When do you need to disclose defects?

One of the more common questions I am asked by Realtors is whether or not we need to disclose defects. The answer is that depends.

If the defect is readily observable, for example a crack in the foundation of an unfinished basement (not hidden by boxes or other strategically placed items), there is no need to disclose, as this would be a patent defect.

If, on the other hand, the seller knows that the finished basement leaks in one corner every spring due to the runoff and has painted it over so no one can tell at the moment, this would need to be disclosed, as this is a latent, or hidden, defect.

So what should you do if your seller tells you about this problem but instructs you not to disclose it, as this would no doubt cause the listing to fetch a lower price? After all, as you know, we owe a fiduciary obligation to our seller clients to put their best interests above all else and follow their instructions, right?

Not quite. Our fiduciary obligations are to put our clients’ best interests above all else except the law and to follow their lawful instructions. Under common law, we are required to disclose all latent defects. In fact, this obligation extends to sellers, too, such that sellers must disclose latent defects. What this means to you is that if your seller asks you not to disclose a latent defect, your response must be that not only must you disclose but that they must also disclose the latent defect. Failure to do so could easily be grounds for a lawsuit brought by the buyer against you, the brokerage, and your seller.

If, after explaining this to your seller, they still insist on not allowing you to disclose the latent defect, you would be best served by smiling, shaking their hand, telling them to have a nice day, and walking out the door without the listing.

If they agree to disclosing the latent defect and you take the listing, it would be prudent to insert a buyer’s acknowledgement in the APS indicating they are aware of the defect. This would protect your seller client, and when you protect your client, you protect yourself.

Next week: Stigmas – To disclose or not to disclose