Brokerage Reminder: Office policies and procedures – administrative structure for business oversight

Tracking agent compliance with policy

Consider yourself as a broker who intends to operate a brokerage company, whether small, medium or large. A goal you have set for yourself is to increase your annual income from real estate sales by recruiting and employing agents and broker-associates.

The process of recruiting agents into your brokerage can take several different paths depending on your business model. Some brokers hire as many agents as they can squeeze into their office. Others recruit only agents and brokers with track records that exceed typical production levels.

When you locate and hire a staff of agents, you need to have an administrative structure to verify the agents are conducting themselves as intended to prevent you from exposure to an unnecessary risk of loss. Implementing continuous oversight limits:

• inconsistencies in file maintenance and reporting;
• unrealistic expectations when dealing with and on behalf of clients; and
• unacceptable employee conduct.

Proper oversight requires:

• the commitment of human resources to identify and report to you any unacceptable staff conduct;
• the holding of training and sales meetings;
• the maintenance of client files and reports; and
• the filing of periodic and event-driven reports for your review.

The employing broker’s management duties

When you employ a sales agent to act on your behalf, you need to exercise reasonable supervision over the activities performed by the agent. Brokers who do not actively supervise their agents risk having their licenses suspended or revoked on the review of a complaint received by the California Bureau of Real Estate (CalBRE). [Calif. Business and Professions Code §10177(h)]

To ensure your agents are diligently complying with the duties owed to clientele and others, you need to establish office policies, procedures, rules and systems relating to:

• soliciting and obtaining buyer and seller listings and negotiating real estate transactions of all types;
• the documentation arising out of licensed activities which may affect the rights and obligations of any party, such as agreements, disclosures, reports and authorizations prepared or received by the agent;
• the filing, maintenance and storage of all documents affecting the rights of the parties;
• the handling and safekeeping of trust funds received by the agent for deposit, retention or transmission to others;
• advertisements, such as flyers, brochures, press releases, multiple listing service (MLS) postings, etc.;
• agents’ compliance with all federal and state laws relating to unlawful discrimination; and
• the receipt of regular periodic reports from agents on their performance of activities within the course and scope of their employment. [California Bureau of Real Estate Regulations §2725]

One method you may use to implement the requirement for supervision of employed agents is to develop a business model. Here, you outline the means and manner by which agents produce and service listings, and how purchase agreements are negotiated and closed. The creation of a plan for office operations logically starts by establishing categories for itemizing administrative and licensed activities, then a written presentation of the conduct required of agents to achieve your objectives for each item.

Business and licensed activities

Categories of business and licensed activities include:

• administrative rules, covering a description of the general business operations of the brokerage office, such as office routines, phone management, sign usage, budgetary allocations for agent-support activities (advertising, FARMing, etc.), agent interviews, goal setting and daily work schedules;
• procedural rules, encompassing the means and methods to be used by agents to obtain measurable results (listings, sales, leases, mortgages, etc.);
• substantive rules, focusing on the documentation needed when producing listings, negotiating sales, leases or mortgages and fulfilling the duties owed by you as the broker to clientele and others;
• compliance checks, consisting of periodic (weekly) and event-driven reports (a listing or sale) to be prepared by the agent, and the review of files and performance schedules by you, the office manager or assistants, such as listing and transaction coordinators; and
• supervisory oversight, an ongoing and continuous process of training agents and managing their activities which fall within the course and scope of their employment.

The rules and procedures you establish to meet your responsibility to manage and oversee the conduct of your agents when they act on your behalf need to be agreed to in writing between you and the employed agents.

A written employment contract details the duties of the sales agent and the agent’s need to comply with an office manual which contains your office policies, rules, procedures and other conduct you deem necessary to fulfill your responsibility for supervision.

Also, the written employment agreement spells out the compensation the agent is to receive for representing you in soliciting and negotiating listings, purchase agreements, leases and financing. [CalBRE Regs. §2726]

The (not so) independent contractor

Most sales agents receive compensation from their brokers based on a negotiated percentage of contingency fees received by the brokers for completed sales, leases or mortgages solicited, negotiated or processed by the agents.

Whether you withhold state and federal income tax on payment of an agent’s compensation depends on the type of employment agreement you and the agent enter into — employee or independent contractor (IC) agreement. [See RPI Form 505 and 506]

The chief advantage for you to use an IC agreement is the simplification of the bookkeeping process. An IC agreement avoids withholding for income taxes or Medicare, unemployment and social security benefits from the agent’s fee while also avoiding equivalent employer contributions.

The IC: an agent of the broker

In spite of the IC employment agreement allowing total discretion to the agent in their conduct for handling of listings and sales, the agent is continuously subject to your supervision. Sales agents are agents of the broker, without regard to the tax purpose of their employment agreement. Thus, you cannot escape liability for your agent’s negligence. [Gipson v. Davis Realty Company (1963) 215 CA2d 190]

In part, supervision is critical to the reduction of your exposure to risks of liability for your sales agents’ failure to inspect, disclose, advise and care for clients.

Risk reduction program

All acts carried out by you or your agents present the possibility that a client or other transaction participant will be injured financially. This includes:

• fact-gathering investigations;
• property inspections by staff;
• negotiations between participants in transactions;
• counseling and advice given to clients; and
• the preparation of disclosures and agreements.

Risks are best limited by choosing activities which can be conducted with more certainty of a favorable result when relied on by the client or others in real estate transactions. Thus, you need to maintain a risk reduction program to keep claims from clients and others under control.

Steps necessary to establish a risk reduction program include:

• identifying activities which expose you to liability based on whether an activity can financially injure the client or others;
• breaking down each identified activity into its component parts, i.e., all of the miscellaneous acts and events that comprise the activity, which need to be avoided or performed properly to prevent a loss to a client, yourself or others;
• evaluating what types of loss a client, you or others might experience if you or your agents engage in the identified activity, or a modified or alternative version of the activity;
• choosing brokerage activities and adopting procedures to set parameters for the agent’s conduct, based on whether they fall within your comfort zone for an acceptable level of exposure to liability; and
• tracking agent compliance with authorized activities, coupled with ongoing remedial training and dispute resolution conduct for complaints and claims made by clients and others.

Identification of activities creating risk

To initiate an analysis for managing your risk of loss, you need to identify and list all the activities agents perform which may potentially be the source of a claim of liability against you.

After identifying the type of broker and agent activities which expose you to liability, the next step is to break down each activity into all of its essential parts.

You need to determine what it is about a particular activity that exposes you to liability. This question is considered when describing the handling of an activity, such as a diligent visual inspection of property, the preparation of a Transfer Disclosure Statement (TDS) or review of an annual property operating statement (APOD). This breakdown of the identified activity — and its timing — into component parts becomes the checklist of proper and improper conduct. [See RPI Form 304 and 352]

Assessment of adverse consequences

Having created a list of brokerage activities and actions your agents will be engaged in, an assessment is conducted of the adverse consequences the activities might generate which may cause a loss for the client or others.

If it is determined a loss can occur, the significance of the loss needs to be evaluated to determine its financial impact — and whether you are exposed to liability for the loss. The evaluation process interprets, in terms of probable losses and liability arising out of an error or omission, the impact of risks taken when representing a client.

This evaluation takes place before you authorize an activity. Only after the evaluation can you logically undertake the risk of your agents performing the service for clients and others.