Real Estate Compliance: 5 Real Estate Laws Brokers Need to Know in 2020

The real estate compliance environment is complex. Federal, state and local laws all impact transactions, and while most brokers understand the main concepts, many fail to meet all of their compliance requirements.

Real estate laws are confusing and unclear – every state presents its laws differently, but there are principles that each one follows. If you follow these principles and use a reliable system (like Paperless Pipeline) to manage your transactions, you’ll find that staying compliant is simple. 

Compliance breaches can lead to a range of legal issues; some will result in failing an audit, others may lead to a criminal conviction. Common violations of real estate law by brokers include:

  • Trust fund violations: Brokers responsible for handling monies co-mingle funds or don’t maintain adequate records.
  • Failure to supervise: This happens when brokers don’t have oversight of an agent’s activity.
  • Unlicensed activity: If a broker allows an unlicensed person to undertake activities that require a license.
  • Misrepresentation: If material facts are misrepresented during a transaction, this can include failure to disclose or an incorrect disclosure. 

Pro Tip: Utilize an online transaction management system to help you avoid potential compliance breaches and ensure you’re audit-ready. Look for features such as Unlimited Users, Monthly Data Backups, and Transaction History Logs to avoid unlicensed activity. 

We’ve written this guide to help brokers quickly and easily ensure they’re meeting their primary obligations. We’ve broken the key elements of real estate compliance into five pillars:

  1. Time
  2. Conduct
  3. Storage 
  4. Completeness
  5. Review

Let’s get started.

Pillar 1: Time 

A series of deadlines govern transactions; from initial offer to closing. As a broker, you need to prove you’ve followed this timeline correctly. It’s essential to understand the process in your state and make sure your agents and coordinators are aware of each stage.

A poorly managed transaction can lead to a deal stalling. Finance falling through, home appraisals and delays are all common issues that need to be mitigated. A good agent will spot issues before they arise, for example, foreseeing a problem with the sale price being higher than the home appraisal valuation.

A good process will address these issues at the earliest opportunity, so problems are surfaced, and deals can be completed.

We’ve covered the key areas that catch out brokers: 

Offer Accepted: Only the First Step

The first time-bound issue an agent has to manage is the offer process – most agents are pretty good at this because they want to close deals and make commissions. 

A seller has typically 72 hours to accept, counter or ignore an offer. Once a seller accepts the buyer’s offer, the property is “under contract”. 

Once a transaction is under contract there are many deadlines each party is responsible for meeting (learn how to create real estate checklists). Many brokerages come unstuck because their agents are great at building relationships and selling, but less good at the process of completing a transaction.

Once an offer is accepted, a process needs to be implemented that leads all parties seamlessly through the deal. 

Depositing Funds & Securing a Mortgage

A common reason for a deal falling through is the refusal of financing; agents should be proactive in getting buyers to obtain financing as early as possible. They should also be aware of passive contingencies that can obligate buyers when a date lapses.  

An earnest money deposit may be required for the property to be taken off the market while finance is prepared. If the seller backs out the earnest money generally goes to the seller as compensation.

A mortgage contingency gives buyers 30 to 60 days to secure loan approvals. If finance can’t be secured within the timeframe the deposit can be returned.

Meeting a contingency can be active (parties are notified once a condition has been reached) or passive (if a contingency deadline passes without a contract being cancelled buyers may be obliged to buy the home). 

Other Contingencies 

There are several time-bound contingencies in the transaction process that need to be tracked,  missing any one of these can see a deal stall or collapse. Here are a few: 

  • The home inspection.
  • The seller disclosing any known problems with the home.
  • The pest inspection not revealing any infestations or damage to the home.
  • The seller completing agreed-upon repairs.

Real estate transactions can easily break down on these points so brokers must manage this process proactively. 

Managing Contract Dates

Terminology can catch out agents and coordinators, so make sure your team are comfortable with the key terms. 

Real estate contract dates are often problematic. Instead of specific dates being identified, the terminology used is the confusing days after and days prior.. It’s worth clarifying these terms and brokers should make sure agents are comfortable with these definitions:

  • Days: This means calendar days. This is the last day for completing an action, and it can’t be a weekend or public holiday. 
  • Days After: Means the days after a specific event; day one counts as the day after the event. 
  • Days Prior: The days before a specific event, not including the day of the event.

