions. FHA also accepts nontraditional credit history data based on applicants payments for rent, utilities, cable, and other periodic debt obligations, and allows seller contributions toward buyers closing expenses and loan fees up to 3% of the loan amount. FHA does not require borrowers to have cash reserves, unlike most conventional lending programs.

WHAT IS THE FHA?

The Federal Housing Administration was created by Congress in 1934 in the depths of the Great Depression. Its purpose was, and is, to provide liquidity for the residential mortgage market and facilitate home purchases. FHA is part of the U.S. Department of Housing and Urban Development (HUD). It does not lend money. Instead, it insures home loans made by private lenders that comply with the agencys underwriting standards. If borrowers subsequently default and go to foreclosure, lenders submit insurance claims and are reimbursed by FHA for 100% of the unpaid balance plus additional costs incurred during the delinquency and foreclosure process. Borrowers pay insurance premiums to FHA in 2 ways: an upfront premium at the time of closing monthly premiums during the term of the loan These premiums not only are used to fund FHAs insurance activities, but also pay for the agencys administrative operations. FHA does not receive money from the federal budget, but is designed to be self-sustaining through its premium income and reserves. Typically, FHA generates net income for the government.

FHA-APPROVED LENDERS
FHA delivers its services to the public through a nationwide network of approved lenders, ranging from banks and credit unions to mortgage companies. Lenders originating loans for FHA insurance generally are either: approved mortgagees who do full underwriting of loans themselves and must meet substantial financial capitalization tests, submit to regular monitoring, and accept full responsibility for the quality of their underwriting. correspondents who can take applications on behalf of sponsoring mortgagees. Underwriting, however, must be performed by the sponsoring mortgagee. Effective May 20, 2010, FHA no longer accepts new applications for loan correspondence approval and effective January 1, 2011, formerly approved loan correspondents will no longer have access to nonpublic FHA systems. Mortgage brokers typically take applications for FHA loans on behalf of an FHA-approved mortgagee or correspondent. To locate FHA lenders anywhere in the U.S. go to the HUD website. www.hud.gov

FHAS ADVANTAGES FOR BORROWERS

FHAs decades-old core function has been to provide financing resources for consumers who may not otherwise have access to conventional mortgage financing at favorable rates and terms. These borrowers typically include:

FHA Programs: Advantages for Borrowers71

FHA INTEREST RATES

There is no FHA interest rate. The agency does not set rates, instead permitting private lenders to offer market rates on a competitive basis.

minimum down payment is 10%. However, real estate professionals working with cash-deficient clients may look to several alternatives. FHA considers the following to be acceptable sources of downpayment cash: savings of the borrower gift money from a relative, employer or union, evidenced by a gift letter spelling out the amount and source of the gift and that no payment is required grants or secondary financing from a state or local program assisting homebuyers gift money from a non-profit organization that is not an interested party in the transaction The fourth source listed above strictly excludes socalled down payment assistance programs that receive contributions from home sellers which are then converted into gifts from the nonprofit group. FHA banned seller-financed down payment assistance schemes when it found that their borrowers defaulted and caused insurance claims disproportionately higher than other borrowers.

FHA PROGRAMS
FHAs most popular and best known program is for owner-occupied, single family home purchases and refinancings under the Section 203(b) program. The name 203(b) refers to the section of the National Housing Act which authorizes the program. 203(b) will receive the bulk of our attention in this modules material, however, the agency also offers mortgage insurance for: multifamily apartments specialized senior housing nursing home/health care facilities condominium housing rehabilitation of single family and small-scale multifamily housing reverse or home equity conversion mortgages manufactured housing Detailed information on all of these can be found at FHAs website. www.fha.gov

Mortgage Insurance Premiums (MIPs)

Under current statutory rules, the maximum mortgage insurance premium FHA may charge borrowers is set at 3% of the loan amount. The most it can charge upfront at closing is 2.25% of the loan amount. This upfront premium typically is rolled into the mortgage amount and is financed over time. The maximum annual premium is 0.55%, and is usually included as part of the borrowers monthly payment. Premium charges are discretionary, and FHA may change them, within statutory limitations, as market conditions dictate. As of October, 2010, the FHA upfront premium has been set at 100 basis points (1 percent) of the loan amount for 203(b) purchase mortgages and streamline refinancings. As of the same date, the annual premium on loans with downpayments of 5 percent or more is 85 basis points (0.85 percent) of the loan amount. For loans with downpayments of less than 5 percent, the premium is 90 basis points (0.90 percent.) Note that payment of annual premiums may be canceled when borrowers who have paid on time for at least 5 years have loan to value ratios (LTVs) on the property of 78% or less. Also note that FHA no longer makes refunds of portions of the upfront MIP to borrowers with excellent payment records who sell or refinance their homes. However, if a borrower refinances an FHA-insured loan into a new FHA loan within 3 years of origination, the agency generally provides a credit for a portion of the upfront MIP on the replacement loan.

203(b) Maximum Mortgage Limits

FHA has set ceilings on the principal amounts of loans that it will insure in hundreds of local areas around the country. These limits are based on formulas keyed to the overall cost of living in each area, along with housing prices. Maximums for single-family home loans are adjusted periodically but currently range from $271,050 to $729,750 in the highest cost areas. The limits by county area are available online. https://entp.hud.gov/idapp/html/hicost look.cfm  Each market area has separate limits based on the number of units in the property. For example, during 2009, the maximum mortgage amounts for the Orlando-Kissimmee area were: $353,750 for 1-family houses; $452,850 for 2-family; $547,400 for 3-family; and $680,300 for 4-family properties.

203(b) Down Payments

The minimum down payment required from a borrower is 3.5%, except in cases where the applicants FICO credit score is below 580, in which case the

72Module 5

Maximum LTVs
Although all new home purchase mortgages insured by FHA are subject to the statutory 3.5% maximum, the agency does allow rate and term refinancings (where no new money is being borrowed) and streamline refinancings to go to 97.75% LTV. On the other hand, refinancings where additional money is being taken outso called cash out refisare limited to 85% maximum LTVs.

is two times or more than the previous price, FHA requires a second appraisal. Sales by lenders disposing of REO/Foreclosed property, and sales by the property disposition firms they hire, are exempt from this rule. In January 2010, FHA Commissioner David Stevens temporarily waived the 90-day rule on transactions through February 2011 in order to facilitate sales and fix-ups, and to help reduce unsold inventories of houses around the country.

Borrower Eligibility Criteria for 203(b) Insurance

FHA has several broad categories of borrowers: Occupant borrowers. They must use the property as their principal residence, take legal title at closing, must be obligated to pay fully on the note, and must sign all security instruments connected with the mortgage. Non-occupant co-borrowers. These are people who agree to pay on the note, and co-own the house, but who need not actually reside in the property. A typical example here is parents who co-purchase with an adult child but live in another house of their own. Co-signers. They agree to make payments on the note if the owners fail to do so, but do not have an actual ownership stake in the real estate. They function more like guarantors. Eligible FHA borrowers must be legal U.S. residents but they are not required to be U.S. citizens. That is a frequently misunderstood but important point. They must have a Social Security number, however. A TIN (taxpayer identification number) alone is not sufficient. Generally the agency restricts borrowers to one FHA loan at a time, with limited case-by-case exceptions such as family relocations, where one property has not been sold but a new one is being acquired. Borrowers are not eligible for FHA financing if they are: currently delinquent on any federal debt or have a lien against any property for debt owed to the U.S. government delinquent on any FHA mortgage or had a claim paid on an FHA loan within the past 3 years

TOTAL: How FHA Evaluates Borrowers

FHA has developed a system that allows it to evaluate applications based on a scorecard tailored to its own historical experience of a variety of borrower characteristics. Known as TOTAL, the system is not an automated underwriting system such as Fannie Maes Desktop Underwriter or Freddie Macs Loan Prospector. It is more of an overlay to those 2 systems, allowing FHA to screen for combinations of characteristics that may be borderline for Fannie and Freddie, but fall within FHAs more generous parameters of acceptability. The TOTAL score is an algorithm, or statistical problem solving tool, that weighs an applicants credit history, monthly housing expenses, LTV, mortgage terms, and other factors. All FHA applicants now get an initial screening at underwriting using the TOTAL system, unless their credit files contain minimal information and they lack a credit score. Applicants whom FHA judges to be acceptable in terms of risk are rated accept. Others are scored as refer, which directs the underwriter to follow FHAs hands-on manual procedures. When applicants can show that they have information that is relevant to their credit risk, but that the TOTAL (Technology Open To Approved Lenders) system does not consider, such as assets that are not liquid but could be converted to cash and used for reserves or monthly payments in a pinch, manual underwriting is performed.

Key Manual Underwriting Factors

Since large percentages of FHA loans now receive manual underwritinganywhere from 25% to 40% in some locationsit is important to understand the key factors involved. Generally speaking, FHA has the industrys most lenient tolerance levels for bankruptcies, allowing consideration of an application even if the homebuyer completed a bankruptcy filing just 2 years before. If the bankruptcy can be documented as beyond the borrowers control, such as a serious, uninsured medical problem or a sudden closing of an employer, the tolerance period can drop to just one year. Similarly, in the case of a Chapter 13 bankruptcy, when all pay-

Anti-Flipping Rule
To avoid the practice of short-term flipping of properties, FHA generally has required sellers to have held legal title to their properties for at least 91 days prior to their contract with a buyer seeking FHA mortgage insurance. If the seller has owned the property anywhere from 91 days to 180 days and the new price

FHA Programs: Advantages for Borrowers73

ments called for under the plan have been completed successfully, FHA, with the permission of the bankruptcy court, will consider applications one year later. Conventional lenders typically reject such borrowers. Other examples where FHAs more sympathetic approach in manual underwriting differs sharply from private lenders are: Collection items on credit files. FHA does not require that they be paid off, but does require a suitable explanation from the borrower. Employment/income. FHA requires that the income claimed by the borrower must be reasonably expected to continue for another 4 years, and must both be documented and verified. Overtime or bonus income are acceptable as part of an application, but must be documented for 2 years and be likely to continue. Self-employment income must show a minimum of 2 years worth of documented and verified income. Other verified income may also be acceptable for qualification purposes, including Social Security payments, retirement plan payments, and alimony. Off the books income not reported to the IRS is never acceptable. Income from ownership of rental real estate may be considered, but it must be documented with a rental revenue history from the building(s), with no vacancy gaps in excess of 3 months.

FHA never adopted the Home Valuation Code of Conduct (HVCC) promulgated by Fannie Mae and Freddie Mac, but incorporated the core policy of the codeprevention of interference in the valuation process by loan officers or brokersinto its own rules. Unlike Fannie Mae and Freddie Mac, FHA also allows appraisers to disclose what they are paid for their work on the valuation report. That, in turn, enables consumers to compare what they are being charged for the appraisal with what any third-party appraisal management company may be receiving. FHA requires appraisers to cite property conditions that normally require repairs in advance of loan closing including: Any condition affecting the health and safety of the occupants. Physical conditions affecting structural integrity. Lead-based paint removal or treatment. If the structure was built before 1978, affected paint surfaces must be treated, including outbuildings, fences, and other surfaces.

REFINANCINGS UNDER 203(b)

FHAs refinancings fall into several broad categories, each with slightly different rules: Rate and term refis. These involve no or minimal (under $500) additional cash out of the proceeds at closing. To qualify, FHA requires that the existing loan must be current, the borrower must have legal title to the real estate, and the property must get a full appraisal. Also, the new mortgage (post-refi) cannot exceed 97.75% of the appraised property value (i.e., a maximum LTV of 97.75). Cash out refis. Two appraisals are required by FHA to establish value for mortgage insurance purposes. Only 1- to 2-unit properties are eligible, and the maximum LTV post-refi is 85%. FHA to FHA Streamline Refis. These are only available when the loan to be refinanced already is insured by FHA, and there is no additional cash taken out. An appraisal is not required, but the maximum mortgage amount is limited to the lesser of the existing principal balance, plus accrued interest, fees, and escrows. When an appraisal is performed for a streamline refi, the maximum LTV is 97.75%.

Appraisals
FHA has made significant changes in its once cumbersome appraisal process in recent years. The basic goal has been to make FHA appraisal practices comparable with those of Fannie Mae and Freddie Mac in the conventional marketplace. FHA now uses Fannie Maes appraisal forms and its property repair standards. Conditions that once required correction or repair in advance of closing (e.g., holes in screens, small cracks in windows, worn carpets or floor finishes) now are merely noted in the appraisal report, but do not stall the real estate transaction. Among the noteworthy appraisal standards points of difference between FHA and other market participants: All FHA appraisers must be certified for residential or general valuations, not merely licensed by their state. FHA maintains a national roster of appraisers approved to do valuations. FHA requires lenders to provide a standard HUD form to consumers encouraging them to get a home inspection prior to closing their purchase.

OTHER FHA PROGRAMS Condominium Units

Though for decades FHA insured condominium mortgages under the Section 234(c) program, vir-

74Module 5

tually all condo unit mortgages in 2011 and beyond are being insured under the rules of the basic 203(b) program. FHA rules effective in 2010 and 2011 make other significant changes in condo financings: First, spot loans on individual units in condominium projects that have not been approved or recertified by FHA no longer can be made by lenders. That is, the entire project must now have updated information on file with FHA regarding condo association budgets and reserves, insurance coverage and other key data that relates to the associations financial stability. FHA does not want to insure a mortgage on a unit in a building where the underlying finances are shaky such as inadequate funds set aside for replacing essential components such as roofs, HVAC system, elevators and the like. In December 2010, approximately 25,000 condo projects failed to submit required certification applications and thus technically became ineligible for individual unit mortgages insured by FHA. Real estate professionals, lenders, unit owners and buyers should check the following look up list online to see the current FHA certification status of condo projects of interest: https://entp.hud.gov/idapp/ html/condlook.cfm. Under rules revised in 2009, for individual units to be eligible FHA now requires: At least 50% of the units in the entire project must be owner-occupied or sold. Projects must be covered by hazard and liability insurance, and flood insurance where applicable. No more than 15% of the individual units may be in arrears on their condo association dues payments. No more than 25% of the total floor space in the project may be used for nonresidential, commercial purposes. An analysis must be performed on the condo associations reserve funds to ensure that they are adequate to handle upcoming capital expenditures and maintenance. No more than 10% of the units may be owned by a single investor or party. Newly-certified projects must reapply to FHA every 2 years. Some of these restrictions are likely to inhibit real estate professionals from using FHA financing for clients in projects that do not meet all the guidelines. Also, check with FHA-approved mortgagees to determine whether a spot loan is feasible for a particular unit under current rules.

FHA Rehabilitation Loan Financingthe 203(k) Program

The 203(k) insurance program is designed to assist buyers who want to finance both the purchase of the property itself, and its substantial renovation, through a single mortgage. It is also available to finance rehabs of existing homes already owned by the applicant. By combining both acquisition and renovation in one loan, 203(k) allows consumers to avoid the high costs of short-term bridge financings. FHA allows permanent, 30-year loan amounts to be based on the projected value of the house after completion of the repairs and upgrades. A portion of the loan proceeds is designated for buying the house itself; the balance of the loan is placed into an escrow account, from which funds are drawn periodically as phases of the renovation are completed. The maximum 203(k) mortgage amount is the lesser of: the as is property value plus the estimated cost of the renovation the existing debt on a house to be refinanced, plus the estimated repair costs 110% of the estimated after renovation value The minimum down payment is 3.5% of the smallest number of the alternatives above. Note that the 203(k) program is unusual in that it does not require an upfront MIP. However, because of the added complexities that come with repairs and escrow drawdowns, there generally are higher fees levied by lenders to cover expenses such as preparation of architectural and engineering documents, reviews by a 203(k) inspector, and additional appraisal costs. The minimum repair cost to be eligible for 203(k) is $5,000. There is no set maximum.

Streamline 203(k) for Limited Repairs

This is a relatively new program from FHA, and it has been extremely well received by real estate professionals and consumers because it is much simpler than the regular 203(k) program, and does not require rehab consultants, or in some cases even third-party inspections. Approximately 75% of all 203(k) loans applications are for the streamlined, limited repair option. It is an excellent program for a buyer who simply needs to quickly upgrade several features of the house without a lot of red tape and inspections. It is also frequently used in conjunction with purchase of FHA-owned (REO) properties that need to be repaired after purchase.

FHA Programs: Advantages for Borrowers75

Among the typical improvements made with Streamline 203(k) financing are: kitchen remodeling, including purchase of appliances painting and weatherization finishing basements and waterproofing septic system or well upgrades or replacement roof repairs, heating and air conditioning system energy efficiency upgrades The maximum rehab amount is $35,000. No additions or structural repairs are permitted. Neither are improvement projects taking more than 6 months to complete. When repairs are estimated to cost less than $15,000, no third-party inspections or consultants are required by FHA. Although 203(k) Streamline-insured loan funds must be spent on residential purposes only, FHA does allow the program to be used in connection with mixed-use properties. There are limitations on the percentage of total space in the mortgaged structure that may be commercialuse, however. For 1-story buildings, the commercial limit is 25% of interior space. For 2-story structures, the limit is 49%, and for 3-story projects, 33%.

a portion of their equity into spendable cash. Rather than paying the lender money as in a standard forward mortgage, the lender makes payments to the senior homeowners. These funds may be disbursed in a lump sum, credit line, or periodic installments. Payments can continue for as long as the seniors occupy the home, remain current on taxes and insurance, and maintain it in good condition. Owners can never be forced to sell the house, even if the balance they owe the lender, including interest and fees, exceeds the market value of the property. FHAs role is to guarantee participating private lenders that, in the event the balance owed approaches what FHA defines as the maximum claim amount the tipping point where the debt owed exceeds the propertys resale valuethe agency will take over the account and pay the lender the full balance of what it is owed. Maximum initial payments available to seniors are determined by a formula using the appraised home value, age of the borrowers, and interest rate on the loan. In October 2010, FHA introduced a new choice for HECM borrowers: They can now opt for the standard program, which comes with an upfront mortgage insurance premium of 2 percent of the property value and a monthly 1.5 percent premium of the outstanding balance. Alternatively, they can choose the new HECM Saver program, which requires lower upfront premiums but also restricts principal limits that is, the total amount of money available to a borrower over the course of the loan. The Saver program has an upfront premium of just 0.01 percent of the property value, and a 1.25 percent monthly premium. Under the Saver program, borrowers will be able to receive approximately 10 to 18 percent less than they would under the HECM Standard. Both programs require free counseling upfront by HUDapproved counselors. More detail about the HECM program, including loan limits, can be found online. www.hud.gov/offices/hsg/sfh/hecm/ hecmhome.cfm

Energy Efficient Mortgage (EEM) Financing

This is an add-on feature used in conjunction with the 203(b) and 203(k) programs that provides special financing for energy improvements with home purchases and refinancings. It allows the financing of up to 100% of the cost of qualified energy improvements up to the greater of: 5% of the property value ($8,000 maximum), or $4,000 The add-on financing is permitted only when the value of the energy to be saved by the improvement is more than the cost of the improvements during their useful life. To determine the costs and savings, the property must be inspected using a Home Energy Ratings Systems (HERS) or an energy consultant. Up to $200 of the cost of the HERS inspection may be included in the loan amount.

Manufactured Home and Lot Insurance (Title I)

Under this program, FHA provides mortgage insurance on manufactured houses, including mobile homes, along with the lots on which they are sited. Loans on manufactured home structures plus a lot can go to a maximum of $92,904, while loans for a lot alone are capped at $23,226. In designated high-cost areas, these limits can be increased by as much as 85%. Loan terms for a single unit manufactured home on a

Home Equity Conversion Mortgages (HECMs)

FHA dominates the reverse mortgage field by virtue of its HECM insurance program. A reverse mortgage allows senior homeowners62 and olderto convert

76Module 5

lot can extend for as long as 20 years. Where multiple manufactured units constitute the home, terms can be up to 25 years. The maximum term on loans for lots without a structure is 15 years. The FHA is continually reviewing and evaluating its mortgage insurance underwriting standards. Consequentially the information in this module is correct at the time of printing; it is recommended to check frequently with the FHA for policy changes and updates. http://portal.hud.gov/

FHA Programs: Advantages for Borrowers77

M odul e 5 P r o g r e s s T e s t
You are not required to answer the progress test questions to complete the 14-hour course. They are intended to help prepare you for the Final Exam. Choose the best response to each question. The answers are found in the back of the book.
1. FHA housing programs are designed primarily for: a. people experienced in home ownership. b. illegal aliens. c. first-time purchasers with modest incomes and limited cash for a down payment. d. developers of tract housing. 2. FHA down payments can include a/an: a. kick-back from the builder. b. gift or grant from a state or local homeowner assistance program. c. in-kind contribution of labor in building the house. d. gift from the seller. 3. An FHA loan requires a minimum down payment of: a. 3.5%. b. 5%. c. 10%. d. 20%. 4. FHA appraisers can be found: a. in the yellow pages. b. at any state-certified appraisal firm. c. on an FHA roster of approved appraisers. d. in a real estate office. 5. FHA rehab loans allow for post-renovation to what percent of the after renovation value? a. 100% b. 110% c. 200% d. 300%

78Module 5

MODULE 6

Appraising Real Estate: The Effects of the Great Recession

Learning Objectives
Upon completion of the module, the learner shall be able to: 1. Define the term appraisal. 2. Explain the difference between price and value. 3. Define the term market value. 4. List the 3 categories of registration and certification for appraisers in Florida. 5. List the basic steps of the appraisal process.

by Francois Gregoire

6. Explain the differences between the 3 methods of determining value: sales comparison, cost depreciation, and income approach. 7. Explain the difference between replacement cost and reproduction cost. 8. Define the terms physical deterioration, functional obsolescence, and external obsolescence. 9. Name the sources of appraisal standards and guidelines. 10. Discuss the 4 sections of the Ethics Rule. 11. Compare and contrast USPAP Standards 1 and 2. 12. Discuss the reasoning of the Fannie Mae Market Conditions form. 13. Understand the history and implications of the Home Valuation Code of Conduct and Appraiser Independence Guidelines. 14. Discuss the purpose of the HUD Mortgagee Letters. 15. Explain accepted communication methods between real estate licensees and appraisers. 16. Discuss some common appraisal myths and explain the facts relating to each.

INTRODUCTION
Real estate licensees have had to cope with a number of changes to their businesses since the great recession of 20082009. It is likely that none have been as drastic, difficult to understand, or had more of an impact on licensees transactions than the changes resulting from modifications to long-standing appraisal practices. The purpose of this module is to provide an understanding of the appraisal process and the legislation, rules, and guidelines affecting appraisers and appraisals. Rather than instruction on how to appraise, the objective is to provide information to assist real

estate professionals in separating reality from myth. The more you know about the person with the clipboard, the more effective your ability to deal with the myriad of changes and challenges ahead. The practice of developing an opinion of the value of real property is called real estate appraisal, property valuation, or land valuation. Appraisals are needed because of the heterogeneous or diverse nature of real property. It is clear that no 2 properties are identical and all parcels differ from one another in some respect, not the least of which is their location, one of the most important determinants of their value. Due 79

80Module 6

to the inherent heterogeneity of real property, there is no centralized market for the trading of property rights, as there is for trade in corporate stock and some classes of personal property. The absence of a market-based pricing mechanism determines the need for an expert appraisal of real estate and/or property. Real estate licensees are likely to encounter appraisers and appraisals in a number of circumstancesmost often related to a mortgage loan to finance the purchase of real estate. Since a written appraisal prepared by a state licensed or certified appraiser is a requirement for many mortgage loans, an understanding of federal, state, and private appraisal requirements will help you enhance your credibility and productivity and avoid misunderstandings and appraisal related catastrophes.

require the use of state certified appraisers to complete appraisals for mortgage loans.

