Selling a house is more stressful than buying a house. Part of the reason why is that you have to reveal everything you know about the house in a home seller's disclosure package. It's like revealing all your secrets to the public.
Seller's disclosures are vital to build confidence and trust for prospective buyers. Without disclosures, buyers will be wary. Imagine buying a car with zero maintenance records during the life of the car. No thank you. The more disclosure documents the better. Besides, seller's disclosures are required by law.
Disclosure rules and regulations are complicated. Each state has different disclosure laws as well. This article will help you better understand what you need to disclose when selling a home. I've sold a home before and the process can be long and difficult.
What Is A Seller’s Disclosure?
A seller’s disclosure statement form is a standard checklist form containing material defects and features of the property. It provides information about the property that may negatively affect the value of the house.
If there are material defects in a property that may impact the value of the property AND the seller is aware of them, the seller should disclose them. However, sellers should report these defects to the best of their knowledge and in good faith. From pest infestation to pending legal issues, you should disclose any known information. This will help you avoid future disputes.
Every state has different seller’s disclosure laws. So, it’s advisable to review the form with your real estate agent or lawyer as per the statutes in your state. Usually, the disclosure form is completed along with the listing paperwork – especially in the Multiple Listing Service (MLS) provided by the listing agent.
Importance Of Seller’s Disclosure
Property Disclosures serve the following purpose in real estate transactions:
1) Give complete information about the property.
Disclosures help communicate the defects present on the property. They ensure that all the stakeholders involved in the transaction are well aware of the property's history.
2) Protects sellers against legal liability.
Once you disclose all the known defects present in the house or which come to light during the inspection, you may be exempted from any future liability against those defects. After all, if the buyer signs off on the disclosures document, then buyers shouldn't be able to come back and complain about the issues.
3) Develops credibility.
When selling a house, you want to be as credible as possible. If you are discovered to be inaccurate and opaque in your disclosures, buyers will fear what else may not be disclosed. Disclosures are a way of achieving all of these and thereby enhancing your credibility.
When To Provide Seller's Disclosure?
Before receiving an offer. Disclosing the house defects beforehand ensures that potential buyers are well aware of your property’s condition. This would get you genuine buyers and not much room will be left for them to negotiate the prices.
After receiving an offer. Sellers get a fixed amount of time to submit their disclosures to the buyers after accepting an offer. This duration differs from state to state. It is usually submitted simultaneously during the inspection process. Depending on your house disclosure statement, the buyer decides to either back off or go ahead with the offer.
In general, when selling a home, the listing agent should make the disclosure documents available as soon as the property is listed on the MLS. Addendums to the disclosure package can always be added.
Here are 10 warning signs to be aware of before buying a house.
What To Include In The Seller’s Disclosure?
The state disclosures forms will differ in format but they contain some general points such as:
- Details about the nature of the occupancy of the property.
- Questions related to property defects which you can answer in “Yes”, “No”, or “Don’t know”.
- A list of issues that sellers need to check off (if present). The list of these defects will differ depending upon the state.
- Space to provide additional information about the property.
Disclosure forms at times are hundreds of pages long. For example, California disclosure packages are almost always over 100 pages long, and sometimes up to 400 pages long. You must be thorough in disclosing and reading all the disclosure documentation.
Common Real Estate Disclosures
Here are the most common real estate disclosures.
Title violations.
The seller should provide complete rights, together with the title documents of the property to avoid legal disputes. You should also disclose legal claims against the property that could affect the transaction. Title insurance is very important so that you are protected from claims.
Surrounding hazards.
The seller must disclose all the risks and hazards their house is vulnerable to. This may include lead based paint disclosure, flood risk disclosure, radon gas disclosure, etc. This helps buyers to make a more aware decision. It also gives them a heads up of things that lie ahead.
Structural defects.
Homebuyers must be aware of the structural state of the property. This includes roof leaks, basement flood, dry rot, or attic insulation. The foundation is the most important structure of the house.
Material defects, such as chimneys, pools, garage floors, etc. should also be disclosed. Sellers should also mention pest infestations.
Water source, well, or irrigation systems.
Sellers should inform buyers about the water source. The presence of any irrigation options or sprinkler systems should also be disclosed.
Sellers are also expected to disclose water pressure problems along with the condition of the water pipes inside and outside, as well as the gutters. Please note that water is one of the main sources of damage for the house.
You should also inform if there are any wells on the property, and notify whether they are sealed or currently not in use. Apart from these, you need to also inform buyers about the condition of the septic tank.
Electrical, heating, and plumbing systems.
Make sure the buyer is notified about past or present electrical issues. Examine if the breakers are still functional. For buyers, ask certifications/permits from the seller to authenticate the system’s condition. Other things may include are appliances, internet, cable, sauna, pump, etc.
Water heater system and HVAC.
Inspect how old the water and gas water heaters are. Both the Heating and HVAC systems should be maintained or replaced if necessary. Radiant heating needs to be especially maintained. It’s advisable to ask or include how long the system is running to estimate the duration of its functionality.
Do You Have To Disclose A Death In a House?
Some buyers are concerned with the history of the property. The death of a person is one of the things people tend to be superstitious about. Thus some states like California, make it mandatory to disclose prior deaths in the house.
Here's a post I wrote on how a death in the house can affect the property's value. The reality is, some cultures will prevent people from buying a house with a death.
In California, you must disclose if there is a death in the house in the past three years. After three years, no disclose of such an occurrence is required. But as always, double check.
Less Common Property Disclosures
Some state-specific seller disclosures are usually not known to home sellers. A few of them are as follows:
Paranormal activities: In some states, sellers have to disclose any known phantom activities taking place in their house. Since very few states require sellers to disclose such things, it is one of the lesser-known disclosures that you should be aware of.
