Generic business risk is mostly a matter of insurance. Although there is overlap, each level of the real estate business will typically carry insurance. For instance, individual agents carry auto insurance on their vehicles consistent with transporting clients, but include the brokerage as an additional insured. Real estate companies will have their own errors and omissions (E&O) insurance, but include agents in the policy.

Fire insurance, premises liability insurance, income insurance and the like should be part of any business’ generic risk management strategy. Since each level of the real estate business is more or less independent, each level should consider and manage generic business risk at their level. How that is done is covered in the Risk Mitigation section of this subject.

Other than insurance, generic business risks are mostly a matter of having good internal policies and agreements. A business can act only through its agents and employees. The internal relationship between agents and employees and the business is, therefore, the source of considerable business risk. The business can find itself liable for the actions of its agents and employees. It can also find itself liable to its agents and employees.

These kinds of internal relationship risks exist no matter the kind of business. Large businesses have separate “human resources” departments to deal with internal relationships. In smaller businesses, internal relationships are handled by the owner or manager. Owners and managers must, therefore, educate themselves about the generic business risks associated with engaging agents and having employees. Tools to help with such education are covered in the Risk Mitigation section of this subject.

The most widely used, and effective, tools for managing generic risk created by being an employer are employee handbooks, office policies and written employee or independent contractor agreements. These tools help companies manage internal relationships. Managing internal relationships allows the company to manage external generic risks created by being an employer. Managing risk created by internal relationships through the proper use of management tools is covered in the Risk Mitigation section of this subject.
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Selling side risks flow from the same duties as listing side risks. The duties of loyalty, obedience, confidentiality, disclosure, reasonable care and diligence, and accounting all apply. Just like on the listing side, each duty is a separate risk generator for risk identification purposes. What changes is the relative importance of each duty as a risk generator. Loyalty, obedience, confidentiality, and disclosure duties create the same type of risk on the selling side as on the listing side. The risks are similar but, with the exception of confidentiality, there is less opportunity to violate these duties on the selling side. The opportunity to violate the duty of reasonable care and diligence is, however, greatly increased on the selling side.

Loyalty to a buyer client means placing the buyer’s interests in front of the agent’s. The buyer’s primary interest is in finding suitable property at a price they are willing to pay. Loyalty can become a risk management issue on the selling side when the buyer’s agent tries to beat their client out of a property by buying it himself. Loyalty can also be implicated if the agent places the interests of other buyers (buyer/buyer conflicts) or third parties (lenders, consultants etc.) over those of the client. Analysis of this kind of selling side loyalty risks is covered in the Risk Analysis section of this subject.

Obedience, as was the case on the listing side, is rarely violated directly by an agent refusing to do what the principal asks. Obedience usually becomes a risk management issue on the selling side only if the buyer demands the selling agent withhold material information from the seller, lenders or other service providers. On the selling side, the information the buyer wants withheld typically involves the buyer’s financial position. That information may or may not be confidential depending on the circumstances and who the information is being withheld from. For instance, buyers may ask their agent to help them hide material financial information from a lender and thus create a conflict between the agent’s obedience duty and their duty of honesty and fair dealing. Analysis of these obedience risks is covered in the Risk Analysis section of this subject.

Confidentiality is implicated anytime an agent discusses the object of the agency relationship with a third party. On the selling side, that means potential risk anytime the buyer’s agent discusses the buyer’s motivation, financial situation or best price with anyone other than the buyer. Confidentiality is a big duty on the selling side of a real estate transaction. Agents sometimes forget that confidential information gained as the result of an agency relationship remains confidential even after the agency relationship ends. Analysis of these direct risks is covered in the Risk Analysis section of this subject.

Disclosure requirements create potential risk anytime the buyer’s agent withholds information from the buyer. For instance, an agent might withhold information about a newly listed property because their client has an offer in on another property. In Oregon, real estate licensees have a disclosure duty to all parties, not just their clients, creating yet another disclosure risk. This disclosure duty to all parties is implicated if the buyer wants material information (like inability to redeem an earnest money note) withheld from the seller. Analysis of disclosure risks is covered in the Risk Analysis section of this subject.

