INTRODUCTION
Understanding what disclosures are needed will protect you from lawsuits. Some disclosures are mandatory.
There are both agent and lender disclosures. There are mandatory disclosures and those that that are important to protect you and your client.
DISCLOSURE
Put simply, it’s the act of giving info about property, transaction or financial. These are forms you give to client or 3rd party, which you explain and then they sign and refer back to later. Disclosures also contain facts that may influence the buyer or seller.
People Involved in Disclosures
Agent/Broker
Lender
Mortgage Broker
Principal
The principal must disclose defects in the property in all residential buildings with 4 or less units.
In the past the rule of thumb was “caveat emptor” or buyer beware. Now the CDRE is enforcing regulation to avoid court time. Both California State Laws and the Department of Real Estate now enforce disclosure.
Disclosures are usually general in nature. if you require a specific disclosure, best to get an attorney.
Mandatory disclosures are required by law to reduce lawsuits. The agent presents the forms, explains the documents. A signature is required as acknowledgment of receipt.
In general a disclosure is something that will most likely influence the buyer. Always use updated, current and locally pertinent documents.
AGENCY DISCLOSURE
Civil Code 2373-2382 outlines agency relationship. Defines who the agent represents.
3 steps in the defining of the relationship
• Disclose
Form is filled out in writing and signed. Agency-client relationship is defined.
• Elect
This is the conversation about what is expected in the client-agency agreement.
• Confirm
Each party signs and is given a copy, this can be a part of the purchase contract or a standalone document.
Sellers agent should inform buyers of agency agreement.
One agent per party = Single
One agent for both = Dual
When speaking in casual terms, agent means salesperson. Agent in contractual terms, means broker. (Usually only one person in each firm). Real Estate Agent is the sub-agent of the broker.
Sellers agent = Represents seller.
Buyers agent = Represents buyer.
Listing agent = Takes the listing.
Selling agent = Brings in the willing buyer.
‘Agency’ and be implies or express.
The relationship can be implied in a conversation or in verbiage.
Express is a signed document, where agent takes on fiduciary responsibility of the client.
Two agency scenarios:
1) If a large company has more than 1 office, and a sales person from 1 office is representing the seller and another office is representing the buyer, it’s considered dual.
2) If a large firm allows franchises, each headed by a broker. Agents from 2 different franchises are not in a dual situation.
Each broker sets his/her own rules as to when to disclose, but the DRE states ASAP.
REAL ESTATE TRANSFER DISCLOSURE
California Civil Code 1.102-1.102.14 any residential unit with 4 and under units is entitles to a transfer statement.
Transfer disclosure informs condition of property, both seen and unseen.
3 Distinct subjects.
• List of items in the home
• List of defects in the home
• List of improvements and alterations. Also neighbors and the neighborhood.
Buyer must receive a copy of the disclosure, if one is not forthcoming the buyer must me made aware of his rights to one.
Disclosure must be made ASAP and before the execution of offer to purchase. If the disclosure is not delivered in a timely manner the buyer can back out. Objection must be made in writing.
FIDUCIARY RESPONSIBILITY AND DISCLOSURE
Agent owes the ‘principal’ fiduciary responsibility. (Loyalty over and above agents interests) Fair and ethical treatment of 3rd party who understands that agents primary concern is to his/her principal. Disclosure must be made before even an offer is made.
Dual agency creates problems if one party is benefiting while the other party suffers, then fiduciary is broken. Open communication and full disclosure is the way to go.
Agents must disclose all ‘red flags’ which include market conditions, value, financing issues, defects with the structure, etc. Agent is to follow direction of the client as long as it’s within the framework of the law.
All information gathered is confidential and not to be shared unless the principal gives commission. No information is to be used in such a way that it influences the transaction.
NATURAL HAZARDS DISCLOSURE
California homes built before 1960 must disclose earthquake weakness. Sellers of investment property built before 1975 must provide also disclose.
