Risk Management, 2020 Quiz Answers

Edited: March 20, 2020; Changed: March 20, 2020; Links: April 14, 2020

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We defend each answer with an explanation base d on citations from the book. Often, we quote more content than needed to put our answers into context and to make this quiz a richer learning experience. Citations from the book appear on a yellow background in Times-Roman.

Paragraphs labeled as “Notes” contain supplemental information we think useful but which is not part of the course. Paragraphs labeled as “Comments” are comments from the author and may be ignored.

Recommendation: If you don’t fully understand any particular question or our explanation of the answer, we suggest you re-read the section upon which it is based. For example, if you missed question #1 or don’t understand our explanation for question #1, then re-read “§2.2: Law of Agency.”

Caveat: These quiz questions are more difficult than the questions on the final. They tend to be longer, make greater use of real estate jargon, and often require more thought than questions on the final.

In several of the questions, Linda and Betty are REALTOR®s. Linda represents Sam, the seller; and Betty represents Bob, the buyer. Linda and Betty work for different brokers.

1. 2.2: AGENCY DISCLOSURE

Betty must have Bob sign her Agency Disclosure … (A) when she prepares a purchase offer for Bob to buy Sam’s house. (B) before she takes Bob to see his first listing. (C) within minutes of their first meeting.

(B) CC §2079.13(b) requires the buyer’s agent to declare his agency relationship by requiring his client to

sign an Agency Disclosure Form (AD) with the buyer when the buyer seeks his services in more than a “casual,

transitory, or preliminary manner, with the object of entering into a real property transaction.”

Of the three possible answers, the one that best matches the law’s requirement is (B), “before she takes Bob to see his first listing” for that is when Betty begins to make a serious commitment to Bob by providing him with her time and the benefit of her experience and know-how.

(A) If Betty were to submit her AD to Bob just before Bob was prepared to make an offer, Betty would be risking the possibility that Bob might have already signed an offer prepared by Linda or even

Frank – Bob’s brother-in-law and newly appointed licensee .

(C) Betty could ask Bob to sign her agency disclosure at their very first meeting and he might even agree to do so provided he trusted her and wasn’t put off by her aggressiveness.

The AD serves only to clarify to the prospective buyer the fiduciary duties the agent intends to provide the prospective buyer. It is not a contract – neither party promises to do anything for the other. If Betty wants to contractually bind Bob to using her as his exclusive buyer’s agent for any property he might select during the listing period, then Betty should have Bob sign CAR®’s Buyer Representation Agreement – Exclusive (Form BRE) ; or, if she wants to bind Bob to her as his buyer’s agent for a specific property, then she should have Bob sign CAR®’s Buyer Representation Agreement – Non-Exclusive (Form BRNE) .

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2. 2.3: VICARIOUS LIABILITY

A seller is vicariously liable for fraud perpetrated by his agent without his knowledge.

False Vicarious liability is a common-law doctrine that holds the principal liable for the negligent acts of his

agents when working within the scope of the agency. “Negligence” is accidental while “fraud” is intentional.

Note #1: In “§2.7: Seller Misrepresentation,” we explain that the broker is not liable for any fraud perpetrated

by his seller and which he “republishes” to buyers providing, that is, that the broker was not complicit in the fraud and

did not have actual knowledge to the contrary.

Note #2: Suppose Bob Buyer sues both Sam Seller and Linda (Sam’s listing agent) for intentional fraud. Even if Linda carries E&O, she will have to pay for her own defense since E&O only provides coverage for claims arising from professional errors and not claims from intentional acts such as fraud or illegal discrimination.

3. 2.6.4: DUTIES TO CLIENT

Linda is Sam’s listing agent; Li Wei is Sam’s prospective buyer and is unrepresented. Linda owes Li Wei the duties of “utmost care” and “loyalty.”

