Bulletin Search

New Design, Improvements for Commission Web Site

As the Bulletin was going to press, the Commission’s newly designed Web site was being launched for the first time. Months in the making, the site has a new look and new features to facilitate its use by licensees and the general public.

Overall, users will experience faster and easier navigation among the site’s various pages and an improved search function which locates information wherever it is located on the site.

The Home page, shown here, features drop-down menus for Licensing, Education, Commission, Publications, Resources, Consumers and Forms. In the middle of the page are links to frequently accessed information relating to Rule/Law Changes, Licensees (licensee search databases), and What’s New (Commission actions and activities).

The site is best visited with the use of the Google Chrome or Foxfire Mozilla browsers, but will work well with any other.

A new feature, FAQ’s, provides commonly asked questions and answers by category (such as Applying for a license, Continuing Education, Legal General, Landlord/Tenant).

In addition, the site has been designed for display on mobile devices, automatically scaling to accommodate different screen proportions.

Users can tour the full range of the site’s features and information through a special video available from the Home page.

This article came from the February 2014-Vol44-3 edition of the bulletin.

Assisting Buyers with “Due Diligence”

As a knowledgeable broker, you can be of great assistance to your buyers with these three critical points when they encounter “Due Diligence” for the first time in the Offer to Purchase and Contract.

□ Due Diligence Fee: Explain how this fee is affected by and results from negotiation involving many dynamic variables, including the length of the period, the amount of due diligence to be performed, and the cost and desirability of the property. Discuss those variables most pertinent to the circumstances of the property with the buyers.

□ Due Diligence Process: Help buyers with the list of inquiries so that it is complete and then guide them in determining the length of the due diligence period, especially when an apppraisal and loan are involved.

□ Due Diligence Period Expiration “Warning”: Go over the “Warning” text in paragraph 4 of Form 2-T so that your buyers understand they have a path out of the contract when they act in time if difficulties arise.

This article came from the February 2014-Vol44-3 edition of the bulletin.

“Due Diligence” Questions and Answers

The Offer to Purchase and Contract form (North Carolina Association of REALTORS®/North Carolina State Bar Association Form 2-T) defines “Due Diligence” under Terms and Definitions at Paragraph 1(h) on the second page. An expanded explanation of the term and the effects of its use follow:

Q: What is “Due Diligence”?

A: “Due Diligence” is the buyer’s opportunity to engage in a process of further investigation of the property and the transaction as described in the Offer to Purchase form within a period of time agreed to by the seller and buyer.

Q: What might the buyer investigate during “Due Diligence”?

A: The buyer will want to inquire about anything bearing on a decision to either move forward with the contract or to terminate it. Paragraph 4 of Form 2-T outlines many, but not all, common considerations of the “Due Diligence” process such as home, pest, and septic inspections, property survey, appraisal, title search, loan qualification and application, repair negotiation, etc.

Q: How much time is allowed for the “Due Diligence” Process?

A: The amount of time is negotiable but the period begins with the effective date of the contract. Paragraph 1(j) of Form 2-T will state the period’s agreed upon ending date. Buyers should be certain to negotiate enough time to fully complete their inquiries – especially as related to appraisal and loan approval and any repairs discovered during property inspections.

Q: What is the “Due Diligence” Fee?

The fee, if any, is negotiated and paid by the buyer to the seller for the right to conduct “Due Diligence”. The amount of the fee may be influenced by such matters as the market for the property, number of days on the market, personal circumstances of buyer and seller, and the length of the “Due Diligence” period.

Q: Is there a limit to the repair items the buyer can ask the seller to perform?

A: No. The buyer is free to ask for any number of things; however, the seller is not obligated to agree to any of them. Repairs, if any, are completely negotiable.

Q: If the buyer is not satisfied with the seller’s response, or lack thereof, to repair requests, what can the buyer do?

A: The buyer can terminate the contract or agree to move forward without the repairs.

Q: Must the repairs be completed by the seller before the end of the “Due Diligence” period?

