Selling a Home With Skeletons in the Closet

Helen Ackley saw dead people.

Three dead people, to be precise. She claims they visited her in her Nyack, N.Y., home: two female ghosts — both of whom wore hoop dresses — and a male ghost, who wore a Revolutionary War uniform.

Nevermind that the house was built in the late 19th century and the American Revolution occurred a century prior, Ackley insisted her guests were very real; she even wrote about them for both Readers' Digest and a local newspaper.

Some Nyack residents thought Ackley's houseguests were a product of her imagination, but the buyer of her home, Manhattan transplant Jeffrey Stambovsky, took the ghosts very seriously.

He ended up suing Ackley and her realtor Richard Ellis for failure to disclose the "phantasmal reputation" of the home before he had agreed to buy it in 1989 for $650,000 with a $32,500 down payment.

Full Disclosure?

In theory, disclosure laws are supposed to protect home sellers from buyers' lawsuits and inform the homebuyer of any physical defects that could hurt the value of the home.

Many states, however, have taken disclosure laws a step further, requiring home sellers to disclose any "stigmas" attached to the property. (A stigma could include a nearby women's shelter, pesky ghosts, if it had been the scene of a violent crime, or even if the home seller had AIDS.)

But what most buyers forget is that the broker is actually working for the seller.

Legally, sellers should disclose all "material facts" (a euphemism for physical or non-physical problems with the house, such as whether it is built on the site of an Indian graveyard or that the last five owners all died mysterious, horrible deaths) about a house, they don't always.

The reason for skating over a house's unpleasant history is, of course, that such information might drive away some buyers and soften its fair market value.

In some states, such as California, disclosure laws have a statute of limitations. For example, buyers must be informed of a "material fact" about the house if it occurred within the past three years.

If, however, a particularly brutal gangland slaying took place there five years before, the broker and the seller don't have to say a thing.

Good Stigma, Bad Stigma

There are no hard and fast rules about disclosing property stigmas, and disclosure laws vary from state to state.

In general, home sellers should disclose any pertinent information that could have an impact on the value of the home. The problem, however, is that rarely do material events physically damage the house.

In most cases, the stigmas are purely psychological. It comes down to the fact that many buyers wouldn't feel comfortable living in a house where a murder or other such crime had taken place.

The house and its valuation are only innocent bystanders that have also been victimized by the material event.

In some cases, of course, homebuyers don't flinch at gruesome facts, particularly if celebrities were involved.

When the bank foreclosed on alleged murderer O.J. Simpson's Brentwood, Calif., estate in 1997 (which included an Olympic-size pool, a tennis court and a waterfall), it was auctioned off to Hawthorne Savings & Loan for $2.6 million (considered a $500,000 discount).

Later, it was resold to an investment banker for nearly $4 million, only after Hawthorne Savings & Loan rejected a lower bid for about $3.2 million.

If the property's notoriety hurt the value of the home, would Hawthorne Savings & Loan really have been afford to reject a market value bid of $3.2 million?

A little notoriety can sometimes enhance the value of a property. The Miami estate where Gianni Versace was murdered in 1997 was auctioned off in May 2000 for about $20 million.

Recently the notorious Pacific Palisades home where Thelma Todd — a popular film actress of the 1920s and '30s who appeared in a couple of Marx Brothers films — was suspiciously found dead in 1935 at the age of 30, came back on the market at about $4.7 million.

Although Todd's death was officially ruled a suicide, there was some speculation that her death may have been a murder. The listing agent, Rene Soto, said he received 75 calls after six hours of posting the "For Sale" sign and believes the history of the building has actually helped increase interest.

"It's definitely improved the valuation of the property," Soto says. "There are a lot of Hollywood history buffs in Los Angeles."

Home Sweet Home

But to many people, skeletons (literal or otherwise) in a house's closet is a definite turnoff.

In Stambovsky's case, he felt the ghosts "greatly diminished" the market valuation of the property. Apparently he was so concerned, he brought a "gypsy-looking" woman wearing a bandana to meet with Ackley to discuss the poltergeists, after which he decided he could not live in the home.

Although the court did not rule Ackley and Ellis' failure to disclose the reputation of the home as fraudulent, in the "spirit of equity" (no pun intended) Stambovsky was allowed out of the contract and recovered his down payment.

It's not entirely clear that the valuation of the home was really hurt by the poltergeists, however.

The subsequent owner of the Ackley home was able to buy it for around $20,000 less (about $630,000) than Stambovsky. Ackley's realtor, Richard Ellis, says the discount was because Stambovsky's price was inflated since he bought the home after a bidding war.

The subsequent owner sold the house several years later for more than $900,000 (which Ellis says was a reasonable market value).

"It's hard to speculate on what effect stigmas have on home prices," says Roger Bernhardt, professor of real estate law at Golden Gate University School of Law in San Francisco. "In general, people are willing to spend more for a hassle-free home, but no home is perfect."

For more, go to Forbes.com..