California residential purchase agreement and joint escrow instructions 2015

California Real Estate Practice

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California Real Estate Practice

Third Edition

Robert L. Herd Bruce A. Southstone

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California Real Estate Practice, 3rd Edition

Robert L. Herd and Bruce A. Southstone

Executive Editor: Sara Glassmeyer

Project Manager: Arlin Kauffman, LEAP Publishing Services

Print and Digital Project Manager: Abby Franklin

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© 2015, 2011 OnCourse Learning

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Illustrations xxi Preface xxv Acknowledgments xxix About the Authors xxxi

1 Starting Your Real Estate Career 2 2 Choosing the Right Broker 30 3 Ethics, Fair Housing, and RESPA 54 4 Disclosures 94 5 Lead Generation or Prospecting for Clients and Customers 152 6 Working with Buyers 176 7 Real Estate Financing 196 8 Writing and Presenting Effective Purchase Contracts 242 9 Preparing for the Listing Appointment 302 10 The Listing Presentation 312 11 Servicing the Listing 358 12 Escrow and Title Insurance 390 13 The Life of an Escrow 436 14 Real Estate Taxation 458 15 Advertising and Marketing 498 16 Alternate Real Estate Careers 518

Appendix A: Quiz Answers 560 Appendix B: Licensed Assistant Pre-employment

Application 564

Glossary 569 Index 607

BRiEf ConTEnTs

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Illustrations xxi Preface xxv Acknowledgments xxix About the Authors xxxi

1 Starting Your Real Estate Career 2 1.1 History 3 1.2 Facts and Myths 7 1.3 Attitude is Everything 10 1.4 Goals 12 1.5 Plans 16 1.6 Real Estate Business Plan 19 1.7 On Becoming a Real Estate Professional 23

Learn Office Policies and Procedures 23 Become Computer Literate 23 Tax Knowledge 23 Equipment Needed 24 About You 26

Summary 26 Important Phrases and Terms 28 Class Discussion Topics 28 Chapter 1 Quiz 28

2 Choosing the Right Broker 30 2.1 The Broker is the Agent 31 2.2 Selecting the Right Broker 34 2.3 Broker/Salesperson Relationships 38 2.4 Continued Education and Advanced

Training 44

ConTEnTs

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Survival Training 48 2.5 Professional Designations 50 Summary 51 Important Phrases and Terms 51 Class Discussion Topics 52 Chapter 2 Quiz 52

3 Ethics, Fair Housing, and RESPA 54 3.1 What Are Ethics? 55 3.2 REALTOR® Code of Ethics—and—The Realtist® 56

National Association of REALTORS® Code of Ethics 56 Realtists® 56

3.3 Fair Housing and Antidiscrimination 56 Federal Laws That Affect Real Estate 65 Thirteenth Amendment 66 Civil Rights Act of 1866 66 Fourteenth Amendment 66 Civil Rights Act of 1870 67 Executive Order 11063 67 Civil Rights Act of 1964 67 Civil Rights Act of 1968 68 Jones v. Mayer 70 1988 Fair Housing Amendments Act 70 Americans with Disabilities Act 71 California Fair Housing Laws 73 Unruh Act 73 Rumford Fair Housing Act 73

3.4 The California Business and Professions Code 74 Section 125.6: Disciplinary Provisions for Discriminatory Acts 74 Section 10177(I): Further Grounds for Disciplinary Action 74 The Holden Act (Housing Financial Discrimination Act of 1977) 75

3.5 Commissioner’s Rules and Regulations 75 Section 2780: Discriminatory Conduct 75 Section 2781: Panic Selling 76 Section 2725f: Duty to Supervise 76

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3.6 Sexual Harassment in the Workplace 77 3.7 Real Estate Settlement Procedures Act

(RESPA) 78 RESPA Prohibitions 78 Exceptions to RESPA’s Prohibitions 79 Examples of Permissible Activities and Payments 80 Examples of Prohibited Activities and Payments 81

3.8 Case Studies of Ethics, Fair Housing, and RESPA 82 Case Study 1 82 Analysis 1 83 Case Study 2 83 Analysis 2 83 Case Study 3 84 Analysis 3 84 Case Study 4 84 Analysis 4 85 Case Study 5 85 Analysis 5 85 Case Study 6 86 Analysis 6 86 Case Study 7 86 Analysis 7 87 Case Study 8 87 Analysis 8 87 Case Study 9 87 Analysis 9 88 Case Study 10 88 Analysis 10 88

Summary 88 Important Phrases and Terms 89 Class Discussion Topics 90 Chapter 3 Quiz 91

4 Disclosures 94 4.1 Understanding Mandated Disclosures 95 4.2 Obligations of a Fiduciary 97 4.3 Agency Disclosure—Process and Timing 100

The Disclosure Process 104

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4.4 Death or AIDS Disclosure 109 Stigmatized Property 110 Licensed Care Facilities 110

4.5 Real Estate Transfer Disclosure Statement (TDS) 110

4.6 Agent’s Inspection Disclosure—How and Why? 111 Insect Infestation 120 Water Damage 120 Material Deterioration 121 Structural Failure 122

4.7 Seller Financing Disclosure 124 Addendum to the RPA-CA Seller Financing Addendum and Disclosure (SFA Revised 11/13) 127

4.8 Environmental Hazards Disclosure 133 Hazardous Substances Released 134 Lead-Based Paint 135 Mold 135 Radon 135 Military Ordnance Location 135

4.9 Natural Hazards Disclosure 136 Earthquake Safety 136 Special Study Zone 140

4.10 Common Interest Subdivisions 143 4.11 Preliminary and Final Public Reports

(Subdivisions) 143 4.12 Right of Rescission 143

Other Required Disclosures 144 4.13 California Association of REALTORS®

Disclosure Chart 145 Summary 147 Important Phrases and Terms 148 Class Discussion Topics 148 Chapter 4 Quiz 149

5 Lead Generation or Prospecting for Clients and Customers 152 5.1 Lead Generation or Prospecting 153

Attitude is Everything 154

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5.2 Do Your Research First 155 5.3 Formulating a Business Plan 156 5.4 The “Do-Not-Call” List 158 5.5 For Sale by Owners 159 5.6 Expired Listings 161 5.7 Your Sphere of Influence 162 5.8 Geographical Farm 163 5.9 Open House 165

