The FIRST rule when Selling Real Estate is:
" Disclose! Disclose! Disclose! "
But how many of you know what the verb,
"to Disclose",
refers to in Real Estate?
Embedded Files
Declaring if a home is being sold "With a Warranty" or "As Is" is the FIRST of many
disclosure statements
made in a typical Disclosure Process.
"With A Warranty" -- Details are provided about what is and is not warrantied and for how long. In addition, material facts and material defects that define the home's "as is condition" must also be "disclosed". Just because the home comes with a Warranty doesn't mean it's Perfect even if it's a new home. Warranties do NOT mean it's coming without Defects, or there are no facts that might affect a Buyer's opinion of value. All relevant information about the "as is condition" that might affect a buyer's opinion of value must be disclosed during the marketing process and prior to entering into a Binding Contract to Sell to avoid seller "mis-representation".
"As Is (aka without a warranty)" - 'As Is' sales are sales absent of any expressed or implied warranties for something to function into the future. As with Warrantied Sales, 'As Is' sales require a seller to disclose material facts and material defects that define the home's "as is condition" for all the same reasons.
So, an "As Is Sale" denotes the type of sale it is
(with or without warranty).
The "As Is Condition" at time of
Marketing the Property, Bid Consideration,
Binding Contract Ratification/Binding Contract Acceptance /Transfer of Title,
define the condition the Buyer allowed for when make a Binding Offer.
That exact same 'As Is Condition' must exist,
with no additional defects, at time of Payment and Deed Conveyance
for a Seller to avoid claims of "misrepresentation.
From my Real Estate Agent Training course in 2002.
I can still remember the day in my Licensing Training course when
the "ah ha" moment came related to "Disclosure".
"If the BUYER didn't know the defect existed at time of Contract Ratification, the defect can NOT exist at time of Payment and Deed Conveyance. It must either be repaired or accounted for. The Previously Agreed upon price was for a home without that defect and that is what must be conveyed. "
Misrepresentation is what happens
if a seller falsifies or omits facts during the marketing process
that causes a Buyer to "over offer" for the property as part of
a Binding Contract Ratification/Acceptance process.
Misrepresentation is tantamount to "bait and switch".
Misrepresentation by a Seller transpires via false statements as well as omissions related to the "as is condition" of the property when it's being marketed. That can transpire with warrantied sales on new homes or non warranted sales (as is sales) for used homes.
Misrepresentation results in an incomplete and inaccurate understanding of material facts and defects that may cause a BUYER offer more than they should, and enter into a BINDING AGREEMENT TO PURCHASE, for more than they would if all material facts and defects were known.
The "bait and switch" analogy should be clear now.
A Seller's Misrepresentation of facts and omissions comes in two Flavors...
Negligent Misrepresentation is accidental
Fraudulent Misrepresentation is with intention to deceive.
When it comes to damages, it doesn't matter if it was accidental or intentional. The damages are the initially the same. In severe cases of Fraud, treble damages may apply.
Examples
If the Seller knows or should have known the furnace installation configuration represented a fire and explosion hazard, and did not disclose that, that would be misrepresentation.
The categorization of negligent or fraudulent may be debated, but that's irrelevant for basic damages.
The Seller was supposed to be a RESPONSIBLE SELLER and s/he was supposed to know about material facts and defects that would affect the Buyer's perception of value and DISCLOSE THOSE, prior to entering accepting a BINDING CONTRACT to PURCHASE/SELL.
If the Seller knew or should have known a building was going to be built in a year that was going to block the million dollar view on a home being sold and failed to disclose that, s/he would have "omitted or concealed a material fact", as compared to a material defect. That type of thing is also "misrepresentation", and a no-no, with consequences, too.
Misrepresentation has consequences.
CAR SALES vs HOME SALES
Non-Binding Agreements Prior to Sale vs
Binding Contracts to Buy/Sell before Due Diligence, Payment, and Deed Conveyance
With Car Sales, you can verbally agree on a price, but that price agreement by default, is NOT binding.
Unless you demand a binding price in writing before or after doing your due diligence, the seller can change their mind on the sale amount or just back out of the sale without consequence.
The Due Diligence process for car buying happens before you agree to a Binding Contract, which typically happens at the SAME TIME as payment exchange, Title Transfer and property transfer (vehicle transfer).
Car sellers are "supposed to" declare defects to you before you make an offer and purchase the car.
If they don't, and you find them before making payment and taking title, you can NOT file claims for misrepresentation, because no Binding Contract was established based on declarations of As Is Condition to start with.
If you find material defects after purchase that you feel the seller knew or should have known about and weren't disclosed, you can file claims for misrepresentation.
With Home Sales, the standard process involves agreeing to a BINDING CONTRACT of sale that establishes a transaction price, inclusive of only the material facts and defects disclosed during the marketing process weeks or months prior to Payment for Property, Deed Conveyance, and possession of property.
