Hot Markets: Risks and Tips to Avoid Getting Burned #537
How hot is the current hot market? Hot enough that earlier this month, the Real Estate Council of BC (RECBC) issued a caution to consumers and real estate professionals, reminding consumers of the importance of due diligence and reminding real estate professionals to have full and frank discussions with consumers, fully explaining the increased risks and consequences of making offers without the usual subject conditions and arming them with all the information needed to make fully informed decisions.
In this hot market, however, real estate professionals may struggle to protect clients when offers are mainly unconditional, or at least without the full subject conditions we typically see in a deal. It's hard to protect your client's interests when you often cannot use one of the best weapons - subject conditions.
Follow the usual advice in markets of any temperature
In this hot market, REALTORS® must keep their cool and remember that some of the oft-repeated, time-tested and best advice to protect themselves and consumers still applies:
- Remember who you act for and the rules of agency.
- Know your client and ask questions. Have full discussions on their needs, wants, issues, firm budget and risk tolerance, and remember that every client is different.
- Know the property you are dealing with and complete due diligence in advance where possible, such as title, property disclosure statement, strata documents, etc.
- Document the advice you give and the decisions the clients make.
- Do not practice outside your area of expertise. If your client wants advice on something outside of your area of expertise, advise them to seek independent professional and/or legal advice and document this recommendation.
How do risks and claims differ in a hot market?
When the market gets hot, things speed up. At the Real Estate Errors & Omissions Insurance Corporation, we are seeing an increase in claims of various types including valuation claims, negligent drafting claims, and claims arising from the imbalance in the market and the multitude of offers for some properties.
1. Valuation claims
In valuation claims, sellers say they undersold or buyers say they overpaid. In these scenarios, we are reminded that real estate professionals are not held to the standard of an appraiser and that appraisals are "an art, not a science." However, when advising on price, thoughtfulness, full discussions, and due diligence are needed.
How to avoid valuation claims
Realtors acting for sellers or buyers should have up-front discussions with their clients at the beginning of any relationship around market conditions, client expectations, the value of properties in the area and other comparable properties, and how offers may be presented, accepted and countered (and the pros and cons of any approach to presenting offers). It's important to set clear expectations during these conversations.
Particularly when acting for sellers and recommending a listing price, you should ideally discuss comparable properties, do a comparative market analysis (CMA) where applicable, and always discuss and document your advice and the client's decisions. Ensure you keep copies of all CMAs and comparable properties that were discussed and that helped to inform the client's decision on the list price.
2. Negligent drafting claims
We are also seeing more claims related to seller's or buyer's remorse when parties want out of a deal as values rise. To escape the deal, the parties and their legal counsel look to the contract for an escape valve. Remember, it is part of your job to draft an enforceable contract. Careful drafting, discussions, setting expectations and documenting advice are paramount and can help to prevent negligent drafting claims.
Some examples of recent negligent drafting claims include:
- questioning authority to enter into a contract and challenging whether the seller is the proper party on title or has a valid power of attorney (POA) to sell;
- raising problems with e-signatures - mainly an alleged lack of review of the contract terms and a failure to explain the terms of the contract properly or at all; and
- alleging improper or incorrect terms/wording of a contract such as parties, price or dates (what I call speed errors).
How to avoid negligent drafting claims
Slow down and proofread all offers and counter-offers, and recommend your clients do the same. Do not assume because the other party said they are only countering on dates, that they have not altered other terms as well. Be careful in the use of e-signature software - encourage and support clients in reviewing the full document each time and not just the purported change, and recommend they read it on a larger screen than their phone.
Additionally, ensure title and company searches are done and you have full written authority to sell from the person on title or a valid POA. Always deal with the party on title and avoid dealing with the kind and/or domineering relative who is not.
Review prices, dates, parties to the contract and all terms carefully with each and every offer and counter-offer (no matter how many there may be).
3. Hot market/offer claims
As you can guess, hot markets are the home to all the usual stress-inducing suspects including bully offers, referential offers, multiple offers, and back-up offers. Offers are also being made in this market for properties sight unseen. Some examples of hot market issues include:
- buyers entering into a contract sight unseen and subject-free, then refusing to close after realizing the view is obstructed;
- buyers making a subject-free offer and claiming they were unaware of the risks and that they had no financing clause. The buyers with pre-approval are then unable to get financing when the property is appraised too low; and
- buyers trying to get out of a subject-free contract when they discover defects at the property in an unconditional deal.
Unfortunately, there is no silver bullet clause (sorry...) as each offer or multiple offer situation is unique. Back-up offers have their own challenges and must be made carefully. Changes to the original contract and extensions should also be made carefully (ideally with legal advice) to not open the contract, trigger the back-up offer and/or be accused of selling the property twice (see my Legally Speaking #519 from October 2019).
How to avoid tripping over offers
As a seller's agent with multiple offers, develop rules for review and offer presentation with your client, follow them, update them, and document and communicate any changes. Consider using an offer comparison chart to track all offers and key terms, and easily compare them.
As a buyer's agent with multiple offers, ask questions to ensure you know when you are in a multiple-offer situation and recommend your clients complete their due diligence in advance where possible. Ensure consumers are aware of the risks and consequences of not doing so, which are very serious and include having no financing to complete a deal or taking on a property that is riddled with expensive defects.
Consider using condition acknowledgment forms with buyers who are going subject-free or without the usual conditions. On that note, BCREA has created the Buyer's Acknowledgement of Information - Recommended Conditions form, which will help you discuss and document a buyer's acknowledgment that they have been advised of the increased risks of not including some or all of the recommended conditions in an offer.
Ideally, recommend clients have a legal professional on board at the beginning of your agency relationship. This enables your client to have a lawyer available, engaged and able to answer thorny questions and provide advice on contractual obligations and risks. Waiting too long to recommend legal advice, particularly in this hot market, may mean your client has no practical opportunity to do so, and neither you nor your client will be protected (see my Legally Speaking #531 from October 2020, my Risk Report article from December 2019, and the RECBC discipline decision of October 30, 2017, 14-431).
Good luck, and remember to stay cool in this hot market!
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