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A colleague of mine sometimes asks me to help teach a course he offers on Real Estate Practice (one of the requirements for getting a real estate license) at West Valley College in Saratoga.   He’s been giving this weekly class for a few years now,  and several times I’ve come in to instruct on the broad topic of disclosure (or “disclosures”) for the 2-3 hour session.  It’s very interesting and a fun topic to for me cover because it reaches into some uncommon, yet critically important, areas of discussion in real estate.

What is “disclosure”?

Disclosure is affirmatively offering information that a the other party in a real estate transaction (and the other party’s agent) would want or need to know to make an informed decision on the realty purchase or sale. Often, this information is not easily apparent.  Most of the time, disclosure refers to the seller’s obligation to disclose in particular.  That will be our focus in this post: the seller’s disclosures.

disclosure omission may be fraud

The sellers obligation to disclose is not the same everywhere.

Disclosure laws and practices vary from state to state, both in terms of what must be disclosed and, sometimes, what must not be disclosed. Sometimes it’s a “don’t ask, don’t tell” situation. My comments here refer to the practice in California, which may be different from other states.

Silicon Valley has varied issues which must be disclosed. Some of them are regional (rather than particular to one home in particular). Some of what must be disclosed is a “natural hazard” and some is an “environmental hazard”.  Other issues might not be hazardous, but instead a nuisance.

Next, find some examples of regional things in the Santa Clara Valley that might be disclosed. In the south county areas of Morgan Hill and Gilroy, disclosure issues will include the farming and crop dusting. In some of the newer, downtown San Jose loft communities, there will be disclosure about the proximity of trains and their late-night runs nearby (horns blaring).  In Cupertino, Los Gatos, Monte Sereno, Saratoga, Almaden Valley, and may areas near hills, there may be disclosures about high water tables, water runoff, and damp crawl spaces.  Remote areas all around Santa Clara County may report a requirement to clear brush within so many feet of structures for fire safety.

Throughout Silicon Valley, we have some constants that should be disclosed. Issues here that the seller needs to tell the buyer include the fact that sometimes we have drought years and cannot water our lawns when we want.  Also, we have expansive clay soils and that is important to know regarding proper grading – do it wrong and your foundation may suffer.  Earthquake fault zones and other natural hazard zones also must be disclosed to buyers. (You would want to know if you were buying a home on the San Andreas or Hayward Fault, wouldn’t you?) Forms and ordered reports do address most of these issues, luckily!

Forms are a big help, but they have limits.

There are forms – lots and lots of forms, particularly when buying or selling a home in Santa Clara County or Silicon Valley – that can help with the obliation to disclose. But what has to be disclosed isn’t necessarily written on the form. The form is just an aid to making that full disclosure.

How does a seller know when something must be disclosed?

 The criteria for disclosing in California is “anything materially affecting value or desireability”. Even that phrase is interpreted differently in different states!  In Oregon, for instance, it refers to the structure itself, period. In California, though, it means anything that would influence a buyer’s decision to buy, and at what price. That’s a big difference!!  So as a basic difference, in Oregon you disclose physical defects of the home and land, for instance. In California, the requirement is far broader and includes non-physical aspects of the home, land, location etc. that would impact a buyer’s decision to buy.

Examples of non-physical aspects of the home that could “materially affect” a buyer’s decision: the history of the home (EG, if a crime had been committed there, if there was a death on the property), issues in the neighborhood (the train goes through a block away at 2am three times a week, there’s a sex offender living next door, the school is about to be closed), and so on.

The issue of hauntings or ghosts is interesting in this regard of disclosure laws varying generally from state to state.   In California and Hawaii, if the seller believes there’s a ghost, it MUST be disclosed. Not so in Oregon. In most states, or at least many, this issue will only be disclosed if a buyer asks about it. And in Colorado, it’s not allowed to be disclosed by the agent. (If you want to read up more on this topic, please see my page on one of my sites on haunted real estate sales: http://www.HauntedRealEstate.com.)

The standard of practice to which we’re held, both as agents and as sellers, is not just what we know or knew, but what we “should know” or “should have known”. Ignorance does not excuse. So if you are selling a home on a hillside, for instance, you (seller AND agent) need to walk the lot. If you don’t, and later it’s discovered that part of the land is slipping down a hill and you did not disclose it, the judge will throw the book at you. You should have known it was there. That’s the idea. Same thing is true for agents. We are supposed to do a “dilligent visual inspection” of the places we sell.

