Water in the Basement and a Checked Box
Dan, a licensee at Cedar Point Realty, lists a 1962 ranch at $248,000. During the listing appointment the seller tells Dan, in confidence, that the basement took on about two inches of water in a 2019 storm (insurance paid $9,100) and that a foundation crack was sealed with epoxy in 2020. The seller's disclosure statement, which Dan helped fill out, answers "no known problems" for water intrusion and foundation issues. The seller says: "It's fixed. Don't scare anybody." The buyer's agent texts Dan: "Any water problems? My buyer is nervous." Dan replies: "The seller's disclosure says no." The buyer's inspector spent 45 minutes in the house without a moisture meter and found nothing; the sale closes 30 days later. At the spring thaw the buyer's basement takes on three inches of water; a contractor quotes $14,000 and confirms the patched crack was visible behind shelving.
1. What were Dan's obligations at the moment he received the buyer's agent's text?
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Dan could not pass along a disclosure he knew to be false, and confidentiality does not cover a client's plan to mislead a buyer.
- Dan knew the disclosure statement was inaccurate. Repeating it - "the disclosure says no" - is a misleading half-truth from the one person in the transaction who knew better.
- Michigan license law prohibits licensees from making fraudulent misrepresentations or concealing material facts in a transaction, and agency confidentiality is not a shield for a client's intent to deceive a third party.
- The correct sequence: (1) go back to the seller in writing and explain that the disclosure must be amended to disclose the 2019 intrusion and the 2020 repair; (2) if the seller agrees, deliver the amended statement and confirm in writing; (3) if the seller refuses, Dan must disclose the known material defect to the buyer's side and, if the seller still insists on the false statement, withdraw from the listing.
- Dan should document everything - the original conversation, the seller's instruction, and the corrective steps - because this file is likely to be litigated.
2. If Dan stays silent and the sale closes, what exposure does he and his broker face?
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Both regulatory discipline and civil liability, and the "as-is" nature of the deal is not a defense to fraud.
- License exposure: a complaint to the state licensing agency can result in investigation, fines, reprimand, suspension, or revocation. Knowingly assisting a false disclosure statement and then repeating it to a buyer's agent are exactly the facts that generate disciplinary actions.
- Civil exposure: the buyer can sue the seller for fraudulent misrepresentation and silent fraud, and can sue Dan and Cedar Point Realty for misrepresentation and for the broker's supervision failures. The broker's errors-and-omissions policy may respond, but coverage does not erase the claim.
- Remedies typically include rescission of the purchase, damages measured by diminution in value or cost of repair (the $14,000 quote is the starting point), and potentially attorney fees depending on the claims pleaded.
- Dan's best protection was never available after closing; the file should instead document the steps he took under the first task.
3. The seller argues the buyer's own inspection and the standard merger and as-is language bar any recovery. Evaluate that defense.
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The defense is weak where the seller's disclosure itself is false and the defect was concealed.
- An inspection protects the seller against claims about conditions a reasonable inspection would have revealed; it does not immunize an affirmative misrepresentation. Here the patched crack was hidden behind shelving and the disclosure affirmatively said there were no known problems.
- Michigan requires a seller's disclosure statement for residential property of one to four units. That statutory duty is not erased by an as-is clause, and the act gives buyers rescission rights in defined timing situations - the buyer's counsel should check the delivery dates against those rules.
- Merger ("the contract supersedes all prior understandings") is generally ineffective to bar a claim for fraud in the inducement, because the fraud is what induced the buyer to sign.
- The buyer's inspector may owe a separate claim, but inspection contracts commonly limit liability to a refund of the fee, which is why the seller and the listing side remain the primary targets. Dan's text message is direct evidence against the listing side.