Risk management practices by the sellers agent in a declining market

Buyer’s remorse, and finger pointing

With home prices falling in 2022-2023 not likely to find a bottom until around 2025, some recent buyers will become fixated on their home’s value. Some will inevitably regret the price they paid, or worse, question the condition of the property they purchased.

In fact, between 2021 and 2022, the number of lawsuits filed against real estate licensees by buyers and sellers has increased by 9%, according to Business Insider.

As prices decline following the spring 2023 seasonal bump in sales, these types of lawsuits will pick up in frequency as homebuyers seek ways to recoup their lost home value. Certainly, they did no wrong — and prices always go up, right?

What’s an agent to do?

To minimize the risk of a lawsuit from a buyer unhappy to see their property value decline, the answer lies mostly in prepping the seller at the listing stage to provide for a complete documentation of property conditions from third parties — and what’s known to themselves. These disclosures are required of the seller by code or case law, complied with based on evidence in marketing documentation, and delivered to prospective buyers before a purchase agreement is entered into.

To achieve these objectives, the sellers agent aggressively encourages the seller to authorize the agent to order out several property reports and disclosures. The purpose: the agent will include these reports in the agent’s marketing package they present to prospective buyers at the earliest opportunity — on first inquiry for information and before the seller enters into a purchase agreement.

Thus, the risk management process starts at the listing stage by a full review with the seller about all variety of disclosures, and ends prior to the seller entering into a purchase agreement.

Related article:

The liquidated damages provision and the breaching buyer’s deposit when prices decline

Encourage the seller to authorize and pay for reports

When a seller employs a broker to act on their behalf to locate a buyer for their property, they enter into an exclusive right-to-sell listing agreement. The listing agreement works as a checklist to assure the agent has discussed all the various disclosures with the seller.  [See RPI e-book Real Estate Practice, Chapter 9; See RPI Form 102]

In times of softening home prices, during a recession or other real estate pricing bust, the sellers agent as the implicit expert retained by the seller asks for authorization to order out or prepare numerous property reports, including:

• a property inspection report for use in the seller preparation of their Transfer Disclosure Statement (TDS);
• a natural hazard disclosure (NHD) report;
• a pest control clearance;
• a lead-based paint disclosure for pre-1978 improvements;
• a residential earthquake hazards report;
• a smoke detector and water heater anchor installation;
• a neighborhood security disclosure; and
• well water quality and quantity reports. [See RPI Form 102 §§7 and 8.2]

Disclaimers of non-responsibility used in an attempt to avoid disclosure duties are not a substitute for disclosing facts known or readily available to the seller or the sellers agent. Thus, disclaimers and like notices are not a defense to buyer claims of nondisclosure by the seller or the sellers agent.

Seller disclosures, explained

Let’s break down each of these seller disclosures the agent needs to inform prospective buyers about on the condition of the property before the agent begins marketing the property for sale.

Fundamentally, providing the home inspection report (HIR) is a cost the seller incurs to assist the agent to properly disclose property conditions which affect its value and use by prospective buyers. The agent is the seller’s representative, not the financier of costs incurred to certify the property for marketing.

Critical as a liability shield, an HIR obtained and used to prepare the seller’s TDS shifts liability to the home inspector for buyer claims of non-disclosure of property conditions unknown to the seller or the sellers agent. [See RPI Form 130]

The HIR is initially used to aid the seller to properly prepare the Condition of Property Transfer Disclosure Statement (TDS) which is then reviewed and confirmed by the sellers agent. The HIR is always attached to the seller’s TDS. Both are included in the agent’s marketing package presented to prospective buyers at the first instance they seek additional property information beyond promotional flyers. [See RPI Form 304]

Next, a seller and the sellers agent use an NHD form to disclose natural hazard information. The form needs to include information known to the seller and sellers agent, or the third-party NHD expert. When not known to them, the information is readily available on maps in the public records of the local planning department as the primary source. [Calif. Civil Code §1103.2; See RPI Form 314]

Another condition of property disclosure the sellers agent needs to request the seller to pay for is a Structural Pest Control report (SPC). The SPC report discloses the existence of termites or structural damage due to a termite infestation or fungi infection on the property. When the buyer first becomes aware of an infestation after the seller enters into the purchase agreement, remedial costs are often beyond the seller’s control. [See RPI e-book Real Estate Practice, Chapter 28]

All single family residences (SFRs) built prior to 1978 offered for sale need to contain a Lead-based Paint (LBP) disclosure as an addenda attached to the listing agreement — for further inclusion in the marketing package. [See RPI Form 313]

Similarly, sellers agents listing SFRs which were built before 1960 need to deliver to the buyer a Residential Earthquake Hazards Report in the marketing package. It identifies any potential earthquake weaknesses on property, which puts the buyer on notice to take whatever action they deem necessary. [See RPI Form 315]

Further, the seller of a one-to-four unit residential property is required to anchor, brace or strap the water heater. This reduces the chance of it falling during an earthquake and rupturing gas and water lines. The seller confirms their water heater is strapped on the TDS. [Calif. Health and Safety Code §19211; See RPI Form 304 §D(2)]

Similarly, the seller declares smoke alarms are installed and in compliance with codes on the TDS. [Health & S C §13113.8; See RPI Form 304 §D(1)]

Also, during bust times, sellers agents are fully aware of the public’s general concern about security in the neighborhood surrounding the subject property. Further, local security is a material fact as any lack of security — crimes to people or property — adversely affects the value of property in the area.

Thus, the sellers agent pulls information, prepares and delivers a Seller’s Neighborhood Security Disclosure to prospective buyers as part of their property marketing package. [See RPI Form 321]

Finally, advise sellers with a water well on their property to provide the buyer with a well inspection report to confirm the water doesn’t contain health hazards and has adequate reserves.

By having the seller agree to upfront costs of third-party inspections for a full disclosure of property conditions timely delivered to buyers or the buyers agent, sellers and their agents build the documentation needed for a more durable shield against claims of non-disclosure in times of declining property values.

Related article:

The mean price trendline: guidance for when to sell

Want to learn more about seller disclosures? Click the image below to download the RPI book cited in this article.