This Real Estate E&O Seminar was recorded live at The Star in Frisco, Texas. The presenter is Barney Schwartz, the CEO of Preferred Guardian Insurance.
My name is Barney Schwartz. I’m the CEO for Preferred Guardian Insurance. I’m not a real estate agent. I’m an insurance agent, broker, and risk manager. The information I have is stuff that I have accumulated via the years and via E&O claims. I’m also one of the five TAR Risk Management Partners, and what TAR does is they go and select certain people in the community that are dedicated to helping you guys avoid getting into trouble. So that’s part of where all this information is derived from.
What you will get out of this class is the most common types of claims and ways to avoid being sued, steps to take when selling your own property, dual agent transactions, and the dangers dealing with the crazy client — you all don’t ever do that, right? And how to protect your email from getting hacked. And you’re going to hear some examples as to where, locally, realtors have gotten their emails hacked into and the troubles associated with it.
So real important with E&O insurance, you need to know who is covered. That third bullet point, an independent contractor, that will be all of you. What triggers you as an independent contractor, though, is you need to put the broker for this office on your contract. So if you decide to put another broker on a contract, or you were at a prior brokerage first, it’s going to come down to whatever broker is on the agreement as to whose E&O insurance is going to go and cover it.
Secondly, the occupation that you serve. The reason why they put that into an E&O policy is if you venture out into residential real estate — and I’m going to give you an example — then the E&O company may or may not cover it. The reason why is they want to limit you to residential real estate. They don’t want to cover you as a lawyer, as an insurance agent, as a CPA, or as anything of that nature.
This particular case, this was a commercial listing. The agent was selling this Jiffy Lube building. It seems pretty standard, right? So as the transaction progressed, the agent was asked, “Well, can you give me some information on revenues?” No problem. They took the information from the seller, sent it over to the buyer. “Can you give me some information on profits?” Absolutely. They sent the information from the buyer to the seller. “Can you give me this information on the business? This information on the business? Well, before long, they actually were acting as a business broker, not as the realtor. A lawsuit comes in, suing the realtor, not on the sale of the commercial building but on the sale of the business, and it was not covered because the realtor was deemed as a business broker. So if you get into commercial real estate, you need to be careful that you don’t cross a line as a business broker.
The big thing with the fiduciary — you may have heard that saying before — y’all are the experts. You’re supposed to recommend things to me if I’m buying a house that I wouldn’t know. I’m supposed to recommend things about insurance that all of you wouldn’t know. If you go and take out car insurance from me and I don’t recommend rental, I don’t recommend uninsured motorist, then I’m not acting as a fiduciary. So that’s the thing you need to understand is you all are the experts.
What to do should an E&O claim or a TREC complaint or a subpoena request surface? Notify your broker. Let me give you an example of a subpoena request. You represent the buyer. The buyer loves you. The seller didn’t disclose everything on their house. So now, the buyer wants to sue the seller, but they don’t want to sue you because you really had nothing to do with the seller non-disclosing certain things wrong with the house. They want to go after the seller and the seller’s realtor. But in order to do that, they want information from you.
All of a sudden, you get this thing in the mail called a subpoena request, or they show up at the office with a subpoena request. Just know that that’s covered under most E&O policies. So if you get that, go to your broker. Don’t start giving copies of your file without the E&O insurance company being notified. The same thing with a TREC complaint. If a client files a TREC complaint on you, make sure you report it to the brokerage firm. Don’t try to answer it on your own because that will be covered under E&O insurance. And then, finally, if you get any sort of demand letter, speed is of the utmost importance. The quicker you can get it in, the quicker the insurance company reacts, the less that they’re going to end up paying out to the third party.
Costs of an E&O Claim. So most E&O claims, when they come in, aren’t for a transaction that you closed last week. So think about six months, nine months ago. And now, all of a sudden, you get a demand letter. Where’s your emails? Where’s your voicemails? Where’s your text messages? Where’s all those methods of communication that that client used to communicate with you? And how easy would it be for you to duplicate it? The stuff from last week, absolutely. It’s probably all sitting in your email. It’s all sitting in your voicemail. It’s all sitting in your text messages. So we’re going to talk a little bit about what to do to preserve that.
Settlements. About half the claims result in no payout to the other party. What does that mean? In a lot of cases, you’re being sued for frivolous matters. But guess who gets paid? The lawyers. So you need to be careful, even though you don’t necessarily do anything wrong. The average indemnity payout — that’s a payout to the other party — is somewhere between $25,000 and $35,000. And over 90% of the claims are settled without going to trial. Why is that? Because it’s easier to give the person a little bit of money than to pay for the lawyers to defend you. The whole point I’m trying to make here is you don’t have to do anything wrong to get sued.