Further reading:
Commercial Property Owners Guide To Earthquake Safety.
All houses sold in California need “earthquake safety disclosure” (Residential Earthquake Hazard Report)
7 Earthquake Safety Questions
1) Is the water-heater braced, strapped or anchored?
Page 6
2) Is the house bolted or anchored to the foundation?
Page 7 Look for bolts every 4 to 6 inches on the sill
3) Cripple walls… Are exterior walls braced?
Page 8+9 Wood wall on top of the foundation connecting the crawl space.
4) If exterior foundation walls are made of unreinforced masonry… has it been strengthened?
Page 10 Bricks or stone without steel rods.
5) Hillside, are exterior hill foundation walls braced or strengthened?
Page 11 Consult an engineer to determine if needs strengthening.
6) If exterior walls are unreinforced masonry, have they been strengthened?
Page 12 Check plans or with a professional to test for steel in the walls.
7) If there is a living space above the garage, has the wall around the door been strengthened?
Page 13 If plywood is present or the wall is in line with the rest of the home, it’s most likely braced.
Page numbers reference:
Homeowners guide to earthquake safety.
Natural Hazards
Check with the County Recorder, County Assessor and County Planning Agency.
• Earthquake fault zones
Seller must indicate if it is a fault zone.
• Seismic hazard zone
Must disclose if potential of massive earthquake. Check with above agencies.
• State fire responsibility area
State require brush clearance or other requirements. State will fight fires in these areas. Check with agencies.
• Very high fire hazard zones
State sets protection requirements that must be followed to protect against wildfires.
• Wild-land area that may contain substantial fire risks and hazards
Wild-land protection is provided by Department of Forestry.
• Special flood hazard areas
FEMA publishes maps indicating flood risks.
• Areas of potential flooding
Potential flood hazard if dams fail.
AGENT’S INSPECTION DISCLOSURE
When an agent takes a listing of 4 and under units, he/she must make a visual inspection of the property. It’s a good idea to start the disclosure at this point, where you can list all the problems you see. If you don’t, you can be liable for up to 2 years after sale.
Some Exemptions:
• Property transfer requiring public report
• Persuant to a court order
• Foreclosure
• Transfer by fiduciary
• From 1 co-owner to another
• Transfers between spouses and blood relatives
• Between spouses in the case of divorce
• State controller transfer as result of not paying property tax
• Transfer to and from Government, includes exchanges
All the above do not require disclosure but it’s a good idea to do a visual inspection and disclosure anyway.
What to check for:
Structure
Problems and faliure due to poor materials, insects, enviroment, faulty design or just deterioration… look for the following:
• Uneven or sloping floors
• Cracks in foundations, corners of walls, around openings, structural walls, beams or columns.
• Uneven roof ridge-line
• Caved in or squeaky floors, possible deflection of girders and joists
• Ill fitting doors
• Unstable structural components
Mould
Must disclose mould, if property is damp or has had a leaky roof, test for mould. Mould can be very serious as some have life threatening allergies towards certain kinds of mould.
Water Problems
Water causes serious problems for a home and can originate from inside or outside the house. Main contributor to mould.
• Warped or rotten wood
• Water spots or stains on the ceiling
• Rust, mold or mildew
• Roof leaks
• Paint problems such as peeling
• Tile damage
Insect infestation
Many insects cause damage, they leave little trace until it’s too late. Worst culprits are:
• Termites
• Carpenter Ants
Signs to look for are:
• Mud tubes made from wood-shavings and mud
• Wood-shavings around wood components
Material Deterioration
Attack from pests, climate, poor building + bad construction can lead to rot, mould and decomposition.
• Erosion of concrete
• Decaying or warping wood
• Warping, rotting or cracking around windows and doors.
Material deterioration points to larger cause and must be disclosed
Agents use 3 techniques in home inspection:
• Have the seller supply the buyer with pest inspection report.
• Have buyer pay to inspect the home professionally to unearth any defects.
