Buyers, Sellers & Disclosure in a Post-Pandemic Real Estate Environment
The New York real estate market has been on hold throughout the last two years, and personal and commercial sales of property have been at all-time lows. COVID-19 has created a sense of panic for investors, middle-income and elderly homeowners who are afraid to be displaced from the condos, co-ops, and private residences. Below, we’ll explore the pros and cons of the evolving disclosure scenario in the 2022 real estate market.
What is the state of the law in New York State relative to real estate sales?
New York state law Section 462 requires all sellers to disclose known material defects to buyers, including:
- Material defects in electrical and other systems
- Termite and asbestos conditions
- Homeowners’ association rules
- Other details on properties, including shared driveways
What are sellers and their agents supposed to disclose to buyers?
Under New York state law, sellers are only required to disclose known material defects to buyers that they know of or should have known of at the time of a property closing. Therefore, if a buyer wants to get out of a real estate transaction and/or recover money damages, they must establish that the seller and their agent effectively made an intentional or negligent misrepresentation of material fact through their silence or affirmative action.
What does this mean to sellers?
It means that sellers can’t be held responsible or sued for what they don’t know about. For example, if a survey doesn’t show that there’s a commercial easement or a common driveway on the property, the realtor or agent doesn’t necessarily have to disclose this information.
However, if the property had a major roof replacement that required permits and an inspection, the seller and their agent should know about such a significant factor and disclose it to the buyer and their representative. Otherwise, their activities could be actionable, and their transaction could be voided.
Should owners sell directly to buyers for expediency & to avoid commissions?
Sellers may consider selling their home directly to a buyer, but only if they don’t make affirmative statements to prospective buyers that turn out to be factually inaccurate, as this could technically constitute fraud.
For instance, a seller might tell a buyer that they needed to obtain gutter replacements and a new roof in 2010 when, in fact, the work occurred in 2008 and permits were required. Although the seller may have volunteered this information believing it to be true, it could still constitute a false and/or negligent misrepresentation of fact that could serve as grounds to rescind the sale. In the same way, if the seller discloses incorrect boundary lines for their property without a survey, it could be actionable.
Property disclosure case study in Demarco v. Petrou
In the State of New York, every seller of any real estate transaction must have both parties sign a Sellers Property Disclosure form. In theory, every listing agent should ask the buyer to sign and review this form, which requires the seller to report known material adverse defects on the property by listing them on the form. However, sellers don’t always adhere to this practice.
Case in point: In Demarco v. Petrou –a Justice Court Decision that came down in Webster County – an owner sold a property to a buyer with a real estate agreement containing a required seller’s property disclosure statement. The real estate agreement was signed by both parties, but the buyer never signed the buyer’s acknowledgment section of the property disclosure statement.
Plus, the seller put an “X” in the statement box, thereby affirming no known material defects on the property. Similarly, the seller’s contract and accompanying seller’s disclosure statement noted that the property was sold to the buyer “AS IS” and waived all requirements for a personal property inspection at the time of sale. But, the seller never told the buyer that there was previously extensive water damage in a bathroom that was suspiciously puttied up with a white plaster substance.
Case outcome signals limits of disclosure
Consequently, the buyer sued the seller for breach of contract and fraud, but later lost at trial because he could not produce an expert or valid property inspection to show that the defect existed on the property at the time of closing.
Essentially, even with a seller’s property disclosure agreement, a buyer can get shortchanged if they don’t have a lawyer review the language of the real estate contract. The buyer should also sign an acknowledgement retaining their right to have a personal property inspection prior to closing. If they don’t, the rule of Caveat Emptor will apply, and the buyer may have no recourse.
Buyer & broker exposure
In theory, both buyers and sellers can be held responsible for fraud if they fail to disclose known material facts in real estate transactions. However, both instances would require a showing of known or intentional fraud, as well as reliance and proof of damages.
Likewise, sellers can also hold buyers responsible for fraud in real estate transactions. This could occur if the buyer fraudulently misrepresents his income or credit score in an effort to secure a mortgage loan by providing false tax returns to the title company, their attorney or real estate broker.
Notably, brokers or listing agents can also be held responsible for fraud. Specifically, they can be held responsible for appraisal fraud if they knowingly inflate the appraised value of a property to enhance their real estate commissions. The unfortunate part here is that, aside from having the broker fired or the broker losing their real estate certification, the potential for criminal prosecution remains low as many unsavory brokers engage in this practice.
How does the disclosure law apply to condominiums & co-ops?
Similar to home sales, sellers of co-ops and their agents are not required to disclose the presence of material defects and, therefore, would not face legal liability unless the buyer could prove that the seller was engaging in active concealment of the problems.
For example, a condo owner may decide to sell their apartment that is in structural decline with water leaks. And, while they may not be required to disclose the leak, the seller may have to do so based upon the buyer’s attorney’s ability to discover the defect as a matter of due diligence through examination of the condo board’s minutes.
The main takeaway on disclosures?
Generally, unless the consumer can prove that either the seller or their agent engaged in some form of active concealment of a known, material, fact-based defect, no cause of action for fraud may arise. Therefore, always include your attorney in closings in order to review the contracts and seller disclosure statements, especially in complicated commercial matters.
- Real Property Law Section ("RRP") §462.
- DeMarco v. Petrou 2021 NY Slip Op 21101