6.2 Disclosure Obligations, Stigmatized Property, and Liability

Material Facts: The Core Standard

A material fact is any fact that could affect a property's value or a reasonable buyer's decision to buy or the price offered. Sellers must disclose known material defects; they are not required to discover defects they do not know about. Buyers are still expected to perform their own due diligence through inspections.

The duty is anchored in the difference between latent and patent defects:

• A latent defect is hidden and not discoverable by ordinary inspection (a cracked sewer line, a previously flooded basement that has been cosmetically repaired). Known latent defects must be disclosed.
• A patent defect is open and obvious (a visibly sagging porch). Buyers are charged with noticing patent conditions.

The heightened disclosure duty applies most clearly to known latent material defects, the kind a buyer could not see but the seller knew about.

Common Disclosure Topics

Most states use a standardized seller property condition disclosure form. On the national exam, focus on the principle rather than a specific state form: the seller reports what is known, the form is not a warranty, and it does not replace a professional inspection. A disclosure reflects the seller's knowledge; an inspection is an independent evaluation. Both are needed for an informed decision.

Misrepresentation, Concealment, and Caveat Emptor

Non-disclosure problems take three forms:

• Misrepresentation is a false statement of fact. It can be intentional (fraud) or negligent (the agent should have known better). Even an honest but false statement can create negligent-misrepresentation liability.
• Concealment is actively hiding a defect, for example painting over a water stain to mask recurring leaks.
• Silence (failure to disclose) can itself be actionable when the fact is a known material defect.

Some states still follow caveat emptor (buyer beware), but even there, sellers must disclose known latent material defects and may not actively conceal them. Puffing ("this is a wonderful neighborhood") is opinion, not a misrepresentation of fact; the line is crossed when an opinion is stated as a verifiable fact that is false.

Stigmatized Property

A stigmatized property is affected by a non-physical condition that some buyers find objectionable: a death on site, a prior violent crime, suspected paranormal activity, or a reputation issue. Because there is no physical defect, disclosure rules are state-specific and often the opposite of physical-defect rules.

Key national principles:

• Many states do not require disclosure of deaths or crimes and some statutes expressly protect agents from liability for not disclosing them.
• Federal fair housing law forbids disclosing that a prior occupant had or died of HIV/AIDS; that is a protected handicap and a non-material fact.
• An agent may never affirmatively misrepresent a stigma. If asked a direct question, the agent follows state law and brokerage policy and must not lie.

The safest national exam answer: stigma disclosure "depends on state law," but the agent must never misrepresent and must never disclose protected-class information.

Liability Allocation and Documentation

Liability for non-disclosure can fall on the seller, the agent, and sometimes the broker. The exam's recurring rule: if both the seller and the agent knew of a defect and it was not disclosed, both are liable (joint and several liability), and the buyer may sue either or both.

Remedies a wronged buyer may seek include damages, rescission of the contract, and complaints leading to license discipline. An agent who documents in writing that the seller was advised to disclose, and keeps records of what was disclosed and when, materially reduces exposure. When a new defect surfaces before closing, the seller must update the disclosure and the agent should ensure the buyer is notified.

Applied Scenario: The Patched Foundation

A seller has patched recurring foundation cracks for ten years and tells the listing agent about it. The cracks are cosmetically hidden behind drywall, so a buyer touring the home cannot see them. This is a known latent material defect. If neither the seller nor the agent discloses it and the buyer later discovers the recurring problem, the buyer can sue both for misrepresentation and seek damages or rescission, and the agent may face license discipline. The correct action was to disclose in writing and encourage the buyer's own inspection.

Contrast: if the same seller genuinely did not know the foundation had a problem, there is no duty to disclose what is unknown, though an obvious sag a buyer could see would be a patent defect the buyer is charged with noticing.