This article covers the due diligence obligations a seller’s agent owes to their seller.

The due diligence effort

A seller’s agent has an agency duty owed to their seller to make a concerted and continuing effort to locate a buyer during the entire listing period, called a due diligence effort.

This effort needs to meet the seller’s reasonable expectations, which the agent sets during the listing stage. If the agent fails to meet the seller’s expectations, the seller has good cause to terminate the agency relationship. Here, the seller may cancel the employment agreement without any obligation to pay a fee. [Coleman v. Mora (1968) 263 CA2d 137]

As part of their due diligence effort, the seller’s agent will:

  • analyze the property — here, the agent gathers readily available information and adverse facts about the listed property before marketing, and includes this information in a listing package for prospective buyers [Jue v. Smiser (1994) 23 CA4th 312]; and
  • market the property by advertising in multiple listing services (MLS) and websites such as Zillow, installing “For Sale” signs, distributing flyers, holding open house events, broadcasting the property at pitch sessions, preparing a marketing/listing package, managing inquiries, etc.

However, the agent needs to prove they exercised due diligence in their analysis and marketing of a property by keeping detailed records. The agent maintains records of all solicitations, contacts, money spent, advertisements placed, buyers contacted directly or indirectly through their agents, and so on, in a separate file for each listed property. [See RPI Forms 520 and 525]

Fact-finding mission

The seller’s agent has a statutory mandate to gather adverse facts about the fundamental characteristics of a one-to-four unit residential property. They will also determine which material facts enhance the property’s value.

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Methods an agent will use to gather these facts include:

  • conducting a competent visual inspection of the property to observe conditions which might adversely affect its market value, noting any adverse conditions on the transfer disclosure statement (TDS) [See RPI Form 304; Calif. Civil Code §2079];
  • assuring the seller promptly delivers to prospective buyers disclosure statements regarding natural hazards, the physical condition of improvements, environment hazards, lead-based paint, neighborhood industrial zoning, common interest development (CID) documents, etc. [See RPI Forms 304, 314 and 308];
  • reviewing, confirming and correcting information and data in the disclosure documents to ensure they are consistent with the seller’s broker’s knowledge;
  • advising the seller to obtain a third-party inspection of the property’s condition, thereby reducing the seller and their broker’s exposure to claims by a buyer who discovers deficiencies unknown to the seller or the seller’s broker; and
  • responding to inquiries by the prospective buyer or their agent into conditions relating to any aspect of the property.

When disclosing defects or responding to inquiries, a seller’s agent needs to be transparent. The agent discloses any and all facts which may have an adverse effect on the property’s value, and may not suppress further investigation or inquiry by the buyer or the buyer’s agent.

A contingency provision addressing the subject of the inquiry also needs to be included in any purchase agreement or counteroffer the buyer enters into.

Information, activities, events, advice

A seller’s agent has a lot to get through when listing and marketing a property for sale. In addition to gathering information, the agent also performs various activities, arranges events and gives the seller advice — all in the interest of ensuring they have performed their due diligence. These items may include:

  • a property profile of the seller’s title from a title company, reviewed to identify all owners needed to list, sell and convey the property and trust deeds recorded on title;
  • a condition of property disclosure sheet, also known as a TDS, filled out and signed by the seller and their broker or agent [See RPI Form 304];
  • a home inspection report paid for by the seller and attached to the TDS to shift liability for missed property conditions from the broker to the inspector;
  • a natural hazard disclosure (NHD) on the property from a local agency or a vendor of NHD reports, paid for by the seller, and reviewed and signed by the seller and the seller’s broker or agent [See RPI Form 314];
  • an annual property operating disclosure (APOD) statement covering the expenses of ownership and any income produced by the property, filled out and signed by the seller, together with a rent roll and copies of lease forms used by the owner [See RPI Forms 352 and 562];
  • copies of all the covenants, conditions and restrictions (CC&Rs), disclosures and assessment data from any homeowners’ association (HOA) involved with the property [See RPI Form 309 and 150 §11.9];
  • a termite report and clearance paid for by the seller;
  • any replacement or repair of defects noted in the home inspection report or on the TDS, as authorized and paid for by the seller;
  • an occupancy transfer certificate (including permits or the completion of retrofitting required by local ordinances) paid for by the seller;
  • a statement on the amount and payment schedule for any special district property improvement bonds or solar bonds which are liens on the property, as shown on the title company’s property profile;
  • a visual inspection of the property and a survey of the surrounding neighborhood by the seller’s broker or agent;
  • advising the seller about the marketability of the listed property based on differing prices and terms for payment of the price — and, for property other than one-to-four residential units, the financial and tax consequences of various sales arrangements available by using alternative purchase agreements, options to buy, exchange agreements and installment sales;
  • a marketing (listing) package on the property the seller’s agent compiles and hands to prospective buyer or the buyer’s agent before the seller accepts any purchase offer, consisting of copies of all the property disclosures;
  • a marketing plan the seller’s agent prepares and reviews with the seller, for locating prospective buyers, such as by distributing flyers, disseminating property data in the MLS, broadcasts at trade meetings attended by buyer’s agents, websites, posting “For Sale” signs on the premises, hosting open house events, posting on bulletin boards, mailing to neighbors and using all other advertising media available to reach prospective buyers;
  • a seller’s net sheet prepared by the seller’s agent and reviewed with the seller each time pricing of the property is an issue, such as when obtaining a listing, changing the listed price, reviewing the terms of a purchase offer or when substantial changes occur in charges or deductions affecting the net proceeds from a sale [See RPI Form 310]; and
  • informing the seller of their agent’s sales activities through weekly communications, advising what specifically has been done during the past several days and what the seller’s agent expects to do in the following days, as well as what the seller can do in response to comments from buyers and their agents, and on any changes in the real estate market.

Throughout the listing process, the seller’s agent needs to keep careful records in a client file of all activities and documents related to the listing. The agent also needs to remain transparent, thorough, and above all, never forget their due diligence owed the seller.

This article was originally posted in July 2015, and has been updated.