February 3rd, 2011 at 10:19 pm
As you know, it has long been common wisdom in our industry that a real estate agent must provide three vendor names when a client asks for a recommendation. For example, if my client wants me to suggest a property inspector, the feeling is that I should give three names so I am not held responsible if the recommended inspector misses a problem with the house. And, while that practice is a good one in many ways, I want to be clear that there is no law requiring it. In truth, you are required to make responsible, reasonable recommendations, no matter the number you make. For example, if you gave the names of three inspectors, but you knew from experience that one of the three did a bad job, that recommendation would be negligent. So it is not really the number that is key, but rather the recommendation itself and the experience it is based upon. As a result, when you have good experience with our affiliates, it is fine to recommend that affiliate alone, without giving other names. We know that our affiliates provide good service and are financially sound. We know they are responsive to you and your clients and we know they are experts in their fields, both with regard to their specific industry and the law applicable to it. So, don’t make your life overly difficult with artificial rules. Don’t worry about numbers. Just recommend competent vendors, who do good work and who you have had good experience with.
Not surprisingly, this issues arises not just in California, but across the country. As a result, below is an e-mail written by Dana Strandmo, General Counsel of HomeServices, about this very subject. Dana sent this e-mail to HomeServices companies across the country. As always, let us know if you have any questions.
Three Referrals – An Urban Legend
Nobody knows where these things get their start. Somewhere, someone recommended or suggested or inferred that real estate agents should give their sellers and buyers at least three business cards for any recommended service to fulfill their fiduciary duty–a belief that has been perpetually perpetuated ever since. There is no legal basis for this three referral minimum.
Making referrals can involve complicated legal questions of agency, fiduciary duty, imputed negligence and vicarious liability in the event of a claim. There is no “three business cards defense” to potential claims under any of these doctrines.
Better advice would be, “Don’t exaggerate, fabricate or prognosticate.”
A good recommendation for a mortgage company is one that says, “HomeServices Lending has competitive mortgage rates and I have had good experience recommending loan officer Todd Johnson to my clients in the past.”
A bad recommendation for a mortgage company is one that says, “AnyMortgage Company has the lowest rates available anywhere and loan officer Dewey Cheetam will get you a rock bottom rate.”
Client recommendations should be made on sound business principles, not urban legends
February 1st, 2011 at 10:18 pm
Just when I think I have seen everything that “short sale” people can come up with, I get a call about something new. Today was one of those days. In this case, our agent represents the buyer in a short sale. The listing agent has been demanding that our buyer deliver their deposit to escrow despite the fact that no short sale lender approval has been received. After trying to convince us that it was ok to make the deposit early, today the listing agent delivered an “approval letter” from the first lender. A copy of that letter is attached. By reviewing the letter carefully, our selling agent recognized that the identity of the buyer was handwritten in rather than typed. Of course, our agent had never seen such a letter before. Additionally, however, she knew that there was a prior buyer for this property who had cancelled escrow after bank approval was received. In those circumstances, of course, she refused to accept the letter provided. No bank that we are aware of has ever sent an approval letter with any part of it, let alone the buyer’s name, handwritten in. As a result, our agent refused to have the buyer make a deposit until a clean “approval letter” is actually received. Obviously, the lesson of this story is simple: read everything in a short sale, including the seemingly simple approval letter, very carefully. People are willing to do anything to get their short sales approved or moving forward. We have to be sure that, at least in our deals, that “anything” does not include something fraudulent. Thanks.
Approval Ltr.pdf
January 27th, 2011 at 10:12 pm
I received a call today that I have received many times over the years. In this instance, we represented both sides in a $4 million transaction. The buyer, without explicitly saying so, apparently wanted to figure out ways to reduce his property tax after close of the escrow. As a result, when structuring the deal, the buyer suggested two things: first, he wanted to pay the commission himself; and, second, he wanted to buy “personal property” from the seller which they valued at $200,000. As a result, the buyer wanted a purchase agreement with the sale price at $3,600,000 ($4 million minus $200,000 in personal property and a 5% commission of $200,000), with separate agreements for the commission and personal property. I was asked two questions in this regard: 1) What advice, if any, should be given to our clients about this structure?; and 2) What sale price should be reported in the MLS?
1) First, while our clients can structure their contract any way they would like, they should understand that, if there is a lender involved on either side of the transaction, this structure would constitute a fraud. In a short sale, the money going to the seller for the personal property would be against short sale lender guidelines and could not be paid. On the buyer’s side, by artificially reducing the sale price of the property, we are impacting the lenders determination of loan amounts, loan to value ratio, etc. As a result, if a loan were involved or this were a short sale, this structure would pose significant problems. Even without a loan, we need to tell our buyer that these attempts may not be successful in reducing his property tax. I have seen transactions where, after close of a deal where the buyer paid commission, the assessor added the commission amount back into the sale price when assessing the property. It was the assessor’s position that commission is normally paid by the seller and included in the sale price, and the tax would therefore be assessed on the sale price plus commission. We should also let the buyer know that the price for personal property could also be added back in if the assessor learned about it and determined that the value assigned to that property was artificially inflated.
2) Next, with regard to the MLS, we believe the sale price reported should include the commission, but not the personal property. As we said above, sales prices normally include the commission. That would be true for the vast majority of sale prices in the MLS. On the other hand, most MLS prices do not include personal property, so we are ok excluding that amount. Even if we have suspicions about the personal property’s true value, it is not our job to investigate or judge that issue.
As always, let us know if you have any questions
January 25th, 2011 at 10:13 pm
As you all know, FHA loans have become more prevalent in our market over the last few years. As a result, it is more important for us to be on top of FHA’s requirements for various loans. In that regard, you should all be aware that as of January 1, 2011, condominium developments must meet tougher requirements in order to be FHA approved. For example, FHA now requires that no more than 10% of the development’s units may be owned by one investor and at least 50% of the units must be owner occupied. Below is a link to a copy of an article from the January/February 2011 edition of California Real Estate discussing the new rules in detail. As always, let us know if you have any questions.
FHA.pdf
January 21st, 2011 at 10:05 pm
As you have heard from us multiple times, in the world of short sales, the words “outside of escrow” are “dirty words.”? No payment can be made outside of escrow and the short sale lender must know everything that is going on.? In an article from the California Property Law Journal, Shannon Ball Jones agrees, writing as follows:
In short sales, agents are sometimes asked to allow payments outside of escrow. For example, if the senior lender permits the junior lender to accept only $2,000 of the sales proceeds, the junior lender occasionally will ask for a larger payment outside of escrow. This is not only a breach of the senior lender’s terms, but constitutes lender fraud. Senior lien holders are now asserting claims against title companies who allow payments outside of escrow, which are not listed on the HUD-1 closing statement or are contrary to the lender’s approval letter. It is likely that in the future, lenders will consider pursuing claims against agents. All payments should be on the HUD-1. If any payments deviate from the senior lender’s approval letter, permission from the senior lender must be obtained.
