Agent found in violation of license law for improper handling of REO listings (OR: Feb. 2010)

by Lorie Garland
Vice President
Legal Services

Do you list properties for an asset management company? Have you agreed to provide general maintenance duties such as cleaning, grass cutting, and snow removal for the properties? If so, how are you and the companies performing these duties paid? Are you complying with the real estate license law requirements? The Ohio Real Estate Commission (OREC) recently found an agent in violation of the license law provisions for not properly handling REO listings.

In this case, an agent entered into listing/management agreements with three asset management companies. These agreements provided that the agent assumed the “care, custody and management” of the companies REO properties. This included agreeing to re-key the locks and to perform general property maintenance such as cleaning, grass cutting, and snow removal. The agent hired a contractor, Mr. McDonald, to perform the general maintenance for the REO properties. The agent did not have a written agreement with Mr. McDonald regarding the property maintenance.

The asset management companies paid the agent directly for managing their REO properties. Checks covering payment for property management services were made payable to the agent and deposited into the agent’s personal bank account. The agent would then pay Mr. McDonald from his personal checking account for the maintenance work on the properties.

Mr. McDonald was not paid for some of the maintenance work he performed on the REO properties and sued the agent for the money he was owed. Mr. McDonald prevailed in the case with the court ordering judgment against the agent in the amount of $3,928.00 plus interest.

Mr. McDonald filed a complaint with the Division of Real Estate and Professional Licensing (Division) and an investigation was conducted regarding the agents relationship with the asset management companies and Mr. McDonald. The first issue addressed was with regard to the agent’s signing of the listing and management agreements for four properties. The agent signed as the broker on two of the agreements and as the sub-broker on the other two agreements. These agreements also did not include the name of the brokerage with whom the agent was licensed. The license law provides that no person shall act as a broker without being licensed as such and that an agent can only operate under the auspices of his broker. The OREC found the agent engaged in misconduct when he held himself out as a broker without having a broker’s license.

The next issue investigated by the Division was that the agent was paid directly for management duties performed under the listing and management agreements. The license law prohibits an agent from collecting money in connection with a real estate transaction, except in the name of and with the consent of the broker with whom he is licensed. The OREC found that the agent engaged in misconduct when he accepted payments for management duties in his own name, instead of the name of his broker.

The Division also looked at the agent’s relationship with Mr. McDonald. The agent did not have a written maintenance agreement with Mr. McDonald. The Canons of Ethics provides that for the protection of the parties, a licensee should reduce all financial obligations and commitments regarding real estate transactions to writing. The OREC found that the agent had delegated his REO property management responsibilities to Mr. McDonald and that this delegation constituted a real estate transaction which should have been in writing. The agent’s failure to reduce his agreement with Mr. McDonald to writing constituted incompetency and a failure to exercise reasonable skill on behalf of his clients, the asset management companies.

The last issue the Division addressed was the judgment the court issued against the agent for the money he owed Mr. McDonald for maintenance performed on the properties. The license law provides that an agent can incur disciplinary sanctions if there is an unsatisfied judgment against the agent that arose out of the agent’s conduct as a licensee. At the time the agent’s conduct was under investigation by the Division, the agent had paid the principal amount of the judgment but not the interest. The OREC found that this constituted an unsatisfied final judgment and therefore subjected the agent to disciplinary sanction.

The OREC revoked the agent’s real estate license. However, the revocation has been stayed pending the agent’s request for reconsideration before the OREC. The reconsideration is scheduled for February.

In this case, the property maintenance duties were part of the listing agreement and therefore had to be performed through the brokerage. The agent delegated the maintenance duties to Mr. McDonald. This resulted in ongoing and substantial payments to Mr. McDonald for the work he performed. In these situations, the Division will consider the amount of work and payment received in determining whether a maintenance agreement is required to be in writing. The Division has indicated that simply hiring someone to mow the grass or re-key a property would not require a written agreement. The extent of the work a contractor will perform is considered in determining whether a written agreement is necessitated to adequately protect your client.

Another question this case raises, is whether an agent can pay the bill owed the person who cuts the grass or the utility company servicing the property and then be reimbursed directly for this expense by the asset management company? The Division has indicated that this can be done. If an agent chooses to personally pay this expense and then be reimbursed by his client, this would not be a violation of the license law. However, the agent should consider the possibility that he might not be reimbursed by his client. Some asset management companies have very strict requirements for reimbursement and if the requirements are not met, i.e. the bill is submitted too late, the agent may not be reimbursed. Licensees should consider this in determining whether to front a client’s bill.