Internet Site 167 Absentee Owners 168

5.10 Building Your Database 170 Summary 171 Important Phrases and Terms 172 Class Discussion Topics 172 Chapter 5 Quiz 173

6 Working with Buyers 176 6.1 Sources of Buyers 177 6.2 The First Appointment 180 6.3 Pre-Approved for Financing 183 6.4 Agency Disclosure 185 6.5 Buyer Representation Agreement 186 6.6 Tips on Showing Property 187 6.7 Buying Signals 190 Summary 192 Important Phrases and Terms 192 Class Discussion Topics 192 Chapter 6 Quiz 193

7 Real Estate Financing 196 7.1 An Appraisal or an Estimate

of Value? 197 7.2 Financing Sources 197 7.3 Primary and Secondary Financing 197

Fannie Mae 198 Ginnie Mae 199 Freddie Mac 199 Federal Agricultural Mortgage Corporation 199

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7.4 Conforming Versus Nonconforming Loans 200 7.5 Types of Lenders 200

Institutional Lenders 200 Noninstitutional Lenders 202 Real Estate Brokers 204

7.6 Types of Loans 205 Conventional Loan 206 Government Participation Loans 207 Other Types of Mortgages and Trust Deeds 210

7.7 Getting the Buyers Pre-Approved (The Financing Process) 222 Qualifying the Borrower 223 Qualifying the Property 234 Computerized Loan Origination 235

7.8 Real Estate Financing Regulations 236 Fair Credit Reporting Act 236 Mortgage Loan Originator (MLO) 236 Truth-in-Lending Act (TILA) 237 Real Estate Settlement Procedures Act 237 Affiliated Business Arrangement 237

Summary 238 Important Phrases and Terms 239 Class Discussion Topics 240 Chapter 7 Quiz 240

8 Writing and Presenting Effective Purchase Contracts 242 8.1 Selling or Counseling 243 8.2 The Counseling Process 245 8.3 Understanding the Residential Purchase

Agreement and Joint Escrow Instructions (RPA-CA) 250 Content of the Form 261 Short Sale 290

8.4 Preparing to Present the Offer to Purchase 290 8.5 Negotiating the Offer with the Sellers 291 8.6 Selling Your Own Listing 292 8.7 Handling Single and Multiple Counteroffers 293 8.8 Buyer’s Estimated Closing Costs 296

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8.9 Setting up the Escrow Timeline 296 Summary 297 Important Phrases and Terms 298 Class Discussion Topics 298 Chapter 8 Quiz 300

9 Preparing for the Listing Appointment 302 9.1 Research Thoroughly First 303 9.2 Comparative Market Analysis 304 9.3 The Listing Presentation Manual 306 9.4 Estimated Seller’s Proceeds Form 308 Summary 309 Important Phrases and Terms 309 Class Discussion Topics 309 Chapter 9 Quiz 310

10 The Listing Presentation 312 10.1 The Listing Agreement 313

Definition 313 Elements 314

10.2 Types of Listing Agreements 314 Residential Listing Agreement (Exclusive Authorization and Right to Sell Listing) (C.A.R. Form RLA, Revised 11/13) 315 Exclusive Agency Listing (Residential Listing Agreement–Agency, C.A.R. Form RLAA) 316 Open Listing (C.A.R. Form RLAN) 316 Exclusive Authorization to Acquire Real Property (Buyer Representation Listings) 317 Option Listing 319 Net Listing 324 Alternative Fee Listing (Limited Agency Broker) 324 MLS Access-Only Listing 324

10.3 The Exclusive Authorization and Right to Sell Listing Form 325 Signatures 341

10.4 Presenting the Comparative Market Analysis and Your Marketing Plan 344 Comparative Market Analysis 346

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10.5 Estimated Seller’s Proceeds 349 10.6 Common Seller Objections and

How to Handle Them 349 Summary 353 Important Phrases and Terms 354 Class Discussion Topics 354 Chapter 10 Quiz 355

11 Servicing the Listing 358 11.1 Your Marketing Plan 359

Next Meeting 359 “For Sale” Sign 362 Rider Strips 362 Talking Signs 363 Keysafe Lockbox Installation 363 Information Boxes 363 Property Brochures 364 Multiple Listing Service 364 The Internet 365 Virtual Tours 367 Advertising 367 Open House 368 Office Tour 368 Multiple Listing Service Tour 369 Just Listed Postcard 369 Your E-mail Database 370 Social Networking 370

11.2 Good Communication 370 Weekly Activity Report 371 Broker Letter 371 Showings 372 Explain Your Advertising Policy 372 Prepare the Owners for an Offer 373 Pricing Strategy 373 Market Conditions 374

11.3 Modifying or Extending the Listing Contract 375 11.4 Presenting Offers to Your Sellers 377

Presenting Your Buyer’s Offer 378

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Presenting Offers from Cooperating Brokers 379 Presenting Multiple Offers 380

11.5 Handling Single or Multiple Counteroffers 381

11.6 Cancellation of Contract 384 Summary 386 Important Phrases and Terms 386 Class Discussion Topics 386 Chapter 11 Quiz 387

12 Escrow and Title Insurance 390 12.1 Escrow 391

Escrow Requirements 392 Escrow Responsibility 392 Broker Responsibility 393 Parties to an Escrow 393 Escrow Licensure Requirements 395 Laws Governing Escrow 396 Advantages of an Escrow 397 Escrow Procedures 398 Opening the Escrow 399 Escrow Instructions 399 Closing the Escrow 401 Common Escrow Documents 403 Deed of Trust and Assignment of Rents 403 Confidential Statement of Information 406 Common Escrow Transaction Terms 406

12.2 Title Insurance 418 CLTA Policy 419 ALTA Policy 428 Preliminary Title Report 429 Special Policies 430 Rebates 430

Summary 431 Important Phrases and Terms 432 Class Discussion Topics 432 Chapter 12 Quiz 433

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13 The Life of an Escrow 436 13.1 Open Escrow 437 13.2 Order Inspections 440

Home Inspector 440 Pest Inspector 440 Licensed Roofer 441 Mandated Disclosures 442

13.3 Financing 445 13.4 Review Reports 446 13.5 Negotiate Repairs 449 13.6 Property Insurance 450 13.7 The Final Walk-Through Inspection 451 13.8 The Closing 452 Summary 453 Important Phrases and Terms 454 Class Discussion Topics 454 Chapter 13 Quiz 455

