RISK MANAGEMENT SEMINAR

SLIDE SHOW

RISK MANAGEMENT PRESENTATION OUTLINE

RISK MANAGEMENTUNDERSTANDING THE RISKRISK AS DEFINED BY THE NATIONAL ASSOCIATION OF REALTORSA. MISREPRESENTATION

B. AGENCYC. FAIR HOUSINGD. ANTI-TRUSTE. THE UNLAWFUL PRACTICE OF LAW

RISK MANAGEMENT PROGRAMA. EDUCATIONB. PAPER TRAILC. TRANSFERRING RISK

I. E&O INSURANCE, HOME WARRANTY II. DISCLOSURE STATEMENTSIII. HOME INSPECTIONS

CONTENTS

THE INTENT OF THIS PRESENTATION IS TO DISCUSS METHODS OF PREVENTING FINANCIAL LOSS

DEFINING RISK IS DESIGNED TO PREVENT PHYSICAL OR FINANCIAL HARM OR LOSS

UNDERSTANDING THE RISK

WE LIVE IN A SUIT CONCIOUS SOCIETY. IN FACT, IN THE U.S. TODAY THERE ARE MORE ATTORNEYS PRACTICING LAW THAN THERE ARE REAL ESTATE AGENTS. THERE ARE 800,000 PRACTICING ATTORNEYS IN THE U.S. AND THEIR NUMBERS CONTINUE TO SWELL, WHILE THE NUMBER OF REAL ESTATE AGENTS IN THE PAST SEVERAL YEARS HAS DECLINED. IT IS A WELL KNOWN FACT THAT IN THE U.S. YOU DO NOT HAVE TO DO ANYTHING WRONG TO HAVE SUIT BROUGHT AGAINST YOU. MANY LAW SUITS FILED AGAINST REAL ESTATE BROKERS ARE CLASSIFIED AS FRIVOLOUS AND OFTEN FILED BY A CONTINGENT ATTORNEY. NONE THE LESS, THESE LAW SUITS NEED TO BE DEFENDED AND CONTINGENT DEFENSE ATTORNEYS ARE A RARE BREED.

THE RISKS AS DEFINED BY THE NATIONAL ASSOCIATION OF

REALTORSMISREPRESENTATION: THIS IS THE BROADEST CATEGORY OF LEGAL LIABILITY; OVER 60% OF LITIGATION ORIGINATES FROM THIS CATEGORY. THE MOST COMMON CAUSE IS INCORRECT SQUARE FOOTAGE. NEXT IS ANY STATEMENT CONCERNING THE STRUCTURAL AND MECHANICAL SYSTEM OF A HOME THAT TURNS OUT TO BE LESS THAN ACCURATE. MANY TIMES, IT IS THE SIMPLIST OF STATEMENTS THAT CAN LEAD TO LIABILITY.

EXAMPLE: A PROSPECTIVE BUYER ASKED THE REAL ESTATE AGENT IF THE ROOF WAS NEW. THE AGENT LOOKS IN THE MLS BOOK AND UNDER COMMENTS IT STATES “NEW ROOF” THIS INFORMATION IS GIVEN TO THE BUYER. THIS MAY CREATE A LEGAL LIABILITY IF LATER THE BUYER FINDS OUT THAT THE ROOF WAS SIX MONTHS OLD AT THE TIME OF PURCHASE. THE BEST RESPONSE TO THE BUYERS QUESTION IS TO STATE THE MONTH AND YEAR THE ROOF WAS INSTALLED. THE SAME HOLDS TRUE FOR APPLIANCES, HEAT PUMPS/AC/HEATING SYSTEMS. IF YOU ARE NOT CERTAIN ABOUT A FACT, FIND OUT. REMEMBER, THE GREATEST CONVEYOR OF MISLEADING INFO IS THE MLS BOOK

AGENCY: WHO DO WE REPRESENT?

