Blog Viewer

Due Diligence Fees and Agent Disclosure Responsibility

The recent increase in demand and prices have caused competing home buyers to resort to drastic measures to give themselves a fighting chance at desirable properties, sometimes forgoing contingencies that protect buyers in standard purchase contracts.

One recent trend has buyers offering large nonrefundable due diligence fees, sometimes over six figures. The interplay between the hot market, high due diligence fees, and disclosure requirements has caused a spike of threatened litigation and licensing board complaints.

Understanding your disclosure responsibilities as an agent can protect you from heightened risk. Read this typical scenario and consider taking steps to protect yourself in today’s market.

SITUATION

A buyer makes a hasty offer on a home that includes an exorbitantly high due diligence fee. A home inspection reveals issues the buyer believes should have been disclosed. The buyer attempts to negotiate significant additional repairs or price reduction but is unsuccessful. The buyer then seeks termination of the contract and return of the due diligence fee, claiming the seller materially breached the contract. This may have been manageable when fees were $750 to $1000 but it becomes a big problem when current fees can cost ten times the usual rate.

WHAT TO KNOW

Each state has a different standard Realtor© form purchase contract that provides for a “due diligence” period, secured by a due diligence fee. This period allows the buyer to conduct any desired inspections or investigations. Before the end of the due diligence period, the buyer can identify repairs and negotiate a repair list with the seller, or, failing that, cancel the contract. If the sale is successful, the due diligence fee is credited to the purchase price. In case of contract cancelation, the fee is earned because the seller has held the property off the market to allow the buyer to conduct their investigations. The due diligence fee is generally non-refundable.

Other states also provide a form for sellers to make detailed written disclosures to potential buyers of the condition of their homes, including any known defects in major components and systems. The form disclosure statement makes it clear that the disclosures are made by the owner, not the real estate agent. However, the agent has a duty to disclose any material facts known or that should be reasonably known. The owner can opt to make “no representation” on the disclosure form, but the agent does not have that option with respect to material facts. For these reasons, the listing real estate agent is often included in any dispute over alleged undisclosed defects.

PREVENTION

Protect yourself from high-risk due diligence scenarios by providing a full and accurate disclosure to any buyer. If the property has had recent repairs or renovation, ensure that all work was done completely, competently, and fully permitted. Check with local authorities for proper permits and verify that all work requiring licensed contractors was, in fact, done by licensed contractors. If structural engineers were called in for assessments, ensure post-completion repairs obtained engineer approval. Deliver documentation such as invoices, reports, and permits to the buyer to clarify the scope of any work completed. If a previous offeror declined to buy the property due to condition issues, make sure to review any inspection reports provided and ensure issues were resolved or fully disclosed. Use email or text to maintain a written record of communication.        

Always review the property disclosure form to note any obvious omissions or misstatements that deviate from your knowledge. If the seller refuses to allow disclosure of material facts to a buyer, you must withdraw from the listing to avoid possible litigation. With the stakes higher than ever, it’s even more important to take an extra step to protect yourself and your clients from a costly scenario.

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