Although "seller disclosure" was a term loosely used before 1990 in both resale homes and new homes, it is now an issue and a formality that has been brought to the forefront in these days of lemon laws and (sometimes justifiably) litigiously righteous consumers.

Although I will not and cannot present this subject to the consumer in purely legal terms, it is important to know the origins and reasons for seller disclosure laws. This is so that you, as the homebuyer, do not blithely initial and sign purchase agreement disclosures without knowing how important your endorsements are.

Seller disclosure requires a home seller (builder or owner) to disclose any known material defect in the property about to be sold to you, the buyer, which could affect the value of your property. It's fairly easy to surmise what defects may already exist in a home that has had several owners; things like plumbing problems, cracked stucco, a roof that will need to be replaced in a year or two, or soil erosion that has required the present owner to do foundation work. But how, you may ask, could this apply to a new home, that is built from the ground up, especially at the point at which you're basically buying the "promise" of a house that does not yet exist?

Homebuilder contracts (lovingly referred to by builders as "purchase agreements") used to be fairly simple, three or four page legal instruments, which were augmented by addenda that altered the purchase price as upgrades were added. They may have been accompanied in some areas by receipts to be initialed by homebuyers, acknowledging they have reviewed the neighborhood rules (C. C & Rs), or the public report, issued by the local Department of Real Estate, regarding the initial approval of the property for residential use.

Needless to say, current new home contract packages are tomes of legal disclosure. Today, builders must disclose everything that may or may even not be useful to know about the land, its development, the surrounding area, soils conditions, future prospects for transportation, schools, and commercial areas and buildings nearby, to name a few. They, or their paperwork, must tell you that the set of abandoned railroad tracks at the bottom of the hill may someday be used for light rail. They must tell you if a three-story tall Home Depot may someday block the view from your family room (or that the proverbial door may be left open for something like this to become a reality). Builders must educate you on what existed on the property before it was subdivided for residential use, inform you of what will be done with the existing trees, and how homes will be placed around them. They should clue you in on where a neighborhood park may be developed and if the softball diamond there will have bright lights used that could keep you awake at night. Now, builders will even have you sign off to acknowledge that the "soil may contain rock," so that if you decide to put a pool in your backyard someday, you can't have recourse against them for a more costly pool dig! The list goes on and on. And you can imagine how incensed a homebuyer taking out a 30-year mortgage on a new home would be without knowing how these things may affect both their lives and their property values.

Builders are big on disclosure, because instead of anticipating the wrath of one homeowner in a given area, they must not rule out the possibility of hundreds of disgruntled people. This unfortunate phenomenon can sometimes lead to millions of dollars in class action lawsuits, should something materially known to the builder to affect future value not be disclosed to purchasers at the time.

The history of seller disclosure is not a long one, and you may begin to appreciate what changes it has caused in the industry to protect you as a consumer. It's logical to think that state law should cover seller disclosure, but in most states it does not, at least not specifically. California is one of the leaders in disclosure laws, with a law passed there in 1987 that codified the questions the seller must answer. In addition, both seller, buyer and any agent involved must initial a form that states that the property has been reasonably inspected with any defects disclosed. By 1992, only Maine and California had any type of formal regulations on the books requiring sellers to disclose hidden materials or latent defects in the property (for builders this would have been things like soils conditions and hazardous substances.) In that same year, national real estate giant Coldwell Banker announced a new policy that required all sellers listing property with their company to fill out and sign disclosure forms regardless of what the state required. Sellers were less than pleased at the prospect, but buyers were no doubt thrilled to be "in the know" when considering a purchase.

According to information taken from Ilyce Glink's new consumer book, "100 Questions Every First-Time Home Buyer Should Ask," state law in Illinois prior to 1993 didn't even address the issue, as many other states did not. "Caveat emptor" (Let the Buyer Beware) was the law of the land. If, however, the seller was prudent enough to tell the representing agent about any defects, the agent or broker was obligated to tell the buyer or buyer's agent. This did not cover the prospect of "What I don't know won't hurt me, so don't tell me."

By the mid-1990s all this began to change. Illinois sellers must now fill out a 22-question seller disclosure form, with the NAR (National Association of Realtors) pushing for disclosure laws mandated by every state. With the majority of after-closing lawsuits brought about due to undisclosed conditions affecting value, it's clear to see what a Pandora's box this entire issue can create with Realtors, buyers and builders. Fingers tend to point to the broker as the consumer advocate and representative expert in these matters. In most states, builders must hold a broker's license to sell their homes, mandating the same requirement.

A case in point for the re-sale of existing (but nearly new) homes came into play when my husband and I put our home on the market back in 1990 in Southern California. The builder of our home had won a lawsuit with the supplier of PVC (plastic) pipes and pipe fittings when it was discovered that there were leaks in many of their homes. Every homeowner in the area who bought from this builder and whose home had this plumbing installed was offered the opportunity to have copper pipes installed. The prospect of having one's home torn apart was not an easy one to face, but in our anticipation of selling the home, we decided to go ahead and have it done. The builder not only replaced the plumbing wherever necessary; it also repainted, cleaned, and did a few repairs while they were at it, and our home showed beautifully by the time we put our "For Sale" sign up. We, as sellers, then had the responsibility to disclose to any potential buyer that the plumbing had had problems in the past, but was replaced with $9,000 of new copper throughout the house.

To make a long story short, it was a major selling point for us. None of our neighbors had taken the step to have the builder re-plumb their homes, and among four homes for sale on our street, ours sold fastest and for the highest price. Not only that, the neighbors who had not taken that step needed to disclose the plumbing problem to potential buyers, handing them the builder's paperwork to order the work done - a negative shadow to cast when selling a home.

With builders of new homes, the tendency now is to disclose even more than is required, so that they are as protected as much as possible from lawsuits that could potentially render them defunct at one point. Some new homebuyers are engaging the services of home inspectors during the process of construction so that they are doubly sure of the quality that is going into the new home. These experts should be able to check the home's framework, electrical, plumbing, and finish work and generate a satisfactory report before the final purchase takes place.

Many in the building industry are crying "overkill" on disclosure laws in some areas, but most feel safer in proceeding with construction after receiving as many initials and signatures as possible from buyers. In many homebuyers' eyes, however, there is never enough protection for them on investments as large as home purchases. Paying close attention to builder disclosures before you buy may give you the confidence to proceed with your eyes wide open, or ultimately to pass on one new home area or builder in favor of another.

Published: April 19, 2000

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