Hey! That was “My Buyer” and “My Commission!”

Imagine that you have been working with some friendly buyers and have shown them multiple properties.  Then, you don’t hear from them for a while.  When you follow up, you find out that they have purchased a home using another agent . . . it may have even been a home that you had shown them previously.  You think:  Hey! That was “my buyer” and “my commission!”  Was it?

 

The MLS Offer of Compensation

After a listing broker enters into a listing agreement with the seller, the broker generally enters the listing information in the multiple listing service (“MLS”) of which the broker is a participant. The MLS is a means by which broker participants make blanket unilateral offers of compensation to other broker participants. A cooperating broker is entitled to a commission from the listing broker pursuant to the MLS offer of compensation when the cooperating broker is the “procuring cause of the sale.” In the event of a procuring cause dispute, if the brokers cannot resolve the issue informally or through mediation, REALTOR^® brokers are obligated to arbitrate.  

 

Procuring Cause

Unfortunately, determining which broker is the procuring cause of the sale can be difficult.   Some of the factors an arbitration hearing panel will consider when determining which broker is the procuring cause of a sale include:

 

• Who first introduced the buyer to the property? The broker who introduced the buyer to the property is not automatically the procuring cause of an ensuing sale, but who initially introduced the property to the buyer is generally an important factor in determining procuring cause.

 

• Was the introduction of the property to the buyer instrumental in creating the desire to purchase? Merely alerting a buyer to the fact that a property is available does not usually constitute procuring cause. 

 

• Did the introduction of the buyer to the property start an uninterrupted series of events leading to the sale or was the series of events interrupted in some way? If there was an interruption or break in the original series of events, a hearing panel will look at how the interruption was caused and by whom. For example, if a broker becomes aware that another’s efforts have broken down, steps in and finalizes a sale by removing an impediment, a hearing panel will consider whether the transaction would have occurred without the assistance of the second broker. If not, the second broker is the procuring cause. However, if a broker is aware of another’s continuing efforts and in bad faith interferes with the transaction, the second broker will not be the procuring cause. 

 

• Did the broker who made the first introduction to the property engage in conduct or fail to take some action that caused the buyer to utilize the services of another broker (estrangement or abandonment)? If the first broker said or did something the broker shouldn’t have, which caused the buyer to decide not to use the broker, that constitutes estrangement, which would break the uninterrupted chain of events. A broker not maintaining contact, not following up or not providing requested information to the buyer in a timely manner would be considered abandonment, which would also break the series of events. The second broker who steps in to assist a buyer to achieve a successful transaction after estrangement or abandonment of the buyer by the first broker would be considered the procuring cause of the sale. 

 

• Did the seller, buyer, or other broker act in bad faith to deprive the first broker of the commission? For example, if the first broker introduced the property to the buyer and brought the negotiations to a point where the buyer had made the decision to purchase, the first broker is the procuring cause. The first broker would prevail in a hearing even if the buyer and seller, with or without a second broker, conspired to take the property off the market and consummate the sale without the first broker or otherwise “froze” the first broker out of the transaction. 

 

Further, in determining which broker is the procuring cause, a hearing panel will consider only facts directly related to the sale of property at issue. The hearing panel will not consider a broker’s prior relationship with the buyer, the fact that the broker showed the buyer numerous other properties, or anything that happened after the buyer decided to make an offer. 

 

Due to all the factors discussed above, procuring cause disputes are best resolved informally or through mediation, which is often successful with the assistance the association’s volunteer mediators. For more information about procuring cause and the REALTOR® arbitration and mediation processes, go to:  https://www.aaronline.com/resolve-disputes/arbitration/

 

As with any potential dispute, communication is key. A salesperson with a procuring cause issue in a transaction, should talk to their broker or manager as soon as possible.  

                                                    Avoiding Procuring Cause Disputes

Not all procuring cause disputes can be avoided, but most can.  One way to avoid a procuring cause dispute is by using the AAR Buyer-Broker Exclusive Employment Agreement. The agreement benefits the buyer by setting forth the terms of the buyer-broker relationship. The agreement benefits the broker by assuring that the broker will be compensated the agreed upon amount if the buyer purchases a property during the term of the agreement.

 In the buyer-broker agreement, the buyer agrees to compensate the broker the specified amount or the compensation the broker receives from the seller or the seller’s broker, whichever is greater. In either event, the buyer authorizes the broker to accept compensation from the seller or the seller’s broker, which shall be credited against any compensation owed by the buyer pursuant to the agreement. If completion of any transaction is prevented by the buyer’s breach or with the consent of the buyer other than as provided in the purchase contract, the total compensation is due and payable by the buyer.

