Stigmatized Properties: Killing the Sale

Would you buy a house that was the site of a homicide or suicide? Many people could care less, but many people are adamantly opposed; this puts sellers and their agents in an interesting position when it comes to disclosure.

There is no doubt that disclosing this information will “stigmatize” the property, and at least in the eyes of many, make it unsuitable for living or cause a price reduction. These effects hurt both the seller’s and the agent’s bottom line. So what do you do?

Missouri has enacted a statute for guidance: MO Statutes 442.600

The fact that a parcel or real property…may be psychologically impacted [site of homicide, suicide or occupant had HIV/AIDS]…shall not be a material or substantial fact that is required to be disclosed…

It goes on to say that no cause of action can be brought against a real estate agent or broker that failed to disclose the fact.

As usual Kansas has different rules, or here a lack of rules on the subject. Kansas Statutes and Cases have not yet addressed this issue which leaves the point up for discussion.

Kansas requires the disclosure of “material facts.” It would ultimately be up to a jury to decide what is “material." So, think of your view, your spouse’s view, and your friends' views on this subject and try to determine which stance is reasonable. If you think a reasonable person could think the value is affected by the information, then you should probably disclose it.

On the flip side, if you do disclose it you are dooming your client to less money. Does that breach your fiduciary duty? What if you’re wrong and Kansas law ends up similar to Missouri’s law?

Say hello to Rock and Hard Place. The key is, that in Kansas you must be up front with your client. Tell them they are not yet required to disclose, but a jury may disagree with their ultimate decision if they choose not to. All the while you must realize that if you tell them to disclose and they get less money they may want to sue you for your “faulty” advice.

Retaining Files = Retaining Defenses

How long should I keep my Real Estate Transaction files?

It is a common question with two competing principles: Regulations vs. Statute of Limitations.

Since most of you are Real Estate Professionals in Missouri and Kansas, I will limit the analysis to these states. Both jurisdictions require that a Real Estate Broker maintain his/her files relating to any Real Estate Transaction for three (3) years.

Missouri - 20 CSR 2250-8.160 - Retention of Records

Kansas Administrative Regulation No. 86-3-10

Most Brokers are proponents of destroying any file older than three (3) years. It is understandable, it helps to clear out valuable storage space. In many brokers' minds, it may also help them to avoid liability. While the first thought may be partially correct, the second is patently false.

Missouri and Kansas have different Statute of Limitations applicable to negligence and fraudulent misrepresentation claims:

Missouri - 5 years
Kansas - 2 years.

This post doesn't apply as much to Kansas transactions since the Commission requires retention for a time period longer than the Statute of Limitation, but Missouri has a troublesome 2 year gap.

I will tell you from experience that the worst case for an attorney is one where the client has no records to dispute the claims, other than a Real Estate Professionals' foggy memory of events that happened over five years ago. To help prove my point, I want you to close your eyes, picture a client from five years ago and tell me who inspected their property and what the inspection report said. Obviously, this exercise is nonsense because it is impossible.

The bottom line is anyone acting as a Real Estate Broker in a Missouri transaction needs to retain his/her files for 5 years. Scan them, and store them on CD, hard drive, back-up disks, online storage, etc. There are many options with little cost, so find one you like and do it.

If you destroy the file, and you get sued, you may have just destroyed your best defense. Open up your check book.

RESPA - Why You Should Care

From my experience, almost every real estate professional has unwittingly violated the Real Estate Settlement Procedures Act (RESPA) at some point in their career. You probably want to know what constitutes a violation, which we will get to. First, I find it effective to explain the potential penalties, which include the following:

• Up to a $10,000 fine, or
  
• Imprisonment for up to one year, or both
• Treble (triple) damages for any actual damages (closing costs)
• Court costs, and reasonable attorney's fees
  

If that doesn't get your attention, you must value you money and freedom less than I do. In general RESPA applies to real estate professionals in two instances:

1. Prohibition of kickbacks and unearned fees [12 USC 2607]
   
2. Sellers requiring a specified title company [12 USC 2608]
   

The first one is pretty straight forward, you are not to "accept any fee, kickback or thing of value pursuant to any agreement or understanding" that is related to or part of a real estate settlement service involving a federally regulated mortgage loan. To put it plainly, you can not get referral fees from your friendly hometown closing company.

The second one, although not directly applicable to the real estate professional, is still important. As a fiduciary (trusted adviser), you have a duty to disclose what you know to your client. Don't let your sellers make the sale conditional on a certain title insurance company, or they will be opening themselves up to treble (triple) damages for the amount paid for the title insurance, and you will have one very unhappy client.

As you often hear, "certain exclusions may apply" which pertains to RESPA as well. There are certain real estate transactions and mortgages that are not covered by RESPA, but to be safe the $50 kickback is hardly worth the risk.

Why a blog?

My firm has been publishing and distributing "interested party" letters for many years as a way to inform our clients of changes in the law. Yet, with technology progressing as it has, I wanted to take the leap into the blogosphere. Naturally I chose the Real Estate field since it is a major part of my practice and it also happens to lend itself well to the blog format.

This blog is intended to be a mix of quick tips and observations that I pick up through my practice as well as brief summaries and updates of relevant changes to the law. My hope is that Real Estate Professionals are able to view this blog not as legal advice, but more as a resource. If you have legal questions, or are being sued please consult and attorney.