Address Condition, Ambience, Hazards & History
California, via its Department of Real Estate (DRE) has constructed the most comprehensive seller disclosure package in the country with one purpose: ensure buyers (consumers) are well-informed about the property and about all those individuals participating directly in the transaction. These disclosures cover realtor and agency relationships, wire fraud, deposit process, market considerations, smoke and carbon monoxide detectors, water conservation, lead paint, water heaters, city trees and more. In all, there are more than 70 pages with the average transaction including more than 50 pages; and if there’s an HOA, that could be another 150 pages.
Of all these documents, four high-impact disclosures serve as the cornerstones to the transaction. They are the Preliminary Title Report, Natural Hazards Report, Transfer Disclosure Statement and Seller Property Questionnaire.
Sellers Are Required To Provide All Applicable Disclosures
As a general rule, all sellers of residential real estate property containing one to four units in California must complete and provide written disclosures to the buyer. There are a few exceptions, including properties transferred by court order or from one co-owner to another. But if you’re offering your home to the public for sale, you can pretty much count on this requirement applying to you. (See, California Civil Code Sects. 1102, 1102.2, 1102.3)
Focus Is On Material Facts
The material facts contained in the disclosures help the buyer make an informed decision and include many different aspects of the house and its surroundings that can impact the desirability of the property. Home buyers need to know as much as possible about a property in order to evaluate whether they really want to buy it and have the financial resources needed to make the purchase and make the house their home. Buyers need to know about potential repairs or needed upgrades in order to make a prudent offer.
The disclosure obligations also remind California home sellers that they have a legal responsibility to be open about a property’s ownership and condition, and can and will be sued for hiding significant problems or defects.
Disclosure Delivery Point
Although California permits disclosures to delivered after contract ratification, the information disclosed may cause the buyer to cancel the contract, which can be damaging to the seller. As a result, it is good practice for potential buyers to have the disclosures prior to deciding to make an offer, and require offers include a receipt of the disclosures. Doing so can save time buyer and seller time and possibly avoid a cancellation that may impact the property’s value.
It’s good practice for the seller to complete all disclosures, inspections, prelim title report and Natural Hazards Report prior to listing their property so that everything is ready for serious offers to be accepted. Once a buyer decides to make an offer any new information could put the seller at risk. Other sellers will make a copy of the disclosures available within a day or two of an open house, or wait for buyers submit an offer before providing the disclosures, with the option for the buyer to back out or renegotiate if the disclosures bring to light anything unexpected. The latter scenario is problematic since cancelled contracts can cause potential buyers to question the property’s value.
If the seller does not give the required disclosures to the buyer by the time the two have signed the purchase agreement, then the buyer has the option to terminate the deal. (After the seller delivers the disclosures, the buyer’s deadline for cancelling is within 3 days via in person delivery or 5 days after delivery by mail.) Providing these disclosures to serious potential buyers as soon as possible decreases the likelihood of a buyer cancelling the offer later due to information found in the disclosures.
Preliminary Title Reports
This helpful document contains a wealth of information. Among the dozens of records that serve to inform or disclose to the buyer significant knowledge about the property, the title report is one of the most important. It documents ownership, vesting, and detail regarding anything recorded against the home, such as liens, encroachments, or easements.
The title company compiles the report from a search of county records to issue title insurance, and any liens against the property are listed as “exceptions” to a title policy.
Here are three important pieces of the title report you should review carefully.
The Legal Description
The legal description is everything you won’t see in any realtor’s marketing or advertising. It’s the written description of the property’s location and the boundaries of the property in relation to the nearby streets and intersections.
In the case of a condominium or planned unit development (PUD), the legal description will include the property’s interest in any common areas, exclusive or non-exclusive easements, and details on any parking or storage that conveys with the property.
Here’s an example of a legal description from a preliminary title report of a property:
“Beginning at a point on the Westerly line of Fifth Avenue, distant thereon 250 feet Southerly from the Southerly line of Balboa Street; running thence Southerly along the Westerly line of Fifth Avenue 25 feet; thence at a right angle Westerly 120 feet,” and so on.
Legalese? Absolutely. But it’s precise, and necessary.
Property taxes always show up as the primary “lien” on a title report. A property cannot be transferred to a new owner with outstanding property taxes due. As the top lien, the report will indicate whether taxes are due or paid in full. Taxes must be settled before any debt holder gets paid.
Mortgage liens are generally listed directly below property taxes, and they’re always ordered first, second, and third. The largest lien holder generally takes first position.
When a sale closes, the liens must be paid in the order that they appear on the title report. In the case of a short sale, there are not enough proceeds from the sale to pay off the property taxes and all of the lien holders. So one or more lenders will get “shorted” by the amount they’re owed. In order for the sale to close, the lender must agree to the short payoff.
Though this list is in no way exclusive, there are a variety of other items that could show up on a title report outside of taxes and loans.
Easements. If another property owner has access to the property via an easement, it would be recorded on the title report. This stays on the report until both parties agree to remove it. The title company can pull the original easement agreement for review.
CC&Rs. In the case of a condo or PUD, there are Covenants, Conditions and Restrictions (CC&Rs), recorded against the property. Any new buyer purchases subject to the rules and regulations documented in the CC&Rs. This is why it’s important for potential buyers to pull these from the report and review them. Once you’re the owner, you’re subject to those rules.
Restrictions, historic oversights, planning requirements. From time to time, there will be items on the preliminary title report that aren’t run of the mill. If the home is located in a historic district and therefore subject to the rules and restrictions of that community, it will show up on the title. In this case, if there are restrictions about changing the facade of a house or requirements that facade alterations comply with a local historical oversight committee led by the local planning department, a potential buyer needs to know this.
Natural Hazards Report
The California Natural Hazard Disclosure Statement poses several “yes/no” questions regarding things like whether your property is located in a special flood hazard area, in an area with a substantial forest fire risk, or in an earthquake fault zone. The local government of your city or county can provide you with more information about these classifications, as can your realtor. Additional disclosure statements, such as those pertaining to special study zones or purchase money liens might also be required, depending on the location and details of your real estate transaction. Your realtor can help you determine whether any additional disclosures are required. Finally, you must also let a buyer know that information regarding the location of registered sex offenders is available from local law enforcement agencies and can be found online at the state-operated website.
This report, which is mandated by California state law, tells the buyer if your home lies within a zone containing any one of six types of hazards.
These address the risk to the property from these hazards:
It’s a straightforward one-page form, containing several yes or no questions about your property. On the disclosure form, you must indicate whether or not each threat applies to your property. The form costs approximately $125, a fee that’s usually paid by the seller at the close of escrow.
Supplemental hazards are also commonly reported in the same report.
Radon Gas exposure
Airport influence area
Megan’s Law disclosures