TRADITIONALLY, REALTORS HAVE REPRESENTED THE SELLER OF THE HOME AND HAVE A FIDUCIARY RESPONSIBILITY TO THE SELLER. THIS WAS LOGICAL BECAUSE BY CONTRACT THE SELLER OF THE HOME WAS PAYING THE COMMISSION. WHILE THE CODE OF ETHICS STATES REALTORS MUST DEAL WITH BUYER IN A HONEST AND ETHICAL FASHION, A REALTORS LOYALTY IS TO THE SELLER. IN THE PAST YEARS, THIS ARRANGEMENT HAS BEEN CHALLENGED BY THE ADVENT OF THE BUYER BROKER. SO MUCH SO, THAT NAR IS CURRENTLY TRYING TO IMPLEMENT A NEW CONTRACT FORM THAT WILL HAVE REALTORS CHECKING OFF WHO THEY ARE REPRESENTING, BUYER, SELLER OR BOTH. DUAL AGENCY LEADS TO GREATER LEGAL LIABILITY BECAUSE A REALTOR CAN REPRESENT BOTH THE BUYER AND SELLER. THIS IS SOMEWHAT INTUNE WITH AN ATTORNEY REPRESENTING THE PLANTIFF AND THE DEFENDANT SIMULTANEOUSLY. IT IS A VERY DIFFICULT SITUATION BUT, ONE THAT LEADS TO THE GREATEST FINANCIAL REWARD. *NOTE: SOME STATE DO NOT ALLOW DUAL AGENCY

FAIR HOUSING

THIS IS THE MOST TALKED ABOUT LEGAL LIABILITY OF THE LAST SEVERAL YEARS. THE PRIMARY THING TO REMEMBER IN THIS CATEGORY IS THAT REGARDLESS OF HOW A QUESTION MIGHT BE PRESENTED TO YOU, IF IT WOULD LEAD TO ANY TYPE OF DISCRIMINATION OR STEERING YOU MUST ANSWER WITH THIS STATEMENT. “I MAY NOT DISCRIMINATE ACCORDING TO RACE, COLOR, CREED, FAMILIAL STATUS OR HANDICAPPING CONDITIONS.”

ANTI-TRUST

ANTI-TRUST IS SIMPLY THE FEDERAL GOVERNMENT INQUIRY INTO PRICE FIXING. THE GOVERNMENT HAS A DIFFICULT TIME COMPREHENDING WHY MOST REAL ESTATE AGENCIES CHARGE THE SAME COMMISION TO SOMEONE ATTEMPTING TO SELL THEIR HOME. AGENTS KNOW IT IS MARKET CONDITIONS AND COMPETITION THAT KEEPS MOST COMMISSION RATES FIXED

THE MOST COMMON VIOLATION OF ANTI-TRUST LAW OCCURS WHEN A REAL ESTATE AGENT TALKS ABOUT THE “AVERAGE COMMISSION” RATE IN A GIVEN COMMUNITY. IT IS IMPORTANT TO UNDERSTAND; YOU MAY ONLY TALK ABOUT THE COMMISSION RATE ESTABLISHED BY YOUR FIRM OR BROKER. TO DISCUSS THE AVERAGE COMMISSION RATE IN A COMMUNITY IS A VIOLATION OF ANTI-TRUST LAWS.

THE UNLAWFUL PRACTICE OF LAWTECHNICALLY, AS REAL ESTATE PROFESSIONALS, REAL ESTATE AGENTS ARE ALLOWED TO FILL IN THE BLANKS ON A CONTRACT DRAWN UP BY AN ATTORNEY. ANYTIME THEY DO MORE THAN FILL IN THE BLANKS, TECHNICALLY THEY ARE VIOLATING THE LAW. THE MOST COMMON VIOLATIONS OCCUR WHEN AN AGENT ADDS ADDENDUM TO EXISTING CONTRACTS. SUCH AS, “PURCHASE OF THIS PROPERTY IS CONTINGENT UPON THE BUYER’S PROPERTY IN MICHIGAN SELLING AND THE BUYER OBTAINING FINANCING.” BY WRITING THIS ADDENDUM AND ADDING IT TO THE CONTRACT, THE AGENT ACTS AS AN ATTORNEY.

