All too often, real estate prospects look to foreclosures as an easy way to buy property on the cheap. Although there are likely decent foreclosure deals available, purchasing a foreclosed home can come with a fair amount of headaches. Keep these in mind if your client decides to go ahead with acquiring a foreclosure.

1) Get it inspected by a professional.

Stipulate to your client that they need to get the property checked out by a certified professional home inspector, and don’t bid on houses that aren’t available for inspection. Don’t let your client base their buying decision on appearances alone; the home could have mold, pests damaging its structural integrity, an insulation problem, shoddy construction, asbestos … you name it. Your client needs to know how much work (and money) they will need to put into the home up front.

2) Consider factors that may have led to the foreclosure.

Is crime on the rise in the neighborhood? Are the schools not making the grade? Is the view not so pleasant? How long has the home been empty? Are there plenty of other foreclosures in the area? Foreclosures aren’t always due to a lack of money or budgeting skills; maybe the previous homeowner bought the house without realizing there was a particular blight on the property.

3) Be cautious if the house is currently occupied.

Keep in mind that some people involved in the foreclosure may be living on the property and may be difficult when it comes time to leave. Even with title in hand, your client could have a hard time evicting the unwanted tenants. And once they do leave, they may have retaliated by destroying the property. (This may not be an issue in certain areas.)

4) Advise your client against flipping.

Unless your client has an arsenal of cheap contractors and materials at their disposal, there always seems to be pitfalls along the way that end up costing more than the person looking to make a quick bundle bargained for.

5) Recommend to buyers that renovations are within the their budget.

Even for properties needing a seemingly modest amount of renovation, there’s usually more work and money involved than planned. In order to make the most of the foreclosure’s bargain price, the buyer should not go into further debt by taking out loans and losing money on interest. Have a home inspector detail all work needed and make sure the buyer has enough cash to fix it all.

6) Recommend they find a reputable lender.

The wrong lender might not spend as much time on a foreclosure case as on a standard real estate purchase, because they stand to make less money on the former. A good lender will research what your client’s best option is. Tell your client to ask a lot of questions—the lender should explain everything to your client very clearly. You should advise them to meet with a real estate attorney as well.

Pearl Insurance is a nationally known broker, marketer, and administrator that specializes in the design and administration of quality insurance plans for associations, affinity groups, unions, and large firms. In addition to providing real estate professionals with quality products and services for 30 years, their partnership with the XL Insurance companies (through Indian Harbor Insurance Company and Greenwich Insurance Company) solidifies their strength, allowing them to offer association members an A rated (by A.M. Best) E&O program. For more information about Pearl’s sponsored E&O programs, call 800.289.8170.

Information provided within this article is not to be taken as legal advice and is to be used for educational and illustrative purposes only.

Sometimes the past is one of the best learning tools around! Use the following Real-Life Errors & Omissions Claim Situation involving REALTOR^® acting outside of your expertise to avoid a similar legal showdown happening to you in your everyday real estate career. And be sure to have a good Real Estate E&O Insurance policy in place to protect you in case you find yourself in the middle of a court battle over performing a function that is outside of your realm as a real estate professional.

A Real Estate agent listed an older residential property that needed a roof replacement because water was penetrating the attic and running down the walls. As part of the marketing strategy the sellers agreed with the agent that the best way to sell the home for a better price would be to have a new roof installed. In addition to fixing the water intrusion problem, it was believed that the enhanced curb appeal of the property would likely garner more interest.

Problem:
The contractor that was hired to do the work was not fully paid by the sellers when the work was completed.

Mistake:
After the marketing strategy was agreed to, the agent decided to select and hire the roofing contractor on behalf of  her clients so that they could focus on prepping and painting the water stains on the interior walls of the home. The sellers provided a check to the agent for the down payment required by the roofer, but it was the agent who signed
the contract order.

Result:
When the project was close to completion, a potential buyer tendered an offer on the property that the sellers quickly accepted. However, when the contractor wasn’t paid by the sellers for the balance due, he filed a mechanic’s lien against the sellers and the real estate agent for non-payment. The buyer then sued the sellers for specific performance and
demanded that either they or the agent pay the contractor to lift the lien. Following a two-month delay in the closing, the matter was resolved after the sellers and agent agreed to contribute equal shares to pay the contractor.

