Disciplinary Actions

CESAR AUGUSTO OSORIO (ARDEN) – The Commission accepted the voluntary surrender of the broker license of Cesar Osorio effective May 18, 2022. The Commission dismissed without prejudice allegations that Mr. Osorio violated provisions of the Real Estate License Law and Commission rules. Mr. Osorio neither admitted nor denied misconduct.

The July 20 Commission meeting will be in Durham!

Have you ever wanted to attend a Real Estate Commission meeting to see what happens? If so, please join us at the Have you ever wanted to attend a Real Estate Commission meeting to see what happens? If so, please join us at the JB Duke Hotel, 230 Science Drive, Durham, NC, in Meeting Room C at 9 a.m. You are welcome to stay for a portion or for all of the Commission’s meeting. Mark your calendars for July 20!

The Pitfalls of Using Escalation Clauses

Stephen L. Fussell, Chief CPO

In an effort to gain a competitive advantage, some prospective buyers may ask their agents to include escalation clauses in their offers.  An escalation clause is one in which a prospective buyer expresses their willingness to pay a specific amount more than the highest competing buyer. The escalation clause may or may not indicate a maximum amount that the prospective buyer is willing to pay.

The Commission discourages the use of escalation clauses. Commission Rule A .0115 reads as follows: “A broker shall not disclose the price or other material terms contained in a party’s offer to purchase, sell, lease, rent, or to option real property to a competing party without the express authority of the offering party.” How does this rule impact escalation clauses? Assume, for example, that Buyer #1 offers to pay $1,000 more than any other offeror. In order to establish the price that Buyer #1 will pay, the brokers involved would have to share the terms of the highest offer with Buyer #1. Sharing these terms is prohibited except in the unlikely event that the other buyer consents to it.

Pitfalls of escalation clauses:

• If a buyer submits an offer containing an escalation clause without knowing the price and terms of the other offers and without specifying a maximum price, the buyer may end up paying much more for the property than desired.
• If a buyer includes a maximum price in an escalation clause, the seller will immediately know the buyer’s top price thereby compromising the buyer’s bargaining position.
• An offer containing an escalation clause may not become enforceable until a specific price is entered into the contract and the buyer sees the price the seller has specified.
• The seller may fabricate a fictitious offer in order to drive up the sales price for a buyer who uses an escalation clause.
• Real estate brokers are prohibited from drafting escalation clauses, because doing so would constitute the unauthorized practice of law. Hiring an attorney is recommended, but will increase the buyer’s costs. The seller should also have an attorney review an offer containing an escalation clause to protect the seller’s interests. Note that the use of an attorney-drafted escalation clause does not relieve the listing firm and its agents from obtaining the express authority of a competing buyer to disclose the terms and conditions of the competing buyer’s offer as required by Rule A .0115. If the competing buyer refuses to give such authorization, then disclosing the terms of the competing offer would violate this rule and subject a licensee to possible disciplinary action even if the clause were drafted by an attorney.
• If multiple buyers were to include escalation clauses in their offers, a bidding war may follow. If no buyer is willing to commit to a specific price, then no contract is ever formed and no property is sold.
• Since the use of an escalation clause implies that a prospective buyer is willing to pay more than other buyers, it may motivate sellers to seek higher prices, a disadvantage to the buyer using the escalation clause. 
• While the use of escalation clauses may lead to higher sales prices, a benefit to the sellers, they could also discourage buyers who do not want to use escalation clauses and risk violation of a Commission rule.  The use of escalation clauses may also lengthen the negotiation process, a potential disadvantage to sellers and buyers.
• The buyer who is unsuccessful in a negotiation where a competing buyer used an escalation clause may feel that they were treated unfairly.  The perception of unfair treatment may discourage the buyer from purchasing property in the future and may lead the buyer to file complaints against the brokers involved in the transaction.
• A broker who discloses the price/terms of an offer without the buyer’s consent or otherwise gives one party an unfair advantage over another risks disciplinary action by the Commission.

A seller’s best response in a multiple offer situation where one or more of the buyers is using an escalation clause will likely be to invite all buyers to make their highest and best offers. That way, each buyer is given an opportunity to buy the property at the price and terms they are willing to pay and the seller will receive the best offer from each buyer rather than an incremental offer from a buyer who wants to offer slightly more than a competing buyer.

