Update On The Chapter 452 Modernization Act

Last week, I wrote about the Chapter 452 Modernization Act in general and proposed Wis. Stat. § 452.142 in particular.  I was pleased to learn about Amendment 5 to Assembly Bill 456, which would have changed the language of Wis. Stat. § 452.142 to the following:

452.142 Actions concerning licensees. (1) Notwithstanding s. 100.18 (11)(b) 3., 893.43, 893.52, or 893.57, an action concerning any act or omission of a licensee relating to the provision of brokerage services by the licensee shall be commenced within 3 years after the cause of action acrrues or be barred.

The new limitations period for actions against real estate agents would have expanded from 2 years to 3 years.  Also, the new limitations period would have been subject to the "discovery rule," helping buyers and sellers who do not discover that they have a potential claim against their real estate agent within that limitations period.  

Amendment 5 was not perfect.  While it would have protected some victims of dishonest real estate agents, it would not have protected victims of sloppy real estate agents.  As I've discussed previously, breach of contract actions accrue at the time of breach and the "discovery rule" does not apply.  Real estate agents breach their contracts when they do not ensure that their buyers have received a completed Real Estate Condition Report signed by all owners of the property before making an offer, when they do not advise buyers to hire their own inspectors, when they do not promptly deliver written notice that their buyers cannot obtain financing, or when they fail to deliver written notice of the defects identified in the buyers' inspection reports.  When other service providers screw up, consumers have 6 years to commence a breach of contract action against them pursuant to Wis. Stat. § 893.43.  When a real estate agent screws up, consumers would have only 3 years to commence a breach of contract action against them.

Despite the continued special interest protectionism, I would have still been satisfied with Wis. Stat. § 452.142 as affected  by Amendment 5.  I thought that this amendment had passed, as I saw "63 Ayes and 35 Noes," so I confirmed my understanding with the office of the amendment's sponsor - Representative Dana Wachs.  I received the unfortunate news that this vote was actually to "table" (i.e., "kill") Amendment 5.  I also learned that the Chapter 452 Modernization Act passed the Assembly.  It will be considered by the Senate before it reaches Governor Walker's desk.   

Proposed Wis. Stat. § 452.142 Is Bad For Homeowners And Bad For Real Estate Agents As Well

This week, the Wisconsin REALTORS Association will almost certainly be successful in convincing the legislature to pass what it calls the "Chapter 452 Modernization Act."  This will be an important act that, to be fair, will provide some benefits to homeowners.  I anticipate writing several posts explaining the significance of this act.

Unfortunately, this "modernization act" features some crass protectionism that demeans all REALTORS and their profession.  Section 147 should be excised from the "Chapter 452 Modernization Act" and given its own name - the "Careless And Dishonest REALTOR Protection Act."  Section 147 will create Wis. Stat. § 452.142:

452.142 Actions concerning licensees. (1) Notwithstanding s. 100.18 (11)(b) 3., 893.43, 893.52, or 893.57, an action concerning any act or omission of a licensee relating to the provision of brokerage services by the licensee shall be commenced within 2 years after whichever of the following that applies occurs first:

(a) A transaction is completed or closed.

(b) An agency agreement is terminated.

(c) An unconsummated transaction is terminated or expires.

(2) The period of limitation under this section may not be reduced by agreement.

Wis. Stat. § 452.142 creates what is known as a statute of limitations for court actions against real estate agents.  Statutes of limitations bar people from seeking justice through the courts regardless of the merits of their claims.  I've written about statutes of limitations before within the context of claims against sellers.

Of note, statutes of limitations for claims against sellers are often extended by operation of the "discovery rule."  Sellers who conceal defects could find themselves hailed into court ten years after selling their home under some circumstances.  Yet, the "discovery rule" will not apply to claims against real estate agents.  Real estate agents who advise their clients to conceal cracks or water damage in order to sell their home are immunized from liability.  Meanwhile, sellers whose only sin may have been listening to professional advice from their real estate agent are left to defend fraud claims alone.

