Broker - COURSE 1 - PLANNING AND START-UP – ELEARNING

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COURSE 1: PLANNING AND START-UP – ELEARNING

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Module 1: Establishing a Brokerage Disclaimer: This is a reference document which contains pages from the Accessible eLearning module. You should complete the eLearning module to proceed to the next step. Please note that the accessible module on the LMS only contains the interactive pages and you need to go through the content of this document thoroughly to attempt the interactive activities in the module. Please use Adobe Acrobat Reader (Recommended version 9 or above) to navigate through this PDF. Real Estate Broker Program ©2021 Real Estate Council of Ontario. All Rights Reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or in any means – by electronic, mechanical, photocopying, recording or otherwise without prior written permission, except for the personal use of the Real Estate Broker Program learner.

© 2021 Real Estate Council of Ontario

Module 1: Establishing a Brokerage Many individuals who obtain their broker registration do so with the intent of opening their own brokerage, for which they will also be the broker of record. However, this is not the only reason. Some individuals may choose to become a broker of record at an existing brokerage or take on another leadership position, such as a branch manager. Regardless of the path chosen, a broker registration opens up a number of career opportunities. The education required to become a broker equips learners with the knowledge to create a better experience for consumers and add more value to the operation of a brokerage. In this module, you will learn about the importance of understanding the current real estate market. You will study in detail the key considerations for establishing a new brokerage. This module also explores key considerations when acquiring an existing brokerage and the different methods of valuation for determining the brokerage’s value. To check your understanding of this module, you must complete all the activities in the online module. © 2021 Real Estate Council of Ontario

While navigating through the online module, click the Legislation button to view laws and regulations related to this module. The contents of the thumbnail Accessible PDF.

and References from the module are added to support your learning throughout this

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Menu: Establishing a Brokerage

Number of Lessons

Lesson Number

5 Lessons

Lesson Name

Lesson 1

Brokerage Landscape in Ontario

Lesson 2

Considerations for Opening a New Brokerage

Lesson 3

Considerations for Acquiring an Existing Brokerage

Lesson 4

Summary Practice Activities Module Summary

© 2021 Real Estate Council of Ontario

Lesson 1 | Page 1 of 10

Lesson 1: Brokerage Landscape in Ontario This lesson describes the current landscape of the real estate industry in Ontario. It also explains potential growth options in the industry and current trends that may impact a brokerage’s growth.

© 2021 Real Estate Council of Ontario

Lesson 1 | Page 2 of 10

In today’s market, real estate brokerages face both significant opportunities and challenges. A full analysis of market conditions at the outset will assist in making key decisions related to setting up a new brokerage. It is important to identify prevailing trends in brokerage operations to help determine potential growth opportunities. In this lesson, you will learn about the current state of the real estate industry and the importance of reviewing existing data. This lesson describes potential growth opportunities you can capitalize on, recent trends in brokerage operations, and how these trends can impact a brokerage’s growth. Upon completion of this lesson, you will be able to: • Identify the current state of the real estate industry Throughout this lesson, you will participate in decision points to test your knowledge on the topics presented. © 2021 Real Estate Council of Ontario

Lesson 1 | Page 3 of 10

If you are planning to open your own brokerage, it is crucial to conduct initial research on the real estate market as it relates to your chosen trading area. As you gather research on definitive factors for your future brokerage (such as location, target market, and services offered), you will narrow down your focus from general to specific so you can make informed decisions about your business. The objective of your research efforts will be to identify all contributing factors and assess the feasibility of your future brokerage. This will help you to avoid wasted time and energy on nonviable options. There are an abundance of reports and statistics available to guide every stage of your analysis.

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Lesson 1 | Page 4 of 10

Analyzing Real Estate Industry Statistics Understanding the current state of the real estate market is a critical part of making business decisions about a future brokerage and its potential viability. Before a broker decides on factors such as their target market area, target consumer demographic, location, and business model, they should first conduct a high-level analysis of external factors in the real estate industry. Although there are currently over 90,000 registrants in Ontario, a broker should study data from local real estate boards or associations regarding specific areas of interest to analyze the level of competition and to identify potential opportunities. Analyzing the statistics that pertain to a broker’s specific areas of interest will give them an idea of how many registrants in the marketplace are vying for a share of the total annual real estate transactions. While a large number of registrants in a given area may imply a significant amount of competition, it could also mean a wider pool © 2021 Real Estate Council of Ontario

of possible recruits available to the new brokerage. Brokers contemplating brokerage ownership and/or management should be realistic about the challenges and opportunities. Based on their research findings, a broker can begin to narrow down their options and make informed decisions for establishing their new brokerage.

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Lesson 1 | Page 5 of 10

Analyzing Market Conditions A broker should also analyze the market stability of an area to help determine whether it will be a suitable location to establish a new brokerage. This can help them to identify potential growth opportunities and potential niches. When studying the current real estate market, a broker should look for: • Underserviced communities (such as neighborhoods and ethnic groups) © 2021 Real Estate Council of Ontario

• Underserviced real estate segments (such as types of properties or market niches) • Competing brokerages within certain areas (including who the brokers and salespersons are, what kind of transactions they conduct, what type of properties they deal with, and who their consumer base is) Understanding the service gaps in an area can help a broker identify possible advantages for their new brokerage. For example, there may be several competing brokerages in the downtown core, but none of them are focused on new residential condominium sales, despite the fact that this type of development is on the rise in the area. Failing to factor in the local market conditions in an area can result in establishing a new brokerage in an already saturated market. Unsuitable market conditions may pose a challenge in attracting consumers, as well as brokers and salespersons, to the brokerage. It is important to understand that a stagnant market may not always imply that a brokerage will fail. Similarly, a stable market may not guarantee success. Market conditions and their implications should always be studied within the context of the brokerage’s vision. Note: A vision should encapsulate a brokerage’s intended future, including factors like its target market, specializations, and metrics used to measure overall success. This may be adapted from time to time as the brokerage grows, market demands change with the economy, or technology advances. You will learn more about vision in a future course.

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Lesson 1 | Page 6 of 10

Growth Opportunities in the Current Market Growth is an important strategic consideration when establishing a brokerage and sustaining momentum. A broker should capitalize on prevailing trends that offer growth potential, while addressing business realities (in other words, any circumstance, usually an external influence, that will affect the brokerage’s abilities to achieve their goals).

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A broker should investigate what is happening in the trading area where they want to open a new brokerage and identify prevailing trends that offer growth potential. A study of age, gender, marital status, income, ethnicity, education, employment, and socio-economic and cultural realities may help a broker understand consumer preferences and behaviour. For example, if a broker wants to open their brokerage in the north end of the city, they should consider the consumer base of the area and their patterns, while contemplating questions such as the following:

•

Are there more people moving to or leaving the area (intensification versus migration)?

•

Is there a specific demographic present or moving into the area (for example, senior citizens)?

•

What types of communities are a part of the growing or existing landscape (for example, a growing Romanian community)?

A broker should also consider whether they have the required skillset, knowledge, connections or affiliations, and resources to be successful in a particular market. All brokerages are trying to carve out their own share of business within the marketplace. However, this should not discourage new brokers from entering the marketplace. It just means they should conduct research to identify the current reality of opening a new brokerage in their area of interest. If research indicates that it will not be a viable opportunity, a broker may choose to go in a different direction with their business.

© 2021 Real Estate Council of Ontario

Lesson 1 | Page 7 of 10

Trends in Brokerage Operations While establishing a brokerage, it is important to be aware of the trends that can impact decisions about the structure and operation of the brokerage. These trends should be considered in relation to specific elements present in the real estate landscape of the desired trading area. Each trend has its own benefits and challenges that should be contemplated before arriving at decisions regarding the structure and operation of a new brokerage. The following three sections contain information about recent trends in brokerage operations.

Franchises A franchise is a type of licence that allows a brokerage (franchisee) to have access to the franchisor’s proprietary knowledge, processes, and trademarks. This licence permits the brokerage to provide a service under the franchisor’s name. In recent years, new franchises have appeared that widen appeal by providing innovative methods, such as profit sharing based on franchisee performance as well as sponsorship and residual income sharing to registrants who bring others into the brokerage. Over the years, major franchises have broadened their available services to include administrative systems that © 2021 Real Estate Council of Ontario

assist brokerages in management functions, performance reporting and tracking, and web-enhanced features or services. Example: A broker contemplating opening a new brokerage wants to associate with a recognized brand, believing that it will help to draw more business and recruit capable brokers and salespersons. They consider joining a franchise.

Virtual brokerages The trend of home-based registrants has come about in large part due to new technologies, particularly mobile communication including internet, smart phones, and advances in GPS or location-based services (like locating a property on a smartphone by its GPS location). Virtual brokerages can provide any combination of services without bearing the capital expenses of owning or leasing a traditional office. Use of virtual technology results in reduced use of space and, subsequently, lower occupancy costs. Example: A broker wants to reduce their occupancy costs, so they decide to open a virtual brokerage. They plan to rent out a facility to use as a meeting space, as needed. The brokerage will reduce their expenses © 2021 Real Estate Council of Ontario

significantly by renting a small space on a scheduled basis instead of having to accommodate all brokers, salespersons, and administrative staff on the floor at once. They will also save on the cost of onsite equipment and furniture.

Sub-franchises Commonly known as a sub-brokerage in the real estate industry, a sub-franchise needs to be registered with RECO as a separate brokerage. Sub-franchises have the same rights, requirements, and obligations as any other brokerage but are not considered a branch of the parent brokerage. They cannot use the brokers and the salespersons employed by the parent brokerage for their trade but can use the support staff and the same address, and share the office space and storage facilities of the parent brokerage. Subfranchises also operate a real estate trust account that is separate from the parent brokerage’s real estate trust account. Example: A broker who is affiliated with a franchise and has a team consisting of two registered assistants and one unregistered assistant is considering opening a subfranchise. The parent brokerage can support the sub© 2021 Real Estate Council of Ontario

franchise by providing administrative services and premises for a fee, and the broker may benefit from preferential tax treatment. The broker also plans to consult a third-party professional for tax advice. This type of arrangement would be mutually beneficial for both the sub-franchise and the parent brokerage. The broker will continue to benefit from the association with the franchise; meanwhile, the parent brokerage will benefit from collecting payments for administrative services and use of the premises.

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Lesson 1 | Page 8 of 10

Trends in Brokerage Layouts The open-concept workspace has become a popular trend for businesses, including brokerages. As opposed to the traditional office layout, the open-concept workspace offers a more modern environment that encourages comfort and collaboration. Rather than cubicles, furniture may include a mix of high-top tables, sofas, and shared workstations. These spaces may also make use of outdoor areas, like rooftops and balconies. In addition, open-concept brokerages often incorporate the latest technology, equipment, and appliances to fit with their overall image (for example, wireless printing, consumer phone applications, and espresso machines). © 2021 Real Estate Council of Ontario

These brokerages tend to appeal to a younger generation of both real estate professionals and the consumers they serve. The brokerage’s layout style also reflects consumer patterns (across all age-groups) for new home construction, favouring vaulted ceilings and open-concept designs. However, if a broker chooses to have an open-concept layout for their brokerage, they should be mindful of possible privacy concerns inherent to conducting business in a shared space. The brokerage should still consider having conference rooms or other private meeting spaces to protect consumer confidentiality.

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Lesson 1 | Page 9 of 10

A broker in AnyCity is contemplating opening a new brokerage in the downtown core. What factors should the broker consider before opening the new brokerage? There are four options. There are multiple correct answers.

1

Demographics of the downtown core

2

Potential competitive advantages

3

The number of active registrants in Ontario

4

Brokerage operation trends in the downtown core

© 2021 Real Estate Council of Ontario

Lesson 1 | Page 10 of 10

Congratulations, you have completed the lesson! Completion of this lesson has enabled you to: • Identify the current state of the real estate industry Here is a summary of the key topics that were discussed in this lesson. An analysis of the market in relation to the desired trading area will assist a broker in making key decisions related to setting up a brokerage. As a broker, you should study the information available to identify the pulse of the market and to better understand consumer preferences and behaviour. © 2021 Real Estate Council of Ontario

To position a brokerage effectively, as a broker, you should capitalize on the growth opportunities present in the industry. This includes exploring the services currently offered within a trading area, a particular community, or a specific sector that is either under-serviced or not serviced at all. As a broker, you should also be aware of key trends that can influence your decisions about the structure and operation of your future brokerage.

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Lesson 2 | Page 1 of 34

Lesson 2: Considerations for Opening a New Brokerage

This lesson explains the key considerations for various decisions you will make while establishing a brokerage. These decisions consist of selecting a business model, ownership type, independent versus franchise, office location, and layout.

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Lesson 2 | Page 2 of 34

Since opening a new brokerage is a significant commitment, it is important to conduct preliminary research and a selfassessment (or self-reflection) before opening and running a new brokerage. The effort expended will impact the quality of decision-making, which may in turn impact the viability of the newly established brokerage. When conducting preliminary research, you should assess opportunities, along with business realities, to identify areas where you may have a competitive advantage. Self-assessment will help you to determine whether you have the required knowledge, connections or affiliations, and resources to be successful in undertaking this business venture. Some of the decisions that you make based on your preliminary research and self-assessment will help define the brokerage’s business model and ownership type, as well as whether the brokerage will operate independently or as © 2021 Real Estate Council of Ontario

part of a franchise organization. Furthermore, it is critical to narrow down a location and office layout for the brokerage. This lesson focuses on many of the key considerations for opening a new brokerage. Upon completion of this lesson, you will be able to: • Describe considerations for opening a new brokerage • Identify the aspects to consider when conducting a feasibility study for opening a new brokerage • Determine the considerations for each ownership type when opening a new brokerage • Identify considerations for purchasing a franchise when opening a new brokerage • Identify considerations for choosing a location for a new brokerage • Determine the optimal office layout for a new brokerage location Throughout this lesson, you will participate in decision points to test your knowledge on the topics presented.

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Lesson 2 | Page 3 of 34

Opening a new brokerage is a significant commitment and requires due diligence in establishing each element (such as location, target market, operational structure, and so on). Research helps build a solid foundation for a brokerage, preparing it for any threats or weaknesses that may arise as it grows. Preliminary research and self-assessment are critical in identifying various factors that may affect a brokerage’s success. Many successful brokerages enjoy longevity, in part, because their owners conduct regular market research to maintain a competitive advantage. © 2021 Real Estate Council of Ontario

Lesson 2 | Page 4 of 34

Preliminary Research Preliminary research is a critical part of narrowing down a broker’s decisions when opening a brokerage. Before a broker delves into the in-depth analysis for their future brokerage, they should thoughtfully consider the following aspects: • What are the results of the feasibility study? (You will learn about feasibility studies later in this module.) • What property types will the brokerage service? • What are the ownership options for the brokerage? (You will learn about ownership options later in this lesson.) © 2021 Real Estate Council of Ontario

• Will the brokerage choose to operate independently or as part of a franchise organization? • What will be the business model of the brokerage? (You will learn about business models later in this lesson.) • What location should be chosen for the brokerage operation? • What are the office space requirements for the new brokerage? • What is the optimal office layout for the new brokerage? • Would the brokerage benefit from leasing or buying the office space? Keep in mind that this list is not exhaustive. A broker’s preliminary research may vary depending on their situation, and their future brokerage’s vision and goals.

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Lesson 2 | Page 5 of 34

Self-Assessment When opening a new brokerage, a broker should assess their own strengths and weaknesses. This will help identify if they have the necessary skillset, knowledge, connections or affiliations, and resources to establish and operate a brokerage. They should consider the following questions: • Do they have the adequate experience for their desired trading area? • What specific skills or knowledge do they have that will be an asset to their new brokerage? © 2021 Real Estate Council of Ontario

• What specific skills or knowledge can they gain or improve upon? • Do they have the appropriate resources and credentials (financial, team members, reputation, and so on)? • Do they have any market share in the desired trading area? If not, do they have a plan as to how they can obtain market share? • Do they have any current market niches (in a demographic or trading area)? • Who should they hire to complement their strengths and weaknesses? Again, this list is not exhaustive. Like considerations for preliminary research, a broker’s self-assessment (or selfreflection) will depend on their personal situation.

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Lesson 2 | Page 6 of 34

Competitive Advantage A broker should also identify and develop any perceived competitive advantage in the marketplace and consider whether they can offer substantial growth potential for their future brokerage. When establishing a new brokerage, a broker may uncover multiple competitive advantages in their research that they can leverage. You will learn about competitive advantage and growth potential in more detail in a future course. The following five sections contain information about competitive advantage.

Market position Positioning theory states that the product or service is not as critical as the positioning of that product or service in the consumer’s mind. It is not what is done but rather what the consumer thinks is done that is important. A broker should aim to acquire high visibility in the marketplace. A broker can target a specific market niche by specializing their service, geographically limiting the area, or identifying a unique stance that can be readily communicated to the selling and buying audiences. In determining a position, it is vital to assess the competition carefully, determine what market niches

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are currently underserved, and identify what brokerages are vulnerable to additional competition and why.

Alliances and affiliations It is important to investigate all possible affiliations that can provide competitive advantage (for example, franchise rights, online lead generation systems, licensing agreements for distinct products or services, and international affiliations). Such alliances can minimize business risk while potentially increasing opportunities or, at minimum, effectively countering competitive positions taken by other brokerages.

Market niches Market niches offer great opportunities, but they can be difficult to locate and develop. Brokerage strength often comes from diversity in the marketplace. Competitive strategies can be limited in homogenous markets where consumers have largely the same needs. However, in a heterogeneous market with differing markets and needs, a brokerage may identify viable trading areas and gain a competitive advantage. © 2021 Real Estate Council of Ontario

Brand loyalty Brand loyalty can reap immediate benefits for a new brokerage. Consumers often seek out a known name. A level of consumer confidence can immediately exist for the operation given the impact of continuous ad campaigns, the synergism of other brokerages operating under the same name, and goodwill associated with the network. Brand loyalty is most associated with franchises, but it can also be created by a single brokerage if a sustained effort is made.

Synergism Competitive advantage can arise from the synergism generated through complementary market activities. A brokerage may tap into several related markets and services (for example, residential resale, residential tenancies, appraisal, and property management). Synergism can be generated by maximizing seller, buyer, and tenant contacts; generating inter-brokerage referrals; capitalizing on diverse cash flows; and developing interrelated market segments for future expansion. A brokerage with sufficient capital may also © 2021 Real Estate Council of Ontario

diversify into property ownership or land development to complement listing or sales activity.

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Lesson 2 | Page 7 of 34

Once you have identified the market area or niche for your brokerage, you will conduct a feasibility study. The feasibility study acts as a more formal investigative tool to assess the viability and desirability of a new brokerage. It is critical to conduct this research before committing resources. Data collected throughout this study helps you, as a broker, make informed decisions to maximize the likelihood of your brokerage’s success.

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Lesson 2 | Page 8 of 34

Feasibility Study The feasibility study should focus on collecting data that can be used to identify the most optimal options for a brokerage. The scope of the feasibility study is influenced by the overall objectives for the brokerage and external influencing factors, such as the current economic and political environment. Since conducting a feasibility study is complex and time-consuming (and could be costly if the decision is made to outsource the work), a broker should only collect and analyze data related to the decisions that they have narrowed down for their brokerage. © 2021 Real Estate Council of Ontario

Example: After completing the initial stages of research, a broker has decided that they want to open a full-service brokerage that specializes in new home sales. They already know that their target demographic will be young families, and they will focus on working with first-time buyers. They have narrowed down their location to either a suburb just outside of AnyCity or the west end of AnyCity. They will now research both of these specific neighborhoods and collect and analyze data specific to their target demographic and focus. The feasibility study usually relies on information that is already available from a variety of sources, such as the local listing board (which a broker would need to be a member of), economic development offices, the municipal office, and the local Chamber of Commerce. Additionally, brokers of record can search Statistics Canada, the Canada Mortgage and Housing Corporation (CMHC), and the Federal Economic Development Agency for information. While these organizations provide a wider perspective of the marketplace at large, brokers of record can use their sites to narrow down information for a specific location. However, these searches may not yield results for smaller communities. Questions to include in a feasibility study may include: • In which trading area should the brokerage be set up? • What is the population count of the trading area under consideration? • What is the specific trading area of interest? • What are the current business realities in the trading area under consideration? (How many transactions have occurred over the past few years, and what are their average prices? How long does the average property stay on the market?) • Who are the competitors in the trading area under consideration? What kind of services do they offer (full, limited, or à la carte)? What are their business premises like? • What type of real estate transactions are the competing brokerages engaged in? What is the average volume of business according to available statistics? © 2021 Real Estate Council of Ontario

• Within the competing brokerages, which brokers or salespersons are completing and negotiating the real estate transactions? What are the number and type of transactions they are engaged in? Knowing this information will help brokers build a recruiting list. Recruiting experienced brokers and salespersons will not only increase their market share, but will also help them in establishing a strong foothold in the marketplace. You will learn more about recruitment methods later. The information gathered in the feasibility study will help identify resources needed to operate a brokerage efficiently. It will also help identify logistical and other business-related problems and solutions, which can contribute to the development of competitive advantages in the marketplace. The feasibility study serves as a solid foundation for developing a business plan. You will learn more about business plans in a later course.

© 2021 Real Estate Council of Ontario

Lesson 2 | Page 9 of 34

A broker has decided to open their own brokerage focused on residential transactions in the north end of the city. What should the broker do next in planning to open their brokerage? There are five options. There are multiple correct answers.

1

Conduct market research in the north end of the city.

2

Identify brokers and salespersons in the north end of the city who have the greatest number of residential transactions in the last year.

3

Identify the services being offered by competitors to consumers and to their brokers and salespersons.

4

Review the volume and number of residential transactions in the neighbouring municipalities.

5

Identify competitors’ brokerage locations and details of what their premises have to offer.

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Lesson 2 | Page 10 of 34

A brokerage’s business model determines the types of services the brokerage will offer. There are three business models that are commonly used: full service, limited service, and à la carte. Choosing your brokerage’s business model requires understanding of the existing models, their key attributes, and their benefits and challenges, as well as the ability to determine the best fit for your new brokerage through a process of elimination.

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Lesson 2 | Page 11 of 34

Choosing a Business Model Selecting an appropriate business model will be largely connected with the broker's experience and vision of the type of brokerage they want to set up. A proper analysis of what models are used by competitors within a specific trading area and how these models are performing could also reveal potential business opportunities. © 2021 Real Estate Council of Ontario

Brokers can access the information available on the local listing boards to study the nature and volume of transactions of competing brokerages for a given period. This will help them understand their market position. Apart from studying the market data for competitors, they can learn about the competitors’ business models by checking their websites. They can corroborate the data related to sales activities with the business models used to identify opportunities and gaps. When selecting a business model for a brokerage, a broker should consider the following questions: • What are the business models being used within the specific trading area? • What are the gaps within the specific trading area that are not being fulfilled by business models currently in use? • Is anything being done poorly by the existing brokerages (potential competitors) that could be improved upon? • What services do they wish to offer to their brokers and salespersons? Regardless of the business model selected, brokerages must meet all of their responsibilities under the Real Estate and Business Brokers Act (REBBA).

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Lesson 2 | Page 12 of 34

Full-Service Business Model In a full-service business model, the brokerage offers a pre-determined service package to consumers. This allows the brokerage to provide end-to-end services, which may include: • Researching properties • Providing opinions to consumers • Listing properties for sale © 2021 Real Estate Council of Ontario

• Taking measurements • Writing interior room descriptions • Taking photos • Advertising properties • Showing properties • Conducting open houses • Following up on leads • Negotiating terms of offers • Preparing agreements of purchase and sale • Completing sales-related documentation A full-service brokerage is often preferred by consumers who do not want to actively engage in the specific activities of a real estate transaction and will rely on the guidance and expertise of the brokerage. For example, a seller client may not want to conduct their own open house, engage with the buyer, prepare their own documentation, and so on. They can outsource the entire transaction to the brokerage, and the brokerage will provide their expertise.

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Lesson 2 | Page 13 of 34

Benefits and Challenges to the Full-Service Business Model Benefits The benefits to the full-service business model are as follows: • A full-service brokerage attracts consumers who value the knowledge and guidance the brokerage offers. • A full-service brokerage is perceived as a one-stop solution for all consumer needs. • A full-service business model may facilitate an increased market share, owing to the wider range of services offered. It is easier for the brokerage to tend to additional consumer needs. For example, a brokerage is employed by a buyer to purchase an investment property. After closing, the buyer hires the brokerage’s services to lease and manage the property. • This model provides more control to the brokerage in detailing the proposed plan of action for each real estate service that is offered. Challenges The challenges to the full-service business model are as follows: • There is a need to recruit brokers and salespersons who have the knowledge and skills to address the varied needs of a larger consumer base. • Ongoing training and support should be provided to brokers and salespersons with varied skills to ensure consistency in the services being offered, which is an additional cost.

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• Additional costs to recruit administrative staff members that have the knowledge and skills required to support the varied services offered by the brokerage are incurred. The brokerage can also contract out these services. • More time, energy, and finances should be invested in distinguishing and developing the services being offered. • There may not be any income when services provided do not result in a complete sale. • It may be more expensive to operate if the brokerage does not recover expenses from the salesperson for signs, advertising, photography, feature sheets, and so on. You will learn more about the recovery of expenses from brokers and salespersons in a later course.

