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How to survive a real estate property management audit in California

Feb 27th, 2015 | By | Category: Real Estate Broker Law

Typical questions a property management broker can expect in California

What questions do they ask in an audit

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Going through a BRE (formerly DRE) real estate property management audit can be very stressful for most brokers in California.  As we have been saying, if you are in the property management business in California (from San Diego to Orange County, Los Angeles and San Francisco and city and town in between), you will be subject at one point or another to one of the following:

1.  A complaint-driven property management audit (for example, if you are sued by a Plaintiff in a real estate case often these Plaintiff will also file a DRE complaint against you.  This can trigger a real estate investigation, or audit.

2. A random property management audit (i.e. you certify you are engaged in property management and you “number comes up” so to speak)

Either way, you end up in a property management audit, and you need to be prepared to show your are in compliance with the Commissioner’s Rules, Regulations and the real estate law in California.  We have help defend you in these investigations.  This blog will help you understand what you can expect in your case, although every case can be different.

Getting the documents ready for the audit (Step One)

The first thing to note is always WHAT IS THE BUREAU OF REAL ESTATE LOOKING FOR.  Normally, when you are in the audit process, the BRE representative (usually an auditor or investigator) will contact you to set up an audit time. They may also send you a letter asking for certain documents be gathered and to have ready.  As a real estate broker, you have a duty to keep records of your business for three years.  As such, you will need to gather the required documents. This is set forth in California Business & Professions Code Section 10148 (click on the image below to watch the video):

keep real estate records three years

The types of documents you will normally have to have ready for the auditor are (trust account signature cards, all bank records of the business including general and trust accounts, independent contractor agreements, real estate transactional documents (ex, resident, commercial, business opportunities, broker escrows, and property management), trust fund records including general ledger, separate beneficiary records, and monthly reconciliation records, original salespersons agreements, property management agreements, business cards, copies of real estate advertisements, etc.).  Read the auditor’s letter closely, they will tell you what you need, and it is VERY IMPORTANT to make sure you have EVERYTHING THEY REQUESTED at the time of the audit.  Do not delay in getting your documents ready.  If you don’t have the documents – GET THEM.

Typical types of questions a BRE auditor may ask you in a property management investigation (Step Two)

During a BRE property management audit, one of the things that is required is an INTERVIEW where the DRE auditor is going to ask the broker about the basic running of the business.  Click on the video on the top of this blog post to hear a few of the questions you might get.  Here are some of the questions I think you can expect to get during a face-to-face interview (usually held at the real estate broker’s office):

A.  Company questions

1.  What company name are you using on your business cards?

2.  Is this name properly licensed with the BRE (many brokers mistakenly believe an LLC can be recognized and licensed by the BRE, the BRE does not recognize the LLC corporation).   Contact us to help you set up a corporation.

3.  Are you using any DBA’S or FBN (fictitious business names), if so, have you recorded these with the County recorder’s office and updated the BRE?  As listed on this post, the BRE finds this to be one of the top ten compliance violations coming from DRE audits.

4.  Is your corporation in good standing with the California Franchise Tax Board and the California Secretary of State (use this SOS lookup tool and print out your results and keep it in a corporate folder)

5.  Who owns the company?

B.  Employee & licensee questions

1.  How many agents do you have?

2.  Is everyone properly licensed? (has anyone’s license expired who is working on a real estate deal)?

3.  Is anyone engaged in unlicensed real estate activities?

4.  Does the broker have an independent contractor agreement with each licensee?

5.  Does the broker have a folder containing all the original salespersons licenses?

C.  Trust fund accounting questions

1.  Does the broker accept client “trust funds?”

2.  If the broker holds client trust funds, are these funds placed into a trust account that is DESIGNATED AS A TRUST ACCOUNT?  This is a common problem in California.

3.  Do the signature cards for the trust account indicate that the account is a trust fund account?

4.  Who are the signors on the trust account?  Only certain persons are allowed to be on the account (Review this DRE trust fund accounting guide for great information)

5.  Is the broker comingling their funds with client trust funds?

6.  Is the broker withdrawing commissions earned under the 25-day rule?

7.  Is the broker keeping the following required real estate records?:

     a.  General columnar ledger

     b.  Separate beneficiary records for each client

     c.  Monthly reconciliation records

8.  Is there any shortage of funds due to be in the Client trust account (meaning you have less money than your “trust fund liability”)

9.  Is there an overage of your trust fund account (in other words, do you have more than $200 of broker funds in your trust account?

