Category Archives: Law

NWMLS Form Changes

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I attended a Forms Update Training Class put on by the NWMLS recently and learned about a bunch of changes that are coming down the pike on October 15, 2007. And while I posted some class notes and sample Purchase and Sale Agreement documents over on my site, I thought I’d summarize things below.

Highlights

  • Coldwell Banker Bain (and I assume others) will drop the usage of their “own” optional clauses forms which will make co-op transactions smoother and easier for all agents.
  • Lots of discussion was given to the Washington State Supreme Court decision Alejandre v. Bull, which was the impetus for many of these changes. I won’t bore you with the details here. But they ruled “economic loss rule” prohibits the Buyer from suing the Seller for negligent misrepresentation regarding the condition of real property when the parties relationship is governed by a contract. The courts want to see the allocation of risk of economic loss in the Purchase and Sale Agreements – Hence the changes.

Purchase and Sale Agreement

  • Legal description must be attached as Exhibit A
  • No more counter-offer expiration date (use the counter-offer form)
  • Paragraph 9 – Buyer to waive or not waive the right to remedy in Form 17
  • Homeowners Policy is new default in P&S
  • Closing date and Possession date same – or use NWMLS forms 65A or 65B
  • New provisions address charges and assessments against the property
  • Page 5, item x: 10 day contingency for buyer to verify all information provided by Seller or Listing Agent.

Form 17

These have been in effect since July, but for clarification sake were covered in the updates class. There are several changes here, but the “Environmental Section” is the main one. Buyer can still waive the right to receive unless one of the items in the Environmental Section is checked yes. In that case, the form can not be waived.

As a side note, foreclosure properties are no longer exempt. No one has a clue why the legislature took that one out.

Financing Contingency

  • Buyer must seek Sellers consent to change lender or loan type after loan application period lapses (usually 5 days)

Inspection Contingency

  • Adds changes for “Environmental” Changes of Form 17
  • Advises Buyers to do septic inspection (NWMLS Form 22S)
  • Neighborhood Review Contingency is back

Optional Clauses Contingency

  • Utilities broadened to include others
  • Selling Office Commission moved to NWMLS Form 41C
  • Seller to produced HOA documents if available

I interrupt the regularly scheduled programming…

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to bring you this video interview by Joel from Inman Connect. While I talk too much and too fast, some of you might find it interesting to hear a bit about the history of RCG as well as some more details on the idea of “linkation“…

Now you can go back to your regularly scheduled programming…

The condo public offering statement/resale certificate

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As always, this post is not legal advice.  For a specific legal question, consult an attorney.

Buying a condo can make a lot of sense, particularly if you can purchase a unit close to work (e.g. downtown) and if your “lifestyle” is conducive to apartment-style living (e.g. no kids, no pets).  If you’ve decided to take the plunge, make sure you do your homework.  The Seattle Times had a good piece on the topic a couple of years ago.  That article notes several sources of information that you should review prior to purchasing, including the public offering statement (for new construction) or the resale certificate (for a previously owned unit).  In reality, your homework can begin and end with the public offering statement or resale certificate, as by law each of these must contain the information necessary to make an informed decision.

That said, don’t revert to your younger self and “forget” to do your homework.  The statement or certificate can be quite intimidating, often including hundreds of pages of information.  Nonetheless, you need to sit down and dedicate some time to reviewing it in detail.  Reading it in bed, before drifting off to sleep, is NOT sufficient (although you may find a cure for your insomnia).  The disclosures contain information about the financial and physical health of the devlopment, as well as the rules that will govern how you can use the unit (such as renting it out).  Ignore this information at your peril — you may find years later that you made a very poor decision, all because you did not take the time to review the provided information.

Finally, given that the disclosure contains hundreds of pages, many of them written in dense “legalese,” you may wonder whether an attorney should also review it on your behalf.  An attorney can explain the disclosure and answer any questions you may have.  Moreover, the attorney may be able to identify issues of concern that you did not appreciate.  On the other hand, the attorney does not and can not know everything that is important to you.  Therefore, while you may benefit from an attorney’s review, the key is that YOU must take the time to review the disclosure carefully.  If, after doing so, you decide that the condo is not for you, both disclosures create a right of rescission (7 days for a public offering statement, 5 days for a resale certificate) so you can cancel your purchase and sale agreement and avoid the mistake entirely.

Where's the line between "agent" and "lawyer"?

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As with any blog post, this does not constitute legal advice. If you have a specific question, consult a specific attorney. 

Recents posts (first by Russ, then by Reba) have examined the role to be played in real estate transactions by agents and lawyers.  No doubt, everyone has a strong opinion based on their own personal experiences.  But what’s the law on the issue?

