Property Condition Disclosures and Liability Flashcards
The seller of residential real property must disclose known material facts about the property to the buyer. A material fact is any fact that is significant or essential to the transaction. It’s a piece of information that could impact the buyer’s decision to purchase the property.
The licensee representing the seller has the duty to inform the seller of their disclosure obligations. Likewise, the licensee representing the buyer has a duty to inform the buyer of their rights to this information.
Arizona Disclosure Forms
While the disclosure of a property’s condition is required, a specific disclosure form is not.
Listing agents who are Realtors will likely provide their sellers with a blank copy of the Arizona Association of Realtors’ Seller’s Property Disclosure Statement. (That’s SPDS for short, pronounced like the best steakhouse side dish: spuds!) 🥔
Whether you use that form or a different version provided by your broker, expect it to look very similar to the following sample form:
A sample “Residential Seller’s Property Disclosure Statement” form.
Required Disclosure Statements
The SPDS organizes required disclosures into six main categories. They are:
Property and Ownership: This section is about where the property is located, who legally owns it, and any issues related to title, liens, zoning, etc.
Building and Safety Information: This part contains disclosures of the structure’s physical condition that buyers will be curious about. What’s the condition of the roof, HVAC, plumbing, and electrical system?
Utilities: The form provides a utilities section where the seller must record the utility services that the property receives.
Environmental Information: The homeowner has a duty to disclose any known environmental hazards on their property. This can include things like lead, asbestos, mold, radon, carbon monoxide, and a host of other issues. I’ll go much further in-depth in discussing these hazards in a later chapter.
Sewer/Wastewater Treatment: A buyer deserves to know what the sewer and wastewater situation is at the property. The seller will disclose what they know about these services and any relevant issues.
Other Conditions and Factors: Any additional material facts that don’t fit into the categories above can be written into the Other Conditions and Factors section. Don’t be shy! Sellers should know that it’s safest to disclose any additional info they’re on the fence about. Honesty’s the best policy, right, Anthony?
Categories of Disclosure Items
agents in a residential transaction must make sure this disclosure happens properly.
Listing Agent Responsibilities
Advise sellers of their duty to disclose any known material defects by completing a Seller’s Property Disclosure Statement.
Give the seller the disclosure form to fill out at the initial listing appointment. It’s an ideal time for the agent to learn more about the property and for the seller to ask questions about what must be disclosed. The form must be signed by the seller to certify that the info is complete and correct.
Deliver the statement to the prospective buyer(s) by the date specified in the purchase contract. The Arizona Association of Realtors’ purchase contract says the SPDS is due within three days of contract acceptance. If you don’t deliver the form by the deadline, the seller will be in breach of contract and the buyer will be able to cancel it.
Buyer’s Agent Responsibilities
Assure that the completed Seller’s Property Disclosure Statement is delivered to the buyer.
Direct the buyer to sign the form to acknowledge receiving it.
Listing Agent and Buyer’s Agent Responsibilities
No matter which side of the transaction you’re on, it’s good ethics to do your due diligence as an agent. Look into any discrepancies or conflicting information you may notice on the SPDS.
The Agent’s Role
Here are a few more important things to consider.
Seller Completes the Form
Note that the seller is responsible for filling out the property disclosure statement, NOT the seller’s agent. You can only help by answering any questions they may have.
Limitations of the Statement
Did you notice that the statement is a disclosure of facts known by the seller? A seller cannot be expected to disclose conditions of which they are unaware.
Also, the buyer should know that the seller’s disclosure statement is not a warranty of any kind, and is not a substitute for any inspections.
Liability of the Agent
The seller’s agent will not be liable for any violation of the law by the seller unless the agent knowingly acts with or otherwise aids the seller in committing the violation. This type of deception can result in thousands of dollars in fines for the wrong-doing agent.
Limitations and Liability
Remember that the seller is liable for disclosing all known material defects that would affect a buyer’s decision to purchase a property. Sellers are not actually liable for reporting material facts they “should have known” but did not know.
The seller is also not liable for any incorrect or incomplete information provided by public agencies or qualified experts. If a home inspector makes a claim and the seller passes along the inspector’s findings to the buyer (without attempting to conceal or alter the information in any way), the seller is not liable for claims made by the home inspector. The same would be true for claims made by public agencies.
EXAMPLE
Andrew is selling his house after living in it for just a year. He’s never had an issue with his hot water heater and has no idea how old the unit is.
A home inspector mistakenly notes that the hot water heater is five years old, when in reality, it’s 15 years old. Andrew passes this info along to a buyer since he has no reason to question it. Andrew will not be held liable for this mistake made by the home inspector.
There is one exception to this rule, however. If the seller has knowledge of a defect or condition that contradicts the information provided by a public agency or qualified expert, then the seller is obligated to disclose that to the buyer.
Lastly, sellers are not obligated to disclose material facts that could only be uncovered by an inspection of portions of the property that are inaccessible or could otherwise only be discovered by a qualified expert.
“Material” to Who?
We’re focusing on material facts known to the seller, but those aren’t the only facts a seller is expected to disclose.
