Friday, February 28, 2014

Buyers Should Always Hire Their Own Inspectors

Home inspections are the most common type of pre-closing inspection in residential real estate transactions. In the WB-11 Residential Offer To Purchase, the buyer's offer can be made contingent on a licensed home inspector completing an inspection that does not report any defects in the property. Assuming that the seller does not have the right to cure, the buyer may be able to back out of the purchase if the home inspector reports any defects - any conditions that would significantly reduce the value of the property, impair the health of its occupants, or reduce its expected life. Home inspections have helped buyers back out the purchase of properties with sinking foundations, sagging roofs, black mold, and other defects.  

Buyers select, contract with, and pay for their home inspector. If a home inspector fails to report on any defects, he may be liable to the buyer. Consequently, the home inspector has an incentive to do a thorough inspection for the buyer.

Properties not served by municipal water and sewer are often contingent on inspections of the well system and the private sanitary (septic) system. However, these contingencies are a different animal. The standard Addendum A To Residential Offer To Purchase normally requires the seller to select, contract with, and pay for well and septic system inspectors. These contingencies are deemed satisfied unless an inspector reports that one of these systems is disapproved for current use.

Trouble is, a lot of failed well and septic systems have not been disapproved for current use. Buyers want a well that doesn't run dry and a septic system that doesn't result in wastewater backing up in their sinks, toilets, and basements. The standard contingencies only address disapproval for current use.

Even worse, well and septic inspectors hired by the seller owe their loyalty to the seller; they may be inclined to say "move along people, nothing to see here!" While well and septic inspectors hired by the seller could be liable to the buyer, these inspectors have legal and factual defenses based on their lack of a contractual relationship with anyone other than the seller.

A new well can cost over $10,000, and a sanitary mound system can run you over $20,000. For that reason alone, buyers should make their offers contingent on well and septic system inspections completed by inspectors that they select, contract with, and pay for. These contingencies should only be deemed satisfied if and only if these inspectors do not report on any defects in these systems. Otherwise, the buyer risks purchasing a property with a legal well that only produces two gallons of water per minute and a legal septic system that occasionally fills the basement with wastewater. 

Tuesday, February 18, 2014

Real Estate Brokers, "As Is" Clauses, And The Unauthorized Practice Of Law

In prior posts, I have discussed the duty to disclose defects in residential property - a duty that is owed to all buyers by both the seller and the real estate broker. When a seller tells his real estate broker that his property's basement leaks, the real estate broker should insist on this information being included in the Real Estate Condition Report. What happens, though, when the seller responds to this advice by asking his real estate broker if he can sell his property "as is"?

For starters, real estate brokers caught in this dilemma should review Cori Lamont's excellent article about "as is" clauses in Wisconsin Real Estate Magazine. The most important point is that an "as is" clause DOES NOT relieve a real estate broker of her obligation to disclose defects to all buyers under Wis. Admin. Code s. REEB 24.07(2). Indeed, I believe that a real estate broker who does not disclose defects to all buyers is also violating her duty to act to protect the public from fraud and misrepresentation under Wis. Admin. Code s. REEB 24.03(2)(b).

To review, the seller wants you to help him escape any risk of liability for misrepresentation. If you help the seller sell his property "as is," you will remain potentially liable to the buyer for failing to disclose the defects that your seller told you about. The "as is" clause may save the seller, but it cannot save you. What's not to like?

But wait, it gets worse! A real estate broker risks violating several rules within Wis. Admin. Code s. REEB 16- Approved Forms And Legal Advice if she gives the client what he wants. A real estate broker would have to draft a special "as is" form because no approved form contains "as is" language. Trouble is, Wis. Admin. Code s. REEB 16.04 bars real estate brokers from drafting special, non-approved forms. Theoretically, a real estate broker could hand write "as is" language in a counteroffer or amendment, but Wis. Admin. Code s. REEB 16.05 bars real estate brokers from giving opinions regarding the legal effect of such language. The seller would want to know if the "as is" language will be his "get out of jail free card," but it is Unlicensed Practice of Law for a real estate broker to give such an opinion. Real estate brokers who draft non-approved forms or engage in Unlicensed Practice of Law demonstrate "incompetency to act as a real estate licensee in a manner that safeguards the interests of the public" pursuant to Wis. Admin. Code s. REEB 16.07. That's not the only possible consequence, as explained in Wis. Stat. s. 757.30(1):   

Every person, who without having first obtained a license to practice law as an attorney of a court of record in this state, as provided by law, practices law within the meaning of sub. (2), or purports to be licensed to practice law as an attorney within the meaning of sub. (3), shall be fined not less than $50 nor more than $500 or imprisoned not more than one year in the county jail or both, and in addition may be punished as for a contempt.

