LEGAL CORNER

Question Seems like more and more of my prospective residents have past due balances on their credit reports and outstanding collection accounts. Years back I wouldn’t even consider someone with a collection account, but if I did that now, I’d have an empty building! What do you think?

 

Answer According to a recent study just released by the Urban Institute, 35.1 per cent of folks with credit records have past due debt that is in collection. That’s one out of every three people you see on the street. Unpaid rent, student loans, credit cards, gym memberships, cell phone and medical bills are most common. As a Lessor your task is to weed out the applicants to determine which of the several will be the ‘best’ pick for your property and will more likely than not comply with the rental terms and honor the obligations created. Past articles have described the screening process and the criteria you should have established. Regarding debt and collection accounts, consider the amount outstanding, the type of debt (i.e. medical vs rent), whether or not the prospect voluntarily disclosed the obligation, and whether or not he/she is making an attempt to re-pay the obligation. Trust is key, a prospect who volunteers the information and is making an attempt at satisfying the debt is preferable to the applicant who doesn’t disclose the collection account, denies the obligation when asked or who blames the past landlord or other creditor for misdeeds. Of course, in an ideal world, all prospects would honor their credit obligations, pay their debts when due, and be honest and truthful in the application process.

 

Question Always been a nice and quiet community, no bother, no worries. Everyone kept to themselves; never ever had complaints about behavior. Well, that all changed when I rented to these last two characters! Ever since these clowns moved in, flashing me their ‘doctor’s note’ saying they could smoke pot, they’ve been puffing away ever since. Apparently they claim to be ‘disabled’ and that because they are ‘disabled’ they get to do whatever they want; smoke literally billows out of their apartment! I’m concerned about lots of things, but mostly, the little girl who lives next door, I believe that she’s asthmatic. How much more of this must I, and the neighbors take?

 

Answer The audacity of some medical ‘professionals’ to abuse and game the system by willfully prescribing the use of ‘medical marijuana’ to non-disabled fraudsters is an affront to all truly disabled persons. As of this writing, the use of marijuana, medical or otherwise, is still illegal under federal law. California enacted the Compassionate Use Act which allows for the possession of a limited amount of marijuana, for personal use, provided certain requirements are met. According to the California Department of Justice, qualified patients and caregivers may possess 8 ounces of dried marijuana, as long as they possess a state-issued identification card. In addition, they may only maintain 6 mature or 12 immature marijuana plants. Local governments may allow patients or caregivers to exceed these base levels. In addition, marijuana smoking is also restricted by location. It may not be smoked wherever smoking is prohibited by law, within 1000 feet of a school, recreation center, or youth center, on a school bus, or in a moving vehicle or boat. The right to ‘smoke’ marijuana in your apartment community is not automatic, and will depend upon the individual facts of each case. The use of non-medical marijuana is illegal under both California and federal law, and cannot be used or smoked anywhere, including your community, and can be grounds for termination of their tenancy. The use of medical marijuana requires that the user be disabled, and the disability must be ‘verifiable.’ Additionally, the disabled individual must request a “reasonable accommodation” from you the housing provider prior to just lighting up. Once the disabled person makes the request for a reasonable accommodation, you are obligated to consider the request, and attempt in good faith to accommodate the request in a reasonable manner. The accommodation does not necessarily require you to ‘grant’ the request outright, but you must make a good faith effort to provide an accommodation that addresses the disability, but does so in such a manner that it does not unreasonably ‘burden’ you the housing provider. The courts will apply a “benefit to the requestor” versus a “burden to the housing provider” standard in determining whether or not you met your obligation to reasonably accommodate the disability. In your specific situation, the initial hurdle for your new residents to surpass is to establish that one or both truly has a “verifiable” disability. A ‘doctors’ note, provided it has not been forged, although highly suspect will generally satisfy the extremely low threshold here in California. The reasonable accommodation, their request to smoke willy nilly within the apartment, must be balanced with the ‘burden’ to you the housing provider, and those other residents that might be affected, i.e. the asthmatic child living next door, or any other resident that has a sensitivity to second hand smoke. It is conceivable, and probably likely, that an asthmatic child when exposed to the smoke billowing from next door, might have a devastating and fatal reaction. Certainly the neighbor child, with a truly verifiable disability, asthma, is entitled to be free of the exhaled smoke as a “reasonable accommodation” for her verifiable disability. When balancing the “benefit” of being able to light up in their apartment, with the “burden” to you as well as the extreme life threatening burden to the asthmatic child, courts would most likely find that a reasonable accommodation would be to prohibit the smoking of the marijuana within the apartment unit, or in any place that might affect the asthmatic child, or others with such a sensitivity to smoke, but provide an area within the community, possibly a portion of the outdoor common area that may be used for the smoking of their medical marijuana, or may even require the tenant to ‘ingest’ the marijuana through prescribed pills or capsules or to ingest by eating, i.e. brownies. Remember, reasonable accommodation issues are extremely fact sensitive and the analysis is dependent on a proper review of the relevant facts. Always contact an experienced attorney when faced with a request for a reasonable accommodation, as the issues are typically complex and a reasoned response must be made in a timely manner.