14 Real Estate Taxation 458 14.1 Real Property Taxes 459

The Tax Bill 459 Supplemental Tax Bill 461 Special Assessments 461 Proposition 13 462 Proposition 58 463 Proposition 60 463 Proposition 90 465 Change-in-Ownership Statement 465 Exemptions 465 Homeowner’s Exemption 465 Veteran’s Exemption 466 Senior Citizen Property Tax Postponement Act 466

14.2 Income Taxes 467 Capital Gain Tax 467 Primary Personal Residence 468 Secondary Residence 468 Land 468 Universal Exclusion for Gain on Sale of Principal Residence 469

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Deductible Versus Nondeductible Home Buying Expenses 469 Building a Home 470 Buying an Existing Home 470 Inheriting a Home 470 Business and Investment Property 470 Depreciation 471 Property Basis 471 Original Basis 472 Operating Expenses 472 Depreciable Basis 472 Computing Capital Gain 474 Depreciation Calculation 474 Tax-Deferred Exchanges 474 The Entity Rule 477 The Investment Property Rule 478 Like-Kind Rule 478 The No-Choice Rule 479 The No-Loss Rule 479 The Delayed Exchange 479 Exchange Analysis 480 Installment Sales 480 Sale-Leaseback 481

14.3 Tax Shelter 481 Home Interest 482 Acquisition Indebtedness 482 Equity Indebtedness 483 Points 484 Determining Gain 484 Types of Gain 484 Home Improvements 485 Relief for “Forced” Sales 486 Other Tax Shelter Issues 487

14.4 Foreign Investment in Real Property Tax Act (FIRPTA) 487 Federal Withholding 488 California Withholding 492

Summary 493

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Important Phrases and Terms 495 Class Discussion Topics 495 Chapter 14 Quiz 496

15 Advertising and Marketing 498 15.1 Advertising and Marketing 499

Advertising 499 15.2 A Budget for Your Business Plan 508 15.3 The Advantages of Niche Marketing 509 15.4 Compliance with CalBRE, State, and

Federal Statutes 510 California Business and Professions Code (B&PC) Section 10139 “Penalties for Unlicensed Person” 510

Summary 514 Important Phrases and Terms 515 Class Discussion Topics 515 Chapter 15 Quiz 516

16 Alternate Real Estate Careers 518 16.1 Commercial Real Estate Brokerage 519

Education and Specialization 520 16.2 Property Management and Leasing 522

State-Defined Responsibilities 523 Specific Duties 524 Establishing Rent Schedules 524 Accounting Records 529 Trust Account Ledger 529 Leasing 529 Types of Leases 530 Residential Leasing 533 Tenant’s Responsibilities 546 Landlord’s Responsibilities 546 Assignment versus Sublease 547 Termination of a Lease 547 Evictions and Unlawful Detainer Action 548 REO and Foreclosed Homes 548 Retaliatory Eviction 549

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16.3 Licensed Real Estate Assistant 549 The Value of a Licensee’s Time 549 The Right Time to Hire an Assistant 550 The Art of Transitioning 550 Hiring/Interviewing 551 Training 552 How to Work Effectively with a Licensee 552 The Four Deadly Sins 553 It’s a Family Affair 554

Summary 554 Important Phrases and Terms 556 Class Discussion Topics 557 Chapter 16 Quiz 557

Appendix A: Quiz Answers 560 Appendix B: Licensed Assistant Pre-employment

Application 564

Glossary 569 Index 607

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Figure 2.1 Brokerage Comparison Chart 37 Figure 2.2 Independent Contractor Agreement 39 Figure 2.3 Employee or Independent

Contractor Checklist for IRS Guidelines 45 Figure 3.1 2015 NAR Code of Ethics 57 Figure 3.2 Equal Housing Opportunity Poster 72 Figure 3.3 Reasonable Modifications to Public

Facilities or Services 73 Figure 4.1 Possible Representation of More Than One

Buyer or Seller—Disclosure and Consent (PRBS) 99

Figure 4.2 Disclosure Regarding Real Estate Agency Relationship (AD Revised 11/12) 105

Figure 4.3 Real Estate Transfer Disclosure Statement (TDS Revised 4/14) 112

Figure 4.4 Seller Financing Addendum and Disclosure 128 Figure 4.5 Residential Earthquake Hazards Report 137 Figure 4.6 Residential Earthquake Hazards

Report Receipt 139 Figure 4.7 Natural Hazards Disclosure Statement 141 Figure 4.8 HUD Notice to Purchasers; For Your

Protection: Get a Home Inspection (HID) 146 Figure 5.1 Sample Weekly Prospecting Plan 158 Figure 5.2 Sample Absentee Owner Letter 169 Figure 6.1 Sample Client Information Sheet 182 Figure 6.2 Qualifying Process 183 Figure 6.3 Rules of Professional Conduct 190 Figure 7.1 Government Home Loan Program 207 Figure 7.2 ARM Checklist 220

illusTRaTions

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xxii Illustrations

Figure 7.3 Uniform Residential Loan Application 224 Figure 8.1 California Residential Purchase

Agreement (RPA-CA) 251 Figure 8.2 Seller Counter Offer 11/14 294 Figure 10.1 Broker Compensation under

Three Types of Listing Agreements 315 Figure 10.2 Buyer Representation Agreement-

Exclusive (C.A.R. Form BRE Rev. 4/13) 320 Figure 10.3 Residential Listing Agreement

(Exclusive Authorization and Right to Sell) C.A.R. Form RLA Rev. 11/13 326

Figure 10.4 Seller’s Advisory (C.A.R. Form SA Rev. 11/13) 342 Figure 10.5 Estimated Seller Proceeds

(C.A.R. Form ESP Rev. 4/06) 350 Figure 11.1 Marketing Plan 360 Figure 11.2 Dividing an MLS Listing Commission 366 Figure 11.3 Modification of Terms Authorization

and Right to Sell 4/13 (Form MT) 376 Figure 11.4 Seller Counter Offer (C.A.R. Form SCO,

and Seller Multiple Counter Offer, SMCO 382 Figure 11.5 Cancellation of Contract

(C.A.R. Form CC 11/14) 385 Figure 12.1 Escrow Responsibilities 392 Figure 12.2 Legal Requirements for Escrow Officers 396 Figure 12.3 The Life of an Escrow 398 Figure 12.4 Grant Deed 404 Figure 12.5 Quitclaim Deed 405 Figure 12.6 Deed of Trust and Assignment of Rents 407 Figure 12.7 Assignment of Deed of Trust 411 Figure 12.8 Buyer’s and Seller’s Closing Costs 413 Figure 12.9 Escrow Closing Statement 417 Figure 12.10 Sample California Land Title

