Re broker-5e - 3

 Important Terminology
• Risk: possibility of incurring loss or misfortune
o Business risk—the probability that an event or action
may adversely affect the business activity or
organization—is a part of owning and operating a
business.
o A person who is risk averse (extremely cautious) will
need to employ several risk management systems and
procedures to minimize the fear of exposure to
potential lawsuits or loss.

 Theory of Risk Management
• Risk management is about protecting the company.
• It takes vision and resolve to build a company;
therefore, the company’s brand name and
reputation is its most valuable asset.
• Vicarious liability is secondary liability. It is based
on the concept of respondeat superior, meaning
that the superior (broker) is responsible for the acts
of the subordinate (salesperson).
• Business risk management is the process of
analyzing exposure to risk (harm or loss) and
determining how to minimize the physical and/or
financial impact.

 Theory of Risk Management (continued)
• Steps in Risk Management
o Identification: common risks in a real estate brokerage
business involve handling client’s money, accurately
completing contracts, making appropriate disclosures,
and competing fairly
 Risks from business operations: antitrust violations, ADA
violations, license violations, intellectual property theft,
advertising, accounting, personal injury liability
 Computer system compromised: loss of data, identity
theft
 Property risks: fire damage, theft, natural disaster
 Financial risks: business interruption, fines, lawsuits

 Theory of Risk Management (continued)
• Steps in Risk Management
o Assessment
 A risk management plan contains an analysis of likely risks
with both high and low impact, as well as mitigation
strategies.
o Mitigation
 Risk Avoidance: includes not doing something that might
have a risk
 Risk Reduction: involves methods that reduce the severity of
the loss or the likelihood of the loss from occurring
 Risk Transfer: purchasing insurance from insurance company
 Risk Retention: involves accepting the loss when it occurs
because the cost of insuring against the loss would be
greater over time than the total losses sustained

 Methods of Loss Control
• Loss control: process of setting up policies and procedures
to reduce the possibility of things going wrong
• Brokerage Oversight and Compliance
o Activities that Need Supervision
 Creating agency or brokerage relationships
 Handling transactions requiring a real estate license
 Overseeing real estate transactions performed by licensees who are
associated with the broker
 Reviewing documents that may have a material effect upon the rights
or obligations of a party to the transaction
 Filing, storage, and maintenance of such documents
 Handling of money received by associated licensees on behalf of a
real estate broker
 Reviewing the advertising of any service for which a real estate
license is required
 Responding promptly to sponsored licensees, clients, and licensees
representing other parties in real estate transactions
 Familiarizing salespeople with the requirements of federal and state
laws governing real estate transactions, including, without limitation,
prohibitions against discrimination

 Methods of Loss Control (continued)
o Ensuring Licensees’ Competency
 A broker must establish written policies, rules, and
procedures for their salespeople to follow.
 Brokers should provide educational training and
instruction to achieve that goal.
o Compliance Review
 A routine audit is one that is performed on a randomly
selected brokerage; whereas, an investigative audit is
based on a complaint from the public or other information
received indicating probable violations by the broker or a
licensee.

o Brokers Who Fail To Exercise Oversight
 Brokers who fail to supervise and/or monitor the
authorized activities of their associate licensees can be
subject to licensing discipline including suspension and
revocation of the real estate license.
 A rent-a-broker refers to a broker who abdicates all actual
responsibility to another individual, usually the true owner
of the company, who may or may not be licensed or
qualified to manage a real estate business.

• Policy and Procedure Manual
o A policy is defined as a predetermined course of action
established as a guide toward accepted objectives and
strategies of the organization.
o A procedure is a particular or specific way of
accomplishing an objective.
o A Policy and Procedure Manual (Manual) contains all
the policies, procedures and work instructions that
make up the way a company carries out all the
functions of its business.

o Writing the Policy and Procedure Manual
 Focus on what you expect sales associates to do, how you
expect them to perform, and what rewards they will
receive if they perform as expected
 Do not include any policies that you do not intend to
follow or to enforce impartially among all members of the
firm

o Writing the Policy and Procedure Manual
 What to Include in the Policy Manual
• Sales Associations: authorized agreements, client/customer
confidentiality, dispute regulation, etc.
• Office Policies: building security, office hours, harassment,
etc.
• Advertising & Marketing: guidelines, lead management, etc.
• Listing & Selling: agency disclosure, deposits and earnest
money policies, listing presentations, presenting offers, etc.
• Information Technology: computer safety and security,
copyright infringement, database management, etc.

