Purchasers of real estate are given protection under U.S. law in the form of “failure to disclose” provisions. Many municipalities require a seller of real estate to provide a “truth-in-housing” statement, which discloses any known problems with or adverse conditions of the property.

Truth-in-housing statements furnish accurate information on the fitness of any real estate property that is being sold. In many states, licensed inspectors must fill out a “truth-in-housing” evaluation and furnish a disclosure report before real estate properties (such as condominiums, duplexes, offices, single-family homes, and townhouses) can be shown to prospective buyers.

Examples of known problems that must be disclosed to the buyer by the seller are:

-- wet basements or defective plumbing

-- leaking or damaged roofs

-- a broken septic tank

-- electrical and wiring problems

-- building without a permit

-- renovations performed without a licensed contractor

-- building code violations

-- the presence of termites, mold, or radon

Failure to disclose such information can result in a violation of the purchase agreement, or even a lawsuit involving fraud.

What Is Reasonable?

When selling real estate property the seller has the legal duty and obligation to divulge everything they are aware of that might reasonably cause the prospective purchaser to decide against buying the property. The question often arises: What is reasonable?

An electrical outlet that doesn’t work is usually not a problem if it can be easily fixed. However, if foundation problems have been an ongoing source of aggravation for the seller, and this information is not disclosed to the buyer, then that is a clear example of failing to disclose.

The prudent thing to do is to be completely honest and to disclose everything, whether you think it is important or not. Let the purchaser decide what is important and what is not.

For Sale by Owner

Real estate agents have generally found that “For Sale By Owner” sellers are not always as up-front and cooperative in revealing problems with their properties. It is wise, therefore, to cautiously deal with any seller who seems dishonest, or avoid them completely.

What about Legal Recourse?

Failure to disclose problems with a property often makes the seller legally liable. The purchaser, however, is protected against such action by legal recourse and has the ability to take out a judgment for punitive damages against the seller, the seller’s agent, and even against the purchaser’s own agent.

The purchaser has the ability to sue for compensation for any original damages to the property unknown at the time of purchase, in addition to any new expenses incurred while in possession of the recently acquired property.

Who Can Help a Purchaser to Avoid These Problems?

Various experts in real estate matters, in addition to your own agent, can help a purchaser avoid problems when purchasing property. These include:

-- building inspectors

-- appraisers

-- accountants

-- attorneys

-- tax records personnel

What Types of Litigation Are Possible?

When confronted with failure to disclose issues with a newly acquired property, purchasers can pursue three types of litigation:

-- “Failure to disclose”

Involves a discovery by the buyer of a problem, after the settlement, in which the purchaser feels the seller was not totally honest in disclosing the condition, or fitness, of the property.

-- Breach of a sales agreement

Involves a case whereby the seller does not adequately perform necessary obligations under the agreement—resulting in an incomplete contract. The purchaser has the right to pursue action called: “allegations of failure to disclose”.

-- Title issues

Involves a case whereby personnel with the title insurance company question the suitability of the title.

Generally, purchasers can litigate under the following general actions that directly or indirectly involve failure to disclose:

• Affirmative concealment of a known defect
• Failure to disclose a known defect, when a duty to do so is expressed
• Fraudulent misrepresentation of a known defect or condition
• Innocent misrepresentation of a material defect
• Negligent misrepresentation made by a seller, owing a duty of care

Doctrine of Caveat Emptor

The doctrine of caveat emptor states: “buyer beware”. A purchaser of real estate property should be well-informed as to the condition of the property. Before the purchase agreement is completed, the buyer should perform inspections of the property so that an informed and knowledgeable decision can be made. Defects or unacceptable conditions should be identified before the agreement is finalized. Often, the buyer will be unable to pursue legal recourse after taking title. However, the legal system has established various exceptions. Buyers should educate themselves about these exceptions, as they pertain to their particular state or municipality, before signing on the dotted line.

Additional Resources

-- Environmental Protection Agency Web site article on failure to disclose:

http://www.epa.gov/region1/pr/2003/feb/030212.html

-- International Risk Management Institute (IRMI): http://www.irmi.com/Expert/Articles/2005/Valentino01.aspx