“Hidden profits” can appear in everyday transactions. Summer Goralik and Troy Palmquist share how to properly disclose information and avoid unintended consequences.
Real estate agents may believe that most compliance violations occur at the brokerage level. But in reality, it often starts with everyday agent actions that are taken for granted as “business as usual.”
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You’ll probably pay upfront for some services on behalf of your listing clients, such as staging, cleaning, landscaping, and photography. If you receive a refund from a client despite receiving a financial benefit from a vendor or transaction, you must disclose that.
Real estate management kickback case
Today we look back at the same property management company we featured in the last episode. This time, he ran into trouble because he was receiving a discount on the repair costs from a frequent contractor, but the property management company is still charging the customer the full amount.
Not only did they not disclose the discount amount, they did not even provide the property owner with a seller’s receipt. Instead, the owner’s statement showed the full amount and no discount was disclosed.
Therefore, the property management company pocketed the discount as income or “secret profit.” The situation was made worse by the fact that this same company had already been tainted by auditors previously for mishandling trust funds.
Additionally, the company walked away with a restricted license, knowing it would be audited again in the future, yet still failed to comply with the law and properly disclose. Simply put, they should have known better.
To see the full story, check out the video of this week’s episode above.
How vendor relationships create hidden rewards
Do you maintain a list of preferred vendors or provide vendor names to your clients upfront or upon request? These relationships could provide you with secret benefits.
If a vendor you recommend offers a benefit, rebate, or referral incentive in exchange for your recommendation, you must disclose that rebate. While some incentive-based referrals are not illegal, the undisclosed compensation associated with the transaction can come back to bite you if there is a compliance audit.
Note that some incentives are completely illegal under RESPA if they are tied to payment service referrals.
When credit card points count as undisclosed profit
For example, let’s say you put staging or inspection fees on a rewards credit card, and the seller later refunds you the money. Free! These points represent the financial gain associated with the transaction.
The California Department of Real Estate has warned that if a licensee earns credit card benefits from reimbursed transaction costs, the points may constitute a financial benefit that must be disclosed to the customer. If not, the interest will qualify as a secret interest.
In this case, the profit does not come directly from the vendor. Instead, it is provided by your credit card company. However, because points are generated from costs associated with a customer’s transactions and are ultimately reimbursed by the customer, the DRE considers those points to be a potential financial gain from the transaction that should be disclosed.
Transparency is more important than intent
There is a fundamental misconception about non-compliance. Most of them are not operatives with elaborate plans or trying to “get away with something.” They simply failed to disclose.
Sometimes it’s because the agent mentions a small financial benefit or doesn’t think it’s necessary to spend time on aggregation. Regulators don’t see it that way.
Whether you think that small benefit is worth disclosing or not, do so so you can sleep better at night and avoid trouble if a compliance audit ever occurs. If you are unsure whether to disclose, please consult your broker. After all, they will also be affected by your failure to disclose properly.
Disclaimer: The information provided in this article is for general informational and educational purposes only and does not constitute legal advice. This discussion is primarily based on applicable laws, regulations and regulatory guidelines in the State of California, including those enforced by the California Department of Real Estate. Interpretations of laws and regulations vary by jurisdiction, so readers should consult a qualified attorney or their broker regarding how these issues apply to their particular situation or other states.
Troy Palmquist is the founder and president of 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.
