Performance audit, Department of Real Estate

              DOUGLAS R. NORTON, CPA
AUDITOR GENERAL
STATE OF ARIZONA
OFFICE OF THE
AUDITOR GENERAL
September 16, 1991
Members of the Arizona Legislature
The Honorable F i f e Symington, Governor
Mr. Jerry Holt, Commissioner
Department of Real Estate
Transmitted herewith i s a report of the Auditor General, A Performance
Audit of the Department of Real Estate. This report i s in response to a
June 14, 1989, resolution of the Joint Legislative Oversight Committee.
The report i d e n t i f i e s several areas in which the Department can improve
i t s effectiveness and efficiency in protecting the public when making
real estate transactions. We found the Department does not s u f f i c i e n t l y
investigate a l l complaints against licensees by e i t h e r t r e a t i n g serious
allegations as lesser violations or by referring them to other agencies
for resolution. In addition, the Department does not monitor compliance
with subdivision laws and has not taken s u f f i c i e n t enforcement action in
cases involving serious violations of these laws. Finally, the
Department has demonstrated a pattern of special treatment and favoritism
through the improper granting of licenses to employees and preferential
treatment to former o f f i c i a l s and select members of the public.
A response from the Department i s contained on the yellow pages following
the body of t h i s report.
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 in the report.
This report w i l l be released to the public on September 17.
Sincerely,
~ ohgfas R. Nor ton
Auditor General
DRN : l mn
Enc l osu re
2700 NORTH CENTRAL AVENUE ' SUITE 700 . PHOENIX, ARIZONA 85004 ' ( 6 0 2 ) 255- 4385 FAX ( 602) 255- 1251
SUMMARY
The Office of the Auditor General has conducted a performance audit and
Sunset revisw of the Dt? partment ~ f Real Estate, pursuant to a June 14,
1989, resolution of the Joint Legislative Oversight Committee. The audit
was conducted under the authority vested in the Auditor General by
Arizona Revised Statutes ( A. R. S.) § § 41- 2351 through 41- 2379.
The Department is under the direction of a Commissioner ( appointed by the
Governor) who with a s t a f f of 74 employees i s responsible for regulating
the a c t i v i t i e s of approximately 50,000 real estate brokers and
salespersons. This regulation includes conducting examinations and
issuing licenses, investigating complaints, auditing broker trust and
property management accounts and transactions, and conducting
administrative hearings to determine d i s c i p l i n a r y sanctions. By issuing
public reports, the Department also regulates the sale of subdivided and
unsubdivided lands, time- share projects, membership campgrounds, and
cemetery plots. F i n a l l y , the Department administers two recovery funds
which are intended to provide compensation to victims of licensee and
subdivider wrongdoing.
The Department Should lrn~ rove
Its lnvestiaation of
Consumer Corn~ laints ( see pages 5 through 13)
The Department needs to strengthen i t s handling of consumer complaints.
We found the Department's Investigations Division does not investigate
a l l complaints meriting an investigation. We i d e n t i f i e d several
instances in which the Division took a very limited view of i t s authority
and dismissed complaints without an investigation. For example, the
Division claims i t i s unable to investigate a complaint received five
years a f t e r the o r i g i n a l real estate purchase. However, our review found
that some complaints dismissed i n t h i s manner involved specific
violations which, by law, are not subject to a statute of limitations.
Establishing c r i t e r i a concerning the severity of a complaint and
therefore the type of response needed by the Department may allow the
Division to f u l ly investigate al l legitimate issues raised in complaints.
Of those complaints that are investigated, we found that over one- third
are inadequately resolved. Among these were cases in which the Division
used l e t t e r s of admonishment as disciplinary actions against licensees.
We could find no statutory authority for the use of these l e t t e r s , which
were often issued by individual investigators, even when the Division had
documentation of s i g n i f i c a n t wrongdoing by the licensees. In addition,
we i d e n t i f i e d cases that appeared to involve real estate violations, such
as t h e f t , misrepresentation, and breach of fiduciary duties, in which the
Division referred the complaint to other agencies or suggested the
complainants f i l e legal action rather than the Department conducting i t s
own investigation.
The Department Needs to
Strensthen Resulation of
Subdivision Deveio~ ment ( see pages 15 through 25)
The Department needs to improve i t s regulation of subdivisions in order
to better protect the public. In the 1960s and 1970s, Arizona land fraud
schemes provided the catalyst f o r the strengthening of regulation
designed to protect the public from fraud and misrepresentation in land
sales. Despite t h i s need to protect the public, we found the Department
has not actively monitored compliance with subdivision laws.
Specifically, the Department does not attempt to identify property that
has been i l l e g a l l y subdivided, nor does i t routinely monitor subdivisions
as they are b u i l t and sold to assure that the developer complies with the
public report. However, both of these problems could be at least
p a r t i a l l y addressed by working cooperatively with the counties. The
Department could do more to identify i l l e g a l subdivisions through the
assistance of county recorders who could n o t i f y the Department of
attempts to transfer land without a public report. In addition, the
Department can strengthen enforcement by coordinating i t s subdivision
regulatory e f f o r t s with those local e n t i t i e s also involved in the
regulation of subdivisions.
In addition to the problems associated with monitoring compliance, the
Department's enforcement of subdivision laws appears weak. The
subdivision law provides the authority and a process for the Department
to formally suspend sales when any person f a i l s to comply with the
provisions of the public report. However, the Department more often
issues " informal suspensions" for which i t has no specific statutory
authority nor formal c r i t e r i a . Further, the Department has adopted an
" educational approach" to modify the behavior o f v i o l a t o r s o f subdivision
laws. However, in the cases we reviewed, t h i s approach does not appear
to have been effective i n preventing further violations.
The Department Should Eliminate
Practices of Special Treatment
and Favoritism ( see pages 27 through 34)
The Department has demonstrated a pattern of special treatment and
favoritism toward some individuals. We i d e n t i f i e d three specific
instances, taking place in 1989 and 1990, in which real estate licenses
were improperly granted to Department employees. In each of the three
cases, we found that some or a l l of the statutory requirements for
licensure were not met and in most instances were waived by Department
o f f i c i a l s , including a former Commissioner. These waivers were granted
although there i s no statutory authority f o r such action. We also found
two former Department o f f i c i a l s who received special treatment when
obtaining and/ or renewing their licenses. Further, one of these
o f f i c i a l s was apparently given special treatment concerning a complaint
with which he was involved. Additionally, we i d e n t i f i e d two members of
the public who were given special treatment when applying for licensure.
In addition to individual cases of favoritism and special treatment, the
Department's lack of adequate controls over some licensing functions
creates the appearance of impropr i ety . We found the Department has
fai led to moni tor the reasons and c i rcumstances under which in- house
licensing exams are administered. We also found the Department's
controls over the granting of continuing education waivers to be weak.
TABLE OF CONTENTS
INTRODUCTION AND BACKGROUND. . . . . . . . . . . . . . . . . . .
FINDING I: THE DEPARTMENT SHOUU) IMPROVE
ITS INVESTIGATION OF CONSLMER COUPLAINTS . . . . . . . . . .
Not A l l Complaints That Warrant
Investigation Are Investigated . . . . . . . . . . . . . . .
Complaint Investigations
Are Inadequately Resolved. . . . . . . . . . . . . . . . . .
Recommendations. . . . . . . . . . . . . . . . . . . . . . .
FINDING I I : ME DEPARTMENT NEEDS TO STRENGTHEN
REGULATIONOF SUBDIVISION DEVELOPMENT. . . . . . . . . . . .
Subdivision Regulation Is Intended
to Protect Real Estate Purchasers. . . . . . . . . . . . . .
The Department Has Not Adequately
Enforced Subdivision Statutes. . . . . . . . . . . . . . . .
The Department Can Streamline Subdivision
Review by Coordinating with
Local E n t i t i e s . . . . . . . . . . . . . . . . . . . . . . .
Recommendations. . . . . . . . . . . . . . . . . . . . . . .
FINDING Ill: THE DEPARTMENT SHOULD ELIMINATE
THE PRACTICES OF SPECIAL TREATMENT
AND FAVOR1 TlSM . . . . . . . . . . . . . . . . . . . . . . .
L i censes l mp rope r l y Granted to Employees . . . . . . . . . . . . . . . . . . . .
Favorable Treatment to Former
O f f i c i a l s and Members of the Public. . . . . . . . . . . . .
Inadequate Controls Create Appearance of Impropriety. . . . . . . . . . . . . . . . . .
Recommendations. . . . . . . . . . . . . . . . . . . . . . .
SUNSETFACTORS . . . . . . . . . . . . . . . . . . . . . . . . .
AGENCY RESPONSE
LIST OF TABLES
Page
TABLE 1 Department of Real Estate A c t i v i t i e s
Fiscal Years 1987- 88, 1988- 89, and 1989- 90 . . . . 2
TABLE 2 Department of Real Estate
Statement of FTEs and Actual and Budgeted
Expenditures Fiscal Years 1989- 90, 1990- 91,
and 1991- 92 ( Unaudited). . . . . . . . . . . . . .
TABLE 3 Comparison of Subdivision Regulatory
A c t i v i t i e s Performed by the Department
and Those Performed by Local E n t i t i e s . . . . . . . 23
INTRODUCTION AND BACKGROUND
The Office of the Auditor General has conducted a performance audit and
Sunset review of the Department of Real Estate, pursuant to a June 14,
1989, resolution of the Joint Legislative Oversight Committee. The audit
was conducted under the authority vested in the Auditor General by
Arizona Revised Statutes ( A, R. S.) § § 41- 2351 through 41- 2379.
The Department i s responsible for regulating the a c t i v i t i e s of
approximately 50,000 real estate brokers and salespersons. This
regulation includes conducting examinations and issuing licenses,
investigating complaints, auditing broker trust and property management
accounts and transactions, and conducting administrative hearings to
determine disciplinary sanctions.
The Department also regulates the sale of:
Subdivided lands - land divided into more than three parcels, each of
which i s less than 36 acres
Unsubdivided lands - land divided into more than three parcels, each
of which is 36 acres or more
a Time- share proiects - a project in which a purchaser receives the
right to exclusive use of a piece of real property on some periodic
bas i s
Membership camp~ rounds - a campground for which a person purchases,
through fee or periodic payments, a right to use outdoor recreation
f a c i l i t i e s
Cemetery plots - includes burial parks, cemetery plots, mausoleums
and crematories
This regulation i s primarily accomplished through the issuance of public
reports which disclose information about the physical and financial
a t t r i b u t e s o f the property to prospective buyers. A copy of the public
report must be provided to prospective buyers before any sale or offer of
sale can be made. The Department's a c t i v i t i e s are presented in Table 1,
page 2.