In the agreement, the buyer also agrees to work exclusively with the broker and be accompanied by the broker on the first visit to any property. If the broker does not accompany the buyer on the first visit to any property, including a model home, new home/lot or “open house,” the buyer acknowledges that the builder, seller, or seller’s broker may refuse to compensate the broker, which will eliminate any credit against the compensation owed by the buyer to the broker. 

Even if you choose not to use the AAR Buyer-Broker Exclusive Employment Agreement, which is your best protection as a buyer’s agent, educate the buyers about the real estate purchasing process, communicate with them often to avoid an abandonment or estrangement argument, and understand the basics of procuring cause.  You deserve to be compensated for your hard work.  You don’t want to find yourself in the situation of thinking:  Hey! That was “my buyer” and “my commission!”  

K. Michelle Lind, Esq. is an attorney who currently serves Of Counsel to the Arizona REALTORS®.  She is also the author of the book - Arizona Real Estate: A Professional's Guide to Law and Practice (3rd Ed.) 

This article is of a general nature and may not be updated or revised for accuracy as statutory or case law changes following the date of first publication. Further, this article reflects only the opinion of the author, is not intended as definitive legal advice and you should not act upon it without seeking independent legal counsel.  11/18/2022

RISING RATES RESULT IN RISING INTEREST IN RISKY WRAPS

 

Rising interest rates result in a rising interest in risky wrap financing. A wrap may be beneficial to the seller if the current interest rate is high, and the seller’s loan is at a lower rate, as is becoming more common in today’s market. A buyer may consider wrap financing if the buyer cannot qualify for new conventional financing or is seeking to negotiate a lower than market interest rate.

However, there are significant risks with wrap financing for both buyer and seller, especially if the seller’s loan documents contain a due-on-sale clause (also known as an acceleration clause), which requires the loan to be paid off if the property is transferred.  Wrap financing also creates substantial risks for the real estate licensees involved in such a transaction.

What is a Wrap?

A wrap is an alternative to the seller paying off or the buyer qualifying to assume the existing loan on the property in a real estate transaction. The seller sells their property to the buyer and agrees to a carryback loan from the buyer for a purchase price that exceeds the seller’s existing loan. The seller does not pay off and the buyer does not assume the seller’s existing loan; the seller remains responsible to the lender for its payment. In other words, the seller “wraps” a larger loan around the existing loan. 

 

Wrap Example:  The seller has a home valued at $500,000 that is encumbered by an existing loan with a $300,000 balance and a 3% interest rate.  The seller sells the home to the buyer for $500,000, with a $50,000 down payment and finances the buyer with a carryback loan of $450,000 at a 5% interest rate.  The buyer makes the monthly loan payments to the seller on the $450,000 loan and the seller makes the payment on their existing $300,000 loan to their lender.  The seller also makes a profit on the 2% difference in the interest rates. 

Wraps are also referred to as wraparound financing, an all-inclusive deed of trust, or a blanket mortgage.

What are the Wrap Risks for the Seller?

• A Due-on-Sale Clause:  Loan documents often contain a due-on-sale clause, and this is almost always the case if the loan is not assumable. If the seller’s loan documents contain a due-on-sale clause, wrap financing is a breach of the seller’s loan documents with serious consequences.  If the seller breaches the terms of the loan documents, the lender is entitled to all available legal remedies, including acceleration of the loan or foreclosure.  Simply put, the seller may be responsible for paying their loan in full without the ability to collect the entire amount from the buyer because the seller is obligated to accept monthly payments under the conditions of the wrap financing agreement.

 

• The Buyer Fails to Make their Payments: The seller is still the primary borrower on the existing loan that was wrapped and is obligated to make the required payments regardless of whether the buyer makes the wrap payments to the seller.  If the seller cannot make their existing loan payments without the wrap payments from the buyer, it can result in past due payments to the seller’s lender, lowering the seller’s credit score or even default and foreclosure.

 

• The Dodd Frank Act:  Since the seller is providing the financing in a wrap, the seller should ensure that they are complying with all applicable laws, including the Dodd Frank Act.  The Arizona REALTORS® provides Dodd Frank Seller Financing Addendums which may need to be utilized in the transaction. 

 

What Are the Wrap Risks for the Buyer?    

• A Due-on-Sale Clause:  If the seller’s loan is wrapped in violation of a due-on-sale clause, the seller’s lender may foreclose on the property.  Because the wrap loan is in second position behind the seller’s loan, the buyer could lose the property if the seller’s loan is not paid in full.   

