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Telling all about your house

When your grandparents bought their first home, they did so at their own risk. Back then, real estate was governed by the ancient Roman dictum of caveat emptor.

Today, however, "let the buyer beware" has gone the way of gladiators and chariots. The operational phrase in real estate now is let the seller beware.

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More than two-thirds of all states require that home sellers present home buyers with a property disclosure form listing known legal hindrances, physical defects and even paranormal activity relating to the property. Failure to do so could result in civil and criminal action, and in some cases even recision of the sale.

Marley's ghost and meth labs
Some states have minimal disclosure requirements. Does the seller have legal authority to sell the property? Are there any boundary disputes, boundary agreements or encroachments? Is the house connected to public sewers? Does the roof leak? Has there been an addition, remodel or other major work, and was it completed to code? Are there structural cracks or defects?

In more stringent states, the list can run to 10 pages, reflecting a variety of consumer or regional concerns, including earthquake damage, mold, radon, insect infestations, even ghosts and paranormal activity.

"The hottest new trend is methamphetamine labs because some residue from that process is toxic," says Craig Cheatham, chief executive officer of The Realty Alliance. "Some states like South Dakota have a specific mention in their requirements that if there has ever been a meth lab on that property, it must be disclosed."

Another disclosure hot button is home insurance, according to Sandy Taraszki, executive director of the Worldwide ERC's Coalition - Center for Governmental Issues.

"Arizona has passed an insurance disclosure, where the seller has to provide a report that covers the last five years, because new homeowners are increasingly having difficulty getting insurance," she says. "At least two dozen states have introduced insurance legislation because of the problem."

Cheatham says disclosure can even reach beyond the property lines.

"Now you're getting into things like water rights because people are struggling to get the resources that are vanishing as we try to share the same things. That creek in the backyard used to be all yours. Now you've got to make sure you've got rights to the water in case somebody upstream takes it."

Similarly, some once-touchy issues, such as whether the house contains ghosts or was the scene of a murder, suicide or AIDS-related death, have largely gone by the wayside, in part to uphold the seller's right of privacy.

"It usually comes down to an interpretation of what actually impacts the value of the house," says Taraszki. "Some things are protected that you can't disclose. For instance, in Pennsylvania, you do not have to disclose a haunted house."

In other words, let the buyer be scared.

"We're getting very, very specific these days," says Cheatham. "The pendulum swings various ways, from rights of privacy to consumer rights. Just how bad does it have to be to be significant? People are still trying to find their way on disclosure."

Buyer rights, seller wrongs
The move toward seller disclosure is a fairly recent one. Until the late 1960s, the vast majority of real estate agents represented the interests of home sellers exclusively. Buyers basically were left to kick the tires and take their chances.

But with the rise of the consumer-rights movement and buyer's agents came a growing body of case law that overturned caveat emptor and held both sellers and their agents liable for failing to disclose major known defects to a buyer.

The state Realtor organizations that license and self-govern real estate practices within their jurisdictions began to develop disclosure forms and encourage their use among their members.

By the late 1980s, state legislatures began to codify property disclosure as a natural extension of consumer-protection laws. As a result, any home seller, whether represented by a real estate agent or selling "by owner," can be legally liable if a state's disclosure requirements aren't met.

Today, most brokers use some form of seller disclosure to protect their sellers and themselves, even in states where it isn't required by law.

"The state doesn't necessarily cover some of the areas that the industry feels are problematic, so what you're seeing is state Realtor organizations developing forms that go further than the state-mandated forms," says Taraszki. "Some states require that you use only their forms; in other states, such as Pennsylvania, the state form is considered the minimum requirement."

The federal government also chipped in a nationwide disclosure requirement under the 1992 Real Estate Disclosure and Notification Rule that requires all sellers of homes built before 1978 to disclose the presence of lead-based paint.

See you in court
So what does it all mean if your buyer drags you into court?

"It depends," says Ralph Holmen, National Association of Realtors associate general counsel. "If the seller completes the form and outright lies, that clearly is going to be a problem; that's just flat-out fraud. Similarly, if the broker knew that a misrepresentation was being made, he or she could be held liable.

"If, on the other hand, the seller simply made a mistake, there may or may not be culpability."

Some successful civil actions result in a monetary award to correct the problem, and some states allow the buyer to collect legal fees, says Holmen. In extreme cases, courts have given the buyer the option to rescind the transaction and even recover sale-related costs such as lender's fees.

NAR is so bullish on disclosure that it has included it in its code of ethics, regardless of state law. Not all real estate professionals are Realtors, however.

"One, it helps equip sellers and brokers who represent sellers to defend themselves when the buyer claims he was not told something or was told something incorrectly; there is a record of what the buyer was told," says Holmen.

"Also, when you provide that information fully and early, you avoid [legal] problems completely. The buyer knows what he's getting so there isn't any litigation at all."

Buyer (still) beware
Sounds great in theory. But buyer-broker Tom Wemett, president of the National Association of Exclusive Buyer Agents, says practical application is less than precise.

Oftentimes, agents adopt a don't-ask, don't-tell attitude just to secure a listing.

"What happens is that listing agents go into the property with blinders on; they don't want to know about that stuff. They hand the seller the property condition disclosure form and say, 'Get this back to me so we can provide it to the buyer.' The problem is, sellers never fill out the form correctly," he says.

There also are those within the industry who feel that mandatory disclosure is simply a big waste of time. Sellers are asked questions they are unqualified to answer (Underground storage tank? Infestation?). Mandatory disclosure also gives agents and brokers only the illusion of legal protection. Buyers would be better served, they say, by a thorough property inspection and an extended home warranty.

Jay MacDonald is a contributing editor based in Mississippi.

-- Updated: July 18, 2006

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