Federally Related Transaction

Title XI of FIRREA describes a federally related transaction as any real estate-related financial transaction in which: a federal financial institutions regulatory agency or the Resolution Trust Corporation engages in, contracts for, or regulates requires the services of an appraiser

Real Estate Related Financial Transaction

According to the act, a real estate related financial transaction is any transaction involving: the sale, lease, purchase, investment in or exchange of real property, including interests in property, or the financing thereof the refinancing of real property or interests in real property the use of real property or interests in property as security for a loan or investment, including mortgage-backed securities The long and short of it is, most mortgage loans used to finance the sale, or refinance residential and nonresidential property, require an appraisal completed by a state-licensed or state-certified appraiser.

FEDERAL FINANCIAL INSTITUTIONS REFORM RECOVERY AND ENFORCEMENT ACT of 1989 (FIRREA)
For many real estate licensees the recent financial crisis affecting the residential real estate market is a new phenomenon, but it is by no means the first national real estate economic calamity. In the late 1980s the savings and loan industry, at that time one of the primary sources of capital for the funding of single family residential mortgage loans, all but collapsed. During the savings and loan crisis, over 700 savings and loan associations failed at a cost of over $120 billion to U.S. taxpayers. As a direct result, Congress enacted the Federal Financial Institutions Reform Recovery and Enforcement Act of 1989 (FIRREA). In addition to establishing the Resolution Trust Corporation (RTC) to close the insolvent savings and loan associations, dispose of their assets, and provide funds to replenish deposit insurance funds, Title XI of FIRREA required the states to create systems and agencies to license and regulate real property appraisers. At that time many states, including Florida, required real property appraisers to hold a real estate license, but Congress insisted the real estate appraiser licensing and regulatory agency be separate and distinct from the agency charged with the responsibility of licensing and regulating real estate brokers and sales associates. Title XI of FIRREA requires the use of a state licensed or state certified appraiser for federally related transactions. Additionally, Title XI explicitly requires appraisals for financial transactions with the Federal National Mortgage Association (Fannie Mae); the Federal Home Loan Mortgage Corporation (Freddie Mac); and the Resolution Trust Corporation (RTC) be prepared by licensed or certified appraisers. Although not specifically addressed in Title XI, loans insured by the Federal Housing Administration (FHA) and loans guaranteed by the Veterans Administration (VA) also

Appraisal Subcommittee
One of the most important provisions of Title XI of FIRREA was the establishment of the Appraisal Subcommittee (ASC). Membership in the ASC consists of designees from: federal financial institutions regulatory agencies Federal Reserve Board, Federal Deposit Insurance Corporation Office of the Comptroller of Currency Office of Thrift Supervision National Credit Union Administration Department of Housing and Urban Development (HUD) The ASC provides oversight of the real estate appraisal process as it relates to federally related transactions. Their responsibilities include monitoring the requirements for certification and licensing of appraisers established by the states, territories, and the District of Columbia. The ASC also monitors the requirements established by the state agencies regard-

Appraising Real Estate: The Effects of the Great Recession 81

ing appraisal standards for federally related transactions and their disciplinary procedures for appraisers. A National Registry of state licensed and state certified appraisers is also maintained by the ASC. The ASC also makes grants to the Appraisal Foundation for the development of appraisal standards and establishment of appraiser qualifications, and reviews their practices, procedures, activities, and organizational structure. Title XI of FIRREA also requires the ASC to make an annual report to Congress.

Florida Real Estate Appraisal Board (FREAB)

The 1990 law, Chapter 475, Part II, F.S., created the Florida Real Estate Appraisal Board (FREAB) within the Division of Real Estate (DRE) of the Department of Business and Professional Regulation (DBPR). Similar to the Florida Real Estate Commission (FREC), the FREAB consists of 7 members: 4 appraisal practitioners, 2 consumers, and 1 user. The law requires 2 licensed or certified residential real estate appraisers and 2 certified general real estate appraisers at the time of their appointment. Two consumer members are representatives of the general public and not connected in any way with the practice of real estate appraisal, real estate brokerage, or mortgage lending. One user member represents organizations that use appraisals for the purpose of eminent domain proceedings, financial transactions, or mortgage insurance. Members are appointed by the governor, subject to confirmation by the senate, for 4-year terms. The FREAB is required, by law, to meet at least once a quarter. In practice, the FREAB meets every other month. The FREAB has the authority to regulate the issuance of licenses, certifications, registrations, and permits (instructors), and to discipline appraisers who fail to comply with the law and rules of the board. The FREAB also establishes qualifications for licenses, certifications, registrations, and permits. Title XI of FIRREA requires that the FREAB establish qualifications for certification that meet or exceed those defined by the Appraiser Qualifications Board (AQB) of the Appraisal Foundation. The law provides that the FREAB establish standards for real estate appraisals and establish standards for, and regulate, supervisory appraisers. The appraisal standards established by the FREAB must meet or exceed the standards adopted by the Appraisal Standards Board (ASB) of the Appraisal Foundation.

APPRAISER LICENSE AND CERTIFICATION REQUIREMENTS Chapter 475, Part II, F.S.
In response to the crisis with savings and loan associations and in anticipation of the pending federal requirements, in 1989 the Florida legislature adopted a law to regulate Florida real estate appraisers. When FIRREA became law in August of the same year, the Florida statute was determined to be out of compliance with the new federal requirements. The Florida legislature responded with a new licensing and certification law for real estate appraisers in 1990. The 1990 Florida statute complied fully with Title XI of FIRREA. Corporations, partnerships, firms, and groups are ineligible for licensing or certification as an appraiser. Credentials are issued to individual persons only. The AQB minimum education, experience, and examination requirements have been incorporated into Chapter 475, Part II, F.S., and rules of the FREAB. As a result of an amendment to Chapter 475, Part II, F.S., adopted and signed into law in 2003, the licensed appraiser credential is no longer issued by the DBPR. Individuals holding any one of the above described credentials are permitted under Florida law to provide appraisal services in any location in Florida. As does Chapter 475 Part I, F.S., Chapter 475, Part II, F.S., specifies violations of the law and provides for a range of penalties for persons found guilty of violations of the law. The possible sanctions include: reprimand fine of up to $5,000 for each offense suspension for up to 10 years revocation An appraiser is a person who is a registered trainee real estate appraiser, licensed real estate appraiser, or a certified real estate appraiser. They render a professional service and are considered a professional within the meaning of Section 95.11(4) (a), F.S.

Categories
Originally, 4 categories of licensees were established, including the category, licensed appraiser. Due to subsequent amendments to Chapter 475 Part II, F.S., the FREAB now issues only 3: registered trainee real estate appraiser certified residential real estate appraiser certified general real estate appraiser Registered trainee real estate appraisers. Registered trainee real estate appraisers are registered with the DBPR as qualified to perform appraisal services only under the direct supervision of a licensed or certified appraiser. The minimum education

82Module 6

requirement consists of 100 hours of board prescribed courses and an approved end-of-course examination. No state examination is required by Chapter 475, Part II, F.S. In a manner similar to that of licensed real estate sales associates affiliation with a real estate broker, registered trainee real estate appraisers must affiliate with a supervisory appraiser; either a certified residential or certified general appraiser. The supervisory appraiser, designated as the primary supervisory appraiser, is responsible for the direct supervision and training of the registered trainee. The primary supervisory appraiser may also designate additional licensed or certified appraisers as secondary supervisory appraisers. A secondary supervisory appraiser must be affiliated with the same firm or business as the primary supervisory appraiser and the primary or secondary supervisory appraiser must have the same business address as the registered trainee real estate appraiser. No certified appraiser may supervise more than 3 trainees at one time. By rule, registered trainee real estate appraisers are required to be located in the same county as their primary supervisory appraiser, or in a county adjacent. Registered trainee real estate appraisers, however, are allowed to appraise throughout the state under supervision. Certified residential real estate appraisers. Individuals certified by the DBPR as qualified to issue appraisal reports for residential real property of 1- to 4-residential units, without regard to transaction value or complexity, or as authorized by federal regulation, hold the certified residential real estate appraiser credential. The AQB has determined the minimum qualifications for state certified residential appraisers are: associate (2 year) degree or higher from an accredited educational institution, or 21 semester hours of AQB prescribed college level courses a minimum of 200 classroom hours of approved appraisal education, including the 15 hour National USPAP Course 2,500 hours of experience obtained during no fewer than 24 months Passing grade on an AQB approved examination Certified general real estate appraisers. A certified general real estate appraiser is an individual certified by the DBPR as qualified to issue appraisal reports for any type of real property in Florida. The AQB determined minimum qualifications for state certified general appraisers are: bachelors degree or higher from an accredited educational institution, or 30 semester hours of AQBprescribed college level courses a minimum of 300 classroom hours of approved

appraisal education, including the 15-hour national USPAP Course 3,000 hours of experience obtained during no fewer than thirty months passing grade on an AQB-approved examination

VALUATION
Appraisers provide valuation services in an independent, impartial, and objective manner. Valuation services are those pertaining to aspects of property value. Bias or advocacy on the part of an appraiser is prohibited. A real estate licensee will most often encounter and interact with an appraiser after the appraiser has an assignment to appraise a property as a result of a contract for sale. The lender is usually required to have an appraisal completed to have an estimate of the value of the property being offered as security for a mortgage loan. The lender is interested in the value of the property as opposed to the price of the property.

Price
Price is the quantity of one thing which is exchanged for another; 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. Price is a fact.

Value
Value, on the other hand, is a matter of opinion; it is the amount of money for which something is exchangeable. 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.

Market Value
For appraisal purposes, value is an opinion of the worth of a property at a given time in accordance with a specific definition of value. In most instances, the lender or loan originator is interested in the appraisers opinion of the market value of the subject property. Among other things, the amount of the loan often depends upon the lesser of the sales price or estimate of market value of the subject property. As such, it is important for real estate licensees to be aware of, and understand, the definition of market value applicable to most residential real estate appraisal assignments.

Appraising Real Estate: The Effects of the Great Recession 83

Market value is the most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller, each acting prudently, knowledgeably, and assuming the price is not affected by undue stimulus. 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 is 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. *Adjustments to the comparables must be made for special or creative financing or sales concessions (Source: Fannie Mae Form 1004 March, 2005). Not only is the definition of market value applicable to the opinion developed by the appraiser, it is also used as a test of transactions that are examined for possible use as comparable sales. In most circumstances, the transaction details of each of the comparable sales must meet each of the 5 conditions to be considered arms length. In a post recession real estate market, an appraisers job is complicated by the volume of transactions negotiated and closed under conditions that cause them to fail the tests enumerated in the definition of market value.

familiar to real estate licensees, the easiest to understand, and often the most applicable to the valuation of 1- to 4-family residential properties. This approach has as its basis the principle of substitution; an individual is not likely 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 appraised (subject property) and comparable properties that have recently sold. In an attempt to measure the market reactions of typical buyers and sellers, the value of the subject property is inferred from the selling prices of the comparable properties. The inference is made by comparing the comparable sales to the subject property and making adjustments to the comparable sale for the differences. The value difference must be measurable and significant enough to affect market behavior. 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 percentage of the sales price or a specific dollar amount. The amount of adjustment, contrary to widely held belief, is not derived from a list. Several methodspaired sales, cost analysis, and capitalization of rent loss or gainare used to derive individual adjustments for differences. To be effective, there must be an abundance of 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. Among the shortcomings inherent in the sales comparison approach is the difficulty in making adjustments for subjectively valued characteristics such as design, appeal, and view.

THE APPRAISAL PROCESS

Because real estate markets are not centralized, and single family markets in particular are incredibly local, what has evolved for the valuation of real property is the appraisal process. Within the appraisal process are several means or approaches to developing an opinion of value. The most common approaches utilized in the valuation of single family residential property are: sales comparison approach cost depreciation approach income approach

Cost Depreciation Approach

The cost depreciation approach is sometimes referred to simply as the cost approach or summation. Again, it is based upon the principle of substitution. In this case, an individual is not likely to pay more for a property than it costs 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.

Sales Comparison Approach

The sales comparison approach is the method most

84Module 6

The application of the cost depreciation approach requires the appraiser to estimate the value of the subject site as though vacant. Usually this is accomplished by the application of the sales comparison approach. In the absence of comparable vacant land sales, the appraiser may employ alternative methods such as extraction or allocation. 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 the cost of materials and labor required to replicate the subject improvements in every detail; a reproduction of the subject improvements. Generally, the appraiser will utilize a cost service or manual such as the Marshall & Swift Residential Cost Handbook. 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 causesphysical 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 exposure to 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 the 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. 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 credible and reliable indication of value for proposed, new, and nearly new residential properties. When the improvements are subject to significant depreciation, an accurate estimate of accrued depreciation is increasingly difficult to obtain, and the indication of value is less credible.

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 1-to 4-family residential property. In the event the appraiser is required to consider the income potential of a 1-to 4-family residential property, the appraiser will most often develop an indication of value by use of a gross rent multiplier. The gross rent multiplier (GRM) is the ratio between the monthly or annual rent of a property and its sales price. It is calculated by dividing the 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 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.

Reconciliation
After the applicable approaches are completed, and an indication of value is derived from each, they are reconciled into a final opinion of value. Provided the data is current and reliable, and the execution of the approaches to values is done appropriately, each should produce an indication of value within a relatively tight range. Reconciliation is the process of re-examining each of the applied approaches to value for reliability and volume of data, the appropriateness to the valuation of the subject property based upon the property type and characteristics, and the soundness of each indication of value. This process is not an average of the various indications of value, but a process of judging which approach produced the most reliable and credible indication of value.

USPAP
Regardless of the intended use of the appraisal, if prepared by either an appraiser registered, licensed, or certified under Chapter 475 Part II, F.S., or by a real

Appraising Real Estate: The Effects of the Great Recession 85

estate sales associate or real estate broker licensed under Chapter 475 Part I, F.S., the appraisal must comply with the Uniform Standards of Professional Appraisal Practice (USPAP). Depending on the intended use and intended users, additional standards and guidelines may be applicable. USPAP is promulgated by the Appraisal Standards Board (ASB) of the Appraisal Foundation. When Congress passed FIRREA in 1989, the Appraisal Foundation was recognized as the source of appraiser qualifications and appraisal standards. Title XI of FIRREA specifically requires that federally regulated financial institutions adopt standards for the performance of real estate appraisals in connection with federally related transactions, and that the standards require, at a minimum, compliance with appraisal standards promulgated by the ASB of the Appraisal Foundation. In addition, the law requires written appraisals for federally related transactions. The original USPAP was developed in 1987, prior to the enactment of Title XI of FIRREA. It was copyrighted by the Appraisal Foundation in 1987 and adopted by the major appraisal organizations in North America. The 20102011 edition of USPAP consists of Definitions, a Preamble, 4 Rules, 10 Standards, and 5 Statements on Appraisal Standards. All are applicable to registered, licensed, and certified appraisers except Standard 4 through Standard 10. Real estate licensees often have specific rules and standards cited to them by appraisers when explaining their work or details about an appraisal. Those most likely to be cited and of most interest to real estate licensees are: Ethics Rule Conduct Section Management Section Confidentiality Section Competency Rule Scope of Work Rule Standard 1 Real Property Appraisal Development Standard 2 Real Property Appraisal Reporting

ethically and competently and prohibits criminal conduct. This section also imposes to perform assignments with impartiality, objectivity, and independence. Advocacy is prohibited in this section, along with communicating assignment results in a misleading or fraudulent manner. Appraisers are also prohibited from knowingly permitting an employee or other person from communicating a misleading or fraudulent report. Real estate licensees should be aware that the appraiser is not an advocate for the buyer, seller, agent, or the lender. This section of the Ethics Rule prohibits the appraiser from misleading the reader of the appraisal report by omitting information about the subject property, the market, or comparable sales. Management Section. Appraisers are prohibited from paying undisclosed fees or commissions in connection with the procurement of an appraisal assignment by the Management Section of the Ethics Rule. This section also prohibits the appraiser from accepting an assignment, or having an arrangement for compensation that depends on: the reporting of a predetermined result (such as an opinion of value) a direction in assignment results that favors the cause of the client the amount of the value opinion the attainment of a stipulated result (approval of a loan or closing of a sale) the occurrence of a subsequent event directly related to the appraisers opinion and specific to the purpose of the assignment (payment of a commission or fee) In simple terms, this section of the Ethics Rule prohibits the appraiser from contingent fee arrangements. It is unethical and illegal for an appraiser to accept an appraisal assignment and assure the client or other parties that the opinion of value will be at, above, or below a specific number. It is unethical and illegal for an appraiser to agree to an arrangement to be paid for the appraisal only if the value is a certain amount. The same applies to agreements for the appraiser to be paid only if the sale closes or the loan is approved. Variations in the appraisal fee that depend on assignment results, specific value opinions, or occurrence of subsequent events are prohibited. Remember, the appraiser is required to perform assignments with impartiality, objectivity, and independence. Confidentiality Section. The Confidentiality Section of the Ethics Rule is often cited by appraisers in their discussions with real estate licensees, buyers, and sellers. This section requires the appraiser to be aware of and comply with all confidentiality laws and

Ethics Rule
The Ethics Rule has 4 separate sections: Conduct, Management, Confidentiality, and Record Keeping. Three of the sections are described below. The Ethics Rule requires the appraisers observation of the highest standards of professional ethics and compliance with USPAP. Conduct Section. The Conduct Section of the Ethics Rule requires the appraiser to perform assignments

86Module 6

regulations applicable in the appraisal assignment. It instructs the appraiser not to disclose confidential information or assignment results (value opinions) to anyone other than the client, or to persons specifically authorized by the client. The client is the party that engages the appraiser for the assignment and most often is the lender. Although the appraiser is often willing to inform the buyer, seller, or real estate licensee of the value opinion, if none of them is the client, the disclosure cannot be made. The client, of course, may authorize the appraiser to disclose the results and discuss the appraisal with other parties.

Competency Rule
In the past year, probably no section of USPAP has been discussed more by non-appraisers than the Competency Rule. Compliance with the rule is required by Chapter 475, Part II, F.S., and necessary

to ensure public trust in the appraisal profession. The rule requires the appraiser to have the knowledge and experience to complete the assignment competently. In the absence of competency, the appraiser must disclose the lack of knowledge and/or experience to the client before accepting the assignment; take all steps necessary or appropriate to complete the assignment competently; and describe the lack of knowledge and/ or experience and the steps taken to complete the assignment competently in the report. Because of the importance of the Competency Rule when discussing appraisals in a post great recession world, it is appropriate to cite sections of the rule and comments from the 20102011 Edition of USPAP. See below for more details about competency.

Scope of Work Rule

The Scope of Work Rule is rather lengthy, but aspects are worth discussing to illustrate the appraisers obligations and the way each appraisal assignment is

COMPETENCY Determining Competency

The appraiser must determine, prior to accepting an assignment, that he or she can perform the assignment competently. Competency requires: 1. the ability to properly identify the problem to be addressed 2. the knowledge and experience to complete the assignment competently, and 3. recognition of, and compliance with, laws and regulations that apply to the appraiser or to the assignment Comment: Competency may apply to factors such as, but not limited to, an appraisers familiarity with a specific type of property or asset, a market, a geographic area, an intended use, specific laws and regulations, or an analytical method. If such a factor is necessary for an appraiser to develop credible assignment results, the appraiser is responsible for having the competency to address that factor or for following the steps outlined below to satisfy this COMPETENCY RULE. For assignments with retrospective opinions and conclusions, the appraiser must meet the requirements of this COMPETENCY RULE at the time of the assignment, rather than the effective date.

Acquiring Competency
If an appraiser determines he or she is not competent prior to accepting an assignment, the appraiser must: 1. disclose the lack of knowledge and/or experience to the client before accepting the assignment 2. take all steps necessary or appropriate to complete the assignment competently, and 3. describe, in the report, the lack of knowledge and/or experience and the steps taken to complete the assignment competently Comment: Competency can be acquired in various ways, including, but not limited to, personal study by the appraiser, association with an appraiser reasonably believed to have the necessary knowledge and/or experience, or retention of others who possess the necessary knowledge and/or experience. In an assignment where geographic competency is necessary, an appraiser who is not familiar with the relevant market characteristics must acquire an understanding necessary to produce credible assignment results for the specific property type and market involved.

Appraising Real Estate: The Effects of the Great Recession 87

approached. The scope of work is developed and determined by the appraiser in consultation with the client. It involves the identification of the problem to be solved and making decisions as to the extent of research and analysis necessary to solve the problem and fulfill the clients needs. Part of the scope of work decision is determining which of the 3 approaches to value is applicable to the appraisal assignment and necessary to develop credible assignment results, and if any of the approaches may be excluded without compromising the credibility of the opinion of value. The scope of work, at a minimum, must include the research, analysis, and reporting necessary to comply with lender, underwriter, and government agency guidelines. This is the section of USPAP that requires the appraiser to adhere to Fannie Mae and Freddie Mac appraisal guidelines. It also imposes on the appraiser an obligation to perform the appraisal and report the findings as specified by HUD or the VA if the appraisal is completed for an FHA-insured or VA-guaranteed loan. The scope of work is acceptable when it meets or exceeds the expectations of parties who are regular intended users of the particular type of appraisal assignment and is similar to the scope of work decision by the appraisers peers when performing the same or a similar appraisal assignment.

Appraisals are permitted to be reported in several ways. Written and oral reports are allowed; however if the appraisal is to be used in connection with a Federally Related Transaction (FRT), the appraisal must be in writing and signed. Standard 2 permits appraisals to be reported under 1 of 3 options; self contained, summary, and restricted use. Most real estate licensees are familiar with the standard form reports used for residential mortgage loan appraisals. The most common form is the Fannie Mae 1004/Freddie Mac 70, also known as the Uniform Residential Appraisal Report (URAR). This form report is a good example of an appraisal reported under the summary report option. By design, USPAP defines broad minimum standards for real property appraisals. There are, however, a wide variety of possible intended users and intended uses of appraisals. USPAP provides for and allows federal and state agencies, as well as various client groups and types of users to adopt more specific and stringent standards. To comply with the rules and standards above, appraisers must be aware of the additional requirements imposed by each client group or agency. See GUIDES FOR ADDITIONAL REQUIREMENTS on page 84.

CHANGES SUBSEQUENT TO THE GREAT RECESSION

As a result of the recent recession and declines in property value, there have been significant changes in real estate markets, brokerage businesses, and real estate appraisal businesses. Banks and thrifts have altered their procedures for evaluating borrowers, extending credit, and assigning appraisals.

Standard 1: Real Property Appraisal Development

The appraiser complies with this standard by identifying the problem, determining the scope of work necessary to solve the problem, and completing the research and analysis necessary to produce a credible appraisal. In observation of this standard, among other requirements, the appraiser makes an analysis of all agreements of sale, options, and listings of the subject property current as of the effective date of the appraisal. The necessary approaches to value are completed, and the various indications of value are reconciled to arrive at an opinion of value.

Fannie Mae 1004 MC Market Conditions Addendum

Fannie Mae and Freddie Mac were caught off guard when the value of real estate started to decline after the boom years of 20002006. Several market areas of the United States were identified as declining in price and value. Although appraisers were required to report the condition of the market; disclose the relationship between supply and demand; report the predominant marketing time; and report the trend of prices and values in the neighborhood section of the URAR, many appraisers fell into the bad habit of neglecting to complete the research and analysis to report these factors accurately. The appraisal report submitted to the lender was often filled with canned statements and boilerplate text leftover from appraisals prepared when the real estate market was much rosier. Because Fannie Mae and Freddie Mac purchase mortgage loans originated by others, it was

Standard 2: Real Property Appraisal Reporting

Compliance with this standard requires the appraiser to communicate the analysis, opinion, and conclusions in a manner that is not misleading. Standard 2 specifies the specific, minimum content. This standard ensures the appraisal report contains sufficient information, and makes certain all assumptions and limiting conditions are disclosed. Standard 2 includes a requirement for a signed certification in every written appraisal report.

