This article discusses the routine use of a criminal activity disclosure as part of a selling agent’s duty to disclose and advise when assisting a buyer to locate a suitable property.

A prospective first-time homebuyer engages the services of a real estate agent to help him find a property to purchase. After viewing several properties, the prospective buyer chooses a suitable house in what appears to be an acceptable neighborhood.

Unknown to the buyer, the seller and neighbors have experienced several incidents of vandalism and petty theft within the last year. The seller does not volunteer this information, and the buyer does not think to inquire about any criminal activity which would affect the security of the property or its desirability as a home. The property itself is sound and the neighborhood is desirable in appearance. This disparity of information between the seller and the prospective buyer is known as asymmetry of information.

Luckily for the prospective buyer, his agent is experienced enough to prepare a purchase agreement which contains  provision allowing the buyer to cancel the purchase agreement based on any reasonable disapproval of conditions discovered by a criminal activity disclosure. The seller accepts the purchase agreement. [See first tuesday Form 150 §11.10]

As part of his due diligence investigation, the buyer’s agent makes inquiries into the recent criminal history of the property. He discovers and discloses to his buyer the vandalism and petty theft. The agent further discusses the findings with the buyer by pointing out the additional security costs of the property, e.g., extra lighting, a security system, security gates, etc. After consideration, the prospective agent decides to cancel the purchase agreement and find a property with fewer associated security costs. [See first tuesday Form 321]

Had the agent been less diligent in his duties, the first-time buyer may have been stuck with costs he hadn’t bargained for on a property of diminished desirability, and thus lesser value, than the price offered. The scenario presented is a mild one, but the oft-overlooked criminal activity disclosure can have a significant and fundamentally crucial effect on the safety of a homeowner and his loved ones, as well as the value of the property.

Existing protections against criminal activity

While laws are in place to protect tenants against foreseeable criminal acts on rented premises, prospective homebuyers looking to purchase single family residences (SFRs) have no legislated protections to rely on. [Ann M. v. Pacific Plaza Shopping Center (1993) 6 CA4th 666]

Similar to the landlord of an apartment complex, a homeowners’ association (HOA) has a duty to prevent dangerous conditions in common areas arising from known and preventable criminal activity. [Frances T. v Village Green Owners Association (1986) 42 C3d 490]

Purchase agreements are statutorily required to include a statement providing the web address of the sex offender registry, It is then up to the buyer and his agent to research the existence of sex offenders in the neighborhood in which the property is located. For the safety of his client, a diligent agent will bring this provision to the attention of his buyer, or research the sex offender status of the neighborhood himself and advise the client, especially if young children will reside in the property. [Calif. Penal Code §290.46, CC §2079.10a; see first tuesday Form 150 §11.16]

Although it is not specific to criminal activity, the mandatory transfer disclosures statement (TDS) also requires the seller of property to provide information about nuisances that may affect the value or use of the property. However, a seller’s memory of past criminal activity may not be sufficiently jostled by this nuisance provision to provide the disclosure the prospective buyer needs and is entitled to. [See first tuesday Form 304]

Prevention is the best defense

Even though a seller and his listing agent are required to disclose any and all known or suspected conditions which negatively affect value of property on the mandatory TDS, many sellers and their agents forget to provide information about past criminal activity because it is not explicitly mentioned in the TDS form or covered in the purchase agreements in use today. (Disclosure of a negative effect is required regardless of whether the negative effect is explicitly stated on a pre-printed TDS form.) [Calif. Civil Code §§1102(a), 1102.3, 1102.8]

Consider a seller looking to relocate to a home near his new workplace. The seller’s employer offers relocation assistance which allows a third-party broker to take over the sale of the seller’s home so the employee can relocate more quickly. The seller enters into an agreement to sell his home to a broker through his employer’s relocation program.

In the past, the seller had called the police several times to complain about loud music and other disturbances at night from the next-door neighbors. The seller does not reveal this to the broker. Instead, he completes and signs a TDS form which disavows knowledge of any neighborhood noise or other nuisances which may affect the desirability of the property. The broker’s daytime inspections of the property do not reveal the nighttime noises, a criminal activity.

