Investigative reports flesh out the marketing package

The primary objective of a seller’s agent on taking a listing is to solicit and locate prospective buyers.

In the process, the seller and their agent need to sufficiently disclose the property’s condition to the buyer. The seller’s agent owes the buyer a general duty to voluntarily and promptly provide critical information on the listed property that might adversely affect its value. This property information is collectively referred to as material facts.

Upfront factual disclosures notify the buyer of any property conditions known to the seller or the seller’s agent. Without this information, a prudent buyer is unable to set a price and make an informed offer. At the listing stage, the seller’s agent gathers property data and organizes it into a marketing package.

The marketing package contains third-party investigative reports prepared by unbiased professionals or government agencies addressing essential aspects of the property’s condition that are of concern to reasonable buyers. [See RPI Form 133]

Two recommended third-party reports to be included in the marketing package are:

  • home inspection report (HIR) to accompany mandated property disclosures [SeeRPI Form 130]; and
  • Natural Hazard Disclosure Statement (NHD), provided by an NHD expert. [See RPIForm 131]

Negotiations with a prospective buyer trigger a full disclosure when the buyer or their agent seeks additional information on a listed property beyond the data contained in a promotional flier.

The marketing role of a home inspection for a seller’s agent

An HIR, paid for by the seller and prepared by a local home inspection company, is necessary so:

  • the agent may properly market the property to prospective buyers and their agents; and
  • the seller may avoid any claims made by a buyer that the condition of the property is misrepresented.

A seller uses the HIR to best prepare their Condition of Property Transfer Disclosure Statement (TDS). The TDS needs to be handed to prospective buyers when they first express serious interest in the property, typically when negotiations commence. [See RPI Form 304]

The HIR is attached to the seller’s TDS. Both are included in the agent’s marketing package presented to prospective buyers as soon as possible — but not later than the seller’s acceptance of an offer submitted by the buyer.

The responsibility of gathering information about the condition of the listed property and delivering the information to prospective buyers lies primarily with the seller’s agent. [Calif. Civil Code §2079]

The seller’s agent needs to request and use the HIR (on behalf of the seller) to supplement their observations during the mandatory visual inspection of the property when reviewing and approving the seller-prepared TDS. When a buyer goes under contract without reviewing an HIR, the seller’s agent loses control over the marketing and sales process — and exposes themselves and their seller to claims of misrepresentation.

The buyer’s reliance on an HIR relieves the seller and their agent from liability for property defects not observed during the seller’s agent’s visual inspection, or which ought to have been known to the seller or the seller’s agent, known as red flag defects.

However, when the seller’s agent relies on the HIR to avoid liability for faulty preparation of the TDS, the seller’s agent needs to select a competent (read: non-negligent) home inspector to prepare the HIR.

On receipt of the HIR, the seller may voluntarily eliminate some or all of the deficiencies noted in the report. However, sellers are not obligated to eliminate any defects they disclose in the TDS and HIR when selling a property, unless they negotiate with the buyer to do so. Here, the seller’s agent orders an updated report for use with the TDS.

Hiring a home inspector

An agent uses the Authorization to Inspect and Prepare a Home Inspection Report published by Realty Publications, Inc. (RPI) to document a request for a home inspection

. It authorizes the selected home inspector to conduct an inspection and prepare an HIR on behalf of the principal. [See RPI Form 130]

The Authorization to Inspect and Prepare a Home Inspection gives the home inspector specific information regarding the requested inspection, including:

The form also contains instructions to the inspector that the HIR is to include:

  • any improvements not in compliance with building codes and for which no permits exist [See RPI Form 1306.2]; and
  • the property’s compliance with safety codes for child resistant pool barriers, hot tub covers, automatic garage doors, door locks/latches, gas valves, security bars and water heaters [See RPI Form 1306.3]; and
  • an energy efficiency inspection. [See RPI Form 1306.1]

Editor’s note — Although Home Energy Raters are specially trained and certified, any home inspector may perform a home energy audit, provided the audit conforms to the California Home Energy Rating System (HERS) regulations established by the California Energy Commission.

