Consumer Protections Diminish with Unlicensed Persons
By Gary Isom, Executive Director of the Arkansas Real Estate Commission
Most of us who have had a remodeling job done, a roof replaced or a tree cut down have been advised to ask the individual providing the services whether they are properly bonded or licensed. This is of course designed to protect the consumer from incompetent work and on-site accidents or injuries.
At the Arkansas Real Estate Commission (AREC), we encounter Arkansas consumers who have engaged the services of an individual who does not hold an Arkansas real estate license, to help them buy, sell, manage or lease real estate. AREC has always had the authority to investigate a complaint against a licensed broker or salesperson. In an effort to offer protection to consumers who are approached by unlicensed persons providing services for which a real estate license is required, legislation was enacted in 2011 to provide AREC jurisdictional authority over those persons. However, that authority does not offer nearly as much protection as that afforded to members of the public who utilize services of those who hold a real estate license.
There are individuals who choose to conduct real estate brokerage activities without obtaining a license. We see this in timeshare resale, property management, auctions, short sales and some business brokerage activities. It also occurs in residential sales. This raises a couple of questions that should be considered. First, why should it matter to the consumer whether the person providing brokerage services holds a real estate license? And secondly, why doesn’t the unlicensed person just get a real estate license?
The most important thing a consumer loses when using an unlicensed person is the protection afforded through practical and accessible resources. There is the Recovery Fund administered by the Real Estate Commission. The Recovery Fund was established to award payment for actual damages to consumers who have suffered a financial loss because of the actions of a licensed real estate broker or salesperson. Since the Recovery Fund is funded by real estate licensees themselves, consumers who use an unlicensed person may not access the fund to cover losses caused by the unlicensed person. This protection provides a really cost-effective form of insurance for buyers and sellers.
In addition, most mainstream residential real estate brokers carry Errors and Omissions (E&O) insurance, offering additional protection for their clients and customers. Since E&O insurance is not required by law, consumers are wise to ask their broker or salesperson whether they carry the insurance. It is highly unlikely that an unlicensed person can even obtain E&O coverage. Consumers should also be aware that some unlicensed persons may have E&O insurance for their non-real estate-related business activities. That coverage would not likely extend to real estate brokerage activities conducted by the unlicensed person. A prime example could be a person who holds an auctioneer license to auction personal property such as furniture and cars but does not hold a real estate license to auction real estate. While the auctioneer may carry E&O insurance, the coverage would likely only apply to the auction of the personal property and not to the real estate.
Another reason to use a licensed broker is that the Arkansas Supreme Court has given licensed brokers limited authority to practice law. As such, your broker or salesperson can help you complete a contract. If you use an unlicensed person, you will need to obtain the services of a licensed attorney if you need assistance in preparing the offers, counter-offers and acceptances. Arkansas is fortunate in this regard. In some states real estate brokers are not authorized to assist consumers with real estate contracts, meaning each consumer needs to have an attorney to represent them in their transaction.
”Now to the second question as to why the unlicensed person doesn’t just get a license. There are a couple of reasons to consider. One being the unlicensed individual may not be willing or able to make the necessary commitment to obtain and maintain a real estate license in Arkansas. The requirements include submitting to and passing an FBI and state police background check. Consumers should have some assurance that persons who have access to their homes have been properly vetted. Licensure also includes completing accredited pre-license education and successfully passing the Arkansas Real Estate Exam. Within the first twelve months of licensure, salespersons go back into the classroom to focus on the practical aspects of everyday occurrences and problems in the real estate business. To stay up to date on the ever-evolving real estate market, licensees complete continuing education annually. So, while some unlicensed persons may not be willing to put in the time and effort to hold a license, the more troubling reason an individual may want to avoid licensure is their intent to operate in a dishonest, unethical or deceptive manner with the public. These persons are often of the misguided belief that since they are unlicensed, they do not fall under the jurisdiction of the Arkansas Real Estate Commission. Some practices tend to exploit consumer vulnerabilities such as a property owner’s dire financial circumstances or a potential buyer’s inability to obtain suitable financing. While these can be challenging situations, experienced brokers are often aware of possible solutions available to consumers to address and overcome such obstacles.
So, just as a consumer should determine whether their contractor, roofer or tree cutting service is properly licensed or bonded, a seller, lessor, buyer, or lessee of real estate should determine whether the person performing real estate brokerage activities on their behalf holds an Arkansas real estate license. This includes residential, commercial and industrial sales as well as property management. Consumers can visit the searchable roster at the Arkansas Real Estate Commission’s website, www.arec.arkansas.gov, to determine whether the person providing real estate brokerage services for them holds an active real estate license. For additional information contact AREC at 501 683-8010.
House to House is distributed weekly by the Arkansas REALTORS® Association. For more information on homeownership in Arkansas, readers may visit www.ArkansasRealtors.com.