Does Full Disclosure Kill Real Estate Deals, Build Character, or Both?

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Full Disclosure is one of those things that is actually really good for everyone involved in a real estate transaction, but can get pushed aside at times in the pursuit of a closed deal.  That is really unfortunate because it is one of the few things in the real estate business that can be a true testament to you and your company’s real character.

To be clear, disclosure in real estate has often been confined to real estate professionals – or at least those professionals with a license, including real estate agents, a real estate brokers, mortgage originators, home inspectors, home appraisers . . . you name it.  If you are a licensed professional in some industry in the real estate business, you are supposed to operate within a standard that includes full disclosure of certain information. 

But what if you are operating a real estate business that does not require a license.  What if you purchase homes wholesale and sell them retail?  What if your business if one built on a business model that does high volume, but doesn’t require a license like mine?  What is your responsibility for full disclosure then?  In my opinion, this is where you earn your reputation and is where real character is built . . . and unfortunately, sometimes lost.

My company is one that does not have rules that govern disclosure.  That does not mean we do not have a responsibility to disclose information that we know is pertinent to a deal.  Often times with real estate, when disclosure is discussed, the conversation surrounds the areas and responsibilities of the people I listed above. That said, we were recently put to the test in another area of disclosure.

We sell investment properties to investors from around the world.  Often those investors are purchasing property with us when they have not seen the property or met with us face to face.  As crazy as that statement may sound, and believe me the responsibility of that situation put back on us is not lost on us, that is the scenario on close to half of the purchases made with our company.  How we earn the trust and reputation to have investors purchase like that is for another article on another day. 

I bring it up because the investor seldom meets anyone that they are dealing with.  They do not meet us as the seller, they do not meet the property manager, and they do not meet the lender or the home inspector or the insurance company.  So in this case, our company is developing a close relationship with the buyer and many times we have the closest relationship out of every company they are dealing with.  If we hear something of importance, something that can affect every company in the process, we are the only ones who know, and that is where your character is tested.

Testing Your Company’s Credibility via Non-Mandated Disclosure

Recently we dealt with two situations that other readers may have already found themselves in or may in the future.   We had two buyers who were purchasing properties with our company.  The first buyer had already purchased two properties with us in Dallas, TX.  Each transaction went smoothly and without any hiccups.  Then the buyer wanted to purchase another property — this time in Memphis, TN.   He was going to use the same lender who already had all of his information and pre-approved him for another property. 

ON a routine conversation, it was disclosed that the buyer was excited to be preparing for a new stage in life.  He was going to be leaving his job before the end of the year and was looking to start his own business.  While being excited for him as a client and having developed a close relationship, we were also concerned because his pre-approval was based on more than his financials.  It was also based on the fact that he had a good paying and stable job.

For us, knowing this information and how it affects the lender, we had no choice but to inform the buyer that he could not move forward with the purchase if that was his plan; additionally, he needed to inform the lender to make sure they were comfortable lending before we were comfortable closing.  I have no idea what others may think of that decision, but I can imagine scenarios where selling that property was important.  I can imagine a scenario where a payment to a hard-money lender is due or a scenario where people that work for you may be expecting a paycheck.  There may be bills due to vendors from the remodel of a property.  Whatever the scenario, none of them are bigger than your integrity, and none of them are worth losing the trust of a lender who places all of their faith in you as the person or company that has the closest relationship to the buyer.  They rely on you to protect the process and if you have information that is important, full disclosure is your only option.

The great thing about this particular buyer is that he completely agreed and informed the lender.  As we all would guess, the lender declined to fund this property and the buyer had to let it go.  For him this was an easy decision and it earned us a tremendous amount of respect in his eyes.  At the time of his leaving his job, he will be able to transfer a sizable 401K to a self-directed custodian and plans to purchase more property in that way.  That day we earned his trust, and not only his future business, but his recommendation and his willingness to share our company with other investors.  The short sighted thought of not saying anything and closing that one deal is trumped by doing the right thing and earning many more deals.

