Recently, we came across a couple of articles asking to what extent a real estate professional holds the burden of assisting clients rather than taking advantage of a good real estate deal themselves. On the one hand, a REALTOR owes it to their buyer clients to show them any properties they may be interested in, and to their seller clients to find the best financial offer out there. On the other hand, the agent may also be a buyer, and their offer may be the best one the seller receives.
Real estate agents, and REALTORS in particular, are held to the standards of the National Association of REALTORS (NAR), including its Code of Ethics. This includes protecting and promoting the interests of their clients, and treating all parties honestly. So if you know you want to purchase a property as a rental investment, but your client expresses an interest in it, what do you do? Bite your tongue and show them the property without telling them you would like to purchase it? If you are representing the seller, whatever offer entails the highest price would be in their best interest, right?
These questions can be tricky, as can the other point the writer brings up about how REALTORS should want more first-time homebuyers to have a chance to purchase rather than getting beat out by more knowledgeable real estate professionals. Should agents have to endure a waiting period wherein the listing is exposed to the market for a certain amount of time, before they are allowed to purchase a property someone already has their eye on and is willing to put in an offer for?
In response to the comments Kelly received on his first article, “Should Real Estate Agents Get First Dibs on New Listings?”, his Part 2 article discusses the audience response, and follows it up with a Washington state case that delves into this very topic.
“The responses fell into two main pots,” writes Kelly. “Readers said agents should be allowed to buy if it was in the best interest of the seller. Others who responded thought that agents should be allowed to purchase a property as soon as it is listed, provided they knowingly had no other active clients who wanted the same home.”
It sounds like it all comes down to the “treating all parties honestly” part of the code. In the case of the agent who bought from under his client’s nose, he not only bought a property he knew his client was interested in, but he also relayed some personal, and possibly incorrect information to the listing agent to keep his client from winning the bid. To make things worse, the agent bought the property under his wife’s name, presumably to hide his indiscretion.
Court documents show that the seller’s agent didn’t know the buyer’s agent’s wife was related to the buyer’s agent, or he wouldn’t have participated in the deal. Besides this lapse of honesty, there were two other areas it seems the buyer’s agent went beyond ethical judgement as well as Washington law by attempting to beat the system: 1) He seemingly ignored Washington state real estate law requiring a buyer’s agent to “be loyal to the buyer by taking no action that is adverse or detrimental to the buyer’s interest in a transaction (and) to timely disclose to the buyer any conflicts of interest.” 2) The law also rules against revealing confidential information after the agent-client relations ceases or has been finalized.
Although the settlement itself is confidential, it is obvious the agent was a bit underhanded in his dealings with his buyer client as well as the seller. Hopefully he had a good E&O policy in place to help him with the legal costs, but it is likely his name has been dragged through the mud in the real estate community.
What do you think—should agents be made to wait until a property has been listed for a while before they get a chance to purchase it, allowing less knowledgeable buyers some time to work out the kinks in their offer? Is it punishing those in the real estate profession to do so?
Sometimes the past is one of the best learning tools around! Use the following Real-Life Errors & Omissions Claim Situation involving REALTOR® acting outside of your expertise to avoid a similar legal showdown happening to you in your everyday real estate career. And be sure to have a good Real Estate E&O Insurance policy in place to protect you in case you find yourself in the middle of a court battle over performing a function that is outside of your realm as a real estate professional.
A Real Estate agent listed an older residential property that needed a roof replacement because water was penetrating the attic and running down the walls. As part of the marketing strategy the sellers agreed with the agent that the best way to sell the home for a better price would be to have a new roof installed. In addition to fixing the water intrusion problem, it was believed that the enhanced curb appeal of the property would likely garner more interest.
Problem:
The contractor that was hired to do the work was not fully paid by the sellers when the work was completed.
Mistake:
After the marketing strategy was agreed to, the agent decided to select and hire the roofing contractor on behalf of her clients so that they could focus on prepping and painting the water stains on the interior walls of the home. The sellers provided a check to the agent for the down payment required by the roofer, but it was the agent who signed
the contract order.
Result: When the project was close to completion, a potential buyer tendered an offer on the property that the sellers quickly accepted. However, when the contractor wasn’t paid by the sellers for the balance due, he filed a mechanic’s lien against the sellers and the real estate agent for non-payment. The buyer then sued the sellers for specific performance and
demanded that either they or the agent pay the contractor to lift the lien. Following a two-month delay in the closing, the matter was resolved after the sellers and agent agreed to contribute equal shares to pay the contractor.
