BROKER RISK MANAGEMENT
WEEKLY PRACTICE TIP
TOP TEN DISCLOSURE ISSUES
Broker Risk Management (“BRM”) recently provided two webinars focusing on an in-depth look at inspections and disclosures. BRM presented a top ten disclosure list. At the clients’ request, the following is that list with a brief discussion of each item.
10: LITIGATION – If a property has been involved in any type of litigation, no matter when that litigation was filed or settled, it should be disclosed to a buyer. It is entirely likely that the litigation may still affect the value or desirability of the property. For example, if the seller or prior owner sued the builder or contractor relating to defective construction, or an HOA sued the builder which constructed the subdivision for defects, those defects may never have been corrected and could still exist at the property. The proper way to make that disclosure is to identify the name of the case, the court and case number (e.g., Smith v. Jones, Orange County Superior Court, Case No. XXXXX). The seller should request that their attorney prepare a disclosure. An agent representing a buyer should recommend that the buyer consult with a qualified California real estate counsel to investigate the litigation history and advise the buyer regarding the risks.
9: ENCROACHMENTS – An encroachment is an unlawful intrusion of a structure or item onto someone else’s property. Examples of encroachments include: buildings; pools; sheds; driveways; fences/retaining walls; trees or landscaping. A common encroachment is a structure belonging to a neighbor which was built over the property line. Whether an encroachment is on the subject property or an adjacent property, it materially affects the value or desirability of the property. It is conceivable that one of the owners could insist that the other owner remove the encroachment leading to litigation. Encroachments must be disclosed.
8: SEPTIC – If a property is on a septic system versus public sanitation, many buyers believe that is a material defect. While some people might not consider a septic system to be an issue, many do. Therefore, the existence of a septic system should be disclosed to the buyer. If an agent is representing a buyer and a septic system exists, it is strongly recommended that the agent advise the buyer to undertake a complete septic inspection. If the septic system is damaged or defective, it could be an expensive repair or replacement.
7: POOL – If a pool exists at the property, it is recommended that a buyer undertake an inspection of it. Pool defects can include: cracks; movement; and defective equipment. In addition, moving soil can also affect the stability of a pool.
6: ROOFING – No matter how old a roof is, it is recommended that a buyer undertake a roof inspection. Even if a roof is new, it could have been installed incorrectly. If a roof was recently repaired, the leak or prior condition should also be disclosed with documents pertaining to any repairs.
5: REPAIRS – If the seller has undertaken any repairs at the property, no matter how minimal, the seller should disclose: the original condition; the repair; who performed the repair; and any documents relating to the repair. It is entirely possible that the repair did not completely correct the defect and the underlying condition could recur. If it does, a buyer is going to claim that the seller was aware of the condition and failed to disclose it.
4: NEIGHBORHOOD NUISANCES – Neighborhood nuisances include, but are not limited to, disturbances in the neighborhood which can affect the property. Examples of neighborhood nuisances include: schools; community pools; sewage plants; air traffic; busy streets; noise from any source; neighbors behaving badly; nearby livestock, etc. If a seller or an agent is aware that such nuisances are in the neighborhood or affect the property, they should be disclosed, even if the seller does not think they are material.
3: PERMITTING – If there is any question that an improvement exists at a property without permitting, it is recommended that a buyer (not the agent) investigate the status of permitting by visiting the local building department. If sellers are aware of any structure, remodel, or repair which was built without required permits, it must be disclosed, even if the seller did not build the structure.
2: SQUARE FOOTAGE – Sellers and agents should be cautious in representing square footage. A property may have more than one square footage calculation which can be from different sources including: Building Department and County Assessor records; appraisals; prior listings in the MLS history of the property; disclosures received by the seller when they purchased the property; and plans for the property. Square footage seems to be a moving number and dependent upon who is doing the calculation. Square footage can also change if sellers have made improvements to the property, whether permitted or not. Therefore, sellers and agents should be cautious in representing square footage. If there are numerous square footage numbers, sellers can use the CAR Square Footage and Lot Size Disclosure form (SFLS) and insert all known numbers. If agents have square footage numbers from prior listings or transactions, agents should also disclose those numbers to buyers. Agents are discouraged from completing the SFLS. If square footage is an issue for a buyer, the buyer should be advised to investigate it and have the square footage measured. The buyer can also request that the lender’s appraiser measure the property and provide the square footage.
1: SOILS ISSUES – In many locations, specifically in Northern California, there is clay soil which expands in the winter with moisture and contracts in the summer when the weather and soil are dry. This can cause significant movement in a home, including a foundation and other structures. In addition, if a foundation has cracked or is moving because of drainage, grading, or other soils issues, the repair can be extraordinarily expensive. Therefore, if there is any red flag that the property has movement or soils issues, sellers should ensure they disclose their knowledge and all relevant documents in their possession or reasonably accessible in that regard and the buyer should thoroughly investigate it by retaining a soils and/or structural engineer.
WEEKLY PRACTICE TIP: DO NOT FORWARD TO CLIENTS. This Weekly Practice Tip is an attorney-client privileged communication 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 LLP. 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 practice.