In this webinar, Mark Carlson from Carlson Law Group, and Dave Miller, Regional Vice President with Fidelity National Home Warranty, talk about how real estate professionals can add some simple steps to their routines to reduce their risk.
This informative webinar covers:
- The latest suggestions for explaining commissions to sellers and buyers
- Quarterly tasks: read the contracts and disclosure forms you use all the time, and keep yourself up-to-date on legal and local issues
- Embrace technology and use software to record everything as it happens – a great tool for for risk management
- Be proactive with cybersecurity – and avoid gmail addresses at all costs
- Understand and adhere to the NAR code of ethics for licensees
- Have a comprehensive E&O policy and know the limitations of coverage Take advantage of a risk management attorney to help you solve issues pre-claim (a CRES advantage)
- Use home warranties as a tool to reduce lawsuits
- Utilize continuing education and training to improve your marketing
To find out more, watch the full webinar, listen to the podcast, or view the transcript below.
Hello everyone and happy holidays. I’m Dave Miller from Fidelity National Home Warranty. On behalf of CRES Insurance and Fidelity National Home Warranty, welcome. Our special guest today is Mark Carlson of the Carlson Law Firm.
Thanks for joining us, Mark. This is the time of year where we start looking at what’s happening the next year. Tell us the temperature right now for Real Estate Errors and Omissions claims, given the market that we’re in.
I think it’s about middle of the road in comparison to the years past where there have been fewer sides because there’s less inventory. So, with fewer sides, it reduces the opportunities for things to go wrong. The market hasn’t been declining, so people haven’t been suing to try to get their equity back. I think as far as the number of claims that we’re getting, it’s pretty middle of the road right now.
That’s a great point. Tell us, and I know it’s a very hot topic, the ruling against NAR and two brokerages that came down in November 2023 regarding commissions. How does that affect licensees? What kind of things should they look for or react to from that ruling?
It’s creating a lot of angst. Everybody wants to know what they need to do, because they feel that if they don’t do something, that they’re not doing things properly. But the reality is it’s going to take months to get that judgment finalized, and then once it’s finalized, it’s going to take many months, maybe a year or two to get through the appeal process.
What Listing Agents Should Explain to Sellers
There are other lawsuits that are pending throughout the country where a couple of them might have a national impact, and I think the strategies to be prepared for what may happen include a couple of things on the listing side.
Number one, when you’re acting as a listing agent, make sure that your seller realizes that the commission being offered is going to go towards the selling agent. That was one of the arguments that they made, and as ridiculous as it may sound, they had sellers coming into trial saying, “Listen, I didn’t know that I was paying for my adversary’s representation. I never would’ve done that had I known what was really going on.”
So, make sure that’s clear. Another thing is to really have a discussion with the seller as to the benefits of the offer to the selling agents as part of the marketing strategy for the property. What I mean by that is, “Okay, seller, if you want to offer 1% to the selling side, here’s what you can expect. If you want to offer 3.5%, here’s what you can expect.” So, the seller is part of the decision-making process as to how much of a commission they’re going to offer to the selling side in order to attract buyers, and make it clear that it’s part of the marketing strategy. Then describe how the MLS benefits sellers, so they understand that process.
What to Explain to Buyers
When you’re on the buyers’ side, make sure they understand you’re not working for free. That was the argument they made in the Missouri case that buyers were saying, “Listen, I had no idea that the commission was baked into the purchase price.” So just make sure that buyers understand you’re not working for free, you’re going to get a commission. Then use the buyer broker forms when you are looking to get a commission that’s different from what’s being offered by the seller, and then be forthright with the buyers as to how much commission you’re going to be receiving.
I’ve heard the CAR in California promote these strategies, and it’s what I think a lot of offices are doing right now.
Don’t Brush Over or Ignore the Basics
You released a risk management update through CRES Insurance and Fidelity, and we’re going to send it out to all our clients. It talks about the need to get back to the basics for licensees, because seemingly minimal errors turn out to be big issues. And these are situations where the licensee should have known better, and maybe licensees are getting away from some of the standard practices.
The first one was understanding the legal landscape. You recommend that licensees attend legal seminars and read everything from their local association to help understand local laws.
When we think about risk management, we use that term in the singular sense. It makes it seem like, okay, you just do one thing and then you’re going to be fine, which we know isn’t the case. If you flip the words and say, “what do I do to manage my risk?” Then it becomes more apparent that it really is a collection of strategies.
