In our latest webinar, Kathryn Holbert from Nevada Real Estate Law and Dave Miller, Regional Vice President with Fidelity National Home Warranty, talk about the latest risk management issues for real estate.
This informative webinar covers:
- The most common reasons real estate professionals face litigation
- Misunderstandings client communications over commissions, and the NAR lawsuit
- Pitfalls of dual agency
- Selling outside of your area
- Home warranties as Risk Management tools
- Releases when you’re asked for money
Interested in finding out more? Watch the full webinar, listen to the podcast, or read the transcript below.
Dave Miller:
Hello everyone, happy new year. Dave Miller, Fidelity National Home Warranty on behalf of CRES E&O Insurance, we welcome you to this seminar with our wonderful Kathryn Holbert, our attorney in Nevada, to give us a quick update on what’s going on. Kathryn, welcome.
Kathryn Holbert:
Good morning, how are you doing today?
Dave Miller:
Fantastic. It’s a new year, and with a new year comes a lot of refocusing on strategies and maybe E&O claims and what’s going on, and that’s why I thought it’d be a great time to get you on the Zoom here so we could educate the CRES insureds and also our CRES Advantage Home Warranty clients of some things that are going on. So I’ll start firing away if you’re ready?
Kathryn Holbert:
Yes, please.
Dave Miller:
Talk to us about E&O claims. Depending on the market, they tend to go up and down. We’re in a market now where obviously the historic low and inventories, fewer transactions, how has that affected your day to day? Are you seeing more claims in this market, or is it less, or is it about the same?
Kathryn Holbert:
It is a different market of course, and actually here in Nevada we are seeing an increase in inventory at certain price point levels and a decrease in other price point levels. There is absolutely still a market, there’s still buyers, there’re still sellers. It has actually even picked up quite a bit just since the first of the year, especially with sellers listing homes. Some of the inventory has been sitting for quite a while. So it is an interesting market, but the market is always changing, and that impacts the kind of E&O claims that I see through both the risk management program and litigation, and yet it doesn’t, because in the almost 20 years that I’ve been doing this, 90% of my cases have always been non-disclosure cases. Regardless of what kind of the market was, the cases that become litigated are generally non-disclosure cases that deal with the SRPD and the condition of the property at the time of close of escrow.
Dave Miller:
Right. So obviously the CRES insureds have access to the CRES risk management hotline, they can call, and you’re going to be fielding a lot of those calls for them if they have something that they want to run by you. Are you seeing more calls now or maybe more people using risk management to help things go away or is your follow-
Kathryn Holbert:
I do. I am seeing an uptake in that. One of the things though that I am most proud of in the very long time I’ve been doing the risk management, what I definitely see is repeat callers. Once somebody calls in and it becomes aware of the risk management program and gets their problem solved through the risk management program, they’re so much more likely to reach out again. And that of course is the purpose of Getty, of the risk management program. I like to say our number one goal is closing the transaction. Our second goal, if that is simply not possible, is at least getting agreed upon cancellation instructions. So even if nobody’s happy, they’re all agreeing to walk away and that’s how you prevent litigation. And really the risk management program is my only opportunity to do that. And I get calls on property management, I get calls on, “I need help with this addendum.” I get calls on “I have this issue on the SRPD, what should I do?”
A very large part of what I do through the risk management E&O program is counsel people and guide people on not only the legal issues involved, but communication, how you speak to your client, how you speak to the other side, and how you do that effectively. Because my cases are non-disclosure cases, but at the end of the day they’re almost always misunderstanding cases and the seller says, “You never told me.” And the buyer says, “Well, I did, but this is how I said it.” And then maybe the agents didn’t understand and proper communication is what prevents lawsuits.
Dave Miller:
Well, I tell you, this has got to be music to CRES’s ears because this is exactly why they set up that hotline so that people could call in and navigate through some troubles that maybe they’re not used to seeing before it becomes a lawsuit. So that’s fantastic. I’m glad you’re being kept busy.
Kathryn Holbert:
Yes.
Dave Miller:
So speaking of busy, I mean it’s been all over the news. This NAR lawsuit, everybody’s up in arms, but as the more I hear about it’s not really that big of a deal, but tell us what your thoughts are there.
