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How to Minimize Risks After Closing
Here are some common lawsuits that occur after closing and how brokers and agents can mitigate those risks early in the transaction.
September 30, 2016
We live in a litigious society, and real estate agents and brokers are sued all the time — even if they don’t think they did anything wrong.
After a property closes, issues can come to light that make the new owners or the sellers upset and want to place blame on their agents. The best thing brokers can do is educate themselves and their agents on all the potential situations that could bring about a lawsuit, and, of course, by carrying errors & omissions insurance.
“The number of lawsuits is growing again as real estate markets are heating up, and that means more transactions and claims,” says Eric Myers, vice president of the errors & omissions department at Victor O. Schinnerer & Co. Inc., a REALTOR Benefits® Program partner.
Post-Closing Lawsuit Examples
Myers cites a recent lawsuit in which an agent representing the owner of a lakefront property viewed tax assessor’s online records and determined the property had 150 feet of waterfront footage. The agent also asked the seller about it, who said that number sounded right. The home was priced and marketed as if it had 150 feet of shoreline.
A few weeks after the sale was complete, the new buyers wrote a letter to the agent saying there was only 100 feet of waterfront land. The agent believed she had suggested the original owner obtain a survey of the property, which that person declined. The owner claimed the agent said a survey was a waste of time and money and not necessary. The seller sued the agent alleging breach of duty, unjust enrichment, and fraudulent representation, and demanded $75,000 in damages. The case was eventually settled for $30,000.
Myers suggests that when the seller refused the suggested survey, the agent should have had them sign a statement of refusal.
Ted Devine, CEO of Insureon, which sells more than 1,000 real estate E&O policies each year, says one of the most common lawsuits against agents is failure to disclose an issue with the house — and these lawsuits can come from both buyers and sellers. It can be anything from a suspected haunted house to basement leakage problems and neighborhood noise.
A recent suit found that a seller told the real estate agent that the home’s sewer system was connected to the city sewer system. It turned out the agent didn’t verify the information, and it wasn’t true, Devine says. It was connected to a sewage tank. “An agent has to use their judgment, and they can be liable for any information they pass on,” he says.
Third-party verification, including the inspection, can help agents reduce their risk. “Stick to what you do as an agent. Don’t go crazy and give advice beyond your scope,” he adds. “If something goes wrong because of your advice, you can be sued.”
For instance, if a buyer asks about remodeling, don’t give your opinion about what they should do it and how much it would cost if you’re not an expert. You can suggest vendors that you know to be reputable or a website that can give them further information.
One of the big reasons agents get sued is buyer’s remorse, explains Steven Sargenti, CEO of CRES Insurance Services in San Diego. “Everything is fine when the buyer moves into the house. A couple weeks after they settle in, the neighbors come over and say, ‘Did you know that this might have been a drug house because people were coming in all hours of the night?’” he says. The buyers might want to find someone to blame, and it often comes back to their agent.
Sargenti adds that a quarter of the money agents spend defending themselves against claims involves cases citing failure to disclose a permit issue. The common scenario is a building addition that was not authorized by the local authority. “The agent needs to go down to the county building and pull those permits themselves,” he says.
Agents should document everything in writing, even text messages and emails, says Sargenti. When taking notes about something that comes up in conversation, the agent should write who said it, the date, and whether it was verbal or via email.
Here are some other ways to manage professional liability as an agent or broker:
- Be careful with numbers. Triple-check every number you write down. Transposing numbers such as 5.19 acres to 5.91 acres can be cause for a lawsuit.
- Treat all clients the same. No matter what their budget or timeline for buying a house is, treat all clients with the same level of service and respect. Keep up to date with fair housing laws.
- Disclose all flaws before the sale takes place. Just because damage from a previous kitchen electrical fire is no longer visible doesn’t mean you shouldn’t tell buyers it happened.
- Don’t embellish a property’s qualities. If a house is three blocks from the beach, don’t describe it as waterfront.
- Don’t exaggerate what you can accomplish. Don’t tell your seller that you can sell their home in two weeks just so they’ll list it with you.
Buying a house is one of the biggest decisions people will make in their lifetime. And they rely on their real estate agents for a lot of information, Myers says. So, when things go wrong, they can sue them. “So, the rule should be ‘if you see something, say something,’” he says.
Myers says that about half of agents do not have E&O insurance. At Schinnerer, it’s typically bought by a brokerage, and the price is based on how much that agency makes. Other agencies sell to individual agents and can be based on their sales or just a flat fee. The premium covers a claim, which includes a lawyer and indemnity if the agent is found guilty. “A quarter of the claims have an indemnity payment,” Myers says. “We spend a lot of money defending real estate agents against these lawsuits.”
NAR’s Risk Management Committee has created documents online for use by brokerages to manage many legal risks that could compromise their business and financial well-being. All of the documents are available for member firms to download and reformat as needed for their firm, including branding with their logo.