One of those strategies is being familiar with what’s going on in the legal landscape. Not to the extent that a lawyer would be on top of things, but certainly knowing if there are new trends coming in from the state level or if you have local ordinances that might affect real property. So have a set schedule, so maybe once a quarter, go attend some sort of legal updates, whether it be a webinar with CAR or your local board or something within your office. But just trying to keep on top of which way the wind is blowing from a legal perspective is kind of the cornerstone to managing your risk.
Another point of emphasis you talked about was taking more care with contracts and disclosure forms. Some licensees will sell 20 or 30 homes a year, and they just whip through the disclosure forms, because they’re so used to doing it. Well, their buyers and sellers may only do this every 5, 10, or 20 years when they buy or sell a house.
Yes, licensees are so accustomed to filling out the forms, they know where the terms need to go, but maybe they haven’t really looked at some of the other terms in a really long time.
I recommend that maybe once a quarter, read the forms that you use for the purpose of understanding what they say, not for the purpose of just filling it out. The reason being is that you want to be able to be familiar with the form so that you can explain their contents to your clients.
Lawsuits originate due to some sort of dissatisfaction. A buyer or seller is not happy with something that happened in a transaction, and they’re usually dissatisfied because their expectation doesn’t turn out to be what actually happens.
By explaining the forms carefully and having a broad understanding of what they provide really helps to avoid those initial misunderstandings, which lead to dissatisfaction, which then again could lead to a lawsuit. What we’re really trying to do is keep people happy.
Technology and Cybersecurity
Talk about embracing technology as a real estate professional. You’ve said it’s really the ally to risk management. And what about cybersecurity and how that’s affecting E&O claims?
At this time of year, are you going to buy a 2024 day planner? Stop relying on paper. There are so many customer relationship management software (CRM) systems. There is transaction coordinating software that most every office uses.
Those kinds of software help you record what happened, when it happened and who was there when it happened. Should you get sued, that’s the key to establishing before a jury that you’re actually telling the truth. Now you’ve got a record recorded at the time that things were happening as to what was said to whom, who said it, and who was around.
It’s just a really important, important piece. Plus, it helps make sure that you have all the documents, especially using the transaction coordinating software and systems that a lot of the offices have, where you can just email a copy of a document into the office and it gets saved, you don’t have to worry about your computer crashing or you have a hard drive that fails. So, it really is important to embrace new technologies and figure out how they can make your practice better.
With cyber security, every agent has personal information about your clients, and that personal information is defined under the civil code. As a fiduciary, you have certain legal obligations to protect that information, and if there’s a breach, you’ve got obligations to notify people of that data breach. If it’s your fault, you may have to provide for credit monitoring for your clients for a year. So, it can be very expensive.
If you’ve got to pay that $20 a month to over 500 clients that were in your database because you left your laptop at a library or wherever, it can be very expensive. So, having your Wi-Fi router at the house that comes in from your internet provider isn’t enough. You should get a firewall, get some IT help, try to create at least some sort of protection. That way if you do get sued from a cyber security issue, then you can say, “Listen, I go above and beyond what normal people do. I’ve done these steps to protect my client’s interest.”
Then it’s a matter of, well, was that sufficient? If you’re using a Gmail account, that’s what the cyber crime folks really like to pick on, where they’ll create URLs that look very close to your email address. But if you’re using your office email that has its own unique URL, then they can’t create another email address that looks like yours, because the domain would be different. So, it’s very important. Cybersecurity crime just keeps getting more sophisticated, more prevalent as we go along, it’s not getting any better.
Codes of Conduct
Talk about the NAR code of conduct and how agents should be knowledgeable of that and be transparent in the transaction.
We have terms prevalent throughout the forms, like honest dealings, good faith, and fair dealings. It’s in the BIA (Buyer’s Inspection Advisory), it’s in the agency disclosure, it’s in the purchase contract, but what does it mean, really? That’s the difficult part — to be able to apply it to your practice.
The code of ethics is important, because if you’re practicing real estate in California and you’re a member of an MLS, that means you are a member of CAR and you’re a Realtor®, and that designation means something. It means that you’ve ascribed to the NAR code of ethics. If you haven’t read the code of ethics or the standards of practice, then it’s hard to say that you’re operating in a way that’s consistent with them.
If you’ve never read those, then put them next to your nightstand, and when you’re having difficulties falling asleep, read them until you fall asleep. Then the next couple of nights, if it happens again, pick up where you left off, and within a week or two you’ll have gotten through everything, it’s not that complicated. Then live up to what those standards ascribe to. They are aspirational, they’re not the definition of a standard of care, but that’s what we all want to do. We all want to be the A student, not the C student, because that helps us avoid dissatisfaction from clients.
