Attention Real Estate Pros: Are you ready to be sued?

By
Real Estate Agent with RE/MAX Alliance - Louisville REALTOR-Luxury Homes

Ready for court?I wrote an Open Letter to First Time Procrastinating Home Buyers a couple of days ago.  The point of the post was to inform buyers that the deadline for writing an offer on a home was somewhere in October.  This post garnered a lot of attention and comments.  Of course, the best was from my new favorite McKinney, Texas Broker Kim Daughtery whose comment included "You're a genius."  Thanks Kim.  Flattery will get you referrals.

All kidding aside, there were some very profound comments that needed to be considered once my suddenly Barry Bond-sized noggin returned to its original size.

In particular, at least 3 very specific scenarios discussed in the comments which could spell trouble for real estate agents and lenders.  Despite my flippant attitude above, each of us should think about the following very seriously.

Scenario 1: Your buyer misses the deadline and doesn't get the $8000.  

Matt Stigliano aptly pointed out he expects lawsuits to arise if this is the case.  I agree.  Think we are wrong? Consider...

  • What if you the lender says you can close in 40 days and it takes 50?  Does it matter that the delay was caused by the buyer not submitting all docs on time?
  • What if you the buyer's agent takes on a new client Oct 1st and don't write an offer until October 20th?  If you miss the deadline, will your clients claim you didn't tell them about the risk?  Does it matter if you did?
  • What if you the seller's agent don't do due diligence with respect to pre-approval letters in multiple offer situations and the buyer your client selects can't close?  Does it matter if you did?
  • What if you the appraiser take 3 weeks to get your report submitted due to the glut of deals?  Does it matter if you worked 60 hours per week just to accomplish that?
  • More importantly, what if you the professional do everything right and it just doesn't work out?

Scenario 2: The buyer walks.

Does anyone really think this won't happen? 

  • How do you the buyer's agent educate the client to prevent this?
  • How do you the seller's agent protect your client?

Scenario 3 The deadline isn't extended.

Many commentors believe the tax credit will be extended.  I probably do as well.  Certainly, we can predict NAR,etc will be all over Congress this fall to make it happen.  That being said, I would never advise my client to that fact.  This credit has been available in one form or another for well over a year.  I am loathe to throw my support behind any petition for an increase on the grounds that buyers have somehow been unable to get motivated to get free money.  Of course, if I have a client in that position, I'll probably have to swallow my principles and argue on their behalf.

In the meantime, my argument to them is "Why do you want to wait? What benefit do you expect to get?  Rates aren't dropping.  Inventory isn't improving.  Where exactly do you think you'll make up the $8k if you are wrong?"

Here's the question though.  Does merely mentioning the possiblity open you up to a lawsuit if it doesn't occur? 

The Answers

Despite Kim's faith, I don't have the answers.  But, I have 2 months to figure it out and this is definitely not something I'm procrastinating about.

Thoughts?

* * * * *

Erik Hitzelberger is a licensed REALTOR with RE/MAX Alliance in Louisville. If you need a Louisville Real Estate agent please email me or call 502.921.3989.

I specialize in the following areas of the Metro Louisville Area: Prospect, Middletown, Jeffersontown (J-Town), Fern Creek, Okolona, Shepherdsville, Mt Washington, Hillview, Brooks and Pewee Valley.  Click the following links to learn more about Louisville and Bullitt County Real Estate or to Search for Louisville Homes 

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Comments (91)

Erik Hitzelberger
RE/MAX Alliance - Louisville REALTOR-Luxury Homes - Louisville, KY
Louisville - Middletown Real Estate

Terry - You raise a lot of interesting questions.  While we will never know the actual answers, the perceived answers will really depend on how cynical one is.  Of course, when it comes to gov't intervention it is hard to be too cynical.

Cathy - I am not going to take a month long vacation, but I'll certainly mind my p's and q's a little closer over the next couple of months.

Penny - The fact that this was tied to a closing date rather than a contract date is really going to cause an issue.  As I read through the comments here and on my previous post, I'm starting to wonder whether 45 days is enough.

JL - I missed your post, but I'll try to find it.  You always have interesting insights.

JL - THANKS.  My first MANCROW feature!  This more than compensates for the gold star which seems to be missing.

