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The No-Lawsuit Guide to Real Estate Transactions: 5 Ways You Could End Up in Court

By Melissa Dittmann Tracey

QUICK SKIM

One in five real estate practitioners will be involved in a lawsuit during their career, says real estate broker Barbara Nichols in The No-Lawsuit Guide to Real Estate Transactions (McGraw-Hill, 2007). The effects can be just as damaging to your reputation as it is to your pocketbook. So how do you make sure you don’t end up in court? There are some obvious lines you know to never cross, but there are far more gray areas that can land you in trouble for nondisclosure, steering, or even false advertising. Nichols gives advice on navigating these potentially risky situations. Buy the Book

FROM THE BOOK: 5 WAYS YOU COULD END UP IN COURT

Real estate lawsuits often stem from what you say — or don’t say — to your client. Bottom line: You’re obligated to report any property information, both onsite and offsite, that could impact the property’s price or a buyer’s decision to buy. Nichols outlines these common legal mishaps for practitioners:

1. Not disclosing property stigmas. Prospective buyers need to be told if a anything in a home’s past could potentially scare off future buyers or hurt the property’s resale value. What counts as a stigma? It could be a murder that once occurred in the home, a rumored haunting, or a history of foundation problems (even if the seller spent thousands of dollars fixing the foundation, future buyers could be hesitant to make an offer). If you don’t disclose any potential stigmas, you could be held liable when the clients find out. So do your research and be sure you know the home’s history.

2. Using risky words. How closely do you proofread your advertising copy? No matter how well-intentioned you are, you could be sued for discrimination or unlawful steering if you use terms such as “perfect for young married couple,” or “no children under age 10.” You’re obligated to provide fair access to properties to everyone, unless the development has been classified as a restricted age community or a “senior citizen residence.” In addition, you shouldn’t talk about the racial or ethnic diversity of a neighborhood even if your clients ask you. However, you can provide general information that would be found in a community profile, such as the average price ranges of properties, education and income levels, and religious facilities.

3. Overlooking a property defect. While you’re not expected to have the expertise of a property inspector, you are required to disclose “any known or readily observable property defects to buyers and sellers,” Nichols writes. She recommends putting all details from your visual property inspection in writing, and then deliver your notes to all parties involved in the transaction. To do a visual inspection, evaluate the property starting with the outside of the building (Is the brick cracked on an exterior chimney?) and then work to the inside (Are there any signs of mold or mildew on walls or floors? Are there cracks in the walls?). Avoid using sweeping statements such as “I don’t see any defects” or “this property is in excellent condition,” since a defect-free property doesn’t exist.

4. Failing to meet fiduciary duties. Your duty includes being loyal by acting in your client’s best interest, not your own self-interest, and obeying all lawful instructions that your client gives you. You’re also responsible for disclosing all relevant information during the transaction, keeping your client’s personal information confidential, exercising reasonable care and diligence, and accounting for all money or property belonging to the client that is given to you. Plus, if applicable, be sure to reveal dual agency — when you’re representing both the buyer and seller — which can create extra levels of challenges that often result in lawsuits.

5. Passing along bogus information. Ignorance is no defense in court. When it comes to misrepresentation, it’s easy to get in trouble by simply not knowing the facts. You could be held liable for not verifying information you pass onto your client, giving incorrect professional advice that you should have known was wrong, or even simply repeating bad information that your seller tells you. So be sure to triple-check that all property details are correct, and have the seller review it, too.

SNEAK PEEK

“Participants in any capacity in today’s real estate market know how complex the typical transaction has become. It seems that every day another document is added to the contract or the disclosures. Average buyers need treatment for writer’s cramp after signing volumes of transaction documents. It is usually at this point that the buyers start to feel panic. … The sellers may be experiencing another kind of panic. Have we sold for enough money? Should we have told the buyers about something else? Did we forget to mention something? … There has never been a time when more was demanded of real estate agents to meet the requirements of their profession and the needs of their clients and customers.”

ABOUT THE AUTHOR

Barbara Nichols is a real estate broker and owner of Nichols Real Estate and General Contracting. She has served as a witness on numerous real estate-related lawsuits involving agents and their brokerages. As a supplement to her book, she has created “How to Stay Out of Court,”, training and workshop materials about risk management and liability issues for real estate professionals.

Check back on Monday, Aug. 6, to read Nichols’ responses to your already submitted questions.

Comments
  1. Kim Giannecchini

    Regarding Item 3, “Overlooking a Property Defect”, I’m a little confused. Sellers are required by law to provide a property disclosure listing all known defects of the property. Buyers are advised to get a professional inspection as a contingency of the sale. Why would the agent, who hasn’t lived on the property and is not a trained inspector, also do an inspection and disclosure? It seems to me this would make the agent more liable, not less.

