Are YOU a Contractor? October 3, 2007
Based on recent changes in Washington law, you might be if you own real estate and either work on it yourself or hire others to work on it.
Without great fanfare, the Washington legislature recently made subtle, yet significant, changes to Washington’s Contractor Registration laws (RCW 18.27 et seq.). Generally, the Contractor Registration laws deal with the regulation, registration, and licensing of contractors. Historically, a contractor’s failure to comply with the registration requirements could lead to civil fines and criminal prosecution. The legislature, acting under pressure to better protect consumers, expanded the definition of contractor; stiffened the consequences for violations and strengthened the Department of Labor and Industries’ enforcement powers against unlicensed contractors.
The biggest change occurred in defining who is required to be licensed. RCW 18.27.010(1) now defines a contractor as:
. . . any person, firm, corporation, or other entity who or which, in the pursuit of an independent business undertakes to, or offers to undertake, or submits a bid to, construct, alter, repair, add to, subtract from, improve, develop, move, wreck, or demolish any building, highway, road, railroad, excavation or other structure, project, development, or improvement attached to real estate or to do any part thereof including the installation of carpeting or other floor covering, the erection of scaffolding or other structures or works in connection therewith, the installation or repair of roofing or siding, performing tree removal services, or cabinet or similar installation; or, who, to do similar work upon his or her own property, employs members of more than one trade upon a single job or project or under a single building permit except as otherwise provided in this chapter. “Contractor” also includes a consultant acting as a general contractor. “Contractor” also includes any person, firm, corporation, or other entity covered by this subsection, whether or not registered as required under this chapter or who are otherwise required to be registered or licensed by law, who offer to sell their property without occupying or using the structures, projects, developments, or improvements for more than one year from the date the structure, project, development, or improvement was substantially completed or abandoned. (emphasis added)
These changes now make it clear that businesses engaged in real estate development activities, even on their own property, must now register. For example, under the old law, a developer who subdivided their own property and made required plat improvements would have previously fallen outside this definition. Now, that same developer fits squarely within this definition, especially if the developer does not “occupy or use” their work for more than a year after substantial completion of the improvements.
Notwithstanding this broadened definition of “contractor,” there are still a variety of exemptions that apply. For example, someone who “constructed an improvement” on their own property or personal residence was exempt from registration unless the improvement was constructed “with the intention and for the purpose of selling the improved property.” So, one who built a home on their own lot for their own use was exempt, but if that same person builds a house for resale purposes, registration is required. This exemption has been narrowed and now states:
Any person working on his or her own property, whether occupied by him or her or not, and any person working on his or her personal residence, whether owned by him or her or not but this exemption shall not apply to any person who performs the activities of a contractor on his or her own property for the purpose of selling, demolishing, or leasing the property;
The “activities of a contractor” include one who, for their own property, employs members of more than one trade upon a single job or project or under a single building permit. Arguably, then, a homeowner who employs multiple trades for typical “pre-listing” improvements may no longer be exempt from registration requirements. Likewise, the real estate “flipper” who buys and updates a home may also no longer be exempt from registration. Also covered may be the real estate investor who buys a home for rental purposes but improves the home prior to leasing it.
If you are now required to register, the amendments also raise the stakes against those who fail to do so. Instead of being a misdemeanor, it is now a “gross” misdemeanor if any of the provisions of RCW 18.27.020 are breached. In addition to failing to register when required, a violation occurs if a contractor hires an unregistered subcontractor.
Failing to register may also create an unforeseen impact on the ability to enforce purchase and sale contracts or leases. RCW 18.27.080 provides that contractors are not allowed to bring a claim for breach of contract unless they can prove they were registered at the time they contracted for the performance of such work or entered into such contract. If an owner performs work on their property that requires registration with the intention of selling or leasing the property, a crafty attorney working for the buyer or tenant may attempt to use RCW 18.27.080 as a defense to enforcement of that contract or lease.
In addition to imposing what could be significant civil and criminal penalties for failure to comply and the potential limitations on contract enforcement, non-compliance may also increase exposure (in the latent defect or warranty context) to owner-developers related to the purchase and sale. While violation of RCW 18.27 does not give a purchaser a separate cause of action against an owner-developer, it could be used in litigation as evidence of malfeasance.