Michael - I hope, regardless of state, that broker's have a plan to at least alert if not alert and protect their agents.  I'll be interested to see wheter NAR or our local MLS's put out any advisory messages in the next month or two.

Natalie - I feel your frustration.  I sense you, like me, are a generally trusting person who would never consider suing for missing a deadline such as this.  However, we both know there is a percentage of people who will either view this as an entitlement.  If they are denied, they will demand for someone else to pick-up the tab.

Steve - It is a shameless plug, but potentially relevant so I'll leave it.

Doug - IMHO, your retort was perfect.  On a side note, I think it's time to break out the Magic 8-ball again.  Whenever a client asks me this question, I'll just hand it over.  Think they'll get the point?

Michael - While I haven't commented yet, I read your post.  Thanks for the mention and I'll get back to it if I can ever get through the comments here.

Brian - Consider yourself blessed.

Peter R.- I think you are right.  I particularly liked Jims (#15) opinion of getting it signed twice.  Also, one or more commentors suggested having it drawn up by an attorney.  More good advice.

Peter B. - Two good thoughts.  However, my goal is avoid having to worry about it.  One idea I haven't seen mentioned is conducting extra due diligence during initial buyer's meetings.  If I don't have a good feel for the person, I am going to be less likely to find a reason to work with him / her.

 

 

 

 

 

Aug 07, 2009 12:14 PM
Erik Hitzelberger
RE/MAX Alliance - Louisville REALTOR-Luxury Homes - Louisville, KY
Louisville - Middletown Real Estate

Linda - Your comment inspired another thought.  What if you recommended the lender who couldn't close?

Teresa - I think the curve is actually a circle.  Being ahead/behind is a matter of perspective.

Richard - I'm not quite willing to go to that extreme, but it is certainly a thought. 

Gene - It's all about being proactive. 

Bonnie - CA is soooo different from KY.  $250+ here is a second if not 3rd home.  Our feeding frenzy price point is around $125.

Lori - I didn't know about the 640 credit score.  Thanks for that tidbit.  Also, depite headlining the newsletter this post wasn't featured by AR.  I'd be bitter except I was featured by MANCROW.  Woohoo!

Lisa - Some of our brethern, perhaps even some on AR, will get caught in the trap.  There is only so much we can do short of walking away for 2 months. 

Kim - I was wondering whether your google alerts would tip you off.  BTW, that almost sounds like a challenge.

Joel - Start writing my friend. Start writing.

John - Thanks for the comments.  I'll try to fill you in on the good, bad, and ugly as the eve draws nie.  (Well, hopefully not the ugly). 

Jeanna - Thank you.  We all want to live in interesting times, but there is a limit on how interesting I need my life to be.  Good luck out there.

 

 

Aug 07, 2009 12:29 PM
Anonymous
Gwendolyn Sadler

I have been been sending out e-mails to all of my past clients. I've also made some appointments for next week to explain that time is running out. I have heard the same as other Realtor's that the incentive might be extended. I've been telling my clients it's possible, but there is no guarantee. We should proceed with what we know. The incentive ends November 30th, 2009.

Aug 07, 2009 12:57 PM
#75
Erik Hitzelberger
RE/MAX Alliance - Louisville REALTOR-Luxury Homes - Louisville, KY
Louisville - Middletown Real Estate

Gwen - This is a running theme.  No one knows that the credit will be extended.  Operating in a manner that assumes it will is risky. 

Aug 07, 2009 01:00 PM
Jeanna Martinez
RE/MAX Access - Schertz, TX

Erik - Amen to that!  Interesting is great...but only when it is a "positive interesting"!! ;)

Aug 07, 2009 01:24 PM
Jenny Durling
L.A. Property Solutions - Los Angeles, CA
For Los Angeles real estate help 213-215-4758

Good post and a lot of food for thought. Alot of folks expect the tax credit to be extended. That would be great but I certainly wouldn't tell any of my clients to count on that.  One thing- it actually expires on Nov 30, not Dec 1. Like others have noted, I certainly won't be writing last minutes offers assuring my clients of ANYTHING! 

Aug 07, 2009 03:15 PM
Erik Hitzelberger
RE/MAX Alliance - Louisville REALTOR-Luxury Homes - Louisville, KY
Louisville - Middletown Real Estate

Jeanna - Exactly!

