Topics about new construction on the WRA Legal Hotline run the gamut for content. As with any area of practice, brokers working with buyers on new construction have many issues to consider in order to assure successful transactions. The following questions and answers represent just a few unique twists on the transaction.
Condominium disclosures on new construction
The buyer is interested in a condominium. The property is new construction, and the buyer will be purchasing the first unit, which is a single-family condominium home. After the offer was accepted, the seller delivered the condominium documents and disclosure materials, but they are not yet recorded. Does the five-business-day rescission period start now, even though the documents have not been recorded?
The seller may provide copies of the condominium documents prior to the recording and the establishment of the condominium. Wis. Stat. § 703.33(1) refers to copies of proposed or existing documents and does not refer to whether they are or are not recorded.
According to the statutory disclosure requirements found in Wis. Stat. § 703.33(4), the buyer has five business days after receipt of the documents in which to rescind, or to request any missing documents in writing if the documents are incomplete. In the event there are changes in the materials between the delivery of the documents and closing, the seller is required to provide a copy of the amended or changed materials if there are material changes. In such a case, the buyer would have a new five-business-day right to rescind.
Wis. Stat. 703.33(3m)
Wis. Stat. § 703.33(3m) CHANGE IN MATERIAL FOLLOWING DELIVERY TO PURCHASER. Any material furnished under sub. (1) may not be changed or amended following delivery to a purchaser, if the change or amendment would affect materially the rights of the purchaser, without first obtaining approval of the purchaser. A copy of amendments shall be delivered promptly to the purchaser.
See the statutes at docs.legis.wisconsin.gov/statutes/statutes/703.pdf. For additional information, see pages 9-10 of the March 2011 Legal Update, “2011 WB-14 Residential Condominium Offer to Purchase,” at www.wra.org/LU1103.
How big is the lot?
The buyers purchased a new construction spec home. Prior to the offer, the agent gave the buyers a preliminary plat map, which was provided by the seller and listing firm, that showed the property at 1.6 acres. After the offer was drafted but before closing, the listing agent brought to the attention of the cooperating agent and buyers that after investigation, the property was actually 1.3 acres, providing the new certified survey map showing 1.3 acres. The buyers went ahead and closed the transaction. Now after closing, the buyers and seller are in a dispute over the lot size. Is the seller liable for misrepresentation in this situation?
An agent or seller can be found liable to a buyer for intentional or negligent misrepresentation if the buyer believed the statement to be true and if the buyer’s reliance upon the statements was reasonable under the circumstances. In Wisconsin, the law provides that an inexperienced buyer should be entitled to rely on the factual statements made by a professional. This means liability can attach even if the agent or seller believed the statement to be true when made because the agent or seller did not use reasonable care in checking the facts.
The basic elements in misrepresentation are: (1) the defendant must make a material factual representation, (2) which is not true, and (3) the plaintiff must believe the representation is true and reasonably rely on the representation to his or her detriment. A buyer knowing the actual property dimensions prior to closing should address the misrepresentation or mistake of fact prior to closing or risk losing the ability to meet the element of reliance in a misrepresentation claim. The time for the buyer to consult with legal counsel is prior to the closing. Once the new information is provided, the buyer’s decision to proceed with the transaction may change the buyer’s potential claims for misrepresentation. It is prudent for the agent to refer the parties to legal counsel to review the transaction and advise accordingly. If the buyer makes claims after closing regarding the conduct of the licensees, the agent would work with his broker and his errors and omissions carrier as necessary if any claims are made against the agent.
Builder referrals
When a buyer is referred to a builder, is there a requirement for a broker to disclose the firm will receive a referral fee? If so, who is responsible for the disclosure?
The necessary disclosures will depend on the situation. Whether the broker is acting as an agent in a real estate transaction or is only making a referral for a construction or building contract will change the necessary disclosures. Wis. Admin. Code § REEB 24.05 addresses disclosure as follows:
REEB 24.05 Disclosure of compensation and interests
(1) Compensation.
