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Regulatory Affairs Case Study: Repeated Material Omissions

By Stephen L. Fussell, Chief Consumer Protection Officer

            This article is a compilation of multiple cases where licensees failed to disclose material defects in the property to multiple buyers. In some cases, the licensees were sellers who purchased properties to renovate and resell for a profit. In most cases, the licensees were listing agents who represented unlicensed investors/“flippers” or typical sellers.

            In the cases involving sellers who were investors, most of the sellers had not inspected the properties when they purchased them. The renovations they performed usually involved cosmetic items: cabinets, countertops, appliances, flooring, plumbing fixtures (e.g. toilets, sinks, faucets, etc.), interior paint, and landscaping. In some cases, the sellers hired unlicensed persons to install HVAC systems or water heaters and did not obtain building permits for improvements that required permits, such as decks, room additions, or structural/mechanical changes. One renovation involved cutting wooden floor joists in the crawl space to make room for new ductwork and pipes without an inspection by a structural engineer or licensed general contractor to evaluate the structural integrity of the remaining floor structure.

            Nearly all of the transactions progressed in a similar manner. Following the completion of the renovations, each seller completed a Residential Property and Owners’ Association Disclosure Statement (“RPOADS”) answering “No Representation” to all of the questions.  The listing agent then entered the property into the local MLS system generally touting beautiful updates to the property.

            Buyer #1 contracted to buy the property and ordered a home inspection which revealed material defects, such as a deck that was structurally unsound, an HVAC system that was underperforming or not working at all, or a basement that was leaking. The agent for Buyer #1 sent a copy of the home inspection report and a Due Diligence Request and Agreement (“DDRA”) to the listing agent. However, due to concern over the condition of the property and the likelihood of expensive future repairs, Buyer #1 terminated the contract during the due diligence period and got the earnest money back, but lost the due diligence fee.

            After termination of the contract, the seller did not hire licensed professionals to correct the defects referenced in Buyer #1’s home inspection report and did not revise the RPOADS to disclose any defects. The listing agent put the property back on the market without disclosing any defects in the MLS system or elsewhere.

           Unaware of the previous inspection, Buyer #2 contracted to buy the subject property and ordered a home inspection which revealed the same defects as Buyer #1’s inspection. The agent for Buyer #2 sent a copy of the inspection report and a DDRA to the listing agent. The seller promised to make repairs, but when Buyer #2 asked his inspector to re-inspect the property, only a few repairs had been attempted and the quality of those repairs was very poor. Disappointed, Buyer #2 terminated his contract after the expiration of the due diligence period and the seller refused to refund the due diligence fee or the earnest money.

           The listing agent put the property back on the market for the third time, again without disclosing any material defects in the MLS or otherwise. The seller did not revise the RPOADS. Buyer #3 quickly and eagerly contracted to buy the property and again paid a due diligence fee and earnest money deposit. Buyer #3 ordered an inspection which identified the same defects reported by the first two home inspectors along with evidence that someone had attempted to conceal some of the defects. Without asking for repairs, Buyer #3 terminated her contract and asked for reimbursement of both the due diligence fee and earnest money deposit as well as the  inspection fees, believing that the seller and/or the listing agent had acted dishonestly. The seller refunded only the earnest money.

           The listing agent put the property on the market for the fourth time. Buyer #4 was a cash buyer, who had been outbid on several previous properties and was determined not to lose out on this property. Buyer #4 offered to pay full-price and close within seven days with no inspections. The seller accepted the offer and the transaction closed without incident.  After the closing, Buyer #4 discovered that the house needed thousands of dollars in repairs (i.e. the same repairs referenced in the first three transactions).

           Sometimes, the buyers who terminated filed complaints with the Real Estate Commission. Sometimes, the successful eventual buyers filed complaints, and several filed civil suits against the sellers, the listing agents and the listing firms for willfully withholding material facts.

Lessons to learn:

           A listing agent must make a reasonable effort to discover material facts by walking through and around a listed property and by asking the seller questions about the property and obtaining copies of available documentation regarding repairs and renovations. In these cases, the listing agent was put on notice about material defects but failed to confirm that repairs had been made. Unless a listing agent is able to confirm with written documentation that a repair has been made, then the listing agent must disclose the defect to all prospective buyers and/or their agents.

