Tell It Like It Is : If you’re a home seller, it’s vital you disclose every flaw in the house--and the neighborhood

When Andrew Loughrin bought his four-bedroom house in northern San Diego County in 1989, he signed an “as-is” clause in his purchase contract. The agreement implied that there were no guarantees about the condition of the rambling 4,000-square-foot house, which sits atop a hill outside Fallbrook.

Soon after closing on the $335,000 home, Loughrin said he discovered “unexpected” defects, including foundation problems, a shoddy roof and a substandard septic system.

“When I got in, it was a horror story,” said Loughrin, who estimates his repair tab at $250,000.

He sued both the seller and the seller’s real estate agent, claiming they were required by state law to disclose known defects despite the signing of the as-is clause. The case is set for jury trial in San Diego Superior Court, said Vista attorney G. S. Wampler, who represents Loughrin.

However, in a pretrial hearing in 1992, San Diego Superior Court Judge Thomas R. Murphy ruled that Loughrin had waived his right to full disclosure because he signed the as-is clause.

Loughrin appealed the judge’s ruling, and one year later, the state’s 4th District Court of Appeal overturned Murphy’s decision. The court affirmed that an as-is clause does not insulate the seller from future claims arising from a failure to comply with the disclosure requirements.

Loughrin’s case follows a several-year tradition of the Legislature and the courts reinforcing the importance of home sellers disclosing everything to buyers.

In 1987, state lawmakers passed a law that required sellers to make full-written disclosure of the condition of the property and all known material facts that could affect its value. The law also requires that sellers present potential buyers with the standard Real Estate Transfer Disclosure Statement as soon as possible before the transfer of title.

Sellers must complete a checklist of certain features of the property, such as the condition of the plumbing and wiring in the house and type of water supply, as well as indicate any problems that they have personal knowledge of that might affect the property, such as foundation settling, leaky roofs or non-functioning electrical.

And no longer is it enough to tell prospective purchasers about the crack in the foundation, sellers also must tell them about the crack house down the street.

“The disclosure requirement covers more than just the structure of the property itself,” said Elizabeth A. Moreno, an attorney with the Los Angeles law firm of Rezak & Katofsky. “It extends to exterior (neighborhood) factors, that even though remote, may affect the desirability of the property.

“It is in the seller’s best interest to disclose any defects to avoid being haunted by future lawsuits in the subsequent months or years,” she said.

And although the disclosure law was intended to be all-inclusive, new legislation and new court rulings are continuing to pile on duties for sellers, including:

--Federal law requires disclosure if the home lies within a flood hazard area, while state law requires that buyers be told if the home sets on or near an earthquake fault. Both disclosures require a special form.

--Home sellers also must indicate the presence of any earthquake weaknesses by filling out the Seismic Safety Commission’s disclosure form.

--The state Legislature sought to protect people living in fire-prone areas, which show up on maps maintained by the California Department of Forestry. A fire hazard disclosure form calls for informing the buyer of the risk of fire and in certain unincorporated areas, that fire protection services may not be readily provided by the state.

--A “military ordnance location” disclosure becomes necessary if the seller knows that a former military training ground, which may be presumed to contain explosives, is within one mile of their property.

The pressure to disclose is not just coming from government. More sophisticated home buyers are demanding to know everything they can about a property before making a purchase.

California’s disclosure law--intended to clarify such issues and followed by other states nationwide--has in many cases resulted in more confusion than clarity. The scope of the law has been broadened to an extent that both home buyers and sellers, as well as their real estate agents and attorneys, freely admit to not fully understanding all of its implications.

Some legal experts say the disclosure law is being stretched to its limit.

Sandra C. Stewart, a partner with Cox, Castle & Nicholson in Century City, once represented a builder who was accused of not disclosing strong winds over the buyer’s new home.

“Imagine if the courts asked, ‘How windy does it get? Twenty miles per hour? Forty miles per hour?’ Most homeowners wouldn’t want to be saddled with (figuring out how to disclose) that,” she said, adding, “The line the courts have drawn is getting fuzzy--it’s not as clear anymore.” In this case, the buyers felt that the severity of the winds was greater than they anticipated. The builder did not disclose the winds at all, and the case was settled. Neither side would disclose the terms of the settlement.

A growing number of disclosure cases are arising from defects near the property, Stewart said.

“These days, sellers must be concerned about problems that take place off the property,” she said, citing the case of Alexander et al. vs. McKnight, in which homeowners were required to disclose the effect that one disruptive household might have on neighborhood property values.

In the lawsuit, the plaintiffs sued their neighbors for operating a tree-trimming business that produced excessive noise and resulted in a large number of cars parked in the front yard, among other nuisances. The Superior Court of San Diego County found that the McKnights’ conduct constituted a “pattern of offensive and noxious activities.”

The court also said that when Elaine Alexander and her neighbors who joined the suit wanted to sell their homes they would be required under state disclosure laws to disclose that the defendants were “difficult neighbors.” The stigma likely would result in decreased value for their property and the plaintiffs were awarded $24,000 as a result.

An appellate court later reduced it to $4,000, reasoning that the behavior causing the nuisance had been eliminated following the lower court’s order. Yet it ruled that the trial court properly determined the plaintiffs should disclose the previous problems to potential home buyers.

Beyond revealing a neighborhood nuisance, assessing the prevalence of crime is a growing concern when it comes time to sell a home.

