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Handling Challenges with Clients and Other Licensees: ClaimPrevent® Summary #6

Could your team — and your new hires — use a refresher on key risk management areas? This ClaimPrevent® Summary touches on critical details about working with clients and other licensees during the buying and selling process. See all of our ClaimPrevent® Summaries:

Firing Difficult Clients

Valid reasons for the termination of a client relationship with a difficult client include:

  • Verbal threats to the licensee and his or her family
  • Bad behavior such as profanity and harassment by the client
  • Failure to respond to the licensee’s written inquiries
  • Unreasonable expectations by the client
  • Dishonest clients who want to hide defects of their listed property

Before you terminate a relationship with a difficult real estate client, make sure you have detailed written documentation that outlines the reasons for the termination and the actions and communication you had with your client. There should also be documentation of the issue being discussed with your broker of record.

If you are in the middle of a transaction, have a face-to-face meeting with your client, if possible, to advise that the relationship is now ending. 

  • If you are the listing agent: have a cancellation of listing dated and signed by all. The cancellation document should provide a telephone number of the local association for a possible referral to another real estate brokerage or an attorney. Give copies of the signed cancellation to your now former client.
  • If you are the buyer’s agent: prepare an addendum form to be signed and dated by you, your buyer client, and broker of record providing a telephone number of the local association for a possible referral to another real estate brokerage or an attorney. Be very careful that you never place your client in a situation where the transaction may not close, because you will be blamed. Send a copy of the signed document to the escrow company and the other real estate licensee in the transaction.

Dual Agency, Conflicts of Interest, and Fiduciary Duties

Dual Agency is where you represent both buyer and seller in a transaction and have a fiduciary duty to both. It’s not typically advantageous to the buyer or the seller (and is illegal in 8 states: Alaska, Wyoming, Colorado, Kansas, Texas, Florida, Vermont and Oklahoma.) A type of Dual Agency is Designated Agency, where the agent for the buyer and agent for the seller both work for the same broker.

Where dual agency is allowable, it requires two things: disclosure and confirmation. Confirmation is done on the Residential Purchase Agreement. That’s at the end of the contract where you write in the broker’s name, not the licensee’s name. The disclosure is via an Agency Disclosure Form.

If there’s an undisclosed dual agency, either principal can void the contract even after it’s closed

Be aware that your brokerage may face a lawsuit arising from a dual agency agreement if:

  • Licensees working on the transaction have shared confidential information with each other. 
  • One licensee gives an advantage to another licensee at your brokerage, even if it’s not the best deal for the other licensee’s client. 
  • There is a failure to disclose the dual agency arrangement. 

Check the fiduciary responsibilities of licensees in your state. For example, in California, licensees acting under the same real estate broker in a dual agency agreement owe the same fiduciary duty to the buyer and the seller as their broker — they have a fiduciary duty to both the buyer and the seller. 

When a dispute arises and the licensee is dual, there’s tremendous pressure for the licensee to try to make the dispute go away. With good intentions, a licensee may try to persuade one side or the other that their position is not right. When you’re a fiduciary to both, you can’t take positions that are contrary to the interest of either side.

You have to essentially be a messenger when there is a dispute between the buyer and the seller:

    • “The buyers want this. Sellers, what would you like to do?”
    • If the sellers want to do something that doesn’t seem to be in their best interest, it certainly is appropriate and proper for a licensee to say, “If you do that, here are the consequences of your actions, so let me know what you’d like to do.”
  • That’s the limit to what a licensee can do to try to resolve a dispute.

Always talk to a manager in your office whenever you are a dual agent and there is a dispute. The licensee and manager may want to see if maybe another licensee within the office is available to step in on one side or the other.

Getting another licensee involved means you’ve got to worry about commission, and both parties have to agree. Rely upon the manager’s and broker’s experience as to when someone else needs to step in.

The fiduciary relationship between a real estate licensee and client is a serious matter. A judge may look at the licensee and say, “You had a fiduciary responsibility to this side and that side, how is that really possible?”

Jurors think that agents get paid too much money for what they do. As a dual agent, you’re trying to get the deal closed, so you can get paid on both sides. That’s where the extra risk is, because it’s an unlevel playing field in front of a jury for real estate licensees.

When you’re a fiduciary, think about what you’re doing as viewed by a jury. “If I do this, how does that look to the outside looking in?”

Maintaining Client Records and Your Transaction Log

Good records management can make the difference between successfully defending a lawsuit or not. 

