By Pamela V. Millward, Associate Legal Counsel
Every year, the North Carolina Real Estate Commission investigates approximately 1,000 complaints filed against its licensees. Some cases are closed without action because the Commission determines that the complaints are without merit. Many are settled through Consent Orders signed by licensees who agree to accept the disciplinary action imposed by the Commission. Others result in a hearing before the Commission.
Each time a complaint is filed against an agent, the agent's real estate license and reputation are at stake. It is hoped that a discussion of the most common causes of complaints received by the Commission will help you as a real estate agent avoid making the mistakes that can lead to Commission investigations and possible disciplinary action.
The License Law requires agents to refrain from misrepresenting material facts - either affirmatively or by willful or negligent omission. What is a material fact? Generally speaking, it is any information which the parties need to know in order to make an informed decision (i.e., which might affect the parties' decision to purchase or sell, or which has the potential to put the contract or interests of the parties at risk).
Material facts fall into three broad categories: facts about the property (leaky roof, synthetic stucco siding, presence of asbestos, etc.); facts relating to the property, including zoning changes and plans for a major highway nearby; and facts which relate to a principal's ability to complete the transaction, such as a bank foreclosure. Typical complaints of misrepresentation involve material facts that include hidden defects, changes in land use, whether a piece of land "percs," square footage and lot-size errors.
A recent complaint came from a condominium-buyer who discovered after closing that the condominium was smaller than she had been led to believe. In fact, the unit measured 200 square feet LESS than the figures in the listing agreement! The listing agent admitted to having used tax records to obtain the square footage.
To avoid this type of complaint, disciplinary action by the Commission and the potential for civil liability, do your homework! Don't rely on the work of others. Measure each piece of property yourself.
Be aware that your duty to properly disclose includes oral representations and representations made in print, so check your MLS listings and advertisements for accuracy. Also be aware of your duty to disclose material facts to all parties involved in the transaction, not just to the party you represent.
The broker-in-charge is responsible for the proper handling and accounting of trust account monies. Although he or she may delegate duties to another broker or bookkeeper, the broker-in-charge retains the ultimate responsibility for the handling of the monies entrusted to the firm and can incur liability for any of the bookkeeper's errors or dishonest actions. Precautions against possible problems include bonding the bookkeeper.
As broker-in-charge, you should reconcile your trust account records to your bank statements on a monthly basis, keep running balances and establish a set of controls and use them. If you assign these functions to a bookkeeper, be sure to check the bookkeeper's work. The failure to properly supervise a bookkeeper can lead to disaster.
It is interesting to note that most Commission complaints in the area of trust account violations come from concerned employees (or former employees).
Under Commission rules, in the event of a dispute, the earnest money must be maintained in a trust account until the disputing parties agree in writing as to the disposition of the funds OR until a court order or judgment determines their disposition. These rules apply even if it is clear to you as a real estate agent that one party has no lawful claim to the funds.
For instance, suppose you are the listing agent for the sale of a home and your seller has a binding contract with a buyer who has a financing contingency in the contract. Although the buyer makes a good faith effort to secure a loan, she cannot qualify. When she asks for a termination of the contract, she also requests the return of her earnest money, but your client refuses her request. Even though under the contract the buyer may be entitled to the earnest money, Commission rules require that you hold the earnest money in escrow until the parties agree or until they get a judgment as to its disposition.
An important distinction needs to be made between earnest money deposits and tenant security deposits held by property management companies. Because security deposits are governed by the Tenant Security Deposit Act, disputed tenant security deposits are handled in an entirely different manner than earnest monies. When a dispute arises between a tenant and landlord, the property management company should follow the instructions of its client as to the disposition of the tenant's security deposit.
As a property manager, you are an agent for the landlord. You are bound by your duty to be loyal and obedient to your principal, so do as your client requests. Do account to the tenant for the money within 30 days as required by the Tenant Security Deposit Act. If a tenant takes issue with the handling of the deposit, the tenant can take the landlord to small claims court.
Commission rules prohibit real estate agents from drafting contracts, contract provisions, or any other legal document. You can assist your clients in filling out the standard forms recommended by the N.C. Bar Association/Association of REALTORS®, but avoid inserting complex contingencies. If your clients' needs go beyond the standard forms, it is important that you refer them to an attorney and thus protect your client -- and your real estate license.
