Why this matters: Delivery of property disclosures to buyers is legislated to occur “as soon as practicable” (ASAP) on inquiry from a prospective buyer, well before a purchase agreement setting a price is entered into. That is, a buyer and their buyer agent cannot evaluate a property for pricing in an offer without the seller and their broker first disclosing its physical and environmental conditions. Without disclosures, the asymmetry of awareness in property conditions works as an intentional fraud on the buyer, and deceit by the seller and the seller broker.
Question: Your courses differ from what I see in practice, in that the Transfer Disclosure Statement, Home Inspection Report and Natural Hazard Disclosure Statement are not usually delivered to a buyer upfront before an offer is entered into. Why does what you write in the courses differ from what I see in my practice?
Answer: When marketing a property as available for sale, upfront property disclosures to buyers at the earliest possible moment is voluntarily proactive seller broker behavior to reflect the spirit of state-mandated public policy for behavior of sellers and the seller agents toward potential buyers.
Property facts the seller broker delivers ASAP to prospects or their agent is transparency by symmetry of information the state demands in sales (and leasing) transactions. Specifically, what the seller and the seller broker know is also known to the buyer on first inquiry (and disclosure), not later when under contract. Thus, upfront property information eliminates misrepresentation by silence about facts known to sellers and their agents long before and never after the price is agreed to.
The ASAP aspect of the TDS
Contrary to what buyer brokers and their agents may experience in practice, firsttuesday digests the rules and reports how a seller agent properly conducts themselves when providing licensed services concerning property they offer as available for sale. A seller broker is to deliver the Transfer Disclosure Statement (TDS) on property they market for sale, together with agency rules, on their first contact with a buyer or their broker, and always before an offer is submitted to their seller. [See RPI Form 304]
The TDS is statutorily mandated for the seller broker to obtain from the seller, review for error, and deliver to the buyer or their agent as soon as practicable (ASAP). [Calif. Civil Code §1102.3]
ASAP means as soon as possible. When a seller agent enters into a seller representation agreement, that is the moment the agent gathers the critical details about the property — material facts. Without knowledge of the property’s conditions, a seller agent is not in a legal position to market it as available for sale. They do not know what it is they are marketing. [Jue v. Smiser (1994) 23 CA4th 312]
The word “practicable,” as used in the phrase “as soon as practicable,” is synonymous with “feasible” or “possible.” Seller disclosures are required promptly when the seller agent becomes aware of the potential buyer. [See August 2001 OAG Opinion]
The seller agent property disclosure rule is not about the last practical moment. It is about the ASAP opportunity presented by first contact with the buyer or their agent who is considering the property for possible acquisition. [See RPI Form 150]
When the seller agent knows — as in, should have known — about property defects and doesn’t disclose them before the buyer further considers a property, it traps the buyer. The buyer is forced to set a price in an offer without knowing what the seller and the seller broker know about the property. The paying field is not level, but asymmetric.
Of course, the last moment beyond which delivery of the TDS by the seller agent before it is a fraud is before the seller accepts the buyer’s purchase agreement offer. Afterward is too late. The purchase agreement is unenforceable, at the option of the buyer, due to the lack of property details presented before contracting — before setting the price for the property.
Editor’s note — Contingency provisions in a purchase agreement allowing for cancellation do not eliminate much less excuse the fraud of a late disclosure of property defects — adverse conditions — when under contract. Failure to disclose gives the buyer rights the seller is not entitled to and automatically puts the seller on defense for lack of the disclosure shield.
For best practices to prepare to market a property, the seller agent needs to:
- instruct the seller to complete and sign the TDS as part of the seller and broker entering into a seller representation agreement [See RPI Form 102]; and
- deliver the TDS to each prospective buyer or their buyer agent on the seller agent’s first contact, and always before they receive and submit an offer to the seller.
When the TDS is delivered after the offer is accepted, the buyer has several actions they may take, ranging from:
- cancellation due to misrepresentation of the property conditions — silence is deceit;
- enforcement of the seller’s performance of the agreement by correction of all undisclosed deficiencies and closing escrow; or
- a price adjustment before closing escrow to cover for lost property value due to undisclosed adverse property conditions.
The buyer’s right to cancel exists as just one of several steps the buyer may take for failure of the seller broker to provide property disclosures before the seller accepts the offer. The seller has no such right to cancel by their failure to disclose. [CC §1102.3(b)]
Without the TDS, prospective buyers are unable to determine the property’s condition, evaluate the property as disclosed, and set the price they are willing to pay to acquire it.
Related video:
Read more about the TDS.