Prevention:
An agent should never select and hire any vendor to do work on sellers’ property—and should certainly never sign a work order on their behalf. By doing so, an agent becomes contractually liable to the vendor and may, as in this case, become the object of litigation when a buyer of the property attempts to enforce a Purchase Agreement. It’s also important to remember that most, if not all, real estate errors & omissions policies don’t provide coverage for claims based on or arising out of liability of others assumed under any contract or agreement. Making the simple decision to leave contractor selection and engagement to a homeowner will increase your chances of avoiding litigation from both the contractor and any potential buyer of property.

Do you have a similar story involving acting outside of your expertise to share with us? Send us your learning experience or just let us know what you think about this one! Just leave a reply below!

If you have any questions about Pearl’s Errors & Omissions Insurance for real estate professionals, give us a call at 800.447.4982—whether you’re looking for a new E&O policy or have questions about your current one. We’d love to hear from you!

You can also visit our website for E&O insurance just for real estate professionals, www.pearlinsurance.com/eo, to find out more about our quality Errors & Omissions program, including policy features, risk management tools, and much more.

Do you or your clients want to do some remodeling, but need to make sure the money you spend will pay off in the long run? Here are six ways to ensure a remodeling project is worth your time and effort, courtesy of Josh Garskof of Money Magazine.

According to a study from Remodeling magazine, the average return on value for an upgrade declined from 87% in 2005 to 64% in 2009. But these six new rules will help you maximize your return on your remodeling investment.

Rule No. 1: Repairs get the biggest returns

The smartest money now goes into “undeferring” needed maintenance. That’s because while buyers might appreciate enhancements like Jacuzzis and Sub-Zeros, they won’t tolerate a house with a leaky roof or antiquated plumbing. “If a property is known to have issues, today’s buyers won’t even look at it,” says Austin real estate appraiser Jim Amorin. And trying to keep problems a secret can cost you big-time. If buyers discover them during inspection, it’s now common practice to ask sellers not only to pick up the tab for the repair but also to pay a penalty to compensate the buyer for the inconvenience of having work done. So the $20,000 you saved by putting off a roof repair, say, could turn into a $30,000 credit to the buyers at closing, says Amorin.

Rule No. 2: Remodeling beats adding on

McMansions have gone the way of the SUV—and large additions don’t pay off either. “There’s been a fundamental shift toward quality over quantity,” says Warwick, R.I., real estate agent Ron Phipps. Having a big, formal living room plus an everyday family room is less desirable than having one multi-use common space. So rather than adding on, you’re better off repurposing existing square footage by reconfiguring the floor plan or capturing unused basement or attic space. Want an eat-in kitchen? Knock down the wall between the kitchen and dining room ($2,000 to $8,000, depending on whether it’s load-bearing or contains plumbing). That will instantly create a large eat-in kitchen and give the whole house a more open feel—without a huge investment to make up at resale.

Rule No. 3: Eco-friendly upgrades can save cash

Some green improvements pay you back long before you sell your house. Install energy-efficient features, such as EnergyStar appliances and extra wall insulation, and you’ll see lower energy bills every month. Add in the federal tax credit of up to $1,500 that lasts through 2010, plus many local rebates and tax incentives (see dsireusa.org), and the work may pay for itself in just five years. Green features are also increasingly a selling point, says Phipps. “Most people in the market right now are first-time homebuyers in their thirties, and they’ve been raised to care about carbon footprints and being ecofriendly,” he says. The best way to go green is with a while-you’re-at-it job: When it’s time to replace your furnace, for example, upgrading to super-efficiency might add only $500 (after tax credits), compared with standard new equipment, but it will save you — and your buyers someday — $150 or more in annual heating costs.

Rule No. 4: Tech infrastructure trumps cool gadgets

Home electronics seem like a deal, since prices have fallen about 50% over the past three years and continue to drop, according to Stephen Baker, president of industry analysis at NPD Group, a market research firm. Still, that doesn’t change the fundamental problem with expensive built-in technology: Put in a $10,000-plus dedicated home theater today, and something better will come along tomorrow and make your system look as if it’s from the Mesozoic Era. With buyers seeking any excuse to low-ball their offers, they’re not going to reward you for an out-of-date system. Tech infrastructure is different, however. Anytime you’re opening up walls for a construction project, have cabling and Ethernet ports installed. At about $80 a room, it’s a low-cost way to provide the capability for whatever technologies come along.

