Caveat emptor -- buyer beware!
States that don't require a disclosure statement go by the "Caveat Emptor" rule – also known as "Buyer Beware!" Basically, this places all the responsibility on the buyer to inspect every single thing in the home and on the property, as well as research invisible issues such as disputes with neighbors or hidden unpermitted work.
Interestingly, whatever a state's laws might be, there are always opportunities for things to slip through the cracks -- and the required elements of disclosures don't always align with a state's known problems. For example, in Florida, pest infestation history disclosures are required, but past flooding to the property does not need to be disclosed. (This is particularly ironic because so much of Florida is designated as a flood hazard area and special flood insurance is required.) Florida isn't alone in this either -- according to the National Resources Defense Council, 21 states do not require adequate flood risk disclosure.
What's the difference between a disclosure statement and an inspection?
A home inspection is conducted by a professional inspector hired by the buyer. The information that the inspector finds is given directly to the buyer. Like a disclosure form, the inspection form encompasses an exhaustive list of features to be checked, but unlike a disclosure, it does not cover invisible issues such as municipal assessments, existing liens, deed restrictions, moneys owed to the HOA.
How to check the facts behind a real estate disclosure statement
Between inspections, optional specialized inspections, appraisals, and title searches, there are ample opportunities to cross-check almost everything on a disclosure statement. For example, if there's faulty electrical wiring that causes some receptacles or switches to not work, an inspector will find the flaws first. If the disclosure statement doesn't fully explain the issue and the seller doesn't make necessary repairs, an appraiser will likely find the same flaws a couple of weeks later and investigate them in even more detail.
As another example, if a buyer notices possible concealed unpermitted work and does not receive any information on it in the disclosure, they can go to the city's building department and request to pull past permits. If they don't find anything about the work in those records, they might mention it to their lender who can ask the appraiser to take an extra-close look at that part of the structure.
Most information related to liens, judgments, and other legal actions will come up during the title search and need to be cleaned before the transaction can go through.
What if something is forgotten on a disclosure?
If you're a seller trying to figure out how exhaustive your disclosure statement needs to be, the prevailing wisdom is, "When in doubt, disclose! Full disclosure is better than partial." Since a disclosure statement is a legally binding document, lies -- even by omission -- have the potential to be extremely damaging and expensive if something you left off causes problems further down the line.
If you're a buyer and you're worried, you can always be extra vigilant by getting specialized inspections (septic tank, roof, mold, and plumbing inspections are just a few of the common ones).
You can also ask your real estate attorney to add clauses in the contract, such as requiring sellers to resolve any code violations prior to closing. This one is specifically designed to protect against undisclosed unpermitted work. If it is discovered (even a few years after the sale closes) and causes problems for the new owner, the former owner will be legally liable whether the omission was accidental or intentional.
The disclosure statement is important to buyer and seller alike
While nobody expects real estate transactions to always sail along under best-faith terms, nobody wants the worst-case scenario, either. No one wants a sale to fall apart ... and even more than that, no one wants a lawsuit three years down the road. With that being the case, and especially given the level of due diligence a buyer can undertake through third-party professionals, it behooves the seller to be proactive and forthcoming with their real estate disclosure statement. Some sellers even create them together with a building inspector to be extra thorough. This isn't just being over-cautious; it allows the seller to get ahead of any issues and correct problems before the buyer ever encounters them.