RISK MANAGEMENT

1. RISK MANAGEMENT That Delicate Balance Steve McTyeire, MBA, Broker Avery Yarbrough School of Real Estate

2. Alabama Real Estate Commission Rules for Classroom CE credit • Sign in, including license number • You must here now to receive credit later • 100% attendance is required • Cell phones must be turned off during class • Computers can only be used to take notes • CMap - Check credit & leave evaluation

3. Textbook 4th Edition Text Written by Jim Lawrence of LAH For The Alabama Real Estate Commission & Alabama Center for Real Estate, The University of Alabama • Available for Purchase $20 Or • Make notes on Handout

4. I. INTRODUCTION Two primary Goals • Primary Goal – To generate income • Primary Goal – To care for the consumer • Purpose of the course – To see that delicate balance between managing risk and generating income is obtainable. • Good Referral

5. II. Risk Management Rules • Federal Laws – Anti-trust, Fair Housing, RESPA … • Alabama Code - contracts… • Alabama Real Estate Laws – 34-27-(1-100) • Local Laws – Health & Safety • NAR Code of Ethics “standard of care” • Court Decisions - Case Law • Maybe more than one answer • Attorneys love “It depends”

6. Pre Test The roof leaks on your listing, and you know it. Do you voluntary disclose it to A. Consumer B. Customer C. Buyer Client in Dual Agency

7. Final Test The roof leaks on your listing and you know it. If ask a direct question about the roof from one of the below, which must you tell. A. Consumer B. Customer C. Client in Dual Agency D. Buyer’s Agent

8. Pre Test Are Property Disclosure forms a good idea for A. Sellers B. Buyers C. Agents

9. Pre Test If the house is haunted, do you disclose?

10. Pre Test Is earnest money required for a valid contract?

11. Pre Test Is it illegal to fail to leave a copy of the listing agreement with the seller?

12. Pre Test Can you pay the seller $100 to list with your company?

13. Pre Test Does this $100 payment to the seller need to be disclosed to the buyer?

14. Pre Test When must earnest money be deposited?

15. Pre Test When must RECAD be presented?

16. Pre Test The mayor wants a new site for City Hall. Do you need to RECAD?

17. Pre Test Can Agency be implied?

18. Pre Test You are a licensee and decide to sell your own private residence on FSBO.com Do you need to disclose your status as an agent?

19. Pre Test Who can you Advise? A. Consumer B. Customer C. Client

20. Pre Test Anti-Trust Is it alright to say your broker sets the commission rates you charge based on services offered? How about, My broker charges what everyone else charges?

21. Pre Test Fair Housing As a property manager, can you discriminate against a drug abuser? How about, if he is in treatment?

22. Pre Test RESPA Can a lender pay for open house expenses if they don’t attend?

23. III. PROPERTY DISCLOSURE • Obligation to disclose in Caveat Emptor? • HARD ? • Where is line? • Office Policy – seller disclosure • Shotgun Attorneys • No one wins, even if you win, you bleed

24. Who will sue you?

25. Risk Management Tools Acronym ACTOR A Avoid Know Rules C Control Office Policy T Transfer Disclose O or R Retain Insurance

26. CAVEAT EMPTOR • The burden is on the buyer in Alabama (Last State) • Modified caveat emptor state • Exemptions are written on your HAND • Health and Safety - Known • Assumption of a Duty – Agency • New Construction - Expect • Direct Inquiry - Vague

27. TYPICAL LEGAL CHARGES • Fraud and Misrepresentation • Intentional Misrepresentation - Mold • Intentional Concealment - School • Negligent or Innocent Misrepresentation - Careless • Negligence – A responsible agent would have… • Suppression – Withholding material fact - Basement • Knowledge of material fact, duty to disclose, failure to • Vicarious Liability – Not unless should have known • Seller • Broker

28. Fraud and Misrepresentation Elements of Fraud A false representation of an important fact or issue Relied upon by the buyer or seller Who is damaged by reliance

29. HOME INSPECTION • Insist that your buyer inspect property • Get monkey off your back • Selecting Inspector • Agent’s one favorite inspector • “Yellow Pages” • List • Don’t guarantee inspector

30. INSPECTION “DO NOTS” • Do not perform inspection, even if you are an inspector • Do not accompany inspector – What did he say? • Do not interpret inspection – draw smiley face • Do not select or allow seller to select inspector • Do not allow buyer to fail to see importance of Inspection • Do not allow buyer refuse inspection without documentation, especially if Buyer’s Agent – page 78 • Do not ignore value of specialized inspector - HVAC

31. OTHER POINTS ON PROPERTY DISCLOSURE • Document, document, document • When in doubt, disclose – permission • Provider of questionable information takes ownership – tax record • “I don’t know” • Point out apparent problems, but draw no conclusions • CYA – Cover Your Assets • After closing, maintain distance

32. PENALTIES • Courts - Criminal & Civil • Actual damages • Punitive damages • Rescission of contract • The Alabama Real estate Commission (Update) • May Revoke license for 2 Years • Suspend license • Reprimand licensee • Fine licensee $100 to $2500

33. THE SELLER’S DISCLOSURE STATEMENT Good Idea?

34. Seller Disclosure page 66 • Seller • 2/3 or more of lawsuits brought by buyers • Buyer • Info for direct questions • Seller Broker • Caveat Emptor • Buyer Broker • Advice

35. Buyer’s Acknowledgment page 71 • Common issues encountered with buyers • Help understand process • Different inspections, insurance, warranties • Better to address issues sooner than later