Jenny - Good clarification.  You have to be in the house prior to Dec 1 which means you have to close on Nov 30 or sooner.  It's not as clear as I probably should have been on my last post, but if I edit it, the whole thing blows up.

Aug 07, 2009 03:27 PM
Carla Muss-Jacobs, RETIRED
RETIRED / State License is Inactive - Portland, OR

Erik -- If the buyer does all they can, in good faith under the terms and conditions of their contract, and we (their agent) do everything, and the lender can't get loan docs out, or forgets to order the appraisal, or gets bogged down with the onslaught of late shoppers, etc. how can it be the agents' fault? 

You (always) pose very good questions.

NOTE TO SELF:  No new clients from Oct. 15 - Dec. 1

Aug 07, 2009 04:03 PM
Erik Hitzelberger
RE/MAX Alliance - Louisville REALTOR-Luxury Homes - Louisville, KY
Louisville - Middletown Real Estate

Carla - I'm not saying it would be your fault.  But, the buyer is going to be upset and you are the closest target. 

Aug 07, 2009 04:27 PM
Lyn Sims
RE/MAX Suburban - Schaumburg, IL
Schaumburg Real Estate

Sorry Erik, I think your being paranoid. Attorneys circling the wagons?  Where?  As some have mentioned you can be sued for anything, another reason for a good paper trail and due diligence on your buyers behalf.  I think you're 'overthinking' the whole result.  Can a buyer sue if he is stupid enough to miss his loan lock and be forced into a higher rate because he didn't move quickly enough?  Same thing.

Aug 08, 2009 01:43 AM
Erik Hitzelberger
RE/MAX Alliance - Louisville REALTOR-Luxury Homes - Louisville, KY
Louisville - Middletown Real Estate

Lyn - No need to apologize for dissenting. I appreciate all views as long as the conversation is civil.  More importantly, I hope yours is correct.  I do think that the multitude of issues that can arise offer more opportunities (exposure) to create problems for the agent.  We will each need to be on top of every detail and it's no secret that some among us are less on top of things than others. 

Aug 08, 2009 02:47 AM
Troy Erickson AZ Realtor (602) 295-6807
Good Company Real Estate - Chandler, AZ
Your Chandler, Ahwatukee, and East Valley Realtor

Erik - I am hoping that this tax credit does not become an issue with buyers and their closing dates.  There are so many things beyond the buyer agents control, I would think it would be very difficult for a lawsuit to incur.  We as realtors typically don't have too much control over when a loan closes.  We can only submit a purchase offer with a closing date, hopefully directed by the buyer.  A lot of the responsibility of when the loan closes is up to the buyer more than the agent.  They need to have pre-approval, submit all documents on time, and be available for signing docs when they are ready.  There are so many variables that I could never come up with all of them.  I think all we can say to our buyers is that there is no guarantee of receiving the tax credit any time we are working on a purchase offer, from now until the deadline.

Aug 08, 2009 01:38 PM
Fred Zipz
North Star, SK

As Realtors, we should all inform our buyers of the following when we first begin showing homes, or, at the very latest, when we begin to write offers:

1.  We don't know if they're definitely eligible for the FTHB tax credit.  We can tell them that we think they are eligible based on their circusmtances as the buyer has related them to us, but we are not accountants or attorneys.  We should advise them to make a call to their accountant to confirm their eligibility.

2. We can't control when the Seller will look at the offer, accept the offer, or want to close on the contract.  We can try to exert influence over the Seller, but ultimately we can't make the Seller do anything in a timely way.

3.  We can't guarantee that their purchase will close by December 1.  Once it goes into escrow, the deal is largely out of our hands and in the hands of other parties (title companies, inspectors, appraisers, and lenders, to name just a few).  We can estimate the closing date, but we can't guarantee it, and we should tell the buyers that they should be prepared for the possibility of missing it.

4.  We have no idea whether Congress will extend the FTHB credit.

There is absolutely no reason to be nervous about this if we provide the proper advice.  And my last piece of advice is to all of the agents reading this blog and the comments:  Provide your buyers with a written statement of the above admonitions, and have your buyers sign off on it at the time that they start submitting offers.  That way, you've got written proof that you notified the buyers that there's a possiblity that their purchase won't close in time for them to receive the benefit of the FTHB credit.

