That Delicate Balance

1
RISK MANAGEMENT

• That Delicate Balance
• Steve McTyeire, MBA, Broker
• Avery Yarbrough School of Real Estate

2
Alabama Real Estate Commission Rules for
Classroom CE credit

• Sign in, including license number
• You must here now to receive credit later
• 100 attendance is required
• Cell phones must be turned off during class
• Computers can only be used to take notes
• CMap - Check credit leave evaluation

3
Textbook

• 4th Edition Text Written by Jim Lawrence of LAH
• For The Alabama Real Estate Commission
• Alabama Center for Real Estate, The University of
  Alabama
• Available for Purchase 20
• Or
• Make notes on Handout

4
I. INTRODUCTION

• Two primary Goals
• Primary Goal To generate income
• Primary Goal To care for the consumer
• Purpose of the course To see that delicate
  balance between managing risk and generating
  income is obtainable.
• Good Referral

5
II. Risk Management Rules

• Federal Laws Anti-trust, Fair Housing, RESPA
• Alabama Code - contracts
• Alabama Real Estate Laws 34-27-(1-100)
• Local Laws Health Safety
• NAR Code of Ethics standard of care
• Court Decisions - Case Law
• Maybe more than one answer
• Attorneys love It depends

6
Pre Test
The roof leaks on your listing, and you know
it. Do you voluntary disclose it to A.
Consumer B. Customer C. Buyer Client in
Dual Agency
7
Final Test
The roof leaks on your listing and you know
it. If ask a direct question about the roof from
one of the below, which must you tell. A.
Consumer B. Customer C. Client in Dual
Agency D. Buyers Agent
8
Pre Test
Are Property Disclosure forms a good idea for
A. Sellers B. Buyers C. Agents
9
Pre Test
If the house is haunted, do you disclose?
10
Pre Test
Is earnest money required for a valid contract?
11
Pre Test
Is it illegal to fail to leave a copy of the
listing agreement with the seller?
12
Pre Test
Can you pay the seller 100 to list with your
company?
13
Pre Test
Does this 100 payment to the seller need to be
disclosed to the buyer?
14
Pre Test
When must earnest money be deposited?
15
Pre Test
When must RECAD be presented?
16
Pre Test
The mayor wants a new site for City Hall. Do
you need to RECAD?
17
Pre Test
Can Agency be implied?
18
Pre Test
You are a licensee and decide to sell your own
private residence on FSBO.com Do you need to
disclose your status as an agent?
19
Pre Test
Who can you Advise? A. Consumer B.
Customer C. Client
20
Pre Test
Anti-Trust Is it alright to say your broker sets
the commission rates you charge based on services
offered? How about, My broker charges what
everyone else charges?
21
Pre Test
Fair Housing As a property manager, can you
discriminate against a drug abuser? How about,
if he is in treatment?
22
Pre Test

• RESPA
• Can a lender pay for open house expenses if they
  dont attend?

23
III. PROPERTY DISCLOSURE

• Obligation to disclose in Caveat Emptor?
• HARD ?
• Where is line?
• Office Policy seller disclosure
• Shotgun Attorneys
• No one wins, even if you win, you bleed

24
Who will sue you?
25
Risk Management Tools Acronym
ACTOR A Avoid Know Rules C
Control Office Policy T Transfer Disclose O
or R Retain Insurance
26
CAVEAT EMPTOR

• The burden is on the buyer in Alabama (Last
  State)
• Modified caveat emptor state
• Exemptions are written on your HAND
• Health and Safety - Known
• Assumption of a Duty Agency
• New Construction - Expect
• Direct Inquiry - Vague

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TYPICAL LEGAL CHARGES

• Fraud and Misrepresentation
• Intentional Misrepresentation - Mold
• Intentional Concealment - School
• Negligent or Innocent Misrepresentation -
  Careless
• Negligence A responsible agent would have
• Suppression Withholding material fact -
  Basement
• Knowledge of material fact, duty to disclose,
  failure to
• Vicarious Liability Not unless should have
  known
• Seller
• Broker

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Fraud and Misrepresentation

• Elements of Fraud
• A false representation of an important fact
• or issue
• Relied upon by the buyer or seller
• Who is damaged by reliance

