According to the Real Estate Agency, around 70% of the complaints that they receive include an element of "misrepresentation". Misrepresentation is probably not the word used by the customer. The customer will say "My Realtor lied to me". Such a statement seems extreme, and is certainly not going to apply to you, right?

Misrepresentation is a charge which can be made where there are merely misunderstandings or mis-communications. Customers arrive at your office with their own ideas of the services you provide. If they are overwhelmed with information, or don’t listen carefully with understanding, they can believe that you "lied" to them, when they should be thanking you profusely for the exceptional service you supplied.

Furthermore, traditionally Realtors and their Brokers are held to a higher standard of care in this area. What does that mean? It means that you will be assisting people who may be very experienced or may be buying their first home. You will have a greater duty to assure complete and accurate communication which is understood by your customer.

Finally, it is important for a Realtor not to have a charge of misrepresentation raised against them, because word of mouth advertising is probably the best source of a continuing stream of customers. Some Realtors today are actually limiting their assistance to those who were referred to them by former customers who were happy with the service they received. Whether or not you limit your customers like this, you certainly want to keep the customers happy and get their repeat business. It beats making cold calls!

WHAT IS IT?

Misrepresentation has been defined by the legal community as:

"Any manifestation by words or other conduct by one person to another that, under the circumstances, amounts to an assertion not in accordance with the facts".

Under this definition there are nine different "facts" to prove before an attorney has presented a judge with a situation involving misrepresentation.

First, there must be a representation. Second, the representation must be false. Third, the representation must be important to the transaction, which attorney’s call "material". Fourth, the speaker must either know that the statement is false, or must know that he or she doesn’t really know whether the statement is true or false. (This level of self knowledge is very difficult to prove. Few people are aware of the extent of their lack of knowledge!) The final proof required about the speaker is that the speaker intend that the hearer act upon the information, and act in the manner reasonably believed.. So simply boasting, with no intent that the hearer take any action or do anything, does not constitute "misrepresentation".

On the injured party’s side, the hearer must not know that the statement is not true. Second, the hearer must rely on what is said. Third, this reliance must be reasonable, that is the hearer must have a right to believe or rely on the statement. Fourth, the hearer must be injured. That is there must be a loss which was a consequence of this statement and which can be compensated by money.

A lawyer has a difficult time proving "misrepresentation" unless there is also proof of a fraud. Misrepresentation is very similar to a criminal fraud charge.

The Random House Dictionary has a different definition of misrepresentation. It says that fraud is "to represent incorrectly, improperly or falsely". This definition includes all the ways that mis-communications can happen: just be wrong, say something inaccurately, or lie.

However, the Real Estate Agency has a definition they call "Plain Language": "When someone, either by their words or acts, asserts something to be true, when in fact, it isn’t." Using this definition, there is no more "caveat emptor" or "buyer beware". This definition does not require that the hearer be deceived, that the hearer rely upon the statement, that there be any damage to the hearer or that the statement be about a matter which is material or important to the transaction.

Under the Agency’s definition, in order for your customer to call the Agency and "prove" to them there was a misrepresentation, all they need to do is show that something was said or implied which wasn’t "true". As we are all human, there is a high likelihood that something we say won’t be 100% accurate, despite our best efforts. On the other hand, if the customer is happy when the transaction ends, or at least happy with their Realtor, there will be no complaints made.

THE THREE FORMS

When does a misstatement rise to the level of misrepresentation? Probably when the customer thinks of it as a "lie". A misstatement would be called "Negligent Misrepresentation", rather than "Willful Misrepresentation" which could be called fraud. For Negligent Misrepresentation you may have either a false statement which the speaker should have known wasn’t true, or a false statement that there was a reason to believe was false, but the Realtor didn’t try to find out if it was true or false.

When things get rushed, do you ignore that "gut instinct" that alerts you and says "something is not right"? If so, you may be in danger of making a misstatement which is Negligent Misrepresentation -- or even of acting in a fashion that one of the parties to the transaction assumes or incorrectly believes something.

