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Monday, March 20, 2006

Lawsuit: Agents Fail to Disclose Representation

by Kenneth R. Harney

Joel Stern of Silver Spring, Maryland, thought he was working with a buyer's agent last year when he agreed to purchase a $700,000 house outside Washington D.C.

But at the contract signing he learned, to his shock, that his agent was actually representing the seller in the transaction. The listing agent for the house worked for the same large real estate brokerage -- Weichert Realtors -- as the agent he thought represented him.

Stern says he began to wonder whether he might have been convinced to pay too high a price for the house at a time when the market was beginning to cool. Then he became concerned that he had agreed to list his current home for sale with the same firm, and had accepted one agent's advice not to include a contingency clause that would have required that his current house be under contract before his $700,000 purchase could close.

He says he didn't want to be in the position of "paying for two houses at the same time," -- something he simply couldn't afford." But he was assured that his house would sell quickly and no such problem would arise.

"I really began to question the whole thing," Stern says, especially the "last minute switch" in representation -- at least as he understood it -- and the agent's failure to make required written disclosures up front.

He checked with a lawyer, found out that under Maryland real estate brokerage rules agents must disclose their representation -- for the seller, the buyer or otherwise -- at the first substantive meeting with a client.

Then Stern backed out of the purchase contract, filed suit, and demanded the return of his $34,000 deposit and cancellation of the contract entirely. The suit asks for $300,000 in punitive damages if the court rules the sales contract to be valid notwithstanding the failure to timely disclose the agent's representation, plus legal fees.

Stern's suit, filed in Montgomery County circuit court, sheds fresh light on a sensitive subject for realty brokers, agents and their clients: Though most states require disclosure of agency representation, many agents apparently are falling down on the job.

The National Association of Realtors' latest buyers and brokers survey research found that just 30 percent of all buyers last year received disclosures about representation from their realty agents at their first substantive meeting. Almost half of all first-time buyers in the same national poll say they either never received an agency disclosure anytime during the sales transaction, or could not recall whether they did or did not.

In an interview last week, NAR's top lawyer, general counsel Laurie Janik, said she "was so extremely disappointed" at the low percentage of agents making up-front disclosures.

"Our eye is not on the ball any more," she said. Janik noted that not only do most states require disclosures, but NAR's own code of ethics urges that clear disclosures be made at the earliest possible opportunity.

Clarity on representation is important in any real estate sale or purchase because Realtors typically assume a position of trust: Buyers may confide their most private financial details, needs and bargaining strategies to an agent they believe represents them. If the agent actually represents the seller, that confidential information very likely will be passed along to the seller, for the seller's advantage.

Thousands of dollars -- and the success or failure of a transaction -- may be riding on proper disclosure of representation. When consumers like Stern feel they have been misled, they sometimes sue the agents and brokerage.

"That's when this issue tends to surface," says Janik, "when something goes sour in the transaction," and seizes on the failure to disclose representation as the triggering event.

Though a preliminary decision by the county circuit court held that failure to disclose representation up-front was not enough in Stern's case to declare the contract null and void, the court invited Stern to amend his complaint for further consideration of the facts.

Lawyers for the Weichert agents said it is company policy not to comment on ongoing litigation. Stern's lawyer, Francis Koh, said the case essentially boils down to this question: Can agents "violate the law and not be held responsible. Mr. Stern believed (his agent) to be representing him. Had he known that she was working for the seller, he would not have gone ahead with the transaction."

What's the upshot of all this for consumers and agents? For buyers and sellers, it's a reminder to always ask your agent up front "who do you represent?" Get a written disclosure in states that require it.

For agents, the bottom line is Laurie Janik's message: Disclose at the earliest opportunity. And avoid suits like Stern's.

Published: March 20, 2006

Kenneth R. Harney writes an award-winning, nationally-syndicated column on housing and real estate from Washington, D.C. He is also managing director of the National Real Estate Development Center, a professional education company. He is a past member of the Federal Reserve Board's Consumer Advisory Council, a committee that by federal statute reviews all Fed actions on home mortgage, consmer credit and banking industry regulation.
He served as a member of the U.S. Department of Housing and Urban Development's Working Group on Computerized Loan Origination (CLO) systems, and is a member of the Editorial Board of the Fannie Mae Foundation's journal, Housing Policy Debate. He is the author of two books on mortgage finance and real estate.

Copyright © 2006 Realty Times®. All Rights Reserved.

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