TABLE 1
DEPARTMENT OF REAL ESTATE ACTIVITIES
FISCAL YEARS 1987- 88, 1988- 89, AND 1989- 90
Act i v i ty 1987- 88 1988- 89 1989- 90
Broker exams
Salesperson exams
New brokers licenses
New salesperson licenses
Broker renewals
Salesperson renewals
Subdivision f i l i n g s
Subdivision inspections
Broker audits conducted
Formal complaints received
Complaints referred to
Attorney General
Hearings held
Consent agreements
License suspensions
License revocations
Fines ordered
Source: Department of Real Estate fiscal year 1991- 92 budget request
The Department i s under the direction of a Commissioner, who is appointed
by the Governor. For fiscal year 1990- 91, the Department was authorized
76 full- time equivalent ( FTE) positions(') ( see Table 2, page 3) which
are dispersed over six operational divisions, including:
Adm i n i st rat i on/ Bus i ness Management ( 10 FTEs
Broker and Property Management Audi ts ( 6 FTEs)
Educat ion ( 6 FTEs)
Investigations ( 11 FTEs)
Licensing ( 20 FTEs)
Subdivisions ( 11 FTEs)
In addition, the Department operarss a branch o f f i c e i n Tucson, staffed
with ten FTEs.
( 1) The Department has combined three of the positions i n t o one i n order to afford a
higher salary f o r that position. Thus, there are only 74 actual positions.
TABLE 2
DEPARTMENT OF REAL ESTATE
STATEMENT OF FTEs AND ACTUAL AND BUDGETED EXPENDITURES
FISCAL YEARS 1989- 90, 1990- 91, AND 1991- 92
( unaudited)
1989- 90 1990- 91 1991- 92
( Actual 1 ( Actual) ( Budqeted)
FTE positions 75 76 76
Personal services $ 1,552,170 $ 1,598,132 $ 1 ,760,100
Employee related 367,293 418,927 430,200
Prof. & outside services 82,533 92,011 80,000
Travel - in- state 65,801 57,358 53,500
out- of- state 10,082 3,567 9,000
Equ i pmen t 15,952 26,132 8 ,000
Other operating 512.557 482,114 527,800
TOTAL $ 2,606.388 $ 2,678,241 $ 2,868,600
Source: Arizona Financial Information System reports for fiscal years
1990 and 1991; State of Arizona, Appropriations Report for the
Fiscal Year Ending June 30, 1991; State of Arizona, Annual
Budget for Fiscal Year 1992
Revenues And Expenditures
The Department receives funding through a general fund appropriation.
Revenues received from licensing and examination applications, and
subdivision f i l i n g s are d i r e c t l y deposited into the State General Fund.
Fees are set so that the revenues derived from them w i l l equal at least
95 percent but not more than 110 percent of the anticipated appropriated
budget for the Department for the succeeding fiscal year. Table 2 l i s t s
the expenditures of the Department for fiscal years 1989- 90 through
1991- 92.
The Department also administers two recovery funds, the Real Estate
Recovery Fund and the Subdivision Recovery Fund, which are intended to
provide compensation to victims of licensee and subdivider wrongdoing.
During fiscal year 1990- 91, there were 15 claims, totaling $ 184,572, paid
from the Real Estate Recovery Fund, leaving a fund balance of $ 744,923.
During the same period, there were no claims paid from the Subdivision
Recovery Fund, leaving a fund balance of $ 1,130,117.
Audit Sco~ e
Our audit focused on the Department's public protection responsibilities
and contains findings in the following three areas:
The Department's investigation of consumer complaints
The Department's regulation of subdivision development
The Department's adherence to statutes and rules regulating the
issuance of real estate licenses
In addition, we addressed the 12 s t a t u t o r i l y mandated sunset factors.
Our audit was conducted in accordance with government auditing standards.
The Auditor General and s t a f f express appreciation to the Commissioner
and the s t a f f of the Department for their cooperation and assistance
during the audit.
FINDING I
THE DEPARTMENT SHOULD IMPROVE ITS INVESTIGATION
OF CONSUMER COMPLAINTS
The Department needs to strengthen i t s handling of consumer complaints.
We found the Department does not investigate a l l legitimate complaints i t
receives. In our review of investigated complaints, over one- third
appear to be inadequately resolved.
The Investigations Division i s responsible f o r protecting the public
through enforcement of real estate statutes and rules, detection of
violations, and the pursuit o f administrative sanctions. The Division
consists of a Consumer Services Section, which provides assistance and
information to the general public in the resolution of real estate
related problems, and a General Investigations Section, which conducts
investigations into alleged violations of real estate statutes and
regulations. This section also conducts background investigations of
individuals applying for real estate licenses.
According to the Division Director, the Division categorizes complaints
as e i t h e r public assistance requests, preliminary inquiries, or case
investigations in order to focus i t s resources. The Division Director
reviews a l l written complaints( l) in the Phoenix o f f i c e and classifies
them as either a public assistance request, preliminary inquiry or an
investigations case. The Director then assigns the complaint to an
investigative s t a f f member .(* I Discussions with Division s t a f f and a
review of Division manuals provided the following information on
complaint categories:
( 1) By statute, the Department can only investigate w r i t t e n complaints. Individuals
registering complaints by phone are sent a complaint fonn by the Department, and
requested t o complete the form and return i t to the Department.
( 2) I n the Tucson Field Office, the Investigations Supervisor reviews, c l a s s i f i e s , and
assigns complaints.
Public assistance requests are complaints that the Division Director
determines are not within the Division's j u r i s d i c t i o n or lack merit.
The Division handles these complaints by sending a l e t t e r to the
complainant referring the complainant to another agency or suggesting
they obtain legal counsel. The Division handled 752 public
assistance requests during fiscal year 1989- 90.
Preliminary inquiries are matters that do not merit a formal case
investigation, but do require inquiries and a contact with the
licensee and public to resolve the problem. Preliminary inquiries
involve a minimum amount of phone contact in order to achieve an
informal resolution. The complainant is n o t i f i e d by phone or l e t t e r
of the complaint's resolution. During fiscal year 1989- 90, the
Division conducted 265 preliminary inquiries.
lnvestiqation cases are complaints that, according to Division pol icy,
are thoroughly investigated and either closed or referred for
administrative action. Actions available to the Department include
f i nes , suspens ions , and l i cense revocat ions . These act ions may be
imposed after a hearing before an administrative law judge or as the
result of a consent agreement between the Department and the
licensee. Complainants are n o t i f i e d of the Division's investigative
determination by l e t t e r . The Department investigated 708 cases
during fiscal year 1989- 90.
Not All Com~ laints That Warrant
lnvestiqation Are lnvestiqated
The Department does not investigate a l l complaints meriting
investigation. Although the system of categorizing complaints was
established to more e f f e c t i v e l y u t i l i z e Department resources, we found
that some complaints with serious allegations were not investigated. The
lack of cr i ter ia for determining the appropriate level of investigation
for a complaint may contribute to the Department's f a i l u r e to investigate
these cases.
Cateqorizin~ com~ laints - Dividing complaints into categories was
established by the current Investigations Division Director as a way to
more e f f e c t i v e l y use the Division's resources. The intent o f the
procedure i s to allow the Division to evaluate each complaint based on
i t s allegations and to focus e f f o r t s on the most serious problems. The
procedure i s a logical approach to a workload that consisted of more than
1,700 consumer complaints during fiscal year 1989- 90.
Some com~ laints not investiqated - In our review we found 18 percent of
the complaints received by the Division were inappropriately categorized
as public assistance requests and preliminary inquiries and, as a
consequence, did not receive an investigation.(') In these instances the
Division was unnecessarily narrow in the way i t interpreted the issues
raised by the complainant.
Our review of public assistance requests and preliminary inquiries
handled by the Division i d e n t i f i e d 48 cases ( 18 percent) that should have
been investigated as cases. In these instances the Division took a very
limited view of i t s authority, c i t i n g various reasons for not
investigating these complaints. The reasons cited include statute of
limitations, lack o f j u r i s d i c t i o n , and the decision that the complaint
would be better handled through c i v i l action. In doing so, the Division
failed to acknowledge the seriousness of the allegations, using the
limitations as a means to dismiss the complaints without investigation.
As an example of t h i s practice the Division often misinterprets i t s
statute of limitations in turning down cases. The Division claims that
i t i s unable to investigate a complaint received f i v e years after the
original purchase, yet our review of state statutes and regulations
revealed that A. R. S. $ 32- 2153. B. s p e c i f i c a l l y mentions certain acts which
are not subject to any time limitations. These acts include substantial
misrepresentation, false promises, fraud, and transacting business
without a license.
The 48 cases c i ted above included' issues that shou Id have been
investigated, as i l l u s t r a t e d in the following examples.
In July 1990, a complainant sent in a detailed l e t t e r of problems
alleging land fraud and asking i f the developer could be called to
task. The complainant states that she purchased 40 acres in a
subdivision in 1974. She moved to the property in 1988 and
discovered that many of the promises made by the developer and
licensee had not materialized. Specifically, she alleges several
( 1) We selected a s t a t i s t i c a l sample of 270 publ i c assistance requests and preliminary
inquiries from the 618 publ i c assistance requests and preliminary inqui ries handled by
the Phoenix o f f i c e during calendar year 1990.
instances of misrepresentation, including the lack of county roads
accessing the subdivision as promised in advertising brochures, and
incorrect information about certain easements and property lines.
The complainant also alleges that an advertised " recreational lake"
i s i n a c t u a l i t y a large, dry, stock pond located on State land. The
Division responded: " Please be advised that the Department's a b i l i t y
to investigate a real estate broker's or developer's a c t i v i t y i s
limited to f i v e ( 5) years after the original purchase."
We contacted the complainant to c l a r i f y several points raised in her
l e t t e r and learned that the developer continues to advertise county
roads and to market and s e l l property in this area. The complainant
also alleges that over $ 1 m i l l i o n was placed i n t o t r u s t s for road
construction, but that only a very small percentage of i t was spent
on roads with the remainder of the funds being unaccounted for.
Finally, the complainant alleges the developer's agent i s acting as a
property manager for some owners and i s fraudulently charging them
for materials and/ or labor he is not supplying.
b e n t s - The v i o l a t ions of misrepresentat ion and false promises
alleged in t h i s complaint are not subject to a statute of limitations
and should have been investigated by the Division. Furthering the
need to investigate t h i s complaint i s the fact that the developer i s
s t i l l marketing t h i s property and according to the complainant i s
continuing t o v i o l a t e real estate rules and regulations. The
complainant has since contacted the Attorney General's o f f i c e after
receipt of the Division's response. In addition, in May 1991,
another complainant wrote to the Governor complaining of land fraud
by t h i s developer. The Governor referred the complaint to the Real
Estate Commissioner who instructed the Division t o investigate this
new complaint.
@ A complainant wrote to the Department in 1990 claiming licensee
misrepresentation concerning a real estate transaction in 1985. The
complainant was told by the real estate licensee that a wash on the
property was not a problem because i t was always dry. A bad storm
flooded the complainant's property, which led her to contact the
Flood Control D i s t r i c t where she learned that her property i s in a
flood area. The complainant was also given a copy of the flood plain
information showing that the property was in a flood area. The flood
plain information contained notations, indicating that the licensee
had received the information p r i o r to the closing of escrow. The
complainant claims that the licensee failed to disclose this
information to her. The Division refused to investigate, claiming
that the complaint was a contract dispute. However, s t a f f notations
in the f i l e indicate that the incident occurred too close to the
statute of limitations for the Division to proceed with an
investigation.
b e n t s - Even though misrepresentation i s not subject to any time
l i m i t a t i o n and i s an investigatible v i o l a t i o n , the Division
apparently elected not to investigate t h i s complaint because of a
supposed statute of limitation. Furthermore, the Division viewed
t h i s complaint as a contract dispute rather than misrepresentation.
