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December 20, 2014

Ten Ways to Lose—Or at Least Endanger—Your License

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Ten Ways to Lose—Or at Least Endanger—Your License

Often it’s carelessness, rather than crime, that comes between you and your livelihood.

A real estate license is every practitioner’s lifeblood. Yet thousands of sales associates and brokers lose their license every year. Some are crooks; others are incompetent; still other ex-licensees were victims of circumstance.

Don’t be one of them. Check your business practices to be sure you’re not guilty--however unconsciously--of an action that can cost you your livelihood. Here’s our infamous “Top Ten” reasons real estate practitioners lose their licenses. This is one “Top Ten” list you don’t want to make.

1. Playing with other people’s money.

Money mistakes are the fastest ways to lose your real estate license. Sloppy bookkeeping, money shuffling, “borrowing”--it’s all bad.

Bill Titter, an enforcement officer for Texas’s Real Estate Commission in Houston, recalls a case in which a broker accepted $18,479 from a buyer to hold so the buyer wouldn’t spend it before closing. The broker cashed the buyer’s check and put the money in his own safety deposit box, then deducted broker’s expenses from it without buyer’s knowledge or consent. The result was license revocation.

Avoiding such a situation is easy for licensees who don’t intend to actually steal the money. “If it isn’t yours, put the money in escrow with the title company or a trust account,” says Titter. Brokers should also avoid deducting any commissions or expenses until after a transaction closes.

Licensees can also unwittingly stumble into dangerous waters through sloppy bookkeeping. This is particularly a problem with property managers, who are charged with far more complex accounting than a typical broker.

“Negligent property management is a common problem,” says Scott Taylor, Oregon’s real estate commissioner. “Generally it’s improper accounting of funds. Sometimes it’s not getting statements out to owners, not getting deposits back when they should. We don’t treat a mistake as theft, but we require managers to reconcile their books every month. If they don’t, that could result in revocation.”

2. Misrepresentation

Misrepresentation, embellishing, obfuscation, omissions, just plain fibbing: Do it often enough, or big enough, and you will lose your license.

Disclosure—or more commonly the lack thereof—is the most common offense that leads to lawsuits against licensees. Probably the most common misrepresentation offenses are in property condition and environmental disclosures, according to NAR General Counsel Laurie K. Janik. (Read Janik’s article “The Top 10 Legal Issues Facing Brokers” here .)

Different states place different levels of responsibility on the licensee’s shoulders, and licensees need to learn how much disclosure they must provide. The simple solution, according to William Moran, chief of enforcement at California’s Real Estate Commission, is “When in doubt, disclose, and do it in writing.”

Sometimes licensees don’t disclose their true relationship to a transaction. This almost always leads to license revocation.

“A broker took a listing on a residential property and then submitted a purchase offer in the name of another person. This buyer was really a “straw man” acting on behalf of the broker, thus making the broker an undisclosed principal in the transaction,” Titter recalls. That broker recently lost his license.

In many states, sales associates are required to provide an agency disclosure form to buyers and sellers. One failure may not get you more than a slap on the wrist, but a pattern of non-disclosure can be serious.

“Generally we investigate and find the broker did not use the form, and we ask to see previous transactions,” explains Bruce Stuart, attorney for licensing services for New York’s Department of State. “When we see there’s a pattern, we revoke the license.”

This situation most frequently happens with a newly licensed salesperson, Stuart explains.

3. Mortgage fraud

At the crossroads of stealing and lying lies the fine art of mortgage fraud. One attorney calls it a “little white lie,” a crime so commonly committed that many people—borrowers, mortgage brokers, appraisers, and real estate practitioners alike—don’t even realize it’s illegal.

The basis of mortgage fraud is that a lender is tricked into lending too much money against an overvalued property. Sometimes a buyer is a little short of cash for the downpayment, and the real estate salesperson will rework the deal so the buyer borrows a little extra beyond the cost of the house itself to cover the down payment.

“Over the last couple of years, we’ve had some licensees that have been involved in mortgage fraud,” says Oregon’s Taylor. “In some cases it was not deliberate: They were told by their mortgage broker or banker it was okay, and they didn’t have a clue.”

Taylor also points out that an appraiser usually has to be involved to make a mortgage fraud scheme work.

Even if you don’t lose your license--and even if you weren’t aware that you were participating in mortgage fraud--the results can be almost as bad.

According to Jon Goodman, a real estate attorney in Colorado and one of the attorneys who handles the state’s legal hotline, the U.S. Department of Housing and Urban Development is known to stop dealing with licensees simply because they were implicated in mortgage fraud.

“I’ve seen one broker disciplined by HUD, and she was prevented from working on FHA transactions for a year. Though I was able to reduce that down to three months, it still was a painful and expensive experience for the broker,” says Goodman. “I don’t think the broker had any inkling that she was doing anything wrong. She felt she was just helping someone buy a house.”

4. Criminal conviction

Not all states automatically revoke your license after a criminal conviction…but most do.

Texas’ Bill Titter says any crime of moral turpitude--rape, murder, robbery, embezzlement--will result in an instant license revocation, but a DUI will not. In Arizona, the Department of Real Estate will give someone convicted of DUI a provisional license, with the requirement that another licensed broker will sponsor the licensee and report on the agent’s sobriety.

In every state, anyone who’s been convicted of a felony in the past is generally barred from receiving a license. However, that doesn’t keep people from trying. You will also lose your license if the Department of Licensing later finds out you have a criminal background.

Why do potential licensees lie about felonies in this day and age, when criminal records are so easy to check? Says Charlie Downs, public information director for Arizona’s Real Estate Commission, “Our Web site and our testing company explain we’re not taking license applicants’ fingerprints for fun, we’re going to run them. The real estate schools don’t really tell their students that a criminal background means you won’t get a license.”