Kathryn Holbert:
Then NAR lawsuit is very interesting. That is a billion dollar lawsuit that essentially comes down to a misunderstanding. The key word in that lawsuit was collusion. And that is what the plaintiffs kept hammering is that the agents and the association were colluding to keep the commissions high at a 6%. Whether that’s high or not totally depends on who you are, but there was not effective communication between the agents and the buyers and the sellers as to who was paying this commission. And of course the sellers were saying, “I did not know I was paying both sides of the commission and you were colluding and keeping that information from me.” And that’s why the jury came back the way they did. And the other big thing about the success of that NAR lawsuit is the plaintiffs were coming at it from the perspective and telling the jury everybody should pay their own commission, which is true, and it is kind of a basic tenant and frequently usually is what happens on the commercial side honestly.
But there’s a lot of problems of why that isn’t feasible on the residential side, especially the lower end residential side when individual home buyers are struggling to come up with a down payment on an FHA loan and they just simply cannot possibly pay the commission on top of everything else. And I won’t get into what I think some of the solutions to the overall big problem are. It will be years before there’s any final decision on that lawsuit. There are still motions pending before the trial court on directed verdicts and remitters and all kinds of stuff like that. Once all of those motions are resolved, it’s going to be appealed by one side or the other. And it may even work its way up eventually to the Supreme Court, but that again will be years. So as far as any laws that come out of that or any real hard case law, it is going to be years.
But what I am telling people now, “What that means to you is talk to your clients, whether you’re representing the buyer or the seller, you need to talk to your clients about how you are getting paid, who’s paying you, what you expect to be paid.” And people are scared to have these conversations and yet it is a perfect opportunity to inform them of the value that you are providing them. If you think you’re entitled to a 3% commission, explain to them why and explain to them what they’re getting out of that and what you can provide to them as a real estate professional that they can’t do themselves or they can’t get somewhere else on their own.
Dave Miller:
So is it your advice to have something in writing? Is there a form that now is going to be coming out that says, “I’m the seller’s agent or I’m the buyer’s agent, I’m going to be paid X amount.” Is it a percentage or is it the dollar amount?
Kathryn Holbert:
Buyer-broker agreements have always existed, and there are some agents and brokers who always use them routinely. There’s others that just flat out will not use them. There are forms available through the associations. Some of them are better than others and none of them are mandated. And I have been encouraging people to dust those off, look at those, analyze them. If the form doesn’t really fit what you want to do, what do you want to do? You can make a very short term buyer-broker agreement if you want. You can limit it to a specific property. There’s a lot of things you can do as you’re discussing that with your clients, and I’ve been seeing them put in, because I’ve actually been being told by brokers recently that they are seeing sellers list property just wanting to share a half a percent or 2% or 1% or something like that.
So I think that sellers and sellers agents are testing that out and trying to push those boundaries. So I’ve seen brokers recently do brier brokers agreements and say, “I want 2.5%, whatever I can get from the other side, great, I’ll let you know what I get from the other side, but if I don’t get my full 2.5% from the other side, I expect it to come from you.” And that is a very clear way to communicate that and it is perfectly appropriate. And of course it’s 100% negotiable and if the buyer, whatever agreement is reached, that’s fine, but it’s important that it be presented and discussed as an agreement, not like “This is what you have to pay me, sign here.” Those are the conversations that resulted in our lawsuit.
Dave Miller:
Right, and I think you made a great point a couple of minutes ago about how the interest rates have affected people saying, “Hey, it’s already tight in this transaction for money. Now I’m paying this side and that side.” So I mean, is this really considered like a consumer protection law? Was this brought up because of higher rates and people crying foul? Why was it brought up now and not 10 years ago?
Kathryn Holbert:
The value in NAR lawsuit was that it was a class action. I’ll be blunt and honest. Nobody would’ve filed that lawsuit on behalf of one seller. So pulling all of the sellers together and some attorney was like, “Hey, I think I can build a class action out of this.” And they did and they did it successfully. None of the issues in our lawsuit are new issues, none of them were caused by the current market. A 6% has been routine broker commission for a very long time. And so it wasn’t any of that that is the why now for the NAR lawsuit, it was just simply a smart attorney figured out, “I can make a class action out of this.”
Dave Miller:
Right. We talked before about dual agency. Should a seller assist the unrepresented buyer in a transaction, talk about some of the pitfalls of that.
