Why this article is important: Climate risks are growing in California, and buyers of property are to be informed by the seller — and the seller agent — of property available for sale of the risk of loss it presents due to natural disaster. Without this knowledge before submitting an offer, buyers are unable to make an informed decision about a property, leaving sellers and their brokers exposed to liability.
Climate risks, measured
Zillow has made headlines for taking down its climate risk scores which shared numerical grades for various climate risks affecting the value for each of its postings of property for sale.
The scores were provided by climate data aggregator and modeler, First Street. Scores range from one-to-ten and forecasted each property’s potential for:
- flood;
- fire;
- wind;
- air quality; and
- heat.
Then, the California Regional Multiple Listing Service (CRMLS) complained Zillow’s risk rating was hurting sales of listings with bad scores — no surprise considering the source. Further, when sellers or their brokers disagreed with the rating given a property available for sale, they found there was no channel to dispute the rating or have it changed.
In response, Zillow removed its climate risk ratings. Instead, each listing now includes an address-specific link to First Street’s climate risk scores. Standard scores are free to access, but in-depth explanations for each score are monetized.
In reality, sales are not hurt by disclosures of any type. What is hurt is the seller’s asking price when maintained above fair market value for the property. And to go a bit further, all property sells in a reasonable period of time when the price reflects the deficiencies and defects in the property. But that requires full disclosure of the defects, when marketing the property for sale. Hello, MLS, are you listening?
In contrast, competitor Redfin has leaned into their own climate risk scores, which offer a less precise (but still present) rating of minimal to severe for each climate risk category on its listings. Redfin uses the same third-party data provider as Zillow.
Redfin acknowledges its climate risk scores can have a negative impact on the pricing of property available for sale with “bad” climate ratings. Together with the National Bureau of Economic Research, Redfin conducted an experiment. Flood risk data was shown to a random assortment of buyers searching for property posted for sale, while not showing flood data to others, deliberately leaving them in the dark for lack of the data.
The results showed an average decline of 1% in sales price for properties purchased by buyers who were shown flood risk data. Further, buyers were more willing to settle for homes with fewer amenities in high-risk flood areas when the home they purchased had a lower risk of flooding than neighboring properties.
In a flip from Zillow’s response to the CRMLS complaint that its climate scores devalued its properties, Redfin’s study claims many of these properties with high climate risks are simply overvalued by the sellers. Their statement is best understood as priced beyond the fair market value of the property.
When buyers lack ready access to information on climate risks, they simply aren’t aware these properties are worth less than they may choose to pay. Hence, California mandates the disclosure of all material defects affecting a property on first contact with a prospective buyer or their agent, that is conditions on or about the property that affect its use.
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Planning for the future
Understanding of the full level of risk that runs with the land and improvements is a material fact since the information influences whether a person wishes to purchase the property, and for how much.
In addition to the likelihood they may lose their home to natural disaster, buyers need to make sure they will be able to obtain (and pay for) adequate property insurance to cover the presence of natural hazards. Further, the insurance coverage analysis of the depreciated value of a property destroyed by a fire or flood as against the cost to replace the property with a new building is typically overlooked. However, the difference is financially devastating as a used home price and replacement with an identical structure are often very diverse amounts.
Often, homeowners in high hazard zones simply forego insurance in the hopes that everything works out. One-in-four homeowners who lost homes in the 2018 Camp Fire were uninsured, losing everything.
A slippery seller may wish to hold the existence of a natural hazard close to their chest, like a vest pocket event, waiting for the “right moment” to reveal it (once the buyer is already committed to a purchase price). But ultimately ends as a waste of time, effort and money for everyone involved — or worse, a complaint to the DRE.
Disclosures of natural hazards need be delivered ASAP, logically as best included in the seller agent’s property marketing package for delivery to prospective buyers or their agents on first contact seeking additional property information. Clue: Natural hazards affect a property’s value. With timely delivery of disclosures, a prospective buyer is able to review the information when negotiations commence — as mandated — before the buyer sets the price or rent by submitting an offer. [Calif. Civil Code §1103.3]
Any lesser conduct by the seller broker is misleading.
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Natural Hazard Disclosure (NHD)
Sellers and seller agents of any type of real estate are to disclose whether the property is located in:
- an area of potential flooding;
- a very high fire hazard severity zone;
- a state fire responsibility area;
- an earthquake fault zone; and
- a seismic hazard zone. [CC §1103.2]
A seller, their agent and third-party natural hazard expert use the government mandated Natural Hazard Disclosure (NHD) Statement when a report on the natural hazards affecting a property is prepared. The NHD is included in a property marketing package provided by the seller broker, to disclose natural hazards to prospective buyers for their review on commencement of negotiations, as mandated. [See RPI Form 314]
However, neither the NHD nor the Transfer Disclosure Statement (TDS), mandated on the sale of one-to-four unit residential property, include information for the buyer to consider about future hazards likely to be brought about by climate change. [CC §§1102(a), 1102.3; See RPI Form 304]
Editor’s note — The NHD encourages brokers and their agents to use NHD 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. [See RPI Form 131]
Still, most homebuyers possess enough knowledge to ask their agent questions about how climate change will impact their home purchase in the years to come. They will end up doing their own research, but it’s wise for seller agents to get ahead of the consuming public’s concerns, especially in a market of declining real estate prices.
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Nine-in-ten homebuyers weigh climate risks when choosing a home
Any of these climate risk concerns can be addressed by an experienced seller agent. For example, a seller agent for a property located in a flood zone can advertise in the listing the mitigation efforts the seller has taken to protect the property against flood damage, or its location on “high ground” relative to other nearby properties.
Property in wildfire-prone areas can advertise its defensible space and other fire prevention efforts taken by the owners. Likewise, property located along the coast can share information on their community’s coastline protection plans.
When the seller cannot afford to make improvements to protect the home from natural hazards, they simply need to drop the price so the next owners can make these improvements, be able to pay higher insurance premiums and absorb the additional risk.
Blocking the availability of property information on the basis that it might hurt the property’s value isn’t just wrong — it’s contrary to California public policy.
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