STATE OF ARIZONA
OFFICE OF THE
AUDITOR GENERAL
A PERFORMANCE AUDIT
OF THE
REAL ESTATE DEPARTMENT
DECEMBER 1981
A REPORT TO THE
ARIZONA STATE LEGISLATURE
REPORT 81 - 22
DOUGLAS R. NORTON. CPA
AUDITOR GENERAL
STATE OF ARIZONA
OFFICE OF THE
AUDITOR GENERAL
December 24, 1981
Members of the Arizona Legislature
The Honorable Bruce Babbitt, Governor
Mr. Richard B. Nicholls, Coriiinissioner
Real Estate Department
Transmitted herewith is a report of the Auditor General, A Performance
Audit of the Real Estate Department. This report is i n response t o a
January 30, 1980, resolution of the J o i n t Legislative Oversight
Committee. The performance audit was conducted a s a part of the Sunset
review s e t forth i n A. R. S. § § 41- 2351 through 41- 2379.
The blue pages present a summary of t h e r e p o r t ; a response from
Mr. Richard B. Nicholls, Commissioner of the Real Estate Department is
found on the yellow pages preceding the appendices.
My s t a f f and I w i l l be pleased to discuss or c l a r i f y items i n the report.
Respectfully submitted,
Staff: Gerald A. Silva
W i l l i a a Thornson
Karen Horloway
Martha Bradley- Rawls
Richard Booth
Enclosure
D O L I ~ ~ RS. Norton
Auditor General
1 1 1 WEST MONROE @ SUITE 600 PHOENIX, ARIZONA 85003 ( 602) 255- 4385
OFFICE OF THE AUDITOR GENERAL
A PERFORMANCE AUDIT OF THE
REAL ESTATE DEPARTMENT
A REPORT TO THE
ARIZONA STATE LEGISLATURE
REPORT 81- 22
TABLE OF CONTENTS
INTRODUCTION AND BACKGROUND
SUNSET FACTORS
FINDINGS
FINDING I
Changes are needed t o make the Real Estate Recovery
Fund more accessible t o the public.
CONCLUSION
RECOMMENDATIONS
FINDING I1
In general, the Department regulates the s a l e or
lease of subdivided and unsubdivided lands e f f e c t i v e l y ;
however, improvements are needed.
CONCLUSION
RECOMMENDATIONS
FINDING I11
The s t a f f i n g l e v e l of the Department investigation
section can be reduced. In addition, steps need to
be taken to reduce complainant d i s s a t i s f a c t i o n with
investigations.
CONCLUSION
RECOMMENDATIONS
' rTRITTEN RESPONSE TO THE AUDITOR GENERAL REPORT
Page
i
1
3
LIST OF TABLES
Page
TABLE 1
Summary of Real Estate Department revenues, full- time
equivalent positions, and expenditures from f i s c a l years
1977- 78 through 1980- 81.
TABLE 2
Summary of r e c e i p t s , claims paid, i n t e r e s t earnings
and ending balances of the Real Estate Recovery Fund
from its inception i n f i s c a l years 1967- 64 through 1980- 81.
SUMMARY
The Office of the Auditor General has conducted a performance audit of the
Real Estate Department i n response t o a January 30, 1980, resolution of
the Joint Legislative Oversight Committee. This performance audit was
conducted a s a part of the Sunset review s e t f o r t h i n Arizona Revised
Statutes ( A. R. s , ) $ $ 41- 2351 through 41- 2379.
The Real Estate Department was established on March 23, 1921, and was
administered by the S t a t e Land Commissioner who served a s an ex o f f i c i o
State Real Estate Commissioner u n t i l 1947. I n 1947, t h e Legislature
created a seven- member Real Estate Board, with a Real Estate Commissioner
as chairman, to administer the Department. I n 1950, the Board was given
authority to appoint the Real Estate Commissioner who no longer was a
member of the Board. Beginning i n 1975, the Governor has appointed the
Real Estate Commissioner.
Responsibilities of the Real Estate Department include:
- Licensing and regulation of r e a l e s t a t e and cemetery brokers and
salesmen.
- Regulation of the s a l e or lease of subdivided and unsubdivided
lands .
- Regulation of cemetery sales.
- Administration of the Real Estate Recovery Fund.
- Administration of the Subdivision Recovery Fund.
- Investigation of consumer complaints regarding r e a l e s t a t e
matters.
We found the Real Estate Recovery Fund is unduly inaccessible to the
public because of p r i o r notice requirements, s t a t u t e of l i m i t a t i o n s
provision, no provisions f o r reimbursement of attorney fees and court
judgment requirements. Only 45 claims t o t a l i n g $ 380,000 have been paid i n
the 17 years of the Fund's existence. A s a r e s u l t , the Real Estate
Recovery Fund now has a balance of more than $ 1 million and the i n t e r e s t
earned on investments of the fund now exceeds the amount paid out i n
claims to consumers.
I f the Recovery Fund were more accessible to the public it appears that
the need f o r r e a l e s t a t e broker bonds could be eliminated, thereby saving
brokers approximately $ 270,000 annually. a age 7 )
We also found the process of requiring t h a t the Real Estate Commissioner
be notified of, and a public report prepared on, subdivided and
unsubdivided land offered f o r s a l e or lease generally appears to be
working well. However, there is a lack of preparation, or carelessness,
which is resulting i n inadequate s i t e inspections. ( page 17)
There is also a lack of regulation over s p l i t s and r e - s p l i t s of land
involving three or fewer l o t s . ( page 17)
Our review also showed the s t a f f i n g level of the Department of Real Es- ate
i n v e s t i g a t i o n s e c t i o n can be reduced by a t l e a s t three persons. Finally,
because i n v e s t i g a t o r s cannot prove or disprove the v a l i d i t y of most
complaints and do not make enough personal contacts with complainants
during i n v e s t i g a t i o n s , complainants are frequently d i s s a t i s f i e d with
Department investigations. ( page 25)
Consideration should be given to the following recommendations:
1. Amend A. R. S. $ 32- 2188 to allow the Real Estate Commissioner to
waive the prior notice requirement for good cause.
2. Expand the s t a t u t e of l i m i t a t i o n s f o r actions against the
recovery fund t o s i x years.
3. Amend A. R. S. 572- 2186 to allow claimants t o recover attorney fees
not to exceed a specified percentage of the claim awarded.
4. Eliminate the requirement t h a t claimants obtain a court judgment
and allow payment to be made following a Departmental hearing.
5. Eliminate statutory requirements for broker bonds.
6. The Department monitor the s i t e inspection process t o ensure that
inspections are adequate.
7. The Legislature consider granting the counties authority, similar
t o t h a t granted municipalities, to regulate s p l i t s and r e - s p l i t s
of land involving three or fewer l o t s .
8. Reduce the s t a f f i n g l e v e l of the Department's investigative
section by two investigators and eliminate t h e p o s i t i o n of
consumer representative.
9. The Real Estate Department develop and implement a productivity
measurement program f o r t h e i n v e s t i g a t i o n section. In doing so
the Department should seek assistance through the productivity
program being developed by the Department of Administration.
10. The Real Estate Department should make every e f f o r t to increase
personal contacts with complainants during the course of, and a t
the conclusion of, investigations.
iii
INTRODUCTION AND BACKGROUND
The Office of the Auditor General has conducted a performance audit of the
Real Estate Department i n response to a January 30, 1980, resolution of
the Joint Legislative Oversight Committee. This performance audit was
conducted as a part of the Sunset review process s e t f o r t h i n A. R. S.
$ 541- 2351 through 41- 2379.