If a buyer asks about any aspect of the property (with very few exceptions, which we’ll cover later), the seller must answer truthfully to the best of their knowledge. It doesn’t matter if the seller thinks that concern is minor and not material.
They say beauty is in the eye of the beholder. I say “material” is in the eye of the buyer. 👀
Seller Consequences
If the seller fails to provide an honest disclosure of material facts, whether by omitting or concealing defects, legal consequences can include the following:
The buyer may cancel the purchase agreement prior to closing.
If the sale has closed, the buyer may pursue legal action on the basis of fraud or misrepresentation.
The buyer may also sue the seller in civil court for damages.
“As Is” Properties
If a property is marketed “as is,” it means the seller has decided that they won’t agree to any repairs. In other words, “What you see is what you get.”
A common misconception among sellers is that if they list the property “as is,” then they are not obligated to make disclosures of known defects. Omission or concealment of material facts is not allowable, even for “as is” properties.
Consider the “as is” designation as something of a red flag that there could be issues and that a buyer shouldn’t expect to negotiate for repairs. You should inquire about known issues the same way you would for other properties.
Seller Liability
Licensees and sellers alike are responsible for disclosing all known material facts in a real estate transaction. This includes defects that are not specifically outlined in the Seller’s Property Disclosure Statement.
Ensuring proper completion of the SPDS form is no small task. As a licensee, you should educate your sellers on their legal obligations to make honest and complete disclosures.
EXAMPLE
A seller knows that there is termite damage in the attic. They reveal this to their agent, along with a request that the agent NOT disclose this fact to the buyer. The agent agrees to conceal the defect and fails to disclose known information to the buyer. The agent can potentially be liable for misrepresentation.
In the following chapters, we’ll learn all about which material facts need to be disclosed and which do not. You’ll also get more insight into licensee and seller liability with regard to material fact disclosure. So hang tight! We’ve got a lot of ground to cover still, Anthony.
Your responsibility will be to ensure that:
Sellers understand the legal requirements.
Buyers are well informed about known issues before deciding to purchase a home.
Liability of the Agent
Licensees have expertise. That’s why they’re expected to know more than sellers. With that knowledge comes the potential for liability. Let’s talk about misrepresentation.
Misrepresentation is a statement, written or spoken, that is false or misleading. There are different types:
Innocent misrepresentation
Negligent misrepresentation
Fraudulent misrepresentation (including “silent fraud”)
Let’s go over these in more detail, Anthony.
Licensee Liability: Misrepresentation
Negligent misrepresentation occurs when the licensee either:
Knows or should have known that a material fact is not accurate
Knows or should have known that certain information should have been disclosed
Unknowingly makes a false statement that is not reasonable to believe
The “should have known” factor is based on a reasonable expectation of competency as a licensee.
EXAMPLE
Your seller’s land was formerly the site of a gas station, which you can expect to have an underground storage tank. When filling out the Seller’s Property Disclosure Statement, the seller claims there are no underground storage tanks.
You don’t notice this omission and allow that disclosure form to pass on to the buyer. The buyer doesn’t think to question the legitimacy of that claim.
As an agent who is expected to be knowledgeable about real estate, you should have read the disclosure statement closely. When you came to this question, you should have asked the seller, “Are you sure there are no underground storage tanks? This land used to be a gas station, correct?”
Whether the seller was trying to omit known material facts or truly didn’t know about underground storage tanks, your expertise is required to avoid engaging in negligent misrepresentation.
Liability
Depending on the circumstances, a licensee could potentially be found liable for acting negligently with regard to property condition disclosures. In the example given, it would be reasonable to expect a licensee to ensure that the seller is engaging in truthful disclosure.
Negligent Misrepresentation
Most of us are familiar with fraud, or the wrongful or criminal deception intended to result in financial or personal gain. Fraudulent misrepresentation occurs when a licensee intentionally attempts to keep a buyer from discovering a material fact. The licensee purposefully conceals a known defect.
EXAMPLE
You’re the listing agent for a property that was built in 1974. You know that federal law requires a lead-based paint disclosure be given to buyers for any homes built prior to 1978. You decide to tell buyers the home was built in 1980. This way, you can avoid the disclosure and make the property more attractive to buyers.
Liability
Acts of fraud are committed with the intent to harm another (in this case, the buyer). Licensees who engage in fraudulent misrepresentation are subject to civil litigation or even criminal prosecution.
Fraudulent Misrepresentation
Recall that the fiduciary duty of loyalty requires that an agent put their client’s best interests ahead of their own. But what if the seller wants you to conceal material facts about a property? Do your duties of loyalty or obedience obligate you to do so?
You should remind such clients of their duties to act lawfully. If they still wish to engage in misrepresentation or fraud, immediately end your relationship with that client. Any commission you earn from that sale is not worth the risk of losing your license or facing legal penalties.
Licensees will not face disciplinary action for disclosing material facts about a property, even if the seller complains that the licensee acted against their wishes. You do NOT have to comply with a client’s request if it’s unlawful.
Responding to Non-Client Inquiries
Remember that licensees always have a duty to respond to questions from customers with honesty and fairness. Misrepresentation is a violation of that duty.
