The California Bureau of Real Estate (CalBRE) reports a surge in complaints from buyers suspicious their offers were not submitted to the seller for consideration. A recent CalBRE publication, dissected by first tuesday, highlights in great detail a licensee’s duty to promptly submit all offers to their principal. Period.
This article is Part I in a series of two. For more information on what to do if you suspect your buyer’s offers are not being presented to a seller, see Part II, “Present every offer and avoid CalBRE scrutiny.”
Omission becomes deceit
Consider a seller who lists their property for sale with a broker. The seller’s broker and their agent are employed to locate a qualified buyer who will make the most attractive offer for the seller to consider.
While marketing the property, the seller’s agent receives an offer to purchase the property from a buyer at a price substantially lower than the listing price sought by the seller.
Shortly after receiving the first offer, the seller’s agent receives another offer to purchase the property. This second offer is for a price greater than the listed price.
The seller’s agent has previously dealt with this second buyer and believes the buyer is less financially qualified than the buyer who submitted the first offer. The agent, sensing the second buyer will have difficulty securing purchase-assist financing called for as a contingency in the purchase offer, doesn’t submit the second offer to the seller.
Despite the inadequate price, the seller believes the first offer is the only available option and accepts this offer by entering into the purchase agreement. The seller closes escrow on the first offer.
Later, the seller discovers the existence of the second offer and its superior terms. The seller seeks to recoup their money losses from the broker in court for the difference between the amount received and the amount of the second offer.
The seller’s agent claims they did not believe the second offer was credible and discarded it in service to the seller, who had already received a bona fide offer to purchase.
Is the seller’s agent liable for the seller’s losses?
Yes! The seller’s agent breached their fiduciary duty to care for and protect the seller’s best interests.
Regardless of the seller’s agent’s intentions, their failure to present the second offer to the seller is tantamount to an outright denial the offer ever existed. This raises the seller’s agent’s actions to the level of deceit by omission.
Not only did the seller’s agent breach the fiduciary duty owed their seller, they also acted fraudulently. The agent’s fraudulent behavior entitles the seller to collect their losses from the agent, as well as punitive damages. Further, the seller’s agent is subject to disciplinary action from the California Bureau of Real Estate (CalBRE), including suspension or revocation of their license. [Simone v. McKee (1956) 142 CA2d 307]
Repeating the refrain: an offer is an offer
This is well-trod ground at first tuesday. We’ve restated again and again the seller’s agent has a duty to present every offer to purchase they receive to their seller, regardless of content or presentation, forever and always, amen. It’s the law. [California Civil Code §2709]
first tuesday frequently receives questions on this matter. Usually the inquiry is presented in conjunction with the myth that California Association of Realtor (CAR)-produced forms are “required” by CalBRE, errors & omissions (E&O) insurance carriers or other parties.
In response to numerous reader queries, we reached out to the CalBRE for clarification on this highly visible issue. In the very next issue of the Real Estate Bulletin, CalBRE recapitulated these obligations by giving the failure-to-present issue top billing in the Fall 2013 issue.
The lengthy and, at times, sternly-worded article notes a recent surge in complaints from buyers suspicious their offers were not submitted to the seller. The agency takes this premise as an opportunity to wag the proverbial finger.
CalBRE Fall 2001 Real Estate Bulletin, “Being an agent means never having to say you’re sorry”
CalBRE Fall 2013 RE Bulletin, “A Licensee’s Duty to Present All Offers”
CalBRE’s article reveals most failure-to-present complaints come from buyers submitting full- or over-asking price cash offers, which the buyer thinks are too good for any rational seller to ignore.
This makes sense, given that crazed cash-flush speculators were afoot throughout 2013. They jostled to outbid one another and accumulate a vast inventory of property, destined for release back into the resale market (speculator shadow inventory, if you will).
It also usefully illustrates the asymmetry of knowledge between speculators and end user buyers. With a better understanding of the law and transaction process than ordinary homebuyers, savvy speculators thus know how to spot red flags—like an absent response to a seemingly lucrative offer.
The end user homebuyer — without the guidance of their agent in navigating the transaction process — is not so fortunate, which explains CalBRE’s focus on cash buyers.
