BROKER RISK MANAGEMENT
WEEKLY PRACTICE TIP
Agents can be very innovative in creating multiple streams of revenue for themselves besides selling and leasing real estate. Some examples of these “side businesses” include the following: agents preparing broker opinions of value of properties; agents charging clients to show or evaluate properties; agents charging clients to create lists of available properties for sale or lease; or real estate-affiliated businesses such as staging. Another variation is agents’ family members (e.g., spouses) owning affiliated companies such as staging, painting, flooring, etc., whose companies agents refer to clients. While these revenue streams can be profitable, there are a number of risks of which brokers and agents need to be aware.
Please note that the California Department of Real Estate requires a real estate license for any work affiliated with the negotiation, purchase, sale or lease of real estate with the expectation of payment. Agents with salesperson licenses cannot get paid for any licensed real estate activities directly; all payments for such activities must be run through their broker. Failure to do so can result in having the DRE sanction their license.
The DRE also requires pre-approval for real estate licensees receiving payment for any activities before the activities take place, known as Advance Fees. For example, an agent may not charge a client a retainer fee for expected services without prior DRE approval. DRE approval is extraordinarily difficult to obtain.
With regard to broker price opinions (“BPOs”), agents may issue BPOs on behalf of clients so long as the agent receives consent from the broker and the payment is made through the broker. However, agents need to recognize that if they are ever called into litigation, they could be challenged as to whether agents have the credentials to prepare a BPO. Generally, BPOs are a summary or shortened version of an appraisal. Agents need to be very cautious and use disclaimer language in BPOs such as the following:
“Agent is providing a broker price opinion based on information available to broker through the Multiple Listing Service as of the date of the BPO. Agent is not a licensed appraiser and the BPO is based on a comparative market analysis and contains the agent’s opinion as to the potential sales value of the Property as of the date of the BPO. The BPO may not be used for purposes of litigation or to establish damages in the event of a claim. The purpose of the BPO is to establish a range of values, which the agent believes a ready, willing and able buyer would pay for the Property in its as-is condition on the date of the BPO.”
Some agents are offering their services to buyers whereby agents research properties on behalf of buyers and provide that research and information to the buyers and then charge for their services. There are a number of concerns with regard to these activities. First, agents must run their payment through their broker, assuming they are a licensed salesperson. Agents must have a buyer representation agreement before undertaking this work. Agents need to be cautious about the potential liability affiliated with these investigations. If an agent only partially investigates a property and the client relies on that investigation and information to their detriment and the agent either misses information or does not provide material available information at the time of the report to the client, the agent and their broker could have liability. An agent should obtain broker consent before undertaking this work. In addition, the broker should assist in preparing an appropriate buyer representation agreement with disclaimer language limiting the agent’s and broker’s liability.
Some agents have established businesses assembling lists of available properties for lease for prospective tenants in exchange for compensation. As with potential properties, an appropriate tenant representation agreement should be prepared with specific limitations specifying the information the agent is providing and the information the agent is not providing with a caveat that the tenant must undertake their own investigation. Payment for these services must be made through the broker and cannot be made at the time of retainer but must be made after the work is complete.
Significant risks also arise out of agents with “side businesses.” For example, if an agent has a staging business and separately stages a property for a fee, that agent could create liability for themselves and their broker arising out of the staging company. To illustrate, recently a broker was sued by a seller because the stager placed a lamp at the property which was defective and caused a fire. The broker facilitated the staging and therefore is being sued. The broker is now looking to the agent for reimbursement as a result of the lamp being owned through the agent’s staging company.
Similar concerns arise if agents are referring clients to affiliated businesses If agents are referring clients to businesses owned by family members, particular if the agent is benefitting (i.e., a spouse and the agent are benefitting by virtue of community property), it is imperative that a proper disclosure be prepared disclosing the relationship between the agent and vendor, along with a disclosure if the agent is benefitting from that relationship. In addition, it is preferable that the vendor sign an indemnity agreement agreeing to indemnify the brokerage in the event of a claim arising from the vendor’s work with referred broker clients. Agents should also ensure that the vendor has appropriate licensing and insurance.
PRACTICE TIPS:
- Agents may not accept compensation for any real estate related activity discussed above that requires a real estate license. Such compensation must be paid through the broker and their broker then pays the agent in accordance with their agreement.
- Agents and brokers may not accept retentions or prepayments prior to the work being performed without written preapproval from the DRE.
- If agents are undertaking BPOs, they should use the recommended language in this Tip.
- Agents should consult with their broker or manager before undertaking any of the above-referenced activities.
- If agents have “affiliated businesses,” they should discuss the use of an appropriate disclosure and indemnity agreement with their broker.
- If agents are performing limited services for clients in exchange for fees, they should discuss it with their broker to ensure they have appropriate agreements with their clients.
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 practices.