Never Sell A Used Car to Someone You Know

The Brief History of Statutory Real Estate Disclosure Requirements

It seems obvious that if a seller has information that influences how much a buyer will pay for what they are selling, the seller should make that information known to produce a balanced transaction. But what if the seller is never going to see the buyer again? Then the seller is forced to weigh the potential personal, continuing effects of a diminished sales price against future plight of the buyer that the seller will never know about. This dilemma is why everyone knows not to sell a used car to someone they know. If you sell a used car to someone you know there is the potential to know about and feel responsible for problems following the sale. If you sell a used car to someone you will never see again, the potential to even know about problems is diminished if not dissolved.

This principle can be applied to real estate markets. As populations become increasingly mobile and complex, we can no longer rely on participants’ potential to face the intrinsic consequences of their actions in others’ lives as motivation for moral behavior. In recent response to the increasing mobility of real estate market participants, legislators have attempted to make the consequences for failure to disclose concrete and personal to the seller, and often their agent. Statutory real estate disclosure requirements often impose fines for failure to comply and expressly allocate burdens to the seller, which guide the way common law will be established.

Problems with real estate are not a new invention, so the perceived need to expressly change the format of real estate transactions must be a response to some other new phenomenon. Historically the courts embraced the idea of caveat emptor, let the buyer beware, however coming into the 1980s the courts experienced an influx of homebuyers suing sellers under the common law fraud of failure to disclose. The question then becomes, did allocation of responsibility truly change, or did the attitudes or behaviors of sellers shift toward nondisclosure?

In studying the capacity of individual men to act, Niebhur explains, “ethical attitudes are more dependant upon personal, intimate and organic contacts than social technicians” (Niebhur, p. 28). In the same text he explains that as the complexity of societies, or groups of men, increase, these personal relationships decline and with them the directly correlated ethical attitudes. As there are more participants in real estate markets, and participants are increasingly able to live more of their lives outside the markets where they do transactions, sellers showed their preference of monetary gain over fair real estate transactions, by hiding (via fraud, misrepresentation, and negligence) material facts that should have been considered in calculating the price of the house. This shift is likely what led to the flood of fraud cases in the courts.

It is not an accident that California, one of the largest and most diverse states in the nation, is pioneering the shift toward legislated morality via statutory disclosure requirements. In 1985 California was the first state to expressly require sellers to disclose their property conditions to buyers (CCC 1102), shortly followed by an agency disclosure requirement in 1987 (CCC 2079.14).

The complexity of California’s real estate markets is evidenced by:
Distance between home, work, and social networks for individuals
Overall population size
Population variation-immigration
Absentee ownership (increasingly possible)
The ability to move long distance (ie out of state, emigration)

In their first attempt to increase incentive for sellers to disclose, the California Legislature acknowledged the preexistence of “obligations of the parties to a real estate contract, or their agents, to disclose any fact materially affecting the value and desirability of the property” (CCC 1102.1 (a)). This broadly encompassing requirement already in place leads one to question what the legislature hoped to accomplish in writing this and subsequent codes.
The Residential Lead-Based Paint Hazard Reduction Act of 1992
Megan’s Law- 1996
Cal. Gov’t § 8589-Natural Hazard Disclosure-1998

The roots of the problem the legislators are trying to solve reveal a potentially important role of real estate agents as markets evolve. Real estate agents often specialize in a specific geographic area and are likely to do multiple transactions in an area over a long period of time. While a buyer moving away from the people in an area may be willing to act in a dishonest or uncooperative manner, an agent who has the potential to do business with these people again will be more motivated toward collaboration and disclosure. For these agents whose ability to do business on an ongoing basis is greater than an isolated transaction, there is a tendency toward equality, which in real estate can only come from full disclosure of material facts (Halpren, 1994, p. 5).

California Department of Real Estate. Disclosures in Real Property Transactions. Sacramento: California Department of Real Estate, 2005. Web.

Halpren, Jennifer J. "The Effect of Friendship on Decisions:." Center for Advanced Human Resource Studies: Working paper Series (1994). Web.

Easton v. Strassburger. Court of Appeals of California, First Appellate District, Division Two. 22 Feb. 1984. Web.

National Association of Realtors. "Milestones in Residential Real Estate: 1900-1999." Realtor Online Magazine. 01 Dec. 1999. Web. 16 Nov. 2009.

Niebuhr, Reinhold. Moral Man and Immoral Society. New York, New York: Charles Scribner's Sons, 1932. Print.

Jenna, Randy, Valerie