California’s Moran agrees. “If the conviction is not disclosed, the Department of Real Estate will find out and the applicant’s chances of receiving a license will be diminished as a result of their non-disclosure.”

5. Not cooperating with investigators

If you find yourself questioned by the state real estate commission, don’t think you can just ignore them. Investigators will not tolerate being stonewalled and pretty much always assume you’re trying to hide something if you’re not completely forthright.

“We had a broker refuse, on the advice of a not-so-smart attorney, to respond to questions or to provide documentation related to a complaint filed against broker,” says Titter. “Generally we absolve the licensee of culpability if the licensee is acting in accordance with an attorney’s instructions, but the violations alleged in this complaint were too egregious for this to be permitted.”

New York’s Stuart agrees. “If a licensee fails to talk to us and provide us records we’ve requested, that’sa failure to cooperate with the investigation. If a licensee doesn’t cooperate, that severely inhibits our ability to regulate the conduct of a real estate business.

“It happens enough that we’d include non-cooperation in the top ten. Usually when they don’t cooperate, it’s a sure sign they’ve done something wrong,” Stuart continues.

6. Incompetence.

Something of a catch-all violation, incompetence includes general professional screw-ups.

“We look for a pattern of conduct or a single act that’s so serious that it demonstrates the licensee lacks professional competence,” says New York’s Stuart. “Typical violations include licensees who manage property for an owner, but forget to make tax or mortgage payments or pay for maintenance or who have such poor bookkeeping that a client is injured.”

Violation of fair housing laws also demonstrates incompetence, according to Stuart. “Take racial profiling, for example. Some owners don’t want to rent to protected classes and request a broker market the property that way. If the broker complies with the owner’s wishes, it’s a violation of fair housing laws and a demonstration of incompetence.

7. Letting your agents run rampant

“Lack of supervision on the part of a broker is a recurring problem,” says California’s Moran. “In case after case, the department has to deal with the problem of real estate brokers becoming designated officers of corporations owned by salespersons or unlicensed individuals, and then not properly supervising the operations.”

When a licensee is charged with supervision, that power comes with great responsibility. But, according to Moran, “All too often, real estate brokers do not take this responsibility seriously, and the public suffers as a result.”

Brokers need to understand what they’re getting into when they allow salespeople to work under their broker license. Inattentive or indifferent brokers may find themselves not only the subject of disciplinary action, Moran explains, but also of a civil lawsuit.

Supervising brokers sometimes get tripped up when they let employees’ licenses or education lapse. While licensees are supposed to be responsible for their own real estate licenses, supervisors need to have systems in place to make sure their people keep up with their licenses and any continuing education requirements--and that licensees don’t continue to work if a license expires.

8. Forgetting who hired you.

Undisclosed dual agency is a particular problem in states that do not have buyer’s agents and, in states like New York, where buyer’s agency is a relatively new concept.

“Typically, in the heat of the deal, sales associates may forget who they’re representing-- buyer or seller,” explains Keith Stack, deputy Secretary of State of New York.

“Listing brokers always represent the seller and have to provide all the fiduciary duties. But they can get too close to the buyer and become a de-facto dual agent. In such cases, licensees forget who they’re working for and whose interests they’re supposed to be looking out for,” Stack continues.

9. Pretending to be a lawyer.

By drafting or significantly altering complex sales contracts, real estate practitioners may be practicing law without a license in some states. In New York, for example, real estate brokers are allowed to prepare simple purchase and leasing contracts, but a complex contract requires a law license. But who determines the complexity of a contract?

“Most contracts we see are not simple,” says New York’s Stuart. “They contain many pages, many terms and conditions that have to be chosen by the real estate broker to be included. In this day and age we never see a “simple” contract. Our recommendation is to assume all contracts are complex. The conservative thing to do is to make every sales contract and lease subject to attorney’s review.”

An easy way to avoid getting tripped up by this top ten mistake, no matter where you’re doing business, is to always insert a disclaimer like, “Contract is subject to review and approval by parties’ respective attorneys.”

The other risk of drafting a complex contract yourself is that you may not do it right. In Oregon, Taylor says he regularly sees contracts in which the broker either didn’t say what was intended, or the grammar was so poor it was impossible to tell what the intent of the contract was.

Taylor says the most typical mistakes occur when practitioners leaves blanks because they’re in a hurry. “Another common mistake is that people don’t think about what they say before they write it down,” Taylor says.

To help avoid contract problems many state REALTOR® associations produce standard, “boilerplate” contracts that have been approved by attorneys. Large brokerages may also hire an attorney to develop a boilerplate contract. But these efforts don’t always solve the practicing law problem.

“A lot of people don’t avail themselves of the boilerplate. They just get sloppy,” Taylor says. “Even if they’ve done everything right, something a sloppy contract will result in a complaint. At other times, the document isn’t understandable, so you have an unenforceable document.”

Taylor says that, while an unenforceable document itself may not lead to a license revocation, it may lead to other actions, such as negligence or dual agency, that, in turn, will lead to revocation.

10. Failure to meet licensing requirements

You have to pay to play, both in cash for continuing education classes and fees and in time for education. It may be easy to forget, it may be easy to let slide, but it’s the dumbest reason to lose a license and the easiest to avoid. Take responsibility for your own education and renewal fees.

According to Texas’ Titter, two or three licensees each month forget to pay their fees, and another two or three a month let their continuing education lapse. Not bad for a state with more than 100,000 licensees--but still avoidable.

So there you have it: Ten ways to lose or endanger your license. Every one of them can be avoided through better professionalism, greater disclosure, more documentation, or more thorough record keeping.

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