Bank-Owned Properties Exempt From Disclosures......True, But The Judge Ruled Differently

Real Estate Agent with Karen Parsons-Fiddler, Broker 949-510-2395 BRE# 01494165


In a normal real estate transaction, buyers are provided with disclosures from the sellers. These disclosures are usually in the form of questions which allow a seller to disclose any and all of the problems they know about which would affect the home. If part of the purchase contract, the seller is obligated to truthfully tell the buyer all defects/negative conditions associated with the property.

This could include:

Plumbing Leaks
Deferred Maintenance
HOA Rules
Neighborhood Noise

The list can be quite extensive...and in California includes an area to discuss "material facts or defects not otherwise disclosed to the buyer." It's very clear that the intent is to give the buyer all information they need to make an informed decision....and if the sellers withhold information they have, they can be held liable for damages. But this does not apply to bank-owned properties (REO).

In California, foreclosed properties are exempt from making these disclosures for the simple reason that the bank has never lived in the home and as such should have no knowledge of defects and/or past problems. Up to a point.

I have a client who purchased a REO a year ago and did not get any disclosures. We performed a home inspection and did our due diligence. He moved in and all seemed well. Then the back slope started to move. As they started to work on fixing the problem (the retaining wall was incorrectly built) they happened to contact a geological engineer who had given an estimate to the BANK prior to the sale. What?

Yes....this property had been in escrow before, and the buyer had backed out when they found that the hill was unstable (there were no visible signs of this, but the previous buyer had a personal reference which alerted him to this potential).

The bank did not disclose this.
The listing agent did not disclose this.

My buyer sued both....claiming that although they were not obligated to provide normal seller disclosures and property questionnaires, if they discover a defect, they are liable to disclose this information. Clearly both the lender and the listing agent were aware that the slope was moving, and the cost to repair. The judge agreed and between actual damages and punitive damages.....well, let's just say he paid off his second mortgage and had a very nice holiday. :).

The basic rule of real estate is still intact.....Disclose, Disclose, Disclose!


Re-Blogged 5 times:

Re-Blogged By Re-Blogged At
  1. Charita Cadenhead 01/05/2011 03:35 PM
  2. Fran Gatti 01/06/2011 02:36 PM
  3. Wendy Cutrufelli 01/07/2011 03:28 AM
  4. Chris Ann Cleland 01/07/2011 12:48 PM
  5. Margaret C. Taylor 01/08/2011 01:11 AM
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Cynthia Larsen
Cotati, CA
Independent Broker In Sonoma County, CA

What was that listing agent THINKING!! Now ... if we can just find a way to have estimates and inspections that were done for a particular property indexed as public record ...

Jan 05, 2011 05:22 AM #3
Lori Bowers
La Quinta, CA
The Lori Bowers Group

Very good to know. I like to read this type of blog on active rain. This is very helpful information.

Jan 05, 2011 05:47 AM #4
Vance Booher
Re/Max Select, SRES - Greensburg, PA

Hi Karen.  Very good point and a win for the good guys!  I am dealing with a REO right now that has apretty obvious foundation issue.  It is, of course, not disclosed.  But it sort of boggles the mind that someone at the listing agency or the bank has not at least looked into it because it is certainly uppermost in the minds of potential buyers.

Jan 05, 2011 07:00 AM #5
Donne Knudsen
Los Angeles & Ventura Counties in CA - Simi Valley, CA
CalState Realty Services

Karen - HALLELUJAH!!!  I love hearing news like this.  Now if we could just get CA DRE and our local MLS boards to respond the same way this judge did.  While this buyer had to sue in order to get restitution, CA buyers and their Realtors who file complaints to the CA DRE and their local boards for the non-disclosure by banks and their LA of defects they undeniably know to be true, should be able to expect the same results. 

The problem is that CA DRE and local MLS boards do absolutely nothing when they get complaints like this filed. I speak from experience when I say that.

Jan 05, 2011 07:11 AM #6
Jim Frimmer
HomeSmart Realty West - San Diego, CA
Realtor & CDPE, Mission Valley specialist

I wonder if the bank and the listing agent now think that he is an activist judge. J

Disclose, disclose, disclose. Triple D. The only time a D is a good grade!

Jan 05, 2011 07:16 AM #7
Stacey Smith
Keller Williams Realty - Aliso Viejo, CA
Your Orange County Beach Cities Realtor

It is nice to know that there is still some justice in the system.. We are all aware that banks exempt themselves from the TDS reason being because they have never lived in the house and don't know the defects, but when a REO is in escrow and inspections are down, and escrow falls out.. You now know ALL defects affecting the property and now makes you liable to disclose.. It is cheaper to be up fron and honest, than to pay for you lie later.

Jan 05, 2011 09:23 AM #8
Cece Blase
Paragon Real Estate Group - San Francisco, CA

What a great story! Congrats! I wonder how long it too for ths to settle?

Jan 05, 2011 03:37 PM #9
William James Walton Sr.
WEICHERT, REALTORS® - Briotti Group - Waterbury, CT
Greater Waterbury Real Estate

Karen, this is good news indeed. I wonder how long it will take for this to be applied across the states.

