Sellers Now Have To Disclose Insurance Claims In Their Real Estate Condition Report

As an attorney who primarily represents buyers in court, I regularly conduct discovery on insurance claims filed by sellers.  Evidence that sellers filed an insurance claim based on the same condition that they later failed to disclose to buyers in their Real Estate Condition Report is pure gold.  Such evidence establishes that the condition existed and that the sellers thought that it was significant enough to file an insurance claim.  Sellers have a really hard time explaining why they checked "NO" to a property condition statement relating to flooding or leaks when they got $10,000 from their insurance company for basement flooding.

The new Real Estate Condition Report required by Wis. Stat. § 709.03 mitigates against such situational candor through requiring sellers to answer the following question:

Have you filed any insurance claims relating to damage to this property or premises within the last five years?

Please note that there is no exception based on the sellers' subjective belief that they have resolved whatever condition caused the damage.  If the seller has filed an insurance claim within the last five years, he or she must answer this question "YES."  The seller should explain his or her "YES" response at the end of Section G, preferably through attaching documents relating to the insurance claim.

Of course, I have also discovered that sellers "forget" to disclose conditions in their Real Estate Condition Report that previously caused them to make a warranty claim against the manufacturer of their roofing shingles, participate in a class action settlement against their siding manufacturer, or even sue their seller for misrepresentation.

Since the Real Estate Condition Report still does not specifically require sellers to disclose such claims, I sometimes write language in offers requiring sellers to provide copies of all warranties and any warranty claims.  You can also find any legal actions that your sellers have filed (or have had filed against them) in Wisconsin courts through Wisconsin Circuit Court Access.     

The New Real Estate Condition Report Expands Required Disclosure Of Unpermitted Work

Before Act 338, the statutorily-required Real Estate Condition Report asked sellers to either agree or disagree with the following statement:

I am aware either that remodeling affecting the property's structure or mechanical systems was done or that additions to to this property were made during my period of ownership without the required permits.
  
While most would agree on what qualifies as an "addition," "remodeling" seems rather vague and indefinite.  Homeowners remodel their kitchens, bathrooms, and rec rooms in ways that affect a property's structure or electrical or plumbing systems.  What about foundation repairs though?  Such work arguably does not fall within the definition of "remodeling," but many buyers would want to know if such work was done without the required permits, especially since foundation repairs so clearly affect a property's structure.  

The new Real Estate Condition Report now required by Wis. Stat. § 709.03 asks sellers the following question:

Are you aware of any remodeling, replacements, or repairs affecting the property's structure or mechanical systems that were done or additions to to this property that were made during your period of ownership without the required permits?  

This change should decrease seller confusion about what unpermitted work must be disclosed at the time of sale and help buyers become better informed about such work. 

Trouble is, this change still depends upon sellers having awareness (i.e., knowing or being put on notice) of local permitting requirements, which vary greatly.  A seller has not answered such a question improperly if he or she was in fact unaware that the local municipality requires permits for installing a patio or replacing a roof.  Buyers should insist on receiving documentation from their sellers on all remodeling, replacements, repairs, and additions that were made during the sellers' ownership.  Buyers should also make open records requests of the local building inspector for copies of all permits that were issued during the sellers' ownership.  In Milwaukee, you can find some of this information online without having to make a formal request.

I draft language in offers protecting buyers from awful surprises like unpermitted repairs made by sellers or their unlicensed contractors.  Please contact me at rudolphkuss@stevensandkuss.com if you want to be represented during your most important purchase. 

Sellers Now Have To Disclose How Long They Have Owned The Property In Their Real Estate Condition Report

Before Act 338, Wis. Stat. § 709.03 only required sellers of residential real estate to disclose how long they had "lived" in the property in their Real Estate Condition Report.

Unfortunately, sellers' responses to this question often painted a misleading picture, particularly with regard to duplexes and other residential rental property.  After all, sellers of rental property may have never "lived" in their property.  Yet, they might have important information about their property's condition that they learned from their contractors or their tenants.  A buyer purchasing a property based on a real estate condition report saying that the owner has lived in the property for 0 years could quite reasonably assume that the owner does not know anything about the property's condition and could thus disregard the owner's representations in that condition report that he or she is not aware of any defects in the property.

