Agent-owned property (AOP) is real estate owned by a real estate licensee. Even if it’s just a small personal stake, it would still be considered agent-owned property.
Whether you are selling your own family home or a residential or commercial investment property, real estate professionals should be aware of the unique risks they face if they decide to act as the selling agent for their own property. This is also the case for property management of a piece of real estate you own yourself.
Here are the lesser-known risks you may need to navigate and the potential implications of taking on this dual role . . .
The Unique Risks of Agent-Owned Properties
There isn’t an issue per se in representing yourself as the buyer or seller in a real estate transaction. You could also act as the property manager for your own property — as long as you’re upfront about it. For transparency, you need to disclose that you are the property owner and if any conflicts of interest exist. Other parties to the transaction (or lease if it’s a tenancy arrangement) must be aware of your personal involvement. Not being transparent could result in you being accused of misrepresentation or failure to disclose.
The situation can get particularly messy if you are a buyer’s agent trying to sell your own property. Real estate licensees have a fiduciary duty to act in their clients’ best interests. It is impossible to remain impartial and fulfill this obligation when you stand to gain from the transaction beyond your regular commission as the buyer’s agent.
Think you want to take the risk? AOP claims and lawsuits are five times more costly than those involving third-party transactions. Plus, “agent-owned property disputes are more likely to pay settlements or judgments than non-agent-owned property disputes,” according to oregonrealtors.org.
Managing your own property as a real estate professional can also be problematic. Having a dual role leads to a conflict of interest where your personal financial gain may overshadow your responsibility to provide the tenants with a safe and well-maintained property in which to live.
There can be both ethical and potential legal concerns with any scenario involving agent-owned property. You need to navigate these scenarios with care to avoid lawsuits and any damage to your professional reputation.
Another significant risk associated with agent-owned property is the potential lack of insurance coverage for the transaction. This can put you in a precarious position if you ever do face a lawsuit.
What is the Issue with Insurance? Understanding Real Estate E&O Coverage Gaps
Some licensees are under the misconception they will be covered by their real estate broker’s Errors and Omissions insurance policy because the selling or property management of their agent-owned property is also part of their job role and core functions at work. Unfortunately, this is not the case. Because of the greatly increased risks of AOP transactions, most real estate broker E&O policies will not cover you for:
- Property management for properties you own (that is, where you wish to manage your property yourself, and you also own it)
- Property sales coverage if it isn’t your primary residence. For example, if it’s an investment property or you have a financial interest in the property.
What makes matters even more complex is the terms and conditions of real estate E&O policies vary significantly.
What is acceptable for one policy may be prohibited in another, leaving real estate licensees in a potentially vulnerable position. Some E&O policies won’t cover agent-owned property claims at all. Some impose specific conditions and criteria that need to be met in order to be covered. For example, on CRES real estate E&O plans with the AOP endorsement, you will have coverage for the transaction when:
- A home inspection report is issued
- A home warranty is in place
- And all state-required property transfer disclosure statements are completed
That’s why it is so crucial to ask about the details of AOP coverage in your broker’s E&O policy (or ensure you read the fine print in your own individual policy if you have one.) You need to understand:
- Exactly what types of AOP transactions are covered. Is it only sales of primary residence? (The CRES AOP endorsement covers AOP sales of rental or vacation properties up to a four-plex.)
- Exactly what steps need to be taken in an AOP sales transaction to meet the coverage requirements.
Never assume you will be covered without examining the extent of your coverage. Otherwise, you may find yourself responsible for substantial costs if a claim arises.
Tips for Real Estate Professionals to Minimize the Risks
Put ethics before financial gain
As a real estate professional, you should always put ethics above financial gain. It can be helpful to set clear boundaries between your professional duties and your personal interests. It’s true that by managing or selling your own property you may profit financially, but it may not be worth it if your reputation is damaged or you end up losing your business due to a costly lawsuit.
Focus on your recordkeeping
If you’re involved in an agent-owned property transaction or you are the property manager for your own property, keeping good records is essential. This is useful if you ever need to defend yourself in a lawsuit. That means keeping every email, every text, and documenting every phone or in-person conversation in your transaction log. (Keep this in mind if you get a new phone. Be sure past texts are transferred to your new phone. An even better plan: whenever you communicate with clients by text, copy and paste the text into an email and email it to your computer where you can save it and print it.)
Prioritize risk management planning
Whether you decide to manage your own agent-owned property or not, risk management should be a fundamental part of your real estate business. To protect yourself from potential lawsuits, financial, and reputational damage, effective risk management is essential. Being proactive and prepared will enable you to manage issues before they escalate, making your business more likely to be around in the long term.
Secure appropriate insurance coverage
The most important step for any real estate professional dealing with agent-owned property is to make sure you have the right insurance coverage. Given that many standard E&O policies have exclusions for agent-owned transactions (especially rental properties or other properties that are not your primary residence), it’s important to review your coverage and any specific criteria. You may need to purchase an individual real estate E&O policy to ensure you have adequate coverage.
Protect Your Real Estate Business from Agent-Owned Property Risks
CRES is your Real Estate Errors & Omissions Insurance specialist. As part of one of the largest insurance brokers in the world, we have access to more E&O options than just about anyone. Contact the CRES team at 800-880-2747 for a confidential discussion today.
