Listing Brokers, Did You Know That Offer Instructions Can Be Dangerous to Sellers?

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LEGAL HOTLINE ARTICLE

We’ve both raised kids and dogs and, in the process, discovered they share a certain quality with real property sellers. When offered endless cookies, kids and dogs will eat too many, even to the point of getting sick. It is an obvious conclusion, then, that even though children and dogs smile (or wag) when given more and more cookies, parents and pet owners should exercise good judgment and limit cookie intake. A child or pet is typically unable to exercise their own good judgment when a pile of cookies sits before them. Consequently, when parents and pet owners show discretion, they create a greater likelihood that children and pets remain healthy. Simply put: too many cookies is bad even if children and pets are happy to get more cookies.

The same is true for sellers. In today’s market, listing brokers love to serve their sellers huge plates of "cookies" and then sit back and watch the seller ravenously devour every last one, with no thought as to possible consequences. Unfortunately, as with children and pets, sellers who are offered unlimited cookies often lack the discretion to say “no”. So long as cookies are offered, they will eat, with no appreciation for the harm they may be doing. Make no mistake, sellers who overeat the “cookies” offered by a seller’s market are more likely to suffer harm.

What are the specific “cookies” that sellers are eating?

This article will discuss several of the “cookies” as well as the adversity seller may experience from consuming them. Before that, however, it is important to explain a listing broker’s role in this feeding frenzy. Listing brokers owe unavoidable Agency Law duties, some of which include, in no particular order: 1) to take no action that is adverse or detrimental to seller’s interests in a transaction; 2) to exercise reasonable skill and care toward all parties; 3) to deliver Real Estate Brokerage Services to all parties with honesty and good faith; 4) to disclose conflicts of interest to seller; and 5) to advise seller to seek the advice of an expert in areas that exceed the scope of listing broker’s expertise.

These Agency Law duties cannot be waived. Additionally, it is important to remember that a listing broker is NEVER empowered to make decisions for a seller. A listing broker should present options to a seller and empower seller to make good decisions. Listing brokers must advise sellers to consult other professionals on issues that exceed the scope of broker’s expertise. Listing broker should always document the firm’s transaction folder with proof of those communications including listing broker’s advice that seller exercise caution and consult an expert before “eating the cookie”.

Far from this, however, it is too often the listing broker who actually serves the heaping plate of cookies and encourages seller to eat with reckless abandon. Worse, some listing brokers force feed the seller and seller is not even aware they are eating. The plate on which these cookies are often served is the “Suggestions for Writing a Successful Offer” sometimes simply referred to as “Offer Instructions” attached to the MLS listing. Make no mistake – including “Suggestions“ or “Instructions” can be an important and highly-appropriate tool for listing brokers to use. However, like any good tool, it can be misused. A hammer is a good tool, but it should not be used to bludgeon buyers.

When the information listing brokers include is beneficial to buyers and buyer brokers as they write an offer, the tool is well used. Too often, however, the “suggestions/instructions” discourage buyers from viewing the property. Rather than enticing buyers to make offers, listing brokers tell buyers, “don’t come if you can’t or won’t write your offer like this.” Even though the “suggestions” may include a statement that “all offers will be presented” the implication is clear. “Your offer will NOT be considered or accepted if it fails to conform to these ‘suggestions’”. Recall there is a section on a listing printout referred to as “Agent Remarks”. This space is adequate for identifying seller’s preferred escrow, title and showing times. It requires broker to be brief and it allows the seller to see exactly what listing agent is asking or requiring of a potential buyer. Listing brokers who claim they need more space to lay out more requirements must be mindful that with their “suggestions/instructions,” they do not preclude some buyers. It is critical to remember that listing brokers should never include “suggestions” or “instructions” to a buyer broker that seller has not specifically approved. Suggestions that are “dangerous cookies” should be included only with evidence in the firm’s transaction folder that listing broker advised caution and encouraged seller to consult an expert. More succinctly, listing broker should never include “suggestions” or “instructions” that seller has not authorized with seller’s signature on the “suggestions” or “instructions” sheet.

So … what are these dangerous cookies?

The “No Inspection” Cookie.

It is widely accepted within the real estate industry and within principles of judicial review associated with real estate transactions, that buyers should conduct due diligence prior to purchasing. Moreover, buyers who fail to conduct due diligence may be without remedy following closing. However, there is a HUGE difference between buyers who choose not to conduct due diligence and those who are prevented from conducting due diligence. The former is the buyer voluntarily forfeiting their right to due diligence, the latter is the buyer being denied their right to due diligence. The law gives no relief to the buyer who chooses to purchase without investigation. The law gives no relief to the seller who denies buyer the opportunity to conduct due diligence.

