Truth or Consequences : Disclosure: State law requires sellers to inform buyers of any defect in their home. Failure to do so makes them and their agents liable for civil damages.

Philip and Karen de Louraille spent several months last year looking for a home in north Orange County. Finally, they found one they could afford--a three-bedroom, family-room home in Brea.

Shortly after they moved in, Karen asked a contractor friend to give her an estimate for opening up the kitchen to the adjacent family room.

“The contractor seemed alarmed at the arrangement of the rooms,” she said. “He told me to go to city hall to see if permits had been pulled for the family room.”

There were no permits.

When a city inspector examined the property, there was more bad news. One bedroom was connected to the garage by a small door. The De Lourailles were told that the room could not be used as a legal bedroom unless the door was sealed and plastered over.

“All of a sudden, our three bedroom with family room house had become a two-bedroom house without a family room,” Karen de Louraille said.

“We were shocked,” her husband added. “We had asked the seller face to face and also through the disclosure statement if all was to code.”

As the De Lourailles learned, nothing can turn a dream house into a nightmare faster than the new owner discovering a property defect that wasn’t disclosed by the seller.

Since 1987, sellers have been required by state law to reveal all known defects in their homes. Intentional failure to notify the buyers makes the seller liable for damages. Disclosing defects usually relieves the seller and the realtor of liability to pay for repairs.

Over the past several years, disclosure has become an increasingly important aspect of the resale real estate business.

” . . . We receive thousands of complaints a year against sellers for failure to disclose relevant information about their properties,” said Randy Brendia of the state Department of Real Estate.

“We advise these buyers to contact an attorney and pursue their problems according to the civil code.”

The department also receives several thousand complaints a year against brokers, agents and mortgage brokers for lack of disclosure in a transaction, Brendia said.

These complaints are investigated, and some of these brokers and agents will have their licenses revoked or suspended by the department, he said.

While many disclosure problems are resolved between the buyer and seller and their agents, many also end up in court.

“Approximately one-third of my cases deal with inquiries or claims pertaining to disclosure or failure to disclose,” said Paula Reddish Zinnemann, counsel to the Westwood law firm of Saltzburg, Ray & Bergman.

“The buyer generally will sue the seller, the selling broker and possibly his own agent,” she said.

And in today’s slumping market, the disclosure problem may get worse, some fear. “People get desperate,” Brendia said. “They may think that telling the negatives will hurt a sale.”

The Real Estate Transfer Disclosure Statement has been part of the state’s Civil Code since January, 1987. Before that, there was a common-law responsibility to disclose material facts that might affect the buyer’s decision to purchase the property, but there was not a standardized form for this purpose, said Alex Creel, vice president for governmental affairs for the California Assn. of Realtors.

The two-page document asks the seller to disclose all factors that materially affect the property--the condition of components such as a dishwasher, central heating, electrical and plumbing systems--and the presence of toxic materials, easements, soil problems, neighborhood noise and flooding problems, for example.

The seller also must disclose room additions, structural modifications, alterations and repairs to the property without permit and not in compliance with building codes.

New-home builders must also make disclosure of taxes and assessments, soil condition, environmental conditions, easements affecting the property and how deposits will be handled.

“We want to disclose everything up front so there isn’t any confusion down the road,” Bart Pachino, corporate counsel for Kaufman & Broad Home Corp., said. “There is no value in hiding anything from our clients.”

In some communities, even more disclosures must be made.

For example, in parts of the San Fernando Valley sellers disclose possible routes for the proposed light-rail line. South Pasadena buyers are told about a proposed extension of the Long Beach (710) Freeway through the city.

When a property is listed, the sellers, usually in conjunction with their agent, fill out and sign the disclosure statement.

“I tell my sellers to be 100% brutally frank,” said Annette V. Graw of South Bay Brokers Inc. in Manhattan Beach.

The listing agent must also make a diligent visual inspection of the property, note defects and sign the form. Within three days of receiving the disclosure statement in person, or five days by mail, the buyer can terminate the transaction.

Before the sale can be completed, the buyer and the buyer’s agent, who must also make an inspection of the property, must sign off on the form.

“I don’t consider I have a solid sale until I have all signatures on the disclosure statement,” said Ira Sanders, vice president and sales manager of the Fred Sands realty office in Los Feliz.

Any time during escrow, if a problem arises or if the seller discovers something about the property that he did not disclose, the transfer disclosure statement must be amended, again giving the buyer the right to terminate the sale.

If a problem occurs after the sale, the buyer must prove that the previous owner knew of the condition at the time of signing the disclosure statement.

Properties in probate, foreclosure, court-ordered transfers, trust and sales between blood relatives, co-owners or between spouses in a marital-related decree are not included in the disclosure requirement. However, the presence of toxic materials may still require disclosure in these situations.

While disclosure is serious business, realtors also recall wacky situations that they have had to share with buyers.

Take, for instance, the case of the curious canine that botched the sale of a Los Feliz hillside home with a swimming pool.

During the home inspection, the buyer noticed that the neighbor’s dog was peering down at the pool area from an adjacent deck. Complaining that the seller had not disclosed the presence of the nosy animal, the buyer backed out of the sale.

“The seller hadn’t thought of the dog as a problem he should disclose,” Sanders said.

“When we relisted the house, the seller did note on the disclosure statement that the neighbor’s dog sometimes enjoyed watching the action in the pool, and the house sold without any further problems.”

Sometimes the seller may not be aware of a disclosure problem.

Prudential California Realty in Beverly Hills became involved in litigation when a buyer complained that the seller and his agent had not disclosed that a rock ‘n’ roll band lived next door and would come home at 2 a.m. and would jam at high volume to relax.