88Module 6

GUIDES FOR ADDITIONAL REQUIREMENTS Fannie Mae Selling Guide

Among the best known and most often cited more specific and stringent standards are those required by Fannie Mae. The specific appraisal requirements and guidelines are published in the Fannie Mae Selling Guide. The Selling Guide is maintained online to facilitate updates and modifications to procedures and policies. www.efanniemae.com/sf/guides/ssg/sgpdf.jsp In addition to the Selling Guide, Fannie Mae issues periodic announcements to inform sellers, servicers, loan originators, and appraisers of new policies and standards, or to clarify existing policy and requirements. https://www.efanniemae.com/sf/guides/ssg/2011annlenltr.jsp

Freddie Mac Seller/Servicer Guide

As another active participant in the secondary mortgage market, Freddie Mac has adopted their own set of appraisal requirements and guidelines known as the Freddie Mac Seller/Servicer Guide. The Freddie Mac guidelines are also published online to accommodate updates to procedures and policies. www.freddiemac.com/sell/guide/ Interested parties are informed of periodic updates to Freddie Mac policies and procedures via Guide Bulletins. Freddie Mac provides an online library of Guide Bulletins at the link above, as well as a subscription service for updates by email. Fannie Mae and Freddie Mac are involved in the secondary market for mortgage loans. In other words, Fannie and Freddie buy and sell mortgage loans that have already been originated. These entities also create and sell securities backed by pools of mortgages held in their name. It is logical for these 2 companies to have minimum and specific standards for appraisals used to estimate the value of the collateral for loans, since they are 2 of the top entities to purchase and securitize loans.

HUD Handbook
Although the Department of Housing and Urban Development (HUD) does not buy and sell mortgage loans, their most recognized and accepted programs involve insuring lenders against loss for mortgage loans made under their specific programs and guidelines. The most popular of these is a program to provide mortgage loan insurance for 1-to 4-family homes under Section 203(b). HUD regulations require the appraiser, as a minimum, to hold a state certified residential appraiser credential, and complete the appraisal in compliance with USPAP and applicable rules and regulations. The specific property and appraisal guidelines are available in the Handbook, HUD 4150.2 Valuation Analysis for Single Family One- to Four-Unit Dwellings.

VA Construction and Valuation Training Guide

Another federal government agency familiar to most residential real estate practitioners is the United States Department of Veterans Affairs (VA). The most recognized VA program provides for a guarantee of part of a mortgage loan made to a qualified veteran. The VA has adopted minimum requirements for real estate appraisers involved in the preparation of appraisals for VA loans, and a specific set of procedures and guidelines for the development, reporting, and delivering of the appraisal. The VA publishes the online manual, M26-2 Construction and Valuation Policies, Procedures, and Methods, and the Construction and Valuation Training Guide to define their specific property and appraisal requirements.

Appraising Real Estate: The Effects of the Great Recession 89

important to their financial health for lenders and loan underwriters to make decisions based on accurate and up-to-date information. Part of the information necessary to make these decisions is accurate data and analysis concerning market conditions. Fannie Mae and Freddie Mac expected the appraiser to not only provide the correct information in the appraisal report, but to also provide their analysis and conclusions for the reasons a market is experiencing declining market values, an over-supply of properties, or marketing times longer than six months. To ensure the appraiser considered and analyzed the data necessary to draw these conclusions, and to provide a basis for making date of sale and time adjustments to comparable sales, Fannie Mae and Freddie Mac developed and introduced the Fannie Mae 1004MC form, often referred to as the Market Conditions form. The Fannie Mae 1004MC was developed to provide the lender with a clear and accurate understanding of the market trends and conditions prevalent in the subject neighborhood. The form gives the appraiser a familiar, structured format to report the data and to more easily identify current market trends and conditions. Conclusions drawn by the appraiser are reported in the Neighborhood Section of the appraisal report. Fannie Mae and Freddie Mac included a section in the form for comments on the prevalence of seller concessions and the trend in seller concessions for the past 12 months. They require the appraiser to consider and report on seller-paid (or third-party paid) costs. For example, the type of concessions to be reported include mortgage payments as well as points and fees paid by the seller, builder, or other third party. When appraising condominium or cooperative pro jects, the prevalence of items such as homeowners association fees and guaranteed rental programs must be disclosed. The appraiser is expected to carefully analyze seller concessions and third party payments because excessive concessions often lead to inflated property values. Appraisers are also expected to research and report on the presence and extent of foreclosure and real estate owned (REO) sales when analyzing market data and provide comment on the form. The form also allows for the appraiser to summarize the data and provide other data, analysis, or additional information, such as analysis of pending sales, which over time can show a market trend. Use of the form was initially required by Fannie Mae and Freddie Mac on April 1, 2009. Shortly afterwards, HUD and the VA made completion of the form compulsory. Gathering the data necessary to prepare the form takes time, as does the analysis. Many borrow-

ers learned of the consequences by paying higher appraisal fees. Additionally, because appraisers are paying closer attention to market conditions, inventory, changes in median listed and sales prices, absorption rates, and seller paid concessions, their opinions of value tend to reflect the actual condition of the current market rather than the optimism of the boom market.

Home Valuation Code of Conduct and Appraiser Independence

Since the savings and loan crisis of the 1980s, nothing generated more interest in real estate appraisals and real property appraisers than the Home Valuation Code of Conduct (HVCC). As a real estate broker or sales associate, the probability is high that your experience of the effects of the agreement on your transactions and relationships during 20092010 were noteworthy and unpleasant. The HVCC is the product of an agreement between the Attorney General of New York (Andrew Cuomo), Fannie Mae, Freddie Mac, and their federal regulator, the Office of Federal Housing Enterprise Oversight (OFHEO). It was amended to include the agency created to replace OFHEO, the Federal Housing Finance Agency (FHFA). For more than a year, the New York Attorney Generals office conducted an investigation into mortgage fraud which included subpoenas to Fannie Mae and Freddie Mac seeking information on the mortgage loans the companies purchased from banks, including Washington Mutual, at that time the nations largest savings association. The subpoenas came on the heels of a lawsuit filed by the Attorney General against First American and its subsidiary Appraisal Management Company (AMC), eAppraiseIT. The lawsuit, announced November 1, 2007, detailed a scheme showing First American and eAppraiseIT surrendered to pressure from Washington Mutual to use appraisers who provided inflated property value estimates in appraisals on homes. Emails obtained as part of the Attorney Generals investigation showed that executives at First American and eAppraiseIT knew their behavior was illegal, but intentionally broke the law to secure future business with Washington Mutual. Rather than submit to further investigation and possible prosecution, Fannie Mae, Freddie Mac, and their regulator, FHFA, capitulated and entered into a settlement agreement with the New York Attorney Generals office. The major component of that agreement is the HVCC, which became effective and was implemented May 1, 2009. The agreement was

90Module 6

expected to have a two year term, but was sunset by the implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act, passed by Congress and signed into law by President Obama in July, 2010. Components of the HVCC agreement were incorporated in federal law by Dodd-Frank amendments to the Truth in Lending Act (TILA). The purpose of the HVCC is to prevent pressure on appraisers from those that stand to gain from closing mortgage loans, and assure the appraisers independence in arriving at their estimate of value. This same purpose served as a guide to Congress in the drafting of the Appraisal Independence Requirements amendments to the TILA in the Dodd-Frank Act. Additionally, subsequent to Dodd-Frank becoming law, both Fannie Mae and Freddie Mac adopted new Appraiser Independence Requirements in October, 2010 to comply with the standards imposed by the Dodd-Frank Act. Fannie Mae Appraiser Independence Requirements http://www.freddiemac.com/sell/guide/ Freddie Mac Appraiser Independence Requirements http://www.scribd.com/full/39467807? access_key=key-1uip5f2scu7fyvnf7lhk The two documents are nearly identical, and follow the appraiser independence standards initially imposed by the Home Valuation Code of Conduct. To assure appraisal independence, there must be a clear separation of those individuals involved in loan origination from the selection of appraisers. Although there are several options available to lenders to maintain the required separation, the means employed by most lenders and loan originators is the use of Appraisal Management Companies. Appraisal Management Companies (AMCs) are brokers of appraisal and other valuation services. These companies, many owned by the largest banks in the nation and, at this time, not regulated by the State of Florida (see update below), assign appraisals to a panel of independent contractor appraisers. The AMC retains a portion of the appraisal fee paid by the borrower for managing the process. The AMC retained share of the fee can be as much as 60%. For many, the criterion used for appraiser selection by the AMC is the appraisers fee and turnaround time. As a result of the low fee split offered to appraisers and the AMC demand for quick completion of the appraisal report, it is not uncommon to find appraisal assignments are being awarded to appraisers at the low end of the range of experience. Additionally, some AMCs tend to assign a relatively high percentage of assignments

to appraisers from outside their area of geographic expertise. The low fee paid to the appraiser, combined with the quick completion time demanded, often results in an appraisal with only a cursory examination of market data and comparable sales. According to a recent survey of membership by the National Association of REALTORS (NAR), 70% of NAR members reported an increased use of out-of-area appraisers and 55% reported a perceived decrease in appraisal quality. As noted in the discussion above, Florida statute, federal law, and USPAP mandate the appraisers compliance with the competency rule. The appraiser must have the knowledge and experience to complete the appraisal assignment competently. Competency encompasses an appraisers familiarity with a specific market or geographic area. An appraiser preparing an appraisal in an unfamiliar location must spend sufficient time to understand the nuances of the local market and the supply and demand factors relating to the specific property type and the location involved. Be aware that just because an appraiser is from out of the area does not mean the appraiser lacks geographic competency. Due to problems with appraiser selection and geographic competency, Freddie Mac issued a Guide Bulletin (Number: 2009-18) on July 10, 2009. The document is addressed to Freddie Mac sellers and servicers and includes specific guidance on the selection of appraisers. Specifically, the Government Sponsored Enterprise (GSE) requires the appraiser to be certified or licensed in the state in which the property is located, and must be eligible to perform appraisals in that state. The guide bulletin also states that appraisers must be familiar with the local market in which the property is located, must be competent to appraise the subject property type, and must have access to the data sources needed to develop a credible appraisal. Additionally, the appraisers opinion of value must reflect the value of the subject property without concessions. (See definition of market value near the beginning of this module). The appraiser must take concessions into account for both the subject property and the comparable sales. Market-based adjustments must be made to the comparable sales to determine the price the purchaser would have paid for the subject property without the concessions. More information about Freddie Mac and the HVCC is provided in their online FAQ page. http://www.freddiemac.com/singlefamily/ appraiser_independence_faq.html#12

Appraising Real Estate: The Effects of the Great Recession 91

In response to questions and concerns about appraiser selection and geographic competency, Fannie Mae issued an announcement and updated their Selling Guide in December, 2010. Fannie Mae makes clear their requirement that the lender only use an appraiser who has the appropriate knowledge and experience to provide complete and accurate appraisal reports. The appraiser must report neighborhood and property conditions in factual and specific terms and must be impartial and specific in describing favorable or unfavorable factors. In an announcement Fannie Mae also points out two statements the appraiser certifies as true when signing the Uniform Residential Appraisal Report: I have knowledge and experience in appraising this type of property in this market area. I am aware of, and have access to, the necessary and appropriate public and private data sources, such as multiple listing services, tax assessment records, public land records, and other such data sources for the area in which the property is located. Additional guidance related to Fannie Mae Appraisal Policy is available online at: www.efanniemae.com/sf/guides/ssg/related sellinginfo/appcode/pdf/appraisalguidance.pdf The HVCC included one specific benefit for the borrower: It specified the borrower is entitled to a copy of the appraisal report three days prior to the closing of the loan. This benefit has been broadened by a DoddFrank amendment to the Equal Credit Opportunity Act. The applicant (borrower) is to be furnished a copy of any and all written appraisals and valuations developed in connection with the application for a loan secured by a first lien on a dwelling upon completion, but in no case later than 3 days prior to the closing of the loan. The Dodd-Frank amendment defines appraisals and valuations as any estimate of the value of a dwelling developed in connection with a creditors decision to provide credit, including those values developed pursuant to a policy of a government sponsored enterprise or by an automated valuation model, a broker price opinion, or other methodology or mechanism. The borrower must be given written notice of this right, and may be required to pay a reasonable cost for a copy of some of the reports.

an effort to allow sufficient time for the FREAB to adopt the rules necessary to implement the law, the legislature specified the effective date as July 1, 2011. Due to other legislative and executive actions, rule making by the FREAB has not advanced. A couple more pieces of the puzzle must fall into place before Floridians start to see the protections offered by HB 303 take effect.

HUD Mortgagee Letters and Appraiser Independence

Effective January 1, 2010, FHA-approved lenders are prohibited from accepting appraisals prepared by FHA roster appraisers who are selected, retained, or compensated in any manner by a mortgage professional or any member of a lenders staff who is compensated on a commission basis tied to the successful completion of a loan. FHA Roster appraisers are required to avoid conflicts of interest and the appearance of conflicts of interest. In order to help appraisers avoid conflicts or the appearance of conflicts, FHA prohibits substantive communications with an appraiser relating to or having an impact on valuation, including: ordering or managing an appraisal assignment by members of a lenders loan production staff any person who is compensated on a commission basis upon the successful completion of a loan who reports to any officer of the lender not independent of the loan production staff and process In addition to the new appraiser independence requirements, the Mortgagee Letter reaffirms policies announced nearly a decade ago. Mortgagees and third parties working on behalf of mortgagees are prohibited from: withholding or threatening to withhold timely payment or partial payment for an appraisal report. withholding or threatening to withhold future business for an appraiser, or demoting or terminating or threatening to demote or terminate an appraiser. expressly or impliedly promising future business, promotions, or increased compensation for an appraiser. conditioning the ordering of an appraisal report or the payment of an appraisal fee salary, or bonus on the opinion, conclusion, or valuation to be reached; on a preliminary value estimate requested from an appraiser. requesting that an appraiser provide an estimated, predetermined, or desired valuation in an appraisal report prior to the completion of the appraisal report; or requesting that an appraiser provide esti-

Florida Law Update2010

During the 2010 session of the Florida Legislature, HB 303 passed both the House and Senate and was signed into law by Governor Crist. The bill included significant amendments to Chapter 475, Part II, F.S. that require the registration and regulation of Appraisal Management Companies in Florida. In

92Module 6

mated values or comparable sales at any time prior to the appraisers completion of an appraisal report. providing to the appraiser an anticipated, estimated, encouraged, or desired value for a subject property or a proposed or target amount to be loaned to the borrower, except that a copy of the sales contract for purchase must be provided. providing to the appraiser, appraisal company, appraisal management company, or any entity or person related to the appraiser, appraisal company, or management company with stock or other financial or nonfinancial benefits. allowing the removal of an appraiser from a list of qualified appraisers or the addition of an appraiser to an exclusionary list of qualified appraisers, used by any entity, without prompt written notice to such appraiser, which notice shall include written evidence of the appraisers illegal conduct, a violation of the Uniform Standards of Professional Appraisal Practice (USPAP), or state licensing standards, improper or unprofessional behavior, or other substantive reason for removal. ordering, obtaining, using, or paying for a second or subsequent appraisal or automated valuation model (AVM) in connection with a mortgage financing transaction unless: (i) there is a reasonable basis to believe that the initial appraisal was flawed or tainted and such appraisal is clearly and appropriately noted in the loan file, or (ii) unless such appraisal or automated valuation model is done pursuant to written, pre-established bona fide pre- or post-funding appraisal review or quality control process or underwriting guidelines, and so long as the lender adheres to a policy of selecting the most reliable appraisal, rather than the appraisal that states the highest value; or any other act or practice that impairs or attempts to impair an appraisers independence, objectivity, or impartiality or violates law or regulation, including, but not limited to: the Truth in Lending Act (TILA), Regulation Z, and USPAP. (Source: HUD Mortgagee Letter 2009-28, September 18, 2009)

and adapt to the new methods.

Selection of the AppraiserAssuring Geographic and Professional Competency

The HVCC does not prohibit the real estate broker or sales associate from talking with the appraiser. Buyers and sellers are permitted to talk with the appraiser as well. Brokers and sales associates can help the buyer or seller assure the appraiser responsible for the assignment has the necessary competence by suggesting they ask a few questions: What license do you hold, what is the number? Are you a trainee appraiser? When did you first obtain your license? Where are you from? When was the last time you appraised a property in my neighborhood? Do you know any of the local long-term real estate professionals in this area? Do you have access to the local Multiple Listing Service? After visiting the property how long will it be until the report is delivered to the lender? Please give me a general physical description to enable me to recognize you at the appointment. The answers will help the licensee, buyer, or seller gauge the appraisers competency to accept and complete the appraisal assignment. Keep in mind the mere fact the appraiser is from outside of the immediate area or travels a significant distance to complete the assignment is not, in itself, an indication of noncompliance with the Competency Rule. The appraiser may have significant experience in the area, the necessary contacts, and access to data to develop a credible appraisal.

Communication with the Appraiser

The Dodd-Frank Act and the Fannie Mae and Freddie Mac Appraiser Independence Requirements do not prohibit the real estate broker or sales associate from communication with the appraiser prior to, during, or subsequent to the assignment. Brokers and sales associates may provide market data and sales information to the appraiser. If you are aware of market data that may be useful to the appraiser, make it available when you meet the appraiser at the property. For instance, if you have documentation about the poor condition of a residence the appraiser is likely to pick up as a recent sale, make the appraiser aware of the problems

DEALING WITH THE CHANGES AND MYTHS

Not only must real estate licensees deal with the results of the recent financial crisis and the effect on the real estate market, their businesses are significantly affected by changes made by financial institutions, government agencies and other regulators in reaction. To survive, provide a high level of service to customers and clients, and be successful, brokers and sales associates must be aware of all the modifications

Appraising Real Estate: The Effects of the Great Recession 93

and deficiencies. The most useful information is that concerning recent arms length transactions of properties similar to the property being appraised. The credibility of the appraisal will also be improved if documentation concerning short sales, foreclosures, pre-foreclosures, and REO properties is provided. Although these transfers should be considered as relevant market data in the development of the appraisal, they should ordinarily be excluded as comparable sales unless it is determined these transactions are the best available, most similar to the subject, and representative of the properties available to typical purchasers for the market in which the property is located. As a means of pre-emption, it may be wise to engage a well-qualified, state certified appraiser to provide an appraisal at the time of the listing, or during the term of the listing. The opinion of value by a disinterested, objective third party may help the seller avoid a costly surprise, and may assist in pricing the listing effectively.

The appraiser is required to use short sales and foreclosures as comparable sales. Not true. This myth is best addressed by quoting directly from a Freddie Mac Guide Bulletin and from a recent FAQ addition to the HUD Valuation Protocol:
The appraisers selection of comparable sales is crucial to providing an accurate opinion of value based on market data. With respect to comparable sales, the appraiser must choose appropriate comparable sales, and certify that the comparable sales chosen are those most similar to the subject property. In underwriting the appraisal, the underwriter must consider whether any adjustments are supported and are reasonable. The amount and number of any adjustments must also be considered. Typically, the higher the amount of the adjustments or the number of adjustments the more likely the comparable sales might not be representative of the subject property. Freddie Mac does not have requirements about what comparable sales the appraiser is to use. For example, we do not require appraisers to use Real Estate Owned (REO), foreclosure or short sales. However, if the appraiser determines that these are representative of the properties available to typical purchasers for the market in which the property is located, appraisers must consider their use.

Appraisal Myths and Realities

The chasm between real estate brokers, sales associates, and appraisers has existed for quite a long time. Imposition of the HVCC has been stressful for both real estate licensees and appraisers and has only heightened confusion and contributed to the anxiety experienced by everyone involved in the real estate profession. Due to the complexities of the real estate brokerage and real estate appraisal professions, there have often been misunderstandings and myths. Some have endured for years. Others appear to have been spawned by the HVCC and condition of the market in this post recession world. It is time to deal with a few of the oldies and some of the newer claims. Because the borrower paid for the appraisal, the borrower owns it. Not true. The appraiser is engaged by the client, most often the lender. The appraisers responsibility is to the client. Mere payment for the appraisal does not create the appraiser/client relationship. Although the HVCC requires the borrower be provided with a copy of the appraisal prior to the closing of the loan, it is the lender that provides the appraisal. The appraiser is prohibited by the Confidentiality Section of the Ethics Rule from disclosing assignment results, unless the client directs otherwise. Appraisers are prohibited from discussing the appraisal with the licensee. Not true. The appraiser may discuss the appraisal with parties other than the client. However, the appraiser may not discuss assignment results (opinion of value) and other confidential information with anyone other than the client or persons specifically authorized by the client.

(Source: Freddie Mac Guide Bulletin 2009-18, July 10, 2009)

FHA Roster appraisers must perform a neighborhood analysis to determine and identify the geographic area that is subject to the same influences as the property being appraised. The appraiser is responsible for selecting comparable sales and, if foreclosure or short sales are prevalent in the subjects market, the appraiser must consider the impact these sales have on market conditions, including marketing times, list to sale ratios, absorption rates, etc., in making the decision to use a distressed sale. A foreclosure or short sale may have condition deficiencies that are not readily apparent. Before relying upon foreclosure or short sales as comparable sales, it is imperative that the appraiser perform the necessary due diligence to fully understand the circumstances surrounding such sales and the impact upon the subjects value and marketability. FHA Roster appraisers must fully explain and support the sales used in the appraisal report with a thorough analysis of market conditions, which include the types of sales found within the market, i.e., new construction, resale, short sales, foreclosures, REO and /or estate sales. The appraiser should attempt to balance the analysis by using more than one sale type, if representational of the market, and contrast the differences of market impact between the sales in order to provide support for the reports conclusions

(Source: Frequently Asked QuestionsValuation Protocol, November 2, 2010)

94Module 6

Comparable sales must be within one mile of the subject property. Partially true. Lenders, GSEs, FHA, and VA prefer that appraisers use comparable sales that are most similar to the subject property, including location. A comparable sale within one mile of the subject property is often considered to be similar to the subject in location by mortgage loan underwriters. This characteristic, however, is a guideline rather than a hard rule for most lenders. Some lenders do have a specific requirement for comparable sales to be within one mile of the subject property. Comparable sales must have sold within the past 6 months. Partially true. Lenders, GSEs, FHA, and VA prefer that appraisers utilize the most recent and comparable sales. When the market is appreciating or declining, the more recent the sale, the better indication it is likely to be representative of current market conditions. This characteristic is a guideline for most lenders. In order to provide the most similar and proximate comparable sales, it is often necessary for the appraiser to include sales with a transfer date more than 6 months prior to the effective date of the appraisal. Mortgage loan underwriters will require the appraiser to provide a detailed explanation why an older sale is included in the appraisal report. Some

lenders do have a specific requirement to only use comparable sales that have sold within the past 4 to 6 months. Of course, there are many more myths making the rounds and more will be created as real estate licensees and real estate appraisers struggle with the changes imposed on our professions and businesses. Hopefully, the background and reference sources included in this module will assist in sorting the myths from reality.

CONCLUSION
Every participant in the real estate market has endured changes as a result of the financial crisis. For certain, more change is in the works, and appraisals will be subject to some of them. Federal agencies are hard at work drafting rules and regulations to implement the appraisal related sections of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Another section of the Dodd-Frank Act will require the Appraisal Subcommittee to monitor each States regulation of Appraisal Management Companies. The Michigan Association of REALTORS has purchased an AMC! What new wonders await us? As always, it is an interesting time to be in real estate.