 

Question I’ve always heard that I should post my rental criteria in a conspicuous place so that applicants can plainly see whether or not they are qualified before they submit their application. I typically require that the applicants combined income exceed three times the rent, however I might make exceptions. Also, in years past, a foreclosure on an applicant’s credit report was an automatic disqualifier, but after attending your tenant screening class, I have reconsidered. With so many exceptions to my rental criteria, my sign would be huge! How do I handle this?

 

Answer Yes, it’s a good practice to post your rental criteria in a conspicuous place. The details and specifics of your rental criteria, however, do not need to be included, as these details and specifics are not necessarily static, that is, they may change or evolve over time depending on your situation. For example, your three times income requirement may work fine if you have a single vacancy and a dozen applicants, however it may be a bit too restrictive in the present economy, or in the event you have three vacancies, your phone hasn’t rung in days, and you’ve only received a single application in the past two weeks. Every owner should establish the following as their general rental criteria. A qualified applicant should: i) have a verifiable and positive credit history; ii) have a verifiable and positive past tenancy history, iii) have sufficient and verifiable income to meet his or her present and future financial obligations, and iv) should not pose a risk of harm to the rental property or to others. These general rental criteria can and should be applied equally and fairly to all applicants, and in compliance with all fair housing rules. Once applied, the best applicant should be accepted, not necessarily the first to apply.

 

This article is presented in a general nature to address typical landlord tenant legal issues. Specific inquiries regarding a particular situation should be addressed to your attorney. The Duringer Law Group, PLC, one of the largest and most experienced landlord tenant law firms, has successfully handled over 235,000 landlord tenant matters throughout California, and has collected over $140,000,000.00 in debt since 1988. The firm may be reached at 714.279.1100, toll free at 800.829.6994 or 877.387.4643. Please visit www.DuringerLaw.com for more information.

A CONTINGENCY OFFER IS A LOT BETTER THAN NO OFFER AT ALL

Now that the market has slowed a bit – i.e. returned to normal— contingency offers are more common and, I would argue, more palatable than they have been during the past few years.

 

By contingency offer I mean an offer to purchase that comes from a buyer who still has to sell his house (or some other property) in order to perform.  His purchase offer is contingent on the sale and close of escrow of his property.  There are many other types of contingencies, and in that sense just about every purchase offer is contingent.  Some are contingent on the close of escrow on a property already sold.  Most offers are contingent on the buyer receiving full loan approval.  Most are also contingent on inspections yielding satisfactory results, or fixing things that need to be fixed.  Nonetheless, in the business, a contingency offer usually means one where the buyer has not yet sold his property.

There are certainly situations where it makes sense to entertain and perhaps accept a contingency offer.  It certainly makes sense when the number of potential buyers is not large.  This could be because of general market conditions, or it could be attributed to the fact that the property you want to sell has limited appeal, or maybe it is just in a price range out of reach to most.  In any of those conditions it makes sense to try to work with the proverbial bird in the hand.

Naturally there are factors to take into consideration.  A primary one is the salability of the buyer’s property.  What one especially wants to know is whether it is or will be priced right.  If the property is local, a listing agent should be able to get a good fix on this.  If it is out of the area it will probably be necessary to establish contact with a knowledgeable broker in that locale.  Some have suggested the strategy of insisting that the buyer’s listing price be reduced by a certain amount if a sale has not occurred within a specified amount of time.

Another consideration that has to be faced when considering a contingency offer is that you don’t want to lose potential market exposure while you are waiting for the buyer to try to sell his house.  The purchase contract (RPA-11) produced by the California Association of Realtors® (CAR) provides a means for dealing with this.

There is a provision in an addendum to the CAR contract that allows for the seller who is accepting a contingency offer to keep his property on the market, with the provision that, should he receive another acceptable offer, the contingency buyer has a specified amount of time (usually 72 hours) to remove the sale contingency, to remove the loan contingency, and to do whatever else will satisfy the seller.  Usually the latter means demonstrating that he, the contingency buyer, has the ability to close even if his house isn’t sold.

Frequently this condition is characterized, albeit inaccurately, as a 72-hour first right of refusal.  Regardless of the terminology, the point is that the contingency buyer has that amount of time to, as it were, fish or cut bait.

Sellers or their agents have often been reluctant to be in this “first right of refusal” situation, because they felt that no other agent would show their property.  Part of the reason for this concern was that the property would no longer be listed in “active” status in the multiple listing system (MLS), hence buyer’s agents would not even see it when they did a computer search.  In some MLS systems (such as California Regional MLS) there is a “middle ground” known as back-up status which means the property is still on the active market and the seller is soliciting further offers.  Good agents who are looking for property will not ignore such listings, but will call the listing agent to find out what the situation is.  Many would be willing to write a back-up offer, knowing of the contingency situation.

Needless to say, there are other factors to be considered as well when entertaining a contingency offer, but these are the primary ones.  One thing is for certain, there can certainly be worse things for sellers than a contingency offer – no offer at all.

