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CRES Risk Management Webinar: Risks to Real Estate Licensees Representing Sellers When Low Inventory

There are extremely low inventory levels for housing across multiple states right now. A significant portion of the real estate market are individuals who are simultaneously selling a home they live in and buying another they intend to live in.

It’s very common to include buyer contingencies in the purchase agreement, which makes the purchase contingent upon the sale of the buyer’s property.

However, there’s no corresponding contingency for the sellers if they’re unable to buy another property before the transaction closes.

The reality of the current market is that even if a seller has significant cash funds, they may not easily find another property to live in (whether buying or renting). Sellers in this low inventory environment are finding themselves with nowhere to live if they complete the sale of their home.

In this webinar, attorney Kathryn Holbert, from Nevada Real Estate Law, LLC, and Dave Miller, Regional Vice President of Fidelity National Home Warranty, discuss this issue. The webinar covers what real estate professionals can do to help sellers in this predicament and how to prevent it from happening.

To find out more, watch the full webinar (or see the transcript below it).


Webinar Transcript: Real Estate Licensee Risks When Representing Sellers in a Low Inventory Environment

Laura Prouse:

Thank you for joining us today to talk about dealing with sellers’ issues created by a historic low inventory.

I am Laura Prouse from CRES. Today we welcome attorney Katheryn Holbert from Nevada Real Estate Law, LLC. Kathryn has been defending real estate professionals throughout Nevada for more than 15 years and is a very active member of the CRES legal panel. Along with Kathryn, we have Dave Miller, regional vice president with Fidelity National Home Warranty. Dave manages the CRES Advantage Home Warranty Plan. When you’re protected by CRES E&O insurance and purchase a Fidelity National Home Warranty for your seller, you reduce your out-of-pocket claims costs. 

Dave Miller:

Today, we’re focusing on contingencies for buyers and sellers. 

We’re still seeing low inventory levels, and it continues to be an epic sellers’ market. But with that comes a lot of challenges for sellers. Historically, we’ve seen sales contingent on buyers selling their house. 

Now, there are issues with sellers selling their house so quickly that they don’t have a place to go. What’s going on?

Kathryn Holbert:

Right now in Las Vegas, there are more real estate agents than there are properties for sale. It is crazy low inventory, and it’s just presenting situations that people didn’t really have to consider or think about before. 

Always before it was like, of course I can buy another house or rent another house if I sell mine. But now, it’s no longer something you can assume. 

A lot of rental properties have been sold and are owner-occupied now. So, the inventory of rentals has decreased. The number of properties for sale has decreased. And it doesn’t matter if you have a suitcase full of cash. You can’t just plan on, hey, I’m going to be able to go find something else to buy. And it’s created a unique situation that’s starting to cause a lot of problems. Brokers may not really know the best way to deal with that kind of situation.

How to Handle Buyer — and Seller  —Contingencies in This Market

Dave Miller:

On the other side of this, are the buyer’s contingencies pretty much dead at thi s point in this market?

Kathryn Holbert:

Not necessarily. 

People are modifying the appraisal contingencies. They are waiving sometimes the home inspection or the repair contingency.

A lot of those items like home inspections, home warranties, you should encourage your clients not to waive them. 

It’s simply that now the buyer is paying for them versus the seller, but I don’t recommend you just waive them. 

The problem is when people are trying to create seller contingencies, and you just cannot do that. As a matter of law for a lot of complex legal reasons, if the seller says, “I’m going to sell you my property,” they have to sell you their property. And if they choose not to just before closing, it creates a lot of legal problems for them. And it’s a situation that has to be resolved, but you can’t resolve it or avoid it by trying to write in a contingency. And frankly, what it does is put the broker at risk of creating a voidable, unenforceable legal contract, which of course, the broker never wants to do.

Dave Miller:

You mentioned that sellers are selling their house so quickly that when it’s time to close, they’re actually dragging their feet, trying to delay it a couple of days or even a week. And that’s causing headaches on both sides of the transaction. 

Kathryn Holbert:

It’s an interesting situation, and of course, you want to do what you can to avoid it. As you’re representing a seller now, it’s a conversation that the broker needs to have at the time the listing is taken. And it’s not a conversation brokers are used to having, but they now need to have that conversation with the person selling their home. 

“What are you going to do when this house sells? Have you got a place to go? Have you already made an offer on another property? Are you going to stay with a family member for a short time? Are you leaving the state? And if you’re leaving the state, have you got a place to go to there?”

I’ve heard there’s low inventory not only in Nevada, but in California, Utah, Arizona, Washington, and Idaho. Pretty much everywhere in the West, inventory is a problem. So even if sellers say, “Hey, I’m planning on moving to Arizona” (or wherever), you still need to say, “Have you got a place to live?”

Because as we’ve said, if the seller just says, “Hey, I don’t want to close,” they’re absolutely in breach of their contract. Does that mean that they shouldn’t breach the contract if their alternative is to be homeless? Maybe not. But that’s a tough conversation that the seller needs to have with their attorney. And the broker needs to be very careful how they guide sellers through that. The best thing they can do for their client is to avoid that situation arising.

Dave Miller:

You mentioned there’s not a form for this. Do sellers disclose this in writing? Do they put it on the MLS? Do they do this verbally with a party when accepting the offer? How do they navigate through this?

Kathryn Holbert:

Well, the calls that I’ve been getting, unfortunately are like this: 

“We’re supposed to close on Friday. The seller just says they’re not closing.” 

And that’s what I’m seeing. And if it happens, if you can’t prevent it, if whoever’s representing the seller doesn’t do a good job to prevent that situation happening and it arises, then it has to be dealt with.

