Practical Steps to Reduce Liability on Short Sales, Foreclosed & Vacant Homes

David Gilpatrick, the president of Residential Environmental Services of America (RESA) and a real estate instructor, taught a breakout session at AAR’s Winter Conference in March. Here are five tips from his session:

  1. Recommend competent consultants.
    David urged agents to consider consultants as part of your risk management team. If you are going to recommend home inspectors to your clients, make sure that they are licensed and insured.

    1. Licensed. Check and confirm that they are licensed. According to David, there are 1,700 licensed home inspectors in Arizona, but only 504 of those licenses are current. The others are expired, revoked or deceased.
    2. Insured. The state requires a minimum $25,000 bond, but that won’t do much good if you’re facing a $100,000 lawsuit. An insured home inspector can indemnify you for the referral.
  2. Disclose any known material defect existing in property.
    This is required by the Arizona Department of Real Estate (A.A.C. R4-28-1101) and by federal disclosure laws. It applies to agents on both sides of the transaction. If an agent knows something relevant and fails to disclose it, that’s fraud. It doesn’t matter whether a SPDS was completed or not. If a bank asks a listing agent not to disclose something, that agent should walk.
  3. Watch out for reasonably obvious defects.
    If agents notice suspicious conditions in the home, they should point these out to their clients and recommend that the clients seek a professional opinion. Reasonably obvious defects are items that you should be able to identify during a walk-through, such as obvious water leaks. Also watch out for things you have not seen before, such as a light switch in a shower, which can be a symptom of other problems.
  4. Ask questions.
    Ask the listing agent what work has been done on the property and why. The agent has a duty to disclose. (See #2.) Do this especially if you can see obvious repairs or updates. For instance, if an REO property has new cabinets, find out why. It’s unlikely the bank put those in just to be nice. David recommended referencing the Registrar of Contractors statute Article 2 (§ 32-1121 A- 5 & 6), which says that any repairs made for the purpose of resale must be done by a licensed contractor and all documentation must be provided to the buyer.
  5. Use the SPDS as a checklist with buyers.
    Just because the bank will not complete a Seller’s Property Disclosure Statement (SPDS) doesn’t mean that your buyer can’t benefit from the document. If you just provide them with a copy of the SPDS, they’ll tune out halfway through reading it. Instead, walk through the home with your buyers and use the SPDS as a checklist. This provides the context buyers need to understand the importance of each item.

Ask a home inspector what is the scariest home they can inspect, says David, and they’ll tell you it’s a vacant home where nothing is disclosed but some surface repairs have been made. Does that sound like a foreclosure? The second scariest home for an inspector, according to David, is when the seller has nothing to lose. Short sale, anyone? In this market especially, a positive partnership with a qualified home inspector can be an important component of your risk management efforts.