  • Keep a file on each customer and prospective customer.
  • Keep a Transaction Log and Document Everything. Your Transaction Log should include details of any telephone conversations you have with your clients regarding transactions. Note the date, time, who you spoke to, what you discussed, and any key outcomes or actions that came out of the conversation. After you finish the conversation, send a recap via email to ensure there’s a written record. Consider the use of transaction coordinating software to help you record what happened, when, and what parties were involved.
  • When any inspection report, other reports, or important correspondence come in, keep these as part of your Transaction Log. Any time you provide a document to your client or a third party and obtain a signature of a receipt, put this in your Transaction Log. 
  • Make sure you organize your Transaction Log in chronological order, logging information when it happens at the time it transpires. If you enter information about something at a later date, you may give the impression you’re recreating a version of the event simply to support your position. 

It’s just a really important, important piece. Plus, it helps make sure that you have all the documents,

In many states, the statute of limitations starts once the problem is discovered – which could be many years after the sale. Your Transaction Log will be a useful record if you ever need to prove anything in court, so it’s best to keep your records indefinitely.

Security of Client Information

The personal information you have on file about your clients needs to be protected. Should there be a data breach, you’ll have to notify clients of that breach. (Be sure your Real Estate Errors and Omissions policy includes coverage for Data Breach.)

When you work from home, be sure you’re using a firewall.  

And avoid using a gmail account for your business email, because cyber criminals really like to impersonate your gmail address. They will create URLs that look very close to your email address to try to fool your clients. Always use your office email that ends with your company’s unique URL. 

See Simple Everyday Strategies for Real Estate Professionals to Reduce Your Risk.



Commission Disputes

If a listing broker is considering also representing a buyer, the listing broker should always find out whether the buyer has signed a buyer-broker exclusive representation contract. If no contract has been signed, the listing broker should have the potential buyers sign one. See: Procuring Cause and Real Estate Commission Disputes.

Sellers are now saying they don’t want to pay the commission they agreed to in the listing contract. Sellers are telling the title agent not to pay the agent’s commission, because the seller believes the agent didn’t work hard enough, or didn’t do enough to deserve the 2% or 1.8% or 2.2% commission. It’s all about managing expectations when working with your clients. 

There are also commission conflicts between brokerages, when a licensee leaves to go to another brokerage. Sometimes, it’s not always clear in the independent contractor agreement as to whether a listing goes with the licensee.

Who has duties as the employing broker, to supervise that contract, including providing contract review, providing closing support? And where does that commission go, and how is that commission split out? 

When switching brokerages, it should be clearly communicated as to which brokerage will maintain the transaction file and be responsible for the closing, including receiving the commission and distribution of the commission proceeds. The licensee must discuss what impact, if any, the change will have on the client, the transaction, and the closing. 

There are also expectations when the licensee is going to bring his/her book of business to the new brokerage.

  • The licensee should read the independent contractor agreement, read the office policy manual, and understand the expectations of the brokerage they’re going from to the brokerage they’re going to. 

Subpoenas and Depositions

A subpoena is a court order, ordering you to do something — to either appear, to produce documents or do both together. For real estate licensees, they’re usually seeking a transaction file. They can also say, “We also want you to appear and talk about these documents.” 

Any request for the file should always be directed to your broker because the transaction file belongs to the broker. 

As a CRES member, your next action should be to contact your ClaimPrevent® Legal Team. Subpoenas and Depositions are not activities you should ever participate in without an attorney. 

If you get a subpoena, you have to take action by a specific date. Your attorney will first figure out the purpose of the subpoena and/or deposition. If you’re asked to appear, you’ll want to work with your attorney to prepare for the deposition.

There are very often documents in your files that are not yours (like a home inspection report), so this is another reason you need to get an attorney involved before you respond. And don’t panic and say, “Hey, my file’s not complete,” and definitely don’t try to complete your file

Should you get served in a lawsuit that is going on between other people that you are not involved with, your number one goal in that situation is to stay out of the litigation.

You definitely do not want to do anything, produce anything, or say anything that is going to get you involved. However, that attorney and any other attorneys involved are looking for any possible way they can bring you into the lawsuit. 

For documents, only give exactly what you are asked for. Don’t volunteer anything additional. And only answer what you’re being asked, do not volunteer additional information. Whenever possible, answer questions with a yes or a no, and if there’s a follow-up question, make the attorney ask that.

Never answer any questions from an attorney without talking to counsel first. If an attorney calls you, you can write down their questions and advise the attorney you’ll have to gather the information and get back to them.

Keep your transaction files for at least 7 years (but indefinitely is better).