Despite the many uncertainties with how this new law will be interpreted, property owners and developers who perform work on their property must at least take a closer look to determine if they must now register as a contractor. Until the courts help clarify these new amendments, the safest course of action is to register. While there is certainly time and cost involved, the alternative may prove even more costly.
Sphere: Related ContentBuyer Agency and Fiduciary = Nonsense June 10, 2007
“In a market flooded with unsold listings, she says, a 3 percent co-op split “is always going to attract more attention than 2 percent. We call [inadequate splits] ‘getting eliminated at the office.”
Just another example of why the argument that fiduciary duties and buyer agency cannot co-exist based on the current method of compensation…and another reason that fiduciary agency duties were eliminated in Washington state.
What amazes me is that agents continue to blog away about the value they bring to their clients based in part on the level of their ”fiduciary” duties, when examples like the above continue to be part of the industry.
If the above quote is true and commonplace in the industry, isn’t it about time we eliminate this fictional notion of fiduciary from the nomenclature of the industry?
Sphere: Related ContentSeller Privacy vs. the Connected Web May 20, 2007
There has been much discussion on RCG and other blogs regarding property blogs and seller’s right to privacy from bloggers who post “sometimes accurate/sometimes not” opinions about a listed home. As was recently shown by NWMLS’ fine against Redfin, an MLS may have legitimate rule authority to prevent a member from engaging in such activity. If, however, the property blogger is not an MLS member and is getting the information from open houses, the MLS rules would be of no consequence to the blogger.
Sellers and listing agents claim foul. How can someone have the right to post negative comments about the listed home for everyone in the world to see? There must be some legal consequence for such acts, right?
Since there is no reported case in Washington state where a private blogger was held liable for making comments about a listed home, we need to look at legal precedent to understand whether a seller could make such a case.
First, in Washington, a defamation case involves damage to the “character” of a person. Historically, it has not been applied to things because things have no “character”. So we shouldn’t use defamation as the legal basis that would support such a claim.
There is, however, a rarely used tort called “injurious falsehood” that may provide an answer. Under the Restatement (Second) of Torts, “one who publishes a false statement harmful to the interests of another is subject to liability for pecuniary loss resulting to the other if: (a) he intends for publication of the statement to result in harm to interests of the other having a pecuniary value, or either recognizes or should recognize that it is likely to do so, and (b) he knows that the statement is false or acts in reckless disregard of its truth or falsity.”
Let’s analyze this law in the context of a property blogger. First, is the blog post a published statement? Sure. Should the blogger recognize that published false information could cause economic harm to the seller? I would think so. Does the blogger know the statement is false or published with reckless disregard of its truth or falsity? Ah, the crux of the issue.
If the statement is true. There is no claim, period. So, if the blogger attends an open house and states, for example, that the kitchen has “old formica” counters which in fact is true, the seller is out of luck.
If the statement is provably false (same example as above but the kitchen really has granite counters), then the seller would have a claim but would have to prove some monetary damages caused by the blog post. While I am sure you could develop a theory to prove these damages, I can also see all sorts of defenses.
The bigger issue, I think, is if the blogger provides a negative opinion based on fact. For example, let’s say the blogger says “the ‘large’ garage is really better suited for your Prius instead of your Suburban.” And let’s say the garage could fit a Suburban but just barely. Is the statement false? Not really. But it does cast a negative light on the garage. Might a prospective buyer with a big SUV choose not to visit the home because of this post. Certainly. Does the seller have a claim for damages? Maybe, but I would think a very difficult one.
This issue is complicated even further if the comments are by an anonymous poster and not the person or company that hosts the blog. According to a recent court decision, a blogger is not liable for the defamatory conduct of contributors under the Communications Decency Act. Likely, the same would hold true in a claim for Injurious Falsehood. The hard road just got harder.
But is this really the issue here? I don’t think so. I think the real issue goes back to control. Enter the Connected Web. Sellers take advantage of property specific web sites and blogs and viral marketing of property specific email (BTW, please stop sending these to me) and even YouTube-esq video sharing. Yet, from many comments on RCG, sellers (or really their Listing Agents) deserve the right to completely control how such information is conveyed and more importantly, what the Connected Web thinks about it.
