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Managing a Vacation Rental Purchase Transaction

By Fred Moreno – Chief Deputy Legal Counsel

Have you acted as a broker in a transaction where the subject property was being leased? If so, you may have learned that North Carolina has two different sets of laws relating to rental property, one pertaining to long-term rentals (Chapter 42), and the other to “vacation” rentals (Chapter 42A). This article will discuss the implications that Chapter 42A may have on the transfer of vacation rental properties.

What makes a rental property a “vacation rental”? Chapter 42A, the Vacation Rental Act (“VRA”), defines a vacation rental as “The rental of residential property for vacation, leisure, or recreation purposes for fewer than 90 days by a person who has a place of permanent residence to which he or she intends to return.” The bulk of the VRA deals with the management of these properties, so anyone handling the management of vacation rentals should be familiar with this law.  But, what about brokers who only deal in sales?  Do they need to know about the VRA? Absolutely – they might be listing one for sale, or representing a buyer who is purchasing one.

There is a common misconception that the VRA only deals with properties located at the beach. In reality, however, rental properties that fall under the VRA are found on the coast, in the mountains, and everywhere in between. More residences in more locations are available now than ever before due to the emergence of the Internet and sites run by companies such as VRBO, Airbnb, and FlipKey, among others. These sites have made it much easier for property owners to rent their places out for a week, two weeks, a month, or even just a weekend get-a-way. The VRA may apply to these properties whether they are being managed by licensed brokers or by unlicensed property owners.

It is common practice for tenants in vacation rentals to submit their applications months or even a year in advance of the dates they intend to occupy the property. Typically, these tenants will also pay most, if not all, of the rental amounts well in advance of their secured dates. This should create two major questions for any buyer agent or listing agent when faced with binding vacation rental agreements during the sale of the property: (1) how are the future tenants going to be handled by the new buyer, and (2) how are the deposits being handled as a result of the sale?

What do we do with these tenants when a property is sold prior to their reserved dates?

NC law requires that a residential property purchaser takes title subject to any vacation rental agreements that are to end “no later than 180 days after the grantee’s interest in the property is recorded”. This means that the purchaser MUST honor those vacation rental agreements. Failure to do so subjects a buyer to a civil lawsuit. A purchaser is not required to honor vacation rental agreements that end more than 180 days after recording, but if they do not, then the tenant is entitled to a refund of the monies paid, minus any fees allowed by law.

The VRA also requires that the property owner disclose to the potential buyer the time periods of any vacation rental agreements currently in place, prior to entering into any contract for sale.  Existing reservations within the 180-day window are a material fact that any listing broker must disclose to prospective purchasers. The property owner is also required, within 10 days after the property transfer, to disclose the name and address for each tenant and to provide a copy of each vacation rental agreement. This task is often handled by the listing agent, working with the seller’s vacation rental manager, if any. A listing agent should ensure that required disclosure is being handled as part of the transaction.

The new purchaser also has duties under the law.  Within 20 days of recording, the purchaser must: (1) notify each tenant in writing of the property transfer, the new purchaser’s name and address, and the date the interest was recorded; (2) advise each tenant whether they have the right to occupy the property subject to the terms of their vacation rental agreement and the provisions of the law; and (3) advise each tenant of whether they have the right to receive a refund of any payments they made.

What do we do with their money?

In a purchase transaction, buyer agents and listing agents must know what is going to happen to the advanced rents, already paid by tenants. These could have been paid to the owner directly, or to a property management firm on behalf of the owner. Some of it may have already been disbursed to the property owner by the management firm prior to the tenant occupying the property. In any case, the law requires that the property owner, or their agent, transfer these funds minus any lawful deductions to the new owner.  The law requires this to occur within 30 days of the property transfer; typically, it is reflected on the Closing Disclosure statement and sent from the closing attorney’s trust account at closing.  This means the amount being held must be accounted for and transferred to the closing attorney prior to closing. It is important for both the listing agent and buyer agent to verify that the correct amount of funds are being transferred.

