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  • Summer Goralik

DRE Compliance Goals - For Brokers

Updated: Mar 19, 2019

Fundamentals of Broker Supervision


In an effort to stay true to my own goals this year, I am writing a follow-up piece to my recent post on “DRE Compliance Goals”. That post, which you can read by clicking here, https://www.expertdrecompliance.com/blog/dre-compliance-goals, highlighted the importance of assessing your regulatory compliance, correcting non-compliant activities, and starting fresh in the new year. It also provided a number of compliance tips that California real estate licensees might use or apply in the area of real estate advertising and transactions. This post, however, will solely focus on California brokers who manage real estate firms and my advice to them on achieving regulatory compliance enforced by the California Department of Real Estate (“DRE”) in 2019.




If you are a sole proprietor broker managing a brokerage, or a designated officer of a licensed real estate corporation, then you are hopefully well aware of the responsibility that you have assumed in this position. As a “responsible broker”, a newly defined term in the Real Estate Law, or “broker of record”, a more commonly used reference, you are essentially responsible for the exercise of control and supervision of real estate salespersons, and may be disciplined by the DRE for the failure to supervise activity requiring a real estate license. Put another way, and in my own words, broker supervision is everything. Let me explain.





I am frequently hired to assist brokers with DRE audit preparation, or perhaps a “mock audit”, with the latter being a practice exercise where I conduct a trial investigation and evaluation of the brokerage’s activities. Either way, I always have a very candid discussion with the broker of record about what broker supervision actually means in the eyes of the DRE. Because I am a former DRE Investigator, I have many instructive stories to share with my clients which illustrate the importance of broker supervision. I provide them with examples of effective broker supervision and what it should ideally look like, as well as the consequences of failing to supervise and/or meet DRE’s statutory standards. In doing so, I have found that this conversation with managing brokers often reveals common problems in the real estate industry.



Common Problems


First, some responsible brokers’ opinions on what they believe is required of them does not always coincide with DRE’s legal expectations of them. In other words, some brokers think they are practicing sufficient supervision while the DRE might view those methods as deficient or problematic. This is especially true when the broker is under investigation in connection with a consumer complaint evidencing violations such as trust fund mishandling or unlicensed activity. And therein lies one common disconnect that I am often trying to solve in my line of work; bringing a broker’s supervision practices more in line with DRE’s regulatory expectations.


Second, I have noticed that when it comes to addressing compliance within a brokerage, there are two different camps of managing brokers; the first camp proactively addresses regulatory and other legal compliance at the outset of their real estate operations, while the second camp seems to deal with compliance “after the fact”, usually when they are confronted with a DRE audit or other regulatory review. The former being a methodical approach, while the latter is more reactive and feels like “damage control” at times.


The truth is, if you want to build a successful brokerage in the real estate industry, then you will have to first prevail as a “responsible broker”. In order to do that, it is strongly recommended that you prioritize and invest in the compliance of your brokerage up-front, and before you inevitably find yourself in the second camp. However, like anything that involves real work, compliance may be an area that you are inclined to put off and delay for a multitude of reasons, but please do not prolong such efforts. The risk which comes with the failure to supervise, coupled with the potential regulatory and financial costs, are just too high.


The purpose of this post is to emphasize some importance basics about broker supervision and preach the positive benefits of being proactive in this area. The following are simple, but valuable tips which supervising brokers might review and thoughtfully consider when it comes to the management of their real estate firms.




Know the Law. Being a successful managing broker means actually knowing the law and understanding compliance. It is crucial that the broker of record fully understand the laws that its brokerage and salesforce are engaged when conducting licensed real estate activity on behalf of the public.


The body of laws and regulations, enforced by the DRE, that a real estate licensee is subject to are found in the California Business and Professions Code 10000 through 11288 and Title 10 of the California Code of Regulations. You can locate the Real Estate Law Book on the DRE’s website here, http://www.bre.ca.gov/Publications/RealEstateLaw.html


I realize that reading the law may not be at the top of your priority list as it can often be hard to digest and understand. Fortunately, DRE’s website contains a multitude of resources, real estate bulletins, advisories, and other pieces aimed at making sense of the law and regulations. The DRE’s published materials also tend to provide a clearer understanding on how they interpret and enforce certain areas of the law along with regulatory insight about certain nuances and activities taking place in the industry.


Let’s be honest, the DRE does not care if your brokerage is the top producing real estate firm, boasts expensive branding and advertising, or has a unique business model. In their world, compliance is the only thing that counts. Hence, the first step to being on the right side of compliance is actually knowing what is required. This means reading the law, understanding what is required, regularly reviewing DRE’s website and their resources, and staying current on your continuing education and legal changes.