One can make a cogent argument that the moment a seller opens their home to the public in the context of a listed home on the Web, that seller gives up something. They are now in public view. In days past, the public view was the neighborhood where Lookey-Lous would visit the open house and engage in neighborhood gossip about the home. Today, it is bloggers who open that home to the world and engage in that same gossip.
The Connected Web has fueled the RE.net and many real estate professionals have latched on to this powerful dynamic as a means to gain public recognition and in some cases, make money. We live in a world of public opinion, now connected over the Globe. Sellers are not immune, nor should they be.
-Russ
Sphere: Related ContentThe Legislature Volleys Back…. May 1, 2007
Recently, I wrote about new case law in Washington that was making it more difficult for buyers of real property to make post-closing claims against the seller for property condition related matters. The Washington legislature has just amended the state’s residential property condition disclosure law to put additional burdens on sellers and will soon require a disclosure form when “unimproved” residential property is sold.
Here are some highlights of SSB 5895 which go into effect on July 22, 2007:
- New Form for Unimproved Residential Real Property. The law now covers “unimproved residential real property”. Under the law, unimproved residential real property means property zoned for residential use that is not improved by residential dwelling units, a residential condominium, a residential timeshare, or a mobile or manufactured home (emphasis added). A new disclosure form applies to such transfers and this form is different than the one used for improved residential property. Thus, the seller of vacant land (in whatever quantity of lots) that is zoned for residential use is required to provide the disclosure form, unless exempt or waived by the buyer.
- New Question About Access Rights. The new law adds some additional disclosures to Form 17. A significant addition is a question that asks: “Is there a private road or easement agreement for access to the property?” If the seller answers “No” or “Don’t Know”, and the title commitment later provides information on such an easement, the law requires the seller to either remove the easement (not likely) or amend the disclosure form and provide the buyer with a new three day right of rescission.
- New Environmental Section. Both Form 17 and the new unimproved property form now have a section entitled “Environmental”. This was formerly called “General” under the prior law. A variety of questions have been added including a question that asks: “Are there any shorelines, wetlands, floodplains or critical areas on the property?” Keeping up with local critical areas ordinances will be a trick in order to answer this question properly.
- Limitation on Buyer Waiver. Under the old law, a seller (e.g. homebuilder) could refuse to sell property to a buyer unless the buyer waived their right to receive a completed form. Now, if the answer to any of the questions in the “Environmental” section would be “yes”, the buyer may not waive the receipt of that section of the form.
- Elimination of Lienholder Exemption. The old law exempted a lienholder who acquired property through foreclosure or deed-in-lieu. That exemption is gone and lienholders who take property back must now comply with the law.
Some practical thoughts….
- For Builders. Clearly, the law will have more of an impact on you than in the past. If you are developing and selling vacant residential lots, you will either have to provide the new disclosure form or obtain the buyer’s waiver. Remember, though, there are new limitations on the ability for a buyer to waive the right to receive the completed Environmental section of the form. This limitation on waiver will likewise apply to the sale of a completed new construction home and careful analysis has to be made in order to avoid a situation where a buyer is not provided the form and prior to closing asserts a right to rescind because the Environmental section was not provided. The new “critical areas” question will be a significant one to address in this regard.
- For Agents. When taking a listing, make sure to advise your seller client to order a preliminary commitment of title insurance. This should provide adequate information in order to answer all of the title questions in the form. Commercial brokers should be aware of the potential for the law to apply to any property zoned, in whole or part, for residential use. This could apply to a commercial building on property that was rezoned residential or to a split-zoned property.
- For Buyers. The disclosure form has never been intended to replace a diligent inspection or to act as a contractual warranty. The law is clear that the only remedy directly related to the disclosure form is the pre-closing right of rescission. Once you close, especially in light of recent case law, your rights to sue the seller for property condition related defects may be severely limited.
- Transition Period. As has been the case with previous amendments to this law, the legislature did not provide guidance concerning its application to transactions already in progress as of July 22, 2007. For sales of “unimproved residential real property”, I would consider using the new form immediately as there is nothing that prohibits the voluntary use of a disclosure form prior to July 22. By doing so, you will effectively address any transition issues. You will, however, want to insert some disclaimer language in the purchase and sale agreement so make sure to consult your attorney. For transactions involving Form 17, you should consult your attorney for specific advise on how you should handle the transition.
