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Thursday, October 14, 2010

A Deal Too Good to Be True

Cari Lynn Pace by GRI Instructor Cari Lynn Pace, GRI, CCIM, CRB, CRS

Teaches GRI Courses 100, 101, 102, 104

View future classes taught by Cari Lynn Pace

Your California real estate license allows you to sell property anywhere within California. But should you? If you are unfamiliar with the area or type of property, it may lead to costly problems, and possibly a lawsuit. Read what happened to another agent and learn from the mistakes.

Background:
The buyers successfully owned and managed a duplex 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, nor had the agent’s broker.
A 20-unit apartment came on the market in a depressed neighborhood. 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 gave the disclosure package to the buyers, who “signed off” without reading them.

After escrow closes the problems begin to surface. The buyers were not up to the management responsibilities and the cash flow was not sufficient to cover the debt. The property was foreclosed. The buyers lost everything. They sued their agent and the broker, of course.

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 20-unit building with no prior experience or broker supervision. The NAR Code of Ethics states that licensees will not take on a transaction that is outside the scope of their knowledge or expertise unless the client is clearly advised of the situation. Issuance of a license through DRE gives agents the right to sell any type of property anywhere in California. However, that’s not an approval to do so. This lawsuit indicates 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. Receiving a referral fee is always better than a lawsuit.

Here’s another approach:
Engage the services of a licensee who is experienced in the type of transaction to assist you. You and the other agent can team up to make sure it is done properly. Paying out a portion of your commission is helpful insurance against a legal proceeding.

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:
What about the buyer – do buyers have any responsibility for their actions, or lack thereof? Yes. 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 in the eyes of the court.

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

Cari Lynn Pace is a S. F. Bay Area Broker and Master Instructor for GRI. She has written several courses and books and is a real estate expert witness in litigation. Her latest book "Don't Shoot Me, I'm Just the Real Estate Agent!" describes the top 100 reasons why agents get dragged into lawsuits. This article should not be interpreted as indicating the Standard of Care for real estate licensees.

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