Before a time of property disclosure statements, homeowners had little to safeguard them from the potential risks that come with purchasing a property. While this was good business decades ago, the mid-1990s introduced a new real estate law that has proven valuable for both homebuyers and sellers.
The History: Why We Have Required Property Disclosure Statements And Why REALTORS® Should Care
Required real estate disclosure forms are a fairly recent development in the world of real estate. In fact, some of you reading this may remember a simpler time before the onset of required disclosures in Iowa in the mid-1990s1. While the business of knowing what to disclose can sometimes be an uncertain one, the effect of these required disclosures has been to offer better protection for homeowners in an ever-changing real estate market.
What Was the Process Before Real Estate Disclosure Forms?
Before required property disclosure statements, “caveat emptor” was the law of the land. Caveat emptor, which translates to “let the buyer beware,” was a laissez-faire doctrine that “precluded buyers of real estate from recovering damages in many cases [where there were problems with the property] as it was up to the purchaser to ‘examine, judge, and test it for himself [. . .] to discover any obvious defects2.’” Simply put, buyers had to purchase a home at their own risk—leaky faucet, flooded basement, and all.
While the “buyer beware” doctrine might sound menacing today, it was fitting several decades ago when buyers and sellers were generally similarly situated people—often farmers—who valued the land itself over any structure thereon and who were similarly capable of repairing any defects that might arise in the non-complex houses of the time period3. With the onset of mass-home-development and complex construction techniques, the balance of bargaining power between developers and buyers shifted to the developers—leaving buyers vulnerable to potential problems with their homes4.
As a result, the doctrine of caveat emptor necessarily eroded in order to protect buyers—first with the recognition of implied warranties of construction, and later with required real estate disclosures5. Luckily for buyers today, the doctrine of caveat emptor has since been weakened and supplemented with protections including: buyer property inspections, required seller disclosures, a misrepresentation cause of action, and the implied warranty of workmanlike construction—effectively reversing the risk from buyer beware to seller beware6.
The Basics: Who Submits a Property Disclosure Statement and What to Disclose
There are two basic, required real estate disclosures: the agency disclosure and the seller’s disclosure. That sounds simple enough—just draft up a couple of disclosure forms and have both parties sign, right? In reality, it’s not always so simple. Because of various types of agency as well as the legal “gray area” surrounding seller disclosures, REALTORS® must use due diligence in the disclosure department.
The Agency Disclosure Form
Every relationship that a REALTOR® is involved in must begin with an agency disclosure—a form, signed by both parties, that explains the type of agency relationship that is established as well as informs the parties of who the REALTOR® represents7. According to the National Association of REALTORS® (NAR), there are six types of agency relationships: a seller’s agent, buyer’s agent, subagent, disclosed dual agent, appointed agent and a non-agency relationship8.
Regardless of who the agent represents, licensees are required to make an affirmative, written disclosure statement to all parties involved in a transaction that explains who the licensee represents and what duties the licensee owes to each party as a result of the agency relationship, as well as any other information necessary to clarify the relationship9. This disclosure must be signed by all parties to the transaction10. This disclosure shall be made by the licensee “at the time the licensee provides specific assistance to the client” and is required to be made and signed “prior to an offer being made or accepted by any party to a transaction11.”
Specific assistance includes “eliciting or accepting confidential information about a party’s real estate needs, motivation, or financial qualifications, or eliciting or accepting information involving a proposed or preliminary offer12.” Specific assistance does not include the open house showing or simple questions concerning price, location, or other factual questions concerning the property13.
Dual Agency Disclosure Statements: Agents Who Represent the Buyer and the Seller
Dual agency relationships can be especially troublesome as the agent is naturally placed in a situation of conflicting interests by representing both the seller and buyer who each have separate interests and hopes for the transaction. In such circumstances, the Iowa Administrative Code (I.A.C.) lists the requirements for a dual agency agreement, including informing clients of the potential for a conflict of interest14. Additionally, the I.A.C. prohibits the disclosure of confidential information from one party to the other15. Confidential information includes information that could place either party at a bargaining disadvantage, information about whether the seller will accept less than the asking price or whether the buyer will pay more, the motivating factors for buying or selling, financial information, and more16.