An April 1990 complainant claims that the l i s t i n g real estate agent
involved in her transaction intentionally misrepresented the property
lines of a parcel of land the complainant purchased. The complainant
states that the property lines she was verbally told of, as well as a
copy of the Multiple L i s t i n g Service l i s t i n g sheet and the map
showing the property lines were inaccurate. Furthermore, the
complainant states that she discovered after the sale that the
l i s t i n g agent was in possession of a survey of the property showing
accurate property lines which was done prior to the sale. The
complainant never received this survey, nor was i t mentioned in the
purchase contract. The Division responded that t h i s was a contract
dispute and would not be investigated. The complainant was not
s a t i s f i e d with the Division's response and requested another review
of her complaint. The Division once again refused to investigate;
however, t h i s time they stated that " We i n v i t e you to r e f i l e your
complaint in the event that you obtain a judgment against the
[ respondent I . "
Comnents - In both responses the Division failed to address the
issue of misrepresentation by a licensee, characterizing the
complaint as a contract dispute, over which the Department lacks
j u r i s d i c t i o n . Furthermore, the Division sent a contradictory message
when i t invited the complainant to r e f i l e i f she obtains a judgment.
This statement, which the Division uses, appears to place the burden
of protecting the public against licensee violations on the
complainant and not on the Department.
Lack of c r i t e r i a may contribute to problem - The Division's lack of well
established c r i t e r i a f o r defining public assistance requests, preliminary
inquiries and case investigations may contribute to i t s f a i l u r e to f u l l y
investigate a l l legitimate issues raised in complaints. In numerous
interviews with the Division Director and s t a f f , as well as a review of
Division manuals, we ascertained that there are no written, formal
c r i t e r i a for determining when a complaint should be defined as a public
assistance request, a prel iminary inquiry, or case investigation. This
lack of c r i t e r i a i s made more serious by the fact that the
c l a s s i f i c a t i o n , and thus the decision to investigate a complaint, i s
determined solely by one person in each o f f i c e .
In addition, lack of c r i t e r i a also allows the Division to control i t s
workload, perhaps inappropriately. The Division Director admitted that
as workloads increase, i t i s possible that the Division might not view
cases the same way as when workloads are smaller. We noted that the
allegations of misrepresentation and false promises alleged in the public
assistance requests and preliminary inquiries appeared to be comparable
to allegations contained in the case investigations we reviewed, further
suggesting that circumstances may influence the way in which the Division
handles complaints.
Comelaint Investisations
Are lnadequatelv Resolved
In our review of consumer complaints which the Division a c t u a l l y
investigated ( case investigations), we found that t h i r t y - f i v e percent are
inappropriately resolved.(') In many instances the Division uses letters
of admonishment as a form of disciplinary action, rather than seeking
legitimate administrative sanctions. In other instances, the Division i s
not adequately investigating complaints, referring them instead to other
regulatory agencies or the courts for resolution.
Letters of admonishment/ written censure - The Division uses l e t t e r s of
admonishment as a disciplinary action without statutory authority. These
l e t t e r s have been used inappropriately. Furthermore, the Division
misleads complainants when informing them of actions taken.
The Division used l e t t e r s of admonishment as a form of discipline in
eleven percent of the cases we reviewed. However, a review of the real
estate statutes revealed that the Department lacks the statutory
authority to send out l e t t e r s of admoni~ hment.(~) Consequently, a l e t t e r
of admonishment cannot be used as a form of discipline, nor can i t be
used as evidence of prior disciplinary actions i f the Department receives
subsequent complaints since the licensee has not had an opportunity to
refute the conclusions of the l e t t e r .
Our review of case investigations showed that l e t t e r s of admonishment had
been sent inappropriately. Although Division manuals l i s t no c r i t e r i a as
to when a l e t t e r of admonishment can be sent, the Division Director
( 1) We reviewed 89 of the 253 highest p r i o r i t y cases the Division received f o r calendar
years 1988, 1989, and 1990.
( 2) Although the Department does not have the statutory authority t o issue l e t t e r s of
admonishment, several other state regulatory authorities have such authority. These
advisory l e t t e r s , often called l e t t e r s of concern, are public documents issued by
these agencies when there i s i n s u f f i c i e n t evidence to merit direct action against the
1 i censee.
claims that an informal policy governs the use of these l e t t e r s .
According to the Director, individual investigators determine when to
send these l e t t e r s and generally send them in cases involving a breach in
normal procedures, inappropriate actions, or when they believe they w i l l
have d i f f i c u l t y proving a violation. The Director further stated that
l e t t e r s of admonishment cannot be used in cases involving t h e f t , fraud,
or i l legal subdivision a c t i v i t y . As i l lustrated by the fol lowing
examples, we found that l e t t e r s were sent in cases where the Division had
documented proof of a violation and/ or a confession by the licensee, and
in circumstances in which the informal policy would preclude the use of
l e t t e r s of admonishment.
The Division received a complaint from HUD alleging that a real
estate licensee had altered an earnest money deposit receipt and used
t h i s receipt as proof of deposit on a HUD purchase. During a meeting
with the Division investigator, the licensee admitted that she
altered the receipt. The Division responded to HUD that there was
i n s u f f i c i e n t cause for administrative action and that while the
respondent did a l t e r the receipt, there was no injured party. Thus,
the licensee w i l l be issued a written censure.
Comnents - The licensee confessed to committing a fraudulent act and
as such the Department should have taken act ion against her l icense.
Instead, the investigator sent a l e t t e r of admonishment to the
respondent even though the Division Director stated that l e t t e r s of
admonishment cannot be used in cases of fraud.
The Division received a complaint and extensive documentation from
the Director of the Gila County Development Office concerning what
It.. . appears to involve a del iberate systematic attempt" to c i rcumvent
subdivision regulations and Gila County's Minor Land Division
Ordinance. The documentation provided reveals the formation and
existence of i l l e g a l subdivisions, and appears to indicate that the
acts were deliberate. The Division reviewed the materials and found
that a licensed broker and two unlicensed individuals violated
subdivision laws. However, no action was taken against the two
unlicensed individuals because they agreed to abide by subdivision
laws in the future. The licensed broker was sent a l e t t e r stating
she was " expected to know subdivision requirements and to inform
prospective c l i e n t s of these requirements." Furthermore, the
Division responded to the complainant that the broker had been
" censuredtt for her conduct, yet there i s no mention of admonishment
or censure in the l e t t e r to the licensee.
Comnents - The investigator sent a l e t t e r of admonishment to the
licensee even though the Division Director stated that l e t t e r s of
admonishment cannot be used in cases of i l l e g a l subdivision a c t i v i t y .
Not only does the Division lack statutory authority to send l e t t e r s o f
admonishment, but it also misleads complainants when informing them of
the results of investigations. Letters to complainants t y p i c a l l y use the
phrases " l e t t e r o f admonishmenttt or " written censure" and suggest that
the Division has taken disciplinary action. However, the tone of the
l e t t e r s actually sent to licensees i s much milder, and the l e t t e r s do not
always mention an admonishment or censure, even when the Division informs
the complainant that they have done this. Thus, the p r a c t i c a l e f f e c t on
the licensee may be considerably less than the complainant would expect
based on communications from the Department.
Referrina cases involvina real estate violations - The Division is not
investigating some real estate v i o l a t i o n s , r e f e r r i n g them instead to
other regulatory agencies or the courts. As i l l u s t r a t e d by the following
example, t h i s results in a lack of enforcement action taken against
l icensees since the Department is the legitimate agency to handle these
violations.
The Department received a complaint from a mortgage company charging
misrepresentation and fraud by a licensed real estate salesperson.
The complainant alleged that the licensee participated in a real
estate transaction whereby an individual obtained financing on a home
by s i g n i f i c a n t l y i n f l a t i n g i t s value and misrepresenting his down
payment. In a sworn statement to the Department, the licensee
acknowledged his participation in the scheme. In his l e t t e r closing
the case, a Division investigator informed the complainant that a
criminal conviction against the licensee would be necessary in order
for the Department to take administrative action on his license.
Further, although the investigator acknowledged some doubt about
whether a criminal investigation would actually be conducted, he
advised the complainant that the case had been referred to the local
police department for investigation. However, according to a
Division investigator, the police did not investigate the case.
Comments - Although the Department received s i g n i f i c a n t evidence
indicating acts of misrepresentation and fraud by a licensee during
the course of a real estate transaction, violations c l e a r l y w i t h i n
the Department's statutory authority, the case was closed and
referred to another agency for investigation. As a result, no
action, neither administrative nor criminal, was taken against the
l i censee .
We i d e n t i f i e d four additional cases that appeared to involve real estate
violations which the Division referred to other agencies or the courts
for resolution. In these cases, complaints were submitted to the
Division alleging various violations of real estate law, such as t h e f t ,
misrepresentation, and breach of fiduciary duties. The Division did not
adequately investigate the complaints, referring them to other agencies
for resolution. Division f i l e s contain no information about the action
taken, i f any, by these other agencies.
RECOMMENDATIONS
1. The Department should investigate a l l legitimate complaints. The
Department needs to establish written c r i t e r i a to ensure that
complaints are appropriately categorized as public assistance
requests, preliminary inquiries or case investigations based on the
issues raised in the complaints.
2. The Department should obtain the necessary statutory authority to
issue letters of admonishment and to use them as a disciplinary
action. Unti l such time as statutory authority i s granted, the
Department should stop using these letters of admonishment as a form
of discipline.
3. The Department needs to f u l l y investigate and take appropriate action
on violations of real estate law within i t s j u r i s d i c t i o n rather than
referring such cases to other agencies.
FINDING I1
THE DEPARTMENT NEEDS TO STRENGTHEN
REGULATION OF SUBDIVISION DEVELOPMENT
The Department of Real Estate needs to improve i t s regulation of
subdivisions. Although subdivision regulation is intended to protect
purchasers from fraud and misrepresentation in land sales, the Department
has not actively monitored compliance with subdivision laws and has taken
only limited enforcement action against violators. The Department could
obtain additional resources for monitoring and enforcement by
coordinating i t s subdivision a c t i v i t i e s with local governments.
Subdivision Resulation Is Intended
to Protect Real Estate Purchasers
The Department regulates the sale of subdivided land in Arizona in order
to protect the public from fraud and misrepresentation. During the 1960s
and 1970s, individuals purchasing land in Arizona were often the victims
of land frauds. In some cases, the developer would s o l i c i t purchasers
through mail order campaigns that included pictures and promises of a
retirement paradise. However, when the purchasers v i s i t e d their property
they discovered that i t was barren land.(') In another scheme the
developer did not record the transfer of the deed, and then fraudulently
sold the land to other purchasers. S t i l l another ploy was to promise
numerous s i t e improvements ( roads, parks, u t i l i t i e s , etc.) but never
i n s t a l l them.
