Brush up on the due diligence obligations of the seller’s and buyer’s broker in this two-part series.

Part I of this Brokerage Reminder series describes the agency duty a seller’s agent owes to their seller, and the due diligence to be performed under an exclusive listing.

For insight into the duties owed a buyer by the buyer’s agent and the seller’s agent, see Part II of this Brokerage Reminder series.

A concerted, continuing effort to sell

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.

Services to be performed by the seller’s agent need to meet the owner’s reasonable expectations, a level set by the agent during the listing stage. If the owner’s expectations are not met, the owner has good cause to terminate the agency by canceling the employment agreement without becoming obligated to pay a fee. [Coleman v. Mora (1968) 263 CA2d 137]

The diligent effort to be performed under an exclusive listing is a measure of the conduct and actions taken by the broker and their agents, including:

  • analyzing the property – a responsibility imposed on the broker or their agent to gather readily available information and adverse facts about the listed property before marketing begins, to be included in a listing package handed to prospective buyers [Jue v. Smiser (1994) 23 CA4th 312]; and
  • marketing the property – advertising in multiple listing services (MLS), installing “For Sale” signs, distributing flyers, holding open house events, broadcasting the property at pitch sessions, preparing a marketing/listing package, managing inquiries, etc.

The agent needs proof they exercised due diligence in their analysis and marketing of a property.

The best evidence of diligence is provided by keeping detailed records. Records of all solicitations, contacts, money spent, advertisements placed, buyers contacted directly or indirectly through their agents, etc., are maintained on worksheets — a physical file separately maintained on each listed property. [See first tuesday Form 520 and 525]

Gathering facts on adverse features

The methods for gathering adverse facts about the property’s fundamental characteristics, a statutory mandate on the sale of a one-to-four unit residential property, 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) [Calif. Civil Code §2079];
  • assuring seller compliance with the seller’s duty to promptly deliver 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 first tuesday Form 304, 314 and 308];
  • reviewing, confirming and correcting information and data in the disclosure documents received from the seller to ensure they are consistent with the seller’s broker’s knowledge;
  • advising the seller on risk avoidance procedures such as obtaining third-party inspections of the property’s condition to reduce the seller’s and their broker’s exposure to claims by a buyer who discovers deficiencies in the property, before or after closing, not known 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.

These methods are also used to determine those facts which enhance the property’s value.

When disclosing defects or responding to inquiries, seller’s agents are to respond with a full and fair answer of facts known to them which are or might be detrimental to the value of the property. The inquiry itself makes the subject matter a material fact about which the prospective buyer seeks more information before completing negotiations or acquiring the property.

Thus, the response of the seller’s agent to the inquiry may not suppress further investigation or inquiry by the buyer or the buyer’s agent. A contingency provision addressing the subject of the inquiry needs to be included in any purchase agreement or counteroffer entered into by the buyer.

Information, activities, events and advice

Information to be gathered, activities to be performed, events to be arranged and advice to be given to a seller by a seller’s agent when listing and marketing a property for sale include:

  1. 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.
  2. A condition of property disclosure sheet, also known as a TDS, filled out and signed by the seller and their broker or agent. [See first tuesday Form 304]
  3. 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.
  4. 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 first tuesday Form 314]
  5. 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 first tuesday Forms 352 and 562]
  6. Copies of all the covenants, conditions and restrictions (CC&Rs), disclosures and assessment data from any homeowners’ association (HOA) involved with the property. [See first tuesday Form 309 and 150 §11.9]
  7. A termite report and clearance paid for by the seller.
  8. Any replacement or repair of defects noted in the home inspection report or on the TDS, as authorized and paid for by the seller.
  9. An occupancy transfer certificate (including permits or the completion of retrofitting required by local ordinances) paid for by the seller.
  10. 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.
  11. A visual inspection of the property and a survey of the surrounding neighborhood by the seller’s broker or agent to become informed about readily available facts affecting the marketability of the property.
  12. 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 which are available by using alternative purchase agreements, options to buy, exchange agreements and installment sales.
  13. A marketing (listing) package on the property compiled by the seller’s agent and handed to prospective buyer or the buyer’s agent before the seller accepts any offer to purchase the property, consisting of copies of all the property disclosures, required or volunteered, to be handed to the prospective buyer or the buyer’s agent by the seller and seller’s broker.
  14. A marketing plan prepared by the seller’s agent and reviewed 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, internet sites, 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.
  15. 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 first tuesday Form 310]
  16. 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.
  17. Keeping records in a client file of all activities and documents generated due to the listing.

Part II of this Brokerage Reminder series discusses the duties the buyer’s agent and seller’s agent owe to the buyer.