BROKER RISK MANAGEMENT
WEEKLY PRACTICE TIP
Q: As a seller’s agent, my practice is to stage the property. Frequently, sellers want to have work done on the property to prepare it for sale. I recommend contractors, landscapers, painters, etc. I encounter sellers who want me to supervise the work being done. Also, a number of agents I know do get involved even up to hiring the workers and even fronting the money. This seems to have legal liability issues, right?
A: You are right to ask this question. Many agents specialize in preparing properties to be placed on the market. This preparation can include various aspects of staging, improvements, repairs, and, in some instances, complete remodels. There is a significant risk that real estate agents may cross the line from being a real estate agent to being a construction manager, exposing them to significant liability. The following is a discussion of the dos and don’ts associated with assisting clients with repairs to properties.
Recommendations: As part of the scope of being a seller’s agent, most agents make recommendations to their clients regarding repairs, upgrades, and improvements to prepare a property for sale and maximize the sales price. The question becomes when does a real estate agent stop acting as an agent and enter the realm of a construction manager?
As part of the scope of being an agent, agents may inspect property and make recommendations to their clients regarding repairs and improvements to prepare the house for sale. Agents may also recommend contractors, vendors, handymen or repair people to undertake these repairs and improvements (“vendors”). Agents should not recommend a vendor unless agents have confirmed the vendor is licensed, if applicable, and have applicable insurance. Agents should also not directly contract with the vendors. Agents may obtain proposals and estimates from qualified vendors and give them to their clients for review, approval, and signature. Agents should not supervise or direct the vendors. Supervising suppliers and workers crosses the line from being an agent into construction management.
The dangers of becoming a property manager include the following:
- Agents becoming liable for payment to vendors.
- Agents becoming liable for any mistakes, negligence or wrongful acts committed by the vendors.
- Agents becoming responsible if sellers are not satisfied with the work of the vendors.
- Agents do not have errors and omissions insurance for construction management.
- Agents likely do not have liability insurance as acting as a construction manager in case of personal injury or property damage.
- Brokerages are not legally responsible for agents moving into the realm of construction management unless the brokerage is aware of that activity and specifically agrees to supervise that activity.
- The Department of Real Estate could find that the agent acted in a negligent manner subjecting the agent to a license sanction, ranging from a fine to suspension of their license.
If an agent is involved in construction management, it not only can be an extremely expensive endeavor, but they may find themselves without insurance, which can potentially put them out of business.
PRACTICE TIPS: For Sellers’ Agents, and for Buyers’ Agents for work after COE
- Agents may recommend repairs or improvements to the property and recommend vendors to be investigated by the client and retained by the client.
- In recommending vendors, please ensure those vendors are licensed and insured.
- Do not recommend unlicensed contractors, aka handy persons, for any work for which a contractor license is required. This has led to many claims against agents.
- It is preferable to recommend more than one vendor to clients for the client to consider.
- Agents should not sign contracts with vendors. Agents should present the vendors’ proposals, bids and contract forms for review and signature by the client.
- Agents should not supervise the work of the vendors. Clients should supervise that work or retain their own construction manager.
- Agents may not accept fees for property management from their clients unless their brokerage is in the business of property management and the agent is a qualified and experienced property manager.
ATTORNEY-CLIENT PRIVILEGED COMMUNICATION. Do not forward to Sellers, Buyers or third parties. This Broker Alert is for the exclusive use of clients of Broker Risk Owners and Management. It may not be reproduced or distributed without the express written consent of Broker Risk Management. 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