Why this matters: Learn the difference between opinions, assurances and guarantees as well as estimates, projections and forecasts.
Follow along with an audio reading of this article adapted as a chapter from our upcoming Real Estate Practice course update.
When an opinion becomes a guarantee
Occasionally, a buyer asks the seller agent what they “believe, contemplate, anticipate or foresee” will occur in the future regarding ownership of a particular property.
The agent’s knowledge and expertise on the subject naturally limits an honest response to such a question. The opinion given in response is always speculation, based on the observations, knowledge and beliefs of the agent about the likelihood an event or condition will occur in the future. Thus, the buyer agent’s statements are either:
- couched in words such as “anticipation,” “estimation,” “prediction” or “projection,” denoting their statement is an opinion about a future event or condition; or
- worded as an assurance the events and conditions, as presented, will occur, a response reaching the level of a guarantee.
The difference between the wording used by a seller agent to express their opinion or guarantee exposes the agent to liability when:
- the buyer acts in reliance on the information by making an offer or eliminating a contingency in escrow to acquire property; and
- the event or condition fails to occur.
An opinion exists when an agent makes a statement about something that has not yet happened. To qualify as an opinion, the statement made by an agent needs to be based on readily available facts gathered in a diligent effort and the agent’s prior knowledge of the subject. However, the nature of an opinion is that the event or condition speculated might not occur.
The event or condition expressed in an opinion is not a factual representation as it has not occurred and does not exist at the time the opinion is given. Alternatively, a fact is an existing condition, presently known or knowable by the agent due to a review of readily available data or information.
Facts are the subject of disclosure rules, not the rules of opinion. However, “guesstimates” and wishful assumptions about knowable facts are not opinion — they are misrepresentations for lack of a diligent effort to learn the facts.
Special circumstances may impose liability
An opinion is a belief which is honestly held. It is based on an agent’s reasonable, although sometimes faulty, analysis of property information known or readily available to the agent. The opinion does not by itself create any liability when the event does not occur.
However, several special circumstances may surround an agent giving an opinion which raises their statement to the status of a misrepresentation.
When special circumstances exist, the agent making the statement exposes themselves to liability for the losses caused by the failure of the predicted event, activity or condition to occur.
Special circumstances which may make a failed prediction an actionable misrepresentation include:
- an opinion given by an agent to a person they owe a fiduciary duty, such as between a seller agent and their seller or a buyer agent and their buyer [Ford v. Cournale (1973) 36 CA3d 172];
- an opinion given to a buyer by a seller agent who holds themselves out as specially qualified or possessing expertise about the subject matter of the transaction [Pacesetter Homes, Inc. v. Brodkin (1970) 5 CA3d 206];
- an opinion given by a seller agent or seller who has superior knowledge on the subject matter, implying they have inside information not available to the buyer [Borba v. Thomas (1977) 70 CA3d 144]; or
- a seller agent’s opinion given to a buyer when the agent does not honestly hold or reasonably believe the truth of their opinion due to facts known or readily available to them. [Cooper v. Jevne (1976) 56 CA3d 860]
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Read more about opinions and guarantees.
An opinion based on facts
Consider a prospective buyer interested in acquiring a lot within a subdivision for the purpose of constructing a home on it.
The subdivider’s agent, based on subdivision maps and discussions with the subdivider, advises the buyer all the lots are the same size and subject to the same use restrictions. Further, each home built on the lots must have a value of at least $400,000.
The buyer purchases the lot and builds their home following the use restrictions.
Due to an economic downturn at the end of the current business cycle, the subdivider resubdivides the remaining unsold lots and removes the use restrictions. The intent of the resubdividing is to increase the marketability of the unsold lots in the tract.
The buyer now seeks to rescind the purchase and recover their entire investment, claiming the subdivider’s agent made false representations about the subdivision on which the buyer relied to acquire the lot.
The subdivider’s agent claims they honestly believed their representations that the subdivider was not going to alter the lots remaining to be sold.
Here, the agent made representations about the lot size truthfully, with no intent to deceive the buyer. Both the agent and the subdivider had a reasonable basis for believing changes were not to occur at the time of the buyer’s purchase. However, a later shift in the economy warranted the changes as necessary to meet buyer demand and prevent the tract from deteriorating in its marketability.