Rule No. 5: Let the Joneses be your guide

During the boom, you could be the first on your block to have a luxury kitchen, spa bathroom, or in-ground pool and count on others following suit. And even if the neighbors never took your lead, there was plenty of equity growth to cover your costs. Nowadays that fudge factor is gone. “You really have to keep your house’s amenities in line with the neighborhood now,” says Kermit Baker, director of the remodeling futures program at Harvard University’s Joint Center for Housing Studies. If other houses on the block have real marble countertops, by all means add one to your house, but if everyone still has faux blue-marble Formica from the ’70s, you’re not getting your money back. Also, keep your projects design-neutral so they’ll appeal to the greatest number of people. Choose neutral colors and traditional electrical and plumbing fixtures unless your house has a modern architectural style.

Rule No. 6: The new payback time is five years

As with any volatile investment, the longer your time frame, the lower the risk. Don’t take on a big project if you’re likely to move in less than three to five years. There’s just too much chance that any money you put in—aside from necessary repairs or superficial cosmetic work—could be lost while the housing market continues to meander. But if you plan to stay awhile, don’t delay starting a project. Home improvements are a bargain right now, with contractors bidding 10%, 20%, even 40% lower for the same work than just a year or two ago, says Bernie Markstein, senior economist for the National Association of Home Builders. Grab them while they’re hungry for work and make it clear that you’ll be getting multiple bids so they’ll be motivated to undercut one another’s prices. You’ll fulfill the first rule of investing: Buy low. Then hope that when you’re ready to move, you can sell high.

In light of a recent terrifying REALTOR shooting, we thought it was time to again share some safety advice for you to keep in mind in your daily practice in real estate. Please read and adhere to these 10 Tips to Open House Safety:

1. Upon entering a house for the first time, check all rooms and determine several “escape” routes. Be hyper-vigilant about your surroundings and a way out.

2. Make sure all deadbolt locks are unlocked to facilitate a faster escape. Be certain there are no obstacles in front of exits.

3. Check to see that if you were to escape by the back door, you could escape from the backyard. Frequently, high fences surround yards that have swimming pools or hot tubs. Find the door in the fence, or locate another way out.

4. Leave one of your business cards, with the data and time on the back, in a kitchen cupboard. Note on it if you were the first to arrive or if clients were waiting.

5. When prospects begin to arrive, jot down their car description, license number, and physical description.

6. When showing the house, always walk behind the prospect. Direct them, don’t lead them.

7. Watch what the prospects are doing at all times. Do not become preoccupied with viewing the home, and expect the unexpected.

8. Notify someone in your office, your answering service, or a friend or relative that you will be calling in every hour on the hour, and that if you don’t call, they are to notify the police immediately.

9. Inform a neighbor that you will be showing the house and ask if he would keep an ear open for anything out of the ordinary.

10. Don’t show alone—have someone from your office, a relative, or friend stay with you.

Source: Washington Real Estate Safety Council

REALTOR^® Magazine provides a lot of resources to help real estate professionals be safe in not only their open houses, but throughout their career. Read their 6 Dangers in Real Estate to further protect yourself in common REALTOR situations.

Sometimes the past is one of the best learning tools around! Use the following Real-Life Errors & Omissions Claim Situation involving REALTOR^® misrepresentation to avoid a similar legal showdown happening to you in your everyday real estate career. And be sure to have a good Real Estate E&O Insurance policy in place to protect you in case you find yourself in the middle of a court battle over not following standard office procedures.

A Real Estate agent listed a residential condominium in an age-restricted community that required, through its homeowners’ association (“HOA”) covenants, that at least one person residing in each unit must be at least 55 years old. Fortunately for the agent and his seller, he was able to sell it quickly to an out-of-state couple who met the age restriction requisite and who planned to live in the property after their retirement two years later.

Problem:
The buyers intended to have their granddaughter live in the property until they retired while she attended a nearby university.

Mistake:
Before the property went under contract, the buyers questioned the agent on whether the restrictive covenants would allow this living arrangement. The agent informed his clients that it would create no problems since the buyers, who would be the actual owners of the unit, satisfied the age condition.

Result:

Soon after the close of escrow, the buyers’ granddaughter moved into the unit and applied for a parking permit only to be informed by the HOA that she and her grandparents were not in compliance with the age restriction covenants since she, as the only resident, did not meet the age requirement. The HOA then declared that she would have to vacate the property. And after unsuccessfully pleading with the HOA Board of Directors to waive the age restriction, the buyers sued the real estate agent, his broker, and the seller alleging negligent and intentional misrepresentation and demanded that they provide alternative housing for their granddaughter until she graduated from college. Following extensive negotiations, the matter was resolved.