Arizona's subdivision laws, i n i t i a l l y enacted in 1937, were strengthened
in the late 1970s in order to address these problems. A. R. S. $ 32- 2183. D
requires subdividers to obtain a public report from the Department p r i o r
( 1) The types of frauds comni tted during t h i s era are i l l u s t r a t e d by Lake Mead Rancheros,
a 1961 offering i n Mohave County. The Real Estate Commissioner at the time called
t h i s one of the most glaring examples of misrepresentation of l o t sales i n the West.
The property was advertised nationally as f u l l y developed, yet i t had no u t i l i t i e s ,
no roads, and the nearest water was a coin- operated tank 12 miles away. I n addition,
the subdivision was over 100 miles from the lake f o r which it was named.
to offering subdivided land for sale.(') The pub1 i c report requi rement
applies to a l l land offered f o r sale in Arizona, regardless of i t s
location. The public report i s based on information submitted by the
developer and v e r i f i e d by the Department. I t discloses information, such
as ownership status, proposed amenities, r e s t r i c t i o n s on the use of the
property, adequacy of the water supply, and the developer's financial
a b i l i t y to complete the project. Purchasers can use t h i s information to
evaluate the lands offered f o r sale. After a project i s approved and i t s
public report issued, the Department may suspend the public report, hence
preventing further sales, i f a developer f a i l s to comply with the
report's provisions.
The Department Has Not Adeauatelv
Enforced Subdivision Statutes
The Department's enforcement of subdivision requirements appears to be
weak. L i t t l e i s done to identify i l l e g a l l y subdivided property, nor does
the Department monitor the developer's a c t i v i t i e s t o ensure that the
subdivision i s constructed as specified in the public report. In
addition, when violations are i d e n t i f i e d , the Department does not
adequately pursue the violators nor take s u f f i c i e n t enforcement action
against them. Further, existing statutes do not allow most victims o f
subdivider wrongdoing access to recovery funds administered by the
Department.
I l l e g a l subdivisions - The Department does l i t t l e to identify or prevent
the i l l e g a l sale of property in subdivisions. There are several types of
i l l e g a l sales: one i s the sale of land without obtaining a public report,
another i s f a i l u r e to comply with the public report, and a t h i r d i s the
sale of land for which the public report has been suspended. The
Department does not attempt to identify property which has been divided
and sold without a public report or to identify sales which do not comply
with the specifications of the public report. According to the Director
of Subdivisions, the Department has no easy way to do so and has chosen
( 1 ) A . R . S . 532- 2101.40 defines subdivided land as I # . . . improved or unimproved 1 and or lands
divided or proposed to be divided f o r the purpose of sale or lease, whether immediate
or future, i n t o four or more l o t s , parcels or f r a c t i o n a l i n t e r e s t s . . . . I1
to use i t s available resources in other areas. In order to prevent the
sale of land for which the public report has been suspended, the
Department relies on t i t l e companies. When the Department suspends a
report, the suspension i s recorded with the county recorder. Thus, when
a t i t l e search i s conducted as a part of the sale, the suspension i s
identified. According to the Director of Subdivisions, a t i t l e company
should not go through with a sale of suspended property. However, the
use of a t i t l e company in the sale of land i s not required, and,
therefore, sales can proceed after a public report i s suspended.
However, other methods of identifying the i l l e g a l sale of property may be
available to the Department. Some local government planning and zoning
o f f i c i a l s we contacted stated that they have arranged for county
recorders and/ or county assessors to n o t i f y them of unusual or suspicious
land s p l i t s . These arrangements enable the local o f f i c i a l s to determine
i f the land s p l i t s require local action or approval. County recorders
are the logical o f f i c i a l s to identify i l l e g a l l y subdivided land. They
handle the transfer of t i t l e when property i s sold and are able to
identify when property i s divided and recorded as separate parcels.
A similar arrangement could be made between the Department and county
recorders for identifying i l l e g a l subdivisions. According to the
President of the Arizona Association of County Recorders, the recorders
recognize i l l e g a l subdivisions as a major problem and would welcome the
opportunity to assist the Department in the i d e n t i f i c a t i o n of i l l e g a l
land s p l i t s .
Subdivision monitoring - The Department does not routinely monitor
subdivisions as they are b u i l t and sold to assure that the developer
complies with the public report. The Division Director asserts that due
to a lack of resources, the Department i s not able to monitor the
development of the subdivision to assure that i t i s actually constructed
and marketed according to the public report. In our review we noted
instances where developers deviated substantially from the terms of the
public report in building their subdivisions. In one case we found that
a developer marketed property under terms different from those specified
in the public report. Another deviation has had significant consequences
for purchasers, as i l l u s t r a t e d i n the following example.
As of September 1991, neither the f i r e hydrants nor the egress road
had been installed in a subdivision despite the assurance in the
public report issued in 1983 that they would be. The Department did
not monitor the development of the subdivision to ensure compliance
with the public report and thus it was not u n t i l a complaint was
received from the homeowners association in October 1990 that the
Department became aware of the noncompliance. Although many people
purchased property in the subdivision over the last eight years, the
c i t y refuses to issue any building permits u n t i l the subdivision i s
brought into compliance with zoning codes.
Comnents: Based on the public report for t h i s subdivision,
purchasers could reasonably expect i t to meet local zoning
requirements. The developer's f a i l u r e t o comply with the public
report, as we1 l as the Department's fai lure to monitor the
subdivision and ensure timely compliance, has prevented purchasers
from bui lding on their land and may subject them to additional costs
for the i n s t a l l a t i o n of those items necessary to meet zoning
requirements.
The Department should periodically monitor subdivision a c t i v i t i e s to
ensure that the developer complies with the terms of the public report.
Such monitoring could be conducted in cooperation with local governments
( as described on page 22) and would enable the Department to identify
potential problems such as the one described above and take action to
protect the purchasers who rely on the public report in making their
decisions.
Weak enforcement action - The Department's enforcement of subdivision
laws appears weak. Most act ions are " informal" act ions, based on vague
c r i t e r i a . Penalties are r e l a t i v e l y minor and do not e f f e c t i v e l y preclude
continued violations.
Although the subdivision law provides the authority and a process for the
Department to formally suspend sales when any person fai Is to comply with
the provisions of the public report, the Department more often
circumvents t h i s process by issuing " informal suspensions."( 1) The
( 1) According to the D i r e c t o r o f Subdivisions, the difference between a formal and
informal suspension i s that formal suspensions are recorded with county recorders and
can prevent sales. Informal suspensions are not recorded; the Department r e l i e s on
the good f a i t h of the developer t o r e f r a i n from sales u n t i l the problem i s corrected.
Department has no specific statutory authority to issue informal
suspensions and no formal c r i t e r i a for when those suspensions are to be
issued. Individual subdivision representatives(') use their discretion
to determine when informal suspensions are appropriate, basing their
decision upon how serious the offense was, the developer's history with
the Department, and their ' gut reaction."
Further, the informal suspension process lacks any real controls. The
Department does not track the number of informal suspensions issued.
Instead, individual representatives rely on their memories to track these
suspensions. Thus, no summary information on the number of informal
suspensions could be provided. Moreover, suspensions are not reviewed to
ensure that the representatives' decisions are consistent.
The lack of controls creates the potential f o r subjective judgment and
favoritism. However, developing written c r i t e r i a and issuing written
consent agreements in the place of informal suspensions would help to
minimize these problems. The Department's legal counsel agrees that
requiring a written consent i s essential. A written consent would, at a
minimum, specify what actions the developer should take, the time frame
for taking the action, and the consequences of f a i l i n g to act. Such
agreements would ensure that there i s no mistake between the parties
regarding the remedy and the discipline. In addition, i t would establish
a record which might become important in considering sanctions for
subsequent violations.
When the Department does take action against violators, penalties appear
to be weak. Although we did not review a l l actions taken by the
Department, our review i d e n t i f i e d cases where developers had long
histories of violations or where the violation had the potential f o r
s i g n i f i c a n t financial impact. However, enforcement actions taken in
these cases do not appear to have been adequate. Instead of penal izing
developers for v i o l a t i n g the subdivision laws, the Department has adopted
( 1 ) The Department's subdivision representatives are responsible f o r ensuring developer
compliance with pub1 i c report requi rements.
an approach whereby it attempts to inform developers o f t h e i r legal
r e s p o n s i b i l i t i e s and promote compliance with the law. The educational
approach adopted by the Department to modify the behavior of the
offenders does not appear to have been effective i n preventing further
violations in the cases we reviewed. The following examples i l l u s t r a t e
the lack of effective act ion against v i o l a t o r s .
Example 1
From 1983 through 1987 the Department received several complaints
regarding the sales practices of a broker, but took no d i s c i p l i n a r y
action. In 1987, the Department was informed that the broker had
IUI 3a1c
offered 1:: 10: s g-- - - I - ifi & mIa-.,, : I Gupa f~- - U.. U- I& LI.. Y w i thout obtaining the
required public report. During i t s investigation, the Department
also found that the broker had offered nearly 170 lots located in
three northern Arizona counties over the preceding several years
without obtaining the necessary public reports. In October 1988, the
Department and the broker agreed to a consent order, based solely on
the i l l e g a l o f f e r i n g o f the 18 lots in Maricopa County, in which the
broker agreed to a revocation of his license, a c i v i l penalty of
$ 1,500, and to cease subdividing land in Arizona. Due to the
interstate nature of the 170 northern Arizona offerings, Department
o f f i c i a l s attempted to refer the case to HUD. After an i n i t i a l
rejection, HUD o f f i c i a l s accepted the case in mid- 1989, but then
returned i t one year later saying they were unable to proceed with an
investigation. However, even after the rejection by HUD, no e f f o r t
was taken by the Department to address the 170 lots in northern
Arizona. This includes a f a i l u r e by the Department to suspend the
sale of the land to prevent further violations. In early 1991 the
Department learned that the ex- broker continues to offer land he owns
in Arizona to foreign investors without the required public reports.
Comnent: According to the Division Director, t h i s case represents
perhaps the largest recent i l l e g a l land sale case in Arizona.
However, the action taken addressed only a few of the violations and
involved a small c i v i l penalty. No action has been taken against the
ex- broker for the 170 lots in northern Arizona which he i l l e g a l l y
offered f o r sale, and no action has been taken to stop his current
i l l e g a l a c t i v i t y . The revocation of the broker's license, while
appropriate, does not prevent further sales, since the ex- broker
owned the property in northern Arizona, and no license is required to
s e l l one's own land.
A real estate broker marketed a subdivision in a manner which was
c l e a r l y out of compliance with the provisions of i t s public report.
This broker sold property v i a agreements for sale, whereby the
developer retains t i t l e to the property u n t i l the property is
completely paid for, rather than by deeds o f t r u s t as were specified
in the public report. As a result, the purchasers may not have been
aware that they did not have t i t l e to their home. The Department
learned that the subdivision was being sold via agreements of sale in
February 1988, but did not suspend sales unt i l May 1989, 15 months
later, when the developer went out of business.