The law also requires the property owner to refund any advanced rents minus any lawful deductions, back to tenants whose vacation rental agreements end after 180 days of recording and whose agreements the new owner will not honor. This must also occur within 30 days of transfer.

What are “lawful deductions”?

Lawful deductions may include fees earned by a property management company who managed the property up until recording.  Management fees are owed by the prior owner, not the tenant. So, if they have already been deducted from the tenant’s deposit, the prior owner is responsible for either reimbursing the tenant or adding the deducted amount to the funds being transferred to the new owner as part of the deposit transfer.

In a Nutshell The sale of residential property that is or has been used as a vacation rental can harbor a number of potential issues that can come back to bite a broker who is not alert to the situation.  It is imperative that a listing agent talk with their seller client and gather all information prior to listing about current vacation rental agreements in place. It is also imperative that a buyer agent talk with their buyer client and discuss the implications of the VRA, including that the buyer would have to honor vacation rental agreements within that 180-day period. The listing agent should also reach out to the property manager, if there is one, and bring them into the loop regarding the sale.  The property manager could be a valuable asset for things such as providing copies of vacation rental agreements and documentation regarding repair issues, as well as providing an accounting of advanced rents that have already been collected or disbursed. Finally, if the proper steps are not followed under the VRA, such conduct may be found to constitute an unfair or deceptive act under N.C.G.S. §75-1.1, which can result in treble damages in a successful lawsuit.

Disciplinary Actions

MICA HOPE MATHEWS (GREENSBORO) – By Consent, the Commission reprimanded Mathews, effective April 1, 2023. The Commission found that June 2021, Mathews acted as a listing agent for a seller and advertised the renovated property as having a new HVAC.  The dates of the HVAC units were actually 2003 and 2015 although a new range hood air makeup system had been installed. The buyer discovered the discrepancy and terminated the transaction, requesting a return of a portion of the $10,000 due diligence fee. Mathews revised her MLS listing following termination of the contract.

HEATHER NICOLE SHELTON (GREENBORO) – By Consent, the Commission suspended the broker license of Shelton for a period of 18 months, effective February 1, 2023. The Commission found that as the broker-in-charge and the qualifying broker of a Firm, Shelton executed a listing agreement to advertise real property for sale. Shelton failed to have all owners of the Subject Property sign the agency agreement. After the Subject Property went under contract, the owners changed the water source from City/County to a well. One of the owners notified Shelton of this change a few days before closing. Shelton failed to inform the buyers or their agent of the water source change. After closing, buyers expended thousands of dollars to run a new water line and meter to the Subject Property as the well could not be used as a water source for the Subject Property. Shelton’s license was on “inactive” status from July 1, 2022 through September 15, 2022, yet Shelton continued to engage in brokerage.

THE PRESTIGE GROUP OF THE TRIAD INC. d/b/a PRESTIGE GROUP REALTY (GREENBORO) – By Consent, the Commission suspended the broker license of Prestige Group Realty for a period of 18 months, effective February 1, 2023. The Commission found that the broker-in-charge (BIC) and the qualifying broker of the Firm, executed a listing agreement to advertise real property for sale. The BIC failed to have all owners of the Subject Property sign the agency agreement. After the Subject Property went under contract, the owners changed the water source from City/County to a well. One of the owners notified the BIC of this change a few days before closing. The BIC failed to inform the buyers or their agent of the water source change. After closing, buyers expended thousands of dollars to run a new water line and meter to the Subject Property as the well could not be used as a water source for the Subject Property. Prestige Group Realty’s license was on “inactive” status from July 1, 2022 through September 15, 2022, yet Prestige Group Realty continued to engage in brokerage.

VANESSA GRUNDAS (ETOWAH) – The Commission accepted the voluntary surrender of the broker license of Grundas effective April 19, 2023. The Commission dismissed without prejudice allegations that Grundas violated provisions of the Real Estate License Law and Commission rules. Grundas neither admitted nor denied misconduct.

