Home Sale Nondisclosures – The Basics
by Randy Ortlieb
Nondisclosure – a recurring theme in home sales which dates back to the Middle Ages, or even earlier. What is it, and how should it be handled?
Simply stated, nondisclosure is any condition of a home that two sides of the sale disagree about. It could be the roof, or termites. The home buyer is often convinced that the seller concealed a hidden problem from them. The seller is convinced that there is no problem and that the buyer should accept the property “as-is.”
The wide gap between these ironclad feelings creates the potential for the two sides to spend vast amounts of legal fees and emotional energy. Which begs the question – who’s right? And also the ultimate question – how do we deal with it?
Residential Real Estate Disputes in Escondido, CA
Caveat Emptor. Under the traditional rule of caveat emptor, a home buyer was essentially deemed to assume the risk of all defects, with a few very rare exceptions. So, if a roof or window leaked, the buyer handled it. If a crack was discovered in the slab, the same result would apply. Sellers loved this rule. Buyers hated it and it led to some very bad results. Eventually the law had to change.
Today’s Rule. The rule of caveat emptor in home sales has gradually disappeared. The law in California now requires a pre-closing disclosure of significant problems whenever a residence is offered for sale.
31 Questions. Significant problems are defined by the law and boil down to 31 questions in 2 main categories: (a) deferred maintenance such as roof leaks and cracked slabs and (b) legal issues such as CC&Rs and lack of building permits. The required disclosures – on a form called the TDS (for Transfer Disclosure Statement) – are part of the Civil Code (Section 1102.6). Nearly all nondisclosure disputes involve one or more of these 31 main topics.
Common Disputes. Some of the more common types of disputes involve unpermitted room additions, roof leaks, cracked slabs, soil problems, encroachments, noise and even bad odors (in the case of a nearby egg ranch).
Explosion of Nondisclosure Claims. In 1984 a court of appeal opinion in a landslide claim made it easier for buyers to file claims for nondisclosure, especially against the brokers involved. The TDS law went into effect in 1988. The real estate industry had a real problem dealing with the increased volume of claims. The costs in time and money were staggering. Insurance carriers came to California and then left abruptly due to the onslaught of claims.
The Solution. The industry had to find a solution. Early attempts included binding arbitration which helped but wasn’t strong enough. Today the situation is better with the nearly universal acceptance of mandatory mediation followed by binding arbitration.
Why it Works. Mandatory mediation successfully resolves most nondisclosure disputes because in theory it provides the parties with the benefits of a trial – a full presentation of their claims and defenses to a neutral party – in an abbreviated and less costly process. The parties are essentially forced to gather their evidence and present their strongest case early on, instead of waiting for many months or years. For instance, a trial can take a year and cost $100,000 or much more. A mediation can resolve a claim in around 60 days for about 1/5 the cost of a trial.
Timing is Everything. The preferred scenario is dealing with the issues early in the transaction, well before the closing. When the property is listed for sale, the seller with prompting from their agent should diligently and thoroughly disclose all known problems, possibly even including past repairs. A buyer with guidance from their home inspector should investigate, inspect thoroughly and ask questions. Ideally there will be a pre-closing discussion of all important issues, and a resolution of all issues that is documented in writing. The nightmare scenario is to wait until after the closing to address a problem. This situation usually results from inadequate planning, poor communication, inattention and unrealistic assumptions.
Not a Panacea. Finding yourself in mediation is not the preferred solution, since it is far costlier than a pre-closing negotiation. But mediation gives both sides in a nondisclosure dispute the opportunity to present and debate their claims, and then resolve them in a fraction of the time and expense of a traditional trial.
Real Estate Lawyer Randy Ortlieb has handled many different kinds of real estate nondisclosure claims. If you have questions, contact Randy at the Palomar Law Group. Call (760) 747-2202, or contact us online.