What Happens if a Seller Fails to Disclose Defects When Selling Property?
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In many states, an owner selling property has an obligation to disclose any latent defect(s) with that property. Latent defects often are not discoverable until months and sometimes years and failure to disclose is tantamount to fraudulent misrepresentation. If the seller does not disclose, the purchaser has a right to just compensation for remedying the defect(s). In some cases, the buyer can request that the purchase be rescinded.
Who is liable?
When a seller fails to disclose a material, latent defect, that seller is liable for any costs the purchaser has to pay to remedy the situation. This liability extends to the listing agent. Both owner and agent have a duty to not only disclose but to exercise reasonable diligence to discover any latent defects in the property they want to sell. This means that even if the defect was not readily observable but could have been reasonably discovered by the seller and/or agent, then liability attaches to both. The owner and agent may remain liable even if the buyer's inspector does not discover the defect(s) during inspection.
Why type of defects must be disclosed?
Any material defects that threaten the property's structure or interferes with the enjoyment must be disclosed. These defects include but are not limited to the following:
- Roof defects
- Wiring and electrical problems
- Water damage
- Problem plumbing
- Nonworking septic tanks
- Permit or code violations
- Shoddy remodeling or construction
- Underlying structural problems not readily observable
According to the National Association of Realtor's study guide, "stigmatized property" is property that has been psychologically impacted by an event that has occurred on the property, even where there was no physical harm to the property. Realtors know that properties with a "reputation" are often hard sells. Additionally, state laws may vary about a seller's obligation to reveal such extraordinary occurrences such as a crime that occurred on the property or even cases where there are reported "hauntings."
In Reed v. King, 193 Cal. Rptr. 130 (Cal. Ct. App. 1983), the court recognized the buyer/plaintiff's right to rescind the contract upon discovery that a woman and four children had been murdered in the home. In Stambovsky v. Ackley, 572 N.Y.S.2nd 672 (N.Y. App. Div. 1991), the court allowed a rescission of a contract after the purchaser discovered his home was widely reputed to be haunted by poltergeists. The court in this case held that even though the owner was under no duty to disclose the home's reputation, and in pursuit of a legal remedy, the plaintiff didn't have "a ghost of a chance," the spirit of equity mandated that the purchaser be allowed to rescind the sale contract and recover his down payment.
Currently 21 states address a property's stigma regarding legal remedies or a bar to suit. These states include:
- New Mexico
- Rhode Island
- South Carolina
- South Dakota
These state laws vary widely. While California's law disallows any obligation to disclose a property's psychological defect, including murder, South Dakota requires disclosure of any murder or other felony that occurred on the property in the 12 months preceding the disclosure statement. Georgia does not required disclosure but requires the seller/agent to respond honestly to any questions relating to any psychological defects.
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If you are selling property, in most states you are obligated to disclose any latent, physical defects to the seller. In a handful of states, you are also required to disclose any stigmatizing psychological defects such as a murder or suicide that occurred on the property. If you do not disclose, you may be sued for compensation to remedy the problems. If you are a purchaser, you can sue for full rescission of the contract. In either case, you should consult with an attorney to discuss your legal obligations and rights.