© 2021 Real Estate Council of Ontario

Lesson 2 | Page 14 of 34

Limited Service Business Model A limited service brokerage provides consumers with a base package of services at a reduced price. The services are limited to what the brokerage selects and cannot be adjusted or customized. This business model caters to consumers who feel they are capable of completing parts of a real estate transaction on their own. For example, the brokerage may be responsible for posting the property on the local listing board(s), while the seller may be responsible for everything else, including showing the property, marketing, negotiating offers, and the paperwork. Benefits The benefits to running a limited-service business model are as follows: • A limited service brokerage attracts consumers who think they can do the work on their own and, therefore, allows brokerages to establish a market niche. • This model allows brokerages to develop efficiencies and lower their costs as they focus on fewer services. • It ensures guaranteed income for services that are not based on completion of sale transactions. Challenges The challenges to running a limited-service business model are as follows: • A limited service brokerage may be liable if the information posted by their clients or customers is not verified and is found to be inaccurate. • There is a need to ensure clients or customers understand the limitations of the services being offered so that they can make an informed decision. Any misunderstanding of the limitations could potentially result in a litigation and, thereafter, a damaged reputation. © 2021 Real Estate Council of Ontario

• If the client or customer is not successful in completing the real estate transaction, they may turn to brokerages offering full service.

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Lesson 2 | Page 15 of 34

À-La-Carte Business Model An à-la-carte brokerage offers a number of different services that the consumer can select based on their needs and on their willingness and comfort level to perform certain duties themselves. Commissions and fees are reflective of the effort and risk associated with each selected service. For example, a brokerage may offer a selection of services that include posting listings, providing signage, setting up lockboxes, marketing, limited consultation time for price strategy, and negotiations. A seller may opt to use only some of the brokerage’s services (that is, to list the property and add additional services as per their requirement). In an àla-carte model, the consumer (instead of the brokerage) has control over the services being contracted. It is important to note that regardless of the offering, the brokerage must adhere to and offer services as mandated by the Real Estate and Business Brokers Act (REBBA). Benefits The benefits to running an à-la-carte service business model are as follows: • This model allows brokerages to create a market niche if they identify a gap in the services being offered by their competitors. • It allows flexibility to introduce a new service at any time as an add-on, based on the market demand and trends, with more ease than with other models. • It ensures guaranteed income for services that are not based on completion of the sales transaction. Challenges The challenges to running an à-la-carte service business model are as follows: © 2021 Real Estate Council of Ontario

• This model does not allow a consistent consumer experience due to its dependence on the consumer’s selection of services contracted, as well as their experience. For example, a client has selected several services but opts to take on a certain duty themselves for which they do not have the necessary experience. The client does not perform this duty correctly and is then unhappy with the brokerage as a result of their own misjudgment. • More work is involved with invoicing and recordkeeping due to the variation in needs and selection of services from one client or customer to another. There is no standard format that the brokerage can follow for invoicing. Each invoice needs to be created as per the arrangement agreed upon with the client or customer. • Since the service structure of this type of business model can be misunderstood more often than with other business models, a brokerage should place more significance on performing due diligence with consumers to ensure that they know exactly what they are agreeing to. For example, a broker or salesperson may require the consumer to initial terms of the agreement to ensure they understand them and to document their understanding.

© 2021 Real Estate Council of Ontario

Lesson 2 | Page 16 of 34

A broker has been working for six years with a brokerage offering limited services. The broker wants to open their own brokerage and focus on residential properties. There are already several brokerages focusing on residential properties in the broker’s trading area, most of which are full-service brokerages. Currently, only one à la carte brokerage exists. The broker understands that most home sellers and buyers in the trading area seem to prefer having a brokerage engaged and responsible for the entire transaction. Which business model should the broker consider for their new brokerage? There are three options. There is only one correct answer.

1

Limited service, as the broker has prior experience working in a brokerage that offers limited services

2

Full service, as there is a demand for end-to-end services in the trading area

3

À la carte, as a brokerage in the broker’s trading area has introduced this model

© 2021 Real Estate Council of Ontario

Lesson 2 | Page 17 of 34

In addition to choosing a business model for your brokerage, you will need to select an appropriate ownership type. There are three ownership types (or legal structures): sole proprietorship, partnership, and corporation. Each has distinct characteristics, which have an impact on the taxes paid, amount of paperwork required, personal liability, and ability to raise capital. A broker should seek appropriate professional legal counsel and expert accounting advice when choosing an ownership type. The Real Estate and Business Brokers Act (REBBA) provides for the three ownership types when applying for a brokerage registration. You will learn more about these ownership types, including the registration process for each, later. © 2021 Real Estate Council of Ontario

Lesson 2 | Page 18 of 34

Sole Proprietorship A sole proprietorship is a business owned by one person operating individually or with the assistance of employees. Simply put, the sole proprietorship does not create a legal distinction between the business and its owner. The sole proprietor owns all the assets and is: • Responsible for the debts • Entitled to the profits • Accountable for any losses The following two sections contain information about the benefits and challenges of sole proprietorship.

Benefits A sole proprietorship requires little paperwork to establish and allows the initiation of the registration process to occur relatively quickly. Legal and accounting fees can be noticeably less as compared to other types of business organizations. It is free from many governmental regulations imposed on partnerships and corporations in Ontario. Tax advantages may also exist, depending on personal levels of income. © 2021 Real Estate Council of Ontario

Losses incurred by the sole proprietor relating to business operations can be applied against other personal income. It should also be noted that a sole proprietor can establish a fiscal year end for the business that differs from their personal fiscal year end. This may offer certain tax advantages depending on personal circumstances.

Challenges Unlimited liability of the owner is the primary disadvantage. If the business goes bankrupt, the creditors may sue the owner and seize their personal assets. Furthermore, any legal liability concerning the business is also a personal liability. This risk can be mitigated to some extent through the purchase of liability and related insurance coverage. From a growth perspective, sole proprietorship can be limited by the owner’s capital resources and individual borrowing power. Generally, the sole proprietor structure is not well suited to expanding and larger brokerages.

© 2021 Real Estate Council of Ontario

Lesson 2 | Page 19 of 34

Partnership Partnerships, although rare, have their own specific considerations. Partnerships can be either general or limited. Legally, the partners must clearly demonstrate that they have jointly contributed money, property, effort, expertise, and skills in furthering the partnership. A general partnership under common law exists when two or more individuals or entities pool their personal and financial resources in a joint effort with the view to earn profit. © 2021 Real Estate Council of Ontario

Limited partnerships must be registered under the Limited Partnerships Act and must have at least one general partner. The general partner can be a corporation. The general partner manages the operation and is responsible for the affairs (including debts) of the limited partnership. Limited partners must be passive investors with the general partner handling all administrative and operational issues. For example, a broker opening a new brokerage might select a limited partnership arrangement so they can directly manage the brokerage (general partner), while attracting passive investors (limited partners) to infuse capital into the new venture.

© 2021 Real Estate Council of Ontario

Lesson 2 | Page 20 of 34

Benefits and Challenges of Partnerships A broker should consider the different benefits and challenges of entering a partnership. The following two sections contain information about the benefits and challenges of a partnership.

Benefits Partnerships normally have increased capital available and improved borrowing power, given that they involve two or more persons or entities. A partnership is easy to form and has low start-up costs when compared to a corporation. In a limited partnership, liability is restricted to capital invested. (This is not the case in a general partnership.) A partnership also allows the partners to contribute their skills and knowledge. For example, one partner can be involved with residential sales, another with commercial activities, and so forth. Ownership may be by registrants and/or non-registrants.

© 2021 Real Estate Council of Ontario

Challenges In a general partnership, every partner bears unlimited liability and is liable for all debts of the partnership incurred during their association with that partnership. Every partner is an agent of the partnership and can bind all other partners. Unacceptable business behaviour and incompetence by one or more of the partners can have far-reaching consequences for the remaining partners. Many configurations are possible when structuring a limited partnership, some of which can directly impact the partnership endeavour and ultimately the limited partners.

© 2021 Real Estate Council of Ontario

Lesson 2 | Page 21 of 34

Corporation A corporation is a business entity created by statute law and established by articles of incorporation. Corporations vary from small, privately held operations to large offerings or public companies. A corporation exists with share capital and is regulated provincially under Ontario’s Business Corporations Act. The corporation, unlike the sole proprietorship and partnership, provides a distinction between the business operation and its owners. As a legal entity, the corporation is capable of merging, creating subsidiary companies, and generally operating distinctly and separately from its owners. The following two sections contain information about the benefits and challenges of a corporation.

Benefits Corporations operate as separate legal entities and have reduced risk exposure for the owners. More than one person can be involved in the ownership. This may improve the borrowing power and help to raise more capital. It is possible to incur debts without risking the same exposure as with a sole proprietorship. Shareholders are not responsible for debts of the corporation unless personal guarantees apply. © 2021 Real Estate Council of Ontario

Corporations allow continuity, whereby the corporation continues to exist even when a shareholder dies. Certain tax advantages may also exist for both the corporation and its shareholders.

Challenges Corporations take more time to set up because of the incorporation process. There are more government regulations that affect the corporation. Various expenses are typically incurred at point of incorporation, including incorporation fees, name search fees, and the expense of filing corporate documents. Lending institutions prefer personal guarantees from the shareholders when advancing loans to corporations. Professional fees for the ongoing maintenance of legal and financial records for the corporation are an added expense. A corporation is a more structured operation than a sole proprietorship or partnership, resulting in more paperwork.

© 2021 Real Estate Council of Ontario

Lesson 2 | Page 22 of 34

A broker has decided to open their own brokerage and is now reviewing the distinct characteristics for each ownership type. Which of the following characteristics are true regarding a corporation? There are six options. There are multiple correct answers.

1

Two or more entities pool their resources.

2

The signature of one partner binds all others.

3

A distinction exists between the business operation and its owners.

4

This legal entity is capable of merging and creating a subsidiary.

5

The liability of the owner is unlimited.

6

No separation exists between business income and the personal earnings of the owner.

© 2021 Real Estate Council of Ontario

Lesson 2 | Page 23 of 34

A broker meets with their accountant and lawyer to discuss ownership options for a new brokerage. They are now finalizing their plans in choosing an ownership type. They have limited resources available and want to raise more capital. Even though the broker wants to participate in the ownership of the brokerage, they do not want to incur taxes for all the profit the brokerage makes. The broker has long-term goals and wants to eventually expand and employ more people. Based on their needs, which ownership type would be most suitable for the broker? There are three options. There is only one correct answer.

1

Sole proprietorship, as they want to participate in the ownership

2

Partnership, as they can invite investors and raise more capital

3

Corporation, as it has limited tax liabilities and the best scope for expansion

© 2021 Real Estate Council of Ontario

Lesson 2 | Page 24 of 34

Some brokerages thrive as independent brokerages, while others are more likely to succeed as franchises. Independent brokerages allow brokers to control each decision regarding the brokerage’s establishment – from strategic decisions to the details of the interiors of the office. Independent brokerage owners leverage their own identity and experience to create their own market niche and expand their business. Franchise owners can benefit from the franchisor’s market presence, brand recognition, network, and credibility. As you learned earlier in this module, franchises have become a popular option for brokerages, owing to the innovative methods they offer. To choose the right option when establishing a new brokerage, it is important to understand the nuances of both independent brokerages and franchises, and identify how they complement your professional strengths, weaknesses, and goals. © 2021 Real Estate Council of Ontario

Lesson 2 | Page 25 of 34

Independent versus Franchise Setting up an independent brokerage was the original way of operating a brokerage and is still a popular choice for many brokers. The size of operations for independent brokerages can range from a one-person brokerage to hundreds of brokers and salespersons employed. In subsequent years, brokers contemplating opening a brokerage have also explored the option of purchasing a franchise. When deciding whether to purchase a franchise or establish an independent brokerage, brokers should consider various factors, such as the available budget and operational resources needed. It is a leading practice for a broker to seek advice from a legal expert when reviewing and negotiating a franchise agreement. The following six sections contain information about the key differences between independent brokerages and franchises.

Start-up cost The operating start-up costs for a franchise will likely be similar to an independent brokerage. However, when purchasing a franchise, payment of an initial fee for purchasing the rights is required, and in most cases, a fee on each renewal is also paid. Legal fees may also be applicable as it is a leading practice to obtain independent legal advice on the obligations required by the franchisor. © 2021 Real Estate Council of Ontario

There may be additional costs to integrate the franchisor’s requirements into the franchisee’s business model (for example, corporate identity requirements in advertising and signage standards, modifications to the office layout, purchasing equipment and supplies directly from the franchisor that may be available at a discount elsewhere, and so on). Ongoing costs include renewal fees, as well as monthly assessments for each individual (applicable only for the brokers and salespersons) with the brokerage. There are also performance quotas that vary with the franchise model and can result in a monthly and/or annual cost. Performance quota could be based on the number of brokers and salespersons with the brokerage, sales volume, and/or market share.

© 2021 Real Estate Council of Ontario

Branding and market presence There may be a need for an independent brokerage to develop a brand strategy and long-term plan to meet specific goals. This may require hiring a marketing professional to help position the brokerage in the market, which can be an additional expense. A franchise has an established brand presence and recognition. Franchisee brokerages must comply with the franchisor’s branding guidelines and requirements with respect to signage, brand colours, advertisements, font style, font size, and so on. Complying with these requirements may sometimes carry additional costs, as the franchisor may require the franchisee to use approved suppliers that may cost more.

© 2021 Real Estate Council of Ontario

Autonomy and decision-making An independent brokerage offers more freedom of choice with respect to selecting an office location, the branding material, suppliers, and so on. Without the requirement of approvals, the turnaround time to make decisions is faster. In order to maintain brand integrity, franchisors detail requirements that must be followed by the franchisee. A franchisor may have clauses in the franchise agreement with respect to approval of the business premises and other aspects pertaining to the brokerage (for instance, advertising campaigns and marketing direction). This may increase the time taken to make decisions.

© 2021 Real Estate Council of Ontario

Training An independent brokerage should provide training for their staff (or identify available training programs) to meet all of the brokerage’s needs (to enable consumer protection, safety, sales skills, administration skills, and so on). Most likely, franchisors offer various training programs at the beginning and throughout the association for brokers, salespersons, and administrative staff. This does not relieve the brokerage from providing other required training.

© 2021 Real Estate Council of Ontario

Recruiting There is a need for an independent brokerage to define their own recruiting strategy that aligns with their vision and goal, and to develop their own recruiting materials, which can be costly in terms of both money and time. Recruiting materials may be prepared by the franchisor, and the broker of record may be taught how to use them. The franchisor may also assist the broker of record with recruiting individuals. The franchisee brokerage may find that recruiting is easier when they are aligned with a known brand and when they value tools in exchange for monthly franchise fees.

Operations An independent brokerage operates according to their own requirements. They can decide on the number of brokers and salespersons they wish to employ. Franchisors set out expectations of performance in the franchise agreement, which can include a time period to open the brokerage office, updates to the office premises, a minimum number of brokers and salespersons, and a minimum number of transactions or amount of business volume. © 2021 Real Estate Council of Ontario

The agreement can also include monthly reporting requirements, which would mean extra recordkeeping.

© 2021 Real Estate Council of Ontario

Lesson 2 | Page 26 of 34

The Real Estate and Business Brokers Act (REBBA) Requirements for Franchising The decision to join a franchise will depend on various factors concerning both the brokerage and the franchise company. A broker considering franchising must be aware of the REBBA requirements: • As with an independent brokerage, a franchisee must qualify for registration as a stand-alone brokerage. Each office must be identified as being independently owned and operated in all advertising.

© 2021 Real Estate Council of Ontario

• As with an independent brokerage, there must be a broker of record for the individual franchise who is designated as such under REBBA. A salesperson cannot act as a broker of record for a franchise or a corporation that owns a franchise. • As with an independent brokerage, all records and trust accounts of the franchisee brokerage must be maintained in Ontario. • The franchisee’s name must include the franchisor’s corporation name (for example, [name of franchisor] ABC Realty Inc.). • The Registrar must review master franchise agreements of franchisors, as well as franchisee agreements, before a franchisor can operate in Ontario. • The Registrar must receive – in addition to copies of all signed individual franchise agreements – any amendments, side agreements, or guarantees relating to such agreements. The Registrar reserves the right to review any amendments prior to implementation. If the master franchise agreement is revised, a copy of the revised agreement must be provided to the Office of the Registrar for review and approval prior to being implemented. Knowledge of the REBBA requirements for franchising saves brokerage’s time and money with the application for registration, as this helps to avoid errors and delay, which can impede the start date of a new brokerage. Remember that as a leading practice, a broker of record should seek advice from a legal professional when considering a franchise.

© 2021 Real Estate Council of Ontario

Lesson 2 | Page 27 of 34

Purchasing a Franchise: Benefits and Challenges Brokers should analyze the benefits and challenges of purchasing a franchise to ensure the feasibility of their choice and its potential advantages to their new brokerage. The following two sections contain information about the different benefits and challenges of purchasing a franchise.

Benefits Purchasing a franchise provides a chance to enter the real estate market with a well-established name. It also provides the opportunity for local, national, and international brand recognition and market visibility. A recognized brand may help attract more clients or customers without the need for the brokerage to spend significant time and resources. Franchisors may provide support to franchisees in the form of operating systems, training (for the broker of record, administrative staff, brokers, or salespersons), and development of educational programs, promotional materials, and ad campaigns.

© 2021 Real Estate Council of Ontario

Franchisors may also provide assistance with the valuation process. This could save the broker money while acquiring and disposing off an existing brokerage. The franchisor head office may negotiate better terms for bulk buying of software systems, equipment, service providers, and so on. Franchise rights could provide protection of a trading area by not allowing others to open in a specific trading area. The franchise network offers the opportunity to develop additional affiliations and alliances. The franchisor can support with national and/or international lead generation. They may also support in recruiting brokers or salespersons who are attracted to the brand image. The franchisor is often in regular contact with government, trade associations, and regulators. This can help franchisee brokerages in being up to date with current regulatory requirements.

© 2021 Real Estate Council of Ontario

Challenges The franchisors require an initial cost for purchasing franchise rights. (The cost is higher for existing brokerages when combined with conversion costs.) They also require renewal fees on each renewal, in most cases. Franchisees need to pay for ongoing royalties or fees for ongoing services, administration, and/or advertising. Franchisee brokerages are reliant upon the franchisor’s ability to provide promised services and products, which are current and compliant. Franchisees rely on the franchisor’s ability to attract and retain other franchisees within the network. Franchisees must be compliant with the franchisor’s requirements as detailed in the franchise agreement.

© 2021 Real Estate Council of Ontario

Lesson 2 | Page 28 of 34

A newly registered broker plans to open a new brokerage in AnyCity. They own a commercial building on Main Street and want to use a portion of the building for the brokerage’s operation. The broker is attracted to a national franchise organization and has arranged a meeting with a franchise representative to discuss the purchase of the franchise. Which questions are appropriate for the broker to ask in the meeting to facilitate their decision whether or not to buy the franchise? There are four options. There are multiple correct answers.

1

What are the franchise fees?

2

Has the master franchise agreement been reviewed by the Registrar?

3

Can the franchisor make their financial statements for the past three years available for review?

4

What trading area is available with the franchisor?

© 2021 Real Estate Council of Ontario

Lesson 2 | Page 29 of 34

The location of a brokerage can influence a brokerage’s ability to market itself, the competition it faces, and the total cost of operation. Having the right location can also attract talented potential staff and consumers of the brokerage’s services.

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Lesson 2 | Page 30 of 34

Considerations for Choosing an Office Location The process of selecting a brokerage’s location typically involves analyzing the population, real estate market activity, and competition within the area. The location should be desirable enough to attract staff and eventually to best serve the brokerage’s clients and customers.

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A sub-optimal location might result in fewer opportunities to market the brokerage’s services. However, the purchase price for a prime location may be too heavy a burden for a newly establishing brokerage. While a main floor, storefront location has certain benefits (high visibility, easy access, and so on), the marketing advantages may be overshadowed by higher operating costs. Key factors to consider when choosing an office location include: • Affordability: Is owning the space or leasing it within budget? Is there adequate square footage at a reasonable cost? • Accessibility: How far is the location from the trading area? Does it have access to public transit? Does it comply with the Accessibility for Ontario with Disabilities Act? Is there ease of vehicular and pedestrian access? Is it located on the ground floor or upper floors? How is the overall visibility of the location? • Parking facilities: Is there enough parking space or access to a nearby parking area? • Signage exposure: Are there enough opportunities to use signs to increase visibility and name recognition? • Neighbourhood: What is the general condition of the neighbourhood? What are the overall traffic patterns? Is third-party approval required for opening a brokerage in this location? What are the nearby complementary retail and service establishments? • Competitor presence: How many brokerages are operating in the area? • Available space: Is there a reasonable possibility of future expansion? Keep in mind that this is not an exhaustive list. Considerations will vary depending on the broker’s situation and their vision and goals for the brokerage.

© 2021 Real Estate Council of Ontario

Lesson 2 | Page 31 of 34

An appropriate office layout plays a key role in maximizing the potential of the brokerage, while staying within budget. Decisions should also be made regarding the type of office layout (for example, separate offices, cubicles, dividers, open areas, or combinations thereof). You should typically seek a balance between adequate space for employees, sufficient privacy, administrative needs, and cost efficiencies. Ultimate design also depends on the brokerage vision and anticipated requirements for both employees and consumers. Of course, these decisions are also tempered by what competing brokerages are offering in the immediate trading area, the business model selected, and the budget that is available. © 2021 Real Estate Council of Ontario

Lesson 2 | Page 32 of 34

Office Layouts: Types When opening a brokerage in a new space, brokers will have the opportunity to design the layout of the brokerage to align with their anticipated needs, vision, and goals. They should understand the needs of brokers, salespersons, and administration staff and opt for a layout that best meets these requirements and maximizes the potential of the space. Some of the available options are private offices, open spaces, shared offices, and co-working spaces.

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As you learned earlier in this module, open-concept brokerage layouts are gaining in popularity. However, many larger brokerages opt for some level of diversity by offering brokers and salespersons the choice of individual offices, shared space (double, triple, or quad), or common “bull pen” areas that provide an open, shared desk space. Different brokerages may share office space and support staff (such as administrative staff and receptionists), but as you learned earlier about sub-franchises, the broker of record must take steps to establish separate identities to comply with the Real Estate and Business Brokers Act (REBBA). They must ensure the following: • Separate phone lines for each brokerage • Advertising that reflects each brokerage as a separate, distinct brokerage • Records of each respective brokerage kept physically separate, secure, and confidential • Physical barrier (not necessarily a wall) between brokerage offices Additionally, RECO may request a diagram of a shared office to check compliance. At no time can sharing of registered brokers or salespersons occur.

© 2021 Real Estate Council of Ontario

Lesson 2 | Page 33 of 34

Office Layouts: Considerations Key considerations when determining the internal configuration of a new brokerage include: • Budget: Evaluate the costs of providing certain facilities against the operating costs and impact of such provisions to avoid spending money due to frequent renovation and/or relocation. • Clientele: Consider what clientele the brokerage wants to attract and serve. Demographics of the client base will be the key determining factor. © 2021 Real Estate Council of Ontario

• Profile of salespersons: Consider the salespersons the brokerage is trying to attract and hire to get the job done. Younger salespersons might want a more open, shared workspace with a lounge-like space that has a high-top or standing workspace, while older salespersons may want private offices, and so on. However, be cautious about stereotyping individuals. • Size of the brokerage: Take into consideration the number of brokers, salespersons, and administrative staff the brokerage is planning to hire to determine the space required. The space that is available will influence the possibilities that exist. For example, if the space is limited, it might not be possible to have multiple private offices. It may mean that an open concept is all that can be made available to salespersons at this location.

© 2021 Real Estate Council of Ontario

Lesson 2 | Page 34 of 34

Congratulations, you have completed the lesson! Completion of this lesson has enabled you to: • Describe considerations for opening a new brokerage • Identify the aspects to consider when conducting a feasibility study for opening a new brokerage • Determine the considerations for each ownership type when opening a new brokerage • Identify considerations for purchasing a franchise when opening a new brokerage • Identify considerations for choosing a location for a new brokerage • Determine the optimal office layout for a new brokerage location There are five sections on this page with a summary of the key topics that were discussed in this lesson.

Considerations for conducting preliminary research and a feasibility study

During the preliminary research to study the feasibility of a brokerage, it is important to conduct an in-depth analysis of various factors to ensure its potential future viability. As a broker, you should conduct a feasibility study to determine your new brokerage’s likelihood of being successful. This will help you to focus efforts where opportunities for success are the highest.

Considerations for choosing a business model

A business model defines how a new brokerage delivers services and attains value. There are three types of business models: full service, limited service, and à la carte. As a broker, you should choose the right business model to support growth based on the brokerage’s vision, core values, and strategic goals. © 2021 Real Estate Council of Ontario

Ownership types

The Real Estate and Business Brokers Act (REBBA) allows three acceptable forms of ownership for a real estate brokerage registration: sole proprietorship, partnership, and corporation. Each type has its benefits and challenges. While choosing an ownership type, as a broker, you should analyze distinct characteristics of each form of ownership based on your brokerage’s goals and vision. Advice from thirdparty professionals (such as accountants and lawyers) should be sought to help make an informed decision.

Considerations for purchasing a franchise

When considering whether to purchase a franchise, as a broker, you should ensure that the franchise aligns with your brokerage’s vision and goals and is a good investment with opportunity for returns. As a broker, you can affiliate with a franchise to make use of its brand exposure and reputation, but this decision should be made after carefully assessing the benefits and challenges of purchasing a franchise. A critical comparison of available options, which considers budget, costs, and time, is important when considering the purchase of a franchise.

