Property Conditions and Disclosures - Part 1 - Chapters 21-23

Question 1

Appreciate the due diligence an exclusively employed broker owes a seller or buyer

Answer 1

Employment in a client relationship imposes special agency (fiduciary) duties on the broker and the agent to use due diligence in meeting the client’s objectives. The promise to use due diligence on behalf of the client is the consideration a broker and their agents owe their client when rendering services in exchange for employment as the exclusive representative of the client.

On entering into a listing employment, a physical file is set up to house information and document all the activity which arises within the broker’s office due to the existence of the employment. All records of an agent’s activities on behalf of a client during the listing period are retained by the agent’s broker for 3 years.

In a real estate transaction, brokers and their agents first ascertain who among the principles involved is their client. If not a client, the person is a customer with whom the broker might be directly negotiating or who is represented by another broker. If the person is a customer and not a client, the duty owed this individual is a general duty to deal fairly and honestly.

Question 2

Implement a best effort obligation to a client under an open listing employment

Answer 2

In contrast to an exclusive listing, a broker entering into an open listing is not committed to render any services at all. The broker and agent only have a best efforts obligation to act on the employment.

Question 3

Annual Property Operating Data Sheet (APOD)

Answer 3

The ANNUAL PROPERTY OPERATING DATA SHEET (APOD) is a worksheet used when gathering income and expenses on the operation of an income-producing property, to analyze its suitability for investment. (IN-COMES A POD)

Question 4

best effort obligation

Answer 4

A BEST-EFFORT OBLIGATION or obligations under an OPEN LISTING requiring agents to take reasonable steps to achieve the objective of the client but requiring no affirmative action until a match is located at which point due diligence is required.

Question 5

due diligence

Answer 5

DUE DILIGENCE is the concerted and continuing efforts taken by an agent to meet the objectives of their client.

Question 6

marketing package

Answer 6

A MARKETING PACKAGE is a property information package handed to prospective buyers containing all the disclosures compiled by the seller’s agent on the listed property.

Question 7

material fact

Answer 7

A MATERIAL FACT is information about a listed property which may affect the property’s value or alter a client’s decision to purchase or sell the property and the needs to be disclosed.

Question 8

natural hazard disclosure (NHD)

Answer 8

The NATURAL HAZARD DISCLOSURE (NHD) is a report provided by a local agency or NHD vendor and used by sellers and sellers agents to disclose natural hazards which exists on a property held out for sale.

Question 9

property profile

Answer 9

A PROPERTY PROFILE is a report from a title company providing information about a property’s ownership, encumbrances, use restrictions and comparable sales data.

Question 10

seller’s net sheet

Answer 10

A SELLER’S NET SHEET is a document prepared by a seller’s agent to disclose the financial consequences of the sale when setting the listing price and on acceptance of a buyer’s price in a purchase offer.

Question 11

Distinguish an agent’s specific agency dity owed to their client from teh limited general duty they owe to others in a transaction

Answer 11

A seller’s broker and their agents have a special fiduciary agency duty, owed solely to a seller who has employed the broker, to diligently market the listed property for sale. The objective of this employment is to locate a prospective buyer who is ready, willing, and able to acquire the property on the listed terms. On locating a prospective buyer, the seller’s agent owes the prospective buyer, and thus also the buyer’s agent, a limited, non-client general duty to voluntarily provide critical factual information on the listed property, collectively called disclosures of material facts.

A seller’s agent owes a limited general duty to any prospective buyer to voluntarily provide information on the property which may affect its value collectively called disclosures. The information disclosed by the seller’s agent need only be sufficient enough in its content to place the buyer on notice of facts which may have an adverse effect on the property’s value or interfere with the buyers intended use.

Question 12

Conduct a due diligence investigation to observe property conditions adversely affecting value for disclosure to prospective buyers

Answer 12

A seller’s agent owes a duty to the prospective buyer to conduct a reasonably diligent visual inspection of the property for defects which adversely affect the value of the listed property. The seller’s agent notes on the transfer disclosure statement (TDS) any defects observable or known to the seller’s agent which are not already noted by the seller or are inconsistent with the sellers disclosures.

Question 13

Protect your seller by enduring all readily known material facts on the listed property are disclosed to prospective buyers before the seller enters into a purchase agreement

Answer 13

What is limited about the general duty is not the extent or detail to which the seller’s agent may go to provide information, but the Minimum Quantity of Fundamental Information and data about the listed property which the seller’s agent will hand to the prospective buyer or the buyer’s agent before the seller’s enter into the purchase agreement.

