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March 8, 2001
By Stuart Lieberman, Esq
Emotions and sound investing do not always go well together. A great business idea may prove to be lousy after the written business plan is evaluated. Even though we all know better, sometimes we defer to our instincts and emotions alone, without asking for the needed backup documentation.
Perhaps our deference to our gut feelings is no stronger than when it comes time to buying a new home; especially if the home will serve as a primary residence. Shelter is, after all, next to clothing and food one of those basic essentials. While our homes may end up being a good investment, we want so much more out of a home than just an investment.
So when it comes time to making a purchase decision, I think that for many people their emotional side plays a more active role than their business sense. People do not want to ask the truly hard questions which may in the long run prove to have been questions that should have been asked. What about former underground tanks? Are there lead problems? Are their mold or fungus problems? Are their noxious smells from a neighborhood factory (a good question to ask because many people go house hunting on the weekend, when factories may not be operating)? Are there hazardous sites within a two mile radius of the home?
Home contracts often contain a "no representation" clause which provides that the seller is not making any statements, one way or the other, about these issues. Many contracts provide buyers with a due diligence period where they can hire a company to determine if these kinds of problems are present. But if you hire an inferior inspector, he or she may miss a problem. Even in the case of a really good inspector, some problems are just not easy to find.
For example, a home that depends on a well to supply drinking water may produce water with high bacteria levels after heavy rainfalls due to nearby agricultural activities. An inspector may suggest that the water be tested, but if the test is taken during a dry spell, nothing will be learned.
This is why I applaud the use of mandatory seller disclosure forms in real estate transactions. These forms are often routinely used by brokers. The form can vary, but it is often a check off list filled with all kinds of possible problems that can be attributable to a home purchase. This list will often cover important environmental problems, such as dirty drinking water, leaking oil tanks, radon, etc.
The seller must state on the form whether he or she has knowledge of any of these problems. The seller signs and dates the form, and often the form contains a statement that the seller knows that the buyer is relying on the form's contents. Buyers should like this form and should insist on it. It provides another layer of protection for them. And brokers, both seller and buyer agents, should want this form as well. It provides them with an added measure of legal protection.
Disclosure forms never replace a due diligence inspection. They are used in conjunction with such inspections. Of course, we all know that people sometimes sign things that are not exactly true. If that happens, and you can prove that a true attempt at deception occurred, you may have legal recourse against the seller in the form of a fraud claim, a claim for negligent misrepresentation, as well as claims under some state consumer fraud acts. Often treble damages (three times the cost of harm) and attorney's fees may also be recovered.
While disclosure forms may provide buyers with legal protection, they do the same for sellers. A seller who fully discloses does not have to worry about an allegation that something was withheld should a problem develop after the sale. By far the best use for these form is not court related, but information related. They provide a clear way for buyers and sellers to learn about and comprehend key issues relating to an important transaction.