Chapter 6 - Property Disclosures
Chapter 6 Overview and Learning Objectives
Exam Significance: This section on Property Disclosures constitutes approximately of the Salesperson Exam, which translates to roughly questions.
Core Learning Objectives: * Recall specific facts and professional responsibilities concerning property condition disclosures. * Identify physical conditions that serve as evidence of structural issues, operating system failures, or general property problems. * Recognize environmental hazards that can impact a property's safety and value. * Distinguish the basic rules surrounding stigmatized properties, including regulations on HIV/AIDS disclosure and Megan’s Law. * Recall the Property Condition Disclosure Law, the use of property disclosure statements, and the professional duty to disclose material facts.
Property Condition and the Role of Inspections
Investment Importance: A home purchase is typically the largest investment a buyer client will make. Because property condition significantly impacts overall value, recommending home inspections is a best practice even for new construction homes.
Limitations of Seller Disclosures: Seller disclosures may not always be accurate; sellers might be unaware of specific defects or may fail to report them correctly.
Home Inspections: These are professional evaluations used to determine the true condition of a property. Inspectors identify: * Defects the buyer should be aware of. * Safety or health hazards.
The Inspection Contingency: This is a critical contractual tool used to protect the buyer’s earnest money deposit.
Negotiation Power: Property condition data is a tool for price negotiation. * Properties in "great condition" command higher values. * Homes requiring major renovation typically sell for significantly less than comparable homes in good condition. * House Flippers: These investors capitalize on this value gap by buying properties at the lowest possible price to renovate and sell for a profit.
Common Areas for Additional Inspection and Investigation
Major Property Systems: These require careful inspection due to high replacement/repair costs and potential dangers. They include: * HVAC (Heating, Ventilation, and Air Conditioning). * Electrical systems. * Plumbing systems. * Major appliances.
Structural Issues: Inspectors look for signs of instability or damage, such as: * Roof condition. * Cracks in the foundation or basement walls. * Water damage or storm damage. * Faulty or leaking windows and doors. * The presence of moisture in basements or crawl spaces.
Pest Infestations: Looking specifically for "wood-eating" or "wood-destroying" pests, including: * Termites. * Carpenter ants. * Beetles.
Interior Environmental Hazards: Common hazards requiring testing include Lead, Radon, Asbestos, and Mold.
Property Surveys: Easements and Encroachments
On-Site Surveys: These help determine the legal physical attributes of the land, including lot size and property line boundaries.
Easements: Defined as non-possessory rights acquired by one party to use another party's land for a specific, special use. These should be listed in the property's deed, title history, or subdivision maps.
Encroachments: Defined as structures or objects (e.g., a fence or shed) built on another person's property without legal permission.
Impact on Value: Both easements and encroachments are critical for buyers to understand because they can affect the property's enjoyment, use, and total value.
Material Facts and Latent Defects
Material Facts: Anything that would affect the value of a property or influence a buyer’s decision regarding whether to buy or how much to pay. Known material facts must always be disclosed. Examples include: * Square footage of the home. * Leaky roofs or flooding in the basement. * Cracked foundations. * Age of property components and systems. * Problems with HVAC, plumbing, or electrical systems. * Defective components involved in class-action lawsuits. * Environmental hazards (mold, lead, asbestos, etc.). * Information on future developments that might impact the property. * Presence of termites or wood-destroying insects. * Easements, encroachments, or boundary disputes.
Latent Defects: These are hidden property conditions that are unlikely to be discovered through a general review or standard inspection. Disclosure requirements for latent defects vary by state law.
Property Condition Disclosure Laws and State Models
Disclosure States: Require sellers and real estate agents to disclose all known material facts and latent defects.
Disclaimer States (Caveat Emptor): Subscribe to a "buyer beware" doctrine. In these states, sellers make no representations about the property condition, and the burden of due diligence falls entirely on the buyer.
Option States: Sellers may choose to either answer the questions on a disclosure form or "disclaim" and make no representations. Sellers may not be required to volunteer info but may be compelled to provide it if asked specifically.
Agent Responsibilities: Real estate agents should NOT complete disclosure forms for sellers or advise them on how to fill them out, other than reminding them to stay honest and meet legal requirements. Disclosures should ideally be made before a contractual agreement is signed.
The MAAP Standard for Agent Disclosure
- Agents are required to disclose adverse material facts based on the MAAP standard: * M - Material: Information that affects a buyer's decision-making process. * A - Adverse: Negative information that might lower the property's value. * A - Actual Knowledge: Information that is specifically known about the property. * P - Physical: Physical conditions of the property that could be plainly noticed.
Home Inspection Reports and Disclosure Nuances
Ownership: Home inspection reports are the legal property of the buyer who paid for them. They can only be released to the listing agent or seller with the buyer's explicit permission.
Lability Prevention: Sellers and listing agents often refuse to review a buyer's inspection report (especially if the contract is terminated) because reviewing it creates "actual knowledge" of defects, making them liable to disclose those findings to future prospective buyers.
No Prior Obligation: Sellers are typically not obligated to share a previous inspection report with new prospective buyers.
Permits, Zoning, and Surrounding Areas
Permit Records: Buyers should obtain a complete permit record to ensure all additions or alterations were properly permitted and inspected. Unpermitted work may require disassembly for inspection or restoration to the original state.
Zoning: Buyers should verify zoning classifications and check for anticipated changes in the property or neighboring area.
External Factors: Potential buyers should be aware of: * Future developments (new roadways, shopping centers). * Noise pollution from nearby bridges, overpasses, train tracks, or airports. Airports may require disclosure if the property is in a current or planned flight path. * Brownfields: Defined as former industrial, factory, manufacturing, or storage sites suspected of containing environmentally hazardous waste from previous usage.
Stigmatized Properties and Megan's Law
Stigmatized Properties: Locations involving a homicide, suicide, crime, or paranormal activity (hauntings). Most states do not consider these disclosable issues.
HIV/AIDS Disclosure: Disclosing that a resident had HIV or AIDS is a direct violation of Fair Housing laws. Real estate agents must never disclose this information.
Megan’s Law (Public Law ): A federal law requiring the release of relevant information to protect the public from sexually violent offenders. * Agents/Sellers are NOT required to research or disclose nearby sex offenders. * Agents should direct buyer clients to public websites or resources to do their own research.
Environmental Hazards: Detailed Definitions
Insurance and CLUE: Insurance companies use the Comprehensive Loss Underwriting Exchange (CLUE) database to determine property insurability. High-hazard areas (flood zones, wetlands, historical districts) are more expensive to insure.
Mold: Growth is promoted by excessive moisture and a lack of air circulation.
Radon: Occurs naturally in the environment and can be found in soil and well water.
Asbestos: A fibrous material used in home materials prior to for fire suppression. It becomes dangerous when it is "friable" (easily crumbled), as inhaled particles damage the lungs. Professional handling is mandatory.
Lead-Based Paint: Found in paint, plumbing, dust, soil, and water. It is most dangerous to children, causing behavioral problems, learning disabilities, seizures, or death. * EPA Requirements: For properties built before , sellers must provide a lead-based paint disclosure and the EPA pamphlet "Protect Your Family." * Testing Period: Buyers have a -day window to conduct a lead inspection or risk assessment after receiving the disclosure.