Failure to communicate is the major reason behind lawsuits and licensing complaints, according to Spencer Stephens, attorney at law.

Stephens has defended real estate agents in professional liability lawsuits, arbitration and licensing complaints since 1993. He says his practice mirrors a NAR study that came out several years ago that states that the most common types of claims overwhelmingly come from buyers and center on accusations of misrepresentation, failure to disclose defects and deficiencies, and failure to perform as a fiduciary.

What do all those failures have in common? Lack of adequate communication that is exacerbated by a sense of entitlement on the part of the buyer.

"From what I have experienced," says Stephens, "most claims come from frustrated expectations, which means communication is believed to have broken down. Misrepresentation, failure to disclose, to fraud, it all boils down to good communication, and an important corollary is managing expectations, from buyers who are new to the process or get unusually excited about their new homes."

Short of deliberate misrepresentation by some agents, the majority of agents don't intend to put their own clients in harm's way. Is there a way to tell in advance that a client is going to be trouble?

"I have seen a few patterns," says Stephens. "Very often, a buyer in a lower bracket will have to settle for a home that isn't as nice or pristine as they would like, and they have buyer's remorse after the closing is executed."

So the buyer sticks himself with a house he doesn't want and the agent is to blame?

"The buyer won't ask what they need to about the undesirable portions of the property," warns Stephens. "They don't think carefully about it. They have a high level of excitement about a house or they make a quick decision about buying for some reason. If someone has a budget of $100,000 to purchase a house and they are in an urban community where property values are high, $100,000 won't go far. They may have to purchase an older home in a less prestigious area, but it is an older home that the roof leaks or the furnace doesn't work or any of a number of things that aren't unusual for older homes, but they think, 'my agent never told me about this.'"

'Buyer Beware' has to apply in favor of all buyers, as an agent can only do so much, suggests Stephens. "That is when contract documents come in handy," he says. "In Maryland and Washington, DC they publish excellent contract forms so if you do get a claim you have a good shield."

How do you stop someone from going after your license or suing you? "If someone is really mad," advises Stephens, "and if they have gone to family and friends, and they get sympathy (You got cheated!) and they say, 'I suffered a loss, now who can I blame?', it is difficult to avoid a claim or complaint against you. Before a lawsuit or claim is filed, you will get a phone call from the person complaining, so be a good listener. Shut your yap and sound sympathetic. Don't apologize or make excuses, but you do want to express sympathy -- 'I know how you feel, it must be tough to go through.' It salves the wound."

License claims and lawsuits can happen to even the most diligent of agents, but is there a type of agent who is more litigation-prone, than another?

Errors and Omissions insurers seem to think so. Brokers pay higher premiums if they operate dual agency, designated agency or transactional brokerage business models.

Stephens notes, "I have not seen a significant change in E & O insurers except that you used to have the same coverage for licensing complaints that you did for a conventional lawsuit. Now there is a cap to defend a licensing claim. An aggrieved consumer will use the same facts as they would in a lawsuit to file a claim to a real estate commission that issued the licenses. The real estate commission disciplines them when they violate rules of ethics. In Maryland, for example, it can go either way. There is a real estate guaranteed fund that a consumer can get money back, but in my experience, it is difficult to succeed on a claim against the guarantee fund.

"I think there are an awful lot of people who look for easy money," he explains. "They go talk to a lawyer, but they don't want to pay $7,000 in lawyer's fees over a $10,000 defect, so they go the licensing claim route because it doesn't cost them a cent. The state pays for the claim to be investigated."

So what can a broker do to lower E & O premiums and hire and/or train agents to be better at communication?

"The agents that I have found who do the best job of communication and avoiding claims," says Stephens, "are the ones with good professional experience in some area before they become a real state agent. Former teachers or engineers or others who have backgrounds where professionalism was demanded of them, and they were held accountable and are well-schooled in ethical performance tend to avoid claims."

Brokers who hire agents who don't have professional backgrounds should be sure that all agents receive risk management training and continuing education courses in ethics, suggests Stephens.

Published: November 28, 2003

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