The seller agent’s statements about the future were honest at the time the agent made them. Thus, their statements qualify as an expression of their opinion.
Further, the buyer did not require the deed from the seller to include a grant of the promised rights that all the lots are the same size with the same restrictions on minimum value. Thus, the buyer did not take proper action in reliance on the seller agent’s opinion when they agreed to purchase the property. [Meehan v. Huntington Land & Improvement Co. (1940) 39 CA2d 349]
Conditional opinions
Consider a developer of a residential duplex subdivision who provides their seller agent with a schedule of projected rents. The developer instructs the agent to inform prospective buyers the rents are estimates of the amounts obtainable for the duplexes on acquisition by the prospective buyer.
The developer has not developed properties in the area prior to this project. Also, they have no actual knowledge of the rents a comparable duplex obtains in the area.
A buyer with minimal investment property understanding and no ownership experience contacts the agent asking for more information. The agent advises the buyer, “When you receive the rents we have included in the schedule of projected rents, it will be a good investment.”
The buyer purchases a duplex with mortgage funding. As the new owner, the buyer is unable to locate tenants willing to pay the rental amounts represented in the agent’s opinion. Ultimately, the buyer loses the property to foreclosure.
Readily available information
Continuing the previous example, the buyer makes a demand on the agent for the loss of their invested funds. The buyer claims the agent’s statements about the property’s future rental income were misrepresentations since the buyer relied on their superior knowledge about rental conditions in the area when purchasing the duplex.
The agent claims the statement of anticipated rents was a mere opinion as the investor’s success was conditioned on collecting the projected rent amounts.
Here, the agent’s statement was only an estimate or opinion held about future anticipated rental income. As no operating history existed to draw on when making the projections, the agent’s opinion was based on all readily available information.
Further, the developer’s lack of prior rental experience in the area or knowledge of rents actually attainable by the duplexes made the statement an opinion. Thus, the buyer may not rely on the rent projections given by the adversarial seller agent as a fact which may reasonably motivate their decision to buy. [Pacesetter Homes, Inc., supra]
Conclusions drawn from opinions
A seller agent’s opinion predicting the future occurrence of an event does not impose liability on the seller agent for erroneous conclusions when the buyer is aware of the relevant facts on which the agent’s opinion is based.
A buyer with knowledge and access to the same information as the seller agent may not later claim their actions were based on the agent’s opinion. This is especially true when the buyer has sufficient time to conduct their own independent investigation to ascertain the accuracy of the agent’s opinion.
Thus, the buyer may not ignore their own awareness of the same facts the seller agent used to develop an opinion and then claim they relied on the seller agent’s opinion as an assurance the prediction will occur.
Consider a tenant agent acting on behalf of a prospective commercial tenant in percentage rent lease negotiations. The commercial landlord has experience and does not retain the services of a real estate agent.
The tenant agent tells the landlord, “in my opinion” the tenant’s annual gross sales receipts will exceed $5,000,000 at the location of the property. The tenant and landlord enter into a lease agreement. The lease rent is a base monthly amount plus a percentage of annual gross sales receipts over $5,000,000. The landlord pays the tenant agent’s fee.
A dispute erupts between the landlord and the tenant. The landlord wants to recover the fee paid to the tenant agent, claiming the agent misrepresented the potential gross sales receipts as exceeding $5,000,000, an amount much higher than the sales the tenant will ever experience during the term of the lease.
Here, the tenant agent prefaced their statements with the words “in my opinion.” Further, it is unreasonable for a landlord to rely on the representation of future gross sales as a condition which will actually occur.
Thus, the gross receipts prediction was made as an estimate honestly held by the agent who represented the tenant. The landlord may not treat the estimates of the adversarial tenant agent as fact.
Further, the landlord had ample time and the means to make their own inquiries and analyze their findings. Here, the agent did not represent the landlord. Accordingly, the landlord needs to conduct their own investigation to confirm whether the estimate the tenant agent made on behalf of the tenant is likely to occur. [Foreman & Clark Corporation v. Fallon (1971) 3 C3d 875]
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Read more about mitigating risk.
