A PROPERTY TO GOOD TO BE TRUE

Case Summary:

The buyers successfully owned and managed two duplexes for several years, and were ready to build their empire. They asked their former agent to find them something bigger to trade into. Their agent had never sold anything larger than a duplex. The agent’s broker had never sold anything larger than a four-plex.

A 40-unit apartment came on the market. The buyers’ agent showed the exterior of the apartment building and touted the incredibly low price per unit. The price was right, the rental market was hot, and the buyers made an offer. The listing agent and seller prepared an incredibly detailed and thorough 200-250 page disclosure package and provided these to the buyers’ agent. It seems the building had many ongoing problems with tenants’ lawsuits against the property owner, evictions, maintenance issues, etc. The buyers’ agent delivered the disclosure package to the buyers, who “signed off” without reading them. Their agent didn't go through any of the disclosures with them.

After escrow closes the problems begin to surface. The buyers are not up to the management responsibilities and the cash flow is not sufficient to cover the debt. The property is foreclosed. The buyers lose everything. They sue their agent and the broker, of course. One of their claims was that they did not understand what problems existed with the apartment building.

Questions:

Is this clearly the agent’s fault? Well, you can guess that it is below the standard of care for the agent to sell a 40-unit building with no prior experience or broker supervision. The issuance of a license through DRE gives agents the right to sell any type of property anywhere in California. But should they? This case demonstrated that the agent and broker were woefully below the level of knowledge required to do this transaction.

What Agents Can Do:

There’s a first time for everything. Agents may want to stretch their capabilities and handle unfamiliar transaction types. Agents can sell property outside of their familiar marketing area. This is not prohibited by the DRE nor by any ethical standards. The proper procedure when faced with a transaction beyond your normal capacities is to first check with your supervising broker to see if there is sufficient oversight to proceed. If not, consider referring the transaction to an agent who can properly fulfill the standard of care. A referral fee is always better than a lawsuit.

Alternatively, engage the services of a licensee experienced in the type of transaction to assist you and make sure it is done properly. A small portion of the commission is an excellent insurance policy against a lawsuit.

Finally, let your clients know that you are unfamiliar with the transaction type, or area. Let them know what steps you are taking to make sure they are properly represented. They will appreciate your honesty and your concerns for their best interests.

Postscript:

Does the buyer in this case have any responsibility for their actions, or lack thereof? These buyers acted foolishly by “signing off” on the overwhelming disclosure package, without reading or understanding it. They didn’t ask questions. The law directs buyers to look out for their own interests. The buyers failed to do that, and had to take partial responsibility for their own losses.

Whenever disclosures reach the agent's hands, do more than just deliver them. Go over all disclosures with your buyers, and use your real estate knowledge to help them understand. You don't have to interpret or research the disclosure information, just advise them what it could indicate. Help them request further detail or inspections if appropriate. Do your best to make sure that your buyers are clear what they are receiving, and how it can affect the property. All properties have problems. Buyers should know what you know, and make their own decisions accordingly.

In the end, both parties to this lawsuit suffered losses of time, money, and reputation. Don’t let it happen to you.

Good luck!

Cari Pace

THE PROBLEM NEIGHBOR

Quick Glimpse of this Case:

This posting deals with a case where the neighbors “over the fence” were openly hostile and abusive towards the sellers. Physical items as well as verbal insults were tossed back and forth. Police reports were filed. Such animosity might be based on pets, personal prejudices, or past disagreements. Good fences don’t always make good neighbors, unfortunately!

Agents Advisory:

First question, is this dispute a material fact about the property? Secondly, how do you satisfy your duty to disclose it? Third, might you be setting yourself up for trouble if you mention the neighbor’s behavior? The answers are Yes, Yes, and No.

Agents are responsible for disclosing anything which could influence the value or desirability of the property. We must disclose all material facts which are not already known to or readily observable by the buyer. The neighbor’s behavior fits this description.

How do you disclose these issues to a potential buyer? Well, in writing is best, and receipted by the buyer to prove they got it. Emails work, too. If that’s not practical, a verbal disclosure is acceptable as long as you can prove you did so. How to prove you disclosed? Notes to your communication log, done at the time you discussed the problem, will help all the parties recall that you did your duty. You may also use a witness to your conversation with the buyer. Just be ready to prove your disclosure if the buyer should come back months or years later to say you never told them.

Finally, are you setting yourself up for a personal lawsuit for slander by the neighbor? You are at risk if you state untruths; that’s slander. You can state what you personally observed, factually and without malice. If the neighbor caused you a ruckus when you held the house open, you can and should bring this up with potential buyers. If you personally didn’t experience any disturbance, disclose the problem issues as described by the seller. State that these observations came from the seller and have not been personally verified by you (unless they have). As a matter of fact, the police reports would also back up your obligation to mention the neighborhood disturbance.

Summary:

Disclose what you know, who gave you the information, and whether it has been verified by you or not. If the buyers don’t consider the neighborhood problems as important to them, they will buy. If the problems are of concern, the buyers are probably better off elsewhere. Give the buyers a contract contingency and sufficient time to meet the neighbors. Let the buyers determine if they will get along. Fully-informed buyers typically make a better decision whether to proceed with escrow or find something else.

Does this issue of problem neighbors reduce the value of the property? Yes, agents agree it would. The difficult question is by how much? If the neighbor problem is a personal one, likely to end when the seller moves out, the diminution in value is minimal. If the problem is expected to continue regardless of who moves in, the reduction in value is greater. Buyers are unlikely to choose a home with built-in problems if there are other homes available with no such issues. It takes a buyer incentive to sell a home with difficult neighbors.

Good luck!

Cari Pace