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Alert – Agents Should Be Cautious During Open Homes

Recently, one of our broker/clients contacted us and advised us that after an open house, the vacant home that he had staged was burglarized. Several of the staging items, such as the television, were taken. The burglar may have cased the home during the open house and returned and broke through a window after the open house concluded.

A California appellate court also recently published an opinion arising out of burglaries from open houses, wherein the defendant stole jewelry. (While the appellate court opinion is irrelevant to a broker’s practice, the fact that the burglaries occurred at an open house is of concern.)

Agents are advised to take precautions during open homes. Agents should advise sellers to ensure that all valuables are safely stored. Agents should also stay alert during open homes for anyone out of place or suspicious.

Brokers are also encouraged to review their insurance policies to evaluate coverage for these instances. Some insurance policies include protections during stolen items during open homes or lockbox violations.

Risks of Making “Sharp Offers”

With the multiple-offer situation developing in the market, many agents are resorting to writing “sharp offers.”  A sharp offer is an offer, which provides that the buyer will pay a certain amount over the next highest offer.  For example, a buyer may offer “$5,000 over the next highest offer.”  This is a risky practice for a number of reasons.

A number of real estate attorneys are of the opinion that sharp offers create illusory contracts, which are unenforceable.  However, an argument can be made that an offer price in a sharp offer can be determined based on the next highest offer, so it is not illusory.  Nevertheless, an argument regarding enforceability exists and can create an issue if one of the parties attempted to cancel the contract.

 Another risk is the unpredictability of the purchase price.  Some sharp offers have reached hundreds of thousands of dollars over the list price.  If a buyer makes a sharp offer, they are obligating themselves to an unknown offer amount.  If they are not able to purchase the property, it could create issues with the seller, depending on the contingencies.  However, if a buyer makes a sharp offer and cannot afford to purchase the property, an argument could be made that the buyer is not acting in good faith.

Other issues have arisen with regard to appraisals in sharp offer situations.  In a number of instances where prices and offers are driven up and a sharp offer is accepted, the property did  not appraise at the sharp offer price.  This could create a dispute between the buyer and the seller.

Selling agents are discouraged from writing sharp offers on behalf of their clients.  If a seller receives a sharp offer, the listing agent should consider countering with a specified purchase price.

HOT ISSUES!

In the ever changing market known as the real estate industry, there are always issues that tend to appear in many transactions.  When these types of issues arise, it is important to be able to recognize them, as well as take the necessary steps to manage the risk of liability.  Remember, however, that these scenarios should be dealt with on a case-by-case basis, and it is always appropriate, and oftentimes necessary, to consult legal counsel.

Keep your hands out of my pocket!  A common issue in the market today is the prominence of pocket listings.  Pocket listings are listings of property (generally residential) that are kept off of the MLS, in essence, in the real estate agent’s pocket.  There are a slew of issues that can arise out of a pocket listing which can result in civil, administrative (BRE), and even criminal liability.  Whether it is a breach of fiduciary duty by failing to adequately advise your client, or unintended discrimination (yes, you can be liable for that too!), it is important to appropriately analyze the scenario with your management and/or other advisors before deciding to take a pocket listing.  Remember to use C.A.R. Form SEL in order to acquire the required authority from your client to exclude the property from the MLS.  Otherwise, you may find an unwanted hand in your pocket…

To dual or not to dual?  Many agents and brokers know that dual agency creates additional responsibilities, and that it is important to handle these scenarios carefully.  However, some types of scenarios, which may not appear to be dual agency, can be still deemed to be dual agency.  Any time agents from the same office represent different parties in a transaction (i.e. separate agents for buyer and seller, but both are under the same broker), a dual agency relationship is created, as the broker owes the same duties to both parties.  Therefore, it is important for all of the agents involved to handle this transaction with extra care, and to obtain all of the necessary dual agency disclosures and consents.  Since these types of transactions create extra duties for the broker, it is good practice to keep the broker and/or manager involved and apprised of the status of the transaction.

