CPR 2016, Book

27 CalBRE Approved Credit Hours Updated: March 11, 2016, Links Fixed: May 9, 2016

45HoursOnline holds the copyright to this book, Consumer Protection Reader, 2016. As its copyright holder, we authorize its use for our customers only. By “customer,” we refer to anyone having paid for a course or package of courses that includes this book. Customers may download, copy, and print this book but only for their individual use. Customers may not distribute this book in any form without our written permission.

Publisher

45HoursOnline 4228 Lobos Road Woodland Hills, CA 91364 (818) 716-1028 Voice (213) 477-2095 Fax [email protected] www.45HoursOnline.com

CalBRE Disclaimer

This course is approved for continuing education credit by CalBRE. Their approval does not constitute an endorsement of the views or opinions expressed by 45HoursOnline, its instructors, its authors, or its lecturers

CalBRE Course and Instructor Evaluation

A course and instructor evaluation is available on CalBRE’s website at www.bre.ca.gov. Access this form by entering “RE 318A” in the search box located in the upper right corner of the home page. PREFACE: This textbook is used for two of our CE courses: (1) Consumer Protection Reader, Part 1 (approved for 12 hours); and (2) Consumer Protection, Part 2 (approved for 15 hours).

This textbook has two sections. The first is “Defensive Real Estate.” It comprises the first 70 pages. It is an extension of our three-hour course, Risk Management. It was written to help agents avoid disputes with their clients. Chuck Milbourne  of 45HoursOnline is its author. The second section is “Consumer Protection Articles” (“Reader”) and it comprises the remainder of this book. It consists of short articles primarily from three sources: (1) CalBRE’s Real Estate Bulletin, (2) RealtyTimes.com, and (3) Dr. Jack Guttentag’s site, The Mortgage Professor. Articles from CalBRE’s Real Estate Bulletin are in the public domain; while

The “Editor” articles from Realty Times and The Mortgage Professor are owned by Realty Times and Dr. Jack Guttentag respectively and used with their permission. All articles, regardless of source, were written in the four years prior to March 1st, 2016.

The articles have been selected and annotated by me, Chuck Milbourne (aka, the “Editor”). The articles I have selected are intended to bring you up-to-date with changes in residential real estate (RRE) brokerage since January 1, 2012. These articles concern changes and developments in California real estate law, construction methods, real estate taxes, appraisal, and other matters of interest to RRE agents and property managers. Typographic Conventions This is a margin note. All margin notes , pictures, and opinion statements are those of the Editor.

Supplemental Text added by the Editor to articles written by others is delimited from the original in one of two ways: (1) When consisting of complete paragraphs it is enclosed in a dashed, light-green box (as you see here); otherwise, it is demarcated from the original text using curly braces {as you see here}. Supplemental text is part of the course.

Paragraphs set against a light-gray background (as you see here) are sidebars. Sidebars are explanatory notes and parenthetical content. The information contained within sidebars is not considered part of the course.

Opinions of and personal asides by the Editor, Chuck Milbourne, are set against a yellow background (as you see here). Feel free to skip these. For the sake of consistency, the Editor has changed all references to sections of the California Civil Code to “CC §”; to the California Business and Professional Code to “BPC §”; and to the Bureau of Real Estate Commissioner’s Regulations to “CR §”. The symbol ‘§’ may be read as “section” and the symbol ‘§§’ as “sections.” “Et al,” as in “CC §2780 et al,” may be read as “all the sub-sections that follow.” Adobe Reader (“AR”) This document is formatted as a PDF file. Any PDF may be read online or offline using the Adobe Reader (AR). AR is freely available from Adobe Systems. There are many other programs that display and print PDF files but AR is the most common. AR is a simple yet powerful eBook reader. If you are unfamiliar with its features, I recommend you take a few minutes to become acquainted with them so as to make your reading of this book more productive.

Most of AR's functions are accessed through its Horizontal and Vertical menus. By default, AR does not display these menus. To display them, position the cursor over the bottom center of the display window. When properly positioned, AR’s floating menu  will

appear. When it does, click the Adobe icon ( ) on the popup menu .

You should know how to use AR’s /Bookmarks\ tab . This tab is used to navigate through the book’s table of contents. You should also know how to use its zooming tools ( ) to change the size of text and Bookmarks Tab pages. You will also find it convenient to use your browser’s key to toggle in and out of “full screen” mode. Finally, you will find its Search tool  a Search Tool convenient way to find content particularly when taking this course’s exams (all exams are “open book”).

This eBook contains hundreds of links to pages on the Internet and to cross references within this book. Both links are visually depicted in underlined purple text which, when moused over, changes the mouse icon from a pointer to a hand icon. Links to Internet sites are accompanied with a yellow tool-tip box while links to cross-referenced sections show only the hand . After clicking a link to an Internet site, use to return to the eBook ...

but ... After clicking a link to a cross-referenced section, use to return to the original link

Abbreviations

To avoid repeating long proper names, we use the following abbreviations.

AB California Assembly Bill APR Annual Percentage Rate BPC California’s Business and Professions Code CalBRE California Bureau of Real Estate, aka, BRE. CAR® California Association of REALTORS® CC California’s Civil Code CPFB Consumer Financial Protection Bureau CID Common Interest Development CR Regulations of the Commissioner of the Bureau of Real Estate DIY Do It Yourself BRE California Bureau of Real Estate, aka CalBRE Fannie Fannie Mae, aka. FHLMC FDIC Federal Deposit of Insurance Corporation FHFA Federal Housing Finance Agency Freddie Freddie Mac, aka FNMA FTB California Franchise Tax Board GSE Government Sponsored Entities (primarily, Fannie and Freddie) HELOC Home Equity Line of Credit HOA Home Owner Associations HUD U.S. Department of Housing and Urban Development IRS Internal Revenue Service K One thousand (e.g., $100K is $100,000) LTV Loan to Value NAR® National Association of REALTORS® PMI Private Mortgage Insurance REO Real Estate Owned RESPA Real Estate Settlement Procedures Act SB California Senate Bill SFR Single Family Residence TDS Transfer Disclosure Statement

Consumer Protection Reader, 2016 Edition TABLE OF CONTENTS 1 Defensive Real Estate 1 1.1 Introduction 1 1.1.1 Scope 1 1.1.2 Client Satisfaction 1 1.1.3 Audience 2 1.1.4 What is Risk? 2 1.1.5 Core Problem 3 1.2 Dispute Resolution 3 1.2.1 Litigation Concepts 3 1.2.1.1 Liability 3 1.2.1.1.1 Vicarious Liability 3 1.2.1.1.2 Joint and Several Liability 4 1.2.1.1.3 Comparative Negligence 5 1.2.1.2 Causes of Action 5 1.2.1.2.1 Breach of Fiduciary Duty 5 1.2.1.2.2 Misrepresentation 6 1.2.1.2.2.1 Fraudulent Misrepresentation 6 1.2.1.2.2.2 Negligent Misrepresentation 7 1.2.1.2.2.3 Innocent Misrepresentation 7 1.2.1.2.3 Negligence 8 1.2.1.2.3.1 Negligent Nondisclosure 8 1.2.1.2.3.2 Negligent Advice/Referrals 8 1.2.2 Methods 9 1.2.2.1 Provisions in CAR® Contracts 9 1.2.2.2 Informal 9 1.2.2.2.1 Informal Negotiation 9 1.2.2.2.2 Mediation 10 1.2.2.2.3 Small Claims Court 10 1.2.2.3 Formal 12 1.2.2.3.1 Arbitration 12 1.2.2.3.2 Litigation 13 1.2.2.4 CalBRE’s License Discipline 16 1.2.2.4.1 Reports of Unlawful Conduct 16 1.2.2.4.2 Newly Acquired Enforcement Powers 17 1.2.2.4.3 Burden-of-Proof in Civil and Administrative Law 17 1.2.2.4.4 Disciplinary Process 19 1.3 Defensive Real Estate 20 1.3.1 Risk Avoidance 20 1.3.1.1 Avoid Dual Agency 20 1.3.1.2 Avoid Vexatious Clients 22 1.3.2 Risk Reduction 22 1.3.2.1 Contract Familiarity 22 1.3.2.2 Transaction File 23 1.3.2.3 Document Review 25 1.3.2.4 Communication 25 1.3.2.5 Risk Management Policies 25 1.3.2.6 Contrition 26 1.3.3 Risk Transfer 26

2016 45HoursOnline, All Rights Reserved Page i Consumer Protection Reader, 2016 Edition 1.3.3.1 Deferral to Experts 26 1.3.3.2 Importance of Deep Pockets 27 1.3.3.3 Advisories 27 1.3.3.4 Insurance 27 1.3.3.4.1 Protecting Yourself 27 1.3.3.4.1.1 E&O 27 1.3.3.4.1.2 General Liability Insurance 29 1.3.3.4.1.3 Automobile Insurance 29 1.3.3.4.2 Protecting your Clients 29 1.3.3.4.2.1 Homeowners Insurance 29 1.3.3.4.2.2 Title Insurance 30 1.3.4 Risk Retention 30 1.3.4.1 High Deductibles 31 1.3.4.2 Incorporation 31 1.4 Home Inspection 31 1.4.1 Actionable Defects 32 1.4.1.1 Ten Most Common Defects 32 1.4.1.2 Red Flags 33 1.4.1.2.1 Visual 34 1.4.1.2.2 Written 34 1.4.1.2.3 Neighborhood 35 1.4.1.2.4 Remodels and Repairs 35 1.4.1.3 Water 35 1.4.1.4 Fungi 36 1.4.1.4.1 Dry Rot 37 1.4.1.4.2 Mold 38 1.4.1.5 Termites 40 1.4.2 Seller and His Agent’s Home Inspection 41 1.4.2.1 Agent’s Visual Inspection 41 1.4.2.2 Seller’s Disclosures 42 1.4.2.3 Natural Hazard Disclosure 42 1.4.3 Professional Pest Inspection 43 1.4.4 Professional Home Inspection 45 1.4.4.1 Need 45 1.4.4.2 Associations 46 1.4.4.2.1 California Real Estate Inspection Association 46 1.4.4.2.2 American Society of Home Inspectors 46 1.4.4.2.3 National Association of Home Inspectors 47 1.4.4.2.4 International Association of Certified Home Inspectors 47 1.4.4.3 Using Home Inspectors 47 1.4.4.3.1 Legal Issues 48 1.4.4.3.2 Scope 49 1.4.4.3.3 Qualifying Home Inspectors 50 1.4.4.4 Pre-Inspection 52 1.4.4.5 Post-Inspection 53 1.4.5 Proactive Steps 54 1.4.5.1 Experts 54 1.4.5.2 Walkthroughs 54 1.4.5.3 Neighborhood Evaluations 55 1.4.5.4 Stigmatized Properties 56 1.4.5.5 CLUE Reports 57 1.4.5.6 Service Contracts 57

Page ii 2016 45HoursOnline, All Rights Reserved Consumer Protection Reader, 2016 Edition 1.4.5.7 Home Warranties 58 2 Consumer Protection Articles 59 2.1 Statutory Law 59 2.1.1 Annual Summaries of New Legislation 59 2.1.1.1 State Legislation 59 2.1.1.1.1 2015 Legislation 59 2.1.1.1.1.1 AB 345 Continuing Education: Management and Supervision 59 2.1.1.1.1.2 AB 607 Authority to Make Trust Account Withdrawal 60 2.1.1.1.1.3 SB 146 Clarification on Team Name Usage 60 2.1.1.1.2 2014 Legislation 60 2.1.1.1.2.1 AB 968 CIDs: Common Areas: Maintenance and Repairs 60 2.1.1.1.2.2 AB 1730 Loan Modifications: Violations and Penalties 60 2.1.1.1.2.3 AB 1770 Refinances: Line of Credit 61 2.1.1.1.2.4 AB 2018 RE Brokers: Fictitious Names: Team Names 61 2.1.1.1.2.5 AB 2100 CIDs: Yard Maintenance: Fines: Drought 61 2.1.1.1.2.6 AB 2396 RE License Applications: Expunged Convictions 62 2.1.1.1.2.7 AB 2430 CIDs: Purchase Disclosures: Fees 62 2.1.1.1.2.8 AB 2540 RE Licensees: E-mails and Contact Information 62 2.1.1.1.2.9 SB 1159 Real Estate License Applicants: Individual Tax Identification Number 62 2.1.1.1.2.10 SB 1171 Dual Agency Disclosure: Commercial Transactions 62 2.1.1.1.3 2013 Legislation 62 2.1.1.1.3.1 SB 426 Civil Procedure: Deficiency Judgments 62 2.1.1.1.3.2 SB 652 Real Property Disclosures: Construction Defect Litigation 63 2.1.1.1.3.3 SB 676 Real Estate Records: Unlawful Destruction 63 2.1.1.1.4 2012 Legislative Summary 63 2.1.1.1.4.1 AB 278/SB 900 Mortgages and Deeds of Trust: Foreclosure 63 2.1.1.1.4.2 AB 1511 Disclosures: Gas Transmission Pipelines 64 2.1.1.1.4.3 AB 1718 Real Estate Broker Licenses 64 2.1.1.1.4.4 AB 1950 Loan Modifications: Advance Fees 65 2.1.1.1.4.5 AB 2314 Real Property: Blight 65 2.1.1.1.4.6 AB 2610 Tenants: Foreclosure and Unlawful Detainer 65 2.1.1.1.4.7 SB 825 Residential Tenancies: Foreclosures. 66 2.1.1.1.4.8 SB 875 Real Estate Licensees 66 2.1.1.1.4.9 SB 1055 Landlord and Tenant: Payments 67 2.1.1.1.4.10 SB 1069 Deficiency Judgments 67 2.1.1.1.4.11 SB 1191 Landlord-Tenant Relations: Notice of Default 67 2.1.2 CalBRE and its Regulations 67 2.1.2.1 New ‘Community-Based’ Outreach Program 67 2.1.2.2 Agents Need’nt Keep Ephemeral Documents. WOW! 69 2.1.2.3 No More DRE 70 2.1.2.4 RE Recovery Fund Protects Fraud Victims 72 2.1.2.5 More Responsibility for Branch Managers 73 2.1.3 Licensing 75 2.1.3.1 Many ‘Fix-It’ Projects Require a Contractor’s License 75 2.1.3.2 Policy on Team Names Is Close to Becoming Law 76 2.1.3.3 CA Revises Broker Requirements 78 2.1.4 CalBRE’s Disciplinary Action 80 2.1.4.1 Mandated Posting of Disciplinary Actions 80 2.1.4.2 CalBRE’s Citation and Fine Program Now in Action 82 2.1.4.3 Denial of License Must be According to the Rules 84

2016 45HoursOnline, All Rights Reserved Page iii Consumer Protection Reader, 2016 Edition 2.1.4.4 Discipline by Another Licensing Authority 85 2.1.4.5 License Regulations Affected by SB 53 87 2.2 Property Management 89 2.2.1 Tenant’s Rights 89 2.2.1.1 Pets and Other Animals 89 2.2.1.2 Court Allows Showings for Tenant-Occupied Homes 92 2.2.1.3 Can a Landord Prohibit Smoking? 93 2.2.1.4 New CA Law Protects Tenants’ Political Signs 94 2.2.2 Manager’s Responsibilities 96 2.2.2.1 Swimming Pool Increases Landlord’s Duties of Care 96 2.2.2.2 Landlords Need to Guard Against Foreseeable Harm 97 2.2.2.3 Whether Defect is Trivial; Not a Trivial Matter 99 2.2.3 Land Use 100 2.2.3.1 Airbnb Provides Benefits But There Are Objections Too 100 2.2.3.2 Protecting Against Prescriptive Easements 102 2.2.3.3 Airbnb: The Goldmine You’ve Been Waiting For? 104 2.2.4 Fair Housing 105 2.2.4.1 Fair Housing Now Covers Gender Identity 105 2.2.4.2 Court Gives Right-to-Discriminate in Roommate Case 107 2.3 Industry 109 2.3.1 Practice 109 2.3.1.1 NAR® Report Tells Where Dangers Lurk 109 2.3.1.2 Anti-Bullying Training Required in Many Brokerages 111 2.3.2 Federal Housing Policy 112 2.3.2.1 Borrowers Pay the Piper for Lender Misdeeds 112 2.3.2.2 Inclusionary Zoning Decision to Have Major Consequences 115 2.3.2.3 What Is The ‘Qualified Mortgage’ Rule? 116 2.3.3 Economy and Demographics 118 2.3.3.1 Is Another Housing Bubble Looming? 118 2.3.3.2 Student Loan Debt and the RE Market 120 2.3.3.3 Goodbye ‘California Dreamin’... Howdy Texas! 122 2.3.3.4 Enter The Dragons: Chinese Investment In US RE 123 2.3.3.5 Economy Brings Generations Under One Roof 125 2.3.4 Home Technology 126 2.3.4.1 Smart Homes: Six Essentials of Home Automation 126 2.3.4.2 Home Trends: What You Will/Won’t See In Homes 128 2.3.4.3 Noisy Neighbors Be Gone 130 2.4 Finance 131 2.4.1 Underwriting 131 2.4.1.1 Using Gift Money for Down Payments 131 2.4.1.2 New Forms for Mortgage Loans Will Cause a Hiccup or Two 132 2.4.1.3 Why Many Good Home Loans Are Not Being Made 134 2.4.1.4 Don’t Sabotage Your Conforming Loan 136 2.4.1.5 Questions About Mortgage Assumptions 137 2.4.1.6 Magic #s, 720/20, Explain Why Credit Is Tight 139 2.4.2 Government-Backed Loans 142 2.4.2.1 Fannie/Freddie’s Attempts to Compete w/ FHA Loans 142 2.4.2.2 Pace Loans: The Good and the Not-So-Good 143 2.4.2.3 V.A. Financing: Excellent Option for Many 145 2.4.3 Types of Loans 146

Page iv 2016 45HoursOnline, All Rights Reserved Consumer Protection Reader, 2016 Edition 2.4.3.1 Another Look at Lease-to-Own House Purchases 146 2.4.3.2 Land Sales Contracts: A Useful Tool 148 2.4.3.3 Conventional vs. FHA: Which Do You Choose? 150 2.4.4 Mortgage Shopping and Financing 152 2.4.4.1 Use a Reverse Mortgage to Buy a New Home 152 2.4.4.2 Larger Downs for Greater Yields Without Risk 153 2.4.4.3 Pre-Approvals May Help Home Buyers, or May Not 155 2.4.4.4 Apply for a Mortgage Jointly or Separately? 156 2.4.4.5 Should You Pay Discount Points? 158 2.4.4.6 How to Avoid Lock Scams? 160 2.4.4.7 Saving Potential Interest Savings on Your Current Mortgage 162 2.4.5 Assumptions and Defaults 163 2.4.5.1 Dealing With an Inherited House 163 2.5 Taxes 165 2.5.1 Mortgage Interest Deduction 165 2.5.1.1 There Are Tax Benefits With Home Ownership 165 2.5.1.2 What if you Don’t Own Your House for Two Years? 167 2.5.1.3 Secret Deductions in CIDs When You Sell Your Unit 168 2.5.2 Homeowners 171 2.5.2.1 Fact or Fiction: A Tax On RE Sales? 171 2.5.2.2 Pitfalls of Transferring Property to Relatives 173 2.5.2.3 An Exchange Will Defer All Tax Obligations 175 2.5.2.4 Property Tax System Coming Under Fire 177 2.5.2.5 Tax Credits For Energy-Efficient Upgrades 179 2.5.3 Agents 181 2.5.3.1 Agents May Not Always Deduct Loses from Rentals 181 2.5.3.2 Are Agents Really Independent Contractors? 183 2.5.3.3 Employee or Independent Contractor? 184 2.6 Settlement 186 2.6.1 Disclosures 186 2.6.1.1 RESPA Applies to Many Settlement Providers 186 2.6.1.2 Beware: There’s a New RESPA Sheriff in Town 187 2.6.1.3 Pocket Listings Require Disclosure 189 2.6.1.4 New Pipeline Disclosure Law 191 2.6.2 Appraisals 192 2.6.2.1 Communication Between Appraisers & Agents 192 2.6.2.2 The Value of Your Home is Going Up in Smoke 194 2.6.2.3 Waiving Appraisal Contingency is Risky Business 195 2.6.3 Offers and Escrows 196 2.6.3.1 What Happens When Principal Refuses to Sign? 196 2.6.3.2 A “Kick-Out Clause” Can Protect Home Sellers 197 2.6.3.3 Tax Returns Are Not Sacred 198 2.6.3.4 Escalation Clauses Are Back: Handle With Care! 200 2.6.3.5 Liquidated Damages Clause May Be Misunderstood 202 2.6.4 Transfers 203 2.6.4.1 Wire Transfer Fraud In RE Transactions 203 2.6.4.2 New “Transfer Upon Death” Deed 204 2.7 Risk Management 206 2.7.1 Agency and Ethics 206 2.7.1.1 Broker’s Duties to Investigate Have Their Limits 206

2016 45HoursOnline, All Rights Reserved Page v Consumer Protection Reader, 2016 Edition 2.7.1.2 Dual Agency Under Scrutiny 207 2.7.1.3 Buyer’s Broker Must Evaluate Reports 209 2.7.1.4 Listing Agent Has Duty Of Care To Third Parties 211 2.7.1.5 Corporate Brokers Not Liable to Third Parties 212 2.7.1.6 Multiple Counters: Confusion and Deception 214 2.7.2 Litigation and Civil Law 216 2.7.2.1 False Predictions Aren’t Fraud 216 2.7.2.2 Meritless Lawsuit Against Agent Draws Sanctions 217 2.7.2.3 Non-Disclosing Seller Pays His Broker’s Legal Costs 219 2.7.2.4 Small Claims Manual, Aid to Realtor®s 221 2.7.3 Contracts and Forms 222 2.7.3.1 Purchase Agreement Undergoes Thorough Revision 222 2.7.3.2 Listing Contract: New Rules for Commission 224 2.7.3.3 Buyer Claiming Breach Must Be Able to Perform 225 2.8 Home Ownership 226 2.8.1 Home Improvement 226 2.8.1.1 Seven Ways To Use The Humble Concrete Block 226 2.8.1.2 Ingenious Storage Options That Will Change Your Life 228 2.8.1.3 Love the House, Hate the Traffic – There Is Hope! 230 2.8.1.4 Smart Home Renovations That Pay You Back 231 2.8.1.5 Top Remodeling Trends For 2014 235 2.8.1.6 Bathroom Remodels Add Value 237 2.8.2 Neighbors & Neighborhoods 238 2.8.2.1 Three Ways to Choose Your Neighborhood and Up Your Value 238 2.8.2.2 Neighbors Know; Home Buyers Can Benefit 240 2.8.2.3 Crime Mapping and other Online Research Tools 242 2.8.2.4 Who Should Pay For A Boundary Fence? 243 2.8.2.5 Nuisances Must be Disclosed but Can Affect Value 244 2.8.2.6 The Aesthetic Value of Trees Can Be Substantial 246 2.8.3 CIDs 247 2.8.3.1 FHA and VA Certification Are Useful for Condominiums 247 2.8.3.2 Court Upholds HOA’S Short-Term Rental Rules 248 2.8.3.3 Should Condo Boards Seek FHA Approval? 249 2.8.3.4 Who Pays for HOA Documents? 251 2.8.3.5 Condo Purchases Require Many Disclosures 252 2.8.3.6 CID Documents 253 3 Appendix 255 3.1 Author Bios 255 3.1.1 Bell, Wayne 255 3.1.2 Chongchua, Phoebe 255 3.1.3 Corcoran, Lew 256 3.1.4 Evans, Blanche 257 3.1.5 Giardinelli, John 257 3.1.6 Guttentag, Dr. Jack 258 3.1.7 Hill, Carla 258 3.1.8 Hunt, Bob 259 3.1.9 Kass, Benny L. 259 3.1.10 Lane, Nora Ling 259 3.1.11 Milbourne, Charles 259 3.1.12 Naciri, Jaymi 260

Page vi 2016 45HoursOnline, All Rights Reserved Consumer Protection Reader, 2016 Edition 3.1.13 Perkins, Broderick 260 3.1.14 Sarro, Anthony 261 3.1.15 Shekhar, Shashank 261 3.1.16 Tuohy, Jennier 261 3.1.17 Wade, PJ 261

Consumer Protection Reader, 2016 Edition

1 DEFENSIVE REAL ESTATE

This book provides the course material for two courses: (1) Consumer Protection Reader, Part 1 (CPR1 – 12 hours), and (2) Consumer Protection Reader, Part 2 (CPR2 – 15 hours) The quiz and final exam for CPR1 test your knowledge of the this material up to “§2.3 Industry” (at about page 125) and the quiz and final exam for CPR2 test your knowledge of the material thereafter.

1.1 INTRODUCTION

This section, “Defensive Real Estate,” is a continuation of our three-hour course, Risk Management. Its purpose is to help California residential real estate agents avoid disputes with their clients.

1.1.1 SCOPE

Before beginning, let’s define our terms and scope.

By “dispute” we mean any claim for damages made by a client against his broker. Disputes may be resolved directly by the parties via discussion and Civil Litigation: Dispute negotiation; or by neutral third-parties using mitigation, arbitration, or civil resolution via a Court of Law (i.e., in Superior Court or Small Claims litigation. In this course, we use the terms “litigation” and “sue” to refer to Court). both arbitration and civil litigation . By “negligence,” we refer to injurious acts by agents made in good faith acting on their client’s behalf. We use the term “alleged” to acknowledge that claims against brokers may be without merit. Allegations may be based on faulty memory, unrealistic expectations, ignorance of the law; or unworthy motives such as envy, regret, or unjust enrichment. By “clients,” we refer to buyers and sellers to whom brokers owe duties based on statutory, contract, or common law. By “California residential real estate brokers,” we refer to broker licensees and their associates who facilitate home sales for their clients. It should be understood that unless we qualify the reference to “brokers” we mean “employing brokers” and their associates whether licensed as salespersons or brokers.

1.1.2 CLIENT SATISFACTION

Consider two successful transactions six months after escrow: one brokered by Sally – a disgrace to our profession, the other by Frank – a model agent. Sally misrepresented the condition of her seller’s home, hired her brother-in-law as home inspector; steered her buyers into a

2016 45HoursOnline, All Rights Reserved Page 1 Consumer Protection Reader, 2016 Edition subprime loan in return for a kickback, and paid a neighbor to bring his pit bulls indoors when showing the home. Both her buyer and seller were delighted with Sally and, six months latter, the buyers thrilled with their home, their neighbors, and the neighbor’s pit bulls. Frank was zealous in making his disclosures, he had his seller’s home pre-inspected, found his buyers the lowest-possible home financing, honestly described the neighborhood and neighbors, and even helped his buyers move in. Although Frank’s seller and buyer were happy with Frank’s service, six months later his buyers learned that the local public school they had planned to send their eight year old daughter was a “failure factory”; i.e., a really bad school.

“Expecting the world to treat you Which agent, Sally or Frank, has the greater risk of being sued? Of course, right because you are a good it is Frank – the model agent. broker is like expecting a shark not to eat you because you are a vegetarian.” We begin with this contrived example to emphasize this point: – Robert Bass (attorney) A transaction becomes risky when the client becomes unhappy.

The client may be unhappy with his home, his loan, his neighbors, or his neighborhood. He may be disappointed, upset, resentful, regretful, or even outraged. His reasons may be logical or illogical; rationale or emotional. Regardless of the reason, once your client becomes unhappy with your transaction, he will tend to blame you for his troubles.

1.1.3 AUDIENCE

This course is written in a conversational style. “We” are 45HoursOnline and “you” are the broker. Please understand that by “broker” we mean the employing broker of a real estate brokerage or any of his agents acting on his behalf or under his supervision – this, of course, includes salespersons and associate brokers working under the employing broker’s license. We have chosen to address this section to the “broker” rather than the “licensee” because the broker is legally liable for any negligent actions under his authority.

1.1.4 WHAT IS RISK?

For our purposes, we define risk narrowly. The higher the probability your client will become dissatisfied with his transaction; the higher your risk. Here are some examples of situations which increase risk:  A buyer discovers his new home has significantly less square footage than he was led to believe.  A seller discovers he sold his house 20% below its market value.  A buyer learns that a neighbor raises roosters.  A seller carries a second without knowing his buyer is unemployed.

Page 2 2016 45HoursOnline, All Rights Reserved Consumer Protection Reader, 2016 Edition When the buyer or seller’s expectations are not met, his recourse is to seek redress from you. If you don’t agree, you have a dispute.

1.1.5 CORE PROBLEM

The root cause of litigation in real estate brokerage is the industry’s compensation system. The law compels the broker to act as a fiduciary – putting the interests of his clients before his own – but the broker is only paid if he closes the deal. The compensation system acts as a corrupting influence on brokers and, even more so, on the broker’s associates who are often more concerned with commissions than their employer’s reputation. In this book, we assume that your only care is the welfare of your clients. That you have unlimited time to make sure everything is done perfectly. That you would rather lose a sale if an alternative is best for your client. That you are expert in all aspects of residential real estate. Be assured, we know these assumptions are unrealistic.

1.2 DISPUTE RESOLUTION

“Today’s client; tomorrow’s This section concerns legal concepts used in litigating negligence claims plaintiff.” against agents and the formal methods of resolving disputes.

1.2.1 LITIGATION CONCEPTS

You need to understand two legal concepts: (1) liability, and (2) cause of action.

1.2.1.1 LIABILITY

There are three forms of liability you need to know:  Vicarious Liability: You may be found liable for the negligent actions of your employees and subagents;  Joint and Several Liability: If jointly liable with other defendants, you may be selected by the plaintiff to pay his entire judgment; and  Comparative Negligence: Your liability may be reduced to the degree your plaintiff shares blame for his injuries. 1.2.1.1.1 VICARIOUS LIABILITY

In the “traditional model” the Vicarious liability arises out of the common law doctrine of respondeat buyer is unrepresented since the superior – responsibility of the superior for the acts of his subordinates. selling agent works (“cooperates”) with the seller and his agent. In the context of a traditional real estate brokerage transaction :

The seller is liable for the acts of his broker. The broker “ salesperson. The salesperson “ cooperating broker The cooperating broker “ cooperating salesperson

2016 45HoursOnline, All Rights Reserved Page 3 Consumer Protection Reader, 2016 Edition Note that in this chain of liability, the seller is vicariously liable for everyone involved – even for the negligent actions of the cooperating agent, a person he may never have met. This is one of the problems of the traditional agency model. Vicarious liability applies only to those negligent acts performed by subordinates within the scope of the superior’s agency. Suppose a Good Samaritan agent conducts a garage sale for her aged seller and, in so doing, negligently sells her client’s original Picasso for $5.00. In this situation, the Good Samaritan agent would be liable to her seller but her broker would not be liable for his agent’s negligent act. The reason: conducting a garage sale is not within the scope of the broker’s agency.

Suppose an agent, unbeknownst to her broker, refused to show homes to a See this explanation of the U.S. couple because they were Muslim. The agent would be liable to the couple Supreme Court case, Holley vs. Meyer, 2003, where a broker was for unlawful discrimination but her broker would not be liable. The reason: held responsible for his agent’s the agent’s unlawful discrimination was not negligent and not known to her discriminatory actions against an broker. (Of course the Muslim couple’s attorney may not know that and so interracial couple. he would sue the agent’s broker too.)

1.2.1.1.2 JOINT AND SEVERAL LIABILITY

As of 2016, there were over a You need to understand the concept of “joint and several liability;” aka, the quarter million members of the “deep pocket rule.” It helps explain why lawyers sue every person State Bar, 185,000 of which were on active status (source). conceivably responsible for their client’s injuries. The “deep pocket” rule states that when a plaintiff is awarded damages against multiple defendants, the plaintiff may recover the full amount of his judgment from any single defendant regardless of that defendant’s degree of liability.

Consider this example:

Your client sues both you and his home inspector to recover the $100K he spent to remove the toxic mold his home inspector failed to find in the attic. At trial, your client convinces the jury that the home inspector was incompetent and that you should have known this when you recommended

him. If the jury awards $100K to your former client finding you 1% liable and Judgment Proof: A defendant or the home inspector 99% liable, then your client may choose to collect his judgment debtor who has no entire judgment from you alone! After you have paid the full settlement, the assets or income from which a law permits you to pursue the home inspector for his share ($99K) which judgment can be satisfied. you will be sure to do providing that he is not judgement proof .

California’s Proposition 51 (1986) There is an important exception to the deep-pocket rule: The “deep pocket” abolished joint and several liability rule applies only to economic damages; that is, for the plaintiff’s actual for non-economic damages. financial losses. Defendants are proportionally responsible for non- economic damages such as for pain and suffering. If, in the above example, your client was also awarded $10K for the emotional distress he suffered as result of your home inspector’s incompetency; then of this portion, your client could only demand from you $100 (1% of $10K) and the remainder ($9,900) from the home inspector.

1.2.1.1.3 COMPARATIVE NEGLIGENCE When a jury determines that the plaintiff is partly to blame for the damages he claims, the award is apportioned according to the doctrine of “comparative negligence.” Say, for example, your former client seeks to recover damages from you for defective construction work performed by a workman you recommended. You refuse to pay because (A) the workman was at fault – not you, and (B) you believe it was your client’s responsibility to have verified the workman’s credentials – not yours. Unable to resolve the dispute, the buyer takes you and the workman to arbitration (assuming the workman agreed to arbitrate). After hearing the facts, the arbitrator determines you are 10% responsible, the workman 50% responsible, and your former client 40% responsible for his own losses. In such matters, California courts (and by extension, arbitration panels) apportion damages using the “pure comparative fault” rule. This rule states that the amount of damages is reduced by the degree to which the plaintiff was at fault. If the amount sought by the plaintiff in the above example was $100K, then the award to the plaintiff would be $60K. By following the “deep pocket rule,” the plaintiff could seek to recover the full amount from you even though the arbitrator found you only 10% at fault. After paying the judgment, you could take legal action, if necessary, against the workman to recover his portion of the judgment, $50K (.5 times $100K). Like it or not, that is how successful plaintiffs recover damages from defendants here in California.

1.2.1.2 CAUSES OF ACTION

Common Law: Law based on A cause of action (aka “a claim”) is a recognized common law  claim that judicial precedents and not on a plaintiff “pleads” in a formal complaint to commence a lawsuit. There are statutes. (Details) two types: (1) a legal claim based on statute or (2) a claim in equity based on common law.

A cause of action has two parts: (1) the legal basis for the wrong the plaintiff claims to have suffered (e.g., fraud), and (2) a remedy which the plaintiff asks the court to grant (e.g., $250K plus attorney fees). The facts the plaintiff must prove to justify his cause of action are called its “elements.” For example, the elements for the cause of action of negligence are: (1) the existence of a duty, (2) breach of that duty, (3) reliance on that breach, and (4) damages. If a complaint does not allege facts sufficient to justify each element of its claim, the court, upon motion by the defendant, may dismiss the complaint. Next we discuss the causes of action most frequently alleged by clients suing their brokers. 1.2.1.2.1 BREACH OF FIDUCIARY DUTY The claim of breach of fiduciary duty is a necessary part of a negligence lawsuit. To prove breach of fiduciary duty your client must show that (1) you were his agent; (2) that as his agent, you owed him a duty; and (3) that you failed to provide him that duty.

2016 45HoursOnline, All Rights Reserved Page 5 Consumer Protection Reader, 2016 Edition There are two ways your client may show that you were his agent: (1) by producing an Agency Disclosure form which names you as his agent, or (2) by showing that you behaved as if you were his agent in that: 1. you performed the duties expected of an agent (known as an “implied agency” or “ostensible agency”); or 2. you didn’t object when the plaintiff introduced you as his agent (known as an “apparent agency”); or 3. you acknowledged the plaintiff’s grant of authority to act on his behalf (another definition of agency).

To support a claim of breach of fiduciary duty, then, your plaintiff must demonstrate that you were his agent and, as such, you failed in one or more of the duties you were obliged to provide. 1.2.1.2.2 MISREPRESENTATION Most real estate attorneys who defend brokers agree that the majority of claims against brokers allege misrepresentation.

Rescission: Cancellation of the Misrepresentation is a false statement made by a seller or his broker which transaction and return of any induces a client into a contract. A finding of misrepresentation allows for the commission. remedies of rescission  and damages.

The elements your client must prove to establish a claim of basic misrepresentation are: (1) you made a false representation at the time of the transaction, (2) the representation was material to the transaction, (3) your client relied on the representation, and (4) as a result of your client’s reliance on the representation he sustained damages. There are three recognized forms of misrepresentation which differ by intent: (1) fraudulent, (2) negligent, and (3) innocent. Each is discussed below: 1.2.1.2.2.1 FRAUDULENT MISREPRESENTATION To establish a claim based on fraudulent misrepresentation, your client must prove basic misrepresentation and two additional elements: 1. You made a representation knowing it to be false or else you made it with a reckless disregard as to whether it was true or false (e.g., “This home is priced 50% below its market value.”)  2. Your intent in making the representation was to induce your client to sell or purchase the property. If you said, “this home will be worth 50% over its market value next year,” and if one year later the home actually lost market value; that would not be fraud. False predictions are not fraud. (Source). The claim of “intentional concealment” (aka, “constructive fraud”) is similar to fraudulent misrepresentation. It imposes liability for intentionally concealing known material defects especially when the:  defect is latent,  defect poses a health or safety risk,  broker leads the buyer away from discovering the defect, or

Page 6 2016 45HoursOnline, All Rights Reserved Consumer Protection Reader, 2016 Edition  broker makes a false statement, believing it to be true but later, after discovering it to be false, fails to correct it.

Since E&O policies cover only negligent acts, liability for fraudulent misrepresentation is not covered. (However, some E&O policies may pay for your defense.) 1.2.1.2.2.2 NEGLIGENT MISREPRESENTATION The majority of claims against brokers allege “negligent misrepresentation” and “innocent misrepresentation” (next section). These are sometimes called, “didn’t know – didn’t verify” misrepresentations. To prevail on a claim for negligent misrepresentation, your client must prove basic misrepresentation plus two additional elements: (1) it was your duty to protect him, and (2) you were negligent in making a representation that he relied upon. You may rely on statements made by your seller unless you have observed facts or conditions which give you reason to believe your seller’s statements are false . Although you are not legally liable for the truth of any material fact relayed by you rom your seller to your buyer, you should not rely upon this fact to protect you from being named in a suit brought by your buyer for misrepresenting that fact. If won't. The degree to which you and your seller were responsible for the misrepresentation is a triable issue. Therefore, remember Ronald Reagan’s dictum, “Trust but Verify.”  To avoid liability for negligent misrepresentation, you should insist upon a competent home inspection and verify any claims made by the seller which may be of material importance to the buyer.

The Alaska Supreme Court noted that real estate professionals “hold themselves out to the public as having specialized knowledge of the realty they sell … [and] …a purchaser who relies on a material misrepresentation, even though innocently made, has a cause of action against the broker originating or communicating the misrepresentation.” 1.2.1.2.2.3 INNOCENT MISREPRESENTATION Should you make a material statement of fact which you have good reason to believe is true but which is later shown to be false, then you may be liable for “innocent misrepresentation.” Courts are likely to regard statements of opinion by brokers regarding real estate as statements of fact which, if proven false and material, could result in liability for innocent misrepresentation. For example, if you offered this opinion: “I think this home may be zoned for horses” it is likely to be interpreted as “This home is zoned for horses.” The usual remedy for this type of misrepresentation is rescission of the contract, the purpose of which is to put the parties back into their positions before the contract. However, the court may award damages in lieu of rescission if it deems rescission as impractical or unfair as, for example, if the innocent misrepresentation was discovered after the buyer closed escrow and subsequently moved into his new home.

1.2.1.2.3 NEGLIGENCE The elements your client must prove to win a judgment claiming negligence are:  Duty: You owed him a duty of care.  Breach of Duty: You breached that duty.  Causation: As a result of your breach, he suffered damage.  Expectation: You could have reasonably foreseen the damage.

These duties are listed in the The duties you, as a fiduciary, owe your client are loyalty, honesty, integrity, Agency Disclosure Form and are and utmost care. The duties you owe third parties are competence, based on statute (CC §2079.16). fairness, and disclosure. 

In order for your client to prove that you owed him a duty you failed to provide, your client must show that you failed to exercise the standard of care customary to the brokerage profession. This can be demonstrated by expert witnesses who may site sections from the NAR® Code of Ethics, case law, their own experience, and the legal standard cited in CC §2079.2: …the standard of care owed by a broker under this article is the degree of care that a reasonably prudent real estate licensee would exercise and is measured by the degree of knowledge through education, experience, and examination, required to obtain a license.

Since all agents pass two college-level courses about real estate to gain their California license: (“Principals of Real Estate” and “Real Estate Practices”), the legal standard of care presumes your knowledge of these subjects and the use of that knowledge to protect and benefit your clients. And since all licensees are required every four years to take 45-hours of CE which includes the six mandatory courses (“Ethics,” “Agency,” “Trust Funds,” “Fair Housing,” “Risk Management”, “Management and Supervision”), licensees are also expected to know and apply their knowledge of these subjects to the benefit and protection of their clients. 1.2.1.2.3.1 NEGLIGENT NONDISCLOSURE To prevail on a claim alleging negligent nondisclosure, your client must show that you had a duty to disclose a material fact or condition and that you negligently failed to do so. The disclosure duty may arise out of statute or common law. A duty arising out of statute is the law that requires the listing agent obtain an agency disclosure before acknowledging a listing (CC § 2079.14). An example of a duty arising out of common law is the “duty to learn the material facts that may affect the principal’s decision” (Field v. Century 21 Klowden-Forness Realty, 1998). 1.2.1.2.3.2 NEGLIGENT ADVICE/REFERRALS Negligent advice imposes liability for giving false professional advice or referrals when the broker should have known the advice was wrong or should have known that the person he referred was incompetent.

“It doesn’t take a weather man to Some experts recommend brokers avoid the risk of incurring liability for know which way the wind blows.” negligent advice by simply not giving any (see Robert Bass’ article, “The Art of -- Bob Dylan Avoiding Misrepresentation”).

1.2.2 METHODS

“Discourage litigation; persuade your neighbors to compromise whenever you can. Point out to them how the nominal winner is often the real loser – in fees, expenses and waste of time.” – Abraham Lincoln

Do all that you can to resolve disputes with your clients face-to-face. Accommodate, negotiate, intimidate, persuade, apologize, make concessions, and compromise. If you cannot resolve your dispute, attempt to persuade your client to mediate. If your client refuses to mediate or if mediation fails, consider taking your dispute to Small Claims Court. If Small Claims Court is not a viable option, consider resolving your dispute using arbitration. And only if arbitration is not possible should you consider civil litigation. The methods for resolving disputes using third parties are, in order of preference: (1) mediation, (2) small claims, (3) arbitration, and (4) litigation. In the sections below, we briefly describe each of these methods.

® 1.2.2.1 PROVISIONS IN CAR CONTRACTS

CAR®’s Residential Listing Agreement requires mediation for disputes between you and your seller. If both of you initial the form’s Arbitration of Disputes provision, then any disputes between you and your seller must be settled by binding arbitration. An exception is made for disputes settled via Small Claims Court (where the amount in dispute is less than $10,000). The CAR® Buyer Broker Representation Agreement , oddly enough, has no dispute resolution provision. Nothing should stop a broker from adding his own provision to the agreement. CAR®’s Purchase Agreement is an agreement between the buyer and seller; brokers are not party to the agreement. It requires the buyer and seller to use mediation to resolve their disputes. If mediation fails and if both the buyer and seller have initialed its Arbitration of Disputes provision, then both must submit their dispute to binding arbitration. If they did not initial the provision, both may still use arbitration to resolve their dispute providing both agree. CAR® contracts do not specify an arbitration firm (e.g., American Arbitration Association). The arbitration provision in CAR® contracts requires the arbitrator to be a retired judge or justice or an attorney with at least five years of residential real estate law experience; however, if the disputants mutually agree they can use any arbitrator of their choice. Whoever the parties select as their arbitrator, the arbitrator is required to render his decision in accordance with California law.

1.2.2.2 INFORMAL

1.2.2.2.1 INFORMAL NEGOTIATION If your client has a complaint and if he trusts you, he will probably try to work out a resolution with you in a friendly, informal manner. When confronted with a complaint, you should make every effort to be responsive

2016 45HoursOnline, All Rights Reserved Page 9 Consumer Protection Reader, 2016 Edition and reasonable even if your client is not. Make every effort to keep communication open and civil. Should your discussions deteriorate into name calling, your client’s next step may be to hire an attorney; that action will almost certainly ratchet up the cost of your dispute. Even if you cannot reach agreement, you should use whatever trust and goodwill remains to persuade your client to mediate rather than file suit. 1.2.2.2.2 MEDIATION Mediation is an informal method of alternate dispute resolution conducted by a neutral adviser who listens to each side and tries to craft a mutually agreeable solution. Anyone can serve as a mediator. CAR®’s Residential Purchase Agreement requires you and your client to mediate any dispute before resorting to legal action. Should either of you fail to do so, the Agreement states that the party that fails to agree to mediation will not be entitled to recover attorney fees.

The best know mediation service The first hurdle in resolving a dispute via mediation is for the parties to find providers are (1) American and agree to a mediator. The mediator should be neutral and trusted by Arbitration Association and, (2) JAMS. both parties. If the disputants cannot find and agree to a volunteer to mediate their dispute, they should consider hiring a professional .

Professionals are trained in the art of mediation. They know how to facilitate effective communication between the disputants. The professional mediator is skilled in the art of developing options, considering alternatives, and reaching consensual settlement. If mediation is successful (its proponents claim an 80% success rate), it is the mediator’s responsibility to reduce the agreement to writing.

Click here to read a sample A mediated dispute generally lasts about a day and the mediator typically set of mediation rules used by charges about $250/hour. These costs are usually split between the ADR Services. disputing parties. 

Note as of January 2016: CAR® offers a mediation program through the CAR® Real Estate Mediation Center for Consumers. The administrative cost is $200, to be split by the parties. Mediation fees are $150 per hour for the first two hours and at the mediator’s published rate thereafter. (Source)

1.2.2.2.3 SMALL CLAIMS COURT

If you have ever watched Judge Judy you know a little something about Small Claims Court. You know that (1) the justice in Small Claims Court is far from perfect, (2) it is very fast and cheap, (3) it almost always is final. Small Claims Court can only be used by individuals seeking monetary damages of $10,000 or less and by businesses seeking $5,000 or less. The cost for filing a claim ranges from $25 to $75 depending on the size of claim (source). Only the principals of the dispute may appear before the judge; paid representatives, attorneys in particular, may not represent their clients before the judge (but an attorney may be consulted by any party outside the Nolo books are courtroom) (source). fabulous.

Page 10 2016 45HoursOnline, All Rights Reserved Consumer Protection Reader, 2016 Edition If a sole proprietorship sues or is sued, its owner must appear in court; if a partnership sues, a partner must go to court; if a corporation sues, one of its employees, officers, or directors must go to court. Exceptions are made for plaintiffs in the armed services and for a business when a claim can be proved by evidence of a business account in which case a regular employee with knowledge of that account may represent the business (details). You can file as many claims as you want for damages of up to $2,500 each but you can only file two claims in a calendar year that ask for damages between $2,500 and $10,000.00.

California used to have Municipal Small Claims Court cannot be used to obtain equitable relief; that is to Courts. These courts handled obtain any form of restitution other than a money award. For example, you medium sized disputes -- disputes of $25K or less. But Municipal may not use the Small Claims Court to enforce a contract or to obtain an courts were eliminated in 1998 by injunction. The only other State court in which plaintiffs can seek relief is Proposition 220 to save money by Superior Court which is considerably more complicated than the Small merging them into the Superior Claims Court. Due to budget cuts of 30% to California’s judicial system Courts (source). beginning in 2012, civil litigation takes considerably longer than it did before (source).

The CAR® Purchase Agreement provides for binding arbitration for disputes between the buyer and seller (not their brokers) providing both the buyer and seller have initialed the Agreement’s Arbitration of Disputes provision. The provision provides an exception for disputes taken to Small Claims Court. The key advantages of taking your dispute to Small Claims Court compared to Superior Court are speed and economy. Disputants in small claims actions have subpoena power. This power provides the right to demand documents and compel witnesses to appear at trial. Monetary judgments awarded by Small Claims Court are indistinguishable from judgments awarded by Superior Court (or by an arbitrator). As with any money judgment, the courts will not help you collect it. However, as a judgment creditor, you are entitled to use all the legal powers available to attorneys and collection agencies to compel collection of your judgment: real estate liens, writs of execution, till taps, bank levies, and so on. A further advantage of settling your disputes using Small Claims Court is that once the judge decides it, your dispute is almost always finally resolved. If the plaintiff loses, he cannot appeal; defendants may appeal to Superior Court but if their appeal is found frivolous the Court may award the original plaintiff up to $2,000 for attorney’s fees and other related expenses. CAR® provides a very detailed (110 pages) “how-to” guide for resolving disputes using the small claims courts, Small Claims Court Assistance Manual for REALTORS® and Their Clients: Helpful Hints for How to Make Your Case in Court

2016 45HoursOnline, All Rights Reserved Page 11 Consumer Protection Reader, 2016 Edition Nolo Press (Nolo.com) is a godsend for anyone wishing to navigate the legal system without representation. It offers a wide selection of books to explain various legal processes to lay readers. Of particular relevance are How to Collect When You Win a Lawsuit and Everybody’s Guide to Small Claims Court in California. An excellent free document about the Small Claims Court is available from the Department of Consumer Affairs of the State of California, The Do’s and Don’ts of Using the Small Claims Court .

1.2.2.3 FORMAL

1.2.2.3.1 ARBITRATION “The existing judicial system is too costly; too painful, too destructive, too inefficient for a truly civilized people. … Reliance on the adversarial process as the principal means of resolving conflicts is a mistake that must be corrected. For some disputes, trials will be the only means but for many claims, trial by adversarial contest must in time go the way of the ancient trial by battle and blood.” – Late Supreme Court Chief Justice Warren E. Burger Arbitration is free-market justice; justice you pay for. But because arbitration is usually faster, quicker, and less formal than civil litigation and because decisions obtained through arbitration are almost always final; arbitration is usually much less expensive than public justice from a public court of law with the notable exception of Small Claims Court. Unlike public justice, where all documents and proceedings are open to the public, arbitration is 100% private. No one other than the disputing parties need know the outcome of a dispute if resolved via arbitration, not your clientele, not homeowners in your farm, not other licensees in your community, and certainly not CalBRE.

In arbitration, the party making a In arbitration, the disputants  select a neutral arbitrator and agree to abide claim is the “claimant;” the party by the arbitrator’s decision. Arbitration is not only faster, cheaper, and less responding is the “respondent.” burdensome than civil litigation; the arbitrator, unlike a judge in Superior Court, is ordinarily an expert in real estate law (but the disputants may choose anyone as their arbitrator).

There is one significant disadvantage to arbitration. Arbitration awards are almost always final. Unless you can prove the arbitrator was corrupt, incompetent, exceeded his authority, refused to hear material evidence, or failed to recuse himself for good cause; you are stuck with his decision. Even if your arbitrator is a mullah and made his decision based on Sharia Law, you may not appeal. The arbitration called for in CAR® contracts is contractual and binding. Evidentiary and procedural rules are relatively informal. Parties are granted pre-hearing and discovery rights.

A contempt order is issued by a The right to subpoena is issued and signed by the arbitrator. The arbitrator court when a person or an entity has the power to order discovery and impose the same liabilities, sanctions, is in contempt of court, meaning they have willfully challenged, and penalties as a court of law (except a contempt order ). The arbitrator ignored, or been disrespectful of decides admissibility, relevance, and materiality of the evidence offered. the court’s authority. (Source) The arbitrator must proceed according to the dictates of due process, treat all parties fairly, and admit all relevant testimony and evidence. Disputants may be represented by an attorney.

Page 12 2016 45HoursOnline, All Rights Reserved Consumer Protection Reader, 2016 Edition As a general rule, attorney fees are not recoverable unless terms in the contract provide for recovery of such fees. The arbitration clause in CAR® contracts provides for recovery of attorney fees by the prevailing party in any action, proceeding, or arbitration; however, this is only true if the prevailing party first attempted to resolve the dispute through mediation; otherwise CAR® contracts state that the prevailing party is not entitled to recover his attorney fees. Remedies which may be awarded by the arbitrator are specific performance, compensatory damages, punitive damages, injunctions, and declaratory relief. 1.2.2.3.2 LITIGATION

Dispute resolution by civil litigation is awful. Civil litigation is expensive, lengthy, stressful, disruptive, and uncertain. Nevertheless when the litigated matter is truly important, when the disputants are irreconcilable, when the stakes are high, and when money is of no object; dispute resolution via civil litigation is the best and fairest means of justice available. Here is how civil litigation works …

First, the easy part: The plaintiff files a “complaint” against one or more defendants and has each served with the complaint. (Someone, often the sheriff, hands the written complaint to a defendant.)

The complaint, as with all aspects of civil litigation, is highly formal. It must cite recognized “causes of action” (e.g., “negligent misrepresentation”, “fraudulent concealment”), cite supportive allegations, and “pray” for relief usually quantified as monetary damages. Most complaints are fashioned from boilerplate, modified by attorneys, naming anyone conceivably liable for their client’s injuries. Attorneys take special care to name defendants (1) that have pockets deep enough to pay for their plaintiff’s damages, (2) who may be willing to settle out of court in exchange for having their name dropped from the complaint, or (3) have insurance policies with high liability limits.

You need to understand just how easy it is for someone who knows the Online services (example) local court rules and has a sample book of pleadings to file suit . It costs provide cookbooks of sample complaints in Word format. about $370 to $435 to file the complaint with the court (source ) and about $40 per defendant for the sheriff to serve it (source).

Most complaints (aka, Statements of Claim) “pray for relief” in an extortionate amount. Most of these pleadings are hyperbolic screeds which allege any and every conceivable wrongdoing the client and his attorney believe they have any chance of proving in court. The psychological strategy used to craft the complaint is “shock-and-awe.” Often its objective is to frighten the defendants into quickly settling out of court to avoid ruinous legal expenses. If you are served with a complaint, you need to respond – usually within 30 days – otherwise the plaintiff can seek a default judgment from the court in the full amount of his claim.

When served with a complaint, your first thought will be to move to Mexico. 2016 45HoursOnline, All Rights Reserved Page 13 Consumer Protection Reader, 2016 Edition Your second thought will be to find an attorney to be your champion. Any attorney you approach will demand a retainer to draft an “answer” or to seek an immediate settlement with the plaintiff’s attorney. The retainer is likely to be in the range of $5K to $10K. At a rate of about $250/hour, $10K buys Click here ► to listen to a you 50 hours of your attorney’s time. Your attorney bills you for every humorous and musical look at minute spent on your case; say “hello” and he will charge you for a quarter billing from the attorney’s hour – his minimum billing unit . When your retainer has been depleted, perspective. he will request another advance – and so on until you settle the case or, more likely, run out of money.

In rare cases, a judge will demand If you know your plaintiff’s case is without merit, you might harbor fantasies that a plaintiff pay the defendant a of retaliating with a counterclaim alleging “abusive process” and/or hefty fine for having brought to his court a meritless lawsuit. You can “malicious prosecution.” You cannot! Both causes of action require the read about such a case in the case on which it is based to be first decided by a court in your clear favor below article, “Meritless Lawsuit before you can file a complaint alleging either claim. And even if you should Against Agent Draws Sanctions.” prevail and file suit alleging either claim, the evidentiary bar required to support them is so high that your chances are, practically speaking, zero .

Assuming you can find an attorney and can afford his retainer, your attorney has a number of ways he can respond: (1) he can file for an extension, (2)

Answer: A written pleading by he can challenge the legality of the complaint (a “demurrer”), (3) he can file which the defendant responds to different types of motions to delay or stop (“quash”) the complaint, (4) he the plaintiff’s complaint. can answer  the complaint, or (5) he can file an answer with a cross- complaint (or “countersuit”) thereby calling and raising the ante for you and your plaintiff.

After you file your answer, next comes the “discovery” period during which your plaintiff may take all the time in the World to “discover” the evidence needed to support his case. Everything discovered by your plaintiff becomes a matter of public record which anyone can access (many jurisdictions are online). At any time your plaintiff may amend his complaint compelling you to answer with your attorney’s help at his usual fee. Eventually, if the case is not settled or dropped, it may come to trial. If the claim includes money damages, you and your plaintiff can agree to a “bench trial” or a “jury trial.” If you choose a “bench trial,” a judge will hear the evidence and decide your case; otherwise, a jury will decide your case. Your plaintiff’s burden-of-proof is minimal; all he has to do to prove an allegation is to convince the trier-of-fact (judge or jury) that his allegation is more likely true than that it is not true. It comes as a surprise to many people that many attorneys who specialize in civil litigation have no trial experience . Why? Because the time and money required to prepare for and conduct the trial is so expensive that few litigants can afford to do so. For fiscal year 2013-14, Superior Court resolved 193,190 unlimited civil cases (cases where the amount in controversy is over $25K). Of these 19% went to trial. For limited cases, 6.5% of the 486,597 went to trial. (Source ) (NOTE: Limited civil cases follow simplified rules compared to unlimited civil cases.)

If you have to go to court, you will find it a nasty place. Most litigants are half mad from years of frustration after having suffered ruinous legal expenses. The court personnel, including judges, have been made surly and cynical from constant stress. On the other hand, your attorney is in his element and is earning your money. The judge treats you as if you were his ignoble subject and expects you to treat him as if royalty . Woe to you should you fail to address the judge as “your Honor” or remain seated when he swaggers into his courtroom. Show him any sign of disrespect, real or imagined, and he may find you “in contempt of court” and impose upon you a fine or even time in jail. In civil cases the standard of proof is “a preponderance of the evidence.” What does this mean? It means that if the trier-of-fact (judge or jury) Judge Judy is the Queen of Hearts of her court room. believes your plaintiff is just even slightly more right than are you, then the trier-of-fact will find for your plaintiff.

The jury usually consists of 12 members, many of whom will be postal workers, government employees, and pensioners. To be found liable (the term “guilty” does not apply to civil cases), three fourths of the jury must agree find for the plaintiff. Juries on civil cases cannot hang. After the trier-of-fact renders its decision, after you have spent tens if not hundreds of thousands of dollars in legal expenses, it still is not over! Either party may appeal. Even a prevailing plaintiff may appeal if he regards the damages awarded to him as insufficient. An appeal must be based on either a procedural error or a serious error in the application of the law; that is, a procedural error that could have affected the outcome. These are called “reversible errors.” Reversible errors include (1) erroneously instructing the jury on the law, (2) permitting improper argument by an attorney, and (3) the improper admission or exclusion of evidence. An appeal is not a new trial – no new evidence is heard or old evidence challenged. The facts of the case cited in the appeal must be from the original court transcript (available for a fee from the court stenographer). It is also usually a requirement that the legal errors alleged by the appellant must have been challenged when they occurred during the trial.

The appeal is a written document based on the trial transcript. It provides a legal argument for setting aside the original judgment. If the appellate court Very few civil cases between believes your appeal has no merit, it “affirms” the lower court’s decision private litigants ever make it to thereby letting the decision of the lower court stand. Should this occur, the the California Supreme Court. appellant may appeal to a higher Court of Appeal. The last stop for a state- Those that are accepted for review must involve unsettled and litigated case is usually the California Supreme Court  ; the last stop in a important issues of California law. federally-litigated case is the U.S. Supreme Court. If a Court of Appeal agrees to hear your case, it listens to oral argument and renders its decision – usually many months later. It is from these decisions that the common law evolves. Ultimately one party will prevail and a judgment will be issued by the court. If the judgment includes a cash award, more legal maneuvering may be required to collect it.

Often judgment debtors, when faced with a demand to pay a large award,

2016 45HoursOnline, All Rights Reserved Page 15 Consumer Protection Reader, 2016 Edition file for bankruptcy to discharge the judgment. (Money judgments for The homestead exemption in personal injuries may not be discharged through bankruptcy). Before Florida is unlimited. This means that a bankrupt with 20 million declaring bankruptcy, impending bankrupts may divest their assets into safe dollars of equity in his Florida harbors such as offshore banks, precious metals, and homesteads in mansion may keep his mansion Florida . Bankruptcy usually defeats the judgement creditor. after discharging his debts (source). Said Robert Bass in a column written for RealtyTimes.com:

I can confidently speak for countless litigators who will tell you that litigation is misery… it is the worst way to resolve disputes. Alas, it is also the best system that mankind has been able to come up with. (source).

1.2.2.4 CALBRE’S LICENSE DISCIPLINE

CalBRE’s primary mission is to protect the public in real estate transactions. In pursuit of this mission, CalBRE enforces the Real Estate Law and disciplines its violators. In the below subsections we describe how CalBRE learns of misconduct, its

BRE’s Logo and Moto disciplinary powers and procedures.

1.2.2.4.1 REPORTS OF UNLAWFUL CONDUCT Violations of the Real Estate Law come to the attention of CalBRE in several ways. Principal among these are written complaints from disgruntled clients (CalBRE form 519A ). CalBRE receives from 8K to 10K complaints a year. As of January 2012, CalBRE is likely to receive even more reports of unlawful conduct from licensees themselves! On this date a new law took effect (BPC §10186.2) which requires any licensee indicted or convicted of a crime (felony or misdemeanor) or sanctioned by any licensing authority from any state to report his conviction or sanction to CalBRE. Failure for a licensee to self-report any such conviction or sanction within 30 days of when it is imposed is in itself a violation of the real estate law for which CalBRE may restrict or revoke the offender’s license. As a result of this law, a California licensee convicted in Idaho for soliciting a prostitute must report his conviction to CalBRE. Or a California real estate licensee who is also a licensed home inspector in Texas and who has been fined by the Texas Real Estate Commission for a home inspection violation must report the Commission’s fine to CalBRE. When CalBRE receives a self-report of wrongdoing, CalBRE decides if the incident warrants an investigation. Another way for you to gain the unwanted attention of CalBRE’s Enforcement Department is for your former client and judgment creditor to file a claim against CalBRE’s Recovery Account. Clients with uncollectible judgments against their brokers may collect up to $50,000 from this fund. It is funded in part through your license renewal fees and by fines paid to CalBRE by licensees.

Page 16 2016 45HoursOnline, All Rights Reserved Consumer Protection Reader, 2016 Edition Enforcement Advocacy Program In 2011, CalBRE announced its “Enforcement Advocacy Program.” This program attempts to resolve minor disputes between consumers and licensees to avoid the need to conduct formal investigations. 1.2.2.4.2 NEWLY ACQUIRED ENFORCEMENT POWERS

CalBRE also approves From CalBRE’s inception in the 1920’s to 2012, CalBRE had but two ways subdivisions, regulates pre-paid to discipline violators of the Real Estate Law: (1) The power to issue desist- rental listings, and oversees HOAs with unsold units. and-refrain orders, and (2) the power to grant, suspend, restrict, and revoke licenses (called “license discipline”).

A desist-and-refrain order is a formal warning that CalBRE will commence legal action unless the recipient ceases his violation of the Real Estate Law. Legal action may consist of license discipline, a fine, or a referral of the violator’s name to the State Attorney General for possible prosecution. As if July 2012, CalBRE’s enforcement powers were significantly extended by SB 53 . CalBRE now has the authority to: 1. levy fines up to $2,500 on offenders of the Real Estate Law and deny license renewal should the offenders fail to pay, Administrative subpoena: An 2. go directly to Superior Court for an order to enforce an order compelling an individual to provide a state or local administrative subpoena , administrative agency with proper 3. release details of its ongoing investigations to the public, and information (source). 4. access DMV records.

SB 706 also provides CalBRE with additional enforcement powers by allowing it to: 1. request that an administrative law judge direct a licensee found to have violated the Real Estate Law to pay the costs associated with the investigation and enforcement action. 2. charge a licensee, who has been issued a restricted license, a fee for the costs associated with monitoring that licensee while he is on restricted status. 1.2.2.4.3 BURDEN-OF-PROOF IN CIVIL AND ADMINISTRATIVE LAW BPC §10176 gives the Commissioner the power to investigate complaints from your clients and, if he determines that you violated the Real Estate Law, to suspend or revoke your license: … the Commissioner may, upon his or her own motion, and shall, upon the verified complaint in writing of any person, investigate the actions of any [licensee and] … may temporarily suspend or permanently revoke a real estate license at any time …

Should your client prevail in a lawsuit against you, the Commissioner may not use the civil court’s finding of liability to justify a restriction to your license. This is because the burden of proof needed by the Commissioner to justify a license restriction is considerably higher than that used by a civil court to make a finding of liability.

2016 45HoursOnline, All Rights Reserved Page 17 Consumer Protection Reader, 2016 Edition Suppose the following: Your buyer sues you and your seller for unlawful discrimination claiming you refused to sell to him because he had children. Eventually he prevails in court and trier-of-fact makes a finding of liability against you. Afterwards you buyer reports his successful outcome to the Commissioner in a written complaint of your wrong doing in which he cites the same facts he presented at your civil trial. Since discrimination based on familial status is also a violation of the Real Estate Law (CR §2780), it would be likely that the Commissioner would take an interest in the buyer’s complaint. But the Commissioner could not use the finding of liability against you to justify disciplining your license since the burden-of-proof the Commissioner is required to follow in order to justify license discipline is considerably more rigorous than the burden-of-proof standard required by a civil court to make a finding of liability against you. The burden-of-proof standard required by a civil court is “by the preponderance of the evidence.” This is the least rigorous burden-of-proof standard possible. This standard requires only that the plaintiff show it is more likely that his allegations are true than that they are not. The burden- of-proof standard required of the Commissioner – who must follow Administrative Law – is considerably more rigorous: it is “by clear and convincing evidence to a reasonable certainty.” (Source) Therefore, when the Commissioner becomes aware that a licensee has been found liable in civil court for a wrong-doing which is also a violation of the Real Estate Law, the Commissioner must conduct his own investigation and find “clear and convincing” evidence that you were in violation of the Real Estate Law. The reverse is true when a licensee is found guilty of a crime “substantially related” to real estate brokerage. Fraud would almost certainly be substantially related but the crime of drug possession would probably not. . In a critical 2009 report of an audit of CalBRE (then the DRE) conducted by California’s Legislative Analyst’s Office, the report questioned the appropriateness of the “clear and convincing” standard used by the Commissioner to justify license discipline. The report argued that the standard was appropriate only for licensees requiring many years of academic preparation (i.e., doctors, attorneys) and not to real estate salespersons who require only nine hours of college-level education in real estate topics. They argued that the lower standard used in civil cases is the appropriate standard; that is, “preponderance of the evidence” (source). A short video (<4 minutes) summary of the audit can be found here ►. Licensees concerned about their Since the burden-of-proof standard used in a criminal proceeding is criminal record may find answers considerably more rigorous than the standard used by the Commissioner in this CalBRE document, “FAQs about Background Reviews and (“beyond a reasonable doubt” vs. “by clear and convincing evidence”), all Screenings ... ” the Commissioner must show to justify discipline based on the conviction is that the licensee’s crime is “substantially related crime” to real estate brokerage.

Summary: If you are found liable for fraud in a civil court, the Commissioner may not use that finding to discipline you (source). (However, he could use the evidence cited in the complaint or produced at trial as a foundation for his own investigation). If, on the other hand, you were found guilty of fraud in a criminal court, the Commissioner could use your conviction to justify revocation or suspension of your license. The

Page 18 2016 45HoursOnline, All Rights Reserved Consumer Protection Reader, 2016 Edition reason for this difference is that the burden-of-proof used for a criminal conviction for fraud is substantially more rigorous than that used by a criminal court to make a finding of liability for fraud (“beyond a reasonable doubt” vs. “by clear and convincing evidence”). 1.2.2.4.4 DISCIPLINARY PROCESS If CalBRE should bring an action against you, possible outcomes are “no action” or a written …

Recently, CalBRE has put most of 1. public reproval in which you are censured, rebuked, or reprimanded its disciplinary documents online in the form of PDF files. A by CalBRE . displinary document may be 2. Desist and Refrain Order describing the results of CalBRE’s accessed from a licensee’s record investigation together with its demand that you desist and refrain by clicking it's ‘H’ number. Licensee records may be from specified acts. accessed from CalBRE's License 3. an “Accusation” of wrong-doing. Lookup site. For example, here is the record for a fraudster recently in the news. The Accusation describes the particular facts that form the basis for the disciplinary action sought by CalBRE together with a demand for an administrative hearing in which to impose that discipline.

You may avoid the hearing by accepting disciplinary sanctions or you may negotiate with CalBRE. If you negotiate and reach an agreement, the agreement is described in a document called the “Stipulation and Waiver.” If you cannot reach an agreement, you may elect to defend yourself in a formal administrative hearing. To notify CalBRE that you object to their proposed resolution, you must file a “Notice of Defense.” In response, CalBRE will schedule a formal administrative hearing.

The administrative hearing process is conducted in accordance with the California Administrative Procedure Act found in the Government Code commencing at §11370. This process has its own rules and jargon peculiar To find attorney’s who specialize to this body of law. These rules permit you to (1) be represented by an in defending licensee’s from attorney , (2) require CalBRE to prove its allegations with “clear and CalBRE accusations, query convincing proof to a reasonably certainty” (a much stricter burden-of-proof “California bureau of real estate than for civil cases), (3) follow formal rules for the admission of evidence, defense lawyers”. and (4) require hearings conducted by an administrative law judge.

After the formal hearing the judge issues a “Proposed Decision.” This document contains findings of fact, discusses mitigating and aggravating factors, provides legal conclusions, and may specify recommended disciplinary actions. The Commissioner may choose to adopt, reject, or reduce the recommended disciplinary actions of the Proposed Decision. If the Commissioner considers changing the recommendations, he must first read the hearing’s full transcript and review the administrative judge’s decision; then, if the Commissioner still wishes to change the recommendations, he must do so with a document called the “Decision After Rejection.” If the Respondent is not satisfied with the Commissioner’s decision, he may petition the Commissioner to reconsider or he may exercise his right of appeal to the Superior Court, California Courts of Appeal, or even to the California Supreme Court.

1.3 DEFENSIVE REAL ESTATE

Here we describe techniques to reduce your risk of developing a serious dispute with your client or, should such a dispute occur, to eliminate or mitigate your liability in the dispute. We have organized these risk reducing practices into four categories: 1. Risk Avoidance: Is any action taken to avoid a risk. Examples are (1) declining dual agency, (2) “firing” a troublesome client, and (3) refusing to take a listing from an devious seller. 2. Risk Reduction: Is any action taken to reduce the severity of a loss. Actions in this category include (1) providing a complete and accurate TDS, (2) obtaining a competent home inspection, and (3) frequent communication with one’s client. 3. Risk Retention: Is any action in which you accept a risk with a mitigation plan should it occur. Examples in this category include self-insurance and incorporation. 4. Risk Transfer: Any action taken to shift risk to someone or some other entity. Examples include (1) the purchase of general liability insurance (shifting risk to the insurance company), (2) deferral to experts (shifting risk to the expert), and (3) warning your client of the possible consequences of an action he proposes (shifting risk to the client).

1.3.1 RISK AVOIDANCE

Some business is just too risky and, therefore, should be avoided. In this sub-section, we describe two business situations which can be very risky: (1) representing both sides of a residential transaction (dual agency); and (2) representing a vexatious client (a client with a propensity to sue). Of course exceptions should be made depending on factors such as the expected gain, the degree of risk, and opportunities for mitigating the risks.

1.3.1.1 AVOID DUAL AGENCY

“REALTORS® urge exclusive representation of clients…” – Preamble to NAR®’s Code of Ethics This section assumes dual agency is disclosed. Undisclosed dual agency is a serious violation of both the common law of agency and the Real Estate Law. CAR®’s Residential Listing Agreement permits the listing broker to unilaterally elect dual agency: Possible Dual Agency With Buyer: Depending upon the circumstances, it may be necessary or appropriate for Broker to act as an agent for both Seller and Buyer, exchange party, or one or more additional parties (“Buyer”). Broker shall, as soon as practicable, disclose to Seller any election to act as a dual agent representing both Seller and Buyer. If a Buyer is procured directly by Broker or an associate-licensee in Broker’s firm, Seller hereby consents to

Situations leading to dual agency include:  A listing agent finds and represents the buyer.  A buyer’s agent finds and represents a seller (usually a FiSBO). See the below article, “Dual  The listing agent and the buyer’s agent work for the same broker . Agency Under Scrutiny” to read how a lawsuit which resulted from this form of dual agency may lead This last situation is sometimes referred to as “designated agency”  – a to a law which outlaws all forms of misleading term used to give the buyer the illusion he has his own advocate dual agency. but, because the same brokerage controls both ends of the transaction; the client’s agent is, in fact, a dual agent.

For most transactions facilitated by dual agents, it should be expected that the risk assumed by the dual agent is greater than the combined risks that would have been assumed had single agents handled each side of the transaction. The risk is greater because when one agent represents both the seller and buyer, it becomes likely that one or both will come to believe over the course of the transaction that his agent favors his counterpart or that the dual agent is more committed to his own interests than to his. In California, dual agency is permitted by statute: A real estate agent, either acting directly or through one or more associate licensees, can legally be the agent of both the Seller and the Buyer in a transaction, but only with the knowledge and consent of both the Seller and the Buyer.

In a dual agency situation, the agent has the following affirmative obligations to both the Seller and the Buyer: (a) A fiduciary duty of utmost care, integrity, honesty and loyalty in the dealings with either the Seller or the Buyer. (b) Other duties to the Seller and the Buyer as stated above in their respective sections.

In representing both Seller and Buyer, the agent may not, without the express permission of the respective party, disclose to the other party that the Seller will accept a price less than the listing price or that the Buyer will pay a price greater than the price offered (CC 2079.16).

Dual agency is especially risky when your seller’s home is overpriced because by statute (see above) and by NAR®’s Code of Ethics you are forbidden from helping the buyer reduce the seller’s price. After a buyer learns he has overpaid, he may conclude that you colluded with your seller to his disadvantage. Resentment leads to dissatisfaction which leads to disputes.

The Pareto principle  predicts that 20% of all clients create 80% of all disputes. You should be keen to identify and possibly fire any client in the troublesome 20%. These are the clients who miss appointments, constantly complain, argue for simplistic solutions, take criticism badly, tell you how to conduct your business, and who sincerely believe that “it never hurts to ask.”

These troublemakers may be nice or disagreeable but they are always difficult to please – demanding you lower your commission, pay for repairs, and support their deceptions. Often they show disrespect for both you and your profession. You should fire these vexatious clients . Write ‘CANCELLED’ across their listing and give it back to them. What are they going to do? What are their damages? You are the one who is out of pocket for the time and money thus expended. Refusing to do business with someone is only illegal if based on a protected class such as race or disability. Said Robert Bass, an Arizona real estate attorney, the “last time I looked, disagreeable SOB’s are not a constitutionally protected class!” (quoted from “How to Fire a Client” by Blanche Evans) Psychologist Martha Stout, who has been a clinical instructor in psychiatry at Harvard Medical School for 25 years, estimates in her book The Sociopath Next Door that as many as 4% of the population are conscienceless sociopaths; that is, individuals incapable of having empathy or affectionate feelings for humans or animals. A sociopathic seller could be expected to have no qualms about concealing defects, not paying your commission, or suing you based on made-up “facts.” (See this article for 11 ways to spot a sociopath.)

1.3.2 RISK REDUCTION

Risk reduction techniques reduce the probability or severity of a risk. The most important risk reduction tool for agents is the home inspection. It is of such importance that we give it its own section. Other less prominent risk reduction techniques are described below.

1.3.2.1 CONTRACT FAMILIARITY

You should be very familiar with three standard contracts: (1) your listing contract (CAR® Form RLA), (2) your buyer broker representation agreement (CAR® Form BR); and (3) the purchase agreement between your seller and buyer (CAR® Form RPA-CA). Of these three, the purchase agreement is by far the most risky.

Although the purchase agreement is signed by the buyer and seller (you are not party to it), should a dispute arise after your principal signs the

Page 22 2016 45HoursOnline, All Rights Reserved Consumer Protection Reader, 2016 Edition agreement it is likely that your principal will blame you for your failure to protect him. CAR® provides a good explanation of this document in its The most frequently used purchase agreement is the California Residential publication, Your Guide to the Purchase Agreement and Joint Escrow Instructions . The current California Residential Purchase Agreement. It is available for version (11/2014) is ten pages of turgid prose in small type. It cross ® purchase here. references about twenty other CAR forms.

1.3.2.2 TRANSACTION FILE

When asked what role agents play in creating conditions for a lawsuit, Bill Hurlbutt, a senior executive with a major E&O carrier says, “It’s not so much that agents do the wrong thing; it’s that they can’t prove that they did the right thing.” (Bob Read, Risk Hotline for Real Estate (Classic Day Publishing, 2005), Pg. 244)) To prove you did do the right thing, you need good documentation for your sales activities. The repository of your documentation is the transaction file (aka, “sales file”). This file should contain all documents, notes, and pictures related to a given transaction. As such it should include:  a checklist,  copies of all legal documents,  all advertising copy,  all significant written communication (letters, emails, contemporaneous notes),  telephone call logs,  fax confirmation sheets, and  photos of the property.

The “transaction file” need not be a single folder, notebook, or database; instead, its contents may be distributed among many sources; for example, photos in the cloud, contracts in a file cabinet, emails on your PC. You needn’t waste your time organizing each transaction file; that step will only be needed if the transaction comes back to haunt you; that is, if your client subsequently claims that because you didn’t do your job he incurred damages for which you owe him compensation. As you drop notes and other documents into your client’s transaction file, always keep in mind that should you be sued, the file will almost certainly be subpoenaed by your client’s attorney. For this reason, never place any document into the file that could prove embarrassing if read in open court. Personal Story: Many years ago I took the buyers of my business to arbitration for breach of contract. At the hearing, the buyer’s attorney called me to the stand. She asked if I had ever written a nasty letter to a client. I said truthfully and with conviction, “never!” “Are you sure?” she asked. I replied “absolutely!” She then produced a nasty letter I had written to a former client. I was stunned. Immediately my attorney advised me to drop the case to avoid punitive damages. I did. When you make your visual inspection, consider taking photos of your seller’s home and neighborhood and be sure your digital camera’s time- stamp feature is ‘ON.’

