Lenders stick listing agents with REO liabilities
Complex listing agreements often favor banks
By Matt Carter, Thursday, July 24, 2008.Bookmarking Sites
SAN FRANCISCO -- With distressed and bank-owned properties now capturing a double-digit share of home sales in many markets, some agents and brokers are depending on listings from lenders to keep them afloat.
But some lenders are crafting listing agreements that attempt to shift the risk that comes with sales of bank-owned homes -- including property defects and personal injury claims -- onto real estate brokers.
A listing agreement that leaves a broker vulnerable to a lawsuit can consume the commissions from dozens of sales, real estate attorney Harold Justman warned during a panel discussion Wednesday at Inman Real Estate Connect San Francisco.
"Some of these listing agreements are lethal, or have lethal provisions in them," Justman said. "You may have a knee-jerk reaction, and say, 'Oh boy, now I have 100 listings.' But a year from now, one lawsuit might wipe out all your profits."
When a broker is sued, "legal fees are always bigger than (real estate) commissions," Justman said. "You've got to analyze that listing agreement. You can't blindly sign the agreement the lender puts to you."
Because most real estate agents are used to working with standard listing agreements prepared by their broker, they aren't attuned to the dangers that may lurk within listing agreements prepared by lenders' attorneys.
Lenders have staffs of in-house attorneys who "spend all of their time writing agreements that minimize their risk," and may draft agreements running 30 pages.
If they can, lenders will try to shift responsibility for managing properties to listing agents, and the duty to disclose property defects. Lenders may also stipulate that real estate brokers will indemnify them from lawsuits or other liabilities associated with a property, Justman said.
"These lenders got into problems by not analyzing the risk associated with borrowers," Justman said. "They are now risk-averse, and are trying to shove all of the risk onto the brokerage industry."
In California, the principal of "buyer beware" does not apply, and sellers run the risk of being sued if they don't disclose defects. Lenders will draw up listing agreements specifying that properties are being sold "as is," but require brokers to investigate and disclose any defects to the buyer.
"The lenders are putting all the risk of disclosure onto the real estate broker, and imposing a duty of disclosure," Justman said. Lenders also want to designate listing agents as property managers, obligating them to inspect homes, identify problems and fix them.
"Your E and O (errors and omission) policy may not cover property management, because it is a high-risk, high-claim activity," Justman said. If somebody falls down the stairs and is paralyzed from the neck down, he said, a broker could end up with the resulting lawsuit.
"If you agree to be a property manager, you've walked into a situation where you may not have E and O coverage when you need it," said Justman, a partner with the law firm Fimmel, Justman and Rible.
To help insulate themselves from risk, real estate brokerages can set up corporate subsidiaries to manage properties during the listing process.
But anybody agreeing to represent bank-owned properties should enter into listings agreements with open eyes.
"Anytime you get a document drafted by an attorney, you have to have another attorney look at it," Justman said, "because attorneys don't draft neutral, fair agreements" for parties who are not their clients.
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Submitted by Tony Arko on July 24, 2008 - 6:05am.
Anybody who has handled a foreclosure knows the listing agreements are completely one sided. But in this market, the agents and brokers have no choice but to sign them as they exist or forego the revenue stream that foreclosures represent. The banks will not give you the listings unless you sign the agreement.
Try to change it and they will give the listings to someone else. And there are plenty of other agents more than willing to sign anything no matter how one-sided it is or how much of a liability it could become.
And in some markets where foreclosures represent 50% or more of the marketplace, choosing not to list foreclosures could be financially devastating. Once again, agents are stuck between a rock and a hard place. The rock being the bank and the hard place being ourselves.
Submitted by Emmanuel Scanlan on July 24, 2008 - 7:03am.
There is help to alleviate, but not eliminate, this issue. Pre-listing inspections by Professional Real Estate Inspectors can help identify these deficiencies so that the RE Agents can at least advise potential buyers of their existence. Yes, conditions can change over very short time periods and buyers should be advised also to have their own inspections performed.
RE Agents are definitely between a rock and a hard spot on this and any other transaction. The truth is, a lawsuit can be filed at any time, for any reason, under any RE deal. RE Agents should take advantage of pre-listing inspections to help disclose defects unknown to them. If nothing else, if the RE deal does enter litigation the RE Agent can demonstrate due diligence and hopefully it will help insulate them from the effects.
"Knowledge is power, but sharing knowledge brings peace!!" (www.psinspection.com)
Submitted by chis eliopoulos on July 24, 2008 - 7:38am.
I have tried to make the point that banks are an absolute liability to the real estate market.
As we are getting deeper to this foreclosing situation all will see that there is a NEED FOR BANKING REFORM.
The bank is out there for the bank no one else.
I have personalty refuse to go along with their game in the short sale process.I was successful many times avoiding their paper work.Also I have never sign one of the agreements that were forcing the broker to buy back bad loans (a common practice among many lenders).
What I'm saying is the banks need the real estate professionals to get them out of the predicament they have put them selves in,not the other way around.They are NOT in any position to dictate policy, do not be intimidated.If one thinks that is on easy street by getting the listing,with this kind of clauses/terms he/she is dreaming.Litigation is costly.Again refuse to be intimidated say no.
Submitted by Louis Herrera on July 24, 2008 - 8:56am.
In the scenario where the bank demands such a one-sided listing agreement and in states where there is no buyer beware principal, an accompanying listing inspection by an professional inspector as part of the marketing collateral would seem like a smart investment by the broker/agent. The inspection report would put everyone on notice to any actual or perceived defects. The net effect of such notice would hopefully shift the burden of liability to the purchase and sale agreement between the seller (bank) and buyer. No?
