Buyer Beware: 6 Types of Sellers Who Don't Have to Disclose Home's Flaws

bank-owned for sale sign in front of house - home disclosuresNo home is perfect -- not even the brand new ones. But every buyer has a different threshold for what property defects or neighborhood issues would be a deal-breaker for them. Smart buyers use their contingency or objection period to do their due diligence, spending time at the home and in the neighborhood, having the place inspected and finalizing their financing. But in most states, home sellers (and their agents) are required by law to disclose all "material facts" they know or should have known about the home to the buyer.That means that any element of the property's condition, location, etc. -- anything about the property, generally speaking -- that would be likely to impact the decision-making of a hypothetical, reasonable buyer is supposed to be disclosed. Savvy buyers often review seller disclosures before they even make an offer on a home, if they are available, and often even rely on the information in the seller's disclosures to direct them as to which inspections and repair bids to obtain before they finalize their decision to buy the place. They most certainly review the disclosures while they do their investigations into the property.

But the disclosure laws are certainly not absolute. In fact, there are at least six major categories of sellers that buyers cannot count on to make full, meaningful and/or honest property disclosures:

1. Sellers in "Caveat Emptor" States. The Supreme Court of Alabama just upheld a generations-old rule of law that sellers in as-is real estate sales in that state do not owe buyers full or honest disclosures of material facts about the property. In fact, the seller in the case at issue had expressly provided the buyer with a disclosure form stating that the property had no flooding problems, despite the fact that the property had major flooding issues for years -- in fact, that's why the seller was selling in the first place. This is not the case in the vast majority of states; in most places, the rule is known colloquially as "as-is/as-disclosed," which simply means that the seller is responsible to disclose material facts about the property, even in an "as-is" transaction. Buyers should check in with their real estate broker, agent or attorney to determine what the seller's disclosure duties are in their state.

2. Investment and Relocation Company Sellers. Many states exempt the sellers of homes that are owned by companies, rather than by human beings, from the full gamut of required disclosures. The rationale is that the company never lived in the house, so it has no way to really know all the ins and outs of the property. This exemption frequently comes up with homes that are owned and being sold by corporate investors and relocation companies ("relo" companies buy homes on behalf of employers who offer this as a benefit to high-level employees when their jobs move).

3. Foreclosure/REO Sellers. Banks and even homeowners' associations that are selling homes they have foreclosed on are -- you guessed it -- companies. As such, similar to the investment and relocation companies, they really have no way to know whether the water heater leaks or when the roof was replaced. Most states provide some level of disclosure exemption for banks and other entities that are reselling foreclosed homes, either at auction or through a more traditional, open-market sale. And even when the state does not exempt the seller, most banks' own boilerplate purchase contracts and disclosure forms make very clear that the bank has no way to know about the condition of the home or the neighborhood, and to forcefully warn buyers that they should fully inspect the home on their own, as a result.

4. Estates and Trusts. This spring, first-time home buyers Robert Quigley and Jennifer Friberg were horrified when the neighbors informed them that the 109-year-old home they had just purchased from the estate of a deceased former owner had actually been a methamphetamine lab! They Googled the address and found that, sure enough, the property was on the DEA's list of crystal meth labs. There's some confusion about whether the family was aware of the toxic chemicals that Quigley and Friberg are still raising funds to clean out of the home, but the fact is that many states exempt estates and trusts from some property disclosure requirements.

Why? Just like with corporate sellers, the estate or trust really has little way to know the property inside and out, and the powers-that-be feel it's in a buyer's best interests to have no disclosures to rely on, rather than to have mandated disclosures from a source that lacks complete information about the home.

5. Governmental Agencies. Many cities, counties, states and even the federal government have entered the real estate business, big-time, during the recession. Counties are selling off the homes they have foreclosed on for non-payment of property taxes, while some states and the federal government are offloading government properties that have outlived their usefulness. Sometimes government agencies simply don't have the information about a property that a traditional seller would; other times, they are exempted by law from making traditional disclosures.

6. Home Builders. New homes simply don't have the history that resale homes do; as a result, many states exempt builders from providing the same level of property disclosures when they sell a new home as are required of sellers of "used" properties.

So, what's the upshot? If you're buying a home from a seller falling into any of these categories, it behooves you to be extra meticulous about your own research and inspections of the property. Ask your broker, agent or attorney which aspects of the property you may need to investigate more deeply, if you suspect your home's seller may be exempt from disclosures.
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