Appraising Real Estate: The Effects of the Great Recession 95

96Module 6

M odul e 6 P r o g r e s s T e s t
You are not required to answer the progress test questions to complete the 14-hour course. They are intended to help prepare you for the Final Exam. Choose the best response to each question. The answers are found in the back of the book.
1. The 1990 law that created the Florida Real Estate Appraisal Board is: a. Chapter 475 Part II. b. Chapter 470 Part II. c. Chapter 380 Part II. d. Chapter 360 Part II. 2. The license categories for appraisers do not include: a. registered trainee real estate appraiser. b. certified residential real estate appraiser. c. certified general real estate appraiser. d. certified trainee appraiser. 3. Appraisers who are registered with the DBPR as qualified to perform appraisal services only under the direct supervision of a licensed or certified appraiser are: a. registered trainee appraisers. b. certified trainee appraisers. c. licensed trainee appraisers. d. specialized trainee appraisers. 4. Which is not a section under the Ethics rule? a. Scope of Work b. Conduct c. Management d. Confidentiality 5. Compliance with Standard 2 requires the appraiser to communicate the analysis, opinion, and conclusions in a manner that is: a. vague. b. not misleading. c. non-specific. d. scientific.

MODULE 7

Community Associations: A Primer for Real Estate Professionals

Learning Objectives
Upon completion of the module, the learner shall be able to: 1. Name the Florida statute that governs condominiums.

by Ellen Hirsch de Haan

2. Explain how to differentiate between condominiums, cooperatives, and subdivisions. 3. Describe the process for an owner to become a member of the community association. 4. Explain the term appurtenance. 5. List 3 examples of common elements in a condominium association. 6. Discuss the purpose of the Declaration of Condominium. 7. Discuss the purpose of the Articles of Incorporation. 8. Discuss the purpose of the bylaws of a condominium association. 9. List the requirements for election of board members. 10. Describe the screening and approval process of prospective owners and renters. 11. Explain the rights renters may or may not have in an association. 12. Discuss several possible conflicts of interest for real estate licensees who are also members of an association.

INTRODUCTION
The regulation and operations of community associations and common-interest communities are governed by a complex web of governing documents, local, state, and federal laws, and rulings of the appeals courts and the Supreme Court of Florida. As a real estate professional, it is very important to have at least a rudimentary understanding of the workings of community associations, both for sales and for rentals, and for situations in which you are managing multiple units or even a condominium or a subdivision, to avoid incurring liability for your customer and yourself. This module should help you take the extra step and learn more than the basics. And, passing on that information to help create a more educated consumer is good for the real estate industry and good for business.

OVERVIEW
Condominiums are governed by Chapter 718, Florida Statutes, the Condominium Act. Please note that Chapter 718 only applies to residential condominiums. Commercial condominiums, such as office parks, docks, parking lots, and the like are not subject to the Condominium Act. Cooperatives are governed by Chapter 719, F.S., the Cooperative Act and homeowner associations are governed by Chapter 720, F.S. Timeshares are governed by Chapter 723, and if they are condominium timeshares, they are also governed by Chapter 718. In addition, there are federal, state, and local laws that cover pools, security services, elevators, fire safety, smoking, pest control, construction, satellite dishes, employees, and so on. Condominiums and cooperatives are also governed by the Florida Administrative 97

98Module 7

Code, which contains a series of rules that define and clarify the laws. Associations are also governed by Florida and federal appellate court decisions. And, condominiums and cooperatives are subject to the decisions of the Division of Arbitration of the Florida DBPR. Community associations were created to govern property for condominiums, cooperatives, and platted subdivisions. Timeshares may also be condominiums, with unit week owners instead of unit owners. Associations govern a wide variety of entities including mobile home parks, dockominiums, office park condominiums, hotel condominiums, parking space condominiums, master associations, and recreation associations. The dwellings may be single family homes, manufactured housing, mid-rise or high-rise apartment building units, town homes, villas, garden homes, and any combination of these. A single family home and the lot on which it is placed can be a condominium unit. There may be multiple buildings comprising one condominium, or each building may be its own condominium. You cannot tell whether the community is a condominium, a cooperative, or a subdivision by looking at the housing stock. The only way to tell is by looking at the governing documents. In a condominium, the purchaser receives a deed to his unit, and an undivided interest in the common elements of the condominium shared with all other owners of units in that condominium. The condominium association does not own the common elements, however, it is possible for the association to own property. For example, if the unit owners buy out a recreation or amenities lease from the developer, the clubhouse and pool may be deeded to the association. Also, the association could hold title to individual units if it forecloses for failure of the owner to pay assessments. In a cooperative (co-op), all of the property, including the apartments, is owned by the corporation. Individuals who purchase in a co-op buy a share of stock and sign a lease with the corporation which gives them the exclusive right to use a particular apartment or lot (e.g., a mobile home park that is a co-op). In a homeowners association, the members of the association own their respective homes, and the association owns all of the common area, for the use and benefit of the members. All common-interest communities have four characteristics: Every owner becomes a member of the community association when they purchase a dwelling. This is

known as mandatory membership. The membership is appurtenant to the unit or the home, and when the home is sold the membership automatically terminates. There are governing documents that are recorded in the public records of the county in which the home is located. They are covenants that run with the land and are binding on every owner and resident of the home, as well as on guests, invitees, contractors, family, and so on. Under the documents, the association has the right to levy assessments, which are mandatory and must be paid by each owner, to cover the costs of maintaining, repairing, and replacing common property and operating the association. Common expenses are defined in the governing documents and in the applicable statutes. All owners share a property interest in the community, whether as a tenant in common or in property held by the association on their behalf.

OWNERSHIP AND THE ASSOCIATION Condominiums

Condominiums are known as creatures of the law. That is, the legislature had to find a way to define ownership of a unit on the third floor, which consists of 4 exterior walls encompassing space which is not on the ground. As stated above, if the unit is in a condominium, each owner buys a unit and the undivided interest in the common elements of the condominium. Since the owner is a tenant in common with all the other owners of units in the condominium, no individual owner can sell off any portion of the common elements. The undivided interest in the common elements is called an appurtenance to the unit, and it is part of the bundle of ownership rights that comes with the fee simple ownership of the unit. And, no interest in a common element or limited common element can be transferred separately from the title to the unit, with very limited exceptions. The Condominium Act provides that parking spaces may be transferred among unit owners, if the authority to do so is contained in the declaration of condominium. There is no such thing as title to a parking space or a boat slip or a storage unit. The space or slip or storage unit number may be shown on the deed, but a unit owner has no ownership interest in the space, slip, or storage unit. He has an exclusive use right to the space, slip, or storage unit; the space, slip, or storage unit are appurtenances to the unit, which transfer to the new buyer with title to the unit. A unit and its boundaries are delineated in the declara-

Community Associations: A Primer for Real Estate Professionals 99

tion. Generally, the unit boundaries are the unfinished surfaces of the floor and ceiling, and the 4 perimeter walls of the individual unit. This means the plaster, paint, and popcorning; floor, wall, and ceiling coverings of any kind, including tile, carpet, wood, mirrors, paint, wallpaper, and so on, are within the unit. The common elements will consist of all of the condominium property outside of the boundaries of the unit itself. This may include the roads, a clubhouse, tennis courts, pool, seawall, entry gate or monument, the elevator, the roof, shuffleboard courts, maintenance sheds, condominium office, managers apartment, hallways, lobby, and so on. The condominium is the physical plant, the building or buildings, the amenities and facilities, and the land on which they are located. The association is the corporation that operates the condominium and is responsible, through the board of directors, to maintain, repair, and replace the condominium property and preserve the property values.

minium association, the cooperative corporation, or the homeowners association, there may be a recreation association, a master association, or a community development or special taxing district. The homeowner will be obligated to pay assessments to the other associations or districts as well. Each of the associations will have its particular obligations, and there may be some overlap of authority. For example, when a homeowners association has architectural control authority, a master association may also have the right to approve alterations or improvements to homes within the subdivision. Community development districts (CDDs) or special taxing districts (STDs) are created by the county government, and instead of levying assessments, the CDD or STD will be supported by county taxes. The boards of a CDD and STD will be elected as part of the general elections within that county. Each association operates through its board of directors. The association is not a democracy. Like the federal and state governments, it is a representative republic in which the members elect the board; the board operates the association and makes decisions about the maintenance, repair, and replacement of the common property, and enforces the governing documents.

Cooperatives
A cooperative is a corporation that owns all of the property. As stated above, an owner in a co-op owns a share of stock in the corporation. He does not own any of the property, including the unit in which he lives. With the share of stock, the shareholder or stockholder is given the exclusive right to use a particular unit. The occupancy arrangement is formalized with a lease agreement. When a co-op is sold, the lease is assigned to the new shareholder, and the stock is returned to the corporation, and a new share is issued to the buyer. There is one share per lot. The association or corporation is responsible for maintenance, repair, and replacement of the co-op property, and the shareholders are responsible for the interiors of their apartments or for the manufactured or mobile housing on a co-op lot. In a mobile home co-op park, the shareholders generally own their homes, while the co-op holds title to the land on which the home is located.

GOVERNING DOCUMENTS
It is critical that real estate licensees make sure every buyer has a complete set of the governing documents for their home, regardless of the type of community in which the home is purchased. Under the law, the associations are required to maintain sets of documents that can be purchased by a buyer. Or, the documents are available through the county public records. If the transaction is a sale, the real estate professional should be familiar with the provisions of the documents that govern review and approvals of purchasers. If handling rentals, be familiar with rental restrictions, use restrictions, parking provisions, and language related to maintenance, repair, and insurance obligations of units.

Subdivision or Planned Unit Development

In a subdivision, an individual owns their own home and the land on which it is built. The homeowners association owns the common property, including any and all amenities and facilities, for the use and benefit of the homeowner. The common property is called common area. There may be more than one layer of association that governs a dwelling. In addition to the condo-

Articles of Incorporation
This document creates the association with the Florida Division of Corporations, as required by Florida law. It should be a simple document, stating the date of incorporation, name and purpose of the association, initial officers and directors, indemnification of the board, and an amendment provision.

100Module 7

Bylaws
This is the procedural manual that governs the associations operations, including the number of directors, quorum requirements for meetings, notice requirements, powers and duties of directors, duties of the officers, and the like. Because the Condominium Act contains a great deal of procedural regulation of condominium operations, and because it can be changed by the legislature on an annual basis, there are usually conflicts between the original bylaws and the current law. In those cases, the law will supersede the bylaws language, and is deemed to be automatically incorporated into the bylaws. It is not necessary to amend the bylaws every time the law changes, as the changes will apply regardless.

Homeowners Association
Declaration of Covenants, Conditions and Restrictions which has the same function as the declaration of condominium. Articles of Incorporation Bylaws Rules and Regulations If the property is a condominium, it is also important to know whether it is new construction or has been converted from a previously existing apartment building. A conversion has very different developer warranties and financial reporting requirements than those for a new building. A conversion is likely to be an older building, and the buyers may have inherited structural, electrical, or plumbing problems, which are not immediately obvious, but can lead to costly repairs in the future.

Rules and Regulations

Rules and regulations are promulgated by the board of directors, to clarify and define provisions of the governing documents, and to regulate use of the property.

ASSOCIATION OPERATIONS
The governing documents and the statutes all provide that the business of the association is to be conducted by the board of directors.

Condominiums
Declaration of Condominium. This is the document that creates or declares the property as a condominium. It contains the rights and responsibilities language who maintains what, who owns what, who insures whatas well as the legal description of the property governed by the association. It will include definitions of terms; easement rights; detailed information on assessments; maintenance, repair, and replacement obligations; procedural requirements for and limitations on alterations and improvements; board of directors authority regarding processing of sales and rentals; and its own amendment provision. It may also contain use restrictions, termination provisions, and information on amenities, boat slips, parking spaces, storage units, and so on. Articles of Incorporation Bylaws Rules and Regulations

Election Process
The board is elected by the members, on an annual basis, in conjunction with the associations annual meeting. For condominiums and co-ops, elections are governed by the law. For a homeowners association, the elections are governed by the provisions of the governing documents. Qualifications of directors are found in the association bylaws, and possibly in the articles of incorporation. Most associations require a director to be a record title holder of some interest in the unit or home. In a condominium, co-owners cannot serve on the board at the same time, unless they own more than one unit, or unless there are not enough eligible candidates to fill the vacancies on the board of directors. And, if a director is 90 days or more delinquent in any monies owed to the association, he/she is automatically off the board. A person who holds a power-of-attorney has limited rights. If the power is specifically set forth in the power-of-attorney, the person may attend and speak at board meetings, and with a proxy to him- or herself, attend and speak at unit owner meetings. A person holding a power-of-attorney cannot vote in the election, but can vote for other matters through the proxy. A person to whom a power-of-attorney is given cannot run for the board. Both the Condominium and the Cooperative Acts

Cooperatives
Proprietary or Master Lease. This document fills the function of the condominium declaration for a co-op. Articles of Incorporation Bylaws Rules and Regulations

Community Associations: A Primer for Real Estate Professionals 101

provide that the first notice of election and annual meeting goes out at least 60 days prior to the date of the annual meeting. The owners have 20 days in which to return their Notice of Intent to be a candidate to the association office. For a condominium, the owner must also sign and return a Candidate Certification as provided in the law. Between the 40th and the 35th day prior to the date of the annual meeting, the association may accept resumes and information sheets about candidates, no longer than one side of an 8-1/2 x 11 sheet of paper. Then, the association prepares the ballot containing the candidates names, in alphabetical order, with the last name first, and sends out the second notice of election and annual meeting package (which includes the notice, a form of proxy, the ballot for election of directors, and an inner and outer envelope for returning the election ballots), at least 14 days prior to the date of the meeting. All ballots for the election of directors are returned to the association sealed in an inner envelope, which is then sealed in an outer envelope. The outer envelope must be signed by the unit owner or shareholder. The election occurs prior to the beginning of the annual meeting by motion from the membership. Tallying of votes can continue while the business of the meeting is conducted. Any owner who wishes to watch the opening of envelopes and the tallying of the votes is permitted to do so, under the law. There is no quorum requirement for the election. However, in order to have a valid election, at least 20% of the ballots must be returned. Once the ballot has been received by the association, it cannot be rescinded. There are no proxies used for the election of directors. Proxies are used to establish a quorum at the annual meeting, and for any voting that is not related to the election of directors. Proxies are revocable up to the time of the meeting. It is possible that a ballot for the election of the directors will be invalid, which means it cannot be counted. Ballots (and the inner and outer envelopes in which they arrived) that are invalid must be set aside, and marked invalid or disregarded. The reason for invalidation must be written on the outside of the envelope. All envelopes and ballots, including those that have been disqualified, must be kept as part of the official records of the association for a period of one year from the date of the annual meeting and election. According to the DBPR Division of Florida Condominiums, Timeshares, and Mobile Homes rules and the Condominium Act, any of the following events will result in an invalid ballot:

if the owner voted for more candidates than there are seats to be filled Please note: An owner may vote for one candidate for each vacant seat. An owner may also vote for less than the number of candidates to fill all seats. For example: casting only one vote on a ballot (known as bullet voting) is legal and valid. The one vote on the ballot is counted. if the outer envelope is not signed or does not show the address of the unit if the outer envelope is missing if there is more than one ballot in the same inner envelope Please note: The association cannot require a person to sign his ballot. But, if a person does sign it, it will not invalidate the ballot. An owner can voluntarily waive his/ her right to a secret ballot. The ballot is eligible to be counted. Also, the association cannot require a person to sign his inner envelope, but a voluntary signature by an owner will not invalidate the ballot. Even though the law does not permit individuals to be elected as write-in candidates, a ballot is not invalid if there is a write-in candidate on it. Disregard the write-in candidate (do not count it), but count the votes for any other candidates indicated, if the ballot is otherwise in compliance with the law. In the event of a tie for the last seat, there will be a run-off election, which requires a special meeting of the members, 14 days advance notice, a ballot showing only the two candidates who are tied for the position, and use of the two envelope system to cast the votes. If a vacancy occurs between elections, the board appoints to fill it. The board is not obligated to appoint someone who previously ran for the board, or the next highest vote getter.

Open Meetings
Under the law for all types of community associations, all actions taken and decisions made by the board must be made at a duly-called meeting of the board at which a quorum of directors is present, and is open for the attendance of the members who wish to do so. The exception to this rule is that the board may meet with the associations legal counsel to discuss possible or pending litigation, in a closed executive session.

102Module 7

Competitive Bids
When the association is considering a contract for goods or services, it is required to obtain competitive bids under certain circumstances. In condominiums and co-ops, if the cost of the work is in excess of 5% of the total budget including reserves, then competitive bids are required. For homeowners associations, if the work exceeds 10% of the annual budget including reserves, then competitive bids are required. A competitive bid means more than one. There is no law that requires an association to obtain 3 bids In case of emergency, or if there is only one reasonable vendor within the geographic area, the association can dispense with the bid process.

regular basis for leaks, mold, and so on. Alterations and improvements are another concern for units and homes governed by community associations. The governing documents generally address procedures for obtaining the approval necessary for alterations or improvements to the units/homes and the common elements or common areas. There is often a percentage of membership approval required for changes to the common property, and sometimes for changes to the exterior of the unit as well. A homeowners association is likely to have architectural control over all exterior changes, with notice requirements and other language requiring copies of plans, as well as specifications regarding particular types of changes (color of the home, setback requirements, prohibition against storage sheds, and so on). For condominiums, if the governing documents have no language addressing material alterations and improvements, the approval of 75% of the members will be required. In co-ops, if the documents are silent, 2/3 of the shareholders must approve alterations and improvements. As mentioned previously, documents for homeowners associations have detailed provisions that address the issue.

MAINTENANCE, REPAIR, AND REPLACEMENT

The boundaries of the unit or the home will be defined in the governing documents. So will the scope of each owners responsibility to maintain, repair, and replace the unit. Generally, condominium unit owners and shareholders in a co-op are responsible for everything from the surface of the 4 perimeter walls inward, and from the unfinished ceiling down and the unfinished surface of the floor up. Generally, the condominium unit owner is responsible to maintain, repair, and replace all unit doors, windows, glass, and screens; appliances; floors and floor surfaces; all interior surfaces; floor, wall, and ceiling coverings; and plumbing and electric within the unit; as well as all furnishings, fixtures, and personal belongings. They will also be responsible to repair and replace their air conditioning equipment, wherever it is located. Owners of homes within a homeowners association are responsible for their entire homes and the lots on which the home is built. However, the documents will provide information on whether the association takes care of the lawn and landscaping, and any portion of the exterior of the home, such as painting or roof repair. If an owner fails to maintain his home, as required by the documents, the association has the ability to bring legal action to enforce the requirement. In some cases, the association has the ability to do the work, and charge it back to the homeowner or unit owner. If managing a unit or a home for an absentee owner, the real estate licensee will need to know the scope of the owners maintenance requirements, and be able to differentiate those obligations from any that belong to the association. And, if a home is unoccupied for any period of time, it will need to be inspected on a

INSURANCE AND WHO PAYS FOR UNIT DAMAGE

One of the biggest hazards of living in a multi-family residential community involves water damage from another unit or from plumbing, or windows from wind-driven rain or from rising waters. For condominiums, co-ops, and homeowners associations, the governing documents may provide for mandatory insurance coverage of the apartments and homes by the owners. If there is a mortgage lender involved, the bank will require the owner to maintain such insurance. Under the condominium law, the association insures windows, regardless of who is responsible to maintain and repair them under the governing documents. So, if the owner wants to replace unit windows, it will be that owners obligation to pay for the replacement. Also, the new windows will have to match the other windows in the condominium, or meet association specifications. However, in the event of replacement of the windows due to catastrophic loss, such as a hurricane or a fire, the replacement is the associations obligation, and the associations insurance will cover it. Any deductible for such a project is a common expense payable by all owners in their pro rata shares. Who is responsible to repair a condominium unit when it is damaged by water intrusion?

Community Associations: A Primer for Real Estate Professionals 103

In 2004, the Arbitration Division decided the case of Los Prados Condominium Association, Inc. v. Jeffrey S. Lemley, Arbitration Case Number 03-6092. The issue was whether the association was liable for damages to a unit when water penetrates from the common elements. The holding was that, absent negligence on the part of the association in maintaining or repairing the common elements, and the finding that the negligence was the proximate cause of the damage, the association has no liability for unit damage. In 2006, the Arbitration Division rendered an opinion In Re Petition for Declaratory Statement Plaza East Association, Inc. The Declaratory Statement differentiates between the obligation to maintain, repair, and replace and the obligation to insure. In this case, the owners were required to maintain, repair, and replace their unit windows, but general maintenance was not an insurable hazard. The declaration in Plaza East provided that damage to the condominium property which occurred because of a catastrophic event that is covered by insurance is the obligation of the association to repair, as a common expense. The deductible is also a common expense. This was true regardless of who was obligated to maintain, repair, and replace the windows under ordinary circumstances. In 2006, the Arbitration Division rendered an opinion In Re Petition for Declaratory Statement Allstate Floridian Insurance Company. In this case, there was water damage to the interior drywall within the unit caused by the units hot water heater. Section 718.111(11)(b), F.S. provides that the association is required to insure property within the units as initially installed, which was held to include interior partition wall drywall. This Declaratory Statement went on to provide that it is still necessary to determine what duty the individual owner had regarding the damage, the cause of the damage, the location of the damage in relation to the cause of the damage, the liability for the cost or repair, and who must make the repair. Ultimately, the order provides that the association was obligated to insure the interior drywall in the units, but not the wall coverings. And, the issues of negligence, liability, damages, insurance coverage, and repair were determined to be matters for a court to decide. Where does this leave the association and the unit owner at this point? Two of the cases apportion responsibility depending upon whether there was negligence on the part of the association or the individual unit owner. The third case determined that maintenance and insurance are separate issues, and did not address negligence or liability at all. These 3 decisions contain conflicting advice and leave the issue open to interpretation.

At this point, the drywall is considered to be initially installed and therefore, covered under Section 718.111(11)(b), F.S., and so it is the insurance obligation of the association. Any deductible is common expense. If a particular unit owner is negligent and damage ensues to his own unit, we look to the findings in Los Prados for guidance. The provisions of Section 718.111(11) which provide that the association is not responsible for wall, floor, and ceiling coverings, etc., applies. Absentee owners are often reluctant to spend the money on insurance for a second or seasonal home or unit. They are self-insuring their units. However, as of this writing, the Condominium Act does require every condominium unit owner to have insurance on their unit, and gives the condominium association the ability to purchase that insurance and charge the cost back to the unit owner. Failure to pay the charge gives the condominium association the power to lien and foreclose to collect. Given the aging of the infrastructure and the originally-installed appliances in many of the condominium and co-op buildings, the chances of water damage to the unit interior from another unit gets higher every year.

ASSESSMENTS
Assessments are levied pursuant to the annual association budget, and are required to be sufficient to cover all known or anticipated expenses for the coming year. They may be due monthly, quarterly, or annually. Annually, prior to the end of the fiscal year, the board of directors or the budget committee put together the budget, which is then formally adopted by the board at a duly-called meeting. It is necessary for the association to send out notice to the owners at least 14 days prior to the date of the board meeting at which the budget will be adopted, advising that the budget will be considered and adopted (date, time, place). This is true even though the budget is adopted by the board, without a vote of the membership. The notice also includes a copy of the proposed budget for the members to see. The members can then attend the meeting and ask questions or otherwise give input, prior to the budgets final adoption. The remedy for failure to pay the assessments is foreclosure, and every type of association has the power to take title to the home if the owner does not pay what is due and owing. In addition to the budgetary assessments, boards have the power to levy special assessments to cover unanticipated or nonrecurring expenses. The board has the same remedies available to collect special assessments.