• Encourage buyer to purchase home protection which will cover defects for 1 year
Listed above are good but agent must always disclose his/her inspection. Also research the location and neighborhood to see if the home has anything to disclose. e.g. Airport or flood-zone.
ENVIRONMENTAL HAZARDS DISCLOSURE
Seller must sign statement, stating ‘hazards unknown’ this releases them from liability.
Booklet: Environmental Hazards: Guide for Homeowners, Buyers, Landlords and Tenants.
Sic Building Syndrome
Air quality, mostly in commercial buildings. Occupiers may experience symptoms such as fatigue, dizziness, nausea and headaches. No exact cause established but increasing ventilation helps. SBS must be disclosed.
Military Ordinance Location
Must be disclosed if within 1 mile of former military training ground.
Lead-based Paint
All homes pre-1978, agent must supply the booklet:Protect Your Family From Lead In Your Home by the FEPA. All hazards in home must be disclosed.
Hazardous Substances Released
Buyers and tenants must be informed of such, on or near the property. Health And Safety Code Section 25359.7(a). Tenants must disclose to landlords if a hazard has been created.
Water Contamination
Any well contamination to communal or private must be disclosed. California has experienced water contamination through industrial, agriculture and military sources.
Disclosure of death or AIDS
Homicide, suicide or accidental death in the past 3 years has to be disclosed. Natural death need not. Not necessary to disclose AIDS.
Stigmatized property
When a property is considered undesireable for other reasons than listed above. Molestation, cults and religious rituals are some reasons.
If property is close to licensed care facility for 6 or more people. Option 95-907 of California Attorney General.
SUBDIVISION DISCLOSURE
3 kinds of reports:
• Preliminary - allows the developer to take deposits. No escrow, good for 1 year.
• Conditional - allows entry into escrow.
• Public report - sign and execute contracts good for 4-5 years and reviewed by California Real Estate Commissioner.
COMMON INTEREST SUBDIVISION
Similar to condo, owner has separate unit within common area. Owner can do anything under Home Owners Association supervision. HOA governs common areas.
Buyer of condo must be given a copy of the Common Interest Development General Information. Also a copy of covenants, conditions and restrictions, bylaws and articles of incorporation as well as HOA financial statement, current assets and costs. If conflict between HOA and developer regarding the building… a disclosure of time, costs and estimate costs.
Interstate Land Sales Full Disclosure Act states: Interstate sales of 25 or more lots must contain disclosure of soil condition, title, avaliable utilities, location, facilities and charges to prevent fraud.
If a developer converts rentals into condo’s, all tenants must be informed.
FINANCIAL DISCLOSURE
Brokers and lenders are responsible for disclosures.
Mortgage Loan Disclosure Statement
If Real Estate Broker negotiates a loan, he/she must offer a Mortgage Loan Disclosure Statement (MLDS) 3 days after the loan application.
Borrowers right to copy of appraisal
Buyer entitled to copy of appraisal if they paid for it, lender must inform buyer of this.
Real Estate Settlement Procedure Act
Applies to all real estate 4 units and under. Buyer must be given good faith estimate of all closing costs within 3 days of application as outlined by Department of Housing and Urban Development. Buyer has right to view settlement on close of escrow or 1 day before.
Broker is allowed to have agreement with the service provider, where both stand to make a profit, though it must be disclosed to the buyer. Also the option to choose his/her own services e.g. Escrow or title co.
Seller financing Disclosure
Any seller carrying back a note on financing must disclose to buyer. 1 to 4 units only.
Sometimes called ‘creative financing’ when the seller carries 2nd or 3rd trust deed. Civil Code 2956-2967 requires a ‘carry-back’ to provide buyer with seller financing and disclosure.
Both seller and buyer must sign arrangement of credit All must receive copies and lender must keep on file for 3 years.
