The Best of the Legal Hotline: What's the Risk?

 Tracy Rucka  |    February 11, 2019
Legal Hotline

Who completes the RECR?

The potential listing agent inspected the seller‚Äôs property and is now sitting down with seller to complete the listing. The seller asked what information needed to be included on the real estate condition report (RECR). The seller also asked the agent, ‚Äúsince you looked at my property, you can fill out the RECR, right?‚ÄĚ How does the listing agent respond to this request?¬†

The listing agent should remember that the responsibility to complete the RECR falls solely upon the shoulders of the seller. If the seller wants specific guidance as to what to disclose, the agent should refer the seller to the seller’s attorney for legal advice. An agent who instructs a seller how to answer questions on the RECR risks liability as to the validity and correctness of the information and the provision of legal advice without a law license, and that agent may be subject to both litigation as well as department discipline. 

The agent may explain the law in Wis. Admin. Code § REEB 24.07(1)(b), which requires the listing broker to inspect the property and ask the seller about the condition of the structure, mechanical systems and other relevant aspects all before the seller signs the listing contract. The agent’s inspection and inquiries are not a substitute for the seller making property condition disclosures in the RECR. 

Risk reduction pointer: With respect to the listing broker’s inspection of the property, no written record is required, but prudent listing brokers will require all agents to keep a written record of their observations, using a form like the WRA Listing/Selling Visual Inspection Form. This form, the WRA-LAI, is available in zipForm and the WRA PDF Form Library.

DSPS audits

The broker is concerned about an upcoming audit by the Wisconsin Department of Safety and Professional Services (DSPS). What can the broker do to prepare?

Actually, the time to prepare for a DSPS audit is on a daily basis. In discussions with the DSPS auditor, the auditor shared some of the items that may be reviewed during the course of a typical audit and some of the miscellaneous errors that he discovers:

  1. Missing signatures on transaction documents.
  2. Addenda not properly incorporated by reference, for example, listed on the addenda line in the offers to purchase.
  3. Brokers conducting business as an LLC or a corporation failing to renew the business entity license for that LLC or corporation.

These errors relate to transaction documentation and licensing issues rather than the bookkeeping and numbers aspect of a transaction, but the contracts that accompany and justify the trust account entries are a critical part of the material subject to an audit. When it comes to the trust account itself, be sure to include trial balances.

The trial balance should be compared with the reconciled bank statement for the trust account each month. In addition, the trial balance and the reconciled bank statement should be compared with the journal running balance. All three should be equal. A description of these steps appears in Wis. Admin. Code § REEB 18.13(3), (4) & (5). Also be sure to notify the DSPS when an account is closed. Brokers must provide written notification when a trust account has either changed or closed.

The No. 1 problem the auditor finds when he audits real estate trust accounts is that brokers do not perform monthly trial balances of the ledgers ‚ÄĒ a listing of the amounts in the trust account for various transactions, identified by the parties‚Äô names, ledger page or other identifier.

Wire fraud

But it won’t happen to me, right? 

It bears repeating: Wire transfer hackers are getting more sophisticated, more patient and more successful. Taking affirmative steps to educate agents and parties alike will minimize the likelihood of your firm being named in the next scam headline. As an industry, brokers, lenders and title companies need to work together for vigilance in the transaction. Watch out for last-minute changes to closing instructions, email requests with different routing numbers, and emails from misspelled senders ‚ÄĒ all are red flags to possible fraud. Be sure to employ adequate cybersecurity measures to avoid the risk. Establish and strictly follow a policy with regard to the communication of wire transfer instructions. Educate consumers at the outset of the transaction and again prior to closing. Parties should receive a pre-closing reminder regarding the risk of wire fraud that details the communication procedures that will be followed. If any change or modification is requested, verify by an independent method.¬†

For more information about cybercrime, see the February 2017 Legal Update, ‚ÄúCombating Cybercrime Concerns,‚ÄĚ at as well as ‚ÄúThe Risks of Sending Wire Transfer Instructions,‚ÄĚ in the October 2017 Wisconsin Real Estate Magazine at¬†

Risk reduction pointer: Keeping a current, periodically updated office policy manual for all agents is a good way to help guard against agents ending up in potential liability situations. Clear rules, procedures, checklists and prohibitions can keep agents from going where they should not go. The WRA Office Policy Manual Guide may be used as a model and starting place when customizing office policies for a specific company. This guide can be ordered at

Ombudsman services

What tools are available when parties are having communication issues?

If agents or parties are interested in facilitating communication and potential dispute resolution, the local REALTOR¬ģ association provides ombudsman and mediation services. The ombudsman process can be beneficial for both consumers and REALTOR¬ģ members who need assistance communicating. The process allows for immediate, informal resolution to common misunderstandings. For example, ombudsmen can field and respond to a wide variety of inquiries and complaints, including general questions about real estate practice, transaction details, ethical practice and enforcement issues. Ombudsmen can also receive and respond to questions and complaints about members, can contact members to inform them that a client or customer has raised a question or issue, and can contact members to obtain information necessary to provide an informed response, thereby facilitating better communication.¬†

When conflict arises, it is often a result of miscommunication or misunderstanding. Brokers and agents using good communication skills may be able to quickly resolve issues before complaints or litigation are filed. The key is to listen to the clients or customers, determine the basis of their complaints, and determine what they need or want to resolve it. Ask questions to clearly understand the consumers’ position. Then offer suggestions and recommendations without judgment. When necessary, refer them to appropriate specialists or legal counsel and follow up important conversations in writing. In many cases, conflicts can be resolved by taking time with clients, customers, agents and brokers and facilitating communication. 

When good planning fails 

The agent received a call from an unhappy buyer. The buyer has been in the home for two weeks, and sewerage water is backing up in the basement. The buyer is threatening to sue the agent, the firm, the seller and the home inspector, saying everyone should have known of the issue. The agent reached out to the broker, who suggested the agent should ‚Äújust take care of it.‚ÄĚ What are the next steps?¬†

Even when an agent and broker do everything proactive to minimize risk, sometimes trouble still happens. If and when buyers threaten to sue after the transaction, it‚Äôs time for agents and brokers to review their errors and omissions (E&O) insurance coverage. Although E&O insurance is not required in Wisconsin, all the premiums will be well worth it to reduce the costs that may be incurred defending a claim by disgruntled buyers. Although you never want to use it, insurance coverage is key, and the time to plan for the unexpected is before the unforeseen event occurs. It may be premature for the broker to say, ‚Äújust take care of it.‚ÄĚ Until the buyer‚Äôs claims are identified, an analysis of possible liability is undertaken, and consultation with legal counsel occurs, making an offer may put the agent or firm at a disadvantage.¬†

E&O insurance provides coverage for the errors and omissions of real estate brokers and agents in providing information or services to their customers or clients. The insurance is intended to protect brokers and agents against liability claims or lawsuits for damages caused by errors ‚ÄĒ something they did, or omissions ‚ÄĒ something they failed to do.¬†

When an agent is included in written or verbal correspondence that threatens possible litigation or claims against the agent or firm, the E&O policy should be brought out. A careful review of the policy with the broker will let the agent know whether (a) the email should be reported to the insurance carrier, and (b) what sort of coverage might be provided if the agent later becomes the target of the buyers or the attorney. Each policy has what are considered triggering terms to initiate a file for possible coverage. If a claim is not timely reported, the agent may lose coverage. The agent should consult with the insurance carrier and broker regarding when to notify the carrier. 

Tracy Rucka is Director of Professional Standards and Practices for the WRA.

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