A BINDING CONTRACT binds the seller into selling the home in the As Is condition that was disclosed during marketing and agreed upon with the Contract Price, with no ability to back out.
To make this type of Contract, "extra" Binding, Title to the property transfers at time of Contract Acceptance, with only a deposit provided. This is a shocker to most until they are told it and shown the clause in the contract that does it (13B for the CAR Contract).
Then, the home must then be delivered weeks or months later in the SAME As Is condition it was disclosed to be in at time of Marketing and Binding Contract Acceptance.
A Buyer's Due Diligence is done AFTER a Binding Contract is established, after Title Transfer has transpired and before Full Payment and Deed Conveyance. It's easy to see this is FAR DIFFERENT than a car purchase, now.
This Due Diligence period after Contract Acceptance is intended is to CONFIRM disclosure statements made by the Seller about As Is condition. It is NOT intended to discover defects. Defects discovered during this time represent documentable misrepresentation, before the final payment for the home is even made.
A specific performance lawsuit could be filed before Deed Conveyance if it was deemed the Seller intended to try to Convey the property with non disclosed defects. Or the transaction can be completed and the Buyer can sue after the fact.
The difference between Car Sales and Home Sales is tied to the existence of a BINDING CONTRACT in a home sale prior to payment, which does NOT exist in a car sale.
This process is required due to the advanced complexities and costs of establishing financing and preparing Deed Documents, as well as doing due diligence.
This Car vs Home analogy exposes a really important difference...
GOOD FAITH IN NEGOTIATIONS IS REQUIRED IN BOTH SITUATIONS, but in Home Sales because TITLE TRANSFERS at time of BINDING CONTRACT ACCEPTANCE and that doesn't exist is car sales, there is difference!!
To ensure "Good Faith" in Negotiations in the Sale of the Home, where a Binding Contract to Sell is created BEFORE transfer of funds, the title to the Home transfers to the Buyer at time of "CONTRACT ACCEPTANCE", not at time of Payment for Property and Physical Possession!!!
YIKES!! YES. As a seller, Full Control of your home's destiny is GONE long before you are paid for it and before you move out!
This BINDING CONTRACT concept creates a Legal Agreement that provides buyers standing to sue for "specific performance" to complete the transaction as promised, should a Seller try to back out or deliver a home with non-disclosed defects or absent material facts that were important.
Home Sellers can NOT back out of a Contract once signed!!
To mitigate LEMON HOME SALES SCHEMES, where home sellers try to sell a lemon and then back out after signing a Contract when they are caught, so they can try again, Home Sellers can NOT back out of a sales contract for non-disclosed defects!!
Saying this another way... SELLERS HAVE NO ABILITY TO CANCEL BINDING AGREEMENTS TO SELL if conditions are found after Contract Acceptance that they should have disclosed!!!
Saying this yet another way, with more technical terms, Sellers's have "no condition contingency kick out" clause, that allows them to "kickout" of the contract due to conditions found or exposed by the Buyer. Buyers can kick out if they find conditions unsatisfactory due negligence, fraud or for other reasons, but sellers can NOT.
EXAMPLE
If the home was presented to be free from $10k in defective insulation in the attic at time of Contract Acceptance, then weeks or months later, at time of Payment and Deed Conveyance, it the home must be free from defective insulation OR the price for the sale has to be reduced by the value of the defect to allow the BUYER to use the monetary reduction to make the home what was promised.
If after Contract Acceptance and before Payment and Deed Conveyance the Seller is presented with this defect and the seller says, "I didn't know there was $10k in damage in the attic. I want to cancel our contract. "
The buyer can say, "Tough Nuggets pal!!".... and then s/he may go on to say one or more of the following...
"As the Seller, it was YOUR RESPONSIBILITY to know what you were selling and YOUR RESPONSIBILITY to DISCLOSE all material defects and material facts properly BEFORE I made a Binding offer to Purchase and/or Before you accepted my Binding Offer to purchase!!"
"Your lack of personal responsibility is NOT my problem. You screwed up."
" I contracted to purchase a home that was presented FREE OF insulation defects in the Attic, and in 4 weeks you have to delivery me your home FREE OF insulation defects or lower the price we agreed upon, so I have the money to correct those myself. "
" A failure to make this adjustment will result in claims of negligent or fraudulent misrepresentation, and both will pay out the same in court".
USED HOMES vs NEW HOMES
The differences are far less than the words convey
Each can be sold like the other via a few changes to terms
"USED HOMES"
ALL "used homes" are sold "As Is" by default.
"As Is" is the juxtaposition to the "with warranty" clause AND BOTH of those types of sales still require disclosure statements to define the "As Is Condition" of the property.
