Disclosure is Never the Wrong Move

You must disclose condition, regardless of your relationship with the buyers

September 1, 2002

Q. I had a buyer who signed a contract on a house based on two pages of a five-page disclosure. When I obtained the other three pages of the disclosure, which was several years old, I learned lead inspection reports showed higher than acceptable levels of lead in the ground surrounding the house. The buyer canceled the contract and got back his earnest money.

What are the listing and buyer’s reps’ responsibilities to ensure that a new disclosure for this property is completed before it’s marketed to a new buyer?

A. Without a doubt, listing agents have an obligation, stemming from common law, the NAR Code of Ethics, and federal law, to disclose what they know.

If homeowners say, “Don’t disclose it,” the listing agent has choices. The agent can tell the owners they’re obligated to disclose and hope the owners comply, which is a “half solution.” Or, after getting an unsatisfactory response from owners, the agent can go directly to the buyers and disclose the information. However, the best option in my mind is the smart business choice: walking away from the listing.

As for the buyer’s rep, Standard of Practice 1-9 in the Code makes it clear that a latent material defect in a property isn’t confidential information. In addition, Case Interpretation 1-25 in the Code of Ethics and Arbitration Manual states that REALTORS® aren’t in violation of the Code if they disclose a material defect known to them, even when sellers won’t. The Code doesn’t obligate or bar a buyer’s rep from contacting the MLS.

Clearly, if you’re working with buyers who are interested in a property and you’re aware of any issues related to the property’s condition, you must disclose the condition, regardless of your brokerage relationship with the buyers.

Q. I negotiated a purchase agreement working as a buyer’s agent, for $136,000, with a second mortgage held by the seller for $18,000. The appraisal didn’t support the combined value.

I renegotiated with the listing agent over the phone to reduce the price. He told me the seller agreed to the new price and asked me to provide an addendum reflecting the change. I wrote an addendum to the contract (in some states only an attorney can write a contract addendum) and had my buyer client sign it before sending it to the seller’s agent.

Did I jeopardize the deal by having my client sign first? If the seller didn’t sign the addendum, would the original purchase agreement have stayed intact?

A. An offer to modify the contract is just that—an offer. If it’s rejected, the original terms apply. Therefore, you didn’t put your client in jeopardy of losing the original deal by having him sign first.

The original deal may have been in jeopardy for other reasons—having nothing to do with your actions—had the seller not signed the addendum. If your client couldn’t obtain a loan without the appraisal supporting the value or if the contract’s appraisal contingency (if one existed) had given the buyer the right to terminate, the deal may have fallen through.

I applaud your concern for treating your clients properly under the law and the NAR Code of Ethics. You’re correct that your actions shouldn’t put a buyer in a precarious position. Article 1 of the Code states that the duty to “protect and promote” the interests of the client is REALTORS®’ primary obligation.

Aydt is senior vice president and general counsel of Prudential Alliance, REALTORS®, St. Louis, and a former chairperson of NAR’s Professional Standards Committee. He has also been honored as Educator of the Year by both NAR and the Missouri Association of REALTORS®.

Bruce Aydt
columnist

Attorney Bruce Aydt, ABR, CRB, SRS, is a national real estate educator, a Missouri real estate broker, and past chair of the National Association of REALTORS® Professional Standards Committee.

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