Disclosures and You: What Can We Learn About a Property Before Buying It

The California Legislature Requires Sellers to Disclose A Lot About Property — Except for When They Didn’t — So What Should You Expect?

 

 

When you’re out and about at open houses or are trying to gauge a property’s popularity you’ll often hear “disclosures” thrown about as if it was going out of style.

So, what are they? Disclosures typically refer to a set documents that sellers are supposed to complete that answers questions about the property they’re selling. Disclosure documents may also include pre-sale property inspections (general contractor’s, pest, roof, fireplace, sewer lateral, underground storage tank), reports about area natural hazards, a property’s permit history and reams of boilerplate advisories and notices. Ultimately from those hundreds of pages about 20-50 pages are relevant. Most seller’s agents want would-be buyers to have reviewed disclosure materials before submitting an offer. So knowing how many disclosure packages an agent has sent out will inform buyers if they face potential competition from other buyers.    

Disclosure Documents Are a Required Part of a Sale

California’s Civil Code requires sellers to disclose property conditions and material information affirmatively to would-be buyers. What’s a material fact? There’s no bright-line rule as the definition changes under different circumstances but it’s generally understood as a fact that will impact a buyer’s decision to make an offer on a property and what the offer will be. There are standard forms the local REALTOR association and state association produce that most agents use.    

If completed properly (and legibly), a set of California disclosure documents can help buyers form a very complete picture of a property and its recent history. While there are other times (such as when a trustee/successor owner who inherits a property) where information is scant. Disclosure documents usually follow a general pattern and are usually hundreds of pages long.  The City’s tradition of having disclosure documents ready before property comes to market runs counter to standard practice in most places where there’s more time to investigate a property after a contract is signed. Having disclosures prepared early allows prospective buyers to assess a property before making an offer, which saves a lot of grief and heartache if an issue pops up after you get into contract.

Getting the 411 About the Property You Like: The Specific Forms That Are Most Useful  

Yes, we said hundreds of pages but some are more relevant than others. While disclosures were traditionally paper  they’re usually sent as one or two PDF documents (with varying scan quality). Depending on the audience, some folks may care less about a building’s permit history because they’re remodeling the property anyway, while some folks fixate on it.  We consider the most relevant ones below:

Transfer Disclosure Statement and various Supplements (The “TDS.”)  The TDS is, perhaps, the most important document of the lot. Unless a property is being sold by a trust or estate, every owner must answer three pages of questions ranging from roof type, crime, if pets lived onsite to what type of defects exist on the premises. Because this document requires a seller or seller representative to sit down and answer questions affirmatively, TDS documents are more solemn. The hope is that sellers are following their duty to tell the truth about a property and that they are, in fact, disclosing any ‘material’ facts that could have an impact on buyers. You may be thinking that this standard is a bit broad and ambiguous as it could overly inclusive as easily as it can be under inclusive.

Other Supplements. There are other circumstances, locales and instances where supplemental forms are required. San Francisco, for example, has its own form that asks questions about rental history while there’s another form for TIC properties and, for income properties, there are forms about the tenants and their rents. 

And All That Other Stuff…

Most of the disclosure package’s pages are taken up by a virtual reference library of a wide variety topics that could impact a house including earthquakes, landslides, fires, mold, more mold, termites, lead paint, flying saucers, locusts … okay, maybe not the last two but there is a lot of literature about many topics that matter and others are inapplicable.  

Property Inspection Reports. It used to be that a buyer would have 21 days to inspect a property after an offer was accepted. Nowadays sellers and their agents will have hire the very same inspectors that buyers’ agents would call to have their properties inspected before coming to the market to encourage contingency-free offers. The inspectors typically come from one of five main companies and will walk the property and prepare a written report that’s sectioned into discussions of a property and its component systems and condition.    

Pest Report. In San Francisco, with its moist and temperate climate, wood structures and density, the prevalence for structural pest damage increases, i.e., termites, beetles and fungus. The average repair bill is around $8,000-$10,000 for most structures in the City with decks, doors jambs, window sills, or mudsill-earth contact being the chief cost centers.   

Sellers used to walk on pins and needles when it came to a pest or termite inspection as a bad report could scuttle an entire transaction. Formally known as a structural pest control inspection these inspections could wood-destroying pests or organisms. Pest reports are divided into two sections (work that should be done now and things that can wait), are supposed to be more objective that not and are registered with the state Structural Pest Control Board. The work recommended in a structural pest report might be done by the company preparing the report or the parties may use another contractor, or do the work themselves. Beware of pest reports and lenders because some lenders will require the pest report’s findings be cleared before a mortgage can fund if they find out about the report. 