While most claim situations are confrontational and upsetting, the two CRES Risk Management attorneys were tremendously professional and very level-headed. I am very sorry this had to happen, but extremely happy that they were there to help us. So from one very hard working real estate licensee to two very skillful professionals I thank you very much.

– Pete M., Broker/Owner REMAX Properties – Singer Island, FL


RESPA prohibits real estate brokers or licensees from receiving or paying money (or other things of value) for referrals. RESPA applies to residential transactions of 1 to 4 units that will be buyer-occupied, with a federally related mortgage loan.

Splitting fees for settlement services is also not allowed under the Act unless it’s a fee for a service provided. There are some exceptions to RESPA’s directions under strict circumstances. If a real estate broker or licensee has an interest in a settlement service company, it may be allowed if:

  • The relationship is disclosed at the time of referral
  • The broker or licensee provides clients with the freedom to choose an alternative service provider if they wish to do so.

The brokers or licensees cannot receive any additional payments other than what is considered to be a return on investment for their ownership share. Payments cannot be linked to the volume of referrals. 

But service providers can provide branded items to real estate licensees, mortgage lenders or other settlement providers, as long as the gift is not conditioned on referrals, and there can be no referral agreements between providers. Further, service providers cannot cover expenses those generating referrals would normally pay.

Always avoid providing lists of preferred providers to clients. Instead, encourage your clients to do their own due diligence and independent research, and let them choose their own providers. 

Sellers cannot require buyers to buy title insurance from a particular title company. And consumers cannot be required to use a partner or co-advertiser of yours for settlement services.

See also: Real Estate Referral Fees and More Under RESPA

and RESPA Compliance for Real Estate Brokers.

Foreign Investment Sales

When dealing with foreign investors, you might work with a person you’ve never met, and sell a property the buyer has never seen in person.  You may also need to work through language barriers, cultural differences, or currency confusion issues. There is also an increased risk of becoming a victim of a scam or fraudulent transaction. 

To manage foreign investment sales effectively:

Ensure Foreign Ownership Laws Compliance:  Anyone can purchase residential property in the United States. Although there is no requirement to be a US citizen, an Individual Taxpayer Identification Number (ITIN) is required. ITINs are issued by the Internal Revenue Service (IRS) or can be arranged through an IRS-approved certified accountant. 

Foreign purchases may be tricky if financing is required. American financial institutions will not typically lend to foreign investors, unless the investors already have other property or financial interests in the United States, or they are residents.

Commercial investments are under increased scrutiny by the Committee on Foreign Investment in the United States (CFIUS). Foreign investors may be required to disclose additional information.

The US Department of Treasury’s Office of Foreign Asset Control (OFAC) prohibits trade and financial transactions with certain individuals, companies, and countries without prior authorization. Exemptions may be granted on a case-by-case basis. To view the sanctions list, visit the OFAC website.

Your foreign investor client may be impacted in the future by the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA). If they purchase the property and then wish to sell it afterwards, the federal government requires that 15% of the sale price be withheld and paid as tax to the government. 

Encourage your buyer client to do their own research and due diligence before making the purchase. 

Be Upfront About the Potential Impact of Currency Fluctuations: Remind your foreign investors that all transactions will be processed in US dollars, and it’s their responsibility to seek advice from their bank or finance company about any additional fees and charges they may incur because of the international transaction. 

The transfer of funds from foreign banks does have the potential to be problematic. Educate your sellers on how the closing process works in the US, and ensure they have the appropriate swift codes and details needed to transfer funds. 

Do Virtual Tours and FaceTime® Walkthroughs: FaceTime and live property walkthroughs can help to provide a realistic view of a property, and they allow the buyers to have a more thorough look and ask questions in real-time. 

Keep in close contact with the client to ensure they’re aware of how the real estate transaction process is managed in the US. Ensure all approvals are obtained in writing, and that identification is verified, so you can be certain of who you’re dealing with. 

Be Alert to Scams: Working with foreign buyers that you’ve never met, combined with cash transactions or international wire transfers can make even the most experienced real estate professional nervous. Be alert to the latest news in real estate scams. 

Due diligence is paramount to ensure that you don’t find yourself facing a lawsuit or, worse, financial ruin and damage to your hard-earned reputation. 

Protect Your Business with Errors and Omissions Insurance

Real Estate E&O Insurance is too important to leave as an afterthought. CRES is your real estate E&O specialist (and has been for more than 25 years). As part of one of the largest insurance brokers in the world, we have access to more E&O (and other real estate-related insurance) options than just about anyone else. Let us do the shopping for you – and find you the best protection at the best price.

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