The case of a California couple who are suing their real estate agent because they feel they overpaid for their home in 2004 has ignited a firestorm within the real estate community. The N.Y. Times featured the case in a recent article, and the Today Show will also apparently be running a story on the suit. Amazingly, according to NAR, this is the first known case where a buyer's agent has been sued by a buyer over valuation issues.
According to the article in the Times, Marty and Vernon Ummel purchased a home in 2005 using the services of Mike Little, a veteran agent with Re/Max Associates. The Ummels claim that Mr. Ummel, who was also working as a mortgage broker, encouraged them to obtain their loan through him. The suit charges that the Ummels requested a copy of the appraisal ordered by Mr. Little prior to the closing, but that it was not provided to them until after they moved into the home.
The Ummels apparently realized something was amiss when they got a flier from another real estate agent in August of 2005, a few days after they moved into their home, which showed that a house up the street had just sold for $105,000 less than theirs, even though it was the same size. When they finally got their appraisal, they learned that the house up the street was not only cheaper, but that it also had a pool. In early October of that same year, they learned from a separate flier that yet another similar sized home on the same street closed the same day as theirs but sold for $175,000 less.
The Ummels accuse Mr. Little not only of withholding information, but of exaggerating the value of the house to push them into a deal. In her deposition, Mrs. Ummel testified that Mr. Little had told them "many times that it was a very good buy."
In an interview with the Times, Mr. Little called the case "ridiculous,", adding: "The lady's a nut job. I didn't do anything wrong." He blamed the suit on a declining market. "When people see their home values and assets declining, they always feel there's someone to blame," he said. "This is a dangerous time for all of us in the industry," Mr. Little remarked.
The mortgage broker and the appraiser, who was accused of skewing his report to make the Ummel's house seem worth the purchase price, have both settled out of court. The case against Mr. Little and Re/Max Associates is scheduled to go to trial on Monday, January 28th in San Diego County.
If Mr Little did indeed fail to disclose the appraisal/prior sale information to his clients in order to save the deal, and his reported $30,000 commission, he has almost certainly breached his fiduciary duties to his clients as their buyer's agent (if he was in fact acting in that capacity, as there was no signed buyer agency agreement). The duty of an agent to disclose material information to their client is well-recognized. It is difficult for me to imagine a scenario where a recent comparable sale just up the street of which an agent has actual knowledge would not be considered to be material. If an agent has knowledge of any information which may influence their client's decision whether or not to purchase, that information is material and must be disclosed.
The fact that Mr. Little was also acting as the Ummels' loan originator is also of concern. Buyer agents must be cognizant of any relationship which could potentially pose a conflict of interest between the agent's duty of loyalty to their client and their own financial interests. A number of agents commenting on this case have repeated the old adage that "pigs get fat and hogs get slaughtered." Greed, and the viewing of a client as a profit center, rather than as a principal, can easily lead to legal liability for breach of one's fiduciary duties.
Undoubtedly, there have been a number of instances in recent years where buyer agents have not fulfilled their fiduciary obligations to their clients. Up until now, soaring property values have masked many of these shortcomings. With property values now in freefall, one can expect that buyer agents who have failed to fulfill their fiduciary duties to their clients will be called to task.
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