HIR in the marketing package
Another aspect of a transaction firsttuesday reports is the seller broker ultimate shield to mitigate risks of liability arising out of their mandated property inspection and marketing disclosures inherent in every transaction. This shield is a Home Inspection Report (HIR). Obtaining and relying on the HIR when reviewing the seller-prepared TDS shifts the liability to the HIR provider for a broker’s unintentional failure to observe and disclose property defects.
Also to consider, buyer losses in a market of rising property prices mostly do not exist, unless they expend cash to cure the defects, not just live with them. The lost value due to defects is not an issue in the “good times” as the property value exceeds the price paid for the property, defects and all.
However, recessions present the reverse liability situation of declining values which do not cover the lost property value attributable to defects. Losses caused by failure to disclose are not eliminated by an increase in property value.
The HIR is ordered on entering into a seller representation agreement before marketing the property. On receipt of the HIR, it is used by the seller to prepare the TDS and relied on by the seller broker to review the TDS for conformance. The HIR is attached to the TDS. Of course, the HIR together with the TDS and all other disclosures are included in the agent’s marketing package handed to all prospective buyers and buyer agents — ASAP — on first inquiry. [See RPI Form 130]
Initially, the HIR directly assists the seller when preparing the TDS to fully disclose all adverse conditions a buyer might be concerned about. Also, the seller agent is mandated to inspect the property before marketing it — so they know what it is — and enter their observations of adverse property aspects on the TDS — whether or not disclosed by the seller or the HIR.
Related article:
A home inspection report: the liability shield for a seller’s broker
The liability shield is this: the seller broker who uses an HIR to prepare the TDS delivered ASAP to a buyer avoids liability for their negligent inspection and disclosure of adverse property conditions by the broker or their agent. [Calif. Business and Professions Code §7195]
Attaching the HIR to the TDS and delivering both ASAP meets and exceeds the statutory duty to deliver the TDS ASAP and by this action shifts the risk of liability for unknown and undisclosed defects to the HIR provider.
Related video:
Read more about the HIR.
Early delivery of NHD
Like the TDS and HIR, firsttuesday also reports on the need to include the Natural Hazard Disclosure (NHD) Statement in the seller agent’s marketing package which is handed to prospective buyers seeking additional property information. [See RPI Form 314]
Natural hazards come with the location of a parcel of real estate, not with the man-made aspects of the property. The existence of a hazard due to the geographic location of a property affects its desirability. Thus, the hazard is a material fact needed by prospective buyers to establish the property’s usefulness and the price they will pay for that use.
A natural hazard disclosure (NHD) is mandated on all types of property. [CC §1103.1(b)]
Also, the NHD too is delivered to prospective buyers as soon as practicable. That practical moment, as feasible and possible, always arrives well before the seller agent presents their seller-client with a purchase agreement offer. [CC §1103.3(a)(2)]
The seller agent’s delayed delivery of an expert’s NHD to the buyer or the buyer’s agent, after the offer has been accepted, does not protect the broker from liability for the buyer’s lost property value due to the nondisclosure before acceptance. When the agent knew or should have known of a natural hazard, which is posted and readily available at the local planning department’s parcel list, the agent is exposed to liability.
Related video:
Read more about the NHD.
Advocating for best practices
Ultimately, firsttuesday advocates for what’s best for consumers — and thus best for the licensee representing them, be they the seller broker or the buyer broker.
We structure our course content to reflect the intention of consumer protection built into California real estate law. For all examples given, we recommend behavior that is maximally proactive and fully reflective of the spirit of state law.
We recognize some licensee “customs” taking place in the state do not abide by real estate codes. Thus, what you are faced with in the field may differ from what you read about in our courses. However, we recommend best practices for our students rather than what seller brokers are able to get away with, particularly during dealings with buyers and their agents when market conditions are most favorable for sellers.
Without disclosures of the property’s condition (TDS), a professional competent inspection of the property by the seller agent, a home inspection report (HIR) and natural hazards disclosure (NHD Statement), a buyer has no sufficient knowledge of what to offer as the price for the property. The buyer does not know what the seller knows — there is a lack of transparency. Thus, the price the buyer offers is set without consideration for adverse conditions — defects.
When price declines accelerate, and property values drop below the price paid, buyers look for who is to blame. Buyers who were not made aware of defects before entering into a purchase contract will come after sellers and seller brokers who did not deliver disclosures upfront.
Do you have a question for the firsttuesday editorial department? Email us at editorial@firsttuesday.us and your topic may be presented in the next Letter to the Editor!
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