A: No, but the seller is required to complete any repairs in a good and workmanlike manner prior to the settlement date. Failure by the seller to complete the repairs could result in a breach of the contract. (See paragraph 8(k) and (l) of Form 2-T).

Q: Must the seller allow the buyer to inspect the property to verify the repairs have been completed even if the “Due Diligence” period has expired?

A: Yes. The buyer has the right to verify the repairs have been completed satisfactorily, during or after the “Due Diligence” period. The buyer also has the right to do a final walk-through. The seller’s failure to permit the buyer to verify repairs or to do a final walk-through is a breach of the contract.

Q: What happens at the end of the “Due Diligence” period?

A: The buyer must make a decision to move forward with the contract or to terminate, so it’s a good idea to discuss progress with the buyer as the end of the period approaches. There is a “Warning” to the buyer in paragraph 4 of Form 2-T advising termination if the seller does not agree to a requested extension of the “Due Diligence” period. The buyer’s loss of the right to terminate for any or no reason then places the earnest money at stake. To avoid any misunderstandings, provide any extension agreed to by the seller to the buyer in writing.

Q: If the buyer decides to terminate the contract under the “Due Diligence” clause, must the seller agree?

A: No. It is the buyer’s sole decision to make, assuming it is made during the “Due Diligence” period and not afterward. The termination is a notification to the seller, and must be in writing, but the buyer does not need the consent of the seller. It is a unilateral decision made by the buyer for any reason or no reason at all.  The buyer typically gets back the earnest money but not the “Due Diligence” fee, unless otherwise negotiated.

This article came from the February 2014-Vol44-3 edition of the bulletin.

New Brokers-in-Charge Should Review Trust Accounts When Taking Control

A new broker-in-charge for a firm that has trust accounts becomes responsible for those accounts from the date the BIC declaration form is signed. Before taking over as BIC of a firm with existing trust accounts, you should first ensure that the accounts are properly reconciled and fully funded. The following are some steps to take to get you started “on the right foot”:

At a minimum, the following trust account records should be present for each trust or escrow account maintained by the previous broker-in-charge:

□ Receipts for cash payments of trust funds □ Deposit tickets □ Cancelled checks □ Journal or check stubs □ Sales transaction ledgers and/or property or owner ledgers for rentals □ Monthly bank reconciliations □ Monthly ledger trial balance

Obtain the most current trust account bank reconciliation.

The most current trust account bank reconciliation should have been prepared by the previous BIC for the prior month, taking into consideration that the company may not receive the monthly trust account bank statement until several days into the current month. If the accounts have not been reconciled, you must do so immediately.

Examine the most recent trust account reconciliation for correctness and accuracy.

• Make sure that the beginning bank balance on the bank reconciliation agrees with the ending balance on the trust account bank statement. Check the math for accuracy.

•  Also check to be sure that the reconciled trust account bank balance on the bank reconciliation agrees with the journal balance and/or check stub balance as of the same cutoff date.

•  Verify that any deposits-in-transit on last month’s bank reconciliation have cleared the bank.

•  Examine the outstanding checks for checks older than three months.

•  Make sure there is a trial balance of the ledgers prepared as of the same cut-off date as the reconciled trust account bank balance. The total on the trial balance should agree with the trust account reconciled bank balance and with the journal and/or check stubs of the same cutoff date. Verify that there are ledgers for each line item on the trial balance.

•  Examine the ledgers to determine the nature of funds on deposit, such as earnest money deposits, landlord rents, tenant security deposits  or owner reserves. Are there unidentified funds in the account?

•  Are there any ledgers with negative balances indicating deficit spending (spending more on a particular owner than what that owner has on deposit)? If so, this must be corrected immediately.

Examine transaction files.

•  Review open sales transaction files to ascertain if required documents such as listing agreement, buyer agency and dual agency agreements (if applicable), Residential Property and Owners’ Association Disclosure Statements and Working With Real Estate Agents acknowledgments are in the files and completed properly.