           Buyer agents also have a duty to verify issues that their clients have identified as being material to them. A prudent buyer agent should ask a listing agent whether the property has been inspected and, if so, ask for a copy of the inspection report. If the listing agent received a copy of the inspection report from a previous buyer, then the listing agent may give the report to a new buyer agent.  If the listing agent did not receive a copy of the previous inspection report, but the agent for the previous buyer informed the listing agent that the report revealed material defects, then the listing agent must disclose to all prospective buyers or their agents that a previous buyer’s home inspection revealed certain material defects and identify those defects.

           When a seller has owned a property for a short period of time (i.e. less than one year), a prudent buyer agent should ask whether the seller is an investor or flipper and, if so, ask for copies of all invoices for renovations performed and ask whether all contractors and vendors were licensed and whether they have been paid in full.

            Some licensees have tried to hide behind the adage that North Carolina is a buyer beware state. However, a licensee (whether a licensed seller or listing agent) must disclose all material facts that the licensee knows or reasonably should know to all interested persons in a timely manner (i.e. before a buyer enters into a contract to buy the property).

Current Stats: Monthly Licensee Count as of September 1, 2020

Commission Spotlight: Education Staff

Are you interested in offering or instructing Prelicensing, Postlicensing, or Update courses? Have you developed a course and want to get it approved as an elective? Do you have questions about the 12-hour BIC Course? If so, you may contact the Education section of the Commission’s Education and Licensing Division.

Education staff members focus on:

For more information or to ask a question, contact the Education and Licensing Division at educforms@ncrec.gov or 919-875-3700.

2020-2021 Update Course

The Commission’s GENUP-General Update and BICUP-Broker-in-Charge courses for 2020-2021 have been available since July 1, 2020, for all licensees.

The 2020-2021 GENUP course topics are:

The 2020-2021 BICUP course topics are:

A statewide Continuing Education course schedule is provided on the Commission’s website (www.ncrec.gov) under the Education menu. Licensees may search for courses by:

Licensees may take the Update course anytime between July 1, 2020 – June 10, 2021. However, the Commission encourages licensees to take the course as early as possible during the license year, to stay up-to-date on law and rule changes.

Per Commission rule 58A .1702, a licensee must take eight (8) hours of continuing education (CE) each year to maintain an active license, as follows:

*A broker with BIC-Eligible status who takes the General Update course and an elective will maintain an Active license but will lose his/her BIC Eligible status and BIC designation.

If you have questions about the CE requirement, contact the Education and Licensing Division at 919.875-3700 or LS@ ncrec.gov.

Disciplinary Actions

VIVIAN M WOODARD (Boone) – By Consent, the Commission reprimanded Ms. Woodard effective June 3, 2020. The Commission found that Ms. Woodard was the listing agent for a residential property and acted as a dual agent for a buyer that went under contract. The buyer terminated after receiving her home inspection report, which Ms. Woodard reviewed. The report recommended that the buyer consider having a general contractor further evaluate the roof, chimney, attic, deck, and crawl space of the subject property. Ms. Woodard then had a licensed general contractor visit the property to view the crawl space and deck. He determined that the moisture problem in the crawl space had “been resolved” and opined that new joists were in place to support the floor system. The contractor did not view the other areas of the home as recommended by the inspection report, however, Ms. Woodard recommended to her seller-clients that they consider looking further into those issues. Another Buyer went under contract a few days later, who terminated the contract after his home inspection discovered some of the same potential issues noted in the first buyer’s inspection. The first buyer then went back under contract, purchased the subject property, and has had no issues to date. Ms. Woodard reviewed the Working With Real Estate Agents brochure with the first buyer, who understood and agreed that Ms. Woodard was acting as a dual agent. However she failed to execute a separate Buyer Agency Agreement. The first buyer and Ms. Woodard’s seller clients have no complaints regarding representation in the transaction.