Reasonable care and diligence, without doubt, generates the most risk on the selling side. The buyer’s direct risks in a real estate transaction are huge. They may pay too much for the property or find the property contains material defects or discover that it is unfit for their intended purpose or that external factors (everything from bad neighbors to flood hazards) greatly reduce its desirability. When any of these things happen, the buyer will wonder why their real estate professional did not prevent the harm or at least warn them of the potential. Analysis of these reasonable care and diligence risks is covered in the Risk Analysis section of this subject.

Accounting is the final direct risk duty on the selling side. As on the listing side, the duty to account requires the agent to keep track of (account for) any money or property of the client’s coming into the agent’s hands as a result of the agency. Because Oregon law requires licensees to keep their client’s funds in trust accounts, accounting is mostly a matter of following trust account rules. Analysis of direct accounting risk is covered in the Risk Analysis section of this subject.
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Direct transactional risks on the listing side are risks associated with the services provided, not the property. Direct risks flow from the duties an agent owes their client. Click here for a copy of listing side agency duties. These duties create the potential for the client to sue the agent claiming the agent breached a duty owed to the principal. Such claims are lumped under the heading of “professional malpractice.”

In Oregon, as in many states, the duties a real estate agent owes to the seller are set out in statute. Click here for a detailed discussion of statutory duties in Oregon. Notwithstanding this statutory illumination, the duties remain basically the same as under common law “fiduciary” duties: Loyalty; Obedience; Confidentiality; Disclosure; Reasonable Care and Diligence; and Accounting. Each duty is a separate risk generator for risk identification purposes.

The duty of loyalty will be implicated anytime the agent deals with their principal directly or otherwise benefits from the agency relationship in the way not known or anticipated by the principal. For example, a listing agent buying the listed property or an agent taking a kickback on a home warranty or receiving an undisclosed “bonus” of some kind on the sale or taking an interest in a company that is purchasing the property or anything that might secretly put money (other than the agreed-to commission) in the agent’s pocket. Analysis of these loyalty risks is covered in the Risk Analysis section of this subject.

Obedience means obeying the lawful instructions of the principal. This duty is rarely violated directly as in an agent refusing to do what the principal asks. Obedience becomes a risk management issue when the seller asks the agent to do something, usually withhold information, which violates the agent’s duties of honesty and fair dealing. Obedience issues are, therefore, almost always based on a conflict of duties. Analysis of these obedience risks is covered in the Risk Analysis section of this subject.

The duty of confidentiality is implicated anytime an agent discusses the object of the agency relationship with a third party. On the listing side, that means anytime the seller’s agent discusses the property, the seller’s motivation or the terms of a transaction with anyone other than the seller. Confidentiality is a big duty. Fortunately, the definition of confidential information (anything learned as an agent that it is not in the principal’s interest to disclose or is not required by law to be disclosed) makes analyzing and controlling confidentiality risk fairly simple. Analysis of confidentiality risks is covered in the Risk Analysis section of this subject.

An agent’s statutory duty of disclosure runs to all parties to a real estate transaction. To one’s own client, an agent must disclose anything that might be important or useful to the client. Direct risk is created anytime an agent withholds information from a client. On the listing side, for instance, the agent might withhold the fact that another offer has been made or is coming in, or that the buyer has failed to meet some deadline or anything else the client is entitled to know about. In Oregon, real estate licensees have a disclosure duty to all parties, not just their clients, creating yet another direct disclosure risk. This duty, however, is limited to material information not known or readily available to another party. Analysis of disclosure risks is covered in the Risk Analysis section of this subject.

The duty of reasonable care and diligence generates little risk on the listing side. Care and diligence is strictly a direct risk issue. Failing to exercise care and diligence means failing to protect or advance the client interests. The duty runs directly only to the client. On the listing side, the seller’s interests are mostly financial. Care and diligence can become an issue on the listing side if property is listed unreasonably high and doesn’t sell as a result, or listed too low and immediately sells below its market value or there is insufficient or incompetent marketing. Sellers who become aware of these costs may try to shift them to the real estate agent. It is this simple economic fact that drives listing cancellations, listing side marketing strife, lack of diligence ethics complaints and occasionally a lawsuit. Analysis of reasonable care and diligence risks is covered in the Risk Analysis section of this subject.

