Traps for Unwary Real Estate Buyers

July 7, 2008

I was asked to briefly summarize some of the legal considerations that a buyer might keep in mind while venturing into the real estate market in Washington. I think something like this might prove to be helpful so long as you keep in mind that this is not a comprehensive list of all possible difficulties. Here is a short list of legalities that might be helpful to buyers of real estate to keep in mind.

New Construction. Washington has an extremely harsh “statute of repose.” Six years after the final permit is issued all recourse against anyone working on the project is barred, exect as to damage that has already arisen.

If for example you buyer a building, or bridge that collapses six and one half years after the last permit, you have no recourse against anyone in the construction industry.

The Washington statute of creates false expectations in the minds of consumers.

If you buy a building with a useful life of forty years you expect it to last that long. In Washington you can only count on six, assuming that you are buying a new building. If you are buying a used building, it is very likely that the six years have passed and you have no recourse whatsoever against anyone involved with the construction of it.

People who spend money to retrofit buildings , to make them earth-quake proof, must remember that they have no recourse against the engineers or builders if the work is faulty, assuming that the earth-quake occurs more than six years later.

This puts a premium on investigation and study before buying. It also puts a premium on the purchase agreement and the ability to look to the seller if there are latent defects. With respect to construction, owners should consider taking these things into account in negotiating contracts.

Building Codes. Many residential buyers put stock in representations that the building complies with code or they just rely on the fact that the building had to be inspected and approved by local government before it could be occupied. This does reduce the chances of defective construction but it is a long way from assuring the purchaser that the construction is not defective and there is no assurance that the building in fact complies with code. There is no recourse in the usual case against the city or county if the building was approved in spite of noncompliance — and this happens.

Form 17. The Seller’s Disclosure Statement required in residential sales has recently been interpreted (see my last entry) as unenforceable by one of our three courts of appeals. This can be cured by modifying the standard forms, but it certainly opens the door to using the form as a tool of deception.

Bad Materials and Workmanship. There are a number of cases in Washington in which purchasers have been held to be without recourse when the property they purchased was defective. The “economic loss rule” is invoked to hold the buyer without recourse. This result can be avoided contractually.

Verbal agreements. The form purchase and sale agreement in common use says that there are no other enforceable agreements. That means that agreements — even written agreements — outside the purchase and sale agreement are at least of questionable enforceability.

“Merger into the Deed.” When the transaction closes many of the terms and conditions of the agreement are terminated. Discovery after closing of a false representation may be too late if the representation or assurance is deemed to have been merged into the deed. This can be avoided by care in writing the contract.

There are of course other issues that arise but this at least gives you a sense of the care that must be taken in protecting an important investment such as buying real estate.

Please note that in the last legislative session a very modest bill was introduced to confer limited rights on home buyers. The bill was killed by the Democrats, particularly Frank Chopp.

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Protect Yourself When Buying a Home in Washington

July 3, 2008

Making an offer on a house is such a tense experience and so pregnant with the possibility of surprises and disappointments, that I thought I’d discuss residential purchase and sales transactions outside of the foreclosure context.

Tuesday the Washington Court of Appeals published a case out of Pierce County that illustrates some of the confusion in the Courts about a buyer’s remedies. The decision is called Stieneke v. Russi. The facts are not terribly unusual but they represent every buyer’s fear.

The Steineke’s found a home they liked in Gig Harbor, signed a purchase and sale agreement with an inspection contingency and then received a “Seller’s Disclosure Statement” (sometimes called form 17), as required by law. The inspector gave clean bill of health, but said that he could not inspect the roof. The disclosure statement said that there had been no difficulties with the roof and the seller, Russi, assured them that he had not had any problems with the roof.

The buyer’s closed, had the roof pressure treated and began enjoying their new home . . . until it rained. Their house was inundated causing damage to the interior. The trial court had no problem awarding damages but the Court of Appeals was not so generous.

The court’s analysis strongly disfavors buyers. It held that there was no breach of contract because the contract did not say anything about the roof and it had an integration clause that said there were no other agreements. The Seller’s Disclosure Statement said that it was not part of the contract so the false statements in that form could not create a breach of contract. The court indicated that there might be no remedy for false disclosures because of the wording on the form.

The buyers also sued in tort, claiming misrepresentation and fraud. The Court held that the economic lass rule (which I’ll discuss another time) barred any remedy for misrepresentation. Fraud has a very high standard of proof and the Court of Appeals sent the case back to the trial court to determine if the standard of proof for fraud had been met.

Hopefully there will be review of this case by the State Supreme Court because there is some conflict among the cases as the the legal status of the disclosure statement.

Meanwhile buyers ought to guard against this happening to them. The first rule of thumb is to always get a seller’s representations in writing. The lesson of this case is that all writings, including the seller’s disclosure statement should be made a part of the contract. This can be done on the face of the statement.

Finally, scrutinize those statements and follow up with questions and require written answers.