It is frightening, the number of “suggestions/instructions” that require buyers to make offers waiving the inspection contingency. Listing brokers … is this suggestion really in seller’s best interest? Recall listing broker’s duty of reasonable skill and care. Certainly, sellers love the idea that a buyer will purchase without an inspection and eliminate the risk that seller will have to make repairs or lose the transaction. But consider the risk to seller if seller “suggests” (mandates) buyer proceed without due diligence. In exchange for a short-term gain, seller assumes the risk that if the buyer is unhappy after closing, seller may have no defense to a claim that seller failed to make adequate disclosure. This is the risk that flows to the seller who denies buyer an inspection contingency. Listing brokers … have you advised your seller to seek the advice of legal counsel regarding this risk? You owe an Agency Law duty to advise the seller to “seek the advice of experts in areas that exceed the scope of your expertise”. Unless you are licensed and insured to advise seller of the legal risks associated with denying buyer the opportunity to inspect the property and terminate the transaction if dissatisfied, you must advise seller to seek the advice of a lawyer with respect to this issue before including a “suggestion/instruction” that buyer’s offer include a waiver of inspection contingency.

As a practical matter, consider this “suggestion/instruction” against the backdrop of today’s market. In truth, many buyers are choosing to submit offers without an inspection contingency to make their offer stronger. If buyer chooses to offer with no inspection contingency, buyer assumes the risk of failing to conduct due diligence. Why then, listing brokers, does it make sense to instruct buyers to make an offer with no inspection contingency when that instruction has the power to restore legal claims to buyer that buyer would voluntarily leave behind if your “suggestions/instructions” were simply silent on this issue?

The “Pre-Inspections” Cookie

Listing brokers who recognize the risks associated with denying an inspection contingency will sometimes “suggest/instruct” a pre-inspection alternative. Pre-inspections typically take one of two forms although a “pre-inspection” can be whatever seller and listing broker craft it to be. Typically, a “pre-inspection” means that: 1) each buyer will hire and pay for buyer’s inspector to conduct a full inspection of seller’s home prior to making buyer’s offer; or 2) seller hires and pays an inspector to prepare a report that is made available to any buyer who may want to offer to purchase seller’s home. Both options can be a “dangerous cookie”.

Encouraging multiple buyers to inspect seller’s home exposes seller’s home to numerous, invasive inspections and the risk that seller’s home is damaged during an inspection. Additionally, it exposes seller to the risk of receiving copies of buyer inspection reports from buyers who attempt to create leverage over seller. Finally, this approach requires buyers to absorb the cost of an expensive inspection of a home that buyer may never have the opportunity to purchase. This may discourage some buyers from jumping into the “buyer pool” and reduce the number of buyers competing to purchase seller’s home. Again, listing brokers, are you benefiting seller with this “suggestion/instruction” considering these potential adverse outcomes? Have you advised seller to consult legal counsel regarding these risks? Is seller aware that this approach may not result in seller avoiding repairs but rather, negotiating repairs at the time of mutual acceptance, when there is less competition for seller’s home because some buyers were dissuaded from jumping into the buyer pool? Make no mistake, listing brokers, a pre-inspection does not forfeit buyers right to ask for corrections with their initial offer or even preclude inclusion of an inspection contingency in their offer.

The other “pre-inspection” approach is even worse. Seller selects an inspector to inspect seller’s home and that inspection report is the only “due diligence” buyer is allowed. Said differently, buyer is required to believe that the condition of the home is what the inspector, selected by seller, says is the condition of the home. But, what if seller’s inspector missed something? What if the condition of the home is something other than what seller and seller’s inspector report? Buyer’s post-closing claim will write itself: 1) seller failed to disclose the true condition of the property; 2) seller denied buyer the opportunity to conduct due diligence; and 3) seller affirmatively misrepresented the condition of the property under the guise of a professional inspection report. There is a reason that Form 35, the standardized Inspection Addendum, requires buyer to select and compensate the inspector. When buyer selects the inspector, buyer loses the claim that seller, through seller’s inspector, intentionally mislead buyer. Seller should not mandate the inspector on whom buyer must rely.

