Monday, November 13, 2017

Real Estate Agent Errors and Omissions Insurance

Real Estate Agent Errors and Omissions Insurance

E and O insurance protects real estate agents in case of lawsuits

agent talking on her cellphone studying paperwork
Big Stock Photo
No matter how carefully a real estate agent performs the job, lawsuits can be filed against the agent and brokerage, even those that may be unfounded or frivolous. Legal expenses must be paid no matter who wins in court, and those costs can be devastating to an agent's finances. Errors and omissions insurance, E&O for short, is the name used to describe a type of malpractice insurance coverage for real estate professionals.

When an agent carries E&O insurance coverage, the insurance company defends the claim and pays any settlement or judgment against the agent up to the limits of liability stated in the policy.  The coverage protects real estate professionals against financial losses from lawsuits filed as a result of their work in the real estate profession. 
Many real estate brokers sell E&O insurance to their sales agents as part of a larger package of services provided to the agent for a flat fee. As such, agents don't always know or think about the particulars of this important insurance policy. Here are some basics about E&O insurance coverage.

Typical E&O Coverage

  • Pays claims that come about due to error, omission, or negligence related to duties as a real estate agent.
  • Pays claims that are made during the policy period.

Common E&O Exclusions

  • Claims resulting in dishonest or criminal acts by an agent.
  • Claims associated with polluted property.
  • Claims against an agent if an agent causes bodily harm or death to another person.
  • Claims arising from damage caused by an agent to someone's property.

E&O Liability Limits

  • Varies depending on your policy. Ask an insurance agent to explain options.

Deductibles for E&O Insurance

In insurance, a deductible is the amount of money an agent must pay before the insurance coverage kicks in.
Some E&O policies have two deductibles.There might be one deductible for defense costs and another for payment of damages if an agent is found to be at fault.
Some brokerages allow zero deductibles on E&O packages, providing the agent maintains a complete file with the required documents the brokerage and the law demands. This can also backfire if the agent cannot produce a complete package from closing.

Protecting Yourself

If a person files a lawsuit against a real estate agent, chances are that person will also file a lawsuit against the brokerage, in addition to filing a complaint with the agent's state real estate commission. As a general practice and for improved risk management in the event of a potential lawsuit, follow these tips:
  • Keep accurate records of all transactions and interactions with clients. For example, some agents keep electronic or handwritten journals that document client names, dates of interactions and topics of conversation.
  • When taking phone calls from clients, agents often have a notepad handy and take detailed notes during the conversation.
  • Note the client responses to documents and statements made by a lender, home inspector and / or home warranty recommendations.
    As a real estate professional, an agent should feel comfortable asking clients to sign documents stating specific actions the agent recommended -- and the client agreed to. For example, the buyer who declines a home inspection may come knocking on an agent's door if the air conditioning breaks down the day she moves into the home the agent sold to her. If the agent's files contain the signed waiver showing that the agent recommended a home inspection and the buyer declined, the agent is covered appropriately.
    Agents should document as many facts as possible during real estate transactions. It could help the agent down the road if a client later becomes unhappy about some aspect of a sale. Some agents even keep records of all of the text messages. Smart agents will also maintain a file of every single email.
    Just drag every email into a folder after closing. With that, an agent might not need to rely on E&O.
    Edited by Elizabeth Weintraub, Home Buying and Selling Expert at The Balance.
    At the time of writing, Elizabeth Weintraub, CalBRE #00697006, is a Broker-Associate at Lyon Real Estate in Sacramento, California.

    Understanding Appraisal Process When Buying or Refinancing a Home

    Understanding Appraisal Process When Buying or Refinancing a Home

    Understanding Home Appraisals
    Zero Creatives/Getty Images
    One of the most critical parts of getting a mortgage is Appraisal. The purpose of an appraisal is to confirm the sales price for the lender.

    What is an Appraisal?

    An appraisal is a professional estimate of the value of the property that you are planning to purchase. The person who does the appraisal is called an appraiser.

    Why Do We Need an Appraisal?

    Lenders always require a home appraisal before they will issue a mortgage.
    They do this to protect their investment: if the actual market value of the property is lower than the sales price, and you default on your mortgage, the lender won't be able to sell the property for enough money to cover the loan.
    While Refinancing, you might get a Property Inspection Waiver (PIW). It happens when the loan amount is significantly lower than the estimated value of the home. Don't count on it even if your loan to value ratio is too low since it rarely occurs.

    Be Sure to Ask for a Copy

    While you pay for the appraisal, it is done to protect the lender, not you the buyer, and the report is usually sent directly to the lender. You can request a copy be sent to you as well, but it doesn't always happen automatically, so you have to ask for it.

    Cost & Time

    It usually costs between $450-$600 for an appraisal, depending on your property type and location. More expensive homes or homes that have more than 1 unit cost higher to get appraised.
    The appraisal process usually takes anything between 3-10 business days. The appraiser sends the report to the mortgage lender, but you have a right to receive a copy of the appraisal report if you have paid for it.

    How Does the Appraiser Arrive at the Property Value?