WILBUR BECK JR (FAYETTEVILLE) – The Commission accepted the voluntary surrender of the broker license of Beck Jr effective April 19, 2023. The Commission dismissed without prejudice allegations that Beck Jr violated provisions of the Real Estate License Law and Commission rules. Beck Jr neither admitted nor denied misconduct.

RENEE HILL DAVIS (ASHEBORO) – The Commission accepted the voluntary surrender of the broker license of Davis effective April 19, 2023. The Commission dismissed without prejudice allegations that Davis violated provisions of the Real Estate License Law and Commission rules. Davis neither admitted nor denied misconduct.

Diversity, Equity, and Inclusion Updates

The Commission recently updated its website and now includes a dedicated diversity, equity, and inclusion (DEI) page. The new DEI page can be used as a resource to learn more about the Commission’s commitment to fostering a diverse and inclusive culture and community in real estate brokerage. You can also learn about new DEI initiatives, as they become available, and connect with other industry resources on diversity, equity, and inclusion. Please review the new page here and feel free to share with others who you feel might benefit from viewing it.

Current Stats: Monthly Licensee Count as of April 1, 2023

Staff Appearances

Minerva Mims, Diversity Equity Inclusion Officer, spoke at the NC REALTORS meeting on April 3.

Sheryl Graham, Consumer Protection Officer, and Angela Munsie, Auditor, spoke at the Realty Executives of Hickory meeting on April 26.

Tech Corner: Understanding NC’s Rollout of Remote Electronic Notarization

From the NC Department of the Secretary of State

Interest in Remote Electronic Notarization (REN) remains high, yet there are strong cross currents to be factored into North Carolina’s rollout.

The global pandemic increased the appetite—indeed, the necessity–for “remote” conduct of economic activity.   Concurrent rapid technological changes have reinforced the importance of ensuring that crucial business, legal, healthcare, and other transactions can be conducted safely, securely and efficiently in a remote environment.  

The North Carolina General Assembly addressed the competing needs by passing the Remote Electronic Notarization Act (RENA) last July.  Some provisions took immediate effect, such as the extension of Emergency Video Notarization (EVN), which now expires at 12:01AM on June 30th.   

Remote electronic notarization (REN)-focused provisions have a longer launch period, however.  Although July 1, 2023 is often mentioned as the “Go-Live” date, that is NOT what the statute actually says.  July 1st is the date by which the Secretary of State “shall begin rulemaking to implement” RENA, and “no temporary or permanent rule shall become effective prior to July 1, 2023.”   So, one might wonder, when will North Carolina notaries be able to conduct remote electronic notarizations?  

When dealing with a new law involving high economic stakes and rapidly evolving technology, preparing the necessary rules is not simple.   Understanding the factors influencing the timeframe for rollout is key for business planning and to stay the course…so that North Carolina gets what we truly want and need.

As soon as RENA was adopted, the North Carolina Secretary of State initiated internal research and requested external input.  On October 21, 2022, the Secretary published Advance Notice of Proposed Rulemaking #1.  In ANPR #1, the Secretary sought input on the role of the remote electronic notary public (RENP) and the general procedures and standards needed to implement RENA to ensure the effectiveness, efficiency and integrity of the notarial acts and processes contemplated under RENA.  The comment period closed November 30th, and the comments are publicly available at this weblink.

On March 30, 2023, Advance Notice of Proposed Rulemaking #2 was published.  In ANPR #2 the Secretary seeks public input on the technical features, components, specifications and standards required by RENA and applicable to the communication, credential analysis, and identity proofing described in the statute.   Input is being accepted through May 15th.  The Secretary is formulating rules based in part upon stakeholder comments received in response to the ANPRs and has already invested over 2,000 hours in the process.

