10 Legal Issues Facing Real Estate Brokers

10 Legal Issues Facing Real Estate Brokers
  • Opening Intro -

    Due to the size of the transaction value and how emotional a home sale often is for both buyer and seller, it's no surprise that brokers find themselves on the receiving end of real estate legal issues.

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Being a real estate broker is one of the few areas of business where a person can effectively dance on the edge of contract law without being a licensed attorney. And given how intricate the documentation can be even in a simple single-family home sale, it’s very easy for a busy broker to miss legal issues in real estate.

Here are ten of the more common areas that really put a legal bull’s-eye mark on the back of a working broker:

1. Property Problems and Defects

A buyer who feels misled will sue quickly.

The issue of disclosure and defect notice is a fundamental requirement in a property sale if the issue is known. However, there are also time limits on some types of issues and how long they have to be reported.

For instance, lead paint in an old home continues to require a notice in many states. However, other repairs may only require notice up to three years from the date of work.

It’s the broker’s job to make sure each disclosure issue is tracked and dealt with properly. A buyer who feels misled will sue quickly, and the lawyer will hang the case on whether the broker did his job correctly.

2. Fiduciary Duty

A broker has to do everything that is necessary and do it properly.

The duty to provide the best representation and care in financial matters for a client is an ambiguous, fuzzy expectation of behavior to do the best job possible. But what is the “best” and according to who or what standard?

It’s a subjective interpretation that often ends up in legal dispute. This is cannon fodder for a lawyer to attack again and again. If a broker can’t make a good case that he did everything necessary for a client and then some, he stands a risk of losing big.

3. Handling a Sale Outside of Known Territory

Many brokers want to keep a client, even if a sale is not in their area.

Some brokers want to keep a client all to themselves, even if a sale is in an area they have no idea about. And that opens up such brokers to making big mistakes about what’s a good sale or what’s not for a client.

Instead, it’s better for a broker to split the commission with a local broker for a better, more protected sale. The sale goes through, the legal risk is far less, and the client gets a better deal in most cases. But for some brokers it’s pulling teeth to get them to split a commission.

4. Treading in Legal Advice

The brokers themselves can’t provide property legal services.

Again, brokers have the unique ability to work right on the edge of property law, but they are not attorneys. And in any situation where a client was given property legal advice, which is mostly contractual, the broker can then be held liable for practicing law without a license.

It’s fine to manage a sale, process the forms, collect the sale, and list more homes. But the broker himself can’t provide property legal services. Period.

5. Tax Advice is Taboo as Well

Tax issues are a big problem.

Tax issues are a big problem, particularly in legal advice on property involving tax-free exchanges. Brokers have to tread extremely lightly on such deals so that they are not easily accused of convincing someone to take a deal based on some perceived tax benefit or tax shelter.

And it’s quite common because a broker clearly has an incentive to see a sale go through.

6. Misleading Selling

A misleading ad or selling never works.

Accuracy in selling descriptions in advertisements is critical. A broker can easily find herself in the situation of defending against a claim that she embellished the details of a home, and the buyer then believes that the real home condition is far from what was advertised.

Buyers agents’ key role is to make sure they deliver clients their ideal property.

7. Contract Term Violation

Never be reckless when it comes to the terms and contract, never.

The real estate broker has two contracts to worry about: the listing agreement and the sales agreement. Both include terms of performance that can open up a broker to litigation if not perceived as fully performed.

A broker has to maintain detailed documentation showing how every term was met adequately and duties were performed. Being careless just opens up an office for a bit of a hit on lack of performance.

8. Client Data

Client data needs to be safe.

As more records become digitized, it becomes easier to lose confidential information. A sloppy office is a big target for a hacker, and the broker can be easily liable to clients who suffer identity theft and related damage as a result.

other related articles of interest:

While you don’t have to blindfold everyone around as you enter your password, you should regularly change your password and limit the number of people who can access your laptop. Upload any vital information onto your back-up storage, and don’t leave papers around however you want.

9. Caveat Emptor Doesn’t Apply to Inspections

A sale without proper inspection can easily fall into accusations of fraud.

A broker has a duty to remind clients to ask for property inspections. Not doing so could lead to a charge that the broker sold a knowingly bad property to a client just to unload a fast sale. It falls into accusations of fraud and breach of fiduciary duty as well.

There might be some cases where you already advise your clients to avoid skipping steps in the process, but they just don’t follow your advice. You really can’t force them to listen to you.

But do know this, even when given advice, some people sue real estate agent for negligence. To protect yourself from liability in cases like this, you might have your clients sign a waiver for you.

10. Dual Agency

Brokers like dual agency because it pays more.

Brokers will find it extremely tempting to take on sales where they represent both the buyer and seller. However, serving two “masters” is extremely risky because there’s a huge question as to whose interest is being protected in such deals.

Brokers like dual agency because it pays more, but the small profit is often not worth the litigation that can bankrupt a brokerage.

Bottom Line

Being a real estate agent isn’t as easy as walking in the park. It is not as easy as people think it is. As you can see, real estate agents can easily be open to lawsuits.

In the worst case, they might even get sued for something like letting their prospect clients fall on the property during the house tour. However, real estate agents can protect themselves from those lawsuits, if they are well aware of these issues.

About the Author: Patrick Watt was an Australian-based financial advisor assistant for many companies. He is now a full-time writer in personal finance and growth hacking. At this time, he writes for National Property Buyers Brisbane. His interests include finance, growth hacking, growth mindset, business development, life coach and self-development.

The views and opinions expressed in guest posts featured on this blog are those of the author and do not necessarily reflect the opinions and views of sayeducate.com

Image Credit: legal issues facing real estate brokers by envato.com

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