If you ignore a red flag of a problem, even if you do so because the transaction has to close very quickly, there is danger. If you see something that leads you to question a statement that your customer makes, you need to follow up on the statement. For example, things that an experienced Realtor notices about a house may be new to the owner. You could notice evidence of a roof leak that the owner who is trying to sell the house didn’t even know exists. If you ask the question, and the answer comes back that the roof doesn’t leak, what do you do?

According to the Real Estate Division, you continue to inquire until you are satisfied that you have an accurate answer. It is not necessary to have an intent to deceive to make statements that are not accurate. Humans are more likely to tell the truth, as they know it, but not to know. That is why they hired YOU, the expert Realtor. (By the way, they will probably expect you to be an expert on everything, until you explain to them that you are a Facilitator, and will help them find the true expert. Even if you ARE an expert, it is wise to recognize that experts make mistakes, and knowing what you DON’T know is difficult for the best of us!)

If you as a Realtor, make ANY statement based upon an assumption without investigation, you are exposed to the risk of misrepresentation. Now, that being said, there will be statements that you know from your experience are accurate. Those are fine to make. However, if there are several possible reasons for a situation, or several ways that something might have occurred, you should protect yourself by giving the usual situation, and making inquiry. You can always say, "I believe so, but let me confirm that for you" or "That is the usual case, but let me check that for you". Allowing the customer to ask questions for which you do not have an immediate answer is not only okay, but may be a method of fostering the feeling that the customer is a responsible part of your team.

When dealing with "For Sale By Owners", also known as FISBOs, special care should be taken to clearly disclose the nature of the services you provide, the limitations of representation and the fees. Many FISBOs are unaware of the extent of work involved in selling a house, or they wouldn’t try to do it themselves. They are without the extensive experience you have, and some of them even feel that a Realtor is taking money without providing a valuable service. As with any group of people who distrust you, special care should be made to communicate clearly and in language that the customer can understand. It may be helpful to provide written information to FISBOs so that they do not have to rely on what they can recall of a conversation. Pacific Northwest Title has a brochure on the value of Realtors which is especially made for such situations. Call your sales representative for free brochures to provide to FISBOS.

Remember that Realtors and Brokers have a higher duty of care and "honesty" in dealing than most professionals or sales people. For example, when you go to buy a car, if one of these "Negligent Misrepresentations" is made, you do not have any right to sue the seller. The seller has a duty to be honest to the best of their knowledge, but you do not have the right to rely upon their statements.

The Real Estate Agency has two different definitions for "Willful Misrepresentation", also known as fraud. The first definition is "Active Fraud" which means "Making a statement that is known to be untrue at the time it is made, upon which someone relies and is harmed". The second definition is "Passive Fraud" which is allowing a known and incorrect assumption to go uncorrected where the incorrect assumption causes harm. In other words, if you are aware that there is an incorrect presumption being made, you will have a duty to correct this mis-impression, but only if the assumption will cause harm.

The "Passive Fraud" requirement for actual harm can create an illusion of safety. What is damage or harm is difficult to define prospectively. The Real Estate Agency will probably find anything that the "injured" party feels is harmful to be actually harmful.

Many of the terms used in defining misrepresentation are capable of several interpretations. Realtors should be aware that the Real Estate Agency is here to protect the public. With this directive, the Agency will probably interpret any statements you make or actions you take exactly the same as your customer, without much regard for your intentions. Notice that an intent to harm is required only for the active fraud. Other actions, or inactions, may be considered misrepresentation where the intent may be ambiguous or even innocent. Is this fair? Probably, as long as the rules are adequately explained to all parties, including Realtors.

How can you protect against a charge of negligent misrepresentation? What is the standard against which you will be measured? If the negligent misrepresentation is alleged in a court of law, the standard you would be measured against is the standard of care taken by other Realtors who sell real property in the same area that you do. Now the court won’t restrict the area as much as some Realtors will, that is if you sell in the Portland area, the entire area may be considered in establishing what is normal, rather than the Sellwood area or Southwest Hills area.

