Sunday, March 16, 2008

Dispute Resolution—Understanding Arbitration in Minnesota Real Estate

This past week I received an email from a reader of my blog who was upset after receiving an arbitration ruling that did not go in his favor. He had read one of my past posts What is a Septic System? How does it differ from a city sewer system? He and his wife had recently purchased a home in Andover, Minnesota and filed for arbitration after discovering a significant problem with their septic system and that the disclosure forms their received were incomplete.

The arbitrator ruled in favor of the sellers, agent and broker and the frustrated homeowner doesn’t understand how this could have happened. He strongly cautioned me to never let my buyers agree to arbitration. I don’t know all of the details of his situation but he was obviously frustrated with the system.

Fortunately, I have not had any clients with outstanding disputes following closings that lead to arbitration or litigation. When clients on both sides of the transaction take the time to:

  • Disclose all defects in the home
  • Perform all inspections
  • Opt to purchase warranties if necessary
  • Review all documents
  • Discuss any and all aspects of the home honestly and thrououghly
Then buyers have a good understanding of what they are purchasing and the limitations of the existing home. Good honest disclosures will prevent most disputes.

If you are considering buying or selling a home in Minnesota will be confronted with the question, “Do you agree to arbitration?”
It's a tough question as most clients do not understand the system they are agreeing to when they receive the disclosure form. Disputes can arise in real estate transactions, so understanding the process of arbitration is essential prior to sitting down to sign the purchase agreement.

When we purchased our first home, prior to my becoming a Realtor, I remember the explanation of the arbitration system given by our real estate agent. “It’s an inexpensive alternative to the legal process and frankly anyone who doesn’t agree to it is a fool as an attorney can cost thousands more.” We couldn’t wait to sign the form.

As a Realtor, I am more diligent when explaining this arbitration system. Though I am not an attorney and cannot give legal advice, I am required to explain this document to my clients. Here is a synopsis of what I say when I explain this form:

“When there is a dispute after the closing, buyers and sellers can choose to arbitrate or litigate for a resolution. By signing the arbitration form, you give up your right to litigate and agree to binding arbitration. Though parties can hire an attorney to assist them with the process, they cannot take their case to a court; they must file a request for arbitration. After the arbitrator makes a ruling, all parties MUST comply with the findings of the arbitrator.”
In Minnesota, the arbitration system for residential commercial property is Construction Arbitration Services (CAS). In reviewing the CAS website, I discovered that hiring a team of arbitrators is not inexpensive. While for small situations under $3000, the fees are relatively low, starting at $250 for one arbitrator to review documents, the numbers are significantly higher for larger claims. If you want to speak with the arbitrator to present your case, the cost jumps to $650 on a case under $3000.
For the situation described above, one arbitrator for a three party case would be $1,200-$1,500 and hiring a 3 member panel would be nearly $2,500! The party bringing the claim would be required to pay the amount upfront for the service and would only receive reimbursement if the decision was in their favor. The arbitrators are not employees of CAS but are neutral third-parties trained in dispute resolution and could be anyone of a number of trained professionals from a variety of backgrounds.  

So what should a buyer or seller do when confronted with this form, sign or not sign?

Again, I cannot give legal advice but a popular option is to decline signing at the time of writing the purchase agreement. This is not an outright refusal to ever agree to arbitration. It is a way to keep your options open in the event a dispute arises. This way a buyer or seller could chose to hire an attorney, file for arbitration or present your case to a small claims court judge if need be.


If you are buying, selling or relocating to Minnesota and need help from a professional Realtor, give me a call or visit my website for a FREE Relocation Packet. I specialize in acreage and lakeshore properties in the north and east Twin Cities metro area including Ham Lake, Lino Lakes and all communities in the Forest Lake School District! Serving Anoka, Chisago, Ramsey and Washington Counties in Minnesota.

Copyright 2008 Teri Eckholm