ADVANCED REALTY LLC (Boone) – By Consent, the Commission reprimanded Advanced Realty LLC effective June 3, 2020.  The Commission found that the Firm listed a residential property for sale and acted as a dual agent for a buyer who went under contract. The buyer terminated after receiving her home inspection report, which the Broker reviewed. The report recommended that the buyer consider having a general contractor further evaluate the roof, chimney, attic, deck, and crawl space of the subject property. The broker then had a licensed general contractor visit the property to view the crawl space and deck. He determined that the moisture problem in the crawl space had “been resolved” and opined that new joists were in place to support the floor system. The contractor did not view other areas of the home as recommended by the inspection report, however, the broker recommended to the seller-clients that they consider looking further into those issues. Another buyer went under contract a few days later, then terminated the contract after his home inspection discovered some of the same potential issues noted in the first buyers inspection. The first buyer then went back under contract, purchased the subject property, and has had no issues to date. The broker reviewed the Working With Real Estate Agents brochure with the first buyer, who understood and agreed that the Firm was acting as a dual agent, however failed to execute a separate Buyer Agency Agreement. The first buyer and the Firm’s seller clients have no complaints regarding representation in the transaction.

MARK EVERETT GUARD (Greensboro) – The Commission accepted the permanent voluntary surrender of the broker license of Mr. Guard effective August 12, 2020. The Commission dismissed without prejudice allegations that Mr. Guard violated provisions of the Real Estate License Law and Commission rules. Mr. Guard neither admitted nor denied misconduct.

HUGH D OSBORNE (Greensboro) – The Commission accepted the permanent voluntary surrender of the broker license of Mr. Osborne effective August 12, 2020. The Commission dismissed without prejudice allegations that Mr. Osborne violated provisions of the Real Estate License Law and Commission rules. Mr. Osborne neither admitted nor denied misconduct.

LAMBETH OSBORNE REALTY (Greensboro) – The Commission accepted the permanent voluntary surrender of the firm license of Lambeth Osborne Realty effective August 12, 2020. The Commission dismissed without prejudice allegations that Lambeth Osborne Realty violated provisions of the Real Estate License Law and Commission rules. Lambeth Osborne Realty neither admitted nor denied misconduct.

JAMES M LEWIS (Glenville) – By Consent, the Commission reprimanded James M Lewis effective October 1, 2020. The Commission found that in or about June 2018, Mr. Lewis, acting as a dual agent in a transaction, ordered a home inspection on behalf of his buyer-client. The home inspection noted a possible infestation of Powder Post Beetles. Mr. Lewis reviewed the home inspection report with the buyer but failed to mention the remarks about the powder post beetles. He submitted a request for a wood-destroying insect inspection to a local pest control firm. but failed to obtain and review a copy of the pest inspection report, which indicated an active infestation of powder post beetles and carpenter beetles, with his buyer-client, although the closing attorney included the report in the package of closing documents. The buyer closed on the house in July 2018, and contracted with a pest control company to spray on a quarterly basis. About 8 months after closing, the pest control company informed the buyer about the infestation and estimated the cost to eliminate the infestations at around $15,000. The Commission noted that Mr. Lewis subsequently paid his buyer-client $15,000 for remediation of the property.

JIM LEWIS REALTY LLC (Glenville) – By Consent, the Commission reprimanded Jim Lewis Realty LLC effective October 1, 2020. The Commission found that in or about June 2018, the Firm, acting as a dual agent in a transaction, ordered a home inspection on behalf of its buyer-client. The inspection noted a possible infestation of Powder Post Beetles. The Firm, through its broker-in-charge, also submitted a request for a wood-destroying insect inspection to a local pest control firm. The broker failed to obtain and review a copy of the pest inspection report, which indicated an active infestation of powder post beetles and carpenter beetles, with his buyer-client, although the closing attorney included the report in the package of closing documents. The buyer closed on the house in July 2018, and contracted with a pest control company to spray on a quarterly basis. About 8 months after closing, the pest control company informed the buyer about the infestation and estimated the cost to eliminate the infestations at around $15,000. The Commission noted that the broker subsequently paid the Firm’s buyer-client $15,000 for remediation of the property.