 

• The Seller Fails to Make their Payments:  Although the seller is responsible for making the payments on the existing loan, the buyer generally has no guarantee that the seller will make these payments. Thus, the property could be foreclosed upon if the seller fails to make payments on the existing loan, even if the buyer has made all their required wrap payments to the seller, because the wrap loan is in second position behind the sellers existing loan.  

 

What If the Parties Insist on Wrap Financing?

If the parties in a transaction insist on wrap financing, your first step is to talk to your broker or manager.  A legal interpretation of the loan to be wrapped is generally outside the area of a real estate licensee’s area of expertise, however your broker or manager can provide guidance on how to handle the transaction. 

Second, because wrap financing raises complex issues, buyers and sellers should be advised in writing to consult with independent legal counsel and tax professionals before entering any transaction with a wrap.

Because of the complexities involved in a wrap, the purchase contract must address numerous issues, such as: 

 

• The buyer should request and obtain a copy of the seller’s existing note and deed of trust to review the rights and obligations of the loan agreement.  The buyer should confirm that a wrap will not trigger a due-on-sale clause. 

 

• The seller must ensure that the buyer is financially capable of making the required payments. Therefore, the seller should require the buyer to provide financial information to the seller, such as a credit report and income verification and seek professional assistance in interpreting the information, if necessary.

 

• All payments should be made concurrently through a single servicing account maintained by a licensed escrow agent with adequate instructions regarding forwarding payments. Record-keeping for a wrap loan can be complex. The seller must keep track of the payments made by the buyer and how much of each payment is attributable to principal and how much is attributable to interest. The amount of interest paid must be provided to the buyer for tax purposes. Therefore, the use of a servicing agent in wrap financing, such as an escrow company, is advisable for record-keeping purposes.

 

How could a lender find out that the loan has been wrapped?

Lenders often discover that a loan has been wrapped by the recording of the transfer of the property, the change of the tax liability, or the change of the insured’s name on insurance policies. Lenders can also become aware of a wrap by receiving payments from the account servicing agent.

 

                                                         Possible Alternatives to Wraps

There may be alternatives to wrap financing depending upon the circumstances, such as: 

•  Loan Assumption:   A loan assumption is when the buyer takes over the seller’s loan and continues to make payments on it. Most conventional loans cannot be assumed because lenders do not allow it with a due on sale clause. However, FHA, VA, and USDA loans may be assumable.

Generally, to assume a loan, the buyer will need to qualify for the loan and will probably incur loan transfer and assumption fees. Additionally, the buyer will most likely have to pay cash (or a seller carryback) to the seller for seller’s equity in the property. A loan assumption is beneficial in that the buyer will inherit the lower interest rate that the seller received when they obtained the loan. Moreover, the term of the loan will likely be shorter than if the buyer were to obtain new financing. In agreeing to a loan assumption, the seller should ensure they are released from any future liability on the loan.   The Arizona REALTORS® provides a Loan-Assumption-Addendum that addresses these and other issues.   

 

•  Buying Down the Interest Rate:  A buyer or a seller through seller concessions, can buy down the buyer’s interest rate on a loan by paying discount points.  The cost of the discount point depends upon a variety of factors.  Additionally, the buydown can be structured in a variety of ways.  The interest rate can be lowered for the life of the loan, a set period of time, or structured in a way that the interest rate gradually increases over time. 

 

• Seller Carryback Financing:  Seller carryback financing occurs when all or a portion of the purchase price is financed by the seller. Generally, the buyer will execute a promissory note and deed of trust in favor of the seller, which will be recorded, at close of escrow. This creates an income-producing note for the seller. As mentioned above, The Arizona REALTORS® provides Dodd Frank Seller Financing Addendums which should be used in the transaction.  

• Loan Programs Other than Conventional Financing:  Non-conforming loans, in other words, loans that do not conform to Fannie Mae or Freddie Mac guidelines, but are government backed, may also be an option.  For example: 

• FHA Loans:  FHA loans may be an option for buyers with lower credit scores or not much money for a down payment.  And closing costs may be rolled into the loan.
•  VA Loans:  VA loan may be an option for active military, veterans, or surviving spouses.   These loans have lower credit score requirements, do not require a down payment, have lower interest rates, and do not require private mortgage insurance (PMI).
• USDA Loans:  USDA loans may be an option for lower income buyers purchasing a home in a qualified rural area.   These loans may have a lower interest rate, do not require a down payment, and may have a lower PMI, which may be rolled into the loan amount.

In conclusion, all the parties in a real estate transaction, including the real estate agents, are subject to an increased risk of liability and disputes in a transaction involving wrap financing.  Always explore other financing options and consult with your broker or manager before writing a contract that includes a wrap. 

