We understand that a delayed or canceled closing can be a nightmare for any broker. While Impact Check may have initially been viewed as a "disruptive technology" that challenges traditional approaches to property valuation, many brokers and appraisers now see it as a valuable layer of protection and a powerful tool for building trust and goodwill with their clients. In fact, we anticipate a reduction in delayed or canceled closings as material property issues are identified earlier in the transaction process.
The routine use of Impact Check provides real estate professionals with a proactive tool to inform clients of material issues affecting the use, improvement, or value of a subject property. By increasing transparency and early disclosure, Impact Check may also help reduce exposure to litigation, professional liability, and disciplinary concerns.
Impact Check employs the nation's most comprehensive, constantly updated database of proposed government takings, projects, roadway changes, superfund hazardous waste sites, high voltage transmission line corridors, railway rights of way, airport safety zones, power plants, nearby registered sex offenders, solid waste facilities, and water and sewage treatment plants, among other factors. Any of these conditions could be vital to determining whether to buy, sell, improve, or assemble almost any individual property in the nation (and arrive at a price determination).
The time required to use Impact Check is minimal, a property check can be performed on-site using existing mobile devices. In contrast, the potential consequences of failing to exercise due care in a real estate transaction can be significant, including the defense of a disciplinary complaint, the accumulation of litigation costs such as attorney fees, and the possibility of an adverse monetary judgment. In addition, the disappointment of a client is an outcome no real estate professional wants to experience.
Real estate transactions and professional appraisals are highly regulated in every state. Many regulators place an affirmative duty on the seller, the appraiser, and the broker to consider and disclose any condition which could affect the value of the subject property. These conditions can be either on the subject property itself, or they can be existing off-site. Failure to meet this responsibility may result in litigation against both the seller and the professional. Even if the defense prevails, the costs and attorney fees incurred by the prevailing party are often not recoverable. And even if they are recoverable, there is always the issue of collectability.
A common standard for determining liability is whether the seller, appraiser, or broker knew or should have known of the condition, even if it is off-site. The professional, due to superior expertise in real estate valuation and transactions, is usually held to an even higher standard than the seller.
It is hard to imagine a more impotent defense than "How could I have known of that condition?" With the use of Impact Check, the defendant can proactively identify such conditions and avoid accusations. With the simple click of a mouse, the seller and his professionals likely could have determined whether the subject property potentially suffered from any condition, on or off-site. A simple "yes/no" inquiry is free of charge. It would be unfortunate for a professional who, in the face such a retort, has no convincing argument that the omission of that simple mouse click did not constitute a failure to use due care.
Several recent publications and court rulings suggest the growing need for Impact Check's services.
The official magazine for the National Association of Realtors has addressed the issue of failure to disclose defects as the number one generator of Errors and Omissions (E&O) insurance claims:
"It doesn't really matter if you're in Massachusetts or North Dakota; we see the same mistakes everywhere," says Brent Rothgeb, who sifts through claims from all over the nation as the manager of the real estate professional liability book for Travelers Insurance.
According to Rothgeb, brokers and managers should pay special attention to four areas when training agents and processing sales in order to avoid a costly E&O claim that could cause caps to be exceeded and premiums to skyrocket.
Reflecting a view shared by many states, the Wisconsin Realtors Association has put it even more succinctly. There is no distinction between on and off-site material problems:
"Provide full disclosure (if material in nature): Make sure buyers are aware of any potential problem areas. For example, if the vacant lot next door will be developed or if a property tends to flood, this fact needs to be disclosed to the buyers in writing to help avoid any future allegations."
The following question was posed to the North Carolina Association of Realtors:
QUESTION: A broker in our office who represents a buyer recently placed a home under contract. During the home inspection, the buyer was standing outside the house and heard a train pass by. Although the railroad track was not visible from the home, the buyer was upset that its proximity to the rear of the property was not disclosed on the Residential Property and Owners' Association Disclosure Statement.
The buyer intends to terminate the contract and is seeking to recover his earnest money, due diligence fee, and home inspection fee. He believes the presence of the railroad track should have been disclosed and that the sellers breached the contract by failing to do so. Does the existence of an active railroad track—one that is not visible from the house—have to be disclosed by the seller? Did the seller breach the contract? If not, does the buyer have a claim for damages against the listing agent?
The answer ("Yes") was surprising to many brokers. While the seller would not be liable for failing to disclose a material off-site condition, the seller's broker was exposed to potential liability and licensing consequences. Relevant excerpts are provided below:
ANSWER: Under North Carolina law, sellers have very limited disclosure obligations to buyers. While sellers may not misrepresent facts or fraudulently conceal defects in their property, the general rule is caveat emptor—let the buyer beware. In this case, there is no evidence that the seller misrepresented any facts or actively concealed the existence of the railroad track. As a result, we do not believe the seller breached the contract.
Unlike sellers, REALTORS® are required by both statute and the REALTOR® Code of Ethics to disclose all material facts to their own clients and to other parties involved in a real estate transaction. Licensees are subject to disciplinary action and potential civil liability for failing to disclose a material fact. In some cases, determining whether a fact is sufficiently "material" to require disclosure can be difficult.
Facts that relate directly to the property include external conditions that may affect the use, desirability, or value of the property. Examples cited in the North Carolina Real Estate Commission's Real Estate Manual include pending zoning changes, restrictive covenants, plans to widen an adjacent street, and plans to develop neighboring properties.
Thus, in our view, both agents—and possibly their firms—face potential disciplinary action and/or civil liability for failing to disclose the existence of the railroad track to the buyer before the property went under contract.
The issue of liability for failing to identify and disclose off-site defects is summarized in an article published in the Brigham Young University Law Review:
II. Judicial Approaches to Disclosure of Off-Site Conditions
Off-Site Defects Treated the Same as On-Site Defects
Several courts have adopted an approach that makes no distinction between disclosure duties for on-site and off-site conditions. Under this approach, the same test is applied to determine a seller's duty to disclose defects, regardless of the physical location of the condition.
Some courts have applied the traditional analysis used for on-site defects to determine whether sellers also have a duty to disclose off-site conditions. In Ribak v. Centex Real Estate Corp., residential homebuyers sued a developer-seller, alleging the seller failed to disclose the existence of a wastewater treatment plant adjacent to the property. The Ribak court applied the same disclosure standard to off-site conditions as it did to on-site conditions, made no distinction based on location, and held the seller liable for nondisclosure.
California was among the first states to codify a broker's duty to investigate off-site latent defects, even when such investigation requires reviewing records at county offices to confirm or rule out issues affecting the subject property.
Under California statute, sellers are required to disclose known defects in fixtures and appliances, known structural defects, defects or conditions affecting the property, and neighborhood noise problems or other nuisances.
The California Court of Appeals in Alexander v. McKnight recognized that the purpose of the statute is to "be liberally interpreted so that a buyer will be fully informed on matters affecting the value of the property to be purchased."
The court made the following observation regarding the doctrine of caveat emptor: "If anything, the concept of 'let the buyer beware' is an anachronism in California, having little or no application in real estate law."
Given California's seismic risk concerns, additional disclosure rules govern earthquake hazards.
A critical statutory provision requires that, when information regarding a seismic hazard zone is reasonably available, the seller or the seller's agent must disclose to a prospective purchaser that the property is located within such a zone. The statute defines "reasonably available" as notice posted at the offices of the county recorder, county assessor, and county planning commission identifying the location and effective date of the seismic hazard maps.
