Part II of this article series discusses differences between the wording used by an agent to express guarantees based on agent expertise, assumptions, estimates and forecasts.
For a discussion of how to mitigate your liability exposure when giving opinions, see The liability posed by opinions, the first part of this two-part series.
Expertise of the broker or 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.
Due to an agent’s experience, special training and education, seller’s agents may find their opinions are given extra weight by a buyer. An agent’s special qualifications 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 developer who controls a homeowners’ association (HOA) which governs a subdivision of homes.
Prospective buyers ask the agent representing the developer and the seller questions about the HOA’s Covenants, Conditions and Restrictions (CC&Rs).
The seller’s agent answers their questions, holding themselves out as an expert on HOAs. The agent assures prospective buyers that the subdivision’s CC&Rs protect the view from each lot, and that the architectural committee will not approve fences interfering with the view. The recorded CC&Rs contain provisions confirming the agent’s statements.
However, an architectural committee is never setup. Further, all proposals for fences are reviewed and approved by the developer themselves. This fact is known to the agent, but not prospective buyers.
A prospective buyer pays a premium for a home with a view.
After acquiring the property, a neighbor erects a fence as approved by the developer. The fence blocks the buyer’s view. The buyer makes a demand on the agent for their money losses brought about by a loss in property value since the agent’s statement on view rights failed to come true.
The seller’s agent claims their statement about the view rights was their opinion which cannot be reasonably relied on by the buyer when making a decision to purchase the property.
In this instance, the agent held themselves out as an expert on HOAs and CC&Rs enforcement. The agent then stated the CC&Rs and architectural committee will maintain the view provided by the development. Further, the seller’s agent knew the architectural committee had not been created and that the developer had full control.
Thus, the buyer may pursue the agent to recover their lost value, i.e., the view, due to the agent’s false opinion — misrepresentation — about the HOA’s ability to protect the buyer’s view rights in the future.
When an agent holds themselves out to be specially qualified in the subject matter expressed in opinion, it becomes a positive statement of truth on which a buyer or seller of lesser knowledge can rely. [Cohen v. S & S Construction Co. (1983) 151 CA3d 941]
Inducing reliance by assurances
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.
The level of assurance equivalent to a guarantee also arises when the buyer indicates they are relying on the agent:
- to analyze a qualifying property’s ability to be used or operated as the buyer has indicated; and
- to advise on whether the property is suitable and will meet the buyer’s expectations.
Further, an agent’s affirmative activities or statements suppressing the buyer’s inspection of the property are assurances. The conclusion drawn from such assurances are the equivalent of a fact.
Facts not supporting the conclusion
An agent’s opinion is to be honestly held by the agent if the agent is to avoid liability when the predicted event or condition does not occur.
An honest belief is based on a due diligence investigation and knowledge of all readily available facts impacting the probability of the event or condition occurring.
When facts affecting the conclusion drawn by the agent are known or readily available to the agent, the test of an honestly held opinion is whether the agent giving the opinion should have known better than to give such an opinion.
An agent who fails to conduct a due diligence investigation to determine the facts before expressing an opinion, is liable for their opinion if an event or condition fails to occur. The agent is liable regardless of any efforts to limit their prediction to a mere speculative opinion.
Without first having the facts on which to base an opinion, the agent’s opinion is either an unfounded guess or an unreasonable assumption.
Consider a seller’s agent for a condominium project who advertises “luxury” condos for sale. The agent knows the condos are poorly constructed and the defects are unobservable to someone not knowledgeable in the field of construction.
A buyer contacts the agent for more information.
The agent tells the buyer that the condos are an “outstanding” investment opportunity. Unaware of the defects, the buyer purchases a condo. The buyer soon discovers the condo is in danger of falling down.
Here, the seller’s agent and their broker are guilty of both affirmative and negative fraud.
The agent could not have honestly believed the condo was an “outstanding” investment opportunity in light of their knowledge of the construction defects. Thus, the agent’s representation is an affirmative fraud, also called an intentional misrepresentation.
Also, the significant defects were material facts since they adversely affected the present value and desirability of the condos. Accordingly, the agent is liable for damages caused by their nondisclosure (omission) of the defects which were known to him, an example of negative fraud, also called deceit. [Cooper, supra]
Predicting the conduct of others
The transfer of real estate to a buyer typically involves third parties who are not principals or agents in the transaction. Some transactions require approval, consent, administrative review or similar conduct by others regarding some event or condition to occur before or after closing. This causes buyers to be concerned about whether the third party will respond favorably or act timely.
Thus, buyers frequently ask agents what they believe will be the reaction of others.
These third parties include a(n):
- water authority;
- planning agency; or
- redevelopment agency.
