Property Disclosure: The Real Estate Professional’s

Guide To Reducing Risk

Marcia L. Russell, DREI

Introduction To Property Disclosure

Why Property Condition Disclosure Is Important

NAR statistics regarding lawsuits

E & O statistics regarding lawsuits Elimination of Caveat Emptor in

most states New focus on environmental

problems

Remedies For Failure To Disclose Defects

Actual damages

Punitive damages

Rescission of the transaction

License suspension or revocation Board of REALTORS® disciplinary

action

Misrepresentation

Definition

What is a material fact?

Opinion versus material fact

Theories of Legal Liability

Active fraud Cooper & Co. v. Lester

Passive fraud Naghad v. Century 21 Page One Realty

Negligent misrepresentation Hamtil v. J.C. Nichols Real Estate

Theories of Legal Liability Negligent non-disclosure

Amato v. Rathbun Realty Gouveia v. Citicorp Easton v. Strassburger Tri-Professional Realty, Inc. v. Hillenburg

Negligent advice Gerard v. Peterson

Reliance on Statements Made by Sellers

When brokers may be liable for incorrect statements made by sellers

Hoffman v. Connell

Other Bases of Misrepresentation Liability

Code of Ethics of National Association of REALTORS®

Licensing Act Liability

Consumer Protection Laws Carter v. Gugliuzzi

Duty to Disclose

Analysis of “who represents whom” in a real estate transaction

Parahoo v. Mancini

Seller Disclosure

Use of property condition disclosure forms

Benefits of using disclosure forms

Trend toward mandatory disclosure

Property Disclosure Benefits

The seller

The purchaser

The real estate professional

Case Summary on Property Condition Disclosure Forms

Amyot v. Luchini Englehart v. Kramer

Limiting Liability for Misrepresentation Claims

Implement procedures designed to reduce liability

Effective use of property condition disclosure forms

Involving third-party experts

Limiting Liability for Misrepresentation Claims

Conduct an inspection and watch for

red flags

Document, document, document

Don’t predict the future

Answer questions carefully

The Role of Home Inspectors

Value of obtaining a professional evaluation of the property

Pre-listing home inspection

Wisdom of buyers conducting their own inspections

Stigmatized Property, Megan’s Law &

Neighborhood Safety

Stigmatized Property

Property psychologically impacted

Event occurred or suspected to have occurred on property

No physical impact

Stigmatized Property Most states have laws

that declare stigmas are not material facts.

Stigmas include Murder

Natural death

Suicide

Assault

Sexual assault

Felony crimes

AIDS and HIV

AIDS Disclosure

AIDS is a fatal disease

AIDS can be transmitted through Sexual contact Inoculation with HIV infected blood Pregnancy

AIDS Disclosure

Fair housing concerns

HUD position

National Association of REALTORS® position

Disclosing Other Stigmas Determine whether the information

is fact or fiction Check state laws Determine materiality Discuss disclosure with the sellers

Disclosing Other Stigmas Benefits of disclosing other stigmas New York Court reviews parties’

duties to disclose house was haunted Stambovsky v. Ackley

Megan’s Law Background Federal law mandates community

notification of location of sex offenders

Megan’s Law The role of the real estate

professional Exemption for licensees in some states Check state laws and licensing

standards for guidelines on disclosure of sex offenders.

Constitutionality Concerns Opponents argue sex offenders are

being punished over and over by publishing their names and location.

Megan’s Laws declared unconstitutional in Hawaii and Connecticut.

Constitutionality Concerns 2003 U.S. Supreme Court Ruling

Connecticut’s Megan’s Law declared constitutional

Neighborhood Safety Responding to questions

regarding neighborhood safety

Property Management- crimes and dangerous conditions

Elizondo v. Brightwood Townhomes

Lead-Based Paint Disclosure

Lead-Based Paint Disclosure

Purpose of The Lead-Based Paint Hazard Reduction Act

Involves housing built prior to 1978

HUD and EPA have issued joint regulations requiring the disclosure of known information on lead-based paint/hazards in target housing.

Regulations The Regulations do not require

testing or removal of lead-based paint.

