Does “as-is,” mean “no disclosures”?

Being up front with vital information has conquered the used car market, and was done solely for marketing reasons. Yet, real estate owned (REO) sales, trustee’s sales, short sales, and the agents that work those deals, have made a run in the opposite direction in spite of anti-fraud legislation.

The problem

These properties are sold “as is,” with some exceptions in the short sale market. Agents continue to perpetuate the misconception that “as is” means the property is sold in its present undisclosed condition. To many agents, “as is” has become synonymous with “no disclosure required.” If they aren’t guilty of completely withholding pertinent information, listing agents nearly always provide the minimum disclosures only AFTER the buyer has submitted an offer and negotiated the purchase price.

Speculators have greatly contributed to this environment where proper concern for disclosures is essentially eliminated. They are determined to buy any property on the market, no matter its condition. Most operate under the delusion that if they simply own property during the next couple of years, they will be handsomely rewarded by a return of boom-time prices and juicy profits.

The rules

Brokers who list one-to-four unit residential property have a duty, separate from the seller’s, to all prospective buyers to timely disclose any physical aspects of a property:

  • observable by a broker on a reasonable inspection of the property; and
  • affecting the property’s market value. [Calif. Civil Code §§2079 et seq, 1102(a), 1102.3]

The only proper method of making this listing agent disclosure is with a Transfer Disclosure Statement (TDS) form.  Further, with few exceptions, sellers of a one-to-four unit residential property likewise must complete and deliver a TDS along with all property-related disclosures to a prospective buyer as soon as practicable – meaning as soon as possible – upon the commencement of negotiations. That means before the seller enters into a binding contract with a buyer. [Calif. Civil Code §§2079 et seq, 1102(a), 1102.3]

Despite legislation requiring disclosures be provided to the buyer as soon as possible, the purchase agreement published by the California Association of Realtors (CAR) fails to reference the underlying law requiring disclosure.  Furthermore, provisions (14)(A) and (14)(B) of CAR’s purchase agreement arbitrarily set time periods of seven days for the delayed delivery of these required reports and disclosures. Only then does the buyer discover if any intentional misrepresentation or deceit has been involved. This lack in the form surely contributes to the general failure of agents to timely disclose.

Legislation clearly prescribes the time for proper delivery of property disclosures. Although some exceptions exist, in most cases “timely” means before the seller’s acceptance. If disclosure is delayed beyond acceptance, provisions (14)(A) and (14)(B) merely satisfy the statutorily mandated additional remedy, provided by a contingency, giving the buyer the right to cancel in addition to all remedies for fraud that already exist.

Editor’s note —Brokers and agents are the gatekeepers of the real estate industry. By definition and legislation, they must possess professional integrity. Complying with disclosure requirements is part of the honest dealing they commit to as licensees. Real estate law does not allow a “buyer beware” treatment. Yet, CAR’s form provides exclusively for delivery of the mandatory disclosures to the buyer after the purchase offer has been accepted, while in escrow, rather than on the commencement of negotiations as mandated.

As a broker, your best practice is always to deliver property disclosures to buyers prior to their setting a property’s value in the process of making an offer. Disclosures impact the value of the property, whether up or down. If the buyer is not able to review and consider the contents of these mandated disclosures before submitting an offer, the buyer is forced to blindly submit the offer.

Here again, speculators acquiring property often disregard conditions beyond those visible on a drive-by of the property or from public records. They are in open combat to get properties, and get them now. For them, determining the property’s condition first is too tedious and inhibits their acquisitions since other speculators are moving in with the same aggressive attitude. All this will end, and probably end in 2013. But the mindset of listing agents has been perverted by many buyers’ disregard for disclosures in today’s market.

The “as-is” provision

“As-is” does not mean “no disclosure required,” regardless of the type of transaction. Since disclosures by the listing broker/agent are mandated, “as-is” treatment is outlawed. Any attempt to have the buyer waive delivery of the TDS, typically accomplished by use of an “as-is” provision in the purchase agreement, is unenforceable. You must never use the words “as is.” They imply a failure to disclose something known to the seller or the listing agent at the time the buyer makes their offer. [CC §1102.1(a)]

Any conditions known to the seller or the listing broker which negatively affect the value and desirability of the property must be disclosed. Items to be disclosed are not limited to those preprinted on the TDS. [CC §1102.8]

If the seller, you, or any other agent involved in the transaction fails to deliver the seller’s TDS (or the listing agent’s TDS if the seller is exempt) to the buyer, the sale of a property remains valid. However, the seller and the listing broker will be liable to the buyer for the amount of actual monetary losses caused by an undisclosed defect known to them and not disclosed or discovered until after the seller accepts the buyer’s offer. [CC §1102.13]

Transfers exempt from providing a TDS prepared by the seller include:

  • foreclosure sales;
  • court ordered transfers;
  • transfers of a decedent’s estate, a guardianship, conservatorship, or trust except where the trustee is a former owner of the property;
  • transfers resulting from failure to pay taxes; and
  • transfers to or from any governmental entity. [CC §§ 1102, 1102.2, 1102.3]

Agent’s required due diligence

For one-to-four unit residential property transactions, whether or not the transfer is exempt from disclosure laws, the listing broker or his agent must conduct a reasonably competent and diligent visual inspection of the property. This includes properties involved in REO transactions where the seller may be exempt from using a TDS to disclose what they know. [CC §2079 et. seq.]

When the listing agent conducts their visual inspection, they do not have to inspect:

  • areas not reasonably accessible;
  • areas off the site of the property;
  • public records or permits concerning the title or use of the property; or
  • the common area if the property is in a common interest development (CID), provided you or the seller deliver to the buyer all documentation pertaining to the CID (i.e. By-Laws, CC&Rs, Rules & Regs., etc). [CC§1368, 2079.3]

The seller is never excused from disclosing known material facts, nor are any of the agents involved in the transaction excused from performing their due diligence and visual inspections. If you deliver property disclosures to the buyer in a timely manner, the buyer has the opportunity to evaluate the property’s market value based on full disclosure. For every transaction you are involved in, you must remind yourself that if any aspect or fact about the property has any influence on the buyer’s decision to purchase the property, or the price they are willing to pay for the property, it must be disclosed – as soon as possible – once negotiations toward making an offer commence.

Credit given to first tuesday Realty Publications, Inc. as the author. Reference to article

About The Author

Fernando Nunez is first tuesday’s in-house Broker Consultant. Fernando has over 20 years’ experience in California real estate, including the single family residence sales, mortgage loan origination, investment properties and commercial leasing.