How to Catch Real Estate Fraud
To win a real estate fraud case, a buyer needs evidence that the seller actually knew that his representation or omission was false. If a seller claims the property has perfect plumbing in the SPDS, he’s only lying if the property actually has a plumbing problem and he knows it. That evidence of knowledge is a crucial area of initial investigation. Fortunately, ample sources are available. The following is a list of the top seven ways sellers get caught failing to disclose.
1) Documents Left in the Property.
Often sellers leave behind documents that prove they knew about problems they deny. For major problems in a property, sellers usually obtain repair quotes before deciding to sell. Even if the seller doesn’t pay for the repair, he gets a document confirming the condition of the property and the cost to repair it. Sellers frequently leave these documents behind after closing. Often, it’s inadvertent; the seller doesn’t have further use for the document, so he doesn’t bother packing it in a rush to move. In fact, sometimes these documents stay in the house through multiple transactions. These documents prove that a seller knew the property had a problem, and buyers can use them to hold fraudsters responsible.
For example, I once saw a case where a house had an undisclosed mold problem. Eventually it got worse and triggered a severe allergic reaction in a buyer. That purchaser found himself stuck with a home he couldn’t live in. He also found a written remediation quote in the attic: a company had advised the seller that the mold was dangerous to human health and would cost $50,000 to repair. Once that document came to light, the seller couldn’t credibly claim he didn’t know about the mold. And his written denial of mold conditions was fraudulent.
Neighbors often have valuable information about property history. They see work being performed from the exterior. Sometimes they get invited over and see inside the property. In fact, when people have problems with their property, sometimes they even ask the neighbors for referrals. A conversation with each nearby neighbor often yields considerable evidence in real estate fraud cases. For instance, a seller who denied a roofing problem on his SPDS will have great difficulty explaining why he asked three neighbors for roofing referrals two months before listing the property.
In one case I tried, the sellers failed to disclose a history of serious problems with the main water supply line. They unsuccessfully attempted to repair it themselves. And two neighbors confirmed this. One neighbor saw them working on it. Another helped them attempt the repair. These witnesses proved that the sellers knew about the plumbing problem, despite failing to disclose it.
3) Home Owner Associations.
HOAs often receive complaints related to the properties they manage. Also, HOA architectural committees have power to approve certain repairs and improvements. These files usually include descriptions of the work and the reason the homeowner wants to do it. Sometimes, these files reveal that an owner wants to conduct major construction because of problem with the property. For example, he knows the property tends to flood during monsoons and wants to divert the water away from the house. That proves knowledge of a flooding problem. If the seller doesn’t disclose that problem, he’s liable for fraud.
In another case, a Fountain Hills seller emailed the HOA architectural committee repeatedly to complain about anticipated construction on a neighboring lot. When the HOA approved the construction anyway, he sent an email complaining that the construction would ruin the mountain view. He elaborated that the view was his only reason for purchasing the property and he intended to sell because of the impending loss of the view. But he didn’t disclose it in the purchase process.
That email proved every element of fraudulent non-disclosure. Not only did it prove the seller knew about the construction and upcoming view loss. It also proved the loss was material; it was so significant it undermined the seller’s original motivation for buying the property and prompted his decision to list it. HOA files are great places to find smoking guns.
4) Physical evidence of repairs.
Sellers often attempt to repair problems with a property. These repairs often conceal the problem during the inspection period and work well enough that the buyer doesn’t notice the problem until weeks or months after closing. Then a problem appears. Sometimes the repair wasn’t thorough. Other times, something wears out near the repair site. But the buyer now has a problem resulting from the non-disclosure. Often, the new owner can ask the contractors whether it looks like any work was done in that area of the house in the recent past. This will reveal evidence of a recent repair the Seller failed to disclose.
One red flag for this behavior is mismatched or non-conforming parts. In one extreme example, Sellers attempted to repair a plumbing problem themselves, but used the wrong pipe size. They attached a 1-inch pipe to a 2-inch pipe using a pipe reducer at the repair site. Soon after closing, the new pipe they installed broke again and the buyers discovered they had been cheated. The mismatched pipe was strong evidence that the sellers had worked on the line without disclosing it.
Another common problem is the partial roof repair. The need for roof repair increases as the roof nears the end of its life. Sometimes sellers notice roof leaks and obtain a relatively small, cheap repair. They just patch a small part. But a seller who fails to disclose a pattern of roof leaks faces liability; a reasonable buyer would have known the roof was near the end of its life if told it leaked four times in three years.
5) Title Insurance Companies.
The disclosure obligation extends to known title defects and sometimes sellers know the property has a title problem but refuse to disclose it. However, sellers who know they have a title problem often make claims with the title insurance company before selling a house.
These claims often yield great evidence of mental state. In one case I tried recently, the seller filed a title insurance claim and then sent several emails contesting the denial. In those emails, he complained that the title problem should have been disclosed to him. He also complained that the problem rendered the entire property worthless.
Tenants often have encyclopedic knowledge of a property’s history. Whenever an investor receives a maintenance request from a long-term tenant, the investor should ask the tenant what he knows about the history of related problems. That tenant will know whether he’s made similar maintenance requests, whether there was a pattern of similar problems, and what the prior owner said about them. Moreover, he may have a long history of correspondence with the prior owner related to that problem.
For example, a tenant calling about an HVAC problem may be able to share the fact that he’s called for HVAC issues 7 times in the prior year. He may even have emails with the landlord and the name of the contractor who worked on it. A strong fact investigator will then contact the contractor and determine what proposals for work that contractor sent. Often, it will yield evidence that the contractor recommended completely replacing a bad HVAC unit, but the Seller didn’t do it and didn’t disclose the problem.
7) Property Manager.
Property managers often have thorough files related to maintenance history. They often retain every maintenance request made by every tenant. They retain estimates and invoices for any repairs performed. And they have correspondence with the owner related to those issues. The property manager’s file is fertile ground for evidence of real estate fraud.
Samuel Doncaster is an experienced real estate trial lawyer who's won multiple trials related to this subject. More importantly, he's never lost in front of a jury. If you've been the victim of real estate fraud, call now to schedule a consultation. 480-616-9377.