So the most common types of claims are misrepresentation and nondisclosure. But the key here is the second bullet point. It isn’t that you fail to disclose. It isn’t that you fail to recommend. And it isn’t that you misrepresent. It’s that you can’t prove that you did. So think about that for a minute. When I ask insurance companies what’s the most common reason for E&O claims, they say lack of documentation. Well, lack of documentation doesn’t cause an E&O claim. What causes an E&O claim is failing to prove that you did certain things. And we’re going to go through some examples of that.
Undertaking additional responsibilities beyond your expertise. You’re going to hear me a few times throughout the next hour talk about, “Stick to what you know best. Stick to real estate. Have the client make the difficult decisions.” We’re going to talk about cyber, and we’re going to talk about management of multiple offers. Do what you do best. Don’t give legal advice. Don’t act as a general contractor, business broker. Stick to residential real estate and force the clients to make the hard decisions.
You’re probably thinking by now, if I was a realtor, I would have the absolute worst customer service of any realtor on the planet. But I’m not here today to talk about customer service. We’ll have somebody do that next week. I’m here to try to help you avoid getting into any trouble.
Does anybody do any house flipping in this room? Okay. The issue you run into is if you decide you’re going to go and rehab a house. And let’s just say it needs minor rehab. So you’re replacing, maybe, some paint and some floors. Now, all of a sudden, somebody buys the house, and there was foundation damage. They’re going to look at you as the realtor to have known about that foundation damage. So if you get into any house flips, just know that it’s a very, very sensitive transaction, and you’re going to need to take extra precaution not to get sued.
Traditional transactions, the most common types of claims, are going to be nondisclosure of repairs as it relates to the seller’s disclosure, the condition quality of the house, and again, issues of documentation.
All right. So I get a call from this real estate office. And the real estate office says, “We want to put these air fresheners in a client’s house.” And I’m like, “Why would you want to do that?” And she goes, “Oh, they’re amazing.” And I said, “What’s so good about them?” She goes, “Well, they can take cat pee and make it smell like cinnamon rolls.” And I’m like, “You can’t go and do that.” And she’s like, “Why not?” And I go, “Well, you’re misrepresenting the house. You’re misrepresenting the odor of the house. What’s going to happen when that person closes on the house and realizes, Oh, the place doesn’t smell like cinnamon rolls any longer? It smells like cat pee.” Think about that for a second.
Now, sometimes I’ll get asked, “Well, what about baking cookies?” Baking cookies, to me, are obvious, right? You have a tray sitting out on the kitchen. And baking cookies don’t plug into the wall and last for hours and hours and hours. So I don’t see any problem with baking cookies.
We’re going to talk about some transactions that I equate to driving on ice. Now, I want everyone to honestly answer this question. Who sent a text message when they were driving today to the office? Somebody? Okay. Mark did. Would you have the guts to do it if the roads were icy? Would you have the guts to program your GPS when the roads were icy? Talk on the phone? Tailgate? Speed? All those other things that you do on normal days or that I do on normal days? The reason why is you programmed yourself that this is a dangerous situation. I know if I go around this room and I ask people to raise their hand, “Who’s detail-oriented?” I’m not going to see a ton of hands go up. It’s the nature of being in real estate. But there’s certain types of transactions I want you to be aware that you need to take extra precaution.
So let’s first talk about agent-owned properties. If you go and sell your own property, there are four things that are going to be required on most E&O policies to have in your file. Those four things are a home inspection, a home warranty, a seller’s disclosure, and an agent/owner representation. And you need to use TREC forms. So think about that for a second. It’s extra dangerous because you’re selling your own property because now you’re the realtor and the owner and there’s extra motivation for you to nondisclose, at least as it’s viewed by the courts. And now, all of a sudden, there’s four things that are required. Not having those four things in the file are like calling me up and saying, “Barney, cancel my car insurance. I’m getting ready to drive home in ice, and when I get home, I’ll re-up my insurance.” Because these are bad, bad transactions. Now, what makes it even worse is, let’s say, that property is a rental property that you own. So you now have to complete a seller’s disclosure. What good is that seller’s disclosure if you haven’t lived in the house in five years? So again, it doesn’t mean don’t sell your own property. It just means take extra precaution.
The second thing is acting in joint representation or as an intermediary. That is where you’re representing both parties or you’re representing one party but you’re handling it for both parties or you’re representing neither party. And we’ll talk more about that. Sometimes you run into issues with an out-of-town buyer, and we’re going to go into claim scenarios with that. We’re going to talk about REO properties. Does anyone want to guess what the problem with a REO property is? There’s no seller’s disclosure. So now, all the information on the property falls on you and the seller and you as that fiduciary expert because you’re supposed to know everything about home construction, right? And then, that funny feeling. I’m going to give you a great claim scenario to go through that.
