My friend Jack recently sold his tenanted investment property. He lives in Alabama, a state prone to sinkholes. (Oooh, foreshadowing.)
He was selling FSBO and was approached by an unrepresented buyer. They agreed on a price, and the sale progressed rather smoothly. Until…
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The Unexpected Problem
Ten days before closing, Jack’s tenant calls him up to tell him that she discovered a shallow hole next to the foundation. Jack goes over to inspect and comes to the conclusion that it’s just an armadillo hole, not uncommon in his part of Alabama.
He shares this with the buyer—neither of them is concerned.
The Unexpected Problem Gets Bigger
Fast forward one week (for those of you keeping score, this is now Friday before closing on Monday): The tenant calls again to say the hole, after some fairly heavy rain, is now much larger.
Jack becomes a LOT more concerned. Despite living in an area of Alabama not known for sinkholes, he’s worried the buyer will simply cancel the sale.
Jack calls in an expert—a geo-structural engineer who miraculously has time to come take a look at the problem. (Jack’s town is in the middle of a construction boom, and all construction workers and related industries are SWAMPED with work and have HUGE lead times for quotes, to say nothing of repairs.) The expert determines that it is NOT a sinkhole, but in fact simply a case of old rotted tree roots finally collapsing after a significant rain.
The engineer further recommends filling with concrete, covering with a few inches of dirt, and all should be right with the world.
Here’s where disclosure comes into play. In most states, if a problem has been repaired and the issue is no longer an issue, disclosure is unnecessary.
What happens if this now-disappeared issue suddenly re-appears? Human nature is to talk and share with the people around us. If you’re experiencing a problem, you generally chat with the neighbors for a couple of reasons:
- You’re frustrated that it’s happening to you and you want to vent.
- You want to know if this is happening to them, too.
What do you think is going to happen to your buyers when THEY experience an issue? They’re going to talk to the neighbors, who will remember that you also had this same issue. Your buyer is going to think you purposely covered up the issue, and depending on the size of the problem, could start talking about a lawsuit—or worse, initiate a lawsuit.
This is where your full disclosure will save your backside—or at least would have if you had disclosed.
See, a judge might look down on your non-disclosure of a serious issue, even when the issue has been repaired. But when you HAVE disclosed a previous-yet-now-repaired problem, the buyers are less likely to come back at you if said problem re-appears later. Further, a judge is more likely to side with you since you did disclose the issue.
I know what you’re thinking: “Aren’t all houses sold as-is, buyer beware?” Yes and no. Anything obvious is not required to be disclosed, although for the purposes of covering your backside, I recommend disclosing EVERYTHING.
Every state has a requirement to disclose any “material defects” about the home. A good rule of thumb is that if it affects the habitability of the home—or is costly to repair—it’s a material defect.
Fun Fact: Many states do NOT require the disclosure of a murder or other heinous crime that occurred at a property, as this could unfairly stigmatize the property. (This one varies state to state and also depends on the individual murder that occurred in the home so if this is your situation, definitely do some research to see what is required.)
Related: Does Full Disclosure Kill Real Estate Deals, Build Character, or Both?
In some instances, disclosing the repair can be a net positive. New roof in 2017 turns a negative “leaking roof” into a selling point.
Now let’s get back to Jack.
Jack told the buyer about the engineer’s proposed fix and offered to make the repair himself.
The buyer agreed to let Jack make the repair (for the record, Jack is very handy and knows what he’s doing), and they were able to close on time.
But let’s look at the alternate-universe view.
Jack does NOT disclose the issue and does not consult an engineer, instead covering it with dirt and hoping nothing happens before closing.
Jack is selling this property with the tenant in place. Tenants love to dish the dirt on their former landlords and would happily share with the new owner that Jack not only knew that there was a hole, but also was aware that it got bigger in a very short period of time.
In Jack’s case, he’d probably be on the hook for the engineer anyway, but if the buyer sues him and wins, he’d also be on the hook for the buyer’s attorney and any court fees and fines. If the hole was in fact a sinkhole, Jack could be forced to return the buyer’s money and take back possession of the home.
Not Worth It
The most common complaint I hear about disclosure is that it will affect the price of the house. And yes, it probably will. But how much will it affect your bottom line to go through a lawsuit that you will almost surely lose?
And what about integrity? Non-disclosure, when you boil it all down, is you lying-by-omission to sell your house. You wouldn’t want it done to you, don’t do it to someone else.
Disclose everything, and you will sleep better at night.
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Has not disclosing everything come back to bite you (or someone you know)?
Share your tales below!