Realty Reality: Damage During Escrow

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Does a buyer have to be told about fairly substantial damage that occurs during escrow, even if the damage is corrected?

Suppose you have sold your home and, during the course of escrow, some event occurs that results in more than minor damage to your house. Perhaps an upstairs tub overflows to the extent that water runs down the stairs and walls. Of course you go ahead and correct the problem and repair the damaged areas. You are confident everything is as good as ever, perhaps even better. Do you need to tell the buyer what happened? Or does that seem like an unnecessary muddying of the waters?

Let us try to give the issue some perspective.

Many of us wouldn’t want to buy a car that had been in a serious accident, even if we knew that it had been repaired and certified by the best shop in the area. Some people feel the same about houses. They just don’t want to buy something that has experienced a significant problem, despite the fact that highly-qualified people may assert that it has been fixed.

Suppose you learned that the house you were buying had once experienced slope failure, a cracked slab, and partial collapse. Even if detailed records and reports by the most reputable firms said that it was now okay, you still might not want to buy it. That is why items from the history of a property, not just facts about its present condition, may be material facts. They may have a negative effect on its value from the perspective of a potential purchaser.

The Residential Purchase Agreement (RPA), the standard residential purchase contract used in California, published by the California Association of Realtors® (CAR), provides for the possibility of events as we have envisioned them, and its answer is clear: “Yes, the buyer must be told.” Section 5A(3) states, “In the event Seller, prior to Close of Escrow, becomes aware of adverse conditions materially affecting the Property, or any material inaccuracy in disclosures, information or representations previously provided to Buyer of which Buyer is otherwise unaware, Seller shall promptly provide a subsequent or amended disclosure or notice, in writing, covering those items.”

So, disclosure to the buyer is required. Does the buyer have any options? He or she does indeed. Section 5A(4) of the RPA stipulates, “If any disclosure … or subsequent or amended disclosure or notice is delivered to Buyer after the offer is Signed, Buyer shall have the right to cancel this agreement within 3 Days After delivery in person, or 5 Days After delivery by deposit in the mail, by giving written notice of cancellation to Seller or Seller’s agent.”

Nor is this simply contractual. It has been noted before that delivery of the standard Transfer Disclosure Statement gives the buyer a 3 day right of rescission (5 days if delivered by mail). The same is true of amendments or supplements to that disclosure. It is spelled out in the California Civil Code (§1102.9). It would apply even if the buyer has already removed his contingencies with respect to inspections and reports.

What are sellers to think about this? You are in escrow. Congratulations! Now just be sure to take care of the property. Don’t let Johnny stuff any diapers down the toilet. Etc. etc. Otherwise, you are going to have to inform the buyer; and that will give him an opportunity to bail.

Written by Bob Hunt

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