How dare your slumber get in the way of your neighbor's patriotism! I jest, of course, though it's no laughing matter to you. Your complaint may strike some as frivolous, but a loud noise is a loud noise -- be it blaring music, baying hounds, revving hot rods or an oversized flag snapping and crackling a few feet from your weary heads. Alas, boorish neighbors who would happily trample our rights in the righteous exercise of their own can really diminish quality of life.
First, whether you need to disclose this to the next buyer is a legitimate concern. Know that if you take official action, such as a police or homeowners association complaint, then that's "on the record," helping make your nondisclosure actionable if the buyer of your home discovers the grievance. Also, many disclosure forms have a space for sellers to divulge "neighborhood noise or nuisance." If the neighbor tells your successor that "you're as bad as my last neighbor" about the flag, that disclosure will raise a different sort of flag -- a red one.
From the looks of it, you've already asked the neighbor if he'd be so kind to lower the flag when the gales whip up, and he has refused. And you've probably already surmised he can fly the flag 24/7 as long as it's illuminated. But have you thought about asking him to consider muffling the flag? Flag enthusiasts say you can temper the snap of a large flag without obscuring its field by adding small pieces of heavy rope to each of the flag's outside corners. Alternatively, you might request that he switch to a quieter polyester flag the next time he replaces it, though he might have a counter suggestion for you that is unflattering.
Alternately, there are a number of options for soundproofing windows, including the installation of thick acoustical windows such as those found at airport hotels and office buildings. Do your homework thoroughly on these and read Internet reviews and threads on the subject if you want to go this route. With such windows installed, the flag may not be a nuisance -- and perhaps a nonissue on disclosure. You could also buy a "white noise" machine, which helps drown out sound.
If all else fails, you may just have to file a noise complaint. There is some precedent for homeowners getting cited for loud flags, by the way, such as the case of a man in Chesterfield Township, Mich., who was ticketed for a noisy 12-foot by 18-foot flag. However, a man in Long Beach, Calif., who flew a massive 30-foot by 60-foot flag on a 132-foot pole over his residence, was able to successfully fight off several complaining neighbors in court. In those two cases, as you might suspect, the flag owners accused the complainants of being un-American.
Hailing from a family with a tradition of military service, I can hardly impugn respectful flag-fliers who comprise the majority. But your peace is literally being disturbed here and your neighbor does seem to be bullying you. I'm sorry to see you've been put in such an awkward position as a seller. Good luck.