Selling new builds or properties under construction can be challenging for real estate licensees. When dealing with these properties, licensees face risks that are not so common with other forms of real estate.
Here is an overview of the risks to watch out for and what you can do as a licensee to avoid a lawsuit.
Risk #1- Buying Property Sight Unseen
Buying a house or an apartment under construction sight unseen can be problematic if there are misunderstandings. What if the buyer is unhappy when they finally see the finished product? What if the rooms ‘seem’ smaller than they expected? What if they are unhappy with the quality of the finish? Or, maybe the traffic noise outside is much louder than expected. In any case, a buyer may decide to sue the seller’s agent or the buyer’s agent claiming misrepresentation by the agent.
These types of issues are difficult to identify without inspecting a property in person. So, real estate licensees need to go the extra mile to ensure buyers know what they are getting into. For seller’s agents, this means recommending the buyers engage a buyer’s agent to represent their interests if they don’t have one already. Emphasize the importance of doing their own due diligence before purchasing. For buyer’s agents, it means being thorough in representing the interests of your client.
Risk #2 – High Possibility of Delays and Cost Blowouts
Since the pandemic, there has been a steep increase in home-building costs, particularly over the past three years. The cost is being driven by materials shortages and rising material costs. Construction material expenses rose 17.5% from 2020 to 2021, which the US Census Bureau stated is the largest year-on-year increase since the 1970s. Further increases have been experienced in 2022.
Delays have also become more common in construction due to labor shortages. These shortages are due to an increase in resignations and retirements among skilled labor in the construction industry, and an insufficient pipeline of newly trained workers. During the pandemic, the increase in staff sicknesses and isolation periods exacerbated an already difficult situation.
Obtaining financing for a new build or property under construction isn’t as straightforward as the mortgage process for existing properties. In the current economic climate, it’s even trickier. Interest rates for mortgages have experienced a rapid surge in 2022. With the average length of construction upwards of 7-8 months or more than 14 months for owner-built homes, there could potentially be multiple rate increases in that period.
Imagine if a real estate licensee has promised a buyer that construction will be completed in 7 months. The timeframe then blows out to one year, due to material and labor shortages, and the whole purchase becomes significantly more expensive for the buyer. What do you think they will do? Chances are the licensee will be in the firing line for a lawsuit.
It is critical that licensees don’t make any promises during the sales process. Otherwise, those promises might come back to haunt you.
Risk #3 – The Construction Contract
New build and construction contracts typically favor the builder. Therefore, it’s important for buyer’s agents to thoroughly examine the contract to pick up any potential issues for their client. In the past, it was easier to add clauses in the contract to protect the buyer, for example, financial penalties for extensive delays. However, due to COVID-19 and the added risks builders and construction companies face, it’s unlikely those types of clauses will get through today.
Buyer’s agents need to ensure clients are aware of any hidden terms and conditions that could affect them. Pay attention especially to:
- Variations (with and without the consent of the purchaser)
- How defects are to be treated and rectified
- Termination clauses
- Completion and handover clauses
- Dispute resolution
- Exceptions or ‘subject to’ conditions
Protect Your Real Estate Business
As a licensee, real estate E&O insurance is a critical tool to protect your business. CRES E&O + ClaimPrevent® insurance can help you to defend a lawsuit if you are sued by a client. We offer access 7 days a week to qualified real estate attorneys who can provide you with legal advice when you need it. Contact the CRES team at 800-880-2747 for a confidential discussion today so we can tailor a policy just for you.