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Homeowners’ and plaintiff’s lawyers see YOU as an easy target

By Dan Rafter

Today’s tight market compels would-be buyers to bid above the asking price to gain a foothold on the homeownership ladder. This market reality has created a new market force–unleashed when buyers find their new home harbors a defect: buyer’s retribution. Buyers who expect a “perfect” and “defect-free” home often turn their anger on the easiest target. … Ahem, that would be you, the REALTOR®.

Today, brokers and agents face ever greater odds that they will become the targets of lawsuits from angry homebuyers or sellers. And though agents are not at fault in an overwhelming majority of such lawsuits, the cost of battling these legal actions and, even more significantly, paying ever higher fees for errors and omissions (E&O) insurance coverage is steadily chipping away at the profits of state real estate firms. Brokers, attorneys and other real estate pros agree that agents must carefully explain to consumers exactly what a real estate professional’s duties include and, just as important, what they don’t. This won’t completely erase the threat of lawsuits, but it will make a significant dent in the number of unsubstantiated claims made against brokerages. That can only make the providers of E&O insurance happy, and result in lower rates.

The Problem

The problem is a big one. The inordinately high number of lawsuits filed against California brokerages has caused E&O providers to drastically increase their rates. Many other providers have simply left the state, frustrated with the high cost of providing coverage here.

In 2004, the California Association of REALTORS®’ Errors & Omissions Task Force found that per-year, per-agent premium prices typically range from $1,500 to $2,000 in the southern portion of the state and generally start at $2,000 in Northern California. Deductibles usually stand at $15,000, but may rise to as much as $50,000 to $100,000 for larger firms.

These numbers are even more disconcerting because agents are rarely to blame when a company becomes the target of a lawsuit. The task force found that 85 percent of the time agents did nothing wrong even though they were named in a lawsuit.

Bill Jansen is more than familiar with this problem. He is president of the Corte Madera-based Broker Risk Management, a company that provides risk-management services to real estate brokerages across California. Before starting the company three years ago, he spent 23 years as a real estate broker.

The fast-paced residential market in California, the same market that has pushed housing costs ever higher, is the biggest culprit in boosting the number of lawsuits filed against real estate firms, Jansen says.

Here’s how it works: Buyers find a property they like. Problem is, other buyers like the same property, giving sellers all the leverage. When buyers find something wrong with a home, they’ll ask the sellers to fix the problems. Sellers, seeing other offers lined up for their properties, refuse. Buyers eventually give in so they won’t lose the home.

But they’re angry. They’re especially angry when the problems in the home—a home for which they’ve paid top dollar—become worse after closing. They’re angry enough to file a lawsuit against the easiest target, the seller’s agents.

“There are things wrong with any property,” Jansen states. “Even new homes have problems. The buyers, then, go with what I call the ‘third negotiation.’ They didn’t have any luck with the first two negotiations: The sellers wouldn’t lower the homes’ costs. They wouldn’t offer credits. So the buyers turn to legal action. Buyers are willing to sue with increasing frequency. When that occurs, there is one question that needs to be answered: Did the agent meet the standard of care that would be reasonably expected?”

That standard is key. Jansen has often been called as an expert witness in legal cases involving real estate deals. When he’s called to testify, he bases his opinion solely on the standard-of-care issue.

Did the agent in his performance of his duties exercise due diligence, skill and care under the circumstances?, Jansen asks. What would a reasonably competent and diligent agent in that marketplace for that type of property do under the circumstances?

Jansen points to a classic example to illustrate just how quick buyers are to sue. About two years ago, the buyers of a home in the state’s Bay area paid $20,000 more than the asking price for a home. The buyers asked the sellers for a $25,000 credit after a home inspection turned up some problems. The sellers declined; they had a backup offer they could turn to. The buyers purchased the home and, after the close of escrow, filed a lawsuit against the sellers’ brokerage for $25,000.

“The merits of what anybody disclosed or did during the selling process were not nearly as important in this case as were the buyers’ perception that they were entitled to $25,000 one way or another,” Jansen says. “That case probably settled for some nuisance value. That’s typically what happens. Brokers know they can throw some money at these cases up front to make them go away.”

That, of course, brings up another problem. Brokers and providers of E&O insurance often decide to settle these cases. Those suing real estate firms realize this, and understand that the odds are good that they’ll receive some financial benefit, whether the agent was at fault or not.

How to Protect Yourself

In 27 years, George Mantor's real estate and mortgage brokerage, Carlsbad-based The Associates Financial Group, has been the target of only one lawsuit. A couple discovered during their divorce proceedings that a home they had purchased through Mantor's brokerage had been listed 18 months earlier for a lower price.

“Think about the ridiculousness of that,” says Mantor, president and chief executive officer of his firm and host of “Keepin’ It Real,” a radio talk show on AM 1000 KCEO that focuses on real estate matters. “Our expert appraiser said it was the market value at the time. The couple had no case. But, of course, you are always a potential target. You are perceived to have deep pockets. It’s common knowledge that errors and omissions insurance exists. It’s also common knowledge that big firms have a threshold. They will pay certain fees to settle these cases. They put up $5,000 and it goes away.”

In Mantor’s case, the insurance company settled for $500. A low amount, but one that Mantor wishes never had to be paid.

How does Mantor keep the threat of lawsuits away? He does what all brokers should do: He trains his agents to provide their customers with in-depth consultation about the duties and obligations agents have. This way, sellers and buyers are more aware of when an agent did not perform her duties and also understand what problems cannot be blamed on real estate agents or their firms.

Mantor also provides his agents with training on the fundamentals of the real estate transaction, to make sure agents can explain this process to their clients. Once clients understand exactly how the buying and selling process is supposed to work, they are less stressful, and more likely to be satisfied with their real estate experience.

This approach is a simple one, and can save brokerages frustration, time and money. Unfortunately, Mantor says, it’s one that many brokerages don’t take.

“Most companies are putting their training focus on better marketing and selling rather than on the basics of the transaction,” he says. “Big companies argue that they don’t have the time to turn their agents into legal experts. They barely have enough time to train them how to sell, they say.”

Another way to protect against lawsuits? Agents should make it clear to clients that there is no such thing as a perfect home.

“Buyers sometimes think they are entitled to a perfect house,” Jansen says. “It might be a 50-year-old house, a 100-year-old house. If the buyers paid way over asking price, their expectation is that everything should work. If it doesn’t, they are willing to go after the seller and one or both of the brokers involved, the home inspector, anyone. Off we go to the races on a claim that is often misplaced.”

Agents should also encourage their buyers to get a home inspection. Some buyers, fearing that they will lose a home, will forego the inspection. When they find problems later, they’re ready to sue.

Dan Rafter is an Indiana-based freelance real estate writer.