As buyers and sellers, you should be aware of your rights and responsibilities relating to disclosure of property conditions. These exist because of laws enacted by Congress and state legislatures and from principles that have evolved from case law or court opinions. Many states have adopted laws requiring property sellers (record owners as well as equitable owners) to provide buyers with a written property disclosure statement or report prior to the signing of a purchase contract, regardless of whether they're using a RE agent or broker.
Although the requirements vary from state to state, the report typically contains questions about the existing structures and major systems, such as the basement, roof, plumbing, heating and electrical. In addition, the seller may also have to disclose whether there are areas of wetlands and floodplain on the property, excavation and fill, underground storage tanks, hazardous substances, defects and dangerous conditions, and issues that could affect title (e.g., boundary disputes, encroachments, easements, common driveways, judgments and liens). The particular state law spells out types of property transfers that are exempt from the law – such as transfers through probate, foreclosure, divorce.
If you are a buyer, you ought to consider attaching the disclosure statement to your purchase contract and incorporating it by reference in the contract. By using a clause like “The property disclosure statement is attached hereto as Exhibit ‘X' and incorporated herein by reference”, the disclosure report becomes part of the purchase contract, just like any other provision in the contract. Doing this could improve your chances of terminating or renegotiating the purchase contract if it turned out that something in the report was inaccurate or not true.
Another benefit would be that it would flush out situations where the seller was not being truthful in the disclosure statement. So, if a seller refuses to allow the disclosure statement to become a part of the purchase contract, that should tell you that perhaps the seller is trying to hide something. (If a seller refuses to give you a disclosure statement, that should raise a big red flag!)
In addition to property disclosures required by specific state laws, sellers may have to disclose any “material facts” that they have knowledge of relating not just to the property itself, but also the surrounding area. This is a gray area and may vary from state to state depending on specific rulings that have emerged from individual lawsuits.
For instance, in some states sellers may have to disclose if a violent crime took place on the property or if the property is haunted, while in other places, there is no requirement to do so. However, I have always taken a different view and that is, when in doubt, disclose. If you have to ask the question “should I disclose?” then chances are, you should.
I define “material fact” as any fact that reasonably could be relevant to a buyer's decision to purchase. It doesn't matter if the seller doesn't think it's relevant so long as reasonable people could agree that the issue or question could be of concern to the buyer in some legitimate way. For instance, in my area there's a property owner attempting to force the local government to permit a large quarry operation. This has been well-publicized with yard signs all over the area saying “ban the quarry”.
I recommended to one owner whose property is contiguous or very close to the potential quarry property that he disclose the existence of this situation to potential buyers. Suppose a seller knew that the state department of transportation intended to put a turnpike exit ramp down the road, or that there was a sewage treatment plant around the corner, or that the property across the street was going to be developed into a school or apartments or whatever.
The seller should disclose those facts because they could easily be considered “material” to the buyer's decision to purchase. Maybe the buyers wouldn't back out of the deal even if they knew about these conditions, but the point is that they have the right to be told about them and then to make their decision with those facts in hand. Aside from avoiding potential lawsuits, there's another benefit to disclosing: a good night's sleep.