Shockwaves rattle the real estate industry

Private Property South Africa
Property Professional

The battle-weary real estate industry is fighting yet another skirmish on yet another front. Lea Jacobs reports.

The real estate industry has weathered a number of knocks over the years. However, recently, the knocks have become body blows and, generally speaking, the public’s opinion of the profession as a whole is not good. While we may all cry ‘you can’t tar the industry and agents with the same brush’, with all the negative press out there, agents should perhaps count themselves lucky that they are not being physically tarred and feathered at this stage. Are the perceptions fair? In some instances, certainly, but not in the majority of cases. ExposedThe most shocking story to date has been the Wendy Machanik Properties (WMP) trust fund scandal. A forensic report revealed that WMP had been dipping into its trust account in order to keep the business afloat. The fact that the irregularities had been occurring over a lengthy period and involved vast amounts of money has added to the drama. The forensic report by Pasco, who conducted the investigation, revealed that not less than R25m was drawn from the account.

The forensic report that formed the basis of a court interdict prohibiting Machanik from drawing funds from her trust account indicated that a fictitious account named Cross/Klein had been created. Moneys transferred into this account, were, in the words of her chief financial officer, to keep the business afloat and prevent it from going into liquidation. The findings found that Machanik’s business account was continually in overdraft from 2007 and was essentially funded with monies from the trust account.It came to light during the investigation that trust monies had been used to pay salaries, personal expenses, for the development of her personal property, as well as business expenses. A former employee that was interviewed by Pasco indicated that at one stage he was instructed to transfer money from the trust account to pay for a pair of earrings that Machanik had bought at a charity auction.Headline NewsHighly regarded, well-known in property circles and extremely well-placed in the industry, it came as no surprise that the story on Machanik received a great deal of negative press. The beauty of the Internet is that not only is the news instantly available to a large audience, it affords readers the opportunity to comment publically – and comment they did.

One reader stated on one of the forums, “The words ‘Trust’ and ‘Estate Agent’ should not be used in the same sentence, other than to say that they have nothing to do with each other!”The story has brought the issue of trust accounts to the fore with SA consumers who have perhaps realised for the first time that their money may not be as safe as houses. This was further exacerbated by a report in the Sunday Times in which both Machanik and her attorney stated that she had been singled out for prosecution for practices that were wide-spread in the industry. The attorney, Cyril Ziman, said that he was aware of complaints about other estate agencies made to the EAAB, “We are questioning why, of all the agencies facing complaints, Wendy has been singled out.”This argument, however, doesn’t really hold much water; pointing out violations by fellow agents does not constitute a defence. There are specific rules and regulations governing the management of trust accounts that have to be complied with by each individual estate agency. The fact that other agents have dipped their fingers into the till, so to speak, in no way justifies you dipping your fingers into the till. While this may not involve outright theft of money, the practice of ‘borrowing’ trust monies to meet business/personal expenses is illegal, precisely because the danger of over-borrowing perpetually exists and sooner or later the source of ‘borrowed’ funds will dry up; as appears to be the case with WMP. The appropriate place to borrow funds is from the bank and not from clients’ money in your trust account, especially when it is without their knowledge or permission.

Repercussions

How the accusation of trust account abuse by agents and the consequent fall-out will affect the industry in the long term remains to be seen. However, the case has put trust accounts under the EAAB’s microscope and agents across the country can and should expect their trust accounts to be investigated.Clive Ashpole from the EAAB said that the misappropriation or incorrect dealing with trust funds continues to remain a perennial problem for the Board, albeit with a minority of practising estate agents. “Under circumstances where it is believed that such non-compliance can adequately be proven, the appropriate legal measures will immediately be instituted against the offending parties.“Where it is alleged that an estate agent has misappropriated trust moneys a full investigation of the occurrence will, as a matter of course, be undertaken by the EAAB. If it is felt that the onus of proving the misappropriation of trust moneys can be discharged by the EAAB appropriate criminal, civil and disciplinary steps will be instituted by the EAAB against the offending party.”Bad News for Estate Agents“Unfortunately, the Machanik case has brought the entire real estate industry into disrepute,” says Jan le Roux, the CEO of Leapfrog Properties. “When an ex-member of the EAAB, managing a relatively big company, for an extended period of time, gets embroiled in a situation like this, it unfortunately does reflect badly on the entire industry. This is extremely unfair and unfortunate.”

Andrew Golding, the president of the Institute of Estate Agents agrees, saying that if the allegations against WMP are upheld in court, then this will be most disappointing because both WMP and Machanik herself have been significant players within the industry.Whether we like it or not, the industry, and particularly estate agents, are viewed by the general public with a fair amount of distrust. The general consensus appears to be that agents earn far too much money, have little in the way of qualifications, and are out there to rip off consumers. Are these assumptions fair? Of course not. However, while we still have agents operating in an illegal manner, outside the bounds of the law, this mind-set is unlikely to change any time soon.“Every industry and profession, unfortunately, has rogue members,” says Golding. “It is possible that there are other estate agencies who do not comply with trust account fund rules; however, I would be most surprised if this is in any way widespread.”ConsequencesThe EAAB must be incredibly embarrassed that one of ‘its own’ has been caught with their fingers in the proverbial cookie jar. It comes as no surprise, then, that they have come out with all guns blazing.

“Immediately the Board became aware of irregularities in the trust accounts of WMP, Ms Machanik was provided an opportunity to both answer and deal with those allegations. Unqualified auditor’s reports for the years 2008 and 2009 were received from the auditors, leading the EAAB to conclude that the situation had indeed been suitably remediated which, as it subsequently transpired, was not the case at all.”It may be unfortunate that such a well-known, high-profile persona has been investigated and if court documents are to be believed, found wanting. However, this case, the courts findings and the subsequent investigations may well prove to be a much-needed, highly-successful PR exercise by exposing bad practices to the public and stopping those who are acting illegally in their tracks.Widespread InvestigationsThe Board has brought in SAB&T, Ernst and Young as well as G&G Chartered Accountants to investigate.

It has been reported that 5 826 estate agencies and 27 769 agents will come under the financial spotlight. According to Portia Mofikoe, the auditors will perform inspections covering the validity of Fidelity Fund certificates, inspect trust accounts and investment monies by real estate agents, as well as investigate payments of more than R25 000 into trust accounts.The outcome of this intensive investigation remains to be seen. However, the EAAB have made its point and agents who are found to be in violation of the law will be dealt with swiftly and severely. Ignorance is no defence – the agents out there who do not have strict control of their trust accounts shouldn’t be surprised when the financial giants come knocking.

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