Last month, I taught at the Triple Play Convention in Atlantic City New Jersey. It’s a tri state convention for New Jersey, New York, and Pennsylvania. For the first two days, I taught the CRB course: “Real Estate is Risky Business”. On day three, I taught a risk reduction course I had written for agents: “Risk Management: What You Do and Say May Be Held Against You”. On the last day, I taught a course “Pricing the Oddball”, which was approved for appraisers and agents. . At all three classes, risk came up, and in all three circumstances, the approach to risk was different among the types of attendees.
Let’s start with the broker/managers. I had a great group of these folks, including a very nice man from the corporate level of a large, national franchise. He took notes copiously and told me and the class, that he had never considered in detail how much a risk policy should be part of the overall approach from the franchisor to the franchisee. The brokers and managers included large companies down to the two person “Mom and Pop” real estate office. In many cases, the name on the door is the last name of the person in class. One of those in the CRB class is a 4th generation REALTOR®. The brokers and managers, to a one, cared about risk; wanted to identify it; wanted to find ways to avoid or mitigate it, and cared deeply about the reputation of the firm, and themselves.
The agents were a mixed bag. Many of them expressed the sentiment that they enjoyed the class, and realized many things that they aren’t doing they should be doing. This class, as I wrote it, is big on defensive real estate: get all the facts on the property, document what you do; build a file that can defend you, if necessary. Some of them “pushed back” with the “I’m too busy to worry about that, and besides it’s not my job”. This included one student who asserted that even deed restrictions or covenants are not something he researches, because “the title company does that”. Of course, the title company typically discloses those findings at the settlement table, which is often too late for the buyer to change his mind—but not too late to sue the broker. I could sense that some were much more concerned about the next commission check, as opposed to a long term reputation in their community, or a long term relationship with clients.
The final group was a mix of appraisers and agents. Appraisers are, by nature and training, detail oriented people. One of those appraisers shared a story I wished I would have had for the three days previous to this course (which was the last day of the convention). We were covering highest and best use of a property, which needs to be done to price it properly. To determine highest and best use, appraisers determine what uses are physically possible, legally permissible, economically feasible and maximally productive. You start with verifying known facts—like zoning. The appraiser told this story. An agent was called upon by an estate to price a property. She did not check the zoning, and thus did not realize that the zoning had changed from residential to “village commercial”. In this community, “village commercial” allowed professional offices, with the result that as large older homes came on the market, they were being purchased by doctors, dentists, real estate companies, insurance companies, attorneys, etc. The agent used comparables which were residential properties, and zoned residential. Based on her advice, the sellers listed the property for $185,000, and it promptly sold. The new owner converted it (with a minimum of expense) into two professional offices, paved the back yard for parking, and resold it very quickly for $425,000. The agent got sued. The appraiser telling the story had been brought into court as a professional witness for the estate, testifying to the value of the property at the time of sale (which was way more than $185,000!) Other students asked what the outcome of the case was (I was curious as well!)—he did not know, but the true point for me is that she got sued. It cost her time, money and reputation. She may have thought it could never happen to her, but it did.
Risk is inherent in our business. We carry E & O insurance to protect ourselves, and most of us diligently pay attention to details, keep good records, and try to keep our clients and customers happy. But, even an innocent REALTOR® can be sued by a litigious client. Lawsuits cost money, time and reputation. Seasoned brokers and agents will agree that they would rather have a sale fall apart before closing, than suffer through a lawsuit post-closing. As we enter 2013, please be careful out there, and do all you can to contain risk!