What is Real Estate Stigma?

Provided by Barry Lebow

When I tell people that I specializd in litigation relating to real estate agency and to real estate stigma, even Realtors ask me to explain what I mean by stigma.

Stigma is basically the effect that lingers after the cure. In real estate it can be something as simple as “how clean is clean?” This refers to a property that say had an oil spill. The buyer may have full access to the reports from the environmental experts but due to say a migrating underground water supply, they may feel that the oil may move back or that a neighbouring property, that was contaminated could have their contamination issues migrate. For grow operations (marijuana grow houses) the problem of stigma is predominately related to mould. House can be cleaned to fullest, problems fixed but mould can result even a year later. Same with a house that had a water problem. Stigma is either real or perceived. Sometimes public opinion or word-of-mouth can result in the highest loss in value. Once the community knows of a problem from a murder to a grow-op, the word is out. In most provinces and states, Realtors must disclose but some of the laws are vague and the buyer is not always protected. Good advice? Recommend a qualified home inspector, one who is reputable -check references and qualifications carefully and do they carry insurance coverage.

For buyers, they should be protected by a buyer agency representation and be a client, not just a customer. A buyer should know that a designated buyer rep works for them and their interests. For Realtors, two ways to protect yourself from future litigation should a stigma problem be found later. First, absolutely always type in the address of a house that you are listing or selling on Google, on Yahoo and other search engines. If it were notorious you may be surprised what you can find on a search. Next, always go back into your local board MLS system as far back as possible to search a subject property.

That last bit of advice should have been done by a Realtor recently. She listed a property and then the buyers found out just before closing that the house had once been insulated with UFFI. The buyers wanted a discount to close and the listing agent insisted she did not know. A simple MLS search would have found a previous listing on the same property where it was clearly stated that UFFI had been removed. She should have known as she should have done her research. Her lack of doing so, of relying on the Seller’s representation is now heading into the court system.

Stigma can be measured in many ways, but the most difficult is by direct comparison. For example, say that you bought a house and found out from a neighbour that it had been the scene of a horrific murder. Your buyers are angry, they want to sue the Seller, and the listing and selling agents. In most jurisdictions, you were denied the right to a material fact. In some places, like California disclosure of a murder must be reported for 3 years. In Canada, only Quebec has a murder disclosure law. How does one measure the loss – if any? In a textbook situation, we would find various murder sites, compare their
selling prices to similar and non-impacted houses in their area and then with enough data estimate a percentage loss to your house. The problem? Most murder sites are not readily disclosed and not all murders may have received excess media attention, which does negatively impact value. The other problem is one of time. Did the murder happen last year, ten years ago or in a small town, heck a 50 year murder still is well remembered. In most provinces, I have not found limitations on disclosure. In Ontario for example, once you had UFFI you are compelled to disclose that fact even though it may have been removed in 1981. Something is very wrong with that scenario. Unlimited disclosure harms the selling public who can be innocent of full knowledge of the history of their home and leads to more lawsuits involving Realtors. It is just wrong to not specify how long a former problem has to be disclosed. That one factor alone assists in
stigmatizing real property.

For a former grow operation we do find comparable sales. We track known grow ops and compare them to similar houses (without the grow op problem) and estimate a percentage loss. This works when the data is available, like it is in my home town of Toronto.

Many stigma problems though cannot be measured from the marketplace. A loss of parking which negates a value, a mould issue, a bad construction job, etc. Comparable data is not available so I have learned to use empirical modelling and formulas that make common sense.

Here is a true test for a real loss in value -can you get a mortgage with the problem known to the lender? If the advance is reduced, if the rate is higher or they say no, you have stigma. Next major test – can you get insurance? If no or highly rated you have a stigma problem.

Ghosts – that is another topic, difficult to outline in one posting but for reference to find out if ghosts are real go to your favourite search engine and type in “Ghosts Nyack” or use this link, http://atlasobscura.com/place/the-ghost-of-nyack. Are ghosts real? That is a definite “yes” according to the Supreme Court of the State of New York. Very interesting case and a good read for Realtors.