Disclosure and Fiduciary Duties
By now you know that a material fact is a fact that, if known, could cause someone to take a different course of action or make a different decision regarding the property to be purchased. In other words, a material fact is any fact that is significant or essential to the real estate transaction.
But when it comes to defects, it gets a little more complicated than that.
Latent Defects
The seller and the listing agent have a duty to disclose latent defects, which are any structural defects that cannot be detected by ordinary inspection.
And if you represent buyer clients, it’s important that you:
Keep a sharp eye out for signs of latent defects
Ask questions on their behalf in an attempt to discover any latent defects that are not readily visible
Patent Defects
The seller and the listing agent do NOT have a duty to disclose what are known as patent defects, which are those that ARE easily discoverable upon inspection.
This might seem odd, but don’t worry, I’ll explain.
Latent Defects vs. Patent Defects
The seller makes certain representations about the size of the lot or improvements on the lot (any non-natural structure built on or affixed to land), encroachments, or easements affecting its use. These are all material facts and the seller is responsible for accurately representing those facts to potential buyers and agents.
If the seller indicates the size of their lot, you can easily verify that information by checking a survey (if one is available) or tax records.
Pro Tip: As a licensee, you shouldn’t quote exact figures without attributing that figure to its source. If you’re going to quantify a material fact, be sure to qualify it with a source as well.
EXAMPLE
If a buyer asks you the square footage of a lot, rather than just answering with “900 square feet,” you should say, “According to the survey, the lot is 900 square feet.”
Encroachments and Easements
In terms of encroachments and easements, the most common examples involve the neighbors. For instance, a neighbor’s fence that extends onto the seller’s property is an encroachment. If the seller is representing that the lot is 400 square feet, but the fence overextends into the seller’s lot, it actually reduces the size of the lot. That would definitely be considered a material fact that would need to be disclosed to the buyer.
Or the inverse could also be true – let’s say the seller built a fence on the property that extends beyond their lot and into their neighbor’s. If a buyer purchased the property assuming that they have full use of the fenced-in land only to later discover that their fence actually encroaches on the neighboring land, they might not be too pleased.
As an agent, you can keep an eye out for things that are very close to the property line as they could potentially be red flags for encroachments. A good first step toward uncovering this kind of material fact is to ask the seller.
Size, Encroachments, and Easements
Time for a little construction detour! 🛠
As a real estate licensee in Arizona, you will be expected to know the basic licensing requirements of contractors in this state and the importance of using their services.
Contractor Licensing Process
Right now, you’re working to earn your real estate license so you can serve your clients legally and skillfully. Contractors do the same thing!
Every contractor who does remodeling or construction for a commercial or residential client is required to be licensed and bonded. A bonded contractor is one that has paid a premium to a surety company that will help out the consumer if the contractor leaves them with damaged property or shoddy or incomplete work. Think of it kind of like insurance.
The state agency that licenses and regulates the activities of contractors is called the Arizona Registrar of Contractors.
In order to apply for a license, a contractor must:
Be at least 18 years old and have a reputation of good character
Have at least four years of practical or management experience, and at least two of these years must have been within the last 10 years. This requirement can be bypassed with a waiver from the Arizona Registrar of Contractors.
Contractor licenses are good for two years. After that, the license must be renewed. The process can require a business management test and sometimes a trade test. License renewal involves a fee of up to $600, which gets deposited into a special contractor fund.
Is a Licensed Contractor Necessary?
As mentioned above, a licensed, bonded professional is necessary when remodeling or construction is involved. If a project is going to affect the structure, plumbing, gas, or electrical or mechanical systems, a licensed contractor is required. So if you have clients mention home renovations, help ‘em out by warning them of this requirement.
What About Permits?
Building permits may also be necessary for major renovation and construction projects. In particular, add-ons to a property should alert you to the likelihood of a permit requirement. Advise clients to research and comply with the permit process for any property improvements or additions.
Failure to comply with permit requirements carries serious consequences. Someone who violates the rules could be charged up to $2,500 in fines and be sentenced to up to six months in jail. A second offense within two years can result in a fine of up to $150,000 and up to 18 months in jail.
Licensed Contractors in Arizona
One more thing to note before we wrap up this chapter and put a bow on it! 🎁
You should know that even an empty lot could require property condition disclosures. If up to five parcels of land in an unincorporated area will be conveyed, the seller has to give the buyer an affidavit of disclosure. This document gets recorded at least seven days prior to closing, just like the deed of transfer.
The affidavit of disclosure includes things like:
Environmental info, including whether the land is on a FEMA-designated floodplain and whether it is affected by fissures or expansive soils (more on this topic in an upcoming chapter)
Access info, such as whether one can physically and legally access the property, whether easements are needed, and info about the access roads
Utility info, including how water will be supplied and how wastewater will be treated
Notes on any applicable zoning restrictions or encumbrances
See some similarities between the affidavit of disclosure and the SPDS? Another similarity: The buyer is asked to acknowledge receiving the affidavit. After receiving it, the buyer then has five days to decide if they want to rescind the contract based on any of the information therein.
Arizona Affidavit of Disclosure
