SAN FRANCISCO — With distressed and bank-owned properties now capturing a double-digit share of home sales in many markets, some agents and brokers are depending on listings from lenders to keep them afloat.
But some lenders are crafting listing agreements that attempt to shift the risk that comes with sales of bank-owned homes — including property defects and personal injury claims — onto real estate brokers.
A listing agreement that leaves a broker vulnerable to a lawsuit can consume the commissions from dozens of sales, real estate attorney Harold Justman warned during a panel discussion Wednesday at Inman Real Estate Connect San Francisco.
"Some of these listing agreements are lethal, or have lethal provisions in them," Justman said. "You may have a knee-jerk reaction, and say, ‘Oh boy, now I have 100 listings.’ But a year from now, one lawsuit might wipe out all your profits."
When a broker is sued, "legal fees are always bigger than (real estate) commissions," Justman said. "You’ve got to analyze that listing agreement. You can’t blindly sign the agreement the lender puts to you."
Because most real estate agents are used to working with standard listing agreements prepared by their broker, they aren’t attuned to the dangers that may lurk within listing agreements prepared by lenders’ attorneys.
Lenders have staffs of in-house attorneys who "spend all of their time writing agreements that minimize their risk," and may draft agreements running 30 pages.
If they can, lenders will try to shift responsibility for managing properties to listing agents, and the duty to disclose property defects. Lenders may also stipulate that real estate brokers will indemnify them from lawsuits or other liabilities associated with a property, Justman said.
"These lenders got into problems by not analyzing the risk associated with borrowers," Justman said. "They are now risk-averse, and are trying to shove all of the risk onto the brokerage industry."
In California, the principal of "buyer beware" does not apply, and sellers run the risk of being sued if they don’t disclose defects. Lenders will draw up listing agreements specifying that properties are being sold "as is," but require brokers to investigate and disclose any defects to the buyer.
"The lenders are putting all the risk of disclosure onto the real estate broker, and imposing a duty of disclosure," Justman said. Lenders also want to designate listing agents as property managers, obligating them to inspect homes, identify problems and fix them.
"Your E and O (errors and omission) policy may not cover property management, because it is a high-risk, high-claim activity," Justman said. If somebody falls down the stairs and is paralyzed from the neck down, he said, a broker could end up with the resulting lawsuit.
"If you agree to be a property manager, you’ve walked into a situation where you may not have E and O coverage when you need it," said Justman, a partner with the law firm Fimmel, Justman and Rible.
To help insulate themselves from risk, real estate brokerages can set up corporate subsidiaries to manage properties during the listing process.
But anybody agreeing to represent bank-owned properties should enter into listings agreements with open eyes.
"Anytime you get a document drafted by an attorney, you have to have another attorney look at it," Justman said, "because attorneys don’t draft neutral, fair agreements" for parties who are not their clients.
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