Commentary by Lisa Davies
CALIFORNIA REAL ESTATE What Every REALTOR Should Know About Natural Hazard Disclosure
For most people, buying a home can be a whirlwind of unexpected emotions, a lot of "hurry-up-and-wait", and a mountain of paperwork. While every piece of paper requiring your client(s) to sign on the line is important, there are only two documents under the California Real Estate Civil Code that gives the buyer the right to walk away from the property and take their deposit with them, they are: (1) The Real Estate Transfer Disclosure Statement (TDS), and (2) The Natural Hazard Disclosure Statement (NHD report). As a trusted advisor to your clients, you can help them understand the value of timely receiving / providing and relying on a complete and accurate natural hazard disclosure statement that names your brokerage as an additional insured on the NHDS preparer's policy, and the dangers of accepting a substandard NHDS into your transaction in this unregulated industry.
I met a Los Angeles real estate broker who told me about an experience she had when she was first starting her career as an agent. She ("Susan") told me that she was very new to the industry and was giddy with excitement when she successfully secured a $1.2 Million listing. After the home buyer removed his contingencies, the buyer had a change of heart and was looking to back out of the deal. Susan, feeling rather proud of herself, politely reminded the home buyer's agent that contingencies had been removed and that the sale would go on. Much to Susan's chagrin, the buyer's agent requested that Susan and the seller provide buyer with the NHDS before the close of escrow as required by law. After the NHDS was delivered, the buyer timely provided his written notice informing Susan and her furious seller that he was exercising his right to terminate the contract under California Civil Code 1103. Susan lost the listing and learned a valuable lesson the hard way - get the NHD report into the buyer's hands a quickly as possible. But which natural hazard disclosure statement should you choose?
At What Cost is a Cheap NHD report?
Written by Mailana Mavromatis
The NHDS, pursuant to California Civil Code 1103 et seq., is a legally required disclosure form in most California residential real estate transactions, which the seller and the seller's agents are obligated to provide to the buyer. It gives the buyer information about items that could negatively affect the value and desirability of his/her property and in some cases could seriously affect the insurability of the property. The NHDS can be prepared by a third party NHD report provider, and the liability will shift to them so long as you first exercise good faith in your selection of the third party NHD report provider under California Civil Code Sections 1103.4 and 1103.7. But since the NHDS industry is unregulated, and since the state of that non-regulation does not require natural hazard zone report companies to carry errors & omissions insurance to protect them, your client, or you, how can you choose the best? Here are a few things to consider in choosing a NHD report provider:
(1) Has the third party NHD statement provider named you/your brokerage as an additional insured on their errors and omissions policy, and have they given you a copy of the insurance certificates for your files?
(2) Has the third party natural hazard disclosure company been sued repeatedly for the content (or lack thereof) in their disclosure statement forms?
(3) Have you compared the differences in natural hazard disclosure companies?
(4) Does the third party disclosure source provider include "advisories" instead of site-specific disclosures?
(5) Have you compared the Terms and Conditions sections?
(6) Have they changed ownership and failed to assume liability for their old reports?
Securing the answers to these questions is part of your due diligence in representing your clients. Knowing the differences in NHD report providers is security for yourself and your clients.
In a recent nondisclosure case, Elaine J. Bandalin vs. Ziba Sohaei, et al., Superior Court of California, County of Marin, CIV073157, where the buyer of a $1,850,000 property sued the seller, the listing agent, and the listing brokerage for failing to disclose the property was in locally mapped high liquefaction and bay mud, among other nondisclosures, the agents that were sued in this case learned the hard way that there are differences in NHD reports. To settle this case, the seller paid $259,803.67, the listing agent and listing brokerage also paid money. As far as we know, the NHD report provider and the affiliated title company paid nothing.
In another case, Thomas Massari et al. vs. Kirk Swirczyniski, and Related Cross-Complaints, Superior Court of California, County of Los Angeles, MC 023500, buyer of a $240,000 property sued the listing agent for money damages because the Mello-Roos amount listed on the title owned NHD report was wrong by over $1,600 and doesn't end until 2045. Not receiving satisfaction from the real estate NHD Company Disclosure Source, the listing agent's only choice was to file a Cross-Complaint against the NHD statement provider, and the natural hazard disclosure report provider's reply was full attack on the Realtor with 29 affirmative defenses. The brokerage reported legal expenses of $14,000 out-of-pocket because the NHD report company did not stand by its report.
The NHD report is critically important, and all NHD reports are different. Choosing the wrong NHD report provider in this unregulated industry could cost you and be doing your client and yourself more harm than good. Don't learn the differences between NHD report providers through high priced litigation. The liability under the Civil Code belongs to you and letting someone else choose your report (like an escrow officer), or claiming ignorance of the differences in the reports does not shield you from liability. Schedule an appointment with upper management of each NHD report provider and get the facts in writing. Know the differences in “real” California real estate NHD report providers. Click here to order your Property I.D. Corporation NHD disclosure form.