Why would you do that if you have an inspection? Well, for starters, the home inspection covers just that – the home, not the land, at least usually. Secondly there may be things which are apparent to you but may not be observable to an inspector, who is focused on a particular list of things to check out. As agents, our job includes looking for “red flags”, things which could concern our sellers and buyers. And often that goes beyond just the structure.

Sellers, when in doubt about disclosure, think of how it would look in front of a judge.  Often, the setting is such that the seller (who knows or should have known about something) has the money, and the buyer has the problem. The buyer comes into court as the victim or potential victim. Who would you side with, if you were the judge? Non-disclosure by a seller is the leading cause of real estate lawsuits.

Disclosing Death in California

There are a couple of tricky areas about disclosure in California. One is that while the seller must affirmatively offer if a death has occurred on the property in the last 3 years, the seller may not tell the buyer that the death was do to HIV or AIDS.  Beyond three years, by the way, the seller does not have to offer this information. If a buyer asks, though, the seller must answer truthfully if a death occurred at any point in history. So if you buy a home, it’s always good to ask if there was EVER a death on the property, assuming you care.  Mental illness is also a protected class, by the way.

Another often misunderstood issue revolves around the FIRPTA disclosure in which the seller must give the buyer his/her/their social security number (or tax ID number). Why is this done? Years ago we had a problem with foreign investors buying, selling, and profiting from real estate sales here and never paying capital gains tax. Uncle Sam wasn’t very happy about this, so instituted some laws to catch these folks and to obtain the capital gains tax. Unhappily for the buyers, long story short is that if the sellers skip out on their obligation, the buyers can become liable. The burden is actually on the buyer to make sure the seller fills out some paperwork (an affidavit) regarding non-foreign status etc. or to have a percentage of the proceedings withheld to pay that tax. And to be precise about who’s who for the affidavit, the SSN is required.

Not so long ago, an agent gave me a FIRPTA with the numbers whited out. Some folks in my office thought that this was acceptable (but being raised by both a Lawyer and a Realtor, I understood that a form with part of the information obscured is not complete and therefore doesn’t do what it’s intended to do) but I asked for the issue to be run by our legal department, because I didn’t think that was right at all. Anyway, our legal eagles said that I was correct, we need to insist on the form being completed because it’s what the IRS requires. It’s not a company or Realtor policy, it’s the law. (The form may now come via the title company in many instances, so the way this is handled may be different in the future.) For more information, please see the IRS document on the web for this topic:  http://www.irs.gov/businesses/small/international/article/0,,id=105000,00.html

We have what seems like a zillion disclosures to complete as sellers and to review as buyers. (This is even more true if you’re buying or selling a condo, townhouse, or planned unit development.) Each question is intended to help the seller to remember to disclose things (and thus keep the seller out of a lawsuit) and to help the buyer to make an informed decision about buying or not buying the property.

Many of the questions and forms are a direct result of a lawsuit at some time. It is positively crucial for sellers to complete them with integrity and thoughtfulness, and for buyers to spend a good deal of time reading and understanding what is being conveyed too. The best way to keep out of trouble is disclose, disclose, disclose.

And buyers, to repeat: read them carefully. If you do not understand something, or if a question sparks more questions, ask. Do not treat these forms like boilerplate. They are extremely important, and buyers too have a duty to fully investigate (and that means taking the time to read these documents carefully as well as doing any other important investigations).

Something important: most real estate lawsuits occur as the result of non-disclosure or under-disclosure of problems by the seller. When in doubt, disclose!   This is an absolutely critical area of any transaction.

To summarize, here are the key points:

1. Disclosure in California must be made of anything “materially affecting value or desireablity”
2. That means if the piece of information would impact a buyer’s decision to buy or how much to pay for a property, the disclosure must be made (whether it’s about the house, the property, the neighborhood – with only a few exceptions for certain protected classes)
3. The standard we are held to is not just what we know, but what we SHOULD know or should have known
4. When in doubt, ask yourself, “how would this look in front of a judge?”
5. Disclosures take time to complete and to review, but doing these things thoughtfully will prevent a myriad of problems from ever occurring.

Please feel free to email me if you have any questions about this subject.  I would be happy to chat with you about it more in person.