THE TECHNOLOGY

We need not look far for examples of difficulties and real harm that occur when technology doesn’t perform as expected or gets ahead of regulation and guardrails (e.g., cryptocurrency and generative artificial intelligence).  North Carolina has proceeded thoughtfully given the stakes with REN.  The General Assembly imposed requirements for security and privacy and background investigations of those providing the technology and storage that the Department is required to flesh out and implement.  We must make sure that the technology used is secure for both the notary and the principal—and all those relying on the process.   Enhancing security and reliability at this stage facilitates economic growth while reducing costly and avoidable litigation. 

For example,

A.  We are required to adopt rules regarding geolocation of the principal who is not located in North Carolina. 

B.  We have to provide rules to prevent the communications technology and the Notary from being deceived, by, for example:

C.  We must determine whether the identity proofing technologies must be 100% accurate or, if not, how much inaccuracy can be tolerated in a process that is designed to reduce the likelihood a document has been signed fraudulently or under duress. 

Rules drafted on these and other topics must be done with care and only after intense research so that the REN process can be conducted securely, with reasonably available technology, and in accordance with the expectations of the General Assembly.

THE RULEMAKING

Drafting and then promulgating rules is labor intensive and time consuming.  Besides creating new rules focused on REN, some existing Notary and E-Notary rules must also be revised so they are consistent with the upcoming REN rules.  All rules must be adopted in accordance with the very deliberative notice and comment provisions of the Administrative Procedure Act, and must meet the standards established by an independent body, the North Carolina Rules Review Commission.  A flow chart of the Office of Administrative Hearings rulemaking process gives an idea of the time, stages and steps required once rules are drafted, yet it does not include all that must be done in connection with initiating and taking the steps on the flow chart. 

LAUNCHING REN

Once rules are finally adopted, the work to launch REN begins.  Platforms and third party vendors must apply, be screened and then licensed, and then contract with North Carolina notaries.  The Notary Manual must be revised to incorporate all the changes to the law and rules.  Forms must be prepared to make it easier for applicants to provide essential information.  All notary training must be updated and community colleges engaged so North Carolina notaries may learn how the changes apply to them, and be trained, tested and authorized to conduct remote electronic notarizations.  We will also have to coordinate with the Registers of Deeds so that notaries receive the proper commission.  All these tasks must be completed before the first REN can be conducted.

So, when will North Carolina notaries be able to use REN?  The short answer is we don’t yet know.  But, just given the mandatory timelines that have to be met before we can adopt rules to even start the program, we expect it will be a year or more before the RENA is up and running.    

WHAT CAN YOU DO NOW?

You, as a stakeholder, are invited to give your input—early—so it can inform and improve rulemaking and expedite the process.  You can do that by going to ANPR #2.  Submit comments by May 15, 2023 to:  Ann B. Wall, General Counsel and Rulemaking Coordinator, ANPR@sosnc.gov.  For updates on our rulemaking, add yourself to our interested parties list.

For those planning to incorporate REN into their business operations, in-person electronic notarization (IPEN) is already available today. IPEN provides a secure platform to electronically notarize electronic signatures on electronic documents with the same level of document integrity required by RENA. In fact, when paired with EVN, remote electronic notarizations can be performed today. Click here for information on how to perform a remote electronic notarization using EVN.  Find an E-Notary through our “Find a Notary” feature here.

There is little need for those planning to implement REN to wait for RENA to be fully effective when the tools of IPEN and EVN can be utilized today. It is highly likely that those who implement REN will also incorporate IPEN and that both will be employed to service remote as well as in person customers. Click here for information on becoming an electronic notary.

Questions and Answers on What’s Happening with the RPOADS Form

Q.            I heard the RPOADS form is changing?

A.             On March 15, 2023, the Commission began accepting public comments on proposed changes to the rule that includes the Residential Property and Owners’ Association Disclosure Statement (RPOADS), 21 NCAC 58A .0114.  If this rulemaking proposal is adopted by the Commission and Rules Review Commission, the changes will become effective July 1, 2023. In order to receive updates regarding rulemaking, subscribe to the Commission’s mailing list.