Escalation clauses tend to focus on price.  Listing agents should exercise care to advise seller-clients to consider more than the sales price in an offer. An offer from a well-qualified buyer who offers a lesser amount may be a wiser choice than a higher offer from a less-qualified buyer. Similarly, an offer from a buyer who has visited the property may be preferred over one who offers a high price sight unseen.

Brokers who choose to use escalation clauses should proceed with extreme caution. Real estate transactions are complex even without such clauses. Real estate transactions in busy markets with low inventory can be even more frantic. Escalation clauses may introduce confusion, anxiety, frustration and fraud.  For these reasons, the Commission discourages their use.

Current Stats: Monthly Licensee Count as of May 1, 2022

It’s Time to Renew your License (May 15-June 30)

This article from the May eBulletin is republished here to remind brokers to renew their license.

Be sure to renew your license between May 15 and June 30, even if you haven’t completed CE. If you do not renew by June 30, your license will expire.

Following are the most frequently-asked questions regarding license renewal.  The answers to all of these questions, as well as step-by-step renewal instructions, are also provided in the Commission’s Renewal Video, which is posted in the Video Library.

When do I renew?

The annual period for renewal of your real estate license began at midnight on May 15 and continues until 11:59 pm on June 30.

How do I renew?

1. Go the Commission’s homepage, www.ncrec.gov.
2. Click on Renew My Broker License.
3. Enter your license number and PIN (password). Your PIN will be the last four digits of your Social Security number unless you have changed it.
4. Verify your contact information, and update information if needed.
5. Provide the “Employee Misclassification” disclosure and certification.
6. If you are a Broker-in-Charge, you will be required to disclose information regarding your trust account(s) and any criminal convictions or disciplinary actions that have occurred within the previous year, if applicable.
7. Pay the $45 renewal fee by Visa, MasterCard, Discover, American Express, or PayPal.

How much is the renewal fee?

The renewal fee is $45.00. You may pay by Visa, MasterCard, Discover, American Express, or PayPal.

Will I get a receipt?

Yes. A printable confirmation of renewal will appear on your screen when the process is complete.

Will the Commission mail me a new pocket card?

No. A link to download your new digital pocket card will appear on your screen when the process is complete. You may print a copy of the pocket card if you prefer to have a paper copy.

I haven’t completed CE, yet. Can I still renew?

Yes. Be sure to renew your license by June 30, even if you do not complete your continuing education by June 10. If you don’t renew, your license will expire.

Can I pay my renewal fee by check?

No. Per Commission Rule 58A .0503, you must renew online.

Can I call the Commission office and pay by phone?

No. Per Commission Rule 58A .0503, you must renew online.

Can I go to the Commission office and pay in person?

If you come to the Commission office, you may renew and pay online, using a computer in our lobby. No cash or checks will be accepted, even in person.

What will happen if I don’t renew by June 30?

If you do not renew your license online by 11:59 pm on June 30, your license will expire. To reinstate an expired license, you must pay a $90 fee between July 1 and December 31. Failure to reinstate the former license by December 31 will result in your having to submit a new application, including application fee and criminal background report. You will also be required to take additional education and/or pass the state license examination. https://www.ncrec.gov/Licensing/Reinstatement

NOTE: If you are a BIC or BIC Eligible and your license expires or changes to inactive status on July 1, you will automatically lose BIC Eligible status and, in turn, BIC designation (if applicable). If that happens, and you wish to regain BIC Eligible status, you must (1) return the license to active status; (2) meet the experience requirements for BIC designation; (3) take the 12-hour Broker-in-Charge Course before re-designation; and (4) complete and submit the Request for BIC Eligible Status and/or Designation form (REC 2.25). Do NOT take the 12- hour BIC Course before your license is on active status! Refer to Rule 58A. 0110 for detailed instructions regarding regaining BIC Eligible status and BIC designation.

Questions about the renewal process?

Email us at LS@ncrec.gov or call us at 919.875.3700.

