When a House Has a Major Defect : States, realty boards can help home buyers facing undisclosed, hidden problems.

A young couple moved into their first home, only to discover a false wall in the basement foundation hiding crumbling cinder block. Repairing the damage, the couple knew, would cost thousands of dollars--money they didn’t have after cleaning out their savings accounts for the home purchase. They felt certain the seller knew about the basement problem, and possibly the realty agent, too.

Given that they’d already closed on the property, do they have any recourse? Real estate specialists across the country respond with an emphatic “yes.”

The most obvious avenue would be to take the seller to court with a civil suit, staking a claim for fraud (though in the young couple’s case, the seller had moved out of state, leaving no forwarding address).

In addition, if the couple truly believed the realty agent failed to disclose his knowledge of the basement defects--or ought to have known and didn’t find out--they could also sue the agent or file a complaint with the real estate commissioner in their state.

In many states, such as California, disgruntled buyers, such as the young couple, can win monetary damages through state “recovery funds” if they prove the real estate agent failed to tell them all he knew about problems with the property.

Buyer’s Own Tough Luck

Other state commissions go even further--taking complaints and paying damages simply because the realty agent failed to seek out information about problems with the property.

The strict notion of “buyer beware” in realty transactions--that it’s the buyer’s own tough luck if he unknowingly gets stuck with a lemon of a house--is declining quickly. More states are becoming consumer oriented, says James A. Edmonds, California’s real estate commissioner.

As an example, he cites a California law, effective since 1987, that requires all home sellers to fill out a detailed questionnaire covering defects in their property. Potential buyers can review the document before they make up their minds.

Realty brokers also have disclosure obligations under the new law, including the requirement that they carefully inspect a property they have listed. A study on the results of the new law is due out in six months.

“To our knowledge, the law has been very effective,” Edmonds says. “We don’t have too many cases where the real estate broker doesn’t comply with the disclosure requirements. They bend over backwards to protect their liability.”

One state whose commission is eager to hear the complaints of disgruntled buyers is Maryland. Under Maryland law, says Charles S. Colson, executive director of the state’s real estate commission, agents are responsible both for what they know and should have known about a property. That includes problems with any major components of a house--a leaking roof or basement, a central air-conditioning or furnace defect or an electrical or plumbing problem.

If disgruntled Maryland buyers chose to lodge a complaint with the commission--and the investigative unit finds the claim solid--the matter could go to a hearing. Then if the hearing panel finds the agent in the wrong, strong action can be taken. The agent could face a reprimand, find his license suspended or revoked or confront a heavy monetary penalty.

The good news is that through the Maryland commission, a wronged buyer could be compensated for the defects--in the young couple’s case for the basement problems--from the state’s Real Estate Guaranty Fund. The buyers could collect up to $25,000 from the fund, after which the agent would have to reimburse the state for its payout.

Complaints to Boards

In addition to a lawsuit or a complaint to a state commission, buyers can press their claim through a local realtors’ board. Realtors are licensed agents who--through their local boards--are also members of the National Assn. of Realtors.

“It may do the buyers some psychic good if they feel they’re bringing the realtor to justice,” says Chicago-based Robert Butters, deputy general counsel for the realtors’ national association.

Realtors must abide by certain ethical standards and their boards have formalized methods for being sure they do. Assuming that in the young couple’s case a realtor was involved, the couple could bring a complaint against him under Article 9 of the association’s code of ethics.

Among other things, the code says a realtor shall “avoid misrepresentation or concealment of pertinent facts related to the property or the transaction.” Still, it adds that “the Realtor shall not, however, be obligated to discover latent defects in the property.”

To activate the realtors’ complaint process, your first step is to write a letter to the board in the area where the property is located. A grievance committee will then investigate your complaint.

Conscious of Ethics

If the committee believes there is reason to proceed, the matter will go before a hearing panel of other realtors. Then, if the panel finds a violation, it has a number of options. It can warn or reprimand the realtor, suspend him or expel him from the organization, or fine him up to $1,000. However, the complaining party has no claim to the fine.

With more customers becoming aggressive in pressing their complaints, agents are becoming more conscious of their ethics, according to Gerald Matthews, executive vice president of the Florida Assn. of Realtors. “Realtors are very careful to do things exactly as they should to avoid lawsuits,” he says.

For the young couple with the basement problem, a basic method of recourse is obviously to sue the seller, though “these are tough cases,” cautions Douglas M. Bregman, a real estate attorney in Bethesda, Md.

When it comes to settled properties, it’s of no help legally under most state laws to show that the seller broke the sales contract, because the contract is effectively dissolved at the settlement table, Bregman says. Instead, the buyer has to prove actual fraud on the sellers’ part.

Formidable Defense

The young couple, for instance, must show that the seller knowingly deceived them by erecting the false wall to conceal the faulty foundation and then deliberately failed to tell them.

But even in so seemingly blatant a case as that, the seller can mount formidable defenses--for instance, that he bought the house after the false wall was put up or that he hired a contractor who he believed fixed the problem.

Even though such cases are tough to win in court, Bregman says that buyers can often be effective in winning out-of-court settlements. And he says you shouldn’t be discouraged that a seller has moved out of town. All the buyer needs to do is obtain a forwarding address. Keep in mind, however, that it’s far easier for a home buyer to press his claim before settlement than after. In virtually all cases, buyers should consider making their sales contracts contingent on completion of a bona fide home inspection. That way, many defects will become apparent before the property is settled, allowing the buyer to demand changes or renegotiate price before the deal has gelled.

Because an increasing number of sellers are being sued these days, Bregman believes an inspection is also in the seller’s interest, since it shows he willingly opened his property to scrutiny.

Says Bregman: “Whether I’m representing the seller or buyer, I always push for a thorough inspection by a reputable inspector because that gets everybody off the hook.”

Distributed by the Los Angeles Times-Washington Post News Service.