104Module 7

Effective July 1, 2010, all community association laws provide that the board of directors can require a renter to pay his/her rent directly to the association, if the owner becomes delinquent during the term of the lease. Under the laws, the association would send a letter directly to the tenant, and copy the owner, requiring that the rent be paid to the association until the account is brought current. This would cover interest, late fees, attorneys fees, court costs, and all unpaid assessments, regular and special. If the tenant does not comply, the association has the direct authority to evict that tenant, even though the association does not own the unit. As a real estate professional, to avoid problems when managing a rental, you will want to arrange for the assessments to be paid out of the proceeds of the rent and be sure the owner of the unit or home understands the legal responsibility imposed on the tenant under this law. In addition, if an owner is delinquent for 90 days or more, the association board has the authority to suspend his/her use rights for common elements/areas and recreational amenities, as well as those of any tenant. The action is taken by the board at a board of directors meeting, and then fourteen days notice must be sent out to the owner via regular mail or hand delivery, with a copy to the tenant. In a homeowners association, the owner has a right to a hearing, prior to the suspension. There is no hearing required for condominiums or cooperatives. The suspension does not apply to access to the unit or home, use of parking spaces, or to utilities. It can apply to cable television services.

Also, use restrictions contained in the declaration are not subject to a reasonableness standard, although they cannot be against public policy or in violation of any law. Restrictions in the declaration or lease cannot be arbitrary in their application. For example, you cannot adopt a provision that provides that ground floor units can have 2 cars, and second floor units are limited to one car (Hidden Harbour Estates, Inc. v. Norman, 309 So.2d 180 (Fla. 4th DCA 1975). What can be handled with a rule, and what requires an amendment to the governing documents? If the use restriction is contained in the declaration or the bylaws, it can only be changed through the amendment process, with a vote and approval of the requisite percentage of association members.

Rule-Making
First, it is necessary to determine the scope of the boards rule-making authority; this is contained in the governing documents. The question is whether the board of directors has the authority to adopt and amend rules and regulations for both units and the remainder of the property outside of the units. The law contains requirements for notice to members if the rule relates to use of the home, as opposed to the common property. There may be other restrictions contained in the documents. There are still a few documents around that require membership vote on rules, as well. Basically, substantive rights and express language of the documents must be addressed through the amendment process. Clarification of documentary language, regulation of behavior, definition of terms used in the documents, and the like can be addressed through the rule-making process. For example, rules that regulate guest occupancy of a unit can be adopted, without an amendment to the declaration being necessary. But, restrictions on leasing require an amendment approved by the membership, as provided in the declaration of condominium.

USE RESTRICTIONS
When handling rentals for the home or unit owner, you need to understand the use restrictions contained in the governing documents. Use restrictions may be contained in the declaration (or master lease) and/or in the association bylaws. In addition, there may be board-made rules and regulations and policies and procedures which govern use and occupancy of the units and homes. There are some differences between the restrictions contained in the declaration, lease, or by-laws and those set forth in a set of rules and regulations. Use restrictions in the declaration have a presumption of validity because the law requires disclosure of the declarations restrictions to all buyers of units and homes, giving the new owner notice of the limitations of his or her use of the property; and any changes to the declaration require advance notice, a membership vote, approval by a certain percentage of the members, and recordation of any change in the county public records (Beachwood v. Poor, 448 So.2d 1143 (Fla. 4th DCA 1984).

Policies and Procedures

Boards also have the authority to adopt policies and procedures regarding the operation of the association. Generally, policies address procedural rights, rather than use restrictions. Examples include policies that regulate: member participation in board and membership meetings the right of a member to have access to the official records of the association

Community Associations: A Primer for Real Estate Professionals 105

Rule-making Guidelines
Under Florida case law, rules cannot be drafted that will change in any way a right that is expressly set forth in the declaration of condominium, the articles of incorporation, or the bylaws, nor can a rule contradict a right which is reasonably inferable from any of those documents. In other words, a rule cannot change the actual language of any of the governing documents, and cannot take away a right that is either specifically granted or not prohibited by the documents. The only way to change a right is to adopt an amendment to the governing documents, at a duly-called meeting of the membership, by approval of the number of members necessary to amend. Rules cannot conflict with any laws. Rules can clarify rights, provide definitions of terms, expand and amplify documentary provisions, and can be promulgated in follow-up to express language in certain provisions of the documents that provide for the board to make rules regarding a particular use or procedure. Under the Condominium Act, if the board is making a rule regarding the use of a unit (e.g., a rule regarding guest occupancy of a unit) then the board must send out notice to all of the owners, at least 14 days in advance of the board meeting at which the rule will be discussed and adopted, even though the membership is not voting on the rule. (Rules regarding common elements do not require the 14-day notice; just the 48-hour posted notice as for any other board meeting.) Rules must be duly adopted at a meeting of the board of directors at which a quorum is present, and once the rule has been approved, a copy of the actual rule language must be sent to every owner, before enforcement of the rule can begin. It is always a good idea to have a workshop for the members to attend, to get their input, and involve them in the process. According to psychological studies, people are more likely to comply with rules if they have had a chance to express their opinions and feelings about them, even if they do not actually like the rule once it has been adopted. Also, rules do not have to be recorded, unless the original set of rules was recorded. Once the rules are recorded, any and all changes to those rules must also be recorded. In addition, enforcement of the new rules is only possible for violations that occur after the time the rule has been adopted. That is, any condition that exists in violation of the rule at the time the rule is adopted is considered to be grandfathered and must be allowed to continue to exist. For example, in the case of a violation of a guest restriction, when a guest arrives after the new rules are adopted, it is a new circumstance, and the guest occupancy will be subject to new regulations, regardless of the number or frequency of previous guest visits to a particular unit. As another example, the board could adopt a specific rule that allows window shades that show from the outside of the building to be white but no other color, and that is a reasonable rule. However, anyone who has window shades that are a different color when the rule went in to effect is allowed to keep the shades, until they are replaced. At that time, the white shades could be required. (This is the concept of grandfathering.) Rules must be reasonably related to a need or a problem within the community. It must be related to a legitimate objective or power that is reserved to the association. And, it should relate to the health, happiness, and enjoyment of life of the members. (Hidden Harbour Estates, Inc. v. Norman) Rules must apply to all owners/members, and must be uniformly, timely, and consistently enforced against all residents within the community. Is a rule the best way to deal with the problem, or is the problem related to only one particular owner, tenant, or guest in one unit? If the answer is that the problem is not general or wide-spread, the remedies provided in the documents or the law should be investigated, rather than using rule-making to control the behavior. It is too easy to punish the good guys as rules often have unintended consequences, once adopted. Is there already a rule or a document provision that addresses the issue? If so, does it need to be modified? As mentioned above, sometimes an amendment to the documents will be called for, and sometimes rules and restrictions have outlived their usefulness, or do not reflect lifestyle changes over the years. For example, there may be a no trucks restriction in the declaration, but the parking lot is full of SUVs and pick-up trucks. Documents and rules should be reviewed periodically and up-dated or purged as appropriate. If a rule is too broad or too vague, an owner or a resident cannot determine what exactly is expected. Those types of rules may be found unenforceable if they are challenged. Also, the board has to be able to monitor behavior, verify the violation, and enforce the rule for it to be valid. For example, a high rise community of seniors passed a rule that prohibited the flushing of toilets between the hours of 10 P.M. and 7 A.M. How in the world would they be able to determine who had flushed the toilet? This rule is not enforceable. If a rule is too narrow, or attempts to be too comprehensive, it will create loopholes, as it is impossible for the board to think of every possible contingency. Accordingly, it is best to avoid lists of dos and donts. There will always be something you neither thought of nor imagined. And, no one will read a 35-page rule book. Rules cannot create 2 or more classes of owners. The rules must apply to every owner and resident at the condominium. Accordingly, rules made for special interest groups or rules that only apply to new owners are invalid and unenforceable.

106Module 7

There are also laws that regulate some aspects of member participation and access to official records, which will affect the scope of any board-made policies and procedures. Both rules and policies should be maintained in a separate binder or book, rather than in the minute book, for ready and easy reference, and to enable copies to be made for new buyers and/or renters, as required. Copies of adopted policies should also be distributed to the members, from time to time, and whenever there are changes or additions to the last set.

The applicant screening procedure is an important aspect of community living. Many condominium and co-op community associations have provisions in their documents giving the association board the right to screen and approve or disapprove prospective purchasers, renters, occupants, or other transfers. These provisions may also include the right to charge a screening or transfer fee to cover the costs of a background investigation. The Florida Condominium and Cooperative Acts provide that the association documents must contain the authority to approve or disapprove transfers and conveyances and the right to charge a fee in connection with this process, before the screening process can be initiated. For a homeowners association, the communitys governing documents may include or be amended to include a review and approval procedure. Why have a background check and the screening interview? As a board member, each director has a fiduciary responsibility, a legal position of trust, to protect the welfare and well being of the residents in the association community, as well as to protect the property values. No director may act in any manner that endangers the health and welfare of the residents. Therefore, a screening committee and board that accept an application and a screening fee, but do not diligently act to check out new residents, may have breached their fiduciary responsibilities. In addition, the screening interview is a perfect opportunity to acquaint a prospective resident with the documents and any occupant responsibilities or restrictions on rights and use of the property. What are appropriate procedures and what limitations are there on board actions? The board of directors should establish basic guidelines for its screening committee to follow when reviewing resale and rental applications. The board and/or the committee should uniformly review all applicants using the same procedures, considerations, and treatment to avoid claims of discrimination. The screening committee must be fully aware of the federal and state laws and any amendments thereof that prohibit discrimination in housing. Also, they must be aware that many counties have local ordinances that also prohibit discrimination because of someones political affiliation or type of employment. Discrimination is not always a clear-cut matter. Basically, it comes down to allowing some to have benefits that others are not afforded (i.e., preferential treatment). Every association should have a comprehensive application form available. The application should include family composition (who will be residing in the home), prior residence history, financial and character

Types of Restrictions
Restrictions in the governing documents and the rules and regulations may include restrictions on types or number of pets permitted, or even prohibitions against having pets. There may be guest restrictions, limits on the number of people who can reside in the unit/home, and single-family occupancy requirements. All of these restrictions affect who can be put in the unit. There may also be parking restrictions, including a limit on the number of cars that can be parked on the premises, types of vehicles that can be parked (e.g., no motorcycles or trucks). Rental restrictions may include the number of rentals per year; minimum or maximum length of rentals; review and approval of all rentals by the board of directors, prior to occupancy. Every occupant of a dwelling is bound by the restrictions, including owners, renters, guests, and contractors who are doing work in the dwelling. If a renter or a guest fails to comply with the documentary restrictions, the association can take legal action to have the renter or guest removed from the unit, and terminate the lease for a rental.

Review and Approval of Sales and Rentals

The screening and approval of prospective owners and renters is a complex and involved process. Although the authority to screen and approve is granted to an association board in the associations governing documents, the language can be fairly vague and general, without specific guidelines. The task is further complicated by the fact that there are some statutory requirements, and some court cases that could have an impact on the ability to disapprove. In light of developments in the law governing occupancy of housing, there are potential dangers inherent in the exercise of these rights by the association and ample opportunity to run afoul of the federal housing and discrimination laws.

Community Associations: A Primer for Real Estate Professionals 107

references. The application may include a brief listing of the requirements for applying to purchase or rent, and a summary of the major use restrictions in the association documents. A set of the current rules and regulations should be attached, and applicants should sign this application form, as a receipt that they have received the rules and as evidence they have completed the application. There must also be affirmative language disclosing that there will be a background check, and that the applicant agrees to it. The application must be fully completed. If the application is incomplete or the screening fee is not included, it is returned immediately to the applicant, and the sale or rental should not be processed. The association documents usually include the time frame by which approval or disapproval of a transaction must be completed. These days are calendar days, which include holidays and weekends. If the documents are silent on the number of days, more than 30 calendar days may be deemed unreasonable. Keep in mind that the associations background check is not disclosed to the owner of the home/unit, or to you as the real estate professional for the transaction. The owner of the home should authorize a separate background check for any prospective tenant. It is a good idea to use a professional investigative company to perform the background check, since they will have the time, expertise, experience, training, techniques, reference materials, and resources to obtain the information necessary to effectively screen applicants. They can also, in effect, provide a legal buffer between you and the applicant similar to a relationship between a bank or retailer and a credit bureau. In the State of Florida, such companies must either be licensed private investigative agencies or operate under the sanctions of the Federal Fair Credit Reporting Act. Under the federal fair debt and credit reporting laws, anyone can operate such a business without any experience or knowledge; however, training and experience are required to obtain a private investigators license; therefore, when seeking the services of an investigative agency, look for a company that has both. The fair debt and credit laws mandate a contract with specific statements regarding legitimate requests for information and confidentiality of report information. If you are conducting a background check on behalf of a unit or homeowner, look carefully at the information you are receiving and watch out for the following pitfalls: Landlords. Do you know if, in fact, the person to whom you are speaking is the landlord or someone covering for the applicant? The current landlord may even lie to you to get rid of the applicant. Has

the applicant lived anywhere other than places he listed on the application? If he did, you may not be able to trace real residential behavior. Banks. Most banks will not give private individuals financial information. However, they may cooperate with licensed investigative agencies. As an agent for the owner of the home/unit, you will want to assist in obtaining sufficient financial information directly from the applicant to ascertain that they can pay the rent, or qualify for the sale. Employers. Is the applicant really employed there? Is it a legitimate business? I know of one case in which the applicant wrote that he was the vice president of a company, when he was actually a janitor. Character references. How do they know the applicants, for how long, why are they moving, children, pets, etc., etc.? Are they related to the applicant in some way? Be careful not to ask any questions prohibited by the federal or state laws. Credit report. An association is not permitted to require a credit report for a rental situation, since there is no credit/creditor relationship between the applicant and the association. The owner remains responsible for all outstanding financial obligations due to the association. In a purchase transaction, if the buyer is getting a mortgage through a financial institution, he is already going through a thorough financial review, therefore, the association is usually hard pressed to reject an applicant on the basis of a credit report. In Florida, in order for a board of directors to have the ability to review and approve sales and rentals of units within a community, the documents must provide that the association has a right of first refusal. This means that the association has to find an alternate buyer or renter, under the same terms and conditions as those set forth in the original deal, in order to be able to turn down an applicant, with some very narrow exceptions. There are a few, very specific grounds for association disapproval of prospective buyers and/or tenants. That is, under the statutes and the Florida case law, there are certain situations under which the association can disapprove of a prospective applicant, without having to exercise a right of first refusal (i.e., without having to provide an alternate applicant): If the owner of the apartment is delinquent in any monies owed to the association, the rental or sale of the unit or home can be disapproved. (Of course, if the owner pays all sums outstanding, then the association has to reconsider the application.) [Florida Statutes, Section 718.116(4); Pine Island Ridge Condominium F. v. Waters, 374 So.2d 1033 (Fla. 4th DCA 1979)]

108Module 7

If the prospective tenant or buyer provides information on the application form that is a material misrepresentation, and impacts on the occupancy, (i.e., if the board cannot verify prior or current employment or most recent address) then the board has the right to disapprove the tenant or the buyer. If the proposed tenant or buyer is or has been in violation of the condominium documents, before taking occupancy of the unit, then the board has the ability to disapprove the tenancy. For example, if none of the prospective residents is 55 or older, and the community is senior housing; or if there are no pets allowed, and the applicant has 2 large dogs; and so on. This right applies to all tenants and purchasers, including those who might already own a unit in the condominium. The evaluation occurs at the time the application is filed. (Coquina Club, Inc. v. Mantz, 342 So.2d 112 (Fla 2nd DCA 1977) Basically, an association may disapprove a lease or prospective tenant, if the basis for the disapproval is reasonable and nondiscriminatory. Again, since the credit history of a prospective tenant is not relevant, it is unreasonable for an association to reject a lease application based upon the tenants credit history. Rejection on the basis of criminal history and prior residential history is reasonable, provided the history is relevant. If you are looking at a criminal background check, you have to look at the severity of the crime, when and how long ago it was committed, and whether it materially impacts on living in a multifamily residential community. If, for example, the criminal event happened 10 years ago, and there has been no problem since, then it may not be a problem for the community. Generally, the concept is once a person is convicted, serves their time and is released, the debt to society has been paid, and the person can get on with life. Each situation however, should be looked at on a case-by-case basis as the information is received, and you, as the real estate professional, as well as the board of the association, should consult with legal counsel if there is a situation regarding past criminal activity, for assistance in making the determination of whether it is grounds for disapproval. And, the association does have the authority to disapprove the rental of an apartment to a person who is a registered sex offender. A misdemeanor is generally not sufficient grounds for disapproval. It is illegal to discriminate based upon race, religion, sex, national origin, color, creed, familial status, or handicap. Other than that, the board is bound by the limitations set forth above in grounds for disapproval. Again, if any of these limitations are the basis

for the disapproval, the association is not obligated to purchase or find an alternate purchaser or renter for the apartment. What goods and furnishings a person chooses to move in to an apartment is not the business of the association and is not grounds for disapproval. The board of directors has the ability to incorporate the grounds for disapproval into the board-made rules, and the language does not have to be an amendment to the documents. If an owner does not get approval for the prospective sale, or otherwise fails to comply with the documentary and policy requirements for processing a sale of an apartment, the association can bring legal action to set aside the sale. If the owner does not get approval for the rental, or the renter is disapproved by the board, but the owner moves the person in anyway, the association can bring legal action against the owner to force the removal of the unapproved occupant. It is important to determine whether there are restrictions on how you gain access to a unit, to show it to a prospective buyer or renter. Some association documents or rules prohibit the use of lock boxes, or designate an area on the common property where all lock boxes must be stored. In gated communities, or secured access buildings, the owner may have to give advance notice to those who monitor entry to allow the unit or the home to be shown. For condominiums and cooperatives, the association has a right of access to the units in case of emergency, or for matters related to maintenance, repair, or replacement of the common property. For example, a tenant cannot refuse access to the unit if the board needs to investigate a leak, or a source of noise or nuisance smells, etc. Access must be during reasonable times, and should be arranged in advance (except in case of emergency).

Senior Housing Occupancy and Fair Housing Laws

Communities may be designated as housing for older persons, so that there must be at least one person 55 years of age or older in each dwelling, and no children under the age of 18 may be permanent occupants. The Federal Fair Housing Amendments Act of 1988 and the Housing for Older Persons Act of 1995 were initially adopted and then supplemented by the rules adopted by the U.S. Department of Housing and Urban Development (HUD). To qualify as housing for older persons, it was necessary to have a minimum of 80% of the units/homes occupied by at least one person who is 55 or older.

Community Associations: A Primer for Real Estate Professionals 109

In addition, it was and still is necessary to hold the community out to the general public as housing for older persons. As long as the community qualifies as senior housing, no children under the age of 18 are permitted to permanently occupy any unit. (Even if one person who occupies the unit is over 55, children under 18 cannot be permanent residents.) Any person over the age of 18 can purchase and/or own a unit. The laws affect occupancy, not ownership. That is, a person under the age of 55 years can buy or inherit a unit, but cannot become a permanent occupant until he is 55, or has another person who is 55 or older living with him. If a unit is rented, then there must be at least one tenant permanently occupying the unit who is 55 years of age or older. When there is no one permanently living in the unit, the restriction does not apply to temporary visits or occasional occupancy, as long as the unit is not the permanent residence of the individual who is under 55. To document that the community is housing for older persons, the board must conduct a census, and obtain a copy of proof of age from at least one person 55 or older in each unit/home. Once a community has met the initial requirements of senior housing laws (having at least 80% of the units occupied by at least one person 55 or older), it continues to be necessary to keep and update proof of age for each unit, and to strictly enforce the provisions of the governing documents regarding occupancy in compliance with the senior housing laws. Following the adoption of the initial federal and state laws in 1988 and in 1994, the federal and state courts and enforcing agencies have continued to interpret the senior housing requirements. Today, in order to maintain senior housing status, it is necessary that 100% of all new occupancy include at least one person who is 55 or older. If a board allows new occupancy without at least one person 55 or older in residence, the association is not holding itself out to the general public as housing for older persons. Under the current law, there are only two exceptions to the 100% of new occupancies by at least one person 55 or older: surviving spouses who are under 55; and heirs who are already in residence at the time of the death or removal of the over 55 individual. In other words, the exceptions are very narrowly defined and limited. The 20% margin is not intended to be used for arms length sales for occupancy by any person of any age, according to the Code of Federal Regulations, HUD Rules, 24 CFR Chapter 1, Section 100.304(c)(2).

In 24 CFR Ch. 1 (4-1-92 Edition), on Page 903 (Subchapter A., Appendix I), the text reads Further, the Department does not believe that the proposed rule can fairly be characterized as establishing a 20% set-aside for persons under 55 years of age. The text provides:
For example, this requirement would preclude an owner or manager from marketing 80% of the units for persons 55 years of age or older and marketing the remaining 20% in a radically different way (e.g., young adults). The policies and procedures for the housing facility as a whole must demonstrate an intent to provide housing for persons 55 years of age or older. In essence, this means that the housing in question must in its marketing to the public and in its internal operations, hold itself out as housing for persons aged 55 or older.

The Arbitration Division of the Department of Business and Professional Regulation (DBPR), which has jurisdiction over condominium and cooperative associations in Florida, adopted this interpretation of the use of the 20% margin in the case of Cummings v. Seagate Towers Condominium Association, Inc., among other decisions.

ACCOMMODATION FOR HANDICAP AND THE FEDERAL LAWS; ALTERATIONS TO COMMON PROPERTY
There are two different laws which govern the accommodation and modification of common property within associations for handicap accessibility: the Americans With Disabilities Act (ADA) and The Fair Housing Amendments Act of 1988 (FHAA).

Americans With Disabilities Act (ADA)

The ADA was created to address handicap accessibility to public and government buildings, including educational institutions, courts, day care centers, stores, offices, and hotels/public accommodations. The ADA is found in Title 42 of the United States Code, (USC), Chapter 126. Relevant language includes:
Section 12132. Discrimination Subject to the provisions of this subchapter, no qualified individual with a disability shall, by reason of such disability, be excluded from participation in or be denied the benefits or the services, programs, or activities of a public entity, or be subjected to discrimination by any such entity. Section 12182. Prohibition of discrimination by public accommodations. No individual shall be discriminated against on the basis of disability in the full and equal enjoyment of the goods, services, facilities, privileges, advantages,

110Module 7
or accommodations of any place of public accommodation by any person who owns, leases (or leases to), or operates a place of public accommodation.

FHAA defines the term disabled:

Under federal law an individual is disabled if he/she has a physical or mental impairment that substantially limits one or more major life activities; has a record of such an impairment; or is regarded as having such an impairment. The term physical or mental impairment includes, but is not limited to, such diseases and conditions as orthopedic, visual, speech, and hearing impairments, cerebral palsy, autism, epilepsy, muscular dystrophy, multiple sclerosis, cancer, heart disease, diabetes, Human Immunodeficiency Virus infection, mental retardation, emotional illness, drug addiction, and alcoholism. This definition doesnt include any individual who is a drug addict and is currently using illegal drugs, or an alcoholic who poses a direct threat to property or safety because of alcohol use.

