Final Post

Never Sell a Used Car to Someone You Know:
The Upside of Intimidating Disclosure Requirements for Real Estate Professionals

By: Randy Jones, Valerie Harper, Jenna Vander Weerd

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. Increasingly mobile sellers may feel decreasing incentive to disclose material facts to transactions in markets where they will no longer have a vested interest. Conversely, real estate professionals need fair transactions in their market to increase their ability to do their job. While statutory real estate disclosure requirements expressly burden sellers and their brokers and can be intimidating, they are critical tools for real estate professionals to emphasize the importance of ethical behavior to sellers and reminders for brokers to act in the long term best interest of the profession.

Changing Seller Behavior

Problems with real estate that should be disclosed are not a new invention, so the legislature’s 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 changing attitudes or behaviors of sellers mandate a new response.

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, and 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. It is in the best interest of real estate markets for prices to be fair and accurate, representing the value with all pertinent flaws and information. So this problem’s growth lies in the growing ability of market participants to disassociate their interests from those of the market. This shift is likely what led to the flood of fraud cases in the courts.

Demographic Roots of the Change

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 section 1102), shortly followed by an agency disclosure requirement in 1987 (CCC 2079.14).

California’s size is one thing that makes real estate sellers increasingly unlikely to know their buyer. In 1980 California had 23.67 million residents, by 1990 that number had grown to 29.22 million residents, and in 2008 the census counted 36.55 million people living in California (Census Bureau, 2007). Immigrants account for a large amount of California’s population growth. In the 1960s and 1970s foreign born individuals represented a low percentage of total population, about nine percent. Coming in to the 1980s that number began to rise, estimated at 15% in 1980, 22% in 1990, and up to 26% in 2000 (Public Policy Institute, 2008). According to Niebhur’s explanation of man’s capacity for morality, increasing diversity not only decreases the chance that a seller will know their buyer, but also decreases the chance that the seller will relate to and feel moral obligation toward the buyer.

Increasing distance between home, work and social networks further demonstrate the complexity of California’s markets. In the past three decades, as housing prices have increased, workers have move to suburbs farther and farther from where they work and socialize (FHWA, 2006). Census data suggests that the number of times people move might actually be decreasing, but for those who do move, the ability to move long distance is increasing as well as the ability to travel long distances. For real estate disclosure, the critical factor is how likely the seller is to have future interaction with their buyer, and if the seller is moving a long distance away, the answer is not likely.

Common Law Roots of the Change

In their first attempt to legislate 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.

Case law further demonstrates that the courts, in fact, previously deemed disclosure an important requirement for brokers, agents, and sellers in transactions including real estate. The California Supreme Court’s1968 majority opinion cited six previous cases establishing an “agent is charged with the duty of fullest disclosure of all material facts concerning the transaction that might affect the principal's decision” (Batson v. Strehlow, 1968). This case speaks specifically to the responsibility of an agent to disclose to their principal, but the courts expand the responsibility to of reasonable care to all parties[1]. In Easton v. Strassburger the California First District Court of Appeals upheld the notion that "A real estate broker is a licensed person or entity who holds himself out to the public as having particular skills and knowledge in the real estate field. He is under a duty to disclose facts materially affecting the value or desirability of the property that are known to him or which through reasonable diligence should be known to him." (Easton v. Strassburger, 1984).
The Easton court upheld the 1976 decision in Cooper v. Jevne that a real estate broker/agent must disclose all known facts on behalf of the seller that affect the desirability, value, or buying decision related to the property and established that the broker and seller are responsible to disclose those facts that should have been known. This rule expands the scope of the disclosure problem past fraud to include a seller and their broker’s responsibility to avoid negligence by full disclosure. The majority went further, to say that the purpose of the Cooper rule established in 1976 was to protect buyers from unethical sellers and their brokers. To offer brokers ignorance as a shield from the requirement to disclose would be contrary to the implication of a specialist in the field and would reward under skilled brokers (Easton v. Strassburger, 1984).

While the courts established, enforced, and even expanded the burdens on sellers in or earlier than the 1960s, continuing and increasing lawsuits evidenced that these common law requirements were insufficient to deter sellers from acting unethically by misrepresenting the condition of the property they were selling. The California legislature began to act in the 1980s, expressly and publicly warning sellers of the consequences of unethical behavior.

A Tool for Brokers and Agents

The roots of the problem reveal a critical reason for real estate agents to use embrace rather than shun disclosure statutes. 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 seller socially uninvested 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, and needs their seller’s cooperation in that. 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). A real estate professional, broker or agent, has an additional vested interest in fair transactions, representing all available information from sellers. When a real estate professional needs market information, he will look to past sales prices in the market, if these prices are based on nondisclosure, they will skew the market.








Batson v. Strehlow. Supreme Court of California. 3. June. 1968. Web.

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.

Murakami, Elaine. "Understanding LEHD and Synthetic Home to Work Flows in "ON THE MAP"" Understanding LEHD and Synthetic Home to Work Flows in "ON THE MAP" US Department of Transportation:Federal Highway Administration, 24 May 2007. Web. 28 Nov. 2009. .

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.

U.S. Bureau of the Census. "1981 to 1989 Intercensal Estimates of the Resident Population of States,." Sept. 1995. Web. Nov. 2009. http://www.census.gov/popest/archives/1980s/8090com.txt

U.S. Bureau of the Census. "Annual Estimates of the Population for the United States, Regions, States, and Puerto Rico: April 1, 2000 to July 1, 2007,." 2007. Web. Nov. 2009. http://www.census.gov/popest/states/NST-ann-est2007.html

[1] Duty of care established by Merrill v. Buck, 1962, upheld in 1981 Earp v. Nobmann