Q.            So what is changing and why?

A.             The biggest change would be moving the RPOADS form out of the rule. Right now, the form is embedded in the rule, and it is difficult, if not impossible to make even the simplest formatting or appearance changes, or even clarify the instructions, without going through the rulemaking process.  Moving the form out of the rule will allow those more technical changes to be done easily and will allow the form to receive an updated appearance so that it is a little more user friendly for brokers and consumers. When you look at the rule, you will see the form is marked out. Under the rulemaking proposal, it’s not being eliminated! It’s just coming out of the rule.

Q.            Would the Commission add new topics to the form without rulemaking?

A.             No. The topics covered in the disclosure must be itemized in either the Residential Property Disclosure Act (N.C.G.S. 47E) (“the law”), or the rule (21 NCAC 58A .0114), and those topics cannot be changed without going through the full rulemaking process. Note that the rule only itemizes the topics not contained in the law, so you have to look at both the law and the rule to see all of the required topics. 

Q.           What questions are proposed to be added to the form, and why?

A.             The Commission is considering adding questions based on public comments received from brokers, attorneys, and others. For example, whether or not any private well has been tested and, if so, when and whether or not a property is in a historic district. Elevators are being covered as well, after the passage of Weston’s Law last year. As a result of federal discussions regarding a mandatory national flood disclosure and a petition filed for rulemaking regarding flood questions, the Commission is considering adding 5 questions related to flooding. A couple of existing questions are also being edited or clarified.

Q.            Will brokers still have input in changes to the form that don’t require rulemaking?

A.             Absolutely. Any substantial change to the topics require the rule to undergo the rulemaking process or a legislative change. The Commission also adopted internal policies and procedures that require any minor change to be published for at least 30 days on its homepage to allow for written comments before the Commission makes final changes. These suggested changes will be published in the Bulletin as well.

Q.            Does this change a broker’s duty?

A.            No.  A broker’s duty is not changing at all. In fact, the Commission is hoping to make it clearer to sellers that even if they check ‘No Representation’ a broker still has a duty to discover and disclose material facts about the property. That standard has not changed.

Stephanie Walker: 2023 Larry A. Outlaw Excellence in Education Award Recipient

2023 Larry A. Outlaw Excellence in Education Award recipient, Stephanie Walker, with past award recipients (from left to right) George Bell, Kelly Allen, Len Elder, Travis Everette, Mel Black, and Matt Davies.

Stephanie Walker of Outer Banks is the 2023 recipient of the Larry A. Outlaw Excellence in Education Award. She is North Carolina Real Estate Commission approved instructor and education provider. An active member of both the North Carolina Real Estate Instructors Association (NCREEA) and the national Real Estate Educators Association (REEA), Walker has attained the REEA Gold Standard Instructor designation. She has been nationally recognized as REEA Educator of the Year in 2021 and received the NCREEA Program of the Year award in 2019.

The Larry A. Outlaw Excellence in Education Award is bestowed upon real estate instructors who have exhibited excellence in, and have made outstanding contributions to, real estate education in North Carolina.The Commission established the award in 2016 to honor the late former Director of the Education and Licensing Division of the North Carolina Real Estate Commission. Larry A. Outlaw, both an attorney and licensed real estate instructor, served as Director of the Education and Licensing Division for 35 years, from its creation in January 1979, until his retirement February 1, 2014.

Outlaw continually worked to improve real estate prelicensing education and to expand real estate education, creating and implementing continuing education program in 1994 and a postlicensing education program in 2006. He advocated for and achieved minimum standards for approval of real estate instructors that included not only effective teaching skills, but real estate brokerage experience as well. He also worked to assure the excellence of the Commission’s licensing examination. Outlaw was a founding member of the REEA, serving as its National President in 1990-1991.

