2015 Broker Claims Survey Results

In an effort to stay apprised of current issues affecting the real estate industry, Arizona REALTORS® Risk Management Department distributed a claims survey to REALTOR® brokers throughout the state in October and November of this year. The survey sought information related to the types of issues, claims, and/or allegations that brokers received via demand letters, lawsuits, and Arizona Department of Real Estate (ADRE) complaints.

The following are the summarized results:

Demand Letters
Out of the 806 responses to this question, 56 brokers reported receiving at least one demand letter. Other than property condition, these letters most often addressed: (1) landlord/tenant disputes, primarily pertaining to deposit refunds and the condition of the rental property; (2) advertising deemed to be deceptive; and (3) ambiguous/unclear contract provisions.

Items two and three demonstrate the importance of broker supervision in not only approving advertising used by their licensees, but reviewing purchase contracts to ensure that the terms are clear and not subject to more than one interpretation.

As for property condition, the most frequently identified issue addressed via demand letter involved the operational condition of the pool and spa, evidencing the need for inspection of this amenity. Not far behind pool and spa were plumbing, HVAC and mold/water intrusion.

Brokers also reported receipt of demand letters pertaining to sellers desiring to cancel their listing agreement, violations of the Do Not Call Registry, slipping and falling at an open house, and a buyer’s loss of inspection and appraisal fees in conjunction with an unsuccessful transaction.

Lawsuits
While it is the hope that most demand letters are resolved before litigation proves necessary, 20 out of 775 responding brokers acknowledged that their brokerage had been sued at least once in 2015. That means that over 97% of responding brokerages were not sued in 2015, which is a credit to the professionalism of REALTORS® throughout the entire state.

The specific claims most frequently litigated asserted negligence and misrepresentation, with only a small percentage of claims involving an allegation of fraud.

Other than property condition, litigation most frequently pertained to landlord/tenant issues, followed closely by claims relating to agency, demonstrating the need for caution when acting in a dual agent capacity.

When the litigation did pertain to a property condition, it usually involved high dollar items that are more expensive to remedy. For example, the two property conditions most frequently addressed via litigation were roof leaks/defects and sewer/septic.

Interestingly, the 2014 Broker Claims Survey also identified roof and sewer/septic among the most common claims, with sewer septic claims falling into one of two categories: (1) the seller failing to correctly identify whether the property is serviced by sewer or septic; or (2) septic tank defects discovered after close of escrow.

ADRE Complaints
789 brokers responded to this question, with 41 indicating receipt of at least one ADRE complaint in 2015. Most involved an allegation of non-disclosure on the part of the licensee. A close second were purported advertising violations, with complaints of this nature being filed by members of the public and other real estate professionals. And as has become increasingly common, many ADRE complaints pertained to property management, often focusing on trust account violations, property damage by the tenant, and alleged wrongful withholding of the security deposit.

As for specific fact patterns, brokers mentioned ADRE complaints filed regarding brokerage abandonment, an agent’s failure to provide signed transaction documents to their principal, failure to timely submit a purchase offer, failure to obtain signatures, and the recommendation of an unlicensed contractor. For the most part, all of these issues can be avoided by providing thorough representation and paying attention to detail.

Finally, the survey asked brokers to provide any additional comments, concerns or information they would like other brokers to be aware of. While some provided additional information regarding specific claims, many others offered simple words of advice.

Among the more common recommendations were encouragement to other brokers to spend time instructing their agents on how to properly write contracts, especially when inserting additional terms and conditions, or imposing alternative contingencies.

Other brokers stressed the need for personal contact, urging brokers to personally interact with their own agents, as well as the other broker in the transaction. This advice ties into a common theme expressed by many brokers, which is the importance of accurate and effective communication.

Unfortunately, demand letters, lawsuits and ADRE complaints are often the cost of doing business. But identifying common claims and taking steps to avoid the pitfalls experienced by others is an important risk management tool.