The following recent Legal Hotline questions relate to the proper procedures to follow when a licensee buys or sells real estate for his or her own personal use or investment. The first thing the licensee typically wants to know is whether he or she can get paid a commission in the transaction. Unfortunately, the answer is no. However, the licensee may receive an incentive or referral fee if the transaction is structured properly.

Agency

Can a real estate licensee buy or sell his or her own property as an agent for him or herself? 

No. An agency relationship is created between a buyer or seller and a real estate broker when they enter into either a buyer agency agreement or listing contract. The agency agreement allows the broker to act on behalf of the principal, that is, the buyer or the seller. The broker earns the commission by providing real estate brokerage services as an agent for the principal.

Black’s Law Dictionary defines an agent as, “A person authorized by another (principal) to act in place of him; one entrusted with another’s business. One who represents and acts for another under the contract or relation of agency.” The essence of the definition is that the agent acts on behalf of another. By definition, two people are required before one person can be an agent. Thus, a real estate licensee who is a principal in the transaction cannot also be his or her own agent.

Commission

Can a real estate licensee earn a commission as an agent in his or her own personal transaction? 

When a real estate licensee is a party to the transaction, the licensee cannot concurrently act as his or her own agent and thus cannot earn a commission in that capacity. The licensee, however, may negotiate for an incentive, but it is a misnomer to say that the licensee is paid a commission.

Incentive

Since a commission is not paid, how can a licensee get an incentive when acting as a buyer? 

The license should first review office policy to see what guidance is there as far as the personal real estate transaction. Depending on the policy, it may be possible for the licensee to proceed independently and request an incentive from the listing broker or the seller. In that case, the licensee drafts the offer to purchase on his or her own behalf. The licensee should cross out line one of the offer to purchase because the licensee is the principal and not an agent in the transaction. An incentive negotiated with the seller would be paid directly to the licensee as a party, and is not subject to the provisions of the independent contractor agreement or to the Wis. Stat. § 452.14(3)(f) prohibition against accepting compensation from anyone other than the broker.

In the alternative, the licensee’s broker/company may provide brokerage services to the licensee as a principal and proceed with the licensee as the client or customer. In this scenario, the licensee may negotiate an incentive is negotiated with the broker/owner.

1. Office policy. Policies are designed to limit broker liability as well as outline appropriate strategies for agents to follow when seeking incentives or referrals in personal transactions. Some brokers require that personal transactions be handled though the company, while others do not.

When setting office policy, two major issues are raised in the analysis of an employer-broker’s potential liability for damages resulting from a salesperson’s purchase or sale of personal real estate. The first issue is related to satisfying the rules of the DRL; the second focuses on civil liability resulting from damages suffered by sellers.

While § RL 17.08 requires a broker to supervise the activities of his or her agents, the DRL has interpreted this to be limited to only those activities requiring licensure under Wis. Stats. § 452.01. Because § 452.01 generally does not require a license for the purchase or sale of personal real estate, the DRL does not require supervision under its rules (except for certain patterns of sales, per § 452.01(2)(b)).

However, potential still exists for the broker/employer to be subject to liability for parties injured by the licensee’s “personal transactions.” This liability results because third parties may assume from their contacts with the licensee that they were dealing with the broker/company through the agent. This misperception may be created, for example, when the licensee meets the other party in career apparel, hands out company business cards, accepts phone calls at the office or corresponds on company letterhead. To avoid this appearance, office policy may prohibit the use of the office, company business cards, office phones, etc. to try to keep the personal real estate activity of licensees separate and apart from the office. Brokers may require licensees to give all parties in personal transactions a disclosure letter indicating no involvement by the broker.

Alternately, a broker might require all personal real estate transactions to be handled under office supervision, so the licensee becomes a client or customer of the company. The licensee’s broker would function as a subagent of the seller or as a buyer’s broker, write the offer for the licensee/buyer, and claim the cooperative commission as the “procuring cause” of the sale. In such cases, the broker must fulfill his or her normal agency duties by properly representing the interests of the parties. If the broker acts as a buyer’s broker, pursuant to § RL 24.07(8)(a) and Standard of Practice 16-11, the buyer’s broker must disclose the buyer agency upon first contact. In addition, pursuant to § RL 24.05(2) and Article 4 of the Code of Ethics, the selling broker must disclose that the buyer is a licensee and obtain the written consent of the parties in the offer. The broker and the licensee/buyer may have an agreement whereby the broker pays the licensee/buyer an incentive, or this may be required by the broker’s office policies and procedures.

In deciding what approach to use, a broker/employer should consult with private counsel. Once approved, the policy should be incorporated into the office policy and procedures manual. The greatest risk of broker liability is in those offices that do not address the issue in any fashion.

2. Incentive from the listing broker. If the buyer/licensee is going to write his or her own offer to purchase, the buyer/licensee may first negotiate an incentive with the listing broker. The agreement would be documented on a separate sheet of paper and signed by the buyer/licensee and the listing broker: “As an inducement to Larry Licensee to purchase the property at 123 Main Street, Salestown, Wisconsin, Real Good Realty, Inc., promises to pay to Mr. Licensee an incentive in the amount of $2,000 at the time of closing provided the closing occurs on or before December 31, 2004. It is agreed that this incentive shall be paid in lieu of any commission offered on the MLS or otherwise, that commission being hereby declined.” Including the waiver of MLS commission, although extraneous, clearly informs the listing company that there is no expectation of any commission offered via the MLS.

3. Incentive from the seller. A licensee may negotiate for an incentive. The agreement should be documented in the offer to purchase. For example, the license may provide, in the offer: “As an incentive for Lucy Licensee to purchase the property at 234 5th Street, Anytown, Wisconsin, the seller promises to pay Ms. Licensee an incentive in the amount of $3,000 at the time of closing.”

4. Incentive from the licensee’s broker. Some office policies require that the broker or office manager act as the agent on behalf of the licensee buyer or seller. In this scenario, the broker drafts the offer to purchase on behalf of the licensee and earns any commission offered by the listing broker. The broker and the licensee may enter into their own incentive agreement regarding the transaction.