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This post was updated Jul. 29, 2024.
Business people tend to focus on revenue-generating activities such as branding, networking, and overall business development.
But as a real estate compliance consultant and former California Department of Real Estate (DRE) investigator, I’m here to tell you that regulatory compliance matters too, however tedious it might sound. Ignoring it can be costly.
Don’t get me wrong — there are some bad apples out there who blatently ignore the law, but many other agents and brokers get into trouble because they make genuine mistakes through lack of knowledge or foresight, and they fail to prioritize regulatory compliance in a timely manner.
So I’d like to shed some light on specific “best practices” that might help licensees proactively think like a regulator to avoid or mitigate regulatory complaints and compliance issues.
It’s true that regulators come in different governmental shapes and forms. However, for this piece, the spotlight will be on state regulatory authorities who directly oversee licensed real estate activity.
Here are five best practice tips to get you thinking like a regulator in 2020.
1. Keep all your electronic communications
I receive a lot of questions about electronic communications and whether every email or text must be retained. Real estate licensees should review their state’s requirements.
In California, the retention of electronic communication used in the course of licensed real estate activity is required by law. However, effective Jan. 1, 2015, per California Civil Code 1624(d), a broker need not retain an electronic message of an ephemeral nature that is not designed to be retained or to create a permanent record, including but not limited to, a text or instant message format communication.
According to the statute, such communications do not constitute a contract to convey property. And while there could be a rare situation where the parties intended the opposite to be true, licensees typically form contracts through written offers and counteroffers.
However, putting aside what is “required” by law, in my opinion it would be prudent to keep all electronic communication in connection with any real estate transaction.
When regulators review your real estate files, they look to these records to help piece together the story of the transaction and corroborate the accounts provided by licensees and other parties. While that notion may make some licensees feel nervous, the truth is, if you have nothing to hide, electronic communication is your friend.
The use and retention of electronic communication allows agents to effectively record and evidence what happened during a transaction. More importantly, it is an essential way to document your own activities and lawful efforts.
Luckily, with the advent of transaction management software and online platforms, organizing and retaining information and records have become a lot more convenient for licensees. Agents would be smart to explore the capacity of those systems to archive their electronic communications as well.
The key point here is that electronic communication is a powerful tool that can exemplify your compliance for regulators, as well as unlock the true story of a transaction which might help mitigate or even dismiss an unfounded complaint or legal action.
2. Keep a communication log
Tracking what is said and done in a real estate transaction should be mandatory. However, I have found that this is not always the case. Yes, it is true that keeping a communication log is an “old-school” practice. But in my opinion, it has a timeless value.
Here’s why: When a regulator investigates a complaint, the agents involved may have to provide a statement or declaration under the penalty of perjury about the details of their involvement and events of the real estate transaction.
Depending on the statute of limitations in your jurisdiction, you might be questioned about a transaction that dates back several years. Without a communication log, an agent’s recollection of those details may be challenging, and important information could be omitted.
Having investigated complaints for the California DRE, I know that licensees are better served by the details, especially when things go wrong.
For example, if an agent is faced with a difficult transaction where the principals are threatening lawsuits, the documentation of details and the licensee’s course of action are highly recommended: what caused the dispute, the parties involved, steps taken to address the problem and how the issue was resolved.
If you record these chronological events as they occur instead of having to rely on fuzzy memories years later, you will have a more accurate account for regulators that can be verified by others.
Honestly, it’s best to document and preserve your transaction files as if they will be examined by a regulator in the future. In the best-case scenario, an accurate and reliable account of your lawful actions and a detailed chronological history of the entire real estate transaction will set you free from any regulatory scrutiny later.
3. Really read your company’s policies and procedures
If I was an agent working for a brokerage, and knowing what I know as a compliance-minded professional, one of the first things I would do is not sell real estate. As absurd as that sounds, I am here to tell you that among other priorities, I would definitely first read my firm’s policy manual before going out into the field.
When an agent gets into trouble with the law and is being investigated by the California DRE, it is my experience that the supervision of that agent by the responsible broker is often brought into question.
It is under these circumstances that regulators may find that either the agent was not supervised, and both the agent and supervising broker are at fault, or the agent was properly supervised but violated the broker’s office policies and procedures. I will tell you that if you are an agent, you do not want to be in the latter group.
If agents are aware of and abide by their office policies and procedures, then their real estate activities are not only compliant with their firms’ protocols, but broader regulatory standards.
Conversely, if agents have not read what is required by their firm, and unknowingly violate any policies, then they not only risk getting into trouble with their brokerages, but they are exposed as a “rogue” agent during a regulatory investigation.
In my world, a rogue agent is one who goes against the grain, failing to adhere to the broker’s office policies and procedures. When a licensee is effectively deemed a rogue agent, the responsible broker may even be “off the hook” and potentially relieved of any further regulatory evaluation or discipline.
Put another way, lack of broker supervision is often difficult to prove when a broker can show that the agent was aware of the brokerage rules, but intentionally broke them.
During a regulatory investigation, a rogue agent may be left defending his or her actions without the support of the supervising broker. You don’t want to be on your own to prove your compliance.
The bottom line: Take the time to read your broker’s policy manual upfront, and be aware of all company expectations.
4. Communicate with your broker in real-time
Simply put, report all transaction issues and problems to your broker in real time. Speaking of policy manuals, there is a good chance that you are required to report certain activities or issues to your brokerage.
Bottom line, if licensees involve their brokers at the start of a problem, it will hopefully prevent the matter from evolving into a regulatory complaint and/or investigation.
It is especially pertinent to involve the broker at the outset of any transaction that is outside the agent’s expertise or involves any conflicts of interest. If you are thinking like a regulator, it is precisely these transactions that have the potential to become the subject of a regulatory complaint.
Because regulators may reach out to supervising brokers when investigating an agent’s activities, it is best that the brokerage not be blindsided.
When agents keep their brokers aware of their activities, and report to them as warranted, a stronger relationship is formed between the two. Ultimately, the agent fares better during a regulatory investigation when the broker is an ally.
5. Verify real estate licenses
Even when you do everything right as a real estate agent in a transaction, regulatory trouble can still find you.
Don’t fall victim to unscrupulous actors in the real estate industry who prey on principals and their agents in an effort to commit fraud. I always advise my clients to perform a regulatory license check of any agents working opposite them in a real estate deal.
Based upon my experience investigating real estate complaints, it seems that many instances of fraud could have been avoided, or at least the victim count reduced, if the purported licenses of the so-called agents had merely been verified with the regulatory authority.
Who wants to work with anyone who doesn’t have a license, or worse, had a license revoked? Not only do you not want to be involved with any such person, you also don’t want to subject your clients to potential financial harm.
Perform license checks and document the names and contact information of the people you work with. Weed out the bad people at the beginning of a transaction, and before it’s too late. Unfortunately, in this area, it’s not just a regulatory investigation that you may have to contend with, but rather, a criminal one.
So when it comes to 2020 goals and priorities, keep the above best practices in mind. The takeaway here is to think one step ahead in the new year.
If you think like a regulator now, your real estate activities may not ever be questioned in the future. But, even if your activities are ever examined by your state regulator, hopefully your investment in compliance and implementation of best practices will pay off.
The author’s opinions, suggestions or recommendations contained in this article are based on her experience working for, and knowledge of the laws enforced by, the California Department of Real Estate and must not be considered legal advice. You should consult with appropriate legal counsel for further clarification.
Summer Goralik is a Real Estate Compliance Consultant and former CA DRE Investigator in Huntington Beach, California. Connect with her on LinkedIn.
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