Misrepresentation is among the most common claims made against real estate agents. It seems pretty obvious that you shouldn’t misrepresent the property you want to sell, but it isn’t always as simple as that. Let’s look at three kinds of misrepresentation, how they can get you into trouble and how your real estate E&O can help.
Also see our Ultimate Guide to Understanding Real Estate Errors and Omissions Insurance
What is Misrepresentation?
Misrepresentation is a false statement that affects someone’s decision to enter into a contract. The three types of misrepresentation are:
- Fraudulent Misrepresentation— when you purposely provide misleading information.
- Negligent Misrepresentation— when you don’t perform your due diligence in providing information, or you provide information without taking reasonable care to determine that it’s true.
- Innocent Misrepresentation— when you have reasonable grounds to believe what you say is true.
Knowingly sharing false information about a property or failure to disclose a known problem, such as water damage, is fraudulent misrepresentation. Fraudulent misrepresentation is a serious offense, but it isn’t the only kind of misrepresentation that can get you into trouble.
Don’t be fooled by the name “innocent” misrepresentation. You can still face a real estate lawsuit for innocent misrepresentation — as well as negligent misrepresentation.
Examples of negligent or innocent misrepresentation include providing inaccurate square footage — by using information populated by MLS or in some cases not verifying information from the seller. Yes, you’re responsible for reviewing and identifying mistakes to correct them on MLS.
Over exaggeration of features can be deemed misrepresentation. And altering photos may be a problem. Editing out temporary items from images, like garbage cans, to create a cleaner look may be acceptable. Removing permanent structures such as power lines or mold spots is misrepresentation.
Wisconsin Court: “That Shouldn’t Be a Problem” = Misrepresentation
A lengthy court battle came to an end when the Wisconsin Court of Appeals found in favor of two buyers in the case of Marchese v. Miller, et al. The buyers alleged that when purchasing a lot from a builder/seller, their broker intentionally misled them:
- Prior to signing the contract, they asked their broker via email if contract amendment terms for the removal of a holding pond would be in the contract.
- The buyers did not want to pay the seller for the lot before the holding pond was removed.
- The removal of the pond was contingent upon the approval of the city and the homeowners’ association.
- When the broker responded in an email, “that shouldn’t be a problem,” the buyers assumed that funds would not be transferred to the seller until the pond could be removed at no cost to them.
However, when the documents were signed, the broker did not explain that $100,000 was being transferred to the seller, who did not have approval to remove the pond.
The buyers were then unable to build on the lot and were forced to buy a different property. The Court concluded that the broker’s failure to disclose that the contract amendment terms were not included in the closing statement supported the jury verdict of intentional misrepresentation.
“The Court observed that the broker knew that the buyers believed that their expectations would be honored, which was the whole point of the contract amendment, and he said, ‘that shouldn’t be a problem’.”
Copyright: ARELLO registered. Condensed from ARELLO’S Boundaries magazine (2015 June)
Full article: Arello Boundaries Excerpt Wisconsin June 2015
How to Avoid Being Sued for Misrepresentation — and What to Do if You Are
To protect yourself from misrepresentation claims, adopt practices to avoid unintentionally misrepresenting anything:
- Make sure to double-check key information, such as square footage.
- Verify any information provided by the seller. (Some states require that you do so. Make sure you know requirements in your state.)
- Document all disclosures and keep records of confirming and sharing them by email.
- Make sure marketing materials are factual and don’t exaggerate features or hide flaws.
Read more on our ClaimPrevent® Summary: Real Estate Licensee Responsibilities When Creating New Listings
Still, no matter how careful you are, it’s quite possible you may be sued for misrepresentation. What do you do if, despite your best efforts, you face a misrepresentation real estate lawsuit?
Protect yourself with Real Estate E&O Insurance
The first thing to do is get legal advice. With CRES E&O + ClaimPrevent®, that’s easy.
As a CRES member, you can simply call the ClaimPrevent® Legal Hotline. CRES has a team of local expert real estate attorneys ready to advise on claims or potential issues. Your legal expert can help you decide on the best course of action based on your particular situation and state.
Even if you aren’t facing a lawsuit, but realize you may have unintentionally misrepresented something, you should get legal guidance. There may be steps you can take that mitigate any issues. At CRES, we want to know about potential issues before they become problems to help you prevent claims.
CRES Real Estate Errors & Omissions insurance gives you extensive protection at an exceptional value, with pre-claim legal help included.