If there is more than 1 arranger of credit he/she who obtains the purchase order must disclose. e.g. Selling broker or broker arranging the sale, sales agent or attorney. Ultimately the sellers agent’s responsibility.
Always disclose any seller financing arrangement. Must include finance charged when more than 4 payments.
List of disclosures:
• Amount:- Where funds originate, purpose and date of transfer.
• If lender requests fast payoff, who is responsible.
• Terms:- Length and number of payment, due date and the amount.
• Record Deed of Trust securing the note.
• Current liens and status
• Buyers credit score, job status and background info.
• If the loan is not fully amortized, e.g. Balloon payment needed. Notice must be given 60-150 days in advance.
• Notice of default so seller is protected if buyer defaults on the senior loan.
• Title insurance obtained and a copy to each the seller and buyer.
• Negative amortization and deferred interest explained to the buyer.
• Notice to seller of property tax payments
• Notice to seller if insurance claims made on the property
Blanket Encumbrance Disclosure
If there is money owing on a property indirectly, buyer must be made aware and steps made to protect his/her funds.
Lender/Purchaser Disclosures
Those who lend through a broker, broker must make statement with terms, status and property info.
Adjustable Rate Loan
Lenders offering this type of loan must provide: Federal Reserve Consumer Handbook on Adjustable-Rate Mortgages.
Notice Of Transfer Of Loan Servicing
Lenders must notify borrower when service is transferred. 1-4 units only.
Elder Abuse
Must disclose when witnessing financial abuse of old persons assets.
Holden Act
Housing Financial Disclosure Act: Alerts buyers to their rights and protection against discrimination.
Truth-In-Lending Act
Regulation Z states there must be disclosure of financing in the ads, also full credit disclosure.
Equal Credit Opportunity Act
Notice of adverse action must contain a reason loan was denied within 30 days of application.
Lender Compensation
When a broker receives compensation from client loan, a disclosure must be made to all parties. NO REFERRAL FEES (Illegal in California).
MELLO-ROOS BOND DISCLOSURE
Shifts expenses from developers to the owners with municipal bonds. This must be made known with 5 year continuation. If this is not disclosed the buyer has 3 days right to recession.
OTHER DISCLOSURES
Buyer State Tax Withholding
Buyer required to withhold 31/3 of sales price for state withholding
Commissions
All commissions are negotiable. California has no maximum or minimum set, this fact must be disclosed.
Sales Price
Within 1 month of the escrow both seller and buyer must be alerted to final sales price.
Importance of Home Inspection Notice
Must be signed. 1-4 units all ??
Megan’s Law
Buyer or leasers of residential (1-4 units) must be informed with notice regarding sex offenders and how to find information.
Water Heater Bracing
All sellers must comply.
Energy Conservation Retrofit and Thermal Insulation Disclosure
Some communities require energy retrofitting.
Smoke Detector Notice
All buyers to review smoke detector statement showing that the home is in compliance.
Structural Pest Control Inspection and Certification Reports
Not all lenders require these reports, but if executed they must be made available to buyer.
Foreign Investment Deal Property Tax Act
Any foreign seller of property in California must inform buyer of required 10% withholding tax of gross sales price.
Working Security Bars
If security bars installed, must be disclosed and safety mechanism installed.
Notice Regarding Availability of Title Insurance
If escrow doesn’t issue title insurance. Buyer must be informed on how to obtain.
RIGHT OF RECESSION
Back out of contract without penalty. If this is not disclosed, time allowed is extended.
Failure to disclose a Mello-Roos or levy would result in a 3 to 5 day recession.
Truth-in-lending, if buyer uses property to secure loan, they have 3 days to back out.
Undivided interest subdivision, tenants in common with other owners but don’t own a unit. e.g. A campground. Buyers have 3 day right to back out.
Sellers selling their equity under foreclosure have 5 days (midnight) following sales agreement or until 8am the day of sale, whichever comes first.
California Association of Realtors has created a pamphlet: California Real Estate Law Disclosure Chart.