At the NAR national conference we had the good fortune of attending a session by Barbara Nichols. This speaker has written a book on avoiding legal liability in real estate transactions. Click here for book info.
Probably the key item in her session was the concept of proactively disclosing ALL material facts. Since material facts are relevant to a buyer's decision, it is important to get them out into the sunshine. So, if you know that the neighbor is crazy, disclose it to the buyer. If you know of any water issues, disclose them. She made a big point out of the fact that afterwards it will look really bad if you knew of a fact and did not disclose it, and it will be very easy for the buyer to say that it was material (i.e., "I wouldn't have bought the house if I had known that.")
She also talked about fiduciary duties of client obedience, client loyalty, etc., and the roles that these played in after-the-fact litigation. She made a point of indicating that a lot of the litigation arises from dual agency situations. Even though you can represent both sides in California, in general, we don't do so. Lawyers can't represent both sides of a dispute on the basis that it is impossible to stay neutral and that the lawyer will inevitably want to favor one side or another. Admittedly real estate agents don't start out on a dual agency deal thinking that there will be any disputes, but if there are, they can find themselves in trouble. The seller may want information disclosed one way (e.g. a summary that leaves out the gritty details), and the buyer might want to know everything. If one has a duty of obedience to both sides, there's going to be a failure somewhere along the line. Anyway, that's why we do our best to avoid dual agency deals.
I cannot count the number of times that a buyers have wanted us as the listing agents to write up a low-ball offer, and, expecting that this would cause a conflict, we simply said, "You need to find a good buyer's agent to submit your offer." Usually, the buyer is in disbelief that we would suggest that they find a good buyers' agent and won't represent them. What the buyer is really after in most of these situations is two things: 1) a low-cost purchase; and 2) a rebate from the listing agent due to the dual agency. It can be an interesting discussion to ask the buyer why he/she only wants to submit the offer through the listing agent, and sometimes they will be obtuse about it (e.g., "The listing agent has a direct line of communication with the seller.") But eventually they get around to saying that as the listing agent, the total fee can be reduced thus bringing down the total expense. Such buyers can be astounded when the listing agent says, "We represent the seller, and we'll get paid for our work. We won't represent the buyer in this case because of the tremendously enhanced possibility of litigation in the event that something unknown to you, me and the seller turns up during the transaction."
The one area that I asked Ms. Nichols about is the area of truly interesting problems where ethical duties directly collide. Here's an example. Agent takes a listing of an older home. There have been a variety of changes, including some renovation, patchwork carpet, etc. Seller fills out the disclosures and nothing about water issues is indicated. Seller has two dozen properties and Agent knows that Seller has filled out the disclosures many times in the past. A couple of months into the listing, agent happens to run into a plumber doing some work at another home being previewed. This was a completely chance event, and agent and plumber did not know each other. But Agent is always looking for good service providers and talks with the plumber and starts asking about other work performed in the area. Plumber starts talking about work to repair bad plumbing at Agent's current listing. In the course of that conversation, it is revealed that there was an ongoing water issue that may or may not be present today. Plumber specifically tells agent that the information is being told in confidence and that Plumber needs Seller's ongoing business due to the number of homes Seller has. The next time the Agent is over at the house with Seller, Agent asks about some of the renovation work, and, specifically, if any water damage had ever occurred to the house. Seller talks about the renovation work and flatly states that no water damage had ever occurred.
What is the agent to do? It certainly appears that Seller has committed a fraud upon the Agent and desires to commit fraud upon any potential buyer. However, Seller does not know anything about the veracity of the plumber. But the information provided by the plumber was not hearsay (e.g., "The seller told me that he once had a flood.) because the plumber actually saw the water on the floor and worked on the pipes, assuming he is to be believed. Where is the obligation of the agent to sort things out, and if the Seller denies the water damage and there is no insurance claim to substantiate it, what is the Agent to do? To disclose the information clearly jeopardizes the plumber's business. To disclose the information also violates the duty of obedience to the Seller as well as the duty of loyalty.
These are the kind of really hard questions that come up in practice. I think it is hard to find good guidance about these kind of really hard questions. (I talked briefly about such problems with Ms. Nichols after the presentation, but she pretty much just gave me the answer of "talk about it with the seller" which I must admit isn't very satisfying to me. If the seller is going to lie in the disclosures, seller is probably going to lie in a face-to-face discussion as well.
If you have a horror story of your own, post it along with your strategy for resolving it and avoiding litigation - we can all learn from these kind of practical case studies.
John Hokkanen
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