Considerations for choosing an appropriate office layout and office location

Location plays a key role in attracting and hiring talented potential staff to the brokerage and in servicing consumers. Additional factors to take into consideration when choosing office location include parking facilities, ease of access, neighbourhood, proximity to the trading area, and presence of competitors. Office layout is crucial for efficient and smooth functioning of a brokerage. While choosing an office layout, as a broker, you should consider the anticipated number of employees, the brokerage’s clientele, and the space available. Budget plays a major role in making decisions about location and layout.

© 2021 Real Estate Council of Ontario

Lesson 3 | Page 1 of 13

Lesson 3: Considerations for Acquiring an Existing Brokerage This lesson discusses some of the key considerations and various methods of valuation when acquiring an existing brokerage.

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Lesson 3 | Page 2 of 13

Acquisition of an existing brokerage can be appealing, given the opportunity to gain immediate market presence within a defined trading area. Deciding whether to open a new brokerage or acquire an existing brokerage requires a comprehensive cost and benefit analysis. The decision to acquire an existing brokerage is dependent upon availability and if the cost to purchase is more reasonable than opening a brand-new brokerage. An acquisition can be particularly appealing if you anticipate difficulty in recruiting capable brokers and salespersons, are concerned about the lack of properly trained administrative staff, have identified problems in securing a suitable location, and/or want to acquire an existing franchise trading area that would otherwise not be available. © 2021 Real Estate Council of Ontario

In this lesson, you will learn about the key aspects to consider when acquiring an existing brokerage and the methods of valuation. This lesson will also discuss the third-party professionals you can consult to identify areas of concern when acquiring an existing brokerage. Upon completion of this lesson, you will be able to: • Identify considerations for acquiring an existing brokerage • Identify key factors to consider when determining the valuation of an existing brokerage Throughout this lesson, you will participate in decision points to test your knowledge on the topics presented.

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Lesson 3 | Page 3 of 13

Acquiring an existing brokerage that aligns with your vision and goals entails a number of legal, business, human resource, intellectual property, and finance-related considerations. When considering acquiring a brokerage, you should take into account several factors, including its reputation, growth potential, and the state of its current staff.

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Lesson 3 | Page 4 of 13

Acquiring an Existing Brokerage Acquiring an Existing Brokerage Key factors to consider when contemplating acquiring a brokerage may include: • Reputation: o What is the reputation of the brokerage in the marketplace? © 2021 Real Estate Council of Ontario

o Are there any ongoing legal matters that might impact the brokerage in the future? • Services: o What services does the brokerage offer to sellers and buyers, as well as to their brokers and salespersons? • Growth: o Has there been growth year-over-year, or has the growth declined or plateaued? • Staff: o How many brokers, salespersons, and administrative staff members work for the brokerage? o Do they align with the desired skillset, income, and strengths required? o How long have they been in the industry? o Are the individuals nearing retirement from the business? o What are the costs of retaining the staff? o Is severance applicable? o Are there any pending RECO insurance claims, discipline or professional standards cases, and/or legal actions against the staff? • Market share: o Has the market share increased or decreased over recent years? o What factors have contributed to this? • Client database: o Does the brokerage have a viable database of former clients? • Office location: © 2021 Real Estate Council of Ontario

o Is the existing location beneficial to the broker planning on acquiring it? (If the office is in a great location, the broker may be willing to overlook some of the negative factors. A brokerage in a busy location that assures good visibility, and a stream of potential clients or customers would be a motivating factor.) • Assets and liabilities: o What are the assets and liabilities for the brokerage under consideration? o Are any assets leased? o Are the facilities and business processes dated? o Can the acquiring broker take advantage of existing equipment, leases, and so on? o What is motivating the existing broker to sell? o Are there any underlying issues with the brokerage or other factors that may be difficult to overcome? • Lease: o Is the office space owned or leased? o If owned and not part of the sale, can it be leased? If leased, can there be an extension or renewal? o Is the lease rate competitive with the market and assignable? • Purchases: o How can it be purchased? o Is it an asset purchase or a share purchase? (You will learn about share purchases and asset purchases later in this module.) o If the brokerage is part of a franchise, will the purchase require transfer costs from the seller to the buyer? (For example, a transfer cost can be an additional fee the buyer has to pay the franchisor.) © 2021 Real Estate Council of Ontario

o Are there any assignment obligations, and if so, what are they? (For example, the buyer may be obligated to sign the current franchise agreement, which may be different from the seller’s existing agreement with the franchisor.) Note: If the decision is made to acquire the brokerage, acquiring brokers must comply with any “conditions of employment” issued by RECO for the brokers and salespersons retained.

© 2021 Real Estate Council of Ontario

Lesson 3 | Page 5 of 13

Share versus Asset Purchase Brokerages (as is the case with other businesses) can be acquired through either a share purchase or the purchase of assets. The decision as to which route to take is critical, as the legal distinction between a share sale and an asset sale impacts, among other things, the tax position of both the seller and the buyer. Brokers should consult with third-party professionals when making this decision.

© 2021 Real Estate Council of Ontario

Share purchases: In a share purchase, the buyer assumes full ownership but also takes on the brokerage’s obligations and liabilities (including tax considerations) unless otherwise negotiated. Liabilities could include indebtedness for existing loans, contractual obligations (lease arrangements and equipment maintenance contracts), and responsibility for accounts payable. The buyer may discover that the brokerage is subject to underestimated amounts or unknown liabilities, such as employee claims (severance obligations), legal liabilities, or environmental responsibilities (for example, contamination of the property and continued obligations to correct it), which now rest with the new owner of the shares. In this type of transaction, the seller sells their shares in the brokerage and, in doing so, completely divests themselves of any further interest in the brokerage, unless otherwise negotiated. The buyer acquires a brokerage with an established credit rating, any leases or other contractual arrangements that are already in place, all internal procedures and documentation, business numbers, and regulatory reporting procedures (for example, Canada Revenue Agency remittances). Furthermore, the employees’ positions are not affected, given that the employing brokerage has not effectively changed. Asset purchases: With an asset purchase arrangement, the buyer can negotiate precisely what is being acquired and more effectively eliminate business risks, underlying tax problems, or other liabilities that could flow from the seller’s business. Furthermore, if the brokerage has been on a downward swing, the buyer can start up with no history or problems associated with the previous operation. Conveyancing costs (that is, costs associated with transferring ownership) related to an asset purchase are usually higher given more complex valuations and negotiations surrounding specific assets. Also, if land is involved, the transfer can result in additional costs (that is, land transfer tax) that would otherwise be minimized in a straight share sale.

© 2021 Real Estate Council of Ontario

Lesson 3 | Page 6 of 13

When assessing the value of an existing brokerage, it is important that you, as a broker, have a list of questions to access as many details as possible to assess whether it makes financial sense to acquire an existing brokerage. Valuation of all aspects of an existing brokerage is critical in making an informed decision. Each aspect of an existing brokerage will likely impact the productivity and profitability of the brokerage. Without due diligence, you can end up overpaying and be left burdened with unnecessary debt. There are different methods of valuation used in cases of share and asset purchases: net operating income, per broker or salesperson, and asset analysis. You will learn about methods of valuation later in this lesson. © 2021 Real Estate Council of Ontario

Lesson 3 | Page 7 of 13

Considerations for Valuating an Existing Brokerage When acquiring an existing brokerage, it is important for the broker to evaluate the value of the property, meaning the real property (the land and improvements to it), chattels, and staff. Some of these considerations are similar to those regarding whether or not to acquire a brokerage. However, they focus primarily on the monetary facets. Aspects that require additional consideration when performing brokerage valuation are as follows:

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• Property: If leased (and the lease was entered into some time ago), a broker could take advantage of more economical rental rates (in case the economy is in a downturn). They should consider the lease term and any renewal obligations. • Assets: Equipment that is already in place at the brokerage can most likely be purchased at a lower price than when purchasing new. For leased equipment, a broker could take advantage of earlier lease rates and terms for the remaining term of lease and possible favourable buyouts. They should further consider the lease term and any renewal obligations. • People: A broker should consider the skillsets, experience, and reputations of the brokers, salespersons, and administrative staff to decide whether to retain them. Retaining existing brokers and salespersons rather than recruiting a new staff may provide time for the broker to focus on other aspects of the business. • Seller financing: The seller financing the acquisition of the brokerage could be advantageous to both the selling broker, as well as the acquiring broker, as it could mean an income stream for the selling broker for several years. The decision about seller financing often comes with higher price expectations but can be used to mediate the offset of disclosed or unexpected liabilities. • Continuity of current owner or management: If a condition of the acquisition includes that the existing owner remains in a management position with the brokerage for a period of time, it can create a more seamless transition. Business would continue as usual for the brokers, salespersons, and administrative staff being retained. It is highly recommended that a broker consults third-party professionals who specialize in real estate brokerages (such as business valuators, accountants, or lawyers) when making the decision of whether or not to acquire a brokerage. These professionals may be able to identify areas of concern that can impact this decision.

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Lesson 3 | Page 8 of 13

Valuation by Net Operating Income In the case of a share purchase, a brokerage’s valuation can be estimated by using a method that factors in earnings before interest, taxes, depreciation, and amortization. The buyer, when provided income statements for the brokerage, can reconstruct these statements using a process called normalization to arrive at adjusted figures based on acceptable appraisal procedures. The resulting adjusted net operating income can then be capitalized to arrive at a value. The typical capitalization rate in the current marketplace is 30 to 35 per cent.

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While this approach appears straightforward, a key challenge involves establishing a realistic cap rate based on sales of comparable brokerages, which are often difficult to obtain. Additionally, even a somewhat minor variation in the cap rate can significantly impact the value estimate. For example, if the net operating income was $100,000 using a cap rate of 30 per cent, the valuation would be $333,333. If using a cap rate of 35 per cent, the valuation would be $285,714. The terms of the agreement normally establish a cash payment between one third and one half of the purchase price upon closing. The remainder is paid out in instalments over the next two to three years. If the seller wants a cash payout on closing, this can result in a discount of up to 25 per cent of the purchase price.

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Lesson 3 | Page 9 of 13

Valuation Per Broker or Salesperson Brokerages may also be valued on a per broker or salesperson basis when a buyer is interested in retaining the existing staff. In such cases, the final price is based on each individual’s past earning history, experience level, contractual arrangement with the brokerage, and current listing inventory. © 2021 Real Estate Council of Ontario

Fundamentally, the amount earned by the brokerage per broker or salesperson will influence the value of each individual. The value is then paid through instalments over time with provisions for adjustment if the salesperson leaves or if performance drops. Essentially, this arrangement is a variation on the common earn-out strategy used in many business sales (that is, a series of payments based on ongoing performance of the brokerage business). In this instance, the price paid per broker or salesperson will be pro-rated in case of early departures, and the full price is paid if the individual is retained for a specific period. Normally, a portion of the money is paid outright in cash with the remaining balance being paid out quarterly based on production. Often, the sale agreement may include a provision that the former owner remain with the brokerage for a specific period to promote higher retention levels and minimize transition issues. This is also commonly the case when the owner’s contribution to revenue is significant. The former owner would also typically be subject to a non-competition clause and a non-solicitation clause, as part of the terms of their agreement.

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Lesson 3 | Page 10 of 13

Valuation by Asset Analysis In an asset sale, each identified asset (for example, inventory, land, and tangible or intangible assets) is individually scrutinized by the buyer and then negotiated to arrive at a value. No specific rules apply, other than the assumption that the buyer typically seeks the lowest price and the seller the highest. Some assets require special attention, such as:

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• A lease may represent value over and above the rental amount being paid, which may factor into the seller price. The added value accrues, given the difference between lease paid and actual value of the space being occupied. For example, prime leasing space may be scarce, and the buyer would otherwise have to pay a premium rate to closely duplicate the existing premises within the desired trading area. The reverse of this is also true; a buyer may be able to replicate the existing premises within the desired trading area at a lower price. • Value for the real property is a consideration based on the market value. Most office equipment, office inventory items, and miscellaneous furniture are negotiated at or near depreciated value. • Value for existing listing inventory may also be a consideration in asset purchase negotiations. The value would be dependent on the ability to assign this inventory to the new broker of record, its potential value (that is, number of listings within five per cent of market value), and the brokerage’s track record on the conversion of active listings into sales. The listing inventory may also be affected by broker or salesperson retention and the current owner’s policy with respect to retaining listings when a broker or salesperson changes offices. • Value also arises from goodwill, which represents additional money that may be realized over and above asset values. Goodwill is an intangible asset and difficult to assign a monetary value. Technically, it represents the amount by which total value paid exceeds the value of assets actually acquired. Goodwill can arise from such things as a brokerage’s significant market share, a well-known image, an experienced sales force, and/or an exemplary credit rating.

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Lesson 3 | Page 11 of 13

A broker learns of an opportunity to purchase an existing brokerage in their trading area. The brokerage operates in a leased space in a neighbourhood mall and currently has 12 brokers and salespersons. The current broker of record has registered the brokerage as a member of the local business association. This has helped the brokerage attract clients and customers in the marketplace. The brokerage has experienced a fall in market share, dipping from fourth position to seventh in the last two years. What further enquiries should the broker make when considering acquiring the brokerage? There are four options. There are multiple correct answers.

1

Reasons for the decline in the brokerage’s market share

2

Real-estate industry experience of the existing brokerage’s salespersons

3

Number of years the brokerage has been in operation

4

Current lease of the office space

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Lesson 3 | Page 12 of 13

A broker has decided to acquire an existing brokerage and wants to retain the current staff. Which methods of valuation would be suitable? There are three options. There are multiple correct answers.

1

Net operating income

2

Per broker or salesperson

3

Asset analysis

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Lesson 3 | Page 13 of 13

Congratulations, you have completed the lesson! Completion of this lesson has enabled you to: • Identify considerations for acquiring an existing brokerage • Identify key factors to consider when determining the valuation of an existing brokerage There are three sections on this page with a summary of the key topics that were discussed in this lesson.

Considerations for acquiring an existing brokerage

You should consider various factors when analyzing the feasibility of acquiring an existing brokerage, including the reputation of the brokerage, services it provides, its business growth, and the number of employees in the brokerage.

Aspects to consider when Before acquiring an existing brokerage, you should be sure to understand exactly the value of what you are acquiring in terms of the assets that are available and the estimating brokerage services being offered by the brokerage. Some aspects to consider during valuation valuation include the property type, assets, current staff, seller financing, and continuity of the current owner or management.

Methods for estimating brokerage valuation

Methods of estimating valuation of an existing brokerage include net operating income, per registrant analysis, and analyzing assets. Net operating income: The buyer reconstructs the income statements to arrive at adjusted figures. This figure is then capitalized to arrive at a purchase value. One of the major challenges in this method of valuation is to establish a realistic cap rate © 2021 Real Estate Council of Ontario

based on the income statement of the existing brokerage, which is often difficult to obtain. Per registrant: The final purchase price is based on the past earning history, experience level, contractual arrangement, and current listing inventory of each registrant employed with the existing brokerage. The final price can be paid in a series of instalments over time and with provisions for adjustment if the salesperson leaves or if performance drops. An advantage of this method of valuation is that the buyer will be required to pay the full price only if the registrants are retained for a pre-decided period. Asset sale: Each identified asset is individually scrutinized by the buyer and then negotiated to arrive at value. This method of valuation is preferred when the buyer is interested in acquiring the tangible and intangible assets of the existing brokerage, including the office equipment, lease, and inventory items.

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Lesson 4 | Page 1 of 11

Lesson 4: Summary Practice Activities This lesson provides a series of activities that will test your knowledge on the entire module.

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Lesson 4 | Page 2 of 11

This lesson provides summary decision points that will test your understanding of key considerations when opening or acquiring a new brokerage. Throughout this lesson, you will participate in decision points to test your knowledge on the topics presented.

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Lesson 4 | Page 3 of 11

Scenario 1: Zoey is currently registered as a broker with a full-service brokerage, ABC Real Estate Inc., and is contemplating opening her own brokerage. She has been quite successful in her 10-year career as a salesperson and boasts a loyal clientele. While she has sold various property types within the city, her primary focus has been on new and resale condominiums. Her strength lies in sales, but her administrative and managerial skills have never been tested. So far, she has operated with a three-person team (including herself) at ABC Real Estate Inc. and has the commitment of the other two team members to move with her to her new brokerage. She would like to attract more brokers and salespersons to her brokerage and discusses her plans with three salespersons from competing brokerages. Over dinner, they express their interest in joining her new brokerage if she offers added business incentives beyond a 95/5 commission split with the brokerage. Zoey has about $185,000 in cash reserves. Her spouse encourages her to start out small with a home office, confine her plans to the existing team, and consider expansion as needed. She is content with a low-key start-up but worries that the brokerage’s momentum in the marketplace could be lost.

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Lesson 4 | Page 4 of 11

Scenario 1: Question 1 of 3 Which statement regarding planning for her new brokerage holds true for Zoey? There are three options. There is only one correct answer. 1

Zoey’s clientele from her contact list can help her attract business to her new brokerage.

2

Deciding to concentrate on new and resale condominiums would be optimal for Zoey due to her experience.

3

Given Zoey and her team members’ experience, it would be a good idea to open a full-service brokerage.

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Lesson 4 | Page 5 of 11

Scenario 1: Question 2 of 3 When studying the market conditions in the city, Zoey notices that there is a steady increase in market activity for residential condominium units in the downtown core. She wants to capitalize on this opportunity by targeting this trading area. Which office locations would suit Zoey’s needs? There are five options. There are multiple correct answers.

1

A leased space on the main floor of a two-storey building in the downtown core of the city. It is within budget and is well-connected with the local transit system. It also has four dedicated parking spaces in front of the building for the associated rental space and a municipal parking lot that is one block away.

2

A leased space on the second floor in a three-storey building in the downtown core. The building was originally built in 1957 for doctors’ offices. The space is available at a low price. The building does not have an elevator but has adequate parking spaces behind the building.

3

A leased space in a newly constructed commercial building in SouthCity, 30 km away from the downtown core. The office space is located on the first floor and is available at a much lower cost than other options in the downtown core. There is a large parking lot at the front of the building.

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4

A leased space in a three-storey, 10-year-old commercial building in the downtown core. The space is on the second floor and is a little over Zoey’s budget. The building has adequate parking spaces and is in the vicinity of some newly constructed condominiums.

5

Zoey lives in a detached home in a residential subdivision 10 km from the downtown core. She has a home office with internet access. The living room can be used for meetings. Her driveway allows two vehicles to be parked side by side.

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Lesson 4 | Page 6 of 11

Scenario 1: Question 3 of 3 Given Zoey’s circumstances, which ownership type would be best for her new brokerage? There are three options. There is only one correct answer.

1

Sole proprietorship, as Zoey has been trading for 10 years and can independently capitalize on her reputation

2

Partnership, as this ownership type will allow Zoey to raise more capital

3

Corporation, as it provides a distinction between the business operation and its owner and will also allow Zoey to raise more capital

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Lesson 4 | Page 7 of 11

Scenario 2: Kevin is a 36-year old broker, working with XYZ Realty Inc. in AnyCity. In his nine-year career in real estate, Kevin has been successful with people in his age group and has built a loyal clientele. He plans to open his own brokerage and conducts a feasibility study. Kevin finds that there is an increase in residential transactions in the north end of AnyCity in the demographic of 40 to 65-year-old people. He wants to capitalize on this opportunity. He has identified three brokerages in the area that collectively capture more than 60 per cent of the market share. The details of the brokerages are as follows: © 2021 Real Estate Council of Ontario

Brokerage A Market Share: 28% Independent or Franchise: Franchise 1 Number of Brokers or salespersons: 23 Brokerage B Market Share: 20% Independent or Franchise: Independent Number of Brokers or salespersons: 18 Brokerage C Market Share: 14% Independent or Franchise: Franchise 2 Number of Brokers or salespersons: 10 Kevin is also aware of a reputed international franchise, Franchise 3, that has established a brand name in selling luxury homes in neighbouring cities. However, they do not have a presence in AnyCity yet.

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Lesson 4 | Page 8 of 11

Scenario 2: Question 1 of 3 Following are the details of brokerages A, B, and C: Brokerage A Market Share: 28% Independent or Franchise: Franchise 1 Number of Brokers or salespersons: 23 Brokerage B Market Share: 20% Independent or Franchise: Independent Number of Brokers or salespersons: 18 Brokerage C Market Share: 14% Independent or Franchise: Franchise 2 Number of Brokers or salespersons: 10 © 2021 Real Estate Council of Ontario

Based on the results of his feasibility study, what should Kevin consider before opening his own brokerage to target the north end? There are three options. There is only one correct answer.

1

Kevin should be wary of the fact that there are already three brokerages in the north end, which capture more than 60 per cent of the market share.

2

There are 51 brokers and salespersons employed with the three competing brokerages, who Kevin could potentially recruit.

3

Kevin can leverage the fact that the clientele from his contact list are approaching their 40s.

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Lesson 4 | Page 9 of 11

Scenario 2: Question 2 of 3 Following are the details of brokerages A, B, and C: Brokerage A Market Share: 28% Independent or Franchise: Franchise 1 Number of Brokers or salespersons: 23 Brokerage B Market Share: 20% Independent or Franchise: Independent Number of Brokers or salespersons: 18 Brokerage C Market Share: 14% Independent or Franchise: Franchise 2 Number of Brokers or salespersons: 10 © 2021 Real Estate Council of Ontario

Kevin has an opportunity to buy Brokerage C. Franchise 2’s brokerage office is located in a leased premises on Main Street, AnyCity. The brokerage was established five years ago by Rothman, who is the broker of record and owner of the franchise. It was the top ranked brokerage in the trading area but suffered a fall in its market share and now occupies the third position in the area. Some of the salespersons hired by Rothman have recently left the brokerage to join the two competing brokerages. Based on these findings, what further research should Kevin conduct to make an informed decision about whether or not to purchase Franchise 2? WHILE NAVIGATING THROUGH THE ONLINE MODULE, CLICK THE EXPERT RESPONSE BUTTON TO VIEW THEIR ANSWER.

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Lesson 4 | Page 10 of 11

Scenario 2: Question 3 of 3 Kevin is considering opening a Franchise 3 franchise for his new brokerage. Franchise 3 is a reputed international franchise that has established a brand name in selling luxury homes. Currently, Franchise 3 does not have a presence in AnyCity. Kevin researches AnyCity’s specific market details and discovers the following: • There were 2,031 properties sold in AnyCity over the past twelve months. • Of these, 29 met Franchise 3’s luxury criteria (2.5 times the average sale price in AnyCity). • Of these, 611 sold within the average price range of $400,000 to $500,000. • The average sale price for a home in AnyCity is $450,000. • The demographic of people selling and buying luxury homes in AnyCity is age 50 and above. Based on Kevin’s findings, would acquiring a Franchise 3 franchise for AnyCity be a sustainable option for him? Why or why not? There are three options. There is only one correct answer. © 2021 Real Estate Council of Ontario

1

Yes; since Franchise 3 does not yet have a presence in AnyCity, Kevin would have the exclusivity of being the only brokerage associated with Franchise 3’s luxury brand.

2

Yes; although there are fewer luxury homes in AnyCity, the total commission earned would be much higher than on an average sale price property, making this a more lucrative option for Kevin’s brokerage.

3

No; the limited number of transactions on luxury properties in AnyCity would not be sustainable compared to the number of average sale price properties.

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Lesson 4 | Page 11 of 11

Congratulations, you have completed the lesson!

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Module Summary | Page 1 of 3

Module Summary This lesson contains a summary of the entire module.

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Module Summary | Page 2 of 3

Congratulations, you have completed this module!

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Module Summary | Page 3 of 3

There are three sections on this page with a summary of the key topics that were discussed in this module.

Brokerage Landscape in Ontario

When establishing a new brokerage, knowledge of the existing landscape, potential growth options, and recent trends in the real estate industry will help you, as a broker, make important decisions related to brokerage operations. It is important to stay updated with the prevailing trends to ensure growth. The real estate industry is ever-changing and has observed several recent advancements. Making use of new technology and implementing and adapting to new industry trends will help you to maximize your brokerage’s potential. You should study the market and the target population to identify areas of the brokerage that need improvement or new services that align with your strengths and brokerage’s vision. Completion of this lesson has enabled you to: • Identify the current state of the real estate industry

Considerations for Opening a New Brokerage

Opening a new brokerage is a huge investment. Preliminary research and a feasibility study should be conducted to assess the possibility of a brokerage’s success. Based on the goals for your brokerage’s operation, you can choose an appropriate business model: full service, limited, or à la carte. Furthermore, you should select an appropriate ownership type (that is, sole proprietorship, partnership, or corporation) based on your resources and plan. It is important to evaluate the benefits and challenges of each of these ownership types when making this decision. When deliberating whether to purchase a franchise, as a broker, you should consider various factors, such as the available budget, costs, and operational resources, which are key to any real estate business. Additionally, you should consider brand recognition, support, and the business model, all of which will impact the establishment of a franchise. © 2021 Real Estate Council of Ontario

You should also identify an appropriate office location and layout for your brokerage. You should base this decision on factors such as budget, space required for the brokerage’s needs, the trading area being serviced, and the target consumer base. Completion of this lesson has enabled you to: • Describe considerations for opening a new brokerage • Identify the aspects to consider when conducting a feasibility study for opening a new brokerage • Identify the type of business model to use when opening a new brokerage • Determine the ownership type when opening a new brokerage • Identify considerations for purchasing a franchise when opening a new brokerage • Identify considerations for choosing a location for a new brokerage • Determine the optimal office layout for a new brokerage location

Considerations for Acquiring an Existing Brokerage

When planning to open your own brokerage, you can also consider acquiring an existing brokerage. Key issues, such as purchasing a brokerage corporation or only the assets of the corporation, should be considered while valuating the brokerage. There are different methods used to estimate the brokerage’s value, namely net operating income, income multiplier, per registrant, and analyzing assets. Completion of this lesson has enabled you to: • Identify considerations for acquiring an existing brokerage • Identify key factors to consider when determining the valuation of an existing brokerage

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Module 2: Registering the Brokerage Disclaimer: This is a reference document which contains pages from the Accessible eLearning module. You should complete the eLearning module to proceed to the next step. Please note that the accessible module on the LMS only contains the interactive pages and you need to go through the content of this document thoroughly to attempt the interactive activities in the module. Please use Adobe Acrobat Reader (Recommended version 9 or above) to navigate through this PDF. Real Estate Broker Program © 2021 Real Estate Council of Ontario. All Rights Reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or in any means – by electronic, mechanical, photocopying, recording or otherwise without prior written permission, except for the personal use of the Real Estate Broker Program learner.