(a) A licensee acting as an agent in a real estate or business opportunity transaction may not accept any fee or compensation related to the transaction from any person, other than the licensee's client, principal firm, or firm the licensee is associated with without prior written consent from all parties to the transaction.
(b) A licensee acting as an agent in a real estate or business opportunity transaction may not recommend or suggest to a party to the transaction the services of another individual or entity from which the licensee may receive compensation for a referral or in which the licensee has an interest, unless the licensee, prior to or at the time of the referral, discloses to the party in writing the fact that he or she may receive compensation for the referral or that he or she has an interest in the individual or entity providing the services. This paragraph does not apply when the licensee makes a referral to another licensee for real estate services under s. 452.19, Stats.
If an agent is working with a buyer who is purchasing a vacant lot, and the agent refers the buyer to the builder, Wis. Admin. Code § REEB 24.05(1)(b) requires disclosure at the time the referral is made; this disclosure should include the fact that the agent may receive a referral fee for the buyer entering into a building contract with the builder.
If the buyer already has a lot and is just seeking a builder to negotiate a construction contract, there is no rule requiring agents to disclose compensation from a builder. It may still be recommended practice to make this disclosure in order to prevent the uncomfortable situation where the buyer later discovers from the builder that the agent was paid a fee.
If the builder owns a lot that will be sold in conjunction with a construction contract, the agent is providing real estate brokerage services. The agent makes the regular agency disclosures, such as the agent is representing the builder/seller. In this situation, there is no separate referral fee requiring separate disclosure.
If the lot is being purchased from a separate seller in a transaction where the broker’s agent is acting as a seller’s agent and at the same time the construction contract is negotiated, it could be argued the agent is being compensated by more than one party and must accordingly obtain the written consent of all parties. Wis. Admin. Code § REEB 24.05(1) would require disclosure and written consents if the term “party,” as used in that dual compensation rule, is interpreted to include the builder.
More information about referral fees is available on pages 1-4 of Legal Update 02.01, “Getting Paid Outside of the MLS,” online at www.wra.org/LU0201.
Tax proration on new construction
An agent wrote an offer for a buyer on a new construction property. The taxes in the MLS sheet were accurately represented for the previous year when the property included only the lot. The selling agent checked the box for the tax proration method at line 124 of the WB-11 Residential Offer to Purchase: “the net general real estate taxes for the preceding year or current year if available.” The builder/seller evaluated the terms of the offer and price based on the use of the preceding year’s assessment. Since there is not a current year tax bill issued yet and the assessment did not change, the title company drafted the closing statement using the tax bill from last year for the proration. How to proceed?
Whatever tax proration agreement is contained in the offer will control the proration at the time of closing. The title company will complete the documents to reflect the terms of the offer. When there is new construction, the offer includes a caution for buyers at lines 131-134.
"CAUTION: Buyer is informed that the actual real estate taxes for the year of closing and subsequent years may be substantially different than the amount used for proration especially in transactions involving new construction, extensive rehabilitation, remodeling or area-wide re-assessment. Buyer is encouraged to contact the local assessor regarding possible tax changes."
Should the parties wish to change the proration formula, they would need to amend the offer. Otherwise the proration will be done in accordance with the method indicted in the contract.
The buyer and seller may also be referred to the standard language of the residential offer calling for the seller to disclose any completed or pending reassessment of the property for tax purposes. If the buyer can show the seller was aware of the reassessment, he may have a misrepresentation or breach of contract claim against the seller.
Licensees should be knowledgeable about real estate transactions and know that properties are assessed as of the first day of the year; and any time construction is completed after the first of the year, a reassessment will occur the following year. When there is new construction, the tax bill from the previous year may only include the vacant land.
See “Property Tax Proration: What Is Fair?” in the February 2007 edition of the Wisconsin Real Estate Magazine at www.wra.org/WREM/Feb07/PropertyTaxProration.
Tracy Rucka is Director of Professional Standards and Practices for the WRA.