When you’re out and about at open houses (when they ever come back) or are trying to gauge a property’s popularity you’ll often hear the word “disclosures” thrown around as if it was going out of style — how many disclosures are out? When are disclosures ready?
So, what are they exactly? And are they really hundreds and hundreds of pages? Do you really learn anything from them?
‘Disclosures’ typically refer to the set documents that sellers are required to complete and provide buyers regarding the property they’re selling. San Francisco’s general practice of having disclosure documents available to buyers before property is in contract runs counter to standard practice in most places. In most parts of the country these documents and information are only provided (or discovered) after a seller accepts a buyer’s offer. The diligence period is when these things get exchanged or investigated.
But just like how we say a property is ‘in contract’ opposed to what most other folks in the country will say — ‘under contract’ (can you just imagine a house under a giant tarp/contract with a meek ‘umm, I’m here… okay, maybe not) — we front-load the process in San Francisco by having buyers look at disclosure information before making an offer so as to encourage serious offers only. Having disclosures prepared early allows prospective buyers to assess a property before making an offer and is intended to save people from surprise heartache and subsequent negotiations as your bid should already reflect any adjustments you would have otherwise asked for if you found an issue that impacted your overall valuation of the property.
It’s kind of like asking for someone’s number…
Most times, when we work with sellers, we’ll caution our sellers against thinking that an offer is serious unless or until a would-be buyer has reviewed the disclosure documents. So knowing how many disclosure packages an agent has sent out will inform buyers if they face potential competition from other buyers.
What’s in a disclosure package anyway?
Disclosure packages can be lightweight, meaty, full of fluff or just-right. In theory, sellers are obliged to answer a set of questions about the property they’re selling on standardized, statewide and city-wide forms. Residential property disclosure requirements are more stringent about property conditions and neighborhood conditions, commercial property disclosures will focus on regulatory issues and/or environmental questions depending.
The information is supposed to be from a seller’s personal observations unless you have an estate/probate sale and/or a sale by an absentee owner, in which case the quality of information usually isn’t as robust. Apart from the questionnaires disclosure documents usually include: a preliminary title report showing the property’s legal description along with levies, liens, and loans linked to the property; pre-sale property inspection reports (general contractor’s, pest, roof, fireplace, sewer lateral, underground storage tank, mold, and other specialty); quasi-customized reports about area natural hazards and environmental issue; the property’s marketing materials; the property’s permit history; if you’re considering a TIC or condominium, various documents about the HOA related to the rules, bylaws, budgeting, insurance and HOA finances; and, the reams of boilerplate advisories and notices from California and local realtor boards. Ultimately from those hundreds of pages about 50-100 pages are the most relevant.
If I Know That You Know That I Know…
Buyers too have an obligation to investigate a property before buying as seller-provided reports or inspections aren’t necessarily a substitute for what a buyer can discover if they had their own inspectors or vendors. Indeed, the tradition before the past decade was that the buyer would hire their own inspectors to inspect a property either right before making an offer or right after their contract was accepted. Seller agents wouldn’t want to see those reports either because it would mean those reports would have to be given to other interested buyers. That being said, listing agents now often hire the same inspectors we’d hire as buyer agents so that the reports would be consistent.
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 price will be. The standard forms the local REALTOR association and state association produce that most agents use usually contain all of the questions and topics the Legislature requires.
So that’s nice ideal, But what do we really get?
How It’s Supposed to Work. If completed properly (and legibly), a set of disclosure documents can help buyers form a very complete picture of a property and its recent history. Some disclosures are meticulous, detailed and quite clear. It’s almost a pleasure to read these documents and the properties these types of disclosures usually accompany also pretty special, attractive or desirable.
The Silent Type. While there are other times (such as when a trustee/successor owner who inherits a property) where information is scant, incomplete or, simply non-existent. But these properties are the ones geared towards flippers, developers or otherwise experienced buyers who will generally know what’s possible for a given property and/or what issues there will be. The emphasis for these types of property has more to do with investigating current planning and zoning policies than the property itself.