The Real Estate Department was established on March 23, 1921, and was
administered by the S t a t e Land Commissioner who served a s an ex o f f i c i o
S t a t e Real Estate Commissioner u n t i l 1947. In 1947, t h e Legislature
created a seven- member Real Estate Board, with a Real Estate Commissioner
as chairman, to administer the Department. In 1950, the Board was given
authority to appoint the Real Estate Commissioner who no longer was a
member of the Board. Beginning i n 1975, the Governor appoints the Real
Estate Commissioner.
The original law of 1921 provided f o r the Department t o regulate and
license r e a l e s t a t e brokers and salesmen. I n 1937, l e g i s l a t i o n was
enacted requiring owners, agents, or subdividers t o notify the
Commissioner of t h e i r i n t e n t t o s e l l or lease subdivided lands. The
Commissioner was required to investigate such subdivisions and to prepare
and make public a report of h i s findings. I f the proposed s a l e or lease
constituted misrepresentation, deceit or fraud the Commissioner was
authorized to issue an o r d e r p r o h i b i t i n g t h e s a l e or lease of the
property. Current Arizona law now p r o h i b i t s t h e s a l e o r lease of land
before the Commissioner's public report is prepared, and requires t h a t a l l
prospective customers be furnished a copy of the r e p o r t .
Other s i g n i f i c a n t developments i n the h i s t o r y of the Department include:
- 1937 l e g i s l a t i o n requiring written examinations of a l l applicants
f o r licensure,
- 1963 l e g i s l a t i o n which created the Real Estate Recovery Fund and
provided f o r regulation of cemeteries,
- 1970 l e g i s l a t i o n which provided f o r t h e l i c e n s i n g of cemetery
brokers and salesmen,
- 1975 l e g i s l a t i o n which placed the regulation of unsubdivided land
under the Department, and
- 1976 l e g i s l a t i o n c r e a t i n g t h e Subdivision Recovery Fund.
The Department receives funding by a general fund appropriation. Revenues
received from examination applications, license applications and license
renewals are deposited d i r e c t l y i n t o the State General Fund. Table 1
lists the revenues and expenditures of the Department f o r f i s c a l years
1977- 78 through 1980- 81.
TABLE 1
SUMNARY C'- REAL ESTATE DEPARTMENT REVENUES,
FULL- TIME EQUI'<' ALENT POSITIONS, AND EXPENDITURES FROM
FISCAL YEARS 1977- 78 THROUGH 1980- 81
REVENUES
Actual Actual Actual Actual
1977- 78 1978- 79 1979- 80 1980- 81
EXPENDITURES :
Personal services 550,862 707,954 821,111 919,333
Employee related 101,256 134,935 152,388 174,773
Professional s e r v i c e s 38,123 61,328 39,128 41,228
Travel:
In S t a t e 21,449 24,760 25,297 26,182
Out of State 3,627 2,277 3,480 2,506
Other operating expenditures 184,963 197,518 174,367 179,671
C a p i t a l o u t l a y 1,485 8,594 4,300 5,099
TOTAL EXPENDITURES
-
901,765 1,137,366 1,220,0711 1,348,492
EXCESS OF REVENUES OVER
EXPEND1 TURES $ 456.754 $ 797.845 $ 515,392 $ 569.252
NUMBER OF FTEs - 5 1 - 64 - 64 - 67
The Auditor General expresses gratitude to the Real Estate Commissioner
and h i s s t a f f f o r t h e i r cooperation and assistance during the course of
t h i s audit.
SUNSET FACTORS
In accordance with A . R. S. § $ 41- 2351 through 41- 2379, nine f a c t o r s a r e
considered to determine, i n p a r t , whether the Real Estate Department
should be continued o r terminated.
SUNSET FACTOR: OBJECTIVE AND PURPOSE
I N ESTABLISHING THE DEPARTMENT
The 1921 l e g i s l a t i o n establishing the S t a t e Real Estate Department
contained no statement of t h e o b j e c t i v e and purpose i n e s t a b l i s h i n g t h e
Department. The Real Estate Commissioner has stated:
" The department was established, and continues, to
r e g u l a t e t h e r e a l e s t a t e business by administering the
provisions of what is now Chapter 29, T i t l e 32 of the
Arizona Revised Statutes. Those provisions deal with:
1) licensing of r e a l e s t a t e brokers and salesmen,
2) the regulation of those brokers and salesmen,
3) the s a l e of subdivided lands, 4) the administration
of the r e a l e s t a t e recovery fund, 5) the organization
and regulation of cemeteries, 6) the s a l e and
mortgaging of unsubdivided lands, and 7) the
administration of the subdivision recovery fund."
SUNSET FACTOR: THE DEGREE TO WHICH
THE DEPARTWNT HAS BEEN ABLE TO RESPOND
TO THE NEEDS OF THE PUBLIC AND THE
EFFICIENCY WITH WHICH IT HAS OPERATED
The Department responds t o the needs of t h e p u b l i c through licensing
persons involved i n r e a l e s t a t e , investigating allegations of wrong doing
by its licensees and ragulatizg land sales. However, the Department needs
to change its' s i t e inspection practices to ensure t h a t such inspections
are conducted e f f i c i e n t l y and t h a t the information gathered is complete
and accurate. ( page 19)
SUNSET FACTOR: THE EXTENT TO WHICH THE
DEPARTMENT HAS OPERATED WITHIN THE PUBLIC INTEREST
The h i s t o r y of the Department with regard to land fraud i n Arizona
contains instances i n which the Department did not a c t i n the public
i n t e r e s t . Through l e g i s l a t i v e and administrative reform these problems
have been addressed. The Real Estate Commissioner has stated:
"... it would be l e s s than candid to say t h a t the
department has always operated within the public
i n t e r e s t . Many years ago known felons were granted
licenses and were approved as subdividers and
developers of unsubdivided lands. However, with the
i n s t i t u t i o n of fingerprinting and more s t r i n g e n t
procedures f o r doing background investigations, t h i s
problem has been alieviztnd irL recent years*
On a more t o t a l scale the department views its primary
function as being one of protecting the public. A l l of
the various sections within the agency carry out t h e i r
functions with p r o t e c t i n g t h e public i n t e r e s t as t h e i r
primary purpose."
SUNSET FACTOR: THE EXTENT TO WHICH RULES
AND REGULATIONS PROMULGATED BY THE DEPARTMENT
ARE CONSISTENT WITH THE LEGISLATIVE MANDATE
The Department completely recodified its rules and regulations i n May and
November of 1980.
A l l of the rule changes were reviewed by the Arizona Attorney General to
ensure consistency with l e g i s l a t i v e mandate.
SUNSET FACTOR: THE EXTENT TO WHICH THE DEPARTIIENT
HAS ENCOURAGED INPUT FROPI THE PUBLIC BEFORE
PROMULGATIHG ITS RULES AND REGULATIONS AND THE
EXTENT TO WHICH I T HAS INFORMED THE PUBLIC AS TO ITS
ACTIONS AND THEIR EXPECTED IMPACT ON THE PUBLIC
The Department follows the s t a t u t o r i l y prescribed procedures f o r public
n o t i f i c a t i o n of meetings and proposed rule changes including posting
notices of public hearings i n its building and f i l i n g rules with the
Secretary of State.
In a d d i t i o n , t h e Department has encouraged input from both industry and
the general public and has furnished copies of d r a f t s of proposed rules to
a l l i n t e r e s t e d p a r t i e s . The Department also held two, r a t h e r than one
required, public hearings t o encourage public input when it recodified its
rules i n May 1980.