 

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Bob Hunt is a CAR director and is the author of Real Estate the Ethical Way.  His email address is scbhunt@aol.com

THERE’S A LOT TO CONSIDER WHEN CHOOSING A HOME INSPECTOR

Many times, in the course of reviewing transaction files, I will read that an agent has recommended to the buyer that he or she should have the home inspected by a licensed home inspector.  While one has to appreciate the earnestness of such advice, it is nonetheless at least a trifle amusing.  This is because there is no licensing of home inspectors here in California.  California is one of 21 states that do not regulate home inspection services via some sort of licensing mechanism.

Of all people, real estate agents know that the mere possession of a license is no particular guarantee of service quality.  Nonetheless, when there is no licensing of what, to many, would seem a fairly technical business, questions do arise as to how one goes about selecting a practitioner.  One approach is to look for some sort of professional validation such as certification.

Indeed, a number of professional liability (Errors and Omissions) insurance companies provide incentives to their real estate customers to use certified home inspectors (or, to do the equivalent, obtain a “certified home inspection”).  But then the question arises, “Certified by whom?”  In some cases the insurance company may name which certifying organizations are acceptable; but, in others, the choice is left to the agent or broker.  The insurance company just wants to know the inspector is certified.

Just as possession of a license to do something is not guarantee of quality, neither is the fact that someone has been certified.  There are dozens of organizations that provide certification in the home inspection field, just as there are dozens of organizations that provide certifications in various aspects of the real estate business.  (One can only imagine how many real estate agents became “certified short sale specialists” during the past few years.)

Some certifying agencies are undoubtedly quite rigorous and good; others, not so much.  (As far as home inspectors go, I am neither qualified nor brave enough to single out here which are the really good ones.)

So what is a real estate agent to do when it comes to choosing or referring a home inspector?  (I include choosing because that is often what the client wants and requests.)  Obviously, in a state where licensing is required, then a license is a must.  Secondly, despite what has been said, an inspector should be sought out who has membership and training through one of the professional societies.  (It really doesn’t take a whole lot of effort to get an idea of which organizations seem substantial and which appear to be on the fly-by-night side.)

One of the most important things that an agent can do – that most consumers are just not in a position to do – is to ask around amongst one’s peers.  And I don’t mean that from the perspective that you want to avoid inspectors who have the reputation of being “deal killers.”  Sometimes that reputation just means that they are thorough, which, as a fiduciary, is just what you want.  (Although, on the other hand, it is perfectly legitimate not to want someone who is a bad communicator or who leans toward negativity.)

There are many specific questions to be asked: “What are their reports like?”  “Do they welcome buyers being present at the inspection?”  “What is their level of experience?”  “Do they carry professional liability (Errors and Omissions) insurance?”

A home inspection is one of the most important parts of a real estate transaction.  Not only should agents recommend that buyers obtain one, they should make every effort to see to it that the inspector is really good at what he or she does.  After all, you’d rather have the inspector tell you about a defect or problem, then to hear about it, after closing, from the buyer’s lawyer.

 

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Bob Hunt is a director of the California Association of Realtors® and is the author of Real Estate the Ethical Way.  His email address is scbhunt@aol.com

POLICY ON REAL ESTATE TEAM NAMES IS CLOSE TO BECOMING LAW

Assembly Bill 2018 (Bocanegra) is quickly working its way through the California legislature in Sacramento.  The bill deals with the use of team names and fictitious business names in the real estate business.  The bill is the result of collaborative work by The California Association of Realtors® (CAR) and The California Bureau of Real Estate (CalBRE).  It has no known opposition.  The bill passed out of the Assembly in May and is moving through Senate committees.  Its passage is extremely likely.  Real estate professionals should pay attention to provisions of the bill.

Some will remember that a little more than a year ago, the California BRE advised the real estate community of new guidelines it was adopting regarding team names.  This was occasioned by the Bureau’s concern that the increased use of team names made it difficult for consumers to identify who were the actual responsible parties of real estate activity conducted by agents affiliated with a team.

The initial guidelines published by CalBRE were fairly clear, but complying with them posed a variety of difficulties.  One problem was that they required that all team names be registered as fictitious business names (more commonly known as DBAs — for “doing business as”) of the broker, not the agent(s).  Thus, if I had a team name (“The Bob Hunt Team”) that became a DBA of the brokerage.  Of course, this, too, was somewhat misleading.  Because of this and other problems, CAR created a task force to work with the BRE on creating a policy that would be mutually satisfactory and that could be put into legislation (as an amendment to the Business and Professions Code).  Hence AB 2018.

The bill recognizes two kinds of names in addition to the use of a person’s actual name: team names and fictitious business names.  The following descriptions are taken from the actual language of the bill.  Any emphasis is added by me.

“Team name” means a professional identity or brand name used by a salesperson or broker associate.  A team name does not constitute a fictitious business name if all of the following apply:

(A)  The name is used by two or more real estate licensees.

(B)  The name includes a licensee’s surname in conjunction with the term “associates,” “group,” or “team.”