2016 45HoursOnline, All Rights Reserved Page 23 Consumer Protection Reader, 2016 Edition All transaction files should include a completed checklist showing the date each required activity was completed. If any of the activities on the list were omitted, take care to provide an explanation for each so that their omission cannot be construed as negligence. An excellent step-by-step guide for maintaining the transaction file is published by CAR®, The Residential Real Estate Transaction Guide . Retention of Records According to CalBRE’s Broker Compliance Evaluation Manual : A licensed real estate broker shall retain for three years copies of all listings, deposit receipts, canceled checks, trust records, and other documents executed by him or her or obtained by him or her in connection with any transactions for which a real estate broker license is required. The retention period shall run from the date of the closing of the transaction or from the date of the listing if the transaction is not consummated. After notice, the books, accounts, and records shall be made available for examination, inspection, and copying by the commissioner or his or her designated representative during regular business hours; and shall, upon the appearance of sufficient cause, be subject to audit without further notice, except that the audit shall not be harassing in nature. This subdivision shall not be construed to require a licensed real estate broker to retain electronic messages of an ephemeral nature, as described in subdivision (d) of Section 1624 of the Civil Code. (BPC §10148) The sentence in the above citation which exempts “electronic communications of an ephemeral nature” was added and made law in July 2014 by AB 126. It exempts licensees from having to retain ephemeral documents such as text messages, tweets, and posts. (See the below article, “Agents Needn’t Keep Ephemeral Documents.” for more details.) Although CalBRE regulations require you to maintain your transaction files for three years, we recommend a much longer retention period. Actions may be brought against you three years after the date your client claims to have discovered your negligent misrepresentation or three years after he should have discovered it. For example, if you represented your client’s roof as new and completely waterproof in April 2016 and then, following a two-year drought, a heavy rain in April 2016 resulted in extensive water damage to the buyer’s home, he would have until April 2019 to bring suit against you for having misrepresented the condition of the seller’s roof. According to Barbara Nichols, a Los Angeles risk management expert: … the best advice is to keep all transaction files for at least five years and major contracts, such as the listing agreement, purchase contract, and disclosure forms for 10 years. (Source)

She offers this test for determining if any transaction file is complete: … ask yourself, “If I’m sued and an attorney subpoenas this file, does it contain everything I need to prove I did everything right?”

Because you have a duty to protect your client, you should review all important documents for red flags; that is, you should be alert to any disadvantageous findings or statements not consistent with your expectations. In particular, the documents you should scrutinize most carefully include the preliminary title report, the appraisal, and the home and termite inspection reports. In Field v. Century 21 Klowden-Forness Realty, 1998, the broker was found liable after the buyer discovered his land was rendered useless by an easement which permitted the local irrigation district to flood his land at any time. The preliminary title report stated “Easement in favor of local irrigation district … ” Either the buyer’s broker never saw the prelim, or read this matter-of-fact statement and failed to appreciate its significance.

1.3.2.4 COMMUNICATION

A common complaint from sellers about their agents is that agents do not return their emails or phone calls. There is no excuse for not maintaining regular contact with your clients when you have so many easy ways to do so: email, cell phones, text messaging, Facebook, twitters, faxes, and the good-old postal service. Agents should not fail to report inactivity since inactivity conveys meaningful information. Regular contact gives you the opportunity to find out what is on the mind of your client and to answer his questions and to allay his concerns. Of all the communication tools at your disposal, email offers the most advantages. It can be sent and replied to at any convenient time, it is time stamped, it can be easily copied or forwarded to many recipients, it can be searched and retrieved, you can add attachments, and it provides a permanent record. Email has disadvantages. Many people don't have the patience to read emails and so they don’t. Emails often fail to convey emotions, concerns, and other levels of non-verbal meaning that more effectively expressed verbally.

1.3.2.5 RISK MANAGEMENT POLICIES

As a broker, you are libel for the actions taken by your agents and their subagents when performing real estate transactions under your license. To minimize your risk, you should adopt written policies clearly stating the information you require from each associate. At a minimum you should specify:  the procedures that must be followed for each type of transaction,  a checklist for the contents of each transaction file,  a listing of activities which require your approval,  the proper use of personal assistants,  requirements for E&O insurance,

2016 45HoursOnline, All Rights Reserved Page 25 Consumer Protection Reader, 2016 Edition  requirements for attending seminars to keep licensees abreast of new laws and regulations,  your duty and right to closely supervise any transaction, and  your probationary policy.

1.3.2.6 CONTRITION

See www.SorryWorks.net for a A proven way to prevent or, at least, mitigate legal action is the simple act of site evangelizes contrition as a contrition – admitting you made a mistake and giving a sincere apology. means to reduce risk for health care professionals. The medical profession – a profession with even greater professional liability than real estate brokerage – embraces this risk avoidance technique.

By admitting your mistakes you motivate your client to reciprocate with empathy and honesty and, if the fault is not entirely yours, for him to admit how he may have shared blame. Often, disputing parties must trust one another before they can work out a mutually agreeable solution. While contrition may fail to reduce tensions, a show of indifference coupled with hostility is almost a sure guarantee to make matters worse.

1.3.3 RISK TRANSFER

Risk transfer techniques shift all or some portion of your risk to others.

1.3.3.1 DEFERRAL TO EXPERTS

If your client must resolve a question of material importance and you do not believe you are qualified to give him advice, refer him to an expert – but be sure that expert carries professional liability insurance. Of the many experts you may refer to your client, none is more important than the home inspector. By discovering all material defects that might otherwise be discovered by the buyer after escrow, he greatly reduces the risk that the buyer will become dissatisfied after escrow. For any material defect the home inspector misses and which the buyer discovers after escrow, you can always hope the buyer will hold the inspector responsible and not you. And if the buyer decides to sue for the undisclosed defect, you can also hope that he sues his home inspector and not you. Here is an example of an informal advisory suggesting that your client defer to an expert: To: [email protected] From: [email protected] Subject: Yesterday’s Walkthrough Dear Fred: … regarding the out-of-plumb deck posts we noticed yesterday. I believe this condition was caused by the eucalyptus tree’s expanding trunk which over time has pushed the deck aside. The seller informs me the tree was a sapling when he built the deck 20 years ago. But I could be wrong. Ground subsidence could have caused the posts to move. I recommend you consult a geologist or a structural engineer to evaluate the home’s foundation.

When working with others to complete a transaction, keep in mind the deep-pocket rule: In any civil action when several defendants share responsibility for an injury, the plaintiff will most likely choose to collect his entire judgment from the defendant with the highest net worth and/or the best insurance.

Consequently, you should ensure that everyone materially involved in your transaction has E&O insurance.

1.3.3.3 ADVISORIES

CAR® recommends you provide its Seller’s Advisory (Form SA) to sellers and its Buyer’s Inspection Advisory (Form BIA) to buyers. CAR®’s Seller’s Advisory underscores your seller’s responsibility to disclose every material defect afflicting the seller’s home. Their Buyer’s Advisory reminds the Buyer that he has the duty “to investigate the condition and suitability of all aspects of the property” and to seek the advice of experts concerning such matters as soil stability, geologic conditions, and structural integrity. You should realize that even when your clients read, understand, and initial these advisories, their acknowledgement does not exempt you from your duty to diligently protect your client’s interest using your knowledge and experience. In representing the buyer, your common law duty to disclose is well stated in Field v Century 21 Klowden-Forness Realty, 1998: [The buyer’s agent] is hired for his professional knowledge and skill; he is expected to perform the necessary research and investigation in order to know those important matters that will affect the principal’s decision and he has a duty to counsel and advise the principal regarding the propriety and ramifications of the decision.

1.3.3.4 INSURANCE

Insurance not only benefits you, it also benefits your client. When your client knows you have insurance, he knows that should you make an innocent mistake which costs him money, your insurance will make him whole. 1.3.3.4.1 PROTECTING YOURSELF You should consider purchasing three types of insurance: (1) E&O, (2) general liability, and (3) supplemental automobile. 1.3.3.4.1.1 E&O E&O insurance (aka, “errors & omissions insurance”, “professional liability insurance” and “malpractice insurance”) is designed to cover the legal expenses and damage awards for “goofs”; that is, negligent acts where the broker (or an associate) has inadvertently neglected to do something he should have done pursuant to rule or custom. As with most insurance policies, E&O policies are subject to a deductible, a policy limit, and exclusions. Most policies exclude:

2016 45HoursOnline, All Rights Reserved Page 27 Consumer Protection Reader, 2016 Edition  intentional acts,  acts performed outside the scope of agency,  personal injury,  suits alleging environmental damage (especially toxic mold),  fair housing violations (except, possibly, for defense),  commission disputes,  transactions for properties owned by the broker, and  issues pertaining to trademarks.

Typical claims covered are those alleging misrepresentation, failure to disclose, breach of duty, excessive compensation, conflict of interest, and failure to secure adequate pricing. With most E&O policies, the named insured is usually the brokerage with coverage extended to associates and personal assistants. Expenses covered include defense costs, judgments; and some policies even provide per diem costs for attending trials and hearings. In computing premiums, underwriters consider factors such as (1) extent of coverage, (2) number of associates, (3) experience of associates, (4) past volume of complaints and lawsuits, (5) years the broker has been in business, (6) use of written policies and procedures, (7) level of supervision, (8) sales volumn, and (9) extent of training. Most policies provide coverage on a “claims-made” basis rather than on an “occurrence” basis: A claims-made policy provides coverage for any claim made while the policy is in effect and which arises from an act made prior to the policy's “retroactive date.” The further back the retroactive date, the more expensive the policy. Suppose you purchase a claims-made policy on January 1, 2016 with a retroactive date of June 1, 2015. If in February of 2016 a client makes a claim for damages resulting from a misrepresentation you made when you sold that client a home in August 2015, then you would be covered. Had you sold the home in February 2015 (before the retroactive date), you would not be covered. An occurrence-based policy covers acts which took place during the coverage period. For example, if you held such a policy for just one year, say 2015, then if in 2016 you were hit with a suit which occurred in 2015, you would be covered.

According to NAR®, 80% of its members maintain E&O insurance. (Many states require their licensees to carry E&O but California is not one of them.) According to an article in RealtyTimes in April 2015, Ted Devine, CEO of an online insurance agency, “A typical E&O policy ranges from about $500 to about $900 per year.” Licensees with E&O should consider making their clients aware that they carry this insurance. On the one hand, some clients may be reassured that

Page 28 2016 45HoursOnline, All Rights Reserved Consumer Protection Reader, 2016 Edition should you make an innocent error that costs them money that you will be able to file a claim to make them whole. On the other hand, some clients may be more apt to sue you if they know you carry such insurance. The obvious drawback to E&O insurance is that it is expensive. A less obvious drawback is that E&O coverage attracts claims. Attorneys, who may charge $250 to $400 per hour, know their fees and their client’s claims will be paid if they can prove their case or motivate your insurer into settling out of court. They also know that if the claim amount is small, most insurers will pay the claim rather than incur the expense of researching the facts and defending the broker. To avoid becoming a magnet for claims, some small proprietors choose not to obtain E&O insurance. Instead, they choose to protect themselves by exercising great care, keeping a reserve from which to pay claims (self insurance), and limiting their losses to their business assets by incorporating their brokerages. 1.3.3.4.1.2 GENERAL LIABILITY INSURANCE General liability insurance is also Most E&O policies do not cover personal injuries which occur in the work known as a “business owner’s place; general liability insurance does. It covers the cost of defending policy.” personal injury lawsuits including investigations and settlements and bonds or judgments required during an appeal procedure.

Most general liability insurance policies have many exclusions. When choosing among policies, be sure you understand each of your policy’s exclusions and policy limits. Examples of typical exclusions: (1) legal expenses other than claims for bodily injury and property damage, (2) contract disputes, (3) failure to provide a safe workplace, and (4) back taxes. Many of these exclusions “dovetail” with other common and readily available coverages, such as business auto or workers compensation coverage which should be separately insured and are outside the scope of a general liability policy (source). Options provided with general liability policies include (1) umbrella insurance (liability coverage over and above the coverage afforded by the regular policy) and (2) special personal property floaters (aka, “endorsements”) for coverage of individual items of significant value. 1.3.3.4.1.3 AUTOMOBILE INSURANCE If you are driving clients on business, be sure to carry auto insurance which provides coverage for passengers who might be injured. 1.3.3.4.2 PROTECTING YOUR CLIENTS The more comprehensive your client’s insurance, the less likely he will take action against you should he incur unforeseen expenses related to a transaction. These events might include: (1) a buyer’s need to make an expensive repair to a home system which failed soon after his purchase, (2) a buyer’s discovery of an undisclosed lien on his new home, or (3) a seller’s liability for an injury suffered by a visitor during his open house. 1.3.3.4.2.1 HOMEOWNERS INSURANCE If you represent the seller, check to make sure he has homeowners insurance with personal liability coverage and theft protection before you agree to hold an open house. Should a visitor be bitten by your seller’s

2016 45HoursOnline, All Rights Reserved Page 29 Consumer Protection Reader, 2016 Edition dog, fall down his stairs, or walk through your seller’s sliding glass door, you will want the visitor’s claims to be paid from your seller’s homeowners insurance policy rather than from your own pocket. Should a lookyloo at your open house break an antique vase or abscond with your seller’s baseball card collection, you will want your seller’s homeowners insurance to cover his loss rather than risk being sued by your seller for negligence. Mortgage lenders nearly always require homeowners insurance to protect against the loss of the home held as collateral; except when the home’s land value exceeds the loan amount. If you represent a buyer who pays cash or makes a large down payment, recommend that he purchase homeowners insurance with a liability limit at least equal to the purchase price of the home. A standard homeowners insurance policy includes four essential types of coverage. They include: (1) Coverage for the structure of the home, (2) Coverage for the owner’s personal belongings, (3) Liability protection from lawsuits for bodily injury or property damage that you, your family members, or your pets cause to other people (4) additional living expenses in the event you are temporarily unable to live in your home because of a fire or other insured disaster. (See this page for details.) There are many forms of homeowners insurance. The most common is called an “all risk” policy also known as an “open perils” policy. An all risk policy covers all aspects of the insured’s home: its structure and its contents. It covers any liability that may arise from its daily use and it covers visitors who may be injured on the premises. 1.3.3.4.2.2 TITLE INSURANCE Title insurance: Insurance You should advise buyers paying cash or making large down payments to against loss from defects in title to purchase a homeowner’s title insurance policy and not a lender’s policy real property and from the invalidity or unenforceability of since the liability limit of a lender’s policy is only the amount of the loan while mortgage liens. Examples of the limit on a homeowner’s policy is the home’s purchase price. defects include unrecorded ® easements, boundary disputes, CAR ’s purchase agreement (Form RPA-CA, paragraph 13) requires that buyers be and forged deeds. provided a current preliminary title report and a CLTA/ALTA Homeowners Policy of title insurance. This policy offers enhanced coverage for losses resulting from post-policy forgeries , boundary disputes, transfers to trusts , and permit problems.

Post-policy Forgery: The homeowner is covered if someone forges the owner’s signature to a deed in an effort to sell or impose a lien or restriction on the owner’s home. Transfers to Trusts: Continuance of coverage should the original owner transfer his title to a trust for which the owner acts as trustee and lifetime beneficiary.

1.3.4 RISK RETENTION

Risk retention is the acceptance of a risk rather than insuring against its occurrence. Risk retention is warranted when the long-term cost of insuring against the risk is more than the expected losses from the risk.

Page 30 2016 45HoursOnline, All Rights Reserved Consumer Protection Reader, 2016 Edition Self-insurance for E&O is a good example of risk retention. In self-insuring, the broker accepts the risk of making professional errors and provides a reserve for mitigating the impact of such errors (e.g., payment to the injured party out of the broker’s reserve fund). All risks not avoided or transferred are retained.

1.3.4.1 HIGH DEDUCTIBLES

To save money on E&O and general liability insurance, consider purchasing a policy with as high a deductible as you can afford – the higher your deductible, the smaller your premium. If your brokerage has the means to withstand a $25K loss without injury to your business, consider purchasing insurance with a $25K deductible.

1.3.4.2 INCORPORATION

A good reason for incorporating your brokerage is to shield your personal assets from liability for business-related risks. If your brokerage is incorporated and should any of its employees (including you) injure a client through professional negligence, the injured party may only recover damages from your corporation’s assets and business income and not from your personal net worth or your individual income. To qualify for the corporate liability shield, its officers must follow strict rules informing and maintaining the corporation. If a plaintiff can prove these rules were not followed, he can “pierce the corporate veil” and recover damages from the owner’s personal assets. The corporate shield only protects for acts performed within the scope of business and not from intentional wrongdoing from the corporation’s agents or its employees. There are several legally-recognized types of corporations including C- corporations, S-corporations, and limited liability corporations (LLC). Each type has its own advantages and drawbacks. All types of corporations are expensive to maintain. One important drawback to incorporation is that a corporation as a defendant in a civil suit must be represented in Superior Court by a member of the State Bar. For example, if a client files suit against your corporation then you must retain an attorney to file your answer – you cannot file your answer in your own name. This restriction can make even the most minor or frivolous of law suits expensive.

1.4 HOME INSPECTION

According to Matt Farmer, associate general council for the Oregon Association of REALTORS®, 90% of risk problems in real estate stem from a disappointed buyer discovering defects after closing. When the problem stands to cost the buyer money, they will either blame the listing agent, saying, “you didn’t tell me such-and-such.” They will also turn to their own buyer’s agent and say “You weren’t diligent in protecting me.” (Bob Read, Risk Hotline for Real Estate (Classic Day Publishing, 2005), Pg. 145))

First we examine the most common “actionable defects”; that is, defects serious enough to lead to litigation. Then we take a quick look at the State- mandated disclosures. We follow with information useful for selecting and working with home inspectors. Finally, we describe proactive measures to reduce your risk from negligent non-disclosure.

1.4.1 ACTIONABLE DEFECTS

1.4.1.1 TEN MOST COMMON DEFECTS

Since any material defect discovered by a buyer after obtaining title is likely to become your problem, you should have a basic understanding of the common defects that, if undisclosed, may lead to litigation. The ten defects listed below are the most commonly reported by home inspectors.

1. Roofing Defects: Roofs develop leaks from aging and wear, insufficient flashing , or improper installation. Leaks can result in toxic mold, pest infestations, and wood rot and, if not repaired, may eventually destroy the home. A seller who lists his home near the end of California’s annual nine month drought (March-November) may be unaware that his roof has leaks . Even if he sells his home during or after the rainy season, he may be unaware of small leaks if the previous season’s rain was infrequent and light as it often is in Southern California.

See this video ► to see how to If, when a home is sold, there hasn’t been a heavy rainfall for more conduct a water test. than a year, buyer’s agents should consider recommending to their clients that they pay for a “water test” to check for roof leaks in their prospective home. This test requires the use of a lawn sprinkler on the roof for several hours followed by a check for leaks . 2. Water Intrusion: Damage from ground water intruding into basements and crawlspaces can be pervasive and difficult to resolve. Correction can be as simple as re-grading the exterior grounds or adding roof gutters with splash blocks and extensions to direct water away from the structure. Unfortunately, major drainage improvements are often necessary and these can require costly ground water systems such as French drains  designed by geotechnical engineers. French Drain Page 32 2016 45HoursOnline, All Rights Reserved Consumer Protection Reader, 2016 Edition

3. Electrical Safety Hazards: Examples are ungrounded outlets, lack of ground fault interrupters (shock protection devices), and faulty wiring conditions in electrical panels. Shoddy work can result in fires and shocks. 4. Hazardous Conditions Involving Gas and Oil Heaters: An older

As of July 1, 2011; carbon heating system or one that has been poorly maintained can be a monoxide detectors have been serious health and safety hazard. In some cases, gas and oil required for all California homes. heaters contain life-threatening defects that can only be detected by See the below article, “CA Law to someone familiar with their operation and design. A cracked heat Require Carbon Monoxide exchanger, for example, can result in tragedy. Carbon monoxide Detectors” for details. poisoning from faulty heaters causes about 400 deaths in the U.S. each year (source) . 5. Generally poor maintenance: If a house has been poorly maintained for years, extensive repairs may be necessary to fix problems such as cracked or peeling paint, crumbling masonry, broken fixtures, shoddy wiring, or failing plumbing. 6. Rotten Wood: Rotted wood at building exteriors and at various plumbing fixtures where wood stays wet for long periods such as roof eaves, exterior trim, on decks, around tubs and showers, or at the base of toilets. 7. Plumbing problems: The most common plumbing defects include old and incompatible piping materials and faulty fixtures or waste lines. These may require simple repairs such as replacing a fixture, or more expensive measures such as replacing the entire plumbing system. 8. Poor Insulation: This defect can usually be corrected by repairing caulking, weather stripping, and other inexpensive repairs around windows and doors. 9. Environmental hazards: Environmental problems include the use of lead-based paint and asbestos, the presence of molds, and the contamination of ground water. These problems are usually expensive to fix. 10. Unsafe Fireplaces: Unsafe conditions can result from lack of maintenance (e.g., neglecting to hire a chimney sweep) and faulty installation of fixtures. Most common among these are the lack of spark arrestors  and substandard placement of wood-burning stoves. Free-standing fireplaces are typically installed by home owners and handymen without knowledge of fire safety

Spark Arrestor atop Chimney requirements. The most common violations in these cases involve insufficient clearance between hot metal surfaces and combustible materials within the building. Fire hazards of this kind are often concealed in attics where they remain undiscovered until a roof fire occurs.

1.4.1.2 RED FLAGS

A good way to become familiar with the home inspection process is to tag along with a competent and experienced home inspector as he performs an inspection. After attending several such inspections, you should be able to make a rough judgment of a home inspector’s competency.

1.4.1.2.1 VISUAL

Click here for Barbara Nichols’ The following lists of visual, written, and neighborhood red flags are taken site. from an article in Realty Magazine Online by Barbara Nichols. Ms. Nichols is a risk management expert who serves as an expert witness in real estate related lawsuits:

 To spot fire or insect damage, push on the wood to see if it’s spongy or scrape off some paint to see underneath.  Look for water marks or efflorescence  on the foundation. Efflorescence is a white chalky substance left behind by water on the outside of the cement or brick.  Look to see if the ground slopes toward the house. If it does, consider it likely that water has seeped into the foundation and may have caused or will cause dry rot and/or accelerate termite infestation.

Efflorescence  Use your nose and fingers to probe for water. Where there is water there may be dry rot, mold, or termites.  Look for curling, damaged, or missing shingles or flashing . If you find such defects check for water damage underneath.  Check if the floors are level. If they are not, be alert to possible structural damage.  If you find stains on the ceiling suspect a damaged roof.  If retaining walls are leaning, suspect ground movement. Damaged Flashing  Be suspicious of any structural irregularities such as changes in ceiling or floor levels, the presence of exterior wall surfaces inside the home, or anything else that suggests an unpermitted construction.  Look for recent repair work. For example, wide cracks in a patio deck that may have been filled with cement or recently laid tile.  Look for termite piles  along walls. Termite Piles If you find red flags, be sure to question the seller about them. If the seller is evasive or has unconvincing answers, consider his evasiveness a red flag. Be sure to check with your home inspector after he has completed his inspection. If he did not spot the same red flags you found, find out why. 1.4.1.2.2 WRITTEN Take care to search for red flags in important documents:  In the preliminary title report, suspicious entries such as: (1) undisclosed easements, liens, encumbrances, or third parties with ownership interests; and (2) a legal description citing a lot size different than advertised.  In the TDS, disclosure of a corrected foundation or structural problem without corroborating evidence such as a permit or construction plans.

Page 34 2016 45HoursOnline, All Rights Reserved Consumer Protection Reader, 2016 Edition  In the TDS, disclosures citing a room addition without a corroborating building permit.  In the pest inspection report, areas or structures cited as “inaccessible” or “unexamined” which deserve inspection. 1.4.1.2.3 NEIGHBORHOOD Be sensitive to adverse conditions common to a home’s age, subdivision, or location such as a home in:  a subdivision where its homes are afflicted with a common defect such as ground subsidence. The phone app Waze has turned  an area afflicted with an environmental nuisance such as airplane some quiet neighborhoods into busy streets (source) noise, heavy commuter traffic .  a home in a neighborhood with a high crime rate.  a home built before 1978 – the last year in which asbestos insulation was permitted; or 1979 – the last year that lead paint was permitted. 1.4.1.2.4 REMODELS AND REPAIRS The remodeler’s objective is usually to turn a quick profit. To achieve this end, he may use the cheapest materials, disregard the building code, conceal defects, and pay no attention to durability. Remodels can look fabulous but conceal serious defects. Red flags associated with remodels include:  Fresh paint, plaster, tile, paneling, or wallpaper covering wood rot or cracks.  New paint applied without preparation.  Use of untreated wood in areas vulnerable to moisture and termites.  Large rooms made by removal of load bearing walls.  Remodeled kitchens replete with fashionable appliances (stainless steel freezers, refrigerated cabinets, overhead TVs) but without compensatory upgrades to the home’s electrical system.  Appliances without warranties.

Of course, if you represent the buyer you should ask to see remodeling Click here to check the status of a permits. If the work was performed by contractors, find out their names and contractor’s license. license numbers for any follow-up that may be required.

1.4.1.3 WATER

The majority of disputes are initiated by buyers claiming their brokers failed to disclose material defects which they found after closing. Of these defects, most are caused by fungi feeding on wet wood. For this reason, you should understand the conditions needed for fungi to grow and you should be able to spot damage caused by these fungi. Fungi are not plants. Plants make their own food using the sun while fungi feed on organic material. The fungi we care about eat wood: these fungi are mildew, mold, and dry rot.

2016 45HoursOnline, All Rights Reserved Page 35 Consumer Protection Reader, 2016 Edition Consider the myriad ways water can wet wood in the home: 1. Rain water or melting snow may puddle around the home and wet its foundation. 2. Water may enter the walls through breaks in flashing. 3. Water from toilets and bathtubs may overflow and seep into walls and floors. 4. Moist air from within the home (e.g., from bathtubs) may condense on contact with cool rafters and roof sheathing. 5. Condensation from the home’s air conditioning unit may drip and accumulate in the crawl space beneath the house. 6. A pet may repeatedly urinate over a spot on the floor. 7. Pots and planters may leak water into the walls or floor. 8. A slow drip from a loose plumbing fixture may wet wood. 9. Condensation on water pipes may drip when the humidity is high.

All lumber must be air or kiln dried before it is sold. Regardless of how it is dried, lumber always contains some moisture. The amount of moisture depends on the average relative humidity of the air to which it is exposed; consequently, the moisture content of wood is lower in dry areas such as Palm Springs, perhaps, 4% to 9% for inside wood, 7% to 12% for outside wood; and much higher in humid areas such as San Francisco, 8% to 13% for inside wood; 9% to 14% for outside wood (source ). When wood’s moisture content reaches 28%, the minute single-celled spores of the dry rot fungus begin to grow on the wood’s surface. The spores are ubiquitous in the air – you are breathing them right now. If the wood’s moisture content continues to 30% or higher for a few days while the temperature remains warm, dry rot will infect the wood. If the moisture content of wood drops below 22%, the rot will become dormant but resume its growth once the moisture content rises above 22% (source).

1.4.1.4 FUNGI

The life cycle of dry rot is similar to the mushroom; the best known of the fungi. By gaining a basic understanding of the fungal life cycle, you will better be able to appreciate why dry rot is so pernicious.

The mushroom is the “fruiting body” of a Examples of the mold spores you much larger mass growing are now breathing as seen underground, the “mycelium.”  The through an electron microscope. mycelium is composed of a mass of minute branching threads called “hyphae” (pronounced like “high fee”) The hyphae exude enzymes onto organic matter to decompose it into digestible nutrients. The hyphae then absorb these nutrients into its body to sustain the mushroom’s growth. When the fungus matures, it pushes its fruiting body, the mushroom, onto

Page 36 2016 45HoursOnline, All Rights Reserved Consumer Protection Reader, 2016 Edition Fruiting body of the most feared the surface. The mushroom then produces spores which it releases into the of the dry rots, Serpula air. Each spore is a cell capable of producing the entire fungus. lacrymans. (The blooms of most rots are not so dramatic.) The life cycle of the dry rots is similar to the mushroom. The only significant differences are that dry rots are inedible and repulsive in appearance .

You should note the following about the fungal lifecycle:  The extraordinarily small, single-celled fungal spores are everywhere – in the air and on the surface of everything inside and outside the home. As many as twenty million can fit on a postage stamp.  Some spores are toxic to sensitive individuals. The “hyphae” are invisible to the naked eye.  Many fungi only become visible when they “bloom”; that is, when they push their fruiting body to the surface of the organic material on which they feed.

Let us take a closer look at the fungi called “dry rots” and “molds.” 1.4.1.4.1 DRY ROT

Figure 1: Advanced Brown Rot Figure 2: Advanced White Rot

Despite its name, dry rot requires moist wood. It grows while the wood is wet and is dormant when it is dry. Subfreezing temperatures do not kill it. Fungicides applied to wood infested with dry rot will kill it but only to whatever depth the fungicide soaks into the wood. Heat treatments will kill dry rot (and any other living organism) if the wood it infests is heated to a temperature above 151°F for at least 75 minutes. Absent heat treatments, the preferred remedy is to remove all the infected wood within two feet of the infection.

One hideous and, fortunately, relatively uncommon species of brown dry rot in California, the “house-eating fungus” (Meruliporia incrassata) is capable of transporting water over long distances to the site of decay through strands called “rhizomorphs.” The strands may extend for thirty or more feet across brick or concrete. Another species (Serpula lacrimans, predominant in Northern Europe) has been known to transport water up three stories. The ideal conditions for dry rot are wood, warmth, dampness,

2016 45HoursOnline, All Rights Reserved Page 37 Consumer Protection Reader, 2016 Edition This badass fungus (Meruliporia incrassata) ate and poor ventilation. These conditions are common to cellars, this Southern California home including its crawl spaces under homes, and under the stairs. owner’s flip-flops (source).

There are two main types of dry rot. Wood infected with brown rot (Figure 1, above) appears brown and has a crumbly appearance. Wood infected with white rot (Figure 2, above) may appear discolored with a white or yellow tint and, when the infection is advanced, the wood may appear stringy or spongy.

Woods resistant to dry rot include: all cedars, old-growth redwood, old- growth bald cypress, white oak, and locust. Only the heartwoods of these species are rot resistant. (Sapwood  is living wood that conducts water from the roots to the leaves; heartwood  is the deadwood that is decay resistant.) These woods contain natural toxins that protect the wood from Sapwood (light)/ Heartwood parasitic organisms including dry rot. Unfortunately, these woods are (dark) expensive. A good article about the merits of In imitation of Nature, less naturally durable woods can be impregnated with various woods is “Wood Myths: Facts and Factions About Wood” pesticides like CCA (chromate copper arsenate) to extend their service life by Paul Fisette (here). by 30 to 50 years or longer (this liquid gives the lumber seen at construction sites a green tint).

An excellent source of images of Dry rot in its early stages can be difficult to detect even with a microscope. various forms and stages of dry rot can be found here. The weakness of infected wood can be significant even in the early stages of dry rot infestation. As the rot advances, the wood’s luster fades; its

surface becomes lifeless, dull, and discolored. A musty odor is often evident. The rate at which decay progresses depends on the wood’s moisture content, its temperature, and the type of fungus which infects it.

The most common areas in which dry rot is found are the bathroom, under the kitchen sink, on window sills, in the thresholds near sliding glass doors, and the attic. Most home insurance policies exclude or limit coverage for damage caused by any form of fungus – dry rots and molds especially. Consequently, buyers who discover extensive damage from dry rot often seek to recover the repair costs from their seller and broker. 1.4.1.4.2 MOLD Molds are also fungi and like dry rots require similar conditions to grow: oxygen, moisture, warmth, and organic material. Like all fungi, molds propagate from single-celled, air borne spores. Also, like dry rots, molds become dormant when their growing conditions are unfavorable and resume growing once favorable conditions return. Molds not only feed on wood but anything organic – even the dust  in the air. Molds are commonly found behind wallpaper and paneling, ceilings, on drywall, and on carpets. Molds are even found growing inside air ducts. Unlike dry rot, which derives the water it needs from the moisture content in wood; molds derive their water from the humidity in the air. Molds require humidity levels at or above 55 to 65% to grow.

Dust: Much of indoor dust is comprised of human skin cells. Your body sheds about 35,000 every hour (source).

Page 38 2016 45HoursOnline, All Rights Reserved Consumer Protection Reader, 2016 Edition Some molds excrete poisons called mycotoxins or produce mycotoxins in their spores. The mycotoxins may be found in either gaseous or liquid forms. Of these molds, some produce mycotoxins only under specific growing conditions. Mycotoxins may be harmful and some experts claim they may even be lethal to humans and animals when their concentrations are high. Exposure to significant quantities of mold spores can cause toxic/allergic reactions. Health effects of mycotoxin exposure purportedly include chronic fatigue and irritability, flu-like symptoms, respiratory problems, headaches, cognitive impairment, and skin disorders.

Most E&O policies do not provide coverage for mold damage owing to the high expense often required to remove molds and because of the high

In 2001, a Texas jury awarded the damage awards  juries have awarded plaintiffs claiming to have been Ballard Family of Dripping Springs injured by toxic mold. Removal of toxic molds may have to be performed $32 million dollars (later reduced under expensive hazmat conditions requiring workers to wear air-tight suits to $4 million) for injuries and equipped with air filtration systems under negative air pressure to avoid damage caused by toxic mold. (Source) contaminating the outside air with mycotoxins. Just testing for toxic mold can cost hundreds of dollars.

Considerable information about mold can be found here. Science has not established a link between mold and ill health. The term “toxic mold” is a term coined by the media; it is not used by scientists who study fungi. Of all the many molds that may be found in the home, Stachybotrys chartarum, a greenish-black fungus, is the most notorious– a so-called “toxic mold.” Species of molds from two mold genera are purported to be allergenic: Penicillium and Aspergillus – the presence of any of these molds has generated seven-figure settlements. (Source) Personal Story: A close relative has the Aspergillus mold growing in her lungs. She contracted the mold as a result of having damaged her immune system from immunosuppressant drugs. Her mold is difficult to remove and is life threatening.

Termites  swarm once a year usually in late summer. After swarming, winged termites may alight on a home and, if the termite is lucky, find an unprotected section of damp wood on which to start feeding. If the termite can also find a mate, a colony is born. The mated pair begins by eating out a chamber in the wood and then seals it. Soon thereafter, the female begins laying eggs. Both the “King” and “Queen” termite feed their young on predigested food until their young are able to feed themselves. The King mates with the Queen for life. Together the King and Queen raise thousands of children – each child is born into caste such as worker and soldier. Unlike human Kings and Queens, termite Kings and Queens are just another caste in the colony. No single termite or caste of termites directs the colony’s activity. Termites are generally grouped according to their feeding behavior. Thus they are categorized into “subterranean,” “soil-feeding,” “dry wood,” “damp wood,” and “grass eating” types. Of these, only the subterranean and dry wood termites eat wooden homes. Dry wood termites have a low moisture requirement and can tolerate dry conditions for prolonged periods. They remain entirely above ground and do not connect their nests to the soil. Subterranean termites require moist environments. To satisfy their need for water, they usually nest in or near the soil and maintain some connection Subterranean Termites with the soil through tunnels in wood or through “shelter tubes” constructed from soil with bits of wood or even plasterboard (drywall). Because dry rot and termites both require high moisture contents in wood, these two pests are often found together.

Once a colony has been established it may take years before their infestation becomes noticeable. Until this happens, the termites give little notice of their presence. Eventually, even an untrained eye can spot the signs of termite infestation: (1) pellets, (2) galleries, and (3) tubes:

Figure 3: Wings Figure 4: Fecal Pellets Figure 5: Galleries Figure 6: Shelter Tubes

 Wings: These are shed by termites following their swarm. Since ants also swarm, the wings from these two species are often confused.  Galleries: These are the most telling and distressing signs of termite damage because the galleries reduce the strength of the lumber in which they are found.  Fecal Pellets: These are often found in a pile at the bottom of a post or wall. The termites create a hole in the wood and push the pellets out of a gallery where they may fall into a neat, conical pile.

Page 40 2016 45HoursOnline, All Rights Reserved Consumer Protection Reader, 2016 Edition  Shelter Tubes: These are made only by subterranean termites. The termites use these shelters to move from the wet ground to dry wood.

If you are the listing broker and see any of these red flags, advise your seller to pay for a pest inspection. Even if the home is never sold the owner needs to know the extent of the infestation and resulting damage. If the owner is sensible and has the money, he will repair the damage and stop the infestation before it gets worse. If any offer is accepted, the chances are the home will have to pass a pest inspection as required by the mortgage lender. CAR®’s Residential Purchase Agreement requires the buyer to approve the “Wood Destroying Inspection Report” as a contingency of the sale. If he does not, he may revise his offer or cancel his purchase agreement. If you represent the buyer and spot any of these red flags (pellets, galleries, and shelter tubes) be wary. If the seller selects the pest inspection service make sure he has an explanation for the signs of infestations you noted. Why aren’t more homes framed with steel or constructed of autoclaved aerated concrete (AAC)? Because these materials are inorganic they cannot be eaten by fungi or termites nor can they burn. This article makes a good case for owning a concrete home.

1.4.2 SELLER AND HIS AGENT’S HOME INSPECTION

This section describes the duty to disclose a home’s material defects for the seller and his agent.

1.4.2.1 AGENT’S VISUAL INSPECTION

The listing agent is required by law to conduct a visual inspection of his seller’s home. The statute which mandates this duty reads: It is the duty of a real estate broker … to conduct a reasonably competent and diligent visual inspection of the property offered for sale and to disclose to that prospective purchaser all facts materially affecting the value or desirability of the property that an investigation would reveal… (CC §2079(a)).

It is best you conduct your inspection before signing your listing agreement. To do your inspection afterwards is to risk discovering major defects that make it unlikely that you can sell the home at the listed price. As you walk around the property with your seller, take care to note all the features you believe may adversely affect the home’s market value and note any red flags. Ask the seller about roof leaks, window leaks, drainage, remodeling, repairs, warranties, cracks – there are so many items to check that it is best that you use a check list. If you do not have a check list, consider using the items listed on CAR®’s Transfer Disclosure Statement (TDS) as a check list or CAR®’s detailed, four-page Seller Property Questionnaire (SPQ) .

2016 45HoursOnline, All Rights Reserved Page 41 Consumer Protection Reader, 2016 Edition When noting down possible defects, take care not to “editorialize,” that is, to offer or infer an opinion about the materiality of any defect. For example, note “cracks in garage floor slab” and not “minor cracks in garage floor due to normal settling.” The later remark expresses an opinion about the significance of the cracks (that they are “minor”) and attributes a cause (“normal settling”). To save time, take pictures of everything you see – these may be useful for posting to the MLS but more importantly they serve to document the condition of the house at the time of your visual inspection (be sure your camera’s date/time stamp feature is on). Place the pictures into your transaction file. If you decide to take the listing and the seller accepts your offer of representation, you should impress upon him his disclosure responsibilities. You should explain the risks to the both of you should he fail to disclose all of his home’s and neighborhood’s material defects. You should also let your seller know that you have a legal duty to prospective buyers to disclose all material defects known even if your seller fails to disclose them or if should disagree with your seller about any defect’s materiality. A good way to explain to your seller his disclosure duties is to walk him through CAR®’s Seller’s Advisory (SA) .

1.4.2.2 SELLER’S DISCLOSURES

If your TDS omits any material defect which is subsequently discovered by the buyer after purchase, you risk being sued by the buyer. Perhaps your seller concealed the omission, perhaps the defect was located in an inaccessible area; perhaps the inspectors should have but failed to find it; it really doesn’t matter. If your buyer must remedy the defect at considerable expense and no one reimburses him, he is likely to sue you and anyone else he thinks should have known about the defect

Minimum disclosure standard: With so much risk hinging on the TDS, you should take special care to All material defects known to you ensure that it is accurate – not accurate to the minimum legal standard  or which should have been known to you or your seller about but accurate in fact. accessible areas of the home (see CC §2079). To reduce your risk of omitting a material defect from your TDS, consider the advantages of obtaining a professional home inspection before you list the property (see the section, “Pre-Inspection” below). While it is true that you can amend the TDS at any time before close of escrow, an amended TDS may be perceived by the buyer as a red flag since it’s need may suggest that previous inspections were inadequate and other material defects may yet be discovered. The seller must complete the TDS (Sections 1 and 2) and the listing broker must add his comments to Sections 3 and the selling broker to Section 4. (CAR®’s Real Estate Transfer Disclosure Statement (aka, “TDS”)

1.4.2.3 NATURAL HAZARD DISCLOSURE

One firm offers to prepare the The Natural Hazard Disclosure (NHD) form is used to make the eight required NHD disclosures and natural hazard zone disclosures as required residential properties by CC numerous others for $79.00 (as of February 2016). §1103.2: (1) FEMA Flood Hazard, (2) Dam Inundation, (3) Earthquake Fault Zone, (4) Seismic Hazard Area, (5) Liquefaction, (6) Landslide, (7)

Page 42 2016 45HoursOnline, All Rights Reserved Consumer Protection Reader, 2016 Edition Very High Fire Hazard Area, and (8) Wildland Fire Area. These disclosures are required for any residential one-to-four unit property.

Most if not all firms that provide the NHS disclosure include a variety of other disclosures such as: (1) Airport Influence Areas, (2) Commercial & Industrial Usage, (3) Megan’s Law, (4) Toxic Mold Act, (5) Radon, (6) Mello-Roos and the 1915 Bond Act Assessment Districts, (7) Environment Contamination Sites, and the recently mandated (8) Gas Transmission and Hazardous Liquid Pipeline Disclosure. (Source) The last and most recently required of these disclosures is discussed in the below articles, “New Pipeline Disclosure Law” and became effective July 2013.

1.4.3 PROFESSIONAL PEST INSPECTION

“Clean” meaning no evidence of A pest inspection is not a legal requirement for the sale of a home but a living wood destroying organisms “clean” pest inspection report is required by virtually all mortgage lenders or damaged wood was found by the inspector. before it will grant a loan . The pest inspection report is also called the WDO report – WDO for “Wood Destroying Organisms”.

AAC:: Autoclaved aerated concrete is a lightweight, precast, Do homes made of inorganic materials such as concrete, AAC , or foam concrete building material steel require pest inspection reports? Apparently so as there is still (details). plenty of wood for termites to munch as concealed in attics, walls, and extending down to the floor slabs. Vertical wood strips, called “furring,” which are installed on the inside surface of the home’s concrete block walls to provide a nailing surface for application of drywall, provide pathways for subterranean termites (the ones that live in the ground, but enter the home daily to feed on the wood) to go from the floor to the ceiling and the wood roof trusses above that. (Source). Even if you were to represent a cash buyer, it would almost certainly be a breach of your fiduciary duty to fail to advise him to make his purchase contingent to a favorable pest inspection. Even new homes framed with wood should be required to pass a pest inspection. New homes, albeit rarely, have been known to be constructed using rotten word  . But the better reason for a new home to have a pest inspection is because the pest inspector not only looks for active infestation and past damage but also for conditions likely to promote infestation (e.g., a poorly ventilated attic). How can a new home have dry rot? Almost all lumber is supposed to be kiln or surface dried before use. If it is not dried sufficiently, it can be delivered green and wet. If it has been dried, it may have been stored for months in inventory under wet conditions. Moreover, if the structure of the home during construction is exposed to rain or very high humidity over a long period it may become infested with dry rot. “Wood destroying organisms” The results of the pest inspection must be documented in a report named include termites, dry rot, wood “Wood Destroying Pest and Organisms Inspection Report .” The format of destroying beetles, and carpenter ants. this report is dictated by statute (BPC §8500 et seq.). Click here to see a completed All pest inspectors must be licensed by the Structural Pest Control Board (a pest inspection report. division of the State Department of Consumer Affairs).

2016 45HoursOnline, All Rights Reserved Page 43 Consumer Protection Reader, 2016 Edition After viewing the home, the pest inspector is required to reach one of three conclusions: (1) “No evidence of wood destroying organisms,” (2) “Evidence of past damage,” or (3) “Evidence of active infestation.”

Conclusion (3) is the show-stopper. No lender will finance a property actively being consumed by insects and/or fungi. The ramifications of Conclusion (2), “Evidence of past damage,” are problematic. Some lenders will advance funds providing the inspector finds no evidence of active infestation; others will want assurances that the property has been free of pests over the past year; others will simply fund the loan. You will surely want to understand the nature and extent of the damage and advise your buyer accordingly. The findings of the report are organized into two sections: SECTION A findings are classified as “Active damage and infestation to wood by wood destroying organisms and pests.” The “cause” of the damage is also classified as a Section A item. SECTION B findings are classified as “Conditions deemed likely to lead to damage or infestation to wood by wood destroying organisms and pests if the condition is not corrected.”

The report contains a “Bid Sheet” used by the inspection company to estimate the cost to perform the corrective work listed in Sections A and B. By custom, the seller selects the inspector, pays for the inspection, and pays for the corrective work listed in Section A. Also, by custom, the buyer pays for the corrective work listed in Section B. Section A items must be corrected; Section B items are usually optional. Neither the seller nor the buyer is required to contract with the inspection company for repairs but, owing to time pressures, the seller often has little choice but to do so. Regardless of whether the original home inspector or a third party (the owner, a contractor, or another home inspection company) performs the corrective work, the original home inspector must issue a “Re- Inspection Report” to certify that the Section A repairs were made. The pest inspection service is legally accountable to both the seller and buyer (source ). Both parties should receive a copy of the pest inspection report. To protect your client, you should thoroughly read the report to make sure it accounts for any red flags you may have discovered on your own. In reviewing the inspection report, the listing broker should take care that all Section A repairs relate to wood damage. Some unscrupulous pest inspection companies mislabel their findings to fool the seller into paying for unneeded corrective work to non-wood components such as tile and bathroom fixtures. The labeling process is critical to both parties since the lender will not finance a property unless all Section A repairs have been made.

As the buyer’s broker, you need to be sensitive to the fact that the pest

Page 44 2016 45HoursOnline, All Rights Reserved Consumer Protection Reader, 2016 Edition control inspector is usually selected by the seller’s broker. It may be in the RESPA considers the service short-term interest of the seller’s broker to select a “friendly” inspector provided by home and pest inspectors as a settlement service inclined to give a “soft” inspection . For example, a friendly inspector and, therefore, forbids kickbacks might label vulnerable areas such as attics, crawl spaces, and roofs as to the agent. “inaccessible” to enhance his own profit and to reduce the risk of finding a problem that could forestall the sale thereby upsetting the broker who recommended him and risking future business from that broker.

The Structural Pest Control Board Any areas the inspector deems inaccessible should be listed in his report. maintains an online database of As the buyer’s broker, you should take notice of these areas and if you reports filed over the past two years here. If you find that a believe they require inspection you should make arrangements with the report is available for your seller and inspector to have them examined. If you believe an inaccessible property, you may request that a area needs inspection, you should try to persuade your buyer to pay the free copy be sent to you by extra cost needed to open the area for inspection. For example, if you were regular mail. to smell a musty odor near wood paneling consider urging your buyer to pay the inspector to remove and then restore the paneling so he can inspect for damage underneath. Other areas which may justify an intrusive inspection are the sub-floors beneath carpets, wall interiors, and anywhere wood may have been or be in contact with a slab foundation or damp earth.

Any buildings not inspected on the property should be listed in the pest inspection report. Buildings often not inspected include garages, guest houses, and storage sheds. If these buildings are important to your buyer, you should arrange for their inspection. A word of caution about licensed pest inspectors: Unlike reputable home inspectors who do not bid for repairing the defects they find, pest inspectors make most of their profits from repairs. Many pest inspection companies lose money on inspections to gain the opportunity to find and repair the damage they find. Consequently, pest inspectors are motivated to find damage – which is good – but some inspectors are undoubtedly overzealous in their reporting of damage and some charge excessively for repairs knowing that sellers are not likely to refuse their repair quotes owing to time pressures.

1.4.4 PROFESSIONAL HOME INSPECTION

1.4.4.1 NEED

A study commissioned by The Wall Street Journal concludes that almost every home, no matter how recently or expertly built, is a money pit  .

The study found that the cost of keeping a typical home up to current standards for 30 years is almost four times the purchase price. In fact some experts say that it may actually be cheaper to buy a new or fully remodeled home every ten years than to deal with the mounting repair problems that occur as materials fail. (Source)

According to the study, homes with the worst repair record tend to be between 10 and 20 years old. That is the period when various home systems begin to fail. These systems include foundations, painting and waterproofing, heating and air conditioning systems, water heaters, plumbing, ductwork, and decks. Rather than replacing failing home

2016 45HoursOnline, All Rights Reserved Page 45 Consumer Protection Reader, 2016 Edition systems, homeowners who know they are going to sell often neglect their home’s maintenance for years prior to the sale and then make shoddy repairs just before putting their homes on the market.

Since new owners are often strapped for cash and struggle to make their mortgage payments, they are often motivated to sue the seller and his agent for the money needed to make urgent and expensive repairs to failed systems such as a roof or heating system. A good home inspector will not only find a home’s existing defects and code violations, he will: (1) report conditions likely to cause problems in the near future, (2) estimate the life expectancies of home systems, and (3) identify safety hazards.

1.4.4.2 ASSOCIATIONS

Most states license home inspectors but California does not. Rather than the state certifying home inspectors, California has four private associations that certify home inspectors . These four associations require members to pass exams, obtain experience, adhere to professional standards, comply with a code of ethics, and take continuing education to maintain their memberships. Below is a brief description of the four principal home inspection associations. 1.4.4.2.1 CALIFORNIA REAL ESTATE INSPECTION ASSOCIATION

The California Real Estate Inspectors Association (CREIA) was founded in 1976. It claims to be a public benefit, non-profit inspection resource association dedicated to the further education of its inspector members. As of February 2016, CREIA claimed over 500 members (source). CREIA provides two semiannual conferences where each chapter provides “education tool boxes” for its members. To maintain one’s membership in CREIA, each member requires 30 hours per year of continuing education via live training.

In February 2016, our search of their website for members within 10 miles of the zip code 91364 (Woodland Hills) returned about 11 members. 1.4.4.2.2 AMERICAN SOCIETY OF HOME INSPECTORS

The American Society of Home Inspectors (ASHI) claims to be the country’s oldest and largest home inspection organization with about 5,400 members (as of January 2015) in the United States and Canada (source). ASHI was founded in 1976. It created the industry’s original standards of practice. All members must adhere to their association’s code of ethics.

Half of ASHI’s members are fully qualified home inspectors; the rest are in training. To attain the status of a “full member,” an inspector must pass an exam provided by the independent Examination Board of Professional Home Inspectors – an exam also used by 17 states for licensing – and pass an exam on ASHI’s Standards of Practice and Code of Ethics. Additionally, full members must have performed a minimum of 250 paid home inspections and must complete 20 hours per year of continuing education. ASHI’s website lists both “fully credentialed” home inspectors

Page 46 2016 45HoursOnline, All Rights Reserved Consumer Protection Reader, 2016 Edition as well as “candidates” who have passed the required exams but have performed only 50 to 250 paid home inspections. The two groups are listed separately on their website. In our search in February 2016 of their site for home inspectors within a 10 mile radius of zip code ‘91364’ (Woodland Hills, CA), we found six members one of which were “certified inspectors” the remainder “associates.” (Source) Most experts (e.g., Barbara Nichols and the late Robert Bruss) recommend home inspectors credentialed by ASHI. 1.4.4.2.3 NATIONAL ASSOCIATION OF HOME INSPECTORS

The National Association of Home Inspectors (NAHI), the second oldest home inspection organization in the North America. It was founded in 1987 as an offshoot of ASHI and has a very similar Standards of Practice and Code of Ethics.

NAHI has three levels of membership; the third and highest is the NAHI Certified Real Estate Inspector (NAHI CRI) designation. To earn the CRI designation, members must pass a rigorous exam (similar to ASHI’s exam) and complete a minimum of 250 paid home inspections. In addition, full members must have passed NAHI’s Standards of Practice and Code of Ethics exam and members are required to complete 16 hours of continuing education each year. The two lowest levels of membership are for NAHI home inspectors who have not yet performed 250 home inspections. (Click here for NAHI’s website.) In our search in February 2016 of their website for members within a 10 mile radius of zip code ‘91364’ (Woodland Hills, CA), we found five members (source). 1.4.4.2.4 INTERNATIONAL ASSOCIATION OF CERTIFIED HOME INSPECTORS

The International Association of Certified Home Inspectors (InterNACHI) is the newest of the three home inspection organizations and has the least rigorous requirements for membership. Members must pass a free online exam. If they fail, they can retake the exam until they pass. The same is true for their Standards of Practice and Code of Ethics exams. InterNACHI says it requires full members to have carried out 100 paid inspections but they do not distinguish which members have met this requirement on their referral list. (Click here for InterNACHI’s website.)

In our search of their website for members within a 10 mile radious of zip code ‘91364’ (Woodland Hills, CA), we found 12 members (source).

1.4.4.3 USING HOME INSPECTORS

If you could take only one action to reduce your liability in a transaction, it should be to employ a qualified, competent, and professional home inspector – with E&O insurance. Usually it is the buyer who selects the home inspector. Should the buyer choose in incompetent inspector who misses one or more major defects, the buyer may subsequently sue the seller and his agent for failing to disclose the defect(s).

2016 45HoursOnline, All Rights Reserved Page 47 Consumer Protection Reader, 2016 Edition The buyer often makes a poor choice of home inspector because (1) he is often in a rush; hence, he chooses the first home inspector he finds; (2) he is short on cash; hence, he selects the least expensive home inspector he finds; and (3) he is inexperienced; hence, he selects the friendliest home inspector he finds. Another problem in letting the buyer select the home inspector is that both the buyer and his agent are biased in favor of the purchase; therefore, both have a tendency to downplay negative findings found by the home inspector .

Although the buyer is ultimately responsible for his choice of home inspector, he often asks for and perfunctorily accepts the home inspector recommended by his agent. Unfortunately, his agent has a strong incentive to recommend an inspector he believes will not issue an unfavorable home inspection report that could disincline his buyer from completing his purchase. With so much riding on the competency and professionalism of the home inspector and with so many reasons to doubt that the buyer will choose wisely, we recommend the seller either: (1) pays for a pre-inspection (see “Pre-Inspection”), or (2) makes the buyer’s choice of home inspector subject to his approval. The criteria for an acceptable home inspector might include the following requirements:  He is full member of CREIA, ASHI, or NAHI.  He has not inspected a home brokered by either the listing agent or buyer’s agent in the preceding three months.  He inspects all areas and structures of the home except those listed in an attached addendum.  He is willing to spend up to two hours answering questions about his findings from all interested parties.  If asked, he is willing to conduct a water test on the roof.  He provides a report similar in detail to a sample report you provide (for example, this one ).  He carries E&O insurance with a large liability limit. 1.4.4.3.1 LEGAL ISSUES BPC §§7195-7199 describe the legal status of home inspectors in California. §7196 defines the standard of care for home inspectors as follows: It is the duty of a home inspector who is not licensed as a general contractor, structural pest control operator, or architect, or registered as a professional engineer to conduct a home inspection with the degree of care that a reasonably prudent home inspector would exercise.

§7198 states that contracts with provisions which waive the inspector’s duty to conduct a professional home inspection (per §7196) or limit the inspector’s liability to his inspection fee are invalid as such provisions are

Page 48 2016 45HoursOnline, All Rights Reserved Consumer Protection Reader, 2016 Edition contrary to public policy. In other words, home inspectors are legally liable for negligence. §7199 states that the statute of limitations for a breach of duty action against a home inspector shall not exceed four years after the date of inspection. Home inspectors may sign contracts with their clients limiting claims to shorter periods (less than four years) providing the period is “reasonable.” In the California case, Moreno v. Sanchez, 2003, the court of appeal ruled that if a limitation on the discovery period is placed onto the contract, that the limitation must be: (1) of reasonable duration for the homeowner to discover a breach, and (2) the discovery period must accrue not from the date of inspection but from the date the breach is discovered or should have been discovered by the homeowner.

Pre-Inspection: A home There are many advantages to a pre-inspection  for the seller. If your inspection conducted before the seller conducts a pre-inspection, be sure the inspector’s contract does not seller lists his home. restrict his liability to the seller but also extends to the buyer.

1.4.4.3.2 SCOPE BPC §7195 defines “home inspection” as: … a noninvasive, physical examination … [of a home’s] mechanical, electrical, or plumbing systems, or the structural and essential components of a residential dwelling … designed to identify material defects in those systems, structures, and components.

Note the word “noninvasive.” An invasive inspection requires the inspector to damage or disassemble some part of the home to inspect for some suspected condition such as a water leak or the presence of a raccoon nest. Invasive procedures include drilling holes into walls to take core samples, removing dry wall to look for water damage, poking a hole in the ceiling to look for pests, and pulling up carpet to inspect the condition of a wood floor. Invasive inspections may be expensive since any damage inflicted by the inspector must usually be repaired at the requestor’s expense. But if an invasive inspection is the only way to determine if a suspected condition exists, you will want to hire a home inspector willing to conduct it. Another question to ask the home inspector after reading his contract is “What do you mean by ‘accessible areas’?” You will want him to be specific. Is the roof accessible? Is the crawl space under the house accessible? Is the attic accessible? Be sure the seller is available when the home inspector conducts his inspection. The seller may be required to unlock rooms and gates for inspection. The seller should also be available to warn the inspector of any hazardous conditions such as the presence of a vicious dog or a loose railing. Some inspectors limit their inspection to the home and do not inspect other stand-alone structures such as garages, guest houses, cabañas, or cabins.

2016 45HoursOnline, All Rights Reserved Page 49 Consumer Protection Reader, 2016 Edition If these structures are important to your buyer, be sure they are included in the inspection. Often home inspectors will exclude the following items from inspection:  recreational facilities such as spas, saunas, steam baths, swimming pools, tennis courts, playground equipment; and other exercise, entertainment, or athletic facilities,  septic systems,  underground storage tanks,  home appliances such as washers, dryers, and dishwashers;  water wells,  roads and driveways, and  landscaping – the health of trees, the condition of sprinkler systems, the safety of outdoor lights, the presence of toxic plants or dangerous wild animals.

Be sure you know which items are to be inspected. If items important to your buyer are not inspected either find an inspector willing to include them in his inspection or arrange for other experts to inspect the excluded items. Inspection for pest, dry rot, or mold may or may not be included in the home inspection since inspections for wood destroying organisms are also performed by licensed pest inspection companies. Because damage caused by pests can be extremely expensive to repair, we recommend home inspectors also report any damage from dry rot and termites they may find during their inspection. (The contracts used by most inspectors provide an exemption for any failure to find damage from pest infestations.) 1.4.4.3.3 QUALIFYING HOME INSPECTORS The choice of home inspector is of such importance in reducing your risk that it should not be left entirely to the buyer, the buyer’s broker, or your principal.

Consider this scenario: Three months after the close of escrow while your buyer is on vacation, a PB (Polybutylene) pipe  in his upstairs bathroom bursts flooding the floor below. Your buyer’s repair cost is enormous and, to avoid a reoccurrence, he must incur further expense to replace all his PB plumbing with copper. Your buyer might not recall that he selected the least expensive home inspector he could find, that he was too busy to attend the inspection, that his inspector marked his plumbing as only “serviceable,” and the inspector took just one hour to conduct his inspection. Rather than delegating the choice of home inspector to your buyer, we recommend you compile a recommendation list of a dozen, pre-qualified

Polybutylene Pipe home inspectors. Below is a list of questions we recommend asking prospective home inspectors: 1. With which home inspector association are you affiliated?: His preferred answers are (1) CREIA for several years, (2) ASHI with

Page 50 2016 45HoursOnline, All Rights Reserved Consumer Protection Reader, 2016 Edition full membership, or (3) NAHI with a designation of Certified Real Estate Inspector. Full members of ASHI and NAHI are reputed to have performed 250 paid home inspections and the members of both organizations are required to follow similar codes of ethics. 2. If your inspection finds defects, can you perform repairs or recommend someone who can? His answers should be “no” and “no.” You want a professional home inspector who makes his living only from home inspection and not from making repairs. 3. Can you provide me a sample of your home inspection report?

His answer should be “yes.” When you receive the sample home inspection report you will want to make sure it includes these seven sections: (1) a description of areas not examined with corresponding explanations for why they were excluded, (2) guidelines for estimating the cost of repairs, (3) recommendations for consulting

other professionals such as arborists or structural engineers, (4) a prioritization of repairs with justifications, (5) estimates for the remaining life expectancy of critical home systems such as the roof, An exemplar home inspection (6) a list of potential safety issues, and (7) a list of recommendations report can be found here . for improving the energy efficiency of the home . 4. Do you have E&O insurance, general liability insurance, and worker’s compensation? His answer should be ‘yes’ for all three types of insurance. 5. Can all parties and their agents accompany you on your inspection? His answer should be “yes”; however, you should not be surprised if the inspector places limits or charges you extra for time spent answering questions. 6. What don’t you inspect? Each inspector sets limitations on what he will inspect based on factors such as accessibility, safety, and expertise. If the reason the inspector won’t inspect an area or feature of the home which is important to you is because the time required to do so is excessive with respect to the total time he plans for the inspection, then ask him if he would be willing to do so for an extra fee. 7. Are you willing to perform a water test on the roof? His answer should be “yes” or “maybe.” If it has not rained for many months and if the roof does not appear to be in good condition, you should ask the home inspector if he thinks a water test on the roof is warranted. If he does, he will probably charge an additional fee for this test. Given that the integrity of the roof is critical to avoid water damage and that it is a virtual certainty that the roof will be rained upon in the future, the additional cost should be worth it especially if the area has not experienced heavy rainfall under windy conditions for many months. 8. Are you willing to be present at the final walk-through? His answer should be “yes.” There is no better person to verify that the recommended repairs were made than the home inspector who found the defects. 9. Can you send me a copy of your home inspection contract? His answer, of course, should be “yes.” You will want to note any clauses which limit the inspector’s liability or his inspection duties.

2016 45HoursOnline, All Rights Reserved Page 51 Consumer Protection Reader, 2016 Edition 10. Can you give me budget figures for defects you find?: His answer should be “yes” because these figures may be needed to negotiate a reduction in the seller’s price to offset the repairs the buyer will have to make should he buy the seller’s home.

One final question you should ask yourself before placing a home inspector on your “approved list:” “If I am sued and this home inspector is asked to testify, would this inspector appear qualified when giving testimony in court?” Once you develop a roster of qualified inspectors, you can make referrals with confidence. Many home inspectors have a cynical view of real estate agents. One such inspector, Tome Corbett, expresses his cynicism in this YouTube video ►. Specifically, his recommendation is for buyers to compile a list of unacceptable home inspectors from inspectors recommended by local real estate agents .

1.4.4.4 PRE-INSPECTION

Before signing a listing contract, urge your seller to purchase a “pre- inspection”; that is, a home inspection before he lists his property. The To see an excellent video extolling the benefits of pre- benefits of a pre-inspection over a home inspection conducted after the inspections, click here ►. purchase agreement (call it a “post-inspection”) are significant .

1. Avoid Cancellations of Purchase Agreements: A pre-inspection substantially reduces the chances that a buyer will cancel his purchase agreement should a post-inspection discover significant defects not listed on your seller’s TDS. 2. Enhance Credibility: Defects discovered by a buyer not on the seller’s TDS tend to make the buyer suspicious that the seller is not being honest. Suspicious buyers are more difficult to work with than trusting buyers. 3. Reduce Repair Costs: The earlier material defects are found and corrected, the lower should be your seller’s cost to correct such defects since he will have more time to find quality services and material, more time to solicit bids, and a wider window in which to take advantage of scheduling discounts and product reductions. 4. Increase Confidence in the Post-Inspection Report: If you are a dual agent, you will save your buyer time and money by not having to purchase a post-inspection.

To assuage any concerns the buyer might have about the condition of the property, you may ask the home inspector who conducted the pre-inspection to walk the property with your buyer and explain his findings. If the buyer is represented, then in all likelihood his broker will recommend another home inspection using an inspector he trusts. This second inspection should increase everyone’s confidence in the adequacy of your seller’s disclosures and serve to validate the competency of the inspector who conducted the pre- inspection.

Page 52 2016 45HoursOnline, All Rights Reserved Consumer Protection Reader, 2016 Edition 5. Substantiate the List Price: A pre-inspection helps you and your seller better set his home’s list price. For each defect found in the pre-inspection, you can work with your seller to have it corrected or else factor it’s repair into the home’s list price. Click here to see another 6. Selling Tool: The home inspection report  produced from the pre- exemplary home inspection report. inspection contains a wealth of information of interest to prospective buyers such as (1) the life expectancy of home systems, (2) estimated costs for repairs of known defects, (3) technical descriptions of the home’s electrical, plumbing, and HVAC systems, and (4) details regarding any safety issues discovered by the inspector. 7. Reduce Liability: Pre-inspections tend to be more thorough than post-inspections particularly when the post-inspector is selected by the buyer’s agent. Therefore, having conducted a pre-inspection using a home inspector you trust will make it less likely that the new owner will find undisclosed material defects and hold you and your seller liable for the cost of his repairs. 8. Qualify the Seller: If your seller is willing to pay for a pre- inspection, he is probably serious about selling his home. The more serious he is, the more likely that your hard work will pay off.

1.4.4.5 POST-INSPECTION

It’s a good idea to invite – maybe even insist – that all interested parties attend the post-inspection (i.e., home inspection). If not the entire inspection, which may take six to eight hours, then at least a wrap-up session where the home inspector summarizes his findings, describes the most serious defects, and answers questions from the principals. With everyone present, any issues requiring repairs or price accommodations can be expeditiously resolved since all parties will be present and privy to the same facts; and, furthermore, the home inspector will be available to clarify his findings and describe repair options. Many of the defects reported by the home inspector may sound serious but in fact be trivial. For example consider this defect: Repair: The wiring at the kitchen waste disposal is incomplete. The cable clamp is missing at the disposal location. Installation is recommended.

Cable clamps  cost about 50 cents and take an instant to snap into place. A buyer with cold feet might obsess about this defect and, after much worry, cite it as a reason for backing out of his offer. On the other hand, a buyer after the home inspection may not understand how serious a defect actually is until after his purchase in which case he might be apt to sue for misrepresentation. With the buyer and seller following the inspector as he tours the house – checking sockets, flushing toilets, and opening and shutting windows – the Cable Clamps buyer has a good opportunity to learn useful details from the seller about his new home: the color codes used for interior paints, tips on fending off neighborhood raccoons, instructions on how to operate the spa heater, details concerning the home’s maintenance history, and useful tips in 2016 45HoursOnline, All Rights Reserved Page 53 Consumer Protection Reader, 2016 Edition dealing with the neighbors.

One further advantage to having all the players in attendance is to ensure that as much of the structure gets inspected as possible. For example, if the outside water heater compartment is locked shut, hopefully the seller can find the keys to have it inspected. If the bedroom wall is damp, the seller may give his permission to have the wall opened for an invasive inspection.

1.4.5 PROACTIVE STEPS

This section lists proactive steps to reduce your liability in real estate transactions. These steps are listed in no particular order.

1.4.5.1 EXPERTS

The home inspector may recommend the buyer consult several professionals to inspect special aspects of the property: a geologist to report on soil stability, a structural engineer to determine the adequacy of shear wall reinforcement, a licensed electrician to evaluate the condition of the circuit panel, an arborist to ascertain the condition of an old oak tree, a certified environmental expert to check for mold, radon, and asbestos; and, of course, a pest control service to look for damage from termite or dry rot. If the buyer contracts all the professionals recommended to him, it may cost him thousands and delay the sale for weeks, months, or stop it altogether. If you believe the use of any given expert is not worthwhile, let your client know your reasons and be sure the decision to contract any given professional is your client’s decision and not yours. Say as little as possible about the need for professionals you think unnecessary and to encourage your client to contract the professionals you think he really needs. The safe-or-sorry approach of contracting half a dozen highly-paid, highly-skilled professionals to evaluate every potentially hazardous condition while prudent is also impractical and expensive.

1.4.5.2 WALKTHROUGHS

Your standard purchase agreement probably permits a walkthrough inspection by the buyer (see “Final Verification of Condition” in CAR®’s purchase agreement, Form RPA-CA) a few days prior to the close of escrow. Regardless of whether you represent the buyer or seller you should attend the walkthrough to verify that all promised repairs have been made to the buyer’s satisfaction. If the repairs have not been made to the buyer’s satisfaction, you will want to be available to help your client negotiate a resolution with the seller. If all is satisfactory, then the selling broker should prepare a release such as CAR®’s Verification of Property Condition (VP) . You should have the buyer sign the release and have the seller countersign it. When thoroughly prepared and signed by your buyer, it will constitute a waiver by your buyer of any claim on the seller for repairs to unlisted items. The walkthrough is not a contingency of the purchase agreement. It should not be used as a tool to restart negotiations. It merely serves to verify that the property is in the same condition as it was at the time the contract was made and as a check to ensure that promised repairs have been made. Page 54 2016 45HoursOnline, All Rights Reserved Consumer Protection Reader, 2016 Edition Recommendations: (1) make sure you have plenty of time for the walkthrough, (2) photograph/video the condition of the house, (3) be accompanied by your home inspector, and (4) know what the contract says.

1.4.5.3 NEIGHBORHOOD EVALUATIONS

Legally you are under no obligation to conduct a neighborhood evaluation; that is, to make an effort to learn about the conditions of safety, environment, noise, schools, neighbor relations, and other factors materially affecting an owner’s enjoyment of his prospective home. As a matter of practicality though, it is a good idea for you or your buyer to do so. Neighborhood conditions that could be material to your buyer are: 1. Noise: Constant dog barking, boisterous children, trains, planes, a nearby bar, playgrounds, commuter traffic. 2. Neighbors: Troublesome neighbors, boundary disputes, loud motorcycles, dog kennels, anti-social teens, drummers, neighbors with leaf blowers. 3. Safety: Retired landfills, landslides, rattlesnakes, bears, tall dead trees, unfenced bodies of water. 4. Crime: High incidence of burglaries, gang problems, vagrants. 5. Municipal Services: Trash pickup, repair, tree trimming, street repair. 6. Dangerous Conditions: Wild dogs, coyotes, bears, flying golf balls, rabid raccoons, falling coconuts, poison ivy, rattlesnakes. 7. Schools: Quality of the school system (e.g., information about local schools is available from a number of services such as www.SchoolMatch.com).

If you advertise yourself as a neighborhood specialist and fail to disclose a significant problem known to exist in the seller’s neighborhood, you risk being sued by your buyer for fraudulent concealment especially if you promote yourself as a “neighborhood expert.” There are a number of resources on the web that can help you learn a neighborhood’s characteristics: 1. Google Maps: Use this site to surveil a neighborhood from the air. At it’s most detailed level, you can see cars, pools, parks, schools, lakes, and other salient features of a neighborhood. Using the accompanying “Street View” you can see the neighborhood from the perspective of someone walking its streets. 2. www.CrimeMapping.com: This site allows you to learn of crimes in the neighborhood and to see where they occur in proximity to an address. Similar sites include www.SpotCrime.com, www.MyLocalCrime.com, www.CrimeReports.com. 3. www.NextDoor.Com: This is a neighborhood social media site in which members discuss neighborhood issues such as crime, traffic, local businesses, and other neighbors. It is not available in many areas and it requires registration. 4. www.Zillow.com, www.Trulia.com, www.RedFin.com, www.REALTOR.com: These sites are pretty much all the same. The 2016 45HoursOnline, All Rights Reserved Page 55 Consumer Protection Reader, 2016 Edition provide sale prices, homes for sale, and estimates of home values plus other relevant detaisl such as property history, property taxes, and nearby schools. 5. www.WalkScore.com: Provides a measurement of a neighborhood’s “walkability” and displays maps showing the nearby restaurants, coffee houses, bars, grocery stores, parks, schools, shopping centers, and entertainment venues. 6. www.GreatSchools.org: Neighborhood schools with member ratings and comments. 7. www.AirBNB.com: Shows a map of homes be rented out as if they were hotel rooms and the rates each owner is charging. 8. Zillow’s Houses For Rent, www.Homes.com : Show homes for rent and their rental prices. 9. www.CriminalWatchDog.com: Shows where registered sex offenders live in your neighborhood.

Additionally, you can search the archives for local newspapers to find of recent events of interest or to learn of the neighborhood’s history.

1.4.5.4 STIGMATIZED PROPERTIES

“Truth will come to light; murder cannot be hid long.” –- William Shakespeare, Merchant of Venice Feng shui (meaning “Wind and A stigmatized property is any home with a notorious Water” in Chinese) is the ancient history. The home might have been the scene of a art of placement to promote harmony, wealth, success and murder/suicide; all its previous owners may all have health. Click here for tips to died from the same disease, the neighbors may believe promote favorable feng shui. it is haunted , it might radiate bad feng shui ; or it might have a history of expensive repairs. Whatever the stigma, be it rational or irrational, you should disclose the stigma even if the law does not require you to do so. The California law concerning properties stigmatized by the deaths of their former occupants states in CC §1710.2: No cause of action arises against an owner of real property or his or her agent … for the failure to disclose to the transferee the occurrence of an occupant’s death … or the manner of death where the death has occurred more than three years prior to the date the transferee offers to purchase … the real property. If a death occurred on a property within three years of the date of transfer and the circumstances of that death are material (for example, the owner died from the Hantavirus he contracted from a rat nest in his garage), it must be disclosed. If the same death occurred before the three-year statutory limitation, while you may have no legal obligation to disclose it, we recommend you do so anyway and let your client decide its relevance.

Page 56 2016 45HoursOnline, All Rights Reserved Consumer Protection Reader, 2016 Edition The same statute absolves you from liability for nondisclosure of an AIDS related death in the home regardless of how recently the death occurred. Yes, medicine over ten years ago proved that AIDS cannot be transmitted in any manner other than by the direct transfer of bodily fluids, but why take the chance that your buyer knows and believes this? In our opinion, you should disclose it. For that matter, you should also disclose any alien abduction  that may have taken place on or near the property. Even if you choose to not take our advice and to take refuge in this statute’s safe harbor (CC §1710.2), if asked directly about any event you must be truthful;

Disclose all alien abductions! otherwise you may be held liable for misrepresentation or concealment.

1.4.5.5 CLUE REPORTS

When homeowners file a claim on their homeowners insurance policy for a wind-damaged roof, treatment for a dog bite, for damage caused by a falling tree; most insurers post a record of the claim to a cooperative database called CLUE (Comprehensive Loss Underwriting Exchange). When an insurer is asked to write a homeowners insurance policy, the insurer checks the home’s claims history on CLUE. If the insurer finds that the claims history is abnormally high, the insurer may refuse to write the policy or he may charge an exorbitant premium. In particular, insurers are reluctant to provide homeowners insurance for homes having had any claim for significant water damage. Should your buyer be unable to obtain homeowners insurance he may not be able to secure financing. If you represent the buyer you should consider writing into the purchase agreement a contingency stating that the seller’s CLUE report must be acceptable to your buyer. As the buyer’s agent, you should expect two benefits from a CLUE report: First, the report serves as a check on the veracity of the seller. If, for example, the report shows a claim for fire damage not disclosed on the seller’s TDS, then you should doubt the seller’s honesty. You could also use your knowledge of the home’s claims history to verify the competency of the home inspector. Second, if the report shows an extensive claims history or any claim for damage caused by water, you should expect that homeowners insurance will either be unavailable or very expensive. In this situation you may want to advise your buyer to negotiate a price reduction.

Under the Fair Credit Report Act, each homeowner is entitled to a copy of his CLUE report. The report is available through the mail for free. To receive it, you must fill out a form available from LexisNexis Personal Reports together with photocopies proving your identity and send it to their processing center.

1.4.5.6 SERVICE CONTRACTS

If you represent the buyer, you should make it a contingency to your buyer’s offer that the seller will assign to your buyer all his warranties, 2016 45HoursOnline, All Rights Reserved Page 57 Consumer Protection Reader, 2016 Edition insurance policies, and service agreements (subject to prorations) on major fixtures and household components such as heating and cooling systems, fountains, pool/spa systems, and built-in kitchen appliances. Unless the written warranty states otherwise, roof warranties are enforceable throughout their guaranteed term by subsequent purchasers.

1.4.5.7 HOME WARRANTIES

Sellers often purchase a home warranty for their buyer’s protection. According to the Home Warranty Association of California, 90% of purchase agreements for re-sales include home warranty service contracts paid by the seller (source). Most home warranties are one-year contracts that provide coverage for the repair of a home’s mechanical systems; including plumbing, heating, electrical, water heater, and most built-in appliances should they fail due to normal wear-and-tear.

Home warranty companies are notorious for denying claims for repairs on items they contend were broken when the policy was purchased (i.e., “pre- existing conditions”) or because the insurer contends the homeowner failed to adequately maintain the system. If the homeowner’s claim is denied by his insurer, he may consider filing suit against the seller and his broker to recover damages. Therefore, when recommending home warranty insurers, be knowledgeable of the insurer’s reputation and be sure to explain to your clients the limitations and liability limits of their home warranty policy. If you recommend a home warranty to your buyer, you should, as with all recommendations, provide a list of reliable vendors. For each home warranty company on your list you should verify that: (1) the policy provides coverage for the items valued by your buyer, (2) the fee for a service call is reasonable, (3) the liability limits of the coverage are reasonable, (4) the company is licensed by the California Department of Insurance, (5) the service assures quick response, (6) the service provides insured contractors for all repairs, (7) the turnaround time for service calls is reasonable; and, finally, (8) the policy can be renewed at the buyer’s option.

2 CONSUMER PROTECTION ARTICLES

The remainder of this book is comprised of articles written within the four years prior to January 1st, 2016. Most articles are from three sources:

In 2015, CalBRE missed its (1) CalBRE’s quarterly Real Estate Bulletin . As a government spring, summer, and fall issues. publication, its articles are in the public domain. They’re well written, authoritative, and thoroughly researched by CalBRE staff. (2) The online magazine, RealtyTimes.com. We use their articles with their permission subject to an annual license. (3) The Mortgage Professor’s web site with permission of it’s owner, Dr. Jack Guttentag.

The articles selected: (1) describe recent developments affecting residential real estate brokerage or (2) describe a matter of interest to residential real estate agents in an especially succinct, clear, or entertaining manner.

Most articles fall under the general topic of “consumer protection”; that is, each provides information that should help agents provide a better and safer service for their clients. The articles are arranged in descending chronological order within sections.

