My property was misrepresented by the bank. Now what?

My property was misrepresented by the bank. Now what?

Question:
Seller is a bank. Transaction is in escrow, with the financing contingency deadline fast approaching–buyer’s inspection is done and settled. Seller agreed to take care of septic according to County requirements. Buyer just received the completed O&M. It states, “Meets requirements for system evaluation and permit compliance” and then a little lower down the page the inspector comments: “Drainfield is sized for 2 bedrooms”.

Property was marketed as a 3 bedroom, appraised as a 3 bedroom, and it is actually a 3 bedroom. A copy of the original septic permit was obtained, and it shows approval of a 2 bedroom system (with a sketch of where a 2 bedroom house was planned to go). The builder actually built a 3 bedroom.

Buyer’s agent just told all of this to the buyer, since buyer’s agent views it as a material fact, and explained that this could make the property tougher to re-sell in the future if regulations get “tighter”. The buyer wants to disregard it and proceed.

This could kill the buyer’s loan if the lender picks up on it–if so, that would probably happen after the financing contingency deadline. The Bank Addendum expressly states that the earnest money will be non-refundable after that deadline.

Is there anything “wrong” with owning a 3 bedroom house that has a 2 bedroom septic? (meaning, would they be exposed to any city/county trouble for non-compliance of the system even though the Health Dept. seems to have signed off on the O&M Evaluation.)

If the buyer’s loan dies after the financing contingency deadline, as a result of this, is it likely we could preserve the buyer’s earnest money anyway? Even though the buyer waived the Form 17, the property was somewhat misrepresented.

Answer:
Currently, the Hotline is not aware of any local jurisdictions that proactively seek and prosecute property owners who put their septic systems to a use greater than that for which it was approved. That is not to say that environmental regulations won’t change in the future and that local jurisdictions won’t someday, take a more aggressive position with septic systems that are used beyond their approved capacity.

With that said, the three bedroom use of a two bedroom septic is still a VERY significant issue. If this buyer closes and wants to obtain any permit to improve the property at any time in the future, the buyer will have to first bring the septic system into compliance by either upgrading the septic system, if possible, or eliminating a bedroom. Buyer must be made aware of that limitation on ownership of the property. And, as mentioned in the question, this is likely to be an issue for future buyers, just as it is an issue for this buyer.

Buyer’s agent and broker must put buyer on written notice of the fact that the septic system is only approved for a two bedroom home and the potential risks associated with that issue. The reason it is important to put this information in writing to buyer is so that agent and broker can use the written disclosure to protect from liability in the event this buyer later claims that agent did not advise of the risks associated with closing this purchase.

Whether there will be any claim later for this buyer to protect the earnest money is unknown. Clearly, the parties used a non standardized bank addendum that modifies the terms of the statewide Financing Contingency Addendum. Perhaps buyer can negotiate with seller that buyer will not terminate based on this new revelation so long as seller agrees that buyer’s earnest money will be refunded in the event buyer’s lender rejects the loan based on this information. If the parties reach that agreement, it will need to be documented in writing. Agent should seek the assistance of legal counsel in drafting this provision.

Another issue, arises, however. That is the issue of fraud on buyer’s lender. Arguably, buyer and buyer’s agent have an obligation to notify buyer’s lender of this issue. Failure to do so can have significant consequences, including violation of a state law which makes most lender fraud a class B felony.

Buyer should be advised to seek legal counsel. This issue, those seemingly of no consequence to buyer in buyer’s ability to occupy and enjoy the house as it stands, is a huge issue with potentially, far-reaching consequences. Agent should notify buyer, in writing, of the situation related to the septic system and in the same writing, advise buyer in strong terms, to seek legal counsel. Agent and broker should consider consulting their own lawyer for assistance in determining how to proceed.

The preceding is an opinion from Annie Fitzsimmons, the attorney who answers questions for the Washington Association of REALTORS® Legal Hotline. For additional questions or information, please contact Jen at (206) 293-1005 or send me an email to jen@jenhudsonhomes.com.