Sometimes the past is one of the best learning tools around! Use the following Real-Life Errors & Omissions Claim Situation involving misrepresentation 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 an optimistic promise.

A real estate agent marketed a commercial piece of property that included street level retail and several residential units on the upper two floors. The owner of the property operated a failing video rental business and was eager to sell the entire building before foreclosure action was undertaken by the mortgage holder. On the other hand, the residential units were producing a steady stream of revenue since they were occupied by longtime occupants who were making timely rental payments.

Problem
Optimistic about the location of the property, the real estate agent erroneously believed that a retail operation could be successful and that the residential lease amounts could be increased since the tenants were comfortable living there and were unlikely willing to move.

Mistake
While working with a prospective buyer, he guaranteed that her greeting card business would generate a positive cash flow and that the tenants would be able to absorb an increase in their monthly rent.

Result
Given these assurances, the buyer decided to acquire the property and notified the tenants of their respective rent increases shortly after the close of escrow. Within the first few months, four of the six tenants informed her that they were unable to pay the increase and decided to move. The buyer then experienced difficulty in finding new tenants willing to pay what she needed in order to make the residential component successful. Compounding the problem, the greeting card business was not seeing the desired foot traffic and corresponding revenue. Over the ensuing 18 months, the status of the business remained unchanged so the buyer sued the real estate agent alleging that he intentionally misrepresented the property’s profit potential. Damages sought included both lost business profits and lost rental income. The parties ultimately resolved the litigation for $75,000 in lieu of enduring a two-week trial.

Prevention
An agent should never make promises or guarantees about the revenue potential or future value of any property marketed for sale. Acting outside the scope of expertise is a dangerous proposition and should be left to a buyer as part of their due diligence obligation. Always recommend in writing that buyers seek counsel of qualified accounting and financial planning experts to help them make decisions on whether to acquire revenue-producing property. Following this practice will not only result in satisfied buyers, but will help avoid unwanted litigation. It should be noted that most, if not all real estate errors & omissions policies do not provide coverage for claims arising out of promises, warranties, or guarantees made as to the future income/value of property or the performance of a business.

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!

You can also visit our website for E&O insurance just for real estate professionals, www.pearlinsurance.com/eo, to find out more about our quality Errors & Omissions program, including policy features, risk management tools, and much more.

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.

For the full article, visit A Peek into the World of Short Sales and REOs.

Real Estate professionals should be extremely careful when you are showing a property, especially if you have never worked with the potential buyer before. Also be certain you are aware and use diligent safety measures when you hold an Open House. In honor of REALTOR Safety Month, please watch this video from the Washington Association of REALTORS (WAR) and the Real Estate Safety Council to learn all the tips you can for the next time you are working showing properties or for any future possible danger that may arise. We care about you!

Are you being too passive in your lead generation techniques? Are you putting your information out there and passively hoping for the buyers to come to you? Don’t fall into these “real estate sinkholes” by putting all your eggs in one marketing basket. You need to be proactive in your marketing and lead generation campaigns.

Avoid getting into a real estate rut by following these marketing tips from Bernice Ross, CEO of RealEstateCoach.com, available at Inman News.