 

Michelle Lind is Of Counsel to the Arizona REALTORS® and the author of Arizona Real Estate: A Professional’s Guide to Law and Practice.  This article is of a general nature and may not be updated or revised for accuracy as statutory or case law changes following the date of first publication. Further, this article reflects only the opinion of the author, is not intended as definitive legal advice and you should not act upon it without seeking independent legal counsel.  11/2/2022

 

“Whiskey is for Drinking; Water is for Fighting Over” . . . What Buyers Need to Know

 

The quote “whiskey is for drinking; water is for fighting over” has often been attributed (possibly incorrectly) to Mark Twain.  However, regardless of where the quote originated, it reflects the fact that “fighting” over water in the West has had a very long and storied history.  For a little background, see the US Department of the Interior Bureau of Reclamation summary of Arizona’s “fights” for an assured water supply over the last century. 

Arizona’s water supply, and the water supply in the entire western United States, continues to be a focus in the media and with the state’s elected officials.  And, water supply is an extremely complex issue, just take a look at the Arizona Department of Water Resources (ADWR) News Blog. 

A real estate licensee is not required to be a water expert.  However, buyers need to know the source of a property’s water supply and if there are any water issues before purchasing that property. A real estate licensee should be knowledgeable as to where to direct a buyer to obtain this information.   

New Home Subdivision Public Report:  A subdivider (anyone who offers six or more lots for sale in a subdivision) must give a prospective new home buyer a copy of an Arizona Department of Real Estate (ADRE) issued Public Report and an opportunity to read and review it before the prospective buyer signs a contract to purchase a home in the subdivision. A.R.S. §32-2183(A). The Public Report is required to include a great deal of information on water supply to the development.  A.A.C. R4-28-A1205.  A resale buyer can obtain a copy of a home’s Public Report from the ADRE  Public Report Database.

Buyer Advisory:  The Arizona REALTORS® Buyer Advisory advises the buyer to investigate the availability and quality of the water to the property and provides several resources.

Water/Well Issues The property may receive water from a municipal system, a private water company, or a well. You should investigate the availability and quality of the water to the property, as well as the water provider.

A list of Arizona’s water companies is available at the Arizona Corporation Commission. https://www.azcc.gov/utilities/water  (Arizona Corporation Commission - Utilities-Water) https://new.azwater.gov/aaws/statutes-rules  (Assured and Adequate Water Supply),

Adjudications: Arizona is undertaking several Stream Adjudications, which are court proceedings to determine the extent and priority of water rights in an entire river system. For information regarding water uses and watersheds affected by these adjudications, and the forms upon sale of the property, visit the Department of Water Resources online. https://new.azwater.gov/adjudications (Department of Water Resources – Adjudications). 

CAGRDs: The Central Arizona Groundwater Replenishment District (CAGRD) functions to replenish groundwater used by its members, individual subdivisions and service areas of member water providers. Homeowners in a CAGRD pay an annual assessment fee which is collected through the county property tax process based on the amount of ground water served to member homes. www.cagrd.com (Central Arizona Ground Water Replenishment District)

Disclosures

Property owners obtain their water from a variety of sources depending upon their location:  public municipalities, private water companies, private wells, shared wells, and hauled water.  According to the Arizona Corporation Commission (ACC), there are more than 400 individual water systems operated by almost 350 companies under their jurisdiction.  The ACC can assist in obtaining information about the water company servicing a particular area. 

SPDS:  Sellers should disclose their property’s water source to the buyers on the Arizona REALTORS® Seller’s Property Disclosure Statement (SPDS).  And, if the seller is aware of any past or present drinking water problems, those should be disclosed on the SPDS as well. 

The SPDS specifically advises the buyer that if the property is served by a well, private water company or municipal water provider that the ADWR may not have made a water supply determination and the buyer should contact the water provider during their Inspection/Due Diligence Period. 

Water Well Disclosures:  If the property is served by a well, the Arizona REALTORS® Domestic Water Well Addendum to the purchase contract and the Domestic Water Well/Water Use Addendum to the Seller’s Property Disclosure Statement should be completed and provided to the buyers to assist them in their inspection and provide additional disclosures. 

Disclosures of Other Known Water Issues:  Sellers and real estate licensees who are aware of other adverse water issues are obligated to disclose those facts to a buyer.  These water issues may occur in “wildcat subdivisions” (in which land is split into five or fewer parcels and are not required to obtain an ADRE Public Report) or in other areas in the state.  Water issues that may need to be disclosed include curtailments, moratoriums, impending water cutoffs, water quality issues, and operational problems with a private utility.

