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CLAIMPREVENT® BLOG

Real Estate Broker Beware — Most Common Complaints That Lead to Litigation

James M. Meseck, a litigation specialist from White and Steele in Colorado, gives us tips on reducing the most common risks for real estate licensees.  (Note that all real estate professionals in Colorado are referred to as “brokers”, so this discussion applies to everyone selling real estate.)

Most Common Complaints

According to James M. Meseck, the most common complaints involve:

  • Septic systems
  • Solar leases
  • Failure to disclose and Seller’s Property Disclosures
  • Water rights
  • Miscommunication
  • Agent-owned property and additional supervision
  • Multiple offers
  • Unpermitted work
  • Easements
  • Flood and fire zones
  • Oil and gas rights
  • MLS issues with images, including drone photos
  • Earnest money and deadlines
  • Who should verify details

It’s how you deal with these issues and solve these problems that’s important. Your real estate E&O insurance should be tailored to your specific activities and risks to be sure your business is protected.  CRES specializes in real estate E&O, and can tailor a policy to include superior coverage, as well as the specific-to-real-estate protections you really need.

You can watch the full webinar replay above, listen to the podcast above, or view the transcript below:

Laura Prouse:

Hello, everyone. Thank you for joining us. I’m Laura Prouse with CRES Insurance. For those of you not familiar with CRES, we’ve been providing real estate errors and omissions insurance and risk management services to real estate licensees for over 25 years. We want licensees to know how to effectively protect themselves in this daily business.

This morning, we’re joined by Jim Meseck from White and Steele. Jim has been a CRES partner for about  five years now. He’s handled hundreds, maybe thousands, of risk management issues for us and provides real estate defense for licensees who are insured through CRES.

James M. Meseck:

Thank you, Laura. Good morning, everybody. I’m an attorney here in Denver with a law firm of White and Steele, where I focus on defending professional malpractice claims. I’ve worked with a large number of real estate brokers, handling not only lawsuits, but also administrative complaints with DORA and the Colorado Real Estate Commission.

Today, I want to focus on how to become better brokers — with knowledge.

David Deutsch says the best institutions are those that keep improving and the most important knowledge that they embody is knowledge of how to detect and eliminate errors.

Today I’ll share with you some of the errors, some of the risk that I see when I’m asked to defend real estate brokers.

Challenges with Septic Systems

Here at Colorado, many counties, through their health department, require that septic systems be permitted, that they be inspected, that they be regularly serviced. However, many of the septic systems were put in 30, 40, 50 years ago when they did not have a permitting process. And so, those septic systems typically have a service life of approximately 40 years.

Many times, the home sellers know they have a septic system, but they don’t know if or are unaware that they don’t have a permit. When they go to sell their property, oftentimes, the seller’s agent, the listing broker, will check the box on the MLS septic system, but they are unaware themselves that that county requires a septic permit.

The problem is compounded when the buyer and the buyer’s agent are unaware of the transfer requirements. In many of these counties (but not all counties in Colorado) – such as older Tri-County, El Paso County – they have a septic system transfer permit requirement.

People get into the home, they close, the title company doesn’t look for permit issues. Neither broker is aware of the permit issues. The seller doesn’t know about it and the buyer, obviously, doesn’t know about it.

But when the buyer discovers problems with the septic system, and calls somebody to inspect it, they say, “We’ve been inspecting this for years. Didn’t you know about this problem? Weren’t you disclosed? Where’s your transfer permit?” And then, there are problems.

Or the buyer wants to remodel and, when they go to the building department, the building department says, “Well, you can’t do it because your septic system isn’t big enough to accommodate the now increase in number of bedrooms.” These issues come up and the buyers blame everybody.

It’s a problem not only with lawsuits but with DORA complaints, licensing complaints. I’m in there with my client at their interview and the question comes up, “Were you a broker back in 2015?” They’ll say, “Yes.” “Well, don’t you remember at the annual update class, slides 256 through 258, we told you about this.” Of course, they’re not going to remember three slides out of hundreds of slides from the annual update classes. That’s a licensing problem there.