In addition, the agent’s duties can change depending on whether they represent the buyer or seller in a transaction. However both sellers' and buyers' agents have an obligation to disclose material adverse facts to the buyer17. Agents must provide brokerage services to all parties honestly and in good faith and diligently exercise reasonable skill and care in providing brokerage services to all parties18.
For the majority of Real Estate history, most agents were considered seller’s agents—much to the surprise of many buyers who assumed the agent was representing them due to the frequent communication and facilitation that occurs between an agent and a buyer. While dual agency disclosure statements existed prior, it was in the early 1990s that they came under fresh scrutiny in the aftermath of a case involving Edina Realty in Minnesota that resulted in a multi-million dollar settlement to consumers for the brokerage’s failure to properly disclose the dual agency relationship19. From this point forward, agency disclosures became a vital part of every Real Estate transaction.
Luckily, the agency disclosure form is fairly simple to make using forms provided by your brokerage or IAR. The most important aspect of the agency disclosure is simply to remember to make it, get the parties’ signatures and, most importantly, be sure the parties understand the form of representation. Following those simple procedures will set every transaction on a successful path. The seller’s disclosure statement, however, is where the real difficulties may arise.
The Seller’s Property Disclosure Statement
On July 1, 1994, the Iowa Legislature enacted a provision that required sellers of properties with 1-4 dwelling units to complete a disclosure form to inform the buyer of the condition of the property and structures on the property, including any defects in the structural integrity20.
The statute requires that the disclosure form be delivered prior to the transferor making or accepting a written offer for the transfer of the real property21. Additionally, the statute imposed liability upon the transferor (seller), broker or salesperson for the “error, inaccuracy or omission in information required in a disclosure statement” unless the buyer had actual knowledge of the inaccuracy or failed to exercise ordinary care to obtain the information22.
What Do Sellers and Realtors Need to Disclose?
So, it is clear that sellers are required to make disclosures regarding the property condition, but what exactly do REALTORS® need to disclose? Does every carpet stain or leaky faucet wield the power to tank a transaction? Probably not.
The Iowa Code places a duty on licensed REALTORS® to disclose to each party “all material adverse facts that the licensee knows23.” According to the Iowa Code, a material fact is a fact that a “party indicates is of such significance, or that is generally recognized by a competent licensee as being of such significance to a reasonable party, that it affects or would affect the party’s decision to enter into a contract . . . or would affect the party’s decision about the terms of the contract24.” The material fact is considered adverse when it involves a condition or occurrence that is generally recognized by a competent licensee as resulting in any of the following:
-
Significantly and adversely affecting the value of the property
-
Significantly reducing the structural integrity of improvement to real estate
-
Presenting a significant health risk to occupants of the property25
The definition is simple enough, but the trouble is, what may be “material” to one potential buyer may not be material to the next. Furthermore, the materiality is based on the subjective buyer’s point of view, rather than a more reasonable, objective point of view. Thus it’s possible that something that is insignificant to a seller could be a “deal breaker” for a buyer based on the buyer’s subjective interests and concerns. Finally, the definition lacks specific information about what conditions may affect value, structural integrity, or health—leaving disclosure decisions largely at the discretion and (hopefully) good judgment of the seller or agent.
