This paper proposes a fault detection method for hysteretic base-isolation systems. One of the key contributions of this work is a Lyapunov-based restoring force observer that leads to the design of a robust fault detection scheme. The different fault types considered are stiffness and damping variations in the system. The proposed fault estimation method provides a direct estimate of the size and severity of the fault, which can be important in many civil engineering applications. A design procedure is described, and nonlinear simulation results are presented to demonstrate the applicability of the proposed method.