Breach of contract is one of the most common reasons a real estate professional is sued by a client. The case of Carpenter Realtors and Susan Hodges v. John Watkin and Susan Watkin demonstrates how failing to adhere to a contract can result in a lawsuit for a real estate professional. The couple signed a contract with Susan Hodges of Carpenter Realtors, which explicitly required the agency to advise the Watkins during closing.
Here’s how the lawsuit played out and how other real estate professionals can avoid going to court with a client.
The Watkins found a home for sale in Indianapolis and agreed to purchase it from Roger and Judy French. A Surveyor Location Report, which is similar to an Improvement Location Certificate, was a requirement of the sales agreement. The report was ordered through the title company hired by the Frenches, Royal Title.
Unfortunately, the Surveyor Location Report wasn’t completed until the day of the closing. The report noted an encroachment onto a vacant lot next to the property. The Watkins asked about the encroachment, but both the closing agent from Royal Title explained it was only an approximation, and the seller, Roger French, proclaimed it was inaccurate. Hodges, their real estate agent, didn’t examine the report or provide any guidance on the issue. Under the belief that the encroachment posed no problem, the closing went on as scheduled.
To the surprise of the Watkins, several months later, the encroachment was determined to be accurate when the vacant lot was sold. The Watkins spent more than $25,000 to remedy it.
The Watkins filed two lawsuits. One was against the sellers, which was settled in 2014, and the other was against Carpenter Realtors and Susan Hodges. At a bench trial in 2016, the Watkins argued that their case was one of breach of contract, not negligence. The trial court agreed and concluded that the failure of Carpenter to render advice regarding the surveyor location report was a breach of contract. Carpenter was ordered to pay $33,314.33 in damages and interest.
Common Ways Real Estate Professionals get sued
In addition to breach of contract, there are some other common ways a real estate professional is sued. Some of those include:
1. Failing to disclose a property defect. If any defects are found after closing, clients will be quick to point the finger at the listing agent. Some common defects include construction issues, work done without proper permits, cracking, noises, leaks, and nuisances. If a client can prove you knew about an issue that wasn’t disclosed, you’ll be held liable.
2. Giving legal advice. While the Watkins won their case because their Realtor failed to advise them at closing, there are certain questions or issues a Realtor or title agent can’t give advice on. Many states consider it illegal for any professional without a license to practice law to give tax or legal advice. Giving the wrong advice, even if your intentions are good, could also result in a lawsuit.
3. Mishandling your client’s sensitive data. Cybercrimes are a growing problem in real estate transactions. Hackers now know there are massive amounts of money being moved between various individuals and adequate cybersecurity protocols aren’t being followed by everyone involved in the transaction. Realtors, title agents, and real estate attorneys are all targets, so be sure you have a secure system, Personally Identifiable Information (PII) is encrypted properly, and your team and other professionals you work with are trained to spot a phishing attempt.
4. Misleading clients. Listing agents want to make sure their property makes a good impression to homebuyers. However, exaggerating features or the condition of the home could land you in court. If a buyer feels misled about anything after purchase, a lawsuit is likely to follow. Any claim made about the property should leave no room for misinterpretation.
5. Negligence. If a real estate professional fails to execute a transaction with reasonable care, a client may claim negligence. Unlike fraud, negligence lacks the element of malicious intent. If a client has trouble proving fraud because they are unable to prove intent, they will usually seek reparations for negligence instead.
6. Representing clients in unfamiliar territory. Real estate professionals that are closing on a property in an unfamiliar area should take extra precautions before the sale. Whether you are showing and selling the property or issuing a title policy, do your research first to make sure all requirements or other situations unique to an area are addressed.
7. Bodily injury. Take precautions before a showing to ensure there are no hazards that could cause trips or falls.
How real estate professionals can protect themselves from lawsuits
Luckily, there are ways to avoid or mitigate the risks of being sued by a client who feels their real estate deal was mishandled.
- Recommend inspections and thoroughly document any property defects. Clients look to their agents for guidance, but real estate agents can’t be expected to be experts in everything. There are some areas that will require a third-party opinion. Be sure inspections are conducted and have your clients sign a statement that they are aware of any issues. Listing agents should prepare a disclosure package that includes all the disclosure information that’s required by the state.
- Review all documents with your clients before closing. The CFPB requires mortgage documents to be prepared and delivered before the day of the closing. This should be true of all documents pertinent to a new owner’s property. Many consumers are unaware of how a professional title search protects their property rights and how a new survey is especially important in determining their title insurance policy.
- When it comes to ordering a survey, recommend the client choose the vendor. This may mean they will have to pay for it, but at least they will have more control over when the information is delivered and better guidance on how to interpret the results.
- Recommend the homebuyer pick the title agency. Realtors and real estate agents often work with a trusted title company they have known for years. Most homebuyers will trust their Realtors recommended title agent, but let homebuyers know that they have the option to pick another title company if they want. If the seller is the one covering the cost of the title insurance, make sure your clients understand how the specifics of the title policy, like the exceptions and exclusions, will impact their property rights.
- Honesty is always the best policy. If a real estate professional hasn’t acted in the best interest of their client, whether from negligence or intentional action, they may be held in breach of duty. Document all of your advice and the client’s decision, and, of course, always practice honesty with your clients to avoid this kind of lawsuit.
- Have the proper liability insurance. In addition to checking a property for tripping and fall hazards before a showing, protect your business with the proper liability insurance for accidents. Additionally, every real estate professional should take the time to evaluate their insurance policies. There are multiple threats to your real estate company or title company, and some policies may be severely lacking. Every insurance company is different in how they underwrite, package, and categorize risk and coverage.
At the closing, the Watkins asked both the sellers and the closing agent for Royal Title about the encroachment. Both essentially explained it was nothing to worry about, but if the Watkins had hired the title company, the response may have been more cautionary.
Why paying for closings costs can work in favor of a buyer
Many homebuyers will often negotiate that the seller covers the closing costs. While this may seem like a win (who doesn’t want to save thousands of dollars at the closing table?), this case is a good example of how remaining in control of important aspects of the closing will pay off in the future.
The survey and the title insurance are two closing cost items that have a lasting impact on the new owner or real estate investor. So, it’s worth considering hiring these professionals if you are the buyer or real estate investor.
Not all lawsuits like this are ruled in favor of homebuyers or real estate investors like the Watkins. In their case, they had an iron-clad contract that required the real estate agent to advise them at the closing. In the court’s ruling, the Watkins argument hinged on the claim of breach of contract and not negligence was highlighted, “Here, the Watkins’ complaint against Carpenter focused on Carpenter’s failure to advise them at closing. Carpenter’s duty to advise the Watkins during closing existed solely by virtue of the contract between the parties.”
While this case may cause anxiety among real estate professionals, I hope it serves as motivation to work harder to protect the interests of homebuyers, conduct business with the utmost honesty, and aspire to the highest caliber of professionalism.