This article discusses how an opinion formed by a broker or his agent, given to a prospective buyer to predict a future event or activity regarding the use and operation of a property, might impose liability should the opinion prove to be erroneous.


When an opinion becomes a guarantee

Occasionally, a buyer will ask either a listing agent or his own agent what the agent “believes, contemplates, anticipates or projects” will occur based on the agent’s greater knowledge about the condition of a property.

The response of the buyer’s agent to the buyer’s questions about disclosures made by the listing agent will naturally be limited to the agent’s knowledge and expertise on the subject. However, the opinion given in response will speculate, based on the observations, knowledge and beliefs of the agent, on the likelihood an event or condition will occur in the future. These statements by the buyer’s agent to his buyer are either:

· couched in words of anticipation, estimation, prediction or projection, denoting it is a mere opinion about an uncertain future event; or

· worded as an assurance the events and conditions, as presented, will occur, a response reaching the level of a guarantee.

The difference between the wording used by an agent to express either an opinion or a guarantee creates the liability the agent is exposed to when:

· the buyer acts in reliance on the information by making an offer to buy or eliminating a contingency and acquiring the property; and

· the event or condition fails to occur.

An opinion is a statement by a broker or his agent, given as his contemplation concerning an event or condition which has not yet occurred. To be classified as an opinion, the statement must be developed by the agent based on readily available facts and his knowledge and expertise on the subject.

It is the nature of an opinion that the event or conditions speculated to come about need not actually occur. The speculation is about an uncertain future event or condition.

In an opinion, the event or condition expressed is not a factual representation. The event or condition expressed has not occurred and does not exist at the time the opinion is given. A fact is an existing condition, presently known or knowable by the agent due to the ready availability of data or information. Facts are the subject of disclosure rules, not the rules of opinion.

Special circumstances impose liability

A statement made to a buyer by any agent which predicts the future occurrence of an event, activity or condition is an opinion. The general rule is that the agent and his broker cannot be held responsible when the prediction given in an opinion does not come to fruition.

However, several special circumstances may surround an agent’s giving of an opinion and raise his statement to the status of a misrepresentation.

If special circumstances exist, the broker and his agent are exposed to liability for the losses caused by the failure of the predicted event, activity or condition to occur.

Special circumstances which may cause a failed prediction to be an actionable misrepresentation include:

· an opinion which is given by an agent acting as the representative of the person who relies on the opinion, such as occurs between the listing agent and his seller or the buyer’s agent and his buyer, called a fiduciary agency relationship [Ford v. Cournale (1973) 36 CA3d 172];

· an opinion which is given to a buyer by a listing agent who holds himself out as specially qualified or possessing expertise about the subject matter of the transaction [Pacesetter Homes, Inc. v. Brodkin (1970) 5 CA3d 206];

· an opinion which is given by a listing agent (or his seller) who has superior knowledge on the subject matter of the opinion under circumstances implying the agent (or the seller) has inside information not available to the buyer which makes the prediction worthy of reliance [Borba v. Thomas (1977) 70 CA3d 144]; or

· an opinion which is given to a buyer by a listing agent who could not honestly hold or reasonably believe the truth of his opinion due to facts known or readily available to him. [Cooper v. Jevne (1976) 56 CA3d 860]

An opinion based on facts

An opinion is an honestly held belief based on a reasonable (although sometimes faulty) analysis of property information known or readily available to the agent giving the opinion. However, the opinion does not by itself create any liability should the event not occur. A special condition needs to envelope the opinion to impose liability.

Consider a prospective buyer who is interested in acquiring a lot within a subdivision track and building a home on it.

The subdivider’s listing agent, based on subdivision maps and discussions with the subdivider, advises the buyer all the lots in the entire tract of land are going to be the same size and subject to the same use restrictions requiring all homes built on the lots to be worth at least $400,000.

The buyer purchases the lot and builds his home in accordance with the use restrictions.

Due to an economic downturn at the end of the current business cycle, the subdivider resubdivides the remaining unsold lots and removes the use restrictions. The resubdividing is intended to increase the marketability of the unsold lots in the tract.

The buyer now seeks to rescind the purchase and recover his entire investment claiming the subdivider’s agent made false representations about the subdivision which the buyer relied on to purchase the lot.

The listing agent claims he honestly believed in the truth of his representations that the subdivider would not in the future alter the lots remaining to be sold.

Here, the listing agent’s representations about the lot size and the Covenants, Conditions & Restrictions (CC&Rs) the subdivider would require in the future were made truthfully, with no intent to deceive the buyer. Both the buyer and the subdivider had a reasonable basis for believing changes would not be necessary at the time of the purchase. However, a later shift in the economy warranted the changes as necessary to prevent the tract from deteriorating in its marketability.

