Prepare for Common Legal Hurdles in Your Business

These are the hurdles agents most often face and how to stay in compliance while navigating a transaction.
Gavel inside labyrinth maze

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A Korean-American couple recently asked Brian Bartholomew to show them homes only in Korean neighborhoods. Bartholomew, a sales associate with RE/MAX Cornerstone in Brea, Calif., immediately saw the red flag. “I can’t steer you toward an area just because of race,” he says he told the client. If Bartholomew had done what the client asked, he would have been in violation of fair housing law. The couple decided to continue working with Bartholomew, and he showed them homes in areas they requested by name rather than demographics.

It doesn’t matter that the buyers were the ones to ask for specific neighborhoods based on their racial and ethnic profile. Under the federal Fair Housing Act and the REALTOR® Code of Ethics, you cannot limit your customers’ housing options based on race or ethnicity, among other protected statuses, even if it’s what the client wants. This is just one of many legal issues practitioners may misunderstand. Beyond fair housing, transactional items that can be wrought with legal consequences include disclosures, contracts, escrow management, and lawful property marketing. “Legal issues permeate all aspects of the real estate industry,” says Steven D. Graham, vice president of risk management at the Missouri REALTORS® association.

Graham’s advice to real estate pros—especially rookies—is to “keep in mind that you are not a lawyer, so you should not be interpreting contracts or providing legal advice.” Rather, you should refer clients to their attorneys when a potential legal issue arises. Common legal issues in real estate include:

  • Inaccurate listing information. Graham says he’s seen lawsuits over listings using square footage from a local assessor’s office that turned out to be false. The Missouri state association has created a Measurement Disclaimer Form to address square footage. It provides the opportunity to cite the source of the square footage used for a listing but also says, “If exact acreage or square footage is a concern, the Property should be independently measured.”
  • Misleading property photos. Using old photos of a property in a listing can lead to accusations of misrepresentation in advertising. Bartholomew recalls going to see one house whose photos showed a lush green lawn, but there was no grass on the property in person. Such a misrepresentation is a violation of Article 2 of the Code of Ethics, which states: “REALTORS® shall avoid exaggeration, misrepresentation, or concealment of pertinent facts relating to the property or the transaction.” A Standard of Practice was added to Article 2 last year addressing the Photoshopping of listing photos.
  • Escrow. A buyer who gets cold feet and wants to cancel a deal may also want his or her earnest money back, turning to you to figure out how to retrieve it. You should refer your client to his or her attorney in such a circumstance. Even in places like Illinois, where a real estate broker serves as the escrow agent, the broker cannot release funds without written permission from both parties in the transaction or a court order.
  • Wire fraud. Fake emails from scammers instructing the release of escrow funds is a growing problem. If you handle escrow funds, you should have policies in place to verify any wiring instructions that are sent to your clients, says Juana Watkins, general counsel at Florida REALTORS®. Such policies might include a disclaimer on your email signature that you will never give wiring instructions via email, as well as procedures to have clients call you to verify any instructions they receive.

Some legal issues will be more obvious, such as a seller who refuses to disclose a known defect about a property. But what if you need additional knowledge about legal issues? For anything you are uncertain about, use industry resources such as in-house legal counsel, if your brokerage has one, or consult your local or state association’s legal hotline, advises Betsy Urbance, general counsel and vice president of legal services at Illinois REALTORS®. “Those organizations typically have people who monitor what is going on in the industry and publish about it on a daily basis—if not hourly,” she says. The Florida REALTORS®’ legal hotline, for example, fields 70,000 calls and emails a year. The Illinois and Missouri state associations’ hotlines handle roughly 3,000 calls each annually. The most common questions relate to disclosures and representation of properties in marketing materials.

Disclosures: A Constant Legal Bug-a-Boo

Issues around property disclosure are perhaps the most common legal pitfalls for real estate pros. Bruce Aydt, ABR, CRB, a real estate attorney and past president of Missouri REALTORS®, says about 80 percent of claims he’s handled relate to property disclosures. State disclosure requirements vary, so you should know the laws in your area. Remember that although your REALTOR® association may provide disclosure forms, your state may not legally mandate all the items on the list.

But there may be particular disclosure laws that are important in your area. In Missouri, where meth houses are common, the state requires disclosure of methamphetamine production on any property. Local REALTOR® associations there have adopted specific meth disclosure forms they include as an item on the overall seller disclosure form. Aydt notes that agents in Missouri are not required to verify or substantiate any information the seller shares with them about meth production on the property. But agents do need to inform buyers of adverse material facts related to the property that they have knowledge about.

Other disclosures can be difficult as well. Bartholomew recalls one client who had done roof repairs and repainted the ceiling in a room where leaking had occurred. The seller disclosed the work to potential buyers, but while the house was on the market, more rain caused the leak to reappear—and more repairs needed to be done. The seller also disclosed the second round of fixes. When a buyer’s inspector found evidence of the repairs, Bartholomew could point to the disclosure to satisfy the buyer’s query about the roof.

Know Your Transaction Forms

You should read and understand every word in the forms you, your clients, and the counterparties in a transaction are signing. Pay attention to the fine print; you need to know exactly what it says in case your clients skim over it and miss important information. “The more knowledgeable you can become with a contract in all of its forms, the better off you’ll be,” Watkins says.

It’s also wise to keep records of signed documents for every deal. “You never know what may come back to bite you,” says Linda Darer, a sales associate with Julia B. Fee Sotheby’s International Realty in Rye, N.Y. Such records came in handy when Darer worked with a divorcing couple who was selling their home. The husband, who had moved out of the $2 million home in Westchester County, accused his wife—and, by extension, Darer—of being unreasonable and rejecting offers because she didn’t really want to sell. He sought legal avenues as part of the divorce proceedings to force her to accept an offer.

The wife’s attorney asked Darer, who kept written records of every offer and counteroffer in the transaction, to furnish the information for the divorce case. The judge, after reviewing the records, determined that the wife was seriously entertaining and countering offers.