“Real Estate Agents: Who’s Looking Out for You?”

                                                                                                                                                           
                                                                                                                                                            By Keith Swift, PhD.

                                                                                                                                                            Executive Director, CALNACHI

The real estate industry leads the nation in litigation, and costs millions of dollars each year--millions that could be better spent on improving the benefits of real estate professionals. The increase in litigation is best reflected in the ever-increasing amount of “legal” documents that find their way into escrow. For instance, several years ago when Consolidated Industries gas furnaces first posed a threat, a general disclaimer regarding horizontal gas furnaces was added, and recent publicity about mold has warranted even more. Consequently, the average file for a residential sale continues to grow with each passing year. The reasons for litigation are deeply rooted in human nature, and most attempts to limit it have been largely unsuccessful. However, it is possible to reduce litigation with a few fundamental changes. Acknowledging that change is always difficult, let’s reflect on the major steps of a real estate transaction to see what we can deduce from the process and what changes might be worth making.

From the moment someone decides to sell a property things are not guaranteed to proceed smoothly. If it sells quickly, sellers are often inclined to believe that their agent listed it too low in order to make a quick commission, and if it doesn’t sell quickly they are equally inclined to believe that their agent is lazy or incompetent or unwilling to spend a sufficient amount of money to market it effectively. Buyers are no different, and have given us the phrase “buyer’s remorse,” and commonly conclude that they either paid too much for a property or were figuratively robbed. And if their remorse is acute enough, people who were once friendly are likely to find themselves communicating through attorneys for months on end, and maybe even years. And justice is rarely served to everyone’s satisfaction. That’s just human nature. But, let’s continue to reflect on the transaction.

At some point after a property is listed for sale, the listing agent will ask the sellers to complete the Transfer Disclosure Statement (TDS). This is appropriate because sellers typically have the most intimate knowledge of a house and property, which they provide for the buyers as a matter of common sense and a gesture of good will, but its main purpose is really to avoid litigation. With the possible exception of loan documents, the TDS is probably the most important document in the entire transaction. Unfortunately, however, sellers are often tempted to conceal what they know or conveniently forget; that too is human nature. And if the sellers move out of state they will be very difficult to prosecute even if they’ve deliberately lied or intentionally concealed defects, which leaves agents and inspectors as the only logical litigants. However, if listing agents actually participated in filling out the TDS and made sure that it was detailed and completed conscientiously, litigation could be significantly reduced. Interestingly, Coldwell Banker has added yet another document to the expanding escrow file—the SPQ, or Seller’s Property Questionnaire, which can be seen as an adjunct to the TDS and yet another attempt to avoid litigation. Despite the potential power of the TDS, the SPQ, and other documents that attempt to limit litigation, the physical inspection appears to offer the ultimate defense.

The idea of having properties inspected was introduced more than thirty years ago by major real estate brokerages, in an attempt to control the assault of civil litigation. Many lobbied to have inspectors characterized as “specialists,” specifically to transfer liability from sellers and agents to inspectors, a liability that inspectors categorically refused to accept by publically identifying themselves as “generalists.” Regardless, these same brokerages arranged group meetings with inspectors, insisted that they carry liability insurance as a condition of agent-endorsement, and then compiled a list of “approved inspectors,” which they distributed throughout their network of offices. However, this did little or nothing to diminish litigation. In fact, ironically, it merely added to the number of people who had “deep pockets” and who could be profitably sued. In short, thousands of inspectors began to be sued along with everyone else who had anything to do with a transaction. Unscrupulous clients and their attorneys were quick to understand that insurance companies could be counted on to settle even the most frivolous of claims rather than incur the greater expense of defending the innocent. Thus, the courts became a place in which huge sums of money changed hands, rather than a forum for justice. Documented proof is not hard to find. Indeed, even the testimony of attorneys is readily available. It goes without saying that this is a national disgrace, which has enabled media icons like Bill O’Reilly to characterize the American judicial system as “a cesspool of corruption” (Who’s Looking Out For You p.166).