2.1 STATUTORY LAW

2.1.1 ANNUAL SUMMARIES OF NEW LEGISLATION

2.1.1.1 STATE LEGISLATION

These annual summaries have been written by CalBRE to alert licensees to significant changes to the Real Estate Law. Please note that “SB” refers to a Senate bill and “AB” to an Assembly bill. 2.1.1.1.1 2015 LEGISLATION Unlike in all of its previous years, CalBRE’s 2015 annual summary of State legislation was not published its Winter edition of its Real Estate Bulletin but in an independent publication available here . 2.1.1.1.1.1 AB 345 CONTINUING EDUCATION: MANAGEMENT AND SUPERVISION This bill requires real estate brokers licensed by CalBRE to complete a three-hour course in the management of real estate offices and supervision of real estate licensed activities prior to renewal of their license. This bill also allows salespersons to complete a continuing

2016 45HoursOnline, All Rights Reserved Page 59 Consumer Protection Reader, 2016 Edition education course that assists them to better understand how to be effectively supervised by a broker or branch manager. 2.1.1.1.1.2 AB 607 AUTHORITY TO MAKE TRUST ACCOUNT WITHDRAWAL This bill codifies existing regulations (CR 2834) pertaining to CalBRE to authorize unlicensed employees of a licensed broker, typically accountants and bookkeepers, to make trust fund withdrawals. This bill modifies these provisions by clarifying the conditions of the withdrawals and specifying fidelity bonds held by brokers can have a deductible of up to 5% of the total bond amount when there is evidence of the broker’s financial responsibility sufficient to cover a loss subject to the deductible. 2.1.1.1.1.3 SB 146 CLARIFICATION ON TEAM NAME USAGE This bill provides technical clean-up to AB 2018, which specifies that, “team names” are not “fictitious business names” and are therefore not required to register with CalBRE. This bill clarifies that team names are not required to register with the county in which the team operates, defines a “responsible broker’s identity,” and makes other non- substantive and conforming amendments. Designated as an “urgency” measure, the amendments went into effect on July 16, 2015. 2.1.1.1.2 2014 LEGISLATION Real Estate Bulletin, December 15, 2014 (Winter) 2.1.1.1.2.1 AB 968 CIDS: COMMON AREAS: MAINTENANCE AND REPAIRS This bill delineates default responsibility between an HOA and a homeowner for repairing, replacing, and/or maintaining various spaces in a CID unless otherwise provided in the governing documents. Specifically, the responsibility is as follows: (1) the owner is responsible for repairing, replacing, and maintaining their separate interest; (2) the owner is responsible for maintaining the exclusive use common area next to their separate interest; and (3) the association is responsible for repairing and replacing the exclusive use common area. This bill takes effect January 1, 2017. CIDs have always distinguished two distinct spaces: (1) the common areas (e.g., the roof and pool) for which the HOA is responsible for both repair and maintenance, and (2) the separate interests (e.g., the airspace within an individual unit) for which the individual owners are responsible for both repair and maintenance. This law creates a new hybrid classification, the exclusive use common areas -- the areas appurtenant to a separate interest and which are used exclusively by an individual owner (e.g., balconies, entryways). Unless the CC&Rs specify otherwise, the exclusive use common areas are to be maintained at the expense of the owner but any repair that may be required must be at the expense of the HOA. 2.1.1.1.2.2 AB 1730 LOAN MODIFICATIONS: VIOLATIONS AND PENALTIES This bill makes violators of mortgage loan modification laws subject to liability in a civil action brought by specified public prosecutors. The bill provides for a separate cause of action if these violations are against a senior citizen or disabled person. This bill sets the statute of limitations for these violations at four years.

Page 60 2016 45HoursOnline, All Rights Reserved Consumer Protection Reader, 2016 Edition This law enhances civil and criminal penalties for violations of the existing prohibitions with respect to advance fees for loan modification services. It increases the potential civil penalty from $2,500 to $20,000 per violation in an action by a public prosecutor and the current misdemeanor penalty might, in the discretion of the prosecutor, be chargeable as a felony. In addition, the bill allows an action for recovery of a further civil penalty of $2,500 if the subject of the wrongdoing was a senior or person with a disability. According to the bill’s author, “Mortgage loan modification fraud is a huge issue, especially amongst unwitting senior citizens. Due to the deflation of real property values, either (1) the liens securing the promissory note(s) for principal residential property exceeds the value of the parcel or (2) the loans which were made have resulted in mortgage payments beyond the ability of the property owners to pay. As a consequence, individuals desperate to save their homes have paid what little money they may still have in advance to individuals who claim to be able to save the home by obtaining a loan modification. These individuals then take the money, abandon the homeowners and allow the property to be sold at foreclosure.” (Source) 2.1.1.1.2.3 AB 1770 REFINANCES: LINE OF CREDIT This bill creates a required form to be used by borrowers in the case of a sale or refinance of real property when there is a home equity line of credit open on that property. The form would instruct the lender to suspend all activity on that line of credit and close the account so that no draws can be made on the line of credit during the refinance process. The bill also instructs the lenders to close the accounts once the accounts are settled, after which the lender is required to issue a reconveyance. This bill took effect July 1, 2015 and sunsets on January 1, 2019. This bill, now CC §2943.1, enhances the process of paying off a HELOC in connection with an escrow for the sale of the secured property or a refinance. It is designed to prevent the situation where a lender fails to close a HELOC prior to close of escrow, funds are drawn on it, and the innocent buyer inherits the underlying lien and loan. The borrower may innocently be unaware that the HELOC is secured by the property or may purposely request multiple HELOCs from different lenders and proceed to draw funds from one line while another is being requested. Any of these circumstances potentially creates conflicts with buyers, as well as loan priority problems for subsequent lenders. (Source ) 2.1.1.1.2.4 AB 2018 RE BROKERS: FICTITIOUS NAMES: TEAM NAMES This bill allows a real estate broker to delegate to a licensed salesperson, under specified conditions, the process of filing a fictitious business name. Moreover, this bill allows a real estate salesperson to contract with a broker allowing the salesperson to retain ownership of a fictitious business name even though the broker may file the fictitious name with the county. This bill also allows a salesperson to use a “team name” without filing for a fictitious business name if certain conditions are met. 2.1.1.1.2.5 AB 2100 CIDS: YARD MAINTENANCE: FINES: DROUGHT This bill prohibits HOAs from fining homeowners for reducing or ceasing to water plants and lawns if the Governor or local government has declared a

2016 45HoursOnline, All Rights Reserved Page 61 Consumer Protection Reader, 2016 Edition state of emergency due to drought. This bill was an urgency statute and became effective upon signing. 2.1.1.1.2.6 AB 2396 RE LICENSE APPLICATIONS: EXPUNGED CONVICTIONS This bill precludes a licensing board or bureau from denying a license application solely on the basis of a conviction that has been dismissed (expunged) pursuant to §§ 1203.4, 1203.4a, or 1203.41 of the Penal Code. An applicant who has a conviction that has been dismissed pursuant to §1203.4, 1203.4a, or 1203.41 of the Penal Code is required to provide proof of the dismissal. 2.1.1.1.2.7 AB 2430 CIDS: PURCHASE DISCLOSURES: FEES See the below article, “Who Pays This bill amends a CID buyer disclosure form as follows: (1) mandates the for HOA Documents” for an fees for each required document to be disclosed; and (2) specifies that fees explanation of this law. for documents not listed in that disclosure form will be charged separately. Documents required to be included by the disclosure form will be paid by the seller. Documents from various parts of the sale will not be bundled together at one price, such as escrow documents, and all fees for documents will be itemized.

2.1.1.1.2.8 AB 2540 RE LICENSEES: E-MAILS AND CONTACT INFORMATION This bill requires real estate licensees to provide CalBRE with an up-to-date mailing address, telephone number, and e-mail address used for licensed activity. The bill also requires applicants for licensure to disclose valid contact information in the application. 2.1.1.1.2.9 SB 1159 REAL ESTATE LICENSE APPLICANTS: INDIVIDUAL TAX IDENTIFICATION NUMBER This bill will eliminate the requirement that a license applicant show proof of legal presence before obtaining a real estate license. Real estate license applicants will still need to provide a social security number/indicial tax identification number in order to obtain a license. The provisions of this bill will be implemented on or before January 1, 2016. Requires all 40 licensing boards under the Department of Consumer Affairs (including CalBRE) to consider applicants regardless of immigration status by 2016. The law change follows a landmark state Supreme Court case earlier this year in which justices ruled that lawyer Sergio Garcia should be admitted to the California bar despite lacking legal status. (Source) 2.1.1.1.2.10 SB 1171 DUAL AGENCY DISCLOSURE: COMMERCIAL TRANSACTIONS This bill extends to commercial transactions the duty of a real estate broker to disclose, in writing, that the broker is acting as a dual agent. Prior to this bill, disclosure of dual agency in commercial transactions involving real property did not have to be in writing. 2.1.1.1.3 2013 LEGISLATION Real Estate Bulletin, December 15, 2013 (Winter) 2.1.1.1.3.1 SB 426 CIVIL PROCEDURE: DEFICIENCY JUDGMENTS This bill clarifies that no deficiency shall be owed or collected when a lender uses the non-judicial foreclosure process or forecloses on a purchase Page 62 2016 45HoursOnline, All Rights Reserved Consumer Protection Reader, 2016 Edition money loan or refinance of a purchase money loan that is secured by the borrower’s home. A judicial foreclosure is processed as a civil lawsuit. As with any lawsuit, a judicial foreclosure is expensive and takes a great deal longer to resolve than does a non-judicial foreclosure. Moreover, even if the lender is successful in getting a court order to auction off the home (foreclosure), the borrower has the “right of redemption” which allows him to buy back the home from the the successful bidder for a period one year after its sale. For these reasons, judicial foreclosure is rarely used in California. (Source) Prior to the enactment of this law, lenders had already been prohibited from collecting a deficiency judgement on a residential purchase money loan regardless of the foreclosure method used by the lender; that is, by either the non-judicial method (such as a trustee sale) or the much more cumbersome and expensive judicial method. However, lenders were not prohibited from claiming that a deficiency was due or from attempting to collect that deficiency from the borrower using extra-judicial methods of collection such as selling the debt to a collection agency. SB 426 closes this loophole thus making it illegal for a lender to collect a deficiency by any means whatsoever. (Source) 2.1.1.1.3.2 SB 652 REAL PROPERTY DISCLOSURES: CONSTRUCTION DEFECT LITIGATION This bill revises the standard disclosure statement used in real estate transactions by requiring a seller of real property to disclose all pre-litigation claims for damages made by the seller to the potential buyer. A bill passed by the California legislature in 2002 (SB 800) provides a pre- litigation procedure in which a homeowner must give his builder the opportunity to correct or compensate the homeowner for any claimed construction defects before suing the builder for redress. Such claims are referred to as “pre-litigation claims.” Suppose, for example, Sally discovers that the wooden deck of her new home is constructed of Douglas fir and not redwood as had been claimed by her builder. She then notifies her builder of this defect together with a demand that he either rebuild the deck with redwood or compensate her for the deck’s reduced value. But before her builder has a chance to make amends, Sally sells her home to Bob. This law compels Sally to disclose to Bob her demand for restitution from her builder. (Source) 2.1.1.1.3.3 SB 676 REAL ESTATE RECORDS: UNLAWFUL DESTRUCTION This bill clarifies that willful destruction or falsification of records required to be maintained by a CalBRE licensee is grounds for disciplinary action. Like other violations of the Real Estate Law, the willful destruction or falsification of records is a misdemeanor. 2.1.1.1.4 2012 LEGISLATIVE SUMMARY Real Estate Bulletin, December 15, 2012 (Winter) 2.1.1.1.4.1 AB 278/SB 900 MORTGAGES AND DEEDS OF TRUST: FORECLOSURE Existing law prescribes foreclosure procedures that a residential mortgage lender must follow upon a borrower’s breach of a loan obligation. Such procedures include requiring the lender to make contact with the borrower

2016 45HoursOnline, All Rights Reserved Page 63 Consumer Protection Reader, 2016 Edition to evaluate alternatives to foreclosure prior to recording a notice of default. Existing law also requires a recorded notice of default to include a declaration that the lender has contacted or attempted with due diligence to contact the borrower. This bill, among other things:  Prohibits the practice of “dual tracking” where a person is negotiating a loan modification with his or her servicer and the servicer forecloses during the loan modification negotiations;  Requires servicers to assign a single point of contact to a borrower upon the borrower’s written request;  Creates a carve-out from certain provisions for individuals and entities that foreclose upon less than 175 loans per year; “Private right of action” means a  Allows for a private right of action  and civil penalties for willful homeowner may sue his lender for violating this law. violations of the bill’s provisions.

2.1.1.1.4.2 AB 1511 DISCLOSURES: GAS TRANSMISSION PIPELINES This law was in response to the Existing law requires that specified material facts about residential real catastrophic pipeline explosion in property be disclosed to a potential buyer prior to close of escrow, including San Bruno, California on September 9, 2010 (details). potential hazards. This bill requires that a notice be placed in every residential real estate purchase contract regarding the potential existence of gas or hazardous liquid transmission pipelines near the subject property.

2.1.1.1.4.3 AB 1718 REAL ESTATE BROKER LICENSES Existing law prescribes the qualifications for licensure as a real estate salesperson or broker and provides for the regulation of licensed individuals

and entities. Existing law requires an applicant for a broker license to have two years experience as a licensed salesperson. Existing law also allows CalBRE to treat any four-year degree from an accredited institution as Here is list of California schools equivalent to the required two years’ real estate experience. This bill offering undergraduate degrees in real estate. It includes five provides that only a degree from a four year college or university with a California State Universities. major or minor in real estate can be considered as equivalent to two years’ experience. 

Owing to the passage of SB 1159, beginning Jan. 1, 2016 To sit for the broker’s exam, one must be 18 years or older, a legal U.S. undocumented workers will be resident , and have no convictions for any crime involving dishonesty. eligible to apply for licensure Additionally, broker candidates must fulfill an experience requirement and (source). an education requirement.

Experience Requirement: Unless one of two exemptions apply, broker candidates must have a minimum of two years full-time salesperson experience earned over the last five years. Part-time activity over ten hours per week is given credit on a prorated basis. CalBRE permits two exemptions from the Experience Requirement: (1) if the candidate has a four-year college degree with a major or minor in real estate (as made necessary by AB 1718 ), (2) if the candidate has two or more years full-time experience in a real-estate related profession such as loan officer or appraiser. Education Requirement: Excepting members of the California State Bar excepted, all other broker candidates must have completed eight college- Page 64 2016 45HoursOnline, All Rights Reserved Consumer Protection Reader, 2016 Edition level classes related to real estate. Since three of these classes are also required to sit for the salesperson exam most broker candidates need only five additional real estate courses. Any or all of these courses may have been completed in college or from a private real estate school. Click here and here for details. 2.1.1.1.4.4 AB 1950 LOAN MODIFICATIONS: ADVANCE FEES Existing law prohibits a real estate licensee or any person from demanding or accepting advance fees in money or other compensation for residential loan modification services; a violation is a public offense carrying a punishment of fine, imprisonment, or both. These provisions sunset on January 1, 2013. This bill deletes those sunset dates as they relate to licensees or any person, making the ban on collection of advance fees permanent. Existing law makes it unlawful for any person to engage in the business of a salesperson or broker without a license. This bill expands the scope of that prohibition to make it unlawful for a person to engage in the business of a mortgage loan originator without an [NMLS] license endorsement. Existing law also provides a statute of limitations of one year for violations of certain sections of the BPC pertaining to advance fees for loan modifications. This bill extends the statute of limitations for such misdemeanor violations to three years. 2.1.1.1.4.5 AB 2314 REAL PROPERTY: BLIGHT Existing law requires the legal owner of vacant, foreclosed residential property to maintain that property or be subject to civil fines that can be

levied by a governmental entity of $1,000 per day. This provision will sunset on January 1, 2013. This bill deletes the sunset date of that provision, making it permanent. Existing law also permits an enforcement agency to This law (encoded as CC bring an action under the Health and Safety Code to prevent, restrain, §2929.3) appears to be yet another law purely for show. As correct or abate blight or nuisance. Such enforcement agency may also go of January 2016, your editor to court to seek a receivership. This bill also prohibits an enforcement failed to find any reports that it action if a person [such as a new owner] is in the process of correcting a has been enforced. violation, except in specified circumstances. 

2.1.1.1.4.6 AB 2610 TENANTS: FORECLOSURE AND UNLAWFUL DETAINER Existing state law requires a trustee or authorized agent, when posting a notice of sale on property subject to a foreclosure, to also post a notice for the resident(s) that alerts the resident(s) that foreclosure procedures are underway. The required language in the notice currently provides that the tenant must be given a new lease or an eviction with 60 days of notice. Existing federal law requires that a tenant under a bona fide lease, as defined, be given 90 days of notice by a successor owner when a home has been foreclosed, unless the new owner will occupy the property as his or her primary residence.

This bill changes state law so the required tenant notice would inform the tenant(s)/resident(s) that they may either be given a 90-day eviction notice

An unlawful detainer action or a new lease by the new owner. The notice further provides that the new occurs when a tenant illegaly owner of the property is required to honor the existing lease and that the stays in possession of a property; resident may therefore have the right to stay in the home for more than 90 for example, after his lease days. expires.

2016 45HoursOnline, All Rights Reserved Page 65 Consumer Protection Reader, 2016 Edition A prejudgment claim is a form The bill also clarifies that a tenant or subtenant of a foreclosed property in that alerts unknown occupants an unlawful detainer action  is allowed to file a prejudgment claim  of that an eviction action has been filed. (Go here for a detailed right to possession or to object to enforcement of a judgment for explanation.) possession, whether or not the tenant or subtenant was served with a prejudgment claim of right to possession.

Tenants shouldn’t be too surprised when receiving a notice that their building is about to be sold and that, consequently, they may need to move in the near future. After all, at least 90 days before the Notice of Sale is recorded, the trustee should have posted a Notice of Default on the building and, thanks to a new law enacted in 2012 (see below section “SB 1191 Landlord-Tenant Relations: Notice of Default”) the landlord is legally required to notify his tenants that he has received a Notice of Default.

When the building’s trustee records his Notice of Sale (90 days after the Notice of Default), this law requires him to post the following notice on the building and send the notice via certified mail to all known tenants:

The foreclosure process has begun on this property, which may affect your right to continue to live in this property. Twenty days or more after the date of this notice, this property may be sold at foreclosure. If you are renting this property, the new property owner may either give you a new lease or rental agreement or provide you with a 90-day eviction notice. You may have a right to stay in your home for longer than 90 days. If you have a fixed-term lease, the new owner must honor the lease unless the new owner will occupy the property as a primary residence or in other limited circumstances. Also, in some cases and in some cities with a “just cause for eviction” law, you may not have to move at all. All rights and obligations under your lease or tenancy, including your obligation to pay rent, will continue after the foreclosure sale. You may wish to contact a lawyer or your local legal aid office or housing counseling agency to discuss any rights you may have.

Thus, a month-to-month tenant who took notice of the original Notice of Default should have, at a minimum, 201 days before having to move: 90 days after the Notice of Default, plus 21 days after the Notice of Sale, plus 90 days after the sale. (Source) 2.1.1.1.4.7 SB 825 RESIDENTIAL TENANCIES: FORECLOSURES. Existing law requires a new owner of a tenant occupied residential property, who obtained the property through foreclosure, to include with any notice of termination of tenancy a form that explains the tenant’s rights and obligations with respect to the tenancy. The notice provision would sunset on January 1, 2013. This bill extends the sunset date to December 31, 2019.

2.1.1.1.4.8 SB 875 REAL ESTATE LICENSEES Existing law provides for the screening, licensure, and regulation of real estate salespersons and brokers. This bill:  Allows CalBRE to proceed with the denial of a license application by notice without first having to file and serve a formal Statement of Issues under the Administrative Procedure Act. An applicant who

Page 66 2016 45HoursOnline, All Rights Reserved Consumer Protection Reader, 2016 Edition receives a notice of license denial may request a hearing to contest the denial;  Prohibits any person subject to a bar order from participating in any examination for licensure;  Allows the Commissioner to require new fingerprints for every licensee who petitions to have a restriction removed or penalty reduced; and  Permits the Commissioner to take administrative action against a person who cheats on or subverts a licensing examination and to bar the person from taking the real estate exam again for up to three years. 2.1.1.1.4.9 SB 1055 LANDLORD AND TENANT: PAYMENTS Existing law regulates landlord-tenant relations in the leasing of residential real property. Existing law also prohibits a landlord or landlord’s agent from solely requiring cash as an exclusive form of payment of rent or security SB 1055 prohibits landlords from deposit. This bill requires a landlord to offer forms of payment other than requiring their tenants to pay their rents online (source). cash or electronic transfer, except in specified circumstances.

2.1.1.1.4.10 SB 1069 DEFICIENCY JUDGMENTS Existing law prohibits a lender from pursuing a deficiency judgment, as defined, against a borrower upon the breach of a home loan obligation. This bill extends anti-deficiency protections to a “purchase money mortgage,” as defined, that has been refinanced, except to the extent that a lender advances new principal (cash-out) that exceeds the original purchase money loan balance. Suppose Bob refinanced his home in the amount of his balance (no cash out) and his lender subsequently foreclosed and then suffered a loss of $100K after reselling Bob’s former home. Before this law, the lender could sue Bob for the $100K; after this law, he can’t. 2.1.1.1.4.11 SB 1191 LANDLORD-TENANT RELATIONS: NOTICE OF DEFAULT Existing law prescribes procedures that must be followed when a lender seeks to foreclose on a residential property and prescribes certain protections for tenants of foreclosed properties. This bill requires every landlord who offers a residential lease and has received a Notice of Default to disclose the Notice of Default in writing to any prospective tenant. The bill also provides a remedy in the event of a landlord’s failure to disclose the Notice of Default. The provisions of this bill sunset on January 1, 2018.

2.1.2 CALBRE AND ITS REGULATIONS

2.1.2.1 NEW ‘COMMUNITY-BASED’ OUTREACH PROGRAM

Real Estate Bulletin, Fall 2014; by Wayne Bell, Former CalBRE Commissioner. As you know from a number of my prior communications, we at CalBRE are committed to outreach. This includes improving communications and engagement with and providing helpful resources to the general public and licensees.

2016 45HoursOnline, All Rights Reserved Page 67 Consumer Protection Reader, 2016 Edition With regard to real estate practitioners, this means community and field outreach by CalBRE to introduce ourselves to and engage with our licensees and to provide information on the breadth of information, tools, and services that CalBRE offers. The model that we have adopted and begun to implement Statewide via broker-office visits is akin to what law enforcement does through community-based policing, and it recognizes the reality that CalBRE cannot, because of its limited staff resources, effectively deal with industry related enforcement issues alone. We must reach out to, communicate with and engage with industry members who share with us a responsibility for helping to ensure a competent and law-abiding real estate marketplace. To be very clear, the purpose of the outreach visits is not investigative, and there is no intent to seek out or look for violations of the Real Estate Law. The offices visited are chosen randomly by district office representatives. Jan. 5, 2014: A couple of days ago I had a chat with my mortgage broker. He mentioned that he was alarmed when a CalBRE representative showed up unannounced at his office. He said the rep explained that he was making a courtesy call in accordance with CalBRE’s “community outreach” program. My broker found him courteous, helpful, and friendly. In addition to focusing on field outreach (like “walking a geographical beat”) and communication between CalBRE and licensees, this community-based model also stresses education, problem identification and solving, and (we hope) timely intervention or collaborative involvement to deal with developing issues. From a practical standpoint, our hope is that this approach will help provide CalBRE’s licensees and the organized real estate industry with: (1) A voice in how the Real Estate Law will be enforced. (2) The identification of, and proactive resolution to, recurring industry problems or issues. (3) A better understanding of CalBRE’s capabilities and limitations. (4) Working relationships with CalBRE representatives. Moreover, we believe this new effort will help enable those of us at CalBRE who are responsible for licensing and regulating the industry to:  More efficiently and effectively use CalBRE resources.  Be more responsive to industry issues as they arise.  Develop improved communication channels.  Obtain better, more complete, and more expeditious information about the efficiency and effectiveness of CalBRE’s enforcement efforts.

So please do not be surprised to see, and please welcome, representatives from CalBRE who come to your offices for communication and outreach. The representative(s) will likely bring a packet of materials for your use, and the packet might include CalBRE’s Broker Evaluation Compliance Manual which provides an easy-to-follow compliance checklist to help licensees stay compliant with the Real Estate Law, various relevant publications for licensees, and contact information for the CalBRE representative(s) who made the office contact. We invite you to let any of CalBRE’s representative(s) (including CalBRE’s executive team) know what you think of the new program , and what other tools, materials, or resources would be of benefit to you. Additionally, we invite and urge you to ask questions and open the lines of communication to CalBRE and its field representatives – and to share with us information about recurrent or outstanding industry problems that we can help to address and resolve.

2.1.2.2 AGENTS NEED’NT KEEP EPHEMERAL DOCUMENTS. WOW!

by Bob Hunt for Realty Times, July 28, 2014 Copyright© 2014 Realty Times®. All Rights Reserved. Used With Permission. Both the law and good risk management practices require that real estate brokerages maintain records of contracts, documents, inspections, reports, requests, demands, etc. that are generated during the course of a real estate transaction. While there may be a core list of items that just about every company requires, organizations will differ with respect to various particulars. Not long ago, CalBRE introduced a generally unwelcome concept into the mix. As we have noted before (“Record Keeping In The Digital Age Is Not Just A Technological Issue”), the Bureau put forward an interpretation that the law (BPC §10148) which requires retention of all documents obtained by an agent “in connection with” a real estate transaction includes all electronic documents. Not just emails; but texts, tweets, and probably even posts. This interpretation did not sit well with members of CAR®. If implemented, it would have required a good deal more time and effort to compile a compliant file. Hence, the CAR® Board of Directors authorized a motion that CAR® “sponsor legislation to prohibit short-lived communication like tweets or text messages from being considered ‘transactional documents’ that must be retained in a broker’s file.” That legislative effort has been successful. AB 2136 passed both houses and was signed into law by the Governor on July 9, 2014. AB 2136 amends both BPC §10148 and also CC §1624 (Statute of Frauds, which controls which contracts must be in writing). It adds to §10148 that “this subdivision shall not be construed to require a licensed real estate broker to retain electronic messages of an ephemeral nature … (as described in §1624).” This piece of legislation had no registered opposition. It sailed through both houses without a single ‘no’ vote in either committee or on the floor. Tellingly, the authors of the legislative bill analyses found it necessary to explain that ephemeral means “short-lived,” and/or they put the word in 2016 45HoursOnline, All Rights Reserved Page 69 Consumer Protection Reader, 2016 Edition scare quotes throughout their analyses. One just has to wonder how many legislators who voted for this bill know what “ephemeral” means. But I digress. The legislation unfortunately focuses on the form of a communication rather than its content. Moreover, the legislation’s sponsors, as did the analysts, seem to take for granted that text messages are unlikely ever to be the vehicles of serious conversations about serious topics. Yes, it is unreasonable to say that all text messages should be retained. But, it is equally unreasonable to suggest that none of them should be. For many years it has been (and still is) considered a good risk management practice to keep logs of telephone conversations. Nowadays, for a sizeable portion of the population, text messages have replaced phone conversations. Thus the advice of a CAR® legal department (recently up-dated) Q&A is apt. Q. Are there reasons a licensee might want to maintain “ephemeral” text or instant messages? A. Yes. While not mandatory, a broker could decide that maintaining such communications could be useful to the transaction record. Similar to keeping a phone log of communications with a client, a broker may wish to keep a log of all texts to show the client was regularly communicated with regarding the transaction and to keep a record generally of the agent’s communications with other agents and third parties.

Be that as it may, it is nonetheless good news that there is not a requirement to keep all electronic communications. Moreover, it was a thoughtful gesture of the Commissioner, Wayne Bell, to let it be known that, even though the law is not effective until January 1, 2015, as of now, the Bureau will not be requiring the retention of the ephemeral records referred to in the bill.

2.1.2.3 NO MORE DRE

by Bob Hunt for Realty Times, March 5, 2013 Copyright© 2013 Realty Times®. All Rights Reserved. Used With Permission. The days of the DRE are numbered. Effective July 1, 2013, it will cease to exist. In name at least. Come July, the DRE will become the Bureau of Real Estate; and if you don’t think that is a big deal, then you are just not attuned to the ways of government.

The shuffling around of the DRE is just one small move in what has been called “the most comprehensive overhaul of state government in decades.” The Government Reorganization Plan (GRP) of Governor Brown was formally proposed in March of last year. It was adopted, by lack of legislative objection, in July. The plan, said the Governor, was “another step in my continuing efforts to streamline government, make it more efficient, and reduce unnecessary spending.” Under the plan, the number of state agencies will be reduced from twelve to ten. (Fear not, though, that this will result in a massive loss of jobs and reduction in the state workforce. Nothing, in that sense, will have been eliminated. Only the names and the

In proposing the GRP, it was noted that “Currently, many unrelated departments - like Caltrans, the DRE, and the Department of Financial Institutions – are housed together, while many related programs are scattered throughout different agencies.” A fair enough criticism, indeed. One doesn’t imagine that, if you were designing the government structures from scratch, you would have created a Business, Transportation, and Housing Agency, under which those three named departments would have been housed.

On the other hand, if you and I were creating the structures of state government, we probably wouldn’t have come up with the current

reorganization plan either. In it, the Department, oops, the Bureau of Real Estate will now reside in the Business and Consumer Services Agency. It will share that organizational house with, among others, The Medical Board of California, the California State Board of Pharmacy, The Bureau of

Use this link to see if your Barbering and Cosmetology, the Bureau of Electronic and Appliance Repair, microwave repairman is licensed Home Furnishings, and Thermal Installation (I’m not kidding ), the State  Athletic Commission, the Cemetery and Funeral Bureau, the State Board of Guide Dogs for the Blind, and the Acupuncture Board.

“What’s the logic in that?” you might ask. According to the GRP, “Entities that regulate or license industries, business activities, or professionals are currently spread throughout State government … Consolidating these entities into a new Business and Consumer Services Agency will improve service, consistency, and efficiency by facilitating shared administrative functions and expertise in areas such as automated systems, investigative practices, and licensing and legal processes.” One can only imagine the savings and efficiencies that will be achieved when the Bureau of Barbering and Cosmetology shares expertise in investigative practices with the Bureau of Guide Dogs for the Blind. CAR® was initially opposed to the GRP, at least insofar as it affected the DRE. There was concern that DRE would (1) lose its regulatory, enforcement, and legal staff; (2) forfeit its operating reserves to the General Fund; and (3) lose some measure of its influence in government. CAR® removed its opposition after receiving assurances that (1) and (2) would not happen and that DRE’s influence would be retained as evidenced by the fact that its head would still have the title of “Commissioner” as opposed to being a Bureau Chief. As noted before, you have to be sensitive to the ways of government to be reassured by such things. For reasons unknown, the BRE (formerly the DRE) changed its name to CalBRE soon after the reorg.

2016 45HoursOnline, All Rights Reserved Page 71 Consumer Protection Reader, 2016 Edition In Sacramento, bureaus report to departments, departments report to agencies, and agencies report directly to the Governor. CalBRE is at the bureau level. As such, it reports to the Department of Consumer Affairs which reports to the Business, Consumer Services and Housing Agency which reports to the Governor. In the reorg, the Commissioner’s organization was demoted from the department level to bureau level. Click here for Sacramento’s 2015 organization chart and here for a description of CalBRE’s sister bureaus all of which report to the DCA – the Department of Consumer Affairs.

2.1.2.4 RE RECOVERY FUND PROTECTS FRAUD VICTIMS

by Bob Hunt for Realty Times, November 6, 2012 Copyright© 2012 Realty Times®. All Rights Reserved. Used With Permission. Formerly called the “Real Estate Many California consumers do not know that their state, like a number of Recovery Fund.” others, has Consumer Recovery Fund . The Recovery Fund is, so to speak, a court of last resort, not first or anywhere in between. It is designed to bring some financial relief to those who (1) have been victimized by the fraudulent actions of a real estate licensee, (2) who have won a judgment in court, and (3) who have been unable to collect from the guilty defendant because that party is bankrupt, insolvent, deceased, or otherwise uncollectible.

The Consumer Recovery Fund was established in 1964. It is funded both from a portion of real estate license fees and also from fines collected by CalBRE. Since its inception, the fund has paid out more than $38 million. BPC §10456.6 calls for 12% of license fees collected to be credited to the Consumer Recovery Account. If the account’s balance exceeds $3.5 million, any excess in fees collected are credited to a general real estate fund. A successful applicant to the Recovery Fund may be paid up to a statutory maximum of $50,000 per transaction, with a possible total aggregate maximum of $250,000 per {the fraud perpetrated by any given} licensee.

The first thing to note about the Consumer Recovery Fund is that a qualified claimant must have been the victim of either deliberate fraud or a conversion of trust funds (stealing a client’s money). So, for example, someone who lost money because of an agent’s incompetence or negligence will not qualify for Recovery Fund payment. Neither will a person who lost money dealing with a real estate agent when the agent was acting as a principal. A qualified claim must result from fraud committed when the guilty party was engaged in behavior for which a real Notorious fraudster, Snidely estate license is required. You don’t have to have a license to act as a Whiplash: Watch him foreclose on principal. So, if a licensee, acting as a principal, bamboozled you, you mortgages in this YouTube video won’t be eligible to tap the fund. ►. Before applying to the Recovery Fund, the victim must have won a judgment in court, through arbitration, or in a bankruptcy proceeding. Also, the applicant must have made a diligent effort to collect and must be able to demonstrate that the licensee and all other entities found liable, did not have assets sufficient to satisfy the judgment.

Page 72 2016 45HoursOnline, All Rights Reserved Consumer Protection Reader, 2016 Edition A recent California appellate case (Worthington v. Davi, as Real Estate Commissioner, 2012) provides insight into the application of Recovery Fund law. The Worthingtons acted as buyers in a series of four real estate transactions where a real estate agent clearly caused them to lose a lot of money because of a variety of the agent’s fraudulent inducements and representations. Their case was arbitrated and they prevailed. When the Worthingtons discovered the defendants’ assets were insufficient to cover the judgment (approximately $280,000), they filed an application with the Consumer Recovery Account. The Commissioner granted part of their application, awarding $50,000 for one of the transactions. However, he denied recovery on the other three transactions because the judgment on those claims was based on breach of the broker’s fiduciary duty rather than “fraud, misrepresentation, or deceit” as required by BPC §10471 of the Code. The Worthingtons took the Commissioner to trial. The trial court said, “The purpose of the Recovery Fund is to satisfy certain types of judgment against licensed real estate brokers and agents … Courts have said that [the law] is to be given a liberal construction to promote its purpose and protect persons within its purview.” The trial court then found that, in at least two more of the transactions, the breach of fiduciary duty arose out of deliberate fraud and, therefore, the Fund should pay the Worthingtons. The Worthingtons were awarded the statutory limit for three of the four transactions. The CalBRE appealed. The Appellate Court agreed with the trial court. In layman’s language, they said that the Commissioner was trying to avoid payment by appealing to a technicality. The Appellate Court quoted an earlier court saying that a statute such as this one should be “construed when its meaning is doubtful so as to suppress the mischief at which it is directed, to advance or extend the remedy provided, and to bring within the scope of the law every case which comes clearly within its spirit and policy.” There’s been a lot of real estate fraud perpetrated within the state of California during the past few years. By the time cases are concluded, it is likely that a number of defendants will be insolvent. We should hope that the Consumer Recovery Fund will be adequately stocked. It doesn’t seem to your Editor that disbursements from the fund are transparent. Nowhere can he find on the Web the fund’s balance, a listing of disbursements from the fund, or that “excess” portion of the fund which is diverted to CalBRE’s general working fund. It seems hypocritical to him that an institution which demands so much transparency from licensees should not provide any transparency to account for the use of a fund financed with 12% of all license fees.

2.1.2.5 MORE RESPONSIBILITY FOR BRANCH MANAGERS

by Bob Hunt for Realty Times, July 10, 2012 Copyright© 2012 Realty Times®. All Rights Reserved. Used With Permission. Effective July 1st, 2012, California brokers of large and/or multi-office real estate firms can, if they choose, take steps that will enable them to rest and breathe more easily. Now, as a result of last year’s SB 510, it is possible

2016 45HoursOnline, All Rights Reserved Page 73 Consumer Protection Reader, 2016 Edition for a broker to appoint a real estate licensee as a branch office or division manager who will (1) take and have responsibility for the oversight and supervision of day-to-day operations in the branch or division real estate office and (2) be subject to potential sanctions and discipline from CalBRE for failure to properly supervise the activities of licensees. Until now, while brokers could and did appoint branch managers, those managers were not subject to CalBRE discipline in the event that they failed to properly supervise the licensees at their office(s). Now, a branch manager may find a greater incentive to ensure that licensee activity is being conducted properly. The CalBRE believes this new law will result in better supervision and more accountability to the public. In a recent advisory the Bureau wrote, “If there is an appointment and supervisorial delegation under the new law, there are license disciplinary consequences to the branch manager. Therefore, in a brokerage with multiple divisions or branch offices, an appointment of branch managers under the new law will arguably better enable the Broker to ‘manage the branch managers’ while allowing the branch managers to ‘manage the line level sales agents’ who report to him or her at the branches or division offices.” The particulars of the new law are to be found in BPC §§ 10164 and 10165. Some of the more relevant points are as follows:  A broker does not have to appoint branch managers under the terms of this law. It is optional.  If an appointment under the terms of the law is made, it must be in writing and CalBRE must be notified (on a specified form ) at the time the appointment is made and when/if it is terminated.  A real estate licensee cannot qualify to be a branch manager if he or Bar Order: A directive from a court to prevent an act or to she (a) holds a restricted license; (b) is or has been subject to a bar compel an act. order ; or (c) is a salesperson with less than two years of full-time real estate experience within five years preceding the appointment.  If an appointment of a branch manager is intended to be within the terms of the new law, the branch manager must agree to accept the delegated responsibility in a written contract.

Even if a branch manager is appointed under the terms of the new law, the broker is still not entirely off the hook. He still has ultimate responsibility and, if called for, could be disciplined for a failure to supervise.

CAR® has developed a contract form (Form OMA ) that may be used to Statutory Form: A form with appoint a branch manager within the terms of the new law. There is no wording dictated by statute. For statutory contract form . The CAR® form is one that is developed for use example, the Agency Disclosure ® Form by those who are members of REALTOR associations. For example, it includes a stipulation that the manager has not been previously disciplined by a local association of REALTOR®s.

There are other aspects to the CAR® form that go beyond the requirements of the law. It assumes that the manager will be an employee. It includes various employee-related provisions. Salary options are included. Also, it calls for the manager’s stipulation that not only does he/she not have a

Page 74 2016 45HoursOnline, All Rights Reserved Consumer Protection Reader, 2016 Edition restricted license but also that there has been no previous restriction or suspension. As noted above, when a branch manager, subject to the provisions of BPC §§10164 and 10165, has been either appointed or dismissed, CalBRE is to be notified on a specified form. That form is RE 242 and can be found on the CalBRE web site. It can be expected that if branch managers are now appointed under the new law’s provisions – with increased liabilities – they will want additional compensation for that. That issue was not covered by SB 510. In response to questions about this new law, CalBRE issued an advisory.

2.1.3 LICENSING

2.1.3.1 MANY ‘FIX-IT’ PROJECTS REQUIRE A CONTRACTOR’S LICENSE

by Bob Hunt for Realty Times, July 19, 2015 Copyright© 2015 Realty Times®. All Rights Reserved. Used With Permission. It is common for home sellers to need to hire someone to do maintenance or corrective work in order to facilitate a sale. Sometimes such work will be done in order to prepare a house to go on the market. Sometimes it will be done in response to a buyer’s “fix-it” list and sometimes it will be performed in order to meet contractual requirements such as doing what is needed in order to obtain a structural pest control clearance. When the work is hired out, as opposed to being done by the homeowner himself, attention should be paid to determine whether or not the person doing the work is required to have a contractor’s license.

You can watch the CLSB bust BPC §7028(a) states, “It is a misdemeanor for any person to engage in the mostly Hispanic working men for business or act in the capacity of a contractor within this state without lacking a contractor’s license in several sting videos posted on having a license therefor, unless such person is particularly exempted from YouTube (query “CLSB stings.”). the provisions of this chapter.” We could find no videos from CLSB demonstrating how they What exempts a person from the license requirement? The same code at solved consumer complaints. §7048(a) says, “This chapter does not apply to any work or operation on one undertaking or project by one or more contracts, the aggregate contract price which for labor, materials, and all other items is less than five hundred dollars ($500)… ” [my emphasis] A project whose price totals less than $500 is considered “… of casual, minor, or inconsequential nature,” and can be performed by a non-licensed person, often referred to as a ‘handyman.’ Good old American ingenuity being what it is, numerous schemes have been devised in attempts to skirt the $500 limit. Some will attempt to avoid the license requirement by breaking a job’s billing up into components, e.g. labor $300 and materials $300. This doesn’t work because the legislation clearly states that the relevant sum is the aggregate of costs. Another ruse is to attempt to segregate the job into smaller components. “I’ll do the north side of the roof for $450, the south side for $450, etc.” This will not work either as the code states that the exemption does not apply for a job, “ … in which a division of the operation is made in contracts of

2016 45HoursOnline, All Rights Reserved Page 75 Consumer Protection Reader, 2016 Edition amounts less than five hundred dollars ($500) for the purpose of evasion of this chapter…” Even if the particular job (e.g. tearing out a wall) is less than $500, it is not exempt if it is, “…part of a larger or major operation [e.g. remodeling the house], whether undertaken by the same or a different contractor… [my emphasis] Also, even if the job is less than $500, the exemption does not apply if the handyman has, through cards or advertising, held himself out to be a contractor. Finally, it should be noted that the law requires a non-licensed person to disclose this fact to the consumer. The code provides specific language that must be delivered at the time of bid or at least prior to entering into a contract to perform work for less than $500. In 10 point boldface type the notice needs to tell the hiring person that the handyman is unlicensed and that a license is required for work that will total more than $500. The required notice also puts the consumer on notice that, “If you contract with someone who does not have a license, the contractor’s state license board may be unable to assist you with a complaint.” There are other headaches a homeowner might have to deal with. If the handyman has hired others to work on the project, they may be considered employees of the homeowner. If the job results in damage to some third party, the homeowner may be liable. Moreover, a “contractor” without a license is not going to have workman’s compensation. If a worker, hired by the unlicensed person, is injured, guess who will be held financially responsible? In these situations, the homeowner is not the only one liable to incur headaches. Unlicensed “contractors” need to know that the homeowner cannot be compelled to pay them for their work. Attorney George Wolff has stated the situation succinctly and forcefully: Even if the work of the unlicensed contractor was perfect and the other party is perfectly happy with the work done and is using it and even if the property owner knew that person was unlicensed before the work started that the builder was not licensed, the unlicensed contractor may not sue to recover the amount owed on the contract and can be forced to pay back to the owner every single penny that it was paid for the work. [my emphasis]

An unlicensed contractor doing work for which a license is required? Not a good idea for either party.

2.1.3.2 POLICY ON TEAM NAMES IS CLOSE TO BECOMING LAW

by Bob Hunt for Realty Times, June 24, 2014 Copyright© 2014 Realty Times®. All Rights Reserved. Used With Permission. AB 2018 is quickly working its way through the California legislature in Sacramento. The bill deals with the use of team names and fictitious

business names in the real estate business. The bill is the result of ® collaborative work by CAR and CalBRE. It has no known opposition. The The bill was signed into law on bill passed out of the Assembly in May and is moving through Senate September, 2014 (source). committees. Its passage is extremely likely . Real estate professionals

Some will remember that a little more than a year ago, CalBRE advised the real estate community of new guidelines it was adopting regarding team names. This was occasioned by the Bureau’s concern that the increased use of team names made it difficult for consumers to identify who were the actual responsible parties of real estate activity conducted by agents affiliated with a team. The initial guidelines published by CalBRE were fairly clear, but complying with them posed a variety of difficulties. One problem was that they required that all team names be registered as fictitious business names (more commonly known as DBAs – for “doing business as”) of the broker, not the agent(s). Thus, if I had a team name (“The Bob Hunt Team”) that became a DBA of the brokerage. Of course, this, too, was somewhat misleading. Because of this and other problems, CAR® created a task force to work with CalBRE on creating a policy that would be mutually satisfactory and that could be put into legislation (as an amendment to the BPC). Hence AB 2018. The bill recognizes two kinds of names in addition to the use of a person’s actual name: team names and fictitious business names. The following descriptions are taken from the actual language of the bill. Any emphasis is added by me. “Team name” means a professional identity or brand name used by a salesperson or broker associate. A team name does not constitute a fictitious business name if all of the following apply:  The name is used by two or more real estate licensees.  The name includes a licensee’s surname in conjunction with the term “associates,” “group,” or “team.”  The name does not include terms that imply the existence of a real estate entity independent of a supervising broker. Additionally,  Advertising that contains a team name, including print or electronic media and “for sale” signage, shall include the licensee’s name and license number.  The supervising broker’s identity shall be displayed as prominently as the team name in all advertising.  The advertising material shall not contain terms that imply the existence of a real estate entity independent of the supervising broker.  As for fictitious business names, “A supervising broker may, by contract, permit a salesperson to do all of the following: (1) File an application with a county clerk to obtain a fictitious business name, (2) Deliver to the bureau an application, signed by the supervising broker, requesting the bureau’s approval to use a county approved fictitious business name that shall be identified with the broker’s license number,

2016 45HoursOnline, All Rights Reserved Page 77 Consumer Protection Reader, 2016 Edition (3) Pay for any fees associated with filing an application with a county of the bureau to obtain or use a fictitious business name, and (4) Maintain ownership of a fictitious business name, as defined…, that may be used subject to the control of a supervising broker. Additionally,  Marketing materials, including print or electronic media and “for sale” signage, using a fictitious business name obtained in accordance with [the above] shall include the supervising broker’s identity in a manner equally as prominent as the fictitious business name.  Advertising, including print or electronic media and “for sale” signage, containing a fictitious business name obtained in accordance with [the above] shall include the salesperson’s name and license number.

There still may be some “tweaking” to do with AB 2018 – I know I can think of a few things – but no one should expect any substantial changes. One thing in particular seems particularly unlikely to be changed. That is the requirement – for both kinds of names – regarding the inclusion of the broker’s identity in all marketing materials and “for sale” signage. In both cases, this is to be “equally as prominent” as either the fictitious business name or the team name. It’s hard to see how this can be interpreted any other way than to mean that, on for sale signs and marketing material, the broker’s name will need to be no smaller in font size than the team or fictitious business name. This represents a major departure from current practices where one is likely to see a Team Name this Big and a Broker Name this Big on the same sign.

It became effective January 1, AB 2018 is not emergency legislation and shouldn’t be expected to take 2015 (source). effect immediately . It probably won’t become effective until next year, maybe not even until June. So why should real estate professionals be paying attention now? Well, if you’re going to buy signs this year, you will probably expect them to last at least a couple of years. It makes sense to give some thought to creating signs now that will be compliant in the years to come.

2.1.3.3 CA REVISES BROKER REQUIREMENTS

by Bob Hunt for Realty Times, September 18, 2012 Copyright© 2012 Realty Times®. All Rights Reserved. Used With Permission. Just a few weeks ago, Governor Brown, signed into law a piece of legislation that will make it more difficult for some people to obtain a real estate broker license. AB 1718 (Hill), was sponsored by CAR®. Why would the association do such a thing? Under current law (the change will not become effective until January 1st, 2013) an applicant for a real estate broker license must generally have two years of full-time experience in the real estate business with a real estate

Page 78 2016 45HoursOnline, All Rights Reserved Consumer Protection Reader, 2016 Edition salesperson license. This requirement can be waived if one of the following conditions can be met: 1. There is a finding of equivalent experience and education by the Real Estate Commissioner. 2. Active membership in the State Bar. 3. A degree or course of study from a four-year college which included “a specialization in real estate.”

Click here for a list of California CAR® believed {requirement} 3. {above} to be, or to have caused, a schools offering undergraduate problem. As the association put it “Over the years, the so-called ‘degree degrees in real estate. It includes five California State Universities. broker’ exception has been interpreted to apply to any degree, and the exception has swallowed the rule. AB 1718 will clarify that the degree claimed as an exception must actually include a major or minor in real estate.”

The bill’s author wrote, “This [current] optional policy by the Commissioner has evolved into a BRE policy to approve all such requests as opposed to reviewing them on a case-by-case basis. As such, individuals can essentially substitute any four year degree, ex. [sic] in English, physical education, chemistry, etc. for practical real world experience.” He went on to say, “Real estate brokers supervise other sales agents, review transaction documents, etc. Ideally, they should be people with field experience. Barring that, the education background they have should be extensive and pertinent to the practice of real estate.” Indeed, it was once pointed out in debate over the matter that even a four- year graduate with a major in Philosophy could have received the exemption. One can only imagine the damage that might do to the profession. In 2006, your Editor obtained a broker’s license despite having no real estate sales experience. To qualify for his license, he used his bachelor’s degree in psychology in lieu of the experience requirement. Although there was no registered opposition to AB 1718, the Senate’s bill analyst pointed out that similar legislation had been vetoed by Governor Schwarzenegger in 2006. The analyst wrote, “The education exemption for brokers has been in place for over thirty years. In that time, no evidence has been presented which shows that brokers who substitute the experience requirement for a baccalaureate degree pose any greater risk to the public than individuals who have a special concentration in real estate.” Moreover, the analyst pointed out that the University of California does not offer a major or minor in real estate and the California State University system offers such specialized courses at only eight of their campuses. He questioned whether it would really be in the state’s interest to “delay or prevent aspiring real estate brokers from practicing in their field.” “Narrowing the exemption can also increase barriers for brokers wishing to open small businesses, impeding job creation and economic growth. This can occur by severely limiting the exemption for four-year general degrees and narrowing the base of potential applicants. In California’s economic crisis, is it in the best interest of the state to inhibit job creation?”

2016 45HoursOnline, All Rights Reserved Page 79 Consumer Protection Reader, 2016 Edition In the end, though, proponents of the bill prevailed and the legislation became law. No more Philosophy majors sneaking into the real estate business without first acquiring real-world experience. Quite a few attorneys have broker licenses. The reason is that before this law an attorney had only to pass CalBRE’s broker exam to earn a broker license. Since attorneys tend to be good test takers (after all, each has passed the Nation’s most difficult bar exam (source)), many attorneys obtained a broker license at little cost. But with this new law, even attorneys must meet the experience requirement (unless they have a college degree in real estate). That requirement is two years of full-time sales experience during the preceding five years (source). Consequently, it should be expected that few new brokers will be members of the State Bar.

2.1.4 CALBRE’S DISCIPLINARY ACTION

2.1.4.1 MANDATED POSTING OF DISCIPLINARY ACTIONS

Real Estate Bulletin, Fall 2014 In 2011, Governor Brown signed SB 706, which, effective January 1, 2012, enacted BPC §10083.2) requires CalBRE, in pertinent part, to provide public information on the Internet regarding the status of every license issued by CalBRE in accordance with the California Public Records Act and the Information Practices Act of 1977. Prior to the effective date of SB 706 and the required online posting of certain public information, consumers were able to access the information only by calling or writing to CalBRE or going to a CalBRE office and requesting the information. Pursuant to the authority set forth in (and as expressly required by) §10083.2, CalBRE posts to a licensee’s online license record the public information associated with any license disciplinary action taken by CalBRE against the licensee. (Click here for CalBRE’s website.) The public information posted on CalBRE’s website includes disciplinary and formal action documents such as Statements of Issues, Accusations, Final Orders, Desist & Refrain Orders, and Stipulations. I’m troubled by details I’ve found on CalBRE’s Licensee Database. In one case, I found an description of a licensee’s youthful indiscretions (shoplifting) in a series of formal action documents linked to his CalBRE record. To me it seems unfair that these details should be publicly available to prospective employers, clients, and others in perpetuity.

Page 80 2016 45HoursOnline, All Rights Reserved Consumer Protection Reader, 2016 Edition In another case, I found that a licensee had his license restricted for prior convictions of battery, reckless driving, and offensive words in school (Penal Code §415.5(a)(3) !) each of which the Bureau determined was a crime which “bears a substantial relationship under CR §2910 to the qualifications, functions or duties of a real estate licensee” (!!). In a later accusation for the same licensee, the Bureau revoked his license for “possession of matter depicting a minor engaged in sexual conduct.” Possession of child pornography is a loathsome crime but is it a crime that should disqualify someone from selling real estate? And because this licensee’s criminal history is available on the Internet for all time, no matter where he goes this info will follow him. It will be always be available at the cost of a five minute search to his prospective employers, to romantic partners, to colleagues, to everyone. January 5, 2014: All of the old and even the recent documents have been scanned into PDF files and not OCRd (translated into searchable text). Consequently, it is for this reason that you can’t use Google or any other search engine to find these documents. Instead one needs to query a licensee’s name to find sites such as www.NeighborCity.com which will find the licensee by name and display a page with the licensee’s license number linked to his CalBRE Record. From time to time, CalBRE receives requests to remove the links to public information and/or certain information contained in the disciplinary and formal action documents. The most common reasons underlying those requests include the following: (1) the public information negatively affects a licensee’s business and livelihood; (2) the public information shows up as listings in search engines and raises questions and doubts about a person by members of the public; (3) the underlying conviction that led to the discipline or formal action has been expunged; and (4) the discipline and/or formal action, or underlying conviction happened “a long time ago.”

The information posted on CalBRE’s website is a public record (available to any member of the public who otherwise requests it), and the fact of a conviction (for a licensing entity such as CalBRE) and the discipline documents mentioning the conviction are a public record. §10083.2 does not provide for the deletion or blocking of access to information contained in disclosable public records and CalBRE will not remove public information from its website.

Commissioner’s Footnote: Furthermore, unlike the statutory provisions applicable to the Medical Board While California’s Medical Board of California, another licensing agency, which set a time limit for posting has been removing public information from its site that was public information , §10083.2 does not have any provisions imposing a beyond the time limit, Governor time limit on CalBRE for providing such public information. Brown signed AB 1886 which, effective Jan. 1st 2015; requires CalBRE will most certainly continue to receive requests to remove certain the Board to post information on public information pertaining to criminal convictions and/or discipline from its serious disciplinary actions website. When it does, CalBRE will continue to be unable to comply with against doctors indefinitely. those requests. Without either a court order or a modification to §10083.2

2016 45HoursOnline, All Rights Reserved Page 81 Consumer Protection Reader, 2016 Edition by the Legislature that specifies the removal of certain information (e.g., a conviction within some period of time after it is expunged) or a time limit for posting public information, CalBRE will continue to implement §10083.2 in accordance with its current practice and will not remove public information from its website.

2.1.4.2 CALBRE’S CITATION AND FINE PROGRAM NOW IN ACTION

Real Estate Bulletin, Spring 2014 CalBRE recently finalized its authority to issue citations and assess administrative fines to violators of the California Real Estate Law. Found in BPC §10080.9 and newly approved CR 2907 (effective July 1, 2014), this new tool gives CalBRE wide latitude to address all violations of the Real Estate Law committed by real estate licensees. It also allows action to be taken on the more serious issue of unlicensed activity conducted by persons not licensed by CalBRE as a real estate broker, salesperson, mortgage loan originator, or prepaid rental listing service. The authority to issue citations and assess fines is expected to help in both obtaining a violator’s attention and reinforcing compliance with the Real Estate Law. How will citations and fines work? A citation or other formal action will be considered when a violation is found after an investigation, audit, or examination of a licensee’s records by CalBRE in response to a complaint, through random selection of a licensee for an office visit or from completion of a routine audit. Depending upon the nature (such as the level of seriousness and potential for harm) and type of the violation, the appropriate action will be determined. For relatively minor and technical violations, especially in those instances where there has been no injury or loss to a consumer or where there is little or no danger to the public, a citation is likely the appropriate action. While CalBRE may issue a citation for any violation of the Real Estate Law, citations are particularly suited for minor violations that do not involve fraud, dishonesty, or loss or injury to a consumer. Consumer protection remains paramount, but citations are especially intended for such minor violations as failure to notify CalBRE of one’s change in address, failure to disclose a real estate license identification number in their first point of contact advertising material, failure to notify CalBRE of newly employed salespersons who were hired and added to office staff, or late or failure to submit required threshold or periodic business activity reports. A citation issued by CalBRE may include an Order of Correction as well as an administrative fine. An Order of Correction is simply a demand to fix or correct the cited violation(s) within a specified period of time (usually 30 days). To satisfy an Order of Correction, a licensee will need to correct identified violations or deficiencies and inform CalBRE with a Statement of Correction/Compliance that all violations have been corrected and that the licensee is now in full compliance with the Real Estate Law. In addition to the Order of Correction, a citation may also – and will most likely – include an administrative fine assessed for each violation. The range of a fine – or the total of a fine assessed to a licensee – is set by statute at $0 to $2,500. The maximum fine amount for real estate licensees is $2,500 per citation,

Page 82 2016 45HoursOnline, All Rights Reserved Consumer Protection Reader, 2016 Edition and fine amounts may vary, depending upon the nature of the violation and other criteria. For example, answers to the following questions will help determine the appropriate fine: Is this the licensee’s first violation of the sort or is the violation a repeat of similar offenses? Was the violation inadvertent, deliberate, or a result of negligence? Did the violation involve or result in injuries to consumers? Before a fine amount is assessed, each violation is evaluated according to specified criteria, which helps establish an appropriate fine amount. Persons unlicensed by CalBRE are also subject to citations and fines. Unlicensed activity is currently and has always been a significant challenge for CalBRE, so issuance of a citation – and accompanying administrative fine – may provide some relief in addressing the problem. Thus, the difference between those persons licensed and those unlicensed is one key factor in how fines will be assessed. While the maximum fine amount for real estate licensees is $2,500 per investigation, those who are found to be conducting unlicensed activities may face substantially larger fine amounts or, rather, multiple fines tied to the same investigation. Fines apply to each unlicensed act A person not properly licensed with CalBRE yet found to be conducting real estate activities that require a license may be issued a citation for the unlicensed activity and assessed the maximum fine amount per citation of $2,500. But while the maximum fine amount for a real estate licensee is $2,500 per case or investigation, the maximum fine amount for an unlicensed individual is a $2,500 fine for EACH unlicensed act or transaction. Calculate the fines that may be assessed against an unlicensed person involved in 100 transactions {$250,000 } for example, and you can see how substantial the cost of operating without a license may become! We hope this new citation authority will help deter and discourage unlicensed activity. What to expect if you receive a citation First, read the citation carefully, along with any notices and details that come with it. The citation will identify the violation(s) you committed, provide information on how to pay the fine, describe any corrective action needed (if necessary), and explain the process for contesting the citation if you choose to. If an Order of Correction is included with the citation, then corrective action will need to be effected within a specific timeframe. Make note of any deadline for making the corrections and instructions for notifying CalBRE that you are now in compliance. Finally, regarding the fine, if one is assessed, you will typically have 30 days from receipt of the citation to pay it. There is a review process if you want to contest the citation. The first level of review is a Citation Review Conference (CRC), which is an informal review of the citation conducted by CalBRE. Depending upon information that you may submit in mitigation, the citation may be upheld, modified, or even dismissed. If the citation and fine are upheld, then the next level to contest the citation would be a formal administrative hearing before an administrative law judge. We are looking to resolve every citation at the lowest possible level of review; however, in some cases an administrative hearing may be the last resort to remedy the matter. An administrative law

2016 45HoursOnline, All Rights Reserved Page 83 Consumer Protection Reader, 2016 Edition judge will review the evidence collected by CalBRE and uphold the citation or determine that CalBRE was in error and dismiss the citation. Administrative hearings are expensive for both CalBRE and the licensee, so CalBRE is going to strive to issue citations and assess fines only in cases where evidence is clear and unambiguous. Specific information regarding the review and appeal processes is available on CalBRE’s website and from the Citation and Fine section. CalBRE considers the issuance of citations an opportunity to help educate both licensees and non-licensees alike and to encourage and reinforce compliance with Real Estate Law. Given this emphasis upon compliance education, information regarding specific citations issued – and any fines paid – will not be posted on CalBRE’s website, nor will such information be attached to one’s individual public licensee website record. The information is still public, however, and may be obtained through a request submitted to CalBRE pursuant to the Public Records Act. Citations should not be ignored. Although they will not be recorded as discipline to your real estate license, the failure to pay a fine could lead to a nonrenewal of your real estate license and, in some cases, possible formal disciplinary action. As for fines received by CalBRE, all money will go into CalBRE’s Real Estate Consumer Recovery Account, which is used to assist victims of real estate fraud committed by licensed agents and brokers. This is not the whole story. According to BPC § 10450.6, any amount in the Consumer Recovery Account (CRA) over $3.5 million is moved into the general Real Estate Fund. But I believe this fund must always be at its limit since 12% of your renewal fees are used to fund the CRA. Doing the math, it works out that it takes only one year of renewal fees to fully fund the CRA (12% times $300-average-renewal-fee times $100K-renewals-annually = $3.6million). If disbursements from the CRA are considerably less than $3.6 million/year, then this would mean all fines go into CalBRE’s general fund. If you have questions or would like to know more about the Citation and Fine program, please contact the Cite and Fine section, one of CalBRE’s newer enforcement units.

2.1.4.3 DENIAL OF LICENSE MUST BE ACCORDING TO THE RULES

by Bob Hunt for Realty Times, December 4, 2012 Copyright© 2012 Realty Times®. All Rights Reserved. Used With Permission. Under BPC §10177 the Commissioner may deny issuance of a license to an applicant who has been convicted of a felony or a crime substantially related to the qualifications, functions, or duties of a real estate licensee. There is, however, another section of that code (§480) that provides an exception to this principle. According to that section, no one shall be denied a license on the basis of a conviction if, according to specified criteria, that person has been rehabilitated. How this all plays out is seen in a recent appellate court decision (Singh v. Davi, as Real Estate Commissioner, 2012). Dave Singh, a native of India who became a naturalized citizen in 1986, served as a police officer from 1997 until 2004. During that time he

Page 84 2016 45HoursOnline, All Rights Reserved Consumer Protection Reader, 2016 Edition received numerous commendations. In 2001, Singh lived with his extended family including his seventy year old father, Sarbjit, and his adult brother, Jasmer. Sarbjit was disabled. Jasmer is mentally handicapped. Singh’s wife had applied for and obtained benefits through In Home Supportive Services (IHSS). The program allowed disabled persons to remain in their home with family members providing assistance. IHSS made payments to Sarbjit, who, in turn, paid Jasmer to provide him assistance with bathing, dressing, and other needs. In October of 2001, Sarbjit and his wife went to India and ended up staying there for three months after Sarbjit suffered a stroke. During this time the payments continued, even though Sarbjit was not at home receiving care from a family member. A fraud investigation resulted in Singh, the head of the household, being convicted of grand theft (by false pretenses). The trial court reduced the offense to a misdemeanor and granted Singh three years of probation. He lost his job as a police officer. In 2006 Singh filed an application for a real estate broker license. It was denied on the basis of his conviction. He applied again in 2008. Again it was denied. A hearing was held before an administrative law judge (ALJ). Four witnesses, including three police officers, testified as character witness. Testimony and evidence was provided showing that he had exceeded his probationary community service requirement and that he was, in other respects, leading an exemplary life. Nonetheless, the ALJ ruled against him. The ALJ said that it would not be in the public interest to issue Singh a broker’s license “given the dishonest nature of his conviction”: The Commissioner adopted the ALJ’s decision and denied the license. Singh then petitioned a Superior Court to set aside the Commissioner’s decision. The trial court agreed with Singh’s contention that the Commissioner had abused his discretion “because the Commissioner could not legally deny Singh a real estate broker’s license because of his conviction where Singh had complied with all applicable criteria of rehabilitation.” The Commissioner then went to the Court of Appeal. But the Appellate Court agreed with Singh. It upheld the trial court’s ruling. The Appellate Court said that the “ALJ did not find Singh’s rehabilitation inadequate because he failed to fully satisfy ... any other criteria of rehabilitation. Instead, the ALJ expressly found Singh’s rehabilitation was inadequate ‘given the dishonest nature’ of his crime and his status as a police officer at the time...” The ALJ and the Commissioner had focused on the nature of the crime, rather than on the conditions of rehabilitation. These were improper grounds for denying the license. We wish Mr. Singh the very best in his real estate career.

2.1.4.4 DISCIPLINE BY ANOTHER LICENSING AUTHORITY

Real Estate Bulletin, July 17, 2012; by Wayne Bell, CalBRE Commissioner On January 1st, 2012, a new section was added to the California Real Estate Law which mandates the reporting by real estate licensees of certain events to CalBRE.

2016 45HoursOnline, All Rights Reserved Page 85 Consumer Protection Reader, 2016 Edition This requirement, which provides CalBRE with a new and important enforcement tool, is contained in BPC §10186.2. That section compels, in subsection (a)(1), a real estate licensee to submit a report of any of the following to CalBRE: (A) The bringing of an indictment or information charging a felony against the licensee. (B) The conviction of the licensee, including any verdict of guilty, or plea of guilty or no contest, of any felony or misdemeanor . (C) Any disciplinary action taken by another licensing entity or authority of this state or of another state or an agency of the federal government.”

Common California misdemeanors include but are not limited to: DUI/DWI, Domestic Violence, Trespass, Petty Theft/Shoplifting, Assault and Battery, Disorderly Conduct, Reckless Driving/Exhibition of Speed, Obscene Matter, Probation Violations, Receipt of Stolen Property, Unlicensed Driver, Illegal Gambling, Public Drunkenness, Solicitation of Prostitution, Violation of Restraining Orders,

CalBRE has developed form RE The law requires that any such report is to be made in writing  within 30 238 – Indictment, Conviction, days “of the date of the bringing of the indictment or the charging of a and Disciplinary Action Notification – for the purpose of felony, the conviction, or the disciplinary action” (subsection (a)(1)(2)), and this reporting. However, any form that failure to make such a written report shall constitute a cause for of written communication will discipline. meet the notification requirement. It is the failure to report that violates the new law. It should be underscored that the Legislature created this section (via SB 706) as a “new tool” to enhance CalBRE’s Enforcement operation and efforts. It was provided so that there would be self-reporting (in writing) by licensees and the Bureau could thus become aware of and track the felony charges and the disciplinary case(s) with respect to (A) and (C) above and determine if the conviction reported in (B) above is a basis for disciplinary action. Before January 1, 2012, the only self-reporting requirements for Bureau licensees were imposed under CR 2930 (Number 19) on restricted licensees relative to arrests. Under the new law, the requirements for self-reporting are broadened and apply to all real estate licensees. Focusing on the clear language of BPC §10186.2, the language of subsection (a)(1)(B) is wide and inclusive in its scope and the requirement to report any felony or misdemeanor conviction within the relevant 30 day window(s) does not permit a licensee to exclude or fail to report what he or she considers minor, insignificant, or non- substantially related convictions. “Any” clearly includes “any,” “every,” and “all” misdemeanor and felony convictions, including those following the entry of a “no contest” plea. The statutory language does not contain any carve outs, limitations, exemptions, or exceptions.

Page 86 2016 45HoursOnline, All Rights Reserved Consumer Protection Reader, 2016 Edition Turning to subsections (a)(1)(A) and (C), there does not have to be a conviction for the reporting of (A), and there does not have to be final discipline imposed for the report to be made under (C).

California professional licensing In fact, a plain reading of (C) suggests that if disciplinary action has been agencies and boards typically “taken,” which includes the bringing or commencement of disciplinary initiate an administrative proceeding to suspend, revoke, charges, such as where there has been the filing of a pleading such as an or deny a professional license by Accusation  by a licensing authority, that action must be reported within 30 issuing an Accusation or a days even if the licensee believes or concludes the action has no merit and Statement of Issues. (Source) even if the action is ultimately unsuccessfully prosecuted by the licensing authority. Moreover, and importantly, the plain language of §10186.2(a)(1)(C) referring to “any disciplinary action” means that the discipline does not have to rise to the level of discipline under §10177(f); namely, suspension or revocation. If the Legislature had wanted a higher level, it could have imposed the same. To reiterate, “Any disciplinary action taken” against a licensee (again meaning filed, initiated, and/or completed) must be reported to CalBRE within the relevant 30 day window. If it is not, the Bureau has the power to discipline the licensee for a violation of §10186.2. Obviously, this does beg the question as to what is a “disciplinary action” by another licensing entity or authority. In the absence of an action seeking or imposing what is universally or obviously deemed to be “discipline,” a licensee will need to determine what is interpreted to be discipline and disciplinary action by the other licensing entity or authority. And if the action is actually or deemed to be “disciplinary,” the licensee must report the same to CalBRE in writing within the applicable 30 day window or face discipline by the Bureau.

2.1.4.5 LICENSE REGULATIONS AFFECTED BY SB 53

By John Giardinelli and Casey McIntosh from The Giardinelli Law Group, APC and was written March 1, 2012. Used with permission. It is important to recognize the implications behind the Real Estate Law that SB 53 addresses. The Real Estate Law provides for the regulation and licensure of real estate brokers and salespersons by the Real Estate Commissioner. Any person who willfully violates or knowingly participates in a violation of the Law’s provisions may be guilty of a crime. As it currently stands, the law allows the Commissioner – either by his or her own motion or upon the submission of a verified complaint – to investigate the actions of a licensee who has engaged in specified acts. Those acts are listed in BPC §10176(a-n) and include such things as making substantial concealment or misrepresentations of material facts; making false promises of a character that is likely to induce, influence, or persuade; unlawful discrimination; acting for more than one party in a transaction without the knowledge or consent of all parties; and conduct that constitutes fraud or dishonest dealing. If the licensee is found to have committed the actions outlined in BPC §10176, the Commissioner can revoke or suspend the licensee’s license or impose a monetary penalty.

2016 45HoursOnline, All Rights Reserved Page 87 Consumer Protection Reader, 2016 Edition The current language of BPC §10177 will become inoperative as of July 1, 2012 and repealed as of January 1, 2013. Instead, new language will be added under BPC §10177, effective July 1, 2012, to allow the Commissioner to suspend or revoke the license of a real estate licensee, delay the renewal of a license, or deny the issuance of a license to an applicant pursuant to the terms outlined in BPC §10177 (a-q). Some of the conditions listed in §10177 include but are not limited to whether a licensee or applicant has entered a plea of guilty or nolo contendere (no contest) to, been found guilty of, or been convicted of a felony or a crime substantially related to the duties of a real estate licensee; whether the licensee willfully used the term “REALTOR®” or a trade name or insignia of a membership in a real estate organization of which the licensee is not a member; whether a licensee has demonstrated negligence or incompetence in performing an act for which he or she is required to have a license; and whether the licensee engaged in any conduct that constitutes fraud or dishonest dealing. If a corporation’s officer, director, or person owning or controlling 10% of the corporation’s stock has violated any of the aforementioned conditions, the Commissioner may suspend or revoke the license of the corporation, delay the renewal of a license of the corporation, or deny the issuance of a license to the corporation. These conditions will become effective on July 1, 2012. SB 53 will also amend BPC §10080.9. The amended Code will allow the Commissioner to issue citations to unlicensed persons that he or she believes to be performing acts for which a license would be required, as well as against licensees who are in violation of the Real Estate Law or any of its rules. The citations would include an order to correct the violation and could impose an administrative fine of up to $2,500. Any money collected from the citations would be placed into the {Consumer} Recovery Account of the Real Estate Fund. If the licensee or unlicensed person wants to contest the citation, they must inform the Commissioner within thirty days of the date of the citation. After that time has passed, the citation or citation and fine becomes final.

Additionally, should a licensee fail to obey a subpoena issued for the production of documents, SB 53, through changes to BPC §10079, will Notice of Motion: Formal notification to one or more parties allow the Commissioner to apply to the Superior Court, (through a noticed that the named party has filed a motion ), for an Order requiring the licensee or a designated motion (involving them in a representative of the licensee to appear at Court with the requested lawsuit) before a court which will documents. Failure to obey this Order would be considered contempt of be heard on the stated date. Court.

Effective July 1, 2012, the current BPC §10156.2 will become inoperative. A “new” §10156.2 will be added in its stead, which will be effective beginning July 1, 2012. Currently, the code section addresses a licensee’s application for renewal of his or her license. If the application is filed before midnight of the last day of the period for which the license was issued, along with the fee and good faith evidence of compliance with Article 2.5 {i.e., continuing education}, then the applicant can continue to operate under his or her existing license (so long as it wasn’t previously suspended or revoked). The language of this portion of §10156.2 does not change, nor does the language with regards to the Commissioner’s ability to advise or reprimand those licensees who are not in compliance with the education requirements. The only language that does change, in fact, is that the

Page 88 2016 45HoursOnline, All Rights Reserved Consumer Protection Reader, 2016 Edition section now states “nothing in this section shall prevent the Commissioner from delaying the renewal of the license of a licensee pursuant to §10177.”  In other words, the Commissioner may delay the renewal of a license for any licensee who has self-reported a disciplinary action to CalBRE. The self-reporting requirement became law via SB 53 in 2012 (now BPC §101862).

When applying online for a renewal, CalBRE’s eLicensing site will ask you: “Within the six-year period prior to filing this application, have you been convicted of a misdemeanor or a felony.” If you answer “yes,” eLicensing immediately cancels your online application and notifies you that you must submit your application via the mail. In this event, weeks or months later CalBRE can be expected to make a determination as to whether your offense “is substantially related to the qualifications, functions, and duties of a real estate licensee.” (See this document for a detailed description of the criteria used to make this determination.) If CalBRE determines that your crime is not substantially related, they will accept your application; otherwise, you can expect one of several outcomes ranging from a request for an onsite interview to outright revocation.

By the way, you should know that CalBRE conducts a criminal check on all applicants. If you should answer “no” when you should have answered “yes,” most likely CalBRE will discover your “error” and interpret as an act of dishonesty deserving of a denial of your renewal application. Regardless of their determination, CalBRE will keep your renewal fee. Lastly, SB 53 provides the Commissioner with access to a person’s records {including pictures} and the DMV for the purpose of enforcing specific provisions of the Real Estate Law or Subdivided Lands Law (Vehicle Code §1808.51). The author has requested we post this disclaimer: This article is re-printed with the permission of The Giardinelli Law Group, APC and is for advertising and informational use only and does not constitute legal advice or create an attorney-client relationship. Readers should not act on information without first consulting legal counsel.

2.2 PROPERTY MANAGEMENT

2.2.1 TENANT’S RIGHTS

2.2.1.1 PETS AND OTHER ANIMALS

by Bob Hunt for Realty Times, January 26, 2015 Copyright© 2015 Realty Times®. All Rights Reserved. Used With Permission. A while back, CAR®’s legal department released a memorandum dealing with the portion of landlord-tenant law that relates to the subject of pets and animals. It provides useful information for both landlords and tenants, as well as for real estate agents who get involved with leasing and/or managing property.

In reviewing such laws it is important to keep in mind that most of the rules need to come with a footnote or to be stated as “in general.” This is because there are all sorts of exceptions if the animal is a service animal (such as a seeing-eye dog) or an animal (sometimes called a companion, comfort, or emotional support animal ) that is used to ameliorate a disability. By law, animals that fit into those categories are not considered pets, and different standards apply.

First, then, let us review the rules as they apply in general, remembering that there will be exceptions for service animals and animals used to mitigate a disability. It is perfectly legal for landlords to prohibit pets. Moreover, it is legal for a landlord to discriminate among pets. A landlord could have a “no-dogs” policy but might allow other kinds of pets. Conversely, a “cats-only” policy would also be legal. Landlords may even specify that certain breeds are Therapy Cat prohibited whereas others may be allowed. In California – thanks to a somewhat recent law – a landlord cannot require that a dog or cat or any other type of animal, be declawed or devocalized as a condition of rental. A landlord could, though, require that any pets be spayed or neutered. Who knew such things? Often landlords are willing to take on pets provided that the tenant will pay a deposit that is higher than normal. This is perfectly legal; but it is still subject to California’s security deposit law which only allows for a maximum Companion Monkey security deposit of two months for unfurnished rentals and three months for furnished rentals. Calling it a “pet deposit” does not put it into a special category which avoids that limit. As a matter of fact, the CAR® memo suggests, “it makes more sense to simply charge a higher security deposit rather than creating a separate pet deposit fee.” Among other things, doing that “prevents unnecessary arguments or confusion if money in the pet deposit is needed for cleaning or damages not caused by pets.” Another pet-related recommendation is that, “it is a good idea to add some specific provisions to the lease itself or in an addendum to the lease which directly regulate animal activity.” (In this regard, REALTOR® s can see the CAR® form PA, Pet Addendum “The

Pit Bull for the Blind – “BACK benefit of adding such detailed provisions is that it makes it clear what rules OFF, BOZO!!!” the tenant must follow when keeping a pet on the property. Also it makes it easier for the landlord to address and possibly evict a tenant for not following the specified rules.” As we have noted, the rules are different when it comes to service or companion animals . In those cases, even if there is a no-pets policy, if a disabled tenant “requests to keep a service animal or other animal and it is a reasonable accommodation of the tenant’s disability, the owner would have to allow the tenant to keep the animal.” This can be dicey. As a general rule, landlords may not inquire about a tenant’s disability. But the CAR® memo points out the following: However, if a tenant asks for an animal and need for the animal is not obvious, then the landlord may further inquire. For example, a tenant who suffers from an anxiety disorder, which may not be apparent, may require a cat as a comfort animal. When a tenant asks for an

Page 90 2016 45HoursOnline, All Rights Reserved Consumer Protection Reader, 2016 Edition accommodation, the tenant and landlord must engage in what is called a “good faith interactive process” to determine how best to accommodate the tenant’s disability. If the need for the animal is not obvious the landlord could ask for verification regarding the nexus between keeping the animal and the tenant’s disability. A tenant can satisfy this by providing written verification. Typically this written verification is from a medical practitioner, although it is not required that it be from a medical doctor and other forms of proof may be acceptable depending on the circumstances.”

As noted, this can be dicey. While California and Federal law are generally the same regarding service and comfort animals, California law goes further in that the same “reasonable accommodations” must also be made for a person who is licensed to train a service animal.

California landlords have no special liability with respect to the behavior of Strict liability is the imposition of pets allowed on the premises, unless the landlord has knowledge of a pet’s liability on a party without a finding of fault. For example, five dangerous propensities and the landlord has done nothing about it. It is the minutes after Suzy adopts Fido owner of the pet who has strict liability . Nonetheless, landlords who allow from an animal rescue shelter, pets should review their insurance with respect to coverage for injury or Fido bolts from his leash and damages caused by a tenant’s pet. They also should be sure what, if any, mames a five-year old boy. Suzy is strictly libel for the boy's injuries exemptions are made for certain breeds. Finally, it’s not a bad idea for a even though she was not landlord to require that the tenant maintain a ‘renter’s insurance’ policy that responsible nor negligent. will provide the tenant with coverage if his or her animal causes harm to someone. The landlord should verify this coverage.

The article does not make this explicitly clear: Landlords may not require applicants or residents to pay a pet deposit for a service dog, psychiatric service dog, or support animal, even if they do so for other applicants or residents. Furthermore, a landlord or other housing provider may deny a request to keep a service dog, psychiatric service dog, or support animal as a reasonable accommodation if the animal: (1) poses a direct threat to the health or safety of others, or (2) would cause substantial physical damage to the property of others. However, if the threat or damage can be reduced or eliminated by another reasonable accommodation, the landlord must allow the animal. (Source). There are many services which, for a small fee, will transform your pet into an assistance animal. For example, this site offers this testimonial: “I can’t thank you guys enough! I am now able to travel with my cat and take her with me which I’ve needed badly because I suffer from anxiety and depression and now that I have Sammy with me I am a thousand times better off. Thanks again!” To reduce the effort needed to convince your landlord that your animal is not a pet but rather is an emotional support animal, you may fit your dog or cat with a vest like the one shown here .

