Once you’re at the offer or accepted contract stage, there are common pitfalls even the most experienced licensee can fall into if you’re not careful — from inspections and deadlines to multiple types of fraud and canceled contracts.
Here’s a summary of how to stay out of legal trouble in key risk management areas for your existing team and new hires.
See all of our ClaimPrevent® Summaries:
- ClaimPrevent® Summary #9: Property Management Evictions and Maintenance
- ClaimPrevent® Summary #8: Property Management Ads and Screening of Applicants
- ClaimPrevent® Summary #6: Handling Challenges with Clients and Other Licensees
- ClaimPrevent® Summary #5: Completing the Residential Purchase Agreement to Avoid Problems
- ClaimPrevent® Summary #4: Handling Offers
- ClaimPrevent® Summary #3: Seller Disclosures and Working New Listings
- ClaimPrevent® Summary #2: Licensee Responsibilities When Creating New Listings
- ClaimPrevent® Summary #1: Attracting Clients and Showing Property
Accepting Client Deposits
Client funds, including buyer deposits, must be deposited in a separate trust or escrow account separate from the brokerage business accounts and any personal funds. There can be no mixing of client and personal funds to avoid a commingling lawsuit.
“As Is” Sales, Inspections, and Home Warranties
As a buyer’s agent, you might ask for things in your initial offer. It might get countered back saying, “no, we’re not paying for any of that.”
As the buyer’s agent, you can say “We’re not going to make you pay for any repairs, a home inspection, or a warranty but we still want to do an inspection and get a home warranty for our protection.”
Buyers still need to be advised to get inspections done. This is especially true when purchasing foreclosure properties.
Buyers’ agents must counsel their buyer clients to perform their own due diligence, including having a home inspection done, testing for radon, having a septic system inspection or sewer line scope inspection, and roof inspections, to name just a few. You want to be sure there aren’t significant problems or things like a pending HOA special assessment.
If the home inspection is horrific, the buyer wants to reserve the right to back out entirely. The buyers’ agent must work to procure a sufficient amount of time for the buyer to inspect the property, make sure the deadlines are met, and get objections filed in time.
Especially if you’re not getting an adequate home inspection, you want to make sure you’ve got a home warranty. The buyer’s agent should document that it is the buyer’s choice on what inspections to have done or the decision to forego any inspections or attempts to negotiate a resolution of inspection objection items.
If you’re representing the seller, you should never have a problem with buyers getting a home inspection. The only issue could be timing, because home inspectors may be busy. If the sellers want a 10-day close, you may run into a time problem.
- The sellers, even though they may be selling the home “as is,” still have a duty to disclose defects or adverse material conditions they have actual knowledge of.
- The seller’s agent has to counsel the sellers as to their duties with disclosures to avoid lawsuits. A home warranty is a great resource for sellers to have, especially if sellers aren’t willing to do repairs.
When purchased by a CRES E&O Member, the CRES Advantage Home Warranty includes Seller’s E&O Protection Plan to protect sellers for 6 months after closing, and covers damages and defense costs up to $25,000 should a problem arise.
See: Real Estate Buyer’s Agent Guide to Buying a Home As Is.
Deadlines and Contract Language
Buyers’ agents must be aware of the deadlines of when to terminate and how to terminate. And it’s critical to be really careful with drafting amendments and extensions.
For example, a buyer could have problems meeting the deadline, due to trying to get loan approval. The seller may get anxious and want to close. One of the brokers might write an amend/extend with this language: “Buyer agrees if contract does not close by February XX, a business day, seller reserves the right to put property back on market and will take backup offers.”
Does that mean: “the contract is terminated if the buyer doesn’t close?” Or “If the buyer doesn’t close by that day, the seller can get backup offers?”
If the seller accepts a backup offer, the seller would be under contract twice for the same property, unless it was clear the original contract was terminated.
Be very careful about when a contract can be terminated, and when and how it can be extended. Buyers’ agents must be constantly aware of the contract deadlines for loan approval, inspections, inspection objection, inspection resolution, HOA documents, due diligence documents, the Seller’s Property Disclosure, and appraisal deadlines.
Inspections
Licensees should never request inspections on behalf of their clients. If you order an inspection from an inspector you’ve chosen and the inspection misses something that costs the buyer money, or the inspection was completed by someone who wasn’t licensed, you could be liable.
Ordering inspections for properties is beyond your responsibilities as a real estate licensee.
- Recommend to any prospective purchasers that they do their own due diligence
- Suggest inspections should be conducted before they make a decision
- Outline that you can arrange for access to the property to allow these inspections to occur
- Do not recommend companies to do the inspections, and steer clear of having preferred contractor lists. Always let the client choose the inspector.
- Do not organize any inspections
Handling Short Sales
When working with buyers, be sure they understand what buying “as is” means, and that closing a short sale can take a lot longer than a normal sale. The short sale needs to be approved by the lender.