The Statute of Frauds requires that all contracts for the sale of land be in writing to be enforceable. Furthermore, all negotiated terms must be in writing, any changes must be initialed by the parties, and the contract must be signed by all parties.
A typical complaint occurs when agents negotiate for their clients orally; e.g., an oral counteroffer is relayed to the buyers and they agree to the new terms; their agent calls and informs the sellers' agent, who tells the sellers. The sellers think that they have a binding contract, but they don't. While the oral acceptance is an indication that a contract will soon be formed, it is not itself legally binding.
To avoid creating conflict between the parties and to ensure that your clients have an enforceable contract, don't tell them that they have a contract until you have the contract signed by all parties.
Allegations of loan fraud usually result from an agent trying to help a buyer who is really not qualified for a loan. The agent wants to help the deal close, so he lends the buyer some closing money or pays some expenses for the buyer without telling the lender. Or perhaps the seller is asked to "give" some money to the buyer without disclosing it on the settlement statement, since the lender has refused to allow any seller financing. Sometimes, even mortgage company representatives ask parties to pass money as a "gift" to the buyer outside of closing.
The rule of thumb is that ANY monies which pass between the parties and their agents MUST be disclosed on the settlement statement (even "extras" paid for by the buyer to the builder over-and-above the contract price), because the monies change the income-to-debt ratio used by the bank to determine the buyer's credit-worthiness. If you fail to disclose information to the lender, you are committing loan fraud, which is a federal offense.
When in doubt as to whether a loan is being handled correctly, contact an attorney or the Real Estate Commission.
The License Law prohibits agents in a transaction from acting for more than one party without the knowledge of all parties. Complaints in this area usually deal with dual agency, seller subagency, and special relationships between the parties.
With dual agency, there is an inherent conflict of interest because the agent is representing both the buyer and seller, who have different and competing interests. To avoid this type of complaint, you as a dual agent must be sure to disclose the duties that you owe to each party. Thoroughly review the agency forms and explain how your responsibilities as a dual agent differ from those in an exclusive agency arrangement. Finally, be sure to have the parties sign the Dual Agency Contract or Dual Agency Addendum, whichever is appropriate.
As a seller's subagent, keep in mind that although you are working with the buyer, your primary obligation is to the seller. Don't advise the buyer on strategy or advocate on his or her behalf.
Finally, if you have a special relationship with any party to the transaction (e.g., you are a relative of the buyer), disclose it to all parties to avoid the appearance of impropriety.
Recently the Commission received a complaint alleging discrimination at an open house. The matter ultimately was resolved, but not before an investigation by both the Real Estate Commission and the North Carolina Human Relations Commission.
The Fair Housing Act makes it unlawful to discriminate in the sale or rental of dwellings of four or more units on the basis of race, color, religion, sex, national origin, familial status (the presence of children under 18 years old) or handicapping conditions (including AIDS). Therefore, if you discover that the landlord, tenant, seller, or buyer that you represent intends to discriminate on the basis of any of these protected classes, you must immediately terminate your agency agreement with that party, or risk violating the law and losing your license to sell real estate in this state.
When the Commission receives a complaint, the first thing Commission staff requests is a copy of the firm's records, including bank statements, canceled checks referencing a ledger sheet, deposit tickets, separate ledgers, general journal or check stubs identifying each transaction, copies of contracts, leases, management agreements, closing statements, property management statements, and other relevant documents.
Commission rules require that agents retain records for three years; however, because complaints filed after the three-year limit for record retention are investigated, the Commission recommends that agents retain their records for longer than three years. Be aware that your documents indicating proper record-keeping can be used in your defense in the event that a complaint is filed against you.
Many complaints to the Commission come from disgruntled clients. Complainants state that their agents will not return their phone calls or keep them updated on their transactions.
Try to avoid this situation by communicating with your clients. Return their phone calls. Keep them informed about what you are doing for them and how the transaction is going. An informed client is less likely to complain to the Commission.
Space allows for only a brief over-view of the top 10 areas of complaint, which were not listed in order of frequency in which the Commission receives them. If you have questions about these 10 or others of concern, please contact the Commission's Legal Services Division.