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HOME INSPECTION

• Insist that your buyer inspect property
• Get monkey off your back
• Selecting Inspector
• Agents one favorite inspector
• Yellow Pages
• List
• Dont guarantee inspector

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INSPECTION DO NOTS

• Do not perform inspection, even if you are an
  inspector
• Do not accompany inspector What did he say?
• Do not interpret inspection draw smiley face
• Do not select or allow seller to select inspector
• Do not allow buyer to fail to see importance of
  Inspection
• Do not allow buyer refuse inspection without
  documentation, especially if Buyers Agent page
  78
• Do not ignore value of specialized inspector -
  HVAC

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OTHER POINTS ON PROPERTY DISCLOSURE

• Document, document, document
• When in doubt, disclose permission
• Provider of questionable information
  takes ownership tax record
• I dont know
• Point out apparent problems, but draw no
  conclusions
• CYA Cover Your Assets
• After closing, maintain distance

32
PENALTIES

• Courts - Criminal Civil
• Actual damages
• Punitive damages
• Rescission of contract
• The Alabama Real estate Commission (Update)
• May Revoke license for 2 Years
• Suspend license
• Reprimand licensee
• Fine licensee 100 to 2500

33
THE SELLERS DISCLOSURE STATEMENT Good
Idea?
34
Seller Disclosure page 66

• Seller
• 2/3 or more of lawsuits brought by buyers
• Buyer
• Info for direct questions
• Seller Broker
• Caveat Emptor
• Buyer Broker
• Advice

35
Buyers Acknowledgment page 71

• Common issues encountered with buyers
• Help understand process
• Different inspections, insurance, warranties
• Better to address issues sooner than later

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STIGMATIZED PROPERTIES

• A property that has been psychologically
  impacted by an event which occurred, or was
  supposed to have occurred, on the property, such
  event being one that has no physical impact of
  any kind
• Four steps
• Fact or fiction - Ghost in attic from murder in
  MBR
• Check state laws - Alabama silent
• Materiality? - Will ghost stay? Murderer still
  there?
• Disclosure - With written permission

37
AIDS Disclosure
NO Dont do it
Federal Fair Housing Law Prohibits disclosure as
a protected class - Handicap Even if ask a
direct question Not material to transaction
any more than disclosing race
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AS IS

• Condition of property at time of contract
• Pictures
• Refers to real estate and all its warts.
• Caveat Emptor applies
• All fraud claims barred if purchaser signs as
  is contract

