Ch. 29 - Risk Management

Advertising includes electronic communication, social media/networking, and internet marketing. Usage must be consistent with company image and legal requirements. The license laws of most states list illegal advertising actions subject to discipline such as:

-making any substantial and intentional misrepresentation making any promise that might cause a person to enter into a contract or agreement when the promise is one the licensee cannot or will not abide by making continued and blatant misrepresentations or false promises through affiliate brokers, other persons, or any advertising medium making misleading or untruthful statements in any advertising, including using the term "Realtor" when not authorized to do so and using any other trade name, insignia or membership in a real estate organization when the licensee is not a member. Committing such acts may result in license suspension or revocation.

Enforcement. Federal antitrust laws are enforced in three main ways:

-the Antitrust Division of the Department of Justice (DOJ) brings criminal and civil enforcement actions -the FTC brings civil enforcement actions -private parties bring lawsuits claiming damages Anyone associated with an organization found guilty of an antitrust violation and determined to have had knowledge of that violation may also suffer legal consequences.

The licensee must also make sure the seller discloses any other circumstances the situation and the law require, which may include:

-wood infestation inspection report -soil test report -subsurface sewage disposal system permit disclosure -impact fees or adequate facilities taxes disclosure -mold and radon reports or treatments

The components of a thoroughly documented paper trail include:

. Policy and procedure manuals · Standard forms · Communication records · Transaction records · Contracts · Accounting · Other important documents

Whether a state applies the fiduciary duties of agency law or specifies its own duties toward clients and consumers, the basic duties remain: To all parties

. honesty · fairness · reasonable care and skill · disclosures

Required records typically include:

. listing agreements · offers · contracts · closing statements · agency agreements · disclosure documents · correspondence and other communication records · notes and any other relevant information

Whether a state applies the fiduciary duties of agency law or specifies its own duties toward clients and consumers, the basic duties remain: To clients

. skill · care · diligence · loyalty · obedience · confidentiality · accounting · full disclosure

Fees for referring clients to the following services are strictly forbidden:

. title services (search, insurance) · appraisals · inspections · surveys · loan issue · credit report · attorney services The sharing of commissions and the payment of referral fees among cooperating brokers and multiple-listing services are not RESPA violations.

Required disclosures usually include:

.agency relationships · property condition · duties and obligations · personal interest in the transaction · personal interest in referrals

Errors and Omissions. Professional liability is of two general types:

1.)Unprofessional conduct - a claim that one has failed to carry out fiduciary duties and provide an acceptable standard of care. 2.)Breach of contract - a claim that one has failed to perform services under the terms of a contract in a timely manner

Policy manual.

A written and uniformly enforced company policy lets everyone in the firm know what to expect before problems arise. The policy manual should cover the company's rules in such areas as floor duty privileges, assignment of relocation properties to agents, referrals between agents within the company, and requirements for continuing education, sales meeting participation, and property tours.

Progress reporting.

All inspections and tests must comply with local and state laws and with the purchase contract. Progress reports should be accurate, timely, in writing, and free of speculation. If a consumer has a question about the meaning of something in an inspection report, the licensee should refer the consumer to the person who wrote the report rather than trying to explain it. This method transfers some of the risk inherent in interpreting the report.

Four well-established strategies for managing risk are:

Avoidance (elimination) Reduction (mitigation, sharing) Transference (outsourcing, insuring) Retention (acceptance and budgeting)

Disclosure

By ensuring that all parties have the information they are entitled to, proper disclosure reduces the risk that clients and customers will accuse a licensee of misleading or inducing them to make a decision with incomplete information. Further, laws in every state require disclosures of one kind or another. Disclosure may be made in writing or verbally and may or may not require written acknowledgment from the receiving party.

