As trusted advisors for some of the biggest investments a person will make in a lifetime, real estate agents are at a high risk of facing legal action. Especially during some of the busiest-ever markets agents have experienced in their careers amid pandemic-fueled demand, it’s easy for multiple clients and contracts to take a hit during chaotic times.
To avoid making a false step that could cost a hefty price, read on to learn about common mistakes agents make and how to prevent them.
1. Misrepresentation of a property
Generally speaking, clients don’t like to feel as though they’ve been misled — particularly when it involves a large investment. When trying to set themselves apart, it can be all too easy for an agent to push a little too far and maybe exaggerate a property’s high points. But what might seem like harmless promotion might put an agent in hot water later.
“Sometimes an agent may be really hungry for a sale and hasn’t made one in quite a while, so they may be tempted to leave out that piece of information they’re afraid might turn the buyer off or cause them to lose a sale,” Leighton J. Hyde, president of the Law Office of Leighton J. Hyde, said in a video the firm produced about common legal issues real estate agents face. “But that simple nondisclosure could actually cost you your license and the ability to make a living.”
If clients feel they’ve been deceived in any way about a property, they might file a lawsuit against their agent. To avoid this, it’s best to make completely truthful claims about a property and steer clear of any kind of misinterpretation.
2. Not disclosing property defects
Like misrepresentation, full disclosure about a property’s dirty secrets is important for any agent to stay on top of.
No client who uncovers something wrong with their house after closing will be happy about it. Although the issue may not always be something that the real estate agent should reasonably have known, some clients will still be ready to trace blame back to the agent.
Therefore, it’s important to encourage clients to complete a thorough set of inspections on the home before making any final decisions, and to be completely transparent about your own assessment of the property. It will also help if you know a trusted inspector or two with a good track record who you can refer to them.
3. Breach of duty
Because the typical layperson doesn’t have nearly the same breadth of knowledge about conducting a real estate transaction as an agent, clients rely on agents to guide them in the right direction and put their best interests first. Therefore, agents are expected to be completely honest and exercise full disclosure to clients — any failure to do so, either intentionally or not, can put agents at risk of being sued.
The best way to avoid a breach of duty charge is to be truthful and practice excellent documentation to prove you’ve represented your client’s best interest.
4. Breach of contract
A lawsuit filed because of a complaint of breach of contract is often made in tandem with claims of negligence and breach of duty or fraud, and can often be traced back to an agent not fulfilling time frames outlined within the contract.
Reviewing all parts of a contract with a lawyer in advance can help avoid issues down the line. Be sure all terms are clear — that way, there’s less risk of confusion later on.
Being charged with negligence is similar to breach of duty in that it results from agents failing to guide their clients appropriately. More specifically, it’s when an agent should be aware of certain information but fails to take the appropriate action in order to exercise “due care” to the client using that information.
In this case, the client cannot prove that the agent had any intention of doing harm to them (that would be considered fraud). Charges of negligence can be challenging, because, particularly for less experienced agents, you may not be aware of the information you should have known.
One helpful way agents can protect themselves against these kinds of lawsuits is by making sure to get insurance coverage for negligence.
6. Issues with funds
There are many ways to handle earnest money deposits — from electronic funds transfer to direct deposit. However, it’s extremely important for agents to ensure that timelines outlined in a contract for these funds are followed to a T.
To avoid any mishaps, follow up with the title company to be sure that funds are in escrow on time, and keep your own escrow timelines organized. Verifying that buyers have sufficient funds to close will allow everyone — especially the sellers — to breathe easier.
“If you’re working with a buyer on a Friday, they give you a check for your dream house, you put it in your briefcase or your purse, the weekend passes, you’ve totally forgotten about it, and the next thing you know, you’ve violated the law because you haven’t gotten it to your broker or to the escrow agent in a timely manner,” Hyde said.
With wire fraud on the rise this year as most business moved remote, it’s also paramount that clients understand the very real risk of wire fraud and do everything to protect themselves against it.
Be sure to communicate with them in person or through a phone call about how they should expect the process to go, and that they’re communicating appropriately with their lending company.
