Are YOU a Contractor?

Based on recent changes in Washington law, you might be if you own real estate and either work on it yourself or hire others to work on it.

Without great fanfare, the Washington legislature recently made subtle, yet significant, changes to Washington’s Contractor Registration laws (RCW 18.27 et seq.). Generally, the Contractor Registration laws deal with the regulation, registration, and licensing of contractors. Historically, a contractor’s failure to comply with the registration requirements could lead to civil fines and criminal prosecution. The legislature, acting under pressure to better protect consumers, expanded the definition of contractor; stiffened the consequences for violations and strengthened the Department of Labor and Industries’ enforcement powers against unlicensed contractors.

The biggest change occurred in defining who is required to be licensed. RCW 18.27.010(1) now defines a contractor as:

. . . any person, firm, corporation, or other entity who or which, in the pursuit of an independent business undertakes to, or offers to undertake, or submits a bid to, construct, alter, repair, add to, subtract from, improve, develop, move, wreck, or demolish any building, highway, road, railroad, excavation or other structure, project, development, or improvement attached to real estate or to do any part thereof including the installation of carpeting or other floor covering, the erection of scaffolding or other structures or works in connection therewith, the installation or repair of roofing or siding, performing tree removal services, or cabinet or similar installation; or, who, to do similar work upon his or her own property, employs members of more than one trade upon a single job or project or under a single building permit except as otherwise provided in this chapter. “Contractor” also includes a consultant acting as a general contractor. “Contractor” also includes any person, firm, corporation, or other entity covered by this subsection, whether or not registered as required under this chapter or who are otherwise required to be registered or licensed by law, who offer to sell their property without occupying or using the structures, projects, developments, or improvements for more than one year from the date the structure, project, development, or improvement was substantially completed or abandoned. (emphasis added)

These changes now make it clear that businesses engaged in real estate development activities, even on their own property, must now register. For example, under the old law, a developer who subdivided their own property and made required plat improvements would have previously fallen outside this definition. Now, that same developer fits squarely within this definition, especially if the developer does not “occupy or use

The Legislature Volleys Back….

Recently, I wrote about new case law in Washington that was making it more difficult for buyers of real property to make post-closing claims against the seller for property condition related matters. The Washington legislature has just amended the state’s residential property condition disclosure law to put additional burdens on sellers and will soon require a disclosure form when “unimproved

While I was away…..

I have not posted in quite some time as I have been consumed with a move to a new firm.  As of three weeks ago, I am now Of Counsel to the law firm of Bullivant Houser Bailey.   

In that period, a very significant case was decided that will greatly impact buyer/seller/broker relationships.  On March 1, 2007, the Washington Supreme Court essentially decided that buyers will no longer have a claim for negligent misrepresentation in post-closing property condition disputes.  For the first time in Washington state, the Supreme Court applied the Economic Loss Rule in the context of a real estate transaction.  The Economic Loss Rule generally provides that where two parties enter into a contract (e.g. a Purchase and Sale Agreement) and economic losses occur (as opposed to physical harm or personal injury), recovery is confined to the contract. 

By way of background, if a buyer of real estate closes and then determines that the property was not in the same condition as disclosed or that the seller withheld material facts, the buyer historically had two ways to state a claim against the seller.  The first was via the contract if there were any express warranties that could be enforced.  However, most residential transactions have few, if any, warranties that benefit the buyer.  So practically, the buyer was forced to go outside the contract and rely on a claim of negligent misrepresentation or fraud (also known as intentional misrepresentation).   These claims are called torts.  Since fraud is very difficult to prove, the claim that many lawyers have relied on for their buyer clients is the negligent misrepresentation claim.   Those days are over! 

In determining whether the Economic Loss Rule applies, the key inquiry is the nature of the loss and the manner in which it occurs.  In other words, does the loss deal with economic injury (e.g. loss of bargain) or personal injury or injury to other property.  If the loss is economic, and no exception applies, then the complaining party will be limited to whatever contract remedies exist.

In the recent case of Alejandre v. Bull, the Buyer claimed that the seller should pay for damages associated with a failed septic system.  The facts are lengthy but like most post-closing property condition disputes, this one clearly involved economic loss and not personal injury.  In a nutshell, since the buyer had no warranties regarding the septic system, they were out of luck unless they could prove that the seller intentionally misrepresented the condition of the septic system (i.e. committed fraud).  In the court’s mind, a negligent misrepresentation was not enough to override the “bargain” struck between the parties under the contract which did not include any warranty for the septic system. 

There will be many buyers who encounter a post-closing loss and start looking for a (deep) pocket.  While the liability of the seller to the buyer is limited by the Economic Loss Rule, no such luck for brokers and agents who have statutory duties (many of which are non-waivable) under RCW 18.86. Those duties include the duty to use reasonable care and skill, to disclose material facts and to advise their client to seek expert advice on matters relating to the transaction that are beyond the agent’s expertise. 