Found on e-bay for $40.

by Bob Hunt for Realty Times, September 30, 2013 Copyright© 2013 Realty Times®. All Rights Reserved. Used With Permission. CC §1954 provides that a landlord may enter a leased or rented dwelling to “exhibit the dwelling unit to prospective or actual purchasers.” Such entry may not be made “during other than normal business hours” unless the tenant consents to entry at some other time. Provided that the tenant has previously been given notice within the past 120 days that the property is for sale, 24 hours is presumed to be reasonable notice, and notice may be given orally (§1954 (d)(2)). While that civil code section clarifies a number of issues, some questions have remained. What, for example, are “normal business hours”? Also, might exhibiting the dwelling to prospective or actual purchasers include holding open houses? A recent California Appellate Court decision (Dromy v. Lukovsky, 2013) provides some answers. To some they may be surprising. Landlord Dromy leased a Santa Monica condominium to Lukovsky (tenant) in 1994. In approximately 2010, Dromy entered into a listing agreement to sell the property. The tenant allowed the agent to conduct individual showings but she refused to permit open houses on the weekends. Dromy filed a motion in Superior Court based on CC §1954 and sought declaratory relief against the tenant. In a declaration supporting the motion, his real estate agent stated: “In my professional opinion, Ms. Lukovsky’s refusal to permit weekend open house showings at the subject property has made it much more difficult to find a prospective purchaser. The custom and practice in the residential real estate community is to conduct weekend open houses in order to market properties more effectively and expose listed properties to the general public.” The statement was not contested. The Superior Court ruled in favor of the landlord; but it did not grant an unrestricted right to hold open houses. Indicating a desire to fashion an order that was fair and reasonable to both sides, it came up with the following: 1. The agent could hold two open houses per month. 2. They could be on weekend days between 1:00 p.m. and 4:30 p.m. 3. The agent must be present and the tenant may be present during any open house. 4. The agent must give ten days advance email notice to the tenant of proposed open house dates and the tenant has 48 hours to acknowledge or to propose an alternative weekend date.

The tenant appealed. The Appellate Court noted that the phrase normal business hours, though not defined in the statute, was meant to strike a balance between two competing policies: (1) the tenant’s right of quiet enjoyment of the property, and (2) the landlord’s right and ability to sell his property. The Court noted that, at the time the legislation was enacted, the current edition of Black’s Law Dictionary defined “business hours” as meaning: “In general those

Page 92 2016 45HoursOnline, All Rights Reserved Consumer Protection Reader, 2016 Edition hours during which persons in the community generally keep their places open for the transaction of business.” The Court then went on to say, “For our purposes, the relevant community consists of licensed professionals working in the residential real estate business.” Moreover, “It is undisputed that the custom and practice of [that community] is to hold open houses during weekends …” Thus, the Appellate Court held that the judgment of the Superior Court was “reasonable under the facts and circumstances and that it complies with the requirements of §1954(b).” California real estate agents will no doubt wonder how this decision applies to their business. The legal department of CAR® had this to say in its legal publication: “…landlords and their listing agents who want to arrange weekend open houses should obtain the tenant’s consent or comply with the reasonableness standard required by the Dromy court.” To help insure that what they schedule is reasonable, landlords and agents “are strongly encouraged to, depending on the circumstances, pattern your weekend open house arrangements in a similar fashion to what the trial court ordered in Dromy …”

2.2.1.3 CAN A LANDORD PROHIBIT SMOKING?

by Bob Hunt for Realty Times, October 4, 2012 Copyright© 2012 Realty Times®. All Rights Reserved. Used With Permission. Is it legal for a landlord to prohibit tenants from smoking in their units and/or other places on the premises? The answer to this question may well vary from state-to-state, although Federal considerations will be common to all. In California, the answer to the question has been clarified by the passage of SB 332 which was signed into law by Governor Brown September 6, 2011. The core of the bill is this: “A landlord of a residential dwelling unit … may prohibit the smoking of a cigarette … or other tobacco product on the property or in the building or portion of the building, including any dwelling unit, other interior or exterior area, or the premises on which it is located …”

After January 1, 2012, if a landlord has such a prohibition in effect, “Every lease or rental agreement … shall include a provision that specifies the areas on the property where smoking is prohibited …” Suppose the tenant already has a rental agreement or that the landlord has adopted a rule prior to January 1st 2012. The new rules must be communicated in a written “change of terms of tenancy” to be provided according to the requirements of other notices. As the senate bill analysis pointed out, “the length of the notice is important as resident smokers facing new prohibitions on smoking must be given adequate time to move, apply for a waiver … or quit the habit. California already requires a month’s notice for any modification of month-to-month leases.” Was the new law necessary? A variety of legislative analyses noted that no current law prohibited landlords from enacting such a policy. Nonetheless, bill supporters such as the California Apartment Association

2016 45HoursOnline, All Rights Reserved Page 93 Consumer Protection Reader, 2016 Edition noted that the lack of any law had created confusion and that it would be beneficial that a landlord’s right to do so be codified. The Association has stated that “smoking is a major source of conflict between smoking and non-smoking tenants.” It is good that this matter has been clarified, however, in California at least, other questions remain: OK, landlords can ban the smoking of tobacco products but what about other substances? Ever-sensitive to the issues that face their members, CAR®’s legal department has produced a memorandum entitled “Medical Marijuana Issues for REALTOR®s”. It’s not as clear as tobacco.

As of Jan. 2016, recreational As a result of California’s Compassionate Use Act (a statewide initiative) marijuana possession of up to and SB 420, The Medical Marijuana Program Act, “…California laws which one ounce is an infraction, similar to a traffic violation, with a $100 provide for criminal penalties … do not apply to persons such as a qualified fine. (Source) patient, a person with a state-issued medical marijuana identification card, or a primary caregiver who act in accordance with the requirements of the Compassionate Care Act and SB420.”

Suffice it to say that an inordinate number of Californians meet the criteria for being a qualified patient.

Congress ended the federal On the other hand, the memo points out, “Marijuana possession, cultivation, government’s prohibition on processing, etc. are all illegal under federal law with no exceptions.”  medical marijuana in December 2014 (source). (For the current So, what is a landlord to do? The CAR® position is that, yes, a landlord can legal status of marijuana use, prohibit smoking (and possessing) marijuana. This is because, “Most click here.) leases, including the CAR® residential lease, prohibit the tenant from engaging in conduct that violates the law.” Moreover, the memo notes that a landlord who knowingly permitted illegal marijuana possession or use could expose his property to possible federal seizure {!}.

Still, the discussion goes on to acknowledge that there could be practical problems in trying to enforce a prohibition through action such as eviction. “Even though a lease requirement to obey all laws seems to be a straightforward proposition, it is possible that a state court judge or jury may not view it as applying to a federal law violation. Certain areas have judges and juries which may not see it as their place to enforce federal law violations.” No one said this was going to be easy.

2.2.1.4 NEW CA LAW PROTECTS TENANTS’ POLITICAL SIGNS

by Bob Hunt for Realty Times, January 10, 2012 Copyright© 2012 Realty Times®. All Rights Reserved. Used With Permission. “Should people lose their right to freedom of expression simply because they rent their property?” The answer is no. Any discrimination that prevents freedom of expression, based on whether or not you own property is a denial of rights that belong to all people.” That’s what California State Senator Christine Kehoe said in advocating her bill, SB 337, during the recent session of the California Legislature. The aim of SB 337 was to prevent landlords from forbidding their tenants to post political signs on the property that they rent.

Page 94 2016 45HoursOnline, All Rights Reserved Consumer Protection Reader, 2016 Edition It is not unreasonable to ask, “Did we need a bill like this? Don’t tenants have first amendment rights just like everyone else? They couldn’t be prohibited from exercising those rights anyway, could they?” Well … it’s a bit more complicated than one might have thought. It is certainly not a slam-dunk First Amendment argument. In both the Senate and Assembly bill analyses it is noted that the First Amendment prohibits government from abridging the freedom of speech. Thus neither cities, counties, states, nor the federal government may enact laws that would do so. But it is not clear that the First Amendment prohibits private enterprises – such as a homeowner association – or individuals – such as a landlord – from restricting someone’s freedom of expression. That would require additional legislation. Thus it is that the California Legislature has previously enacted statutes providing that the governing documents of a CID cannot prohibit unit owners from posting “noncommercial signs, posters, flags, or banners on or in their individual properties, except as required for the protection of public health or safety or if the posting would violate a local, state, or federal law.” And, just as free speech is judicially recognized as having limits (the old “fire-in-the-theater” argument), the California law allows for limits on the size and material of such signs. California also has specific legislation providing that mobile home parks cannot prohibit unit owners from displaying political signs – again, subject to specified limitations. But, until this year, there was no law specifically addressing the ability of tenants to display such signs.

When SB 337 was first introduced it had a wider scope than the version that was finally adopted. Similar to the CID law, it would have given tenants the right to display noncommercial signs. After amendments, though, the bill addressed only political signs. As a tenant, then, I could post a sign advocating the election of a green party candidate but not a sign encouraging the consumption of broccoli . SB 337 contains other limitations as well. Signs cannot be more than six Tenants have no right to display this sign. square feet, nor may they violate any law, or, if in a CID, may they violate any lawful rule. They must relate to a specific election, referendum, recall, or issue before a public body (e.g. school board) that will be up for a vote. Thus, they cannot be generally political. A sign that said "Defy Authority" would not be protected.

Finally, signs covered by SB 337 are subject to time limits as set by local ordinance, or no more than 90 days before and 15 days after the election or vote. You couldn’t put up a sign in January advocating a political outcome in the November election. Who could possibly have been opposed to SB 337? Opponents included CAR®, the California Apartment Association, and many local apartment associations. Among the arguments they put forth: “rental property owners and managers must have the unfettered flexibility to judge what may or may not be suitable conduct by one resident if it has the prospect of affecting the quiet enjoyment of other residents in rental housing.” It doesn’t take a lot of imagination to think of some political signs that could really generate disharmony in an apartment complex. 2016 45HoursOnline, All Rights Reserved Page 95 Consumer Protection Reader, 2016 Edition Be that as it may, SB 337 passed both the State Assembly and Senate and was signed by the Governor on Sept. 30, 2011. Its effects will certainly be seen in 2012.

2.2.2 MANAGER’S RESPONSIBILITIES

2.2.2.1 SWIMMING POOL INCREASES LANDLORD’S DUTIES OF CARE

by Bob Hunt for Realty Times, October 27, 2014 Copyright© 2014 Realty Times®. All Rights Reserved. Used With Permission. Might a landlord have extra liability if he rents out a property that includes a swimming pool? Most of us would probably answer “yes,” and we would be right. But just how far do the landlord’s duties extend? Well, how about a duty of care to protect the minor children of the tenant’s guests? The point is clearly made in a California case filed earlier this year. (Johnson v. Prasad, 2014) The Prasads purchased a home with a backyard swimming pool in 2000. The pool was built in 1976 or 1977. It complied with state and local ordinances at the time. (Subsequently, California adopted the Swimming Pool Safety Act which requires a variety of pool safety measures; but it only applies to pools built or remodeled after January 1, 2007) The Prasads did nothing to change the pool. A six-foot fence prevented entry into the backyard. The only access from the house to the pool was through the kitchen. There was a sliding glass door with a security gate over it. The gate did not have a self-closing mechanism. The property was managed by a Century 21 firm since 2009. In June of 2009 the property was rented. The lease called for the landlords to maintain the pool. The lease provided that the landlords or their service provider would have access for such maintenance purposes. The tenants had a party on June 28, 2009. Among the guests were Andre Soucy, his four-year old son, Allen, and Allen’s grandmother and grandfather. There were a number of other people, including children. According to the court record, “They all went in the pool. Eventually, everyone got out. The grandmother went inside the house and did not close the security gate or the sliding glass door behind her because others were still coming in. At some point, the grandmother lost track of Allen. As it turns out, Allen had gone outside the house to the backyard. When he was discovered, he was at the bottom of the pool.” Allen died. It was a tragic situation, indeed, and one that ultimately turned into a lawsuit. Allen’s mother filed a wrongful death suit alleging the grandmother and father were negligent in supervising Allen, the homeowners (the Prasads) were negligent in failing to properly fence the pool or otherwise protect a child from accidentally falling into the pool and Century 21 was negligent in failing to ensure that the property met safety code. She did not sue the tenants. The Prasads and Century 21 moved for summary judgment – essentially, dismissal – which the trial court granted. Among the things the court said, “the pool was not a ‘nuisance’ or an unreasonably dangerous condition of the property”; “nothing these defendants did or failed to do created any type

Page 96 2016 45HoursOnline, All Rights Reserved Consumer Protection Reader, 2016 Edition of dangerous condition or in any way contributed to this accident,” there was no evidence that it was more likely than not that the conduct of the [Prasads] and Century 21 was a cause in fact of the drowning; and “even the security gate and sliding door could not have been involved in this action since they were left open on purpose.” Case decided? No, the plaintiff appealed. And the Appellate Court disagreed with the trial court as to whether or not the landlords owed a duty of care to the child. The court noted that “In determining a duty’s existence and scope” consideration of several factors is called for. The foreseeability of harm and the extent of the burden [to prevent it] “are ordinarily the crucial considerations.” The court reasoned that it was foreseeable to the landlords that children would be on the property and that “children would approach the pool, regardless of their capacity to swim, thus exposing themselves to the danger of drowning.” The foreseeability of harm factor was there. The Appellate Court also noted that the defendants did not violate the Swimming Pool Safety Act. Nonetheless, the Court also said, “the existence of this statute informs the extent of burden to the homeowners [Prasads] and consequences to the community of imposing a duty to exercise care with resulting liability for breach.” Hence, the court seemed to reason, even though the law did not require that the landlords comply with the act (i.e., adding safety features), its very existence suggests that they might have a duty to do so. Having established in its own mind that the landlord’s did have a duty of care to the child, the court then turned to the question of whether that duty was breached. That, the Appellate Court said, was a matter for a jury to decide. “A jury could conclude a reasonably prudent homeowner should have taken further precautions because it was foreseeable that a child could still access the pool and could drown or be injured. Or it could decide the opposite. Where reasonable minds could differ, it was error for the trial court to decide that question as a matter of law.” So, the case against the landlords has been sent back to trial. As to Century 21, the Appellate Court upheld the trial court’s ruling. Century 21 could not have been negligent in failing to determine that the premises met safety code because the only safety code at issue exempted those premises. At least that part of the Appellate ruling made sense. A couple of years ago I was at a back yard party. Our host had an unfenced pool. I was facing towards the pool when I noticed a two-year old wattle up to the pool and, without any hesitation, fell in. The child’s father instantly jumped to its rescue. Previous to this incident, I had believed children have an innate fear of open water. This incident proved me wrong.

2.2.2.2 LANDLORDS NEED TO GUARD AGAINST FORESEEABLE HARM

by Bob Hunt for Realty Times, September 29, 2014 Copyright© 2014 Realty Times®. All Rights Reserved. Used With Permission. Landlords have duties to tenants beyond that of providing habitable premises with working heating and plumbing systems, roofs that don’t leak,

2016 45HoursOnline, All Rights Reserved Page 97 Consumer Protection Reader, 2016 Edition etc. They also must take reasonable measures to protect tenants from foreseeable harm that might result from conditions on the premises. Such harm includes possible criminal acts. A decision by California’s Court of Appeal includes an instructive discussion of these matters. The case (Vasquez v. Residential Investments, 2004) from which the discussion arises has facts that range from mundane to tragic. Abigail Ramirez and her infant daughter lived with Abigail’s parents in an apartment building owned by Residential Investments, Inc. When the family moved in, a glass pane was missing from an arrangement of glass panes on the top half of the door. A piece of cardboard covered the opening. The tenants made a number of requests that the pane be replaced. They felt that its absence created a security risk. After some length of time, Abigail’s brother replaced the cardboard with a piece of plywood that he affixed using finishing nails. Some time later, Abigail, who had recently been living with her boyfriend (the father of her daughter) moved back into the apartment of her parents. Her boyfriend, Jesús Vasquez, who had heard that Abigail had been seeing someone else, came to the apartment armed with a knife. When he was refused entry, he pushed out the plywood piece, reached through the opening and opened the door from the inside. He then killed Abigail. The lawsuit against Residential Investments was brought on behalf of the infant daughter. It alleged that the owners were negligent by not replacing the missing pane and that the negligence was a direct and proximate cause of Abigail’s death. In defense, the apartment owners argued that property owners have no duty to take precautions against criminal activity that they had no reason to anticipate. The trial court ruled in favor of the defense and granted summary judgment, holding that the incident was not sufficiently foreseeable so as to give the owner’s a duty to prevent Vasquez from gaining entry to the apartment. The appellate court reversed the trial court’s decision and sent the case back for trial. The appellate court did not say that the owner’s were, in fact, negligent; but it did say that it was a triable issue, one that a jury should decide on the basis of the facts of the case. In its discussion the court noted that the law is clear on the point that there is “…a duty by landowners to maintain property in their possession and control in a reasonably safe condition.” But then the court went on to acknowledge that this is, at best, a general principle that gives no specific direction. The discussion points out that the determination of duty requires a balancing act in each particular case. A landlord has a duty to exercise reasonable care, but what is reasonable depends on the circumstances, “…considering the foreseeability of the risk of harm balanced against the extent of the burden of eliminating or mitigating that risk.” The court’s discussion reviewed a long list of landlord liability cases (the legal landscape is, of course, littered with them). Of particular note was one in which a landlord had failed to fix a lock to a common hallway thus making it possible for an intruder to enter and rape one of the tenants. Although rape had never before occurred on those premises, robbery had. The court held that, even though the foreseeability of a rape occurring might have been slight, the foreseeability of criminal activity was stronger. Page 98 2016 45HoursOnline, All Rights Reserved Consumer Protection Reader, 2016 Edition Moreover, the burden of repairing the lock was minimal. Hence, the landlord had a duty to do so; and the failure to do so constituted negligence. He did not have a duty to guarantee the safety of his tenants but he certainly had a duty to maintain a “first line of defense.” In this decision a ruling from a Georgia court was approvingly quoted: “The landlord is no insurer of his (or her) tenant’s safety, but … is certainly no bystander.” The moral here for landlords – fix the locks. And take care of other matters that constitute risks of foreseeable harm. After searching the Web, we were unable to determine if the lawsuit was refiled and, if so, its outcome.

2.2.2.3 WHETHER DEFECT IS TRIVIAL; NOT A TRIVIAL MATTER

by Bob Hunt for Realty Times, June 19, 2012 Copyright© 2012 Realty Times®. All Rights Reserved. Used With Permission. There is nothing trivial about a person tripping, falling, and sustaining injuries that required six surgeries and physical therapy over a two and one-half year period. Nonetheless, the condition that contributed to such an accident might itself have been nothing more than a trivial defect. And, if indeed it was a trivial defect, the landowner on whose property it occurred had no duty to have it fixed and no liability to the person who sustained the injuries. That, in a nutshell, is the essence of a recently-decided case (Cadam v. Somerset Gardens Townhouse HOA, 2011). The ruling is instructive and will no doubt be welcomed by those who are charged with maintaining sidewalks, walkways, and the like.

Barbara Cadam leased a unit in Somerset Gardens, a development consisting of 93 townhomes. Although it was her normal practice to enter her townhome through the garage, one day in October of 2006, Ms. Cadam had occasion to use the walkway. She had engaged one of the gardeners in a conversation about a sprinkler problem. At the end of the conversation she headed away on the walkway; but when the gardener said something more, she turned to look at him. “At that point, her right foot caught in a Trip Hazard (Not the crack which walkway separation. Cadam fell forward on her hands, shoulder, elbow, Ms. Cadam tripped over.) and right knee.” As she described it, “I kind of looked [at the gardener], and my right foot caught, I hit with … the toe of my right shoe, and I started to go forward and I tried to catch myself with my left foot and it also hit this rise in the cement and I went down …”

According to the court record, she was wearing high heels at the time. “The cement walkway was clean and dry and it was a bright day. As agreed by the parties, the difference in height between the two walkway segments was between three-fourths and seven-eighths inch.” The injuries to her hands, wrists, elbows, and right knee required the treatment described earlier. She was 63 {and wearing high heels?} at the time of the accident. Her hand injuries have caused permanent nerve damage and disability. Ms. Cadam sued the HOA, the management company, and the builders for premises liability and negligence. (At the beginning of the trial she settled with Inland Pacific Builders for $155,000 and they were dismissed from the

2016 45HoursOnline, All Rights Reserved Page 99 Consumer Protection Reader, 2016 Edition suit.) The jury decided in her favor and awarded $1,336,197 damages {!!}. It found that the HOA and the management company were each 50% responsible.

A judgment-not-withstanding- The defendants filed a motion for a “judgment notwithstanding verdict ,” verdict is when a judge in a civil which the trial court granted. It ruled that “no reasonable person could find jury trial may overrule the decision of a jury and reverse or this was not a trivial defect looking at the photographs … the height, [and] amend their verdict. the surrounding circumstances.” Cadam appealed. The appellate court pointed out that “It is well settled that a property owner is not liable for damages caused by a minor, trivial, or insignificant defect in his property.” It referred to the principle as the “trivial defect defense” and went on to say, “Persons who maintain walkways – whether public or private – are not required to maintain them in absolutely perfect condition … . Moreover, what constitutes a minor defect may be a question of law.” It cited decisions “finding trivial defects ranging from three-fourths inch to one and one-half inches.” The court also noted that, in this case, “photographs of the separation do not reflect a jagged separation, shadows, or debris obscuring the separation.” … “There were no protrusions from the separation and other persons had not fallen there.” Moreover, Cadam testified that she did not see the separation because she “wasn't looking at it.”

The appellate court asserted that, on their review of the evidence, “the walkway defect here was trivial as a matter of law.” As such, the

property owners had no duty to repair it. The appellate court upheld the trial court’s ruling and found in favor of the defendants. A lot of this might strike the reader as just plain common sense. I would agree. Refreshing isn’t it? Probably because there are no personal injury attorneys in Mexico, holes in sidewalks are a common sight. You need to be alert when Mexican sidewalk. walking in Mexico. Sidewalks and steps are rarely level or uniform and it is not remarkable to come across holes in which you could lose a small person .

2.2.3 LAND USE

2.2.3.1 AIRBNB PROVIDES BENEFITS BUT THERE ARE OBJECTIONS TOO

Airbnb is an immensely popular platform for providing peer-to-peer lodging opportunities. According to its web site, the company, which was founded in 2008, has arranged lodging for more than 40 million travelers to date. It claims more than 1.5 million listings in 34,000 cities spread over 190+ countries. But it is not popular with everyone. In jurisdictions all around the country (primarily cities and vacation destinations) it has been subjected to a variety of criticisms and complaints. Many of these have resulted in the adoption of new ordinances and/or renewed zeal in the enforcement of existing ones.

Here, without taking sides, we review a number of the issues that are frequently raised. They fall into three somewhat imprecise categories: (1) code compliance, (2) social impacts, and (3) contractual obligations. (Also, we note that Airbnb is not the only business operating in this space. But it is certainly the biggest gorilla. Hence we speak here only of that company.) (1) Codes and ordinances affecting Airbnb lodging arrangements vary greatly among cities and counties. Many prohibit residential rentals of less than thirty days in any area other than those zoned for hotel or motel use. Others may allow short-term rentals, but require a fee based on actual usage (e.g. a “transient occupancy tax”). In other jurisdictions where residential rentals of less than thirty days are allowed, there may not be an occupancy tax, but there will be a registration requirement – along with a fee. Needless to say, more than a few Airbnb hosts have failed to comply with such requirements. Our local Orange County Register conducted a survey that showed there were literally hundreds of local Airbnb listings in cities where such rentals were prohibited. (2) What I have classified as the “social impacts” of Airbnb take place at different levels, the most local of which being the neighborhood in which the listing exists. Neighbors in close proximity, such as in a CID, frequently complain of increased, louder than usual, and often late-hour noise. None of this might be surprising – though still annoying – in a vacation area motel but it is not what most have signed up for when they purchased their condominium as a permanent residence. The most notorious offenses seem to be in the cases where the host has provided an entire free-standing home. If it’s next to a theme park, or close to a popular beach, both the numbers and the manners of the visiting guests can easily get out of hand. On a much broader social scale, serious concerns have been voiced about the fact that the full utilization of homes and apartments for short-term and vacation rentals has the effect of reducing the available rental housing stock in areas where shortages already exist. Santa Monica and San Francisco are cities where this has been a particular concern. An excellent in-depth report done by the San Francisco Chronicle in July of this year asserted that at least 350 entire homes were listed as available vacation rentals throughout the year. The Chronicle framed the debate in this way: Opponents say short-term rentals are so lucrative that greedy landlords and tenants illegally divert precious housing stock to

2016 45HoursOnline, All Rights Reserved Page 101 Consumer Protection Reader, 2016 Edition the practice. Proponents say services like Airbnb help regular people afford to stay in San Francisco while forging international friendships.

Another social issue in connection with short-term and vacation rentals is the potential for fair housing violations. Hosts have a great deal of freedom in selecting and rejecting applicants; and they are far from being subject to the scrutiny of regulators who have been policing the standard rental markets for years. Finally, there is a fairness issue that is raised, naturally, by the standard commercial competitors of those who would provide short- term rentals on a peer-to-peer basis. It sounds much like the battle between commercial taxi operators and the Uber operation. Hotels and motels, like the owners of cabs and cab companies, say that it is unfair for these “free lance” competitors not to have to be subject to the same health and safety safeguards and standards that they must meet. (3) Under the category of contractual obligations Airbnb hosts need to be aware not only of municipal ordinances, but also the CC&Rs which apply both in condominium developments and many communities of single-family homes. It is quite common for those documents to prohibit rentals of less than thirty days, and sometimes even longer periods.

Finally, it is common for Airbnb hosts to be offering out an extra room, or even a roll-out bed, in an apartment which the host is renting. Indeed, it is by earning extra income in this way that some tenants are able to keep up with the steep rise in rental rates throughout the country. The problem is that it is often the case that the tenant/host has a lease agreement with the landlord that prohibits sub-letting in this manner. The remarkable success of Airbnb, now with a valuation in the neighborhood of $20 billion, demonstrates its popularity and the fact that it is meeting certain consumer needs (or wants) in the same way that Uber has. But it is also a business model that has its share of potential problems. REALTOR®s can expect that they will be drawn more and more into the land use and property rights issues that surround this business. They will do well to be acquainted with the issues.

2.2.3.2 PROTECTING AGAINST PRESCRIPTIVE EASEMENTS

by Bob Hunt for Realty Times, August 10, 2015 Copyright© 2014 Realty Times®. All Rights Reserved. Used With Permission. Property owners whose land is crossed over or otherwise used by people who don’t own it are well-advised to keep in mind the rules regarding prescriptive easements. If they don’t, they may wake up some day to discover that those other persons have gained a permanent right to use that property in the manner that they have been doing. A recent California ruling (Pulido v. Pereira, 2015 ) nicely lays out some of those considerations. According to the Court record, here’s what happened:

“The Pulidos purchased property in Calaveras County in 2001. When Antonio Pulido first visited the property he took Hogan Dam Road and turned off onto Quartz Hill Drive  to access the property. There was no gate where he turned onto Quartz Hill Drive. When the Pulidos purchased their property, Dennis Lee owned the property that was later purchased by Pereira. The Pulidos bought the property with the intent to build a house on it. In the meantime, they were using the property for target shooting. Antonio Pulido went to the property once or twice a month to walk around and shoot targets. Every time the Pulidos went to the property they had to untie a chain strung between two posts at the entrance to Quartz Hill Drive off of Hogan Dam Road. (The chain was strung up by the neighboring property owner, Pereira. Quartz Hill Drive was actually part of Pereira's property.)

“In 2007 the Pulidos’ neighboring property owner, Pereira, informed him that he was going to put a lock on the gate. Antonio Pulido told Pereira to give him a key to the gate if he locked it. Pereira said he would think about it. The Pulidos continued to use Quartz Hill Drive to access their property, until one day they arrived at the gate and a woman there told them a court case had been filed and they were not Location and Street View to use the road anymore. Pereira later installed a lock and dug a trench across Quartz Hill Drive.”

Naturally, the dispute wound up in court, which might be better than the old west six-gun ways of settling such matters. The trial court “determined the Pulidos had established a prescriptive easement over Quartz Hill Drive. The trial court stated that [the Pulidos’] use, together with that of their predecessors, had satisfied the burden of proving continuous use of Quartz Hill Drive for the five year prescriptive period.” “Judgment was entered on the cross-complaint in favor of the Pulidos for an easement by prescription for ingress and egress over Quartz Hill Drive on Pereira's property. Pereira was permanently enjoined from interfering with the Pulidos’ use and enjoyment of the easement.”

Pereira appealed. The Appellate discussion began by laying out the Adverse in this context means essential issues. “The elements necessary to establish a prescriptive that the property was used without the permission of the easement are well settled. The party claiming such an easement must owner. show use of the property which has been open, notorious, continuous, and adverse  for an uninterrupted period of five years.”

In examining the matter of continuous use of the road, the Appellate Court pointed out that since 1990 the road had been used by the persons who had owned the property that Pulidos had purchased. Although it was not necessary to demonstrate here (because Pulidos himself had used it for more than five years), the question of use by a preceding owner can be relevant in a prescriptive easement claim. Use by a previous owner counts toward the five-year period, as long as it is continuous with the use of the claimant. A new owner of land could base a prescriptive easement claim in part on the use by previous owners.

Pereira argued that he had no notice of the use of the road. But the Notorious use is use that is open Appellate Court pointed out “Notice can be inferred or implied from visible, and obvious to neighbors leading to a presumption that the owner open, and notorious use … Here there was evidence that the Pulidos 2016 45HoursOnline, All Rights Reserved Page 103 Consumer Protection Reader, 2016 Edition has notice of it. used the easement regularly and openly… Coupled with the fact that the road had visible track marks and that Pereira must have been aware someone was using the road since he strung barbed wire across the entrance to the road, there was sufficient evidence from which the trial court could conclude Pereira had notice of his neighbor Pulidos’ use of the road.”

Property owners who are concerned that the uninvited users of their property might be establishing the elements of a prescriptive easement claim should seek the advice of a real estate attorney. Curiously, one of the ways the establishment of a prescriptive easement can be thwarted is by granting permission to use the property. (Have you ever seen those signs that say, “Right to pass by Permission, and Subject to Control of Owner: Section 1008, Civil Code”?) But that’s a topic for another day.

2.2.3.3 AIRBNB: THE GOLDMINE YOU’VE BEEN WAITING FOR?

by Jaymi Naciri for Realty Times, October 24, 2014 Copyright© 2014 Realty Times®. All Rights Reserved. Used With Permission. Your tenants are moving out when their lease is up and you aren’t sure it’s the right time to sell. You’ve been increasingly staying at your girlfriend or boyfriend’s place leaving yours mostly empty. You thought about renting it but don’t know if you want to tie it up for a whole year. You live in an area favored by tourists – or at least one that hosts an event or two every so often that brings in a big crowd. What do these three scenarios have in common? They may each offer a great opportunity to use Airbnb.

What is Airbnb anyway? Airbnb describes itself as “a community marketplace where guests can book spaces from hosts, connecting people who have space to spare with those who are looking for a place to stay.” With Airbnb, you can list your home, or even just a room {or even the sofa in your living room } if you’re so inclined, for travelers from all over the world. They stay, you get paid. It’s a growing alternative to hotels and works particularly well for those places that are located in a desirable travel spot or one that attracts large sporting or entertainment Couch for rent in San Francisco, available from Airbnb, events or conventions. But the exciting news for those with January 16, 2015. a property “to spare” is the potential income generated.

How much income are we talking? Well, a lot, depending on how well – and how much – you use it. Consider this Fast Company story that profiled an entrepreneurial Airbnb host who expects to make a six-figure income just from renting out his spaces. Or this account from Business Insider that details how one man made enough money through Airbnb to buy a house. “He was charging

Page 104 2016 45HoursOnline, All Rights Reserved Consumer Protection Reader, 2016 Edition $200/night and paying $1,900/mo. in rent, staying with his girlfriend whenever the apartment was rented out,” they said. And don’t forget to check out their inside look at Super Bowl Airbnb rentals – a way to make a serious buck (and something that has us thinking very seriously about how to use the NFL connection in our city. Hmmmmm … ) What kind of responsibilities are involved Not unlike being a landlord, being an Airbnb host comes with a list of have- tos for basic care and maintenance. You are responsible for providing bedding, dishes, and other items for daily living, as well as cleaning and replacing them as needed. Easy tip #1: Shop at IKEA (Mr. Six Figures referenced above reportedly outfitted his one-bedroom apartments for $8,000 each including all the furniture).

Easy tip #2: Get a cleaning crew. If you’re thinking of taking the Airbnb plunge, these additional tips from Huffington Post should help, as should these nine hospitality tips from the Airbnb blog. Beware the legal issues. As Airbnb has grown (Wikipedia reports the company founded in 2008 now has more than 800,000 spaces around the world and a valuation of $10 billion), so has its critics. Not surprisingly, that is led by the hotel industry that is losing business to Airbnb. A few cities around the world have raised the question of hotel taxes, while the company and the New York State attorney general have also famously tangled over subletting laws. If you are planning to Airbnb your place, be sure to check your state and local regulations to make sure you stay on the right side of the law. You can read more about pending legal issues and how Airbnb has responded to them here. You can also calculate how much your space is worth on their site. But, you probably want to use it as a starting point. Their estimation proved to be low when we did further research. For the best idea of what you can charge, estimate on their site and Google other Airbnb listings in your area.

2.2.4 FAIR HOUSING

2.2.4.1 FAIR HOUSING NOW COVERS GENDER IDENTITY

by Bob Hunt for Realty Times, July 31, 2012 Copyright© 2012 Realty Times®. All Rights Reserved. Used With Permission. California fair housing law has generally had broader application than federal statutes. Effective January 1, 2012, that coverage became even broader. This was the result of AB 887 (Atkins), The Gender Nondiscrimination Act, which was passed by the Legislature and approved by the Governor October 9th of last year. According to the Assembly Bill Analysis, the legislation,

2016 45HoursOnline, All Rights Reserved Page 105 Consumer Protection Reader, 2016 Edition 1. Expressly adds the terms “gender identity” and “gender expression” to various provisions [in existing law] that define sex as including gender. 2. Defines “gender expression” as meaning a person’s gender-related appearance and behavior whether or not stereotypically associated with the person's assigned sex at birth . 3. Expressly adds the terms gender, gender identity, and gender expression as among the enumerated characteristics under various provisions of the law that require equal rights and opportunities and prohibit discrimination based on specific enumerated characteristics. 4. Requires an employer to allow an employee to appear or dress consistently with the employee’s gender expression, in addition to with the employee’s gender identity.

The bill’s author said that the legislation was needed in order to clarify The character played by Eddie prohibitions that could be found in existing law, but that could not be clearly Redmayne expresses herself as or easily identified. She wrote, female although born male.

Gender identity refers to a person’s deeply felt internal sense of being male or female. Gender expression refers to one’s behavior, mannerisms, appearance, and other characteristics that are perceived to be masculine or feminine. [This bill] will take existing protections based on gender identity and expression and specifically list them as protected categories in our non-discrimination laws. By making these protections explicit, people will more clearly understand California’s non-discrimination laws.

A representative of the Transgender Law Center, a co-sponsor of the bill, stated the need for the bill in this manner: If an HR manager looks up the Fair Employment and Housing Act in an effort to list the protected categories in their business’ employee handbook, they will only see ‘gender.’ They will not clearly see gender identity and gender expression because they are contained in the definition of gender in a separate section of the law. Should this bill pass {it did}, that same HR professional will clearly see gender identity and expression and be far more likely to list those categories in the employee handbook.”

And so, of course, would the trainer who is responsible for teaching fair housing law and practices at a real estate brokerage. California real estate firms will most likely be affected by this law in the area of property management. Rental agents and property managers find themselves engaged in an apparently never-ending process of education with landlords who think that they are free to discriminate according to their various personal whims when it comes to tenant applicants. Of course this happens from time-to-time with sellers too. Now, some new, clearly- identified protected classes will be added to the lists about which those property owners need to be informed.

Page 106 2016 45HoursOnline, All Rights Reserved Consumer Protection Reader, 2016 Edition Insofar as brokers are also, for many purposes, considered to be employers, the new law will affect them in that regard also. One thing to note, though, is that even though employers are required “to allow an employee to appear or dress consistently with the employee’s gender expression, in addition to with the employee’s gender identity,” some lawyers have suggested that reasonable dress codes, appropriate to the gender, may still be maintained. Employing brokers should check with their own company legal counsel.

2.2.4.2 COURT GIVES RIGHT-TO-DISCRIMINATE IN ROOMMATE CASE

by Bob Hunt for Realty Times, May 15, 2012 Copyright© 2012 Realty Times®. All Rights Reserved. Used With Permission. There’s no place like home. In the privacy of your own home, you can take off your coat, kick off your shoes, let your guard down and be completely yourself. While we usually share our homes only with friends and family, sometimes we need to take in a stranger to help pay the rent. When that happens, can the government limit whom we choose? Specifically, do the anti-discrimination provisions of the Fair Housing Act (“FHA”) extend to the selection of roommates?

Those are the words of Alex Kozinski, Chief Judge of the United States Court of Appeals for the Ninth Circuit. Judge Kozinski wrote the majority opinion in the case of Fair Housing Council of San Fernando Valley; The Fair Housing Council of San Diego v. Roommate.com, LLC. The opinion was filed February 2, 2012. Judge Kozinski once called for an ethics investigation of himself after the Los Angeles Times reported that he ran a web site with sexually explicit Judge Alex Kozinski photos and videos. Judge Kozinski has written dissents for several prominent cases and his essays have been featured in publications such as Slate, The New Yorker, The New Republic and National Review. Click here for a Wiki article about him. As described by the court, the facts of the case were as follows: Roommates.com, LLC (Roommate) operates an Internet-based business that helps roommates find each other. Roommate’s website receives over 40,000 visits a day and roughly a million new postings for roommates are created each year. When users sign up, they must create a profile by answering a series of questions about their sex, sexual orientation, and whether children will be living with them. An open-ended “Additional Comments” section lets users include information not prompted by the questionnaire. Users are asked to list their preferences for roommate characteristics, including sex, sexual orientation, and familial status. Based on the profiles and preferences, Roommate matches users and provides them a list of housing-seekers or available rooms meeting their criteria. Users can also search available listings based on roommate characteristics, including sex, sexual orientation and familial status. The Fair Housing Councils of San Fernando Valley and San Diego (FHCs) sued Roommate in federal court, alleging that the website’s questions requiring disclosure of sex, sexual orientation, and familial 2016 45HoursOnline, All Rights Reserved Page 107 Consumer Protection Reader, 2016 Edition status, and its sorting, steering and matching of users based on those characteristics, violate the Fair Housing Act (FHA) ... and the California Fair Employment and Housing Act (FEHA) ...

Internet providers can not be held liable for publishing information provided by others (it is called the “§230 Immunity”). However, this exemption did not apply to Roommates since it solicited information about the protected- group status of roommate candidates using an online interactive questionnaire (source). In its analysis of the case, the court began by observing that, if the FHA extends to shared living situations, then “it’s quite clear that what Roommates does amounts to a violation.” The “pivotal question,” it said, was whether or not the FHA applies to roommates. The FHA prohibits discrimination of various sorts “in the sale or rental of a dwelling.” Thus, “the reach of the statute turns on the meaning of ‘dwelling’.” The court pointed out that the FHA defines “dwelling” as “any building, structure, or portion thereof which is occupied as, or designed or intended for occupancy as, a residence by one or more families,” and that a dwelling is thus “a living unit designed or intended for occupancy by a family.” It would be difficult, though not impossible, Judge Kozinski wrote, “to divide a single-family house or apartment into separate ‘dwellings’ for purposes of the statute.” But, he wondered, “What if roommates share a bedroom? Could a ‘dwelling’ be a bottom bunk and half an armoire? It makes practical sense to interpret ‘dwelling’ as an independent living unit and stop the FHA at the front door.” Not only does it make practical sense, the court also saw sound legal reasons for not construing “dwelling” as applying to portions of a living space. The opinion notes that it is a “well-established principle that statutes will be interpreted to avoid constitutional difficulties” and the court saw serious constitutional difficulties in extending anti-discrimination laws choosing a roommate.

“An orthodox Jew may want a roommate with similar beliefs and dietary restrictions,” Judge Kozinski wrote, “so he won’t have to worry about finding honey-baked ham in the refrigerator next to the potato latkes .” That’s just one example. Put more generally, the opinion states, “Holding that the FHA applies inside a home or apartment would allow the government to restrict our ability to choose roommates compatible with our lifestyles. This would be a serious invasion of privacy, autonomy and security.” A law that Potato Latkes allows that would, indeed, raise serious constitutional issues.

For such reasons, the court determined that “dwelling,” in the context of the Fair Housing Act, should not be understood as applying to shared living units. Hence, “Because we find that the FHA doesn't apply to the sharing of living units, it follows that it’s not unlawful to discriminate in selecting a roommate.” This position marks the division between the material covered by final exams for Consumer Protection Reader, Part 1 (12 hours) and Consumer Protection Reader, Part 2 (15 hours).

2.3 INDUSTRY

2.3.1 PRACTICE

® 2.3.1.1 NAR REPORT TELLS WHERE DANGERS LURK

by Bob Hunt for Realty Times, May 27 2015 Copyright© 2014 Realty Times®. All Rights Reserved. Used With Permission. This article was published in two parts: May 27th and June 1st 2015. The real estate industry is saddled with a large number of part-time, untrained, unethical, and/or incompetent agents. This knowledge gap threatens the credibility of the industry. The delta between great real estate service and poor real estate service has simply become too large, due to the unacceptably low entry requirements to become a real estate agent. Professional, hardworking agents increasingly understand that the ‘not so good’ agents {are} bringing the entire industry down.

No, that’s not me talking. (Though I might agree.) I’m quoting. As a matter of fact, I’m quoting from a recently-released report that was commissioned by, of all people, NAR®. The report is the D.A.N.G.E.R. Report. D.A.N.G.E.R. from “definitive analysis of negative game changers emerging in real estate.” To be sure, a bit of a stretch just to create an acronym.) The report can be downloaded by anyone, for free here. One might wonder: Why would NAR® commission a report that says things like that? Consider this explanation from NAR®’s Strategic Thinking Advisory Committee: “… effectively planning for the future requires a thorough understanding of the threats and challenges that the real estate industry faces today and during the next few years… To help move the discussion forward…[the committee], along with Stefan Swanepoel, has created a report that seeks to describe as many of the threats and dangers as possible that may affect the real estate industry.”

Stefan Swanepoel  is without a doubt one of the leading (perhaps the leading) consultant to the residential real estate industry in the United States. NAR® commissioned him and his T3 group to “uncover, research, and index the potential threats facing the industry.” The goal was to “provide Organized Real Estate, as well as its members, a comprehensive report identifying the most significant threats, risks, and black swans facing the real estate industry without judging or discarding them, without placing blame or picking sides and without attempting to solve them.”

Swanepoel’s group did this by researching over 200 reports, surveying more than 7,500 brokers and agents, and interviewing (by Swanepoel) 70 CEOs and other senior executives from the largest franchisors, the largest real estate brokerage companies, national, state and local REALTOR® Associations, and various MLS organizations. All the opinions expressed and comments made are given without attribution.

2016 45HoursOnline, All Rights Reserved Page 109 Consumer Protection Reader, 2016 Edition The research, survey, and interview results were categorized into five major sections of the industry: agents, brokers, NAR®, State & Local Associations, and MLS organizations. Ten dangers are listed for each category. Mr. Swanepoel adds his personal perspective to each danger. The danger’s “threat level” is then ranked according to a three-dimensional index. The dimensions are: (1) The probability of the danger occurring; (2) Timing (e.g. within 1 year, 2-3, years, etc.); and (3) Impact (e.g. a Game Changer, Major Impact, Moderate Impact).

This then results in a composite score called the Danger Index (e.g. Critical, Severe, High). The authors clearly state that the index is not scientific but is a combined and weighted representation of the research, surveys, and interviews that took place. An example of this ranking is the danger that “Masses of Marginal Agents Destroy [Industry] Reputation,” as represented by the comments we quoted at the beginning of this discussion. That had a Danger Index of 100 (Critical). Its probability was the highest at 5.0 (100% chance). The timing factor was 4.0 (within 1 to 3 years), and the Impact 5.0 (Game Changer). Among the other dangers that the report found to be facing agents; Commissions Spiral Downwards (Danger Index 87.5) and that the IRS will force the end of Independent Contractor status (Danger Index 63). The report’s results are categorized into five major sections of the real estate industry: (1) agents, (2) brokers, (3) NAR®, (4) State & Local Associations, and (5) MLS organizations. We will examine some of the specific dangers that the report says are facing agents and brokers. We will consider two from each category. One of the significant and likely dangers said to be facing real estate agents is “commissions spiral downward.” The study points out that, internationally, U.S. commissions are on the high side. The following comparisons are given: United Kingdom 1 to 2% ; Singapore 1.5 to 2% ; Netherlands 1.5 to 2% ; Australia 2 to 3% ; Belgium 3% ; Germany 3 to 6%. Swanepoel comments: “Consumers are definitely becoming more motivated to find an alternative solution, and a growing new generation of brokers and agents are exploring a legion of new business models and pricing models that will most likely become commonplace in the next five to ten years.” Of the more than 7,500 REALTOR®s surveyed in the study, a full 89% said that this would have a “major” or “game changer” impact on agents. Another danger – one that agents may not often think about –“IRS Forces Exodus of Independent Contractors.” The report points to the IRS as the danger source (“An IRS ruling [could be] handed down that reclassifies the legal status of real estate agents from independent contractors to employees.”), but it could just as well come from the courts. Currently, a number of suits around the country are challenging the Independent Contractor classification for real estate agents. As Swanepoel puts it, “A scenario in which agents are considered employees would initiate a complete reorganization of the existing revenue

Page 110 2016 45HoursOnline, All Rights Reserved Consumer Protection Reader, 2016 Edition model. Most brokerage companies would be unwilling to hire agents that will not generate enough business to cover their costs.” He goes on: “Agents would thus have three primary options: work as an employee for a large company under its operational guidelines, become a broker and work as a sole practitioner, or leave the industry altogether.” Turning to the dangers threatening brokers, we first note the one at the top of Swanepoel’s list: “Regulatory Tsunami Hits.” He refers here to the activities and proclivities of the CFPB. The CFPB is a creation of the Dodd- Frank act. Swanepoel says, “Only time will tell how much of an impact the CFPB will have on real estate brokers … What we do know is that the failure to comply at any level is not an option and the penalties for failure will be costly. Those who suggest that real estate service providers are not vulnerable under the Financial Services provisions need to remember that there has been little or no effective RESPA enforcement by HUD over the past decade. Most brokerage companies are either ignorant of the fact or believe they are in compliance with CFPB/RESPA regulations, however most are likely in violation already.” The danger index for this? 100 = critical. The probability? 5.0 = 100% chance. This is a brokerage train wreck waiting to happen. Finally, we note the danger to brokerages that “A Consumer Brand Crashes the Party.” The possibility is that “A well-established consumer brand is introduced into the marketplace and a new multi-billion dollar residential real estate brokerage brand is created.”

“It would not be a stretch,” Swanepoel says, “for home improvement giants Home Depot ($133 billion market cap, $79 billion in annual sales)  and Lowe’s ($70 billion market cap, $55 billion in sales), to expand into the residential real estate brokerage business.”

The spectre looms. NAR® did not ask for, nor did the report’s creators provide, tentative solutions for the dangers outlined. That will be up to us. We’d better get busy.

2.3.1.2 ANTI-BULLYING TRAINING REQUIRED IN MANY BROKERAGES

by Bob Hunt for Realty Times, February 23, 2015 Copyright© 2015 Realty Times®. All Rights Reserved. Used With Permission. As a result of AB 2053, many California real estate brokerages will now be required to provide anti-bullying training to their supervisory employees. This is in addition to the already-required training regarding sexual harassment. It is a safe bet that quite a few California brokers and owners do not realize that they are required to provide such training. That is because the law (Government Code §12950.1) applies to employers having fifty or more employees. While quite a few real estate companies have more than fifty agents, not many think of themselves as having more than fifty employees. A company with fifty agents could likely have fewer than ten who are actually on payroll.

2016 45HoursOnline, All Rights Reserved Page 111 Consumer Protection Reader, 2016 Edition But the law applies to more than payroll employees. It says, “For purposes of this section only, ‘employer’ means any person regularly employing 50 or more persons or regularly receiving the services of 50 or more persons providing services pursuant to a contract …” [my emphasis] Those would be independent contractor agents. What does the law require? For almost ten years affected employers have been mandated to “… provide at least two hours of classroom or other effective interactive training and education regarding sexual harassment to all supervisory employees within six months of their assumption of a supervisory position, and thereafter every two years.” Now, added to that, “An employer shall also include prevention of abusive conduct as a component of the training and education specified …” “Abusive conduct” is defined as “conduct of an employer or employee in the workplace, with malice, that a reasonable person would find hostile, offensive, and unrelated to an employer’s legitimate business interests. Abusive conduct may include repeated infliction of verbal abuse, such as the use of derogatory remarks, insults, and epithets, verbal or physical conduct that a reasonable person would find threatening, intimidating, or humiliating, or the gratuitous sabotage or undermining of a person’s work performance.” Proponents of the legislation cited surveys commissioned by the Workplace Bullying Institute showing that 27% of Americans have suffered abusive conduct at work, another 21% have witnessed it, and 72% are aware that workplace bullying happens. They argued that workplace bullying reduces productivity and morale which may lead to higher absenteeism rates, frequent turnover, and even increases in medical and workers’ compensation claims. The bill passed last summer and was approved by the Governor September 9, 2014. Who in a real estate company with 50 or more employees (including agents) would be required to take the training? Supervisory employees. Presumably, that would include the office manager and perhaps the supervising broker. Probably not the transaction coordinator(s) or the receptionist. Surely there could be others. Finally, we note what at least one attorney has observed: while anti- bullying training is now required, bullying itself – unless directed at a member of a protected class – is not against the law.

2.3.2 FEDERAL HOUSING POLICY

2.3.2.1 BORROWERS PAY THE PIPER FOR LENDER MISDEEDS

by Dr. Jack Guttentag (“The Mortgage Professor”) December 5, 2015 for www.MtgProfessor.com. Used With Permission. “I have been turned down by two different lenders because my last years’ tax return didn’t show enough income from my business to qualify, despite a credit score of 800 and a down payment of 50%. Does this make sense?” No, it doesn’t make sense, you and thousands of other potential home buyers are being rationed out of the market because of the misdeeds of

Page 112 2016 45HoursOnline, All Rights Reserved Consumer Protection Reader, 2016 Edition lenders during the go-go years leading to the financial crisis. How we got to this state of affairs is the subject of this article. The Three Prongs of Loan Underwriting Underwriting rules focus on three borrower features that affect the probability that a mortgage loan will be repaid as promised. These are: (1) Payment obligations relative to income, which measures an applicant’s capacity to make mortgage payments. (2) Equity in the property relative to property value, which measures the applicant’s incentive to make mortgage payments. (3) Credit score, which measures the applicant’s past reliability in meeting financial commitments.

Because most loans are sold by those who originate them, acceptable values of underwriting rules, and acceptable tradeoffs between them, are formulated primarily by the agencies who buy them or insure them: Fannie, Freddie, and FHA. Loan originators can be more restrictive than the agencies in setting rules but they cannot be less restrictive unless they are prepared to own the loans themselves. In addition to the underwriting prongs described above, loan originators are concerned with the degree of rigor with which the agencies monitor underwriting decisions. An affirmative decision by the originator that turns out to be unacceptable to the agency results in a required buy-back or a mortgage insurance rejection, which carries significant cost to the originator. Underwriting Becomes Flexible in Years Before the Housing Bubble In the years before the housing bubble, underwriting systems became increasingly flexible, driven in part by the development of automated systems at Fannie and Freddie and by the development and increasing use of credit scores. Under these evolving rules, applicants could be weak in one underwriting dimension so long as they were strong in the other two. Flexibility was further increased by the development of alternative documentation requirements falling between the extremes of “full doc” and “no doc”. Compliance with underwriting rules was subject to periodic spot checks by the agencies. Underwriting Deteriorates During the Bubble A bubble is a period of unsustainable price increases. The bubble period that preceded the Financial Crisis ran from September 1998 to June 2005, during which the Case/Shiller house price index rose by 10.5% a year. Over the preceding period from February 1975 when the index begins to September 1998, the average annual increase had been 5.5%. When house prices are rising by 10% a year or more, borrowers’ equity rises by the same amount, which makes it very difficult to originate a bad loan – one that results in loss to the lender/investor. Borrowers could be qualified on the basis of reduced payments that lasted only a few years because the loans could be refinanced when the initial payment period ended. Those that can’t make the higher payments can sell the house at a profit. In the worst case where the lender had to foreclose, their costs are fully covered by the sale proceeds.

2016 45HoursOnline, All Rights Reserved Page 113 Consumer Protection Reader, 2016 Edition The bubble led to a liberalization of underwriting rules and widespread violations of the rules that remained as scrutiny by the agencies largely disappeared. Underwriting Becomes Rigid After the Financial Crisis House prices stopped rising and began to fall after June 2005 causing enormous losses to mortgage-related firms, the insolvency of many, and a crisis of confidence during 2007-8. Underwriting rules did a 180 during these years, swinging from being excessively liberal to excessively restrictive and rigid. That is where they remain today, although house prices began to rise again starting in 2012. Perhaps the most important of the underwriting rule rigidities involve income documentation. The abuses that arose during the bubble years and the losses that occurred when the bubble burst had such a major impact on the mindsets of lawmakers, regulators and Fannie/Freddie that an affordability requirement has become the law of the land; borrowers must be able to document that their income is adequate, regardless of how good their credit is and how much equity they have in the property. The affordability requirement imposes an especially heavy burden on self- employed borrowers, who face the greatest difficulty in proving that they have enough income to qualify. Prior to the crisis, a variety of alternatives to full documentation of income were available, including “stated income,” where the lender accepted the borrower’s statement subject to a reasonableness test and verification of employment. Stated income documentation was designed originally for self-employed borrowers and it worked very well for years. Then, during the bubble period, the option was abused and stated income loans became “liar loans.” After the crisis, instead of curbing the abuses, the option was eliminated. My mailbox is crammed with letters from self-employed loan applicants with high credit scores and ample equity whose applications were refused because of an inability to document their income adequately. The problem is heightened by the much strengthened surveillance over compliance which increases risk to the originators. Assessing the income documentation provided by a self-employed applicant is a judgment call that carries a high cost to originators if they get it wrong. The loss on a required loan buyback can wipe out the profit on multiple good loans. The prudent path is not to invest any time in such loans which is the policy taken by the lenders consulted by the frustrated applicant whose letter to me is cited at the beginning of this article.

by Bob Hunt for Realty Times, July 20, 2015 Copyright© 2015 Realty Times®. All Rights Reserved. Used With Permission. Last month’s California Supreme Court decision (California Building Industry Association (CBIA) v. City of San Jose, 2015 ) will make it easier for California cities and counties to pass inclusionary zoning ordinances. According to HUD, inclusionary zoning or housing programs “require or encourage developers to set aside a certain percentage of housing units in new or rehabilitated projects for low-and moderate-income residents. This integration of affordable units into market-rate projects creates opportunities for households with diverse socioeconomic backgrounds to live in the same developments and have access to [the] same types of community services and amenities …”

California counties and cities have long had an obligation to develop a general plan “…including a mandatory housing element consisting of standards and plans for housing sites in the municipality that ‘shall endeavor to make adequate provision for the housing needs of all economic segments of the community.” In the case at hand the city of San Jose had adopted an ordinance that would apply to all residential developments in the city that would create 20 or more new, additional, or modified dwelling units. The inclusionary housing requirement specified that “15% of the proposed on-site for-sale units in the development shall be made available at an ‘affordable housing cost’” (as defined in the Health and Safety Code). If the developer chose an available alternative option, such as constructing affordable housing elsewhere or paying an in lieu fee, the requirement increases to no less than 20% of the total units. The CBIA challenged the ordinance on the grounds that there was no evidence that new developments of twenty units or more would have such negative public impacts as to justify the requirements of the new ordinance. If it couldn’t be shown that the development itself would cause a lack of affordable housing, then, according to the CBIA, it couldn’t be justified to make the developer sell units at below market rates. To do that, they argued, would amount to an unconstitutional taking of the developer’s property. The Superior Court agreed with the CBIA’s contentions and ruled that the ordinance was constitutionally invalid. On appeal, however, the Appellate Court ruled that the city did not have to show a causal relationship (a nexus) between the potential harm caused by the development and the benefit brought about by the ordinance’s requirements. Rather, the Appellate Court held, the ordinance only needed to be evaluated under the standards for general land use regulations: namely, did the requirements “bear a real and substantial relation to the public welfare …”? The Supreme Court agreed with the Appellate Court and upheld its ruling. It noted that, “As a general matter, so long as a land use regulation does not constitute a physical taking or deprive a property owner of all viable

2016 45HoursOnline, All Rights Reserved Page 115 Consumer Protection Reader, 2016 Edition economic use of the property, such a restriction does not violate the takings clause…” In the case of the San Jose ordinance, no transfer of any real estate interest to the city was required; nor was any parcel of property taken. Moreover, it certainly was not the case that the property owner would be deprived of any economic benefit. Indeed, it was noted that “the San Jose ordinance makes available a number of economically beneficial incentives - - including a density bonus, a reduction in parking requirements, and potential financial subsidies …” such that “it is not the case that the San Jose ordinance will necessarily reduce a developer’s revenue or profit …”

The Supreme Court acknowledged that “A municipality’s authority to impose price controls on developers is, of course, unquestionably subject to constitutional limits.” If they were deemed to be confiscatory – if they denied a property owner a fair and reasonable return on its property – they So a little-bit confiscatory is okay. would be deemed to be unconstitutional . But no evidence had been introduced to suggest that the effects of the San Jose ordinance would be so extreme.

The court wrote, “Most land use regulations or restrictions reduce the value of property; in this regard the affordable housing requirement at issue here is no different from limitations on density, unit size, number of bedrooms required set-backs, or building heights.” [my emphasis] But such reductions in value do not in themselves constitute an unconstitutional taking. Hence, “the validity of the ordinance does not depend upon a showing that the restrictions are reasonably related to the impact of a particular development to which the ordinance applies. Rather, the restrictions must be reasonably related to the broad general welfare purposes for which the ordinance was created.” Currently, 170 California jurisdictions {about one third of the State’s jurisdictions source} have some sort of inclusionary zoning ordinance. This ruling will make it easier for such ordinances to withstand court challenges. (Particular cases could still be found invalid if they were too extreme.) The burden of proof shifts from the city or county to the owner/developer. Unless this case goes to the U.S. Supreme Court and is overturned there, it can be expected that there will be more inclusionary zoning ordinances in California.

2.3.2.3 WHAT IS THE ‘QUALIFIED MORTGAGE’ RULE?

by Shashank Shekhar for Realty Times, May 2, 2013 Copyright© 2014 Realty Times®. All Rights Reserved. Used With Permission. The Qualified Mortgage (QM) rule, also called the “Ability To Repay” rule, is the first-ever attempt at defining and establishing qualifying standards for borrowers applying for mortgage loans. Under the far-reaching Dodd-Frank, the QM rule is being implemented by CFPB. QM loans get a full legal shield from the CFPB. The shield mandates that a judge would rule in the lenders’ favor if the borrower contests a foreclosure on a QM.

The CFPB announced on Jan. 10, 2013, QM loans cap the debt-to-income Probably this “benchmark rate” is (DTI) ratio at 43%. Also mortgage rates on these loans can’t be more than Libor. 150 basis points (1.5%) over the benchmark rates .

Automated Underwriting: A For the next seven year transition period, the DTI ratio of 43% can be computer-generated loan exceeded if the loan is approved by Fannie, Freddie, and FHA automatic underwriting decision. (Details) underwriting systems .

Are any loan programs exempted from QM Rule? A hybrid ARM blends the Lenders will enjoy a safe harbor from litigation if they refinance borrowers characteristics of a fixed-rate from a hybrid adjustable rate mortgage (ARM)  {or any other mortgage mortgage and an ARM. It has an initial fixed interest rate period loan in compliance with the QM rule} , negative amortization loan, or other followed by an adjustable rate toxic mortgage into a “standard mortgage” with fixed rates for at least five period. years, provided the new loan reduces the borrower’s monthly payments.

Also, the Home Affordable Refinance Program (HARP) is exempt from the QM rule. HARP loans can exceed the maximum DTI requirements. Which loan programs don’t qualify for qualified mortgage status? Interest-only loans and negative amortization loans don’t qualify for QM status. Will the QM rule further tighten the lending standards? While the CFPB wanted to prevent a contraction of credit, it also wants to provide the “greatest consumer protections ever devised,” CFPB director Richard Cordray said. However, David Stevens, the chief executive of the Mortgage Bankers Association, said the DTI requirements for jumbo mortgages could tighten standards for those loans which have already become much harder to get. “It will restrict credit on the margin over the current environment and that’s something we cannot afford,” Stevens said. Does QM rule favor a certain category of lending institution? Most qualified mortgages will have a 3% cap on the amount of fees and origination costs that lenders can charge. Mortgage brokers are concerned it could hurt their business model.

On Sep. 2015, CFPB finalized A 3% cap may not be much of a problem in high loan amount areas like changes to QR rules to facilitate most of California. However, in areas where loan sizes are small, 3% may responsible lending by small creditors, particularly in rural and not be enough to cover all origination fees which can include loan points, underserved areas. (Source) processing fees, administration fees, underwriting fees, etc.  In addition, mortgage units run by real estate brokerages and home builders could be hit because any costs from affiliated services that they offer, say, title insurance or mortgage services, would count towards that 3% cap. The CFPB is also seeking public comments on extending the QM exemptions to nonprofit groups and housing finance agencies that traditionally serve low- and moderate-income consumers.

2016 45HoursOnline, All Rights Reserved Page 117 Consumer Protection Reader, 2016 Edition Are QM rules permanent or can be changed later? While any rule can be changed by Congressional mandate at a later date, it looks like this one is here to stay for decades. When is the Qualified Mortgage rule effective? The final QM Rule goes into effect on January 10, 2014. An additional summary of the Qualified Mortgage rule is available from NAR®. The QM rule is aligned with a similar rule, the Qualified Residential Mortgage (QRM). While QM is designed to protect home buyers, QRM is designed to protect investors of mortgage-backed securities (MBS). QM was finalized by the CFPB in early 2014 while QRM was finalized by the FDIC in October of 2014. It took nearly three years of deliberations by regulators before they finalized QRM. The final rule includes a broad definition of QRM and aligns it with the QM rule. Previously proposed QRM rules imposed high down payment requirements (source). The QRM rule provides a set of requirements a loan must meet to be considered a safe loan and a loan eligible for sale to investors as part of a mortgage-backed security without the lender having to retain 5% of the loan amount on its books (source). Under the QRM rule, as under the QM rule, loans are generally considered qualified if the borrower’s debt-to-income ratio is 43% (source). Thus, if a loan meets the underwriting requirements of the QM rule, then it meets the QRM rule and the MBS issuer does not have to hold a stake in it. If it doesn’t comply with the QM rule, the issuer must hold 5% of the MBS for five years or until a a majority of the outstanding balance is paid off. In the future, mortgages with low documentation and risky products will be limited, less liquid, and require higher costs. Non-QM lending was only 2.6% of originations in the second quarter of 2014, and any MBS issuer who wants to incorporate them into an MBS will have to hold five percent of the risk going forward. The QRM rule takes effect in October 2015 (source).

2.3.3 ECONOMY AND DEMOGRAPHICS

2.3.3.1 IS ANOTHER HOUSING BUBBLE LOOMING?

by Dr. Jack Guttentag (“The Mortgage Professor”) June 5, 2015 for www.MtgProfessor.com. Used With Permission. The question is being asked with increasing frequency and also with great anxiety. The last housing bubble led to a financial crisis followed by a recession. Many of those commenting on the question, however, don’t understand what a price bubble is. It is not a marked rise in prices. Sharp price

Page 118 2016 45HoursOnline, All Rights Reserved Consumer Protection Reader, 2016 Edition increases are common and pose no threat to the stability of the economy whereas price bubbles are rare and do pose a threat. A price bubble is a rise in price based on the expectation that the price will rise. Sooner or later something happens to erode confidence in continued price increases at which point the bubble bursts and prices drop. What makes it a price bubble is that the cause of the price increase is an expectation that the price will increase which sooner or later must reverse itself. Bubbles can only arise in markets where the stock of items is very large relative to new production. If a rise in price immediately stimulates an increase in supply any bubble will quickly disappear. Housing meets that condition because the stock of houses is large relative to new construction, but ocean liners have an even longer production cycle than houses and to my knowledge that industry has never been hit by a price bubble. Something else must be involved and it is quite possible that there is no single explanation. The expectations of price increases that drove the house price bubble of 2000-2006, which led to the financial crisis, was not limited to the consumers looking to buy houses. It also engulfed the lenders who financed their house purchases and the investors here and abroad who purchased the securities that were issued against home mortgage collateral. Indeed, they were the crucial players in the bubble. Rising home prices convert virtually all mortgage loans, even those that violate the most sacrosanct underwriting rules, into good loans. For example:  The borrower with an adjustable rate mortgage can’t meet the new higher payment on the first rate adjustment date in two years. No problem, after two years of price increase, the house will then have enough equity to allow the lender to refinance the loan with a new lower payment.  The borrower has no money for a down payment. No problem, after two years of 5% price increases, the borrower will have equity of more than 10%.  The borrower is a poor credit risk with a high likelihood of defaulting. No problem if he defaults, the price increases will cover the foreclosure costs and we’ll get our money back.

The presumption that house prices could only rise was supported by a long record of house price increases interrupted by only occasional declines in specific areas that were moderate and short-lived. Prior to 2006, there had not been a national decline in house prices since the depression of the 1930s. The premise that this pattern would continue was entirely plausible – so much so that it was generally accepted by regulators who did nothing to deflate the bubble. Wholesale acceptance by lenders, investors, and regulators of the premise that house prices could only rise led to the bubble, which invalidated the premise when the bubble burst – as all bubbles do. House prices generally fell between 2006 and 2012 and have been on the rise since 2012, with the increases in some areas bringing prices above the

2016 45HoursOnline, All Rights Reserved Page 119 Consumer Protection Reader, 2016 Edition highs reached in 2006. Reports of large price increases are now invariably accompanied by concerns about whether or not another bubble may be brewing. My view is that we are a long way from another house price bubble. Home buyers, lenders, investors and regulators now understand that a nationwide decline in house prices is possible – because we recently lived through one. Probably it will take another generation to forget what we learned. Even if the lesson was forgotten tomorrow, furthermore, changes that have occurred in the housing finance system as a result of the crisis and the recession would make it very difficult if not impossible for the system to support a bubble. Among the more important changes:  Appraisals tend to err on the low side today, rather than on the high side as was the case during the bubble.  Alternative documentation rules that allowed many borrowers to qualify without adequate financial capacity, are gone; full documentation is the rule.  The private secondary market in mortgage-backed securities, which financed most of the sub-prime mortgages written during the bubble period, collapsed during the crisis and has barely begun to recover.

In many respects, these changes went too far and made the housing finance system less effective but they did eliminate the threat of another housing bubble. I don’t expect to see another one in my lifetime. Dissenting Opinion: Kevin Wilson writes in the National Review that “Housing Bubble 2.0” is forming particularly in localities such as San Francisco where, for example, the average home price is 1.4 million – 50% higher than at its 2007 peak.

2.3.3.2 STUDENT LOAN DEBT AND THE RE MARKET

by Bob Hunt for Realty Times, April 20, 2015 Copyright© 2015 Realty Times®. All Rights Reserved. Used With Permission. What we know for sure is that there is a lot of student loan debt out there. What we know or believe with less certainty is what kind of effect that debt has on the real estate market – both now and in the future. The total amount of student loan debt is staggering. CFPB estimated it at $1.2 trillion in May of 2013, and it is a figure that has been rapidly growing. In the period from near the end of 2011 until mid-year of 2013, outstanding student loan debt grew approximately 20%. During that same period, credit card debt increased about 2%. Student loan debt is now the second largest category of consumer debt, exceeded only by mortgage

obligations.

According to Forbes Magazine (August 2013), approximately 2/3 of those currently graduating from colleges and universities will have loan debt. The average amount is around $27,000. Nor does this just apply to four-year

Page 120 2016 45HoursOnline, All Rights Reserved Consumer Protection Reader, 2016 Edition schools. Of students completing associate degrees from community colleges in 2008, “38% graduated with debt. In the for-profit sector of two- year degrees, over 90% have debt. The average debt load at a public two- year institution is $7,000.” Moreover, student loan debt is, in general, somewhat less than golden. A recent Wall Street Journal article (April, 2015) cites a study from the St. Louis Federal Reserve Bank showing that the student loan delinquency rate is almost twice as bad as previously thought. The study pointed out that the official measure is that 17% of student loans are delinquent at least thirty days. This compares delinquent loans to all student loans. But many student loans – almost half – are not yet in repayment status. Because the borrowers are still in school, or are in a “grace” period, they are not required to be making payments. If you took the delinquent loans as a percentage of loans which currently require payments, the number is an extremely high 31%. (For example, the delinquency rate for auto loans is about 8%.) So what does all this have to do with the real estate market? Well, more than a few people have noticed that the run-up in student loan debt just happens to coincide with an historic drop in first-time buyers. Since 2011, first-time buyers have represented less than {the historical norm of 40% among primary residence buyers}. In 2014 only 33% of transactions involved first-time buyers (2014 NAR® Profile of Home Buyers and Sellers ). That is the lowest percentage since 1987. Now correlation doesn’t necessarily mean causation but it is also telling that the demographics of all those student loan debt holders fits nicely with those of typical first-time buyers. They are the same group that is putting off household formation. In September, 2014, the Wall Street Journal reported on a study by John Burns Real Estate Consulting predicting that the effects of student loan debt could reduce yearly sales nationally by almost 8%. The report estimated that “every $250 per month in student loan debt reduces borrowers’ purchasing power by $44,000,” and that “around 35% of households under age 40 have monthly student debt payments exceeding $250, up from 22% of households in 2005.” The Burns report estimated that approximately 308K purchases were “lost” because of student loan debt with payments up to $500 monthly. Harvard economist Larry Summers, former chair of President Obama’s National Economic Council, has said that, “A crucial factor slowing down the recovery has been the limited demand for homeownership resulting in part from a slowdown of family formation.” Summers believes that the underlying culprit is student loan debt. But, other studies suggest that things might not be so bad. Research from Federal Reserve economists (Mezza, Sommer, and Sherlund) show that, in earlier years (2004-2010), those with student loan debt were slower than those without it at getting into home ownership, but, by the age of 35 their ownership rates were just about the same. “Our results suggest that for those with college education student loan debt more likely affects the timing of homeownership than people’s eventual attainment of it.” And, as to all those scary reports about the size of student loan debt, more research has yielded some interesting counter-intuitive results: there is an 2016 45HoursOnline, All Rights Reserved Page 121 Consumer Protection Reader, 2016 Edition almost inverse relationship between default rates and the amount of student debt owed. The research came from the Federal Reserve of New York and was reported by the Wall Street Journal in February of this year. We quote: Among those who owed less than $5,000, one in three had defaulted at some point as of Dec. 31, 2014. Those borrowers made up 21% of the entire pool of those with debt. The Fed researchers show that the higher the debt burden, the lower the default rate. Those with burdens above $100,000 had the lowest rate at 17.6%. Why is that? One likely explanation, offered by the New York Fed researchers, is that many Americans with small loan balances are dropouts. They may have attended school for a semester or two without getting a degree. They often don’t end up with the decent- paying job that a college education is supposed to bring, and thus lack the income to repay their debt. Another possibility is that low-balance borrowers attained credentials such as certificates that don’t lead to the kinds of jobs and salaries that a bachelor’s degree does. By contrast, many borrowers with large loan balances are people who graduated from master’s programs and professional schools – doctors, lawyers – who typically end up with generous salaries…”

There’s little doubt that the growth of student loan debt has had an effect on the real estate market. It has lowered the rate of first-time buyers and that, of course, affects the move-up market. But don’t write off those folks just yet. Their time will come.

2.3.3.3 GOODBYE ‘CALIFORNIA DREAMIN’... HOWDY TEXAS!

Being a Texas REALTOR® for over 30 years, I’ve seen an interesting phenomena happening in the last six months – Californians moving to Texas in droves, particularly to Dallas! A majority of Californians did something strange on election day this year – they voted to make themselves worse off by voting for Proposition 30, the brainchild of Democratic Governor Jerry Brown which was the straw that broke the camel’s back! This bill raises the states sales tax from 7.25% to 7.5% and imposes higher income-tax rates

on the wealthiest Californians .

The sales tax in Texas varies from 6.25% to 8.25% (source) and in California from 7.25% to 10%. (Source) Texas is one of seven states The top marginal rate goes from the current 10.3% to 13.3%, one of the without an income tax (source). highest in the nation. Think about that for a second: 13.3% additional tax

For every dollar earned above $400K a single taxpayer pays 53 cents in Federal and State income taxes (the top marginal rate for the federal income tax is 39.6%. (Source) Many taxpayers have decided that the California weather and lifestyle is no longer enough or worth the higher price they now have to pay. After just working with my own client, moving his business from California, I learned a great deal about the mass exodus. They had enough of the government in their pockets and there are multitudes following in their footsteps.

A right-to-work state compels For most of its history, California was the promised land – it is the biggest employees to join the union if the state in the union and Texas is the second largest state. 20% of the US company is a “closed shop.” A “closed shop” is a company which population lives in both states. California was the dream state to live in until has an agreement with its labor around 1990 when two million more people moved out than moved in. union to only hire employees who Where were they moving to? Texas! To start out with, the cost of living in are union members. Twenty-four Texas is 42% less than California. But probably the biggest factor is no states are right-to-work states all of which are in the South state income tax. Other population shifts can be due to Texas being a right- excepting Michigan and Indiana. to-work  state versus California being a union state. That’s huge! The poverty rate is the highest in California. Big government is their chosen model whereas Texas is a model for how a state should be run. Since President Obama took office, California has had 10% unemployment ... 3% higher than Texas. All the while, their government employees are some of the highest paid in the nation. $178,789 is the average salary of LA city council members. With all the big government spending and all migration to other states, California will have fewer taxpayers to foot the bill. If California wants to stop the bleeding it needs to be lowering taxes, cut spending and encouraging economic growth – that’s how it’s done in Texas! Every agent I talk to has a buyer from California. I was on a home inspection recently and the inspector overheard my conversation about the Texas migration from California when he interrupted me and said that his last seven home inspections were top executive buyers moving from California. WOW! Well, that confirmed the realty that there is no more “California Dreamin.” With my primary market servicing the high end homes of Park Cities and Preston Hollow in Dallas, no vacation for me this spring, instead it’s going to be one busy season!

For a less sanguine view of living in states without an income tax, see “The Joys of No Income Tax, the Agonies of Other Kinds.” ¶ Even the Chinese are buying expensive homes in Texas (source1 and source2).

2.3.3.4 ENTER THE DRAGONS: CHINESE INVESTMENT IN US RE

by Anthony Sarro for Realty Times, December 17, 2012 Copyright© 2012 Realty Times®. All Rights Reserved. Used With Permission. “Move not unless you see an advantage, use not your troops (or in this case, money) unless there is something to be gained.” Sun Tzu This philosophy is as old as mankind, even older than the extra packet of soy sauce in your kitchen drawer, and is in process even as you read this.

2016 45HoursOnline, All Rights Reserved Page 123 Consumer Protection Reader, 2016 Edition Chinese investment in U.S. real estate is second only to ... wait for it ... Canada. (what?) Yes, our neighbors to the north are number one and China is gaining fast. Chinese interest is nothing new, however, traditional motivation centered on practical reasons. For instance, as more Chinese students choose higher American education, property in the Boston area was purchased for student housing. Conversely, the current interest is due to a confluence, or perfect storm of factors that are contributing to the latest trend. Obviously the U.S. housing market, though showing signs of strengthening is still relatively weak, with areas still 50-60% below their peaks.

As of December, 2014, Anne Add the growth of Chinese personal wealth and the anticipation of the Stevenson-Yang, a Chinese Chinese homeland real estate bubble about to go pop! Plus, their slowest resident and expert, claims the Chinese real estate bubble has economic growth since 2008, and suddenly “Go West young man” takes on already burst albeit in slow a whole new meaning. Chinese speculators previously invested heavily in motion. Moreover, she says that Singapore and the United Kingdom but their latest favorites include New wealthy Chinese are increasingly York City, parts of Los Angeles, and their newest discovery, Toledo. Yes, moving their wealth out of the country for fear of a financial as in “Holy Toledo! Batman!” The “Swing” state of Ohio. $8,950,000 of and/or political collapse. (Source) actual invested capital with another two hundred million in proposed purchases.

Another market in their sights is Miami, which just so happens to be rated number one in the country for appreciation within the next five years. But Chinese investors are by no means unsolicited, many Mayors and Governors are marketing their cities and states, resulting in direct benefits for their efforts. Private American companies are organizing junkets with multi-city tours for commercial investors.

And now, the bonus round for the Samsonite luggage; did you know that This is known as an EB-5 visa along with some eligibility requirements and if $1,000,000 is invested in an (source). Many attorneys specialize in helping wealthy American business, the chances of obtaining a green-card and path to foreignors obtain this type of visa citizenship are greatly increased? And in areas of high unemployment the (source) (IDEA: Partner with an minimum is lowered to $500,000 . How to improve an already perfect EB-5 attorney?). storm? Form a corporation, buy a half million dollars worth of real estate and become a citizen.

The good news and bottom line is this: the only reason anyone would invest in the U.S. estate market is because they see opportunity for growth, inevitable value appreciation, and because we are the country where a person can start with nothing and live any dream. But fear not, friends, Romans and countrymen, we’re not on a path to becoming the Peoples Republic of America, opportunity for all is the basic beauty of our country; “If the American dream is for Americans only, it will remain our dream and never become our destiny” – Rene de Visme Williamson. Since this article was written, Chinese investment in U.S. real estate has only accelerated. This excellent New York Times article written in Nov. 2015 explains the reasons why Chinese are so eager to purchase U.S. properties and it includes a revealing four-minute video showing Chinese house hounters looking for homes in the U.S. while explaining their interest in becoming U.S. homeowners.

by Phoebe Chongchua for Realty Times, April 20, 2012 Copyright© 2012 Realty Times®. All Rights Reserved. Used With Permission. After college some people say they’ll never have another roommate but tough economic times are making people consider multi-generational housing. In fact, the latest figures report that 4.4 million U.S. homes had three generations or more living in the same home in 2010, according to the Census Bureau. Three generations living in one home is becoming so popular that builders are designing for this target market. Toll

Three generations under one roof. Brothers is replacing some of its family rooms with floor plans that include a guest suite complete with a kitchenette (perfect for grandma). This type of design used to be only a custom option but is now becoming much more mainstream.

Other home builders are redesigning one of the two-car garages to create extra space inside the home so that the floor plan can accommodate a guest room.

According to the U.S. Census Bureau, “doubled-up households” have grown tremendously (10.7%) from 19.7 million households in 2007 to 21.8 million households by the spring of 2011  {tremendous?}. Doubled-up households include an extra, non-student, adult who isn’t a partner or spouse but lives in the house. These households include many adult children who are now living with their parents due to being unable to find work. The Census Bureau reports a 25% jump in the number of 25- to 34-year olds living with their parents

(Source) from 2001 to 2007. I’ve written about this change in living arrangements in previous columns but it’s becoming so prevalent that it’s worth taking a look at what makes the living conditions work. There are now more books than ever popping up that provide tips and guidelines to a successful multi-generational living arrangement. However, those who have done it advise others to give the idea good long consideration and to have many conversations with those who are planning to move in together. Sometimes these living situations are a matter of necessity and there isn’t much time to “think things over,” but if it’s not urgent, the experienced say, make a list of the pros and cons and weigh everything carefully.