While I was away….. April 10, 2007
I have not posted in quite some time as I have been consumed with a move to a new firm. As of three weeks ago, I am now Of Counsel to the law firm of Bullivant Houser Bailey.
In that period, a very significant case was decided that will greatly impact buyer/seller/broker relationships. On March 1, 2007, the Washington Supreme Court essentially decided that buyers will no longer have a claim for negligent misrepresentation in post-closing property condition disputes. For the first time in Washington state, the Supreme Court applied the Economic Loss Rule in the context of a real estate transaction. The Economic Loss Rule generally provides that where two parties enter into a contract (e.g. a Purchase and Sale Agreement) and economic losses occur (as opposed to physical harm or personal injury), recovery is confined to the contract.
By way of background, if a buyer of real estate closes and then determines that the property was not in the same condition as disclosed or that the seller withheld material facts, the buyer historically had two ways to state a claim against the seller. The first was via the contract if there were any express warranties that could be enforced. However, most residential transactions have few, if any, warranties that benefit the buyer. So practically, the buyer was forced to go outside the contract and rely on a claim of negligent misrepresentation or fraud (also known as intentional misrepresentation). These claims are called torts. Since fraud is very difficult to prove, the claim that many lawyers have relied on for their buyer clients is the negligent misrepresentation claim. Those days are over!
In determining whether the Economic Loss Rule applies, the key inquiry is the nature of the loss and the manner in which it occurs. In other words, does the loss deal with economic injury (e.g. loss of bargain) or personal injury or injury to other property. If the loss is economic, and no exception applies, then the complaining party will be limited to whatever contract remedies exist.
In the recent case of Alejandre v. Bull, the Buyer claimed that the seller should pay for damages associated with a failed septic system. The facts are lengthy but like most post-closing property condition disputes, this one clearly involved economic loss and not personal injury. In a nutshell, since the buyer had no warranties regarding the septic system, they were out of luck unless they could prove that the seller intentionally misrepresented the condition of the septic system (i.e. committed fraud). In the court’s mind, a negligent misrepresentation was not enough to override the “bargain” struck between the parties under the contract which did not include any warranty for the septic system.
There will be many buyers who encounter a post-closing loss and start looking for a (deep) pocket. While the liability of the seller to the buyer is limited by the Economic Loss Rule, no such luck for brokers and agents who have statutory duties (many of which are non-waivable) under RCW 18.86. Those duties include the duty to use reasonable care and skill, to disclose material facts and to advise their client to seek expert advice on matters relating to the transaction that are beyond the agent’s expertise.
Buyers would be well-served to negotiate warranties that apply to aspects of the property that are important to them. At the same time, brokers and agents need to understand that while they legally don’t have any greater duties to the buyer, the practical effect of this case will cause unhappy buyers to look to the broker’s E/O policy with greater frequency. Now more than ever, brokers and agents will make sure that the buyer conducts comprehensive due diligence concerning the condition of the property and that appropriate experts are hired to advise them.
All properties have warts. The key is to expose them before closing so that the buyer can determine if they can live with them.
-Russ
Sphere: Related Content(Are We) Oil and Water? February 8, 2007
In a comment to a post on Financing Contingencies, Reba baited Craig and I to write a post on the uncommon relationships between real estate agent and attorney. She said,
“Maybe it’s worth another blog post to discuss why some agents seem to feel that they are diametrically opposed to attorneys when it comes to real estate transactions. I constantly hear people say “if an attorney gets involved this deal is dead” or “lawyers kill deals.” I have yet to experience it and I work with attorneys frequently on behalf of my clients - and their accountants/CPA, financial advisors, insurance agents, and more.”
Since we talk A LOT about transparency on this blog, I would love to understand if real estate agents really do look at attorneys with an evil stare and if so, why. Caveat: one may read this post and think it a self-serving attempt to get business from residential agents. Since my focus is on commercial transactions, certainly not the case for me.
I think it is important to first start the question with an understanding that there
ARE some good, competent, ethical real estate attorneys in the world whose sole mission is NOT to kill deals. Just like there are good, competent, ethical real estate agents in the world blah, blah, blah….
