The rules are only different if the buyers of the foreclosed property (REO) agree to the sellers' waiver of their right to a recourse (right to sue). While the original offer protects the buyers rights to a certain extend, after the offer is accepted by the bank, the buyer of an REO property will receive an addendum which he may decide to sign or not to sign. The banks explain this like this: the bank has never been residing in the property and never been doing anything in the house - hence, they don't sign the Seller's disclosure, and instead make the buyer aware of the situation.
If the buyer signs such an addendum, and the bank was upfront about their lack of knowledge on the property, the bank and agents are usually not liable, but the new owner will be (to the municipality they are in and potentially to their future buyer, unless all issues brought to code). As long as the buyers decision to buy is consciencious, both sides are fine (better read the addendum when buying a foreclosure!). Usually, the addendum is so "airtight" that recourse is highly unlikely.
If the buyer finds this situation with the bank unacceptable, the buyer is free to cancel the transaction and move on to purchasing another property.
Yes, things are different for the homeowners...
The homeowner must disclose all work done on the house via Sellers Disclosures, as well as all "material facts" that could effect the value of the property. It's best to provide permits and warrantees, if any, as well as elevation certificate and a survey. The owner sometimes has to bring the issues up to code (probably the best way would be before selling - by inviting the building inspector for a courtesy inspection (if applicable in your city/town)). Or, if the house is sold "as is", an attorney can prepare a contract where the buyer would be taking the responsibility for all the future fines/code/permits issues. However, the deal would have to be outrageously great for the buyer,
as some fines will be huge (triple size), and some liens might have interest growing every day.
With many properties on the market available for sale, such buyer would be very rare.
I say, it is truly best to prepare the house for sale in a way that such issues don't come up,
and the home inspection won't be reducing your bottom line (fixing small leaks, regrouting the tile, fixing a leaky toilet can amount to the price the buyer may not want to pay). However, if this is not an option, fixing these issues yourself after the inspection would be much cheaper for you (instead of reducing already agreed upon price).
Hope this helps!
Beachfront Realty, Inc.