Conditioning the statement
Now consider a prospective buyer who asks the seller agent to point out where the boundaries for the lot are located. The seller agent states a fence surrounding the property represents the boundaries. The seller agent does not indicate the source of the information upon which they based their boundary opinion.
The seller agent does not provide the buyer with the metes and bounds description or instruct the buyer to investigate the boundaries.
Specifically, the agent does not qualify their statement with words such as “the boundaries in this subdivision are usually where the fence has been placed.” Further, the seller agent does not say, “in my opinion” or “I believe” to indicate any uncertainty about the location of the boundaries. The agent’s statement of the boundary location was absolute — the fence surrounding the property is the boundary.
The buyer indicates they intend to build a pool on their acquisition of the property. The seller agent does not respond to the buyer’s statement about the intent to build a pool. The seller agent has no actual knowledge of easements or zoning ordinances which might exist and adversely affect implementation of the buyer’s intended future use of the property. This information is readily available in the public record or from public agencies with a phone call.
Without further investigation, the buyer and seller enter into a purchase agreement. The seller agent does not include a contingency provision in the purchase agreement they prepared to provide the buyer with an opportunity to verify the location of the boundaries, or to confirm their ability to obtain a permit to build a pool as a condition for closing escrow.
Prior to closing, the buyer does not ask the title company nor bring in a surveyor to establish the boundaries. The buyer does not consult with either the local planning department or a pool contractor on the ability to build a pool.
In fact, the location of the rear fence is several feet beyond the property line. The misplaced fence gives the rear yard the appearance of having sufficient room to accommodate a pool, which it does not. Also, an easement for water lines and a sewer line runs across the entire rear of the property. The seller agent has no actual knowledge of the easement.
Here, the buyer acted in reliance of the seller agent’s statement about the location of the boundaries. As a result, the failure to condition their statement about the location of the boundaries imposes liability for the boundary discrepancy on the seller agent. Without qualifying their statement, the agent’s comments became a misrepresentation about the actual location of the boundaries.
Lack of actual knowledge
In the previous example, the seller agent has no liability exposure for their failure to disclose the easements due to the agent’s lack of actual knowledge of the easements, even though the information was readily available on request. The seller agent did not owe the buyer a duty to advise the buyer to check the title for any easements or restrictions which may interfere with the construction of a pool.
The seller agent did conduct a visual inspection of the property and observed nothing which indicated the existence of an easement. Further, the agent knew nothing about any such easement and had no duty to investigate the condition of title or zoning since they are public records and go beyond observations resulting from a limited visual inspection of the property.
However, when the buyer made an inquiry about the boundaries of the property and announced their intention to install a pool, the subject matter of these inquiries became material facts known to the seller agent. When a seller agent responds to an inquiry by a prospective buyer without conditioning their statement, the buyer may rely on the information. The buyer may thus acquire the property without further confirmation of the accuracy or truthfulness of the seller agent’s statements.
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Further-approval contingency provision
Due to the buyer’s inquiry of the seller agent, the seller agent needs to include a further-approval contingency provision in the purchase agreement. The further-approval contingency provision requires the buyer to further investigate as a condition of closing. Thus, when results of a buyer’s investigation are not satisfactory to the buyer (or waived), the buyer may cancel the transaction.
Without the inquiry from the buyer, the seller agent need not volunteer their opinion about the location of the boundaries. Thus, without the inquiry, the seller agent need not go beyond the minimum required disclosures about the physical condition of the property based on their observations during their inspection of the property. When the agent responds to the buyer’s request, a contingency provision for further approval of the condition included in the purchase agreement avoids the dispute.
Opinions of the buyer agent
A seller agent has only a general agency duty to deal honestly and in good faith with a prospective buyer. As for a buyer, the seller agent’s opinions are those of an adversary.
Thus, a seller agent’s opinion may not be reasonably relied upon by a prospective buyer as having a high probability of occurring, unless special circumstances exist.
In contrast, a buyer agent has a special fiduciary duty to handle their buyer with the same level of care and protection a trustee exercises on behalf of their beneficiary.
This special agency duty owed to a buyer raises a buyer agent’s opinion given to a buyer to a higher level of reliability than had the seller agent acting solely on behalf of a seller expressed the same opinion. Thus, as a fiduciary, the opinion of the buyer agent becomes an assurance the condition or event which was the subject of the opinion will occur, unless the buyer agent conditions their opinion.