SUNSET FACTOR: THE EXTENT TO WHICH THE
DEPARTMENT HAS BEEN ABLE TO INVESTIGATE
AND RESOLVE COMPLAINTS THAT ARE WITHIN
ITS JURISDICTION
The Department i n v e s t i g a t e s a l l of the complaints t h a t it receives.
However, the nature of most of the complaints the Department receives is
such t h a t the Department is unable to s u b s t a n t i a t e or r e f u t e a majority
of complaint allegations. ( page 28)
SUNSET FACTOR: THE EXTENT TO WHICH THE
ATTORNEY GENERAL OR ANY OTHER AGENCY OF
STATE GOVERNMENT HAS THE AUTHORITY TO
PROSECUTE ACTIONS UNDER ENABLING LEGISLATION
The Attorney General has s u f f i c i e n t authority to prosecute actions under
SUNSET FACTOR: THE EXTENT TO WHICH THE
DEPARTMENT HAS ADDRESSED DEFICIENCIES IB
THE ENABLING STATUTES WHICH PREVENT IT FROM
FULFILLING ITS STATUTORY MANDATE
The Departxent has a c t i v e l y addressed deficiencies i n its enabling
s t a t u t e s . In 1981, the Department requested the introduction of f i v e
b i l l s which would have 1) eliminated the requirement f o r brokers' bonds,
2) deleted requirements f o r l i c e n s e applicants to furnish character
references, 3) allowed the Department t o take d i s c i p l i n a r y a c t i o n against
licensees f o r negligence, 4) removed commercial and i n d u s t r i a l
developments from the subdivision regulatory requirements, and
5) required subdividers and developers t o place a l l earnest money deposits
i n neutral escrow deposit accounts. None of these b i l l s were passed by
the Legislature.
SUNSET FACTOR: THE EXTENT TO WHICH
CHANGES ARE NECESSARY I N THE LAWS OF
THE DEPARTMENT TO ADEQUATELY COMPLY
WITH THE FACTORS LISTED I N THIS SUBSECTION
The Department intends to request changes i n its enabling l e g i s l a t i o n
during the 1982 session which w i l l 1) allow d i s c i p l i n a r y action to be
taken a g a i n s t l i c e n s e e s f o r negligence, 2) provide more specific
l e g i s l a t i o n t o regulate the s a l e of time- sharing properties, and
3) modify the p r i o r notice requirement associated with the Real Estate
Recovery Fund t o allow waiver f o r good cause shown.
Further changes t h a t should be considered are revisions of the s t a t u t e s
governing the Real Estate Recovery Fund to increase public protection i n
conjunction with elimination of the brokers' bonds. ( page 7)
FINDING I
CHANGES ARE NEEDED TO MAKE THE REAL ESTATE RECOVEXY FUND MORE ACCESSIBLE
TO THE PUBLIC.
Effective July 1, 1964, Arizona s t a t u t e s provide f o r a Real Estate
Recovery Fund from which any person, except bonding companies when they
are not principals i n a r e a l e s t a t e transaction, aggrieved by an a c t ,
representation, transaction or conduct of a duly licensed broker or
salesman may recover actual or compensatory damages up to $ 10,000. Our
review of the operations of the Real Estate Recovery Fund revealed t h a t it
is unduly inaccessible to the public because of
- p r i o r n o t i c e requirements,
- s t a t u t e of l i m i t a t i o n s provisions,
- no provision f o r reimbursement of attorney f e e s , and
- court judgment requirements.
A s a r e s u l t , the Real Estate Recovery Fund has a balance of more than $ 1
million. I f the Recovery Fund were more accessible to the public it
appears t h a t the need f o r r e a l e s t a t e broker bonds would be eliminated,
thereby saving brokers approximately $ 270,000 annually i n bond premiums.
A s of July 1, 1980, Arizona was one of 30 s t a t e s t h a t have r e a l e s t a t e
recovery funds. The other 29 s t a t e s are l i s t e d below:
Alabama
Alaska
Arkansas
California
Colorado
Connecticut
Ee laware
Florida
Georgia
Hawaii
Idaho
I l l i n o i s
Kansas
Kentucky
Louisiana
Maryland
Minnesota
Nevada
New Jersey
New Mexico
North Carolina
North Dakota
Ohio
Oklahoma
Pennsylvania
South Dakota
Texas
Utah
Virginia
P e r t i n e n t f e a t u r e s of the Arizona Real Estate Recovery Fund are these:
- For an o r i g i n a l license a broker pays $ 20 i n t o the Fund.
- For an o r i g i n a l license a salesman pays $ 10 i n t o the Fund.
- The Fund's l i a b i l i t y does not exceed $ 10,000 f o r damages
sustained regarding any one transaction.
- The Fund's l i a b i l i t y does not exceed $ 20,000 f o r any license.
- The Fund is not obligated f o r the a c t s of a broker or salesman
while acting on h i s own behalf i n property owned or controlled by
him.
- I f , on December 31 of every year, the balance remaining i n the
Fund is l e s s than $ 200,000, brokers and salesman s h a l l pay $ 10
and $ 5, respectively, i n t o the Fund when renewing t h e i r licenses.
- Upon payment from the Fund a broker or salesman's license is
automatically terminated u n t i l the amount of payment is repaid i n
f u l l , plus i n t e r e s t a t the r a t e of s i x percent a year.
- Monies paid i n t o the Fund s h a l l be deposited i n t o the S t a t e
Treasury and invested and reinvested i n the same manner as Funds
of the S t a t e Employees Retirement System with earned i n t e r e s t
deposited to t h e c r e d i t of the Fund.
In addition t o the above provisions, A. R. S. $$ 32- 2186 through 32- 2193
contain p r i o r notice requirements, s t a t u t e of l i m i t a t i o n provisions, no
provision f o r reimbursement of attorney fees and court judgment
requirements which appear to render the Fund unduly inaccessible to the
public.
P r i o r Notice Requirement
A. R. S. $ 32- 2188, subsection A , provides that
" When any aggrieved person commences action f o r a
judgment which may r e s u l t i n collection from the r e a l
e s t a t e recovery fund, the aggrieved person s h a l l notify
the commissioner i n writing, by c e r t i f i e d mail return
receipt requested, to t h i s e f f e c t a t the time of the
commencement of such action." ( ~ m ~ h a saidsd ed)
If a person does not s a t i s f y the above w r i t t e n n o t i f i c a t i o n requirement he
is precluded from obtaining money from the Fund. Although the Department
does not keep data on how many persons are excluded by t h i s requirement,
we i d e n t i f i e d a t l e a s t 77 claims t h a t a r e pending against broker bonds;
however, only 32 prior notices have been f i l e d with the Department. Thus,
there are a t l e a s t 45 persons engaged i n l e g a l actions to recover damages
from brokers who have, by d e f i n i t i o n , f a i l e d to provide p r i o r notice and
w i l l therefore not be e l i g i b l e f o r payments from the Fund.
According t o the Department's a s s i s t a n t Attorney General the p r i o r notice
requirement is the biggest obstacle preventing public access to the Fund,
because 1) the requirement cannot be waived f o r good cause, 2) most
lawyers w i l l not f i l e a notice unless they think they w i l l recover from
the Fund and t h i s is not known a t the commencement of t h e l a w s u i t , and
3) many lawyers do not know what the prior notice requirement implies as
it is not a common s t a t u t o r y provision. The a s s i s t a n t Attorney General's
comments were supported by two private attorneys who had recently been
involved with claims against the Fund. The Department's a s s i s t a n t
Attorney General recommends t h a t the prior notice requirement be amended
to allox the Commissioner t o waive the requirement " for good cause shown,"
and the Department intends to request appropriate l e g i s l a t i o n during 1982.
