Do you Negotiate over Texts? If you do – Watch Out!

The speed of business is faster than ever and the constant need to be connected weighs down school children, stay at home parents and business leaders alike.  One way to cope is to communicate with any and all means available to make life easier – and we are growing to expect this.

But the question needs to be asked – as a real estate professional, are we treating each communication as an official business response that is being done in writing?  Should we be?  In a recent court case, St. John’s Holdings, LLC v. Two Electronics, LLC, we may find the beginning of our answer.

This case, argued in front of the Massachusetts Land Court, revolves around real estate negotiations taking place over texts.  Two brokers were communicating over a commercial property to be purchased.  A letter of intent (LOI) had previously been drafted, points negotiated in person and then parties left for the day.  Over the course of the following days, the two brokers texted various changes to the contract, including sales price, due diligence period, earnest money and closing date.  The seller’s agent texted that the seller wanted the LOI signed by the buyer to close the deal.  The buyer’s agent amended the LOI to the terms agreed upon in the text messages, had the buyers sign it and texted back that the LOI was signed.

The sellers, however never signed the LOI and instead sold to another party who was also interested in the building.  The buyer sued, arguing that they two parties had an agreement – and had the texts to prove it!

The court determined that the texts constituted a legally binding contract – and were not merely part of the negotiations.  The court went on to explain that the texts contained all the elements of a contract – the subject of the agreement, showed that they made a contract, states the essential terms of the contract and bears some form of signature.  In this case, each text was “signed” with the agent’s name.  Finally, the court determined that the texts made it clear that the LOI was simply to memorialize the agreement reached.

The court’s decision came as a shock to many and will have implications not only in Massachusetts, but across the country.   The ruling should ultimately change the way agents look at texts, emails and other forms of electronic communication.  It may even be beneficial to include a disclaimer in electronic communication stating that absent a signed contract, the following email/text/tweet/chat/etc. is not a binding contract.  It is also important to manage client expectations if the an agreement or sales price has only been agreed to over texts and not in the contract.

Regardless of the means, lawsuits over contract negotiations are nothing new.  It is important to have Realtor’s professional liability insurance in place to cover a firm against such allegations.  Absent the insurance, a firm or an agent could be paying out of pocket for huge settlements and defense costs.  If you want to discuss getting insurance on your firm or want a second review of your current program, please contact us today.

Will Insurance Soon be Mandatory For Illinois Realtors?

Professional liability insurance isn’t mandatory in Illinois, but there are rumors that soon it will be.  At a recent speaking event, the Illinois Department of Financial and Professional Regulations (IDFPR) hinted at making professional liability insurance mandatory in Illinois.

Currently the nation is split among states that require firm to carry professional liability insurance (also known as Errors and Omissions or “E&O”) and states that are silent on the matter.  The IDFPR – the department that regulates the real estate industry in Illinois  – is scheduled to open the Real Estate License Act of 2010 for revisions later this year.  Part of those revisions could include a major policy shift on insurance and have implications for even the smallest firms.

E&O insurance provides firms with coverage for allegations of professional misconduct.  Broadly speaking, it covers defense costs and damages assessed against a firm for allegations of misconduct, errors, mistakes or omissions in the rendering of professional services.  This differs from General Liability insurance since general liability covers firms against bodily injury and property damage – the standard “slips, trips and falls” protection most firms purchase.  In fact, general liability policies specifically exclude any claim related to a professional service – making E&O vital to a complete risk management program.

While real estate claim examples are as diverse as the number of claims that come in, some of the more common claim revolve around a few key areas:

  • Disclosures.  When an agent fails to properly disclose information to a buyer or seller, this can lead to claims
  • Data Integrity.  Inputting improper information such as square footage or school districts can upset buyers
  • Documentation.  A lack of adequate documentation of home warranty offers, inspections, negotiations and the like can leave large gaps of evidence when defending against a claim
  • Referrals.  Making a referral to a third party that is not qualified or who does a poor job can cause the client to come back to you for compensation

Remembering that E&O insurance covers mistakes and oversights of an agent makes the possible claim scenario list very broad and highlights the importance of such coverage.

