(A Little Bit of) What Real Estate Agents Need to Know
California real estate agents and brokers arguably face the highest risk of a lawsuit as a result of the disclosure process. How it usually goes is like this: the buyer closes escrow and moves in, after which time he or she observes a significant issue—often pertaining to water intrusion, mold, or a structural defect—and proceeds to sue his or her agent, the seller, and the listing agent all at once for damages. In such lawsuits, there’s almost always a claim that accuses the buying agent of breaching his or her fiduciary duty owed to the Buyer. For this post, we’ll take a look at why that is and go over a couple of pointers toward avoiding this trap, both on the buying and selling sides of a transaction.
WHAT IS A FIDUCIARY DUTY AND WHAT DOES IT MEAN FOR THE DISCLOSURE PROCESS?
One court famously described what a fiduciary duty means for an agent and his or her client, in a way that directly pertains to the disclosure process:
“The broker must place himself [or herself] in the position of the principal and ask himself [or herself] the type of information required for the principal to make a well-informed decision. This obligation requires investigation of facts not known to the agent and disclosure of all material facts that might be reasonably discovered.”
The key parts of the foregoing language are those calling on agents to step into the shoes of the client to “learn,” “obtain,” and “investigate” on his and her behalf. Importantly, this language bears in mind the skillset of an agent and doesn’t require forays into the tradesperson’s skills of home inspecting and the like.
Instead, what it means is that if you see or suspect any red flags, your fiduciary duty requires you to at least articulate your concern to your client. Here’s some tips to assist you with putting this into practice.
AVOID SPECULATING AND “EXPLAINING AWAY” YOUR BUYER’S INQUIRIES ABOUT A HOME’S POTENTIALLY NEGATIVE FEATURES. CAREFULLY REVIEW THE SELLER’S DISCLOSURES AND INSPECTION REPORTS WITH YOUR BUYER INSTEAD OF HANDING THEM OVER WITH NO COMMENT.
The best agents are also the most attentive and consistently address potential problems, as they perceive them, for their buyer’s consideration and further investigation. For example, if a buyer notices air fresheners throughout a property during a showing with his or her agent and comments on a strange and unidentifiable smell permeating the interior, it’s ill-advised to brush this inquiry off as, say, a “fresh coat of paint” if the agent has no understanding or reason to believe that’s indeed the case. Instead, the agent who fulfills his or her fiduciary obligation along the above-described lines will make a point to inquire with the listing agent on behalf of the buyer as to the origin of the odor.
Another way to be in step with your fiduciary duty is to approach the disclosure process interactively with your clients. On the buying side, for instance, always review the seller’s disclosures critically with your buyer. Do they touch on and address your buyer’s concerns? The same is true with home inspection reports which, most of the time, recommend follow up investigations by other tradespersons. Attentively review this report (and all other reports) with your buyer and have your buyer sign every report you deliver. If something concerns you, including the absence of information you expected to be addressed, be sure to articulate your concern to your buyer. In short, don’t assume that your buyer is picking up on everything on his or her own. Rather, be his or her second pair of eyes.
IF YOU CAN SEE THE DOTS DURING YOUR VISUAL INSPECTION, CONNECT THEM FOR YOUR CLIENT.
CAR’s “Agent Visual Inspection Disclosure” form captures the following legal obligation: “[i]t is the duty of a real estate broker or salesperson . . . to a prospective buyer of residential property . . . to conduct a reasonably competent and diligent visual inspection of the property offered for sale and to disclose to that prospective buyer all facts materially affecting the value or desirability of the property that an investigation would reveal.” This agent’s duty of inspection closely relates to the fiduciary duty, even though they’re technically distinct. Here’s a practical example of the close relationship between the two.
Suppose you’re a buying agent conducting your walk through of a property on which your client made an offer. You observe prominent cracks throughout several walls within the home. In satisfaction of your agent’s duty to inspect, you note your observation of these cracks throughout your AVID. Privately, however, you now have concerns that the cracks might be reflective of structural problems, such as a moving foundation. Even though you properly discharged your duty of visual inspection, your fiduciary duty requires that you take your visual inspection a step further and communicate your private concern to your buyer and recommend that a structural engineer takes a look. You’ve now directly placed your client in a great position to “make a well-informed decision,” per the court’s admonishment quoted above, about whether to purchase the property.
Similar situations arise on the listing side. Suppose that you’re the listing agent who encounters and forms the same suspicion about the cracks in your selling client’s home, which you diligently record in your AVID. Your fiduciary duty, this time to your seller, requires you to voice your concern such that he or she is empowered to ascertain the extent of the potential problem, if any, and repair or disclose it.
The foregoing examples underscore another critical point about AVIDs in general, which is that the agent’s duty to visually inspect is non-delegable. Always fill out your AVID with your own observations and never substitute your own observations with a recommendation to “see the home inspection report.”
Carefully adhering to the above will do much toward cutting off avenues by which principals and/or clients can maintain viable claims against you for a purported breach of fiduciary duty.