A Regulatory Affairs Case Study

By Rob Patchett

As fiduciaries, brokers are required to place their clients’ interests above their own interests. This also means that brokers are prohibited from engaging in self-dealing. In one case, a broker went to great lengths to attempt to purchase a condominium from her client at well below market value.

Respondent Broker was the qualifying broker and broker-in-charge of her solo firm. Her husband’s lease on a condominium was approaching its termination and the owner contacted Respondent Broker and her husband to see if they would purchase the condo at the end of the tenancy. Respondent Broker and her husband decided not to purchase the condominium, but Respondent Broker offered to list the condo for the owner. Respondent Broker represented to the owner-seller she knew investors who were interested in purchasing a condominium. The owner-seller and Respondent Broker executed a six-month exclusive listing agreement with a 5% commission at a list price of $226,000.

After several weeks, Respondent Broker informed her seller-client that the potential investors were not interested in making an offer on the condominium, but her husband had renewed interest in purchasing the condominium. The seller-client spoke directly to Respondent Broker’s husband who offered $215,000 to purchase the condominium; the seller rejected his offer. At this time, Respondent Broker had never publically advertised the condominium for sale.

Suspicious, the seller spoke to another broker about the sale of his condominium. This broker was shocked to hear the list price was so low. He informed the seller that his condominium should be listed between $250,000 and $270,000 based upon recent sales. After learning this information, the seller-client emailed Respondent Broker asking to terminate the listing agreement. The broker refused to terminate the agreement.

A few weeks later, Respondent Broker emailed her seller-client a letter purportedly from Respondent Broker’s attorney. The letter demanded the seller-client accept the husband’s offer because it was a “full-price” offer. The seller-client was given two options for accepting the offer. He could sell the condominium to the husband for $215,000 and not pay Respondent Broker a commission or sell the condominium for $226,000 and pay a 5% commission. The letter was unsigned and contained several factual and typographical errors. During the course of the Commission’s investigation, the Commission’s Consumer Protection Officer confirmed that the attorney did not draft, sign, or send the letter to the seller. Evidence tends to indicate that either Respondent Broker or her husband drafted the letter purporting to be an attorney.

The seller-client rejected all of the husband’s offers. Respondent Broker then demanded her seller-client pay her commission for bringing a “ready, willing, and able buyer” that he rejected. The seller-client declined to pay Respondent Broker’s commission. Several months later, the seller-client sold his condominium for $269,000.

In this case, Respondent Broker’s only concern was for her personal gain. She attempted to buy her client’s condominium below market value by misrepresenting the fair market value to her client. She also attempted to force her seller-client into selling by sending a fictitious attorney demand letter. Finally, she attempted to collect a commission by claiming she brought a legitimate “ready, willing, and able buyer” to her seller-client. Following the investigation, the broker surrendered her license and that of her firm.

Brokers owe fiduciary duties to their clients. These fiduciary duties prohibit brokers from self-dealing. Commission rule 58A .0104(p) specifically requires listing brokers to disclose in writing conflicts of interest, transfer or terminate listing agreements, and notify the seller-client that they may terminate the listing agreement prior to entering into a contract for a property that the listing broker or firm is listing. Furthermore, North Carolina General Statute 93A-6(a)(8) and (10) gives the Commission authority to discipline brokers who are unworthy or incompetent to act as real estate brokers in a manner as to endanger the interest of the public and for conduct which constitutes improper, fraudulent, or dishonest dealing, respectively.