If the lead paint is in good condition, it typically does not pose a problem

Lead Poisoning and Its Effects on Children and Others Major sources of lead exposure

Children between the ages of 18 months & 6 years are at greatest risk

Testing for lead poisoning

Lead Poisoning and Its Effects on Children and Others Lead-based paint is the most

common cause of lead poisoning in children.

Health problems include: Damage to the brain and nervous

system Behavior and learning problems Slowed growth Hearing problems Headaches Coma, convulsions and death

Lead Poisoning and Its Effects on Children and Others The best way to determine if a child

has high levels of lead in the blood is to do a blood test

Toxic signs

Lead Poisoning in Adults Lead in drinking

water

Pregnant women

Symptoms in adults

Brief History of Lead The many uses of lead

Efforts to restrict the uses of lead

Summary of Housing Not Covered

Housing built after 1977

Zero bedroom units

Housing for the elderly or persons with disabilities

Leases for less than 100 days

Foreclosure sales

Rental housing certified as lead-free

Definitions Agent

Housing for the elderly

Lead-based paint

Lead-based paint hazard

Risk assessment

Target housing

Zero bedroom units

Essential Requirements of Sellers/Lessors

Prior to ratification of a contract— Sellers & lessors must disclose known lead-

based paint and/or hazards & provide available reports to buyers & renters.

Buyers & renters must be given the pamphlet Protect Your Family From Lead in Your Home.

Buyers must be given a 10-day opportunity to conduct an inspection or risk assessment

Lead warning statements

Essential Requirements of Sellers/Lessors

Prior to ratification of a contract —

Records must be maintained for three years

Sample contract contingency

Sellers, lessors and real estate agents share responsibility for compliance

Essential Requirements of Sellers/Lessors

Buyers must acknowledge receipt of the Pamphlet, the required disclosures, and the 10-day opportunity to conduct a risk assessment or inspection for the presence of lead-based paint

Enforcement

HUD penalties up to $11,000 for each violation

EPA—Civil penalties up to $11,000 per violation; Criminal penalties up to $11,000 per violation

Private action with treble damages available

Testing Paint inspection

Risk assessment

Testing methods

New Regulations for Federally Assisted Housing HUD-issued rules require notification,

evaluation and reduction of lead-based paint hazards in housing that receives federal assistance

Covered properties

Lead-Based Paint Pre-Renovation Rules What is covered

Who is covered

What is required

When to give notice

Case Law EPA imposes first civil penalties

totaling $439,725.

EPA sites building owners for 46 violations of Lead-Based Paint Rules

Large Settlements in Property Management Padilla v. Jois Realty

Hiraldo v. Kahn

Mold: A Growing Concern

Mold and How It Affects Real Estate

Latest environmental scare Response by the real estate

profession Response by the insurance industry Debate on health effects of mold

What Is Mold?

Type of fungi

Common indoor molds

CDC position on heath concerns

What Is Mold?

Type of fungi

Common indoor molds

CDC position on heath concerns

CDC: Making Your Home Less Mold Friendly

Maintain indoor humidity below 50%

Use air conditioners and dehumidifiers during humid months

Maintain adequate ventilation

Add mold inhibitors to paint

How Molds Reproduce

Food source

Source of moisture

Optimal temperature

Building Materials and Construction

Tight building construction

Moisture control

New building

materials

Common Sources of Indoor Moisture Overflow from sinks

and sewers Wet and damp areas Moisture from cooking

and bathing Humidifiers Flooding Plumbing leaks and

broken pipes Condensation on

improperly insulated pipes

Leaking roofs Clothes dryer not

properly vented Firewood stored

indoors Over watering plants Older doors that

lack good seals Cracks or holes in

the building

Toxic Mold—Stachybotrys Chartarum

Thrives on materials high in cellulose

Can create mycotoxins

Adverse reactions to toxic mold

People affected more than others

Health Effects of Mold

Allergies

Infections

Irritations

Health Effects of Mold

Common health effects

Serious health

effects

EPA: A Brief Guide to Mold, Moisture and Your Home

Guidelines for cleaning up mold

problems

Guidelines for preventing mold

growth

EPA: A Brief Guide to Mold, Moisture and Your Home

Key to mold control is moisture control

Moisture and mold control prevention tips from the Guide

Removing Mold Proper equipment Shut down

systems Minimize

spreading of spores

Remove visible mold

Disinfect surface

Mold in My Home: What Do I Do? How can I tell if I have

mold? Should I test for mold? General clean-up

procedures What should I save or toss?

