The Residential Purchase Agreement is the most important form in a real estate transaction. But it’s also the cause of most of the litigation that occurs in real estate.
In this webinar, Mark Carlson, attorney from Carlson Law Group and Dave Miller, who manages the CRES Advantage Home Warranty Program, discuss 5 key issues to consider when filling out the Residential Purchase Agreement (RPA), including:
The dangers of having incomplete information in the purchase agreement
The pros and cons of buyers specifying service providers in the agreement for things like escrow, title and home warranty.
Properties with tenants and possession issues during the pandemic, with the uncertainty of eviction moratorium timeframes
Dealing with multiple counter offers
When you have a valid approved counter-offer — and when you don’t
Dual agency is also a hot topic right now. The current market is tough and opportunities to be both the listing agent and buyer’s agent can be lucrative with commissions – but they can also be dangerous. Mark and Dave discuss the potential pitfalls, the importance of disclosure and confirmation, and your fiduciary duty if you do decide to pursue dual agency opportunities.
Laura Prouse: Thank you for joining us today on two topics that you probably address daily, but can lead to claims if not addressed properly, five considerations when filling out the Residential Purchase Agreement (RPA) and properly handling dual agency. I’m Laura Prouse with CRES Insurance Services.
Today, we welcome attorney Mark Carlson from the Carlson Law Group. Mark has been defending real estate agents since 1993 and has worked with CRES for over 20 years as a founding member of our legal panel. Along with Mark we also have Dave Miller, regional vice president with Fidelity National Home Warranty. Dave manages the CRES Advantage Home Warranty Program. When a CRES E&O client provides a home warranty, the real estate seller enjoys $25,000 in Seller’s E&O insurance protection.
Simple Steps to Reduce the Risk in the Residential Purchase Agreement
Dave Miller: The RPA is probably the most used form in a real estate transaction, but unfortunately it’s also where a lot of litigation can come up down the road. Mark, with regards to the RPA, give us five considerations that real estate professionals need to consider when filling out the RPA.
Mark Carlson: Like any house, it all starts with a good foundation. What I constantly remind agents about are the simple things like filling out the contract and, if there are counters, completely. So often I see the financing terms being left blank. And if there’s a problem and the buyers want to get out, they’ll say, “I didn’t get the loan I wanted, but then there’s no term.” So, the fault falls to the agents for not drafting a clear contract.
Just the other week I had a seller retain me to help evaluate offers on a very substantial property in the Beverly Hills area. There were something like 13 or 14 offers, all from the Beverly Hills “A” list of real estate agents. Of those 14 or so offers, there were only one or two that even had all the paragraphs there that list all the additional documents that are going to be attached. The property was held in a trust and only one of the offers had that the trust advisory was to be attached.
Mark Carlson: Little things like that don’t really create any problems in a transaction. But if other problems arise, and the agents haven’t filling out the contracts completely, it just makes it look sloppy. So, it’s hard to justify your actions elsewhere when basic things like filling out the offer isn’t done properly.
I had an option contract many years ago, where there was no indication of whether the option money was to go to the purchase price. Everything about the option was just incomplete. Of course, the agents got sued because the buyer tried to exercise the option, and the seller tried to avoid it.
So just starting with a good foundation, filling out everything completely, fully and clearly is step one.
Dave Miller: How about services like pest control, escrow (if used), title, home warranty, a home inspection?
Mark Carlson: In this sellers’ market, you see selling agents trying to endear their offer to the listing agent by saying, “Seller’s choice” and not putting something in. I think most sellers probably don’t care about service providers, if they do they’ll just counter, but it’s difficult when you give away control right out of the shoot.
I would say even in a strong market like this, have the buyers use service providers they know and trust and put that in the contract. I’ve had a lot of cases especially within the last nine months, where if there’s a broker escrow from the listing side, now the buyers are trying to get their deposit back and the escrow is favored. The broker-owned escrow is favoring listing agent and seller side. And it becomes a disadvantage to the buyer where the buyer has the ability to put that in at the first stroke.
Dave Miller: I know agents are advised by risk management attorneys to make sure they give at least three or four recommendations to allow buyers and sellers to pick their service providers. Agents don’t want to create “preferred provider” lists.
