A Realtor® is exposed to potential liabilities every day. Whether you’re showing a listing, representing a client at closing, or performing any other job-related duty, the likelihood of having an errors and omissions suit filed against you is very real. Don’t wait another day to learn how you can help minimize your risks before they happen. Discover how 10 common mistakes occurred and how they could have been avoided in the following real-life claim scenarios.
Water intrusion caused by faulty foundations, roofs, and windows is very common. Inferior design, construction, and/or installation can create moisture problems, which can lead to wood dry rot, mold, and pest infestation. Also, poor drainage can result in wet basements and damaged personal property. These problems are prevalent in both old and new construction, making it vital to never assume that new construction or renovations are without flaws. An initial home inspection revealed faulty windows, which resulted in a failed transaction. When a subsequent sale occurred, the real estate agent failed to have the seller update the disclosure statement and only verbally advised the purchasers of the defects. The buyers soon discovered the problems and sued the sellers and agent. The cost to settle the case was $12,000.
Prevention Tip #1: always recommend that your clients obtain a home inspection by a qualified professional and make sure you obtain, review, and update the seller’s disclosure form as necessary.
Frequently, litigation ensues after a seller and/or real estate professional incorrectly identifies property landmarks as being “the boundary.” Buyers may decide to build a fence or install a pool on what they think is their property, only to discover that it is their neighbor’s. More serious problems can arise if the agent misinterprets the boundary pins and/or fails to provide the buyers with survey results.
After a professional survey, the real estate agent incorrectly interpreted the positioning of the stakes and failed to provide the buyer with a copy of the findings, resulting in the buyer making substantial landscaping renovations on the neighbor’s property. The litigation ended with the agent paying a rather significant settlement to both the buyer and the neighboring property owner.
Prevention tip #2: Recommend buyers have property boundaries surveyed to verify acreage and demarcation, and provide that report to the buyer. Never guess if you’re unsure of a boundary or its marking.
Many real estate professionals with an extensive residential background attempt to handle foreclosure sales. These transactions require a special expertise and diligence to complete, and dabbling in the area can lead to mistakes and claims.
A real estate agent, inexperienced with foreclosure sales, was hired to auction a property by the mortgage lender. Unfortunately, the agent failed to consider the second mortgage when auctioning the property. The buyer eventually agreed to complete the sale, with the agent paying off the second mortgage note and being barred from future auction sales for that lender.
Prevention Tip #3: Never act outside your area of expertise—refer unusual or unfamiliar listing situations to a specialist.
Misrepresentation of School District
School districts, on occasion, make changes to which schools serve certain neighborhoods within a community. Having sold many homes in the same neighborhood, a real estate professional assumed that the most recent listing was in the same school district, although he was aware the district had recently redrawn its boundaries. Because the agent failed to verify the school boundary information, the claim eventually settled for a large amount.
Prevention Tip #4: Verify all information provided about a property is accurate, and if you’re not sure about something, ask.
Homeowners’ Associations and Restrictive Covenants
Newer residential subdivisions typically utilize homeowners’ associations and restrictive covenants to help protect the integrity of the neighborhood and property values. These restrictions can include building specifications, land use regulations, and even pet stipulations. Claims can arise when potential buyers don’t receive a copy of these governing documents, or agents attempt to interpret their applicability.
A real estate professional incorrectly advised his clients that their granddaughter could live in their new property, despite restrictive covenants specifying a much older age requirement. To further complicate matters, the agent failed to provide the buyers with a copy of the covenants prior to executing the purchase agreement. The matter was eventually resolved following extensive negotiations.
Prevention Tip #5: Disclose—in writing—all pertinent property information and documentation about a property to buyers, have them sign a receipt acknowledging the disclosure, and retain it in your transaction file.
