Real Estate Seller Disclosures and Working New Listings: ClaimPrevent® Summary 3

This session covers Seller Disclosures, Real Estate Licensee Disclosure Responsibilities, Staging, and Showings from a Risk Management perspective. Use this ClaimPrevent® summary for onboarding new hires or as a refresher to help prevent legal problems.

Seller Disclosures

Most states require the seller and real estate licensee to:

• Disclose any material defects, problems, or issues with the property that may influence either the price of the property or a buyer’s decision to purchase. 

• Disclose any prior reports on the property.

Examples of material defects include things such as: water damage in the basement, a structural defect, environmental hazards and/or renovations that were done without a permit. It could also involve a lien on the property or a demolition order. 

If the property is being marketed as having “green” or sustainable features, be sure the condition and status of all green home technologies are disclosed correctly.

Educate your sellers on the importance of being honest when completing disclosure forms. Ensure your clients understand what needs to be disclosed and why. Communicate to them that it is important, because the consequences for a failure to disclose can be very serious and costly (and it is fraud!). 

Never Complete Disclosure Paperwork for the Seller. Sellers must complete the disclosure form themselves. Under no circumstances should a real estate licensee complete this paperwork on behalf of a client.

AUTOMATED SELLER DISCLOSURES

Giving your seller access to online automated seller disclosures gives you several benefits:

1. It removes the licensee from the disclosure process.
2. It walks the seller through the disclosures step by step, and each step must be completed before proceeding.

When setting up the disclosures for the seller, double check that all the information you’ve input about the property sale is accurate.

See Using Automated Seller Disclosure Forms.

PROBLEMS WITH NEIGHBORS

Most states require disclosure about any known major nuisances. This would include neighbor disputes, boundary issues, excessive noise issues or other problems that may influence a buyer’s decision to purchase the home. Keep in mind that it’s not enough to simply check the box that there’s a nuisance issue. Sellers must explain in detail what the issues are to fulfill their disclosure obligations.

LICENSEE DISCLOSURE RESPONSIBILITIES

Lawsuits against real estate licensees due to “failure to disclose’” are common. The responsibility to disclose doesn’t end at the seller — real estate licensees must disclose any known material defects as well. 

Some states, such as California, impose additional obligations of licensees to undertake a visual inspection of the property. Any defects spotted during that inspection must be disclosed. 

What if a seller deliberately withholds information about a known defect, leaving you vulnerable to a lawsuit? If you discover that your client is withholding information and failing to disclose a known defect, you must disclose this to the buyer.

But you can’t disclose what you don’t know about. You can only disclose what you have actual knowledge of. 

FAILURE TO TELL THE BUYER IMPORTANT INFORMATION

Omissions can be something a licensee simply forgot to pass on to the buyer. This includes things like:

• Information about a planned development of a 20-story apartment building right next door
• A current neighbor dispute about a large tree in the yard of the property for sale
• A recent survey of the land that showed a fence is incorrectly positioned

In the case of a boundary line, recommend the potential buyer do their own independent research to accurately identify property boundaries.

See Risks for Real Estate Licensees Selling Penthouses for specific disclosure issues.

Another common issue is septic system permits. The number of bedrooms in a home dictates the number of potential residents in a home — and the required size of a home’s septic system. Homeowners/builders need to obtain a permit when they build a home, but home extensions and renovations are very common. Additional rooms may not meet the home’s septic permit requirements and could result in increased costs for the new buyer to fix.  Encourage all buyers to do their own due diligence and tell them to get a professional building inspection.

What about prior inspection reports? See what the attorney says about disclosing them in the short video below . . .

UNPERMITTED WORK

If you know about unpermitted work, you need to disclose it. It’s common for real estate licensees to pull the permit file and include it in the disclosure packet. But this can be risky and make you vulnerable to a permit-related lawsuit. That’s because permit files may be incomplete or contain errors.

A permit file doesn’t show unpermitted work. It only shows what works have been permitted on the property. There’s no guarantee the file is 100% accurate. It may be incomplete or contain administrative errors. Use a CRES Building Permit History Report for a comprehensive view.

POOLS AND DIVING BOARDS

You must disclose any major issues regarding the pool’s condition. If it’s an issue that will cost the buyer money in the future, a safety issue, or something that materially affects the value and desirability of the home, it must be disclosed to the prospective purchaser. 

Encourage buyers to have an independent inspection of the pool and diving board to ensure everything meets the required standard and is safe for use. To minimize your liability, it’s important that you don’t arrange this inspection and that you don’t refer them to a particular contractor. 

Buyers should also be encouraged to seek insurance advice from their home insurer, because diving boards may mean a higher insurance premium. 