Illinois currently doesn’t require this insurance, but many clients expect – or even demand – firms to purchase it.  A sophisticated client of any size will ask to see proof of insurance and banks listing a REO property through a firm will require it.  However, most small shops still do not purchase.

It has been our experience that sole practitioners view the risk of mistakes within their control and they decide to self-insure.  Typically, once licensees are sponsored or when the broker realizes that some things are out of his or her control, they begin to look closely at a policy.  However, if the IDFPR regulation does change, this will cause real estate firms of all sizes to buy it – regardless of the number of transactions or whether the firm sponsors licensees.

While the prospect of a forced purchase may sound daunting, professional liability insurance can be cost effective, as well.  Policies start around $500 for a sole practitioner or a small firm.  By decreasing the limit or increasing the deductible, firms can tailor their coverage to a price point they are comfortable with.  Other factors that impact policies are revenues, professional count, types of service (transactions, property management, auctions, etc.), and whether firms handle residential properties or commercial properties, just to name a few.

As the IDFPR reviews the current law and debates making insurance mandatory in Illinois, it is prudent for firms to begin familiarizing themselves with the insurance landscape.  One of the most important items for all firms to note is that the insurance companies that offer this type of insurance do not offer the same coverage.  While the base coverage is similar (coverage for errors or omissions in the rendering of professional services), the policies quickly broaden from there.  Some policies don’t cover property management.  Others exclude property that is damaged or stolen at an open house or due to a lockbox that an agent fails to secure properly.  Mold disclosure claims and coverage for discrimination and fair housing violations also vary greatly.  Finally, when an agent sells a property he or she owns part of, this may or may not be covered under a policy, depending on how it is structured.

Since coverage not standardized across markets, price is not a final determinant of the policy to buy.  It is important to review the coverage carefully and partner with an experience insurance broker who can access multiple markets and review the coverage on your behalf.  In light of the possibility that E&O insurance becomes mandatory in Illinois, understanding the policy dynamics become all the more important.  If you are looking for a quote or simply have questions about this insurance, please contact us today.

Acquiring a Realtor from a Competing Firm leads to Lawsuit

Compass – a New York based real estate firm – has been sued in federal court over an agent they hired from a competing brokerage.

Post-2008 has showed increased mergers, acquisitions and movement of real estate agents among firms.  The tapering revenue and desire to expand geographically has fueled the corporate side of this movement.  The search for more money, more prestigious firms or a better work balance spurs individuals into moving.  However, these transactions are not without their risk.  Compass found out first hand just what that risk could mean.

In this specific lawsuit, Compass hired Meg Salem from Saunders & Associates.  The problem was that Ms. Salem took with her over an alleged 11,000 listings from her former firm and handed them to Compass.  In the most recent court documents, it has been revealed that listings have been returned and the agent has been fired.  However, Saunders claims that only a fraction of the stolen records were returned and they need them all.

Compass argues that they have nothing left to do as they have not acted on the listings, returned the listings and also fired the agent who did the improper act.  Compass explains that Saunders is trying to “stifle legitimate competition from Compass” in their overlapping market.

Compass was founded in 2013, but with investor capital.  Now has raised $123M in funds, hired 300 agents and is reportedly nearing 800M in valuation as a firm.  It is by no means a small company or an unsophisticated one.

However, most firms do not have this level of resources, so hiring practices should be an item to take careful note of.  Firms should make it clear prior to hiring an experienced real estate agent that no resources from the previous firm should be brought over.

Relationships follow the person, but files, documents or other proprietary data should not.  It is important to make this a very clear item during both the interview and the on-boarding process.  It is also wise to have this rule noted in the firm’s policy manual.

