Suing the Buyer’s Agent for the Shortfall in Valuation after the Bidding War
Can a successful bidder sue his own Agent after the property fails to appraise?
We looked at a situation where Bill submitted an unconditional Offer in a bidding war, defaulted on the transaction and now has $170,000 in losses.
The appraisal came up short.
Here is the scenario. Bob puts his property on the market at $540,000. That really doesn’t make that much sense, since he paid $600,000 for it last year.
The market has moved up 15% since that time, so, doing the calculations that should mean about $690,000. Bob did nothing to the property, no improvements whatsoever.
The “marketing efforts” associated with the $540,000 listing are designed to create a bidding war which will suggest that this property is heavily sought after.
The problem at the present time is that in Toronto this strategy seems to work, or at least it works on enough people. If he were to list at $640,000 he might only get 10 Offers, but at $540,000 he has another 10 hopefuls, all assuming that they are going to be the lucky ones. Of course, you appreciate that likely it is only the top 10 who can really afford it anyways.
Bob gets 20 Offers for the property, and as the game is played sends everyone back to improve their Offers.
Bill is getting anxious, he and his wife have been looking for three years and to this point in time have lost out on 9 properties, all in competition. So, what does Bill do? Bill stretches and offers $800,000, that’s $110,000 over market and $260,000 over asking. His Offer is attractive to Bob since there are no conditions.
Naturally, he gets the “good news” he is the successful bidder. Bill pays over the $75,000 deposit and looks forward to the closing in 45 days.
What’s the problem? Within a few days, he gets the “bad news”, he doesn’t qualify for a mortgage which will allow him to close this deal. The appraisal came in at $700,000, and that was generous. The appraiser and the Bank both think that he overpaid by a ridiculous amount, and he did, but certainly not with their money!
Does Bill have a claim against his own Agent for negligence.
The issue for Agents is one of “informed consent”. That means, read clients their rights, get their client’s response, document in writing the response and instructions, and the Agent is “good to go”. So, what’s the problem with all of this? Agents don’t know what to say, or if they say something, it’s either wrong or confusing. For a lawsuit, this is not a good way to start.
In our example, we really need to assess the level of Bill’s sophistication. If Bill is a lawyer, seasoned investor or vice president of a Bank, that’s not good for Bill.
However, it’s far more likely that Bill is unsophisticated and easily influenced, otherwise this wouldn’t have happened. He may be a first time buyer and not be involved in any regular line of work which would make him “market savvy”. This means that he is “vulnerable” and essentially that is the basis of a lawsuit.
A Buyer’s agent must investigate, determine and verify the material facts, that is, anything that might affect the value of a property. Here we have the property underlisted. Did Bill know this? Is he aware that will drive more potential buyers into the bidding process? But, some of that demand is artificial. Bob paid $600,000 for it, so he is not going to take less than that in a rising market. This is a “material fact”. The Agent needs to prove that this fact was provided to Bill.
There is also the market research associated with the property. The rise in price would take the property value up by 15% to $690,000.
Now, we come to the bidding war game and valuations. Every dollar over the $690,000 is at risk of not being supported in an appraisal. What does that mean? It simply means that Bill must have another source of funds for this, because it won’t be the Bank.
Every dollar that he bids over the $690,000 is at risk and requires separate funding.
In our example, Bill bid $800,000 and won. That means he needs $70,000 down (10%) and another $90,000 to top up the bid. His Agent should have discussed this with him. If Bill assumed the risk, that is one thing, if he didn’t know, then, he has a potential lawsuit.
OREA Form 127 comes to mind. It deals with “informed consent”.
What were the available options:
· Do not participate in this bidding war
· Include a condition on financing
· Include a condition on satisfactory appraisal
· Include a provision for a Seller take back second mortgage for the deficiency
In order for an Agent to successfully defend an action by Bill, the Agent will have to prove that these facts were properly communicated to Bill, that Bill understood and that Bill elected to proceed assuming the attendant risks.
So, that information needs to reduced to writing! It can be in a document like Form 127, it can be in a letter, in an email or even in a text. The difficulty is that text is usually too short and is less likely to contain all the information necessary for Bill to make an informed choice.
Bill’s case is based upon not having the right information at hand in a timely manner.
Brian Madigan LL.B. Broker