Industry Decoded with Rick Rosenblum
Illustration by Lanette Behiry/Real Estate News

Industry Decoded: Why risk prevention is critical for brokerages 

Lawsuits aren't just a risk for large, national firms. Brokerages of all sizes are exposed to legal and regulatory threats and need to be proactive.

March 8, 2023
4 minutes

Thinking big about residential real estate success requires a big-picture perspective. Industry Decoded features industry experts who can enrich your understanding of issues affecting the industry as a whole.

Most real estate brokerages are focused on their daily operations — bringing in new business, recruiting agents, closing deals — but they often fail to prioritize risk prevention.

Exposure to lawsuits, adverse regulatory actions, and insider threats are all very real risks for brokerages, yet many lack the foresight, resources and tools to avoid them.

Multimillion-dollar class action lawsuits calling out large, national real estate firms make the headline news. Less publicized, but more frequent, are suits filed against smaller, local brokerages. Most of these lawsuits stem from misunderstandings of contracts, negligence on the part of agents and brokers, mishandling of trust funds, or failure to disclose important facts related to properties and transactions.

When overseeing real estate transactions, it's important for brokers and agents to be aware of their legal obligations and disclosure requirements. Being armed with such knowledge can help protect an agent, their managing broker and the firm from potential financial ramifications and reputational damage.

Even in the best of circumstances — when a brokerage is sued but the lawsuit is dismissed — errors and omissions insurance premiums tend to go up. But those aren't the only costs. Sleepless nights, reputational costs, future regulator inquiry (which exposes the firm to potential license loss), and actual hard dollar defense costs take a toll on a business.

Rarely do brokerages budget for anti-litigation training, mock audits or the implementation of rigid systemic checks and balances throughout the transaction lifecycle. In fact, most brokerages don't take action until the threat "hits the fan," despite the prevalence of claims against brokerages and their agents and brokers.

Common claims agents and brokerages face

Breach of Contract: This occurs when one party to the transaction fails to hold up their end of the agreement. More specifically, this can be defined as a violation of an obligation or agreement.

For example, if an agent did not provide crucial services that they spelled out in their listing agreement, that could be a breach of contract.

Negligence: Negligence is when an individual's actions cause harm to another person due to carelessness or lack of proper caution. In real estate law, this means agents or brokers may be liable for failing to meet professional standards when representing clients in transactions or providing advice.

For example, if an agent failed to perform a duty which resulted in a loss to the claimant, they could be subject to a professional negligence claim for lack of reasonable care and failure to perform services.

Fraudulent Misrepresentation: This occurs when an individual provides false information knowingly either by purposeful omission, misrepresentation, or falsification of relevant and material facts pertaining to a property or transaction.

For example, knowingly and willfully omitting vital information in order to conceal a known material defect could be an act of fraudulent misrepresentation.

For these three commonly litigated areas, agents, brokers and their firms are typically all named parties in the legal complaint. It is vital that real estate professionals fully understand the importance of laws relating to disclosure, agency relationship, and the common law decisions related to standard of care.

It is my observation and belief that most real estate brokerages greatly underestimate the need to increase their compliance and risk management programs. And at some point, they are likely to incur painful costs in response to a lawsuit or other adverse event — costs that greatly exceed what they could have spent on training and other proactive measures. Benjamin Franklin said it best: "An ounce of prevention is worth a pound of cure."

Richard Rosenblum is VP of Strategic Projects at T3 Sixty and is a Certified Fraud Examiner and Certified Financial Crime Specialist. He is a licensed real estate broker who has worked for traditional and proptech brokerages, as well as in the mortgage industry, for almost 35 years. The views expressed in this column are solely those of the author. (Note: T3 Sixty founder Stefan Swanepoel also founded Real Estate News.)

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