To say the real estate market has been a roller coaster ride the last two years is putting it mildly. During the height of the COVID-19 pandemic, houses across the region sold in hours at record prices. Now, with interest rates rising in the face of a tenuous economy, the number of houses on the market is trending downward.
Peaks and valleys in real estate tend to drive people to take troubling risks, points out Matt Alegi, an attorney and co-chair of the real estate practice at Shulman Rogers.
WTOP talked with Alegi about the current state of the housing market in the region to understand the types of legal issues that arise as well as how buyers and sellers can protect their investments in a market where the median home sale price across Washington, D.C., Maryland and Virginia hovered near $500,000 in July 2022.
Q1: During the recent housing sales peak, a lot of buyers waived their inspections and contingencies to lock in a quick purchase. What are the risks, and why should people — surprisingly even sellers — never forego that inspection?
ALEGI: The market has been overheated for a couple of years and it’s starting to shift now, clearly. When you get that overheating and then super cooling, you get a lot of buyer’s remorse.
For the past two years, especially in lower Montgomery County and Northwest D.C., a house would go on the market, and the listing broker would say, “We’re taking offers in three days at 5 p.m.” And then you’d see 10, 12 or 14 offers for every property with escalation clauses — waiving inspections, waiving financing and appraisal contingencies. It was very hot, if not overheated.
As the market has begun to cool, you see buyer’s remorse. The phone calls lawyers are getting now start with, “Oh my gosh, the seller lied to me,” or “The seller hid something from me.”
Property condition disclosure obligations in Maryland can be nuanced. As the seller of residential property, you have to disclose latent defects in Maryland. Generally, a latent defect is a property condition that could hurt someone but that a person likely wouldn’t be able to see by just visually inspecting the property. Sellers only have to disclose latent defects they actually know about. A broker or agent must disclose material facts they know or should have been able to find — it’s a negligence standard.
Maryland also has a standard disclosure form that is put in all residential real estate contracts. Sellers don’t have to fill it out, except for noting latent defects they know about. It’s a checklist of items, and it’s limited to actual knowledge.
When a buyer is in the house for six months, and they say, “Man, you know, the, the backyard floods every time it rains in the spring. The seller had to know about this. They lied to me. I want to go after the seller for having fraudulently induced me to enter into this contract. They filled out the disclosure form, and they said they never had evidence of moisture in the basement or in the guest room.”
Maybe they didn’t. Those disclosures are to the best actual knowledge of the person filling them out. Actual knowledge is tough to prove in a courtroom. But when you have a third-party home inspection, at least as the lawyer representing that seller, you have a third-party factual report to point to when these disputes arise.
For instance, a buyer notes in a lawsuit that, when they refinished the basement, they found all this mold behind the wall and alleges that the seller had to have known about it. Before the pandemic, there was almost always an inspection. I could look at the inspection report and say, “These people who sold the property have lived here for three years. They didn’t use the basement very much. You hired a professional inspector who didn’t note this mold. How can you expect this layperson, the seller of the property who’s living their life and running their kids to practice and didn’t renovate the basement, to have known this?”
Without having the inspection contingency, you don’t have the third-party inspection report. And as a seller, you don’t have as clear a defense. You don’t have that fact to point to. It’s hard to prove someone’s actual knowledge of a defect that they may have failed to disclose.
But sellers and listing agents thought during the pandemic, it was a wonderful thing not to get an inspection contingency. While I’ll agree on waiving appraisal and financing contingencies all the live long day because the seller gets more damages if the buyer defaults, the seller is the one without a ready defense without the inspection contingency.
And, here’s the other thing. In a hot market, your buyers aren’t walking away because of something an inspector finds, unless it’s something catastrophic, which it almost never is.
If a buyer has a remorse claim, once the seller comes back with that inspection, you’re in a negotiating phase, and it’s a far easier response for a buyer’s lawyer to say, “I hear what you’re saying, but the only things we disclosed were to the best of our actual knowledge. We have no actual knowledge of (insert condition) that the buyer is complaining about.”
And while actual knowledge is hard to prove, it’s not impossible. Here’s a really good example. The seller had denied actual knowledge of a mold problem, but, before moving out, left a mold remediation paint can they bought at Lowe’s, with a receipt taped to it with the date on it, in the crawlspace. That was a good fact. Real evidence. Otherwise, it’s often he said, she said. And remember: It’s very expensive to go to court over anything anymore.
Q2: You talked about the sellers. What about buyers? Is there a reason that they should want to forego the inspection?
ALEGI: I don’t think so. The ones who are well represented, most of them had inspections that just didn’t have inspection contingencies. Either their agents were telling them, “Look, you’re not going to get an inspection contingency. But when we go check out the property, we’re going to bring our crack home inspector. As we walk the property, he’s going to have the moisture reader out. He’s going to check the ground fault circuit interrupters. He’s going to look for big, big problems.”
In Maryland, home inspections can be a little problematic. Unlike some other jurisdictions, where if a home inspector misses something, the buyer has a real cause of action against the inspector. In Maryland, damages are usually limited to the cost paid for the inspection in the inspection agreement, and Maryland courts uphold those limitations clauses.
