9 Potential Real Estate Lawsuits and How to Avoid Them

male real estate agent giving thumbs up

From a presentation by Jim Meseck, White and Steele

If there’s an unhappy seller or buyer, you can bet they’re going to find a way to blame their real estate broker or agent. We’ve seen potential real estate lawsuits occur when buyers’ and sellers’ expectations exceed what is reasonable. (Some of them would be laughable, if they didn’t actually happen.)

Real Estate Lawsuit Triggers

Mistakes, miscommunication, and mistaken beliefs can lead to statements like “You should have known” or “You didn’t tell me.” It’s essential that you know what you are responsible to share and that you keep clients informed of where they need to do diligence. And of course, document it all!

These are some of the statements from unhappy buyers or sellers and how they can impact your business.

“Well, you should have known . . .”

Some buyers believe the real estate broker or agent is responsible for everything and knows every intimate detail about a property.

Here’s a very typical E&O claim: failure to review and correct the seller’s property disclosure if you are the seller’s agent. But (in most states), the agent has no duty to investigate on behalf of the client. You have no duty to verify the representations of a seller or the seller’s representative. However, buyers still expect you to go out and do their due diligence for them.

Another claim we see is “you should’ve known everything about those communities. You should’ve known what school district is there. You should have told me it was a crappy school. Now my kids have to go to that school.”

What to Do

How do you combat this problem? Discuss anything about the home that you’ve noticed with your sellers. Be sure you go over definitions and the listing contract with your sellers, and follow up your conversation with email.

As for the community, encourage buyers to do their due diligence in reviewing public information about the communities they are interested in.   How to do this and steer clear of Fair Housing violations.

Embrace email. Make email your best friend so you can document all the conversations, and it doesn’t become a “he said, she said” situation.

“But the broker promised . . . “

This occurs most often with inspection objection and inspection resolution items. The buyer comes up with their list of things that they want done or corrected or made better, and the inspection resolution is negotiated. The negotiation is supposed to be an agreement on what’s going to be done.

Guess what? Sometimes sellers don’t always perform. They don’t always do what they say they’re going to do, and you don’t find out about it until after closing. Your seller is long gone, but who’s still there? The broker. The buyers say, “Well, it’s your fault. You should’ve made sure it got done.”

What to Do

Stay in touch with the seller’s agent to follow-up on progress on the inspection resolution list.  If the seller runs into a problem with anything on the list, you can alert your buyers and/or negotiate a credit for the item with the seller’s agent.  Request that the seller confirm that each item on the list has been addressed.

Be sure you and your buyers perform a final walk-through BEFORE final closing.  Check everything on the inspection resolution list, and address any omissions or problems with the seller’s agent at that time.

“How can I help?”

You’re human. Maybe you’re very empathetic. By design, you’re a problem solver. You want to make sure everybody has a positive experience, because you’re thinking about the next sale. But that can lead to problems.

Brokers will oftentimes say, “Okay, there’s this problem. What can I do to make it better?” or “How can I fix this?” The buyers take that as some type of promise that you’re going to make everything all right, and you’re going to write a check.

What to Do

Beware about overpromising. Even if you don’t think of it as a promise, the buyer may hear it that way.

“You conspired with the home inspector . . .”

Another common claim we see has to deal with home inspections. One of the reasons brokers get blamed for the mistakes or errors of home inspectors is because home inspectors can put in their contract a limitation of liability clause. That means if the home inspector makes a mistake, the amount of damages or the relief that can be recovered by the buyer is what’s limited in the contract. Very often, it’s the cost of the inspection.

The home inspector can make a $10,000 mistake when he did a $600 home inspection, and all the buyer gets is $600 back. Who do you think the buyers are going to go after? They’re going to go after you, especially if you referred the buyer to that home inspector, or you didn’t tell them to get the solar panels inspected. Or you didn’t tell them to get the septic system inspected in addition.

Buyers might also say, “You picked out the home inspector for me. You went to the home inspection knowing I couldn’t be there. You were there supposed to protect me and yet you two, you and the home inspector, messed up so it’s your fault.”

What to Do

Always provide multiple suggestions for home inspectors to your clients. Document your suggested list in the customer file. Put in writing to the client your specific suggestions as to what should be included in the home inspection, especially when solar panels or septic systems are involved.  In your written documentation to the buyer, remind your buyer you are not an expert in home building and repair; suggest that the client be present during the home inspection.  The home inspector is being hired by the buyers, and they should be the ones to work directly with him or her. See our sample Home Inspections Disclosure Letter.

“You knew the seller was covering up problems . . .”

After you list the property, the homeowner decides to make some “renovations”. Then the home sells, and the buyer discovers they weren’t just renovations, they were cover-ups of real problems.

The argument is that the seller made these changes while you had the house listed, so you must have known why the changes were being made and what was being covered up.

What to Do

Frequently, the sellers will not obtain permits for work they do. Be sure you advise buyers to do their due diligence. CRES Building Permit History Reports can help advise buyers or your seller as to the existence or absence of permits.

If it looks like it’s recent work, especially if it’s drywall, you don’t know what they did to the electrical or plumbing behind the drywall. Any changes behind the wall require a permit. If you’re a seller’s agent, you absolutely have to tell your sellers to disclose that they didn’t obtain permits if that’s the case.

