August 9th - 2005

De-stigmatizing problem properties

Do you routinely check for skeletons in the closets when you take a new listing?

Do you routinely check for skeletons in the closets when you take a new listing? Not likely, but in the case of “stigmatized” properties, REALTORS need to be clear about what they are required to disclose legally, and what they are comfortable with ethically.

Stigmas fall under three categories: pure or psychological stigma, physical stigma and neighbourhood conditions. Pure stigma includes properties that have been the scene of murders, suicides, deaths and haunting. These “spooky” issues are referred to as pure stigmas because there is no physical harm to the property itself.

Physical stigmas are just that – properties with physical problems that include termite infestation, UFFI, asbestos, lead paint, radon gas, mold, grow houses and buried oil tanks.

The third category, neighbourhood conditions, covers properties situated in neighbourhoods that have perceived problems. For example, if a property is located in an area where crime rates are high, it’s perceived value will be lower in the minds of many potential buyers.

In the remake of the movie, the Amityville Horror, the real estate salesperson reluctantly discloses to the potential buyer the fact that a family was brutally murdered in the house. However, better an informed and somewhat hesitant buyer than an uninformed and later litigious buyer. If you saw the movie, you know that the buyers went ahead even after the disclosure. Many times, depending on the type of stigma, the buyers will continue with the sale perhaps with a little more negotiating power.

Disclosure duties
Real estate professionals have a duty to discover and disclose facts about a property that is being listed or shown to a buyer client that could be relevant to a buyer’s client’s decision to buy. As a REALTOR, your codes of ethics require you to discover facts pertaining to every property for which you accept an agency. The disclosure issue is covered in Article 4 of the CREA Code and Rule 11 of the RECO Code.

As a general rule, sellers of real estate and their listing agents have a duty to disclose any hidden (latent) defects that they are aware of in the property that could affect a reasonable buyer’s use and enjoyment and/or perceived value of the property.

However, the seller may not have a legal obligation to disclose a factor that could stigmatize a property unless it constitutes a latent defect– one that renders the property dangerous to inhabitants, unfit to live in, or unsuitable for the purpose that you know the buyer is buying it.

Not all real estate lawyers agree that stigmas, particularly pure stigmas, are latent defects, but the issue does potentially put your disclosure obligation and that of your seller at odds. The safe route is to disclose all pertinent facts to buyers. Ask yourself if it’s something you would want to know if you were buying the property yourself. “If the answer is yes, then you know you should be disclosing this information to the buyer,” one lawyer counsels.

Let professionalism prevail
Even if you or your seller is not required by law to disclose the information, the bar in terms of the level of professionalism required of REALTORS continues to move higher. As long as you do everything you can on behalf of sellers and buyers to get information on stigma affecting properties, you will reduce the chances that you will become a defendant in a lawsuit for nondisclosure. And, it’s not just the legal headaches you need to be concerned about. Your reputation as a professional REALTOR also could be harmed. By fulfilling your legal and ethical duties regarding the detection and disclosure of stigma, you will insulate yourself and your clients from a lot of unnecessary pain and suffering.

Learn more
The more you know about stigmatized properties, the better you will be able to handle this type of listing should it come up. The OREA Real Estate College has a continuing education course worth three CEU credits entitled, Stigma and Property: Detection, Disclosure and Cure. For information on upcoming courses and locations, visit www.oreacollege.com or contact your real estate board.

Tips for handling problem properties
In his course Stigma and Property: Detection, Disclosure and Cure, real estate lawyer William Johnston offers several tips. Here is a sample:

When representing a seller client

  • Use a Seller Property Information Statement (SPIS) to learn everything you can about the property when you take the listing.
  • If the SPIS you use does not include specific questions about “pure,” physical and neighbourhood stigma, make sure you raise the issues anyway.
  • Recommend a professional property inspection as part of the marketing package. Any defects can then be either disclosed and/or cured prior to sale.
  • Ask the seller if he or she has ever made a claim on their property insurance policy, and, if so, for what.
  • Point out to the seller that it is in his or her best interests to err on the side of disclosure.
  • If the seller refuses to disclose a defect that you know must be disclosed, turn down the listing.

When representing a buyer client:

  • Always recommend a professional property inspection prior to firming up the deal.
  • Ask the listing agent for a copy of the SPIS. [Though the form does not provide information on pure stigmas, make inquiries on behalf of your client, in the event the seller agent has been instructed not to disclose the information.]
  • Make the agreement conditional upon the buyer confirming that he/she can get property insurance.
  • Check with available sources (municipal offices, police, and registry offices) regarding neighbourhood conditions that could affect your buyer’s use and enjoyment and/or perceived value of the property.

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For more information contact

Ontario Real Estate Association

Jean-Adrien Delicano

Senior Manager, Media Relations

JeanAdrienD@orea.com

416-445-9910 ext. 246

Ontario Real Estate Association
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