Lawsuits hapen
Even in a good real estate market, housing receives a fair share of negative publicity. Featured newscasts in 2004 and 2005 showed cold, sleep-deprived homebuyers camping out overnight anxiously waiting for the opportunity to place a reservation on a new home. Affordable housing advocates lamented escalating home prices were contributing to an increase in the number of homeless. Economic soothsayers speculated upon when the housing bubble would pop, plunging the economy into recession. Flippers were making excessive fortunes and greedy landlords were gauging renters.
Now that the pendulum has swung, or the axe fallen, depending upon your perspective, real estate continues to get clobbered by the major media. Somehow the housing market is totally responsible for the recent correction in the stock market, tightening credit standards, a drop in consumer spending, job loses, foreclosures, higher house payments, decreasing tax revenues and global warming.
Not everyone is complaining about our market correction. The drop in home sales and property values has been a mini-economic boom to real estate attorneys who specialize in real estate deals gone bad. According to the insurance industry professionals, liability cases against real estate agents, builders and lenders have increased significantly over the past year. So much so that the National Association of Realtors recently completed a random survey of 650 court cases, jury verdicts and settlement reports to determine the most problematic legal challenges facing real estate professionals. The details of the 2007 “Legal Scan” are not released to the general public but a summery report was issued earlier this month.
The leading cause of lawsuits against real estate agents was alleged omissions or misrepresentations about a property’s condition. The most common property defects were: mold, structure defects, zoning, sewer/septic system, drainage, and insect or vermin infestation. Allegations of breach of an agent’s fiduciary responsibility were central to 100 of the 650 cases and agents who represented both the buyer and seller in a real estate transaction (dual agency) had more legal problems than those who only represented one party (single agency). There were also a number of cases alleging illegal kickbacks, undisclosed affiliated business arrangements and inadequate disclosure of settlement costs.
While consumers filed hundreds of lawsuits against their real estate agents, they didn’t win most of them. Most of the lawsuits were settled before trial. Of the 650 cases studied, 315 ended in a judgment either from a pretrial proceeding or a verdict. Of those, 66 percent were resolved in favor of the agent. Most of the cases that went against an agent were jury trials. The highest awards were for deceptive trade practices followed by breach of fiduciary duty and breach of contract. The highest award in the survey was for $4.2 million the lowest was $5,000.
Unfortunately, like with any other business, mistakes and misunderstandings happen. When something major goes wrong with the family home, however, you can’t mail it back for a refund. Buying a home is the single largest financial investment most of us make and that decision is usually based upon our positive emotional expectations. We expect to live happily ever after in our dream home. We visualize a sanctuary of peace and refuge, the nice quiet neighbors next door and appreciating property values. Problems often occur when life’s reality doesn’t meet expectations. The replacement of the central air conditioner, a leaky roof or a backed up septic wasn’t part of the dream of home ownership. When a homeowners dream turns into a nightmare they begin to carefully analyze how they ended up in their situation, occasionally with the help of an attorney.
The number of lawsuits against agents always increases during a downturn in the market. Property defects don’t seem as severe when property values are increasing. A little mold in the bathroom….no problem, planning on remodeling anyway. Overlooking a property defect or an agent’s misrepresentation when values are declining is more difficult.
Like any profession, there are a few unscrupulous and greedy agents who will say or do anything to get a client to the closing table. However, the majority of judgments against agents in the cases studied were not the result of fraud or intentional misrepresentation but negligence misrepresentation and breach of fiduciary duty. New agents who had been in the business less than 3 years and high volume agents who managed 40 plus clients a year were more likely to end up in court.
The California Association of Realtors have been concerned about the increasing number of consumer lawsuits against their membership. Last year they promoted new legislation requiring all licensed agent to complete a 3-hour, Department of Real Estate approved, Risk Management course before agents can renew their 4-year license. The DRE should also require agents as a condition of licensure, to maintain Professional Liability Insurance. Filing a lawsuit against an agent isn’t any guarantee that the plaintiff will be able to collect for damages. Homebuyers and their agents deserve some standard of minimum protection that would avoid cumbersome and costly lawsuits or bureaucratic DRE procedures. Perhaps the California Association of Realtors will make that a legislative priority in the future.