However, the "standard of care" for a Realtor in any area is established at a high level, because the courts have held that a Realtor has a "fiduciary duty" to their clients. A "fiduciary" duty is a duty to perform an undertaking with the "utmost good faith and loyalty to a client’s interest". A Personal Representative of the Estate of a dead person has a "fiduciary" duty. A Trustee of an active trust (not a deed of trust) has a "fiduciary" duty.

When you have a "fiduciary" duty, the customer has the right to trust or rely upon your statements in matters connected with the sale or purchase of real property. The customer doesn’t have to be on the alert or investigate the statements, but has the right to place confidence in them. When this duty exists, there is a duty of full disclosure, which is a positive duty to communicate all information which is material to the parties’ transaction which is currently possessed or subsequently discovered. In other words, if in the middle of a transaction, a statement made becomes incorrect, that information must be passed on to the parties to the transaction.

The duty to disclose (and possibly the "fiduciary" duty) has been extended by the court even to situations where the Realtor is engaged in private dealings and has no principal-agency relationship with the purchaser or owner. In other words, despite the ability of a non-Realtor to sell their real property in an arms length transaction and be liable ONLY for actual, intentional fraud, a Realtor engaged in buying or selling property for themselves has a requirement to disclose fully and frankly all facts material to the transaction and to correct any mis-impressions the other parties to the transaction may have.

Not only do you have a duty to disclose matters to the parties in a transaction, the duty is to make the explanation understandable to the parties. In one case decided in 1961, the court stated:

"[The] duty is to make [the] explanation commensurate with the education and understanding of the people he is dealing with, and if he is unable to give them competent advice, he should allow them to obtain it elsewhere."

In this case, English was a second language for the parties involved, who also appeared to have a limited education. The Realtor was required not only to make a simple explanation of the facts, but to assure that the parties actually understood the explanation.

If you deal with individuals for whom English is a second language, do you always have an interpreter? How can you assure yourself that the parties actually understood the entire transaction? One method might be to have the customer tell you in their own words, possibly in their primary language, what they understand you to have said.

It is not really practical to require a certified interpreter for every meeting that you have with a client. On the other hand, use of minor children to "interpret" would probably cause difficulty. How could you determine that the children understood enough of what they heard to properly translate the message?

The prudent Realtor must take reasonable steps to assure that you know enough about your customer and their level of experience with real property to tailor your explanations to their ability to understand. If you are not fluent in the primary language of your customer, someone who is able to translate what you say and assure that it is understandable by the customer should be present. Again, making sure that the customer is satisfied and happy at the conclusion of the transaction should prevent any complaints.

In the event that a Realtor is determined to have failed to meet the requirements of the "fiduciary" duty, the court or the regulator can impose "punitive" damages, or damages that are intended as a punishment. These damages would be in addition to any monies awarded to the customer for actual harm or loss sustained.

CAUTION: DANGEROUS!!!

There are three areas of a Realtor’s work that require special care to avoid the allegations of misrepresentation: CMAs, Disclosure/Disclaimer Forms and Contingencies.

The use of computers to generate CMAs is becoming more the rule than the exception. While computers are a great aid in this task, the accuracy of comparables should be verified by actually viewing the homes used. Taking a tour of the house, or having seen the home on the property tour day, may draw to your attention distinctions which a bare computerized statement wouldn’t.

For example, the computer simply states the number of rooms, square footage and date of completion. Owner maintenance is not a part of the computerized information. A well maintained house may have a much higher value than a similar house with no maintenance at all. Furthermore, the existence and state of landscaping may greatly impact the house’s saleability. A house with a simple lawn most likely will sell more quickly than a house with a beautiful English garden which requires daily maintenance.

Even though the similarity and saleability of homes is a subjective judgment which could vary from Realtor to Realtor, the fact that an informed decision was made after inspection of the property will protect you from any allegations that your CMA was a "misrepresentation" because it failed to factor in the "extent of owner improvements" or some other objection that the seller has. (Interestingly, the customization of the house that makes it unique and delays its sale is generally considered by the seller to be a plus which should make the house sell quicker!)

