A real estate agent, Jerry Jenkins, and real estate brokerage, Evelina Properties, Inc., signed an exclusive listing agreement with the Carl Vanderhorst Foundation, a non-profit foundation owner of a property in Arkansas, in order to sell the residence at an auction. Jerry had known Carl Vanderhorst, the original owner and builder of the property, for more than 40 years on a professional basis, and therefore, trusted Carl's representation that the property was in outstanding condition prior to the auction.
Linda and Juan Lopez purchased the property at auction as is for $1.9 million. However, a few months following the closing, they discovered that the property had numerous structural defects and poor soil conditions causing the foundation to fail, jeopardizing the structural integrity of the residence. Linda and Juan alleged that Evelina Properties, Inc. and Jerry possessed engineering reports that noted problems with the structural integrity that were concealed from them. Their complaint asserted causes of action against both parties for fraudulent misrepresentation, negligent misrepresentation, and violation of the state's Unfair and Deceptive Trade Practices Act (UDTPA). Regarding damages, Linda and Juan asserted that repair costs were in the range of approximately $800,000, and they sought treble damages and attorney's fees as permitted under the UDTPA.
Jerry did not disclose the engineering report that cast doubt on the structural integrity of the property because it wasn't generated on behalf of the seller. Rather, he received it from another prospective buyer in a prior failed sale of the property. The prospective buyer had ordered an engineering report due to soil conditions in the area. The report indicated soil conditions that may lead to structural failure of the home. Jerry believed the report was inaccurate because he had a previous report, undertaken at the seller's request, attesting to the soundness of the structure and because he knew the original builders (through Carl Vanderhorst) well and trusted their abilities and reputations.
The claim closed with a payment of $1.5 million to Linda and Juan Lopez, which included $500,000 for actual damages and another $1,000,000 under the UDPTA.
Risk Factor #1
Because of their relationship, Jerry took Carl's word regarding the condition of the property. A real estate professional must perform his or her own due diligence and disclose all known facts about a property listing, as well as any issues that a reasonably prudent real estate professional should have been able to determine about a property through observation.
Risk Factor #2
Jerry was in possession of a prior engineering report that indicated potential soil issues with the property. Jerry had another engineering report that attested to the soundness of the property. Both reports should have been shared with potential bidders prior to the auction.