BROKER RISK MANAGEMENT
WEEKLY PRACTICE TIP
Recently, there has been a significant increase in claims and Department of Real Estate (“DRE”) investigations affiliated with real estate agents’ use of contractors. The following addresses some scenarios and recommendations.
SCENARIO NO. 1: I am a listing agent and retained a licensed general contractor to assist with preparing the property for market. The seller is unhappy, complaining about the quality of the contractor’s work. I paid the contractor, and now the seller does not want to repay me nor pay the contractor. The seller now wants to cancel the listing.
RESPONSE: As a real estate agent, you should not retain nor pay contractors directly. You may make recommendations regarding improvements to increase the potential sales price of the property. You may also recommend contractors and vendors for the sellers to retain, so long as you have no reason to believe that the contractors are unprofessional, and you verify that the contractors have a current contractor’s license, workers’ compensation insurance, and commercial general liability insurance. (Check the California Contractors State License Board website to verify that the contractor is licensed, has worker’s compensation insurance, and whether the contractor has any complaints.) Contracts with contractors should always be between the seller and the contractor directly. Agents should not be in the middle of that relationship. You should not pay the contractor directly. You should not manage the contractor. In this instance, you should immediately notify your manager, who can discuss with the brokerage legal counsel resolving the matter between the seller and the contractor.
SCENARIO NO. 2: I represented a buyer in a closed transaction. The house was a fixer upper. I made recommendations to the buyer regarding improvements that the buyer should consider making once they owned the property. After the close of escrow, I continued to work with the buyer in making those improvements, recommended contractors and bought supplies at Home Depot for the construction project. I also met with the contractor and outlined suggested work. The buyers are now dissatisfied with the contractor’s work and have sued me and my broker. Our brokerage errors and omission insurance company has denied coverage.
RESPONSE: The agency relationship with all clients terminates upon the close of escrow. Therefore, agents should not represent clients after the close of escrow on any issues, including regarding construction projects. This agent should not have undertaken supervision of the contractor nor participated in the improvements or construction. Because the errors and omissions insurance carrier has denied coverage, it is recommended that the agent immediately speaks with the agent’s manager and that a settlement be negotiated with the buyers and the contractor as soon as possible to minimize costs.
SCENARIO NO. 3: I am a listing agent. I loaned the seller $10,000 to make improvements to the property and had the seller sign a promissory note. I recommended vendors to the seller, who made the decisions regarding improvements, signed the contracts with the vendors, and paid them directly. The seller has now utilized that money and does not want to sell the property as the seller likes the improvements. The seller has now filed a Department of Real Estate complaint alleging that I improperly loaned the seller money and mishandled the improvement process.
RESPONSE: This agent properly managed the transaction in that the agent loaned the seller money and had the seller sign a promissory note. The agent made recommendations to the seller regarding work to be performed and contractors and vendors who could perform the work. The seller reviewed the proposals and entered contracts directly with the contractor or vendor. After we responded on the agent’s behalf to the DRE, the DRE closed the investigation, finding that the agent handled this situation in accordance with the law.
See the attached Advisory regarding working with contractors, which is recommended to be used when working with contractors and vendors in staging and remodeling projects.
PRACTICE TIPS: The following are practice tips regarding working with stagers and contractors:
- Agents may make recommendations regarding improvements to be made by clients at properties to improve value, as part of their agency relationship and responsibilities.
- If agents recommend contractors or vendors, agents need to ensure that the contractors and vendors are properly licensed, insured, and that the agents have no reason to believe that the contractors are not professional. For example, if an agent received a prior complaint about a contractor, the agent should probably stop recommending that contractor to future clients. Agents can verify a contractor’s licensure and whether the contractor has worker’s compensation insurance on the California Contractors State License Board website at cslb.ca.gov. Agents can ask the contractor whether they have commercial liability insurance and provide proof. (This is a common question asked of contractors and the contractor will not be surprised.)
- Agents should provide clients with proposals from contractors and vendors. Contracts for services and supplies for construction projects should be executed between the owner (buyer or seller) and the contractor or vendor. Agents should not enter contracts with contractors and vendors on behalf of their clients.
- If agents are advancing funds to the client for improvements to the property and expect to be repaid, agents should use promissory notes approved by their brokerage and have the sellers sign the promissory note before loaning money. Those promissory notes can be secured by a deed of trust, if the agent deems it necessary.
- Agents should not undertake construction management activities which include supervising or managing contractors.
WEEKLY PRACTICE TIP: DO NOT FORWARD TO CLIENTS. This Weekly Practice Tip is an attorney-client privileged communication for the exclusive use of clients of Broker Risk Management and their agents. It may not be reproduced or distributed without the express written consent of Broker Risk Management LLP. The advice and recommendations contained herein are not necessarily indicative of standards of care in the industry, but rather are intended to suggest good risk management practices.