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At some point it will happen to almost every agent: A client wants to cover something up. Ugh, you want the sale, and maybe it’s not that big of a deal, but …And it’s that “but” that’s making you think. Because you know it’s not OK. But it’s more than that. In fact, spoiler alert: It’s not even “not OK,” it’s maybe illegal.
Let’s take a look at some issues, keeping in mind that any agent who is unsure about any real estate situation should always contact a lawyer.
The distinction needs to be made over cosmetic issues and material facts. A cosmetic issue should be addressed, as we’ll discuss below, but a material fact can cause ongoing turmoil if not disclosed.
“A material fact in real estate is defined as a fact that, if known, might have caused a buyer or seller of real estate to make a different decision with regards to remaining in a contract, or to the price paid or received,” says Kelly Hanson, associate broker at Keller Williams Realty Coeur d’Alene in Idaho. That’s why it’s important to him to work with the seller to address the issue upfront since it can evolve into a lawsuit when the buyer eventually discovers the issue. “My advice actually saves them money and grief in the sale,” he says.
When dealing with latent defects, anything the seller knows but doesn’t disclose, such as water intrusion during heavy rains or an electrical switch that intermittently goes out, can be grounds for the buyer to take legal action against the seller, even after closing, says Zak deLeon with Harry Norman Realtors in Atlanta, Georgia. And it can be discovered innocently – maybe a neighbor says “Oh yeah, they told me about that problem,” or the buyer gets a call from a vendor who previously looked at the issue.
According to Philip Georgiades, chief real estate agent for FedHome Loan Centers, in most states, both the agent and the seller are obligated to disclose any known “material” defects. “If you as an agent are complicit in real estate fraud, you can expect to be sued by the buyer at a minimum. In most cases your ‘Errors and Omissions’ insurance offers no protection against fraud claims,” he says. “And depending on the severity of the issue, you can expect to lose your license and perhaps even face prison time.
And even if it never gets that far, you’re at risk of losing something else critical – your reputation. “Regardless of the law in a particular state, all real estate agents would be well to consider the ethical and long-term business consequences to their reputation of not disclosing a material defect to a buyer,” points out David Reischer, real estate agent, attorney and CEO of LegalAdvice.com. “An unscrupulous agent that fails to disclose important information to buyers risks losing future customers. It is to the long-term benefit of the real estate agent to counsel their client of the benefits, even if the home seller feels otherwise.”
But at the same time, you might not want to just lose the listing outright by telling your client he or she is a liar. Here are seven ways to potentially work with a client who wants to cover something up.
Jeff Lichtenstein, owner and founder of Echo Fine Properties in Palm Beach Gardens, Florida, says they have all their clients fill this out as an attachment for the buyer’s agent to see and have their client go over and sign off on. “I’ve had sellers who are nervous about revealing something, but I resolve most of those fears by assuring them that no house is perfect,” he says. After all, as he points out, mold is common in his market in Florida, and who hasn’t had a plumbing or roof leak? “Buyers don’t care as long as you show them it was addressed. If you can get valid receipts, all the better.”
It’s in the seller’s best interest to over-disclose rather than under-disclose, notes deLeon, who says his personal motto is “When in doubt, disclose.”
Most defects are eventually discovered, whether in the walkthrough or during the home inspection. “Any issue that’s revealed then can cause a buyer to question what else wasn’t disclosed and consider terminating their contract,” he says. And, that puts the house back on the market, with the stigmatization of already having been under contract. “Any other buyer would wonder why the first buyer backed out,” he notes.
Especially with a cosmetic defect, it’s better just to fix it prior to listing it, advises REALTOR® Carrie Hays with Block + Lot Real Estate in Lexington, Kentucky. “Minor repairs often lead sellers to a larger return on investment,” she points out. Especially, since as mentioned it’s liable to be found anyway; for example, if the seller attempts to cover a hole in the drywall with a picture for showings, the buyer will most likely discover the issue during the final walkthrough. And that could lead to a buyer delaying closing or even terminating the purchase.
“As with most things in life, the golden rule applies. ‘Do unto others as you would like done unto you.’ Fix it the way that you would want someone else to if you were purchasing their home,” says Hays.
The home can be marketed “as is” if it’s simply cosmetically outdated but functionally sound, notes Caleb Liu of House Simply Sold in Orange, California. Or if more extensive rehabbing is required, the home can be marketed as a fixer-upper. “In a seller’s market, reasonably priced homes are in great demand so even disclosing most issues should not prevent the house from being sold,” he points out. Then everyone is in the loop.
If the buyer can prove that material defects were purposely left off the disclosure, the seller can be sued in court for fraudulent misrepresentation, Liu points out. “The buyer can be awarded compensatory damages for the monetary value of any repairs, as well as significant punitive damages as additional penalty. Tell the seller that the risk just isn’t worth it.”
However, Ryan Marek, founder and CEO of technology-based real estate company Keyla Inc., says a common mistake is appealing to sellers about longer-term issues, and the fact is that many don’t care. “Make sure to tell them how it’ll affect them in the here and now,” he suggests. In fact, even if they fire you, they still know about the defect so if they should list it themselves and hide it, it likely will come back to haunt them. “The real estate world is pretty small, and the home would essentially become blacklisted once someone did a home inspection. No buyer’s agent wants to purchase a home that is hiding defects,” he says.
“I’ve used the line, ‘Don’t you want to sleep at night after the sale?’” says Lichtenstein, who finds that one spouse will usually chime in and reason with the other at that point. “People also don’t like to be embarrassed, and it’s such a small world that fear of them getting a bad reputation in the community usually sinks in.”
“’Can’t do a good deal with a bad guy,’ was my Grandpa’s saying in business,” says Lichtenstein, who says he simply won’t do business with a client who isn’t honest. And to that point, he adds, “Bad guys give bad referrals, and it never works out in the end. I’ve followed that motto for my entire career and have had zero problems on the disclosure side because of it.”
Sound advice and sound strategies.
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