At present 4 states in the US specifically mention paranormal activities in their seller disclosure laws. These are New York, New Jersey, Minnesota, and Massachusetts.
Nearby sex offenders: To be doubly sure of the buyer’s safety, sellers should disclose about nearby sex offenders. For example, in California, all the stakeholders involved in the transaction process have to sign Megan’s Law DataBase Disclosure Form. It puts the onus on the buyers to search the sexual offender’s database if they desire.
Military airport disclosures: Some states like Arizona and Virginia require sellers to disclose the presence of nearby Military airports. This is to make the buyers aware if the property falls in the high noise contour or if it is susceptible to accidents.
What Is Caveat Emptor In Real Estate?
Some of the states have a “Caveat Emptor Rule”, a neo-Latin phrase that also means “let the buyer beware”. The rule states that it is the buyer’s responsibility to find out if there are major or minor defects with the property.
It serves as a warning to the buyer. And if he/she does not perform the necessary due diligence to inspect, it’s entirely not the seller’s liability if the property does not meet the expectation.
However, there are certain topics and issues the owner is not obligated to disclose. Certain information such as homicide and suicide are mostly not mentioned in the seller’s disclosure form. They can be regarded as non-relevant and could be left untold.
Due to caveat emptor in real estate, a buyer should get an inspector before buying the house. In a hot real estate market, waiving inspections is common. However, the more you suspect something to be wrong with the house, the more important it is to get a professional inspector. At the end of the day, the buyer is stuck with the consequences.
Lead-Based Paint Disclosure
These are real estate disclosures governed by federal laws and sellers across the USA are required to furnish these when selling their houses.
Houses built before 1978 are required by law to complete a lead paint disclosure form. Every seller must notify the new homeowner of any present or past exposure to lead. The seller must also provide an EPA pamphlet called “Protect Your Family from Lead in Your Home.”
The buyer must acknowledge receipt of this pamphlet and information on lead-based paint hazards on the EPA disclosure form.
The seller can provide 10 days for the buyer to do a risk assessment or paint inspection for lead-based paint or lead-based paint hazards. Failure to comply with the federal disclosure could lead to litigation and sellers may have to suffer charges for the damages (which usually could cost over $10,000).
Homes that have been extensively modeled and repainted after 1978 may have removed all the lead-based paint. Regardless, the remodeling and lead-paint disclosure must be included.
What Happens If A Seller Lies On A Disclosure?
It's hard to prove a seller lied on a seller's disclosure because the seller can just say they forgot or they didn't know. But sometimes sellers do lie on the disclosure statement. In such cases, several actions can be taken against the seller.
Breach of contract. A buyer can file a lawsuit for breach of contract with intentional misrepresentation. The penalty for lying on the seller’s disclosure includes the cost of repairs along with attorney fees.
A case of fraud. The buyer can file a case of fraud against the seller. If the buyer succeeds in doing so, he/she can claim punitive damages as well. This is usually two or three times bigger than regular compensation. The seller’s intention of defrauding the buyer has to be proven beforehand.
Rescission of the contract. In some cases where the lie causes the buyer huge losses, courts can order equitable relief in the form of a recission of the contract. Under this, the contract becomes null and void as if it never existed before. The aggrieved party is brought back to a position had the sale not occurred and all the expenses made by the buyer are returned as compensation.
Negotiation of price. In most situations, an agreement can be made based on price. If it is found out the seller didn't disclosure something and the buyer still wants to buy, the buyer can ask for a price reduction.
What If The Seller Makes A Mistake Or Inadvertently Omits Something In The Disclosure?
Compensation of damages. The buyer can file a suit for compensation of damages caused to the buyer because of being misled by the seller.
Suit for negligence. A suit for negligence or negligent misrepresentation can be filed against the seller. Here damages can be claimed against the mistake made by the seller.
Negotiation of price. Again, if the buyer still wants to buy the property, then the buyer could come back and negotiate for a price discount.
How To Minimize Issues In Seller’s Disclosure Statement
You want to disclose everything and be as thorough as possible when putting together your seller's disclosure statement. When in doubt, include the information in the disclosure package.
Here are other ways to minimize issues in the seller's disclosure.
Review and verify. There’s a time allowance (some permit 10 days) to review and verify everything about your Purchase Agreement or FSBO Contract —also the square footage, home usage, and marketing.
Ask questions. Ask questions when in doubt. This would help you in avoiding future troubles.
Hire a professional inspector. A professional home inspector can help you gather backup information about the property’s condition. You can also opt for a pre-inspection before listing.
Get a licensed agent involved. The best way to avoid seller disclosure issues is to get an experienced real estate agent.
As a homebuyer, you must read the seller's disclosure statement thoroughly and ask questions!
Always Disclose As Much As Possible And Ask Questions
A seller's disclosure statement is a chance for the seller to come clean with all issues of the house. When in doubt, include the information. And if a seller doesn't know, the seller should market in the disclosure statement they do not know.
Both sellers and buyers need to ask as many questions as possible before getting into contract and during contract. The financing contingency and home inspection contingency gives buyers time to check on all the details in the house.
A home is an expensive asset that has a lot of ongoing maintenance. It is vital both buyers and sellers know as much as possible about the property as possible. Best of luck in selling or buying a home!
Real Estate Recommendation
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I've personally invested $810,000 in private real estate since 2016 to diversify my expensive San Francisco, Lake Tahoe, and Honolulu real estate holdings. As a father, I also want to earn more 100% passive income so I can spend more time with family.
Financial Samurai began in 2009 and is one of the largest, most trusted independently-owned personal finance sites today with over 1 million readers a month. Sam manages a real estate portfolio of over $10 million and has bought and sold many properties since 2003.