The property sector presents significant tension for realtors during a buyer’s market. Currently, there is an inventory surplus on the one hand and high home prices and interest rates limiting purchasing power on the other. In December 2022, according to statistics by the National Association of Realtors (NAR), the total existing home sales were US $ 4.02 million, with an additional 2.9 months’ supply of inventory remaining.
In such circumstances, there is mounting pressure on realtors to close deals, which often causes ethical missteps or oversight while making defect disclosures. For instance, a study by the Cinch Home Service showed 77% of the participants who were home sellers said that their real estate agents encouraged them not to disclose defects, and 74% admitted to hiding issues with superficial repairs.
State law and regulation impose a legal obligation on the seller and the realtor to disclose any material defects in a property to potential buyers. But what constitutes a proper disclosure, and what actions can be interpreted as an inability to provide essential information for a well-considered decision?
What is Failure to Disclose?
In a real estate transaction, failure to disclose is a term used to refer to the practice of sellers, landlords, or realtors refusing to provide sufficient information about the flaws that could affect the value of a property. The law seeks to have buyers make informed decisions when purchasing a property and promote transparency in real estate transactions. Therefore, failure to disclose can result in legal action against the realtor and the seller.
What are Realtors Required to Disclose?
According to state and federal law, realtors should disclose all material defects on a property and any personal relationship they may have with the buyers. For instance, the Real Estate Settlement Procedures Act (RESPA) is a federal law that requires real estate agents to disclose settlement expenses protecting buyers from high closing costs.
Further, in Maryland, sellers must fill out the Maryland Residential Property Disclosure Statement and disclose any latent defects that the buyer may not be able to establish even after careful inspection. The form also requires that the seller lists other defects or conditions of the home, including issues with plumbing, electrical, HVAC system, or any other component. States like Texas, Florida, Illinois, and New York have similar requirements. But the abovementioned New York and Illinois states also have additional disclosure requirements. For instance, New York requires sellers to disclose issues relating to asbestos or lead-based paints or hazards, while Illinois requires disclosure of issues related to radon gas.
Material defects are significant issues with a residential real property’s system or component that adversely affects the property’s value, pose a health or safety risk, or undermine the buyer’s capacity to enjoy it. State law does not consider ordinary wear and tear, rust, or cracks in any part of the house as material defects.
Examples of Material Defect Disclosures
As defined in the section above, material defects go beyond the integrity of the structure or components of the house to any information that would undermine the house’s value or the buyer’s capacity to enjoy it. Examples of such defects include the following:
- Neighborhood nuisance — Any activity or phenomenon likely to undermine the new owner’s enjoyment of their property without invading their space is a neighborhood nuisance. Examples may include noises, odors, or any irritations from industrial or commercial properties nearby, airports, or drug houses.
- A death in the home — States such as Alaska, California, and South Dakota require sellers to disclose if a death occurred in the house within the last three years. Other states like New York, New Jersey, Massachusetts, and Minnesota require disclosing events such as murder or suicide, or alleged haunting. Beyond some buyers’ superstition and sensitivity, such events stigmatize the property and affect its value.
- The property repair history — A seller or realtor should disclose significant repair history relating to the property so that the buyer’s home inspector can pay special attention to those areas and ascertain if they pose any hazard or undermine the home’s value.
- Damages due to water — Water damage may impair the house’s electrical system and other systems. Further, damage from storms or flooding and slow leaks undermine the home’s price and can damage valuables.
- Bankruptcy and property liens — A creditor can repose a property with a lien attached. In such instances, an owner cannot borrow against the property or even sell it until the debtor clears the debt.
- Information regarding any homeowner’s association — Homeowners’ associations have membership rules and regulations that a new buyer may want to know before buying a property. If the association’s reputation or laws are at odds with the buyer, the buyer can opt out of the purchase.
- Disclosing a list of items — Any fixtures, fittings, furniture, or appliances that come with the property need to be listed.
What are considered latent defects?
In addition to material defects that may be obvious at the time of purchase or shortly after settling into a new house, state law also requires realtors to disclose latent defects. A latent defect is any hidden or unapparent flaw that negatively affects the property’s value, functionality, or safety.
Further, the law does not hold the seller or real estate agent responsible for new defects that arise after the sale and cannot be blamed on the seller. The law anticipates situations where the seller may be unaware of certain flaws, such as an underground septic tank or sewer line leakages. In such circumstances, the seller will not be held liable if the defects are discovered after the sale. A seller may file a disclaimer statement instead of a disclosure.
But what if, for example, the seller didn’t disclose the foundation problem? Though such a defect is not apparent and may not be discovered through inspection, the seller has a legal obligation to disclose or be liable for damages.
Disclosure vs. Disclaimers: What’s the Difference?
As stated earlier, a disclosure statement provides complete and truthful information about any significant property or environmental flaws that are likely to undermine its value and enjoyment or pose a safety concern to its occupants. On the other hand, a disclaimer is a statement through which the seller absolves themselves from any liability or responsibility arising from failing to disclose material defects in the property.
As part of the disclosure statement, a seller may issue a legal disclaimer that provides additional protection to the seller and explains the limitations of the information provided in the disclosures.
What if the property is sold as it is?
Alternatively, a seller may issue a disclaimer statement instead of a disclosure one and declare that they are not aware of any defects to the property and are not responsible for disclosing them but present the property for sale ‘as-is’ without any warranties or guarantees.
