Mandated on one-to-four unit residential property

The seller of a one-to-four unit residential property completes and delivers to a prospective buyer a statutory form called a Condition of Property Transfer Disclosure Statement, commonly known as a Transfer Disclosure Statement (TDS). [Calif. Civil Code §§1102(a), 1102.3; see RPI Form 304]

The seller’s use of the TDS form, with a few non-conventional sales exceptions, is mandated for use when making disclosures about improvements. Here, the seller is required to prepare a TDS with honesty and in good faith, whether or not the seller retains an agent to review its content before handing it to prospective buyers. [CC §1102.7]

When preparing the TDS, the seller sets forth any property defects they know or suspect to exist. Defects to be disclosed in the TDS include any conditions known to the seller which might negatively affect the value and desirability of the property for a prospective buyer, even though they may not be an item listed on the TDS. Thus, disclosures to the buyer are not limited to classic conditions preprinted for comment on the form. [CC §1102.8]

Further, the buyer cannot waive the seller’s delivery of the statutorily-mandated TDS. Any attempted waiver, such as the use of an “as-is” clause in the purchase agreement, is unenforceable as against public policy. The words “as is” are never to be used in the context of real estate transactions.

“As is” implies a failure to disclose something adverse known to the seller or their agent, a prohibited activity. In contrast, “as disclosed” is the condition of the property as known by the buyer when the seller accepts their purchase agreement offer. [CC §1102.1(a)]

Thus, all buyers purchase property:

  • “as disclosed” by the seller, the seller’s broker and the broker’s agents; and
  • “as actually observed” by the buyer prior to entering into the purchase agreement.

The problem

Agents continue to perpetuate the misconception that “as is” means the property is sold in its present undisclosed condition. For many agents, “as is” has become synonymous with “no disclosure required.” Seller’s agents nearly always provide the minimum disclosures and do so only AFTER the buyer has submitted an offer and negotiated the purchase price.

Speculators have greatly contributed to this environment where proper concern for disclosures by seller’s agents is essentially eliminated. When speculators are active, they are determined to buy any property on the market, no matter its condition.

The words “as is” do not mean “no disclosure required” by the seller, regardless of the type of real estate transaction or sophistication of the buyer. Since disclosures are mandated, “as-is” treatment is outlawed.

“As is” provisions are disruptive of proper conduct unnecessary to disclose the condition of the property. As mandated, information giving notice of defects is presented in the seller’s TDS prepared at the time of the listing and handed to all prospective buyers of the property. The seller simply discloses the defects, whether or not they agree to make repairs.

When defects are disclosed as required prior to entering into a purchase agreement, negotiations may call for the seller to correct some or all of the disclosed defects. When corrections and repairs are not negotiated, the buyer takes ownership of the property subject to all those defects “as disclosed” by the seller or their agent in the TDS no later than the seller’s acceptance of the buyer’s offer. [CC §1102.1(a)]

The rules

While it is the seller who prepares the TDS, the TDS is delivered to the prospective buyer by the agent who is directly handed the buyer’s purchase agreement offer. When the sales transaction is negotiated principal-to-principal — directly between the seller and buyer without the participation of a transaction agent — the seller remains obligated to deliver the TDS directly to the buyer. [CC §1102.12]

The failure of the seller or any of the agents involved to deliver the seller’s TDS to the buyer does not invalidate a sales transaction once it has closed. However, the seller and the seller’s broker are both liable for the actual monetary losses incurred by the buyer due to an undisclosed defect known to them or unknown to them due to their negligence at the time the offer was accepted by the seller. [CC §1102.13]

Thus, the buyer is best served when they receive and review the TDS before the seller accepts their purchase agreement offer.

When the TDS is delivered to the buyer after the seller enters into a purchase agreement — the delivery being untimely and contrary to the spirit of TDS rules — the buyer may:

  • cancel the purchase agreement on discovery of undisclosed defects known to the seller or the seller’s agent and unknown and unobserved by the buyer or the buyer’s agent prior to acceptance [CC §1102.3];
  • make a demand on the seller to correct the defects or reduce the price accordingly before escrow closes [See RPI Form 150 §11.2]; or
  • close escrow and make a demand on the seller for the costs to cure the defects. [Jue Smiser (1994) 23 CA4th 312]

Mandatory inspection by the seller’s agent

Brokers and their agents who list one-to-four unit residential property have a duty to all prospective buyers, separate from the seller’s, to timely disclose any physical aspects of a property:

  • observable by the broker or their agent on a reasonable inspection of the property; and
  • affecting the property’s market value. [CC §§2079 et seq, 1102(a), 1102.3]

