The Seller of My Home Failed to Disclose Water Damage. What Now?

You’re deep into the honeymoon phase with your new house — picking out wall colors, rearranging furniture, playing with your décor options — when suddenly, disaster strikes!

Perhaps you discover discoloration in some tucked-away corner, or you hear mysterious dripping sounds in your walls, or a sudden rainstorm reveals a leaky roof. Once you investigate, it becomes clear that this water damage problem is an old one, and your seller should have disclosed it when you bought the house.

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That’s what happened to one of Maryland-based agent Greg Cullison’s clients: “I had a buyer who bought a renovated home from a house flipper, and the seller signed a disclaimer that there were no latent defects. Shortly after moving in, the buyer’s child became ill and, after a couple of visits to the doctor, it was determined that the property had mold.”

This seems like an obvious failure: The seller didn’t disclose existing water despite knowing about it, period. But unfortunately, it’s not enough to just know in your bones that your seller failed to disclose pre-existing water damage. If you intend to collect from the seller, you have to be able to prove it.

Let’s walk through what it’ll take to build your case…and whether or not it’s worth pursuing.

Defining the problem: What’s the cause of the water damage?

Water damage can lead to a lot of problems, including structural damage, mold, and destruction of your furnishings and belongings. Plus, water makes a house more susceptible to wood-destroying insects — moisture is like a dinner bell to termites.

When you encounter any of these issues shortly after moving into a house, it’s natural to assume that the problem existed prior to your purchase. To substantiate whether that’s true, you’ll need to identify the source of the problem.

If you suspect that your new house has pre-existing water damage, here are the most common culprits that may have caused the damage:

• Ill-repaired roof
• Rusty pipes
• Old water heaters
• Improper landscape drainage around the foundation
• Leaky toilets
• Water/sewer issues
• Backflow and cross-connection issues

For Cullison’s buyer, they had a plumbing issue soon after closing on the house that could account for the mold:

“Shortly after the buyer moved into the home, they discovered a leaking water pipe leading to the bathroom in the basement. The buyer got that repaired, but within the next 30 days is when their child began experiencing the mold-related sickness.”

Once you find the source of your water damage, you need to figure out how long it’s been going on.

Establishing a timeline: When did the water damage start?

You can’t go accusing the seller of not disclosing that water damage until you establish a timeline to determine if it started before you took ownership of the home.

“The first thing you need to do if you suspect that your home has undisclosed water damage is contact a qualified contractor to evaluate the problem,” advises Cullison.

“If the contractor finds evidence that the water damage existed prior to your buying the house, then I would advise that you seek legal counsel from a real estate attorney.”

Your contractor will be looking for these signs of water damage:

• Mold
• Wood rot
• Damp, swollen, or discolored walls and ceilings
• Rusty metal, especially around plumbing
• Sounds of leaks within the walls
• Roof damage, including loose shingles
• Unpleasant odors caused by water damage

As your contractor examines the damage, they’ll look for telltale age signs, like long-term wood rot and water stain rings. It takes that expert eye to determine if the water damage is new or if it started long before you bought the house.

Keep in mind, though, that your contractor is not an archeologist and there’s no “carbon dating” for water damage.

Even if there is evidence that your water damage is the result of a recurring, longer-term problem, any timeline data provided is purely your expert’s estimation. (Note: Your seller may be able to refute your expert’s testimony with their own expert should the resolution process go that far).

Also, even if the defect causing the water damage existed before you purchased the house, that doesn’t mean that your seller was aware of the problem.

Legally, a seller cannot be expected to disclose an issue that they are unaware of.

What evidence is there that the seller knew about it?

Even if it seems painfully obvious that the water damage occurred long before you purchased the property, you’ll need evidence to prove it if you intend to sue for damages.

You’ll need evidence that shows two things: 1) that the water damage existed prior to your purchasing the house; and 2) that the seller knew of and did not disclose the existing, or prior, water damage.

Evidence of that can prove that your seller is liable includes:

• Timeline testimony from your contractor
• Paperwork or repairman testimony that previous repairs were made to attempt to fix the problem
• Neighbor testimony of the prior condition of the home
• Photo evidence of remodeling done to deliberately conceal undisclosed water damage (such as fresh drywall, paint, or paneling over the source of the water damage)
• Testimony from the contractor who did the remodel to hide the water damage

With their child’s health at stake, Cullison’s client began their investigation by talking to their neighbors:

“The buyer spoke to several neighbors that were familiar with the property and discovered it had previously been a foreclosure property. During that time, the house was vacant for years with water in the basement. So, even though the house was beautifully remodeled, it clearly had a mold problem that wasn’t properly remediated by the seller.”

That testimony sounds like direct evidence that the seller deliberately concealed pre-existing water damage, but let’s not forget the leaky pipe problem that occurred just prior to the discovery of mold in the house. It would be difficult to prove whether the mold problem started due to the prior water damage in the basement, or if it began after the pipe leak was discovered.

