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What Does A Listing Agent Do With Neighbor's Negative 'Information'?

Written by on Monday, 30 December 2013 1:24 pm
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Suppose a listing agent is told by a neighbor that the property he has for sale probably has a structural defect. What is he supposed to do now? Should he query the owner? Should he do his own investigation? Should he put his hands over his ears and run away?

As with all of these kinds of questions, the right answer will be, "It depends." The circumstances could vary greatly, and no single answer will be adequate for all the possibilities. Nonetheless, a California Appellate decision of some years ago (Wilson v. Century 21 Great Western Realty, First Appellate District, 4/29/1993) gives a fair amount of guidance.

Real estate agent Harry Kraft listed a two-bedroom cottage on a large lot in Walnut Creek for $159,000. (I told you it was some time ago.) The house was built in 1947 and had not been well maintained. After getting roof and termite reports, the price was lowered to $149,500. The property was advertised as a "fixer upper", to be sold "as is."

The property was purchased by John Wilson, a general contractor who had been looking for a house to fix up. Wilson read the reports and personally inspected the property before making an offer. Later, in a walk-through he saw obvious sloping of the floors. At another inspection, he noted a sump pump under the house. Moreover, he was notified on the standard disclosure form that there had been drainage and grading problems. Later, he testified that he knew that he had the right to obtain a property inspection report, but he chose not to do so. Wilson made his offer in July. During the escrow, he obtained another roof report. He also did the required termite repairs himself. He removed the inspection contingency in August and closed escrow in October.

Early on in the listing period - when the price was still $159,000 - agent Kraft had a conversation with a neighbor, Jack Goldner, who had expressed an interest in purchasing the house. Goldner was also a contractor. Goldner said the price was too high and suggested that the house might have foundation problems.

According to Goldner's testimony, "I told him, basically, that I was a contractor, that I was a home inspector, that I had had similar problems in my own house, had to replace my own foundation…had seen other people in the area that had to replace their foundations, and so I told him that if it [were] disclosed that there were those problems in that house, I expected the value would come down."

About three months after escrow closed, Goldner told the buyer, Wilson, about the conversation he had had with the listing agent. According to the record, "Realizing that Wilson was a contractor too, Goldner gave him 'a bit more elaborate' account than he had with Kraft." In December, the buyer had a company X-ray the foundation. The report revealed there was no steel reinforcement.

Wilson and his wife brought suit against the agent, Kraft, and his company, Century 21 Great Western Realty. They claimed fraud, negligent misrepresentation, and negligence. The court found in favor of the defendants. The Wilsons appealed.

First of all, the Appellate Court noted that, "Negligent misrepresentation is a species of fraud or deceit specifically requiring a 'positive assertion'...an 'implied' assertion or representation is not enough. The Appellate Court agreed with the defendants that no such assertion had been shown.

Nor was there negligence. The Appellate Court noted that an agent's statutory duty to inspect and disclose is codified in Civil Code §2079. It then observed as follows.

"Plaintiffs fail to read the statute carefully enough. They base their case on a claimed duty by Kraft to investigate the foundation, based on the neighbor's comments, to discover defects… and then to disclose those defects to plaintiffs. The statute does not require that kind of investigation and disclosure. Section 2079 requires a reasonably competent and diligent 'visual' inspection and disclosure of any material defects which 'such an investigation' would reveal."

"Uncontradicted evidence shows that the only visually apparent problems with the foundation were some cracks and that those were disclosed... Nothing in the statutes required Kraft to order an X-ray examination of steel. Lack of steel was undisputedly hidden to the eye..."

No statutory duty was breached. No negligence was found.

Bob Hunt is a director of the California Association of Realtors®. He is the author of Real Estate the Ethical Way.

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5 comments

  • Comment Link Chat Lines Wednesday, 12 February 2014 2:50 am posted by Chat Lines

    Its like you read my mind! You seem to know so much about this, like you wrote the book in it or something. I think that you can do with some pics to drive the message home a little bit, but other than that, this is magnificent blog. An excellent read. I will definitely be back.

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  • Comment Link Leslea Knauff Thursday, 23 January 2014 11:11 pm posted by Leslea Knauff

    Having been in a difficult situation where neighbors were actually making stuff up about a property because they did not want it to be sold to someone who might subdivide and build on it, I am always suspicious of neighbors' remarks because one does not know what their true motivations are. Anyone can tell you they are a "contractor" but how does one know that they have personally inspected the property--and what their expertise is. In the case of my listing, the seller and I put together some information that included comments by the neighbors and then what we knew to be FACTS about the property--including some news articles. The property did sell to a developer--for a fair price that was satisfactory to the seller--and the problem neighbors then had large McMansions right in their own backyards. And, by the way, the nice family who would have kept everything as it was--were scared away by the so-called 'disclosures' we had to make.

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  • Comment Link MABEL APOE Saturday, 11 January 2014 10:25 am posted by MABEL APOE

    THE AGENT SHOULD HAVE KNOWN THAT THE NEIGHBOUR WOULD DEFINITELY ALERT THE NEW OWNER TO THE FACTS, EXPECIALLY WHEN HE WAS ALSO INTERESTED IN BUYING THE HOUSE. BESIDES, THE AGENT SHOULD HAVE TOLD THE HOME OWNER WHAT THE NEIGHBOUR SAID AND DISCLOSE ALL NEW INFOMATIONS TO THE BUYER .WELL WE LEARN EVERY DAY. GOOD ARTICLE.THIS IS THE BENEFIT OF CONTINUE EDUCATION. THANKS .

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  • Comment Link Margaret Goss Tuesday, 07 January 2014 4:27 pm posted by Margaret Goss

    While I can see why the agent wasn't held responsible, I feel he should still have said something to the homeowner. The two could then have decided how to proceed. I'm not sure which way to go, but that conversation needed to happen.

    At least, as an agent myself, I would have told the homeowner.

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  • Comment Link Jeff Tuesday, 31 December 2013 7:45 am posted by Jeff

    This is such a tough situation to be in. Thanks for the great advice on how to deal with it.

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