Real Estate Investing Article Property Disclosures
Making money in real estate investing is glorious, but it won’t happen until you put some hard work into understanding all the fine print.
As buyers and sellers, you should be aware of your rights and responsibilities relating to disclosure of property conditions.
These exist because of laws enacted by Congress and state legislatures and from principles that have evolved from case law or court opinions.
Where you plan to invest, know that different states have different laws.
Many states have adopted laws requiring property sellers (record owners as well as equitable owners) to provide buyers with a written property disclosure statement or report prior to the signing of a purchase contract, regardless of whether or not they’re using a real estate agent or broker.
Why aren’t the real estate laws the same in every state? Although the requirements vary from state to state, the report typically contains questions about the existing structures and major systems, such as the basement, roof, plumbing, heating and electrical.
From the sellers side, the seller may have to disclose whether there are areas of wetlands and floodplain on the property, excavation and fill, underground storage tanks, etc…
Also they should disclose things like hazardous substances, defects and dangerous conditions, and issues that could affect title (e.g., boundary disputes, encroachments, easements, common driveways, judgments and liens).
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The particular state law spells out types of property transfers that are exempt from the law – such as transfers through probate, foreclosure and divorce – or certain categories of properties, like commercial and multi-unit residential.
Are you investing in real estate? If you’re a buyer, you ought to consider attaching the disclosure statement to your purchase contract and incorporating it by reference in the contract.
By using a clause like “The property disclosure statement dated ____________is attached hereto as Exhibit ‘A’ and incorporated herein by reference”, the disclosure report may become part of the purchase contract, just like any other provision in the contract. Doing this could improve your chances of terminating or renegotiating the purchase contract if it turned out that something in the report was inaccurate or not true.
In addition, it would flush out situations where the seller was not being truthful in the disclosure statement. So, if a seller refuses to allow the disclosure statement to become a part of the purchase contract, that should tell you that perhaps the seller is trying to hide something. If a seller refuses to give you a disclosure statement, you should probably run away from the property as fast as you can.
In addition to property disclosures required by specific state laws, sellers may have to disclose any “material facts” that they have knowledge of relating not just to the property itself, but also to the surrounding area.
This is a gray area and may vary from state to state depending on specific rulings that have emerged from individual lawsuits and you should consult your attorney for guidance. For instance, in some states sellers may have to disclose if a violent crime or paranormal events took place on the property, while in other places, there is no requirement to do so.
However, you should always choose to disclose. If you have to ask the question “should I disclose?” then chances are, you should. I’ve always defined “material fact” as any fact that could be relevant to a buyer’s decision to purchase.
It doesn’t matter if the seller doesn’t think it’s relevant so long as reasonable people could agree that the issue or question could be of concern to the buyer in some legitimate way.
For instance, if there’s a property owner attempting to force the local government to permit a large quarry operation. This has been well-publicized with yard signs all over the area saying “ban the quarry.”
It’s recommended that some owners whose property is very close to the quarry property that they disclose the existence of this situation to potential buyers.
Suppose a seller knew that the state department of transportation intended to put a turnpike exit ramp down the road, or that there was a sewage treatment plant around the corner, or that the property across the street was going to be developed into a school or apartments or whatever.
They should disclose those facts because they could easily be considered “material” to the buyer’s decision to purchase.
Maybe the buyers wouldn’t back out of the deal even if they knew about these conditions, but the point is that they have the right to be told about them and then to make their decision with those facts in hand. Aside from avoiding potential lawsuits, there’s another benefit to disclosing: a good night’s sleep.
If you do eventually buy a rental house, then make sure you know that tenants have rights. Many states have areas called “rent control” which puts a cap on just how much you’re able to raise the monthly rent on any given tenant.