Sometimes when different generations live together, it can be a blessing and save money in many ways such as the grandparents may be able to … or take care of a pet while on vacation. help with small children and ultimately save on child-care costs for the working adult children .

2016 45HoursOnline, All Rights Reserved Page 125 Consumer Protection Reader, 2016 Edition This, though, can be tricky. Just like an older teenage child might not want to babysit the younger ones, some grandparents aren’t interested in spending their golden years raising even their own grandchildren. The lesson is this type of living arrangement can’t leave anything to chance or assumption. Don’t assume that family members will take on certain roles. Have conversations about the challenges, benefits, needs, and even when and where each family member will get space and time alone.

Many use RoomMates.com to While there are many things to consider, the good news is that there are find room mates. more homes that are either newly built or remodeled with the multi- generational family living arrangement in mind. That means your house- hunting can be tailored to your specific needs and you may not need to make as many or even any modifications to fit your needs.

2.3.4 HOME TECHNOLOGY

2.3.4.1 SMART HOMES: SIX ESSENTIALS OF HOME AUTOMATION

by Jennifer Tuohy for Realty Times, May 13, 2014 Copyright© 2014 Realty Times®. All Rights Reserved. Used With Permission. 2014 has roundly been hailed as the year the home gets smart. If you’ve thought about dabbling in home automation but found the array of devices, systems, gadgets and price points just too overwhelming, you are not alone. While the concept of a home that is smarter than its owner is both thrilling and slightly scary, in reality, what most of us want out of our smart homes is simple: security, savings and a dash of convenience. Manufacturers are catching on to this consumer desire and have come up with a variety of simple, stand-alone, smart gadgets that get you a step closer to the home of the future without the need for a computer science degree. 1. Belkin WeMo If you only make one smart home purchase it should be the Belkin WeMo ($50). This little gadget can turn anything with a plug into a smart device. Plug it into an outlet, then plug any household device – lamp, coffee maker, oven, space heater – into the WeMo and voila; your device is now connected to wifi and controllable with your smartphone or computer. For some wow-your-friends type home automation, pair your WeMo with the web service “If This Then That” and have your toilets flush when you get an email from your boss or set your coffee maker to turn on five minutes before your alarm goes off. Upgrade to the $100 WeMo, which comes with a motion sensor, and program your device to turn off your curling iron when you walk out of the bathroom or send you a text message when someone opens your front door. Works with voice commands using Amazon’s Echo.

Page 126 2016 45HoursOnline, All Rights Reserved Consumer Protection Reader, 2016 Edition 2. Nest The leader in the field of smart climate control, Nest is not the only connected thermostat on the market, but it’s the first on the market with true artificial intelligence. The Nest Learning Thermostat ($249) monitors your movements and learns your routines, then adjusts the temperate accordingly to save money and energy – it claims up to 20%. The Nest gets to the very crux of the simple smart home solution: a device that acts like your very own butler, anticipating your needs without you having to lift a finger.

3. Phillips Hue Click here ► for a demonstration The Hue light bulb from Philips is probably the most fun home automation on YouTube. tool currently on the market. Pick up a starter pack of three bulbs and one wifi bridge device ($200) and have hours of fun playing with the lighting of your home. Each bulb can deliver a full spectrum of color. Have a photo of your favorite beach at sunrise? Pull it up in the Hue App on your smartphone and recreate the exact lighting in your living room.

You can also set the lights to come on automatically or control them remotely from the Hue smartphone app, as well as set different rooms to light up at different times – a good way to deter would-be thieves. Geo- fencing technology means the lights can turn on when you walk up to the door and turn off when you leave (just make sure no one else is home). The LED bulbs use 80% less electricity than traditional bulbs and Hue also has an IFTT channel, allowing you to set up some more wow-your-friends automation such as turning all your lights Wolverine Blue at the start of a Michigan basketball Game. 4. Kwikset Kevo From losing your keys, to locking your son out of the house while you’re stuck at work (or just helping avoid that awkward jiggle when you arrive at your front door laden down with bags), a smart lock solves a lot of problems.

Smart locks range in abilities, with some really exciting new intelligent devices coming down the line. But right now the best option comes from Kwikset. Its Kevo Bluetooth Enabled Deadbolt ($219) turns your iPhone into your key (if you don’t have an iPhone the key fob works in the same way). Simply walk up to the door with your phone or key fob in your pocket and touch the lock with your finger to open it. You can also send electronic keys to family, friends or visitors who have iOS devices (Android coming soon). Plus, crucially, you can still use a regular key, nullifying concerns of what happens when your phone’s battery dies, the power goes out, or grandma comes to visit.

2016 45HoursOnline, All Rights Reserved Page 127 Consumer Protection Reader, 2016 Edition 5. Defender Surveillance System A whole home surveillance system was once the sole purview of spies and millionaires with white cats. Today however, we can all keep an eye on our garden gnomes from the security of the sofa, or a beach in the Bahamas, with simple to install and surprisingly inexpensive tech like the Defender Surveillance System. For around $300 you can have six high-tech, all-weather cameras with 100 feet of night vision. Simple to install and compatible with computers and most smartphones, Defender’s surveillance system allows you to view Surveillance Camera. footage or your home from anywhere in the world, courtesy of a 500GB hard drive that will record more than two years of footage.

6. Bluetooth Audio Path Light Kit A smart home should sense your every need. After a long day at work, when you step into your garden in search of relaxation, your warm white LED lights should greet you, showing you the way to your favorite lounger. There, once you sit back, relax and sip a glass of wine, your favorite album begins to plays through them. That’s right, through the lights. The Bluetooth Audio Path Light Kit by CE TECH ($169) is the first low-voltage landscape light kit integrated with wireless Bluetooth speakers, allowing you to enjoy your tunes outdoors via your smartphone or any Bluetooth enabled device. Thank you, Jeeves. That will be all ...

2.3.4.2 HOME TRENDS: WHAT YOU WILL/WON’T SEE IN HOMES

by Phoebe Chongchua for Realty Times, July 13, 2012 Copyright© 2012 Realty Times®. All Rights Reserved. Used With Permission. Even in difficult economic markets, homebuilders are still striving to deliver amenities that offer comfort, style, and functionality. But which amenities are popular these days has changed.

According to the National Association of Homebuilders, (NAHB), you’ll find that builders are figuring out the best ways to rework spaces. Out go formal dens and in come smaller home management areas (think office but not quite as spacious or traditional, more like a “pocket office.” A “pocket office,” according to NAHB, can be located in a large pantry area or nearby the kitchen or family great room .) It’s all about conserving and creating efficient workable spaces that also offer other functions. Along the lines of making things more efficient, laundry facilities are now being placed near the “master bedroom’s walk-in closet,” writes the NAHB in a press statement.

Watch for shadow units – separate units that are built alongside the main home that conveniently accommodate other residents (like elderly parents) but still offer access to the main floor plan through a door connected to the unit. Also becoming increasingly popular are two master suites  in one home. Typically one suite is located on the ground floor to ease the access for elderly occupants. Perhaps a bit of Zen-like influence, homes are mixing materials such as metal, wood, and stone, creating a modern look in the home’s façade. But the once common rectangular-shaped home is taking on new shapes fewer roof lines. NAHB, says that homes will be “visually stimulating” and make use of as much natural light as possible. For instance, in a corner area, builders are placing two windows to allow “unobstructed views and maximum light to come in.”

Instead of a rectangle, you’ll notice that the family triangle area is becoming the norm . An open triangular floor plan creates room for residents to have their own space in the family triangle area. Lighting and architectural detail are vital in order to keep the family triangle area from appearing cramped or like it’s just a large room. When effectively designed, the home can have an eating area, a kitchen, and a sitting area all in the family triangle and look and feel as though it has some separation from the different areas. However, homes will still have some private areas that offer a place for residents to get away to work alone. Kitchens are still one of the most important rooms in the house. Becoming not only more popular but also necessary are walk-in pantries. These large pantries sometimes have a little kitchen desk inside-perfect for making notes about what’s needed from the

“Family Triangle” – One room which includes market. They generally have room for a laptop and paperwork and kitchen, dining room, and living room. it’s all out of view from guests in the main kitchen area.

Of course, outdoor living spaces are becoming more desirable especially in areas where the climate is mild year round. In the past, I’ve written about how homeowners are bringing the indoors outside by creating living-room like areas outside. However, the trend of building big outdoor kitchens is on the decline. It seems that while homeowners want more livable space to relax on their outdoor couch, the outdoor kitchen is one area that homeowners feel they can live without. Good design, efficiency, and functionality top the list of things that builders are aiming for and homeowners are hoping for. (Plus, of course, affordability.)

by Carla Hill for Realty Times, April 3, 2012 Copyright© 2012 Realty Times®. All Rights Reserved. Used With Permission. From noisy neighbors and adolescent garage bands to urban living spaces it can be hard to find some peace and quiet. Aside from relying on city and HOA ordinance enforcement, a strong hand with teenagers, or complaining to the noisy party, it can be tough to find a solution to a noisy space.

Enter QuietFiber® noise absorbing material . This versatile material is a solid way to address sound issues and can be installed as an easy do-it- yourself project. According to the makers of this revolutionary product, “QuietFiber is the only sound dampening product on the market that can be custom tailored to create a complimentary design element in any space. You have the sound abatement properties you need in a product that can be completely hidden under a tapestry or in strategic spots throughout the room, or disguised as an artistic element within the space.”

QuietFiber® is one of several noise absorbing products. A list of others can be found here. When complaints from neighbors began to trickle in for club owner Bobbie Rahmani in Los Angeles, California, he knew he had to find a way to deaden the noise and relieve his stressed out neighbors. He also wanted a solution that looked as good as it worked. “We haven’t had any complaints since we hung the panels, and no news is always good news,” Rahmani said of the noise deadening qualities of the QuietFiber treatments.

This versatile material is a solid way to address sound issues and can be installed as an easy do-it-yourself project. High sound absorbency QuietFiber is a two-inch thick DIY interior noise solution that can be cut to fit and simply hot glued underneath a bar, cabinets, countertops, tables, chairs, behind a wall tapestry or curtains. Slide a QuietFiber “pillow” on top of cabinets, or anywhere else that reverberant noise and echo is a problem.

Generator enclosure Easily cut to size with a serrated knife, Quiet Fiber can be concealed almost soundproofed with QuietFiber. anywhere.

This product can be the solution for walls and ceilings. Plus, as an added bonus it is fire-rated for floor, 100% recyclable, and 100% USA made.

To see an impressive Youtube Are you looking for solutions in your new construction? Consider using this video demonstration of this solution in walls between studs and under drywall. Existing-homes can product, click here ►. benefit as well. That’s what the makers of this new product are counting on!

2.4 FINANCE

The quiz and final exam for Consumer Protection Reader 2016, Part 2 begins here.

2.4.1 UNDERWRITING

2.4.1.1 USING GIFT MONEY FOR DOWN PAYMENTS

by Blanche Evans for Realty Times, August 12, 2015 Copyright© 2014 Realty Times®. All Rights Reserved. Used With Permission. To take advantage of low interest rates while home prices climb higher and higher, some homebuyers need help accumulating enough money for a down-payment. To satisfy secondary market loan package purchasers such as Fannie and Freddie and insurers like the FHA, lenders have strict rules about where down-payment money originates. Lenders prefer that borrowers supply their own down-payment funds. It shows they have “skin in the game” and that they are good with money and can meet their financial goals. But thanks to the Great Recession and the slow road back to recovery, many homebuyers are turning to their parents, grandparents, and other family or friends for help. Research in 2015 from loanDepot LLC, found that more parents are planning on helping their Millennial-age kids buy homes. In the last five years, 13% of parents pitched in with down payments, covering closing costs, or co-signing the loan but lenders anticipate that fully 17% of parents will help their kids . From loanDepot’s summary of the study, The survey asked parents of adults age 18-38 whether and how they were expecting to help their children buy their first home in the next five years and compared the results to what parents did in the past five years.

Overall, the number of parents who expect to help their children buy a home in some way grew from 13% to 17%. Because gifts are a gray area, lenders are requiring more documentation for down payment monies. For example, a parent may provide a few thousand

dollars to an adult child to use as a down-payment – but is the money a gift Click here for a sample gift or a loan? Lenders may require borrowers and gift-givers to provide a letter. certified down-payment gift letter  or to sign an affidavit.

Such affidavits must include:  The amount of the gift, accompanied by a corresponding cashier’s check.  The name and address of the gift-giver and relationship the gift- giver has to the homebuyer.  The purpose of the gift – to be used only as a down payment on the subject property, complete with the property’s address

2016 45HoursOnline, All Rights Reserved Page 131 Consumer Protection Reader, 2016 Edition  A statement confirming that the gift is not a loan and does not need to be repaid.  Signatures of the borrower and the gift-giver.

Because lenders require a paper trail, allowing parents to simply transfer money into the borrower’s account to mix with the borrower’s funds is discouraged. First, a large deposit raises the borrower’s income and alters the bank statements, possibly allowing a borrower to qualify for a home that in reality is too expensive. And don’t think underwriters won’t find it. One of the first things they do is examine your bank accounts. If you want to get a conventional loan, Quicken Loans advises the following:

 If you put down 20% or more, it can all be from a gift.  If you put down less than 20%, part of the money can be a gift; how much varies by loan type.  You can only use gift money on primary residences and second homes.  For FHA and VA loans, all of your down- payment can be gift money {if your credit score is 620 or higher}. If your credit score is

Source (FICO scores range from 300 to 850) between 580 and 619 , at least 3.5% of your down payment must be your own A minimum FICO score of 580 is needed to qualify for FHA's 3.5% down payment program. (Source) money.  You can only use gift money on primary residences. If you’re planning to use gift money as part or all of your down payment, ask your lender how to meet the appropriate requirements.

2.4.1.2 NEW FORMS FOR MORTGAGE LOANS WILL CAUSE A HICCUP OR TWO

by Bob Hunt for Realty Times, May 12, 2015 Copyright© 2014 Realty Times®. All Rights Reserved. Used With Permission. Click here for a sample of the August 1, 2015 is the date that the Good Faith Estimate (GFE), the HUD-1 Loan Estimate and here for a closing statement, and the Truth-in-Lending Act (TILA) disclosures will be sample of the Closing Disclosure. replaced in most transactions by two new forms – the Loan Estimate and the Closing Disclosure . While this change may not directly affect the way most real estate agents do business, it is certainly something they will need to become familiar with. They will also want to understand that their affiliate friends in the lending, title, and escrow business may be feeling more than just a touch of pressure as they work to become familiar with the new forms and procedures.

The legal department of CAR® has recently published a question-and- answer memorandum (Loan Estimate and Closing Disclosure Forms) {we can’t find this document} that explains many of the changes. It points out that the changes are a result of Dodd-Frank legislation that directed the CFPB to create rules, regulations, and forms that “are designed to aid the

Page 132 2016 45HoursOnline, All Rights Reserved Consumer Protection Reader, 2016 Edition consumer in comparison shopping, improve consumer understanding, and prevent surprises at the closing table.” Whether or not these changes will actually have that effect is something we’ll just have to wait to see. The new forms will be required in most transactions involving financing. They will not, though, be required in those involving HELOCSs, reverse mortgages, or mobile home financing. Those will still use the forms used now. The Loan Estimate replaces the current Good Faith Estimate and the initial Truth-in-Lending forms. It combines an estimate of loan costs and terms, along with various disclosures relating to the loan terms. The lender must deliver or place in the mail the Loan Estimate no later than the third day after receiving the consumer’s application. An application means the submission by the borrower of six pieces of information: name, income, social security number, address of the property, estimate of the value of the property, and the amount of loan sought. One of the causes of consumer (and agent) complaints that the CFPB is seeking to eliminate is the frequent discrepancy between Good Faith Estimates and the actual costs at closing. Thus, the regulation holds the lender strictly to the estimates of some of the types of costs, but not all. There are three categories: 1. “Zero tolerance” In this category the lender is held strictly to the cost in the loan estimates. These include fees paid to the lender or mortgage broker, or an affiliate of either. Any cost in this category that is over the amount stated in the Loan Estimate must be refunded to the borrower. 2. “10% tolerance” These include recording fees and charges for third-party services where the charge is not paid to the lender or the lender’s affiliate. All these costs are added together. If the total exceeds 10% of the Loan Estimate, the difference must be refunded to the borrower. 3. “No tolerance” These are estimates for such things as property insurance premiums and impound accounts. They are not within the control of the lender, and the lender is not charged if the estimate is inaccurate.

The Closing Disclosure replaces the HUD-1 and the final Truth-in-lending disclosures. The borrower must receive the Closing Disclosure no later than three business days before consummation. Consummation is not the same as closing. Nor is it funding. As CAR®’s memo puts it, “Consummation occurs when the consumer becomes contractually obligated to the creditor on the loan (as determined by State law)…” In California, for example, consummation occurs when the borrower signs the loan documents. Suppose, for example, that closing is scheduled to occur on Wednesday, and that the lender – as is not uncommon – will not fund until at least 24 hours after loan documents are signed. Loan documents might be signed late Monday afternoon. Funding occurs late Tuesday afternoon, but too late for recording. Recording (closing) then occurs Wednesday morning. When was consummation? In California, it was Monday. So when was the

2016 45HoursOnline, All Rights Reserved Page 133 Consumer Protection Reader, 2016 Edition Closing Disclosure due? Thursday the week before. Sunday didn’t count, because it is three business days. Any changes to the Closing Disclosure rendering it inaccurate will require an updated Closing Disclosure. Suppose, using the example above, that a buyer “walk through” on Friday resulted in a $500 credit being given to the buyer because of some inadequate or undone repair. That would call for the Closing Disclosure to be updated. The CAR® memo states that “Normally a change in the Closing Disclosure will not require any extra time.” However, if a material change were to be made to the loan itself – such as a change in the loan’s APR – that would also require a reset of the three business day period. Also, the memo warns, “…the lender’s own procedures under the new rules may be cumbersome and cause delays.” Settlement agents, escrows, and lenders will all get used to the new forms and procedures. But it is reasonable to expect some glitches along the way. Agents should be prepared for some delays as the new rules take effect.

2.4.1.3 WHY MANY GOOD HOME LOANS ARE NOT BEING MADE

by Dr. Jack Guttentag (“The Mortgage Professor”) October 25, 2014 for www.MtgProfessor.com. Used With Permission. The housing sector today is not providing the economic stimulus we had come to expect during periods of economic recovery. A major reason is that the underwriting rules and practices that determine whether or not an applicant qualifies for a home mortgage are much stricter today than they were before the financial crisis. In part, the tightening reflects changes in the market environment that make mortgage loans generally more risky than they were before the crisis. The major factor was the nationwide decline in house prices between 2006 and 2009, the first such decline since the 1930s. The very liberal terms that prevailed prior to the crisis were based on a widespread belief that such declines were a thing of the past. When price changes are always positive, it is very difficult to make a bad mortgage loan. Now that the market understands that house prices can decline, mortgages are considered riskier. A second factor has been the post-crisis practice of Fannie and Freddie to require lenders originating loans for sale to the agencies to buy them back if they default too quickly. This has caused many lenders to impose underwriting rules (referred to as “overlays”) that are more restrictive than required by law and regulation. A third factor has been the post-crisis tightening of underwriting standards imposed by law and regulation. The riskier mortgage types that experienced the highest default rates are no longer permitted. This includes loans that allow negative amortization where the payment does not cover the interest and loans that allow interest-only where the payment covers only the interest. Monthly payments today must be fully-amortizing, meaning that if continued through the life of the loan, the balance will be paid off at term.

Page 134 2016 45HoursOnline, All Rights Reserved Consumer Protection Reader, 2016 Edition In addition, riskier loan features that are still allowed carry a larger penalty than they did before the crisis. For example, a borrower refinancing with “cash-out” is subject to a larger price penalty relative to a no-cash refinance than before the crisis and may also be subject to a higher credit score requirement, a higher equity requirement, or both. The same is true of loans on 2-4 family properties and condos, relative to loans on single-family homes. But the tightening of underwriting rules following the crisis has gone beyond these rational adjustments to a riskier environment. It also included knee- jerk responses to pre-crisis abuses, particularly to the many cases of loans granted to people who obviously couldn’t repay them. A system of hastily enacted rules and procedures designed to prevent this from happening again are now blocking many good loans from being made. The following are major features of this system:  A belief that all mortgage loans should be affordable. In fact, there are numerous circumstances in which an unaffordable loan is in the interest of a borrower and where the evidence is compelling that the loan will be fully repaid. One example is a cash-out refinance by an owner who wants to remain in the house a few more years before selling and uses the cash to make the payment. Underwriter judgments are needed in such cases, however, and these are not a part of the new system.  Underwriter discretion is substantially narrowed. Rules have largely eliminated discretion and the major role of underwriters today is to check for conformity with the rules.  Ratios of debt-to-income above 43% indicate over-commitment by the applicant. Given the wide range of circumstances that can affect a borrower’s capacity to meet obligations, fixation on any ratio as a maximum makes no sense. But again, the sense should be provided by an underwriter with the discretion to make a call and that no longer exists.  The affordability requirement is absolute and not affected by the applicant’s credit score or equity in the property. Applicants making a down payment of 40% with a credit score of 800 are turned down if their income is not adequate. This makes no sense.  Income must be fully documented. Prior to the crisis, documentation requirements ranged from full-doc to no-doc, with three or four partial docs in-between. The less complete the documentation, the higher the price and the larger the required equity and credit score. That sensible system is now gone and all loans must be fully documented. This is why I keep getting letters from self-employed applicants who cannot qualify despite having large equity and a high credit score.

Much of the system of rules and beliefs described above stem from Dodd- Frank and were formulated in an atmosphere hostile to lenders. But borrowers are the ones paying the price. The issues need to be reconsidered in an atmosphere free of vindictiveness toward lenders. It could begin with Fannie, Freddie, and their supervisor the FHFA which could re-examine their rules, identify those

2016 45HoursOnline, All Rights Reserved Page 135 Consumer Protection Reader, 2016 Edition that should be liberalized, and determine which they could fix on their own and which would require new legislation.

2.4.1.4 DON’T SABOTAGE YOUR CONFORMING LOAN

by Blanche Evans for Realty Times, April 9, 2014 Copyright© 2014 Realty Times®. All Rights Reserved. Used With Permission. Conforming Loan: A mortgage If you’re qualified for a conforming loan , there’s important information you loan that conforms to GSE need to know. You can qualify and still be turned down. (Fannie & Freddie) guidelines A conforming loan meets guidelines required by the secondary market that purchases the loans to package into securities. In other words, the bank loans you money. It sells your loan to entities that buy loan packages. It uses the money it receives to make new loans, keeping the lending market fluid.

Conforming loans that aren’t in compliance with requirements are more likely to default, creating more risk for secondary market buyers and investors. During the housing downturn beginning in 2007, many loans went into default, causing the secondary market provided by Fannie and Freddie to go bankrupt.

Uniform Mortgage Data The result? Conforming loan requirements got stricter. The Federal Program: An effort by Fannie Housing Finance Agency created the Uniform Mortgage Data Program  to and Freddie to enhance data quality and standardization. improve the screening of mortgage loans sold to Fannie and Freddie. New loan standards were implemented under Fannie’s Loan Quality Initiative (LQI), a means of collecting updated electronic appraisal and loan data. While the compliance requirements are directed toward banks and appraisers, consumers are also impacted. The LQI requires lenders to comply with stricter credit and eligibility standards, pricing guidelines, and other criteria to meet Fannie’s Selling Guide, or conforming standards. If a loan doesn’t conform to Fannie’s guidelines, the bank is unable to sell it, and the loan stays on the bank’s books, severely limiting the bank’s ability to make new loans. If the bank can’t sell the loan, it doesn’t want to make the loan. That’s why it can cancel your “pre-approval” anytime without warning. Innocent actions on your part may disqualify you from the loan you thought you were qualified to receive. For example, you may get a loan approval for a certain amount but then you decide to buy new furniture to go in your new house. But that purchase could cause your credit score to dip just enough to put you outside of conforming income-to-debt ratios. How does the bank know you bought furniture? It pulls your credit reports and scores. The bank has to do this before Fannie catches any “undisclosed liabilities” or discrepancies with the LQI electronic data processing and refuses to buy the loan. That means banks will retrieve your credit reports twice – once to okay the loan and again to make sure you still qualify for a conforming loan.

Page 136 2016 45HoursOnline, All Rights Reserved Consumer Protection Reader, 2016 Edition The bank can also run a Mortgage Electronic Registration System (MERS®) report to determine if the borrower has undisclosed liens or if another mortgage is being established simultaneously. For the bank to be certain about you, it runs all three credit bureau reports and credit scores, when it may have only run one report to preapprove your loan. Resist the urge to use your credit cards or to sign up for new credit cards while you’re trying to buy a home. Pay your card balances per usual and on time. Ask your lender what you can do to make sure your loan stays on track. It’s better to picnic on the floor for a few days than lose the opportunity to buy the home of your dreams.

2.4.1.5 QUESTIONS ABOUT MORTGAGE ASSUMPTIONS

by Dr. Jack Guttentag (“The Mortgage Professor”) December 4, 2013 for www.MtgProfessor.com. Used With Permission. Three years later (January 2016) With rising interest rates lurking on the horizon , some consumers with rising interest rates are still lurking homes they plan to sell within the next five years or so are asking questions on the horizon. As of Jan. 13, 2016 the rates are: about whether or not they can transfer their low-rate mortgage to a purchaser of their house. These are some of the common ones.

What is an assumption? It is a transfer of responsibility for repaying a mortgage from the seller of the house that secures the mortgage to the purchaser of that house. The purchaser assumes all the obligations under the mortgage, just as if the loan had been made to her.

(Source) Does my mortgage contract allow assumption? If your mortgage is an FHA or VA, the answer is “yes,” subject to the agency’s approval of the buyer’s qualifications. If your mortgage is conventional, the general answer is “no,” you must get the lender’s permission for an assumption and if they agree it will be at the current market rate. What is a “due-on-sale” clause? It is a provision found in all conventional mortgage contracts that upon sale of the property, the loan must be repaid. If it must be repaid, it cannot be assumed by the buyer. Are there any exceptions? Yes, due-on-sale does not apply in many intra-family transactions such as a parent deeding a house to a child or a spouse, or following a death or a divorce. But the exceptions don’t help home sellers in typical arms-length transactions. Is there any way around due-on-sale clauses? Quite a few, of which the most common is the wrap-around mortgage, executed without the permission or knowledge of the lender. With a wrap- around the seller takes a mortgage from the buyer and continues to pay the old mortgage out of the proceeds of the new one. The new mortgage “wraps” the old one.

2016 45HoursOnline, All Rights Reserved Page 137 Consumer Protection Reader, 2016 Edition For example, Sam, who has a $140,000 mortgage on his home, sells his home to Betty for $200,000. Betty pays $10,000 down and borrows $190,000 on a new mortgage given by Sam. This mortgage “wraps around” the existing $140,000 mortgage because the seller as the new lender continues to make the payments on the old mortgage. Collectively, buyer and seller benefit by retaining the old low-rate mortgage. When interest rates start to rise significantly, we will see more wrap-around mortgages because the benefit from keeping old mortgages in play increases. How is the benefit split between buyer and seller? The buyer benefits by paying a mortgage rate below the current market rate which will be only partly offset by the higher price paid for the house. The seller benefits from a higher price on his house, and/or from the spread between the rate paid by the buyer on the seller’s mortgage and the rate the seller is paying on the old mortgage. For example, if the rate on the existing $140,000 loan balance is 4% and the current market rate is 8%, the buyer might be charged 6% with the seller earning a 2% spread on $140,000. What is the down side? The home seller who does this violates his contract with the lender, which he may or may not get away with. In some states, escrow companies are We could find no such law in California. required by law to inform a lender whose loan is being wrapped . If a wrap-around deal on a non-assumable loan does close and the lender discovers it afterwards, the lender may call the loan, or demand an immediate increase in interest rate and probably a healthy assumption fee.

If the seller has a new set of housing expenses and depends on the buyer’s payment to him to fund the payment on the old mortgage, failure of the buyer to pay poses a major problem for the seller. The seller in such case must get the buyer evicted, using whatever legal processes are stipulated in the sale agreement and authorized by state law. In the meantime, the seller’s delinquencies will drop her credit score. The buyer is also at risk. If the seller for some reason does not make the payments on the old mortgage, the lender can foreclose and take the property. In that event, the buyer can retain the home only by making a deal with the lender and has little bargaining power in the process. Are there other ways without risk? Maybe. Lease-to-own transactions usually have other objectives but since they do not involve paying off an existing mortgage they can also be used for the primary purpose of keeping that mortgage alive. That is a topic for another day.

Because mortgage rates have been at historic lows (<5%) for so long (the past five years), it’s easy to believe these rates are normal. They are not. . It’s also well to remind licensees, in particular licensees born after 1955, that when money is tight or when there is a high inflation, mortgage rates can reach double digits . Imagine the challenge of selling homes in a market where the best 30-year loan available is at 18.5%.

January 71 to January 2016, Source

2.4.1.6 MAGIC #S, 720/20, EXPLAIN WHY CREDIT IS TIGHT

by Broderick Perkins for Realty Times, May 10, 2012 Copyright© 2014 Realty Times®. All Rights Reserved. Used With Permission. Although credit is no longer as tight today, January 2016, as it was when this article was written, 2012, credit is still far tighter today than in 2006 – the year of comparison for this article. If you play the mortgage lottery for a shot at winning a home loan, you only need two numbers to win – 720 and 20. A credit score of 720 or higher, combined with a down payment of 20% or more gives you the best shot at landing a mortgage like it’s 2006. Of course, you must otherwise pass muster with an honest application, adequate documented income, debt-to-income ratios, etc., etc. The Fed recently asked loan officers to indicate how much more or less likely it is today, compared with 2006, that their bank would originate a Fannie- or Freddie-backed, 30-year, fixed-rate home mortgage to borrowers, based on a variety of credit score-down payment scenarios. When it came to the 720/20 combination, 78.8% said chances were “about the same,” 1.9% said chances were “somewhat better” and 9.6% said chances are “much more likely,” according to the Fed’s latest Senior Loan Officer Opinion Survey on Bank Lending Practices a quarterly survey of loan officers from 58 domestic banks and 23 U.S. branches of foreign banks. That means 90.3% of surveyed loan officers said chances ranged from “about the same” to “much more likely,” compared to 2006, that the bank would originate a home loan to borrowers with the 720/20 combination. Lower the numbers on either side of the equation and the percentages of loan officers who said they would originate like it’s 2006 also fell.

2016 45HoursOnline, All Rights Reserved Page 139 Consumer Protection Reader, 2016 Edition Take a look. With a 720 credit score and a 10% down payment, it drops to 76.9% said chances ranged from “about the same” to “much more likely” today, compared to 2006, that the loan would pass muster.  For 680-20, it was only 71.2%.  For 680-10, 50%.  For 620-20, 28.8%.  For 620-10, 17.3%.

Mortgage insurance shortage Why do banks get squeamish when borrowers come in with low credit scores and down payments?

The major mortgage insurance On the down payment side, it’s not just that the buyer has a greater stake in companies are: (1) Subsidiaries the home with a larger down payment and is thus less likely to default. of MGIC Investment Corporation, (2) Radian Group, (3) Genworth A down payment smaller than 20% comes with a mortgage insurance Financial, (4) PMI Group, (5) requirement and mortgage insurance today isn’t what it used to be. American International Group. These five companies wrote 80% Dominated by a half a dozen insurance groups , mortgage insurance of the $4.4 billion of premiums in companies write policies that pay claims to banks for failed mortgages. 2010 (source). They typically do not pay the full amount of a loss on a foreclosure but instead dole out claims that typically cover 20% to 50% of the loan. 

How Mortgage Insurance Works: Mortgage insurance protects a lender against loss in the event his borrower defaults. Suppose Bob puts down 5% on his $420K home. As a condition to funding Bob’s loan, his lender requires Bob to purchase mortgage insurance. Four years later Bob defaults and his lender then takes his title. When he defaults, Bob’s loan balance is $375K and it’s market value is just $260K. His lender files a claim for the difference, $115K. The insurer pays the lender 30% of Bob’s loan balance; $112.5K (.3 x $375). Thus the lender takes a loss of only $2.5K ($115K - $112.5K). The insurer also pays the lender 30% of his indirect losses including delinquent interest, legal fees, and property-preservation costs. (Source). In a hot market, banks and mortgage insurers can handle the loss. Not so much now. A major scourge that brought down the housing market were no- and low- down toxic mortgages in a host of varieties that saddled down payment- poor borrowers with mortgage insurance payments. The promise was “Buy now and buy big. We’ve got your back.” However, when millions of borrowers holding those loans defaulted, the mortgage insurance industry had to ante up and pay benefits. Because there were so many loans with mortgage insurance that didn’t quite cover the bill, banks took it on the chin.

Page 140 2016 45HoursOnline, All Rights Reserved Consumer Protection Reader, 2016 Edition When those abusive mortgage lenders failed and sank, they towed mortgage insurance companies under with them. In August last year, Arizona’s Department of Insurance took over two PMI Group Inc. companies and ordered a third to stop writing policies. PMI was the nation’s third largest mortgage insurance company. In January this year, North Carolina likewise took control of the sixth largest mortgage insurance company, Republic Mortgage Insurance Company, the largest subsidiary of Old Republic International Corp. With fewer companies and mortgage insurance coffers drained by foreclosures, coverage is harder to get. What is available costs more than it did during boom times. Down-payment-poor borrowers who need it often can’t get it because it adds to their debt and throws their debt-to-income ratios out of whack. Without the insurance, for low down payment borrowers seeking Fannie and Freddie loans, the loan doesn’t fly. Inside credit scores On the credit score side, a higher score, along with a large down payment don’t just indicate how well a borrower will or won’t repay the mortgage. Those borrowers are also less likely to cheat on the application process. Right up there with mortgage insurance problems as a reason lenders won’t approve some mortgages, loan officers cited “putbacks” or “forced mortgage repurchases” as a primary reason they avoid lower scores and smaller down payments. “Putbacks” are often triggered by fraud, often at the application level. A “putback” is like a consumer returning an item to a retail store because the product wasn’t as advertised. A mortgage “putback” occurs when a GSE buys a loan, finds anomalies in the loan {and then} forces the originator to take the loan back as “not-as-advertised.” Fraudulent or faulty origination documents, often in the borrowers’ creditworthiness or in the appraised value, is a growing reason for putbacks. The U.S. Treasury's Financial Crimes Enforcement Network (FinCEN) recently reported mortgage loan fraud reported suspicious activity reports (MLF SARs) rose 31% in 2011, compared to 2010, because forced repurchases – putbacks – drove up the count. A litany of lender concerns Senior loan officers offered other reasons why lenders remain skittish, including:  Continued concern about their bank’s exposure to residential real estate loans in a foreclosure-ridden economic atmosphere. The regulatory changes have  Increased concerns about the effects of regulatory changes and been made. See article, “Q&A: What is the ‘Qualified Mortgage’ other government oversight – which lenders pretty much brought on Rule?” themselves.  Higher servicing costs for delinquent mortgages.

2016 45HoursOnline, All Rights Reserved Page 141 Consumer Protection Reader, 2016 Edition  Borrowers having a tougher time obtaining second liens to go with an origination mortgage. Second loans once eliminated the need for private mortgage insurance

Loan officers also said they are often understaffed and when they face high volumes of applications, they can’t keep up. Not that there’s a lot of sympathy for lenders, but distressed properties add to the normal work load. Foreclosures, short sales, modifications, and other work outs have always been around, just not in the volume they are in today. Loan officers also named difficulties in completing timely and accurate underwriting, in completing timely and accurate appraisals, and in hiring skilled servicing or loan processing staff.

2.4.2 GOVERNMENT-BACKED LOANS

2.4.2.1 FANNIE/FREDDIE’S ATTEMPTS TO COMPETE W/ FHA LOANS

by Chuck Milbourne, Editor, January 13 2016 Adapted from a New York Times article written December 18, 2015. FHA’s share of the mortgage market went from 4% before the Financial Crises (2006) to 33% during the height of that crises (2009) . Their market share increase was at the expense of the GSE’s (primarily Fannie and Freddie). At present (2016) FHA’s market share has declined to about 17% but their share is still well above its measure before the Crises. Since the Crises, the GSEs have been trying to regain the share they held before the

Source Crises. In December 2014, Fannie introduced a mortgage program requiring only 3% down (formerly 5%) vs. FHA’s 3.5% down (VA’s is also 3.5%). Freddie followed suit in March 2015. Since then, neither product has enticed first- time buyers. As of the third quarter 2015, those high LTV products accounted for less than 3% of all high-LTV loans. Instead, as they have since 2009, buyers continue to flock toward low- down-payment loans from the FHA and VA. These loans continue to make up at least 90% of all high-LTV home purchase originations, compared with about 33% in 2007 High-LTV loans are a growing share of the market. As of the third quarter of 2015, mortgages requiring less than 5% down made up 23% of all purchase originations, up 20%. Ben Graboske, the senior vice president for Black Knight’s data and analytics division, said he was initially surprised that the Fannie and Freddie low-down-payment products hadn’t gained much ground. “When we dug into it,” he said, “we found that those products had higher FICO

Page 142 2016 45HoursOnline, All Rights Reserved Consumer Protection Reader, 2016 Edition minimums than the FHA/VA products, so that explained some disparity. But FHA and VA still seem to have a disproportionate share.” The minimum FICO credit score for Fannie’s high-LTV loan is 620, for example, versus 580 for FHA and VA loans. Another reason for the disparity in popularity is that, for borrowers at the lower end of the credit spectrum, the monthly payment on FHA loans can be considerably less. That’s because the FHA reduced its mortgage insurance premiums last year by 50 basis points, making their rates far more competitive with private mortgage insurers. A recent analysis estimated that on a purchase of $250,000, with 3½% down, a loan with private mortgage insurance could cost a borrower with a FICO score below 680 from $225 to $260 more a month than an FHA loan. Brian Koss, the executive vice president of Mortgage Network, an independent mortgage banker based in Danvers, MA, and serving the East Coast, said that the need Fannie and Freddie were trying to meet is already being met. “They were late to the party,” he said, “and they chose some of the more restrictive approaches.” FHA is preferred, he said, “because people who have a need for a low down payment, who are also struggling with income, need flexibility in their debt ratios and flexibility in the credit score requirements.” Fannie and Freddie don’t allow for as much flexibility in underwriting.

2.4.2.2 PACE LOANS: THE GOOD AND THE NOT-SO-GOOD

by Bob Hunt for Realty Times, October 26, 2015 Copyright© 2015 Realty Times®. All Rights Reserved. Used With Permission. Recently, CAR®’s Legal Department issued an updated version of its question-and-answer memorandum regarding PACE loans and solar leases {we couldn’t find it}. Real estate agents will do well to familiarize themselves with its contents. Here we will consider some of the matters related to PACE loans. PACE (Property Assessed Clean Energy) programs are a big deal. More than twenty states have passed legislation enabling PACE programs in their jurisdictions. In California, 30+ counties {there are 58 counties in CA}, including 354 communities, have approved PACE programs.

JPA: An entity permitted under PACE programs generally begin with a local public agency establishing a Calififornia law (Government Joint Powers Authority (JPA ) to authorize the creation of a PACE loan Code §6502), whereby two or more public authorities (e.g. local program. (Actually, the program covers more than “clean energy.” It also governments, or utility or supports water conservation measures and a variety of energy-saving transport districts) jointly exercise devices.) The programs are funded by either private or public sources or a any power common to all of them combination of both. Typically, the programs issue bonds to pay for the (source).. improvements and the bonds are then sold to private investors.

In an individual case, the homeowner will submit an application to the entity administering the program to determine eligibility. The homeowner then chooses from a list of eligible improvements and contacts an approved contractor. When the work is done, the administering entity will pay the contractor and a lien is placed against the property. The homeowner repays the cost of improvements, plus interest, through the lien which is a special assessment on the property tax bill. Typically, the liens are from 2016 45HoursOnline, All Rights Reserved Page 143 Consumer Protection Reader, 2016 Edition five to 20 years. They are similar to the property tax bill and are paid at the same time and in the same manner. Most significantly, the liens have a “super priority” position – like taxes – and take precedent over other liens such as mortgages. Eligibility for a PACE loan program is a fairly easy matter. There is not an income and credit qualification. The homeowner must be current on property taxes, have no judgments, and no mortgage delinquency. Not bad for 100% financing. It is not cheap, though. At this writing, PACE interest rates are likely to be in the 6% to 9% range, while mortgages are still under 5%. Also, loan origination fees and other loan costs are built into the assessment amount. This is nice at closing – there is no money out of pocket – but it does add to the monthly cost. Generally, the loan amounts are limited to not more than 10% to 15% of fair market value. Whether the interest on these loans, with payments on the tax bill, is deductible is an open question. The CAR® memo leans toward the position that the interest is not tax deductible. But some PACE advertising suggests that it is. Borrowers should ask a tax person, not a real estate agent. It is possible, though, that certain kinds of qualified improvements might be eligible for a tax credit. It all sounds pretty good. Indeed, something that sounds that good must have a downside, right? Right. In July of 2010, the Federal Housing Financing Agency (FHFA) – the overseer of Fannie and Freddie – issued a policy letter pointing out that Freddie and Fannie loans prohibited any non- tax encumbrances from taking priority over them: “…programs with first liens run contrary to the Fannie-Freddie Uniform Security Instrument.” That position was solidified and further clarified in a statement released 12/22/2014. “…Fannie and Freddie’s policies prohibit the purchase of a mortgage where the property has a first lien PACE loan attached to it. This restriction has two potential implications for borrowers. First, a homeowner with a first-lien PACE loan cannot refinance their existing mortgage with a Fannie or Freddie mortgage. Second, anyone wanting to buy a home that already has a first-lien PACE loan cannot use a Fannie or Freddie loan for the purchase.” In short, if a PACE loan borrower wants to refinance or to sell to a conventional borrower, he or she is going to have to pay off the PACE lien to get it done. Most borrowers had probably not counted on this. There are attempts to work around the FHFA position. HERO (Home Energy Renovation Opportunity) – one of the largest and most visible PACE program administrators – is offering to subordinate their loans to any Fannie or Freddie financing. So far, though, this has not been deemed acceptable. On another front, FHA is trying to put together a program whereby that entity could provide financing in cases where an existing PACE lien met its criteria. Again, no progress yet. The existence of a PACE loan on a for-sale property is definitely something that both agent and owner would need to disclose. It is called for in the standard California Residential Purchase Agreement (¶ 8.B); and, even if that document were not used, it is clearly a material fact that needs to be revealed to a buyer. Moreover, the existence of a PACE lien should appear on a preliminary title report as well as on a tax report.

Page 144 2016 45HoursOnline, All Rights Reserved Consumer Protection Reader, 2016 Edition There are many good things about PACE program loans; but there are things about which one should be wary as well.

2.4.2.3 V.A. FINANCING: EXCELLENT OPTION FOR MANY

by Bob Hunt for Realty Times, March 10, 2014 Copyright© 2014 Realty Times®. All Rights Reserved. Used With Permission. United States military veterans are not a protected class for purposes of anti-discrimination actions. But, in some areas, they should be. My market (south Orange County, California) is one of those areas. OK, ok, to be precise, it is not vets, per se, who are treated in a discriminatory fashion, it is vets who want to use V.A. financing. That this is an issue could certainly be surprising to many real estate agents. There are many parts of the country where V.A. financing is the bread and butter of the business. There are market areas where V.A. and FHA financing are the norm. If you work in one of those areas, you might find it almost incomprehensible that many – probably most – agents in areas such as this one {Orange County} have never been involved in a transaction in which V.A. financing was used.

The problem, then, becomes this: When an offer is brought that involves V.A. financing, it is liable to be dismissed out of hand. Why? Because the agent – never having had first-hand experience with V.A. financing – relies on horror stories and bad-news experiences handed down from days long gone by. Thus we thank our good friend, Kevin Budde, one of the brighter lights in our part of the lending world, for providing the inspiration and most of the factual content, for today’s column. Kevin says that there are four myths about V.A. financing that inhibit agents in our and similar areas from using and/or accepting V.A. financing. Myth number one is that sellers will have to pay points based upon the loan amount. This belief dates back to days when the (maximum) interest rate was set periodically by the V.A.. In those days, if market rates available to lenders were higher than the rate set by the V.A., the veteran could not make up the difference, so the seller had to. Today, V.A. loan rates float with the market. (At the time of this writing they are about 4.125%). There is no longer a ‘gap’ that the seller has to fill. The second myth is that sellers have to pay additional closing cost fees that the veteran is not allowed to pay. Under today’s rules, the veteran pays customary buyer’s fees in the market area. A third ancient seller objection to V.A. loans is that V.A. appraisals often require “fix it” work (paint window sills, replace cabinet handles, etc.) that increases the seller’s costs. Kevin points out that now, “…the focus is on health and safety issues of the property which are deficiencies that could cause harm to the occupant.” These would need to be addressed in any kind of transaction. Finally, there are those who still believe that V.A. insured loans take much longer to close than do conventional ones. It just isn’t – or needn’t be – so. If everyone does their homework and submits information

V.A. loan guarantee limits vary from area to area. In Orange County, California, the limit – with no down payment – is $687,500. In Monterey

As of Jan 2016, an active duty County, California, it is $500,000. In Arapahoe County, Colorado, it is corporale in the army with an E4 $425,000. But a vet can buy above the limit by putting down 25% of the paygrade is paid from $24K to amount above the limit. Thus, here in this area, a vet could buy an $29K annually (source). $800,000 house putting only $28,125 (3.5%) down. What former E-4 Corporal  wouldn’t want to do that?

V.A. financing opens up purchasing possibilities to a significant number of qualified buyers. Sellers – or their agents – who don’t want to accommodate that are making a serious mistake.

2.4.3 TYPES OF LOANS

2.4.3.1 ANOTHER LOOK AT LEASE-TO-OWN HOUSE PURCHASES

by Dr. Jack Guttentag (“The Mortgage Professor”) November 11, 2015 for www.MtgProfessor.com. Used With Permission. A lease-to-own house purchase (henceforth LTO) is a lease combined with an option to purchase the property within a specified period, usually three years or less, at an agreed-upon price. In recent years I have written several articles on the topic and they are among the most read of the many hundreds of articles on my web site. The reason is that they offer the hope of home ownership to many wannabe owners who can’t meet purchase requirements in any other way; and they offer many wannabe home sellers who have been frustrated by the market’s lack of interest in their home, an opportunity to sell at a more attractive price than is otherwise available. Weaknesses of Buyers and Sellers Both participants in LTO transactions do so because of weaknesses. In the case of buyers, the weakness almost always is that they are unable to qualify for the mortgage they need to finance a purchase. They may have a foreclosure on their record which they must wait out or their credit score may be too low to meet lender requirements. The LTO offers such consumers an opportunity to bet on themselves. The bet is that before the option period expires they will qualify for the mortgage they need to exercise the purchase option. During the option period, the foreclosure waiting period passes, and they have the opportunity to raise their credit score while living in the house. In the case of sellers, the weakness is an inability to sell at what the owner considers the correct value. This could be because property values in the area in which the property was located had declined. In such case, the LTO offers the prospect of being able to sell in the future at a substantially higher price than is available today. Another possible weakness that has become important in recent years is that the condition of the house is poor and the owner does not have the means to fix it. An LTO buyer is likely not to be so fussy about the condition of the house and may be positioned to fix the deficiencies during the option period.

Page 146 2016 45HoursOnline, All Rights Reserved Consumer Protection Reader, 2016 Edition Important Contractual Provisions of a Lease-Purchase Transaction In a typical arrangement, the borrower pays an option fee, 1% to 5% of the price, which is credited to the purchase price. The borrower pays a market rent, and an additional rent credit payment that is also credited to the purchase price. The option fee, option period, rent, rent credit payment, and purchase price are all negotiable items. If the purchase option is not exercised, the buyer loses both the option fee and the rent credit payment. The option fee and rent credit payment are viewed differently by buyers and sellers. To the buyer, they are part of the equity in the house they fully expect to own. To sellers, however, these payments are the best guarantee that their houses will sell; if they don’t sell, the payments are retained as income. That the benefit to the seller generally exceeds the cost to the buyer makes the lease-to-own deal a possible win-win. The rent credit payment, which is unique to LTO deals, is an amount above the market rent paid by the buyer, which is credited back to the buyer at closing. Rent credits can be used in two different ways which are not always distinguished. The simplest approach reduces the sale price at closing by the total rent credit paid by the buyer. This reduces the required down payment only slightly. For example, if the sale price is $100,000 and the rent credit totals $5,000, the sale price becomes $95,000 and the down payment required at 5% falls from $5,000 to $4750. The rent credit is much more useful to the buyer if it can be used for the down payment in its entirety. If the rent credit of $5,000 in the example above is used in this way, the price of the house would remain at $100,000 but the buyer would receive $5,000 from the seller at closing which could be used as down payment. For this to work, however, the lender must accept the rent credit as legitimate savings by the buyer. To be sure that the rent credit is an amount paid above a fair market rent, the lender will require that the market rent be documented by an appraisal. To be sure that the buyer actually made the payments, the lender will want to see the cancelled checks that evidence the payments. [Note: According to Jack Pritchard, the best way to get the rent credit accepted as down payment is to execute a new purchase contract at a reduced price. This eliminates the need to document the rent credit.] Other provisions of LTO contracts are too numerous to mention here. A more complete list that buyers and sellers can use in negotiating a deal is available at LTO Contractual Provisions. The LTO Calculator Mainly of interest to potential sellers, my LTO calculator developed with Chuck Freedenberg allows sellers to view an LTO deal as an investment generating an attractive rate of return, relative to what the seller could obtain by selling at the best price obtainable in the current market. The investment return is net of the costs of ownership during the option period, including mortgage interest payments, property taxes, homeowners insurance and other expenses of ownership. The calculator is available at Lease-to-Own Calculator.

by Benny L. Kass for Realty Times, August 18, 2015 Copyright© 2014 Realty Times®. All Rights Reserved. Used With Permission. Written by Benny L. Kass on Tuesday, 18 August 2015 3:01 pm Many buyers are being priced out of the real estate arena because of two important factors: prices are high and concern that interest rates are starting to creep up. If the circumstances are right, sellers have yet another option to consider, namely a land sales contract. It is also referred to as a contract for deed or an installment sales contract. Under this arrangement, the seller and the buyer enter into a real estate contract. The parties agree that the deed to the property will be held in escrow by a neutral third party – usually the settlement attorney. The buyer agrees to pay the seller a fixed dollar amount each and every month, and when the agreed upon price has been reached – or when the buyers are finally able to obtain commercial financing – the seller will be paid in full and the deed will be taken out of escrow and recorded in favor of the buyer. Let’s take this example: Seller has a house that he wants to sell for $400,000. The house is free and clear; there is no mortgage. The buyer signs a contract, whereby a deposit of 10% will be given to the seller ($40,000) and agrees to pay the buyer the difference on a monthly basis, based on a mutually agreed upon interest rate. In our example, if the parties agree on a 6% rate, the buyer will have to pay the seller $2,128.43 per month. The buyer will also agree to pay the real estate tax and the home owner’s insurance. The advantage to the Seller is that they have been relieved of their obligations to maintain and care for the house and will be getting a decent rate of return on their money. There are taxable consequences involved with such a transaction and your tax advisor should be consulted before you enter into such an agreement. The disadvantage, of course, to the seller is that they will not receive all of the sales proceeds up front. From the buyer’s point of view, if they can afford the monthly payment, they have a house in which to live, and are getting a loan – albeit above current market rates – but which they might not have been able to afford from a commercial lender. This is an easy example. But what if the seller has an outstanding mortgage. Almost all commercial loans nowadays contain what is known as a “due on sale” clause. This means that when the property is sold – and this includes a long term lease or a land installment sale – the entire mortgage is due and payable. Many people – especially in the early l990’s when interest rates were high – tried to end run the lender by entering into an installment sales contract and attempting to hide the fact from their lender. The buyer would make the monthly payments to the seller, who in return would pay the mortgage. In many cases, the lender did not find out about this transaction – although

Page 148 2016 45HoursOnline, All Rights Reserved Consumer Protection Reader, 2016 Edition many people throughout the country were in fact caught and their mortgage was called. Accordingly, if you are the seller and have a mortgage, you must confirm with your lender that they will allow the land installment sale transaction to go forward. If your loan is an adjustable rate mortgage (ARM) your lender may not object, although it will want to determine the credit worthiness of your buyer and it will insist that you remain legally obligated under the loan, in case the buyer defaults.

These contracts are not new. As far as I could determine, they date back to the Wild West in the 1800’s. A rancher had many acres that some of his Fee Simple: Is the highest ownership interest possible that farmhands wanted to buy. Each would cost $500. The farmhand would can be had in real property. You give the rancher $10 as a down payment and would pay the rancher $10 own it free and clear providing per month until the balance of the purchase price ($490) was paid in full. In you pay your taxes, you don’t some cases the rancher would charge interest on the outstanding balance; pledge it as collateral, the police in other cases, no interest would be charged. Finally, when the full amount don´t seize it, and local authorities don’t force you to sell of the purchase price – namely the $500 – was paid, the rancher would then it under their powers of eminent transfer title to the real estate “in fee simple”  to the buyer. A deed would domain. (Source) be recorded and the buyer would then be the rightful owner of the property.

If the buyer defaulted before making all of the monthly payments, the buyer could lose all of his rights to purchase and the buyer might also forfeit all of the monies previously given to the rancher. Many years ago, the IRS took the position that such a land sales contract transaction was a sale for tax purposes. The seller would have to report the sale and, depending on the circumstances, pay tax on any profit that was made (albeit on an installment sale basis). The purchaser, on the other hand, would be considered the owner of the real estate, so that any mortgage interest and real estate taxes paid would be deductible from his/her income tax return.

Equitable Owner: Rights to enjoy The seller remains the legal owner of the property, but the buyer becomes the the land but may not sell it. the “equitable” owner. 

The theory behind this concept is that it is anticipated that in the years to come, the buyer’s income will increase – as will the value of the house – so that the buyers will ultimately be able to refinance with a commercial lender and pay the seller off in full. Logistically, it works this way. There are two settlements. In the “first settlement,” the parties will sign a contract, spelling out all rights and obligations of both parties. The sellers will sign a deed which will be held by the settlement attorney or title (escrow) company in escrow. The contract will spell out the requirements for taking this deed out of escrow. If, for example, the purchaser fully complies with all of the terms of the contract and is finally able to pay off the full amount of the outstanding note, the deed is to be recorded in the name of the purchaser. This would be the “second” or “final” settlement. On the other hand, if the buyer is in arrears on the monthly payments and the seller gives reasonable notice of this default to the buyer, the deed will be taken out of escrow and returned to the seller. At that time, the purchaser will become a “tenant,” and – subject to the existing landlord/tenant laws of the jurisdiction where the property is located – the 2016 45HoursOnline, All Rights Reserved Page 149 Consumer Protection Reader, 2016 Edition buyer may be evicted. Buyers and sellers under this kind of arrangement should negotiate – before a contract is entered into – all of the important terms and conditions, especially what will happen on a default by the buyer. Sellers want the buyer to move out of the property and also to forfeit all of the moneys paid to the date of the default. Buyers are prepared to move out but do not want to forfeit any of their moneys. This issue must be resolved, in writing, before the transaction has been completed. Some people consider it unfair that the buyer should lose all of the moneys which have been paid to date should the buyer default. However, the answer to this is that the buyer has had the use of the house, and in effect has paid rent to the landlord/owner. And unlike a tenant, the buyers can deduct the mortgage interest which they pay to the owner as well as the real estate taxes. It must be pointed out that in order to take these deductions, there has to be a recorded deed of trust (mortgage) recorded on the land records. This should be arranged at the first settlement. Some state laws – such as Maryland – require that a land contract be recorded among the Land Records in the jurisdiction where the property is located. This is for the protection of the buyer, so as to put the World on notice that the buyer has equitable title to the property. If the deed is not recorded and the buyer is dealing with a dishonest seller, there is nothing to stop that seller from fraudulently selling the property to a third party who may have absolutely no knowledge about the land sales contract. The land sales contract clearly raises many legal problems – although they are not unsurmountable. If you wish to pursue such a transaction, make sure you discuss these issues fully with your tax and legal advisors. A carefully drafted land sales contract must be entered into, touching all of the points discussed above. NAR® publishes a guide entitled, Field Guide to Lease-Option Purchases. We couldn’t find a CAR® form for this purpose but we found several sample lease-to-own contracts when googling “residential lease option purchase pdf”.

2.4.3.3 CONVENTIONAL VS. FHA: WHICH DO YOU CHOOSE?

by Dr. Jack Guttentag (“The Mortgage Professor”) September 30, 2014 for www.MtgProfessor.com. Used With Permission. It is not an academic question. My calculations show that the wrong choice can cost as much as $33,000 over 15 years on a $200,000 loan and as much as $66,000 on a $400,000 loan. Don’t jump to the conclusion that the better choice is the mortgage with the lower interest rate. FHAs carry a lower interest rate but largely because of their high insurance premiums, they usually (but not always) cost the borrower more. Do You Qualify for Both? You have a choice between FHA and conventional mortgages only if you qualify for both. Then you can select the one that will cost you the least over the period you hold it provided you correctly identify which one that is. Borrowers who cannot qualify for a conventional loan have no choice, they

Page 150 2016 45HoursOnline, All Rights Reserved Consumer Protection Reader, 2016 Edition must use an FHA, which means that step one is to determine whether or not you qualify for both. If you can only put 3.5% down, for example, you can only qualify for an FHA and the same is true if you can only put 5% down and your credit score is less than 660 . On December 2014 Fannie and Freddie announced that they would be lowering their minimum downpayment from 5% to 3% for first time buyers and refinancing homeowners. Fannie began offering 3% down mortgages December 15, 2014 and Freddie on March 23, 2015. To qualify for these low downpayment mortgages, borrowers must have a FICO of 620 or better, purchase mortgage insurance, and receive counseling. (Source) On January 2015, FHA lowered their mortgage insurance premium (MIP) rates by half a percent (source) from 1.35% to .85% however, for FHA loans funded after June 3, 2013, the MIP lasts for the life of the loan (it isn’t automatically removed when the loan’s LTV hits 80%) (source). Because qualification requirements can vary with the purpose of the loan and type of property, there are a number of other situations where borrowers can only qualify for an FHA. If the borrower is looking to purchase a 4-family house, for example, qualification may be possible only with an FHA because the down payment requirement is much smaller than it is on a conventional loan. While FHA qualification requirements are generally less restrictive than conventional requirements, there is one important exception. Loans used to purchase a property for investment purposes, as opposed to occupancy, are not allowed by FHA under any circumstances. To see where your particular transaction stands in meeting FHA and conventional requirements, check it out with the Do-You-Qualify calculator on my web site. Pricing Categories Lenders today have two price lists for FHA loans and three lists for conventional loans. On FHAs, they distinguish:  FHA standard loans, which are for amounts up to $271,050, and  FHA jumbo loans, which are for amounts up to $625,500, the maximums varying by county. On conventional loans, they distinguish: The current conventional and  Conforming standard loans, which are for amounts up to $417,000 FHA jumbo loan limits for California counties can be found and eligible for purchase by Fannie and Freddie. here.  Conforming jumbo loans, which are for amounts up to $625,500, the maximums varying by county and eligible for purchase by Fannie and Freddie.  Non-conforming jumbo loans, which are for amounts that exceed the conforming jumbo county limits and cannot be purchased by Fannie and Freddie.

These pricing structures require that FHA/conventional cost comparisons be done separately for different loan amounts. The amounts I use are $200,000 which captures the pricing of conforming standard versus FHA standard; $400,000 which captures the pricing of conforming standard

2016 45HoursOnline, All Rights Reserved Page 151 Consumer Protection Reader, 2016 Edition versus FHA jumbo; and $600,000 which captures the pricing of conforming jumbo versus FHA jumbo. Measuring Cost to Borrower The cost of a mortgage to a borrower should be measured over the period the borrower has the mortgage. It is always possible that one mortgage might have lower costs over one period while the other would have lower costs over a longer or shorter period. Since mortgage life is not known in advance, I measure cost over three periods: 5, 10 and 15 years. My cost measure includes lender charges and mortgage insurance charges but not charges of other third parties, such as title insurers, which are not related to mortgage type. Total cost is defined as the sum of monthly payments of principal, interest, and mortgage insurance, points and other lender fees paid upfront, and lost interest on upfront and monthly costs at 2%, less reduction in the loan balance over the period. For each of the three loan amounts I compared the costs at four loan-to- value ratios (80%, 85%, 90% and 95%), three credit scores (640, 740 and 800), and three periods (five, ten, and 15 years), or 36 comparisons altogether {4x3x3=36}. The Results On both the $200,000 loan and the $400,000 loan, the cost of the FHA was significantly higher than that of the conventional in all 36 comparisons. This conclusion would hold for loan amounts up to $417,000. Prospective borrowers can safely assume that for loans up to $417,000, they are better off with the conventional than with the FHA. On the $600,000 loan, however, the results are mixed. At a credit score of 640, a borrower cannot qualify for a $600,000 conventional loan. At 740 and 800, the cost of a conventional loan is smaller with loan-to-value ratios of 90 or less, but at a ratio of 95, the cost of the conventional is larger. This mixed result would hold for any loan amount greater than $417,000.

2.4.4 MORTGAGE SHOPPING AND FINANCING

2.4.4.1 USE A REVERSE MORTGAGE TO BUY A NEW HOME

by Blanche Evans for Realty Times, July 22, 2015 Copyright© 2015 Realty Times®. All Rights Reserved. Used With Permission. The reverse mortgage industry was developed to provide seniors aged 62 and above a means to stay in their homes and utilize the mortgage proceeds to supplement their incomes. But not all seniors want to remain in their current homes. Some seniors want to downsize or trade their two-stories for one level or live in a home with barrier-free Universal Design that makes it easier to reach cabinets, turn doorknobs, use a wheelchair, and more. Others may want to relocate closer to family or to enjoy the activities of a senior community.

Now, thanks to HUD’s FHA Reverse Mortgage to Purchase, seniors can buy a new home using the same advantages of a traditional reverse

Page 152 2016 45HoursOnline, All Rights Reserved Consumer Protection Reader, 2016 Edition mortgage. Reverse mortgages are increasing in popularity with seniors who have equity in their homes and want to supplement their income. The only reverse mortgage insured by the U.S. Federal Government is called a Home Equity Conversion Mortgage or HECM and is only available through an FHA approved lender. Like the FHA conventional reverse mortgages, the Reverse Mortgage to Purchase allows seniors to buy a new home with no credit or income requirements and no monthly payments for as long as they occupy the home as their primary residence, maintain the home, pay property taxes, and so on. How it works is that the borrowers would normally sell their current home in order to have a down payment or if they have enough cash to put toward the new home purchase, they may keep their current home as a rental investment. The down payment can only come from the sale of the current home, the sale of other assets, or savings. The borrowers may not use cash from credit cards, bridge loans, seller financing or seller contributions to closing costs. The down payment plus the proceeds from the reverse mortgage pay for the new home. The sale of the current home and the purchase of the new home can be completed in a single transaction. Eligible homes for purchase include single-family homes, HUD-approved condominiums, planned unit developments, two-to-four-unit properties, and manufactured homes built after June 15, 1976. Reverse mortgages to purchase may not be used on coops, second homes, boarding houses, bed and breakfasts, or homes on leased land. Borrowers must occupy the home as their primary residence within 60 days of the closing date. If the borrowers are purchasing new or ongoing construction, the construction must be complete and a certificate of occupancy must be issued prior to the loan application. With an aging population that’s living longer and likely to outlive savings or outspend Social Security and other retirement funds, reverse mortgages to purchase can be a legitimate option for seniors. To learn more, consult with a lender that is HUD-approved to learn more about HECM for Purchase loans.

2.4.4.2 LARGER DOWNS FOR GREATER YIELDS WITHOUT RISK

by Dr. Jack Guttentag (“The Mortgage Professor”) July 27, 2014 for www.MtgProfessor.com. Used With Permission. Consumers looking to purchase a home within the near future face many decisions including how large a down payment to make. The down payment is the sale price (confirmed by an appraisal) less the loan amount. In most cases, home purchasers must have financial assets at least as large as the down payment they make. Down Payment as an Investment: Many consumers put down as little as possible despite having the capacity to put down more because they view the down payment as lost money. But that is a mistake. The down payment is an investment that yields a return that is far above anything else

2016 45HoursOnline, All Rights Reserved Page 153 Consumer Protection Reader, 2016 Edition available to consumer and the return is 100% risk-free. Here is an example. John is planning to purchase a house for $200,000 financed with a mortgage of $190,000 priced at 4.25% and one point. His $10,000 down payment is 5% of the price. He is retaining another $10,000 in a money market fund that is currently yielding him less than 1%. If he uses that $10,000 instead to increase the down payment to 10% or (even better) if he can save that amount before the deal is executed, his rate of return on the $10,000 will be 7 to 8% depending on how long he has the mortgage. And there is no risk. Return Derived from Loan Elimination: Where does the yield come from? Part of it comes from the elimination of $10,000 of mortgage loan on which he would be paying 4.25% and one point. He retains the interest and points on the $10,000 he does not borrow. Assuming he has the loan for seven years, this component of the return is 4.43%. Some readers may have difficulty with this concept but it is quite straightforward. If you invest $10,000 in a security, your return is the interest paid to you by the security issuer. If you invest $10,000 in a down payment, the return to you includes the interest and points you do not have to pay the mortgage lender on the $10,000 you don’t borrow. Return Derived from Reducing the Cost of the Remaining Loan: But the rate of return on down payment has a kicker that has no counterpart in the securities market. The home purchaser who increases the down payment not only eliminates the charge on the loan that isn’t made but reduces the charge on the loan that is made. In John’s case, in addition to the saving on interest and points on the $10,000 he does not borrow, he reduces the mortgage insurance premium on the $180,000 he will borrow. On a $190,000 loan with 5% down, assuming the borrower has excellent credit, the monthly mortgage insurance premium is about $85, whereas on a $180,000 loan with 10% down, the premium is about $58. This reduction in premium increases the rate of return on the $10,000 investment in down payment to about 7.88%. Readers interested in making similar calculations on their own transactions can do them with calculator 12a on my web site. Why Loan Costs Decline With Larger Down Payments: The larger the down payment, the lower the risk of loss to the lender. In the event the borrower defaults, the likelihood that the unpaid debt will exceed the property value is smaller when the down payment is larger. In addition, borrowers who have been able to save the funds for a larger down payment are viewed as less likely to default because of their demonstrated budgetary discipline. The result is that the mortgage price declines as the down payment rises. In our system, a major part of the risk associated with low down payments is shifted from the lender to a mortgage insurer but this changes nothing of substance. Mortgage insurance premiums decline as the down payment rises and hit zero at 20% down. You can use this saving Saving For a Down Payment: Consumers who are actively planning to calculator to determine how much purchase a house will base their down payment decision on the financial money would be in a savings

Page 154 2016 45HoursOnline, All Rights Reserved Consumer Protection Reader, 2016 Edition account after some number of assets they now have. Consumers looking ahead to a time when they hope years given an interest rate and a to be better positioned to purchase a house must develop a savings plan. fixed monthly deposit. In doing this, they should assume that the return they earn on the new savings is 1.5 times the prevailing home mortgage interest rate. This is a conservative estimate of the rate of return on the savings when it is used as a down payment to buy a house.

If home purchase is in your plans but you have never been able to save, it is time you learned how. The secret is to give saving high priority in your budget. Decide beforehand what part of your income you can afford to save and create a special account for that purpose. Then immediately after you are paid, write a check for deposit in that account. If you view saving as a residual – what remains of your income unspent at the end of the month – you are giving saving the lowest possible priority which is a virtual guarantee of failure.

2.4.4.3 PRE-APPROVALS MAY HELP HOME BUYERS, OR MAY NOT

by Dr. Jack Guttentag (“The Mortgage Professor”) June 21, 2014 for www.MtgProfessor.com. Used With Permission. With bargaining power shifting from home buyers to sellers in an increasing number of local markets, buyers in competition with other buyers are looking for any edge they can get. One possible edge is a pre-approval letter (henceforth PAL) from a lender. Pre-Approval Defined: A PAL is a statement by a lender that a prospective buyer has the income, assets, and credit to be approved for the mortgage required to purchase a house of some assumed value. To a prospective seller, the PAL is evidence that the prospective buyer can be taken seriously. It is not conclusive evidence, however. A PAL is a lender’s opinion but it is not a commitment and the opinions of some lenders are a lot better than the opinions of others. The Best PALs Carry the Signature of an Underwriter: Because an underwriter’s job is accepting and rejecting loan applicants, they should be the one responsible for issuing a PAL. But underwriters dealing with loan applicants work with a complete file which includes an appraisal whereas PALs are based on incomplete information and no appraisal. For this reason, many lenders are reluctant to use underwriters to generate PALs and leave the task for loan officers. PALs issued by loan officers have much less credibility than PALs issued by underwriters though a house seller may or may not recognize the difference. REALTOR®s Like PALs: REALTOR®s frequently recommend PALs to clients. PALs allow REALTOR®s to avoid wasting their time on wannabe buyers who can’t qualify for the loans needed to complete purchases. Why Lenders Offer PALs: Lenders view PALs as a way to generate more business on the assumption that some of the buyers obtaining PALs will return for a loan. But the borrower is not committed to the lender providing the PAL any more than the lender is committed to making a loan. Weakness of All PALs: The major weakness of all PALs is that they are based on incomplete data that do not bind the lender issuing it. If the PAL shows an acceptable monthly mortgage payment, the interest rate used to

2016 45HoursOnline, All Rights Reserved Page 155 Consumer Protection Reader, 2016 Edition calculate it is not guaranteed and won’t be until the borrower submits a complete application and the rate is locked. If the PAL shows an acceptable maximum loan, the maximum will be contingent upon a property appraisal of some minimum amount. The PAL also uses income and asset data provided by the prospective buyer which the lender won’t bother verifying until the buyer submits an application. The PAL is Particularly Weak in Connection With Self-Employed Borrowers: The tightening of underwriting requirements after the financial crisis had a disproportionate impact on self-employed borrowers who have to document their income from tax returns over two years. This can be a time-consuming chore which few lenders are willing to do for uncommitted shoppers. If I were a seller, I would not be impressed with a PAL for a self- employed buyer and if I were a self-employed buyer I would look for a better way to prove my bona fides to a seller than a PAL. A Strategy More Credible Than a PAL: My son recently purchased a home in an active market using a very different technique. He offered the seller a deposit equal to 5% of the price and removed all conditions from the transaction. He discarded the widely used mortgage contingency clause under which a transaction is voided if the buyer cannot obtain the mortgage required to complete the purchase. He also left out any requirement that he be able to sell his existing house. The seller thus knew that if for any reason my son could not complete the transaction, the deposit was the seller’s to keep. The seller grabbed the offer. Of course this approach only works for buyers who are well-heeled. Some such buyers can document possession of liquid assets in excess of the sale price which is also more persuasive than a PAL. Bottom Line: Prospective home buyers who cannot purchase a house without a mortgage but do not have access to more powerful strategies for impressing sellers should get a PAL. Only one is needed but take the trouble of finding one that is signed by the lender’s underwriter.

2.4.4.4 APPLY FOR A MORTGAGE JOINTLY OR SEPARATELY?

by Dr. Jack Guttentag (“The Mortgage Professor”) June 6, 2014 for www.MtgProfessor.com. Used With Permission. “My wife and I are looking to purchase a $450,000 home and I am wondering whether I should apply for the mortgage we will need as an individual or jointly with my wife? I make $84,000 a year and have a credit score of about 800. She makes $48,000 and has a credit score of about 680.”  Congratulations on considering this question before you start house shopping. The extra time could come in handy

FICO scores range from 300 to 850. as I’ll explain shortly. However, you haven’t given me enough information to answer your question. In addition to your incomes and credit scores, I need to know your financial assets and debt payments, held individually and jointly. Also, give me your best guess as to how long you will have the new house. “I have about $25,000 of financial assets in my name and no debts, she has $32,000 and no debts. Figure we will be here for seven years.”

Page 156 2016 45HoursOnline, All Rights Reserved Consumer Protection Reader, 2016 Edition Single vs. Joint Application When you apply for a mortgage jointly your incomes are combined and so are any financial assets that are carried in your individual names. Combining income and assets strengthens your application making it more likely that you will qualify for the mortgage you want. On the other hand, a joint application also requires that you combine the debt obligations of each party that are carried in separate names. That is not an issue for you but it could weaken other applications. The other downside of the joint application is that the lower of the two credit scores is used in pricing the loan. You do have that problem. Qualification vs. Pricing In deciding whether to apply singly or jointly, you need to consider the implications of the decision separately for qualification and pricing. Qualification is a yes/no affair, you either qualify for a particular loan type, or you don’t. If you can only qualify by applying jointly, then that is what you do and there is nothing more to consider. If you can qualify singly, you might still want to apply jointly if doing so results in a lower cost, a possibility considered below. Your Qualification In determining whether or not you qualify, I used the qualification calculator on my web site. The calculator shows the mortgages for which a user qualifies, the mortgages for which they don’t qualify, and exactly what they need to do to shift a mortgage from the second category to the first. In qualifying you singly, I assumed that you put 5% down, which uses up most of your cash. With 5% down and a credit score of 800, you qualify for a 30-year fixed-rate loan and a 5/1 adjustable. You do not qualify for a 15- year fixed rate loan, however, because the larger payment on the 15 brings your debt-to-income ratio to 49.9%, which is above the maximum of 43%. If you apply jointly, the larger joint income allows you to qualify for all three mortgages including the 15-year. This is only relevant if you want the 15, which saves on interest cost but carries a substantially higher payment.

Here is one of the results using the Professor’s Qualification Calculator The Cost of Single vs. Joint Applications If you can qualify either way, your selection of single versus joint application can be based on the one that results in the lower cost. I measure your costs over the seven years you expect to be in the house. They consist of upfront fees and charges, monthly payments including mortgage insurance,

2016 45HoursOnline, All Rights Reserved Page 157 Consumer Protection Reader, 2016 Edition and interest loss on both upfront and monthly charges, less tax savings and balance reduction. On May 30, the total cost to you of a 30-year fixed-rate mortgage on a joint application was $100,499 compared to $112,634 on a single application. The cost difference on a 15-year was about the same. The reason that a joint application will save you money is that your wife has enough assets in her own name to double the size of the down payment, from 5% to 10%. The cost reduction resulting from the larger down payment swamps the cost increase stemming from using her lower credit score. Managing the Process If you use a loan officer or mortgage broker to guide you through the process, their focus will be on qualification rather than pricing. If you can’t qualify, there can be no deal and no deal means no commission. If you can only qualify in one way, whether it is single or joint, that is the way he will guide you. And that’s OK, because on that issue your interests and those of your advisor are aligned. But if you can qualify either way, then you want to use the option that will cost the least and in making that decision you may not receive any help. Yet the issue is very simple. A joint application means a lower credit score which raises the price so you do it only if the spouse with the lower credit score has enough financial assets to lower the mortgage cost by increasing the down payment. NOTE: The increase in down payment must go past a pricing notch point: 5%, 10%, 15% or 20%. An increase from 5% to 9% will not help but raising it from 9% to 10% will. Of course, it would help even more if your spouse transferred her assets to you so that you could apply singly with both a larger down payment and a higher credit score. I don’t recommend making an asset transfer on a temporary basis for the sole purpose of increasing the down payment and the underwriter won’t allow it in any case. If you want to go this route without a challenge, the asset transfers should occur no less than 90 days prior to the date of the loan application. Because you started thinking about this early, you have the 90 days that are needed.

2.4.4.5 SHOULD YOU PAY DISCOUNT POINTS?

by Blanche Evans for Realty Times, March 25, 2014 Copyright© 2014 Realty Times®. All Rights Reserved. Used With Permission. When you see mortgage loans advertised online, you may think those rates are for everybody, but they aren’t. Known as benchmark mortgage rates, the best rates are for borrowers with perfect credit and who are buying a home well within conforming loan limits and with a large down-payment as icing on the cake. The rates you see may be teaser rates and they aren’t going to be available to you when you apply for a loan. That’s because banks will charge you “discount” points to give you their best rate. You’re not required to pay points, but it’s a choice if you want a lower interest rate. Explains David Reed, author of Mortgages 101, “points,” or discount points, are a percentage of the loan amount. If a mortgage is $200,000, then one “point” is $2,000.

Page 158 2016 45HoursOnline, All Rights Reserved Consumer Protection Reader, 2016 Edition Should you pay $2000 up front to save a point over the life of the loan? It’s a function of how the rate is offered, says Reed. For each point paid, your interest rate should be reduced by about 1/4 of a point. If you can get a 5% loan with no points, then you can likely get the same loan at 4.75% by paying one point. The point “discounts” the interest rate, that’s why it’s referred to as a discount point. You’re paying the cost of the discount points in your closing costs in advance. That’s cash you could use in your down-payment or to buy furniture or to upgrade your home. Reed says he isn’t a fan of paying discount points because the math never seems to work. On a 30-year mortgage loan at $300,000 and 5% interest, the monthly payment works out to $1,610 without any points. Paying one point ($3,000) would reduce your rate to 4.75%, making your discounted payment $1,564 per month. That's a reduction of $46.00 per month. Now weigh that against the cost of $3,000. To get that, divide $46 into $3000. The result is 65. What that means is it will take you 65 payments to break even, nearly 5½ years. What about paying two points? The math is still the same. On that same $300,000 loan at 4.50% and two points the monthly payment is $1,520, or lower by $90.00 per month when compared to the 5% rate. Divide that $90.00 into the two points of $6,000 and the result is (drum roll, please) 67. It would take 67 months to break even. In general, it will take about five years to break even for every discount point paid. If you don’t plan on staying in your home for at least five years or more, you won’t come out ahead. “I say take the $3,000 and pay down the principal,” says Reed. “Pass on the points.” It’s always a good idea to borrow less. This analysis is too simplistic for it ignores the time value of money and the tax savings realized when paying points. Using the Mortgage Professor’s Mortgage Points Calculator, we can see that the true breakeven point when paying 2 points to reduce the rate from 5% to 4.5% on a $300K, 30-year loan assuming a discount rate of 3% and a 15% tax bracket is not 67 months but 53 months – just 4.42 years –a difference of 14 months. With these assumptions, then, the borrower would save $90 on each payment after 4.42 years. (Note: The “discount rate” is the rate expected for an alternative safe investment.)

