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Learning the Legal Pitfalls of Real Estate

By:
Sep 5, 2016

Real Estate Laws

By Liz Milner

Real estate law was the focus of this first-ever event that took place on Wed., June 20 at NVAR’s Herndon Center. Members of NVAR’s Attorney Roundtable, a group that meets quarterly to discuss real estate law issues, selected topics from agency to listing syndication.

Alternative Financing
John F. Pitrelli, a Principal of Key Title and an Attorney Roundtable member, explained how the “contract for deed” method of financing is gaining new popularity in the wake of the foreclosure crisis.

The contract for deed is underused but has great potential because it can bring people who have previously suffered a foreclosure or a short sale back into the market. In this approach, sellers become lenders, using their existing loan to make a loan to the buyer. For example, a seller who purchased property with a mortgage loan of 4 percent could offer the buyer a loan at 6 percent. The buyer pays the seller and seller pays the loan officer. A joint account is set up so that the buyer deposits a payment into the account each month and the money is automatically transferred to the seller. The deed is signed at settlement and held in escrow until the purchaser pays off the seller, which usually happens in three to five years.

The contract for deed has two components:
1) A typical contract, with an addendum specifying that it’s a contract for deed.
2) The “Contract for Deed,” which gets recorded in the land records immediately; later another deed is recorded when final payment to the seller is made.

The contract for deed is different from lease-purchase because the buyer gets the tax benefits, and the agent gets the commission immediately. Buyers also have the right to treat the property as their own and make any alterations they see fit.

The seller meanwhile is in the position of a lender; not a landlord. The seller is not liable for maintaining the property once the contract is signed. Virginia courts have ruled that the contract for deed doesn’t violate the “Due on Sale” clause, and the IRS considers the contract for deed to be a sale of the property.

The contract for deed is especially good when the market interest rate is high in that it enables the seller to offer the buyer a lower price because they don’t have to pay higher interest rates. It is also useful in our present market because it permits people who can’t qualify for conventional credit, such as those who’ve recently suffered a foreclosure or a short sale, to reenter the market.

In the event of a default, the seller files an affidavit to the escrow agents and requests that the buyer’s rights in the property be extinguished. The defaulting buyer then must pay liquidated damages of 10 percent and lose all the money already paid for the property.

The New Agency Laws
Vince Keegan of Hometown Title and Escrow provided a summary of the Virginia residential agency laws that went into effect on July 1, 2012. These laws are intended to ensure that consumers understand their relationship with their real estate agent. The laws protect Realtors® because they require formal, written evidence that the client was fully informed regarding the relationship with the agent. Understanding the impact of the new legislation is important because failure to comply could result in civil liability and/or disciplinary action by the Virginia Real Estate Board.

Keegan’s presentation included a review of the new dual agency/dual representation and designated agency/designated representation requirements, Virginia agency law terminology, the different types of brokerage relationships and the duties of a standard agent, a limited service agent and an independent contractor. He also reviewed potential liability issues and strategies for avoiding VREB violations. To view a one-hour webinar about the New Agency Laws on the NVAR web site, visit go.nvar.com/newagencylaws.

Teams: A Brand, A Challenge
The new agency rules have put a spotlight on the role that effective team management plays in avoiding conflicts of interest. In his presentation, “A How-to Guide for Operating Teams in Virginia,” Lem Marshall, attorney and former VAR General Counsel, explained the role that team management can play in mitigating the risk being of sued or running afoul of the VREB.

Teams, Marshall said, are more common and established in commercial real estate. They first became important to residential real estate during the real estate bubble of the 1980s and 1990s. As larger residential real estate firms gobbled up smaller ones, teams emerged as a natural outgrowth of the larger sized firm.

While teams increase efficiency, they can also be a management challenge, Marshall explained. Virginia law permits the operation of the team autonomously within a firm without that team having a separate corporate identity. A team may, however, establish a separate corporate identity under the Virginia Code. This business entity salesperson status is advantageous for tax, succession and liability purposes, Marshall said.Va. Code Ann. §54.1-2100. The license that is issued to the business entity is distinct from the individual licenses that each team member possesses.

Marshall warns that business entity salesperson licensees must pay attention to corporate niceties. They must be sure to have annual reports, regular meetings, meeting minutes, notices to shareholders, and current filings with the Virginia Corporation Commission.

Brokers are ultimately responsible for the actions of the business entity salespersons who operate out of their offices, Marshall cautions. This is a potential source of friction because the teams, by their very nature, have a separate identity and all that comes with it — separate branding, advertising, hiring and compensation. The broker and the team leader both want control over the team. In the eyes of the VREB, the team leader has zero legal responsibility for the actions of team members, unless he is also the broker of record. The broker, however, has the ultimate responsibility and can lose his/her license for actions taken by team members.

Brokers should be aware of the tension between a team’s desire to brand itself as unique, and the VREB’s requirement that in all ads the firm name must be clearly and legibly displayed. Ads must make clear that the team is operating under the supervision of the brokerage firm.

Personnel practices present another area of potential friction, Marshall said. The team members’ first loyalty will be to the team leader, Marshall explained, not the brokerage. At the same time, he added, the broker is the one who will be held liable for any unfair employment practices within a team.

E & O Coverage: Zero Gaps
Real Estate “Errors and Omissions” coverage was the subject of a presentation by Debbie Bindeman of Pearl Insurance and Liz Ives of XL Group.

