Does a sales agent have a duty to report unlawful activity by other sales agents? What about a broker? This article explores the required and ethical duties of real estate professionals.
A common situation
Consider a licensed real estate agent who represents a homebuyer client. The buyer is interested in a particular listing and asks their agent to place a competitive offer on the home. The buyer’s agent submits the offer to the seller’s agent.
At the same time, the seller’s agent also receives an offer from a different buyer who agrees to let the listing agent represent them. The dual agent thus presents their buyer’s offer to the seller, which is less competitive than the original buyer’s offer. The dual agent knows they will receive fees from both buyer and seller if the seller accepts their buyer’s offer, a dual agency situation. The dual agent does not present the more competitive offer from the buyer they don’t represent.
The seller accepts the less competitive offer, since it is the only one they are aware of receiving. The highly aware buyer’s agent suspects the dual agent did not present their buyer’s offer.
The buyer’s agent wants to report the dual agent to the California Bureau of Real Estate (CalBRE). After all, their buyer missed out on their home purchase and the seller lost out on a more competitive offer — all so the dual agent could receive a double fee.
Agents are required to present all offers received as directed by the seller. The agent who fails to submit all offers as directed violates California real estate law. [Calif. Business & Professions Code §10148]
At the same time, the buyer’s agent feels bad about “snitching” on a fellow real estate agent. After all, their buyer will soon find another home to place an offer on, and the seller is none the wiser. And reporting the agent to CalBRE could mean the dual agent loses their livelihood. Further, the buyer’s agent has no duty to report the listing agent to CalBRE, as no law requires sales agents to report on the activities of fellow agents (though ethically they may feel justified to do so).
The buyer’s agent is conflicted.
The requirements of reporting
In a recent first tuesday poll, 90% of voters said they would report a fellow agent to CalBRE for disciplinary action. However, CalBRE feels they aren’t informed about most unlawful activity.
While sales agents are not required by law to report the unlawful activity of other sales agents, employing brokers are held to a different standard.
Further, a broker who dismisses or fires a sales agent for violating real estate law needs to notify CalBRE of the incident within ten days of firing the agent. The broker needs to include details on why the agent was fired in the report. [Real Estate Regulations §2752]
However, CalBRE says “it’s clear” that most brokers who end up firing an agent for unlawful brokerage activity do not report it to CalBRE as required. Brokers who discover an agent under their employ engaged in violations of California’s real estate law likely fear CalBRE discipline against the agent and the broker.
A sales agent who is employed at the same brokerage where an agent is dismissed also has some duty to report. However, they will not be penalized unless it is proven they had knowledge of the broker’s violation of not reporting. [Calif. Bus & Prof Code §10179]
The penalty for not reporting an agent’s dismissal for violation of real estate law is:
- a temporary broker license suspension; and/or
- a permanent revocation of the broker’s license. [Calif. Bus & Prof Code §10178]
To answer the broker’s fears of retaliation, CalBRE instituted their Benefit of Doubt (BOD) program, which essentially guarantees a broker won’t be disciplined along with their wayward agent — right away. They still may face discipline if they did not fulfill their duties as the agent’s supervising broker. So, it’s clear why a broker may not wish to risk a lost license or a stain on their record (as all discipline actions are posted online, right where a potential client can look up the broker’s license number). [Calif. Bus & Prof Code §10083.2]
After all, if the broker doesn’t notify CalBRE, who will?
Some non-licensees take matters into their own hands.
Take the example above, in which the buyer’s agent is unsure whether to report the dual agent for failing to present their buyer’s offer.
CalBRE often receives complaints from non-licensees in which the consumer suspects the seller’s agent did not present their offer. The frequency of complaints like these spike during hot markets, when inventory is low and multiple offers are common. Buyers who place an offer above the listing price and don’t receive a reply from the seller wonder if the seller even saw their offer.
Of course, foul play isn’t always the case in multiple offer situations. Just because the listing agent doesn’t respond to what the buyer thinks is a competitive offer doesn’t mean they did not present it to the seller. However, the fact that buyers complain to CalBRE about these situations shows us that clients are ready and willing to report agent abuses to the authorities.
Consumers can file complaints to CalBRE by filling out Form RE 519 or by using the online complaint system, both found here. The CalBRE has the authority to remove or suspend a license. However, if the consumer is seeking money as part of their complaint, the consumer needs to consult an attorney.
Another way brokers get caught for failing to report illegal sales agent activities is through a visit from CalBRE.
The CalBRE regularly conducts random audits of brokerages to ensure compliance with real estate law. When these audits turn up activity warranting discipline, the actions are published by CalBRE here: Summary of Enforcement Actions.
Twenty offices were the subject of such audit accusations during September 2015, as detailed in CalBRE’s enforcement action list.
The most common violations found by CalBRE audits can be found here. Many of these violations have to do with improper handling of trust funds. Another significant and common error identified during audits is improper supervision by employing brokers. [Calif. Bus & Prof Code §10159.2]
The broker needs to establish rules and systems to oversee their employee and agent:
- use and storage of transaction documents;
- handling of trust funds;
- compliance with real estate laws and non-discrimination laws; and
- regular reporting of licensed activities to the employing broker.
The rules and procedures the broker has in place to monitor these activities need to be in writing. However, CalBRE commonly finds that brokers neglect to properly monitor their agents, particularly by failing to supervise trust fund handling and failing to have written procedures for regular agent reporting.
Further, in a recent first tuesday poll only 32% reported that their broker requires regular transaction updates. 23% said their broker does not require any transaction updates and 45% said their broker only requires to be notified when major steps of the transaction are accomplished (i.e. closing).
The ethics of reporting
Let’s return to the original example, in which the sales agent is unsure about reporting their fellow agent.
We already know the sales agent has no legal duty to report the dual agent for failing to present all offers as directed by the seller. But what about the agent’s ethical duty to report?
The public has a well-ingrained distrust of real estate professionals. In a 2011 Gallup poll, 75% of respondents rated real estate professionals as having “average” or “low” honesty and ethics. Only 20% said agents had “high” or “very high” ethics. For comparison, real estate professionals fared worse than politicians, lobbyists and lawyers in the survey — though they did receive higher ethics scores than insurance salespersons (not a great feat).
Further, most respondents to a first tuesday poll ranked sales agents as having a “low” standard of ethics — and most of our readers are real estate professionals themselves.
Something is clearly wrong with the profession when insiders view fellow sales agents as unethical.
How to restore the public’s trust in real estate professionals?
To the buyer’s agent who is aware of the dual agent’s unlawful withholding of the buyer’s offer: report the listing agent to CalBRE. Yes, the buyer’s agent is not required to report the offense. But it is the ethical thing to do.
CalBRE used to have a code of ethics. However, in a strange decision, they got rid of it.
81% of respondents to a 2012 poll by first tuesday said they want CalBRE to resurrect the Ethics and Professional Conduct Code, which was mandatory from 1979-1996.
True, trade unions have codes of ethics. However, these ethical standards do not hold the full force of the law. CalBRE ought to reinstate the Code of Ethics, and make the public well aware of the fact. This will go a short way to restoring trust in real estate agents. But to fully establish trust, it starts with the actions of agents.