Be sure never to sell a short sale to a family member; a real estate professional must avoid having a family member or friend benefit from the sale. Your fiduciary obligation is to your seller.
Record every conversation with the seller. Suggest that both buyer and seller consult legal counsel about the sale. And do not speculate as to whether the lender will issue a deficiency judgment against your seller.
See Short Sale Risks for Real Estate Professionals.
Real Estate Fraud – Watch Out for These Transaction Red Flags
Not meeting your client in person: If your “client” always has an excuse as to why they can’t meet in person during the transaction, consider that a red flag. They may be using someone else’s identity to take out a loan, purchase a property, or even sell a property they don’t legally own.
Rushing the deal: Fraudsters often take advantage of the last-minute closing frenzy to perpetrate fraud. Beware of:
- “Last minute” wiring instructions that change bank information
- Addenda changing title or ownership
- In the case of a seller carryback loan, moving the seller’s loan to a junior position.
Read last minute changes carefully. Understand what is being changed and why and who is making the change.
Changes to contact info: Verify any changes that occur during the transaction to avoid wiring money to a fraudster’s bank account.
Monetary instruments that no one recognizes. Just recently, a “buyer” attempted to make an all-cash purchase using a “Bill of Exchange” issued by the US government. The “buyer” claimed it was a legitimate instrument and wanted escrow and the seller to accept it.
- Red Flag #1: The “buyer” refused to deposit it into his own bank and wire funds to close
- Red Flag #2: The instrument had a significant typo
- Red Flag #3: The “buyer” threatened to cancel the deal if they wouldn’t take the instrument
- Red Flag #4: the escrow officer’s bank had never seen such an instrument and advised to decline it
Non-Real Estate Escrow/Closing transactions: Real estate errors and omissions policies typically don’t cover non-real estate escrow/closing transactions. Be wary of requests to handle a non-real estate escrow/close as these can be complicated, use different forms and contracts, and have different standards of care. Stay with what you know.
See: Red Flags in Real Estate Transactions that Could Indicate Fraud.
Money Laundering
Be extra vigilant with buyers paying cash and not negotiating the purchase price, or whenever a third party is involved in the transaction.
Wire Fraud
Wire fraud typically happens by giving or sending money to false bank account addresses. The latest wire fraud tactics include sending instructions via text message to verify identify or make a small payment.
To avoid problems:
- Confirm wire instructions with your buyers over the phone or in person.
- Advise them NOT TO ACT on any change in wire instructions without confirming it with you by phone and email.
- Have your buyers call escrow/closing staff before and after they send a wire, so that escrow/closing knows it’s coming, and they can confirm the wire got there.
- Advise your clients never to accept new instructions directly from someone saying they’re from “escrow.”
- If your buyers send a wire, and then they call the correct escrow number that you provided, and escrow doesn’t know anything about it, they have 24 hours in which to stop the wire. But if your buyers don’t follow up to confirm receipt of the wire and 24 hours pass, it’s nearly impossible to get that money back.
See Latest Wire Fraud Scams Affecting Real Estate Transactions.
As a real estate licensee, never click on an attachment from an unknown sender. Call the person first to verify who they are. Attachments can load viruses onto your computer, and quickly spread throughout a brokerage’s entire IT system. These types of email attacks may give the scammer the ability to view and send emails in your name to your clients to change wire instructions.
Lender Fraud
Lender fraud is illegal and those implicated in lending fraud schemes can face criminal charges and jail time. Here are some ways lender fraud can occur:
Over-ask offers with post-transaction credits
When borrowers don’t have the required deposit, they may try to negotiate deals with the seller to circumvent their lender’s rules. For example, making an offer that is over the asking price and trying to get a credit refunded to the buyers at closing.
A major risk for real estate licensees is being drawn into these lender fraud schemes. If a borrower defaults on a loan, the lender could potentially sue a real estate licensee if they believe they were aware of the lender fraud.
A real estate licensee is aware of what is in the contract and what payments will be made as part of the transaction. Real estate licensees should avoid involvement in any attempts to hide things from a lender or circumvent the lender’s policies.
- If you have any knowledge that the buyer lied on their mortgage application, you must disclose that information and step away from the transaction, so you cannot be implicated in the future.
- If asked to include credits in the transaction to accommodate an over-ask offer, do not agree to this. If your seller wishes to accept an offer that includes an illegitimate credit to the buyer on closing against your advice, try to convince them otherwise due to the risks or step away from the transaction.
- If there is a legitimate credit owed to the buyer (for example a repair credit or a seller concession), always request prior approval from the lender in writing to minimize any future liability.
See How Real Estate Licenses Can Avoid Lender Fraud.
Seller Carryback Loans and Potential Fraud
Be aware of this scam, typically with residential homes priced from $2 million to $3 million.
There’s a request from the buyer for the seller to carry back a loan on a residential property.
