Lawsuits are blanketing the real estate industry, should you be worried you could be next?

It looks like the Grinch is bringing lawsuits this season. Should you be worried you could be next?

I don’t know. However, make no mistake, our industry is changing and that process can be messy. You need to pay attention and take some action to protect yourself. In my view, we will likely see agents, particularly the higher profile ones, named in some of these lawsuits along with the brokerages.

So practically speaking, what can you do to be prepared to be sued? Remember getting sued is always a possibility, today’s issues aside. You’re in business after all and stuff happens.

Before I dive into my 4-point checklist, a disclaimer: I am not an attorney. You should consult with your legal and tax professionals who know your particular circumstances before taking action.

  1. You need to have an up-to-date profit and loss statement and balance sheet. I’m a broken record on this topic because so many still don’t, or have one, (somewhere maybe?), but couldn’t tell you much about it. If you do get sued, your attorney needs to have an immediate understanding of your financial situation and you will not have the luxury of time to engage a firm like ours for a multi-month “clean-up” process to get an accurate picture. Do this now.
  2. Consider moving cash out of the business. Be careful with this one though. First, if you are filing as an S-Corp, or are a C-Corp, you can’t move unlimited sums out of the business without potentially triggering a tax issue. Consult with your CPA and Financial Advisor on this. Additionally, moving the money doesn’t necessarily protect it. Your attorney can tell you more about this, but if you keep more than 3 months of operating cash in the business, it’s a conversation you should have immediately.
  3. Do business within a legal entity. Too many agents are operating without any legal entity which is extremely risky. I know some states still require the commission to be in the licensee’s name, but there are ways in every single one of those states to still do business within an entity. An entity isn’t a “get out of jail free” card, there are limitations and compliance you need to be aware of, so consult with your local attorney about the particulars. But I see no good reason if you’ve been in the business for more than a year and are planning to stay, that you wouldn’t invest in a legal entity.
  4. Obtain a general liability policy. A lot of what we do creates liability outside the coverage of Errors and Omissions (E&O) insurance and given most agents are 1099 contractors, thus small business owners, what do you think would happen if someone slips and falls during our open house? Sure the seller might get sued, but so might you. Contact your insurance agent and ensure your business activities are covered with a liability policy. (The cost is $500-$1000 a year.) No, your personal umbrella policy probably will not cover your business activities.

You might be noticing that all of the above recommendations are just good business practices. So don’t let the Grinch steal your Christmas, focus on some good business housekeeping and prepare for a powerful 2024.