By Neil Goradia
“OMG! My agent just made $7,000 and all they did was list my property!”
Does this sound familiar?
How often have you felt the need to defend your commission as a real estate agent?
This article is not to beat up on for sale by owners. In fact, there are plenty of times that it works great.
Instead, I am going to discuss disclosures and relate them to an incident I recently became aware of. It’s an example of a person who sold a house as a FSBO, which was purchased by a real estate investor. Neither had professional training on how to perform the transaction. The result was a lot of stress (ongoing, I might add) and costs incurred that could have been avoided.
The moral of the story
Buying and selling property involves a lot of money. There are certain laws and procedures to protect the buyer and the seller. When a real estate agent is not involved, some of these procedures can be missed, and the buyer, seller, or both end up with a ton of headaches. This is how real estate agents can show their value. Those who are not trained in buying or selling property as an agent or attorney should seek professional help. In this case, the buyer may end up paying more than $15,000 in costs incurred due to a fire.
I am dividing this post on seller disclosures into four parts:
Part 1: What they are
Part 2: What must they include
Part 3: How do they protect the buyer
Part 4: Case study: What happened in this example
I really hope you get a small piece of value from this article, and that real estate agents are able to use this to explain and provide real value to customers.
Part 1: What are seller disclosures?
In real estate sales, disclosures refer to the seller’s legal responsibilities to reveal known defects about the home or property they are selling. To say it another way: A person selling their home must tell the potential buyer about the stuff they know is wrong with it.
The basics you need to know are:
- Disclosure requirements vary by state (importance of having a local pro).
- They must be in writing.
- They are not the inspection report (buyer should get this separately).
- Disclosures don’t require the seller to go looking for problems (that is what the inspection is for).
To give you an example of something a seller should disclose: Let’s say an individual wants to sell their townhome. Two years ago, he or she received notification that there was a known defect in the electrical panel that was installed when the property was built. When a buyer agrees to buy the townhome, the seller must disclose the issue with the panel. If the seller does not tell the buyer about the panel, and it causes damage or harm (maybe a fire), then the seller may be in trouble for not telling them. I will leave it up to your imagination to determine what that trouble might look like.
Part 2: What must seller disclosures include?
My rule of thumb is, “When in doubt, disclose it.” While some sellers might believe this is a turn-off, I believe that it is, in fact, a show of transparency to the buyer that builds a level of trust. Further down the road, this may be paid back to the seller (and the agent). Just you see.
Some of the more common items that sellers should disclose (lead paint not included).
- Health and safety hazards: Disclosing mold, radon, and asbestos is common. Problems with the foundation also.
- Mechanical issues: Known issues with the AC or HVAC should be disclosed. Also, water, sewer, and appliances.
- Structural defects: Again, issues with the foundation or roof.
- Flooding: Previous water damage. This could be due to environmental or plumbing issues.
- Renovations: Work the seller had done on the home must be disclosed, whether it was permitted or not. If you can’t decide if a remodeling project seems big enough to disclose, it’s always best to err on the side of disclosing.
- Pests: Termites and rodents, among others.
- Legal issues: Sellers also must report liens against the property or bankruptcy proceedings that could affect the sale.
Maybe working with a real estate professional is worth it.
Part 3: How do disclosures protect the buyer?
A seller’s disclosures protect the buyer by legally requiring the seller to tell them of known problems. Therefore, a buyer will know about issues, such as known asbestos, flood issues, or potentially life-endangering fire hazards. By knowing about these things, the buyer can assess whether the property is worth what was offered. It also enables the buyer to make the necessary preparations if they still choose to move forward with the purchase.
Let’s use the scenario of a defective electrical panel. If the seller is told that the panel is defective, they may either negotiate a lower price, ask the seller to fix it, or fix it themselves. The buyer may also choose to ignore the seller’s disclosure and live with the defective box.
Now imagine the fuse box didn’t work correctly and a fire started. Who is at fault? The buyer or the seller?
Are you starting to see how disclosures are beneficial for both parties? Can you also see why it’s so important to make sure these are done correctly? Real estate agents should also be able to explain this value proposition to their potential clients, too.
Part 4: What happened in the FSBO example?
After the FSBO sale to the real estate investor, there was a fire in the house. The fire occurred because —you likely guessed it—an electrical panel that was known to be defective.
Thankfully no one was hurt. The fire was put out quickly and only cost about $15,000 in damages. But it could have been the entire house.
Since the fire occurred, there has been a lot of finger-pointing, blame, and stress involved. The buyer threatened to sue the seller for not disclosing the defect. The seller threatened the buyer for not asking for disclosures or an inspection. The investor’s insurance suggests they will not cover this because the buyer didn’t follow the proper procedure to ensure the safety and protection of the asset when buying the property.
You can clearly see how this mess could have been avoided if a real estate agent had been involved.
- An agent would have ensured the proper disclosures forms were filled out.
- An agent would have suggested that the buyer get a licensed inspector to check the property. At this point, the panel would have been identified as a possible problem, allowing the buyer or seller to replace and avoid the fire completely.
Buying and selling a house is a huge undertaking not to be taken lightly, and real estate professionals play an important role. When everything goes smoothly, it’s great and is seemingly easy. But there is a lot that goes on in the background to ensure the protection and safety of everyone involved.
Next time you want to demonstrate the value of using a real estate agent, please think of this story. Agents should take the time to communicate to potential clients how they can protect them from risk.
Stay safe, my friends.
Neil Goradia is the founder of Go Indy Real Estate in Indianapolis. In addition to being an agent, he has a background in fix and flips, land development, and private lending. Connect with him on Facebook.