Kathryn Holbert:
Nevada does allow dual representation. Every transaction you’ve got us have the duties owed, signed in Nevada. In addition, there’s the consent to act form saying you could act for both parties or you can only act for me. So you’ve got to get both forms signed. And my concern is when an unrepresented buyer approaches a seller’s agent and says, “Hey, I can’t pay my own commission. I want to just do it myself.” That the agent has got to be very clear on what their role is, not only with the buyer and the seller, but with themselves. And they cannot say, “I’ll just help you out, but I won’t represent you.” If an agent is going to assist the buyer in any way, they are representing them under the law and they need the right form signed and they need to do it correctly and they can do it correctly.
Now, if the seller is only paying 3% and isn’t going to pay you to represent the buyer, I don’t recommend that you do that, but you are allowed to do that in Nevada. But what is going to get agents in trouble is if they do that partway and pretend that they’re not really representing the other side. That is going to get them involved in a lawsuit and in trouble with the NRED.
Dave Miller:
And we’ve talked about it before, and this is a rhetorical question, but would you agree that dual agent transactions are just a nightmare with claims?
Kathryn Holbert:
Yes, they are bad.
Dave Miller:
I know it sounds great to get both sides, but how do you convince a jury that you have a fiduciary duty to this side and that side at the same time?
Kathryn Holbert:
You cannot really effectively represent both parties that inherently have competing interests.
Dave Miller:
And just what you hear too, right? “I will take this much for the house.” But how do you relay that to the other side? I think you’ve always recommended the crescent shirts to have another agent in the office represent the side just so that-
Kathryn Holbert:
At least do that. If the brokerage is going to do both sides, at least have different agents represent the buyer and the seller.
Dave Miller:
Great advice. I’ve always asked you about, and it’s crazy that there are six different associations in Nevada. You have different tort and different laws down in southern Nevada, different in the northern Nevada, Reno region, but there’s different forms, different associations. What should Nevada CRES insureds know about maybe if they’re in Vegas selling a home in Reno and other places? Can you expand on that?
Kathryn Holbert:
Yes. The primary difference is the different forms because the majority of the forms, there’s only three forms, the duties owed, the consent to act and the SRPD in Nevada are the only forms that are done by the Nevada Real Estate Division on the state level. All the rest of the forms are done by the individual associations and there are multiple ones. And paying dues to all of them is a major complaint of the people that work in the whole state. And the forms are quite different. There’s some things I like better about the southern purchase agreement. There’s some things I like better about the northern, and I say northern and southern because although there’s a lot of little small ones, the major ones are the northern in Reno and the southern one in Las Vegas. And there has been talk for years and years and years about a statewide purchase agreement or statewide forms, and there has been some limited action on that. I don’t know that it will ever happen because the cooperation at the high levels that it’s going to take to make that happen just as unlikely to occur.
Dave Miller:
So if an agent’s selling a house outside of their association, would there be a risk in a lawsuit by not including that association’s form?
Kathryn Holbert:
The bigger the risk of the lawsuit is not just the fact that you use that form, but you used a form you’re not familiar with and you don’t know what you’re doing.
And even if you’re in Southern Utah and you’re going to the Northern Nevada market, even though you’re very comfortable and familiar with the Southern Nevada forums and you say, “Hey, I like this form better, I want to use this form.” Nobody up north is familiar with that form. And so you’re going to have problems with misunderstandings again because they’re using a form that you’re not familiar with or you’re using a form that they’re not familiar with. If you’re going to practice in another geographical area that uses different forms, just make sure you’re very familiar with them. If you’re not, call risk management.
Dave Miller:
That’s great advice. It’s always blown me away, the different associations there. So hopefully they all come together in the future, but that’s good to know. Let’s talk about a home warranty real quick. Obviously we’re with Fidelity National Home Warranty, we always promote that 95% of lawsuits are buyers suing sellers. And a home warranty plan is that one product that actually stays with the buyers after the close of escrow. And can you just talk to how, and we preach this too, how a home warranty is a risk management tool in a transaction and how keeping the buyers happier after the close of escrow could maybe limit a lawsuit?
Kathryn Holbert:
Absolutely. I kind of started this seminar, 90%, 95% of my cases have always been over the SRPD and nondisclosure issues, which of course relate to the condition of the home. Essentially what those lawsuits are is “The home had this problem, this defect, whatever it may be, at the time I closed escrow and I didn’t know that it had this problem.” Well, if it’s a problem that the home warranty will fix, problem solved. If there’s a home warranty and they call that home warranty and the home warranty comes and takes care of the problem, there’s no lawsuit. If it’s a bigger problem or there’s issues with the home warranty claim, of course then it could go forward. But even in that instance, the home warranty is very valuable to have because it could possibly reduce your retention due under a claim or something like that. And so it is just best standard practice to always have a home warranty on every transaction. And the seller paying for that for the buyer is always a show of good faith.
