Buying or selling a house: disclosure rights and obligations

Money, Real estate

Most homeowners want to purchase their home, move in, and live in it. Case closed. If it isn’t a turnkey property, the owners still want to know what they’re facing in their fixer-upper. Not to mention, disclosing all manner of structural, environmental, or neighborhood issues during a home sale is required by law.

But what if you don’t know about a problem in the property you’re purchasing and it rears its ugly head weeks, months, or even years after the home sale? What if you’re the one to sell a property without disclosing all its flaws?

When disclosures come back to bite you

Even well-intentioned sellers can get tripped up by disclosure requirements. Rick J. Hecker, attorney with Clymer Conrad in Lancaster, Pennsylvania, relates the story of one of his clients, a house flipper who encountered an angry buyer, more than a year after the purchase. “Unknown to my client, there was a sump pump on the property hidden in a small crawl space. My client was not aware of the crawl space, much less the sump pump, due to his relatively short period of ownership. As a result, he represented on the seller’s disclosure that there was no sump pump.”

Not that significant an oversight, right? At least, not until the buyer discovered a year later that a sump pump did, in fact, exist – and this discovery was made because the pump had failed and created a mold issue.

“In real estate transactions, the merger doctrine generally prohibits a buyer from returning to the seller after a transaction has closed,” says Hecker. Under the merger doctrine, the provisions in the purchase contract merge in the deed at closing. Therefore, any guarantees made in the contract that are not reflected in the deed expire once the deed is conveyed to the buyer.

“Generally this stops the undoing of transactions where there is only buyer’s remorse,” Hecker explains. “However, one major exception to the merger doctrine is for instances of fraudulently induced transactions. A false statement on a seller’s disclosure is a pretty good place to begin when considering whether there has been a fraudulently induced transaction.” Hecker’s client is facing this very situation.

Is ignorance a defense? That’s for a judge to decide. But Brian Pendergraft, a real estate attorney with The Pendergraft Firm in the Washington, D.C. metro area, says this: “If the buyer has not discovered hidden defects that the seller should have disclosed until after the sale went through, then the buyer has a claim against the seller for intentional misrepresentation, concealment, and non-disclosure. Generally, a buyer can seek compensatory and punitive damages in such a lawsuit. Buyers should seek legal counsel before filing any lawsuits because real property litigation is very technical.”

Be smarter than the disclosure process

Whether you are buying a preowned home or investing in new construction, you don’t know everything there is to know about the structure. You must rely on other people to tell you the truth. Or, you could hire someone and pay them to tell you the truth.

“Get as many inspections as possible,” says attorney Melinda Grimaldi, owner and operator of the Grimaldi Law Firm in Hollywood, Florida, who is currently dealing with a disgruntled buyer who found evidence of lead-based paint even though the seller’s disclosure stated they had no knowledge of it. The kicker? “The buyers had the right to do an inspection of the property but chose not to. Unless we have evidence that the seller concealed or had knowledge of the lead-based paint, the buyer now must proceed with fixing the issue at their own cost.”

Grimaldi has encountered many scenarios where buyers did not take full advantage of their inspection periods, which resulted in problems only discovered after closing. Some inspections – like that for lead-based paint – is an additional inspection that must be ordered and paid for. “The buyers are given time for this inspection, but almost never take the extra initiative and cost to do it,” says Grimaldi. That small expense up front can save you thousands in the long run. “If something hidden is discovered, the buyer can negotiate with the seller to get it fixed or get a credit at closing so the buyer can fix it themselves.

When bad things happen to good homes

What about grisly crimes or other notorious happenings that can affect a house’s value? Must they be disclosed? It depends on which state the house is in.

In 1998, a teenager murdered his parents in a Huntsville, Alabama, home and injured his three younger siblings who survived. The parents’ home was foreclosed in 2000, and has sold four times since then.    There would have been no required disclosure under Alabama law, which uses caveat emptor, essentially letting buyers know that the sale of used real property comes with a “buyer beware” notice.

“Under the principle of caveat emptor, the seller has no duty to disclose defects in the property unless it poses a health or safety risk to the buyer,” says Mac Martinson, real estate attorney with Martinson and Beason in Huntsville. “The burden is on the buyer to verify the quality of the property and the absence of defects.”

Martinson says there have been instances where termites have severely damaged a home, or a home has experienced significant water damage and mold from a flood. “The seller could be liable, if they knew of the damage, as this is a health and safety issue and the seller did not correct the problem.”

Recourse for a bad real estate purchase

When the unexpected happens with a property you’re purchasing, you don’t have to live with it because you’ve signed some papers. “In most jurisdictions, if a contract has been ratified but the seller has not made required disclosures and the buyer has not waived her right to receive such disclosures, the seller can back out of the deal and receive her earnest money deposit back,” says Pendergraft.

Then, of course, comes another issue. “Often, sellers who fail to disclose defects will also refuse to release the earnest money deposit to buyers who back out of a deal because of defects,” says Pendergraft, who has written letters demanding the return of the earnest money deposit. “This tends to work,” he says. “If the seller refuses to return the earnest money deposit, then litigation against the seller may or may not be worth it, depending upon the amount of the earnest money deposit.

So, what should you disclose

Home sellers want their property to be attractive to their target audience. In California, there are rules requiring the full and complete disclosure of all material matters that may affect the buyer’s desirability of the property. “This is broad, and can include appliances that are not functioning correctly, neighbor noises, prior deaths inside the home, prior insurance claims, etc. These are so important that the concept of ‘as is’ was eliminated by law. If the seller fails to disclose all material facts, the buyer can sue for rescission, monetary, or fraud damages,” says say Michael J. Simkin, attorney with Simkin & Associates in Los Angeles.

In a perfect world, you bid on a house, get a contract, and hire an independent home inspector to investigate the details. It’s money well-spent to protect a buyer’s interests. In the meantime, “The buyer should spend time inspecting the property to determine the condition of the property, including the electrical, plumbing, HVAC, foundation, roof, septic system, the school district, flood zones, road access, utilities to the property, and the cable and internet provider,” says Martinson.

“Before the closing, a little due diligence on the part of the buyer will assist them in determining that they are informed about the property,” says Martinson, “and avoid headaches down the road.”