The lack of an adequate and safe water supply to a property is undoubtably a material fact.  Where a seller of real property knows of facts materially affecting the value of the property that are not readily observable and are not known to the buyer, the seller is under a duty to disclose those facts to the buyer. Hill v. Jones, 151 Ariz. 81, 725 P.2d 1115 (App. 1986).

Additionally, pursuant to the Arizona REALTORS® Residential Resale Purchase Contract the seller warrants that the seller has disclosed to the buyer and real estate agent all material latent defects and any information concerning the home known to seller, excluding opinions of value, which materially and adversely affect the purchase price to be paid by the buyer. 

Additionally, the Arizona Department of Real Estate Commissioner’s Rules R4-28-1101 requires a real estate licensee participating in a real estate transaction to disclose to all other parties any information which the licensee possesses that materially and adversely affects the consideration to be paid by any party to the transaction, including any material defect existing in the property being transferred.

Don’t become a Party to a Water “Fight”

With the appropriate disclosures and the buyer’s due diligence, a real estate licensee, seller, and buyer can avoid becoming involved in a water “fight” after close of escrow.   If there is any question about the source, availability, quality of the water to the property, water rights, or water costs, assist the buyer in investigating the issue during the Inspection/Due Diligence Period by directing them to the appropriate sources of information.  

 

Michelle Lind is Of Counsel to the Arizona REALTORS® and the author of Arizona Real Estate: A Professional’s Guide to Law and Practice.  This article is of a general nature and may not be updated or revised for accuracy as statutory or case law changes following the date of first publication. Further, this article reflects only the opinion of the author, is not intended as definitive legal advice and you should not act upon it without seeking independent legal counsel.  10/25/2022

The Buyers’ Questions – Real Estate Tales From the Courtroom

 

In this real estate malpractice lawsuit, the court discusses a real estate agent’s 

duty to the client versus a real estate agent’s duty to a non-client. 

The Alleged Facts

The real estate agent represented the seller in selling vacant hillside land in Surprise, Arizona, in which the agent had been involved in the successful efforts to subdivide into lots. During that work, the real estate agent had contact with a civil engineer about road access to the lots. The civil engineer testified that he told the real estate agent that it would take at least one year to do the road work required (including permitting) before any construction on an access road could begin. However, the real estate agent testified to seeing the access road being built five to six months after that meeting with the civil engineer. 

 A few years later, the buyers contacted this real estate agent to view the lots as a possible homesite. During a site visit, in responding to the buyers’ questions about the access road, the real estate agent said it was a good road built at a substantial cost, although it was not yet complete. One of the buyers testified that the real estate agent said, “the county wouldn't let us sell these lots up there if this road weren't [sic] built right.” When the buyers asked the real estate agent whether they should have their own real estate agent, the real estate agent said that was not necessary. The buyers then signed an agreement whereby the real estate agent acted as a dual agent.  (The reported case does not specify whether this agreement was the AAR Consent to Limited Representation Agreement.)

At a later meeting, the real estate agent provided the buyers with written easements in case they had “any lingering doubts about the road.” The real estate agent assured them “that everything was good about the road” and that the buyers “knew everything there was to know about” the road.

The real estate agent provided the buyers a disclosure affidavit that stated “[t]here is ... legal access” and “physical access to the Property.” After reviewing the affidavit, the buyers again expressed concern about access, including whether a two-wheel drive vehicle could operate on the road. The real estate agent then added a handwritten note on the affidavit stating the road was “[c]urrently not traversable by two wheel drive passenger motor vehicle.” 

The buyers signed a contract to purchase a lot, which was amended several times, including amendments to address the access road. One buyer testified that, before closing, she again asked the real estate agent about the road and the real estate agent again said that the buyers knew “everything there is to know about this road.” The transaction closed.

When the buyers applied for a permit to build a home on the lot, Maricopa County denied the application because the road was built without a permit.

The Lawsuit

When the buyers were unable to obtain a permit to build a home on the lot, they filed this lawsuit against the real estate agent and the seller asserting fiduciary duty and negligence-based claims, misrepresentation of the status of the road, and failure to disclose material information about the status of the road, resulting in a seven-day jury trial.  “The jury heard expert testimony about a real estate agent's obligation to give “full, complete, accurate disclosure of important information” in the agent's possession, and that this standard could be breached if an agent affirmatively gave information without knowledge of its truth or that the agent knew was incorrect.”

After deliberation, the jury returned a verdict in favor of the buyers for $318,200.47, allocating no fault to the buyers, 30 percent fault to the seller and 70 percent fault to the real estate agent.   The real estate agent appealed. 