For the buyer agent to give their opinion to their buyer and keep it from rising to an actionable assurance when the predicted event fails to occur, the opinion needs to include a recommendation to investigate and analyze relevant information to confirm the agent’s opinion.
Further, to mitigate risks, the buyer agent needs to include a further-approval contingency provision in any offer the buyer makes. The further-approval contingency provision covers the condition or event which is the subject of the buyer’s inquiry and the agent’s opinion. [Borba, supra]
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Assurance of suitability without a contingency
Consider a buyer agent who represents a prospective buyer looking for rental income property.
The buyer agent is aware the buyer’s primary purpose for acquiring property is to receive spendable income from the investment.
The agent locates a multi-unit apartment complex. The agent assures the buyer:
- monthly vacancies will only be three or four units as the apartment complex is the only complex in the area which allows children and pets;
- the complex requires little expense to maintain; and
- the buyer will receive the amount of spendable income sought from the investment.
Even though the seller’s books and records are readily available for inspection on request, the buyer agent does not:
- verify the accuracy of the seller’s forward APOD of forecasted income and expenses; or
- confirm the maintenance costs.
The buyer agent fills out and hands their buyer an Annual Property Operating Data sheet (APOD) restating the representations already made to the buyer about the agent’s projections of future income. [See RPI Form 352]
The buyer, in reliance on their agent’s predictions about the property’s future operations, enters into a purchase agreement with the seller. The purchase agreement does not include further-approval contingency provisions to:
- confirm the integrity of the improvements; or
- investigate the income and expenses experienced by the seller.
After the buyer acquires the property, the buyer encounters higher maintenance costs and significantly lower rental income than their agent represented. Also, the property has a high turnover rate, and multiple tenants are constantly delinquent in the payment of rent.
The buyer does not receive the sought-after spendable income their agent projected. Soon, the buyer loses the property to foreclosure.
The buyer makes a demand on their buyer agent for their lost investment, claiming the agent misrepresented the operations of the property. The buyer agent rejects the demand, claiming their comments on the property’s performance were opinions, not guarantees.
Here, the buyer had the right to rely on their agent’s unconditional statements of facts about the property. The buyer was further correct to treat the representations as true without concern for their verification as a fiduciary relationship existed between the buyer and their agent. Thus, the buyer agent’s predictions were misrepresentations as they did not materialize, and the basis for the buyer’s recovery of the value of the lost investment. [Ford, supra]
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Expertise of the agent
Agents often hold themselves out as experts with superior knowledge about a particular type of transaction, such as high-end residential properties, apartment projects, industrial buildings or land. Agents often claim special knowledge for the reason of an alphabet-soup-type certification they attach to their name. Prospective buyers, aware of a seller agent’s specialty, often ask the agent for their opinion about an anticipated future use or operation of the property.
Due to an agent’s experience, special training and education, a seller agent may find a buyer gives their opinion extra weight. An agent’s special qualifications suddenly become reasonable justification for the buyer to rely on their opinion as an assurance they will experience the predicted event, activity or condition as represented. Thus, a risk averse agent will express their opinion as only a belief or thinking.
Consider a developer who controls a homeowners’ association (HOA) which governs a countryside subdivision of homes.
The developer and seller agent hold themselves out as HOA experts when they receive questions about HOA operations and the Covenants, Conditions and Restrictions (CC&Rs) from prospective buyers.
The seller agent assures prospective buyers the subdivision’s CC&Rs protect the view from each lot, and the architectural committee does not approve fences which interfere with the view. The recorded CC&Rs contain provisions confirming the agent’s statements.
However, an architectural committee is never set up. Further, the developer reviews and approves all proposals for fences themselves. This fact is known to the agent, but not prospective buyers.
A prospective buyer pays a premium for a home with a view.
After acquiring the property, a neighbor erects a fence as approved by the developer. The fence blocks the buyer’s view. The buyer makes a demand on the agent for their money losses brought about by a loss in value their property suffered since the agent’s statement on view rights did not come true.
The seller agent claims their statement about the view rights was their opinion which may not be reasonably relied on by the buyer when deciding to purchase the property.
