If you are an investor, a qualified, educated, investor-savvy real estate agent is one of your greatest resources. And you could be asking them to break the law. No, I’m not pointing the finger but I am noticing some investors in our community asking questions that agents cannot legally answer. Today, I am going to share three things you’re agent cannot legally do. My hope is that by sharing this information I can shed some light on why you may be getting vague responses or no response at all to some of your questions.
First, some background. I was an investor before I became a licensed real estate agent. This was very helpful when it comes to working with investors, but it also got me in some trouble with my brokerage and put my license at risk. There was a point when I was helping with project management, collecting bids for investors, bidding on investor’s behalf at the foreclosure auction, building houses for others, offering tenant placement, and taking the lead on due diligence as a licensed agent.
I thought I was offering a valuable service to my investor clients and being helpful, but I was offering services outside the responsibilities of a real estate agent, and in some cases, acting as a licensed contractor without having such a license.
To save the investor and the agent some frustration, below are 5 common questions/tasks that real estate agents can’t answer, tell you or do.
1. A real estate agent is not allowed to give rehab estimates or even share contractor referrals without risking their license
In many states, anyone who offers to oversee projects, collecting bids, or coordinating repairs may be acting as a general contractor. If they don’t have a contractor’s license, they could be putting themselves at risk, especially if they hold a real estate license. Same issue with stating an estimated rehab budget.
Will you find agents that give rehab budgets anyway? Of course. But if you happen to come across an agent who is hesitant to give a rehab estimate, this is why.
Another big liability for agents is sharing contractor referrals. My attorney shared a case he won where an agent was held personally liable for sharing a contractor contact. Their client asked for a contractor referral. The real estate agent shared contact information for a contractor. That contractor ended up shooting a nail through a plumbing pipe which caused mold growth and major damages. The contractor’s license had lapsed, and the agent had to pay $300,000 to the client. The court ruled that it was the agent’s fiduciary duty to check the status of the contractor’s license prior to sharing the contact, which the agent failed to do.
Agents, we do this all the time, it’s okay to do so long as you get a signed disclosure prior to sharing contacts.
Investors, always verify rehab estimates with licensed contractors, and always verify the status of their license prior to hiring the contractor.
2. A real estate agent is not allowed to tell you where the “bad” neighborhoods are or comment about which schools are good or bad.
We’re often asked to share maps of a city outlining the good areas versus the areas to stay away from. Doing so would be a major Fair Housing violation. A law, established in 1968, was created to make it illegal for real estate agents to steer their clients to particular neighborhoods. The law is designed to protect against discrimination based on race, religion, disability, sexual orientation, gender, or even family status.
Your agent is not trying to avoid doing “extra work”, the agent is following the law.
3. A real estate agent is not allowed to run a return analysis for you
This is a gray area. To some attorneys, it could be considered offering investment advice without a proper license. Do some agents do this? Of course, but you’ll often see disclosures or disclaimers.
Instead, agents can share the information you would need to run your own analysis, which we recommend you do on any deal you receive.
4. A real estate agent is not allowed to do due diligence on a property for clients
All real estate licensees are required to be hung at a real estate brokerage, and each brokerage carries their own E&O policy, each E&O policy has different limitations. Most do not allow for coverage on any activities outside of negotiating and interpreting an approved purchase and sale agreement, including the pulling of permits, reviewing of profit and loss, pulling permits, reviewing zoning, etc.
A real estate agent can point you in the right direction, gather information for you from the seller, and share contact information for qualified professionals who can help with permitting/zoning/development questions.
They cannot do this due diligence for you without risking their license and subjecting themselves to an E&O claim if they miss something.
5. A real estate agent is not allowed to give legal or tax advice
I couldn’t even count all of the times that I have been asked about tax liability on the sale of properties, questioned about title vesting, and have even been asked to create an LLC for clients. Real estate licensees do not have the qualifications to answer such questions, and doing so can land them in hot water, affecting their ability to maintain a real estate license. These questions are best answered by attorneys and CPA’s.
Working with agents to purchase an investment property is different than the experience you may have had with a residential agent when buying a primary residence. In those types of transactions, it’s often the agents who take the lead and walks a buyer through the process. As an investor, you are expected to do your own due diligence and verify everything. ‘Trust, but verify’ is a good rule of thumb.
I also want to add that if you really value having an investment-savvy agent working on-the-ground to find you deals, you must respect the agent’s time. The quickest way to get to the bottom of an agent’s list is by wasting their time. Most don’t realize they are making these mistakes.
Do not call them to simply ask questions if you have no intention to buy in the immediate to near future. While they are your eyes and ears on the ground, you’ll want to first decide if their market fits your criteria. You can find out about major employers, job growth, wage growth, appreciation, and other data online.
If you are six months out from purchasing or still saving up capital for the down payment, now is not the time to talk to every agent in every market. Use your time and resources to research and conduct due diligence on your own and respect their time. Be sure you are only inquiring about deals you are qualified to purchase and interested in purchasing.
We do recommend using the deal list as a way to build the skillset of deal analysis and basic due diligence along with area scouting. That way, when you’re ready to buy, you can be confident in your decision to move forward with a property.
The best way to achieve your goals of building your own passive income portfolio is to know what you are looking for, be decisive, learn to quickly and confidently analyze deals, and follow a due diligence process.