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Sold Today, Sued Tomorrow. What Did I Do Wrong?

Question:I have been sailing along in my real estate career for three years without even a hint of trouble. Recently, however, I listed a property which we sold through another broker to some out of town buyers. Now the buyers are suing the sellers, my broker and me, maintaining there were several “material facts” about the property which we did not disclose. In looking back, I now recognize some danger signs in working with the buyers that I probably should have spotted and some things I could have done better regarding the listing. Any general guidance on how to avoid situations like this in the future?

Answer. Some Realtors spend an entire career without even a hint of a law suit. In today's sue happy society, however, I'm afraid we are going to have to accept the possibility of litigation as an unfortunate part of the facts of life in the real estate trenches.

To help you cope, here is some general guidance based upon my own experience, feedback from several of my former real estate licensing students who are now real estate professionals, and the input of several members of my network who are attorneys who specialize in real estate, and whose opinions I respect.

1. Define “Material Fact.” Here is the introductory sentence in a lengthy definition in The Language of Real Estate by author John Reilly. “Any fact that is relevant to a person making a decision.” As you might suspect, in the real world it’s a bit more complicated than that. The introduction in many jurisdictions of formal seller property disclosure forms have taken some of the heat off real estate professionals, but not all. It’s important that in any listing you take that you fully counsel the sellers as to the critical necessity of making full disclosure of all material facts. “When in doubt, disclose” is how my broker advised me when I was getting started. Another practical bit of advice is “if you were the buyer would you want it disclosed?” There are some items that because of state and federal fair housing laws may not be disclosed. Most of those relate to whether or not an occupant of the property has AIDS.

2. Practice "Loss Prevention." This is a fancy term which simply means that in everything from automobile maintenance to legal matters it is easier to prevent a problem than it is to solve one after it surfaces. In real estate there are several areas in which difficulties are likely to arise. For example, buyers typically make up the lion’s share of unhappy campers. And “failure to disclose material facts” is their number one issue. Stay up to date on matters such as these by participating in professional education and through professional reading.

In almost all jurisdictions there are attorneys who specialize in real estate law. It would be very instructive if your broker or your local Realtor group would schedule these experts for educational sessions. I recall vividly the seminars our broker scheduled for us with our local barrister.

3. Construct a "Paper Trail." Oliver Frascona, a Colorado attorney and real estate broker, is the coauthor (along with real estate broker and wife Katherine Reece Frascona) of a book called The Digital Paper Trail In Real Estate Transactions. A key element of the paper trail concept is to put everything important in writing and hang on to it. Written disclaimers are also vital. When disputes arise, it is remarkable how self serving memories become. You can check out the book’s contents and gain access to a wealth of other pertinent information by visiting Franscona’s web site at Oliver is also a frequent presenter at Realtor functions.

4. Establish an Early Warning System. You need to be alert to initial signs of potential problems in two areas - people and property. When working with sellers many agents strongly recommend to the owners that they obtain a thorough home inspection conducted by a professional inspector. The further guidance is to correct any problems and disclose those not .not addressed.

In his book, Attorney Frascona offers some guidance for spotting problem people with his: “Profile of a Plaintiff” (that's the "sue-er" with you being the "sue-ee"): Here are a few: 1. someone who envies the material possessions of others 2. someone who feels the world is not fair to them. 3. someone who tells you about the poor conduct of another real estate professional, lawyer, or lender. 4. Someone who confides excessively in you. 5. Someone who suggests that some action or statement is either correct or incorrect in direct contradiction to what you know to be true. 6. Someone who wants to "get away" with something or wants to "get around" the rules.

I would add this to Oliver’s list. If you are working with a home owner on a potential listing and hear the phrase “what they don’t know won’t hurt them”, I strongly recommend you head for the nearest exit.

5. Get Insured. Most people come in to real estate as a second or third career and some bring "deep pockets," as they say in legal circles. That means they may be the only person involved in a dispute who could pay an adverse judgment. Everyone else could be “judgment proof,” which simply means they don’t have any assets (that can be reached.). No matter how competent, honest, and professional a person might be, those who sell real estate without adequate Errors and Omissions (E & O) insurance are taking a monumental gamble. Ditto for personal liability insurance. Fortunately, more and more states are making E & O insurance mandatory and most supervising brokers have established contacts with companies who provide plans.

6. Stay Calm. Getting sued is certainly no fun, but losing your cool and coming unglued will do nothing but make a bad situation worse. I have seen some otherwise steadfast Rocks of Gibraltar completely crumble and agree to about anything to avoid the ordeal of formal legal action, even Small Claims Court. At even the first hint of trouble, inform your broker since she is likely to be in the pot with you, and secure competent legal counsel. If despite everyone's best efforts, you find yourself in the position of a defendant, remember the advice of Abe Lincoln, himself a pretty good country lawyer. His suggestion for the proper attitude to adopt when facing adversity was to remember that: "this too, shall pass away."

Best Regards, Ken Edwards

Dr. Kenneth W. Edwards, GRI
7990 NW Ridgewood Drive, Corvallis OR 97330
Phone: 541.757.1379 Fax: 541.754.2945

(Article Published by Permission)

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