False Sam is Linda’s client; Li Wei is unrepresented (he has no agent). Hence, Linda owes only Sam

the fiduciary duties of utmost care, integrity, honesty, and loyalty. Linda owes Li Wei (the buyer) the duties every agent owes to any “third party,” namely the duties of diligence, honesty and disclosure (see §2.6.2).

Note #1: Li Wei (the unrepresented buyer) can be variously referred to as a “third party,” a “non-fiduciary,” or a “customer.” “Customer” is the term used in NAR®’s Code of Ethics, in which NAR® defines “customer” as “a party to a real estate transaction who receives information, services, or benefits but has no contractual relationship with the REALTOR

® or the REALTOR®’s firm…”.

Note #2: In this situation, Linda would be wise to have Li Wei sign CAR®’s Buyer Non-Agency Agreement (Form BNA) . To this same form, Linda would attach CAR®’s Disclosure Regarding Real Estate Agency (Form AD) to formally notify Li Wei that she was representing only Sam in the transaction. The Non-Agency agreement would serve to reinforce this fact. Here is the provision from Form BNA which makes this clear:

Even with this form fully executed, Li Wei might still be able to claim that Susy was his ostensible agent if Susy performed any service for Li Wei in the course of the transaction that was not also for Sam’s benefit; for example, if Susy showed Li Wei other properties or if she advised Li Wei about financing alternatives.

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4. 2.6.5.1: TRANSFER DISCLOSURE STATEMENT (TDS)

When Linda conducted her visual inspection of Sam’s home, she spotted poison oak in his front yard. She had it removed the next day. Linda sold Sam’s home to Bob. Soon after moving in, Bob was hospitalized for severe burns from the poison oak he contracted in his backyard. Bob has an actionable claim against Linda.

True Bob is likely to prevail in a breach of duty action

against Linda for her failure to conduct a competent visual inspection.

The fact that Linda had found the poison oak in Sam’s front yard proves that she knew how to identify that noxious shrub and her failure to disclose the poison oak in Sam’s backyard is evidence that she failed in her statutory duty to perform a “competent visual inspection” of Sam’s home.

Citation: CC §2079 states that any lawsuit from the buyer alleging a breach of the

listing broker’s duty to perform a competent visual inspection must be filed by the buyer

within two years from the earliest of these three dates: (1) date of occupancy, (2) date

of the deed’s recordation, or (3) the date escrow closes.

Note: In all probability, Bob would also sue Sam. Sam might avoid liability if he could convince the court that: (A) he didn’t know how to recognize poison oak, (B) that he was one of the lucky few who is immune to its toxins, and (C) no one, especially not Linda, had ever identified the weed for him.

5. 2.6.5.2: MLS

The listing broker is liable for the truth of all representations and statements he posts to the MLS.

True CC §1088 requires that you obtain your seller’s permission before placing his listing into the Multiple

Listing Service. That same statute also makes the agent “responsible for the truth of all representations and

statements made by the agent … of which that agent … had knowledge or reasonably should have had knowledge to

anyone injured by their falseness or inaccuracy.” Therefore, it is important that the information you post to the MLS

be accurate.

Note #1: The text of CC §1088 reads: “A listing may not be placed in a multiple listing service unless authorized or directed by the owner in the listing. If an agent or appraiser places a listing or other information in the multiple listing service, that agent or appraiser shall be responsible for the truth of all representations and statements made by the agent or appraiser of which that agent or appraiser had knowledge or reasonably should have had knowledge to anyone injured by their falseness or inaccuracy.”

Note #2: CAR®’s Residential Listing Agreement (CAR® Form RLA) provides a check box to permit the seller to opt out of the MLS while at the same time strongly advising the seller not to do so:

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6. 2.6.5.4: VISUAL INSPECTIONS

The listing broker is only required to disclose his actual knowledge of material defects.

False The term “actual knowledge” is a legal term which refers to direct and clear awareness as to a fact

or condition. The answer to this question would have been true prior to 1984 when it was a licensee’s duty to disclose only that which was actually known to him. But the Easton v. Strassburger, 1984 decision changed the disclosure duty to a “should-have-known” standard. It mandated that the listing broker make a visual inspection of all accessible portions of his seller’s home and disclose all material defects he finds.