Mark Carlson: When it comes to inspections (whether home, termite, roofer, or septic), I think it’s smart for agents to say, “Here’s the list of vendors that our clients have had good success with.” If they don’t do a proper inspection, then you don’t have a negligent referral argument.
But when it comes to title and home warranty, I’m not that concerned. I think it’d be better for the selling agent to have a conversation with the buyer. “Are there any title companies that you like?” I think putting one in the offer is okay with respect to those types of service providers.
Tenants and Possession of Property
Dave Miller: Let’s turn to issues with tenants and possession.
Mark Carlson: In 2020 with COVID, tenants and possession was a huge deal because of the eviction moratoriums. I would urge all agents to have buyers and sellers talk to attorneys if there are tenants and possession. Get direction from the principals as to whether the buyer is going to take the property with the tenants in possession, or whether the seller is going to try to evict or entice the tenants to leave so the property can be delivered vacant. It would be a mistake for an agent to assume it’s not going to be a problem in getting the tenants out during a closing period. Even if they provide for a longer closing, nobody knows right now when tenants are ultimately going to be able to be evicted.
Multiple Counter Offers and the Elements that Make a Valid Contract
Dave Miller: Real estate inventory is still very low. I think the unsold inventory index is 2.1 months in California, which is ridiculous. How do counter offers tie into the RPA? What’s important when you have counter offers?
Mark Carlson: First, a multiple counter in this hot market is pretty common. Unfortunately, we frequently see an error where the multiple counter box isn’t checked, and then you get two acceptances. Now, you’ve sold the property twice because you failed to put in a multiple counter.
Mark Carlson: There’s always this urge to get the highest price and to use some sharp negotiating practice like counter with your highest and best. And I think that’s dangerous because in California, the three essential terms are the identity of the property, the identity of the principles and the purchase price. The courts can imply every other reasonable term, but those are the three things that have to be in a contract for it to be enforceable.
Mark Carlson: The California RPA has an “integration clause”, which means that all of the terms of the contract are contained within the four corners of the document. That means you can’t look outside the contract to figure anything else out. When you say, “Highest and best,” you don’t know where to find that number. If you’ve got multiple counters or the acceptance that comes back or another counter that comes back, it just creates a problem, because you can’t look at it from document to document and track the price terms.
I prefer having agents make a clear counter with an actual number, and then see where it goes. If you counter at a certain number, and you get multiple acceptance, you can always call them back up and say, “I’ve got multiple counters at my counter price, so let’s do it again.”
Dave Miller: What about the “mirror image” rule?
Mark Carlson: California has a mirror image rule when it comes to contract formation. That means that the acceptance has to be a mirror image of the offer. So, if I have an offer that comes in, the seller might like everything about the offer except that the buyer wants 45 days and the seller wants 30 days. If I cross out the 45 and change it to 30 days, that actually constitutes a counter that requires separate acceptance.
We see that quite often where they’re just minor, little terms and someone says, “Oh, well just change it and initial it.” It actually requires separate acceptance. If there’s a problem down the road, that little handwritten change may become an issue as to whether a contract is enforceable or not.
Performance is another issue where you have to be available. You have to calendar everything as an agent so that you don’t miss deadlines. You need to be available and diligent when it comes to contract performance.
The Risks of Dual Agency
Dave Miller: When agents have the opportunity to be both listing agent and the buyer’s agent, it can be lucrative in terms of commissions. But “dual agency” can also be very dangerous.
Mark Carlson: In some jurisdictions, dual agency isn’t allowed. Where dual agency is allowable, it requires two things: disclosure and confirmation. Confirmation is done on the RPA. That’s at the end of the contract where you write in the broker’s name, not the agent’s name. Then the disclosure is via the Agency Disclosure Form.
When we see errors in this, we see:
Agents just forget about the disclosure form
The problem is there’s one pesky case that suggests if there’s an undisclosed dual agency, that either principal can void the contract even after it’s closed. You can imagine the kind of havoc that would wreak if you had a buyer or seller after a deal was closed saying, “There was an undisclosed dual agency, because you forgot to send me the disclosure form, and I want to unwind this deal.”
