Avoid Legal & Ethical Pitfalls

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Avoid Legal and Ethical Pitfalls

Maintaining a solid reputation contributes to your business success. Here are key steps to help you stay on the right side of the law and the Code of Ethics.

May - June
2021

Key Takeaways:

  • If a legal issue arises during a transaction, agents should talk to their broker, call an association’s legal hotline, or refer the client to a lawyer.
  • Keep records of your advice to clients using emails, texts, and other notes.
  • Handle multiple offer situations carefully to avoid accusations of negligence or preferential treatment that may violate fair housing laws.

The measures agents and brokers need to take to avoid legal trouble can feel onerous at times, but dealing with a lawsuit can be much worse. Legal action by a buyer or seller, a fair housing complaint, or an alleged violation of the National Association of REALTORS® Code of Ethics could result in a fine, penalty, or judgment for damages, not to mention lasting damage to a professional’s reputation.

In today’s litigious environment, agents and brokers need to mitigate the risk of liability—being held legally responsible for conduct that results in a loss or injury to another person. That’s especially important as 2020 saw a spike in reported errors and omissions claims, continuing a year-over-year trend of increased litigation against REALTORS®.

Allegations of negligence and nondisclosure continue to be the most commonly reported claim types, according to Zach Vollmer, real estate E&O program manager with Victor Insurance Managers Inc., a REALTOR Benefits® partner. “Losses pertaining to online services, such as virtual home tours and home staging, are becoming more commonplace,” he says. “Looking forward, we expect to see an increase in losses alleging fair housing violations and wrongful eviction stemming from the ongoing economic impact of the COVID-19 pandemic.”

Broadly speaking, to reduce liability risks at any stage of their business dealings, agents should educate clients about every stage of a transaction, disclose all relevant information, and treat everyone in the same professional manner, says Bob Arnold, an agent who leads the M2M Team at Realty Executives Integrity in Milwaukee. “If agents make decisions for clients without discussing the options, they can get in trouble,” he says.

Deanne Rymarowicz, NAR associate counsel, takes that idea one step further. “Agents need to be careful about serving their clients and avoid overstepping their role,” Rymarowicz says. “If a legal issue arises during a transaction, agents should talk to their broker, call their association’s legal hotline, or refer the client to a lawyer.”

It’s a smart practice to stick to the facts rather than giving opinions when discussing matters with clients, says Robert Ransome, broker-owner with Ransome Realty Group in Richmond, Va. In addition, “You should document your advice and conversations in emails, texts, and notes. That can be very helpful later on if a liability issue arises that is related to the transaction.”

Here are some of the seven issues that have legal or ethical pitfalls for agents and brokers.

1. Multiple Offers

Buyer and seller agents need to handle multiple-offer situations carefully to avoid accusations of negligence or preferential treatment that violates federal, state, or local fair housing laws or ordinances.

“Multiple offers have become the norm in our market,” says Arnold, “so it’s very important to make sure the buyers under- stand the best-case and worst-case scenarios when submitting an offer and to document that conversation.”

Brian Bartholomew, an agent with eXp Realty of California in San Ramon, Calif., says he recently received 28 offers on a home that sold quickly for $80,000 above the list price. To help the seller obtain the highest and best offer from each buyer, he advised sending out the same counteroffer to all the buyer’s agents, requesting specifics in terms of timelines, pricing, and financing. Then he showed the offers to the seller on a spreadsheet without the names of the buyers or their agents.

Lisa Mack, an agent with Coldwell Banker Residential Brokerage in Chambersburg, Pa., advises a cautious approach to submitting “love letters” with a buyer’s offer in hopes of winning a bidding war for a home. “You need to avoid any issues related to fair housing,” she says. “I am very careful to keep to the details and terms of the offers, rather than have the seller focus on the buyer.” NAR attorneys advise that if a buyer insists on writing a letter, the agent should not help draft or deliver it.

Other issues can arise in multiple-offer situations, such as a buyer’s agent who may be showing the same listing to multiple buyers. “You need to have a tactful conversation with each buyer and let them know you have other parties interested in the same property,” says Ransome. “Then you can give them the option of staying with you or referring them to someone else.”

2. Seller Disclosures

Agents and brokers need to follow their state laws and the Code of Ethics with regard to seller disclosures about the condition of a home. Bartholomew says he advises sellers to disclose any issues that come to mind when listing a property. “If a client tells you about a problem, it needs to be disclosed to buyers,” he adds. “Be honest with your clients so they can be honest with you.”

From the buyer’s standpoint, Arnold suggests going over the disclosure form and pointing out issues without giving an opinion on whether a problem can be remedied easily or not. “We simply say, ‘This is what the seller has disclosed,’” he adds.