That’s not a lot of peace of mind from a liability perspective as a buyer. But there are good inspectors, and having a professional inspection, even a walk-and-talk, will certainly — even in an overheated market — allow you to understand what’s coming and help you to budget for and mentally prepare for owning a home. The really good inspectors do a good job of detailing things, like, “Hey, you’re going to need a new roof in two to three years.”
Also, they look for latent defects that are very difficult to observe on visual inspection. A trained professional is going to see a lot more than a layperson, even if you’re not going to get a concession out of your seller. And even if you don’t have great liability protection in Maryland, you at least know what you’re getting into. That helps you make an informed purchase decision. “Am I going to keep bidding this up in this hot market or not because I’m going to have these major upkeep investments down the road?”
Q3: You mentioned the term “latent defect.” Can you talk about what that means and why buyers should know what it is?
ALEGI: It’s a defined legal term in Maryland real estate law. Back in the olden days, home sales were generally “buyer beware.” You buy something, then it’s up to you to figure it out. Sellers had no obligation to tell you anything about it.
In Maryland, the laws have changed on that. Maryland has a modern regime as it relates to defining a consumer sellers’ obligation to disclose the condition of residential real property that they’re selling. And that’s also true for the licensed real estate broker in Maryland too.
In Maryland, you can either use the disclosure/disclaimer law, and make a disclosure about the property condition using the form I mentioned, or you can disclaim making any disclosures.
The disclosure form is attached to the contract with multiple yes-or-no questions. Have you had moisture issues? Is air conditioning provided? If there’s air conditioning, is air provided to all finished rooms, et cetera, et cetera, et cetera?
Or you can say, “Look, I’m not telling anything about the property.” There are situations in which such a disclaimer is perfectly appropriate. For instance, the seller hasn’t lived in the property for years and has been renting it out. There are also transactions that are exempt from the law completely, such as a fiduciary acting in the administration of a trust or estate, or a foreclosure trustee or bank. There’s no knowledge. There’s no ability to have the knowledge. So they’re not obligated to do anything.
But in Maryland, if you are a consumer seller who is obligated, you must disclose latent defects of which you have actual knowledge. The definition of latent defect in the code is kind of long and clunky and legal. But what it comes down to is any physical condition of the property that a layperson would not notice on a visual inspection but that could cause actual harm to someone.
As a for instance, there’s a gaping hole in a second floor hallway, and you throw a carpet over it. That’s a latent defect. You will miss it if you walk past it, but if you step on it, you’re going to fall down and hurt yourself. Again, the law notes “actual knowledge,” and actual knowledge can be hard to prove.
In Maryland, a real estate broker has a heightened disclosure obligation, which a lot of people don’t realize unless they get into a lawsuit with somebody about a condition and someone brings the broker in. They have a heightened obligation to disclose material facts they knew or should have known might influence a consumer’s decision to buy a property or the price they would pay.
And this covers anything that anybody has shared with them who was selling. It’s pretty broad, and it’s a negligence standard — the broker knew or should have known. So it’s not just that they had actual knowledge of something, but it’s that a reasonably prudent real estate licensee in these circumstances should have known, which is a much broader standard.
Q4: But that’s just Maryland, right? Not D.C. or Virginia. Can you speak to the legal differences generally across the region?
ALEGI: Virginia is very much caveat emptor, essentially buyer beware. There is no latent or material defect reporting requirement. In Virginia, there’s a very limited number of specific things that a seller has to tell a potential buyer.
D.C. is pretty similar. It has a disclosure form that’s clearly limited to the best of the actual knowledge of the seller. Plus, the code in D.C. clearly says, if they did their best, they’re not liable. And, if the licensed real estate broker has informed the consumer, the seller, to fill out the form, they’ve pretty much met their obligation too.
So Maryland has a very modern, very buyer-favorable approach. Virginia is pretty much still the old way: “You bought it, it’s yours. Good luck.” D.C. is in between but still nowhere near that kind of an evolution that has happened in real estate law and in practice in Maryland.
Q5: What are the most prevalent claims you’re seeing right now?
ALEGI: Not the biggest dollar-wise but the most prevalent claim that I’ve seen over the last couple of months is, “We bought this house, and we didn’t get an inspection, and that seller lied to us. They had to have known that the backyard flooded twice a year when we get these crazy rains. They had to have known that there was that mold or that rot behind the drywall in the basement? How did they not know about this? They checked off on the form that there was no moisture. But when we were doing our renovations, it’s clear, the water had been dripping down here for 10 years.”
Ninety percent of those cases we’re seeing relate to transactions that have happened in the last two years, where there was no home inspection. There’s no third-party inspection report to point to. And, here’s the thing, the Maryland form is to the best of the actual knowledge of the seller. It’s tough to prove actual knowledge.
About Matt Alegi
- 17+ years as a real estate lawyer
- Grew up in Montgomery County, Maryland
- Earned his law degree from Catholic University of America, Columbus School of Law
- Many years practicing Brazilian jiu-jitsu at the Yamasaki Academy
- Enjoys traveling with his family (and riding motorcycles)