Could you be honest with market factors or other information where it might prevent a sale? That certainly could happen. There could be some house your clients really love, and you know their financial situation, and you can see as a professional they’re making a bad decision. Well, rather than just saying, “Well, that’s their decision, they’re big boys and girls,” be honest with them and say, “Maybe you ought to think about something different, because here are the problems that you might have.” Again, if they are dissatisfied after the transaction, that’s where that dissatisfaction leads to lawsuits.
How Errors and Omissions Can Protect You
A great protector against lawsuits is an Errors and Omissions insurance policy. CRES Insurance is the largest writer of E&O in California and one of the largest in the nation. For those who don’t use CRES, they have access to more E&O options than just about anyone, because they’re part of one of the largest insurance brokers in the world. Talk about how licensees and brokers sometimes get into trouble because they’re doing some side stuff that might not be covered under the E&O insurance, like property management or maybe agent-owned property flips.
Your E&O policy really is the last line of defense to a lawsuit, and if you don’t have a good policy with the right coverages – and the right amount of coverages — then you’re going to be bearing those losses on your own. For most licensees, they’re just relying upon the broker to buy a policy that matches what they need. But there are some things you mentioned that are common exclusions that licensees should be knowledgeable of, so if they get into a transaction, they know enough to say, “Ooh, this might be something that there could be a coverage issue, I better go talk to my manager.”
Agent-owned properties are a big one. If I am representing myself and others maybe through an LLC or if I’m buying or selling a property on my own, there are limitations of coverage and some requirements that need to happen for there to be coverage. So, you need to know what those requirements are.
Flipping properties is another common exclusion. The condo conversion property was an apartment, now it’s a condominium. There are typically exclusions for coverage subject to certain things that need to be done in that circumstance.
Property management typically is not covered unless there’s a separate property management rider. Sometimes you get into a circumstance where you’re an unintended property manager. You’re helping the seller with dealing with the tenants while you’re trying to get the property ready for sale. All of a sudden that balance tips in one direction, and now you’ve done one too many things on the scale that make it appear that you were actually acting as a property manager.
So just things to be aware of, and if there’s any doubt, of course you need to talk to your manager, because they’ll have access to the policies and know exactly what the office has and doesn’t have with respect to coverages.
We talked about CRES Insurance and how their E&O coverage and options are different. I’ll tell you also how they’re different — because they want to hear from you when you think you have a claim, not when you already have it. Risk management is so important in a real estate transaction, and you talk about the importance of almost having an attorney sitting on your shoulder at all times throughout that transaction. Just talk about the importance of risk management and how involving an attorney early when you think there might be a problem can actually help the lawsuit go away.
Most licensees have that sixth sense. You sense something about a particular client, you’re worried, they give you an uneasy feeling. Or you’re in a circumstance now where you’re not quite sure what to do. That’s the time to get a risk management attorney involved. They bring a different perspective pre-claim.
Most licensees are used to seeing deals go smoothly. As lawyers that do risk management work, especially with my firm, we handle risk management matters all up and down the state. We see where the trends are in one area of the state where maybe they haven’t yet appeared in another area of the state.
A risk management attorney can help you navigate and spot threats maybe that you didn’t even realize. So, if it turns into a bumpy transaction, we can hopefully smooth that road out to have a smooth landing towards closing.
Talk about due diligence for licensees and brokers in a transaction, and how doing that can really lessen the blow should you have an E&O lawsuit.
So, everybody’s going to say, “Well, of course I do my own due diligence. I’m a good agent, I do what I’m supposed to do, and I know what I’m supposed to do, so that’s nonsense. That really isn’t a risk management strategy.” But when you think about it, it is. The reason is because you may be … like a lot of top agents I know, you may have the uncanny ability to remember when a property sold, who bought it, what it sold for, whether they had kids or a dog. So, in the area that you farm, you know those details.
So, when you go into a listing presentation, you say, “We should list your property for $X, and the seller says, “Well, okay.” Then when the lawsuit comes in, if there’s a claim that the property undersold, the seller says, “Well, geez, I think you undersold, because my cousin Jimmy, who knows a lot about real estate, told me that the property was really worth a lot more than what it sold for.” So now again, you’re getting that seed of discontent that grows into a lawsuit.