"As Is" does NOT mean, "What the Buyer can figure out". Bury that thought 6 feet deep.
Sometimes the Seller will agree to pay for a third party warranty that covers some items, but the Seller will seldom if ever promise to personally warranty items into the future. That's an "As Is Sale with a Warranty". Isn't that kind of like a Warrantied Sale? Yes but no.
If that is done it must be done in writing, with any warrantied details documented, because by default that promise is assumed not to exist.
As you can see, an "As Is Sale" and the "As Is Condition" related to issues of misrepresentation are really loosely related and arguably unrelated when put in proper context.
"NEW HOMES"
Juxtaposition to the sale of a "used home" is the sale of a "new home".
By Law, all "newly built homes" must be sold with some level of "warranty" for future performance for "some items" for a designated period of time. The first buyer of every home is the "beta tester" for the product. Thus, consumer protection dictates they deserve mandatory protection with some type of warranty, but be sure to read the warranty. Some items may be excluded!!
Thus the home is not sold "As Is" because it's sold "with a warranty".
BUT, this does NOT suggest new homes are defect free and it does NOT suggest no disclosures are required to detail the "As Is Condition" of the home for protection against misrepresentation.
A new home could have a defect that is not warrantied. For sure. As long as that defect was or is disclosed during the Buyers Bid Consideration process and acknowledged properly by both parties PRIOR TO Contract Acceptance, it's all still Kosher.
The new home can be sold with a Warranty and a Defect, just like a used home can be sold with a defect and a lesser warranty, typically from a third party instead of the seller.
"But what if all but one of the doors closes almost perfectly, and I have to push just a little hard on one of them?"
A Fair question. Open to interpretation. Make them fix it before buying, or Accept the defect and tell them you're offering $100 less than asking price to account for the sticking door.
The Scratch and Dent Sale Analogy applies to ALL Home Sales!!
Think of the sale of a ALL HOMES as a "scratch and dent" sale where the seller is OBLIGATED BY LAW and CASE PRECEDENT to describe all known scratches and dents in a clear enough manner that that the BUYER could assign a monetary value on the defect or fact, BEFORE making an offer.
The Seller's obligation to describe all "scratches and dents" (aka material facts and defects that might affect the buyers perception of value is done via "Disclosure Statements" and a "Disclosure Process".
The Disclosure statement could state, "No known material facts or defects".
That's a valid disclosure statement and that happens a lot in states that allow free form disclosure statements.
That does NOT mean the home is PERFECT. It suggests that anything that might not be perfect is easily visible for consideration by a Buyer during a casual walk through of the property.
With that last sentence we introduced another concept related to disclosure. One need not disclose defects that should be patentably obvious to a layman who takes a casual stroll through the home and around the property as part of the sales process, without investigating any attics, crawl spaces or other spaces not easy to fully access in laymen's garb.
What's "material"?
(aka how big does defect need to be to require disclosure?)
The first questions that always come up once Seller's and Buyer's get this "scratch and dent" sale concept with a requirement on the Seller to be responsible and disclose are:
"Who and what defines what's material or relevant?" Good question. There is 'some grey', but not nearly enough to cheat big time.
"Is the small ding in the drywall in the living room that will cost $100 to touch up relevant enough to require a specific disclosure statement?" In short, Yes. Probably. Especially if it's hidden behind a vase, painting or chair. But if not, what's the consequence?
"What about homes that are in pretty bad shape all around, but livable. They have dings in all the walls and most of the doors don't close right, but they are livable. Disclosing every ding is impossible!!". It is. This is a tougher one to handle, but it can be handled with a statement like,
"The home is in average to poor physical condition. Lots of dings, doors that don't work etc. However all defects known are easily visible and we know of none that are not obvious via a walkthrough of the home. There are no material defects in the areas you can not see when walking through the home for purposes of viewing it for making an offer. "
These are all good questions. There is room for disagreements and error. Get the bigger picture first. We'll get into the nitty gritty details later.
End of the BASICs and ADVANCED education
for Real Estate DISCLOSURE Requirements.
It's just that simple
May this be the end of Confusion for Profits
by Brokers and Agents of an unhealthy Brother.
May this be the end of Confusion for Profits
by Brokers and Agents of an unhealthy Brother.
Please read the rest of this website in the Context of Used Home Sales
between two parties that are using Real Estate Brokers,
because that is the Scenario that gave rises to this website.
Please exclude the idea of purchasing properties at
Auctions or from Banks for now,
because some of the rules for Disclosure
may not apply equally or at all for those.
Please read the rest of this website in the Context of Used Home Sales
between two parties that are using Real Estate Brokers,
because that is the Scenario that gave rises to this website.
Please exclude the idea of purchasing properties at
Auctions or from Banks for now,
because some of the rules for Disclosure
may not apply equally or at all for those.
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