Failure to disclose woes can be costly to sellers, and agents.
Arecent case in our office illustrates the difference between the seller not disclosing, a seller’s agent not disclosing, and a buyer’s agent not following through on his or her duty to counsel and advise.
The property had an illegal garage: It had been changed to a rental. The result was that the sellers would not only forced to take back the property, but they – and both agents in the transaction had to pay substantial damages.
The buyers were a couple who’s native language was not English. Their only previous experience in real estate had been purchasing their own residence.
The buyers were trying to help their daughter and her husband buy a home. The only way my clients could accomplish this was to purchase a property that also have a second residential unit – a “granny unit” – that could be rented and produce income to help them pay the cost of the mortgage, taxes and insurance on the property.
The agent was aware that the couple could not qualify for a loan without rental income of approximately $1,000 a month
The agent located a property with a detached rental unit that met the buyers’ requirements. Their daughter and her husband could live in the main house, and rental income from the granny unit would pay part of the monthly mortgage.
The rental unit on the property was a garage that the sellers had converted. The property was located in an area of San Jose zoned for single-family use only; that zoning does not permit a separate rental structure on the property.
The sellers had been warned twice in writing by the city of San Jose that they had to convert the rental unit back to a garage and install a concrete driveway.
But the sellers failed to disclose this information to the buyers.
The real estate agent representing the seller stated in the Transfer Disclosure Statement that “the back unit is permitted as a garage, not a cottage”; however, the court later found that the agent knew that the city of San Jose wanted the unit to be converted back to a garage.
The sellers did check the box on the disclosure form that indicated they were aware of zoning violations, but they never explained what it was.
The buyers’ agent spoke their native language but had no idea of the consequences of the statement, “the back unit is permitted as a garage, not a cottage”
The agent admitted she didn’t know this meant the city could require that the illegal structure revert to a garage.
So the buyers’ agent never advised her clients to investigate what it meant that the back unit was not allowed as a cottage. She merely advised them that “you can increase the rent about $100 per month.”
The various parties face different requirements in situations like this.
The sellers must disclose what they know. The sellers’ agent also has to disclose what he or she knows – or should know – and make a visible, diligent inspection of the accessible areas of the property. That is the law.
The buyers’ agent, however, is a fiduciary. As a consequence, that agent has a duty to advise the buyers of the consequences of their decision and to advise them of the ramifications.
The buyers’ agent had a duty to investigate the circumstances, knowing that this was a very important decision for the buyers and that the rental income was an important aspect of the sale.
The buyers, thinking they were obtaining a property with a valid rental unit that would generate the income they needed, applied for a loan, disclosed to the lender that the monthly income they would be receiving from the rental, and, as a result, qualified for the loan.
They closed escrow and bought the property.
Within two or three months after the close of escrow, the new buyers were told by the city that they had to give notice to their tenant, have the tenant immediately vacate the premises, have all personal property removed from the rental unit, and turn the rental unit back into garage.
They were also told they had to build a concrete driveway to the garage area.
Efforts to resolve this case informally before filing any action were unsuccessful.
The sellers, their agent and the buyers’ agent were unwilling to admit their failure to perform their disclosure and other duties. The buyers could not afford to keep the property.
The buyer sued – and won – to cancel the contract and return the property plus damages.
The sellers were forced to take back the property and return to the buyers their down payment, closing costs, loan payments, taxes and all other expenses related to the purchase of the property and it’s maintenance. The buyers were also awarded their attorney’s fees.
Failure to disclose these types of problems can end up costing sellers and agents much more than the loss of a particular sale or the loss of the commission.
If the sellers had disclosed that the rental unit had to be restored to a garage, the buyers would have looked elsewhere. Another buyer, of course, might have been willing to purchase the property and make the necessary restorations.
Attorney Ron Rossi is a senior partner with Liccardo, Rossi, Sturges & McNeils. Write him in care of the San Jose Mercury News, 750 Ridder Park Drive, San Jose, California 95190