Disciplinary Actions

BEECH MOUNTAIN VACATION RENTALS, INC (BEECH MOUNTAIN) – The Commission accepted the permanent voluntary surrender of the firm license of Beech Mountain Vacation Rentals, Inc., effective April 20, 2022. The Commission dismissed without prejudice allegations that Beech Mountain Vacation Rentals, Inc. violated provisions of the Real Estate License Law and Commission rules. Beech Mountain Vacation Rentals, Inc. neither admitted nor denied misconduct.

MARGARET ANNE DUNN (CHARLOTTE) – By Consent, the Commission reprimanded the broker license of Ms. Dunn, effective April 1, 2022. The Commission found that in June 2019, Ms. Dunn acted as a buyer agent for a client who purchased a residential property that included a mobile home. Ms. Dunn obtained and reviewed a copy of the septic permit during the due diligence period but failed to notice or discuss with her buyer-client that the septic permit specified three bedrooms while the subject property was listed as having four bedrooms.

JORDAN BLAKE ISRAEL (ARDEN) – The Commission accepted the permanent voluntary surrender of the broker license of Mr. Israel, effective April 20, 2022. The Commission dismissed without prejudice allegations that Mr. Israel violated provisions of the Real Estate License Law and Commission rules. Mr. Israel neither admitted nor denied misconduct.

TRISTAN BISHOP PAN (RALEIGH) – By Consent, the Commission revoked the broker license of Mr. Pan effective April 20, 2022. The Commission found that in September, 2020, Mr. Pan was indicted by the United States Attorney, Eastern District of North Carolina, Western Division, in Case No. 5:20-CR-436-1B0(4) on 6 counts involving wire fraud, bank fraud, making false statements to a financial institution, and devising a scheme to defraud and obtain money and property by defrauding a financial institution, the details of which are set forth in the indictment. On or about March 15, 2022, Mr. Pan pled guilty to 1 count of wire fraud in violation of 18 USC § 1343 and the remaining counts were dismissed. Mr. Pan was sentenced to be committed to federal prison for 1-20 months, after which he will be placed on supervised release for 1-3 years on condition, including that he pay restitution, cooperate in the collection of DNA as directed, and forfeit certain assets.

PREMIER TRIAD VENTURES LLC (GREENSBORO) – By Consent, the Commission reprimanded the firm license of Premier Triad Ventures LLC, effective April 20, 2022. The Commission found that from November 2019 through July 2021, the Firm, due to inadequate policy and practice, allowed for entities not properly licensed with the Commission to receive compensation for real estate brokerage activities.

HAMPTON H RUTLEDGE (FAYETTEVILLE) – Following a hearing, the Commission suspended the broker license of Mr. Rutledge for three years effective September 15, 2021.  The Commission then stayed the suspension effective March 15, 2022, following Mr. Rutledge’s completion of certain continuing education and postlicensing courses. The Commission found that Mr. Rutledge, as qualifying broker of a firm doing property management, failed to ensure that the firm’s broker-in-charge maintained the firm’s trust accounts and the records pertaining thereto in compliance with Commission rules, and that the firm’s Chief Financial Officer converted trust monies to his own use, leading to a shortage in both the rent and security deposit trust accounts of at least $435,000. The Commission further found that the firm charged a number of landlord-clients an unexplained $250 fee and failed to timely refund the fee after promising to do so.

TOLL BROTHERS REAL ESTATE INC (RALEIGH) – By Consent, the Commission suspended the firm license of Toll Brothers Real Estate for a period of 2 years, effective March 15, 2022. The Commission then stayed the suspension effective March 15, 2022. The Commission found the Firm was involved in selling to five buyers, lots and new construction homes in a subdivision that its affiliate had developed. The lots were located on a street which appeared to be a cul-de-sac and the Firm’s MLS listing directed potential buyers to turn “into the cul-de-sac” to get to the listed lots. In fact, the adjacent parcel had a right-of-way to connect a private drive to the cul-de-sac. In the purchase agreement documents, the Firm and its affiliate expressly encouraged buyers to examine surrounding properties and referred them to the municipal records that included the re-zoning and the right-of-way described above. The buyers, in contracting to purchase, signed documentation noting that they were “aware that some home sites are located near undeveloped property that is adjacent to the Community that could be developed in the future.”

