Pitfalls for Colorado Brokers in a Seller’s Real Estate Market

aerial view of real estate in a city

Colorado is experiencing unprecedented market conditions that favor sellers of real property. The heavily favorable sellers’ real estate market is due to a combination of factors, including the large number of people moving to Colorado, favorable interest rates, the effects of the COVID-19 pandemic (including the ability to work from virtually anywhere), and a limited supply of new home construction. As mentioned, the result has been a windfall to sellers of residential real estate. This market has created conditions that real estate brokers (in particular, buyers’ agents) must be aware of. The following is a Top 10 list of claims and issues arising out of Colorado’s sellers’ market.

1. Accepting Multiple Offers

Once a property is listed, sellers’ agents are receiving multiple offers, including cash offers and other terms favorable to the seller. These offers are often submitted through electronic forms which make it easy to forward to the sellers for their review and consideration. Unfortunately, the electronic format does not have a safety setting which would prevent a seller from accepting more than one offer. We are now seeing claims where there are two or more buyers for the same property who claim they have a valid and enforceable contract. Obviously, the seller cannot sell the same property to two different buyers. Usually, the way this works out is that one buyer is paid not to buy a property. The best way to protect yourself and your seller is to ensure that the seller cannot accept multiple offers — by providing the offers in a PDF format or setting the defaults on the electronic software system or forms. Anytime multiple offers are received simultaneously or concurrently, the broker should advise the seller that multiple offers have been received, and that the offers will be presented and discussed. The seller should further be instructed not to sign anything regarding the offers until talking with the seller’s agent. In Colorado, there is no need for the seller to acknowledge receipt of an offer.

2. Appraisal Gaps

One trend we’ve seen with this sellers’ market is that buyers are willing to pay a premium for a property. In order to persuade a seller to accept their offer, buyers often propose that they will pay not only an amount above the listing price but also an amount above the appraised value. When preparing such offers, the buyer’s agent and the transaction broker must work especially hard to ensure that the additional provisions regarding an above ask offer with an appraisal gap coverage is accurately communicated. A buyer’s agent must have a direct and serious conversation with your buyer clients about how the appraisal gap offer would work, to ensure that the buyer does have the amount necessary to cover the gap.

If it turns out that the buyer cannot bring additional funds to the closing above the appraised value and what the lender will loan, then the buyer has an uncomfortable choice of scrambling to obtain money from family, a hard money loan, or losing the buyer’s earnest money. The buyer’s agent needs to document that this conversation took place, and that the buyer understood these risks. The additional provisions language regarding the appraisal gap must be clearly set forth in the Contract to Buy and Sell in order to avoid any dispute with the seller, seller’s agent and the buyer. It is always advisable for the broker to advise the principals to consult with an attorney and have an attorney draft this type of additional provision.

3. Keeping the Transaction on Schedule

Problems and delays are typical to any real estate transaction. However, sellers are becoming less and less patient in Colorado,  knowing that they can get a quick offer with favorable terms, including a quick closing. Buyers’ agents must work extremely hard and be constantly diligent to the contract deadlines for loan approval, inspections, inspection objection, inspection resolution, HOA documents, due diligence documents, the Seller’s Property Disclosure, and appraisal deadlines.

Appraisers are being kept extremely busy in Colorado (and other western states) due to the volume and the amount of purchase transactions as well as refinance transactions. It’s extremely important that the buyer’s agent seek out and obtain any necessary extensions and amend the contract to protect the buyer’s rights. We are seeing claims where deadlines have come and gone, where the buyer’s agent did not act soon enough, although the delays were not the fault of the agent. These claims include the loss of the buyer’s earnest money — as well as the opportunity to purchase an affordable home under lending terms for which the buyer initially qualified but lost the opportunity to close. The buyer’s agent must be constantly communicating and focused on all of the details of the transaction.