(C)  The name does not include terms that imply the existence of a real estate entity independent of a supervising broker.

Additionally,

(a) …advertising that contains a team name, including print or electronic media and “for sale” signage, shall include the licensee’s name and license number.

(b) The supervising broker’s identity shall be displayed as prominently as the team name in all advertising.

(c) The advertising material shall not contain terms that imply the existence of a real estate entity independent of the supervising broker.

As for fictitious business names, “A supervising broker may, by contract, permit a salesperson to do all of the following:

(A)  File an application with a county clerk to obtain a fictitious business name.

(B)  Deliver to the bureau an application, signed by the supervising broker, requesting the bureau’s approval to use a county approved fictitious business name that shall be identified with the broker’s license number.

(C)  Pay for any fees associated with filing an application with a county of the bureau to obtain or use a fictitious business name.

(D)  Maintain ownership of a fictitious business name, as defined…, that may be used subject to the control of a supervising broker.

Additionally,

Marketing materials, including print or electronic media and “for sale” signage, using a fictitious business name obtained in accordance with [the above] shall include the supervising broker’s identity in a manner equally as prominent as the fictitious business name.

… advertising, including print or electronic media and “for sale” signage, containing a fictitious business name obtained in accordance with [the above] shall include the salesperson’s name and license number.

There still may be some “tweaking” to do with AB 2018 – I know I can think of a few things – but no one should expect any substantial changes.  One thing in particular seems particularly unlikely to be changed.  That is the requirement – for both kinds of names – regarding the inclusion of the broker’s identity in all marketing materials and “for sale” signage.  In both cases, this is to be “equally as prominent” as either the fictitious business name or the team name.

It’s hard to see how this can be interpreted any other way than to mean that, on for sale signs and marketing material, the broker’s name will need to be no smaller in font size than the team or fictitious business name.  This represents a major departure from current practices where one is likely to see a Team Name this Big and a Broker Name this Big on the same sign.

AB 2018 is not emergency legislation and shouldn’t be expected to take effect immediately.  It probably won’t become effective until next year, maybe not even until June.  So why should real estate professionals be paying attention now?  Well, if you’re going to buy signs this year, you will probably expect them to last at least a couple of years.  It makes sense to give some thought to creating signs now that will be compliant in the years to come.

 

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Bob Hunt is a CAR director and the author of Real Estate the Ethical Way.  His email address is scbhunt@aol.com

CALIFORNIA RESIDENTIAL PURCHASE AGREEMENT UNDERGOES THOROUGH REVISION

California’s standard Residential Purchase Agreement (RPA), produced by the California Association of Realtors® (CAR) is undergoing a major revamping.  While the changes being made do not represent a radical transformation or restructuring of the nature of the agreement, there are still many, many changes.  Some of them are only slight alterations in wording; others are “tweaks” on the way certain issues are handled; and a few will constitute substantive changes in transactional practice.

It is often said that the armed forces of nations are constantly preparing to fight the last war in which they were engaged.  Something of that goes on in the revision of standard contracts as well.  We try to make revisions that will accommodate and account for the peculiarities and problems encountered in the most recent market.  But, sometimes, as markets inevitably change, those recent issues and problems just fade away.  To be replaced by new ones, no doubt.

In no particular order, then, we review some of the more noticeable changes to the California Residential Purchase Agreement.

  1. Added to the Financing section is a paragraph entitled Lender Limits on Buyer Credits.  It reads:  “Any credit to Buyer, from any source, for closing or other costs that is agreed to by the Parties (“Contractual Credit”) shall be disclosed to Buyer’s lender.  If the total credit allowed by Buyer’s lender (“Lender Allowable Credit”) is less than the Contractual Credit, then (i) the Contractual Credit shall be reduced to the Lender Allowable Credit, and (ii) in the absence of a separate written agreement between the Parties, there shall be no automatic adjustment to the purchase price to make up for the difference between the Contractual Credit and the Lender Allowable Credit.”

This is to say, a buyer who offers a big price, but then seeks to reduce it by asking for big credits, had better be prepared to deal with the lender’s disallowance of those credits.

  1. Another addition to the RPA is a section entitled “Representative Capacity.”  It deals with parties who are signing “in a representative capacity and not for him/herself as an individual.”  Such parties must complete a specified addendum and must deliver within three days after acceptance of the contract “evidence of authority to act in that capacity.”  Failure to deliver such evidence triggers a Seller’s right to cancel.
  2. Loan contingency is not automatically tied to appraisal.  “If there is no appraisal contingency or the appraisal contingency has been waived or removed, then failure of the Property to appraise at the purchase price does not entitle Buyer to exercise the cancellation right pursuant to the loan contingency if Buyer is otherwise qualified for the specified loan.”
  3. Added to the section detailing what items are included and excluded from the sale is a section for Leased or Liened Items and Systems. The need for this was occasioned primarily by the increasing presence of solar systems that come with a long-term lease.  The Buyer’s approval of and ability to assume the lease is made a contingency of the purchase.
  4. A large Scope of Duty section has been added to the purchase agreement.  It has nothing to do with contractual terms between buyer and seller.  It is a CYA section for the protection of brokers.  It details the many things that the brokers are not responsible for and that they are not required to do.  The entire section was taken from an existing buyer and seller advisory, which, unfortunately, is not always used by agents.
  5. A major change that will particularly be noticed by Southern California agents is the removal of the termite report from the list of inspections whose cost is allocated, by negotiation, either to the buyer or the seller.  Additionally, a widely-used addendum (WPA) – indicating who will pay for termite repairs – is no longer referenced in the contract.