Opening with some “scary” statistics, Bindeman said NAR estimates that one in four Realtors® will have a claim made against them at some point in their career. “In other words,” Bindeman said, “Realtors® run a 25 percent risk.” What makes it scarier, she said, is that they aren’t always aware that a claim is going to be made.

In a car accident, Bindeman explained, a driver knows immediately if there’s likely going to be a claim made against him. Realtors®, however, can be liable for past incidents that they may not even aware of. Depending on the issue, the time limit imposed by the statute of limitations may not even begin until the problem is discovered and the claim is made. For this reason, Bindeman recommended that Realtors® have continuous coverage with no gaps, and make sure that this insurance covers liabilities in the past. She advised the audience that when they switch carriers, to make sure that the coverage offered covers all past actions.

E&O coverage, also known as professional liability coverage, confers blanket coverage on the broker-owner and his or her agents, agent’s personal assistants, former agents and former employees. As long as the broker keeps coverage in place, agents are covered for their actions with that broker.

Real estate E&O policies do not cover every source of risk, and agents need to be aware of common exclusions. Bodily injury and property damage are the most common exclusions from professional real estate E&O policies, Bindeman said. Recently there has been an increase in claims associated with REO properties, she cautioned.

Banks are shifting the risk of maintaining foreclosed properties onto Realtors®. Since the Realtors® want to sell these properties, they have been taking on duties that aren’t covered by their E&O policies. Some have been held liable for damaging the property or failing to maintain it. These Realtors® could also be held liable if a client is injured while viewing the property. To protect themselves, Bindeman said, Realtors® should be sure that they, and the contractors they hire, have good general liability insurance.

Serving as a power of attorney for a client also is not covered under E&O policies, said Bindeman. Realtors® who have acted in that capacity at closing have been held liable for actions that their clients didn’t approve of.

Other exclusions that Bindeman noted include the sale of agent-owned property; the failure to advise clients of possible pollution such as radon, mold, lead-based paint and underground storage tanks; and intentional fraud and illegal activity.

Distressed Property: Sometimes a Source of Stress
Virginia case law covering distressed properties recently took an unexpected turn as the Virginia Supreme Court ruling in Mathews v. PHH interpreted HUD regulations on FHA-backed loans to give distressed homeowners broader grounds for contesting foreclosures. In his presentation, “Distressed Property Sales: How to Spot Issues Before they Become Problems,” Chris Brown, attorney with Brown, Brown & Brown, PC, gave an overview of Mathews v. PHH and other recent precedents and explained how they could affect foreclosure sales.

Brown said that he expects to see more loan modifications and short sales in the wake of these legal decisions. Brown’s strategy in formulating a foreclosure defense for Virginia homeowners rests on citing Mortgage Electronic Registration Systems (MERS) as the owner on title documents. MERS was created to facilitate real estate transactions because the bundling and trading of risky debt before the real estate bubble burst made it difficult to ascertain who actually owned the title to a specific property.

Foreclosure proceedings that cite MERS as the title owner are wrongful because MERS doesn’t have the authority to foreclose, said Brown. He argues that before a foreclosure can go forward, the “cloud” on the title must be removed, pursuant to Va. Code Ann. § 55–153. The burden, he said, is on the party that is foreclosing to produce an “instrument of assignment” that proves the right to enforce the Deed of Trust. This defense is still working its way through the courts. If it is upheld, Brown said, it could alter the way titles are recorded.

Listing Syndication
Erik Feig, MRIS General Counsel, and Sarah Louppe Petcher, NVAR General Counsel, led a workshop on the benefits and liabilities of listing syndication. This “obscure and misunderstood method of advertising,” they said, has suddenly become “a hot-button discussion topic.” Realtors® and the public need online listings to be accurate and up-to-date, said Petcher, but there is no means of ensuring that information on third-party real estate sites is dependable.

Commenting about the role of multiple listing services in distributing real estate listings, Feig said that while MRIS computers host the information, the data is the property of the brokers. MRIS relies on the brokers to use their discretion in deciding where the listings will go.

Feig described the three ways that listings are typically distributed:

- Internet Data Exchange Program (IDX). IDX is a data feed for distributing information that resides in the MRIS database. Only MRIS brokers have access to IDX. It is broker-to-broker cooperative advertising.
- Virtual Office Websites (VOW). VOWs are intended to provide online broker-to-client services. It is an online equivalent of a bricks-and-mortar brokerage.
- Third party advertising sites. Examples are Zillow and Trulia.

MRIS cannot police real estate sites on the Internet, Feig explained. MRIS’s role, he said, is that of distributor, “We’re providing a service by facilitating your ability to do your marketing.” Ensuring the accuracy of the information on third-party sites is the responsibility of the broker, he said, not MRIS.

Petcher noted that there is rising concern among brokers regarding the consequences of having inaccurate data on third-party sites. Virginia law holds brokers responsible for that the accuracy of all on-line brokerage listings. The law obligates the broker to “make timely written requests for updates reflecting material changes to the listing status or property descriptions” even when the website is controlled by a third party. With the proliferation of third party real estate sites, this creates a situation where brokers, to be in compliance with state law, must spend an inordinate amount of time sending update requests to these sites.

The market must exert pressure on these sites, Feig said, and brokers are the logical ones to do due diligence. They should send letters to syndicators requesting that they modify inaccurate information, he added. Only brokers can force these sites to correct listings.

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Is there a Real Estate Law issue you’d like clarified? Send e-mails suggesting topics for next year’s Legal Summit to NVAR’s General Counsel, Sarah Louppe Petcher (spetcher@nvar.com)

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