So again, the five items. Again, so if you’re kind of paying half attention, pay real good attention to this if you ever go to sell your own property. Home inspection, home warranty, seller’s disclosure, TREC or state-approved forms, and the realtor and owner disclosure. The thing you really want to do is you want to get the buyer to do the home inspector. You want them to select it. But you bring up a very good point. What happens if the buyer refuses the home inspection? So in that case, as the seller and the owner, you’ve got to go and get your own home inspection. But that’s problematic all in itself because guess who you’re going to call for their home inspection? The same person you go and refer all your buyers to for home inspections, right? So if I’m the lawyer on the other side, I’m going to turn around and say, “Well, how many referrals have you given to Joe the Home Inspector? Five? How many have you given to Mark the Home Inspector? None? Oh, so you’re good friends with Joe, and he’s going to do things to help you out.” You get the picture. You always want to try to get that buyer to pick the home inspector.
Let’s talk about joint representation. This is a situation where you’re sitting in an open house, and all of a sudden, the buyer comes in. And the buyer goes, “I love this house.” “Great. You want to buy it?” “Yeah.” And you ask the buyer, “Well, do you have a realtor?” They’re like, “No.” And now, all of a sudden a 6% light bulb goes up, and you’re like, “Cool. I get to represent both sides.” But you don’t get to represent both sides. You can handle it for both sides, but what you do need to do is give that buyer a disclosure. And here’s some sample wording, and there’s a TREC form along these lines that basically says, “I don’t represent you, Mr. Buyer or Mrs. Buyer, and you are encouraged to seek representation from a licensed realtor or attorney.”
Now, this is not to be confused with acting as an intermediary. As an intermediary, you represent neither party. And those are problematic. The State of Texas is the only state that will allow a realtor to act as an intermediary, and the firm itself may have certain rules that you need to check with your broker on joint representation and acting as an intermediary. And part of the problem is the courts are going to typically view dual agency, dual representation, as a conflict of interest. And so again, this is like driving on ice, like we talked about before, with bald tires and no brakes. It doesn’t mean you’re going to get into a wreck, but you better be really, really careful.
So let’s talk about making referrals. You need to be very, very careful when you refer home inspectors, contractors, property managers. Do not refer relatives. Do not refer only one. Don’t make reference to the best. And we’re going to go over some claim scenarios as to why.
So the first one we’re going to talk about is a claim scenario called, At the House. So in this particular case, the seller had already moved. They’re sitting in Seattle. You’re handling the listing for their house. The house is home inspected, and a bunch of things came up on the home inspection. So what do you do as a realtor? You don’t listen to what I say. You go and you call the general contractor and get them to go out to the house. You meet the general contractor at the house. You stay at the house while the general contractor is doing the work.
But here’s the problem that resulted in the claim. You supervised the work. You made the arrangements. The buyer didn’t do a post-work inspection. And the biggest one is you stated that the items were fixed. You never want to state that things were fixed. You give a copy of a receipt, and you let them go and reinspect or analyze the work that had been done. If you state that’s something’s been fixed, then you’re on the hook if it hasn’t been fixed correctly because, at the end of the day, you don’t know if that plumber did a good job or that electrician did a good job. But you’re handing them a copy of the receipt.
And under no circumstance do you modify the seller’s disclosure after this work is done. If the deal falls through, you just staple copies of the receipts to the seller’s disclosure. So in this particular case, the realtor took responsibility to have the home repaired. Details of the repairs were not provided. The realtor stated that the items were fixed, and the contractor was uninsured. So you can see a few things that went wrong. In this particular case, there was an E&O claim, and I believe about $15,000 was paid out.
So let’s talk about written evidence versus statements. And this could fall into the lines of a home inspection, repairs, foundation work, accuracy in the seller’s disclosure. In situations like this, you don’t want to make modifications on the seller’s disclosure. You want to staple copies of receipts, again. If for some reason a deal goes through, you want the prior home inspection to be stapled to the seller’s disclosure. You nor your client want to take that home inspection, interpret it, and redo the seller’s disclosure. Again, let the buyer, the potential buyer interpret those documents. Same thing with an engineer report that comes with the foundation. Don’t turn around and say, “No foundation damage.” Give a copy of the report.
Let’s talk a little bit about this situation because it falls right into line with exactly what you had just asked. The buyer, in this case, hasn’t yet moved to DFW. So the buyer came. They liked the house, and now they need to get the house inspected. But they’re in Buffalo, New York, so they pick up the phone and say, “Hey, who do I call for a home inspection?” And you want to provide great service. And again, you don’t do what I recommend, but you want to be a good realtor and provide great service. So you say, “Don’t worry about it. I’ll go and arrange it.” So you call up your home inspector that you’re buddies with. The home inspector goes out to the house. You meet the home inspector out at the house to go and help them out. The home inspector sends you a copy of the inspection report because they had no contact with the buyer. And guess what happened? You turn around, what anybody would do, you hit the forward button, and you say, “Here’s a copy of your home inspection report.”