•  Do the offers state that the firm is holding the earnest money deposit? If so, are there ledgers for each of the sales transactions where the firm is holding earnest money?

•  Are there copies of the earnest money deposit checks and due diligence checks?

Review rental property management files to make certain they contain required documents.

Property management files should include:

•  Property management agreements.

•    Property management statements accounting to the owner for rents.  (These may be kept in the firm’s trust accounting software. If so, a hard copy need not be in the owner’s file as long as the statements are accessible.)

•  Copies of invoices, bills and contracts paid from the trust account for the rental owner.

•  Lease agreements.

•  Security deposit checks received after April 1, 2013. (Commission rules changed on April 1, 2013 to require the retention of copies of security deposit checks.)

Verify the vendor list to ensure all are legitimate.

•  Do any vendors have a post office box and no physical address?

• Are there disbursements to vendors for round figures?

•  Are there work orders and invoices for each disbursement to a vendor?

•   Does the firm have staff in-house maintenance?

•  Are there receipts for purchases and expenditures?

•  Are there work orders and documentation (pictures, receipts, etc.) for maintenance performed?

•  Do invoices fully document repairs and maintenance performed?

If you have problems performing the above procedures yourself, you may want to consider hiring an outside accountant or CPA to assist you. Make sure that the accountant or CPA you hire understands the Commission rules.

If you decide to become a BIC of a firm with inadequate trust account records, you must immediately perform these procedures and correct any deficiencies!  You don’t want any problems you inherit from the previous broker-in-charge to carry over and continue into your tenure as the broker-in-charge.

If further assistance is needed, do not hesitate to contact the Commission.

This article came from the February 2014-Vol44-3 edition of the bulletin.

What to Do When a Complaint Is Filed Against You

The Commission receives an average of 1,500 complaints each year that cover every aspect of real estate brokerage plus unrelated issues such as criminal convictions. So, what should you do if a complaint is filed against you?

• First, don’t panic. The Commission does not automatically assume that the allegation(s) in a complaint are true. Real estate brokers are considered innocent until proven guilty. However, to fulfill its mission to protect the interests of consumers, the Commission investigates each complaint to determine whether there has been any wrongdoing by a licensee.

• Second, if you receive a Letter of Inquiry from the Commission regarding a complaint, you must respond within fourteen (14) days of its receipt. If you need more time, contact the staff member who sent you the letter and ask for an extension of time to respond. Staff will usually be able to accommodate reasonable requests.

• Third, when responding to a Letter of Inquiry, provide a factual description of the transaction or incident described in the complaint and provide copies of relevant documents to support your statements. The Commission has the authority to expand investigations beyond the allegations described in complaints and may ask you for information and/or documentation regarding other aspects of a transaction or matter. You should fully answer the Letter of Inquiry before the deadline.

• Fourth, you may hire an attorney to represent you in responding to a Letter of Inquiry or when meeting with an Auditor/Investigator; however, it is not a requirement. If you are unsure about whether to obtain legal representation, you may want to discuss your situation with an attorney before deciding.

Cases which cannot be investigated by a Letter of Inquiry or where the broker fails to respond are assigned to a field investigator who performs face-to-face interviews, audits trust accounts and gathers information and documentation that may be needed to evaluate a complaint.

After receiving your written response to the Commission’s inquiry, it is evaluated to determine any need for additional information and/or further investigation. Once the file provides a clear understanding of the facts, or in the case of a field investigation, after the report is completed, a decision is made to close the file with or without a warning or to forward the case to the members of the Commission to order its closing or to order an evidentiary hearing. Only Commission members can order a hearing against a broker or licensed firm. If the file is closed, you and the complaining witness will receive notification in writing of the decision.

When the Commission orders a hearing, the case is assigned to a staff attorney to prosecute on behalf of the Commission and you (or your attorney, if you have one) will be contacted to discuss your options for settling the matter.