Buyers would be well-served to negotiate warranties that apply to aspects of the property that are important to them.  At the same time, brokers and agents need to understand that while they legally don’t have any greater duties to the buyer, the practical effect of this case will cause unhappy buyers to look to the broker’s E/O policy with greater frequency.  Now more than ever, brokers and agents will make sure that the buyer conducts comprehensive due diligence concerning the condition of the property and that appropriate experts are hired to advise them.  

All properties have warts.  The key is to expose them before closing so that the buyer can determine if they can live with them.


(Are We) Oil and Water?

In a comment to a post on Financing Contingencies, Reba baited Craig and I to write a post on the uncommon relationships between real estate agent and attorney.   She said,

“Maybe it’s worth another blog post to discuss why some agents seem to feel that they are diametrically opposed to attorneys when it comes to real estate transactions. I constantly hear people say “if an attorney gets involved this deal is dead

Does It Really Matter….?

Ardell’s recent post on FSBOs was courageous as you won’t see many agents talk about how one might sell a property without listing it. While it may be a bit counter intuitive to some agents, one reading the post should come away feeling that Ardell (and others like her) are not in the business of providing self-serving advice.

In her post, Ardell said, “[T]here are several companies that offer this service, and while it is true that some agents may boycott you and not show your house, if you have one of those houses that will “sell itself

Truth or Great PR

As I was doing my normal Sunday online reading, I found this NY Times article about discount commissions that really was a featurette for Redin. In the article, there are anecdotal comments about seller’s agents not being willing to show Redfin buyers their listing. There is also a quote from our own Marlow Harris of alluding to the possibility that these stories may be more PR than truth (my words, not Marlow’s). A Windermere agent is quoted as saying that such claims are “absolute absurdity.”

So I have a couple of questions. First, are there a significant number of listing agents out there that will look down on buyers who use non-traditional brokerages (even to the degree of making themselves unavailable to show the home) or is this just great PR spin? If there is any truth in the claims, I presume that these uncooperative agents take this stance because they don’t feel like they are paid to fill the traditional role of the selling agent (e.g. showing the home). If that’s the case, then why don’t these listing agents incorporate a variable rate commission (similar to the strategy builders have used for some time to address the selling agent who magically appears after the site agent has done all the work of “selling” the buyer on the new home)? NWMLS rules would allow it, so why is it not being done?

You Have to Wonder….

And some ask why the government is so fixated on organized real estate. It is because of this mindset and the audacity to shout it out to the world…

I tactfully tell my sellers if I reduce my commission to 4 percent or 5 percent, the buyer’s agents will show my listings last only after showing the full-commission listings. Whether it’s ethical or not, that’s what happens.

Full article on Inman (subscription required after a day)


“Disguised” FSBO Market Share

Some big news happened last week in Texas which I discuss on my blog [link removed]. In a nutshell, the FTC obtained a Consent Order from the Austin Board of Realtors to eliminate a rule that treated Exclusive Agency Listings different from Exclusive Right to Sell Listings, at least with respect to the publishing of those listings on public web sites. Rules like these have been adopted to deal with flat fee listing brokers who did nothing more than insert the listing into the MLS database. In other words, these are “disguised” FSBOs where the owner has agreed to pay some selling office commission but usually receives little or no additional help from the listing broker.

In its investigation, the FTC found that, prior to the adoption of the rule, 18% of the listings in the Austin MLS were Exclusive Agency Listings. Once the rule was adopted, the number of Exclusive Agency Listings dropped to 2.5% of the total.

I have always heard that the FSBO rate was somewhere around 10-15% nationally. Since the 18% figure does not include what I might call “pure” FSBOs where the seller basically hammers up a sign and calls it good, the actual FSBO rate in Austin (before the rule adoption) was probably greater than 20%. Is this surprising? Do you think it reflects historical numbers or is some kind of trend? Any thoughts on where the 15.5% went after the rule was adopted?

“2010 or Bust”

This may be the new mantra of the DOJ when it comes to its current anti-trust case against the National Association of REALTORS.  The boys at Freakonomics are at it again with an interesting post about some inside scoop on settlement discussions.

In a recent presentation [link removed] to some MLS folks, I concluded that the DOJ has absolutely no incentive to settle this case unless NAR comes to its knees on the issue of who is a “broker” for purposes of access to MLS listing data.  I also believe that this case is very analogous to the Visa/Mastercard case brought by the DOJ in 1998.  That case took 5 years to reach its conclusion.  Based on that same time line, the NAR case could easily stick around until 2010.

Every day that goes by without resolution of this case helps the new real estate players gain necessary traction in their quest to legitimacy.  If NAR settles the case and gives the DOJ what it wants (open access to all “brokers”), Katy bar the door.  If NAR holds out and we don’t have resolution until 2010, then (regardless of the end ruling in the case), the practical effect may likely be the same with these “new” models then being accepted as part of the real estate brokerage industry. 

This case, like the Visa/Mastercard case, is about innovation or maybe the lack thereof.  Query the impact if the human and monetary resources that are being used to defend this case were instead re-directed to innovate on behalf of traditional brokers to leverage the riches of data that lies within its control.