 The Wisconsin REALTORS Association points out that home inspectors are protected by a 2-year statute of limitations.  This statute of limitation was part of the legislative bargain that subjected home inspectors to registration and licensing requirements for the first time.  Before 1998, any handyman could hold himself out as a "home inspector" without even having to pass a test.  In contrast, real estate agents have been licensed and regulated by the State of Wisconsin since forever and claims against them have always been subject to the same statutes of limitations that govern claims against all other citizens of this state.  There is no compelling reason for the legislature to suddenly grant real estate agents special protections against negligence and fraud claims.  Under this law, consumers have more time to sue used car salesmen for fraud.  Maybe I'm living in an idealized fantasy world, but I thought that real estate agents held themselves to higher standards than used car salesmen.

Furthermore, it simply takes more time for buyers to discover that they have claims against the sellers' real estate agent than it does for them to discover that they have claims against their home inspector.  The buyers walked through the property with their home inspector, asked questions, got answers, and received a written report.  When the buyers discover defects after closing, they and their attorneys have all of the information that they need to evaluate a potential claim against their home inspector.  The same logic does not hold true for the buyers' potential claims against the sellers' real estate agent.  As I've written before, most buyers' claims against the sellers' real estate agent are for failing to disclose what they knew about the property.  When buyers come into my office, I have no idea whether or not the sellers told their real estate agent that their roof leaked.  I have no idea whether or not the sellers' real estate agent advised the sellers to paint their cracked great room walls and ceiling.  When I commence a court action on behalf of defrauded buyers, the sellers are typically the only defendants.  Real estate agents might get added later on as defendants, but only after I have the chance to question the sellers about why they failed to mention their leaky roof or basement in their Real Estate Condition Report.

Wis. Stat. § 452.142(1) will force all attorneys representing defrauded buyers to change their behavior.  Failing to sue real estate agents right away might subject attorneys to liability for malpractice.  There is no surer way to get sued for legal malpractice than to blow a deadline or a statute of limitation.  Consequently, I will have no choice but to allege fraud and misrepresentation claims against real estate agents without fully investigating the facts.  I apologize in advance to the truly ethical real estate agents out there who advise their clients to disclose everything that a buyer could possibly want to know in the Real Estate Condition Report and who would never dream of advising a client to paint over a cracked foundation wall.  Unfortunately for you, your association insists on protecting the bad apples that spoil your profession.        

The Wonderful World Of Seller Financing

I recently defended a foreclosure lawsuit, but not one brought by a bank or mortgage lender.  In this case, my clients were sued by the couple who sold them their home and were financing their purchase of that home.  Welcome to the wonderful world of seller financing!

My clients and their sellers both signed the State Bar of Wisconsin Form 11-2003, which is otherwise known as the Land Contract.  Buyers and sellers of residential real estate enter into the Land Contract when the buyers cannot pay cash and cannot obtain financing.  In some transactions, the Land Contract is the only contract that the parties sign.  In other transactions, the parties enter into a WB-11 Residential Offer To Purchase and enter into the Land Contract in the event that financing is not available on the terms stated in the offer and the seller agrees to finance the transaction pursuant to lines 289-297 of the offer.

In my case, my clients stopped paying on the Land Contract and abandoned the property after they discovered some serious property defects (including fire and water damage) that the sellers failed to disclose to them.  My clients' best defense was that the Land Contract was induced by misrepresentation.  Trouble is, the sellers made no written representations to them about the property's condition, such as providing them with a Real Estate Condition Report or even making the representations contained in lines 109-115 of the WB-11 Residential Offer.

