Sometimes Your Gut Just Tells You “No”
Unique Seller Disclosure Circumstances
A host of factors come into play as potential buyers weigh the pros and cons of a property. Maybe they don’t like the carpeting, the paint colors, or the noisy motorcycle across the street. In some rarer cases, a property may have developed a stigma, either real or imagined, that could negatively affect a potential buyer’s final decision. Is the obligation to disclose a psychological stigma bound by law or ethics? What if a stigma is simply not verifiable either by law or scientific fact? Here’s a unique case study involving stigmatized property that will shed light on best practices for agents.
Situation
A psychological stigma is something unrelated to the features or physical condition of a property that could affect the sale. A typical stigma might be previous criminal or drug activity, suicide, death, a former occupant who was a sexual predator, a troubled neighborhood, or even the belief a property is haunted. In this case study, an agent represented a seller in the sale of a home that was used for methamphetamine production.
Mistake
It was alleged the agent failed to disclose that the methamphetamine production had occurred on the property. The agent “suspected” but was unable to confirm such activities.
Result
Several months after the closing, a neighbor informed the buyer of the drug-related activities. The agent was then sued for failing to disclose that the property was suspected to have been used as a methamphetamine lab. The buyer argued that there was material information that was not disclosed which licensees are obligated to disclose by statute. The buyer alleged psychological stigma damage and diminished value of the property. The cost to remediate the affected areas exceeded $100,000. The buyer also argued that psychological stigma could impact the value of the property.
Disclosure of psychological stigma varies from state to state. Agents need to know their state requirements, enforcement regulations, and who is required to make such disclosures. Exposure may exist if psychological stigma could materially impair the value of a property. For example, in some the seller is required to disclose if a murder took place or if a sex offender lived in the neighborhood. Exposure may also exist if an agent discloses facts without verifying for accuracy.
In this case study, it was determined that the seller had an obligation to disclose facts materially affecting the value of the property. Furthermore, the agent was never able to confirm prior criminal activity. Successfully defending disclosure of psychological stigma requires review on a state-by-state basis.
Prevention
The best risk management practice is to disclose what is known or required by your state. Focus on the open and obvious issues, and always disclose information made available by the seller. Make sure to document that the purchaser is responsible for verifying any defects or quality issues.
Protecting yourself and your firm starts with a good grounding in the regulations that pertain to real estate transactions in your state as well as the code of ethics governing real estate agents in general. An important component of risk management is making informed decisions.
This article was produced in conjunction with XL Catlin and is not to be taken as legal advice.