Source: https://www.berkleysp.com/

A real estate agent represented the seller in the sale of their house to a contractor for more than $2 million. The contractor/purchaser financed the property with a first mortgage loan from a private lender and two notes from the seller in the combined amount of $770,000, which were all secured by the house and property.

The contractor/purchaser defaulted on payments on the loans and notes. Due to a possible overvaluation of the property  at the time of the sale, there was insufficient equity in the property to repay the lien holders if the property was sold. The  sellers alleged that the real estate agent provided improper advice on the risks of the structure of the financing of the sale  and failed to encourage them to retain an attorney in the transaction,  which was not required by law.

Berkley Services Professionals paid $385,000 on behalf of the policyholder and defense costs of $24,000. The policyholder paid an additional $15,000 in defense costs via their deductible.

Lessons learned: Real estate agents have potential exposure to liability for breach of fiduciary duty and good faith. This  can happen, as it did in this case, when complicated financing structures are involved and there is a failure to properly  investigate the condition of the borrower in the transaction or to obtain current financial information from the borrower.  It is also commonly acknowledged that a seller carryback loan has inherent risks that a real estate agent should  disclose  in writing to the seller before close of escrow. In addition, the real estate agent should have advised the homeowner client  to obtain independent legal advice before engaging in two seller-financed mortgages.