The deal seems straightforward:
- Full price cash offer
- Quick close
However, there are Red Flags that indicate a potential SCAM:
- Minimal deposit relative to sales price, e.g., $10,000 deposit on a $2.5 million purchase price
- Buyer asks for seller to carry back a substantial portion of the sales price (usually half)
- Buyer is an LLC
- Sometimes the buyer transfers their position to another “buyer” LLC
- Prior to closing, the buyers advise they need a hard money loan instead of using cash
In this scenario, the seller has been moved to second position, with the hard money lender in first position.
This is not always obvious, and the buyers make it complicated to try to disguise the switch.
- Sometimes, the closing statements are missing information about the seller being in second position – and don’t mention the additional financing where the hard money loan was in first position
- In other cases, the seller advised he didn’t get all of the financing documents
Sometimes, the buyer gets the hard money loan with upfront cash back – so all loans combined (hard money first plus the seller carryback) exceed the purchase price.
Sometimes the buyer asks the seller for cash and adds it to the seller carry back loan.
The transaction closes, and then the problems start:
- The buyer LLC makes one payment and stops.
- The hard money lender is in first position and forecloses on the home
- The seller in second position is left to either cure the loan or lose everything
This situation is disastrous for the seller, and can be a very expensive oversight for licensees who miss the switch with the hard money loan.
Beware of any buyers that suddenly need a hard money loan near the closing date. This could be part of their plan to send all parties involved into a frenzied rush to still make the deal happen. When a transaction is rushed, it’s easier to overlook critical elements.
So always do your due diligence with all closing documents to protect your seller, your business, and your reputation.
Deed Fraud
This typically involves scammers choosing a property (often a vacant home) and gathering information to then assume the owner’s identity. They forge their name on the transfer paperwork —and arrange for the transfer of ownership of the property, while the real owner is none the wiser. The owner may not discover the fraud until they’re alerted that their property has been sold or refinanced without their approval.
Deed fraud is most common in homes that are vacant for long periods. Since long-term vacant properties are statistically at a higher risk, suggesting more frequent inspections can be beneficial. Utility bills and other documents should not be sent to their vacant property address. If they are, this is only helping the scammers to obtain confidential personal information which can then be used against the property owner.
Other less damaging deed scams involve unscrupulous companies presenting home buyers or homeowners with exorbitant invoices for deed title searches that they don’t need. A fake company could use agent/broker details (lifted from your marketing pieces) on an invoice for deed or title searches — and your clients think it’s an official invoice from you.
Red flags your clients can watch for:
- If they are no longer receiving utility bills
- An unexplained change in credit ratings
- Unexpected charges showing in bank accounts or on credit cards
- Receiving information in the mail about loans when you didn’t request them
- A tenant stops paying rent (but they may be paying the new ‘owner’ instead)
See How to Help Your Real Estate Clients Avoid Deed Fraud.
Terminating Contracts
Licensees are increasingly finding themselves a target of buyers’ frustrations when sellers will not lower the price to the appraised value, will not make inspection objection repairs, or when the HOA will not provide the necessary documents, among many other items that are beyond the licensee’s control. Buyers’ agents are increasingly being scrutinized as to whether they are protecting their clients’ interests, advocating for the buyer, and protecting the buyer’s earnest money.
Sellers are desiring to protect and realize the advantages in the contracts. When a buyer decides to terminate the contract, the seller is quick to accuse the buyer of breaching the duty of good faith and fair dealing and accusing the buyer’s agent of conspiring or tortuously interfering with the contract.
As a result, buyers are aggressively trying to retain the benefit of the earnest money. It’s critical that a buyer’s agent document and verify the legitimate reasons the buyer elected to terminate the contract, and that the notice to terminate was not only timely provided, but that it accurately provided the reason why the buyer chose to terminate.
Beware of Uncancelled Contracts
If the seller tries to back out of a contract, the buyer could say, “I’m not going to let you out of this contract.” But the buyer can’t do anything to make the seller sell the property, all they can do is file the lawsuit and try to enforce the contract. The seller may say, “Well, I’m not in contract with you anymore. I’m going to sell it to somebody else.” The problem is if that contract is still open and has not been canceled, they’re technically under two contracts.
One party to a transaction can send a cancellation notice to the other. But until both parties agree, earnest money can’t be released.
Closing Gifts
Per RESPA, there can be no financial benefit of a transaction to a non-licensee. Further, a real estate licensee can’t give a gift for which you receive any monetary fee.
Gifting services carries two problems: first, it could be seen as a recommendation unless you include a disclaimer that it is not. But second, there could be a problem with the service and then you’ll be blamed.
See more on Real Estate Closing Gifts that Avoid Problems.
Unfortunately, I have had a claim filed against my business but the attorneys at CRES were so responsive and professional…
– Mike T., Owner, Real Estate Firm
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