39
PROPERTY DISCLOSURESITUATIONS
40
Situation 1
You are the listing agent on a property. The
seller is your client. The seller tells you that
the air conditioning system does not work. It is
not a health and safety issue. A buyer sees the
home for the third time. The buyers agent tells
you that the buyer is very interested in making
an offer. Concerning the air conditioning, you
should A. Tell the buyers agent that the
system is broken. B. Not tell the buyers
agent the system is broken C. Require the
seller to complete a sellers disclosure
form. D. Tell the seller to disclose nothing
if asked.
41
Situation 2
You are the listing agent on a property. The
seller is your client. The seller tells you that
the back deck, which is 30 feet off the ground,
has a lot of rotten wood underneath and is in
great danger of collapsing. A buyer sees the
property for the third time. The buyers agent
tells you that the buyer is interested in making
an offer. Neither the buyer nor the buyers
agent has questioned the structural integrity of
the back deck. Concerning the deck, you
should A. Tell the buyers agent that the
deck is dangerous B. Not tell the buyers
agent that the deck is dangerous C. Require
the seller to complete a sellers disclosure form
to see if the buyers agent catches the
defect. D. Require the seller to replace the
deck
42
Situation 3
You are the listing agent. The seller is your
client. The seller tells you that the new
paneling in the basement was put there by him to
cover some mold behind the paneling. The seller
also tells you that the mold has been tested by
a professional and declared, in the sellers
words as a little unhealthy. The seller tells
you to keep the covered defect confidential, as
he needs top dollar for the house. He also tells
you that he will pull the listing should you not
agree to the cover-up. Concerning the mold, you
should A. Not disclose the presence of the
mold, since the seller is your client and you
owe the fiduciary duties of confidentiality,
and obedience. B. Not disclose the presence
of the mold, since you need the listing and a
potential sale and since the mold is only a
little unhealthy C. Secretly tell the
buyers agent about the mold. D. Discuss the
importance of disclosure with the seller and
terminate the listing should the seller not
agree.
43
Situation 4
You are the listing agent. The seller is your
client. There is a slight roof leak over one
corner of the third bedroom. It is not a health
or safety factor. The seller tells you about the
leak, but ask you to keep it confidential. A
buyer sees the property for the third time. The
buyers agent says to you I noticed a slight
discoloring in the ceiling tile in a corner of
the third bedroom. Does the roof leak right
there? Concerning the leak, you should A.
Not disclose the roof leak, because it is not a
health or safety factor. B. Disclose the
roof leak only with the sellers permission. C.
Disclose the fact that the roof leaks. D. Try
to shift the agents focus to the positive traits
of the property without answering the specific
question about the roof.
44
Situation 5
You are the listing agent. The seller is your
client. Even thought the house is in generally
good condition, there is a slight roof leak over
one corner of the third bedroom. It is not a
health or safety factor. The seller tells you
about the leak, but ask you to keep it
confidential. A buyer sees the property for the
third time. The buyers agent ask you this
question Is the house in generally good
condition? You should A. Respond, Yes the
house is in generally good condition. B.
Respond, No, the roof leaks over one corner of
the third bedroom. C. Refuse to answer the
question and ask the seller for permission to
disclose the roof leak. D. Tell the buyers
agent that Alabama is a caveat emptor state
and it is the buyers obligation to discover
any and all defects concerning the property.
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Situation 6
You are a buyers agent. The buyers are your
clients. They are from out-of-town and not
familiar with any home inspectors in the area.
They have put a property under contract with the
right to inspect. They ask you, their agent, for
a recommendation for a home inspector. You
should A. Give them a copy of the Yellow
Pages. B. Give them a limited list of
inspectors who are guaranteed by you and your
company. C. Give them a limited list of
inspectors who you have worked with in the
past. D. Recommend your one favorite home
inspector who you have been using for years.
46
Situation 7
A house is placed on the market for sale. It is
listed with a licensee and marketed through the
MLS. It is being sold by the owners family.
The owner murdered his wife in the master
bedroom and then took his own life in the same
location. Which of the following is not
true? A. Since this is a health and safety
issue, the listing agent must disclose the
event to all interested parties. B. The
listing agent is not required to disclose the
event. C. To avoid a difficult situation at or
following closing, the listing agent should
discuss timely and tactful disclosure to an
interested party with the sellers family. D.
A buyers agent has the obligation to disclose
this event to the buyers even if the agent is
unaware of the situation.
47
IV. ALABAMA LICENSE LAW

• One way for a real estate licensee to reduce
  risks is to have a complete, working knowledge of
  
• Alabama License Law

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34-27-36 DISCIPLINARY ACTION

• Property disclosure - already covered
• Immediate family under the law
• Any false promise reduced commission
• Deceptive advertising as agent
• Earnest money account
• Placing a sign

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34-27-36 DISCIPLINARY ACTION

• 34-27-36(10) Failing to furnish a copy of
  documents with reasonable promptness
• 34-27-36(25) It is illegal to fail to leave a
  copy of the listing agreement with the seller
• Expiration date required on listing
• No Net Listings

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EARNEST MONEY

• Immediately to broker
• Relieved in writing on contract - postdated
• Must be deposited when the offer becomes a
  contract
• Unless another date applies
• Release of earnest money
• Mutual Release signed by all parties

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Others Money

• Must be held in a separate escrow account in
  FDIC bank
• Separate from operating account
• Accounted AREC audited
• Records kept for 3 years, as most records
• Must never be
• Comingled
• Converted
• Released without authorization

