The Effects of Trends in Real Estate on Legal Issues

There is no doubt that changes in the real estate market affect legal issues pertaining to real estate professionals.  This is evident when reviewing the changes in the real estate market during the last nine (9) years.

In 2007, the Great Recession hit the real estate market.  As a result, there were unprecedented increases in foreclosures and short sales due to losses of income and depreciation in the value of homes.  The situation was compounded by loans secured by real estate, for which borrowers did not qualify.  There were also questionable loan products with adjustable rates, creating a situation where borrowers could no longer afford their properties.  As a result, from 2007 to approximately 2011, the real estate industry dealt with short sales and the REO resale market.

In approximately 2010, the “flipper market” was born.  Due to low priced short sales and REO resales, investors began purchasing properties.  Those investors renovated and improved those properties and subsequently, placed them on the market.  While the flippers assisted in the recovery of the real estate market by driving prices up, they also created a significant amount of litigation for real estate professionals. 

Flippers’ objectives in investing in property is to earn a profit.  Therefore, when making improvements, many investors take shortcuts or do not utilize the highest quality materials.  Investors also know very little about the properties they own.  Therefore, disclosures are not as complete as those prepared by homeowners who are familiar with their homes, because they lived in those homes for long periods of time.  Many times, investors failed to obtain necessary permits for their improvements and repairs.  When buyers view flipper properties, the properties are generally in aesthetically good condition.  Therefore, buyers are lulled into a sense that the property is in good condition, even if it is only cosmetic.  Buyers moved into homes and learned that the repairs were either insignificant, improper or lacking in quality, there were no permits or serious problems with the property that were never disclosed.  From 2012, when these properties started closing through the first part of 2016, lawsuits against flippers constituted approximately forty to fifty percent (40% - 50%) of the non-disclosure litigation in California. 

Another fallout from the Great Recession was an increase in rentals.  People displaced by the foreclosure/short sale market could no longer qualify to purchase properties.  Therefore, they began renting.  These homeowners started competing with Millennials, who appeared to have a preference for renting versus purchasing real property.  This trend caused a significant increase in the rental market.

The rental market has also created significant issues for real estate professionals.  For example, agents started dealing with tenants and leases where they had not done so in the past.  Tenants filed claims against real estate agents arising out of the following:  interference with tenant’s rights; violation of rent control laws; wrongful termination of leases; wrongful eviction; failure to maintain property; and uninhabitability claims.

The real estate market started its recovery in approximately, 2012.  By 2014, there were many areas where the market had a complete reversal and became a seller’s market.  This led to multiple offer situations.  Buyers then started writing non-contingent offers to be competitive.  Non-contingent offers led to a wave of litigation by buyers claiming that they were not properly advised on the risks of not having inspections. 

2016 has brought a more normalized market.  There are very few short sales or REO sales; these sales are only taking place in isolated areas where the economy has not recovered and loan modification agreements are not being renewed.  The flip market is exhausting itself and investor resales are becoming more limited.  “Boomerang buyers,” who were displaced during the short sale/REO market,  are now recovering financially and purchasing homes, which is decreasing the rental market.  The market seems to be more normalized with more equality between buyers and sellers, which is creating more stability and less litigation.  Unequal markets lead to more claims.

Because of the more normalized market with equal bargaining power between buyers and sellers, the parties are negotiating inspections, repairs, extensions to escrow and other terms.  Because buyers have an opportunity to inspect property and are doing so, and have the ability to ask for credits and repairs from sellers, claims are decreasing and resulting litigation is becoming more stable. 

Shannon B. Jones, Partner, sbj@sbj-law.com