Material Fact in a Real Estate Transaction
Definition: A material fact in real estate is well-defined as a fact that, if known, might have caused a buyer or seller of real estate to make a different decision with regards to remaining in a contract or to the price paid or received.
There are fancier sounding legal definitions, but as a real estate professional, it clarifies what we should disclose in a transaction. Most laws require that we disclose known material facts. So, if an agent had shown a home in the past that had water damage at the time, even if it wasn't there later, they should disclose it to other potential buyers. Wouldn't you possibly reconsider the price offered or staying in the deal if you found out about significant water damage?
Material Fact Varies by State and Human Nature Factors
Let's take some example case law and issues people have had in buying homes around the country to illustrate what may or may not be a material fact that must be disclosed.
Home Condition and Repair Issues
In almost every case, any known defects in the structure must be disclosed as material facts. Obviously, a potential buyer would either change their mind or their price offer if they find out about an issue with the roof or the foundation.
One real-life example clearly illustrates the legal concept. A real estate agent who worked primarily as a buyer agent showed a home to a potential buyer. They made another purchase decision, partly because of the large crack uncovered when an area rug was moved. They picked up the corner of the rug and found a huge foundation crack across much of the main room floor.
Months later, this agent again showed the home to another buyer client. The room had been carpeted. In checking the required disclosure documents, there was no mention of a crack or of it being repaired. The agent informed the client of the previous showing and condition and they moved on. It would be another discussion of the ethics and possible liability of the listing agent. The buyer agent considered filing an ethics complaint but decided against it. What would you do?
In most states, stories of ghosts and haunting are not considered a material fact, but I wouldn't bet on it until the research is done in the state where the home is listed. A good discussion of this from a legal perspective is over at TexasBar.com. You can't be sure what should be disclosed without research, and sometimes it is best to just go ahead and make the disclosure.
Prior Murder in the Home
Pennsylvania has court decision precedent to state that a prior murder in the home is not a material fact and does not need to be disclosed. Again, that's just one state, and you really need to be sure that you know what the law is in your state if you have knowledge of a murder in the home in the past. A case in California ruled for a buyer not told of murders in a home he bought. Sometimes even a violent death not ruled a murder may need to be disclosed. An example would be a self-defense shooting of a home intruder inside the home.
Restrictions on Number of Dogs Material Fact in Iowa
The brokerage in a case in Iowa had to pay damages for not making proper disclosure to buyers of the fact that there was an HOA restriction to one dog per residence. The buyers found out and killed the deal. Seasonal issues caused the home to stay on the market for a while and sell for less than the initial buyers offered. In this case, the brokerage was representing both sides, so was in a position to control information from seller to buyer side.
Real estate agents and their brokers are in dangerous territory if they fail to disclose something they know, even if they thought they didn't need to do so. A good rule to follow is that if you're wondering if you should, just go ahead and disclose to avoid lawsuits later. For agents and brokers who practice exclusive buyer agency, it's a lot easier. They only represent buyers, and it's easy to keep their best interests at the top of the list.