Before wrapping up my first tip, which I admit is fairly obvious, it might be worth noting here that when you are a real estate licensee, you are subject to many different bodies of law and regulations. Actually, most of the real estate contracts and disclosures that you deal with every day comprise legal provisions reflective of or subject to the California Civil Code, which the DRE does not enforce.


Similarly, there is a world of ethical real estate standards and rules which govern “Realtors” known as the “Code of Ethics”. These are required guidelines created and upheld by the National and California Association of Realtors and typically enforced by local real estate boards. Again, the DRE does not specifically enforce these ethical requirements in the real estate arena.


Thus, one of your inherent duties as broker of record is to fully understand all of the requirements involved in the real estate industry and successfully navigate between what is required, by whom, and how to stay compliant with all government, civil, and trade regulations.




Baseline Requirements. Next, in order to practice “reasonable supervision”, as required by the DRE, a managing broker must be acutely familiar with what is legally expected of them when holding this title. Hence, knowing and understanding the “baseline” requirements is a necessity. If you are not familiar with those fundamentals, then that’s where your journey as a responsible broker should begin.


Every responsible broker should know that Regulation 2725 of the Commissioner’s Regulations covers “Broker Supervision”. It is a very basic blueprint of broker supervision or what i call, your baseline (broker supervision) requirements, which is enforced and taken very seriously by DRE.


Regulation 2725 essentially outlines seven areas that a broker is required to review, oversee, inspect and manage. Those areas include licensed real estate transactions, the execution of material documents, advertising, trust fund handling, file storage and retention, licensed activities of salespeople, and training of licensed staff about anti-discrimination laws and regulations.


I quote the regulation quite frequently because it is a great starting point to understanding “broker supervision” and how DRE both defines and measures it. If you are a new responsible broker or perhaps even been in the business awhile but have never been audited (thankfully), at least you know there is at least one code section that you can rely on when it comes to understanding broker supervision.


I refer to Regulation 2725 as the “baseline” requirements because there is a lot more a broker could be doing, regulating and enforcing. But at the very least, every responsible broker should know and understand this regulation. It will at least point you in the right direction in your quest to being compliant.




Policy Manual. Part of Regulation 2725 requires that a broker establish “policies, procedures, rules and systems” in order to reasonably supervise the requisite areas that I mentioned above. This brings me to my next tip. Although it is not technically required by law, you should establish written office policies and procedures.


As a responsible broker, a policy manual is a way in which you can communicate your expectations and goals, clearly reflect your brokerage’s requirements, outline procedures and milestones, promote best practices and provide training. It’s also a way for a broker to officially notify all of his or her staff about what is required when acting on the firm’s behalf. Of course when you establish policies, you will also need to create a system by which you can monitor compliance with them. This is yet another required component of Regulation 2725 and broker supervision. However, without a policy manual, monitoring compliance is a futile exercise.


Nonetheless, if you succeed in establishing written policies and procedures, and effectively monitoring compliance, you will not only be ensuring the success of your own brokerage, but you will also be safeguarding the public from potential abusive or unlawful business practices. Unfortunately, the real estate industry has its share of bad actors engaging in fraudulent or unlawful behavior. But based on my experience, some of those activities could have been halted or even prevented if salespeople had been properly supervised by their responsible brokers.


If you do not currently use a policy manual in order to supervise your brokerage and enforce your policies, you may want to ask yourself why not. Establishing a policy manual is a small thing that can have a rather large impact on your firm, transitioning your leadership from “laissez faire” oversight to effective DRE-required supervision. These valuable steps will not only bring you closer to achieving regulatory compliance, but will also ensure that you are prepared for any DRE audit or regulatory review whenever that day comes.


As a disclaimer, please note, if you create a policy manual that you never use, enforce, or legally update, then no value will be gained. I remember interviewing brokers when I worked at the DRE, and questioning them about their beautifully written policy manuals. More often than not, they could not recite the policies it contained. So, if you employ a policy manual, please make sure you are using and enforcing it. On the other hand, if you do not have one, there are still nine months left in 2019 to change things around.





System of Supervision. As I recited above, one of the areas that a broker must exhibit reasonable supervision is in the area of licensed real estate transactions. To be exact, the regulation states that reasonable supervision includes, as appropriate, the establishment of policies, rules, procedures and systems to review, oversee, inspect and manage transactions requiring a real estate license.