Nine months later, the house was a dump — or it was a dump before nine months, but they just found out it was a dump — and they turn around and file a lawsuit against you. And they file the lawsuit because they said you never recommended I get a home inspection. So what do you do? You go through your emails, and you can’t find it. Why? Because it happened nine months ago. And even if you could find it, it wasn’t necessarily proof that they had received it. So when you have information like this — it could be a home inspection, it could be a counteroffer, it could be an increase, whatever it is — there’s nothing wrong with telling that client, please confirm that you’ve received this information. I do it all the time. If somebody turns around and says, “Hey, I want to add a $15,000 engagement ring to my home insurance policy,” I’ll send an email to the person and say, “Please confirm you would like to add the $15,000 ring to the policy.” I don’t just automatically do it. Why? Because they could turn around and say it was a $20,000 ring, not a $15,000 ring.
So just think about that. And again, this is about recognizing those higher-hazard transactions. So if you don’t do it every single time, you’ll do it, hopefully, on some of those situations that we’ve talked about.
Audience member: Because I was always taught that real estate agents should not be at the inspection until the wrap-up, and then, only if the client is willing to be there also. Otherwise, we should have no contact. Because if we’re at the inspection and something turns up that maybe doesn’t make the inspection report but we were there and we had knowledge of it, therefore we’re liable. And we’re assuming that it’s getting sent to the client and we didn’t disclose it because we assumed it was already being sent. So I’ve been taught since moving to Texas, don’t go to the inspections unless your client’s going to be there and you can go for the wrap-up with your client and the inspector.
Barney Schwartz: So the problem that you run into isn’t so much attending it. It’s the information and the advice you give to the client after attending it. So just to be there and be quiet, you’re really not adding any risk. But if you turn around and you say, “Yeah, he put that crack on the wall. I wouldn’t worry about it. We’ll just put a little spackle on it and repaint the wall. It’ll be fine.” Well, lo and behold, that crack may have been due to a crack in the foundation. So now, all of a sudden, if you start giving advice about the home inspection and you were there, you’re just one step removed from being the home inspector. So once you confirm the information’s been received, you want to create a centralized hub of your information. So one of the questions I’ll get asked sometimes is, “Well, what do you do if you get a voicemail?” Well, for those of you that use iPhones, you ever see that little box with the arrow sticking up? You go to your voicemail. You can hit that little arrow button and forward that voicemail to your email. I like that a lot more than the voice transcription apps because that leaves itself open for some interpretation. And if you want to, I’ll be happy to show you how to do it after the meeting if you have any questions. The same thing with social media. If you get an important message on Facebook, take a picture of it with your phone and forward the picture to your computer, or screenshot it.
So we’re going to talk about a claim scenario called The Voicemail. In this particular case, an agent was given permission to sign a contract on the client’s behalf via voicemail. Now, hopefully, all of you see that as a huge no-no. The client didn’t realize that someone else had first right on the commercial property, clients whose agent stating they never gave them permission. The agent kept the voicemail, giving her permission. And guess what happened? The agent got off the hook because they had that voicemail.
Remember how I gave you the information earlier that said most E&O claims happen nine months to a year after the fact? How many of you have critical emails on your phone still stored from nine months ago? Almost nobody. Why? Because your voicemail gets filled up, right? So what do you do? That’s the importance, when you have an important email, of hitting that forward button and making sure it’s stored in your email.
The next scenario is a claim called Coming Up Roses. In this particular case, the client, the buyer, loves roses. The buyer looks at the realtor and goes, “I absolutely have to have a mini-greenhouse to go and cultivate my habit.” And you’re like, “No problem. Let’s look over the homeowner association documents.” So you look through the homeowner association documents, and you make the interpretation that it’s okay for her to have her mini-greenhouse.
So the mistake that was made there is provide a copy of the homeowner rules and regulations. Do not interpret them. Remember, earlier I said, “Stick to residential real estate.” Well, you start interpreting homeowner association documents, you’re acting more as a lawyer than as a realtor. Make sure the buyer confirms in the case of a townhouse or a condo that the homeowner association covers the outer structure because that isn’t 100% of the time. And there’s more and more condominiums and townhomes popping up.
All right. Calm before the storm. We never have hail here, right? So in this particular scenario, the buyer walks through on a Wednesday, hail happens on a Thursday, and you want to close on a Friday. It’s possible you can close, but here’s the problem. Now the buyer has a house with roof damage. The buyer goes to file a claim. The buyer’s insurance company denies it. Why? Because their policy hadn’t taken effect yet. Now, I know realtors on the other side return your calls immediately all the time, right? And that’s when you’re trying to buy one of their houses. Now, what’s going to happen if you call up a seller’s agent and said, “Hello, Mr. and Mrs. Agent. My name is So-and-So. And I need your seller to report a homeowner claim on a file you already closed.” And let’s say you got a good, reputable realtor on the other side. Let’s say they convince the seller to file the claim. Now there’s one problem. The homeowner insurance companies will not accept assignments. So even if you get something signed saying that seller assigns benefits over to the buyer, the insurance companies aren’t going to take it anyway. So the claims money is going to go to the seller. Now, as you know with a home insurance claim, there’s a deductible. Is that seller going to go and pay a $3,000 to $10,000 deductible after the house is already closed?
