This article reviews the marketing assistance a seller provides a listing agent by authorizing investigative reports regarding the listed property before it is marketed.
Greater transparency in a sale
An owner of a single-family residence (SFR) wants to list the property for sale with the brokerage office of an agent known to the owner.
The agent prepares an exclusive right-to-sell listing agreement form for review with the owner.
The agent also prepares an addendum (among others) in which he estimates the cost of third-party investigative reports needed to provide prospective buyers with information on the property. The reports are those which are always demanded by prudent buyers and careful buyer’s agents for confirmation and approval by the buyer before closing escrow on a purchase of property.
Here, the listing agent will present this listing package cost sheet addendum to the owner as a “seller’s budget,” also called an authorization for preparatory charges. It will set out the costs of those third-party reports the owner will most likely incur on a sale of the property.
The cost sheet prepared by the agent estimates the cost of investigative reports prepared by other professionals or government agencies which will help put a face on the property so it can be better evaluated by prospective buyers. The recommended reports include an occupancy (transfer) certificate (by local ordinance), natural hazard disclosure (NHD), structural pest control report (and possible clearance), home inspection report, well water report and a septic tank report. [See Form 107 accompanying this article]
The reports will become part of the listing agent’s marketing package for the sale of the listed property. The agent is aware the best way to market property and expose it to a prospective buyer who will actually enter into a purchase agreement without further negotiations prior to the close of escrow is to fully disclose the condition of the property when first dealing with him.
Also, a buyer’s expectations about the property are established based on his impression of the property at the time he enters into a purchase agreement, not later after the price has been set, escrow opened and the true condition of the property revealed to the buyer for the first time due to an in-escrow delivery of the reports. [Jue v. Smiser (1994) 23 CA4th 312]
Here, the owner has to make a choice as to when he will incur the expense of third-party reports, be it:
- now, when he lists the property for sale, so a purchase agreement entered into with a prospective buyer has a greater likelihood of closing since the delivery of the reports before the owner accepts the buyer’s purchase agreement offer helps to eliminate deception about the property’s existing condition; or
- later, after entering into a purchase agreement with a buyer who has already developed expectations about the property which will probably differ from the reports and, unless the owner repairs the defects or adjusts the price, will likely result in the buyer cancelling the purchase agreement or closing escrow and demanding a return of the overpayment in price or the cost incurred for repairs. [Jue, supra]
The listing agent meets with the owner to review the listing agreement and its addenda. The cost sheet is presented as an integral part of the agent’s marketing plan to attract buyers willing to buy the property based on their full knowledge of its condition. The disclosures provide a competitive sales advantage over other apparently qualified properties which are marketed without reports to corroborate their condition.
Also, agents representing buyers are attracted to properties offered with all investigative third-party reports handed to them in a complete listing package (marketing package). With this package, property disclosures made to buyers through the use of third-party reports help reduce:
- the seller’s exposure to liability under his duty to fully disclose his actual knowledge of the property’s condition [Calif. Civil Code §1102.4]; and
- the listing agent’s exposure to liability under his duty to personally inspect, observe and report his findings about a property’s condition. [CC §2079]
Also, closing escrow on the purchase agreement will not be subject to the buyer’s further-approval of the property conditions when all reports are delivered to the prospective buyer prior to entering into a purchase agreement.
The primary marketing advantage for the owner who provides prospective buyers with third-party reports is that the sale of the property is transparent since it is based on the condition “as disclosed” by the reports.
Avoided is the undisclosed (and prohibited) “as is” sale which leads inevitably to price renegotiations, repairs, or worse yet for all, cancellation of the purchase agreement or litigation for failing to disclose facts about material defects known when the purchase agreement was accepted. [CC §§1102.1, 2079]
Owner’s motivation to sell
An owner’s reaction to a listing agent’s request for the owner’s participation in an advantageous marketing plan by incurring the costs of property reports upfront offers the agent an insight into the extent of the owner’s motivation to sell the property. The agent’s goal, besides getting a listing, is to encourage and receive maximum cooperation from the owner in the sales effort.