To discuss ways to protect your firm or about ways insurance can provide a backstop when sued, contact us today.

Selling and Advertising Across State Lines

In an interesting case in Nebraska, a real estate agent was issued a cease and desist order over selling homes located in Nebraska.  The order came because she was licensed in another state.

The cease and desist was issued by the Nebraska Real Estate Commission and told Leslie Young, a California Realtor, to stop listing properties located in Nebraska.  Young was running a website Elist.me which solicited home sellers to input their home’s information into her website.  She would then place the home for sale on various other “for sale by owner” websites and realtor.com.  Young argued that she was preparing advertising for a fee and did not perform any duties of a real estate agent.  She ended up suing the Nebraska Commission on the matter.

However, after a number of legal maneuvers and appeals, a Federal Judge has thrown out Young’s lawsuit, explaining that she advertised herself as a real estate agent and the Nebraska real estate code prohibited anyone from performing the functions of a real estate agent without having a license in that state.

While Young may still decide to appeal the decision, this matter contains important implications for real estate firms today.  Many firms do business across state lines and some large firms have clients across the country.  However, those firms tend to be licensed in those states already.  This case highlights that even advertising for a property in a state the firm is not licensed in could expose the firm to legal ramifications.

Another aspect of this is the regulatory aspect.  This case was not strictly speaking a real estate malpractice claim.  It was a regulatory matter.  All Realtor professional liability policies cover lawsuits alleging malpractice, but not all cover regulatory actions or investigations.  Many firms face instances where clients are upset at their services.  Some will choose to sue while others will report the matter to the state’s real estate commission.  Having insurance to cover both types of matters is important for any firm’s risk management.

Real Estate Regulatory Insurance to discuss ways to protect your firm from real estate lawsuits and for a complimentary review of your current insurance plan.

Another Copyright Infringement Lawsuit for MLS Photos

In a previous post, we reported on a matter of copyright infringement costing a Realtor $250,000.  In that case, the Realtor pulled photos directly from the internet and saved them to the MLS of a home he had listed.  The photographer discovered this violation and sued the Realtor.  This error cost the Realtor a pretty penny.

Lest you think this type of risk is unique, another similar matter has arisen recently, but with a fact profile a little more alarming.

A Beverly Hills mansion was being sold with a list price in the millions.  The listing agent was given a memory stick containing photos of the property from the personal assistant of the seller.  The listing agent was told to use them on the MLS.  Because of this advice, the listing agent went ahead and used a number of the photos he found on the memory stick, some additional photos that he took with his own camera and also a few he had found online.

The trouble started when the photographer of the memory stick photos was alerted to the fact that her pictures were being used for a purpose she had not authorized.  The photographer had taken the pictures for a magazine article and given a copy to the owner as a gift – but never released the copyright on them or permitted them to be used for another purpose.  It turned out that the online picture the real estate agent found were also taken by this same photographer and used without permission.  To make matters worse, the listing agent also cropped out the “copyright” watermarks on the pictures – in violation of federal laws.

The real estate firm Mansion Realty and the listing agent were sued for this violation.  Despite the fact that the infringement happened unintentionally, the lawsuit was settled for $200,000.

The outcome and situation between this case and the case previously mentioned are similar, but this matter raises a few additional risk management points for real estate firms to consider.

  • Real estate agents need to make sure they have written permission to use photos before they are posted on the MLS, social media or sent in mailings.  Even when the owner of the property says to use them, this case shows us that might not even be enough!
  • Realtors need to be careful when cropping pictures for the MLS or other uses.  The listing agent in this case didn’t mean to break federal law, but he did.
  • Firms need to be careful when using clip art, saved photos or stock images.  Looking at pictures from the internet costs you nothing.  Saving those pictures and using them as your own can cost you $200,000.  Firms must assume that most anything in print (online or on paper) is protected by copyrights.