52
Alabama License Law Situations
53
Situation 8
Which of the following acts is illegal? A.
Disclosing to a buyer that the listing agent is
the wife of the seller/builder B. Placing a
For Sale sign on the property with
permission C. Releasing the earnest money to
the buyer at the buyers request D. Paying
the buyer an incentive to close the sale
54
Situation 9
Which of the following acts is illegal? A.
Paying an insurance agent a referral fee for a
successful lead. B. Giving a seller a copy of
the listing agreement a day after its
execution C. Informing the seller that
listing agent intends to buy the listed
property for himself/herself. D. A company
setting up a rental deposits escrow separate
from an earnest money escrow account.
55
Situation 10
You are the buyers agent. It is Friday. Your
out-of-town buyer clients have just had their
offer accepted on a piece of property. The
earnest money check is made out to your company.
The buyers ask you to hold the check until
Wednesday of next week so that they can get back
home and transfer funds from their savings
account to their checking account to cover the
check. Which of the following is true? A.
This is an illegal act, since the earnest money
check must be made out to and deposited by the
listing agency. B. Since the buyer is your
client and you have the fiduciary duty of
obedience , you agree to hold the check until
Wednesday. C. You tell the buyer that you can
only hold the check with written disclosure to
and agreement from the seller. D. The check
can not be held, it must be deposited
immediately.
56
Situation 11
You are the buyers agent. Your buyer client has
written an offer on a piece of property that has
been accepted by the seller. The seller is being
represented by another real estate broker. The
earnest money check was written to your company
and has been deposited into your companys escrow
account. Your buyer client calls you, very
distraught and agitated , and tells you that she
has changed her mind about the purchase of the
house and wants her earnest money returned to her
immediately. You should A. Initiate a mutual
release form, signed by your buyer client and
requesting return of the earnest money, and
deliver the form to the listing agent. B.
Follow your buyer clients lawful instructions
and return the earnest money immediately.
C. Tell her that a deal is a deal and
instruct her to proceed with the contract and
closing. D. Give her legal advice as to what
legal options that both she and the seller
might have in a cancelled contract situation.
57
V. AGENCYWhat are the fiduciary duties?
58
FIDUCIARY DUTIES

• Obedience
• Loyalty
• Disclosure
• Confidentiality
• Accounting
• Reasonable skill and care

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OBLIGATIONS TO ALL PARTIES

• Honestly and in good faith - Lie to no one
• Reasonable skill and care - Standard of care
• Confidential information Disclosure required
  for law, client
• Account for all property Earnest money
• Present all offers - Timely
• Answer all questions Completely and accurately
  
• Acting on own behalf, family Disclose
• Disclose known latent defects no obligation to
  discover

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Obligations to all parties Answer HARD ?
61
RECAD 34-27-82REAL ESTATE CONSUMERS AGENCY
AND DISCLOSURE ACT

• Single Agent representing only one party
• Must be in writing
• Dual Agent representing both parties
• Limited Consensual Must be in writing
• Transaction Broker representing neither party
• Relationship without a signed agreement
• Sub-Agency Acting for another licensee
• Pre-RECAD

62
KEYS TO RECAD

• A written and signed statement of the law
• Same form used by all brokerages
• Must be signed and dated by licensee
• As soon as reasonably possible and before any
  confidential information is disclosed to any
  other person by the licensee
• THREE MAGIC WORDS Alabama law requires...
• Available Booklet
• Will see again in contract
• Must have office policy sign each year

63

• Exempt from RECAD
• Property Management
• Dealing with non persons
• such as corporations, governments, ect.
• Not Exempt from RECAD
• Commercial Real Estate Services
• Selling your own home FSBO