The agent’s statements about the future were honestly entertained. Thus, his statements qualify as an expression of his opinion.

Further, the buyer did not reasonably rely on the listing agent’s opinion when he agreed to purchase the property. The buyer did not require the deed from the seller to include a grant of the promised rights that all the lots would be the same size with the same restrictions on minimum value. [Meehan v. Huntington Land & Improvement Co. (1940) 39 CA2d 349]

Conditional opinions

Special circumstances surrounding the giving of an opinion may create an environment in which the buyer, with good reason, may rely on the agent’s opinion to make decisions.

Consider a developer of a residential duplex subdivision who provides his listing agent with a schedule of projected rents. The agent is instructed to inform prospective buyers these rents are estimates of the amounts obtainable from the duplexes should they buy one.

The developer has not developed properties in the area prior to this project. Also, he has no actual knowledge of the rents a duplex might obtain in the area.

A buyer with minimal investment property experience in the area contacts the listing agent for information about the duplexes being built.

The buyer is advised by the listing agent that “if you receive the rents we contemplate, it will be a good investment.”

The buyer purchases a duplex, but is unable to locate tenants willing to pay the rental amounts the listing agent gave in his opinion. Ultimately, the buyer loses the property to foreclosure.

The buyer makes a demand on the listing agent and the listing agent’s broker for the loss of his invested funds. The buyer claims the listing agent’s statements about the property’s future rental income were misrepresentations, which the buyer relied on to purchase the duplex, since the listing broker, his agent and the developer had superior knowledge about rental conditions in the area.

The listing broker claims the statement his agent made about rental amounts was a mere opinion since it conditioned success on collecting these amounts.

Here, the listing agent’s statement was only an estimate or opinion he held about future anticipated rental income for a new development since no operating history existed to draw on when making the projections. Thus, his opinion was based on all readily available information.

Also, the buyer’s lack of experience as an owner of investment property, the agent’s choice of words, i.e., “if” and “contemplate,” and the developer’s lack of prior rental experience in the area or knowledge of rents actually attainable by the duplexes made the statement an opinion. Thus, the buyer could not rely on the rent projections given by the adversarial listing agent as a fact which could reasonably motivate his decision to buy. [Pacesetter Homes, Inc., supra]

Conclusions drawn from opinions

An opinion given by a listing agent predicting the future occurrence of an event or condition concerning the buyer’s use or management of a property does not impose liability on the listing agent for erroneous conclusions when the buyer is or has been made aware of all the relevant facts on which the agent’s opinion is based.

Also, a buyer who has knowledge of and equal access to the same information and documents relied on by the listing agent to form his opinion, and has sufficient time to conduct his own independent investigation to ascertain the accuracy of the agent’s opinion, cannot later claim he acted in reliance on the listing agent’s opinion. This is especially true for buyers who possess the expertise needed to analyze the facts and make their own determination about the likelihood the agent’s predictions will occur.

Thus, the buyer cannot ignore his own knowledge of the same facts used by the listing agent to develop the agent’s opinion and then claim he relied on the listing agent’s opinion as an assurance the prediction would occur.

Consider a leasing agent acting on behalf of a prospective tenant in lease negotiations with an experienced commercial landlord who has not retained the services of a real estate agent.

The leasing agent tells the landlord that “in my opinion” the tenant’s annual gross sales receipts will be in excess of $5,000,000. After several months of negotiations conducted between the tenant’s leasing agent and the seller’s attorney, both of whom are very experienced practitioners, a lease agreement is entered into. The lease rent is a base monthly amount plus a percentage of annual gross sales receipts over $5,000,000. The landlord pays the leasing agent’s fee.

A dispute erupts between the landlord and the tenant. The landlord now wants to recover the fee he paid the tenant’s agent, claiming the agent actually represented the potential gross sales receipts as $7,500,000, an amount much higher than the sales the tenant would ever experience during the leasing period. Thus, the landlord would receive very little if any percentage rent above the fixed minimum rent.

Here, the tenant’s agent prefaced his statements with the words “in my opinion.” Also, a landlord cannot reasonably rely on or treat the representation of future gross sales as an event which will actually occur.

Thus, the landlord should have known the gross receipts prediction was just an estimate honestly made by the agent who represented the buyer. He could not treat the estimates of the adversarial agent as fact.

