The Natural Hazard Disclosure Statement (NHD): included in marketing packages to create transparency and attract buyers

When to deliver the NHD

Consider a SFR home that is listed for sale in the Malibu Hills in Los Angeles County.

The listing agent asks the seller to fill out an NHD as part of the listing package prior to placing the property in the local multiple listing services (MLSs). The listing agent wants the NHD information communicated to selling agents and prospective buyers up-front, not just available and accessible if requested by a knowledgeable prospective buyer.  This voluntary release of property information as soon as possible in the marketing stage is the transparency given to buyers looking into property conditions that the listing agent needs to side-step claims the seller or the listing agent withheld critical information affecting the property’s value based on its location within a natural hazard area.

However, the seller is reluctant to fill out the NHD and refuses to fill out the NHD, fearing the property will sit unsold if up-front disclosures are made which might show the property in an unfavorable light to some buyers.

The property is published on area MLSs by the listing agent.

A buyer’s agent sees the property on the MLS and informs his buyer of the MLS listing. The buyer likes the location of the property, but has read about fires destroying homes in neighboring areas. The buyer visits the property and wishes to make an offer, but the buyer’s agent, being aware that the property is in close proximity to wildfire hazards, asks the seller’s agent for an NHD before preparing and submitting an offer.

The seller is reluctant to provide information on the property, pushing his agent instead to have the buyer submit an offer before the NHD is handed over. The buyer is instructed to submit his purchase offer immediately and is told he will receive the NHD while in escrow before the transaction closes.

The prospective buyer, based on his current knowledge of the property and ignorant of the fact the property is located in Very High Fire Hazard Severity Zone, submits his offer to the seller with the expectation of receiving the NHD disclosures during escrow.

Prior to closing, the seller delivers the NHD to the buyer, revealing the property is located in a hazardous area. Within three days of receiving the NHD, the buyer and his agent further investigate into the consequences of owning property in a hazardous area.  They discover the use and occupancy of the properly is controlled by a local ordinance imposing a strict 100-foot brush clearance requirement, among other activities which increase the cost of ownership.

The buyer asks for and gets information from the seller on the cost of hiring brush clearance contractors to meet the local requirements and the distance to the nearest fire station.

Additionally, the buyer engages an insurance agent to contact insurers for quotes on hazard insurance policies for the property and compare premiums to premiums on property not located within the hazard areas.

The insurance agent contacts the current insurer about coverage. The insurer informs the insurance agent that they will not be issuing a new policy on the property for the buyer due to the history of brushfires within the last two years, the hazards within 200 feet of the property, and the claims on the property within the past five years.  The only insurance available is through the California Fair Access to Insurance Requirements (FAIR) plan.

The buyer, shocked by the property’s location in a Very High Fire Hazard Severity Zone, the local ordinance brush requirements and unavailability of regular hazard insurance coverage, cancels the transaction. The tardy delivery of the NHD was a surprise inflicted on the buyer after going to escrow which eventually killed the deal.

It is common (but very poor) practice in some areas for agents to only deliver the NHD (as well as other critical disclosures) after the buyer is under contract. This is professionally illogical and perverse. An NHD contains material information which must be considered by a buyer prior to setting a price, much less submitting an offer to purchase. Without disclosures, the buyer does not get to know what the seller and the listing agent know, or have readily available for them to know, until after the buyer has become bound by the terms of a purchase agreement and escrow has been opened.

This asymmetry of information, the antithesis of transparency, openness and ethical conduct, is a deplorable condition for a listing agent to survive in.  Without proper disclosures, prospective buyers cannot readily, if ever, ascertain the value of the property and distinguish it from other competing properties they are considering – the primary purpose served by delivering information.  An agent cannot “bag” the buyer, then let the cat out later.

Further, the listing agent who fails to disclose a natural hazard and declare compliance in the purchase agree­ment and instead makes an untimely disclosure “in escrow” imposes on his seller a statutory penalty, in addition to all the fraud claims to recover lost property value for misleading the buyer by silence (asymmetry) prior to entering into the purchase agreement. The buyer, on an in-escrow delivery of the NHD disclosure, is entited to:

• a three-day right of cancellation; or

• a five-day right of cancellation, should the NHD be mailed to the buyer. [CC §1103.3(c)]

Similarly, if a natural hazard is known to any agent (or seller) or noted in the public records and is not disclosed or discovered until after the transaction has closed escrow, the buyer may rescind the sale and be refunded his investment, called restoration. [Karoutas v. HomeFed Bank (1991) 232 CA3d 767]

Thus, good brokerage practice requires delivery of the NHD to the prospective buyer before he makes an offer or accepts a counteroffer, while he is still addressed as the prospective buyer in the statutory scheme. Disclosures should not be delayed until the prospect has become the buyer under a purchase agreement and is entitled to ownership of the property at the price and on the terms agreed. Properly, the purchase agreement offer includes a copy of the seller’s NHD Statement as an addendum (along with all other disclosures), noting in the purchase agreement that the transaction is in compliance with NHD law. [See first tuesday Form 150 §11.5]

Therefore, the need to prepare the seller’s NHD statement in advance of locating a prospective buyer must be anticipated by the seller and listing agent.

Thus, if the NHD is delivered before an offer has been submitted, there are no surprises regarding the conditions of the property.  Further, there is no justification for the buyer to exercise any right to terminate the transaction prior to closing based on a late delivery of the NHD.

Who delivers the NHD?

Whether a seller markets his property himself or lists the property with a broker, it is the seller who is charged with the disclosure to prospective buyers of any known natural hazards, as well as those contained in public records.

If the buyer does not have a broker but the seller has an agent, the seller’s agent is responsible for delivering the NHD to the prospective buyer.

However, the listing agent is not required to understand or advise on the effect hazards have on the property or the buyer. Also, the listing agent has absolutely no duty to voluntarily explain to a prospective buyer the effect a known natural hazard (which is itself disclosed) might have on the property or the buyer. The task of explaining the consequence of living with a natural hazard is the duty of a buyer’s agent.

Delivery may be in person or by mail. Also, delivery is considered to have been made if the NHD is received by the spouse of the buyer. [CC §1103.10]

Compliance by the seller and listing agent to deliver the NHD to the buyer is required to be documented by a provision in the purchase agreement. [See first tuesday Form 150 §11.5]

Buyer’s agent incentive

The primary marketing advantage for the owner who provides prospective buyers with third-party reports is that the sale of the property is transparent since it is based on the condition “as disclosed” by the reports.

Avoided is the undisclosed (and prohibited) “as is” sale which leads inevitably to price renegotiations, repairs, or worse yet for all, cancellation of the purchase agreement or litigation for failing to disclose facts about material defects known when the purchase agreement was accepted. [CC §§1102.1, 2079]

The buyer’s agent, on receiving the NHD from the listing agent, owes the buyer a special agency duty to care for and protect his buyer’s best interest by reviewing the NHD Statement himself for any disclosure which might affect the property’s value or its desirability for his buyer. The buyer’s agent is then required to deliver the NHD to the buyer and make any recommendations or explanations the buyer’s agent may have regarding the consequences of its content. [CC §§1103.2, 1103.12]

Helpful links:

The Community Status Book can be obtained here.

Flood Insurance Rate Maps and Flood Hazard Boundary Maps are all available at the FEMA Flood Map store by calling (800) 358-9616 or via the web here.

Seismic hazard maps can be obtained here.

Tsunami inundation maps are available from the National Oceanic and Atmospheric Administration (NOAA) led National Tsunami Hazard Mitigation Program (NTHMP) here.