Conflicts of interest

Conflicts of interest arise when an agent forgets to put the best interests of a client ahead of those of everyone else. This can happen in situations involving undisclosed dual agencies, broker-owned listings, licensees buying for their own account, vendor referrals, and property management subcontracting of services, among many others. Even ordinary, everyday transactions carry a built-in risk of conflict of interest. Consider the fact that a licensee usually receives no compensation for a failed transaction. Therefore, it is in the licensee's interest to see the transaction completed, even if it may not be in the client's best interest. A negative result from a home inspection or other test has the potential to cause a buyer to back out of a contract. A licensee who has forgotten whose best interest should be primary might be tempted to recommend inspectors who will overlook problems in exchange for receiving referrals. Licensees must always disclose any self-interest they have in a transaction, and always remember their duties to clients and consumers.

Appraisal problems.

Delays and appraised value are the typical problem areas. Failure to inform parties about delays can compromise the transaction. An under-appraisal will require the buyer to make a larger down payment or the seller to lower the price. If the property appraises for more than the purchase price, the seller may blame the agent for suggesting the lower price. In such a case, the seller's agent's defense is that the seller agreed to the listing price and that the price was a factor in attracting the buyer to the property.

Documentation and Record keeping

Documentation provides evidence of compliance with laws and regulations. It proves what clients and customers and licensees said and did in a transaction. Some documentation is required by law.

Experience shows that the most practical strategies for risk management in real estate practice are reduction and transference, with procedures focusing on:

Education Disclosure Documentation Insurance

Lead-based paint and other disclosures.

Federal law requires sellers of houses built before 1978 to make a lead-based paint disclosure before accepting an offer to purchase. The licensee must tell the seller about this requirement, give the seller the proper disclosure form, and make sure that the buyer receives it.

Primary Areas of Risk- Recommending Providers

First, the consumer may not be satisfied with the performance of the recommended party and blame the licensee. Second, in cases where a recommended provider performs illegal acts, there may be legal consequences for the licensee. Third, if a licensee has a business relationship with a recommended vendor or provider and neglects to disclose the fact, there are license violation consequences. The major risk management technique is to shift the responsibility for choosing a vendor to the consumer. This can be done by refusing to recommend vendors at all; by presenting a broad range of choices and allowing the consumer to select; or by presenting a short list of thoroughly vetted vendors and allowing the consumer to make the decision, always with the disclaimer that to the best of the licensee's knowledge,

Comparative Market Analysis (CMA). In preparing a Comparative Market Analysis, licensees should guard against using the terms "appraisal" and "value," which are reserved for the use of certified appraisers. Misuse of these terms could lead to a charge of misrepresenting oneself as an appraiser.

In discussing listed properties with clients or customers, real estate licensees should be careful to use guarded terms such as "recommended listing price," "recommended purchase price,' and "recommended listing price range."

Estimate of Closing Costs. In preparing an estimate of closing costs for a seller or buyer, there is the risk of forgetting something, leading to an unpleasant surprise when the consumer suddenly faces unexpected costs or conditions.

Licensees should use their broker's form, if there is one, and make it clear to the consumer that it is only an estimate of likely costs, not a statement of actual costs. In some states, brokers and licensees do not prepare closing cost estimates, leaving that task to the lender.

Qualifying buyers.

Many transactions fail because a buyer has been improperly qualified before the offer is presented. Using a lender to qualify the buyer saves time and protects the agent against leading a seller to believe a purchaser is fully qualified when this may not be the case. Also, lenders and loan agents are better able to look into the buyer's qualifications than a real estate licensee is. If it becomes necessary to show a property to a potential buyer who has not been qualified by a lender, the licensee can gain some protection by performing an informal qualification and documenting the fact that it was based on the information provided by the buyer. The buyer's signature on this documentation indicates the buyer's acceptance of at least partial responsibility for the qualification.

Advertising risk

Risk can be reduced by the use of street names or other non-biased geographical references when stating where the property is located, and by describing the property rather than the type of persons who might live in or around it. Even if a home appears "ideal for a young family," it is best not to advertise it as such. Such advertising would exclude other groups such as singles, the elderly, and older families. In advertising the sale or rental of housing covered by the Fair Housing Act, HUD recommends using the Fair Housing Logo or phrase "Equal Housing Opportunity."

