Lawsuits Against Brokers Rise as Real Estate Prices Sag
Real estate agents are increasingly worried about being sued by their clients these days. Agents and brokers find they are spending more time than ever dealing with lawsuits--or trying to stay out of them. And it’s estimated by many brokers that the cost of insuring real estate brokers against lawsuits now adds up to $75 to the expenses of real estate companies on every home sale.
In California one broker was successfully sued by a buyer who wasn’t told that he wouldn’t be able to move his in-laws into a recently purchased home; there were multifamily zoning restrictions the broker hadn’t told the buyer about. Another broker was recently sued for not telling a buyer there had once been a suicide at a residence for sale. In another case, the parents of a youngster injured by a car pulling out of a neighboring driveway sued the broker who had sold them their home six months before. Reason: The broker should have told them the hedge near the neighbor’s driveway posed a hazard.
These and many other suits have brokers and agents in the San Fernando Valley and Ventura County a bit scared every time they talk to a buyer or a seller. “In a declining real estate market, you have more litigation,” said Michele Morley, chief financial officer and general counsel for James R. Gary & Co. Ltd. in Woodland Hills. “As home values have dropped, people are more unhappy about their home purchases.”
Lawsuits, Morley said, are “a constant, nagging concern--today might be the day you get hit with substantial litigation.” Even doing everything right is no guarantee of being safe from a suit, Morley complained. “I hear from brokers that they are facing more and more frivolous litigation,” she said. “There is still the cost of litigation, and you sometimes have to throw money at it to avoid a fight.”
When buyers or sellers are unhappy about a home sale, they frequently will sue anyone and everyone they can think of--including the real estate broker, said Steve Sokol, associate general counsel for the California Assn. of Realtors in Los Angeles. The cost of litigation is so high, he added, that many brokers agree to a settlement just to avoid the prospect of even more expensive litigation. “If the broker has insurance, that’s yet another reason to sue,” he said.
Most real estate brokers carry so-called errors and omissions insurance for their companies and agents. The cost varies widely, depending on the number of transactions a company does and whether any suits against the brokerage have been successful in the past. Policies can also carry deductibles of anywhere between $5,000 and $25,000 per claim. Some brokers have not been able to get insurance coverage because of past problems with lawsuits. These brokers either purchase separate policies for each transaction they handle or go without insurance. And to be without insurance has been particularly risky in this climate of decreasing home prices.
The sinking of home prices in the Valley back to 1987 levels has also led to many more lawsuits against real estate brokers, said Larry Ackard, a vice president at Jon Douglas Co. in West Los Angeles.
“When homes are selling well and fast, people don’t think about suing so much,” he said. “In leaner times, maybe they seem to find more fault with the service they’re getting.”
In the last five years, Ackard said, litigation and settlement expenses for Jon Douglas have increased tremendously. “In 1990 it was manageable; now it’s become unmanageable,” he said.
About 65% of the claims against Jon Douglas are related to allegations that an agent failed to disclose a property’s problems to the buyer, Ackard said. Another 21% of the claims touch on non-performance by a buyer or a seller. And 14% of them, Ackard said, relate to complaints about inspection, title or escrow services. About 80% of complaints against the company are ultimately resolved by informal mediation, Ackard said. The other 20% go to formal mediation, small claims court, binding arbitration or drawn-out litigation.
Transactions that run the highest risk of resulting in a claim against a broker are those involving hillside properties, agents doing business out of their usual geographic area of expertise and deals involving buyers who are also lawyers.
“Attorneys are one of our highest risks,” Ackard said. “They’re trained to be litigious and they often are.”
F. Milton Condon, a partner at Condon, Condon & Festa in Santa Monica, reports that his law firm gets about 20 calls a week from agents or brokers concerned about being sued.
“In good times, the properties were turning over and people were making money,” he recalled, “so fewer people sued.” Now there are more people looking for deep pockets to make up for their losses on real estate deals, Condon said. “With homes worth less, people tend to look around for ways to recoup their losses.”
Condon said he advises brokers to disclose, disclose and disclose. The more they tell buyers about the problems associated with a property the smaller the chance they’ll be sued. Brokers have the obligation to disclose any problem that a reasonable buyer would want to know about. Brokers have to disclose what they know, and they have a duty to make a reasonable inspection of the property on their own to discover defects that the buyer would be interested in learning about.
Tom Motter, regional director of Century 21 of the Pacific in Woodland Hills, doesn’t think that more suits are being filed, but he does perceive more awareness by brokers about their potential liabilities. Motter also thinks that many of the suits that have been filed against his company and others have actually improved the profession.
“It absolutely has made brokers and agents better at what they do,” he said.
It has also added to the amount of paperwork in the typical real estate transaction. The standard purchase contract, which was about one page long 15 years ago, has now grown to eight pages, with up to 20 addenda. It’s part of an effort to respond to an increasingly litigious society.
Century 21 of the Pacific has to deal with an average of about six to 10 lawsuits a year by disgruntled buyers or sellers, Motter said. The company’s franchisees deal with most of the other suits on their own.
The focus is on preventing the suits before they happen, Motter said.
“A lot of lawsuits are instigated because the parties won’t sit down and talk about it,” Motter said. “A small problem can get into a big problem when people think they have no other way to go than to file a lawsuit.” Most problems can be solved if the parties talk about them openly, Motter said.
