March 22nd, 2013 at 7:41 pm
As we have discussed numerous times, in today’s market, buyers are writing offers or handling transactions in ways that are tailored to please their seller.? For example, offers are being written with shortened contingencies or no contingencies at all.? Further, once in escrow, buyers are removing contingencies more quickly because they fear a cancellation.? Unfortunately, and as we know, while those actions are often necessary, they also carry risks.? As a result, ? when making the decision to remove a contingency, either in the offer or in escrow, our clients need to be careful how they proceed. ?
Further, while all contingencies? are important, some carry more risks than others.? For example, with regard to the loan contingency, our buyers are often faced with decision of whether to remove it on day 17 or earlier, even if they are not totally comfortable doing so.? In some cases, the buyer will refuse to remove the loan until they get a writing saying their application is approved, no matter what the risks are.? So, what is our involvement in this process and, more importantly, what should we be telling our buyers when they ask for advice?
First, and most importantly, we need to be clear with our buyers that, no matter what their lender or loan broker said, no loan approval is totally safe until the loan funds and escrow closes.? As you know, all loan approvals have conditions to them, often including the risk of a review appraisal.? ? In short, no matter what assurance you think you have, removing a loan contingency always has some risk.? Before the loan funds, we can never tell a buyer that they are 100% safe and that there are no risks that the loan will be turned down. Obviously, these risks normally do not occur, but they exist.? So, when asked we can never give a buyer total comfort.? We need to explain the risks that exist, letting them know that if they remove the contingency and the loan is denied, their deposit could be lost.? We also need to recommend that they talk to their loan representative and try to get as much comfort as possible.? Then, and only then, should they decide whether to remove the contingency.
Additionally, however, you also need to make sure your buyer understands the risks on the other side of the transaction.? After all, if the contingency is not removed, the seller may give a Notice to Perform and cancel the agreement.? Especially in a seller’s market like today, it is easier for the seller to find another buyer and they are therefore more willing to cancel and move on.? As a result, no matter how much comfort a buyer has about the loan, they risk losing the property if they refuse to remove the contingency.
As a result, when representing a buyer and being asked about this contingency, identify the risks and let the buyer make the choice.? Remember, our job is to provide information, not decide what our client is going to do.? So, give the buyer both sides and let them decide.? By doing these things, we protect ourselves and give the client all the information they need to protect their own interests too.
As always, please contact your manager with any questions you may have and they will contact the Legal Department if necessary.
March 15th, 2013 at 7:39 pm
I have received a number of calls recently about deals where the buyer comes in unrepresented, and wants to go through the transaction without their own broker. They typically do this to save money, thinking that they will be able to have the selling side commission credited back to them. With that in mind, there are a number of things that I want you to be aware of.
1. ? ? First, please understand that you have no obligation to discount or credit part of your commission to an unrepresented buyer. As you know, you have a listing agreement with the seller which says that you will be paid 6%. The only agreement you have to share that commission is through the MLS, with a cooperating broker. As a result, if the buyer is unrepresented, there is no cooperating broker and you have no obligation to share your commission with anyone. Instead, you can keep the whole thing. In truth, even if a buyer is “representing himself,” you will end up doing significantly more work so keeping the entire commission is justified.
2. ? ? Next, if you are involved in a deal of this nature, you need to make sure your paperwork is correct. As you know, without an agent helping them, the buyer will invariably look to you for assistance. As a result, to get the deal closed, and help your seller, you may need to do more for and with the buyer than is normal. So, to counteract any claim that this extra work created an agency, your documents need to be very clear that you only represent the seller. That starts, of course, with paragraph 2C of the RPA. In that section, make sure you put our name in the “Listing Agent” line only and check the box that says “the Seller exclusively.” With regard to the “Selling Agent” line, you should either leave it blank or put lines through it. Of course, you should never put our name in the “Selling Agent” line or check any box that says we represent the buyer or both the buyer and seller.
3. ? ? Next, please make sure your buyer signs the Buyer Non-Agency Agreement (CAR Form BNA). When completing that form, make sure not to check the box in paragraph 1D where you would identify another broker (since there isn’t one). Furthermore, be sure to check the second box in paragraph 3 which starts as follows: “Buyer is not at this time represented by a real estate licensee.” This form, in paragraph 2, makes it clear that the “Listing Broker does NOT represent Buyer and Listing Broker will NOT be Buyer’s Agent..” As a result, it makes it much more difficult for the buyer to claim differently later on in the deal.