The “Waive Buyer’s Right to Receive the Seller Disclosure Statement” Cookie

There are two closely related, but very different cookies, that fall under this broad caption. There is the healthy waiver cookie that seller consumes by asking buyer to sign the second buyer signature line after providing a completed Seller Disclosure Statement and there is the dangerous cookie seller consumes by requiring buyer to waive the right to receive answers on Seller’s Disclosure Statement by mandating buyer’s signature on the third buyer signature line.

With the healthy cookie, seller merely prevents buyer from attempting to rescind the purchase agreement, late in the transaction, based on a claimed technicality of seller’s failure to answer some small portion of the disclosure statement. Importantly, however, seller provides a completed disclosure statement to buyer, consistent with Washington law.

With the dangerous cookie, seller makes no disclosure of known conditions on seller’s property but takes advantage of the competitive seller’s market to compel buyer to close without learning what seller knows about seller’s property. Why is this cookie dangerous? Because Washington law obligates a seller to disclose seller’s knowledge of material defects within the property even if seller does not complete a Form 17. The seller who avoids this pre-closing obligation by flexing a tight-inventory-muscle is far more susceptible to post-closing liability when the buyer discovers the material defects seller failed to disclose. The craziest part of this cookie is that a buyer who is desperate to find housing will often overlook many disclosed conditions and complete the purchase but discovery of those same conditions after closing may trigger an emotional reaction leading to litigation. Listing brokers who encourage sellers to deny disclosure of known material defects prior to closing for the short term gain of avoiding completion of a Form 17 may be subjecting seller to greater risk of post-closing litigation, legal fees and a damages award to buyer.

This is not to say that there are not times when a seller wisely chooses to avoid disclosures and requires buyer to waive the right to rescind the purchase agreement. But, those situations are rare and often, the seller in those situations is represented by legal counsel who may advise seller to avoid completion of the Form 17. For example, seller may be unable to personally complete or sign agreements and disclosures, signing, instead, through a guardian or other third party who lacks knowledge of seller’s property. Even in this situation, however, seller can be liable for a failure to disclose known material defects. Of course, the seller that is an estate is exempt from the Seller Disclosure Act. Even so, any seller who fails to provide a Form 17, either because the seller is exempt or because the seller requires buyer’s waiver of rescission rights, retains the obligation to disclose known material defects in the property and failure to make those disclosures may result in post-closing liability. Before a seller willfully chooses to avoid disclosing known material defects, denying buyer the choice of purchasing despite those defects, which is a choice that would largely insulate seller from liability regarding those defects, broker should advise seller to seek legal counsel. This minor, short-term benefit could yield significant, long-term liabilities.

“Delete the Information Verification” Cookie.

It is truly stunning how many listing agents suggest that the “Information Verification” provision of Form 21 be eliminated from buyer’s offer. A savvy buyer broker will eagerly comply with this request, recognizing that listing broker is ill-informed as to the significance of this provision. The “Information Verification” provision benefits and protects the seller. It is not a 10-day get-out-of-jail-free card. Rather, it allows buyer to terminate only if buyer discovers a material inaccuracy in a representation made by seller. If buyer discovers such an inaccuracy and wants to terminate, is not that outcome better than buyer discovering the misrepresentation after closing and suing seller for damages? Said differently, the “Information Verification” provision gives seller a defense to post-closing liability. Seller’s argument would be that if buyer had the right to terminate upon discovery of a material misrepresentation but buyer failed to terminate, buyer either failed to conduct due diligence or buyer discovered the misrepresentation and closed anyway. There is no guarantee that this defense shields seller from liability. But, it is guaranteed that if the “Information Verification” provision is eliminated, seller will be without the defense, a defense that the lawyers who draft the forms deem beneficial. Woe to the listing broker who must defend their advice to seller to eliminate this provision when seller is sued after closing and seller’s lawyer is without the defense this standardized provision provides. If seller misunderstands the provision, and chances are good that many do, broker should advise seller to seek the advice of seller’s lawyer before striking the provision. Brokers are held to the standard of care of a lawyer when drafting a purchase agreement. Perhaps listing brokers should pause before eliminating a provision that the lawyers who draft the forms include. In all likelihood, the idea to eliminate the provision was not the seller’s but the listing broker’s, focusing the liability target squarely on listing broker and listing firm.

The “Post-Closing Possession” Cookie.

