Reference no: EM133318750

Case: Brenda wants to invest in fixer-uppers. She knows there is a lot of money to be made in real estate, and she is willing to put in the work to learn real estate and make simple repairs herself. Although she has modest funds and a good credit score, she's very nervous about starting without experience and losing all her money. Brenda signs up for a real estate brokerage course at a local community college and passes. Although she qualified to take the broker exam, she decides not to do so. BRenda then contacts Bob, a local real estate broker who advertises "Fixer Uppers Are My Specialty." Bob explains that he has several distressed properties, some of which are bank-owned,which require "tender loving care." Brenda is quite interested, and because she has the broker course under her belt, she asks to see several of Bob's listings. The first listing that Brenda inspects interests her. It's a 900-square-foot brick-and-frame ranch over a full, unfinished basement. The house has five rooms, two bedrooms, and a bath. The listing is small relative to its neighborhood and requires several repairs. The owner is a bank, and the property is currently vacant and has been winterized-the water pipes have been drained and anti-freeze has been poured into some pipes and fixtures (it's currently winter in the Midwest). As Bob shows Brenda the house, he explains, "The bank has assured me this house is in good structural condition. I have a letter here from a contractor assuring us that this house only needs minor cosmetic repairs. A do-it-yourselfer such as you shouldn't have any trouble fixing it up and flipping it quickly." Brenda is uncertain, but she is eager to buy a house and start working-she wants to make money! She trusts Bob implicitly. When Brenda wants to hire a home inspector, Bob just hands her a copy of the contractor's report. "Why waste all that money on a home inspection when we have this inspection already?" he says. "Besides, we'll get an appraisal soon. The appraiser will inspect the house." Brenda relents and accepts the contractor's report. Because the house was built in 1950, Brend thought the paint should be tested for lead. After all, she learned in her brokerage course that houses built before 1978 might contain lead. Bob explained that this was not a significant issue and that, if the house tested positive, Brenda would need to either remove the lead or disclose the lead-based paint to future prospective buyers and tenants. She would need to do the same if the property had tested positive for radon. Brenda decides not to pursue the lead testing or radon testing. Brenda makes an offer, which is immediately accepted by the bank. Bob congratulates her on "starting on the path to real estate riches." Brenda's full-time day job starts to take up all her time. Her boss insists she wrok a great deal of overtime or "I'll find someone who will." Brenda has very little spare time, and her new investment sits and languishes for several months. The neighborhood owners' association is impatient and tells Brenda that her house is a boarded-up eyesore in the community. Brenda calls Bob for advice only to find out that Bob no longer works at the brokerage. The sponsoring broker isn't interested in talking to Brenda due to irregularities associated with Bob's employment. Brenda calls Patrice, a broker recommended to her by a friend. Brenda explains that she is losing money supporting her investment and does not have the time or money to fix it anymore. "I just want to sell it 'as is' and break even," she says. Patrice explains that selling "as is" is not an acceptable option and recommends that Brenda consult a real estate attorney before proceeding.

1. What liability does Bob have? What liability does Bob's sponsoring broker have? Should Brenda report Bob and his broker to the state licensing agency?

2. Was Brenda properly prepared to tackle this project? What advice should she have been given by Bob? Why are brokers licensed? Whom is the state trying to protect by mandating real estate licensure?

3. Brenda lists her house with Patrice. A home inspection reveals several serious defects, including lead-based paint and high levels of radon, which will cost several thousands dollars to fix. Brenda's attorney recommends that Brenda disclose this on the seller disclosure form. The property is now much more difficult to market and will be sold much less than Brenda paid. Brend is upside down: she owes more than her house is worth. The lender is threatening to sue for the deficiency if they lose money at the closing. What are Brenda's options?

4. The house was appraised when Brenda applied for her mortgage. Should the appraiser have noted all the repairs in the report? Brenda claims she never saw the appraisal. Does Brenda have a claim with the appraiser? Should she report the appraiser to the state appraisal board?

5. Bob, a broker, is working with Brenda as a buyer. What are Bob's responsibilities to disclose his role as a designated agent?

6. Is Bob a dual agent? What are the disclosure obligations Bob faces? If he does not make these disclosures, what recourse does Brenda have? What recourse does the state licensing agency have?