Citation: California Supreme Court’s decision in Easton v. Strassburger, 1984 jolted the residential brokerage

profession. Before Easton, the disclosure duty was the responsibility of the seller. The listing broker’s disclosure

duty was the Lingsch Duty (after Lingsch v. Savage, 1963) which stated that the listing broker’s disclosure duty was

limited to his actual knowledge. ¶ Before Easton, if the broker hadn’t seen the mold festooning the second floor

ceiling of his seller’s home because he hadn’t bothered to climb the stairs; then, by the Lingsch Duty , the buyer

could not hold the broker liable for having failed to disclose it. ¶ After Easton, the Court imposed a “should-have-

known” standard. The Court reasoned that a broker had a duty to conduct at least a visual inspection of his seller’s

home and disclose whatever a reasonably competent real estate investigation should have revealed.

7. 2.7: SELLER MISREPRESENTATION

Linda repeats to Bob what she was told by Sam – that his deck was built with pest-resistant redwood. Bob buys Sam’s home. Six months later his deck collapses. The reason: It had been built with untreated Douglas fir. Bob has an actionable claim of misrepresentation against both Sam and Linda.

False He has an actionable claim only against Sam – not Linda. An

agent is not responsible for passing on the fraudulent claims of his seller (providing the agent believes the claims are true).

Citation: The broker is not liable for any fraud perpetrated by his seller and

which he “republished” to buyers providing; that is, that the broker was not

complicit in the fraud and did not have actual knowledge to the contrary.

Comment: Even though Linda appears not to have liability for having passed on to Bob the seller’s misrepresentation that the deck was built with redwood; in the real world, Bob would certainly name Linda as a defendant. And why not? It costs very little to serve Linda with his complaint and, who knows? – maybe Linda (or her E&O carrier) will pay Bob to settle only to avoid litigation costs.

Note: Suppose Sam had simply repeated what he had been told by his contractor, Carlos – the man Sam hired to build his deck. If so, then Sam would be liable to Bob for the tort of “innocent misrepresentation” and Carlos – assuming he lied to Sam – would be liable to Sam for the tort of “fraudulent misrepresentation.”

Suppose Carlos is a licensed contractor. Then Sam could file a complaint with the California Contractors State License Board for help in resolving his dispute with Carlos and/or Sam could sue Carlos for damages (hopefully in Small Claims Court providing his damages were less than $10K).

But suppose Carlos is unlicensed. Then BPC §7031(b) allows Sam to recover every dollar he paid to Carlos unconditionally; that is, even if Sam had told Carlos that he insisted Douglas Fir be used and even if Sam had been 100% satisfied with Carlos’ work! (Source) This process is called “disgorgement” and is considered a remedy and not a punishment (source).

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8. 2.9.1: PROVISIONS IN CAR® CONTRACTS

According to CAR®’s Purchase Agreement, if the buyer sues the seller without having first offered to mediate, the buyer forfeits his right to recover attorney fees.

True CAR®’s California Residential Purchase Agreement and Joint Escrow Instructions (Form RPA-CA) is an

agreement between the buyer and seller; brokers are not party to the Agreement. It (like CAR®’s listing agreement)

requires the parties to first try mediation to resolve their dispute; otherwise, the party initiating arbitration or court

action without having first attempted to mediate the dispute forfeits his right to recover attorney fees in any

subsequent legal action. The Agreement states that should the buyer and seller agree to its Arbitration of Disputes

provision, both must submit their dispute to binding arbitration.

Note: CAR®’s California Residential Purchase Agreement (CAR Form RPA-CA) also has an “Arbitration of Disputes” provision which if initialed by both the buyer and seller requires disputes not settled through mediation to be settled using binding arbitration by a judge with “five years of residential real estate law experience.”

9. 2.9.3: SMALL CLAIMS COURT

A plaintiff in a small claims action may appeal an adverse decision.

