Risk management: a little understood concept
Originally appeared in Hills Publications, Nov. 17, 2006 and ANG Newspapers, Nov. 18, 2006
California has over 500,000 real estate licensees and countless thousands of attorneys ready to sue them. In real estate, risk management means companies and agents avoiding legal difficulties, especially lawsuits. What is most important to you as a buyer or seller, however, is preventing problems resulting from your agent’s lack of knowledge or inattention to details.
Purchase contracts
Today, more than one year after the real estate market “correction,” an astonishingly large number of agents in our area are still writing purchase contracts that were risky for their buyers, even in the heat of a seller’s market. Contingency-free contracts now make considerably less sense. Specifically, it is the failure to include appropriate contingencies in the contract that can put you in a vulnerable position.
Contingencies are conditions that must be fulfilled in order for the contract to continue. They are meant to protect you as a buyer or seller. Inspections and financing are the most common ones. During the height of our eight-plus year seller’s market, salespeople commonly wrote offers without one or both of these contingencies, often not fully explaining their implications.
This is a practice I have never followed because the potential jeopardy to both buyers and sellers is unacceptable. A contract without an inspection contingency is fraught with danger for the buyer; he may not know of serious defects until after he owns the home. The lack of a loan contingency places the purchaser in the position of possibly losing a large deposit and potentially being liable for significant damages if the financing does not go through as envisioned.
Given the infrequency of multiple offers in today’s market, there is little reason for agents to eliminate either or both of these crucial contingencies. As about two-thirds of our local Realtors entered the business since 1997, when our seller’s market began, it can be surmised that many are acting out of rote and do not recognize the implications of their actions.
Real estate people who have not been through a “normal” market, as we are experiencing now, may be unaware of how to handle a purchase contingent on the sale of the buyer’s home. This type of offer, which was not welcomed by sellers in the recent past, will become more common now.
A contingent sale often involves complex considerations for both the buyer and seller. Make sure your agent knows how to protect you by including suitable clauses in the contract.
Failing to disclose
As an expert witness in residential real estate matters, I see the aftermath of loose practices by licensees. Although buyers generally sue sellers, I recently testified in a Superior Court action where the sellers were suing the buyers’ agent.
Cases involving failure to disclose usually involve problems with or related to the property that were discovered after close of escrow. Often, this entails the absence of, or inadequate, inspections.
Sellers, and their agent, have a legal duty to disclose all known defects that could influence either a buyer’s decision to buy or how much to pay. The California Association of Realtors has numerous disclosure forms meant to assist sellers in listing deficiencies and detailing problems with their property. Not all agents, nonetheless, understand and take the time to explain to their sellers the importance of full disclosure.
Issues commonly arise in the following categories: water, moisture, drainage, sewer line; foundation integrity; roof condition and/or leaks; rooms incorrectly called or used as sleeping rooms (bedrooms); neighborhood disturbances; work done without permit and/or not to code; type of flooring under carpeting and its condition; property lines, easements, encroachments.
Realtors who are attuned to risk management assess relevant variables when they visit a home, whether they are representing a buyer or seller. As an example, if I see and smell moisture under a house, I recommend it be investigated. This could be related to a drainage, foundation, mold or mildew problem that may have health as well as structural implications.
Working out of area of expertise
The Internet has made it easy for agents to expand their marketing territory. Unfortunately, in their search of a commission check, salespeople sometimes do business in areas with which they are unfamiliar. This can be costly to both the agent and his client.
Out-of-area Realtors tend not to be familiar with local concerns, such as slide areas in the El Cerrito to Oakland corridor. They may not be knowledgeable about neighborhoods and why one, or a section of one, is preferable to another. Similarly, pricing can be a mystery to the mega-area agent. Those from outside will probably not be aware of specific problems, such as the “blue water” debacle some years ago in Contra Costa county.
With thousands to choose from, it makes little sense to work with someone who is not a local, full-time Realtor. Even if it is a close relative or friend, at the very least, have him or her partner with someone who knows the area.
Put it in writing
Many disputes become contentious because the agents did not clarify all the key aspects of the transaction in writing. The contract and any subsequent agreements must be written and clearly drafted. Additionally, ask your agent if he or she keeps a “transaction log.” This is a running account of what has happened since he or she started working with you.
My experience is that the most professional, well-organized Realtors maintain this type of contemporaneous written record, but they are in the minority. Over and over, when I consult with attorneys, I see scribbled agent notes that appear to have been hastily created after the lawsuit. That is not good enough.
Final Thoughts
Attorneys I know predict that, as the current market continues, we will see a marked increase in real estate related lawsuits. This is a complicated, detailed business. You deserve a representative who is experienced, knowledgeable and cares enough to minimize your risk as well as his own.
Related Articles:
Poor Representation: Big Problem in Real Estate
Your Agent Can Get You In Trouble
Unwritten Contingencies
Disclosure Duties Continue Developing