This is not to say that buyers can’t get termite reports and request that repairs be made.  They can, just as they can with respect to roofs, windows, etc.  The point is that termite inspections will now be treated the same as any other inspection a buyer might want to make.  The same with the request to make repairs.  Termite work is no longer, so to speak, enshrined in the contract, and there is no implication that sellers must agree to bear the entire cost of termite repairs.

The revised purchase agreement is in its fourth and final draft form.  CAR members can view it on the Association Web Site at www.car.org.  Only a short period remains for comments to be submitted.  In August, CAR legal staff members will begin teaching courses on the new document.  It will be released for use in November.

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Bob Hunt is a CAR director and a former chair of its Standard Forms Committee.  He is the author of Real Estate the Ethical Way.  His email address is scbhunt@aol.com

CALIFORNIA BUREAU OF REAL ESTATE ROLLS OUT “CITE AND FINE” POLICY

Law book

The Summer 2014 issue of the Real Estate Bulletin, produced by the California Bureau of Real Estate, announces that the Bureau has finalized its authority to issue citations and assess fines without first going through a lengthy, and sometimes expensive, process of administrative hearings.  The details of the “cite and fine” program can be found in Business and Professions Code 10080.9 and Commissioner’s Regulations 2907 (effective July 1, 2014).  These codes not only set forth procedures for citing and fining errant real estate licensees, but also they provide for similar procedures to be applied to unlicensed persons who are doing things that require a license.

 

How will “cite and fine” work?  The Bulletin explains it thus:  “A citation or other formal action will be considered when a violation is found after an investigation, audit, or examination of a licensee’s records by CalBRE in response to a complaint, through random selection of a licensee for an office visit, or from completion of a routine audit.  Depending upon the nature (such as the level of seriousness and potential for harm) and type of the violation, the appropriate action will be determined.”

 

The Bureau says that “a citation is likely the appropriate action”  in cases of “relatively minor and technical violations, especially in those instances where there has been no injury or loss to a consumer…”.  They include in their examples of relatively minor violations “failure to disclose a real estate license identification number in their first point of contact advertising material”.  It seems a safe bet that another kind of violation that will make “easy pickings” and that will fit the “minor violation” criterion will be non-compliant signage such as signs that do not adequately identify the employing broker — signs where the agent or team name is in very large print and the broker’s name is in very small print.

 

The Bureau says that a citation will most likely “include an administrative fine assessed for each violation.  The range of a fine — or the total of a fine assessed to a licensee — is set by statute at $0 to $2,500.  The maximum fine amount for real estate licensees is $2,500 per citation…”  (Fines assessed against non-licensees may go considerably higher.)  “Before a fine amount is assessed, each violation is evaluated according to specified criteria, which helps establish an appropriate fine amount.”

 

Suppose a citation has been received.  “The citation will identify the violation(s) you committed, provide information on how to pay the fine, describe any corrective action needed (if necessary), and explain the process for contesting the citation, if you choose to.”  This process will be familiar to Californians who have already had experience with various traffic citations.  It is a bit of a twist on the principle of being assumed innocent until proven guilty.  You are presumed guilty unless you want to go to the time and expense of proving yourself innocent.

 

A cynic might perceive the cite-and-fine policy as a quick and easy way for the BRE to replenish its administrative coffers after years of budget cuts and restraints.  But this is not so.  “As for fines received by CalBRE, all money will go into CalBRE’s Real Estate Consumer Recovery Account, which is used to assist victims of real estate fraud committed by licensed agents and brokers.”

 

Offenders will appreciate the policy that “information regarding specific citations issued — and any fines paid — will not be posted on CalBRE’s website, nor will such information be attached to one’s individual public licensee website record.”  As it stands now, if there has been a hearing and a violation has been found, that information appears on the publicly-accessible website.  Still, the information is public and can be obtained through a Public Records Act request.

 

The Bureau says that it “considers the issuance of citations an opportunity to help educate both licensees and nonlicensees alike and to encourage and reinforce compliance with Real Estate Law.”  If that can be accomplished at a reasonable cost without a lot of hassle, it will be a good thing.

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Bob Hunt is a director of the California Association of Realtors and is the author of Real Estate the Ethical Way.  His email address is scbhunt@aol.com

DUAL AGENCY UNDER SCRUTINY IN CALIFORNIA

DualAgencyA recent California Appellate Court ruling is liable to have major long-term consequences for the real estate practice of dual agency in the Golden State.  In this case (Hiroshi Horiike v. Coldwell Banker, Second Appellate District, April 9, 2014), the dual agency was not a matter of a single person – real estate agent – representing both buyer and seller.  Rather, it was a case of different agents from different offices (of the same firm) representing the two parties.