Rationalizing the breach of duty
Although a seller’s agent’s failure to present may go unnoticed and thus unreported by an unskilled end user buyer, that doesn’t mean it happens less frequently.
Numerous (improper) reasons exist to explain a seller’s agent failure to transmit an offer to their seller. None of these excuses make the conduct appropriate. The Bulletin article suggests brokers “cherry pick” offers which yield the highest commission, which is a serious misdeed of placing the agent’s interests ahead of the client’s.
Other reasons for this bad seller’s agent behavior include:
- pre-screening offers and submitting only those the agent believes the seller is most likely to accept (in essence, making unauthorized decisions on the client’s behalf);
- dismissal without presentation of offers submitted on an unfamiliar form (a conflict of interest arising from a broker’s bias toward or against a publisher);
- discarding an offer based on a belief the offer isn’t likely to gain a short sale lender’s approval; or
- rejection of offers presented on non-trade union forms in the mistaken belief their E&O insurance policy will not cover claims arising from a dispute.
How standard is “standard”?
This last rationale stems from a persistent, widespread misunderstanding of how E&O insurance works. E&O insurance protects licensees from the full cost of defending against a negligence claim made by a client or others with the payment of premiums. Providers manage the risk involved in this type of coverage by, among other things, encouraging the use of “industry standard” agreement and disclosure forms.
Many brokers, and thus their agents, misunderstand what is truly meant by the expression “industry standard.” Standard simply means a document created with boilerplate provisions conforming to local, state and federal laws and regulations, and general brokerage practice.
What E&O providers seek to avoid with standard forms is the use of homebrewed forms created independently by the broker. “Standard” means using published forms which conform to law. Standard does not mean only those forms published by trade unions such as CAR.
Duty to present
What experienced flippers understand and most homebuyers do not: the agency relationship and a licensee’s fiduciary duty mandate the disclosure of any fact which potentially affects their principal’s interests in a transaction, known as a material fact.
An offer to purchase is material to the seller’s decision-making process regardless of its content or form of presentation – oral included. It’s a critical factor in the seller’s evaluation of the desirability of their property and negotiation in its price and terms of sale. [CC §2279(a)]
Failure to present an offer denies the seller the opportunity to weigh all offers their agent receives and to better understand buyer demand. Failure to present any offer, oral or written in any form, is essentially an affirmative representation to the seller the offer does not exist. [Miller & Starr §3:27]
Failure to present all offers: a reportable offense
It’s possible to look at this duty as not just a benefit to the seller, but to the buyer as well. Effectively, it means a buyer has an implicit right to have their offer at the very least looked at by a seller when a broker is involved in the transaction. Otherwise, how can the seller consider it?
Presenting all offers further serves a critical public purpose: enhanced perception of fairness and transparency in the real estate marketplace, fortified by the conduct of the agent – the Gatekeeper to real estate ownership for both the buyer and the seller.
No duty to respond
It is important to remember that neither the seller nor their agent has any legal duty to respond to an offer. Failure to respond to an offer does not necessarily mean that offer was not presented. And if a seller instructs their agent (preferably evidenced in writing) not to present offers which fail to meet agreed-upon criteria, the seller’s agent is excused from handing those offers over. [Stevens v. Hutton (1945) 71 CA2d 676; CC §2079]
The Bulletin article suggests a considerable portion of failure-to-present complaints stem from the initial misconception that a response of some kind is required. It’s not hard to imagine that CalBRE initiates a number of investigations on this matter only to discover a breach of the seller’s agent’s duties did not occur.
A possible reason for that is CalBRE’s investigative protocol. If a complaint is filed and an investigation begun, the burden of proof of presentation falls on the seller’s agent. The investigators require the seller’s agent produce documentary evidence they fulfilled their fiduciary duty and presented every offer received to their seller.
That’s why the seller’s agent is best served leaving a paper trail — that signed rejection of an offer in the space provided on purchase agreement forms, whether or not returned to the buyer making the offer. Although not legally required, first tuesday encourages a seller’s agent’s use of a formal rejection or written acknowledgement of unsuitable offers. [See first tuesday form 150]
Are you concerned a seller’s agent is not presenting your buyer’s offers to the seller? You have options. See Part II of this series, “Present every offer and avoid CalBRE scrutiny.”