We all know that the seminal case on the issue is Cultum v. Heritage House Realtors, 103 Wn.2d 623 (1985). In that case, the buyer told the agent that she wanted to be able to inspect the home and rescind the contract based on her subjective interpretation of that inspection. Acting on this request, the agent used a form “drafted by an attorney” to include in the contract a very simple inspection contingency: “This offer is contingent on a satisfactory Structural Inspection, to be completed by 8/20/80.” The agent used the “single standard form” provided by the broker. The buyer performed a whole house inspection and was not satisfied with the results. The seller, however, refused to return the earnest money because the report did not objectively indicate any structural defficiencies.

The trial court found that the agent, in drafting the contingency, engaged in the practice of law.  The Supreme Court agreed, as the agent clearly created a document that affected the legal rights and obligations of the buyer. However, the Court decided that, in the interests of an efficient real estate market, an agent should be allowed to engage in the limited practice of law.  Thus, the Court concluded (using “agent” in place of “broker/salesperson”:

“[An agent] is permitted to complete simple printed standardized real estate forms, which forms must be approved by a lawyer, it being understood that these forms shall not be used for other than simple real estate transactions which arise in the usual course of the [agent’s] business and that such forms will be used only in connection with real estate transactions actually handled by such [agent] as [an agent] and then without charge for the simple service of completing the form.” 

However, “if [the agent] believes there may be complicated legal issues involved, he or she should persuade the parties to seek legal advice.” Moreover, “when completing form earnest money agreements, [the agent] must comply with the standard of care of a practicing attorney.” 103 Wn.d20 at 630-31.

So when does the agent cross the line and engage in the unauthorized practice of law?  Before rereading the case in response to the above posts, I thought that a Form 34 was a standing invitation for an agent to cross the line. However, that very probably is not correct. After all, the agent in Cultum wrote a simple contingency, and that fell within the Court’s rule allowing agents to practice law to a limited extent.  (The agent was ultimately liable for the buyer’s loss because the contingency was poorly written, but that’s another topic).

The answer, as suggested by the posts and the comments, turns on the complexity of the clause being inserted into the Form 34. If it’s a “complicated legal issue,” it’s not appropriate for an agent.  Seller wants to take chandelier?  Probably OK. Contract is contingent on events not directly within the control of the parties? Probably not OK. Unfortunately, there’s no bright line rule to be applied in every situation.

In light of that rule, should agents be trained in how to insert contractual language in a Form 34?  After reading Cultum, I think so. They have the legal authority to do so and almost certainly will if necessary to meet the needs of the client. If they can and will do so, then they should have appropriate training so that they can do so competently.

And a final note: should an agent review a non-client’s PSA? Well, the agent does so at his or her own risk, as that review clearly falls outside of the rule set by Cultum.  The review almost certainly constitutes the unauthorized practice of law.

 

Real Estate and Ethics: Collision or Harmony?

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The “Party is over” for local company
Elizabeth Rhodes of The Seattle Times reports on the rise and fall of Merit Financial in today’s Sunday paper. Ironically, it is not in the real estate section (it should be) but the business section— a full page article, above the fold.

I encourage everyone who is in business and those not already aware of the demise of Merit Financial to read the article in Sunday’s paper. I grabbed the bulldog edition and read through it taking away several points and add a couple personal suggestions:

  • It is critically important to know who you do business with.
  • It is of equal importance to understand (as much as possible) the financial foundation with those whom you entrust your clients. Will they be here today and gone tomorrow? There are several ways to get a general snapshot of this legally and unobtrusively. It has saved me more than once of going into business with others who have a poor track record or are saddled with debt. Debt and escrow trust accounts are a disaster waiting to happen.
  • Success is not necessarily defined by owning designer shoes, clothes or driving Hummers, Porches, Mercedes, BMW’s or living in a McMansion. I think we all have our experiences of knowing a multi-millionaire or two who drives a modest car, shops at Goodwill or is found handing out $100 Bills to surprised people in Chicago, as was the case last week.
  • Worry about your very last customer’s experience and service satisfaction, not the trappings of the paycheck. Income will only follow if you are passionate about providing great service at a great price, in that order.
  • If the focus is only on the paycheck, increasing that yield spread premium, or making a “deal,” your customers will see right through you, sooner or later. It shows.
  • Fundamental real estate knowledge coupled with the experience of having a great support structure around you will lead to satisfied customers and foster long-term business relationships.
  • Make it a point in 2007 to surround yourself with real estate professionals in your support structure that may know more about their expertise than yourself. It is not necessary to be an expert in every arm of real estate. There are great loan officers, excellent escrow and title staff that are eager to assist you with your questions. The more I hear “I’ve been in this business x amount of years and I’ve never heard of escrow doing such a thing or…..(insert your own verbage)…. the more we know it is a dead giveaway that posturing is taking place and what is meant is “I don’t know.” There is much to gain and everyone learns more collectively if there are less “I know it all” personalities. What is sorely needed and refreshing to hear is, “I have never run into this scenario, please help.”

