High-Risk Areas of Real Estate Professional Practice
Some areas that brokers will need to be aware that may involve extra steps and input from the E & O provider may include the following:
Short Sales: Short sales include very significant responsibilities that are borne by the agent that include the traditional due diligence on the property and transaction. However, the sales associate is also put into a position of having to advise the client of the “life ramifications” of any decisions in these transactions.
Property Management: There have been numerous reports of the mishandling of funds in property management trust accounts and the broker will need to be very proactive in ensuring that these funds are handled properly.
“Fix & Flips”: These types of transactions is where an investor buys a property in need of professional attention and has the renovations and repairs done with the intent of selling the property quickly for a profit. Issues that need to be considered here are contractor licensing, building permits, property taxes and even RESPA.
Money Development: Agents who arrange for private investors to make loans on properties as part of their handling a transaction would more than likely need a mortgage broker’s license.
Selling Securities: Licensees who assemble investor clients into partnerships or limited liability corporations (L.L.C.) will probably be required to have a Class 7 securities license with the Securities and Exchange Commission (SEC) or a Class 63 Arizona Securities License.
Preferred Vendor Lists: Brokers will want to make sure that any vendors they, or their salespeople, recommend from inspectors, home warranty companies, lawn keepers, remodelers, roofers, exterminators, pool technicians and other vendors are properly vetted for having the proper credentials (licensing, bonding, insurance, etc.) and have a positive history in providing services to the public. Recommending a service provider who either is not properly credentialed or has a negative history of service may constitute a “negligent referral”.
Foreign Investors: There are certainly anti-discrimination and fair housing laws that must be considered here. However, an agent will also need to consider how they are going to qualified and are their funds legal. Off-Shore funds transfers are heavily scrutinized today.
Unlicensed Assistants; Unlicensed “Negotiators”: Any person engaged in “professional real estate activity” requires a real estate license and short sale “negotiators” who are independently compensated by hours or project will need a license.
Lapsed or Gapped E & O Policy: A salesperson who changes brokerages without “tail” or “extended” coverage may be operating without the insurance during their transition. Even with the extended or tail coverage, the terms and conditions of the coverage may be amended during the transition.
Fringe Work: Some licensees may try to earn extra income by doing such activities as foreclosure trustee work, repair work, Real Estate Owned (REO) and other property management, credit restoration and private money development. These activities are considered outside the boundaries of normal practice or on the edge of it and without the proper education, can be very risky for the sales associate and the broker. In addition, many of these activities are outside of licensure and outside of the E & O coverage as well.
Evaluating errors & omissions coverage is something that neither the broker nor salesperson should take lightly. The policy that is incorporated into the brokerage should be carefully evaluated by both the broker and salespersons. The operational boundaries of the brokerage should also be consistent with the coverage of the E & O policy.
There are generally five areas of compliance that a broker needs to consider in supervising the advertising and marketing that is used by the licensees the broker employs:
- Fiduciary Duty – For example, could an advertisement that states the seller’s motivation be a violation of fiduciary duty?
- Commissioner’s Rules and Statutes.
- Truth in Advertising (a.k.a. Regulation Z) or Truth in Lending – when a broker advertises properties with assumable loans or seller-assisted financing.
- Real Estate Settlement Procedures Act (RESPA) – Many brokers utilize Affiliated Business Arrangements (ABA) with lenders, home warranty companies, inspectors and title companies to market their services.
- Fair Housing – Issues such as making sure advertising is inclusive of multicultural consumers is a heavily scrutinized activity by HUD of housing providers.
Advertising is defined as the act or acts of exposing the services and listed properties of the brokerage to the public with the use of one or more types of media. The media can include online media, social media, print, radio, and television. These media outlets are not necessarily confined to those listed in the previous sentence. Unique media outlets are also a part of what is regulated by the ADRE and can include such devices as billboard and location (yard) signage and automobile signage. Essentially, anywhere there can be exposure to the public of the brokerage services and/or properties is considered advertising.
Broker Review & Oversight:
The specific guidelines and rules on advertising are done by licensees are contained in the Arizona Administrative Code under R4-28-502. More specifically, R4-28-502(G) does state that the designated broker shall supervise all real estate advertising done by all licensees under his or her employ. A broker shall reasonably supervise any advertising done by any licensee operating under his or her employment. For example, if a salesperson employed by the designated broker violates his or her fiduciary duty by revealing confidential information in an ad, the licensee would be held accountable for violating the fiduciary duty (R4-28-1101A) while the broker would be held responsible for violating the fiduciary duty as well, and possibly failing to supervise the agent who violated the duty.