 

Chris Cortazzo, a salesperson for Coldwell Banker Residential Brokerage (CB) listed a property in Malibu in September of 2006.  In the listing, and on a flier, he stated that the home “offers approximately 15,000 square feet of living areas.”  The MLS service that provided public record information stated that the living area was 9,434 square feet.  The building permit indicates a single-family home of 9,224 square feet, a guest house of 746 square feet, a garage of 1,080 square feet, and a basement of unspecified area.  The listing agent had or subsequently obtained a letter from the architect “stating the size of the house under a current Malibu building department ordinance was approximately 15,000 square feet.”

 

An offer was made the following March.  In response to the buyers’ request for verification of the square footage, they were given the architect’s letter.  The listing agent also advised that they have a qualified specialist verify the square footage.  He also gave that advice on the Transfer Disclosure Statement.

 

Unable to obtain building plans or to receive an escrow extension for further investigation, the buyers cancelled.

 

In July, the listing field for square footage was changed to “‘0/O.T.’ by which he meant zero square feet and other comments.”

 

A couple of months later, the plaintiff, Hiroshi Horiike, was working with Chizuko Namba, a salesperson in another CB office.  She arranged for him to see the Malibu property.  Horiike received a copy of the flyer saying that the home “offers approximately 15,000 square feet of living areas.”  He made an offer and escrow opened in November.  Namba was provided with a copy of the building permit which she sent to Horiike along with other documents.

 

Both parties signed a confirmation of the real estate agency relationships as required by Civil Code section 2079.17.  They also signed a mandated agency disclosure form which describes various agency relationships and the duties of agents.    Among other things, that form says that “A real estate agent, either acting directly or through one or more associate licensees, can legally be the agent of both the Seller and the Buyer in a transaction…”  It also says that an agent in a dual agency situation has a fiduciary duty to both the seller and the buyer.

 

The transaction closed.  During the course of the transaction, Horiike did not receive advice to hire a specialist to verify square footage, as had the buyers in the previous transaction.

 

In 2009, Horiike reviewed the building permit in preparation for work on the property.  He could not verify the approximately 15,000 square feet of living area.  He sued CB and the listing agent.  He did not sue his agent, Namba, whom he said he liked.

 

The trial court granted one motion of nonsuit on the grounds that the listing agent had no fiduciary duty to the buyer.  Then the jury found that the listing agent had not made a false representation of a material fact, hence there was no misrepresentation.  It also found that he did not intentionally fail to disclose an important or material fact to the buyer.

 

Horiike appealed.  The Appellate Court said that “The motion for nonsuit should have been denied and the action…for breach of fiduciary duty submitted to the jury.”  Clearly, CB was a dual agent, and “When an associate licensee owes a duty to any principal…that duty is equivalent to the duty owed to that party by the broker…”  Thus, “The jury’s findings that Cortazzo did not provide false information to Horiike, or provided false information that he reasonably believed to be true, and did not intentionally conceal information, does not satisfy his duty to Horiike as a fiduciary.”  [my emphasis]  As a fiduciary, the listing agent should have gone the “extra mile” to provide the buyer with information about matters that concerned him.

 

The Appellate Court said that, because CB had fiduciary duties to the buyer, so, then, did its agents, both of its agents.  In short, the Court said that it is a mistake – and a common myth – that when there are two agents of the same company in a dual agency situation, each of them only has fiduciary duties to his/her personal client.  They are both the fiduciaries of both.  The case was remanded for a new trial.

 

There is a great deal of concern about this ruling in the California real estate community.  It runs counter to the way – rightly or wrongly — that agents and brokers have thought things were.  It certainly raises practical questions.  (In the case at hand, for example, the listing agent did not even speak the same language as the buyer.)

 

The California Association of Realtors® (CAR) will support CB in a petition for review by the California Supreme Court.  But this may be one of those situations where you should be careful what you ask for.  It is certainly possible that dual agency, as it is now commonly practiced in California, will become untenable.

 

Other states have dealt with this type of situation by creating a category called designated agents. The agents are, respectively, fiduciaries of only one party.  To be able to do this in California would require legislative action.  That would be a topic for another day.

 

Bob Hunt is a CAR director and is the author of Real Estate the Ethical Way.  His email address is scbhunt@aol.com

WHAT ADVERTISING WORKS AND WHAT DOESN’T?

AdvertisingIt’s an old adage. “We know that half of advertising doesn’t work.  The problem is… We don’t know which half.”

 

Realtors® are fortunate in this regard.  They do know what advertising doesn’t work.  Or, if they don’t, at least they have the information available to them.

 

The information can be found in the annual National Association of Realtors® (NAR) Profile of Home Buyers and Sellers.  Unfortunately, the information about advertising effectiveness – or the lack thereof – is easily overlooked, as it is somewhat buried in a literal mountain of other data.  There are lots of gems in the Profile that are, similarly, easy to overlook.

