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Disclosure requirements can be a complex topic to maneuver with clients. When a seller asks if they should disclose a “defect” or not, you might automatically want to give them advice. However, that might not always be the best course of action. Learn from this real estate agent’s mistake to determine if and when you should advise a client on disclosure requirements.

Situation

A seller contacted a real estate agent to act as the seller’s agent in a residential home sale. At various times over the years the seller had owned the property, the seller would notice water intrusion in the front door area around the transom and windows. The seller decided to make repairs himself by re-caulking the front door and window area. The leaking occurred about three or four times, and the seller would repair it each time. 

However, the problem never went away completely. Instead of hiring a contractor to investigate and resolve the issue, the seller viewed the leaking and repair cycle as simply a home maintenance issue. The leaking last occurred about two years before the sale to the buyer, but, about one month after closing, a fierce rainstorm produced significant leaking in the front door and window area of the home—right where the problem began.

Problem

The seller had completed a voluntary property disclosure form, as part of the sales transaction, using a form provided by the real estate agent (the locale did not require a specific disclosure form by statute or rule). The form included questions about any “defects” in the roof or windows and if there were any known “defects” that would substantially impact the value of the home. 

While filling out the form, the seller asked the real estate agent whether the past leaking and repairs needed to be disclosed since the leaking last occurred two years ago but had been “fixed.” The agent advised the seller to tell the truth—if the past leaking was truly fixed, then it did not need to be disclosed. The buyer sued the seller, and the seller in turn filed a third-party complaint against the real estate agent alleging that the agent had instructed the seller on how he should complete the disclosure form. 

Mistake

The listing agreement between the seller and real estate agent clearly stated that the agent was not providing legal, contracting, or engineering advice. However, the agent gave an opinion implicitly, if not explicitly, to the seller about what qualified as a “defect.” The opinion was given in good faith with no intent to hide information or trick the seller.

Nevertheless, the agent did not think clearly about what was being said and whether a repeated problem that has been “fixed” is close enough to a “defect,” or whether to advise the seller to seek specific legal advice or speak to a contractor.

Result

After lengthy litigation, the seller settled with the plaintiff-buyer for a substantial sum. After the real estate agent’s deductible was exhausted on legal fees, the agent made a modest contribution to the settlement via their insurance carrier. 

While the legal rules vary from state to state, it is necessary to be cautious in these types of situations. For more than 50 years, various state courts have determined that a seller is under a duty to disclose known defects to the seller, even if not asked about them, when a reasonably diligent inspection by the buyer would not reveal the defect. The recommendations in this article may differ from state and local practices. 

Prevention

In short, don’t offer an opinion about what “defects” must be disclosed. However, there are some situations where you may want to advise your client that a “no defect” answer on a disclosure form should be rethought. For example, answering the question “Have there been roof leaks?” with “no defects” when there are clearly water stains on the upstairs bedroom ceiling is not a reasonable answer since there are obvious defects to the roof.

Just as you should avoid offering opinion as to what is a “defect,” you don’t want to become party to fraud through willful ignorance or silence in the face of contrary facts. As a practical point, should your client ask you if they should disclose something, the answer is most likely “yes.” If anything, “yes” is the safer answer in that case. If the repair or problem is significant enough to produce this question from your client, then it is likely close enough to the line to get your client, and you, in trouble for not disclosing. 

These decisions may differ from one situation to another based on how much risk you are willing to shoulder for advising that a repair or problem not be disclosed, and your decision must be weighed against the loss of a sale or reduction in sale price. While no agent wants to lose a sale, you should also consider the expense of your deductible being spent in the event of a lawsuit as well as the significant amount of time you will devote to dealing with the lawsuit rather than attending to your business. Likewise, do not discount the mental and emotional toll that dealing with a lawsuit will have on you. These “soft” factors should be placed on the scale next to the “hard” factors of loss, or reduction in the price, or a sale when you make your risk management decision. 

Also, never forget that a jury verdict against you or your agency for fraud, for even one dollar, is still a court judgment for fraud. Avoiding litigation is always your best course of action.