Poor timeliness is one of the main reasons that real estate deals collapse. There are a raft of conditions that need to be met. You need a system that empowers your agents and coordinators to remain compliant and close more deals. 

Pro Tip: Save time with automatic checklists, due dates, and task reminders in Paperless Pipeline. See how it works → 

Pillar 2: Conduct

Real estate transactions can create misaligned incentives between principal and agent. In any industry where remuneration is mostly commission-based, salespeople often have an incentive to operate in their own best interests. 

Agents are regularly presented with ethical dilemmas, where the unethical approach can lead to making more money.  

Withholding offers, failing to disclose information or fabricating offers to get a listing are all possible tactics. 

The National Association of Realtors (NAR) lays out a code of ethics, and it’s fair to say they take professional standards very seriously. They believe a realtor has a “grave social responsibility” to uphold a “patriotic duty” and recognize:

“that the interests of the nation and its citizens require the highest and best use of the land and the widest distribution of land ownership. They require the creation of adequate housing, the building of functioning cities, the development of productive industries and farms, and the preservation of a healthful environment.”

You can read the full NRA Code of Ethics here

A membership requirement is to attend a course on ethics every four years. Although It’s not required for real estate agents or brokers to be a member, most are (it had 1.39m members as of June 2020).

Its code of ethics is widely regarded as the gold standard, and if you follow these you will be on the right track. The problem for real estate brokers is policing their agents; it’s hard to monitor everything agents are doing.

Pro Tip: Paperless Pipeline helps real estate brokers promote professional behaviour and ethical practices. See how it works →

But you can’t be penalized for unethical behavior, can you?

The short answer is, yes. Real estate agent behavior isn’t just a case of upholding patriotic values – Fiduciary duty governs the conduct of agents.

Fiduciary duty requires the agent to act in the principal’s best interest at all times. Punishment for violating these duties ranges from loss of commission to damages and in extreme circumstances, criminal charges.

The most significant penalty is to reputation – agents and brokers seen to act dishonestly are unlikely to last long in such a competitive market. 

Quick Overview of Fiduciary Duties under the Principal-Agent Relationship 

When a real estate agent is hired to buy or a sell a property, they enter into an “agency relationship.” This means the agent must act with their client’s best interests in mind – this is when they take on fiduciary duties.

Here is a reminder of the core duties:

  • Loyalty: Agents should protect their clients’ interests over anyone else when transacting.
  • Confidentiality: The agent must not disclose clients’ personal information. 
  • Obedience: Agents need to follow instructions unless those instructions break other laws.
  • Competence, Care and Diligence: An agency must act with care, and if they don’t have the level of competence for specific tasks, they need to disclose this information.
  • Accounting: Agents must disclose exactly how funds are being used during the transaction.

Pro Tip: Paperless Pipeline gives brokers clear oversight over how their agents are operating with received email capture, activity logs, and permission settings. See how it works →

Pillar 3: Storage

Record retention rules for real estate brokers are theoretically simple, but the practicalities are complicated by state laws. Most states haven’t written laws with technology in mind, leaving brokers unclear on whether their storage methods are compliant.

There are a couple of areas that trip up real estate brokers:

  1. They don’t record the right information.
  2. The storage methods don’t satisfy state regulators.

We’re going to focus on how to avoid #2, but first, let’s briefly review #1 (we go into more detail in Pillar 4). 

Washington Realtors requires brokers to record information that is “material to the brokerage services required.” This article on their website spends nearly 2,000 words describing precisely what information needs to be retained; this changes a little from state to state, but it’s a typical list.

The article reminds brokers of the need to keep any informal communication like text messages or social media conversations.

What information you need to keep remains fairly consistent between states. How you store that information is less clear, and we’re going to take a look at why.

Storage in 2020 

So assuming you have kept the right information the next question is will your storage methods satisfy regulators. 

This is where the fun begins.

