PROPERTY CONDITION DISCLOSURE FORMS: HOW THE REAL ESTATE INDUSTRY EASED THE TRANSITION FROM CAVEAT EMPTOR TO "SELLER TELL ALL"

B. Should Seller Disclosure Be Mandated by Statute or Not?

Over two-thirds of states mandate seller disclosure by statute. Mandated seller disclosure statutes have some distinct advantages. Generally, sellers are more likely to provide written property disclosures that have been mandated by statute.141 Statutorily mandated disclosure also protects conscientious brokers from unfair competition by rivals trying to snare listings by convincing sellers they do not need to fill out the disclosure form.142

The integrity of a disclosure system depends on high rates of seller compliance because when few sellers comply, buyers may not know what to make of the disclosures they do receive.143 Consider the myriad possibilities. Should buyers assume that sellers, who are not willing to fill out a property condition disclosure form, have something to hide or just that non-complying sellers have been cautioned by their attorneys against increasing their exposure to later claims of misrepresentation for innocent omissions? Where disclosure compliance rates are low, buyers could assume there is a selection bias resulting in a higher frequency of disclosures from sellers of relatively trouble-free houses, and thus reduce their bids on homes being sold without an accompanying seller disclosure form.144 Buyers would be uncertain whether the homes of sellers voluntarily disclosing numerous defects are more or less defect-ridden than homes of non-disclosing sellers. Maybe disclosing sellers are just more honest. These uncertainties are minimized when buyers receive completed, standard property condition disclosure forms from all, or nearly all, sellers.

Substantial compliance rates can be secured by means other than the enactment of a property condition disclosure statute. Currently, fifteen states are without property condition disclosure statutes. Nonetheless, in most of these states, property condition disclosure forms, promulgated by Realtor associations or brokerage firms, are widely utilized. Sellers who dutifully sign Realtor-drafted purchase forms and listing agreements will find that these forms oblige them to fill out property condition disclosure forms.145 In Utah, with limited exceptions, the legislature has empowered the state attorney general and the division of real estate to promulgate standard real estate forms.146 Utah real estate licensees may use only these forms. Both the purchase and sale agreement and the listing agreement obligate the seller to provide a property condition disclosure. Utah compliance rates are high-estimated at upwards of seventy-five percent.147 In Colorado, the real estate commission promulgated a property condition disclosure form, and virtually all sellers fill it out.148 Use of the form has become so commonplace that most sellers probably assume they have no choice.

Besides mandating seller compliance, statutes can resolve countless issues that could give rise to costly disputes. For instance, all statutes authorize some exemptions, most commonly for transfers by government entities, estate administrators, foreclosing lenders, court orders, transfers of new homes never occupied, or transfers between co-owners and spouses.149 Some statutes specify a procedure for sellers to amend forms in order to correct errors or reveal newly discovered defects.150 Some outline the precise procedure for completion and transmission of the form, including the role, if any, of brokers in the process.151 Under most statutes, after receiving the disclosure form, buyers are given a set period of time to rescind, usually limited to three days from receipt of the report.152 During this statutory disclosure rescission period, the deal is in limbo, but the rescission period will not cause any additional delay if the buyer receives the disclosure document well within the other contingency review periods provided in the contract for the buyer's home inspection, title review, and financing.