We all know caveat emptor, i.e. “buyer beware,” is the law in our state in the selling of used homes. Simply stated, this means that neither the seller nor the seller’s agents, unless asked, are required to disclose defects, except those which might pose a health or safety risk to the buyers. Many brokers list and sell homes relying on the principles of caveat emptor. Seller disclosure is almost the exact opposite. Brokers who practice seller disclosure require the seller at the time of the listing to fill out a form which details items known to the seller to be defective. This list is then shared with potential purchasers, and even with cooperating brokers. This article is to help brokers and consumers understand some of the consequences of their choice.

Caveat Emptor The Alabama Supreme Court has held caveat emptor to be the law in a consistent line of cases. Everyone should be on notice that there is no warranty which comes with the sale of a used home. Buyers have a chance to inspect them, and should assume the responsibility of a purchase.  A used home is like a used car, when you buy it, it is yours. End of story, right? Not exactly. Too often, the story just begins there. In most transactions there are no problems.  In many, however, used houses have so many things which can be wrong, the result can be unhappy buyers. The lawsuits we see and our E & O experience tells us that property condition problems are the primary cause of suits and claims in our state. Unhappy buyers often react poorly when caveat emptor is explained to them.  Many will say bad things about your company.  Some will force you to notify your errors and omissions insurance carrier of a potential claim. Some will end up in an attorney’s office, where talk will turn to looking for misrepresentation by the agents involved. This is because caveat emptor will not allow a successful lawsuit, but misrepresentation will.  Besides, misrepresentation can trigger an award for punitive damages. Typically, a plaintiff’s attorney will file the lawsuit alleging negligence in order to get recovery from a possible E & O claim, and will allege misrepresentation. As the suit develops, a decision will be made about which to really pursue. That decision will usually be driven by which nets the most money. In case you have not heard, our errors and omissions insurance carrier, St. Paul Fire and Marine, has reported to us through Williams Underwriting that our claims in Alabama have been higher than expected. In fact our claims are significantly higher than all other states with mandatory E & O programs. If this continues true, the impact on our mandatory E & O program could become the subject of another article. Maybe too, our higher claims experience is another symptom of what some call lawsuit abuse, and is another illustration of the need for “tort reform” in our state. I will leave that judgment to you.

Seller Disclosure Because seller disclosure is relatively new and not as widely practiced in our state, lessons are more difficult to draw.  Seller disclosure seeks to avoid some of the problems of caveat emptor by requiring disclosure from the best source of information, the sellers. The buyer is told about problems, repairs are done in advance or are negotiated, and everyone lives happily ever after. Right? Well, as you might have guessed, there still are problems. There will still be some unhappy buyers after a seller disclosure sale, but probably fewer of them. I say probably because we have had few significant consumer complaints, and no resulting lawsuits of which I am aware. Perhaps we can draw lessons from other states. The National Association of Realtors recently reported that misrepresentation claims accounted for 61% of all claims received by their endorsed errors and omissions insurance carrier. Seller disclosure is widely practiced in other states. Caveat emptor as we know it is not the law in other states.  Remember, too, that there appear to be fewer claims and suits in most other states compared to Alabama. Many things could account for this high percentage of misrepresentation claims.  Common sense says one explanation is buyers get disclosure, but later claim it was not truthful, complete disclosure.  They and their attorneys then begin the search for misrepresentation based claims. Any resulting lawsuit will be like the one already described, with counts based both upon negligence and misrepresentation.

Conclusion It seems no wonder that brokers, buyers, and sellers struggle with the issues involving problems with sales of used homes. Consumers, both buyers and sellers, should take enough time to learn the difference between caveat emptor and seller disclosure. No government agency or legal system can substitute for consumers’ responsibility for their own decisions. For brokers the issues are more complicated. The goal in any business is satisfied customers and clients, with low risk of loss due to suits and claims. The law of caveat emptor is well settled. Brokers know what they are getting when relying on it. With the number of lawsuits and E & O claims we are experiencing, though, it is easy to understand why a broker would opt for seller disclosure. I know a Florida broker who believes that mandatory home inspection such as they have is a good solution. It is not the purpose of this article to push any point of view. We just want brokers to be as informed as possible when making business decisions.

Again, it should be noted that the information presented in the preceding article relates ONLY to people buying & selling houses in the state of ALABAMA and their agents.