Wisconsin real estate licensees have additional disclosure and consent obligations when they are representing entities, such as LLCs, in which the licensees have an interest; representing family; or when engaging in personal transactions.
Selling or buying property for your LLC
Say a licensee creates a limited liability company (LLC) for investment properties, which is called Lola Rentals LLC. Lola Licensee is the only member of Lola Rentals LLC. Lola Licensee is an agent for ABC Real Estate. Lola Licensee frequently acts as the agent for Lola Rentals LLC when selling or buying properties for her LLC. What are her disclosure obligations, and how can she legally act as an agent for Lola Rentals LLC?
What is an LLC?
An LLC is a limited liability company. In Wisconsin, LLCs are governed by Wis. Stat. Chap. 183 Limited Liability Companies. LLCs are ubiquitous in real estate and many other businesses but are a relatively new entity for conducting business. Wisconsin’s first iteration of the LLC statute did not go into effect until January 1, 1994. In simple terms, an LLC provides the flexibility of operating as a partnership while providing the limitation of liability enjoyed by corporations. Additionally, LLCs are relatively easy to create and have minimum filing requirements with the Wisconsin Department of Financial Institutions (DFI).
In addition to other activities that an LLC can conduct, an LLC can “purchase, take, receive, lease or otherwise acquire and own, hold, improve, use and otherwise deal in or with real or personal property, or any other legal or equitable interest in real or personal property” if such activity is not restricted by the LLC’s operating agreement.
What are the laws or rules related to acting on behalf of one’s LLC, one’s family or one’s LLC?
Four different laws and rules, detailed in the box to the right, are related to acting on behalf of an LLC or a family LLC:
- Wis. Stat 452.13 rule regarding prohibited conduct
- Wis. Admin. Code § REEB 24.05(2) regarding disclosure of interest
- Article 4 of the REALTOR® Code of Ethics
- Standard of Practice 4-1 of the REALTOR® Code of Ethics
Laws and Rules Related to Acting on Behalf of One’s LLC, One’s Family or One’s LLC
Wis. Stat. § 452.133(3)(b) Prohibited Conduct
In providing brokerage services, a licensee may not do any of the following: act in a transaction on the licensee’s own behalf, on behalf of the licensee’s immediate family if the firm is an individual, on behalf of the licensee’s firm, or on behalf of any organization or business entity in which the licensee has an interest, without the prior written consent of all parties to the transaction. For the purpose of complying with this paragraph, a licensee shall obtain the written consent in the offer to purchase, option, lease or other transaction contract.
Wis. Admin. Code § REEB 24.05(2) Disclosure of Interest
A licensee acting as an agent in a real estate or business opportunity transaction may not act in the transaction on the licensee’s own behalf, on behalf of the licensee’s firm, on behalf of any member of the licensee’s immediate family or any combination of members of the licensee’s immediate family, or on behalf of any other organization or business entity in which the licensee has an interest without the prior written consent of all parties to the transaction. For the purpose of this subsection, a licensee shall obtain the written consent in the offer to purchase, option, lease or other transaction contract.
Article 4 REALTOR® Code of Ethics
REALTORS® shall not acquire an interest in or buy or present offers from themselves, any member of their immediate families, their firms or any member thereof, or any entities in which they have any ownership interest, any real property without making their true position known to the owner or the owner’s agent or broker. In selling property they own, or in which they have any interest, REALTORS® shall reveal their ownership or interest in writing to the purchaser or the purchaser’s representative. (Amended 1/00)
Standard of Practice 4-1
For the protection of all parties, the disclosures required by Article 4 shall be in writing and provided by REALTORS® prior to the signing of any contract. (Adopted 2/86)
How does Lola Licensee comply with the rules when selling property for Lola Rentals LLC?
She cannot act on behalf of Lola Rentals LLC without the prior written consent of all the parties because Lola Rentals LLC is an “organization or business entity in which” Lola Licensee has an interest. If she wants to sell a property owned by Lola Rentals LLC using her firm, Lola Licensee must list it with ABC Real Estate with a listing contract. ABC Real Estate is the firm, and Lola Rentals LLC is the client. Lola Licensee is the listing agent. To expedite compliance with her disclosure obligation, she may choose to disclose to other agents that she is a member of the seller’s LLC. By disclosing this information to other agents, other agents can include this information when drafting offers by stating in the Additional Provisions or in an addendum that “All parties understand licensee, _________, has an interest in the (Buyer) (Seller) [STRIKE ONE] entity or organization and consent to the licensee serving as a real estate agent for that entity or organization in this transaction. Lola Licensee (Listing Agent) is a member of Lola Rentals LLC (Seller).” If a buyer submitted an offer that did not include this disclosure, Lola Licensee would need to counter the offer to include this information to obtain the prior written consent of all parties, and the consent shall be in the “offer to purchase, option, lease, or other transaction contract.”