Obviously, tort reform would significantly diminish frivolous litigation, but that’s not likely to happen any time soon. Change is glacially slow, and reforming any industry in which money flows is difficult at best. However, there is hope for the real estate industry and the common good, but it will require a change in the way agents and inspectors regard each other and a change in the way in which they conduct their business. Unfortunately for consumers, inspectors and realtors have come to regard themselves as adversaries. But, let’s consider some of the clichéd stereotypes that confirm this. Realtors are often compared with used-car salesmen, while inspectors are characterized as deal-killers and alarmists, but both generally end up together in the same courtroom characterized as villains and frauds, or worse. However, these stereotypes are not without foundation. In some cases, realtors have colluded to conceal things, minimized serious deficiencies, and commonly insulted inspectors by shopping for “cheap inspections” on behalf of their clients, and some are surprised and even indignant when an inspector enquires about the listing price of a property to establish a fee--a price on which an agent’s commission is based and not on the amount of work or degree of liability entailed. And it is not without significance that the TDS includes copies marked for the broker, the seller, and the buyer, but not one for the inspector, who usually has to ask to be shown it. It makes no sense. A simple act of sharing information could change the relationship between agents and inspectors, and could certainly help in reducing litigation. Many agents never learn that decent inspectors have had their insurance cancelled and their livelihoods jeopardized by frivolous litigation. And the truth is, many inspectors have been forced to accept that the courts and their clients actually regard them as specialists, whether they like it or not. Consequently, many inspectors now use specialized instruments while continuing to insist that they are “generalists,” and they’ve certainly become more stringent in their observations over the years. For instance, nervously afraid to report that an old furnace is simply “functional,” they’re more likely to report that it’s old and beyond its design-life, and should be evaluated for replacement by a specialist, which commonly results in buyers requesting at least the partial cost of a new furnace, which in turn leads to conscientious inspectors being labeled as “deal killers.” The statute of limitations on a property in California is four years, four years in which the inspectors and agents remain vulnerable to lawsuits, and this in a state where frivolous litigation is rampant. Indeed, in California, inspectors can be sued by persons who have not paid them or entered into a contract with them. It’s a travesty, but a travesty with an unfortunate legal precedent.

The purchase of a property is probably the most expensive investment that consumers ever make, and they deserve the professional support of agents. And yet some agents make the dire mistake of shopping for a cheap inspection, without seeming to understand that they are likely get exactly that—a cheap inspection, and one that is very likely to leave a client feeling duped and angry when “something” does go wrong, and also an opportunity for an attorney to build a case against an agent for negligence and fraudulent referral. And it really won’t matter when an agent protests that they actually recommended three or more inspectors from an approved list of inspectors and advised the client to make their own choice. Common sense confirms that agents have had far more experience evaluating inspectors than the average consumer and should logically make the choice on behalf of their clients, but that choice should never be based on a fee--unless it’s the most expensive fee, which would logically be for a quality inspection. Paradoxically, agents don’t complain that geologists and structural engineers are too expensive, and yet inspectors accept the responsibility of evaluating far more than soils and structural components. This flies in the face of common sense, but it’s true. Inspectors are analogous to general practitioners who understand a great deal about medicine and the human body, and are able to recognize when they need to advise their clients to seek a specialist opinion.  And what person in their right mind would shop for a cheap doctor? All inspectors are not alike, and neither are all agents. By simply acknowledging this, agents and inspectors could change the way in which they view each other and agree to work together as a professional team, with the common goal of serving the consumer and diminishing litigation.

It is not difficult to shop for a good inspector, and certainly no more difficult than shopping for a good real estate agent. Both should be selected on their qualifications, their experience, their willingness to provide professional service, and their ability to provide insurance coverage. Inspectors should stand behind their work, respond to any complaint promptly and courteously, and be prepared to compensate for any errors or omissions in their service. However, realizing that change is essential, CALNACHI inspectors have voluntarily agreed to work to the most stringent Standards of Practice in the industry, and not because they were forced to but because they chose to. And when agents recommend CALNACHI inspectors they can rest assured that the phrase “California’s premier inspectors” is no empty advertising slogan but a statement of fact. With just the slightest effort, agents and inspectors could find themselves working together as a professional team in the service of the consumer.