Pitfalls in Property Management

This article will outline several of the common pitfalls that brokers may face when offering property management services.

Material Fact Disclosures

One of the biggest misunderstandings in property management is the idea that leasing is not the same as buying or selling real estate and, therefore, the same rules about material facts do not apply. This is false. Property managers have the same duty to discover and disclose material facts to potential tenants as do brokers involved in a sales transaction. Material facts are defined as:  information that could affect a reasonable person’s decision to buy, sell or LEASE.

Some common examples of issues that arise as material facts in a sales and/or lease transaction are:

1. Septic systems. Are you advertising a home with a 3 bedroom septic permit with more bedrooms than the permit allows? What does the local municipality set as the occupancy limit?
2. Disclosing HOA rules and covenants. Can a tenant park his work truck/van that has the business advertised on that vehicle? Can a tenant park on the street? Can a tenant install a satellite dish or have an above ground pool? Are there restrictions on the number and/or type of pets? Are there rental restrictions on the property affecting short term rentals like AirBnB & VRBO, or long term rentals?
3. Are there flooding issues in the yard when it rains? Have there been structural issues in the home (e.g. moisture in the crawlspace, termites, truss repairs, fire)?
4. Are you advertising the availability of high speed or fiber internet without having confirmed this with a provider?

Misrepresentation of a material fact can lead to a finding that a property manager has violated multiple sections of the License Law (NCGS § 93A-6) and can lead to disciplinary action.

Security Deposits

Tenant security deposits continue to be an issue for property managers who must be knowledgeable on the proper use of the deposit in order to make proper and timely decisions regarding disbursement of the deposit. The Tenant Security Deposit Act in NCGS § 42-51 outlines the permitted uses of the deposit, including, among other items, damage to the property, costs of re-renting a property if the tenant breaks the lease, and costs of storing a tenants belongings after eviction. NCGS 42-52 specifically states that normal wear and tear is not damage.

The question often arises about whether a lease provision will supersede GS 42-51. If the lease states, for example, upon move out the tenant must mow the lawn, replace all air filters and burned out bulbs, and clean the unit or the landlord will charge this against the deposit, can the deposit be used to cover these costs? As noted above, these items would generally be considered normal wear and tear rather than “damage” and therefore cannot be deducted from the security deposit. Whether these costs constitute a breach of the lease is a civil matter and the landlord or property manager should go to court to recover costs for items covered in the lease which are not specifically allowed in NCGS 42-51.   

So what should a property manager do if the landlord is insistent on charging for items against the deposit that the manager knows are not permitted? The manager should document their conversations with the landlord-client and may send the landlord the deposit. They must also inform the tenant that the landlord is in possession of the deposit and the disposition of the deposit is between the tenant and the landlord at this point. 

Keep in mind, however, that NCGS § 42-55 provides that the willful failure by a landlord to comply with the deposit notice requirements of the Tenant Security Deposit Act VOIDS the landlord’s right to retain any portion of the tenant security deposit. A property manager whose landlord-client insists on retaining tenant security deposits for “damages” about which the manager disagrees may want to consider whether they should retain that landlord-client in future.   

Communication

Problems of communications between property managers and tenants or landlords remain the leading cause of complaints filed against property managers. One of the most common issues is the work order request. Most Property Management Agreements (PMAs) have some language that allows a property manager to complete work that costs less than a certain dollar amount and requires landlord approval for all work over that amount. However, a property manager still has a duty to disclose to the landlord all repairs or other work that is done to their property. The property manager must save all receipts for such work and must disclose to the landlord and get consent for any fees charged by the property manager that are in addition to the vendor cost.

The biggest frustration tenants face is not knowing what is going on. The manager may be waiting for a required approval for work from a landlord or they may be getting multiple bids from vendors. Maybe the vendor is waiting for parts to come in. Whatever the delay, giving updates to the tenant and explaining the process would help them understand that their issue is not being ignored. For tenants who are waiting for something to be fixed so they can fully enjoy the home, it is a big deal. Communication on both ends is key!

Staff Appearances

Brian Heath, Consumer Protection Officer, spoke at the eXp Realty meeting on May 3.

Bruce Rinne, Information Officer, spoke at the Premier Sotheby’s International Realty meeting on May 3.

Charlie Moody, Assistant Director of Regulatory Affairs, spoke at the RRAR Realtor Giving Network meeting on May 5.

Sheryl Graham, Consumer Protection Officer, spoke at the Goldsboro Wayne County Association of Realtors meeting on May 17.

Minerva Mims, Diversity Equity Inclusion Officer, spoke at the Raleigh Regional Association of REALTORS meeting on May 18.

Diversity, Equity, and Inclusion Updates

Interested in learning more about the North Carolina Real Estate Commission’s diversity, equity, and inclusion (DEI) programs and initiatives? Have a program that you’d like the North Carolina Real Estate Commission’s DEI Officer to present at? Using the request for program presenter form, on the Commission’s website, you may request to have the Commission’s DEI Officer present at your event. There are no fees to have the Commission’s DEI officer present, nor are gifts expected or accepted. Click here to learn more about the parameters for requesting the Commission’s DEI Officer as a presenter and to submit the request form.

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. Click here for more info.

Disciplinary Actions

DONALD CATO (GREENSBORO) – The Commission accepted the voluntary surrender of the broker license of Cato effective May 17, 2023. The Commission dismissed without prejudice allegations that Cato violated provisions of the Real Estate License Law and Commission rules. Cato neither admitted nor denied misconduct.

