FOR BROKERS: Risk Management

The Right Road

BY NEWTON MARSHALL

With real estate sales still slow in many parts of the country, you can bet consumers are scrutinizing deals like never before. So if your internal policies and record keeping were a bit loose during the go-go market, it’s time you took steps to protect your brokerage. Make sure your written procedures lay out the key dos and don’ts that associates need to follow.

Among the top risks that brokers face each year are misrepresentation, violations of federal Real Estate Settlement Procedures Act (RESPA) and the Truth in Lending Act (TILA), and discrimination under the Fair Housing Act. Antitrust is another area you need to address.

Do you have policies that cover those four major risk areas? Even if you do, it’s a good idea to look at them with fresh eyes by comparing them with the basic principles outlined here. If they match up closely, you’ve made the right moves to protect your associates and your company.

Misrepresentation

It’s hard to be in real estate brokerage without at some point experiencing a buyer’s complaint about material misrepresentation of a property’s condition. Whether a customer actually files a lawsuit is another matter.

To protect yourself, put these rules in your policy manual and reinforce them regularly at your sales meetings. They’re all based on common sense, but they can’t be reinforced enough.

• Disclose all material adverse conditions. That seems obvious, but what’s less obvious is what is meant by “material.” So put this rule in your manual: To decide whether a condition is material, ask yourself whether buyers would still be interested in the property if they knew about the condition or whether it would affect the sales price they’d be willing to pay.

The fact is, buyers may still be interested after a condition is disclosed. But if you don’t disclose it and they file a lawsuit, you can be sure they’ll testify that they would never have bought the property — at least not on the terms agreed to in the contract — had the condition been disclosed to them.

• Don’t discuss what you don’t know. You need not investigate the property for material defects, but neither may you be willfully blind to its condition. If defects are revealed to you or you observe them, you must disclose them; but if buyers ask, for example, whether the structure is sound, it’s not a good idea to hazard a guess.
  
• Don’t complete real property disclosure forms for clients. Let sellers fill out the forms for themselves. If they ask you whether certain conditions should be disclosed, refer them to an attorney. Explain that deciding what to disclose is a legal matter and that you don’t practice law.
• Don’t tell buyers or sellers what to do with a property. Instead, provide facts and market information so that buyers or sellers can make their own decisions. Refer questions about issues like zoning, school district boundaries, or floodplains to an authoritative source.
  
• Don’t order or interpret inspection or pest reports. If you arrange for inspections as an accommodation to clients, arrange for the report and the bill to go directly to the clients, lest you be seen as “owning” the results. Better yet, don’t arrange for the inspections at all; instead, recommend several vendors and let the buyers (or sellers in some cases) hire the inspectors. If inspection reports do come through you, don’t provide the conclusions orally to your clients. Give them a copy of the report and leave it at that.

Settlement Violations

The disclosure and anti-kickback provisions of the federal Real Estate Settlement Procedures Act and the Truth in Lending Act are central to how you carry out your daily business. At their core, those provisions are intended to make sure that you disclose any business relationship you have with settlement service providers to whom you provide referrals, and that you receive no type of enrichment for those referrals.

Your associates are constantly solicited for referrals from a host of settlement service providers, and the RESPA restrictions apply to them, too. So make sure your associates abide by this handful of disclosure and antikickback rules, just as your brokerage does.

• Disclose relationships. That’s obvious enough, but you need to make disclosures in writing and include them for all your affiliated real estate service providers. You need not disclose financial terms.
  
• Don’t require the use of certain services by clients. You can publicize service providers, and even do joint marketing with them, as long as the relationship is disclosed and costs are equitably allocated. But let clients make their own choices.
  
• Don’t set up shell companies to receive referrals. If you set up separate companies, they must be viable as stand-alone entities, and they must provide separate, non-duplicative services and price their services at fair market value.
  
• Don’t accept extravagant entertainment from service providers. Vacations, fancy gifts, or any other “things of value” not commensurate with services performed are seen as a kickback by the U.S. Department of Housing and Urban Development, which enforces RESPA rules. States have their own rules, too.
  
• Don’t ask for or agree to exchange fees for referring business. You should be paid for the value of any service you provide to clients; but referrals are not a service to your client, so no compensation can be earned for making them.

Fair Housing Discrimination

Violations under the anti-discrimination Fair Housing Act can be subtle. Showing minority clients a limited number of properties, for instance, or discouraging them from looking in higher-priced neighborhoods can be discriminatory. Discouraging them from contacting certain buyers and sellers can be, too.

To help focus your associates’ attention on the risks they face, make it clear you have thought through your fair housing policies by committing yourself and your associates to the spirit and letter of the law; illustrating how the law works through the use of hypothetical scenarios; using pamphlets and posters to make customers and clients aware of their Fair Housing Act rights; and investigating all complaints of discrimination, including complaints made by a competitor, without regard to whether they seem to have merit.

Those measures might seem like a lot, but remember that penalties for Fair Housing Act violations are significant: tens of thousands of dollars, in some cases, and that doesn’t factor in the damage to the reputation of your brokerage or the potential loss of your license.

And it’s not just HUD that enforces the Fair Housing Act. Other groups like state housing agencies or private fair housing organizations can send testers to check your compliance and can sue for violations found by those testers.

Marketing efforts are one of the main fair housing battlegrounds, so you need to be careful in your advertisements.

In general, puffery or opinions about the property are not actionable, but it’s imperative that your ads not express or imply any preference based on a buyer’s membership in a protected class.

As a rule of thumb, you want your ads to describe the property, not the desired buyer, and to describe the neighborhood, not the neighbors.

You’ll be on the right track if your manual includes these basic provisions:

• Require broker review of associate marketing campaigns before publication. Confer with associates about the basis for questionable or atypical representations.
  
• Avoid identifying the property’s location next to a specific church or within a parish. Avoid answering questions that relate to the religious, racial, or ethnic makeup of a neighborhood.
  
• Don’t state a preference for a certain class of people, such as couples or singles. However, HUD has said you can use architectural terms such as “mother-in-law suite” because they describe the property, not a preferred buyer for the property.
  
• Use the equal opportunity slogan or logo in all advertising. It’s a requirement if you’re selling properties owned or held by HUD, and its recommended in all cases. Displaying the logo gives the public a visual sign that you understand your obligations under the law.

Antitrust Breaches

Antitrust laws are applicable to the real estate profession mainly in connection with commission rates and relations between competitors.

To avoid being named a defendant in an antitrust suit brought by the government or a competitor, you’ll want to be clear on a few basic points:

• Don’t discuss your business with your competitors. Stay clear of any conduct that can be construed to be collusion with competitors. For example, don’t discuss your company’s commission rates with brokers or managers from other companies at a party, at lunch, or at the gym. Oral discussions in informal settings can give rise to antitrust claims; your comments don’t have to be in writing.
  
• Avoid steering business away from a competitor. You can’t suggest that brokers refuse to show homes listed by another broker, whatever commission split the broker is offering.
  
• Ensure that the factors you use to set commission splits with other brokers are determined unilaterally by you. Never discuss special arrangements with other brokers.

There are many other areas of potential legal liability for which you should have a clear policy—hiring and firing of staff, sexual harassment, and salesperson departures, for example. But when it comes to managing the transaction itself, the points I’ve outlined here will get you off to a solid start in minimizing the very real risks of operating a real estate brokerage business.

Marshall is a partner at Hinshaw & Culbertson LLP in Chicago. He can be reached at nmarshall@hinshawlaw.com.