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    Wisconsin Lawyer
    June 04, 2021

    American Dream Turned Nightmare: Liability for Undisclosed Defects in Real Estate Sales

    When residential real estate is hot, sellers might be tempted to ignore, and buyers to overlook, problems with homes on the market. But this short-term approach to sweetening a deal can have extreme negative effects for all parties to a transaction.

    Kevin David Trost

    blossoming tree in front of house

    Wisconsin is experiencing a hot real estate market in which demand for single-family homes is outstripping supply. Prices have increased an average of 10.3 percent statewide during the last year while the total number of listings has decreased by 36.9 percent.1 Several conditions have coalesced to create this sellers’ market. First, there is strong demand from buyers enticed by the current low mortgage rates.2 Second, existing homeowners have avoided listing their homes for sale during the pandemic.3 Third, buyers are hesitant to build a new home while lumber remains at record-breaking prices.4

    One effect of the current market is that in order to present a more attractive offer to sellers, more buyers forego due diligence and waive the home-inspection contingency. Months or years down the road, these homeowners may regret their haste after a significant undisclosed defect with the home appears. The homeowners may discover a leaky roof, a termite infestation, an unstable foundation, or any number of possible problems. Had they known about the defect before the closing, they could have demanded a financial concession from the sellers or even walked away from the purchase. Instead, the homeowners are left analyzing their potential legal recourse against those involved with the sale. In the most severe cases, homeowners may consider walking away from the home and their mortgage and declaring bankruptcy.

    This article analyzes the legal duties and potential liabilities of the different players involved in residential real estate sales. Sellers, buyers, real estate agents, home inspectors, and contractors all have different duties and responsibilities during the sale process. The sections below analyze the potential liabilities of each of these players.

    Sellers’ Potential Liabilities

    Potential liability for the sellers of a home arises primarily from the sellers’ disclosures on the real estate condition report. Under Wisconsin law, sellers of a property are required to complete a pre-printed disclosure document.5 On this form, sellers disclose whether they are aware of defects with various components of the structure and property.6 A defect is defined as a “condition that would have a significant adverse effect on the value of the property; that would significantly impair the health or safety of future occupants of the property; or that if not repaired, removed, or replaced would significantly shorten or adversely affect the expected normal life of the premises.”7

    Kevin D. TrostKevin D. Trost, U.W. 1998, is the founding member of Trost LLC, Madison. His practice focuses on litigating and resolving disputes regarding real estate, financial services, banking, insurance, landlord tenant, construction, and contractual matters. Get to know the author: Check out Q&A below.

    The report must be made available to the buyers within 10 days after the sellers accept the buyers’ offer.8 The sellers’ disclosures on the real estate condition report are incorporated into the offer to purchase.9 Accordingly, sellers who are not truthful in completing the report may be subject to a claim for breach of contract.

    More significantly, buyers frequently rely on the sellers’ disclosures in deciding whether to proceed with purchasing the house. When sellers are untruthful in completing the real estate condition report, buyers may have a statutory claim for false advertising under Wis. Stat. section 100.18. If a jury or judge finds in the buyers’ favor on this claim, the sellers can have a judgment entered against them for double damages and also for the buyers’ reasonable attorney fees. Sellers may also face liability under Wis. Stat. section 895.446 for civil theft. An unfavorable verdict under this statute could saddle sellers with triple damages as well as payment of the buyers’ reasonable investigation costs, including attorney fees.10

    For most claims, the sellers’ liability is contingent on a factfinder determining that the sellers had knowledge of a defect and failed to disclose. Demonstrating that sellers had knowledge of a particular undisclosed defect is not easy. It is rare that sellers will admit to knowledge of a defect. In most cases, buyers must rely on circumstantial evidence of the sellers’ knowledge, such as items left behind in the house or evidence of the sellers’ prior work on the house. It should also be noted that the Wisconsin Statutes allow sellers to rely on the work and statements of third-party professionals.11 For example, sellers who are accused of mispresenting the condition of a roof might defeat the claim if they can show the roof was professionally inspected the previous year and given a clean bill of health.