Therefore, real estate brokers should "just say no" when asked to draft "as is" language on behalf of sellers of residential property.  

Sunday, February 16, 2014

What's In Your Wallet?- 2013 AB 523 And The Defrauded Homeowner

In the good old days (before December 2, 2011), homeowners who prevailed at trial against their sellers could enter a judgment against their sellers and watch that judgment grow at a rate of 12% a year. Sellers found liable by a jury would often find a way to pay off their debts to our clients right away - who wants a debt that accrues interest at 12% a year? Only payday loans and credit card balances earn a higher interest rate. Any rational debtor wants to pay off their higher interest rate debts first.

That all changed with the enactment of 2011 Wis Act 69, which reduced the interest rate on civil judgments to 1% plus the prime rate. The prime rate has been stuck at 3.25% for years, so homeowners who have entered judgment against their sellers since December 2, 2011 have watched their judgments grow by a paltry 4.25% a year. Sellers are no longer motivated to pay off their debts to homeowners. Sellers are only motivated to pay off their debts to our clients when their creditors demand it - when they want to finance the purchase of property or refinance their existing loans.

At least 2011 Wis. Act 69 applied equally to ALL creditors- credit card companies that obtained judgments against homeowners and other consumers were treated the same as homeowners who obtained judgments against their sellers. Unfortunately, it appears that this equal treatment of creditors will end soon. The Wisconsin Assembly has passed  2013 AB 523, which proposes to increase the annual interest rate on small claims judgments to 12% while leaving the annual interest rate on large claims judgments unchanged.

This proposed law, which still must be approved by the Wisconsin Senate and signed by the Governor, would be incredibly unfair to homeowners and other consumers. The damages that we suffer at the hands of negligent professionals and fraudulent sellers will almost always exceed the $10,000 small claims limit, so their debts to us will accrue interest at only 4.25% per year. On the other side of the coin, homeowners and other consumers are the most common small claims debtors. Some of us fall behind on our credit card balances or our medical bills. If this bill becomes law, our debts to them will accrue interest at 12% per year. In short, some creditors will become more equal than others.

I agree that the 12% interest rate on civil judgments should be restored, but that change should apply to ALL civil judgments. There is no rational reason for our legislature to place the interests of credit card companies ahead of the interests of injured and defrauded homeowners and consumers.

UPDATE - This proposed law has been resurrected as 2015 AB 95 and 2015 SB 76. Please see Wisconsin Consumer Blog for a different perspective.

Friday, February 14, 2014

Real Estate Agents: Just Disclose It

Back when I introduced this blog, I noted that my partner and I primarily represent homeowners who have purchased defective property in their cases against those involved in that purchase. My blog posts have almost exclusively focused on cases against sellers. Many of you might ask "what about cases against real estate agents?"

I believe that I have represented more real estate agents than I have sued. Sellers are usually the only defendants in the cases that we pursue on behalf of defrauded homeowners. Our client's contract is with the seller, not with the seller's real estate agent. Also, as real estate agents remind me when I question them about their involvement, the disclosure form for defects in residential real estate transactions is the Seller's Real Estate Condition Report. It is the seller who completes and signs the Real Estate Condition Report. Obviously, the seller who has lived in the home for twenty-plus years is in a better position to know if the basement leaks than a real estate agent who has visited the home once.

About the only way that a seller's real estate agent (listing agent) can get him or herself in trouble with the buyer is by falsely advertising the property or by not disclosing defects. We occasionally pursue cases against listing agents for making false statements in their advertising flyers, such as falsely representing that a property is zoned commercial. Since those cases are very rare, a listing agent should be primarily concerned with making sure that all defects are disclosed in writing to all buyers. Sellers completing Real Estate Condition Reports are often full of excuses for not wanting to disclose their basement problems:
  • "It only happened once - in June 2008 when I-94 flooded"
  • "It hasn't happened in years"
  • "My Uncle Louie fixed the problem"
 A competent and honest real estate professional will ask him or herself "is this something that a buyer would want to know?" Listing agents should also recognize that sellers (gasp!) often minimize their basement problems. June of 2008 might actually mean "every June since 2008." It hasn't happened in years might actually mean "2012." Uncle Louie might be kookier than Uncle Buck. Listing agents must recognize that Wis. Stat. s. 709.02 is intended to protect them and that they must advise sellers to disclose, disclose, DISCLOSE! If a seller tells his or her listing agent about a defect but refuses to disclose it in a Real Estate Condition Report, the listing agent had better make sure that the defect is disclosed to all buyers in writing. Otherwise, the listing agent faces liability under Wis. Stat. s. 452.133(1)(c) or Wis. Admin. Code s. REEB 24.07(2).