Avoiding real estate professional liability claims should be a goal for all firms.  Contact us to learn more ways about protecting yourself and your firm from claims through the use of sound risk management and malpractice insurance.

Referrals, Property Development Bring Lawsuits

Dangers of Referrals

In Nebraska, a lawsuit involving a referral from a real estate agent made it all the way to the Nebraska Supreme Court.  The lawsuit stemmed from an email written by an agent after using Steinhausen Home Inspections.  The email said that the owner, Matthew Steinhausen did a poor job on a property inspection, was a “total idiot” and the agent would never use him or his company again.  The email went to 600 people.  Mr. Steinhausen alleged that the email was libel and hurt his business.

In this particular matter, the court affirmed a dismissal of the case, but left room for the matter to be re-filed under modified allegations with a lower court (the lawsuit was filed by Steinhausen as an individual rather than by his company).

Real estate agents are in a position of expertise and trust.  Often clients ask their agents for referrals for property inspectors, contractors, lawyers and mortgage companies.  The fact that an agent has earned the trust of their client and become a source of information is good, but the outcome of referrals can occasionally lead to claims.  This case highlights the fact that not every referral will be a good one.  Clients can become upset over a poor job and sue the person referred and also the agent who referred him or her.

Negligent referrals has always been a hot topic in risk management and with good reason.  Each year many claims stem from a bad referral and – depending on the services – some of the damages can be large.  There are a few ways to protect your firm from receiving a claim for a negligent referral.

First, make sure that you are referring experts – not just people you like.  It is important to periodically check on the quality of work your referral sources, as well.  Ask clients how the referral performed and if they would use them again.

Secondly, it may be beneficial to offer clients a list of 2 or 3 choices for each job – rather than just one choice.  This can help offset some of the liability of only recommending the one person, but will not absolve your firm of all liability.

Third, a firm may decide not to endorse anyone as a preferred partner and avoid the situation altogether.

Property Renovation Leads to Lawsuit

A homeowner sued Handy Realtors, Inc., among others, for their role in a poorly completed renovation on a home.  Handy Realtors was engaged to elevate and build an addition to a home in the New Orleans area.  Unfortunately, after the completion of the work, the new portions of the home began to settle.  This led to cracks in the foundation, drywall, uneven counters and moisture collecting in the floorboards.  The homeowner alleges that the work was not completed up to national and local building codes.

Realtors engaging in development work is not uncommon.  Many firms offer property management and building services as well as the ability to sell properties.  However, the risks and considerations are also expanded with these additional services.  It is important to realize that the standard professional liability insurance policy does not cover development of properties and may even exclude property management.

If your firm is engaging in these types of services, it is important to have a review of the real estate firm’s professional liability insurance to make sure the firm is adequately covered for the work it does.

Contact us to learn more about protecting your real estate brokerage firm and obtaining the proper insurance.

How Does Legalized Marijuana Impact Realtors?

As the public perception of marijuana changes, so are the laws – and at a quick pace in recent years.  Many states are allowing medicinal and/or recreational use of marijuana within their boundaries.  Some of those states are also allowing a limited number of marijuana plants to be grown for personal use.  With many of these state being among the largest and most populated in the nation, roughly half of all Realtors live in a state with some marijuana usage allowed.  These developments impact real estate agents in many diverse ways.

Management Concerns

As many real estate agents also manage properties or act as leasing agents, the landlord-tenant issues and property management liability are important aspects to consider.

When acting as the landlord of a premise, it is part of your duty of care to rent the properties to tenants who will, among other things, keep the property in good condition.  Smoking or cultivation of plants on premises can damage the property and impact other tenants in the building.  It is important to draft leases that are clear on what activities are allowed and what activities are banned.  If you are acting as a property manager and rent a home or condo to someone who converts the space to an indoor greenhouse, you could be held liable for damages that result.  It is vital for real estate professionals to maintain control over the usage of the properties they manage and investigate suspicious activity.

