6.2 Disclosure Obligations, Stigmatized Property, and Liability

Material facts and the duty to disclose

A material fact is any fact that could affect a reasonable buyer's decision to purchase or the price they would pay. The national exam tests the difference between physical defects (must disclose if known) and intangible "stigmas" (treated very differently across jurisdictions).

The modern rule under the National Association of REALTORS Code of Ethics and most state laws: licensees must disclose known latent material defects to buyers. A latent defect is hidden, not discoverable by ordinary inspection, and known (or that should be known) to the seller or agent, for example a cracked foundation hidden behind fresh drywall or a chronically flooding basement that has been freshly painted.

Contrast with a patent defect: an obvious, visible problem (a missing railing, a hole in the roof). Patent defects are discoverable by ordinary inspection, but the safer exam answer still favors disclosure of any known problem.

Who owes what duty

Caveat emptor ("let the buyer beware") historically placed the burden on buyers. It has been largely replaced by an affirmative duty to disclose known defects. The exam trap: an option that says the seller "had no duty because the buyer should have discovered it" is usually wrong when the defect was latent and known.

Stigmatized property

A stigmatized property is one that is psychologically impacted by an event with no physical defect, such as a death, suicide, felony, or a reputed haunting. Many states have statutes declaring these are not material facts that must be disclosed, and some specifically protect HIV/AIDS status of a former occupant.

Key rules the exam tests:

• A death on a property (natural, suicide, or even homicide) is frequently not a required disclosure under state "stigma" statutes, but the licensee may not lie if asked a direct question.
• Fair housing prohibits disclosing that a former occupant had HIV/AIDS or any protected-class information; revealing it can violate the federal Fair Housing Act.
• A megan's-law / sex-offender registry is public; agents typically refer buyers to the public database rather than personally vouching for the data.

Worked scenario: A buyer asks, "Did anyone die in this house?" The state does not require disclosing a prior natural death. The agent should not volunteer protected information, but if directly asked, the agent must not misrepresent and can direct the buyer to verify independently. Lying converts a non-material fact into actionable misrepresentation.

Liability: misrepresentation and the environmental superfund

Liability tiers the exam tests:

• Innocent misrepresentation: an unintentional false statement; contract may be rescinded.
• Negligent misrepresentation: failure to use reasonable care; damages.
• Fraud / willful misrepresentation: knowing lie or active concealment; damages, rescission, license discipline.
• Puffing: opinion/sales talk ("best view in town") is not actionable; a false statement of fact is.

CERCLA / Superfund (1980) imposes strict, joint and several, and retroactive liability on potentially responsible parties for hazardous-waste cleanup, including current owners. An innocent landowner or bona fide prospective purchaser defense may apply if the buyer performed all appropriate inquiries (a Phase I Environmental Site Assessment) before purchase and found nothing. This is why commercial buyers order Phase I ESAs.

Worked example: A buyer acquires land later found contaminated by a prior owner's dumping. Under CERCLA's strict/retroactive scheme the new owner can be liable, but a documented Phase I ESA performed before closing supports the innocent-landowner defense.

The seller's disclosure form and "as-is" sales

Most states require the seller to complete a residential property condition disclosure form covering items such as the roof, foundation, plumbing, electrical, HVAC, water source, sewage, and known hazards. The licensee should encourage accuracy but must not coach the seller to omit known problems.

A frequent exam trap concerns "as-is" sales. Selling a property "as-is" means the seller will not make repairs; it does not waive the duty to disclose known latent defects, and it does not shield the seller from fraud liability for active concealment. The buyer still typically retains the right to inspect.

Numeric scenario: A seller marks "no known roof leaks" while having paid a roofer $3,200 the prior winter for leak repairs. That false statement of fact is negligent or fraudulent misrepresentation depending on intent, and "as-is" language will not protect the seller.

Practical liability defense for the licensee

The national exam rewards licensees who reduce their own exposure through process, not promises. Internalize this short framework:

The through-line for the whole chapter: recognize, disclose what is known, refer to professionals, and document. Answers that have you diagnosing, concealing, guaranteeing, or volunteering protected information are the distractors.