Advising clients through a cooling real estate market

This article discusses when — and how — a real estate agent or broker ought to counsel their clients considering buying in today’s tumultuous housing market.

Knowledge withheld; knowledge lost

Real estate agents are often wary of offering opinions of any kind. Not wishing to be “on the hook” for a client’s regretful decision, they steer clear of providing information about the housing market beyond the most basic facts.

But is an agent to be blamed for not speaking up when the knowledge withheld amounts to the client making a poor housing and financial choice?

As we head into 2023, the housing market is screaming that it’s a bad time to buy, due to factors like:

• spiraling home sales volume;
• plummeting home prices;
• still-rising mortgage interest rates; and
• the generally-poor economic outlook for 2023.

When buyer clients want to know their agent’s opinion about what is likely the biggest investment and financial decision of their lives — what’s an agent to say?

Not only are licensees permitted to share their hard-earned knowledge, but their agency relationship with their client may actually require them to do so depending on the agent’s scope of knowledge.

Related article:

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Further, an opinion given by a seller’s agent predicting the future occurrence of an event does not impose liability on the seller’s agent for erroneous conclusions when the buyer is aware of the relevant facts on which the agent’s opinion is based.

A client who has knowledge of and equal access to the same information relied on by the agent cannot later claim they acted in reliance on the agent’s opinion. This is especially true when the client has sufficient time to conduct their own independent investigation to ascertain the accuracy of the agent’s opinion.

Therefore, a discussion about housing market trends is permissible and even encouraged in today’s rapidly shifting market.

Insolvent by 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. Prospective buyers, aware of a seller’s agent’s specialty, often ask the agent for their opinion about some anticipated future use or operation of the property.

Due to an agent’s experience, special training and education, agents will find their opinion is given extra weight by a buyer. An agent’s special expertise suddenly become reasonable justification for the buyer to rely on their opinion as an assurance the predicted event, activity or condition will be experienced as stated. Thus, a risk averse agent will express their opinion as only a belief or thought.

Consider a homeowner who obtains an adjustable rate mortgage (ARM) secured by a trust deed on their home. On origination, the lender verbally assures the homeowner the property will appreciate in value in the future, allowing the homeowner to sell the home or refinance the mortgage before needing to make higher monthly payments when the ARM adjusts.

Years later, the homeowner defaults and the lender begins foreclosure proceedings. Prior to foreclosure, the buyer discovers their home has depreciated in value, contrary to the lender’s confident forecast at the time of origination.

The homeowner seeks compensation and termination of the foreclosure proceedings, claiming the lender committed fraud since it informed the homeowner the property would appreciate over time and it did not.

The lender claims it did not commit fraud since its statements about the future value of the homeowner’s property were speculative opinions and not meant to be relied on by the homeowner.

A California court of appeals dismissed the homeowner’s claim and held the lender did not commit fraud since the lender’s forecast of the home’s value was mere speculation, not a misrepresentation of known facts or reliable information intended to be used by the homeowner. [Graham v. Bank of America (May 23, 2014)_CA4th_]

Editor’s note — “Don’t worry about the rate adjustment — you can just sell or refinance before your payment increases.” Sound familiar? This was a common refrain during the Millennium Boom. The events of this case happen to coincide with the vicissitudes of the boom-and-bust cycle; the owners obtained the loan in 2005 and had to begin repaying principal (and deferred interest) in 2010, after their property was plunged into negative equity, similar to what is currently happening to buyers in 2021-2022, who are now finding themselves losing equity by the day. However, the lender’s bad sales pitch does not excuse the owner from their loan commitment.

Related article:

Still sinking, California home sales volume comes up for air in August 2022

Avoid liability and provide counsel

Any liability for a faulty forecast is avoided when couched in a discussion of market trends and the evolving factors about which the client needs to be concerned.

All agents give opinions to buyers. However, when the opinion is coupled with advice expressing no further need for the buyer or others to investigate and confirm the prediction, the opinion is elevated to the level of a guarantee.

Therefore, agents need to avoid definitive statements with nothing to back them up. For example: “Prices won’t drop any further,” or “Interest rates will only keep rising, it’s best to buy now.” These are both potentially misleading statements with no factual information provided.

Related article:

When an Opinion Becomes a Guarantee

 

Further, any affirmative activities or statements of any agent designed to suppress the buyer’s inspection of the property or circumstances surrounding the transaction are considered assurances which allows the client to draw the conclusion the agent’s opinion is equivalent to a fact.

For the buyer’s 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 will include a recommendation to investigate and analyze relevant information to confirm the agent’s opinion. [See RPI e-book: Office Management & Supervision, Agency, Fair Housing, Trust Funds, Ethics and Risk Management Chapter 6: Opinions with erroneous conclusions]

Real estate agents: How often do your buyer clients bring up the state of the housing market in 2022? Are they worried about buying due to economic trends? Share your experience with other readers in the comments below!