 

NAR has been publishing the yearly Profile for more than a decade now.  There has been an overall consistency to the questions asked and the topics covered, so that, in many cases, definite trends have emerged.  This is clearly the case with respect to advertising effectiveness.

 

Think of advertising as an information source about a particular product.  In the case of residential real estate, the product would be a home that is for sale.  For a typical listing, many different forms of advertising will be used.  Among the more common forms: placement in the MLS, posting on Internet sites, yard signs, newspaper ads, home books or magazines, and open houses.  Of course there are other less common forms such as television and even bill boards.

 

With the exception of the MLS, what all of these advertising forms have in common is that they are meant to provide at least initial information about the availability of the property to an audience of potential home buyers.  In the case of the MLS, information is provided to other agents who, in turn, will provide it to potential buyers.

 

We say that an ad is effective if, from among that audience, it provides the information to a person who becomes interested and ultimately purchases the property.  If the ad doesn’t do that, then, no matter how lovely or costly it might be, or how large an audience it reached, it is ineffective.

 

(O.K.  Timeout.  I know that real estate advertising may have other purposes as well.  One of its other purposes may be to provide an agent with good leads – regardless of whether they purchase the particular property advertised.  Another purpose may be – as in a splashy ad in the Sunday paper – to enhance the listing agent’s reputation among some target group of readers.  Here, we are considering the purpose of the ad from the perspective of the client – the owner and would-be seller of the property.)

 

We learn a lot from the Profile about the use of ad forms by home buyers.  Not surprisingly, they tend to use a variety of types of ads as sources of information.  The Internet is the most widely used source of information, whereas real estate agents are the second most used source of information .  51% of home buyers said that yard signs were an important or very important source of information to them; on the other hand, only 23% thought that of newspaper ads.

 

But what about the effectiveness of advertising forms?  Through what form of advertising did buyers find the home that they ultimately purchased?

 

The effectiveness of Internet advertising continues to grow.  This past year (July, 2012 – June, 2013) 43% of buyers found on the Internet the home that they ultimately purchased.  (Note:  they didn’t buy the home on the Internet; they found it there.  Almost all buyers used an agent.)  The information source second to that was real estate agents, which would be attributable to the MLS.  33% of buyers learned of the home they bought from an agent.  The third category?  Yard signs and open houses at 9%.

 

85% of the effective ads come from these three sources: Internet, agents (MLS), and yard signs.  The others, not so much.  Only 1% of buyers found their home through a newspaper ad.  Another 1% from a home book or magazine.

 

In real estate, at least, we know what advertising works and what doesn’t.  But we sure spend a lot of money on what doesn’t.  The explanation of that phenomenon I will leave to others.

 

Bob Hunt is a director of the California Association of Realtors® and is the author of Real Estate the Ethical Way.  His email address is scbhunt@aol.com

BORROWING FROM A 401(k) TO FINANCE HOME PURCHASE

According to the National Association of Realtors® 2013 Profile of Home Buyer and Sellers, 8% of first-time buyers borrowed from their 401(k) retirement accounts as a source of downpayment money.  It’s a good bet that a significant number of potential first-time buyers, as well as others, are not acquainted with how this works.  It’s also a good bet that, among those with the ability to use 401(k) funds, many are not familiar with the pros and cons of doing so.

401K

In what follows I will make a brief attempt to address such issues.  This will certainly not be a complete treatise.  Those who are truly interested should contact a competent financial advisor.  Moreover, to find out if borrowing downpayment money from one’s 401(k) is feasible, it will also be necessary to discuss this with both your lender and your employer’s benefits administrator.

 

Not every 401(k) plan allows for borrowing.  (Just one reason to talk first with the plan administrator.)  Of those that do, typically the amount available for borrowing is the lesser of $50,000 or one-half the value of the account.  In some cases, plans allow for a larger amount to be borrowed if it is to be used for a downpayment on the borrower’s home.

 

In most cases, the loan must be repaid within 5 years.  While you don’t have to go through typical qualification procedures and pay loan origination costs – it is, after all, your money and not that of some third party – there are still implications to this new occurrence of debt.  It is likely to affect your ability to qualify for a mortgage and/or the amount of mortgage for which you can qualify.  This is something you will want to check out with your mortgage lender.

 

You will pay interest on your 401(k) loan, but it will be interest you are paying into your own account.  Typically, the interest rate will be low, maybe a couple of points above prime.  Perhaps you will not be earning as much as the account’s typical investment return, but the money will be earning something.   However, the interest you pay to yourself on your 401(k) loan is not tax deductible; whereas the interest on a mortgage loan would be.

 

There is no penalty for this withdrawal of funds in the form of a loan.  However, if you are unable to repay it, there will be the standard 10% early withdrawal penalty (if you are under 59½), and the amount withdrawn will be treated as taxable income.  Moreover, if you lose your job with your current employer, you generally must repay the loan within 60 – 90 days.  Otherwise, the penalties kick in.

