Power of Sale – is there a duty to disclose latent defects?

For the third time in the past few months, I’ve seen a certain row unit be conditionally sold and then pop back on the market. It’s a power of sale, meaning the financial institution that held the owner’s mortgage wasn’t paid, and has taken over title so they can sell it and recover their money.

It’s priced so low that I was curious why it keeps coming back on the market so I searched the adjacent row units and discovered there had been a fire.

Clearly, these deals collapse when the prospective buyers do the home inspections and find the fire damage.

It got me to thinking, because as realtors we have an obligation under our code of ethics to disclose material defects, ones that might affect a buyer’s decision. There’s a difference between  latent defects, i.e. those that a buyer would not be aware of and patent defects, ones that are obvious,  which  don’t have to be disclosed.

I would consider a fire to be a latent defect, since a buyer can’t always tell if there’s been one in the absence of disclosure without an inspector gaining access to an attic and seeing the scorch marks.

But banks in foreclosure and power of sale situations sell properties “as is.” They don’t disclose anything, not even taxes — everything is up to the buyer to verify themselves.

Do they, or the realtor, have an obligation to disclose?

Now, I can see how a bank might not know there had been a fire in the unit. They don’t have anything to do with the home after they finance it until the payments stop coming and the power of sale procedure is invoked.

If the bank doesn’t know, then the realtor wouldn’t know either, at least not initially. So no disclosure.

But after three deals have collapsed, the realtor must surely know now that there was a fire in the unit and  I would expect they would have advised their client, the bank, as to why each deal has collapsed. Shouldn’t there be disclosure of the fire in the listing now, as there was with the adjacent property, so that a prospective buyer can decide what to do, at least knowing the issue?

Well, I’ve checked and I can’t find any case-law that says yes. Perhaps the seller doesn’t have to disclose the fire in these circumstances where a property is being sold “as is.” Perhaps  caveat emptor applies: the prudent buyer will find there was a fire when they do their home inspection and can decide whether to proceed or not then.

But it seems to me that not disclosing the fire damage does a disservice to both  buyer and seller. It’s unlikely the seller will ever be able to sell when every home inspection leads to the buyer finding out about the fire;  certainly not fair to buyers to keep making offers that go south after they’ve had to pay for an inspection. The only people benefiting currently are the home inspectors.  And I’m not so sure a realtor would be protected if someone complained to our governing body that a material defect was not disclosed and as a result they are out of pocket.

But I’m adding a new question to my list of questions when I’m acting for buyers.  I always ask if there was any kind of water damage or anything else I should know about. From now on, I’m going to ask if there was a fire as well. And you can bet if I’m acting for the sellers in these circumstances, I’m going to want written instructions either way.

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