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Risk Management Tips For Real Estate Brokers and Owners - Part One

Posted by attorney Phillip Querin
Filed under: Starting an LLC

[PCQ Note: This is a two-part series on claims evaluation for real estate companies. These are my opinions alone and are not meant to supersede or replace any company’s policy, which may differ. Nor is it meant to be a substitute for prompt consultation with the company’s own legal counsel for instruction, advice and direction. In all cases, principal brokers are encouraged to thoroughly review potential claims with their own counsel at the earliest possible time. Lastly, this article should not be interpreted as reflecting or establishing a standard of practice.]

Introduction. Litigation and arbitration cannot be avoided forever. They are a fact of life in today’s litigious society and a cost of doing business. This is especially true in those professions where fiduciary relationships are created between the consumer and the service provider. Realtors®, doctors, lawyers, and the clergy, are just a few of the targets for litigation because of the nature of the service they provide. Trust is an essential byproduct of these relationships, and accordingly, liability is high. But this does not mean that the risk inherent in these professions cannot be effectively managed. The purpose of this article is to locate and analyze these risks, discuss how to reduce or avoid them, and develop protocols for dealing with client dissatisfaction before it ripens into an actual claim.

Identifying Risk. Every real estate company of any size should evaluate whether to create a quality assurance committee with the sole mission of determining how best to manage professional risks and handle claims. Here are some issues to consider and questions to ask:

Ø Are there agents who have had multiple claims filed against them? Are they sufficiently counseled and supervised?

Ø Are there some agents whose specialty (e.g. foreclosure properties) invites greater risk?

Ø What about short sales and other distressed transactions? Is there in-house training? Are agents permitted to hold themselves out as “specialists" and if so, are they? [PCQ Note: At a time when there are very few attorneys that fully understand this new landscape, it is hard to know what actually constitutes a “specialist." Perhaps the use of a less superlative term might be appropriate.]

Ø Does the agent list bank REO properties? Are they using bank-created addenda? Has the company taken a close look at these documents? Remember, this is still a consumer transaction if the buyers are purchasing the property as a primary residence. While the bank may believe they do not have to disclose known material defects, there is an argument that the agent does.

Ø Are agents permitted to develop their own forms or clauses for distressed transactions, especially short sales?

Ø Does the company have meetings to address some of the ethical issues we’re now seeing in short sale transactions (such as the representation of buyers making offers on multiple properties with no ability or intent to close on all of them)? Are sellers being made aware of this when the offer comes in?

Ø Are listing agents withholding short sale offers from the lender? Are they counseling sellers to reject all offers until the bank has decided on the one currently being considered?

Ø Importantly, does the listing agent in the short sale first determine the lender’s policy on submitting multiple offers?

Ø Does the agent thoroughly evaluate whether the seller is a good short sale candidate? Do they encourage clients to secure expert outside advice where appropriate?

Ø Are agents fully aware of potential tax and promissory note liability to sellers in short sales – especially where the property is not a primary residence? Do they encourage clients to obtain outside professional consultation?

Ø Is the agent involved in charging clients separately from the commission for other distressed transaction assistance?

Ø Is the agent involved (directly as a principal, or indirectly as a continuing referral source) with any other company, group, or individuals, holding themselves out as “consultants" or other designations, suggesting a superior skill in distressed transactions?

Ø Does the company encourage the use of the OREF short sale forms (or a comparable substitute that has been reviewed and approved by the company attorney)?

Ø How many agents is the principal broker responsible for supervising? Is the ratio realistic?

Ø Are there some agents with other real estate related business, such as home construction, multiple rentals they are self-managing? Are they allowed to list and sell their own properties, or do they list with others in the company?

Ø Do agents have non-licensed spouses or significant others engaged in some real estate related business to whom they refer their clients? Is the relationship disclosed?

Ø Are all agents encouraged to fully document their professional real estate activities for inclusion in their personal file? How long do they retain these personal files?

Ø Are transactional files reviewed for completeness at the conclusion of the transaction before the commission is disbursed to the agent?

Ø How many brokers have licensed personal assistants and is someone really supervising them?

Ø How extensive is the company’s office policy regarding client complaints? Are agents encouraged to immediately report problems to their principal broker, or are they left to be handled by the individual agent until the last minute?

Ø Is agent advertising really supervised? Are agents permitted to use inflated or misleading language regarding their experience and skill – especially in more complicated forms of transaction such as distressed sales? What about advertising condominium expertise? Does the agent truly have the experience, or are they simply trying to drum up business in that area?

Ø How does the company deal with dual representation – are single agents allowed to represent both sides of the transaction – and if so, are they supervised any closer than others?

Ø Is principal broker review truly a review or merely a rubber stamp?

Ø Are the rules of client confidentiality sufficiently defined in written office policy and are the policies actually observed and enforced?

Ø Does the company have written office policies that comply with state law and is there principal broker training to assure that each agent is familiar with them?

Ø Does the company have an in-depth orientation program to familiarize new agents with all company policy – especially in identifying risk management issues early on?

Ø What policies, if any, does the company have regarding allowing its agents to testify in court about “industry standards"?

Ø What policies, if any, does the company have in permitting its agents to file complaints against other agents with the Real Estate Agency or local board?

Ø Are the principal brokers sufficiently familiar with the company’s E&O coverage to know which activities are covered and which are excluded? If so, are agents permitted to engage in excluded activities inside the company?

These are just a few of the issues that should be addressed at the quality assurance level. A realistic evaluation of them is the best place to start when developing effective risk management guidelines. The next step is to implement corrective action to reduce or eliminate known risks. This requires management from the top down.

© 2010 Phillip C. Querin, QUERIN LAW GROUP LLC. No portion may be reproduced or copied without the author’s express written consent.

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