Based on my clients' experience, I strongly advise all buyers to use the WB-11 Residential Offer even if they doubt that they will be unable to obtain financing.  All buyers need the protection that the WB-11 Residential Offer provides, including property condition representations by the sellers; title insurance; and the right to have the property appraised, inspected, and tested.  The State Bar Land Contract lacks these basic protections and also makes the buyers responsible for the sellers' costs, expenses, and attorneys' fees in the event that the buyers cannot make their payments and the sellers foreclose or sue them for the amount owed.

Please email me at rudolphkuss@stevensandkuss.com if you or your clients need an attorney to protect their interests in the purchase of residential real estate or the financing of that purchase.      

What To Do With The Earnest Money When Your Buyers Disappear

Though I usually represent people who have purchased a home, sellers and their agents contact me from time to time with questions that arise during the sales process.  This past week, a real estate agent asked me what to do with disappearing buyers.  These are buyers who agree to purchase a property and put down a few thousand dollars in earnest money but then completely drop off the face of the earth.  They will not close on their purchase due to financing, the appraisal, cold feet, or some other excuse.  The sellers do not want to sue them for breach of contract because they have since sold the property to other buyers.  The sellers' real estate agent has sent the disappearing buyers a WB-45 Cancellation Agreement & Mutual Release with no response.  The agent wants to close her file and does not want to continue to hold the disappearing buyers' money.  What can she do?

This situation is covered by lines 71-91 of the WB-11 Residential Offer To Purchase and Wis. Admin. Code s. REEB § 18.09.  If at least sixty days has passed since the date when the disappearing buyers were supposed to close, the agent should have an attorney review the transaction and direct her on how to disburse the earnest money.  Since the buyers have disappeared, that attorney will almost certainly direct the agent to disburse the earnest money to the sellers.  Assuming that neither the agent nor her firm have knowledge that the buyers disagree with this disbursement, the firm can immediately disburse the earnest money as directed by the attorney.  The language of the WB-11 offer should protect the agent and her firm from being sued for this disbursement as long as they follow these rules and act in good faith.

Please contact me at rudolphkuss@stevensandkuss.com if you ever need an attorney to review a real estate transaction and direct the disbursement of earnest money.       

Is Lying About Your Property's Condition A Federal Crime?

One of 2015's biggest news stories in Florida was the arrest, indictment and conviction of Glenn and Kathryn Jasen. If you click on these links, you'll discover that the Jasens' federal crime was failing to disclose to the buyers of their property that it had been affected by sinkholes.  Indeed, the Jasens violated the Florida statute discussed in my last post  through failing to disclose that they had collected money from their insurance company on a sinkhole claim.  They were indicted under 18 U.S.C. § 1343 - a federal wire fraud statute.  The federal government proved that they intentionally participated in a scheme to defraud and used interstate wires in furtherance of the scheme.  In other words, they intentionally defrauded their buyers regarding the condition of their property and received money from the buyers' federally-insured mortgage lender in doing so.  The Jasens now face up to twenty years in a federal penitentiary.

The answer to the question posed by this post's title is that lying about your property's condition could be a federal crime if the buyers finance their purchase with a federally-insured mortgage loan.  Even as someone who usually represents defrauded buyers in residential real estate misrepresentation cases, I must agree that this is a scary proposition.

However, as this article points out, the Jasen case was the first federal criminal conviction of its kind.  The Jasens pocketed their insurance money, did nothing to address the sinkhole activity or resulting damage, and endangered the health and safety of a young family through failing to disclose any of this.  The United States Attorney was essentially shamed into pursuing this case by the local news media.  I'm not holding my breath on Milwaukee-area news stations shaming the United States Attorney for the Eastern District of Wisconsin into turning garden-variety leaky basement cases into federal wire fraud cases.  

After all, many of the claims that we pursue ARE state crimes or statutory violations.  Wis. Stat § 943.20(1)(d) makes it a felony to obtain money through misrepresenting the condition of your property with the intent to deceive and defraud the buyer.  Wis. Stat. § 100.18 prohibits making any untrue, deceptive, or misleading representation with the intent to sell real estate.  Yet, I am not aware of any district attorney prosecuting a seller in any of my cases even after a jury has found the seller liable.

