11 Questions to Ask a Prospective Broker of Record
2) Do you have any licensing violations in any states?If your broker of record has licensing violations, its probably time to look for a new broker of record. A broker of record who has licensing violations demonstrates a lack of understanding of, and committment to, licensing law. In addition, its important to realize that lots of licensees commit violations every day of the week which go unnoticed, but it’s usually only the most egregious violators that get caught!
3) Have you ever had any complaints filed against you?A broker of record may not have any licensing violations, but that doesn't mean they haven't had any complaints filed against them! Many complaints do not result in an actual violation, usually just a reprimand or a warning. So its important to consider this aspect as well since complaints may indicate they haven’t been following the law very closely. While complaints don’t necessarily imply they did anything wrong, as the old saying goes...“where there’s smoke, there’s fire.”
4) What kind of experience do you have in dealing with regulatory agencies if there’s ever an issue with one of our transactions?This one is critical, yet always overlooked. A broker of record must be adequately prepared for any potential issues with regulatory agencies. Whether its receiving an audit notice, a regulatory inquiry, or a call/email from a regulator, the broker of record must have a plan in place for how to respond. They should be able to address any questions effectively while also having documentation on hand that supports transaction activities. This is usually only possible if the broker of record has a good system in place for retaining transaction documents. Remember, regulators can come calling years after a transaction has ended, so its important that the broker of record is adequately prepared. Otherwise, everyone in the transaction risks licensing violations and financial penalties.
5) Do you provide a regulatory compliance guarantee?A broker of record should be more than just a “straw man” for the transaction to portray an image of compliance. They need to actually ensure compliance by understanding license portability laws, effectively integrating them into their transactional processes, and assisting the out-of-state licensee in certain situations. A broker of record who offers a guarantee is confident in their ability to execute a license portability transaction effectively. As far as we know, we are the only broker of record that offers a 100% regulatory compliance guarantee.
6) How do you handle transaction audits by the regulatory agencies?A broker of record should be prepared for an audit well in advance of the actual audit. This is as simple as having proper policies in place and good record retention practices with regard to; earnest money deposits, executed contracts, closing statements, bank statements, ledgers, and reconciliation statements.
7) Do you have a written co-brokerage agreement that complies with the regulatory agencies regarding license portability?A transaction-tested and legally compliant co-brokerage agreement is a critical component of a license portability transaction. It must contain certain elements to ensure regulatory compliance in the transaction state and to ensure the least amount of friction between the broker of record and the broker during the transaction. It explains the relationship, identifies how fees will be split, and makes it clear to the out-of-state broker which activities are permitted/prohibited.
8) Do you use client-related transaction forms that comply with state laws and the regulatory agencies regarding license portability?As stated above, forms play a ritical role in license portability transactions. As such, transaction-tested and legally compliant client-related transaction forms that have been drafted to comply with various state laws and regulatory requirements is essential. We’ve seen forms used by other brokers of record and those forms rarely contain all of the required elements of a legally-compliant license portability transaction.
9) How will you pay me my commission?In most states, an out-of-state broker's commission can be disbursed directly by the settlement company to the out-of-state broker. If the broker of record is working with an out-of-state salesperson instead of a broker (which is also legal in most states), then the settlement company or broker of record must disburse the salesperson's commission to their home state broker. In turn, the home state broker would then pay the out-of-state salesperson. This particular requirement is a function of the transaction state's licensing laws as well as the out-of-state salesperson's home state licensing laws. Otherwise, the broker of record and the salesperson may be in violation of licensing laws - not only in the transaction state, but also in the salesperson's home state.
10) Do you include non-compete language in your contracts?An honest broker of record will insert non-compete provisions in their co-brokerage agreements. Otherwise, they may be trying to unfairly capitalize on your transactions or your clients. They should respect the relationships you have with your clients and never solicit your clients for business. They should also forward all inquiries about listings to you, where legally allowed. In fact, they should allow you to make it clear in advertising materials that you're the "primary listing contact," where legally allowed. The sole focus of a broker of record’s service should be to assist you in ensuring a legally-compliant out-of-state real estate transaction.
11) Do you carry E&O insurance coverage in the transaction state?E&O is an important risk-mitigating tool and is often required in various states. If your broker of record isn’t carrying such a policy, they are likely running afoul of the law. In commercial real estate, in which transaction price points can range from $1,000,000-$20,000,000 a comprehensive E&O policy is essential to regulatory compliance and legal protection, particularly if the broker of record is younger, less experienced, or doesn't specialize in license portability transactions on a national scale.