The Appeal - What Law Applies

On appeal the real estate agent argued that the superior court should “have offered a specific legal instruction ... as set forth in Aranki v. RKP Investments, 194 Ariz. 206, 979 P.2d 534 (App.1999)” which states:

The real estate agent is not liable to the buyers for passing on information without proof that they did so under circumstances suggesting they knew or should have known that any information provided by the sellers might be false.

However, the Court of Appeals noted that this language in the Aranki case addressed a negligent misrepresentation claim by a buyer against a seller's agent, not a client's fiduciary duty claims against the client's agent. 

The Court went on to discuss an agent's fiduciary duty to a client, noting cases that state: “A real estate agent owes the duty of utmost good faith and loyalty to his [or her] principal” and real estate agents owe “duty of good faith and loyalty to their principal” and “must exercise reasonable due care and diligence to effect a” transaction to the client's “best advantage”, along with the Commissioner’s Rule A.A.C. R4–28–1101(A)  that a real estate agent “owes a fiduciary duty to the client and shall protect and promote the client's interests.”

The Court explained that the Aranki case recognized the “important distinctions between the claims” by a buyer against a seller's agent (where no fiduciary duty is owed) and by a buyer against the buyer's agent (where a fiduciary duty is owed). “Aranki simply acknowledged the compatibility of the fiduciary duty an agent owes to his client with the duty to deal fairly with all other parties to the transaction.”

The decision in the Aranki case stated:

The duty of fair dealing does not include investigations to discover defects in the sellers' property ... Thus, the misrepresentation claim would be proved here only if plaintiffs [the purchasers] could establish that the [seller's brokers and agents] ... knew or should have known of the defects [in the land] giving rise to this litigation and failed to disclose such information. The sellers' real estate brokers and agents are not liable to the [non-client] buyers for passing along such information without proof that they did so under circumstances suggesting that they knew or should have known that the information provided by the sellers might be false. 

There was virtually no discussion by the Court of Appeals addressing the fact that the real estate agent was acting as a dual agent in the transaction at issue. 

The Court of Appeals Decision

The Court of Appeals in this case ultimately determined that the superior court did not err and the judgment against the real estate agent and in favor of the buyers was affirmed.

 Case Lessons: 

• If the buyer questions the accuracy of the seller’s representations or any information, advise the buyer in writing to obtain independent verification.
• Do not be the source of information – be the source of the source. 

 Helmke v. Service First Realty, LLC, Court of Appeals of Arizona, No. 1 CA–CV 14–0078 (2015)

NOTICE: NOT FOR OFFICIAL PUBLICATION. UNDER ARIZONA RULE OF THE SUPREME COURT 111(c), THIS DECISION IS NOT PRECEDENTIAL AND MAY BE CITED ONLY AS AUTHORIZED BY RULE.

 Michelle Lind is Of Counsel to the Arizona REALTORS® and the author of Arizona Real Estate: A Professional’s Guide to Law and Practice.  This article is of a general nature and may not be updated or revised for accuracy as statutory or case law changes following the date of first publication. Further, this article reflects only the opinion of the author, is not intended as definitive legal advice and you should not act upon it without seeking independent legal counsel.  10/17/2022

Real Estate Tales from the Courtroom: The Sex Offender Next Door

 

In this case, the buyers filed a lawsuit against the sellers and the real estate broker, alleging fraud, negligent misrepresentation, breach of the duty of good faith and fair dealing, and breach of fiduciary duty after finding out their neighbor was a registered sex offender.  The buyers did not ask to rescind the purchase contract but demanded compensatory and punitive damages.

The Facts Alleged in the Case

The sellers purportedly decided to sell their Scottsdale home because a convicted sex offender lived next door. The broker acted as a disclosed dual agent in the transaction.  During negotiations, when the buyers asked the sellers why they were selling, the sellers said they wanted to move to be closer to friends.  Neither the sellers nor the broker disclosed to the buyer that the next-door neighbor was a sex offender. 

 Six months later, after having moved into the home, the buyers discovered that their neighbor was a “level-one” sex offender that was not listed on the Sex Offender Registry.  The buyers filed the lawsuit alleging that if they had known of the sex offender, they would not have purchased the house. 

The buyer argued that the sellers fraudulently misrepresented their true reason for wanting to move by telling the buyers they wanted to live closer to friends, when they actually wanted to move away from the sex offender next door.  The sellers argued that their alleged statement that they were moving to be near friends was (i) not a representation that there were no sex offenders living near the home; (ii) no prospective buyer would reasonably rely on a seller's representation about his or her reason for moving; (iii) the possible presence of a sex offender could not have been too important to the buyers because they never asked the sellers about the issue, and (iv) pursuant to A.R.S. § 32–2156 there is no liability for failing to disclose any fact or suspicion that there was a sex offender located in the vicinity of the home. 