The other thing, unfortunately, that I’m seeing is situations where buyers and sellers just don’t close. If the buyer and seller don’t close, you’re still under contract. You can’t just pretend that doesn’t exist. You really need to deal with it. And the best-case scenario is to negotiate agreed-upon cancellation instructions.

I had one scenario where the seller basically ended up paying the buyer, I think it was $5,000, and said, “I can’t close. If I close, I’m going to be homeless. I need to get out of this contract. Here’s your earnest money back. And besides your earnest money, here’s another 5,000. Sorry.” But they agreed to cancel the instructions. They prevented a lawsuit, and they completely resolved it.

Ideally, that should have been handled better in the very beginning when the property was listed. So the bottom line is, as a seller and a seller’s broker:

  • Don’t sell the property: don’t list it for sale until the sellers are actually ready to sell and certain they have someplace to go.

The Buyers’ Side

Dave Miller:

Let’s go to the buyers’ side. If I’m buying a property, and I know the seller may not find another home, what should I be aware of? How should buyers navigate from their side?

Kathryn Holbert:

The buyers are put in an unfortunate situation. And there are different types of buyers. I think the one I just talked to you about was an investor that was like, “Fine. I’ll let you buy me out. Basically, I’ll take the money and move on.” If it’s a family that’s selling their own house, which was one of the situations I was involved in, they need to buy yours or they’re going to be homeless.

There’s some sympathy there, but at the same time, buyers may think, “I’m sorry, but why should I be homeless? You entered into this contract. You said you’d sell me the property. I need a place to live too.” And that becomes very difficult. I think in that scenario, we basically just negotiated for a little bit more time and closed with a 30-day lease-back or something like that.

Of course, lease-backs can be difficult. I’d almost rather that the negotiation be to delay the closing date and then still have a clean closing. 

Dave Miller:

And I know you’re only hearing about the things that escalate to potential lawsuits, but are you finding that both sides are able to be a little bit flexible with this? Or are buyers saying, “No, you will sell me this property per contract?”

Kathryn Holbert:

There is a little bit of that. I will occasionally get those calls like, “You have to sell me this house.” And I try to step back and explain to everybody the reality that yes, litigation is always an option. And yes, they’re in breach of their contract. Litigation is never the best option, though, and I’m a litigator. I go to court. I see these lawsuits. And so, I say, “You’re right, but fighting about this isn’t going to help.”

Representing the buyer, the buyer could say, “I’m not going to let you out of this contract,” because of course the buyer can’t do anything to make the seller sell the property. All they can do is file the lawsuit and try to enforce that. And I have seen that happen. And then of course the seller says, “Well, I’m not in contract with you anymore. I’m going to sell it to somebody else.” The problem is if that contract is still open and has not been canceled, they’re technically under two contracts.

Now there are issues with the first contract, and there may be breaches with that first contract, but it’s still an open contract. And you’re going to have a lot of issues if you then enter into a contract to sell it to somebody else. That’s the main situation that a broker needs to avoid.

5 Steps to Reduce Your Risk in a Low Inventory Environment

Dave Miller:

Your summary outline for this webinar is great. You have five really good best practices that readers should be aware of. Can you go through those?

Kathryn Holbert:

  1. Try to prevent the problem by addressing it at the very beginning when the listing is taken
  • Don’t list the property for sale until the seller is 100% sure that they can go through with it, and they’re ready to sell, and they can be out. 
  • A 10-day cash close is not at all uncommon right now. So, if the seller says, “I can’t be out for 30 days,” then don’t list it yet. Don’t list it until they’re ready to sell.
  1. Don’t accept or write seller’s contingencies from either side. When the seller receives an offer, I’ve seen the sellers try to counter with some kind of contingency on it. If you’re representing the seller, do not do that. Just avoid that altogether. It’s just going to cause a lot of problems for everybody if you try to make any kind of contingency on the seller’s part.
  2. If the problem does arise, notify all parties as soon as possible.

Maybe the sellers’ situation has changed. Even though you tried your best to avoid the problem, something happens. 

  • Notify everyone that, “Hey, you might have a problem here.” 
  1.  Try to resolve it.

Talk to everybody and see what can be worked out. Can we delay the closing for a week or a few days? Can we do a rent-back? Can we just cancel it and give you your earnest money back and maybe pay for your inspections or whatever other costs and fees that the buyer has already incurred?

There are a lot of things that can be done, but the sooner you address it with an apologetic tone, the better. The seller should be coming to the buyer with, “I am so sorry, but this is my current situation.” And that is more likely to generate a better attitude of cooperation from the buyer to try to resolve the problem. If both sides just start saying, “I’m going to sue you over this,” it just escalates the situation and makes it worse for everybody.

  1. Create agreed-upon cancellation instructions and make sure the transaction is completely resolved before the seller tries to enter into a new listing agreement with anybody.

Dave Miller:

It sounds like with most risk management issues, proceed with caution, but absolutely disclose everything about the situation, whether it be “I can’t find a house” or anything related to the transaction. Disclose, disclose, disclose, and be honest. That sounds like what you’re telling us.

Kathryn Holbert:

Absolutely. And there are a lot of things that can be done to resolve the issues before closing. Try to explore the options, and always reach out to your CRES risk management attorney. Get them involved sooner rather than later. Let them know what’s going on and encourage your clients to seek their own legal advice as well.

Laura Prouse:

Katherine, Dave, thank you. Always a wealth of information. Great questions and great content, as always. And thank you all for watching. We’ll see you next time.

 

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