Material Facts in Real Estate

This is a copy of an article I wrote for the Highlands Newspaper that is receiving a lot of attention from buyers, sellers and other brokers. Below is a link to the paper. 23mar9.pdf (highlandsinfo.com) on page 4

Material Facts

In North Carolina, quite a bit of time is spent covering material facts in both pre and post licensing as well as in the continuing education we are required to take every year.?Because of the amount of time spent discussing this you might think that a material fact only involves the brokers, when in reality, it is much more complicated and involves all parties involved in real estate transactions.

A material fact is defined by the NC Real Estate Commission as “any fact that could affect a reasonable person’s decision to buy, sell or lease real property is considered a material fact and must be disclosed by a broker to the parties in the transaction and any interested third parties regardless of the agency role within the transaction”.?That’s a lot to digest, so let’s first start with a few descriptions.?Yes, I have had several unreasonable clients, but I think the general meaning is that the person is of sound mind.?The broker could be a buyer’s agent, listing or seller’s agent, leasing agent or a dual agent, representing both the parties of a transaction.?The parties of a transaction would be the buyer, seller, lessor and lessee.?Any interested third party would be considered any potential buyer or lessee.?Most often this involves buyers and sellers of real property which is primarily what I am discussing.

Brokers are subject to disciplinary action if they make any willful or negligent misrepresentation, omission and or failure in disclosing material facts to all parties in a transaction.?In 2020-2021, 47% of the complaints to the NCREC were based on the failure to disclose material facts.?Of those complaints, 30% were attributed to structural issues and items that showed on previous home inspections.?Other major items included:?stated square footage; lots, subdivisions and roads; permits; sewage/septic and water; as well as other material facts.?The complaints were based on the fact the broker knew of the fact and it wasn’t disclosed, either by oversight or on purpose.

There are four types of material facts:?

1)????Facts about the property itself like structure, flooding, systems and roof leaks.

2)????Facts relating directly to the property like covenants, zoning and adjacent property.

3)????Facts affecting a principal’s ability to complete the transaction such as a loan denial for the buyer or title issue for the seller.

4)????Facts known of special importance to a party such as the buyer intends to do a short-term rental or wants to raise chickens.

A material fact can be categorized as something that is known to exist; something that the broker reasonably knows and should further investigate; or something that is common knowledge.?These categories cover a wide swath of items, data and knowledge.?Some examples would be an obvious addition that probably wasn’t permitted or an article in the newspaper about an upcoming zoning change.?It’s important that the broker is competent in three areas – geographic knowledge, market activity and industry standards in order to disclose material facts.?

It is a listing broker’s duty to discover all information about the property prior to marketing it.?This would include if it is in a flood zone, within town limits, subject to zoning or HOA covenants, researching the septic system, etc.?They must also look at the property for any obvious signs of material facts like foundation cracks, rot, additions or renovations that may not have been permitted.?It is not required for the broker to crawl through attics and crawl spaces but to ask questions and look for red flags that may require further investigation.?The homeowner must complete the Residential Property and Owners Association Disclosure and can choose to check “no representation” on any item, however, if the broker knows there to be a defect it must be disclosed, even if the owner requests that it not be disclosed.?

It is a buyers agent’s duty to discover and disclose items that the listing agent may have overlooked as well as anything that might be specific to the buyer’s needs.?Part of this process includes the confirming how the property was advertised (in the MLS) as well as inspections with any discrepancies found to be reported to the listing agent.?Inspection reports are confidential, however a material fact identified in a home inspection prepared for the buyer must be disclosed to the listing agent even if the inspection itself is not shared. ?Most sellers are unaware of this, but once the listing agent knows of something, it must be disclosed, or investigated with a professional opinion that the inspection was incorrect.?Even if this occurs, it is best to disclose the potential defect along with the opinion of the professional.

Upon review, it isn’t surprising that 47% of the complaints are related to material facts.?No matter the size of the transaction, it is important to research and disclose all material facts up front, or as soon as they are discovered.?It impacts all parties of the transaction and if something isn’t disclosed, or found to be known and intentionally not disclosed, parties may end up in litigation.?It’s also important to keep in mind that when a transaction is occurring without the use of a licensed broker, that material facts may not be disclosed to buyers or a specific need might be overlooked.?Also, just because you use a licensed broker, if they are not familiar with the area, a material fact could be overlooked.