Why is seller seeking post-closing possession of buyer’s home? Is seller without a home to occupy? Is seller bridging the gap of time between closing of seller’s home and closing of the home seller is purchasing? Or is listing broker suggesting to seller that seller could simply enjoy a more relaxed move after closing? In today’s market, where buyers are making reckless bargains for the sole purpose of securing the opportunity to buy a home, listing broker may consider this an easy, inexpensive concession that an eager buyer can toss to seller. However, in a world where a pandemic related eviction moratorium makes it even more difficult, time-consuming and costly than normal to evict a tenant, this “suggestion/instruction” may deter buyers from any interest in seller’s home. If seller does not need post-closing occupancy, listing broker’s “suggestion/instruction” that buyer offer post-closing occupancy could cost seller a loss of buyers.

The “Release the Earnest Money” Cookie.

Earnest money supports a promise that buyer makes to seller, that if buyer fails to perform the terms of agreement, buyer will compensate seller’s losses. Earnest money is NOT a signing bonus for seller. Yet, that is exactly what it becomes when listing broker “suggests/instructs” that buyer’s earnest money be released to seller immediately following mutual acceptance. Releasing earnest money to seller before seller is entitled to ownership of the money creates risk for seller and buyer.

Consider that in most purchase agreements, buyer is benefited by contingencies that legally excuse buyer’s obligation to close. If buyer terminates pursuant to a contingency, buyer is entitled to recovery of the earnest money. In other transactions, buyer has statutory opportunities to terminate and if buyer terminates based on a statutory right, buyer is entitled to recover earnest money. In every transaction, buyer has the right to recover earnest money if seller cannot timely deliver marketable title. However, if earnest money is released to seller prior to closing, will seller be able to return the earnest money when buyer is legally entitled to recover it? Or will seller, upon receipt of a “signing bonus,” promptly spend those funds? If buyer is entitled to recover earnest money and seller is unwilling or unable to return it, buyer will have a claim to judicial relief and recovery of not only the earnest money but attorney fees and 12% interest on the earnest money for the time it was denied to buyer. Listing brokers, have you advantaged seller by giving seller “earnest money” that seller cannot spend? Worse, have you advantaged seller if you give seller earnest money that seller does spend and then must return?

The "Good" Cookies.

With all of these dangerous cookies on the menu, are there any healthy cookies that listing brokers should encourage sellers to include on the plate of “suggestions/instructions” offered to buyer brokers? Absolutely.

Listing brokers should attach the following documents to the MLS printout and suggest buyer broker include these in buyer’s offer.

  1. Seller initialed Exhibit A from the preliminary commitment for title ordered by listing broker when listing broker took the listing

  2. Seller’s completed and initialed Form 22K

Listing brokers should attach these documents for buyer’s review and benefit:

  1. Form 22E (FIRPTA certificate)

  2. Preliminary Commitment for Title (unless there is good reason not to do so such as seller bankruptcy)

  3. Seller’s completed and signed Form 17

  4. Appropriate HOA documentation

Listing brokers should consider suggesting:

  1. That buyers who need financing include a letter from a competent lender showing that buyer already received underwriting pre-approval;

  2. That buyer include proof of funds with buyer’s offer or a Form 22EF;

  3. That buyer acknowledges receipt of an attached Form 17 by signing either buyer’s signature line 1 (acknowledgment of receipt) and/or line 2 (waiver of buyer’s right to rescind based on Seller Disclosure Act following buyer’s review of the Form 17);

  4. That a buyer who intends to offer more than list price include a Form 22AD;

  5. That buyer designate the identified title company that produced the preliminary commitment for title;

  6. and that buyer designate the identified, preferred escrow company.

Ultimately, any “suggestions” or “instructions” attached to a listing should be the seller’s suggestions or instructions, not the listing broker’s. Moreover, any suggestions/instructions should be intended and designed to assist a buyer in writing an offer reflective of seller’s priorities, including the need for sellers to reduce the risk of post-closing liability through smart pre-closing behavior. Because the suggestions/instructions are the seller’s, different listings will necessarily include different suggestions/instructions. Yet, it is obvious that many listing brokers use a ”one-size-fits-all” list of suggestions/instructions without any evidence that the suggestions/instructions reflect the seller’s objectives. Seller should evidence seller’s commitment to the “suggestions/instructions” by signing the “suggestions/instructions” clearly and conspicuously. Seller’s signed consent, along with all required warnings from listing broker for seller to seek the advice of experts in areas that exceed the scope of broker’s expertise, should be retained in the firm’s transaction folder.

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