Undisclosed Defects Needn’t Trap Smart, Informed Buyers

Have you ever bought a house with undisclosed defects?

If the seller knew of the defects and failed to disclose them to the buyer, the seller may be liable for damages. But the buyer’s legal difficulty is proving the seller knew about the defects and failed to disclose.

Suppose the home you buy was recently painted inside and outside (as smart sellers often do). In addition to making the home look attractive, that paint might be hiding serious defects, such as a leaking roof, termite damage or dry rot.

California was the first state to require house and condo sellers to disclose in writing all known defects of the property. About 35 other states followed, but the types of disclosures vary state by state. Long gone are the old days of “let the buyer beware.”

If in doubt, disclose. That should be the motto of every seller and agent because if the buyer is told about a home’s defect, preferably in writing, that prevents the buyer from recovering damages for nondisclosure.

Last year I wrote about friends who wanted to buy a home in a specific, top-quality school district. After they moved in, they learned from neighbors that the house is not within the desired school district. Instead, the house is two blocks outside the top district, in an inferior district that is primarily on the other side of a major freeway.

The seller’s listing agent had artfully concealed the bad school district by disclosing only its number, not its name, on the multiple listing. The buyer’s agent didn’t catch this major deception.

The buyers could have sued for rescission of the sale, but they liked the spacious house. So they contacted the top-quality school district and obtained an inter-district transfer.

However, their home is still within the inferior school district, which will hurt resale value in the future. Potential buyers should be aware that school districts don’t necessarily follow city boundaries.

Being within a poor-quality school district is known as an “incurable defect.” Other examples of incurable home defects include a poor floor plan, an undesirable location, such as near a smelly city dump, or being adjacent to a railroad track. However, sometimes a home’s incurable defect can be overcome by another advantage.

Another couple bought a house with a horrible floor plan because it was all they could afford within the best school district for their two children. After a few years, they sold that house and bought a better one within the same school district.

However, they had no trouble selling the house with the bad floor plan because its superb school district location outweighed the defect.

Buyers should include at least two key contingencies, in addition to receiving a satisfactory seller’s home disclosure report, if they are to avoid buying a “bad house”:

* Finance contingency clause. Even if you are pre-approved in writing by a lender for a home mortgage (as you should be before shopping for a home), be sure to include in your purchase offer a finance contingency clause. Then, if your house doesn’t appraise for at least the sales price by the lender who gave you pre-approval, you can cancel the purchase and get your deposit refunded.

* Professional inspection clause. Make your home purchase offer contingent on a satisfactory professional inspection. Look for local members of the American Society of Home Inspectors, or ASHI, at (800) 743-2744 or on the Internet at www.ashi.com.

Incidentally, be sure to accompany the professional inspector to discuss any defects not previously disclosed. Don’t hesitate to ask questions. Most inspectors enjoy answering questions and explaining how to resolve problems discovered.

After moving into your home, if you discover a serious defect, ask the neighbors if they knew of the problem. If they knew, chances are your sellers knew and can be held liable for damages due to their faulty disclosure statement.

Some sellers erroneously think they can avoid disclosing residence defects by selling the home “as is.” An “as is” sale just means the seller doesn’t have to pay for any repairs. However, even “as is” sellers must still disclose to their buyers any known defects in the residence.

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Robert J. Bruss is a syndicated columnist as well as a real estate investor, lawyer, broker and educator in the Bay Area.