Further, the landlord had ample time and the means to make his own inquiries and analyze his findings. Since the landlord was not represented by a real estate agent, he should have conducted his own due diligence investigation if he intended to eliminate the uncertainties of estimates an agent made on behalf of the tenant. [Foreman & Clark Corporation v. Fallon (1971) 3 C3d 875]

Opinions of the buyer’s broker

A seller’s broker and listing agent, acting exclusively on behalf of a seller, have only a general non-agency duty to deal honestly and in good faith with a prospective buyer. As for a buyer, the listing agent’s opinions are those of an adversary.

Thus, a listing agent’s opinion cannot be reasonably relied upon by a prospective buyer as having a high probability of occurring, unless special circumstances surround the agent’s act of giving an opinion.

In contrast, a buyer’s broker and his agent have a special fiduciary (agency) duty to handle a buyer with the same level of care and protection a trustee would exercise on behalf of his beneficiary.

This special agency duty owed to a buyer raises an opinion given to a buyer by the buyer’s broker or his agent to a higher level of reliability than had the same opinion been expressed by a listing agent acting solely on behalf of a seller. Thus, as a fiduciary, the opinion of the buyer’s agent becomes an assurance that the condition or event which was the subject of the opinion will occur, unless the buyer’s agent conditionalizes his opinion.

For the buyer’s agent to give his opinion to his buyer and keep it from rising to an actionable assurance, the advice given with the opinion must include a recommendation to investigate and expertly analyze relevant information in order to confirm the agent’s opinion. Further, a contingency provision covering the condition or event that is the subject of the opinion needs to be included in any offer the buyer makes and the contingency must be eliminated before closing. [Borba, supra]

Consider a buyer’s agent who represents a prospective buyer looking for rental income property.

The buyer’s agent is aware that the buyer’s primary purpose for acquiring property is to receive a minimum amount of spendable income from the investment.

The agent locates a multi-unit apartment complex. The agent assures his buyer that:

· monthly vacancies will only be three or four units since the apartment complex is the only complex in the area which allows children and pets;

· the complex will require very little expense to maintain; and

· the buyer will receive the amount of spendable income sought from the investment.

Even though the seller’s books and records are readily available for inspection, the buyer’s agent does not verify the accuracy of the seller’s income and expense statements, or confirm the maintenance costs. Without doing so, the agent fills out and hands his buyer an Annual Property Operating Data (APOD) sheet restating the representations already made to the buyer about the agent’s projections of future income. [See first tuesday Form 352]

The buyer, in reliance on his agent’s predictions about the property’s future operations, enters into a purchase agreement with the seller as prepared by his agent. No contingency provisions are included to confirm the integrity of the improvements or investigate the income and expenses experienced by the seller.

After the buyer acquires the property, the buyer encounters higher maintenance costs and significantly lower rental income than represented by his agent. Also, the property has a high turnover rate and a large number of tenants are constantly delinquent in the payment of rent.

The buyer does not receive the sought-after minimum spendable income projected by his agent. Soon, due to persistent negative cash flow, the property is lost to foreclosure.

The buyer makes a demand on his agent for his lost investment, claiming the agent misrepresented the operations of the property. The buyer’s agent rejects the demand, claiming his comments on the property’s performance were opinions, not guarantees.

Here, the buyer had the right to rely on his agent’s unconditional statements of facts about the property and treat them as true without concern for their verification since a fiduciary relationship existed between the buyer and his agent.

Thus, the buyer’s agent’s predictions were misrepresentations, the basis for the buyer’s recovery of the value of the lost investment. The unfounded and careless predictions of the buyer’s agent, given in an opinion as fact, constituted deceit, a form of misrepresentation. [Ford, supra]

Expertise of the broker or agent

Agents are known to be specialists and often properly 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 listing agent’s specialty, often ask the agent for his opinion about some anticipated future use or operation of the property.

However, due to their experience, special training and education in a particular aspect of a property or type of transaction, listing agents may find that when they give their opinion to a buyer, their special qualifications suddenly become reasonable justification for the buyer to rely on their opinion as an assurance that the predicted event, activity or condition will actually be experienced as stated.

Thus, an agent’s wording of his opinion needs to express that the opinion is only his belief or his thought on the matter. Having expressed an opinion, the agent then needs to include a further-approval contingency calling for the buyer to confirm information given in the opinion.

Consider a developer who controls a homeowners’ association (HOA) which governs a subdivision of homes he is marketing to prospective buyers as having a panoramic view of the countryside.

The developer and his listing agent hold themselves out as experts in the establishment and administration of HOAs when questions about HOA operations and the Covenants, Conditions and Restrictions (CC&Rs) are received from prospective buyers.

