Every real estate transaction involves a mountain of paperwork: home inspection reports, loan estimates, purchase agreements and more. While some pieces of that paperwork puzzle are specific to either buyers or sellers, there is one document that both parties should make sure they understand: the seller’s disclosure.

What is a seller’s disclosure?

A seller’s disclosure is a form that outlines a property owner’s knowledge of any defects that may impact the property value, or impact a new owner’s safety and well-being once they move in. The majority of seller’s disclosures have a fairly standard structure, with yes/no/don’t know questions about different pieces of the property. The forms typically cover major potential problems — the presence of toxic substances, evidence of pest damage or past leaks in the roof, for example. Many also ask a seller to indicate any renovations or remodeling efforts and whether those were completed with a permit.

However, the specifics of a seller’s disclosure are different from state to state. In Delaware, for example, sellers must complete a seven-page form detailing everything from the date of the last roof installation to whether or not pets have ever lived in the home. If you’re selling a home in Georgia, the disclosure may be provided verbally instead of via a written document. And in Arkansas, there is no state law requiring sellers to complete a disclosure form.

Even if the state doesn’t legally require a seller’s disclosure, real estate agents will often provide a template for a disclosure statement with a recommendation to complete it. For example, North Dakota only recently started requiring sellers in the state to complete a written disclosure. But James Jensen, broker/owner of RE/MAX Now in Valley City, says that he advised sellers to proactively fill one out anyway, as a way to protect themselves from potential legal complications and deliver extra reassurance for buyers.

“The disclosure statement is an important piece of the sale,” Jensen says. “Oftentimes, sellers are worried about disclosing something, but it’s important to understand that people expect to see items on the statement. For example, say there was a seepage problem two years ago, but the seller indicates that they have since installed new gutters. That gives comfort to the buyer.”

How it works for sellers

When you’re selling your home, it’s wise to complete a written disclosure before you even list the property, and in many states, that’s standard practice. However, some states have more generous timelines for disclosures. In Washington, for example, a seller must share a disclosure within five business days of acceptance of a contract.

Sellers shouldn’t be concerned that past issues will derail the sale, Jensen says — as long as the issue has been resolved. It is a red flag, however, if a seller indicates a problem without any resolution and without any knowledge of why the problem occurred. “If you indicate you have seepage every year but you don’t know why, a buyer is going to be concerned,” he says. “If your disclosure is vague, the buyer has another reason to drag their feet.”

Some sellers even go above and beyond by sharing extra information in the name of transparency. This can be very helpful for buyers: “If you had an electrician replace some lights three years ago, include the electrician’s name on the disclosure so the buyer knows who to contact if there is a problem,” Jensen says.

Keep in mind that there may be a sizable window of time between the initial purchase agreement and the closing, and if anything changes on the property in the interim, sellers may need to update their disclosure statements. “If anything changed from the time of listing, then the seller should complete what has changed, and the buyer will need to sign to acknowledge the update,” Jensen says.

What happens if a seller lies?

Honesty is the name of the game when it comes to completing a disclosure form — dishonesty could have legal repercussions. If the new owner comes to believe you lied about something, or neglected to mention it, they may be able to take you to court.

Consider this ominous passage from the Illinois Real Property Disclosure Act: “A person who knowingly violates or fails to perform any duty prescribed by any provision of the Act, or who discloses any information on the Residential Real Property Disclosure Report that he knows to be false, shall be liable in the amount of actual damages and court costs, and the court may award reasonable attorney fees incurred by the prevailing party.”

However, sellers don’t have to worry forever. There is typically a limitation on how far into the future they may be held liable for any issues. In Illinois, for example, legal action based on a disclosure form can only occur for one year after the sale.

How it works for buyers

Buyers should pay as much attention to disclosures as sellers do — it’s all for your benefit, after all. When you’re buying a house, a disclosure can provide much needed peace of mind. In some cases, it can even offer some additional time to back out of the contract: For example, in Washington, buyers have three business days after receiving the disclosure to rescind an offer. Regardless of their location, buyers will need to sign the form to indicate they have received it and reviewed the information.

It’s important to understand that sellers’ disclosures are all about their existing knowledge of the property. You can’t disclose what you don’t know — sellers may be unaware of issues that occurred well before they lived there, for example, particularly in an older home.

Therefore, a seller’s disclosure is not a substitute for the essential investigative work to verify that a property is a wise investment. “Always get a home inspection,” Jensen advises. “If the disclosure raises any additional concerns, make sure you’re communicating with your home inspector about those areas. For example, if the seller indicates there was a sewer backup a few years ago, perhaps run some extra tests.”

Bottom line

Seller’s disclosures are designed to provide a level of transparency before proceeding with a contract. For sellers who are completing them, it’s important to be honest to avoid any legal consequences. For buyers who are reviewing them, it’s important to look for any potential red flags that would make you think twice about paying for the property. No matter which side of the transaction you’re on, a real estate agent can help you make sense of the information.