The law in many of these Colorado counties says that once you transfer the property, you’re supposed to get a transfer permit. The transfer permit means that the septic system has been inspected for any problems and that it’s not only usable but safe for drinking water, underground water for the surrounding area.

But after a sale when there are problems with the septic system, the leech field or the tank, or the tank’s so old that it can’t pass the inspection, who’s going to pay for that? A new septic system typically runs $30,000 to $40,000.

If you’re on a smaller parcel of land or if you’re near water or a house is close by or other structures, where are you going to put that drain field or leech field? Where are you going to put in the tank? That can increase the cost.

The bottom line: please be aware if a property has a septic system. More likely than not, that county is going to require a transfer permit process.

Another problem that creates confusion is that these permits are not filed with the building department for the county. They are filed with the health department. That confuses a lot of people because why would you go to look for something structural with the County Health Department? If you’re in Adams County or Arapahoe and Douglas County, you go to the Tri-County Health Department. If you’re in Boulder, you go to the Boulder County Health Department.

Some red flags to look for:

  • If the property is on one acre or more
  • If the property was built before 1960 or developed before 1960
  • If they don’t have records for a sewer tap
  • If they’re not being charged for sewer fees

And if you’re a buyer’s agent and you see that the septic system box on the MLS is checked, then you need to look into that. It’s not always easy to try and get a septic system permitted. Most counties are pushing people to get on public sewer.

Solar Leases

We’re also seeing issues with solar leases. Most people think that when they buy a house and see solar panels, they come with the house and that may not be the case. Oftentimes, solar companies will lease the panels. Then, there’s a huge provision that says upon sale or termination, the solar company gets the panels back.

The solar company will come and remove the panels, or they’ll require an immediate payoff for any unpaid portion of the contract. When you see solar panels on a house or the side of a house or next to the house, start asking questions.

Your buyer is not going to be happy when the solar panel company comes and starts removing the solar panels.

Failure to Disclose and Seller’s Property Disclosures

Other common complaints to be aware of and to be knowledgeable about mostly relate to an alleged failure to disclose adverse material conditions. As brokers here in Colorado, you know under our statutory requirement that you’re required to disclose actually known adverse material conditions.

And so, a lot of these cases circle around whether you knew. A lot of times, we will get complaints alleging the broker should have known. Well, that’s not the law. We may have to educate the claimant’s attorney on what the statute actually requires. But then, the race is on to try and show that the broker had actual knowledge and did not disclose.

A lot of “failure to disclose” cases involve is water intrusion or mold. This was particularly a problem and resulted in a tremendous number of cases from the huge rains we had in 2013, and especially in 2015 in the Colorado Springs area. There was so much water in those years that houses that never had water intrusion or flooding had water intrusion and flooding.

A lot of times, the sellers just took care of the problem. But maybe they didn’t completely fix the problem or remediate the mold that showed up. Buyers go into the homes and find water stains, mold stains, damage. And then, they start talking to the neighbors and the neighbors say, “Oh yeah, the whole block flooded.” And then, that starts creating questions about what the broker knew.

We see claims regarding failure to review and correct the seller’s property disclosures. That’s a case where you’re damned if you do, damned if you don’t, because they’re going to criticize you either way. “Well, you had the information. You supplied it. What did you do to make sure it was accurate?”

Well, the statutes say you have no duty to investigate the property on behalf of the other party. You also have no duty to verify the representations of the seller.

That hasn’t really stopped the claimant’s attorneys from still trying to argue, “Well, you had it. You could have reviewed it. You should have reviewed it, and you didn’t review it to make sure it was consistent and accurate.” Just be aware of those issues.

Water Rights

Other issues we come across involve water rights. This traditionally was considered a rural or agricultural property issue, but now is becoming a suburban issue. As Colorado cities grow, they’re taking up agricultural land and, with that land, there are usually water rights. Colorado has a very unique water rights system based upon shares. If you have water rights, you actually own shares, and it’s based upon feet per acre.