MOST CONTRACTS HAVE SUCH ADDENDUM AND TECHNICALLY ARE ILLEGAL. THIS SITUATION PROBABLY WILL NOT CHANGE IN THE IMMEDIATE FUTURE. BUT, IN CALIFORNIA EACH REAL ESTATE CONTRACT HAS ABOUT 25 PAGES. MOST OF THE PAGES ARE PREPRINTED ADDENDUM, WRITTEN BY ATTORNEYS, THAT ADDRESS THE GREATEST MAJORITY OF COMMON ADDENDUM NEEDED BY REAL ESTATE AGENTS.

NOW THAT YOU BETTER UNDERSTAND THE RISKS, LET US NOW DISCUSS RISK MANAGEMENT PROCEDURES.

RISK MANAGEMENT PROGRAM

EDUCATION: YOUR LOCAL BOARD DOES AN OUTSTANDING JOB OF PRESENTING EDUCATIONAL OPPORTUNITIES. MANY TIMES THEY DEAL WITH THE SPECIFIC SUBJECTS I HAVE DISCUSSED WITH YOU. NAR HAS DEVELOPED A LEGAL LIABILITY SERIES THAT ADDRESSES EACH OF THESE FIVE CATEGORIES WITH A 3-HOUR SEMINAR. WHEN THESE EDUCATIONAL OPPORTUNITIES PRESENT THEMSELVES, PLEASE TAKE ADVANTAGE OF THEM.

PAPER TRAIL: IT IS NO LONGER ENOUGH TO SIMPLY DO IT RIGHT. TODAY, YOU MUST BE ABLE TO PROVE THAT YOU DID IT RIGHT. IN ORDER TO PROVE THIS, YOU MUST ESTABLISH A PAPER TRAIL. THE PAPER TRAIL IS SIMPLY KEEPING ACCURATE RECORDS AND NOTES FROM ALL CONVERSATIONS AND NEGOTIATIONS THAT OCCUR IN A REAL ESTATE TRANSACTION. EVERYTHING YOU SAY OR DO WHILE NEGOTIATING A REAL ESTATE CONTRACT FROM THE VERY FIRST SHOWING TO THE CLOSING, SHOULD BE DOCUMENTED AND FILED.

PAPER TRAIL CONTINUED

IN FACT, THERE IS A VERY APPROPRIATE BOOK TITLED, “THE PAPER TRAIL” BY OLIVER FRANSCONA. IT IS NORMALLY AVAILABLE AT LOCAL BOARDS. THIS BOOK ALSO HAS A LIST OF STANDARD ADDENDUM THAT MOST REAL ESTATE CONTRACTS REQUIRE. THE AUTHOR GRANTS PERMISSION TO COPY AND USE THESE ADDENDUM. OLIVER FRENSCONA IS A PRACTICING ATTORNEY IN BOULDER, COLORADO

THE TRANSFER OF RISK

ERRORS AND OMISSIONS INSURANCE: A PARTIAL TRANSFER OF RISK MAY BE ACCOMPLISHED BY PROCURING AND MAINTAINING ERRORS AND OMISSIONS INSURANCE. PROFESSIONAL LIABILITY SERVICES CAN ASSIST YOU IN YOUR SEARCH FOR QUALITY COVERAGE AT AN AFFORDABLE PRICE.

THE TRANSFER OF RISK

USE OF HOME WARRANTY PRODUCT: HOME WARRANTIES ARE ANOTHER WAY TO TRANSFER RISK. THIS PRODUCT COVERS REPAIRS ON THE MECHANICAL SYSTEMS DURING THE LISTING PERIOD AND ONE YEAR FOR THE BUYER AFTER CLOSING. APPROXIMATELY 41% OF LITIGATION IN THE REAL ESTATE FIELD TODAY ARE DUE TO THE MISREPRESENTATION OF PROPERTY CONDITIONS AFTER CLOSING. DOESN’T IT MAKE SENSE TO USE A WARRANTY AS A PART OF YOUR RISK MANAGEMENT PROGRAM?