The listing agent assures prospective buyers that the subdivision’s CC&Rs protect the view from each lot, that any future landscaping or fencing requires approval from a special architectural committee, and that the committee will not approve fences or landscaping which interfere with the view. The recorded CC&Rs contain provisions for the committee and view protection which confirm the agent’s statements.

However, an architectural committee is never setup. Further, all proposals for fences are reviewed and approved by the developer himself, a fact known to his agent, but not to prospective buyers. A prospective buyer pays a premium for a view lot improved with a home which has a panoramic 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 listing agent for his money losses brought about by a loss in value suffered by his property since the agent’s statement on view rights failed to come true.

The listing agent claims his statement about the view rights was his opinion, given as a representative of the seller, a statement which could not be reasonably relied on by the buyer when making a decision to purchase the property.

Here, the listing agent held himself out as an expert on association management and CC&Rs enforcement. The agent then stated the CC&Rs and architectural committee would maintain the view provided by the development.

However, the listing agent knew the committee required to make such decisions had not been created and that the developer himself had full control. Thus, the buyer could pursue the agent to recover his lost value, i.e., the view, due to his false opinion about the HOA’s ability to protect the buyer’s view rights in the future.

When an agent holds himself out to be specially qualified and informed in the subject matter expressed in his opinion regarding future expectations, his opinion 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 predicting all sorts of events or conditions the buyer will experience after acquiring a property. However, when the opinion is coupled with advice expressing no further need for the buyer, or others on behalf of the buyer, 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 out of a buyer’s indication to any agent that the buyer is relying on the agent to analyze a qualifying property to determine the 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.

Also, any affirmative activities or statements of any agent designed to suppress the buyer’s inspection of the property, his inquiries of the owner or the owner’s manager or agents, or the employment of other experts when the agent knows the buyer will rely on the agent’s representations about a property’s future performance, are considered assurances which make the conclusion drawn in the opinion the equivalent of a fact.

If the predicted event or condition does not come to pass and it was the buyer’s agent who suppressed the buyer’s due diligence activities, the buyer’s agent is liable for the lost benefit of the bargain he predicted would occur, including projected net spendable income, not just the loss of the price paid.

As for the listing agent’s liability to the buyer under the same circumstances, liability is limited to the loss of the price paid and no future losses are collectable.

Facts not supporting the conclusion

An agent’s opinion must be a belief honestly held by the agent if the agent is to avoid liability when the predicted event or condition does not occur. For an agent to hold an honest belief, the opinion must be formed based on a due diligence investigation and knowledge of all readily available facts which have a bearing on the probability of the event or condition occurring.

When facts affecting the conclusion drawn by the agent in his opinion 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.

Thus, an agent who fails to conduct a due diligence investigation to determine the facts before expressing an opinion which the investigation would have influenced will be liable for his opinion as a misrepresentation should the event or condition fail to occur, no matter his wording to limit the 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 about events and conditions he predicts will occur in the future.

Consider a listing agent for a condominium project who advertises “luxury” condos for sale. The listing agent knows the condos are poorly constructed and that the defects are unobservable to someone not knowledgeable in the field of construction.

A buyer contacts the agent for more information.

The listing 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 that the building housing the condos is in danger of falling down.

Here, the listing agent (and his broker) are guilty of both affirmative and negative fraud.

By telling the buyer that the condos were an outstanding investment opportunity, an opinion the broker could not have honestly held in light of his knowledge of the construction defects, the broker’s representation is an affirmative fraud, also called an intentional misrepresentation. The listing agent should have known better than to give such an opinion.

Also, the significant defects in the “luxury” project were material facts since they adversely affected the present value and desirability of the condos. Accordingly, the listing broker is liable for damages caused by his nondisclosure (omission) of the defects which were known to him, but unknown and unobservable by the buyer, an example of a representation which is a 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. Approval, consent, administrative review and other like-type conduct by others regarding some event or condition which is to occur before or after closing, cause buyers to be concerned about whether the third party will respond favorably to the proposed transaction. As a result, buyers ask agents what they believe might be the reaction of others, such as a HOA, water authority, landlord, contractor, lender, attorney, accountant, planning agency or redevelopment agency.

Consider agricultural land listed for sale. For a buyer to receive water from the Bureau of Reclamation, the buyer must obtain approval of the purchase price from the Bureau, a third party.

The listing 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 this season, asks the listing agent about the probability of the Bureau’s approval.

The agent consults with his seller as to whether the transaction would be approved by the Bureau since the seller has dealt with the Bureau over water issues before.

The seller says “he believes” it would.

The listing agent tells the buyer of the seller’s opinion on Bureau approval. The buyer waives the Bureau-approval contingency, stating he will get the approval later. Escrow is closed.

