Accurate disclosure documents are crucial to both sides in real estate transactions. When selling a property, the owner must always reveal essential information in a written disclosure document.

The Claim

Home buyers found a home they liked and made an offer for the property that was governed by HOA rules. The buyer’s offer was accepted by the seller, who was also self-representing as the listing agent in the deal. After the sale was final, the new homeowners, who purchased the property with the express intent of renting it out, learned that the HOA rules for their community prohibit new owners from leasing their property for one year.

The buyers claim that the agent misled them. They contend that if the seller had provided correct information, they would have known about the one-year rental prohibition. Furthermore, they state they would have terminated the deal had they been fully informed.

What Went Wrong

The buyers received erroneous information when deciding whether to purchase a property from the owner, who was also the listing agent on the transaction. They allege that the seller did not disclose critical information during a sale and have sought legal action.

In this case, the buyers sought to purchase an investment property in a development where similar adjacent subcommunity properties were sold in phases, each having separate and distinct HOAs. There is a one-year waiting period in the HOA rules for the property in contention, and that is where the problem arose.

The agent provided the buyers with HOA documents regulating an older, adjacent community. However, its regulations do not have a rental prohibition period of one year for new homeowners. HOAs will generally use rules, such as the one-year rental prohibition, to combat investment companies from buying and flipping homes into rental properties in their community.

While the owner/agent may be facing substantial legal defense costs and settlement fees, the buyers could have been more diligent in reviewing the documents they received to ensure they were correct. Had the buyer carefully reviewed the HOA CC&Rs, they may have noticed the discrepancies in the HOA names on the documents and requested the proper documentation. This could have avoided the ensuing disappointments and lawsuits.

It is unclear if the agent was merely incompetent or intentionally deceitful. Either way, the agent is facing troubling legal problems, reputational issues, and substantial costs and fees. It is imperative that both agents and sellers be truthful and accurate when providing information to buyers.

It is surprising that an owner/agent did not know such important HOA rules for the property they were selling. However, if misrepresenting a property for sale was a genuine mistake and she has professional liability insurance, then she most likely will be covered legally.

This real-life example of how a real estate deal can go sour stresses why agents need broad professional liability protection. An excellent E&O policy protects you from paying costly legal fees and settlement costs and defends your reputation.

Our E&O insurance experts are prepared to help you protect your real estate agency. On the human side, how we feel about our insurance agent’s professional liability coverage is that someone has our back. And we want peace of mind for our clients.  Click here.