HOMEOWNERS ASSOCIATIONS

Real estate licensees need to take great care when selling properties that are covered by a Homeowners Association. Disclosure of anything that may affect a purchaser’s decision to buy or not buy a property is essential. It’s also important to be very careful what you tell prospective buyers – about what is and isn’t allowed.

Never tell a prospective buyer that something is okay when a homeowners association is involved.

Real estate licensees should recommend to all prospective buyers to do their own due diligence. (Potential buyers can find CC&Rs and other Association Regulations online for many communities.)

Licensees should also provide the contact details of the Homeowners Association, so that prospective buyers can ask any questions they might have about the restrictions, rules or fees involved.

Best to get information on HOA fees in writing, either from the Homeowners Association or from their CC&Rs or Association Regulations, to pass on to potential buyers (and note the source and any “as of” date on the information).

STIGMATIZED PROPERTY

There are different reasons a home could be considered stigmatized, such as a home with a history of being haunted or a home where a death has occurred.

Most states do not require disclosures for stigmatized or psychological factors — they focus on the physical defects, such as structural issues or major leaks. 

Sellers and real estate professionals need to determine what must be disclosed and ensure all state regulations are followed. 

Consider if the stigmatization is likely to materially influence a buyer’s decision to purchase the property. If the buyer is informed about the stigmatization, would they have negotiated a lower price because the property is deemed to be worth less? If the answer is yes, you should strongly consider disclosing the stigmatization.

These states do require disclosures relating to deaths in the home:

• California — Any deaths within the past 3 years must be disclosed. 
• South Dakota — Sellers must disclose any human death by homicide or suicide if one has occurred on the property in the past 12 months. 
• Alaska — Licensees must disclose any homicide or suicide that has occurred on the property in the past year that they are aware of. If the licensee does not know, they will not be held liable for a failure to disclose. 

HAZARDOUS MATERIALS AND OLDER HOMES

Claims often allege a failure to disclose on the part of the seller and/or the licensee when a buyer discovers an issue after closing.  Older homes may contain hazardous materials, such as: asbestos, lead-based paint, formaldehyde, treated timbers, carbon monoxide from old heaters, and more.

Licensees are not expected to do building inspections — a visual inspection may be all that’s required (depending on your state.)  Many hazards will not be visible to the naked eye.

But licensees should become familiar with what hazardous materials are likely in older homes. Ask the right questions of sellers to ensure that any known hazards are disclosed.  

You should make inquiries to ensure the home is safe, especially if there are any red flags found during your visual inspection. This is necessary for two reasons:

1. To ensure the property is safe for people to attend open houses and showings. For example, if there is damage to the ceilings, walls or flooring of a home that may have asbestos, you should not enter the property until safety testing has been completed. 
2. To ensure that any non-compliance issues of the home are known and disclosed, so prospective buyers are aware they can’t live in the home until these issues are fixed. 

And always recommend that a buyer have a Home Inspection by a professional before purchasing. Provide this recommendation in writing and place a copy in your file.

NATURAL HAZARD DISCLOSURES

CRES Natural Hazard Disclosure (NHD) reports provide valuable insight into any natural hazards that exist where a property is located (including wildfire areas, earthquake fault areas, tsunami inundation hazards, naturally-occurring asbestos areas, critical habitats, abandoned mines, sinkholes, methane gas zones, and more) plus special assessment districts and estimates of property taxes.

Natural Hazard Disclosures help buyers understand the potential hazards of a property.

Since January 1, 2021, California property owners who are selling their homes which are in high to very high fire severity zones that were built prior to calendar year 2010 are required to provide all potential buyers of the home before close of escrow a written and dated notice stating:

1. The mandated statutory notice containing information to the buyer on how to fire harden a home (See California Association of Realtor [C.A.R. © Form FHDS 6/21]).
2. A detailed written disclosure of the features of the listed home that makes the home suspectable to embers and wildfires.
3. If there has been no home hardening inspection report on the home within six (6) months of the contract date, the parties are required to sign a dated and written agreement where the buyer will obtain documentation of compliance under local ordinance or, if there is no local ordinance on home hardening, the buyer will within one (1) year of escrow’s close, obtain home hardening compliance written documentation provided there is a state, local or other government agency or qualified nonprofit providing home hardening  inspections with home hardening compliance documentation of the property under contract to sell.
4. The failure of the seller to comply with California’s new home hardening fire disclosure law before close of escrow allows the buyer to cancel the escrow to purchase a given property and receive the return of all his or her earnest money deposit even if the buyer has waived in writing all contingencies of the sale.

CRES now makes Natural Hazard Disclosures available for 48 states.

See How Natural Hazard Disclosure Reports Can Minimize Real Estate Risk.