Communication records

Some communications with transaction parties are good and necessary for business. Others are required by law, such as certain disclosures. A transaction checklist is a good tool for managing risk associated with the failure to make required communications to all principals and for keeping track of required communications from co-op agents. Retaining evidence that information has been communicated is a necessary procedure. Electronic communications should be archived on suitable electronic media. Copies of mailed or faxed communications should be maintained in the transaction folder. It is always difficult to document telephone or face-to-face conversations, especially with the constant use of cell phones from a variety of locations. It is a good practice to make brief notes at the time and then write them up later for mailing or faxing to the other party. Be sure, however, that you can produce these notes on demand, lest you be accused later of withholding documentation that has been promised. Maintaining a good record of communications is useful for resolving disagreements where parties dispute what has been said because it allows the licensee to produce a dated document that resolves the issue definitively.

Transaction records.

State laws require licensees to document transactions. Firms are required to keep written records of all real estate transactions for a number of years (usually three to five) after closing or termination.

Antitrust laws forbid brokers to band together to set a price on their services in listing and selling property. Even being overheard discussing commission rates or being present at such a conversation can lead to charges of price fixing.

The law recognizes that some cooperative arrangements between firms - such as joint development projects - may help consumers by allowing these firms to compete more effectively against each other. Even so the government does not prosecute all agreements between companies, but only those that will raise prices for the public or deny the public new and better products.

Lending fees disclosure

The licensee should explain loan fees, charges, amounts, timing, and responsibilities. Agents can assist in the loan decision by explaining how to compare loans with differing charges and interest rates. The fact that a high origination fee and points may make a loan with a low interest rate unattractive to a borrower is important information for the agent to provide, and providing it may protect the agent against a later complaint that the buyer suffered a loss because of the agent's failure to inform.

Fire and hazard Insurance

The risks of property damage caused by fire, wind, hail, smoke, civil disturbance, and other such causes are covered by fire and hazard insurance.

Flood Insurance

The risks of property damage caused by floods, heavy rains, snow, drainage failures, and failed public infrastructures such as dams and levees are covered by a specialized flood policy. Regular hazard policies do not include flood coverage.

Common risks and errors in the contracting process include:

Using an illegal formA licensee may be punished for using any real estate listing agreement form, sales contract form, or offer to purchase form that lacks a definite termination date. Failing to state inclusions and exclusions The parties should identify as included in or excluded from the transfer any ambiguous items. Unwritten agreements between the parties are a source of later dispute and trouble. Failing to track the progress of contingency satisfaction The time period for completing contingencies such as inspections is specific and limited. Failure to meet or waive a condition may terminate the contract. A "time is of the essence" clause in the standard agreement makes the time period for contingencies critical. Mistakes in entering data in a form All data should be checked and verified: dates, times, amounts, warranties, descriptions, names, representations, promises, procedures, authority, etc. One way to reduce risk in the contracting process is to use a checklist that covers all the contract items.

Procedures manual

a reference handbook explaining the procedures to be followed when performing a task by which a legal right may be enforced

Licensees are disciplined for:

acting without a license when a license is required demanding a referral fee without reasonable cause entering into a net listing trying to induce another licensee's client to end or change an existing agency contract paying a commission to an unlicensed individual or company receiving an illegal referral fee, rebate or kickback practicing with an expired license

ere are a few of the standard forms a brokerage should provide for its licensees and affiliates:

buyer and seller representation agreements, exclusive and nonexclusive agreement to show property purchase and sale agreement agency disclosure form property condition disclosure, disclaimer, and exemption form lease agreement personal interest disclosure form referral for service disclosure form lead-based paint disclosure form special disclosure forms (mold, radon, subsurface sewage system, impact fees/adequate facilities taxes, etc.) referral agreement independent contractor agreement settlement statement closing checklist

surety bond

coverage against losses resulting from criminal or negligent acts of an employee

contents and personal property

coverage for building contents and personal property when they are not actually on the building premises

casualty Insurance

coverage for specific risks, such as theft, vandalism, burglary, illness and accident, machinery damage

consequential loss, use, and occupancy Insurance

coverage for the business losses resulting from a disaster, such as loss of rent and other revenue, when the property cannot be used for business

