By Curtis Aldendifer, Associate Legal Counsel
Each year, the Real Estate Commission receives as many as 1,000 – 1,200 complaints against brokers from consumers, and in some cases, other brokers. Most are resolved without disciplinary action. Some go to hearing before the Commission, which may result in sanctions ranging from a reprimand to a license suspension or revocation.
The top ten complaints follow with suggestions as to how to avoid mistakes that may lead to disciplinary action.
1. Disclosure of Material Facts
Material facts fall into three general categories: facts about the property (leaky roof, cracked foundation, termite infestation, water intrusion, the presence of mold, etc.); facts relating to the property, such as zoning changes or the construction of a major roadway nearby; and facts that relate to a principal’s ability to perform under the contract, such as a pending bank foreclosure or short sale situation.
Typical complaints of misrepresentation involve advertising a property for rent or sale with a greater number of bedrooms than is permitted by the property’s septic permit, or advertising a larger living area for the property than was constructed pursuant to permit. Complaints sometimes involve hidden defects (cracked foundation or water intrusion resulting in mold) that were revealed by an inspection performed by a previous buyer.
To avoid complaints of misrepresentation or non-disclosure of material facts, you need to do your homework. Don’t rely on information obtained from others – verify it through reliable sources. Also, check the accuracy of advertisements in print, on the MLS, or at a Web site.
A broker’s duty to disclose material facts extends to his or her client, and to all parties involved in the transaction (including the lender in a short sale situation).
2. Mismanagement of Trust Accounts
The broker-in-charge is responsible for the proper handling of funds belonging to others, including the management of the trust account and trust account records. Although the broker-in-charge may delegate trust accounting duties, he or she remains ultimately responsible.
A broker-in-charge is responsible for maintaining a monthly trust account journal with a running balance, property ledgers for each sale transaction or lease, account reconciliations with bank statements and journal on a monthly basis, and a copy of the reconciliation worksheet with the trust account records. In many instances, where trust account violations have occurred, the investigation reveals that the broker-in-charge was not properly supervising those charged with bookkeeping duties, and was not regularly (preferably monthly) reviewing the trust account records.
Records must be retained for three years after all funds held in trust have been disbursed to the proper parties or until the conclusion of the transaction, whichever occurs later.
3. Disputed Deposits
A. Earnest Money Deposits – Commission rules require that, in the event of a dispute between a buyer and seller or landlord and tenant regarding the return or forfeiture of any deposit held by a broker, other than a tenant security deposit, the broker must hold the deposit in a trust account until a written release from the parties authorizes its disposition or until a court orders disbursement. The rule applies even where it appears clear to the broker that one party has no valid claim to the deposit. In lieu of retaining the disputed funds, a broker may deposit the funds with the Clerk of the Court at least 90 days after notifying the parties claiming ownership of the funds. Thereafter, it will be up to the parties to file a special proceeding with the Clerk of the Court to determine ownership of the funds. This procedure is described in the Offer to Purchase and Contract (Standard Form 2-T, rev. 1/2011) and enables brokers to educate their clients regarding handling of disputed deposits, and be less likely to face a complaint about the funds’ return.
B. Tenant Security Deposits – Disputes concerning the disposition of a tenant security deposit are governed by the Tenant Security Deposit Act (“TSDA”), G.S. § 42-50 et.seq. When a dispute arises between a tenant and landlord, a property manager should follow the lawful directions of his or her client (the landlord) and disburse the security deposit accordingly.
The property manager is required to refund the balance not retained by the landlord to the tenant no later than 30 days following termination of the tenancy, together with an itemized list of damages charged against the security deposit. If the extent of the landlord’s claim against the security deposit cannot be determined within 30 days following termination of the tenancy, the property manager must provide an interim accounting within 30 days, followed by a final accounting and refund of the balance within 60 days of the termination of the tenancy. Thereafter, a tenant must take the landlord to court to resolve the matter.
4. Charges Against Tenant Security Deposits
The TSDA sets forth the maximum amount that may be imposed as a tenant security deposit, depending upon the duration of the tenancy, and further limits the items that may be covered. The deposit may not exceed an amount equal to two weeks’ rent if a tenancy is week to week, one and one half months’ rent if a tenancy is month to month, and two months’ rent for terms greater than month to month.
Items covered by the deposit include non-payment of rent, water and sewer service charges, damage to the premises, nonfulfillment of the rental period, unpaid bills that become a lien against the leased premises due to the tenant’s occupancy, costs of re-renting the premises following a breach by the tenant, removal and storage of property after an eviction and related court costs. No other deductions are allowed.
Two common complaints against property managers involve charges for items such as cleaning carpets and appliances, and for re-renting the premises following a tenant’s breach. The TSDA permits charges against the security deposit for property damage, but not for “ordinary wear and tear.” Lease provisions imposing certain cleaning requirements on the tenant prior to vacating may not be enforced by charging the TSD and could require enforcement through a civil court proceeding. Much of the confusion related to improper charges for property damage can be eliminated by the proper use of property condition checklists.
5. Short Sales
A short sale transaction constitutes a material fact that must be disclosed to potential buyers. For a detailed discussion, see the article on short sales in this issue of the Bulletin.
