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In most states, home sellers are required to be upfront with prospective buyers about issues that could affect the property's value or desirability. The seller's disclosure is a form that summarizes these details in black and white. It's meant to give buyers a fuller picture of what they can expect from the home so they can decide if it's right for them. Depending on what's disclosed, a buyer may decide to walk away from the deal.
Laws around seller disclosures vary by state, but it's usually forbidden to hide, conceal or fail to disclose known issues with the property. Here's a rundown of how seller disclosures generally work—and what to do if you uncover any serious property issues.
What's Included in a Seller's Disclosure?
Seller disclosures are designed to protect the buyer by explaining known property issues. The disclosure document is a good-faith communication in which the seller shares any defects that could cause concern for a new owner. The specifics vary from state to state but it's illegal to knowingly conceal major property defects. Written seller disclosures typically include things like:
- Roofing issues
- Problems related to the foundation
- Pest infestations
- The presence of lead-based paint or other hazards
- Water damage
- Problems with any of the home's major systems (HVAC, plumbing, etc.)
Again, your state will have its own disclosure requirements. In California, for example, sellers must disclose neighborhood nuisances like barking dogs. They're also obligated to share if a death occurred on the property within the past few years. South Dakota and Alaska have similar rules, though that isn't the case in all states. Meanwhile, sellers in certain states have to direct homebuyers to a law enforcement database where they can locate registered sex offenders.
And then there are "buyer beware" states that don't require sellers to disclose much at all. In Alabama, for instance, the burden for discovering potential issues largely falls on the buyer. There are exceptions. If the buyer specifically asks about certain defects, Alabama sellers are obligated to answer honestly. They must also come forward if there's a known material defect that's considered a health or safety risk to a new owner.
A real estate agent or attorney can clarify which disclosures are required in your state, and what they mean in plain language. Either way, seller disclosures are generally presented in paperwork that both the seller and buyer must sign before closing on the home.
What to Do If Major Issues Are Disclosed
You may spot red flags when reading through the seller disclosures. For example, you may find significant water damage stemming from previous flooding, or structural issues that could cost thousands of dollars to repair. In this case, your best bet here is to schedule an independent home inspection. A certified inspector can uncover all kinds of property issues. They can also drill deeper on the problems noted by the seller.
You'll have to cover the price, which generally costs anywhere from $280 to $401, according to HomeAdvisor. But it could make or break your decision to buy the property. In an ideal situation, you might discover that the issues are easily remedied and don't pose a long-term risk.
If you decide to back out of the deal, just know that you could potentially lose your earnest money. This is a deposit prospective buyers usually make prior to closing on a home. It typically ranges anywhere from 1% to 3% and usually goes toward the down payment. If you have a home inspection contingency in your contract and your inspection reveals significant issues, you should get your deposit back—but that's not always the case. If you waived your inspection contingency your deposit might be lost.
What to Do If the Seller Lies on Their Disclosure Report
Actively withholding information or fraudulently claiming that a home is free of issues is against the law. As a buyer, it will likely provide a loophole to call it quits on the sale and get a refund on your deposit. In extreme cases, a buyer may close the deal and move into the home only to find a significant problem that the seller failed to disclose. They could take legal action against the seller, though they'll have to prove that the seller knowingly lied. In many states, grounds for a lawsuit may include:
- The seller claimed that a certain home feature was in better condition than it actually was
- The seller failed to mention a material defect
- The seller hid or lied about a material defect
Even in some "buyer beware" states, buyers can still sue if the seller conceals a known health or safety hazard.
The Bottom Line
Understanding seller disclosure laws in your state can make you a more informed homebuyer. It can also help you determine if a potential property is right for you. No matter what, having the strongest credit score possible is a key part of the homebuying process. It can unlock better financing options, including lower interest rates and more favorable home loan terms. You can check your credit report and credit score for free with Experian.