NOTE:  Overages are supposed to have their own reconciliation

10.  Has there been a conversion or embezzlement of client trust funds?

D.  Property management questions

1.  How many units do you manage?

2.  What is the breakdown of types of properties you manage?

3.  Does the broker manage their own properties?

4.  How much money is coming in annually each year?

5.  Do you accept cash?

6.  Do you perform maintenance services?

7.  Do you markup your services?

8.  Do you have a property management contract with each owner that describes all charges and fees in detail?

9.  Do you screen tenants?  If so, what do you charge for a screening fee?

10.  Do you pay taxes and mortgages for the owners?  If so, is this spelled out in the property management agreement?

11. Do you have an affiliate companies that perform property management services?  If so, is an affiliate business disclosure made?

E.  Miscellaneous questions:

1.  Does the broker accept “advance fees” without an approved advance fee agreement? (see video below)

2.  Is the broker engaged in “broker escrows”

3.  Does the company handle “business opportunities”

4.  Is the broker a REAL BROKER or a RENT-A-BROKER (prohibited)

TIP:  The broker of record (i.e. designated broker of record) needs to understand the operation, and who takes money, who talks to clients, what the file flow process is, and how things work.  The Broker has a duty of supervision which many companies don’t realize.  If you are just “renting a broker’s license” and they have no idea what is going on, this will raise the common compliance violation of “failure to supervise licensed real estate activity.”

broker advance fee agreements

Again, these are some of the common questions a real estate broker can expect when facing a DRE / BRE audit.  The audits can last from 2-10 days or more, depending on the complexity of the business and number of files and nature of the investigation.  If trust fund accounting violations or failure to keep records are noted, then the broker will potentially face paying the costs of the audit along with a reasonable investigation fee.  Compliance violations can also trigger either a “cite and fine” case, or formal BRE accusation which will seek to discipline the real estate licensee (by either revoking, suspending, or restricting the real estate license).  We can help brokers either settle these cases, or take the case to an administrative hearing if a settlement cannot be reached.  Contact us if you are considering a broker annual self audit,

Contact a California real estate lawyer

If you are facing a BRE investigation, audit request, accusation, desist and refrain letter or cite and fine case, contact us to discuss your legal rights.  As a real estate broker and licensee, you are entitled to “due process” during the investigation phase, and we can help you with broker self audits, or help you prepare your legal defense, or help fight your broker accusation case.  Attorney Steve Vondran has been in the real estate trenches for years helping brokers just like you resolve compliance issues, investigations, arbitrations and real estate litigation.  We have flexible legal fees and offices in Beverly Hills, San Francisco, Newport Beach and San Diego.  Call (877) 276-5084 or fill out the contact form below to speak with one of our real estate lawyers.  Please be sure to leave your name and phone number.  We look forward to working with you.  Don’t forget to SUBSCRIBE to our business and real estate youtube channel by clicking on the RED “V” in the top right hand corner of our videos.



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We are a business and civil litigation firm with a focus on copyright infringement cases involving illegal movie downloads (torrent cases such as London Has Fallen, ME2 Productions and Malibu Media defense), software audits (ex. Microsoft audits, SPLA, Autodesk audit notification letter, Siemens PLM defense, SIIA, Adobe and Business Software Alliance defense) and other software vendors threatening piracy and infringement. We also handle cases involving internet law, anti-SLAPP, media law, right of publicity, trademarks & domain name infringement, and we have a niche practice area handling California BRE licensing disputes, accusations, subpoena response, statement of issues and investigations. We have offices in San Francisco, Beverly Hills, Newport Beach, San Diego & Phoenix, Arizona and accept federal copyright and trademark cases nationwide. All content on our website is general legal information only and not a substitute for legal advice, and should not be relied upon. Decisions to hire counsel should not be based on advertising alone. Blogs, videos and podcasts are authored by Steve Vondran, Esq. unless otherwise noted. We can be reached at (877) 276-5084.

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