The seller delivers the TDS to the broker and executes a blank grant deed with written instructions to allow for the transfer of the property to the eventual buyer-occupant. The seller relocates, and leaves the broker to find a buyer for the property.

The broker locates a buyer and provides the buyer with the seller’s TDS statement, as the broker has never occupied the property and was only facilitating the sale of the property under the employee relocation program. The sale is completed and the buyer is deeded the property. After moving in to the property, the buyer discovers the nighttime noises which were not disclosed on the original seller’s TDS form.

The buyer sues the seller and the broker for damages and a rescission of the grant deed claiming both parties were required to disclose the nuisance to the buyer.  Are the seller and the broker liable to the buyer for failing to disclose the existence of the nighttime noises?

Only the seller is! Here, the seller was solely responsible for disclosing information he knew would affect the desirability of the property, as neither the broker’s nor the buyer’s daytime inspections would have revealed a nighttime nuisance. Thus, the asymmetry of information on the seller’s part concerning conditions that adversely affect the use and value of the property placed the burden of disclosure on the seller. [Shapiro v. Sutherland (1998) CA4th 1534]

While the above case may be an instance of the seller outright deceiving the buyer, it also illustrates the need for specific disclosure of activity which may significantly affect the desirability of property — such as criminal doings in the neighborhood which cannot be detected by daylight investigations.

Unless the buyer’s agent has the wherewithal to make a direct inquiry into the status of the criminal activity around the property, it may go undiscovered. After a purchase, the buyer may be able to hold the seller liable for failure to disclose a fact which was known to the seller to affect the valuation of the property. But this is of little comfort to a buyer who has suffered injury, a loss of property — or worse, a loss of life – due to the lack of awareness of conditions known to others in the transaction which may be present in the area around the property.

Calling the gatekeepers to arms

Sellers are not alone in pulling the proverbial wool over a buyer’s eyes. Careless listing agents also have the upper hand, hiding the asymmetry of information like cards up their sleeves. A listing agent has readily available access to information about the neighborhood and conditions the seller experiences in living with the property. They call on termite inspectors, home inspectors, natural hazard engineers and a covey of affiliates to provide information on a property, and even information from the local police is more readily available to them.  While it is true that California law requires facts which adversely affect the value of a property, called material facts, be disclosed to all prospective buyers, it is often the culture of these less than forthcoming listing agents and their equally close-mouthed sellers to collude in “forgetting” the existence of negative factors which are not overtly observable to a buyer or the buyer’s agent.

The buyer’s agent then must act as a detective investigating a crime: he must be extra vigilant in order to offset the seller’s diametrically opposed goal of getting as much as he can for his property. Not only does this asymmetry of information almost exclusively benefit the seller, it is all but endorsed by a too-loose regulatory scheme. The problem with permitting conditions of asymmetric information to exist in a real estate transaction (whether a sale or a loan) is that it results in predatory activity which corrupts the gatekeepers. Let the buyer beware, indeed.

The agent, as a gatekeeper to real estate and a fiduciary to the buyer, must care for and protect his buyer by providing for the seller to deliver a criminal activity and security disclosure to allow the client to make as informed a choice about the property possible. If the seller is not forthcoming about possible criminal activity in the neighborhood, the agent can take it one step further and get information from the local law enforcement and neighbors. In property transactions, it is always better for the buyer to know ahead of time all he can about the property to avoid any potentially devastating consequences, financial, emotional or physical.

Further, as the explicit disclosure of criminal activity by sellers and their listing agents is not yet mandatory in California, it is imperative that brokers and agents protect their buyers while the real estate market favors buyers. During a buyer’s market, buyers and their agents hold captive the ears of a legislature eager to provide additional protection for homebuyers, and thus can control the chain of events leading to better protection for buyers. Suggestions should be made that legislators mandate use of a criminal activity and security disclosure, either as a separate form or a provision of the standardized TDS. The real estate industry must protect its constituency from both physical and financial harm if it is to flourish in the future.

Once the market shifts to favor sellers, profits will begin luring regulators away from protecting the interests of the homeowners — to the long-term detriment of all.