It is very important that the CMAs contain all the elements required by the rules promulgated by the Real Estate Agency. Most important of these rules are ones which specifically indicate that a CMA is not an appraisal, but is prepared to allow value guidance to an owner who is thinking of selling their home. An additional statement that the document is prepared to assist in pricing the home so that it is competitive against other homes which are for sale in the area is mandatory.

It might be helpful to discuss with the sellers the differences between intrinsic value, value to the current owner, and value as established for replacement (used by casualty insurers). Value may have little to do with what the house will sell for, especially if the market is weak and there are many homes for sale to few buyers! If the owner/seller is not willing to be realistic in pricing, the listing may not be worth taking.

When a customer insists on an unrealistic price, despite your CMAs and your advice, then documentation is in order. The customer may wish to under or over price the home. In either situation it is important to document the records to show that the proper information was provided and that the price was established by the seller and is either below or above the market price suggested by the CMAs.

If you are representing the buyer, you should do your own CMAs. Having your own CMAs may assist you in getting the seller to lower the price, or in showing your customer that the price set by the seller is fair.

Disclosure/Disclaimer Forms are another area which is especially dangerous. You have a duty to explain the standardized forms that you supply to your customer, especially if you assist them in completing the form. BUT THE CHOICE TO DISCLOSE OR DISCLAIM IS A LEGAL QUESTION. The Agency is adamant that you not advise your client which form to use. You need to refer them to an attorney. Now it is always wise to advise clients to seek competent legal assistance.

As we all know, you may lead a horse to water, but you cannot make him drink. If the customer has determined that the use of an attorney is not warranted, whether the customer’s decision is based upon cost or distrust of attorneys or a simple belief that they can handle the matter alone, you are not going to convince them to seek legal advice. What do you do, then, when they ask you what you would do in this situation?

If you answer the question, there is a high probability that the customer would believe that you advised them on a choice between the Disclosure or Disclaimer Form. If they are dissatisfied at the end of the transaction, this may be part of a complaint they raise with the Agency. Given the amount of publicity the Agency has given their determination that choice of the correct form is a legal question, the only possible defense to such a charge is a total denial -- hopefully reinforced by a written statement signed by the seller stating that they have not relied upon any statement you made to select the disclosure or disclaimer form, that prior to their selection they were advised to seek legal counsel and if no legal counsel was obtained (or retained!), the seller made this decision themselves against the advice of their Realtor.

You should be aware that the use of a Disclaimer DOES NOT re-establish "buyer beware". The seller must still disclose any material facts (or defects) which they actually know about. The use of a Disclaimer is more like a statement that "this is what I know, but I am not an expert". The use of a Disclaimer DOES NOT allow you to ignore the red flags that you notice from your experience. Even though the seller may actually not know or realize a defect exists, if YOU do, you will have to ask the questions necessary to determine if the defect is the one your experience leads you to expect. (By the way, if you have no experience, take your Broker or an experienced Realtor through the seller’s house. If you are inexperienced, you have reason to know that you won’t recognize the red flags. That could substantiate a charge of misrepresentation!)

Once you establish that there is something you believe to be a "material fact" which needs to be disclosed, do not allow the seller to instruct you not to disclose. This would be a violation of law. A Realtor cannot be asked or required to violate the law. (Well, sometimes they ask, but you should not!) On the other hand, be sure that the "material fact" which you wish to disclose can be disclosed to the other side. For example, if the seller is providing financing to the buyer, then the fact that the buyer just completed a bankruptcy may be a material fact in the seller extending credit to the buyer. On the other hand, if you have a buyer whose financing is approved and the seller is being cashed out, the seller probably has no right to know anything about prior bankruptcies.

Even though you are aware that the Realtor representing the other side of the sale has a duty to disclose a matter, you are not allowed to assume that the statements made are true. As a Realtor, you should check out red flags and be verifying matters within your ability to verify.