4. ? ? Finally, be very careful what you do to help the buyer. You cannot give them advice. If they ask for any, remind them that you don’t represent them and recommend that they get a broker or talk to their attorney. You should also avoid giving them forms. First, to do so would be a violation of CAR’s copyright of those documents. They are for the use of CAR members only. Also, by telling them what forms to use, you are walking closer to that line of representation. So, do as little as possible while still trying to help get your seller’s deal closed.
As always, please contact your manager with any questions you may have and they will get the Legal Department involved if necessary.
March 8th, 2013 at 7:38 pm
As we have discussed in the past, we are seeing significant multiple offer activity in our markets which have made it difficult and frustrating for your buyers. After all, they often make offers on multiple properties, and lose out to other buyers on each occasion. As a result, you are being asked to help make their offers more attractive and, in some instances, are suggesting that they make an all cash offer even if they want to get a loan. From experience, we know that this can cause problems with the seller, who accepted your offer, in part, because they thought there was no loan. So, the question becomes what happens when you actually apply for the loan? What rights do the buyer and seller each have in this scenario?
First, you need to recall that the RPA specifically deals with this situation. In paragraph 3K, “Buyer Stated Financing,” the contract provides that, if the buyer seeks alternate financing, the seller does not have to cooperate and the buyer “shall” also pursue the financing identified in the contract. Notice that the contract does not say that the buyer cannot seek alternate financing. It just says that if she does, the seller will be uninvolved and the buyer should “also” pursue the financing promised. As a result, if my offer and contract are for all cash, while I can apply for a loan, that fact does not change my contractual obligations and I need to be prepared to pay all cash if the loan does not come through or is late. I cannot cancel the deal if my loan is denied. This fact is emphasized by the contract when it says that the “failure to secure alternate financing does not excuse Buyer from the obligation to purchase the Property…” (Emphasis added.)
With this in mind, how should you handle this situation if you represent the buyer. First, if suggesting this type of offer, make sure your buyer actually has the cash to close. If they don’t, their deposit would be at risk if the loan falls through. Next, because the seller does not have to cooperate with the loan, you need to make sure that the appraiser gets into the property as part of your investigations, before you remove your contingency. If you still have that contingency, you have every right to appraise the property even when there is no loan. Once that contingency is gone, however, the seller does not have to let an appraiser in because the contract says he doesn’t have to cooperate. So do your appraisal as early as possible and hold your investigation contingency until it is done. Of course, the safest thing to do is let the listing agent know your plan up front. I know that would be a problem in many instances, but if it would not, disclosing the plan up front avoids the risk of any problem. Of course, I leave that decision to your discretion.
So, if your buyer wants to get a loan after making an all cash offer, make sure they know that their obligations don’t change and they still need the cash as a backup. Also, make sure they get the appraiser in the property quickly. If you do those things, everyone is protected.
As always, contact your manager with any questions you may have and they will get the Legal Department involved if necessary. Thanks.
March 1st, 2013 at 7:37 pm
As you know, during the course of a transaction, your client receives a lot of documents from escrow. In truth, even though we do our best to make sure they read everything, because of the sheer volume of documents involved in our transaction, that doesn’t always happen. In fact, oftentimes documents will be signed without us seeing them or even knowing they were sent to our client. While this is not an issue in many cases, recently we have seen a problem arise that we wanted to discuss with you.
