What to Disclose When Selling a Home

In the past, the general rule if you were buying a home was caveat emptor-buyer beware. The seller wasn't obliged to tell you whether the roof leaked or the furnace didn't work, or even if the house was built on a toxic dump. If you were buying a home, you were supposed to figure all of that out for yourself.

But in recent years, the general trend towards consumer protection has included a change in the laws of most states on what needs to be disclosed. In most states, if you're selling a home it is illegal to fail to disclose major physical defects in your property, such as a basement that floods in heavy rains. You may need to make written disclosures to indicate what you know about the condition of your home.

In some states, seller disclosures are still voluntary, but even then you may want to consider telling the buyer what you know. A major cause of post-sale disputes and lawsuits is defects and disclosure, and most disputes can be avoided if proper disclosures are made.

This is an area of the law that changes rapidly, differs widely from state to state, and may be affected by local ordinances, so consult your lawyer for up-to-date information on the law that applies to you.

How does the seller make disclosures?
It depends. In many states, compliance with disclosure obligations is made easy through the use of seller disclosure forms. These forms consist of a long list of questions, for example whether there has been fire, wind or flood damage that required repair; whether the property is in an earthquake fault zone; even whether a death has occurred on the property within the last three years. The seller must answer each question "yes," "no," or "don't know." It's perfectly acceptable for a seller to answer a question "don't know"-the purpose of the disclosure is to make the seller tell the buyer what the seller knows about the property, not to initiate a research project. The seller disclosure forms are usually then attached to the sale contract.

*Exceptions

Not all sellers have to make disclosures-the common exception in most states is for banks and mortgage companies who are selling foreclosed properties. If you're buying a foreclosed property, it's a good idea to pay for a professional inspection to ensure everything is in good shape. The old motto applies in these cases: buyer beware.

Even in those states that do not require written disclosures, some real estate companies require prospective sellers to complete a disclosure form before listing the property.

Other states may only require oral disclosures. If you're buying a home, it is prudent to record any disclosures the seller makes, and even ask whether the seller is willing to make disclosures in writing.

What does the seller need to disclose?
In most states where disclosures are mandatory, sellers are required to disclose material facts about the property for sale-that is, anything that could affect the sale price or influence a buyer's decision to purchase a home. This is obviously a pretty subjective requirement-a fact that is material to one buyer may not concern another. Remember, generally you only need to disclose information within your personal knowledge. If you're wondering whether something should be disclosed, consult a real estate agent or your property attorney. Ask yourself if you'd want to have the information if you were the buyer. If the answer is yes, then disclose. It could save you a lot of trouble down the line.

There are some defects that should always be disclosed:

• Plumbing and sewage issues;
• Water leakage of any type, including in basements;
• Termites or other insect infestations;
• Roof defects;
• Heating or air conditioning system issues;
• Property drainage problems;
• Foundation instabilities or cracks;
• Problems with title to the property; and
• Issues with neighbors that aren't obvious

Structural defects are one thing; toxic materials in the house are another. Federal law requires sellers to disclose all known lead-based paint and hazards in the house-which may include lead pipes or repairs to pipes-and give buyers a ten-day opportunity to test the house for lead. State laws may require sellers to make disclosures about other toxic materials, including radon, mercury, asbestos, carbon monoxide and formaldehyde.

What happens if a seller fails to disclose?
A seller who doesn't disclose known defects can be sued by the buyer after the defect has been discovered. The seller may then be responsible for the costs or repairs and other damages resulting from the undisclosed defect. A seller may even be ordered to take the property back if a judge rescinds, or invalidates, the sale. These kinds of lawsuits can turn out to be very expensive-a seller can be held responsible for the buyers' attorney's fees, and if there is fraud involved a seller may even have to pay punitive damages to the buyer.

Inspections
In most states, sellers are only required to disclose what they know, not what they ought to know. If the sellers haven't been living in the house long, or are just unobservant, they may not have noticed a defect. The sellers cannot disclose the defect to the buyer and the buyer has no protection.

To avoid being stuck with a new home that needs a raft of expensive repairs, it's a good idea for a buyer to insist that the contract be contingent on a satisfactory house inspection. A professional inspector will inspect all major house systems, including the roof, plumbing, electrical and heating systems and drainage. If you're buying a home, you may think an inspection is a waste of time and money. But consider-if the house is in good shape, your mind will be at rest. If there are any problems, it may be possible to negotiate a new price with the owner, or back out of the deal.

Sellers might also consider a house inspection before they even put the house on the market. A house inspection could reveal defects that come as a surprise and can be fixed up before the house goes on the market.

On the other hand, sellers only need to disclose what they know. A house inspection could give sellers knowledge-about lead paint, for example-that they'd rather not have. Once sellers know about a defect, they've got to disclose it.