Statute of Limitations
A. R. S. 532- 2188, subsection A, establishes a two- year s t a t u t e of
l i m i t a t i o n s f o r collection from the Recovery Fund. This two- year
l i m i t a t i o n is considerably l e s s than the six- year s t a t u t e of l i m i t a t i o n s
t h a t applies t o claims f i l e d against bonds i n Arizona and may contribute
to the Fund's i n a c c e s s i b i l i t y . The Department does not keep records on
the number of claims t h a t have been rejected because of the two- year
s t a t u t e of limitations. A s a r e s u l t , an exact assessment of the degree t o
which the two- year f i l i n g requirement impairs Fund a c c e s s i b i l i t y cannot be
made. However, it should be noted t h a t of the 29 other s t a t e s with r e a l
e s t a t e recovery funds, 20 have no s t a t u t e of l i m i t a t i o n s specified.
Non- Recovery of Attorney's Fees
A. R. S. $ 32- 2186 provides that payments from the Recovery Fund may only be
made for "... actual or compensatory damages ...." A s a r e s u l t , claimants
may not recover attorney fees or other costs involved i n obtaining
payments from the Fund. This nonprovision for attorney fees may
exacerbate Fund i n a c c e s s i b i l i t y i n t h a t it is frequently a lengthy legal
process t o access the Fund and often requires claimants to r e t a i n
attorneys. According t o one attorney, f i l i n g a claim against the Recovery
Fund can double a claimant's l e g a l costs.
For example, A. R. S. $ 32- 2188, subsection C , specifies t h a t i n order to
access the Fund a claimant must show:
" 1. He is not a spouse of debtor, or the personal
representative of such spouse.
" 2. He has complied with a l l the requirements of
t h i s section.
" 3. He has obtained a judgment as s e t out i n
subsection B of t h i s section, s t a t i n g the amount
thereof and the amount owing thereon a t the date of the
application, and that i n such action he had joined any
and a l l bonding companies which issued corporate surety
bonds to the judgment debtors as principals and a l l
other necessary p a r t i e s .
" 4. He has caused to be issued a w r i t of execution
upon such judgment and the o f f i c e r executing the same
has made a return showing t h a t no personal or r e a l
property of the judgment debtor l i a b l e t o be levied
upon i n s a t i s f a c t i o n of the judgment could be found, or
that the amount realized on the s a l e of them or of such
of them a s were found, under such execution, was
i n s u f f i c i e n t t o s a t i s f y the judgzc- at, s t a t i n g tke
amount so realized and the balance remaining due on the
judgment a f t e r application thereon of the amount
realized.
" 5. He has caused the judgment debtor to make
discovery under oath, pursuant t o $ 12- 1631, concerning
his property.
" 6. He has made a l l reasonable searches and
i n q u i r i e s to a s c e r t a i n whether the judgment debtor is
possessed of r e a l or personal property or other a s s e t s ,
l i a b l e to be sold or applied i n s a t i s f a c t i o n of the
judgment.
" 7. That by such search he has discovered no
personal o r r e a l property or other a s s e t s l i a b l e to be
sold or applied, or t h a t he has discovered c e r t a i n of
them, describing them, owned by the judgment debtor and
l i a b l e t o be so applied, and t h a t he has taken a l l
necessary action and proceedings f o r the r e a l i z a t i o n
thereof, and t h a t the amount thereby realized was
i n s u f f i c i e n t to s a t i s f y the judgment, s t a t i n g the
amount so realized and the balance remaining due on the
judgment aftsr applica- klon of the amount realized.
" 8. That the following items, i f any, as recovered
by him have been applied t o t h e a c t u a l or compensatory
damages awarded by the court:
( a ) Any amount recovered from the judgment
debtor or debtors.
( b) Any amount recovered from the bonding
company or companies.
( c j Any amount recovered i n out of court
settlements as t o p a r t i c u l a r defendants."
Thus, while it cannot be empirically demonstrated, it seems reasonable to
assume t h a t the prospect of incurring s u b s t a n t i a l unreimbursed legal
expenses may discourage some aggrieved persons from f i l i n g against the
Fund.
It is noteworthy t h a t persons f i l i n g claims against broker bonds can
recover t h e i r a t t o r n e y f e e s . According t o the a s s i s t a n t Attorney General
for the Department, it may be desirable to provide f o r some recovery of
a t t o r n e y ' s f e e s , but such recovery should be limited to a percentage of
the claim awarded.
Eliminating the Requirement
For Court Judgments
Currently claimants are required t o obtain a court judgment i n order t o
obtain money from the Recovery Fund.
A. R. S. $ 32- 2188, subsections B and E provide:
" B. When any aggrieved person recovers a valid judgment
i n any court of competent j u r i s d i c t i o n against any broker
or salesman, for any a c t , representation, transaction, or
conduct which is i n violation of the provisions of t h i s
chapter or t h e r e g u l a t i o n s promulgated pursuant t h e r e t o ,
which occurred on o r a f t e r July 1, 1964, the aggrieved
person may, upon the termination of a l l proceedings,
including reviews and appeals i n connection with the
judgment, f i l e a v e r i f i e d claim i n the court i n which the
judgment was entered and, upon ten days' written notice t o
the commissioner, may apply to t?? court for an order
directing payment out of the r e a l eszate recovezy fund, of
the amount unpaid upon the judgment, subject t o the
l i m i t a t i o n s s t a t e d i n t h i s section.
" E. The court s h a l l make an order directed t o the
commissioner requiring payment from the r e a l e s t a t e
recovery fund of whatever sum it s h a l l find to be payable
upon the claim, pursuant t o the provisions of and i n
accordance with the l i m i t a t i o n s contained i n t h i s section,
i f the court is s a t i s f i e d , upon the hearing, of the t r u t h
of a l l matters required to be shown by the aggrieved person
by subsection C of t h i s section and t h a t the aggrieved
person has f u l l y pursued and exhausted a l l remedies
available to him f o r recovering the amount awarded by the
judgment of the court."
By way of comparison, a t l e a s t two of the other s t a t e s with r e a l e s t a t e
recovery funds ( ~ l a s k a and ~ entucky) allow claims against t h e i r recovery
funds to be paid following a Real Estate Department hearing. Similarly,
i n Arizona A. R. S. $ 32- 1198.03 provides for the Division of Mobile and
Manufactured Housing Standards to pay claims from the Division's trust
account recovery fund following a hearing by the Division.
Allowing the Real Estate Department t o pay claims against the recovery
fund based on the r e s u l t s of a departmental hearing rather than a court
judgment would g r e a t l y simplify the requirements a claimant must s a t i s f y
i n order to obtain payment from the Fund.
$ 1 Million Fund Balance
A s of June 30, 1981, the Real Estate Recovery Fund had a balance of
$ 1,245,722. Table 2 summarizes the receipts, claims paid, i n t e r e s t
earnings and ending balances of the Fund from its inception i n f i s c a l year
1963- 64 through 1980- 81.
TABLE 2
SUMMARY OF RECEIPTS, CLAIMS PAID, INTEREST EARNINGS AND ENDING
BALANCES OF THE REAL ESTATE RECOVERY FUND FROM ITS INCEFTION I N
FISCAL YEAR 1963- 64 THROUGH 1980- 81"
Fiscal Year Claims Paid
I n t e r e s t
Earnings
Ending Fund
Balance
$ 113,510
245,906
277,403
294,239
309,990
324,681
358,463
376,265
456,096
491,983
554,848
610,640
704,289
794,608
885,653
956,887
1,111,220
1,245,722
A s shown above, the fund balance has been increasing a t a steady rate.