    Buyers’ Potential Liabilities

    Prospective purchasers of a home are not devoid of responsibility during the real estate purchase process. While they lack depth of knowledge about the home compared to the sellers, they cannot ignore obvious defects. For example, the sellers might fail to disclose any defects with the windows even though the kitchen window has a noticeable crack running down the middle of the pane of glass. The sellers likely have a persuasive defense that the buyers knew or should have been aware of the obviously defective window.12

    The buyers’ culpability may be greatly diminished if a defect is not obvious or if the buyers are first-time home buyers who lack a general depth of knowledge about real estate. After all, buyers may only visit a property two or three times before the closing. Normally, they will at least visit for a showing and during the final walk-through before the closing. They might (or might not) also attend a home inspection. Many buyers will only spend a few hours in a property before purchase. Even seasoned buyers may experience a sensory overload while touring a property as they attempt to determine whether it meets their needs. It is understandable that buyers may overlook or not understand the significance of a water mark on a room’s ceiling or a slightly deformed top of a water heater. As a result, it may be difficult to hold buyers entirely responsible for observing a defect unless the defect is glaring and obvious.

    A Buyer’s Nightmare: Defective Flashing Caused Extensive Water Damage, Repair, Costs

    This author’s expertise stems from not only professional experience but also personal experience. Nearly two years after purchasing a house, the author discovered that the roof was defectively flashed and had been leaking water into the structure of the house for decades. This discovery led to an extreme home renovation involving the removal of the roof, siding, brick, windows, drywall in numerous rooms, and structural repairs including the replacement of more than 30 feet of rotten rim joist. It also resulted in a multiyear legal action against the sellers of the house; the home inspector who appeared to miss tell-tale signs of prior attempts to address the leaking flashing; and the sellers’ roofer, who reused flashing when re-roofing the house.

    Fortunately, the legal claims yielded a favorable settlement a few weeks before a jury trial scheduled to last eight days. During the litigation, the parties addressed a variety of legal issues that arise in undisclosed-defect cases, including the determination that a contractual-arbitration clause had been waived, the inapplicability of the economic loss doctrine to limit noneconomic damages, and the enforcement of the transferability of a contractor’s written warranty.

    Real Estate Agents’ Potential Liabilities

    Disgruntled buyers often cast blame on the sellers’ real estate agent and potentially their own agent for failing to identify a problem with a property. Real estate agents have a duty, codified in the Wisconsin Administrative Code, to inspect property and disclose certain facts.13 They are required to perform a “reasonably competent and diligent inspection” to identify observable, material adverse facts.14 An agent must disclose all material adverse facts that the agent knows and that another party does not know or cannot discover through reasonably vigilant observation.15 For real estate agents, a material adverse fact is one that is of such import that it would affect a party’s decision to enter into a real estate contract or would affect the terms of the contract.16

    Although these codified duties provide grounds for buyers to include agents in their claims for compensation for undisclosed defects, liability for a real estate agent can be illusory. As professionals in the real estate industry, agents should have a higher degree of expertise than buyers in spotting defects with a house. Nevertheless, agents often do not spend any more time in a property than buyers, which constrains the level of detail that they can be expected to identify in an inspection. Like buyers, they have to rely to some extent on the sellers’ representations about the property.17

    More significantly, agents are released from their duty to inspect or disclose adverse property conditions if a third-party home inspection occurs.18 Following a third-party inspection, the agent’s responsibility is reduced to disclosing any adverse facts known by the agent that contradict the information disclosed in the inspector’s report or the sellers’ real estate condition report.19

    Home Inspectors’ Potential Liabilities

    Unlike several other states, Wisconsin licenses home inspectors and regulates their work.20 Home inspectors are obligated by Wisconsin regulations to conduct a “reasonably competent and diligent home inspection” to “detect observable conditions” that are “readily accessible.”21 Inspectors are thereafter required to prepare a written report on the inspection, including a disclosure of material adverse facts. For a home inspector, material adverse facts are property conditions that, “if not repaired, will have a significant adverse effect on the life expectancy of the identified item.”22

    The Wisconsin Statutes explain the components of the property that the inspector must inspect and describe.23 They also specify certain conditions about which the home inspector has no duty to inspect. For example, a home inspector has no legal obligation to comment on the adequacy of mechanical components.24 While the inspector must comment on whether a furnace is operational, buyers might discover after the sale that the far reaches of the house are uncomfortable in the extremes of winter because the system components are inadequately sized.

