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When a Real Estate Seller Doesn’t Disclose a Known Defect

Seller disclosure requirements vary from state to state. However, most state disclosure requirements relate to material defects in the home. Examples of material defects include things such as: water damage in the basement, a structural defect, environmental hazards and/or renovations that were done without a permit. It could also involve a lien on the property or a demolition order. Material defects are problems with the property that could influence the value of the home. They are significant enough to also influence whether a purchaser decides to buy the property or not. Buyers have the right to make an informed decision and need to know all material defects before deciding to purchase. 

When it comes to disclosures, real estate licensees rely a lot on what their seller tells them about their property. But, what if a seller deliberately withholds information about a known defect, leaving you vulnerable to a lawsuit? Here are some strategies to protect yourself from a dishonest seller and minimize your risk of facing a lawsuit. 

Brush Up On Your Disclosure Knowledge

Lawsuits against real estate licensees due to ‘Failure to disclose’ are common. The responsibility to disclose doesn’t end at the seller — real estate licensees must disclose any material defects as well. That’s why licensees need a solid understanding of the disclosure laws in the states where they do business. To be able to advise your clients, you need to know exactly what’s required. 

Some states, such as California, impose additional obligations of licensees to undertake a visual inspection of the property. Any defects spotted during that inspection must be disclosed. 

Educate Your Clients

Educate your sellers on the importance of being honest when completing disclosure forms. Ensure your clients understand what needs to be disclosed and why. Communicate to them that it is important, because the consequences for a failure to disclose can be very serious and costly (and it is fraud!). 

Encourage them to take their time in completing the forms. Sometimes important things can be missed if  a person is feeling pressured to complete a form quickly. 

Never Complete Disclosure Paperwork for the Seller

Sellers must complete the disclosure form themselves. Under no circumstances should a real estate licensee complete this paperwork on behalf of a client. If you do complete this crucial paperwork, it leaves you very vulnerable to a lawsuit. Sellers may say you failed to complete the form as they instructed. Or they might accuse you of omitting something important on the form. 

Encourage Buyers to Do a Building Inspection

Buyers should always be encouraged to do a comprehensive building inspection before deciding to purchase a property. This doesn’t negate the need for a seller and licensee to disclose — those obligations still stand. But, encouraging buyers to do their due diligence can help to ensure they make an informed decision. It can also minimize the risk of facing a lawsuit in your real estate business. 

Encourage the Buyer to Visit the Property

Whilst some buyers might purchase a property sight-unseen, this can increase the risk of legal issues in the future. What if they find defects when they move into the home? What if they’re not happy with the noisy next door neighbors or the loud traffic noise post-purchase? Buyers should be encouraged to visit the property themselves if it’s practical for them to do so. It can save problems cropping up in the future. 

Other Due Diligence Actions 

Buyers should be encouraged to do their own due diligence to make sure the home is suitable for them. 

In addition to arranging a building inspection, some buyers might want to arrange:

  • An electrical inspection
  • A pest inspection (to ensure there are no pests or signs of termite damage)
  • Searches and checks to ensure there are no encumbrances on the property

Err on the Side of Disclosure

Encourage your clients to err on the side of disclosure. As a real estate licensee, this should be your approach as well. If you know of a material defect that could influence the purchase price or a buyer’s decision to buy the property, you must disclose it.

If you discover that your client is withholding information and failing to disclose a known defect, you must disclose this to the buyer.

Failure to disclose is serious business. Always fulfill your disclosure obligations as a licensee, or you’ll be headed to court defending a lawsuit against an aggravated buyer in the future. 

Maintain Your Insurance

CRES offers customized E&O Insurance for real estate professionals. With E&O + ClaimPrevent®, you’ll even have access to qualified attorneys who can give you expert legal advice 7 days a week. 

Want to find out more? Contact the friendly team at CRES today at 800-880-2747 for a confidential discussion.

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