Legal Lines

by Lem Marshall
VAR Special Counsel

Q.  Principal broker is part owner of a property listed with the firm. How should the firm deal with prospective buyers represented by the firm?

A.  Carefully.

First, the principal broker should never try to represent the buyer of the property. Dual agency of this sort is just about impossible to pull off; I continue to believe that it’s silly to pretend to be impartial in a deal in which you are involved as a party. Similarly, if the buyer is represented by another agent in the firm, the principal broker should not try to act as the supervising broker of that transaction and designate different agents in the firm to represent him and the buyer. In such a situation, he would still be a dual agent, and would have a hard time claiming impartiality between the seller (him) and buyer, or listing agent (his agent) and buyer’s agent. This will be a no-win position if any problems arise.

I would suggest allowing another broker in the firm, one with experience and independence, act as the supervising broker of the transaction and designate agents to represent both parties. This will keep the principal broker free of conflicts to the extent possible, always assuming, of course, that he stays scrupulously away from the decisions of the supervising broker.

Above all, make clear to the buyer the owner’s identity and position in the firm. And be sure the contract contains the appropriate disclosure of licensee status.

Q.  A buyer is obtaining 100% financing, and seller has agreed to credit $1000 for needed repairs plus pay other closing costs. The lender will not permit the repair credit to be shown on the settlement statement, and says it will have to be paid outside closing. The listing agent expresses doubts about the legality of such payment by her client, whereupon the buyer insists that instead of the credit, the seller simply reduce the price by the credit amount. Seller has a better offer in hand (for the entire larger piece of which this is a part), and the listing agent wants to know (i) whether a price reduction will be legal, and (ii) whether seller is obligated to reduce the price as a way of getting the promised $1000 to the buyer.

A.  What a cute problem. The listing agent is correct, of course, that paying the credit off the statement is illegal, and might involve buyer, seller and their agents in loan fraud. But may the seller reduce the price instead? Of course, as long as the underwriter is aware of the concession and approves of it. Almost certainly this will affect buyer’s loan amount, but if he is okay with that, the reduction is fine.

But is seller obligated to make the reduction if he can’t pay the credit? I don’t think so. The contract has explicit terms, some of which could involve seller in an illegal act, but recasting the deal is not thereby required. Of course, seller risks losing the deal if the buyer is unwilling to go forward, but that’s the seller’s risk.

Actually, there is probably a way for the buyer to structure the deal to both get the credit legally and hold the seller to the deal. Why not secure lender approval to have the money credited to seller but held by the settlement company and used solely to pay the contractors upon completion of the repairs? Lenders recoil from de facto price reductions that increase their loan-to-value ratios (that is what the cash credit does), but are much friendlier to actions that increase the value of the property – such as repairs – and thereby lower their LTV ratios. If buyer hits on this, seller will probably have to comply, and thus lose his better deal. But I don’t see that it’s seller’s obligation to propose this solution.