Code Talk: Disclose Early and Often
Posted on June 1, 2013 by Bethany Brannan
Editor’s Note: The Code of Ethics turns 100 in 2013. AAR will be celebrating the code with monthly articles published under the caption, Code Talk, in the Arizona REALTOR® Magazine, discussing the various ways the code governs professional conduct and interaction with the consumer in every day transactions.
Article 2 of the National Association of REALTORS® Code of Ethics states: “REALTORS® shall avoid exaggeration, misrepresentation, or concealment of pertinent facts relating to the property or the transaction.”
This seems straightforward enough. But with disclosure, come gray areas. Take the following NAR case interpretation:
Seller A came to REALTOR® B’s office explaining that his company was transferring him to another city and he wished to sell his home. In executing the listing contract, Seller A specified that the house had hardwood floors throughout and that the selling price would include the shutters and draperies that had been custom made for the house. Seller A said that he would like to continue to occupy the house for 90 days while his wife looked for another home at his new location, and agreed that REALTOR® B could show the house during this time without making a special appointment for each visit. Accordingly, REALTOR® B advertised the house, showed it to a number of prospective buyers, and obtained a purchase contract from Buyer C. Settlement was completed and at the expiration of the 90-day period from the date of listing, Seller A moved out and Buyer C moved in.
On the day that Buyer C moved in, seeing the house for the first time in its unfurnished condition, he quickly observed that hardwood flooring existed only on the outer rim of the floor in each room that had been visible beyond the edges of rugs when he inspected the house, and that the areas that had been previously covered by rugs in each room were of subflooring material. He complained that REALTOR® B, the listing broker, had misrepresented the house in his advertisements and in the description included in his listing form which had specified “hardwood floors throughout.” Buyer C complained to REALTOR® B, who immediately contacted Seller A. REALTOR® B pointed out that the house had been fully furnished when it was listed and Seller A had said that the house had hardwood floors throughout. Seller A acknowledged that he had so described the floors, but said the error was inadvertent since he had lived in the house for 10 years since it had been custom built for him. He explained that in discussing the plans and specifications with the contractor who had built the house, the contractor had pointed out various methods of reducing construction costs, including limiting the use of hardwood flooring to the outer rim of each room’s floor. Since Seller A had planned to use rugs in each room, he had agreed, and after 10 years of living in the house with the sub-flooring covered by rugs, he had “simply forgotten about it.”
REALTOR® B explained, however, that Seller A’s description, which he had accepted, had resulted in misrepresentation to the buyer. “But it’s a small point,” said Seller A. “He’ll probably use rugs too, so it really doesn’t make any difference.” After further pressure from REALTOR® B for some kind of adjustment for Buyer C, Seller A concluded, “It was an honest mistake. It’s not important. I’m not going to do anything about it. If Buyer C thinks this is a serious matter, let him sue me.”
REALTOR® B explained Seller A’s attitude to Buyer C, saying that he regretted it very much, but under the circumstances could do nothing more about it. It was at this point that Buyer C filed a complaint with REALTOR® B’s Board.
At the hearing before a Hearing Panel of the Professional Standards Committee of REALTOR® B’s Board, during which all of these facts were brought out, the panel found that REALTOR® B had acted in good faith in accepting Seller A’s description of the property. While Article 2 prohibits concealment of pertinent facts, exaggeration, and misrepresentation, REALTOR® B had faithfully represented to Buyer C information given to him by Seller A. There were no obvious reasons to suspect that hardwood floors were not present throughout as Seller A had advised. REALTOR® B was found not in violation of Article 2.
Case #2-3: Obligation to Disclose Defects | (Revised Case #9-9 May, 1988. Transferred to Article 2 November, 1994)
Advice from the Pros
Echoing the example above, Frank Dickens, SRES, ABR, CRMS, a REALTOR® with Realty ONE Group in Phoenix offers a warning: “Agents can innocently get caught up in a lack of disclosure.” But, Dickens offers some sage advice, “You must encourage your seller to go deeper. Even the most minor repair can become a huge issue to a buyer that is disgruntled.” Dickens uses an example of a home with a newly- added roof. While nothing is wrong with the new roof per se, there must’ve been a reason for a new roof to be added. Ask your clients why they chose to make upgrades to the house and you’ll soon get the whole story. Much like a well-documented used car, Dickens says that buyers aren’t looking for a perfect house; they are looking for an honest seller.
When he encounters a seller that may be hesitant to disclose something, Dickens is straightforward with his clients saying, “I have a fiduciary obligation to sell your home for the most amount of money and the least amount of liability.” Dickens takes his job as an advisor seriously and helps his clients understand the ramifications of not disclosing. “In the lawsuits I’ve seen, typically the buyer is suing the seller’s agent. These cases go on for years and years. If you want to make sure that you’re protecting yourself and your clients, you have to get them to disclose and document everything.”
Disclosure Forms From Arizona Association of REALTORS®
When it comes to disclosure, agents should encourage their sellers to use the Seller Property Disclosure Statement (SPDS) form and be as thorough as possible. (Note: If you are using the AAR Residential Resale Real Estate Contract, you are contractually obligated to deliver a completed SPDS to the buyer within five days after contract acceptance.) This form allows the seller to list all known issues about the property. It is also a great way for sellers to identify any repairs made to the property. A sample of the SPDS is available here. AAR also provides a Vacant Land/Lot Seller SPDS.
A Comprehensive Loss Underwriting Exchange (CLUE) is a report from the seller providing a five-year insurance claim/inquiry history for a specific property address. More information on using CLUE Reports is here.
Tips for Buyers
The AAR Buyer Advisory was created to help buyers identify some of the more common issues that a buyer should investigate and verify concerning a property purchase. Included is a list of:
- Common documents a buyer should review;
- Physical conditions in the property the buyer should investigate; and
- Conditions affecting the surrounding area that the buyer should investigate.