In Loughrin v. Superior Court (Barr) (1993), the matter established that stating that a property is being sold in its ‘as-is’ form absolves the seller from any liability arising from defects discovered by the buyer after the sale. However, suppose a court establishes that the seller knew about a defect and, either through fraud, misrepresentation, or bad faith, intentionally conceals material defects. In that case, the disclaimer statement will not offer any protection. It is, therefore, essential to consult with an attorney to determine if a disclaimer will be effective for your circumstances.
Why choose disclaimers over disclosure?
Depending on the circumstances around the sale of the property, it may be better to opt to make a disclaimer than provide disclosures. For instance, if the seller is dealing with an older property and does not have complete information on the property history, a disclaimer statement will protect them if unknown defects become apparent after the sale.
Furthermore, if the seller relies on subjective information such as the value of the property or market conditions, the disclaimer statement will work best. Work with a legal counsel to determine which option is best for you.
How Can You Prevent Failure to Disclose Violations?
As a realtor, you want to protect yourself from failure to disclose violations. Remember, the seller is responsible for revealing apparent and obvious defects on a property, while you are responsible for disclosing latent defects.
To prevent a failure to disclose a violation, consider taking the following steps:
- Familiarize yourself with your state disclosure laws and obligation — Find out and fulfill your obligations under the state disclosure laws and the federal Real Estate Settlement Procedures Act (RESPA).
- Obtain full disclosure from the seller regarding known defects — Obtain the seller’s disclosure through a property disclosure statement, affidavit, or declaration providing the relevant details of the property, which may include repair history, previous owners, water damage, or any other form of defects. If the time comes and you are looking for how to prove the seller lied on disclosure, these documents will come in handy.
- Conduct a thorough inspection of the property and review its documentation — Work with an inspector to inspect the property and review any relevant documentation to determine the integrity of the property, discover latent defects, or ascertain if there have been any significant repairs.
- Consult with local authorities — Consult with local authorities and review local building codes, zoning laws, and any other relevant regulations to determine if any unpermitted work, such as additional bedrooms, bathrooms, decks, or patios, has been done on the property. Your consultation will help determine if the seller didn’t disclose unpermitted work.
- Maintain records of all disclosures and communications — Be prepared to counter any allegations of non-disclosure or misrepresentation by maintaining a record of disclosures and communications made to the local authority, seller, and buyer, any relevant information gathered as part of the assessment. It’s advisable to maintain such records for seven years after closing.
- Consider seeking legal counsel — Engage a qualified attorney who can advise you on your obligations to disclose and ensure that all the disclosures you make are done according to state law.
- Provide complete and accurate information — When making a disclosure, provide complete and accurate information about the property, including material and latent defects and any known violations you may have encountered and corrected.
A buyer can sue the seller, realtor, or inspector if a disclosure violation occurs.
Suing the seller/landlord
Can you sue the previous homeowner for non-disclosure? Yes, you can. A buyer or tenant can sue a previous homeowner and seek compensation for damage. They must provide evidence that they suffered harm from the seller’s false or misleading representations in their disclosure statement.
Suing the realtor
A buyer may result to suing real estate agent for misrepresentation. Especially if they can show that the agent was involved in a failure to disclose a material or latent defect or violation or made false or misleading statements in the disclosure.
Suing the home inspector
A buyer or homeowner can sue a home inspector for damages if they can prove the inspector was negligent in performing a home inspection and failed to disclose a material or latent defect or violation.
Evaluating the Strength of a Legal Case
To evaluate the strength of a legal case against you, understand that the buyer must be able to prove the following:
- You were under a duty to disclose that fact to the plaintiff;
- You concealed or suppressed a material defect or adverse fact about the property to defraud the buyer;
- The plaintiff (buyer) was unaware of the concealed fact and would have otherwise acted on it if they had known;
- Plaintiff suffered harm as a result of the concealment.
To be able to disprove the above, take the following steps —
- Gather contractual agreements and review disclosure obligations — Review the state requirements for disclosure and the purchase agreement, which outlines your responsibilities towards the buyer and their duties towards making an informed purchase decision. Determine what your obligations to disclose were and consider whether, with this information, it is possible to show that you had a duty to declare the fact that makes the subject of the plaintiff suit.
- Gather correspondence documentation — Gather documentation of disclosures you made, purchase agreements, and correspondence between you, the seller, and the buyer. Review to determine if you had disclosed the issue to the subject of the lawsuit.
- Proof of material defect — Review the evidence of material defect presented by the buyer. Do they have an inspection report or test results showing chemical hazards or flaws? Determine what evidence they have that forms the basis for their claim that you failed to disclose a defect.
- Nature of defect and timing of discovery — Remember, you cannot be held liable for defects that you or the seller were unaware existed or occurred after the buyer occupied the property.
- Previous legal rulings in similar cases — Courts have pronounced themselves on many aspects of the legal principle of failure to disclose. Work with an attorney to find out if there are any rulings on cases similar to yours.
- Statute of limitations for filing a lawsuit — While the exact timeframe may vary depending on your state, the statute of limitations for filing cases for failure to disclose is between one to six years, after which a buyer loses their legal right to seek remedies.
Failure to disclose lawsuits is complex and time-consuming. But whatever the case, it cannot all be on the real estate agent. For example, you may determine that the seller lied on the property disclosure statement. Search on the Lawrina Match for a qualified, practicing lawyer near you who will help you navigate the complexities of your case.
Failure to disclose property defects by real estate agents can lead to severe consequences for buyers and sellers. It is also the responsibility of realtors to ensure that all information about the property is disclosed in a timely and transparent manner. Neglecting to do so could result in legal action and damage their professional reputation. However, if realtors fulfill their legal obligation to disclose all property defects, they can effectively defend themselves against potential liability claims from disgruntled buyers.