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KREC Newsletter Digest - Winter 2001
Index of Articles in This Digest
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IT'S THAT TIME OF YEAR AGAIN - RENEWAL

All licenses will expire on March 31, 2001 and must be renewed by that date. Renewal forms are being mailed to all principal brokers and licensees in escrow. If you are a principal broker or a licensee in escrow and do not receive a renewal form by March 15, 2001, please call the Commission.

Keep in mind that renewals must be received or postmarked by March 31, 2001, and there is no grace period. Late penalties are imposed for renewals received after this date -- $100 before May 15 and $200 after May 15.

A late renewal affects the start date of your errors and omissions insurance. Active licensees who do not renew before March 31st become unlicensed. They will not be insured for any claims made against them during the period of unlicensure, unless they purchase coverage commonly known as "Tail Coverage." This coverage must be purchased directly from the insurance carrier.

During the month of March, the Commission renews approximately 25,000 licensees, both active and inactive. Commission employees take on extra workload during renewal in addition to normal duties. Due to this increased workload, the staff is unable to answer phone calls regarding receipt of renewals. If you would like to know if your renewal has been received, we suggest that you send it via certified mail, return receipt requested, or you can get a certificate of mailing from your local post office. We also suggest that you check with your bank to see if your renewal check has been cashed. Once your check has been cashed, you can be assured that your renewal has been processed.

We receive many renewal forms without a check attached. This assures that you will receive your renewal form back and slows down the renewal process. We also receive checks without a renewal form. This can be a problem, because many times there are two or more people with the same name. Please remember to attach your check to your renewal form before mailing both of them to the Commission. Also, make sure you sign your check.

Principal brokers have a great responsibility at renewal. Please make sure to read all of the 2001 License Renewal Instructions that accompany the renewal form, especially if you are making changes. The majority of renewals are returned because principal brokers make a change on their renewal and do not calculate the correct amount due the Commission.

Lastly, all of us at the Commission want to especially thank those of you who renew quickly and correctly. We could not do it without your cooperation, and we appreciate the many licensees who consistently turn in a perfect renewal. We strive to process the renewals in a timely manner for our licensees.

And, as always, if you ever need assistance in preparing your renewal or if you have questions about the renewal process, please do not hesitate to contact us. We are always ready to help.

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Comments from the Chair
by: Ron Smith, Chairman

Happy New Year and much success to everyone in 2001.

I have been selected by my fellow Commissioners to serve as the Chairman of the Commission. One of my duties as Chairman is the authorship of the "Comments" column in this newsletter. This month's topic is EDUCATION.

Each month we review many cases that could be avoided by simple use of license law knowledge. Licensees can gain this knowledge by attending the continuing education and core courses that are offered all over the state.

Monthly, the Commission Education Department reviews pre-license and continuing education courses and instructors. Kentucky is fortunate to have many excellent educators and quality courses from which to choose. I encourage all of you to take advantage of as many classes as possible.

To the licensees that are mandated to attend continuing education and core courses, I urge you not to make it an "attending experience" but a "learning experience." Get involved in the class. If you need more answers, ask the instructor. Don't leave the class until you are clear about the requirements of the license law.

To the grandfathered licensees who regularly attend education courses, I applaud you. I am witness to this because my fellow licensed Commissioners are all grandfathered and yearly attend education courses. Please take the time to improve your knowledge. You will not be graded, but you will be rewarded.

To all licensees, don't wait until the end of the year to attend your classes. You could risk not getting the course of your choice. Review your selections and zero in on areas that you are unfamiliar with or in which you need a refresher.

Learning can be fun. I suggest logging onto the KREC website at www.krec.ky.gov. Click on THE FREQUENTLY ASKED QUESTIONS tab. Use the questions and answers to play Real Estate Jeopardy or Who Wants to Be a License Law-aire. ARELLO has developed a Fair Housing Jeopardy game that is fun to play. Logon to their site at www.ARELLO.com.

