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Closing Defects

Blog by Nigel Denham, Senior Vice President - Sales | February 8th, 2018

Closing Defects

Many real estate agents and lawyers are often faced with advising both buyers and sellers of their legal obligations to disclose defects on the property. This newsletter will discuss the difference between different types of defects and will also provide some guidance for both sellers, buyers and realtors in terms of how to deal with disclosing these defects.

A patent defect is one that is easily and readily observable on a inspection of the property. An example of this would be a broken railing or damage to the walls. In the case of patent defects, the principal of caveat emptor or buyer beware applies which means that the buyer should have noticed the defect. Accordingly, the seller is not obligated to disclose patent defects. If a buyer can see the defect, it cannot later complain about it following closing.

A latent defect is a defect that is hidden and not observable upon a reasonable n inspection of the property. The law is that if a seller knows about a latent defect which would render the property uninhabitable or unsafe, then a seller must disclose this defect. Examples of these defects include problems with the structure or foundation, major leaks in the roof or basement or mold. By failing to disclose a hidden or latent defect that a seller knows about, a seller could expose itself to being sued after closing.

Another more controversial type of latent defect is psychological or stigma defect. These types of defects include things like death or suicide on the property or something that stigmatizes the property such as a pedophile living in close proximity to the property. Does a seller have an obligation to disclose these defects to a potential buyer? There is no straightforward answer, however, when in doubt, a seller should disclose any major issues to avoid a potential lawsuit after closing.

To protect themselves, buyers should make all purchase transactions conditional on a home inspection report. This will give the buyer the opportunity to do a thorough inspection of the property to determine if there are any defects which could then be addressed prior to the offer becoming firm and binding. In addition, the buyer’s realtor should insert the appropriate representations and warranties in the Agreement of Purchase and Sale.

Many sellers are reluctant to disclose defects feeling that it will reduce the numbers of potential buyers and the ultimate sale price. While this may be somewhat true, the greater risk of not disclosing the defect outweighs the potential increase in price.  It should always be remembered that by disclosing defects upfront, a seller will reduce the risk of being a party to a legal dispute down the road.

Article Provided by Isenberg & Shuman