It is also important to consider your state’s laws regarding special accommodation for medical use of marijuana.  Some states say medical marijuana smoking must be allowed as a special accommodation and California even says that to ban it would be a violation of fair housing laws.

Property Damage Potential

Cultivation of any plant within the confines of a home is a recipe for disaster.  Homes were not designed to handle the ventilation, hydration and electrical needs of plants.  Improper cultivation techniques can lead to damage to the building or unit itself.  Real Estate agents should be able to spot signs of this – whether the plants cultivated are marijuana or simply a tomato.  The Canadian Real Estate Association has published an educational pamphlet outlining common signs of indoor cultivation:

  • Modified ductwork, plumbing or electrical work to a specific area of the house
  • Circular holes or patched holes that could have been used for exhaust fans or vents
  • Stains in soffits from venting
  • Stains on the floor from containers sitting too long
  • Rotten wood or warped wood due to excessive moisture
  • Wiring or piping that circumvents water or electrical meters
  • Strange or unique odor from plant material, chemicals or fertilizers

These items should be looked at by a prudent agent in today’s environment.

To ask or not to ask?

As a real estate agent, what should you do when you do notice some of the items noted above?  When taking a new listing, should you ask what went on and if any remediation was done?  Do your line of questions differ if it is marijuana plants as opposed to flowers?  What needs to be disclosed on the MLS and to potential buyers about this?  If you are a buyer’s agent and you notice potential signs – but no damage – what is the proper route to go?  These are things that real estate firms need to consider as they draft language for their policy manuals and develops procedures for agents on this developing topic.

Contact us to learn about ways to further protect your real estate firm from professional liability or to discuss additional risk management steps your firm can take.

Realtors Sued over Surveys and Flood Plains

In the news this past month came a pair of lawsuits with concerning implications for the real estate industry.  Real estate firms should note of the dynamics of each suit and take stock of their own internal risk management guidelines and insurance.

The first case takes place in Pinellas County, Florida.  A Realtor was sued three years after acting as the buyer’s agent on a large waterfront home.  The home had a first floor that was finished with a number of bonus rooms including a game room and work out room.  However, the county sent a letter – addressed to the prior owners – noting that the first floor was below the flood plain and could not have habitable square footage.  The finished rooms were illegal and could only be used for storage or parking.  The new owners sued the real estate firm alleging that the agent failed to make the buyers aware of this violation prior to purchase.  The Realtor notes that the title company cleared the title and the seller also signed a disclosure that there were no violations.  It was noted that the seller did know about the violation and only fixed a portion of the first floor before selling.

In the second case, a Kentucky man is suing a Tennessee Realtor for failing to advise of the property lines on a lot prior to purchased.  The Realtor brought only the data sheets when walking the lot and did not give accurate description of the corners.  The buyer claims that the lot would not accommodate the house he wanted to build.  It is further alleged that the Realtor did not advise that the lot had a drainage easement that cut the property in half – which is estimated to cost nearly $30,000 to rectify.  The Realtor explains that the survey was recommended, and the buyer was in construction himself and was a sophisticated buyer.

Both of these cases highlight the fact that real estate agents are sued for matters that even seem out of their control.  Many firms do not carry real estate professional liability insurance, explaining that they follow all recommended risk management practices, always require home inspections and home warranties, and use standard contracts.  The matters noted above serve to remind that even when real estate agents take precautions, have clean disclosures, and recommend surveys – they can still be sued.

It is important for all real estate firms to have malpractice insurance as this coverage will defend the firm even from frivolous claims.  While the firm may have to pay a deductible, having attorneys on call and an experienced claims adjuster walking the firm through the process is invaluable.

Contact us to discuss how you might best protect your firm from allegations of wrongdoing.

