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Property disclosure ranks high among real estate legal disputes

A biennial research report by the National Assn. of Realtors indicates that a handful of real estate agents and brokers and their clients either don't know the law or don't care to follow it.

February 05, 2012|By Lew Sichelman

Reporting From Washington — When it comes to lawsuits, real estate agents and brokers tangle mostly among themselves.

But a good number of cases are brought by disgruntled buyers or sellers.

To be fair, the vast majority of real estate deals go off without a hitch, or at least without problems that leave buyers or sellers feeling so wronged that they are willing to spend the time and money to take someone to court.

If the latest edition of "Legal Scan" tells us anything, it is that a handful of agents and brokers and their clients either don't know the law or don't care to follow it.

"Legal Scan" is a biennial research report by the National Assn. of Realtors. Combining surveys of state real estate commissions and other key people in the business with a close analysis of case law and recently enacted statutes, the document identifies potential pitfalls that can ensnare anyone.

Property condition disclosures, for example, are a significant source of disputes, particularly when the house involved is either a foreclosure being resold by the bank or a short sale in which the seller owes more than the place is worth.

Disclosure problems involving underwater owners were deemed the most significant of all legal issues discussed in the 63-page report. Two-thirds of the respondents expect the level of disputes to rise, if only because short sales are not expected to go away any time soon.

Often, according to the report, the upside-down seller "sees no benefit" in giving up any information about the property. And sometimes, because the short-sale process takes so long, the property's condition changes while the contract is pending.

Lenders are blamed for much of the tumult because, as one respondent put it, "they are unresponsive and do not approve transactions in a timely manner."

But real estate agents take it on the chin too. Said another respondent: "Too many agents are dabbling in short sales without training and are not properly advising sellers of options and recommending legal counsel."

The message here: Sellers should work only with agents who are experienced and trained in handling short sales. So should buyers, because other respondents say many uninformed agents tend to give advice outside the scope of their expertise.

The situation is much the same when the house is a foreclosure and the seller is the bank. Nearly half the respondents said "real estate owned" (bank-owned) properties are already the basis of a significant number of disputes, and almost two-thirds think disputes over REOs is likely to increase over the next two years.

Generally, banks believe they have no duty to disclose anything about the property. As far as they are concerned, an REO is sold as is. Often, they do little or nothing to prevent damage to houses during the long, drawn-out repossession process.

But an Idaho respondent said: "Although folks understand the 'as is' clause, when the property is bank-owned, buyers and agents still expect banks to fix issues that are a threat to health and safety. Banks are not [doing that], and ugly battles ensue."

Even when the house is not a short sale or foreclosure, property condition disclosure is a big bugaboo: Nearly 95% of the respondents say the issue is the basis of either a moderate or high number of legal disputes.

Especially bothersome are structural defects discovered after the deal is done. Mold and water intrusion claims are also big. "If it's a big-ticket item, the buyer will want to blame someone else," said a respondent from Colorado.

"Administrative fees" are another topic being litigated. These are fees over and above the sales commission that cover things like the need to store documents for a number of years, and the fees are supposed to be disclosed when the house is listed. But when sellers aren't told, or when they don't pay attention, they go to court.

Frivolous? Perhaps. The respondents say cases that have no basis in law are a significant problem in and of themselves. One said plaintiffs are looking for a "deep pocket," with the mentality that "everything is someone else's fault."


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