You have just moved into your new home. You read books and articles about how to buy a used home. You hired a well-recommended licensed Realtor to help you find and buy your home. You hired a home inspection company and a general contractor recommended by your Realtor to inspect the home. You read all the disclosures and reports. And still there’s a problem.
Maybe you flushed every toilet during your walk-throughs, but now a month after closing, the toilets have all backed up. When the rooter truck parked out front, one of the neighbors told you that this happened all the time during the last year the sellers were there.
Maybe the place smells so bad no one can stay inside your new home. Now you know why every time you visited, the patio was freshly hosed-down and the house smelled of air-freshener and incense. The walls are full of bats and several feet of accumulated bat guano.
Both true stories.
What do you do?
First, don’t wait. Statutes of limitation are laws which say that you cannot sue someone more than a certain period of time after the person does you harm. The limitation period for breach of the warranties in a written contract is 4 years. The period for fraud and misrepresentation is the later of 3 years or 1 year after discovery. The period for negligence by the seller, the real estate broker and the agent, including negligence in performing inspections of the home, is 2 years.
You want as many defendants contributing to the cost of repairs as possible. Therefore, you don’t want to give any of them a good statute of limitation defense.
Second, find out everything that is wrong with the house that you did not already know about, what it will take to fix everything, and how much it will cost. This kind of inspection is way beyond the training and skill of commercial home inspectors and outside the experience of most general contractors. An attorney who has handled such cases will know some general contractors who know how to do this and how to prepare a comprehensive report with photos that highlight the problems.
Third, send the report with a letter demanding payment for the cost of the repairs to the seller and to the real estate brokers and agents who represented both sides. Better, have an attorney send that letter.
Next, you need to know some things about your contract and the law.
Most California home purchase contracts include a provision that requires the sides to participate in mediation of any dispute before submitting the dispute to arbitration or a lawsuit. The forms of the California Association of Realtors say that if you start a lawsuit or arbitration before asking for mediation, that you cannot recover your attorney fees. Failing to request mediation could put you at a big disadvantage in trying to negotiate a settlement, because the other side will argue that if you lose, you will end up paying their attorney fees, instead of getting the small settlement they are offering you.
A mediation is a meeting conducted by a trained and experience neutral third party who will try to negotiate a compromise and settlement. The mediator does not decide who is right or wrong, or who wins or loses. The mediator might give you advice about the risks and weaknesses of your case, in order to get you to lower your demand. The mediator will do the same thing with the other side, too.
At the mediation, you will be negotiating to get enough money to pay for the repairs. At a trial or arbitration, that will not be the measure of your damages. The law is that the measure of damages for misrepresentation or failure to disclose defects a real property transaction is the difference between the price you paid and the price which a reasonable fully informed buyer would have paid.
That is not necessarily the same as the price you paid minus the cost of the repairs. In a sellers’ market, where there are more buyers looking for homes than there are homes for sale, especially where there are multiple bids on homes and there are buyers who have made offers on homes and been turned down several times, it can be argued that there were buyers who would have paid the same purchase price, even in they had been fully informed about the undisclosed defects.
This adds considerably to the costs of such trials. Both sides will have one or more experts to testify about the defects, what it will take to fix them, and how much it will cost, AND, each side will have a professional appraiser and a real estate broker to testify about the price the home would have sold for if the defects had been fully disclosed. Each expert will need to study what happened in order to develop opinions. Both sides will want to take the depositions of the experts on the other side. All the experts will need to testify at trial. And they get paid for all the time they spend doing all of this, including waiting time while each waits for his or her time to testify.
Every defect is a mini-trial requiring its own evidence and testimony, its own description of the defect, the repair and the cost, and its own testimony by each expert. If there are a lot of problems, such as consequences of structural defects or water intrusion (leaks or flooding), taking the case all the way through a trial or arbitration hearing can be very expensive. It is important not to let the legal costs get higher than the repair costs.
All of this puts heavy pressure on both sides to settle. Almost all such cases are resolved through negotiation or mediation.
The other piece of law you need to know is the defense of the seller and the real estate brokers and agents. They are required to disclose any defect about which they have actual knowledge AND which you could not have discovered by making a reasonable visual inspection of all accessible parts of the property. The real estate brokers or agents have the obligation to perform such an inspection of all accessible parts of the property and to disclose any defects which they observe.
That means that they are not liable for anything that you ought to have noticed yourself. If you could not have observed the defect, how can you expect them to have seen it or known about it? Think about that regarding the defects you are claiming. Were they actively hidden, like the broken sewer line and the bats in the example above? When you were inspecting the house in July or August, did you turn on the furnace to make sure it was in working order? Did you turn the light switches on in every room? Did you fail to notice the brown water staining on the ceiling or a wall?
So you’re going to mediation. Make sure the other side has all the information it needs in order to make you a deal that will allow you to pay for the repairs you need to do. Don’t hold anything back. Answer all their questions. Let them do all the inspections they ask for. If they have any doubts, they aren’t going to offer you as much.
Take an experienced attorney with you to the mediation. There are a variety of techniques that mediators use to persuade you to agree. You need an attorney who can identify what is going on and advise you. When the other side raises risks and weaknesses about your case, you want someone with you who can effectively show the mediator why those are not problems, how they will be dealt with at trial, and emphasize the much greater risks of the other sides’ positions.
The seller and the brokers are likely to have insurance coverage and insurance adjusters at the mediation. They have been to lots of them. You will be the only one there who has not. Your lawyer will help you make up for this.
Your lawyer will also be able to help the mediator exploit conflicts between the defendants and their insurance companies. For example, if your claim against a defendant is greater than her or his insurance coverage, if you offer to accept an amount equal to that defendant’s insurance coverage and the insurance company rejects that offer, then at trial, if you win more than the insurance coverage, the insurance company must pay all of it, even though it’s more than the amount of the insurance. The company cannot reject a policy limits offer and place its insured at risk of having to pay more.
That’s just one example of a mediation strategy an attorney might provide at the appropriate time.
So start by getting an attorney who really knows this type of case. Let the attorney hire an expert to thoroughly inspect your home for every possible defect, especially any you have not discovered, yet. Then start negotiating with the other side. Help them get their insurance involved. You’re not taking this to court. You’re settling it at a mediation.