Escrow closes the door on a closing

Every real estate practitioner has had the opportunity to work through an ethical dilemma in real estate. Recently, our escrow office experienced probably one of the more difficult ethical issues: coming across highly probable transaction fraud a business day prior to closing. We wrestled with the issue all weekend a short while ago. Any way you sliced it, the ramifications were not good. In our minds, the “what-if scenario flow charts” were in full swing. For example:

  • Don’t close the transaction and lives will be turned upside down, not to mention thousands of dollars of commissions lost, including our own earned income. Side note: escrow (the “presumably” neutral party) only gets paid if the deal closes, an issue that I personally would like to see changed and take up with Dept. of Financial Institutions or others in Olympia.
  • Obviously, another downside is that we will probably lose the business relationship forever, regardless of whether we are correct or not. Certainly, how this plays out will clearly show the true colors of the agents involved.
  • Close the transaction and the risk grows exponentially as time goes on. Escrow will be named in a claim regardless of all the disclosures and tight legal language escrow has.

Interestingly, with the broker and sales agents fully aware of why we elected to not close, they have elected to try another company to close the transaction. Hopefully, they can work through the problem and get it done in a legal and ethical manner. We wish them the best.

In the end, pushing the ethical limit or being a party to fraud is just not worth the risk, short-term and long-term.

California realtors make a call for higher standards…

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There was an interesting article (requires a subscription) on Inman yesterday about the California Association of Realtors (www.car.org) pushing for higher licensing standards. CAR’s president noted that currently in California someone who cuts hair requires more training than real estate agents to obtain a license for their profession.

I applaud the fact that the industries own are finally calling for improved standards — though I’m not sure they are asking for a high-enough bar, but that’s just my opinion. Currently in Washington, the Department of Licensing requires you to be at least 18-years old, complete 60 clock-hours of training and pass the state exam with a score of 70% or better.

I personally would not want to be represented by that agent who scored 71%…I’ve already met enough of them across the table. It’s not all bad though…Let me also state that I HAVE BEEN impressed with the quality of agents hired by some of the more well known brokerages. They have displayed the professionalism I wish we had across the board in this industry.

So what do you think? Is 70% a reasonable bar for licensing? Should an AA or Bachelors degree be required? Is it the amount of clock hours that matter or the testing to demonstrate prociency in what you’ve learned.

Buying Investment Property – Entity Protection

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Many “average” Americans are dipping their toe into the world of investment real estate. Not satisfied with owning REITs, many non-real estate professionals are turning to buying vacation homes, single family rental properties, small multi-family dwellings and even small commercial buildings.

If you are in this group (or thinking of joining this group), I want to give you three letters to remember as you begin your journey – LLC.

LLCs is an acronym for limited liability company. It is a form of entity recognized by states as providing liability protection for its members. At the same time, it receives different tax treatment than traditional corporations. It also is much more flexible than corporations when structuring relationships between members. The following is a very high level discussion on some benefits of forming an LLC. While forming LLCs can be done by laypersons, you should consult an attorney or CPA before taking that step.

TAX TREATMENT – When an individual forms an LLC, the feds disregard the entity and tax the individual as if no LLC existed. If more than one unmarried persons form an LLC, again there is entity protection like a corporation and the individuals are taxed as partners by the feds. So, instead of filing a separate corporate tax return, the members file form K-1s as part of their individual return. The benefit of this is that there is no double taxation as there would be if the investor(s) had created a C-Corp. Moreover, the members can have a much more flexible relationship than had they formed an S-Corp.

LIABILITY PROTECTION – This is the main reason to form the LLC. Say you want to purchase a rental house. If you purchase it in your own name, all of your personal assets are subject to risk in the event that something goes wrong. If you and your renters get into a lease dispute, they may sue you and your individual assets are on the line. What if someone gets hurt on the property and your insurance coverage is not enough to cover the loss? Again, your assets will be at risk. If you form an LLC, you have just created an entity that is separate from you. Its assets are only those that the LLC owns – usually the property. Thus, if something goes wrong, usually only the property is at risk and not your life savings. This can be worth a lot of sleep at night.

While LLCs may not be for every real estate investor, they are certainly three letters that need to be discussed when buying investment property.

Golf Balls

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Ok, this post is really not about golf balls but they are part of the story. A recent case illustrates how courts are putting more obligations on buyers of residential property to understand the condition of the property notwithstanding the seller’s customary obligation to provide a disclosure form to the buyer.

This case involved a buyer who was purchasing a house on a golf course. I can already hear you thinking that anyone who buys a house on a golf course surely knows that one thing follows: errant golf balls. The seller did not consider errant golf balls being a problem and therefore did not disclose them in the property disclosure statement. Although they fell into the yard with some frequency during the summer, he did not remember that they caused damage to the house, his family or even their dog. When buyer first viewed the house, he noticed a ball in the street and even inquired as to “whether the balls fly here.