The broker should integrate a system in managing the brokerage in monitoring and reviewing all advertising done by the licensees in the company to verify that the advertising is in compliance with the Commissioner’s Rules.
One very important area of the broker’s supervision is to make sure that any advertisements are factual and contain accurate claims and representations. Sometimes agents may puff or exaggerate by using superlatives in their ads (“MOST MAGNIFICENT MOUNTAIN VIEWS IN THE VALLEY!”). While the ADRE does not prohibit this practice, a broker who is a member of the National Association of REALTORS® should understand that Article 3 of the REALTOR® Code of Ethics prohibits exaggeration. Statements based on subjective opinions should be carefully monitored by the broker.
There are other statutes and rules that do tie in with real estate advertising. For example, R4-28-1101(A) states that an agent has a fiduciary duty to his or her client and shall treat fairly, all other parties to the transaction. Two of the primary obligations of the agent’s fiduciary duty is confidentiality and loyalty. If the agent uses words that express such issues as the seller’s motivation (“Motivated Seller”), those words might be interpreted to have compromised the seller’s negotiating position. The broker should be certain that his or her agents are using expressions that protect the client’s privacy. Another obligation of fiduciary duty is for the agent to provide reasonable care and diligence. If an ad can be construed as ineffective, it could be the basis for an allegation of breach of fiduciary duty.
Another concern is the duty of accounting where the broker must be able to account for any and all monies in a transaction. For example, if the seller does contribute funds for advertising his or her property, the money should be properly handled by being deposited into a trust account and used only for the advertising expenditures agreed to between the broker and seller. Another aspect of the duty of accounting is when the promise of advertising is used to induce a seller to list his or her property with the brokerage. If a seller is promised that their property will be advertised in a certain way or a certain number of times, the brokerage will have to “account” for this promise to demonstrate that it has fulfilled its promise.
Another example is advertising that an owner might consider offering seller-assisted financing to a buyer by carrying back a deferred balance and stating terms such as the interest rate or the amount down. The Federal Truth-in-Advertising law does require certain disclosures if certain “triggering terms” are used in advertising private financing that includes the Annual Percentage Rate (APR) is any one or more of these terms is used in the ad. The broker should be familiar with the requirements of this federal law.
Still, another consideration is the Federal and State Fair Housing Laws. The Equal Housing Opportunity logo which is the house with the equal sign in it should be considered in terms of where it should be displayed. The Department of Housing & Urban Development (HUD) only requires that this logo is prominently displayed at the entrance of the housing provider’s office, but does not require that it be displayed anywhere else. However, if there should ever be a fair housing complaint filed against the broker, the absence of the logo from the broker’s marketing plan may be an exacerbating factor. A broker should consider using the logo to ensure its prominence in his or her marketing/advertising program.
Additionally, under the Fair Housing Laws, any advertisements published under the broker’s supervision should be considered “inclusive” of those in protected classes under the law. The protected classes include:
- National Origin
- Gender (Sex)
- Familial Status
- Disability (Handicap)
All licensees should be able to recite these protected classes off the top of their heads when asked and when composing ads, should keep them in mind. In addition, the National Association of REALTORS® has established that discrimination against a person based on their sexual orientation is unethical (Article 10 of the NAR Code of Ethics). Other cities may also have added additional protected classes under their laws as well. For example, the City of Tucson has added sexual orientation, age, marital status, ancestry and public assistance as additional protected classes. Advertisements that express a preference for people based on a protected class are prohibited by the laws. The cautionary note here is that words that may even seem innocuous may be violations. For example, if an ad says “Ideal for Joggers”, this could be interpreted to mean that those who are mobility-impaired (protected disability) may not be welcome to the community. It is better to describe the features of a property rather than the type of buyer who may buy the property. In this case, it would be more appropriate to say “Jogging Trails” rather than “Ideal for Joggers”. A designated broker should review any advertising carefully or make sure it is carefully reviewed by branch managing brokers or advertising/marketing professionals to ensure compliance.
One other issue the broker should consider is the Real Estate Settlement Procedures Act (RESPA). If the brokerage is part of an Affiliated Business Arrangement (AfBA) the broker needs to be aware that even advertising for the broker paid for, directly or indirectly, by a settlement/closing provider is considered an illegal kickback. For example, if the brokerage and a lender run an advertisement together, each must pay their proportionate share of the ad. If one pays a disproportionate share of the cost of the ad, this could be considered unlawful compensation.