The Physics of Due Diligence

Water drop

The Facts

Newly married, the Smith’s began searching for an undeveloped plot of land to build their dream home. With the help of local real estate agent, Ms. Mills, they found and purchased a parcel of raw land that suited their needs.  Fourteen months after closing, their dream home was built. Unfortunately, they were about to learn a lesson in physics.

The parcel of land they purchased with the help and guidance of Ms. Mills was located atop a steep hill, and while the views were stunning, the water pressure was nonexistent. Unable to draw more than a trickle from their sinks and showers the Scott’s filed suit against their real estate agent Ms. Mills.

Information brought to light during the trial revealed that Ms. Mills never recommended a land or geological survey be performed prior to purchase.1 When asked directly by the Smith’s if the incline might present any unforeseen problems, her response was, “I would not be the right person to ask about that.” 2

 

The Result

The case was eventually settled for $30,000, the cost to install a high pressure pumping system on the property to improve water pressure.

Due diligence on the part of a real estate agent is the reasonable effort to provide both accurate and complete information about a property. The failure to recommend a property inspection or a clear lack of understanding about a property one represents does not meet the standards of due diligence required for all real estate professionals. As a real estate agent, you represent yourself as experts in your field and in doing so are expected to show reasonable care when representing a client.

Risk Factors

Risk Factor #1

The agent engaged in a transaction she was not capable of handling. She did not understand the nuances/specifics of a raw land transaction. In taking on the buyers as clients, she did not live up to her duty as a fiduciary and put the clients’ interests first.

Risk Factor #2

The agent did not fulfill her obligation of due diligence by nonchalantly stating, “I would not be the person to ask about that.”  Had she understood the specifics of a land transaction, she should have recommended a land or hydro-geological survey.  Not understanding the specifics, the agent should have directed the buyers to an expert who could have properly advised them.


 

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