Storage requirements vary between states, so you need to check your local regulations. Some states require a hard copy while some are happy to see review evidence through a software platform.

When data is kept remotely in the cloud, it can be hard to satisfy regulations that were written with filing cabinets in mind. For example, we work with agents in Arizona that to satisfy regulators on storage location have to give Paperless Pipeline’s address. Of course, the data is stored on cloud servers not on our premises but as the technology provider, our address satisfies state regulators. 

Most states stipulate the storage of documents for three years, a good practice is to keep documentation for ten years – or indefinitely. 

Pro Tip: Paperless Pipeline makes record keeping easy. Every plan includes unlimited storage, your transactions are stored for 10 years from the day they’re created, and every customer is provided with free monthly data backups for local storage options. See how it works →

Pillar 4: Completeness

This means having a complete paper trail from listing the property to closing the sale. Real estate brokers and transaction coordinators have no room for error here – the law is clear on what documentation is required.

The specifics can vary between states; here are the file requirements for the Arizona Department of Real Estate and Colorado Department of Regulatory Agencies.

The principles are consistent, but some of the specifics may change, for example, the format for storing documents or the communication log.

Here are some key areas that are typically covered.

  1. Filing System: All records must be stored systematically in one place and often accessible in real time.
  2. Responsibility: Important actions such as document and offer reviews are often legally required for brokers or compliance and conveyance officers. A time-strapped record showing w completed an action must be recorded.
  3. Brokerage Relationship: A licensed broker must often prove the rights of their clients and the necessary disclosures are in place and correctSales Transaction Folder: To include contracts, escrow receipts, settlement statements etc.
  4. Inspections: Any reports or declarations.

Paperless Pipeline is the Perfect Solution for Completeness 

  • Transaction checklists are customized for each deal so your team won’t miss anything. Read more here
  • Make sure your deal is completed on time by setting critical due dates and setting daily reminders for your team. Read more here
  • Manage a large number of transactions with custom reports; set filters like closing soon, overdue. Read more here. 
  • Instant notification when documents are uploaded; review these key documents on any device. Read more here
  • Customize locations so each office or team will see information relevant to them, while still maintaining a whole-company view. Read more here.
  • Connect your account to 1,500 apps, including Gmail, Google Docs, Trello and Salesforce. Read more here.

Pillar 5: Review 

As a check and balance designated brokers or associate brokers with delegated broker duties need to review key documents, like listing and purchase agreements.

Failure to demonstrate documents have been reviewed by an appropriate person can result in a failed audit. Moreover, the process of reviewing documents is there for a reason, if problems are spotted, then compliance failures can be avoided – saving a brokerage from bigger problems in the future.

Traditionally document review was done using pen and paper, but the industry is moving towards electronic document reviews. Although the days of initials scrawled on the front of a document as proof of review should be in the past, many brokerages still use pen and paper to review documents.

This manual process creates a few challenges:

  • There isn’t a quick and easy way to track what documents need to be reviewed.
  • While in-trays can do the job, the manual process is slow and cumbersome.
  • There is no central view on what is in the review pipeline, so when documents do need to be amended, it’s hard to keep track.

The use of software to review documents electronically is a huge step forward. At a glance, brokers can see what documents need to be reviewed and mark them as completed. If there are any issues, these can be noted and sent back to the agent.

If you are using software, the activity log must reliably demonstrate who has completed the review.  

Pro Tip: Make document review simple, easy, and quick. With Paperless Pipeline you can review documents, send notes, and approve from anywhere and on any device. Ensure that you’re able to remain compliant with review permissions, and a time and date record on every document. See how it works →

Paperless Pipeline – Document Review Made Simple 

  • See all unreviewed documents in one place.
  • Mark a document as reviewed with one click.
  • Time and date stamp approval to prove who completed the review.
  • Download evidence quickly and easily for an audit. 
  • Filter the documents you want to prioritize. 
  • Add comments and immediately notify the relevant agent.

Thanks for reading. 87,000 agents and transaction coordinators use the Paperless Pipeline platform to manage their transactions. Join them and make worrying about real estate laws a thing of the past.

  • Free setup 
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