When listing properties owned by her LLC, she must also be mindful that her disclosure obligations as the listing agent are distinctly different from her disclosure obligations as a seller. Lola Licensee, as the sole member of Lola Rentals LLC, must complete a real estate condition report if the property being sold contains 1-4 dwelling units, even if Lola Licensee herself has never lived in the property being offered for sale. When completing a real estate condition report, a seller must disclose known defects whereas a listing agent must disclose material adverse facts and information suggesting material adverse facts. Lola Licensee’s disclosure obligations are broader than Lola Rentals LLC’s disclosure obligations. Lola Rentals LLC only must disclose the “for sure” issues with the property, whereas Lola Licensee must disclose the “for sure” issues with the property and the “maybe” issues with a property.
How does Lola Licensee comply with the rules when buying property for Lola Rentals LLC?
If Lola Licensee would like to act as a buyer’s agent for Lola Rentals LLC in purchasing a property, Lola Rentals LLC must hire Lola Licensee’s firm, ABC Real Estate, with a buyer agency agreement. Lola Rentals LLC is the client of ABC Real Estate. If Lola Licensee tried to represent Lola Rentals LLC as a customer without acting as a buyer’s agent, Lola Licensee’s duties as a fiduciary to Lola Rentals LLC and her duties as a subagent of the listing firm will be in conflict. Lola Rentals LLC hires ABC Real Estate with a buyer agency agreement. In any offer Lola Licensee writes for Lola Rentals LLC, she must include a statement disclosing her interest in Lola Rentals LLC. The statement could be the same statement Lola Licensee used when disclosing her interest when listing a property for Lola Rentals LLC but indicate that she has an interest in the buyer entity or organization.
When representing an LLC in which the licensee has an interest, the licensee must remember to treat the LLC as the legally distinct entity it is and disclose that the licensee has an interest in the LLC. The disclosure shall be in the offer, option, lease or other transaction document. If Lola Licensee was writing an offer for a corporation in which she held stock, a non-profit where she occupied a board seat, or any other organization or business entity in which she has an interest, she would have to disclose her interest and obtain prior written consent to act on behalf of the organization or business entity; and her consent is obtained in the offer, option, lease or other transaction document.
Selling or buying property for your family
Lola Licensee’s family members turn to her for all their real estate needs. She lists property for family members, and she writes offers. How can she correctly provide real estate services to her family members? A licensee cannot act on behalf of the licensee’s immediate family without the prior written consent of all the parties. Lola Licensee must adhere to the “immediate family” definition that’s outlined in the state administrative code:
Wis. Admin. Code § REEB 11.02(6m): “Member of the licensee’s immediate family” means any of the following:
(a) A parent, stepparent, grandparent, foster parent, child, stepchild, grandchild, foster child, brother, sister, aunt,
or uncle of the licensee.
(b) The spouse or domestic partner of the licensee or of any person listed in par. (a).
Lola Licensee’s sister is interested in a property listed by a firm with which Lola Licensee has no affiliation and asked Lola Licensee to submit the offer. How does Lola Licensee handle this scenario?
Lola Licensee’s sister wants to submit an offer on a property listed by XYZ Real Estate. While not required, Lola Licensee may consider asking her sister to sign a buyer agency agreement with Lola Licensee’s firm, which is ABC Real Estate. If her sister does not sign a buyer agency agreement with ABC Real Estate, her sister will be a customer of ABC Real Estate and not a client. As such, Lola Licensee could not offer her sister information and advice on matters that are material to her client’s transaction. To avoid actual conflicts of interest or the appearance of conflicts of interest, Lola Licensee should probably enter into a buyer agency agreement with her sister and represent her as a client rather than attempting to offer brokerage services to her as a customer and as a subagent of the listing firm, XYZ Real Estate.
