WEEKLY PRACTICE TIP
BROKER RISK MANAGEMENT
Agent Competency in Field
BOTTOM LINE: It is dangerous to sell property types with which you are not familiar, or properties outside of your geographic area.
Q: I am a residential agent and sold a home to a couple recently. They own a granite and tile business and mentioned that they are looking for a warehouse/retail showroom of about 5,000 square feet to relocate their business. I started looking online and found a commercial property that meets their needs. I drafted a purchase agreement on a residential form (that’s all I had). Listing agent, an experienced commercial broker, countered with a commercial form with which I am not familiar. We are now about to remove contingencies and my client asked me about getting something called a Phase 1 Environmental. I am not sure what that is. Can you help me?
A: Get out of the deep end of the pool. You don’t know how to swim. You are clearly operating in an area with which you are totally unfamiliar. The risks to you are: (1) you could be sued by your client; (2) have your license suspended or revoked by CalBRE; and (3) be subject to an ethics complaint.
1. LIABILITY: A real estate licensee has the obligation of providing their client with the “diligent exercise of reasonable skill and care” in performance of their duties (e.g., see the Agency Disclosure form). Failure to do so could result in an agent falling below the standard of care, and incur liability.
Basically, the definition of standard of care is whether “the agent, in the performance of her/his duties, exercised diligence, skill and care under the circumstances.” One measure meeting this standard is to ask: “What would a reasonably competent and diligent agent in this area for this type of property do under these circumstances?”
So, the standard of care applied in a particular transaction can depend on the circumstances of the case: who the principals are (first-time home buyer vs. skilled investor), type of property involved (small condo vs. commercial building) and what reasonably competent and diligent agents in that area would do in those circumstances.
Failure to meet this standard of care can expose the agent and broker to liability.
2. CALIFORNIA LAW: Licensees are required to be competent in the area of real estate in which they practice. CalBRE can revoke or suspend a real estate license if a licensee: “demonstrated negligence or incompetence in performing any act for which he or she is required to hold a license.” Business & Professions Code §10177(g)
3. CODE OF ETHICS: Article 11 of the Code of Ethics states:
“The services which Realtors provide to their clients and customers shall conform to the standards of practice and competence which are reasonably expected in the specific real estate disciplines in which they engage; specifically, residential real estate brokerage, real property management, commercial and industrial real estate brokerage, real estate appraisal, real estate counseling, real estate syndication, real estate auction, and international real estate.
Realtors shall not undertake to provide specialized professional services concerning a type of property or service that is outside their field of competence unless they engage the assistance of one who is competent on such types of property or service, or unless the facts are fully disclosed to the client. Any persons engaged to provide such assistance shall be so identified to the client and their contribution to the assignment should be set forth.”
Too often agents are lured by the siren song of a commission on a type of property with which they are not familiar; or to work outside of their geographic area to list or assist in the purchase of a property for a client.
PRACTICE TIPS: So as to keep your license, not get sued and/or not have an ethics complaint against you, follow these practice tips.
1. If you have never been involved with a commercial property, or other type of property with which you are not familiar, either refer it out, or co-list or share the buyer with an experienced agent (with your broker’s permission). Watch and learn; let that agent be your mentor if this is an area you wish to handle and your broker approves.
2. The same applies to properties outside of your geographic area. Rather than try to handle resort properties, second homes, country property or urban condos/co-ops/TIC’s if that is not within your expertise, it is best to just take a referral fee and sleep at night.
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.