Accounting is the final direct risk duty. Accounting is a duty that flows logically from the duties of loyalty, disclosure and diligence. The duty to account requires the agent to keep track of (account for) any money or property of the client’s coming into the agent’s hands as a result of the agency. The duty to account can be violated innocently from ignorance, but typically failure-to-account claims are the result of the agent deliberately hiding or otherwise misappropriating their client’s funds. Because Oregon law requires licensees to keep their client’s funds in trust accounts, accounting is mostly a matter of following trust account rules. Analysis of accounting risk is covered in theRisk Analysis section of this subject.

In addition to the direct risks created by agency relationships, there is also a direct risk that flows from simply being in the business of providing real estate services. This risk results from the Unlawful Trade Practices Act. The Unlawful Trade Practices Act is state consumer protection legislation that protects consumers as consumers from sharp business practices. The Act creates a separate duty to conduct business affairs in a lawful manner. As such, it creates a direct risk for all real estate licensees. Analysis of risks created by the Unlawful Trade Practice Act is covered in the Risk Analysis section of this subject.
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Most of the risk involved in real estate and, therefore, the risk we most want to learn to manage, is risk associated with real estate transactions. Transaction risks flow from principal to real estate agent. That is the case because most losses suffered by real estate professionals are losses one of the principals would suffer personally if they could not shift the loss to the agent. If there is no loss to a principal, there is nothing to shift and, therefore, no risk to the agent.

This simple insight is the key to understanding risk identification in the real estate profession. What we want to identify initially is not the real estate professional’s risks, but their client’s and customer’s risks. We want to identify all the ways a buyer or seller might end up suffering financial loss as the result of being involved in a real estate transaction. This sounds daunting, but it is actually very simple, at least initially.

Identifying transactional risks is easier on the seller’s side of the transaction. Seller’s normally do not suffer loses as the result of real estate transactions – as long as the property is worth more than the seller owes on it. That is the case because a real estate transaction reduced to its essence is the exchange of real property for money. The seller gets a pocket full of money and the buyer gets the deed to some kind of real property. If you think about it at that level, it is easy to see that it is a lot more likely there is something wrong with the property than it is there is something wrong with the money.

For identification purposes, transactional risks can be broken down into “direct risks” and “reflected risks.” Direct risks are those that flow directly from the agent’s duties and responsibilities to the client, to the public or to the Real Estate Agency. Reflected risks are those created by the agent’s principal. When the principal breaches a legal duty, their agent, though not directly responsible, may well be put at risk. Because the duties owed, and services performed, vary depending on which side of a transaction the agent is on, direct and reflected transactional risks must be identified on both the listing side and the selling side.

Risk identification takes place on two levels. One is identification of the risks associated with being involved in real estate transactions. The other is the risk associated with operating a business. Potential losses associated with owning buildings, equipment, hiring staff, interacting with clients and customers and the like are fundamentally the same regardless of the business enterprise. You can think of such risks as “generic risks.” Real estate transaction risks are, on the other hand, specific to being in the business of helping clients buy or sell specific real property. You can think of such risks as “transaction risks.”

Generic Risks

Businesses, all businesses, have assets in the form of buildings, tools and staff. These assets must be protected and managed in a way that reduces risk of lost – both loss of the asset and losses caused by loss of the asset. A fire or a car crash, for instance, can cost a business asset and staff losses that cause further losses.

The real estate industry is mostly structured around independent contractor relationships. That structure creates businesses within businesses. Real estate companies, many of them franchised entities within still larger businesses, associated with individual agents running their own small businesses as independent contractors. General business risks exist at each level. Typically, generic business risks are handled independently at each level. Analysis of these generic risks is covered in the Risk Analysis section of this subject.

Risk management is about managing threats to your business. In the broadest sense, risk management includes threats created by everything from politics to the environment to a particular real estate transaction. Managing risk is, therefore, always about prioritization. What is needed is a plan to deal with the risks that create the potential loses most likely to occur in your business.

Your business is helping buyers and sellers involved in real estate transactions. To manage the risk generated by that activity you must look at the business activities that create the potential for economic loss. These will include the “generic” risks that attach to operating any business as well as the “transaction” risk that attach to individual real estate transactions. That means dealing with the risk involved in driving customers and clients around in your car as well as the risk that a client will experience a financial loss as the result of a transaction. Beginning with Risk Identification, this topic covers both the generic and transaction risks associated with providing professional real estate services.