The i n t e r e s t earned on investments of the fund alone has been g r e a t e r than
the amount paid out i n claims t o consumers.
* The amounts appearing i n Table 2 are unaudited and were obtained from
several sources as Real Estate Department s t a f f were unable to provide
us with complete data. We cannot a t t e s t t o the accuracy of these
amounts, but provide them as best estimates.
In our opinion, the ever increasing fund balance is largely a function of
excessive consumer i n a c c e s s i b i l i t y t o the Fund.
Broker Bonds Could Be Eliminated
A. R. S. $ 32- 2124, subsection H, requires brokers t o carry a $ 5,000
corporate surety bond i n addition t o paying i n t o the Real Estate Recovery
Fund and s t a t e s :
" H. The commissioner s h a l l require of the applicant,
i f for a broker's l i c e n s e , a corporate surety bond, to
be approved by him, i n the amount of f i v e thousand
d o l l a r s f o r each calendar year i n which the license
w i l l be e f f e c t i v e . The bond s h a l l be conditioned upon
the f a i t h f u l compliance of the broker with the
provisions of t h i s chapter, and t h a t he w i l l conduct
the business of r e a l e s t a t e broker or cemetery broker
i n a r e l i a b l e and dependable manner. A l l bonds s h a l l
be i n favor of the s t a t e , f o r the benefit of any person
injured by the wrongful a c t , d e f a u l t , fraud or
misrepresentation of the broker i n h i s capacity as
such, and any person so injured may bring s u i t on the
bond i n h i s own name. No additional bond s h a l l be
required from o f f i c e r s of a corporation or members of a
partnership licensed to a c t as a r e a l e s t a t e broker or
cemetery broker while i n the employment of a
corporation or partnership."
I f the Real Estate Recovery Fund were made more a c c e s s i b l e , t h e need for
t h i s dual coverage could be eliminated. In that eventuality, brokers i n
Arizona would save an estimated $ 270,000 i n bond premiums per year. In
1981, the Department requested t h a t House B i l l 2172 be introduced which
called f o r the elimination of brokers' bonds. The b i l l was not passed by
the Legislature.
CONCLUSION
The Real Estate Recovery Fund is unduly inaccessible t o the public because
of p r i o r notice requirements, s t a t u t e of l i m i t a t i o n provisions, no
provisions f o r reimbursement of attorney fees and court judgment
requirements. A s a r e s u l t , the Real Estate Recovery Fund now has a
balance of more than $ 1 million.
I f the Recovery Fund were more accessible t o the public it appears t h a t
the need f o r r e a l e s t a t e broker bonds would be eliminated, thereby saving
brokers approximately $ 270,000 annually.
RECOMMENDATIONS
Consideration should be given t o the following recommendations:
1. Amend A. R. S. $ 32- 2188 t o allow the Commissioner of Real Estate to
waive the prior notice requirement f o r good cause.
2. Expand the s t a t u t e of l i m i t a t i o n s f o r actions against the
recovery fund t o s i x years.
3. Amend A. R. S. $ 32- 2186 t o allow claimants t o recover attorney fees
not t o exceed a specified percentage of the claim awarded.
4. Eliminate the requirement t h a t claimants obtain a court judgment
and allow payment to be made following a Departmental hearing.
5. Eliminate statutory requirements f o r broker bonds.
FINDING I1
I N GENERAL THE DEPARTMENT REGULATES THE SALE OR LEASE OF SUBDIVIDED AND
UNSUBDIVIDED LANDS EFFECTIVELY; HOWEVER, IMPROVEMENTS ARE NEEDED.
Arizona law requires developers to provide the Real Estate Commission with
c e r t a i n w r i t t e n information and the Real Estate Department t o publish a
public report prior to the property prcposed f o r s a l e or lease being
offered t o the public.
Our review revealed t h a t customers are being provided the public reports
as required by law and t h a t with few exceptions the customers find the
reports t o be both useful and informative. However, there are two areas
that need improvement:
1. There is a lack of preparation, or carelessness, resulting i n
inadequate s i t e inspections of some of the s i t e s on which public
reports are t o be issued. In some i n s t a n c e s t h e s e s i t e
inspections, which a r e used t o both verify and g a t h e r d a t a used
i n the public r e p o r t s , have been performed on the wrong s i t e s .
2. There is a lack of regulation over land s p l i t s of two or three
parcels t h a t are exempt from n o t i f i c a t i o n and public report
procedures. These s p l i t s are resulting i n many of the same
problems the public report processes were designed t o combat and
are creating problems f o r counties.
Statutory Requirements
Arizona Revised S t a t u t e s $$ 32- 2181 and 32- 2195.01 require t h a t the Real
Estate Commissioner be notified before subdivided* or unsubdividedH lands
are offered f o r s a l e or lease. The owner, agent or subdivider must
provide the Commissioner, i n writing, comprehensive and detailed
information about the land including:
- the l e g a l description and area of land;
- the c o n d i t i o n o f t h e t i t l e t o t h e land;
- provisions made f o r permanent access t o the land;
- the a v a i l a b i l i t y of sewage di. > a1 f a c i l i t i e s and other public
u t i l i t i e s including water, e l e c t r i c i t y , gas and telephones;
- the a v a i l a b i l i t y of an assured water supply a s c e r t i f i e d by the
Director of water resources, where required; and
- proposed uses of the land.
Following receipt of the information the Commissioner is required t o
examine the land and issue a public r e p o r t . This report includes the
information provided t o the Commissioner plus any other information the
Commissioner determines is necessary. The owner, agent or subdivider must
then furnish a copy of the public report to each purchaser/ lessee. The
land may not be sold or leased before the Commissioner i s s u e s t h e public
report. I f the land is sold or leased before t h e r e p o r t is issued, the
s a l e or lease is voidable by the purchaser/ lessee.
* Subdivided lands include both improved and unimproved lands t h a t are
divided i n t o four or more l o t s . It does not include land where each
l o t or parcel is g r e a t e r than 36 acres nor does it include the leasing
of apartments or offices.
** Unsubdivided land covered by these requirements includes four or more
contiguous parcels of land i n which each parcel is g r e a t e r than 36
acres but l e s s than 160 acres.
The process of requiring t h a t the Commissioner be notified and a public
report be issued generally appears to be working well i n that the public
reports are disclosing p o t e n t i a l l y troublesome aspects of the land to
buyers, p a r t i c u l a r l y when the land is located outside areas having normal
services. Information contained i n public reports t h a t we reviewed
included the following:
" Prospective purchasers are advised t h a t earnest money
deposits, down payments and other advanced monies w i l l
not be placed i n a neutral escrc- S. Such monies w i l l be
paid d i r e c t l y to the s e l l e r on6 may be used by the
s e l l e r . This means the purchaser assumes a r i s k of
losing such monies if the s e l l e r is unable or unwilling
t o perform under the terns of the purchase contract."
" Depths to water on the properties. .. range from 1,200
to 1,400 f e e t . Depths t o water g r e a t e r than 400 f e e t
exceed normal practice f o r domestic wells d r i l l e d i n
Arizona. "
" Developer has made no provisions to provide any
u t i l i t y s e r v i c e s , t h e r e f o r e , purchasers w i l l have t o
bear the expense of obtaining u t i l i t y service - i f and
when it becomes available."
" Developer also advised t h a t the roads w i l l not be
b u i l t according to the minimum standards of the County."
" NOTE: The counts w i l l not maintain the roads u n t i l
they have " been constructed t o minimum standards
and the county approves and accepts them f o r
maintenance. I f t h e s t r e e t s a r e not accepted
f o r the maintenance, the future cost of
maintenance w i l l have t o be aid bv the adjacent
propertyowners."
