Market Transition and Bubble = Claims

by David Hamerslough

Is the market in transition? Is a bubble imminent? These are currently the subjects of discussion and debate within the real estate industry. If you ask five real estate licensees for an opinion on these subjects, you’ll likely get five different responses.

However, if you ask five qualified real estate attorneys what one consequence is of a market transition or a bubble, you’ll get a unanimous response: market transitions and bubbles result in claims by both sellers and buyers. The most frequent claim by a seller is that they missed selling at the peak of the market because of pricing and/or marketing decisions they attribute to their agent. who is then accused of breaching the agent’s fiduciary duties to the seller.

The most frequent claims by a buyer are that they wrote an offer that contained a price, terms, and conditions that were not warranted by the market or that they purchased at the peak of the market and were not advised that they were doing so and thus the agent breached their fiduciary duties to the buyer.

This article identifies some of the questions that will be asked by a qualified California real estate attorney when evaluating claims by sellers and buyers in connection with a changing market and what documentation will become the key exhibits in any subsequent action.

Claims By Sellers

How did the seller’s agent stay current on market conditions (e.g., office meetings, industry publications, volume of transactions)?
How many transactions was the seller’s agent involved in during the six months prior to the sale ? Were those transactions in the same neighborhood and at the same price point as the transaction in dispute?
What was the list price for the property and the strategy behind the list price? Were there any reductions, and if so, why?
Was the property listed on the MLS? At what point in time? What impact did the decisions regarding the MLS have on the sale of the property?
What feedback, if any, was received regarding the property either from other agents or prospective purchasers? What changes, if any, were made with respect to the pricing or marketing of the property in response to this feedback? If no changes were made, why not?
What recommendations, if any, were made regarding repairs and/or improvements to the property prior to the marketing of the property? If those were performed, how long did they take to complete? Did they add any value? Did the timing of completing those repairs and/or improvements delay the listing of the property?
Was a CMA prepared? What comps were selected? Was the CMA documented, and were the comps saved in the broker file?
What was the marketing plan?
How did the marketing plan and pricing strategy compare to those for other properties that were in competition with the seller’s property?
Was the marketing plan executed? Why or why not?
How and where was the property marketed, and why were those choices made?
What was the quality of the photos for the marketing of the property?
Were virtual tours or similar marketing devices utilized? If not, why not?
What was the quality of any staging?
What was the seller’s exit strategy and the timing relating to that move?
Was the seller under any financial, timing, and/or personal pressure to sell? If so, how did that factor into the pricing and/or marketing strategy?
How did the recommendations and actions (or inactions) of the listing agent compare to those for other properties that were being marketed by that agent and the agent’s brokerage in the same timeframe or historically?
How many other transactions was the listing agent working on in this same timeframe?
If the property was being listed by a team, which agent was working directly with the seller? What was the level of experience of that team member?

Ultimately, the answers to many of these questions will be dependent upon the communications that took place between the listing agent and the seller. Hopefully many, if not most, of these communications were in writing, but the timing of those communications will also play a key role. While both the PRDS and C.A.R. listing agreements address some of the specific marketing tools that will and will not be utilized to sell the property, supplementing what is in that agreement with contemporaneous communications can help avoid any misunderstandings (let alone claims) regarding the pricing and marketing of the property.

Claims By Buyers

How did the buyer’s agent stay current on market conditions (e.g., office meetings, industry publications, volume of transactions)?
How many transactions was the buyer’s agent involved in in the last six months? Were those transactions in the same neighborhood and at the same price point as the transaction in dispute?
What was the buyer’s state of mind relative to the market? Is the buyer paying more for the property because of an emotional attachment to that particular property, buyer fatigue, etc.?
Was the buyer under any time, financial, or other type of pressure? How many prior offers had the buyer written, and, of those, how many had the buyer lost out on?
Was there a consistent reason for why the buyer had lost out on those prior deals?
How long was the agent working with the buyer?
Did the agent do a CMA? Were appropriate comps used? What choices were made regarding comparable properties? Was the CMA provided to the buyer in writing and was that documentation included in the broker file?
What discussions, if any, took place regarding the market, the CMA, and buyer’s pricing strategy with regard to the property that is the subject of the dispute? Were any changes made to the buyer’s strategies in view of the deals that the buyer lost out on? If not, why not?
What was the buyer’s offering price relative to the CMA? Was the pricing strategy based on a price per square foot, other factors or simply a mathematical calculation based upon list price and perceived interest?
What discussions took place between the buyer’s agent and the seller’s agent prior to the offer being written with regard to how much interest/competition the buyer faced for this property?
What specific words were used by the seller’s agent (e.g., “I have other interested parties,” “I am expecting X number of offers,” “I have been told that an offer is coming in at a specific time and date,” etc.)? The details of such discussions can be significant in determining whether the advice that the buyer’s agent gave the buyer regarding pricing and terms was reasonable under the circumstances.
What were the other terms of the offer (e.g., contingent vs. non-contingent, loan and appraisal contingencies)? Ultimately, there will be a comparison of the price, terms, and conditions of the buyer’s offer with the other offers, if any, that came in at that time and an assessment will be made as to whether the price, terms, and conditions were reasonable given the market conditions and the actual competition that existed for that property.
If the buyer was represented by a team, which agent was working directly with the buyer? What was the level of experience of that team member?
What was the buyer’s anticipated investment in renovating the property, if any? To what extent will that investment end up with the buyer having too much money in the property relative to its market value?
Was the buyer purchasing for the objective of long-term ownership? If not, then can the buyer afford to ride out the market if it declines? The buyer’s financial and job status can greatly impact that assessment. Reselling a property within 1-3 years could be a problem if a buyer overpays or invests too much money in the property relative to other properties in the area and is forced to sell before the market can rebound.

While both PRDS and C.A.R. have advisories that specifically address market conditions, a good practice is for agents to supplement what is in those advisories with contemporaneous, documented communications that can help avoid any misunderstandings (let alone claims) on all of the factors which led the buyers to enter into the purchase agreement with the seller.

About the Author

In his 40 years of practice, Dave Hamerslough has litigated and arbitrated residential and commercial real estate disputes on behalf of brokers and agents, buyers and sellers, and landlords and tenants. He teaches courses and writes articles on these subjects for brokers, agents, attorneys, and consumers. Dave also acts as mediator and arbitrator of real estate disputes. He is admitted to practice in all California courts.

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