Disclosure Dilemma: Should You Tell All?

If it's material, you must disclose it.

November 1, 2007

Q: A listing agent was told by the home’s current owner that he recently learned there had been a fire in the home before he bought the property. The previous owner didn’t disclose this fact to the current owner. Does the agent or current owner have to disclose to prospective buyers the fact that a fire occurred in the property?

A: Article 2 of the Code says, “REALTORS® shall avoid exaggeration, misrepresentation, or concealment of pertinent facts relating to the property or the transaction. REALTORS® shall not, however, be obligated to discover latent defects in the property, to advise on matters outside the scope of their real estate license, or to disclose facts [that] are confidential under the scope of agency or non-agency relationships as defined by state law.” Likewise, absent a legal or regulatory prohibition, Standard of Practice 2-1 requires that any material fact that could affect a reasonable purchaser’s decision to purchase or the price that a purchaser might pay must be disclosed.

The question is whether the earlier fire is a pertinent, or material, fact. Material facts include, but are not limited to, those factors that might affect the habitability of the property, its desirability, the price the purchaser would pay, or the purchaser’s ability to resell the property at a future date. (See Appendix II to Part Four of the Code of Ethics and Arbitration Manual for a description of pertinent facts.)

If the fire was of a size, nature, or character that it affected the home’s habitability, it’s clearly a pertinent fact to be disclosed. Likewise, if the fire was of a size or nature that it affected the property’s desirability, the price a reasonable purchaser might pay, or the resale potential, it’s a pertinent fact to be disclosed. The adage “when in doubt, disclose” may be the best way to avoid questions about whether the fire was a pertinent fact. Ultimately, whether the fire constitutes a pertinent fact could be determined only by an ethics hearing panel.

Q: Is there anything in the Code of Ethics that prohibits one salesperson from gossiping about or bad-mouthing another salesperson in the same office or from another office?

A: Article 15 of the Code covers situations in which a REALTOR® makes false or misleading statements about a competitor. It says, “REALTORS® shall not knowingly or recklessly make false or misleading statements about competitors, their businesses, or their business practices.” The article is directed to false or misleading statements that are known to be false or stated “recklessly,” that is, without regard to the truth or falsity of the statement. “Gossip” and “bad-mouthing” may be covered by Article 15 if the statements made are known to be false or misleading.

But statements that are truthful aren’t violations of Article 15 of the Code, even if they’re unflattering. For example, Bob is competing for a listing in a subdivision with Sue. During a listing presentation, Bob tells the home owners that they should list with him because he sold 15 homes in the subdivision in the past year. Bob also tells the owners that Sue sold only one home in the subdivision in the past year. Bob’s factual claims are supported by objective information from the local MLS.

So although this may be a less-than-flattering statement about Sue’s activity in the subdivision, it’s true so it isn’t a violation of Article 15. Some practitioners may consider Bob’s statement to be “bad-mouthing” his competitor, but because the statement is truthful, there’s no violation of Article 15.

Bruce Aydt

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.