Association Policy 420 Figure 14.1 Real Property Taxation Calendar 460 Figure 14.2 Use of an Intermediary in a

Tax-Deferred Exchange 476 Figure 14.3 Buyer’s Affidavit 489

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xxiiiIllustrations

Figure 14.4 Seller’s Affidavit of Nonforeign Status 490 Figure 16.1 Property Management Agreement 525 Figure 16.2 Residential Lease Agreement

(C.A.R. Form Revised 12/13) 534 Figure 16.3 Move In/Move Out Inspection

(C.A.R. Form MIMO, Revised 11/07) 541

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a nEW BEGinninG The housing market has undergone volatile changes in recent years, the impacts of which are demanding better performance from those in the field. Although the real estate market has always seen and will always experience fluctuations, the combined fallout in the finance, banking, and construction industries did not help an already fragile situation. We open with this statement because that is where we are— at a new beginning.

Real estate has been and continues to be one of the most exciting and rewarding career paths we know. The opportunity to work with others in brokering the foundation of their dreams has pushed us to want to better ourselves so that we can better serve the consumers who rely on us.

MEasuRaBlE ouTCoMEs The real estate market can be tough—and rewarding. With this third edition, we hope to provide new and updated information to aid instruc- tors in their goal of better preparing students to meet the challenges of an ever-changing real estate market. This challenge is and continues to be one of constant vigilance in the area of professional education so as to maximize the ability of every licensee to meet the changing needs for consumer protection the public has a right to expect.

While it is true that student learning objectives require basic think- ing skills, “student learning outcomes” require a higher order of think- ing, analysis, synthesis, and/or evaluation. The authors sincerely hope that this third edition becomes an instructional tool further facilitating the teaching and learning experience on both sides of the lectern.

CalBRE liCEnsE REQuiREMEnTs The state of California and its Bureau of Real Estate require appli- cants for the salesperson license to show, among other requirements (see BPC §10153), an understanding of California real estate as

PREfaCE

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xxvi Preface

evidenced by successful completion of three college-level courses of study in Real Estate Principles, Real Estate Practice, plus one course from a list of approved courses. This text may be used for a college-level course of study to meet the required Real Estate Practice requirement. Also, to qualify to sit for the California broker license examination, one must successfully complete eight required college-level courses, including a course in California Real Estate Practice. This text and the associated college-level course also meet that requirement.

THE THiRD EDiTion Since publication of California Real Estate Practice, 1st Edition, real estate as practiced in California has continued to change and evolve as it has since its earliest beginnings. This third edition underwent significant revision to cover current principles, practices, and technol- ogy. California real estate is a work in progress; therefore, constant adjustment in both detail and practice is necessary to maintain a level of knowledge and professional competence sufficient to meet the high standards of consumer protection demanded by professional stand- ards, the state of California, and the California Bureau of Real Estate (CalBRE).

We have made a concerted effort to minimize the confusing use of the word “agent.” Generally speaking, an agent is one who is authorized to represent another (called the principal) in dealings with a third party. However, California real estate law has limited those who, for compensation, may legally act as agents in real estate and related transactions to those holding a valid California real estate bro- ker license. Hence, there can be only one person in each firm who qualifies as a “real estate agent” and who can legally represent the public for compensation; that person would be the employing broker at each firm.

All other “licensees,” whether broker associate or salesperson, working under an independent contractor agreement with a princi- ple broker, and being therefore an agent of that broker, will be referred to in this text as a either licensee, listing licensee, selling licensee, sales- person, or seller’s or buyer’s representative, not as “agent” as that position is already held by the employing broker who is the only one that by law can be paid directly for her services. We will use the term agent when specifically referring to a firm’s employing real estate bro- ker or professional representatives in other fields such as loan agent or insurance agent. Our intent here is to avoid any confusion that may be caused by misuse of terminology.

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In deference to the fact that a majority of licensees nationally are women and to avoid the repetitious use of gender-specific pronouns, we use the feminine where a gender-specific pronoun is required. It should be understood that we are referring to both genders.

nEW To THE THiRD EDiTion Global changes to the third edition are extensive and include additions of and updates to California real estate law, references to California Civil Code (CCC), Business and Professions Code (B&PC), Regula- tions of the Real Estate Commissioner, revised title of the Department of Real Estate to the California Bureau of Real Estate (CalBRE), and an update of all forms where necessary throughout.

Other significant changes by chapter include the following:

• Chapter 1: Re-titled subsections and edit text, revised chapter quiz.

• Chapter 2: Updated forms, terms, and definitions, revised legal forms and chapter quiz.

• Chapter 3: Newly updated NAR 2015 Code of Ethics, moved and expanded various B&PC definitions 2780, 2781, revised case studies, Section 3.6 modified, revised chapter quiz.

• Chapter 4: Detailed and expanded descriptions, newly revised forms, revised chapter quiz.

• Chapter 5: Minor changes plus revised chapter quiz. • Chapter 6: Major revision and clarifications, new forms, and

revised chapter quiz. • Chapter 7: Formerly Chapter 11, new forms, revised government-

agency descriptions and definitions. • Chapter 8: Formerly Chapter 7, new forms and listing agree-

ment with revised annotations, revised chapter quiz. • Chapter 9: Formerly Chapter 8, minor changes and revised chap-

ter quiz. • Chapter 10: Formerly Chapter 9, newly revised forms, revised

annotations and chapter quiz. • Chapter 11: Formerly Chapter 10, revised forms and chapter quiz. • Chapter 12: Newly revised forms and chapter quiz. • Chapter 13: Newly revised forms and chapter quiz. • Chapter 14: Revised definitions and formulas and chapter quiz. • Chapter 15: Minor changes and revised chapter quiz. • Chapter 16: New and updated forms and revised chapter quiz.