Once the generic and transaction risks associated with providing professional real estate services have been identified, specific risks will be analyzed in the Risk Analysis section of this topic. Risk analysis involves identifying the events and activities most associated with specific legal claims like misrepresentation, lack of due diligence or law or rule violations. The final section of this topic is devoted to Risk Mitigation, or how to use human, organizational and technological resources to reduce risk.

The Homebuyer Protection Act applies to all new residential construction. It also applies to any residential property where $50,000 in remodeling or renovation has been done within 90 days of a sale. If the property falls into one of these two categories, the Act applies to the property and a CCB “Notice of Compliance with the Homebuyer Protection Act” form must be given to the buyer.

The form has two sections: “A” and “B.” Section “A” informs the buyer that the provisions of 87.007 do not apply to the particular sale. The Act applies to the sale if any work for which a lien might attach was completed within 75 days of the date of sale. The date of sale is the date the buyer becomes bound on the contract. If the seller knows no person may file a lien against the property, they may check the box in section A. Section “B” informs the buyer that the Act does apply to the particular sale. Section “B” also gives the buyer notice of how the seller will comply with the Act. There are five ways listed on the form for the seller to comply. The seller is free to choose any of the five. Click here to see a flow chart of timelines and choices involved.

The process just described can be confusing to real estate licensees if not addressed one step at a time. The first question, asked at the time of listing, is: does the Act apply to the property? That is, is this property new residential construction or has it had $50,000 or more worth of improvements within the last 90 days? If the answer is yes, the Act applies to the property and the seller will need to get the CCB “Notice of Compliance with the Homebuyer Protection Act” form. The seller can get the form by clicking here.

If the Act applies to a sale, which of the allowed protections listed in Section “B” of the form might best suit the seller’s circumstances is a business question for the seller. To the extent that answering that business question requires legal knowledge, it is beyond the expertise of a real estate licensee. Do not let your client involve you in the unauthorized practice of law. That said, you should know enough about the Act to advise your client on its basic operation so they can make informed choices.
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Oregon law imposes the obligation of good faith and fair dealing on all parties to a contract. Oregon real estate law demands disclosure of material facts known by an agent and not apparent or readily ascertainable to a party. Click here for a detailed discussion of Agency Duties. Together, these obligations can create a duty to disclose the existence of a foreclosure or, in some circumstances, problems on the selling side. These disclosures are mandatory in the sense that they are demanded by law. Click here for a detailed discussion of the Disclosure Duties.

Mandatory disclosure on the selling side is rare. The pre-foreclosure market being what it is, however, there may be situations when an agent learns the buyer is being dishonest to the seller — for instance, a buyer who is running a foreclosure scam. An agent who discovers their buyer is involved in a scam and has no intention of performing as required by the sale contract, can find themselves stuck between their duty of loyalty and confidentiality to the client and duty of honesty to the other party. At the first hint that such a situation may develop, the agent should take the matter to their principal broker. There may be time to end the agency relationship. If not, the duty of honesty must always take precedent after, of course, full disclosure to the client.

Far more common than questions of honesty on the selling side are questions of disclosure of material facts on the listing side. Here, the disclosure question is when and if the foreclosure itself must be disclosed to potential buyers. Such disclosures are serious matters because disclosing a pending foreclosure will tend to drive down offers both in number and price. Fortunately, the mere fact that the seller is in default and facing potential foreclosure is not material and, therefore, need not be disclosed.

Although not well understood by agents, foreclosure itself is not material. That is the case because, until the sale takes place, the owner retains full ownership in the property and can sell it with clear title at anytime by simply paying off the loan. Thus, a foreclosure becomes material only if and when an offer is accepted with a closing date that is beyond the foreclosure sale date (or involves a short sale or other third-party approval e.g., a bankruptcy trustee). That is the case as long as the seller can stop foreclosure and deliver clear title at closing.

Disclosure of a pending foreclosure in the MLS, or in ads or simply by word of mouth from the listing agent raises serious loyalty and confidentiality issues. It may be that the seller wants to signal distress in order to attract bargain hunters and “investors,” but that is a decision for the seller after full disclosure of the potential consequences. Such decisions should never be made unilaterally by the agent. As long as the seller can deliver clear title without approval of a third-party, there is nothing that requires disclosure of pre-foreclosure sales. Click here to review similar disclosure timing issues in short sales.
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