Inadequate S i t e Inspections
Once the Real Estate Commissioner has been n o t i f i e d of an i n t e n t t o s e l l
subdivided or unsubdivided lands, and has received the required
information, he is required by s t a t u t e to examine the land i n question.
This examination includes a s i t e inspection by the Department s t a f f .
S i t e inspections are made to verify the information presented to the
Commissioner about the nature of the land. Such items a s t h e l o c a t i o n and
type of roads, evidence of u t i l i t i e s , evidence of water l i n e s , flood
conditions, topography and type of s o i l are examined.
S i t e inspections also provide the opportunity t o g a t h e r a d d i t i o n a l data
that might not be normally disclosed through the information provided by
the owner or agent.
We found a number of s i t e inspections are not being performed adequately.
We were able to document f i v e instances, occurring within a 30- day period,
i n which s i t e inspections had t o be repeated because the f i r s t inspection
was inadequate. In three of these instances the inspections had to be
repeated because reported data, such a s the existence of water l i n e s , was
not v e r i f i e d . In two o t h e r i n s t a n c e s the inspections had to be repeated
because they were performed on the wrong s i t e .
I n addition, we were informed by the Department's subdivision section
s t a f f of nine o t h e r i n s t a n c e s i n which s i t e inspections were inadequate
and had to be repeated. We were unable to f u l l y document those instances
because the Department does not document and report such occurrences.
Inadequate s i t e inspections appear t o be caused by e i t h e r a lack of
preparation or carelessness on the p a r t of the inspector. Department
f i l e s contain s u f f i c i e n t information t o preclude inadequate inspections.
Further, i f the person performing the s i t e inspection is uncertain about
any aspect of the inspection, including how to locate the s i t e , he can
contact the developer or s a l e s agent. Such contacts a r e routinely made by
some inspectors. On the other hand, those persons who inspected the wrong
s i t e s e i t h e r did not make such contacts, or turned down developer o f f e r s
of accompaniment during the inspection.
A s a r e s u l t of inadequate inspections, data c r i t i c a l to the preparation of
the public report may not be properly gathered and v e r i f i e d , the S t a t e
incurs t h e c o s t of the reinspections,* and proposed land s a l e s are
unnecessarily delayed.
Unregulated Land S p l i t s
Arizona s t a t u t e s exclude land parcel s p l i t s involving three o r fewer l o t s
from the reporting requirenents i n A. R. S. $ § 32- 2181 and 32- 2195.01. I f
the three or fewer l o t s proposed f o r s a l e a r e within the boundaries of a
municipality and involve a new s t r e e t , they f a l l under the regulation of
the municipality. However, when such l o t s are outside the municipality,
no regulation e x i s t s .
Failure to provide f o r regulation of these parcel s p l i t s is resulting i n
many of the same problems the n o t i f i c a t i o n and public report processes
were designed t o prevent. For example, a 640- acre section i n Maricopa
County was, over an eight- year period, s p l i t and r e s p l i t u n t i l there were
130 parcels f o r sale. None of these parcels were subject t o the reporting
requirements of A. R. S. § $ 32- 2181 and 32- 2195.01. When s p l i t t i n g occurs on
such a magnitude, numerous problems can a r i s e . Some of these problems
include:
- parcels without adequate access ( landlocked parcels)
- parcels with overextended or inadequate u t i l i t i e s
- parcels with flooding and drainage problems
- inadequate legal descriptions
- l o t s which cannot be used f o r t h e i r intended purposes because the
l o t s i z e s f a i l to meet zoning requirements.
* A. R. S. $ 532- 2182 and 32- 2195.02 provide f o r the owners or agents t o
pay for the actual costs of the examination of the land. The S t a t e ,
however, assumes the costs of reinspections i f the f i r s t inspection is
inadequate. For s i x instances of reinspection we i d e n t i f i e d , t h e c o s t
of reinspection ranged from approximately $ 36 t o approximately $ 178.
One solution t o the problem of unregulated land s a l e s would be t o give the
counties j u r i s d i c t i o n over s a l e s of three l o t s or l e s s , much the same as
the municipalities have. Under the provisions of A. R. S. $ 9- 463.01,
municipalities may r e g u l a t e p a r c e l s s p l i t i n t o two or three l o t s i f a new
s t r e e t is created. Such regulation includes establishing requirements
concerning s t r e e t s , u t i l i t i e s , sewers and other improvements as well as
ensuring compliance with rules f o r flood control and groundwater
management. Further, surveyed p l a t maps of t h e p a r c e l s must also be
provided. The Arizona Association of County Planning Directors has
prepared and submitted such l e g i s l a t i o n numerous times during the past ten
years.
SGNCLUSI ON
The process of requiring t h a t the Real Estate Commissioner be notified o f ,
and a public report prepared on, subdivided and unsubdivided land offered
f o r s a l e or lease generally appears t o be working well. However, there is
a lack of preparation, or carelessness, which is resulting i n inadequate
s i t e inspections. There is also a lack of regulation over s p l i t s and
r e s p l i t s of land involving three or fewer l o t s .
RECOMMENDATIONS
Consideration should be given t o the following recommendations:
1. The Department monitor the s i t e inspection process to ensure t h a t
inspections are adequate.
2. The Legislature enact l e g i s l a t i o n granting the counties
a u t h o r i t y , s i m i l a r to t h a t granted municipalities, to regulate
s p l i t s and r e s p l i t s of land involving three or fewer l o t s .
FINDING I11
THE STAFFING LEVEL OF THE DEPARTMENT INVESTIGATION SECTION
CAN BE REDUCED. IN ADDITION, STEPS NEED TO BE TAKEN TO REDUCE
COMPLAINANT DISSATISFACTION WITH INVESTIGATIONS.
The Arizona Real Estate Department employs ten investigators and
investigates approximately 800 consumer complaints* per year. These
investigations have resulted in 140 hearings held by the Department in the
past three fiscal years with the following outcomes: 44 revocations of
licenses, 36 suspensions of licenses, 72 fines, five licensees placed on
probation and ten licensees issued cease and desist orders. Another nine
licensees were denied the right to renew their licenses.
In reviewing the investigative section of the Real Estate Department we
found that
1. Staffing of the investigations section could be reduced by at
least three positions ( two investigators and the consumer
representative) .
2. Due to the nature of the types of complaints received, the
Department cannot prove or disprove the validity of a complaint
in a majority of the cases.
3. The inability to prove or disprove the validity of a complaint
combined with insufficient personal contacts with the
complainants during the investigations frequently result in
complainant dissatisfaction with the Department's investigations.
* Department complaint totals for 1980 show 1,667 complaints
investigated. However, this figure includes Department- initiated
investigations, background checks on license applicants and responses
to public inquiries for information.
Staffing Can Be Reduced
During the course o f t h e audit we became concerned about the productivity
and s t a f f i n g l e v e l of the investigations section. The section has ten
investigators, a s s i s t e d by one consumer representative, who each
investigate an average of only 80 complaints a year. Although we found
the i n v e s t i g a t o r s have additional duties," we believe the number of
complaints handled per i n v e s t i g a t o r is still low when compared to the
investigations section of the Arizona Department of Insurance.
Comparing t h e i n v e s t i g a t i o n s sections of both departments we found both
sections investigate consumer complaints, f i n g e r p r i n t and conduct
background investigations of applicants, and perform o t h e r s p e c i a l
investigations f o r t h e i r departments. A s i g n i f i c a n t difference occurs,
however, i n the number of consumer complaints that are handled by each
section as shown below.
