California Real Estate Practice

Chapter 4
Disclosures

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 4.1 Understanding Mandated Disclosures
Buyer Beware or Caveat emptor has evolved over the years to:
Venditor emptor or Seller Beware! Disclose!, Disclose!, Disclose!
Full disclosure disclosing to a buyer fully and accurately all known
material facts that may influence the decision making process.
No fraud if decision maker has full and accurate information.
You can sell a toxic waste dump if the buyer has complete
information.
Protects the principals
buyers
sellers
tenants
landlords
brokers
Satisfies licensees and principals duties under the law.

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Disclose in writing
Reading a disclosure and understanding it are
two different things.
Licensee must assure that recipient of
disclosure acknowledges receipt.
Note any discussions for clarification in
contemporaneous log*.
Any lack of understanding should prompt
professional referral.

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Mandate
from the Latin manus, or mandamus
judicial or legal command
order given by a court or other
authoritative body
disclosures that are determined by judicial
precedent and are requirements of the
contract
Mandated disclosures are necessary to
protect parties concerned.

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C.A.R. forms
updated twice a year where needed.
Use only the correct and current form.
Licensees not excused for using the wrong
form.
C.A.R. will assist in the defense of any claim
alleging any printed provision of a form,
current at the time, does not meet the
statutory requirement.
C.A.R. user agreement does not apply to
outdated forms.
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Licensee obligation to disclose
goes beyond mandated disclosures
Duty to fully disclose and guide her
principal concerning issues of what
must be disclosed.
When in doubt, see your broker.

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4.2 Obligations of a fiduciary
Duty owed by an broker to a principal:
contract creates agent/principal relationship.
licensee owes same duty to brokers principal since she is
an agent of the broker.
interests of the client come ahead of those of the fiduciary.
Duties owed a customer somewhat different.
customer is an unrepresented third party.
no fiduciary obligation were contractual relationship does
not exist.
A duty of honesty, fair dealing, and full disclosure are
required.

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Line separating client from customer can be fuzzy.

Written contracts required for all real estate

contracts to ensure enforceability of any
compensation agreement. (Statute of Frauds)
An oral agreement can also create a contract
and a fiduciary relationship without a written
agreement.
Action of the parties can create an ostensible
or undisclosed dual agency without a written
agreement.

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A dual agency caution for licensee

A licensee working in a fully disclosed dual

agency capacity is a fiduciary to both
parties.
May not offer advice or counsel that favors
one party over the other.
No discussion with seller of offering price
or buyers terms.
No discussion with buyer of offered price
or sellers terms.
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Duty to an unrepresented principal
may not be fiduciary but still
requires:
honesty
care
fair dealing
due diligence
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4.3 Agency Disclosure
Agency is a relationship created when one person (the
principal) directs another (the agent) to act on her behalf in
dealing with another (third party).
agent is a person acting under provisions of title 9 (commencing
with 2295) in a real property transaction, and includes a person
who is licensed as a real estate broker under Chapter 3
(commencing with 10130) of Part 1 of Division 4 of the Business
and Professions Code (B&PC), under whose license a listing is
executed or an offer to purchase is obtained.
Employing broker and agent are used synonymously.
Real estate salespersons commonly call themselves agents but
for the purpose of compensation there is only one agent in each
real estate company whether a sole proprietorship, limited liability
company (LLC), or corporation, and that is the designated or
employing broker.

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 Agency
Franchises that are independently owned and operated
have separate agent owner/brokers.
the designated broker of a firm is the agent of the client.
the associate licensee is the agent of the broker.
associate licensees interact with the brokers clients on the brokers
behalf.
Model MLS Rules adopted by most California Multiple Listing Systems allow
only three types of agency:
sellers agent
buyers agent
agent representing both buyer and seller (dual agent)
Subagent is not a category and is specifically excluded as an option.
CCC 2079.13(p)
Requires a three step process: DISCLOSE ELECT CONFIRM

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Agency Process Step one, Disclose
Disclose
Agency Disclosure form (AD) provided to principal as soon as
practicable but prior to entering into a listing agreement or purchase
contract.
Client signature is an acknowledgement of receipt of a copy. (not an
election)
In addition, the CAR contract calls for the PRBS form (Possibility of
Representation of more than one Buyer and Seller) per para. 2C of
the RPA (Residential Purchase Contract).
Also, the buyers licensee must provide the AD for to the seller (even
though the listing licensee has already done this) before presenting
the contract to the seller for consideration. There are at least two
reasons for this seeming redundancy, one is the law says you have
to do it this way, and the second is the seller may not always be
represented by a real estate broker/licensee.

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Agency process Step two Elect
Obviously, the actual election of the type of agency can
occur only after the buyer has found a property to
purchase. A seller cannot know whether single or dual
agency would be appropriate until she knows who will
represent the buyer.
If the buyers broker is also the listing broker it must be a
dual agency.
If the buyer is represented by a cooperating licensee (an
associate licensee employed by another broker), the type
of agency would be an exclusive representation by each
broker/licensee. You wont know this until or unless the
buyers broker is known.