And then, you have the third item called recoverable depreciation. And that’s that second check you get when you have a home claim. So the first check you get is less depreciation. The second check you get includes depreciation. So roof issues and hail. The definition of a roof replacement. Generally, they’re going to measure a 10 x 10 square on the roof, and they’re going to count how many hits are within that 10 x 10 square. Most insurance companies, if you have 8 hits, they’re going to deem it a replacement. Some companies go up to as many as 16. There’s nothing within the insurance code that says, “X number of hits, new roof.” And you can expect that to start getting stricter and stricter as the companies are getting hit harder and harder. Collin County is the number one county in the United States for hail claims.
So what to do when you’re ready to close on a house and there’s roof damage? So it’s not the situation where you’ve already closed. But now, maybe you have a week, two weeks. Well, you heard the roofer earlier say that they’re willing to come out and pre-inspect. So you want a roofer to inspect before you report to insurance because you don’t want a zero-pay claim on a house that isn’t necessary. If the roofer determines that there’s damage, then you want the roofer and the insurance company adjuster to be there at the same time. Why? Because if the claims adjuster from the insurance company goes out, they’re going to miss something. And if they miss something, guess what’s going to happen? It’s going to go to a supplemental unit in Mishawaka, Indiana, that has a stack of files this high. And you want your file to go to the top of the list because you’re getting ready to close on a house with a very irritable adjustor on the other end that’s getting beat up every day about claims. So if you can get the two of them out there at the same time, that will be a huge, huge benefit.
I want to talk a little bit about text message dangers. And I’m going to give a claim example, a brief claim example, that a listing agent didn’t get her commission because she had put all these comments about the buyer, about being from this ethnicity. So consider and assume an open audience whenever you’re sending a text message. Don’t use symbols and emojis unless they’re completely necessary because they do get misinterpreted. Reread your texts and check where you’re sending. And send critical text messages to your email.
I’m going to give you an example. So you see this picture up on the wall? I mentioned to you I was from New York. And in this particular circumstance, that quarterback had just thrown his third interception, and it was returned for a touchdown. And I’m texting back and forth with my son, who wasn’t at the house. And I said, “Isn’t this a bunch of BS?” Well, little did I know it was Sunday. In came a text message from the wife of a professional hockey player and says, “Hey, Barney. I’m sorry I won’t be able to meet with you tomorrow.” And I respond, “Well, isn’t this a bunch of BS.” So don’t do as I do. Do as I say. Be really, really careful when you send text messages.
Let’s talk about a claim scenario now called The Greenbelt. This is one of my favorites because it deals with what I would consider probably not the most mentally sane client. They purchased this house. This is actually the house. It was located via Google Maps. And this house overlooks this beautiful greenbelt over here to the right. It looks more like a rock belt to me rather than a greenbelt. Now, do you see anything strange about this beautiful greenbelt? Well, look over to the left, and there’s construction going up at the top of the greenbelt. This happened nine months after closing on the house. So guess what happened? You get a letter in the mail that says the following, “The purchase was intended to be the purchase of their dream home, the culmination of a life of toil, sacrifice, and saving. This home was to be the escape from their busy city lives and their desire for wide open spaces.” The defendants operate in the real estate industry, so they knew far better than the plaintiffs.
You know about all the new construction that’s going on here, right? (Laughter). Especially nine months down the road. Now, what’s the takeaway from this? I have a hard time believing that this client wasn’t, “I need to have open spaces. I need to have a greenbelt. I need to have something overlooking green.” Well, we all know you can see green today, and tomorrow it’s going to be concrete. So I would have turned around and told them, “Look, I can’t make any promises what’s going to be a year, two years, three years from now. Check with the Department of Economic Development with the city to make sure there’s no construction plan. And by the way, the same thing could be said for the client insisting on a school, the client insisting on a square footage. How much redistricting have they done here in Frisco? A bunch, right? Every couple years? Same thing in McKinney. The same thing in Allen, although they’re starting to get built out a little bit more. If the client insists, “I absolutely have to have my kids go to Smith Elementary School,” you’d better send them to the school district and have them verify that there’s no plan changes for Smith Elementary School.
And the same thing could be with square footage. The last thing you want is a client that turns around and says, “I have to have a 4,000 square-foot house, and MLS says it’s 4,015 square feet.” It’s advised you go to that client and say, “I recommend you have somebody come out and measure the square footage.” Because what you’re going to do is you’re going to send an email to them or you’re going to send a communication to them and say, “I would recommend you have it measured.”
