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Published by the CIPS Network of the National Association of REALTORS®
Second Quarter 2007
Business Opportunities Requires Knowing the Laws
By Finley Maxson
The growth of the second-home market—both domestic and international—presents a significant business opportunity for real estate professionals. But with opportunity also comes the need for education. U.S. REALTORS® need to be aware of state and federal laws that may impact how they work with developers in the second home market, regardless of whether the developers are local, out of state or out of the country.
Real estate professionals marketing properties on behalf of a developer need to know whether their state requires developers to register these properties with the state government and, if so, whether the developer has registered with the state government. A real estate professional who represents an unregistered development could face civil fine or possibly even criminal prosecution by the state. These registration laws regulate any qualifying development that is marketed in the state, whether it is an in-state, out-of-state, or out-of-country development. Laws exist at both the state and federal level.
State Laws
Approximately 30 states require qualifying developers to register with the state government. These requirements generally apply to the developers’ agents involved in the marketing of the properties such as real estate professionals. The state laws vary widely in their terms, but the laws generally could be described as regulating developments composed of subdivided land with at least 10 or more units. The laws apply only to a real estate salesperson that is directly representing a developer or similar entity for multiple units in the development; the laws do not apply to single unit transactions such as a broker listing a single unit in a development. The laws also do not usually regulate large tracts of land, even if the owner has subdivided this land.
The rationale for these laws is to give the state jurisdiction over developers who are marketing properties in their state so that they may enforce its laws against any developer who perpetrates fraud against the citizens in the state. The registration requirements for developers are extensive in their terms and can be costly to the developer. The registration process requires the developer to provide extensive information about the development and to pay fees associated with the registration process, including inspection fees in some cases. The registration may also need to be renewed annually. The state laws give buyers certain rights, the most important being the right to rescind the purchase if the sale is found to be in violation of state law. This right can last for years after a transaction has closed, and may require bonds to be posted and may also include specific contract and escrow requirements.
Federal Law
The Interstate Land Sales Full Disclosure Act (“Act”) requires developers of subdivisions to register with the U.S. Department of Housing and Urban Development (“HUD”) and provide a “property report” before a contract or agreement is signed. As with state laws, the federal law applies to developers, but does not pose the risks to real estate professionals representing developers that the state laws do. In general, this law applies to offers of 100 or more lots, although some of its requirements do impact smaller developments. HUD certifies Arizona, California, Florida, and Minnesota laws so that if a developer has effectively registered with those states, HUD will accept that state’s disclosure document in lieu of the standard federal registration. Similarly, some states will accept specific elements of a federal filing as a substitute for their own paper work requirements. However, developers will still need to fulfill other registration requirements applicable in that state.
What does all this really mean for U.S. REALTORS®? The same as with any area of the real estate practice—it’s important to understand the laws in your state and how they impact your business activities so you can be confident you are conducting business within the legal boundaries of your state.
To learn about your state laws, contact the state commerce department (which oversees interstate commerce). NAR is in the process of organizing state information, as known, which will be published at REALTOR.org by summer. To learn more about the federal law, visit www.hud.gov/offices/hsg/sfh/ils/ilshome.cfm.
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