“You know you’re living in an area with five burglaries on your street and six months later, your buyer gets robbed. Should you have said something?” Stewart asked. “You always err on the side of disclosing. If you’re thinking about it, tell it.”

Added Thomas McCormick, a partner with the Lerner & Veit law firm in San Francisco: “If it can affect the value of the property, then you have to disclose it.”

Yet making this determination is not so easy, he acknowledged.

“The harder questions are when a person calls and says somebody thinks their neighbor sells drugs,” McCormick said. “Is there any proof? Have they ever been arrested? There is a case where the buyer sued the seller because of someone suspicious. The buyer said everybody in the neighborhood seems to know about it.”

This puts the seller in a difficult situation. McCormick said unless the person has a criminal record, sellers should be careful not to make such accusations or they could be sued for defamation.

“I advise them to not allege anyone is involved in criminal activity, but to tell buyers there are some strange circumstances going on in the house three doors down. It discloses the problem without opening up the agent or seller to defamation charges,” McCormick said.

“So the best thing to do is say, ‘We don’t know what the problem is three doors down,’ and tell them to check with the police department. You kick the burden back over to the buyer. . . .”

Further complications arise when disclosure obligations are weighed against the possibility of killing the sale.

Disclosure of criminal activity is a sensitive issue for sellers because: “The problem is, a lot of people don’t want to disclose it, and they want to get out of the neighborhood,” McCormick said.

Another tricky area is the seller’s liability for disclosure of the circumstances surrounding any death on the property.

The law states that if the death occurred within three years and it affects the value, it must be disclosed, according to San Francisco attorney Marc Weissman. However, if the death occurred three or more years ago, it does not have to be disclosed.

The law still raises the question about which types of deaths impact a property’s value. A murder 10 years ago is much more objectionable to most buyers than the fact that a former occupant more recently committed suicide in the garage.

“Or, if mom died in the kitchen of a heart attack, would that bug you? . . . If you’re smart, you’re gonna disclose that grandma died in her sleep at age 109,” Weissman said, explaining that most deaths by natural causes or following a long-term illness are not offensive.

The disclosure issue becomes even more complicated when it involves AIDS.

In 1986, state lawmakers decided that the fact a former homeowner or tenant had died of AIDS is not relevant to “the value or desirability” of a house or apartment. The law states: “No cause of action arises against an owner of real property or his or her agent for the failure to disclose (to the buyer or tenant) that an occupant was afflicted with or died from (AIDS).”

Yet the disclosure law states that sellers must respond honestly to direct questions. For example, if an agent or buyer asks if anyone died of AIDS in the house, is the seller obligated to disclose what they know?

Said attorney Weissman: “I think the seller must answer truthfully.”

Carolyn D’Agosta, a broker with Anne Winton & Associates in Rancho Bernardo, said while both the seller and the agent are named in most disclosure lawsuits, the seller bears the prime disclosure burden.

“The Transfer Disclosure Statement is a seller’s disclosure statement. The real estate person does not live in the home or the neighborhood,” said D’Agosta, who teaches courses on the disclosure statement for the California Assn. of Realtors. “The seller lives in the home--that’s really where we want to get the information from. Nobody knows your house like you.”

“For example, in a home where there’s a roof problem and the property owner went through and painted over the stain, the real estate agent is not going to know about it. (Agents) don’t do roof inspections,” she said.

The responsibility of the individual seller also was stressed by attorney Michael Scholtes with the Oakland law firm Fong & Fong, which specializes in community association law.

Sales of condos require even more complex disclosures because of homeowners association rules, the shared use of common areas, payment of association dues and other financial considerations. The state’s Davis-Stirling Common Interest Development Act requires condo sellers to provide prospective buyers with “everything germane to the association,” including whether or not the board of directors anticipates the levy of a special assessment, Scholtes said.

Another section of the act places a duty on sellers to furnish all governing documents--not just the standard covenants, codes and restrictions--which are on file at the county recorder’s office.

“Rules are not recorded anywhere,” Scholtes said. “And rules can be very important. Buyers need to see the rules so (they) can decide if (they) can live with these restrictions. Everything related to a piece of land should be discernible; there should be no surprises.”

Disclosure of the physical condition of the house may not be as important to buyers of new homes as with resales, yet people want more information about the neighborhood, schools and an overall sense of what they can expect living in the area, according to Bart Pachino, senior vice president and general counsel for Kaufman & Broad Home Corp. in Westwood.

Since so many of Kaufman & Broad’s sales are to first-time buyers, Pachino said, a potential for confusion is created if buyers do not understand “what it means to buy a home when they’ve seen the model home and how it differs from the home they’re going to buy.

“We just view disclosure as being a welcome opportunity to give information to a buyer so there’s no misunderstanding.”

The disclosure laws may be having unintended consequences. For example, home sales prices are often discounted to account for problems that now must be disclosed and, therefore, more accurately reflect their real value.

And some sellers more readily make improvements to their property to avoid disclosure issues.

Steve Sokol, an attorney with the California Assn. of Realtors in Los Angeles, noted that the simple idea of disclosure has led to more sophisticated home inspections and warranties.

In addition, some alert real estate brokers and agents have developed their own detailed disclosure forms. Theoretically, the belief holds that if something is disclosed, the act of disclosure itself provides protection against future claims by the buyer.

A parallel trend is the rise in real estate litigation in California.

“We live in a ‘victimology’ society where people often look for someone to blame,” Sokol said. “You have to be defensive about everything and that’s the reason for disclosure.”