When the real estate market heats up, so do the number of lawsuits against real estate agents and their brokers. Many buyers and sellers of real estate do not often pause to consider that they are involving themselves in a legal transaction, which can have severe consequences if not handled properly. Many agents, whether intentionally or by mistake,Â unfortunately do not understand the ramifications of contract law.
Here are the main areas for which agents and their brokers are sued in real estate sales-related cases:
1. Failure to advise on a contract. Real estate agents have a duty to make sure buyers and sellers understand the contacts they are signing. If there are any problematic issues or clauses in the contract the agent needs to make sure her clients understand them before signing. It is important to remember here that there is a fine line for agents – only attorneys can give legal advice (see below). An agent can explain a contract clause but should always defer to her broker and an attorney if further clarification or if advice is needed.
2. Giving legal advice. Only an attorney is licensed to give legal advice. Unfortunately there are many agents who provide legal advice, whether intentionally or not (most just have no clue they are doing so). I have seen it happen. The golden rule for agents is to not provide any advice on the contract that could be considered legal advice…when in doubt tell them you cannot give legal advice and refer the question to a broker (or if an agent is a broker he can refer directly to an attorney).
3. Misrepresentation of property features. This is a leading cause of real estate sales litigation. The key to avoid litigation is to be honest. Exaggerating features of a property or claiming it has features it does not can land agents in the hot seat.
4. Failure to disclose defects. Real estate agents have a duty to disclose any known defects of a property, or any that they see that are obvious (think big wet spot under a sink or in a ceiling, or an HVAC system that does not come on when started, for example). It is important to remember that a real estate agent is not held to the same standard as a home inspector, but here in California most agents complete an Agent Visual Inspection Disclosure, in which they document any known or observed faulty conditions.
When in doubt, always disclose (this is the same thing agents should tell their sellers when they fill out their disclosures – disclose everything). This is especially important if a listing agent has an escrow fall out and has been given a home inspection or other reports from a previous buyer – at that point the agent and homeowner are considered to have knowledge of the issues that were discovered and reported, and must disclose those items and provide the report to any new buyers.
There have been rumblings in past years about allowing only licensed attorneys to obtain broker licenses, but that has never been implemented. It may help reduce lawsuits, but the problem is that mistakes will still be made by agents, and brokers will often not catch them (especially brokers who oversee large numbers of agents).
The best security for buyers and sellers is to work with an agent who is also an attorney. In many states only attorneys can be the closing agents in real estate sales (here in California we have escrow officers instead, but attorneys can handle them as well, although this is rare). Working with an agent or broker who has a legal background offers peace of mind for both buyers and sellers of real estate.