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 Agency process Step three - Confirm
Confirmation of agency para. 2B of the Purchase
agreement
If dual agency is elected, licensee will need the
written informed consent of the parties.
If either buyer or seller are not represented by a
licensee either a Buyer Non-Agency or Seller Non-
Agency Agreement may be appropriate.
If single agency has been elected. That is, each
party is represented by separate brokers,
confirmation in paragraph 2B of the RPA should so
indicate; or as a separate document: CAR form AC,
Confirmation of Agency.
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Agency timing of disclosure
When to disclose
Listing licensee who does not represent the buyer
as soon as practicable and/or
prior to entering into a listing agreement or contract.
Listing licensee who represents both Buyer and Seller (Dual Agency)
If separate licensees of the same firm (its still dual agency)
represent each party, listing licensee must provide the AD to the
seller and buyer licensee must provide the AD to the buyer as well
as the PRBS form.
no separate disclosure by the buyers licensee to the seller before
presenting the offer is required.
Selling licensee who represents buyer only
to the buyer as soon as practicable and/or
prior to execution of the buyers offer to purchase (RPA-CA)
selling licensee provides buyer with both AD and PRBS forms and
receives a signed acknowledgement.
to the seller an AD-2 form (the same one signed by the buyer) prior
to presenting the offer to purchase.

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 4.4 Death or AIDS Disclosure
Death on private property need not be disclosed.
Murder or suicide should be disclosed for a minimum of three
years.
No licensee liability for non-disclosure of a death more than
three years prior to the date of the offer to purchase, lease, or
rent.
No licensee liability for failure to disclose that a former resident
ever had or died of AIDS.
If a buyer asks you directly if a person ever died on the property
of AIDS, the Dept. of Housing and Urban Development (HUD)
does not provide a correct response but advises only that the
licensee not respond. NAR, on the other hand, suggests that
such information is not material to the transaction.

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Stigmatized properties
Properties that may be deemed uninhabitable or undesirable for
other than physical or environmental reasons.
Possible reasons for a stigmatized property include:
murder
suicide
molestation
satanic rituals
Feng shui
haunted
unlucky house
Willful non disclosure of such issues are judicially unclear.
If there is a question, apply the Golden Rule and then ask your
broker and attorney.
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Licensed care facilities
California attorney general opinion 95-
907 makes it clear that a real estate
licensee need not disclose the location
of a licensed care facility that serves six
or fewer people. A larger facility close to
a one to four residential unit property
that was being sold would probably
require disclosure.

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4.5 Real Estate Transfer Disclosure Statement (TDS)
In the transfer of residential one to four (including residential stock co-
ops for four or fewer units) seller is obligated to provide buyers a Real
Estate Transfer Disclosure statement (TDS).
If one licensee involved, she must deliver it to buyer.
If two licensees are involved, selling licensee who obtained the offer
delivers to buyer.
If no licensees involved, seller is responsible for delivery to the buyer.
If seller has not completed the disclosure statement, buyer must be
notified in writing that she has the right to receive such a statement.
TDS must be fully executed and delivered as soon as practicable;
contract calls for delivery in 7 days (or other agreed period)
CAR contract calls for delivery of the TDS with the optional inclusion of
CAR form AVID Agents Visual Inspection Disclosure. See fig. 4.3

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Easton v. Strassburger case
Involved the failure of a real estate licensee to conduct a reasonable
visual inspection and investigation of a property and report visible
defects to the buyer.
indications of land slippage on a slopped property when sale took
place.
not long after buyer moved in, the ground started sliding down
the hill.
Courts found that licensees had been negligent in their duty to
investigate and fully disclose defects in writing.
This case had the effect of imposing a greater duty of care on
licensees to be responsible, not only for what they know but for
what they should have known by conducting a reasonably
competent visual inspection.
The mandated Transfer Disclosure Statement and licensee visual
inspection requirement came as a direct result of this case.

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 The TDS
On page three of the TDS there are three boxes that
may be checked by the licensee and they are:
See attached Agent Visual Inspection
Disclosure (AVID)
Agent notes no items for disclosure.
Agent notes the following items:
The authors can think of no circumstances where a
licensee would be justified in checking the second box
indicating no items for disclosure. A check here
means you didnt look!
Highly recommend the use of the AVID in all cases.
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Visual Inspection things to look for:
Any condition that may signal that a problem may exist.
The licensees job is not to define the problem but to
recognize those conditions which should be defined by a
professional. Find Red Flags!
Though you may have been a building contractor in a former
life, you are highly advised to avoid sounding like one
unless you are willing to be held to the standard of care of a
currently licensed professional in the field. Your brokers
Errors and Omissions insurance will probably not cover you
if you are wrong.
Your visual inspection should be to determine if further
inspection by a professional should be recommended.
Look for: insect infestation, water damage, material
deterioration, any potential for structural failure.

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Seller Disclosure Exemptions
Transfers pursuant to a court order.
Transfers by a fiduciary representing a trust, guardianship,
or conservatorship.
Transfers between spouses or to a direct blood relative by
the state controller.
Transfers to or from any government entity, including
exchanges requiring a public report (new construction).
Transfers by foreclosure.
Transfers from one co-owner to one or more co-owners.
The licensee is not exempt and must still do her part of the
TDS including the AVID.