KARINA VISHNYA (HICKORY) – The Commission accepted the voluntary surrender of the broker license of Ms. Vishnya for a period of five years, effective April 20, 2022. The Commission dismissed without prejudice allegations that Ms. Vishnya violated provisions of the Real Estate License Law and Commission rules. Ms. Vishnya neither admitted nor denied misconduct.

Staff Appearances

Sheryl Graham, Consumer Protection Officer, spoke at the HTR Southern Properties office meeting on April 5.

Janet Thoren, Director of Regulatory Affairs, spoke at the Lantern Realty and Development LLC meeting on April 13.

Bruce Rinne, Information Officer, spoke at the United Real Estate-Queen City meeting on April 26.

Miriam Baer, ExecutiveDirector of NC Real Estate Commission, spoke at the Pointe Realty Group sales meeting on April 27.

Janet Thoren, Director of Regulatory Affairs, spoke at the Outer Banks Association of REALTORS General Membership meeting on April 28.

Employment Opportunities Available

Are you interested in joining the staff of the North Carolina Real Estate Commission? From time to time, employment opportunities become available. They are posted on the Commission’s website under the “About Us” tab.

We currently have available the following position:

Director of Education and Licensing is currently available at the Commission’s office in Raleigh. A summary of the position and other employment opportunities are available on the Commission’s website. – Application deadline May 12, 2022.

Click here for more information.

“Multiple Trust Account Violations” – A Regulatory Affairs Division Case Study

The Commission’s auditors visit brokers-in-charge throughout the state to perform spot audits of trust accounts. This case is an example of why brokers-in-charge are now required by Rule A.0110 to take the Basic Trust Account Course within 120 days of assuming responsibility for a trust account (but no more than every three years).  In the spot audit of a real estate firm that performed both sales and long term property management, the auditor found multiple areas of concern. Unfortunately, the broker-in-charge had been making mistakes in their trust account recordkeeping for so long that it was impossible to determine exactly how much of the money in the trust account belonged to which owner.  Being able to identify exactly whose money is in the bank is a primary reason for the trust accounting rules – A.0116, A.0117, and A.0118. 

The Ledger Problem:

The first problem the broker-in-charge had was that the software used for the property management accounting created ledgers where rent was treated like an accounts receivable, meaning that at the beginning of the month the rent populated as being due from the tenant. This is perfectly fine for tenant ledgers and tracking outstanding balances. However, Rule A .0117(c)(4) also requires that property or owner ledgers be maintained, and this firm did not have either. Property or owner ledgers should show the exact amount of money on hand, at any given time, for a particular property or owner. The problem with ledgers that populate an amount due is that, if the tenant does not pay their rent for that month or multiple months, there is a balance on the ledger that is an outstanding amount owed by the tenant when the ledger should indicate the amount of money on hand for the owner. 

Sometimes when ledgers do not exist or are unclear, auditors use owner statements as a substitute, which is what we attempted to do on this audit. In this case, many owner statements had negative balances. Negative balance owner statements indicate that the expenses exceeded the income for that particular owner. When more money is spent on a property than the owner has in the trust account, it usually means that another owner/client has just paid those expenses. This is one form of deficit spending. 

The Journal Problem:

Deposits and withdrawals on the ledgers and owner statements should be traceable to a journal.  A journal is a check register where all deposits and withdrawals in a trust account are recorded. In this case, a journal was maintained but individual entries were not recorded. Instead, one amount was entered for all deposits on one day and another lump sum entry was made for all the withdrawals. There was no way to trace deposits or withdrawals on the journal to the ledgers or to confirm that all the journal entries were being posted. 

The Reconciliation Problem:

In addition, there was no way to reconcile to the journal, which meant that the required three-way reconciliations were not being performed. The bank statements were not being reconciled against the journal because there was no way to confirm that the journal was accurate. The journal was not reconciled against the trial balance because no trial balance was maintained. 

A trial balance is the sum of all of the ledgers at a set cutoff date, usually the same date as the bank statement. If a property management firm represents fifty owners, then every month the balance of each of those fifty owner ledgers should be totaled. This total should match, exactly, the reconciled bank balance and journal balance. In this case, since there were no owner or property ledgers, a trial balance could not be produced. 