Comnent: Despite evidence that the broker was not complying with the
public report in marketing the subdivision, the Department took no
action to require the developer to comply with the report nor did the
Department amend the report to reflect actual marketing practices.
No action was taken against the broker, the corporate o f f i c e r s , or
the development company. No penalties were assessed, and no licenses
revoked. In fact, the only disciplinary action taken was to suspend
sales after the developer went bankrupt. The broker i s s t i l l
licensed to do business in Arizona.
The Department's limited action in these and other cases we i d e n t i f i e d
does not appear to e f f e c t i v e l y protect the purchasers of subdivided real
estate in ~ r i z o n a . ( ' ) The cases i l lustrate the abi l i ty of subdividers to
circumvent the key provision of the law - the public report - with l i t t l e
consequence. As a result, purchasers may continue to be a t r i s k when
buying property in subdivisions. This continued r i s k occurs despite the
e f f o r t s of the Legislature to provide protection to consumers through the
subdivision law.
exist in^ statutes hinder access to recovery funds - Beyond the
Department's weak enforcement of subdivision laws, current statutes
hinder access to a recovery fund administered by the Department and
designed to compensate persons harmed by subdividers. A. R. S. 532- 2196
directs the Real Estate Commissioner to establish a Subdivision Recovery
Fund and, based on a court judgment, pay claims of up to $ 10,000 per
transaction to the purchaser of an unimproved subdivision l o t who i s
injured by fraud or misrepresentation of a subdivider. As such,
purchasers of improved subdivided land are i n e l i g i b l e for the protection
provided by the fund. Adding to t h i s problem i s the Department's
interpretation that the mere planning of improvements by a subdivider
( 1) The Department has been slow to act i n the case c i t e d on page 18 where the developer
f a i l e d t o i n s t a l l f i r e hydrants and e x i t roads as specified i n the public report.
Eight months a f t e r receiving the complaint, the Department s t i l l had not taken any
action t o compel the developer to correct the s i t u a t i o n o r t o prevent future problems.
makes the l o t improved land and therefore not covered by the fund. This
overly r e s t r i c t i v e access to the fund i s i l l u s t r a t e d by the small number
of claims paid from it, reported by Department o f f i c i a l s to be only four
in the last f i f t e e n years. Further, this limited access has allowed the
fund balance to grow to $ 1,130,117 as of June 30, 1991. However, a
statutory revision making purchasers of improved lots e l i g i b l e for
reimbursement from the Subdivision Recovery Fund could provide additional
protection to those injured by the i l l e g a l acts of a subdivider.
The Department Can Streamline Subdivision - Review
bv Coordinatina with Local Entities
The Department can obtain additional resources to strengthen enforcement
by streamlining the subdivision review process. The s i m i l a r i t i e s between
the Department's subdivision review a c t i v i t i e s and those of local
governments provide opportunities for u t i l i z i n g work currently performed
by c i t y and county s t a f f . To improve i t s effectiveness and efficiency,
the Department could coordinate i t s e f f o r t s with those of the local
e n t i t i e s involved in the regulation of subdivisions.
S i m i l a r i t i e s between Department and local sovernment a c t i v i t i e s - Several
of the Department's a c t i v i t i e s i n approving subdivision public reports
are similar t a c t i v i t i e s of local governments that also regulate
subdivision dr , opment. Department subdivision representatives review
developers' applications f o r public reports and supporting documents to:
1) confirm compliance with subdivision laws and rules; 2) identify any
conditions that might affect the buyer's use or enjoyment of the
property; and 3) identify any responsibilities or obligations the
purchaser may have to assume. Once the app l i cat ion has been reviewed, a
subdivision representative inspects the s i t e to assure that the property
i s as described in the application; that the u t i l i t i e s are being
installed as promised; that there are no additional nuisance factors
which should be described in the report; and that the developer is
meeting established deadlines.
Developers must comply with local requirements as well. For example, the
developer must obtain a recorded p l a t , approved by local authorities
prior to applying for a public report from the Department. The plat,
which is a detailed set of plans for building the subdivision, contains
technical information on the proposed layout, drainage, water, u t i l i t i e s ,
street improvements, etc. Plans are generally reviewed by a number of
local entities including: 1) c i t y or county engineers, 2) planning and
zoning o f f i c i a l s , 3) f i r e and police departments, 4) public health s t a f f ,
and 5) parks and recreation o f f i c i a l s . Table 3 shows the areas where
these local a c t i v i t i e s overlap with those of the Department.
TABLE 3
COMPARISON OF SUBDIVISION REGULATORY ACTIVITIES
PERFORMED BY THE DEPARTMENT AND THOSE
PERFORMED BY LOCAL ENTITIES
Performed
by the
majority of
Performed by entities
the De~ artment sam~ le d
Document rev i ew
Review financial/ legal aspects of sale
Conditions, covenants, & restrictions
Review advertising/ promotional plan
Provide disclosure informat ion to buyer
U t i l i t i e s cost
Road maintenance costs
Site inspection
Technical assurances
Compliance with planning & zoning
Permanent access to property X
Water supply X
Sewage X
U t i l i t i e s installation X
Roads cons t ruc t i on X
Field inspection X
ldent i fy nuisance factors X
Inspect amenities ( pools, club house) X
( a) Although many of the local e n t i t i e s did not inspect f o r nuisance factors, most were
confident that the zoning department addressed t h i s . I f planning and zoning declared
the land a residential area, then there were no nuisance factors of consequence.
Source: The Department of Real Estate, and an Auditor General survey of
18 of the c i t i e s and counties in Arizona regarding subdivision
regulation. Cities and counties were selected so that both
urban and rural areas were represented.
Coordination and cooperation with local aovernments - These s i m i l a r i t i e s
create the p o t e n t i a l f o r reducing departmental involvement in approving
public reports. The Department could streamline i t s review process and
thus devote more e f f o r t to enforcement by accepting the s i t e inspections
done by those local governments which are adequately staffed to conduct
these inspections. In addition, the Department could make arrangements
to have those same local e n t i t i e s review the amenities as a part of their
s i t e inspection. Currently the Department appears to review many of the
same items that the local governments review. The only item examined by
the Department that i s not routinely checked by most of the local
governments i s the construction of the proposed amenities ( swimming
pools, club houses, gold courses, etc.)
Local authorities whom we contacted agreed that i t would be possible to
work out an agreement with the Department whereby local inspectors would
examine the construction of amenities and inform the Department of the
status. In addition, the Department appears to duplicate the e f f o r t s of
local authorities in the technical reviews i t conducts. For example, the
Department evaluates access to the parcels, a v a i l a b i l i t y and q u a l i t y o f
water, and sewage treatment f a c i l i t i e s , each of which, in most cases, has
already been reviewed by the local authorities.
The Legislature may wish to provide the Department with s p e c i f i c
authority t o implement t h i s procedure. We believe the Department has
statutory authority to u t i l i z e the reviews and investigative work done by
local e n t i t i e s . A. R. S. $ 32- 2181.01. A gives the Commissioner the
authority to exempt an applicant from any or a l l of the provisions of the
subdivision statutes provided that they are not essential to the public
interest. Therefore, the Commissioner could accept the s i t e inspections
conducted by the local e n t i t i e s and not require Department s t a f f to
reinspect the sites. ( This option appears to be most feasible i n c i t i e s
and counties that have strong professional planning, zoning and other
development s t a f f . ) However, while the Department favors t h i s concept,
the Department's Attorney General representative disagrees with our
interpretation of A. R. S. $ 32- 2181.01. A, and feels a statutory change w i l l
be necessary for the Department to u t i l i z e work conducted by the local
enti ties.
Coordinating with local governments w i l l enable Department subdivision
s t a f f to devote additional time to enforcement a c t i v i t y . However, we
were unable to estimate the potential time savings because the Department
does not keep records of the amount of time spent on reviewing
applications and inspecting subdivisions. The p o s s i b i l i t y for savings,
p a r t i c u l a r l y for inspections outside of the Phoenix and Tucson areas,
warrants further evaluation.
RECOMMENDATIONS
1. The Legislature should consider amending A. R. S. 532- 2196 to make
purchasers of improved subdivided land e l i g i b l e for reimbursement
from the Subdivision Recovery Fund.
2. The Legislature should consider amending A. R. S. 932- 2181.01. A to
provide s p e c i f i c authority for the Department to u t i l i z e reviews and
investigative work conducted by local e n t i t i e s .
3. The Department should work with county recorders to establish
procedures by which rec~ rders n o t i f y the Department of attempts to
transfer land without public reports.
4. The Department should more e f f e c t i v e l y monitor developers' compliance
with pub1 i c reports, including a) periodic audits of developers'
records to assure that pub1 i c reports are distributed as required by
law, and b) in cooperation with local governments, where feasible,
following up on subdivision development to ensure that i t i s
constructed and marketed in accordance with the public report.
5. The Department should discontinue i t s use of informal suspensions and
formalize i t s procedures for suspending public reports by
establishing c r i t e r i a for suspensions and using signed consent
agreements that clearly document the terms of suspension.
6. The Department should exercise i t s e x i s t i n g authority to take
stronger effective enforcement action against those who v i o l a t e the
subdivision laws.
7. The Department should review the f e a s i b i l i t y and potential cost
savings of coordinating i t s subdivision regulatory a c t i v i t i e s with
those of local governments. Such coordination should focus on
eliminating a c t i v i t i e s that duplicate the e f f o r t s of local e n t i t i e s .
FINDING Ill
THE DEPARTMENT SHOULD ELIMINATE THE PRACTICES
OF SPECIAL TREATMENT AND FAVORITISM
The Department has demonstrated a pattern of special treatment and
favoritism to some individuals. Specifically, the Department has
improperly granted licenses to employees and extended preferential
treatment to former o f f i c i a l s and select members of the public. In
addition, inadequate controls over some licensing functions create the
appearance of impropriety.
Licenses Improperly
Granted To Employees
We i d e n t i f i e d three specific instances in which real estate licenses were
improperly granted to Department employees. Although statutes require
those applying for licensure to meet certain minimum qualifications, in
each of the three cases some or a l l of the statutory requirements were
not met and in most instances were waived by Department o f f i c i a l s ,
including the former Commissioner.
Statutes require minimum qualifications - Arizona Revised Statutes
$ 532- 2124 and 32- 2132 dictate that each applicant for an original real
estate broker's or salesperson's license meet specific minimum
qualifications for Iicensure. The requirements for a real estate
salesperson's license include:
Completing a real estate course of at least 90 ' hours or the
equivalent and s a t i s f a c t o r i l y passing an exam on the course
Passing a written exam administered by the Commissioner and designed
to determine the applicant's knowledge of the English language, real
estate conveyances, principles of business and land economics, the
obligations between principal and agent, the canons of business
ethics, and the provisions of Arizona's real estate statutes and rules
Paying applicable examination and licensing fees
The statutory requirements for a real estate broker's Iicense include
these provisions, plus an additional requirement of three years " actual
experience" as a licensed salesperson, or real estate broker in another
state, during the five years immediately preceding application for
licensure.
