Recovering Damages Failure To Disclose Real Property Defects

With the downturn in the real estate market, some sellers are deciding not to disclose known problems with their home. These problems range from minor issues involving leaky faucets and faulty electrical outlets to major issues like mold, water damage, sewer backups and leaking roofs. More and more home buyers are taking sellers to court to recover damages for failing to disclose real property defects.

When selling Colorado residential real estate, the seller is required to fill out a very detailed seller disclosure form. This form lists many standard, household items requesting disclosure if that item is in working condition. The seller disclosure form also contains general disclosures about the building structure, foundation, electrical system, plumbing system and sewer system.

The seller must be truthful when making these disclosures. Contrary to popular belief, checking the box “I don’t know” is not being truthful if, in fact, the seller has some knowledge of an issue. It is fraud.

In Colorado, fraud is a misrepresentation, which is a false or misleading statement that induces a home buyer to act or refrain from acting made either with knowledge of its untruth, or recklessly and willfully without regard to its consequences, and with an intent to mislead and deceive. In my opinion (and that of several judges I know), checking the box “I don’t know” on a seller disclosure form is fraud when, in fact, a seller has knowledge of recent repairs or problems. The rule is, when in doubt, disclose.

Some sellers believe that a little disclosure of a large problem shifts the burden of checking out the problem to the buyer. I respectfully disagree. For example, if the roof leaks, writing “minor roof repair work” on the seller property disclosure does not place the burden on the buyer to now ferret out the extent of the repair or the leak.

As great as all this may sound to a disgruntled home buyer, proving the fraud can be very difficult. Sometimes, buyers get lucky. The buyer may happen to call the same tradesman who the seller used for the problem. The tradesman may be a great source for previous invoices proving up the nondisclosure. Neighbors may be helpful in discovering that the seller did not fully disclose, but most neighbors do not want to get involved. Insurance claims by the former property owner can be another good source of information, but getting access to those claims can be difficult before filing a lawsuit.

The best way for a buyer to protect himself or herself is to require disclosure of all repairs. For example, a buyer can request, as part of the contract, that the seller disclose all repairs and improvements over the last 12 months. This includes actual invoices. The buyer can also request a complete history of insurance claims filed by the seller since the seller owned the house. While this may not always avoid the fraud, it makes proving the fraud much easier.

The worst way for a buyer to protect himself or herself is to rely on the home inspector. Most buyers hire a home inspector to go through the property looking for possible problems. The home inspector is not a specialist in any one area. The home inspector takes no responsibility for failure to discover a problem with the house.

Another way for a buyer to protect himself or herself is to hire a true tradesman. While this can be expensive, it is much more effective than hiring a home inspector. An experienced roofer should inspect the roof. A licensed electrician should inspect the electrical system. A licensed plumber should inspect the plumbing system, and so on.

At the risk of sounding self-serving, a good lawyer can help protect a buyer from nondisclosure of real property defects. In many states, the lawyer is an integral part of the home buying process. A good real estate lawyer will help the buyer draft the contract with an eye toward forcing disclosure. A real estate lawyer will use customized contract clauses demanding the disclosure of the actual plumber, electrician, roofer, etc. used by the seller. The real estate lawyer may have other custom clauses requiring the seller to provide direct access to repair records and insurance files. Just having a lawyer in the process can cause some sellers to be a little more open about the history of the property.

There are many bargains in today’s real estate market. However, buyers must be careful to avoid buying the proverbial money pit. A little extra effort in drafting the real estate contract can go a long way toward unveiling potential problems with residential real estate.

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