7. Mishandling data
Along the same vein, agents should make sure to take all necessary precautions when handling client data on their computers. Keeping up to date on antivirus/malware, privacy and server protection should be at the front of agents’ minds in order to prevent bad actors from stealing client data.
Again, getting covered with E&O insurance (errors and omissions insurance) that covers business vulnerabilities and cyber liability — as well as exercising every possible precaution — can help protect agents.
8. Injuring clients
Unfortunately, clients getting injured either en route to a property or at a property showing is a real risk agents face.
The best way agents can protect themselves from facing a lawsuit as a result is by having ample E&O insurance and making sure the property is free of any potential hazards. Remove any tripping hazards on stairs or otherwise, be sure any insecure handrails are tightened, secure loose bricks, and look out for anything else in a precarious position. Fix it before any showings begin.
Though most agents are likely refraining from it now anyway due to the pandemic, it’s probably a good rule of thumb to simply avoid driving clients anywhere — unless it’s absolutely necessary.
9. Giving legal advice
Because real estate and the law are inherently intertwined, navigating the line between real estate adviser and legal adviser can sometimes be a tricky tightrope for real estate agents.
It’s part of an agent’s job to advise clients in their best interest, but it’s important to avoid wading into legal territory since it’s illegal in most states for real estate agents to give any kind of legal advice or represent themselves as practicing law without a license.
“I see this a lot in landlord-tenant matters,” Hyde said. “As a real estate agent, you’re permitted to fill in the blanks on a lease, but you’re not allowed to alter the lease itself. So, a tenant may make an innocent request, you scratch something out on the lease form, and the next thing you know, you’re practicing law without a license.”
Rather than get into a hairy situation later if you get blamed for a bad move, it’s best to have lawyer referrals at the ready to pass off to clients.
10. COVID-19-related issues
Given the current surge in coronavirus cases across the country, the best practice right now is to not actively conduct any showings with buyers and sellers who have or might have COVID-19.
Aside from the moral dilemma of potentially exposing someone who is vulnerable to the virus, showing the home of a client with COVID-19 to potential buyers could cost agents their job — and potentially end up in a lawsuit as well.
One Compass agent who conducted in-person showings of a COVID-19 infected couple’s home was let go from the company in June after not disclosing the sellers’ COVID-19 status. Had things gone the wrong way for any of the home’s prospective buyers, the agent could very well have faced a lawsuit for not disclosing this information.
Bonus: For developer brokers, details, views and taxes
Shaun Pappas, a partner at Starr Associates, said the most common dubious legal situations he sees developer brokers get into involve not being completely familiar with lengthy contracts, promising protected views in an offering and not disclosing details about how property taxes can increase in the near future.
Since offering plans on new developments can be quite hefty, it’s all too easy for a broker to let noteworthy details slip through the cracks. Oftentimes, brokers are expected to have these 400-page documents down pat, which, Pappas said, “the attorneys that addressed them don’t even necessarily know.”
All to say, it can seem impossible for anyone to remember every line in a document that large. Still, brokers should make every effort to do so to cover their own and their clients’ backs.
Whether a property’s views are protected or not are “always disclosed in the offering plan,” Pappas said. But that doesn’t mean a broker necessarily has total control over how views might change in the future, so it’s important to be thoroughly familiar with that portion of a contract. “If that portion of the offering isn’t known specifically by the broker in and out, sometimes they can make a mistake there,” he said.
Likewise, if a broker fails to disclose how property taxes might increase after the first year on a new build, a client might be able to make a case against a broker for negligence.
“In new construction, offerings the first year of taxes is typically a lot lower than the actual taxes will be upon completion of the building,” Pappas said. “The reason why is taxes are assessed on a pre-built building in the beginning, and then on a fully-constructed building after it’s actually built, so that first year, even sometimes second year of a building, the taxes are lower significantly in certain instances. I’ve seen issues where that’s represented to the buyer, and year two comes and the taxes double, and it wasn’t fully discussed why that happens and how that happens.”