DRE Hot Seat: a broker defrauds his owner client and his tenant

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This article is part of an ongoing series covering violations of real estate law. Here, the Department of Real Estate (DRE) revoked the California real estate license of a broker acting as a property manager who charged the tenant more than what was paid to the landlord.

The California Department of Real Estate (DRE) decided by court order revoke license of Bruce Orona, a broker since 1985 operating out of San Diego, California. The decision took effect in June 2022. Scott Orona, brother of Bruce Orona and broker since 2000, also surrendered his license in connection with the disciplinary measures taken against him and his brother.

The Oronas provided property management services for an apartment owner in San Diego.

The Oronas entered into a new rental agreement with a tenant, but submitted an agreement to the landlord with radically different terms.

The Residential lease agreement the landlord received Oronas set the monthly rent amount at $2,150. The rent had to be paid to the landlord. The security deposit was set at $2,150. [See RPI Form 550]

However, the Residential lease agreement the tenant has received and signed the monthly rent fixed at $2,300 with a security deposit of $2,300.

In an email to the tenant, the Oronas asked the tenant to pay the security deposit to Bruce Orona instead of the landlord. Moreover, the Oronas distorted to the tenant that they spoke to the landlord and that the landlord wanted all rental checks to be made payable to Bruce Orona until further notice. So the Oronas pocketed the difference between what was billed to the tenant and what was then paid out to the landlord.

From June 2018 to October 2018, Bruce Orona received $2,300 for each month’s rent. The landlord received monthly payments in the amount of $2,150 from July 2018 to September 2018. The Oronas did not remit the tenant’s October 2018 rent to the landlord.

In December 2019, DRE completed an audit of Bruce Orona’s limited records. In a talk with the listener, Bruce Orona:

  • refused to manage owner’s properties;
  • denied having a trust fund account for the owner;
  • refused to collect funds for the owner; and
  • did not provide the documents requested for review.

The DRE concluded that Bruce and Scott Orona violated real estate law, as they:

  • rendered substantial false statements [Business & Professions Code §10176(a)];
  • made false promises for the purpose of influencing, persuading or inducing [Bus & P C §10176(b)];
  • took the secret, undisclosed compensation and did not disclose the total amount they were compensated to the transaction participant who entered into a contract with them [Bus & P C §10176(g)];
  • engaged in fraud Where dishonest transaction [Bus & P C §§10176(i); 10177(j)];
  • deliberately ignored real estate law [Bus & P C §10177(d)];
  • demonstrated neglect as a licensee [Bus & P C §10177(g)]; and
  • failed to keep records and documents relating to transactions for which a broker’s license is required. [Bus & P C §10148]

Related article:

Hot Seat DRE: Sitseefly, Inc.

Trust funds are held in trust for the owner

Any fees or compensation a Licensee earns in connection with Licensed Activities must be disclosed.

Compensation is generally disclosed on:

Compensation comes in many forms, including real estate fees, escrow fees, property management fees, mortgage origination and servicing fees.

DRE auditors often find situations where a licensee has billed customers for a excessive amount for costs incurred or when an operator has benefited from trust funds, according to the DRE Real estate newsletter summer 2019.

Brokers, while acting on behalf of others in their capacity as real estate transaction agents, receive funds which do not belong to them and which are held in trust for the owner of the funds. These trust fund to understand:

  • down payments on purchase offers and rental or loan requests;
  • advanced fees for any brokerage services to be provided in the future, called advance fee;
  • funds advanced for future expenses;
  • funds from sellers, borrowers and owners as reserves to cover future costs;
  • rental income and security deposits from tenants;
  • financing of a mortgage loan or the purchase of real estate; and
  • proceeds from a sale or financing.

Funds received in the form of cash or checks payable to the broker as agent must be:

  • deposited in the broker’s trust account;
  • detainees not deposited in accordance with instructions; Where
  • endorsed and delivered to other beneficiaries of the funds.

Before the end of the third working day following the day the Broker receives negotiable trust funds, the Broker must deposit the funds:

  • with the person or receiver custodian entitled to the funds (as beneficiary or by endorsement); Where
  • in a trust account kept by the broker with a bank or other custodian recognized by the State.

Trust funds are held by brokers for custodial purposes and cannot be dealt with casually. Record keeping and accounting requirements are imposed on brokers when they receive, transfer or disburse trust funds. Trust funds received in the form of checks or cash may only be used for authorized expenses incurred for the benefit of the owner of the funds. [See RPI e-book Real Estate Principles, Chapter 6]

The use by a dealer of trust funds for any reason other than those expressly authorized by the owner of the funds constitutes conversion client funds for the broker’s own use.

All records of the trust fund should be retained by the dealer for three years after the closing or cancellation of the transaction involving the trust funds. The DRE may audit trust fund accounts. [Bus & P C §10148(a)]

Additionally, all records of a agent activities on behalf of a client are retained by the agent’s broker for three years. [Bus & P C §10148]

The DRE requires brokers to keep real estate documents for three years when the documents were:

  • used in a transaction requiring a real estate broker’s license; and
  • executed or obtained by the broker or the broker’s agent.

Upon notice from DRE, these records shall be made available for review, inspection and copying by a representative of DRE. [See RPI e-book Real Estate Practice, Chapter 21]

Related article:

DRE Hot Seat: Making Material Misrepresentations Constitutes Dishonesty

Want to learn more about trust funds and record keeping? Click on an image below to download the RPI books cited in this article.

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