 The Court Reviews the Arizona REALTORS® Forms

In deciding the case, the Court mentioned all the notices about sex offenders in the Arizona REALTORS® forms used in the transaction. 

The sellers provided the buyers with an Arizona REALTORS® Residential Seller's Property Disclosure Statement (SPDS).   Just above the buyers’ signature on the SPDS there is a notice: 

·         “Notice: Buyer acknowledges that by law, Sellers, Lessors and Brokers are not obligated to disclose that the Property is or has been ... located in the vicinity of a sex offender.”

The statement on the front of the SPDS titled “Residential Seller Advisory” states: 

·         Please note: By law, sellers are not obligated to disclose that the property is or has been (1) the site of a natural death, suicide, homicide ...... or (3) located in the vicinity of a sex offender. However, the law does not protect a seller who makes an intentional misrepresentation. For example, if you are asked whether there has been a death on the property and you know that there was such a death, you should not answer “no” or “I don't know”; instead you should either answer truthfully or respond that you are not legally required to answer the question.

The court also referenced the “Inspection Period” section of the Arizona REALTORS® Residential Resale Real Estate Purchase Contract that stated:   

·         “If the presence of sex offenders in the vicinity ... is a material matter to the Buyer, it must be investigated by the Buyer during the Inspection Period.” The contract allowed a 14–day inspection period and further provided that the buyers had “conducted all desired independent inspections and investigations and accept[ ] the Premises.”

And, another section of the contract that stated:

·         “Buyer warrants that Buyer is not relying on any verbal representations concerning the Premises except disclosed as follows: ____.”

The buyers initialed the word “None” handwritten in the space that followed.

The Court Addressed the Broker’s Dual Agency and Duty to Disclose

In addressing the claims against the broker, the court stated that the broker's fiduciary duty to disclose material information is not necessarily diminished in a dual-agency situation.  “When obtaining clients' consent to represent both parties in a transaction, a broker must deal fairly and in good faith with each of them”, and “disclose all material facts that the [broker] knows, has reason to know, or should know would reasonably affect the principal's judgment unless the principal has manifested that such facts are already known by the principal or that the principal does not wish to know them.”

 The court stated that with the clients' informed consent and in the absence of fraud, the duties a broker owes their clients may be limited by agreement. The court noted that both buyers and sellers agreed to the Arizona REALTORS® Consent to Limited Representation (“Consent”).  The court quoted portions of the Consent as follows:

 [Broker] represents both the Buyer and the Seller with limitations of the duties owed to the Buyer and the Seller, such as:

* * *

·         (2) There will be conflicts in the duties of loyalty, obedience, disclosure and confidentiality. Disclosure of confidential information may be made only with written authorization. This does not relieve [Broker] of any legal obligation to disclose all known facts which materially and adversely affect the consideration to be paid by any party to the transaction.

 3) Pursuant to A.R.S. § 32–2156, Sellers, Lessors and Broker/Licensee(s) are not obligated to disclose that the Subject Property is or has been ... located in the vicinity of a sex offender.

The Court’s Decision

·         Buyer v. Seller:  The court acknowledged that the seller made fair points regarding their statements about why they were moving, and the court did not say that as a matter of law, the alleged misrepresentation was material to the transaction or that the buyers reasonably relied on it.  “However, when one is asked a question that fairly calls for disclosure of a material fact, he or she commits fraud by concealing the truth or otherwise answering in a manner deliberately calculated to mislead.” Therefore, the court found that a jury must decide whether the sellers were liable to the buyers for common-law fraud.  The ultimate outcome of the buyers’ case against the seller on the common law fraud claim is unknown to this author.

 Buyer v. Broker:  The court stated that even assuming that A.R.S. § 32–2156 did not apply and the broker otherwise would have had a duty to the buyers to disclose the sex offender, the buyers expressly agreed that broker had no obligation to make that disclosure in the Arizona REALTORS® Consent to Limited Representation form. Therefore, the buyers’ claim against the broker was dismissed.

 Case Lessons:

·         If asked about suicides, murders, other felonies, or registered sex offenders in the vicinity of the home – you can decline to answer pursuant to A.R.S. § 32–2156, but you should not answer in a way that would be a lie or misleading.

 When acting as a dual agent, always use the Arizona REALTORS® Consent to Limited Representation form. 

