We understand that the delay or cancellation of a closing is a nightmare for any broker. Impact Check may be at first considered a "disruptive technology" that is changing the way real estate is valued; however, many brokers and appraisers now feel that Impact Check affords them both a higher level of protection as well as a tool for generating goodwill from their clients. In fact, we expect to see a reduction in the number of delayed or cancelled closings caused by recently-discovered defects to the subject property.
The routine use of Impact Check affords the professional with a powerful tool to inform their clients of material issues affecting use, improvement or value of the subject property as well as to potentially avoid the risk of litigation, liability or discipline issues.
Impact Check employs the nation's most comprehensive, constantly updated database of, among other things, proposed government takings, projects, roadway changes, superfund hazardous waste sites, high voltage transmission line corridors, railway rights of way, airport safety zones, power plants, nearby registered sex offenders, solid waste facilities, water and sewage treatment plants, and other factors. Any of these conditions could be vital to determining whether to buy, sell, improve, or assemble almost any individual property in the nation (and arrive at a price determination).
The time required to use Impact Check is trivial. A property check can even be performed on-site using your existing mobile devices. The cost in time and money is minor. In contrast, the potential consequences of a failure to use due care in a real estate transaction can include the defense of a disciplinary complaint, the accrual of litigation costs including attorney fees, and the potential of an adverse money judgment. In addition, the disappointment of a client is something no professional wants to experience.
Real estate transactions and professional appraisals are highly regulated in every state. Many regulators place an affirmative duty on the seller, the appraiser, and the broker to consider and disclose any condition which could affect the value of the subject property. These conditions can be either on the subject property itself, or they can be existing off-site. Failure to meet this responsibility may result in litigation against both the seller and the professional. Even if the defense prevails, the costs and attorney fees incurred by the prevailing party are often not recoverable. And even if they are recoverable, there is always the issue of collectability.
A common standard for determining liability is whether the seller, appraiser, or broker knew or should have known of the condition, even if it is off-site. The professional, due to superior expertise in real estate valuation and transactions, is usually held to an even higher standard than the seller.
It is hard to imagine a more impotent defense than "How could I have known of that condition?" The defendant would be able to educate the Court about the ability to identify such conditions by using Impact Check. With the simple click of a mouse, the seller and his professionals likely could have determined whether the subject property potentially suffered from any condition, on- or off-site. A simple "yes/no" inquiry is free of charge. It would be unfortunate for a professional who, in the face such a retort, has no convincing argument that the omission of that simple mouse click did not constitute a failure to use due care.
Several recent publications and court rulings suggest the growing need for Impact Check’s services.
The official magazine for the National Association of Realtors has addressed the issue of failure to disclose defects as the Number 1 generator of Errors and Omissions insurance claims:
“It doesn’t really matter if you’re in Massachusetts or North Dakota; we see the same mistakes everywhere,” says (Brent) Rothgeb, who sifts through claims from all over the nation as the manager of the real estate professional liability book for Travelers Insurance.
According to Rothgeb, brokers and managers should pay special attention to four areas when training agents and processing sales in order to avoid a costly E&O claim that could cause caps to be exceeded and premiums to skyrocket.
In a view typical of many States, the Wisconsin Realtors Association has put it even more succinctly. There is no distinction between on and off-site material problems:
"Provide full disclosure (if material in nature): Make sure buyers are aware of any potential problem areas. For example, if the vacant lot next door will be developed or if a property tends to flood, this fact needs to be disclosed to the buyers in writing to help avoid any future allegations."
The following question was posed to the North Carolina Association of Realtors:
"QUESTION: A broker in our office who represents a buyer recently put a home under contract. During the home inspection this week, the buyer was standing outside the house and heard a train go by. It was not visible but the buyer was upset that the existence of a railroad track in close proximity to the back side of the property was not disclosed on the Residential Property and Owners’ Association Disclosure Statement.