Annual
Number of Investigators Number of Consumer Complaints
Insurance
Real Estate
Part of t h i s difference i n the number of complaints processed can possibly
be explained by additional and d i f f e r i n g duties; f o r example, Real Estate
i n v e s t i g a t o r s also monitor licensing examinations, inspect subdivisions
and conduct surveys of brokers while Insurance i n v e s t i g a t o r s do not. Part
of the difference i n the number of complaints processed might also be
explained by inherent differences between complaints about insurance
versus complaints about r e a l e s t a t e . Nevertheless, we believe the f a c t
that the Insurance Department processes s i x times more complaints per
i n v e s t i g a t o r than does Real Estate is signficant.
* Investigators i n Arizona perform a wide variety of duties i n addition
t o i n v e s t i g a t i n g complaints including: monitoring continuing education
courses, investigating backgrounds of applicants, monitoring licensing
examinations, inspecting subdivisions and auditing brokers. The time
required t o perform these duties is unknown.
In addition, the investigators have recently been relieved of two
additional duties. Beginning in October 1981, investigators no longer are
required to do fingerprinting and background investigations, because the
Federal Bureau of Investigation discontinued processing fingerprints for
one year. Also effective October 1981, investigators no longer conduct
site inspections of subdivisions. That function will be performed by the
Department's subdivision staff.
Further, according to the Department's Chief Investigator, the Department
is receiving fewer complaints and the nature of complaints has become more
general and presents fewer difficult investigations.
The above changes coupled with the low volume of complaints processed per
investigator as compared to the Insurance Department, leads us to estimate
that the staffing of the section could be reduced by at least two
investigators and that the position of consumer representative could be
eliminated.
Should the investigations section be reduced by three positions we believe
further study should still be made of the productivity of the
investigations section. A staffing level of eight investigators would
result in investigators averaging approximately 100 complaint
investigations per year or one- fifth the number of complaints investigated
by each Department of Insurance investigator.
The Department of Administration ( DOA) is currently developing a
productivity management project using the services of an outside
consultant. The project is being pilot tested in the DOA Personnel
Division and will be ready for expansion to other agencies in January
1982. We believe the Real Estate Department should seek assistance from
DOA in conducting a productivity study of its investigations section.
I n a b i l i t y to Prove or Disprove Validity of Complaints
The majority of the consumer complaints received by the Department are
complaints that cannot be easily proved or disproved. Complaints about
alleged misrepresentations, earnest money agreements and duty to c l i e n t s
often involve allegations that promises or agreements made verbally by a
broker or salesperson were broken. In most instances there are no
witnesses to the alleged agreements and/ or the written documents
pertaining t o the transaction ( such as the earnest money agreement)
conflict with the alleged verbal agreements. I n these cases it becomes
the complainant's word against the broker's and the Department cannot
prove or disprove the complaint.
Other complaints require the Department to show that a licensee knowingly
and intentionally acted i n a manner that was not i n h i s c l i e n t ' s best
i n t e r e s t . Difficulty i n showing a l i c e n s e e ' s i n t e n t , p a r t i c u l a r l y on the
basis of a single complaint, prevents the Department from proving or
disproving the v a l i d i t y of some of these complaints. Additionally, the
Department cannot address 16 percent of the consumer complaints it
receives because it e i t h e r has no j u r i s d i c t i o n or is barred by s t a t u t e s of
limitation.
We estimate the Department is unable to prove or disprove the v a l i d i t y of
56 percent of the consumer complaints it receives.
Frequent Complainant Dissatisfation
The i n a b i l i t y to prove or disprove the v a l i d i t y of the majority of
consumer complaints combined with insufficient personal contacts with the
complainants frequently r e s u l t s i n complainant d i s s a t i s f a c t i o n . A
majority of the complainants do - not believe the Department investigators
are f a i r and impartial, nor do they believe the investigators do a l l they
can do to resolve complaints.
The Office of the Auditor General surveyed complainants about t h e i r
experiences i n f i l i n g a complaint with the Department. Questions asked
the complainants addressed such areas a s the f a i r n e s s and i m p a r t i a l i t y of
the i n v e s t i g a t o r s , whether t h e i n v e s t i g a t o r s did a l l they could to resolve
the complaint, and additional steps t h a t should be taken t o improve the
Department's complaint process. Results of the survey showed high levels
of complainant d i s s a t i s f a c t i o n , p a r t i c u l a r l y when compared t o the r e s u l t s
of a survey of persons f i l i n g complaints with the Arizona Department of
Insurance which was made i n preparing Report No. 79- 4, A Performance Audit
of the Arizona Department of Insurance. Comparisons of the r e s u l t s of the
two surveys are shown below:
Question: Do you believe the Department i n v e s t i g a t o r was f a i r and
impartial?
- Yes - No No Answer
Insurance Complainants 70% 15% 15%
Real Estate Complainants 30 56 14
Question: Do you believe the i n v e s t i g a t o r did a l l he could t o resolve your
complaint?
- Yes - No No Answer
Insurance Complainants 60% 29% 11%
Real Estate Complainants 25 6 5 10
Question: I f you had another complaint would you f i l e with the Department?
- Yes - N 0 No Answer
Insurance Complainants 73% 13% 14%
Real Estate Complainants 46 46 8
Many complainants also provided written comments with t h e i r answers t o the
survey questions. These comments coupled with t h e i r suggestions f o r
improving the complaint investigations most frequently addressed t h e l a c k
of personal contact between the i n v e s t i g a t o r s and the complainants. It
appears t h a t the Department's extensive use of l e t t e r s i n the
investigative process coupled with the i n a b i l i t y to prove or disprove the
v a l i d i t y of the majority of the complaints r e s u l t s i n complainant
perceptions t h a t the Department is biased and not doing a l l it can to
resolve complaints. Complainants appear to equate a lack of personal
contact with a lack of i n t e r e s t and e f f o r t .
CONCLUSION
The staffing level of the Department of Real Estate investigations section
can be reduced by at least three persons. In addition, because
investigators cannot prove or disprove the validity of most complaints and
do not make enough personal contacts with complainants during
investigations, complainants are frequently dissatisfied with Department
investigations.
RECOMMENDATIONS
Consideration should be given to the following recommendations:
1. The staffing level of the Department's investigative section
should be reduced by two investigators, and the position cf
consumer representative should be eliminated.
2. The Real Estate Department should develop and implement a
productivity measurement program for the investigations section.
In doing so the Department should seek assistance through the
productivity program being developed by the Department of
Administration.
3. The Real Estate Department should make every effort to increase
personal contacts with complainants during the course of, and at
the conclusion of, investigations.
RICHARD 6. NICHOLLS
STATEREALESTATE
COMMISSIONER
1645 W. JEFFERSON
PHOENIX, ARIZONA 85007
5055 E. BROADWAY
SUITE D- 201
TUCSON, ARIZONA 857 1 1
December 18, 1981
8
M r . Douglas R. Norton
Auditor General
L e g i s l a t i v e Services Wing
Suite 200
S t a t e Capitol
I) Phoenix, Arizona 85007
Dear M r . Norton :
The response t o the performance a u d i t completed by your o f f i c e
w i l l be b r i e f . Given the number and complexity of the s t a t u t o r y
b d u t i e s undertaken by the Real E s t a t e Department, the areas of
criticism, c o n s t r u c t i v e though they may be, are minor and confirm
our strong b e l i e f t h a t the Department has come a long way i n improv-ing
its performance. This, I b e l i e v e , is l a r g e l y r e s p o n s i b l e t o a
knowledgeable s t a f f .