Buyers should always pay close attention to the seller disclosures, says Mack. “In a tight market with bidding wars for properties, a buyer might want to waive an inspection,” she says. “But you need to be sure they understand the consequences if they include a waiver in their offer.”

Liability concerns for brokers and agents can occur even after a transaction has closed if a client is experiencing buyer’s remorse, says Ransome. “Buyers often want everything to be perfect, especially if they feel they overpaid,” he says. “So be sure to explain both the value and the limitations of home inspections and property surveys, and let them know there can be issues with any property.”

3. Fair Housing

Fair housing issues can arise whenever buyers feel they’ve faced discrimination because of race, ethnicity, gender, age, disability, religion, or other protected classes.

“This is a very timely issue now,” says Rymarowicz, citing a pending Massachusetts case where the seller saw the buyer’s name on an offer and asked the listing agent whether the buyer was Black. “The agent did the right thing and terminated the relationship.”

It’s not just seeing a buyer’s name that can lead to potential fair housing violations. Sellers can decide not to sell to certain individuals after looking at their social media posts or security videos when prospects tour the home. “Keep sellers focused on the buyers’ offers rather than the people,” Ransome says.

Ed Forman, president of Watson Realty Corp. in Jacksonville, Fla., advises agents to be clear and transparent with buyer clients to be sure they feel they have been treated fairly—and to document those conversations. “In one case, buyers we represented didn’t understand why the seller accepted an offer that was $10,000 below their bid on their dream home,” he says. “I reviewed our agent’s notes and saw their offer was contingent on the sale of their own home, making it less attractive to the seller. When I explained this to the buyers, they thanked me, saying, ‘Now that I know what happened, this won’t worry me for the rest of my life.’”

4. Wire Fraud

Agents and brokers need to guard against wire fraud scams that could cost a buyer or seller hundreds of thousands of dollars. “We put a warning on all our documentation not to accept any last-minute wiring instructions,” says Forman. “We encourage title companies to speak directly to the buyer. However, we did catch one fraudulent transfer a few weeks ago and called the FBI. We were able to freeze the bank account and the buyers got their money back before it disappeared.”

Bartholomew likewise tells his clients to call the escrow agent or title company directly at a known number to confirm the details before sending a wire transfer.

Rymarowicz cautions that the FBI’s Internet Crime Complaint Center reports a growing number of wire fraud and other scams stemming from compromised business emails. “With everything being done virtually in the pandemic, it’s likely the numbers will be even higher now.” Brokers can obtain cyber liability protection through CyberPolicy, a REALTOR Benefits® partner, offering enhanced coverage and premium credits for members.

5. Social Media

Be very careful before posting to social media, says Forman. Avoid misleading or deceptive representations and comments that could violate fair housing principles. Be sure to follow state-required disclosures on advertisements, in keeping with NAR’s policies. “Keep your posts professional and talk about the home, rather than the buyer,” says Mack. “We are accountable for our personal as well as our professional posts, so think twice and be sure you are not violating any laws or causing a potential backlash from anyone.”

Last November NAR expanded the Code of Ethics to ban discriminatory hate speech and conduct directed at members of any class protected under Article 10. The change applies to all of a member’s activities, not just those that are real estate– related. “We all represent the real estate industry, and must be careful to uphold those standards in all our posts,” adds Forman.

6. ADA Website Accessibility

In Florida and other states, plaintiffs’ lawyers have contacted real estate brokers and agents whose websites fail to meet the accessibility guidelines in the Americans with Disabilities Act. “You need to be sure your site can be accessed by everyone,” says Rymarowicz. Accessible websites or mobile apps can interact with assistive technologies, including software that converts speech to text and screen readers that display voice-to-text on a webpage. Users should be able to navigate a site using just a keyboard, if necessary.

Forman says the ADA compliance requirements offer an opportunity for upgrades to sites to be sure everyone has an equal opportunity to educate themselves, search for homes, and make a well-informed decision. “Sometimes the lawyers give you a gift in terms of doing what’s right for your customers,” he adds.

7. Do Not Call Registry

Bartholomew makes sure every call is made personally, without violating the Telephone Consumer Protection Act or the National Do Not Call Registry. “Agents should avoid making automatic calls and be sure to leave voicemail if no one answers,” he says. “Our clients are upset about getting robocalls from companies using virtual assistants and dialers to see if they want to sell their homes.”

Forman says his brokerage provides a do-not-call list for agents to check before they begin making unsolicited calls. “If someone makes a mistake, we apologize and correct it immediately,” he adds.

Richard Westlund

Richard Westlund is an award-winning freelance writer in Miami, Florida, who focuses on real estate, technology, finance, and a wide range of other business topics. He can be reached at rnwestlund@gmail.com

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