As a seller, what is my responsibility in disclosing defects to a potential buyer?
There is a property law doctrine when it comes to buying a home called caveat emptor – which means let the buyer beware. The modern law has adjusted this old principle and affords real estate buyers with some protections. Specifically, a seller is obligated to disclose problems that could affect the property's value or appeal. In most states, it is illegal to fraudulently conceal major physical defects in your property such as a basement that floods in heavy rains.
Generally, you are responsible for disclosing only information within your personal knowledge – in other words, you don't usually need to hire inspectors to turn up problems you never had an inkling existed.
However, in some states, laws dictate that you are responsible for searching for certain problems, whether you see signs of the problem or not. In these cases, or where you could have seen a particular defect but turned a blind eye, you could ultimately end up in court, compensating the buyer for the costs of your failure to speak up sooner.
Full disclosure of any property defects will help increase the buyer's confidence that you're dealing fairly. Full disclosure will also protect you from legal problems later, such as buyers who want out of the deal or who claim damages suffered because you carelessly or intentionally withheld information about your property.
Just because you disclose a problem doesn't mean you must repair or correct it. The disclosed item can become a point of negotiation between you and your buyer.
There is an interesting and famous case – Stambovsky v. Ackley, 169 A.D.2d 254 (NY App. Div. 1991) – where the New York appellate division decided that a buyer could back out of a sale and obtain his down payment because the seller’s did not disclose that the house had a reputation to be haunted by ghosts. The Court held that the buyer was unable to obtain this information by physical inspection and since it was well-known in the area and well-known to the sellers, the sellers were under a legal obligation to disclose this information to the buyer.