An owner can “dress up ” the property and enhance its “curb appeal” by cosmetic painting, landscaping and clean up. However, it is the fundamentals about the property which generate firm offers to purchase. It is to this end the owner is asked not only to list the property, but to be enthusiastic about disclosing the property’s fundamentals to prospective buyers at the earliest opportunity.
However, the owner’s motivation to sell may have more to do with his lack of available cash for loan payments than his desire to incur the cost of the reports needed to properly market the property. In the case of a financially distressed owner who is unwilling or unable to obtain expert third-party reports, the listing comes with a significant increase in the listing agent’s risk of losing a sale due to a buyer’s disapproval of contingencies involving in-escrow disclosures.
Also, an owner may not want to disclose the condition of the property until after he accepts a purchase agreement offer from a buyer. He will then make only those concessions necessary to keep the transaction together, or resell the property to a competing back-up buyer who has been fully informed about the property’s condition. Such conduct by an owner is deceitful.
Here, the owner knows something fundamental about the property which negatively affects its value and he does not want to tell the buyer before entering into a purchase agreement. He would rather wait to make disclosures after the buyer has committed himself to purchase the property, a type of intentional seller fraud.
The best time for the listing agent to present the owner with the cost sheet is when the listing in entered into. If the owner really wants to sell and not just “test his price” in the market, he will respond in a positive manner to the agent’s advice. If the owner’s response is negative, the owner’s intentions to quickly enter into a sales transaction with a likelihood of closing are probably suspect.
The owner’s negative response to making property disclosures at the earliest opportunity is an indication of the level of future cooperation in marketing, contracting to sell and closing an escrow which the agent can expect to encounter from the owner.
Brokerage fee considerations
The amount of the brokerage fee sought by a listing agent on a property is implicitly related to the:
- price sought by the owner of the property;
- time and effort the agent will spend servicing the listing; and
- probability of actually locating a buyer and closing a sale.
After analyzing these implications, it is the likelihood the property will sell and the broker receive a fee that causes a broker and his listing agent to agree to a listing in the first place, on terms and for a fee which are reasonable under the circumstances.
Consider a broker who requires his agents to attach a cost sheet to all listings. By including the addendum, the owner will (or will not) authorize the listing agent to order out reports needed to more effectively market the property and screen prospective buyers. The broker requires the addendum to make his agents more productive since the property reports reduce the time spent closing a purchase agreement since it has been preceded by disclosures, rather than the reverse order of events.
As part of the listing agent’s negotiations to set the fee for a commissionable event, the agent is instructed by his broker to first attempt to get the owner to authorize the immediate purchase of the necessary reports. If the owner concedes the reports are necessary, but wants to wait until a buyer is located, the listing agent, to overcome the objections, might then negotiate terms for immediate authority to order reports. As an economic inducement, the broker, through his agent, might offer to offset the fee earned on a sale by the amount of the cost of the reports (but not for the amount of any corrective work undertaken on the owner’s property). [See Form 107 §3.3]
Alternatively, a reduction in the brokerage fee by one-quarter to one percent might be offered to induce the owner to assist in the marketing process by paying for the reports now. The reduced fee would reflect the greater likelihood of a successful closing of a sale, devoid of complications before or after closing.
Thus, the fee ultimately agreed to reflects:
- the reduced time and effort necessary to service the listing;
- the reduced risk of loss of the time, effort and money invested in the listing by the broker and the listing agent; and
- a more effective marketing plan, which, on average, will produce more transactions annually for the broker.
Making a sales transaction more transparent for buyers always rewards the brokers and agents for their professionalism in this and future transactions.
Requesting authority
When preparing the cost sheet authorizing the agent to incur the cost of preparatory reports, cost estimates will be entered on items which will ultimately be required to close a sale. If an owner should refuse to incur the cost of third-party reports on the sale of his property, then a prudent buyer will incur them (on the advice of his agent). In turn, the buyer will inevitably use the reports against the owner as a “punch list” for demanding repairs and replacements to be completed before he will close escrow.