So we’re going to deviate for a second. Sellers Shield is a great website when you have a difficult seller, you have a difficult buyer. I think Sellers Shield would be a pretty good thing to do when you’re selling your own property. Because when you’re selling your own property, you’re acting as a realtor and as a seller. But your real estate E&O policy is only going to cover you on the real estate side. It’s not going to cover you if you fail to disclose something or you get sued by a crazy buyer. Let’s say you’re dealing with a seller that has a crazy buyer on the other side. Maybe you recommend to your seller to go and get this. Or maybe you turn around and you don’t trust the seller. Or maybe you’re representing the seller, and you don’t feel like the seller is fully disclosing everything. So these are areas where I would recommend that you look into the seller’s disclosure. It’s not something I make money on. I’m just doing this as a risk management tip.
Let’s talk a little bit about photos. So I’d like to use an example where you have an MLS listing out there. And guess what? You guys went out, you did such a great sales job that now they want to move the listing over to you. So what do you do? You go into MLS. You copy the listing over. But guess who you just copied over? The photos that were paid for, possibly, by the other realtor. When you have photos, those photos are owned by the photographer, and you cannot go and put them for any other use by any other people unless you have the permission of the photographer. And guess what? When you take a listing over from another realtor, they’re not very, very happy. So if they see an opportunity to go and sue you, they’re going to jump on it.
I had one realtor that asked me a couple of weeks ago. They actually had paid to have a drone fly over it. And that realtor had the nerve to use the drone photos on their next listing. So in this particular case, a listing agent was given a flash drive with photos by the seller. The photos were taken by a professional photographer. To make the photos fit MLS, they cropped the copyright on the photos. So there were two things that the realtor did wrong here. They cropped the photos; they modified them. And they also didn’t get permission to go and do it.
The agent altered the work, removing the copyright. Photos that are posted on the internet are not public. They have copyrights as well. Same could be true when you use photos from a prior sale. So the best thing to do is, if you think that there’s going to be issues with a listing and you’re paying for the photos, have that photographer sign something releasing the photos to you so you own them. Or if you’re passing the cost to the owner of the house, have them own them. Because a lot of times what will happen is you’ll sell somebody a house and you’ll use the photos. And then, that person sells the house. Well, guess what? All the stuff’s still on Zillow or one of the websites. They can go and take your photos.
So we’re going to spend a few minutes talking about email hacking. This is a situation where a password was discovered on a Gmail or a Hotmail account. The password was changed. The hacker read through the email looking for cash buyers and sent the cash buyer fictitious wiring instructions. This is real. This happened to a real estate office in North Texas that we insure. And they said, “Wire $50,000,” and within 15 minutes it was dispersed into 15 international accounts.
So what do you do? This is real because they know they’re targeting realtors now. So first, be aware of phishing schemes. That’s kind of like opening up the door to get into your computer. I don’t know about all of you, but I get at least two or three emails a week that have a link in the email that looks real. In this particular case, it was, “Click here to access your spam quarantine.” It may say home inspection. It may say HUD statement. It will say something that’s relevant to you. It’s probably going to come from somebody you know because somebody got into that person’s email.
So one of the things I recommend doing is hovering your mouse over that link. If you do it, you’re going to see who it actually came from. So you see, in this particular case, this email was coming from 69.89.whatever.whatever. Sorry, but I don’t know anybody by that name. And that also signaled to me that it was coming from a wrong address. Remember, don’t click on it. Just put the mouse by it, and that will tell you. Look for misspellings. It’s common for a zero to be an O, a dollar sign to be an S, an L to be a one. Something of that nature. Again, this is like opening up the key to your computer.
How cyber crimes affect you. Think about if you lost your computer for a second. What kind of personal information do you have on it? The encryption virus is incredible if you’ve ever seen that. That’s where they go and, basically, take all of your Word docs, PDFs, Excel documents. You go to open it up, and it looks like hieroglyphics. And then, if you want it back in English, you’ve got to pay a ransom to the people that put that virus on your computer. You need to check the hacking into email we’ve talked about.
Now, also be aware of wiring instructions that come from title companies because title companies are getting hacked into. So they’re sending the email to you. And what do you do? You hit the forward button to the buyers. So make sure you verify any wiring instructions that come through to you. All of you have your computers password-protected, right? Well, if you ever want to get into a computer, at least a PC, all you have to do is type into wikiHow or into Google, “How do you hack into a computer?” And they list three steps to be able to get into it.
I found this fascinating. I found this online. Password-guessing computer programs can cycle through as many as 350 billion password combinations per second and, in five-and-a-half hours, have guessed every eight-digit symbol, password, lower case/upper case, digits, and symbols.