Positive statement of truth
In the previous instance, the agent held themselves out as an expert on HOA and CC&R enforcement. The agent then stated the CC&Rs and architectural committee will maintain the view provided by the development. Further, the seller agent knew the architectural committee did not exist and the developer had full control.
Thus, the buyer may pursue the agent to recover their lost value, in other words, their view, due to the agent’s false opinion about the HOA’s ability to protect the buyer’s view rights — a misrepresentation.
When an agent holds themselves out to be specially qualified in the subject matter expressed in opinion, it becomes a positive statement of truth on which a buyer or seller of lesser knowledge may rely. [Cohen v. S & S Construction Co. (1983) 151 CA3d 941]
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Inducing reliance by assurances
All agents give their opinions to buyers. However, when an agent couples their opinion with advice expressing no further need for the buyer or others to investigate and confirm the opinion, the opinion elevates to the level of a guarantee.
The level of assurance equivalent to a guarantee also arises when the buyer indicates they are relying on the agent:
- to analyze a qualifying property to determine the buyer’s ability to use or operate the property as indicated; and
- to advise on whether the property is suitable and will meet the buyer’s expectations.
Further, any affirmative act or statement by an agent that discourages the buyer’s inspection of the property is an assurance, making the opinion’s conclusion the equivalent of fact.
Facts not supporting the conclusion
An agent needs to honestly hold their opinion for the agent to avoid liability when the predicted event or condition does not occur.
For an agent to hold an honest belief, the opinion needs to result from the agent’s present knowledge and their diligent investigation of all readily available facts bearing on the probability of the event or condition occurring.
When facts affecting the conclusion drawn by the agent are known or readily available to the agent, the test of an honestly held opinion is whether the agent giving the opinion knew or should have known better than to give such an opinion.
An agent who fails to diligently investigate to determine the facts before expressing an opinion, an investigation which might influence their opinion, is liable for their opinion when the event or condition fails to occur. The agent is liable without concern for their wording to limit the prediction to a mere speculative opinion as existing facts are contrary to the opinion.
Without first gathering available facts for developing an opinion, the agent’s opinion is either an unfounded guess (guesstimate) or an unreasonable assumption.
Intentional misrepresentation
Consider a seller agent for a condominium project who advertises “luxury” condos for sale. The agent knows the condos are poorly constructed and the defects are unobservable to someone not trained in the field of construction.
A buyer contacts the seller agent for more information.
The seller agent tells the buyer, “The condos are an ‘outstanding’ investment opportunity.” Unaware of the defects, the buyer purchases a condo. The buyer soon discovers the condo is in danger of collapsing.
Here, the seller agent is guilty of both affirmative and negative fraud.
The seller agent did not honestly believe the condo was an “outstanding” investment opportunity considering their knowledge of the construction defects. Thus, the agent’s representation is an affirmative fraud, also called an intentional misrepresentation.
Also, the significant defects in the “luxury” project were material facts as they adversely affected the present value and desirability of the condos. Accordingly, the seller agent is liable for money losses caused by their nondisclosure (omission) of the defects which were known to them, an example of negative fraud, also called deceit. [Cooper, supra]
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Predicting the conduct of others
The transfer of real estate to a buyer typically involves third parties who are not principals or agents in the transaction. Some transactions require approval, consent, administrative review or similar conduct by others regarding some event or condition to occur before or after closing. This is caused by buyers concerned about whether the third party will respond favorably.
Thus, buyers frequently ask agents what they believe will be the reaction of others.
These third parties include a(n):
- HOA;
- water authority;
- landlord;
- contractor;
- mortgage loan originator (MLO);
- attorney;
- accountant;
- planning agency; or
- redevelopment agency.
Commenting on the reactions of others
Consider agricultural land listed for sale. For a buyer to receive water from the Bureau of Reclamation, the buyer must first obtain approval of the purchase transaction from the Bureau.
The seller agent locates a buyer. The agent draws up a purchase agreement contingent on the Bureau’s approval of the purchase price. The agent estimates the approval process will take 30 to 60 days.
The buyer, concerned with meeting the planting deadline for the season, asks the agent about the probability of the Bureau’s approval.
The seller agent consults with the seller as to whether the Bureau will approve the transaction as the seller has dealt with the Bureau over water issues before. The seller says “they believe” the Bureau will approve it.
