Flipping Out? Check Your Coverage Before You Do
Flipping properties has become very popular in no small part due to television shows and celebrity personalities. But for real estate professionals, there are additional concerns to consider before engaging in this practice. It’s important to know what activities are covered under your errors & omissions policy before moving ahead on any transaction. This real-world scenario shows how guiding industry principals protect not only buyers and sellers, but real estate professionals too.
A real estate agent entered into a listing agreement with an owner of a million-dollar property. The agent recommended a target sale price based upon a comparative market analysis. Shortly thereafter, the agent expressed an interest in directly acquiring the property and presented a purchase offer. The agent and the seller agreed on a price after a brief period of negotiation and proceeded to close escrow.
The property was never entered into the Multiple Listing Service (MLS), and the agreed upon sale price was well below the property’s true market value. The agent proceeded to sell the property one week later for $200,000 more than the price he paid.
By neglecting to place the property into the MLS, the agent did not afford his seller the opportunity to attract the best possible sale price. The agent failed to put the best interest of his client first.
The seller sued the agent and his brokerage alleging, in part, they purposely suggested an under-market price with the intention of buying and flipping the property. The brokerage submitted the claim to its insurance company, which subsequently denied coverage since their errors & omissions policy did not afford protection to any individual or entity of the brokerage who had a financial interest in the purchase and sale of the property.*
Real estate professionals should employ risk avoidance strategies in order to prevent lawsuits and the likelihood that their errors and omissions policy will not defend and indemnify them. Risk avoidance is a risk management technique used to avoid situations that may lead to potential liability exposure.
In this example, the agent could have avoided professional and personal claims against him and his brokerage by entering the property into the MLS and not purchasing it. Additionally, real estate professionals should always be familiar with their policy’s coverage and/or exclusions, including agent-owned property transactions.
The interests of your client should always come first in any real estate transaction as stated in the Code of Ethics and Standards of Practice of the National Association of REALTORS®. These standards guide real estate professionals and are designed to not only protect buyers and sellers, but also the agents and brokers themselves.
Preventing a claim in the first place is part of a comprehensive risk management strategy. For more information about E&O coverage and other risk management topics, visit pearlinsurance.com.
*There are varying provisions in some errors and omissions policies that allow coverage in the sale of certain residential property.
This article was produced in conjunction with AXA XL and is not to be taken as legal advice.