Home inspectors

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What is a Seller's Disclosure?

There was a time when caveat emptor, or "buyer beware," ruled in the home buying arena. The burden of discovering property defects was placed wholly on the buyer.

In recent years, there has been a move away from caveat emptor. Instead, many states are requiring sellers to disclose property defects when they sell. In some states, "seller beware" is now the more appropriate admonition.

California was one of the first states to require a state-mandated seller disclosure statement, called The Real Estate Transfer Disclosure Statement, or TDS. The TDS asks sellers to disclose property defects they are aware of. If the buyers haven't already signed off on a completed TDS before entering into a purchase contract, they have the right to cancel the contract within 3 days after the TDS is delivered to them, or within 5 days if it's mailed.

Not all states have seller disclosure requirements, although there is a movement in this direction nationally. Some states have voluntary seller disclosures. In states that don't have disclosure requirements, some real estate companies require sellers to complete a company's seller disclosure statement as a condition of the listing agreement.

Sellers often wonder what they should disclose. Usually a seller is required to disclose any known material facts that are not readily apparent to a buyer, although this is not the case in every state. A basement that floods, but where all evidence of flooding has been removed prior to selling, is an example of a material fact. If the house were sold during the summer months, the buyer would have no way of knowing about this drainage problem unless the seller told him.

Determining what is a material fact is not always clear-cut. Sometimes there is an element of subjectivity involved. For example, it was material to one homebuyer to know that there had been a rape on the property several years before. She lived alone and the garage was detached from the house. When she learned this information, she decided not to buy this house. This fact was not material to the buyers who purchased the home.

A good rule of thumb for disclosures is: If you're asking yourself if something should be disclosed, it's probably material to someone, so disclose it. You want to avoid being sued after closing by buyers who feel that material information was intentionally concealed from them. If you have any questions about what should and shouldn't be disclosed, ask your real estate agent or a knowledgeable real estate attorney.

First Time Tip: Buyers who are purchasing a home in a state that doesn't have a seller disclosure requirement should consider asking the seller to complete a generic disclosure form. Some consumer-oriented home buying books, like "Starting Out", include a copy of such a form.

Even when you do have the benefit of a seller disclosure statement on a property, you should not rely on this alone for your information about the property. Disclosures are not a substitute for inspections. Be sure to include an inspection contingency in your purchase agreement.

Sellers who have current inspection reports on the property should disclose them. It's also good idea to make past reports available to buyers. They provide an historical perspective that can be useful in determining if an observable defect is significant. A defect that has not changed for many years might be less of a worry than one that recently appeared.

The Closing: Sellers have other disclosure requirements such as the Federally mandated lead-based paint hazards and flood zone disclosures. State-mandated disclosures vary from one state to the next and many municipalities have locally mandated disclosure requirements.