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Module 2: Registering the Brokerage As you consider opening a new brokerage, it is important to understand the various processes involved in establishing the ownership type and then applying to RECO for brokerage registration. This module focuses on the processes and registration reporting requirements, as per REBBA, the Business Corporations Act, and the Business Names Act, for a sole proprietorship, a partnership, and a corporation. In addition, the module briefly explains the process of transferring the ownership of an existing brokerage in case you choose to acquire one. To check your understanding of this module, you must complete all the activities in the online module. While navigating through the online module, click the Legislation button to view laws and regulations related to this module. The contents of the thumbnails Accessible PDF.

and References from the module are added to support your learning throughout this

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Menu: Registering the Brokerage

Number of Lessons

Lesson Number

4 Lessons

Lesson Name

Lesson 1

Registration Process Specific to an Ownership Type

Lesson 2

Common Registration Requirements for all Ownership Types

Lesson 3

Summary Practice Activities Module Summary

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Lesson 1 | Page 1 of 21

Lesson 1: Registration Process Specific to an Ownership Type

This lesson focuses on registration requirements and processes with respect to REBBA and business registration that apply to a new brokerage for the three ownership types: sole proprietorship, partnership, and corporation. This lesson also explains the requirements for acquiring an existing brokerage.

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Lesson 1 | Page 2 of 21

Before you apply for a brokerage registration with RECO, it is important to understand the steps required to establish the ownership type. This will help prevent delays in starting your brokerage. The processes will vary depending on the ownership type you plan to establish. Upon completion of this lesson, you will be able to: • Identify the key registration requirements when establishing a sole proprietorship • Identify the key registration requirements when establishing a partnership • Identify the key registration requirements when establishing a corporation A corporation is the most commonly used ownership type for brokerages. Sole proprietorships are less common, and partnerships are rare in Ontario. To facilitate learning, we have organized the topics in this lesson from the simplest form of ownership type to the most complex. Throughout this lesson, you will participate in decision points to test your knowledge on the topics presented.

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Lesson 1 | Page 3 of 21

In a previous module, you learned that a sole proprietorship is a business owned by one person operating individually or with the assistance of employees. A sole proprietorship does not create a legal distinction between the business and its owner. Therefore, the process of establishing a sole proprietorship that can trade as a brokerage is less complex as compared to other forms of ownership.

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Lesson 1 | Page 4 of 21

Steps Involved in Establishing a Sole Proprietorship You learned about the advantages and disadvantages of a sole proprietorship in a previous module. A sole proprietorship is less complex to set up and involves less paperwork. However, a sole proprietorship involves greater liability because there is no separation between the legal liability of the business and the personal liability of the sole proprietor.

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A sole proprietorship operates in the broker applicant’s name. The registration process for a sole proprietorship begins with the RECO application. As a broker applicant, you must submit the completed RECO Application for New: Sole Proprietor and the applicable fee, along with the following documentation to RECO: • Copy of the signature card or form for the real estate trust account that is on file with a financial institution located in Ontario (You will learn about real estate trust accounts later in this module.) • Signed and dated letter of resignation or termination from your current registered brokerage • Canadian Criminal Record and Judicial Matters Check (completed within six months prior to submission of the application) • Copy of the Master Business Licence reflecting the registration of the sole proprietorship The application form for New: Sole Proprietor can be downloaded from the RECO website. If RECO approves the application, they will send the certificate of registration to the brokerage address, after which trading activities can begin. The brokerage must have an address for service in Ontario, irrespective of the form of ownership. Registrants are not allowed to trade in real estate in Ontario from an office that is located outside of the province and must maintain an address for service within Ontario.

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Lesson 1 | Page 5 of 21

Sole Proprietorship Requirements If you choose to establish a sole proprietorship, it is important to consider the following REBBA requirements before initiating the registration process: • The sole proprietor (owner) must be the broker of record. A sole proprietor is not permitted to have another broker as the broker of record for their brokerage even when they are away on a temporary basis. They are responsible to adhere to their duties as a broker of record at all times.

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• The sole proprietor owns all assets, is responsible for all debts, is entitled to profits, and is accountable for all losses. • The sole proprietorship must operate solely in the broker of record’s name. For example, if broker Larry Smith decides to establish a sole proprietorship, the sole proprietorship will operate, including all advertising, as Larry Smith. • The sole proprietor is not permitted to pass on the business to another broker of record (for example, if the sole proprietor wants to retire or sell their business) using the original sole proprietor’s name. A sole proprietorship lacks continuity because the sole proprietorship cannot be sold and must be wound down. • In the case of a deceased sole proprietor, the executor of the estate is responsible for winding up the brokerage.

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Lesson 1 | Page 6 of 21

In a previous module, you learned that you could create a general partnership with two or more individuals or entities where everyone pools their personal and financial resources to run a business that is financially viable. Alternatively, you can enter a limited partnership with other individuals who are passive investors (limited partners) and have limited liability. As mentioned earlier, partnerships occur rarely for brokerages in Ontario.

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Lesson 1 | Page 7 of 21

Partnership Requirements You learned about the advantages and disadvantages of partnerships in a previous module. A partnership helps in pooling multiple skills and resources. However, the success of a partnership depends on mutual agreement between partners. A partnership seeking registration as a real estate brokerage must have a written partnership agreement before the RECO application for a new partnership is submitted. © 2021 Real Estate Council of Ontario

Before you create a partnership agreement and initiate the registration process, it is prudent to consider the following REBBA requirements that pertain to a partnership: • A partnership, to be registered under REBBA, must consist of at least two individuals or entities (for example, corporations) who pool their resources (capital, ability, and effort). • A partnership typically operates under the names of the partners as registered with REBBA. For example, if Evelyn A. Smith and John B. Jones want to register their partnership using their registered names, they can do that. However, if they want to trade using another name, such as Smith and Jones, this would require registration under the Business Names Act. • A partnership may be registered using another name, provided that such a name meets the REBBA requirements and is registered under the Business Names Act. It is important to remember that under the Business Names Act, business names must be renewed every five years. • Generally, the creation of a partnership can be oral or in writing. However, a partnership seeking registration as a real estate brokerage must have a partnership agreement in writing. • A partnership must be registered under the Partnerships Act. • REBBA provides that a surviving or remaining partner may carry on business in the name of the original partnership, provided that the surviving or remaining partner publishes on all letterhead, circulars, and advertisements used in connection with the business that they are a sole proprietor. In a partnership, the broker of record does not have to be any one of the partners. However, the broker of record must be designated through passage of a partnership resolution made by the partners and signed by the partners or officers with the appropriate signing authority. If a corporation is a general partner in a limited partnership, officers may be signatories on the partnership resolution. The partnership resolution must be submitted along with the RECO application for registration of a partnership. Regardless of the ownership type, all registration documents must be retained by the brokerage. You will learn more about record retention requirements in a later course.

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Lesson 1 | Page 8 of 21

Steps Involved in Establishing a Partnership

For illustrative purposes, the steps involved in establishing a partnership are shown on this page. Please note that partnership agreements are complex and a third-party professional, such as a lawyer, should be engaged when drafting a partnership agreement. The following five sections contain information on each step. Select a partnership name

If the partnership name is something other than the individuals’ names as registered with RECO, it will need to be registered under the Business Names Act. A partnership name can be registered at any ServiceOntario service location across the province or online (https://www.ontario.ca/page/register-business-name-limited-partnership).

Request review of partnership name from RECO

It is recommended to get the partnership name reviewed by RECO before creating the partnership agreement.

Create a partnership agreement

While templated partnership agreements are widely available for use, obtaining legal advice is strongly recommended to ensure clarity in the agreement and avoid misunderstanding between the partners.

© 2021 Real Estate Council of Ontario

Register the partnership under the Partnerships Act

A partnership can be registered under the Partnerships Act at any ServiceOntario service location across the province or online (https://www.ontario.ca/page/register-businessname-limited-partnership). A lawyer can also be hired to facilitate the registration process. Any change in the ownership interest of a partnership is deemed as creation of a new partnership for registration purposes, under the Partnerships Act.

Submit RECO application for registration

To register the partnership as a brokerage, the Application for New: Partnership must be completed and then delivered to the RECO office, along with all supporting documentation. The application form can be downloaded from the RECO website. You will learn about the required documentation later in this module.

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Lesson 1 | Page 9 of 21

In a previous module, you learned that a corporation is a business entity created under the law governing corporations and established by articles of incorporation. Corporations vary from small privately held operations to large offering or public companies. The corporation, unlike a sole proprietor or partnership, provides a distinction between the business operation and its owner(s).

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Lesson 1 | Page 10 of 21

Steps Involved in Establishing a Corporation You learned in some detail about the advantages and disadvantages of a corporation in a previous module. A corporation is a legal entity that is capable of merging and creating subsidiary companies and generally operating distinctly and separately from its owners. As a separate legal entity there is reduced risk exposure for the owners. It is worth remembering that this ownership arrangement is both an advantage and a disadvantage. Creating the corporate entity takes time and can be costly. A corporation must be established under the Business Corporations Act before it can obtain registration as a new brokerage with RECO. A third-party professional, such as a lawyer, should be engaged when setting up a corporation. The following four sections contain information on the steps involved in registering a corporation.

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Step 1: Choose a corporation name A corporation name (also known as a corporate name) contains three elements: a distinctive element, a descriptive element, and a legal element. In this example for ABC Realty Inc., ABC is the main distinguishing characteristic for the corporation, Realty indicates the type of business undertaken, and Inc. indicates the legal status of the business. A corporation name must comply with the following REBBA requirements: • If the corporation is part of a franchise, the franchise name must form part of the distinctive element of the corporation name: for example, [Franchise] ABC Realty Inc. The corporation must change their name when the affiliation with the franchise ceases. • A personal name of the broker of record may be used as the distinctive element, provided that the individual is registered under REBBA and the name is not being used by another corporation. • Selected marketing, relocation, and limited image service companies may affiliate with real estate brokerages and provide certification or trademarks for promotion. Such marks must be clearly distinguished from any corporation name in advertising, business cards, and other promotional pieces. Generally, a corporation name is acceptable to be used for registration as a brokerage, provided that it: • Complies with the Business Corporations Act

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• Is not in any way misleading or offensive • Is not currently used by another brokerage • Does not in any way cause confusion to the public about the corporation name being similar to another brokerage’s name Anyone seeking corporation registration is advised to contact RECO with their planned corporation name prior to proceeding with incorporation to avoid delays and additional expenses, in cases where RECO has identified issues with the corporation name.

Step 2: Conduct a New Upgraded Automated Name Search (NUANS) After selecting a name for your corporation, you must conduct a NUANS confirming that the name selected is not the same as or similar to another existing Ontario corporation. Note that NUANS is mandatory when incorporating in Ontario. The NUANS report lists corporation names, business names, and trademarks similar to the proposed name

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Step 3: Complete articles of incorporation After determining that the name is approved by RECO and confirming that the name is not found in NUANS, the incorporation documents must be filed with the Ministry of Public and Business Service within 90 days of using the NUANS.

Step 4: Submit RECO application for registration After the articles of incorporation are completed, the RECO Application for New: Brokerage and supporting documents can be submitted to register the corporation as a brokerage with RECO.

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Lesson 1 | Page 11 of 21

Business Corporations Act Requirements

The Business Corporations Act sets out various statutory requirements regarding corporation name selection. The following six sections contain information on each requirement in detail. Required words, letters, The words Limited, Limitée, Incorporated, Incorporée, Corporation, or the corresponding abbreviations of Ltd., Ltée., Inc., or Corp. must be used. Only letters from the Roman and numerals alphabet, Arabic numerals, or a combination thereof can be used, subject to additional rules concerning punctuation, which are outlined in the Act. Language

A corporation name may only be in English, French, or a combination of French and English where the French and English are used together in a combination form or are equivalent but used separately.

Distinctiveness

A corporation name cannot be general in its meaning but must rather provide a distinctive identification. Distinctiveness can be challenged in instances where a general descriptive word has been used for 20 years or more as a corporation name and has become identified with a certain service.

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Prohibited words and names

No word or expression in any language that is obscene or connotes a business that is scandalous, obscene, immoral, or otherwise objectionable on public grounds can be used in a corporation name. Words such as amalgamated, architect, association, college, condominium, co-operative, council, engineer, and veteran cannot be used in a corporation name. Words that suggest some type of government sponsorship or affiliation cannot be used in a corporation name. This prohibition also extends to words that suggest an association or affiliation with a university, political leader or party, or a professional association (for example, architects, engineers, and lawyers).

Length of name

A name greater in length than 120 characters (including punctuation and spaces) is prohibited due to registration process limitations.

Numbered company

A person seeking to register a corporation can avoid name search issues by incorporating a numbered company (for example, 282827 Ontario Limited). While this is acceptable for the Business Corporations Act, an individual seeking brokerage corporation registration under RECO will have to trade using a trade style name approved by RECO and registered under the Business Names Act.

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Lesson 1 | Page 12 of 21

Corporate Administration The administration and management of a corporation is relatively straightforward. Administration in this case means that there are different roles within a corporation that participate in the running of the corporation. The shareholders own the shares of the corporation, the directors oversee the direction of the corporation on behalf of the shareholders, and the officers manage the day-to-day operations. The directors are responsible for making major business and policy decisions, and the officers (president, vice-president, secretary, and treasurer) are responsible for implementing the policies. If you choose to set up a corporation, you should consult a lawyer to assist in defining the structure of your corporation. You may choose multiple roles for yourself or appoint others for these roles based on the advice of your lawyer. The following two sections contain information on the liabilities and responsibilities of shareholders and directors and officers in a corporation.

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Shareholders Shareholders are not generally liable for any act, default, obligation, or liability of the corporation, but exceptions do apply. If a shareholder uses insider information to reduce their financial liability to the detriment of a creditor, such as a financial institution, the court can order the shareholder to return the funds so that the creditor gets paid. If the shareholders limit the rights and powers of the directors (permitted under the Business Corporations Act), those shareholders take on a corresponding share of liability normally placed on the directors. In the case of dissolution, each shareholder who participates in the final distribution of property remains subject to a civil action, criminal action, administrative action, or proceeding relating to that corporation for a period of five years from the point of dissolution.

Directors and officers Directors and officers must act honestly and in good faith, with the best interests of the corporation in mind. They must exercise the care, diligence, and skill that a reasonably prudent individual would exercise in comparable circumstances. Directors and officers must fully disclose any conflict of interest when decisions are made concerning the corporation. Following such disclosure, the director or officer revealing the conflict is not permitted to vote on the matter. A director is permitted to undertake

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contracts with the corporation provided that disclosure is given. The Business Corporations Act provides that a corporation can secure liability insurance for directors and officers, which typically covers all incidents, unless the individual fails to act honestly and in good faith. In addition to this, directors may be held jointly and severally liable for wages (not exceeding six months) that are owed to employees. Selected director actions can result in liability, and that liability may be joint and several. The liability of an individual director may be limited or removed if the corporation minutes note dissent, or other suitable notice is given concerning the dissent of that director. A director cannot be found liable if, in making decisions, they rely on financial statements presented by an auditor or an officer of the corporation, or upon the advice of professionals retained by the corporation. A right of action against a director is subject to a two-year limit from the date on which the particular resolution was passed initiating the action.

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Lesson 1 | Page 13 of 21

Initial Corporate Documents As you set up a corporation, it is prudent to prepare the initial corporate documents with the help of your lawyer and accountant for corporation filing with ServiceOntario. The initial corporate documents are useful for establishing a governance structure for a corporation. All of these registration documents must be retained by the brokerage. You will learn about record retention requirements in a later course. The following five sections contain information on the initial corporate documents required to set up a corporation.

Bylaws The corporation operates within bylaws, which are the rules and guidelines for its operation, covering such procedures as the role of directors, duties and responsibilities of officers, meetings, and issuance of shares.

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Resolutions Resolutions are passed by the directors to govern the organization over and above the bylaws but within the limitations of the bylaws. For example, a sole director who is the owner and broker of record may wish to appoint officers, the names of whom would be recorded as a resolution. While the right to appoint is in the bylaws, the actual appointment is made by resolution.

Corporate seal A corporate seal is not mandatory, but the authority of the person or persons signing on behalf of the corporation must be established. If a seal is obtained (which is recommended), ensure that the corporate seal is kept in a secure location. Equally important, make certain that a certified copy of the resolution of the corporation authorizing any business transaction is also securely stored. Prudent practice suggests that any document be signed on behalf of a corporation under its corporate seal with the authority of the person signing appropriately noted (that is, the position held within the corporation, such as ABC Realty Inc. per John Jones, President). If a corporate seal is not used, the following words should be added: “I/we have the authority to bind the corporation.”

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Minute book The minute book must include all relevant corporation documents, such as the articles of incorporation, general bylaws, minutes of meetings, resolutions, shares, registers (for example, shareholders, share transfers, and directors), banking resolutions, and auditor requirement or exemption, as applicable. The minute book must be updated on an annual basis.

Financial records Required financial records are stipulated in the regulations of the Business Corporations Act and include a balance sheet, statement of retained earnings, income statement, and cash flow statement.

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Lesson 1 | Page 14 of 21

Corporation Shares A corporation is a separate legal entity with corporate ownership divided into portions called shares. Corporations can have different classes or types of shares and rights associated with those shares. The description of the share structure and the authority to issue those shares are set out in the articles of incorporation. The number of shares capable of being issued is usually unlimited, unless the articles provide otherwise. Share structure will vary based on individual requirements with particular emphasis on flexibility and future growth. Fortunately, share structure can be modified after incorporation, as the need arises. Many start-up brokerage corporations begin with one class of shares being issued, in which all shareholders have equal rights. When different classes are created, either at the time of incorporation or subsequently, rights, privileges, and conditions can vary. Rights associated with shares can be grouped under three main categories: • The right to vote • The right to dividends

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• The right to corporate assets upon dissolution An equity share for purposes of REBBA refers to a class or series of shares of a corporation that carries a voting right either under all circumstances or under circumstances that have occurred and are continuing. When a corporation registers and upon each renewal, the brokerage must disclose to RECO the identity of each person that beneficially owns or controls 10 per cent or more of the equity shares. At this time, the brokerage must also inform RECO of the names of persons who are associated with each other and who together beneficially own or control 10 per cent or more of the equity shares. In addition to this disclosure, every brokerage that is a corporation must notify RECO, in writing, within 30 days of the issue or transfer of any equity shares of the corporation that results in any person or persons who are associated with each other acquiring or accumulating beneficial ownership or control of 10 per cent or more of the equity shares. In addition, RECO must be informed if there is an increase in the percentage of equity shares where the person or associated persons already beneficially owned or controlled 10 per cent or more of the equity shares.

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Lesson 1 | Page 15 of 21

Shareholder Agreement The shareholders in a corporation must enter a shareholder agreement to outline their respective privileges, rights, and duties. As such, this agreement is designed to govern the relationship between the shareholders and contemplate various matters that could otherwise result in costly negotiations, should a dispute arise. Typically, the shareholder agreement is private and distinct from the articles of incorporation, which are publicly recorded as part of the incorporation process. Shareholder agreements, among other things, regulate the ownership and voting rights of shares and normally include certain restrictions on transferring shares. These agreements often address control and management of the corporation (for example, powers to designate directors and special voting privileges regarding specific corporate priorities), share valuation, non-competition provisions, and dispute resolution mechanisms. Legal advice is strongly recommended when structuring such an agreement. © 2021 Real Estate Council of Ontario

Lesson 1 | Page 16 of 21

In a previous module, you learned about acquisitions (purchasing an existing corporation). Acquisitions can be in the form of an asset purchase or a share purchase. An asset purchase could involve the purchase of real estate, office furniture and equipment, listing inventory, and goodwill. A share purchase is the purchase of shares within the corporation. Reporting requirements for an asset purchase and a share purchase vary depending on the type of acquisition.

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Lesson 1 | Page 17 of 21

Acquiring an Existing Brokerage Asset purchase In an asset purchase type of acquisition, the seller and/or the buyer may need to report to RECO, depending on the type of asset and its intended use. For example, if one brokerage purchases a property from another brokerage with the intention of moving their branch office to the new location, the asset purchase will trigger the need to report the new address to RECO through the Notice of Address Change: Brokerage/Sole Proprietor/Partnership form. If the seller brokerage has a branch office operating from the property and they intend to close their branch office, they need to report the termination of the branch office registration to RECO through the Notice of Branch Change form.

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However, if the property does not house any part of the brokerage operation and is sold to someone who has no intention to use it for real estate, the sale would not need to be reported to RECO. Share purchase In a share purchase type of acquisition, the seller broker first needs to notify the provincial government about the change in ownership. The seller broker needs to pass a resolution indicating the share acquisition, document the changes in the articles of incorporation, and then file the Articles of Amendment. Form 1 Initial Return/Notice of Change must be filed with the Ministry of Public and Business Service within 15 days after the change through any ServiceOntario service location across the province or online (https://www.ontario.ca/page/form-initial-returnnotice-change-making-changes-corporate-information). A lawyer can also be hired to facilitate the process. The buyer broker must then complete the RECO Notice of Brokerage/Sole Proprietor Change form indicating changes to the corporation structure, broker of record, and real estate trust account details. The buyer broker must also complete any supporting documents required for the notification, such as the Articles of Amendment, officer, director, and shareholder registers, Form 1 Initial Return/Notice of Change, Master Business Licence, and original Canadian Criminal Record and Judicial Matters Check for themselves, as well as for all new officers, directors, and shareholders of the corporation. These documents must be submitted to RECO for approval, within five days of the change. You will learn about real estate trust accounts later in the module.

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Lesson 1 | Page 18 of 21

Rita’s father owns a brokerage and has been operating it as a sole proprietorship for the past 20 years at a prime location that he purchased 15 years ago. He has a good reputation and loyal clientele. Rita has been working with her father for the past five years and has recently acquired her broker registration. Rita’s father now wants to retire and spend time with his grandkids. He wishes for Rita to acquire the brokerage from him, as his business has established goodwill and is well-known in the community. Which ownership options could be appropriate for Rita? There are four options. There are multiple correct answers.

1

Since it is a family-owned business, Rita can submit the Notice of Brokerage/Sole Proprietor Change form to RECO and start operations after she receives approval.

2

Since the office location is owned by Rita’s father, Rita can enter into a lease agreement for the business premises and submit the RECO Application for New: Sole Proprietor.

3

Since it is a family-owned business, Rita can form a partnership with her father and then submit the Application for New: Partnership.

4

Since the family name is well-known, Rita can create a corporation including the family name and submit the Application for New: Brokerage to RECO.

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Lesson 1 | Page 19 of 21

A broker earned their broker registration a few years ago and has since been working as a manager in a brokerage. The broker now wants to start their own brokerage and has decided to create a corporation, holding the position of director and officer as they start out. The broker has decided to use their family name for the brokerage. What are some of the first steps that the broker needs to take to create their corporation? There are four options. There are multiple correct answers. 1

Obtain a NUANS report for the selected name to check if there are other businesses using similar names

2

Submit an Application for New: Brokerage to RECO

3

Create the minute book and include all relevant corporation documents there

4

Get a shareholder agreement created in consultation with a lawyer

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Lesson 1 | Page 20 of 21

A broker decides to acquire a brokerage through a share purchase with the provision that the current broker of record remains as the broker of record for the brokerage for a two-year period. What are some of the steps required to change the ownership of the brokerage? There are four options. There are multiple correct answers.

1

Make changes to the articles of incorporation to indicate the share purchase, by filing the Articles of Amendment

2

Submit Form 1 Initial Return/Notice of Change to the Ministry of Public and Business Service

3

Submit a Notice of Brokerage/Sole Proprietor Change to notify RECO about who the broker of record would be with this ownership change

4

Submit an Application for New: Brokerage to notify RECO of the change in ownership

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Lesson 1 | Page 21 of 21

Congratulations, you have completed the lesson! Completion of this lesson has enabled you to: • Identify the key registration requirements when establishing a sole proprietorship • Identify the key registration requirements when establishing a partnership • Identify the key registration requirements when establishing a corporation There are four sections on this page with a summary of the key topics that were discussed in this lesson.

Establishing a sole proprietorship

Since there is no separation between the business and its owner in a sole proprietorship, the sole proprietorship will operate in the broker applicant’s name. The registration process for a sole proprietorship begins with the RECO Application for New: Sole Proprietor. REBBA specifies various requirements pertaining to a sole proprietorship. It is prudent for a broker applicant to consider these requirements before initiating the application process.