Aug 08, 2009 02:25 PM
Jennifer Fivelsdal
JFIVE Home Realty LLC | 845-758-6842|162 Deer Run Rd Red Hook NY 12571 - Rhinebeck, NY
Mid Hudson Valley real estate connection

Erik you are so right this is a subject that we need to pay attention to, even if as agent we are not at fault some buyers will try to pin the blame on us.  It is estremely important to educate these buyers and take steps to protect ourselves.

Aug 08, 2009 10:55 PM
Anonymous
Sheila Calistri

Whew, I didn't read through all of the comments but I do believe a solid paper trail is important.  In Florida, just about every home listed is a short sale so it is impossible at this point to promise a buyer will close in time to get the tax credit......unless it's extended. 

Aug 09, 2009 07:09 AM
#87
Bart Foster
Keller Williams Realty Boston - Metro - Boston, MA
Boston MA Real Estate

When I first read, I though, OMG how true.... then I thought, how nuts. If what you are saying is true then anytime a transaction missess it's initial intended closing date, we are open to litigation. Think for a moment, buyer needs to extend the rental on their apartment, or worst yet, is stuck getting a hotel room... same could be true for a seller expecting to close, who has moved out, relocating and needs funds on their previous property to close on a new home clear across the country. It's ludicrous.

Think of it for a moment, who here has written a contract that in any way shape or form 1) indicated to the other party that they were a 1st time buyer, 2) was going to get a big fat $8,000 credit next year & 3) was not willing to pay another dime for the property because of it? Quite frankly if I were representing the buyer would I not be breaching my fiduciary responsibilities with regards to keeping their Free gift from Uncle Sam private.... you bet. Because the seller might see this as an opportunity so work the buyer for a few more $$$$.

Additionally, at least in my office, I have yet to see any Purchase and Sale signed by a Real Estate agent. The contract is not between us, it is between the buyer and seller. And none has yet had any disclosure with regards to the $8,000 credit and what would happen if the two parties were unable to close before the deadline. 

Perhaps this is the closing or suggestion; a very generic paragraph needs to be added that indicates weather or not the buyer is or plans to apply for the credit, that the buyer waives their right to persue damages if closing does not occur prior to the expiration of the program.  And lastly, unless you want to be party to the transaction, never sign a p&s.

Aug 12, 2009 05:45 AM
Gary Steuernagel ASSOC. BROKER, ABR, CRB
Keller Williams Southwest - Sugar Land, TX

Its shortsighted  to think that there isn't a good chance to be sued.  If we miss the deadline the attorneys will only have to file a suit against us for say $30,000 ($8,000 plus potential punitive damages due to our alleged negligence, plus attorneys fees).  Our E and O carriers won't want to fight it and will offer to eventually settle for about $15,000.

In my office, if an agent is sued and looses or has to settle they are required to pay the deductible ($2500).  

If there are no other consequences the agent is out $2,500 and both they and myself the broker are out of our time to defend ourselves.

I've put together an additional disclosure to be signed by buyers irrespective of whether we represent them as buyers or sellers.  I have an obligation to protect my agents and company, even if the chances of needing to are remote or unneeded, as some other previous postings state.  When we've represented sellers the cooperating agents and brokers have not once argued with having their buyers sign this in the last three weeks we've been using it.

 

Aug 15, 2009 09:32 AM
Kenneth Young
Uni International LLC - Virginia Beach, VA

Erik,

Good post, has alot of ppl thinking.   Remember anyone can sue for anything...    One question, where did you get that clock on your orginal post ??

Aug 18, 2009 07:45 AM
Mark Velasco
Sharpstone Commercial - Whittier, CA
Top Producing COMMERCIAL Team 30+ years experience

I think that you are right Erik. I am going to make sure that my Clients are fully informed of this impending deadline.

Aug 18, 2009 06:18 PM
Anonymous
Jeri Groves

Has anyone considered that there are NO enforceable regulations about the time a BANK may take to input, process and approve a short sale?  Where does that leave us when we have a client who put in an offer months and months and months ago, and the short sale STILL has not been approved?

Oct 15, 2009 03:58 PM
#92