• Following the Golden Rule is a pathway for
compliance with state laws and regulations.
• Avoid Disciplinary Action and Lawsuits
o Practice Ethical Behavior
 The NAR Code of Ethics establishes high professional
standards for real estate licensees to follow.
o Comply with Anti-Trust Laws
 The Sherman Antitrust Act is a federal law that prohibits
businesses from conspiring with one another to fix prices
and control competition in their respective industries.
 Price fixing is the act of conspiring with the competition to
set prices for selling goods or services.

o Comply with ADA
o Americans with Disabilities Act (ADA) prohibits
discrimination against individuals with disabilities in
employment, public services, telecommunication, public
accommodations, and commercial facilities
o Comply with Fair Housing Laws
 A Prospect Equal Service Report provided by the National
Association of REALTORS® can be used as a guideline for
service and documentation of nondiscrimination.

o Comply with Fair Lending Laws
 It is important to know and follow the different laws that
pertain to real estate financing.
o Disclose Agency and Brokerage Representation
 Practice real estate in accordance with each state’s agency
regulations
o Comply with Do Not Contact Policies
 Prospecting is the process of identifying potential
customers.
 Cold calling is the practice of making unsolicited calls to
people you do not know in order to get new business.

o Disclosure Material Facts
 Avoid Misrepresentation: making a false statement or concealing a
material fact, causing someone loss or harm
 Comply with Advertising Guidelines
o Complete Contracts Carefully
 Licensees should read a contract thoroughly and ensure that no
minute detail is omitted, such as checking an appropriate box when
necessary.
 If there is any ambiguity in the contract, a licensee should make sure
to solve discrepancies prior to executing a contract.
 Be sure the parties to the transaction understand the nature of the
contract and that all questions or concerns are addressed
immediately.
 When corrections or additions must be included on a contract,
licensees should not make these changes arbitrarily.

o Handle Trust Funds Accurately
 Trust funds are money or other things of value received
from people by an agent to be used in real estate
transactions.
 Handling Trust Funds – The Right Way
• When a broker or salesperson receives funds from a
principal, the funds must be placed into a neutral escrow
depository, or into a lawful trust account.
• A neutral depository is an escrow business conducted by
someone who is a licensed escrow holder.

 Handling Trust Funds – The Wrong Way
• Brokers mishandle trust funds through commingling,
conversion, and shortages in escrow accounts.
• Commingling is the illegal practice of mixing funds in a
broker’s personal or general business account.
• Conversion is the appropriation of property or funds
belonging to another.
• Lack of knowledge in accounting principles coupled with
poor record keeping usually results in escrow account
shortages.

 Handling Trust Funds – Correctly
• Company funds must not be deposited into the broker’s trust
account; rather they should be deposited into the brokerage
business or personal account.
• Company funds are commingled if deposited into the trust
account.
• Keep separate transaction journals for sales escrow, rental
escrow, and advance-fee escrow accounts.
• Prepare reconciliation statements for each account.
• Keep records of all deposits and withdrawals from escrow
accounts as mandated by your individual state laws (in some
states, that period is four years).

• Protect Your Computer Data
o All company computers must be assigned unique
passwords that are difficult to decode.
o You should use a computer backup system to prevent
data loss if a disaster or emergency occurs.
o Identity theft occurs when an individual uses someone
else’s personal information to commit fraud. You
could be sued if there is a breach of your security and
sensitive information about others is exposed or
stolen.

• Follow Fair Employment Practices
o Treat all members of the company equally and without
favoritism.
o Federal law prohibits employment discrimination
based on race, national origin, religion and creed,
gender, age, and disability.
o The restrictions on race, religion, gender, and
disability apply to businesses with 15 or more
employees.
o The restrictions on age apply to businesses with 20 or
more employees.

