Legal Scan

February 1, 2006

Trial trends

Despite record sales volumes and a burgeoning number of real estate practitioners, reported legal actions related to real estate declined 37 percent over a two-year period in the states tracked by the NATIONAL ASSOCIATION OF REALTORS® 2005 “Legal Scan.” Perhaps even better news for harried practitioners was that most cases covered by the recently released “Scan” that came to trial were decided in favor of licensees. Brokers or salespeople were found liable in only 28 percent of the cases analyzed. The “Scan” covers 2003–2004 cases. The previous “Legal Scan,” released in 2003, covered 2001–2002 cases.

Although cases involving property management were once again the most frequent area of liability, legal issues such as breach of contract, breach of fiduciary duty, and property disclosure were the major areas of liability for residential practitioners.

Because virtually every step in the real estate process involves a contract and many imply fiduciary duties, it’s not surprising that these issues top the list. Similarly, because no home is without defects of some sort, it makes sense that many of the cases that end up in court are related to property condition.

Flipping prompts biggest award

Rapid price appreciation in some markets has led to an upswing in cases involving flipping and fraudulent appraisals. In fact, the largest non-property-management liability award made during 2003–2004 was $1.3 million in Hoffman v. Stamper (Court of Appeals, Maryland, 2005).

In the case Toyome Stamper and eight other plaintiffs charged that sellers Robert and Suzanne Beeman, through their company A Home of Your Own Inc., had engaged in a civil conspiracy with an appraiser, Arthur Hoffman, and a mortgage loan officer, Joyce Wood, and her employer, Irwin Mortgage Corp., to vastly inflate the price of properties before reselling them. A civil conspiracy to defraud occurs when a combination of two or more people agree to accomplish an unlawful act or to use unlawful means to accomplish an illegal act that results in damages to the plaintiff.

Stamper and the other plaintiffs bought their properties from the Beemans, who located dilapidated properties, made a few cosmetic repairs, and then put them up for sale. The Beemans led the buyers to believe that the homes had been rehabbed.

The Beemans also helped the buyers obtain FHA financing on these overpriced properties through Wood and Irwin Mortgage. Wood alleged that she hadn’t been a party to the fraud but had mistakenly relied on faulty appraisals in making the loans. However, the court ruled that she helped manipulate the transaction by pretending that closing costs were being paid for by gifts from third parties and not by the sellers, which isn’t permitted under an FHA loan. Wood also generated good faith estimates for the buyers based on income, not on the property’s price, misleading buyers about their mortgage payment costs. Irwin Mortgage was held liable based on Wood’s actions.

As required under FHA regulations, the properties were appraised, by Hoffman, before the loans were finalized. When Hoffman couldn’t justify the high contract sale prices, he used numbers the Beemans supplied as comparables. Hoffman also wrote the appraisal reports to conceal the source of the comparables. However, at the trial, he claimed he knew nothing about the flipping scheme.

Soon after moving into their properties, the buyers experienced serious problems including lack of heat, faulty plumbing, and nonfunctioning appliances. They called the Beemans, but received no response. One buyer never moved into the property, and five more lost their properties to foreclosure.

The jury ruled that Stamper and the other plaintiffs had been the victims of fraud. The lender’s actions were also judged to be a violation of the Maryland Consumer Protection Act. To prove fraud, defendants must make a false statement they either know is false or recklessly don’t try to confirm as true. In addition, a statement must have been made with the intent to defraud and must have been relied on by the plaintiff. Finally the plaintiff must have suffered compensable damage because of the misrepresentation. The court found that the buyers had relied on the appraiser’s misrepresentations about value in making the purchase. The appraisal was also used to justify financing.

A lower court awarded damages totaling $1.4 million, which were reduced to $1.3 million on appeal.

Future legal trends

In addition to analyzing recent trends in real estate litigation, the “Legal Scan” also surveyed more than 1,400 industry participants, including members of NAR’s Risk Management and Professional Standards committees, brokers and sales associates, attorneys who represent real estate boards, real estate educators, and members of a Real Estate Buyer’s Agent Council advisory group on what legal issues they predict will result in the greatest number of disputes in the next two-year period. Disagreements over advertising, particularly with listings on the Web, were seen as likely by 72 percent of respondents, while 60 percent feared increased litigation relating to antisolicitation laws.

Other areas of major concern include mold (64 percent), violations of the Real Estate Settlement Procedures Act relating to affiliated businesses (58 percent), and RESPA kickbacks (54 percent).

Although it’s good news that the number of cases covered by the “Scan” has declined, that doesn’t mean you shouldn’t stay up to date on real estate laws and regulations. Staying on the right side of the law is still vastly preferable to risking a day in court.