Avoid Liability Claims With Better Communication

A lack of communication can prove costly to your business.

January 1, 2004

A failure to communicate is the major reason behind lawsuits and licensing complaints, according to Spencer Stephens, attorney at law.

Stephens has defended real estate salespeople in professional liability lawsuits, arbitration, and licensing complaints since 1993. He says his practice mirrors a NATIONAL ASSOCIATION OF REALTORS® study from several years ago stating that claims most commonly come from buyers and center around accusations of misrepresentation, failure to disclose defects and deficiencies, and failure to perform as a fiduciary.

What do all those failures have in common? Lack of adequate communication, exacerbated by a sense of entitlement on the buyers’ part.

"From what I have experienced, most claims come from frustrated expectations, which means communication is believed to have broken down,” says Stephens. He says that avoiding charges of misrepresentation, failure to disclose, and fraud often boils down to maintaining good communication. “An important corollary is managing expectations from buyers who are new to the process or get unusually excited about their new homes,” he adds.

Stephens has observed some patterns among these cases. "Very often, a buyer in a lower bracket will have to settle for a home that isn't as nice or pristine as they would like, and they have buyer's remorse after the closing is executed."

So the buyer sticks himself with a house he doesn't want and the salesperson is to blame?

Buyers don’t always ask everything they need to about a property, warns Stephens. "They don't think carefully about it,” he says. “They have a high level of excitement about a house or they make a quick decision about buying for some reason. … They may have to purchase an older home in a less prestigious area, but if it is an older home in which the roof leaks or the furnace doesn't work or any of a number of things that aren't unusual for older homes, they think, 'my salesperson never told me about this.'"

'Buyer Beware' has to apply in favor of all buyers, as a salesperson can only do so much, suggests Stephens. "That is when contract documents come in handy," he says. "In Maryland and Washington, D.C., they publish excellent contract forms so if you do get a claim, you have a good shield."

How do you stop someone from going after your license or suing you? "If someone is really mad … and they say, 'I suffered a loss; now who can I blame?'—it is difficult to avoid a claim or complaint against you,” advises Stephens.

Before a lawsuit or claim is filed, you will get a phone call from the person complaining, he advises. Always be a good listener. “Don't apologize or make excuses, but you do want to express sympathy,” he says. “It salves the wound.” For example, you might tell them, “I know how you feel. It must be tough to go through,” he suggests.

License claims and lawsuits can happen to even the most diligent of salespeople, but is there a type of salesperson who is more litigation-prone than another?

Errors and omissions insurers seem to think so. Brokers pay higher premiums if they operate dual agency, designated agency, or transactional brokerage business models.

"I have not seen a significant change in E&O insurers except that you used to have the same coverage for licensing complaints that you did for a conventional lawsuit,” Stephens notes. “Now there is a cap to defend a licensing claim. An aggrieved consumer will use the same facts as they would in a lawsuit to file a claim to a real estate commission that issued the licenses. The real estate commission disciplines them when they violate rules of ethics. In Maryland, for example, it can go either way. There is a real estate guaranteed fund that a consumer can get money back, but in my experience, it is difficult to succeed on a claim against the guarantee fund.

"I think there are an awful lot of people who look for easy money," Stephens explains. "They go talk to a lawyer, but they don't want to pay $7,000 in lawyer's fees over a $10,000 defect, so they go the licensing claim route because it doesn't cost them a cent. The state pays for the claim to be investigated."

So what can a broker do to lower E&O premiums and hire and/or train salespeople to be better at communication?

"The salespeople that I have found who do the best job of communication and avoiding claims are the ones with good professional experience in some area before they become a real state agent,”says Stephens. "Former teachers or engineers or others who have backgrounds where professionalism was demanded of them, and they were held accountable and are well-schooled in ethical performance, tend to avoid claims."

Brokers who hire salespeople who don't have professional backgrounds should be sure that all salespeople receive risk management training and continuing education courses in ethics, suggests Stephens.

(c) Copyright 2004 Realty Times. Reprinted with permission.

Blanche Evans is a writer/editor and CEO of evansEmedia. Formerly, she was a senior editor with Realty Times, where she was named by REALTOR® Magazine as one of the most influential people in the real estate industry.

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