The topic of virtual brokers has never been more relevant than now. With the Covid-19 virus officially upon us, more California brokers and agents are turning to their home offices and virtual network of available technology to offer and conduct real estate services. While some licensees are well-skilled in this area and have been using technology to engage in real estate for years, others are having to quickly adapt to the concept and logistics of a “virtual real estate office”.
For me, the term, “virtual brokerage”, has the tendency to conjure up different meanings. When I worked at the California Department of Real Estate (DRE) between 2008-2014, I recall brokers (and Investigators alike) referring to virtual offices as temporary locations that licensees were renting out by the hour to conduct real estate business only when they needed it. Needless to say, from a regulatory point of view, that practice was frowned upon and often a violation of law, which will be covered later in this article.
This idea of the virtual broker could also be differentiated by varying degrees of “virtual”. Some brokers and agents have completely immersed themselves in the virtual office. These individuals are entirely dependent on different forms of technology to make their jobs more efficient and their high-tech savvy customers happy. While other licensees have incorporated only some of the perks of the virtual office, perhaps utilizing electronic signatures and cloud-based softwares to transact real estate and retain records.
However, it seems now that a virtual broker more commonly refers to an “online” brokerage with no “real” physical presence, and a salesforce which primarily works remotely and/or from their home offices. Through the sophisticated use of technology, many online brokers offer a new streamlined approach to buying and selling real estate. This new philosophy often comes with discounted commission fee structures or flat fees to attract consumers and compete with the old guard of real estate professionals.
Putting the nomenclature aside though, whether you are new or old to this type of electronic operation, you should know that the laws and regulations enforced by the DRE neither specifically permit or prohibit a “virtual brokerage”. But, one thing is for certain, the Real Estate law was created with a “brick and mortar” business operation in mind, and the DRE makes no special exceptions for those brokerages who elect to use a virtual office to run their real estate practices. Put another way, the same statutory requirements apply to all brokerages, regardless of form or technology.
Essentially, there is a conflict that the virtual real estate office needs to reconcile; the real estate space is becoming more technologically driven and remotely conducted, but the laws that govern its activities are “old” laws. The latter still requires certain behaviors and baseline compliance regardless of how you get the work done. In order to help navigate this duality and bridge this divide, here are a few simple reminders to assist real estate brokers in the area of office space, transaction records, and broker supervision. Hopefully, these tips will help brokers keep their virtual offices in check when it comes to achieving DRE compliance.
By law, every real estate broker must have and maintain a definite place of business in the State of California that serves as his or her office for the transaction of business. The law also states that this office shall be the place where his or her license is displayed and where personal consultations with clients are held.
What this means is, no matter how “virtual” you have gone or want to be in the real estate industry, the DRE still requires that you maintain a physical office. Not only is this a place where you might meet clients or transact business, but this is a “real” office where the DRE can meet with you, face-to-face, examine your transaction records (which should be accessible on-site), and ultimately assess your brokerage for compliance.
So, if a virtual broker operates her licensed activities from a home office, for example, how does that space fit into the DRE required paradigm? Well, easily, as long as the broker plays by the statutory rules. If your home office is the place where you meet with clients, negotiate real estate contracts, review your agents’ transaction files, and the hub wherein you remotely oversee your licensees and brokerage activities (to be discussed in more detail later), then there should be no issues.
Admittedly, I have seen some brokers try to pass their post office (P.O.) box locations off as their physical office in order to pass muster with DRE licensing requirements. Hopefully it goes without saying, but a P.O. box does not meet DRE’s physical office requirement and it is unlikely that this violation will go unnoticed, especially if the broker becomes the subject of any DRE inquiry, investigation or audit.
Before moving on, it should be mentioned that the DRE also enforces requirements related to “branch offices” which are office locations separate from a broker’s main office where licensed real estate activities are conducted on behalf of the brokerage. Given these rules, a virtual broker also has to consider where their agents are performing licensed work.
For example, if several agents affiliated with the virtual brokerage share a retail office space wherein they meet with clients and perform licensed acts, then the brokerage will have to license this location with DRE as a branch office under their corporate license. Aside from licensing requirements, the responsible broker must also supervise the activities of any branch office locations and the salespeople who work there.
Ultimately, the physical office requirement is an easy rule for the virtual broker to get right. If you are aware of the law and doing what you are required to do from the location(s) that you say you are doing it, then this requisite shouldn’t be a hang-up for the virtual brokerage.
Let's turn our focus to the real estate records that you prepare and retain. If you are a virtual broker that doesn't want to hang on to hard copies of documents, this seems to be an easier area to comply with since the law has generously carved out a way for you to store your documents electronically. Pursuant to Commissioner’s Regulation 2729, a broker is permitted to use electronic image storage media to retain and store copies of all transaction records as long as the following requirements are met:
The electronic image storage shall be nonerasable “write once, read many” (“WORM”) that does not allow changes to the stored document or record.
The stored document or record is made or preserved as part of and in the regular course of business.
The original record from which the stored document or record was copied was made or prepared by the broker or the broker's employees at or near the time of the act, condition or event reflected in the record.
The custodian of the record is able to identify the stored document or record, the mode of its preparation, and the mode of storing it on the electronic image storage.
The electronic image storage system contains a reliable indexing system that provides ready access to a desired document or record, appropriate quality control of the storage process to ensure the quality of imaged documents or records, and date ordered arrangement of stored documents or records to assure a consistent and logical flow of paperwork to preclude unnecessary search time.
Records copied and stored under this section shall be retained for three years pursuant to Section 10148 of the Code.
An important reminder for those licensees who are ever visited by a DRE Investigator or Auditor, a broker is also required to maintain at the broker's office a means of viewing copies of documents or records stored pursuant to this section. If requested, the broker must provide the DRE with a paper copy of the document and at the broker’s expense.