64
RECADSITUATIONS
65
Situation 12
You are a licensee. You have just met a young
couple form out-of-state. You determine they
need representation. They express an interest in
needing an agent. When you introduce the RECAD
form to them, they tell you that their parents
told them not to sign anything, so they refuse to
sign the RECAD form. Which of the following is
true? A. You can not represent them because
they refused to sign the RECAD form. B.
You can represent them with a signed buyer agency
agreement. C. You would be an undisclosed
agent if you showed them any houses D.
Alabama License Law requires you and them to sign
RECAD
66
Situation 13
You are on a listing presentation. You are in
competition for the listing. Even though you
warned the seller not to disclose any
confidential information to you. The seller
tells you they are really motivated to sell fast
because of a new job starting soon in another
state. You later discover that the seller has
listed with a competitor. Later, you agree to
represent a couple as buyer clients. They sign a
buyers agency agreement with you. You discern
that the property listed with the other company
might be right for your buyer clients. You show
the home, and your buyers like it well enough to
write an offer. You should A. Tell your
buyers of the sellers motivation so that the
buyers can take advantage of that fact. B.
Not tell your buyers because you are a dual
agent. C. Not tell your buyers about the
sellers motivation because the information
would be information a reasonable person would
want to keep confidential. D. Get the
sellers permission to disclose their motivation
to your buyers
67
Situation 14
You represented the seller in the sale of their
large, single family home in a sparsely populated
area of town. You also represented the buyer.
You are a limited consensual dual agent. The
property is under contract, but not yet closed.
By chance, you discover that an adjoining
property consisting of several acres has been
rezoned for high density multi-family housing.
This would probably have a negative impact on the
value of the home under contract. Neither your
buyer or seller knows this yet. You should A.
Disclose this fact to your buyer client
immediately. B. Keep this information
confidential to protect your seller client. C.
Say nothing to anyone, as you need the money from
the closing. D. Discuss disclosure with your
seller client to prevent a future problem
68
Situation 15
In situation 14, you chose to discuss disclosure
with your seller client to possibly avoid any
future problems. Your seller responded to your
request for disclosure by saying, I dont want
you to disclose anything! I need for this sale
to close in a most desperate way! You
should A. Follow your seller clients lawful
instructions. B. Forfeit your commission and
walk away from the sale. C. Have your seller
sign a document prohibiting you from disclosing
this information to the purchaser. D. Tell
your buyer client anyway to avoid a possible
lawsuit.
69
Situation 16
You are a commercial real estate agent. You are
to meet with a purchaser who is seeking a piece
of commercial property. He contacts you to show
him a warehouse downtown that is for sale. Which
of the following is true? A. You do not have
to RECAD him because you are a commercial
agent. B. You do not have to RECAD him
because he is buying a commercial
property. C. You do not have to RECAD him
because he is probably incorporated. D. You
have to RECAD him.
70
VI. Environmental Hazards

• Stay within scope of license Real Estate
  Salesperson
• It is illegal for a licensee to act
  negligently or incompetently in performing any
  act for which a real estate license is required.
• You are not a home inspector or mold expert.
• Dont put that monkey on your back

71
Lead Paint

• Disclosure required for pre-1978 Federal
  Law
• Must be signed by all, including listing agent
• Record kept 3 years
• 11,000 Fine and then there will be Alabama
  law violations

72
VII. CONTRACTS

• Sheriff Taylor and Floyd
• Required elements
• Legal
• Authority
• Age
• Objective
• Competency
• Consideration
• Something for Something
• Offer and Acceptance
• Interest in RE must be in writing, net sheet
• May be void or voidable

73
Net Sheets 790 X 3 .04

• Licensee shall prepare and furnish a net sheet at
  time of offer
• Best Reasonable Guess - Informed
• Cant rely on lender
• Update as necessary with counter
• Leave signed copy retain office copy
• How many years?
• Rule does not say net sheet must be prepared at
  time of listing
• Good idea - no surprises
• Not GFE

74
CONTRACT DOS AND DONTS

• Do not negotiate verbally without written follow
  up
• Do use a pre-printed form written by an attorney
• Do write it as client tells you
• Do be specific and clear Refrigerator
• Do not sign or initial without authority
• Do not speak for client without checking with
  client first
• Do insure that contract is entire agreement
• Do not forget net sheet

75
CONTRACT POINTS

• A counter does not void a contract different
  from offer
• To present or not present - Dont delay
• Be aware of deadlines - Laches
• Notification Imputed knowledge break clause
• Contracts- Disclosure of
• Alabama Law Not required
• REALTOR - Standards of Practice 3-6 shall
  disclose

76
Multiple Offers

• Must timely present all written offers, unless
  relieved
• Any order
• May have each buyers agent present their
  offer
• With you present
• Discuss pros and cons of each with seller
  client afterwards
• Reject all
• Accept one
• Counter best one and put in primary position,
  with others as backups

