Real Estate Fraud and Misrepresentation

This page discusses fraud and negligent misrepresentation in real estate transactions, as well as, some distinctions between the two causes of action.

  1. What is fraud
  2. Examples of fraud in real estate
  3. What is negligent misrepresentation
  4. Some common questions related to fraud and misrepresentation

1. What is Fraud?

Very simply, fraud in real estate occurs when one party deceives another and tricks that party into taking action they would not have taken had they known of the fraud. Fraud occurs variably in different contexts, for example, as fraud in the inducement, fraud in the execution, concealment, non-disclosure and intentional misrepresentation. In all contexts, fraud is undertaken intentionally for the benefit of the deceitful party and to the detriment of the other. To be successful in an action for fraud, the plaintiff must sufficiently allege and prove that there was a false representation, of a material fact, made with knowledge of its falsity, with the intent to deceive, reliance upon the representation, and damages.

2. Examples of Fraud in Real Estate

Three examples of fraud might include situations similar to the examples discussed below.

Example of Real Estate Fraud #1

A close relative forges the Deed to a family member’s home, transfers title to themselves, and immediately secures a line of credit against the property. The family member uses the money as down payment on an investment property and to buy a new car. The title transfer and secured line of credit results in a sizeable lien on the property and a significant legal challenge to reverse the damage done by the fraudulent title transfer.

Example of Real Estate Fraud #2

The seller of a large residential parcel lists the property for sale as one that can be subdivided into several lots and developed within a prime residential area. The buyer purchases the lot intending to build homes on the land, including one for personal use. The seller knowingly failed to disclose that development of the land is prohibited due to wetlands, streams and floodplain regulations. As a result, the land is not suitable for improvement, and the purchaser overpaid for the property.

Example of Real Estate Fraud #3

A company purchased a house to renovate and resell it for profit. While working on the renovation, it became apparent that the basement had water intrusion problems. Instead of taking measures to fix the water intrusion problem, such as installing a vapor barrier or drain system, the company erected walls in the basement and concealed the evidence of water intrusion. The property is sold to an unsuspecting buyer who soon learns there is a water problem in the basement.

As seen in all three of the foregoing examples, there was a fraudulent misrepresentation and an action taken in reliance on the misrepresentation. In any real estate transaction, the parties make representations to one another, and a party aggrieved by a misrepresentation could find themselves in one of the most frustrating and emotionally trying times of their lives. When a party discovers that a material misrepresentation was made prior to, or during, a transaction, the party may rescind the contract and collect incidental costs or affirm the contract and sue for damages.

3. What is Negligent Misrepresentation?

Generally, a negligent misrepresentation occurs when factually incorrect information is conveyed to an interested party, and the interested party takes some action in reliance upon that information, to their detriment. Negligent misrepresentation is different than fraudulent misrepresentation in that there is no intention to deceive. The party making the misrepresentation did so unintentionally.

4. Common Questions Related to Fraud in Real Estate

If a party makes representations about the quality and condition of property but omits other facts important to qualify those statements, an action for misrepresentation could be founded by the fact that a false impression was created by the omission of other facts. Once a party makes some representations and selects only facts that are beneficial to them, while willfully concealing or suppressing other material facts that are unfavorable to them, it may be considered just as much a fraud as an actual misrepresentation.

If the misrepresentation were made prior to signing of the respective clause, such a clause should not prevent an action for fraud, so long, of course, as the buyer can prove all required elements. The reason is that the seller should not benefit from their own false representations at the expense of the buyer simply because the buyer signed a contract containing such a clause after the fraud occurred. Therefore, when responding to an inquiry or question, such as in property disclosures, the seller should respond fully and accurately, supplying all material facts, not only those beneficial to them. In addition, material representations made in a property advertisement should be accurate and complete so as to not create a false impression.

A buyer may be justified in relying upon a seller’s material representation even where the buyer had the option to verify the seller’s statements, such as during an inspection. Nothing requires either party to question the information provided or to treat the transaction as if they are dealing with a fraud. Each party is entitled to rely on the information provided to them.

An action for fraud or negligent misrepresentation is a very fact specific undertaking. If you are considering such a lawsuit, you should contact legal counsel to assist with this endeavor.

Call Zaharevich Law Office or fill out the Consultation Request Form below to schedule a consultation.

DISCLAIMER: The foregoing is a general discussion and not legal advice. Please do not consider it legal advice. The facts of every case are different, and if you have a case involving similar circumstances, you should seek legal counsel for assistance. It is generally not advisable to pursue complicated legal action without an attorney or to analyze or assess the facts of your own case.