Establishing a partnership

A partnership could be created as a general partnership or a limited one. Regardless of the type of partnership, a partnership seeking registration as a real estate brokerage must have a partnership agreement in writing, and that partnership must be registered under the Partnerships Act before the registration process is initiated with RECO. To register a partnership with RECO, the Application for New: Partnership must be submitted along with all supporting documentation.

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Similar to sole proprietorship, REBBA specifies various requirements pertaining to a partnership. It is important for a broker applicant to consider these requirements before initiating the process to create a partnership agreement.

Establishing a corporation

A corporation must be established under the Business Corporations Act before it can obtain registration as a new brokerage. The incorporation process for a corporation involves choosing a name for the corporation, conducting a NUANS name search, completing the articles of incorporation, and filing the application for incorporation with the Ministry of Public and Business Service. The RECO Application for New: Brokerage can be submitted to register the corporation as a brokerage only after the incorporation process has been completed. It is of utmost importance for a broker applicant to consider the REBBA requirements, as well as the requirements of the Business Corporations Act, before initiating the incorporation process for a corporation.

Acquiring an existing brokerage

Acquisitions (purchasing an existing corporation) can be in the form of an asset purchase or a share purchase. In an asset purchase type of acquisition, the seller or the buyer may need to report to RECO, depending on the type of asset and its intended use. In a share purchase type of acquisition, the seller broker must notify the provincial government and the buyer broker must notify RECO about the changes to the corporation.

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Lesson 2 | Page 1 of 23

Lesson 2: Common Registration Requirements for all Ownership Types

This lesson provides an overview of the various business registrations required by a brokerage related to income tax, payroll deductions, harmonized sales tax (HST), and employer health tax (EHT). The lesson also highlights the importance of registering an internet domain name for the brokerage. In addition, this lesson describes the registration reporting requirements for RECO and the documentation that must accompany the application for all ownership types. The lesson also describes the guidelines for setting up bank accounts for a brokerage.

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Lesson 2 | Page 2 of 23

To complete brokerage registration with RECO, you must submit the application for the appropriate ownership type along with various other documents. Failure to complete and submit the required documents along with the RECO application will delay processing of the application. A brokerage is also required to fulfill all registration requirements for federal and provincial taxes. Upon completion of this lesson, you will be able to: • Identify additional regulatory requirements common for all ownership types • Identify considerations for obtaining and registering an internet domain name • Identify additional considerations for partnerships and corporations • Set up bank accounts for a new brokerage

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• Identify ongoing reporting and registration requirements Throughout this lesson, you will participate in decision points to test your knowledge on the topics presented.

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Lesson 2 | Page 3 of 23

The business entity that operates the brokerage (that is, the proprietor, the partnership, or the corporation) is required to register with the Canada Revenue Agency (CRA) and the Ministry of Finance to remit federal and provincial taxes, as applicable. As a broker of record, you must understand the obligations that your brokerage has with respect to various taxes and complete the required registration formalities.

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Lesson 2 | Page 4 of 23

Registration Requirements Related to Taxes The business entity that operates the brokerage (that is, the proprietor, the partnership, or the corporation) is required to register with the CRA if revenue expectations exceed $30,000 during the initial year or any calendar quarter of that year. Upon registration, a 15-digit business number (BN) is assigned by the CRA with the four common accounts required for business: income tax (RC), payroll deductions (RP), HST (RT), and import/export (RM). Real estate brokerages typically require the following three accounts: • Income tax account (RC): Brokerages need to remit income tax to the federal government. This account is used to file income tax.

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• Payroll deductions account (RP): If hiring employees, brokerages need the CRA payroll account to make payroll deductions from their employees for the Canada Pension Plan (CPP), Employment Insurance (EI), and income tax. • HST account (RT): Brokerages need the HST account to remit harmonized sales tax (HST) if revenue exceeds $30,000 in the last four consecutive calendar quarters or in any single calendar quarter. The business entity that operates the brokerage can register voluntarily with the CRA if their taxable sales are less than $30,000. A business entity with a cumulative annual payroll exceeding $490,000 is also required to register with the Ministry of Finance and remit Employer Health Tax (EHT). It is prudent to consult with third-party professionals, such as an accountant, to obtain advice on taxation and registration matters, as registration requirements and taxation rules can change.

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Lesson 2 | Page 5 of 23

Most consumers start their search for their real estate needs on the internet. As a broker of record, you will want to set up your brokerage operation to be aligned to the needs of a digital world. An internet domain name that is similar to the registered name of the brokerage or any other name that may help capture consumer attention and direct traffic to the brokerage’s website should be secured for the brokerage’s use. It is prudent to contact a professional to help facilitate the process for securing a domain name and setting up the brokerage’s website. © 2021 Real Estate Council of Ontario

Lesson 2 | Page 6 of 23

Domain Name An internet domain name is a website address, and it typically consists of three parts: the server prefix, the domain name (second level domain), and the domain suffix (top level domain). Domain suffixes (also referred to as top level domains) could be .com (commerce), .gov (government), .net, .org, and country codes such as .ca for Canada. Some of the top-level domains may be restricted and may not be available to brokerages. The domain name in a website address is the identifier for a brokerage. A brokerage should have its own identifiable, unique domain name, which includes keywords regarding the brokerage. It should be short, easy to spell, and easy to remember. If there are chances of the selected name being misspelled, both the correct and incorrect spellings of the domain name can be registered to ensure that individuals searching for the brokerage find the right website.

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Lesson 2 | Page 7 of 23

Domain Name Registration Various online retailers that sell internet domain names and related services are available on the internet to facilitate the registration of domain names, along with other complementary services. To determine if the selected domain name is available, the retailer will search the WHOIS domain name search. The name selected, if still available, may be registerable with one or more domain suffixes (for example, .com, .ca, and/or .org). A brokerage may decide to register several domain suffixes to avert losing traffic to potential competitors or others (for example, abcrealty.ca, abcrealty.com, and abcrealty.biz). Registration procedures vary somewhat based on the domain suffix(es) being registered. For example, when registering a .ca name, domain name registrations must be processed through the Canadian Internet Registration Authority (CIRA), regardless of the retailer used. Registrations are always handled by certified retailers and never

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directly with the CIRA. Domain names using .ca are reserved for Canadians and organizations (including real estate brokerages) that have significant Canadian presence. All requirements are set out on the CIRA website. Registering a brokerage domain name allows for email addresses with that domain name as part of the address, for example, [email protected].

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Lesson 2 | Page 8 of 23

Two brokers have been working in the same brokerage for the past couple of years. They have decided to set up a brokerage as partners and apply to RECO for a brokerage registration. They need to complete the registration for federal and provincial taxes. They do not intend to hire brokers and salespersons yet. They have decided to hire only an administrative employee with an annual salary of $60,000. As the real estate market is going through a decline in sales activity, they have assumed conservative revenue projections in their first year. They estimate their net income before taxes in the first year of their operations to be $100,000. What accounts would the brokers need to set up to pay the applicable federal and provincial taxes for their brokerage? There are four options. There are multiple correct answers. 1

Income tax account

2

Payroll deduction account

3

HST account

4

EHT account

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Lesson 2 | Page 9 of 23

REBBA sets out specific disclosures related to directors, officers, interested persons, associated persons, and ownership interest structures in the RECO application form for partnerships and corporations. An incomplete application may lead to delay in processing. Any false statement in the application could result in the refusal of the registration or the registration being revoked.

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Lesson 2 | Page 10 of 23

Interested Persons RECO may consider provisions involving interested persons when considering applicants for registration. An interested person includes anyone who can exercise (or may exercise) direct or indirect control or provides

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financing for the brokerage operation. The individual may have no direct ownership stake but has influence over decisions being made. An interested person may be someone who demonstrates the following: • Has or may have a beneficial interest in the applicant’s business • Exercises or may exercise control either directly or indirectly over the applicant • Has provided or may have provided financing either directly or indirectly to the applicant’s business A registration can be refused if RECO is of the opinion that the conduct of any interested person affords reasonable grounds that the business will not be carried out in accordance with the law and with honesty and integrity. For example, RECO may refuse registration based on the past conduct and/or financial position of an interested person. Furthermore, a refusal could occur if that person makes false statements in fulfilling RECO’s requests for additional information during the registration process.

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Lesson 2 | Page 11 of 23

Associated Persons RECO may also consider provisions involving associated persons when reviewing applicants for registration. An associated person would be someone outside of the business arrangement but having some association with the broker applicant. An associated person may be someone who is associated with the applicant in any of the following circumstances: • One person is a corporation of which the other person is an officer or director. © 2021 Real Estate Council of Ontario

• One person is a partnership of which the other person is a partner. • Both persons are partners of the same partnership. • One person is a corporation that is controlled directly or indirectly by the other person. • Both persons are corporations, and one corporation is controlled directly or indirectly by the same person who controls directly or indirectly the other corporation. • Both persons are members of the same voting trust relating to shares of a corporation. • Both persons are associated within the meaning of these circumstances with the same person.

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Lesson 2 | Page 12 of 23

Ownership Disclosures No restrictions exist limiting the ownership of partnership or corporation brokerages by non-registered persons, brokers, or salespersons (including registrants not employed by the partnership or corporation). However, brokerage corporations must disclose the identity of persons who beneficially own 10 per cent or more of the equity shares in the RECO application form. They must also disclose persons associated with each other who together beneficially own 10 per cent or more of the equity shares. These disclosures should be made at the time of registration or renewal. Any change to the ownership or control of shares that falls within this category must be submitted to RECO within 30 days after the issue or transfer of any shares. © 2021 Real Estate Council of Ontario

Lesson 2 | Page 13 of 23

Ownership Structures for Partnerships and Corporations, I Every real estate brokerage must designate a broker to be the broker of record when submitting an application for a new brokerage. In a sole proprietorship, the sole proprietor must be the broker of record. In cases of partnerships and corporations, the broker of record can be a registrant owner or an individual who is hired to fill the role. The RECO application for registration includes applicable resolutions related to the designating of a broker of record. A copy of this resolution must be submitted to RECO as part of the application or designation process. REBBA provides significant latitude when structuring partnerships and corporations. Regardless of ownership arrangement, a broker of record must be designated for every brokerage. This individual oversees brokerage operations and must ensure full compliance with REBBA by everyone within the brokerage. You will learn more about broker of record responsibilities in the next module. The following four sections contain examples of ownership structures involving both registered and non-registered owners.

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Sole proprietorship

General partnership – Individuals

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General partnership – Corporations

Limited partnership – Individuals

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Lesson 2 | Page 14 of 23

Ownership Structures for Partnerships and Corporations, II The following three sections contain some additional examples of ownership structures involving both registered and nonregistered owners.

Corporation – Individual shareholders

Corporation owning two brokerages

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Corporations owning shares in a brokerage

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Lesson 2 | Page 15 of 23

Documentation for RECO Application Each RECO application provides detailed instructions for the respective brokerage category. It is important to fully review the application before submitting it for registration so that the required details are completed correctly. After deciding on ownership type and creation of entity (in case of partnership or corporation), the correct RECO application form must be completed and submitted to RECO for approval, along with required documentation and payment; the application specifies details of the documentation that must be submitted to RECO along with the

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application form. Note that the application form varies for the different ownership types, and each application has specific requirements, depending on the ownership type. Some of the documentation that needs to be submitted along with the Application for New: Brokerage includes the following: • Articles of Incorporation • Officer, Director, and Shareholder Registers • Form 1 Initial Return/Notice of Change • Master Business Licence • Signature card or form for the real estate trust account (you will learn about real estate trust accounts later in the module) • Application for employee termination or employee transfer • Transfer fees and fee for new brokerage application • Signed and dated letter of resignation or termination (if applicable) • Canadian Criminal Record and Judicial Matters Check for each officer, director, and shareholder For a partnership, documents such as the Articles of Incorporation; Officer, Director, and Shareholder Registers; and Form 1 Initial Return/Notice of Change will not apply. Instead, the Partnership Agreement and Partnership Resolution will be required. If, as a broker applicant, you are already registered with a brokerage, you must terminate and transfer your registration from the current brokerage to the new brokerage. You can terminate and transfer your registration on the same day or on different days. The transfer date must be on or after the termination date.

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Lesson 2 | Page 16 of 23

As part of the RECO application process for your brokerage, you will need to establish bank accounts, specifically the real estate trust account.

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Lesson 2 | Page 17 of 23

Bank Accounts When it comes to setting up bank accounts for a brokerage, REBBA includes guidelines related to how trust monies must be handled and maintained. Brokerages typically set up three different bank accounts: a real estate trust account, a general operating account, and a commission trust account. Only the real estate trust account is a legislative requirement under REBBA. As you set up these accounts with your bank or financial institution, you should specify the signing authority for the bank accounts and the record-keeping tools, such as deposit book with duplicate pages and monthly statements, which you will require. The following three sections contain information on these accounts.

Real estate trust account REBBA directs that a brokerage must maintain a real estate trust account in the Province of Ontario solely for deposits received from consumers. When you set up this account with a bank or financial institution, you must ensure that the trust account is designated as a real estate trust account, meaning the designation of the account should appear on all cheques, deposit slips, and bank statements. All transactions must be authorized by the broker of record, limiting signing authority on the trust account to the broker of record. In cases where the broker of record is absent or unable to act, an alternate broker of record (if identified and applicable based on ownership type) can have signing authority on the real estate trust account. You will learn

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more about an alternate broker of record in a later module. Note that you need to specify the details of the real estate trust account in the RECO application, such as the name of the bank, address, and account number. For this reason, this account must be set up before you complete the RECO application. Any errors or missing details related to this account could delay the processing of the application. Smaller brokerages may encounter situations where there is no activity in the real estate trust account for one or more months. The bank’s computer system may automatically assign a dormant status to the account. The brokerage is strongly recommended to take steps to ensure that this does not happen. If it does, the account must be immediately activated.

General operating account When maintaining trust monies, there is a specific REBBA requirement that a brokerage keep the trust monies separate from monies belonging to the brokerage. For this reason, a brokerage must maintain a general operating account, which contains the monies belonging to the brokerage. Money in this account is used for paying for expenses of the brokerage, such as personnel, occupancy, and operating expenses. You must instruct the bank that any service charges or bank charges applicable to the real estate trust account or commission trust account are debited only from the general operating account.

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Commission trust account A commission trust account is used to process commission payments owing to registrants of the brokerage and to co-operating brokerages. This account is used only for the receipt and disbursement of commission trust funds and is to be kept separate and apart from the statutory real estate trust account. It is important to have a written agreement with the brokerage’s brokers and salespersons to identify how commissions are to be paid or held and reference the commission trust account for clarity.

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Lesson 2 | Page 18 of 23

Martha Cohen has created a corporation with the name Cohen Realty Ltd. for which she will be the broker of record. She has an appointment at the bank to set up the accounts for her brokerage so that she can complete her RECO application for a new brokerage. Which of the following instructions would Martha provide to the account manager at the bank? There are four options. There are multiple correct answers. 1

Set up the real estate trust account in the following name: Cohen Realty Ltd., Trust Account

2

Debit bank charges applicable to the real estate trust account from the commission trust account

3

Transactions in the real estate trust account must be allowed only if authorized by Martha Cohen

4

Provide monthly bank statements and deposit book with duplicate pages for all three bank accounts

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Lesson 2 | Page 19 of 23

Any changes in the details provided in the RECO application form must be submitted to RECO within a specified time period. REBBA sets out specific requirements related to when and how the changes need to be reported to RECO.

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Lesson 2 | Page 20 of 23

REBBA Requirements for Notifying Changes REBBA sets out specific requirements related to notifying RECO of any changes in the details provided in the RECO application form. The changes could be related to the brokerage, brokers, salespersons, or any other information provided in the application form. These changes must be reported to RECO using appropriate RECO forms. The following are the most commonly encountered changes. This information is being provided for educational purposes and is subject to change. You should refer to the RECO website for the most up-to-date information. 1. If any change to the address for service, business address, or contact information previously reported to RECO is required that applies to brokerages, brokers, and salespersons, a written notice within five days of the event has to be provided. 2. If changes in any information included on application for registration or renewal are required that applies to brokerages, brokers, and salespersons, a written notice within five days of the event has to be provided. 3. If any change concerning the position of Broker of Record is required, a written notice within five days has to be provided. 4. If any change in the commencement or termination of brokers or salespersons is required, a written notice of any commencement or termination within five days has to be provided. Registrant must also provide notification in the case of termination. 5. If any change in the designation of a broker employed by the brokerage (Not a sole proprietorship) as an alternate broker of record is required, a written notice has to be provided. 6. If any change in the notice of share issue or transfer of shares is required that applies to brokerage, a written notice within 30 days for issues/transfers exceeding ownership control criteria in REBBA has to be provided. The threshold is 10 per cent or more of the issued and outstanding equity shares. 7. If any change to the officers and directors previously reported to RECO is required that applies to brokerage, a written notice within five days has to be provided. 8. Any change in a partnership requires a new application for registration.

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Lesson 2 | Page 21 of 23

REBBA Requirements for Renewals All registrants (brokerages, brokers, and salespersons) must renew their registrations every two years. The broker of record should monitor expiration dates for the brokerage, as well as for brokers and salespersons employed by the

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brokerage, to ensure compliance to REBBA requirements. Key points concerning the renewal process include the following: • RECO sends renewal reminder notices 60, 30, and 10 days prior to renewal date (courtesy only). • Registrants are responsible to ensure that their registration is renewed regardless of whether or not a renewal reminder is received. • Registrants must complete and submit the renewal application prior to the expiry date. • If a renewal application is received by RECO prior to the registration expiry date, the registrant can continue to trade, despite the fact that a new Certificate of Registration has not been received. • If the renewal application is not received by the expiry date, the registration lapses. A notice is sent to the registrant via email at the time of the termination. The former registrant should then contact RECO regarding the reinstatement process. The former registrant is not permitted to trade in real estate or be paid any commission for trades that occurred while unregistered.

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Lesson 2 | Page 22 of 23

A salesperson acquired 80 per cent of the shares in a brokerage corporation. As per the agreement, the owner will continue to be the broker of record for two years and will retain 20 per cent shares in the brokerage. The registration of the brokerage was renewed one year ago. What obligation must the broker of record complete to comply with REBBA? There are four options. There is only one correct answer. 1

Application for renewal

2

Notice of change of broker of record

3

Notice of share issue or transfer

4

Notice of partnership

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Lesson 2 | Page 23 of 23

Congratulations, you have completed the lesson! Completion of this lesson has enabled you to: • Identify additional regulatory requirements common for all ownership types • Identify considerations for obtaining and registering a domain name • Identify additional considerations for partnerships and corporations • Set up bank accounts for a new brokerage • Identify ongoing reporting and registration requirements There are five sections on this page with a summary of the key topics that were discussed in this lesson.

Registration requirements related to federal and provincial taxes

Real estate brokerages are required to register with the CRA if revenue expectations exceed $30,000 during the initial year or any calendar quarter of that year. Upon registration, a 15-digit BN is assigned by the CRA with the four common accounts required for remitting income tax, payroll deductions, HST, and import/export-related deductions. A real estate brokerage with a cumulative annual payroll exceeding $490,000 is also required to register with the Ministry of Finance and remit EHT.

Considerations for an internet domain name

Brokerages should set up their brokerage operation to be aligned to the needs of a digital world. An internet domain name that is similar to the registered name of the brokerage or any other name that may help capture consumer attention and direct traffic to the brokerage’s website should be secured for the brokerage’s use. The domain name in a website address is the identifier for a brokerage. A brokerage should have its own identifiable, unique domain name, which includes

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keywords regarding the brokerage. It should be short, easy to spell, and easy to remember. Domain name registration is accomplished through an online retailer that sells domain names and related services.

Additional considerations for partnerships and corporations

RECO requires specific disclosures related to directors, officers, interested persons, associated persons, and ownership interest structures when registering a brokerage in Ontario. These disclosures apply specifically to partnerships and corporations and are required in the RECO application form. An interested person includes anyone who can exercise (or may exercise) direct or indirect control or provides financing for the brokerage operation. The individual may have no direct ownership stake but has influence over decisions being made. An associated person would be someone who is outside of the business arrangement but has some association with the broker applicant. In a sole proprietorship, the sole proprietor must be the broker of record. In the case of partnerships and corporations, the broker of record can be a registrant owner or an individual who is hired to fill the role. The RECO application for registration includes applicable resolutions to the designating of a broker of record. A copy of this resolution must be submitted to RECO as part of the application or designation process.

Bank accounts required for REBBA includes guidelines related to how trust monies must be handled and maintained. Brokerages set up three different bank accounts: real estate trust a new brokerage

account, general operating account, and commission trust account. Only the real estate trust account is a legislative requirement.

Ongoing reporting requirements

Any changes in the details provided in the RECO application form must be notified to RECO within a specified time period. The changes could be related to the following: • Address for service, business address, or contact information

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• Ownership change • Share issue or transfer • Broker of record, brokers, and salespersons • Officers and directors Brokerages, brokers, and salespersons need to renew their registration every two years.

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Lesson 3 | Page 1 of 8

Lesson 3: Summary Practice Activities This lesson provides a series of activities that will test your knowledge on the entire module.

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Lesson 3 | Page 2 of 8

This lesson provides summary practice activities. Throughout this lesson, you will participate in decision points to test your knowledge on the topics presented.

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Lesson 3 | Page 3 of 8

A broker working for XYZ Realty Ltd. completed their Criminal Record and Judicial Matters Check two months ago when they applied for their broker registration. The broker plans to start their own brokerage as a sole proprietorship in three months. The broker of record at XYZ Realty Ltd. has agreed to write a letter indicating that they will terminate the employment of the broker with the brokerage one day prior to the broker’s registration as a sole proprietor. What must the broker do to complete their application for a new sole proprietor before they send it to RECO? There are four options. There are multiple correct answers. 1

Reapply for a Criminal Record and Judicial Matters Check

2

Identify a name for their brokerage and obtain a NUANS report to check if that name can be used

3

Set up the real estate trust account for the brokerage

4

Obtain a copy of the signature card of the real estate trust account on file with the bank and include it with the application to RECO

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Lesson 3 | Page 4 of 8

Two friends who are brokers decide to set up a brokerage as partners and name their brokerage as PQR Partners, Real Estate Brokerage. They estimate their net income before taxes in the first year of their operations would be approximately $200,000. They are making a list of the regulatory requirements they need to fulfill to operate their partnership as a brokerage. What regulatory requirements must they meet to operate their partnership as a brokerage? There are six options. There are multiple correct answers. 1

Create a partnership agreement

2

Register their partnership name under the Business Names Act

3

Register their partnership name under the Business Corporations Act

4

Register their partnership under the Partnerships Act

5

Register their partnership as a brokerage with RECO

6

Register their partnership with the CRA

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Lesson 3 | Page 5 of 8

A broker and two salespersons are considering setting up a brokerage. They are comparing the benefits and restrictions of partnership and corporation ownership options for their brokerage. Which statements about partnerships and corporations are true? There are four options. There are multiple correct answers.

1

They could establish a partnership through an oral agreement, while a corporation would require a written shareholders agreement.

2

They can all have signing authority on the real estate trust account in a partnership; however, only the broker would have signing authority on the real estate trust account if they decide on a corporation.

3

The broker could be the broker of record for their brokerage in either form of ownership.

4

They must create the ownership prior to applying for registration with RECO regardless of whether they opt for a partnership or a corporation.

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Lesson 3 | Page 6 of 8

A broker and a salesperson decide to form a corporation operating as ABC Real Estate Inc. They initiate the process for creating the corporation. What steps do they need to take to establish the corporation? There are four options. There are multiple correct answers. 1

Check if the name ABC Real Estate Inc. is available

2

Complete and file the articles of incorporation with RECO

3

Identify the broker’s and salesperson’s roles, duties, and responsibilities as officer and director of the corporation

4

Create a shareholder agreement to address privileges, rights, and duties of the two people involved in the corporation

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Lesson 3 | Page 7 of 8

A broker plans to buy equity shares in a brokerage along with their parents, who are non-registrants. After taking over, the broker plans to be the broker of record. The broker’s mother and father will each acquire five per cent of the equity shares. They meet with their lawyers and accountants to work out the details. What steps must be taken to complete the acquisition? There are five options. There are multiple correct answers. 1

File the Articles of Amendment

2

Report the acquisition to the Ministry of Public and Business Service on the appropriate form

3

Report to RECO about the change in broker of record

4

Report to RECO about the change in share ownership

5

Submit the Application for New: Partnership to notify RECO about the change in ownership

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Lesson 3 | Page 8 of 8

Congratulations, you have completed the lesson!

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Module Summary | Page 1 of 3

Module Summary

This lesson contains a summary of the entire module.

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Module Summary | Page 2 of 3

Congratulations, you have completed this module! The next screen will present a summary of the lessons in this module.

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Module Summary | Page 3 of 3

There are two sections on this page with a summary of the key topics that were discussed in this module.