Prevention:
An agent should never select and hire any vendor to do work on sellers’ property—and should certainly never sign a work order on their behalf. By doing so, an agent becomes contractually liable to the vendor and may, as in this case, become the object of litigation when a buyer of the property attempts to enforce a Purchase Agreement. It’s also important to remember that most, if not all, real estate errors & omissions policies don’t provide coverage for claims based on or arising out of liability of others assumed under any contract or agreement. Making the simple decision to leave contractor selection and engagement to a homeowner will increase your chances of avoiding litigation from both the contractor and any potential buyer of property.
Do you have a similar story involving acting outside of your expertise to share with us? Send us your learning experience or just let us know what you think about this one! Just leave a reply below!
If you have any questions about Pearl’s Errors & Omissions Insurance for real estate professionals, give us a call at 800.447.4982—whether you’re looking for a new E&O policy or have questions about your current one. We’d love to hear from you!
Pearl Insurance Risk Management Expert and Corporate Training Manager Paul Espinosa recently spoke at the Greensboro Regional REALTORS® Association Luncheon on March 1, 2011. In the following video, he offers his top five problem areas for real estate agents:
Sometimes the past is one of the best learning tools around! Use the following Real-Life Errors & Omissions Claim Situation involving REALTOR® negligence to avoid a similar legal showdown happening to you in your everyday real estate career. And be sure to have a good Real Estate E&O Insurance policy in place to protect you in case you find yourself in the middle of a court battle over not disclosing property conditions.
A Real Estate agent listed a residential property on behalf of a married couple who were supposedly going to relocate to another part of the country. Approximately two months later, another couple submitted an offer through their agent that was accepted and formalized in a Purchase & Sale Agreement.
Problem:
The sellers were in the process of going through a divorce, with the wife having moved out of the property and unaware that her husband was trying to sell it.
Mistake:
The agent allowed the husband to sign the Listing Agreement and the Purchase & Sale Agreement on behalf of his wife, when both of them were the legal owners.
Result:
Following the execution of the Purchase & Sale Agreement, the husband informed his wife that he had sold the house and asked her to attend the closing to sign the necessary documents. The wife refused to do so and notified the real estate agents that the deal was not going to go forward. After the buyers were notified, they sued the sellers for specific performance under the contract. The wife seller then third-partied the listing agent into the litigation alleging that she acted negligently in accepting the forged signatures. The case was ultimately settled when the husband seller and the listing agent’s errors & omissions insurance carrier paid a monetary sum to the buyers to walk away from what was otherwise an invalid contract.
Prevention:
Many real estate errors & omissions claims can be avoided by simply exercising ordinary care to your clients. This entails knowing who your clients are and properly communicating to each one of them anything—from the comparative market values to what they should expect during the listing period and after the property goes under contract.
Obviously, getting the proper signatures or initials on all documents will help protect you and your clients, while assuring that the transaction will proceed in a straightforward and legally-binding fashion. Good communication skills and the implementation of other risk reduction methods into your daily routine will help avoid the need to pay costly attorney fees and settlements.
Do you have a similar story involving negligence to share with us? Send us your learning experience or just let us know what you think about this one! Just leave a reply below!
If you have any questions about Pearl’s Errors & Omissions Insurance for real estate professionals, give us a call at 800.447.4982—whether you’re looking for a new E&O policy or have questions about your current one. We’d love to hear from you!
Considering venturing into the lucrative—if you can handle the extra workload—life of short sales? Roger Higle, course writer for Keller Williams University, Keller Williams Realty International in Austin, Texas, asks four top distressed property agents how they became successful at selling short sales and REOs in A Peek into the World of Short Sales and REOs.
According to Higle’s experts, seller qualification is very important in short sales. A seller must be very forthcoming with his financial situation, have the work ethic to produce the many documents required by banks to make a short sale successful, and trust his agent’s advice and expertise to make the short sale happen. Short sale lead generation is much like traditional lead generation, with one exception: asking the seller a very direct and sometimes unsettling question, “Are you behind in your mortgage payments?”
Lending institutions are now expecting more from agents than ever before. It’s the agent doing a lot of the work that a bank previously performed, resulting in additional overhead for the selling agent. Agents are also taking on additional risk. Since bank-owned properties are typically sold “as is,” agents need to really consider the risks of unforeseen defects and other problems with the properties—and to have all lender contracts reviewed and to know what their E&O insurance will cover.
Sometimes the past is one of the best learning tools around! Use the following Real-Life Errors & Omissions Claim Situation involving a Conflict of Interest to avoid a similar legal showdown happening to you in your everyday real estate career. And be sure to have a good Real Estate E&O Insurance policy in place to protect you in case you find yourself in the middle of a court battle over property you may purchase.