The agent tells the buyer of the seller’s opinion. The buyer waives the Bureau-approval contingency, stating they will get the approval later. Escrow closes.
The buyer files for Bureau approval. During the approval process period, the property’s natural well caves in. The Bureau refuses to approve the transaction and will not provide water.
The buyer seeks to recover their losses from the seller, claiming the seller’s prediction of a future event (approval by the Bureau) was a fact they relied on when they purchased the property.
However, nothing suggests the seller or their agent held themselves out to be specially qualified regarding Bureau approval. Thus, the seller’s erroneous prediction about the approval was not a misrepresentation of fact. Instead, it was an expression of their opinion.
The seller’s access to facts about the Bureau’s approval process was equally available to the buyer. Furthermore, unless a special prior relationship exists between the seller and buyer, the buyer is not entitled to rely on the opinion of the seller (or the seller agent) concerning the future decisions of a public body. [Borba, supra]
Estimates as projections or forecasts
Nearly every transaction offers an agent the opportunity to provide estimates for their clients or the other principals involved. Estimates include:
- approximations;
- predictions;
- pro-forma statements;
- anticipated expenditures; and
- contemplated charges.
Estimates relate to income and/or expenditures, such as exist in:
- seller’s net sheets [See RPI Form 310];
- buyer’s cost sheets [See RPI Form 311];
- operating cost sheets for owner-occupied properties;
- APODs on income properties [See RPI Form 352];
- mortgage origination or assumption charges;
- mortgage loan originator impounds;
- rent schedules (or rolls) [See RPI Form 352-1];
- repair costs for clearances; and
- any other like-type predictions of costs or charges.
Estimates by their nature are not facts. The amounts estimated have not yet actually occurred. The amount estimated will become certain only by its occurrence in the future. The amount actually experienced may or may not equal the amount estimated.
A document entitled “estimate” is typically based on the actual amounts currently experienced. Thus, estimates are fairly accurate in amount, not just guesswork. Words used in titles such as “contemplated,” “pro-forma,” “anticipated” or “predicted” indicate forecasts and something less than an accurate estimate and, thus, provide less basis for a buyer to rely.
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Making projections is not forecasting
Opinions voiced by agents about an income property’s future performance are either projections or forecasts.
A seller agent prepares a projection on an income property to represent its anticipated future annual operations. The data usually is set out in an APOD worksheet handed to prospective buyers to induce them to purchase the property. The data entered on the APOD for a projection are based on the income and expenses incurred by the seller during the preceding 12-month period. [See RPI Form 352]
To make the projection, the seller agent adjusts the amounts experienced by the seller during the past year to meet expectation of income and expenses likely to occur over the next year. Thus, the agent adjusts the past amounts for forward trends in income and expenses reflected by information known or currently available to the agent.
No estimations, contemplations or use of figures other than those the owner experienced are used as a basis to prepare the projection, except for adjustments to reflect changed conditions known (or knowable due to access to readily available facts).
Making forecasts due to changing conditions
A forecast requires the knowledge and analysis of an anticipated change in circumstances which will influence the future income, expenses and operations of a property. Anticipated changes are distinct from trend factors used for projections. Forecasts anticipate future changes in income and expenses which the preparer of the forecast believes will probably occur under new or developing circumstances on the property or in the local economy.
Changes in circumstances considered in a forecast of income and expenses include:
- new management;
- rent increases up to current market rates;
- elimination of deferred maintenance and replacement of obsolete fixtures or appliances;
- changes in rent control ordinances;
- new construction adding to the supply of competing income properties;
- foreclosures adding properties to an illiquid market;
- commodity market prices (natural gas, water, fuel oil, electricity, etc.);
- local and state government fiscal demands for revenue and services;
- federal monetary policy effects on short- and long-term rates;
- demographics of increasing/decreasing population density and income in the area immediately surrounding the property;
- traffic count changes anticipated;
- zoning changes reducing, altering or increasing the availability of comparable competitive properties;
- government condemnation, relocation or redevelopment actions;
- changes in the local employment base of employed individuals;
- on-site security measures to prevent crime;
- the age and condition of the major components of the structure;
- local socio-economic trends; and
- municipal improvement programs affecting the location of the property.
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