AgentIndustry Voices

Ways real estate agents can reduce legal risk

As a real estate agent, you're exposed to legal risk every day. Here are some ways to minimize that legal risk.

As a real estate agent, you’re exposed to legal risk every day. After all, you’re dealing with one of the most expensive purchases in most people’s lives. Here are some ways to minimize that legal risk.

Everyone knows this story: A buyer closes on a property, finds out that the property has issues and files a complaint against the real estate agent. The lawsuit claims negligence and that the seller and agent collaborated to conceal deficiencies to promote a higher-priced transaction and collect a more significant commission. The buyer may also file a disciplinary complaint against the agent. This puts the agent in financial danger, and at risk of losing his or her professional license as a result of the grievance.

In most cases, there was no coordination or conspiracy between the seller and the buyer to hide the property’s flaws. The agent was most likely unaware of anything concealed or unreported.

Unfortunately, litigation and complaints are a professional risk. However, by taking a few basic steps, you can reduce the risk and become successful in the real estate industry.

Communication is key

Keep your clients informed of all changes in a proposal or contract. Try to respond to their messages promptly (within 24 hours). It shows that they are your top priority. Keep the client informed of all developments.

After each phone contact, agents should write an email verifying what was discussed and the agreement and plan for the future.

Don’t set unrealistic expectations

Don’t try to shield your customers from unpleasant news. If a matter develops during a transaction, your client will rely on you for a thorough explanation. You must provide an honest assessment of the risks.

The client may be disappointed to learn of the stumbling block but not as disappointed as a client who proceeds unaware, only to wonder later that you failed to notify them.

Also, avoid “overselling” and raising your client’s expectations. Be honest and communicate clearly.

Be sure the title of the property is clear

Clear property title means the seller has no liens against the property and there are no other potential owners in the chain of the title who must sign off on the sale besides you.

Tax or mechanic liens can usually be cleared before closing. If those liens go unnoticed until after the buyer has taken ownership of the home, the buyer might sue the seller to get the money back.

If the seller was unaware of or failed to mention additional ownership interests in the home, the seller may face a lawsuit from the buyer when other owners come forward to claim their stake.

When other ownership interests in real estate exist, and ownership facts are unknown, the phrase “clouded title” is used. As a result, it’s to your best advantage to disclose all prospective other real estate owners and make sure they’re on board with the transaction.

Adhere to the NAR Code of Ethics

Breach of duty is one of the most prevalent claims made against real estate brokers. Real estate agents understand they must act in the best interests of their clients, as clients place a high level of faith in their knowledge.

Because of this, you should know and understand the National Association of Realtors’ Code of Ethics, adhere to them and fully disclose all issues to minimize legal risk.

Any breach of this responsibility, whether due to negligence or deliberate activity, can result in a lawsuit.

Educate about fraud

Scammers and fraudsters use deceptive tactics to persuade naïve victims to send money to them. Wire fraud has been a common cybercrime perpetrated again real estate buyers.

Clients have been duped into paying significant deposits on houses after receiving compelling emails, only to discover that the money went to a scammer instead.

To avoid a situation like this, make sure your clients understand the transaction process and are aware of potential phishing and wire fraud scams.

Follow up emails about wire transfers with a phone call, urging the recipient not to change instructions without first receiving an email and then calling to confirm.

Renew your E&O policy on time

Real estate agents should have an E&O (Errors and Omissions) policy in place to protect them if something goes wrong in a transaction. Even if you have done nothing illegal, you may have to defend yourself against an angry customer.

It’s all too common for people to forget to renew their insurance, and the results can be disastrous. Your real estate E&O insurance must have been continuous, with no gaps to maintain coverage for earlier transactions.

Make sure you know when your E&O insurance will expire and that you renew it as soon as possible to minimize your legal risk.

Write down all the agreements and instructions

It’s critical to write down all important and relevant facts. Document all offers and client instructions. If you discuss something significant with your client over the phone or video chat, create a written summary of the conversation as soon as possible to ensure you have a record on file.

Consider liability insurance

Having insurance will not prevent you from a lawsuit, but it will protect you from personal liability and minimize your legal risk.

For a variety of reasons, buyers file lawsuits against their agents under state and federal law. Getting embroiled in a lawsuit is never a good thing. The litigation procedure can take a long time and be quite expensive.

Many people don’t set out with the intention of being sued. But failing to follow advice might lead them down that path. The above actions may minimize your risk. This is not meant to replace legal counsel from a local attorney, but it should give you an understanding of where the hazards are so you can avoid them more effectively.