“Well you should have been able to tell the square footage was wrong . . .”

For some reason, buyers expect that their agent can walk into a home and automatically calculate the square footage of a space.

What to Do

Go over the square footage disclosure with buyers, document it, and tell them you did not do a square footage measurement. They should do one if it’s important to them. The appraiser should measure the square footage and document it in their appraisal.

“You didn’t tell me . . .”

Another complaint we see frequently (in Colorado) is failure to advise on dangers, such as flood zones or forest fire risk, or on rights issues, such as water or mineral rights.

When we had huge amounts of rain, people realized, “Oh, I’m in a flood plain.” That was never disclosed, they never realized it, and they get flooded.Complicating the situation is that FEMA is working on reconfiguring the map of the flood plains, and so it’s not always clear if a property is in a flood plain.

Another issue that we are beginning to see is failure to advise on a forest fire risk. Maps are being developed to track where forest fires are and what your risk is. As more people move closer to forested areas (frequently building expensive homes), one of the issues becomes “you didn’t tell me I was living in a forest fire area.”

Geological hazards are expansive soils. There have been landslides in Colorado Springs (as well as recent slides in California). In Colorado along the Front Range, we have expansive soils. If the buyer is not aware of that, and later discovers heaving soils and moving foundations, they’ll want to blame the broker.

In Colorado, water rights and mineral rights are also issues. lt. We’re seeing complaints like, “Well, you didn’t tell me I was entitled to mineral rights and I sold those.” Or, “You didn’t tell me, I could have carved those out and kept them and just sold the surface rights.”

Fracking is also a very hot topic in Colorado in the past year, since we had a home explosion.

What to Do

Any time water rights comes up as an issue, you need to immediately refer your client to a water rights attorney, because that involves special drafting of contract provisions and descriptions in the title. There are water rights courts in Colorado, and there’s also a water rights exchange that determines the value of water rights.

Anytime there’s any kind of suggestion or indication of mineral rights, refer your clients to an attorney.

Make sure your clients are aware of fracking, and that they get whatever investigation and do whatever due diligence they believe is necessary. Be sure to let your clients know that this is an issue. Advise them in writing to conduct their own investigation, and place a copy in their file.

“You didn’t review the title . . .”

Frequently, we see complaints that the broker didn’t review the title and discover . . . (this easement, mineral rights, etc.). We had a case where the seller contracted with the buyer to sell the house. The title commitment showed that the property was entitled to mineral royalties and all of a sudden, it was the broker’s fault. (If the guy had been living there for how many years, how can it be the broker’s fault?) But the seller says the broker didn’t review the title with him.

What to Do

Obviously, real estate professionals (in Colorado) can’t review titles, because that requires a legal opinion. The seller will argue, “You didn’t refer me to an attorney.” Be careful about reviewing title, and make sure you advise in writing that the buyer or seller consult an attorney anytime there is a title question.

“The listing said or showed . . .”

Another issue is misstating information or misleading photos in the MLS. In one case, the listing agent hired a professional photographer to take shots by drone of the community, specifically of the rec center. Unfortunately, the home had membership to a different rec center than the one in the photo. The buyers wanted to be at the rec center in the photo because it had a nice pool. They claimed misleading advertising and filed a complaint.

Square footage discrepancies are frequently blamed on the broker. Either the broker who prepared the square footage disclosure relied on assessor records (which are not always entirely accurate), or the broker failed to figure out the square footage from simply walking into a space.

What to Do

As the listing agent, be sure every element of your listing and advertising is accurate.

For square footage disclosure, what’s the best practice? In Colorado, use the Colorado Real Estate Commission approved form if you are the seller’s agent. As the buyer’s agent, be sure to advise the buyer to verify and do whatever due diligence the buyer believes is necessary. (And do all of these advisories in writing, with a copy in the client file.)

Be Ready for a Real Estate Commission Investigation

When a client complains to your state’s Real Estate Commission, the investigator has a checklist of items that they will go through to make sure there’s not an unrelated licensing violation. You want to be prepared. They will check your continuing education credits. Make sure those are up to date. Sometimes, they will do a spot check and say, “Well, show me your certificate for the annual update class in 2015.” Then you’re like, “Uh, well, I don’t know where it is, but I did take it.” Keep those certificates.

What to Do

Make sure your continuing education credits are up to date. Keep certificates for annual update classes. Also, keep client records for the required amount of time, because that’s one of the checklist items the investigator looks for. If he asks for a transaction file, you’ll need to have everything in it that’s required to be there. In Colorado, if you don’t have all the required documentation, that’s a licensing violation.

 

These are just some of the risks that we see when we’re defending brokers. It’s a valuable use of your time to review your real estate E&O insurance policy and make sure you have the coverages you need to protect yourself.

In most cases, CRES E&O will give you more comprehensive coverage and more specific-to-real-estate protection.

This blog/website is made available by CRES Insurance Services for educational purposes to give you general information and understanding of legal risks and insurance options, not to provide specific legal advice. This blog/website should not be used as a substitute for competent legal advice from a licensed professional attorney in your state. Claims examples are for illustrative purposes only. Read your policy for a complete description of what is covered and excluded.

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