BROKER RISK MANAGEMENT
WEEKLY PRACTICE TIP
Public Reports on Subdivision Sales
Q: I just took my first listing on a condominium subdivision in a 36-unit development. This was a development that sold most of the units five years ago, but the developer kept 6 of the units and rented them. Now, that same developer wants to sell those units. The original Public Report has expired. Do I have to wait for a new Public Report to start marketing them? Also, do I have to use the old attorney-drafted purchase agreement which was approved by the DRE at the time the original Public Report was issued? When can I start advertising prices? Help!
A: First some background:
1. The California Department of Real Estate (“DRE”) has jurisdiction for any subdivision of property into 5 or more lots or units (such as condos, condo conversions, lots, TIC’s, etc.). The DRE requires an application with them and the issuance of a Final Public Report (the “White Slip”). Attached to that DRE application must be the form of Purchase Agreement that the developer intends to use and which must be approved by the DRE.
2. A Conditional Public Report or a Final Public Report (the “White Slip”) is required before you can enter into a sales contract; and,
3. A Final Public Report (the “White Slip”) is required in order to close escrow.
4. With a Preliminary Title Report (the “Pink Slip”) a seller cannot enter into sales contracts, but can quote prices and take reservations. NOTE: There are regulations regarding the handling of funds taken for reservations pursuant to a Pink Slip. There are also risks in taking reservations, since buyers sometimes believe that they have a right to buy at a reservation price (even though the DRE-approved reservation form makes clear that there are no rights to buy until a purchase agreement is signed with the developer), and hire attorneys to try to enforce that belief. Many subdivision marketers will not take reservations for this reason.
5. The Public Report is a consumer protection document that may alert prospective buyers about negative aspects of the offered property, such as unusual restrictions or easements, necessary special permits for improvements, unusual financial arrangements, or adverse environmental factors or hazards. EXCLUSIONS: Exclusions from the requirement for a Public Report include commercial or industrial subdivisions, and residential subdivisions with 2-4 units.
6. A Public Report must be given to any member of the public who asks for one. A purchaser must sign a receipt for any Public Report given to them (whether Preliminary, Conditional or Final) and the seller must keep a copy of all receipts for three years.
7. VIOLATIONS: The DRE Commissioner can discipline a licensee who violates these laws. Anyone who violates these laws, even innocently, can receive a license sanction from the DRE. And anyone who willfully violates these laws can be guilty of a public offense and punishable by a fine of up to $10,000, or prison for one year, or both.
B. EXPIRED PUBLIC REPORT: If the Public Report has expired, and the developer still owns units that have never been sold, even if they have been rented for many years, the developer/seller must apply for, and receive, a new Public Report, and comply with all of the Public Report rules.
In that renewal application to the DRE, the DRE will require approval of a Purchase Agreement form just as before. So, it is wise for the developer to submit a new form for this with any updates and changes they wish to make.
A broker selling these units, and their listing agents, must use the DRE-approved Purchase Agreement form and follow the same rules regarding marketing, ratifying contracts and closing as with a new Public Report development.
PRACTICE TIPS:
LISTING AGENTS:
1. Prior to receiving any version of a Public Report, it is permissible to advertise “Coming Soon” with just a general statement of what will be sold (e.g., “Coming Soon: Five Condominiums, 2 and 3 bedrooms. Contact: _______________ for information.”) However, no prices can be given until either the Preliminary, Conditional or Final Public Report is received by the developer.
2. It is best not to take reservations when a Preliminary Public Report is received. It is safer to just take names and tell the prospects you will call them when the developer can enter into contracts.
3. Always have a Conditional or Final Public Report in hand before allowing a seller to sell a unit in a 5+ unit residential subdivision; and have the Final Public Report before closing the sale. Obtain and keep in the file copies of receipts for all Public Reports (whether preliminary, conditional or final) as is required by law.
BUYERS’ AGENTS:
4. As a buyer’s agent, ask for the Public Report prior to writing an offer if the subdivision has 5 or more units.
5. Advise your buyer to read the Public Report prior to entering into a Purchase Agreement.
This Weekly Practice Tip is 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.
© Copyright Broker Risk Management 2012 08/24/12