Dave Miller:
And sometimes even an agent will throw it in as a closing gift because they want to make sure that it lessens the chance of a lawsuit.
Kathryn Holbert:
And in some instances, the agent needs to pay that in order to get the reduction in their deductible. So everybody needs to be aware of that and make sure they understand what their policy requirements are, because sometimes they have to pay that in order to get the benefit.
Dave Miller:
Well, and any questions on the home warranty side? Of course, we have three fantastic sales executives there. In Northern Nevada, we have Katie Morales, and in the Vegas/Henderson area we have Ken Schulkey and Terry Estrada. And of course I can be reached at any time for that. So Kathryn, I know you’re busy. So one last question, if we may, you receive a lot of risk management calls day-to-day, month to month on, you talked about some of the calls that you’re getting. If you could categorize a few, what are your top two that you’re getting? Is it property management, is it forms? Is it just general disclosure?
Kathryn Holbert:
Well, I get a lot of property management questions, questions regarding just security deposit, transmittals, just general terms of the lease. “This is what they’re doing. Is this a violation? How do I handle this problematic tenant or this problematic landlord?” There’s always a lot of the property management questions. The other just broad category is “How do I close this transaction?” Yeah, and it’s so crazy, the problems that I hear that have come up in a transaction and they just say, “This particular issue is what has arisen in this transaction. How do we navigate this and what are the documents that we need? How do we reach a resolution on this?” And a lot of those are related to disclosure issues, some kind of condition of the property that came up during an inspection or something like that. And maybe they’re trying to do a credit in lieu of repair or they’re making repairs, but they can’t be done until after close of escrow or all of those kinds of things.
But are exactly the kind of things that if they’re not properly handled before close of escrow cause a lawsuit after the close of escrow. So particularly if you’ve got a disclosure issue that’s causing a hiccup in your transaction, reach out. Let’s make sure we get that completely taken care of before escrow closes.
Dave Miller:
Are you drafting a lot of releases? I know in years past, you’ve always said that if the agents being asked if for a concession of a dollar amount, you’ll sometimes tell them, “Go ahead and concede that $1,000 because this could become a two or $3,000 claim later.” Are you drafting something that says, “Hey, for this $1,000 we’re done?” It’s really important, isn’t it?
Kathryn Holbert:
Yes. Yeah. I tell before and after if a claim arises, once somebody has made a demand and said, “I have this complaint against you, I want you to pay X number of dollars.” What you are doing at that point in time is buying a release. So you do not pay them unless you get your release. And if you need help drafting it, that of course is something that I can usually do through the risk management program. But you don’t pay anybody any money ever, just as a general rule in life, unless you get that release.
Dave Miller:
Well, absolutely. Because if you give them a thousand dollars, now six months later they decide that wasn’t enough. The repair was actually X, and now we want a little bit more. And then they probably get more, don’t they?
Kathryn Holbert:
Exactly. And of course I tell them at this point in time, it doesn’t even matter if you did anything wrong or not because what you’re doing is buying the release. And I’ll help them say, “In this particular instance, $1,000 is a good price to pay for that release.”
Dave Miller:
Absolutely.
Kathryn Holbert:
Or $10,000 is not, don’t pay 10 grand for that.
Dave Miller:
Well, it’s the scare tactic, right? “I need $10,000.” And a lot of people are going to push back and say, “Okay, how about I just give you five?” And so that’s probably what you see often.
Kathryn Holbert:
Right. And of course a lot of that could be negotiable and I definitely can help people understand the value of the claims, which of course determines the value of the release.
Dave Miller:
Right. Well, all great information. I just want to thank you so much, Kathryn. You’re just such a wealth of knowledge. You’re on the ground every day, right? There in the trench, so you know what we’re talking about. We always appreciate you being on here to educate the CRES insureds and all of our Fidelity National Home Warranty clients. So we appreciate your time very much.
Kathryn Holbert:
Absolutely a pleasure. Thanks for having me.
Dave Miller:
Absolutely. And we’ll meet in the next couple of months and we’ll talk a little bit more about property management, correct?
Kathryn Holbert:
Yes, let’s do that. There’s a lot to talk about there.
Dave Miller:
All right, great. Well for now, thanks so much and have a great day.
Kathryn Holbert:
You too. Thanks so much.
