By Alan G. Orlowsky, J.D., C.P.A.
In many cases, people are so in love with a house or condo, and they’re so eager to sign a contract and close the sale, that they gloss over the property inspection process. Often, when they are advised by an inspector that there might be a significant defect such as a leak or a boundary dispute that’s worth investigating further, they tend to downplay it or even ignore it rather than risk delaying — or worse, scotching — the deal.
That kind of wishful thinking and denial sometimes lands buyers in a heap of trouble. Once you close the deal and move into the place, if you find a defect and suspect the sellers of fraudulently concealing it, your remedies are much more limited than if you had discovered it (or addressed the issue) well before closing. Fixing a serious defect such as asbestos or water contamination could cost you tens of thousands of dollars. In the worst cases, families have had to move out shortly after moving in, due to such a catastrophe.
The bottom line is, don’t rush through the inspection process. Read the seller’s disclosure statement carefully and critically, ideally before you make an offer. Never sign a contract that doesn’t contain an inspection contingency. Hire a competent home inspector — and if necessary a specialized engineer — and thoroughly investigate all indications of a possible defect. If you discover a defect that wasn’t disclosed, pursue remedies immediately. Here is an explanation of the law and available remedies:
The Illinois Residential Real Property Disclosure Act (RRPDA) requires sellers to complete a disclosure report indicating whether they are aware of any “material” defects in the home or on the property.
The term “material” isn’t defined by the Act, but such defects may include:
Many sellers complete the disclosure form and give it to their realtor as soon as they put their house or condo on the market. They should make the report available to prospective buyers at the outset. According to the RRPDA, they must provide this information to prospective buyers before entering into a contract with the buyer. But as a matter of common law, the buyer may decide to waive this requirement, although it’s usually not a good idea. If they provide the disclosure report after you sign a contract but before closing, you have three business days in which to rescind the contract if you’re not satisfied with the report.
Law or no law, you should ask to see the disclosure form before you make an offer. If the seller´s realtor refuses to show it to you at this point, ask why. If the reason doesn’t seem to make sense, you may still decide to go forward with an offer, but be wary and give yourself plenty of time for an inspection and, if necessary, rescission.
If you see the disclosure report and it contains a defect that you’re not willing to live with (literally), you have three options: ask the seller to fix the defect at their expense, decide that you will bear the expense of fixing it, or withdraw your offer.
The sellers are not required to actively look for defects, only to state what defects they are aware of, if any. For example, they do not need to hire an engineer to assess the property’s structural integrity or review floodplain maps.
Sellers also do not have to disclose previous defects that have since been corrected. If a flood control system has been installed in the basement, for instance, the sellers would not have to disclose previous flooding problems – assuming the problems have not recurred since the system was installed.
Even if you receive the seller´s disclosure report and are satisfied with it, you should conduct a thorough inspection of the property. Take the time to find a qualified inspector: Get recommendations from friends, your lender, or real estate professionals who aren’t involved in your deal. (Realtors involved in the deal are likely to favor lenient inspectors who will understate defects because they want the deal to settle quickly.)
Generally, a sales contract will include an inspection contingency clause, which makes the contract contingent on a satisfactory inspection by the buyers within a limited period, typically five to ten days.
If your inspector finds defects that weren’t in the disclosure report, that doesn’t necessarily mean the seller concealed or intentionally omitted them. They simply may not have been aware of them. At this point, your main concern is not whether the inspection report was fraudulent, but how serious the defect is and what you want to do about it. You have several options:
You should also conduct a final walk-through inspection immediately before closing, especially if the seller has removed furniture and furnishings since your inspection.
At this point, the sellers have a legal obligation to report any new defects or defects that they become newly aware of. But you do not now have a right to rescind the contract unless the seller knew of the defect prior to completing the disclosure form.
If you discover, after you close the deal and take possession of the property, a significant defect that was not disclosed by the seller, you can certainly contact the seller and ask them to pay the expense of repairs. In some cases, they might comply with your request in order to avoid legal action.
On the other hand, they might respond: We didn’t disclose that problem because we didn’t know about it, so we’re not obligated to pay? Maybe they’re telling the truth, maybe not. If you think they’re lying, and they falsified the disclosure report, you can bring an action under the RRPDA (within one year of closing) or sue for fraud in state court. If you win the lawsuit, the sellers must pay the cost of repairing the defect, plus court costs and possibly attorney fees.
To prevail in court, of course, you would have to prove that the seller was actually aware of the defect and failed to disclose it. Your attorney can do this by introducing repair estimates, inspection reports, appraisals, or statements from contractors or neighbors who were aware of the problem before the property went up for sale.
Often the sellers are anxious to sell their property and fail to adequately reveal defects hoping that they’ll be overlooked. At the same time, many buyers are excited about the property and tend to rush through the inspection phase of the negotiations. Protect yourself by taking advantage of every opportunity that the law allows to uncover possible problems before you make what might be the biggest investment of your life.
Alan G. Orlowsky, President of Orlowsky & Wilson, Ltd. in Lincolnshire, Illinois, has been counseling people on estate planning for 28 years. He previously worked for the IRS in its Estate and Gift Tax Division. He also worked for the Deloitte & Touche accounting firm, and he has taught taxation and accounting at Loyola University of Chicago, School of Business.
Al is a contributing author of the book 21st Century Wealth (Esperti Peterson Institute, Denver, 2000), and has written numerous articles on the subject of estate planning. Contact Alan Orlowsky by email or call 847-325-5559.