“You didn’t tell me there was asbestos in the house!  I’m going to sue you!”

Last week, I walked you through why shopping for a loan mid-way through an escrow could cost you some cash if you’re a Buyer.  This week, we’re going to help Sellers avoid getting sued.  You’ll want to understand the importance of truthful disclosure.

What’s one way to avoid getting sued?

Sellers will help themselves avoid lawsuits by disclosing information about their property for sale.  The law requires that all material facts about a property be disclosed…facts that, if known, might make a Buyer change his or her mind about a sale transaction.

Purchasing a home ranks as a very serious and expensive endeavor so finding out if the yard floods in the winter or if there is lead-based paint on the walls might change the desirability of a property and the price a Buyer is willing to pay for it.

What is a real estate disclosure?

Disclosure forms are the means by which potential problem areas, about or around a home, are documented so that Buyers have the information needed to make a decision about whether to purchase.  Sellers have an obligation to disclose items that may affect the value of the property that is being sold.  It is illegal in California to deliberately conceal major defects on your property, but sellers are not the only parties required to disclose.

Disclosures make up a large percentage of what a Buyer signs when they buy a home in California.  There’s a section right in the Residential Purchase Agreement with an overview of the typical types of disclosures a Buyer will see:

  • Sellers disclosures about the house
  • 3rd Party Companies provide information about the property where it’s located called natural hazard disclosures (flood zone?, earthquake zone?, etc.)
  • The State requires that buyers be told about the Megan’s law database which is another disclosure
  • The State requires disclosures about things like lead-based paint and asbestos which are based on the years a home was built and construction methods.
  • There’s also disclosures about what agency relationship means
  • Agents are also required to make a visual inspection of the home and when they document, they are only documenting anything that could be perceived as not normal or problematic. I once had a Seller chastise me because I “didn’t write anything nice about his house”.   It’s not a marketing document.  It’s meant to record the defects observed.

Do Buyers really have to read all those disclosures?

Recently, a colleague of mine got an angry call from a Buyer who claimed that she was not made aware of asbestos that was found in the attic by a contractor who was hired for remodeling after she had purchased the home.  The contractor added cost to the initial construction estimate because he tested for and found asbestos which required additional remediation costs to remove it.  She threatened to sue the Seller and the Agent.

It turns out that the Buyer signed but didn’t read two explicit disclosures about the possible presence of asbestos due to the age of the home.  The law places the burden on the Buyer to read the documentation that they are given.  When a Buyer reads that that a condition may exist, it’s entirely up to them whether they want to do further inspection of the condition or forego testing and take a chance and they also have the option of choosing not to move forward with the purchase.  Agents are not contractors.  They are not experts or specialists in construction or in specialty issues like mold, asbestos, or lead-based paint so unless they are told for a fact by an expert, they aren’t allowed to tell Buyers anything except where they can hire an inspector for expert testing.

What do you have to disclose?

Sellers must disclose everything they know about a property even why they painted. Most of the time, paint is used to refresh and make a place look more attractive, but some unscrupulous Sellers may use paint to hide water stains on the ceiling.  The idea is that if the Seller commits it to writing and the comments later turn out to be suspect, then there’s a potential for a Buyer to bring a lawsuit.  Understand that if you have the desire to hide something, your neighbors may be the ones telling the new owners that you’ve had problems with a leaky roof for years.  It’s not worth trying to hide problems.

If you’re a landlord, you must provide a bed bug disclosure.  If the home is in an HOA, there are many disclosures for making the balance sheets and reserves known to potential sellers along with HOA rules, pending litigation, and restrictions.

You have to disclose if there was a death on the property within the last three years.  Understand though that if it were a peaceful death, not everyone cares.  I show houses all the time and most Buyers aren’t deterred by it.  If they found out about a death after-the-fact though, they could sue the Seller.

Speaking of death, there is a situation where not all disclosures are made and that’s when an Executor or parties of a trust sell a property where the owner died on the property.  A very typical example of this is where an elderly parent passes away of natural causes in their own home and the adult children as heirs are selling it.  They have a lesser burden to disclose but they still must disclose a death.

The last category of disclosure occurs on a stigmatized property which is defined as one that has been “psychologically impacted by an event, which occurred or was suspected to have occurred on the property, such event being one that has no physical impact of any kind.”  Examples of stigmatizing factors include murder, suicide and other deaths, serious crime, proximity to registered sex offenders, hauntings and other paranormal activity.  According to the National Association of Realtors, about 20% of buyers would expect a price discount from around 31-50%.  I would expect that the East Area Rapist home in Citrus Heights would sell for much less than market value.

What’s the bottom line?

So if you’re the Seller, it’s probably going to cost you less to disclose truthfully.  It’s always better to be able to say you’ve had a problem and you paid a licensed contractor to remedy the situation but you’ll need to disclose both the problem and the fix.  The alternative is court and the costs of lawsuits can be expensive and time consuming.

For the Buyers, I know that you can really glaze over reading all the information that comes to you in the forms you’re required to sign and technology makes it easy to go from one signature to another in a fraction of a second, but reading what you’re signing is going to save you a lot of heartache later.