As a real estate investor selling a property, there are certain real estate property disclosures mandated by state and federal law and it is absolutely essential that you be aware of them.
Disclosure documents do come in a variety of forms, they also vary from state to state and whether you are selling or buying, the disclosures are an integral part of the real estate transaction every time. Not only do they, if followed as mandated, and as custom and practice dictate, inform and serve notice to the buyer of any known property defects, whether current or past, and more generally, provide salient information about the property and the seller’s experience with it. These documents also serve to protect the seller from the potential of future legal action initiated by a buyer. The upfront disclosure of defects prior to any closing is the seller’s chance to be transparent, as well as law compliant, as to any condition that can that can negatively impact the value, ownership, or enjoyment of the subject real estate. Most sellers recognize the benefit to them in disclosing any defects as they tout all the positive home features.
Disclosure mandates vary from state to state. A seller must know his or her state law on seller disclosures. Disclosure laws typically cover major home systems and conditions, including but not limited to plumbing and sewage issues, electrical issues, water leakage of any type, including in basements and around windows, termites or other insect, pest, mold, or rot infestations, roof defects, heating and air condition issues, inadequate ventilation of attic or crawlspace, foundation cracks, condition of the roof, and other structural elements, construction defects, property drainage issues, title issues, appliances, whether or not the property is located within a flood zone or earthquake prone zone and even meth labs and child predator concerns with passage of Megan’s law. Still other standard disclosures may include property line disputes, whether the home is located in a historic district, neighborhood nuisances, and the existence of pets.
As a general principle, a seller may be obligated to disclose problems that could affect the value or desirability of the property. If the defects are known, they must be disclosed. Generally, if the seller is unaware, that seller is not obligated to take affirmative steps and institute an independent investigation to seek out problems that may or may not exist. Most states only require disclosure of what the seller knows. The disclosure documents define the scope of seller liability, further representing the seller is not liable for any error, inaccuracy, or omission that was not within the seller’s scope of actual knowledge.
The typical seller disclosure documents are several pages in length, often local or state real estate association or even state bar approved and directs the seller report known defects in the home. The format is generally boiler plate where the seller answers a series of yes or no questions. The documents will mimic the state mandated laundry list of what must be covered and disclosed.
A disclosure is not the same as an inspection done independently and often by a third party at the buyer’s expense. An inspection examination may reveal defects a seller may not be aware of. That is part of the due diligence of the buyer and not the responsibility of the seller. Likewise, an “as is” provision is in no way a substitute for full and mandated disclosure.
Disclosure documents are generally provided to buyers once the offer is accepted. The buyer now has the opportunity to review what is now provided and in conjunction with the inspection contingency, and with anything disclosed or found, the buyer has the option to negotiate a satisfactory resolution or walk away. Savvy sellers let buyers know everything up front. That way deals do not fall apart at closing or create legal exposure to the seller later.
There are too many different disclosure mandates from state to state to detail them here. Also, be mindful of any local laws that may control what must be disclosed. For investor sellers, coordinating with a realtor or attorney on your team or someone you may rely upon to make sure you know what is required is sound business practice. Most states but not all require real estate disclosure be in written form, often on forms the seller and buyer must sign and date. Whether your state requires the disclosure be written, signed, and dated, or not, it is sound practice to do so and keep your copies.
The majority of disclosure issues are state mandated but federal law requires disclosure of lead based paint and related hazards if the home was built prior to 1978. Homes built before 1978 may well contain lead based paint. There is an EPA approved form to utilize along with an EPA pamphlet entitled “Protect Your Family From Lead in Your Home” you must provide buyers if the home was built before 1978. The law permits the buyers a ten-day window to test for lead. The federal law further requires that the warnings set forth in the law are disclosed in the purchase and sale contract, providing a “lead warning statement “declaring the seller has met all notification requirements. All parties by their executed signature, verify mandated compliance of the federal law. The law also requires the seller keep the signed acknowledgements for three calendar years as proof that the law was followed.
The bottom line is for the investor seller to know his or her state law on seller disclosures. Knowing and then disclosing what you need to disclose as a seller is necessary due diligence and sound business practice.