For a complete list of education courses, you can contact one of our providers or logon to our website at www.krec.ky.gov

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From the Director's Desk
by: Norman Brown, Executive Director

The Year 2000 was yet another busy and productive year for all of us involved in the real estate industry in Kentucky. While all of you were busy listing and selling property, we at the Commission were working hard to ensure that the industry moves forward into this new century in a strong and fruitful manner. The following is a brief overview of the projects we worked on last year:

CONTINUING
EDUCATION

We have developed a Brokerage Management Skills course to be implemented some time this year. We have also updated the core course to include the new statutory changes passed by the General Assembly. We held a very successful Educators Conference in November that was attended by some 50 instructors from across the Common-wealth. We are now also tracking our continuing education compliance through an enhanced computer system.

In addition, the Commission sponsored the development of a high school program called "Home Sweet Home" that teaches teenagers about the value of home ownership, good credit and the like. This program is already being trained and presented. If you know of any teachers or schools that would be interested in such a class, let me know.

INDUSTRY GROUPS

We also enjoyed our continued good relations with the industry trade groups throughout the state. We joined forces with KAR to pass a comprehensive license law package and are now working on numerous regulation changes to make the package complete. In addition, we visited local Boards of Realtors® in eight different locations throughout the state to discuss the goings-on at the Commission and in the industry itself.

Commissioners and members of our staff have attended all of the KAR meetings throughout the state this year, and we have also been represented throughout the country at all of the Association of Real Estate License Law Officials (ARELLO) meetings.

LEGAL DEPARTMENT

As in the past two years, Complaints were down again this year and settlements were up. In fact, we had only 98 total complaints in 2000. This is down from 152 complaints in 1999 and 124 complaints in 1998. What's more, there were only 10 disciplinary hearings conducted the entire year. In addition, the legal department is committed to answering every single call that comes in from licensees and consumers alike in order to alleviate any problems arising out of day-to-day business transactions. Part of this service is to intervene pre-complaint in order to resolve disputes without the necessity of a hearing or other action. As far as we know, Kentucky is the only state that has a full-time staff attorney to answer legal questions.

LICENSEE RECOGNITION

Last, but certainly not least, we held our second annual Fifty Year Celebration, honoring those licensees who have held a real estate license for half a century. We sponsored a breakfast for these honorees and gave out plaques commemorating this awesome achievement. Former Commis-sioner Bob Massey and Secretary of State John Y. Brown, III both spoke at the event. We will continue this tradition every year to acknowledge those who have committed their careers to our industry.

If you need legal, licensing or education assistance, remember, we are always here to help.

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ATTENTION ESCROWED LICENSEES

Licensees in escrow will find a brand new renewal form in their mailboxes this year. For the first time, the Commission will be scanning escrow renewals. Licensees will receive a 3 1/2" by 8 1/2" card that will need to be bubbled in. Licensees can still make changes on the form, if necessary. The form should not be folded, bent or stapled. Simply fill out the form, attach the correct amount requested and mail back to the Commission. The renewal fee is $55 for Brokers, and $50 for Sales Associates.

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CONTINUING EDUCATION UPDATES

Beginning January 1, the mandatory law requirement for continuing education increases from 2 to 3 hours. Acceptable law topics include agency, Kentucky license law, fair housing, contracts, environmental law, antitrust, 1031 tax exchanges, misrepresentation, and risk reduction courses containing topics noted above. Keep in mind that the total number of hours required did not change. Licensees subject to continuing education are still required to attend a total of 6 hours.

Two-hour courses will no longer be approved for continuing education credit. All courses must be at least three hours in length to be considered for credit.

Reminder -- All active licensees subject to the continuing education requirements must complete the core course every four years. If you have not taken the course and your birthday falls during the months of July, August, or September, you will be required to complete the Kentucky Core Course during the calendar year 2001. Remember, if you have gone outside of your mandated year by taking the course early, then it is your responsibility to take the course once every four years.

This course is also the mandatory course required for licensees who are reactivating their licenses from escrow. The Core Course is a comprehensive 6-hour course covering the federal and state laws that are applicable to real estate.

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UNLICENSED PEOPLE MAY NOT RECEIVE COMMISSIONS
by Lee Harris, Staff Attorney

Recently, the Commission has received numerous complaints about the unlicensed practice of real estate. Two of the main areas where unlicensed brokerage is taking place are in builder developments and apartment complexes. Apparently, some builders and property managers are hiring unlicensed individuals to man their model homes or to rent or sell their properties and then paying those unlicensed people a commission or other performance-based compensation. This type of payment is restricted solely to licensees.