But I just wanted to help my client!  Many real estate professionals receive requests from their clients to take on additional tasks.  While these professionals happily take these tasks on, as they wish to help their clients, doing so is often not advisable and can create additional liabilities for the real estate professionals.  A common type of these tasks relates to property management.  Oftentimes, the owner of a property which was listed by an agent (or which an agent is trying to list), asks the agent to take on some extra tasks related to maintenance of the property or with a tenancy issue.  Some examples of these tasks include, communicating with the tenant about the tenancy, arranging for repair work to be done at the property, or any type of task that a property manager would typically do.  While the intentions of the agents are innocent and often to provide value added assistance, these kinds of tasks can create extra liability for the agent.   The BRE has certain rules that property managers must follow, and if an agent is deemed a property manager due to their acts, they must have followed these rules as well.  Additionally, many E&O Policies specifically exclude property management services.  This would mean that if a claim were to arise, the agent and/or broker could be left without coverage.  So while this may be nice for the client, it is definitely not nice for the agent.

Remember, you are a Real Estate Professional!  Consistent with the agents who take on property manager roles, many agents expand their liabilities and duties during the course of escrow as well.  While most agents know not to diagnose issues with the property (i.e. why those cracks are there, how the water spots happened, etc.), many agents take on expert duties (legal, tax, structural, etc.) which should be left to the appropriate professionals.  On the legal front a lot of agents and brokers start arguing legalities with the other side, for example, how the sections of the contract should be interpreted, how to draft some addendum, and whether terms are enforceable, to name a few.  In these types of scenarios it is imperative that the agent recommend, in writing (email is fine), that the principal seek the assistance of an attorney, so that none of their rights are jeopardized.  Otherwise the agent could unintentionally give advice that damages the client, and a breach of fiduciary duty case would inevitably follow.  The same applies as to financial/tax issues and property condition issues.

Cancelled!  It is a common mistake in the industry that, when a party has a right to cancel the agreement and escrow pursuant to the contract, such party can unilaterally cancel the agreement, without the other party.  However, this notion is simply incorrect.  In order to cancel the agreement and escrow, there needs to be a mutual instruction, signed by both buyer and seller.  Without mutual instructions, the contract and the escrow remain open, meaning that the property cannot be sold to another party, and the deposit is not distributed.  It should be noted that, if another escrow is opened with a new party, said escrow must be made contingent upon the cancellation of the first escrow.  Also, a lot of times an escrow and contract are not cancelled simply due to a dispute over the distribution of the deposit.  This is unnecessary, however, as paragraph 2C of C.A.R. form CC can be used to cancel the agreement, but leave the deposit with the escrow company until the buyer and seller resolve the deposit dispute. One of the most challenging problems is when there are more than one buyer with a contractual right to a property…this risk needs to be CANCELLED!

Watch What You Say! The old saying from Jack Webb on Dragnet: “What you say can and will be used against you in a court of law” is a good message to remember. Everything you say is vulnerable to discovery.  Texts, e-mails and other informal manners of communication are generally recoverable (even if deleted). With this in mind, anything you say or write should be stated or written as if it will be reviewed by a judge.

There are other areas of concern which we will continue to highlight.  The most important point, and it is our constant message, is be mindful of all the mines out there.  As the summer heats up, keep cool with a careful handling of your professional activities.

Bottomless Pit

The residential real estate market is inundated with short pay, foreclosure and loan modification issues.  This might lead a person to think that loans, property value and foreclosures are the most common subjects of lawsuits in the residential real estate arena.  While there has been a significant up-tick in lawsuits related to these areas, now as always, physical defects at the property are the most likely trigger for a lawsuit by a buyer.

This risk is even more prevalent under current market conditions.  First, it is more likely that a property is suffering from deferred maintenance and is in a state of ill repair.  Second, because money is limited for everyone, there is a lower tolerance for defects and a greater risk that the parties will go to battle over who should be responsible for the cost of repairs.
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Cycles of the Season

As a general rule, this newsletter focuses on traditional legal issues affecting real estate professionals.  In light of the current economic times, and in particular as we approach the end of a very turbulent year, it seems appropriate to step back from this traditional approach and refocus our attention on the more human side of our career endeavors.

For most of us, this year has been like no other we have ever experienced.  From the accelerated decline in real estate values to the radical descent of the stock market our assets have dwindled.  Reflecting upon the abrupt implosion of major corporations, as well as the mom and pop stores across the country, we cannot help but recognize the fragility of all businesses.  Most notably, the loss of jobs, spending power and security of the “every-person,” has had a ripple effect, the consequences of which we are still yet to fully grasp.

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