Q: I have been working with Buyers who needed a 4-bedroom home and were delighted when I found what they were looking for in their price range. The MLS had said it had 4 bedrooms but the information from the Assessor indicated it only had 3 bedrooms. I asked the Listing Agent to check with the Seller who said they had the permits to add the additional bedroom and the County was slow in changing their records. I passed that response on to the Buyers and they removed all of their contingencies. Just before escrow was set to close, they discovered that the 4th bedroom was illegal. They cancelled the deal.
The Buyers retained an attorney and ultimately got their deposit back from the Seller; however, now they are mad at me. How can I avoid this type of problem in the future?
A: To avoid this type of problem in the future you need to understand the current requirements for meeting one’s fiduciary duties and you must be able to prove that you met all of those requirements in a timely fashion (preferably before the Buyer removes their contingencies).
HISTORICAL BACKGROUND: The 2016 landmark California Supreme Court case, Horiike v. Coldwell Banker Real Estate Southern California, dealt with an Agent’s fiduciary duty to point out size discrepancies to their clients and to recommend that Buyers take appropriate investigative action to determine for, themselves, if the Property meets their needs. Agents should always reinforce the disclaimer language that is found in all standard advisories that state: “Agent has not, and will not, verify or investigate the information supplied by others,” when they forward documents and/or information to Buyers.
Both SFAR and PRDS have a one-page form to help Brokers meet all of their disclosure obligations regarding size discrepancies. Broker Risk Management created its own comparable form for its clients to facilitate that process in areas of the state that do not have a local form for this purpose.
See two Weekly Practice Tips: “Square Footage and Lot Size Advisory and Disclosure” AND
“When Should Buyer’s Agents Use the New Square Footage and Lot Size Advisory and Disclosure”
The size discrepancy disclosures and advisory forms warn Buyers not to rely on any of the sources that have provided the disparate size numbers. Those forms do not recommend that Buyers request that the Sellers or the Agents determine which size is THE correct size. The proper recommendation is for Buyers to investigate the issues with appropriate professionals (such as a surveyor for lot size) to determine, for themselves, if the size of the structure(s) and/or the land meets their needs.
The most important first step in meeting the Agent’s duties is to actually READ all of the documents and to encourage the Buyers to read everything as well. Conflicting information is often buried in the documents. When there is conflicting information, disclose, in writing, that there is a discrepancy in the data.
The import of the Horiike case is not limited to discrepancies in square footage or lot size. Whenever there are any discrepancies in the information provided to Buyers, the Buyer’s Agent (when there are two separate
Brokerage operations handling the transaction) or both the Buyer’s and Seller’s Agents (when the same
Brokerage operation is a dual agent) should document that: (a) the discrepancy has been pointed out to the
Buyers; and (b) that the Buyers have been advised to conduct their own diligent investigation with the correct sources to determine, for themselves, whether the Property meets their current needs and/or future plans. Agents are not obligated, and should not attempt, to determine which of the conflicting data is correct.
All too often when Buyers have questions about conflicting or inadequate information in disclosures and reports, the temptation is to recommend asking the Sellers to clarify the issue(s) and then the Sellers’ answers are forwarded to the Buyers. California law makes it clear that the Buyer’s Agent:
“cannot accept information received from another person, such as the seller, as being true, and transmit it to his or her client without either verifying the information or disclosing to the client that the information has not been verified”
BOTTOM LINE: Asking for more information from the Sellers is, at best, just the first step.
Sellers are not the best source of information regarding most topics, especially on issues such as the existence or status of permits, the legality of bedrooms and baths, whether past improvements or modifications were “code compliant” or “built to approved plans.” These are issues which can only be determined by construction experts who need to not only inspect the Property but they must also go to the City or County offices to review all of the files that the City or County maintains on the Property. Preferably, the experts will do that investigation along with the Buyers. Quick internet searches of on-line information are generally inadequate to determine these issues.
PRACTICE TIPS:
- READ all disclosures and reports, preferably before providing that material to the Buyers. Encourage Buyers to read everything as well.
- DOCUMENT that you have pointed out any and all discrepancies. If the discrepancy relates to size, use a Square Footage/Lot Size Disclosure Advisory. If the discrepancy relates to any other issue(s), send an email and/or include in the Agent’s Visual Inspection Advisory that there is “A discrepancy in the available information regarding [insert specific issue(s)/discrepancies .]
- Add a DISCLAIMER to the written disclosure about the discrepancy that you have not and will not verify or investigate the information supplied by others and then you should not conduct the investigation.
- WARN Buyers, in writing, not to simply rely on any information supplied by the Sellers.
- RECOMMEND, in writing, that Buyers investigate with the appropriate professionals whether the discrepancy will impact the value or desirability of the Property and/or whether the information will impact the Buyers’ intended use or development of the Property.
This Weekly Practice Tip is an attorney-client privileged document 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. 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.
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