During a recent First Friday Legal Forum, Gayle Brixey and MiChell Bird from the Idaho Real Estate Commission (IREC) stopped by to share some common issues they see while performing audits. As you prepare for your next IREC audit, keep these tips in mind to (hopefully) help you avoid citations.
Trust Accounts and Ledger Cards
Brokers are often cited for either not having an accurate ledger card or not creating one at all.
Even if your brokerage no longer has its own trust account, Idaho statue Section 54-2044(2) says that ledger cards are required as it assumes the brokerage will “touch” the earnest money, even if it will be delivered directly to and held by a title company. Article 8 of NAR’s Code of Ethics also refers to this, as it requires REALTORS® to keep “special account” of client funds and earnest money.
The best way to avoid a problem is to track everything; either by creating a ledger card when the broker takes physical possession of any earnest money, or, upon assumption of responsibility for earnest money when the purchase and sales agreement is accepted. The purchase and sales agreement should state how the earnest money will be handled (for example, if the buyer, agent, admin, courier, etc., will deliver it to a title company).
Don’t have a ledger card built? Check out this example from IREC.
Earnest Money Handling and Receipts
Earnest money is another common area for citations, resulting both from handling errors and a lack of receipts.
When deciding who should handle the earnest money, keep in mind that while it may seem easier not to take possession of earnest money, consider whether your buyer will have the same level of urgency as you would to deliver everything on time and as outlined in the purchase and sale agreement. The buyer’s failure to comply with the earnest money deposit terms in the contract may result in cancellation of the contract, loss of earnest money, etc., creating more issues than you were trying to avoid in the first place.
Regardless of who handles the earnest money, you should always get a receipt from the title company (or whichever entity is holding the earnest money) that shows:
- The date the earnest money was delivered/received;
- Who delivered the earnest money;
- Who received the earnest money and their signature;
- The property the earnest money relates to; and,
- The amount and type of earnest money received (cash, check, etc.).
If no receipt is provided or made available, an email confirming delivery and receipt might be acceptable (but not always) and should specify the elements noted above. You can never be too cautious when it comes to earnest money — record everything.
And remember, if the listing agent requests a copy of your buyer’s earnest money check or receipt, redact any bank account or routing numbers before sharing to protect your client’s personal information.
Purchase and Sale Agreement Elements
Brokers are also regularly cited for not having in writing all the elements in the purchase and sale agreement as required by statute, specifically Section 54-2051(4) and Section 54-2048(d), or, not having rejected offers marked and dated as such in their transaction files.
To prevent a citation and violation of Article 9 of NAR’s Code of Ethics, ensure all appropriate signatures and the dates of such signatures are completed, and that any change to the agreement is initialed and dated by the parties to the transaction. Especially when an agreement, amendment, or addendum is drafted digitally, any additional information that is added by hand should also be initialed and dated by the parties since it is not known if that information was added at a later date. For example, let’s say you prepare a purchase and sale agreement for your buyer, filling out all the information except the offer price and closing date. You then handwrite those elements in once your buyer decides, and then scan the paperwork in for digital signatures. Be sure to include initials and dates next to those handwritten price and date elements.
Any handwritten information on a Purchase and Sales agreement, regardless of whether it was added before it was presented to the other party, should be considered a ‘change’ to the agreement, and therefore INITIALED and dated for proper recordkeeping and audit purposes.” – Gayle Brixey
Other commonly missed elements in purchase and sales agreements:
- If the form of earnest money delivered is different than what was noted in the agreement, an addendum is required which must be signed and dated by all parties. For example, the buyer says they’ll provide the earnest money with a personal check but then delivers it as cash.
- Regarding the legal description, if the purchase and sale agreement says something like, “See Exhibit A,” the exhibit showing the full legal description must be acknowledged by buyer and seller, with signatures or initials and dates, and then be included as part of the contract.
- Regarding rejected offers, the statute states that these must be “clearly marked and dated as rejected,” however it does not specify “who” should mark and date it. It is recommended that brokerages create a policy to follow consistently about who and how rejected offers will be marked and retained in transaction files, so it’s done so consistently.
Agency Representation Confirmation
Agency representation is another area where citations are common. Brokers are often cited for not selecting the correct form of representation, for marking multiple forms of representation on the purchase and sale agreement and for not completing the “Price” section of the seller representation agreement in their transaction files. Idaho statutes Section 54-2051(4)(d) and Section 54-2085(4) require brokers to accurately and fully complete these sections. Article 1 of the Code of Ethics also touches on these responsibilities.
When completing these sections of the purchase and sale agreement, keep in mind:
- If this seller is a FSBO or if the seller or buyer is not party to a contractual representation agreement (RE-16, RE-14, or similar), the “Representation Confirmation” section on the purchase and sale agreement must still be completed by marking the “NONAGENT” option(s).
- If the seller (bank-owned, builder, commercial, upon the advice of separate legal counsel, etc.), will not include the “Representation Confirmation” section in or attached to the purchase and sale agreement, the broker should keep documentation in the transaction file showing attempts to get the Representation Confirmation incorporated into the contract.
- The “Price” section of the seller representation agreement (RE-16 or similar) must be completed. If there are multiple properties or lots associated with this agreement (a new development, for example) an addendum should be added to the agreement, signed and dated by all parties, listing each property and the respective prices.
Advertising
IREC may cite brokers and their affiliated salespersons for common advertising violations that they see or that are reported to them. Some recent issues have included:
- Not clearly specifying an administrative assistant or other person as unlicensed when shown alongside licensed real estate agents on a brokerage’s website, maybe as part of the office roster, directory, team rosters, etc.
- Not removing agents who are no longer affiliated with the brokerage from the brokerage’s website, office roster, directory, marketing, photos, team rosters, etc.
- Not consistently representing your current brokerage across all online and offline marketing. For example, a licensed salesperson’s website, flyers, and Facebook business page all show Brokerage ABC, but their LinkedIn profile shows Brokerage XYZ.
Brokers should make it an office policy to regularly check the advertising for each agent to ensure they are in line with Section 54-2053 of the Idaho Code and Article 12 of the REALTOR® Code of Ethics.
For more information on proper use of the REALTOR® trademark, click here or check out the Five Things You Need to Know About the REALTOR® Trademarks.
If you have additional questions about the audit process, or if you are interested in learning more about common citations, please contact IREC directly or seek advice from your own legal counsel. They can be reached at 208-334-3285.
This content was summarized from the discussion at a recent First Friday Legal Forum, offered exclusively to designated and managing broker members of BRR. It is provided here for educational and informational purposes only. It is not intended to be nor, should it be used as a substitute for legal advice regarding any specific circumstance; including but not limited to IREC audits of transaction files and advertising. Every fact and situation is different and you should consult with your personal attorney before acting upon the matters discussed during these forums and in this post.
