Window to the Law: Reduce the Risk of Misrepresentation Claims

Misrepresentation of a property’s condition is consistently among the top claims against real estate professionals. Typically, an unhappy purchaser brings a claim after discovering a physical defect or other undisclosed condition they believe should have been disclosed prior to purchase. To reduce the risk of a costly misrepresentation claim, it’s critical that real estate professionals are familiar with applicable disclosure laws.

Real estate professionals generally owe a duty to disclose any known material fact under state law and, pursuant to Article 2 of the REALTOR® Code of Ethics, REALTORS® must disclose material facts, which are facts that a reasonable buyer would consider important in deciding whether and on what terms to purchase a property. In addition, most states require some form of a seller’s disclosure informing buyers about known defects and other property conditions, such as water damage, mechanical problems, and structural issues.

Failure to properly disclose can lead to misrepresentation claims, ranging from fraud to negligence and in some states, innocent misrepresentation.

A real estate professional commits fraud when they make a statement of material fact, knowing it to be false and intending a purchaser to rely on the statement, and the purchaser relies on that statement in making the purchase.

Negligent misrepresentation arises from a lack of care in obtaining or delivering accurate information to the buyer, for example, when a cursory examination of the property would indicate the seller’s statements are incorrect.

Negligence claims can involve not only what a real estate professional knew about a property, and failed to disclose, but also what they should have known.

The price of non-disclosure can be steep. One court awarded $170,000 in punitive damages for a real estate agent’s reckless disregard of the truth. In this case, the agent was acting for an investor, and was involved in the property during its purchase and subsequent extensive repairs for water intrusion damage. Yet, when completing the disclosure form for her client, the agent crossed out specific questions regarding water damage and repairs.

Follow these best practices to help avoid a claim of misrepresentation for failure to disclose:

1. 1. Always ensure that material, known facts and defects are disclosed to the buyer. Review the seller’s disclosure to ensure all questions are answered, and if the seller refuses to disclose a material fact or defect that you know about, you should make the disclosure.
2. Do not complete a disclosure form on behalf of a seller client. If a disabled client needs assistance, advise the client to have a friend or family member help them.
3. 3. Immediately correct any misstatements you or the seller may have made, upon learning of the error.
4. Document and keep information received from the seller and provided to the buyer, including answers to questions about the condition of the property. Document any research done on the condition of the property, including the sources of information.
5. Stay informed about any “red flags” of defects that may be common to properties in the area such as zoning changes or plumbing issues. Discuss any red flags with the seller and have them investigated. If the investigation is inconclusive, alert the buyer to the potential red flag and its consequences.

For more information, check out nar.realtor/hazards-disclosures.

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