Q: We represent a Buyer who is in escrow on a gorgeous estate. After the Buyer’s offer was accepted, we received a NHD report from a reputable company that shows the Property is located in a very high Fire Hazard Zone. Two days later, we received the Seller’s disclosures via email and attached to the TDS was a summary page from another NHD provider that states the Property is not in a Fire Hazard Zone. We immediately contacted both companies and asked that they double-check their findings; both companies are certain that their report is correct. We have no means of determining which report is correct.
The Buyer has three days left to rescind because the TDS and the second NHD summary were emailed to us two days ago. What do we do now? We know that we are obligated to point out the discrepancy to the Buyer but what else is required at this stage?
A: You are right that the discrepancy between the two reports needs to be pointed out to the Buyer and, as was explained in our recent Weekly Practice Tip: Dealing with Discrepancies, the information about the discrepancy needs to be in writing. As is true with all discrepancies, it is important to take all of the following steps:
- Document that you have pointed out this discrepancy in a writing to the Buyer such as an email;
- Disclaim that you have not, and will not, investigate or verify which report is correct;
- Warn the Buyer not to rely on the information provided by the Seller; and
- Recommend in writing that the Buyer investigate with appropriate professionals whether the discrepancy will impact the value or desirability of the Property and whether the information will impact the Buyer’s intended use or development of the Property.
It is also important to make certain that the Buyer understands when the Buyer’s rescission right will end and what additional investigative steps should be taken by the Buyer in connection with this particular type of discrepancy. Property that is located in a very high Fire Hazard Zone may be difficult to insure, and/or obtaining fire hazard insurance coverage could be extremely costly. As such, the recommendation to investigate this discrepancy needs to advise contacting the Buyer’s insurance broker to ascertain what position the insurer is going to take on this topic.
In this particular scenario, even if you have previously provided the NHD material to your clients, you should provide all of the NHD material to the Buyer attached to an email which states the following:
In reviewing the two different NHD Reports, we noted that there is a significant discrepancy regarding the conclusion reached by the two NHD Providers as to whether or not the Property is in a Fire Hazard Zone. We cannot, and will not, investigate or otherwise verify which report is correct because the law recognizes that, as real estate licensees, we do not have the requisite expertise to make that determination.
We therefore strongly recommend that you not rely on either report and that you immediately contact your insurance broker to determine whether or not your insurer considers the Property to be in that zone; the insurer’s determination on that topic can greatly impact your ability to obtain insurance coverage. You need to conduct that investigation immediately because the time frame for you to rescind the transaction is limited to five (5) days from the date that the TDS was emailed to our office which was two (2) days ago.
PRACTICE TIPS
- It is critical that regardless of who you represent in a transaction, Agents must read all available information regarding a Property and, in particular, note whether there are any discrepancies in the information.
- Document that you have pointed out the discrepancy.
- Be certain to use the proper disclaimer stating you will not verify or investigate the discrepancy.
- Warn the Buyer not to rely on the information provided by the Seller.
- Recommend appropriate follow-up investigations depending upon the type of discrepancy.
- Make sure that the Buyer understands any time constraints in conducting that follow-up investigation such as when a rescission right will end and/or whether the Buyer has any viable contingency rights; and
- If you have any concerns that additional warnings may be needed, contact your Broker or Branch Manager for additional guidance.
This Weekly Practice Tip is an attorney-client privileged document for the exclusive use of clients of Broker Risk Management and their agents. It may not be reproduced or distributed without the express written consent of Broker Risk Management. The advice and recommendations contained herein are not necessarily indicative of standards of care in the industry, but rather are intended to suggest good risk management practices.