Prevention:
The agent incorrectly assumed that there would be no problem with a college-age woman occupying the unit as long as the owners met the age requirement. To complicate matters further, there was a dispute as to whether the agent actually provided a copy of the HOA covenants to the buyers before they executed the Purchase Agreement. If the agent was able to demonstrate that the buyers acknowledged receipt of the covenants in writing, he would have been able to put himself and his broker in a better position to defend the case. Having the ability to prove that the buyers had the opportunity to review the HOA documents would have certainly helped in that endeavor.

Do you have a similar story involving misrepresentation to share with us? Send us your learning experience or just let us know what you think about this one! Just leave a reply below!

If you have any questions about Pearl’s Errors & Omissions Insurance for real estate professionals, give us a call at 800.447.4982—whether you’re looking for a new E&O policy or have questions about your current one. We’d love to hear from you!

You can also visit our website for E&O insurance just for real estate professionals, www.pearlinsurance.com/eo, to find out more about our quality Errors & Omissions program, including policy features, risk management tools, and much more.

Clients respect and rely on real estate agents who are informed and go the extra mile for them. Read the following article on the importance of removing old windows with lead-based paint from homes built prior to 1978.

http://rismedia.com/2011-03-24/lead-paint-hazards-and-older-windows-march-20-26-national-poison-prevention-week/

Pearl Insurance Risk Management Expert and Corporate Training Manager Paul Espinosa recently spoke at the Greensboro Regional REALTORS® Association Luncheon on March 1, 2011. In the following video, he offers his top five problem areas for real estate agents:

14. Disclose agency relationships as soon as possible. The law requires disclosure, but you control the timing. Recognize that although dual agency is permitted by statute (Civil Code Section 1090), dual agency is one of the greatest magnets for liability in California courts. As one astute observer aptly put it: “Although the buyer and seller may acknowledge dual agency in writing, mere disclosure of this does not resolve the ‘schizophrenic obligations’ of a broker.”

15. What should you do if you become aware of a claim? Talk to your broker and/or an attorney. Get as much information from the claimant; attempt to resolve/settle early. Avoid making admissions. Do not write on original documents. Do not panic. Provide a detailed and confidential narrative memorandum to your attorney. Be candid about facts which show you were possibly at fault. Use mediation. Get advice. Make a prudent business decision—remember, justice, whatever that means, can be a very expensive commodity.

http://realestateeo.com/extras/lisa-riggins-disclaimer.html

10. Do not give legal advice, e.g., telling the buyer or seller that they should or should not initial the arbitration clause. Arbitration is a decision for the principal. Another example—don’t attempt to explain the legal ramifications of the liquidated damages clause. Consider referring your client to an attorney where appropriate. Answering questions like “What does this mean?” carries liability.

11. Stick to your specialty. Even the best agents cannot be all-knowing about all properties. You will be considered to know more about the area that you farm and/or your “specialty.” This applies particularly with agents’ services relative to short sales, REO properties, and foreclosures.

12. Review preliminary title reports carefully and as soon as possible.

13. Use standard forms and procedures. The supervising broker should be monitoring your contracts to ensure that what you have written is clear. An important general rule affecting any contract is that vagueness is construed against the party responsible for the ambiguity.

http://realestateeo.com/extras/lisa-riggins-disclaimer.html

6.  In California, you are required to make a reasonable, competent, and diligent visual inspection of accessible areas of the property and disclose to prospective buyers all facts materially affecting the value and desirability of the property [… when the licensee has reason to believe such facts are not known to, nor readily observable by a prospective purchaser]. In the Transfer Disclosure Statement (TDS), do not volunteer conclusions as to the cause of anything you disclose; do not diagnose or characterize, only cite factual observations.

7.  Stay well informed. Employ determinative risk management and loss prevention tools from counsel experienced in real estate brokerage and sales law. Attend board/association seminars, and read trade publications (e.g., C.A.R.’s Legal Briefs and Q&As, the DRE Bulletin, etc.).

8.  Do not jump the gun. Avoid situations that could lead to two contracts. Exercise the utmost care with multiple offers, backup offers, and contingencies.

9.  FSBOs raise red flags. Is the seller doing something other than simply saving a commission? Have you unwittingly become the seller’s agent?

http://realestateeo.com/extras/lisa-riggins-disclaimer.html