Basement flooding. Mould behind the walls. Cracks in the foundation. These are just some of the stories that are regularly received from buyers who discovered defects in their home shortly after closing, which were not disclosed by the seller.
Sellers must disclose anything that could affect the property’s value or desirability, from big problems such as a compromised foundation to — in some states — simple neighborhood nuisances such as that dog next door that barks every night.
Not all material defects are deal-breakers
Some sellers worry that if they disclose a defect in their property, buyers won’t want to buy it. This sometimes happens. But, in general, buyers value a seller’s upfront candor because it allows them to make an educated decision about an expensive transaction. Every house has defects, even new ones.
Disclosure laws that dictate what a seller needs to disclose vary from one state to the next. California was at the forefront of consumer protection regarding homebuying beginning in 1987 when sellers of one- to four-unit residential buildings were required to complete a real estate transfer disclosure form.
Some sellers are exempt from completing this form, like a trustee who never occupied the property and has limited or no information about the property’s condition. But all home sellers in California are required to disclose material facts, even if they are exempt from completing the mandated form.
A material fact is one that would affect a buyer’s decision to buy a property or the price buyers would be willing to pay for it. Before it became the seller’s duty to disclose known material facts, caveat emptor, or buyer beware, was the rule of the day.
Not all states have written seller disclosure requirements. However, more than 30 states followed course after California made seller disclosure law. Generally, the trend nationally is toward disclosure of material facts.
What is and isn’t a material fact is not always black and white. There can be an element of subjectivity. For instance, years ago, a seller of a home in the trendy Rockridge neighborhood of Oakland, Calif., asked if he needed to disclose that someone had been raped in the house when the previous owners owned it.
The current seller was an attorney, although not specializing in real estate. He was concerned that he would be held to a higher standard than someone who didn’t have legal expertise if he didn’t disclose the information and was later sued by the buyer.
There were multiple offers on the property. One buyer withdrew when she learned that a rape had occurred at the house. She would be living by herself and was already concerned that the house didn’t have an attached garage, and she would often return home from work late at night.
In this situation, the seller’s forthright disclosure of an unpleasant event that occurred at the house caused a buyer to decide against buying it. However, it didn’t keep the house from selling. Other buyers were not at all deterred by the disclosure, made an offer and the sale closed.
This is an example of a subjective material fact. It might not be material to all buyers, but it could be to some. In comparison, most buyers would find a roof that leaks like a sieve a material fact that would at least impact the price they’d be willing to pay.
HOUSE HUNTING TIP: Seek the advice of your real estate agent or attorney if you’re unsure about what you should or are required to disclose. Keep in mind that most real estate agents are not attorneys and can’t give legal advice. It’s worth the cost to get good legal advice about accurate disclosures. Intentionally withholding a material fact could get you into a legal action with the buyers after closing.
A general rule of thumb that might not apply to every situation is: If you’re asking yourself if you should disclose something, it’s probably material to someone, so disclose it.
THE CLOSING: Your goal in selling your home should be to do so as risk-free as possible. A post-closing lawsuit or mediation could be costly and time consuming.
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