There are thousands of cases cited in the Annotations of Title 42, Chapter 126, U.S.C.A., all of which involve a governmental entity or agency, or a hotel, a store, a university, and other public services and locations. The ADA also applies to country clubs, golf courses, and tennis clubs that have public memberships, and to beauty shops, restaurants, convenience stores, and medical and professional offices. If a communitys common elements or areas include these kinds of facilities, and if the facilities are intended and operated specifically for use by consumers and the general public, beyond the resident population and its guests within the community, then certain portions of the property are subject to the ADA requirements for accommodations for handicapped persons. All modifications required to be made under the ADA are made at the expense of the property owner, and not the expense of the person requesting the handicap accessibility. These include handicap-accessible bathrooms, ramps for entry into the building, parking exclusively reserved for handicapped drivers, and so on. Most of the communities are multi-family residential property. They are not a commercial apartment or rental complex. And, they are not a public facility. (The fact that someone may invite an outside guest to join her at the clubhouse does not qualify it as a public facility.) Under those circumstances, there are no uses or facilities related to the community that are public accommodations or public entities as defined by the ADA. The community is not for the general public, but used solely as a residential community of dwelling units, with common area/elements, pool, and so on, for use of the association members, residents, and their guests. Accordingly, the ADA does not apply to either the community or its property. Keep in mind that a clubhouse that is open to the public for private parties and functions, or advertises bingo or card games could fall under the ADA, and require all modifications under the act.

Based upon the joint statement issued by the U.S. Department of Housing and Urban Development and the Department of Justice, the association has the ability to request some limited additional information to document the existence of a handicap which meets the conditions of the state and federal law. To accomplish this, some associations use a form titled Handicapped Accommodation Request Verification, which is completed and signed by the physician of the owner or resident. This form, or a similar form, should be obtained from the associations attorney. Prescription pet. The FHAA also applies when a resident in a no pet building asks for permission to have a dog or cat as an accommodation for a handicap. This is often referred to as a prescription pet. Such prescription pets are subject to a similar analysis as described above. Based upon the Joint Statement issued by the U.S. Department of Housing and Urban Development (HUD) and the Department of Justice, an association that has received a request from an owner to have a pet in a no pet building has the ability to request some limited additional information to document the existence of a handicap which meets the conditions of the state and federal law, to justify the accommodation for a handicap. The associations attorney can provide a form Handicapped Accommodation Request Verification Form, which is given to the resident for completion and signature of her physician, attesting to a handicap that falls under the FHAA, and that the pet in question materially assists the individual in having full enjoyment and use of the unit and the grounds. Once the form is completed and returned, the attorney should be consulted regarding the evaluation of the claim and determination of whether it meets the requirements of the FHAA.

Fair Housing Amendments Act of 1988 (FHAA)

Community associations are governed by the FHAA, under which the association must allow an owner or resident to make reasonable modifications to the common elements to accommodate handicap (mental or physical), at the expense of the individual requesting the modification. Regarding accomodations for the handicapped, the

Community Associations: A Primer for Real Estate Professionals 111

If a modification to the common property is necessary to accommodate a handicapped person, under the FHAA, the modification is not considered to be a material alteration, and does not require membership or board approval. The modification has to be stable and sturdy, has to have the necessary permits for construction, and it cannot create a dangerous condition for others using the property, in order to be proper and legal. If a prescription pet is required to be permitted on the property, that does not create selective enforcement, nor does it prevent the board from otherwise enforcing the no pet restrictions in the governing documents for the other residents in the future. It is not necessary to republish the documents or otherwise take action to re-establish the boards right to enforce restrictions.

ciation has to permit an individual to install a satellite dish less than one meter in diameter on his or her condominium or co-op balcony, but the dish could not be outside of the balcony dimensions, (i.e., cannot extend outside the plane of the balcony railings). The owner does not automatically have the right to drill through the common element walls to run wiring, and under the case law, is not entitled to mount a dish on common exterior building walls or roofs, or penetrate the building walls in any way, or exceed the ceiling height, etc. Under the law, and under the Florida arbitration decisions, the FCC administrative rulings and federal court cases, an owner cannot place a dish on the roof of the condominium building, as that area is part of the common elements, and is owned in undivided interest by all of the owners of units in the condominium. It is not property over which the owner or the occupants of a unit have exclusive use or control, nor is it property of that the unit owner is the sole owner. Likewise, the grass, parking spaces and all other areas of the common elements are off limits to owners for installation of satellite dishes. Subject to the limitations set forth below, a homeowners association board has rights to limit where a satellite dish is installed. The FCC rules give an association board a certain amount of control over the installations that are permitted. Under the current law and the rules, the board has the full authority, and the weight of the law behind it, to prohibit the installation of satellite dishes anywhere on the common elements, as mentioned above. This is true even though some owners cannot receive the signals if their units do not face the southwest quadrant where the satellite is located. If unit balcony exposure prevents signal reception, the board does not have to provide an alternate site for placement of the dish. Basically, the law does not permit the association to require approval of satellite dishes. But, under the law, the board can adopt formal regulations regarding the installation, placement, and color of the dish, if the regulation (s): do not unreasonably delay the installation of the dish. (For example, the board cannot adopt a rule that gives it 90 days to review an application for installation of a satellite dish.) cannot unreasonably increase the cost of the installation. (For example, the board cannot require that an individual enclose his balcony in order to place a satellite dish there.) cannot unreasonably impair the reception of the

REGULATION OF SATELLITE DISHES, OVERTHE-AIR RECEPTION DEVICES

Some of the older communities in Florida have documents that prohibit television antennae or satellite dishes. As of 1996, those blanket restrictions are no longer enforceable. The Telecommunications Act of 1996 was adopted by the United States Congress, and provides that an owner may install a satellite dish less than one meter (39 inches) in diameter, subject to rules and regulations promulgated by the Federal Communications Commission (FCC). Under the FCC rules, the installation of a satellite dish is only permitted on property that is owned by or under the exclusive use or control of that individual. The ownership in question refers to private ownership, and does not apply to common elements or condominium property. This includes the right to place a small dish within a unit, or on a balcony that is attached to a unit, because the owner has the right of exclusive use or control over that area. However, the right ends at the balcony railing or at the imaginary plane created by the outermost boundaries. The railing and the space beyond the railing or above the ceiling are outside of the owners use rights. Likewise, the roof, the exterior building walls, the common grounds, parking areas, etc., are all off limits, since these areas, which are outside of the unit, are either owned in undivided interest by all of the shareholders in the condominium or are outside of the exclusive use or control of an individual owner. The provisions of the act and the FCC rules have been tested and interpreted thousands of times, in the federal and state courts, as well as agency action by the FCC, and the Arbitration Division of the DBPR. Under the current law and the FCC rules, an asso-

112Module 7

satellite signal. (However, in the situation in which an individual may not be able to get reception because his balcony faces in the wrong direction, the board is not required to make accommodations to allow the owner to install it anywhere else on the property.) The board can require that any installation fully comply with all requirements of the current building codes concerning hurricanes and storms, and can require that an owner repair any damage that is done to the common elements or limited common elements during the installation process. In addition, the board may require that a satellite dish be removed from a balcony when a hurricane warning is issued. The federal courts and the FCC have ruled that there is no first amendment right involved in having a satellite dish. In fact, the applicable constitutional clause prohibits the taking of private property without just compensation. Owners who want to install antennas on common elements are actually trespassing on property owned by other persons. From time to time, over-zealous salespersons have advised buyers that it is not possible for the association to stop the installation. This information is not correct, and the court cases and FCC rulings have clearly held that associations definitely have the right to regulate satellite dishes along the lines set forth above.

Some associations send a second notice, advising that further failure to comply will result in legal action. Ultimately, the matter is referred to the associations legal counsel. The attorney should start with a demand letter.

Arbitration and Access to Court

If voluntary compliance cannot be achieved, the association takes further action. For condominiums and co-ops, the statutes provide for mandatory nonbinding arbitration of any disputes related to the boards authority to require a unit owner to take action or not take action involving the owners unit or appurtenances there. Arbitration is also required for any issue related to the failure of the association to: properly conduct elections give adequate notice of meetings or other action properly conduct association and board meetings allow access to and inspection of official records of the association Condominiums and co-ops have direct access to the courts for all other types of disputes, including those related to tenants, title to the unit or common elements, warranty issues, collection of assessments, and foreclosure. Generally, homeowners associations can enforce their documents in court with a couple of exceptions. Section 720.311, F.S., applies to all homeowners associations in Florida. It provides that recall disputes and disputes related to elections in homeowners associations must be submitted to the DBPR for mandatory binding arbitration. Then, Section 720.311(2)(a), F.S., provides:
Disputes between the association and a parcel owner regarding use of or changes to the parcel or the common areas and other covenant enforcement disputes, disputes regarding amendments to the association documents, disputes regarding meetings of the board and committees appointed by the board, membership meetings not including election meetings, and access to the official records of the association shall be filed with the department for mandatory mediation before the dispute is filed in court. Mediation proceedings must be conducted in accordance with the applicable Florida Rules of Civil Procedure, and these proceedings are privileged and confidential to the same extent as court-order mediation.... (Note: The department being referred to is the Department of Business and Professional Regulation).

ENFORCEMENT OF AND REMEDIES FOR VIOLATIONS

Chapters 718, 719 and 720 of the Florida Statutes all address the enforcement of the associations governing documents. In addition, there are provisions for enforcement in those governing documents.

Pre-Litigation Procedures
Boards should adopt policies related to enforcement procedures. There should be a board-made rule requiring notice of a violation to be in writing, signed by the complainant, and showing the owners unit number or street address. This information can be kept confidential. Ultimately, however, anyone with direct information about a violation could be called upon to testify if enforcement through legal action becomes necessary. Once the violation has been verified, a letter should be sent to the owner of the unit or home, addressing the violation, asking for compliance, and setting a time limit by which compliance is expected. The notice should also include a phone number for someone to contact about the violation.

Community Associations: A Primer for Real Estate Professionals 113

That section of 720, F.S., contains additional instructions and limitations on the dispute resolution process. In the case of a conflict between the law and the documents, the Florida Statutes take precedence over any provision of the governing documents. However, before getting to the court, a homeowners association is required to participate in pre-suit mediation. Listed below are the steps to initiate and proceed with mediation: Under Section 720.311, F.S., the party who wishes to bring the law suit must first send a form letter, which is set forth in the law, by certified mail and regular mail with a demand for pre-suit mediation. The letter must include the names of 5 certified mediators from which the responding party may choose. The mediation must take place within 90 days of the offer to mediate. The responding party must respond to the demand within 20 days from the date of the letter, or the aggrieved party may move ahead with the lawsuit in court. If the responding party fails or refuses to participate in the mediation process, he/she/it may not recover attorneys fees or costs in the subsequent litigation. All of the statutes that regulate community associations provide the right of the prevailing party to collect the attorneys fees and costs.

The association must give the unit owner or renter notice of the violation, and the opportunity to cure. The notice must include the fact that the owner is entitled to request a hearing before an independent fining committee (i.e., not board members). The owner then has 14 days in which to request the hearing. If the owner does not request a hearing, or if the hearing is held and the committee determines the owner is in violation, the committee recommends to the board that it levy the fine. The fine becomes effective only at that point. If a fine is recommended by the committee, the board can determine that it does not wish to levy a fine. However, if the committee recommends no fine, the board does not have the authority to override that recommendation. Under the law, the maximum fine an association can levy is $100 per violation. The law provides that each day the violation continues (after the fine has been levied) is a new violation, up to a maximum of $1,000. The board cannot levy the fine until the entire due process procedure has been completed, which includes notice, chance to cure, opportunity to have a hearing, recommendation to the board, and levying of fine by the board. As a means of enforcement of the documents, fining has some limitations. Because of the statutory requirements, the fining process is cumbersome, time-consuming and administratively daunting. First, the board must find a group of owners who are willing to sit on the enforcement committee. Fines are not a particularly effective deterrent for individuals who make a habit of or condone violations involving their units, because fines do not require the owner to fix the problem, restore the alteration, or stop doing something. For example, a person in violation of the no pet provisions could pay the fine, but is not required to remove the dog. And, under the law, an association cannot lien to collect the fine. In addition, the board must go to small claims court and try to recover the fine. Although a financial penalty is sometimes a good incentive to encourage an owner to control the use of his or her unit or the common elements, because it is so difficult to collect and because it does not achieve the associations goal of getting compliance, it has limited use.

Fining
Another enforcement remedy available to associations is the use of monetary fines for violations of the documents. State law highly regulates the fining process for all types of associations. First, the right to fine must be contained in either the declaration or the by-laws of the association. Without that enabling language in either document, an association will not be able to levy any fines. It is necessary for an amendment to be adopted before any fining could occur. Once the authority to fine exists, and before an association board can levy a fine, there are a number of steps which must be followed: Upon receipt of notice of an alleged violation, the board must verify there is something in the documents that is being violated. The next step is to verify the violation actually occurred.

Failure to Enforce; Loss of Right to Enforce; Republication

From time to time, you will find that boards of directors have not fully enforced all provisions of the governing documents. Generally, under the Florida case law, if the association has not enforced the documents

114Module 7

in the past, the board loses its right to enforce against those types of violations in the future. When prior boards have not uniformly enforced the governing documents, there are defenses available to any owner or other resident against whom the current board attempts to enforce restrictions. This considerably weakens the associations ability to pursue a case, and in some instances prevents the board from enforcing at all. Under Florida Case Law, there are several defenses individuals may raise: 1. Selective enforcement. This translates as failure of past directors to enforce a particular provision uniformly against all owners and occupants. Provisions of the governing documents must be enforced for everyone promptly when a violation comes to the boards attention. 2. Waiver and estoppel. This translates as a prior board being aware of a violation, but failing to take action at the time. As a result, the owner or occupant is now entitled to rely upon the fact that the board did not enforce against him/her in the past. In fact, the board waived its right to enforce and is now prevented from doing so. 3. Laches. This translates as an unreasonable amount of time has gone by between the time the board became aware of a violation, and the attempt to enforce. Under the governing documents and the law, the association has the authority and ability to enforce the documents and regulate the use of the common property, however, board action must be consistently taken, in a timely manner, and documents must be uniformly enforced for everyone to maintain that authority and ability. Under the Florida case law, the current board is not able to start enforcement action against owners who have violated the documents if there has not been enforcement in the past. (Chattel Shipping and Investments, Inc. v. Brickell Place Condominium Association, 481 So.2d 29 (Fla. 3d DCA 1986)) On the other hand, if the board has uniformly enforced a particular provision of the documents, then the board can continue to do so, and that specific enforcement action is not lost. That is, failure to enforce a particular provision does not prevent the board from enforcing another provision if the second provision has been enforced over time.

application of the documents. To accomplish this purpose, the board must republish the governing documents, which can be done without a vote of the membership. (Chattel Shipping and Investments, Inc. v. Brickell Place Condominium Association) Republication does not require the board to actually copy the entire document book. Republication requires that the board send a letter to all owners stating the boards intention to republish the governing documents. Furthermore, the board states that it will fully enforce against all new violations occurring subsequent to the republication, as soon as they come to the attention of the board of directors. Under the law, the board is then protected against attempts to enforce from that point forward for new violations. The previously occurring violations are to be grandfathered, and permitted to continue. After republication, there cannot be challenges to enforcement based upon any prior course of action by the board, which occurred before the republication. The documentary rights and obligations of the board and the owners are reinstated, and can be enforced for new violations from then on. The procedure to republish the documents is: 1. At a duly called meeting of the board, at which a quorum of the directors is present, a motion is made, seconded and adopted along the lines of the following: MOTION: I move that the Board of Directors readopt and republish all provisions of our governing documents, including the rules and regulations; including ______________________ ; that we grandfather in any current violations which have not been enforced in the past; and that we fully enforce all future violations from this point onward. (The board can, of course, highlight any other particular provisions it wants to focus on as part of the motion, if the directors wished to do so.) 2. Once the motion is adopted, the board sets a date on which the enforcement begins, and a notice is sent to every owner advising of the republication and intent to enforce. The board can take the opportunity to highlight particular provisions in that notice, rather than mentioning them in the text of the motion. 3. In order to allow for delivery of the notice, the board sets the enforcement date for two or three days after the date of the board meeting at which the republication occurs.

Re-Establishing Right to Enforce

There is a way to re-establish the enforceability and

Community Associations: A Primer for Real Estate Professionals 115

4. Send the notice to all owners regarding the republication, describing the return to documentary restrictions in as much detail as the board chooses, and advising that the provisions will be fully enforced from that point on. The notice also provides that residents who are grandfathered are not able to replace nonconforming items without board approval as required in the documents or the rules. The association attorney should be involved in drafting the notice to be sure it complies with legal requirements. For any currently existing violations, the board creates a detailed record for future reference and documents the grandfathered units, if any. Then, new violations can be promptly enforced.

licensees might also be named in an enforcement action, so it is in their best interest and in the best interest of their customers to keep renters on the straight and narrow. Renters do not have the right to attend either board or membership meetings, as those are private corporate meetings open only to members or shareholders. Renters also have no right to vote in association matters. If a renter has a problem, he is required to contact the owner or the owners representative (the real estate licensee). Renters should not contact the association manager or the board of directors.

POSSIBLE CONFLICT OF INTEREST FOR LICENSEES

The previous real estate boom offered a unique opportunity, and many real estate professionals took advantage of the market to personally purchase units to use as rental property. If you own a unit in a condominium, for example, you are a member of that association, and have the right to vote, serve on the board, vote to amend documents, and so on. You also have the obligation to pay assessments and follow the requirements of the governing documents. If you choose to run for the board of directors, be aware of the potential for conflict of interest. As a director, your obligation is to the entire membership of the association. For example, assume the board wants to propose some amendments that places limits on rental of units in the condominium. You, as an investor/owner, may have a different goal than the board. Sooner or later, the decision of the board most likely will impact your personal financial condition. As a director, you are obligated to put aside your personal needs and consider what is best for the community as a whole. A similar potential for conflict of interest arises if you serve on a screening committee. Even if you are not on the committee, you may see notices from owners who intend to put their units on the market or seek a renter. There is a possibility for the appearance of impropriety. Some owners may think you are taking personal advantage of insider information.

OWNERS RIGHTS AND RESPONSIBILITIES

Even though the board is in charge of the community, owners have a number of rights and responsibilities that are set forth in the governing documents and the law. Owners have the ability to elect the board of directors; to vote to approve amendments to the governing documents; and to approve material alterations of the common property by the association. Owners have the right to inspect all official records of the association, including the financial records and information on owners who have not paid their assessments; and to attend meetings of the board and of the membership. They also have the right to use the common property for the purposes for which the property is intended. The owners have the obligation to maintain their homes, to comply with the requirements of the governing documents, including the rules and regulations, and to pay their assessments. When an owner has a renter in their unit or home, the owner has the responsibility to pay the assessments to protect the renters rights of quiet enjoyment. Homeowners associations are permitted to suspend rights to use the common area and to turn off cable television services (if there is a bulk service agreement in place) when an owners assessments fees are delinquent.

RENTERS RIGHTS AND RESPONSIBILITIES

Most of the time, the renter stands in the shoes of the owner and has all of the rights to use the home and the common property, including the clubhouse, pool, parking spaces, and so on. Renters must abide by the governing documents, including the screening and approval process. If a renter violates the governing documents, she is subject to enforcement, and so is the owner of the unit. As the representative for the owner, real estate

MANAGING HOMES AND UNITS IN TODAYS ECONOMY

Todays real estate market is still recovering from the recent economic downturn. The weakened economy has dramatically affected common-interest communities. In many cases, it has resulted in a rise in the number of rental units available, as owners are scrambling to pay their assessments on second or seasonal homes. If a number of owners are not paying assessments,

116Module 7

it directly impacts on every other owner of a unit or home or share of stock in the community. Under the Florida Law, the remaining owners are responsible to make up the deficit when one or more of the owners fail to pay. When funds are insufficient to cover association expenses, loss of services and deterioration of the buildings and grounds may result, depressing the

property values further. The number of foreclosures continues to rise, even in communities that have been stable for more than 30 years. In fact, some communities are experiencing the first foreclosure in their history. As a business person, would you go out to a shopping

TRUE LIFE TALES

In a high-end subdivision of single-family homes, a moving van pulled up to a home, in the middle of the day. The president of the association lived next door to that home, and knowing that the house was in foreclosure, he assumed his neighbors were moving out. It wasnt until the following day that the police advised him the house had been cleaned out by some rather brazen thieves. A unit in a luxury high-rise condominium in Miami was offered for rent. A man showed the unit and made the rental arrangements. Only it turned out he didnt actually own the unit, nor was he an agent for the owner. He just broke in, changed the locks, rented it out and took the rather substantial monthly rent money. Robin Hood companies have sprung up. They contact the owners of the home or the unit which is going into foreclosure and offer to remove all of the contents and liquidate them. They get a percentage of the take, and the owner of the home gets the rest of the cash. Owners are also arranging to strip their units or homes. This involves removing their personal belongings, including the furniture, fixtures, appliances, sinks, cabinetry, lighting, counter tops, toilets, plumbing, wiring, and anything else they can dig out or otherwise remove. These items are then sold and the owner pockets the cash. Of course, stripping renders the unit uninhabitable and results in a very sizeable outlay of cash necessary to make the repairs. I heard about a gentleman who lived in a 35-unit, older condominium building. He bought his unit for cash when times were good. Then he put both a first and second mortgage on the unit and went back to Brazil with all of the cash, abandoning the unit. Of course, he stopped paying the association fees and the mortgage lenders; the unit is now in foreclosure. In a 35-unit condominium, one unit in foreclosure has a tremendous impact.

CASE STUDIES Case Study 1

The water heaters in the condominium units are 30 years old. They are starting to break down, resulting in spectacular floods of the units below. When you inspect one of the units you manage while the owner is out of town, you find 4 inches of water in the living room, which has soaked the carpet, warped the wood floors, and damaged all of the furniture. In addition, the plaster in the living room ceiling is soaked and is falling down. Does the association have any obligation to remove the water and try to mitigate the damage when the flood occurs? No. In fact, the association actually has no right to take any action regarding the interior of a unit, other than to notify the owner as soon as the flood is reported. Does the board or the association manager have any obligation to inspect the unit when an owner is away? Definitely not. In fact, a board or an association manager who inspects unit interiors on a regular basis in the absence of an owner is opening him or herself up to significant liability. Who is responsible to pay for the damage? The owner should have insurance that will cover the damage. Under Florida law, the association is responsible for replacement of any drywall, but the plaster, carpet, paint, popcorning, and all fur-

Community Associations: A Primer for Real Estate Professionals 117

nishings and personal belongings is the financial obligation of the unit owner. Can the owner of the unit recover costs from the owner of the upstairs unit? The owner cannot make a claim against any insurance carrier but his own. The current procedure is that each insurance carrier pays only for the unit which is covered by that policy. The owner may have a claim against his neighbor if there has been any negligence by that neighbor (e.g., he knew his water heater was leaking, but didnt replace it, and then it exploded).

to have a set of the rules handy for the renter. If there are use restrictions in the documents that will affect the tenant, you may want to create a summary sheet of those to add to the set of rules. Does the renter need to be interview and approved by the association? For senior housing communities, is at least one of the tenants 55 years of age or older? Reminding the tenant to abide by the rules and the use restrictions; also alert the tenant to the fact that he/she cannot attend association meetings. Determine whether the tenant has ever lived in a community association before, and if not, remind him/her about noise, loud music and voices, parking limits, guest limits, etc. Make sure the tenant(s) know(s) where to pay or send the rent, and whom to contact in case of a problem. Tenants should contact the owner of the unit or you, as agent for the owner, and not the association, if there is a problem with the unit.

Case Study 2
You pick up a listing for the sale of a home that is governed by a community association. What items should definitely be on your checklist? Set of governing documents, obtained from the association or from the public records, through the title company. Review the documents and be familiar with the use restrictions. Can a buyer have pets? Are there any parking issues? Is the community designated as senior housing? Are there any guest restrictions? What are the amenities available for use by the residents? Are rentals permitted? Are there limits on the length of a rental, or the number of times a unit can be rented in a year? Is there more than one association with jurisdiction over the home for which membership is required? Has the potential buyer ever lived in a community association before? If not, talk about what community association living entails, including the unit owners rights and responsibilities.