Thirty Percent of House Disappears after Purchase

Chinese Millionaire Hiroshi Horiike just lost 5,566 square feet from his California Tuscan-style mansion.  After looking at more than 80 estates, Horiike settled on a 4 bedroom Malibu home with a reported 15,000 square feet of living space.  However, after purchasing the home, he discovered that the actual living area was only 9,434 square feet.  The 15,000 sq. ft. was confirmed by the seller’s brochure as well as his agent representing him on the purchase.

Horiike paid cash for the $12.5M home, making an appraisal unnecessary.  He also did not order a measurement when he had the foundation tested prior to the purchase.  Only when he decided to remodel a portion of the home did he learn about the square footage.  The agent listing the home explained that Malibu allows the square footage calculation to include basement, garage and patio space in a post-2005 ruling.  Including these spaces does bring the house up to 15,000 square feet, explained the listing agent.

Further complicating the matter is that the transaction was done with dual agency.  Both the seller and the buyer were representing by the same Coldwell Banker office.  Horiike feels that he was scammed and has denied to arbitrate the matter.  He feels it is important to make the case public for justice and to act as a warning to others.

This case brings about two important considerations for real estate agents liability.

  1. The first is the importance of disclosing all relevant details about a home as accurately as possible.  Horiike was not a native speaker and did not know the local codes regarding square footage.  While the ongoing court case revolves around the agent’s intent to deceive, it is necessary to go the extra mile and intend to inform.  Home buyers and home sellers that are not familiar with the process may need that extra hand-holding.  This will not only mitigate lawsuits in the future, but also make clients more ready to use a firm again or refer their friends there.
  2. Secondly, the dual agency aspect of the case necessitates consideration.  Horiike won a case in appeals court that the seller’s agent has a fiduciary duty to the buyer when the buyer’s agent and seller’s agent work for the same brokerage.  This is only a California state decision currently, but it could have ripple effects in the future.  Real Estate firms that allow dual agency may be inviting lawsuits that are increasingly harder to defend.  Care must be taken when allowing these transactions.

Protecting your firm is paramount in today’s complex litigious environment.  Proper risk mitigation techniques as well as properly structured Realtors Professional Liability insurance is necessary.  Contact us to discuss how to best protect your firm.

Real Estate Firm Settles Trademark Lawsuit

In March of 2013, a lawsuit was filed against Ohio-based real estate firm Dotloop for using the word “loop” in its name.  This lawsuit has recently been settled and the terms are confidential.  Dotloop began its company in 2008 under the name “MLS Contracts”, but later decided to change its name to “Dotloop” in 2009 and filed a trademark for the name in 2011.

This action got the attention of California-based real estate firm LoopNet which filed the lawsuit in 2013 after disputing the trademark attempt with the Patent and Trademark Office.  The lawsuit alleged that Dotloop infringed on its trademark by using the word “loop” in its name.  LoopNet went on to explain that they had been using that mark “loop” for 20 years – building recognition and goodwill in the marketplace and online.  LoopNet filed the lawsuit because it felt that Dotloop unfairly hitched their company to LoopNet’s prior success, essentially stealing their goodwill.

The lawsuit was settled before going to trial and the terms of the agreement and undisclosed.

Real Estate firms face many risks in operating their business.  People may get upset if they feel discriminated against or unfairly treated.  Someone could walk into the real estate firm’s office and trip on loose carpet.  A professional liability claim can arise for failing to disclose certain material items on a house.  Confidential client data could be lost or stolen – leading to a security breach.

While trademark infringement is not often top of mind for real estate firms, this case highlights the fact that it is a risk.  Trademark infringement claims can also be insured.  This coverage is tied in with a Business Owners Policy (BOP) – also known as a Business Package Policy.  Typically included in this insurance policy is coverage for the property of the firm, general liability, hired automobile liability, and infringement of trademarks.

A well rounded risk management program contemplates all aspects of a real estate firm.  Professional liability, general liability, property – and even trademarks.  Contact us today for a comprehensive review of your firm’s risk and solution on how to protect it.