Seller Property Condition Disclosures can be a helpful starting point for prospective buyers, but they come with risks and their helpfulness to the buyer can be limited in some cases. This article is intended to help qualifying brokers understand the nuances of Seller Property Condition Disclosures so they can educate the licensees in their company and set an appropriate company policy regarding the use of such disclosures.

This article is for information only and does not constitute legal advice. If you need legal advice, please seek guidance from retained counsel.

Benefits

The primary benefit of a Seller Property Condition Disclosure (“Seller Disclosure”) is that it helps a prospective buyer know more about a property before making an offer or before an inspection has been completed. In theory, a Seller Disclosure tells the buyer everything potentially pertinent to the state of the property that the seller knows. This helps the buyer know whether there are specific issues that they will want to further investigate during the inspection contingency. Another benefit is to the seller: a Seller Disclosure is free, unlike a formal inspection. So, if a seller is tight on money up-front, a Seller Disclosure can be an appealing option. 

Risks

There are two types of risks associated with Seller Disclosures: (1) risks for the seller/the licensee working with them and (2) risks for the buyer.

For the Seller/Listing Licensee

The most significant risks of Seller Disclosures are to the seller and the licensee working with them. A seller who completes a Seller Disclosure must be very careful to answer it fully and honestly. Of course, most sellers understand that they can’t be intentionally dishonest. But, what if a seller forgets about the flood that happened many years ago? What if they misremember the details of a repair that was completed long in the past? Such an error can create liability for the seller that wouldn’t have existed if the seller hadn’t completed a Seller Disclosure.

For the licensee listing the property, having a Seller Disclosure on file gives them information about the property that they wouldn’t have had otherwise. If a licensee has a Seller Disclosure on file for one of their listings, they are responsible for reading it and knowing what it says – they can’t claim that they’ve never read it or are otherwise unfamiliar with it. If the Seller Disclosure contains information about latent health and safety defects, the licensee is then required by law to disclose those defect(s) to prospective buyers. In this way, a Seller Disclosure can also create responsibilities and liability for the listing licensee that wouldn’t exist if there were no Seller Disclosure.

For the Buyer

Although Seller Disclosures generally help the buyer, they raise two types of risks for buyers. First, a Seller Disclosure that doesn’t list any negative items can lull a buyer into a false sense of security. As a result, they may choose not to obtain a formal inspection of the property. Because of Alabama’s status as a caveat emptor, or buyer beware, state, a formal inspection is always advisable. Remember: just because a seller isn’t aware of any issues with the property doesn’t mean that no issues exist. A licensed inspector is trained to do a deep dive to discover issues that might have gone unnoticed by the seller. A positive-seeming Seller Disclosure can tempt a buyer to save some money and skip the inspection – which can be extremely costly in the long run.

The second risk of Seller Disclosures for buyers is that in some cases, the protection that a Seller Disclosure provides can be limited. Many “as-is” purchase agreements specifically state that any representations the seller made about the property that aren’t included in the purchase agreement are of no effect. The Supreme Court of Alabama has upheld this interpretation, ruling that Alabama courts should not consider fraud in a Seller Disclosure if the parties executed an “as-is” purchase agreement and the Seller Disclosure wasn’t part of that purchase agreement. Teer v Johnston, 60 So.3d 253 (Ala. 2010)¹. So, if the parties execute an “as-is” purchase agreement and they don’t incorporate the Seller Disclosure into the purchase agreement, the Seller Disclosure is of very little value to the buyer after closing.

Best Practices

When Working with Sellers

Qualifying brokers should consider, based on the above information, and any other factors they find relevant, setting a uniform company policy regarding Seller Disclosures. Once that policy is set, it’s very important to educate all licensees in the company about the policy. If Seller Disclosures are allowed, licensees should understand the benefits and risks and be able to articulate that information to sellers. Because a seller is only required by Alabama law to make very limited disclosures, companies shouldn’t force sellers to complete written Seller Disclosures in order to list their property. If Seller Disclosures aren’t allowed, listing licensees should understand how to respond to buyers’ requests for Seller Disclosures.

When Working with Buyers

Because Seller Disclosures can provide a “sneak peak” into a property, a buyer’s licensee should never refuse one if it is offered. However, buyers’ licensees should take care to ensure that the buyer understands that a formal property inspection is still highly advisable – no matter how positive the Seller Disclosure is. It is the buyer’s licensee’s duty to educate the buyer about caveat emptor.

When the buyer makes an offer on a property about which they have received a Seller Disclosure, it’s important to consider the language of the purchase agreement. If the purchase agreement is an “as-is” contract, the licensee should request adding language that incorporates the Seller Disclosure into the purchase agreement as an exhibit. This helps ensure the buyer receives the maximum possible protection from the Seller Disclosure.

If you have questions about this article and are an AAR member, please contact the Legal Line.

¹The Alabama Supreme Court also affirmed the idea that an “as-is” purchase agreement does not automatically incorporate disclosures related to the property made by the seller in Kidd v Benson, 321 So.3d 676 (Ala. 2020).