In our latest webinar, Kathryn Holbert from Nevada Real Estate Law and Dave Miller, Regional Vice President with Fidelity National Home Warranty, talk about the latest risk management issues for real estate.
This informative webinar covers:
- The most common reasons real estate professionals face litigation
- Misunderstandings in client communications over commissions, and the NAR lawsuit
- Pitfalls of dual agency
- Selling outside of your area
- Home warranties as Risk Management tools
- Releases when you’re asked for money
Interested in finding out more? Watch the full webinar, listen to the podcast, or read the transcript below.
Dave Miller:
Hello everyone, happy new year. Dave Miller, Fidelity National Home Warranty on behalf of CRES E&O Insurance. We welcome you to this seminar with Kathryn Holbert, our attorney in Nevada, to give us a quick update on what’s going on. Welcome, Kathryn. Talk to us about E&O claims. We’re in a market now with historically low inventories and fewer transactions. How has that affected your day to day? Are you seeing more claims in this market, or is it less, or is it about the same?
Kathryn Holbert:
It is a different market of course, and here in Nevada we are seeing an increase in inventory at certain price point levels and a decrease in other price point levels. There is still a market, there are still buyers, there are still sellers. It has even picked up quite a bit just since the first of the year, especially with sellers listing homes. But some of the inventory has been sitting for quite a while.
So, it is an interesting market. In the almost 20 years that I’ve been doing this, 90% of my cases have always been non-disclosure cases. Regardless of what kind of market it is, the cases that become litigated are generally non-disclosure cases that deal with the SRPD (Sellers Real Property Disclosure) and the condition of the property at the time of close of escrow.
Dave Miller:
Obviously CRES E&O members have access to the CRES risk management hotline they can call if they want to run something by an attorney. Are you seeing more calls now or maybe more people using risk management to help things go away?
Kathryn Holbert:
I am seeing an uptake in calls. One of the things that I am proud of in the very long time I’ve been doing the CRES risk management is I get repeat callers. Once somebody calls in to the risk management program and gets their problem solved, they’re so much more likely to reach out again. And that of course is the purpose of the risk management program. I like to say our number one goal is closing the transaction. Our second goal, if that is simply not possible, is at least getting agreed upon cancellation instructions. So even if nobody’s happy, they’re all agreeing to walk away and that’s how you prevent litigation. And really the risk management program is my only opportunity to do that. And I get calls on property management, I get calls on, “I need help with this addendum.” I get calls on “I have this issue on the SRPD, what should I do?”
A very large part of what I do through the risk management E&O program is counsel people and guide people on not only the legal issues involved, but communication, how you speak to your client, how you speak to the other side, and how you do that effectively. They’re almost always misunderstanding cases and the seller says, “You never told me.” And the buyer says, “Well, I did, but this is how I said it.” And then maybe the agents didn’t understand, but proper communication is what prevents lawsuits.
Effects of the NAR Lawsuit on Client Communication
Dave Miller:
This NAR lawsuit. Tell us what your thoughts are there.
Kathryn Holbert:
The NAR lawsuit is very interesting. It’s a billion-dollar lawsuit that essentially comes down to a misunderstanding. The key word in that lawsuit was collusion. And that is what the plaintiffs kept hammering is that the agents and the association were colluding to keep the commissions high at 6%. Whether that’s high or not depends on who you are, but there was not effective communication between the agents and the buyers and the sellers as to who was paying this commission. Of course, the sellers were saying, “I did not know I was paying both sides of the commission, and you were colluding and keeping that information from me.” And that’s why the jury came back the way they did. And the other big thing about the success of that NAR lawsuit is the plaintiffs were telling the jury everybody should pay their own commission, which is usually what happens on the commercial side.
But there are a lot of problems about why that isn’t feasible on the residential side, especially the lower end residential side. When individual home buyers are struggling to come up with a down payment on an FHA loan, they simply cannot pay the commission on top of everything else. And I won’t get into what I think some of the solutions to the overall big problem are. It will be years before there’s any final decision on that lawsuit. There are still motions pending before the trial court, and once all those motions are resolved, it’s going to be appealed by one side or the other. And it may even work its way up eventually to the Supreme Court, but that again will be years.