A lot of times, the sellers will want to reserve the water rights. Or they’ve already sold their water rights to a city or a municipality, and they don’t always tell the broker that.

The broker is like, “Okay, this is a suburban home. We’re just selling it as is.” The buyers don’t understand that there’s a well that they could be using for irrigating their yards, and they think, “Okay, I’ve got that.” Or if they are aware of it, they think they’ve got that right and they can use it. Well, those rights have been sold, and so that creates problems.

And then there’s an issue of, “Well, what are the water rights worth? What were the shares at the time? What could they have gotten for them on an open market?” Here, in Colorado, there are at least two trading places where people can buy and sell water rights. One is in Fort Collins. I think the other is in Greeley where the Colorado Water Court is located.

Miscommunication from a Team Member

Some other problems arise if you’re working with a team or you have an assistant, and there’s a miscommunication and wrong or inaccurate information is sent.

A lot of times, the buyer’s agents are in a rush and will call the listing agent and say, “Hey, can you send me the information you’ve got for (an Airbnb property), what were the rentals? What were the days of occupancy? What did you charge? What are the high low seasons? Can you send that over?” Unfortunately, when it does get sent over, it may be information for another property.

I had a case in Steamboat Springs where there were two condo buildings side by side, and they were numbered the same except the condos were not all the same size. My broker had one condo listed in each building at the time, and they were on the same floor but with different unit numbers. The one that went under contract was the smaller unit.

And then, the buyer’s agent called and said, “Hey, send me over the rental history and accounting information.” The listing agent called his assistant, and the assistant sent over the information for the larger unit in the building next door. And so, when the buyers tried to rent out the property, they were not getting the revenue they saw because it was priced too high for being a smaller unit. Of course, they filed a claim.

Agent-Owned Property Sales

We also see a lot of problems with agent-owned property and whether the employing broker provided additional supervision.

In many of your policy manuals, there’s a section about when additional or closer supervision is required. Commonly, one of those times is when it’s an agent-owned property.

We all get busy and, unfortunately, there’s just regular supervision just looking at the file. And then, it turns out that the owner/agent made a mistake along the way that he could have avoided.

We see a lot of agent-owned property claims because, of course, the agent also owned the property and would’ve known about the entire history of the property – including what maintenance was done and what was fixed. And so, it’s hard to claim, “No duty to disclose. We didn’t have actual knowledge.”

Just be mindful when you are listing your own property, acting as your own agent. If you’re an employing broker, be mindful of what your policy manual says in those instances.

Multiple Offers

Another big problem I see with frequency now that the real estate market has skyrocketed is with multiple offers.

We see that sellers are accepting contracts, multiple contracts, at the same time. Multiple offers come in. The listing broker forwards them to the seller and says, “What do you want to do? Which one do you want?” Some of the sellers are elderly, or they’re just not sophisticated, and they just keep clicking sign, sign, sign, send, send, send.

In one case, an elderly woman had accepted six different contracts to buy her home. Obviously, she can’t sell the property to six different people. Some buyers were nice and understood. Others were more aggressive and demanded performance or compensation. And so, a couple of times we’ve had to pay people not to buy a house.

Permitted Work

Another issue is when sellers do their own home improvement projects, bypass the building department permits that are required, and then they don’t disclose that.

Not being professional contractors, they didn’t necessarily follow the building code requirements or practices. A lot of times, the buyers will find something, have a contractor come out and say, “Well this is not up to code. I looked and there’s no permit for this work.”

If the buyers want to sell the property in the future, they would have to disclose there were no permits, and there are building code violations. They’re going to say that affects the value of the property, and that the broker knew or should have known when they listed the property. Or their buyer’s agent should have told them or done their due diligence for them by researching the permit history.

