This article is part of an ongoing series covering violations of real estate law. Here, the DRE revoked the license of a real estate corporation along with its designated officer for failing to retain documents, unlawful use of a fictitious business name, making substantial misrepresentations and failing to adequately supervise.

In July 2021, the California Department of Real Estate (DRE) revoked the license of Pacific West Homes & Investments, Inc. (PWHII), a real estate corporation. PWHII operated out of Covina, California since 2016. The DRE also revoked the license of the corporation’s designated officer (DO), Derek George Haymond, a broker since 2010.

On February 28, 2019, the DRE completed an audit of PWHII’s books and records. The audit period covered May 1, 2017 through November 30, 2018.

The audit revealed several codes and regulations were violated by PWHII, including:

  • conducting real estate sales activities while using unlicensed fictitious business names;
  • failing to retain required sales transaction documents;
  • making substantial misrepresentations and engaging in fraud and dishonest dealing; and
  • failure from the DO to adequately supervise the activities of PWHII’s salespersons, employees and agents while also failing to establish policies, rules, procedures and systems to review and manage transactions requiring a real estate license and the handling of trust funds.

In 2018, the DRE received a consumer complaint about PWHII. PWHII represented both the buyer and seller of a property in Los Angeles as a dual agent. The buyer provided PWHII a good faith deposit for the property which was held undeposited by PWHII. The transaction failed to close and PWHII refused to return the funds to the buyer.

In response to this complaint, the DRE demanded to see records from PWHII and Haymond relating to the Los Angeles property.

Haymond claimed on behalf of PWHII:

  • he had no involvement with the Los Angeles property;
  • he did not receive deposits or trust funds for the Los Angeles transaction; and
  • he did not possess the transaction file for the Los Angeles property.

When PWHII conducted sales activities using alternative names (“Pacific West Homes,” “Pacific West Homes & Investments” and “Pacific West Homes & Inv.”) to the one that was licensed, it resulted in the revocation of PWHII’s corporate license.

Haymond’s failure to retain the required documents, the dishonest dealing to the participant who made the complaint to the DRE and ultimately, his lack of general oversight of business operations to ensure compliance with real estate law led to the revocation of his personal license.

Forming a business model and supervising

A broker who develops a business model and procedures for oversight of their licensed and unlicensed staff mitigates the risk of inadequate broker supervision. [See RPI e-book Real Estate Practice Chapter 1]

In creating and maintaining a plan for office operations, the broker may attribute administrative, procedural and licensed activities under certain categories. Some of these categories include:

  • administrative rules, encompassing general business operations of the brokerage office, such as storing documents for the requisite three years required by DRE regulations [Calif. Business and Professions Code §10148(a)];
  • procedural rules, including the methods to be used by agents in obtaining measurable results, such as establishing the forms to be used and proper trust fund handling procedures;
  • substantive rules, covering the documentation needed when conducting real estate sales activities, such as taking property listings and preparing offers;
  • compliance checks, ensuring consistent periodic reviews of files and performance schedules are conducted by the broker, such as maintaining listing and sales reports; and
  • supervisory oversight, an ongoing and continuous process of training agents and ensuring their activities are conducted in compliance with the broker’s policies and controlling law.

Related Video: A Broker’s Use of Supervisors

Click here for more information on this topic.

California law requires real estate brokers to retain records for three years. These records include:

  • listings;
  • deposit slips;
  • canceled checks;
  • trust records; and
  • other documents executed or obtained in connection with any transactions for which a real estate license is required. [Bus & PC §10148(a)]

The DRE and state codes require brokers to exercise reasonable supervision over the activities of their salespersons. [Calif. Department of Real Estate Regulations §2725; Bus & PC §10159.2]

Reasonable supervision includes the establishment of policies, rules, procedures and systems to review, oversee, inspect and manage:

  • transactions requiring a real estate license;
  • documents materially affecting the rights or obligations of clients in transactions;
  • the filing, storage and maintenance of documents related to the real estate services rendered;
  • the handling and documentation of trust funds;
  • advertisements of real estate services requiring a license;
  • employee’s knowledge of anti-discrimination, fair housing and agency laws; and
  • reports on the activities of the employees. [DRE Regs. §2725]

Further, fictitious business names need to be licensed by the DRE to conduct any activity requiring a real estate license. [DRE Regs. §2731]

Related article:

Rules for fictitious business names and team names

Brokers who are unable to provide adequate continuous oversight over all the licensees and unlicensed staff may employ a licensee to act as an office manager to carry out the employing broker’s supervisory responsibility to review documents and maintain files.

However, while an office manager carries out the duty to supervise employees, the employing broker still retains overall supervisorial responsibility at all times. An employing broker’s duty to supervise cannot be entirely delegated to others. Thus, the employing broker needs to periodically audit and review the actions of an office manager, and in turn, each employee. [DRE Regs. §2725]

Broker supervision is a requirement under state law and DRE regulations. When a broker has been found to be negligent, it constitutes cause for the revocation of their license. [Bus & PC §§10177(d), 10177(g)]

Related article:

Brokerage Reminder: Branch office managers share responsibility for oversight and management

Want to learn more about this topic? Click the image below to download the RPI book cited in this article.