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:
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!