Practice of Real Estate

1. Real Estate License Law

Every state requires real estate brokers and salespersons to be licensed. License laws exist to protect the public by ensuring minimum competency and ethical standards. On the national exam, questions focus on general licensing principles rather than state-specific requirements.

A real estate broker is licensed to operate independently — they may own a brokerage, employ salespersons, and handle transactions directly. A real estate salesperson (also called an associate broker in some states) must work under the supervision of a licensed broker. Salespersons cannot operate independently or collect commissions directly from clients — all commissions flow through the broker, who then splits them with the salesperson per their agreement.

Licensees must meet requirements for pre-licensing education, pass a state exam, submit to a background check, and complete continuing education (CE) to renew. Grounds for disciplinary action include: misrepresentation, fraud, commingling client funds, failing to disclose material facts, practicing without a license (or with an expired license), violating fair housing laws, and criminal convictions involving moral turpitude. Penalties range from fines and license suspension to permanent revocation.

2. The Fair Housing Act

The Fair Housing Act (Title VIII of the Civil Rights Act of 1968, amended in 1988) is one of the most heavily tested topics. It prohibits discrimination in the sale, rental, and financing of housing based on seven protected classes: race, color, religion, sex (including gender identity and sexual orientation per HUD interpretation), national origin, familial status (families with children under 18, pregnant women), and disability (both physical and mental).

Prohibited actions include: refusing to sell, rent, or negotiate; setting different terms or conditions; discriminatory advertising; "steering" (directing buyers toward or away from certain neighborhoods based on a protected class); "blockbusting" (inducing homeowners to sell by suggesting that members of a protected class are moving into the neighborhood); and "redlining" (refusing to lend in certain neighborhoods based on racial composition).

Exemptions to the Fair Housing Act include: (1) owner-occupied buildings with four or fewer units (the "Mrs. Murphy exemption"), (2) single-family homes sold or rented by the owner without a real estate agent, provided the owner does not own more than three such homes, and (3) housing operated by religious organizations or private clubs that limit occupancy to members, provided membership is not discriminatory. These exemptions do NOT apply to discriminatory advertising — discriminatory advertising is never exempt.

3. Americans with Disabilities Act (ADA)

The ADA requires public accommodations and commercial facilities to be accessible to individuals with disabilities. In real estate, this primarily affects commercial properties and the office spaces of real estate businesses. Real estate offices open to the public must provide reasonable accommodations. The Fair Housing Act separately requires landlords to allow tenants with disabilities to make reasonable modifications at the tenant's expense — and new multifamily construction (built after March 1991) with four or more units must include accessible features.

4. Property Disclosures

Real estate licensees have a duty to disclose material facts about a property. A material fact is any information that could affect a buyer's decision to purchase or the price they are willing to pay. This includes known physical defects (leaky roof, foundation issues, flood damage), environmental hazards (lead-based paint, radon, asbestos, mold), and even psychological stigmas in some states (death on the property, proximity to a registered sex offender — rules vary by state).

Federal law requires sellers and landlords of housing built before 1978 to provide a lead-based paint disclosure and an EPA pamphlet to buyers and tenants, along with a 10-day opportunity for the buyer to inspect. States often have additional disclosure requirements about flood zones, seismic hazards, and methamphetamine contamination.

The general rule: if in doubt, disclose. Failure to disclose known material defects can result in liability for fraud, misrepresentation, or negligent nondisclosure. The agent's duty is to the principal — if the agent knows of a defect and the seller refuses to disclose, the agent must still disclose it or withdraw from the transaction.

5. Advertising Rules

Real estate advertising is regulated at both federal and state levels. Federal Fair Housing regulations prohibit discriminatory advertising — any ad that indicates a preference, limitation, or discrimination based on a protected class is illegal. HUD provides specific guidance on potentially discriminatory language (e.g., "great for young couples," "Christian neighborhood," "no children allowed" are all red flags).

State license laws typically require that all advertising clearly identify the licensed broker or brokerage. The broker's name must be displayed in a prominent manner. Ads must not be misleading or deceptive. Virtual "coming soon" listings, exaggerated claims of property features, or false representations of the licensee's expertise are prohibited. The CAN-SPAM Act also regulates commercial email advertising.

6. Trust Accounts and Commingling

Real estate brokers who hold client funds (earnest money deposits, rent payments, security deposits) must maintain a trust account (also called an escrow account) separate from their business and personal accounts. Commingling — mixing client funds with the broker's own funds — is a serious license law violation that can result in license suspension or revocation. Client funds must be deposited promptly (typically within 1-3 business days, depending on state law).

Conversion — the unauthorized use of client funds for the broker's own purposes — is even more serious and can result in criminal charges. Trust accounts must be reconciled regularly, and detailed records must be maintained for a specified period (typically 3-5 years). Commissions earned are transferred from the trust account to the broker's operating account only after the transaction closes.