When you wear the hat of the designated broker, the stakes are very high. Learn how to stay on the right side of best practices from real estate compliance consultant Summer Goralik.

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When it comes to ensuring that agents do the right thing and comply with the law, the “designated broker” of a real estate company sits in the hot seat in the industry. Not only are they subject to statutory requirements enforced by state regulators, but real estate firms also look to their designated brokers for direction, guidance and truth. 

To put it frankly, the old adage, “heavy lies the head that wears the crown,” is a relatively accurate depiction of the heavy hand a designated broker has dealt to them when it comes to supervising and managing licensed real estate activity. 

In my opinion, and I believe others would agree, the designated broker role is one of the most important and influential positions within a real estate brokerage. As a real estate compliance consultant and former California Department of Real Estate (DRE) Investigator, I can tell you firsthand that a real estate firm’s regulatory success relies on appropriate and adequate broker supervision.

Without it, a brokerage could be subject to civil and regulatory complaints, administrative penalties and discipline or even license revocation. So if you are thinking about becoming a designated broker or perhaps already filling these shoes, this piece will highlight the role of a designated broker and its duties and risks.

What is a designated broker? 

A designated broker, sometimes referred to as the “broker of record,” “managing broker” or other, similar terms, is a real estate broker licensed and recognized by a state regulator as the responsible broker for the supervision and management of real estate agents and activities conducted under, and affiliated with, a licensed real estate company. 

Depending on the state where you operate, a broker may operate a real estate business as a sole proprietor and/or under an entity like a corporation or limited liability company (LLC). Regardless of geography or business structure, all real estate companies must have designated brokers in place who are assigned the ultimate task of ensuring real estate compliance for, and on behalf of, the entire brokerage. 

Requisite duties 

The duties of the designated broker are vast and, in fact, mandated by state law. While state laws may differ regarding the particulars or how the law is applied or enforced by the government, they share a common denominator. 

That is, broker supervision laws generally require that a designated broker review, supervise, manage and/or monitor all licensed activities on behalf of the brokerage, including but not limited to, its sales agents’ activities, advertising, real estate transactions, record retention, fair housing compliance and trust fund handling. 

Put another way, a designated broker is more than just a company spokesperson. State regulators view a designated broker as the chief representative of the brokerage. It is the designated broker who they call upon when consumer complaints are received and/or an investigation has been initiated.

Moreover, the designated broker is required to respond to such inquiries, to comply with regulatory requests and take necessary corrective actions to resolve any regulatory issues, non-compliance, and enforcement actions. Simply put, the designated broker is responsible for a real estate company’s conduct and compliance. 

The risks 

When you wear the hat of the designated broker, the stakes are very high. The designated broker’s license is on the line if something goes wrong. For example, when a complaint is received by a state regulator, the designated broker’s supervision is always put under a microscope. 

Regulatory complaints and inquiries afford the state real estate department an opportunity to determine if the issue is a mere one-time offense or perhaps representative of a more problematic pattern of brokerage conduct, including the designated broker’s failure to supervise. In reality, some designated brokers pass these regulatory tests, and some do not. 

When I worked at the California DRE and investigated real estate complaints for a living, I would often interview designated brokers and collect information about their supervision duties and practices. 

In order to corroborate a designated broker’s statement and cross-check the narrative, I would review company documents and transaction files, and interview sales agents and employees working for the brokerage. As you might imagine, there were many occasions where these investigations revealed troublesome discrepancies between a designated broker’s perspective and what was happening in practice.

It also uncovered significant non-compliance and law violations, including a lack of broker supervision. 

Different approaches to supervision 

Group A 

In my line of work, I interact with and evaluate the performance of, designated brokers all of the time. On the one hand, there are brokers who are doing the work. Let’s call them “Group A”. 

They understood the seriousness of the position before they took the job, recognized that their license was on the line and at risk, and are fully committed to the challenging role. Furthermore, these brokers create and implement thoughtful and compliant policies, procedures, rules and systems which allow them to effectively review and monitor the activities of their real estate firms, enforce the brokerage rules and, most importantly, ensure that the business is continually compliant. 

To be fair, this group also includes designated brokers who may not know the extent of responsibility that the job requires upfront but quickly resolve this blindspot by doing their homework. 

