Fraud, Puffing & Misrepresentation in Real Estate

Instructor: Shawn Grimsley
Real estate fraud is an unfortunate reality. In this lesson, you'll learn about the different types of fraud perpetrated by licensed salespersons and brokers in real estate sales transactions. We'll also distinguish puffing from fraud.

Misrepresentation & Consequences

Linus is a licensed real estate salesperson who helps his clients either buy or sell real estate. A large part of Linus' job is the marketing and showing of properties to potential buyers. He also helps his clients understand important documents involved in real estate. People rely upon what Linus says and trusts that he is acting honestly.

Linus must make sure he deals honestly with everyone. If his statements cross the line into fraud, Linus may face severe consequences ranging from regulatory sanctions, loss of his license, civil court judgments and even criminal conviction. Linus's duty of honesty is pretty broad. If he knows his client has committed a fraud and does nothing to try to correct it, he may be viewed as aiding in the commission of the fraud and face the same negative consequences we've already discussed. So what do these terms mean? Let's take a look.

Actual Fraud

Fraud is a misrepresentation of a material fact (a fact of significance or importance) used to induce someone to do something. Fraud is like ice cream - it comes in different flavors. Actual fraud occurs when you intentionally deceive a person by misrepresenting a material fact that induces the person to rely upon the fact. Let's look at an example.

A buyer who is looking for a house with at least 2,000 finished square feet contacts Linus. Linus tells the potential buyer that his client's house consists of 2,100 finished square feet. While the house consists of a total of 2,100 square feet, only 1,850 square feet is finished. As a licensed real estate salesperson, Linus knows the difference between a finished and an unfinished area of a residential house, but he knows the buyer wants at least 2,000 finished square feet. Linus has misrepresented a material fact in hopes of inducing the prospective buyer to buy the house. Linus has committed an actual fraud.

Negative Fraud

Linus can also commit a fraud by intentionally failing to disclose a material fact. This is known as a negative fraud.

Linus is representing a seller who has informed him that the basement contains asbestos, which is a health risk. Linus instructs the seller not to disclose the asbestos issue because it could either kill a deal or result in a much lower sales price even though state law requires that the seller disclose the presence of it. Linus and his client are committing a negative fraud by failing to disclose a material fact in hopes of inducing someone to buy the house.

Constructive Fraud

Constructive fraud is an act that the law deems is fraudulent, though intent to deceive does not have to be proven. It generally arises when someone is harmed based upon a breach of a legal duty that a person owes to another that results in damage to that person. Consider the following example:

Linus has bills to pay and a baby on the way. He really needs to hit his commission goals for this quarter. He's working with a client who's looking for a new home and has told Linus that she's on a tight budget.

Linus shows her a house that's about 10% over her budget. She likes it and places an offer within her budget. The seller counters at a price about 5% over her budget. She asks Linus if this is the best deal she can get in the real estate market right now. Linus hasn't performed any recent research on the issue. However, he tells her he thinks the offer is fair and that the house will probably sell pretty quickly even though he really doesn't know how fast houses are selling in this neighborhood. The client decides to purchase the house based on Linus's statements, which was actually a bit above fair market value.

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