And with that, I tell you how to go ahead and set passwords, even though they can still get in no matter what your passwords are. You want to use upper/lowercase. You want to use at least eight symbols. Change them every 3-6 months. Do not maintain a password database. Now, there’s a great app out there that I use called LastPass. And LastPass will actually store all of your passwords. L-A-S-T-P-A-S-S. And what it does is, if you go to sign in your computer from a different IP address, like if you go and take your laptop, it’s going to ask you for a password. And you can even double-authenticate that so that you get a text message on your phone with the code. And you need the code to be able to get the text message. So depending on how OCD you are — as insurance agents that have many, many different companies, I’ve got 140 IDs and passwords. And it’s a lifesaver. And it’s a timesaver.
So if you don’t listen to anything else, I want you to listen to this. Google, Yahoo, Hotmail, Facebook, they have an option called two-step or double authentication or verification. And if you’ve ever gone and logged onto a bank and you get that six-digit text message, that’s what this does. And it’s a very easy option to go and select within Google. And if you’re not doing it within Facebook, I highly recommend you start doing it. I don’t know about you, but I’ve gotten plenty of messages from people that said, “Don’t accept that friend request. I’ve been hacked.” There’s no reason for any of you to get hacked. I’m sure you use Facebook for business. Go in and double-authenticate your Facebook. It’s a pain in the neck. Yes, you do need your phone every once in a while. But you know what? Go buy an Apple watch, and then, you don’t have to get up off the sofa when you double-authenticate.
Wi-Fi passwords. That’s another way they get in. They gain access to the network. And what they do is they monitor what you do. So most people have common IDs and common passwords. I could tell you my ID and password that I use, and you could probably get into 20 of my websites. And that’s what they do within the public Wi-Fi is they say, “Well, if you use that for NTREIS, maybe you use it for Bank of America too.” And that’s how they go and get in.
So if you have an iPhone and you’re sitting in Starbucks, you see this option here called personal hotspot. That will allow you to use your phone for an internet connection. And if you’re looking at personal information, I would highly, highly recommend that. If you’re doing any banking at Starbucks, use the personal hotspot. I don’t think you’re going to see much difference in data unless you’re streaming or you’re doing something that eats up a lot of information.
So let’s sum this up. Don’t click on links that will allow the password capture. Again, that could be something that says HUD statement, home inspection, counteroffer, whatever. You may want to advise your cash buyers that you’re not going to give them any wiring instructions. Add a signature to the bottom of your email. Password complexity with the cell phone, or two-step verification. And stay away from public Wi-Fi.
I always recommend that people create a centralized hub. This is a way for you to go and store your stuff online so that, if you lose your computer and you have that troublesome client — if you use iCloud, you may want to use iCloud for this. If you use Gmail, you may want Google Drive. I use Dropbox. It works great. And then, I would highly recommend you use a backup system on your computer. Five bucks a month. If your computer crashes, your computer dies, you lose it. And this is important from a data security standpoint because, if someone steals your computer, you’re going to know what information was stolen. The other cool thing that I didn’t mention about that LastPass is, if someone steals your computer, you log onto LastPass from another computer, and you basically shut down all your passwords.
We’re going to jump gears now. We’re going to talk about tenant selection. I highly recommend that, when you’re doing tenant, that you use a tenant selection form. This is to help avoid any sort of discrimination, the kinds of things that a tenant form should include. The names and numbers of previous landlords, monthly income requirements, deposits within 24 hours, credit and criminal reports obtained, and any pet requirements. I understand you don’t do property management in the office. And there, up on the board, are 12 reasons not to do it: failure to properly screen rental applicants, failure to maintain property in a safe manner, maintaining accurate rent receipts and records, alleged violation of fair housing, failure to locate renters for a leased property, alleged wrongful eviction, failure to perform repairs, failure to collect rent, misrepresentation of zoning ordinances, failure to disclose lead paint, alleged negligence in allowing pets, failure to maintain insurance.
We’re going to skip over those two slides because of the lack of property management. Let’s talk about these four items. Where did we talk about these four items before? Selling your own house. Exactly. Those same four items — home inspection, home warranty, seller’s disclosure, and using TREC forms — can also help cut the E&O deductible in half. Why do insurance companies do that? Because they realize, if you have those four things in the file, that it’s much less likely for there to be an E&O claim.
Let’s talk a little about CLUE reports. CLUE reports are something that insurance agents have available at their disposal if they do car and home insurance. A CLUE report will list any claims that were filed on the property within the last five years. That information will include the data loss, the type of claim, and the dollar amount paid. If anybody needs a CLUE report, all you have to do is text me the address, and I can have those run for you if you don’t have an insurance agent to run them for you.
Flood zone reports. More and more flood zones seem to be popping up, and people are more and more conscious of flood insurance than they’ve ever been. The important thing for you to know is, if somebody is in a flood zone, they’re going to need something called an elevation certificate. That elevation certificate tells the client how high up that house is in relation to the flood zone. The company that typically does those are your survey companies. So what you want to make sure is, when the mortgage company orders a survey, that they order the survey with the elevation report. Otherwise, your buyer is going to end up having to pay for two surveys or two visits, and they’re not going to be very, very happy. The difference in price between an elevated house and a non-elevated house, we’ve seen $2,500 go to $280 per year. So very, very important to have that.