The buyer files for Bureau approval of the sale when the property’s natural well caves in.

The Bureau refuses to approve the transaction. Thus, the Bureau will not provide water.

The buyer seeks to recover his losses from the seller, claiming the seller’s prediction of a future event (approval by the Bureau) was a fact on which he could rely in his purchase of the property.

However, nothing suggests the seller or the listing 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, but a mere expression of his opinion.

The seller’s access to and awareness of facts concerning the Bureau’s approval process or likelihood of approval were either known or equally available to the buyer. If the buyer is curious about the details and paperwork needed for the approval, the buyer (or his agent) is duty bound to contact the Bureau himself.

Furthermore, unless a special relationship exists between the seller and buyer, the buyer is not entitled to rely on the opinion of the seller (or the listing agent) concerning the future decisions of a public body, in this case, the Bureau of Reclamation. [Borba, supra]

When the buyer has ready access to the third party, the buyer’s reliance on the opinion of the seller’s listing agent is unjustified. All the buyer need do to answer his own inquiry is contact the person involved and inquire himself.

As for a buyer’s agent, his response to his buyer’s inquiry may be an opinion on the probability of a positive or negative reaction by the third party, but must be accompanied with the advice to make the offer to purchase conditioned on getting the approval. If the contingency already exists, then get the approval to satisfy the contingency or be disapproved and cancel.

Estimates as projections or forecasts

Estimates presented to prospective buyers by agents are labelled with many titles and arise in a variety of real estate transactions. Every transaction offers agents the opportunity to provide estimates for their clients or the other principals involved. Estimates include approximations, predictions, pro-forma statements, anticipated expenditures and contemplated charges.

Estimates relate to income and/or expenditures, such as exist in:

· seller’s net sheets;

· buyer’s cost sheets;

· operating cost sheets for owner-occupied properties;

· APODs on income properties;

· loan origination or assumption charges;

· lender impounds;

· rent schedules (rolls);

· repair costs for clearances; and

· any other like-type predictions of costs or charges.

Estimates by their nature are not facts. The amounts estimated have 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 which would currently be experienced. Thus, estimates are expected to be quite accurate in amount, not just a guess. Words used in titles such as contemplated, pro-forma, anticipated or predicted indicate something less than an accurate estimate and provide less basis for a client to rely on them as an assurance they will occur.

Opinions voiced by agents about an income property’s future performance fall into one of three general categories:

· projections;

· forecasts; or

· unfounded opinions.

A projection is prepared by a listing agent on a property’s annual operations using an APOD sheet which will be handed to prospective buyers to induce them to purchase the property. The data entered on the APOD by the agent 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.

The amounts experienced by the owner/seller during the past year are projected to occur (again) over the next year, adjusted by the agent for any trends in income and expenses reflected by information currently available or presently known to the owner or the agent.

Trend information is used in a projection to make mathematical adjustments to income and expenses based on market conditions or implementable rent control increases, and to operating costs known to be increasing (or decreasing) by prior announcements of the providers.

Thus, the past year’s operations experienced by the property are anticipated to be repeated, as adjusted, and occur again during the first 12 months of operation by a new owner. No estimations, contemplations or use of figures other than those experienced by the owner are used to prepare a projection, except for adjustments to reflect changed conditions known (or should be known due to readily available facts). If these adjustments are not included in the projection, the opinion is not honestly held since it would be an opinion not actually held or not reasonably held by the agent or seller preparing the projection.

A forecast is an entirely different opinion from a projection, although both are based on beliefs about events and conditions which are honestly believed will likely occur in the future.

A forecast requires the knowledge and analysis of an anticipated change in circumstances (other than trend factors used for projections) which will influence the future income, expenses and operations (use) of a property and produce forward changes in income and expense the preparer of the forecast believes will probably occur under new or developing circumstances.

Changes in circumstances which might affect the income, expenses and debt servicing the buyer should experience during the 12- month period following the close of escrow and would be considered in a forecast include:

· new management;

· rent increases up to current market rates;

· elimination of deferred maintenance and replacement of obsolete fixtures/appliances (renovation);

· changes in rent control ordinances;

· new construction adding to the supply of competing income properties;

· commodity market prices (natural gas, water, fuel oil, electricity, etc.);

· local and state government fiscal demands for revenue and services (taxes);

· federal monetary policy effects on short-term and long-term rates (controlling any ARM loans encumbering the property or refinancing);

· demographics of increasing/decreasing population density in the area immediately surrounding the property (age and appreciation for the location);

· traffic count changes anticipated (due to traffic buildup or diversions);

· 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 and unemployed individuals;

· on-site security measures for the prevention of 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.