Keep in mind that, as with many legal principles, there are exceptions. A REALTOR® does not need to disclose the following material adverse facts:
-
Those that are known by the buyer
-
Those a buyer could discover through a reasonably diligent inspection
-
Those facts whose disclosure is prohibited by law
-
Those that are known to a person who conducts an inspection on behalf of the party26
Additionally, there are a number of property transfers that are exempt from seller property condition disclosures altogether. These include:
-
Court-ordered transfers such as bankruptcy, eminent domain, or foreclosure,
-
Reclaimed mortgages
-
Estate administration
-
Joint tenant or tenant in common transfers
-
Spousal or lineal kinship transfers, and so on27
The majority of property transfers go smoothly, but occasionally an issue will arise that may cause even a seasoned REALTOR® to question their responsibility to disclose a certain bit of information to the buyer. We have statutory rules to guide us, but unfortunately for REALTORS®, not all disclosure issues are black and white. The classic disclosure example is that of the “haunted house”—do you have to tell the buyer and risk scaring them away? Can one even prove it’s haunted? Questions like these are what make the business of disclosures a difficult one. Due to this uncertainty, many REALTORS® follow the modified golden rule to “disclose to others as you would have them disclose to you,” and while this is a good principle to follow, failure to disclose something could lead to legal trouble down the road. In contrast, over-disclosure could turn potential buyers away as the list of “defects” mounts. So how do REALTORS® decide what to disclose?
Property Disclosure Statements in Action
First, there are a few automatic disclosures that must be made including the Radon Fact Sheet (published by the Iowa Department of Public Health) and the Lead-Based Paint Disclosure.
After the automatic disclosures are made, REALTORS® should begin by determining whether an issue represents a material adverse fact by affecting the value, structural integrity, or presenting a health risk. Some things, like floor cracks or rotting structural wood, would probably fall easily into the category of material adverse facts and should be disclosed. But what about potential issues like a past murder in the home, bad neighbors or personal details about the seller’s health and lifestyle? Issues like those warrant a bit more consideration. And remember: there are certain facts that, even when known by the seller or agent, cannot be disclosed for purposes of confidentiality (e.g. seller has AIDS).
When in Doubt, Disclose!
Seller’s disclosures can be a legal “gray area” for REALTORS® who may be unsure of what they can or should disclose to an interested buyer. It is important for REALTORS® to disclose the basic, material adverse facts that affect the structural integrity, health, or value of the home. Iowa Association of Realtors® provides a number of resources including informational articles and answers to FAQs to help guide REALTORS® disclosure decisions, and we encourage you to communicate with other members of the profession when in doubt.
The bottom line is, if you’re unsure whether or not to disclose, the safer choice is to disclose the condition—so long as it is not barred from disclosure by confidentiality.
Written by Shannon Holmberg, IAR Legal Intern
Sources:
-
Megan Peterson, Note, Seller Beware: Mandatory Disclosure Provisions in Iowa Put Sellers of Residential Real Estate on Alert, 50 Drake L. Rev. 569, 578 (2002).
-
Arthur v. Brick, 565 N.W.2d 623, 625 (Iowa Ct. App. 1997) (quoting Swanson v. Baldwin, 85 N.W.2d 576, 578 (Iowa 1957).
-
Peterson, supra, at 576.
-
Id. at 573.
-
Id. at 576–77.
-
See id.
-
Iowa Code § 543B.55 (2015).
-
http://realtormag.realtor.org/sales-and-marketing/selling/understand-agency-relationships
-
Iowa Code § 543B.57.
-
Id.
-
Id. (emphasis added).
-
Id.
-
Id.
-
Iowa Admin. Code r. 193E—12.5(2) (2015).
-
Iowa Admin. Code r. 193E—2.1, 12.5(1).
-
Id.
-
http://www.iowarealtors.com/legislation/frequent-legal-questions
-
http://www.iowarealtors.com/legislation/frequent-legal-questions
-
http://articles.chicagotribune.com/1995-02-12/business/9502120092_1_dual-agency-seller-s-agents-settlement
-
Iowa Code § 558A.1(5), 558A.4(1).
-
Iowa Code § 558A.2(1).
-
Iowa Code § 558A.6(1).
-
Iowa Code § 543B.56.
-
Iowa Code § 543B.5(15)(a).
-
Iowa Code § 543B.5(15)(b)(1-3).
-
Iowa Code § 543B.5(14).
-
Iowa Code § 558A.1.