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Defect disclosure a ‘turning point’ in real estate
By: Barry Stone
September 30, 2003
Dear Barry,
I was a Realtor nearly 25 years ago, before having children. With my kids now grown, I’ve gone back to work but can’t believe how much things have changed. Before, no one ever talked about disclosure, and home inspectors were unheard of. Now, I can’t spend five minutes in the office without someone mentioning home inspection reports and disclosure forms. How did all this change happen? – Cheryl
Dear Cheryl,
Disclosure marks the historical turning point in American real estate. To get the full picture, let’s step back a few generations. In the early 1900s, the main concerns among home buyers were stable foundations and waterproof roofs. Litigation was the last thought on anyone’s mind, and most people were thankful to have flush toilets.
In the ensuing decades, home-buying changed dramatically, from a simple, casual exchange to a complicated, legalistic process; from a personal handshake to an intricate complex of fine print signed in triplicate, witnessed by notaries, reviewed by attorneys, evaluated by appraisers, overseen by escrow officers, underwritten by title insurance companies and dominated by disclosure requirements.
Most of this change is actually quite recent. By the mid 1960s, the purchase price of a home was barely more than two years income for one working person, mortgage interest rates were around 5 percent, and buyers were unconcerned about routine defects. The American Dream was affordable, and people accepted flaws as part of the package.
Then came the 1970s: Societal change went ballistic, affecting all aspects of business and finance. Home prices escalated to previously unimagined levels. With the expanded financial commitment of enormous down payments and burdensome monthly installments, people were less willing to accept homes in “as is” condition. Properties were expected to be in good repair, and buyers were less forgiving of undisclosed defects.
In response to these changes, contractors offered a new kind of service: property inspections for home buyers. These early home inspections were basic overviews, concerned primarily with major structural and mechanical defects. Most people remained unaware of such services, and the quality of these new inspections was rudimentary at best.
As home inspections slowly became popular, growth brought an increased demand for ever-more detailed inspections. When buyers were not satisfied, inspectors learned that faulty reporting spelled legal trouble. With the onset of claims and lawsuits, the exactitude of inspections rapidly intensified.
As these transformations were occurring in the marketplace, government agencies and legislatures were riding the wave of change. By the late 1980s, many states were enacting seller disclosure laws, signaling the end of the “buyer beware” era. Previously, sellers could “spit shine” a defective home, declare that everything was perfect and walk away free of consequence. New disclosure requirements altered that picture, providing penalties for sellers who failed to reveal known problems and setting new standards for agents and brokers. The problem with these requirements was that sellers and agents were often unaware of latent defects.
As the demand for disclosure increased on all fronts, home inspectors emerged as a significant new profession. The first generation of inspectors, conceived in the '70s, foresaw the need for meaningful standards to regulate their new and evolving trade. Across the country, they formed national and state associations such as ASHI, the American Society of Home Inspectors, and CREIA, the California Real Estate Inspection Association.
Without state licensing, self-regulation did much to elevate professional inspectorship. Formal standards of practice were drafted, as committees of leading home inspectors brought years of experience to the forefront. Ongoing education became mandatory for member inspectors, and codes of ethics were set forth to govern professional conduct.
In the short span of 25 years, the real estate transaction process has been totally transformed. Fear of litigation dominates the marketplace, and active disclosure has been recognized as the best preemptive defense. Information is now the central contingency, casting home inspectors as center stage consumer advocates.
Copyright 2003 Barry Stone
Distributed by Inman News