There are two components to reasonable care and diligence when it comes to what might go wrong in a real estate transaction. One is to know the facts involved in the transaction. This component raises the nasty and much fought over question of a real estate licensee’s duty to “investigate.” The other diligence component is assessing the probability of harm based on the facts known. That is, how likely is it that a specific harm will result from the buyer not knowing something the agent knows or with reasonable care should have known?

“Knows or should have known” is the key to understanding what facts regarding a real estate transaction a real estate licensee must know. Although it doesn’t seem that way, there is no duty to “investigate” – at least, none in the abstract. Instead, any fact of importance told to a real estate licensee by anyone during a transaction, or that would be apparent to a reasonable agent in the circumstances, is “known.” For instance, any important information contained in any document in the agent’s possession, is “known.” A few real life cases will help flesh out what must be “known.”

In a recent discipline action by the Oregon Real Estate Agency, a licensee was held responsible for falsely advertising property as “adjacent to BLM” because a narrow “flag” divided the listed property from nearby federal land. The owner told the agent the land was “adjacent.” The true state of affairs, however, was depicted on a plat map found in the agent’s files. According to the Agency, the agent’s reliance on the seller’s statement when the true state of affairs was right in the agent’s file demonstrated a lack of diligence.

Similarly, the Agency disciplined an agent for failing to disclose that the property was in the 100-year flood plain because an assessor’s report found in the agent’s file suggested the property was in the flood plain. A Washington State agent was held responsible for failing to disclose a past flooding event the agent, according to the seller’s testimony, told the seller no disclosure was necessary because the problem was fixed. Everyone did, in fact, think the problem was fixed, but that didn’t mean the fact that it had to be fixed and the nature of the fix were not material.

In each of these cases, the agent was mistaken about the true state of affairs but nevertheless made material representations or failed to disclose material information. The resulting liability doesn’t create a duty to investigate. Such liability is simply a function of the duty to use reasonable care and diligence when making representations or advising clients. There is a big difference between investigation and reasonable care and diligence. Take for example, the famous Arizona case Aranke v. RKP Investments.

In Aranke, a listing agent in Arizona was exonerated in a misrepresentation case involving failure to disclose serious foundation damage. The agent was exonerated because she recommended the seller have exterior cracks inspected by a contractor and shared the contractor’s report with the buyer. The disclosure worked even though the report was wrong because the listing agent used reasonable care and diligence in dealing with the exterior cracks. The buyer’s agent, on the other hand, did not fare so well because they could not show they warned the buyer about relying on the seller’s inspector or the importance of having their own inspection.

Reasonable care and diligence is a huge duty for risk management purposes. It creates direct risks to one’s own clients and underpins misrepresentation claims brought by other parties. On the listing side, the direct risks created by the duty of reasonable care and diligence mostly involve marketing. If property is listed unreasonably high on the agent’s recommendation and doesn’t sell as a result, or there is insufficient or incompetent marketing, the seller may suffer a financial lost due to staying on the market without a sale.

The same kind of money-based listing risk is created if the property is listed too low for the market. Instead of lost opportunity costs, the seller will suffer a direct loss equal to the difference between the fair market value of the property and its sale price. This sort of claim is not uncommon in rapidly increasing markets. Most successful claims of this kind, however, involve the agent purchasing their own listing and thus implicates the duty of loyalty.

Other than in “loyalty” situations, mitigation of listing side reasonable care and diligence risks is mostly a matter of being able to prove good business practices. That is the case because liability for financial loss can be shifted to an agent only if the principal shows that the loss resulted from the agent’s negligence. Breach of a duty of care requires proof of conduct below the standard of care for the industry. Listing too high or too low for the market, inadequate marketing and the like are all negligence type claims.

To defeat a negligence claim, it is necessary to document why things were done the way they were. That means being able to explain through documents how and why the listing price was established and how and why the property was marketed the way it was. There are two major business tools used to create the documentation necessary. They are a CMA/BPO and a written marketing plan.

Competitive Market Analysis (CMA) and Broker Price Opinions (BPO) are covered in depth in the Holding Yourself Out to the Public chapter of the Toolkit. For risk management purposes, the CMA is the more important document. That is the case because the CMA contains the research and analysis that goes into the BPO. It is what justifies the recommended listing price stated in the BPO. The more complete and professional the CMA, the more difficult it will later be for someone to attack the listing price as too high or too low.