6. Drafting Legal Documents
The Real Estate License Law prohibits brokers from drafting contracts, contract provisions, or any other legal documents, or from performing any other service constituting the practice of law as defined by G.S. § 84-2.1. While a broker may assist a client in filling out the standard forms approved by the N.C. Bar Association and N.C. Association of REALTORS®, the broker must nevertheless avoid inserting complex contingencies into an Offer to Purchase and Contract or addendum. If a transaction requires more than can be inserted into the blanks of a standard form, a broker should refer the client to an attorney. Under no circumstances should a broker attempt to alter or combine approved forms that are not written to be used together. For example, don’t combine an Offer to Purchase and Contract form with a standard residential lease form in an attempt to create a lease-purchase contract. In addition to engaging in the unauthorized practice of law, the broker will likely run afoul of recent legislation imposing strict requirements and restrictions on lease-purchase option agreements. Parties in lease-purchase transactions must be referred to private attorneys for document preparation and guidance.
7. Disputes Regarding Contract Acceptance
Negotiations leading to a contract can be fast-paced, to the extent that brokers find themselves communicating offers and counter-offers, as well as acceptances, orally. An example of such a situation occurs when an oral counter-offer is communicated to the buyers, who orally agree to the new terms. The acceptance is orally relayed to the sellers, who now mistakenly think they have a valid contract.
The Statute of Frauds requires that all contracts for the sale of land or for lease agreements exceeding three years be in writing and signed by the parties to be enforceable. In order for a valid contract to exist, all negotiated terms must be in writing and signed by the parties. Any changes must also be in writing and initialed by the parties.
A broker can best keep his or her clients informed of all communications material to negotiations between the parties by ensuring that offers, counter-offers, and acceptances are in writing and contain all necessary signatures. Oral agreements for the sale of real property are not binding.
8. Conflict of Interest
The Real Estate License Law prohibits brokers in a transaction from acting for more than one party without the knowledge of all parties for whom the broker acts. The most common complaints deal with dual agency, seller subagency, and special relationships between the parties.
With dual agency, an inherent conflict of interest exists because the broker is representing both the buyer and seller who have different and competing interests. To avoid a complaint of this type, Commission rules require that a broker provide a prospective client with the Working With Real Estate Agents brochure, and thoroughly review the types of agency and the broker’s duties associated with each. The broker and prospective client must then agree as to whether the broker will work as a seller’s agent, a buyer’s agent, a seller’s subagent, or a dual agent. To serve as a dual agent, the broker must first obtain written consent from all parties to the transaction.
Where a broker is working with a buyer who declines an agency relationship, the broker must disclose that he or she is working as the seller’s subagent, and caution the buyer against revealing any confidential information. The seller’s subagent can neither advise the buyer nor advocate on his or her behalf.
Brokers should also beware of conflict of interest issues that may arise in connection with the sale of the broker’s own property. Although the broker is the seller, a prospective buyer may assume that the broker is representing the buyer’s interests. This is especially true where the buyer had previously entered into an exclusive agency relationship with the broker prior to being shown the broker’s listed property. Brokers are strongly discouraged from showing properties they own to buyers they represent. If necessary, it is better to terminate the agency relationship, refer the buyer to another broker, and collect a referral fee, rather than risk a conflict of interest complaint.
9. Lack of Communication
A large number of complaints cite the broker’s failure to communicate with his or her client. In sales transactions, sellers whose homes have remained on the market for prolonged periods express frustration at not being better informed regarding the broker’s marketing strategies. Buyers note the lack of communication from their brokers concerning such matters as the outcome of property inspections or the progress in short sales of the lender approval process. Landlords complain about not being kept informed regarding marketing efforts to secure new tenants or property maintenance issues. But, by far the most frequent complaints we receive from brokers and consumers alike deal with the failure of other brokers to return phone calls or e-mails.
As a fiduciary, it is essential that you establish a method and frequency of communication that is responsive to your client’s needs and preferences. As a broker, you should return telephone calls, e-mails, and other electronic communications promptly. If you are unable to respond promptly, due to a vacation or trip out of town, make sure that you have a back-up person to handle your calls in your absence and that you notify your broker-in-charge and your clients. Also, be sure to create an appropriate voice-mail message or automatic e-mail response to alert others trying to reach you.
10. Loan Fraud
Allegations of loan fraud often result from a broker trying to assist a buyer who is having difficulty qualifying for a loan in the amount needed to purchase a property. To help the deal close, the broker lends the buyer money for closing costs without notifying the lender. Alternatively, the seller may be asked to lend or “give” the buyer some money without telling the lender, since the lender has refused to allow any seller financing. Sometimes, the mortgage broker may ask the parties to pass money to the buyer as a “gift” outside of closing.
The rule of thumb is that any money which passes between the parties and third parties or even their brokers during the course of the transaction must be disclosed on the settlement statement (even “extras” paid for by the buyer to the builder over-and-above the contract price). The reason is that such payments may affect the loan-to-debt ratio used by the lender to determine creditworthiness. If you fail to disclose information to the lender, you may be committing loan fraud, which is a federal offense.
If in doubt as to whether a transaction is being handled correctly, contact an attorney or the Real Estate Commission.
This article came from the May 2011-Vol42-1 edition of the bulletin.