Full-Disclosure: Rescinding a Real Estate Deal in an Appreciating Market

Written by Columnist:

Samuel Doncaster

One of the most common questions I get from buyers discovering a material seller non-disclosure or false disclosure is what they can do about it. One option is rescission. If the buyer chooses rescission, he gives the house back, and he gets back his purchase price. But it doesn’t end there. Obviously, someone simply getting the purchase price back wouldn’t be whole without more, and there’s a lot more a buyer can receive. In addition to rescission, a buy can claim:

• Lost Appreciation—Especially in a rapidly appreciating market, a buyer who merely gets his money back risks being unable to purchase a similar quality house. For example, if someone buys a house for a million dollars, and the market appreciates 20% before he catches the fraud, a house that was as disclosed would have been worth $1.2 million. We consistently claim these types of damages on behalf of buyers, and they’re entitled to it. 
• Diminished Value of Use—In addition, Buyers are entitled to diminished value of use. We measure the value of use of a property based on rental value. So, we have an appraiser determine what the property would rent for if it was in as-disclosed condition. Then, the appraiser considers what the actual rental value is. The difference is diminished value of use. And the buyer is entitled to that amount from the date of closing until the seller returns the full purchase price. 
• Interest payments—Buyers only agree to the obligation to pay interest in reliance on the seller’s representations regarding the property. When those are false, the buyer is entitled to compensation for that interest. In addition to monthly interest payments, any points on the buyer’s loan are compensable.  
• Repairs and upgrades—Any contracting work the buyer procures prior to learning of the undisclosed condition is compensable. But most buyers wouldn’t complete the purchase, let alone spend this extra money if they had known of a serious defect that the seller should have disclosed.  
• Move in costs—Any money the buyer spends moving into the property is compensable. It’s another expense the buyer wouldn’t have had if the seller had been honest. 
• Closing costs—Every time I mediate one of these cases, I add closing costs to the demand. We include buyer’s share of title and escrow. We include title insurance. Recording fees. If any additional closing costs are shifted onto the buyer in the contract, we add them back in for this demand. 
• Hedonic damages—Even many real estate lawyers miss this. But if the buyer used or intended to use the property as a personal residence, damages for emotional distress and lost enjoyment of life are available. This issue hasn’t received much attention in Arizona, but we do have authority to support it. 

Commissions typically don’t factor into this calculation. They’re paid by the seller, not the buyer. So, they don’t become a factor in the demand. 

Accounting for all those factors, buyers who discover fraud and rescind are typically entitled to between thirty and fifty percent over the purchase price. The buyer is entitled to enough money to get out of the bad house and into a good one of the quality he thought he was buying.

Samuel Doncaster is a trial lawyer who’s very active in real estate fraud cases. He routinely helps people get their money back when they’ve been cheated in real estate deals. If you have a client who needs help with a disclosure issue, you can help them set an appointment by calling 480-666-4054 for a strategy session. That strategy session comes with a risk-free, 100% money-back guarantee.