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

As practical business people, brokers saw substantial marketing advantages accompanying seller disclosure. Some sellers, rather than having to confess to embarrassing defects, volunteered last minute improvements that made their properties more attractive and justified higher asking prices.81 Brokers also discovered that buyers were less likely to bolt from deals if weaknesses noted by home inspectors had been forthrightly described at the outset.

Most important of all, satisfaction with their purchases rose measurably among buyers who felt they had been told the truth about the property.82 Brokers care about customer satisfacttion because satisfied buyers may refer their friends to the broker, and become a source of repeat business. Even purchasers who elect to rescind because of defects unflinchingly disclosed may look to the same broker for assistance in locating a more suitable home.

An Ohio study added further support to the notion that buyers' comfort levels with their acquisitions increase when they feel they have been told the truth about the property.83 In 1993, Ohio enacted a seller disclosure law. The study questioned one group of Ohio home buyers in 1990, before the enactment of the law, and a comparable group of buyers in 1996, after enactment of the law. Roughly two-thirds of the buyers in both survey years reported having received a home of the construction quality they had expected. Disclosure made a statistically significant difference in buyers' post-sale satisfaction rates. The number of buyers disappointed with their acquisitions after the closing dropped from fifteen percent before the statute was enacted to five percent afterwards.84

Brokers and scholars of law and economics agree that disclosure has the potential of increasing home prices.85 Understandably, buyers seek price reductions to offset the costs of repairing disclosed defects. By the same token, buyers pay more for homes free of defects. Absent a reliable system of full disclosure, buyers do not know whether the home is defectridden or defect-free when making their offers. Rational buyers would be expected to discount offer prices to account for the possibility that they were bidding on a home with concealed faults. Once a trustworthy system of seller disclosure is put into place, buyers will offer more for homes reported to be in good condition.

Seller disclosure has not put an end to all "undisclosed defect" litigation. Indeed, the general counsel of one of southern California's largest brokerage firms reports that although he has seen a sizable reduction in the number of claims per transaction, ninety to ninety-five percent of all claims currently filed against the firm are for alleged disclosure failures.86

Buyers continue to file claims for many reasons. Some brokers and sellers simply neglect to make any of the requisite disclosures. Others deliberately hide matters that should have been disclosed87 or engage in fraud.88 They may advise buyers against obtaining independent home inspections89 or urge sellers to obtain second opinions from pest control experts, home inspectors, or geologists when the first inspection report is unfavorable, then show prospective buyers only the second favorable report.90 One litigator reports that every buyer he represents, including those who received perfectly adequate seller disclosure, adamantly insists the broker downplayed disclosed defects, convincing the buyer to disregard them.91 Some lawsuits are filed by buyers' seizing upon modest imperfections disclosed by the seller as a convenient excuse for backing out of a deal.92