Chapter 23: Risk Management

Risk
Two Dimensions:
1. Probability of occurrence
2. The extent of exposure to monetary or non-monetary consequences.
Risk Management
Four strategies:
1. *Avoidance:* refraining from an activity that carries risk.

2. *Reduction:* taking steps to reduce probability or severity of a potential loss. May result in an increase in risk in another area.

*Agent provides consumer with expertise and advice but the consumer decides how much to offer.

3. *Transference:* passing the risk to another party, by contract or other means. In real estate –errors and omissions (E&O) insurance policy.

4. *Retention:* entering into known risk and taking responsibility for consequences.

Risk Management procedures
1. *Education:* Agents should be familiar with forms and how to complete them. Familiar with laws and job responsibilities.

2. *Disclosure:* Provide information to consumer to avoid misunderstanding and lawsuits. *in writing or verbal. no written acknowledgment.*

Required disclosures:
-agency relationships
-property condition
-duties and obligations
-personal interest in the transaction
-personal interest in referrals.

3. *Documentation and Record keeping:* provides evidence of compliance with laws and regulations; manuals, forms, records, contracts, accounting, and other important documents.

4. *Insurance:* general liability, E&O, fire and hazard flood, casualty, workers, personal property, consequential loss, surety bond.

Policy manual
Cover’s company rules in such areas as:
-floor duty privileges
-assignment of relocation properties to agents
-referrals between agents within the company
-requirements for continuing education, sales meeting participation, and property tours.
Procedures manual
Should spell out how to handle every aspect of the company’s business for agents and brokers.
Transaction records
Required:
-listing agreements
-offers
-contracts
-closing statements
-agency agreements
-disclosure documents
-correspondence and other communication records
-notes and any other relevant information
Accounting
Escrow records will include:

-depositor
-date of deposit
-date of withdrawal
-payee
-other information deemed pertinent by the real estate commission

General Liability Insurance
Provides coverage for risks incurred by a property owner when the public or a licensee enters the owned property.

Insurer pays: covered claim, legal fees, cost, expenses, and medial expenses due to negligence.

Errors and Omissions Insurance
Two types:
1.* Unprofessional conduct-* claim that one has failed to carry out fiduciary duties and provide standard care.
2. *Breach of contract-* claim that one has failed to perform services in contract in a timely manner.

*Covers:* damages resulting from any negligent act, error or omission arising out of Professional Services.

*E&O insurance covers “mistakes” but not crimes.*

Areas of Risk: Agency
*Main failures:* inform and disclose, carry out agency duties.

*Disclosure requirements:* verbal to other licensees and to buyer and seller, in writing before listing agreement, signed receipt disclosure was made.

*Duties to all:* honesty, fairness, care, skill, required disclosures.

*Duties to client:* diligence, loyalty, obedience, confidentiality, accounting, full disclosure.

-conflict of interest arises when the agent does not put the best interest of a client ahead of those of everyone else.

Property disclosures
Seller must provide property disclosure to buyer before accepting purchase offer.

Any home built before 1978 is required to provide a lead-based paint disclosure.

Failure to disclose, whether intentional or not, may be construed as misrepresentation.

Listing and selling process
*a listing agreement is enforceable only if it is in writing.

*Licensees must verify:* the property condition, ownership status, and the client’s authority to act.

*Comparative Market Analysis (CMA)*
-Avoid terms: appraisal, value, recommended purchase price and listing price range to avoid misrepresentation.
-best to be conservative and document that seller went higher than recommended price.

>Licensees should use broker form when providing estimate closing costs and stress to client that it is just an estimate, not actual cost.

> State and federal laws, and the federal Fair Housing laws regulate advertising.

Contracting process
Statute of Frauds states that all contracts *must be in writing to be enforceable.*

Risks and errors:
-Illegal form; must have termination date.
-Failing to state inclusions and exclusions from parties in transfer of items.
-Fail to complete contingencies such as inspections. “time is of the essence” clause in agreement makes this critical.
-Mistakes in entering data in form. should be checked & verified. checklist.

*Unauthorized practice of law:* non-lawyers may fill in blanks and delete words on standard contract forms; illegal to give legal advice but may express opinion.

Fair Housing
Advertisements may not state preference, limitation or discrimination based on race, color, religion, national origin, sex, handicap, or familial status.

-can lead to a *steering* charge or violation

Antitrust laws
Forbid brokers to band together to set a price on their services in listing and selling.

-violations = price fixing.

*Sherman Antitrust Act:* makes illegal all agreements among competitors that would unfairly restrict interstate trade.

*Clayton Act:* prohibits mergers or acquisitions that lessens competition and increases prices.

*Federal Trade Commission Act:* forbids unfair competition in interstate commerce but establishes no criminal penalty.

*Enforcement:* Antitrust Division of the Department of Justice (DOJ), Federal Trade Commission (FTC), and private parties lawsuits.

Rules and Regulation
Violators of state rules and regulations risk license expiration, revocation, suspension, lawsuit, and other discipline.

Causes of discipline include; commission of prohibited acts, practicing with expired license, disclosure failures, earnest money mishandling.

Misrepresentations
*Unintentional misrepresentation:* occurs when a licensee unknowingly conveys inaccurate information to a consumer concerning a property, financing or agency service.

*Intentional misrepresentation:* Also known as fraud, occurs when a licensee knowingly conveys false information about a property, financing or service.

Recommending Providers
*Risks:* consumer dissatisfaction, if vendor performs illegal acts — there may be legal consequences for the licensee, must disclose business relationships with vendor.

It is best to not recommend vendor or provide a short list of trusted vendors with a disclaimer and allow the consumer to choose.

Financing and closing
*Risks:*
-Fair housing and ECOA discrimination violations
-failed transactions due to agent failure to monitor contingency period
-Appraisal problems (under- and over-appraisal)
-Failure to qualify buyer
-Failure to ensure proper disclosure of closing costs
-RESPA violations
Trust fund handling
*Risks:*
-mishandling of earnest money deposits; commingling and conversion.

*Requirements:*
-broker named trustee on account
-federally-insured bank in state
-account is not interest-bearing
-records in particular format
-separate records kept for each beneficiary, property, or transaction
-records of funds match bank statements
-withdrawals only by broker-trustee or specifically authorized person.

Commingling
mixing the broker’s personal or business funds with escrow funds (client funds).
Conversion
Depositing client funds in a personal or business account, or using them for any purpose other than the client’s business.