For the prior video feature in this series introducing the proper disclosure of natural hazards which come with the location of a parcel of real estate, click here.
Disclosure of flood zones and areas of potential flooding
Investigating flood problems was facilitated by the passage of the National Flood Insurance Act of 1968 (NFIA).
The NFIA established a means for property owners to obtain flood insurance with the National Flood Insurance Program (NFIP). The Federal Emergency Management Agency (FEMA) is the administrative entity created to police the NFIP by investigating and mapping regions susceptible to flooding.
Any flood zone designated with the letter “A” or “V” is a special flood hazard area and is to be disclosed as a natural hazard on the NHD Statement. [See RPI Form 314 §1]
Zones “A” and “V” both correspond with areas with a 1% chance of flooding in any given year, called 100-year floodplains, e.g., a structure located within a special flood hazard area shown on an NFIP map has a 26% chance of suffering flood damage during the term of a 30-year mortgage.
However, Zone “V” is subject to additional storm wave hazards.
Both zones are subject to mandatory flood insurance purchase requirements.
Information about flood hazard areas and zones come from:
- city/county planners and engineers;
- county flood control offices;
- local or regional FEMA offices; and
- the U.S. Corps of Engineers.
Another flooding disclosure which needs to be made on the NHD Statement arises when the property is located in an area of potential flooding. [See RPI Form 314 §2]
An area of potential flooding is a location subject to partial flooding if sudden or total dam failure occurs. The inundation maps showing the areas of potential flooding due to dam failure are prepared by the California Office of Emergency Services. [Calif. Government Code §8589.5(a)]
Once alerted by the seller’s agent to the existence of a flooding condition, the buyer’s agent is to inquire further to learn the significance of the disclosure to the buyer.
Marketing a property in a special flood hazard area
Consider a seller of a single family residential property (SFR) located in a special flood hazard area who wants to list their property for sale.
The agent prepares an Exclusive Right to Sell Listing Agreement for review by the seller. [See RPI Form 102]
The agent also prepares a cost workup for the seller estimating the cost of third-party investigative reports needed to provide prospective buyers with information on the property. The reports include those either statutorily mandated or demanded by prudent buyers and protective buyer’s agents for their information and approval.
The seller’s agent presents this listing package cost sheet to the owner as a “seller’s budget,” also called an marketing package cost sheet. It sets out the costs of all third-party reports the seller will inevitably incur on a sale of the property. [See RPI Form 107]
The cost sheet prepared by the agent estimates the cost of investigative reports prepared by other professionals or government agencies which will help put a face on the property so it can be better evaluated by prospective buyers – transparency communicated by disclosures. The recommended reports include an NHD statement. The agent estimates the cost of the NHD will be no more than $100. [See RPI Form 107 §2.1(a)]
After reviewing the estimated costs and marketing strategy with the seller’s agent, the seller gives the seller’s agent authority to hire a third-party NHD expert of known competence to prepare an NHD report on the property. [See RPI Form 131]
The seller’s agent, acting on behalf of the seller, orders an NHD from an NHD expert. The NHD expert employed by the seller at the agent’s suggestion gathers information about the geographic area surrounding the seller’s property from the public records and prepares the NHD report which they sign and deliver to the seller and their agent for a fee of $90.
On receipt of the report prepared by the NHD expert, the seller and the agent review it for accuracies or differences between their knowledge and the information contained in the report. The seller and the agent observe no discrepancies. Accordingly, both the seller and agent sign the third-party NHD report as mandated. [See RPI Form 314]
The NHD, signed by the expert, seller and agent, is included in the agent’s marketing package used to provide maximum information on the listed property. The agent is aware the best way to market property and avoid further price negotiations during escrow is to fully disclose the condition of the property when first dealing with the eventual buyer.
A buyer’s expectations about a property are established based on their impression of the property developed by the time they enter into a purchase agreement, not later after the price has been set, a binding purchase agreement entered into, escrow opened and then, for the first time, the true condition of the property is dilatorily revealed to the buyer. [Jue v. Smiser (1994) 23 CA4th 312]
Here, when asked to authorize the ordering out of the NHD report, the seller had to choose when to incur the expense of the third-party reports; either:
- now, when they list the property for sale, so a purchase agreement entered into with a prospective buyer has a greater likelihood of closing since deception about the property’s existing NHD condition is eliminated by the prior delivery of the reports; or
- later, after entering into a purchase agreement with a buyer who has already developed expectations about the property which may well differ from the reports and, unless the seller eliminates the defects or adjusts the price, will likely result in the buyer cancelling the purchase agreement or closing escrow and demanding a return of the overpayment in price or the cost incurred for corrective action. [Jue, supra]
Beneficially, the disclosures provide the seller and agent with a competitive sales advantage for the seller’s property over other apparently qualified properties which are marketed without reports to corroborate their condition.
A prospective buyer, having seen the property, indicates they have an interest in purchasing the property by asking for information. In response, they are given a copy of the marketing package containing the NHD.
After reviewing the NHD (and all the other disclosures) in the marketing package, the buyer, now aware the property is located within a flood zone, submits an offer to purchase the property. It is eventually accepted and escrow is opened. The sale closes and the buyer takes ownership and possession.
During the spring, the property is flooded, resulting in significant damage not covered by insurance. The buyer demands compensation from the seller and the agent for money losses due to the flooding, claiming the NHD disclosure lacked information about the extent of the flooding or the property damage that could occur.
Can the seller or agent be held liable to the buyer for the cost to repair the property that was damaged by the flood?
No! Due to the seller’s delivery of the NHD prior to contracting to sell the property, the buyer was notified of the material fact that the property was located in a special flood area, and thus was at greater risk of flooding. Without conducting a further due diligence investigation into the disclosed risk, the buyer set the price to be paid in his purchase offer to acquire the property knowing full well it was located in a special flood area. Neither the seller nor the agent had any duty to the buyer to advise further about the type or extent of losses the risk of flooding presents (unless the agent also represented the buyer).
On the other hand, the buyer’s agent had a responsibility to assure their buyer understood the extent of these hazard risks prior to setting a price and submitting an offer.
