Eric McConnell is a former property manager and licensed real estate agent who has trained numerous employees on the fundamentals of real estate.
Richard and Raymond are twin brothers from Milwaukee. Richard is a contractor and Raymond is a real estate broker. After working in separate fields for years, the two of them come together and form an LLC to purchase an old factory building they will be re-purposing as a luxury loft. It's a classic turn of the century building with frescoes on the lobby ceiling, marble steps and vintage sconces throughout. Richard's contracting team renovates the units one by one while Raymond sells them.
It is important to both Richard and Raymond, as well as the individual unit owners in the loft, that the building maintains as much of its original feel and character as possible. For this reason, Raymond inserts a clause into the purchase and sale agreements requiring buyers to use Richard's services in renovating their particular loft. This type of clause, known as a tie-in arrangement, is only allowable in Wisconsin under a specific set of circumstances.
Let's examine the proper use of tie-in arrangements and other written agreements in Wisconsin real estate.
Tie-in arrangements are clauses in purchase contracts where the buyer's ability to purchase a piece of property is tied to the buyer performing another action, such as using contractors designated by the seller or selling corporation. For the most part, the Wisconsin Administrative Code prohibits tie-in arrangements. However, the code does allow them under the following limited circumstances:
Tie-in arrangements can only be used in contracts to purchase vacant property. The administrative code does not allow tie-in arrangements in connection with the purchase of vacant land. Because Richard and Raymond are partners in the LLC that owns the building, their proposed tie-in arrangement is legal under the administrative code. Licensees must disclose the tie-in arrangement and their ownership interest to potential buyers (or their agents) at the earliest point possible in the sales process.
As discussed, there are limited circumstances under which tie-in arrangements are permissible under the administrative code. The following types of tie-in arrangements are expressly prohibited by the code:
Anytime a licensee reaches an agreement of any kind with a client that will require the client to perform a specific duty, the agreement and all its terms must be in writing and signed by the client. Unless these agreements are written by the client's attorney or the client themselves, they must be prepared by the licensee's employing brokerage. This requirement for written agreements applies to the full range of contracts that may become necessary to successfully complete a real estate transaction.
The administrative code prevents licensees from grossly exaggerating the anticipated value of a property for rent or sale when seeking to initiate an agency relationship with or have a listing agreement signed by the property's owner. Licensees are also prohibited from overstating or misleading clients about the potential advantages of signing a listing agreement with them. Simply put, a licensee can not tell an owner they can sell a property for double its normal market value or insinuate that they have connections with other buyers just to get a listing agreement signed.
A net listing agreement is a contract between a property owner and a licensee where the licensee sets a ''net price'' for the listing with the licensee's firm to receive however much money the property sells above the net price as a commission. An example of a net listing would be a property listed by the licensee where instead of a set commission rate (e.g. 5% of the sale price) for a property listed at $200,000.00, the licensee's firm would receive a $10,000.00 commission if the property sold for $210,000.00. Due to the fact that it would be far too easy for licensees to intentionally lower the list price of a property in order to receive a larger commission, net listings are prohibited by the administrative code.
The administrative code prevents licensees from creating or using any document in a real estate transaction that implies an interest in a property that doesn't exist. This means licensees are not allowed to draft fake purchase contracts for the purposes of motivating a potential buyer to raise their price or otherwise improve their offer.
A tie-in arrangement is a clause in a Wisconsin real estate purchase contract which stipulates that buyers cannot complete the purchase of a given property without completing another task. The Wisconsin Administrative Code forbids tie-in arrangements except for the following circumstances:
Tie-in arrangements are only permissible in the case of vacant buildings that are being improved or completed by the contractor. The listing agent for the property is responsible for disclosing the tie-in arrangement too all parties of a transaction at the earliest moment possible.
The administrative code also requires all agreements between a licensee and their client to be in writing. These agreements may only be prepared by the licensee, the client or the client's attorney. Licensees are prohibited from making over-inflated claims regarding the value of a property or the potential benefit of the licensee's services strictly for the purposes of securing a listing agreement. Net listings and the creation of false documents by licensees are also violations of the administrative code.
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