A buyer of a one-to-four unit residential property has two years from the close of escrow to pursue the seller’s broker and agent to recover losses caused by the broker’s or agent’s negligent failure to disclose observable and known defects affecting the property’s physical condition and value. Undisclosed and unknown defects permitting recovery by a buyer for the cost to cure the defect or loss of value are those observable by a reasonably competent broker during a visual on-site inspection. A seller’s agent is expected to be as competent as their broker in an inspection. [CC §2079.4]

However, the buyer is unable to recover their losses from the seller’s broker if the seller’s broker or agent inspected the property as a reasonable competent broker, did not observe the defect and did not actually know it existed. [CC §1102.4(a)]

Flawed provisions

Despite legislation requiring disclosures be provided to the buyer as soon as practicable (ASAP), the purchase agreement published by the California Association of Realtors (CAR) fails to reference or provide for the underlying law requiring timely disclosure. Furthermore, the related provisions included in CAR’s purchase agreement call only for the delayed and untimely delivery of these required reports and disclosures within an arbitrarily set time period of seven days. Only then does the buyer discover any intentional misrepresentation or deceit involved at the time of contracting. This form surely contributes to the general failure of agents to timely disclose for lack of an alternative provision noting disclosures in compliance with the mandates.

Legislation clearly prescribes the time for proper delivery of property disclosures. Although some exceptions exist, in most cases “timely” means before the seller’s acceptance. When disclosure is delayed beyond acceptance, contingency provisions merely satisfy the statutorily provided additional remedy, giving the buyer the right to cancel, in addition to all remedies for fraudulent behavior that already exist.

Editor’s note —Brokers and agents are the gatekeepers of the real estate industry. By definition and legislation, they must possess professional integrity. Complying with disclosure requirements is part of the honest dealing with members of the public they are commit to as licensees. Real estate law does not allow a “buyer beware” treatment. Yet, CAR’s form provides exclusively for delivery of the mandatory disclosures to the buyer after the purchase offer has been accepted, while in escrow, rather than on the commencement of negotiations to set the price, terms and conditions as mandated.

Your best practice is to always deliver property disclosures to buyers prior to their setting a property’s value in the process of making an offer. Disclosures impact the value of the property, whether up or down. When the buyer is unable to review and consider the contents of these mandated disclosures before submitting an offer, the buyer is forced to blindly set the price offered — which the seller needs to counter to be assured the buyer has received and reviewed their TDS.

Here again, speculators acquiring property often disregard conditions beyond those visible on a drive-by of the property or from public records. They are in open combat to get properties, and get them now. For them, determining the property’s condition first is too tedious and inhibits their acquisitions since other speculators are moving in with the same aggressive attitude. However, this behavior has corrupted the mindset of listing agents by many buyers’ disregard for disclosures in recent years.

Targeted property sales and exempt sellers

A seller’s exemption from providing a buyer with a statutory TDS does not exempt the seller from disclosing material facts known to them. Transactions which exempt the seller from preparing and delivering the statutory TDS form to a buyer as the means for disclosing property defects include transfers:

  • by court order, such as probate, eminent domain or bankruptcy;
  • by judicial foreclosure or trustee’s sale;
  • on the resale of real estate owned (REO) property acquired by a lender on a deed-in-lieu of foreclosure, or by foreclosure;
  • from co-owner to co-owner;
  • from parent to child;
  • from spouse to spouse, including property settlements resulting from a dissolution of marriage;
  • by tax sale;
  • by reversion of unclaimed property to the state; and
  • from or to any government agency. [CC §1102.2]

However, the seller’s agent is not exempt from preparing and delivering a TDS to a buyer. Whether or not the seller is exempt from using the TDS, the seller’s broker and their agents are never exempt from:

  • conducting a visual inspection of a one-to-four unit residential property, sold or acquired on behalf of any seller or buyer [CC §2079]; and
  • disclosing their observations and knowledge about the property on a TDS form or other separate document. [CC §1102.1]

The seller is never excused or excluded from disclosing known material facts, nor are any of the agents involved in the transaction excused from performing their due diligence and visual inspections. When you deliver property disclosures to the buyer in a timely manner, the buyer has the opportunity to evaluate the property’s market value based on full disclosure.

For every transaction you are involved in, you need to remind yourself that when any aspect or fact about the property may have any influence on the buyer’s decision to purchase the property, or the price they are willing to pay for the property, it needs to be disclosed ASAP — once negotiations toward entering into a purchase agreement commence.