The term compliance refers to a business, person, or industry conforming to a rule, such as a policy or standard of law. The real estate sale process has plenty of regulations that agents and brokers must abide by to complete a transaction. But why is compliance vital in real estate?
Why is compliance important in real estate sales?
Over the last hundred years, the sheer volume of regulations, laws, standards, and guidelines has increased dramatically. Regulatory compliance seeks to uphold ethics and laws.
Regulatory compliance is a matter of law
No matter what industry or business you’re in, all companies must adhere to specific laws and regulations as part of operations. Regulatory compliance specifically deals with laws an organization must follow—for example, the Fair Housing Act and RESPA compliance.
Without regulatory compliance measures, there would be no repercussions for agents who discriminate against buyers or receive money for referrals. There would also be no way to discipline agents or brokers who offer advice beyond their expertise if said advice causes harm.
Regulatory compliance is constantly changing
A few years ago, the American Disabilities Act (ADA) mandated that businesses that fall under the ADA regulations must ensure their website is accessible to people with disabilities. In 2020, COVID-19 compliance required businesses to minimize the risk of infection in workplaces.
If brokerages didn’t stay on top of these regulations, they would have “failed to comply.” The government doesn’t take ignorance as a defence, so full real estate compliance must be achieved regardless of how quickly regulations evolve. Otherwise, they may get sued.
Regulatory compliance protects everyone
Businesses that fail to comply open themselves up to financial liability and potential lawsuits. In 2017, several data breaches led to thousands of lawsuits, causing the cost per case to rise from $4.4 million to $7.2 million in just one year. These businesses lost a lot of loyal customers.
Regulatory compliance keeps brokerages lawful, sure, but they also protect their resources and reputation. One compliance mishap can cause irreparable damage for companies, especially if discretion is their main selling point. The risks are great, but compliance is there to protect you.
6 best practices to ensure compliance in real estate sales
Whether you’re an agent, a broker, or an investor, there are many things you can do to stay on top of your regulatory compliance. Here are 6 compliance best practices you should follow.
1. Conduct a compliance audit
Creating a compliance plan requires an initial audit. You need to know your compliance baseline and identify where any problems lie. Look at your strengths and weaknesses in everything from risk management procedures to security policies and identify where issues may occur.
Since regulations change quickly, there are probably weaknesses in your policy. It’s essential to look at security issues that could come from your computer. Strengthen the areas that have the most impact on your business first, then review what they may cost you if a breach happens.
2. Hire a compliance officer
Depending on how busy your brokerage is, you may not have the time to constantly check for compliance issues in your company. However, you can hire a corporate compliance officer (CCO) who can champion corporate accountability, integrity, and ethics from the ground up.
If your brokerage isn’t big enough to warrant a CCO, a regular CO can help you get the job done. Both professions are responsible for ensuring a company complies with regulations and legal requirements. A CO and CCO will assess risks and have a plan in place during a breach.
3. Establish and maintain procedures
Your brokerage may have a compliance officer and acknowledge what must be done to maintain compliance, but without policies and procedures, your audit will be for nothing. If you have a CO on staff, be sure to create a policy that addresses specific compliance areas in your audit.
Every real estate sales process must abide by time constraints, storage procedures, paper trails, and review standards. Don’t leave these out of your policy, even if they’re well-known or you trust your agents. Even the NAR’s Code of Ethics should be outlined in your policy.
4. Follow the NAR’s Code of Ethics
All agents and brokers are aware of The National Association of Realtors (NAR) Code of Ethics and its 17 articles. These include duties to the clients and customers, like “protecting the best interest of the client,” and duties to the public like “no false or misleading advertising.”
Despite how hard realtors have tried to separate themselves from the 2008 subprime mortgage crisis and rumours of backroom dealings, only 11% of people fully trust realtors. It’s vital that brokerages do their due diligence by presenting themselves as trustworthy and knowledgeable.
5. Regulatory compliance training
Regulatory compliance training can make sure the policies you create stick in your brokerage. Your policy will likely address specific issues, like listing issues. If you don’t crack down on agents that incorrectly list room sizes, you won’t be able to protect your business from liability.
In fact, listing issues are one of the most common reasons for lawsuits. Agents may overstate the property, offer incorrect zoning info, or lie about the age of the house. While these problems seem minor, you need to explain the importance of compliance to minimize bad habits.
6. Keep improving your policies
Always remember that compliance isn’t a one-and-done policy. You need to regularly review periods and audits, seek input from professionals (like CCOs), and track regulatory changes and their impact. You should never let your policies sit unreviewed for over a month.
Automate most of the auditing and review process, even if you have access to COs and other industry professionals. That way, you’ll receive updates whenever there are changes to the real estate sales process. With automation, you can continuously assess program effectiveness.
Although staying compliant in your real estate business can be tough, taking steps to ensure regulatory compliance can save you a lot of time and money. It’s better to set up your policy now, so you can avoid regulatory issues and protect your business from potential lawsuits.