Q: Two very good clients own a vacation home on a lake more than 200 miles from where I usually operate and they want me to sell it for them. Then they plan to take the proceeds to purchase a rental property in another county that is 100 miles away. They really want to work with me because they trust me. Is this something I can do? How bad can it be to list or sell out-of-area properties?
A: You are wise to ask whether you should take the listing and/or represent buyers with “out-of-area” properties because either of these transactions could be far riskier than working within your own territory. Although the California real estate license enables an Agent to list, sell or lease anywhere within the boundaries of the state and there are statewide forms available from the California Association of REALTORS®, there are several legal and practical issues that Agents and their Brokers should consider when contemplating an out-of-area listing or sale.
1. DISCLOSURES: Each area of California will have its local disclosure issues. Some areas have their own specialized disclosure forms that are created and/or used by the local Associations of REALTORS® (some of which are called “Disclosure & Disclaimer Advisory”) or by a local governmental entity. Not all local Agents know what information must be disclosed to the Buyer; thus out-of-area Agents cannot rely on the other Agent in the transaction to make sure the disclosures are handled correctly.
Because many cities and counties have ever-changing local issues, regulations and/or even mandated disclosure forms, it is not always easy for local Agents to keep up with all of the issues that need to be disclosed to Sellers and Buyers. Local issues such as tenant’s rights, fire hazard dangers and fire mitigation measures, pending zoning changes, noise, and odor issues are generally known by the local Brokerage operations who can make sure that the information is disclosed to the Buyers. Out-of-area Agents do not know about these issues and thus cannot make the disclosure themselves let alone prompt the Seller to make those disclosures.
How bad can it be? Out-of-area Agents are often involved in disclosure claims. In a recent lawsuit, neither the out-of-area Listing Agent nor the rookie (and poorly managed) Buyer’s Agent was aware of the mandatory pre-sale city inspection that was needed to sell that Property. The out-of-area Agent used his preferred Escrow Company (also out of the area of the Property) which contributed to the problem. After escrow closed, the Buyer attempted to pull a permit to replace the roof; the city building department noticed the lack of the mandatory inspection report. When the City’s report was completed, $16,000 of mandatory code compliance work was required (none of which the Buyer was aware of prior to COE) and there was a hefty fine for failure to comply with the City’s pre-sale requirements. Both Agents and their Brokers reimbursed the Buyer for the fine and the code compliance work and they paid additional sums to cover the Buyer’s legal fees and costs.
2. CUSTOM AND PRACTICE: Each area has different customs and practices such as whether disclosures are always published and delivered to Buyers prior to an offer being written, or routinely delivered after contract ratification. The issue as to who pays for escrow and title fees varies by area and is also a matter of local custom. Out-of-area Agents are unfamiliar with the local standard of practice.
How bad can it be? In claims and lawsuits, the standard of care is usually determined by what a reasonably competent and diligent Agent in the area would do under comparable circumstances. Agents who choose to work outside of their normal market may be unaware of what a local, reasonably competent Agent would do with respect to different circumstances or situations. In one recent claim, the out-of-area Agent who ended up representing both Seller and Buyer, did not know the Property was within the Coastal Commission’s purview, a fact routinely disclosed by local Brokerages. The Buyer was thus unaware that their intended improvements would need to be approved by the Commission so they did not secure that approval. Later, when the Coastal Commission demanded that the completed improvements be removed, the out-of-area Agent and Broker were the primary targets of the Buyer’s lawsuit. Failure to meet the local standard of practice could lead to a claim against you for negligence or even breach of fiduciary duty.
See Weekly Practice Tip: “What is the Standard of Care?” (9-03-21)
3. MULTIPLE LISTING SERVICE: If your broker is not a member of the local MLS where the Property is located, you may still be able to list the property in that local MLS if your MLS has a “reciprocal agreement” with the MLS where your listing is located. However, as the Buyer’s Agent, you may not get paid.
How bad can it be? If there is no reciprocal agreement between the MLS’s, you will not be able to advertise the Property in the local MLS which means that you are potentially breaching your fiduciary duties to the Seller. You may not be able to get paid when representing the Buyer. Even if you are the “procuring cause,” the Listing Broker is NOT obligated to pay the cooperating broker compensation in the MLS unless the Buyer’s Agent is a member of the MLS, is part of a reciprocal MLS or there is a separate, written, and signed agreement to have the Listing Brokerage pay the Buyer’s Brokerage.
See Weekly Practice Tip: “Using the Revised CAR Cooperating Broker Compensation Agreement” (6-11-21)
4. AVID: Regardless of who you represent, you will have to travel to the Property to conduct a competent, diligent visual inspection and complete the AVID. This is not optional and cannot be delegated to a local Agent.
How bad can it be? For a variety of reasons, out-of-area Agents simply do not get around to doing their visual inspections in a timely fashion (if at all). Failing to conduct the Agent’s visual inspection duty can easily lead to a claim against the Agent for negligence (breaching a statutory duty) and breach of fiduciary duty.
5. PRICING: Perhaps most importantly, you may not be able to establish an accurate listing price or a reasonable purchase price. Is the local market trending up or down? You will be at a disadvantage to know whether the “comps” are really accurate for this Property. You may not know if there are proposed changes that will impact the future use, development, value, or desirability of the Property such as roads or highways; changes to schools or school districts; subdivision or commercial construction, etc. Locals Agents know this information.
How bad can it be? Without the proper local knowledge, providing the Seller and/or the Buyer with pricing advice could lead to a significant loss for the client and a possible breach of fiduciary duty claim against you.
6. INSPECTORS, CONTRACTORS AND OTHER VENDORS: Local brokerages know who the most reliable and cost-effective inspectors are to evaluate the general condition, pest issues, roof, foundation, soils, pool, and other areas of concern.
How bad can it be? You could end up recommending to your Seller or Buyer an inspector or contractor who is known in the area as notoriously bad – you might not have a clue leading to a breach of fiduciary duty claim.
PRACTICE TIPS:
- Although Realtor.com, Zillow, Trulia and other online platforms make it easier to see properties that are for sale everywhere in California, do not be tempted to believe that you can easily list or sell properties that are out-of-area. In view of the six significant topics listed above (along with the inherent risks of working outside of your normal market area), avoid taking listings or agreeing to aid Buyers in parts of the state where you have no working knowledge of the local market.
- Discuss with your Branch Manager or Broker the wisdom of referring your clients to a reputable, local broker who can better protect all of the clients’ interests. However large the potential commission may be, the risks involved are too great to work on out-of-area transactions; instead, accept a referral fee. Your clients will appreciate your honesty and the clients will be better served and you can still get paid while greatly minimizing your risks.
WEEKLY PRACTICE TIP: DO NOT FORWARD TO CLIENTS. This Weekly Practice Tip is 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.
© Copyright Broker Risk Management 2021 10/15/2021