Reading the Tea Leaves. The middle way, where sellers are forthcoming generally, but there may be some items that need clarifying, is usually what most people will do. There’s a certain amount of context that we’re missing or that we’ll have to ask further about. But usually people try to do the right thing when they answer these questions. The variability comes from people being people and having different sensitivities and different subjective standards. Here’s where we try to look at other resources and information sources to figure out a given question or issue.
Getting the 411 About the Property You Like: The Specific Items 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 as well as the multi-unit pre-sale process the City requires.
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.
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.
Specialty Reports. When circumstances warrant there will be special reports for things like mold after a water leak for example; a geotechnical report (for hillside properties); sewer later report (for older properties, or as required in certain areas of the Bay Area);
Estimates and Plans. Ranging from fully entitled, job-card ready remodeling plans for a renovation, demolition, and replacement to sketches, to idea drawings there are lots of options when it comes to a property with ‘entitled’ plans. This is when we have to drill down to see if the plans have been approved by the Planning Department and the Department of Building and Inspection as the differences could mean months, if not years, of difference.
AH, BUT HOW DO YOU DO DISCLOSURES?
— East bay Buyer’s Agent
The California Legislature requires sellers to provide buyers a huge amount of consumer protection in the form of disclosure documents meant to inform a buyer. The sheer volume and denseness of the documents may have the exact opposite effect.
We are required to provide would-be buyers a long list of standardized disclosure documents that can add up to hundreds of pages of paper. It’s rare that a listing agent views piles of papers as an opportunity but we see them as just that. Here’s how most fall short:
Hide the Ball. Disclosure documents usually consists of hundreds of pages of boilerplate notices, advisories and blurry reports that leave a buyer with that glazed-over look. Many buyers may fail to appreciate any information particular to a property that may be buried in the disclosures. Most agents and sellers think their disclosure obligations are satisfied because they gave a buyer this stack of papers (e.g., constructive notice). While that may be true it’s riskier on a practical level as a buyer who feels as if something has been hidden from them will become a less trusting buyer making any transaction more difficult.
Reduced Readability, Increased Liability. Most property disclosure documents are simply tossed into a scanner without any regard for legibility.
Pro-forma Tedium. Many sellers and their agents view disclosure documents as a chore (and yes, they are) and try to breeze through completing them as fast as possible. Any while many forms are inapplicable there some forms that really do matter and really do carry a tremendous amount of weight. But which ones?
Our approach to disclosures is focused and clear—thus offering you more protection after the sale
We view disclosure documents as another opportunity to engage buyers and to inform them simultaneously. Our documents are converted to ‘pdf’ format not scanned when possible.
Therefore, our documents are legible. We prepare and include a well-crafted, custom informative Q+A cover page that seeks to address the most common of buyer questions truthfully and objectively. In the past, we’ve had buyer agents saying our disclosures almost scared off their clients. We view that as a win because we want to go with the buyer who’s serious and who is buying our listing with their eyes wide open rather than going into contract with us blindly as that shortsighted buyer’s escrow is more likely to fall apart.
Good news: we regularly work either as buyer or seller agents and can, therefore, bring you the necessary perspective that proves pretty helpful when it comes to buyer diligence efforts and seller compliance with the applicable disclosure standards.
Questions as to what’s important and what’s irrelevant are based on an objective standard that is inherently subjective: information that would have the impact of altering a reasonable buyer’s decision to make an offer for a property in the first place and, if so, a buyer’s offer price. This information falls under the definition of a “material fact.” Sellers are obliged by the Legislature to disclose material facts to would-be buyers, who are also entitled to conduct their own investigation of the property they’re buying.
As you’d guess, what’s material and what’s immaterial will vary on whomever is doing the considering as one buyer’s hoppy horse/pet issue may be a complete nothing burger to another buyer. Finding the right balance of disclosure without overdoing and being able to pick up on the most important bits of information is something we’ve been complimented on time and time again and is something that plays on our strengths and background as being a reporter, lawyer, EMT and ICU nurse.
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.