Lola Licensee and her sister decide to enter into a buyer agency agreement to avoid the potential conflict of interest, and Lola Licensee can now draft an offer for her sister. Because her sister is her immediate family, though, Lola Licensee must obtain the prior written consent to act on behalf of her sister, and the consent must be in the “offer to purchase, option, lease, or other transaction contract.” To obtain this consent, she can include a provision, such as, “All parties understand (Buyer)(Seller) [STRIKE ONE] is related to the Wisconsin real estate licensee acting on (Seller’s)(Buyer’s) [STRIKE ONE] behalf and consent to the licensee serving as a real estate agent in this transaction.”
Lola Licensee’s sister is ready to sell property and asked Lola Licensee to list the property. What does Lola Licensee do in this situation?
Lola Licensee can list the property with Lola Licensee’s firm, ABC Real Estate. Her sister would enter into a listing contract where the sister would be a client of ABC Real Estate. To expedite disclosure and obtain consent to represent a family member, Lola Licensee could disclose her relationship to the seller to other licensees so they could include appropriate disclosure and consent language in any offer to purchase, option, lease or other transaction contract. If an agent submitted an offer to purchase, option, lease or other transaction contract that did not include the disclosure and consent language, Lola Licensee would have to counter the proposal to incorporate the language using the same or a similar provision that she used to include the consent and disclosure that she drafted for her sister.
Selling or buying property for yourself
What if Lola Licensee wants to buy property for herself or sell property she personally owns that’s not owned by Lola Rentals LLC?
In addition to obtaining the prior written consent of all parties, when a licensee is acting as a principal, such as a seller or a buyer in a transaction, the licensee must disclose that the licensee has a real estate license. The disclosure must be in writing and must be made even before submitting an offer or other written proposal. Lola Licensee needs to disclose in writing that she is licensed. Her disclosure obligation is specifically outlined in Wis. Admin. Code § REEB 24.05:
Wis. Admin. Code § REEB 24.05(5) Disclosure of licensure.
(a) A licensee acting as a principal in a real estate or business opportunity transaction shall disclose his, her, or its license status and intent to act in the transaction as a principal at the earliest of all of the following:
- The first contact with the other party or an agent representing the other party where information regarding the other party or the transaction is being exchanged.
- A showing of the property.
- Any other negotiation with the seller or the listing firm
(b) The disclosure under this subsection shall be made in writing to the other party in a transaction or to an agent representing the other party.
Lola Licensee may comply with this disclosure requirement by handing her business card that identifies Lola Licensee as a Wisconsin real estate licensee to an agent conducting an open house. She may comply with this disclosure by stating she is a Wisconsin real estate licensee in an email to the listing agent inquiring about a showing. If Lola Licensee is selling real estate that she owns personally and not owned by Lola Rentals LLC, she may disclose that she is licensed in the advertisement for the property. All these methods of disclosure would be effective as long as the disclosure is in writing and offered to the other party or the other party’s agent at the first contact, a showing or any other negotiations.
While the disclosure of licensure must be made in writing and early on in the transaction, to comply with Wis. Stat. § 452.133(3)(a), Lola Licensee must also obtain the prior written consent of all parties to act on her own behalf in a transaction. To obtain the prior written consent, she could include in her offer language such as, “All parties understand Buyer is a real estate licensee with _________. Buyer is purchasing the Property for (personal) (speculation) (investment) [STRIKE AS APPLICABLE] purposes and Buyer may realize a profit from a subsequent resale.”
Your LLC, your family and you
As with many things in real estate, “disclose!” is the magic word when it comes to transactions in which the licensee has some interest other than just representing the seller, buyer, landlord or tenant. Remember that an LLC is a separate legal entity from its member or members. When a licensee is conducting a transaction on behalf of an LLC, corporation or other entity, the licensee must treat the LLC, corporation or other entity exactly as the licensee would treat any other seller or buyer. Even though the licensee may be the only member of the LLC, which does make it difficult to distinguish between the LLC as its own entity and the member of it, the licensee must observe all the formalities and disclosure obligations the licensee would observe with any other client. This means having a listing contract when selling property for an LLC in which the licensee has an interest, or also having a buyer agency agreement when buying property for an LLC in which the licensee has an interest.
In addition to following the same process and procedures a licensee would use when representing any party in a transaction, the licensee also must obtain the prior written consent of all parties when acting on behalf of the licensee, the licensee’s family or any entity or organization, such as an LLC, in which the licensee has an interest.
Finally, when acting as a principal, a licensee must not forget to disclose that the licensee is licensed. Follow Lola Licensee’s lead and always give proper disclosures and obtain consent before acting on behalf of your LLC, your family or yourself.
Jennifer Lindsley is Director of Training and a staff attorney for the WRA.