Registration Process Specific to an Ownership Type

REBBA specifies different registration requirements depending on whether it is a sole proprietorship, a partnership, or a corporation. A corporation is the most commonly used ownership type for brokerages. Sole proprietorships are less common, and partnerships as brokerages occur very rarely. The registration process for a sole proprietorship begins with the RECO Application for New: Sole Proprietor. A partnership seeking registration as a real estate brokerage must have a partnership agreement in writing, and that partnership must be registered under the Partnerships Act before the registration process is initiated with RECO. A corporation must be established under the Business Corporations Act before it can obtain registration as a new brokerage. The incorporation process for a corporation involves choosing a name for the corporation, conducting a NUANS name search, completing the articles of incorporation, and filing the application for incorporation with the Ministry of Public and Business Service. The RECO Application for New: Brokerage can be submitted to register the corporation as a brokerage only after the incorporation process has been completed. In a share purchase acquisition, the seller broker must notify the provincial government and the buyer broker must notify RECO about the changes to the corporation. It is of utmost importance for a broker applicant to consider the processes and documentation that need to be completed to finalize the acquisition. Completion of this lesson has enabled you to: • Identify the key registration requirements when establishing a sole proprietorship • Identify the key registration requirements when establishing a partnership

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• Identify the key registration requirements when establishing a corporation

Common Registration Requirements for all Ownership Types

The business entity that operates the brokerage (that is, the proprietor, the partnership, or the corporation) is required to register with the CRA for income tax, payroll deductions, and HST. A business entity with a cumulative annual payroll exceeding $490,000 is also required to register with the Ministry of Finance and remit EHT. Brokerages should set up their brokerage operation to be aligned to the needs of a digital world. An internet domain name that is similar to the registered name of the brokerage or any other name that may help capture consumer attention and direct traffic to the brokerage’s website should be secured for the brokerage’s use. A brokerage should have its own identifiable, unique domain name, which includes key words regarding the brokerage. It should be short, easy to spell, and easy to remember. RECO requires specific disclosures related to directors, officers, interested persons, associated persons, and ownership interest structures when registering a brokerage in Ontario. These disclosures apply specifically to partnerships and corporations and are required in the RECO application form. The RECO application must also include applicable resolutions related to designating a broker of record. REBBA includes guidelines related to how trust monies must be handled and maintained. Brokerages set up three different bank accounts: a real estate trust account, a general operating account, and a commission trust account. Only the real estate trust account is a legislative requirement. Any changes in the details provided in the RECO application form must be notified to RECO within a specified time period. The changes could be related to the following: • Address for service, business address, or contact information • Ownership change

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• Share issue or transfer • Broker of record, brokers, and salespersons • Officers and directors Completion of this lesson has enabled you to: • Identify additional regulatory requirements common for all ownership types • Identify considerations for obtaining and registering a domain name • Identify additional considerations for partnerships and corporations • Set up bank accounts for a new brokerage • Identify ongoing reporting and registration requirements

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V6

Module 3: Defining the Roles and Responsibilities in a Brokerage Disclaimer: This is a reference document which contains pages from the Accessible eLearning module. You should complete the eLearning module to proceed to the next step. Please note that the accessible module on the LMS only contains the interactive pages and you need to go through the content of this document thoroughly to attempt the interactive activities in the module. Please use Adobe Acrobat Reader (Recommended version 9 or above) to navigate through this PDF. Real Estate Salesperson Program © 2021 Real Estate Council of Ontario. All Rights Reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or in any means – by electronic, mechanical, photocopying, recording or otherwise without prior written permission, except for the personal use of the Real Estate Salesperson Program learner.

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Module 3: Defining the Roles and Responsibilities in a Brokerage A brokerage, as with any business, is most successful when properly established and operated. Running a brokerage will require you to interact with brokers, salespersons, and administrative staff in your brokerage. The success of the brokerage primarily depends on the seamless completion of tasks by these entities in a brokerage. Studying the organizational structure will help you understand the division of responsibilities and the optimal workflow in a typical brokerage. In this module, you will learn about requirements defined under REBBA for different roles in a typical brokerage. You will also review the lines of authority and types of brokerage operations. To check your understanding of this module, you must complete all the activities in the online module. While navigating through the online module, click the Legislation button to view laws and regulations related to this module. The contents of the thumbnails Accessible PDF.

and References from the module are added to support your learning throughout this

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Menu: Defining the Roles and Responsibilities in a Brokerage

Number of Lessons

Lesson Number

4 Lessons

Lesson Name

Lesson 1

Roles in a Brokerage

Lesson 2

Delegation Within a Brokerage

Lesson 3

Summary Practice Activities Module Summary

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Lesson 1 | Page 1 of 18

Lesson 1: Roles in a Brokerage

This lesson introduces the key roles operating in a typical brokerage and how REBBA defines the responsibilities of an owner, a broker of record, and a branch manager. It further describes the restrictions that apply to a nonregistered owner. It provides information about when and how to designate an alternate broker of record when the broker of record is unavailable.

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Lesson 1 | Page 2 of 18

There are several factors that determine a brokerage’s success. Two critical factors are the organizational structure of a brokerage and the distribution of responsibilities within the brokerage. Each brokerage may adapt its organizational structure to align with their vision and goals, while ensuring compliance with REBBA. A well-defined organizational structure improves operational efficiency. REBBA sets out various statutory obligations that must be complied with when defining the detailed responsibilities of the various roles that operate in a typical brokerage. Upon completion of this lesson, you will be able to: • Identify the various roles in a typical brokerage • Identify the role and responsibilities of an owner in a brokerage • Identify the role and responsibilities of a broker of record in a brokerage • Identify the role and responsibilities of a branch manager in a brokerage • Describe when and how to designate another broker to be the broker of record when the broker of record is unavailable Throughout this lesson, you will participate in decision points to test your knowledge on the topics presented.

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Lesson 1 | Page 3 of 18

Different individuals within a brokerage perform specialized functions and collaborate with one another to meet the brokerage’s vision and goals. Even though work is delegated to individuals within the brokerage, the ultimate responsibility remains with the broker of record. It is important for everyone to be aware of their distinct responsibilities. This helps to ensure open communication and that tasks get completed on time with utmost quality.

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Lesson 1 | Page 4 of 18

Roles in a Typical Brokerage For any given brokerage, the typical roles observed are owner, broker of record, branch manager, administrative staff, and the brokers or salespersons. Each of these are responsible for different aspects of a brokerage. The owner makes key decisions related to the brokerage, such as the strategy, direction, and financial decisions. If the owner is not the broker of record, they may require the assistance of the broker of record to execute these plans.

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The broker of record ensures compliance with REBBA and other provincial and federal legislation governing all aspects of the brokerage. The broker of record is responsible for running the day-to-day brokerage business and may also trade in real estate. Branch managers ensure that the brokerage’s policies are adhered to. They are responsible for overseeing the operations at branch level and report to the broker of record if any issues arise. A branch manager may also trade in real estate. The administrative staff performs non-trading activities for the brokerage depending on their skill set and expertise. Brokers and salespersons act on behalf of the brokerage on any trading activity. These could be residential, commercial, or industrial transactions (depending on their skill set and expertise). You will learn more about the responsibilities of an owner, a broker of record, and a branch manager in detail in the next few screens.

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Lesson 1 | Page 5 of 18

The owner of a brokerage may or may not necessarily be registered to trade in real estate. As you learned earlier, regardless of the form of ownership, a broker of record must be designated for every brokerage. In the case of a sole proprietorship, the owner must be registered and is required to be the broker of record. A broker, salesperson, or a non-registered owner can own an interest in a partnership or a corporation and operate it as a real estate brokerage. In this instance, any broker employed by the brokerage can be the broker of record. Typically, if the owner has broker registration, they choose to be the broker of record. The responsibilities of a registered owner vary from that of a non-registered owner. As you learned earlier, there are special reporting obligations to RECO if an owner has 10 per cent or more of the equity shares in a corporation.

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Lesson 1 | Page 6 of 18

Roles and Responsibilities of an Owner The role of an owner is to direct the brokerage operations by providing economic resources and valuable assistance, as needed. An owner is required to have a general understanding of real estate and how a brokerage operates, with all its fiduciary and regulatory responsibilities. Responsibilities of an owner • Developing a vision for the brokerage. • Creating a business plan with a focus on future growth and management. • Defining goals for the brokerage and using these for performance reviews. • Examining the financial condition of the brokerage. • Solving day-to-day issues related to technology, equipment, and the business premises that the brokerage may be facing. © 2021 Real Estate Council of Ontario

• Designating a broker employed by the brokerage to be the broker of record in a corporation and partnership. (Note that the owner will be the broker of record in a sole proprietorship.) • Maintaining a healthy working relationship with the broker of record if the owner is not the broker of record. You will learn about some of these responsibilities in detail in a later course. Restrictions that apply to a non-registered owner • A non-registered owner should understand that the broker of record will have full authority to ensure the brokerage complies with REBBA. A non-registered owner cannot trade in real estate in any way. This means that they cannot be present at meetings with a client or a customer or participate in brokerage negotiations.

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Lesson 1 | Page 7 of 18

A broker of record holds a pivotal role In a real estate brokerage, given their overriding responsibilities for brokerage operations, compliance with REBBA, supervision of brokers, salespersons, and non-registrants (that is, administrative staff), the overseeing of delegated responsibilities, and the review or approval of trade-related documents. The owner may have a vision for the brokerage, but it is the broker of record who is responsible for ensuring that the brokerage complies with the Act and its regulations. Failing to comply with the Act and the regulations can lead to legal and financial liabilities for a brokerage, including disciplinary actions, suspension, or loss of registration.

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Lesson 1 | Page 8 of 18

Responsibilities of a Broker of Record as per REBBA REBBA sets out various statutory obligations for a broker of record but does not reduce these to detailed responsibilities and duties. They fall under the general requirement of ensuring brokerage compliance with the Act and its regulations. The broker of record’s obligation relates not only to being responsible for oversight, but also to ensuring proper conduct by all individuals employed by the brokerage. It is the broker of record’s responsibility to take reasonable steps to correct misconduct upon becoming aware of its occurrence. Obligations Under REBBA 1. REBBA compliance: Ensure that the brokerage fully complies with the Act and its regulations. 2. Participation: Participate actively in the management of the brokerage.

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3. Supervision: Ensure an adequate level of supervision for brokers, salespersons, and other persons employed by the brokerage. 4. Reasonable steps to address failure: Take reasonable steps to deal with any failure to comply with the Act or the regulations by a broker, salesperson, or other person employed by the brokerage. 5. Real estate trust account and trade record sheets: Review and sign monthly trust account reconciliations and trade record sheets. 6. Financial statements: Sign any brokerage financial statements as required by RECO. Currently, brokerages do not have to provide financial statements on a periodic basis. However, every brokerage, when required to do so by RECO, must file a financial statement signed by the broker of record and certified by a person licensed under the Public Accounting Act.

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Lesson 1 | Page 9 of 18

Active Participation and Accountability Brokers and salespersons are responsible for their own conduct regarding REBBA compliance. However, the broker of record can be held accountable for the actions of the brokers and salespersons employed by their brokerage, in cases such as disciplinary actions arising from RECO’s progressive discipline process. RECO may hold a broker of record accountable in the following cases: • They were aware of a broker’s or salesperson’s improper behaviour or misconduct and did nothing to correct the situation. • They were directly involved in such improper behaviour or misconduct. • They did not provide adequate supervision and, in failing to do so, allowed improper behaviour or misconduct to occur.

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• They became aware of the misconduct after the fact, but did not properly address such misconduct, take corrective measures, or attempt to mediate damages resulting from the conduct. • They failed to notify RECO when aware of fraudulent or other unlawful activities of brokers and/or salespersons. If the broker of record demonstrated diligence in attempting to ensure compliance but the brokerage systems failed to perform as needed, RECO could still find the brokerage and/or the broker of record responsible. In common law, a brokerage can be vicariously liable for the mistakes of its brokers and salespersons, when, in fact, the brokerage may not have been directly involved in the wrongdoing. The legal premise of vicarious liability is that one party is responsible for the misconduct of another, even when the first party was not involved in the misconduct. The broker of record should be actively involved in the day-to-day operations of the brokerage to ensure high standards are firmly entrenched and continuously enforced. The direct participation of the broker of record will vary based on the business model selected, the extent of technological innovations, the number of brokers and salespersons employed, and the effectiveness of delegation to others including registered persons (for example, branch managers) or unregistered persons (administrative staff). However, the broker of record will always have the ultimate responsibility for the brokerage operation and should presume involved, functional, and dynamic participation in brokerage activities to ensure standards enforcement and compliance with REBBA and various provincial and federal legislation.

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Lesson 1 | Page 10 of 18

General Responsibilities of a Broker of Record Apart from ensuring compliance with REBBA, a broker of record also assumes general responsibilities for managing day-to-day operations of a brokerage. It is the broker of record’s responsibility to do the following: • Ensure brokers, salespersons, and non-registrants (administrative staff) are informed about the key industry trends and legislative changes that may impact the brokerage. • Manage recruitment and selection procedures and related documentation for the brokerage. • Create orientation programs for new staff and ongoing training programs for existing staff with a focus on skills enhancement, professional development, and performance management. • Create a written brokerage policies and procedures manual. • Develop business plans and prepare budgets based on brokerage needs and circumstances.

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• Oversee the accounting system for the brokerage and monitor financial performance of the brokerage. • Safeguard brokerage records. • Define standards and risk management procedures to prevent errors, negligence, and misrepresentation in real estate transactions.

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Lesson 1 | Page 11 of 18

REBBA requires a brokerage that is not a sole proprietorship to designate a broker employed by the brokerage who, when the broker of record is absent or unable to act, can exercise and perform the powers and duties of the broker of record. This will ensure the brokerage is prepared for any situations where the broker of record is absent.

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Lesson 1 | Page 12 of 18

Designating an Alternate Broker of Record According to REBBA, an alternate broker of record must be designated in addition to the broker of record if the brokerage has another broker (or brokers) registered with the brokerage. The alternate broker of record is expected to exercise and perform the duties of a broker of record in situations when the broker of record is absent or unable to perform their duties. The alternate broker of record should be a person of trust and should also have the requisite capabilities and knowledge. Key requirements related to designating an alternate broker of record are: 1. Notification and/or change: Corporate and partnership brokerages must provide written notice to RECO of their designation of (or any changes in their designation of) an alternate broker who can sign trust and trade transactions in the absence of the broker of record. 2. Corporate resolution: Corporations and partnerships must designate the alternate signing authority via a corporate or a partnership resolution. 3. When to designate: Corporate and partnership brokerages must identify another broker as an alternate signing authority to review and sign real estate trust account transactions, trade records, and monthly reconciliations when the broker of record is unable to act. The alternate broker of record must be identified when the Application for New Brokerage is submitted to RECO, provided they have another broker who will be joining the brokerage. 4. Review and sign-off authority: The authority of an alternate broker of record is permanent until revoked by the broker of record. The alternate signing authority may review and sign off on the following transactions during short periods when the broker of record is absent or unable to act: a. Real estate trust account transactions b. Trade records c. Monthly trust account reconciliations

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The designated broker of record remains responsible for other duties and functions under the Act and the regulations. The broker of record can define the scope of responsibilities that an alternate broker of record can perform on their behalf. For example, the alternate may only have signing authority for RECO applications. In this case, a signed letter specifying this must be submitted to RECO. 5. Documents required: When appointing an alternate broker of record, the following documents are required for submission to RECO: a. A signed and dated letter from the broker of record reflecting the specifics of the alternate broker of record’s authority to sign real estate trust account transactions, trade records, and monthly reconciliations in the broker of record’s absence or inability to act b. An original criminal record check for the alternate broker of record completed within the six months prior to submission of the request c. A copy of the signature card on file from the financial institution reflecting the following: i. Real estate trust account number ii. Corporate name or trade style name if applicable iii. Name, title, and signature of the broker of record and the alternate signatory iv. Account type – real estate trust account (not “in trust” or “trust account”) v. Signatory instructions (for example, broker of record sole signing authority, alternate signatory to sign in broker of record’s absence)

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Lesson 1 | Page 13 of 18

A branch office with one broker or salesperson requires no additional supervision other than the broker of record. A branch office with more than one salesperson must be under the direct supervision of a branch manager. The branch manager must be a broker or a salesperson who has been registered for at least two years and is ultimately responsible to the broker of record.

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Lesson 1 | Page 14 of 18

Responsibilities of a Branch Manager As mentioned earlier, a branch manager may be a broker or a salesperson who has been registered for at least two years and is ultimately responsible to the broker of record. They are accountable at the branch level to follow the broker of record’s instructions and are responsible for the day-to-day activities at a brokerage branch office. A branch manager also ensures that the brokerage’s policies are adhered to. Their scope of authority depends on the broker of record’s mandate within the overall brokerage structure. According to legislation, the branch manager is responsible for the following: • Ensuring an adequate level of supervision for brokers, salespersons, and other individuals employed at the branch office • Taking reasonable steps to address any failure to comply with REBBA or the regulations by a broker, a salesperson, or another individual employed at the branch office • Managing all records relating to the branch office

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A branch manager may also assist with the following tasks: • Overseeing the administrative staff • Assisting salespersons with their transactions • Recruiting brokers and salespersons for the branch office • Developing and facilitating training programs • Communicating with the broker of record to ensure that brokerage policies are being implemented at the branch

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Lesson 1 | Page 15 of 18

REBBA Requirements for a Branch Office The authority granted to a broker of record may include hiring managers for registered branches of the brokerage. The Act directs that a brokerage cannot conduct business from more than one location to which the public is invited (subject to certain exceptions) unless the brokerage is registered in respect of each location, one of which must be designated as the main brokerage office with the balance identified as branch office(s). The following two sections contain information on the REBBA requirements governing how to manage a brokerage with a single branch versus one with multiple branches. Managing a branch office Every branch office of a brokerage must be under the supervision of a broker of record. According to the Act, every branch office of a brokerage that has more than one salesperson must be under the direct management of a branch manager who must be a broker or a salesperson who has been registered for a minimum of two years. The branch manager is ultimately responsible to the broker of record.

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Managing multiple branch offices RECO discourages the practice of the same person acting as the manager for more than one branch office. Having each branch office managed by a different person allows for better supervision and participation in all activities at that location. This reduces risk to the brokerage and helps safeguard the best interests of consumers. If a request is made to have the same person manage multiple branch offices, the following questions will be asked by RECO: • Will the manager attend each office every day? • How many people work at the branch offices? • How many offices are presently being managed or will be managed by one manager? • What is the distance between branch offices? • What electronic means are in place for the manager to stay in contact with the branch offices?

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Lesson 1 | Page 16 of 18

The broker of record of ABC Real Estate Inc. has just hired a new branch manager for their north end branch office. The broker of record is meeting with the new branch manager to discuss their list of responsibilities. What should the broker of record include in the branch manager’s list of responsibilities? There are four options. There are multiple correct answers.

1

Provide supervision to all individuals working at the branch office.

2

Take reasonable steps to address any failure to comply with REBBA or the regulations by a broker, salesperson, or another individual employed at the branch office.

3

Ensure that the brokerage complies with REBBA.

4

Organize and arrange training sessions for brokers and salespersons employed by the branch.

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Lesson 1 | Page 17 of 18

A non-registered owner owns XYZ Realty Ltd. Which activities can the non-registered owner perform on behalf of XYZ Realty Ltd.? There are four options. There are multiple correct answers.

1

Acquiring technology to automate recordkeeping for the brokerage

2

Helping sellers identify an appropriate listing price of their property

3

Purchasing equipment and furniture for the brokerage office

4

Signing for the brokerage’s real estate trust account

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Lesson 1 | Page 18 of 18

Congratulations, you have completed the lesson! Completion of this lesson has enabled you to: • Identify the various roles in a typical brokerage • Identify the role and responsibilities of an owner in a brokerage • Identify the role and responsibilities of a broker of record in a brokerage • Identify the role and responsibilities of a branch manager in a brokerage • Describe when and how to designate another broker to be the broker of record when the broker of record is unavailable There are four sections on this page with a summary of the key topics that were discussed in this lesson.

Key roles operating in a brokerage

There are multiple roles that operate in a brokerage: for example, owner(s), broker of record, branch manager(s), administrative staff, brokers, and salespersons. Each role is responsible for different aspects of a brokerage.

Role and responsibilities of an owner

The owner makes key decisions related to the brokerage, such as the strategy, direction, and financial decisions. If the owner is not the broker of record, they may require the assistance of the broker of record to execute these plans. An owner is responsible for: • Developing a vision for the brokerage • Creating a business plan with a focus on future growth and management • Defining goals for the brokerage and using these for performance reviews • Examining the financial condition of the brokerage • Solving day-to-day issues that the brokerage may be facing In a sole proprietorship, the owner is also the broker of record.

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The broker of record is responsible for ensuring that the brokerage complies with REBBA Role and responsibilities of and other provincial and federal legislation. a broker of record Other statutory obligations of a broker of record include: • Actively participating in the management of the brokerage • Ensuring an adequate level of supervision of all persons working in a brokerage • Taking reasonable steps to address any failure to comply with the Act or the regulations by any person working at the brokerage • Reviewing and signing monthly trust account reconciliations and trade record sheets and any brokerage financial statements, as required by RECO The branch manager is responsible for the day-to-day activities at a brokerage branch office Role and responsibilities of and is ultimately responsible to the broker of record. a branch manager A branch manager is responsible for: • Ensuring an adequate level of supervision for all persons working at the branch office • Taking reasonable steps to address any failure to comply with REBBA or the regulations by any person employed at the branch office • Managing all records relating to the branch office REBBA has laid out specific requirements related to who can manage a branch and the number of branches a person can manage.

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Lesson 2 | Page 1 of 7

Lesson 2: Delegation Within a Brokerage

This lesson gives an overview of the delegation of responsibilities in a typical brokerage. It also distinguishes between lines of authority in a brokerage and its operation types.

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Lesson 2 | Page 2 of 7

The delegation of authority and responsibilities within a brokerage are important considerations for a broker of record. Clearly defined lines of authority enable a culture of accountability and the smooth transitioning of tasks. Delegation and lines of authority can vary based on the type of brokerage operation, but any delegation or transfer of responsibilities must remain compliant with REBBA. This lesson describes the delegation of responsibilities in a brokerage and why this is important. It further describes brokerage operation types and authority lines. Upon completion of this lesson, you will be able to: • Distinguish typical lines of authority/delegation within a brokerage Throughout this lesson, you will participate in decision points to test your knowledge on the topics presented.

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Lesson 2 | Page 3 of 7

It is important as a broker of record to know which tasks can be delegated to a manager, a broker, a salesperson, and an administrative staff member in compliance with REBBA. Although work may be delegated, you will be ultimately responsible as a broker of record for supervising tasks to ensure they are completed in compliance with REBBA.

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Lesson 2 | Page 4 of 7

Delegation and Types of Brokerage Operation Brokerages address delegation in various ways based on the type of brokerage operation: for example, single location or decentralized brokerage operations (main office and branches). The following three sections contain information on the brokerage operation types. Single-location brokerage with centralized decision-making Single-location brokerages are noted for their top-down management style. The owner is also typically the broker of record, and they have direct control over all operations, resulting in highly centralized decisionmaking. Traditionally, single-location brokerages have fewer than 40 employed brokers and salespersons. When there is growth within a brokerage, the broker of record will need to hire a manager to assist them, which will also come at a cost to the brokerage. Single-location brokerages have proven very resilient due to inherent cost efficiencies of one location. Delegation is straightforward given the direct control and participation by the broker of record or the owner.

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Single-location brokerage with distributed responsibilities A single-location operation with distributed responsibilities is useful in situations where the brokerage wants to leverage the advantages of a single location and generate higher volumes. The objective is to obtain greater efficiencies and effectively control a large sales force. The removal of various ownership restrictions provides more flexibility in internal operating structure and the delegation of authority. The flowchart in the background describes that the broker of record in such a type of operation oversees trade-related activities, with other duties being shared by a general manager and an accounting supervisor. However, many variations are possible. Decentralized (main location and branch offices) brokerage The decentralized brokerage provides greater operational flexibility and is better suited for brokerages seeking wider geographic coverage. An efficient decentralized operation is typically made up of a head (main) office, which performs centralized administrative functions and provides selected services that are most efficiently delivered from the head office (for example, technology and training services), along with branch offices. Managers of those branches are given varying measures of autonomy to handle day-today activities at the branch level. The success of decentralized operations lies in welldefined policies and procedures to ensure that © 2021 Real Estate Council of Ontario

delegation is precisely defined and articulated. The challenge involves finding the right mix between the manager(s) rights to make decisions within reasonable constraints imposed by the head office.

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Lesson 2 | Page 5 of 7

Lines of Delegation and Leading Practices Authority lines in a real estate brokerage are often hierarchical, flowing downward from the owner. Typically, delegation flows from the owner and/or the broker of record to branch managers (if applicable), individual brokers and salespersons, administrative staff, and so on. However, while delegation by the broker of record transfers the formal authority, the ultimate responsibility remains with the broker of record. Any such delegation should be prudently exercised based on trust between the parties and the capabilities or skills of the person being delegated.

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To comply with REBBA, assuming an owner and/or the broker of record wishes to delegate duties, some leading practices are as follows: • Brokerage monitoring systems should be in place to continuously confirm that delegated tasks are being performed correctly. • Adequate policies, procedures, and job descriptions should exist to ensure clarity in tasks to be performed and the responsibility delegated. Individuals delegated should be competent to carry out the defined tasks in an accurate and thorough manner.

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Lesson 2 | Page 6 of 7

A salesperson from a co-operating brokerage delivers a Notice of Fulfillment to the listing brokerage office and would like someone to acknowledge receipt of delivery on their copy. The listing salesperson and the broker of record are both currently unavailable. Who has the authority to sign the acknowledgement of receipt? There are four options. There are multiple correct answers.

1

Front desk receptionist

2

Branch manager

3

Any broker or salesperson

4

Bookkeeper

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Lesson 2 | Page 7 of 7

Congratulations, you have completed the lesson! Completion of this lesson has enabled you to: • Distinguish typical lines of authority/delegation within a brokerage There are two sections on this page with a summary of the key topics that were discussed in this lesson.