Jan 05, 2011 03:43 PM #10
Tni LeBlanc, Realtor®, J.D.
Mint Properties, Lic. #01871795 - Santa Maria, CA
Tenacious Tni (805) 878-9879


Thank you, thank you, thank you, for posting this.  I have been singing this song for years. Just because you are an REO doesn't mean you don't have to disclose something you know!!!!  This kind of thing makes me not feel bad for people when they get sued.  If you're not going to use common sense why should I care?  Being an REO just means you don't have to fill out the TDS form - but if you know something you better tell.  At the very least, the listing agent better make sure that what they know gets in the hands of the buyers.  Any listing agent who would go along with that and adopt the same stance (that they don't have to disclose) for themselves deserves to be sued.  

Banks need to be put on notice, no they have never been to the property but the do have a FILE!  If you remediated mold on the property you need to disclose that!  If I know that as a buyer I might want to have a mold test to see if you did it right!  These are not difficult concepts - I don't know why people are forgetting the fundamentals.  

OK I feel better now.  Hope that wasn't too negative.  LOL.


Jan 05, 2011 03:58 PM #11
Linda Humphrey
Humphrey Home Connections Realty, Reno, Nevada - Reno, NV
CRS, Broker/Owner HHC Realty

Excellent! It is really tiresome the way REO sellers trample all over state laws and contracts, and the listing agents often go along because they don't want to bite the hand that feeds them.

Jan 05, 2011 04:48 PM #12
Karen Fiddler, Broker/Owner
Karen Parsons-Fiddler, Broker 949-510-2395 - Mission Viejo, CA
Orange County & Lake Arrowhead, CA (949)510-2395

Good morning all! to answer a few questions.....

The suit was filed last March and the judgment came in December. I went with the buyer to see his attorney at the beginning, but was not at the trial. The attorney just got a copy of the written estimate given to the listing agent for the earlier buyer....and from there it went very quickly. The buyer sued the REO itself and the listing agent/broker. Apparently they ended up blaming each other. :)

Jan 06, 2011 01:46 AM #13
Christine Smith
Buyers Brokers Only LLC - - Canton, MA
Exclusive Buyer Agent & Attorney, Canton, MA

I am so glad to hear that this worked out for your buyer - as it should have!  Wow.  As Tni said above, if you have actual knowledge of something you have to disclose it - it doesn't matter who you are!  In MA we've had REO sellers try to say that they were exempt from the MA Lead Paint Law, but they are not and buyers agents really need to force the issue with them. 

Jan 06, 2011 05:19 AM #14
Michael Jacobs
Pasadena, CA
Los Angeles Pasadena 818.516.4393

Hi Karen --- an incredible story!  As others have commented -- what was the listing agent thinking!!  I am glad that your buyer received justice and a nice, strong retaining wall.  

Jan 06, 2011 05:20 AM #15
Carla Muss-Jacobs, RETIRED
RETIRED / State License is Inactive - Portland, OR

When Jupiter aligns with Mars . . . this is an example of things all working in the best for the buyer.  The engineer, the PRIOR inspection and transaction in escrow where a previous buyer found out, and revoked their offer.  YUP, listing agent and seller KNEW!!  The Judge ruled correctly!!  GEEZ what didn't the listing agent "get" about disclosing material defects?  "Information concerning latent material defects is not considered confidential information under this Code of Ethics. SOP 1-9"  

Jan 06, 2011 06:19 AM #16
Carla Muss-Jacobs, RETIRED
RETIRED / State License is Inactive - Portland, OR

P.S.  Thanks Chris Ann for featuring this in your group, which I didn't know existed, but now JOINED!!  Yes, bartender . . . make it a double!!  I'll have a few for your group I'm sure!!  :-) 

Jan 06, 2011 06:21 AM #17
Connie Harvey
Pilkerton Realtors - Brentwood, TN
Realtor - Nashville TN Real Estate

Karen, I'm glad they sued. I can't imagine a Judge ruling against them either. Now the Realtor on the other hand, here in Tennessee, still would have been required to disclose.

Jan 06, 2011 09:01 AM #18
Fran Gatti
RE/MAX Integrity - Medford, OR
Managing Principal Broker - RE/MAX Integrity

Karen, agreed and good for your buyer.  Our COE does not allow an agent to disregard disclosing   negative facts we know about a property in any case, REO or not.  The bank got was coming to them and so did the agent.  Thanks for sharing.

Jan 06, 2011 02:33 PM #19
Joan Whitebook
BHG The Masiello Group - Nashua, NH
Consumer Focused Real Estate Services

This is an important case.  It an lender has actual knowledge, they are not off the hook just because they didn't live in the house.  Do you have the citation or a link to this case?

Jan 06, 2011 02:46 PM #20
Sharon Alters
Coldwell Banker Vanguard Realty - 904-673-2308 - Fleming Island, FL
Realtor - Homes for Sale Fleming Island FL

Karen, this sounds like it could be a landmark case in the future. It certainly changes the game for banks and their stonewalled way of nondisclosure?

Jan 06, 2011 03:15 PM #21
Wendy Cutrufelli
Alain Pinel Realtors - Walnut Creek, CA
Contra Costa Realtor


How did the listing agent MISS that s/he had to disclose that material fact?  That agent obligation is written on so many of our pre-printed forms that it is ridiculous!  Incredibly fortunate that your buyers contacted the EXACT geological engineer that the bank used or the bank would have gotten off without penalty!

Jan 07, 2011 03:17 AM #22
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Orange County & Lake Arrowhead, CA (949)510-2395
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