I believe that many of the aforementioned lawyers are ”professionals” in the truest form of the word. I hope I fall in that category. In many of the deals in which I am involved, I get questions from clients that are clearly out of my professional ability. For example, if a client has a tax question, I am the first one to say that I am not a tax lawyer or CPA and if they want an answer to that question, then we need to find them the appropriate expert. By referring the client to someone who knows more than I, this creates somewhat of a paradoxical environment of making me look more professional, not less. In the end, I know that getting the client to the expert is in the client’s best interests and that is what “service professionalism” is all about.
Moving to the real estate side, the perception is that most residential agents would rather listen to fingernails on a chalkboard than send their client to an attorney for help with the transaction. Specifically, I am talking about the contract. And this is where I clearly don’t understand. First, as between (good) real estate lawyer and (good) real estate agent, can anyone argue that the real estate lawyer is better skilled at drafting contracts? Second, if the agent refers the client over to the lawyer for legal advice on the contract, the agent is magically off the hook from a liability standpoint. If there is ever a question about how the contract was drafted, agent merely stands up, points finger at attorney and sits down.
Although Craig may differ on this point, I am NOT of the opinion (at least here in WA state) that all residential deals should go to attorney for review. The standard forms are great for the ‘run of the mill’ deals and most (good) agents are plenty skilled at filling out the forms. Where I have to scratch my head is with the deals that are a bit out of the ordinary. Where the blank addendum becomes a significant part of the deal. My guess is that most of these deals also don’t get to the attorney. And yet I have seen many of these deals when the transaction blows up or after closing and everyone (many times including the agent) are in wonder why they tried to go it alone.
I anticipate that some will argue that attorneys don’t work nights and weekends and that is when all of the deals are done. While certainly true in some situations, I don’t buy it for many transactions. Even if the deal is done at midnight, a simple attorney review contingency allows the deal to get papered without waiving one party’s right to have the expert take a peek.
Is my (and Reba’s) perception true? If so, a change of perception as to the benefits of legal review in deals that warrant it may very well make the real estate agent look more professional to their clients. In this day and age, that can only be a good thing.
-Russ
Sphere: Related ContentFuture of Realtor Associations January 6, 2007
Last week, I did a presentation to the leadership group of a large local Realtor Association and MLS entitled “The Future of the Realtor Association and MLS”. While sitting at the airport waiting for my flight, I read Inman’s blog post regarding the relevance of Realtors. As I contemplated the responses and my recent presentation, maybe as important a question is the relevance, now and in the future, of the Realtor Association to industry practitioners. At the national, state and local level, this organization has had the most impact on how residential real estate is bought and sold. I have been a supporter of Realtor Associations (and their MLSs) which I believe have provided significantly more good to our nation than bad. But this is not a question of good or bad. It is a question of that organization’s ability to continue to work in the face of times that we have never seen before.
For years, the industry has operated in a closed circle that allowed it to control access to listing data and made it very difficult for the average consumer to NOT utilize the services of a Realtor if they wanted access to this very efficient system. This closed circle allowed the Realtor Association and its connected MLS to dictate the “rules of the game” and there was very little ability or reason for industry participants to differentiate.
In addition, the relationship with the consumer was owned by the agent. The broker, for all their importance and public persona, was at the mercy of his top producers for any decision that was not in their best interests could be met with movement to another company. No agents, no revenue.
Lastly, while there were different demographics of consumers, the control of the industry made these generational differences rather dull and insignificant. 
All of this made it rather simple for the Realtor Association and its connected MLS to service their customer who, in reality, was the agent.
Today, the picture is vastly different. The closed circle over listing data is gone. Consumers have it and love it. Underscored by the wave of consumerism and social power that is Web2.0, consumer generational differences have begun to emerge. Boomers, GenX’ers and Millenials all look at the world through a different lens and serving them requires different approaches.
Brokers have figured out that they cannot make money on the brokerage side and but for ancillary services like mortgage, title and escrow, they would be broke. They also now realize the good news/bad news situation that the consumer relationship is under attack from all sides. While this has created a need to address “untraditional” interlopers, it has also provided the opportunity for the broker, and NOT the agent, to control the relationship with the consumer. Brokers realize that if they control that relationship, there is the potential to actually make money from brokerage operations. This places the broker/agent relationship squarely in conflict.
This dynamic, fostered by governmental pressure and scrutiny, has encouraged some brokers to adopt different models and for agents to actually want to be DIFFERENT than their peers, not just from a compensation perspective but from a service point of view.