Property Disclosure: Depending on the state, the licensee may have no further duty to disclose property condition after properly informing parties of their rights and obligations. However, the licensee may still be subject to legal action for

deliberately distorting the facts (intentional misrepresentation) cheating any party (fraud) concealing or failing to disclose adverse facts which the licensee knew about or should have known about (intentional or unintentional misrepresentation)

Accounting, In addition to other accounting records, there is the requirement to maintain written accounting of escrow funds. For each transaction, property, and principal, escrow records will include:

depositor · date of deposit · date of withdrawal · payee · other information deemed pertinent by the real estate commission Other documents. Additional documents may be required by law or regulation, or should be kept simply as protection in case of disputes and lawsuits. These would include copies of advertising materials, materials used in training licensees, records of compliance with continuing education requirements, safety manuals, and anything else that shows how the firm conducts its business and safeguards its staff as well as the rights of consumers.

disclosure requirements. These are, typically, to:

disclose status verbally to other licensees on initial contact disclose status verbally to buyer and seller before providing real estate services confirm the disclosure in writing before signing a listing agreement or presenting a purchase offer (to an unrepresented seller) or before preparing a purchase offer (to an unrepresented buyer) get a signed receipt indicating the written disclosure has been made

The licensee's risks regarding RESPA primarily relate to

failing to ensure that the consumer is informed about his or her rights under the law giving or receiving an illegal kickback

Licensees are mainly sued for:

fair housing violations antitrust violations license law and other state law violations breach of contract agency duty violations illegal practice of law failures to disclose customer or client dissatisfaction fraud theft

Penalties for Violation of Antitrust Laws include:

fines for individuals and corporations, as well as possible imprisonment. Under the Clayton Antitrust Act, parties can sue antitrust violators and recover three times the damages they incurred plus court costs and attorneys' fees.

The Federal Trade Commission Act

forbids unfair competition in interstate commerce but establishes no criminal penalties.

RESPA currently requires lenders to:

give a copy of the booklet, "Your home loan toolkit" to every person at the time of application for a loan. provide a Loan Estimate of settlement costs at the time of loan application or within three business days of application. use the Closing Disclosure form to detail all financial particulars of a transaction. The Closing Disclosure must be delivered to the borrower at least three days before closing. The actual time frame is based on the method of delivery. The settlement agent must also provide the seller with the Closing Disclosure, which may be done at consummation.

workers' compensation Insurance

hospital and medical coverage for employees injured in the course of employment, mandated by state laws

The Sherman Antitrust Act makes

illegal all contracts, agreements, and conspiracies among competitors that would unfairly restrict interstate trade by fixing prices, rigging bids, or other means. An unlawful monopoly is created when one company becomes the only supplier of a product or service by getting rid of competition via secret agreements with other companies.

Avoidance

includes refraining from an activity that carries risk. One can avoid the risks of being in an automobile accident by not riding in automobiles. Avoiding risks also means missing the opportunity to benefit from the avoided activity.

Reduction

involves taking steps to reduce the probability or the severity of a potential loss. However, this strategy may result in reducing risk in one area only to increase it in another. A familiar example is a sprinkler system that dispenses water to reduce the risk of fire but at the same time increases the risk of water damage. In real estate practice, one risk reduction tactic is to share responsibility for making a decision. The licensee provides the consumer with expertise, and perhaps some advice, but lets the consumer decide how much to offer. In this way, the licensee gets some relief from the risks inherent in the buyer's decision to purchase.

Risk management

is a structured approach to dealing with the uncertainties and consequences of risk. In real estate practice, the aim is to reduce risk to an acceptable level through anticipation and planning.

Risk

is the chance of losing something.