JAHQUIIS ALSTON (Charlotte) – By Consent, the Commission suspended the broker license of Mr. Alston for a period of 18 months effective July 4, 2020. The Commission then stayed the suspension in its entirety. The Commission found that in December 2016, Mr. Alston submitted an application for his real estate license but failed to disclose a June 2015 disciplinary action from the NC Board of Massage and Bodywork Therapy on his application. In June, 2017, the Massage Board revoked his license based on a second complaint. Mr. Alston also failed to disclose this revocation to the Commission. The Commission noted that in 2019, Mr. Alston submitted an application to the NC Appraisal Board disclosing his two prior disciplinary actions from the NC Board of Massage and Bodywork Therapy.

Appearances

Nick Smith and Sheryl Graham, Consumer Protection Officers, spoke at the Central Carolina Association of Realtors virtual membership meeting on August 11.

Let’s Make The 2020 Census A Success in NC

The North Carolina Complete Count Commission (NC CCC) is committed to making the 2020 Census a success for our state.  Visit census.nc.gov for information and resources.

Why the Census Matters

The US Census is a once a decade count of everyone residing in the United States. It will have a big impact on North Carolina’s communities through representation, funding, and reliable information.  The US Constitution requires a Census every 10 years to determine seats in the US House of Representatives.  North Carolina has 13 Congressional seats, but recent estimates show that our state may gain a seat after the 2020 Census.  A complete count will ensure that North Carolina’s voice will be appropriately represented in Congress.  The Census also provides the most detailed picture of our communities, and governmental funding programs rely on Census data to distribute billions of dollars each year.  In Fiscal Year 2015, the US Government distributed over $16 billion in North Carolina providing resources for schools, health care, highways, and more.  That’s $1,623 per person per year, and the State of North Carolina also distributes about $200 per person per year to counties and towns based on Census information.  Information from the Census helps local service providers and businesses plan for our dynamic state.  The Census is important to our future.  When you complete your 2020 Census form, you Make NC Count.

How do People Respond

The 2020 Census will shape representation, funding, and planning for North Carolina’s future; and being counted in the Census is quick, easy, and safe. This is the first US Census to allow internet or smartphone responses; you can complete your Census form online.  The Census invitation was mailed in March and included a web address, Census ID code, and phone number.  If you did not receive it you can still take it at https://2020census.gov/en.html. If you do not have internet access or would rather not reply online, you can provide your information by phone at 844-330-2020.  You can also use the phone number to request a paper Census form.  Census forms are available in 12 languages, and Census support is available in over 50 languages including American Sign Language.  Questionnaire support is available online via chat and over the phone. Census Enumerators are now visiting the addresses of non-responders to make sure everyone is counted.  The information you provide is confidential and by law cannot be shared for 72 years.  This includes all federal and state government agencies, law enforcement, courts, etc.  The Census questionnaire is short and can be completed in a few minutes.  Your confidential participation helps provide representation, funding, and planning data to serve your community for the next decade.  When you complete your 2020 Census form, you Make NC Count.

How the Census Works

The 2020 Census is a big operation – in fact, it is the largest peacetime operation conducted by the US government.  It takes a big operation to count everyone in a nation that is growing and becoming more mobile and diverse.  The task of the Census is to count everyone once, only once, and in the right place.  This task is required by the Constitution to determine where Congressional seats should be apportioned.  Everyone counts in the Census – no matter your age, race, sex, or place of birth.  The Census counts everyone in every living situation whether you reside in a house, apartment, dorm, prison, barracks, or are homeless.  The Census counts everyone where they usually live on April 1, 2020; but the Census does not change your legal residence for taxes, voter registration, or other residency status. 

Participation is required by law. While you can skip questions on the Census form, this increases your likelihood of being visited by a Census Enumerator.

