If you are a licensed real estate broker in California, you will likely be visited at some point by the Department of Real Estate (DRE), the State regulatory authority responsible for the regulation of real estate licensees and enforcement of the Real Estate Law. There are different types of DRE inquiries though and they are not all created equal. But no need to panic - you will get through it! Let's talk shop by discussing some of the different types of DRE inspections, potential audit triggers. and a few tips to get you started when your time is up.
DRE audit vs. broker office survey
An "audit" is a regulatory examination performed by a DRE Auditor. This job title typically belongs to an individual with some kind of accounting background. Like I tell my clients, the star of a DRE audit is your trust fund handling. Aside from a general inspection of your licensed activities and business operation, a DRE Auditor is largely focused on the set-up of the trust account, handling of trust funds, requisite records, proper accounting, trust account reconciliation, and broker supervision over trust fund activities.
On the other hand, a "broker office survey", as the DRE has coined it, is an inspection performed by a Special Investigator. As you might guess, the typical Investigator is not an accountant. They will be surveying (or investigating) your entire operation for regulatory compliance and will conduct a detailed interview with the broker of record in order to assess his/her supervision over the activities of the brokerage and licensees. However, it is worth noting, a DRE Investigator might conduct a more watered down inspection or streamline their survey by focusing on specific activities conducted by the brokerage or its licensees, or inquiring about a particular transaction which might stem from a complaint and/or corresponding investigation.
While a broker office survey might include the review of a broker's trust fund handling, it is not as comprehensive as the trust account examination conducted by a DRE Auditor. The latter will review your trust fund handling in detail in order to establish your trust fund accountability as well as determine if your records are complete and accurate, monthly trust account reconciliations are being performed, and that there are no trust account discrepancies or issues, such as shortages or commingling.
"The start of a DRE audit is trust fund handling.
What triggers a DRE audit?
When I was an Investigator for the DRE (2008-2014), I was extremely busy with investigating a heavy caseload of complaints. So at that time, based upon my experience, the typical trigger of any DRE visit was most likely a complaint. But theoretically, an audit or broker office survey could just be a "routine" inspection performed by a DRE Auditor or Investigator.
So how will you know WHY you are being audited? Well, you can always ask the Auditor or Investigator about the purpose of the audit. If it is routine, then the Auditor or Investigator will mostly likely reveal that fact. However, if you are unable to secure additional information as to what spawned the inspection, then it is probably complaint-based.
Many times brokers might have a good idea why they are being audited as they have been dealing with an unhappy client post-closing, are involved in a lawsuit involving a problematic transaction, and/or are or were a party to a real estate dispute. If you are still guessing as to the reasons for the DRE visit, you might inquire with your agents to determine if there are any complaints or issues that they have not reported to you.
Either way, audit or broker office survey, routine or complaint based, the DRE wants to review and assess, among other items, your general business operation, licensed real estate activities, trust fund handling, transactions, and advertising, as well as a broker's supervision over these requisite areas of the law.
What's Next?
Well, to put it simply, time is of the essence so you will need to get prepared! We could talk for days about audit preparation, which is why I offer consulting services for a living, but here are a few tips.
First, ask the Auditor or Investigator about the time period of activity that he or she will be examining. Typically, you will receive a written notice about the audit or broker office survey which would outline the inspection period and documents that must be made available. Bottom line, unless you are advised differently, the scope of any DRE examination could cover the last three years of your real estate activity. Hence, you will need to make sure you have all of the required records available for inspection. Pursuant to California Business and Professions Code 10148, these records include (but are not limited to) all listings, deposit receipts, canceled checks, trust records, and other documents executed or obtained in connection with any transactions for which a real estate broker license is required.
Second, aside from having the records available, which some might say is the easy part, you should then evaluate or measure your compliance before the audit. If you can detect violations or non-compliant activities before the DRE arrives, there may be an opportunity to correct those items or at least take steps in good faith to identify the issues and path of correction in order to ensure future compliance. In turn, when you can reasonably explain to the DRE why something happened and/or what steps are being taken to correct the problem, this is better than being caught off guard by a compliance issue in which you have no prior knowledge about.
Finally, if you know the law and have been prioritizing compliance, then the DRE inspection could be an opportunity. Yes, I said opportunity! You get a chance to confirm what you are doing right, or recognize your shortcomings, while face-to-face with a knowledgeable DRE representative whom can help you better understand the law and how DRE enforces it.
But, even if you know you are not perfect or have some compliance issues to address, the audit process, albeit potentially challenging, will help you improve the operation of your brokerage. To clearly understand your statutory duties, measure how your brokerage is doing and learn how to correct non-compliant activities, are all good and necessary things! Perhaps it will inspire a fresh start (akin to a New Year's resolution), and be a motivating force, in moving your brokerage forward in the right direction.
Just remember to relax, actively listen, take clear and detailed notes, and ask valuable questions. No one wants to be audited, this I know, but try and take advantage of the experience, whether the outcome is positive or not!
If you need help with preparing for a DRE audit or have other real estate compliance needs, please contact me at summer@expertdrecompliance.com
About the Author
Summer Goralik is a Real Estate Compliance Consultant and Broker, and former DRE Investigator. She offers real estate brokers assistance with DRE audits and myriad compliance services. Summer is not an attorney, thus any opinions, suggestions or recommendations contained herein are based on her experience working for, and knowledge of the laws enforced by, the Department of Real Estate, and must not be considered legal advice. Please consult with a California licensed real estate attorney for legal advice, support and/or clarification.
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