  • Dry Rot. Dry Rot is a fungus (ew) that grows when a building’s wood framing repeatedly is exposed to water and dampness. If unchecked, that fungus will literally eat its way through the wood turning it into dust. On average it can take up to 7 years for dry rot to show any visual signs of damage or to manifest significant damage requiring repair. Damaged wood will need replacement (like filling a cavity) and the affected area will require chemical treatment.  
  • Wood-eating Beetles. As their names implies, wood-eating beetles are beetles that slowly eat away the wooden structure of a property. You can’t spot these guys but you can spot evidence of them (usually after 2 years) in pin-point-sized holes in exposed wood and tell-tale dust. If unabated, the beetles will eat the wood to dust. What’s the remedy? Spray and repair or replace.  
  • Termites. Termites are notoriously fast workers and can do serious damage in 1 to 3 months. You’ll see channels or tubes and deteriorated wood in their wake. Treatment is usually done by pumping orange-based chemicals into the ground to eliminate their colonies/nests. And, infestations are either “active” or dormant meaning for some reason the termites simply ceased their activity. Pest companies will still recommend treatment because you won’t know when they could come back. Preventing unwanted termites usually consists of raising where a foundation meets the soil and monitoring traps.  

Agent Inspections. The seller’s agent is obliged to perform a reasonably competent and diligent visual inspection of the property’s accessible areas. This inspection and subsequent report is where agents should note — in very clinical terms — any defect, condition, or observation that’s intended to inform a buyer of the property’s condition. You’ll come to see that many agents are incredibly taciturn in these documents. Eventually, the buyer’s agent will do one of these reports as well.

Natural Hazards Disclosure Reports. Based on a property’s location, a handful of companies prepare 100-page-plus reports showing risks associated with gas lines, landslide, forest fire and liquefaction risks as well as toxic these disclosures for such items as gas lines, previous industrial uses, area ground contamination, and other information such as property tax and assessment obligations and overhead airplane paths for example. 

What Might We See?

Important Diligence Links

While we can’t learn everything about a given property or parcel online there are a lot of resources that can help you learn get a much better sense of one before you ever set foot on it in person! 

 

Disclosures are so very important. We’re here to help you…  

  • Understand the relevance Disclosure documents and information has

  • What information is supposed to be within the Disclosures versus what is and what’s not 

  • How certain Disclosure Documents matter more than others

Some Common Disclosure Documents:

 

The Most Relevant and Specific

  • Real Estate Agency Relationship Disclosure | a form that tells everyone what us agents have a fiduciary duty to protect your interests
  • Real Estate Transfer Disclosure Statement (TDS) | essentially a Q+A for the property that the seller must complete
  • Supplements to the TDS | more seller Q+As tailored for specific cities or circumstances (TIC Addenda, San Francisco Seller Supplemental, Commercial) 
  • Building Permit History (”3R”) | the official building and zoning record of what was done according to records (compare with what was really done). Interestingly the online version is more comprehensive
  • Preliminary Title Report | information about current owners, property taxes, assessments, current loans and liens
  • Inspection Reports | Seller-provided contractor inspection reports; pest reports; specialty reports, e.g., sewer, roof, fireplace, geotechnical, architectural, historic, CEQA (for commercial: Phase 1 and Phase 2) etc. 
  • For Investment Properties: Tenant Estoppels and Questionnaires | SF protects tenant rights to the extreme, if completed, these forms will show rents, tenant information and protected status if applicable
  • For commercial and investment: Rent rolls, leases, etc. 
  • Trust Disclosures | If the property is being sold by an estate where the owner is no longer alive; effectively let’s you know that you may not get any of the above information

 

For Condos and New Construction

  • Condominium/HOA Documents | All about your association and development (CC&Rs, budget, bylaws, financial documents and certification, reserve studies, meeting minutes, master insurance policy) 
  • TIC Documents | Lots of information about tenancy in common units
  • Public Report, SB 800 Notices, Budget Reserve Study | For new construction condo developments there are more specific documents needed from the BRE and the developer  

 

Less Specific, More Boilerplate 

  • Lead-Based Paint Disclosure | previously prized for deep hues and colors, lead-based paint, it turns out, is harmful; discovering that fact came relatively recently which means that a lot of the older homes in the City will have some paint some where.
  • Square Footage Advisory | just warning you now but people measure things differently and there are different sources for those numbers; just remember that you like the place and it won’t live differently because of some silly number
  • Area Manmade & Natural Hazard Reports | sounds and looks scarier than the situation really may be, but interesting reading nonetheless usually issued by Property I.D. or JCP/LGS
  • Smoke/CO Detector requirement notices and compliance | the sellers must install these; appraisers will look for
  • SF Energy & Water Conservation Certification | the sellers must comply and inspect before close, i.e., new toilets, weather stripping
  • Market Conditions Advisories | general information about the marketplace in the City, square footage, market conditions in the State and about real estate generally 
  • Supplemental Tax Statement | SF takes too long to give you updated property tax bills, so budget for it
  • General Stuff About… | Even more about lead paint, earthquake risks, energy conservation practices

Sometimes disclosures will be long and extended while many other times they will be sparse as people are fearful of opening up a Pandora’s box of starting to say something but then being incomplete. Regardless, there’s no such thing as perfect information nor can we know everything about a given property either. We’ll just have to have the requisite amount of faith in the process too. 

Vanguard Properties believes information to be correct but has not verified this information and assumes no legal responsibility for its accuracy. Buyers should investigate the property and any issues or questions to their own satisfaction before proceeding with a purchase.

Kevin K. Ho, Esq. + Jonathan B McNarry
San Francisco Real Estate Experts
+1-415.297-7462 (Kevin)
+1-415.215.4393 (Jonathan)