Thus, for an owner selling property, it is best to get the reports sooner rather than later. The same holds true for implementing the listing agent’s marketing plan for the property.
It is worth noting that none of the listed items on the cost sheet are part of the broker’s overhead for maintaining a brokerage office. All the costs listed, if incurred, are related solely to the condition of the property listed, marketed and sold. They are incurred to establish the condition of the owner’s property, not to pay for the services of the broker and the listing agent. Thus, the costs should be paid by the owner and not borne by the broker or the listing agent.
Further, since the reports are of assistance to the listing agent in the marketing of the property, the costs should be incurred by the owner at the time of the listing. Thus, the reports would be received before the listing agent puts the property on the market. It is always helpful to know the nature and condition of the property you are marketing since the knowledge reduces omissions and misstatements. [Jue, supra]
Occasionally, a reticent broker or agent will entertain the thought that some brokers do not ask owners for the authority to order reports before a property is sold. And since the competition does not ask, why should they ask, lest they lose listings to other brokers by asking owners to spend money on property reports.
Editor’s note — These reticent brokers and listing agents may then feel as if they must advance the costs of these reports in the hope the property will sell and they will receive a fee to cover their advances.
Business cycles in real estate sales may also influence a broker’s desire to request authorization to obtain property reports for a listing package. During periods of rising prices, disclosures seem less likely to occur as sellers become greedy and demanding while buyers are anxious and permissive. Both sellers and buyers drop their guard in a deliberate effort to meet their objectives. Brokers and their agents are too often accommodating of the lax environment. The failures only lay dormant until the next recession when the inevitable drop in property values bring some of the failures to litigation.
Conversely, during periods of decreased sales volume with buyers more selective and buyer’s agents increasingly more protective of their clients, the owner will have to step forward to fund the cost of reports in order to “sell” the property. The listing agent provided with property reports has a better listing package, and thus a better disclosed and more certain set of property conditions, than competing, under-disclosed properties.
When to pay
When filling out the cost sheet, an owner has choices as to when and how he will pay for the cost of the reports.
The owner may agree to pay the charges directly to the third-party vendors when billed, in which case the agent coordinates the arrangements for payment with the vendors. While the owner’s check is payable to the vendor, not the broker, if it is handed to the listing agent for delivery to the vendor, the check constitutes trust funds which require an entry in the trust fund ledger maintained by the listing agent’s broker. [See Form 107 §3.1]
On the other hand, the owner may deposit the estimated cost of the reports with the broker by making the check payable to the broker, called advance costs. The broker would then pay the charges from the deposit when billed by the reporting service. [See Form 107 §3.2]
Advance costs as trust funds
Funds advanced by a client directly to a broker belong to the client.
The broker must place all advance deposits received in the broker’s name in a trust account, whether they are advances for future costs or fees. [Calif. Business and Professions Code §10146]
The cost sheet authorizes the broker to disburse the client’s funds from the trust account only as costs are incurred.
When the listing terminates, the broker must return all remaining trust funds to the client. The broker cannot use trust funds to offset any fees the client still owes him.
At least every calendar quarter, the broker must give the client a statement accounting for all funds held in trust. A monthly mailing of a copy of the client’s trust account ledger would create a better business relationship.
A final accounting must be made when the listing agreement expires. Again, if any funds remain in trust, they must be returned to the client with this accounting. [Bus & P C §10146]
The statement of account for the trust funds must include the following information:
- the amount of the deposit toward advance costs;
- the amount of each disbursement of funds from the trust account;
- an itemized description of the cost obligation paid on each disbursement;
- the current remaining balance of the advance cost deposit; and
- an attached copy of any advertisements paid for from the advance cost deposit.
Lastly, the broker must keep all accounting records for at least three years and make them available to the Department of Real Estate (DRE) on request. [Bus & P C §10148]
A broker who fails to place those advance deposits payable to the broker in his trust account, or who later fails to deliver proper trust account statements to his client, is presumed to be guilty of embezzlement. [Burch v. Argus Properties, Inc. (1979) 92 CA3d 128]
