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How to Avoid a Lawsuit When Acting as an Agent for an Auctioned Property

Managing client expectations can be a challenge at the best of times. When you’re acting as a seller’s or buyer’s agent for an auctioned property, it can be even more difficult.

The auction process is fast, and it’s an intense process. Sometimes things can go awry, and even good real estate agents can find themselves facing a lawsuit. 

If you have a solid understanding of the risks associated with selling/buying properties at auction, this can greatly decrease your chances of facing legal action. Here are some tips to help you along the way…

Encourage Realistic Expectations

Many factors influence the success of auctions. On the seller’s side, it’s essential they have realistic expectations in terms of price and contract terms. When reserves are set higher than market demand dictates, properties are invariably passed over. This results in disappointed and sometimes angry sellers. It’s much more effective to have the hard conversations about realistic expectations upfront before the home goes to auction, instead of dealing with the fallout afterward. 

Realistic expectations are also important when it comes to buyers. In a tight housing market, they need to be prepared for the worst.  Auctions are highly competitive sales environments, and buyers may not be successful if not flexible with their budget. If they’re successful in winning the auction, your clients need to be prepared to comply with much stricter terms than a regular property transaction. 

Ensure Your Client Understands the Risks

The buying process is much more compressed in an auction scenario, and this can increase stress levels for everyone involved. Be sure all parties have realistic expectations from the outset and are aware of and understand the risks. 

The chances of selling a property quickly and profitably at auction are quite high for sellers, particularly in popular real estate markets in California. But, for buyers, this fast transaction process can be far more risky.

To mitigate your risk as the real estate agent, be sure to explain the auction process to your buyers in detail. Encourage them to go through a comprehensive due diligence process before the auction. That way, they can be confident there won’t be any hidden surprises post-purchase — and you can be confident they won’t have grounds to sue you if they find a major defect they weren’t aware of.

Encouraging due diligence means not only encouraging buyers to visually inspect the home, but also recommend:

  • A title search
  • Professional building inspection
  • Electrical inspection 
  • Pest inspection 

Auctioned properties are sold ‘as is,’ so it’s important your buyers are armed with all the information they need to make an informed decision. 

Buyers do need to be aware that gaining access to auction properties is far more restrictive than for homes for sale in the regular real estate marketplace. This, combined with the time pressures involved with auctions, does bring with it a higher degree of risk. 

You should also encourage your buyers to get to know the neighborhood before they purchase in the area.  Often, buyers can get swept up in the auction process, and then realize afterward they don’t like the area they’ve bought into! A bad auction purchase can have long-lasting negative effects. 

Finally, the financing process is far less flexible with auctions. Encourage your buyers to be fully prepared with financing before the auction begins. They are likely to need access to cash or a cashier’s check on the day in case they win the auction, although payment options will vary from auction to auction. Ensure your client knows exactly what’s required and forward this information in writing to protect yourself from liability. You don’t want to be facing a lawsuit because your buyers are underprepared, and they blame you for it. 

Protect Yourself Against Potential Risks and Liabilities 

Good recordkeeping is essential, so you’ll have evidence to back you up should you ever need to defend yourself against a lawsuit in the future. 

The best piece of advice for real estate agents when dealing with sellers or buyers at auction is to get all instructions from your client in writing. That means all instructions — including reserve prices for buyers, maximum bidding prices for buyers, any variations of terms — everything!

Obtain written disclosures from your sellers — never accept disclosure information verbally and never fill in the forms for them. Ensure all required paperwork is completed and signed by your clients. You, the agent, are just the messenger in passing that information on. 

Ensure You Have  E&O Coverage Tailored for Real Estate

To protect yourself against potential lawsuits, Errors and Omissions insurance customized for real estate is essential. At CRES, we offer Real Estate E&O + ClaimPrevent®, which provides a legal advisory service with fully qualified attorneys available 7 days a week to help you reduce your risk. If you’re interested in preventing legal issues before they become lawsuits, contact CRES at 800-880-2747 for a confidential discussion today.

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