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Telling the Buyer What You Know: Seller Disclosure Statements

By John B. Swift posted 05-19-2015 16:45

  

Imagine the following residential property transaction. A buyer purchases a property after reviewing a Seller Disclosure Statement (SDS). The seller, who had lived in the house for 30 years, answered this question on the SDS:

 “Basement/Crawlspace: Has there been evidence of water? Yes __X__ No____

If Yes, please explain:_Just a little water visible in the floor drains from time to time.”

 After closing the sale, the buyer promptly moved most of her valuable possessions into that basement’s storage space. The following spring, a large storm caused the city sewer to back up and flood the basement with three feet of sewage, destroying everything in it. That buyer had considered it an unfortunate event until her neighbors stopped by to tell her all about how the basement had flooded with at least three feet of water every year at that time for as long as they could remember. After the buyer calls in the disaster remediation cavalry and the insurance company, the next call is probably going to be to an attorney.

  As the residential housing market in Michigan recovers and more houses are sold as nondistressed properties (not in foreclosure, not a short sale, etc.), the inescapable disputes between buyers and sellers like the situation described above just might be on the rise.

 In Michigan, the SDS is statutorily required and regulated by the Seller Disclosure Act (MCL 565.951 et seq.). The SDS is a universal form filled out by sellers when they list the property for sale that asks a series of questions about the basic features and mechanicals of the property, such as the roof, basement, furnace, water heater, and windows. (See a sample Seller Disclosure Statement here.) Many of the questions on the SDS require the seller to provide one of three responses: (1) the item is in working order, (2) the item is not in working order, or (3) the condition of the item is unknown to the seller. As you might imagine, sellers will often want to simply claim that they have no knowledge as to the condition of each component so as to limit their personal liability.

 These disclosures are not meant to replace a buyer’s own independent home inspection or even an appraisal done as part of an application for a purchase money mortgage. However, since even the reasonable due diligence of the typical buyer will not necessarily reveal all of the defects in a house, the information in the SDS remains a key consideration in the buyer’s decision making.

 Sellers might often want to simply claim that they have no knowledge as to each component on the SDS so as to limit their personal liability. It may be a better option to scare off a tepid buyer with all of the facts than to incur any risk of getting hauled into court sometime in the future. A seller who tries to honestly disclose every defect in a house often attracts a more trusting buyer, which in turn leads to a smoother transaction for everyone involved.

 For more information on Seller’s Disclosure Statements, see the How-To Kit Understanding Seller Disclosure Requirements for Residential Property.

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