In general, the longer the borrower expects to stay in his home after the break-even point, the better the return on points.

by Dr. Jack Guttentag (“The Mortgage Professor”) April 5, 2013 for www.MtgProfessor.com. Used With Permission. A mortgage price quote means nothing until it is properly locked with the lender. A rate lock, as it is commonly called, is the lender’s commitment that they will make the specified loan at the specified price within a specified future period. The price includes not only the interest rate but also points, which are upfront charges expressed as a percent of the loan, fixed-dollar charges, and (if the loan is adjustable rate) the margin and maximum rate. Locking Has Become More Difficult Since the Financial Crisis Before the financial crisis, if you started early enough in the day, it was relatively easy to contact a lender and lock the price the same day. Today, it is extremely difficult, if not impossible. Delays are more frequent today than before the financial crisis, and the delay periods are longer. Before the crisis, income and asset documentation as well as appraisal requirements were often waived, facilitating the locking process. There are few if any waivers today. Determining the property value, which has a major bearing on the terms of a loan, is particularly problematic. Before the crisis, lenders would lock based on the borrower’s or broker’s estimate of value if it was a refinance or the sale price if it was a purchase, confident that in the great majority of cases the appraisal would confirm the value. Appraisals in buoyant markets generally did. Today, lenders cannot have this confidence because appraisals have become conservative and they also take longer. So lenders do one of two things. Either they require an appraisal before they lock or they lock without it but require that the appraisal, when it materializes, show a value above some level for the lock to remain valid. Lock Delays Carry Risk to Borrowers Because market prices are highly volatile, lenders reset them every morning, and often during the day as well. This makes it very likely that the price on the lock day will not be the same as the price quoted to the borrower earlier on which the borrower’s decision to proceed was based. While prices may change in either direction, the risks to the borrower are not symmetrical. Borrowers waiting to lock will always pay more if the price has risen but they won’t necessarily pay less if the price has declined. Lock Scamming Is All Too Easy A lender who locks at the current price when that price is higher than the one quoted to the borrower earlier should do the same when the current price is lower. However, few borrowers are likely to object if they are locked at the price they were quoted previously and my soundings suggest that this is a common occurrence. The irony is that the borrowers who consider themselves victimized are the ones who pay a higher price following an increase in the market price, whereas the real victims are those who pay the same price following a market decline.

The Good Faith Estimate (GFE) Doesn’t Help In August 2015, the CFPB The GFE  is a federally-required disclosure of rates, fees, and other loan required the GFE and the Truth- characteristics that must be provided to the borrower within three business in-Lending Act disclosure be replaced in most transactions by days of the submission of a loan application. It is designed to protect two new forms – the Loan borrowers against a variety of hazards but it does not protect them against Estimate and the Closing lock scamming. Disclosure. See the article "New Forms for Mortgage Loans Will If the loan has been locked at the time the GFE is issued, any scamming Cause a Hiccup of Two" for has already occurred. If the loan is not locked when the GFE is issued, the details. rates and fees shown on the GFE are pre-lock quotes similar to those quoted to the borrower orally, but many borrowers don’t understand this. The GFE states that “The interest rate for this GFE is available through [Date],” and if the loan has not been locked, the lender enters a day that has already expired. This is a horribly round-about and confusing way to tell the borrower that the loan is not locked. 

Here is now the new form used to replace the GSE, the Loan Estimate, reports the lock. It simply has a check box to indicate if the loan is locked:

Protecting Yourself Against Lock-Scamming When the market price changes between the time the lender quotes a price to the borrower and the time the loan is locked, the lock price should be based on the “twin sibling rule”: That rule states that the price locked will be the price the lender would quote on the same day on the identical transaction to the borrower’s twin requesting a price quote. If the new market price is below the price quoted to the borrower earlier, the lender will lock the lower price. If the new market price is higher than the price quoted earlier, the lender should not lock until explicitly authorized to do so by the borrower. How does a borrower verify that the lender has followed this rule? One way is to monitor market changes on a day-to-day basis. The best tool for this purpose is my daily series on wholesale mortgage prices {available here}. Even better is to deal with lenders who provide Internet access to their pricing systems through third party multi-lender web sites, where borrowers can check their price on the system when they lock, Three sites that provide this facility are MortgageMarvel.com, Zillow.com, and MtgProfessor.com, which is mine.

by Dr. Jack Guttentag (“The Mortgage Professor”) January 15, 2013 for www.MtgProfessor.com. Used With Permission.

This Is a Good Time to Pay Down Your Mortgage One of the vexing features of the post-crisis financial system is the dearth of riskless investments paying a decent return. The rates on Federal Government securities and insured CDs are not much greater than zero.  Yet every homeowner with a mortgage has the opportunity to earn a return equal to the interest rate on the mortgage, with no risk, simply by making extra payments. It is the best investment opportunity most homeowners

Source have. The only downside to using mortgage repayment as an investment is that it has no liquidity – once you make the payment you can’t take it back if you have an unexpected need for funds. However, most homeowners with mortgages who place their savings in bank deposits or money market funds paying less than 1%, rather than earning 3 to 6% by paying down their mortgage, do it for reasons other than a need for liquidity. The main reason is confusion about one or another feature of loan repayment. Confusion About Loan Repayment as an Investment Some borrowers have trouble viewing mortgage repayment as equivalent to buying a bond or a CD. Yet in both cases, you pay out money now and receive a stream of income in the future based on the contracted interest rate. The only difference is that the income received from a mortgage repayment is cancellation of interest that you would have had to pay otherwise. The difference between receiving $1,000 of interest, and eliminating the payment of $1,000 of interest, is one of form but not of substance. Those with a mortgage can actually earn a little more than the interest rate on their mortgage by taking advantage of the 10-15 day payment grace period that is found in all mortgage contracts. By adding the extra payment to the scheduled payment, the borrower will save interest for the entire month, even though they do not provide the funds until 10 or 15 days into the month. Note: if they make a separate payment after the grace period their loan balance may not be reduced until the following month which would reduce their return on investment. Confusion Over Deductibility Some borrowers who itemize their tax deductions don’t want to repay their mortgage because it entails loss of a deduction. But the loss is exactly the same as that on a taxable investment. For example, a borrower in the 33% tax bracket who repays a 3% mortgage earns 2% after tax. If instead, the borrower purchased a CD paying 1%, the after-tax return is 0.67%. If the before-tax rate on the repaid mortgage is above the before-tax rate on the alternative investment, the same will be the case after taxes.

Page 162 2016 45HoursOnline, All Rights Reserved Consumer Protection Reader, 2016 Edition Confusion Over Mortgage Life Cycle Some borrowers believe that they missed the boat on loan repayment because they didn’t do it in the early years of their mortgage when the regular payment went largely to interest, whereas now most of it goes to principal. But the rate of return on mortgage investment is not affected by where the mortgage is in its life cycle. While the allocation of scheduled payments between principal and interest changes over the life of the mortgage, extra payments go entirely to principal, no matter what stage of its life cycle the mortgage is in. Confusion Over Imminent Sale or Retirement Some borrowers are immobilized by plans to sell the home, as if somehow this would prevent their obtaining the expected benefit from making extra payments. But it wouldn’t, in fact the benefit would become glaringly evident in the smaller loan balance they have to pay off out of the sale proceeds. A similar point applies to those planning to retire with reduced income. If and when they need a reverse mortgage in the future, they will have to pay off their existing mortgage in the process, and the lower the balance, the more they will be able to draw on the reverse mortgage. Confusion Over Whether the Lender Will Credit Their Account Numerous versions have crossed my desk, including a concern that the lender won’t credit their account until the end of the term. This is not true, the account is credited immediately or even a few days early, as noted above. A variant is that the lender will use the extra payments for some purpose other than reducing the loan balance. The only substance to this concern is that the lender will indeed apply extra payments to any unpaid obligations, of which the most likely is an underfunded tax/insurance escrow account. Aside from that, the only thing the lender can do with extra payments, other than credit them to the loan balance, is to steal them, which they never do. With one exception, borrowers making extra payments need not provide special instructions as to how the payments should be applied. The exception applies when the extra payment is an exact multiple of the scheduled payment – the payment the borrower is obliged to make each month. If the scheduled payment is $600 and the borrower sends in a check for $1200, the lender does not know whether the borrower wants to apply the extra $600 to principal or is paying for two months. To avoid this problem, do not make extra payments an exact multiple of the scheduled payment.

2.4.5 ASSUMPTIONS AND DEFAULTS

2.4.5.1 DEALING WITH AN INHERITED HOUSE

by Banny L. Kass for Realty Times, January 20, 2015 Copyright© 2015 Realty Times®. All Rights Reserved. Used With Permission. Question to Mr. Kass: My father recently passed and I have inherited his townhouse. He had an existing mortgage. I am continuing to make the mortgage payments. I have not notified the mortgage company. I am

2016 45HoursOnline, All Rights Reserved Page 163 Consumer Protection Reader, 2016 Edition unable to obtain financing for a home in my name at this time, and was turned down for two home loan attempts. If the lender finds out that I now own the house, can they pull the loan? I don’t want to lose the house. There was a will (I was the sole beneficiary) and I had an attorney prepare the deed which was properly recorded in my name. If I sell the home and payoff the mortgage, are there capital gains taxes or other taxes that I may have to pay? It was my father’s wish that the house be mine upon his death, yet I am afraid if I notify the mortgage company, they will pull the loan. Answer: You have nothing to worry about so long as you continue to pay the mortgage. I suspect there is a “due on sale” clause in the mortgage document that your father signed, which states that the lender can call the entire loan due if the property is sold or otherwise transferred without the lender’s consent. However, back in l982, Congress enacted the Garn-St. Germain Depository Institutions Act, named after its principal sponsors, Congressman Fernand St. Germain (D-RI) and Senator Jack Garn (R-Utah). Among its many provisions, the Act restricted lenders from enforcing the due on sales clause under certain circumstances. According to the law, “a lender may not exercise its option pursuant to a due-on-sale clause upon … a transfer to a relative resulting from the death of a borrower ...” Since your father’s property was transferred to you upon his death, your lender cannot call that loan due, so long as you remain current with the monthly mortgage obligations. I would not hesitate to advise the lender that you are the new owner and send a copy of the deed which reflects that you transferred the property to yourself in your capacity as Personal Representative of your father’s estate. You want the lender to start sending you the mortgage payment coupons. More importantly, at the end of each year, lenders are required to send their borrowers (and the IRS) a statement regarding the amount of interest and real estate taxes that were paid in that year and you want to make sure that this statement is in your name and reflects your social security number. Otherwise, the IRS may question as to why you are deducting mortgage interest when they do not have this confirmation from your lender.

It should also be pointed out that there is another important restriction contained in the Act. A lender cannot enforce the due-on-sale clause upon

Devise: An old-fashioned word “a transfer by devise , descent, or operation of law on the death of a joint for giving real property by a will, tenant or tenant by the entirety.” This means that if two people hold as distinguished from words for property as joint tenants (or husband and wife hold as tenants by the giving personal property entirety), on the death of one of the parties, the survivor gets the title and does not have to pay off any outstanding mortgage.

You asked about any taxes that you may have to pay should you decide to sell the house. Here is where the concept of the “stepped-up” basis comes into play. This means that when a person inherits real estate, their tax basis is the value of the house on the date of death. (Note: it can also be based on the value six months after death, but you have to discuss this with your tax advisors). Here's an example: Your dad bought the property with your mother many years ago for $30,000. Your mother died in 2000 when the property was

Page 164 2016 45HoursOnline, All Rights Reserved Consumer Protection Reader, 2016 Edition worth $200,000. We have to determine the tax basis of the property. The basis for your mother and father was $15,000 each. In 2000, your dad received the stepped up basis of half of the value, namely $100,000, thereby increasing his basis to $115,000. When your father died, the house was worth $400,000. If you sell it for that amount, you will not have made any gain, and thus will not have to pay any capital gains tax. Should you sell for a higher price, your gain will currently be taxed at 20% for federal tax plus whatever applicable state tax you will have to pay. If, on the other hand, you decide to stay in the house, you may be eligible for the up-to-$250,000 exclusion of gain (or $500,000 if you are married and file a joint tax return). You must have owned and used the home as your principal residence for two out of five years (or a total of 730 days) before the house is sold in order to be eligible for this great tax break. Let’s say that you decide to sell the house three years from now, when it is worth $500,000. Assuming that you did not make any improvements to the property – which would increase your tax basis – and ignoring closing costs and commissions which would reduce your profit, you will have made a gain of $100,000 ($500,000 less your basis of $400,000). Since that is below the $250,000 ceiling, you will not have to pay any capital gains tax. Our tax laws are complex, but in your case, it appears that you are a big winner. But please don’t rely on this column; discuss your specific situation with your own financial or tax advisor.

2.5 TAXES

2.5.1 MORTGAGE INTEREST DEDUCTION

2.5.1.1 THERE ARE TAX BENEFITS WITH HOME OWNERSHIP

by Benny L. Kass for Realty Times, December 30, 2015 Copyright© 2015 Realty Times®. All Rights Reserved. Used With Permission. Homeownership has always been the “great American dream.” To foster and encourage this dream, Congress has consistently enacted tax legislation which favors homeowners. Indeed, much has been written that our tax laws discriminate against renters by giving unfair and unequal tax benefits to those who own homes. Every four years, some candidate for high political office tries to focus our attention on equalizing the tax laws and repealing the homeowner benefits, but these arguments have consistently fallen on deaf ears. And this coming election year is no different. For those of us who own homes, here is a list of the itemized tax deductions available to the average homeowner. Every year, you are permitted to deduct the following expenses:

2016 45HoursOnline, All Rights Reserved Page 165 Consumer Protection Reader, 2016 Edition  Taxes: Real property taxes, both state and local, can be deducted. However, it should be noted that real estate taxes are only deductible in the year they are actually paid to the government. Thus, if in year 2015, your lender held in escrow moneys for taxes due in 2016, you cannot take a deduction for these taxes when you file your 2015 tax return. Mortgage lenders are required to send an annual statement to borrowers by the end of January of each year, reflecting the amount of mortgage interest and real estate taxes the homeowner paid during the previous year.  Mortgage Interest: Interest on mortgage loans on a first or second home is fully deductible, subject to the following limitations: acquisition loans up to $1 million and home equity loans up to $100,000. If you are married, but file separately, these limits are split in half. You must understand the concept of an acquisition loan. To qualify for such a loan; you must buy, construct, or substantially improve your home. If you refinance for more than the outstanding indebtedness, the excess amount does not qualify as an acquisition loan unless you use all of the excess to improve your home. However, any other excess may qualify as a home equity loan. Let us look at this example: Several years ago you purchased your house for $150,000 and obtained a mortgage in the amount of $100,000. Last year, your mortgage indebtedness had been reduced to $95,000 but your house was worth $300,000. Because rates were low last year, you refinanced and were able to get a new mortgage of $175,000. Your acquisition indebtedness is $95,000. The additional $80,000 that you took out of your equity does not qualify as acquisition indebtedness, but since it is under $100,000, it qualifies as if it was a home equity loan. Several years ago, the IRS ruled that one does not have to take out a separate home equity loan to qualify for this aspect of the tax deduction. However, if you had borrowed $200,000, you would only be able to deduct interest on $195,000 of your loan -- the $95,000 acquisition indebtedness, plus the $100,000 home equity. The remaining interest is treated as personal interest, and is not deductible.  Points: When you obtain a mortgage loan, some lenders will allow you to pay one or more points to get that loan. The more points you pay, the lower your mortgage interest rate should be. Whether referred to as “loan origination fees,” “premium charges,” or “discounts,” these are still points. Each point is 1% of the amount borrowed; if you obtain a loan of $170,000, each point will cost you $1,700. The IRS has also ruled that even if points are paid by sellers, they are still deductible by the homebuyer. Points paid to a lender when you refinance your current mortgage are not fully deductible in the year they are paid; you have to allocate the amount over the life of the loan. For example, you paid $1700 in points for a 30 year loan. Each year you are permitted to deduct only $56.66 ($1700 divided

Page 166 2016 45HoursOnline, All Rights Reserved Consumer Protection Reader, 2016 Edition by 30); however, when you pay off this new loan, any remaining portion of the points you have not deducted are then deductible in full.-

Needless to say, if you have any questions about these tax benefits, discuss them with your financial and legal advisors.

2.5.1.2 WHAT IF YOU DON’T OWN YOUR HOUSE FOR TWO YEARS?

by Benny L. Kass for Realty Times, October 8, 2014 Copyright© 2014 Realty Times®. All Rights Reserved. Used With Permission. If you owned and lived in your home for at least two years before it is sold, the law – today at least – is clear: you can exclude from profit up to $250,000 if you are single or $500,000 if you are married and file a joint return. But what if you have made a profit on your house but sell it before the magic two years spelled out in the tax law? In l997, when Congress enacted this favorable legislation, it had absolutely no inkling that the real estate market in the early 2000’s would be so hot, and that so many homeowners would make such large profits on their home sales – even if they did not own their property for the full two years. However, Congress did provide reduced exclusions if prior to holding the property for the full two years, the homeowner had to sell due to a change in employment, health reasons, or “unforseen circumstances.” The IRS has established certain “safe harbors.” If the taxpayer falls within one of these safety zones, they will automatically be entitled to the appropriate exclusion of gain. Here are some of the “safe harbors”: Employment: If your new place of employment is at least 50 miles farther from the residence sold than was the former place of employment, the homeowner who sells his/her home in order to be closer to the job can take a proportionate exclusion of gain. For example, if the homeowner owned the home for only one year, that homeowner would be entitled to exclude half of either the $250,000 or the $500,000 exclusion, depending on the marital and tax filing status of the taxpayer. According to the regulations, employment is defined as “the commencement of employment with a new employer, the continuation of employment with the same employer, or the commencement or continuation of self-employment.” Health: If a doctor recommends a change of residence for reasons of health, this will be a safe harbor. What determines “health”? According to the IRS, “if the taxpayer’s primary reason for the sale is (1) to obtain, provide, or facilitate the diagnosis, cure, mitigation, or treatment of disease, illness, or injury... or (2) to obtain or provide medical or personal care for a qualified individual suffering from a disease, illness or injury.” It should be noted that “qualified individuals” includes family members who are in need of medical assistance away from the principal residence. The IRS made it clear, however, that a sale of the family home merely because it is beneficial to the general health or well-being of the taxpayer will not fall within the safe harbor.

2016 45HoursOnline, All Rights Reserved Page 167 Consumer Protection Reader, 2016 Edition Unforseen Circumstances: Congress passed the buck to the IRS to come up with definitions – safe harbors – under this amorphous category. The IRS rose to the challenge, by providing that the following events would be considered “safe harbors,” on the condition that these events involve the taxpayer, his/her spouse, co-owner or a member of the taxpayer’s household: (1) death; (2) being terminated from employment and thus eligible for unemployment compensation; (3) a change in job status that results in the taxpayer being unable to pay the mortgage and reasonable basic living expenses for the taxpayer’s household; (4) divorce or legal separation; (5) multiple births resulting from the same pregnancy; (6) Involuntary conversion of the property – such as a condemnation by a governmental authority, and (7) destruction of the property because of a man-made disaster, an act of war or terrorism. Additionally, the IRS kept the safe harbor door open by allowing the IRS Commissioner the right to expand these seven items should the need arise – either generally or in response to a particular situation involving a specific taxpayer. Taxpayers who believe that they are entitled to claim an exemption because they fall into one of these safe harbors should immediately consult their tax advisors – and preferably before you sell. Determining the safe harbor is the easy part; calculating the applicable exclusion may require a graduate degree in mathematics. According to the IRS, “to figure the portion of the gain allocated to the period of non-qualified use, multiply the gain by the following fraction:

Total-Nonqualified-Use-During-Ownership (after 2010 for 2015+ return) Total-period-of-ownership

For more, check out IRS Publication 523, “Selling Your Home ”.

2.5.1.3 SECRET DEDUCTIONS IN CIDS WHEN YOU SELL YOUR UNIT

by Benny L. Kass for Realty Times, February 9, 2014 Copyright© 2014 Realty Times®. All Rights Reserved. Used With Permission. Example: You purchased your single family house many years ago for $100,000. Over the years, you have spent $50,000 in improvements and have the bills to document this. This increases your basis for tax purposes to $150,000. You sell the property for $650,000. Your profit (excluding for this discussion sales commissions and settlement costs) is $500,000. Currently, under Federal law, if you are married and file a joint income tax return, you will not have to pay any capital gains tax. If you are single – or file a separate tax return – you can exclude up to $250,000 of your profit. Capital Gains Tax The difference – $250,000 – and depending on your income, will be taxed at the current rate of 20%, and you may have to pay up to $50,000 to the IRS.

Now let us change this example to the purchase and sale of a condominium, cooperative, or a unit within a community association. You bought the unit for $100,000 and sold it for $650,000. Since the IRS will consider your profit at $550,000, even if you are eligible for the up-to – $500,000 exclusion of gain, you will have to pay capital gains tax in the amount of $10,000 ($50,000 x 20%).

Page 168 2016 45HoursOnline, All Rights Reserved Consumer Protection Reader, 2016 Edition For example, if you bought or built the property, your basis is what it cost you. If it was a gift, your basis is the basis of the person giving you the property. And if you inherited the house, your basis will most likely be the fair market value as of the date of death – called a “stepped up” basis. Let us define some important terms:  Gain. This is also known as “profit,” and the gain on the sale of your home is the amount realized minus the adjusted basis of the home you sold . Profit?

Often the gain on the sale of a home is attributable more to inflation than increase in demand.

Consider a home bought in 1975 for $200K in cash. $200K in 1975 dollars is equal to $878K in 2014 dollars (source). If the couple sold their home for $878K, then in real terms (“purchasing power”) they had no gain but in absolute terms a gain of $678K. Subtracting from this their mortgage exclusion of $500K, the couple would have to pay capital gains on $178K. If the couple’s capital gains tax bracket was 15%, then the IRS would demand $26.7K and the state Franchise Tax Board $17.8K dollars (10% of $178K, source). Thus the couple would have to pay a total capital gains of $44.5K despite having realized no real gain.

NOTE: $44.5K in 2014 dollars is equal to $10.1K 1975 dollars. Thus in real terms they took a loss of about 5% on their home (not counting all the expenses and property taxes incurred over the years).

 Amount Realized. This is the selling price of your old home minus your selling expenses. These would include real estate commissions, advertising fees and legal fees incurred exclusively in the selling process.  Adjusted Basis. This is your basis in the property increased or decreased by such expenses as settlement fees or the costs of additions and improvements that have been made to your property. (A Worksheet to assist you in determining adjusted basis can be found on pages 17-18 of Publication 523).

Thus, as can be seen, in order to reduce your gain, (and pay less tax), you want to legitimately increase both your basis and your selling expenses. Let’s go back to our example. You bought your community association property for $100,000. It is now worth $650,000 and you are about to sell it and will also pay a commission of $32,500. The adjusted sales price is $617,500 ($650,000 minus $32,500). Your profit – gain – is $517,500. Even if you are eligible for the full $500,000 gain exclusion, you will still have to pay capital gains tax on the $17,500, which at the current rate of 20% will cost you $3,500. Since you purchased your property, your community association has spent a considerable amount of money improving the property. They have added

2016 45HoursOnline, All Rights Reserved Page 169 Consumer Protection Reader, 2016 Edition a new roof (or roofs), installed a swimming pool, and made other similar improvements. In your community association, you own a percentage interest of that association. Generally, (other than for cooperatives) your percentage interest will be found at the end of a legal document known as the “Declaration.” The total of everyone’s percentage interest in the association should be 100%. In a cooperative, your percentage interest should be reflected on your share certificate or proprietary lease. Let us assume that the association spent $300,000 in improvements from the time you bought the property and that your percentage interest is 1.5. (You can find your percentage interest at the end of the association’s declaration). If you multiply your percentage interest times the total improvements, you get a figure of $4,500, and this amount can – and should – be added to your basis as “improvements.” It is surprising to me that many community association owners are not aware of this tax benefit. This is especially helpful for the elderly owner who is selling his or her last property and does not want to have to pay a lot of tax on the gain that was made. In our example, by adding $4,500 to basis, the taxpayer is going to be saving $900 in capital tax gains that would otherwise have to be paid to the IRS. In most community associations, the records should be available as to the total expenditure for improvements on a year-to-year basis. Please understand that maintenance and repair items are not added to basis, but capital improvements – generally items which have a useful life of one year or more – are indeed legitimate items to be added to basis. In recent years, community associations have exercised their statutory warranty rights and made claims against their developer. In a Private Letter Ruling, the IRS took the position that when the developer settled with the association and gave it money for the warranty claims, the owners had to reduce their basis by their proportionate share of the recovery attributable to the common areas. This is based on the percentage interest that each owner has in the association. However, the IRS also stated that the owners could increase their basis by their proportionate share of the amount spent and retained by the condominium association to make the improvements to the common areas. Thus, in this example, if the amount received from the developer by the association equaled the amount spent for improvements, this would be a wash and would cause no change to the basis of the homeowner’s property. A Private Letter Ruling is not binding on the IRS and cannot be used as precedent for other tax matters. But it nevertheless reflects the thinking process of the IRS. Basis is a concept on which most of us pay little attention. However, as we get older, and become concerned with conserving the majority of our assets, the concept of adjusted basis becomes critical. The fact remains that each dollar that can legitimately be added to the purchase price (the adjusted basis) generates a savings to the individual community association owner.

Page 170 2016 45HoursOnline, All Rights Reserved Consumer Protection Reader, 2016 Edition What, then, should an owner do who sold his or her property within the last few years and was not aware of this special tax break? You may be able to file an amended return but you must discuss the logistics and the legality of an amended return with your own tax advisers. For California, the combined federal and state capital gains tax is the second highest capital gains tax in the World next only to Denmark. The top capital gains tax rate in California at the state level is 13.3% percent, the highest in the nation. Since the current (January 2015) top federal capital gains tax rate is 20%, the total top capital gains tax rate in California is a whopping 33% and this does not even include the hidden inflation tax. (Source).

2.5.2 HOMEOWNERS

2.5.2.1 FACT OR FICTION: A TAX ON RE SALES?

by Benny L. Kass for Realty Times, July 21, 2014 Copyright© 2014 Realty Times®. All Rights Reserved. Used With Permission. On January 1, 2013, the Net Investment Tax {also called the “Net Investment Income Tax”} went into effect. Despite numerous articles and columns reminding consumers that this tax does not apply to every real estate sale, rumors continue to keep flying all over the country, claiming that the Health Reform legislation Congress enacted includes a sales tax on all real estate sales. While there is a tax, it does not apply to everyone. The Health Care and Education Reconciliation Act of 2010 was signed into law by President Obama on March 30, 2010. It is a comprehensive and extremely complex piece of legislation. One section (§1402) is entitled “Unearned Income Medicare Contribution” and does impose a 3.8% tax on any profit on the sale of real estate – residential or investment. But it is aimed at high-income consumers, who comprise a small minority of American citizens. Let’s look at the true facts of this new law.

There is another “Medicare Tax” First, it is not a sales tax nor does it impose any transfer or recordation tax. of .9% also imposed on the well- It is often called a “Medicare” tax because the moneys received will be healed (see notes below). allocated to the Medicare Trust Fund which is part of the Social Security System .

Next, if your income (technically called “adjusted gross income”) is less than $200,000, you are home free. The income thresholds are clearly spelled out in the law. If you are married and file a joint tax return with your spouse, the law will apply only if your income is over $250,000. (If you and your spouse opt to file a separate tax return, the threshold is reduced to $125,000. For all other taxpayers, you have to earn more than $200,000 in order to be under the new law.

2016 45HoursOnline, All Rights Reserved Page 171 Consumer Protection Reader, 2016 Edition The up-to-$500,000 exclusion of gain for married couples filing a joint tax return (or up-to-$250,000 for single taxpayers) has not been repealed. Nor has the right to deduct mortgage interest and real estate tax payment been eliminated. How is the tax calculated? It is a complex formula that could be called the “Accountant’s Protection Act.” As a taxpayer, you (or your financial advisor) must determine which is less: the gain you have made on the sale of your house or the amount that your income exceeds the appropriate threshold.

Adjusted gross income: An Complicated? Yes. Let’s look at these examples. Your adjusted gross individual's total gross income income  is $150,000. You sell your house and made a profit of $400,000. minus specific deductions. In- other-words, the money you can There is no change in the way you determine your gain: you take your spend. purchase price, add any major improvements you have made over the years, and subtract that number from the net sales price. Based on this formula, you and your spouse have owned and lived in the property for at least two out of the five years before it was sold. Accordingly, you are eligible to exclude all of your profit; you are not subject to the new 3.8% tax. Keep the money and enjoy.

Change the example so that your adjusted gross income is $300,000. Since you are eligible to take the profit exclusion of up-to-$500,000, once again you do not have to pay the Medicare tax; your entire gain is excluded, and thus there is no profit to tax. But let’s assume you strike it rich and have made a profit of $600,000. Your income is $300,000. You can only exclude $500,000 under current law, so you will have to pay capital gains tax on the remaining balance. The rate currently is 20%, so you will owe Uncle Sam $20,000 ($100,000 x 20%). But since your income is over the threshold, you now have to pay the 3.8% tax. But on what amount? As indicated earlier, the tax is based on lesser of your profit or the difference between the threshold and your income. Your profit is $100,000. The difference between your income and the threshold is $50,000 ($300,000 - $250,000). In our example, the lower number is $50,000, and you will have to pay an additional $1,900 to the IRS (3.8% x $50,000). According to statistics provided by NAR®, the median average sales price for homes in the United States (as of July, 2014) was $213,400. Clearly, none of these homes could make a profit of even $250,000, so if you qualify for the exclusion of gain requirements, you will not be impacted by this new law. Those requirements are: you have to have owned and used the property as your principal residence for two out of the five years before it is sold.

Let’s not forget the 13.3% capital Of course, in homes where a large profit will be made, some home owners gains tax owed by high-income may be hit with this tax. But the large profit that you make should offset the couples (>$500K) (source ). nominal tax {nominal!?} that has to be paid . Since the law applies to all forms of real estate, including vacation homes, you should consider consulting with your tax and financial advisors as to your exposure.

Page 172 2016 45HoursOnline, All Rights Reserved Consumer Protection Reader, 2016 Edition Actually the Net Investment Income Tax applies to many other forms of investments (“unearned income”) besides real estate. It includes investment income from dividends, interest, annuities, royalties, and rents. The regulations which impose this tax require 150 pages just to describe the term “Net Investment Income.” (Source) The same high-income individuals who are subject to the 3.8% Net Investment tax are also subject to a .9% “Medicare Tax.” The Medicare Tax is a .9% increase in the 1.45% Medicare levy imposed on earnings above those income thresholds used to compute the 3.8% Net Investment tax (e.g., for married couples filing jointly the threshold is $250K). (Source) These two additional taxes (Net Investment and Medicare taxes) were imposed by Congress to pay for The Affordable Care Act (a.k.a., “Obamacare”) and are expected to raise about $318 billion over the next decade – roughly half of the law’s new tax revenue. Other taxes and tax changes make up the difference. (Source)

2.5.2.2 PITFALLS OF TRANSFERRING PROPERTY TO RELATIVES

by Benny L. Kass for Realty Times, May 14, 2014 Copyright© 2014 Realty Times®. All Rights Reserved. Used With Permission. Question to Mr. Kass: Is it a good decision to deed our house to one of our children or would it be better to just put these instructions in your will? What is the downside to doing this? Answer: There may be serious tax consequences if you transfer your property to your children while you are living. You may not be doing them a favor. Let’s take this example. You bought a house many, many years ago for $75,000. It is now worth $500,000. You have added $25,000 of improvements. Your basis for tax purposes is $100,000. You want to be nice to your daughter and decide to give her the house. Since the basis of the person giving a gift (the “giftor”) becomes the tax basis of the recipient of a gift (let’s call it the “giftee”), your daughter is now the proud owner of a house with your low tax basis. You downsize to a smaller property and move out... Now, your daughter has several choices. She can immediately sell the house, for $500,000. She pays a real estate commission and other closing costs of $30,000. For tax purposes, since her tax basis is only $100,000, she will have made a profit of $370,000 ($500,000 - 30,000 - 100,000). If property is held for less than one year before it is sold, the seller cannot claim capital gains treatment. Instead, the profit is taxed as ordinary income. If, for example, your daughter is in a 30% tax bracket, she would have to pay as much as $111,000 in federal income tax. However, since she received a gift from you, the time in which you owned the property is added to her holding period. Assuming that you have owned the property for more than one year, your daughter could then be taxed at 20%, which is the current rate for capital gains. Even so, she will still have to pay the IRS $74,500, plus any applicable state and local tax.

2016 45HoursOnline, All Rights Reserved Page 173 Consumer Protection Reader, 2016 Edition She can decide to move in and treat the house as her principal residence. If she owns and lives in the property for two out of the five years before it is sold, she can exclude up to $250,000 of any profit (or up-to $500,000 if she is married and files a joint tax return). While we all hope that property values will continue to appreciate in the years to come, even if she only gets $500,000 for the house, she may still have to pay some tax on her gain, especially if she is not married. And clearly if she sells the house and makes a profit of over $500,000, she will owe money to the IRS. If your daughter decides not to move in, she could consider doing a §1031 (Starker) exchange, but once again, there is a big risk. In order to have a successful exchange, the property being exchanged (called the “relinquished” property) must have been held for investment. If she immediately put the property on the market after taking title from you, the IRS can take the position that the house was not “held” for investment and will reject the exchange transaction. Finally, your daughter could rent out the house and become a landlord. Under this scenario, while she could later do a Starker exchange, she will have lost the opportunity to claim the up-to-$500,000 gain exclusion. Now, let’s change the facts. You decide to leave the property to your daughter after you die. Although your estate will have to be probated in a jurisdiction where you were last domiciled, your daughter will be able to take advantage of what is known as the “stepped up basis”. In simple terms, this means that the value of the property on the date of your death becomes the basis of the person who inherits the house. So if the house is appraised at $500,000 on your death, your daughter can sell it for that price and pay no capital gains tax at all. If she sells it for more than the valuation at death, then she would have to pay some tax on that profit. In order to take advantage of this stepped up basis, you have to receive the property by “bequest, devise, or inheritance.” That’s legal language to mean that somehow you inherited the property when the previous owner died. The answer to your question is not easy. Much depends on what your daughter’s plans are. If she wants to live in the house and you are definitely planning on moving out, then it may be a good idea to give her the house. But there are other options. Talk with your tax and financial advisors about selling her the house and you take back a mortgage. She will make monthly payments to you. If she cannot afford those payments, you have the right to gift her (completely tax free for both of you) up to $14,000 a year. This gift will help to reduce the value of your estate while at the same time assisting your daughter with the mortgage payments. She can even offset $1,000 a month so as to reduce her mortgage obligations to you. There is one additional issue that you should consider. Make sure all of your children understand your rationale for wanting to give your daughter your house. You don’t want your other kids angry at you now – or after your death.

There is yet one additional option, depending on your state law. There is a

Page 174 2016 45HoursOnline, All Rights Reserved Consumer Protection Reader, 2016 Edition California is not one of them concept (incorporated into law in many states) called “Transfer of Death (source). Deed.” If your state has adopted this law , talk with your personal attorney whether this is something you might want to do. Oversimplified, you prepare a deed conveying the property to your daughter on your death. You still own the property and can cancel that deed at any time.

For more information, go to the IRS website (www.irs.gov), click on “publications” to get Publication 523 entitled "Selling Your Home . But caution: recently the Tax Court made it clear that just because certain facts are referenced in IRS publications, does not make it legal nor precedent. A couple rolled over more than one of their IRA's in one year. IRS Publication 590 (Individual Retirement Agreements ) – as well as a then-proposed regulation – both state that the rule applies on an IRA-by-IRA basis. The tax court made it clear that despite the written language, the law states that the one rollover rule per year applies on an aggregate basis – namely you can only roll over one IRA per year. So read the IRS publications, but don't rely completely on them without first consulting your tax advisors. Another consideration when gifting or bequeathing a home to a child (or grandchild) is the child’s annual State property tax burden. In California we pay property tax on our home’s “base value.” A home’s base value starts at 1% of the home’s original price (or market value) and increases each year by 2% (less if that year’s cost-of-living was less). Thus, if the Smith’s bought their home in 1986 for $100K, their property tax in 1986 was $1,000, in 1987 it was $1020, in 1988 $1040.40, and -- jumping forward -- was $1,776 in 2015. A home’s base value is “reassessed” to market value or the amount of purchase when it is transferred EXCEPT if is transferred from parent to child or from a grandparent to grandchild. Thus if in 2016 the Smith’s gifted their Little Johnny their home, Little Johnny would retain their parent’s tax base. Thus Little Johnny would pay $1,811 in property tax in 2016 with 2% annual increases thereafter. If instead the Smith's sold their home to a stranger for $900K, then Stranger Bob would pay $9,000 in property tax the first year and $9,180 in 2017, and 2% increases each year thereafter. The rules for “reassessment” can be quite complicated. See this article for details.

2.5.2.3 AN EXCHANGE WILL DEFER ALL TAX OBLIGATIONS

by Benny L. Kass for Realty Times, March 10, 2014 Copyright© 2014 Realty Times®. All Rights Reserved. Used With Permission. You bought your home many years ago but when the family expanded you The Medicare Surtax (a.k.a., “The bought another home and have been renting out the first one for many Net Investment Income Tax”) applies to adjusted investment years. You want to stop being a landlord but your tax accountant has income in excess of $125K for indicated that your gain is over $400,000 and that you will have to pay as single taxpayers and $250K for high as $80,000 in capital gains tax, plus recapture your depreciation at married taxpayers (details). 25%. And depending on your income tax bracket, you may also have to pay the new 3.8% Medicare Surtax . Clearly, this is not what you planned when you first bought the house.

2016 45HoursOnline, All Rights Reserved Page 175 Consumer Protection Reader, 2016 Edition There is some good news; consider doing a Starker (§1031) exchange. If you follow the rules, you can defer any and all tax. The IRS has issued proposed regulations which make it clear that the surtax does not have to be paid if you do an exchange. And although these regulations have not yet been finalized, the IRS has stated that taxpayers may rely on them at least until the final regulations are implemented. Although often called a “tax-free” exchange, a Starker will not relieve you from the ultimate obligation to pay the capital gains tax. It will, however, allow you to defer paying that tax until you sell your last investment property. At that time, any gain that you have deferred will be built into the new property. What is a Starker – also referred to as a “like kind” exchange. The ideal exchange is a direct exchange. I own investment property A and you own property B (also investment). Both are of equal value. On February 1, 2014, you convey B to me and on that same day I convey property A to you. If there is a written agreement between us that this is to be a §1031 exchange, neither of us will have to immediately pay any capital gains tax on any profit we have made. However, such a transaction is rarely possible. The logistics of finding the replacement property to be exchanged simultaneously with the relinquished property is very difficult if not impossible to coordinate. Many years ago, a man by the name of T.J. Starker sold property in Oregon, pursuant to a “land exchange agreement” but did not receive any money for the sale. Instead, the seller – a couple of years later – transferred replacement property to Mr. Starker. The IRS considered this a taxable sale but the 9th Circuit Court of Appeals held that this was a deferred exchange which was permitted under §1031 of the Tax Code. In other words, the exchange did not have to take place simultaneously. There are two kinds of deferred (Starker) exchanges: (1) A Forward Exchange: You sell the relinquished property, and within the time limitations spelled out in §1031, you obtain the replacement property; and (2) A Reverse Exchange: You obtain title to the replacement first and then sell the relinquished property.

The rules are complex but here is a general overview of the process. With some important exceptions the rules apply equally whether the exchange is forward or reverse: §1031 permits a delay (non-recognition) of gain only if the following conditions are met: First, the property transferred (called by the IRS the “relinquished property”) and the exchange property (“replacement property”) must be “property held for productive use in trade, in business, or for investment.” Neither property in this exchange can be your principal residence unless you have abandoned it as your personal house. Your vacation home would also not qualify as investment property unless you actually start to rent it out more or less full time.

Page 176 2016 45HoursOnline, All Rights Reserved Consumer Protection Reader, 2016 Edition Second, there must be an exchange; the IRS wants to ensure that a transaction that is called an exchange is not really a sale and a subsequent purchase. Third, the replacement property must be of “like kind.” The courts have given a very broad definition to this concept. As a general rule, all real estate is considered “like kind” with all other real estate. Thus, a condominium unit can be swapped for an office building, a single family home for raw land, or a farm for commercial or industrial property. Here is a general overview of the requirements: 1. Identification of the replacement property within 45 days. Congress did not like the fact that the Starker opinion had no time limitations on when the exchange could take place. Accordingly, the law now requires that the taxpayer identify the replacement property (or properties) no later than 45 days after the relinquished property has been sold. 2. Who is the neutral party? Perhaps the most important requirement of a successful §1031 exchange is that the taxpayer cannot receive (or control) even one penny of the net sales proceeds from the relinquished property. All such proceeds must be held in escrow by a neutral party and go directly into the purchase of the replacement property. Generally, an intermediary or escrow agent is involved in the transaction. In order to make absolutely sure that the taxpayer does not have control or access to these funds during this interim period, the IRS requires that this agent cannot be the taxpayer or a related party. The holder of the escrow account can be an attorney or a broker engaged primarily to facilitate the exchange. 3. Take title within 180 days: The replacement property must be obtained no later than 180 days after the relinquished property is transferred or the due date of the taxpayer’s income tax return for the year in which the transfer is made. If, for example, you transferred the relinquished property on December 1, 2013 your tax return is due on April 15, 2014. That is only 149 days. You either have to obtain the replacement property by that date or get extensions from the IRS so that you can extend out to the full 180 days.

The rules are extremely complex. You must seek both legal and tax accounting advice before you enter into any like-kind exchange transaction – whether forward or reverse.

2.5.2.4 PROPERTY TAX SYSTEM COMING UNDER FIRE

by Bob Hunt for Realty Times, June 27, 2013 Copyright© 2013 Realty Times®. All Rights Reserved. Used With Permission. A recent California Appellate Court decision reminds us how different the State’s property tax system is from other jurisdictions. In so doing it points to one of the sources of dissatisfaction with that system that many are expressing these days.

The tax assessor valuation of a real estate property in California is

2016 45HoursOnline, All Rights Reserved Page 177 Consumer Protection Reader, 2016 Edition determined by the property’s value – its price – at the time of purchase. Other things being equal (e.g. no substantial improvements being made to The inflation factor cannot exceed the property) any further increase in its assessed value is only determined 2% (source). by the application of a modest inflation factor . Market factors do not play a role. Clearly, this leads to anomalous results.

Suppose I purchased a Plan B in the Happy Homes tract in 2003 for $300,000. If I made no substantial improvements that would catch the tax assessor’s eye, my assessed valuation today would be $300,000 plus whatever limited inflation factors might have been applied (e.g. 2% a year for the past 10 years). It might now be assessed at around $365,000. Also suppose that my neighbor down the street bought the same model on a similar lot around 2007 – during the bubble – for $600,000. His assessed value today, with five years of inflation factor , would be about $300,000 greater than mine (roughly $675,000). The same houses essentially – both would fetch about the same price, whatever that might be, in today’s market

Inflation Factor by Year (Source – yet with very different assessed values. ) (It’s usually 2% but not Another way in which California property taxes differ significantly from those always.) of other regions is that there is no “split role.” Different types of property are all taxed in the same way. The same tax rates and valuation methods apply to commercial properties as they do to residential properties.

The appellate court case mentioned earlier (Borikas v. Alameda Unified School District, 2013) addresses the matter of taxing different types of property at different rates.

In June of 2008, voters in the Alameda Unified School District approved a Actually the rate for properties parcel tax as Measure H on their ballot. It provided that residential and larger than 2,000 square feet was 15 cents per square foot to a commercial/industrial properties be taxed differently. Residential properties maximum of $9,500 with senior were to be taxed at $120 per year. Commercial and industrial parcels less homeowners and disabled than 2,000 square feet would also be taxed at $120 per year; but those homeowners exempted. (Source) greater than 2,000 square feet would be taxed at a higher rate up to $9,500 per year .

In August of the same year, George Borikas, trustee of a trust owning commercial properties, filed suit to have the special tax invalidated. He alleged that the tax violated the Government Code (§50079) because it did not apply uniformly to all parcels in the district. The trial court ruled against Borikas, who then appealed. It all came down to the meaning of uniform. The district argued that “uniformity” in the realm of tax law “has a well-established meaning that allows rational classifications and requires only that all taxpayers or property within a classification be treated the same.” It cited a long line of cases involving constitutionally-based equal protection challenges. But the Appellate Court disagreed. After a long review of the legislative history of that portion of the Government Code, along with other legislative items, it said it was apparent that the Legislature intended that districts “did not have authority to classify taxpayers and property and impose differential tax rates.” The trial court ruling was overturned.

Of course the court did not say whether the present tax law is good or bad. It just stated what it means. However, today, more and more of those in

Page 178 2016 45HoursOnline, All Rights Reserved Consumer Protection Reader, 2016 Edition and around the Legislature are saying that the tax law is not so good. As we are all told, government and the school districts are “starved for funds.” But no one is in the mood to ask the general populace, again, to raise taxes on itself. A likely candidate for increased taxes, though, can be found in commercial property. Proposals are floating for the authorization of a split role tax system in California. It wouldn’t be surprising to see such legislation introduced in this session. Even those who see the split role as reasonable are still wary that such tinkering with the system might be “the camel’s nose under the tent. ” Polls show that most Californians like the property tax system the way it is. It will be interesting to see what the future holds.

Lenny Goldberg, the man behind the effort to force Amazon to collect sales taxes on purchases made by California residents, is on a personal jihad to cripple Proposition 13. His first objective is to present the voters with an initiative to assess commercial properties at market value. He expects to have an initiative ready for voters by 2016 or 2018. (Source) As of January 2016, there is no such initiative ready to go before the voters.

2.5.2.5 TAX CREDITS FOR ENERGY-EFFICIENT UPGRADES

by Broderick Perkins for Realty Times, March 18, 2013 Copyright© 2013 Realty Times®. All Rights Reserved. Used With Permission. You need a scorecard to keep up with Washington’s budgetary moves these days. When legislators kept the nation from toppling off a fiscal cliff, they left a host of key housing and mortgage related benefits intact. That’s a good thing. But they also left the housing market’s most needy with festering sequestration budget cuts, higher Social Security taxes and the payroll tax cut vanished. Not so good. There’s one other bit of good news that came out of the fiscal cliff-averting “American Taxpayer Relief Act of 2012”  – federal tax credits for energy efficient upgrades. This American Taxpayer Relief Act of 2012 made the Bush Tax Cuts permanent except for “high income” taxpayers. The “Bush Tax Cuts” had provided a temporary reduction of the highest marginal income tax rate from 39.6% to 35%. Originally the reduction was to have expired at the end 2010 but it was subsequently extended to the end of 2012. This act made these tax cuts permanent except for high income taxpayers. “High income” was defined as $400K/year for single taxpayers and $450K/year for couples.. For these high income individuals, the highest marginal income tax rate reverted back to the rate existing before the Bush Tax Cuts; that is, to 39.5%. (Source.)

2016 45HoursOnline, All Rights Reserved Page 179 Consumer Protection Reader, 2016 Edition Tax Credits for Energy Efficient Home Improvements The credits vary, but can cut hundreds of dollars off taxes due. Tax credits are deducted, dollar-for-dollar, from your tax bill and can result in a refund if the credit is larger than your taxes due. Deductions, on the other hand, are subtracted from your income, so there’s less income to tax.

In December 2015, Congress Energy efficient home improvement tax credits go back to 2006, were last extended the residential energy due to expire in 2011 but were extended for 2012 and 2013 . efficient property credit through 2022 for purchases of qualified Renewable energy source tax credits for wind, solar, and geothermal solar electric property and improvements are available through {2016. qualified solar water heating property. (Source) Some states offer additional financial incentives for energy efficient home improvements.

Some states offer additional financial incentives for energy efficient home improvements . California offers a plethora of incentive programs to encourage homeowners to install solar power in their homes. First and foremost is the California Solar Initiative which Governor Schwarzenegger’s championed as his “Million Solar Roofs Program.” As of 2012, the rebates provided by the Initiative range from $0.20 to $0.35 per AC watt for residential systems. (Source) Additionally; many cities, utility districts, and counties have their own programs to induce homeowners to install solar. To see a list, click here. You file for the credits with IRS Form 5695 . Be sure to keep a copy of the “Manufacturer's Certification Statement,” to be sure the work and materials qualify as well as any receipts or itemized bills. What’s Available For each item, Consumer Reports offers ratings and recommendations for the best products, which must meet Energy Star or other standards. Windows, doors and skylights – You can replace one or outfit your home with a full array of new windows, doors, and skylights. The credit is 10% of the cost of the materials only – not installation – up to $200 for windows, $500 for doors and skylights. Metal and asphalt roofs – Even without a tax credit, roofing materials that can lower a roof’s surface temperature by up to 100 degrees is a plus for your utility bill. The credit is 10% of the cost of the materials – not including installation – up to $500.

Insulation – Insulation batts , rolls, blow-in fibers, rigid boards, expanding spray, and pour-in-place materials can qualify. Likewise, qualified weather stripping, spray foam in a can, caulk, and house wrap is covered. The credit is 10% of the cost of the materials – not installation – up to $500. Some installation work is a do-it-yourself job.

Unfaced fiberglass batt insulation Non-solar water heaters – Heating water can add up to 25% of the energy in rafter bays. used in your home. Qualifying water heaters can include gas, oil, propane

The tax credit is a flat $300. Energy Systems, Heating, Ventilation and Air Conditioning  Solar energy systems, small wind turbines, and geothermal heat pumps get you a tax credit of 30% off the cost of the system, including installation, with no ceiling on the amount of the tax credit.  Qualifying air source heat pumps, central air conditioning units, and biomass stoves get you a tax credit of $300. A heat pump is a device used for  Heat pumps  are an energy-efficient alternative to furnaces and air space heating or cooling. It functions as an air conditioner in conditioners for moderate climates. reverse, releasing heat in the  Central air conditioning, must meet certain efficiency and home rather than the surrounding performance requirements outlined on the Energy Star website and environment. Heat pumps generally draw heat from the you can prove this with the Manufacturer’s Certification Statement. cooler external air or from the  Biomass stoves burn wood, wood waste, wood pellets, agricultural ground. crops and trees, plants, grasses, residues, and fibers. Gas, propane or oil hot water boilers and natural gas, propane or oil furnaces can come with a $150 tax credit.  Gas, propane or oil hot water boilers circulate water throughout the home in a system of baseboard heating units, radiators, and/or radiant tubing in the floor.  Natural gas, propane or oil furnaces use those energy sources to heat your home.

Finally, advanced main air circulating fans that use no more than 2% of the furnace’s total energy to circulate heat through the duct system. The tax credit is $50.

2.5.3 AGENTS

2.5.3.1 AGENTS MAY NOT ALWAYS DEDUCT LOSES FROM RENTALS

by Bob Hunt for Realty Times, June 9, 2014 Copyright© 2014 Realty Times®. All Rights Reserved. Used With Permission. For example; if Sally nets $200K True or false? If a person meets the IRS test for being a qualified real in real estate commissions while estate professional, then that person is automatically entitled to taking $180K loss on the apartment building she owns and deduct losses from his or her rental property against ordinary income. manages, is her taxable income  [NOTE: “qualified real estate professional” is not a term used in the tax $20K? code but it’s easier to use than continually referring to IRC §469(c)(7)(B)] If you answered “true” you have plenty of company within the real estate community. Being in a position to deduct rental property losses against ordinary income is often touted as a benefit – one of the perks – of being a (pretty much) full-time real estate professional. The problem is, there may be a bit more to it than is often implied. The IRS would say the statement above is false. It’s a bit more complicated.

Interested parties would do well to acquaint themselves with the federal case of Gragg v. United States of America, 2013. Here’s what happened.

2016 45HoursOnline, All Rights Reserved Page 181 Consumer Protection Reader, 2016 Edition In 2009, the IRS conducted an audit of the taxpayers’ returns for 2006 and 2007. In both years, losses from rental properties were deducted against ordinary income. In both years Mrs. Gragg’s occupation was listed as “real estate sales.” The deductions were disallowed. There was an additional assessment of $14,874 for 2006 and an assessment of $43,499 for 2007. Both assessments, plus penalties and interest, were paid in full. Then, in 2011, the taxpayers filed Claims for Refund for both years. The basis for the refund was “Taxpayer is a real estate professional and as such is not subject to the passive loss limitations which the IRS disallowed.” The claims were denied and the taxpayers filed a lawsuit. In October of 2013, the government (IRS) filed a motion for summary judgment – essentially a motion to dismiss. The motion specifically says “The United States does not dispute that Plaintiff Delores Gragg is a real estate professional under 26 U.S.C. §469(c)(7) for both the 2006 and 2007 tax years.” Subsequently, the taxpayers filed a motion of opposition and the government then filed a reply to the opposition. We pick it up from there. The taxpayer’s case rests on a reading of the Internal Revenue Code such that “26 U.S.C. §469(c)(7)(A)(i) expressly states that the rental real estate activity of any taxpayer who qualifies for the real estate professional exception will not be considered passive activity.” [my emphasis] If rental activity is not passive activity, then rental losses can be used to offset other income. In short, the taxpayers’ position was that the answer to the question at the beginning of this column is “True.” But the IRS, referring to other parts of the tax code, said that determining a real estate licensee’s professional status was just one step in the process. “However, the inquiry does not end there. Instead, the rental real estate activities of qualifying taxpayers will continue to be treated as passive activities unless the taxpayer materially participates in each of those rental real estate activities… Material participation for this purpose has the same definition as under §469(h)(1), meaning that the taxpayer must be involved in the operations of the activity on a basis that is regular, continuous, and substantial.” [my emphasis] Another section of the Code (26 C.F.R. §1.469-5T) provides a seven factor test (e.g. did the individual participate in the activity for more than 500 hours during the year?) such that at least one of them must be met in order to demonstrate that the taxpayer, albeit a qualified real estate professional, has materially participated in the rental activity.

The Court agreed with the IRS and the motion for summary judgment was As of Jan. 2016, no new news. granted March 31, 2014. We shall wait to see if there is an appeal. Meanwhile, be careful about deducting those rental losses. 

(By the way: I fully expect that there will be someone out there who will let me know that they successfully deducted losses on rentals where they had practically no involvement with the rental activity. My only question would be: Were you audited? Every deduction “works,” as long as you haven’t been audited...)

by Bob Hunt for Realty Times, February 10, 2014 Copyright© 2014 Realty Times®. All Rights Reserved. Used With Permission. Coldwell Banker settled this case In Los Angeles County Superior Court there is a case pending (Bararsani v. out-of-court by agreeing to pay a Coldwell Banker Real Estate Brokerage Company) that, depending on its $4.5 million settlement thus deferring for another day the outcome, could have wide-spread consequences for the conduct of real question whether agents are estate brokerage business in California and, possibly, the rest of the employees or independent country. It has to do with the classification of real estate agents as contractors. (Source) independent contractors rather than as employees .

In California it is possible for real estate agents to work in employee status, but the overwhelming majority of brokers and agents choose to use the independent contractor model. This is appealing to brokerage firms in a variety of ways. Not only does it save them a great deal of paperwork, but also it relieves them of responsibility for the payment of such things as payroll withholding and unemployment insurance. Moreover, in many cases brokerages that may have hundreds of agents (as independent contractors) might still not have enough employees (secretarial staff, etc.) to meet threshold requirements for such things as mandatory provision of health insurance. Many agents tend to favor independent contractor status as well. Although most of them might wish that the firm would pay more of their business expenses, they like not having payroll withholding and they enjoy some of the perceived benefits of Schedule C deductions. Many just like the idea of being their own boss, not having to be at the office at a certain time, etc. According to federal law (26 USC. §3508 (b)), for federal tax purposes, real estate agents will not be treated as employees if a three-part test is met: (1) The agent must be licensed, (2) Substantially all payment is made on the basis of sales or output but not on hours worked, and (3) There must be a written contract between agent and company providing that, for federal tax purposes, the agent will not be treated as an employee. California law contains similar statutes (BPC §10032 (b) and Employment Insurance Code §650). However, California does not provide that agents can be treated as independent contractors for all purposes, even if the three-part test is met. Thus, California firms must carry workers’ compensation insurance for their agents, even if they have an independent contractor agreement. Also, California brokers cannot limit their liability to third parties for the agent’s actions by attempting to claim that the agents are independent contractors. According to an SEC filing by Realogy (corporate parent of Coldwell Banker), the Bararsani suit alleges that Coldwell Banker Real Estate Brokerage Company (CBRBC) “…had misclassified current and former affiliated sales associates as independent contractors when they were actually employees,” and, because of that, “... CBRBC has violated several sections of the California Labor Code including §2802 for failing to reimburse plaintiff and the purported class for business related expenses…” [my emphasis] Among other things, it appears that the suit will ask that the class be reimbursed for dues paid to multiple listing systems and to associations of REALTOR®s. This is not small potatoes.

2016 45HoursOnline, All Rights Reserved Page 183 Consumer Protection Reader, 2016 Edition The Bararsani suit was filed November 15, 2012. In July of 2013, CBRBC filed a demurrer (essentially, a motion to dismiss) asserting that, under California law, the claims were without basis, because all elements of California's three-part test had been satisfied by the company and its agents. The court denied the demurrer, thus allowing the trial court to look at a more complex multi-factor common law test to determine whether there had been a misclassification. There is a 20-factor test that is used in cases where an employee/independent contractor classification is challenged. It is used by the IRS, among others. It includes questions such as, “May the person receive training from or at the direction of the employer?”; “May the person quit work at any time without incurring liability?” Yes answers to these questions indicate an employee relationship. CBRBC appealed, but the appellate court has sent the matter back to the trial court. The suit has been filed as a class-action, which makes it even more complex than it might have been. Currently, the plaintiff’s side is seeking to have a class certified. This means finding a sufficient number of people who fit the plaintiff’s situation. Many Coldwell Banker agents who had been affiliated at the relevant times have been contacted with respect to joining the class. It’s not going to be over soon. No matter what happens at the trial level, you can count on appeals. The ultimate result could have a significant effect on the real estate industry.

2.5.3.3 EMPLOYEE OR INDEPENDENT CONTRACTOR?

by Bob Hunt for Realty Times, February 14, 2012 Copyright© 2012 Realty Times®. All Rights Reserved. Used With Permission. Most real estate brokers and sales agents who work for a brokerage firm are classified as independent contractors. And rightly so. They are paid – via commission splits – on the basis of the results of their work, not on the time or manner of their work. They are expected to operate within the bounds of the law and, if they are REALTOR®s, the REALTOR® Code of Ethics. But, for the most part, the manner in which they conduct their business is up to them. (This is not necessarily so. A brokerage could operate with an employer- employee relationship. Indeed, there are some who do.)

Well, according to the article Generally, there is little reason to question the independent contractor immediately above, this clearly is status of real estate sales agents . Sure, there may be questions now and not so. The conflict arises from the real estate law that requires then about mandatory office meetings, “floor time,” or dress codes; but, on brokers to supervise their agents the whole, brokerage operations satisfy the various tests that may be and the labor laws that state that imposed by agencies such as the IRS, the Department of Labor, and their supervision means the agent is state counterparts. an employee. It is not so clear, however, that the same thing can be said regarding the people who work for real estate sales people. Over the years it has become commonplace for real estate agents to take on assistants. Agents may pay assistants to do all manner of things.

Page 184 2016 45HoursOnline, All Rights Reserved Consumer Protection Reader, 2016 Edition Some may want assistants to engage in activities that require a real estate license, such as holding an open house, and discussing price and terms with prospective buyers who come to it. Others may employ assistants to do more mundane tasks such as bookkeeping, writing and placing ads, or sticking little flags into lawns on the 4th of July. In many cases, assistants may perform both some tasks that require a license and some that don’t. Often, agents who hire assistants will classify them as independent contractors. This may be attractive to both parties. It avoids all sorts of paperwork, much of which is payroll related. The assistant doesn’t have withholding taken out of his or her check; and the agent avoids paying into such things as workers’ compensation, unemployment insurance, or Social Security. A win-win, right? Not in the eyes of the California Legislature. In October of 2011 the California Governor approved SB 459 (Corbett), a bill which would “prohibit willful misclassification, as defined, of individuals as independent contractors.” The bill became effective January 1, 2012. Now, everyone already knew that you weren’t supposed to willfully misclassify those who you paid as independent contractors. But the provisions of SB 459 gave some teeth to that admonition. The bill provides for penalties of $5,000 – $15,000 for each violation and up to $25,000 for those who have engaged in a pattern or practice of willful misclassification. Proponents of the bill pointed to two distinct areas of concern: (1) employees who are misclassified lose a variety of benefits and protections such as minimum wage, overtime, workers’ compensation, and unemployment insurance; (2) the State of California is estimated to have lost in the neighborhood of seven billion dollars in tax revenues over the years as a result of misclassifications. So if a bureaucrat in the Labor Commissioner’s office believes a business has deliberately misclassified its “employees” as independent contractors, the bureaucrat’s office can fine that business five to fifteen thousand dollars per employee and refer the purported violation to both the FTB and the IRS. These two taxing authorities could then be expected to assess the business heavy fines, penalties, and demands for back taxes. Furthermore, the business would then be required to damage its good will by posting an announcement of its purported violation on its website thereby making the business a potential target for a class action suit from former workers for unpaid social security taxes and other benefits which the law requires employers to provide its employees.

In your editor’s opinion this law serves to intimidate businesses into classifying their workers as employees even when they are actually independent contractors. (See this article for a legal critique of the law.)

NOTE: As of January 2016, we could find no news that the law has been used to penalize any company. It’s yet another law that Sacramento enacts to instill fear but doesn’t have the will to apply. The State of California is not the only government entity concerned about this. The U.S. Department of Labor has signed agreements with Colorado, Connecticut, Hawaii, Illinois, Maryland, Massachusetts, Minnesota, Missouri, Montana, Utah, and Washington to work together to target employers who are guilty of misclassification. Why? The U.S. Government

2016 45HoursOnline, All Rights Reserved Page 185 Consumer Protection Reader, 2016 Edition Accountability Office conducted a study that found “employee misclassification cost the United States Government $2.72 billion in revenue from Social Security, unemployment, and income taxes in 2006 alone.” To be sure, real estate agents who hire assistants, marketers, coordinators, schedulers, etc. and call them independent contractors are not the biggest fish the Department of Labor and State agencies have to fry. But it’s a net you wouldn’t want to get caught up in. Sales agents and brokers who are hiring staff and assistants would do well to review their employment classifications. One thing to remember for sure: just because your assistant is a licensee doesn’t mean that he or she is an independent contractor.

2.6 SETTLEMENT

2.6.1 DISCLOSURES

2.6.1.1 RESPA APPLIES TO MANY SETTLEMENT PROVIDERS

by Bob Hunt for Realty Times, April 22, 2014 Copyright© 2014 Realty Times®. All Rights Reserved. Used With Permission. Our recent discussion of RESPA, like similar discussions before it, prompts more questions than answers. Perhaps it will always be so. When talk of RESPA enforcement arises, it seems there is always someone who can figure out an exception or some way to work around the rules as they have been understood. A recent U.S. District Court ruling (Henson and Turner v. Fidelity National Financial, Inc, 2014) moves the ball forward toward achieving understanding regarding two issues: (1) What sorts of entities are covered by RESPA regulations? and (2) Can payments be considered (referrals) even if they are not tied to particular transactions? We remind ourselves that RESPA does not prohibit referrals per se. Rather, it prohibits certain people from getting paid, or paying, for referrals where the referral is for “business incident to or a part of a real estate settlement service involving a federally-related mortgage loan…” This prohibition applies only to transactions involving residential properties up to and including four units. Moreover, referrals between real estate brokerages are exempted. So, to whom does RESPA apply? It is clear that real estate agents and brokerages, title companies, escrow companies, and mortgage lenders are covered; but questions have been raised about providers of services that seemed less central. In 2010, HUD responded to a request from NAR® asking for clarification regarding referral compensation being paid to agents and brokers by home warranty companies. HUD’s position was that the provision of a home warranty policy is a settlement service, and it would, therefore, be illegal under RESPA to receive payment for referring such business. (A subsequent attempt, in 2012, to have Congress declare that

Page 186 2016 45HoursOnline, All Rights Reserved Consumer Protection Reader, 2016 Edition home warranty companies were not covered settlement service providers passed the House as H.R. 2446, but died in the Senate.) In the case at hand, plaintiffs contended that the defendant’s subsidiaries (title company escrows) were receiving prohibited kickbacks from delivery services UPS, Federal Express, and OnTrac. In its motion to dismiss, defendant Fidelity argued that “it would ‘produce absurd results’ to subject companies like Kinko’s and Staples to RESPA regulation for tangential services they might provide in real-estate settlements.” But the Court said, “There is no serious dispute that the overnight delivery services were ‘provided in connection with a real estate settlement’… ” Moreover, it went on to assert, “Neither would it be ‘absurd’ to subject companies like the delivery companies, Staples, and Kinko’s to RESPA regulations. Congress has not exempted delivery and office-supply companies from the prohibition against kickbacks and unearned fee- splitting. It is therefore not up to the courts to engraft such an exemption onto the statute.” The defendants also argued that the fees it received were not referrals but, rather, were marketing fees. However, the plaintiffs had argued that the periodic fees received by the defendant fluctuated and were based on the volume of business referred. The Court agreed with plaintiffs that “a prohibited referral agreement need not be connected to a particular transaction...” It said, “when ‘a thing of value is received repeatedly and is connected in any way with the volume or value of the business referred, the receipt of the thing of value is evidence that it is made pursuant to an agreement or understanding for the referral of business.’” “[T]he prohibited referral agreement need not be linked to each particular real-estate settlement …” The points made in Henson and Turner v. Fidelity won’t settle all the questions about RESPA but they have provided more clarity than we had before.

2.6.1.2 BEWARE: THERE’S A NEW RESPA SHERIFF IN TOWN

by Bob Hunt for Realty Times, March 31, 2014 Copyright© 2014 Realty Times®. All Rights Reserved. Used With Permission. When it comes to enforcement of RESPA, there’s a new sheriff in town and it is increasingly apparent that he takes his job seriously. The sheriff is the CFPB (Consumer Finance Protection Bureau), a creation of the Dodd- Frank Act. While it is not exactly new - the Bureau began operations in July of 2011 – the real estate industry is just beginning to understand the extent of the CFPB’s regulatory powers and the aggressiveness with which it is exercising them. Recently, RESPA News provided an analysis of CFPB’s 2013 enforcement actions as well as an overview of the Bureau’s powers. Unlike HUD, which was previously charged with RESPA enforcement, the CFPB can initiate civil actions in its own name, with its own attorneys. HUD, like other executive agencies, had to present their cases to the Department of Justice, which would then review the matter and decide whether or not to proceed with a suit.

2016 45HoursOnline, All Rights Reserved Page 187 Consumer Protection Reader, 2016 Edition The analysis went on to point out that, if CFPB determines that a law has been violated, it can impose significant sanctions including rescission, refund of money, payment of damages, public notice regarding the violation, and civil money penalties. These monetary penalties include: $5,000 per day for violation of a consumer protection law, $25,000 per day if the violation is deemed reckless, and up to $1 million per day for any violation committed knowingly. Gary Kidder, managing partner of Weiner Brodsky Kidder PC, says if the penalties seem surreal, “... the reality is they were put into Dodd-Frank to be a game changer.” Not only are the possible financial penalties harsh, but also, according to Gary Cunningham, former Deputy Assistant Secretary at HUD, “If the CFPB files suit, the defendant can expect a broadly circulated press release in its home market and elsewhere in industry publications, which state complaint allegations as facts ... and seems intended to be very harmful to the defendant’s reputation ...”

It is no surprise then, that real estate brokerages are being advised to “stay out of the CFPB’s crosshairs.” Cunningham says, “Companies must

seriously review all of their policies and procedures that are subject to CFPB enforcement to be sure they fully comply... From a RESPA perspective this January 2016: We have never includes affiliated business rules and, I expect, marketing agreements ... the heard of an individual being CFPB is not backing off. Stay away from the gray areas.” charged with a RESPA violation nor have we been able to find a Moreover, RESPA News warns, “Don’t think that because you are a small single report on the Internet of an company that the bureau will overlook you... In fact, the CFPB has begun to individual charged with a RESPA violation. target individuals as well as companies ...”  There is, I suspect, a tendency for individual agents and teams within a January 2014: The team is the brokerage to think that they are under the radar of agencies like CFPB and Creig Northrop Team which is affiliated with Long & Foster Real that it is the brokerage, not they, who should worry about things such as Estate Inc. in Maryland. This is RESPA enforcement actions. Not so. Indeed, one of the news-making no small concern; it has five items in recent months has been a U.S. District Court’s certification of a locations throughout Maryland major class-action suit against a team within a major brokerage . The and was ranked No. 2 in the US last year (source). brokerage itself was dismissed. And the charge? That illegal kickbacks were being funneled to the team through a sham marketing agreement.

Those who wish to review their marketing agreements (often referred to as MSAs, for Marketing Service Agreement) would do well to consult an article “It’s Time for a RESPA Checkup ”) by the deservedly well-known RESPA attorney, Phillip Schulman. Although written several years ago, it is not only still relevant, it is especially relevant. Schulman points out that a marketing agreement will satisfy RESPA requirements if it meets two conditions: (1) The payment recipient performs real marketing services; and (2) the marketing fee is commensurate with the fair market value of the services performed and is not paid on a per- transaction basis. He advises that a marketing agreement should be written and should contain a list of the actual services and he recommends that “the parties to a marketing agreement create a reporting system under the agreement to ensure all services are performed and measure the level of performance.” As to the payment for marketing services, he emphasizes that it should be a flat fee that is “not tied in any way to closed transactions or to the success

Page 188 2016 45HoursOnline, All Rights Reserved Consumer Protection Reader, 2016 Edition of the marketing arrangement.” Schulman acknowledges that there is no “one-size-fits-all approach” for determining the fair market value of marketing services. But he does say that “one important factor to consider when determining fair market value is the size of the [entity] performing the services.” A large brokerage can produce more marketing materials and reach a large customer base than a small one. Size matters. If, for example, a five-person team were receiving compensation comparable to that of a 100-agent brokerage, it would suggest that the team was being paid for something more than marketing services. The new sheriff would be interested. January 19, 2016: Republicans might be shooting the new sheriff this time next year should one of their candidates win the White House on November 4th of this year. Most if not all of the current GOP candidates are hostile to Dodd/Frank (the law that created the CFPB) and several are on record favoring its repeal (Trump, Carson, Cruz, Paul, and Huckabee). (Source)

2.6.1.3 POCKET LISTINGS REQUIRE DISCLOSURE

by Bob Hunt for Realty Times, April 9, 2013 Copyright© 2013 Realty Times®. All Rights Reserved. Used With Permission. Pocket listings have never really been gone – they occur in all kinds of markets – but they seem to be back now in a big way. And a lot of people – real estate agents in particular – are not happy about it. Articles debating their value and impact have appeared on the NAR® web site, Realtor.org, and pro and con opinions have been weighed in on real estate sites throughout the blogosphere. The term “pocket listing” has more than one use. Sometimes it is used merely to refer to a situation where a homeowner has, without a contract being signed, told an agent that he has some interest in selling and would entertain an offer if the agent brings a buyer. There really is not much controversy, nor much enthusiasm, about pocket listings in this sense. The kind of pocket listing that generates controversy is the situation where an agent does have a listing contract but the listing is not entered into the Multiple Listing System (MLS). In most MLS organizations this practice is generally prohibited. The California Regional Multiple Listing System (CRMLS) requires “Broker participants shall input exclusive right to sell or exclusive agency listings on 1-4 unit residential property types, and vacant lots located within the service area of the MLS within two business days of the start date of the listing.” Other MLS organizations have similar requirements. Most will also have an exemption provision. At CRMLS the exemption is stated this way: “If the seller(s) refuses to permit the listing to be disseminated by the MLS, within two business days, the listing broker shall submit to the MLS a certification signed by the seller(s) that the seller(s) does not authorize the listing to be disseminated by the MLS.” Other systems may have a variation on this. For example, the CRMLS exemption does not require that the seller’s certification appear on a particular form. Other systems may provide that a particular verbiage is required. CRMLS requires that the certification be submitted to the MLS. (I can guarantee

2016 45HoursOnline, All Rights Reserved Page 189 Consumer Protection Reader, 2016 Edition that this does not happen 100% of the time.) Other systems might find it satisfactory simply that such a certification be on file with the listing broker. CAR® produces a form that can be used in this situation, “Seller Instruction to Exclude Listing From the Multiple Listing Service or Listing Information from the Internet (Form SEL). ” The SEL contains language that goes to the heart of the controversy about pocket listings. That is, it makes it clear to the seller that, by keeping the property out of the MLS, the seller is reducing the property’s potential exposure to the market place. First, the form explains, “It is likely that a significant number of real estate practitioners in any given area are participants or subscribers to the MLS. The MLS may also be part of a reciprocal agreement to which other multiple listing services belong.” It then notes, “Listing property with an MLS exposes a seller’s property to all real estate agents and brokers who are participants or subscribers to the MLS, all real estate agents and brokers receiving access to the MLS by way of an MLS reciprocal agreement, and potential buyer clients of those agents and brokers.” The opt-out section then reads, “If this option is checked, Seller certifies that Seller understands the implications of not submitting the Property to the MLS.” The SEL allows for the listing to be withheld from the MLS either for a period of days or for the entire duration of the listing. We won’t debate the wisdom or the ethics of pocket listings here, but we do note that if one is to be used, it’s a good idea for both the seller and the agent to use a form like the SEL. By signing it, the seller indicates that he understands what’s going on. And that’s a good thing. Advantages of Pocket Listings to Sellers: A pocket listing can be attractive to sellers because it potentially offers greater privacy, convenience, and flexibility than an MLS listing, according to Alexander Clark, an agent at Zephyr Real Estate in San Francisco, and founder of PocketListings.net, a website that promotes pocket listings. “Most of the people who go the pocket listing route do so because of privacy. That’s why a lot of movie stars, wealthy people, and high-profile people sell their property without sharing it on the multiple-listing service,” Clark says. A pocket listing also can allow sellers time to repair and stage their property, resolve personal concerns they may have about selling their home, and even price-test the market before they commit to a sale, explains Wendy Furth, a REALTOR® and assistant manager at Rodeo Realty in Calabasas, California. “One reason a seller might want to stay as a pocket is because they figure (the broker) can just fish for buyers. It’s perceived as being no-muss, no- fuss, no for-sale sign, no open houses, just find a buyer,” she says. (Excerpted from this article.)

by Bob Hunt for Realty Times, December 26, 2012 Copyright© 2012 Realty Times®. All Rights Reserved. Used With Permission. Apparently, it is a law of the political universe that, if there is an occurrence of a disaster – either natural or man-made – it shall be followed by the creation of new laws and/or regulations. In September of 2010, a disaster occurred in San Bruno, California when a natural gas pipeline ruptured and exploded . Eight people were killed, dozens were injured, and there was extensive property damage. Image from the Explosion – eight people died. It took a while, but the laws are beginning to emerge. In May of 2012 both houses of the California legislature passed AB 1511. It was approved by the Governor in July and will become effective July 1, 2013. The bill requires “all contracts for the sale of residential real property entered into on or after July 1, 2013, to contain a specified notice pertaining to gas and hazardous liquid transmission pipelines.” The notice says this: This notice is being provided simply to inform you that information about the general location of gas and hazardous liquid transmission pipelines is available to the public via the National Pipeline Mapping System (NPMS) Internet Web site maintained by the United States Department of Transportation at http://www.npms.phmsa.dot.gov. To seek further information about possible transmission pipelines near the property, you may contact your local gas utility or other pipeline operators in the area. Contact information for pipeline operators is searchable by ZIP code and county on the NPMS Internet Web site.

Upon delivery of the notice, “the seller or broker is not required to provide information in addition to that contained in the notice regarding gas and hazardous liquid transmission pipelines …” AB 1511 started out differently. Originally, it would have required “…the expert report, commonly used to fulfill the natural hazard disclosure requirements, to include a specified ‘Notice of Possible Transmission Pipeline’ if the property for sale is located within 1,100 feet of a gas transmission or hazardous liquid pipeline.” As noted by the Assembly legislative analyst, “These expert reports are prepared for a fee by third- party hazard disclosure providers who, under existing law, thereby assume the liability for making determinations of proximity to hazards …”

A clever observer might have noticed that this would have effectively required a Natural Hazard Report in every transaction (they occur in most Click here to go to NHDirect, a company which provides Natural anyway). Moreover, it would have to be by a provider that included a Hazard Disclosure reports. pipeline report. Surprise. The bill was supported by two companies that had ramped up their products to include pipeline reports.

However, the bill was also opposed by other Natural Hazard Disclosure companies. Why? Because they felt that the NPMS (National Pipeline Mapping System) was not a good source of data on which to base a mandatory disclosure. It was pointed out – and there was no disagreement – that the NPMS maps had a margin of error of ±500 feet . This, they said,

2016 45HoursOnline, All Rights Reserved Page 191 Consumer Protection Reader, 2016 Edition could lead to either a false sense of alarm or a false sense of security. Further, it was clear that these companies did not want to be put in a position of assuming liability when the data base available was so sketchy. The result, then, was a compromise. Let the consumer decide. Essentially, the consumer is told, “Here is a website you can go to. Go look for yourself and make your decision.” In that respect, the “disclosure” is much like that for Megan’s law. No one says for sure that a given sex offender is or is not located within a certain distance of the subject property. Rather, the buyer is told to go look at the website – not a model of being accurate and/or up-to-date – and is advised to make his own decision. The NPMS website contains maps for the entire country, not just California. Again, the address is http://www.npms.phmsa.dot.gov. Check it out for yourself. January 2016: I did but the maps were hard to find and once found didn’t function well. But I did discover that there is an oil pipeline a few hundred feet from my home in Woodland Hills that delivers oil pumped from the fields in Santa Paula to a refinery in Long Beach refinery.

