They Lied!! | Evaluating Fraud In A Real Estate Transaction

By: Scott Umstead

Some people will lie to get what they want and some of those people want you to buy their home.  Over many years of legal practice, I have consulted with many clients who believed they were victims of fraud.  Each situation turns on its own facts, but the applicable law and basic approach is very similar from one matter to the next.  With this as the backdrop, I present here a general discussion of fraud in real estate transactions.

Let’s begin with an example:

Hypothetical #1: A MLS listing and Residential Property Condition Disclosure reflect a property is on “public sewer.”  After the transaction is closed, the purchaser is shocked to learn there is only a septic system.  In fact, the septic system ruptures – the mess and the expense is hard to bear.  The purchaser expects to recover from the seller and maybe even the listing agent.

The Evaluation:  There is a relatively common misconception that fraud always exists where a person relies on a misrepresentation.  Actually, fraud has nine (9) required legal elements and recovery can only be had where all nine (9) are proven (more on this below).  One required element is that the person making the representation have “knowledge of its falsity” or at least speak with “a reckless disregard for truth or falsity.”  Further, the person who relies on the statement, must be “ignorant of the statement’s falsity” and must have a “right to rely” on the statement.  In this hypothetical, let’s suppose the seller made a simple mistake in checking the wrong box.  To add to it, let’s suppose the purchaser had a Home Inspection and an appraisal.  If done properly, both the Home Inspection and the appraisal stated the home had a septic system.  If either or both report(s) showed septic and the purchaser paid no attention, recovery against the seller will likely be barred.  But what about recovery from the listing agent?  Here, the purchaser’s chances are within an inch of zero for two reasons:

  1. The standard MLS disclaimer found at the bottom of each listing provides: “This information is deemed reliable, but not guaranteed. Neither … the listing broker, nor their agents or subagents are responsible for the accuracy of this information.  The buyer is responsible for verifying all information …;” and
  2. An agent is not responsible for a misrepresentation in a Residential Property Condition Disclosure unless the agent knew or should have know it was false.

ELEMENTS OF FRAUD: To establish a cause of action for fraud based upon misrepresentation, each of the following elements must be proven by “clear, cogent and convincing evidence:”

  1. A representation of fact. An opinion is not a statement of fact nor is a prediction.  In the example above, the “representation of fact” is clear.  Silence can sometimes constitute a “statement,” but only where there is a duty to disclose and/or there is a deliberate concealment.
  2. The representation is false (easy enough).
  3. As used in this sense, “material” essentially means “meaningful.”  In other words, the representation must have played a significant role in the decision to enter into the contract.
  4. Knowledge of falsity or reckless disregard of truth. The essence of a lie is that the speaker knows it is false.  The law, however, views this element as satisfied even if the speaker did not actually know the statement was false, but spoke with a reckless disregard of the truth.  Reckless disregard is said to exist where a person makes a statement and knows he lacks the necessary knowledge to be confident the statement is true.
  5. Intent that the statement be relied on. This generally means the person making the statement has reason to expect another person may act or refrain from acting based upon the statement.
  6. The hearer’s ignorance of the falsity of the statement. If the hearer knows the statement is false and acts anyway, he obviously did not rely on it and, therefore, cannot complain later.
  7. The hearer’s reliance on the truth of the statement. If the purchaser would have undertaken the purchase whether the statement was true or not, he is not deemed to have relied on the statement.
  8. The hearer’s right to rely on the statement. A person who is reckless or grossly negligent in his reliance on a statement cannot complain later.  In the hypothetical above, the failure of the purchaser to read either the Home Inspection or the Appraisal may stand squarely in the way of his ability to recover from the seller.
  9. Consequent and proximate injury. To recover at all, the purchaser must be injured.  If, for example, a seller represents he has a septic tank, but the property is actually on the public sewer system, it is fairly obvious the reality is better than the representation, so the purchaser would likely fail in his attempt to recover.  A “proximate” injury means one directly related to the representation itself.

When I was a young attorney, I felt the nine (9) elements of fraud would be more understandable if we boiled them down to 3 or 4.  As time went on, I realized each element asks its own individual question and each question has value in determining whether a person who makes a false statement should, in fairness, be held financially responsible.  Normal people are offended and, in many situations, even angered by a lie, but the law requires we set aside anger.  The law is appropriately interested only in whether each of the nine (9) elements is proven.  In fact, while a typical civil case only requires proof by a preponderance of the evidence (as in 51%), fraud requires more — it requires proof by evidence that is clear, cogent and convincing.  A failure to prove any one of the nine (9) elements is fatal to recovery.

With these thoughts now fresh, let’s turn to more hypotheticals.

Hypothetical #2:  The MLS listing shows “granite countertops.”  The purchasers tour the home before signing the contract, have the home inspected and tour it themselves two more times before closing.  After closing, they discover the countertops are actually laminate (formica).

The Evaluation:  The purchasers satisfy elements #1 and #2, but sharply fail on many of the others.  The more dramatic failures are on elements #6 and #8.

Hypothetical #3:  The Residential Property Condition Disclosure (section IV) asks for “known present wood problems caused by termites, insects, wood destroying organisms, dry rot or fungus.”  The seller states “none.”  In reality, the seller recently remodeled part of the home and, in doing so, discovered mold inside the wall.  The seller did not address/remediate the mold.  Instead, he covered the exposed wall again with sheetrock and listed it for sale.  After the closing, the purchasers’ young daughter develops respiratory issues and, following a professional inspection, the mold is discovered in the wall.

The Evaluation:  The seller is in very serious danger.  Mold is a “wood destroying organism” and is also considered a “fungus.”  Elements #1 – #5 look like clear winners and the remaining elements seem to tip toward the purchasers, as well.  Unless the seller can demonstrate the purchasers somehow either knew or should have known of the mold (ex. a neighbor who helped with the seller’s remodel told them before the purchase or a home inspector found mold indicators and the purchasers failed to delve further), the seller may soon need his checkbook.

Hypothetical #4:  A MLS listing offers land and a double-wide mobile home (in reality, it is a single-wide).  The purchaser lives out of state and makes an offer without visiting the property.  Before closing, the purchaser comes to town, drives by the property and closes on the purchase.  Later, the purchaser wishes to recover from the seller because the home was represented as a double-wide.

The Evaluation:  The purchaser likely fails on element #5 — the seller surely expected prospective purchasers would physically see the home being purchased, so it is doubtful he expected anyone would rely on the MLS description.  The purchaser also should fail on element #6 – the purchaser actually saw the home before the closing and will not be deemed to have relied on a statement so plainly false.  For the same reason, the purchaser will fail on element #8 – he saw the home and reliance on a statement that it was a double-wide clearly was reckless or grossly negligent.  The purchaser may fail on other elements, as well, but recovery will be barred if he fails on even one element.

The purpose of this article is to introduce the topic in an understandable and maybe even conversational way.  The hypothetical’s are simple and intended merely to illustrate the general approach.  Real life situations can, of course, be far more complex.  If you feel you are the victim of fraud, you should get actual legal advice.

**Portions of this article are drawn from Elements of Civil Causes of Action, by Michael G. Sullivan, Esq. and Douglas S. MacGregor, Esq.

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