Finally, be aware -- there is no such thing as an "undisclosed contingency offer". Any material fact affecting the ability of the buyer to perform on the sales contract MUST be disclosed in the offer. For example, the buyer makes an all cash offer. The buyer has the ability to put all cash into the deal, but, after the offer is accepted, learns from his accountant that it would be wiser to use financing. Can the buyer simply substitute in financing? Absolutely not, at least not without amending the Earnest Money Agreement to obtain the seller’s agreement. Anything that may impede the buyer’s closing on the date agreed upon must be disclosed. While sales contingent upon the sale of another home are not the most attractive to the seller, the facts must be disclosed. The seller’s signature must be obtained ONLY after disclosing all the terms.

PRACTICE TIPS

What steps can you take to avoid any charges of misrepresentation? Well, it is helpful always to have a happy customer at the end of the transaction. Since that is not always possible, there are a number of protective steps which will provide you with a record of the transaction and the most protection available:

Disclose, disclose, disclose. Be sure that you monitor the disclosures you make. If the information changes during the transaction, be sure to make an additional disclosure, preferably in writing.

Document, document, document. There are so many papers involved in closing a transaction, you may not remember all of them. It is certain that your customer will not have a sterling memory. For humans, it is natural for us to remember things slightly differently from other people. This is why a written statement made at the same time (contemporaneously in legalese) as the actions taken is so helpful. It is not natural to write everything down. But if this habit is established for the "material" areas of a real estate transaction, it will be very helpful to disprove any differences in memory.

Write up refusals. When you recommend something and the customer declines, write up a brief acknowledgment from the customer of your recommendation and their decision. Obviously this will not be something you choose to do in all areas, but especially in areas of concern, you should make an effort to obtain such an acknowledgment. If you believe it is not wise to ask your client for their signature, then at a minimum you should note your own file that the advice was given, what date it was given, and that your customer declined the advice.

Review your recommendations with your Broker. Some Brokers wish to have you provide a single recommendation for inspectors or for attorneys. Follow the direction of the Broker in this area. You are best protected from any misunderstandings about the "recommendation" if you use lists. On these lists you can indicate that the parties are experienced in the area and have worked successfully with you in the past, but future performance is not guaranteed. However, if your Broker feels that this is one of the services you provide your customers, consult the Broker on any liability limitations the Broker approves of using.

Look for RED FLAGS. When you find them, deal with them, and document your actions. Sometimes things that look like problems are not. Better to discover the situation early in the process, rather than at closing or worse yet due to a complaint of misrepresentation filed against you!

When you are requested to perform a function or render an opinion or look something up which is outside of the services that you usually provide, it is helpful to use a confirming letter. For example, you have asked me about _______. Here is the answer that I found ________, and here are the authorities I consulted ______________. In the event of being asked to perform a function outside your normal functions, you might use a letter stating: You have asked me to mow the lawn. I understand that to mean cut the grass, edge the lawn, dispose of the clippings and clean the lawnmower. If you disagree with my understanding of your request, please let me know by the end of business on _____(date).

Be sure to take advantage of the various opportunities to educate yourself. While having a "string of letters" after your name may not appeal to you, it has the effect of providing you with information on how to perform your job correctly. When you are taking the effort to become the best Realtor humanly possible, the Real Estate Agency and the Courts both allow for the human error factor. In fact, in a Court of law the expert with the most and best credentials is generally the one the judge believes is correct.

On the other hand, when a class on a specific subject has been offered numerous times, and you have been "too busy" to learn about that aspect of real estate, you may be given an opportunity to appreciate the necessity of the education. This opportunity may come in the form of a fine, or worse!

It is important not only to comply with the continuing education process required for licensing, but to keep up with the information provided by the Real Estate Agency in the Oregon Real Estate News Journal. This publication is an excellent resource for information regarding new procedures the Agency is implementing, for their interpretation of new laws, for information on the violations which others are being disciplined over, AND for the educational opportunities provided by the Agency.

The information supplied here is available in an expanded mode, with citations to the cases which established the "rules" from the Real Estate Agency. PNWT highly recommends that each Brokerage obtain the video tape of Scott Taylor and provide it to their Agents.

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This educational series is created to allow Realtors to obtain continuing education. The articles are intended for general informational purposes and are not to be construed as legal advice or legal opinion on any specific facts or circumstances. You are advised to consult with an attorney concerning any questions about your rights or responsibilities in any specific situation.