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insTRuCTional suPPoRT Instructors who adopt this book receive access to an online Instruc- tor’s Manual written by the authors. Each chapter is supported with chapter rationale, overall focus of classroom discussions, lecture out- line, classroom discussion topics, and supplemental learning activities or quizzes. In addition, there are a 50-question Mid-Term Exam and a 100-question Final Exam.

Classroom PowerPoint® presentation slides also support each chap- ter outlining learning objectives, emphasizing key concepts, and high- lighting real-world applications to help further engage learners and generate classroom discussion.

These instructional support materials are available online only to adopters from the text companion site: www.oncoursepublishing.com.

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When I was asked to write a second edition of this textbook, I asked myself, “What can I do to make it clearly the very best textbook out there? What can I do to make it a valuable cutting-edge resource?” The answer came in the form of Bruce Southstone, a practicing Cali- fornia broker, director of the California Association of REALTORS®, and community college real estate instructor. Bruce and I have nearly seventy years of real estate experience between us, and our collabora- tion gives the reader many useful suggestions about how to handle the everyday issues faced by a licensee.

It was a pleasure to work with Bruce because his tenure as a col- lege instructor brought a very sharp academic viewpoint to the mate- rial conveyed in this book and balances well with what each of us has experienced as working brokers. He is a stickler for detail and regu- larly cites useful Civil Code sections and Commissioner’s rules for the reader to earmark for handy future reference—something I believe you and your students will certainly appreciate.

We hope you enjoy reading this book as much as we did writing it and what you learn will enhance your knowledge, your ability to bet- ter represent your clients, and your ability to earn an excellent living while doing so.

I would also like to express our appreciation to those who served as reviewers and who provided insightful comments and valuable suggestions: George Devine of the University of San Francisco and Hal Bouley of Coastline Community College.

aCKnoWlEDGMEnTs

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aBouT THE auTHoRs

Bob Herd started his real estate career in early 1972 with a small real estate company on the San Francisco Peninsula. Although no formal training programs or systems were available in those days, Bob used some good initial training from his branch manager, his natural ability to interact with people, and his keen intuition about human nature to sell more than sixty homes his first and second years in the busi- ness. He was awarded the coveted “Top Salesperson” award in 1974 from the real estate association to which he belonged. Although Bob opened his own highly successful company in 1974, he still remained very active in sales, and under his training and guidance one of his agents won the “Top Salesperson” award every year for the next six years, except in 1979.

Over the course of his career, which spans more than forty-three years, he has been a salesperson, broker owner, branch manager, and regional manager for some of the largest real estate companies in the San Francisco Bay area. Whether he was in a sales position or a non- selling management position, he always maintained and nurtured in his associates a keen sense of the ever-evolving sensible, human nature– based style of professionally handling the needs of customers and clients. A past president of his association, Bob has been a licensed California broker since 1974 and holds the Certified Real Estate Bro- kerage Manager (CRB), Certified Residential Specialist (CRS), and Graduate, REALTORS® Institute (GRI) designations. You may con- tact Bob by e-mail at rlherd@comcast.net.

Bruce Southstone, a licensed California real estate broker with more than twenty-five years’ experience in real estate sales, management, training, consulting, and coaching has taught for many real estate asso- ciations, franchises, and independent brokers and served more than thirteen years as adjunct instructor in real estate at Cabrillo College, Aptos, CA.

President of the Santa Cruz Association of REALTORS® in 2002, he was named REALTOR® of the Year in 2004 and received the Asso- ciation’s Lifetime Achievement Award in 2008. As a member/director

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xxxii About the Authors

of the California Association of REALTORS®, he has served as mem- ber and Regional Representative of many committees and task forces including but not limited to Legislative, Referral Fee Task Force, Real Estate Finance, Professional Standards, Risk Management, Commer- cial Investment, Nominating, and many more local association groups. He has held many real estate advanced designations, including Certi- fied Real Estate Broker Manager (CRB), Certified Residential Special- ist (CRS), ePRO, and Graduate, REALTORS® Institute (GRI).

He also served as a subject matter expert (SME) on the California Bureau of Real Estate License Examination Validation Study (the most extensive study of its kind in more than forty years) with the purpose of developing real estate license examinations that appropriately test and measure the knowledge levels of salesperson and broker license applicants.

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sTuDEnT lEaRninG ouTCoMEs Upon completion of this chapter, the student will be able to: • Restate the requirements for a California Real Estate Salesperson

license. • Recognize the value of ethical conduct to the real estate professional. • Explain the value that a real estate licensee brings to the consumer. • Identify the two things a licensee has to sell. • Create a personal business plan. • Formulate personal real estate goals.

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3

sTaRTinG YouR REal EsTaTE CaREER

1 CHAPTER

1.1 HisToRY Consumer surveys indicate that the biggest shortcoming among real estate professionals is a general failure to communicate effectively with clients, customers, and each other. For communication to be effec- tive there must be a common language and common understanding of terms and concepts. Most students taking a course in California Real Estate Practice have been exposed to many new terms and con- cepts during their study of real estate principles. Terms and their precise meanings have a tendency to change over time. Because real estate, like other professions, is a work in progress, it is imperative that every licensee stay current with the nuances in terms and usage in the industry.

We feel obligated to clarify some of the more prevalent misunder- standings that have come into common usage. Such clarification will aid all licensees in communicating with each other and with consumers.

It is important that we establish and agree on the primary purpose of the real estate professional. Why do we do what we do? Some, who have worked in this industry for years, are not clear about why they are in this business. Many believe they are here solely to “make money.” Of course, they can’t mean that literally because “making money” is a function reserved to the U.S. Mint. What they really mean is that they are in this business to “earn money.” The definition of the word “earn” is “to gain or get in return for one’s labor or service.” Com- pensation follows service. It seems such a small point, but it is critical that every licensee understand the sequence of events: service, then compensation. Our purpose is service and the fee received is a by- product of the labor or service provided.

Now we must ask, if our purpose is service and our goal is earn- ing money, what is the purpose of the Bureau of Real Estate and the licensing structure? Is there a common goal here that can be integrated

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4 CHaPTER 1 Starting Your Real Estate Career

harmoniously? The common goal is consumer protection. If every licensee were to embrace the goal of providing service that facilitates the sale or purchase of property while protecting the clients’ and cus- tomer’s interests, we would have the ultimate in harmonious relation- ships. By using the knowledge gained through the licensing process to protect the interest of the client, the licensee will also have protected the parties to the transaction, themselves, their broker, and the reputa- tion of the industry as a whole. Now there’s a win/win combination.

