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Avoid The Risk - Steps That Can Reduce Your Risk

by Michele Lerner | Apr 28, 2014
REALTORS® are commonly thought of as gregarious and chatty, yet the number one reason they run into legal hassles is sharing too little rather than too much. Mike McDonagh, general counsel for MAR, says that failure to disclose issues about a property is the most common reason REALTORS® call MAR’s legal hotline for help.
“Chapter 93A” is a statute that protects consumers from an unfair or deceptive practice by a broker, says McDonagh. Take, for example, a listing that says a roof is “like new”, but once the buyers move in they discover the roof is ten years old and needs a repair. Those buyers can sue the broker for deception, then it’s up to the salesperson and the broker to prove they did not know about the problem.

While legal hassles cannot be 100% avoided, there are steps that can reduce your risk of getting into trouble with your clients, other REALTORS®, and their clients.

Disclose and Document

“In Massachusetts, the seller isn’t required to make any disclosure except about lead paint,” says McDonagh. “However, brokers, if they know about any problem at all, are required to volunteer that information to potential buyers.” “Any fact that could influence a purchaser’s decision about a home must be disclosed by a broker, whether the fact comes from personal observation, the seller, or an outside expert,” says Richard Sullivan, an attorney with Sullivan Law in Wakefield. “It can be hard if you have to have a confrontation with your client about this, but as a REALTOR®, you must tell your client it’s a matter of law that you have to disclose anything you know about the property.”

“You have to be careful about how you advertise, because 93A comes into play with ads, too,” says Trisha McCarthy, a broker with Keller Williams Realty in Newburyport and MAR past president. “For instance, you can’t Photoshop a house picture so that the power lines don’t show because that misrepresents the property.”

Sullivan notes that many REALTORS® get in trouble because of their email habits. “Electronic discovery is a goldmine for attorneys, so the way you write your emails will either kill you or save you,” says Sullivan. “People write emails casually and forget that some things need to be kept confidential and others, such as property disclosures, should be fully documented. If you email someone about your client and say he’s a pain in the neck and that client sues you later, your email can be used as proof that you didn’t like him and didn’t represent him appropriately.”

In another case, Sullivan says that buyers of a house that had been abandoned by the previous owner accused the listing agent of rigging the heat to pretend that it worked during a showing, but the broker was able to produce public records that showed that the water and heat had been shut off for years.

Avoid Negligent Misrepresentation

Misrepresentation can be related to more than just a property condition, it can also refer to things outside the property’s borders such as a plan to build wind turbines that the salesperson knows about or the presence of a sex offender in the neighborhood. McDonagh says that brokers have a duty to disclose anything that could impact a property’s value whether it’s visible or not.

Avoid negligent misrepresentation either by saying “I don’t know” to shift the risk back to the client or by doing research, says Debbie Bindeman, a regional director for Pearl Insurance, an affinity partner of MAR which provides errors and omissions coverage nationwide. For example, if a buyer asks about the assigned school district, it’s best to recheck it or say you don’t know because school boundaries may have changed. In one case a brokerage had to pay for four years of private school because a REALTOR® told the buyers that the house they bought was assigned to the high school they wanted their kids to attend but it wasn’t true.

“Don’t act outside your area of expertise,” says Bindeman, “such as making comments that can be interpreted as legal, tax, or property condition advice. REALTORS® are not lawyers, tax experts, or home inspectors and making statements in those areas can lead to innocent misrepresentation.”

Fair Housing Violations

In addition to issues with disclosure, complaints about Fair Housing rules are common.

“In one recent case, a broker was found liable and had to pay more than $60,000, because he asked a prospective tenant where he was from and that’s a protected class of questions under Fair Housing rules,” says McDonagh. “Most REALTORS® are very familiar with Fair Housing, but they still run into trouble sometimes, primarily related to families with young children.”

McCarthy says it helps to keep in mind that you’re talking about property, not people. She says you can ask buyers and renters how many bedrooms someone wants, but not how many kids they have, because that could indicate that the landlord is discriminating against families.

Errors and Omissions Insurance Protects You

“Some states have mandatory errors and omissions insurance requirements, but not Massachusetts,” says Bindeman. “However, many franchises require it to protect themselves from lawsuits.”

Bindeman says the insurance provides broad coverage for anyone supplying real estate services, including current and former agents, their assistants, and personal assistants.

“Three out of four of our insurance claims are for cases made by buyers against sellers,” says Bindeman. “Typically the buyer alleges that the seller misrepresented the condition of the house so the buyer then sues the listing agent, since they allege the listing agent also ‘should have known’ of the problem or condition too. Buyers try to sue the sellers, the listing agent and the brokerage, which is when errors and omissions insurance kicks in and looks into the allegations to determine if it is a covered claim situation. The majority of these cases are frivolous but it takes legal expertise to find that out and to prove it.”

Bindeman says that most errors and omissions insurance companies have staff available to talk to brokers about issues even before a claim is made.

Broker Responsibilities

Brokers are liable for legal issues that arise with their sales agents and should carry insurance to cover legal costs and potential payments if a Realtor® or broker violated any regulations. The costs can be extensive if, for example, a sales agent failed to disclose a water problem and the brokerage has to pay for mold remediation, says Sullivan.

“Brokers should tell their sales people that they will not earn their commission if they aren’t doing their paperwork correctly,” says Sullivan. “Brokers should have a checklist that REALTORS® need to complete with all the required forms and a system for  documentation. There are materials from the Board and the state including an agency disclosure form and, for sellers, a lead paint disclosure form.”

Your Best Defense

Rely on the MAR and NAR to keep you informed about legal issues, says McCarthy. Legal information is constantly updated and your broker can email or call the legal hotline with specific questions.

“‘Document, document, document’ should be a mantra for every REALTOR®,” says Bindeman. “Keep notes about where you found information, print your emails, save every file and jot down a few notes after each appointment. If you’ve been driving around with a client all day, make some notes about what you discussed and put them in the file. Documentation is the best defense for errors and omissions attorneys.”

Notify your broker immediately if there’s a potential problem and make sure your broker notifies the errors and omissions insurance company, says Sullivan.

“Anticipate problems and try to work anything out before it blows up,” says McDonagh. “It’s much harder to fix things after they’ve blown up, so it saves time, trouble, and stress to call the legal hotline as early as possible if you think something may go wrong.”