House to House: Is Property Condition Disclosure Required by Law?

Posted by Emily Morgan - July 16, 2012 - House To House - No Comments

House to House: Is Property Condition Disclosure Required by Law?

Arkansas REALTORS® Association

This week’s column is guest authored by Gary Isom, Executive Director of the Arkansas Real Estate Commission.

 

Of the questions we receive from the media, the topic that most often arises is related to property condition disclosure, also referred to as seller disclosure.  The typical question is something like “Does the state of Arkansas require sellers to disclose information about the condition of their property?”

Whenever this question comes in, the first thing we do is go into “educational” mode. There are many issues that have to be clarified and addressed when answering this question.

First, we’ll consider the question in its most wide-ranging and comprehensive context.

“Is there a state law in Arkansas that requires every property owner to disclose all aspects of the condition of his or her property when selling that property?”

The answer is no. Furthermore, I doubt that there will ever be such a law in Arkansas. It would be a very difficult sell for a legislator to convince all the citizens of his constituency that it is in their best interest for the state to require those property owners to disclose everything they know about their property whenever they sell it.

Now, let’s take the question a step further and narrow it down a little so that it fits more within the jurisdiction of the Arkansas Real Estate Commission, the agency that issues real estate licenses in the state of Arkansas.

“Does the Arkansas Real Estate Commission require every real estate agent that lists and sells real estate in the state of Arkansas to disclose information about the condition of the property they are listing or selling?”

The answer is yes. It is actually a commission regulation; however, regulations, like laws, are always open to interpretation.  The Real Estate Commission regulation states “A licensee shall exert reasonable efforts to ascertain those facts which are material to the value or desirability of every property for which the licensee accepts the agency, so that in offering the property the licensee will be informed about its condition and thus able to avoid intentional or negligent misrepresentation to the public concerning such property.”

So, we must first consider what “reasonable efforts” are and then turn our attention to “those facts which are material to the value or desirability of the property”. We would certainly not expect a real estate agent to pull off sheetrock or siding to see if there are any termites in the walls. However, if there is a large water spot surrounding a light fixture on the ceiling, the agent would be wise to inquire of the seller as to the condition of the roof. The question of “material value” can cause some interesting discussions. While that ceiling mark and potential roof leak would obviously affect the value of the property since some repairs would be necessary, let’s consider that a previous owner was brutally murdered in the house? While the market value of the house may be compromised by such knowledge in the community, we cannot readily conclude that the material value of the property is affected. Most agents, when placed in this situation, tell us that they will advise the seller that any information of this sort be disclosed. Actually, Arkansas law does address the subject of Psychologically Impacted Properties by the following excerpts of Arkansas Code Annotated  17-10-101, which is separate from the real estate license law:

(5) “Psychologically impacted” means without limitation that the real property was or was at any time suspected to have been the site of a homicide, suicide, or felony; and

 

(6) “Transferee” means and includes without limitation a buyer, purchaser, grantee, lessee, tenant, or one receiving any estate or interest in real property.

 

(b) The existence of any fact or circumstance or suspicion of the existence of any fact or circumstance that indicates a property might be or is psychologically impacted is not a material fact that must be disclosed in a real property transaction.

 

(c) No cause of action shall arise against an appraiser of real property, a licensee as agent of an owner, or a licensee as agent of a potential or actual transferee of real property for failure to inquire about, make a disclosure about, or release information about the existence of any fact or circumstance or suspicion of the existence of any fact or circumstance that indicates that the real property is psychologically impacted.

 

Even with this statute, the Arkansas Real Estate Commission still advises real estate agents that they must be honest when asked a specific question to which they know the answer. So, if a potential buyer asks whether this is the house where the brutal tragedy occurred, the agent should respond affirmatively if they know it was.

Now, let’s ask one other question. “Are there any other mechanisms in place in Arkansas by which property owners disclose information about their property when attempting to sell?

The answer is yes. The public and media often use the term “realtor” as a generic reference to anyone who holds a real estate license. In fact, the term “Realtor” is a trademark for a member of the National Association of Realtors and in Arkansas, a member of the Arkansas Realtors Association. Approximately seventy percent (70%) of the persons who hold Arkansas real estate licenses are also members of the Arkansas Realtors Association and therefore appropriately referred to as “Realtors”. The Arkansas Realtors Association has developed the real estate forms and contracts that are used in most residential real estate transactions in Arkansas. One of those forms is entitled “Seller Property Disclosure”. When listing property, Realtors strongly encourage all sellers to complete the Seller Property Disclosure form. There are close to sixty (60) questions on the form to which the seller is asked to indicate “Yes”, “No”, “Unknown” or “Not Applicable”. The Real Estate Contract developed by the Arkansas Realtors Association and used by its members allows for buyers to request a copy of the Seller Property Disclosure form as part of their offer.

Lastly, we’ll consider one other issue separately as it is getting lots of attention lately. Does it have to be disclosed that a house was previously raided for the production of methamphetamine (meth)? This one raises the questions of knowledge and material value. As in all real property transactions in Arkansas, there is no disclosure statute addressing the individual owner/seller. If a real estate agent knows that methamphetamine was cooked in the house, that would be considered a fact that could affect the material value of the property since the cost to rehab such a property can be significant. A real estate agent would be wise to walk away from such a listing if the seller was not agreeable to disclosing such information.  If an agent innocently brokers the sale of a property without knowledge that meth was cooked on the property, the agent would not likely be sanctioned by this commission. Agents, unless there is reason for suspicion, are not expected to determine whether every house they list has had meth cooked in it.

So, to conclude, the state of Arkansas does not require property condition disclosure by every seller; however, the majority of residential transactions in Arkansas most likely will include the seller’s disclosure about certain aspects of the property. In the typical residential real estate transaction in Arkansas, the most conclusive property condition disclosure will be those transactions brokered by a Realtor with the second being those transactions brokered by licensed real estate agents who are NOT members of the Arkansas Realtors Association. As for buyers and sellers negotiating their own real estate transaction, any requirement for disclosure about property condition is determined by the contractual agreement of the parties to the transaction.

 

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