Introduction
I know, you are probably TIRED of hearing about another blog on real estate COMPLIANCE but this is an extremely important topic that most brokers are not even aware of, but the California Bureau of Real Estate (“BRE”), soon to go back to the “Department of Real Estate” name, is out in full force handling audits throughout the State of California through its four office locations (San Diego, Fresno, Los Angeles, and Oakland). What does this mean for the California property manager? It means you better be ready to “show your books” as we are seeing a major crack down on improper trust fund accounting practices. Where violations are found, many brokers are being pushed to an administrative hearing with the Office of Administrative hearings. This blog will give you some of my tips from over 13 years representing brokers and salespersons in compliance audits, investigations and hearings.
What is the DRE looking for?
A broker is required to adhere to a slew of laws, regulations, statutes, and commissioner rules and regulations. Fail to do so can lead to adverse consequences to the real estate licensee. The BRE auditors are looking for COMPLIANCE. They want to know that the broker:
(a) Understands the rules that apply to them
(b) Are complying with these rules
A deficiency in compliance can pose a problem to the livelihood of the licensee. We have seen this many times. We have also talked about the top 10 violations found in Cal real estate audits.
In general, when you are facing a property management audit, the following are key items the auditor will be looking for, and if you don’t know what some of these requirements are, it would behoove you to retain legal counsel to help you understand and prepare for an audit.
(1) Is your company using “unlicensed DBA’s?” Believe it or not if your company is named “Pacific Property Management Executives” and the legal name of the company adds the “Inc.” for corporation, if you fail to use the “Inc.” the BRE will consider this to be the use of an “unlicensed” DBA. This can result in a compliance violation. By itself it is probably somewhat harmless, but taken together with other violations could be more serious.
(2) Is your corporation in “good standing” with the California Secretary of State? Are you all paid up with the Franchise Tax Board?
(3) Are you using your real estate license number on your website, business cards, and in advertising? Do you save all your advertising for three years? This is a form of real estate records the broker should be keeping for a minimum of three years.
(4) Is your “trust account” really a designated trust account? Many brokers take this for granted, but I would have to say this is the NUMBER ONE violation that pops up in trust fund accounting audits. This is a real problem because, essentially, these client funds are subject to bank levy and can cause HUGE compliance issues. For example, one broker had 60k in trust funds seized due to a personal obligation, and this lead to a loss of all client trust funds. Can you say MAJOR CIVIL LIABILITY?
(5) Are you keeping a “general ledger” (all trust funds going in and out of your client trust account?)
(6) Are you keeping “separate beneficiary records?” If you don’t know what this term means, I can almost assure you that you are at risk. This is another common compliance deficiency.
(7) Are you reconciling at least once per month and keeping records of this?
(8) Is there a trust fund shortage?
(9) Are you comingling personal funds with Client funds? Managing your own properties?
(10) Are you keeping all records of real estate transactions for three years? If served a subpoena by the BRE, can you properly comply by submitting the required records (BP 10148).
These are some of the more common violations. There are also more obscure things like does the broker have a contract with the corporation, are all agents licensed and supervised, is there any unlicensed real estate activity and other issues.
How many management companies are being audited?
According to sources, there are approximately 200 audits being conducted per month in California from San Diego up to Sacramento. That is over 2,000 per year. Approximately 1/3 to one half of these audits may turn into a formal accusation being filed. I spoke with one of the lead attorneys from the BRE a couple years back, he told me that every property management company will be audited over the next several years. This is not a matter of “IF” but “WHEN.” So if you are not planning now, or considering performing a “self-audit” you could be a sitting duck when you receive the audit demand letter.
How long does an audit last?
A typical audit can last 1-10 days depending upon the size of the company. If found guilty of violations, the broker will normally wind up being asked to property audit costs along with "reasonable costs of investigation."
What are the penalties for non-compliance?
Several years ago, many of these cases would be settled with a suspension or restricted license. Nowadays, however, the BRE (In my opinion) has become much tougher and a “committee” reviews each case to determine whether settlement is appropriate or whether a hearing is required. We have seen more and more cases being pushed to a hearing. It is important when you are wrapped up in a non-compliance situation to understand how the BRE works, and how a hearing works. If you need help, call us to discuss. It is also important to make sure you timely file the Notice of Defense document within 15 days of being served.
Here is a video I did on the potential penalties for real estate non-compliance.
What is the “cite and fine?”
Cite and fine is something most brokers can hope for. This involves paying a fine to the Department for non-compliance violations. It is like a police officer writing you a ticket and you pay a fine for each noted violation. Usually the maximum is $2,500 for licensees.
Will an accusation go on the DRE public records database?
Yes. This is one of the most important things each licensee should realize. When you are formally accused of violations this will go up on your public records database for all to see. This, of course, can cost you a big account when a potential client is performing their “due diligence” into hiring your company. In some circumstances, we may be able to get your case settled and get this unsightly blemish removed.
What types of discipline might the DRE impose on my license?
Disciplinary measures can run the gamut:
- Informal reprimand
- Cite and Fine (charges up to $2,500)
- Suspension of license
- Restricted license (loss of “due process” rights)
- Revoked license
- Bar Order
Do I need to hire a law firm to get me ready?
No you don’t. Just like doing your own taxes or repairing your own car, you can do it yourself without hiring a lawyer. The problem is “you don’t know what you don’t know.” Our firm has been through many of these audits, hearings, and settlement process. We know what the BRE is looking for, and we know what is expected of you.
Video Resources
Here are a few popular videos that you may find helpful.
Contact a Cal DRE defense law firm
Our firm handles real estate arbitration, mediation, and litigation and audit & investigation cases with the CalBRE. Contact us for a no cost initial consultation at (877) 276-5084. In many cases we are able to offer predictable flat rate legal fees.
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