The Unpermitted Addition, the Water Line, and the Threat to Pull the Listing

The inspection argument answers the wrong question. 'Caveat emptor' governs what a buyer could reasonably discover. It does not license a seller or a licensee to conceal what they already know.

Two known latent material facts exist:

1. The 2021 flood through the addition. A faint water line and mismatched baseboard are physical traces; the seller's knowledge of six inches of standing water is itself the material fact. Flood history affects value, insurability, and future use.
2. The unpermitted 480-square-foot addition. Permitting status affects legal use, insurability, lender acceptance, and assessed square footage - and the assessor's records are now inconsistent with the physical house.

Both are material and not readily observable by a buyer walking through.

What the broker must do:

• Deliver a complete, honest seller's property disclosure. New Mexico has no single statewide statutory form, but the common-law duty to disclose known latent material defects applies, and most New Mexico transactions use a seller's disclosure form as a matter of practice. Use it, and complete it truthfully.
• Never write 'no known defects,' never omit the flood, never describe the addition as permitted.
• Disclose to the buyer's agent in writing and within the inspection period.

The faint water line is the tell. A licensee who sees it and says nothing is not 'letting the buyer inspect' - the licensee is participating in concealment.

Two separate problems: legality and square footage.

Legality. An FHA appraiser must confirm the property meets minimum property requirements and is legally permissible for residential use. An unpermitted addition is not automatically fatal - but if the county requires permits or a letter of compliance, the appraiser may condition the appraisal on the seller obtaining one, and the lender will not clear the condition until it is satisfied.

Square footage and value. If the appraiser cannot verify the addition as permitted habitable space, it may be excluded from the gross living area, and the assessor records support that exclusion. Quantify the exposure with the local market: at, say, $185 per square foot, 480 square feet represents roughly $88,800 of value. If the appraiser excludes it, the report can land below the contract price - and an FHA buyer at 3.5% down usually has no cash to cover an appraisal gap.

The bath count discrepancy compounds it. The listing advertises a bedroom/bath count the records do not support; that is a listing-accuracy problem on top of the permit problem.

Realistic options for the seller:

1. Pull the after-the-fact permit or obtain a county letter of compliance - the clean solution, but it costs time and money, and the county may require plan review or inspection of concealed work.
2. Disclose the addition as unpermitted and re-price to reflect the risk; the buyer's appraiser then values what actually exists.
3. Negotiate a repair or escrow holdback - rarely available on FHA files.
4. Accept that an FHA buyer may simply not be able to close, and market to a conventional or cash buyer.

Broker's duty: price and market the property consistent with what is legally there. Advertising 2,380 square feet when the county says 1,900 is a misrepresentation regardless of who built what.

This is the exam's real question: whose interests control?

What loyalty does and does not cover. The Cordovas are the broker's clients. Loyalty, confidentiality, and obedience to lawful instructions apply. But confidentiality does not extend to a duty to conceal a material defect, and obedience does not extend to an unlawful instruction. A licensee may not make a substantial misrepresentation or participate in one.

Sequence of action:

1. Advise in writing. Give the Cordovas a dated memorandum explaining the disclosure obligation, the specific facts that must be disclosed (2021 flood, unpermitted addition, assessor discrepancy), and the licensee's own independent duty of honesty to the buying public.
2. Offer the fix. Give them the choice to correct the situation - obtain permits, disclose and re-price, or complete the seller's disclosure accurately. Most sellers choose this once the alternative is explained.
3. Deliver the disclosure. If the buyer is already under contract, the known defect must reach the buyer in writing within the inspection period. Delay is itself a problem.
4. If the seller still refuses, terminate the listing. Provide written notice, document the reason, and stop marketing. A broker who stays on the listing and stays silent is exposed to Commission discipline, a civil claim by the buyer, and loss of the very commission being protected.

What the broker may not do: alter the seller's disclosure, 'forget' to mention the flood, use a vague phrase like 'seller makes no representations,' or tell the buyer's agent one story and the seller another.

A closing note on the threat: a seller's threat to pull a listing is a business consequence, not a legal shield. The broker's license is worth more than the listing, and the file memorandum written today is the best evidence of good faith if a complaint arrives next year.