False. Only defendants may appeal their case to Superior Court but, should that court find

that the defendant’s appeal is without merit, it may award the original plaintiff up to $2,000 for

attorney’s fees, transportation, and lodging.

Note #1: Remember, plaintiffs must collect any money judgment from the defendant. No one at Small Claims Court is going to lift his little finger to help you collect the money it has awarded you.

Note #2: If you are thinking about using Small Claims Court we recommend two books (1) Everybody’s Guide to Small Claims Court in California and (2) CAR®’s Small Claims Court Assistance Manual for Realtors and Their Clients .

10. 2.9.4: ARBITRATION

Nothing about an arbitration proceeding may be made public without the consent of the disputing parties.

True Unlike public justice where all documents and proceedings are open to the public, arbitration is 100%

private.

Note #1: Suppose two clients, Abe and Bob, both claim that you fraudulently misrepresented your seller’s home. Abe agrees to settle his dispute via arbitration; but Bob takes you to court.

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If you settle with Abe, the arbitrator’s decision and the facts put before him will, by default, be private (see next note). However, in your civil dispute with Bob, its decision, its testimony, and its pleadings will all be publicly available to anyone willing to pay the modest fees the court charges to send you these details. (Some jurisdictions even make these documents available for free via the Internet.)

Suppose Bob prevails in his dispute and so informs the DRE (he would begin the complaint process here). The DRE may not use the fact that you were found liable for fraudulent misrepresentation to justify license discipline. The reason is that the burden of proof in a civil action is not as rigorous as that required to support an administrative decision (the DRE uses administrative law in its disciplinary proceedings). What the DRE could do, would be to obtain the transcript, pleadings, and other documents presented to the court during Bob’s law suit as a foundation upon which it to build a case against you. (See the article, “Administrative Hearings,” in Real Estate Matters )

Note #2: Parties to business arbitrations can divulge to third-parties details presented by their counterparty in arbitration. However, the parties may obtain a protective order from the arbitrator to ensure the confidentiality of the proceedings or they may agree between themselves to keep the proceedings confidential. (Source).

11. 2.9.5: LITIGATION

To prevail in a civil suit, the plaintiff must prove the defendant liable “beyond any reasonable doubt.”

False “Beyond any reasonable doubt” is the standard of proof required to establish guilt in a criminal

case; that is, any action where the consequences of conviction could include incarceration. To prevail at

trial, the plaintiff need only convince 3/4th’s of the jury (often consisting of government workers and pensioners) that

his defendant was more likely than not to have been responsible for his injuries. The standard of proof in civil cases

is the “preponderance of evidence” –meaning the plaintiff need only convince the finder of fact (a judge or jury) that

his claim for damages is more likely just than unjust.

Note: The standard of proof the DRE must use in defending its decisions to discipline a licensee is “clear and convincing evidence” – a higher standard than the “preponderance of evidence” standard used in civil courts. This higher standard requires “that the evidence presented by a party during the trial must be highly and substantially more probable to be true than not and the trier-of-fact must have a firm belief or conviction in its factuality (source)”.

12. 3.1: NEGLIGENT MISREPRESENTATION

The most frequent cause of action against brokers is “failure to secure adequate pricing.”

False [From a quote from Matt Farmer, associate general counsel for the Oregon Association of

REALTOR®s]: About 90% of risk problems in real estate stem from disappointed buyers discovering defects after

closing. [Attributed to Matt Farmer, counsel for the Oregon Association of REALTOR®s]

Note: Todd C. Gurney, member at the legal firm Garcia & Gurney, agrees with Mr. Farmer: “the number one reason a REALTOR

® gets sued is because he or she fails to inform the new buyers about a major defect in the property.” (Source)

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13. 3.2.1: LEGAL ISSUES

It is illegal for a dual agent to let his buyer know his seller’s home is substantially overpriced.