That would be a very expensive case to defend and resolve.
Dave Miller: What if a dispute arises, and I’m the listing agent and I represent the buyers as well. I have to be able to relay that concern to the other party, but then I’m also representing the other party.
Mark Carlson: Real estate licensees like to be helpful. They’re typically overly helpful and that gets them into problems. When a dispute arises and the agent is dual, there’s tremendous pressure for the agent to try to make the dispute go away.
With good intentions, you see agents trying to persuade one side or the other that their position is not right. When you’re a fiduciary to both, you can’t take positions that are contrary to the interest of either side.
You have to essentially be a messenger when there is a dispute between the buyer and the seller:
The buyers want this. Sellers, what would you like to do?
Well, we want to do this. If the sellers want to do something that doesn’t seem to be in their best interest, it certainly is appropriate and proper for an agent to say, “Well if you do that, then here are the consequences to your actions, so let me know what you’d like to do.”
That’s the limit to what an agent can do to try to resolve a dispute.
What I always recommend if there’s a dispute is to talk to a manager in your office and let the manager know what’s happening. In that way, you have another set of eyes on the transaction. The agent and manager may want to see if maybe another agent within the office is available to step in on one side or the other.
Getting another agent involved is obviously complicated, because now you’ve got to worry about commission, and you’ve got to get the parties to agree. Rely upon the manager’s and broker’s experience as to when someone else needs to step in.
Try to make it clear to buyer and seller that there’s no betrayal of confidence via the one agent, because if Agent A is only conversing with seller and Agent B is only conversing with the buyer, there can’t be the argument that that confidence is what we’re trading.
Dave Miller: The fiduciary relationship between an agent and client is a serious matter. You’ve been in many courtrooms before. What are judges feeling when they look at an agent and say, “You had a fiduciary to this side and that side, how is that really possible?”
Mark Carlson: Having tried 20-some odd cases before juries involving this issue, jurors think that agents get paid too much money for what they do. Often, you’ll have jurors that have never bought a house, and they have no idea what the process is. But they still have this concept that an agent is supposed to almost be a guarantor that the transaction goes without a problem.
They don’t see the 50 showings to the Joneses before the Joneses decide they want to buy a house and all the extra time that the agents put in to try to market property. All they see is, “We wrote an offer, and you got a great big check.” And all you’re trying to do by being dual agent is get the deal closed so you could get paid on both sides. That’s where the extra risk is, because it’s an unlevel playing field in front of a jury for real estate agents.
With respect to fiduciary duty, jurors are trying to figure out “who’s got the white hat on? Who’s got the black hat on?” And they watch all these legal shows on TV, and they’re expecting a moment at any time that makes it clear as to “Who’s the bad guy?
When you’re a fiduciary, think about what you’re doing as viewed by a jury. Are they going to see you having a white hat on or having a black hat on? And look at how a jury would consider your actions retrospectively. Have the presence of mind to think, “if I do this, how does that look to the outside looking in?” Then I think you’re going to be more cognizant of your potential pitfalls as a fiduciary on certain issues.
Laura Prouse: I just wanted to say thank you to both of you. We’ll reconvene in a few weeks and do another webinar together.
Mr. Carlson formed Carlson Law Group, Inc. in January 2005. He currently represents scores of real estate professionals in a wide range of matters. Mr. Carlson also represents individuals in the purchase, sale and lease of residential, commercial and industrial properties. Additionally, he has assisted several clients in building permit, zoning and other land use matters. Mr. Carlson’s practice focuses mainly on litigated matters, and he has handled over a dozen jury trials to verdict as well as several court trials. His trial experience includes two trials that each lasted over five weeks. Throughout his career, Mr. Carlson has strived to provide superior legal services while at the same time containing costs for his clients.
This blog/website is made available by CRES Insurance Services for educational purposes to give you general information and understanding of legal risks and insurance options, not to provide specific legal advice. This blog/website should not be used as a substitute for competent legal advice from a licensed professional attorney in your state. Claims examples are for illustrative purposes only. Read your policy for a complete description of what is covered and excluded.
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