The California Department of Real Estate (“DRE”) has issued an internal directive to start broker office surveys (“BOS”) in 2013. A BOS will include unannounced and unscheduled visits to brokers’ officers and an audit of random files that the DRE requests. Although the California DRE has always conducted random audits, they were previously scheduled in advance so that the broker had time to get files and records organized. However, with this change, brokers will now need to be ready at a moment’s notice for a surprise visit from the DRE.
These visits are meant to ensure a broker’s residential real estate business activities are in compliance with the laws and regulations administered by the DRE. If you are a broker, you should anticipate that the DRE will ask to see records from various transactions or random files if they visit. All brokers need to be prepared for a potential BOS as they were scheduled to begin at the start of 2013.
According to the DRE, the most common violations found during a BOS, include violations relating to the following:
• Licensing Compliance
• Trust Account Compliance
• Required Disclosures
• Record Keeping
Pursuant to California Business & Professions Code Section 10163, a broker may only operate a business from the main office address printed on his or her license certificate unless he or she has a branch office license for other locations. As a result, the DRE will be looking to make sure that you have a branch office license from each location from which you conduct business. During a BOS, the DRE will also examine whether you are operating with an unlawful fictitious business name, since brokers may only use a fictitious business if it is approved by the DRE.
In addition, as part of licensing compliance, the DRE will also be scrutinizing your employment of salespersons. Specifically, they will be looking at whether you are employing salespersons without DRE notification, employing expired/unlicensed salespersons, and/or employing salespersons without contracts. With respect to employing salespersons, it is important to remember the following rules:
• A broker has five days to notify the DRE whenever a salesperson is hired or terminated;
• A broker may not pay an expired or an unlicensed person for any act that requires a license; and • Written employment agreements are required for each salesperson or broker working as a sales agent.
Trust Account Compliance
In order to ensure that you are complying with the various laws and regulations relating to trust accounts, you should be prepared to show the DRE that you are maintaining the following records in accordance with Commissioner’s Regulations 2831 and 2831.1:
• A record of funds not placed in trust accounts, including but not limited to uncashed checks made out to escrow companies, appraisers, and/or sellers;
• A record of all funds deposited in trust accounts; and • Separate records of trust funds for each beneficiary or transaction accounting for all funds, which have been deposited into a trust account.
Besides making sure that proper records are maintained with respect to trust accounts, the DRE will also be looking at whether real estate brokers are properly handing the trust funds. This includes being able to establish that you are, among other things, not holding trust funds too long, not commingling funds, and performing monthly reconciliations of trust account records.
Commissioner’s Regulation 2725 requires that brokers exercise reasonable supervision over their salespersons. During a BOS, the DRE will look to whether there are policies and procedures in place to ensure that a broker maintains overall responsibility of: (1) reviewing and managing all transactions that require a license; (2) documents which may have a material effect on the parties; (3) filing and maintaining these documents; (4) handling trust funds; (5) advertising; (6) familiarizing salespersons with laws relating to the prohibition of discrimination; and (7) regular reports of activities of salespersons.
Required Disclosures & Record Keeping
Last but not least, the DRE will be assess whether you are making all required disclosures, including but not limited to those set forth in California Business & Professions Code Section 10176 et seq. Additionally, as part of the DRE’s review of your records, they will examine whether your are maintaining all required records (e.g., listings, deposit receipts, cancelled checks, trust account records, employment agreements, etc.) for three years and may ask that the records be made available for inspection and copying.
Failure to comply with the regulations and laws administered by the DRE could result in disciplinary action against the broker by the DRE.
To prepare for a BOS from the California DRE, you can visit the Department of Real Estate’s Compliance Checklist. Please contact our Bay Area real estate lawyers if you need assistance preparing for these visits and would like our attorneys to help you complete a broker self-evaluation. Our lawyers can make sure you are apprised of the laws and regulations administered by the DRE which affect your licensed real estate operations.