 

Home Staging

Normally, the real estate licensee would deal directly with the professional staging company, and their fees would be covered within the commission price charged by the licensee. Be sure to obtain a quote from the stagers before you agree on a commission rate with the seller. 

Licensees need to be clear with the property owners about the costs of staging, what each step entails, and what they need to clear out to make staging possible. Do a risk assessment on home staging and aim to minimize any risks. For example:

• Consider any items that could be damaged 
• Consider any items that could cause damage to the property 
• Avoid high risk, expensive items such as sculptures or expensive artwork 
• Avoid small items that could be easily stolen during open houses or inspections
• Consider only showing the property to qualified buyers versus open houses 

Real estate licensees also need to be very clear in contracts and agreements about who is responsible if damage occurs to property during the staging process. Or, what if the home stagers move some of the seller’s belongings and they’re damaged? You should be working with a reputable home staging company that has appropriate insurance coverage for these scenarios. 

Showings

Having an empty pool and a diving board during an Open House could be potentially dangerous. Caution your sellers about the risks of an empty pool. If it can’t be avoided, ensure that access to the pool and diving board area is limited for safety reasons and appropriate safety warnings are in place.

If questioned about the pool, don’t speculate on issues beyond your area of expertise such as: maintenance costs, how long it will last, safety, insurance issues, repairs, removal costs, etc. Suggest to the buyer that they do their own diligence to find accurate answers. Encourage buyers to do a pool inspection by a fully qualified pool inspector. Make this recommendation in writing and put a copy of the email in the file. 

CLUTTERED, DIRTY, OR HOARDER PROPERTIES

Recommend that sellers declutter. This reduces risks to people who come to see the property and makes the property more appealing to potential buyers. 

You may need to suggest that a professional company come in to declutter the home. This might involve sorting and removing items, cleaning, and staging the home. Some people simply need help to get through the process because it’s time consuming, or they don’t know where to start. People with hoarding disorder may be resistant, creating more of a challenge. Because excessive clutter or hoarding can create other health risks, hiring people who are used to dealing with this situation is wise.

Unclean or untidy homes may also mask more significant issues in the home. For example, trash may cover up a wall leak or unstable floorboard. If you are the listing agent, and these issues are only uncovered once the owners move out, you will have a problem. Encourage your sellers to clean up, to show their home in the best light and have a better chance of a higher offer.

HOMES TO BE DEMOLISHED

Allowing showings for potentially hazardous property is dangerous and could cause injury to yourself or others. It will likely depend on the nature of the property issues as to whether internal access would be allowed. However, no internal inspections should be done on a property that has been deemed too unsafe to occupy. 

If the property is condemned and too unsafe to access, it should be fenced off for safety reasons. If it isn’t, you might recommend to the seller that this should be done before showing the property. 

When dealing with a home that needs to be demolished:

• Don’t be tempted to estimate the costs of demolition. The cost range for demolition is vast, and you should recommend the buyer seek independent advice about the costs.
• Don’t provide advice on permits. Refer the buyer to the local government rules for demolitions. If the home has dangerous materials, such as asbestos, there will likely be additional regulations that need to be followed. 
• Don’t recommend companies to do the demolition work (in case something goes wrong and the buyer holds you responsible).
• Don’t provide advice or suggestions about possible developments on the land after the home is demolished. Suggest the buyer seek advice from the local authorities about any building or zoning restrictions. 

I have been using CRES Insurance services since 2009 and have been happy with the services provided. I appreciate their willingness to find discounts for me upon renewal and the Risk Management Hotline is also helpful when I need a quick response from an attorney looking out for my best interests.

– David K. – Santa Cruz, CA

Protect Your Business with Errors and Omissions Insurance

Every real estate licensee should ensure that your particular business activities are covered with a real estate E&O insurance policy. CRES has been insuring real estate professionals for more than 25 years — it’s all we do, so we’re experts in finding you the right coverage for your business.

As part of one of the largest insurance brokers in the world, we have access to more real estate E&O insurance options (and other insurance for real estate licensees and brokers as well) than just about anyone. Let us do the shopping for you and find you the best protection at the best price.

 

Check out our other summaries from a risk management perspective:

ClaimPrevent® Summary 1: Attracting New Clients and Showing Property

ClaimPrevent® Summary 2: Seller Disclosures and Working New Listings

ClaimPrevent® Summary 4: Handling Offers to Purchase Real Estate

ClaimPrevent® Summary 5: Filling Out the Purchase and Sale Agreement to Avoid Problems

ClaimPrevent® Summary 6: Handling Challenges with Clients and Other Licensees

ClaimPrevent® Summary 7: Avoiding Legal Trouble when Working a Real Estate Contract

ClaimPrevent® Summary 8: Property Management Ads and Screening of Applicants

ClaimPrevent® Summary 9: Property Management Evictions and Maintenance