Specifically, one of the best and seemingly most innocent things an escrow company does is send documents to the buyer and confirm, in writing, that those documents were received. These items take many forms, from the termite report to the CC&Rs to the Preliminary Title Report. In most cases, this is a wonderful thing. We need to make sure that the buyer receives those documents and the receipt produced by escrow proves that fact. What we have seen recently, however, is that many escrow companies are doing more than proving the buyer’s receipt. Instead, the document they send with any particular report is called an “Approval” and, in addition to acknowledging receipt, the buyer is asked to “approve” it. The problem comes when that Approval is signed without any thought or discussion. For example, the Purchase Agreement has a contingency for title or CC&Rs, and has specific timelines and rights that go along with that contingency. If the buyer receives either of these documents from escrow and, without thinking or talking to you, signs this “Approval,” have they impacted their contingency rights? After all, if I sign a the Approval upon receipt, and then read the document, something in it may cause me to want to cancel. Theoretically, however, I have already “approved” the document and an argument can be made that it would be a bad faith breach of contract to now exercise the contingency. The lesson here is obvious. Make sure your buyers know to run all documents by you before they sign them and you can make sure they don’t approve anything they are not ready to approve. Cross out the word “Approval” in the title of the document, and cross out any language in the body saying the buyer “approves the report.” That way you protect your client’s contingency rights and keep them as long as necessary.
As an aside, you should know that, as of today, Pickford Escrow has no documents that include approval language. They will only send your clients receipts. As a result, when you use Pickford, you can be sure they will not cause this problem for you or your client.
As always, please contact your manager if you have any questions and they will get the Legal Department involved if necessary. Thanks
February 21st, 2013 at 7:36 pm
As you know, when possible we like to share the stories of lawsuits that have been filed against the Company and our agents.? Often, those stories can help us avoid similar problems in the future.? In a recently settled case, we represented the seller of a $2 million property in Los Angeles.? The buyers were the music producers of the television show “Glee,” and planned to make significant modifications to the property, including turning the garage into a music studio.? As a result, any prior work done to the property, and whether that work was done with permit and to code, was of great interest to them.
Given that issue, in the seller’s disclosures, we tried to ensure that she gave all relevant information to the buyer.? In her TDS, the seller stated that there were modifications made without permit and not to code.? In her explanation of that disclosure, the seller identified a wall that was added to one of the property’s bedrooms.? That was all the seller disclosed in this regard.? Additionally, however, our agent disclosed that the garage at the property had been converted without a permit.? In this case, that was all our agent knew and therefore all she could disclose.
Furthermore, because of the buyers’ interest in this issue, the Purchase Agreement provided that the seller would deliver all plans for work performed at the property to the buyer.? Our agent also promised to provide the buyer with permits.? As a result, our agent went to the Department of Building and Safety and filled out a form asking for all permits and documents related to the property.? Upon returning to her office, however, and discussing the transaction with a colleague, our agent was told that we do not provide permits.? She was reminded that the Civil Code specifically says that our inspection duties do not include an inspection of public records and, therefore, if the buyer wants permits, they need to go to the City themselves.? As a result, when she was notified that the permits were available, our agent did not pick them up and never provided them to the buyers.? Therefore, when escrow closed, the buyers were not aware that the documents showed significant additional work done without permits and that numerous stop orders had been issued regarding work started by the sellers.? As a result of these conditions, the buyer was required to bring the entire property up to code before making their own renovations.? According to plaintiffs, the extra costs exceeded $1.2 million.
Of course, a lawsuit against Prudential, the seller and the buyer’s agent followed.? The claim against Prudential related specifically to the permits, and the fact that our agent took it upon herself to provide them to the buyer.? While it is clear that we had no duty to do so, the plaintiffs argued that by going to the City and requesting documents, our agent assumed the duty to provide them to the buyer and her change of course, and failure to pick the permits up, constituted a breach.? The case was recently resolved for a 6 figure settlement.
So, what is the lesson from this case?? First, do not go to the City to pull permits.? As? I stated above, the Code specifically says that we do not have to do so.? If your buyer wants permits, refer them to the City themselves, or to a company that will pull them directly.? By getting a third party involved, we avoid the responsibility that what we provide may be incomplete.? In the worst case, go to the City with your client, but let them request the documents.? That way it is their responsibility, not ours.? Next, however, you need to remember that if you accept a greater duty than required, you need to perform it competently. If you go to the City to get permits, you need to be sure that you deliver what you get to the buyer.? If you get an extra inspection report regarding some system, you need to be sure to turn it over.? You cannot go half way, or decide in the middle of performing a job that you shouldn’t have started it in the first place.? Once you start doing something for a party, do it completely and do it well.? That way, no one can argue that you breached a duty you voluntarily assumed.
As always, please contact your manager with any questions you may have and they will get the Legal Department involved, if necessary
