Odds ‘n Ends in Real Estate

Wednesday, February 15, 2017

·         The increasing use of drones in the real estate industry has resulted in new regulations on registration and use of drones by the Federal Aviation Administration, limits on drone use by several municipalities, and a new kind of risk for insurers to underwrite and price. For real estate professionals this new insurance risk can vary greatly depending on how you use a drone. If you hire a third party to fly the drone, you may still have liability exposure related to physical damages caused if a drone crashes even if you were not flying the drone personally. There may also be some invasion of privacy issues arising out of drone use if the drone flies over a neighbor’s home and takes photos of the neighbor of their minor children. Since this is a rapidly evolving area, you would be well-advised to speak with your insurance advisor before jumping on board the drone train. You need to know if your current general liability policy offers any coverage to protect you from personal or property damage claims or if your E&O policy covers any errors resulting from you misinterpreting or misusing photos taken by a drone. It is very likely some insurance carriers will exclude drones from coverage until enough claims data is available to underwrite this new risk. Others may offer coverage with sub-limits or only offer via an expensive rider which could influence the feasibility of using a drone.
·         Did you know that in some markets over 50% of real estate sales never appear in the local MLS system? A portion of those may be “pocket listings” where the agent or broker does not have a signed listing agreement, but has knowledge that an owner would be willing to sell if the price was right. Another group includes those properties where a listing agreement exists, but the property owner specifically asked the agent or broker not to put the listing into the MLS due to the owner’s concerns about privacy and/or safety. Finally, an increasing number of real estate sales take place in the “for sale by owner” (FSBO) segment of the market where there is no listing agent or broker and, in many cases, no agent or broker on the buy side either. Many new online platforms also target his growing segment of the market by offering transactional support for a fixed fee. Is this trend significant? Absolutely, and it may also have the effect of distorting market trends and pricing. If you feel you are in a market where a significant portion of real estate sales never make it into the MLS, you need to look to a good source of public records to be able to determine what is really happening in a local market or submarket. Failing to do so could result in a claim being filed against you later.
·         The relationship between real estate brokers and agents and home inspectors can be filled with friction and misunderstanding, but in one state real estate brokers and agents apparently crossed the line by “blackballing” home inspectors who did not belong to the “right” association of home inspectors. After fielding and investigating a complaint from a blackballed inspector, the head of the state’s department of real estate and licensing issued an advisory opinion making it clear that while brokers and agents may certainly recommend a home inspector they are not to endorse any particular service provider, trade organization, or certification. The advisory opinion went on to make it clear that failing to comply could result in future disciplinary action against any broker or agent in violation of the opinion. While this was just a state level decision, everyone involved also needs to remember the Real Estate Settlement Procedures Act (RESPA) makes blackballing or steering a potential federal crime. Best practices dictate that brokers and agents simply provide a list of home inspectors working in their area to any client who asks and then step back and let the client pick which inspector they want to work with. It is safe to assume that labeling a home inspector or home inspection firm as a “deal killer” would also be frowned upon by this state.
·         Appraisers are concerned with a proposed change in the way Fannie Mae intends to use the scores from its proprietary Collateral Underwriter (CU) system which assigns a risk score to each appraisal it evaluates. Going forward Fannie Mae is planning on relieving lenders from making standard representations and warranties as to the value of collateral in a loan sold to Fannie Mae if the CU score is 2.5 or below. According to Fannie Mae, appraisals with scores below this benchmark are considered low risk and apparently the risk is low enough Fannie Mae will forego standard reps and warranties which can expose a lender to buying back a defaulted loan later if the appraised value at funding is challenged. Appraisers fear this will cause lenders to push for appraisers to write their reports to hit “the number” with the number not being the appraised value as it has been in the past, but with the number now being the targeted 2.5 CU score. Given the historical problems that have resulted when appraisers were pressured to hit a valuation target, it is reasonable for appraisers to fear this new number will become an artificial focus for lenders who want to sell as many loans without reps and warranties as possible. As an aside Fannie Mae estimates as many as 60% of loans could fall into this category and if that is true, lenders may feel motivated to work only with appraisers who can write appraisals that score 2.5 or less.
·         Through both up and down markets, over many years, complaints against real estate brokers and agents still fall into three primary categories: failing to adequately disclose issues with a property, making factual errors in listing and marketing a property, and providing inadequate guidance to both buyers and sellers. There are a number of other issues related to short sales and foreclosure sales, but most complaints still fall into one of the three primary categories. The key to avoiding issues in these areas is for the broker or agent to remember their primary responsibility is to protect the interests of their client while still complying with the ethical and legal requirements imposed upon them by virtue of being a licensed professional. If you find yourself edging into gray areas in order to keep a deal alive or collect a commission, the likelihood your will find yourself dealing with a complaint almost doubles. One tip to avoid getting into a legal or ethical predicament is to put yourself into the shoes of your client and ask yourself what you would expect of your broker or agent if you were the client.
·         How Loud, Inc. is a relatively new company that has developed a proprietary method for measuring noise levels around a specific property. How Loud’s SoundScore™ uses an algorithm developed by a member of the faculty at CalTech to assess and measure various noise generating sources near an address. How Loud has already sound mapped 3000 US cities and is working on expanding its coverage both in the US and in other countries. Sound clearly can impact quality of life and now there is a way to measure and compare the level of the impact. In the near future, it is possible this data will be used for both disclosure and valuation purposes and could influence the way people select which home to buy if there are several roughly equivalent options being considered. For more information on different ways you can use How Loud’s SoundScore™ you can contact Mike at 858-200-1018.
·         Home inspectors generally assess the condition and functionality of major systems inside a home. Recently, there has been a push by buyers to have inspectors expand their assessment to include exterior issues like landscaping and drainage. The thought behind this push is that landscaping and drainage can have a big adverse impact on the cost of home ownership, either due to the cost of maintaining landscaping or the chance landscaping or drainage issues could result in structural issues for a home. In many cases, it may still be necessary to bring in other professionals to evaluate what an inspector observes.
·         Quick facts:
1.      55% of home buyers and renters now indicate they are willing to pay more for a home or apartment that allows them to get to work without using a vehicle.
2.      Between 1995 and 2006 home ownership rates jumped from 65% to almost 70%. This increase is seen largely as a by-product of subprime lending practices which eventually resulted in a major drop in values and a significant increase in foreclosure activity. In 1965 when home ownership first began being monitored the rate was just under 63%; in contrast the rate at the end of 2016 was just under 64%.
3.      Student loan debt is having a material impact on when those in the 25-35 age bracket enter the housing market as first time buyers. Total student loan debt is over $1.3 trillion and makes up roughly 10% of all outstanding debt in the US. A survey by the National Association of Realtors (NAR) in 2016 reported two-thirds of non-homeowners with student loan debt are not comfortable also paying for a mortgage.
4.      ¿Hablas bienes raíces? If you don’t, perhaps you should start. Over 75% of the new households projected to be created between now and 2025 will be ethnically diverse and 40% of those will be Hispanic. Since 2000, Hispanics have accounted for over 50% of the growth in US homeownership. 
Author: Brian L. Trotier, JD, is the Executive Vice President and Chief Operating Officer of FREA and a former practicing attorney with more than 30 years experience in real estate and risk management.

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