                          Lerner V. DMB Realty, LLC., 234 Ariz. 397, 322 P.3d 909 (2014)

Michelle Lind is Of Counsel to the Arizona REALTORS® and the author of Arizona Real Estate: A Professional’s Guide to Law and Practice.  This article is of a general nature and may not be updated or revised for accuracy as statutory or case law changes following the date of first publication. Further, this article reflects only the opinion of the author, is not intended as definitive legal advice and you should not act upon it without seeking independent legal counsel.  9/23/22

 

What the Heck is the “Standard of Care”?

 

You have likely heard the phrase “standard of care,” but what the heck is it?  Well, the term "standard of care" is a legal concept that is generally applied to the conduct of any professional, such as a doctor, a lawyer, or an engineer, and the legal concept of “standard of care” applies to real estate professionals as well. 

The Standard of Care Requires Reasonable Care

The standard of care requires that a real estate agent exercise the degree of care that a reasonable agent would exercise in the same or similar circumstances. Figuring out what is “reasonable” under the circumstances is generally the hard part. 

What constitutes reasonable care in a transaction varies depending on the situation. The specific conduct, disclosures, advice, and counsel required of an agent depend on the facts of each transaction, the knowledge and the experience of the client, the questions asked by the client, the nature of the property and the terms of sale. You are not required to be perfect, but you are required to act with reasonable care.

 Reasonable care may include:

·         Resisting any temptation to provide advice that is outside the area of expertise for a real estate licensee.

·         Recommending other professionals when necessary to perform inspections and investigations or to provide legal and tax advice.

·         Assisting your client in verifying information when you have reason to question the accuracy of the information being provided or when your client has questioned the information.

·         Disclosing all known material defects existing in the property. If you have to ask whether a fact must be disclosed, the answer is probably “yes.” 

·         Practicing within your area of expertise.

·         Understanding the purchase contract and related documents.

·         Complying with the ADRE Statutes and Commissioner’s Rules.  https://azre.gov/laws-rules-policy-statements-and-advisories

                                            

If you are unsure what is reasonable under the circumstances or how to handle a situation, always consult with your designated broker or manager for guidance. 

The Battle of the Experts in Determining the Standard of Care

How does the judge, jury or arbitrator in a lawsuit determine what a "reasonable” real estate professional would do in the same or similar circumstances? That is where the experts come in.

The standard of care is generally established by expert testimony, unless the conduct required by the situation is within the common knowledge of a layperson. Therefore, a plaintiff buyer or seller that alleges that a defendant agent acted negligently usually must present the testimony of a qualified expert, in other words, another agent, that the defendant agent acted unreasonably and fell below the standard of care.

The defendant agent will generally do the same – present the testimony of another agent as an expert witness that will testify that the agent’s actions were reasonable under the circumstances and within the standard of care. 

The judge, jury or arbitrator will consider the testimony of each expert along with the rest of the evidence presented and make the determination of whether the agent complied with the standard of care.  If not, there are consequences. 

Consequences of Falling Below the Standard of Care

If an agent’s conduct falls below the standard of care, the agent is negligent. Once an agent’s negligence is established in a lawsuit, the agent will be held liable to the plaintiff buyer or seller for all damages (money) caused by the negligent conduct. Additionally, any judgment arising from such a case must be reported to the ADRE within ten days and the ADRE may impose regulatory sanctions as well.

Tips to Help You Practice Within the Standard of Care

The following is a list of tips to help you exercise reasonable care and practice within the standard of care.  

• Get to know your client and their concerns.                                                  

• Read and understand the purchase contract & related forms. 

• Educate your client on the process and documents.

• Avoid shortcuts, such as incorporating other documents into the contract or failing to write contingencies out completely.

• Handle all offers properly and promptly. 

• Practice only within your area of expertise, both in practice area and geographically.

• When in doubt, disclose – and do it in writing.                                             

• Assist your client with disclosures & due diligence. 

• Think before you speak - don’t speculate or guess. Identify the source of any information provided and direct your client to the source if possible.

• Verify information if you have reason to question the accuracy of information being provided in a transaction or if your client has questioned the accuracy of the information.

• Document the transaction - take contemporaneous notes and confirm important issues in writing.

• Communicate, communicate, communicate – answer your phone and promptly return calls to clients and the other agent.  Talking is almost always better than texting. 

 Don’t forget – you are a professional.  By complying with the standard of care, you not only reduce the potential of costly and time-consuming lawsuits, but also reduce the risk that your clients will encounter problems during or after the transaction.

Michelle Lind is Of Counsel to the Arizona REALTORS® and the author of Arizona Real Estate: A Professional’s Guide to Law and Practice.  This article is of a general nature and may not be updated or revised for accuracy as statutory or case law changes following the date of first publication. Further, this article reflects only the opinion of the author, is not intended as definitive legal advice and you should not act upon it without seeking independent legal counsel.  9/7/22