Lastly, Realtor Associations, once tied at the hip to the MLS at the county level, have become bit players in larger regionalized MLSs necessitated by the need to serve market areas that do not conform to county geography.
Realtor Associations now face a very different industry that they serve. 
It is no longer a one-size-fits-all environment. They have constituents at the broker and agent level who no longer will subscribe to a single way of operations, primarily because their customers won’t let them.
Realtor Associations have survived because, at a macro level, they have enabled their members to be successful. Judging from the people that I met last week, leaders of Realtor Associations and their MLSs are struggling to first understand the historic changes that are taking place and secondly, how they can move their organization to a place where they support ALL of their current membership.
The strength of the Realtor Association is in its membership. In these changing times, it is not a foregone conclusion that this strength will always be present. And a smaller and/or weakened Realtor Association will absolutely have an impact on how we buy and sell real estate.
Sphere: Related ContentDoes It Really Matter….? November 27, 2006
Ardell’s recent post on FSBOs was courageous as you won’t see many agents talk about how one might sell a property without listing it. While it may be a bit counter intuitive to some agents, one reading the post should come away feeling that Ardell (and others like her) are not in the business of providing self-serving advice.
In her post, Ardell said, “[T]here are several companies that offer this service, and while it is true that some agents may boycott you and not show your house, if you have one of those houses that will “sell itself”, then that should not affect you much.” In response to a comment, she also said, “[I] had a very bad experience recently where an agent agreed to take about 1.5%, but then talked the buyer out of the house at time of inspection and sold him one where he made 3%…”
Switch gears for a moment. Greg at BloodhoundBlog conducted his dual agency smackdown discussion on the merits of single buyer agency vs. dual agency. A lot of effort and words but very little new perspective. Some folks supporting single agency and others supporting dual agency.
Does IT really matter? IT being A-G-E-N-C-Y. Whether an agent only represents the buyer or both buyer and seller, the whole concept of agency, at its core, has and will always be trust. Real estate professionals love to throw around the word “fiduciary” as one of the reasons that supports their commission structure. Look it up. Trust is integral to the role of a legal fiduciary in any context.
What Ardell describes is the antithesis of a trust relationship. And you can find comments like Ardell’s all over the Web. If they are purely anecdotal instances of the exception versus the rule, then they should be stated as such and the industry should be all over these types of comments (like bees on honey) as an outrage to the way business is really done. If, however, these stories truly reflect the state of the industry when it comes to putting money before relationships, then the industry needs to either remove these people from their ranks OR discontinue this idle chatter about agency.
The word “transparency” is an overused term these days in real estate and has generally been linked to Web2.0. Here is a suggestion. For a moment, forget about real estate transparency in the online world and move it offline. What do you see?
Sphere: Related ContentTruth or Great PR September 4, 2006
As I was doing my normal Sunday online reading, I found this NY Times article about discount commissions that really was a featurette for Redin. In the article, there are anecdotal comments about seller’s agents not being willing to show Redfin buyers their listing. There is also a quote from our own Marlow Harris of 360Digest.com alluding to the possibility that these stories may be more PR than truth (my words, not Marlow’s). A Windermere agent is quoted as saying that such claims are “absolute absurdity.”
So I have a couple of questions. First, are there a significant number of listing agents out there that will look down on buyers who use non-traditional brokerages (even to the degree of making themselves unavailable to show the home) or is this just great PR spin? If there is any truth in the claims, I presume that these uncooperative agents take this stance because they don’t feel like they are paid to fill the traditional role of the selling agent (e.g. showing the home). If that’s the case, then why don’t these listing agents incorporate a variable rate commission (similar to the strategy builders have used for some time to address the selling agent who magically appears after the site agent has done all the work of “selling” the buyer on the new home)? NWMLS rules would allow it, so why is it not being done?
Sphere: Related ContentYou Have to Wonder…. July 17, 2006
And some ask why the government is so fixated on organized real estate. It is because of this mindset and the audacity to shout it out to the world…
I tactfully tell my sellers if I reduce my commission to 4 percent or 5 percent, the buyer’s agents will show my listings last only after showing the full-commission listings. Whether it’s ethical or not, that’s what happens.
Full article on Inman (subscription required after a day)
-Russ
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