Of course, the sellers may be long gone, or they have no assets, or they went through whatever capital gain they appreciated on the property. Guess who’s left to be blamed? It’s the brokers. So, broker beware.

(Note that CRES Real Estate Errors and Omissions members get 25 free Building Permit History Reports each policy year, to show buyers the permits on a property.)

 

Easements

Another thing to be particularly mindful about, especially if you’re up in the mountains, is easements. The properties are on sides of mountains, and the property boundaries are not always clear. The sellers   may have let their neighbor use their driveway or drive across their property, or they didn’t even know that there was an easement.

Similarly, if you are selling the property because of easement errors, I always recommend that the brokers advise, at least in writing, that the buyer get a survey. If a seller knows there’s an issue, they may want to do a preemptive survey of their own.

Flood Zones and Forest Fires

Here in Colorado, Mother Nature has blessed us with beautiful mountains, sunshine, and rivers.  Unfortunately, with that comes floods and forest fires.

We frequently had claims in the past for, “Well, you didn’t tell me I was in a flood zone, and I needed flood insurance.” Well, that has largely been resolved through the flood zone mapping.

But another issue that’s coming up now are forest fires. The more we develop in forested areas, the more likely the risk. A lot of people when buying a home don’t buy the insurance they need, so whose fault is it? It’s the broker. “You didn’t tell me I was in a forest fire risk area.”

When you go out to a property and you’re looking to list it, or if you’re taking a client there for a showing, look around at the landscape area. Sometimes if there’s an HOA, talk with them about what insurance the HOA has, and what insurance you need.

Oil and Gas Rights

Two really big things that are also coming to the forefront here in Colorado are oil and gas rights.

Colorado cities are growing tremendously fast, and they’re getting into areas that were either agricultural, or we now know there’s oil and gas under these areas.

There are oil and gas extraction activities going on in the northern suburbs of Denver, including Westminster, all the way up along I-25, Larimer County, Boulder County (although Boulder County has tried to slow that down), and Weld County.

When people sell their suburban home, oftentimes they want to keep the mineral rights. Maybe they’ve contracted them, or there’s a futures contract, or they can contract them and get royalties. That doesn’t always get translated into the buy and sell contract. A lot of times, the title company doesn’t pick up on this, and they just prepare a regular deed.

If you’re going to reserve mineral rights, mineral rights are property rights. They are not personal property rights.

A bill of sale for oil and gas won’t do you any good. You’ve got to put mineral rights in the deed or reserve it in the deed.

A lot of times when we get involved, it’s the buyer who has the rights when the seller wanted to keep them, and the title company made the mistake. But, as you know, in the closing instructions, the title company says they are only going to be the scrivener and that it’s up to you to review.

Similarly, from time to time, we have unfortunate instances where houses blow up because of natural gas leaks. Sometimes pipes under the ground that we thought were abandoned were not actually abandoned and developed a leak.

Again, it’s important for brokers to understand the neighborhood, what’s going on in the neighborhood, and at least advise the buyer to look into what’s going on with the oil and gas activity in the area.

Misleading MLS Photos

Some other problems we see involve misleading photos or information in the MLS.

Another brand-new claim that I’ve started seeing in the past two years is the use of drone photography when putting the photos in the MLS or in the marketing materials.

One instance we had was a woman who took a shot of the neighborhood with a drone and, in the forefront, was this awesome rec center with this incredibly fun pool with a water slide. Unfortunately, that rec center did not go with that property. That property was part of a community that had another rec center that did not have an awesome slide or pool. The people were disappointed when they bought their house and went to the rec center to go use the pool and were told, “You’re not a member. It’s going to cost you X to join.”

Also, with drone photography — this is especially true with condos and townhouses — brokers will want to take a shot of the outside. Well, it also captures the neighboring house, and you can see inside.

The neighbors follow what’s going on when they see the house next door for sale. They go on Zillow or wherever the photos are posted and they’ll see, “That’s my home. I didn’t give you permission. You can see in my home. That’s my daughter’s bedroom.” There are privacy concerns that cause cease-and-desist letters.