@ With r e s p e c t t o Finding I, t h e Department agrees with the a s s e s s -
ment of the Auditor General t h a t access t o t h e Recovery Fund has
been l i m i t e d by the p r i o r n o t i c e requirements and s t a t u t e of
l i m i t a t i o n s imposed by law. As noted, the Department has already
submitted proposed amendments t o Section 32- 2188 which a u t h o r i z e s
the Commissioner t o waive the p r i o r n o t i c e requirement i f t h e
B public i n t e r e s t w i l l not be adversely a f f e c t e d . This should
insure an e q u i t a b l e r e s u l t . Additionally, t h e Department has
no o b j e c t i o n t o an expansion of the s t a t u t e of l i m i t a t i o n s t o
the s i x years recommended. However, t h i s recommendation might
be a l t e r e d s l i g h t l y i f t h e e l i m i n a t i o n of t h e c o u r t judgment
requirement is enacted by t h e L e g i s l a t u r e .
D
Currently t h e Department's j u r i s d i c t i o n over the a c t s of its
l i c e n s e e s i s l i m i t e d t o a five- year s t a t u t e of l i m i t a t i o n s .
( Section 32- 2153) If t h e Department is t o assume d i r e c t con-t
r o l of the Recovery Fund it would be c o n s i s t e n t t o a l s o l i m i t
those a c t i o n s t o f i v e years. Assuming t h i s s t a t u t o r y change and
b the r e s u l t i n g d i r e c t c o n t r o l over the fund, the Department would
have no o b j e c t i o n s , t o the payment, out of t h a t fund, of reason-a
b l e . a t t o r n e y l s f e e s much the same as is provided i n Section 12-
341.01.
M r . Douglas R. Norton
Page 2
December 12, 1981
Regarding Finding 11, the Department f e e l s t h a t t h e a u d i t has
placed undue emphasis on a v e r y few i n s p e c t i o n s t h a t needed t o
be repeated. This is e s p e c i a l l y t r u e i n l i g h t of the a u d i t ' s
conclusion t h a t t h e e n t i r e s i t e i n s p e c t i o n process " appears t o
be working well".
The " c a r e l e s s n e s s " r e ~ o r t e db y the Auditor General can be a t t r i b u t e d
t o human e r r o r when conducting an i n s p e c t i o n of l a r g e l y undeveloped
p a r c e l s of property. This, of course, means t h a t t h e r e a r e o f t e n
no e s t a b l i s h e d landmarks and t h e r e is o f t e n poor access a t t h e t i m e
of i n s p e c t i o n . I n s p e c t i o n s t y p i c a l l y a r e not a s e r i o u s problem i n
the performance of s t a t u t o r y d u t i e s . The Department f e e l s t h a t the
a u d i t gives t h e p o i n t undue and unnecessary emphasis.
F i n a l l y , and with r e s p e c t t o the same i s s u e , it should be noted t h a t
primary r e s p o n s i b i l i t y f o r t h e s e i n s p e c t i o n s has been redelegated
t o the Department's Subdivision Section.
As t o Finding 111, a few general comments s e e m t o be i n o r d e r . The
observations ( b) and ( c ) , a s found on page 25, a r e c o r r e c t . The
~ ~ x t u roef i n v e s t i g a t i o n s , e s p e c i a l l y those involving misrepresenta-t
i o n s , a r e d i f f i c u l t t o prove as i n d i c a t e d i n your r e p o r t . Obviously, 4
because they a r e d i f f i c u l t does not mean theyshould not be undertaken.
There is a t e n e n t i n law which s t a t e s t h a t " misrepresentation is the
e a s i e s t t o a l l e g e and t h e h a r d e s t t o prove". Your a u d i t confirms
t h i s . The d i s s a t i s f a c t i o n of complainants i n t h e Department's a b i l i t y
t o prove a complaint is probably the complainant's lack of understand-ing
t h a t i n a d i s c i p l i n a r y proceeding they, the complainant, would ( I
a t b e s t be a witness f o r the S t a t e . This lack of understanding may
be our i n v e s t i g a t o r s ' i n a b i l i t y t o put t h e complaint i n the proper
p e r s p e c t i v e w i t h the complainant. This agency is not an a r b i t r a t o r .
We have no s t a t u t o r y a u t h o r i t y t o demand t h e r e t u r n of money o r the
execution of c o n t r a c t u a l o b l i g a t i o n s . Both a r e c i v i l matters. It
should be noted, however, t h a t s i n c e January of 1978, when we s t a r t e d ( I
keeping f i g u r e s on monies returned t o complainants, the Department
has been instrumental i n e f f e c t i n g t h e r e t u r n of more than one and
a h a l f m i l l i o n d o l l a r s t o the Arizona public through the Department's
i n v e s t i g a t i v e a c t i v i t i e s .
I do not a g r e e w i t h t h e recommendation o f Finding I11 ( a ) on t h e
reduction of t h r e e p o s i t i o n s ( two i n v e s t i g a t o r s and the consumer
representati-; e) . The t h r u s t of t h i s recommendation appears t o
have stemmed from the comparison with t h e Department of Insurance
M r . Douglas R. Norton
Page 3
December 18, 1981
and the Department of Real E s t a t e . I believe no comparison can
reasonably be made as the types of complaints handled by the Depart-ment
of Insurance a r e not as complex as r e a l e s t a t e complaints.
It is my understanding a good many complaints of the Insurance
Department concern claims a g a i n s t companies and a r e disposed o f
r a t h e r quickly.
I n t h e p a s t f o u r y e a r s t h i s agency has gone t o almost as many
proceedings a g a i n s t l i c e n s e e s seeking suspensions o r revocations
of l i c e n s e s f o r improper conduct as i n the p a s t 56- year h i s t o r y
of t h i s agency. I f e e l t h a t the number of hearings has gone a
long way t o calm the waters i n t h e market place r e l a t i n g t o
dealing i n Arizona land. One does not have t o be a g r e a t h i s t o r i a n
t o r e c a l l the n a t i o n a l s t o r i e s on land fraud which were a d a i l y
occurrence j u s t a few years ago. The L e g i s l a t u r e , i n enacting
s t r o n g e r laws ( HB 2064, 1978) and i n giving t h i s Department adequate
s t a f f i n g , has addressed those problems responsibly. The number of
d i s c i p l i n a r y hearings t h a t t h i s agency has conducted i n the p a s t
f o u r y e a r s could only have taken place with adequate s t a f f i n g .
Also, it might be noted t h a t s i n c e 1980 our consumer r e p r e s e n t a t i v e
has taken 21,945 telephone c a l l s as w e l l as conducted 1,616 i n d i v i d u a l
interviews. With the reduction i n s t a f f suggested by you, t h e s e
telephone c a l l s and interviews would n a t u r a l l y have t o be absorbed
by t h e i n v e s t i g a t i v e s e c t i o n . A reduction i n s t a f f appears incon-s
i s t e n t with your recommendation t h a t t h e i n v e s t i g a t o r s should be
i n the f i e l d more and make more c o n t a c t s with complainants.
In my opinion your recommendation f o r a reduction i n s t a f f is an
i n v i t a t i o n t o the s t a t u s quo of the 1960s and e a r l y 70s land fraud
e r a . I would be hopeful t h a t the L e g i s l a t u r e i n t h e i r wisdom would
not wish t o take t h i s kind of gamble.
Your s t a f f has spent considerable t i m e and e f f o r t i n t h i s a u d i t .
Their c o n t a c t s with my s t a f f have been p o s i t i v e . Your recommenda-t
i o n s g e n e r a l l y a r e b e n e f i c i a l and should a s s i s t i n t h e responsible
administration of t h i s Department.
Sincerely,
COMMISSIONER
DEPARTMENT OF REAL ESTATE