36. STIGMATIZED PROPERTIES • “A property that has been psychologically impacted by an event which occurred, or was supposed to have occurred, on the property, such event being one that has no physical impact of any kind” • Four steps • Fact or fiction - Ghost in attic from murder in MBR • Check state laws - Alabama silent • Materiality? - Will ghost stay? Murderer still there? • Disclosure - With written permission

37. AIDS Disclosure NO – Don’t do it Federal Fair Housing Law Prohibits disclosure as a protected class - Handicap Even if ask a direct question Not material to transaction any more than disclosing race

38. “AS IS” • “Condition of property at time of contract” • Pictures • Refers to real estate and all its warts. • Caveat Emptor applies • All fraud claims barred if purchaser signs “as is” contract

39. PROPERTY DISCLOSURESITUATIONS

40. Situation #1 You are the listing agent on a property. The seller is your client. The seller tells you that the air conditioning system does not work. It is not a health and safety issue. A buyer sees the home for the third time. The buyer’s agent tells you that the buyer is very interested in making an offer. Concerning the air conditioning, you should A. Tell the buyer’s agent that the system is broken. B. Not tell the buyer’s agent the system is broken C. Require the seller to complete a seller’s disclosure form. D. Tell the seller to disclose nothing if asked.

41. Situation #2 You are the listing agent on a property. The seller is your client. The seller tells you that the back deck, which is 30 feet off the ground, has a lot of rotten wood underneath and is in great danger of collapsing. A buyer sees the property for the third time. The buyer’s agent tells you that the buyer is interested in making an offer. Neither the buyer nor the buyer’s agent has questioned the structural integrity of the back deck. Concerning the deck, you should A. Tell the buyer’s agent that the deck is dangerous B. Not tell the buyer’s agent that the deck is dangerous C. Require the seller to complete a seller’s disclosure form to see if the buyer’s agent catches the defect. D. Require the seller to replace the deck

42. Situation #3 You are the listing agent. The seller is your client. The seller tells you that the new paneling in the basement was put there by him to cover some mold behind the paneling. The seller also tells you that the mold has been tested by a professional and declared, in the seller’s words as “a little unhealthy.” The seller tells you to keep the covered defect confidential, as he needs top dollar for the house. He also tells you that he will pull the listing should you not agree to the cover-up. Concerning the mold, you should A. Not disclose the presence of the mold, since the seller is your client and you owe the fiduciary duties of confidentiality, and obedience. B. Not disclose the presence of the mold, since you need the listing and a potential sale and since the mold is only “a little unhealthy” C. Secretly tell the buyer’s agent about the mold. D. Discuss the importance of disclosure with the seller and terminate the listing should the seller not agree.

43. Situation #4 You are the listing agent. The seller is your client. There is a slight roof leak over one corner of the third bedroom. It is not a health or safety factor. The seller tells you about the leak, but ask you to keep it confidential. A buyer sees the property for the third time. The buyer’s agent says to you: “I noticed a slight discoloring in the ceiling tile in a corner of the third bedroom. Does the roof leak right there?” Concerning the leak, you should A. Not disclose the roof leak, because it is not a health or safety factor. B. Disclose the roof leak only with the seller’s permission. C. Disclose the fact that the roof leaks. D. Try to shift the agent’s focus to the positive traits of the property without answering the specific question about the roof.

44. Situation #5 You are the listing agent. The seller is your client. Even thought the house is in generally good condition, there is a slight roof leak over one corner of the third bedroom. It is not a health or safety factor. The seller tells you about the leak, but ask you to keep it confidential. A buyer sees the property for the third time. The buyer’s agent ask you this question: “Is the house in generally good condition?” You should A. Respond, Yes the house is in generally good condition. B. Respond, “No, the roof leaks over one corner of the third bedroom. C. Refuse to answer the question and ask the seller for permission to disclose the roof leak. D. Tell the buyer’s agent that Alabama is a “caveat emptor” state and it is the buyer’s obligation to discover any and all defects concerning the property.

45. Situation #6 You are a buyer’s agent. The buyer’s are your clients. They are from out-of-town and not familiar with any home inspectors in the area. They have put a property under contract with the right to inspect. They ask you, their agent, for a recommendation for a home inspector. You should A. Give them a copy of the Yellow Pages. B. Give them a limited list of inspectors who are guaranteed by you and your company. C. Give them a limited list of inspectors who you have worked with in the past. D. Recommend your one favorite home inspector who you have been using for years.

46. Situation #7 A house is placed on the market for sale. It is listed with a licensee and marketed through the MLS. It is being sold by the owner’s family. The owner murdered his wife in the master bedroom and then took his own life in the same location. Which of the following is not true? A. Since this is a health and safety issue, the listing agent must disclose the event to all interested parties. B. The listing agent is not required to disclose the event. C. To avoid a difficult situation at or following closing, the listing agent should discuss timely and tactful disclosure to an interested party with the seller’s family. D. A buyer’s agent has the obligation to disclose this event to the buyers even if the agent is unaware of the situation.

47. IV. ALABAMA LICENSE LAW • One way for a real estate licensee to reduce risks is to have a complete, working knowledge of Alabama License Law

48. 34-27-36 DISCIPLINARY ACTION • Property disclosure - already covered • Immediate family – under the law • Any false promise – reduced commission • Deceptive advertising – as agent • Earnest money – account … • Placing a sign

49. 34-27-36 DISCIPLINARY ACTION • 34-27-36(10) Failing to furnish a copy of documents with reasonable promptness • 34-27-36(25) It is illegal to fail to leave a copy of the listing agreement with the seller • Expiration date required on listing • No Net Listings

50. EARNEST MONEY • Immediately to broker • Relieved in writing on contract - postdated • Must be deposited when the offer becomes a contract • Unless another date applies • Release of earnest money • Mutual Release signed by all parties