    The most important component in arriving at the value is what is called comparable sales (or comps in short).
    These are similar properties usually located within a mile and have sold in last 90 days. The appraiser compares mainly the below features of the property against the comparables to arrive at the value
    • Square footage
    • Appearance
    • Amenities
    • Condition
    A large 4 bedroom home in an area where mostly 3 bedroom homes have recently sold will have a higher value, and a house with peeling paint and a patchy lawn in a well-manicured suburb will appraise at a lower amount than otherwise similar properties.

    What If the Property Appraises for Less Than the Sales Price?

    While deciding your loan amount as a percentage of the property price, the lender will pick the lower of the Sales Price or Appraised Value. So if the property appraises at same or higher than the sales price, you could still get the same loan amount you applied for, but if it appraises for less, the lender will reduce the loan amount to match the value of the home according to the appraisal.
    Though it can cause everyone involved in the transaction to panic; note that there are several options for the deal to happen still. If you wrote your offer contract to include a contingency requiring the property to be valued at the selling price or higher, you can:
    • Walk away from the deal
    • Negotiate with the seller to reduce the selling price
    • Put more money down to cover the difference between appraised value and the selling price
    • Dispute the appraisal: find out what comparable sales were used and ask your agent if they are appropriate, often your agent will be more familiar with the area than the appraiser and can find additional comps to support a higher valuation. 

    Modular Homes vs Manufactured

    What Are Modular Homes vs Manufactured?

    Modular Home
     Modular homes look just like traditional homes. © Big Stock Photo
    When you are buying a home, you might hear the terms modular homes, manufactured homes and site built homes. It's important to understand how they all differ, no matter whether you are purchasing an existing house or plan to build on land that is subject to restrictions. The differences can affect a home's price and its resale value, and even dictate whether or not it can be built on your land.

    What Are Site Built Homes?

    • They are constructed entirely at the building site.
    • Common construction materials are 2 by 4s and 4 by 6s precut wood used for framing and trusses.
    • They conform to all state, local or regional codes where the house is located.
    • Often called 'stick-built' houses, they make up the majority of all new homes constructed today and are the favored way to build a home.
    • A well-built, cared for site-built home generally increases in value over time, although its location plays a key role in value.

    What Are Modular Homes?

    You might find this hard to believe, but the photograph on this page is of a modular home. It looks just like a regular house built on top of a slab with 2x4s, doesn't it? You cannot really tell the difference these days. Modular homes are typically very well built. Here are more facts about modular homes:
    • Modular homes are built in sections at a factory.
    • Modular homes are built to conform to all state, local or regional building codes at their destinations.
    • Sections are transported to the building site on truck beds, then joined together by local contractors.
    • Local building inspectors check to make sure a modular home's structure meets requirements and that all finish work is done properly.
    • Modular homes are sometimes less expensive per square foot than site built houses.
    • A well-built modular home should have the same longevity as its site-built counterpart, increasing in value over time.
    • Read ​​more facts about modular homes

    What Are Manufactured Homes?

    • Formerly referred to as mobile homes or trailers, but with many more style options than in the past.
    • Manufactured houses are built in a factory.
    • They conform to a Federal building code, called the HUD code, rather than to building codes at their destinations.
    • Manufactured homes are built on a non-removable steel chassis.
    • Sections are transported to the building site on their own wheels.
    • Multi-part manufactured units are joined at their destination.
    • Segments are not always placed on a permanent foundation, making them more difficult to re-finance.
    • Building inspectors check the work done locally (electric hook up, etc.) but are not required to approve the structure.
    • Manufactured housing is generally less expensive than site built and modular homes.
    • Manufactured homes sometimes decrease in value over time.

    What Do the Differences Mean to You?

    Restrictive Covenants and Deed Restrictions
    • Communities generally have no restrictions against traditional, site-built homes. Many housing developments do set minimum size requirements and stipulate you must build a house that conforms to published restricted covenants or be approved by an architectural review committee.
    • Most developments allow modular homes. Some do not, but, in those cases, the restrictions seem to have been imposed because of an ongoing confusion about the differences between modular homes and manufactured homes.
    • Restrictive covenants and deed restrictions often exclude manufactured homes.
    Investigate the deed restrictions thoroughly before purchasing land for any type of new home. Further, obtain a copy of the Covenants, Conditions and Restrictions, also known as the CC&Rs for your new neighborhood. Study the plat map and know where your easement boundaries lie to make sure you do not place your modular home on top of any easements.

    Are Prefab Modular Homes the Same as Shipping Containers?

    Shipping containers can also be called a modular home but they are generally very different from your typical modular home.
    A conventional modular home looks very much like a traditional stick-built home. It is hard to tell the difference. Whereas a shipping container home, constructed from an actual shipping container and not a replica, looks like a shipping container home, made from corrugated metal.
    A single pod modular home built from a shipping container can be used as a cabin, getaway or tiny home. For more space, consider joining together two shipping containers.
    At the time of writing, Elizabeth Weintraub, CalBRE #00697006, is a Broker-Associate at Lyon Real Estate in Sacramento, California.