If a settlement cannot be reached, then the Commission will hold the hearing. The Commission Chair (or Vice Chair) presides over the hearing and the members sit as the fact finder/jury.  After evidence is presented by the Commission’s staff attorney and by you (or your attorney), the Commission members will decide whether the evidence warrants disciplinary action and, if so, the appropriate action (reprimand, suspension, or revocation).

All disciplinary actions are published in the Commission’s Real Estate eBulletin, which is sent by email monthly, and distributed to the North Carolina Association of REALTORS®, the Better Business Bureau in the area where the violation occurred, and the local board.

The Commission retains records of complaints filed against its licensees, and  under state law, those files are public records. In the event that someone contacts the Commission to inquire about complaints filed against a broker, the Commission’s staff will report the number of cases and their disposition, and will provide copies if requested to do so.

When a case is closed without any disciplinary action, the Commission’s staff informs callers that the evidence of a violation was insufficient to warrant disciplinary action and that the mere fact that a complaint was filed does not necessarily mean that a broker engaged in misconduct.

In summary, the Commission takes an objective, open-minded approach to investigating each complaint. Only cases involving sufficient, admissible evidence of a violation of the Real Estate License Law (Chapter 93A of the North Carolina General Statutes) or the Commission’s rules result in disciplinary action. If a broker has not committed a violation, there is nothing to fear from a complaint. Moreover, conducting your business with a focus on integrity and customer service will go a long way toward protecting you from ever receiving a complaint.

Commercial, Residential Brokerage Fields Differ

If you are a residential broker without commercial brokerage experience or a commercial broker without residential brokerage experience, you will face considerable challenges if you choose to cross the professional line into the other realm.

Most of the real estate laws and Commission rules will apply, as the adjacent article explains, but the day-to-day conduct of business involving, say, a three-bedroom home compared with a three-story office building will differ greatly.

Any residential broker who wishes to venture into commercial real estate or vice versa, should consider partnering with an experienced broker in the new field to better learn both the business and how best to represent clients.

This article came from the February 2014-Vol44-3 edition of the bulletin.

Commercial and Residential Brokers Follow Same Laws, Commission Rules

Some commercial brokers have been surprised to learn that the Real Estate License Law (Chapter 93A of the North Carolina General Statutes) and the Commission’s rules apply to commercial brokers as well as residential brokers. While there are some laws and rules that apply only in residential transactions, in general, most apply to both residential and commercial brokers alike. Here is a brief review of some important laws and rules that apply to everyone.

Any person or firm must first obtain a real estate license to engage in commercial or residential real estate brokerage activities. Commercial or residential real estate firms other than sole proprietorships must obtain separate firm licenses. An out-of-state broker who wishes to engage in commercial transactions in North Carolina may choose to either obtain a North Carolina broker license or a limited non-resident commercial broker license requiring affiliation with a resident North Carolina broker.

In both commercial and residential sales transactions:

• Brokers must review the Working With Real Estate Agents brochure with prospective buyers and sellers at first substantial contact. (Note: The brochure is not required for leasing transactions. Although the North Carolina Association of REALTORS® (NCAR) has created a form for use by its members in commercial leasing transactions, use of NCAR’s form is not required by the Commission.)

• A commercial or residential listing agent must enter into a written listing agreement before beginning to market a seller’s property, including placing a “For Sale” sign on a seller’s property.

• A commercial or residential buyer agent must enter into a written buyer agency agreement no later than the point at which a buyer-client is ready to write an offer. Dual agency is permitted only after obtaining the advance, written authorization of all parties or sets of parties. Any broker who fails to properly establish his or her agency relationship in writing in a transaction is prohibited by law from receiving any compensation either directly or indirectly from the transaction.

Similarly, in commercial or residential leasing transactions:

• Brokers who represent landlords must enter into written property management agreements before beginning to market or manage the landlords’ properties.