77
CONTRACTSITUATIONS
78
Situation 17
Which of the following are asking for
trouble? A. Negotiating the terms of a
contract for your client with the other partys
agent over the telephone without immediate
written follow-up. B. Negotiating the terms
of a contract for your client with the other
partys agent because you think you know your
clients desires and intentions. C.
Initialing a sales contract change or counter
for your client because your client is
out-of-town and probably cannot be
reached. D. All of the above
79
Situation 18
You are the listing agent in a multiple-offer
situation. One of the offers is from your own
buyer client. Therefore, you are a limited
consensual dual agent. The best way to minimize
risk is to A. Present only your buyers
offer so that you can receive both sides of the
commission. B. Present all offers to your
seller client but emphasize the benefits of
your buyer clients offer. C. Ask each buyers
agent to present their buyer clients offer to
your seller with you attending the
presentations. D. Staying totally neutral by
placing all the offers in an envelope and
advising your sellers to study them all and then
pick one without any help from you.
80
Situation 19
You are the listing agent. You have shown your
listing to one of your buyer clients. Therefore,
You are a limited consensual dual agent. Your
buyer client has written an offer that has been
countered by your seller client. The counter is
back in your buyers hands and they are thinking
about it. An agent with another company who has
shown your listing several times to the same
buyer calls and tells you that their buyer is
writing an offer. You should A. Inform both
your buyer client and the other buyers agent
that a competing offer situation may
exist. B. Call your buyer client immediately
and tell them to respond quickly or they might
lose the house. C. Call your seller and tell
them that they should take your clients initial
offer. D. Tell the other agent that the
property is already under contract and they are
too late.
81
Situation 20
You are the listing agent. You have received
several offers on your seller clients property.
You should A. Counter them all at list price
with no contingencies and deliver the counter
offers back to the buyers agents. B. Reject
all with instructions to the buyers agents to
come back with their buyers best offers. C.
Accept the best offer. D. Counter the best
offer in the primary position and counter the
others in a backup position.
82
VIII. ANTI-TRUST

• It is illegal for real estate companies, brokers
  or agents to be involved in an agreement, a
  conspiracy, or understanding that fixes prices
• Or
• Group Boycott
• Dont even talk about it

83
ANTI-TRUST PENALTIES

• Liability for three times plaintiffs actual
  damages
• Pay plaintiffs reasonable attorneys fees
• Court may supervise defendants business
• Actual prison time
• Not just AREC penalty of 100 to 2500, but
  Federal,
• Then
• AREC will get involved due to felony conviction
• 10 days to notify AREC of any civil or criminal
  real estate

84
IX. Fair Housing Protected Classes
F Familial Status R Race E E O
Will not cover violation S Sex H
Handicap C Color O Opportunities should
be Equal R Religion N National Origin
85
OTHER FAIR HOUSING VIOLATIONS

• Steering
• You would be better off in this area
• Blockbusting
• You had better sell while you can, because they
  are moving into the neighborhood

86
FAIR HOUSING EXCEPTIONS

• Qualified Senior Citizen Housing - 62 or 80
  over 55
• Number of persons per bedroom - Local laws
• Heath and safety - Threat of
• Reasonable demands - Modification
• Units operated by a religious group -
• May not discriminate in membership
• Owner-occupied four-unit building
• A single-family property No licensee is involved

87
Fair Housing Advertising

• Focus on property and not potential buyers
• If using people in advertisements, vary them
• Prohibited words , more on HUD site
• No Mexicans
• Acceptable words
• se habla espanol
• Dont use only publications targeting a
  certain group

88
RESPA 1974Real Estate Settlement Procedures
Act

• RESPA - Requires disclosures that list
  settlement cost to be given to homebuyers and
  sellers - GFE new rules
• RESPA - Eliminates abusive practices, such as
  kickbacks and referral fees, which increase cost
  paid by consumers.
• RESPA - Reduces amounts that homebuyers must
  place in escrow accounts

89
RESPA Settlement Services

• Real estate brokerage services
• Services related to issuance of a title policy
• Services related to a mortgage loan
• Attorney Fees
• Other services that a settlement services
  provider requires a borrower to pay

90
RESPAProhibited

• Kickbacks - Anything of value markup
• For
• Referrals an understanding - splits

91
RESPAExceptions

• Pay for real work
• Affiliated Business Arrangements
• Real work
• Disclose

92
RESPA Enforcement

• Civil Harmed party will cost
• Settlement with HUD cost
• Felony Year in prison
• Not just AREC penalty of 100 to 2500, but
  Federal,
• Then
• AREC will get involved due to felony conviction
• 10 days to notify AREC of any civil or criminal
  real estate

93
X. CONCLUSION

• Document
• Obey laws
• Know duties, limitations
• Practice RECAD, RESPA, Ethics
• Insist upon inspection
• When in doubt, disclose
• I didnt know that Can cost you in many ways

94

• What did you learn?