    Home inspectors likewise have no duty to mention the presence of pests, insects, or vermin.25 Thus, an inspector who emerges from inspecting the attic might say nothing about the mouse tunnels observed in the insulation or piles of bat guano. Similarly, the scope of the inspector’s work is limited to the physical residence itself and attached components such as a garage and deck. The scope of the home inspector’s duties does not extend to the health of trees or other features in the yard or to underground components such as a well or septic system.26 Those must be the subject of separate inspections.

    Following a third-party inspection, the agent’s responsibility is reduced to disclosing any adverse facts known by the agent that contradict the information disclosed in the inspector’s report or the sellers’ real estate condition report.

    A home inspector is subject to liability for professional negligence for overlooking or inaccurately describing observable conditions. It is important to recognize a couple of key limits to a home inspector’s potential liability. First, the statute of limitation on a claim against a home inspector is two years.27 This two-year period runs from the date of the home inspection, not from the date a defective condition is discovered. Accordingly, it is not uncommon for the statute of limitation to have expired on a claim against a home inspector before the buyers even discover a problem and realize they may have an actionable claim.

    A second key limitation to liability is that a home inspector is only responsible to inspect and describe components of a home that are observable and readily accessible.28 Because the home inspection occurs before closing when title to the property remains vested in the sellers, the home inspector is not privileged to move the sellers’ personal property. Thus, there may be personal property of the sellers that (intentionally or unintentionally) obscures or hides property defects. If the sellers’ basement is filled with personal property, the home inspector might not spot a crack in the foundation or water stains running down the wall indicating a water intrusion problem. Additionally, a home inspection is not designed to be technically exhaustive, so buyers cannot rely on a home inspection to constitute a review of compliance with local building codes.29

    Also of interest

    Dealing with Real Estate Property Defects?

    Real Estate Transactions System

    Learn more about the obligations and duties regarding disclosure of real estate property defects with Real Estate Transactions System by State Bar of Wisconsin PINNACLE®. Designed to be used in conjunction with standard real estate forms currently in use in Wisconsin, the book provides numerous sample clauses for contingencies, warranties and representations, and other provisions.

    Avoid unfavorable outcomes for your clients by ordering the print book: $245 Members | $310 Nonmembers. Or choose the PINNACLE subscription-based online library Books UnBound® version: $190 Members | $237.50 Nonmembers. Learn more at wisbar.org/Ak0078.

    Contractors’ Potential Liabilities

    Sellers frequently hire contractors to undertake repairs before listing a home for sale. Some of those repairs may be performed without permits or not to industry standards. This is especially true if sellers do not provide the same level of oversight of the contractors that they would have provided if they were planning to stay in the home. Buyers that discover a defect resulting from the contractor’s work after the closing may file a professional-negligence claim against the contractor or seek to enforce a contractor’s warranty.

    Regarding a contractor’s warranty, it is not uncommon for sellers and their real estate agents to mention a contractor’s warranty in marketing materials given to prospective buyers. Care should be taken to ensure that a referenced warranty is transferrable and will continue in force upon the sale of the home. Contractors’ warranties are often written to be specific to the purchaser of the product or service.30 Buyers may be surprised to learn after the closing that a warranty that would logically run with the home, such as a roofer’s warranty, was specific to the sellers and was no longer in effect upon the sale of the home. Buyers may be reduced to arguing that they are third-party beneficiaries of the sellers’ warranty.31

    Conclusion

    The purchase of a home can be an exciting occasion. However, it can also lead to equally negative emotions when the buyers discover undisclosed defects after the closing. Suddenly the buyers are facing unexpected repairs costing thousands or, in severe cases, hundreds of thousands of dollars. They begin to question whether the sellers who lived in the property for many years, the experienced real estate agents, or the buyers’ home inspector knew or should have known about a compromised roof, a mouse-infested attic, or a water-damaged finished basement. To carefully analyze whether someone failed in their obligations, it is important to understand the duties of the people involved in the transaction.

    It might be tempting for buyers in the current real estate market to waive their right to an inspection. Taking such a gamble helps the buyers present the most tantalizing offer to sellers who are likely choosing among multiple full-price (or over full-price) offers. Nevertheless, this approach is fraught with danger in the event the sellers intentionally or unintentionally fail to disclose a significant defect with the home. The potential benefits of waiving an inspection contingency are outweighed by the risk of later discovering an expensive remediation and repair nightmare.