• Brokers who represent a commercial or residential tenant must enter into a written agency agreement with the tenant no later than the point at which the tenant is ready to negotiate or sign a lease. Dual agency requires the advance, written authorization of all parties. Brokers, who represent landlords or tenants without written agency agreements, are prohibited from receiving compensation from those transactions.

Commercial and residential brokers must also handle trust monies in accordance with the Commission trust account rules, disclose material facts, retain transaction records for three years, and furnish all parties with copies of agency agreements and contracts.

This article is not intended to address all of the rules, but to remind both commercial and residential brokers of some of the Commission’s requirements. When in doubt about any of the Commission’s rules, brokers should contact the Commission’s office and a member of our staff will be glad to provide more information and/or clarification.

This article came from the February 2014-Vol44-3 edition of the bulletin.

Electronic Signatures, Property Management Among 2013-2015 Update Course Topics

The two main topics for the 2014-2015 Update Course for the licensing year beginning July 1 will be (1) electronic signatures and electronic record-keeping, and (2) property management issues.

Specifically addressed in the course will be the requirements and considerations of electronic signatures and how to maintain electronic record-keeping.

Discussion of issues relating to property management will cover:

• Any significant recent revisions to landlord-tenant law;

• Rule A.0109(a) and (b) in connection with kickbacks from service providers or inflated invoices that include a fee for broker;

• The Commission’s position relating to fees to reserve a rental unit pending lease execution; and

• Fair housing relating to requests for accommodations/modifications, what an owner/agent may ask a tenant to verify, and reasonable restrictions.

Other Update Course topics include:

• revised rules and new or revised laws that impact real estate brokerage;

• working with an unrepresented buyer as Seller agent only when the broker’s company has the listing;

• the extent of a broker’s duty to discover and disclose the status of public vs. private streets, challenges with discovery, and related issues;

• consideration of when a broker promotes brokerage services or properties utilizing “social media”;

how to keep a current and active license.

This article came from the February 2014-Vol44-3 edition of the bulletin.

Commission Cracks Down on Firms Offering Illegal Leases, Credit Repair

The Commission recently investigated and disciplined two licensed real estate firms following receipt of complaints from consumers entering into certain residential leases.

The disciplined licensees all engaged in a business model that focused on an option to purchase agreement executed at the time of the lease. In both cases, tenant/buyers would make a significant down payment to obtain an opportunity to purchase the property within a certain time and for a set price.

As a rule, the tenant/buyers were unqualified for traditional financing, and were promised credit repair programs that would enable them to obtain financing when the time came to buy their home at the end of the lease term.

Problems arose for the formerly licensed firms when many tenant/buyers realized that their rental units were being foreclosed upon in the middle of their tenancy, making their option to purchase worthless.

Others discovered that promises made by the real estate firms regarding their credit repair services were untrue. After many months of following the advice of credit counsellors, these consumers found themselves just as unqualified to purchase their home as they were when they first began their tenancy.

These firms and their brokers are no longer licensed because they were ignorant of, or simply did not adhere to, the regulations and statutes governing option contracts and credit repair services.

As a caution to anyone participating in a real estate transaction involving option contracts or promises of credit repair, this article will touch on the uses, regulations, and pitfalls that arise when the lease with option to purchase scenario is utilized.

We’ll also consider the credit repair services these firms offered and things to know if approached with questions from one of your real estate clients.

The Lease with an Option to Purchase

The tightening of residential mortgage lending following the recent economic downturn forced many homeowners to rent their homes when qualified buyers became scarce. Some builders and homeowners found tenants willing to pay an upfront, nonrefundable down payment to secure the right or option to purchase the property at a set price in the future. Such arrangements could legitimately provide the seller immediate cash and security in knowing that they had a good tenant in their home along with the expectation of a future closing.

Similarly, tenants who may have lost  a job or gone through bankruptcy or a prior foreclosure were sometimes able to negotiate a competitive purchase price for a future closing, allowing them time to qualify for a mortgage.