    I am new to the sales end of this business, but I have not heard of this recommendation before, nor has any agent ever provided me with such a report during any of my personal home sales and purchases (although they have helped me determine how best to fill out the seller’s disclosure form). Is this something new, or did I just totally miss this requirement?

  2. When a buyer pays for his or her appraisal and the property purchase price is more than the appraisal value, if the seller refuses to come down to the appraised value, thus not selling the home at that price to the buyer, is the seller then required to reimburse the buyer for the cost of the appraisal?

  3. It seems to me, that if I am disclosing “rumored hauntings” that I could be harming my seller’s opportunity to sell a house, and opening myself up for a lawsuit from the seller. I completely agree that all facts relevant to a homes value need to be disclosed. Unless something has changed, at one point murders, suicides & accidental deaths, specifically did not legally have to be disclosed as they don’t have an impact on the homes value. I personally think they should be disclosed, but I can understand why that shouldn’t be mandatory.

    I do wonder why a “history of foundation problems” was included in this section of stigmas, as foundation problems would need to be disclosed. We are not in the business of hiding anything, but I’d probably shy away from any paranormal revelations unless the homeowner feels strongly about it.

  4. The author seems to be well credentialed and experienced and I suspect that her book is a worthwhile read. As an attorney, broker, and real estate writer myself, I’d like to add that it is very important that you look into your STATE SPECIFIC laws and rules with respect to disclosure practices before making any decisions as to what is, or is not appropriate to disclose.

    A good resource, if available, are the many state and local “legal help-desks” sponsored by numerous boards and associations of Realtors nationally. Answers to your real estate related legal questions may be a quick, toll-free call away.

    That said, do read the book — you can never go wrong with self-education.

  5. Barbara Nichols

    Answer to question #1

    Not all states require agents to conduct a visual inspection of the property. Agents should be aware of local defect issues and disclose these with recommendations to the buyer to inspect. For example, if septic systems and cracked slab foundations are a serious local issue, buyers should be directed to have a septic system inspection and consult with a structural engineer. Buyers may not know of issues such as the property is in the flight path of the airport, or that the freeway they are near is scheduled to be widened. These are issues agents need to be aware of and disclose in writing. I would not recommend filling out the seller’s disclosure form. You should answer the seller’s questions on filling out the form, but it should be filled out by the seller.

  6. Barbara Nichols

    Answer to question #2

    The seller would not be required to reimburse the buyer for the cost of an appraisal in the situation you describe unless this was written into the contract. In our present market, that might not be a bad idea.

  7. Barbara Nichols

    Answer to question #3

    You are unlikely to be sued concerning a haunted house as haunted houses are difficult to prove in court. I would not disclose that a property is supposedly haunted unless the whole neighborhood believes so and the seller too. The unhappy buyer will hear this from neighbors very soon after they take possession. In some states all deaths from any cause must be disclosed if they took place on the property within the last 3 years. Check with your state on this matter. The seller should disclose a foundation problem with their property. What if the development they are in has a history of foundation problems and the seller does not know if he has a problem? The agent should advise the buyer to inspect for a foundation problem to be sure his purchase does not have this problem.

  8. Barbara Nichols

    To: John (the agent/attorney)

    I agree with what you have said and my book does advise agents to consult with their own state requirements and to with an attorney. I frequently utilize the advice of my state association legal hot line. Agents should consult with attorneys whenever they are tempted to write several sentences into an agreement, whether in a counteroffer, or walkthrough inspection. Faulty language written by non-attorney agents is a frequent source of problems.

  9. Great book. I’m glad its dated in 2007 the newer the better. Laws a changing every year.

  10. Craig

    If you are an agent and you do not write that future houses could be built in the area you live in, would that be grounds for a nondisclosure lawsuit? Building more property increases the value of the existing property, if the value of the new development is greater, this would be an advantage right?

  11. Sylvia

    Me and Husband used a Realtor/Broker my questions is it agaist the law if she didn’t give us copies of signed listing agreenment and signed seller and buyers contract. This Realtor did’nt give us any copies. Can You email me back what our rights are. Thank You Sylvia 7/19/11

  12. Interesting article. Amazing 1 in 5 will end up in court! I read what one agent said and she said to always think “what would a judge say if you were in front of her or him”!
    Neighbors always come to open houses and tell all, disclosure is the key word, and what you don’t know they will. It goes back to the golden rule Do onto others as you would have them do onto you. Will everyone do it no but the ones you work with will because we read this great article and we take our jobs seriously! Thanks for sharing

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