Under Wis. Stat. § 709.03 as amended by Act 338, sellers now must disclose in their Real Estate Condition Report how long they have "owned" the property as well as how long they have "lived" in the property.  I view this as a positive change because it helps buyers of residential real estate - particularly rental property - distinguish between properties that have been owned by the seller for more than ten years from properties that were only recently inherited by the seller.  With that additional information, buyers should be able to more confidently rely upon a real estate condition report completed by a long-time owner of a property even if that owner has never lived onsite.

Do sellers of residential rental property really need to complete a Real Estate Condition Report?  As long as the property has 1 to 4 dwelling units and the seller is not otherwise exempt from Chapter 709's requirements (i.e., the seller is not a personal representative of an estate nor the trustee of a trust), a seller of residential rental property must complete a Real Estate Condition Report based on his or her notice or knowledge of conditions affecting the property.  If your tenants have told you that the toilets frequently overflow or that the foundation walls leak when the snow melts, you'd better include that information in your Real Estate Condition Report.

If you're selling your rental property and need help completing the new Real Estate Condition Report, please contact me at rudolphkuss@stevensandkuss.com.

Some Sellers Will Have To Complete A New Real Estate Condition Report

This post is for you if you currently have residential real estate or vacant land for sale.  

Since you read this blog, you know about Act 338 and the new Real Estate Condition Report.  July 1, 2018 has come and gone, and Section 8 of Act 338 clearly says that "[t]his Act takes effect on July 1, 2018."  You have already completed a Real Estate Condition Report.  Do you have to complete the new Real Estate Condition Report required by Wis. Stat. § 709.03 as amended by Act 338?

You do not have to complete a new Real Estate Condition Report if your Real Estate Condition Report was furnished to the prospective buyer of your property on or before June 30, 2018:

Section 7. Initial applicability.

(1) Real estate condition and vacant land disclosure reports. The treatment of sections 709.03 and 709.033 of the statutes first applies to reports that are furnished on the effective date of this subsection. 

This rule appears to apply even if the prospective buyer does not make an offer until July 1, 2018 or later.  Since you furnished a Real Estate Condition Report that complied with the previous version of the statute, you do not have to complete a new Real Estate Condition Report that complies with the amended version of the statute.

What if you completed a Real Estate Condition Report but did not furnish it to any prospective buyer on or before June 30, 2018?  The answer to that question is less clear.

I disagree with those who will argue that sellers do not have to complete a new Real Estate Condition Report simply because they completed a Real Estate Condition Report that complied with the previous version of the statute.  Section 7 of Act 338 does not say that the amended version of the statute first applies to reports that are completed on the effective date; it says that the amended version of the statute first applies to reports that are furnished on the effective date.  

Within the context of Chapter 709, "furnished" means "provided" or "shared," as that is how "furnished" is used in Wis. Stat. s. 709.02(1) - the statutory subsection that requires disclosure of property conditions through a Real Estate Condition Report.  Wis. Stat. § 709.02(1) speaks of furnishing a Real Estate Condition Report to "the prospective buyer."  

Does that mean that once a prospective buyer goes away, you have to furnish a new Real Estate Condition Report that complies with the amended version of the statute to the next prospective buyer?  My original post supported that position, but I now reject it.  Section 7 of Act 338 speaks of "reports that are furnished" - not "reports that are furnished to the prospective buyer."

Does that mean that you have "furnished" a Real Estate Condition Report through sharing it on the Multiple Listing Service or on a real estate portal?  Or does that mean that you must have provided a Real Estate Condition Report that complies with the previous version of the statute to a prospective buyer?  Section 7 of Act 338 is silent on "furnished to whom," and silence breeds ambiguity.  Since the legislature did not clearly answer this question, sellers have an argument that they do not have to furnish a new Real Estate Condition Report if they shared the old one with the public, and buyers have an argument that sellers have to furnish a new Real Estate Condition Report unless the old one was furnished to a prospective buyer.  

I provide legal representation to people who are selling their home "for sale by owner," a/k/a FSBOs.  If you need help completing a new Real Estate Condition Report, please contact me at rudolphkuss@stevensandkuss.com. 

