Legal battles over real estate transactions increase

When it comes to lawsuits, real estate agents and brokers tangle mostly among themselves. But disgruntled buyers or sellers who believe they’ve been so wronged that they are willing to spend the time and money to take their realty professionals to court bring a fair number of cases.

The vast majority of transactions go off without a hitch. Moreover, the cases that are adjudicated tend to come down in favor of the defendant.

But if the latest edition of Legal Scan tells us anything, it’s that a handful of agents and brokers either don’t know the law or don’t care to follow it.

Legal Scan is a biennial research report by the National Assn. of Realtors of the legal issues facing its 1 million members. Combining surveys of state real estate commissions and other key people in the business with an analysis of case law and recently enacted statutes, the report identifies potential pitfalls that can ensnare anyone.

For example, disputes involving disclosure of a property’s condition now exceed disputes over agency issues, a catchall classification that includes buyer representation and breach of fiduciary duty. And issues involving the federal law intended to protect consumers from being overcharged at closing comes in third.

The caseload in all three categories has grown since the Realtors group last scanned the legal minefield in 2007. Moreover, a significant number of survey respondents think the trend is likely to continue.

Take, for example, what plaintiffs believe is the improper disclosure of a property’s condition. One-third of the respondents say disclosure issues are a “significant source” of their clients’ beefs, and nearly 45% believe the topic will become an even bigger issue over the next two years.

Water intrusion and the mold problems that often follow are a major issue. Disputes concerning structural defects are also extremely common. And issues concerning septic and sewer systems, misstatements about square footage and “as is” clauses also generate more than their fair share of legal problems.

Many of these disputes arise when the seller is a bank. The problem with water and mold is linked to the foreclosure crisis by several respondents, one of whom said water intrusion “has become a larger issue due to the number of houses not being maintained” or sitting empty for long periods of time.

Another notes the increased role of banks as sellers, saying banks are failing to disclose and agents are “getting stuck with the issue.”

But other comments point to the need for better training, if not greater adherence to the law. Said one respondent: “Agents misunderstand the requirement to disclose [known] material defects and even what constitutes a material defect.”

Disclosures related to septic tanks are a significant problem in areas where the systems are prevalent. In Connecticut, nearly three-quarters of the lawsuits against agents are said to involve sewage disposal.

The misstatement of square footage has taken on greater importance because housing values are sagging. One respondent says that some agents are so eager to make a sale that they ignore such errors, and another remarks that a single method of determining square footage is needed to avoid legal problems.

But others maintain that agents and brokers are scapegoats for buyers who made poor decisions. “Buyers want to blame someone for their investment,” one respondent said.

Only agents are responsible for agency issues, which the report called one of its most important topics. After more than 20 years of efforts to clarify who works for whom in a real estate transaction, and scores of statutes redefining the relationship between agents and the people they serve, it seems that many realty pros still can’t get it right.

Some survey participants couple the lack of understanding with the need to earn a paycheck. “Too many agents still do not understand what their duty is, or they put their commission first,” one said. “The goal is the ‘deal’ and not correct representation,” another said.

One agency issue about which buyers and sellers need to be aware is the shopping of competing offers. North Carolina and Montana are among the states that have now prohibited agents from disclosing the price and material terms of one buyer’s offer to another potential buyer who is making an offer on the same property.

Another key agency issue is when agents try to represent both the buyer and seller in the same transaction. Trying to walk such a legal tightrope is so hazardous that some states prohibit so-called dual agency.

And a third issue under this category has to do with buyer representation. Although some agents claim to be buyer representatives, the study finds that many do not understand the responsibilities that go along with wearing that hat.

Even disclosure seems to be a problem. The comments are telling: “Agents forget or ignore the rules.” “Buyers, more than sellers, are not being told whom the agent represents.”

The Real Estate Settlement Procedures Act, the law intended to prevent buyers from being charged unnecessarily high settlement fees, is a top area of concern too. Nearly two-thirds of the respondents believe that there is a significant need for training.

Although the act is by and large a lending law, agents stand accused of taking kickbacks or forcing clients to use service providers in which the agent has a financial interest.

That brings us back to the infighting among agents and brokers over commissions. Disputes over money are significant, half the respondents said, and 3 out of 4 believe the issue will increase in importance over the next two years.

“Brokers are fighting over a smaller pot of money,” one said. “Our economy is creating a shark-filled environment,” another said.

Distributed by United Feature Syndicate Inc.