Now that the pendulum has swung, or the axe fallen, depending upon your perspective, real estate continues to get clobbered by the major media. Somehow the housing market is totally responsible for the recent correction in the stock market, tightening credit standards, a drop in consumer spending, job loses, foreclosures, higher house payments, decreasing tax revenues and global warming.
Not everyone is complaining about our market correction. The drop in home sales and property values has been a mini-economic boom to real estate attorneys who specialize in real estate deals gone bad. According to the insurance industry professionals, liability cases against real estate agents, builders and lenders have increased significantly over the past year. So much so that the National Association of Realtors recently completed a random survey of 650 court cases, jury verdicts and settlement reports to determine the most problematic legal challenges facing real estate professionals. The details of the 2007 “Legal Scan” are not released to the general public but a summery report was issued earlier this month.
The leading cause of lawsuits against real estate agents was alleged omissions or misrepresentations about a property’s condition. The most common property defects were: mold, structure defects, zoning, sewer/septic system, drainage, and insect or vermin infestation. Allegations of breach of an agent’s fiduciary responsibility were central to 100 of the 650 cases and agents who represented both the buyer and seller in a real estate transaction (dual agency) had more legal problems than those who only represented one party (single agency). There were also a number of cases alleging illegal kickbacks, undisclosed affiliated business arrangements and inadequate disclosure of settlement costs.
While consumers filed hundreds of lawsuits against their real estate agents, they didn’t win most of them. Most of the lawsuits were settled before trial. Of the 650 cases studied, 315 ended in a judgment either from a pretrial proceeding or a verdict. Of those, 66 percent were resolved in favor of the agent. Most of the cases that went against an agent were jury trials. The highest awards were for deceptive trade practices followed by breach of fiduciary duty and breach of contract. The highest award in the survey was for $4.2 million the lowest was $5,000.
Unfortunately, like with any other business, mistakes and misunderstandings happen. When something major goes wrong with the family home, however, you can’t mail it back for a refund. Buying a home is the single largest financial investment most of us make and that decision is usually based upon our positive emotional expectations. We expect to live happily ever after in our dream home. We visualize a sanctuary of peace and refuge, the nice quiet neighbors next door and appreciating property values. Problems often occur when life’s reality doesn’t meet expectations. The replacement of the central air conditioner, a leaky roof or a backed up septic wasn’t part of the dream of home ownership. When a homeowners dream turns into a nightmare they begin to carefully analyze how they ended up in their situation, occasionally with the help of an attorney.
The number of lawsuits against agents always increases during a downturn in the market. Property defects don’t seem as severe when property values are increasing. A little mold in the bathroom….no problem, planning on remodeling anyway. Overlooking a property defect or an agent’s misrepresentation when values are declining is more difficult.
Like any profession, there are a few unscrupulous and greedy agents who will say or do anything to get a client to the closing table. However, the majority of judgments against agents in the cases studied were not the result of fraud or intentional misrepresentation but negligence misrepresentation and breach of fiduciary duty. New agents who had been in the business less than 3 years and high volume agents who managed 40 plus clients a year were more likely to end up in court.
The California Association of Realtors have been concerned about the increasing number of consumer lawsuits against their membership. Last year they promoted new legislation requiring all licensed agent to complete a 3-hour, Department of Real Estate approved, Risk Management course before agents can renew their 4-year license. The DRE should also require agents as a condition of licensure, to maintain Professional Liability Insurance. Filing a lawsuit against an agent isn’t any guarantee that the plaintiff will be able to collect for damages. Homebuyers and their agents deserve some standard of minimum protection that would avoid cumbersome and costly lawsuits or bureaucratic DRE procedures. Perhaps the California Association of Realtors will make that a legislative priority in the future.
posted by Ken Calhoon at 8:21 AM
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