Office Hours with Professor Bill is a multimedia learning experience covering fundamental real estate concepts.
In Episode 11, Professor Bill responds to questions about:
- disclosure law; and
- agency duties and their limitations.
And thus concludes the first semester of Office Hours with Professor Bill. See you all next semester!
Student: Professor Bill, could you tell me more about disclosure law?
In your representation of sellers, compliance with disclosure law is perhaps the most critical thing to get right.
Timely disclosure not only keeps you out of trouble, but it improves your chances of entering under contract with a ready, willing, and able buyer.
A broker and their sales agents are to disclose the physical nature and condition of a property when first providing property information to individuals interested in making an offer to purchase.
- physical nature (size, age, etc.)
- physical condition
As part of this, licensees have a general duty to timely disclose any significant physical aspects of a property that may affect the property’s market value or the buyer’s decision to purchase.
Student: What is meant by timely?
Really, we’re referring to the earliest possible moment.
Understand this to mean upon the commencement of negotiations and prior to making an offer.
As a rule of thumb, when it comes to disclosure, the earlier the better. Always.
If the disclosures are not timely made, the buyer may:
- cancel the offer on discovery of the broker’s failure to disclose before the buyer enters into a purchase agreement with the seller; or
- close escrow on the purchase and seek recovery of the costs to cure the untimely disclosure of known defects.
Student: What are the different duties an agent owes their client in a transaction? What duties are owed to others?
A seller’s broker and their agents have a special fiduciary agency duty, owed solely to a seller who has employed the broker, to diligently market the listed property for sale.
The objective of this employment is to locate a prospective buyer who is ready, willing, and able to acquire the property on the listed terms.
On locating a prospective buyer, either directly or through a buyer’s agent, the seller’s agent owes the prospective buyer, and thus also the buyer’s agent, a limited, non-client general duty to voluntarily provide critical factual information on the listed property, collectively called material facts.
Student: What exactly is limited about this duty?
What is limited about the duty is not the extent or detail to which the seller’s agent may go to provide information, but the minimal quantity of property information which the seller’s agent will hand to the prospective buyer and the buyer’s agent before the entering into a purchase agreement.
The information disclosed by the seller’s agent needs to be sufficient to place the buyer on notice of facts which may have an adverse effect on the property’s value or interfere with the buyer’s intended use.
The methods for gathering adverse facts about a property’s fundamental characteristics, as well as facts which enhance value, require the seller’s agent to actively take steps to make specific disclosures when marketing a one-to-four-unit residential property for sale.
These actions include, but are not limited to:
- conducting a visual inspection of the property to observe conditions which might adversely affect the market value of the property, and then enter any observations of adverse conditions on the seller-prepared Transfer Disclosure Statement (TDS).
- assuring seller compliance with the seller’s duty to deliver statements to prospective buyers as soon as possible by providing the seller with statutory forms at the listing stage to be filled out, signed by the seller, and returned to the agent for inclusion in the marketing package handed to prospective buyers on their inquiry into additional property information
- reviewing and confirming without further investigation that all the information in the disclosure documents received from the seller are consistent with information known to the seller’s agent
- advising the seller on risk avoidance procedures by recommending the seller obtain third-party inspections of the property’s condition to reduce the exposure to claims by a buyer who might discover deficiencies in the property not known to the seller or the seller’s agent
- responding to inquiries by the prospective buyer or buyer’s agent into conditions relating to any aspect of the property with a full and fair answer of related facts.
Student: What does this mean when I’m approached by a prospective buyer or a buyer’s agent?
When asked by the prospective buyer or a buyer’s agent about any aspect, feature or condition which relates to the property or the transaction in some way, the seller’s agent is duty-bound to respond fully and fairly to the inquiry.
Here, the buyer is entitled to a response based on the seller’s agent’s working knowledge of the underlying facts or identification of the source of the information given.
Conversely, it is the buyer’s agent who has a duty to care for and protect the buyer’s best interests in the purchase of property.
The buyer’s agent, not the seller’s agent, is to determine what due diligence efforts are necessary to learn which facts disclosed by the seller’s agent interfere with the buyer’s expectations for the use and enjoyment of the property.
To complete the disclosure process, the seller’s agent serves as a conduit through which property information provided by the seller is filtered before the seller’s agent passes it on to the prospective buyer.
Accordingly, all property information received from the seller is reviewed by the seller’s agent for any inaccuracies or untruthful statements known or suspected to exist by the seller’s agent.
Let’s take a moment to discuss property that is sold “as-is,” and see how this concept fits into the disclosure requirements.
You have probably seen “as-is” in listings, right? If you include the caveat that a property is sold “as-is,” that means you don’t have to disclose anything. Right? Think again.
Student: Could you give me an example?
Consider a seller’s agent who is aware the seller’s residence fails to conform to building regulations.
The defect, if known to a buyer, would likely affect the price they are willing to pay. The defect is more commonly known as a material fact.
The agent knows the buyer who is interested in making an offer is not aware of the violations and might reconsider the price they are willing to pay for the property if they learn of the violations.
The agent decides not to disclose their knowledge of the defect.
In an attempt to cover the omission, the agent writes an “as-is” disclaimer into the purchase agreement.
The “as-is” provision states the buyer accepts the property in its current “as-is” condition.
Since the property is being sold “as-is,” the agent doesn’t disclose anything else to the buyer.
After the buyer acquires the property, the city refuses to provide utility services to the residence due to the building violations.
The buyer demands their money losses from the agent’s broker, claiming the agent breached their general agency duty to disclose conditions of the property known to the agent before the buyer agreed to purchase.
The agent claims the buyer waived their right to collect money damages when they signed the purchase agreement with the “as- is” disclaimer.