There is confusion even among licensees as to what type of compensation is allowed under the law. There is an exception in our laws that an unlicensed person can work for the owner of property as a "regular employee." This term is defined in the license laws as "an employee . . ., whose total compensation is subject to withholding of federal and state taxes and FICA payments, and who receives from the employer a fixed salary governed by federal wage guidelines that is not affected by specific real estate transactions." See KRS 324.010(11). (Emphasis added)

It is the last part of the definition which is key to this discussion. If an unlicensed person receives a commission or bonus based upon how many homes are sold or apartments are rented, then he or she is breaking the law. In addition, the builder, property manager or owner is also breaking the law. These violations are illegal and are subject to severe penalties, such as fines, imprisonment and/or disgorgement of the illegal funds.

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ILLEGAL PROPERTY FLIPPING
By: Larry Disney, Real Estate Appraisers Board

The following article was written by Larry Disney, Chief Investigator for the Kentucky Real Estate Appraisers Board (KREAB). This article has been modified for publication in the KREC newsletter to alert real estate licensees to this practice. Any real estate licensee involved in this practice could face very severe disciplinary action by the KREC.

The millennium arrived and, as predicted, a number of changes are being observed. One new trend in real estate that will require specific knowledge and concern for licensees is "property flipping." However, discussions with real property appraisers, real estate licensees and attorneys reveal that very few individuals have any idea what the term really implies.

The Appraisal Standards Board of the Appraisal Foundation, Frequently Asked Questions 2000 edition describes the act of flipping. "Property flipping," or a "flip," is the "transfer of property where fraud is used to obtain unfair prices and loans." The key term is fraud -- an intentional act that is illegal. The Appraisal Standards Board of the Appraisal Foundation further advises that the negative connotation of property flipping is "drastically different from buying and selling property at a profit." The act of buying real property for a low price and selling the same property for market value is a long established legal practice. The most important objective to understand is "market value." Also, flipping in itself is not always an illegal act -- it depends on the circumstances.

The majority of flipping cases involve residential properties (one to four family). The typical definition of value in these cases is "market value". The emphasis in the definition is "the most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale." It is quite clear from the wording that the licensee's task is to analyze the subject property, any sales data available, and other information available that can be used for estimating the most probable sales price for the subject property. Also, the market that is being analyzed must be considered competitive and open. The selection of sales and available financing must be typical of that which is considered normal. The financing and terms must be void of any special or creative conditions to enhance a sale that is not reflective of normal conditions. The sale must be fair.

To achieve fairness the following conditions must be met: (1) buyers and sellers are typically motivated; (2) both parties are well informed or well advised and acting in what they consider their best interests; (3) the price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale.

The question: "What is considered illegal in the act of flipping real property?" A flip becomes illegal when an appraisal is inflated or another deception is used to obtain a mortgage. The following scenario of flipping fraud was offered by Mike A. Abel, an attorney with America's Choice Title Agency in North Canton, Ohio:

A buyer contracts to purchase a property in his name for $30,000. Before closing the deal, he draws up a second contract to sell the property to a co-conspirator at $70,000 - a price substantially higher than market value. He property to a co-conspirator at $70,000 - a price substantially higher than market value. He seeks a loan for the second contract through a loan officer or mortgage broker.

An appraiser inflates the value of the property, enough to justify the loan, and is paid triple the usual fee. A lender approves the package and releases the $70,000.

Next, the contracts for the property are closed either simultaneously or within a few days or weeks of each other.

The originator of the scheme takes the $70,000, pays off the $30,000 and divides the remaining $40,000 between himself and any other plotters - usually the mortgage broker or loan officer and sometimes the second buyer. That buyer makes a few payments on the property, then allows it to go into foreclosure. Finally, the lender learns that the property doesn't cover the loan value.

In many of the illegal flipping cases, the subject property is located in neighborhoods with low property values. The data selected for comparison are taken from superior market areas with superior dwelling characteristics. The licensee may or may not be a knowing participant in the process. Often he/she lacks competency in the appraisal process or knowledge of the market area. In many cases, the fees charged by the licensees for their services are not higher than usual, they are lower than those normally charged for similar assignments.

The Commission has already been alerted to several cases involving real estate licensees. If you feel that a particular transaction is questionable, please contact the KREAB or the KREC for assistance. With your help, we will send a strong message to those who want to commit fraud: they are not welcome in the Commonwealth of Kentucky.