After completing a comparative market analysis, a Real Estate agent entered into a listing agreement with an owner of residential property. Shortly after signing the agreement, the agent expressed interest in purchasing the property himself and presented the seller with a purchase offer. The agent and seller agreed on a price and proceeded to close escrow.
Problem
The agent never placed the home into the Multiple Listing Service (MLS) and the price he paid for the property was significantly below its true market value. To make matters worse, the agent sold the property a short time later for approximately $30,000 more than what he paid.
Mistake
By neglecting to place the property into the MLS, the agent did not give the seller an opportunity to elicit the best possible sale price for the property—ultimately failing to put the best interest of his client first.
Result
The seller sued the agent and his broker, alleging they had taken advantage of her, and requested she be awarded compensatory and punitive damages. When the agent and broker turned the claim into their real estate errors & omissions insurance company, they were denied coverage because their policy did not offer protection for any individual or entity that had a financial interest in the purchase of property. In the end, the agent settled with the seller for $30,000 and incurred approximately $11,000 in legal expenses.
Prevention
The agent could have avoided professional and personal claims against him and his broker by entering the property into the MLS or by not purchasing it altogether. However, if he still decided to purchase the property, providing the seller with full disclosure of the potential conflict of interest prior to closing could have also prevented the claim from being made.
Most, if not all, real estate errors & omissions insurance policies do not cover situations where an individual or entity of a brokerage has a financial interest in the purchase of property. So before you enter into any unique transactions, familiarize yourself with the terms and conditions of your errors & omissions insurance policy, seek clarification on unclear terms and conditions, and consult with your insurance agent or carrier to ensure your transactions will be covered.
Do you have a similar story involving a Conflict of Interest or purchasing property to share with us? Send us your learning experience or just let us know what you think about this one! Just leave a reply below!
If you have any questions about Pearl’s Errors & Omissions Insurance for real estate professionals, give us a call at 800.447.4982—whether you’re looking for a new E&O policy or have questions about your current one. We’d love to hear from you!
You can also visitwww.pearlinsurance.com/eo to find out more about our quality Errors & Omissions program, including policy features, risk management tools, and much more.
Sometimes the past is one of the best learning tools around! Use the following Real-Life Errors & Omissions Claim Situation involving breach of Purchase Agreement to avoid a similar legal showdown happening to you in your everyday real estate career. And be sure to have a good Real Estate E&O Insurance policy in place to protect you in case you find yourself in the middle of a court battle over a simple matter of lack of communication.
A homeowner placed a house on the market through an agent affiliated with a local broker. At the time of the listing, the house was occupied by the seller’s grown children. A buyer, represented by an agent with the same broker, made an offer on the house, which the seller accepted. The buyer made an earnest money deposit of $2,500 held by the seller’s agent. The Purchase Agreement stated that the seller was not required to make any repair under $300.
Problem
The transaction began to break down over the home inspection process. The buyer wanted repairs on a number of items he claimed were damaged by the seller’s children. The seller had relied on the repair clause in the Purchase Agreement that relieves him of responsibility for repairs under $300. Nevertheless, the seller offered to complete some of the repairs under $300. This led the buyer to request even more, resulting in the exchange of 17 conversations over the repairs. As a result, the buyer refused to attend the closing.
Mistake
Both agents took a passive approach as the dispute escalated. The listing agent failed to adequately inform the seller of his rights and obligations under the Purchase Agreement. The buyer’s agent made no effort to rein in the expectations and demands of his client until it was too late.
Result
The buyer’s failure to appear at the closing caused the seller to take legal action, suing him for breaching the terms of the Purchase Agreement and refusing to close on the home. The seller also sued his agent for not adequately representing him, failing to enforce the terms of the Purchase Agreement, failing to inform the buyer of his limited liability for repairs under the Agreement, and for allowing negotiations for repairs to continue. The buyer demanded compensatory damages and the earnest money being held by his agent. Ultimately, the earnest money was turned over to the seller and an additional modest sum was paid by the buyer and broker to settle the case.
Prevention
Both agents should have been more involved throughout the transaction and the dispute over repairs. Being aware of discrepancies allows you to stay on top of situations, which could potentially spiral out of control. Yielding responsibility for resolution of disputes leaves an open invitation for problems to arise. Remember your representation responsibilities and keep your client informed of their rights and obligations throughout the selling/buying process. Temper expectations that don’t conform with agreements or common sense. Your prompt and intelligent response to issues like this could prevent considerable loss.
