Licensee Liability, Inspections and Home Warranties

Material Facts, Defects, and Licensee Liability

A material fact is any piece of information that could significantly affect a reasonable person's decision regarding the purchase, price, or terms of a real estate transaction. In real estate practice, defects generally fall into two categories: patent defects and latent defects. A patent defect is an obvious, readily visible flaw that can be discovered through an ordinary visual inspection of the property, such as a large crack across a front window. In contrast, a latent defect is a hidden flaw that is not readily discoverable through an ordinary visual inspection, such as an internal plumbing leak concealed behind finished drywall.

Licensees generally must disclose known material property defects to prospective buyers as required by state law, even if they do not represent the buyer. However, the exact scope of disclosure duties varies by state. A licensee can generally rely on written statements provided by the seller unless the licensee has independent knowledge or reasonable grounds to suspect that the information is inaccurate. Failing to disclose known material defects can have serious consequences, subjecting a licensee to civil lawsuits for damages, state licensing sanctions, administrative fines, or license revocation.

Liability often turns on how misrepresentations occur. Fraudulent or intentional misrepresentation happens when a licensee knowingly makes a false material statement or deliberately conceals a material fact that must be disclosed, intending that another party rely on the deception. Negligent misrepresentation occurs when a licensee provides materially inaccurate information without exercising reasonable care to verify its accuracy; whether there is a duty to investigate or disclose additional facts depends on the circumstances and state law. Finally, innocent misrepresentation takes place when a licensee provides inaccurate information honestly believing it to be true, without negligence or an intent to deceive.

Salespersons must remember their regulatory standing. A salesperson works under a supervising broker, who may be held responsible for the salesperson's professional acts within the scope of their brokerage work, subject to state law. To guard against financial losses, Errors and Omissions (E&O) insurance provides liability protection for licensees against claims of negligence or honest mistakes. However, E&O insurance typically excludes intentional fraud or criminal acts. Crucially, an 'as is' clause in a purchase contract means the buyer accepts the property in its existing condition, but it does not permit fraud or eliminate property condition disclosures required by state law.