Arbitration: How Buying a New Home Could Become a Nightmare 

Arbitration, an out-of-court resolution process, has been around since 1925.  Until recently businesses have used it for their disputes with other businesses.  Now, however, more and more companies are utilizing arbitration to settle their battles with consumers.  Increasingly, arbitration clauses have been popping up in real estate transactions as well.  This phenomenon has lead to an outcry from unhappy home buyers who, in growing numbers, are telling of their horrific experiences.

How it Works 

   
   Many homeowners agree to waive their rights to traditional legal proceedings without even knowing it.  Buried in the pages of real estate sales materials are arbitration disclosures, committing the buyer to the process.  If a problem arises, the matter cannot be taken to court.  Instead, an arbitrator is selected from a list.  The arbitrator hears testimonies from the various sides and arguments from lawyers if those involved have chosen to use them.  After hearing the testimony and reading the lawyers’ statements, the arbitrator makes a ruling, acting as both judge and jury.

A Severely Biased Process

  Many problems suggest that one should never sign an arbitration disclosure agreement when buying a home.

1. Since arbitrators are engaged in the business of providing arbitration services, they may be biased toward Realtors who they frequently deal with.

2. The arbitrator is not an expert in law.  In a recent case, the arbitrator was an architect by trade, in another case, an engineer.  Many times these mediators do not completely understand the ever-changing laws regarding evidence, testimony, and liability.

3. There is absolutely no discovery.

4. Arbitrators not only decide who will pay for what damages, but they also decide who pays the bill for their time.  Some argue that arbitration is cheaper than using the courts, but they do not mention that someone has to pay the arbitrator.  It will most likely be the consumer.

5. Awards are smaller.  Though empirical data is hard to find, Jackson Williams of Congress Watch, a consumer advocacy group, reports that awards in arbitration are 20 percent less than those in a traditional court setting.

Changes on the Way

  Thankfully, new court rulings against the arbitration process are sparking reform.  Until those changes are given time to take affect, however, a home buyer must stick to the old saying “Consumers Beware” and never sign an arbitration disclosure agreement.

Office Closed
July 4

Kent W. Speight

Attorney

James T. McNary

Associate Attorney

Jennifer L. Lappegaard  Associate Attorney

Kay M. Halvorsen

Legal Assistant

Ruth A. Goudy

Legal Assistant

Yvonne M. Raasch

Secretary

Barbara J. Janisch

Secretary

Zeke Johnson

Intern

New Real Estate Laws

Despite all of the struggles, the 2002 legislative session did pass new real estate laws.  The following summaries mention just a couple of these important changes.

Disclosure in Real Estate Sales

Effective January 1, 2003 owners of real estate will have to inform potential buyers of known problems with their property.  Previous to this bill, no law required that disclosures be given.  Most of the everyday property exchanges will be affected by the law with few exceptions.  Here are some highlights of the new legislation:

• An owner must give to either the potential buyer or their real estate agent a written list of defects.

• An owner does not have to inform buyer of predatory offenders, but must inform them of how to access the predatory offender registry.

• An owner can hire a qualified third party to create the report if they prefer.

• An owner is liable for failing to disclose to buyer known adverse conditions.

• An owner is not liable for omitting defects not within their knowledge or that would have required expertise outside of their abilities.

• An owner is not liable for omissions of a third-party inspection.

• An owner and a buyer may waive the requirement of written disclosure if they wish.

• Also, to the dismay of all those concerned about poltergeists, the owner has “no duty to disclose...perceived paranormal activity.”  Now that’s scary.

Changes to Mortgages

•  Here’s a quick look at changes made to laws dealing with mortgages:

• Clarifies that there are not limits on the amounts of interest, points, finance charges, fees or other charges on mortgages of over $100,000.

• Prohibits residential lenders from adding to the principal any lender fee greater than five percent of the loan amount (some exceptions apply).

• Prohibits residential mortgage originators from charging prepayment penalties for (1) partial prepayment, (2) prepayment on sale, and (3) prepayment made more than 42 months after the date of the note.

Laws passed in 2002 by the Minnesota Legislature will be available at

www.leg.state.mn.us.