QUESTION: We represented an investor Buyer last year in the purchase of a “fixer-upper.” He told us his LLC would acquire title but he would personally do the work. He has done a beautiful job improving the Property and now wants us to list it. He wants us to advertise the Property as being “completely remodeled by artisan craftsmen.” Are there any issues that we should be concerned about when marketing the Property? Are there any specific steps that we can take to protect our Brokerage?
ANSWER: You should not advertise the Property in the manner requested by the Seller; flips are never “completely remodeled.” At the very least, the residence will be constructed on an existing foundation and using some or all of the original framing. It is thus important that no effort be made in any of the advertising material or disclosures to over-sell the extent of the work performed. For additional information about words and phrases that should not be used in advertisements, see Weekly Practice Tip: Advertising Words That Should Not Be Used (08/28/2020).
In addition to avoiding the terminology requested by the Seller in your advertisement of the Property, you will need to find out a great deal of information from the Seller before you market the Property. There are several issues that Listing Agents need to consider when marketing a “flip.”
THE SELLER’S ACQUISITION OF THE PROPERTY: It is critical that anyone selling a “flip” completely understand what the actual condition the Property was in before any of the work was done. The best way to protect Sellers and Listing Agents is to make sure that all of the disclosures and reports that were provided to the Seller during his acquisition of the Property are provided to the Buyer. Since you represented the Seller when Seller bought the Property, you should immediately obtain a copy of your Broker’s deal file for that prior transaction.
Even if you had not represented the Seller during Seller’s acquisition of the Property, the disclosures and reports from that prior transaction should be obtained. If the Seller does not have that material any more, the Seller needs to send a written request to Seller’s prior Agent’s Broker for a complete copy of all transaction documents.
Once all of the prior transaction documents have been obtained, the disclosures and reports should be assembled into a disclosure packet to provide to the Buyer along with all of the Seller’s current disclosures. The standard method for delivering disclosures and reports to a new Buyer that were in a prior transaction file is generally referred to as a Historical Document Production. Check with your Broker to find out if you have a company policy regarding the handling of historical documents (from prior transaction files) and the specific forms that you need to use to comply with your company’s policies.
PICTURES: There is nothing more illustrative of the changes made to a Property than to provide before and after photographs. If either you or the Seller have any pictures showing what the Property had looked like when the Seller bought it and the extent of the changes now that it is being resold, those pictures should be provided to the Buyer as part of the Seller’s disclosures. Make certain that a complete copy of the pictures is included in your Broker file.
DISCLOSING THE ACTUAL WORK PERFORMED: The disclosures that are provided to the Buyer should include any and all documentation (reports, estimates, invoices, permits) that the Seller has regarding the work done. Be aware that the work performed by the Seller may have simply been cosmetic and only covered up “red flags” without fixing the underlying problems. Even if you believe that the Seller made all necessary repairs in a workmanlike fashion, you do not know that your beliefs are 100% accurate and you should not simply assume that whatever the
Seller tells you is correct. Therefore, you should not make any representations regarding the quality of the work that was performed nor should you make any representations regarding whether the prior problems with the Property have all been resolved and will ever reoccur. The Listing Agent and Broker are liable for any misrepresentations that they make in the advertising.
- QUESTIONS TO ASK THE SELLER: To facilitate the sale of a “flip,” Listing Agents should ask the Seller the following questions before marketing the Property and the Seller’s answers to these questions, along with any supporting documentation that the Seller has for these answers, should be included in the Seller’s disclosures that are provided to the Buyer:
- Who acted as the General Contractor and what type of Contractor’s License did that person hold? If the Seller did the work, do not assume that they have any actual building experience or proper licenses. Some flippers purport to have extensive building experience, a contractor’s license or they claim that they used people who were licensed. Some flippers set up companies or limited liability entities using the name “Builder,” “Construction Expert” or “Restoration.” Use of that terminology is not a guarantee or assurance that any of the work was done by a licensed contractor using licensed tradespeople.
- Who were all of the people or entities who did the work? Were these workers licensed? Were permits obtained? Does the Seller have any documents confirming these answers?
- Did the work on the Property trigger the need to bring certain features up to current code, such as water-conserving plumbing fixtures and pool/spa safety mechanisms to prevent drowning? If so, were all required retrofits taken care of? Does the Seller have any documents confirming these answers?
- Are there any Warranties for new equipment, systems or appliances? Does the Seller have any documents confirming these answers? Agents should not attempt to determine if the warranties are or are not transferable and the Agent should not make any representations about the extent or transferability of any warranties. The Buyer should be told to make their own determination about these issues.
If the Seller denies having any or all requested documents, make certain that you confirm, in an email to the Seller, that the Seller has assured you that the Seller does not have any other documents aside from whatever material the Seller has provided to you.
PRACTICE TIPS FOR LISTING AGENTS:
- Do not over-sell either the amount of the work or the quality of the work that has been performed; Sellers may make whatever boasts they want to make about the remodeling/renovation work but you should not adopt their statements as your own; you should avoid including the Seller’s statements in your advertising material.
- Do not over-sell the qualifications of the Seller or anyone else who performed any work on the Property including, but not limited to, the ability of the Seller or anyone else to “stand behind their work.
- Do not make any statements or representations regarding: (a) the legality of the work; (b) whether all required permits were obtained; and/or (c) whether all required retrofit work has been done.
- Make certain that you review the Seller’s disclosure documents, such as the TDS and SPQ, to confirm that these forms have been fully completed by the Seller and then check to make sure these disclosures are consistent with the Seller’s other documentation before providing any of this material to anyone.
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 2020 09/11/2020