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COMMISSION ELECTS RON SMITH AS NEW CHAIRMAN

Recently, the Commission elected Ron Smith to serve as Chairman of the Commission.

Ron was elected to the Commission in November of 1998 by Governor Paul Patton. He is the principal broker of Frank Clay Realty and has been with the company for over twenty years. He was originally licensed as a sales associate in 1978 and obtained his brokers license in 1995.

Ron is an active member of the Greater Louisville Association of Realtors® and the Kentucky Association of Realtors®. He is also a member of the National Association of Real Estate Brokers and the National Association of Real Estate License Law Officials. He is also an active member of the West Chestnut Street Baptist Church.

Ron lives in Louisville with his wife Shirlee. They have five children and five grandchildren.

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ATTENTION: NEW LICENSES WILL NOT BE ISSUED AT RENEWAL

The license you received at renewal last year is a permanent one. The license will still expire every year on March 31st, but a new license will not be issued every year. New licenses will only be printed when there has been a change in the license status. If you need to make a change to your license, it must be returned to the Commission before a new license will be issued.

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DISCIPLINARY ACTIONS

WILLIAM I. SHAW
(LEXINGTON): Case No. 00-0006.
Violation: Shaw was found in violation of several licensing laws, including KRS 324.160(4)(b) for making any substantial misrepresentation which substantially affects the value of a property; KRS 324.160(4)(v) for conduct which constitutes improper, fraudulent or dishonest dealing; KRS 324.160(4)(u) for violating any other provision of KRS Chapter 324 or any duly passed regulation, specifically 201 KAR 11:121, Section 1(4) for failing to act in accordance with a fiduciary standard towards a client; KRS 324.111 for improper handling of escrowed monies; and KRS 324.151(3) for failing to answer a Complaint filed against him at the Commission; and KRS 324.160(4)(s) for failing to respond to a Commission investigation in a timely manner.

Shaw was found to have defrauded a Lexington couple out of hundreds of thousands of dollars. The couple had given Shaw $5,000 earnest money which he never deposited into his escrow account. In addition, they gave him $235,000 to purchase property for them and to build a house and a barn on the property. The buildings were never completed, and Shaw apparently spent the money on other pursuits. The couple filed a lawsuit against Shaw and received a judgment for $268,732 in compensatory damages and $403,098 in punitive damages.

Disposition: For these violations, the Commission adopted the General Counsel's Exceptions to the Hearing Officer's Recommendations and ordered Shaw's license to be revoked for a period of not less than five (5) years. In addition, he was ordered to notify all of his clients, prospects, etc. (within 30 days of the Final Order) that he had been revoked. The revocation was ordered in effect regardless of appeal.

E. PORTER HATCHER
(LOUISVILLE): Case No. 00-0011.
Violation: Mr. Hatcher entered into a settlement agreement in this case, whereby he stipulated to a violation of KRS 324.160(1)(k) for being convicted of a felony while holding a real estate license issued by the Commonwealth.

Disposition: For this violation, he agreed to accept a formal reprimand from the Commission and to have his license placed on suspension for a period of sixty (60) days. In addition, Hatcher agreed to attend twelve (12) hours of continuing education in addition to any hours already required by law within twelve (12) months of the Commission's Final Order.

JAMIE DUNN
(PURYEAR, TN.) Case No. 00-0051:
Violation: The Commission entered into a settlement agreement with Mr. Dunn, whereby he stipulated to a violation of KRS 324.160(4)(k) for being convicted of a felony while holding a real estate license issued by the Commonwealth.

Disposition: Dunn agreed to have his license placed on suspension for a period of six (6) months following his release from prison and to accept a formal reprimand from the Commission.

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INDUSTRY EXPERT COLUMN
REDUCTION$ AND PAYMENT$ MUST BE REPORTED

by Dennis J. Stilger, Attorney - Copyright ©2001

Agents are often asked to reduce their commissions to accommodate closings. For business purposes, agents will occasionally comply. Of course, under KRS 324.160 (4)(f), it is only the principal broker who is entitled to compensation for activities governed by the licensing law. Therefore, an agent should always have his or her principal broker's permission before agreeing to any such reduction in compensation.