Mold Issues and the Real Estate Professional The real estate agent duties State law requirements regarding

disclosure of latent defects California Code

Mold Issues and the Real Estate Professional Risk Reduction Tips

Education Visual inspection by concerned party Seller disclosure

Crisis in the Insurance Industry

Multi-million dollar judgments

Debate as to proven health effects

CDC position

Texas Medical Association

Texas—Mold’s Ground Zero

70% of claims in 2001 were in Texas

Mold claims skyrocketed from 1,050

in Q1 of 2000 to 14,706 in Q4 of

2001.

Mold tax

$0

$100

$200

$300

$400

$500

$600

$700

$800

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001*

Source: Texas Department of Insurance * 2001 (estimate based on Jan. - Mar. data)

Texas: Paid Losses for Water Damage Claims

Sharp increase in water losses were obviously part of the problem.

The Response from the Insurance Industry Homeowners’ insurance becoming

unavailable and unaffordable Exclusionary endorsements Other options

The Lawsuits California homeowner awarded

$18.5 million Tenants awarded $1 million in

Delaware Ed McMahon sued for $20 million Multi-million dollar Texas mold

verdict reduced

Other Environmental Concerns

Hazardous Materials

Effect on property values Testing requirements by lenders

Health concerns

The Real Estate Professional’s Role Become familiar with common

hazards in market

Recognize potential hazards

Avoid making representations about environmental condition of property

The Real Estate Professional’s Role

Environmental contingency clause

Seller property condition forms

Home inspectors

CERCLA and SARA

Creates liability for cleanup

Innocent landowner’s defense

Potentially responsible parties

Liability of the real estate agent

Environmental Due Diligence

The process of taking all appropriate and reasonable steps to ascertain there is no contamination at the site.

Evaluating Environmental Hazards Preliminary Site Assessment

Phase 1 Environmental Assessment

Phase 2 Environmental Assessment

Phase 3 Environmental Assessment

De Minimis Settlement

The EPA will consider a de minimus settlement with innocent landowners that would limit the amount that must be contributed for the clean-up.

Factors considered by EPA to establish de minimus settlement.

Asbestos

Naturally occurring silicate mineral Link to cancer Use in construction materials When asbestos is dangerous Litigation update

Common Places Where Asbestos Is Found Vinyl flooring material Patching compounds & textured paint Ceiling tiles & sprayed ceilings Stove & furnace insulation Door gaskets Pipe insulation & wall/ceiling insulation

In some appliances, roof shingles, & siding

Removal of Asbestos Damaged asbestos should be

repaired, enclosed or removed by a trained professional.

EPA publication Asbestos in the Home: A Homeowner’s Guide

Radon

Radon is a naturally occurring odorless, tasteless radioactive gas

Radon is the second leading cause of lung cancer after cigarette smoking

EPA estimates that 1 out of 15 homes has radon levels in excess of its guidelines

Radon

Testing for radon Easy and affordable Costs Charcoal canister and alpha tract

detector Factors to consider when testing

Real estate transactions and radon

Radon

Radon reduction methods Increase natural ventilation Seal cracks and openings Seal floors in basements Naturally ventilate the crawl space Filter the water through a bed of

granular activated carbon

Radon

The EPA Guidelines If buying or selling a home, have it tested. If buying a new home, ask if radon-resistant

construction features were used and if the home has been tested.

Fix the home if the radon level is 4 Pico Curies per liter or higher.

Radon levels of less that 4 pCi/L still pose a risk and in many cases may be reduced.

Underground Storage Tanks Definition

EPA regulation under RCRA

EPA updated regulations

Exempt tanks

Underground Storage Tanks The role of the real estate

professional Red flags

Leaking underground storage tanks

Waste Disposal Sites

Golf courses and office buildings are being constructed on landfill sites.

Impact on the real estate industry

Noise

Noises that are known should be disclosed to purchasers

Noise is a major source of stress

Alexander v. McKnight