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Real Estate: Practicing Full Disclosure

By: Lois Kadosh, MA
Tel: (510) 525-2694
Email Ms. Kadosh

Licensees cannot practice real estate in a vacuum; knowledge of real estate laws, codes of ethics, agency relationships and disclosures all merge together to give them the basis from which they may effectively practice their craft and continue to build competence and confidence.

Agents must not forget that a major part of their job is to advise clients within their expertise as real estate professionals. These clients, buyers and sellers alike, have a right to expect their agents to help them make informed decisions regarding the sale and/or purchase of real estate.

In practicing full-disclosure it is not enough for the agent to just hand buyer-clients and/or seller-clients written disclosures and property inspection reports without a discussion about what he or she is giving them. Has the licensee fulfilled his or her fiduciary duty by giving clients these disclosures and urging them to read them? No, as illustrated in the following tale of woe.

In Practice: Let's begin with the premise that Rita is just seconds away from calling her attorney... Here are the facts:

The 45-year old subject property is situated on the side of a hill with a beautiful view of the city. At the Sunday Open House listing agent John puts all property disclosures, including an engineer's report, next to the flyers for buyers to read.

Rita, a prospective buyer who is new to the area, falls in love with the house and asks John to write up an offer for her. Needless to say, he is delighted.

Soon after escrow closes, Rita learns from a neighbor that a house that used to sit on the vacant lot next door to her property slipped down the hillside during the rainy season several years ago. Rita immediately calls her broker to get the facts. John confirms the story and says it was all in the reports that were available during the open house. Didn't she read them?

Rita hires an engineer to check out her property and during the inspection the engineer points out cracks that are just starting to emerge throughout the newly painted house. In short, she learns that her new home may be in harm's way and that it will cost a sizable amount of money to stabilize the property.

She asks John what he and the seller are planning to do about this problem. He stands by his original premise: All disclosures were readily available for review; Rita just hadn't taken the time to read them.

Typically, in cases like this, attorneys will analyze the manner in which agents handle themselves during a particular transaction. Specifically, attorneys will ascertain the licensee's legal and ethical duties toward the client and then determine whether or not he or she fulfilled those obligations within the standard of care.

Let's return to John's situation. First of all, was he operating within the standard of care? In other words, was he working within the framework of the day-to-day practice of real estate, codes of ethical conduct, relevant real estate laws, including educational and licensing provisions? Second, since John was acting as a dual agent in this transaction, did he meet his fiduciary duties to both buyer and seller?

To answer these two questions, keep in mind that a real estate licensee's obligations grow out of the kind of relationship he or she has with the buyer and/or seller. For example, a buyer's agent would owe the utmost loyalty as a fiduciary to the buyer. On the other hand, this licensee's duty to the seller would be limited to being honest and fair. Now, as a dual agent, John owed the utmost loyalty to both the buyer and seller.

Was John looking out for Rita's best interests, that is, helping her make an informed decision whether or not to purchase his listing? No.

Should he have volunteered the facts he knew regarding the property and the neighborhood before Rita made her decision to buy? Yes.

Did John fulfill his agency obligations by leaving disclosures and reports at the property without directing Rita's attention to the importance of these reports once Rita became his client? No. It is hopefully obvious that John is facing some legal problems.

In the everyday world of real estate, real estate brokers and salespersons are constantly challenged to do the right thing and it is up to each to land on the right side of the law every time!

Lois Kadosh is a real estate educator, broker and expert witness in California. In addition to working as a consultant and expert witness for attorneys, she is available for presentations and workshops for attorneys, real estate licensees and consumers.

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