Tom Kelly: Do we need more seller disclosure?

A friend of mine refurbishes properties in his spare time. His goal is to find one property a year, buy it right, fix it up and rent it out for the long term. He’s picky and thorough and able to turn tear-downs into attractive homes.

One of his latest projects involved a short sale in a neighborhood he long desired. The place was a disaster with all sorts of drug paraphernalia that had to be cleaned up and hauled away. He told me that one of the neighbors said there had been at least one drug bust there and that for a few years people often came and went at all hours of the night.

When I asked him if he thought the stigma of the place reduced its value. He replied:

“I’m sure it did. At least for somebody.”

The seller of the short sale did not disclose that a felony had been committed on the mandatory Seller Disclosure Statement for Improved Property (commonly known as Form 17) The form did not ask the question. “Crime” does not have its own category. It also does not come under “are there any other material defects affecting the property that a buyer should know about.”

It was not always that way. Stigma – in some rare cases positive – used to play a bigger role in disclosing components of value.

For example, when Form 17 was first introduced as a voluntary form by the Puget Sound Multiple Listing Service (now the Northwest Multiple Listing Service) Form 17 included questions about any known “crimes of violence” on the property, suicide, or death from other than natural causes. It was amended in 1993 to “are you aware of anyone having died of suicide or homicide on the property?”

When the Washington State legislature made Form 17 mandatory in 1995, no mention of death or crime was included.

“Form 17 was intended to point out the known structural problems or systems problems with the property,” said Chris Osborn, attorney for the Northwest Multiple. “It was a reminder to the seller that if you know about it, state it. It isn’t a vehicle to try and trick anybody.”

Form 17 was a move to help protect sellers and agents from lawsuits resulting from sellers not disclosing a home’s defects and shortcomings. Questions on the form are about basic sewage, heating, repairs, termites, boundaries and neighborhood conditions. Problems found and then subsequently repaired do not need to be listed.

In the first years, when Form 17 was required of local MLS agents but not legally binding, it sometimes became more of a hindrance than a help. For example, several years ago, a local case in which a caregiver stole more than $30,000 from a dying man brought questions from real estate agents and brokers after the estate was settled.

Were the seller and listing agent obligated to disclose that a felony had been committed in the home?

The main question in most real estate fraud and misrepresentation cases is whether the omission of information, or a statement made, is a material fact. A “material fact” is loosely defined as something that could affect the price somebody would pay for a service or product.

The federal Fair Housing Amendments Act of 1988 prohibits discrimination in the sale, rental and financing of housing based on race, color, sex, handicap, family status or national origin.

Armed with that information and more, many states went back to basics, crafting seller disclosure forms to reflect the condition of the structure and its systems.

But should all known “non-structure” history be eliminated from disclosure? Would you want to know if your potential getaway in the country was once a well known clearing house for street drugs?

Tom Kelly’s new E-book “Bargains Beyond the Border: Get Past the Blood and Drugs: Mexico’s Lower Cost of Living Can Avert a Tearful Retirement” is available online at Apple’s iBookstore, Amazon.com, Sony’s Reader Store, Barnes & Noble, Kobo, Borders Books, Diesel eBook Store, and Google Editions. It mirrors a recent article by CNN on the benefits of the country, including increased rental possibilities.