Once the CMA and BPO are in place, the agent should think about how to document the listing price decision in a way that shows the decision was the made by the client, not the agent, and was based on timely accurate information. Probably the easiest way to do that is to have a CMA/BPO presentation that is followed by a client email. The presentation of the CMA/BPO is the agent’s presentation of current market data and a recommended listing price, but the listing price decision remains with the client. Once the client makes that decision, the agent can follow up with an email memorializing the information presented, the recommendation made and the client’s decision.

Here is an example of a follow up listing price email:

“To follow up on our meeting, I want to let you know I have completed the listing package and filed the listing with the Multiple Listing Service at the listed price of $__________________. As you know, this price is [more, less, the same] as the price recommended in the Broker Price Opinion I presented on [date]. My listing price recommendation was based on the Competitive Market Analysis I presented with the Price Opinion. I look forward to working with you to market and complete a sale at the listing price you selected. I will keep you informed of market conditions and any feed-back we receive as we are marketing the property.”

Notice again the pattern of the email. The list price is not only stated, but expressly compared to the price recommended in the broker price opinion. The BPO is then linked to the CMA. In this way, it is clear that the price was chosen by the seller based on market research provided by the agent.

So far, we have been dealing with diligence on the listing side with the focus on marketing because on that side of a real estate transaction it is negligence in marketing that is most likely to cost the seller money. The flip side of that kind of marketing risk exists on the selling side in advising the buyer on an offering price. Selling agents have sensed this risk exposure and controlled it in much the same way a listing agent should control the same kind of risk on the listing side. That is, by creating evidence that the client was properly informed and made the decision themselves. This can be a sensitive matter on the selling side.

“What should I offer?” goes right to the value of buyer representation. What the client buyer is seeking with that question is a professional opinion within the scope of a real estate licensee’s expertise. Dodging the question is poor client service. Expressing an opinion in dollars and cents without anything to back it up is risky. To mitigate that risk, follow the client information/client decision model.

Although a full CMA/BPO may not be called for, that doesn’t mean the buyer client is not entitled to a frank business discussion of how offer price affects negotiations in the circumstances. Once that conversation takes place, look for an opportunity to confirm it and the buyer’s decision with client email. For instance, notice to the buyer client that the offer has been presented could be an opportunity to set out the high points of the offer price discussion and document that the decision was the buyer’s, not the agent’s. For example:

I just wanted to let you know that your offer on the property at [address] has been presented to the seller. As you remember, we discussed market conditions, the listed price, your motivation and what we know of the seller’s circumstance before you decided on the offer price. I will, of course, let you know as soon as I hear anything from the listing agent and we can go from there. Until then, let’s keep our fingers crossed.

The idea is to combine client service with risk mitigation. Clients love to be kept informed. Why not take advantage of that need to make sure what actually happened is part of the record. That way, if someone later wants to cast what happened in a different light, there is more than just memory of what happened to go on.

Reasonable care and diligence is an empty concept in the abstract. The phrase takes on meaning only in a particular context. Anticipating and avoiding harm to clients is the hallmark of reasonable care and diligence. The risk-averse agent will always consider what might go wrong based on their understanding of the situation. That can be a very daunting undertaking in something as complicated as a real estate transaction.

A good way to deal with diligence in complex situations is to use checklists. A checklist is first a memory tool. It is a way to avoid “forgetting” something important. Checklists also, however, can be used to impose order and sequence on what might otherwise be a confusing mish-mash of facts and events. Real estate transactions lend themselves well to the use of checklists.

If you think about the risk points discussed, you can begin to isolate the particular events that can create risk as the various stages of a real estate transaction. The sequence of risk points begins with listing property. It continues through the agent’s walkthrough, getting the seller’s disclosure, getting the preliminary title report, entering the listing into the MLS, advertising the property, writing or receiving an offer, assisting clients in performance of the resulting contract (including deadline management) and, finally, closing the deal. Each of these stages can be mapped into a checklist.

A good checklist will do more than simply remind the agent of what must be done at a particular stage of a real estate transaction. The checklist can anticipate risk points and force the agent to resolve the risk or mitigate it. For instance, a listing checklist can force the issue of a prior listing onto the table so that potential procuring cause issues can be assessed. A preliminary title checklist can identify any mismatch between the parties to the listing agreement and those who hold title. An advertising checklist can force an agent to verify any material facts contained in the ad.

Checklists work by forcing the agent using the checklist to identify risk points. They can be tailored to specific kinds of transactions like rural property or short sales. They are themselves evidence of reasonable care and diligence in the performance of professional real estate activity. Oregon REALTORS® has developed a number of sample checklists for use by members. Below are sample checklists: