In a perfect world, the seller lists his home with a real estate professional, it is sold, the transaction closes, the keys are given to the new homeowner who lives happily ever after.
In reality, this scenario is often interrupted by a buyer who encounters problems after the sale that results in litigation against the seller and the real estate agent.
The National Association of Realtors reports that the failure to disclose material facts is the leading cause of lawsuits filed against sellers and their real estate agents.
Today the law in most states requires that sellers disclose all known material defects affecting the value or desirability of a property to potential purchasers.
A defect is material if a reasonably objective buyer would attach enough importance to it so as to affect the decision to buy the property.
Full disclosure during the negotiations of a sale provides the purchaser with a true picture of the property and lessens the possibility of a future lawsuit against the seller or real estate agent for misrepresentation or fraud.
In Colorado, the Real Estate Commission has approved a standard seller’s property disclosure form, for both residential and vacant land.
In the residential form, a seller must disclose information concerning appliances, electrical system, heating and cooling, water system, roof, environmental conditions, structural conditions and other items such as zoning violations.
As to the vacant land disclosure, a seller must disclose information regarding the use and access, water and sewer, environmental conditions, noxious weeds, and violations of law.
Both forms contain warnings to the seller that the completion of the form has important legal consequences.
The seller is then instructed to complete the form to the best of seller’s “current actual knowledge” as of the date the form is completed. Sellers are not responsible to disclose any defect about which they have no knowledge.
Circumstances that could psychologically impact or stigmatize property need not be disclosed. For example, that a former occupant was HIV-positive or had AIDS, or that the dwelling was the site of a homicide, suicide, or felony are examples of items that need not be disclosed.
These property disclosure statements are excellent vehicles for communicating information constituting full disclosure. These forms are effectively used to convey information from the seller to prospective purchasers regarding the property’s condition.
The use of these forms is a major step toward full disclosure and shifts the responsibility of disclosure to the one who knows the property best, the seller.
In Colorado, the seller’s property disclosure responsibility also extends to the real estate professional. Colorado statute provides that a broker acting as a seller’s agent must disclose to any prospective buyer all adverse material facts actually known by such broker.
Such adverse material facts may include but shall not be limited to the title and the physical condition of the property, any material defects in the property, and any environmental hazards affecting the property which are required by law to be disclosed.
Under these provisions, a broker’s duty to disclose adverse material facts to a prospective buyer is limited to such facts that are “actually known” by the broker.
The seller’s broker has no duty to conduct an independent inspection of the property or to independently verify the accuracy or completeness of any statement made by the seller.
A seller’s disclosure is not equivalent to an inspection report on the condition of the property. The buyer has the right to request an inspection and have one performed by a building inspector.
A building inspector is supposed to perform a thorough inspection of the property to make sure everything is working properly. The seller is not obligated to provide an inspection, or pay for it. The seller, through his or her property disclosure, provides a more general disclosure about the property and what might impact its value.
Concealing unfavorable information rarely pays off. One seller decided not to disclose estimates he had obtained to replace his roof.
Unfortunately, his neighbors took care of this disclosure for him. The buyer became friends with the next-door neighbor soon after he took possession of the property.
The neighbor told the new homeowner that the seller was planning on replacing the roof before the next rainy season.
Sellers and their agents should take their disclosure obligations quite seriously. The majority of lawsuits from real estate transactions involve disputes on disclosure. If you are aware of a problem, disclose it immediately.
Troy Olsen is a partner with Rothgerber Johnson & Lyons LLP where his practice emphasizes real estate and construction litigation. He can be reached at 386-3000 or by e-mail at [email protected]