Statutory requirements waived - We found three Department employees who
received real estate licenses through the waiver of some or a l l statutory
requirements for l icensure. These waivers were granted by a former
Commissioner and/ or other Department o f f i c i a l s although there i s no
statutory authority for the waiver of these requi rements. The speci f ics
of the three cases are as follows.
Emplovee 1
In September 1990 t h i s employee received a real estate broker's
license although he did not meet several statutory requirements,
including three years experience as a licensed salesperson during the
previous f i v e years, completion of 90 hours of real estate course
work, and taking the written licensing exam. A Licensing Division
o f f i c i a l indicated that the license was issued because the
Commissioner waived these requirements. When asked about t h i s case,
the former Commissioner stated he waived the requirements because he
thought the employee would be leaving the Department and he wanted to
be sure the employee was licensed as he had been before joining the
Department . However, the employee had been l i censed as a
salesperson, not as a broker, before joining the Department.
Emplovee 2
In August 1990 t h i s employee received a real estate salesperson
license although he had not completed 90 hours of real estate course
work and taken the written licensing exam. According to a Licensing
Division o f f i c i a l , the license was issued at the d i r e c t i o n o f the
Commissioner who waived these requirements. When asked about this
case, the former Commissioner stated he waived the requirements
because the employee was r e t i r i n g from the Department and he wanted
to return to the employee the license he had to give up when he
joined the Department several years e a r l i e r . However, the
Commissioner lacked the statutory authority to grant such waivers, as
well as the authority to reinstate a license.
Shortly before leaving the Department, t h i s employee received a
broker's license although he fai led to meet the three years
experience requirement. Additionally, the c e r t i f i c a t i o n for the
employee's 90 hours of real estate course work was merely signed- off
by a Department Education Division employee. The employee stated
that she was instructed by the Director of the Education Division to
c e r t i f y the 90 hours of course work although there was no
documentation to support i t . The former Education Director could not
recal I whether she gave those instructions.
The present Commissioner i s aware of these inappropriately granted
licenses and with the assistance of the Attorney General's Office is
currently acting to remove the licenses from the three individuals.
Favorable Treatment to Former
Officials and Members of the Public
The Department has extended favorable treatment to former o f f i c i a l s and
select members of the public. Through our work, we i d e n t i f i e d two former
Department o f f i c i a l s who received special treatment in the licensing or
complaint resolution process. Additionally, we found two members of the
public who were given special treatment when applying for licensure.
Former o f f i c i a l s received special treatment - Our review found that a
former Commissioner received special treatment when obtaining and
renewing a license and in the resolution of a complaint case. In
addition, a former Assistant Commissioner was given favorable treatment
in the renewal of a license. Below are summaries of these instances.
Former Commissioner
Upon leaving the Department in 1986, the former Commissioner obtained
a real estate broker's license although he did not have the
s t a t u t o r i l y required three years experience during the preceding f i v e
years. He had not been actively licensed for more than 25 years.
Further, on his last day as Commissioner, he took the broker's
licensing exam which, based on a notation on the application, was
administered i n the Deputy Commissioner's o f f i c e .
A t the time of his license renewal in 1988, the former Commissioner
requested that the Commissioner allow him to use time spent at a real
estate regulatory conference and teaching two real estate courses to
f u l f i l l the majority of his continuing education requirements. The
Commissioner granted t h i s request; although according to the then
Director of the Education Division, i t was the Department's policy
not to accept such undocumented a c t i v i t i e s as continuing education
credits.
Also in 1988, the Department investigated the a c t i v i t i e s of a real
estate brokerage firm, identifying several serious violations
involving property management i r r e g u l a r i t i e s , including the
embezzlement of approximately $ 6,000, and the payment of referral
fees by the firm to unlicensed individuals and companies. During
much of the time the documented violations took place, the former
Commissioner was employed as the f i rm's designated broker, a posit ion
which, according to Department interpretation, made him responsible
for the a c t i v i t i e s of the firm as well as for the licensees employed
by the firm. However, while the Commissioner took disciplinary
action against the firm and the licensees, he failed to take any
action against the former Commissioner. This occurred although we
found similar cases before and after t h i s case in which the
Commissioner took an action against the designated broker.
Former Assistant Commissioner
More than three years after leaving the Department, the former
Assistant omm missioner(') applied for and received a real estate
salesperson license. Upon renewing his license, the former Assistant
Commissioner was granted a waiver of the continuing education
requirements by the Director of the Education Division, although
there was no reason given for the waiver. Further, the former
Director of the Education Division cannot recall why the waiver was
granted.
Special treatment to members of public - Beyond the preferential
treatment received by former Department o f f i c i a l s , we found two members
of the public who were given preferential treatment when obtaining
licenses from the Department. As summarized below, in each of these
instances t h i s treatment appears to have been given at the direction of
the then Commissioner.
Case 1
In August 1990, the Commissioner instructed the Education Division
Director to process the documentation necessary to c e r t i f y an
applicant for a real estate broker's license and administer an
in- house licensing exam to the individual (; - er than require him to
take the exam offered monthly by the Depa - n t t s contract testing
service). Although she had some concerns ~ t the documentation
provided by the applicant, including the use a college math course
( 1 ) The Department has since changed the t i t l e o f t h i s position to deputy commissioner.
30
taken approximately 36 years earlier t o s a t i s f y 45 of the 90 hours of
the prelicensing education requirements, at the d i r e c t i o n o f the
Commissioner, the Education Division Director c e r t i f i e d the
applicant's education and experience requirements necessary for
licensure, and scheduled an in- house licensing exam. As a result,
the applicant received a real estate broker's license in October 1990.
When asked about t h i s case, the former Commissioner told us the
applicant was his neighbor and that after leaving the Department, he
was employed as a real estate broker by the applicant's real estate
company.
Case 2
In March 1989, the Department administered an in- house real estate
salesperson licensing exam to an applicant who had failed the exam
offered by the contract testing service several times before.
According to the former Education Division Director, the Commissioner
instructed her to administer the in- house exam to the applicant " as a
favor" because the applicant had provided him information regarding
possible i l l e g a l real estate a c t i v i t i e s . In addition, a notation on
the exam application indicates the Commissioner waived the exam fee,
although he did not have the authority to do t h i s . Finally, the
applicant i n i t i a l l y failed the test but was given credit for two
answers which allowed her to pass the exam. The Department could not
provide documentation to show why the credit was given for the two
answers .
lnadeauate Controls Create
Ag~ earance of l m ~ r o ~ r i e t y
In addition to individual cases of favoritism and special treatment, the
Department's lack of adequate controls over some licensing functions
creates the appearance of impropriety. The Department has f a i l e d to
monitor the provision of in- house licensing exams. In addition, controls
need to be exercised over the granting of continuing education waivers.
Failure t o monitor in- house licensinq exams - The Department has f a i l e d
to monitor the reasons and circumstances under which in- house licensing
exams are administered. While the Department has given in- house
licensing exams to several individuals over the past few years, there are
no c r i t e r i a dictating when and to whom the exams w i l l be offered. This
lack of c r i t e r i a , as well as the lack of documentation associated with
the admission of the exams, raises questions about the v a l i d i t y of some
exam results. Further, according to Department officials, the in- house
exams were copies of exams previously administered by the contract
testing service.
According to Department records, from 1988 to January 1991, 15 l icense
applicants were given either a salesperson or brokers licensing exam
administered by Department employees.(') These 15 applicants were
allowed to take t h i s in- house exam rather then the corresponding monthly
exam offered at several locations throughout the State by the
Department's contract testing service.
Although the Department administers in- house exams, we were unable to
identify any written or uniform c r i t e r i a concerning when and to whom
these exams w i l l be offered. According to current and former Department
o f f i c i a l s , the practice o f o f f e r i n g in- house exams was designe'd to
address those situations in which applicants experienced some hardship,
such as a handicap, religious beliefs, or financial hardship, in taking
the exam as scheduled by the contract testing service. However, based on
information provided by the Department, while there were a variety of
reasons for allowing the applicants to take the in- house exam, 8 of the
15 applicants had f a i l e d the test offered by the contracting testing
service on two or more previous occasions. Despite their previous poor
performance, 14 of the 15 applicants passed the in- house exam.
In addition to a lack o f w r i t t e n c r i t e r i a concerning when to offer the
in- house exam, the Department's documentation of who took the exam, why
they were allowed to take i t , as well as the results of the exam are
lacking. For example, in our review of the in- house exam process, we
found:
Records regarding who had taken in- house exams p r i o r to 1988 had been
des t royed
There i s no single l i s t i n g of who had been given in- house exams
( 1) Statutes and rules governing the real estate licensing process appear t o allow the
Department the authority to o f f e r in- house 1 icensi ng exams. Arizona Revised Statutes
$ 32- 2124. E. instructs the Commissioner to administer an examination i n order to
determine each applicant's knowledge o f c e r t a i n areas related to r e a l estate. I n
addition, administrative rule R4- 28- 402 stipulates that a 1 icensing examination w i l l
be held each calendar month and " . . . a t such other times as the Commissioner deems
necessary .' I
There was no documentation indicating why in- house exams were
necessary
C r i t i c a l documentation including the exam questions and answers keys
were not maintained by the Department
This lack of documentation i s p a r t i c u l a r l y significant since 3 of the 15
applicants were given credit for one or more incorrect answers. In each
instance, granting this credit allowed the applicant to pass the exam.
However, because the exam questions and answers were not maintained,
Department o f f i c i a l s were unable to support the reasons for granting the
credits, leaving some uncertainty about the v a l i d i t y of the exam results.
Controls needed over continuina education waivers - The Department needs
to implement controls over the granting of continuing education waivers.
Although the Cortunissioner appears to have broad authority in t h i s area,
additional controls could reduce any appearance of favorable treatment.
The statutes give the Commissioner considerable authority regarding
continuing education requirements. A. R. S. $ 32- 2! 30. A. stipu! ates that
a l l licensees must obtain 24 hours of continuing education to renew their
license. This statute also allows the Commissioner to waive t h i s
requ i rement ' I . . . for good cause shown .' I In response to this, through
administrative rule and department policy, the Commissioner has adopted a
p o l i c y o f waiving the continuing education requirement for Department
employees who maintain an inactive real estate license, as well as for
members of the State Legislature and a i l statewide elected o f f i c e holders
who maintain a license.
While the Commissioner has the authority to grant these waivers, the
controls over the process appear weak. Specifically, the Department, in
the past, has not always documented the basis upon which the waivers were
granted. As i l l u s t r a t e d by the granting of a continuing education waiver
to a former Assistant Commissioner ( see page 301, without s u f f i c i e n t
documentation, the granting of these waivers can be perceived as
favoritism.
RECOMMENDATIONS
The Department should ensure that a l l applicants demonstrate f u l l
compliance with a l l statutory requirements for Iicensure. In doing
so, the Department should refrain from granting special treatment to
current and former department o f f i c i a l s or to members of the public.
The Department should establish controls over i t s administration of
in- house licensing exams to include c r i t e r i a for the circumstances
under which the exams w i l l be offered and the maintenance of adequate
documentation to support t h i s c r i t e r i a and the exam results.
The Department should establish controls over the granting of waivers
for continuing education requirements to include requiring
documentation of the reasons why waivers are granted.