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Insect Infestation
termites recommend further
inspection by a professional
ants recommend further
inspection by a professional
beetles recommend further
inspection by a professional

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Water damage
May be caused by:
faulty plumbing
condensation
seepage
drainage
high ground water level

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Indicators of water damage are:
mold
warped flooring
water stains on ceiling
rotted wood
cracked, chipped, loose tile
roof defects
peeling or flaking paint
Recommend further inspection by a Professional

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Material Deterioration
Decaying or warped wood such as
decks, porches, wood trim.
Erosion or cracking of concrete or
masonry.
Cracking or warping of garage door
trim.
Recommend further inspection by a
Professional
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Structural failure
can be caused by any of the above problems.
bulging of floors, sagging roof ridgeline.
uneven or sloping floors.
cracks in beams, and walls.
instability in any load-bearing member.
Call for further inspection.

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Recognizing Red Flags
One of the most important things a licensee does.
In any case where you recommend further
inspection and buyer refuses to do so, complete a
contract addendum stating your recommendation
and that buyers have chosen not to follow your
advice and have buyer sign it for the file.
Have seller pay for a Home Inspection before listing
the property. Forewarned is forearmed.
Use or recommend a Home Warranty.

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4.7 Seller Financing defined
It is seller financing when:
buyer allowed to defer payment of purchase
price
written agreement provides for finance charge
or payments in more than 4 installments
includes: notes, trust deeds, mortgages, land
contracts, installment contracts, leases with
options to purchase, security documents, or any
other name that might be given a financing
agreement.
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Seller financing disclosure
The person who must disclose seller financing to both buyer and
seller is the arranger of credit.
The licensee who obtained the purchase contract is the arranger of
credit.
It is important for the buyers licensee to be aware that they are
fully responsible for the written disclosure of seller financing unless
another person has been designated in writing.
Disclosure must be made prior to the execution of any note.
Any notes signed prior to disclosure must be contingent on buyers
written approval of the disclosure to be valid.
The arranger, buyer, and seller all must sign the disclosure
statements with copies to both buyer and seller. Arranger retains
for 3 years.
For a complete list of the content of the SFA see figure 4.4
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4.8 Environment Hazards Disclosure
Sellers must disclose known environmental hazards
Because sellers may not be aware of known hazards,
licensee should provide a copy of The Combined
Hazards booklet that includes:
Residential Environmental Hazards: A guide for
Homeowners, Homebuyers, Landlords and Tenants
The California Home Energy Rating System (HERS)
The Homeowners Guide to Earthquake Safety
Protect Your Family from Lead in Your Home
Licensee to obtain a signed receipt acknowledging
receipt of this booklet.

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The Combined Hazards Book
Disclosures cover the following areas:
Asbestos
Formaldehyde
Hazardous wastes
Household hazardous wastes
Lead
Mold
Radon
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Military Ordnance Location
Part of the TDS disclosure law.
If property is within one mile of a former
military ordnance location, training
ground, or ammunition storage area
that may contain or have contained
explosives, transferor must disclose
that these sites may contain potentially
explosive ammunition.
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4.9 Natural Hazards Disclosure Earthquake safety
The Combined Hazards Book contains the earthquake
safety disclosure and nine questions for seller disclosure.
If these questions (p. 136-37) cannot be answered by seller
from a cursory visual inspection seller should seek service
of a licensed architect or engineer.
If even a part of the answer to any question is no the
entire answer is no.
Any work done to correct any deficiency must be disclosed.
To fulfill the legal disclosure requirements a broker/licensee
must provide both the disclosure statement and The
Combined Hazards Book to the buyer as well as a Natural
Hazards Disclosure Statement. see figure 4.7

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 Natural Hazards professional reports
Are available from various providers at a nominal
cost to seller and include:
disclosures required for residential
environmental hazards
earthquake safety
the six types of natural hazards requiring
disclosure.
any Special Study Zones required by Alquist-
Priolo Special Study Zone Act.
It does not eliminate the need for the Natural
Hazards Disclosure.
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4.10 Common Interest Subdivisions
Common Interest Development (CID) Initial sale
requires:
Preliminary public report
Final public report
A developer my take reservations to purchase
agreements with potential buyers prior to issuance
of the Final Report.
A developer may not enter into a binding purchase
contract before the final public report has been
issued.

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4.12 Right of Rescission
Failure to disclose rights of rescission
automatically extends those rights.
Mello-Roos disclosure
Time share
Truth-in-Lending act (TILA)
Undivided Interest Subdivisions
Interstate Land Sales Full Disclosure Act
Home Equity Sales

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Other disclosures
Megans law
Water Heater Bracing
Home Energy Ratings (HERS)
Smoke Detector Notice
Carbon Monoxide
Home Inspection Notice
For Your Protection: Get A Home
Inspection
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4.13 C.A.R. Disclosure Chart
C.A.R. prepares a chart for its
members:
California Real Estate Law
Disclosure chart
http://www.car.org/legal/disclosu
re-charts/sakes-disclosure-chart/
see text p.145 bottom of page.
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