In a typical, legitimate lease with option to purchase transaction, both the potential tenant-buyer and the seller risk losses in exchange for the promise of a future gain should the deal close. The tenant risks the non-refundable option fee, and the seller risks the possibility of a sale at a later date.

In the transactions investigated by the Commission, alleged “investors” offered to secure the tenant for the homeowner, and charged an upfront fee to the tenant for a future right to purchase the seller’s home. In such cases, the “investor” risked nothing and had no motivation to ensure the success of the transaction or compliance with state laws.  In fact, when a prospective purchaser defaulted under the option to purchase or lease, the “investors” kept the option fee, a new tenant was found and charged a new option fee also retained by the “investor.” Therefore, failed transactions actually provided better opportunities for these “investors” to realize greater gains.

North Carolina General Statutes, Chapter 47G, govern every option contract executed along with a lease agreement. The law dictates that every such option contract contain at least nine (9) specific disclosures and details of the transaction. State law also provides every purchaser a three-day right to cancel such an option contract, and guarantees the right to a refund of any property exchanged or payments made by the purchasers if cancelled timely.

The seller is also required to record the option contract, or a memorandum of the same, in the office of the register of deeds in the county where the property is located.  These are a few of the many statutory requirements in our State with which the disciplined real estate firms failed to comply.

Credit Repair Providers

With very few exceptions, anyone offering credit repair programs must complete the promised programs prior to collecting or charging a fee. The firms that recently lost their licenses with the Commission charged upfront or monthly enrollment fees to participate in their advertised credit repair program.

The firms also falsely promised they could remove legitimate debts from consumer credit reports and gave deceptive advice on how to improve credit. While these guarantees were hollow, the promise of better credit was the hook for prospective purchasers who wanted to own a home now, but did not qualify for traditional financing.

There are two acts governing credit repair services in North Carolina. The first is the Federal Credit Repair Organizations Act, 15 U.S.C. 41, and the second is the North Carolina Credit Repair Services Act, N.C.G.S. § 66-220.

Both of these laws prohibit credit repair providers from making any statement or giving any advice that is untrue or misleading.  They also require that credit repair companies make certain disclosures and give the opportunity to cancel a credit repair contract. Most importantly, the laws provide for civil liability for violations and protect consumers by making noncompliant contracts void.

When the Commission investigated the licensees offering credit repair, it found that not only were their services noncompliant with state and federal laws, but that the individuals were unaware of the strict regulation of their activities.

The Federal Trade Commission advises consumers that when they see the common claims and advertisements guaranteeing perfect credit in very little time, consumers should do themselves a favor, save the money, and avoid what’s likely a scam. The only way to improve consumer credit is with time, effort, and a personal debt repayment plan.

Legitimate credit counselling providers are available through military bases, credit unions, non-profit groups, housing authorities, or consumer protection agencies.

There is also a list of government-approved organizations available at www.usdoj.gov/ust that work with folks prior to filing bankruptcy. As a broker, if you have a client who requests help repairing credit, be sure to caution them about potential scams and suggest they contact their financial institution or consult the above government-approved list of providers.

This article came from the February 2014-Vol44-3 edition of the bulletin.

Bruce W. Moyer, Education Director

Bruce W. Moyer, Ed.S., DREI, has been named Director of Education and Licensing effective February 1.

Moyer joined the Commission as Education and Licensing Officer in 2012.

He holds an Educational Specialist’s Degree (Master’s +30 in Education) from the University of South Carolina, and holds the DREI (Distinguished Real Estate Instructor) designation from the national Real Estate Educators Association.

For 10 years in Charlotte, Moyer was principal broker and broker-in-charge of his own firm, Urban Realty, and for two years a broker with Keller Williams Realty South Park in Charlotte.

He taught real estate prelicense, postlicense, and continuing education at Superior School of Real Estate for five years.

The primary responsibility of the Director of Education and Licensing is to plan and direct the Commission’s education, examination, and licensing programs and operations on a statewide basis.

This article came from the February 2014-Vol44-3 edition of the bulletin.