Why not?  For one, salaried government attorneys have no financial incentive to pursue these cases.  More importantly, government attorneys expect to win every single case that they indict.  While the Jasen case was a slam dunk, no government attorney would attempt to obtain a felony conviction in the more common residential real estate misrepresentation cases that are often colored in shades of gray.  Were the sellers who owned their property for only three years aware that the basement or roof leaked?  Were the sellers aware that the cracks in their living room were signs of a major structural defect?  What if the sellers hired contractors to repair the defects affecting their property? What if the basement has not leaked since 2010?  What if the buyers' home inspector alerted the buyer to the leakage?  What if the buyers were advised to have the property evaluated by a structural engineer or a mold specialist?  The United States Attorney would stay miles away from these fraud cases, but these are the cases that I litigate on a daily basis even though I know that I will lose some of them.

If you think that you were deceived in the purchase of your home, please do not contact the U.S. Marshals.  Instead, you should email me at rudolphkuss@stevensandkuss.com.

Does Florida Have Anything To Teach Wisconsin About Residential Real Estate Disclosure Law?

While visiting family in Florida over the holidays, I am becoming intrigued by some of the differences between real estate disclosure laws in Florida vs. those in Wisconsin. As we've discussed before, Wisconsin has a specific statute that requires most sellers of residential real estate to furnish a Real Estate Condition Report to buyers. See Wis. Stat. § 709.02.  There's another state statute that specifies the minimally required form of the Real Estate Condition Report.  See Wis. Stat. § 709.03. In general, sellers are required to declare whether or not they are "aware" of "defects" affecting their property. "Aware" is defined as having "notice of knowledge."  "Defect" means "a condition that would have a significant adverse effect on the value of the property; that would significantly impair the health or safety of future occupants of the property; or that if not repaired, removed or replaced would significantly shorten or adversely affect the expected normal life of the premises."

Litigating civil actions (i.e., lawsuits) arising from allegedly false Real Estate Condition Reports can sometimes be a frustrating experience because it is often unclear what qualifies as a defect.  If water flooded the sellers' basement during the notorious rains of 2008 or 2010, does that qualify as a "defect"? What if the sellers "repaired" the "defect" by adding additional sump pumps or replacing drain tile? What if the sellers did nothing to "repair" the "defect," but the "defect" has not reappeared since 2010?

While flooded basements are a big deal in Wisconsin, most Florida homes do not have basements.  Sinkholes are the hot button topic down here - holes open up in the ground and homes sink into them.  These sinkholes swallow homes and the people inside of them.  Prospective buyers are understandably worried about sinkholes.  In its infinite wisdom, the Florida legislature passed Fl. Stat. § 627.7073(2)(c), which requires sellers to disclose that their insurer has paid a sinkhole claim and whether or not they used the full amount of the proceeds to repair the sinkhole damage.  Reading between the lines, it appears that some Florida homeowners obtain money from their insurance company for sinkhole damage but then use to money for consumer spending rather than repairs.  Even worse, they pretend that nothing ever happened when it is time to sell their property. 

I see a similar phenomenon in Wisconsin with respect to insurance claims for basement flooding.  Some Wisconsin homeowners who experienced basement flooding in 2008 or 2010 and were fortunate enough to have a sump crock overflow endorsement obtained money from their insurance company.  The insurance company based its payout on detailed estimates on the cost of drying out the basement and removing and replacing carpeting, drywall, insulation, baseboards, and wall studs.  The homeowner used some of the money to suck water out the carpeting and replace a few sheets of drywall but pocketed the rest.  They disclosed nothing at the time of sale and my clients have now discovered saturated building materials and mold growth.

