SAN FRANCISCO — Realtors who are always seeking a technological edge over their competitors shouldn’t neglect another area where they can gain a competitive advantage: the law.
For some agents, willful ignorance of legal issues creates pitfalls that can lead to substantial liabilities. For others, a little legal knowledge can make them dangerous, leading them to violate the fundamental rule of never offering clients legal advice.
As senior legal counsel for the California Association of Realtors, Stella Ling tends to classify Realtors into three groups — two of which, she says, are bound to get themselves into trouble: those who don’t want to know anything about the law, and those who seem to think they know enough to practice law.
Ling wishes that more Realtors fell into the third group, which she calls "just know it" agents. "Just know it" agents know the law well enough to help steer their clients around bumps in the road, but know better than to play lawyer by giving legal advice.
In short, while real estate agents can’t practice the law, they must know it, or they may find themselves encumbered with burdens that their better-informed competitors can avoid.
A good example, Ling told Realtors attending Inman News’ "Agent Reboot" conference in San Francisco this week, is the seller who cashed out the equity they had in their home when refinancing.
Such sellers may be unaware that even though all of their sale proceeds go to paying off their mortgage, they may still end up owing the IRS a considerable sum on top of that if they realized capital gains on the sale.
The agent who’s blissfully unaware of this issue may work for months helping the seller market their home, only to have the seller suddenly become aware of the issue and pull their home off the market because they can’t afford the tax liability.
If the sale goes through before they learn of their tax liability, they may sue the agent for leaving them in the dark.
The blissfully ignorant agent may prevail in a lawsuit — Ling recounted a real-life example where an agent successfully defended against a suit by an investor who said he would have chosen a 1031 exchange if he’d been aware of the tax liability from a sale.
But regardless of the outcome, being sued is always a drain on time and resources.
Just because an agent is aware of the capital gains issue doesn’t mean that agent will automatically avoid trouble. Agents who think of themselves as a legal expert might provide their client with details and ramifications down to the amount the seller might be liable for.
The problem with providing such information is that it might be wrong. The agent who provides legal advice to a client creates legal liability.
"If you are wrong, it’s your responsibility," Ling said. "Even if you are completely accurate about the tax law, you are second-guessing what their accountant might say about the issue, and if the accountant tells them something different, you’re going to have a problem."
The "just know it" client knows that the correct course of action when becoming aware of such pitfalls is to direct the client to talk to an accountant or attorney — providing references to several.
CAR also offers members a Q-and-A on the topic that agents can give to clients so that agents are not giving them legal advice. Alternately, an agent could direct clients to the Internal Revenue Service website, Ling said.
Like other state Realtor associations, CAR offers its members dozens of standardized forms and contracts that can help them to avoid court disputes.
Standardized forms are available to deal with many situations, such as a seller who’s impatient with a would-be buyer who’s failing to perform and wants to accept an offer from another buyer.
An agent who believes she knows enough about the law to accept a second offer and draft a counteroffer stating that the second offer is subject to the cancellation of the first buyer may only be opening a can of worms, Ling said.
What do you do with the deposit for buyer No. 2? Does it go into escrow now, or after the first buyer cancels? When does the clock start running on deadlines for inspections or closings?
Do they start when the second offer is submitted, or when the first buyer cancels? What if the first seller comes back and offers more money?
An agent who knows little about the law risks derailing the deal and alienating the client if the agent wants to take the time to hire a lawyer to draft contractual language.
Ling said such situations are easily addressed with a standardized form CAR provides members: the purchase agreement addendum.
"Precisely because you guys cannot practice law is why CAR has a litany of standard forms for you to use — just fill in the blanks," Ling said. CAR also offers a legal hot line for additional help in drafting documents.
Another advantage of using CAR’s standard forms is that they are constantly updated to keep up with new legal requirements, and to accommodate suggestions by members.
For example, the latest version of the purchase agreement form CAR introduced in April doesn’t require buyers to submit an initial deposit when submitting an offer. Instead, the deposit is collected and placed in escrow after the offer is accepted — saving brokers the responsibility of safeguarding the funds themselves.
"The reason for the change was that brokers said they didn’t like handling all the deposits," Ling said.
Don’t like the new procedure? Check a box on the form and the buyer will be required to put up a deposit when submitting their offer.
Ling said her legal advice to agents — "just know it," but don’t practice law — applies to their dealings with clients. When it comes to your own legal issues, she said, know the law and use it to your advantage.
An agent who has a seller who wants to cancel a listing agreement has legal rights and should know them when considering the strategy to use in dealing with the request, Ling said.
Residential listing agreements typically have two components: the agency component and the commission component.
"If sellers say they want to fire you, they can do so," Ling said, warning agents not to make trouble for sellers by dragging their feet about removing a listing from the multiple listing service or taking down a for-sale sign.
In the same way that you can back out of an appointment with a hairdresser before you get your haircut, "You cannot hold the seller to a personal service agreement with you," Ling said.
However, the seller can’t unilaterally cancel the commission component of a listing agreement. If the seller wants to pull out without the agent’s consent, the agent is still entitled to compensation.
Some sellers are aware of this and will resort to more devious tactics — such as attempting to render a property unmarketable by refusing offers.
Ling advised agents to negotiate, starting things off as amicably as possible and gradually moving to a tougher stance if that doesn’t get results.
"The nice way to approach this is you say, ‘Fine, seller, you can cancel, but I will be entitled to my compensation,’ " Ling said. Then you offer to repost the listing."
If the seller declines, an agent might offer to release the seller from the listing agreement if the seller agrees to reimburse the agent for out-of-pocket expenses (CAR offers a standardized "cancellation of listing" form for such situations).
If that doesn’t work and the amount of compensation at stake is large, "You don’t have much choice but to hire an attorney," and fight it out in court, Ling acknowledged.
One option is to hire an attorney on a contingency fee basis, in which the attorney is paid a percentage of any commission he or she helps the agent recover.
Small claims court may be the cheapest way to settle disputes of up to $7,500 (for brokers who are sole proprietors) or $5,000 (for those who are corporations), Ling said.
The threat of legal action may convince the seller to settle. If you do have to go to court, make sure you have itemized your expenses in marketing the seller’s property, including the hourly rate you feel you are entitled to for the time you’ve invested.
If you win in court, you still have to collect. One option is to obtain a lien against the seller’s home, which the seller will have to take care of if the seller wants to sell or refinance.