Sellers who are questioned about why they did not disclose certain defects in their Real Estate Condition Report often try to throw their listing agent under the bus. Sellers may testify that they told their listing agent about their shifting foundation wall and that their listing agent advised them to omit that defect from their condition report and paint over that wall. That actually happened on the morning of my first bench trial, so I called the listing agent to testify that afternoon. He clearly and unambiguously testified that he was never told about any basement defects and that he would have advised the sellers to disclose any basement defects in their condition report had they simply told him about those defects. I usually find such explanations convincing, and so do judges and juries. In order to sue a real estate agent, I have to be convinced that the agent knew about the defects. Why would a real estate agent risk being held liable for repair costs and diminished value and jeopardize his or her license for a 6% commission? That does not make sense!        

Friday, February 7, 2014

The General Rule Is That Sellers of Residential Real Estate Are Required To Complete A Real Estate Condition Report

I passed my Real Estate Salesperson and Real Estate Broker exams during the past month, and I am in the process of getting licensed as a Real Estate Broker. Consequently, I will write several posts in the future about aspects of real estate practice that are not directly related to litigation. This is one of those posts, even if my experience as a litigator inspired me to write it.

In an earlier post, I strongly suggested that prospective homebuyers insist on receiving a Real Estate Condition Report prior to submitting any offer to purchase a residential property.

My firm has a client who is adamant that his seller violated the law by failing to furnish a Real Estate Condition Report on his property on the grounds that he never lived in the property. The client is 100% correct. Wis. Stat. s. 709.01 requires transferrors of residential real property to furnish a Real Estate Condition Report unless (1) the property has never been inhabited; (2) the seller is a personal representative of an estate; (3) the seller is a trustee; (4) the seller is a conservator; or (5) the seller is a fiduciary appointed by or supervised by a court. This statute does not contain a general exception for home flippers who purchase properties out of foreclosure, make some repairs and cosmetic improvements, and then sell to new homeowners.

Unfortunately, I see these kinds of shenanigans all the time. Either the seller does not furnish a Real Estate Condition Report or furnishes one with all of the Property Condition Statements crossed out with a statement that "seller has never lived in the property." If a seller has "never lived in the property," he should have no problem certifying in a Real Estate Condition Report that he is not aware of any defects affecting the property. Yet, home flippers often try to skirt Chapter 709's requirements instead. 

Wisconsin law does not appear to provide a post-closing legal remedy for violation of Wis. Stat. s. 709.02. Even though my client is 100% correct, he has no remedy for this particular wrong. Instead, we are suing the seller for making misrepresentations in the written purchase contract and through concealing defective basement walls with paint.

It is up to prospective homebuyers and buyers' agents to police violations of Chapter 709

Again, no one should submit an offer to purchase residential property without first receiving a completed Real Estate Condition Report. While a seller is not legally required to furnish a Real Estate Condition Report prior to receiving an offer, there is no reason why he could not do so. Sellers typically complete Real Estate Condition Reports on the same day that they list their property for sale with a real estate broker. If the seller withholds his Real Estate Condition Report, there is something amiss.

In the event that the Real Estate Condition Report is not furnished by the time that the offer is submitted, the buyer has a right to rescind the contract if the required report is not furnished within 10 days after acceptance. Since Wis. Stat. s. 709.02 requires a "completed copy of the report," I would argue that a buyer still has a right to rescind if a home flipper furnishes a Real Estate Condition Report with the Property Condition Statements crossed out or left blank. Every situation is different, however, and homebuyers and their agents should consult with counsel prior to exercising their rescission rights.

Monday, February 3, 2014

My Thoughts On The Wisconsin Law Journal's Review Of Circuit Court Judges

This morning, the Wisconsin Law Journal released its review of how Wisconsin's circuit court judges fared in the Wisconsin Supreme Court and Court of Appeals in 2013. As a frequent practitioner in Wisconsin's circuit and appellate courts, I am always intrigued by this annual list. In a way, this list is like the standings page in the sports section - it tracks wins, losses, and winning percentage.

However, I believe that lawyers are doing themselves and their clients a disservice if they use this list to separate the "good" judges from the "bad" judges. For example, I have practiced in front of Judge Hue, Judge Todd Martens, and Judge Malloy and consider them to be very competent and thoughtful judges. I would not consider substituting on any of them. Yet, they all had "losing" records last year. On the other side of the coin, there are some judges who are fascist, senile, or only on the bench because of who they are related to. Yet, some of them had "winning" records last year.

The only way to know the "good" judges from the "bad" judges is to practice in front of those judges. My partner and I have considerable experience practicing in front of the judges in Milwaukee, Waukesha, Washington, Ozaukee, and Racine Counties. We also have experience practicing in front of judges in Walworth, Rock, Jefferson, Dodge, Fond du Lac, Outagamie, and Sheboygan Counties. Please feel free to contact us if you have questions about the judge assigned to your case.