    Attorneys representing sellers should make their clients aware of their duties of disclosure and the potential legal implications of misrepresentation. Selling a home is not a caveat emptor scenario. Wisconsin law provides buyers with strong statutory claims that carry with them the possibility of punitive-damages and attorney fee awards. Even when sellers successfully defend themselves against such claims, they do so at a great financial and emotional cost. It is better for sellers to risk overdisclosure on a real estate condition report and leave the closing with a clear conscience.

    » Cite this article: 94 Wis. Law. 16-21 (June 2021).

    Meet Our Contributors

    What is one of your memorable experiences as a lawyer?

    Kevin D. TrostNot many attorneys can say they were robbed in open court with the judge on the bench. For several years I practiced law in Detroit, Mich., where all the motions for the week were scheduled to be heard at the same time. Attorneys would wait their turn in chairs on the court’s side of the railing that separated the public gallery from the rest of the courtroom.

    One morning, when my motion was called, I walked to the podium to make my argument, leaving my briefcase underneath my chair in the attorney section. I returned from my successful motion only to discover that my briefcase was missing. Neither the court nor the court’s staff had a clue as to what had occurred.

    With the help of courthouse security and the closed circuit cameras, it was discovered that a young woman in the courtroom’s public gallery had brazenly reached over the railing and stolen the briefcase. She was soon apprehended and criminally charged for theft. Ironically, for her new crime, she had to return to the same courtroom that she was visiting on the day of the theft for a previous crime.

    Kevin D. Trost, Trost LLC, Madison.

    Become a contributor! Are you working on an interesting case? Have a practice tip to share? There are several ways to contribute to Wisconsin Lawyer. To discuss a topic idea, contact Managing Editor Karlé Lester at (800) 444-9404, ext. 6127, or email klester@wisbar.org. Check out our writing and submission guidelines.

    Endnotes

    1 Wis. Realtors Ass’n, March 2021 Home Sales Report, www.wra.org/HSRMar2021/ (April 19, 2021).

    2 Zach Winter, Why Are House Prices Going Up, and How Long Will It Last? (May 4, 2021), https://www.bankrate.com/real-estate/why-are-house-prices-going-up/.

    3 Id.

    4 Lance Lambert, Lumber Prices Are up 232% and “Could Spiral out of Control in the Next Few Months”, Fortune (April 27, 2021).

    5 Wis. Stat. § 709.02.

    6 Wis. Stat. § 709.03.

    7 Id.

    8 Wis. Stat. § 709.02(1).

    9 See WB-11 Residential Offer to Purchase, lines 159-162.

    10 Wis. Stat. § 895.446(3).

    11 Wis. Stat. § 709.07.

    12 See Malzewski v. Rapkin, 2006 WI App 183, ¶ 15, 296 Wis. 2d 98, 723 N.W.2d 156 (citing Lambert v. Hein,218 Wis. 2d 712, 582 N.W.2d 84 (Ct. App. 1998)) (“A buyer aware of the ‘true nature’ of defects, or who has the right to discover the ‘true nature’ of defects that are disclosed, cannot later complain when he or she goes ahead with the purchase: (1) despite knowing about the defects, or (2) after giving up a right under the contract to discover their ‘true nature.’”).

    13 Wis. Admin. Code § REEB 24.07(1)(c).

    14 Id.

    15 Wis. Stat. § 452.133.

    16 Wis. Admin. Code § REEB 24.02(1), (12).

    17 Realtors are immune from liability if they are unaware that the sellers’ representations are untrue. Norton v. Migliaccio, 2008 WI 44, ¶ 31, 309 Wis. 2d 132, 749 N.W.2d 544.

    18 Wis. Stat. § 452.23(2); Wis. Admin Code § REEB 24.07(5).

    19 Wis. Admin. Code § REEB 24.07(6).

    20 Wis. Stat. §§ 440.97-.979.

    21 Wis. Admin. Code § SPS 131.31(1).

    22 Wis. Stat. § 440.975(3).

    23 See generally Wis. Stat. § 440.975.

    24 Wis. Stat. § 440.975(4)(d).

    25 Wis. Stat. § 440.975(6)(k).

    26 Wis. Stat. § 440.975(6)(L).

    27 Wis. Stat. § 440.977.

    28 Wis. Stat. § 440.975(2).

    29 Id.

    30 Drafters of warranties are required to specify any limitations on scope. Wis. Admin. Code § ATCP 110.04(2).

    31 Shilling v. Employers Mut. Cas. Co., 212 Wis. 2d 878, 886-87, 569 N.W.2d 776 (1997).




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