BROKER RISK MANAGEMENT
WEEKLY PRACTICE TIP
Broker Risk Management (“BRM”) held a webinar regarding post-close of escrow issues. BRM has continued to receive questions arising out of the webinar. The following are the questions and answers.
QUESTION NO. 1: What defines a material fact that has to be disclosed to a buyer?
ANSWER: Any fact or document reasonably in seller’s possession which affects the value or desirability of the property. As a standard rule, if the agent or the seller questions whether something should be disclosed, it should be.
QUESTION NO. 2: Is it a material fact that the market has changed and a property is now available for less money?
ANSWER: If you are representing a buyer, it is within your duty to review the prior history of the property, such as the prior MLS history of marketing and pricing of the property, and provide it to the buyer. The buyer should know time on the market and if the seller has reduced the price. If you are representing a seller, you are not obligated to disclose to the buyer that the seller’s price has declined.
QUESTION NO. 3: Is it accurate that buyers can cancel a purchase contract for any reason without giving an explanation if the contingencies are in place?
ANSWER: No. The parties are required by law act in good faith toward each other. Therefore, if a buyer is going to cancel a transaction based on a contingency, the cancellation must fall within the purview of one of the contingencies and the cancellation must be exercised in good faith. For example, if a loan contingency remains in place, the buyer may cancel the contract if the buyer is not able to obtain a loan as set forth in the purchase and sale agreement. If a buyer has a property inspection contingency in place, the buyer cannot cancel the contract for any reason, but must do so based on a condition at the property to which the buyer objects. However, if that buyer has removed the inspection contingency, but still has the loan contingency, the seller cannot use the loan to cancel the contract (assuming that they qualify for the loan) after discovering a defect in the property. To further illustrate, if a buyer is in escrow on a property in a particular neighborhood. If the buyer sees a home with the same floor plan listed for sale in the same neighborhood at a lower sales price, the buyer cannot cancel the first contract and buy the second property without exposure to liability to the seller.
QUESTION NO. 4: With regard to cancellation, if a seller sends a notice to perform to a buyer and the buyer does not timely perform, the seller then sends a notice to cancel. Is the contract considered canceled with the sellers’ signatures?
ANSWER: No. All parties need to cancel the contract to have an effective cancellation.
QUESTION NO. 5: Is there liability for an agent representing one of the parties to a transaction to have missed an email?
ANSWER: Yes. There is no excuse for missing an email. Legally, if an email was sent to you, it is considered delivered, and does not matter if you have seen it or not. For example, if a disclosure is provided to the listing agent by email and the listing agent misses it and fails to provide it to the buyer, the listing agent is liable to both the buyer and the seller for the mistake.
QUESTION NO. 6: With regard to errors and omissions insurance, is a subpoena and/or a DRE investigation considered a claim?
ANSWER: Not necessarily. A claim is generally defined as a demand for services or compensation. However, most reputable insurance companies offer coverage without a retention (deductible) to handle a Department of Real Estate investigation or a subpoena.
QUESTION NO. 7: What is an agent’s deductible?
ANSWER: The deductible, called a retention in an errors and omissions insurance policy, is the amount the agent and/or broker pay before insurance coverage is triggered. The retention is the amount provided by the insurance company in the policy. Generally, the proportionate payment of the retention is shared between the broker and the agent as set forth in the broker’s policies.
QUESTION NO. 8: Why should buyers fill out the buyer’s maximum loan interest rate and points in the purchase agreement? How does this protect the buyer with a loan contingency in place?
ANSWER: By specifying the above loan information, the buyer has established a benchmark for qualifying for a loan. For example, if the buyer specifies a maximum 6% loan in the loan contingency and cannot obtain a 6% loan, the buyer can cancel the contract pursuant to the loan contingency. On the other hand, if the buyer leaves it blank and cannot qualify for a 6% loan, but can qualify for a 10% hard money loan, the buyer may not be able to cancel the contract and receive the return of the buyer’s deposit.
QUESTION NO. 9: Does BRM recommend that an agent keep emails, text messages and notes regarding conversations with clients, other agents, contractors, etc.?
ANSWER: Yes. The more documentation you have in your file regarding a transaction, the more information you will have to defend yourself in the event of a claim. The DRE requires that all such documentation be kept in the broker file for the listing and transaction.
WEEKLY PRACTICE TIP: DO NOT FORWARD TO CLIENTS. This Weekly Practice Tip is an attorney-client privileged communication 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 LLP. 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 practice.