As a real estate agent, you may assume that most compliance violations happen at the brokerage level. In reality, however, many begin with everyday agent behaviors that you may take for granted as “business as usual.”
You probably pay for some services up front on behalf of your listing clients: things like staging, cleaning, landscaping or photography. If you are then reimbursed by the client while still receiving a financial benefit from the vendor or the transaction, you’ll need to disclose that.
The case of the property management kickback
In this case, we look back at the same property management company that was featured in our last episode. This time, they’ve run into trouble because they’re getting a discount on repairs from their frequently used vendors, but the property management company is still billing clients for the full amount.
Not only did they not disclose the discount, but they didn’t even provide the vendors’ receipts to the property owners. Instead, they sent owner’s statements with the full amount shown and no disclosure of the discount.
Thus, the property management company was pocketing the discount as revenue or “secret profit.” This was made so much worse by the fact that this same company had already been dinged by auditors previously, for trust fund mishandling.
What’s more, having walked away with restricted licenses, the company knew that they would subsequently be audited again and still failed to abide by the law and properly disclose. Simply put, they should have known better.
To get the whole story, check out the video of this week’s episode above.
How vendor relationships can create hidden compensation
Do you maintain a preferred vendor list or provide vendor names to clients, either proactively or upon request? Those relationships could be opening you up to secret profits.
If the vendors you recommend provide perks, rebates or referral incentives in exchange for your recommendations, that kickback must be disclosed. While some incentive-based referrals aren’t illegal, the undisclosed compensation tied to the transaction can come back to haunt you in the event of a compliance audit.
It’s worth noting that some incentives are outright illegal under RESPA if tied to settlement service referrals.
When credit card points count as undisclosed profit
Say you put staging or inspection costs on a rewards credit card and the seller subsequently reimburses you. Ta-da! Those points represent a financial benefit tied to the transaction.
The California Department of Real Estate has cautioned that when licensees earn credit card rewards from reimbursed transaction expenses, those points may constitute a financial benefit that should be disclosed to the client. Otherwise, that benefit will qualify as secret profit.
In this case, the benefit doesn’t even come directly from the vendor. Instead, it comes from the credit card company. But because the points were generated from expenses tied to the client’s transaction — and ultimately reimbursed by the client — the DRE views them as a potential financial benefit arising from the transaction that should be disclosed.
Transparency matters more than intent
There’s a fundamental misunderstanding about compliance violations: Most are not elaborate schemes or agents looking to “get away with something.” They’re simple failures to disclose.
Sometimes it’s because agents assume a small financial benefit isn’t worth mentioning or taking the time to tally. Regulators don’t see it that way.
Whether you see that small benefit as worthy of disclosure or not, go ahead and disclose it so that you can sleep better at night and avoid trouble in the event of a compliance audit. If you’re unsure about whether or not to disclose, talk to your broker. After all, they’ll be impacted by your failure to properly disclose as well.
Disclaimer: The information provided in this article is for general informational and educational purposes only and does not constitute legal advice. The discussion is based primarily on laws, regulations, and regulatory guidance applicable in the State of California, including those enforced by the California Department of Real Estate. Laws and regulatory interpretations vary by jurisdiction, and readers should consult with qualified legal counsel or their broker regarding how these issues may apply to their specific situation or in other states.
Troy Palmquist is the founder and principal at HomeCode Advisors. Connect with him on LinkedIn.
Summer Goralik is a real estate compliance consultant and former CA DRE Investigator in Huntington Beach, California. Connect with her on LinkedIn.
