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2007-03-08 19:34:00

A Real Estate Risk Management Guide

The following is an excerpt from Waging War Against Real Estate Discounters by Bernice Ross, Ph.D.

Risk Management Guide

Our company wants to minimize your exposure to costly litigation. Therefore, we strongly urge you and your listing agent to complete each of the following steps.

_____  1.  Review Agency Disclosure requirements with your agent prior to signing listing agreement.

_____  2. Your listing agent should also explain what happens if your agent or another agent from our company sells the property without an outside broker (i.e., the “dual agency” requirements.)

_____  3.  Please put all property defects in writing on the disclosure statement. State law requires agents to disclose any problems they observe as well. Making a complete disclosure not only limits your risk, it also decreases the probability that you will have to pay for additional repairs after your property is under contract.

_____  4. We strongly recommend giving the disclosure statement to the buyers prior to the time they write an offer. This allows the buyer to investigate any concerns they have at the beginning of the transaction. It also increases the probability your transaction will close in a timely manner.

_____  5.  Please give your listing agent any past inspection reports you have in your possession. Failure to do so could make you liable for failure to disclose.

_____  6.  Have you made any changes to your property that may require a permit? If so, please provide your listing agent with copies of the permits. If you have made improvements without acquiring permits, please inform your agent. In some locations, your local municipality can require you to change the property back to its original condition if there is no permit for the improvements.

_____  7.  We do not provide exact estimates of closing costs since this can lead to litigation. Instead, your agent will review the approximate amount of closing costs as a percentage of the purchase price. No one can precisely estimate closing costs until the transaction closes.

_____  8. If your local MLS requires agents to measure the property, they will do so. However, NEVER quote lot size or square footage information to potential buyers. If you or the agent do so, you can be liable for the differences. Instead, advise the buyer to have the property and improvements measured by a professional appraiser and/or surveyor.

_____  9.  Avoid diagnosing problems. In other words, if you have a brown stain on the ceiling, avoid attributing it to a roof leak unless you are certain there is a problem with the roof. This is especially true for agents. When agents diagnose problems rather than referring the question to a qualified inspection specialist, they put you and your property at risk for litigation.

_____ 10. Carefully review all federal, state, and local environmental hazard requirements with your listing agent. The law requires your agent to inquire about whether your property is near a hazardous waste dump, landfill, abandoned gas station, auto-wrecking yard, chemical plant, refinery, chemically or heavily pesticide treated agricultural land, industrial waste, etc. Agents are also required to inquire about the presence of radon, asbestos, lead-based paint, noise pollution (including noisy neighbors), etc.

What You Fail to Disclose Can Leave You Exposed

The preceding section describes real estate disclosure strategies you must address to protect both your clients and your license. Convincing sellers to be completely honest about the condition of their property can be challenging. Often the sellers don’t notice problems they have lived with for years. Occasionally, some sellers may actually cover up problems. To minimize litigation risks, encourage the seller to be proactive in making a complete and honest disclosure of the property’s condition.

Managing Risk Management Disclosures

Some sellers may be reluctant to make a complete and full disclosure. They feel disclosing all problems will cost them money or prevent the sale. Surprisingly, people purchase terrible properties with major defects, provided the seller discloses these issues up front. On the other hand, when the seller hides defects and the buyers discover them later, the sale usually cancels. This can result in failure-to-disclose litigation. Even if the buyer does not litigate, the seller must still begin the marketing process over again. Furthermore, most states require the agent to disclose past inspection reports to subsequent buyers.

Sometimes sellers are aware of problems, but are not particularly concerned. For example, the sellers may not notice the sloping floors that indicate a foundation problem. When you spot this type of potential problem, do NOT diagnose. Instead, advise the sellers to note the sloping floors on their inspection disclosure. If they elect not to disclose the floor problem and your state requires you to fill out a disclosure, then avoid diagnosing. Your disclosure should simply read, “Sloping floors noted in entry, kitchen, and dining room.” If the buyer asks you to diagnose the problem, respond by saying,

Mr. and Mrs. Buyer, if you are concerned about the floors, hire an inspector to conduct an independent investigation.

If the seller knows of a problem and demands you hide it, inform your supervising broker immediately. In most cases, the smart move is to cancel the listing rather than representing someone who is pressuring you to violate the law.

A second item the sellers may find to be controversial is giving the buyer a copy of the disclosure prior to or at the time they write the offer. If the buyer knows about the drawbacks of the property prior to writing an offer, the buyer will be less likely to ask the seller to lower the price based upon the inspections.

Permits are another area that can cause tremendous difficulty. For example, in Los Angeles County, you must obtain a permit to replace an old water heater or dishwasher. Furthermore, if the owner adds a new master bedroom and fails to obtain a permit, the city can force the homeowner to return the property to its original condition. Other municipalities have no permit requirements at all. To protect all parties involved, familiarize yourself with what is required in your market area as well as the potential penalties for violating the building code. 

 Chapter 14 Supporting Scripts

Discussing risk management and requesting full disclosure can be difficult, especially when the seller has something to hide. Because we live in a highly litigious society, having this conversation with your sellers may be the best way to protect them (and you) from costly litigation. Most sellers will appreciate your concern and will respond favorably. If the seller is hiding something, this conversation will often bring the issue to the surface. If this happens, you must decide whether you will work with a seller who may be a high risk for litigation. 

In terms of differentiating your services from the competition, very few agents address risk management. This is an easy way to differentiate your services. To implement the risk management conversation in your listing consultation, use any of the scripts below. (Additional scripts are contained in Chapter 18.)

Script #1: Company has a risk management program*

*You may substitute your company’s risk management suggestions rather than relying on the Risk Management Guide in this article.

The best way to limit your exposure to litigation is to follow the guidelines on this Risk Management Guide.

Hand them the guide and continue the conversation:

Buyers will purchase almost anything if the defects are disclosed up front. What no one likes, however, is learning about problems after the property is under contract. To avoid costly litigation, my company strongly recommends that you follow each item on the Risk Management Guide carefully. Is limiting your risk of litigation a service you want?

Script #2: Company lacks risk management program; Agent will use Risk Management Guide

The best way to limit your exposure to litigation is to follow the guidelines on this Risk Management Guide.

Hand them the Risk Management Guide and continue the conversation:

Buyers will purchase almost anything if the defects are disclosed up front. What no one likes, however,  is learning about problems after the property is under contract. Following the suggestions on the Risk Management Guide will help you avoid costly litigation. Is limiting your risk of litigation a service you want?

Script #3: Seller does not want to make a full disclosure

Did I understand correctly, that you do not want to disclose the problem with ______ to prospective buyers?

Wait for their response.

You have an important decision to make. You can make the appropriate disclosures as required by law or you can run the risk of being sued for failure to disclose. The choice is yours. What would you like to do?

If the seller is unwilling to make the disclosures required by law, walk away from the listing. It’s simply too costly to take the risk of being sued.

Chapter 14 Action Plan

You may be tempted to skip the action items in this chapter. The risk management discussion is a high-level conversation that shows the seller you are an experienced professional. It’s definitely worth the effort and it’s easy to do when you use the Risk Management Guide.

As in previous chapters, place a plus (+) next to each item you plan to implement in your business. Rewrite any action steps that need alteration.

Action Plan

___ 1. I will discuss my company’s risk management program during my next listing presentation.
___ 2. I will use the Risk Management Guide from this chapter as part of my listing consultation.
___ 3. I will take specific steps to ensure the sellers make all required disclosures.

(Waging War Against Real Estate Discounters is available with a companion set of scripts and CDs.)

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