How Buyers Should Protect Themselves From Undesirable Restrictive Covenants

In my last post, I lauded the new Real Estate Condition Report's required disclosure of restrictive covenants and deed restrictions.  I write this post to emphasize that disclosure of the mere existence of restrictive covenants in a subdivision isn't good enough.

To review, sellers answer questions on a Real Estate Condition Report "YES," "NO," or "N/A."  A "YES" answer to the question "are you aware of restrictive covenants or deed restrictions on the property?" only tells buyers that there are restrictive covenants or deed restrictions; it does not inform buyers what uses of the property are actually restricted.  A mere affirmative answer to this question fails to inform buyers whether or not they can have an above-ground pool or hang out their laundry.

True, sellers are required to explain their "YES" responses.  The old Real Estate Condition Report contained an explanation section several lines in length at the end of the report.  The new Real Estate Condition Report contains explanation sections that run only three lines long at the end of each section.  Since the question about restrictive covenants is question 7 in the "LAND USE" section, sellers must explain a "YES" response to that question at the end of that section.  Even assuming that this question is the only one in that section to which the seller answered "YES," three lines is nowhere near enough space to explain restrictive covenants that may run over thirty pages in length.

Some real estate condition reports provide sellers with an option of answering "See Expert's Report" instead of "YES, "NO, or "N/A."  While restrictive covenants are not expert reports, such an option could prompt some sellers to attach their subdivision's restrictive covenants to their real estate condition reports.  Alternatively, some sellers might "explain" their "YES" response to the restrictive covenants question as "see attached restrictive covenants."  I doubt that either practice is common however.

Even before sellers were questioned about restrictive covenants and deed restrictions in the new Real Estate Condition Report, I drafted language in offers requiring sellers to deliver any restrictive covenants to buyers within 10 days of acceptance.  Even that isn't good enough however.  If the content of restrictive covenants is important to buyers and those restrictive covenants are not provided to buyers prior to acceptance, buyers might have to close on their purchase even if they later find out that they cannot have their pool.  Without a contingency or a right to rescission based on the contents of the restrictive covenants, the buyers have no excuse for failing to close and might forfeit their earnest money or even face liability for damages.

Going forward, I will draft language in offers requiring sellers to deliver any restrictive covenants to buyers within 10 days of acceptance AND giving buyers the right to rescind their offer and get their earnest money back in the event that they object to the content of any of those restrictive covenants.  Of course, some sellers will object to this language because it would allow buyers to rescind for purely subjective reasons (unlike rescissions based on the disclosure of defects in a Real Estate Condition Report, which are subject to a more objective standard).  Trouble is, I see no other way to protect buyers from purchasing a property with undesirable restrictive covenants other than demanding that sellers deliver said covenants to buyers before any offer is made, which is unrealistic under most circumstances.

Please reach out to me at rudolphkuss@stevensandkuss.com if you're interested in a property for sale in a residential subdivision. 

Sellers Now Must Disclose Restrictive Covenants And Deed Restrictions

Based on my experience, the biggest improvement in the new Real Estate Condition Report required by 2017 Wis. Act 338 and Wis. Stat. § 709.03 is the following question:  "Are you aware of restrictive covenants or deed restrictions on the property?"

The closest that the old Real Estate Condition Report came to this question was Property Condition Statement C.26, which read as follows: "I am aware of subdivision homeowners' associations, common areas co-owned with others, zoning violations or nonconforming uses, rights-of-way, easements, or another use of a part of the property by nonowners, other than recorded utility easements."  A seller who was aware of restrictive covenants in his subdivision could honestly answer this statement "No" as long as his subdivision did not have an actual homeowners association.

Contrary to what is popular belief in some quarters, restrictive covenants are enforceable even without a homeowners' association.  Some of these restrictive covenants are written so that any neighborhood bully can sue his neighbor for enjoying an above-ground pool or installing a vinyl fence on his property.  Even worse, some of these restrictive covenants are written so that the neighborhood fascist can seek payment of his attorneys' fees from the poor neighbor that he is suing for having the wrong politician's campaign sign on his lawn or leaving Christmas lights up past New Years Day on his home.