This is an area that I have witnessed spark legal debate, differing opinions, or just plain confusion. For the sake of keeping things simple, I urge real estate brokers to closely comply with the required tenets of Regulation 2725. One way to measure whether you are on the right track or not, is by going through the following exercise.



Managing Broker: If you do not review every real estate transaction file that is consummated through your brokerage, then the following questions should be addressed:



-Are real estate files being reviewed?

-Who is responsible for reviewing real estate files?

-Is your designee, whom reviews transaction files, licensed by the DRE?

-Do you have established policies and procedures (in writing)?

-Does your designee adhere to your established policies and procedures?

-Who supervises the designee and how do you monitor compliance?

-Is there any system in place in which you, your licensed designee and/or designated office manager reviews and/or approves real estate transaction files?

-When are real estate transaction files being reviewed? (if files are not being reviewed prior to the close of escrow, then you have to ask yourself what is the benefit of files being reviewed at all)

-When files are reviewed, which types of activities and requirements are being reviewed for compliance?

-Do you use a file transaction checklist? If a file is missing documentation or does not comply with the brokerage’s file transaction checklist (if one is employed), how is that situation dealt with and by whom?

-As the managing broker, do you ever review, monitor, supervise, or approve transaction files?


Perhaps an equally productive exercise is if you imagine yourself face-to-face with a DRE Investigator and being asked the questions above. Furthermore, how would you describe your policies, procedures, rules and systems in all of the areas you are responsible for supervising (e.g., real estate transactions, trust fund handling, advertising)?


As a helpful suggestion, you might detail your system of supervision in writing. If you can write it down, then you might be better prepared to explain it to the DRE. Specifically, you might describe a summary of your policies and procedures that you employ and enforce; the specific tasks you perform as broker of record; the role of designated licensed agents or brokers who may play a part in the oversight of your brokerage; and how you monitor the overall compliance of your firm.


If this exercise is one that you find fairly easy to do, then you are likely on the right track. However, if these questions cannot be answered easily, and you find yourself staring at a blank piece of paper, then you know that you have some real work to do.




Timing Matters


All of the above tips require work, but it is productive and valuable work that you can be doing now. Please take the time to be thoughtful and methodical about this as these simple tasks could be big game savers in the long run. Proactive efforts like these evidence how you are investing in yourself as broker of record, the success and viability of your brokerage, and protecting yourself and firm from regulatory and civil liability.


The reality is, you may not have this opportunity later, especially if you are suddenly faced with a DRE audit notice or inquiry about a problematic transaction or salesperson. This is a peaceful moment which you can take advantage of in the present and in turn, potentially save yourself from unnecessary regulatory, civil, and/or financial trouble in the future.


Please keep in mind that this article only scrapes the surface when it comes to items that might be reviewed, discussed, considered, implemented, and enforced. But the point is to hopefully better understand the importance of broker supervision and the essence of time. If you start examining your own activities under a microscope now, then you may be able to address unlawful activities and potential issues before the DRE discovers your non-compliance.


As a former DRE Investigator and now independent compliance consultant to many real estate brokers and firms, please trust me when I tell you (again) that broker supervision is literally everything. And while it is extremely challenging at times to always get it right, and you may not, please make sure you are at least always trying.


The decision to become a responsible broker is a very important one and should not be taken lightly. You must understand the law, DRE’s expectations of you as a responsible broker, and the myriad liability you have acquired. Aside from recognizing the statutory and regulatory duties, you must also be fully committed to the role and have a viable action plan in place to meet all of the responsibilities that it demands. But, the good news is, if you take the time to actually do the work, I promise your valuable efforts will not be in vain.


In closing, here are some DRE resources (located on DRE’s website) geared towards responsible brokers and compliance which you might find helpful:


Broker Supervision: the buck stops here:

http://www.dre.ca.gov/files/pdf/reb/rebsummer_10.pdf


Broker Evaluation Compliance Manual:

http://www.dre.ca.gov/files/pdf/brkrcomp.pdf


Broker Self-Evaluation (RE540):

http://www.dre.ca.gov/files/pdf/forms/re540.pdf


Mortgage Loan Broker Compliance Evaluation Manual

http://www.dre.ca.gov/files/pdf/re7.pdf




About the Author


Summer Goralik is a Real Estate Compliance Consultant and Broker (#02022805) with six years experience working as a Special Investigator for the California Department of Real Estate ("DRE"). She offers myriad consulting services which aim to assist real estate licensees with DRE compliance matters. Please check out Summer's website for more information about her background and services:

www.expertdrecompliance.com