The Shortage Problem:

A true trial balance could not be created from the owner statements because of all the negative balances. Using the owner statements, even with the negative balances, it showed that the property management trust account had a significant shortage.

As seen in this case, failure to maintain trust account records properly at any stage in the process can have a domino effect. The auditor found other more minor infractions in addition to the major problems. The firm was given an opportunity to correct the deficiencies but they were unsuccessful in bringing the trust account into compliance and, therefore, received a disciplinary sanction. Trust account problems and shortages do not necessarily stem from theft or evil intent. A shortage can result if the broker-in-charge is not taking the necessary steps to maintain records. If any of the above sounds familiar (or unfamiliar) and you maintain a trust account, then take the trust account course and start to work on fixing your trust account records. It is only a matter of time before an auditor from the Commission will be knocking on your door.

It’s Time to Renew your License (May 15-June 30)

Be sure to renew your license between May 15 and June 30, even if you haven’t completed CE. If you do not renew by June 30, your license will expire.

Following are the most frequently-asked questions regarding license renewal.  The answers to all of these questions, as well as step-by-step renewal instructions, are also provided in the Commission’s Renewal Video, which is posted in the Video Library.

When do I renew?

The annual period for renewal of your real estate license begins at midnight on May 15 and continues until 11:59 pm on June 30.

How do I renew?

1. Go the Commission’s homepage, www.ncrec.gov.
2. Click on Renew My Broker License. The renewal link will appear on the website on May 15.
3. Enter your license number and PIN (password). Your PIN will be the last four digits of your Social Security number unless you have changed it.
4. Verify your contact information, and update information if needed.
5. Provide the “Employee Misclassification” disclosure and certification.
6. If you are a Broker-in-Charge, you will be required to disclose information regarding your trust account(s) and any criminal convictions or disciplinary actions that have occurred within the previous year, if applicable.
7. Pay the $45 renewal fee by Visa, MasterCard, Discover, American Express, or PayPal.

How much is the renewal fee?

The renewal fee is $45.00. You may pay by Visa, MasterCard, Discover, American Express, or PayPal.

Will I get a receipt?

Yes. A printable confirmation of renewal will appear on your screen when the process is complete.

Will the Commission mail me a new pocket card?

No. A link to download your new digital pocket card will appear on your screen when the process is complete. You may print a copy of the pocket card if you prefer to have a paper copy.

I haven’t completed CE, yet. Can I still renew?

Yes. Be sure to renew your license by June 30, even if you do not complete your continuing education by June 10. If you don’t renew, your license will expire.

Can I pay my renewal fee by check?

No. Per Commission Rule 58A .0503, you must renew online.

Can I call the Commission office and pay by phone?

No. Per Commission Rule 58A .0503, you must renew online.

Can I go to the Commission office and pay in person?

If you come to the Commission office, you may renew and pay online, using a computer in our lobby. No cash or checks will be accepted, even in person.

What will happen if I don’t renew by June 30?

If you do not renew your license online by 11:59 pm on June 30, your license will expire. To reinstate an expired license, you must pay a $90 fee between July 1 and December 31. Failure to reinstate the former license by December 31 will result in your having to submit a new application, including application fee and criminal background report. You will also be required to take additional education and/or pass the state license examination. https://www.ncrec.gov/Licensing/Reinstatement

NOTE: If you are a BIC or BIC Eligible and your license expires or changes to inactive status on July 1, you will automatically lose BIC Eligible status and, in turn, BIC designation (if applicable). If that happens, and you wish to regain BIC Eligible status, you must (1) return the license to active status; (2) meet the experience requirements for BIC designation; (3) take the 12-hour Broker-in-Charge Course before re-designation; and (4) complete and submit the Request for BIC Eligible Status and/or Designation form (REC 2.25). Do NOT take the 12- hour BIC Course before your license is on active status! Refer to Rule 58A. 0110 for detailed instructions regarding regaining BIC Eligible status and BIC designation.

Questions about the renewal process?

Email us at LS@ncrec.gov or call us at 919.875.3700.