Hidden Dangers
By Michael Repka, ESQ. | CEO & General Counsel
Whenever homeowners mention the possibility of selling their home without using a professional real estate agent, various agents are quick to counter with the argument that a lot of legal pitfalls are lurking out there. These agents continue that the sellers need a qualified agent to help the sellers navigate through the disclosure and legal landscape.
Although these statements are fundamentally true, the argument falls short in that many agents are trained not to provide any legal advice, including with regard to disclosures. In fact, many agents are trained not to answer any questions about how the sellers should prepare their disclosures at all, because doing so could create liability for the agents or their brokerages. It is not uncommon for agents, especially inexperienced agents, to do nothing more than give a stack of disclosure forms to the sellers and tell them to do their best to answer everything completely and honestly. If they have any questions, they are told to speak with a qualified residential real estate attorney, but access to such an attorney is often not provided.
Given that most listing agents do not have any legal training, this advice is not without merit, but it does not comport with the argument that the sellers need a professional real estate agent to avoid legal pitfalls. Sellers deserve more than this.
California Disclosure Requirements
California defines actual fraud quite broadly, and specifically includes “the suppression of that which is true, by one having the knowledge or belief of that fact” (CA Civ. Code §1572, subd. (3)). In other words, when sellers fail to disclose a material fact, they are committing actual fraud under California law. Thus, most sellers are told they need to disclose everything they know about the property. However, this broad statement is too vague and can lead to unexpected exposure, even for sellers who make a good-faith attempt to heed the advice.
Danger of Providing Too Little Information
Perhaps the most common non-disclosure case involves sellers who knew of some potential defect, yet failed to share this information with potential buyers. Under California law, a seller must disclose all material facts not known to, or within the reach of, diligent buyers exhibiting reasonable attention and observation. California law defines a material fact as any fact that affects the value or desirability of a particular property, which is unquestionably a very broad definition.
Thus, by way of example, sellers who know that their foundation is starting to fail and needs to be repaired and reinforced have a duty to disclose this information. If they fail to do so, then they could be held liable for damages under a theory of actual fraud.
Active Concealment of a Material Defect
Any actions to conceal a material defect can exacerbate the sellers’ predicament. Imagine what would happen if the same sellers, being aware of the foundation defect, decided to have heavy boxes moved to the area directly in front of a foundation crack. This could certainly be construed as an attempt to hinder the buyer’s ability to discover the problem.
One of the challenges that a plaintiff’s attorney faces in recovering damages from the sellers in a non-disclosure case is to establish that the sellers actually knew, or reasonably should have known, of the defect. The sudden decision to move boxes in front of a foundation crack would certainly be proffered as evidence to support the assertion that the sellers knew of the crack.
While the majority of sellers would not do something as egregious as blocking access to a crack in the foundation, many find themselves in legal hot water as a result of undisclosed improvements done to prepare a home for listing. Although there are countless examples, one of the most common is when, unbeknownst to the buyers, sellers paint a room prior to selling their home. When the buyers subsequently discover a water leak, most attorneys would argue that the sellers (or listing agent) must have painted the room to conceal water stains or other evidence of past leaks. The argument continues that the buyers would have demonstrated additional vigilance if they had known that the room was recently painted, but they were duped because the painting was not disclosed.
When the DeLeon Team preps a home for sale, we are careful to inform potential buyers of the actions we took to get the property ready. This certainly eases the buyers’ minds by letting them know that the home is ready for them, but it is also a good way to reduce our sellers’ exposure to this legal claim.
The Surprising Danger From Sellers’ Helpfulness
Answering disclosure questions is fraught with peril for poorly advised sellers. Perhaps the most surprising area of exposure comes from sellers who are trying to be completely honest and as helpful as possible. There are generally two key areas of potential exposure to these sellers: (1) providing statements that could be construed as a warranty, and (2) misdiagnosing a cause or the required cure.
When sellers say they repaired something and it is as “good as new,” or when they say that “we corrected a problem and it will be fine for the next 20 years,” they may create liability for themselves. Some readers may think that no seller would actually say something like that, yet I often encounter sellers ready to make these kinds of statements. Needless to say, I encourage sellers to rephrase these statements.
Similarly, sellers often create additional liability for themselves by speculating about the actual cause of a defect. Sellers must fully and honestly disclose what they know about the property they are selling. However, many sellers go beyond that by explaining what they believe is the underlying cause or the needed solution. The sellers should stop where their knowledge stops.
Perhaps this is best explained with another example. A seller may know that her roof leaks near a skylight when it rains. A well-advised seller would disclose that “the roof leaks when it rains.” If the seller is confident that the only location of the leak is near the skylight, then the seller could expand the disclosure to say that “the roof leaks near the kitchen skylight when it rains.”
However, some sellers take it upon themselves to add speculation as to the cause of the problem or the needed solution, such as “the roof leaks near the skylight because it needs some sealant around the base of the skylight.” It is easy to imagine a buyer’s reaction if it turned out that the problem could only be rectified by replacing the entire roof.
Sellers’ Best Practices When Preparing Disclosure Forms
Undoubtedly, sellers face considerable risk when preparing their disclosures during the sale process. However, they can substantially mitigate this risk by taking a few simple steps.
First, they should disclose everything that they would want to know if they were buying the house. Second, they should include everything they know, even if it is not covered by the particular questions on disclosure forms. Third, they should be careful not to go beyond things that they actually know, resisting speculation about the cause of a problem or the possible solution. Finally, they should discuss any questions with a qualified real estate attorney. If their listing agent is unwilling to cover the cost of this consultation, then the sellers should give serious consideration to making their own investment in this important peace of mind.
If you have any questions, I am available to meet with DeLeon sellers about any and all disclosure-related questions at no additional charge.
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