A material fact in real estate is information that, if known, might cause a buyer to make a different decision about remaining in a purchase contract, or to the price paid or received for property. Both residential and commercial properties can be impacted by material fact disclosure requirements.
Most state laws require that a real estate agent must disclose all known material facts.
What Is a Material Fact?
A material fact must be just that—a supportable fact. It must detract from the value of the property or pose a danger to occupants. But it could also simply be information that would affect the legitimacy and enforceability of the contract.1
- Alternate name: Material adverse fact
The precise details of what does or doesn't constitute a material fact can vary somewhat by state.
How Material Facts Work
Agents, brokers, and sellers have an obligation in all states to divulge or disclose information that could affect the salability of a property. As an example, an agent who showed a property in the past that had water damage at the time should disclose this information to potential buyers, even if the damage isn't visible years later.
Buyers might reconsider how much they'll offer or even whether they want to stay in the deal if they know about any significant water damage.
Types of Material Facts
Material facts can range from physical flaws to something less tangible, such as rumors of a ghost habitually rattling chains in the attic.
Home Condition and Repair Issues
Known defects in the structure must be disclosed as material facts in almost every state. A potential buyer would either change their mind or their price offer if they learned about an issue with the roof or the foundation.
Most lenders require home inspections and appraisals that will most likely turn up serious defects, even if the agent or seller doesn't disclose them. There's generally no hiding these things.
As an example, a real estate agent who worked primarily as a buyer agent showed a home to a potential buyer. The buyer made another purchase decision after they picked up the corner of an area rug and found a significant foundation crack across much of the main room floor. The seller and/or listing agent had an obligation to disclose this information.
Murder or Death in the Home
This category is listed as an "emotional defect" in some states. It includes murders, deaths, or other violent crimes that might have happened on the property.
Check with your state to find out what's considered reportable in the case of emotional defects. There might be limitations on timeframes and deaths by natural causes or suicide.
A Pennsylvania court issued a precedent decision that a prior murder in a home was not a material fact and did not need to be disclosed, but that's just one state. You'll definitely want to look into your state's rules if you have knowledge that a murder was committed in the home. A California court did just the opposite and ruled for a buyer who wasn't told of murders in a home they bought.
Sometimes even violent deaths must be disclosed, even if they weren't technically or legally considered murder. An example would be a self-defense shooting of a home intruder inside the home.
Stories of ghosts, haunting, and paranormal activity aren't considered a material fact in many states. The property might be rumored to be located near an ancient burial site, or maybe a previous owner set aside a portion of the back yard for their beloved pets who passed.
Sometimes it's best to just make the disclosure if you can't be sure what should be disclosed without doing some research.
Animals As Material Facts
Sellers must disclose if a house has problems from animals or pests in some states. Texas requires the disclosure of bee swarms, scorpions, and rabid animals, but it's not just animal issues like this that you have to consider when you sell your home. Animal issues can extend to a neighbor's incessantly-barking dog or to someone in the neighborhood who raises chickens.
A brokerage in an Iowa case had to pay damages for not making proper disclosure to buyers of the fact that there was an HOA restriction of one dog per residence. The buyers found out and killed the deal. Seasonal issues caused the home to stay on the market for a while and sell for less than the initial buyers offered.
Requirements to Disclose Material Facts
Real estate agents and their brokers are in dangerous territory if they fail to disclose something they know, even if they think they don't need to do so. A good rule to follow is that you should just go ahead and disclose the information to avoid lawsuits if you're wondering whether you should in the first place.
Damages awarded in a lawsuit over undisclosed material facts can range from punitive in extremely bad cases (the monetary award is meant as punishment to the seller and/or agent) to compensatory (the seller and/or agent must compensate the buyer for the cost of repairing the issue). Again, it can depend on the state.2
There's a good chance that it would bother a buyer if the information made you think twice about disclosing it.
Some states, such as Maryland, go a step further and require that sellers and real estate licensees must disclose if they even "should" have known about a material fact.3 Oregon obligates sellers and licensees to seek expert advice if they think there might be a problem, but the issue is outside their area of expertise.4
The question is easier, however, for agents and brokers who practice exclusive buyer agency. They only represent buyers, not sellers, and it's easy to keep their best interests at the top of the list.
- A material fact is information that would influence a buyer’s decision to purchase a property or how much they might be willing to pay for it if they were made aware of it.
- Material facts can include structural damage or “emotional” information about the property, such as that someone was murdered there.
- Sellers and real estate licensees are legally required in all states to divulge material facts, but the exact rules for doing so and as to what exactly must be disclosed can vary.
- Working with a trained and licensed Realtor or broker in your area will help you avoid most costly mistakes of non-disclosure of material facts.
- See article: https://www.thebalancesmb.com/material-fact-in-a-real-estate-transaction-2866907