ERICK STEPHENS (GARNER) – The Commission accepted the voluntary surrender of the broker license of Stephens effective May 17, 2023. The Commission dismissed without prejudice allegations that Stephens violated provisions of the Real Estate License Law and Commission rules. Stephens neither admitted nor denied misconduct.

RICHARD T HAYES (WILMINGTON) – By Consent, the Commission suspended the broker license of Hayes for a period of 12 months, effective May 15, 2023, with the suspension to be stayed effective November 15, 2023. The Commission found that, while acting as a licensed attorney, Hayes was disciplined by the North Carolina State Bar in 2005 and in 2009. Hayes was also convicted of one count of misdemeanor failure to pay income tax in 2006 in Wake County District Court. Hayes failed to report the disciplinary actions and the criminal conviction to the Commission within 60 days as required.

JAIME LEE YOUNG (FAYETTEVILLE) – By Consent, the Commission suspended the broker license of Young for a period of 18 months, effective April 1, 2023. The Commission then stayed the suspension in its entirety. The Commission found that in May 2022, Young was the listing agent for the sale of a residential property. The sellers of the subject property accepted an offer to purchase and contract, a term of which required the payment of a due diligence fee by the buyers.  The buyers did not immediately remit this fee. Young advised the sellers that due to the failure of the buyers to immediately remit this fee, the contract was not fully executed. Upon this advice, and without properly terminating, the sellers accepted another offer to purchase.

HALEY DONIELLE KERNELLS (FAYETTEVILLE) – By Consent, the Commission suspended the broker license of Kernells for a period of 18 months, effective April 1, 2023. The Commission then stayed the suspension in its entirety. The Commission found that in May 2022, when Kernells was designated as broker-in-charge, an affiliated broker listed a home for sale. An offer to purchase was accepted, requiring the payment of a due diligence fee, which the buyers did not immediately remit. Kernells advised the affiliated broker that due to the failure of the buyers to immediately remit the due diligence fee, the contract was not fully executed. Upon this advice, and without properly terminating, the sellers accepted another offer to purchase. 

STEPHANIE WADE GODWIN (SANFORD) – By Consent, the Commission suspended the broker license of Godwin for a period of 12 months, effective March 1, 2023. The Commission then stayed the suspension after 1 month served. The Commission found that in December 2022, Godwin listed the subject property for sale. Godwin was aware that the subject property had been completely remodeled by the seller, who was an investor. Godwin failed to discover and disclose that no permits had been obtained for the renovations to the subject property.

FRANCIS XAVIER RECK (WILMINGTON) – By Consent, the Commission suspended the broker license of Reck for a period of 12 months, effective April 1, 2023. The Commission then stayed the suspension in its entirety. The Commission found that Reck was the listing agent for a residential property. A buyer submitted an offer which included an escalation clause. The sellers received an additional offer. Thereafter, Reck advised the buyers’ agent that the sellers had received another offer.  The sellers then countered the first buyers’ offer with an increased purchase price, pursuant to the escalation clause. The first buyers requested proof of the second offer and Reck revealed the terms of the second offer without first receiving permission from the offeror. 

JUDITH HIGGINS WAGNER (BOONE) – By Consent, the Commission suspended the broker license of Wagner for a period of 12 months, effective May 1, 2023. The Commission then stayed the suspension in its entirety. The Commission found that in February 2022, Wagner entered into a listing agreement for a residential property. Wagner falsely advertised the property as containing “HSpeed Internet – DSL.” Wagner failed to verify that the property had such internet available and accessible.

ALLAN M WAGNER (BOONE) – By Consent, the Commission suspended the broker license of Wagner for a period of 12 months, effective May 1, 2023. The Commission then stayed the suspension in its entirety. The Commission found that in February 2022, Wagner entered into a listing agreement for a residential property. Wagner advertised the property as containing “HSpeed Internet – DSL.” Wagner failed to verify that the property had such internet available and accessible.

RHONDA LYNNE ADAMS (FAYETTVILLE) – By Consent, the Commission reprimanded Adams, effective April 1, 2023. The Commission found that Adams was the broker-in-charge of another broker during a sales transaction. The broker represented a buyer client to whom he made a promise to credit $10,000. A credit of $5,000 was noted on the closing disclosure of the transaction and the broker agreed to credit the remaining $5,000 to their client following future closings. After the subject transaction closed, Adams became aware the broker had made the promise but did not ensure that they fulfilled the promise.

EXP REALTY LLC (FAYETTVILLE) – By Consent, the Commission reprimanded EXP Realty LLC, effective April 1, 2023. The Commission found that an affiliated broker of the Firm represented a buyer-client to whom they promised to rebate $10,000 – half at the time of closing and half upon the close of other transactions. After the close of the first transaction, the broker-in-charge of the Firm became aware of the promise made by the broker but did not ensure that they paid the remaining $5,000 as promised.

The April Outreach Commission Meeting in Edenton Was a Success

The Commission held its April 2023 meeting in Edenton, NC at the Historic 1767 Chowan County Courthouse as part of its outreach initiative. The Commission welcomed local brokers and the public to the meeting. The Commission held two hearings in the historic courtroom, a rule-making hearing and a disciplinary hearing. You can view past meetings, and a schedule of the upcoming meetings, on the Commission’s website.

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.

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.