Making the Tough Decisions

Within a few short weeks we had a very similar situation where an investor who has never purchased with our company decided he wanted to purchase two properties at the same time.  After getting pre-qualified with a lender, he picked out two properties.  According to the buyer, he had plenty of reserves and wanted to buy “a lot” of investment properties.  Listening closely is a lost art in business, and I’m not sure it has ever been part of the real estate professional’s repertoire, but it is a crucial skill if other people and companies are relying on you.  The particular person in our company who was working with this buyer continued to talk to the buyer and ask questions about his plans for investment and what his future plans were.

The buyer told her that he planned to close on these two properties, move overseas, and travel for a bit.  When she inquired about his job, his response was that he could get another job when he returned.  He stated that he had enough money saved up and that he would be ok.  When she asked about the two properties he was buying, he said that he planned to use the income from the properties in case he needed any extra play money.  She knew that this would be an unacceptable answer to us on so many levels, but mostly because the buyer was setting himself up for failure. 

It was bad enough that he planned to quit his job after buying.  That piece of information, just as in the first case, was enough to cause us to disclose that information to the lender and more than likely cause the deals to fail.  But, to hear that a buyer was not approaching his investment in a responsible way and planning properly, was a huge concern as well.  His failure as an investor would cause a lot of unnecessary and extra work on our side, but it would also leave a black mark on our company with a lender.  Just as in the first case, this was an easy call for us.  By exercising full disclosure, the two deals were declined.

Full Disclosure

Full Disclosure is defined as the general need in business transactions for both parties to tell the whole truth about any material issue pertaining to the transaction.  It is easy to know what to do when you have a license and training that tells you what to do and how to do it.  Yet, even with that training and licensing, we hear everyday about disclosure violations and the penalties that accompany those violations.  It is much harder to know what to do when there is no licensing and/or training and when the training is your experiences in life and the license lies somewhere within.  It is harder to do the right thing when there is no financial penalty, but bending the rules can lead to income.  That is when you are truly measured as a person.  Pass that test and your reputation and your business will grow!

Photo: Scott Robinson

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About Author

In 2005, Chris Clothier (G+) began working with other investors and has since helped hundreds of investors purchase over 2,300 properties in Memphis, Dallas and Houston through the Memphis Invest family of companies.

4 Comments

  1. If everyone practiced full disclosure perhaps we could get back to doing business on a handshake and having it mean more than the 35 page lawyer designed contracts.

  2. Couldn’t agree more,
    We’re in the same boat, Chris, with the vast majority of our clients buying sight unseen (and us unseen), because that’s one of our specialties (purchase and earn income without leaving your home and office), and because in Japan, the law forbids property manager, sellers, buyers or realtors from entering a property while it’s tenanted (so even when you do visit, all you can do is circle the building, stumble along the corridors, and nod a lot.
    Full disclosure is a must. The only secret or magic that we, as investment suppliers, invoke, is the kind that comes from experience, thorough familiarity with our local markets, and the contacts and skills required to make it so happen seamlessly. No amount of disclosure can take that away from us, and to see all of it transparently come together into a living, working, profitable portfolio is something that no one can do as efficiently and successfully like us (if we know what we’re doing), so disclosure is nothing to be afraid of.

  3. Meg Stephan on

    Question: As an investor, what are you obligated to disclose about a property you are selling? We’ve purchased a home from people who say they never lived here and claim to know nothing about the propety on the disclosure. We’ve been here a month and already sewage has come up through the shower on one side of the house and there is a massive sewer gas leak on the other side of the house that shows up faithful every evening. The sellers owned the home a year prior to selling. In the inspection, a slowing draining shower came up, so – AT OUR OWN EXPENSE – during escrow we paid to have the pipe video cam’ed from the outside to the street. Some roots showed up, but nothing major. After taking ownership, we gave the roots a “haircut.” Despite that action, we’ve basically had the plumbing blow up on us after less than four weeks in the house and have now come to find out that the main line is broken under the house (we didn’t video the pipes in the house during escrow) which will render it uninhabitalable for likely three weeks, not to mention the expense of tearing apart the house, jack-hammering through the floor, fixing the main line and re-laying the foundation and replacing the hardwood floors. Are we to believe the investors had “no clue” there was any sort of a plumbing issue whatsoever? They owned the house for a year, had people working on it… who I am sure had to pee from time to time. Do you know if we have any recourse?

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