Bottomless Pit

The residential real estate market is inundated with short pay, foreclosure and loan modification issues.  This might lead a person to think that loans, property value and foreclosures are the most common subjects of lawsuits in the residential real estate arena.  While there has been a significant up-tick in lawsuits related to these areas, now as always, physical defects at the property are the most likely trigger for a lawsuit by a buyer.

This risk is even more prevalent under current market conditions.  First, it is more likely that a property is suffering from deferred maintenance and is in a state of ill repair.  Second, because money is limited for everyone, there is a lower tolerance for defects and a greater risk that the parties will go to battle over who should be responsible for the cost of repairs.

In many ways, the risk for a lawsuit in this area is like a bottomless pit.  No matter how much dirt is shoveled into the pit, there still exists a hole into which any person involved in the transaction may fall.  That risk cannot be avoided.  It is possible, however, to put a series of safety nets in the hole to catch the unsuspecting person should he or she stumble into it.

One safety net is for buyers and sellers to use real estate brokers and agents who are members of the National Association of REALTORS® and California Association of REALTORS®.  These real estate professionals are trained to navigate transactions through the maze of considerations which confront buyers and sellers.  In addition, they are required to abide by a code of ethical obligations.  Should a problem arise, they are governed by professional standards bodies which can police their activities and address the concerns of the consumer.

Another safety net is to use the industry forms created by the California Association of Realtors.  These forms have been carefully structured to assist the parties in properly evaluating and documenting all relevant disclosure issues.  One of the forms is the “Transfer Disclosure Statement.”  This is a statutorily mandated disclosure document for virtually all transactions involving residential properties of four or less units.  A second document is the “Sellers Property Questionnaire.”  This document provides sellers with a thorough list of items for which they should provide disclosures.  A third document is the “Agent Visual Inspection Disclosure.”  This document provides the real estate agent with a vehicle to provide meaningful disclosures which they must provide after they have performed their obligatory visual inspection of accessible areas of the property.  When properly completed, these three documents should provide a buyer with all the disclosure information required from the seller and real estate brokers.  This in turn should minimize the risk of a dissatisfied buyer and the potential for a lawsuit.

Related to these disclosure documents is determining what issues warrant disclosure.  As a general notion, if the question arises as to whether something should be disclosed, the likely answer is yes.  It is better to over-disclose, rather than under-disclose.  The cost involved in defending a lawsuit by a disgruntled buyer can be very significant.  For this reason, it is better to lose a bad deal than to make a bad deal by failing to provide adequate disclosures.

While disclosing all issues is critically important, diagnosing those issues can be very problematic.  The diagnosis of the nature or cause of a defect should be made by the appropriate expert.  This is another safety net for sellers, real estate brokers, agents and attorneys involved in residential transactions.  The initial diagnosis should be made by a home inspector who is properly trained and experienced in identifying and diagnosing defects.  Depending on the findings of that home inspector, along with the location and features of the property, it may be advisable to also have the property further inspected by specialists, such as geological engineers, structural engineers, appraisers, pest control specialists, etc.  In choosing these experts, their experience and references should be carefully considered.  In addition, when possible, it is important that they have errors and omissions insurance.

Closely related to the foregoing, is the appropriate use of attorneys, accountants and other professionals to advise the parties about various legal, tax and related issues.  The need for these professionals regarding physical defects is fairly limited.  Nonetheless, it is important to defer legal, tax and other sophisticated issues to the proper professionals.

Despite the best efforts by all parties, certain defects will simply go undetected.  A safety net to deal with these defects is a home warranty program which may pay for the repair of many standard items.  With a home warranty in place, the buyer has an avenue to remedy many defects without pursuing a claim against the sellers, brokers or attorneys who may be involved in the transaction.  These policies are widely available and generally reasonably priced.

A last point of importance is that everything should always be fully documented.  Through documentation, expectations and understandings are most successfully managed.  In addition, in the event of a lawsuit, there is tangible evidence to accurately set forth what occurred.

While the foregoing safety nets will not prevent all lawsuits, they will minimize the number and severity of lawsuits by buyers against sellers, real estate brokers and attorneys.  Equally important, they will promote a better experience with respect to one of life’s true joys -- the purchase of a home.

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