• Provide a Safe Work Environment
o There should be adequate lighting in hallways, stairs, and
outside areas.
o Exits should be well marked, well lighted, and clear of
obstacles.
o Handrails, steps, and landings should be in good condition.
o Doormats should be flat and slip resistant.
o Any spills should be cleaned up immediately.
o Walkways should be kept in good condition.
• Practice Fire Safety
o Office is equipped with functional smoke alarms and fire
extinguishers

• Implement a Disaster Plan
o Emergency Plan: part of the disaster plan dealing with
the first and immediate response to the disaster
 Store emergency response supplies
 List the steps needed to secure the office and its contents
 After the disaster, thoroughly inspect your office and
record all of the damage
 Keep damaged property for inspection
o Recovery Plan: detailed outline of what needs to be
done and by who after a disaster occurs
 List of your insurance policies
 Inventory of business equipment and other items
 Backups of your business computer records

 Buy Business Insurance to Transfer Risk
• Business insurance protects your investment by
minimizing financial risks associated with
unexpected events, such as a death of a partner, an
injured employee, a lawsuit, or a natural disaster.
• The cost of an insurance policy (premium) is
affected by the amount of its deductible.
• The deductible is the amount the insured must pay
when any insurance claim is filed.
• Types of Insurance Policies
o There is a broad range of insurance policies offered to
protect a brokerage company.

(continued)
• Property Insurance Policy
o Property insurance covers loss or damage to the building
that houses your business, as well as everything related to
the loss or damage of company property.
o Company property includes office furnishings, computers,
signs, company papers, and other items vital to your
business operations.
o Peril-specific policies cover losses from only the risk listed in
the policy, such as a fire insurance policy, a crime policy, or
a business interruption policy.
o All risk policies cover a wide range of incidents and risks
except those listed in the policy.

 Buy Business Insurance to Transfer Risk (continued)
o Businessowners Policy (BOP): combines a number of coverages
into a standard package that is offered at a lower premium than
if each coverage was purchased separately
 Replacement value covers a structure for the amount it will cost to
rebuild the same structure, if it is built today.
 Actual cash value covers a structure at the depreciated value of the
loss.
 Standard Coverage
• Business Interruption Insurance ensures you are paid if you lose income
as a result of damage that temporarily shuts down or limits your
business.
• With Actions of Civil Authorities coverage, if the loss at the other
property is due to a cause covered by your policy, then the insurer will
pay for your actual loss of business income and expense.
• With Computer Operations Interruption coverage, the insurer will pay
for business income lost (usually up to $10,000) if computer operations
are interrupted due to a covered cause of loss.

 Buy Business Insurance to Transfer Risk (continued)
o Businessowners Policy (BOP)
 Additional Coverages
• The Computer Fraud and Funds Transfer Fraud Endorsement covers the
risk that someone may cause an unauthorized transfer of funds from
your bank account, whether through electronic or written instructions.
• Electronic Commerce Endorsement covers any lost income if your
ability to conduct e-commerce is slowed down or stopped due to the
causes of loss covered by the BOP.
• Earthquake insurance policies cover damage to the structure during an
earthquake, but can vary greatly in terms of exclusions and
deductibles.
• Flood insurance covers losses from flooding (including structural
damage), damage to furnace, water heater, and air conditioner units,
flood debris clean up, and the replacement of floor surfaces.

(continued)
• Liability Insurance: provides protection from the
negligent acts and omissions of an individual, business,
or organization that causes bodily injury and/or property
damage to a third party
o Errors & Omissions Insurance: covers various claims for
errors, mistakes, neglect, or carelessness in the normal
business activities of a real estate brokerage
o Business Identity Insurance: provides legal liability coverage
to businesses that are victims of data theft
o Employment Practices Liability Insurance: pays (up to the
policy limits) any damages for which an employer is legally
liable if the employer violated an employee’s civil or other
legal rights
o Umbrella Liability Policy: covers the amount of loss above the
limits of a basic liability policy

(continued)
• Automobile Insurance
o Your sales associates’ personal automobile policies
provide coverage for some business use of their
vehicles.
o A business auto policy offers more protection.
o The Non-owned Auto Liability Endorsement provides
coverage when employees and agents drive their own
vehicles on business.

(continued)
• Workers’ Compensation Insurance: protects the
employer from being sued by an employee for job-
related injuries
o Federal Unemployment Tax
 All employers, not employees, are required to pay federal
unemployment tax (FUTA) if they meet certain
qualifications.
 Employers must pay FUTA if they had one or more
employees at any time in any 20 calendar weeks or paid
wages of $1,500 or more in any calendar quarter.
 The unemployment insurance rate and taxable wage limit
may change each year.

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