Consider agricultural land listed for sale. For a buyer to receive water from the Bureau of Reclamation, the buyer is to first obtain approval of the purchase price from the Bureau.
The seller’s agent locates a buyer.
A purchase agreement is drawn up contingent on the Bureau’s approval of the purchase price. The agent estimates the approval process will take 30 to 60 days.
The buyer, concerned with meeting the planting deadline for the season, asks the agent about the probability of the Bureau’s approval.
The seller’s agent consults with the seller as to whether the transaction will be approved by the Bureau since the seller has dealt with the Bureau over water issues before.
The seller says “he believes” it will be approved.
The agent tells the buyer of the seller’s opinion. The buyer waives the Bureau-approval contingency, stating they will get the approval later. Escrow is closed.
The buyer files for Bureau approval. During the approval process period, the property’s natural well caves in. The Bureau refuses to approve the transaction and will not provide water.
The buyer seeks to recover their losses from the seller, claiming the seller’s prediction of a future event (approval by the Bureau) was a fact they relied on when they purchased the property.
However, nothing suggests the seller or their agent held themselves out to be specially qualified on the subject of Bureau approval. Thus, the seller’s erroneous prediction about the approval was not a misrepresentation of fact. Instead, it was an expression of opinion.
The seller’s access to facts about the Bureau’s approval process was equally available to the buyer. Furthermore, unless a special prior relationship exists between the seller and buyer, the buyer is not entitled to rely on the opinion of the seller (or the seller’s agent) concerning the future decisions of a public body. [Borba, supra]
Estimates as projections or forecasts
Nearly every transaction offers agents the opportunity to provide estimates for their clients or the other principals involved. Estimates include:
- pro-forma statements;
- anticipated expenditures; and
- contemplated charges.
Estimates relate to income and/or expenditures, such as exist in:
- seller’s net sheets [See first tuesday Form 310];
- buyer’s cost sheets [See first tuesday Form 311];
- operating cost sheets for owner-occupied properties;
- Annual Property Operating Data (APOD) on income properties [See first tuesday Form 352];
- loan origination or assumption charges;
- lender impounds;
- rent schedules (rolls) [See first tuesday Form 352-1];
- repair costs for clearances; and
- any other like-type predictions of costs or charges.
Estimates by their nature are not facts. The amount estimated has not yet actually occurred. The amount estimated will become certain only by its occurrence in the future. The amount actually experienced may or may not equal the amount estimated.
A document entitled an “estimate” is typically based on the actual amount currently experienced. Thus, estimates are expected to be fairly accurate in amount, not just guesswork. Words used in titles such as “contemplated,” “pro-forma,” “anticipated” or “predicted” indicate something less than an accurate estimate, and provide less basis on which a buyer can rely.
Distinguish projection from forecasts
Opinions voiced by agents about an income property’s future performance are either projections or forecasts.
A projection is prepared by a seller’s agent on an income property to represent its annual operations. The data is set out in an APOD sheet handed to prospective buyers to induce them to purchase the property. The data entered on the APOD is a projection based exclusively on the income and expenses actually incurred by the owner/seller of the property during the preceding 12-month period. [See first tuesday Form 352]
The amounts experienced by the seller during the past year are projected to occur again over the next year. However these amounts are adjusted by the agent for any trends in income and expenses reflected by information currently available or known to the agent.
No estimations, contemplations or use of figures other than those experienced by the owner are to be used as a basis to prepare the projection, except for adjustments to reflect changed conditions which are known or should be known due to readily available facts.
A forecast requires the knowledge and analysis of an anticipated change in circumstances which will influence the future income, expenses and operations of a property. There anticipated changes are distinct from trend factors used for projections. Forecasts anticipate future changes in income and expense the preparer of the forecast believes will probably occur under new or developing circumstances.
Changes in circumstances considered in a forecast include:
- new management;
- rent increases up to current market rates;
- elimination of deferred maintenance and replacement of obsolete fixtures/appliances;
- changes in rent control ordinances;
- new construction adding to the supply of competing income properties;
- foreclosures adding properties to an illiquid market;
- commodity market prices (natural gas, water, fuel oil, electricity, etc.);
- local and state government fiscal demands for revenue and services;
- federal monetary policy effects on short- and long-term rates;
- demographics of increasing/decreasing population density in the area immediately surrounding the property;
- traffic count changes anticipated;
- zoning changes reducing, altering or increasing the availability of comparable competitive properties;
- government condemnation, relocation or redevelopment actions;
- changes in the local employment base of employed individuals;
- on-site security measures to prevent crime;
- the age and condition of the major components of the structure;
- local socio-economic trends; and
- municipal improvement programs affecting the location of the property.