 

Not surprisingly, among writers on financial matters, there is a wide range of opinions as to whether or not it is a good idea to borrow from these retirement funds in order to finance a home purchase.  The chief negative focuses on the loss of earnings growth.  This is especially relevant because it is unlikely that most people would, or would be able to, continue their 401(k) contributions during the period they were also paying back the loan.  Thus, not only would the amount withdrawn not be earning the fund’s annual return, there would not be new money coming in to earn that return.

 

There is also a “double-tax” factor to be considered.  When making loan repayment, the interest paid will be with after-tax dollars.  Then, when those dollars are ultimately withdrawn, they will be taxed again.

 

On the other hand, if one assumes even a conservative appreciation rate over the years, it must be acknowledged that the borrowed downpayment money will get good returns on a highly-leveraged, (still) tax-advantaged investment.  Nor should the non-economic social and psychological benefits of home ownership be overlooked.

 

Borrowing from a 401(k) to help finance a home purchase is not a slam-dunk option for those who have such plans.  There are several considerations that need to be examined.  If it is an option, though, it is worth the effort to examine them.

 

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Bob Hunt is a director of the California Association of Realtors® and is the author of Real Estate the Ethical Way.  His email address is scbhunt@aol.com

GUIDELINES HELP IN CONSIDERATION OF PROCURING CAUSE CASES

ArbitrationThe residential real estate business is quite competitive, and it is no surprise that from time to time disputes between agents rise to a level that calls for formal arbitration.  One of the most common real estate arbitration themes has to do with claims to a commission.  Generally this involves agents who have worked with the same buyer, and the issue is which agent is the one who has earned a commission by “…procuring a buyer which ultimately results in the creation of a sales or lease contract.”

 

Such disputes are commonly referred to as “procuring cause” cases, and for years they have given the brokerage community fits.  What has been especially troublesome is the fact that there has seemed to be little consistency between procuring-cause arbitration rulings from one jurisdiction to the next, or even from case to case within a given jurisdiction.  In large part this inconsistency has been explained by the alleged fact that arbitrators have not had a clear set of guidelines to help them come to their conclusions in particular cases.

 

Some years ago, after long and often-heated debate, the directors of the California Association of Realtors® (CAR) approved a document, Procuring Cause Guidelines, that could be used “to assist arbitration panelists in deciding which of multiple brokers is the procuring cause of a given transaction.”  The document also received approval from the National Association of Realtors® (NAR).  Its use by a local association is strictly voluntary.

 

The Guidelines do not present a method that will definitively yield a decision in any particular procuring cause case.  Rather, they provide a factors chart which, appropriately enough, gives guidance to panelists with respect to the sorts of questions they should be asking and the kinds of circumstances they should be considering.

 

One thing, though, is clear.  “Procuring Cause is a factors test that doesn’t necessarily have one triggering event that will give a sure result.”  There is no one crucial factor.  That fact that Broker A introduced the buyer to the property does not, in and of itself, mean that Broker A is the procuring cause.  Conversely, even if Broker B wrote the offer that was ultimately accepted, that doesn’t necessarily mean that Broker B is the procuring cause.

 

Generally, a procuring cause complaint is filed by the broker who did not receive the commission.  “The broker who files the arbitration complaint carries the burden of proof to demonstrate, by a preponderance of the evidence, why he or she is the procuring cause of the transaction and is, thus, entitled to the commission…”  “A number of relevant factors, including the behavior of the involved brokers and the reason the buyer left the first broker, would be used by the panel to decide who gets the commission.”  Hence the factors chart.

 

“For purposes of the chart, Intro Broker is the one who did not ultimately write the contract, and Closing Broker is the one who wrote the contract that was ultimately accepted and performed services through escrow to close the transaction.”  The chart is divided as follows:

A. Connection to the Transaction.  Factors 1-7 include the relationship of both brokers to the buyer in this particular transaction.

B.  Buyer’s Choice.  Factors 8-10 focus on why the buyer left the Intro Broker.

C.  Broker Conduct.  Factors 11-18 focus on the conduct of the Closing Broker.

D.  Other.  Factors 19-24 deal with contractual and other miscellaneous issues that are relevant to the ultimate decision.

 

Some examples of relevant factors:  “Did a significant amount of time elapse between the time the first broker showed the property and the closing broker actually wrote the offer?”  If so, that factor favors the closing broker.

 

“Did the closing broker instruct the buyer to shop with other brokers, and then return to him/her when the buyer was ready to make an offer?”  An affirmative answer would favor the Intro broker.

 

“Was the closing broker a listing broker who offered to ‘cut the buyer a deal’ by lowering the commission if the buyer made an offer directly through him/her?”  That too would favor the complaining broker.

 

The factors list goes on and on (six pages), and covers most situations that are liable to arise.  It doesn’t give numerical weighting to various answers, and doesn’t yield a computable decision.  There is still room for judgment.  Nonetheless, it gives arbitrators much clearer guidelines than they once had.

 

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Bob Hunt is a CAR director and is the author of Real Estate the Ethical Way.  His email address is scbhunt@aol.com

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