The Top
Ten Complaints and How to Avoid Them
By Curtis Aldendifer, Associate Legal Counsel
Each year, the Real Estate Commission receives as man=
y 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: fa=
cts
about the property (leaky roof, cracked foundation, termite infestation, wa=
ter
intrusion, the presence of mold, etc.); facts relating to the property, suc=
h 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 t=
han
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<=
/span>
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 delega=
te
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 ha=
ve
occurred, the investigation reveals that the broker-in-charge was not prope=
rly
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 fu=
nds
held in trust have been disbursed to the proper parties or until the conclu=
sion
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 dep=
osit
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 th=
at
one party has no valid claim to the deposit. In lieu of retaining the dispu=
ted
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. Thereafte=
r,
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 t=
he
Offer to Purchase and Contract (Standard Form 2-T, rev. 1/2011) and enables
brokers to educate their clients regarding handling of disputed deposits, a=
nd
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 gove=
rned
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 fol=
low
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 charg=
ed
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 da=
ys
of the termination of the tenancy. Thereafter, a tenant=
must take the landlord to court =
to
resolve the matter.
4. =
Charges Against Tenant
Security De=
posits
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 r=
ent,
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 invol=
ve
charges for items such as cleaning carpets and appliances, and for re-renti=
ng
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 enforcem=
ent
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 f=
rom 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 approv=
ed
by the N.C. Bar Association and N.C. Association of REALTORS®, the broker m=
ust
nevertheless avoid inserting complex contingencies into an Offer to Purchase
and Contract or addendum. If a transaction requires more than can be insert=
ed
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 af=
oul
of recent legislation imposing strict requirements and restrictions on
lease-purchase option agreements. Parties in lease-purchase transactions mu=
st
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 situat=
ion
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. A=
ny
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 relations=
hips
between the parties.
With dual agency, an inherent conflict of interest ex=
ists
because the broker is representing both the buyer and seller who have diffe=
rent
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 revie=
w 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 s=
erve
as a dual agent, the broker must first obtain written consent from all part=
ies
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 advocat=
e on
his or her behalf.
Brokers shou=
ld
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 i=
nto
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 failur=
e to
communicate with his or her client. In sales transactions, sellers whose ho=
mes
have remained on the market for prolonged periods express frustration at not
being better informed regarding the broker’s marketing strategies. Buyers n=
ote
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 n=
eeds
and preferences. As a broker, you should return telephone calls, e-mails, a=
nd
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 r=
each
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 le=
nds
the buyer money for closing costs without notifying the lender. Alternative=
ly,
the seller may be asked to lend or “give” the buyer some money without tell=
ing
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 buy=
er
as a “gift” outside of closing.
The rule of thumb is that any money which passes betw=
een
the parties and third parties or even their brokers during the course of the
transaction must be disclosed on the settlement statement (even “extras” pa=
id
for by the buyer to the builder over-and-above the contract price). The rea=
son
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 lend=
er,
you may be committing loan fraud, which is a federal offense.
If in doubt as to whether a transaction is being hand=
led
correctly, contact an attorney or the Real Estate Commission.