4. Waiving Inspections and Objections

In this current market climate, sellers are becoming extremely reluctant to negotiate on inspection objection items. Most sellers are wanting to sell the property purely “AS IS.” Nevertheless, buyers’ agents must counsel their buyer clients to perform their own due diligence, including having a home inspection done, testing for radon, having a septic system inspection or sewer line scope inspection, and roof inspections, to name just a few. Buyers will sometimes get discouraged knowing that even if problems are found, the seller is unlikely to negotiate a resolution or take responsibility for fixing the problem. Many buyers simply forego the inspection only to get into the home and learn that there are significant problems such as: cracks in the foundation, cracks in the slab-on-grade floor, mold, building code violations, lack of permits, hail damage to the roof, a pending HOA special assessment, and a problem with the sewer or septic system, to name just a few examples of the common problems that buyers are discovering after closing.

The buyers’ agents must do everything in their power to encourage the buyer to have as many inspections done as possible. Buyers’ agents should do everything they can to procure a sufficient amount of time for the buyer to inspect the property and protect the buyer’s earnest money. 

The buyer’s agent should document the advice and recommendations given regarding inspections. More importantly, document that it is the buyer’s choice on what inspections to have done — or the decision to forego any inspections or attempts to negotiate in a resolution to inspection objection items. We are seeing claims where the buyers decided to forego any inspections,  but then blame their real estate broker once they get into the home and discover significant problems that may have been revealed during the inspection process. The best way that brokers can protect themselves is to encourage inspections and  document the decisions made solely by the buyer based on all the information that was available at the time.

5. Terminating Contracts

Brokers are increasingly finding themselves a target of buyers’ frustrations when: sellers will not lower the price to the appraised value, will not make inspection objection repairs, or when the HOA will not provide the necessary documents, among many other items that are beyond the broker’s control.

Buyers’ brokers are increasingly being scrutinized as to whether they are protecting their clients’ interests, advocating for the buyer, and protecting the buyer’s earnest money. Sellers are desiring to protect and realize the advantages in the contracts. We are seeing claims that when a buyer decides to terminate the contract, the seller is quick to accuse the buyer of breaching the duty of good faith and fair dealing and accusing the buyer’s agent of conspiring or tortuously interfering with the contract. As a result, buyers are aggressively trying to retain the benefit of the earnest money. Therefore, it’s critical that a buyer’s agent be able to document and verify the legitimate reasons the buyer elected to terminate the contract, and that the notice to terminate was not only provided in a timely manner, but it also accurately provided the reason why the buyer chose to terminate. 

6. Ambiguous Amend/Extend Language

Due to the pressures on buyers and delays associated with appraisal, inspections and obtaining lending, sellers are reluctant to grant extensions. As a result, we are seeing creative drafting of provisions allowing for an extension by both buyers’ and sellers’ agents. Examples include allowing the seller to accept a backup offer, the buyer agreeing to waive inspection objections, or fully committing the buyer’s earnest money to the transaction.

Sometimes, due to creative drafting, it becomes unclear when the earnest money “goes hard” or whether the backup offer goes into the first position should the buyer not be able to close by the deadline. Brokers should strive to clearly articulate the client’s position and protect it through clear drafting and communicating amend/extend terms. If there’s any doubt, ambiguity, or concern, the buyer and the seller should consult with a legal counsel who can assist with drafting amendments or extensions to the Contracts to Buy and Sell.

7. Contingencies

Another contract drafting problem that has come to the forefront in this current market is contingencies. Contingencies can take many forms. Contingencies that are resulting in disputes include:

  • Deadlines for the buyer to close, when the contract to purchase is contingent upon the sale of buyer’s current property or another property
  • Price escalation clause to meet appraised value
  • Appraisal gap contingency
  • Initial cash offer contingent upon whether the buyer elects to seek financing

Oftentimes, these contingencies lead to delays which bring up disputes and place earnest money at risk. In addition, what was thought to be a clearly stated contingency is oftentimes subject to interpretation and different viewpoints, depending on the agenda or the interest of the buyer or seller at that particular moment.

It cannot be stressed how important it is to draft these contingencies in a way that clearly communicates the interests of the party who is proposing the contingency. When drafting these contingencies, careful thought should be given as to how the words could be interpreted or applied to different scenarios. Attorneys can be of great assistance to the parties in drafting contingency language.

