There is a Commissioner’s Rule known as AAC (Arizona Administrative Code) R4-28-1101b that states that a licensee shall disclose anything that could materially or adversely affect the consideration to be paid by any party to the transaction to all parties in the transaction in writing before close of escrow.  These include the following:

·         Material Defects

·         Liens and/or encumbrances

·         Possible inability of seller to complete transaction

·         Possible inability of buyer to complete transaction

On short sales there may be significant issues concerning the seller’s ability to perform including obtaining lender approval for the transaction.  Also, the fact that many short sale properties do have deferred maintenance that is needed for the property is a very important disclosure issue.

Here is a simple process that will substantially reduce your risk of having to confront a messy and annoying legal issue.  After all, your time is much more productive in developing business, making listing presentations, showing properties to qualified buyers, presenting offers, and closing escrows.  You already have enough to do without having to extinguish a legal fire.  We are always seeking the “magic pill” to solve all of our problems and this is no exception.  As you might guess there is no such thing but we do have a suggested communication process that comes pretty close to being this miracle elixir.  The attached risk management worksheet will be particularly helpful with REO and Short Sale properties that are very prevalent in today’s market.

This process applies in dealing with either a buyer or seller and can be applied systematically to creating that “paper trail” that becomes essential when you may be put into the position of having to defend yourself against a baseless accusation.  Most often, if you receive an accusatory letter from a lawyer, they will do everything possible to make it as intimidating as possible and it may even read like complete fiction.  Unfortunately, judges and juries historically have sided with the non-professional when it’s simply a matter of the agent’s word against the consumer.  The best way to overcome this is to have probative evidence that you did your due diligence.  Below is the format to follow that will best ensure this.

1.                  INQUIRE:  Whether you are representing the buyer or the seller, the best way to go on record as having done this is to ask the seller to fill out the SELLER PROPERTY DISCLOSURE STATEMENT (S.P.D.S.) Even if the seller ends up not doing this it is important that you are on record as having asked them to do it.  While there are exceptions, a seller, especially owner-occupied, should be willing to do this.  If they’re not, you may want to reconsider taking the listing.  If you are representing the buyer, you have already asked for the SPDS in the offer.

2.                  OBSERVE:  Whether you are working with a buyer or seller, you will most likely have a chance to observe the premises and most often there will be visible clues as to some possible underlying problems.  Remember you are NOT doing an inspection as that will be done by a qualified state-certified professional but if you do notice “red flags” such as stains in the ceilings, cracks on the floors and walls, little tunnels, uneven floors, or algae growth in the pool, etc, make a note of them here.  Since you are not doing an inspection, you can apply something called the “Tool & Tuxedo” rule that means that if getting access to an area requires the use of a tool (screwdriver, ladder) or would soil the hypothetical tuxedo or evening gown you’re wearing, you don’t check that area out.  It is “inaccessible for observation”.

3.                  POINT OUT:  After you have noted the “red flags”, point them out to your seller or buyer.  Advise them that these are things you noticed in your casual viewing of the property and let them know that there might have been some other visible things you may have missed and there were areas you were not able to observe because they were inaccessible.

4.                  RECOMMEND:  Advise the buyer or seller that since you have noticed these red flags, that it would be in their best interests to have these checked by a qualified professional to determine the underlying conditions and what measures are needed to correct them.  With a seller, advise them that they have the option of repairing them which will most likely result in far less of an expenditure on their part, than what the buyer will most likely ask for in concessions when they have the property inspected by their inspector.

5.                  RECOMMEND AND DISCLOSE TO BUYER:  This, of course, is part of the contractual language you will review if you’re representing the buyer but if your seller says that they just want to sell their property “as is”, to be prepared to adjust their expectations in such areas as price and terms as the buyer will most likely ask for concessions in these areas.

Remember to have a written record of having this communication as part of your paper trail which could even be a letter to your client with a copy in the transaction file.  Also, don’t forget to advise your seller or buyer that they should consult with any qualified professionals to seek competent advice and to check out any other sources of important consumer information.

Risk Reduction Worksheet

David Compton is a professional speaker/trainer, author consultant in the real estate industry. He is also a partner in Practical Resources with George Smith; a company that specializes in delivering quality educational programs to real estate and mortgage professionals.   He has spent over 36 years in real estate in residential and commercial sales, site selector for a fast food restaurant chain, branch manager, director of education for one of the largest real estate brokerages in the nation, and for the last 25 years as a speaker/trainer.  He has developed over 200 real estate courses and has authored over 150 articles for real estate print and online publications.