Real Estate Disclosure Laws

The concept of "disclosure" is one of the most misunderstood legal topics in real estate. Disclosure laws are changing constantly. Buyers, sellers, even real estate agents and brokers remain confused.

Through the 1960s, real estate agents always represented the seller. Real estate agents were required by law to work exclusively in the interest of the property owner. The unwritten rule was, "Let the buyer beware."

In most home purchases real estate disclosure laws did not require the agent or the seller to disclose the property's defects. If the buyer failed to discover a major defect before the purchase, it was his tough luck. The buyer had little or no recourse against the seller or the agent.

The only potential recourse could have come from sellers and their real estate agents making explicitly false representations regarding the property. In this case, the buyer, even under these older regulations, could have justifiable cause to seek action against the seller and/or agent. Basically, it was assumed that a home was bought "as is."

From the later 1960s through today, there have been thousands of state and federal regulations, court decisions and licensing standards affecting disclosure procedures. The rule has changed from, "Let the buyer beware," to "Let the sellers and their agents beware." Today, the law frowns upon sellers and their agents who fail to disclose a serious defect in the property.

Whether you're working with a "buyer's agent" or a "seller's agent," any real estate agent who does not expose serious defects in the property can be held liable for the omission. However, a problem arises in determining which defects should be construed as "serious."

How Serious Are Defects?

A man knew he had a malfunctioning gas heater, and even though a repairman warned him that the heater could start a fire, he sold the property without informing the buyers. Soon after the buyers moved in, the heater exploded and killed two family members. The court determined that the seller was criminally liable, convicted him of involuntary manslaughter and sentenced him to 15 years in jail.

Though this is an extreme example, it really did happen. But, what about less serious problems like poor wiring that may become dangerous in the future?

There are many gray areas regarding the disclosure of these sorts of liabilities. Serious defects can lead to extensive and expensive property damage, personal injury, or even death.

Because of this, you must insist that the sellers and their agents provide a complete list of the property's defects, large or small.

Suspect Defects

More problems can arise when you try to get information about a property. What if the owner or real estate agent doesn't know about the potentially dangerous electrical wiring, or termites in the foundation, or the rotting wood under the roof shingles? What if the seller and agent don't know, but only suspect that a defect may exist?

The courts generally rule that a seller or agent can't disclose what they don't know. This "ignorance defense" is not airtight, however. There are real estate laws in many states that require owners and agents to perform certain investigations.

In California, for example, a real estate agent must inspect the property before listing it for sale. In Massachusetts, sellers must have their property tested for urea formaldehyde foam insulation.

In a bizarre California case, the jury ruled that the realty firm should be held liable for not telling the buyer that the property's hillside location made it likely that the home could be damaged by mudslides. The realty firm contended that it had no knowledge of mudslides. But "not knowing" with good reason is not the same as reasonably suspecting that a condition may exist.

"Puffing"

There is a long-standing practice used by real estate agents that can prevent you from getting all the information you need to make a proper purchasing decision. It's called "puffing" or "puffery."

Puffing is making a statement that sounds very good, but contains no facts. Examples of these are "Great neighborhood," "A true bargain," or "It's a very quiet neighborhood." Accepting these kinds of statements in lieu of specific facts can get you into trouble.

There are unethical real estate agents that use this tactic purposely to either mask their knowledge of the property or to intentionally avoid disclosing negative information.

If you are told, "It's a great neighborhood," and find a crack house around the corner, you might be greatly disappointed. "This is not a great neighborhood," you would argue. If, however, in the agent's opinion, the neighborhood is turning around and improving, he may consider it great.

Now imagine yourself in court arguing over whose opinion is more correct than the other.

Exclusions to the Laws

Real estate disclosure laws still exclude some types of sellers, transaction types and properties. Government agencies, financial institutions, auctioneers and some court-appointed trustees may not be covered in all of the disclosure laws.

In addition, buyers of commercial or investment properties may receive less protection under these laws than the average home buyer. If you buy a foreclosure at the courthouse, for example, you will be buying it "as is."

In some states FSBOs (for sale by owner) may not require the same high standards of disclosure that a real estate agent must meet.

Rules of the Road

It's up to the buyer to get as much information as you can about the property you want to purchase. Reliance on disclosure laws can be dangerous. There are many exceptions and exclusions.

Don't wait for others to reveal all they know about the property; find out for yourself:

• Ask your real estate agent or attorney to fully explain the disclosure laws in your state. Learn what types of disclosure laws may not apply to your home-buying situation.
• Ask the real estate agents questions that require factual, detailed answers. Do not settle for answers that may be debatable or sound "puffed up."
• Be sure to have the seller prepare a list of defects.
• Hire an inspector to examine the property and evaluate the neighborhood yourself.