Submitted by Dave "Utah Dave" Robison on July 24, 2008 - 9:28am.
Ouch, I definitely think that it would be helpful if there was a list on here that stated all the banks that make you do this. This way we dont waste our time with them. Shift the liability to the broker if they want the listing? Wow. Your Friend,
Utah Dave
www.utahdave.com
Submitted by Kaye Thomas on July 24, 2008 - 9:38am.
A year ago I had an agent ask me why I didn't want REO and short sale business.. this is exactly the reason. I'm not putting my license and business on the line while taking all responsibility and the often discounted fees banks are willing to pay for listing their properties.
There should be some protection for agents on these listings. A pre-inspection may not be enough in many cases to avoid liablility.
Submitted by Michael Espiritu on July 24, 2008 - 10:24am.
Michael Espiritu
Submitted by Michael Espiritu on July 24, 2008 - 11:13am.
In CA there actually are protections in the listing agreement that will indemnify the broker if someone gets hurt while viewing a listing, etc. The sellers (banks) are exempt from some disclosure requirements but the duty and let me repeat the duty of the listing agent is to disclose any material defects known. This is a state mandated requirement and just makes good business sense. The biggest reason for litigation is not disclosing material defects that are known to the seller and the agent.
There is a disclosure form in CA that is called AVID(Agent Visual Inspection Disclosure). This form outlines what anyone would be able to notice or see through a diligent visual inspection of the property. Front and back yards,porches, doorways, windows, doorknobs, etc. Each room, hallway, ceiling. This is what any agent should do on any listing regardless of REO status or a standard sale.
A buyer should know exactly what they are getting into. NO buyer should purchase any property without having a professional home inspection even on new construction. If no inspection is done then I require a waiver that says it was highly recommended that a home inspection be conducted but the buyer is refusing to do do. That is how you limit liability by doing your due diligence.Everything in writing and nothing verbal is reliable.
Even a buyer's agent should use the AVID form disclosing any material defects that they know of regarding the property because the buyer's agent also has a duty to disclose material defects and can be sued for refusing or not disclosing.
We use the CA Residential Listing Agreement Form that protects the listing broker in addition to any bank addendum.
We also have an REO Listing Advisory Form that lists what the exemptions are and what the disclosure process is for the banks.
I can guarantee that if I ever get sued and I have used the AVID Form and noted the defects that I observed I have a better shot of winning than an agent who said they did a diligent visual inspection but does not have proof of it. A conversation log is also a requirement and will help your case in the evnt of being sued.
Yes it takes longer but why would you put your license, reputation, brokerage at risk by being lazy???
The bank addendums are strictly for the benefit of the bank, that is a given. Reading all paperwork and understanding the contracts should be a basic requirement to practice real estate.
Actually having to work hard and earning the commission is not a bad thing.
In the San Bernardino / Riverside County area of southern California the REO market is the thing that is keeping a lot of us employed. It is becoming a huge segment of the market and if you are not working w/ REO's in some fashion then you are missing a huge niche that can be very lucrative if done correctly and with integrity.
The tag line should be "Broker Beware".
Michael Espiritu
Broker
Copeland Wealth Mangement
SoCal
Submitted by Larry Littlejohn on July 24, 2008 - 5:13pm.
I would love to get my hands on an REO. Sounds like income to me. 707 549-3435 Gold Circle Realty
Submitted by Nancy Abney on July 25, 2008 - 3:40am.
All aspects of the real estate profession offer the prospect of an unjustified claim by an unscrupulous buyer/seller/other agent. I have worked for several banks over the past 20+ years without "real" litigation. It's a matter of paying attention to the details and addressing issues timely. REO business requires a lot of documentation when a problem comes up but most of all, don't pretend you are an attorney, contractor, inspector, plumber, electrician, magician, etc. I have had a few instances of having to discuss the merits of litigation with a buyer's attorney who decided not to proceed (there is a thing called counter suit) and two that did file but were ultimately unsuccessful. Documentation and keeping within the boundaries of your expertise is key when dealing with any real estate transaction. And yes, there are some clients you just have to pass up. This is not "easy money" but neither is a traditional real estate business if you take your resonsibilities seriously.
Submitted by Andrea Tucker on July 29, 2008 - 2:40pm.
Hey, Michael Espiritu or anyone in CA...Any chance of getting a copy of the CA AVD form, I am in Western WA and I don't think we have this type of form,it may be helpful my email is soldbyandrea@gmail.com and phone is 425.870.6699. Thanks!!
Submitted by Christine Donovan - Costa Mesa Real Estate on July 29, 2008 - 11:29pm.
I think as with all things, we need to read and understand what we are getting in to before signing any agreement. The banks may have power, but we need to make informed decisions, and that can include the power to walk away if we are unable to negotiate and equible agreement. This can be tough to do, but as an attorney, I know that litigation is always a possibility and an expensive one at that and opening yourself to more risk should be done with careful consideration.
Website: Costa Mesa Real Estate
Blog: Costa Mesa Neighborhood Blog
Submitted by Ralph M on August 6, 2008 - 10:39am.
Here is some free advice....
Sign the agreement(s) with your name and "All rights reserved"
Ex- Joe Schmoo, All Rights Reserved...'
You will be protected.
If you do not believe me , ask Dan the zebra man to contact his attorney to verify my above statement.
Do you here me Dan?
I am still waiting for you to prove me wrong on the mls terms..
Submitted by Ralph M on August 6, 2008 - 10:39am.
www.aarsteam.com