Some of the things that make homes uninsurable. Age of roof or a roof needing replacement. Unfenced pools. Some companies don’t like slides or diving boards. Prior claims are becoming much more problematic. Vicious dogs. Some companies don’t like trampolines. Why am I telling you this? I’m not trying to get you into the insurance industry or insurance business, but if any of those things happen, these are reasons to have your clients get the insurance during that option period. Because if there’s a problem with insurance, then they can get out of the house.
So there’s pictures of some of the bad dogs: the Pit Bull, the Rottweiler, the German Shepherd, the Chow, the Doberman. And that guy right down there in the bottom corner is a mutt that I went and adopted back in May of last year. And people are asking me, “Well, why don’t you get him DNA tested?” And I said, “Well, I can’t because then I won’t be able to get home insurance.” So if they’re mixed with any of those breeds, then they’re problematic as well.
Audience member: So if you have one of those dogs, then it’s more difficult to get insurance?
Barney Schwartz: It’s more difficult. There still are companies that will insure you. My understanding is, if they don’t have a biting history, Allstate and Compass and Farmers will consider them. But beyond that, there aren’t very many other companies that will.
Audience member: What if they are service dogs?
Barney Schwartz: That’s a whole another story. So now, you have an issue with service dogs. And I actually usually get the question with service dogs with property management. Like what happens if somebody wants to lease a house, they have a Pit Bull, and it’s a service dog? Then, my recommendation to them is make sure they have higher liability limits. But we haven’t had any situations yet where somebody’s said, “Yes, I have a Pit Bull, but it’s a service dog.”
Audience member: I didn’t know they would make those service dogs.
Audience member: I don’t think so. But we have a German shepherd that’s registered as a service dog because we adopted him. But–
Barney Schwartz: German shepherds usually aren’t on the list, but they’re on some of the lists. But if you have a Pit Bull, you have a Rottweiler, you have a Doberman, you have a Chow, those are the ones that you’re going to see almost always on the list. The average price of a dog-bite claim is about $32,000. Because you think about it, if you have a beautiful, 18-year-old woman that gets bitten and now has a permanent scar on her face, it’s a limits claim. I certainly wouldn’t want to go and defend an insurance company up in front of a trial with somebody who now doesn’t look the same anymore.
Let’s talk about leasebacks. This is important. Again, I don’t want you to be insurance agents. But if you have a leaseback, make sure you tell your buyer to tell their insurance agent. And get documentation that they notified their insurance agent. Because when you have a leaseback, the buyer buys a policy that says, “We will insure a home in which you reside.” The seller’s home policy will no longer be effective because they no longer own the house. So technically, if that seller burns down the house, there’s no insurance. Now, most companies won’t want to do a separate policy, but some will. Some leasebacks we can do up to four days. Some we can do up to 14 days. Some we can do 30 days. It depends on the insurance company. Again, all you want to do is make sure your buyer notifies their insurance agent and preferably gets an email back and says, “No problem on the leaseback.” The same thing with insurance for rental properties when you go and rent your house. Let’s say your seller has gone and moved into another house, and instead of selling their house, they’re going to go and rent it. Well, they need to convert it to a landlord policy from a homeowner policy.
Vacant homes. A house is generally considered vacant after 60 days, after which, in most cases, insurance companies do not provide coverage. So again, you want to advise your buyer if the house is going to be vacant. Make sure you tell your insurance agent that it’s vacant. And the reason why vacant houses are problematic is an increased exposure to theft and vandalism.
Foundation claims. So you’re getting ready to close on a house, and all of a sudden, there’s foundation damage. Some insurance policies will cover foundation damage, but there has to be a leak under the slab that caused the foundation damage. Now, here’s a problem. You’re in a rush, you go and have the foundation work done, and now they do a leak test. And now, there’s a leak under the slab. So the person goes and reports it to the insurance company. The insurance company is not going to honor it because you have to do the leak test before the foundation work because the foundation work can cause the leak. So the thing you want to do is give your seller the option of having a pre-leak test done.
So tips to avoid lawsuits. Maintain good communication. Be liked. Avoid giving false expectations. You’ve heard this one before. Have the client make the hard decisions. Document your advice. Do not file commission disputes because, a lot of times, that will result in a counterclaim. Avoid the difficult and unethical client. Remember the greenbelt claim? Put your client’s interest first. So just to recap, we talked about agent-owned properties, avoiding the crazy client, dual-agency transactions, the cyber and email, and tenant selection. One hour to make it through 60 slides. That’s pretty good.
Thank you for listening to Barney Schwartz at Preferred Guardian Insurance. If you’d like Barney to speak to your group, feel free to reach out by email at firstname.lastname@example.org, or give him a call at his office at 972-331-5100. That’s 972-331-5100.