It should be noted that with any documents and/or information stored electronically, the security of those records is tantamount. Unfortunately, the potential risk of unscrupulous actors stealing our nonpublic information has become a reality for far too many in the real estate industry. Therefore, brokers who rely on the electronic storage of their real estate documents are wise to ensure that their systems and networks, or those of the third party providers that they have entrusted, have taken the proper measures to protect their records from possible compromise.
When we discuss virtual brokers in the DRE’s world, one of the key issues to cover is broker supervision. This is one of the most fundamental requisites in any compliance discussion and equally applies to all responsible brokers regardless if they administer their real estate firms in a conventional office or through the digital arena.
As a former DRE Investigator, I have seen brokers utterly fail in the supervision department. Notably, many of these failures took place in a “real” office setting where the supervising broker sat down the hall from his agents and still neglected to do the right thing. It is against this backdrop that I believe a responsible broker overseeing a virtual real estate office can rise to the occasion and perform “reasonable supervision”, but it will not be without at least one inherent challenge. Before providing more detail on this point, let’s quickly define “reasonable supervision”.
Under Commissioner’s Regulation 2725, a real estate broker must perform reasonable supervision and establish policies, procedures, rules and systems in order to review, oversee, inspect and manage all of the activities of the brokerage and its salespeople, including but not limited to, real estate activities, material documents and transactions, advertising, trust fund handling, and record retention. Every broker or brokerage firm who retains agents are required to comply and fulfill this regulatory standard.
Given the above regulation, if I am the responsible broker of a virtual brokerage, I know that one of the first hurdles that I will need to tackle is the idea that I may fall short of my regulatory duties simply because of the nature of my online brokerage platform. Thus, in order to combat any potential preconceived notions, I will need to prove to the DRE that despite the fact that I may not see my agents every day, meet to discuss transactional issues in person, or available “on-site” at a central office place, I am fully aware of all my firm’s activities and can perform reasonable supervision all the same (or do I dare say better?).
Actually, a virtual real estate office has a lot of tools at their disposal to get the job done. For example, the use of regular video chats and virtual meetings, online transaction management software, electronic communication, and of course the timeless technology of a telephone, will enable a broker to connect with his or her agents daily. Additionally, the establishment and implementation of a system of supervision built on effective policies and procedures will be like the glue that holds the virtual brokerage together in a compliant and efficient fashion.
A virtual brokerage founded and executed on these principles will enable the responsible broker to perform the required work and accomplish compliance despite not sitting in the same physical office as his or her agents. In other words, your virtuality doesn’t have to be a hindrance to your compliance, but instead, can be utilized in a way that will maximize your supervision efforts and chances of achieving compliance.
Although my advice is the same for all brokers, the following suggestions are especially important for the virtual real estate broker:
Establish rules and expectations for your agents to follow, and if need be, provide realistic means by which they can adhere to them through training and education
Create a written policy and procedures manual that you will actually use, enforce, and monitor compliance with
Make sure you have controls in place to review and approve advertisements
Monitor and/or address any unauthorized “team names” or unlicensed fictitious business names
Set-up a system of supervision and methods of review wherein you and/or your licensed designees effectively and continually meet the requirements of Regulation 2725
Be the “gatekeepers” of compliance on behalf of the brokerage when it comes to all licensed real estate activities and transactions
Use effective technological platforms and mediums to communicate, educate and reach your agents on regular basis
Invite dialogue, questions, and concerns, forging a space where agents feel connected despite geographical distance
Require thresholds of broker reporting, highlighting any and all issues which mandate your attention and review
Identify, confront and enforce compliance or legal issues in real time, and immediately correct or improve business practices when warranted
Implement a course of action to comply with DRE’s laws and regulations, risk management protocols, and default plans to effectively confront issues when they arise
Document your efforts, actions, policies, and systems, creating a papertrail of evidence for the DRE that will hopefully discredit any potential complaints or allegations involving “lack of broker supervision”
In my line of business, I constantly preach that broker supervision is the key to success for any real estate brokerage. As a virtual brokerage, this concept is amplified in importance and should be prioritized at all costs. But like anything, if there is a will, then there is a way, and that has never been more true than in the area of compliance.
As I always say, compliance doesn’t have to be hard, it just needs to be understood. All the prudent virtual broker has to do is understand the good old-fashioned Real Estate law. The answers are all there. If reading the law is not your preferred method of gathering information, then you are fortunate there are other options available in this industry. Brokers, virtual or not, can lean on the DRE’s website and publications, local boards of realtors, outside consultants, educational course providers, and licensed real estate attorneys to assist them with their compliance journey. Bottom line, the secret to getting the virtual brokerage formula right is just understanding the basics of what every broker is required to do.
For more information, you might check out DRE’s Spring 2019 Real Estate Bulletin which included an article on this topic.
ABOUT THE AUTHOR
Summer Goralik is a Real Estate Compliance Consultant and licensed Real Estate Broker (#02022805). Summer offers real estate brokers a variety of consulting services including assistance with California Department of Real Estate (DRE) audit preparation, mock audits, advertising review, and training. She helps licensees evaluate their regulatory compliance and correct any non-compliant activities. Summer has an extensive background in real estate which includes private sector, regulatory and law enforcement experience. Most recently, she worked for the Orange County District Attorney's Office as a Civilian Economic Crimes Investigator in their Real Estate Fraud Unit. Prior to that, Summer worked for the DRE for six years as an Investigator. Among many achievements, she wrote several articles for DRE, four of which were co-authored with former Commissioner Wayne Bell. Before she embarked on her career in government and law enforcement, Summer also worked in the escrow industry for nearly five years, for both an independent escrow company and broker-controlled escrow division.