Case Study 4
You drive into a community made up of 68 single-family homes, on half-acre lots. The community is governed by an association. What type of association will it have? Dont be fooled by the fact that it is made up of single family homes. It is possible to have a condominium in which the lots are the units? How do you find out what kind of association it is? Look at the governing documents. What other documents should a prospective buyer ask for? The frequently asked questions and answers sheet or disclosure statement that associations are required to maintain and update. The current budget and last years year-end financial report, with information on whether there are Reserves, and how well are they funded.

Case Study 3
You pick up a listing for the rental of a condominium unit. What items are on your checklist that relate directly to rentals? You dont need to provide a renter with a set of governing documents, but you will want

118Module 7

mall, round up a hundred or so complete strangers, and go into an equal equity partnership with them in a business? No? Well, that is exactly what every member of a community association has done. They have gone into full equity partnership with a lot of strangers, and the partnership involves their homes. As it turns out, some of those folks are stranger than others. Every member of a community association has a duty to every other member, to pay the bills, maintain the property, participate in the governance process, and comply with the governing documents. Also, every member has the ability to see all of the financial records of the association, including the list of accounts receivable and the names of the neighbor who is not paying assessments on time or at all. For more than 25 years, it has been conventional wisdom that community associations are recession- and inflation-proof. That is no longer true. And, when the associations are not flourishing, it has a trickle down effect on roofers, general contractors, pool and lawn service companies, tree trimming services; architects and engineers, and local retailers. The economy has proven to be a boon to those who are always alert to new entrepreneurial opportunities.

CONCLUSION
As a real estate professional you have a duty to be familiar with the workings of community associations. You should also be familiar with the types and configurations of housing stock that are subject to those communities. If you are not knowledgeable about your product, you could have liability to buyers, sellers, and renters if information you give them is relied upon and turns out to be wrong. Encourage buyers to ask for copies of the current budget for the association, and to inquire whether there are reserve funds for future maintenance and repair. Buyers should also ask about special assessments, and when the roof was last replaced or the roads resurfaced, so they know if they are likely to have to come up with assessment monies in the near future. Suggest that the buyer talk to other people who live in the community to get a feeling for what it is like to live there. Clearly, it is better for you if the buyer loves the new home and the community in which it is located, and has reviewed the rules before buying, to know exactly what he or she is getting into. Welcome to my world!

Community Associations: A Primer for Real Estate Professionals 119

M odul e 7 P r o g r e s s T e s t
You are not required to answer the progress test questions to complete the 14-hour course. They are intended to help prepare you for the Final Exam. Choose the best response to each question. The answers are found in the back of the book.
1. Cooperatives are governed by: a. Chapter 710, F.S. b. Chapter 712, F.S. c. Chapter 715, F.S. d. Chapter 719, F.S. 2. According to the division rules and the Condominium Act, which event will result in an invalid ballot? a. the outer envelope is not signed b. the inner envelope is signed c. the outer envelope is present d. there is only one ballot in the same inner envelope 3. Arbitration is required for any issue related to the failure of the association to: a. block access to official records of the association. b. properly conduct elections. c. refuse to allow inspection of official records of the association. d. hold private meetings. 4. Owners do not have the right to: a. elect the board of directors. b. inspect all official records of the association. c. attend board meetings. d. prevent other owners from use of the common areas. 5. A person with a power-ofattorney does not have the right to: a. vote in an election. b. attend board meetings. c. speak at board meetings. d. vote for certain matters through proxy.

CASE STUDY/PROGRESS TEST ANSWER KEYS

Note: T  hese are the answers to the Case Studies questions, and progress test questions. They are not the Final Exam answers. Do not transfer these responses to your Answer Sheet.

MODULE 1 Real Estate Core Law: License Law, State and Federal Laws, and the Brokerage Relationship Disclosure Act
CASE STUDIES: PART I Case Study 1
1. a 2. c

CASE STUDIES: PART III Case Study 1

1. b 2. a 1. c 2. d

Case Study 2
1. b 2. d

Case Study 2

8. d 9. b 10. a 11. b 12. d 13. c 14. a 15. d

CASE STUDIES: PART II Case Study 1

1. a 2. b 1. d 2. b

Progress Test Questions

1. c 2. b 3. a 4. d 5. b 6. b 7. c

Case Study 2

MODULE 2 New Energy Incentives: Gain a Competitive Edge

Progress Test Questions
1. 2. 3. 4. 5. c c b d a

MODULE 3 Credit Products and Offerings: The Role of the Federal governmenT
Progress Test Questions
1. 2. 3. 4. 5. b b d a c

Case Study/Progress Test Answer Keys121

MODULE 4 RESPA: Review the Fundamentals and the New Federal Rules
Progress Test Questions
1. 2. 3. 4. 5. b c b c a

MODULE 5 FHA Programs: Advantages for Borrowers

Progress Test Questions
1. 2. 3. 4. 5. c b a c b

MODULE 6 Appraising Real Estate: The Effects of the Great Recession

Progress Test Questions
1. 2. 3. 4. 5. a d a a b

MODULE 7 Community Associations: A Primer for Real Estate Professionals

Progress Test Questions
1. 2. 3. 4. 5. d a b d a

INDEX A
ADA (Americans with Disabilities Act), 10910 address, 2, 8 advance fees, 3 advance rent, 18 advertising, 2, 1011, 49 affiliated business arrangements (AfBAs), 57 AMCs (Appraisal Management Companies), 89, 90, 91, 94 American Recovery and Reinvestment Act, 38 American Society of Heating, Refrigeration and Airconditioning Engineers (ASHRAE), 40 Americans with Disabilities Act (ADA), 10910 amount financed, under TILA, 46 Annual Percentage Rate (APR), 46, 49 anti-flipping rule, 72 applicant screening procedure (community associations), 1068 application for licensure, 3, 9 appraisal, 7394 appraiser license and certification requirements, 8182 changes subsequent to great recession, 87, 8992 cost depreciation approach, 8384 FHA process, practice, 73 Financial Institutions Reform Recovery and Enforcement Act, 8081, 85 Home Valuation Code of Conduct, 73, 8991, 92, 93 income approach, 84 myths and realities, 9394 process, 8384 reconciliation, 84 resources, 41, 88 sales comparison approach, 83, 84 Uniform Standards of Professional Appraisal Practice, 82, 8487, 90, 92 valuation, 8283 Appraisal Foundation, 81, 82, 85 Appraisal Management Companies (AMCs), 89, 90, 91, 94 Appraisal Qualifications Board (AQB), 81, 82 Appraisal Standards Board (ASB), 85 Appraisal Subcommittee (ASC), 8081, 94 appraisers, 8182, 85, 90, 9293 appurtenances, 98 APR (Annual Percentage Rate), 46, 49 AQB (Appraisal Qualifications Board), 81, 82 arbitration, 27, 98, 102, 103, 109, 111-113 articles of incorporation, 99 ASB (Appraisal Standards Board), 81, 85 ASC (Appraisal Subcommittee), 8081, 94 ASHRAE (American Society of Heating, Refrigeration and Air-conditioning Engineers), 40 assessments, 98-100, 1034 Attorney General of New York, 89 attorneys, 49, 57, 104, 113 automated valuation model (AVM), 91, 92 banks, background checks with, 107 bids, competitive, 1012 blind advertisements, 2, 11 board of directors (community associations) assessments, 1034 election process, 100101 enforcement, 11315 licensees on, 115 policies and procedures, 104, 106 review and approval of sales and rentals, 1068 rule-making, 104, 105 boat slips, 98 bonds, surety, 18 borrowers, 70, 7273, 93 branch offices, 10 Brokerage Relationship Disclosure Act (BRDA), 14 brokerage relationships, 3, 1416 brokerages escrow accounts, 26 office requirements, 10 records, 13 registration, 910 sign requirements, 10 broker associates, 910, 26 See also licensees brokers application for licensure, 3 appraisers and, 9293 branch offices, 10 business forms, 910 commissions, 1112, 60 discipline, 3 escrow accounts, 2628 experience requirement, 3 foreign, 12 license renewal, 7 liens, 1213 nonresident requirements, 9 personal assistants, 13 post-license education, 67 records, 13 rental information, 1314 signs, 10 transaction, 2, 14, 15, 16, 36 See also licensees budgetary assessments, 103 builders, home, 61 business days, defined, 26 bylaws, 100

C
carryback financing, 47, 56 cash out refis, 72, 73 CDDs (community development districts), 23, 99 certified general real estate appraisers, 82 certified residential real estate appraisers, 82 character references, 107 charges for settlement services, averaging, 60 citations, 6 City of Tallahassee Utilities, 41, 42 claim, notice of, 19

B
back-end premiums, 5960 background checks, 107 balloon payments, 49 ballots, invalid, 101 bankruptcies, 50, 7273

Index123
closed end credit, 47, 49 closings, quickie, 47 collection agencies, 51 Commercial Real Estate Leasing Commission Lien Act, 1213 Commercial Real Estate Sales Commission Lien Act, 12 commission notices, 12 commissions, 1112, 60 common areas, 99, 104, 10910, 111 community associations, 97118 access to units, 108 assessments, 98, 1034 characteristics, 98 conflict of interest for licensees, possible, 115 enforcement and remedies for violations, 11215 governing documents, 98, 99100 handicap accessibility, 10911 insurance and payment for unit damage, 1023 maintenance, repair, and replacement, 102 managing homes/units in todays economy, 11516, 118 operations, 100102 ownership, 98104 owners rights and responsibilities, 115 renters rights and responsibilities, 115 satellite dishes, 97, 11112 senior housing occupancy, 1089 statutes governing, 9798 use restrictions, 1048 See also condominiums; cooperatives; homeowners associations community development districts (CDDs), 23, 99 comparable sales, 9394 compensation, in affiliated business arrangements, 57 Competency Rule (USPAP), 86, 90, 92 competitive bids, 1012 Condominium Act about, 97 bylaws versus, 100 election process, 100101 insurance and payment for unit damage, 102, 103 parking spaces, 98 review and approval of sales and rentals, 106 rule-making, 105 condominiums access to units, 108 arbitration and access to court, 112 assessment delinquencies, 104 conversions to, 100 described, 98 disclosure, 24 election process, 100101 escrow disputes or good faith doubts, 27 FHA and, 7374 governing documents, 100 insurance and payment for unit damage, 1023 maintenance, repair, and replacement, 102 ownership, 9899 review and approval of sales and rentals, 106 satellite dishes, 111 statutes governing, 97 See also community associations Conduct Section of Ethics Rule (USPAP), 85 Confidentiality Section of Ethics Rule (USPAP), 8586, 93 conflict of interest, 115 Consent to Transition to Transaction Broker, 36 Consumer Credit Protection Act, 46, 49, 51 Consumer Financial Protection Bureau, 46, 49, 56, 59 contingent fee arrangements, 85 continuing education, 7 contracts, 2122, 26, 27 conversions to condominiums, 100 Cooperative Act, 97, 100101, 106 cooperatives access to units, 108 arbitration and access to court, 112 assessment delinquencies, 104 described, 98 election process, 100101 governing documents, 100 insurance, 102 maintenance, repair, and replacement, 102 ownership, 99 review and approval of sales and rentals, 106 statutes governing, 97 See also community associations corporations, 9 correspondents, 70 co-signers, 72 cost depreciation approach to appraisal, 8384 credit products and offerings, 4552 See also mortgages credit repair organizations (CROs), 52 Credit Repair Organizations Act (CROA), 52 credit reports, 50, 73, 107, 108 credit repositories, 49, 50, 51 criminal history, 108 CROA (Credit Repair Organizations Act), 52 CROs (credit repair organizations), 52 current mailing address, 2, 8

D
DBPR. See Department of Business and Professional Regulation (DBPR) DCA (Department of Community Affairs), 21 declaration of condominium, 100 Department of Business and Professional Regulation (DBPR) appraisers, 8182 arbitration, 112 brokerage records, 13 Division of Arbitration, 98, 1023, 109, 111 Division of Florida Condominiums, Timeshares and Mobile Homes, 24 Division of Real Estate, 4, 8, 910, 81 license renewal, 7-10 name changes, 8 nonresident requirements, 9 office requirements, 10 regulatory structure, 34 rental information, 13 unlicensed activity, 13 website, 5 See also Florida Real Estate Appraisal Board (FREAB) Department of Community Affairs (DCA), 21 Department of Housing and Urban Development (HUD). See Housing and Urban Development (HUD) Department of Justice, 110

124Index
Department of Revenue, 41 Department of Veterans Affairs (VA), 56, 80, 88, 89, 94 deposits escrow, 26 security, 1819 depreciation, 8384 designated sales associates, 16 disciplinary actions, 3, 6 disclosure affiliated business arrangements, 57 brokerage relationship, 1415 condominium, 24 credit repair organizations, 52 designated sales associate, 16 energy-efficiency rating, 21 homeowners association, 2223, 34 lead-based paint, 20, 21, 3133 material facts, 22 no brokerage relationship, 16, 36 personal property, disposition of tenants, 19 property condition, 22 property tax, 24 radon gas, 21 Real Estate Settlement Procedures Act, 5867 sellers, 22 single agency, 15, 35 stigmatized property, 22 transaction brokers, 15, 16, 36 Truth in Lending Act, 4647, 48, 49 discrimination in housing, 106108 Disposition of Personal Property Landlord and Tenant Act, 19 distance learning, 6 Division of Arbitration, 98, 1023, 109, 111 See also Department of Business and Professional Regulation (DBPR) Division of Florida Condominiums, Timeshares and Mobile Homes, 24 See also Department of Business and Professional Regulation (DBPR) Division of Real Estate (DRE), 4, 8, 910, 81 See also Department of Business and Professional Regulation (DBPR) Dodd-Frank Wall Street Reform and Consumer Protection Act appraisals, 91, 94 communication with appraisers, 92 Home Valuation Code of Conduct, 90, 91 mortgages, 47, 49 regulatory oversight, 49, 56 doors, exterior, 3940 down payments, 49, 71, 74 DRE. See Division of Real Estate (DRE) dual agency, 14 change of, 8 employment requirements, FHA, 73 energy efficiency, 21, 38, 3942, 75 Energy Efficient Mortgage (EEM), 75 energy incentives, 3742 ENERGY STAR program, 39, 41 Environmental Protection Agency (EPA), 20, 39 Equal Credit Opportunity Act (ECOA), 49, 5152, 91 escrow accounts, 2629 escrow agents, 26, 27 escrow disbursement order (EDO), 27 escrow disputes or good faith doubts, 27 Ethics Rule (USPAP), 82, 8488, 92 external obsolescence, 84

F
Fair and Accurate Credit Transactions Act (FACTA), 51 Fair Credit Reporting Act (FCRA), 4950, 107 Fair Housing Amendments Act (FHAA), 108, 11011 Fannie Mae appraisals, 73, 80, 87, 88, 8990, 91 Appraiser Independence Requirements, 90, 92 Desktop Underwriter, 72 guidelines, 70 Home Valuation Code of Conduct, 89 RESPA and, 56 Fannie Mae 1004/Freddie Mac 70 form, 87 Fannie Mae 1004MC form, 87, 89 Fannie Mae Selling Guide, 88, 91 fax advertising, 11 FCC (Federal Communications Commission), 111, 112 FCRA (Fair Credit Reporting Act), 4950, 107 Federal Communications Commission (FCC), 111, 112 Federal Home Loan Mortgage Corporation. See Freddie Mac Federal Housing Administration (FHA) about, 70 anti-flipping rule, 72 appraisals, 73, 80, 91, 93, 94 borrowers, advantages for, 70 condominium mortgage insurance, 7374 credit guidelines, 70 Energy Efficient Mortgage, 75 Home Equity Conversion Mortgages, 75 interest rates, 71 lenders, approved, 70, 91 loan to value ratios, 71, 72, 73 manufactured home and lot insurance, 7576 market share, 70 mortgage insurance premiums, 71 refinancings, 72, 73 rehabilitation loan financing, 7475 RESPA and, 56 Roster appraisers, 91, 93 Section 203(b) program, 71, 72, 7374 Section 203(k) program, 7475 Section 234(c) program, 73 TOTAL system, 72 underwriting, manual, 7273 Federal Housing Finance Agency (FHFA), 89 federally related transactions (FRTs), 80, 81, 85, 87 Federal National Mortgage Association. See Fannie Mae Federal Reserve Board, 46, 80 Federal Trade Commission (FTC), 50, 51, 52

E
eAppraiseIT, 89 ECOA (Equal Credit Opportunity Act), 49, 5152, 91 Economic Stimulus Bill, 38 EDO (escrow disbursement order), 27 EEM (Energy Efficient Mortgage), 75 election process (community associations), 100101 employer background checks with, 107

Index125
fees advance, 3 contingent arrangements, 85 loan, 59 referral, 12, 5658 splitting, 57 unearned, 57 FHA See Federal Housing Administration FHAA (Fair Housing Amendments Act), 109, 11011 FHFA (Federal Housing Finance Agency), 89 fiduciary relationship, 2, 15, 106 finance charge, 46, 49 Financial Institutions Reform Recovery and Enforcement Act (FIRREA), 8081, 85 financing contingency clause, 27 fining, 113 FIRREA (Financial Institutions Reform Recovery and Enforcement Act), 8081, 85 First American, 89 first refusal, right of, 107 flipping, rule against, 72 Florida Appraisal Management Companies, 90-94 appraiser license and certification requirements, 8182 energy incentives, 4041 See also specific agencies, laws and topics Florida Administrative Code, 4, 9798 Florida Building Code, 23, 24 Florida Energy and Climate Commission, 41, 42 Florida Landlord and Tenant Act, 1819 Florida Real Estate Appraisal Board (FREAB), 8182, 91 Florida Real Estate Commission (FREC) address changes, 8 advertising, 10, 11 branch offices, 10 brokerage relationships, authorized, 14 citations, 6 commissions, 1112 disciplinary guidelines, 6 employer, change of, 8 escrow accounts, 26-28 mutual recognition, 8 notice of noncompliance, 6 office requirements, 10 regulatory structure, 3 rule changes, 23, 45 (table) surety bonds, 18 unlicensed activity, 13 Florida Residential Landlord and Tenant Act, 1819 foreclosures, 3, 24, 52, 93, 116 foreign brokers, 12 forms Confirmation of Receipt of Lead Pamphlet, 33 Consent to Transition to Transaction Broker, 36 Disclosure of Information on Lead-Based Paint and/ or Lead-Based Paint Hazards for Target Housing Rentals and Leases, 32 Disclosure of Information on Lead-Based Paint and/ or Lead-Based Paint Hazards for Target Housing Sales, 31 Disclosure Summary, 22-24, 34 Federal Truth-in-Lending Disclosure Statement, 48 Good Faith Estimate, 58-59, 6264 HUD-1 settlement statement, 56, 60, 6567 No Brokerage Relationship Notice, 36 Single Agent Notice, 35 FREAB (Florida Real Estate Appraisal Board), 8182, 91 FREC See Florida Real Estate Commission Freddie Mac appraisals, 73, 79, 80, 87, 88, 8990, 93 Appraiser Independence Requirements, 90, 92 Guide Bulletin (2009-18), 90, 93 guidelines, 70 Home Valuation Code of Conduct, 89 Loan Prospector, 72 RESPA and, 56 Freddie Mac 70 form, 87, 91 Freddie Mac Seller/Servicer Guide, 88 FRTs (federally related transactions), 80, 81, 85, 87 FTC (Federal Trade Commission), 50, 51, 52 fuel cells, 38, 39, 40 functional obsolescence, 84

G
Gainesville Regional Utilities, 41, 42 geothermal heat pumps, 38, 39 GFE (Good Faith Estimate), 56, 5860, 6264 gift letters, 71 Good Faith Estimate (GFE), 56, 5860, 6264 governing documents, 98, 99100, 11415 Government Sponsored Enterprises (GSEs), 90, 94 grandfathering, 105 gross rent multiplier (GRM), 84 GSEs (Government Sponsored Enterprises), 90, 91, 94

H
handicap accessibility, 10911 Handicapped Accommodation Request Verification, 110 heat pumps, geothermal, 39 HECMs (Home Equity Conversion Mortgages), 75 HELOCs (home equity lines of credit), 47, 52 HERS (Home Energy Rating Systems), 75 high cost (subprime) mortgages, 49 HIV/AIDS, 21 Home Energy Rating Systems (HERS), 75 Home Equity Conversion Mortgages (HECMs), 75 home equity lines of credit (HELOCs), 47, 52 home inspectors, 24 home offices, 10 homeowners associations arbitration and access to court, 11213 assessment delinquencies, 104 described, 98 disclosure, 2223, 34 election process, 100 governing documents, 100 insurance, 102 maintenance, repair, and replacement, 102 review and approval of sales and rentals, 106 satellite dishes, 11112 statutes governing, 97 See also community associations Home Valuation Code of Conduct (HVCC), 73, 8991, 92, 93 Housing and Urban Development (HUD) affiliated business arrangements, 5758 appraisals, 88, 89, 93 enforcement of RESPA, 56, 58 fee splitting and unearned fees, 57

126Index
Good Faith Estimate, 59 handicap accessibility, 110 Mortgagee Letter 2009-28, 9192 referral fees, 5657 RESPA FAQs, 6061 senior housing occupancy, 1089 settlement services, averaging charges for, 60 Valuation Protocol, 93 See also Federal Housing Administration (FHA) HUD-1 settlement statement, 56, 5859, 6061, 6567 HVCC (Home Valuation Code of Conduct), 73, 8991, 92, 93 conflict of interest, possible, 98, 101, 102, 115 continuing education, 7 disciplinary actions, 3, 6 personal assistants, 13 rental information, 1314 See also broker associates; brokers; sales associates licenses application process, 3 home inspectors, 24 involuntary inactive, 7 maintaining, 68 mold assessors/remediators, 24 nonresident applicants, 89 reactivating, 3 renewing, 7 voluntary inactive, 7 lien notices, 13 liens, 1213 limited liability companies (LLCs), 910 limited liability partnerships (LLPs), 910 loan servicers, 61 loan servicing rules, 61 loan terms and fees, 59 See also mortgages loan to value (LTV) ratios, 71, 72, 73 Los Prados Condominium Association, Inc. v. Jeffrey S. Lemley, 1023 LTV (loan to value) ratios, 71, 72, 73

I
identity theft, 51 IEEC (International Energy Conservation Code), 40, 41 income approach to appraisal, 84 income requirements, FHA, 73 In Re Petition for Declaratory Statement Allstate Floridian Insurance Company, 103 In Re Petition for Declaratory Statement Plaza East Association, Inc., 103 insider information, 115 insulation, 40 insurance condominium mortgage insurance, 7374 homeowners, 102, 103 manufactured home and lot, 7576 mortgage insurance premium (MIP), 46, 70, 71 title, 60, 61 interest-bearing accounts, 27 interest rates, 71 Internal Revenue Service (IRS), 38, 40, 41 International Energy Conservation Code (IEEC), 40, 41 Internet advertising, 11 involuntary inactive licenses, 3, 7 IRS (Internal Revenue Service), 38, 40, 41