“The seller didn’t disclose the nuisance because he worked nights and wasn’t at home when the band practiced, and our agent took the listing in daytime hours when the band wasn’t at home,” said Marv Silverman, executive vice president of the firm.

“During the ensuing litigation, blessings from heaven, the rock group, which was renting the house, left. When the problem disappeared, the claim disappeared.”

Neighborhood conditions can create additional problems.

“Some buyers are naive about potential problems of home ownership such as invasions by ants or other insects, city noises and local conditions,” said James R. Gary, a San Fernando Valley broker.

To avoid disputes, Gary has drafted a humorous addendum to the required disclosure statement.

Because of the rural nature of parts of the Valley, one clause warns buyers that “noises such as roosters crowing, chickens clucking, donkeys braying, horses neighing, sheep baaing, cows mooing, ducks quacking, geese honking, goats bleating must be expected, not to mention the flies.”

But it’s not just neighborhood nuisances or property defects that must be disclosed. Pertinent information about the history of the house--anything that might stigmatize the property or adversely affect its value--must be shared with prospective buyers.

A death on a property within the past three years must be disclosed, unless the death resulted from AIDS. But if the realtor is asked a direct question about the cause of a death on the property, they cannot make a deliberate misrepresentation.

“The (disclosure) law doesn’t immunize a real estate broker and allow him to tell a lie . . . ,” said Creel, of the realty trade group. “He could certainly say, ‘I’m not prepared to answer that question.’ ”

Broker Vince Cervantes of Century 21 Rainbow in Cudahy had to tell a buyer about a murder in a probate home he sold in North Long Beach. A disgruntled tenant shot and killed his landlord, who had come to collect the rent.

“My client wasn’t bothered by the murder,” Cervantes said, “because the house was in a neighborhood of well-tended houses and the value of the property was not adversely affected.”

Even the supernatural has been disclosed.

Cindy Royall, an agent with James R. Gary Ltd. in Woodland Hills, told a buyer that a friendly ghost had been exorcised from a San Fernando Valley home she listed. The house had been featured in a television show on parapsychology.

“The buyer told me he was grateful for the information and signed off on the disclosure,” she said. “You have to disclose anything that might be a factor in the sale.”

Problems caused by a failure to disclose can take a heavy toll, both in financial and emotional terms, whether they are settled in or out of court.

The De Lourailles, for example, were told by the city of Brea to demolish their patio, which sloped toward the house and prevented rainwater from draining properly, and to bring the family room up to code or remove it.

They decided to consult an attorney, Jan Flory of Fullerton, to recover the cost of the demolition and repairs.

The case was settled out of court with no admission of liability on the part of the sellers or their agent. The cost, however, was steep. The sellers forgave a $25,950 second mortgage and the agent paid $4,000.

“My case was stronger from the onset because the sellers had stated in the disclosure statement that all was to code and done with permits,” Flory said.

“We attempted to work out a settlement to everyone’s satisfaction,” Warren Wymer, the attorney representing the agent, said.

The sellers, a retired couple, said they sold the house in good faith. Some of the conditions, they said, predated their ownership of the house. They said the enclosed patio was built by a former owner, who they believed had a permit to enclose the patio.

“I can’t believe the anguish this situation has caused us,” the seller’s wife said in a telephone interview from their new home on the Colorado River.

“You would have had to be a builder or contractor to tell this wasn’t a legal room,” said Zeinab Baset, an agent of Tarbell Realty in Yorba Linda, who represented the De Lourailles.

Baset said that she and her clients had repeatedly asked if there were permits for the room and were told that there were. Presale inspections had not turned up anything unusual about the house. Usually, appraisers make a visual inspection to see if additions have been made in a professional, workmanlike manner, she said. A lender had offered financing on the property.

More importantly, the signed disclosure statement stated that there had been no additions made without permits.

“This was an unusual case,” Baset said. “I often sell houses with non-permitted rooms, but they are disclosed.”

“The disclosure statement should reflect the condition of the property as known to the seller--the things a reasonable inspection would reveal,” said attorney Flory. “It’s not a warranty. It’s just a disclosure of defects.”

Realty agents are often included in disclosure lawsuits, and most brokers carry errors and omissions insurance for protection.

“There isn’t much you can do with a suit-happy person. People who feel victimized are ready to assault,” said Cheryl Cosner, a broker at Century 21 Hillcrest in Mission Hills.

Cosner and her husband, Rich, train their agents to make detailed notations on the disclosure statement and to continue documentation until close of escrow.

Fred Sands Realtors has in-service training and educational seminars to teach agents about the ins and outs of disclosure. Also, a three-month mentor-protege program helps new licensees learn the process.

To avoid disputes over the working components of the house--dishwashers, plumbing, built-in ovens and cooktops, wiring and water heaters, for example--many realtors advise sellers to buy a home warranty policy for one year.

Such plans do not usually cover building and zoning code violations, repair of cosmetic defects or removal of toxic materials or asbestos. This leaves a gray area in which disputes may occur.

“Some buyers are unwilling to accept the fact that with a house problems can occur,” attorney Zinnemann said. “They want the broker and the seller to be insurers of the condition of the house.

“There is often a question of perception and expectations of the parties involved. The seller may be used to a condition and no longer notice it. The buyer will consider it a major problem.”

When Brian and Shelley Kadison sold their San Fernando Valley house last year they disclosed that an exterior concrete block wall had cracks, and they adjusted the price to reflect the condition. To satisfy the buyers, they replaced the wall. Several months later, the new owners complained that the roof over a covered breezeway leaked in a heavy rain storm.

“I said that was it,” Brian Kadison said. “We wouldn’t pay to set it fixed. It had never leaked while we lived there.”