MAY 2007

LEGAL NOTES

If you aspire to open your own Real Estate brokerage—whether it is a small boutique or part of a major franchise—it is important that you do your homework on what it will take to make your dream come true. Setting up a Real Estate brokerage involves much more than just marketing and sales. Systems and policies for staffing, sales, insurance and more are required. Follow these tips to ensure that your new business is profitable, productive and fully protected.

The Basics

As a first order of business, you must meet the financial requirements, have the mandated experience and obtain proper licensing to open a Real Estate brokerage. (NAC 645.120, 645.150.) It is unlawful to open a Real Estate brokerage without a license or permit. (NRS 645.230.) When opening a business brokerage, you will need to obtain a separate business brokerage permit which requires a separate educational course, test and license (called a permit).

Once these things are in order, you can proceed with finding your location, forming your entity (what you can call yourself and who must be licensed are regulated by statute—see NRS 645.370, 645.380), acquiring state and local business licenses and tax reporting information, hiring your staff, implementing policies, obtaining insurance and—last but certainly not least—opening for business.

Operating Procedures and Systems

Successful and productive offices are not built by accident. Written operations and procedures manuals that provide clear direction for even the smallest tasks are necessary. Nowadays it is extremely important for companies to have detailed written documentation about office policies and procedures.

A manual for Real Estate agents to refer to in their daily business can help solve and prevent disputes, and also help ensure the productivity and good reputation of your business. For example, if you do not establish clear policies prohibiting agents from promising clients a portion of the commission—or finder’s fee—and your new agent uses commission splitting as his sales tactic, you can be sued as the broker if there is a dispute over this commission split. Having a written policy against such transactions, even if you as the broker do get sued, goes a long way toward allowing you to get out of the lawsuit earlier rather than later.

Broker Management

Millions of dollars are lost each year when a brokerage fails to set up a system to manage agents and require agent accountability. From a sales perspective, it is important to stay on top of how agents are responding to leads and how they are turning leads into sales. From a liability perspective, it is critical that brokerage managers be involved in all stages of a transaction to ensure that brokers are complying with legal and company policies.

One of the best things a brokerage owner can do is be available for agents and be involved in every deal that comes through the door. Too often, brokerage owners focus entirely on generating new business and fail to review contracts. If you do not plan to manage sales agents yourself, a manager is one of your most important assets. Always make sure that someone is reviewing agents’ contracts and signing off on important transactions.

Insurance and Risk Management

It is a shame to see a good brokerage business fail due to a lawsuit or inability to renew its insurance policy. However, it happens more often than you would think. When you start a new business, you cannot afford to be naïve. If you plan to hire agents and run a successful brokerage, make sure you are up-to-date about the legalities of running a brokerage.

One of the best things a brokerage owner can invest in is a good insurance broker. In many cases, new owners cover their businesses with a comprehensive general liability (CGL) policy and assume they are fully covered. However, while the CGL policy may be the perfect policy for an ice cream store or retail chain, it fails to include coverage for what brokerages really need.

For example, if a client buys a home and finds mold three months later, he might try to sue the sales agent for breach of fiduciary duty or negligence. As another example, in a business brokerage deal, if a client buys a business and it fails, he may blame the agents for not exercising better due diligence. The bottom line—when something goes wrong, buyers often blame everyone but themselves. Ultimately, the allegations of failure fall on the brokerage, costing thousands in legal fees.

A custom insurance policy helps protect the business from such legal issues. Therefore, I highly recommend spending the time and money to enlist the services of an experienced insurance broker. This extra investment could save your business.

Training

Continuous education and training should be a top priority. Training plays a major role in a brokerage’s success. Successful brokerages are usually those that understand the importance of training and education programs that keep their staff on top of the latest trends and laws.

Passing the license exam is just the first step for a broker. Brokers need additional and up-to-date training on sales, legal, forms, ethics and contracts topics to be successful and compliant. By encouraging and offering training on a regular basis, you are increasing your team’s knowledge and productivity, and protecting your business from falling behind in today’s competitive marketplace. You are also meeting your mandatory responsibility as a broker to train your agents. (See NAC 645.600.)

A Final Word

Opening a Real Estate brokerage is an exciting and positive opportunity. However, if you fail to do your homework and get your business in order before you open your doors, you may be doomed to fail. Fortunately, these tips can help prevent legal issues and a negative image. Simply remember that you are responsible for what your sales agents do when they operate under your company’s name and hang their licenses under your broker’s license, whether they are employees or independent contractors. By mandating continuing education and training, reviewing all deals and obtaining the right insurance, you are off to a good start.

Disclaimer: The above is not intended to be, nor is it legal advice, and should not be relied upon for any reason. Even though this article maybe disseminated throughout the U.S., the material covers only Nevada law, and no other. E RealEstateExec and Exec MediaGroup ,LLC expresses no opinion on any other state's law, nor about the handling of any particular legal situation. You should consult your attorney, accountant or business advisor before undertaking any action. No attorney-client relationship is created between E RealEstateExec, Exec MediaGroup,LLC and the reader.