November 21, 2011

5 things to know about real estate disclosures

By Brendan DeSimone for Zillow

It’s standard practice in real estate to give a home a fresh coat of paint before putting it on the market. Nine out of 10 times, the intention is to show the property at its best. But every so often, the seller paints the house in hopes of covering something up.

That’s why I always triple-check the disclosure documents of newly painted houses, to ensure there were no recent leaks or other damage. It’s the seller’s obligation to disclose these kinds of issues. And it’s the buyer’s responsibility to be completely aware of past problems before signing on the dotted line.

Whether you’re a buyer or a seller, here are five things you should know about real estate disclosures.

1. What is a disclosure?

Disclosure statements, which can come in a variety of forms, are the buyer’s opportunity to learn as much as they can about the property and the seller’s experience in it.

Potential seller disclosures range from knowledge of leaky windows to loud neighbors to information about a major construction or development project nearby. Not only do disclosure documents serve to inform buyers, they can protect the sellers from future legal action. It is the seller’s chance to lay out anything that can negatively affect the value, usefulness or enjoyment of the property.

Leaking windows — bad coincidence?

I once had a buyer call me after the first rainstorm of the season. The windows in the master bedroom were leaking. We checked back on the disclosure documents from the sale and there wasn’t any mention of the leaks. Nothing showed up in the property inspection report at the time of escrow, either.

Unfortunately for the buyers, I said, this is part of homeownership. This could be the result of something that was building over time. I thought that was the end of it. The same client called back a few weeks later. They had workers out to check on the siding. That prompted their neighbor to inquire what they were up to. According to the neighbor, the previous owner of my client’s property had the same siding issues and had discussed it with the neighbor.

Given this new information, it was clear the previous seller had not properly disclosed. I had the buyers do more investigation, get bids and understand what the issue was. Armed with the knowledge of the neighbor and the approximate costs, we went back to the seller, through his agent. Though it did not turn into a lawsuit, the seller took responsibility and the situation was resolved quickly and fairly.

But too often, the lack of proper disclosure can result in a lawsuit. I heard of a story in which a buyer bought a house, with the seller disclosing that a kitchen renovation was done without permits. A few years later, that buyer went to sell the property but didn’t disclose that the previous owner had renovated the kitchen without a permit. The new buyer wanted to do some electrical work with a permit. The city inspector discovered that some things had not been done to code. The inspector dug deeper and realized that much of the kitchen renovation (both plumbing and electrical) was not to code. The new buyer was on the hook for ripping out the kitchen and doing it over. A lawsuit arose between the current owner and the second seller for not disclosing. The original sellers had covered themselves, but the second seller had not.

2. How does a seller go about making a disclosure to the buyer?

Disclosure laws vary from state to state, even down to the city and county level. California has some of the most stringent disclosure requirements. Often, sellers there are required to complete or sign off on over 50 pages of documents, such as a Natural Hazards Disclosure Statement, Lead Based Paint Disclosure, Advisories about Market Conditions and even Megan’s Law Disclosures.

Depending on where you live, sellers can be on the hook for what they disclose (or fail to) for up to ten years. I’ve seen agents and sellers take all types of approaches when dealing with property disclosures. More than anything, I always tell sellers to err on the side of caution. If you know it, disclose it. If you try to hide something, it can come back to bite you long after the sale and it is just not worth it.

Disclosure typically comes in the form of boilerplate documents (put together by the local or state Realtor association), where the seller is responsible for answering a series of yes/no questions detailing their home and their experience there.

Aside from the boilerplate documents a seller is required to complete, if there is any written (or sometimes verbal) communication regarding something negative about the property, it should be disclosed to the buyer. For example, there was a property for sale with a dispute over a tree on the property line and whose responsibility it was. The neighbor faxed a letter to the seller’s real estate agent documenting the dispute. This immediately became a disclosure item that both the seller and buyer needed to sign off on.

Bottom line: Disclosure statements are legal documents that can stand up in court.

3. What do sellers typically disclose to potential buyers?

The work and upgrades sellers have done to their property are a common disclosure, whether the work was done with or without permits. If done with permits, buyers are advised to cross check the seller’s disclosure with the city building permit report. Doing work without the city signing off with a permit is a key disclosure. If the work was not approved by the city, it may not have been performed to code and may cause a fire or health hazard. Buyers should independently investigate any non-permit work that was done.

Other common disclosures include the existence of pets, termite problems, neighborhood nuisances, any history of property line disputes, and defects or malfunctions with major systems or appliances. Disclosure documents often ask sellers if they are involved in bankruptcy proceedings, if there any liens on the property, and so on. Failure to disclose can result in a messy conflict with the buyer after the sale.

Some disclosure documents are very detailed. For instance, among the questions posed by the San Francisco Association of Realtors disclosure statement are:

  • Is there any non-tempered glass on shower or sliding doors?
  • Have there been any unusual odor problems in the neighborhood?
  • Was there any death on the property in the last three years?

4. Is a disclosure the same as an inspection? Are the two related?

A disclosure is something given to the buyer by the seller documenting their knowledge of the property. It is not the same thing as an inspection; because there are things the seller may not be aware of that an inspection brings to light.

This is why a property inspection should always be done by the buyer while in escrow. The inspector will check the property out from top to bottom, many times verifying what the seller has disclosed but sometimes bringing to light new issues. Often, we will see sellers hire a property inspector before going on the market. It seems backwards, but this is the sellers’ opportunity to hire an independent party to inspect the property, in case they missed or were not aware of something.

5. When does the buyer typically receive a seller’s disclosure statements?

In most markets, disclosure documents are provided to buyers once the seller has accepted their offer. In addition to their inspections or loan contingency, the buyer has an opportunity to review the seller’s disclosures. If the buyer discovers something negative about the property through disclosure, he can usually back out of the offer without losing his escrow deposit.

In some markets, sellers provide these disclosures to the buyers even before they receive an offer. Some sellers prefer to have buyers know everything they need to know up front. This is also smart because it saves everyone time, hassle and expense by preventing deals from falling apart once they’re in escrow.

Buyers are required to sign off on disclosure documents and reports. So it’s important to review them carefully and ask questions if you need to.

Full Disclosure Up Front is the Way to Go

In some ways, providing full disclosure can actually help a seller. As a Realtor reviewing disclosures with potential buyers, I like to see a comprehensive set of disclosure documents. It shows that the seller is thorough and upfront. This goes a long way toward giving buyers peace of mind, and in this market, anything you can do to move buyers off the dime is worth considering.

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