Real Estate Firms Avoid Referral Issues by Managing Vendors

Real estate firms refer clients to various third-party vendors, such as home inspectors, appraisers, and mortgage brokers. These vendors play a crucial role in home buying and selling, so they must provide quality services to clients. However, referring clients to unreliable or unqualified businesses, or vendors, can result in legal liability and damage to a real estate firm’s reputation.

This is where third-party risk management (TPRM) comes in. TPRM is the practice that helps real estate firms thoroughly vet the vendors and service providers they refer to their clients. By managing vendors and implementing third-party risk management, firms can minimize legal liability and ensure high-quality services from reputable vendors.

Legal Liability of Referring Real Estate Clients to Your Third-Party Vendors 

In general, a real estate firm isn’t legally responsible for the actions of a business (or third-party vendor) that they refer to their clients, but the firm must act in good faith and follow industry standards in selecting the vendor. Real estate firms can still be liable for the actions of third-party vendors who act improperly or negligently in specific circumstances. For example, if a real estate firm knew or should’ve known that the third-party vendor engaged in misconduct or negligence, there could be consequences. 

Here are some examples of situations where a real estate firm may be responsible for third-party vendor actions:

• Negligent referral: If a real estate firm refers a client to an incompetent or unqualified vendor, and the vendor's actions harm the client. 
• Breach of contract: If a real estate firm has a contractual relationship with a third-party vendor and the vendor breaches the contract terms, the firm may be responsible for any damages resulting from the breach.
• Agency relationship: When a real estate firm has an agency relationship with a third-party vendor, such as when the vendor represents the firm in the transaction, the firm may be responsible for that vendor's actions.

Vendors Who Real Estate Firms Refer Clients To

Depending on a client's needs, real estate agents give referrals to a number of third-party vendors or businesses. The following are some examples of vendors that should be managed using third-party risk management before referred to clients:

• Home inspectors: They’re responsible for thoroughly inspecting property to find potential issues or defects.
• Mortgage lenders: Mortgage lenders provide home loan financing.
• Title companies: Title companies conduct a title search on a property to make sure there are no liens or other legal issues that may affect the sale. 
• Appraisers: An individual who determines the value of real estate to determine the market value.
• Closing agents: Also known as a settlement agent or escrow agent, a neutral third party that facilitates the transfer of ownership of a property from the seller to the buyer. The closing agent oversees the closing process. That involves ensuring all necessary documentation is completed and signed correctly, funds are transferred between parties, and any outstanding liens or claims on the property are resolved. Some states require a closing agent in real estate transactions, while others don’t.
• Property valuation firms: Companies that provide real estate appraisal and valuation services to determine property value.
• Property managers: Companies that provide services such as tenant screening, rent collection, maintenance and repairs, and lease preparation.
• Contractors and suppliers: These companies provide services such as construction, renovation, and maintenance for real estate.
• Legal counsel: Attorneys who provide legal advice and representation in real estate transactions.
• Home warranty companies: Offers insurance policies that cover repairing or replacing certain home appliances and systems.
• Moving companies: These companies transport personal property for people who are moving.

How Managing Vendors Can Help Real Estate Firms

Real estate firms can manage their vendors by using third-party risk management to properly vet the businesses they refer to their clients. These are four best practices real estate firms should implement: 

1. Establish clear policies and procedures: Referrals to third parties should be managed according to clear policies and procedures. The policies should include guidelines for selecting, vetting, and monitoring vendors. It should also include protocols for addressing any issues that may arise.
2. Conduct due diligence: Real estate firms should do their due diligence on vendors before referring them to clients. Due diligence includes verifying a vendor’s qualifications, credentials, and reputation in the industry. This ensures that clients are referred to qualified and reliable vendors.
3. Monitor vendor performance: Real estate firms must monitor vendor performance over time to ensure they meet or exceed their client's expectations. They also must track key performance metrics such as response times, completion rates, and customer satisfaction. By monitoring vendor performance, firms can identify potential issues before they become problems and take corrective actions if necessary.
4. Include liability limitations in contracts: A real estate firm can limit its liability by including liability limitations in contracts with clients and vendors. Legal counsel should draft and review these provisions to ensure they are enforceable.

Third-party referrals are an integral part of the real estate industry, but also come with significant risks. Managing vendors helps firms mitigate these risks and minimize legal liability while protecting their clients. Before referring third-party vendors to clients, real estate firms should vet them to ensure they have the necessary skills and qualifications and adhere to ethical and legal standards.