But what I am telling people now, “What that means to you is talk to your clients, whether you’re representing the buyer or the seller, you need to talk to your clients about how you are getting paid, who’s paying you, what you expect to be paid.” And people are scared to have these conversations and yet it is a perfect opportunity to inform clients of the value that you are providing them. If you think you’re entitled to a 3% commission, explain to clients why, what they’re getting, and what you can provide to them as a real estate professional that they can’t do themselves or can’t get somewhere else on their own.
Dave Miller:
Is it your advice to have something in writing? Is there a form that now is going to be coming out that says, “I’m the seller’s agent or I’m the buyer’s agent, I’m going to be paid X amount.” Is it a percentage or is it the dollar amount?
Kathryn Holbert:
Buyer-broker agreements have always existed, and there are some agents and brokers who always use them routinely. There are forms available through the associations. Some of them are better than others and none of them are mandated. And I have been encouraging people to dust those off, look at those, analyze them. If the form doesn’t really fit what you want to do, what do you want to do? You can make a very short-term buyer-broker agreement if you want. You can limit it to a specific property. There are a lot of things you can do as you’re discussing that with your clients, and I’ve been told by brokers recently they are seeing sellers wanting to share a half a percent or 2% or 1%.
So, I think sellers and sellers agents are testing that out and trying to push those boundaries. I’ve seen brokers recently do buyer-broker agreements and say, “I want 2.5%, whatever I can get from the other side, great, I’ll let you know what I get from the other side, but if I don’t get my full 2.5% from the other side, I expect it to come from you.” And that is a very clear way to communicate that and it is perfectly appropriate. And of course, it’s 100% negotiable, but it’s important that it be presented and discussed as an agreement, not like “This is what you have to pay me, sign here.” Those are the conversations that resulted in our lawsuit.
Dave Miller:
I think you made a great point about how the interest rates have affected people saying, “Hey, it’s already tight in this transaction for money. Now I’m paying this side and that side.” Is this considered like a consumer protection law? Was this brought up because of higher rates and people crying foul? Why was it brought up now and not 10 years ago?
Kathryn Holbert:
The value in the NAR lawsuit was that it was a class action, pulling all the sellers together. None of the issues in the lawsuit are new issues, none of them were caused by the current market. A 6% has been the routine broker commission for a very long time. It was just simply a smart attorney figured out, “I can make a class action out of this.”
The Pitfalls of Dual Agency
Dave Miller:
We talked before about dual agency. Should a seller’s agent assist the unrepresented buyer in a transaction, talk about some of the pitfalls of dual agency.
Kathryn Holbert:
Nevada does allow dual representation. Every transaction has the form, Duties Owed by a Nevada Licensee. In addition, there’s the Consent to Act form saying you could act for both parties or you can only act for one. You’ve got to get both forms signed.
My concern is when an unrepresented buyer approaches a seller’s agent and says, “Hey, I can’t pay my own commission. I want to just do it myself.” Then the agent has got to be very clear on what their role is, not only with the buyer and the seller, but with themselves. They cannot say, “I’ll just help you out, but I won’t represent you.” If an agent is going to assist the buyers in any way, he/she is representing them under the law, and the right form should be signed to do it correctly
Now, if the seller is only paying 3% and isn’t going to pay you to represent the buyer, I don’t recommend that you help the buyer, but you are allowed to do that in Nevada. But what is going to get agents in trouble is if they do that part way and pretend that they’re not really representing the other side. That is going to get them involved in a lawsuit and in trouble with the Real Estate Division.
Dave Miller:
Dual agent transactions are a nightmare with claims. I know it sounds great to get both sides, but how do you convince a jury that you have a fiduciary duty to this side and that side at the same time?
Kathryn Holbert:
You cannot effectively represent both parties that inherently have competing interests.
Dave Miller:
I think you’ve always recommended having another agent in the office represent the other side.
Kathryn Holbert:
At least do that. If the brokerage is going to do both sides, at least have different agents representing the buyer and the seller.
Selling Out of Your Market Area
Dave Miller:
There are six different associations in Nevada. You have different laws down in southern Nevada, different in northern Nevada, and different forms through the different associations. How does that affect Nevada licensees selling property in Las Vegas versus Reno and other places?
Kathryn Holbert:
The primary difference is the different forms. The majority of the forms — the Duties Owed, the Consent to Act and the Sellers Real Property Disclosure in Nevada are the only forms that are done by the Nevada Real Estate Division on the state level.
