To protect home buyers from fraud and unpleasant surprises, sellers are required, under the law of most U.S. states, to reveal certain information about the condition of the house or property. These disclosures, often referred to as transfer disclosures, inform buyers about existing physical, legal, neighbor, environmental, and other problems, and help the buyer make a decision about whether to buy the property and on what terms.
Disclosure requirements apply not only to the house itself, but also to the area surrounding the house.
Each state has its own disclosure requirements, and some disclosures are required by federal law (mainly to do with the presence of lead paint).
Most states have also created standard disclosure forms for use by sellers. These can be many pages long, and take serious time and thought to fill out. The question then becomes, do sellers really have to give buyers every detail of what's less than perfect about the property?
In fact, there are some limitations on the usual required seller disclosures, as discussed here.
Sellers Need Disclose Only Defects Within Their Knowledge
It is a standard part of state disclosure laws that sellers need to advise buyers only of those defects that they know about. In other words, they do not need to hire an inspector or climb into their attic or crawl space to root out trouble.
In California, for example, the wording of the seller disclosure form is prescribed by law, and includes such language as, "Are there, to the best of your (Seller’s) knowledge, any of the above that are not in operating condition?" and "Are you (Seller) aware of any of the following . . . ." That's very different than if the form were to ask straight out, "Are there any problems."
Many state disclosure forms also include an "I Don't Know" box to check with regard to various listed types of home defects.
This limitation doesn't, however, mean that sellers can conveniently forget about problems, or close their eyes to issues (called "willful blindness" in legal terms). ("Water in the basement? I don't see any water, and I'm not going to look further even if I do.")
Sellers Need Only Disclose Material Defects
Another common way that state laws limit sellers' disclosure responsibility (and thus potential liability) is to require that they disclose only "material" defects. This is normally defined as significant defects, which would have an impact on the value or continued existence of the property or the buyer's willingness to purchase it, or would impact the owners' health and safety.
So, for instance, little dings in the paint surface or a door knob that's coming loose would probably not be considered material defects and need not be listed on a disclosure form. But faulty electrical wiring or a cracked foundation or slab certainly would be seen as material.
Here, for example, is how the Illinois disclosure law defines material: ". . . a condition that would have a substantial adverse effect on the value of the residential real property or that would significantly impair the health or safety of future occupants of the residential real property unless the seller reasonably believes that the condition has been corrected." (765 Illinois Code Section 77/35.)
Even if the state's law doesn't mention the word "material," it may work the concept into its definition of the "defects" that home sellers must disclose. Indiana law, for example, says a defect is "a condition that would have a significant adverse effect on the value of the property, that would significantly impair the health or safety of future occupants of the property, or that if not repaired, removed, or replaced would significantly shorten or adversely affect the expected normal life of the premises." (Indiana Code §32-21-5-2.)
Sellers Need Only Disclose Defects That Are Hidden (Latent)
Many states' disclosure laws provide that you must disclose only those defects that would not be patently obvious to the average buyer walking through the home.
For example, you may not have to disclose that a large crack exists in the living room wall, since a potential buyer can easily see the crack. However, you must disclose the existence of a leaky roof, as this is likely only noticeable in a heavy rain.
On the other hand, given how obvious such a problem is, there's really no reason not to add it to your disclosure form, just in case an overly litigious buyer later decides to sue over it.
Sellers Need Not Disclose Issues That Their State's Law Specifically Names as Exempt From Disclosure
Some states have carved out topics that sellers should not be required to disclose. These carve-outs are typically meant to protect the privacy of the sellers or past occupants, or to protect home sellers from being sued over issues that the legislators considered spurious.
So, for example, in California, sellers need not disclose include whether someone died on the property, as long as the death occurred more than three years before the current potential buyer’s purchase offer. (California Civil Code Section 1710.2.)
And in Indiana, the law says that, "An owner or agent is not required to disclose to a transferee any knowledge of a psychologically affected property . . . ." (Indiana Code § 32-21-6 -5.) In other words, a property that has acquired a stigma due to, perhaps, a suicide or ghost rumors would likely not be considered defective in Indiana.
Even if your state has such language in its disclosure laws, however, realize that you cannot lie if a buyer asks you a direct question about an issue with the property. This can be tricky. You may need to simply decline to answer.
Consequences of Failure to Comply With Disclosure Obligations
If you, as a home seller in one of the states requiring disclosures, fail to disclose hidden (latent), material defects that you knew about before the sale closed, the buyer could back out of the purchase agreement, or sue you after the purchase; perhaps years later, depending on the statute of limitations in your state.
Questions to Ask a Residential Real Estate Lawyer
- Is this a big ("material") enough home defect to disclose to prospective home buyers?
- The prospective buyers have asked me about whether the house is haunted. I think it is. Does the law in our state require me to disclose this? If it specifically says I don't need to disclose it, how do I answer without lying?
- What exactly are the extent of my disclosure obligations in our state?