6.2 Disclosure Obligations, Stigmatized Property, and Liability

Disclosure law protects buyers by forcing sellers and agents to share what they know. The national exam tests the definition of a material fact, who must disclose, and who bears liability when disclosure fails.

Material Facts

A material fact is any fact that could affect the value of a property or a buyer's decision to buy. Opinions and puffery are not material facts; verifiable conditions usually are.

Table: Common Material-Fact Categories

Failing to disclose a known material fact can expose both the seller and the agent to liability.

Seller Duty: Disclose Known, Don't Discover Unknown

Most states use a seller property disclosure form, but the national principles are uniform:

• Sellers must disclose known defects and hazards.
• Sellers have no duty to discover latent defects they don't know about.
• Buyers should still order independent inspections — a disclosure is what the seller knows, not an inspection report.

Caveat Emptor (General)

Some states still recite caveat emptor ("let the buyer beware"), but even there a seller must not actively conceal a known material defect or make false statements. The modern national rule favors affirmative disclosure of known defects.

Agent Duties and Updating Disclosures

Agents owe duties to clients and customers alike. An agent must:

• Disclose known material facts to the parties
• Avoid misrepresentation — active (false statement) or by silence
• Investigate obvious red flags rather than parrot unverified seller claims
• Recommend inspections when conditions warrant

Updating duty: if a new defect surfaces before closing, the seller must update the disclosure and the buyer must be notified promptly. Planning to repair does not erase the duty to disclose. Agents should keep written records of what was disclosed and when, because documentation is the broker's primary defense in a later dispute.

Stigmatized Property

A stigmatized property is one affected by a non-physical condition — a death, a felony, suicide, or alleged paranormal activity. These rules are highly state-specific: some states bar lawsuits for non-disclosure of stigmas, some protect a deceased occupant's HIV/AIDS status under fair-housing rules, and many set time limits.

National exam principle:

• The agent must never misrepresent a fact, even a stigma.
• The agent follows state law and brokerage policy on what must be volunteered.
• The agent may direct curious buyers to do their own research where permitted.

A correct exam answer about stigmatized property almost always reads "it depends on state law, but never lie."

Liability Allocation

Liability for non-disclosure or misrepresentation can fall on the seller, the agent, the broker, or several of them jointly.

• Seller knew, agent did not (no red flags): seller bears primary liability.
• Agent knew or should have known: agent faces negligence, license discipline, and errors-and-omissions claims.
• Both knew: joint and several liability — the buyer may sue either or both, and both can face license action.

Remedies a wronged buyer may pursue include damages, rescission of the contract, and a complaint to the real estate commission. Misrepresentation can be intentional or merely negligent; even an honest but false statement can create liability.

Types of Misrepresentation

Not every false statement carries the same liability. The exam separates three degrees:

• Innocent misrepresentation - an untrue statement the speaker honestly believed was true. It can still support rescission, because the buyer relied on it, though damages may be limited.
• Negligent misrepresentation - the speaker should have known the statement was false; failing to verify an obvious red flag is negligence.
• Fraudulent misrepresentation (fraud) - a knowing false statement or deliberate concealment made to induce reliance. Fraud exposes the wrongdoer to damages, rescission, and punitive damages, plus license revocation.

Table: Degrees of Misrepresentation

Puffing - subjective sales talk ('best view in town') - is not misrepresentation because no reasonable buyer treats it as a verifiable fact. But a specific factual claim ('the roof is two years old') is not puffing and must be true.

Exam Trap: Even an honest false statement (innocent misrepresentation) can let a buyer rescind. Good faith is not a complete defense.

Worked Scenario and Common Traps

Scenario. A seller has patched recurring foundation cracks for years and the listing agent has seen the patches. The disclosure form omits any structural problem. After closing, the cracks reopen. Because both the seller and the agent knew, the buyer may sue both for misrepresentation and seek damages or rescission, and the agent may face discipline.

Common exam traps:

• Assuming a disclosure replaces an inspection — it does not; both are needed.
• Thinking an agent can stay silent about a known defect — silence can be misrepresentation.
• Believing stigma disclosure is federally uniform — it is state-specific.
• Assuming the seller is always solely liable — a knowing agent shares liability.