Education

is the first line of defense against risk. When licensees are familiar with the forms provided by the office, how and when to complete them and where to send them, the likelihood of errors is reduced. Likewise, licensees need to be able to identify and understand common contract elements, complete contract forms developed by attorneys, and evaluate offers received from co-op agents on their listings without committing a license violation or breach of law. In most states, brokers have a legal obligation to provide training to affiliated licensees. Licensees also have the obligation to seek out appropriate education and training outside the brokerage to ensure that they know how to comply with the law. In addition, licensees must satisfy legal requirements for continuing education, while those who care about personal excellence will seek further education and training to enhance their professional skills.

The risks of unintentional misrepresentation are reduced if an agent

learns to measure and calculate areas accurately relies on measurements reported by others only with extreme caution and specific disclaimers refrains from exaggeration avoids stating opinions a consumer might take for expertise

Non-compliance poses a direct threat to the legal and financial status of licensee and license in the following general ways:

license expiration license revocation or suspension licensee discipline suit for damages

Licenses expire because licensees neglect to:

maintain E & O insurance when required meet education requirements observe correct renewal procedures

Risky areas for unintentional misrepresentation include:

making and reporting measurements describing property offering opinions about future growth and development of a neighborhood or neighboring property making declarative statements about the presence or absence of hazardous materials

Transference

means passing the risk to another party, by contract or other means. An insurance policy is the common example, but sometimes the wording of a sales or personal services contract can transfer risk without resorting to insurance. In the real estate business, transference is typically and most successfully accomplished by means of an errors and omissions (E&O) insurance policy, either on the individuals in a firm or on the firm itself. State law may require such insurance.

License revocation or suspension. Licenses are typically revoked or suspended when a licensee is found guilty of:

obtaining a license under false pretenses committing a "prohibited act" neglecting to present every written offer as required neglecting to deliver signed copies of accepted offers to transaction parties as required failing to make sure that all required terms and conditions are present in a contract to purchase handling earnest money and other escrow funds improperly

Retention

of risk means entering into an activity in spite of known risks and taking full responsibility for the consequences. This is, in effect, self-insurance, the only strategy left when risk cannot be reduced or transferred and one has decided not to avoid it because of the desirability of the potential benefits.

Answering questions. When faced with questions that might lead to a steering charge or other violation of fair housing laws, it is best

or the licensee to limit the response to features of the home and to the process of selling, buying, and listing properties, and refer the questioner to someone else to answer questions about such matters as the demographic make-up of the neighborhood. It is illegal for the licensee to voice an opinion based on race, religion, color, creed, national origin, sex, handicap, elderliness, or familial status. The licensee should explain this fact to the buyer and be wary of any situation where the licensee's behavior might be construed as discriminatory.

Carrying out the duties of agency also require disclosures of:

personal interest the agent has in a transaction (such as owner or buyer) personal benefit the agent will derive from a service referral required property and market information information about customers a client is entitled to have

Authorizations and Permissions. Licensees should stay within the bounds of the authority granted by the agency agreement or must not do anything requiring permission without first getting that permission in writing. For instance, permission should be obtained before doing any of the following unless the listing agreement specifically grants the authority:

post a sign on the property remove other signs show the property hand out the property condition disclosure distribute marketing materials advertise in various media use a multiple listing service cooperate with other licensees divide the commission or negotiate a commission split share final sales data with the MLS place a lock box on the property appoint subagents appoint a designated agent change agency status

The Clayton Act

prohibits mergers or acquisitions that are likely to lessen competition and increase prices to consumers. The Act also prohibits certain other business practices that under certain circumstances may harm competition. Private parties injured by an antitrust violation may sue in federal court for three times their actual damages, plus court costs and attorneys' fees.

General liability insurance

provides coverage for risks incurred by a property owner when the public or a licensee enters the owned property (public liability). The insurer pays the covered claim and legal fees, costs, and expenses, including medical expenses, resulting from owner negligence or other causes. This type of insurance does not cover professional liability, for which an Errors & Omissions policy is necessary.