Any approved North Carolina real estate instructor may be nominated for the award. The Commission considers nominations from brokers, instructors, students, and the general public while evaluating the criteria of each nominee. As this year’s recipient, Walker exemplifies an instructor whose ongoing contribution to the profession honors the award’s eponym.

THE NCREC 2023 Spring Educators Conference

The North Carolina Real Estate Commission was pleased to host its 2023 Spring Educators Conference on Tuesday, March 21, 2023, at the McKimmon Center in Raleigh. The theme of the conference was NCREC Trek: Exploring Brave New Educational Worlds.

The registration for the conference was limited to 300 participants. Mel Black, Commission Chair, opened the conference with a welcome to all of the attendees. After the welcome, the day-long event featured the following presentations by Commission Staff members and the Keynote Speaker.

The conference concluded with the presentation of the 2023 Larry A. Outlaw Excellence in Education Award to Stephanie Walker by Commission Chair Black. The Commission established the Larry A. Outlaw Excellence in Education Award in 2016 to honor the Commission’s late former Director of Education and Licensing Division. This year’s recipient of the Larry A. Outlaw award, Stephanie Walker, demonstrated ongoing excellence in outstanding contributions to real estate education in North Carolina.

The Commission thanks North Carolina’s real estate educational community for its continued interest and support, and congratulates Stephanie Walker on her award.

Frequently Misunderstood Terms Seen and Heard by NCREC Regulatory Affairs Division Staff

By Stephen Fussell, Chief Consumer Protection

At the Commission, we hear and read lots of statements from real estate brokers. Some of those statements imply that the brokers who made them did not understand the terms they were using. Here are some clarifications for some of the things we routinely hear and read.

The North Carolina Real Estate Commission (“Commission”) and NC Realtors (“NCR”) are two different organizations.

Client vs. Customer: A client is someone with whom a broker has a written agency agreement. The broker represents the client and has a fiduciary duty to act in the best interests of the client at all times. Prior to entering into the written agency agreement, the client was a customer.  Additionally, in serving a client, a broker may assist a customer. A broker must be fair and honest with a customer. However, a broker does not represent a customer or have a fiduciary duty to act in a customer’s best interest.

Example #1: A property manager represents a landlord (client). A property manager may assist a prospective tenant (customer) in viewing a rental property and entering into a lease for the landlord’s property.

Example #2: A listing agent may show their listing to an unrepresented prospective buyer (a customer) and prepare an offer for the buyer without representing the buyer. The listing agent must review a Working With Real Estate Agents Disclosure with the buyer at first substantial contact and mark the “Unrepresented Buyer” section at the bottom of the form.

Offer vs. Contract: An offer is an oral or written expression of a willingness to buy, sell or lease at a specified price and terms. A contract is a signed, written agreement that memorializes all of the terms and conditions agreed upon by the parties. Buyers usually submit offers. If sellers sign the offer without changes and communicate this fact to the buyers, then the offer becomes a contract. If sellers make changes to the offer they receive, then the sellers have created a counteroffer. The sellers must initial the changes and sign the counteroffer and the buyers must initial the changes and communicate their acceptance in order for the counteroffer to become a contract.

Acceptance of an offer occurs when the last party to receive an offer or counteroffer signs the offer/counteroffer. Acceptance must then be communicated to all parties before the offer becomes a contract. Pursuant to the Statute of Frauds, there is no such thing as “verbal acceptance” of a real estate sales offer. If a seller says they will accept an offer, it has no effect until the seller actually signs the offer without making any changes to it and then communicates that fact to the buyer. Brokers should never use the terms, “verbal acceptance” and “verbally accepted,” as these terms are misleading and may cause a buyer or seller to falsely believe that a valid contract has been formed. If an offer is not signed by all parties, then it’s not a contract. For more information on the Commission, agency, offer & acceptance, and many other topics, check out the many brochures, publications, and videos available at ncrec.gov.