2.6.2 APPRAISALS

2.6.2.1 COMMUNICATION BETWEEN APPRAISERS & AGENTS

by the Realty Times staff, December 3, 2013 Copyright© 2013 Realty Times®. All Rights Reserved. Used With Permission. Issues with appraisals continue to impact real estate transactions but better communications between real estate agents and appraisers could help to minimize problems, according to panelists at a property valuation forum at the 2013 REALTOR®s Conference and Expo. Most of the attendees were both sales agents and appraisers. Lenders implemented tighter lending standards in recent years and appraisers must be able to conduct independent and impartial valuations due to increased government regulations. These requirements have left real estate agents and appraisers confused about what can or cannot be discussed during the appraisal process and with whom agents can talk to if they have a complaint about the results of an appraisal. John Anderson with Twin Oaks Realty Inc. in Crystal, Minn., said he recently asked a group of real estate agents to identify their primary concerns for the year ahead. “Eighty to ninety percent of those agents said appraisals were the top issue facing them in 2014,” he said. “I’ve personally had more appraisal problems in the past year than I’ve had in the past three decades.” Anderson insists on being at a property when the appraiser arrives. “I present documents and information about the property which might include comparable properties that were ‘pocket listings,’ those sold outside of a multiple listing service,” he said. “There is a misconception among some appraisers about the ability to communicate but I present them with a folder of materials for them to consider.” In today’s market, home appraisals that fail to provide credible valuation can postpone or cancel sales. Valuations that are not credible can be the Page 192 2016 45HoursOnline, All Rights Reserved Consumer Protection Reader, 2016 Edition result of lenders or Appraisal Management Companies (AMC) assigning appraisers that do not have the necessary competency, such as geographic expertise, to complete an appraisal report. Vic Knight, an appraiser with Chapel Hill Appraisals in Raleigh, N.C., said timing is important in communicating with appraisers. “The window of opportunity to communicate with an appraiser is before the valuation is made. Once that window closes, you can ask for a correction of errors, or seek clarification,” he said. Buyers, sellers, and REALTOR®s are free to ask appraisers or lenders to consider additional property information, documentation, and comparisons. They may discuss the unique conditions of a home and its neighborhood with appraisers. Once an appraisal has been completed, any communications about errors or offers of additional information must be with the client who ordered the appraisal, generally the lender. Anna Ruotolo, vice president of business development at Opes Advisors, San Francisco, with over 30 years of experience in the mortgage industry, said upfront communication is vital. “I wouldn’t let an appraiser enter a home without being present, so I have an opportunity to provide them with information about the property,” she said. “You can conversationally determine their geographic competency by asking how often they’re in the area or if they’re aware of a particular development.” Marty Wagar, an appraiser with Midwest Appraisal Management Group in Portage, Mich., said the intent of an AMC is to provide a firewall between lenders and appraisers. “AMCs should be charged with having local competency rather than focusing on speed and cost,” he said. “The primary consideration for an appraiser is geographic competency, regardless of where the appraiser lives or his or her access to local MLS data.” Wagner said some lenders create problems by prohibiting any communications even if it doesn’t involve valuation. Another issue is regulating a healthy real estate market with standards that were drawn up during a downturn. “As for geographic competency, it’s perfectly fine to ask a lender how their appraisals are distributed.” John Ebner, managing director and mortgage advisor at Opes Advisors, described the recourse that might be available after an appraisal is complete. “Possibilities regarding an error include a comparable property that should have been used or excluded or adjustments for comparable properties which can be presented for consideration. It’s not easy to get a change but it can be done.” Appraisal standards are improved continuously as qualifications and standards of the Uniform Standards of Professional Appraisal Practice are strengthened. The continued evolution of the USPAP helps ensure that appraisers are competent with independence and integrity. In February 2012, NAR® adopted the Responsible Valuation Policy. It serves as a guide for members and staff in advocacy efforts for federal legislation and regulatory policy. This statement of policy, aside from the NAR® Code of Ethics, offers guidelines for REALTOR® members and is not intended to impose new or additional standards of practice. 2016 45HoursOnline, All Rights Reserved Page 193 Consumer Protection Reader, 2016 Edition 2.6.2.2 THE VALUE OF YOUR HOME IS GOING UP IN SMOKE

by Lew Corcoran for Realty Times, September 30, 2013 Copyright© 2013 Realty Times®. All Rights Reserved. Used With Permission. If you’re a cigarette smoker and you smoke in your home, then you’re causing your home’s resale value to go up in smoke. A recent study commissioned by Pfizer Canada, a pharmaceutical manufacturer, has found that smoking in your home can reduce its resale value by as much as 20% or more. Third-hand cigarette smoke is that smoke that lingers long after the second-hand smoke has cleared out. It can settle on carpets, drapes, dust, furniture, countertops, and every other area of a room. The tar and nicotine from cigarette smoke will also adhere to walls and ceilings, turning them from white to an ugly brownish-yellow . If you have wallpaper, turn it back a little at the ceiling and you’ll see what I mean. According to researchers at the Lawrence Berkeley National Laboratory in California, people “can be exposed to third-hand smoke through inhalation, ingestion or skin contact.” Further, they say, third-hand smoke “can damage human cells and is a carcinogen that can affect people’s health.”

“Tobacco-specific nitrosamines, some of the chemical compounds in third- hand smoke, are among the most potent carcinogens there are,” according to Lara Gundel, a Berkeley Lab scientist and co-author of the study. The study also reports that it found third-hand smoke in dust and on surfaces of rooms more than two months after the former home owners had moved out. “Vacuuming, wiping surfaces, and improved ventilation don’t do much to reduce this nicotine contamination,” Lawrence Berkeley researchers say. If you have lingering cigarette smells in your home, you’ll find that prospective homebuyers won’t linger too long in your home and will quickly move on. Almost 90% of real estate agents surveyed say that it’s very difficult to sell a home where the owners smoked indoors. What can you do to eliminate third-hand cigarette smoke in your home? You can forget about Rug Doctor. And don’t bother calling Stanley Steamer either. You’ll have to replace the carpets and drapes, and repaint the walls and ceilings. And if you must smoke, consider smoking in the great outdoors. Googling “cleaning smoker’s home” will yield several articles describing how to clean homes formerly occupied by heavy smokers. Some experts advise not painting over the smoke-stained walls claiming that the paint won’t adhere to the tobacco oils clinging to the walls.

by Bob Hunt for Realty Times, April 16, 2013 Copyright© 2013 Realty Times®. All Rights Reserved. Used With Permission. In many parts of the country the market is hot and prices have come roaring back. This presents a problem for appraisers and, therefore, it presents a problem for buyers who, typically, have a contingency (often as part of a loan approval contingency) that the property must appraise for at least the contract price. In many areas, sellers are insisting that buyers must waive any appraisal contingency. Often, buyers are willing to do this; but certainly risks are involved. The problem is not uniquely new. Many agents have experienced this sort of market phenomenon before. On the one hand, there is excess demand; thus, prices rise. On the other hand, lenders continue to be cautious and appraisers are not only cautious but also are bound by data that is more reflective of what has happened than what is happening now. As a result, it is not uncommon for appraisals to come in at a lower price than the one that was agreed to by buyer and seller. What happens then? If the appraisal contingency has been waived, the scenario may go something like this: The agreed-upon price is $400,000. The buyer proposes to obtain an 80% loan ($320,000) and to put 20% down ($80,000). But, at the seller’s insistence the buyer waives any appraisal contingency. If the property appraises at less than $400,000, he will make up the difference. Suppose, then, that the property appraises for $380,000. The lender, who is willing to put up 80% of appraised value, is now going to give a loan of $304,000. Normally, that would kill the deal, but, if the buyer has waived the appraisal contingency he will have to come up with $96,000 down, rather than $80,000.

Appraisal Congency Clause from CAR®’s Residential Purchase Agreement Of course the appraisal might have been even lower. That would require the buyer to put down even more money. One strategy that buyers can try in these situations is to put a cap on how much they might have to come up with. For example, a buyer might say, “If the property doesn’t appraise, I will come up with the difference up to a certain amount, $xxx. If more is required, the seller will have to reduce the price proportionately.” Naturally, depending on the seller’s perception of the market such a strategy may or may not be acceptable. Sometimes buyers are told something like this: “Don’t worry about waiving the appraisal contingency; you can always get out of the transaction on the basis of some other contingency [usually inspections].” Real estate agents ought never to say this. For one thing, by common law, contracts – such as real estate contracts – have an implicit covenant of good faith and fair dealing. Sometimes, as in the contract produced by CAR®, this covenant is made specific. You can’t just make up some reason for getting out. Also, there are timing issues. The speed at which appraisals occur and are completed is notoriously difficult to predict. Regrettably, it is common for 2016 45HoursOnline, All Rights Reserved Page 195 Consumer Protection Reader, 2016 Edition the appraisal to occur relatively late in the transaction period. Now, in California for example, the inspection period is usually seventeen days (it can be changed by mutual agreement). It would not be at all unusual for the appraisal to occur after that period had run. Which is to say, by the time the appraisal comes in it will probably be too late to get out of the contract on the basis of an alleged inspection deficiency. A buyer’s agent in a no-appraisal-contingency is in a dicey position. Buyers want what they want and will pay what they are willing to pay. But they look to their agents for guidance. While I, personally, don’t think we are in a bubble about to pop, we could be. And among those buyers who agreed to pay over appraised value, some are liable to be aggrieved. Hard as it is to believe, some might come back after their agents. CAR® produces a form entitled “Market Conditions Advisory (MCA).” Among other things, the form specifies that a purchase price offered by a buyer is his decision, not the agent’s. Moreover, it states that making an offer without contingencies, such as the appraisal contingency, is not recommended by the broker. The MCA was a product of the bubble years. It is becoming relevant again. Especially if buyers are willing to waive appraisal contingencies.

2.6.3 OFFERS AND ESCROWS

2.6.3.1 WHAT HAPPENS WHEN PRINCIPAL REFUSES TO SIGN?

by Bob Hunt for Realty Times, June 15, 2015 Copyright© 2015 Realty Times®. All Rights Reserved. Used With Permission. Many of us have experienced clients who were so upset about something gone wrong in a transaction that they no longer wanted to have anything to

do with it. Really – just a refusal to participate in any way. Back is turned. A defiant Arms are folded. Fists are clenched . They won’t sign cancellation client. instructions, won’t sign for return of deposit, won’t sign a grant deed, nothing. Whatever needs to be done, they are not going to do it.

Well, what happens then? Can a court, make them sign a document? Not really. (The court might punish someone for not signing; but that is a different issue. It doesn’t get the document signed.) But what the court can do is to appoint someone else to sign on their behalf. The case of Blueberry Properties v. Esther Khoe Chow, 2014 is instructive.

In June of 2011, Ms. Chow entered into an agreement to sell her apartment complex in Los Angeles. However, as sometimes happens, she

subsequently changed her mind. She even returned the deposit money that Blueberry had placed into escrow. But Blueberry was not in agreement with her change of heart. Blueberry went to court and sued for specific Specific Performance: An order performance . In July of 2012, the parties entered into a settlement of a court which requires a party to perform a specific act, usually whereby Chow agreed to sell the property to Blueberry in accordance with what is stated in a contract. the terms of their original agreement. Unfortunately, Chow failed to comply with the settlement. She withheld her signatures from the documents necessary to reopen and complete the sale.

Back to court. This time the court issued a judgment which, among other things, said “Esther Chow [is] ordered to do all things necessary and to Page 196 2016 45HoursOnline, All Rights Reserved Consumer Protection Reader, 2016 Edition execute all documents necessary to consummate the sale by Defendant, Esther Chow to Plaintiff, BLUEBERRY PROPERTIES…” Alas, Ms. Chow again refused to sign the escrow documents. This time Blueberry went back to the court and asked for an order appointing an elisor . An elisor is someone the court appoints to sign and/or act on behalf of some other person. The court issued such an order. So Ms. Chow appealed the appointment of an elisor. The Second Appellate District Court didn’t think much of Ms. Chow’s arguments and/or behavior. They upheld the order appointing an elisor. Ms. Chow’s signatures are no longer needed. The trial court appointed the clerk of the court as elisor to execute an escrow agreement on behalf of the seller. The appellate court affirmed the trial court’s order because it was proper under Code of Civil Procedure §664.6 – a code section which empowers the court to compel obedience to its judgments. (Source) Commenting on this case in the California Real Estate Law newsletter, attorney Julia Wei says: “The Buyer’s right to specific performance is nearly absolute and though the remedy may take a number of litigation efforts to enforce, the Seller does not actually need to sign any of the documents in order for the transfer of the property to occur.”

2.6.3.2 A “KICK-OUT CLAUSE” CAN PROTECT HOME SELLERS

by Benny L. Kass for Realty Times, July 14, 2015 Copyright© 2015 Realty Times®. All Rights Reserved. Used With Permission. Question Mr. Kass: We were about to sign a contract to sell our house to a very nice couple, when they advised us they cannot afford to buy our house unless they sell their house first. We would like to sell to this couple but are reluctant to take our house off the market for an indefinite period while the buyers try to sell their house. How do you resolve this dilemma? Answer: There is a concept in real estate called “the kick-out clause,” which may solve your concerns. No one likes to sign contracts which are contingent on the purchasers’ ability to sell their own house. Unfortunately, not everyone can afford to buy a new home until they sell their current property. And even if you can afford to carry the financial burden of two houses, many prospective home buyers still prefer to include a contingency in their contract to the effect that they do not have to purchase the new property until and unless their current home is not just under contract but actually is sold. Generally speaking, when buyers present sellers an offer to purchase, they can include a contingency for the sale of their house. This is known as a “contingent contract.” In simple English, this means that if the specified event does not occur – in this case the buyers do not sell their house – then the contract to purchase the new property becomes null and void and the purchasers are entitled to a full refund of any earnest money deposit. Needless to say, as you have suggested, sellers do not want to take their house off the market for an indefinite period. Accordingly, a compromise has been developed which is known as a “kick- out” clause. Under this arrangement, the contract provides that while the

2016 45HoursOnline, All Rights Reserved Page 197 Consumer Protection Reader, 2016 Edition sellers are willing to accept a contingency contract, the sellers will continue to market the house. If another qualified buyer is found, the seller will give the current purchaser a certain amount of time – usually 72 hours – in which to remove the contingency (i.e., keep the contract alive) or exercise the contingency and decide not to purchase the new property. This kick-out clause has to be carefully drafted. If the potential purchasers are confronted with the 72 hour kick-out period and decide to delete (remove) the sale contingency, they may still be able to get out from under the original contract if they cannot get financing. Keep in mind that most standard sales contracts also contain another contingency on the ability of the purchaser to obtain the necessary financing. This creates a dilemma for everyone. If the purchasers remove the sale contingency but still have the financing contingency in the contract, it is likely that a lender will not give a binding loan commitment to the purchasers unless they sell their house first. Thus, the mere removal of the sale contingency does not meet the seller’s needs. The purchaser can still find an excuse to back out of the contract based on another contingency in the contract. Thus, sellers should include at the very least the following language in the 72 hour kick-out clause: The parties agree that sellers’ property shall remain on the market during the above contingency period. If the purchaser does not remove the above contingency and provide evidence satisfactory to seller in their sole discretion of ability to perform under the terms herein within (a specific number of) hours after receipt of written notice that seller has accepted a secondary contract, purchaser’s deposit shall be promptly returned in full and the first contract automatically becomes null and void.

CAR® form “Contengency for Sale of Buyer’s Property (Form COP) ” may be used by the buyer to make his purchase contingent to the sale of his home. Paragraph 7 of that form is the form’s kick-out clause. Click here for an explanation of how to use the form.

2.6.3.3 TAX RETURNS ARE NOT SACRED

by Benny L. Kass for Realty Times, July 28, 2014 Copyright© 2014 Realty Times®. All Rights Reserved. Used With Permission. Question to Mr. Kass: Last week, I went to settlement on my first house. The settlement clerk at the title company had me sign a number of papers – most of which I did not understand. However, one document was an IRS Form that appeared to give carte blanche authority to the holder to access my income tax returns. When I questioned why I had to sign this form, I was told “the lender wants it.” I was also told not to fill in the date after my signature. Is it customary in real estate closings to require such a form and, if so, why does the lender want it?

After October 2015, the CFPB Answer: When I first started practicing law, homebuyers only had to sign required that the HUD-1 be three legal documents when they went to settlement: a promissory note, replaced with the Closing Disclosure (source). the deed of trust (the mortgage), and a settlement statement (now called a HUD-1) .

Nowadays, every time there is a lawsuit involving mortgage lending or whenever a regulatory body issues a new rule, lenders add new forms to their arsenal. And the new regulatory body that has issued a number of new rules (requiring new documents) is the CFPB. So when buyers go to closing today, in addition to the note and deed of trust, here is a sample of the other documents they have to sign (or already signed): loan application, authorization to obtain a credit report, driver's license information, certificate that they will personally reside in the house, power of attorney to lender to correct typographical mistakes, proof that they are American citizens, an affidavit that there are no liens or lawsuits pending against them, and an IRS form stating that they do not owe any back taxes and are not subject to “withholding” requirements.

The original article referenced a In addition, lenders insist that borrowers sign IRS Form 4506-T , entitled slightly different form, Form 4506: “Request for Transcript of Tax Return” . In my opinion, this is the most “Request for Copy of Tax Return.” See the note at the objectionable documents required at settlement. By signing this form, you end of this article for an are giving a blank check to the holder of the document to have complete explanation of the differences access to your Federal Income tax return(s). It is a virtual invitation to pry between these two forms. into what you thought are your private tax returns.

Lenders claim they need this form in case they subsequently discover irregularities, fraud, or misrepresentations on the part of their borrowers. If shortly after settlement the borrower stops making the mortgage payments, the lender wants the right to investigate whether the borrower was telling the truth when they applied for the loan. And, according to the lending community, reviewing past and future income tax returns will assist them in this determination. As we all know, mortgage lenders rarely keep the loans they make in their own portfolio. They sell the loans in the secondary mortgage market so that they will have more money to make more loans. This means that any subsequent lender who holds your mortgage document has the right to ask the IRS for copies of your tax returns. This also means that your social security number – which must be listed on Form 4506 – can be found in a file drawer somewhere in the United States (or for that matter if the papers are sold internationally, anywhere in the world.) Why did your lender ask you not to date the form? According to the instructions that accompany Form 4506, the IRS advises they will reject the request unless it is received within 60 days of the date signed by the taxpayer. Since the lender does not know when it will ask the IRS for a copy of your tax return, they want you to leave the form undated. Presumably, the lender will fill in the date at a later time. But this is contrary to the clear instructions provided by the IRS on the top of the form: “Do not sign this form unless all applicable lines have been completed”

2016 45HoursOnline, All Rights Reserved Page 199 Consumer Protection Reader, 2016 Edition “Request may be rejected if the form is incomplete, illegible or any required line was blank at the time of signature.”

A careful reading of the form indicates that the holder can request more than one tax year income tax return. If you review this form (which is available on the IRS web site paragraph 7 is entitled “tax year requested,” and has blanks for up to eight tax years. In fact, the IRS specifically states on the form that “if you are requesting more than eight years or periods, you must attach another Form 4506.” The answer to your question is yes; it is customary in the industry that this form is required. But the bottom line is that if you want that mortgage loan, you have to comply with all of the lender’s requirements – reasonable or not. Conversely, how do you get your own information from the IRS. According to the IRS, in Summer Tax Tip 2014-11, if you can’t find your copies, you can get a transcript of the information you need, free online. “A tax account transcript includes your marital status, the type of return you filed, your adjusted gross income and taxable income.” (Use the IRS “Get Transcript Tool”). And if you really need an earlier tax return, you can use Form 4506T-EZ. The original of this article referenced IRS Form 4256: “Request for Copy of Tax Return” vs. the form which I believe lenders actually use, IRS Form 4256-T: “Request for Transcript of Tax Return”. IRS explains the differences between a transcript and copy here. A copy is an actual photo- copy of the return; a transcript is just the numbers that have been transcribed into digital format. The important distinction for the lender is that a copy of a return costs $50 and takes up to 75 days to receive whereas a transcript of a return costs nothing and can be received within a day or two. Last week (Feb. 2015) I refinanced my home. In the huge packet of documents my lender required me to sign was IRS Form 4256-T. Whereas the last time I refinanced my previous lender had left the line for tax years blank, this time the form specified three tax years: 2012, 2013, 2014. I found this reasonable since I had already furnished my lender with copies of my 2012 and 2013 returns and I found it reasonable that he might want to see my yet-to-be completed 2014 return in the event I should default on my new loan.

2.6.3.4 ESCALATION CLAUSES ARE BACK: HANDLE WITH CARE!

by Bob Hunt for Realty Times, February 19, 2013 Copyright© 2013 Realty Times®. All Rights Reserved. Used With Permission. One sure sign that the market has heated up is that not only have multiple offer situations become commonplace, but also that offers with escalation clauses are showing up in those situations. In this context, an escalation clause in an offer says that the buyer will pay some fixed amount more than any competing offer the seller might receive. There are – or should be – more details to it than that; but the stated willingness to pay more than others is the essence.

Page 200 2016 45HoursOnline, All Rights Reserved Consumer Protection Reader, 2016 Edition This is not a brand new phenomenon. Offers with escalation clauses (sometimes called “sharp bids”) were around in the mid to late 90s and also during the most recent bubble years. They may have been used before that but at this point I am memory-challenged. Reactions to the use of escalation clauses run the gamut. Some think they are the greatest invention since the catcher’s mitt. Others view them as instruments of the devil. Many people say, “huh?” One thing about them is for sure: everyone wants to be very, very careful if and when they come into play. On the buyer’s side, there are a variety of caveats to keep in mind. First and foremost, a buyer should consider putting a cap or limit on his offer. Suppose the property is listed for $220,000; and further suppose that the buyer would be willing to pay up to $250,000, but no more. Then the buyer might want to cap his clause at $250,000. He could offer $220,000 and be willing, let’s say, to pay $2,000 above anyone else’s higher offer. But not beyond $250,000. Among other things, it keeps him out of an infinite loop that could occur with a competing escalation offer. There are other things for a buyer to think about. His offer should compete on the basis of net proceeds. Remember his $220,000 offer. He doesn’t want to have to escalate over a competing offer of $222,000 that includes a $10,000 credit to the buyer’s closing costs. The buyer also doesn’t want to compete with offers that include seller financing, much longer escrows, or a sale contingency. It should be an apples-to-apples comparison. It is also important for a buyer to specify the manner in which he can authenticate the bona fide nature of the competing offer. I have seen a number of escalation forms and I have yet to see one that seems comfortable in this regard. Another important issue for the buyer to think about is what will constitute a satisfactory seller response. Does the seller accept the offered price, even if the escalation provision never gets invoked? How long does the seller have to solicit and consider competing offers? Many people emphasize the seller’s vulnerability to a buyer who wouldn’t or might not be able to perform. This, though, isn’t a lot different than in standard offer situations. One of the major concerns of a seller in this situation is that it is not in his interest for other buyers to know that an escalation clause is in play. Why? Consider the example we used earlier: Let’s suppose that the escalation offer’s cap of $250,000 really stretches the limit of value for the property and that it is likely that no other buyer would go that high. Now, suppose that Buyer 2 would be willing to pay $230,000 – $10,000 more than the offer with the escalation clause – but he would never pay $250,000. If Buyer 2 knows about the escalation provision, then he knows his $230,000 offer will not be accepted (because the escalation offer will then go to $232,000). Moreover, he knows he won’t go up to the $250,000 limit. So, there’s no point in making an offer at all. As a consequence, the escalation clause offer at $220,000 trumps Buyer 2’s potential offer of $230,000. Not a good thing for the seller. And, of course, other potential buyers might reason the same way.

2016 45HoursOnline, All Rights Reserved Page 201 Consumer Protection Reader, 2016 Edition Escalation clause – or sharp bid – offers are neither illegal nor immoral. Indeed, various reputable companies, REALTOR® associations, and MLS organizations have, over the years, produced forms designed to accommodate them. Using them is a strategy that some have employed with good success. The point here is simply that they demand handling with care.

2.6.3.5 LIQUIDATED DAMAGES CLAUSE MAY BE MISUNDERSTOOD

by Bob Hunt for Realty Times, April 17, 2012 Copyright© 2012 Realty Times®. All Rights Reserved. Used With Permission. Is a liquidated damages clause a good thing to have in a real estate contract? If so, for whom is it good? The buyer? The seller? Both? Like so many questions in real estate and life in general the first answer to such questions is, “It depends.” Before we get into that, though, a word about what a liquidated damages clause is. A liquidated damages clause sets in advance – at the time of contract formation – what the monetary value of damages shall be in the event of contract breach by one of the parties. Often, a liquidated damages clause (actually, a paragraph or section) will include a recitation that the parties are agreeing ahead of time, because it would likely be difficult to determine the actual damages should a breach occur. But such a statement is not necessary. A liquidated damages clause could be directed toward both parties. For example, “If either of us fails to perform, he will owe the other $10,000.” But it need not do so. Commonly, a liquidated damages clause will be directed towards only one. E.G., “If the commercial landlord doesn’t deliver the property within fifteen days of the date promised, he will owe the tenant $10,000.” The standard residential purchase contract {Paragraph 21(b)} produced by CAR® contains a liquidated damages clause. It says this: If Buyers fails to complete this purchase because of Buyer’s default, Seller shall retain, as liquidated damages, the deposit actually paid. If the Property is a dwelling with no more than four units, one of which Buyer intends to occupy, then the amount retained shall be no more than 3% of the purchase price. Any excess shall be returned to Buyer. Release of funds will require mutual, signed release instructions from both Buyer and Seller, judicial decision, or arbitration award …

Three items are worth noting: (i) This provision is asymmetrical. That is, it burdens only one party, the Buyer. It does not provide for any preset damages should the seller breach. (Presumably, a seller breach could lead to a suit for performance.) (ii) It is limited. For residential properties of less than five units, one of which will be occupied by the buyer, the amount cannot be more than 3% of the purchase price. This has been set by legislation (CC §1675).

Page 202 2016 45HoursOnline, All Rights Reserved Consumer Protection Reader, 2016 Edition (iii) Payment of the damages would still require the agreement (by signatures) of both parties. That is because there has to be agreement that there has been a breach. Otherwise, a judicial or arbitration conclusion will have to be reached.

Signing (or initialing) a liquidated damages clause is optional. Although it is preprinted into the CAR® purchase agreement, it will only apply if both parties so indicate. This is where problems based on misunderstanding may arise. Commonly, when encountering a liquidated damages clause, a principal is liable to ask, “What does this mean?” It would not be unusual for an agent to say something like, “This means that if the buyer breaches, the seller gets to keep the deposit.” That, unfortunately, does not go far enough in explanation for many sellers. They need to know that it means that, in the event of breach, they would be entitled to no more than the deposit (or no more than 3% of the purchase price, if the deposit is larger than that). Often, when buyers have breached a contract, the seller feels wounded and entitled to more than the deposit. If a liquidated damages clause is in effect, that will not be an outcome. Is a liquidated damages clause a good thing? For both buyers and sellers the answer may be ‘yes’ and ‘no’. It depends. Suppose the buyer backs out – breaches – very early into the transaction. Typically, that would not cause a lot of damage to the seller. A liquidated damages provision may give too much to the seller. Conversely, a seller who has gone through a long escrow and who has made plans and commitments – sometimes financial – may feel that limiting the damages to the deposit (or 3% of the price) is not sufficient. For both parties, though, if they have agreed to a liquidated damages provision, they at least know what is at stake.

2.6.4 TRANSFERS

2.6.4.1 WIRE TRANSFER FRAUD IN RE TRANSACTIONS

by Bob Hunt for Realty Times, December 28, 2015 Copyright© 2015 Realty Times®. All Rights Reserved. Used With Permission. About one year ago, our column dealt with the subject of wire transfer fraud in real estate transactions. Regrettably, the topic is still a current one. On December 15th, NAR® issued an alert on the subject. Anecdotally, incidents have increased in the Southern California area. The nature of the scam is unchanged, so what was said last year is still on point. It goes as follows. Wire transfer instructions are emailed to the buyer. The buyer complies with the instructions to the letter. The next day, escrow contacts the buyer asking if the money has been sent yet. The buyer checks with his bank and is assured that the funds have been transferred out. When the money has still not shown up, everyone begins to retrace steps. As it turns out, the wiring instruction was bogus. The email came from an address that looked very much like that of the escrow or title company but it was not actually theirs.

2016 45HoursOnline, All Rights Reserved Page 203 Consumer Protection Reader, 2016 Edition And the recipient bank account? It was real; it just wasn’t the correct one. And, yes, it has been emptied out by now. The scheme has been perpetrated by hackers and it has been going on around the country for a while now. Chicago Title put out an alert that described the steps involved. We summarize them here: First, hackers identify the email accounts of real estate agents and brokers. Then they hack directly into the accounts “and identify emails referencing pending real estate deals. From these strings of emails, the hackers pull out specific details about the deal, such as: (a) the parties’ names, (b) the title company involved, (c) the escrow officer in charge of the deal, and (d) other information specific to the transaction.” Next, they send fraudulent email “directly to the buyer or lender, making it look like it was sent by the real estate agent, mortgage broker, or escrow agent. These fraudulent emails now direct the buyer and/or lender to wire the funds necessary to close escrow directly to a different bank account than provided in the preliminary report or in the escrow instructions. Obviously, this new bank account is controlled by the hacker, not the title company or the escrow holder.” Then, if the buyer, or the lender, does not detect the fraud, “the money is wired to the bogus account controlled by the hacker and is immediately withdrawn. Due to the amounts involved and the complex nature of investigating and prosecuting wire fraud, the odds are that the authorities will do nothing to help in these instances.” [my emphasis] For the most part, prevention recommendations tend to focus on the non- secure nature of most email accounts. It’s a fair bet that most real estate agents do not have secure accounts and they can be easily hacked. But, in a world where Target, Sony, and the Defense Department get hacked, it is not plausible to think that most agents, escrow companies, and clients are ever going to enjoy a very high level of security. While suggestions like two-factor authentication and encrypted emails may have their place, it is refreshing that a practical, non-technical word of advice comes from, of all places, an alert put out by the Silicon Valley Association of REALTOR®s. To wit: Buyers and sellers should confirm all email wiring instructions directly with the escrow officer by calling the escrow officer on the telephone. In that conversation, the correct account number information should be repeated verbally before taking any steps to have the funds transferred.

Certainly, if wiring instructions are changed via email, the buyer should confirm that by phone with the escrow officer and the buyer’s real estate agent.

2.6.4.2 NEW “TRANSFER UPON DEATH” DEED

by Bob Hunt for Realty Times, October 12, 2015 Copyright© 2015 Realty Times®. All Rights Reserved. Used With Permission. In California there exists a variety of ways by which an owner of real property can direct who shall become the new owner of that property when

Page 204 2016 45HoursOnline, All Rights Reserved Consumer Protection Reader, 2016 Edition the current owner dies. Most common among these are: by will; through creation of a trust; or, by owning either in joint tenancy with right of survivorship or as community property with right of survivorship. As of January 1, 2016, there will be another way also. On September 21 of this year the Governor approved AB 139 which had been passed by the Legislature on September 9. AB 139 establishes a method for conveying real property upon death through a revocable transfer upon death deed. Why the need for this new method? The author of AB 139 wrote this:

The most common form of real property transfer upon death, a will, must pass through probate, a lengthy legal process … The process is often grueling, can take up to a year, and often results in statutory probate fees in the thousands of dollars. Similarly, establishment of a revocable trust  can cost upwards of $2,000. For seniors and “A revocable living trust is a popular estate planning tool that individuals whose estate consists primarily of the home, the money you can use to determine who will to establish a trust is out of the question. get your property when you die. Most living trusts are ‘revocable’ [The] revocable transfer on death deed (revocable TOD deed) is the because you can change them as most simple and inexpensive transfer mechanism on the market your circumstances or wishes today. Furthermore, it may be the only tool available to unmarried change. Revocable living trusts are ‘living’ because you make homeowners who wish to leave their property to a lifelong partner, them during your lifetime.” family member, friend, or loved one upon death, but who cannot (Source) afford to set up a trust.”

AB 139 allows an interest in certain real property to be transferred on death by recording a revocable TOD deed. The deed transfers ownership of that property interest upon the death of the owner. Some of the basic features regarding this deed are: Applicable property types are one-to four-residential dwelling units, condominium units, or not more than 40 acres of agricultural land with a single-family residence.  A revocable TOD deed is not effective unless the transferor signs and dates the deed before a notary public.  The deed does not need to be delivered to the beneficiary.  The deed must be recorded 60 days or less from the time it is signed.  The deed may be revoked by the transferor at any time.  The form of the deed is prescribed by law. Not only does it contain its own explanation of how it works, it also provides its own frequently-asked-questions section.

For example, it tells the transferor how he or she can revoke the deed. There are three ways: (1) A revocation form can be recorded. (2) A new and different TOD deed may be recorded. (3) The property can be transferred to someone else and that deed recorded, prior to the transferor's death.

2016 45HoursOnline, All Rights Reserved Page 205 Consumer Protection Reader, 2016 Edition Yes, that’s right, a person might give out more than one revocable TOD deed. The new law provides that the deed with effect will be that one which has the most recent recording date. What if the beneficiary – the person named in the deed – dies before the person who was giving the property? Then the deed simply has no effect. Can more than one beneficiary be named in the same deed? Yes. The ownership interests will be divided equally among them. The list of questions goes on and on. AB 139 directs the California Law Revision Commission to study the effect of the TOD deed as established by the bill and to report back to the Legislature no later than January 1, 2020. It is specifically to study whether the deed is working effectively, whether it has been used to perpetuate financial abuse, whether it needs changes, and whether it should be continued. Unless the Legislature acts otherwise, the bill will sunset on January 1, 2021; but that would not invalidate any revocable TOD deed executed before that date.

2.7 RISK MANAGEMENT

2.7.1 AGENCY AND ETHICS

2.7.1.1 BROKER’S DUTIES TO INVESTIGATE HAVE THEIR LIMITS

by Bob Hunt for Realty Times, January 13, 2015 Copyright© 2015 Realty Times®. All Rights Reserved. Used With Permission. Imagine this: You have been a tenant in a downtown high-rise condominium building for more than a year when you learn that another unit in the building has been foreclosed upon and it is now offered for sale by the bank. The price is attractive and you make an offer that is accepted. During the course of the negotiations and escrow you are informed by the agent, who is representing both you and the seller, that the HOA had earlier sued the developer for construction defects and that the lawsuit had been settled for $5.1 million. Your agent and the seller both advise you to obtain a professional inspection of the property, which you do. Everything appears to be okay, the previous lawsuit doesn’t bother you, and you go ahead and close escrow. Later, when you are about to proceed with your plans to install marble flooring, you are informed by the HOA that this cannot be done because the construction defects affected the load-bearing capabilities of the building. Nobody had told you that part. They should have, right? You should be able to recover damages, or rescind the deal, right? Wrong; at least wrong if this occurs in California’s Second Appellate District. In the case of Assilzadeh v. California Federal Bank, 2000 whose facts closely resembled those we have hypothesized, the court ruled that both broker and seller had fulfilled their disclosure duties by making the buyer aware of the construction-defect suit and its subsequent settlement. The

Page 206 2016 45HoursOnline, All Rights Reserved Consumer Protection Reader, 2016 Edition court rejected the buyer’s argument that it was the broker’s duty to investigate the details of the litigation in order to determine whether she would be able to make the improvements that she desired. The court’s reasoning in this situation was similar to that of an earlier San Diego case (Sweat v. Hollister, 1995). In that situation a buyer was informed that the property he was buying was in a flood zone and that, as a result of that fact, the city had zoned it as a “non-conforming use.” Later, after escrow had closed, he discovered that, because of the zoning classification, he would not be able to obtain a permit for a planned addition. In that situation the court ruled that it was not the broker’s duty to investigate and/or explain the implications of the facts that had been disclosed. In the Assilzadeh case the court concluded that the fiduciary duties of the dual agent, “…were fulfilled when the buyer was informed that a construction defect lawsuit had been filed and settled. At that point the buyer should have investigated further and, if necessary, should have hired an attorney for advice on the legal aspects of the lawsuit and settlement…[Neither the broker nor the individual agent] was required to read and analyze the legal documents located in the court file.” Real estate brokers, their attorneys, and their insurance companies are fond of these decisions. And, to be sure, they do contain some sound principles. Brokers and agents can’t be expected to investigate, interpret and explain everything. To do so would surely go beyond the scope of their training and it would put them in the position of being amateur geologist, building inspector, soils engineer, fire safety expert, etc. Moreover, buyers need to take on some responsibility for themselves. They need to ask lots of questions. They need to be willing to do some investigating on their own. They cannot assume that all questioning will be done on their behalf.

2.7.1.2 DUAL AGENCY UNDER SCRUTINY

by Bob Hunt for Realty Times, May 5, 2014 Copyright© 2014 Realty Times®. All Rights Reserved. Used With Permission. A recent California Appellate Court ruling is liable to have major long-term consequences for the real estate practice of dual agency in the Golden State. In this case (Hiroshi Horiike v. Coldwell Banker, 2014 ), the dual agency was not a matter of a single person – real estate agent – representing both buyer and seller. Rather, it was a case of different agents from different offices (of the same firm) representing the two parties.

January 2016: Mr. Cortazzo has Chris Cortazzo, a salesperson for Coldwell Banker Residential Brokerage a number of spectacular listings – (CB) listed a property in Malibu in September of 2006. In the listing, and on nothing under $2 million. Check out his website. a flier, he stated that the home “offers approximately 15,000 square feet of living areas.” The MLS service that provided public record information stated that the living area was 9,434 square feet. The building permit indicates a single-family home of 9,224 square feet, a guest house of 746 square feet, a garage of 1,080 square feet, and a basement of unspecified area. The listing agent had or subsequently obtained a letter from the architect “stating the size of the house under a current Malibu building department ordinance was approximately 15,000 square feet.”

2016 45HoursOnline, All Rights Reserved Page 207 Consumer Protection Reader, 2016 Edition An offer was made the following March. In response to the buyers’ request for verification of the square footage, they were given the architect’s letter. The listing agent also advised that they have a qualified specialist verify the square footage. He also gave that advice on the Transfer Disclosure Statement. Unable to obtain building plans or to receive an escrow extension for further investigation, the buyers cancelled. In July, the listing field for square footage was changed to “0/O.T. by which he meant zero square feet and other comments.”

Mr. Horiike is Chinese – he A couple of months later, the plaintiff, Hiroshi Horiike, was working with changed his Chinese name to a Chizuko Namba, a salesperson in another CB office. She arranged for him Japanese name (source). to see the Malibu property. Horiike received a copy of the flyer saying that Mr. Horiike paid cash, hence the home “offers approximately 15,000 square feet of living areas.” He there was no lender demanding an appraisal (source). made an offer and escrow opened in November. Namba was provided with a copy of the building permit which she sent to Horiike along with other documents.

Both parties signed a confirmation of the real estate agency relationships as required by CC § 2079.17. They also signed a mandated agency disclosure form which describes various agency relationships and the duties of agents. Among other things, that form says that “A real estate agent, either acting directly or through one or more associate licensees, can legally be the agent of both the Seller and the Buyer in a transaction…” It also says that an agent in a dual agency situation has a fiduciary duty to both the seller and the buyer. The transaction closed. During the course of the transaction, Horiike did not receive advice to hire a specialist to verify square footage, as had the buyers in the previous transaction. In 2009, Horiike reviewed the building permit in preparation for work on the property. He could not verify the approximately 15,000 square feet of living area. He sued CB and the listing agent. He did not sue his agent, Namba, whom he said he liked. The trial court granted one motion of nonsuit on the grounds that the listing agent had no fiduciary duty to the buyer. Then the jury found that the listing agent had not made a false representation of a material fact, hence there was no misrepresentation. It also found that he did not intentionally fail to disclose an important or material fact to the buyer. Horiike appealed. The Appellate Court said that: “The motion for nonsuit should have been denied and the action … for breach of fiduciary duty submitted to the jury.” Clearly, CB was a dual agent, and “When an associate licensee owes a duty to any principal … that duty is equivalent to the duty owed to that party by the broker…” Thus, “The jury’s findings that Cortazzo did not provide false information to Horiike or provided false information that he reasonably believed to be true, and did not intentionally conceal information, does not satisfy his duty to Horiike as a fiduciary.” [my emphasis] As a fiduciary, the listing agent should have gone the “extra mile” to provide the buyer with information about matters that concerned him.

Page 208 2016 45HoursOnline, All Rights Reserved Consumer Protection Reader, 2016 Edition The Appellate Court said that, because CB had fiduciary duties to the buyer, so, then, did its agents, both of its agents. In short, the Court said that it is a mistake – and a common myth – that when there are two agents of the same company in a dual agency situation, each of them only has fiduciary duties to his/her personal client. They are both the fiduciaries of both. The case was remanded for a new trial.

Floriday and Colorado prohibit There is a great deal of concern about this ruling in the California real estate dual agency (source). community. It runs counter to the way – rightly or wrongly – that agents and brokers have thought things were. It certainly raises practical questions. (In the case at hand, for example, the listing agent did not even speak the same language as the buyer.)

CAR® will support CB in a petition for review by the California Supreme Court. But this may be one of those situations where you should be careful what you ask for. It is certainly possible that dual agency, as it is now commonly practiced in California, will become untenable. Other states have dealt with this type of situation by creating a category called designated agents . Those agents are, respectively, fiduciaries of only one party. To be able to do this in California would require legislative action. That would be a topic for another day.

The New York Times profiled this case in a January 14, 2015 an elaborate article which you can find here. We could find no further information on this case as of January 20, 2016.

2.7.1.3 BUYER’S BROKER MUST EVALUATE REPORTS

by Bob Hunt for Realty Times, March 17, 2014 Copyright© 2014 Realty Times®. All Rights Reserved. Used With Permission. Today we review a recent California Appellate Court Decision (Saffie v. Schmeling, 2014) that contains language indicating that a buyer’s broker may have more responsibility for “fact checking” than is often believed. But before we get into the meat of the case, let me address a few words to a common misperception. There appears to be a wide-spread belief that court decisions are written in such an arcane, jargon-filled manner that they are virtually inaccessible to an ordinary reader. Not so. Oh, sure, there’s the occasional Latin phrase and an obscure reference to another decision, but, by and large, they are written in clear, plain English and are easily understood even if the reader is not a law school graduate. Consider the opening line from the case at hand: “This case arises from a real estate transaction that did not turn out as well for the buyer, plaintiff George Saffie (buyer), as he had hoped.” Pretty clear, isn’t it? Here is what happened. In June of 2006, the seller’s broker entered a commercial parcel listing onto the MLS. The listing included this language: “This parcel is in an earthquake study zone but has had a Fault Hazard Investigation completed and has been declared buildable by the investigating licensed geologist. Report available for serious buyers.” The report was done in 1982. The

2016 45HoursOnline, All Rights Reserved Page 209 Consumer Protection Reader, 2016 Edition date, May 20, 1982, appeared prominently on the cover of the report. In July of 1982, the Riverside County Planning Department issued a letter granting “final approval of the report.” In June of 2006, the buyer made an offer, through a different broker, that was accepted. During escrow the seller’s agent gave the buyer’s broker a copy of the report and of the letter. Later, the buyer’s broker testified that he did not read the report nor did he even understand what a fault hazard investigation was. The trial court found that the buyer’s broker had led the buyer to believe that the report was current and that the property was “ready to build.”

After the transaction closed the buyer found that the County of Riverside did not agree that the property was ready to build. Standards had changed since the 1994 Northridge earthquake  and the 1982 report was not up to those standards. A subsequent investigation, performed to current standards, showed that the property required so much excavation and such setbacks that it was no longer feasible for development.

Northridge Earthquake, Source Naturally, the buyer sued everyone. The trial court determined no award was owed from the seller or the seller’s broker but that the buyer’s broker and his firm were liable in the amount of approximately $232,000 for breach of fiduciary duty and negligence. The buyer appealed only with respect to the finding of no liability on behalf of the seller’s broker. The buyer contended that the seller’s broker’s statement in the MLS was false or inaccurate because it failed to specify that the report was done in 1982, thereby giving “a false impression that the report was current as of the date of the MLS listing and remained ‘valid’ as a basis for commercially developing the property…” Thus, the buyer argued, the trial court should have applied CC §1088 . CC §1088 says that an agent “shall be responsible for the truth of all representations and statements” of which the agent had knowledge or should have had knowledge. But the Appellate court disagreed with the allegation that the MLS statement was false or inaccurate. The buyer and his broker believed that the property was fully cleared for building. But, the court noted, “seller’s broker never said that it was.” It went on to say, “... the seller’s broker did not affirm that the geologist performed his investigation in accord with current County of Riverside requirements, nor did he state that all necessary approvals for building had been obtained … There is nothing in §1088 ... imposing responsibility on a seller’s broker to ensure that true statements in the MLS are not misconstrued or to make certain that the buyer and the buyer’s broker perform the appropriate due diligence ...” Not only did the Appellate Court say that the seller’s broker did nothing wrong but also it went on to say, “It was incumbent on buyer – and on buyer’s broker, in his role as a fiduciary for buyer – to determine whether the Fault Hazard Investigation report was something buyer should rely on for his particular purposes.” The court then cited an earlier case (Field v. Century 21 Klowden-Forness Realty, 1998) stating that “a selling broker has no obligation to purchasers to investigate public records or permits pertaining to title or use of the property,” but the buyer’s broker [my

Page 210 2016 45HoursOnline, All Rights Reserved Consumer Protection Reader, 2016 Edition emphasis] “is expected to perform the necessary research and investigation in order to know those important matters that will affect the principal’s decision.” This is serious stuff. Those who would be a buyer’s broker should take heed.

2.7.1.4 LISTING AGENT HAS DUTY OF CARE TO THIRD PARTIES

by Bob Hunt for Realty Times, May 18, 2013 Copyright© 2013 Realty Times®. All Rights Reserved. Used With Permission. We know that listing agents have duties to their principals and that they also have duties to buyers and the agents of buyers. But we tend mostly to think of those duties as they relate to the specifics of a transaction: Truth- telling, honesty and fair dealing, disclosure. These are the things that come to mind.

A recent California Appellate Court decision (Hall v. Aurora Loan Services, 2013) reminds us, however, that a listing agent has a considerably wider range of duties to prospective buyers and their agents. In this regard, the agent’s duties are akin to those that a property owner has to guests and invitees on the premises. The property in question was an REO which had been foreclosed on by Aurora Loan Services. In May of 2009, Aurora listed the property with Jon Wood and Holly Sibley of Rockcliff Realty. The court record tells us that “One of the features of the house was an attic that had been converted into a ‘bonus room’ by a previous owner. This room was accessed by using a pull-down stairway ladder ... ”. In late May, the house was inspected by a licensed contractor who prepared a report titled “Estimate for Repairs.” Copies of the report were sent to the listing agents and to a bank loan officer. The report listed more than 50 items under a heading entitled “Health and Safety Required Repairs –

Pull-Down Stariway ladder. Group 1.” In fact, the report commingled cosmetic items (e.g. “Minor Drywall patch and touchup paint” and “Remove and Replace Carpet”) along with health and safety items such as “Mold Abatement and Air test” and “Repair Deck at Edge – Trip Hazard.” One of the listed items was “Stair – Remove and Replace Attic Stair.”

On August 1, 2009 real estate agent Pinda Hall showed the property to two of her clients. By that time the house had been shown literally dozens of times by others. When Hall and her clients came to the stairway ladder, which was in the down position, she inspected it and thought it looked safe. Hall “told her clients to be careful as they used the ladder.” When she {Pinda} followed them up “a hinge broke, the ladder failed, and she fell. The fall fractured her right leg and injured her knees.”

Loss of Consortium: Loss of Hall and her husband filed a lawsuit against both Aurora and the listing the benefits of a family agents. The complaint included three causes of action: (1) general relationship due to injuries caused by another. negligence; (2) premises liability; and (3) loss of consortium . The agents moved for summary judgment (essentially, dismissal). They argued that the undisputed facts showed they had no notice or knowledge of a defect in the stairway ladder and were therefore entitled to judgment as

2016 45HoursOnline, All Rights Reserved Page 211 Consumer Protection Reader, 2016 Edition a matter of law. The trial court agreed. It dismissed both them and Aurora. The Halls then appealed. The appellate court noted that “to impose liability for injuries suffered by an invitee due to a defective condition of the premises, the owner or occupier must have either actual or constructive knowledge of the dangerous condition or have been able by the exercise of ordinary care to discover the condition …” It then observed that listing agents have duties not just as created by the listing contract but also by laws of agency. “Under the law of agency, real estate agents owe a duty of care to all persons, including third persons, with the area of foreseeable risk.”

In that case, a prospective tenant The court reviewed an earlier case (Merrill v. Buck, 1962) which “held that thought she was entering a closet real estate agents are bound to exercise reasonable care to discover via an inward-swinging door only to fall down basement stairs. An dangerous conditions of property they are marketing and to warn visitors of appellate court concluded her them or to make them safe.” A “real estate agent has a duty to notify agent was liable. visitors of marketed property of concealed dangerous conditions of which the agent has actual or constructive knowledge .”

Actual vs. Constructive Knowledge: Suppose an agent spotted termite pellets on window sills throughout his listing. If the agent was sued by the buyer for failing to disclose his home’s termite infestation, the agent could argue that he didn’t have actual knowledge of the infestation since he hadn’t actually seen the termites. But the buyer could argue that the agent had constructive knowledge of the infestation since the termite pellets were in plain site and real estate agents are expected to know that the presence of such pellets is certain evidence of termite infestation. The appellate court said that the central issue was “whether evidence was presented upon which a jury could find that Aurora and the listing agents knew or should have known that the ladder was unsafe.” There was “no indication in the record that the listing agents did anything to follow up with [the contractor] about the reasons for his recommendations or to inquire further into the stairway ladder’s safety.” The appellate court reversed the summary judgment and remanded the case for trial. It made clear that it was not saying the agents were, in fact, liable, but it did say “evidence was presented that created a triable issue as to whether defendants knew or should have known that the stairway ladder in this case was a concealed danger.” The lesson for listing agents: Do you have an inspection report? Read it. If a safety issue is unclear, follow up on it. Do you have a “fixer” listing – as so many REOs are? – Check it out for possible unsafe conditions. Ask questions. Err on the side of caution.

2.7.1.5 CORPORATE BROKERS NOT LIABLE TO THIRD PARTIES

by Bob Hunt for Realty Times, September 25, 2012 Copyright© 2012 Realty Times®. All Rights Reserved. Used With Permission. Although many of them may not know it, California real estate brokers who act as designated officers (sometimes called corporate brokers or brokers of record) have reason to be pleased with a recent appellate court decision (Sandler v. Sanchez, 2012). The effect of the decision is that, in general, even if a designated officer fails to fulfill his statutory obligation to supervise

Page 212 2016 45HoursOnline, All Rights Reserved Consumer Protection Reader, 2016 Edition the company sales agents, he or she will not have personal liability to third parties who may have been harmed by the wrong-doing of one of those salespersons.

Cast of Characters: The facts of the case were not pretty. The Sandlers, along with another Buyer: The Sandlers party, were induced by Keith Desser, a real estate licensee representing Agent: Desser Gold Coast Financial, to lend $600,000 to 765 South Windsor, LLC. The Agency: Gold Coast Financial – purpose of the loan was to finance improvements to an eight-unit apartment a corporation owned by Desser! Designated Officer: Sanchez building for the purpose of converting the units to condominiums. The Sandlers were seriously misled. $600,000 was not enough money to do the improvements and there was not sufficient equity in the property to secure their loan, which was junior. Moreover, Desser used $300,000 of the loan proceeds for his own personal expenses. When the senior loan foreclosed, the Sandlers were wiped out. Naturally, they sued.

Gold Coast Financial is a corporation. In California a corporation can be a licensed real estate broker. In order to do so, the corporation must designate a licensed individual broker as the entity’s designated officer. Sanchez was the designated officer of Gold Coast Financial. As such, pursuant to BPC §10159.2, he was “responsible for the supervision and control of the activities conducted on behalf of the corporation by its officers and employees … including the supervision of salespersons licensed to the corporation … ” Thus, Sanchez was responsible for supervising Desser (even though salesperson Desser also happened to be the sole shareholder of Gold Coast). The Sandlers, of course, sued everyone. But, by the time the case reached the court of appeal, Desser had died and both Gold Coast and 765 South Windsor were insolvent. Sanchez was, so to speak, the last man standing. According to the court record, the Sandlers alleged that, “he, as Gold Coast’s designated officer, owed them a duty in accordance with BPC §10159.2 to supervise Gold Coast’s employees, including Desser. Had Sanchez fulfilled his duty to supervise, he would have learned about Desser’s material misrepresentations and either disclosed them to the Sandler parties or cancelled the loan transaction.” The court {of appeal} reviewed the governing law. It noted, “ … 10159.2 imposes a duty on the designated officer to supervise the corporate broker’s employees. The question in this case is to whom is that duty owed?” [my emphasis] The court reviewed other cases as well as the legislative history that brought this section into being. It concluded that, similar to a section governing contractors, the relevant code section “ … was regulatory and disciplinary in nature. It did not create a duty to third parties and therefore could not be a basis for the [broker’s] personal liability.” The failure to supervise could lead to discipline from CalBRE, and could even be grounds for action by the corporation against the designated officer, but – unless the broker had participated in the bad behavior –- he could not be held liable for it by the injured party. In a former life as a software consultant, I once lost a major contract with a Fortune 500 firm despite strong qualifications, proven reputation, and a low price. The reason given: “If the project went sour, there would be nobody [meaning me] to sue.” Sometimes one should think that way.

by Bob Hunt for Realty Times, March 27, 2012 Copyright© 2012 Realty Times®. All Rights Reserved. Used With Permission. In many parts of the country resale inventory has declined steeply and properties for sale – particularly those at the lower end of the price range – are frequently receiving multiple offers. This may be some cause for exhilaration but also it creates a potential for confusion and frustration. When there are multiple offers sellers may find themselves in a situation where they would like to make multiple counter offers. Seldom does one offer among a few stand out so clearly with respect to price and terms that a seller will just want to accept it as is without giving anyone else even a chance to better it. Perhaps the most common multiple offer situation is one in which none of the offers is as high as the listing price. Especially in recent years, almost every potential buyer wants to offer a bit less even if the list price appears to be a good one. There is, though, the other end of the spectrum – when the list price is clearly below market value – and everyone offers above it. Of course price is not the only factor. Frequently, in a multiple offer situation, one buyer may specify an acceptable price but unacceptable terms (e.g., a very long escrow period); whereas another buyer may have desirable terms (e.g., cash and a short escrow) but an unacceptable price. So a seller might want to counter to both. To buyer A he might say, “I’ll take your price but no more than a thirty-day escrow.” To buyer B, “Your terms are OK but the price needs to come up by $10,000.” Of course it could be much more complicated than that and there might be five or six parties making an offer. Suppose a seller makes counter offers to two or more parties. What if they all accept? Uh-oh. That could lead to problems. I can remember the dark ages of real estate when the prevailing sentiment (it shouldn’t be dignified by calling it a “rule”) was that “the first signed acceptance back is the one that wins.” That led to bizarre scenarios with anxious buyers waiting in a car outside the seller’s home, waiting for their agent to bring out a counter for them to sign. Needless to say, more than a few disputes arose in those multiple counter offer situations. Some years ago the Standard Forms Committee of CAR® devised an imaginative and thoughtful solution for the multiple counter offer situation. They added a couple of paragraphs to what was already a standard counter offer form. The first one (¶4) says: [ ] (if checked) MULTIPLE COUNTER OFFERS: Seller is making a Counter Offer(s) to another prospective buyer(s) on terms that may or may not be the same as in the Counter Offer. Acceptance of this Counter Offer by Buyer shall not be binding unless and until it is subsequently re-Signed by Seller in Paragraph 7 below …

and then goes on to say how long the buyer has to respond.

Page 214 2016 45HoursOnline, All Rights Reserved Consumer Protection Reader, 2016 Edition The second addition (¶7) says MULTIPLE COUNTER OFFER SIGNATURE LINE: By signing below, Seller accepts this Multiple Counter Offer.

And then it provides a place for signature along with a warning to the seller not to sign it until after the Buyer has signed. When this second signature is obtained, it confirms which of the accepted counter offers he has chosen. So the seller gives out multiple counters but none of them are binding. He is only bound if he subsequently puts a second signature on one that has been accepted by a buyer. Even if all the buyers had accepted what was countered to them. Of course it could happen that none of the seller’s counter offers will be accepted. That is then the seller’s tough luck, just as could happen with a single counter offer. Making a counter offer is a rejection of the original offer. The seller who makes a counter doesn’t retain the right to go back to the original unless the buyer agrees. The standard CAR® counter offer, with the optional provision for multiple counter offer situations, has done much to clear up the confusion and misunderstandings that might exist in a multiple offer situation. That is a good thing. Regrettably, some listing agents have found that these provisions can also be used in a misleading way, so as to – perhaps – create an atmosphere that is favorable to the seller. What they will do is to use the multiple counter offer provisions noted above, even though, in fact, there are no other counter offers being made. The point of this, of course, is to give the buyer the impression that he is in competition with some other buyer(s). And this is done in the belief that the buyer who believes he is in competition will be more likely to ‘up’ his offer to pay more than he originally proposed – maybe even more than he ever thought he would go. To be sure, that belief may be wrong. It is a gamble. Some buyers will say, “I don’t want to get into a bidding war,” and will drop out altogether. Yet they might have responded positively to a straight-forward counter offer. I don’t know whether creating an illusion of a competition is a useful strategy for the seller or not. I don’t suppose that anyone really knows. I just know that some agents – and probably some sellers too – think it is a good idea. OK, so we may not know if it’s a good idea in the “useful-to-the-seller” sense; is it a good strategy in the other sense of good? No, I don’t think so. It is, after all, untrue. It is, in a word, fraudulent. Would it be actionable, as in “a fraudulent inducement to enter into a contract?” I don’t know. That’s one for the lawyers. No doubt it would be a highly fact-specific call. I have heard agents defend the practice (of pretending that multiple offers exist) on the grounds that “another offer might come in, and we want to preserve the seller’s options.” OK, I see the point. But you don’t need to fabricate a situation to do that. With respect to the CAR® form, just eliminate the part that says that multiple counter offers are being made; and

2016 45HoursOnline, All Rights Reserved Page 215 Consumer Protection Reader, 2016 Edition retain that which says that a second seller signature will be required in order for the accepted counter offer to be binding. There are all sorts of ways to preserve the seller’s options. Deception need not be one of them. Tell the truth. That way, as Mark Twain has said, “you will gratify some and astonish the others.”

2.7.2 LITIGATION AND CIVIL LAW

2.7.2.1 FALSE PREDICTIONS AREN’T FRAUD

by Bob Hunt for Realty Times, October 13, 2014 Copyright© 2014 Realty Times®. All Rights Reserved. Used With Permission. “Don’t worry about an adjustable loan or negative amortization. Look at how your property has been appreciating! That’s not going to stop; and you’ll always be able to refinance or to sell at a profit.” Many people have said that or something like it. Most of the time, most of them were wrong. Could they be sued? Of course. You can be sued for just about anything. But, would they lose the law suit? Not necessarily. And that – to most of us, I suspect – is somewhat surprising. Two recent California Appellate Court decisions deal with law suits where representations about the future value of the plaintiff’s real estate was a central element. The similarity of both of the complaints and the decisions merit discussing them together. One is Cansino v. Bank of America, 2014; the other is Graham v. Bank of America, 2014. The Cansinos were classic serial borrowers – a species nurtured by the financing climate of the early 2000s. In 2000, they obtained a $280,000 mortgage (five year, fixed-rate) on their Milpitas home. In 2002, they refinanced with a $386,000 loan (fixed rate for three years). In 2005, they refinanced again for $496,000 (initial rate was 1%; five years minimum monthly payments would result in negative amortization). At that time, the lender appraised their home at $620,000. The lenders representatives “told plaintiffs their home would appreciate and they would be able to sell or refinance the home at a later date before having to make higher monthly loan payments or pay an increased principal of $620,000 which would result from negative amortization.” According to the record, “In 2010, plaintiffs discovered that their home was valued between $350,000 and $400,000.” As of March 2012, the balance due on the loan was approximately $625,000 and the fair market value was approximately $350,000. The Cansinos filed suit in 2011. The borrower in the Graham case obtained two loans in 2004, allowing him to purchase his Vista home with 100% financing. The purchase price was $489,000. The maker of the $97,800 second mortgage appraised the house at $525,000. Mr. Graham fell behind in payments in 2011. A notice of default was recorded in 2012 indicating he owed more than $100,000 in past due payments and costs. In his suit against the bank, Graham alleged that “Lending Personnel made the following representations related to his loans: (a) the home had an

Page 216 2016 45HoursOnline, All Rights Reserved Consumer Protection Reader, 2016 Edition ‘increasing and revised upwards’ – value of $525,000; (b) such was the fair market value (FMV) of the home; (c) such ‘rapid increase in the FMV’ of the home ‘demonstrated the security of the purchase’; (d) the FMV of the home ‘was ever-increasing such that the [home] could be ‘turned for a profit’ in the near future or refinanced to obtain better terms’.” In both cases the plaintiffs alleged fraud as a cause of action. Both cases were dismissed at the trial level and then were heard at their respective districts’ Courts of Appeal. While there were other issues at play in both cases, the Appellate Courts upheld the trial courts in each instance. The fraud issues were essentially the same and the reasoning of both courts was the same. Predictions about a buyer’s real estate investment or the fair market value for property in the future are not actionable representations. ‘It is [settled] law that an actionable misrepresentation must be made about past or existing facts; statements regarding future events are merely deemed opinions. (Graham) The law is well established that actionable misrepresentations must pertain to past or existing material facts. Statements or predictions regarding future events are deemed to be mere opinions which are not actionable. (Cansinos)

The courts were quite clear about this. You may well be a qualified expert in some field or another; but, when you start talking about future events, you are not representing facts, you are expressing an opinion. So, there you have it. Those speculative and irresponsible statements that we all (now, at least) condemn, may be all of that, but they are probably not actionable in a court of law. Please, though, don’t tell anyone that I said it was OK to make such statements.

2.7.2.2 MERITLESS LAWSUIT AGAINST AGENT DRAWS SANCTIONS

by Bob Hunt for Realty Times, October 6, 2014 Copyright© 2014 Realty Times®. All Rights Reserved. Used With Permission. We’ve all heard of situations where a real estate agent and/or firm is named in a lawsuit even though, by any objective measure, the agent did nothing wrong. Moreover, it is not unusual, in such a situation, for the agent – or the agent’s insurer – simply to settle on the grounds that doing so is less expensive and less cumbersome than seeking vindication through a full-

“Settle or I’ll go to discovery!” blown trial. And life goes on. But what if, so to speak, the tables were turned? What if the agent responded with an action against the plaintiff for bringing a case that is frivolous – without factual or legal merit? Any chance of the agent winning that one? Yes, if it looks anything like Peake v. Underwood, 2014, recently decided by a California Court of Appeal. Joanne Peake purchased a home from the Underwoods in 2008. The Underwoods were represented by Paul Ferrell of Prudential Dunn REALTOR®s. (Mr. Ferrell had represented the Underwoods when they

2016 45HoursOnline, All Rights Reserved Page 217 Consumer Protection Reader, 2016 Edition acquired the home a year earlier.) Two years later, in early 2010, after discovering that water intrusion had caused damage to the “… foundation and attached flooring structures,” Peake filed suit against the sellers, the termite inspector, the home inspector, and the agent, Paul Ferrell. Initial causes of action asserted against Ferrell were (1) breach of statutory duties (CC §§ 2079 and 1102), (2) negligence, (3) breach of fiduciary duty, and (4) constructive fraud. After the case had been pending more than a year, Ferrell moved for terminating {?} and monetary sanctions against Peake and her lawyer. His grounds were CC §128.7 which allows for sanctions if the trial court finds that a pleading is factually or legally frivolous. Ferrell argued that the undisputed evidence showed that he had fulfilled his statutory and common law disclosure duties. The trial court agreed with Ferrell and ordered Peake and her attorney to pay $60,000 for Ferrell’s attorney fees. Naturally, they appealed. We pick up at the Appellate Court’s ruling. Ferrell’s counsel … sent numerous emails to Peake’s counsel (Shaw), explaining the legal and factual deficiencies of Peake’s statutory claim and encouraging Shaw to consult with a real estate standard-of-care expert. In the emails, Ferrell’s counsel emphasized that Ferrell had provided Peake with all the information in his possession, including documents showing possible problems with the subflooring, and noted an agent’s statutory duties are limited to a visual inspection. Ferrell’s counsel reminded Shaw of his ongoing duty to reevaluate the merits of Peake’s claim and warned that if Peake did not dismiss her claim, Ferrell would seek sanctions from Peake and Shaw under §128.7.

CC §128.7 is based on Rule 11 of the Federal Rules of Civil Procedure (28 U.S.C.), as amended in 1993. The Appellate Court explained it this way: “Under Rule 11, even though an action may not be frivolous when it is filed, it may become so if later-acquired evidence refutes the findings of a pre- filing investigation and the attorney continues to file papers supporting the client’s claims.” … “Thus, a plaintiff’s attorney cannot ‘just cling tenaciously to the investigation he had done at the outset of the litigation and bury his head in the sand.’” In this particular case, the statutory claims against Ferrell involved CC §§ 2079 and 1102. The Appellate Court wrote: §2079 imposes on a seller’s agent the duty ‘to conduct a reasonably competent and diligent visual inspection of the property offered for sale and to disclose to [the] prospective purchaser all facts materially affecting the value or desirability of the property that an investigation would reveal…’ (§2079, subd.(a).)”

The Court pointed out that the inspection “does not include or involve an inspection of areas that are reasonably and normally inaccessible.” The Court then wrote that §1102 imposes these same limited duties [on an agent]. Peake alleged that Ferrell breached his duties by failing to disclose the condition of the subfloors. “However,” the Court said, “it is undisputed that

Page 218 2016 45HoursOnline, All Rights Reserved Consumer Protection Reader, 2016 Edition this alleged defect was not visible and would not have been apparent during a reasonable property inspection. Thus, as a matter of law, Ferrell did not breach his statutory duties under §§ 2079 and 1102 et seq.” As to the common-law fraud claims, the Appellate Court observed, “…because a seller’s agent has no fiduciary relationship with a buyer, the courts have strictly limited the scope of an agent’s disclosure duties under a fraudulent concealment theory.” If the seller knows of material facts “… and also knows that such facts are not known to, or within the reach of the diligent attention and observation of the buyer, the seller is under a duty to disclose them to the buyer.” This duty applies to the seller’s agent as well as to the seller. But, in this case, the Appellate Court pointed out, Ferrell had provided the buyer with a variety of reports – some of which addressed the drainage and subfloor issues – from the Underwoods’ purchase escrow. Also, Ferrell’s inspection report to Peake noted that there was a soft spot in the subfloor in one of the bedrooms. The buyer had been put on notice. Ferrell had done his seller’s agent duty. While noting that “Courts must carefully consider the circumstances for awarding sanctions,” it nonetheless concluded that “The record before us presents an appropriate case for sanctions.” The trial court’s award was upheld: $60,000 {}. The Carr McClellan Law Blog (June 30, 2014) nicely summarizes the potential importance of this case: It is common practice for parties to “blame the agents” when a transaction sours, just to have another source of settlement funds. Defending these claims is expensive and the agents rarely recover their cost of defense. The Peake case teaches that the agent’s attorney should weigh in early and often with emails and letters showing why the claims are baseless. These communications should demand that the claims be withdrawn or sanctions will be requested. That used to be an idle threat but after the Peake decision, complaining parties (and their attorneys) will have to weigh whether they will be the ones making the payment at the end of the day.

I find the results of this case uplifting. The defendant made a sincere effort to acquaint the plaintiff’s attorney with the facts and the law to which attorney turned a deaf ear – no doubt to intimidate the plaintiff into a settlement. But the strategy backfired and it was the plaintiff’s attorney who had to pay the defendant.

2.7.2.3 NON-DISCLOSING SELLER PAYS HIS BROKER’S LEGAL COSTS

by Bob Hunt for Realty Times, September 9, 2014 Copyright© 2014 Realty Times®. All Rights Reserved. Used With Permission. Hard as it is to believe, there have been occasions when a seller did not divulge all material facts about a property to the listing broker. “Oh, did I forget to tell you about the sink hole?” “Why would a buyer want to know that the toilets backed up last year? It’s all fixed now.” Etc. Etc. So, what happens if the undisclosed problem later becomes the subject of a law suit and the listing broker gets dragged into the suit? Even if the 2016 45HoursOnline, All Rights Reserved Page 219 Consumer Protection Reader, 2016 Edition broker is subsequently vindicated, he will still have legal costs. And he’s likely not to have a contract – especially with the buyer – that would require the other party to pay his attorney fees.

Should the seller have to cover the listing broker’s costs? You bet. And he will if the listing agreement includes an indemnification provision such as the ® This case is “unpublished.” one in the standard listing contract produced by CAR . A recent court case confirms this. (Bardack v. Rudy Tomjanovich et al., 2014 ).

Rudy and Sophie Tomjanovich (yes, basketball fans, that Rudy Tomjanovich ) purchased a Los Angeles area home in 2004 for $4.25 million. According to the court record, “At the time they bought the home, they were given reports and disclosures indicating that the home had active water leaks. In December 2004, the Tomjanoviches experienced a water leak in the entry foyer. In April 2006, another leak occurred in the foyer skylight.” In 2007 they listed the home for sale with Coldwell Banker. A buyer was procured and the sale closed. At no time did the Tomjanoviches “… disclose to [the buyer] or Coldwell Banker the reports they had received at the time they bought the home or that the property had water leaks while

they owned it.”

Subsequently, the buyer experienced several leaks. He sued the Tomjanoviches for breach of contract, intentional misrepresentation, concealment, and rescission among other things. Not only did the Tomjanoviches deny any wrongdoing but also they filed a cross-complaint against their listing broker, Coldwell Banker. They alleged that “Coldwell Banker was negligent and breached its fiduciary duties to the Tomjanoviches … ” The jury found that the Tomjanoviches were liable to the buyer on a number of counts. They awarded the buyer compensatory damages of over $2.8 million and punitive damages of $250,000 {!}. The jury also determined “that Coldwell Banker… had not acted negligently nor breached any fiduciary duty to the Tomjanoviches.” Coldwell Banker then filed a motion for recovery of attorney’s fees and costs. Their motion was based on an indemnity clause in the listing agreement. According to CC §2772, “Indemnity is a contract by which one engages to save another from a legal consequence of the conduct of one of the parties, or of some other person.” The indemnity agreement in the CAR® listing contract, which appears in bold print, says this: Seller further agrees to indemnify, defend and hold Broker harmless from all claims, disputes, litigation, judgments attorney fees, and costs arising from any incorrect information supplied by Seller, or from any material facts that Seller knows but fails to disclose.

The trial court found in favor of Coldwell Banker and entered a judgment on its behalf for attorney fees of – get this! – $348,372. The Tomjanoviches appealed, arguing that the indemnity provision only applied to third-party claims (remember, it was Tomjanovich, not the buyer,

Page 220 2016 45HoursOnline, All Rights Reserved Consumer Protection Reader, 2016 Edition who sued Coldwell Banker). But the appellate court disagreed. It upheld the trial court’s finding. The Tomjanovich decision is not published for use in decisions by other courts but it does show that the indemnification provision in the CAR® listing agreement has teeth. Listing brokers who do not currently use an indemnity provision in their agreements might want to consider employing one. ® 2.7.2.4 SMALL CLAIMS MANUAL, AID TO REALTOR S

by Bob Hunt for Realty Times, August 5, 2013 Copyright© 2013 Realty Times®. All Rights Reserved. Used With Permission. Over the course of a career, a real estate agent may find himself in small claims court in connection with a dispute arising out of a real estate transaction. He may be there as a defendant, as a witness, or even as a plaintiff. Sometimes, he may be involved just in an attempt to help a client even if he doesn’t have a role as a witness. While small claims court may lack some of the trappings and formalities of higher venues, it can be intimidating enough to those who are not “regulars.” Moreover, its procedures may be such as to confuse and/or hinder even those with a meritorious case to present. Thus it is that the recently-produced Small Claims Court Assistance Manual for REALTOR®s and Their Clients , will provide valuable assistance to members of CAR®. The manual was created by the CAR® legal staff. Its declared purpose is “to help REALTOR®s and their clients prepare for and present a case in small claims court.”

The rules for small claims courts vary from state to state. In California, as of January 1, 2012, small claims court jurisdiction is up to $10,000. Small is bigger than it used to be. Even if a plaintiff is owed, or thinks he is owed, more than $10,000 he can choose to waive his rights to the excess and proceed in small claims court. Suppose there is a dispute over a $15,000 earnest money deposit. The plaintiff could waive the $5,000 excess over the court’s jurisdiction. It is understandable why someone might want to do this. The case will be heard in a much shorter time frame than would be likely in a higher venue. Also, in small claims court there are minimal legal costs. That is because, with very limited exceptions, attorneys are not permitted to represent a party in a small claims court action. CAR® small claims manual is designed to provide help for typical real estate related small claims matters. The first chapter provides an overview of small claims court. The second chapter is titled General Advice Applicable to all Claims, Preparing and Presenting Your Case. This consists of such down-to-earth suggestions as: “Create a folder with tabs, so that if the judge wants to see, for example, the purchase agreement, he or she can quickly flip right to it. The easier it is for a judge to find and view a document the more likely that judge will actually examine it …” Watch several cases before going to court. State the most important part of your case first and follow up with your key points.

2016 45HoursOnline, All Rights Reserved Page 221 Consumer Protection Reader, 2016 Edition Definitely do not interrupt the judge. When the judge begins talking, you stop talking. Don’t attempt to talk over the judge. The judge can interrupt you but you cannot interrupt the judge.  Chapters 3 – 6 of the manual address a variety of scenarios. They are grouped around four categories:  Chapter 3 – Claims by a listing broker for compensation.  Chapter 4 – Claims by a buyer for return of a deposit or damages.  Chapter 5 – Claims by a seller for release of a deposit or damages.  Chapter 6 – Defenses by a broker against claims made by a buyer.

The scenarios have a sample opening statement, a list of suggested documents, a list of the relevant forms or clauses, and a list of supporting legal authorities for the position that is being taken. The appendix of the manual contains the relevant forms and documents as well as the legal authorities or cases. They are not just citations, they present the opinions. This appendix is more than 200 pages long. CAR® members can access the Small Claims Manual at the legal section of the organization web site, CAR.org. It can be downloaded, or one can just use the link. It should prove to be an extremely useful document.

2.7.3 CONTRACTS AND FORMS

2.7.3.1 PURCHASE AGREEMENT UNDERGOES THOROUGH REVISION

by Bob Hunt for Realty Times, June 16, 2014 Copyright© 2014 Realty Times®. All Rights Reserved. Used With Permission. Click here to see the current California’s standard Residential Purchase Agreement (RPA), produced by Agreement. CAR® is undergoing a major revamping. While the changes being made do not represent a radical transformation or restructuring of the nature of the agreement, there are still many, many changes. Some of them are only slight alterations in wording; others are “tweaks” on the way certain issues are handled; and a few will constitute substantive changes in transactional practice.

It is often said that the armed forces of nations are constantly preparing to fight the last war in which they were engaged. Something of that goes on in the revision of standard contracts as well. We try to make revisions that will accommodate and account for the peculiarities and problems encountered in the most recent market. But, sometimes, as markets inevitably change, those recent issues and problems just fade away. To be replaced by new ones, no doubt. In no particular order, then, we review some of the more noticeable changes to the California Residential Purchase Agreement. 1. Added to the Financing section is a paragraph entitled “Lender Limits on Buyer Credits.” It reads: “Any credit to Buyer, from any source, for closing or other costs that is agreed to by the Parties (‘Contractual Credit’) shall be disclosed to Buyer’s lender. If the total credit allowed by Buyer’s lender (‘Lender Allowable Credit’) is less than the Contractual Credit, then (i) the Contractual Credit shall

Page 222 2016 45HoursOnline, All Rights Reserved Consumer Protection Reader, 2016 Edition be reduced to the Lender Allowable Credit, and (ii) in the absence of a separate written agreement between the Parties, there shall be no automatic adjustment to the purchase price to make up for the difference between the Contractual Credit and the Lender Allowable Credit.” This is to say, a buyer who offers a big price, but then seeks to reduce it by asking for big credits, had better be prepared to deal with the lender’s disallowance of those credits. 2. Another addition to the RPA is a section entitled “Representative Capacity.” It deals with parties who are signing “in a representative capacity and not for him/herself as an individual.” Such parties must complete a specified addendum and must deliver within three days after acceptance of the contract “evidence of authority to act in that capacity.” Failure to deliver such evidence triggers a Seller’s right to cancel. 3. Loan contingency is not automatically tied to appraisal. “If there is no appraisal contingency or the appraisal contingency has been waived or removed, then failure of the Property to appraise at the purchase price does not entitle Buyer to exercise the cancellation right pursuant to the loan contingency if Buyer is otherwise qualified for the specified loan.” 4. Added to the section detailing what items are included and excluded from the sale is a section for “Leased or Liened Items and Systems.” The need for this was occasioned primarily by the increasing presence of solar systems that come with a long-term lease. The Buyer’s approval of and ability to assume the lease is made a contingency of the purchase. 5. A large Scope of Duty section has been added to the purchase agreement. It has nothing to do with contractual terms between buyer and seller. It is a CYA section for the protection of brokers. It details the many things that the brokers are not responsible for and that they are not required to do. The entire section was taken from an existing buyer and seller advisory, which, unfortunately, is not always used by agents. 6. A major change that will particularly be noticed by southern California agents is the removal of the termite report from the list of inspections whose cost is allocated, by negotiation, either to the buyer or the seller. Additionally, a widely-used addendum (WPA) – indicating who will pay for termite repairs – is no longer referenced in the contract. This is not to say that buyers can’t get termite reports and request that repairs be made. They can, just as they can with respect to roofs, windows, etc. The point is that termite inspections will now be treated the same as any other inspection a buyer might want to make. The same with the request to make repairs. Termite work is no longer, so to speak, enshrined in the contract, and there is no implication that sellers must agree to bear the entire cost of termite repairs.

The revised purchase agreement is in its fourth and final draft form. CAR® embers can view it on the Association Web Site at www.CAR.org. Only a 2016 45HoursOnline, All Rights Reserved Page 223 Consumer Protection Reader, 2016 Edition short period remains for comments to be submitted. In August, CAR® legal staff members will begin teaching courses on the new document. It will be released for use in November.

2.7.3.2 LISTING CONTRACT: NEW RULES FOR COMMISSION

by Bob Hunt for Realty Times, May 14, 2013 Copyright© 2014 Realty Times®. All Rights Reserved. Used With Permission. When is a listing agent owed a commission? The answer to that depends, of course, on the language in the listing agreement. Recently, the Standard Forms Advisory Committee of CAR® revised the language in the standard Residential Listing Agreement (RLA) . The new language makes it clear that, unless certain exceptions apply, a commission is owed only when both of two conditions are met: (1) a ready, willing, and able buyer  makes an offer whose price and terms are accepted by the seller, and (2) the buyer completes the transaction, unless prevented from doing so by the seller.

Previously (and maybe still) it was widely understood that a commission had Ready, Willing, and Able Buyer been earned if a buyer was procured who made an offer that matched the price and terms specified in the listing agreement, or on other price and terms the seller might find acceptable. A completed transaction was not a required condition for a commission to have been earned.

The previous version of the RLA said a commission was due if anyone: “procures a buyer(s) who offers to purchase the Property on the above price and terms, or on any price or terms acceptable to Seller.” Suppose that one had a listing agreement using the previous form and that the “above price and terms” stipulated something like “purchase price of $300,000, cash proceeds to seller, escrow in 45 days or less.” Next, suppose that a buyer came forward with a funds-verified, cash offer of $300,000 and a 30 day escrow. One more supposition: the market seems to be heating up and the seller wants to take advantage of it; so he counters at $325,000. The buyer walks. Has a commission been earned? Under the old language, many would have said “yes.” But not under the new contract. Now, the buyer must have an offer that is accepted. Moreover, he must also complete the transaction (unless prevented from doing so by the seller). Why the change? Often, when real estate practices change, when contract or disclosure language is changed, it is the result of a court decision. That is what happened here. Last year, California’s Fourth Appellate District Court ruled on a dispute involving whether or not a commission had been earned. The case of RealPro, Inc. v. Smith Residual Company, 2012 did not involve a CAR® listing agreement, but the one that had been used had similar language. In the RealPro situation, a buyer had made a full-price ($17 million) offer on terms that the seller found acceptable. However, the seller then increased the listing price to $19.5 million. The buyer declined the price increase; but, subsequently, the buyer’s broker, as a third-party beneficiary, sued for his commission. The trial court focused on the portion of the listing that set forth price and terms, which said “$17,000,000 cash or such other price and terms

Page 224 2016 45HoursOnline, All Rights Reserved Consumer Protection Reader, 2016 Edition acceptable to Sellers...” The court’s view was that it would be a mistake to say that the listing was for $17 million. Rather, it “was for $17 million cash or such other price, plus terms acceptable to Sellers.” The Appellate Court said, “we, like the trial court, conclude that the $17 million price was merely an invitation to submit offers. Although RealPro submitted an offer to purchase the Property, such offer never materialized into a sale that would trigger RealPro’s right to a commission.” Pretty clearly, the appellate court was of the view that it is a sale – not just an acceptable offer – that triggers a commission. You can’t fight them; so you might as well join them. The new RLA reads that a commission is due if anyone “... procures a ready, willing, and able buyer(s) whose offer to purchase the Property on any price and terms is accepted by Seller, provided the Buyer completes the transaction or is prevented from doing so by the Seller.” [my emphasis] Readers will note that the new condition (completion of the sale) is qualified by the phrase “or is prevented from doing so by the Seller.” Does that mean that, if a transaction is underway and the seller does something to prevent the closing, a commission will then be owed? It reads that way, doesn’t it? We’ll let you know once it has been litigated.