Listing agreements. Before entering into a listing agreement, a licensee should explain that it is necessary to comply with fair housing laws and obtain the potential client's acknowledgment and agreement. The licensee should make it clear that the agent will

reject the use of terms indicating race, religion, creed, color, national origin, sex, handicap, age or familial status to describe prospective buyers. terminate the listing if the seller uses race, religion, creed, color, national origin, sex, handicap, age, or familial status in the consideration of an offer. inform the broker if the seller makes any attempt to discriminate illegally.

Penalties. Possible penalties for breach of agency relationships include:

rescission of transaction loss of compensation fees and costs punitive damages ethics discipline license discipline

the real estate licensee, who makes numerous complex decisions every day, faces a high degree of

risk potential.

Standard forms

save time and protect against the unauthorized practice of law. Since they are most often prepared by lawyers familiar with the market area, they can address contingencies that are common in the area in a manner that reflects the real estate laws of the state. On the other hand, a licensee often needs to adapt a standardized form for a client by assisting with filling in blanks, modifying terms, and attaching addenda. The licensee must always remain aware of the limitations the state has placed on such activities.

The duty to exercise skill, care and diligence means

that licensees may not be casual or negligent in their actions. Licensee negligence is actionable when principals are harmed by the licensee's failure.

The duty of obedience requires

the agent to act on the principal's wishes regarding the transaction as long as they do not result in any illegal action. The duty of obedience never overrides the legal obligation of agents to deal fairly and honestly with all parties.

The duty of confidentiality requires

the agent to hold in confidence any information that would harm the client's interests or bargaining position or anything else the client wishes to keep secret, unless the law requires disclosure. The duty of confidentiality survives the termination of the listing contract.

The duty of loyalty requires

the agent to put the client's interests above those of everyone else, including his or her own.

Typical trust fund handling requirements include:

the broker named as trustee of the account a federally-insured bank or recognized depository located in the state an account that is not interest-bearing if the financial institution ever requires prior written notice for withdrawals maintenance of records in a particular accounting format separate records kept for each beneficiary, property, or transaction records of funds received and paid out regularly reconciled with bank statements withdrawals only by the broker-trustee or other specifically authorized person

Unauthorized practice of law.

the proffering of legal advice or services by one who is not a licensed attorney. writing contracts licensees may fill in blanks or make deletions on a preprinted contract form prepared by a lawyer. While a licensee may make deletions, additions to a form should be drafted by an attorney. The principals themselves can make changes as long as each change is signed or initialed by all signers. Preprinted riders can often be attached as addenda to a contract without an attorney.

The licensee, in accordance with the duty of due diligence, must verify the accuracy of the statements in the listing regarding the property, the owner, and the owner's representations. Especially important facts for a broker or agent to verify are:

the property condition ownership status the client's authority to act

The risks of agency will occur in one of two areas:

the requirement to inform and disclose the requirement to carry out an agency duty.

The duty of accounting applies

to all funds involved in a real estate transaction. Accounts must be maintained as required by law, and escrow funds are to be handled strictly in accordance with the law.

The duty of disclosure applies

to both parties to a transaction, although usually with some differences. Proper disclosure to customers primarily concerns agency, property condition, and environmental hazards. To the client, it generally concerns all known facts regarding the property and the transaction, including information about the other transaction party. State laws prescribe what may, must, and must not be disclosed. Licensees must be vigilant to avoid oversights and conflicts of interest that can lead to a disclosure to the wrong party or disclosure of information that is confidential.

E&O policy provides coverage for "damages resulting from any negligent act, error or omission arising out of Professional Services." A standard policy does NOT cover:

violations of law fraudulent, dishonest, criminal or malicious acts mishandling of escrow moneys, earnest money deposits, or security deposits antitrust violations sexual harassment Fair Housing violations licensee-owned properties environmental violations failure to detect or disclose environmental conditions, including mold acts committed prior to licensure or after termination of active status activities as an appraiser if licensing other than a real estate license is required E&O insurance, in short, covers "mistakes" but not crimes.