This past year has been out of the ordinary for those of us involved in the real estate industry. We have all experienced unprecedented changes in the real estate market, and as attorneys, have seen an interesting shift in the types of claims filed against real estate brokers. Not surprisingly, we have also noticed an increase in some types of claims being made, and expect an even further increase in overall claim activity. These shifts have resulted from dissatisfaction on the part of buyers and sellers, who may have had unrealistic expectations as to profits to be made, the timing of a transaction, and other aspects of a transaction. This article will review some of the types of issues we have addressed throughout the past year.
In our last article, we discussed the liability inherent in real estate brokers advertising and selling investments. As buyers and sellers cease to make “quick” profits on real estate, they look to their brokers for recovery of losses. In doing so, they consider the range of claims they could bring against brokers. We have seen an increase in securities law claims against brokers as a result of the changing real estate market, and would advise brokers to be careful when advertising investment properties. Specifically, brokers should be clear in their role in a transaction – they are listing or selling the property, and not advising buyers on investments. In addition, brokers should be careful when teaming with other professionals in listing and selling property – buyers are more likely to claim brokers are unlawfully acting as investment advisers when the brokers are providing a team approach to investments – packaging real estate representation, lending, inspections and appraisals together.
Short sales have become more and more common in the real estate market. As a result, many brokers have had to learn the ins and outs of a short sale transaction while listing a short sale property. Brokers who are comfortable with listing and selling short sale properties should ensure that their clients are aware of the risks and realities of short sale transactions. In order to accomplish this, brokers should have their clients sign the OREF short sale explanation and addendum. Brokers should also advise their clients to seek legal and tax advice, as short sales may have significant implications for sellers. For instance, some lenders may agree to forgive a portion of the seller’s underlying debt so that the property can sell. However, some lenders may reserve the right to pursue the seller for the “forgiven” debt after the property is sold. Other lenders may also ask the seller to sign a promissory note for the amount of the “forgiven” debt. Brokers should not represent to their sellers that a lender will not pursue the sellers for the “forgiven” debt, as this is not always the case. Furthermore, recent federal legislation has eliminated the requirement that sellers pay income taxes on forgiven debt, provided the seller and property meet the stated requirements.
Some brokers may wish to avoid short sales altogether, perhaps deeming them to involve too much work for too little pay. In such instances, brokers faced with a short sale listing they do not wish to take may want refer the client to another broker in their office, particularly one with relevant experience. Brokers should be careful in advising their clients to engage a short sale “expert,” who may or may not have a real estate license, as we have found that some individuals or companies holding themselves out as “experts” do not have the seller’s best interests at heart. Rather, some “experts” purchase the property from the seller, and therefore have an interest that is adverse to the seller’s.
In order to stay competitive in this market, it is crucial that brokers provide their clients with a high level of service by providing them with ideas as to how to sell their properties quickly and efficiently. One reality of our current real estate market is that many buyers are having a difficult time qualifying for financing. Brokers faced with a crumbling transaction as a result of a buyer’s inability to qualify would benefit from suggesting that their clients consider alternative methods of financing a transaction. For instance, perhaps a seller is willing to sell the property to the buyer on a contract or through a trust deed and note. The seller may also be willing to consider entering into a lease option with a buyer. Such alternative methods of financing will enable willing buyers and sellers to close a deal, and will lead to commissions for the brokers involved.
Brokers should be careful not to advise their clients as to the best form of alternative financing, but should instead direct their clients to consider their alternatives, and speak with their legal and tax advisors as to the implications of alternative financing and the form in which such financing would take place. In addition, brokers should advise their clients to review any underlying deeds of trust or mortgages in order to determine whether entering into a contract, trust deed and note or lease option will trigger a due on sale clause.
Condominium Construction Defects
We have continued to see a number of claims against sellers and brokers relating to construction defects of condominiums. Typically, the basis for these claims is that the seller and broker allegedly failed to disclose the presence or nature of water intrusion or other damages and/or defects, or that the seller and broker should have known of the problems and disclosed them to the buyer. Due to the potential for condominium problems, brokers representing buyers should ensure that their clients request and review condominium documents in order to determine whether the association is involved in litigation, or whether there are any material defects at the condominiums. Relevant documents include but are not limited to condominium association meeting minutes, correspondence to association members, studies and bylaws. Brokers representing sellers should ensure that all information relating to the association and the condominium itself is disclosed to the buyer. In the event the buyer does not ask for condominium documents, the listing broker would be prudent to have the seller provide condominium documents anyway.
As always, we advise that brokers properly document their files, not practice outside of their expertise and/or license, consult their principal brokers on any issues that arise, and advise their clients to seek independent legal and tax advice. By following these guidelines, brokers can position themselves to be prepared for whatever changes the market may bring in 2009.
This column contains general information only and must not be construed as legal advice.
Questions may be submitted directly to Maylie & Grayson by fax at (503) 775-1765,
by email at or by mail at 7959 SE Foster Road, Portland, Oregon 97206.