The Wisconsin legislature could enact a statute similar to Fl. Stat. § 627.7073 with respect to flood claims.  If it does, it should require disclosure of the flood claims information along with the Real Estate Condition Report.  The Florida Statute requires disclosure "before closing," which is too late as a practical matter, especially in this post-TRID era in which buyers must receive their closing documents at least three business days before closing.  Disclosure of a property condition means nothing if the buyer is still legally obligated (and practically committed) to close on the purchase. 

Homeowners Should Still Be Allowed To Testify On The Value Of Their Property

Late last year, I hailed the Wisconsin Court of Appeals' decision in Mueller v. Harry Kaufmann Motorcars, Inc., 2015 WI App 8, 359 Wis. 2d 597, 859 N.W.2d 451 for reaffirming that property owners may testify on the actual value of their property to them at the time of sale and that such testimony is sufficient to establish benefit of bargain damages. This sounds like a bunch of legalese, so I'll break it down.

Let's say that you purchased a property with a "clean" Real Estate Condition Report for $250,000. After closing on your purchase and moving into your new home, you discover that the well only produces 2 gallons per minute of water, the septic leech bed has failed and the county is requiring you to replace it with a mound system, the neighbors are demanding that you tear down the pole barn that your sellers illegally erected last summer, and the basement leaks like a sieve. As a property owner in Wisconsin, you may testify that you would have paid no more than $200,000 for your property had the sellers told you the truth about all of these conditions. Your "benefit of bargain" damages are $50,000.00 because the property's value was $250,000 "as represented," but the property's actual value to you in its true condition was only $200,000. You didn't get what you paid for; you got cheated out of $50,000. A jury could award you $50,000 as the damages that you suffered as a result of the sellers' misrepresentations.

Oh, but wait a minute! There are rules governing testimony by lay (non-expert) witnesses in Wisconsin courts. In January of 2011, Wis. Stat. (Rule) § 907.01 was revised to specify that opinion testimony by lay witnesses is limited to those opinions that are "[n]ot based on scientific, technical, or other specialized knowledge within the scope of a witness under s. 907.02(1)." In other words, the rules now specify that lay witnesses cannot give expert testimony. A homeowner cannot get up on the stand and opine that his home's foundation has been sinking since construction or that his home's roof is leaking due to improper installation of the valley flashing. A homeowner similarly cannot get up on the stand and opine that it is necessary to install eight helical piers to stabilize the foundation. Such opinions clearly fall on the expert testimony side of the ledger - they are based on the scientific, technical, or other specialized knowledge of an engineer or other professional. Courts generally require expert testimony on complex causation issues because such issues are outside of a typical juror's wheelhouse. Expert testimony only helps the jury if it comes from a real expert; not from a homeowner playing armchair engineer.

So does this rule change mean that homeowners can no longer testify on how much they would have paid for their property with full disclosure of all the defects? Isn't this expert testimony that should only be offered by a licensed and experienced appraiser?

While such an argument is facially appealing, it ignores the reality that homeowners are not testifying on the fair market value of their property. Fair market value is an expert opinion often supported by objective evidence such as comparable sales. Homeowners are testifying on the subjective value that they would have placed on their property at the time of sale with full disclosure of all of the defects. As I've said before, such subjective opinions of value need not be based on independent financial data. See D.L. Anderson's Lakeside Leisure Co., Inc. v. Anderson, 2008 WI 126, 314 Wis. 2d 560, 757 N.W.2d 803. Federal courts considering the equivalent federal rule allow property owners to offer lay opinions on property values. See, e.g., Christopher Phelps & Associates, LLC v. Galloway, 492 F.3d 532 (4th Cir. 2007).

The bottom line is that recent changes in Wisconsin's lay opinion rules did not bar homeowners from opining in court on the actual value of the property that they purchased. That being said, homeowners should expect their subjective valuation opinions to be greeted with skepticism by judges and juries. In my experience, it is usually better for defrauded homeowners to seek the cost of repairs as damages, especially when evidence of those damages is straightforward and supported by expert testimony.