In addition, the insights from the neighbors were not alone proof that the seller flipping the foreclosed property knew of and deliberately hid any pre-existing water damage. It’s quite possible that the seller didn’t own the property long enough to know its full history.

Did you have a professional home inspection on the property before buying?

While most states require sellers to disclose any latent defects or pre-existing water damage, they don’t shoulder all of the responsibility — it is also up to buyers to do their due diligence in evaluating the condition of the house.

“I always have my flashlight out when showing houses to buyers so that we can get a good look at the baseboards, the sump pump, and look for discoloration on any unfinished drywall. I also look for professional waterproofing — which is a great thing for a house to have to prevent water damage,” says Cullison.

“Anytime I’m showing my buyer a property that has even the slightest evidence of a moisture problem, I advise them to stay clear of the property.”

Unfortunately, sometimes your love affair with the home’s good points can blind you to potential water damage that the seller did disclose.

That’s why it’s so important to have a professional home inspection done while you’re in escrow. A qualified home inspector will examine the roof, drains, visible plumbing, and crawl spaces for any signs of pre-existing water damage.

While the inspection is absolutely vital to help you spot water damage problems before you close on your home, it can hurt your case against the seller.

If your home inspection expert failed to find pre-existing water damage during their inspection, the seller can reasonably argue that there is no way they could have known about the problem.

How to pursue litigation

When your water damage is extensive and the cause of costly repairs, pursuing litigation to hold the seller financially responsible may be your only option.

However, there are several steps you need to take before reaching that point.

Step 1: Research your area’s seller disclosure laws

The first thing you must do is find out if the seller has any fiduciary responsibility for the water damage according to the seller disclosure laws in your state.

While some states require lengthy disclosure forms that cover questions related to pre-existing water damage, other states allow sellers to simply complete a short disclaimer form stating that there are no known existing problems. Still, other states apply the rule of “caveat emptor,” which is Latin for “buyer beware.” This puts the onus for discovering flaws and repair issues on the home buyer prior to closing on the house.

Step 2: Contact your real estate agent

Reaching out to the real estate agent who helped you buy the house is one of the first calls you should make if you suspect that you’ve discovered pre-existing water damage.

Not only can they help you understand the nuances of your area’s disclosure laws, but they also have recommendations for the experts you’ll need to prove your case, including real estate attorneys and contractors.

Your agent may also have a good working relationship with your seller’s agent, which could lead to resolving the issue without litigation. If not, your agent may be able to grease the wheels to obtain the names of any contractors who worked on any water damage repairs for the seller.

Step 3: Enlist the help of a real estate attorney

Don’t make the mistake of waiting too long to contact a real estate attorney if you suspect that your home has undisclosed water damage.

An attorney has the knowledge and training to help you determine who is responsible for the failure to disclose. For example, you might be focused solely on the seller, when in reality it’s the seller’s agent or your own home inspector who’s actually the party responsible for not telling you about the pre-existing water damage.

A real estate attorney is also the best person to evaluate whether you even have a case worth pursuing.

Step 4: Evaluate your case

The simple existence of pre-existing, undisclosed water damage doesn’t necessarily mean you have a case. There are a number of criteria that your situation needs to meet before an attorney will take your case to court:

• Statute of Limitations: Every U.S. state sets a time limit on suing your seller for undisclosed damage — if you’re outside that timeframe, there’s no point in suing.
• Evidence of fraud or negligence: Your evidence must prove that the water damage was pre-existing and that your seller either neglected to disclose it or committed fraud to hide its existence.
• Proof of your “plausible deniability”: You must also have proof that the water damage isn’t an obvious defect easily spotted by you or your home inspector. (If you failed to inquire about obvious ceiling cracks or water stains, that’s on you.)
• Documentation of monetary damages: Don’t think you can use undisclosed water damage to get an after-closing reduction if you feel you overpaid for your house. In order to sue for damages, you must obtain either repair quotes or have receipts from work done to prove that you have a reasonable right to expect financial compensation from the seller.

Step 5: Reach out to your homeowners insurance company

It’s a good idea to contact your homeowners insurance company about whether the damage you’ve found would be covered under your policy. However, be aware that homeowners insurance companies are reluctant to pay off insurance claims on damage caused by a pre-existing problem. So, it’s possible that the insurance company may deny your claim to cover any part of the damage that existed before you assumed ownership.

Step 6: Send a demand letter

If your seller intentionally hid pre-existing water damage or deliberately omitted it from the disclosure form, you may not need to go as far as a lawsuit to get them to pay up.

Sellers taken to court over property damage fraud need lawyers, too, and that will cost them a lot in legal fees. If they know they’re guilty, they may be willing to pay up if you simply send them a demand letter.