True As a dual agent, you are legally prohibited from telling the couple {the buyers} that your seller’s home has

been overpriced. CC §2079.13 reads: “In representing both Seller and Buyer, the agent may not, without the express

permission of the respective party, disclose to the other party that the Seller will accept a price less than the listing

price or that the Buyer will pay a price greater than the price offered.”

Note: The 2019 Clean Up Law (AB 1289 and AB 2884) expanded what must be kept confidential in a dual agency to also include “confidential information, including but not limited to, facts relating to either the buyer’s or seller’s financial position, motivations, bargaining position, or other personal information that may impact price including the seller’s willingness to accept a price less than the listing price or the buyer’s willingness to pay a price greater than the price offered.” (Source)

Comment: Two students have called me on separate occasions complaining that the answer to this question

should be False. Both argued that the law quoted above must be interpreted strictly. Everyone would

agree that if a dual agent were to say to his buyer, “I happen to know Sam will take less,” that this would be a clear violation of this law. What these two agents argued, though, is that the dual agent who says to his buyer that his seller’s home is overpriced is merely stating a fact (is it really a fact or an “opinion of value” as the Uniform Standards of Professional Appraisal Practice defines “appraisal”) and because these two believe it is fact, the statement cannot be a violation of this law. I don’t agree.

When the dual agent says that his seller’s home is “substantially overpriced”; isn’t this just another way of him saying to his buyer that only a fool would pay his seller’s price and, since his buyer isn’t a fool, he should substantially reduce his offer?

If a seller’s single agent were to say to the buyer’s agent that his seller would take a much lower price since he knows the seller’s home is overpriced, wouldn’t this be a clear act of disloyalty to his seller?

14. 3.3.1.2: LISTING AGREEMENT

CAR®’s Residential Listing Agreement ... A. requires your seller to forfeit his right to recover attorney fees should he sue without first trying mediation. B. informs your seller that you must seek his approval before representing his buyer. C. requires the use of Small Claims Court to settle any commission dispute of less than $10,000. D. informs your seller that he may cancel his listing should you leave your brokerage. E. assures your seller that any promises not listed in the agreement remain in force.

(A) Paragraph labeled Dispute Resolution/Mediation states that if you or your seller should fail to first try

mediation to resolve any dispute arising from the agreement, then the party that moves directly to arbitration or

litigation forfeits his right to recover attorney fees in any subsequent action. The Agreement allows either party to skip mediation and take the dispute directly to Small Claims Court but this particular court may only award money judgments up to $10K. Also, probate petitions and bankruptcy petitions are also exempted from the mediation provision. (Click here for a CAR® document which answers common questions about mediation.)

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(B) is wrong because the Agreement states that the seller authorizes the listing broker to also represent the buyer (§9c). Here is the wording from the Agreement: “If a Buyer is procured directly by Broker or an associate-licensee in Broker’s firm, Seller hereby consents to Broker acting as a dual agent for Seller and such Buyer.”

(C) is wrong because the Agreement does not require Small Claims Court to settle any dispute. If your seller refuses to pay your commission of $10K (or greater if you are willing to settle for $10K), then you can take your seller directly to Small Claims Court.

(D) is wrong because if you are an associate-licensee (working under a broker’s license) the Agreement is not between you and the seller but between your brokerage and the seller.

(E) is wrong because the Agreement contains an “Entire Agreement” provision. This means that if a promise is not in the listing agreement it can’t be enforced.

Note: Whereas the buyer in §2c of CAR®’s Buyer’s Representation Agreement – Exclusive (Form BRE) may preclude his broker from acting as a dual agent by checking an opt-out box, the seller in §9c of CAR®’s Residential Listing Agreement (Form RLA) has no such choice. If the buyer opts-out of any possibility of his agent electing dual agency, it means that the buyer’s agent may not show the buyer any homes listed with his brokerage. The seller can opt out only if the listing brokerage agrees to striking §9c of the RLA and adding an additional clause such as the one advocated by the Consumer Advocates in American Real Estate:

15. 3.3.5: FAIR HOUSING

Which question from a landlord to a prospective tenant is illegal? A. Why did your doctor prescribe a therapy python? B. Ours is a 55+ community. May I ask your age? C. One of our tenants is a registered sex offender – do you have children?