Loss of Earnest Money

Quickly, loss of earnest money is another problem we see — where deadlines were missed or never put in the contract in the first place. So be very careful when drafting documents.

We’re trying to give you the knowledge so that you can be a better, stronger, and smarter broker.

Who Should Verify Information

Laura Prouse:

I have a question. It sounds like most of the responsibility falls on the buyer’s agent not to take the seller’s agent information as fact. Is that correct? Should the buyer’s agent be following up on what the seller’s agent provides?

James M. Meseck:

Definitely, the buyer’s agent should be following up with the seller’s agent and doing that in writing, so we can go back and document who provided what information when.

A lot of these lawsuits and cases come down to who knew what when.

You need to be asking questions. You need to follow up in writing. Just because the buyer’s agent should be following up, that doesn’t let the seller’s agent off the hook. As you know, they still have the statutory duty to disclose all actual adverse knowledge or actual knowledge of adverse material conditions. They can’t say, “Well, I wasn’t asked.” Our system is not set up for wasn’t asked, don’t have to tell.

We’ve switched from a buyer-beware system to a seller-beware system, and I would even say broker-beware system, to protect consumers. Do get your buyers to do their due diligence. Don’t volunteer to take on activities beyond your scope, but you still have a duty to advise them of issues you’re aware of.

Laura Prouse:

Is it okay to write in an email that you don’t know anything about fracking and mineral rights?

James M. Meseck:

You don’t have an affirmative duty to tell people what you don’t know.

If you made such a statement, people could get suspicious about, “Well, why are you putting that statement in writing? What did you really know? Did you suspect there was something? If you didn’t suspect there was something, why would you write that?” I wouldn’t necessarily recommend it. If you suspect that there is oil and gas activity going on in the neighborhood, talk to your seller about that, and then send a confirmation that here’s what we discussed and this was your answer.

Laura Prouse:

Okay, another question. Do I really need a lawyer to respond to a DORA licensing complaint?

James M. Meseck:

I’m going to give you a lawyer answer and say, “It depends.”

It depends on several things. How serious is the complaint? If you get the feeling that you are being set up for a lawsuit, then definitely you will want an attorney to defend you.

Or, if there is an ongoing lawsuit at the same time, you will definitely want an attorney. Also, are they looking for financial reimbursement. A lot of times, people don’t understand that DORA can’t make the broker pay them money for whatever losses they’re claiming, but that tells me that there’s a claim coming. There, you may want an attorney.

If you’re familiar with the division of real estate investigators, the Colorado Real Estate Commission, they can be very harsh. They have their investigation strategies, and in my opinion, they’re designed, to trip up the unwary.

For example, you may get asked the question, “Well, did you give me everything in your transaction file?” You’re thinking, “I think I did. I gave you everything that I thought was relevant to the issue. Was there anything missing?” And then, they’ll follow up and say, “Are you sure you gave me everything?”

They’re supposed to identify the specific documents they want, but a lot of times they don’t. They’ll just say, “Did you give me everything?”

And then, eight, nine months later, you’ll get the report saying, “Broker was asked to provide transaction document. Broker was asked to provide everything. Broker did not provide everything. These are the documents that we’re missing.”

A lot of times, if brokers knew what specifically was being asked for, they would’ve provided the document and there wouldn’t be a licensing issue. But these are the types of things you have to guard against.

You may think, “Oh, the complaint is just about this one issue that really doesn’t involve anything.” But they investigate the entire transaction. In my 12 years of doing this, I’ve never seen a single 100% perfect transaction. A lot of them are insignificant, minimal issues. But if you’re concerned that this may become a licensing issue, then definitely reach out and get an attorney.

Laura Prouse:

Jim, thank you for a great presentation. Thank you for joining us today. We hope you found this valuable to help you protect your business.

Read more on our ClaimPrevent® Summary: Real Estate Licensee Responsibilities When Creating New Listings

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