What constitutes service to one licensee may not fit the definition of service to another. This variation in the definition of “service” is the variable that makes it such a challenge for all licensees to provide identical service to every consumer.

Reality and consistency are as elusive in the world of real estate as in any other. This field is in a constant state of change. The value of the land, as well as the needs of the people who live on it, may be differ- ent today than yesterday. Values and customer needs vary constantly. Because of this, licensees need to be aware of the changing needs of buyers and sellers and the necessity for flexibility in their services and marketing practices. For example, because each property and each buyer are unique, accurate pricing or appraising is more an art form than an exact science. No two properties are identical. Even adjoining properties offer different benefits and burdens.

Strength or weakness in the real estate marketplace is determined by “perceived value” that, in turn, creates supply and demand. Some of the reasons for the broad range of perceived values that exist today are: • Buyer and seller knowledge – The Internet gives buyers and sellers

access to a vast amount of real estate information; however, even if sales data is available, it may be misinterpreted by either buy- ers, sellers, or both. The inability to interpret the data can often lead buyers and sellers to overpay or underprice the homes they buy or sell. The GIGO (garbage in, garbage out) rule applies to real estate marketing as well as to computers. Providing accurate information to clients and customers along with proper interpre- tation of the data is one of the most important consumer protec- tion services offered by the knowledgeable licensee.

• Motivation – Motivation has a major influence on the seller’s asking price, the price offered by the buyer, and the price finally accepted by the seller. A particular home may meet all of a buyer’s needs, but any number of motives may cause that buyer to offer a premium well above the seller’s asking price. Another buyer may be less motivated or only mildly interested in the same home and

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51.1 History

may offer less than the seller’s asking price. Sometimes the moti- vation to accept employment in another city is strong enough to cause the seller to accept less for her home than, say, a seller whose motivation for selling is to purchase a larger, more expen- sive home. For many sellers, getting the highest price for their home may not be their primary goal, just as for many buyers pay- ing the absolute lowest price may not be their primary goal.

• Product differentiation – No property is exactly like another. Even in tract homes with exactly the same floor plan there are differences such as location (one backs up to a busy highway while another is on a quiet street), amenities (one has a remodeled kitchen while another has the original kitchen including dated tile), total area, architectural style, maintenance, external influences such as bark- ing dogs, and/or a stunning view. The appraiser factors all of these variables into an analysis of what the property is worth, but the appraiser’s conclusion is still only an estimate of value that is valid only on that date and at that time. The actual price a property is sold for is generally set by a seller’s acceptance of a buyer’s specific offer. The sellers can ask any price that they want, but if no buyer is willing to accept the property on the terms and conditions set by the seller the property remains unsold.

• The ability of the real estate licensee – Most buyers and sellers rely on information provided by a real estate professional. Even the For Sale by Owner needs the pricing information from the Multiple listing service (Mls) in order to price her property com- petitively. On occasion a licensee will agree to represent a seller whose property is in an area or of a type where the licensee has no experience or knowledge. When this happens, the licensee may suggest an asking price or range that is inappropriately high or low that may have the effect of underpricing or discouraging interest by overpricing. Although most licensees are interested in selling property (not just listing property), there are a few who may purposely suggest an unobtainably high selling price in order to beat the competition for the listing. This is clearly a violation of the national association of REalToRs® (naR) Code of Ethics as well as laws relating to misrepresentation.

• Terms – Because most real estate purchases are financed, there is interdependency between real estate values and the availability of low-cost financing. When interest rates are low, financing is not usually an issue with most buyers. When rates rise, however, an astute seller can get a higher price for a property by offer- ing below market financing, although it’s necessary to become

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6 CHaPTER 1 Starting Your Real Estate Career

familiar with all of the risks associated with doing so. This financ- ing can be in the form of a first or second loan or a seller credit to the buyer for all or part of the buyer’s closing costs. The availability of purchase money from lenders is a critical factor in the viability of markets worldwide. There are specific forms that must be used with seller financing; be sure to familiarize yourself with them.

There are also times when different rules apply to different segments of the real estate marketplace. Different price ranges may have different supply/demand rules in play at the same time, even in the same mar- ketplace: homes in the lower price range may be selling briskly while nearby higher priced homes are taking a long time to sell because of lower demand.

The Mls provides current information on competitive pricing in the marketplace. This allows a licensee to more accurately assess a given property’s comparable market value and then to convey that informa- tion to the client or customer so they can make a better decision about the listing or offering price for a given property.

As a licensee, you must be able to clearly explain the services you offer. You must be able to show the seller/buyer how your service can be of benefit.

Before dispelling and clarifying a few of the more prevalent myths currently embraced by many consumers and professionals alike, we need to define a few basic terms. Here are a few definitions from the California Business and Professions Code (BPC) to aid in a common understanding of this discussion:

• BPC 10011 “Licensee,” when used without modification, refers to a person, whether broker or salesman, licensed under any of the provisions of this part.

• BPC 10131 A real estate broker within the meaning of this part is a person who, for compensation or in expectation of compensa- tion, regardless of the form or time of payment, does or negoti- ates to do one or more of the following acts for another or others: a. Sells or offers to sell; buys or offers to buy; solicits prospec-

tive sellers or purchasers of; solicits or obtains listings of; or negotiates the purchase, sale, or exchange of real property or a business opportunity.

b. Leases or rents or offers to lease or rent, or places for rent, or solicits listings of places for rent, or solicits for prospective ten- ants, or leases on real property, or on a business opportunity, or collects rents from real property or improvements thereon, or from business opportunities.

