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Operating Outside Your Usual Territory? Be Extra Careful.

Many real estate professionals have a geographic area where most of their transactions take place. It’s an area they are familiar with and are confident in their knowledge of the market. Operating outside of your normal area requires a higher degree of diligence to ensure you cover any gaps in understanding that could lead to a claim.

In this real-world example, the number of parties involved and unsubstantiated information being passed off as fact, leads to a complicated claim that could have been avoided.

SITUATION

A real estate agent lists a property situated on a major road outside of his usual geographic area of operation. The state Department of Transportation (DOT) has long-term plans to widen the road, which is common knowledge, but the work has not been finally approved or funded. The official DOT website does not indicate any impending activity. The construction is thought to be years down the road, and the scope of expected work is not likely to seriously impact the listed property. The agent’s MLS includes details on the road project, stating “minor road widening shown on DOT master plan but not yet approved or funded.” A potential buyer places the property under contract. The buyer and her agent are aware of the road widening plans, but have also heard the work is years in the future, and the impact will likely be insignificant.

PROBLEM

The DOT receives funding for the project much sooner than expected. In addition, the scope of the work is increased and includes a much greater widening of the road than first planned. The DOT website is not immediately updated to give notice of the pending work. Residents and local real estate agents in the immediate area are aware the scope of work has increased, and for several weeks purchasing agents contact residents regarding impending land condemnations. A purchasing agent contacts the listing agent to request a meeting to discuss a price for condemnation of the property under contract. The listing agent immediately calls the buyer's agent to inform her of the requested meeting and verbally passes along the phone number of the purchasing agent. The buyer's agent later denies this claim. The buyer’s agent says her client still wants to close the deal. Several days later, the listing agent receives a letter from the purchasing agent, but does not forward it to the buyer’s agent because it contains no information that was not verbally conveyed. The sale closes and the buyer takes possession of the property. The buyer spends $10,000 on renovations. The purchasing agent eventually visits the buyer and informs them the DOT is taking the entire property. The DOT and the buyer agree to a settlement in which the DOT acquires the entire tract for more than the buyer paid for it. Nevertheless, the buyer files a civil action for damages and a Real Estate Commission (REC) complaint against the listing agent.

MISTAKE

The listing agent should have documented discussions with neighbors and local agents regarding the road widening project, instead of relying solely on hearsay. The agent should have also documented passing along the purchasing agent’s information to the seller’s agent to reduce the likelihood of a he said/she said argument. In addition, the agent should have been particularly vigilant, since he did not normally operate in that area, and the progression of DOT plans was well known. Lastly, the listing agent should not have assumed a condemnation award of more than the purchase price would preclude a civil action or REC complaint.

RESULT

The REC sanctioned the listing agent for failing to disclose a material fact. Even though the condemnation price was greater than the sale price, the civil action resulted in a judgment against the listing agent for the costs of the renovations, and the loss of benefit-of-the-bargain damages since the buyer presented as evidence that the property was worth well in excess of the sale price and condemnation award.

PREVENTION

Real estate transactions can be extremely complicated depending on the circumstance. It is always best practice to document any developing disclosure items in writing. Verbal “disclosures” can be denied and result in a he said/she said argument that is very difficult to defend without records. When conducting research, don’t rely solely on online or unofficial sources. And be careful working outside your usual geographic area. Following these standard practices can help reduce your risk of a claim, preserve your reputation, and protect your bottom line.