Due Diligence, Part 4 — Disclosure Requirements

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Aimed at investors in fixer upper properties, this continuing discussion of Due Diligence from the “Real Estate Investing for Dummies” outline, turns to disclosure requirements. Due diligence is the time period between the acceptance of the offer to purchase a house and the close of escrow and completion of the sale. It is the time to get the answers to all of your questions about the house. You will never discover some of the problems that exist unless the seller tells you, which is what disclosure is all about.

The Tucson Police Example

The concept of disclosure reminds me of when the Tucson police were looking for a man they suspected of a string of burglaries. They had six photographs of the man, all taken in different locatoins and from different angles. They sent faxes of the pictures to police departments all over the country.

Three days later, Tucson received a fax from the police chief from a small town in Arizona. The report read, “We got right to work on those six pictures you sent. We’ver arrested five of the suspects, and we have the sixth under observation right now.” A classic case of a cloud of confusion caused by not enough disclosure.

Disclosure Requirements Vary

Many states have seller disclosure requirements fo residential renal property with four or fewer units. Sellers are required to supply the buyer with a written statement that identifies all known structural and mechanical problems, and in many cases, the seller must complete a comprehensive questionnaire.

However, buyers of residential investment properties with five or more units or any tyupe of commercial property usually don’t have the same protections. The idea is that buyers and sellers are more sophisticated and don’t need a formal written statement.

My opinion is that whether or not a formal disclosure statement is required, if you are the seller, it is in your best interest to disclose all problems that could affect the value or use of the house. Two reasons to fully disclose problems are: 1) morally, it is the right thing to do, and 2) the buyer could still come back and take you to court under claims of misrepresentation and fraud. Why take the chance? Once you sell a house, you want to be done with it and not have to worry about being dragged into court.

What about if a seller offers a house on a “as-is” basis? Does he or she still have to disclose problems?

The “as-is” approach to selling is the next article in this series.

How to Sell Your Home Smart