2.7.3.3 BUYER CLAIMING BREACH MUST BE ABLE TO PERFORM

by Bob Hunt for Realty Times, April 24, 2012 Copyright© 2012 Realty Times®. All Rights Reserved. Used With Permission. Sad to say, but it occasionally – maybe even frequently – happens that when the scheduled time for closing comes, neither party is ready to perform. So what happens then? No doubt what happens most of the time is that both buyer and seller continue their efforts and eventually the transaction closes. But suppose that one of the parties has had a change of heart. Can they simply cancel on the grounds that the other has breached? A recent California ruling (Tornel v. Office of the Public Guardian of Los Angeles County, 2011 ) shows that it is not that simple. In May of 2008, Mario Tornel and Martha Silva (buyers) purchased a home at an auction conducted by the Public Guardian of Los Angeles County acting in its capacity as conservator of the estate of Mary Buchenau. On August 1 the probate court confirmed the sale at a price of $254,000. Escrow instructions provided that the buyers would deposit 10% of the purchase price and that the remaining $228,600 was to be paid to the escrow holder no later than two working days prior to close of escrow. Also, before the close of escrow the conservator was to deliver all instruments necessary for the transfer of title. Escrow was scheduled to close on September 30. The buyers put their deposit into escrow but by September 30 neither party had tendered performance. The buyers had not deposited the balance of the purchase price and the conservator had not supplied the deed. On October 15, a party acting on behalf of the buyers wrote the escrow company requesting that the escrow be cancelled and the deposit returned. Then, on October 19 – roughly twenty days late – the conservator delivered the deed to escrow. The buyers, however, refused to consummate the

2016 45HoursOnline, All Rights Reserved Page 225 Consumer Protection Reader, 2016 Edition purchase, claiming the conservator was already in breach. They insisted that the escrow be cancelled and their deposit returned. The conservator then filed a petition with the court to vacate the order confirming the sale so that the property could be marketed to new buyers. The conservator also requested authority to retain the deposit and to be awarded damages. The probate court granted the petition and continued the matter until resale, at which time damages could be assessed. When the buyers attempted to have this order set aside, the court gave them the opportunity to complete the sale at the original purchase price but they declined. Subsequently, the property resold for a lower price. Not only did the buyer’s lose their deposit, they were assessed $34,662 in damages. Of course they appealed. The appellate court upheld the lower court’s ruling. The appellate court observed that “It is well established that if it is not clearly specified that time is of the essence in an escrow transaction, a ‘reasonable time’ is allowed for performance of the escrow conditions.” There was no “time is of the essence” provision in this sale and there was nothing that implied that timing was essential. The buyers “presented no evidence at the trial level that a delay of 19 days following a two-month escrow was an unreasonable time for performance.” Moreover, the court spelled out a crucial principle for its ruling: “even if time for performance has expired, a party cannot claim default by the other party as justification to terminate the escrow without either performing or having tendered performance to the other party.” [my emphasis] Because the buyers had not deposited their funds as required, they could not successfully claim that the other party had breached. The moral to this story? Do not complain about the other side not having their ducks in a row until you have made sure that yours are.

2.8 HOME OWNERSHIP

2.8.1 HOME IMPROVEMENT

2.8.1.1 SEVEN WAYS TO USE THE HUMBLE CONCRETE BLOCK

by Jaymi Naciri for Realty Times, August 16, 2015 Copyright© 2014 Realty Times®. All Rights Reserved. Used With Permission. When it comes to cheap chic, wood pallets  have been having their day, being transformed into everything from patio furniture to wall coverings. But now it’s time for a new super affordable material to shine, and it is! Behold the humble concrete block  and all the cool things you can do with it.

“Why are cinder blocks so versatile? Perhaps it’s the fact that their form is simple, clean-lined and modern,” said Decoist. “And their color is a tone of gray that goes with everything.

Page 226 2016 45HoursOnline, All Rights Reserved Consumer Protection Reader, 2016 Edition “Not to mention, many of these blocks have openings that are perfect for displaying plants and incorporating other materials, such as wooden beams.”

In January 2016, your editor Concrete blocks, or cinder blocks as they’re also known, can be used bought concrete blocks from indoors and out, on their own or in collaboration with other materials, Home Depot for 95 cents each! painted or naked, and only cost a buck and change apiece.

All it takes is a little imagination, and some upper body strength to carry them to and from the car. Here are a few ideas to get you started. Bed Frame : Place a layer of concrete blocks under a mattress and you’ve got a great industrial look for just a few dollars. Paint them whatever color you want or leave them bare, and you can even use the cubby openings for storage.

These things are really heavy – 28 pounds each (source). I wouldn’t place them on a wooden floor without placing them upon a protective layer. Coffee table : A couple of blocks and a wood top – try an old door you pick up at an antique store or garage sale – and you’ve got a standout table, like this one featured on Remodelista. “Legendary designer and antiques dealer Axel Vervoordt created an informal coffee table with concrete blocks and a slab of wood in this Belgian interior.

Shelving: Need to create some inexpensive storage? Blocks + a couple of sheets of MDF = a stylish place to put your books and knickknacks that costs almost nothing and can be put together in a few minutes. Paint just the insides of the blocks for a unique look.

Stairs : A sloped hill in your yard can be a hazard, and can also be expensive to fix. A few cinder blocks filled with pebbles from Home Depot, and you have some pretty snazzy DIY stairs.

Raised garden : Concrete blocks also make a great choice to create a raised garden bed that is "cheaper and more durable than using wood," said Apartment Therapy.

Vertical garden : Need a cool place to display all those succulents? Check out this vertical garden made from cinder blocks and lots of liquid nails. Fire Pit : Forget those expensive fire pits. With a couple armfuls of concrete blocks, you can build one of your own “for under $60,” said Apartment Therapy.

2016 45HoursOnline, All Rights Reserved Page 227 Consumer Protection Reader, 2016 Edition Do a Google image search on “cinder blocks creative ideas” to see many other uses for cinder blocks. It’s amazing what you can do with these blocks especially when each block costs about a buck.

2.8.1.2 INGENIOUS STORAGE OPTIONS THAT WILL CHANGE YOUR LIFE

by Jaymi Naciri for Realty Times, January 25, 2015 Copyright© 2015 Realty Times®. All Rights Reserved. Used With Permission. Most conversations about storage, and about moving up, for that matter, make us think about George Carlin If you haven’t seen his “stuff” rant ►, you should definitely check it out (there may be a bad word or two). He has a point, and yet … we still need more room to put our stuff. And since we don’t see ourselves chucking it all and going full nomad, we’re always super excited to learn new ways and find new places to put it all. Here are the ingenious storage solutions that’ll help us all make room for all our stuff. Take advantage of the space under the stairs Whether it’s pullout drawers , the flip-up kind , or built-in wine storage, under-the-stairs storage just might be the very best kind of storage. Check out Bob Vila for more ideas.

Under the bed storage We’re not talking about shoeboxes – although do what you have to do if you’re short on closet space! Ingenious ideas for under-the bed storage include pullout drawers that provide deep storage for linens, and a flip-up bed that you can store a up to 26 cubic feet of stuff under. And if you want to go all out, there’s this platform storage option that is unique and utilitarian .

Built-in kitchen nook The advantages of the built-in eating area include: 1. It’s cozy. 2. It’s chic. 3. It takes up less space than a traditional table and chairs.

4. It’s a great place to store some kitchen essentials. Yes, we’re always looking for places to put our cookie sheets, Pyrex, and muffin tins. We mean tablecloths, placemats, and fancy napkins. Either way, a flip-up or liftoff bench, or large drawers as part of your eating nook will give you useful storage.

Toy storage You can replicate the look of the built-in seating and create a charming and useful kids storage/seating area with these IKEA Kallax shelving units turned on their sides and topped with pillows. A few bins inside help you keep everything tidy. Shelving on the back of a kid's closet door can also provide a convenient place to store books, puzzles, and art supplies.

Use those cabinet tops Just because you don’t have cabinets that go to the ceiling doesn’t mean you can’t have convenient kitchen storage. Make the open shelving trend work for you with framing that extends the look and function of the cabinets. Or, spend a few bucks and bring in a few baskets for a rustic look that can store small appliances, extra dishes, or cookbooks. The same idea works in bathrooms and on top of large pieces of furniture.

Don’t forget about bottom cabinets In many cases, base cabinets are designed as one open space, which doesn’t allow for much organization. You can use every inch of the space in there and double your storage by adding a stepped shelf inside each set of doors. Adding a tension rod gives you an easy and inexpensive way to hang spray bottles under the sink.

Maximize your closet space If you haven’t double hung every inch of your closet, built or brought in shelves where you could and turned the back of the door into a shoe holder, you’re wasting space! Here are some more closet tips, like adding rows of molding inside your closet to hang your heels.

Over the door It’s not always about creating more space, but about using the space you have more wisely. A simple shelf on top of your bathroom door gives you an added storage option with a quaint look.

A great hiding place If you need a good hiding place to store an extra key, some emergency cash, or some valuables, try this: “Glue old book spines to a box for hidden storage. Leave the front cover on one of the books and the back cover on another to use as the sides of your box,” said DIY Home Sweet Home. Need even more storage ideas? Check out Real Simple and Pinterest.

by Phoebe Chongchua for Realty Times, February 19, 2014 Copyright© 2014 Realty Times®. All Rights Reserved. Used With Permission. Depending on the location, whether you’re shopping for a new home or trying to sell your current residence, one of the biggest challenges is trying to reduce street noise. Tony Sola, founder of Acoustics.com cautions homeowners and buyers about too high expectations when it comes to reducing traffic noise. “Too many times I have seen homeowners try to do something about the noise by adding another layer of drywall or something to the wall itself. It’s not minimal return, it’s zero return. Unless you control the weak point, that does nothing,” says Sola. Sola says there are some cases where the wall might be the weak point but he says usually that’s just one percent of the time. Generally the windows are the weakest noise link. So, if you’ve fallen in love with a home that’s perfect for you but butting up a little close to a busy road, there are options to help make the traffic less noticeable. Starting with the interior of the house, the first area to listen closely to are the windows. They can tend to let in a significant amount of noise. “The sound almost always goes through the window and doing anything at all to the walls will be pointless until you have fixed the noise that comes through the window,” says Sola.

Windows have a Sound Transmission Class (STC) rating. The higher the rating the less outside noise you should hear inside the home. A typical A company named SoundProof Windows, Inc. claims to produce single-pane window only has a 22-25 STC rating whereas a dual-pane windows with a rating of 50 window might have a STC rating of 27-32. There are also specialty (source). windows with even higher STC ratings available .

Choosing the right STC rating depends on what you’re planning to do. “If you’re looking at a STC 30 window versus a STC 33 window, you’re not going to notice a huge difference in that but it might be worth it to you, if they’re about the same price. But if you’re looking at replacing windows and you’re planning to go from a STC 30 to a STC 33, that’s a lot of work to get virtually little improvement. If you can get a five or six decibel difference, then that can start to make a noticeable change,” explains Sola. Keeping sound from coming into your home is usually only part of the solution. Many people want to enjoy a traffic-noise-free backyard. This can be a little more complicated but not impossible. “One of the first things you would look at is the barrier. If you’ve got a view wall or wrought iron fence that’s not going to block anything, or if you have large oleander bushes, that might block the view but it doesn’t block the sound at all,” says Sola. Instead he says a solid wall that doesn’t have gaps in it will help a little. “Auto noise comes from the tires. So to control auto noise the wall will work pretty well because the source is really low – it’s at ground level but truck

Page 230 2016 45HoursOnline, All Rights Reserved Consumer Protection Reader, 2016 Edition noise – the medium trucks or the semi truck – comes from about eight feet off the ground, so even if you build a six, seven, or eight-foot wall, that won’t help much,” says Sola.

However, if you couple a barrier wall with a noise-masking system such as a water feature  then you can virtually wash away the traffic sounds. “A water feature, if done right, can work very well,” says Sola. “You wouldn’t want a water feature that’s just trickling water. You would want something more substantial that does have a noise level to it and more of a broad band noise,” says Sola. He says the problem with water features is they tend to be very localized. Sola says he’s been to some homes where the homeowner placed one water feature in the backyard and it drowned out the traffic noise in that one area of the yard but the street noise could be heard from other parts of the backyard. He says that’s when a couple of fountains might need to be used.

Getting creative is the key. Working with a sound acoustic expert and landscaper can result in a beautifully designed outdoor area that’s doesn’t reveal any sign of the chaotic hustle and bustle of the nearby road.

2.8.1.4 SMART HOME RENOVATIONS THAT PAY YOU BACK

by Jaymi Naciri for Realty Times, December 14, 2013 Copyright© 2013 Realty Times®. All Rights Reserved. Used With Permission. Small renovations to your home can pack a big punch. Big renovations can also pack a big punch – but they can also be a big headache and come at a big cost. While you may be eyeing a new bonus room and guest bedroom in the attic, beware that not every renovation pays you back at the same rate. “Homeowners in many areas of the United States can still recoup 80 to 90% of the money spent on home improvements,” said MSN Money. “The key is to know where to spend. Just because you put $20,000 into renovations, it won’t necessarily add that much value. The key to adding value is to focus on the things that are important to buyers and to not over- improve. You don’t want to have the most expensive house on the block. So if the houses in your neighborhood have concrete driveways, investing in expensive brick pavers may not be in your best interest financially.” It is also important to consider your lifestyle, so that you make smart changes according to your desired outcome, said CBS News. “Home remodeling is all about return on investment. When deciding which project to tackle in your house, consider your circumstances. If you’re planning on staying forever, make changes to the space that makes it more livable for you. Just remember not to go so overboard that you can never sell the house if you suddenly needed to. If your current place is not your forever home, only invest time and energy into projects that will give you a decent return when you eventually sell it.” 

Imagine how little people would redesign a home originally designed for buyers of normal stature . Although their redesigned home would lower its resale value for buyers of normal height, it would fetch a higher price from little buyers. Here are some tips for making smart renovations that can bring enjoyment of your home and also make you money.

How much should you spend? The easy answer is to determine what you’re comfortable with budget-wise and then bump that amount up against home values in your area and the latest numbers defining ROI for your project. Remodeling magazine releases a cost versus value report every year. You can read the 2013 version here.

“The biggest mistake homeowners make is spending more on the remodeling project than their home value can support. Don’t expect to get optimum return on a $65,000 kitchen if the home is valued at $300,000,” said HGTV. Generally speaking, you can spend between 6 and 10% of the total home value and get fair returns. You also can be too thrifty and overlook items that buyers look for in your price range. Remodeling for resale means choosing materials that appeal to the masses. This means opting for stainless steel appliances that are high quality rather than professional-grade models. Spend on functional features like pantry drawers, soft close cabinet drawers and doors, waste- recycling cabinetry. But don’t over-personalize the space. You may appreciate the art-deco drawer pulls that cost $50 a pop, but will buyers care? Probably not. Exterior Before you consider an exterior renovation, take a good look at your home’s exterior with fresh eyes. Is the paint peeling? Is the lawn dead? “If your house doesn’t look appealing from the outside, chances are a potential buyer will never make it inside,” said The Learning Channel (TLC). “According to Bankrate.com, a good first impression can add 5 to 10% to the value of your home. If the exterior color of your house is dated or fading, painting is a good place to start your improvements. Choose colors and exterior details that match the period of your house.” If it’s landscaping you need, re-seeding your lawn costs a fraction of putting down new sod, but takes longer to bear fruit. If you just need a quick fix before an open house, head to a home improvement store for some potted flowers to place at either side of the door or along your front walkway. The splash of color brightens up a house and can turn drab to dreamy.

An important, but often overlooked, renovation is the front door. In fact, replacing a “low-quality entry door with a steel version will give you the My sources tell me the actual biggest bang for your buck.” According to Remodeling’s cost-vs.-value value is 85.62% . report as reported by Forbes, “homeowners can expect an 85.6% return  on investment, or $856 on a $1,000 job.”

Page 232 2016 45HoursOnline, All Rights Reserved Consumer Protection Reader, 2016 Edition Sound boring? No. 2 on their list will give you some enjoyment out of your space while also providing you a great return on your investment when it’s time to sell: add a deck. And make sure you do it professionally. “This is definitely not a DIY job, since a poorly constructed deck could end up costing you big money in the long run,” said CBS News. “Have a pro install a nice wooden deck, however, and you could see a 77.3% return on your investment. That’s more Deck Remodeling than $7,730 on a $10,000 job.

If you are thinking about adding a deck yourself and you don’t have neither the skills nor the experience, make sure you check out HGTV’s Top 25 Biggest Renovating Mistakes.

A New Coat Once you have taken stock of your exterior, it’s time to take a look around the inside. Outside of picking up your stuff and de-cluttering the home, painting is probably the easiest change you can make for the lowest cost and biggest impact. “Painting is one of the least expensive ways to freshen and improve your home’s look, and consequently its value,” said TLC.

Are all your walls white? You can add a little personality without going overboard just by splashing some neutral paint on the walls. Are the colors too bold or to personal for potential buyers? Toning it down will help buyers see the home, and not get lost in the cobalt blue walls. In addition to the walls, “A coat of paint can do wonders to brighten up dingy cupboards, for example, or old paneling,” said TLC.

Kitchens Yes, paint can indeed provide an easy update in a kitchen. If you have old cabinetry and it’s not cost-effective to change it out, a coat of paint can give you a great head start and turn around potential buyers that would have been turned off by all that outdated mid-range maple. “For potential buyers, the kitchen is the room that can make or break the sale. An upgraded, attractive kitchen can make your A kitchen sorely in need of remodelling (from home irresistible. Ideally, your kitchen renovation should earn a UglyHousePhotos.com). 70% return on investment when you sell your home,” said HGTV. “But this depends on the features you choose, how much you spend remodeling and whether your priority is to create a dream kitchen for yourself or a kitchen that will appeal to potential buyers. The biggest mistake homeowners make is spending more on the remodeling project than their home value can support. Don’t expect to get optimum return on a $65,000 kitchen if the home is valued at $300,000.”

2016 45HoursOnline, All Rights Reserved Page 233 Consumer Protection Reader, 2016 Edition Kitchen remodels remain a top choice of homeowners – both those who are looking to sell and those who just want to improve the aesthetic or function of their home. “Over the last five years, nearly four in ten home improvement dollars have gone into kitchens and future spending is likely to follow the same trend, according to a recent survey by Houzz,” said Huffington Post. “U.S. homeowners on average spent $28,030 to remodel their kitchens over the last five years with costs varying widely at different budget levels. Nationwide, the average cost for a high-end kitchen was $54,942, $22,390 for a mid-range kitchen, and $7,133 for a lower-budget kitchen.” For more renovation dos and don’ts, see Life Hacker's guide to the renovations that raise your value – and the ones that don’t. Bathroom A recent story about home renovation projects from the Chicago Tribune found that the average small bathroom home renovation cost is a little under $16,000. However, you’d only expect to see a payback of a little over $10,200 on that project if you turned around and sold your home within a year of completing the project. That’s not to say that a well-thought-out and executed bathroom renovation won’t pay off for you. “Kitchen and bathroom remodels continue to be two of the best investments you can make in your house,” said HGTV. “They’re always right up there at the top of the list. They’re the big, sexy rooms that new home builders splurge on, so when buyers are shopping around that’s what they want in an existing home, too.”

If your bathroom looks like this , by all means, go for the gut job. There are resources out there that can help you work around ugly tile but some bathrooms are just beyond an easy fix. If you’re considering a bathroom renovation, Better Homes and Gardens recommends: “White sinks, tubs, and toilets all cost less than those in colors because manufacturers make and sell more of them.” Updated vanities and tubs can fetch a near 100% ROI, said Yahoo.

Skimp on high-cost items like tile, buying only enough to tile “only the shower and/or bath area walls. If it’s within your budget, tile halfway up the wall, add a border design, and paint the area above.”

Update the cabinet hardware “to provide an instant visual impact at a minimal cost.”

Trendy Tile If you love the look of pricey hand-painted or mosaic tile but you’re on a budget, include a few... among affordable field tiles. Or, use your accent tile in a unique design, like in this bathroom, which allows you to create a modern, inviting look without the high cost. You can see some more ideas for low-cost bathroom renovation ideas here.

2.8.1.5 TOP REMODELING TRENDS FOR 2014

by Jaymi Naciri for Realty Times, February 20, 2013 Copyright© 2014 Realty Times®. All Rights Reserved. Used With Permission. The end of the year brings many things. Special time spent with family and loved ones. Presents from Santa. The promise of a fresh start. And, if you’re like us, an insatiable desire to change up your environment by updating it with the latest trends. If you are feeling the pull toward renovating, redecorating, or revising your home for 2014, there are some exciting trends you may want to incorporate. We break it down for you below. Color Trends Radiant Orchid is the Pantone  color of the year but color trends for 2014 are also feeling blue. Blues across the color wheel are predicted to be hot hues for 2014. Navy, in particular, has captured the fancy of design experts. “Navy blue will be a big trend for 2014. I’m seeing a lot of the shade on the runways, on the streets, in editorials, in chic interiors... I actually think everyone will get it in 2014,” said designer Mark D. Sikes in House Beautiful’s Top Radiant Orchid “inspires confidence and emanates great Decorating Trends for 2014. joy, love and health.” (Source) The company is best known for its Pantone Matching System (PMS), a proprietary color space used in a variety of industries, primarily printing, though sometimes in the manufacture of colored paint, fabric, and plastics. The Pantone color of year for 2015 is marsala  which is described on Pantone’s site as “much like the fortified wine that gives Marsala its name, this tasteful hue embodies the satisfying richness of a fulfilling meal while its grounding red-brown roots emanate a sophisticated, natural earthiness. This hearty, yet stylish tone is universally appealing and translates easily to Marsala (18-1438) fashion, beauty, industrial design, home furnishings, and interiors.”

2016 45HoursOnline, All Rights Reserved Page 235 Consumer Protection Reader, 2016 Edition Glamming It Up Another way to change up your space: inject a glam feel as a nod to art décor or the Great Gatsby. This is another hot 2014 trend showing up in wallpaper, textiles, furniture, and accessories. “Move over white walls, in 2014 we’ll be seeing rooms with a lot more drama and glamour. Dark, moody walls in black will be the perfect backdrop to the metallic accessories that we're all loving right now,”

Mecca Interiors said Jeanine Hays of Aphrochic.com in House Beautiful.

In the Kitchen When it comes to renovating, kitchens are going glam too. “The kitchen has long since become the heart of the home, and now designers are dressing it up accordingly,” said Elle Décor, “with elaborate custom cabinetry painted in rich gemstone colors, and accented with gleaming brass or chrome, all lit by unusual lighting fixtures. Kitchens are becoming downright glamorous.” Floating shelves  are also a hot 2014 design trend according to remodeling firm the Neil Kelly Company. A floating shelf shows no unsightly brackets – it appears to be “floating” on the wall.

Elle Décor Bathroom Beauties A recent Hanley Wood survey revealed that 58% of those planning to renovate in 2014 are planning bathroom updates.

The trend toward creating a spa-like environment in the bathroom continues, with “clean lines, fluidity, and futuristic bath fixtures. Bring a spa-like feel to your master bath by indulging in floating sinks and softer, contoured shapes that bring a serene feel to the bathroom and give a feeling of spaciousness. Add depth to the bathroom by incorporating textures in the bathroom with mosaic tiles that feel luxurious and modern. Blend in futuristic trends like a waterfall shower, Neil Kelly. modern touch faucets, and heated floors to add interest and visual splendor,” said Scott Yancey from Flipping Las Vegas.

Kelly agrees, emphasizing oversized walk-in showers and elegant standalone tubs as strong bathroom trends for 2014. The Tech Touch For those who are remodeling, Kelly also points out the No. 1 trend for 2014 that brings some much-needed tech help to the home. U- Socket is a wall plug  that “has two built-in USB ports to power devices including iPhones, gaming devices, digital cameras, Kindles and iPads ... and features a smart sensor that allows it to shut off when the device is fully charged.” Want more info about 2014 trends and how homeowners’ needs have changed over the years? Check out Business Week’s Graphic: The House Americans Want Now. U-SockIT, $29.95 at Amazon

by Carla Hill for Realty Times, November 12, 2012 Copyright© 2012 Realty Times®. All Rights Reserved. Used With Permission. Homeowners looking to add value to their home should start in one of the most central rooms of the home – the bathroom. According to C.P. Hart, one of the UK’s leading contemporary bathroom retailers and suppliers of bespoke bathrooms since 1937, a great bathroom can add real value to your property. HouseLogic, supported by NAR®, reports that the top bathroom trends can even be real money savers.

Low-flow toilets have been First, take note of energy conservation. Low-flow toilets  can use a required for all remodels in fraction of the amount of water of standard versions. Low-flow shower California since January 2014 (Source). heads and faucets can also conserve water, a prime consideration for homeowners all across the drought-ridden Midwest and beyond.

The next trend will tug at the heart of every tech geek. HouseLogic reports it’s all about technological advances. “You’ll be able to create a custom showering experience more affordably than ever. For $300 for simple controllers to $3,500 or more for a complete luxury installation, programmable let you digitally set your preferred water temperature, volume, and even massage settings before you step in. To achieve a personalized showering experience, you’ll need a 120-volt power source, and a thermostatic valve and controller in addition to your

Aquapeutics 6810B Luxury Steam Shower –$4,300. standard shower head or heads. Luxury models may include a steam system, a wifi source for music, multiple body spray outlets, tankless water heater, and a secondary controller to start the system from another room.”

Take it a step further with docking stations for your iPod and integrated television screens in your mirrors! C.P. Hart say it goes beyond saving energy and geeking out, however. Bathrooms can have focal points and finishes that can be real show stoppers. “Fittings and accessories should never be ignored when furnishing your washroom. A key piece, such as a basin, can really enliven the look and bring a touch of luxury to any space. Glass Design create bespoke {sic} washbowls that are a great example of cutting-edge design meets decadence. Each piece is uniquely designed, using materials that capture the soul of the product, adding a new lease of life to your abode.” Today’s bathroom designs are about clean lines and organized beauty. Less is more, letting the eye fall on the room’s shining stars, such as travertine floors, marble sinks, and beautiful faucets. It’s time to go minimalist. “Enhancing your bathroom’s shape and size through discrete storage, each piece is custom-made, maximizing surface space through multi-storage units. With a range of styles, colors and sizes to choose from, you won’t be short of ideas to match existing bathroom features,” C.P. Hart says.

Consider a beautiful freestanding tub, reminiscent of the claw- footed examples from yesteryear. There are a wide range of shapes and styles available from many large retailers. These baths can become the focal point of any space. “From traditional Victorian to industrial-inspired designs and Japanese influences, there is a great range of inspiring pieces to choose from,” says C.P. Hart. Finally, think about future use of a bathroom. There’s an aging demographic of baby boomers in the United States that is trending bathrooms towards future functionality. HouseLogic reports, “Expect to see faux wood, linen, and uniquely-textured looks for tiled bathroom floors and walls in 2012. The texture adds both visual impact and better traction for wet feet.”

And let’s not forget accessible tubs. “The accessible tub is no longer limited to the high-walled, narrow-door format that dominated the market in the last decade. Newer models, such as Kohler’s Elevance ($5,100) , employ rising panels in front that give more of a traditional tub look with easier entry and exit. Others use standard hinged, sealed doors but are increasing door width by several inches for better accessibility and appearance.”

Kohler’s Elevance Today’s bathroom trends are about modern functionality. Go green and clean.

2.8.2 NEIGHBORS & NEIGHBORHOODS

2.8.2.1 THREE WAYS TO CHOOSE YOUR NEIGHBORHOOD AND UP YOUR VALUE

by Jaymi Naciri for Realty Times, February 12, 2015 Copyright© 2015 Realty Times®. All Rights Reserved. Used With Permission. Deciding where to buy a home can be one of the most difficult decisions to make. If you have a built-in reason to choose one area over another (it’s close to work; it’s where you grew up and you’re emotionally tied to it; there’s a rumor about a professional football team coming soon), it can be easier. But for the rest of us, a multitude of factors can make the choice challenging. So how do you know where to buy if you’ve got value in mind? Here are a couple schools of thought. Go where the rich go. A recent feature in CNN Money noted that “The United States is the top destination for those worth more than $30 million buying residential property valued at a million or more according to a report from Wealth-X and Sotheby’s International Reality.” New York is the leading city worldwide for wealthy residences, they said. Los Angeles and San Francisco are also in the top five. Within those cities,

Page 238 2016 45HoursOnline, All Rights Reserved Consumer Protection Reader, 2016 Edition individual neighborhoods cater to moneyed buyers. So what do you do if you can’t afford those premium neighborhoods? You live close by. “There’s a neighborhood in Southern California called Coto de Caza that was popularized on Real Housewives of Orange County and is one of the most desirable places to live anywhere in the states,” said real estate advisor Sara David. “Several years ago, a developer came in and built a community of substantially smaller but still very attractive production homes just outside the gates and marketed the property as ‘Coto de Caza adjacent.’ It was a huge draw for buyers, who have seen their home values explode over the years. It’s not a unique situation. There is a long history of ‘adjacent’ neighborhoods gaining in reputation and value simply because of what they are next to.” Go where Starbucks goes. “Confirmation that Starbucks is boosting more than your productivity,” said Apartment Therapy. “Higher home prices actually follow Starbucks, rather than the other way around.” Yes, call it “The Starbucks effect,” said TIME magazine. “Proximity to a local coffee shop has a very real, and positive, effect on home values,” with data over 17 years showing that “homes adjacent to the local Starbucks almost doubled in value, up by 96%. Those further out appreciated by 65% over the same period.” Go where the schools are. It’s an obvious choice to look for good schools for homebuyers that have a family or are planning for one. In fact, in some cases, buyers are willing to forgo other amenities to be in a top school district. “Homebuyers are willing to pay more and give up certain home features for a home located in their district of choice,” said AOL. “They are especially willing to give up accessibility to shopping and nearby parks and trails among other amenities, to reside within school district boundaries of choice.” But being near acclaimed schools is important even for childless couples. “Living near a high-scoring school can increase your home’s value by over $200,000, according to the Brookings Institution ,” said AOL. That’s not chump change. There are plenty of attractive advantages that come with proximity to a school, including increased police protection, personal use of school facilities, and living in a ‘Drug-Free School Zone.’ “Even those couples who don’t have kids yet but are planning to are worried about the quality of schools in the neighborhoods where they are considering buying,” said Stacie Staub of Live Urban Real Estate. “High- scoring or popular schools do raise property values and demand for homes, no question.” How did you choose your neighborhood?

by PJ Wade for Realty Times, August 18 2014 Copyright© 2014 Realty Times®. All Rights Reserved. Used With Permission. Home buyers, sellers, and the real estate professionals who help them can get so fixated on the specific property to be bought or sold that they overlook a valuable information resource for both selling or buying – the neighbors. Who knows as much, or perhaps more, about a listed property and the location than seasoned owners of abutting properties, especially those who pre-date the current owner?  The owner, keen on selling for the best price, as fast as possible, and with the minimum amount of hassle may still be shy about pitching their home to friends, relatives, and contacts. The two, three, or four abutting property owners and the rest of the close neighbors, all of whom continue to be committed to living in the area they love, represent an even bigger pool of friends and contacts that could be potential buyers or sales supporters. Sellers who ensure that the Marketing Strategy for the listing includes the professional canvassing neighbors with notice of the new listing and any subsequent price changes, are tapping into a neighborhood force of those who know why they love living where they do and usually love to talk about it.  Real estate professionals assisting buyers and sellers want to know everything about the property and location they are listing or selling but unless they live nearby they may overlook subtle micro variations on local trends. For instance, the new mega build next door to my house is being promoted for its proximity to a popular public school. Lots of viewings, but after months in a hot market, no sale. In this high-traffic block, the majority of neighbors do not have small children. This particular property also has a bricked-over small lot with nowhere for kids to play and nowhere to conveniently leave strollers and other kid-transporting vehicles. Parents may also see the huge backyard hot tub and full-size outside kitchen as tempting hazards to small children. The tight-space rear parking makes kid-hauling SUVs too large for the site. This particular house suits singles or couples with older or no children and no big vehicles, which describes the majority of residents on this block. It’s the walkability of the area and proximity to village-like shopping that are the draw for these property owners.  Neighbors know how the municipality deals with front-yard parking- pad applications and can share examples of successful and failed parking requests. (The developer who bought the property originally should have checked with neighbors or city hall to find out if the planned front parking pad – an essential to a high sale price – would ever be a reality.) Availability of street parking permits can also be a hot topic with neighbors, especially in areas where they are hard to get. Sites such as CrimeMapping.com  Local minor crime and break-in rates are issues neighbors keep on display neigborhood crime statistics displayed graphically. top of . Checking out local newspapers, websites and insurance

Page 240 2016 45HoursOnline, All Rights Reserved Consumer Protection Reader, 2016 Edition Sites such as WalkScore.com brokers can provide details about these patterns but talking to show neighborhood amenities neighbors gets the real story. such as restaurants, stores, parks, and bus lines.  When a property has not changed owners for decades, neighbors may be invaluable in establishing grandfathered rights to parking, rental, or other uses. Affidavits from neighbors may enable new owners to obtain legal consent to continue parking and otherwise- not-allowed uses.  Ask neighbors if police are often called into the area to settle neighbor disputes. For example, recent buyers up the street resold their house a short time after they moved in because of irreconcilable differences with one long-time neighbor. A colleague of mine sold their beloved home on a cul-de-sac a few miles from here and bought another one at the far side of this treasured enclave when a new ultra-noisy, intrusive large family moved in next door to them. Persistent loud-barking dogs, on-going fence issues, or excessively noisy equipment such as old air conditioners are a few issues that buyers may want to know about.

Items in the list above are part of the adventure of city living but it can be helpful for buyers to get an inside view of the neighborhood they are considering as “home.” Buyers’ Offers Should Reflect Their Expectations Builders, renovators, and developers expect buyers to request physical changes to the property even when work is substantially finished. For instance, in the property mentioned above, an offer could include the following considerations:  By seeing how other property owners use their homes and yards, buyers may want to customize the lot and building to their needs. A buyer desiring more precious yard space could ask for the oversized outdoor hot tub and/or kitchen unit to be removed or for changes to landscaping with a credit to the buyer.  Neighbors also know about quirks in the property that may cause problems down the road. For instance, the two basement windows that cantilever open to block the narrow mutual driveway could be replaced by fixed or sliding panes for safety and access reasons.  Seasonal issues like spring flooding and winter ice are also important to consider. For example, the steep front paved area becomes very slippery when snow and ice arrive. The rear below- grade basement entrance may have flooding issues when leaves (blocking the drain) and rain fall at the same time.  Home inspections are common practice even when extensive warranties exist. Neighbors who have watched construction of the house may have valuable detail for structural engineers attempting to determine the standard of construction and future problems. Neighbors cannot speak to the quality of construction or give construction opinions – nor should they be encouraged or tricked into this – but they have lived through construction first-hand and may know more than they realize. Like, how many shortcuts or do- overs were undertaken to meet deadlines, cut costs, correct miscalculations, or incorporate redesigns. This insight can be 2016 45HoursOnline, All Rights Reserved Page 241 Consumer Protection Reader, 2016 Edition particularly useful for in-fill builds without extensive warranties and when dealing with new builders without established track records.

Most neighbors will not volunteer their ideas or information to you although they’ll probably exchange ideas with each other. Neighbors would like good neighbors to buy into their area, so demonstrate your respect for their time and knowledge and start the conversation. You might also try the social networking service, NextDoor.com which services neighborhoods throughout the United States. If the neighborhood you are interested in is covered by NextDoor and if its neighbors are active in the site, you can expect to learn much about the neighborhood. In my neighborhood, for example, you would learn that coyotes have been eating stray pets, that there has been a rash of car break-ins, and that fossil fish have been discovered.

2.8.2.3 CRIME MAPPING AND OTHER ONLINE RESEARCH TOOLS

by Chuck Milbourne, Editor, December 4, 2013 In many areas of the state, timely crime statistics are available over the Internet at the neighborhood and street level. Given a home address, agents can obtain reports such as the following:

The above reports from www.CrimeMapping.com show crimes within a one mile radius of a home at 16606 Haynes St. in Lake Balboa California over a six month period. The first plots crimes on a map of the area and uses icons to represent the type of crime. When an icon is clicked, a popup gives details of the crime including its date, location, and description.

To access Google’s Street View, It can be seen from the above that the majority of crimes – especially the just type in an address into Google. most serious – are perpetrated in a small pocket to the east of the subject home and that the home is insulated from this pocket by an airport to the north, a golf course to the east, and a large park to the south. Therefore, it might be concluded that although there is serious crime nearby, the home’s immediate neighborhood is relatively safe.

With the map come several useful functions: (1) send a link of the map to an email address, (2) display a detailed report of each crime sorted by date or location; (3) sign up to receive immediate emails reporting new crimes in the neighborhood, and (4) display “trend reports.”

Page 242 2016 45HoursOnline, All Rights Reserved Consumer Protection Reader, 2016 Edition When asked by a buyer if an area is safe, rather than answering vaguely (“Yes, I think so.”) agents should consider introducing their buyer to this or some similar report and encourage their buyers to register for crime alerts in neighborhoods of interest. The above reports are from www.CrimeMapping.com but other sites also provide similar crime statistics including www.CrimeReports.com, www.MyLocalCrime.com, www.RaidsOnline.com, and www.Trulia.com (which provides statistics for any listed property). Of the several sites providing crime statistics, I found CrimeMapping.com to be the most accurate. It was the only one which reported a crime of which I had personal knowledge.

2.8.2.4 WHO SHOULD PAY FOR A BOUNDARY FENCE?

by Bob Hunt for Realty Times, October 28, 2013 Copyright© 2013 Realty Times®. All Rights Reserved. Used With Permission. “Good fences make good neighbors” the New England poet told us (Robert Frost, The Mending Wall); but no one said who pays for them. Fortunately, for Californians, the state legislature has spoken on the matter.

This law is known as the “Good In August of this year Governor Brown signed AB 1404 into law . The Neighbors Fence Act and its intent of that bill was “to clarify and modernize California’s almost 150 year details are discussed here. old neighborhood fence statute, maintaining the state’s long tradition which holds that neighbors are presumed to gain mutual benefits from the construction and maintenance of a boundary fence between their properties, and as a result are generally equally responsible to contribute to the construction and maintenance of their shared fencing.”

According to the bill’s authors “...in a society no longer dominated by agrarian pursuits, modernizing the statute to better reflect the contemporary benefits associated with neighborhood fences makes sense... The modernization of the statute in this bill will thus better recognize these contemporary mutual benefits by clarifying the rebuttable presumption that adjoining landowners share an equal benefit and an equal responsibility for the reasonable costs of construction and maintenance of any fence dividing properties.” Moreover, “… the bill appropriately takes into account that neighborhood fences are not always mutually beneficial and that an adjoining landowner who clearly receives little or no benefit from a boundary fence should not be forced to subsidize an adjoining landowner’s fence construction.” [my emphasis] Under the new law, “Where a landowner intends to incur costs for [such a fence], the landowner shall give 30 days’ prior written notice to each affected adjoining landowner. The notice shall include notification of the presumption of equal responsibility for the reasonable costs of construction, maintenance, or necessary replacement of the fence. The notice shall include a description of the nature of the problem facing the shared fence, the proposed solution for addressing the problem, the estimated construction or maintenance costs involved to address the problem, the proposed cost sharing approach, and the proposed timeline for getting the problem addressed.”

2016 45HoursOnline, All Rights Reserved Page 243 Consumer Protection Reader, 2016 Edition Suffice it to say that we are some distance from Robert Frost’s day (I let my neighbor know beyond the hill; And on a day we meet to walk the line And set the wall between us once again.) If the adjoining neighbor objects, he must be able to present “a preponderance of the evidence” showing some or more of the following: 1. Whether the financial burden to one landowner is substantially disproportionate to the benefit conferred upon that landowner by the fence in question. 2. Whether the cost of the fence would exceed the difference in the value of the real property before and after its installation. 3. Whether the financial burden to one landowner would impose an undue financial hardship given that party’s financial circumstances as demonstrated by reasonable proof. 4. The reasonableness of a particular construction or maintenance project including all of the following: (a) The extent to which the costs of the project appear to be unnecessary or excessive (b) The extent to which the costs of the project appear to be the result of the landowner’s personal aesthetic, architectural, or other preferences. 5. And, if that’s not enough, “Any other equitable factors appropriate to the circumstances.”

As noted, until now, no modification has been made of CC §841, California’s shared-fence law, since it was enacted in 1872. In the Bill Analysis, Assembly staff noted that the last published case citing that law occurred in 1964. The staff report said, “Given the regularity with which fence repairs are likely made within the state and the lack of reported cases brought on the issue, it appears as though many landowners attempt to resolve any fence dispute without seeking court involvement (or go to small claims court for reimbursement of costs.).” Are things all better now? We shall see.

2.8.2.5 NUISANCES MUST BE DISCLOSED BUT CAN AFFECT VALUE

by Bob Hunt for Realty Times, April 2, 2013 Copyright© 2013 Realty Times®. All Rights Reserved. Used With Permission. Neighbors can be a nuisance. Being neighbors, therefore, sometimes we can be a nuisance. Most of our and their nuisance-causing behaviors are sporadic, transitory, and often unintentional. They constitute one of those wrinkles in life with which we can all put up. Regrettably, though, some nuisances are persistent. When that happens it diminishes not only our enjoyment of our property but also its value. Not surprisingly, the definition of what is a nuisance is broad and

vague. CC §3479 says in part, “Anything which is injurious to health ... or offensive to the senses, or an obstruction to the free use of property, so as to interfere with the comfortable enjoyment of life or

Some nuisances are public, meaning that they may affect an entire community (right; now we have to define community). Whereas others may be private, affecting only one or a small group of persons. Someone who has polluted a waterway may have committed a public nuisance; while your neighbor’s act of draining motor oil onto your property is likely a private nuisance. Some nuisances may be both public and private. The emission of noxious odors by a manufacturing facility might be a public nuisance in that a whole neighborhood might be affected; but it might also be private with regards to adjacent property owners who were more seriously affected, e.g. by having a health hazard, not just an annoyance. Clearly, one person’s nuisance may not be another’s. The sound of night- time pony league baseball games might be music to the ears of one person; whereas to others it would be an annoying bother. This much is definite: if some activity or behavior clearly constitutes a nuisance in a particular neighborhood, or part thereof, then it must be disclosed to a potential purchaser. This is where the diminishment in value comes in. This issue was specifically addressed by a California Appellate court in the case of Alexandar v. McKnight, 1992. The trial court had found that the defendant’s behavior (which included operating a noisy wood chipper business from their home, late night basketball games, and parking too many cars on the property) constituted a nuisance; and that the existence of such nuisance(s) would have to be disclosed on the mandatory disclosure form (the TDS, Transfer Disclosure Statement) required by California law. Such disclosure, the trial court found, would have a negative effect on the market value of the property. Although, for technical reasons we don’t need to explore here, the Appellate Court did not uphold the damages found by the trial court, it did concur with the principal that disclosure of the nuisance would negatively affect the value of the property. “It is reasonable to assume that a prospective buyer would not be anxious to become involved in a neighborhood dispute and that, all things being equal, would prefer to live in a more collegial and hospitable neighborhood. In economic terms this reluctance would be reflected in a reduced purchase price. The buyer willing to assume headaches and other emotional discomfort in purchasing a residence will undoubtedly expect a discount for doing so.” Frequently, a neighborhood nuisance will not be within the capability of a buyer to discover using reasonable efforts. Therefore, much relies upon disclosure; and disclosure may result in a diminished value. For this reason, it is a good idea to try to nip nuisances in the bud, though, of course, in a pleasant and neighborly way. No one really likes to get involved in such matters; but better the owner now, than the buyer and his lawyer later. It’s surprising that I haven’t read more stories about agents being sued for non-disclosure of neighborhood nuisances. Click here to read how an agent in Placerville, CA was forced to pay for failure to disclose a bear in his seller’s neighborhood.

by Bob Hunt for Realty Times, January 15, 2013 Copyright© 2013 Realty Times®. All Rights Reserved. Used With Permission. I think that I shall never see; A poem lovely as a tree So wrote Joyce Kilmer (Alfred Joyce Kilmer, that is) in 1913; but even Mr. Kilmer might have been shocked to learn how valuable a lovely tree can be. A recent ruling by a California Appellate Court (Rony v. Costa, 2012) sheds some light on this subject. Most real estate agents and many property owners are aware of the right to remove overhanging branches from a neighbor’s tree to the extent that those branches actually intrude over your property. But, as we learn from the Rony case, you want to be darn sure that the tree trimming goes no farther than the property line. Ellen Rony has lived on her property in Tiburon since 1979. A distinguishing feature of that property was two towering Monterey cypress trees that marked the northwest and northeast corners. Over the years, Ms. Rony periodically had the trees professionally trimmed to enhance their appearance. In 2000, Paola Costa and family moved onto the property just behind that of Ms. Rony. In 2008 Mr. Costa decided to install an outdoor oven in the southeast corner of his lot, adjacent to the Rony property. He hired a day laborer to cut tree branches that extended over the cooking area. The laborer cut branches from trees on Costa’s property and also from trees on Rony’s property. He not only cut away overhanging branches, he cut into Rony’s tree itself. According to testimony, he “made 32 cuts along the north side of the tree and had denuded three vertical limbs of their branches and growth. The cuts left stubs, [that] were not of ‘professional’ quality, and did not promote the health of the tree.” In December of 2008, Rony filed a complaint against the Costas alleging that they were responsible for the laborer’s tree cutting and that they should pay enhanced damages under CC §3346. Both parties produced expert witnesses at the trial. Both of them employed complex formulas to assess the value of the damages. They both referred to the Guide for Plant Appraisal in support of their reasoning. Their conclusions, however, were significantly different. Rony’s expert calculated the loss at $59,248. Costa’s, on the other hand, arrived at the figure of $7,530. When the trial court filed its statement of decision, it found, first, that Costa was vicariously liable for the damage the laborer had inflicted. But, when it came to damages, the court found neither expert opinion to be compelling. The court essentially struck a middle ground, finding actual damages – including aesthetic considerations – to be $22,530. But, then, under the provisions of CC §3346, the damage amount was doubled to $45,060. CC §3346(a), as the Appellate Court put it, “punishes [as] wrongful ‘injuries to trees’.” It provides that “injuries to trees, timber, or underwood upon the land of another, or removal thereof, the measure of damages is three times such sum as would compensate for the actual detriment …” Who knew this? The section also provides that if the trespass is “casual or Page 246 2016 45HoursOnline, All Rights Reserved Consumer Protection Reader, 2016 Edition involuntary” or if it is made under a probable cause to believe that no trespass was committed, then the measure of damages will only be double. Thus, the trial court only doubled the actual damages. The Court of Appeal upheld the trial court’s finding. Most notably, it upheld the trial court’s prerogative to place a “dollar amount on aesthetic harm, unless the amount was ‘so grossly excessive as to shock the moral sense …’” [my emphasis] As the Appellate Court pithily put it, “Given the hack job [the laborer] inflicted on Rony’s tree while trespassing on her property, we do not find the trial court’s award ‘shocking’ and will not second-guess the amount the trial court selected after carefully considering the evidence before it.” “Only God can make a tree” Joyce Kilmer wrote. But a court can tell you that it may be worth a whole lot of money.

2.8.3 CIDS

2.8.3.1 FHA AND VA CERTIFICATION ARE USEFUL FOR CONDOMINIUMS

by Bob Hunt for Realty Times, August 17, 2015 Copyright© 2015 Realty Times®. All Rights Reserved. Used With Permission. Buyers who qualify for FHA and/or VA mortgages are frequently shut out of purchasing opportunities because there are many condominium developments that have not obtained approval from the FHA or VA. A recently-approved law in California aims to help rectify that situation. Recently Governor Jerry Brown signed into law AB 596, a bill that will require condominium HOAs to disclose to their members whether their developments have been approved for FHA or VA financing.

The disclosure will occur each year and will accompany the annual budget report that each such HOA is required to distribute to members 30 to 90

days prior to the end of the fiscal year. The annual budget report includes, among other things, information regarding the HOA’s operating budget, a summary of its reserves, information about insurance coverage, and information regarding outstanding loans. AB 596 adds the requirement that,

on a separate piece of paper in at least 10-point font, there will be statements saying whether or not the development has been certified by The below article, “Should Condo FHA or the Department of Veterans Affairs. Those disclosures will be Boards See FHA Approval” prefaced by a statement saying, “Certification by the FHA may provide provides a compellling list of benefits to members of an association, including an improvement in an reasons for HOA’s to obtain FHA certification. owner’s ability to refinance a mortgage or obtain secondary financing and an increase in the pool of potential buyers of the separate interest.” A similar statement referring to VA will also be included.

The thinking behind AB 596 rests on (at least) two premises: (1) Many condo owners do not know whether or not their development is FHA or VA approved; and (2) many condo owners do not realize that having FHA or VA approval increases the marketability of their units. It is presumed that increasing owner awareness in these regards will result in encouraging, or prodding, HOA boards of directors to seek the appropriate approvals.

2016 45HoursOnline, All Rights Reserved Page 247 Consumer Protection Reader, 2016 Edition There are more than 50,000 CIDs in California, consisting of more than 4.8 million units. That is approximately one-quarter of the state’s housing stock. 56% of those CIDs are condominiums. Fewer than 30% of them are approved for FHA financing. The proportion with VA approval is even lower. Many developments that had FHA approval no longer have it as a result of rule changes in 2010. Whereas FHA approval, once received, used to be “lifetime,” the FHA put in a re-certification process in response to the foreclosure crisis. Now FHA requires re-certification every two years. Nationwide, more than 9,600 developments have lost their FHA certification. There are a number of reasons that, to date, there have not been more associations obtaining approval from FHA and/or VA. One, perhaps the major one, has simply been ignorance about the situation. AB 596 aimed to correct that. Another is that going through the application process – even if it is not terribly difficult – is not something that a typical HOA director wants to spend time on. Some have management companies that can handle the process; others don’t.

Click here for the website of a There are individuals and organizations that will provide the service at a company that specializes in price. During testimony regarding the legislation, prices quoted ranged from securing FHA/VA certification. $600 to $2,000.

One erroneous, and somewhat insidious, belief that has been known to deter HOAs from seeking certification is the mistaken belief that FHA or VA programs are “subsidized housing,” a form of welfare. There are those who don’t want their developments to be available to such programs. Mostly, though, it appears that lack of certification is simply a result of general ignorance about the process and its benefits. AB 596 is one way to address this.

2.8.3.2 COURT UPHOLDS HOA’S SHORT-TERM RENTAL RULES

by Bob Hunt for Realty Times, May 4, 2015 Copyright© 2015 Realty Times®. All Rights Reserved. Used With Permission. A Calififornia HOA adopted a rule that homeowners who rented out their homes could not do so for periods of less than seven days. Moreover, the HOA imposed an annual fee of $325 on owners who rent out their homes. The purpose of the fee was to defray, at least partially, the extra costs to the HOA that were caused by renters. Can they do that? Yes, according to California’s Second Appellate District Court of Appeal (Oak Shores Community Association v. Burlison, 2015 ). The Oak Shores Community Association (HOA) is the governing body of Oak Shores, a lakeside community consisting of 851 parcels of land. Six hundred sixty parcels are developed with single-family homes. Only about 20% are occupied by full-time residents. Approximately sixty-six absentee owners rent their homes to short-term vacation renters. The HOA adopted a set of rules which included a minimal rental period of seven days and a $325 annual fee imposed on owners who rented their homes. Owners of two different lots brought an action against the HOA challenging these rules. The challenge was brought in part under CC Page 248 2016 45HoursOnline, All Rights Reserved Consumer Protection Reader, 2016 Edition §1366.1 (since renumbered to {CC §5600(b(}) which states that “An association shall not impose or collect an assessment or fee that exceeds the amount necessary to defray the costs for which it is levied.” The trial court found in favor of the HOA, so the plaintiffs appealed. Among other things, the Appellate Court quoted from an earlier California Supreme Court decision (Lamden v. La Jolla Shores Clubdominium Homeowners Assn., 1998) saying, “Generally, courts will uphold decisions made by the governing board of an owners association so long as they represent good faith efforts to further the purposes of the common interest development, are consistent with the development’s governing documents, and comply with the public policy.” Moreover, the appellate court noted “That short-term renters cost the Association more than long-term renters or permanent residents is not only supported by the evidence but experience and common sense places the matter beyond debate.” Evidence by expert witnesses as well as the HOA’s accountants had supported the position. The Appellate Court also noted other cases (Laguna Royale Owners Assn. v Darger, 1981) had upheld the rights of the HOA to impose minimum rental periods. Not only did the Appellate Court uphold the trial court’s decision in favor of the HOA, but also it awarded attorney fees. The attorney fees in this case were – are you ready? – $1,180,646.50. It’s enough to make a person think twice about suing their HOA. In many California areas, as well as in tourist destinations around the country, both HOAs and communities are wrestling with the impact of short- term rentals brought about by organizations such as Airbnb. The ruling in Oak Shores may give them some guidance.

2.8.3.3 SHOULD CONDO BOARDS SEEK FHA APPROVAL?

by Dr. Jack Guttentag (“The Mortgage Professor”) February 20, 2014 for www.MtgProfessor.com. Used With Permission. As explained in the above article, If a condo meets FHA approval, purchasers of units in the condo are eligible “FHA and VA Certification are for FHA financing. This is advantageous to existing residents who want to Useful for Condominimums” a new California law, AB 596, will sell their units or may want to in the future. It is also advantageous to require all HOAs to disclose existing residents who want to stay put but anticipate that at some point they starting July 1, 2016 if f they are may run short of money and look to the possibility of taking an FHA-insured FHA/VA certified in their annual reverse mortgage. Yet despite these advantages of FHA approval to condo budget disclosures. (Source) residents, many condos that meet the agency’s requirements have never sought approval or have allowed their approved status to lapse.

FHA Condo Requirements The FHA condo approval requirements are 95 pages long, vary with the type and size of the condo and are not easy to summarize. Much of it has to do with what constitutes acceptable documentation and procedures. In general, the requirements are designed to protect residents against financial hazards arising from their responsibility for the condominium’s affairs. Rules that protect the residents also protect the lenders who make

2016 45HoursOnline, All Rights Reserved Page 249 Consumer Protection Reader, 2016 Edition condo loans which in turn protects FHA as the insurer of those loans. Here are a few of the more obvious ones:  On a new condo, the developer must have sold at least 50% of the units in the project to permanent owner occupants. This minimizes the risk that the condo is not economically viable.  No more than 15% of the units in the condo can be delinquent more than 60 days on their condo association fees. This minimizes the risk that dues-paying residents will have to cover the deficiencies of those in arrears.  The condominium must be covered by hazard, flood, liability and other insurance required by state or local condominium laws or acceptable to FHA. This minimizes the risk that a natural or other disaster will jeopardize the solvency of the condo.

Note that Fannie and Freddie have condo requirements that are similar to those of FHA, though less extensive. If a mortgage loan that will be sold to one of those agencies is secured by a condo unit, the condo project must be approved by the agency purchasing the loan. Condo Approval FHA Helps Residents Sell Their Units If a condo is FHA approved, a unit in the condo can be sold to a borrower who needs the low down payment available on an FHA mortgage to make the purchase. This expands the pool of potential buyers for a condo unit. In addition, potential buyers may view FHA approval of a condo as akin to a Good Housekeeping seal. It means that the condo complies with a wide range of requirements bearing on its financial soundness eliminating the need for potential buyers to conduct their own examination. Condo Approval Makes Seniors Eligible for a HECM Reverse Mortgage Residents of condos who have reached an age where they begin to think about retirement ought also to consider the possibility that they might need to supplement their retirement income by taking out a reverse mortgage. All of the private reverse mortgage programs folded up after the financial crisis of 2007-8 while Fannie terminated its reverse mortgage program in 2010. This left the FHA HECM program as the only one still functioning. Seniors living in condos, however, are eligible only if their condo is FHA- approved. Lack of Approval May Reflect Condo Weaknesses A condo may not be FHA-approved because it does not meet the agency’s requirements. The financial crisis increased the number of such condos by increasing the delinquency and foreclosure rates of residents which reduced the incomes of condo associations. How these troubled condos can meet such challenges is a topic for another article. My focus here is on condos that do meet the FHA requirements but are not FHA approved, either because they have never sought approval or because they have allowed their approval to lapse. Why Some Condos Do’nt Have Approval Although They Could Qualify Sponsors of new condominiums often seek FHA-approval at the outset to make it easier to sell the units. If the sponsor doesn’t get FHA approval at the beginning, the condo board that ends up administering the affairs of the Page 250 2016 45HoursOnline, All Rights Reserved Consumer Protection Reader, 2016 Edition condo is not likely to seek it later on unless there is strong sentiment among the residents that it is advantageous for them. Jim Deanne, who I interviewed in connection with this article because he acts as a consultant to condo boards looking to get approved, estimates that less than half of those who would qualify are actually approved. The cost is not a significant deterrent – Jim charges only $995 for guiding the board through the entire process and $500 of that is not payable until approval. The major reason why more condos are not FHA-approved is the apathetic myopia of residents. While FHA approval makes it easier to sell units in the condo, this is immediately relevant only to those condo residents with concrete plans to sell. This is usually a small group. Other residents are likely to be indifferent – until their time comes to sell. Similarly, only a small number of residents are likely to be interested in a reverse mortgage at any one time. Most residents who are too young to qualify don’t believe they will ever grow old – or run out of money when they do.

2.8.3.4 WHO PAYS FOR HOA DOCUMENTS?

by Bob Hunt for Realty Times, September 2, 2014 Copyright© 2014 Realty Times®. All Rights Reserved. Used With Permission. When a condominium is sold, who should pay the cost of providing the buyer with various HOA documents, the buyer or the seller? The purchase and sale of a condominium unit can often be more complicated, involve more paperwork, and have proportionately higher expenses than the sale of a free-standing single family home. This doesn’t just apply to condominiums; it is also true of sales in other sorts of CIDs. In these transactions expenses are often driven up by fees that are charged for association documents such as CC&Rs, By-Laws, Operating Rules, and disclosures about the HOA, its budget, balance sheet, reserves, assessments, etc. The provision of many of these documents may be required by law. Naturally, the question arises: who is to pay for all of this? For many years this question was not a big issue because the costs were fairly minimal. But, for at least the past two decades, in California those charges have become significant. (Probably in other states too.) Both HOAs and their management companies learned that the business of providing documents for ownership transfers could become a significant profit center – thus offsetting the need to raise monthly dues. Recently, CAR® provided the state legislature with examples showing that the charges for providing HOA documents to a prospective purchaser could exceed $1,000.

For some years now, in California, the question of “who should pay?” has been a subject of negotiation. The current standard CAR® purchase See the article, “Purchase contract contains an allocation of costs section that allows for either party, Agreement Undergoes Thorough ® Revision.” or both in part, to be charged. When CAR releases its new standard form purchase contract in November {2014}  that issue will no longer be negotiable. More precisely, the contract will stipulate that the seller is to pay for the cost of providing those documents that the law requires be given to the purchaser.

2016 45HoursOnline, All Rights Reserved Page 251 Consumer Protection Reader, 2016 Edition The change was not, of course, just the result of a whim or an anti-seller bias on behalf of CAR®’s Standard Forms Committee. Rather, it was the result of legislation. asdf AB 2430 passed the legislature and was approved by the Governor July 23, 2014. It will take effect January 1, 2015. AB 2430 had a two-fold overarching purpose: (1) “to make it ‘perfectly clear’ that [non-required] documents cannot be bundled with ... documents that are required to be provided by the seller or seller’s agent...” , and (2) “to make it ‘perfectly clear’ that it is the seller who is required to pay the document provider for provision of the documents to the prospective purchaser ... ” Part of the way the bill accomplishes its purpose was to provide a mandatory request form that will show which documents are required by law and what the document provider will charge for each one. Moreover, the bill clearly makes it possible for sellers to reduce their costs by providing to the buyer any of the documents – provided they are current – that the seller has in their possession. While all of this is clear, it may pose problems in some situations. Escrow companies do not want to order documents unless they have money in the escrow account to pay for them. Typically, such payment would come from the buyer’s earnest money deposit. But, in this case, if the charges must be against the seller, the seller may need to bring money into escrow, early on, in order to cover it. Unfortunately, though, as in short sale scenarios, the seller may not have the money to bring to escrow. In other cases, such as REO sales, the seller may have the money but will be adamantly against putting any into escrow. More little things for the real estate agent to work out. Isn’t that great?

2.8.3.5 CONDO PURCHASES REQUIRE MANY DISCLOSURES

by Bob Hunt for Realty Times, May 1, 2013 Copyright© 2013 Realty Times®. All Rights Reserved. Used With Permission. It’s just more complicated to buy or sell a condominium or other property in a CID than it is to engage in a similar transaction with a typical free- standing single family home. This is because when buying a condominium you aren’t just buying a piece of real estate, you are also buying into an HOA. And, while the unit can be observed and physically inspected, the association is a bit more abstract, albeit just as real. Thus it is that California law requires that the purchaser of a unit in a CID must be provided with a substantial amount of information about the HOA, its rules, its activities, and its financial health. These are in addition to the myriad other disclosures that are required upon the transfer of residential real estate. The disclosures required for a condominium are found in CC §§ 1365-1368 and 1375. The general categories of those required disclosures are as follows: (1) By-laws, Covenants, Conditions, and Restrictions (CC&Rs), (2) Operating Rules and Regulations, and Restrictions (such as age, pets, or rental uses); (3) Financial matters including Budget, Reserves, Financial Statement, and Regular and Special Assessments; (4) A preliminary list of defects if any legal action or settlement has taken place with the developer;

Page 252 2016 45HoursOnline, All Rights Reserved Consumer Protection Reader, 2016 Edition and (5) any notices of violation(s) against the seller and/or any unpaid obligations of the seller. While the law requires the disclosure of many items to a condominium buyer, there is still a good bit of information that isn’t mandated but that a buyer might likely want to know. That is why the standard purchase contract produced by CAR® enumerates additional items to be provided by the seller to the buyer. Thus, if the CAR® purchase agreement is used, it becomes a contractual obligation of the seller to provide (i) disclosure of any pending or anticipated claim or litigation by or against the HOA, (ii) a statement containing the location and number of designated parking and storage spaces, and (iii) copies of the most recent 12 months HOA minutes for regular and special meetings. Receiving the information described in the above paragraphs is extremely important for the purchaser of a CID. Sometimes, a deal may die because of the disclosure. While that may be regrettable, it is usually preferable to a subsequent law suit on the basis of non-disclosure. Of course not every negative disclosure is a deal killer. Often it is simply an occasion for renegotiation. Suppose, for example, that there is pending or anticipated litigation involving the association and that a special assessment will probably be forthcoming. This needn’t kill a transaction. It could be compensated for by a price reduction or perhaps even by having money set aside, after closing, to pay such future assessment. Conversely, it could be the case that a settlement or award is anticipated. That need not be viewed simply as the buyer’s good fortune. An agreement could be made to assign a portion of the proceeds to the seller. There are lots of ways to skin a cat, they say; and there are lots of ways for buyers and sellers to work together to overcome obstacles. But first they need to know what the obstacles are. That’s one reason that so much information must be processed when one purchases a unit in a CID.

2.8.3.6 CID DOCUMENTS

Real Estate Bulletin, March15, 2012 (Spring) As CIDs become more prevalent, it is increasingly important that real estate brokers and salespersons become more knowledgeable about the management documents affecting the use, control, and operation of units and the common area within a CID as well as applicable laws and regulations. Here are some suggestions to assist you in completing a smooth transaction involving a CID:  Always be prepared for purchaser’s questions. Purchasers are more knowledgeable than ever. Be familiar with the documents that are used with a CID. The buyer must receive a copy of the CC&R’s, Bylaws, Articles of Incorporation (if applicable for that project), the Subdivision Public Report, and the HOA’s budget.  Be prepared to explain what an assessment or maintenance fee is and know what the HOA must maintain. If the project has a subsidy arrangement {?}, be able to explain the agreement. When will the subsidy expire? What will the assessment be after the subsidy ends? If the project has an existing HOA, be prepared to discuss

2016 45HoursOnline, All Rights Reserved Page 253 Consumer Protection Reader, 2016 Edition the financial status of the project. Both purchasers and lenders request this type of information.  Review the CC&R’s applicable to the project. Developers are

including more information in the CC&R’s such as disclosures of soil conditions, building restrictions, and earthquake fault lines. Be familiar with the use restrictions in the CC&R’s and the HOA’s rules implemented by the board of directors, such as the pool and clubhouse usage and hours, pet restrictions, parking requirements, A Subdivision Public Report is required by CalBRE for the sale etc. or lease of lots, parcels, or units  Read the Subdivision Public Report . Be able to answer questions within a subdivision. Just as corporations must obtain approval about the major sections of the report. Be prepared to explain what to issue and sell stock certificates, type of legal interest is being conveyed and be familiar with any a developer must obtain approval material disclosures. to sell or lease five or more lots, parcels, or units within a subdivision. Further information regarding CIDs and the public report process is available on the BRE Web site.

3 APPENDIX

3.1 AUTHOR BIOS

3.1.1 BELL, WAYNE

Wayne Bell Commisioner of Real Estate, CalBRE Mr. Wayne Bell is the Real Estate Commissioner for the California Bureau of Real Estate. Prior to his appointment by Governor Brown in July 2013, he was the Bureau’s Chief Counsel; and Assistant Commissioner from 2006. From 2003 to 2006 he was special counsel and director of homeownership at the California Housing Finance Agency. Mr. Bell was deputy secretary and general counsel at the California Business, Transportation and Housing Agency from 1999 to 2003 and served in various positions at Ralphs Grocery Company from 1989 to 1999, including vice president, senior counsel, and assistant secretary. Mr. Bell earned a Juris Doctorate degree from Loyola Law School, Los Angeles.

3.1.2 CHONGCHUA, PHOEBE

Phoebe Chongchua is a brand journalist, real estate writer, and travel and lifestyle host. She is the founder of Live Fit Enterprises which is the parent company of online video publications: Live Fit Magazine, The Plant-Based Diet, SD Real Estate Help, and PCIN.TV (Internet Network TV), and the company’s brand journalism agency and video production team, Live Fit Films. Phoebe is a veteran TV News Anchor/Reporter (more than 20 years in TV) who produces brand journalism Video News Stories (VNS) for companies. Through strategic marketing campaigns, Live Fit Films helps address companies’ needs by creating high-quality, custom content that gives the brand a leading edge over the competition and a credible, compelling message for the consumer.

Her company, Live Fit Films, a full-service, brand journalism multimedia agency provides clients with video news stories, custom content writing, public relations, ongoing marketing consulting, social media, website development, producing of 30-minute paid programming and educational TV shows, and the purchasing of airtime on Networks. We help businesses find and share their important stories with consumers via Video News Stories and articles via the Internet, TV, radio, print publications, and social media.

3.1.3 CORCORAN, LEW

REALTOR (R) at Coldwell Banker Residential Brokerage August 2014 With many years of experience and knowledge working in the real estate and mortgage industries, I can say with confidence that I'll help you make the right move! See my profile at www.LewCorcoran.com.

Corporate Mortgage & RE Benefits Advisor at Best Choice RE Services November 2010 - June 2013 As a Corporate Mortgage / Real Estate Benefit Advisor, I set up mortgage and real estate benefit programs for corporations, businesses and companies and their employees in Massachusetts.

Certified Short Sale Professional at Best Choice RE Services November 2010 - June 2013 Certified Short Sale Professional REO Asset Professional at Best Choice RE Services November 2010 - June 2013 REO Asset Professional Licensed Real Estate Professional at Best Choice RE Services November 2009 - June 2013 Buyer's Agent Seller's Agent RE Social Media Consultant & Trainer at Best Choice RE Services 2009 - June 2013 As a Real Estate Social Media Consultant and Trainer, I assist real estate agents and other real estate industry professionals with social media marketing and help them dominate the real estate market in their local market area Corporate Mortgage and RE Benefits Advisor/Mortgage Broker/Social Media Consultant at Northeast Community Mortgage 2008 - 2009 Corporate Mortgage and Real Estate Benefits Advisor / Mortgage Broker / Real Estate Social Media Consultant

3.1.4 EVANS, BLANCHE

“Blanche Evans is a true rainmaker who brings prosperity to everything she touches.” Jan Tardy, Tardy & Associates I have extensive and award-winning experience in marketing, communications, journalism and art fields. I’m a self-starter who works well with others as well as independently, and I take great pride in my networking and teamwork skills. Blanche founded www.evansEmedia.com in 2008 as a copywriting/marketing support firm using Adobe Creative Suite products. Clients include Petey Parker and Associates, Whispering Pines RV and Cabin Resort, Greater Greenville Association of REALTORS®, Better Homes and Gardens Real Estate, Prudential California Realty, MLS Listings of Northern California, Tardy & Associates, among others. See: www.evansemagazine.com, www.ggarmarketclick.com, and www.peteyparkerenterprises.com. Contact Blanche at: [email protected].

3.1.5 GIARDINELLI, JOHN

John V. Giardinelli is the principal of The Giardinelli Law Group, APC, and is the founding attorney and senior partner of the firm’s predecessor law firms. His practice is primarily real estate and business planning. He has extensive background in the preparation of real estate and business transactional documents, real estate and business litigation, land use, construction defect matters, contract law, corporate law, and business law.

John is an experienced trial attorney (retired) and has served as an arbitrator and mediator by private party engagement and on appointment from the Riverside Superior Court. He has been retained as an expert witness to testify a number of times regarding real estate broker/agent fiduciary duty issues. John represents a number of Associations of REALTOR®s with membership exceeding 30,000 real estate professionals. He administers several REALTOR®s professional standards programs, is an instructor for Professional Realty Institute (GRI), and has taught a real estate class for the California State University. He writes several Association newsletters, has presented several talks at CAR®’s Convention and Legal Affairs Forum, and is a frequent guest speaker and teacher at seminars and luncheons on issues of interest to real estate professionals. John was admitted to the California Bar in 1977 after receiving his undergraduate degree from the University of California at Irvine in 1974, and his Juris Doctor Degree from Western State University in 1977, where he served as an editorial board member for law review, moot court champion, and graduated with honors.

3.1.6 GUTTENTAG, DR. JACK

Jack M. Guttentag, is Professor of Finance Emeritus, formerly Jacob Safra Professor of International Banking, at the Wharton School of the University of Pennsylvania. Earlier he was Chief of the Domestic Research Division of the Federal Reserve Bank of New York, on the senior staff of the National Bureau of Economic Research and managing editor of both the Journal of Finance (1974-77) and the Housing Finance Review (1983-89). The “Mortgage Professor. Professor Guttentag has been a student of the home loan market for many years, and his bibliography of scholarly articles, books and monographs is large and diverse. He has also been an active practitioner, serving as a consultant to many government agencies and private financial institutions, including HUD, USAID, Freddie Mac, Citicorp, Dominion Bancshares, the World Bank, J.P. Morgan Securities, the New Zealand Bankers Association, and many others. In addition, he has been a director of the Teachers Insurance and Annuity Association, Federal Home Loan Bank of Pittsburgh, Guild Mortgage Investments, and First Federal Savings and Loan Association of Rochester.

Throughout his career, Professor Guttentag has been concerned with the difficulties faced by consumers in the home loan market. In 1985 he joined with Gerald Hurst, a colleague at Wharton, to found GHR Systems, Inc. which developed a nationwide electronic network that lenders use to deliver complex mortgage information quickly to loan-officer employees, mortgage brokers, and consumers using the Internet. The company also provides easy-to-use tools that enable loan officers to act as consultants to borrowers during the origination process, while speeding up the process. In August, 2005, GHR was purchased by Metavante Corporation.

In 1997 Professor Guttentag began to phase out his teaching at Wharton to focus his efforts more fully toward helping consumers navigate the home loan market effectively. He began a weekly column on mortgages that is nationally syndicated, and began the development of his web site. The major purpose of both is to help consumers make better decisions. He published The Pocket Mortgage Guide in 2003 and The Mortgage High Recommended! Encyclopedia in 2004, with a second edition in 2010; all were published byMcGraw Hill.

3.1.7 HILL, CARLA

Carla Hill, M.A., works on the Realty Times staff as Managing Editor for the online publication. She also is producer for the real estate news channel, seen daily on RealtyTimes.com and on video newsletters nationwide. She currently works out of the Realty Times corporate office and studio in Dallas, TX.

3.1.8 HUNT, BOB

Bob Hunt is a director of NAR® and is author of, Real Estate the Ethical Way. A graduate of Princeton with a master’s degree from UCLA in philosophy, Hunt has served as a U.S. Marine, REALTOR® association president in South Orange County, and director of CAR®, and is an award- winning REALTOR®. Contact Bob at [email protected].

3.1.9 KASS, BENNY L.

Author of the weekly Housing Council column with The Washington Post for nearly 30 years, Benny Kass is the senior partner with the Washington, DC law firm of Kass, Mitek & Kass, PLLC and a specialist in such real estate legal areas as commercial and residential financing, closings, foreclosures and workouts. Mr. Kass is a Charter Member of the College of Community Association Attorneys, and has written extensively about community association issues. In addition, he is a life member of the National Conference of Commissioners on Uniform State Laws. In this capacity, he has been involved in the development of almost all of the Commission’s real estate laws, including the Uniform Common Interest Ownership Act which has been adopted in many states.

3.1.10 LANE, NORA LING

Ms. Lane is a real estate agent and vice president of Allie Beth Allman & Associates in Dallas, Texas. To visit her website, click here.

3.1.11 MILBOURNE, CHARLES

I graduated in 1972 with a B.A. degree in psychology from CSUN. I began my career in 1973 at Lundberg Survey for three months and then three years at Security Pacific Bank as a market analyst. From 1976 to 1979 I worked as an applications consultant for Tymshare’s real estate/financial branch in Orange County, CA. In this capacity I worked with the Society of Real Estate Appraisers (which, in 1991, merged into the Appraisal Institute). As Tymshare’s liaison to the SREA, I worked with their board to improve and promote “Mulvar,” a computer program using multiple regression to estimate home market value from the Society’s database of home sales.

2016 45HoursOnline, All Rights Reserved Page 259 Consumer Protection Reader, 2016 Edition During my employment at Tymshare, I co-developed a software system for Marshall and Swift for computing the replacement cost of buildings based on their well-known handbook. I also developed numerous computer models for appraising income properties using ROI, goal seeking, and heuristic programming methods. In 1980 I left Tymshare to become an independent computer programmer. As such, I developed real estate applications for many banks and Savings and Loans all of which disappeared in the aftermath of the S&L Crises. In 1989 I formed my own consultancy (TACS) which grew to four offices and fifteen employees. I spent half my time training programmers from large corporations around the country in the use of a fourth-generation computer language named FOCUS. In the 1990s I founded Focused Solutions, Inc. to develop and sell ATS (“Applicant Tracking System”). A system which used OCR technology to scan employment resumes into an indexed database. In 2006, I earned a broker license (01765249) and formed 45HoursOnline.

3.1.12 NACIRI, JAYMI

Ms. Naciri is a contributor to Realty Times, writer, and content creator/manager/publisher tackling traditional and social media with vigor. Her LinkedIn bio can be viewed here.

3.1.13 PERKINS, BRODERICK

A journalist for 35-years, Broderick Perkins parlayed an old-school daily newspaper career into a digital news service offering editorial content and consulting services. Perkins' San Jose, CA-based DeadlineNews Group includes the flagship news site, DeadlineNews.Com, offering real estate, personal finance and consumer journalism, and a backshop, the Deadline Newsroom. POSTSCRIPT from 2013-09-30: Broderick Perkins - long time Realty Times contributor died. He passed away on Sunday morning, losing his battle with liver cancer. Realty Times began publishing in October of 1997 and Broderick became one of it's first contributors. Through last week Mr. Perkins had written more than 2,100 articles for Realty Times. “Broderick was one of the first writers to contact me after we begin publishing” says Realty Times' President, Jody Lane. “Within two weeks he was telling me how little I knew about the publishing business, which of course was true”, said Lane. “His knowledge about real estate issues was unsurpassed, but most of all I'm going to miss his humor. I considered him a good friend.”

3.1.14 SARRO, ANTHONY

Priority Appraisal Services, Ltd www.e-TaxReductions.com - specializing in, Real Estate Tax Reduction Services

3.1.15 SHEKHAR, SHASHANK

DeadlineNews.Com contributing writer Shashank Shekhar is a San Jose, California-based mortgage lender, author, national speaker and blogger. He has been named to National Mortgage Professional Magazine’s “Top 25 Most Connected” and “Top 40 Under-40 Most influential” mortgage professionals. Shekhar’s work is featured on Homes.com, Examiner.com, Lender411.com, and his own Lending Expert Blog. Local and national media frequently tap him as an expert mortgage industry source. Connect with Shekhar on Facebook. Contact him at [email protected] or call 1.408.615.0655.

3.1.16 TUOHY, JENNIER

Jennifer Tuohy writes about home technology and automation for Home Depot. Jennifer focuses on new innovations being incorporated for use with appliances, thermostats, doors, and outdoor living. You can find more info on these home automation devices available at Home Depot, including the models highlighted by Jennifer.

3.1.17 WADE, PJ

Futurist and Strategist PJ Wade is “The Catalyst” – intent on Challenging The Best to Become Even Better. A dynamic speaker and author of eight books and more than 1800 published articles, PJ concentrates on the knowledge, insight, and special decision-making skills essential for the professionals and their clients who are determined to thrive in the 21st- Century vortex of change. PJ Wade’s latest business book, What's Your Point? Cut The Crap, Hit The Mark & Stick! (CatapultPublishing.com) further proves PJ’s forward-thinking expertise and her on-point ability to explain technical, even non-verbal, communication details in practical, understandable terms.

PJ: “What's Your Point? – the pivotal 21st-Century business question - must be answered before you open your mouth, hit a key, or tap anything. Too often ‘Your Point’ is not clear to you, and communication remains an expensive illusion.” Designed for experienced advisors, executives, entrepreneurs, and other professionals, who may not have received as much formal training in communication as they have in their own field, this comprehensive ebook 2016 45HoursOnline, All Rights Reserved Page 261 Consumer Protection Reader, 2016 Edition starts where other business books leave off. What's Your Point? presents the rich combination of practical suggestions, game-changing concepts, and on-point perspectives essential to those rising to the challenge of modern effective business communication, online & off.