(C) is illegal because the landlord asks a prospective tenant a question

about his “family status” – one of the 13 State-protected attributes. The fact that his question incidentally discloses that one of the landlord’s tenants is a registered sex offender does not make the question any less illegal (see Note #1).

(A) is legal because the Fair Housing Act permits a landlord to question the need for a requested accommodation if it is not obvious to the landlord (1) the nature of the requestor’s disability for which he needs the accommodation, or (2) how the accommodation will mitigate the difficulties resulting from the requestor’s disability.

(B) is legal but only because the property manager provides housing within a legally permitted seniors-only community.

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Citation: Put simply, in your interactions with prospects and clients the fair housing laws require you to act as if

you were blind to all 12 attributes. The law permits only two exceptions: (1) a landlord or lessor is permitted to

“see” and ask about the disability of any person requesting a reasonable accommodation to his rental policy if the

person’s need for the accommodation is not obvious, and (2) a landlord or lessor may “see” the age of an applicant

but only if the applicant wishes to purchase property within a legally-sanctioned seniors-only community.

Note #1: If the reason the landlord prefaces his question with his fleeting disclosure that one of his tenants is a sex offender is to discourage families with children from renting his apartments, then his question would be doubly illegal. First, because it is illegal to ask prospective buyers/tenants if they have children; and second, because the landlord uses the question to steer families with children away from his apartment.

If, on the other hand, the landlord was using the question to warn prospective tenants with children that a sex offender resides in the building, then the landlord should say so outright rather than mentioning it parenthetically. For example, he could state in the preface to his tenant application form something like: “Please understand that in 2016 one of our tenants was convicted of indecent exposure and was subsequently labeled a ‘sex offender.’ We learned of his conviction in the second year of his ten-year lease.”

Note #2: Regarding the questions that a housing provider may ask of a prospective tenant concerning his request for a reasonable accommodation to his disability, HUD writes in one of its publications , “A housing provider may not ordinarily inquire as to the nature and severity of an individual’s disability. However, in response to a request for a reasonable accommodation, a housing provider may request reliable disability-related information that (1) is necessary to verify that the person meets the Act’s definition of disability (i.e., has a physical or mental impairment that substantially limits one or more major life activities), (2) describes the needed accommodation, and (3) shows the relationship between the person’s disability and the need for the requested accommodation.”

The housing provider may deny a request for a “reasonable accommodation” if by doing so the accommodation would create a nuisance to other tenants, if it would be too costly, or if it posed a danger to other residents.

Note #3: Two tangentially interesting facts: (1) pet pythons have killed infants (click here to read about such an incident), and (2) Great Britain’s National Health Service has used snakes to help treat depression (source).

16. 3.3.6.3: DISCRIMINATORY ADVERTISING

Which of the following sentences if used in an ad for an apartment would be illegal? A. Quiet Manor strictly enforces its noise abatement policy” B. “Studio apartment perfect for empty nesters?” C. “The Arbors offers a clothing-optional pool!!!”

(B) Shows a preference for childless couples (“empty nesters”) – a preference based on the protected

attribute of “family status.”

Citation: When advertising, take care when drafting ad copy to not state or infer any preference for or against any of

the 13 protected groups.

(A) is legal even though it appears to discriminate in favor of quiet tenants. Since “noisiness” is fortunately not one of the 13 protected classes, this form of discrimination is not illegal. True, children are often noisy but so are many adults.

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(C) is legal – it states no preference for any tenant; it only lists a feature some prospective tenants might value. True, most parents probably wouldn’t consider an apartment complex where the tenants walked around in their birthday suits a wholesome environment for raising young children. But some parents wouldn’t mind. (click here for an article about an HOA with a clothing-optional pool).