Do you have a similar story involving a breach in a Purchase Agreement to share with us? Send us your learning experience or just let us know what you think about this one! Just leave a reply below!
If you have any questions about Pearl’s Errors & Omissions Insurance for real estate professionals, give us a call at 800.447.4982—whether you’re looking for a new E&O policy or have questions about your current one. We’d love to hear from you!
You can also visitwww.pearlinsurance.com/eo to find out more about our quality Errors & Omissions program, including policy features, risk management tools, and much more.
Sometimes the past is one of the best learning tools around! Use the following Real-Life Errors & Omissions Claim Situation involving transfer of responsibility and lack of documentation to avoid a similar legal showdown happening to you in your everyday real estate career. And be sure to have a good Real Estate E&O Insurance policy in place to protect you in case you find yourself in the middle of a court battle over giving incorrect property information.
A Real Estate agent listed a high-end residential property for sale. The property was constructed prior to 1979, and because of its age, it was presumed to contain lead-based paint. The property eventually went under contract with the seller, who was an attorney, advising the agent that he would handle the negotiations directly with the buyers and would take care of the lead paint disclosure responsibilities.
Problem
The seller met with the buyers, who were also represented by the agent, and entered into the Purchase Agreement without the agent knowing its details until after execution. It was then brought to his attention that during the course of finalizing the Purchase Agreement, the seller never provided the buyers with the legally required lead paint disclosure.
Mistake
Unfortunately, the agent relied on the seller of the property to negotiate the terms of the contract and to produce the lead paint disclosure instead of handling the details himself. After the buyers signed the Purchase Agreement, they realized that they would have to incur thousands of dollars for lead abatement.
Result
The buyers, who were expecting their first child and wanted the home free of lead-based paint, attempted to terminate the contract, but ultimately purchased the property at a significantly reduced price. The seller, being a lawyer, knew that it was truly the agent’s responsibility to assure proper disclosure and then filed suit against him and the broker alleging that they violated both disclosure requirements and the state consumer protection statute. The state’s consumer protection statute called for an award of treble damages in the event the jury determined a violation existed.
The matter was resolved following a failed summary judgment motion (which would have dismissed the broker and agent from the litigation). The seller’s attorney argued that the agent misunderstood the instructions by the seller and that there was no evidentiary documentation from the agent on a transfer of responsibility.
Prevention The agent would have avoided litigation if he had not allowed his client to assume his responsibilities during the course
of the transaction.
Do you have a similar story involving transfer of responsibility and documentation to share with us? Send us your learning experience or just let us know what you think about this one! Just leave a reply below!
If you have any questions about Pearl’s Errors & Omissions Insurance for real estate professionals, give us a call at 800.447.4982—whether you’re looking for a new E&O policy or have questions about your current one. We’d love to hear from you!
You can also visitwww.pearlinsurance.com/eo to find out more about our quality Errors & Omissions program, including policy features, risk management tools, and much more.
Tip 8 of 12 Risk Reduction Techniques for your daily real estate practice
Controlling your Errors & Omissions should be the mission of all real estate professionals. That’s why we’ve compiled a list of 12 risk reduction techniques you can use to minimize your legal liability and maximize your earning potential.
Tip 8: Review the Code of Ethics regularly.
As a REALTOR®, you have agreed to abide by a strict Code of Ethics to help maintain the highest standard of integrity among real estate professionals. To find the most current Code of Ethics and Standards of Practice, visit the National Association of REALTORS website at www.realtor.org.
Stay tuned for more—we have 4 more risk reduction tips to help you in your daily real estate practice! And check out our other blog posts; we have information on risk management training for your agents, using disclosure forms, what to look for in buying an E&O policy, real estate trends, and more. If you have any comments regarding the Code of Ethics, please share them below. We’d love to hear from you!
Tip 4 of 12 Risk Reduction Techniques for your daily real estate practice
Controlling your Errors & Omissions should be the mission of all real estate professionals. That’s why we’ve compiled a list of 12 risk reduction techniques you can use to minimize your legal liability and maximize your earning potential.
TIP 4: Disclose all conflicts of interest in writing.
Claims filed alleging failure to disclose dual agency typically have a high success rate for plaintiffs and result in sizable settlements. To avoid this type of situation, just remember the Four Ds! Decide whom you will represent. Disclose this to all parties. Document your decision in writing. And Do as you say.
Stay tuned for more risk reduction tips—we have 8 more to post! While you’re at it, check out our other blog posts; we have information on risk management training for your agents, using disclosure forms, what to look for in buying an E&O policy, and more. And send us your real estate horror stories involving conflicts of interest—we want to hear from you!
