REAL ESTATE TOPICS:  DISCLOSE, DISCLOSE, DISCLOSE

Not too many years ago, the attitude – and practice – in real estate sales was, “Caveat Emptor” or “Let the Buyer Beware”.  The literal definition of that Latin term is:  The principle that the seller cannot be held responsible for the quality of his product unless guaranteed in a warranty.  Real estate purchase contracts were always written in overwhelming favor of the seller.  My how times have changed!  The mantra in today’s world is definitely:  Disclose, Disclose, Disclose - because the seller of real estate certainly can be held responsible for not doing so.  Sellers are well advised to make every possible material fact available to potential buyers.

The current Arizona Association of REALTORS^® (AAR) Residential Resale Real Estate Purchase Contract which was significantly revised again in May of 2005, devotes much language regarding full disclosure of all material facts related to the sale of real estate, placing the lion’s share of responsibility on the seller.  Section 4 of the contract is simply entitled, “Disclosures” and places the following burdens directly on the seller.

4a. Seller Property Disclosure Statement (“SPDS”):  Seller shall deliver a completed AAR SPDS form to the Buyer within five (5) days after Contract acceptance.  Buyer shall provide notice of any SPDS items disapproved with the Inspection Period or five (5) days after receipt of the SPDS, whichever is later.

The SPDS is a six page document that is designed to communicate all known material facts about the property to the buyer.  The seller must complete this form themselves.  It is not acceptable practice for their real estate agent to do this for them.  It is imperative that all of the questions on the form be answered as truthfully and as fully as possible.  The following information is taken directly from the cover page of the SPDS document and provides pretty thorough insight into its contents.

The SPDS is divided into six general sections:

1)       Ownership and Property:  This section asks for general information about the property, such as location, ownership and occupancy.  Any seller, whether or not that seller has actually lived in the property, should be able to answer most, if not all, of the questions in this section.

2)       Building and Safety Information:  This section asks for information regarding the physical aspects of the property.  You should disclose any past or present problems with the property and any work or improvements made to the property.  You are also asked specifically to disclose any knowledge of past or current presence of termites or other wood destroying organisms on the property, and whether scorpions or other possible “pests” have ever been present on the property.  Although many sellers will answer affirmatively to these questions, they were necessitated by lawsuits involving the alleged non-disclosure of the natural inhabitants.

3)       Utilities:  You are asked whether the property currently receives the listed utilities, and if so, to identify the provider.  The water source and any known information about drinking water problems should also be disclosed.

4)       Environmental Information:  A variety of environmental information is requested.  In addition to questions regarding environmental hazards, you are asked to disclose any issues relating to soil settlement/expansion, drainage/grade or erosion; noise from the surrounding area including airport and traffic noise; and any odors or other nuisances.  As a result of recent lawsuits and potential health concerns, you are asked specifically if you are aware of any past or present mold growth on the property.  Mold spores are everywhere and when mold spores drop in places where there is water damage or excessive moisture, or where there has been flooding, mold will grow.  Thus, you are asked to disclose any conditions conducive to mold growth, such as past or present dampness/moisture, flooding, and water damage or water leaks of any kind.

5)       Sewer/Wastewater Treatment:  There are many questions dealing with the topic of sewer or wastewater treatment as a result of claims involving alleged misrepresentations that the property was connected to a sewer, when in fact it was not.  You are asked if the entire property is connected to a sewer and if so, whether the sewer connection has been professionally verified.  If the property is served by an on-site wastewater treatment facility, i.e., a septic or alternative wastewater system, a variety of additional information is required.

6)       Other Conditions and Factors – Additional Explanations:  These blank lines provide space for you to disclose any other important information concerning the property that might affect the buyer’s decision-making process, the value of the property, or its use, and to make any other necessary explanations.

There are some exceptions to the legal requirement to disclose everything the seller may know.

Please note:  By law, sellers are not obligated to disclose that the property is or has been:  (1) the site of a natural death, suicide, homicide, or any other crime classified as a felony; (2) owned or occupied by a person exposed to HIV, or diagnosed as having AIDS or any other disease not known to be transmitted through common occupancy of real estate; or (3) located in the vicinity of a sex offender.  However, the law does not protect a seller who makes an intentional misrepresentation.  For example, if you are asked whether there has been a death on the property and you know that there was such a death, you should not answer “no” or “I don’t know”; instead you should either answer truthfully or respond that you are not legally required to answer the question.

Yes, the SPDS is pretty thorough in its interrogation of the property seller and it is not especially fun to sit and complete but it is essential that it be done.

Even More Disclosure

One topic that is not addressed in current regulations but has been established by Arizona Supreme Court rulings, relates to the materiality of the financial ability of the buyer or the seller to successfully close on a transaction.  In the past, financial matters of the parties to a contract were considered confidential and not disclosed.  This issue is addressed fairly well covering buyers that are obtaining financing in our current Residential Purchase Contract and accompanying Loan Status Report and Loan Status Update forms.   But it is not so clear for cash buyers or for sellers.  In today’s world, if a buyer or a seller finds themselves at risk of being unable to complete their contractual obligations – for any reason, including financial, they must disclose that fact to the other party immediately upon discovery.  Real estate agents also have this obligation in representing their clients.

