PROPERTY CONDITION DISCLOSURE FORMS: HOW THE REAL ESTATE INDUSTRY EASED THE TRANSITION FROM CAVEAT EMPTOR TO "SELLER TELL ALL"

Real Property, Probate and Trust Journal, Summer 2004 by Lefcoe, George

IV. WHY BROKERS ARE THE DRIVING FORCE BEHIND THE SELLER DISCLOSURE MOVEMENT

Politically, the driving force behind seller disclosure requirements has been NAR. NAR is the preeminent trade association to which the overwhelming majority of active residential brokers and sales persons belong.69 In 1991, when NAR revved up its campaign for the use of property condition disclosure laws,70 disclosure laws existed only in California and Maine. NAR's campaign has been an overwhelming success. As noted earlier, property condition disclosure forms are now required of sellers in two-thirds of the states and are widely used in the remaining states.

Some broker resistance to full disclosure norms would be understandable. Residential real estate agents are in the business of marketing and selling homes, and their compensation is contingent on sales. Brokers earn nothing for pointing out facts that kill a deal.71 Usually sales are best achieved by accentuating the positive, not by zeroing in on an exhaustive description of all the home's major hidden flaws-at least not until the buyer is emotionally committed to the acquisition.72 Some brokers worry that meticulously honest sellers could lose buyers to less-candid or more desperate sellers.73 Sometimes sellers admit property defects to their sales agents, requesting strict confidence. If the agent breaches that confidence by making full disclosure to a prospective buyer, the seller is likely to feel betrayed.

Brokers overcame these doubts partly in response to home defect litigation brought by disappointed buyers successfully targeting listing and seller brokers, along with sellers. Potential liability for what the seller fails to disclose about the condition of the property has long been a concern of the real estate brokerage profession. According to some insurance industry estimates, two-thirds of buyers' claims against sellers and brokers involve non-disclosure, and the average award in such cases has more than doubled since 1984.74

Realtors hoped that full disclosure by sellers would cut down on defect litigation, and that buyers who were not deterred from litigating would lose their lawsuits over matters that were previously disclosed. "The buyer can't come back and say, 'You didn't tell me. . . .'"75 In mandating honesty as the best policy, seller disclosure requirements also help to resolve the theoretical conflict between the listing broker's fiduciary duty of utmost loyalty to the seller and the listing broker's duties of due care, good faith, honesty, and fair dealing to the buyer. When brokers have been held liable for relaying misinformation supplied by sellers, disclosure laws give agents recourse against the mistaken or dishonest seller.76 Some laws completely exonerate an agent from liability for innocently or negligently passing along inaccurate information provided by a seller.77

Full disclosure by sellers reduces buyer claims against brokers, while a strict regime of caveat emptor has the opposite effect. A recent study of insurance claims against real estate salespersons in five southern states concluded that seventy-six percent of all these suits "had something to do with the condition of the property being sold."78 One of the five jurisdictions, Alabama, was a caveat emptor state. The other four-Louisiana, Kentucky, Mississippi, and Tennessee-had enacted mandatory seller disclosure laws. One of the states, Louisiana, followed the civil law and implied a warranty of fitness against all home sellers. Based on the number of licensees and average number of annual home sales, claims were far more frequent in Alabama than in Louisiana.79 In the other three states, claim frequency fell between the Alabama and Louisiana extremes. As the authors of the study concluded: "There seems to be little question that the property condition disclosure, whether mandatory or voluntary, can reduce error and omission claims against real estate licensees."80