M
Management Section of Ethics Rule (USPAP), 85 manufactured home and lot insurance, 7576 market value, 75, 8283 mark-ups, 57 master lease, 100, 104 material facts, 22 mediation, 27, 112, 113 meetings, open, 101 microturbines, 39, 40 MDIA (Mortgage Disclosures Improvement Act), 47 military personnel, 1920, 2122 MIP (mortgage insurance premium), 46, 70, 71 mold assessors/remediators, 24 Mortgage Disclosures Improvement Act (MDIA), 47 mortgagees. See lenders Mortgage Foreclosure Rescue Act, 3, 24 mortgage insurance premium (MIP), 46, 71 mortgage professionals, 57, 58, 60, 70 mortgages appraisals, 80 closed end credit, 47 condominium, 7374 Energy Efficient Mortgage, 75 Good Faith Estimate, 59 high cost (subprime), 49 Home Equity Conversion Mortgage, 75 mutual recognition, 8

J
Johnson v. Davis, 22 joint ventures, 57

K
kickbacks, 5657

L
laches, 114 landlords, 1820, 27, 50, 107 latent defects, 22 lawyers, 26, 56 lead-based paint, 2021, 3133, 73 lease agreements, 99, 100 Leasing Act, 1213 lenders affiliated business arrangements, 57 appraisals, 82, 9192, 93, 94 FHA-approved, 70, 91 Good Faith Estimate, 59, 60 licensees advertising, 1011 appraisals, 79, 82, 85, 93 brokerage relationships, authorized, 1416 change of name, address, or employer, 8 commissions, 1112, 60 community associations and, 98, 101, 102, 115

N
name changes, 8 nameplate capacity, 39, 40 National Association of REALTORS (NAR), 90 National Fenestration Rating Council (NFRC), 39, 41 National Housing Act, 71 See also Section 203(b) program

Index127
New York Attorney General, 89 NFRC (National Fenestration Rating Council), 39, 41 no brokerage relationship, 14, 15, 16, 36 noncompliance, notice of, 5, 6, 17 non-occupant co-borrowers, 72 nonresident applicants, 89 real estate related financial transactions, 80 Real Estate Settlement Procedures Act (RESPA), 5567 disclosures, 5867 enforcement, 58 Good Faith Estimate, 56, 5860, 6264 history, 56 HUD-1 settlement statement, 56, 5859, 6061, 6567 loan servicing rules, 61 referral fees and kickbacks, 5658 title insurance, seller-required, 61 Real Property Appraisal Development (USPAP), 87 Real Property Appraisal Reporting (USPAP), 87 reconciliation appraisal, 84 escrow accounts, 2627 records, brokerage, 13 recovery fund, 13 referral fees, 12, 5658 refinancings, 72, 73, 80 registered trainee real estate appraisers, 8182 registration, brokerage firm, 910 Reg Z, 4649, 90, 92 rehabilitation loan financing, 7475 renewable energy, 3839, 40, 41 renewal, license, 7 Renovate Right (pamphlet), 20 rent, advance, 1819 rentals information about, 13 review and approval of, 1068 renters, 1820, 27, 1034, 107, 115 replacement cost, 84 reproduction cost, 84 republication of governing documents, 11415 rescission rights, 47 Residential Lead-based Paint Hazard Reduction Act, 20 residential sales, 2, 14 Residential Swimming Pool Safety Act, 2324 Resolution Trust Corporation (RTC), 80 RESPA. See Real Estate Settlement Procedures Act (RESPA) right of first refusal, 107 Robin Hood companies, 116 roofing, 40 RTC (Resolution Trust Corporation), 80 rules and regulations (community associations), 100, 104, 105

O
obsolescence, 84 occupant borrowers, 72 Office of Federal Housing Enterprise Oversight (OFHEO), 89 offices, 10 office space rental arrangements, 56 OFHEO (Office of Federal Housing Enterprise Oversight), 89 older persons, housing for, 1089 open-ended credit, 47 open meetings, 101 Orlando Utilities Commission, 41, 42 overages, escrow account, 26, 27

P
paint, lead-based, 2021, 3133, 73 parking restrictions, 106 parking spaces, 98 par rate, 60 partnerships, 9-10, 57, 58, 81 party, defined, 2, 12 payment schedule, under TILA, 47, 49 personal assistants, 13 personal property, disposition of the tenants, 19 pets, prescription, 110, 111 photovoltaic systems, 3839, 41 physical deterioration, 84 planned unit development, 99 See also community associations PMI (Private Mortgage Insurance), 46, 47 point-of-contact, 2, 11 policies and procedures (community associations), 104, 106, 109 post-license education, 67 power-of-attorney, 100 prepaid finance charges, 46 prescription pets, 110, 111 price, defined, 82 primary supervisory appraisers, 82 principle of substitution, 83 Private Mortgage Insurance (PMI), 46, 47 property condition, 22, 73, 91 property tax, 24, 41 proprietary leases, 100 Protect Your Family from Lead in Your Home (pamphlet), 20, 25, 31, 33 proxies, 101

S
sales comparable, 9394 residential, 2, 14 review and approval of, 1068 short, 93 Sales Act, 12 sales associates application for licensure, 3 appraisers and, 9293 branch offices, 10 commissions, 9, 10, 11-12, 28 designated, 16 escrow funds, 26, 2728 forms, 910 personal assistants, 9, 13 post-license education, 67

Q
quickie closings, 47

R
radon gas, 21 rate and term refis, 72, 73 reactivation of involuntarily inactive license, 3 Real Estate Recovery Fund, 13

128Index
rental information, 1314 sales comparison approach to appraisal, 83, 84 sales contracts, 2122, 26, 27 satellite dishes, 11112 Scope of Work Rule (USPAP), 85, 8687 secondary supervisory appraisers, 82 Section 203(b) program, 71, 72, 7374 Section 203(k) program, 7475 Section 234(c) program, 73 security deposits, 1819 seller concessions, 89 seller-financed down payment assistance, 71 seller financing, 47, 56 sellers disclosure, 22 senior housing occupancy, 1089 settlement costs, 59 HUD-1settlement statement, 56, 5859, 6061, 64, 6567 procedures, 27 service providers, 5658, 60 SHGC (Solar Heat Gain Coefficient), 3940 short sales, 93 signs, 10 single agency, 2, 15, 16, 35 skylights, 3940 solar energy systems, 3839, 40, 41 Solar Heat Gain Coefficient (SHGC), 3940 solar pool heaters, 41 solar water heaters, 38, 41 sold signs, 11 sole proprietors, 9 special assessments, 103 special taxing districts (STDs), 99 spot loans, 74 Standard 1: Real Property Appraisal Development (USPAP), 85, 87 Standard 2: Real Property Appraisal Reporting (USPAP), 85, 87 statutory changes, 23, 45 (table) STDs (special taxing districts), 99 stigmatized property, 2, 18, 22 storage units, 98, 100 Streamline 203(k) financing, 7475 streamline refis, 72, 73 stripping units/homes, 116 subdivisions, 98, 99 See also community associations subprime mortgages, 49 substitution, principle of, 83 summation, 8384 supervisory appraisers, 81, 82 surety bonds, 18 swimming pools, 18, 2324, 41 test of transactions, 83 thing of value, under RESPA, 5657 3 day-7 day rule, 47 TILA (Truth in Lending Act), 4649, 90, 92 timeshares, 97, 98, 100 See also community associations title companies, 26, 56, 57, 61 title insurance, 56-61 tolerance levels, under RESPA, 59, 60 total of payments, under TILA, 4647 TOTAL (Technology Open To Approved Lenders) system, 72 trade line blocking, 51 transaction brokers, 2, 14, 15, 16, 36 triggering terms, 49 trust liability, 2, 26, 27 Truth in Lending Act (TILA), 4649, 50, 59, 90, 92 203(b) program, 71, 72, 7374, 75, 88 203(k) program, 7475 234(c) program, 73

U
U-factor, 39 underwriting, manual, 51, 70, 72-73, 92, 93 unearned fees, 56, 57 Uniform Residential Appraisal Report (URAP), 87, 91 Uniform Standards of Professional Appraisal Practice (USPAP), 82, 8487, 90, 92 unlicensed activity, 13 URAP (Uniform Residential Appraisal Report), 87, 91 use restrictions (community associations), 99, 100, 104, 107, 117 USPAP (Uniform Standards of Professional Appraisal Practice), 82, 8487, 90, 92 utility, 83 utility rebates and loan programs, 41

V
VA (Veterans Affairs), 56, 80, 88, 89, 94 valuation, 8283 See also appraisal value, defined, 82 Veterans Administration, 80 Veterans Affairs (VA), 56, 80, 88, 89, 94 voluntary inactive licenses, 7

W
waiver and estoppel, 114 Washington Mutual, 89 windows, exterior, 3940, 102, 104 wind turbines, 39, 40

Y
yield-spread premiums, 5960

T
target housing, 20, 3133 tax credits, federal energy, 3840 Technology Open To Approved Lenders (TOTAL) system, 72 Telecommunications Act, 111 tenants, 18-20, 27, 28, 33, 40, 103-4, 107, 108, 112, 115, 117 10% tolerance, 59

Z
zero tolerance, 59

BERT R O D GERS SC H O O L S O F REA L ESTATE

Final Exam 30
FINAL EXAM INSTRUCTIONS
 The Final Exam consists of 30 multiple-choice questions. A passing score is 80 percent or higher (a minimum of 24 correct answers).  You may reference the book while taking the Final Exam. It is an open-book exam and there is no time limit.  Choose the best answer for each question. If you mark more than one answer or do not mark any answer, you will not receive credit for that question.  Mark your answers on the Answer Sheet provided. Please use a pen (blue or black ink) to fill in your answers and other information on the Answer Sheet.  FREC Rule 61J2-3.009 states that exam questions cannot follow the order of the course material and must include knowledge-level, comprehension-level, and application-level questions. You will not find a word-for-word answer for each question.

Consider taking the Final Exam online at www.BertRodgers.com

You may return the Final Exam Answer Sheet in this book to Bert Rodgers Schools for grading or you may go online to www.BertRodgers.com and complete the online version of the same Final Exam.  To take the same Final Exam online, visit our web site and purchase the 14-Hour Real Estate Continuing Education course. Upon opening the course, select the Final Exam number that matches the Final Exam number from this book.  The online Final Exam consists of 30 multiple-choice questions. A passing score is 80 percent or higher (a minimum of 24 correct answers).  Each online exam question includes a Review Text button. The Review Text is provided to assist you in locating the section of text pertaining to each questions learning objective.  Online Final Exams are graded immediately, no waiting for results!  As soon as the Final Exam is submitted, you receive your score. Then you may immediately print your Course Completion Report. Note: T  his course material is approved by the Florida Real Estate Commission through September 30, 2012. Answer sheets postmarked after that date cannot be graded. Answer sheets delivered online, in person, or by fax after that date cannot be graded.

129 Final Exam

130Final Exam Thirty

Final Exam Thirty 131 1. Sales Associate Bill is handling a real estate transaction involving a commercial building. He should know that the Radon Gas disclosure is required to be given to a buyer in the: a. sale or lease of any building. b. sale and lease of residential property. c. sale of residential property. d. sale of any building. 2. Real estate broker Matt operates a property management company. What is the maximum amount of personal funds he is permitted to maintain in the property management account? a. $5,000 b. $1,000 c. $200 d. $0 3. The DBPR received Carols application for licensure in April of 2010. When will her application expire? a. March 2011 b. April 2011 c. March 2012 d. April 2012 4. Both the buyer and seller in a commercial real estate transaction have assets in excess of 1 million dollars. They would like the brokerage firm handling the transaction to appoint different sales associates to represent each of them as a single agent. Which form of representation would enable the firm to comply with this request? a. disclosed dual agency b. transaction broker c. designated sales associate d. none; single agency is illegal 5. Sales Associate Danielle is representing a buyer as a single agent. The buyer is interested in seeing a home that is listed by Danielles brokerage firm. In order to show the buyer the listed home, which disclosure form must Danielle have the buyer sign? a. Transaction Broker b. Consent to Act as a Dual Agent c. No Brokerage Relationship d. Transition to Transaction Broker 6. Broker Barbara is preparing to write a contract for a buyer who wants to purchase a home built in 2005. Which disclosure is Broker Barbara required to give to the buyer at or before the execution of the sale and purchase contract? a. Stigmatized Property Disclosure b. Lead-Based Paint Disclosure c. Mold Disclosure d. Property Tax Disclosure

132Final Exam Thirty 7. Veronica is buying a home in a community that requires membership in its homeowners association. The developer did not provide Veronica with the required homeowners association disclosure. Veronica may: a. void the contract prior to closing. b. void the contract 7 days prior to closing. c. delay closing until she has had a chance to review the disclosure. d. proceed with the sale and be exempt from membership in the homeowners association. 8. Sales Associate Jordan is representing a buyer and seller in the same transaction. In accordance with Chapter 475, F.S., she can do so as long as she is providing limited representation: a. as a transaction broker. b. as a disclosed dual agent. c. in a no brokerage relationship. d. as a designated sales associate. 9. Broker Karen is filling out a contract for sale and purchase. The contract indicates that an attorney will be the escrow agent. Broker Karen is not required to include the escrow agents: a. name. b. phone number. c. address. d. web address. 10. Sales Associate Gillian received an earnest money deposit on Friday. When must she deliver the deposit to her broker? a. Saturday b. Monday c. Tuesday d. Wednesday 11. While performing her monthly escrow account reconciliation, Broker Alexis determines the account is short. What action must she take? a. notify the FREC in writing of the shortage within 3 business days b. note the shortage and corrective action on the reconciliation c. immediately replace the missing funds d. request a DBPR investigator perform an audit 12. Broker Brad is acting in the capacity of a transaction broker. What form of representation may he provide when he performs the services of real estate? a. fiduciary representation b. limited fiduciary representation c. dual representation d. limited representation

Final Exam Thirty 133 13. Mr. and Mrs. Brown have applied for an FHA mortgage loan. The FHA lender will evaluate them using: a. Fannie Mae and Freddie Mac guidelines. b. a credit report. c. the TOTAL scorecard. d. a personal reference check. 14. Borrowers pay upfront FHA premiums: a. in a balloon payment at the end of the loan term. b. at closing. c. annually. d. semi-annually. 15. Valerie has applied for an FHA mortgage and will need some down payment assistance. Which source of funds for the down payment is not acceptable? a. her savings b. gift money from her employer c. a grant from a state program that assists homebuyers d. down payment assistance from sellers 16. The undivided interest in the common elements of community association property is called a/an: a. appurtenance to the unit. b. adherence to the unit. c. separation from the unit. d. section of the unit. 17. Which statement about community associations is true? a. Single-family home communities are never condominiums. b. Every purchaser of a condominium unit is automatically a member of the association. c. The declaration is the procedural manual for the associations operations. d. A person holding a power-of-attorney from a unit owner can run for the board of directors. 18. Jorge recently made energy efficiency improvements to the home he has owned for 10 years. What is the maximum federal tax credit he can receive? a. $250 per improvement b. $500 c. $10,000 d. There is no limit 19. Anna is considering the use of wind turbines to power her home. What regulatory details and guidelines should she be aware of before finalizing her decision? a. Small-capacity wind turbines qualify for federal tax credits up to 50% of the total installed cost. b. The turbine must carry a nameplate capacity of no more than 50 kilowatts. c. Residential wind turbines often require local approvals for compliance with noise, height, and environmental protection rules. d. The federal tax credit cannot be carried forward to future years.

134Final Exam Thirty 20. Which statement is false regarding solar-energy photovoltaic systems? a. Installations on existing homes are among the fastest-growing uses of federal tax credits. b. They are eligible for federal tax credits up to 30% of the total installed cost. c. The maximum federal tax credit may not exceed $25,000 in any single tax year. d. Carryovers of unused federal tax credits to future tax years are permitted. 21. The residents of a recently developed subdivision often complain of offensive odors from a countymaintained sewage treatment plant one-quarter mile north of the development. This is an example of: a. the principle of substitution. b. functional obsolescence. c. external obsolescence. d. overcapacity. 22. In the definition of market value, which condition is assumed? a. typically motivated buyer and seller b. average time allowed for market exposure c. no financing involved d. inclusion of a competent real estate broker 23. According to Standard 2 of USPAP, appraisal reports must include: a. replacement cost of the improvements. b. a signed certification. c. land value estimate. d. the income approach. 24. The Uniform Standards of Professional Appraisal Practice (USPAP) are promulgated by the: a. Appraisal Subcommittee (ASC). b. Appraisal Foundation (TAP). c. Appraiser Qualifications Board (AQB). d. Appraisal Standards Board (ASB). 25. The Good Faith Estimate (GFE): a. details the actual costs at the end of the loan process. b. is typically received just before the closing. c. is typically completed by the title company. d. is provided to homebuyers at the beginning of the loan process. 26. Broker Elaine is referring a client to an affiliated title company. She has provided the AfBA disclosure separate from all other disclosures which the client has signed and dated. Broker Elaine: a. has violated RESPA. b. has made the disclosure correctly. c. should have combined the AfBA disclosure with the others. d. has violated Reg Z.

Final Exam Thirty 135 27. XYZ Mortgage Company offers a free cruise to the real estate broker who refers the most settlement service customers each year. The brokers simply make referrals, they dont actually perform a service. This activity is: a. legal. b. unregulated. c. a violation of Reg Z. d. a violation of RESPA. 28. Reg Z applies to: a. the regulation of equal employment. b. the rules that dictate how lenders disclose the cost of credit and loans. c. financing by home builders. d. homeowners who offer a seller takeback note on one house only. 29. The Consumer Credit Protection Act: a. protects consumers against racial discrimination. b. mandates what interest rate banks can legally charge. c. defines key disclosures affecting offers of credit. d. tells newspapers how to advertise real estate. 30. Brad obtained a home equity line of credit to cover the costs of adding a new room onto his home. He probably has a/an: a. closed end loan. b. blanket mortgage. c. open-ended loan. d. renewable residential loan.

136 Bert Rodgers Schools of Real Estate, Inc.

14-Hour Continuing Education Course

Instructions

STUDENT INFORMATION
The license number you provide to our school is the number we use to report your education to the DBPR. You may verify your license number at MyFlorida.com/dbpr. If the license number is incorrect, your education may not be reported and you may face a penalty or disciplinary action. Note to brokers: Please enter all of your broker license numbers on your answer sheet.

TUITION/Grading Services
Standard Grading - Correspondence Fax or mail your Answer Sheet and appropriate payment. Upon receipt, your Answer Sheet is processed and your official Course Completion Report will be sent to you by First-Class Mail. Priority Grading Same-Day Priority Grading ($10) by return Email or Fax. Fax your Answer Sheet to us any business day by 3 PM (EST). We will email or fax your Course Completion Report to you the same day. A hard copy Course Completion Report will be mailed to you the next business day. Next-Day Priority Grading ($7) by return Email or Fax. Fax your Answer Sheet to us any business day by 5 PM (EST). We will email or fax your Course Completion Report by 11 AM (EST) the next business day. A hard copy Course Completion Report will be mailed to you the next business day. Priority Grading Notes You must have a fax number or email address to receive results. Fax your Answer Sheet to 941-378-3883. Provide your fax number or legible email address on the Answer Sheet. We will attempt to fax your Course Completion Report a maximum of 3 times. For email priority grading, your Course Completion Report will be emailed as a PDF attachment. You must have the free program Adobe Acrobat Reader (www.acrobat.com) to view and/or print the Course Completion Report. To prevent your emailed Course Completion Report from going into your SPAM, make prioritygrading@BertRodgers.com a trusted source.

Grading Policy
Questions Missed Grade % 0 . . . . . . . . . . 100 1 . . . . . . . . . . . 97 2 . . . . . . . . . . . 93 3 . . . . . . . . . . . 90 4 . . . . . . . . . . . 87 5 . . . . . . . . . . . 83 6 . . . . . . . . . . . 80 7+ . . . . . . . . Re-Exam

Payment Method
Bert Rodgers Schools accepts checks, money orders, Discover, Visa, MasterCard, American Express, and Visa or MasterCard debit cards. Tuition for courses completed online or submitted via fax must be paid by credit card or debit card. Note: Your exam will not be processed until complete payment is received. There are additional charges for Priority Grading.

Certificate of Achievement
To obtain your personalized Certificate of Achievement, suitable for framing, check the Certificate of Achievement box in the Tuition/Grading section of the Answer Sheet. Add a payment of $5 to your tuition. Your certificate is then mailed to you.

Answer Sheet
Sales Associate

Course Expires September 30, 2012

Course Approval #0012897

2012 14-Hour Course

EXAM 30

STUDENT INFORMATION (please print clearly, use blue or black ink)

Your Real Estate License Number (write in only one license #):

broker or broker Associate or

FINAL EXAM ANSWERS

Example:
A B B B B B B B B B B B B B B B B B B B B B B B B B B B B B B B C C C C C C C C C C C C C C C C C C C C C C C C C C C C C C C D D D D D D D D D D D D D D D D D D D D D D D D D D D D D D D

SL
Write in your license # - 7 digits or less (not the AC#)

BK
Write in your license # - 7 digits or less (not the AC#)

Name:_______________________________________________________________________________ Address: _________________________________________________________ Apt./Ste. #_________ City: _________________________________________________ State: _________ Zip:____________ Phone Day: ________ ________ _____________ Fax: ________ ________ _____________ Email Address:________________________________________________________________________ l Yes, I want to receive Law and Rule Updates from Bert Rodgers Schools via email.

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13.

A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A

Tuition / Grading services

You must provide a legible fax number or email address to receive Priority Grading Services.

l Same-Day Priority Grading - EmailBack or FaxBack

In by 3 PM EST, M-F, back the same business day

l Standard Grading Included ____________ +$10.00 ____________

l 14-Hour Continuing Education Tuition

$22.50 ____________

Email to: __________________________________________________________ or Fax Course Completion Report to: ________ ________ _____________

l Next-Day Priority Grading - EmailBack or FaxBack

In by 5 PM EST, M-F, back by 11 AM the next business day

+$7.00 ____________

14. 15. 16.

Email to: __________________________________________________________ or Fax Course Completion Report to: ________ ________ _____________

l Certificate of Achievement (optional)

+$5.00 ____________ TOTAL ____________

17. 18. 19. 20. 21. 22. 23. 24. 25. 26.

Thank you for choosing Bert Rodgers Schools!

Payment method

(make check or money order payable to Bert Rodgers Schools)

Mail your check, money order, or credit card information and Answer Sheet. If using a credit card you may fax this Answer Sheet to: 941-378-3883. l Check # ______________ l Money Order Credit Card Number Expiration Date of Card l VISA (16 digits) l Discover (16 digits) l American Express (15 digits) l MasterCard (16 digits)

10

11

12

13

14

15

16

(Month)

(Year)

Signature of Cardholder (required)

27. 28.

P.O. Box 4708, Sarasota, FL 34230-4708 941-378-2900 Fax: 941-378-3883 800-432-0320 www.BertRodgers.com

29. 30.

EXAM 30

Are you ready to renew your license?

You need to Achieve a passing score on the final examination Pay your license renewal fee to the DBPR Verify that the DBPR has an accurate record of your education and license renewal fee

T ell us What You Think!

Please help us serve you better by taking a few moments to share your thoughts about your Bert Rodgers Schools experience. Mail or fax your comments or email us at REinfo@BertRodgers.com. Thank you! __________________________________________________________________________________________ __________________________________________________________________________________________ __________________________________________________________________________________________ __________________________________________________________________________________________ __________________________________________________________________________________________ __________________________________________________________________________________________ __________________________________________________________________________________________ __________________________________________________________________________________________ Which topic(s) did you enjoy the most?_________________________________________________________ __________________________________________________________________________________________ __________________________________________________________________________________________ __________________________________________________________________________________________ What topics would you suggest for future continuing education? ________________________________ __________________________________________________________________________________________ __________________________________________________________________________________________ __________________________________________________________________________________________

NEW! Law and Rule Updates

Be sure you fill out the Student Information section of the Answer Sheet including your email address to receive updates of laws and rules affecting the real estate industry.

Bert R odgers S chools fax # 941-378-3883