At the end of every year, we reflect back on the types of claims we’ve seen involving real estate brokers. Although 2009 has been a challenging year in the real estate market, we have seen many of the same types of claims as in years past. This article will outline some interesting and/or recurring claims we have seen this year, and how the real estate brokers involved could have reduced or avoided the risks relating to the claims.
Not surprisingly, seller financing was popular during 2009. Although rates were favorable, many buyers were not able to qualify for conventional financing due to tightened lending policies. As a result, many sellers allowed buyers to purchase their properties via trust deeds or land sale contracts. Despite a happy ending for sellers, who may not have otherwise been able to sell their properties, some buyers have been placed into undesirable situations. For instance, some buyers may not have understood that the sellers’ underlying loans had due on sale clauses that were triggered by the buyers’ purchases on contract. If the sellers were unable to refinance or pay off their underlying loans upon acceleration by their lenders, and the buyers did not have the ability to do so, the underlying lenders would foreclose on the properties. As a result, the buyers would lose the properties and potentially any down payments or other funds they have paid the sellers.
Although real estate brokers do not make purchase and financing decisions on behalf of their clients, brokers should ensure that their clients understand the types of issues that should be considered before entering into a transaction. For instance, a buyer may not understand that a seller offering to finance his or her purchase may have underlying financing that contains a due on sale clause. In addition, a buyer may not understand the importance of determining the amount of the seller’s underlying debt, and ensuring that the seller is making timely payments to his or her underlying lender so that the property does not go into foreclosure. Brokers who understand how underlying encumbrances impact seller financing are able to provide better service to their clients, whether they be sellers or buyers, and reduce their risk by encouraging their clients to consider the complexities of seller financed transactions.
Short sales have become a reality of our market, and we’ve talked about them frequently over the past several years. However, we continue to see issues arise between short sale buyers or sellers and their brokers, and thought it was worth mentioning them in this article. One of the best pieces of advice we can give brokers regarding short sales is to know what you’re doing, and know how to protect your clients. No commission is worth the risk inherent in providing representation in a transaction in which you don’t have the necessary expertise or support. Many brokers seek the advice and involvement of their principal brokers, whereas others may refer short sale transactions to brokers who are more familiar with them.
Another issue we have seen arise with respect to short sales relates to education of short sale buyers. As most real estate brokers know, although a seller may accept a primary offer to send to the lender for consideration, the lender may decide to instead select a backup offer as a primary offer. For buyers, this may be disconcerting, as the fact that a buyer’s offer was the first short sale offer accepted by a seller does not necessarily mean that either a) the lender will agree to a short sale at all, or b) the lender will accept the buyer’s offer over subsequent offers. Brokers are well served by educating their buyers on the fact that short sales are complex, and that buyers may not be successful in having their accepted short sale offers approved by lenders. In essence, buyers should be coached to have realistic expectations about whether they will ultimately be able to purchase short sale properties they are considering. Brokers who manage their clients’ expectations, and ensure that their clients are realistic given the marketplace, will reduce the risk of having unhappy clients claiming that the brokers misrepresented the facts of a short sale to them.
Brokers who assist clients in buying and selling condominiums are at greater risk for claims due to an increase in condominium litigation. The fact scenario typically involves a condominium buyer who does not learn of potential defects and/or litigation involving the condominium until after his or her purchase is closed. The seller and brokers involved had a duty to disclose any known, material defects to the buyer, and the buyer’s broker should have prompted the buyer to request and review any and all condominium documents, including but not limited to meeting minutes, newsletters, and budgets. Perhaps the buyer did not request documents, or perhaps the buyer only requested certain documents that did not disclose the material defects. Either way, in our experience, both the listing and selling brokers are drawn into claims involving unhappy buyers faced with a potential special assessment.
Prudent listing brokers should ensure that, upon listing a condominium for sale, they have collected all relevant condominium documents and make them available to buyers and their brokers. Such documents should include condominium association meeting minutes and newsletters that date as far back as possible, and at a minimum, at least 2 years back. Selling brokers should make certain that their buyer clients both request and review all documents to ensure they are satisfied with the state of the condominium and its association. Brokers can avoid some of the risk inherent in listing and selling condominiums by ensuring that their sellers provide detailed information about the relevant condominium association and that their buyers request and review such information. Additionally, brokers should consider using appropriate condominium addendums to address these issues.
Due Diligence for Clients
Many clients may ask brokers to assist them in conducting due diligence prior to finalizing their purchase of property. Such due diligence may include visits to county or city offices, or researching zoning and related uses of properties. Although brokers may be tempted to provide their clients with a high level of service, which may include providing additional information on the zoning of property or the ability to subdivide a parcel, they may face a much higher risk of later being blamed by clients should the information not be accurate. Instead of conducting due diligence on behalf of clients, brokers should encourage their clients to visit relevant offices and look to sources for such information on their own. Should clients insist that they are not qualified to search for and comprehend such information, brokers may wish to refer their clients, in writing, to professionals who may be able to do conduct such due diligence for them.
We have continued to handle claims being made by buyers who insist that their brokers have sold them investments rather than solely real estate. Some brokers may advertise their listings as “investments,” suggesting that buyers may make significant profits on such properties. Although such a description may sound innocuous, it can have grave consequences. For instance, a buyer who claims a broker sold them an investment may also claim that the broker did so without a securities license. Liability and associated penalties for securities law violations can be significant. For this reason, brokers should be very careful about how they advertise their listings, and not characterize them as “investments.”
Other claims we’ve seen made against brokers in 2009 have involved brokers’ failure to protect their own clients. One such circumstance involved a selling broker failing to request a property disclosure statement on behalf of the buyer. As the buyer was not familiar with real property sale requirements, and therefore did not know about the presence of a property disclosure statement, the buyer did not know to ask for one. Had the buyer asked for one, the buyer may have learned of material defects that could have impacted the buyer’s decision to move forward with his or her purchase. Although the seller and listing broker should have provided the disclosure statement to the selling broker, the selling broker should have been prompted to request a copy when one was not provided. Regardless of their level of experience, brokers should ensure that they protect their clients by ensuring that all aspects of a transaction are appropriately documented and handled.
Contributing to Clients’ Deals
Some brokers, when faced with situations in which their clients have not been able to secure funds for earnest money deposits or other fees and costs, have either lent their clients money or contributed their own funds to pay for things such as home inspections. A broker should not contribute money to a client’s transaction, as such a contribution could constitute a conflict of interest. In addition, a client could blame the broker for either forcing the client into a transaction that was not right for him or her, such as the purchase of a home that a buyer could not afford, or for a negligent service that was paid for by the broker, such as for a home inspection. Brokers may want to educate their buyers in advance about the risks involved in failing to close a transaction, such as loss of earnest money. Brokers would also be prudent to refrain from going too far in assisting their clients, such as contributing any sums to a transaction, regardless of whether it’s a gift or loan.
The above constitutes only a small but important subsection of the types of claims faced by brokers during 2009. In our experience, many claims against brokers could have been resolved by clear, written communication between brokers and their clients, brokers working within their expertise, and brokers making referrals to experts when appropriate.
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.