Due Diligence for Real Estate Professionals
| November 16, 2021
by Gary Siegle and Kristian Tzenov, RECA Regulatory Compliance Advisors
Some of the complaints RECA has been receiving lately have centered around issues that would never have happened had the licensee involved done their due diligence in a transaction.
Due diligence is the level of judgment, care, responsibility, and activity performed by the licensee. It includes the systematic acquiring of facts and objective information about the property that is, or may be, the subject of a transaction, and it includes all the necessary procedures that will result in an efficient transaction. It’s basically doing your research on a property in the best interests of your client and making sure you document everything and follow the standards of practice. It is a part of competent service, and is expected by the consumer.
Pulling Title— RECA is seeing a rise of complaints where the allegations indicate either title was not pulled or carefully reviewed. Had it been pulled and checked it would have likely changed the course of the transaction.
Ideally a certificate of title should be checked 3 times during a transaction:
- By the seller agent to ensure they are not misrepresenting the property: e.g. is the property being marketed as having a secondary suite? A restrictive covenant may not allow secondary suites regardless of municipality approval.
- By the buyer agent to ensure the property meets the purpose of the buyer: e.g. is there a restrictive covenant that may hinder the buyer to use the property as they wish, such as running a home business or fencing the property.
- By the mortgage broker to ensure the financing is not hindered: e.g. does the historical title show the property was used as a former grow-op, will the lender approve?
Multiple offers—RECA is seeing an increase in complaints around multiple offer situations, usually due to one or both parties not understanding the multiple offer process before they agree to enter it. Licensees assisting sellers should advise them of the pros and cons of multiple offers, and licensees assisting buyers should advise buyers as to how the process works, particularly the fact that the seller is in the driver’s seat during multiple offers. For example, many complaints come from buyer clients who are upset that a seller never saw their offer, not knowing that the sellers had advised their licensee to only bring offers that met a certain criterion.
Mortgage Broker Due Diligence—RECA is seeing an increase in complaints after borrowers proceed with a transaction thinking they have mortgage approval, when it’s only a pre-approval. Mortgage brokers providing pre-approvals should explain that although qualified for financing, due to many different circumstances consumers may have their financing approval withdrawn by the lender. The can happen if a property was a former grow op—even when remediated fully, or if restrictive covenants are discovered, if the borrowers financial situation has changed since the pre-approval, or if other property issues are discovered by the lender during underwriting (e.g., age, size, location, condition, property type, zoning, etc.)
General Due Diligence
Beyond the situations mentioned above, due diligence activities can vary depending on the situation, but generally they should undertake the following activities:
- Document, in writing, the information they receive from others and convey to clients, including situational details such as where and when the conversations occurred
- Retain and provide to the brokerage all documentation and trade records related to the transaction as part of their record keeping obligations under the Rules
- Ensure that they never provide legal advice to clients
- Advise clients to seek legal advice and/or advice from an appropriate expert if the clients seek an opinion from the real estate professional which is beyond their expertise
Due diligence activities are critical to a real estate transaction as they provide clients with the information, they need to help them make an informed decision and provide instructions on how they wish to proceed.