E&O Risk Manager: Buyer Sues Agent for Breach of Standard of Care

A Real-Life Situation on the Importance of Knowing Local Guidelines

Situation:

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A real estate agent was working on behalf of a client who was in the business of acquiring residential properties below market value which could be renovated and sold for a profit. The first property the agent located was a 2,700 square foot home that required kitchen, bathroom, and cosmetic upgrades. The comps provided to the client demonstrated that with a $40,000 renovation, the home’s market value would increase by $70,000, yielding the client a profit of $30,000. Based on this projection, the client purchased the property and completed the renovations. It was then placed back on the market through the Multiple Listing Service (MLS).

Problem:

The actual size of the house was only 2,000 square feet, not 2,700 square feet.

Mistake:

The listing agent in the original transaction identified the property as having 2,700 square feet, but that square footage included the garage and storage area.

Result:

In order to advertise the newly-renovated property to other real estate agents, an open house was held shortly after being offered through the MLS. The client was also present to answer any specific questions related to the renovations. However, the first group of agents that viewed the property immediately questioned the square footage. Several calculations confirmed the error, leading to an immediate cancellation of the open house and an ensuing lawsuit against the seller and both real estate agents. The allegations against the client’s agent included breach of the standard of care for failing to verify the square footage at the time of purchase and when it was relisted in the MLS. Meanwhile, the property was sold by another agent, allegedly resulting in a $45,000 loss to the client. The lawsuit was eventually resolved with the agents paying the majority of the settlement.

Prevention:

Most, if not all, real estate commissions provide guidelines for brokers and agents representing both sellers and buyers. Generally speaking, agents may rely on the listing agent’s square footage representations, except in those unusual instances when there is an error in the reported square footage. That error should be obvious to a reasonably prudent agent. For example, a discrepancy of 20 or 30 feet may not be considered material in nature, but a 400- or 500-foot discrepancy might be considered a red flag, necessitating further investigation. It’s a good practice to familiarize yourself with local guidelines and be mindful of square footage representations. If you think it’s incorrect, advise your client promptly and seek verification.

The recommendations in this article may differ from state and local practices. Greenwich Insurance Company and Indian Harbor Insurance Company Coverage is not available in all jurisdictions.

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