The buyer intends to terminate the contract. However, the buyer also wants to recover his (earnest money and) Due Diligence Fee and the home inspector’s fee because he feels that the presence of the railroad track should have been disclosed and that the sellers have somehow breached the contract. Does the existence of an active train track (that is not visible from the house) have to be disclosed by the seller? Did the seller breach the contract? If not, does the buyer have a claim for damages against the listing agent?"
The answer ("Yes") was surprising to many Brokers. While the seller himself would not be liable for failure to disclose a material off-site defect, his Broker was exposed to full liability and licensing issues (here are the relevant excerpts):
"ANSWER: Under North Carolina law, sellers have very limited disclosure obligations to buyers. While sellers may not misrepresent facts, or fraudulently conceal a defect in their property, the general rule is caveat emptor, let the buyer beware. Here, there is no evidence that the seller has misrepresented anything nor actively concealed the existence of the track. As a result, we do not believe that the seller has breached the contract.
Unlike sellers, REALTORS® are required both by statute and by the REALTOR® Code of Ethics to disclose all material facts to their own clients and to the other parties involved in a real estate transaction. Licensees are subject to disciplinary action and potential civil liability for failing to disclose a material fact.
In some cases, it is not easy to determine whether a fact is sufficiently “material” to require disclosure.
Facts that relate directly to the property, are typically external factors that affect the use, desirability or value of a property. Examples given in the Real Estate Commission’s Real Estate Manual are a pending zoning change, the existence of restrictive covenants, plans to widen an adjacent street, and plans to build a shopping center on adjacent property."
"Thus, in our view, both agents (and possibly their firms) face potential disciplinary action and/or civil liability for failing to disclose the track to the prospect before the property went under contract."
The issue of liability for failure to identify and disclose off-site defects is summarized in an article published in the Brigham Young University Law Review:
"II. JUDICIAL APPROACHES TO DISCLOSURE OF OFF-SITE CONDITIONS
A number of courts have utilized an approach that makes no distinction between disclosure duties for on-site and off-site conditions. The same test is used for a seller’s duty to disclose defects, irrespective of the physical location of that defect.
"Cases where courts used the general test and required disclosure of off-site conditions:
Some courts have applied the traditional analysis for the duty to disclose on-site conditions to determine whether sellers also have a duty to disclose off-site conditions. In Ribak v. Centex Real Estate Corp., residential homebuyers brought suit against a developer/seller alleging that the seller had failed to disclose the existence of a wastewater treatment plant adjacent to the purchased property. The Ribak court espoused the same test for the disclosure of off-site conditions as it uses for on-site conditions. It made no distinction based on the location of the condition and held the seller liable for nondisclosure.
California was one of the first states to codify the duty of a Broker to investigate off-site latent defects, even if it meant a visit to county offices to confirm or exclude a problem with the subject property.
Under the California statute, the seller must disclose known existing defects in fixtures and appliances on the property, known defects in the structure of the home, defects in the property or matters affecting the property, and neighborhood noise problems or other nuisances.
The California Court of Appeals in Alexander v. McKnight recognized the purpose of the statute requires it to “be liberally interpreted so that a buyer will be fully informed on matters affecting the value of the property to be purchased.” The court uttered this strong statement about caveat emptor: “If anything, the concept of ‘let the buyer beware’ is an anachronism in California having little or no application in real estate law.”
Considering California’s concern over earthquakes, special disclosure rules govern seismic risks.
A critical provision of the statute provides that, when information on a seismic hazard zone is “reasonably available,” the seller, or agent acting for the seller, shall disclose to a prospective purchaser that the property is located within a seismic hazard zone. The phrase “reasonably available” is defined to mean “that for any county that includes areas covered by seismic hazard maps, a notice is posted at the offices of the county recorder, county assessor, and county planning commission identifying the location of the maps and the effective date of the notice.”
*Note: This communication is not intended to convey any legal opinions or advice. We are not attorneys. The application of the information contained herein varies from State to State, and is not in any way meant to be a substitute for a professional consultation with your own qualified attorney.