Before selling residential property in Arizona, a seller is required by law (a combination of state statutes and court cases) to tell the prospective buyer certain things about the property's physical condition. The most typical method for doing so is by completing a written disclosure statement and giving it to the buyer.
The information disclosed will help the buyer to make an informed decision as to whether to purchase the property and on what terms. It is important to comply with these requirements, as failure to do so will allow the buyer to sue you if upon discovering any defects that you knew of but didn't disclose.
Let's look at this legal matter in further detail, including:
An Arizona seller has a duty to disclose important facts that might negatively affect the value of the property. This comes primarily from a court case called Hill v. Jones, 151 Ariz. 81, 725 P.2d 1115 (1986).
As the court pointed out, "nondisclosure of a fact known to one party may be equivalent to the assertion that the fact does not exist," and when someone "conveys a false impression" by disclosing some facts while concealing others, it creates "a false representation that what is disclosed is the whole truth."
The court concluded that nondisclosure of material property defects could be equated with and given the same legal effect as fraud or misrepresentation when the relevant facts are known to the seller but not reasonably capable of being known to the buyer.
The seller is obligated to make the required disclosures regardless of whether the property is being sold "As Is." (See S. Development Corp. v. Pima Capital Management Co., 201 Ariz. 10, 31 P.3rd 123 (2001).)
A seller in Arizona is required by law to disclose material information about the property that the seller actually and personally knows of, and that affects the value and desirability of the property.
As a practical matter, what is meant by "material?" The court in Hill said an issue is "material" if it is one to which a reasonable person would attach importance in determining a course of action in the transaction. In that particular case, the issue was termite damage, which the court held that the seller should have disclosed.
In other words, you are not required to disclose every little detail about the property to the buyer, down to the last scratch on the floor; which isn't something that would cause a reasonable buyer to change their mind about the offer price or whether to go forward with the sale. But be sure to correct any mistakes or wrong assumptions that the buyer is relying on in agreeing to purchase the house at the offered price.
Also, you are not required to expand your knowledge of the property's possible problems by performing any investigation of the property, nor are you responsible for reporting issues that you "should have known," but didn't.
The Arizona legislature did identify a few specific situations in which sellers are legally bound to make disclosures, as follows:
In addition, Arizona real estate practices require additional disclosures in certain circumstances. For example, the standard Arizona real estate contract requires the seller to provide the buyer with a copy of a report showing a five-year history (or the length of time the seller owned the property if less than five years) of insurance claims filed on the property, called a Comprehensive Loss Underwriting Exchange (CLUE) report.
A good rule to follow is to disclose all material property issues to the buyer. There is some information, however, that a seller does not legally have to disclose, such as:
(See Ariz. Rev. Stat. § 32-2156.)
But what if the buyer asks about these? It's important that you do not lie or make misleading statements about these matters. Instead, either answer honestly or indicate that you will not answer because you are not required to do so by law.
Unlike in some states, the Arizona legislature has not come up with language for a disclosure form that a seller must complete. In an effort to assist sellers in satisfying their disclosure requirements, the Arizona Association of Realtors drafted the most commonly used disclosure form, the Residential Seller's Property Disclosure Statement (pronounced "spuds" by real estate professionals in Arizona).
The form is essentially a checklist asking you to indicate the condition of various features of the property and known problems affecting the property. The disclosure statement is not a warranty, but simply a disclosure of facts of which the seller is aware. It actually requires the buyer to acknowledge that the information in the statement is based only on the seller's actual knowledge.
The standard Arizona Association of Realtors contract requires a seller to deliver the disclosure statement to the buyer within three days of accepting the buyer's offer. It is customary and good practice, however, to provide or offer the disclosure statement early on, for example when showing the property to prospective buyers.
The disclosure statement is divided into the following six sections:
If you do not know the answer to questions either raised by the buyer or listed on the standard disclosure form, you may satisfy the disclosure requirements by indicating that you do not know. Never guess about an answer. You could be held responsible for misrepresentation if your guess is incorrect.
A separate but related rule, the Arizona Commissioner's Rule R4-28-1101(B), creates a disclosure requirement for sellers' real estate agents. They must disclose to home buyers in writing any information they possess that "materially or adversely affects the consideration to be paid by any party to the transaction, including...Any material defect existing in the property being transferred."
The upshot is that if you tell your real estate agent about an unseen or non-obvious problem on your property, or if the agent notices issues on their own (a good agent will notice property problems that the average person doesn't) the agent must share that information with homebuyers.
If information you provided to the home buyer changes after you've given them the disclosure form, you have a duty to disclose the new information. For example, if the roof starts leaking after you provide your disclosure statement but before you actually close on the property, you must advise the buyer. This disclosure does not require you to repair the leak, only to let the buyer know about it. (You may negotiate the repair issue as part of the contract negotiations, but of course would want to take immediate steps to mitigate any ongoing damage.)
If a home was built prior to 1978, federal law requires the seller to disclose all information regarding lead-based paint and provide a pamphlet on identifying and controlling lead-based paint hazards. More information on lead-based paint can be found on the Environmental Protection Agency website.
If you violate Arizona's disclosure law by misrepresenting or not disclosing required information, the buyer may pursue legal action against you based on any of a number of legal theories: failure to disclose, fraud, or misrepresentation (intentional or negligent).
A buyer who is successful in such a lawsuit may be awarded substantial monetary damages. Or, in unusual cases, a court might void the contract and return all property or money back to the original parties, as if the purchase never occurred ("rescission"). So remember, if in doubt, and to avoid litigation, make sure to disclose all information about the property.
If you have a specific question about disclosure requirements, want to get the latest news about developments in Arizona's disclosure laws, or find yourself in situation where you need advice on how to proceed, please consult an experienced local real estate lawyer. These laws can be complicated, and are best interpreted by professionals who handle such matters every day.