Protect Your Buyer Client in the Purchase of Unimproved Property

By Lisa Scoble posted 09-15-2021 02:52 PM

  

For Sale SignProtect Your Buyer Client in the Purchase of Unimproved Property

Buyers tend to have big dreams for their purchased properties. A fresh coat of paint and an outdoor patio are far different from building a dream home from the ground up or developing a planned community. A buyer’s agent/broker should think twice when learning of their client’s plans for a property. Supposing the seller’s agent will assume all responsibility in a transaction can expose a buyer’s agent/broker to possible liability.

In this real-world example, taking the extra step to determine if your buyer’s plans for their property are feasible could help protect you from possible third-party claims.

SITUATION

A real estate agent/broker represented a buyer who purchased unimproved farm/ranch land, intending to construct multiple homes on the acreage. The state’s standard sales contract did not require a seller’s disclosure notice, nor any specific requirements for representations by the seller, such as the suitability of the property for home construction. As a result, the seller did not share that the land had a propensity to flood, making portions of the land unsuitable for home construction and inaccessible in times of heavy rain. After the sale, the buyer could not obtain a building permit from the county to build their country dream homes. The buyer sued the seller and the seller’s broker for misrepresentation. In turn, the seller’s broker sued the buyer’s agent/broker for his alleged negligence in protecting his client’s intended use of the property upon purchase, as well as preserving his client’s ability to forego the purchase once the feasibility of the intended use was confirmed.

PROBLEM

The seller’s broker filed a third-party petition against the buyer’s agent/broker alleging: a.) failure to utilize a termination option in the sales contract to determine the suitability of the property for its intended use; b.) not specifically identifying where the intended homes were to be to constructed to further define the intended use; c.) failing to instruct the buyer to obtain an inspection of the property to confirm its suitability for the buyer’s intended use; d.) failing to instruct the buyer not to accept the property “as is;” e.) not having the buyer insert in the special provisions portion of the sales contract objective evidence to be obtained or provided to demonstrate the suitability of the property for the buyer’s intended use; and, f.) not insisting that the survey required by the sales contract identify all flood plain designations.

MISTAKE

The seller did not reveal the alleged propensity for flooding on the property in the limited categories of disclosures in the contract. Rather than simply taking the seller’s word on such a crucial issue affecting the buyer’s intended use of the property, the agent/broker could have recommended the buyer obtain an option period as permitted by applicable state law to investigate the ability to construct homes in the preferred locations on the property. In addition, the contract could have included the right to terminate upon doing the due diligence suggested by the specific needs and intent of the buyer. Once the buyer had identified the intended locations for the homes to be constructed, the buyer could then have been advised to obtain an inspection of the property. While the generic term is “home inspector,” there are professionals who also offer inspections of unimproved farm and ranch land. Upon informing the inspector of both the locations of the intended home construction and the general plans for use of the land upon purchase, the inspector could have determined the suitability of the land for home construction within the option period. The buyer would not have been forced to accept the property “as is.” If the inspector determined from direct inspection of the topography or via public and historical records that the property did not meet the buyer’s needs, the buyer could either have terminated the contract or negotiated concessions if any detrimental conditions could have been remedied.

RESULT

The buyer’s suit against the seller and the seller’s broker unnecessarily involved the buyer’s agent/broker by the third-party petition, causing the buyer’s agent/broker to participate in a protracted litigation. The buyer firmly believed it was solely the seller’s alleged misrepresentation that damaged them, but further safeguards recommended by the buyer’s agent/broker could perhaps have prevented being named a third-party defendant in the litigation. The claim could have also been fueled by the likely availability of a payout from the buyer’s agent/broker insurer.

PREVENTION

If a buyer is purchasing unimproved land with a specific plan or intent for use, a “home inspection” could protect both the buyer and the agent/broker if the inspector is provided information about the buyer’s plans. In addition, an option period in the sales contract could prevent litigation for all parties involved.

 It is wise to both identify the client’s specific intended use of the property and have the client exercise a high level of due diligence to confirm their intended use, since unimproved land sales transactions do not feature the same level of disclosures typically required of home sales. Fulfilling your duty of care to protect your client goes a long way in protecting you as well, both professionally and financially.  

For more information about E&O coverage and other risk management topics, visit pearlinsurance.com.

The purpose of this article is to inform and insulate real estate professionals from potential monetary claims and professional grievances. The fact patterns are from actual claims against real estate agents. While the author is an experienced claims representative, the opinions expressed herein are general in nature, not fact nor state specific; and therefore, should not be taken as a substitute for legal advice from an attorney licensed in your state. This article was produced in conjunction with AXA XL and is not to be taken as legal advice.
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