Duties of A Home Buyer's Agent -- The Recent N.Y. Times Article

A couple of weeks ago I was interviewed by a reporter from the New York Times who was writing a story about an unusual case pending in San Diego. The case concerns a buyer who is suing her agent because he allegedly misled her about the value of a house she and her husband purchased.

I expressed the general view that far more claims concerning the purchase of residential real estate will be asserted in the present declining market than are asserted in an appreciating market. But I opined that there will probably not be a wave of cases alleging that buyers' agents misled buyers as to property values during the recent boom years in the residential market. Value is in the eye of the beholder and information about home sales is publicly available.

The article ran in the New York Times on January 22, 2008 and included one of statements that I made to the author. To read the article, click here.

There are many reasons that a buyer's agent can be sued -- most claims arise from a misrepresentation or non-disclosure about the physical condition of real property. But it is certainly possible that an agent can misrepresent the value of a home, and whether this is actionable will depend on the facts of the case. As the authors of a leading real estate treatise have poetically concluded, “The kind and number of intentional misrepresentations reflected in the reported decisions are as plentiful as grains of sand on the beach.” 1 Miller & Starr, California Real Estate (3d ed. ) p. 436.

The law in this area is well settled but is worth briefly summarizing. A buyer's agent has a fiduciary duty to disclose material facts to the buyer. This includes a duty to disclose reasonably obtainable material information, which may require the agent to investigate facts not yet known to the agent. [See Leko v. Cornerstone Bldg. Inspection Service (2001) 86 Cal. App. 4th 1109, 1115–1116—this includes the obligation to discover and disclose material defects in property.]

The broker's fiduciary duty to disclose material facts about the property arises upon creation of the principal-broker relationship—before the purchase contract is entered into.
Exxess Electronixx v. Heger Realty Corp. (1998) 64 Cal. App. 4th 698, 711.

When transmitting material information from the seller (or others) to the buyer, the buyer's broker must either verify the accuracy of the information or disclose to the buyer that the information has not been verified. Salahutdin v. Valley of Calif., Inc. (1994) 24 Cal. App. 4th 555, 562–563 & fn. 3. A buyer's broker who accepts material information from others as being true and transmits it to the buyer without verification or disclosing to the buyer that it has not been verified breaches his or her duty and may be liable to the buyer for negligent misrepresentation or “constructive fraud.” Id.

On the other hand, the “buyer's agent is not required to verify information received from the seller and passed on to the buyer if the buyer understands the agent is merely passing on unverified information.” Pagano v. Krohn (1997) 60 Cal. App. 4th 1, 11; see Assilzadeh v. California Fed'l Bank (2000) 82 Cal. App. 4th 399, 417.

Knowledge of these rules and a spirit of full disclosure will help keep real estate agents out of trouble.

Agent for Home Equity Purchaser is No Longer Required to be Bonded

Even a well intentioned law may be declared void for vagueness if the reader is left in a fog. A recent case in point involves the bonding requirement in the Cal. Home Equity Sales Contract Act.

According to the Court of Appeal, "The Home Equity Sales Contract Act (Civ. Code, section 1695 et seq . . .) was enacted to protect homeowners faced with mortgage foreclosure proceedings from being victimized by person employing oral and written representations, intimidation, and other unreasonable commercial practices to induce homeowners to sell their homes for a fraction of their fair market value and lose the equity in their homes. (citations omitted)." Schweitzer v. Westminster Investments, Inc. (12/13/2007) 157 Cal. App. 4th 1195.

The Home Equity Sales Contract Act ("HESCA") contains a number of protections for sellers in foreclosure. As discussed in my February 20, 2007 post ["Buyers (and Agents) Beware If the Seller is Upside Down"): "There is another interesting protection for equity sellers. If an equity buyer is represented by an agent, the agent must have a bond from an admitted insurer in an amount equal to twice the fair market value of the property. But no insurer admitted in California offers such a bond, so agents should avoid representing equity buyers." The Court of Appeal has recently eliminated the requirement of a bond. The reason -- that bonding subsection of the law was so vague that a person of ordinary intelligence would have to guess what it requires.

In Schweitzer, the trial court held that a deed transferring the property to an equity purchaser was voidable because the purchaser's representative did not have the bond required by Civil Code section 1695.17. The code section requires proof that the purchaser's agent/representative is "bonded by an admitted surety in an amount equal to twice the fair market value of the real property which is the subject of the contract." The Court of Appeal reversed, holding that the requirement of a bond was void for vagueness and unenforceable.

That language, reasoned the Court of Appeal, ". . . provided no guidance on the amount, the obligee, the beneficiaries, the terms or conditions of the bond, the delivery and acceptance requirements, or the enforcement mechanisms of the required bond." However, the rest of the HESCA is enforceable because the statute had a "severability" provision specifying that if any provision of the Act is declared unconstitutional the remainder shall not be affected (section 1695.11) if it is "grammatically, functionally and volitionally separable." Under the remaining provisions, the equity purchase contract was enforceable.

Schweitzer v. Westminster teaches us 3 lessons: a statute, like a contract, should be complete and written so that a person of ordinary intelligence does not have to guess what it requires; the remainder of the HESCA survives intact, including the requirement that a purchaser's representative be licensed by the Department of Real Estate; and, "Buyers (and Agents) Should Still Beware If the Seller is Upside Down."

Real Estate Appraisers -- Decline in Home Prices Exposes Inflated Appraisals

In a surging real estate market, the "rising tide lifts all boats." The rapid appreciation of home prices makes it less likely that a buyer will complain about problems with his purchase that are discovered after the close of escrow. But for every high tide there is a low tide that exposes rocks below the surface and barnacles on grounded ships.

A down cycle in the real estate market also exposes a variety of reasons for the artificial inflation in prices: lax loan underwriting, fudged loan applications, rampant speculation, "creative" financing, a secondary market for sub prime loans, and inflated appraisals. The last of these problems is the subject of this post.

Since the savings and loan debacle in the 1980's, the federal government has regulated real estate appraisers who prepare appraisals for loans by federally insured institutions. For example, California established an apparatus for licensing real estate appraisers in 1989.

Appraisers can be liable for negligence or negligent misrepresentation to lenders or buyers who rely on inflated appraisals that have not been prepared in accordance with the standard of care. Based on anecdotal evidence in my litigation practice, the licensing of real estate appraisers appeared to result in the decline of lawsuits against appraisers after 1989. I handled a number of such cases for a mortgage company and a S&L before 1989, but none in the 1990's after licensing became mandatory.

Unfortunately, the recent decline in the housing market has again exposed problems caused inflated residential real estate appraisals. So two months ago, the California Legislature made it illegal to pressure an appraiser to reach a inflated opinion of value. And a new California law effective January 1, 2008 has substantially increased the educational requirements for certified appraisers.

How does "the market" pressure appraisers to inflate appraisals? Will the new laws have any effect on the appraisal industry? How widespread is the problem of inflated appraisals? A recent article in the Los Angeles Times tackles these questions. To read the article, click here.