John M. Lee: How to Stay Out of Court

It is very unfortunate that we live in a litigious society.

Because real estate contracts are legal documents, when issues rise from transactions the consequences can be ominous. With property prices increasing as high and as fast as they have in the past few years, sellers need to be extra careful during the sales process concerning contractual language and disclosures.

Usually, when property prices are increasing, the number of real estate lawsuits tend to decrease because buyers who find some defects a number of years later, their properties have appreciated enough so that they are happy to fix the property.

But, when prices are flat or decreasing and buyers think they paid too much for their properties, they will look toward the sellers and/or agents for financial help to mitigate the issues. Often, this process results in arbitration or a lawsuit.

In today's market, we are getting to that point so sellers, agents and attorneys must pay more attention to the details of the transactions and to make sure everything is legal.

Most of the complaints we see as real estate brokers are for non-disclosures. In every residential transaction of four units and less, with the exception of probate, trust and foreclosure sales, a transfer disclosure statement is required to be given from the sellers to the buyers. And, in many cases, a more detailed supplemental transfer disclosure statement is also completed and given to the buyers.

Sellers need to go through and answer all the questions carefully. Remember, if in doubt, disclose more rather than less. If there is not enough space in the paperwork to disclose completely, use an addendum or another form to provide more details.

Sometimes, sellers ask if they need to disclose a certain item. Just the fact that they mention it is probably cause to disclose it because you never know what the potential buyers are concerned about. Some agents carry errors and omissions (E&O) insurance. The insurance carriers have minimum educational requirements for agents, and most companies that carry E&O insurance will have risk management programs for agents, educating them on current legal issues and how to minimize risk.

If sellers are sued in a transaction, chances are high that the agents will also be bought into the lawsuit. Since real estate contracts are legal documents with consequences, I would suggest that buyers and sellers have access to good real estate attorneys in the event that legal counsel is required.

Chances are, you will not need to use them, but it is better to know that you have access to someone when you need them, rather than scrambling to find someone when the need arises. Correcting problems after the close of escrow are messy and costly. It is better to disclose and deal with problems during the transaction rather than after.

The worst that can happen is the transaction falls apart and you have to re-market the property. In the long run, this is a better solution than getting embroiled in a bitter legal battle after the close of escrow. Happy selling.

My wish is that none of you ever get involved in a lawsuit, as it is no fun and a tremendous, emotionally-draining experience.

John M. Lee sells for Pacific Union and specializes in the Richmond and Sunset districts. If you have questions about real estate, call (415) 447-6231 or e-mail johnlee@isellsf.com.