Misrepresentation of Well Water
It is not uncommon for real estate professionals to represent that well water flow and quality is adequate for a buyer’s needs. The source of this statement may come from the seller, but it shouldn’t be assumed that the buyer will necessarily agree. Contaminated water can involve significant expenditure if clean water has to be delivered to maintain the property’s legal occupancy. A well inspection may also detect other environmental hazards, such as underground storage tanks. Despite visual evidence of ongoing well testing on the property, a real estate
agent took the sellers’ word that there was no problem with the quality of their well water. After closing, the buyers received notice from an environmental engineering company about contamination in their water supply. They then sued the agent, alleging misrepresentation and failure to recommend a water quality inspection.
Prevention Tip #6: Whenever a well is located on a property, recommend that your clients have a licensed professional inspect the well and water quality. If they decline, document this fact in writing with a signed waiver.
Real Estate Litigation
Property sales may result from a legal situation necessitating the transaction, or may be impacted by an associated lawsuit. Any such dispute is usually revealed during the title search and should be
disclosed to all potential buyers, because it could ultimately affect the property’s title. Although aware of ongoing litigation regarding ownership to a driveway, a real estate professional did not inform potential buyers of the property’s legal status since their state did not require a Seller’s Property Disclosure Statement. The buyers terminated the contract when they learned of the issue, then sued the agent for extensive damages.
Prevention Tip #7: Fully disclose any potential problem areas (if material in nature) in writing, and even if not required by your state, consider using a seller’s disclosure for all transactions.
Mistakes often occur when a real estate professional assumes that their residential expertise will translate to the commercial arena. Claims are typically generated after a buyer learns that their new property cannot be used for their intended purpose, although represented as such by the listing agent. As an expert in residential real estate, an agent incorrectly advised a client that he could operate his commercial business out of his new home. After the city contacted the buyer about his nonconformance to zoning regulations and denied his variance request, that buyer sued the agent and supervising broker, who settled for a substantial sum.
Prevention Tip #8: Again, never act outside your area of expertise— seek the assistance of a subject expert.
A home that appears to be in proper working order may have underlying issues not visible to potential buyers. Cracks in basement walls, ceiling stains, and uneven floors can all signal more extensive problems. Professional home inspections can help to detect such defects before closing. Relying on an undated soil study provided by the sellers that indicated no problems, a real estate professional recommended a property to his buyers, who also wanted to install a swimming pool. After closing, the buyers learned that the soil condition was much worse than disclosed and also that the home’s foundation had shifted. The agent was sued for failure to recommend a soil study or home inspection, resulting in a six-figure settlement.
Prevention Tip #9: Never interpret property condition or rely on undated reports—suggest that your clients have these items inspected carefully before making (or accepting) an offer.
Misrepresentation of Property Income
Income-generating properties and fashionable neighborhoods may impact a parcel’s value, but can’t guarantee it. By speculating on the future viability of a property, a real estate professional could create an unreasonable expectation of profitability. A real estate professional erroneously believed that a particular retail property and its upper-floor residential rental units would be successful. Having been assured by the agent of this “guaranteed” income, the buyer acquired the property, which ultimately failed due to empty rentals and low business traffic. The matter was resolved for $75,000 after a two-week trial.
Prevent Tip #10: Always recommend that buyers seek the advice of a qualified expert, and avoid using adjectives that overstate the facts about a property.
If you remain up-to-date on current industry trends, practice sound risk management procedures, and make sure that you have a comprehensive Errors & Omissions Insurance policy in place, you can protect your firm and career against claims and their consequences.
Richard J. Monahan, CPCU is vice president of XL Select Professional and Clara Miles is copywriter for Pearl Insurance, endorsed E&O provider for MAR, that specializes in the design and administration of quality insurance plans for associations, affinity groups, and large firms. Their partnership with the XL Insurance companies (through Indian Harbor Insurance Company and Greenwich Insurance Company) allows them to offer association members an A rated (by A.M. Best) E&O program. For more information on Pearl E&O programs, call Debbie Bindeman, your association’s Regional Director, at 1.800.455.1154. Information provided within this article is not to be taken as legal.