Vibrant real estate markets come with an array of rewards, but beware of risks by John Torvi

Landy Insurance Agency" width="240" height="300" /> John Torvi, Herbert H. Landy Insurance Agency

The vibrant real estate market in New York and many other parts of the country means that real estate professionals are managing robust market activity with all of the accompanying rewards, and risks, that come with it. While there are numerous “wins” in the market for the public and professionals alike, those of us on the insurance risk and claim side are sleeping with one eye open. Past experience shows that active and changing market conditions increase chances of professional liability claims from unhappy consumers. Many claims remain the type seen under any economic conditions – disclosure/property condition, breach of contract allegations, escrow disputes and Fair Housing are always amongst the most common types of allegations. Conditions that arise from a specific set of circumstances, for example the foreclosure phenomenon of a few years ago, can lead to changes in the way an agent may practice. Subsequently, the E&O insurance carriers saw an atypical jump in claims relating to improper evictions, inappropriate legal, tax or financial advice and valuation disputes.

Characteristics of today’s market include low interest rates, increases in investment sales, more ownership interest from millennials, decreasing numbers of cash sales and rising prices accompanied by affordability issues for many would-be buyers. To add to the mix, we have Brexit and Federal Reserve concerns about rapid escalation of commercial property values (as reported June, 2016) combined with increased vacancy rates.

Agents, property managers and other professionals may need to gain a better understanding of these trends in order to best serve their clients and avoid any mishap. Considerable information continues to be available regarding recent additional trouble spots including cybercrime, social engineering and drone usage, for example. Valuation has and remains a trouble spot, and increasing property values driven by increasing demand means that one particular subject – Escalation Clauses in sales agreements – deserves more attention.

High demand properties may result in a bidding war that needs to be managed by both the buyer’s and seller’s agents. To more effectively do this and reduce the risk involved in using Escalation Clauses, agents can take certain steps to produce a successful transaction. They include:

• Provide proof of a higher offer (privacy protected of course). Stating that a higher offer exists, without proof, can result in accusations of fraud, negligence or breach of contract;

• Before making the higher offer, make sure the buyer has been approved for the highest amount they intend to and are able to spend;

• Include a cap that the potential buyer has to avoid an offer that cannot be made real;

• Ensure that the property will appraise at the higher price points. Seek a pre-sale appraisal and/or include an appraisal contingency in the sales agreement;

• Include in writing any other contingencies related to the escalated price points, such as additional home inspections; and

• Make sure the escalation clause passes legal muster. Recommend, in writing, that all parties have their attorneys review the arrangements and language prior to signing off.

Differences in interpretation of the contract language needs to be resolved prior to any offer, and certainly before any signing of contracts.

As with all things in real estate sales, preparedness, written disclosure, documentation and cautious adherence to sound procedures will aid in a successful and profitable experience for all involved, and reduce the possibility of a call to the insurance carrier.

John Torvi is the vice president of marketing & sales at the Herbert H. Landy Insurance Agency, Needham, Mass.