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71.2 Facts and Myths

c. Assists or offers to assist in filing an application for the pur- chase or lease of, or in locating or entering upon, lands owned by the state or federal government.

d. Solicits borrowers or lenders for or negotiates loans or collects payments or performs services for borrowers or lenders or note owners in connection with loans secured directly or collaterally by liens on real property or on a business opportunity.

e. Sells or offers to sell, buys or offers to buy, or exchanges or of- fers to exchange a real property sales contract, or a promissory note secured directly or collaterally by a lien on real property or on a business opportunity, and performs services for the holders thereof. (Broker’s definition continues in B&PC 10131.1-6)

• BPC 10132 Salesman Defined: A real estate salesman within the meaning of this part is a natural person who, for a compensation or in expectation of a compensation, is employed by a licensed real estate broker to do one or more of the acts set forth in Sec- tions 10131, 10131.1, 10131.2, 10131.3, 10131.4, 10131.5, and 10131.6 (Busi ness and Professions Code 10130, per Califor- nia Bureau of Real Estate 2014 Real Estate Law Book, pp. 24–28, Jan. 1, 2014)

1.2 faCTs anD MYTHs Because our legal system relies to such a large extent on English com- mon law, it is important to know that the word “property” did not refer to the actual dirt but rather to the “bundle of rights” which the owner enjoyed. These include the right to:

• Possess • Use • Encumber • Transfer • Exclude others

English courts distinguished between lawsuits over land itself (the “real” thing) and those suits that could award only monetary damages. One brought “real action” to recover “real property” (real estate) and personal action to recover “personal property”—an “estate” being the ownership interest or bundle of rights, not the actual land itself.

Myth number one: California real estate salespersons sell real estate. After all, that is what it says on the license. This myth has been the cause of much misunderstanding between buyers, sellers, and licen- sees. The real estate licensee has only two things to sell, and neither is real

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8 CHaPTER 1 Starting Your Real Estate Career

estate. Real estate licensees sell time and knowledge to people who need assistance with real estate issues.

Think about it. The actual seller of real property is the owner, not the licensee. The broker acts on behalf of the seller to bring a buyer who is ready, willing, and able to purchase the property on the terms and conditions specified by the seller, or on such other terms and con- ditions the seller finds acceptable, and the licensee acts to find such a person on behalf of the broker. Per the listing contract, the seller is the “principal” and the broker is the “agent” acting on her behalf. It is the employing broker (agent) who, by law, is the only one allowed to receive compensation for effecting the sale or transfer of real property (BPC 10131). Because the broker/agent is the only one authorized by law to collect a fee for real estate services, the licensee (those licen- sees, broker associates, or salespersons) working under the supervision of the employing broker/agent must be employed by a licensed bro- ker, and therefore their compensation must be paid only through that employing broker—never directly from buyers, sellers, or others.

The logical progression is as follows: The property owner or buyer (the principal) hires an “agent” (broker) to represent her in the sale or purchase of property. That broker hires a licensed real estate sales- person (the licensee) to represent her in dealings with the public. The licensee is never the direct representative of the principal; the licen- see always represents the broker who represents the client. In other words, the broker is the “agent” of the principal. The licensee is the “agent of the agent.” Licensees have misunderstood their relationship to the client by referring to them as “my client;” they are not the licen- see’s clients, they are clients of the broker. The licensee’s client is the broker. This concept becomes critically important when the licensee decides to change broker affiliations. Listings taken by a licensee in the name of the employing broker/agent, as well as the buyers being represented directly, through a Buyer Representation Agreement or, indirectly, through a Calif. Purchase Agreement belong to the broker. When any other disposition occurs, it is because the broker and licen- see have negotiated an alternate agreement.

You can see from this discussion how misuse of the term “agent” can lead to universal misunderstanding by brokers, licensees, clients, and customers. It has become standard usage in the industry and by the public to refer to all licensees as “agents.” Although technically correct (all licensees do represent others), we must be very careful to clearly understand who is representing whom because there can be only one “agent” with every firm; that “agent” is, by definition, a licensed California real estate broker. licensees, whether broker asso- ciate or salesperson, work under and offer their services through the

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91.2 Facts and Myths

“employing broker.” It’s that broker who may legally offer to sell, lease, and rent property for compensation, not the salesperson. Prop- erties are listed (and contracts written) in the name of the seller or buyer and the broker, not the salesperson licensee. The authors, when referring to salespersons or broker associates working under an employing broker, will use the term licensee.

Because it is important that you know what service you offer the consumer, you need to be very clear on this point: You have only two things to sell—your time and your knowledge. Your time and your knowledge (that is, the knowledge required to obtain a California real estate license and the “local” knowledge required to be able to give the principals proper advice) are the essence of the consumer protec- tion services you offer. Many careers have met their untimely demise as a result of failure to understand this concept.

Myth number two: All licensees offer the same service so they should all be paid the same fee. Although “activity for which a license is required” may be the same, the real “service” of time and knowl- edge varies with the knowledge and experience of each individual bro- ker and licensee.

Success or failure is not something that happens to you—it’s a choice. The single most important component of that choice is belief. Your belief system will determine your success. Because suc- cess is a concept and not an object, you must have a clear idea of what you mean by success before you can develop a plan to achieve it. When you have created your own clear image of what success is to you “Your beliefs become your thoughts, your thoughts become your words, your words become your actions, your actions become your habits, your habits become your values, and your values become your destiny.” (Mahatma Gandhi)

As a new licensee, there will be many times when you may be tempted to doubt your knowledge and abilities. The more confident you are in your knowledge of any subject, the more confidence you will feel and the more you will project. The authors sincerely encour- age every licensee to maximize their confidence by maximizing their knowledge and ability. Your community college can be of great assis- tance in providing specific instruction in many aspects of business and real estate. Take advantage of this valuable resource.

The California Real Estate Broker License is a good start toward professional competence. The added knowledge and confidence gained through studying for and passing the California Real Estate Broker Exam is the least we owe the people we serve. Although the broker’s license is a good start, education and the acquisition of real estate knowledge does not end there. Beyond the broker’s license, there are

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other professional designations that can enhance your knowledge and expertise.

If you studied for your license through one of the license training schools, you received a three-ring binder with approximately sixteen chapters of information that is critical knowledge to help you pass your real estate exam. This is valuable information, and the authors suggest that you reread each chapter, one chapter a day, until you have re-read the entire binder five times.

1.3 aTTiTuDE is EvERYTHinG “If you think you can do a thing or think you can’t do a thing, you’re right,” said Henry Ford. Real estate is no exception to this rule. As with most human endeavor, belief is a critical component of accom- plishment and plays a major role in determining individual and collec- tive reality. Your attitude, positive or negative, will dictate how others perceive you and how you perceive yourself.

Getting started will be much more difficult if you believe it will be difficult. A negative attitude will almost certainly guarantee a negative result and consequent need for a career change.

There is no substitute for a strong belief in “self.” Do whatever is necessary to put yourself in a positive environment. Surround your- self with as many successful people as you can. Successful people have positive attitudes and are fun to be around. You will find that success, like negativity, can be catching.

You make presentations using your knowledge of real estate regu- lations and the local area and custom. In order to do that effectively, you must bring your positive attitude with you wherever you go. Your broker will not be watching over you every minute of every day. For the positive, “yes, I can” attitude to be there, it must be nurtured and cultivated by you. Many motivational programs on CD and other media are available if you need quick inspiration. Keep a few of your favorites in your car and play them often.

To keep a positive attitude, ask yourself the following questions. If your answer to any of them is “no,” take steps to reaffirm who you are and your role as a service provider and .advocate for consumer protection.

• Are you able to handle your own inner fear? Fear can keep you from taking the bold steps needed to call or see people and help them with their real estate needs. More people fail as real estate profes- sionals due to an unfounded fear of rejection than any other reason. Remember, every buyer or seller needs the knowledge and service you, as a licensee, bring to the relationship through your broker.

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111.3 Attitude Is Everything

• Are you persistent? When a client says no, do you just quit ask- ing or do you take it as a signal to probe for more information? Often when clients say “no” they are really telling you that they don’t have enough information to make a decision. If you just give up, hoping you won’t offend them, you may well be keep- ing them from achieving the result that they truly desire. Only a small percentage of your potential clientele will agree with you or ultimately complete a transaction with you, but the service you provide to that small percentage can make you an excellent living and you will help a lot of people, so keep probing.

• Are you self-confident? There is no substitute for the confidence that comes with professional knowledge and competence. Your clients want you to lead them to a logical and safe conclusion, even before they believe it themselves. If you lack self-confidence, it will be seen as uncertainty and your clients will perceive you as lacking knowledge about the issues at hand. You need to have a deep reservoir of local real estate knowledge so when you are asked for advice or direction by your clients, your knowledge and preparation will reflect your professionalism. You can’t fake this. If you don’t have a ready answer to every question, tell them you will find the answer and get back to them. No one expects you to know everything, but knowledge within the scope of your license is one place where more is better.

• Are you enthusiastic? Enthusiasm can be highly contagious. Enthu- siastic licensees have an insatiable thirst for knowledge about every aspect of the real estate business and are always looking for ways to improve how they represent others. When you are truly enthu- siastic about your work, it rubs off on your clients and they begin to mirror your enthusiasm. Demonstrate enthusiasm in whatever you do.

• Are you a problem solver? Matching motivated buyers and sellers in a real estate transaction will bring many differences into the light. Most can be dealt with creatively, given sufficient understanding by the licensee. This means asking many questions. Approach all differences of opinion with an open mind. Each party will tend to see the solution that works for them; it’s your job to help the client see the “harmony” in the solution. Here is where your crea- tivity and negotiating skills can shine. We sell time and knowledge to people who need advice and direction when they are buying or selling real property.

• Are you adept at handling objections? One of the most difficult clients to represent is the one who never raises any objections but doesn’t commit to buy or sell.

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12 CHaPTER 1 Starting Your Real Estate Career

1.4 Goals You must ask yourself two important questions: Who am I? and What do I want? Most people avoid the first question because they believe the answer to be obvious; it is not. Who you are is not defined by what you do. That’s what our culture would have you believe. Who you are is, perhaps, a philosophical question beyond the scope of this text, but each of us needs an answer to this question.

As the comedian says, “I always wanted to be somebody; … I guess I should have been more specific.” Getting specific about who you are and what you want is the first step toward achievement. It is difficult to achieve what one cannot define.

What do you want to achieve in this life with the time you have available? From the macro to the micro, large to small, lifetime goals to tasks of the present moment, each individual must create their own goal. Since this is a text on California Real Estate Practice, we will assume you have worked through your lifetime goals and are now at the micro level of determining what you will achieve as a real estate licensee.

Goals establish the baseline you will use to measure your progress. A number of factors must be considered when setting goals because these factors will profoundly affect your ability to meet or exceed them. Among the more obvious are:

• Personal motivation – Just how motivated are you to succeed in the real estate business? Some people go into this business think- ing they will “give it a try.” If “trying” is your goal, you will surely succeed at that, but “trying” is not achieving. Many others have a strong desire to become the very best at what they do and will not settle for less. Your attitude is the single biggest factor in deciding your fate as a real estate professional. We are all, at this moment, a reflection of the choices we have made.

• Personal finances – Although some new licensees may establish a meaningful earnings pattern very quickly, some can take a year or longer to become established, depending on economic and other market conditions. Any well-thought-out business plan contains reserves for contingencies. You should be able to support yourself through savings or other income for a minimum of six to twelve months. Financial reserves that will sustain both you and your family for less than a year may cause you to focus your attention on day-to-day survival rather than on your plan to become suc- cessful in real estate. You may have untapped financial resources that you are not aware of, such as a working spouse, an unused car, camper, RV, motorcycle, or boat that you can sell. You may

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131.4 Goals

also have some form of a retirement plan or life insurance policy that you can borrow from. While a loan from family members sounds good, think this through very clearly first!

• Economic and market conditions – Supply and demand has a marked influence on the activity of any product or service industry. Health of the national and local economies affects marketability of most products and services including real estate. Starting a successful career in real estate can be done in virtually any market condition, but it can be much easier when capable buyers are abundant. If you enter the profession during a period of increased demand for real estate, you can expect the number of licensees to increase and competition among those licensees to become more intense. The opposite is also true. A decline in demand will reduce the number of licensees, creating an environment where only the most deter- mined service providers prevail.

• Personal support from family and friends – You need a support group. The added incentive that comes from the support of family and friends can be critical to success in any field. It is particularly important in real estate to enjoy the support of family and friends as this is the group that will make up a major portion of your sphere of influence (soi).

To be effective, goal setting must be an exact, not abstract, exercise, or it loses much of its meaning and effectiveness. As an example, an abstract goal would be: “I will see For Sale by Owners this week.” A much more effective and specific goal would be: “I will talk with each For Sale by Owner on Elm Street between 3:00 p.m. and 6:00 p.m., this Wednesday, Thursday, and Friday.”

To be most effective, your goals must be in writing, on 3 × 5 cards placed in conspicuous places—for example, your car visor, your bath- room mirror, or on the first page of your daily planner.