Confidentiality – Participating is Safe

Your Census response is confidential and protected for 72 years per Title 13 of the US Code.  Your personal Census information cannot be shared with any one or any government agency including law enforcement, immigration, IRS, etc.  Violation of Census confidentiality is punishable by five years in federal prison and/or $250,000 fine.  These severe penalties protect your Census privacy.  While participating in the Census is safe, knowing what to expect will help avoid potential scams and fraud.  The 2020 Census is short.  The Census form asks questions about housing tenure (owning/renting), phone number, number of people in the home, relationship, and name, sex, race, Hispanic/Latino origin for each person in the home.  The 2020 Census does NOT ask for social security numbers, bank or credit card account numbers, money or donations, or anything on behalf of a political party.  Census Enumerators are now in the field conducting 2020 Census non-response operations.  All Census workers will have ID badges with their photograph, US Department of Commerce watermark, and expiration date.  Census workers will carry a hand-held device and a clearly marked US Census Bureau bag.  If asked, Census workers will produce their supervisor’s contact information and/or regional office phone number for verification and a letter from the Director of the Census Bureau on US Census Bureau letterhead.  A Census worker will never ask to enter your home.  Your Census response is important to the future of your community, and your participation is safe.

Think Before You Speak… or Post

By Nicholas Smith

The Commission regularly receives complaints against brokers caused, at least in part, by a lack of professionalism in their communications. These complaints are often a result of brokers who have acted angrily or aggressively, communicated threats, made personal attacks or who made rude or vulgar comments in person, over the phone, or online. 

Social media, texting, and email are a part of everyday life, both professional and personal. The conduct of the real estate brokerage business can also be extremely fast-paced and is increasingly handled electronically. Brokers can now text, email, and post “on-the-fly,” leading to communications that, in hindsight, might have been better phrased or simply better left unsaid. Responding to a text, email or social media post in anger or frustration can often exacerbate a problem in a transaction instead of reducing tensions.

Social media like Facebook and Twitter began as platforms for personal interactions. These platforms and those like them are now used both for personal activities and for advertising and branding professional services.  Increasingly, the Commission is receiving complaints about brokers posting offensive content on social media. Posts that someone may consider offensive (e.g. discriminatory, political, angry rants, etc.) may not only damage your business and reputation but may lead to complaints with consumer websites, professional groups or associations, your firm and the Commission.

Of course, not all these complaints are actionable. Brokers are entitled to express their opinions and political beliefs. Being rude is generally not enough to constitute a violation of the License Law or Commission rules. On the other hand, the Commission may reprimand, suspend or revoke the license of a broker who is unworthy to act as a broker in a manner as to endanger the public interest. This could include conduct such as threatening physical harm or violence.

As brokers continue to expand their use of social media to network and promote their businesses, brokers should carefully consider the effect of their online presence, particularly on professional pages. A firm’s broker-in-charge (BIC) should also consider using written office policies to address their broker’s conduct in communicating in person and online. The Commission expects licensed brokers to be professional, so be mindful of what you say and how you say it. Keep in mind, as a North Carolina broker, you are a representative for all brokers in our state.

Current Stats: Monthly Licensee Count as of August 1, 2020

Commission Spotlight: Consumer Protection Officers (CPOs)

Have you heard of the Commission’s “brown envelope?” 

When the Commission receives a complaint against a broker, a staff attorney reviews the complaint to determine whether the allegations fall under the jurisdiction of the Real Estate Commission.  The staff attorney is not attempting to determine whether the allegations are true or false at this stage.  Rather, the attorney must consider: “If all allegations in this complaint are true as written, would there be a violation of License law and Commission rules?”  If the answer is yes, then a case file is opened.

If most of the necessary information can be gathered by mail or email, then the case is referred to a Consumer Protection Officer, or CPO, who writes to the responding broker and any witnesses to obtain statements and documents. Typically, the first piece of correspondence from the CPO related to an investigation will be mailed in a brown envelope.

A copy of the complaint and any documents the Commission received is included with the initial letter of inquiry. Pursuant to Rule 58A .0601(e), any broker who receives a letter of inquiry shall submit a written response within 14 days of receipt. If additional time is needed to prepare a thorough response, the broker should contact the CPO who wrote the letter of inquiry and request an extension of time to respond, which typically is granted.

In addition to investigating complaints against licensees, CPOs:

To learn more about the complaint process or to file a complaint, go to the Commission’s website, or contact Regulatory Affairs at RA@ncrec.gov or 919-719-9180.