SUNSET FACTORS
In accordance with Arizona Revised Statutes ( A. R. S.) 541- 2354, the
Legislature should consider the following 12 factors in determining
whether the Department of Real Estate should be continued or terminated.
1. The obiective and purpose in establishins the Department
The legislation establishing the State Real Estate Department
contains no statement of objective and purpose for the Department.
However, in i t s fiscal year 1990 annual report the Department defined
i t s goals as follows:
" The goals of the Department are to protect the public; to increase
the proficiency, competency, knowledge, and i n t e g r i t y of i t s
licensees; and to regulate the state real estate industry consistent
with existing law in a manner which inspires public confidence."
In order to carry out t h i s responsibility to the pub1 ic, Arizona law
empowers the Department to license and regulate real estate brokers,
salespeople, and partnerships; investigate complaints regarding real
estate transactions, regulate the offering and sale of subdivided
land, unsubdivided land, cemeteries, time- shares, and membership
campgrounds; administer the real estate and subdivision recovery
funds; d i s t r i b u t e educational material; and regulate real estate
schools, instructors, and courses.
2. The effectiveness with which the Department has met its objective and
purpose and the efficiencv with which the Department has operated
The Department could improve i t s effectiveness and efficiency in
meeting i t s goal of protecting the public from land sale fraud. Our
review shows that the Department does not monitor compliance with
subdivision laws and has not taken s u f f i c i e n t enforcement action i n
cases involving serious violations of these laws. The Department can
increase i t s efficiency in subdivision regulation by coordinating i t s
a c t i v i t i e s with local governments ( see Finding 1 1 ) .
We also found that the Department's a b i l i t y to protect the public i s
limited because i t does not consistently investigate consumer
complaints, and many complaints that are investigated are
inadequately resolved ( see Finding I).
3. The extent to which the Department has operated within the public
interest
The Department has generally operated in the public interest by
enforcing entry standards and standards of professional conduct
within the real estate industry. However i t s granting of favorable
treatment in the licensing process has not been in the public
interest because individuals who have not met licensing requirements
have been granted l i censes ( see F i nd i ng I I I 1.
4. The extent to which rules and requlations promulqated by the
Department are consistent with the leqislative mandate
Although the Department's rules have been c e r t i f i e d by the Attorney
General as consistent with the l e g i s l a t i v e mandate, R4- 28- 303. K,
which requires brokers to assume responsibility for the acts of sales
people they employ, appears to exceed the Department's statutory
a u t h o r i t y . S p e c i f i c a l l y , while A. R. S. $ 32- 2153. A. 21 permits the
Commissioner to discipline brokers who f a i l to reasonably supervise
employees, R4- 28- 303. K exceeds t h i s statute by holding brokers
responsible for a l l acts o f t h e i r employees.
5. The extent to which the Department has encouraaed input from the
public before promulqatina its rules and resulations- and the extent to
which it has informed the public as to its actions and their expected
impact on the public
During recent e f f o r t s to promulgate rules, the Department has
encouraged input from the public by: 1) forming a committee of
persons representing various segments of the real estate and legal
communities t o d r a f t rules; 2) holding public meetings throughout the
state to discuss proposed rules; 3) pub1 ishing informat ion regarding
the proposed changes and the upcoming pub l i c meetings in the
Department bul let in; and 4) presenting informat ion on the proposed
changes to a variety of professional organizations.
The Department also informs the profession and the public by
publishing a b u l l e t i n which is distributed to a l l licensees, a l l
relevant boards and associations, a l l real estate schools and
colleges that teach real estate courses, and to anyone else
requesting a copy. Between 50,000 and 54,000 b u l l e t i n s are sent out
with each mailing. The b u l l e t i n contains information on recent
changes in rules and departmental requirements; an a r t i c l e by the
Consumer Representative explaining the subject of the majority o f the
recent complaints; a l i s t of a l l Department administrative actions
taken since the past b u l l e t i n was published; and an overview of any
relevant current events.
The Department also allows public access to i t s information on
licensees. Interested persons may c a l l the Department and receive
information on the status of a real estate person's license. In
response, the Department w i l l provide information on 1) the type of
license the person has ( salesperson, broker, etc.); 2) the name of
the licensee's broker ( unless the licensee i s a designated broker
him- or herself); 3) the address of the licensee's o f f i c e ; and 4) the
date the license w i l l expire. I f requested, the Department w i l l also
furnish the c a l l e r with information on the licensee's disciplinary
history including the number of complaints f i l e d against the licensee
in the past three years, the substance of those complaints, and the
action which was taken by the Department.
Information over three years old i s available upon request. I f the
person i s w i l l i n g to make an appointment and v i s i t the Department
offices, he or she may review any complaint f i l e s on the licensee in
quest ion.
6. The extent to which the Department has been able to investiqate and
resolve com~ laints that are within its jurisdiction
Although A. R. S. 532- 2108 provides the Commissioner with clear
authority to investigate complaints, the Department has not
s u f f i c i e n t l y investigated a l l complaints against licensees. The
Department has inappropriately handled some complaints of alleged
serious violations against licensees, treating them as lesser
violations. Thus, the Department has not conducted an adequate
investigation of the allegations. We also found that the Department
uses l e t t e r s of admonishment without statutory authority and refers
cases for which i t has j u r i s d i c t i o n to other agencies for
investigation ( see Finding I).
7. The extent to which the Attornev General or anv other applicable
aaencv of State government has the authoritv to prosecute actions
under the enablinq lesislation
The Attorney General i s the legal counsel for the Department and is
authorized by A. R. S. 532- 2111 to act for the Commissioner in a l l
legal actions or proceedings. According to the Department's Attorney
General representative t h i s includes the authority t o prosecute
violations of the real estate statutes.
8. The extent to which the Department has addressed deficiencies in its
enablin~ statute which prevent it from fulfillinq its statutory mandate
The Department has actively addressed deficiencies in the enabling
statutes over the years. The most notable recent e f f o r t was the
passage of Senate B i l l 1054 in 1989 which reworded and reorganized
approximately 70 statutes to increase consistency and uniformity in
the regulation of the real estate industry. The legislation also
made the following substantive changes: 1) increasing the relicense
education requirements for obtaining a salesperson's license from 45
hours to 90 hours; 2) requiring applicants for subdivision public
reports, and applicants for the operation of membership campgrounds
or cemeteries to submit fingerprints and disclose their criminal
history, i f any exists; 3) creating a " publ icat ions revolving fund"
to develop, p r i n t , and d i s t r i b u t e real estate laws and rules, and
consumer information pamphlets; and 4) moving from regulation of
membership campgrounds to licensure and a modified public report
system.
9. The extent to which chanqes are necessary in the laws of the
Department to adeauatelv comply with the factors listed in the Sunset
- Law
Based on our audit work, we recommend that the Legislature consider
amending A. R. S. 532- 2196 to make purchasers of improved subdivided
land e l i g i b l e for reimbursement from the Subdivision Recovery Fund.
10. The extent to which the termination of the Department would
sianificantlv harm the public health, safetv or welfare
Termination of the Department and the resulting deregulation of real
estate professionals could pose a threat to public safety and
financial security. Real estate purchases are substantial
investments involving complex transactions. Real estate laws and
licensing requirements protect the public while making these
purchases.
Through i t s licensing function the Department screens applicants to
exclude the unknowledgeable and the unscrupulous. In addition to
protecting the public's financial security, the Department also
screens a l l applicants for licensure to ensure the public's physical
security. F i n a l l y , through the public report process, the Department
helps protect the public from fraud and misrepresentation by
disclosing important attributes associated with the sale of
subdivided land.
11. The extent to which the level of requlation exercised bv the
Department is a ~ p r o ~ r i a taen d whether less or more strinaent level of
regulation would be appropriate
The Department has generally exercised an appropriate level of
regulation. However, the system for licensing brokers appears
unnecessarily complex. The Department currently issues f i v e
different types of broker's licenses:
Desianated broker - an o f f i c e r or member of a corporat ion who i s
designated to act as the broker for the corporation, the license
i s recorded under the corporate name
Self- emploved broker - the owner of the corporation
Associate broker - works for another broker and i s a partner in
the corporation
a Doin- q business with and for - a broker who i s employed by
another broker
a Doina business with and for corporate - a broker who i s employed
by a designated broker and whose l icense i s recorded under the
corporation name
To simplify i t s licensing process and records, the Department should
combine these f i v e categories into perhaps as few as two. By
statute, a l l real estate firms must be under the direction o f either
a designated broker or a self- employed broker. The remaining three
categories appear designed to address the specific needs of the
industry rather than to f u l f i l l any regulatory need. For example, a
doing business with and for broker acts under the direction of a
designated or self- employed broker, much l i k e a real estate
salesperson does. In addition, the doing business with and for
corporate category was apparently established to allow corporate
licensees to work under the direction of a designated or
self- employed broker. Yet, of the nearly 12,000 brokers licensed in
the state, only 118 are licensed under t h i s corporate category.
Finally, there appears to be no statutory basis for the associate
broker category; only 53 are licensed in the State.
12. The extent to which the Department has used private contractors in
the ~ erformance of its duties and how effective use of private
contractors could be accomplished
The Department has made use of private contractors for several
services. Private security firms and various law enforcement
agencies fingerprint license applicants, and a private testing firm
administers the I icensing exam. In addition, th'e Department
contracts for administrative law judges when deemed necessary or cost
e f f e c t i v e .
FIFE SYMINGTON
GOVERNOR
JERRY A. HOLT
COMMISSIONER
202 E. EARLL DRIVE
SUITE 400
PHOENIX, ARIZONA 85012
( 602) 255- 4345
$ i, tnfe of Arizona
Bepnrfmenf of BeaI Esinfe
Phoenix, Arizona
September 1 1. 199 1
5099 E. GRANT ROAD
SUITE 121
TUCSON, ARIZONA 8571 2
( 602) 628- 5323
Douglas R. Norton
Auditor General
2700 N. Central Avenue
Phoenix, AZ 85004
Dear Mr. Norton:
Enclosed are written comments made in response to the Sunset Review and
Performance Audit of the Arizona Department of Real Estate. The comments
are divided into three sections: General Comments, Legislative Proposals and
Response to Recommendations.
Let me take this opportunity to praise your staff and their work. The audit
team was very courteous and professional during the countless hours they
spent with ADRE staff.
The audit findings represent real depth of effort on their part, and audit
recommendations represent, on the whole, sound management practices.
While some differences of opinion persist as to audit finding details, we find
the audit recommendations to be substantially correct, reasonable and , in
most cases, within the Department's ability to implement.
The audit has come at a propitious time. As the recently appointed Real
Estate Commissioner, I welcome the opportunity to make changes within
the prudent bounds of good management and legal authority. A number of the
audit recommendations have already been acted upon. Others are in process.
But without those recommendations, it might have taken months to come to
many of the same conclusions which your audit has illuminated.
The audit experience has been very positive. The Department appreciates
the findings and is committed to implementing your recommendations
within the confines of resource limitations.
