What action must be taken if a licensee sells property with an unmerchantable title?

When a licensee sells property with an unmerchantable title, the most critical action is to disclose this fact to the buyer prior to accepting any deposits. This is crucial because the buyer has the right to know about any potential issues with the title that may affect their ownership or the property's value. An unmerchantable title indicates that there are claims, defects, or issues with the title that could prevent a clean transfer of ownership, which is a significant risk for the buyer.

By disclosing this information, the buyer can make an informed decision about whether to proceed with the purchase and can better assess the risks involved. Transparency in real estate transactions is vital for maintaining trust and ensuring that buyers are fully aware of what they are entering into.

In contrast, documenting the transaction thoroughly, transferring proceeds immediately, or notifying the seller after the transaction do not adequately protect the rights and interests of the buyer in this context. The seller should be aware of the title issues before selling, and the responsibility falls on the licensee to ensure that the buyer is informed early in the process.