This article comments on the early use of the Natural Hazards Disclosure (NHD) statement by the listing agent when marketing property to properly inform a prospective buyer and the selling agent before the price is set and an offer is submitted to the seller. Also discussed is the liability protection afforded to the listing agent and seller by upfront delivery of the NHD.
The openness and ethics of delivery – ASAP
A seller of a single family residential property (SFR) located in a special flood hazard area wants to list the property for sale with a brokerage office through an agent known to the seller.
The agent prepares an Exclusive Right to Sell Listing Agreement for review by the seller. [See first tuesday 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.
Here, the listing agent will present this listing package cost sheet to the owner as a “seller’s budget,” also called an authorization for preparatory charges. It will set out the costs of these third-party reports the owner will inevitably incur on a sale of the property. [See first tuesday 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 a natural hazard disclosure (NHD), occupancy (transfer) certificate (by local ordinance), structural pest control report (and possible clearance), home inspection report, well water report and a septic tank report. The agent estimates the cost of the NHD will be no more than $100. [See first tuesday Form 107 §2.1(a)]
After reviewing the estimated costs and marketing strategy with the listing agent, the seller gives the listing agent authority to hire a third-party NHD expert of known competence to immediately prepare an NHD report on the property. [See first tuesday Form 131]
The listing agent, acting on behalf of the owner, orders out 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 he then signs and delivers to the seller and listing agent for a fee of $90.
On receipt of the report prepared by the NHD expert, the seller and the listing agent review it for accuracies or differences between their knowledge and the information contained in the report. The seller and listing agent observe no discrepancies. Accordingly, both the seller and his listing agent sign the third-party NHD report as mandated. [See first tuesday Form 314]
The NHD, signed by the expert, seller and listing agent, is included in the listing 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 his impression of the property developed by the time he enters 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 he lists 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 owner 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 the listing 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 he has an interest in purchasing the property by asking for information. In response, he is given a copy of the marketing package containing the NHD since a further inquiry into the property is the point at which negotiations legally begin, requiring a full disclosure of the property’s conditions.
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. [See first tuesday Form 150]
During the spring, the property is flooded, resulting in significant damage not covered by insurance. The buyer demands compensation from the seller and the listing agent for his 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 listing 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 his listing agent have any duty to the buyer (unless the listing agent also represents the buyer) to advise further about the type or extent of losses the risk of flooding presents.
On the other hand, the buyer’s selling agent had a responsibility to assure that his buyer understood the extent of these hazard risks prior to setting a price and submitting an offer.
The standardized hazard disclosure
Every agent aspires to be fully employed, working for very good clients, so the clients and the agent will both succeed in closing real estate transactions. The client’s property and its surrounding environment are the focal point, the hub, from which all broker employment activities emanate.
For every party in any real estate related transaction to do well, it is critical that all data and information about a property cannot be limited in its quality, quantity and timing of release by the listing or leasing agent representing the property owner. A flood of property information is not a hazard in this occupation, but is the beneficial antithesis of stark, reluctant releases of information to interested buyers. Reluctance to disclose upfront is a risk that is inconsistent with all the current and long-term aspirations of an agent providing real estate services as it interferes with closing and invites litigation. Simply put, hoarding property information is counterproductive and wrong.
The existence of natural hazards surrounding a property affects its value and desirability to prospective buyers since, by their nature, hazards limit a buyer’s ability to develop the property, obtain regular insurance or receive disaster assistence.
Thus, sellers and listing agents of one-to-four unit residential property have an affirmative duty to disclose their knowledge about the existance of natural hazards to a prospective buyer at the earliest possible opportunity – when the buyer starts asking questions which demonstrate an interest in buying the property.
Natural hazards come with the location of a parcel of real estate, not with the man-made aspects of the property such as those covered in a transfer disclosure statement (TDS). [See first tuesday Form 304]
Locations where the land and improvements might be subject to natural hazards include:
- a federally designated special flood hazard area;
- potential flooding and inundation areas;
- very high fire hazard severity zones;
- wildland fire areas;
- earthquake fault zones; and
- seismic hazard zones. [Calif. Civil Code §1103(c)]
To unify and streamline the disclosure by a seller (and his listing agent) about those natural hazards which affect a property, the California legislature created a statutory form entitled the Natural Hazard Disclosure (NHD) Statement in 1998. [See first tuesday Form 314]
The NHD form is used by a seller and his listing agent for their preparation (or acknowledgement of their review of a report prepared by an NHD expert) and disclosure of natural hazard information. The information is known to both the seller and listing agent (and the NHD expert) and available to them as shown on maps in the public records and print-outs from the local planning department. [CC §1103.2; see first tuesday Form 314]
Actual use of the NHD by sellers and their agents is mandated on the sale of one-to-four unit residential properties, called targeted properties. Some sellers of targeted properties are excluded from mandatory use of the form. Thus, the form, prepared and signed by the seller or a third-party expert (unless excluded), must be included in the marketing package handed to prospective buyers on every one-to-four unit residential property, as it is mandated that the disclosure be given to the buyer before the buyer’s purchase offer is accepted. [Calif. Attorney General Opinion 01-406 (August 24, 2001); CC §1103.3(a); see first tuesday Form 150 §11.5]
A seller’s NHD, whether or not prepared by a third-party expert, is not a warranty or guarantee by the seller or listing agent of the natural hazards affecting the property. The NHD is a report of the seller’s and listing agent’s (or the NHD expert’s) knowledge (actual and constructive) of any natural hazards affecting the property. [CC §1103.2(a); see first tuesday Form 314]
Editor’s note — Any attempt by a seller or listing agent to use an “as-is” provision or otherwise provide for the buyer to agree to waive his right to receive the seller’s NHD statement is void as against public policy. Property is sold “as disclosed,” never “as is.” [CC §1103(d)]