Selling real-estate owned (REO) residential properties can be a tricky business. As an agent, and as a brokerage, it's important to decide whether you want to take on that additional risk.
Situation
A bank hired an agent to list and sell an REO residential property after the homeowners defaulted on their mortgage and lost it through foreclosure. The agreement required the agent to ensure the property was habitable and properly maintained.
However, facing a challenging economy and a lack of qualified buyers, the bank decided to lease the property for a year with the hope that the local real estate market would recover quickly. Shortly thereafter, the agent was successful in finding suitable tenants.
Problem
The agent did not have experience in handling REO listings but still worked on the listing regardless of his inexperience.
Mistake
Due to their lack of experience with REO listings, the agent was unaware that he had property management responsibilities when renting the home to tenants.
Result
After a guest of a tenant fell down the stairs and fractured his leg, both the agent and broker were named as defendants in a lawsuit. The complaint alleged that the real estate defendants failed to install a handrail prior to leasing the property, resulting in unsafe conditions.
It was only at that point that the agent finally took the time to carefully read over the agreement and learned that he did, in fact, have property management obligations. Compounding the problem, the broker had long prohibited agents from providing these exact services in order to avoid risks associated with managing properties.
Prevention
The broker may have prevented the lawsuit if he or a designee reviewed the agreement beforehand to ensure the agent wasn't unknowingly taking on responsibilities that contradicted the business philosophy of the brokerage. It is also important to avoid signing hold harmless agreements unless it is beneficial to the company.
There are numerous obligations imposed upon property managers that can lead to claims ranging from bodily injury to the improper handling of security deposits to violations of the Americans with Disabilities Act and fair housing laws. Additionally, an agent may be responsible for acquiring liability insurance for an REO property to protect the bank. Therefore, if a decision is made to pursue revenue by providing property management services, it is highly recommended that all agents complete training through either formal education or working with another experienced agent. If a brokerage is not equipped or insured to meet the challenges associated with REO properties, it will jeopardize its reputation and even its very existence.
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.