State Laws May Limit Marketing of Developer’s UnitsWith lower travel costs and advances in communication technology, the world often seems to be a much smaller place. However, many states still require developers to register their properties with the state government, regardless of the development’s location. A real estate professional who represents an unregistered development could face a civil fine or possibly even criminal prosecution by their state. These registration laws regulate any qualifying development which is marketed in the state, whether it be an in-state development, out-of-state development, or even an international development. Therefore, real estate professionals who are considering entering into marketing agreements with developers will need to ascertain whether their state has a registration law and if so, whether the developer has registered with the state government.
State Laws
Approximately 30 states require qualifying developers to register with the state government. NAR is preparing a grid which will identify states where NAR knows these laws to exist, and this guidance will be posted on realtor.org. These requirements generally apply to the developer’s agents involved in the marketing of the properties such as real estate professionals, and so real estate professionals should make sure that a developer has properly registered the development prior to their marketing efforts. The state laws vary widely in their terms, but the laws generally could be described as regulating developments composed of subdivided land with at least 10 or more units. The laws only apply to a real estate salesperson who is representing a developer or similar entity directly for multiple units in the development; the laws do not apply to single unit transactions such as a broker listing a single unit in a development. The laws also do not usually regulate large tracts of land, even if the owner has subdivided this land. The laws would cover any qualifying development, regardless of location.
The rationale for states creating these laws is to give the states jurisdiction over developers who are marketing properties in their states in order to allow the states to enforce their laws against any developer who perpetrates fraud against the citizens in the states. The registration requirements for developers are extensive in their terms and can impose great costs upon a developer. The registration process will require the developer to gather voluminous information about the development and will also require the developer to pay certain fees associated with the registration process, including inspection fees in some cases. The registration may also need to be renewed annually.
The state laws give the buyers certain rights. The most important right is the right to rescind the purchase if the sale is found to be in violation of state law and this right can last for years after a transaction has closed. These laws may require bonds to be posted and may also include specific contract and escrow requirements.
Federal Law
The Interstate Land Sales Full Disclosure Act (“Act”) also requires developers of subdivisions to register with the U.S. Department of Housing and Urban Development (“HUD”) and provide a “property report” before a contract or agreement is signed. Although the federal law does apply to U.S. developers, it does not pose the perils to real estate professionals representing developers that the state laws do because the law is limited to developers and similar entities. In general, this law applies to developments of 100 or more units, although some of its requirements do impact smaller developments. Arizona, California, Florida, and Minnesota are certified by HUD so that if a developer has effectively registered with those states, HUD will accept that state’s disclosure documents in lieu of the standard federal registration. Similarly, some states will accept specific elements of a federal filing as a substitute for their own paper work requirements. However, developers will still need to fulfill other registration requirements applicable in that state.
Are you now representing an unregistered development? I had never thought to ask before; I just assumed if they had the money and permits, they were good to go. Maybe not.
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