The Story of Jack and the Growing Sinkhole (a.k.a. Why You Should Disclose Everything)

by | BiggerPockets.com

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…

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.

FHA Home Inspection Checklist
Related: A Natural Disaster Could Wipe Out Your Investment: What to Consider Before Buying

Great news!

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.

BUT…

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.

Full Disclosure

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.

Need more tips about selling your property? There’s a book for that!

Are you selling your property? Then you NEED this book. Click here to learn how to sell your home.

Has not disclosing everything come back to bite you (or someone you know)?

Share your tales below!

About Author

Mindy Jensen

Mindy has flipped numerous homes in the past 10 years, one at a time and doing much of the work with her husband. She lives in Longmont, CO, and is always looking for an ugly duckling to turn into a swan.

2 Comments

  1. Shawn Swisher

    I completely agree full disclosure is always better for the seller! However, not every state has a requirement for sellers to disclose all material defects. The property mentioned in the article is located in Alabama, which is still a Caveat Emptor state, or “buyer beware”. For many folks that may be hard to believe but Alabama is very much still a seller friendly state. Sellers in Alabama aren’t required to make disclosures except in the following situations:
    1) if a fiduciary relationship exists between the buyer and seller
    2) if the seller knows the home may pose a health or safety risk to the buyer
    3) if the buyer directly questions the seller on a specific defect

    Not all states are the same so buyers need to be aware of the disclosure laws in the specific state they are purchasing in. The laws could be very different than what they may be used to in their home state.

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