Delegation of responsibilities

Delegation and lines of authority can vary based on the type of brokerage operation, but any delegation or transfer of responsibilities must remain compliant with REBBA. The lines of delegation flow down from the broker of record to the branch manager, administrative staff, and other brokers or salespersons. While the broker of record may delegate certain tasks to others and hold them accountable, they are ultimately responsible for ensuring that the brokerage complies with the Act and the regulations.

Lines of delegation in different types of brokerages

The lines of delegations vary based on the type of brokerage operation. However, the ultimate responsibility remains with the broker of record. Any delegation in a brokerage should be prudently exercised based on trust between the parties and the capabilities or skills of the person being delegated. The brokerage should have a monitoring system in place to continuously confirm that delegated tasks are being performed correctly. Adequate policies, procedures, and job descriptions should exist to ensure clarity in tasks to be performed, and individuals delegated should be competent to carry out the defined tasks.

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Lesson 3 | Page 1 of 7

Lesson 3: Summary Practice Activities

This lesson provides a series of activities that will test your knowledge on the entire module.

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Lesson 3 | Page 2 of 7

This lesson contains decision points that will test your understanding of the different roles and the delegation of responsibilities that typically occurs within a brokerage. Throughout this lesson, you will participate in decision points to test your knowledge on the topics presented.

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Lesson 3 | Page 3 of 7

XYZ Realty Inc. has expanded its business operations and has recently hired 20 new salespersons. The broker of record now wants to delegate some of their tasks to the branch manager, whom they recently hired to accommodate future growth. What are some leading practices that the broker of record should follow before delegating tasks to the branch manager? There are three options. There are multiple correct answers.

1

Build a monitoring system.

2

Check if the salespersons are willing to report to the branch manager.

3

Check the branch manager’s competency to perform the delegated tasks.

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Lesson 3 | Page 4 of 7

A broker of record is conducting a training session with a newly recruited branch manager. The broker of record wants to ensure that the new branch manager understands their responsibilities regarding proper conduct of brokerage operations. The broker of record presents the following hypothetical scenario to the new branch manager: A brokerage has recently promoted one of their salespersons to the position of branch manager. Although the salesperson brought sound decision-making and thorough understanding of brokerage policies and procedures, they struggled to establish their authority at the branch office in their new role. Some colleagues at the branch regularly approached them whenever they had trade-related issues, while others found the new branch manager strict and did not approach them for guidance. This resulted in the new branch manager not being fully aware of the activities of all brokers and salespersons at the branch office. One day, the new branch manager receives a call from a seller client complaining that they had signed a listing agreement last month and that the salesperson had promised to return with a copy for them. They contacted the salesperson the following week to remind them that they have still not received their copy. The salesperson apologized and promised to deliver their copy, but never did.

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What actions should the branch manager take to manage the situation and fulfill their obligations, as per REBBA? There are four options. There are multiple correct answers.

1

Contact the listing salesperson and ensure that the seller receives their copy of the listing agreement.

2

Report the salesperson’s actions to the broker of record.

3

Provide supervision to all branch office employees.

4

Check all records related to the branch office.

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Lesson 3 | Page 5 of 7

The broker of record at ABC Realty Inc. has hired a recent graduate of the real estate salesperson program. The individual has received their registration from RECO, and they are eager to start their real estate career. What should the broker of record do to ensure the newly recruited salesperson operates in compliance with REBBA? There are four options. There are multiple correct answers.

1

Provide an adequate level of supervision.

2

Actively participate in managing the salesperson’s activities.

3

Provide videos on sales training techniques.

4

Ensure the brokerage provides comprehensive training.

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Lesson 3 | Page 6 of 7

The alternate broker of record at ABC Real Estate Inc. has decided to retire, and the brokerage now needs to designate another person as an alternate broker of record. What requirements must be fulfilled by ABC Real Estate Inc. to designate an alternate broker of record? There are four options. There are multiple correct answers.

1

The person must be appointed by the passage of a corporate resolution.

2

The person must have been an employee of ABC Real Estate Inc. for at least three years.

3

The person must be a salesperson employed by ABC Real Estate Inc.

4

The person must be approved by RECO.

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Lesson 3 | Page 7 of 7

Congratulations, you have completed this lesson!

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Module Summary | Page 1 of 3

Module Summary

This lesson contains a summary of the entire module.

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Module Summary | Page 2 of 3

Congratulations, you have completed this module! The next screen will present a summary of the lessons in this module.

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Module Summary | Page 3 of 3

There are two sections on this page with a summary of the key topics that were discussed in this module.

Roles in a Brokerage

The key roles in a typical brokerage are owner, broker of record, branch manager, administrative staff, and brokers or salespersons. In a sole proprietorship, the broker of record is also the owner. A corporation and partnership brokerage can be owned by more than one broker or salesperson. A brokerage can also be owned by a non-registered owner(s). There are differences in the responsibilities of a registered and a non-registered owner. The broker of record is always responsible for enforcing standards and ensuring all transactions of a brokerage, as well as all brokers and salespersons, comply with REBBA. Completion of this lesson has enabled you to: • Identify the various roles in a typical brokerage • Identify the role and responsibilities of an owner in a brokerage • Identify the role and responsibilities of a broker of record in a brokerage • Identify the role and responsibilities of a branch manager in a brokerage • Describe when and how to designate another broker to be the broker of record when the broker of record is absent or unable to fulfill their duties to the brokerage

Delegation Within Brokerages address delegation in various ways based on the type of brokerage operation. a Brokerage In a single-location brokerage with centralized decision-making, the owner is also typically the broker of record, and they have direct control over all operations. In a single-location brokerage with distributed responsibilities, the broker of record oversees trade-related activities, with other duties being shared by a general manager and an accounting supervisor. A decentralized brokerage has multiple branch locations operating under a branch manager. Such brokerages have a head (main) office, which performs centralized administrative functions and provides selected services to branch offices. Managers of the branches have autonomy to handle day-to-day activities at the branch level.

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Typically, delegation flows from the owner and/or the broker of record to branch managers (if applicable), individual brokers and salespersons, administrative staff, and so forth. While delegation by the broker of record transfers the formal authority, the ultimate responsibility remains with the broker of record. Completion of this lesson has enabled you to: • Distinguish typical lines of authority/delegation within a brokerage

© 2021 Real Estate Council of Ontario

V6

Module 4: Identifying Risks, Liabilities, and Insurance Considerations for a Brokerage Disclaimer: This is a reference document which contains pages from the Accessible eLearning module. You should complete the eLearning module to proceed to the next step. Please note that the accessible module on the LMS only contains the interactive pages and you need to go through the content of this document thoroughly to attempt the interactive activities in the module. Please use Adobe Acrobat Reader (Recommended version 9 or above) to navigate through this PDF. Real Estate Broker Program © 2021 Real Estate Council of Ontario. All Rights Reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or in any means – by electronic, mechanical, photocopying, recording or otherwise without prior written permission, except for the personal use of the Real Estate Broker Program learner.

© 2021 Real Estate Council of Ontario

Module 4: Identifying Risks, Liabilities, and Insurance Considerations for a Brokerage Risk management involves the ability to identify risks and implement appropriate strategies to manage them. As a broker of record, operating a brokerage, will require you to acknowledge that there is inherent risk in real estate transactions. These risks and their impact can be minimized by adhering to Real Estate Business and Brokers Act (REBBA) requirements, defining appropriate brokerage policies and procedures, and conducting training on an ongoing basis. This module describes the nature of risks a brokerage may be exposed to over time. It discusses various risk management practices that a brokerage can implement to minimize the occurrence and impact of risks. It explains the features of the Professional Liability Insurance Program administered by RECO. Furthermore, it outlines some additional insurance coverage that brokerages can consider purchasing. To check your understanding of this module, you must complete all the activities in the online module. While navigating through the online module, click the Legislation button to view laws and regulations related to this module. The contents of the thumbnails Accessible PDF.

and References from the module are added to support your learning throughout this

© 2021 Real Estate Council of Ontario

Module 4: Identifying Risks, Liabilities, and Insurance Considerations for a Brokerage Number of Lessons

Lesson Number

4 Lessons

Lesson Name

Lesson 1

Identifying Risks and Liabilities Impacting a Brokerage

Lesson 2

Managing Risks and Liabilities Impacting a Brokerage

Lesson 3

Summary Practice Activities Module Summary

© 2021 Real Estate Council of Ontario

Lesson 1 | Page 1 of 14

Lesson 1: Identifying Risks and Liabilities Impacting a Brokerage

This lesson describes the importance of identifying risks associated with trading in real estate. It explains vicarious liability and common types of trade and non-trade related risks that apply to a brokerage.

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Lesson 1 | Page 2 of 14

Risk is a factor in all consumer dealings and business activities. Consumers take risks when negotiating and acquiring property. They manage that risk by engaging with real estate professionals and brokerages to provide services that guide them safely through the real estate trade-related transactions. Brokerages take business risks in developing and delivering services to consumers. Proactive risk identification and management helps brokerages offer quality services to consumers as well as control costs. It often prevents the financial and legal complications associated with dealing in real estate transactions along with ensuring fair trade. As a broker of record, you will be responsible for promoting a culture that facilitates continuous risk identification and management. You will be required to invest in proper training and include relevant processes within the

© 2021 Real Estate Council of Ontario

brokerage policies that reinforce the culture. The first step in planning for risk is identifying the risks that apply to your brokerage’s services, business model, and ownership type. Upon completion of this lesson, you will be able to: • Identify risks and legal liabilities that can impact a brokerage • Identify typical trade-related risks and legal liabilities for a brokerage • Identify typical non-trade related risks and legal liabilities that can impact a brokerage Throughout this lesson, you will participate in decision points to test your knowledge on the topics presented.

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Lesson 1 | Page 3 of 14

As a broker of record, you will identify potential risks that apply to your brokerage in advance when there is still time to plan. This will help you minimize any negative impacts on the functioning of the brokerage and help maintain high standards. However, risk identification and management is not a one-time activity. It should be your primary focus to identify potential risks and manage them on an ongoing basis. Proactive risk identification and management will help you ensure professionalism by your staff, keeping them continuously focused in ensuring consumer protection during trade-related activities. It will also help you optimize operations, drive competitive advantage, and sustain future profitability and growth for your brokerage.

© 2021 Real Estate Council of Ontario

Lesson 1 | Page 4 of 14

Identifying Risks and Liabilities Proactive identification of risks and liabilities should be an integral part of the brokerage’s overall business strategy. This involves complying with REBBA and other regulatory requirements. A broker of record is responsible for leading the risk identification process in a brokerage. A proactive, problem-solving approach can help them oversee the overall functioning of the brokerage and identify risks at both macro and micro levels. At a macro level, a broker of record addresses risks related to infrastructure, the real estate industry, staff, processes, regulatory compliance, and so on. At a micro level, a broker of record addresses risks that may occur in real estate transactions in their brokerage. Establishing the right brokerage policies and procedures and providing appropriate training can empower brokers and salespersons to identify and manage risks for each transaction. A

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broker of record should make themselves available to assist and guide brokers and salespersons throughout the identification and management of risks applicable to real estate transactions. A broker of record can proactively prepare for potential risks applicable to their brokerage by reviewing disciplinary cases, which illustrate issues and risks faced by other brokerages. They can also study insurance claims, statistics, and trends. These resources can be used as learning opportunities that can help a broker of record define appropriate measures to avoid and mitigate identified risks in their brokerage. For more information on existing disciplinary cases, review the Recent Enforcement Decisions section on the RECO website. For more information on insurance claims, statistics, and trends, review the RECO Insurance Program website.

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Lesson 1 | Page 5 of 14

Vicarious Liability: An Introduction When identifying risks, a broker of record needs to consider risks that may be applicable to the brokerage due to the actions of their staff, that is, brokers, salespersons, and administrative staff. A brokerage can be held responsible for the intentional or unintentional wrongdoings committed by their staff, even if the brokerage may not have been directly involved. In common law, this is referred to as the brokerage being vicariously liable for the mistakes of its staff. For example, suppose a salesperson is listing a property for sale and has limited time to complete their paperwork before meeting the seller. They copy details from another brokerage’s expired listing of the property without verifying details. The property is sold, and the transaction is closed. If the buyer later learns that the details about the property were reported in error, they may sue the brokerage for damages and demand compensation. In such a case, the brokerage could be vicariously liable for the salesperson’s wrongdoing. Since the salesperson is in violation of REBBA, this could indicate performance issues and further manifestation of risks.

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Lesson 1 | Page 6 of 14

Vicarious Liability: Impact on the Brokerage This concept of vicarious liability, from a legal perspective, is built on the premise that an employed individual is under the supervision of the employing brokerage and they carried out the wrongdoing during the normal course of business. For real estate purposes, vicarious liability can involve the seller or the buyer and the brokerage itself for the actions of a broker or salesperson employed by that brokerage. This means that if a seller or buyer suffers any real or perceived damage, they may seek restitution (usually monetary) from the brokerage and the broker or salesperson involved. A lawsuit involving vicarious liability may lead to loss of money, business, and reputation for the brokerage. A broker of record should understand the extent of liability under this legal principle. As soon as the brokerage and the broker or salesperson involved receive a legal notice involving a claim or believe that a claim may be imminent, the broker of record must ensure that the broker or salesperson contacts RECO’s insurer and provides full details of the events known to them along with all applicable documents. Not reporting to RECO’s insurer in a timely manner may void their errors and omissions insurance.

© 2021 Real Estate Council of Ontario

Lesson 1 | Page 7 of 14

A broker of record wants to prepare appropriate response strategies for potential cases of vicarious liability. To do so, they need to identify some possibilities where the brokerage could be vicariously liable for a broker’s or salesperson’s actions. In which of the given scenarios can the brokerage be held vicariously liable for the salesperson’s actions? There are four options. There are multiple correct answers.

1

A salesperson indicates in a feature sheet an incorrect lot dimension. The agreement of purchase and sale is prepared indicating the incorrect dimension and is signed by the buyer. The buyer learns about this misrepresentation after the sale has closed.

2

An individual with a pre-existing medical condition attending the open house faints and is injured. The salesperson calls 911 and assists the injured individual while waiting for emergency personnel.

3

A salesperson conducts an open house, which is attended by many people. The salesperson is unable to monitor all attendees as they tour the property. After the open house, the seller finds that an expensive piece of jewellery is missing.

4

A salesperson unlocks the front door of a property that they are about to show a buyer. The homeowner’s dog escapes and cannot be located by the salesperson.

© 2021 Real Estate Council of Ontario

Lesson 1 | Page 8 of 14

Trade-related risks are risks arising out of professional services provided by a broker, salesperson, or brokerage. As a broker of record, you will be responsible to ensure that your brokers and salespersons are fully trained in all aspects of the real estate transaction, can identify inherent trade-related risks, understand the consequences of these risks, and take necessary steps to avoid or mitigate them. This can be best accomplished through defining appropriate policies, providing training and individual coaching, and monitoring brokers’ and salespersons’ actions. It is important to ensure that potential risks are managed in a manner consistent with REBBA.

© 2021 Real Estate Council of Ontario

Lesson 1 | Page 9 of 14

Trade-Related Risks A broker of record should establish measures to avoid or mitigate trade-related risks that can impact a brokerage. Some common risks associated with trading are: • Problems associated with client representation, duties owed, and associated disclosures • Misrepresentation or non-disclosure of facts concerning listed properties, including verbal misunderstandings with sellers and buyers, and disclosure of material facts and latent defects • Errors in the preparation, delivery, or amendment of listings, agreements of purchase and sale, and related forms The following three sections contain examples of common risks associated with trading.

Problems associated with client representation Breach of representation (fiduciary) duties are a continuing source of litigation. Some examples of significant issues are: • Failing to explain the various service options at the earliest practical opportunity and ensure they are understood • Failing to properly advance the client’s interests during agreement negotiations • Not properly disclosing when brokers and salesperson have a direct or indirect interest in properties they are selling or acquiring • Problems arising with services described in an agreement but not provided to the client • Failing to advertise property details accurately

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• Failing to put promises in writing • Exceeding the authority granted in the representation agreement • Misleading a customer (through words and/or conduct) to believe that the broker or salesperson is working on their behalf when only providing customer services • Failing to maintain proper communication with the client to keep them fully informed about significant stages in the offer negotiations • Failing to disclose the existence of multiple representation and/or the ramifications in terms of duties to the client • Failing to advise the seller to disclose any known latent defects to prospective buyers

Misrepresentation Misrepresentations (that is, statements made without verifying the facts) are a major concern for a brokerage. Misrepresentation can be innocent, negligent, or fraudulent. You will learn more about this in detail in a later course. Examples of misrepresentation are: • Disregarding or misreading source documents when preparing listing information • Failing to verify statements made to sellers and buyers • Providing incorrect or incomplete information about wells and septic systems, including a lack of

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appropriate conditions in the agreement of purchase and sale • Providing incorrect and/or incomplete property tax details when preparing listing information • Making inaccurate representations about overall property condition • Assuming that seller representations are accurate • Failing to fully discuss and investigate leaks or moisture in basement areas and other defects both at the time of listing and when showing property • Relying on outdated surveys and/or accepting the seller’s assurances regarding unverified property lines • Failing to verify easements, the extent of such easements, and their impact on the use and enjoyment of the property • Assuming that no special zoning requirements or local improvement levies apply to the property being listed • Failing to take the time to fully investigate chattels included in the sale, fixtures excluded, and rental items but including them as part of the seller-signed listing agreement and data forms • Failing to verify information from past listings • Failing to verify legality of multiple units in a residential property

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Documentation errors Brokers of record, brokers, and salespersons should demonstrate competence when drafting agreements and related documents such as notices, amendments, and waivers. Common documentation errors include: • Including ambiguous clauses with terms that can be misinterpreted by sellers and buyers • Making transposition errors when transferring details from source documents to listing data forms, feature sheets, and information sheets • Failing to include appropriate clauses to protect the seller’s and buyer’s interest • Failing to investigate material facts about a listed property and failing to note them accordingly • Removing or waiving the wrong condition • Removing all conditions in a multiple offer situation in the heat of negotiations without the buyer’s full understanding of the implications of that action • Failing to ensure that parties to the agreement sign within prescribed time limits • Failing to ensure documents are delivered and acknowledged in accordance with agreement terms • Permitting an individual to sign as a witness who did not actually witness the signing of the document • Failing to fully review pre-printed clauses with sellers and buyers to ensure that terms and conditions are fully understood

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Lesson 1 | Page 10 of 14

Non-trade related risks are risks that arise outside a real estate transaction and primarily deal with operational issues. A brokerage is a business, and its operation can be affected by non-trade related risks. The sources of these risks may be internal or external to its functioning and may have adverse consequences for a brokerage’s operations and business. Typically, internal risks can be proactively avoided or mitigated by establishing appropriate policy, procedures, and training in a brokerage in the first place. Most external factors are beyond the immediate control of a brokerage. Therefore, a different approach is required to manage them and offset the impact.

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Lesson 1 | Page 11 of 14

Non-Trade Related Internal Risks Non-trade related internal risks are operational risks that centre around inadequacies or failures in the day-to-day operations of the brokerage. They may include issues related to: • Inconsistent quality of services offered by the staff on behalf of the brokerage • Insufficient infrastructure or technology • Maintenance of office premises

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• Ineffective delegation of responsibilities • Inadequate brokerage policies and procedures • Insufficient training provided to the staff Non-trade related internal risks are usually within the immediate control of the brokerage. They can be managed by proactively using strategies that are a blend of training, procedures, cross-checks, and other leading practices. Some examples of non-trade related internal risks are as follows: • An accounting error caused due to ineffective delegation or untrained resources could put the brokerage at risk. Establishing proper lines of authority and providing appropriate training could help the brokerage avoid this risk. • A phishing attack or ransomware onto the brokerage network can result in loss of data and reputation to the brokerage. Training staff, investing in the right software that encrypts brokerage data, appointing a dedicated IT professional, establishing brokerage policies and procedures, and purchasing a cyber-liability insurance policy can help in mitigating cyber risks.

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Lesson 1 | Page 12 of 14

Non-Trade Related External Risks Non-trade related external risks are usually caused by factors beyond a brokerage’s immediate influence or control. Yet these risks can directly impact brokerage operations and often take a brokerage by surprise. External risks include the following:

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• Financial risks that are caused by changes in interest rates and purchasing power of future dollars. These risks affect the spending capacity of the owner(s) to keep the brokerage operational. Financial risks are also related to the brokerage’s investments, investment performance, and duration of investments. • Market risks including risks caused by competition, market trends, force majeure (unforeseen circumstances), changes in legislation, and credit risks. • Business risks that are caused by taxation levels, consumer confidence, or spending patterns, and economic activity that can dictate the sustainability of a brokerage. There could be additional non-trade related factors that cause risks, such as natural or man-made calamities (earthquakes, pandemics, hurricanes, fires, terrorism, vandalism, civil unrest, labour strikes, and theft by staff or outside parties). While it may not be possible to reduce the probability of external risks occurring or to reliably predict them, their impact can be managed to a considerable extent by investing in the right infrastructure. Brokerages can also set aside reserves and/or purchase appropriate insurance policies in anticipation of problems that may arise in the future.

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Lesson 1 | Page 13 of 14

Identify which of the following scenarios represent trade-related risks. There are four options. There are multiple correct answers.

1

A buyer is interested in buying a commercial property. The salesperson prepares an agreement of purchase and sale and misstates the zoning and permitted uses of the property.

2

A new administrative staff member does not forward the brokerage phone lines to answering services at the end of the day. This results in a loss of business to the brokerage.

3

A broker is representing both the seller and the buyer in a transaction. However, this is not disclosed nor is informed consent obtained from the seller and buyer.

4

Some hackers interrupt a brokerage’s business by locking up systems with ransomware.

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Lesson 1 | Page 14 of 14

Congratulations, you have completed the lesson! Completion of this lesson has enabled you to: • Identify risks and legal liabilities that can impact a brokerage • Identify typical trade-related risks and legal liabilities for a brokerage • Identify typical non-trade related risks and legal liabilities that can impact a brokerage There are three sections on this page with a summary of the key topics that were discussed in this lesson.

Identifying risks and liabilities

Risk management involves the ability to identify risks and appropriately implement risk response strategies. As a broker of record, you will be responsible for leading the risk identification process in your brokerage. Proactive identification of risks and liabilities should be an integral part of your brokerage’s overall business strategy.

Vicarious liability

The brokerage can be vicariously liable for mistakes made by its staff, even when it may not have been directly involved in the wrongdoing. As a broker of record, you should understand the extent of liability under the principle of vicarious liability. As soon as the brokerage and the broker or salesperson involved receive a legal notice involving a lawsuit or believe that a lawsuit may be imminent, you must ensure that the broker or salesperson contacts RECO’s insurer and provides full details of the events known to them along with all applicable documents.

Trade-related risks are risks arising out of professional services provided by a broker, Trade-related salesperson, or brokerage. As a broker of record, you should ensure that your brokers and risks and nontrade related risks salespersons are fully trained in all aspects of the trade and can identify inherent traderelated risks on an ongoing basis. Common trade-related risks are problems associated with client representation, misrepresentation, and errors in documentation.

Non-trade related risks can be due to internal or external factors. Non-trade related internal risks are operational risks that centre around inadequacies or failures in the day-

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to-day operations of the brokerage. Non-trade related external risks are usually caused by factors beyond a brokerage’s immediate influence or control.

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Lesson 2 | Page 1 of 14

Lesson 2: Managing Risks and Liabilities Impacting a Brokerage This lesson identifies types of risk response strategies and leading practices a broker of record can implement to proactively manage risks. It describes the key features of the Professional Liability Insurance Program. It further describes some of the additional types of insurance that brokerages can consider purchasing.

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Lesson 2 | Page 2 of 14

The biggest challenge in most real estate transactions is not identification of risks but planning and responding to them effectively. As you learned earlier in this module, risk management is the process of identifying risks and creating appropriate risk response strategies to minimize their occurrence and/or impact. The risk management plan for a brokerage can be a mix of various risk response strategies. These response strategies can be used to avoid, mitigate, and transfer risks whenever possible and, in some circumstances, accept risks. As a broker of record, it will be prudent that you establish processes, policies, and training to minimize the occurrence and impact of risks associated with trade-related transactions and business operations. Entrepreneurial ability, ongoing oversight, and a level of sophistication gained through experience can have a significant, positive impact on reducing the occurrence and impact of such risks within the brokerage. Upon completion of this lesson, you will be able to: • Identify typical leading practices that a broker of record can use to manage risks • Identify key features of the Professional Liability Insurance Program administered by RECO • Identify additional insurance coverage that a brokerage can consider Throughout this lesson, you will participate in decision points to test your knowledge on the topics presented.

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Lesson 2 | Page 3 of 14

The success of a brokerage is a result of the due diligence observed by each of its stakeholders. As a broker of record, you will be responsible for proactively developing a plan of action to manage risks that could potentially impact your brokerage business negatively or interrupt its operations. Brokers and salespersons should be encouraged to identify risks that might affect real estate transactions or outcomes and bring any concerns to your attention. To ensure effective risk management, you will need to systematically consider the multiple categories of risks you may face so that you can institute appropriate risk response strategies for each.