7
commissioner
JH: cd
Enclosures
ARIZONA DEPARTMENT OF REAL ESTATE
Response to Auditor General's
Sunset Review and Performance Audit
September 11,1991
I. GENERAL COMMENTS
A number of disagreements persist with respect to detail and comments
used by the Auditor General in substantiating his conclusions and
recommendations. However, if the findings were altered to reflect the
Department's view in every instance, no substantial change would result to
the audit's recommendations, or to the Department's response to the
recommendations. This being the case, it is simply not productive to further
debate these points.
With regard to examples which set forth lack of good investigative
procedure, improper actions or lack of appropriate follow- up, two previously
closed cases have been reopened and at least one new investigation initiated.
As detailed in Responses to Recommendations, the Department plans
internal review and management changes to improve investigative
effectiveness while protecting and preserving the public interest.
There are also numerous examples in the audit findings which illustrate lack
of written procedures, resulting in inconsistent treatment of licensees and
license applicants. Steps have been taken to implement internal procedures
to ensure more consistency. These steps are also detailed in Responses to
Recommendations.
11. LEGISLATIVE PROPOSALS
A number of possible legislative proposals may result from the Sunset Review
and Performance Audit findings. Among them are:
1. Expand Department disciplinary authority to include lesser
disciplinary actions such as " Letters of Admonishment," " Reprimand"
and " Written Censure," so that responses to relatively minor offenses
can be made without having to take strong disciplinary measures. This
may additionally include putting a licensee on " probationary" status.
2. Permit within the scope of A. RS. § 32- 2 18 1.0 1 . A the latitude
of authority for the Commissioner to give blanket acceptance
for site inspections conducted by counties or municipalities.
Application of such authority by the Commissioner could reduce
duplication of subdivision inspections by the Department and local
government.
3. Clarify the apparent conflict between R4- 28- 303. K and 532-
2 153. A. 2 1. Although the Attorney General's staff advises the
Arizona Department of Real Estate 2
Department that there is no conflict, the Auditor General's legal
advisor believes that, " while A. R. S. 532- 2153. A. 21 permits the
Commissioner to discipline brokers who fail to reasonably supervise
employees, R4- 28- 303. K exceeds the statute by holding brokers
responsible for all acts of their employees."
4. Expand the use of the Subdivision Recovery Fund in § 32- 2 196 to
allow eligibility for recovery fund reimbursements for purchasers of
improved subdivided land as well as for unimproved subdivided land.
5. Allow employees of the Department who are required to place their
licenses in inactive status to renew such licenses while continuing
inactive, without having to pay renewal fees.
In July 199 1 the Real Estate Commissioner created the Commissioner's
Select Committee on Real Estate Rules and Laws. The purpose of the
Committee is to review real estate related rules and laws with the intent of
suggesting changes to modernize, repeal, update and/ or streamline these
rules and laws. The Committee consists of 55 members from the public and
all areas of the regulated industry aided by 10 ADRE staff members. Nine
subcommittees of the Committee are presently actively engaged in this
review.
The above five legislative proposals will be submitted to the Committee for
inclusion in its review of rules and laws. After further review by the Real
Estate Advisory Board, the Office of the Governor plus public comment, it is
anticipated that a number of legislative recommendations from the
Committee will be submitted for consideration in the 1993 legislative
session.
III. RESPONSES TO RECOMMENDATIONS
The Department respectfully submits the following responses to the Sunset
Review and Performance Audit recommendations:
k Investigations ( reference page 13 of audit)
Audit Recommendation 1 :
The Department should investigate all legitimate complaints.
The Department needs to establish written criteria to ensure
that complaints are appropriately categorized as public
assistance requests, preliminary inquiries or case investigations
based on the issues raised in the complaints.
Department Response:
1. We agree the Department should investigate all legitimate
complaints.
Arizona Department of Real Estate 3
2. The Investigations Division has adopted written criteria to
ensure that complaints are properly categorized and acted upon
as a Public Assistance Request ( P. A. R.), Preliminary Inquiry
( Prelim), or Case Investigation. However, as demonstrated by
audit findings, adherence to these written criteria appears to be
lax, indicating a further need to firm up the link between theory
and practice.
3. Department response to the audit findings will include a
review, by internal performance audit, of the sufficiency of
written criteria and procedures followed for complaint
categorizations, assignment of complaints, case loads, and follow-through
on complaints. Appropriate training, personnel
reassignment and other corrective actions will be taken as
necessary to ensure future compliance.
Audit Recommendation 2:
The Department should obtain the necessary statutory authority
to issue letters of admonishment and to use them as a
disciplinary action. Until such time as statutory authority is
granted, the Department should stop using these letters of
admonishment as a fonn of discipline.
Department Response:
On September 1, 1991, the Department ceased the practice of issuing
" letters of admonishment" and " written censure" as means for
disciplinary actions. Instead, when stronger action is not appropriate, the
Department will issue " administrative warnings" which will serve as a
notice of violation and strong future action if compliance does not result.
Additionally, legislation will be considered to create statutory authority
for official reprimand and censure actions.
Audit Recommendation 3:
The Department needs to fully investigate and take appropriate
action on violations of real estate law within its jwisdiction
rather than refemng such cases to other agencies.
Department Response:
Audit Findings appear to uncover a pattern of referral of
complaints to other agencies as a substitute for Department
Arizona Department of Real Estate
action. While it is certainly appropriate to inform complainants of
other possible legal remedies, any complaint within the purview
of the Department should be vigorously pursued. Remedial
education for key Department staff appears to be appropriate and
will be implemented via violation/ jurisdiction workshop for
Investigations and Subdivisions Divisions staff to be conducted by
the office of the Attorney General. Other staff may also be
included.
B. Subdivisions ( reference pages 25 and 26 of audit)
Audit Recommendatwn 1 :
The Legislature should consider amending A. R. S. 532- 21 96 to
make purchasers of improved subdivided land eligible for
reimbursement from the Subdivision Recovery Fund.
Department Response:
The Department agrees that expanded use of the Subdivision
Recovery Fund should be explored. Legislation may be
considered to permit reimbursements in cases involving
improved subdivided lands as well as unimproved subdivided
land. Such legislation should include possible adjustments as to
who pays into the fund, level of fees, maximum amount of
payouts, reimbursement qualifications, and administrative
adjustment of available fund monies.
Audit Recommendatwn 2:
The Legisluture should consider amending A. R. S. § 32- 2 181.0 1 . A
to provide spec@ authority for the Department to utilize
reviews and investigative work conducted by local entities.
Department Response:
The Department agrees that such specific authority to utilize
reviews and investigative work by counties and municipalities
should be explored to reduce duplication of activities.
Audit Recommendation 3:
The Department should work with county recorders to establish
procedures by which recorders notih the Department of
attempts to transfer land without public reports.
Arizona Department ojReaL Estate 5
Department Response:
To better monitor illegal subdividing, the Department will seek
to establish procedures with county recorders in which they
would report certain property conveyances to the Department.
Audit Recomrnendatwn 4:
The Department should more effectively monitor developers'
compliance with public reports, including ul periodic audits of
developers' records to assure that public reports are distributed
as required by law, and b) in cooperation with local
governments, where feasible, following up on subdivision
development to ensure that it is constructed and marketed in
accordance with the public report.
Department Response:
In order to more effectively monitor subdivision compliance
with public reports, within present resource constraints:
1. The Subdivisions Division will develop a weighted random
sampling procedure to assure public reports are distributed as
required by law.
2. The Subdivisions Division will pursue cooperation with local
governments to follow up on subdivision development to ensure
that construction and marketing is in accordance with the
public report.
Audit Recommendation 5:
The Department should discontinue its use of informal
suspensions and formalize its procedures for suspending public
reports by establishing criteria for suspensions and using signed
consent agreements that clearly document the terms of
suspension.
Department Response:
Beginning August 26, 199 1, the Department discontinued its
use of " informal suspension" of sales for subdivisions not in
compliance with the law or public report. The Department now
uses a " consent to suspend sales" agreement which is signed by
the subdivider and which clearly documents the terms of the
consent. Such consents will be delivered to the Administration
Division to ensure compliance.
Arizona Department of Real Estate 6 a
Audit Recommendation 6:
The Department should exercise its existing authority to take
stronger effective enforcement action against those who violute
the subdivision laws.
Department Response:
In order to ensure appropriate effective enforcement action
against subdivision violators, the future investigation of these
violations will be conducted by the Subdivisions Division instead
of the Investigations Division. Current Subdivisions Division
employees are former Department investigators, and that,
coupled with their exclusive depth of knowledge of subdivision
laws, makes them ideally qualified to perform such
investigations. In practice, the Subdivisions Division is already
handling the most complex of the subdivisions investigations. It
is anticipated that transfer of all subdivision violation
investigations from the Investigations Division to the
Subdivisions Division will take place by October 1, 199 1.
Audit Recommendation 7:
The Department should review the feasibility and potential cost
savings of coordinating its subdivision regulatory activities with
those of local governments. Such coordination should focus on
eliminating activities that duplicate the eflorts of local entities.
Department Response:
The Department agrees that many of its regulatory activities are
duplicating those of local governments.
1. The Department will determine the extent of the ability and
willingness of local governments to monitor subdividing
activities, including conducting inspections, on behalf of the
Department.
2. Although authority does not currently exist in law to delegate
the Department's regulatory review responsibilities to local
government, if the Department determines that both ability and
willingness of local government exists to coordinate subdivision
activities, a legislative proposal may be made to give the needed
delegatory authority to the Department.
Arizona Department of Real Estate 7
C. Administrative Practices ( reference page 34 of audit)
Audit ~ ecommendatwn1 :
The Department should ensure that all applicants demonstrate
full compliance with all statutory requirements for licensure. In
doing so, the Department should refrain from granting special
treatment to current and former Department officials or to
members of the public.
Department Response:
The Department now requires that all applicants for licensure
be in full compliance with all statutory requirements. Complete
review of all applicants' course work for pre- licensure and
renewal is now an integral procedure in the Education
Division's approval process. For instance, a recent Attorney
General memorandum sets forth definite criteria to be used in
such evaluation. Also, a proposed rule has been drafted by the
Attorney General to address procedures for waiving continuing
education requirements.
Audit Recommendation 2:
The Department should establish controls over its
administration of in- house licensing e x m to include criteria
for the circumstances under which the exams will be offered
and the maintenance of adequate documentation to support this
criteria and the exam results.
Department Response:
The Department anticipates it will cease administering in- house
examinations within the next few months. The Department is
currently negotiating a change to electronic testing and because
such testing will be conducted five days per week instead of
once a month, there will be no further need for in- house
testing. Procedures for the administration of in- house testing,
however, have been established and implemented.
Audit Recommendation 3:
The Department should establish controls over the granting of
waivers for continuing education requirements to include
requiring documentation of the reasons why waivers are
granted.
Arizona Department of Real Estate 8 a
Department Response:
Since June 1991, documentation of the reasons for granting
continuing education waivers has been required. Individuals now
requesting such a waiver must submit their request in writing,
with justification. Upon granting the request, the written waiver
and justification are included in the licensee's file. A proposed
rule draft by the Attorney General's Office, setting forth policy
criteria for granting a waiver, is being reviewed for
implementation.