The seller’s agent is mandated to review the TDS based on the HIR and their own visual inspection. When prospective buyers are informed about the precise condition of the physical property before they submit an offer to purchase, the seller avoids demands to correct property defects or to adjust the sales price before escrow closes — or worse, cancellation or post-closing litigation. With the HIR and TDS delivered to the buyer prior to the seller’s acceptance of the purchase agreement, the property has been purchased transparently “as disclosed.” [See RPI Form 304]

Editor’s note  — When the home inspector who prepared the HIR is unknown to the buyer’s agent, it is good practice for the buyer’s agent to also recommend as part of the buyer’s due diligence investigation that the buyer conduct their own inspections pertaining to all physical aspects of the property.

A unified NHD disclosure for all real estate sales

Natural hazards

come with the location of any parcel of real estate. Locations where a property might be subject to natural hazards include:

  • special flood hazard areas, a federal designation;
  • potential flooding and inundation areas;
  • severe fire hazard zones;
  • wildland fire areas;
  • earthquake fault zones; and
  • seismic hazard zones.

The existence of a hazard due to the geographic location of a property affects its desirability, and thus its value to prospective buyers — a material fact requiring disclosure. Hazards, by their nature, limit a buyer’s ability to develop the property, obtain insurance or receive disaster relief.

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Natural Hazard Disclosures

Whether a seller lists the property with a broker or markets the property themselves, the seller needs to disclose any natural hazards known to the seller, including those readily available in public records.

A seller or their agent present these disclosures in the statutorily-mandated Natural Hazard Disclosure (NHD) Statement, a form unique to California. [See RPI Form 314]

Use of an expert to avoid seller liability

Delivery of natural hazard information is mandated on all types of real estate. [CC §1103.1(b)]

As with any other material fact, natural hazards affect a property’s desirability, and thus its value to a prospective buyer.

A seller and their agent need to exercise ordinary care in gathering natural hazard information, either on their own or with the assistance of an NHD expert, such as a geologist.

Here, the expert prepares the NHD form for the seller and the seller’s agent to review, add any comments, sign and include in the marketing package to be delivered to prospective buyers. [CC §1103.4(a)]

For the seller and their agent to rely on an NHD report prepared by a third party, the seller’s agent need only:

  • requestan NHD report from a reliable expert in natural hazards, such as an engineer or a geologist who has studied public records;
  • reviewthe NHD form prepared by the expert and enter any actual knowledge the seller or seller’s agent may possess, whether contrary or supplemental to the expert’s report; and
  • signthe NHD Statement provided by the NHD expert and deliver it with the NHD report to prospective buyers or buyer’s agents on commencement of negotiations (always prior to the seller’s acceptance of an offer). [CC §1103.2(f)(2)]

The Natural Hazard Disclosure encourages brokers and their agents to use natural hazard experts to gather and report the information publicly available from the local planning department rather than do the work themselves. This practice relieves the seller’s agent of any liability for errors unknown to the agent.

Hiring an NHD expert

An agent uses the Authorization to Prepare Natural Hazard Disclosure published by RPI to document a request for an inspection ordered by behalf of the seller (or buyer). It authorizes an NHD expert to prepare an NHD report for disclosing property conditions to a buyer. [See RPI Form 131]

The Authorization to Prepare Natural Hazard Disclosure contains:

  • the property address [See RPI Form 1311];
  • a statement that the expert is being retained to prepare a NHD report for the identified property [See RPI Form 1312];
  • the identity of the person the NHD report will be delivered to when complete [See RPI Form 13113]; and
  • the anticipated fee owed the expert on delivery of the report to the agent. [See RPIForm 1314]

This article was originally published September 2017, and has been updated.