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Lesson 2 | Page 4 of 14

Risk Management: Risk Response Strategies A brokerage’s reputation is its biggest asset, and establishing and maintaining high standards are key to building its credibility. There are multiple response strategies adopted across industries to manage risks. Choosing the appropriate strategy for a brokerage may depend on the circumstances and the type of risk being considered. For illustrative purposes, a brokerage can use the following: • Avoid risks: The most certain way to prevent risks from arising from a certain activity is by eliminating the cause itself. Avoiding risks is a recommended strategy for risks that could potentially have a significant impact on the consumer or the brokerage. • Mitigate risks: The most common way to handle risks is to reduce them to an acceptable level. Brokerages can mitigate risks through implementing preventive measures.

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• Transfer risks: Transferring risks involves shifting the risk to some other entity. • Accept risks: If a risk is inevitable or infrequent and has a minor impact, brokerages may choose to accept the risk and do nothing until the need arises. Avoiding risks is usually the ideal approach. However, it is not always possible to avoid risks. A broker of record should focus their energy on identifying appropriate mitigation practices for the brokerage. Transferring risks may reduce the impact of those risks on the brokerage should they occur, but ideally, brokerages should aim to reduce the probability of their occurrence. Accepting risks is not a recommended risk response strategy and should be sparingly implemented. For example, a brokerage may not purchase a type of additional insurance coverage for risks that are less likely to occur as the coverage is expensive. In this case, they choose to accept the risks and will have to pay for the consequences should the risks occur in future.

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Lesson 2 | Page 5 of 14

Leading Practices to Manage Risks The most effective approach to risk management is to anticipate risks and proactively implement solutions, rather than finding ways to minimize the impact after the event. Implementing proactive, comprehensive risk response strategies may allow a brokerage to avoid adverse publicity, limit exposure to risky situations, and avoid potential litigation when risk events occur. A broker of record can adopt leading practices to avoid, mitigate, and transfer their brokerage’s identified risks. Continuous monitoring and reviewing of risks will ensure that risks have been correctly identified and appropriate practices have been put in place to address them. The following four sections contain information on a selection of leading practices employed by brokerages to manage risks.

Establishing appropriate brokerage policies and procedures To ensure high standards in a brokerage, the broker of record should carefully create an office policy manual and ensure the brokerage staff reads, understands, and agrees to abide by it. The office policy manual should include policies and procedures that consider appropriate response strategies for each identified risk. Based on the risks applicable to the brokerage’s operations and services offered, a broker of record may be able to avoid some risks and mitigate others. For example, the broker of record of a brokerage trading in commercial properties could implement a brokerage policy restricting brokers and salespersons from trading in other types of properties. They could recommend for brokers and salespersons to refer

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such transactions to other brokerages. They could also include this restriction as a term in the employment contract. This will help the broker of record avoid risks arising from the brokers’ and salespersons’ lack of knowledge in different trading areas. Furthermore, creating recruiting policies to hire competent and knowledgeable people who are aligned with the brokerage’s vision and goals can help the broker of record mitigate risks. Some examples of what a broker of record can include in the office policy manual are: • Requirements when brokers and salespersons want to buy and sell property for their own account • Practices in compliance with REBBA and other legislations • Specific procedures that must be followed for each trade-related activity • Defined responsibilities and lines of delegation for all staff in the brokerage

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Establishing appropriate training interventions Training is an ongoing commitment that a broker of record should diligently plan for throughout the year. A broker of record can mitigate risks by providing appropriate training and ongoing coaching to their brokers and salespersons. Brokers and salespersons should be trained to understand: • Risks specific to the operations and services of the brokerage, including appropriate response strategies • All applicable compliance requirements and legislation affecting real estate activities • Brokerage-specific trading requirements and processes • Trade-related documents and contracts • All software programs and tools used in the brokerage • Soft skills required for successful communication and negotiations A broker of record can establish additional training programs to improve the brokers’, salespersons’, and administrative staff’s capabilities, capacities, productivity, and performance.

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Creating checklists and job aids To mitigate trade-related risks, a broker of record can make use of checklists and job aids. This will help them ensure consistency and quality in the delivery of services to the consumer. These checklists and job aids can be: • A pre-established set of approved clauses for brokers and salespersons to use • Prepared document packages to build seller and buyer relationships ensuring that all REBBA and other regulatory requirements as well as brokerage policies are met • Guidelines for using lockboxes on properties • Registrar’s bulletins This is not an exhaustive list. A broker of record should prepare resources based on their brokerage’s needs.

Mentoring brokers and salespersons A broker of record can potentially mitigate risks by fostering a climate in which brokers and salespersons are encouraged to consult with them when they encounter challenges. This is especially true with newly registered salespersons or for brokers and salespersons transferred from another brokerage. It is important for a broker of record to be aware of who might need more assistance within the brokerage. A broker of record can also consider introducing a mentoring program within their brokerage where an

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experienced broker or salesperson will guide a new salesperson for a period of time. Any errors made by the new salesperson should be reviewed by the mentor with the salesperson, and corrective action should be taken. Mentoring programs are a popular mitigation strategy. Mentors can assist the broker of record with supervision. However, this does not relieve the broker of record from their obligations of supervision and active participation.

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Lesson 2 | Page 6 of 14

Additional Leading Practices to Manage Risks As you learned earlier in this module, a broker of record can adopt various leading practices to avoid, mitigate, and transfer their brokerage’s identified risks. The following four sections contain information on a collection of additional leading practices employed by brokerages to manage risks.

Investing in infrastructure and technology A broker of record can avoid and mitigate risks and liabilities to their brokerage by investing in infrastructure that can make day-to-day activities efficient, cost-effective, compliant with legislative requirements, and error free. For example, using technology for recordkeeping and information retrieval can help avoid risks related to errors in storage of documents and loss of data. Furthermore, client contact software can help brokerages mitigate risks that may arise during client interactions by documenting key elements of the conversation. The right infrastructure and technology can improve operational efficiency by reducing time taken to complete tasks, simplifying processes, ensuring consistency across services, and reducing human error. A broker of record should ensure that the latest technologies and client contact software they invest in are put into regular use. To maximize returns from these investments, they should train brokers,

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salespersons, and administrative staff on how to use them.

Communicating ongoing updates A broker of record can mitigate risks by communicating necessary information and providing updates regarding changes to the legislative requirements that regulate real estate in Ontario. Furthermore, they should communicate updates regarding brokerage inventory changes, local issues, policy updates, and so on. Ongoing communication can be established through: • Informative emails, text messages, and videos • Social media groups and discussion threads • Virtual and in-person training programs

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Involving third-party professionals A broker of record can transfer risks to third-party professionals by ensuring that they are involved when brokers and salespersons are: • Not able to provide services with reasonable knowledge, skill, judgement, and competence • Not authorized by law to provide the services For example, brokers and salespersons should recommend buyers to engage the services from a qualified home inspector as brokers and salespersons do not have the knowledge, skilled judgement, and competence to provide those services. If the buyer refuses, they should obtain a written acknowledgement stating the same. Involving third-party professionals also helps a brokerage mitigate risks, as it reduces the probability of the risks occurring. If required, brokers and salespersons may provide sellers and buyers with a list of third-party professionals to consult on specific topics like legal matters, accounting advice, and environmental and structural issues. These professionals could be lawyers, appraisers, accountants, engineers, architects, electricians, building inspectors, or well and septic installers. Brokers and salespersons should accompany thirdparty professionals on site visits.

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Purchasing appropriate insurance Brokerages can transfer risk by purchasing appropriate insurance policies. When buying an insurance policy, a broker of record should review and understand the extent of the coverage and its terms and conditions. This understanding will help them define office policies and identify training needs for brokers and salespersons. For example, a broker of record may communicate timelines to brokers and salespersons for reporting issues to the insurer based on the policy terms and conditions. You will learn more about types of insurance policies to consider later in this module. In order to benefit from their insurance policy, a broker of record should ensure that they involve the insurer as soon as they become aware of a problem or a circumstance that may give rise to a claim.

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Lesson 2 | Page 7 of 14

A broker is planning to open a new brokerage and wants to institute robust risk management initiatives for the brokerage. What can the broker do to proactively avoid and mitigate risks to their brokerage? There are four options. There are multiple correct answers. 1

Purchase automobile and property insurance policies to protect the brokerage from all future risks.

2

Provide training to brokers and salespersons on trade-related activities.

3

Delegate trade-related inspections to third-party professionals.

4

Create appropriate brokerage policies and procedures.

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Lesson 2 | Page 8 of 14

The Professional Liability Insurance Program offers the most comprehensive insurance protection of its kind in Canada. All brokers and salespersons are obligated, as a requirement of registration, to participate in the Professional Liability Insurance Program, which also extends coverage to the brokerage.

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Lesson 2 | Page 9 of 14

Professional Liability Insurance Program A broker of record should understand the terms of the Professional Liability Insurance Program. This understanding will help them guide brokers and salespersons when there is a need to report a concern to the insurer. It will also help them identify any additional coverage needed for the brokerage in consultation with an insurance broker. Under the Professional Liability Insurance Program, the three distinct coverages for brokers, salespersons, and brokerage are Errors & Omissions, Commission Protection, and Consumer Deposit. What does the coverage include? Coverage Errors & Omissions • What is covered? Covers mistakes such as: o Forgetting a key clause in the agreement of purchase and sale o Making a mistake with respect to taxes o Using the wrong form o Under or overpricing a property o Or none of the above – groundless accusations can lead to expensive claims • Limit per claim: $1,000,000 • Limit per year: $3,000,000 • Limit per event: NA • Deductible: $2,500 (damages only) Increased by $2,500 for each additional claim where damages are paid in a three-year period

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Commission Protection • What is covered? Covers loss of commissions against: o A registrant becoming insolvent (that is, brokerage going bankrupt) o Theft, fraud, misappropriation, or wrongful conversion by a registrant o Social engineering (subject to $25,000 sub-limit per claim) • Limit per claim: $100,000 • Limit per year: N/A • Limit per event: $3,000,000 • Deductible: $250 Consumer Deposit • What is covered? Covers consumers’ deposits against: o A registrant becoming insolvent (that is, brokerage going bankrupt) o Theft, fraud, misappropriation, or wrongful conversion by a registrant o Social engineering (subject to $25,000 sub-limit per claim) • Limit per claim: $100,000 • Limit per year: N/A • Limit per event: $3,000,000 • Deductible: $0 It is important for a broker of record to understand what is covered and what is not covered under the Professional Liability Insurance Program. Furthermore, they need to understand the insurer’s requirements when submitting a claim or providing a written notice of a potential claim. This will help ensure that all documents or reports are submitted in a timely manner.

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Lesson 2 | Page 10 of 14

Coverage and Exclusions in the Errors & Omissions Insurance Coverage The Errors & Omissions Insurance coverage offers protection to registrants for errors and omissions committed in the course of their professional services. The Errors & Omissions Insurance coverage includes:

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• Claims made against a registrant for damages or compensation, alleging negligence in providing professional services • Defence and legal costs for the registrant’s representation • Claims made against a registrant for bodily injury, sickness, disease, mental anguish and distress, or death, and/or property damage (subject to a maximum of $100,000), only if arising out of the provision of professional services The Errors & Omissions Insurance coverage excludes: • Non-compliance with REBBA related to the notice of disclosure for direct or indirect interest of the registrant • Acts, errors, or omissions that are fraudulent, dishonest, criminal, or malicious • Disputes relating to commissions, fees, compensation, reward, or any other form of remuneration • Fines, penalties, or taxes assessed against the registrant • Cases where the registrant’s gross revenue derived from property management is greater than 35 per cent • Cases where the registrant is acting as a mortgage broker • Real estate appraisal services for the purpose of financing or in the usual course of business by anyone with appraiser designations For a detailed description, as well as insurance-related requirements, refer to the insurance policy booklet available on the RECO website. To get a more in-depth understanding, you can also take the Mandatory Continuing Education (MCE) course offered by RECO.

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Lesson 2 | Page 11 of 14

As a broker of record, you should consult with your insurance broker to determine if there are any gaps between what is covered and what is excluded from the Errors & Omissions Insurance coverage of the Professional Liability Insurance Program and the brokerage’s activities. If any gaps are identified, you should consider arranging additional coverage to protect your brokerage in the event of any claim concerning these activities that are not covered. You may also need coverage for other matters, such as general liability; directors’ and officers’ liability; property; crime; cyber liability; automobile; and medical, disability, and life insurance.

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Lesson 2 | Page 12 of 14

Additional Insurance Coverage A broker of record should consult with insurance brokers who have expertise in business risk management to determine appropriate additional coverage requirements for your brokerage. They may suggest insurance package bundles, which may include any of the following: Professional Liability: Brokerages can purchase additional errors and omissions insurance for professional services. If a brokerage finds itself involved in trading activities not covered by RECO’s Errors & Omissions Insurance coverage, the broker of

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record must discuss the nature of trading activities with an insurance broker. The insurance broker can assist with obtaining appropriate insurance coverage for: • Cases where the registrant’s gross revenue derived from property management is greater than 35 per cent • Cases where the registrant is acting as a mortgage broker • Real estate appraisal services for the purpose of financing or in the usual course of business by anyone with appraiser designations General Liability: General liability insurance responds to claims for liability arising from general business operations. This includes situations where damage is caused to the property of others, bodily injury, personal injury, and advertising liability. It also responds to claims for loss or damage caused to rented or leased premises. This coverage is important and can be acquired for the brokerage, for brokers and salespersons, or for both the brokerage and its brokers and salespersons. Depending on the policy purchased, it may or may not include coverage for subcontractors, real estate services, and activities off the brokerage premises. For example, a claim against a broker or salesperson by an individual injured at an open house or showing may not be covered if: • Subcontractors are excluded: This is because most brokers or salespersons are employed as subcontractors • Real estate services are excluded: This is because running an open house would be considered real estate services • Activities off the brokerage premises are excluded: This is because such a policy will not respond to claims arising at an open house It is important that a broker of record understands who and what is covered by the General Liability policy and lets individual brokers and salespersons know if they need to seek out their own coverage. Directors’ and Officers’ Liability: Brokerages can purchase this insurance to protect the personal assets of corporate directors, officers, and their spouses in the event they are personally sued for actual or alleged wrongful acts in managing the brokerage. Property (Owned or Leased): Brokerages can purchase commercial property insurance to protect their building, office equipment, and furniture from fire, theft, or water damage. Business interruption and equipment breakdown insurance can also be purchased along with property insurance.

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Cyber Liability: Brokerages can purchase cyber liability insurance to recover the cost of dealing with a cyberattack, such as a data breach or virus. Crime: A crime insurance policy typically provides coverage for crimes by employees or outside parties, such as dishonesty and forgery. Automobile: Brokerages can purchase automobile insurance whether the automobile is owned or leased, which should include liability limits of at least $2,000,000. In cases where the automobile is not owned or leased by the brokerage, coverage is typically provided by the vehicle owner, such as a broker or salesperson. Often, brokers’ and salespersons’ contracts would stipulate minimum levels of coverage. Medical, Disability, and Life: Brokerages can explore a group plan that could offer an attractive benefits package for brokers and salespersons, which may include insurance coverage for prescription drugs, dental needs, short- and long-term disability, individual life insurance for all employees, and so on. A life insurance package can be acquired for all shareholders in a brokerage. In the event of a shareholder’s passing, the life insurance policy compensates the shareholder’s estate for their shares in the corporation. This eliminates the need for the corporation to compensate the heirs of the deceased shareholder using corporate cash reserves or by acquiring debt.

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Lesson 2 | Page 13 of 14

A buyer client files a lawsuit for $125,000 claiming that they were not represented correctly by the salesperson and the brokerage. The amount includes $75,000 for reimbursement of appraisal, mortgage broker, and legal fees, and the environmental assessment, as well as $50,000 for mental anguish and distress. The salesperson immediately reports the issue to the RECO insurance provider, and a defence is put forward. Although the salesperson had prepared proper documentation, this does not prevent the buyer from taking legal action. The court rules in favour of the salesperson and the brokerage. The defence costs, provided for the salesperson, total $87,000. The buyer client fails to close on the real estate transaction, and the brokerage does not receive the commission payment of $16,500, plus HST. Which costs would be covered under the Errors & Omissions Insurance coverage in this situation? There are four options. There is only one correct answer.

1

$50,000 claimed by the buyer client for mental anguish and distress

2

$125,000 claimed by the buyer client

3

Commission payment of $16,500, plus HST

4

Defence costs of $87,000

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Lesson 2 | Page 14 of 14

Congratulations, you have completed the lesson! Completion of this lesson has enabled you to: • Identify typical leading practices that a broker of record can use to manage risks • Identify key features of the Professional Liability Insurance Program administered by RECO • Identify additional insurance coverage that a brokerage can consider There are four sections on this page with a summary of the key topics that were discussed in this lesson.

Risk response strategies

As a broker of record, you should develop a risk response plan to reduce risks to your brokerage. There are multiple risk response strategies: • Avoid risks • Mitigate risks • Transfer risks • Accept risks Each strategy may be an appropriate choice, depending on the circumstances and the type of risk being considered.

Leading practices to manage risks

As a broker of record, you should focus on leading practices to safeguard your brokerage from lawsuits and to avoid loss of time, money, and reputation. You can use a variety of methods to avoid, mitigate, and transfer risks, such as: • Establishing appropriate policies and procedures • Establishing appropriate training interventions • Creating checklists and job aids • Mentoring brokers and salespersons • Investing in infrastructure and technology • Involving third-party professionals

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• Communicating ongoing updates • Purchasing appropriate insurance

The Professional All brokers and salespersons are required to participate in the Professional Liability Liability Insurance Insurance Program. The three types of coverage under the Professional Liability Insurance Program include Errors & Omissions, Commission Protection, and Consumer Deposit. Program Additional insurance coverage

As a broker of record, you should consult with insurance brokers to determine gaps between your brokerage operations and what is covered in the Errors & Omissions Insurance coverage. This will help you assess additional insurance coverage needs for your brokerage. Additional insurance can be for professional and general liability; directors’ and officers’ liability; property premises; cyber liability; crime; automobile; and medical, disability, and life insurance.

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Lesson 3 | Page 1 of 8

Lesson 3: Summary Practice Activities This lesson provides a series of activities that will test your knowledge on the entire module.

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Lesson 3 | Page 2 of 8

This lesson provides summary practice activities. Throughout this lesson, you will participate in decision points to test your knowledge on the topics presented.

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Lesson 3 | Page 3 of 8

A broker of record wants to manage risks related to misrepresentation in their brokerage. To mitigate risks, they create a listing checklist for the brokers and salespersons. The checklist includes sections to enter the source of information used for verification. The broker of record also conducts training programs for brokers and salespersons on how to research and verify key details when listing properties for sale. They now want to implement practices to avoid and transfer misrepresentation-related risks to the brokerage. Which proactive measures could help the broker of record transfer risks of misrepresentation? There are four options. There are multiple correct answers.

1

Introduce a mentoring program where experienced brokers and salespersons assist new salespersons throughout the trading activity.

2

Purchase insurance to reduce the brokerage’s liability.

3

Send out regular newsletters reminding brokers and salespersons about the REBBA requirements that govern trading in real estate.

4

Involve third-party professionals when representing a seller or buyer.

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Lesson 3 | Page 4 of 8

A broker of record is reviewing the Errors & Omissions Insurance of the Professional Liability Insurance Program to understand its terms. Which expenses will be covered under RECO’s Errors & Omissions Insurance coverage? There are five options. There are multiple correct answers.

1

Any cost for discipline penalty

2

Damages for negligent misrepresentation by a salesperson

3

Defence costs on behalf of the salesperson and the brokerage

4

Damages for a salesperson’s mental anguish

5

Costs for the educational courses imposed by the discipline committee

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Lesson 3 | Page 5 of 8

Identify which of the following are appropriate risk mitigation strategies. There are three options. There are multiple correct answers.

1

The broker of record purchases a new software program for brokers and salespersons to upload transaction documents. However, most of the brokers and salespersons still prefer the original method of using hard copies (paper documents). Therefore, training the salespersons and brokers on the latest technology can help in mitigating the risks.

2

A salesperson faces difficulty in drafting the agreement of purchase and sale on their own. This leads to misinterpretation and errors. Therefore, preparing an inventory of clauses can help in mitigating risks.

3

A recently hired salesperson inspects a property and is unsure about how to describe it in the listing agreement. Therefore, assigning mentors cannot help in mitigating risks.

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Lesson 3 | Page 6 of 8

A broker wants to identify potential cases of vicarious liability for their brokerage. When will a brokerage be vicariously liable? There are three options. There are multiple correct answers. 1

If a salesperson employed by the brokerage misrepresents the buyer

2

If the property listed by the brokerage faces damage due to external hazards before the transaction is closed

3

If the administrative staff employed by the brokerage includes incorrect information in an advertisement on the brokerage’s website

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Lesson 3 | Page 7 of 8

A new salesperson with XYZ Realty Ltd. has a listing appointment for a property. The seller purchased the property 10 years ago, and the listing at that time stated that there were three parking spots: one in the garage and two in series outside the garage taking up space on the mutual driveway. As a proactive risk management strategy, the broker of record with XYZ Realty Ltd. has assigned an experienced salesperson as a mentor to the new salesperson to assist them in providing professional services. How should the mentor guide the new salesperson in listing this property to avoid traderelated risks? There are four options. There are multiple correct answers.

1

Instruct the new salesperson to add “this location provides unique three-car parking” to the comment section of the listing.

2

Instruct the new salesperson to create an advertising brochure that states, “The configuration of this rear yard and right of way provides unique three-car parking.”

3

Accompany the new salesperson on the listing appointment and demonstrate collection of material facts and completion of a representation agreement.

4

Instruct the new salesperson to ask the seller to have a copy of the survey and deed ready for their review and a reference for the listing appointment so the salesperson can confirm the number of “legal” parking spaces.

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Lesson 3 | Page 8 of 8

Congratulations, you have completed the lesson!

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Module Summary | Page 1 of 4

Module Summary

This lesson contains a summary of the entire module.

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Module Summary | Page 2 of 4

Congratulations, you have completed this module! This lesson will present a summary of the lessons in this module.

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Module Summary | Page 3 of 4

There are two sections on this page with a summary of the key topics that were discussed in this module.

Identifying Risks and Liabilities Impacting a Brokerage

As a broker of record, you will be responsible for promoting a culture that facilitates continuous risk identification and management. You should understand the risks that apply to your brokerage’s services, business model, and ownership type to eventually identify appropriate response strategies. A brokerage is vicariously liable for the wrongdoings of its staff, regardless of the brokerage’s involvement in the wrongdoing. There are various trade-related and non-trade related risks that may impact your brokerage. If not proactively managed, they can adversely impact the consumer and also hurt the reputation of your brokerage. Completion of this lesson has further enabled you to: • Identify risks and legal liabilities that can impact a brokerage • Identify typical trade-related risks and legal liabilities for a brokerage • Identify typical non-trade related risks and legal liabilities that can impact a brokerage

Managing Risks and Liabilities Impacting a Brokerage

Brokerages can adopt various risk response strategies to manage identified risks. They can avoid risks, mitigate risks, transfer risks, and accept risks. As a broker of record, you can implement various leading practices to manage risks to your brokerage. These include establishing appropriate policies and procedures for your brokerage, providing appropriate training to the brokerage staff, investing in the right infrastructure and technology, involving third-party professionals, mentoring brokers and salespersons, communicating ongoing updates, and purchasing appropriate insurance. As a broker of record, you should understand the key features of the Professional Liability Insurance Program and identify gaps between the brokerage operations and what is included in the Errors & Omissions Insurance coverage. The brokerage should also purchase additional insurance based on its needs to further protect itself against other legal and financial risks, such as professional liability; general liability; directors’ and © 2021 Real Estate Council of Ontario

officers’ liability; property; cyber liability; crime; automobile; and medical, disability, and life. Completion of this lesson has enabled you to: • Identify typical leading practices that a broker of record can use to manage risks • Identify key features of the Professional Liability Insurance Program administered by RECO • Identify additional insurance coverage that a brokerage can consider

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Module Summary | Page 4 of 4

Course Closure You have now completed the first course in the Broker program: Planning and Start-Up. This course has highlighted the key considerations for establishing a successful brokerage as a prelude to a more detailed examination of some topics in subsequent courses. To begin with, it is important to research the market – its trends and realities – and identify and assess existing gaps and opportunities. Choosing the ownership type, business model, target demographic, office location and layout, and whether to open an independent brokerage or franchise will all define the roadmap of your brokerage. The choices you make will affect legal requirements, personal liability, registration requirements, taxes, and revenue. You can either open a new brokerage or acquire an existing brokerage, each of which have their own set of regulatory requirements. After you identify an ownership type for your brokerage, you must follow the regulatory requirements and business registration process applicable to the ownership type. In the case that you choose to acquire a brokerage, you must follow the process of transferring the ownership of an existing brokerage as defined under REBBA and the Business Corporations Act, for a corporation. It is important to know the roles and responsibilities of the key stakeholders in a brokerage and define an organizational structure that aligns with your brokerage’s vision and goals. While the broker of record may define lines of authority to delegate tasks based on the brokerage’s operation, the ultimate responsibility remains with the broker of record. To ensure consumer protection and identify compliance requirements, it is important that a brokerage proactively identifies and manages risks. The brokerage’s risk management plan may include a mix of different types of risk response strategies for all identified trade-related and non-trade related risks. The broker of record should also review the Professional Liability Insurance Program administered by RECO and identify any additional insurance that should be purchased for the brokerage. Careful planning can often mean the difference between success and failure. Establishing a brokerage involves planning, making key legal and financial decisions, completing brokerage registration requirements, defining the brokerage’s operations, and identifying and managing risks.

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In the next course, Business Management, you will learn about ways to build and maintain general records, set up the accounting system, and track the financial performance of the brokerage.

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