In my opinion, the existence of restrictive covenants in a subdivision is far more worthy of disclosure to buyers than the existence of a homeowners' association.  While homeowners' associations may sue homeowners, they are at least theoretically controlled by the board member election process, Robert's Rules of Order, and group dynamics.  The restrictive covenants themselves are the potentially adverse condition affecting the property, regardless of whether they are enforceable by a homeowners' association or by any of your crazy neighbors.

Please reach out to me at rudolphkuss@stevensandkuss.com if you are being bullied by your neighbor or by your homeowners' association over your use of your property.

Introducing 2017 Wis. Act 338

My next few posts will discuss 2017 Wis. Act 338.  I agree with the Wisconsin REALTORS Association that this new law represents an "extreme makeover" of the condition reports used in Wisconsin real estate transactions.  The intent of this law is to make real estate condition reports more user-friendly and less confusing.  While these new forms will take some getting used to, I generally agree that the new real estate condition reports are an improvement.

While the condition reports that sellers of residential real estate and vacant land must complete have substantially changed, it is important to recognize that the scope of Chapter 709 has not.  Wis. Stat. § 709.01 (when read in conjunction with Wis. Stat. § 709.02) still requires sellers of residential real estate or vacant land to furnish a real estate condition report unless they have never occupied the property and are either a personal representative of an estate, a trustee of a trust, a conservator, or a fiduciary appointed by a court.  If the property is owned by an estate, the personal representative still must furnish a condition report unless he or she has never lived in the property (even as a child).  If the sellers have set up a revocable trust or family trust for estate planning purposes and transferred ownership of the property to that trust (as many couples do), they still must furnish a condition report.  Finally, limited liability companies that purchase foreclosed or otherwise distressed properties in order to fix them up and sell them ("flippers") still must furnish a real estate condition report even if they have never occupied the property because § 709.01(2) does not contain an exception for LLCs or their members.  Act 338 did not change the scope of Chapter 709 at all.

Understanding The New Condominium Sales Law

In the next few posts, I will discuss new laws affecting residential real estate sales or residential real estate litigation.  This post addresses 2017 Wis. Act. 303.

Effective April 18, 2018, condominium associations may charge condominium unit sellers a fee of up to $50.00 for furnishing the documents that a seller must furnish to a purchaser pursuant to the WB-14 Residential Condominium Offer To Purchase.  See Wis. Stat. § 703.20(2)(a).  This provision was apparently intended to prevent condominium associations from charging sellers extortionate fees for the required documents, though I suspect that some associations that have never before charged such a fee will now do so because this law expressly authorizes such charges.

Wis. Stat. § 703.33(1) requires condominium unit sellers to furnish certain documents to purchasers not later than 15 days prior to closing.  Effective July 1, 2018, the executive summary required under § 703.33(1)(h) must include the amount of the condominium association's reserve account balance when the association maintains such an account for repairs and replacement of the common elements.  This law imposes additional obligations on condominium associations rather than on condominium unit sellers, as associations are required to furnish all of the required information to sellers upon written request.  See Wis. Stat. § 703.20(2).  That being said, this law potentially benefits purchasers and burdens sellers.  I could foresee a diligent purchaser (or his tenacious lawyer) seeking to renegotiate the purchase price or void the purchase contract altogether upon disclosure that the condominium association has insufficient funds to finance repairs or replacement of its building roofs or parking lots.

Finally, effective July 1, 2018, Wis. Stat. § 703.335 requires a condominium association to provide a written payoff statement to a condominium unit seller or his agent upon written request.  This sounds like a positive development, as purchasers of condominium units often expect reassurances that they will not be responsible for dues and assessments that should have been paid during the prior ownership.  Unfortunately, this law has no teeth.  Under § 703.335(5), the liability of a condominium association to a seller for failing to provide a payoff statement within the statutory deadline - or at all- is capped at $350.00.  A condominium unit seller could sustain damages far exceeding $350.00 if the closing of the sale of his unit is delayed or lost as a result of the association's failure to timely provide the required payoff statement.

Please contact me at rudolphkuss@stevensandkuss.com if you are looking to buy or sell a condominium unit or if you were deceived in your purchase of a condominium unit.