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3 Reasons Why a Real Estate Boom Can Put Your Brokerage at Risk

Row of wooden houses arranged from shortest to tallest with yellow arrows resting on top of them highlighting the progression of height.

It shouldn't be news to anyone in the real estate business that the market is red hot right now. However, with this boom in sales comes potential risks to both buyer and seller agents. While avoiding legal action altogether may be an unrealistic goal, being aware of these top three risks will help to limit your potential exposure.

Risk #1: Over-Asking Offers

In the current real estate boom, properties are routinely selling for well over the listing price. Buyers often find themselves in a competitive bidding situation where the highest number wins. The result can be a potentially inflated number that is not in line with appraisal values.

With a limited housing supply, a buyer’s agent may advise her client to increase their offer to win the property against other potential buyers. But does that mean the buyer’s agent is advising on market value of the property? No. A buyer’s agent needs to explain clearly to her client that the agent is advising only on a strategy for a winning offer (e.g. increasing the offer price), but that the agent is not and cannot opine on the market value of the property.

Risk #2: Waiving All Contingencies

In a competitive bidding scenario, buyers routinely waive all contingencies upfront as part of a purchase offer to make it more attractive to the seller. Sellers are more inclined to accept an offer with no contingencies because it is essentially a done deal once the offer is accepted. By contrast, an offer with multiple contingencies would allow the buyer to legally walk away from the deal before the close of escrow for a number of reasons. In this seller’s market, no seller wants that much uncertainty surrounding the transaction.

There are a multitude of risks associated with an upfront waiver of all contingencies. How much does the buyer know about the true conditions of the property? Does the buyer still need financing and an appraisal to complete the purchase?

Although there are pre-printed forms published by the California Association of Realtors advising parties on the risks of waiving contingencies, the buyer’s agent needs to communicate these risks directly to their client in the context of the specific property the buyer is purchasing. For example, if the buyer is aware of a history of water intrusion on the property, has the buyer investigated to determine the cause of the water intrusion and estimated costs to repair the damage? If the buyer still needs an appraisal for financing, are they able to cover the difference in purchase funds if the property does not appraise for the purchase price? The agent should address these types of questions with their client, preferably in writing, to ensure that the buyer has thought through the impact and consequences of waiving all contingencies upfront. As the buyer’s agent, the burden falls to you to make sure the client fully understands the implications of waiving all contingencies or have them consult an experienced real estate attorney if there are any legal questions.

For a seller’s agent, it is important to remember that the seller is still legally obligated to disclose all facts that materially affect the value or desirability of the property. Therefore, even when a buyer has waived all contingencies up front, if the seller failed to disclose material facts concerning the condition of the property at the time the parties executed the contract, the buyer may still have a claim of fraud or misrepresentation against the seller to get out of the deal. If a seller’s agent anticipates a competitive bidding scenario in which buyers may offer to waive all contingencies up front, the agent should advise the seller to perform all necessary inspections and prepare all disclosures up front before the time of listing. This will help safeguard against any potential claims in the future.

Risk #3: Purchasing a Property Sight Unseen

In a booming market, buyers may be willing to make an offer, sight unseen, solely based on photos or video footage of the property. Following the pandemic, the practice of virtually touring a property has become much more prevalent. If a buyer has not physically walked the property, the buyer’s agent has a heightened duty to conduct a reasonably competent and diligent visual inspection of the property and disclose to the buyer all facts materially affecting the value or desirability of the property.

Arguably, the seller’s agent has a heightened duty to the buyer, too, if the agent is aware that the buyer has not physically set foot on the property before making the purchase. If the buyer is willing to purchase the property based on a virtual tour alone, both agents need to confirm that in writing and further confirm that the buyer was given the opportunity to physically inspect the property and elected not to.

Conclusion

There’s a lot to celebrate in a real estate boom, but it’s important to keep your team vigilant with the amount of risk this can create. Encourage well-organized, well-documented notes on all back and forth between your agent and their clients.


Image courtesy of iStock.com/ThitareeSarmkasat


The views expressed in this article are those of the author and do not necessarily reflect those of Berxi™ or Berkshire Hathaway Specialty Insurance Company. This article (subject to change without notice) is for informational purposes only, and does not constitute professional advice.

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