But on the flip side, if you come in with that knowledge that’s in your head, but now you print it out on paper, “Okay, seller, here’s all the sales that have closed in your area, here’s why I think that this purchase price is appropriate.” Same thing with the buyer, “Hey buyer, here’s the current sales, here’s where I think you need to be.” Then they have an understanding as to what you’re recommending and why you’re recommending it. Even down to inspection requirements or requests, just being open with the clients as to why you’re recommending the things you are and showing them the backup data that you’re using to make that decision, but all that’s contained within your experience and years of doing this.
You just mentioned the word inspection and inspectors. How important is it for licensees and brokers to build a reliable network with title, escrow, home warranty, appraisers, inspectors? How valuable can that be for them?
So, a chain is as strong as its weakest link. We’ve all heard that, and that applies to this circumstance. You may be the best agent in the area, but if the people that you’re suggesting to your clients are not cut from that same cloth, then that’s going to breed potential dissatisfaction. If they have a home inspection that misses things they’ve discovered after the fact, then they become disgruntled.
For the vendors or service providers that the buyers and sellers are going to need, you can have a list of two or three that you can say to your clients, “Okay, here’s a list of a couple or three home inspectors that our clients have had good experiences with.”
Some folks are concerned about giving suggestions so that they avoid lawsuits of giving a negligent referral, but really that standard is so high. You have to almost refer somebody that either doesn’t have a license for which you’re referring them, or you’re referring somebody that you know is not competent to do the job. That’s the legal standard. So, having folks that you can suggest to your clients that you know are going to be professional and provide good service is key to avoiding that dissatisfaction, which leads to lawsuits.
That’s such a great point. At Fidelity, we always tell licensees and brokers who use us that we’re going to take care of your clients. Sometimes they’ll say, “I have to give them three companies, because I’m worried about them coming back after me.” Your words of wisdom there are good because there’s not really a lot of liability there.
Right. If you’re just saying, “Here are some folks, some contractors and architects, whomever, that our clients have reported to us that they’ve had good experiences with,” that’s not an endorsement. You’re just relaying information from what other people have said. Of course, you want that to be true, so you don’t want to just put them on the list and then say that and not be truthful. Try to get some feedback from your clients that they are in fact happy with the folks that you’ve suggested.
And allow the buyer or seller to make the appropriate decision.
Perfect. We know that 95% to 98% of E&O lawsuits are buyers suing sellers. Home warranties can help reduce a lawsuit after the sale, because that home warranty protects the buyer’s home for 12 or 13 months after closing.
And a lot of times, these lawsuits stem from very small problems. I move in, I’m happy. Two weeks later, the dishwasher fails, and so now I’m suspect. What else might go wrong? And now I’m looking for things. But if that problem gets fixed quickly to the buyer’s satisfaction, the buyer will think it was just a fluke and no big deal.
Sometimes, the buyer calls for home warranty coverage, and they have a service call, “No, sorry, that’s not covered. No, I can’t fix it. I’m going to have to come back, but here, pay me my service call fee.” Then the second time they come back, it’s somebody different, “Oh, you have to pay a service call fee.” “Well, wait a minute. I just paid a service call fee.”
So these types of situations lead to dissatisfaction. But if you can get somebody out there on a home warranty claim to provide quick and thorough service, that leaves a happy buyer and happy buyers don’t typically sue.
That’s great. Talk about continuing education and training. When real estate professionals renew their license, they should take care with their CE credit.
Similar to being abreast of the legal environment, you also need to be abreast of what’s going on from a nuts and bolts perspective. What are some of the sales trends? How are people marketing their properties in a better way? The real estate industry constantly evolves, and if you’re stagnant and just doing the same thing the same way, then people that have more up-to-date methods of doing things might be attractive to certain clients, and then you’re going to lose business.
Go to trade shows a couple of times a year, attend the different marketing strategy seminars and webinars. If your office is offering a class, even though you think you know the topic, go anyway. If you come away from a training hour at your office and get one little piece of information that might improve your practice, then that’s a win. That’s what you’re looking for.
If you do it three or four or five times a year, by the end of the year you’re doing a handful of things differently than you were at the beginning of the year. Hopefully, it leads to better service to your clients, more professional service to your clients, which should result in more sales, more listings, more buyers, and more commission dollars.
Mark, I know you’ve been doing this for over 30 years. I don’t think there’s anybody better, because you are on the front line all the time just doing real estate E&O claims, and that’s what makes you an expert. Mark, thanks so much for your time today.
My pleasure. Thanks for the invite. Happy to give some of these strategies to hopefully keep people out of trouble. I’m like the dentist, nobody wants to come and see me.
On behalf of CRES Insurance, Fidelity National Home Warranty, and Carlson Law Group, happy holidays to everyone and we’ll give you an update in the first part of next year.