8. Seller Has No Place to Live

Following up on the issue with contingencies, oftentimes sellers want to take advantage of the favorable market and interest rates and try to upgrade their own home. In preparing the contingency in a counterproposal, a seller thinks that they can find a suitable replacement home or go live with a family member or friend. However, once they get into the contract and realize just how difficult it is and how expensive it is to find another place to live, sellers often want to terminate and get out of the contract. This can be difficult. In those instances, we are seeing claims against the seller’s agent for not better advising the seller and protecting the seller from the risk of their own decision. The best way to manage this risk is to document in the transaction file that the broker discussed with the seller their options, the difficultly of buyers in this market, and that the seller has a clear, reliable backup plan in the event that another property cannot be put under contract in time. 

9. Post-Closing Occupancy Agreements

One alternative for sellers who are looking for a replacement home is to negotiate and enter into a post-closing occupancy arrangement with the buyer. Such an arrangement allows the seller to continue to reside in the home and keep possession after closing.

The Colorado Real Estate Commission has approved a form for a short-term post-closing occupancy arrangement. Brokers should be familiar with this form and know how to read, prepare and discuss the form to educate their clients on its intended use. The Post-Closing Occupancy Agreement form does have limitations and can lead to disputes. If the seller is likely to remain in the property for more than six months, it is best to not use the Post-Closing Occupancy Agreement form and instead have an attorney prepare a lease agreement. If using the form, the Post-Closing Occupancy Agreement must state with specificity the deadline by which the seller has to vacate and tender possession to the buyer. While the buyer and seller may be eager and willing to accommodate each other to effectuate a closing, the buyer’s and seller’s interests drastically change after the closing and the buyers have an expectation as to when they will take possession of the property.

All Post-Closing Occupancy Agreements should be reduced to writing. The written agreement should clearly identify the date by which the seller must vacate, including all personal property that was not included in the transaction. The written agreement must identify what consideration is being paid by the seller to continue to occupy the property, if any. It is also advisable to have the consequences for any breach included in the written agreement. Consistent with the theme throughout this write-up, it is always a good idea to have the buyer and seller consult with an attorney. Consider having an attorney draft any post-closing occupancy that involves any additional details or complications beyond that which can be simply handled with the Commission-approved form.

10. Switching Brokerages

We are currently observing two types of claims when brokers switch from one brokerage to another while the transaction is pending or the listing is ongoing. When switching brokerages, it should be clearly communicated as to which brokerage will maintain the transaction file and be responsible for the closing, including receiving the commission and distribution of the commission proceeds. If the broker decides to switch brokerages during a transaction or while a listing is open, the broker must discuss what impact, if any, the change will have on the client, the transaction and the closing.

We are seeing claims where expectations were not clearly set forth, and there was a dispute as to: which brokerage would receive the commission, the brokerage’s expectation as to the commission that would be paid, or what broker concessions would be acceptable or appropriate.

The second scenario in which we see problems for brokers is when they go from one brokerage where there was a group errors and omissions insurance policy to another brokerage that also has an errors and omissions insurance policy. This can result in a lapse or denial of coverage when the transaction occurred while the broker was still with the original brokerage but the claim is made after the transition to the new brokerage. This problem can be avoided by the broker obtaining their own individual policy or obtaining a tail policy. Brokers need to give special consideration to whether they will have E&O insurance coverage in such instances as they pursue cleaner opportunities with new brokerages based on the success they are finding in the current real estate market. 

By Jim Meseck* and Anthony Lally†
White and Steele. P.C.
(303) 296-2828
Dominion Towers, North Tower
600 Seventeenth Street, 600N
Denver, Colorado 80202-5406

 

*Jim Meseck (jmeseck@wsteele.com) is a shareholder at White and Steele, P.C. His practice centers on litigation with a focus on real estate professional liability defense, personal injury defense, and legal malpractice defense.

Anthony Lally (alally@wsteele.com) is an associate at White and Steele, P.C. His practice centers on insurance defense litigation, specifically professional liability defense, insurance bad faith defense, personal injury defense, and construction defect litigation.

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.

Originally Published March 30, 2021

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