Real Estate

Real Estate Matters

Managing risk

by Michael Repka

The real estate industry faces many challenges. The industry is made up of agents from all walks of life and educational backgrounds that range from a high school diploma to graduate degrees from the world's best law and business schools. Past work experience ranges from none to many years as a builder, real estate attorney or interior designer. Similarly, individual experience as a real estate agent spans the gambit from a few months to 30 or 40 years, or more.


Michael Repka, managing broker and general counsel for DeLeon Realty, Inc. Photo by Veronica Weber.
While the diversity of backgrounds found in a typical office has its advantages, it also creates a lot of challenges for the management of real estate offices. Put simply, some agents are very qualified to advise clients in certain areas, but they would be dangerous advising clients in other areas. As a result, most brokerages train all of their agents not to give any advice regarding legal, tax, construction or disclosure issues.

Unfortunately, that leaves many clients guessing at the seriousness of items identified in disclosures, the meaning of contractual terms, or the likelihood of adverse consequences from a course of action. What's worse, many clients don't realize they are on their own until things go wrong.

Reviewing disclosures

When given a packet of disclosures, buyers may want to ask their agent to provide a written summary of the key items in the disclosures. While it is very important for the client to review the disclosures themselves, the agent's summary will list what the agent feels are the "deal breakers" and reduce the client's risk of not understanding the significance of certain items. Although some agents will resist doing this from fear of liability if they miss something, an experienced and thorough agent shouldn't miss anything.

Real estate inspectors, like the entire real estate industry, have become very risk adverse. As a result, inspection reports include a lot of disclaimers regarding inaccessible areas, limitations on the scope of the inspection, and notations of relatively minor problems. All of this can distract from the major issues. Thus, clients should consider asking for copies of sample reports so that they can become familiar with some of the "boilerplate" language.

Structuring offers

Many agents revert to a practiced refrain whenever advising clients about the wisdom of including contingencies -- they always seem to offer the same advice irrespective of the particular circumstances. Some believe that all offers have to be non-contingent in this heated sellers' market. Other agents (or clients) believe that they always need to have contingencies "just in case." There are too many variables for either absolute to be correct all of the time. When structuring an offer, the agent and client need to carefully consider the real risk and only include the protections that may actually be needed given the facts and circumstances surrounding that particular transaction.

Many offers get passed over due to contingencies that seem unnecessary. For example, some agents submit offers with financing contingencies even when the client purportedly has "great credit," strong income and are only borrowing 50 percent of the purchase price. Like insurance, offer contingencies come at a cost -- sellers should, and do, favor offers with fewer or no contingencies over offers with contingencies unless the other offer is significantly higher in price.

Resolving disputes

Although the vast majority of real estate transactions close with no major complications, sometimes things do go wrong. Unfortunately, most clients and many agents don't fully understand the legal rights and responsibilities included in the contract they signed. For example, most buyers submit offers that include the elective Liquidated Damages paragraph, yet many are surprised to learn that they relieved the Seller from their burden of having to prove the amount of actual damages by agreeing to that part of the contract.

When there is a breach of contract, the clients should ask the agent to let them speak with an attorney. Each side will have certain rights and responsibilities, which need to be fully understood before the client takes any action.

Far too often, people try to break real estate transactions down into easy-to-digest rules. Whether it is applying a formulaic approach to calculating prices based on square footage or deciding if they should include certain terms or contingencies in a contract, they overlook the nuances. Buying or selling a home is a very important transaction for almost everyone. The best advice is to do your homework and find an agent that is willing and able to give you clear, sound advice, in writing, so that you know that they are willing to stand behind it.

Michael Repka, managing broker and general counsel for DeLeon Realty, Palo Alto, formerly practiced real estate and tax law in Palo Alto. He serves on the Board of Directors of the California Association of Realtors. He can be reached at MichaelR@DeLeonRealty.com.

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