THE TRANSFER OF RISK

DISCLOSURE STATEMENTS: MANY STATES HAVE PASSED LAWS REQUIRING SELLERS TO FILL OUT DISCLOSURE STATEMENTS. THE BALANCE OF STATES ARE CURRENTLY DRAFTING LEGISLATION WHICH WILL MAKE THIS PART OF A MANDATED PROGRAM NATIONWIDE. THIS IS AN EXCELLENT TRANSFER OF RISK METHOD SINCE THE SELLER OF THE HOME IS FORCED TO DICUSS THE CONDITIONS OF THE MECHANICAL AND STRUCTURE COMPONENTS, TO THE BEST OF THEIR KNOWLEDGE.

THE TRANSFER OF RISK

HOME INSPECTIONS: THIS IS A RAPIDLY GROWING AREA OF THE REAL ESTATE TRANSACTION. ALTHOUGH, LOOSELY ORGANIZED AND SOMETIMES A DETERRANT TO THE ACTUAL CLOSING OF THE TRANSACTION, HOME INSPECTIONS ARE AN EXCELLENT TRANSFER OF RISK. IF YOU ARE CURRENTLY USING HOME INSPECTORS, IT IS BEST TO USE AN INSPECTOR THAT IS CERTIFIED BY ONE OR MORE OF THE NATIONAL ORGANIZATIONS, SUCH AS THE AMERICAN SOCIETY OF HOME INSPECTIONS OR AMERICAN INSTITUTE OF INSPECTORS. THERE ARE SEVERAL OTHER NATIONAL ORGANIZATION, BUT THERE IS NO CLEAR LEADER

THE TRANSFER OF RISKHOME INSPECTIONS CONT.: IT IS ALSO IMPORTANT TO OBTAIN A CERTIFICATE OF INSURANCE FROM HOME INSPECTORS. THESE INSPECTORS SHOULD HAVE E&O INSURANCE AND GENERAL LIABILITY INSURANCE. PLEASE DO NOT ACCEPT A COPY OF THE INSURANCE POLICY OR DECLARATIONS PAGE OF THE POLICY. A CERTIFICATE OF INSURANCE IS ACTUALLY ISSUED BY THE INSURANCE COMPANY TO VERIFY COVERAGE IS IN FORCE AND IS PAID IN ADVANCE. PLEASE REMEMBER TO NEVER REFER A SINGLE HOME INSPECTION COMPANY TO A PROSPECTIVE BUYER. A LIST OF SEVERAL DIFFERENT INSPECTION SERVICES SHOULD BE ACCUMULATED AND THE SAME FORMAT SHOULD BE USED FOR TITLE INSURANCE, MORTGAGE OR ANY TYPE OF INSURANCE FOR ACTUAL CLOSING.

3%2%

27%

7%4%

11%

41%

5%

Breach of Cont. - 7% Negl. - 27%

Fraud/Int. Acts - 11% Misrep. - 41%

Breach Fid. Duty - 5% Breach Good Faith - 2%

Conceal - 3% Other - 4%

0

1000

2000

3000

4000

5000

6000

Breach ofCont. - 7%

Negl. - 27% Fraud/Int.Acts - 11%

Misrep. - 41% Breach Fid.Duty - 5%

Breach GoodFaith - 2%

Conceal - 3% Other - 4%

3%10%

3%

6%

10%

3%2%

5%4%3%4%

7%

5%

3%

4%

28%

HVAC/Fire - 3% Sewer/Well - 10% Plumbing - 3%

Roof - 6% Struct. - 10% Floor/Wall - 3%

Insect Dam. - 2% Boundary - 5% Financing - 4%

Invest. Value - 3% Valuation - 4% Spec. Perf. - 7%

Drainage - 5% Finc. Stab. Buyer - 3% Code Violation - 4%

Other - 28%

0

500

1000

1500

2000

2500

3000

HVAC/Fire -3%

Plumbing -3%

Struct. -10%

Insect Dam.- 2%

Financing -4%

Valuation -4%

Drainage -5%

CodeViolation -

4%