While 201 KAR 11:121, Section 1 (2) generally prohibits rebates, a safe harbor exists for an agent to "disseminate information about the fee or other compensation a licensed agent agrees to charge for his services." Therefore, it seems fairly clear that, under the license law, an agent, with the principal broker's permission, can agree to reduce a commission.

As a matter of license law, agents should be careful that the closing documents and other documentation correctly reflect that this is what is being done; i.e., that the agent is reducing a commission, presumably therefore making more proceeds available to the seller. The seller then would be making any compensation to the buyer if it is the buyer that is the intended ultimate beneficiary of the fee reduction. This process should always be followed rather than the agent actually collecting a full commission and then compensating the buyer directly.

In addition to the license law concerns, there is an additional layer of federal laws implicated in fee reductions. The Real Estate Settlement Procedures Act, or RESPA, administered by Housing and Urban Development (HUD), governs the proper completion of the so-called HUD2 or Closing Statement. RESPA applies to transactions in interstate commerce. This in effect makes RESPA applicable to any conventionally financed transaction.

12 U.S.C. Section 2603 mandates the use of the Uniform Settlement Statement in all federal related mortgage loans. Part 3500 of the Code of Federal Regulations (CFR) was promulgated pursuant to RESPA. 3500.8 (b) states that the settlement agent shall complete the HUD2 in accordance with the instructions set forth in appendix 8. Subsection 4 requires that charges not listed on the HUD2 be inserted in blank spaces or by an addition of lines.

Appendix 8 of Part 3500 gives detailed line by line instructions for closing agents to follow. It provides, in pertinent part, that the "settlement agent shall complete the HUD2 to itemize all charges imposed upon the borrower and the seller by the lender and all sales commissions, whether to be paid at settlement or outside settlement, or any other charges which either the borrower or the seller will pay for at settlement."

The instructions go on to provide for the listing of so-called "POC items" to be paid outside of closing but not reflected in the totals on the HUD2.

To summarize, reductions in commissions are allowed. However, they should be carried out only with the principal broker's knowledge and consent. All documentation should reflect that it is a reduction in commission and compensation to the buyer should be reflected in documentation between the seller and the buyer so that commissions are not being paid by agents to buyers.

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Commission Enacted New Statute that Protects Licensees from Paying After-the-Fact Referral Fees
by Lee B. Harris, Staff Attorney

Over the past few years, the Commission legal staff has received various concerns from brokers and agents who were being forced to share their commissions with relocation companies after the licensee had already procured the business. Of course, if a relocation company contacts a licensee and refers a client to him or her, licensees have no problem paying a referral fee to the relocation company. This is a normal, everyday practice in the real estate industry. The problem arises in the instances when a broker or agent finds a client, lists his or her home, shows the property and finds a buyer and THEN the relocation company shows up to demand a large percentage of the commission check without ever having made the referral. This scenario comes up frequently when a seller has a relocation package with his or her employer. Once the employee finds out he or she is being transferred, the employee contacts the real estate agent who sold him or her the home. Only later does the relocation company find out that the employee is moving and that the home has already been listed. The relocation company then sends documents to the agent or broker, indicating that a large referral fee is due. The Commission believed that this practice was unfair and detrimental to our licensees. Therefore, we recently passed KRS 324.165, a new section of the license law which prevents these so-called "after-the-fact referral fees." Violation of the section by a licensee in this state will be considered improper conduct under KRS 324.160(1)(w). Violation of this section by someone who is not licensed in this Common-wealth will subject that person or entity to the penalties, such as fines and/or imprisonment, found in KRS 324.990. Please take a minute to look at your new yellow law manual on page 9 to review the precise language of the statute. The Commission has already had several licensees call to seek our assistance in upholding the law and preventing the payment of such fees. I know of at least one instance when an after-the-fact referral fee was demanded, but, after informing the relocation company of the new law, the relocation company backed off. If this situation happens to you, please let us know so that we can assist you in informing the relocation company of our new law and our commitment to enforcing it for the protection of our licensees.

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How Does Kentucky Compare to Other States?

KY Chart

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REMINDER

The Commission is currently working on new Seller's Disclosure & Agency Disclosure forms. Please keep this in mind when ordering new forms for your company. We don't want you to have to discard large supplies of pre-printed forms. You will be notified when the new forms become mandatory.

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Last Revised: March 9, 2002
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