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Six Disclosures that Real Estate Sellers Must Make, or It Could Cost You!

What you don't say could come back to haunt you, in the form of blown sales or lawsuits.

By Melinda Fulmer of MSN Real Estate

These days, the trend among cash-strapped home sellers seems to be to say less in hopes of getting more at closing. But in the long run, this less-than-full disclosure can prove costly.

Lawsuits stemming from nondisclosure of a property's problems are becoming a bigger issue, according to respondents in the National Association of Realtors 2011 Legal Scan survey. Of the agents who responded, about 75% ranked this issue among their "top three current and future issues."

While the rule with home buying was once "caveat emptor," or "buyer beware," an increasing number of sellers are finding themselves on the hook for nondisclosure.

"I think a lot of sellers don't have a full understanding of what the seller disclosure statement means when they fill it out," says Illinois home inspector Jack McGraw of Jacks Home Services. "You can often tell there has been work done" on a house, he says, but these fixes don't show up anywhere on paper.

Indeed, sometimes there is a big effort to cover up any signs of trouble. Omaha, Neb., appraiser John Bredemeyer says he recalls one home that had a giant console television pushed up against a door angled in one corner of the basement. Once the property was sold and the TV hauled away, the new owners found a big surprise.

"They opened up the door and the foundation was crumbling," Bredemeyer says. Ultimately, the home's original owners wound up paying to fix it.

Sellers must disclose anything that could affect the property's value or desirability, from big problems such as a compromised foundation to in some states simple neighborhood nuisances such as that dog next door that barks every night.

Disclosure laws vary. Some states require sellers to look for and cite certain problems even if they are not aware of them.

No one gets out of these disclosures: Even those marketing a home "as is" have to obey state disclosure laws, says Ilona Bray, real-estate attorney and co-author of "Nolo's Essential Guide to Buying Your First Home." As-is sellers are simply advertising that they're not going to negotiate on price because of these issues.

Here are the six things that a seller must reveal about a home to avoid legal trouble down the road.

1. Repairs
This is a pretty broad category but one that a lot of buyers seem confused about. If you have made repairs to your property, you should disclose them, even if the problem has been resolved.

That could be something as major as a crack you had sealed in the foundation, or something as minor as snaking your sewer line every year to clear tree roots.

Any repairs to the roof, plumbing, electrical system or heating and cooling unit that you are aware of including any repairs disclosed to you by previous owners should be laid bare, as well as any drywall or structural repairs to remedy water damage.

"If you knew that there had been hail on the roof and it was leaking, you should disclose that," Bredemeyer says. "If you knew last fall that the A/C didn't work, that's something you should disclose to a buyer."

The bottom line is that sellers should disclose anything that is not readily identifiable by the buyer.

2. Termites
One such invisible problem is termites. If your home has a history of termite infestation, especially if it has been treated more than once, it should be disclosed to the buyer, because it can greatly affect the value of the home.

To lessen the impact of this disclosure, sellers can get another termite inspection before listing their home that shows it to be clear of the pests. This disclosure, along with any information about treatment warranties that could be transferred, should be given to the buyer at closing.

3. Water damage/mold
If the home has had a leaky roof, a flooded basement or dampness and mold in certain areas, these water issues must be disclosed.

A good home inspector can often spot the signs of water damage, even if they have been painted or plastered over, McGraw says. But it's no sure thing. That's why water damage is one of the biggest causes of disclosure-related lawsuits, says Joseph Rand, managing partner and general counsel for Better Homes & Gardens Real Estate Rand Realty in Nyack, N.Y.

One buyer that Rand's firm represented had to call out a plumber soon after the purchase for some serious flooding in the basement. Once there, the plumber told the buyer, "I was just out here six months ago for the same thing."

The sellers were successfully sued for not disclosing this fact. "It was one of the few times that the buyer caught the seller red-handed," Rand says.

4. Lead
If you are selling a house built before 1978, you must comply with a federal law that requires disclosure of all known lead-based paint and hazards in the house.

Buyers must receive a copy of the Environmental Protection Agency pamphlet "Protect Your Family from Lead in Your Home" and they must be allowed a 10-day window to test the house for lead.

The contract must include that warning as well as signed statements from all parties verifying that the requirements for disclosure were met. If a seller doesn't comply with these requirements, the buyer can sue for triple the amount of damages suffered. More information from the EPA on lead disclosure is available here.

5. Natural hazards
Some states, such as California, require sellers to disclose any risk of natural disasters such as a flood plain or earthquake zone or susceptibility to wildfires. This disclosure is meant to warn buyers of the financial risk and danger they face from these catastrophes, as well as alert them to trouble they may face in getting insurance for a home in that location.

6. Infamous past
Even a home's notorious past must be disclosed. One New York case many years ago involved a home that reportedly was haunted and was the subject of many articles and tours. When that ghoulish past wasn't disclosed to the new buyer, the seller was successfully sued for nondisclosure, because that notoriety was likely to diminish its resale value, Bray says.

The same holds true for a home's criminal past. Some states require disclosure of murders on the property, others do not. But since these horrific events tend to lower the value of a property, most real-estate agents choose to disclose them rather than risk legal action. In fact, the NAR even published a field guide for agents to deal with these "stigmatized" properties.

Other special disclosures might include a historical designation that restricts remodeling, or any other special zoning or local environmental concerns.

The bottom line is that if there's a question in your mind about whether or not you should disclose something, you probably should. "Anything that the buyer would feel misled by is something that you should disclose," Bray says.

However, disclosure does not mean sellers are obligated to fix a home's problems, Bray says. Rather, the disclosed issues can merely become a point of negotiation between buyer and seller.

How can sellers protect themselves without blowing a sale?
To find out which disclosures your state requires, you can contact its department of real estate. Bray also suggests sellers get a home inspection before listing the home. It's not required, but it can help you figure out what to disclose.

If repairs must be done, McGraw suggests getting bids from a few contractors so you can negotiate more effectively. If a problem was fixed, disclose it and let people know what you have done to resolve it.

McGraw suggests preparing a binder for potential buyers of repairs, permits and warranties. It makes you look like a conscientious seller. And if you're not disclosing something on a form, remember to document it in writing, even it's just an email copied to a witness, Rand says.

It might seem strange, but sometimes a heavy dose of disclosure can actually make a buyer more ready to act. "They will say, 'This is an upfront person that I can work with,'" Bray says.

In a depressed housing market, no one wants to give up money from the purchase price, but full disclosure is one way to make sure you're not giving up a lot more of it later on.

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