This demand letter should:

• Cover the facts of the case
• Outline your evidence of the seller’s malfeasance
• Spell out the risks to the seller
• Ask for a specific resolution
• State your willingness to pursue litigation if your demands aren’t met

While it’s called a demand letter, you don’t want to antagonize the seller, especially so early in the process.

The letter should be polite, direct, and businesslike so that your seller is willing to meet your demands.

Step 7: Seek mediation

While a seller might not agree to meet all of your demands, they may be willing to negotiate a resolution. That’s why some states require that the buyer and seller attempt to resolve undisclosed water damage disputes through mediation first.

It’s the mediation stage that Cullison’s clients are currently working through to resolve their undisclosed water damage issue:

“My buyer is currently seeking mediation. In fact, in Maryland, the contract of sale states that mediation is the first step that must be taken when there are disputes over issues like undisclosed water damage. If both parties cannot come to terms in mediation, only then can my buyer pursue legal action.”

Step 8: File a lawsuit

If mediation does fail, going to court may be your only option to obtain compensation from your seller. You’ll pursue your case either in small claims court or state court:

• Small claims court: Every state has an allowable claim amount dollar limit that ranges from $2,500 to $15,000; filing here can be done without the expense of hiring an attorney.
• File suit in the state court: If your claim is over the small claims court limit, you’ll need to pay an attorney to file your case in the state court; expect to pay 30% to 40% of your collected damages to your attorney, unless your settlement includes reimbursement of your court costs and attorney’s fees.

The expense of suing someone is why many real estate agents and attorneys advise litigation only as a last resort. If you do reach this point, take your time and carefully consider if it’s worth what it’ll cost you in time and money.

Weighing the time and cost of legal action

“I’m not a lawyer, so I can’t give legal advice — but if mediation fails, I think you need to do a common-sense cost-benefit analysis before pursuing any expensive legal action against the seller,” advises Cullison.

Repairing undisclosed water damage is expensive, but suing to get your seller to reimburse you may actually cost you more. If you’re looking at $10,000 or more to repair the water damage and fix the cause, then legal action may be worth it.

But if the water damage is minimal and the fix to prevent future damage is a simple downspout tweak to direct water away from your foundation, then your best bet is to let it go without any action beyond a demand letter.

Before taking your seller to court, run the numbers on how much the repairs will cost you, versus how much you’ll spend on litigation:

• Repair estimates from several contractors (average cost to repair water damage runs about $2,800)
• Court costs (check out the court costs in your state)
• Real estate attorney’s fees (fees run between $150 to $300 per hour)

Remember, these are all just estimates at this point; the repair could end up costing more than you anticipate. But so could your litigation expenses if the case drags out.

You’ll also need to factor in intangibles required to pursue reimbursement from a seller who’s refusing to pay. Ask yourself: “Is the money I’ll get after paying my litigation expenses worth what I’ll spend in my own time and effort?”

While you’re weighing the pros and cons of taking legal action, also consider your other options to cover costs beyond dipping into your own savings.

Many types of water damage are covered by your homeowners insurance policy. Or, if the damage occurred within your first year of owning the house, it may be covered by your home warranty if you negotiated home repair insurance coverage into your sale.

For example, let’s say your hot water heater rusted out and flooded the lower level of your townhouse within the first year of ownership. The home warranty that you negotiated as part of the sale may cover anything from:

• replacing the water heater
• fresh drywall and paint in every lower-level room
• new carpet in the living room and all the way up the stairs
• new flooring in my kitchen and bath
• replacement or reimbursement for water damage to your personal property

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Can you know that pre-existing water damage was deliberately undisclosed?

When you feel cheated and deceived by your seller about undisclosed water damage, it’s only natural to want justice and reimbursement for the repairs to your home. Unfortunately, what you feel and what you can prove are two very different things.

Yes, your seller may have deliberately hidden the pre-existing water damage. On the other hand, they may have also been completely unaware and answered the disclosure form questions to the best of their knowledge. That’s what Cullison feels happened with his client’s seller:

“No one knows what’s in someone’s heart and soul, but I do honestly believe that the seller never meant to deceive my buyer in any way. I think that the seller believed that the property did not have any latent defects.”

If you do discover undisclosed water damage, your decision over whether or not to take legal action can wait. The very first thing you need to do is take care of the problem ASAP.

“Don’t let the problem fester while trying to get the seller to pay up. It’s only going to get worse and spiral out of control,” advises Cullison.

“Solve the problem immediately so that you don’t wind up with a larger one, but keep track of your expenses so that you have a dollar amount ready when you go into remediation.”

Disclaimer: Information in this blog post is meant to be used as a helpful guide, and not to be taken as legal advice. If you need assistance navigating a claim against a seller or seller disclosure lawsuit of any kind, please consult a skilled real estate attorney. 

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