Specifically, they diligently take it upon themselves to learn the law and what is expected of them, implement a course of action to ensure continual compliance, hire key players to assist them with getting the job done right, seek outside help when needed, and do the work (a recurring theme in this article). 

When this group gets approached by a state regulator, I am not as concerned. This group can prove that there is real supervision and management is performed. 

Group B 

Conversely, there is a “Group B” of designated brokers who didn’t fully understand the role before taking the job. While they generally want to do the right thing and know that they should, they are also very busy (perhaps with their own sales activities) and do not have a lot of time to focus on and prioritize compliance.

Oftentimes, it’s only after they have been notified of a regulatory complaint or upcoming government audit, that they finally take a break to assess compliance. By the way, a firm’s assessment of compliance at this stage can quickly become an exercise in damage control. It’s not wise or fun. 

While these designated brokers certainly don’t intend to violate the law, their lack of supervision can be hard to hide. When designated brokers fall asleep at the wheel, many bad things can happen, such as the distribution of non-compliant advertising, the failure to provide required disclosures to clients, retention of incomplete transaction files and other unlawful conduct. 

These unsupervised activities eventually spill over into consumer complaints and inevitably expose the brokerage to varying degrees of trouble. By “trouble”, I am referring to civil lawsuits and/or regulatory actions, both of which can incur major legal defense fees for the brokerage. 

This group of designated brokers experiences a higher level of scrutiny and headache when it comes time for a regulatory investigation or audit. And unlike the first group of designated brokers that I described, Group B has a much tougher time evidencing that they are really doing their jobs. 

Group C 

Finally, designated brokers in “Group C” are the absentee brokers, sometimes referred to as “rent-a-brokers”. Essentially, this designated broker allows a real estate firm to rent out their license for a monthly fee so that the brokerage can get licensed and start operating.

Group C does not supervise any real estate activities. They are out of touch with the company’s business and activities and are usually never around (physically or remotely). In fact, the real people in charge are the owners of the business, some of whom are not licensed at all. 

Believe it or not, this lack of supervision is sometimes by design. Meaning, it is convenient for the real estate firm because they do not want to be supervised by the designated broker or bothered by compliance. Similarly, the absentee broker is only invested in the paycheck and certainly not any mandate to ensure that the company is adhering to the law. 

Naturally, these operations come with expiration dates as it is only a matter of time before something goes wrong. When it does, the state regulator indeed gets involved, and depending on the nature of the violations, the real estate company could also be subject to potential criminal prosecution. 

Real supervision matters

If you are going to operate a brokerage and enlist as the designated broker, then you must understand one simple thing: it’s all about broker supervision, and it starts with you. Either you are all in or not. There is no in-between. 

It would be best if you didn’t fake it either. Some designated brokers set up pristine brokerage policies and procedures on paper. Still, at the end of the day, they do not enforce them or take any steps to monitor compliance, rendering these policies meaningless. So again, the designated broker role does require real work. 

Thankfully, many states permit designated brokers to delegate some duties and responsibilities to other licensees. Although different jurisdictions may have varying requirements and conditions related to the delegation of authority, they all tend to say the same thing: A designated broker may rely upon other licensees to assist with supervision of the brokerage as long as overall supervision is not relinquished.

 Returning to the recurring theme of this piece, it is ultimately the designated broker who will be held responsible for the offering and performance of real estate services, agent conduct and activities, and regulatory compliance on behalf of the brokerage. 

Bottom line 

For those brokers considering a designated broker position, the important thing to understand upfront is what the job and commitment truly entail. This shouldn’t be a quick decision and certainly not one for the faint of heartAs you can see, there is a lot on the line. But if you fully comprehend the duties and risks involved, and are still up for the task, then go for it. 

For those brokers who are currently working as designated brokers, I hope this article serves as a helpful reminder to remain vigilant with your duties and supervision practices and aim high when it comes to regulatory compliance. 

The opinions, suggestions or recommendations contained in this article are based on her experience working for, and knowledge of the laws enforced by, the California Department of Real Estate and must not be considered legal advice. You should consult with appropriate legal counsel for further clarification. 

Summer Goralik is a Real Estate Compliance Consultant and former CA DRE Investigator in Huntington Beach, California. Connect with her on LinkedIn.

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