Risk management is all the rage these days. A good business has some plan along this line. Your plan should begin with the basics, like licensee owned property. Too much misunderstanding continues about this subject.  Misunderstandings lead to problems, which in this area come with a genuine double-whammy.  Whammy one: Your license can be revoked for nothing more than dishonest acts. Whammy two: You have no errors and omissions coverage for even simple mistakes. If you are a qualifying broker, add whammy three: You are responsible.

Let’s take E&O coverage first. The state group insurance carrier is St. Paul Fire and Marine with Williams Underwriting as the program administrator. Their summary of policy exclusions contains one for “Listing, selling or managing real estate that is owned, built or developed by an insured who has over a 10% ownership interest in said real estate.” A policy exclusion means you are not covered. Not everyone has the state group coverage, but all active licensees have some coverage. All the policies we have seen contain a similar exclusion.

Remind yourself to take extra care in dealing with your own property. Do you, who are qualifying brokers, have procedures for your salespeople when they sell or rent their own property, and do you remember what to do when you sell or rent yours? An easy memory trick is to pretend all property in which you deal is listed or being managed by your company for the public. This will provide the proper guide every time.

Now, back to the basics of license law.  Section 34-27-2(b)(1) Code of Alabama 1975, as amended, (the Code, hereafter) exempts owners of real estate from being licensed in transactions involving their own property. Real translation: The State of Alabama does not require every property owner to get licensed in order to sell or lease his or her own property. Fake translation: The license law does not apply to me, a licensee, when I deal in my own property.

Here are some real life situations.  In which of these does the law apply to you? In which is your qualifying broker responsible for your actions? A salesperson or associate broker who owns houses he or she rents or sells.  A salesperson or associate broker who owns commercial property he or she leases or sells.  A salesperson or associate broker who owns apartments he or she leases or sells.  A salesperson or associate broker who also is a builder, and sells homes he or she builds.  A salesperson or associate broker who is married to a builder, and sells the homes being built.  A salesperson or associate broker who is a developer, and sells lots being developed.  A salesperson or associate broker who is married to a developer, and sells lots being developed.  A salesperson or associate broker who is married to the owner of any kind of real property, and sells theproperty.

The law applies to you in every one of them. Your qualifying broker is responsible for every one of them. This means there should be a sales or rental file in the office for every one. Any earnest money or security deposit must be turned over to the qualifying broker, and deposited into a trust account, unless a release is executed by the appropriate parties. The company RECAD office policy is to be followed, except where the RECAD law itself provides an exception. These answers apply even if you and your qualifying broker have agreed that these transactions do not have to be listed or “run through” the company. You and your broker cannot contract to waive requirements of the law.

The law also holds real estate licensees to a higher standard when dealing in property owned by them or their family. This is an often overlooked feature of the license law. Section 34-27-36(a)(2) of the Code provides for disciplinary action when “Engaging in misrepresentation or dishonest or fraudulent acts when selling, buying, trading, or renting real property of his or her own or of a spouse or child or parent.” To possibly lose your license, all that must be shown is that you acted dishonestly. No other violation of law is necessary. To avoid any misunderstanding of what the law is, the Commission many years ago wrote Rule 790-X-1-.03(2). This rule says a licensee must abide by all provisions of the law and rules in dealing in his or her own property, or that of a spouse, child, or parent.

Yes, the law in the other states is similar, and it has been challenged in court in some of those states. The licensees lost those cases. We do not have an Alabama case, but I can provide you the cite for the most recent case in which the Colorado Real Estate Commission prevailed.

You should be able to construct a checklist for licensee owned property from this article. I hope the information will help with your risk management plan. Besides, we have a selfish motive. If you do it right, the public should have fewer problems.  We all can benefit.

Again, it should be noted that the information presented in the preceding article relates ONLY to people buying & selling houses in the state of ALABAMA and their agents.