All the rest of the forms are done by the individual associations. And the forms are quite different.
Dave Miller:
If an agent is selling a house outside of his or her association, what are the lawsuit risks?
Kathryn Holbert:
The biggest risk of a lawsuit is if you use a form you (or other parties to the transaction) are not familiar with.
Let’s say you work in southern Nevada, and you’re going to the Northern Nevada market. You’re very comfortable and familiar with the Southern Nevada forums and you say, “Hey, I like this form better, I want to use this form.” Nobody up north is familiar with that form. You’re going to have problems with misunderstandings because either they’re using a form that you’re not familiar with or you’re using a form that they’re not familiar with. If you’re going to practice in another geographical area that uses different forms, just make sure you’re very familiar with them. If you’re not, call CRES Risk Management.
Home Warranty as a Risk Management Tool
Dave Miller:
At Fidelity National Home Warranty, we always promote that 95% of lawsuits are buyers suing sellers. A home warranty plan is one product that stays with the buyers after the close of escrow. How can a home warranty be a risk management tool in a transaction, like how keeping the buyers happier after the close of escrow could maybe limit a lawsuit?
Kathryn Holbert:
About 90% or 95% of my cases have always been over the Sellers Real Property Disclosure and nondisclosure issues, which of course relate to the condition of the home. Essentially what those lawsuits are is, “The home had this problem, this defect, at the time I closed escrow, and I didn’t know that it had this problem.” Well, if it’s a problem that the home warranty will fix, the problem is solved. If there’s a home warranty and the buyer calls that home warranty and the home warranty comes and takes care of the problem, there’s no lawsuit. If it’s a bigger problem or there are issues with the home warranty claim, of course then it could go forward. But even in that instance, the home warranty is very valuable to have because it could possibly reduce your retention (out of pocket claims expense) due under a claim. So, it is just best practice to always have a home warranty on every transaction. And the seller providing a home warranty for the buyer is always a show of good faith.
The agent usually needs to pay for the home warranty to get the reduction in their Errors and Omissions insurance deductible. So as the agent, provide the home warranty to your seller to help the home sell and help prevent problems after the sale.
Issues CRES Risk Management Can Help With
Kathryn Holbert:
I get a lot of property management questions, questions regarding the security deposit, transmittals, and general terms of the lease. “This is what they’re doing. Is this a violation? How do I handle this problematic tenant or this problematic landlord?”
The other broad category is “How do I close this transaction?” Problems come up in a transaction and the licensee will say, “This particular issue is what has arisen in this transaction. How do we navigate this and what are the documents that we need? How do we reach a resolution on this?”
A lot of those are related to disclosure issues, some kind of condition of the property that came up during an inspection. And maybe they’re trying to do a credit in lieu of repair or they’re making repairs, but they can’t be done until after close of escrow.
These are exactly the kind of things that if they’re not properly handled before close of escrow cause a lawsuit after the close of escrow. So, if you’ve got a disclosure issue that’s causing a hiccup in your transaction, reach out. Let’s make sure we get that completely taken care of before escrow closes.
Dave Miller:
Are you drafting a lot of releases? You’ve said that if the agents are being asked for a concession of a dollar amount, you’ll sometimes tell them, “Go ahead and concede that $1,000 because this could become a two or $3,000 claim later.” Are you drafting something that says, “Hey, for this $1,000 we’re done?”
Kathryn Holbert:
Yes. Once somebody makes a demand and says, “I have this complaint against you, I want you to pay X number of dollars.” What you are doing at that point in time is buying a release. So, you do not pay them unless you get your release. And if you need help drafting it, that is something we can usually do through the risk management program. But you don’t pay anybody any money unless you get that release.
It doesn’t matter if you did anything wrong or not because what you’re doing is buying the release. So it could be, “In this particular instance, $1,000 is a good price to pay for that release.”
But $10,000 is not.
Dave Miller:
It’s a scare tactic. “I need $10,000.” And a lot of people are going to push back and say, “Okay, how about I just give you five?”
Kathryn Holbert:
A lot of that could be negotiable, and I can help people understand the value of the claims, which of course determines the value of the release.
Dave Miller:
All great information. I just want to thank you so much, Kathryn. And we’ll meet in the next couple of months and talk a little bit more about property management.
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