BROKER RISK MANAGEMENT
WEEKLY PRACTICE TIP
Recently, Broker Risk Management (“BRM”) has been asked to review contracts written by investor buyers. BRM has also received a number of inquiries as to whether old and outdated forms may be used by parties in a transaction. There are risks associated with using non-industry and outdated forms.
SITUATION NO. 1: I am a listing agent. My seller received a one-page offer written by an investor buyer, which does not include many of the terms set forth in the California Association of Realtors (“CAR”) Residential Purchase Agreement and Deposit Receipt (“RPA”). What is the risk of allowing the seller to utilize this form and how do I proceed?
RESPONSE: Many investor purchasers are using their own simple contract forms to write offers. BRM has reviewed a number of these offers and thus far, none of them have included sufficient terms to properly protect a seller. Most of these contracts are either missing important terms or are written to the benefit of the buyer. Notwithstanding these deficiencies, a listing agent has a fiduciary obligation to transmit the offer to the seller. Agents should recommend that the seller use CAR purchase agreements, or other appropriate industry standard forms. If the seller is inclined to accept the offer, you can rewrite the offer on the appropriate industry standard form and submit it back to the buyer as a counter-offer. If the seller is inclined to accept the offer as submitted by the buyer on an inadequate form, it is recommended that you advise the seller that the contract form creates a risk to the seller and that the seller should review the contract form with a qualified California real estate attorney before signing it.
SITUATION NO. 2: I am a listing agent. I recently received an offer from an unrepresented buyer on an outdated CAR form. Can I use this form? If not, how should I proceed?
RESPONSE: CAR updates its forms on a regular basis to ensure that Realtors are complying with the law and to address potential issues and risks. For example, the SPQ was recently updated to address the new requirement that flippers (sellers who have owned a property for 18 months or less and engaged contractors to perform improvements or repairs) properly disclose improvements and repairs to property. A further example includes CAR’s addressing the NAR settlement issues and requirements. If outdated forms are used by agents, agents run the risk of failing to comply with the law and placing their clients at risk. Agents should take steps to assure that the forms being used are the most current. If an outdated form is received, an agent can rewrite the terms in the form of a counteroffer on an updated form and send them back to the other party.
DISCUSSION: Real estate agents are essentially practicing law when they negotiate and write contracts and contract-related documents. However, real estate agents may do so, when they use form contracts drafted by a Realtor association or other industry source for industry use, or by an attorney for the brokerage. Custom contracts created by brokers or agents, as well as those created by attorneys specifically for buyers, sellers, landlords or tenants, fall outside the exception. Therefore, arguably, the use of those contracts fall below the standard of care.
Given the parameters of the law, it is important that agents use forms created by trusted sources such as CAR, SFAR, PRDS, or BRM. Agents should not be creating their own forms or using non-conforming forms such as those created by investor sellers.
Another related issue is when an agent is working with a buyer on new construction where the builder/seller has custom form agreements. In those instances, agents generally act as a referral agent and do not represent buyers with normal responsibilities associated with the purchase and sale of property. Subdivision builders generally prepare custom contracts which are reviewed and approved by the California Department of Real Estate as part the approval of new subdivisions of five or more parcels. These agreements are generally prepared by attorneys on behalf of the builder for the builder’s benefit. If an agent is representing a buyer in these instances, it is recommended that the agent refer the buyer to a qualified California real estate attorney to review and approve purchase agreement, CC&Rs and related documents.
RISK MANAGEMENT TIPS:
- If you are a listing agent and receive a contract drafted by an investor buyer, submit it to the seller with a recommendation that, if the seller is inclined to accept the offer, an appropriate form contract be used. Advise the seller of the risks of using a buyer’s form contract, which is generally inadequate to properly protect the seller.
- If a seller is inclined to accept a buyer’s form offer, refer the seller to a qualified California real estate attorney before accepting the offer.
- Do not use outdated forms.
- Do not use forms created by other real estate brokers/agents without review and approval by your manager.
- In representing a buyer in new home construction, if a custom contract and/or other documents are provided, refer your buyer to a qualified California real estate attorney to review and to answer any questions regarding the documents.
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.