This has always frequently been an issue with buyers – primarily due to the challenges of obtaining a loan.  However, it may become more and more common for sellers given the recent dramatic increase in property values and the current decline in property values.  If a seller has been recently persuaded to over-borrow against the perceived equity in their home, they may not be able to net enough from their sale to repay the debt they incurred.  This is sometimes referred to as being “upside-down” in the property – owing more than you are going to receive.  The result is that the seller would have to bring cash to the closing table.  This is often not possible or will require some other sacrifice – like selling off other assets – in order to perform.  The required disclosure would simply be that the seller will not, or may not be able to close escrow as a result of their financial circumstance – not all of the specifics of dollar amounts, or account numbers or other personal details have to be disclosed.

Well, back to the Purchase Contract for more requirements regarding disclosure.  Section 4b requires disclosure regarding insurance:

4b. Insurance Claims History:  Seller shall deliver to Buyer a written five-year claims history regarding Premises (or a claims history for the length of time Seller has owned the Premises if less than five years) from Seller’s insurance company or an insurance support organization or consumer reporting agency, or if unavailable from these sources, from Seller, within five (5) days after Contract acceptance.  (Seller may obscure any reference to date of birth or social security number from the document).  Buyer shall provide notice of any items disapproved within the Inspection Period or five (5) days after receipt of the claims history, whichever is later.

4c. Lead-Based Paint Disclosure:  If the Premises were built prior to 1978, the Seller shall: (i) notify the Buyer of any known lead-based paint (“LBP”) or LBP hazards in the Premises: (ii) provide the Buyer with the Disclosure of Information on Lead-Based Paint and Lead-Based Paint Hazards, and any report, records, pamphlets, and/or other materials referenced therein, including the pamphlet “Protect Your Family from Lead in Your Home (collectively “LBP Information”).  Buyer shall return a signed copy of the Disclosure of Information on Lead-Based Paint and Lead-Based Paint Hazards to Seller prior to COE.  …

4d. Affidavit of Disclosure:  If the Premises is located in an unincorporated area of the county, and five or fewer parcels of property other than subdivided property are being transferred, the Seller shall deliver a completed Affidavit of Disclosure in the form required by law to the Buyer within five (5) days after Contract acceptance.  Buyer shall provide notice of any Affidavit of Disclosure items disapproved within the Inspection Period or five (5) days after receipt of the Affidavit of Disclosure, whichever is later.

4e. Changes During Escrow:  Seller shall immediately notify Buyer of any changes in the Premises or disclosures made herein, in the SPDS, or otherwise.  Such notice shall be considered an update of the SPDS.  Unless Seller is already obligated, Buyer shall be allowed five (5) days after delivery of such notice to provide notice of disapproval to Seller.

Well, it should be evident that all this disclosure business is no small matter.  Failure to disclose anything that may be material to the buyer inasmuch as it may affect their decision to purchase the property, or the property’s value, is a liability that will follow the seller beyond the date of closing.  If in doubt about whether something is material, disclose it.  What is not material to the seller may be to the buyer – and that’s what counts.

By the way, REALTORS^® are also required to disclose all material facts known to them.  At the same time they have a fiduciary obligation protect the interests of their clients, they must always follow the rules and behave within the law.  In other words, if a seller tells their agent that, “yeah, we had a roof leak two years ago, but we got it fixed and there hasn’t been any problem – but we don’t want you to tell anyone” – that’s a problem.  If you decide to want to hide something or lie about something – that’s your decision, don’t ask your agent to do it.  This is not a fun tightrope to walk.  Yes, the agent’s job is to protect and promote their clients best interests, but not to lie for them or conceal material facts.  Sellers must be advised that any material fact must be disclosed.

On a slightly different note, some sellers feel compelled to tell their agent all kinds of personal information about their lives – divorces, their motivation for selling, how low they are willing to go on price, etc., etc.  This kind of information is considered confidential and should not be disclosed – unless you want it to be.  If you do, give that instruction to your agent in writing.  Let’s say you want to tell everyone that you are “highly motivated”, or you’ll “consider all offers”.  These are not normally terms that are going to bring in the best offer – but if it is the truth and that’s what you want to do expedite that sale – fine.  But, put it in writing for your agent, so that they are properly authorized to use such language.

DISCLAIMER

John P. Hale is owner and Designated Broker of Touchstone Residential Realty, Inc., 2485 West Tom Watson Drive, Tucson, Arizona 85745.  He has been a residential real estate agent in the greater Tucson Metropolitan area since 2000.  In addition to being licensed as a Broker rather than a salesperson, John holds the following designations awarded by the National Association of REALTORS^®:  ABR – Accredited Buyer Representative, ASR – Accredited Seller Representative, CRS – Certified Residential Specialist, and GRI – Graduate Realtor Institute.  And, John is among the very few that have been named, MRE – Master of Real Estate by the Arizona Association of Real Estate.

Please note that this article was written by him to reflect the author’s opinion of good practice at the time of its’ writing for the general benefit of those considering sale or purchase of residential real estate, it is not intended as definitive legal advice and you should not act upon it as such without seeking independent legal counsel.  Frequent changes in the law and standards of practice may cause this information to become outdated and no longer applicable or even incorrect.