The information disclosed by the seller’s agent need only be sufficient enough in its content to place the buyer on notice of facts that may affect the properties value or the buyers use. This non-fiduciary duty of good faith and fair dealing prevents the seller’s agent from exploiting a prospective buyer buy:

• Providing less than the minimum required disclosures
• Giving unfounded opinions or deceptive responses
• Stifling the buyers attempts to learn more about the property.

All property information received from a seller is reviewed by the seller’s agent for inaccuracies or untruthful statements. However a seller’s agent need not investigate the sellers claims any further before using the information to market the property so long as they are not known to the agent to be false.

Under a solar lease, property owners enter into a lease agreement with a solar company for the installation of solar panels and equipment for the owners use. The seller’s agent needs to disclose the existence of the solar lease in the published MLS listing. This includes the details of assuming the lease, or alternatives to assuming the lease. As with all property disclosures, it’s imperative that the prospective buyer and seller have the same information about the solar lease before – not after – the purchase agreement is inked.

Question 14

Understand the need to qualify your representations in a transaction when they are opinions and not based on the results of an investigation into the facts

Answer 14

When asked by a prospective buyer or buyers agent about any aspect feature or condition which relates to a property or the transaction in some way, the seller’s agent is duty-bound to respond fully and fairly to the inquiry. The response includes material facts known to the seller’s agent about the subject matter of the inquiry and is free of half-truths and misleading statements or opinions.

Conversely, it is the buyer or the buyer’s agent who has a duty to care for and protect the buyers best interest in the purchase of property. The buyer’s agent, not the seller’s agent, is to determine what do diligence efforts are necessary to learn the extent to which the facts disclosed by the seller’s agent interfere with the buyers expectations for the use and enjoyment of the property before allowing the buyer to make the decision to purchase or close escrow.

An agent when giving advice needs to either identify the source of the information as coming from the seller or include a contingency provision for the buyers further approval of whatever the buyers issue might be in purchasing the property.

When a contingency provision is included in the purchase agreement, the buyer is the one required as a condition of closing to further investigate and approve by waiving the contingency as satisfied.

Without an inquiry from a buyer, the seller’s agent has no duty to volunteer an opinion about a particular issue regarding a property. Thus, without an inquiry the seller’s agent need not go beyond the minimum required disclosures about the physical condition of a property known to be defective.

Question 15

fiduciary duty

Answer 15

A FIDUCIARY DUTY is the duty owed by an agent to act in the highest good faith toward their client and not to obtain any advantage over the client by the slightest misrepresentation, concealment, duress or undue influence.

Question 16

general duty

Answer 16

A GENERAL DUTY is the duty a licensee owes to non-client individuals to act honestly and in good faith with upfront disclosures of known conditions which can adversely affect a property’s value.

Question 17

marketing package

Answer 17

A MARKETING PACKAGE is a property information package handed to prospective buyers containing all the disclosures compiled by the seller’s agent on the listed property.

Question 18

material fact

Answer 18

A MATERIAL FACT is information about a listed property which may affect the property’s value or alter a client’s decision to purchase or sell the property and, thus, needs to be disclosed.

Question 19

multiple listing service (MLS)

Answer 19

THE MULTIPLE LISTING SERVICE (MLS) is a subscription available to real estate brokers which pools preliminary information on property listings for publication.

Question 20

preliminary title report (prelim)

Answer 20

THE PRELIMINARY TITLE REPORT (prelim) is a report constituting a revocable offer by a title insurer to issue a policy of title insurance used by a buyer and escrow for an initial review of the vesting and encumbrances recorded and currently affecting title to a property.

A property’s title conditions, consisting of encumbrances which a preliminary title report (prelim) is to disclose, such as easements, CCRs, legal descriptions, trust deed Provisions, Etc

Question 21

title conditions

Answer 21

TITLE CONDITIONS are encumbrances such as liens, conditions, covenants and restrictions and easements which affect title to property.

Question 22

Transfer Disclosure Statement (TDS)

Answer 22

The TRANSFER DISCLOSURE STATEMENT (TDS) is a mandatory disclosure prepared by a seller and given to prospective buyers setting forth any property defects known or suspected to exist by the seller, generally called a condition of property disclosure.

Question 23

Distinguish between honestly held opinions, assurances and guarantees

Answer 23

Statements made by an agent to their client are expressed as either an opinion about an uncertain future event, or as an assurance the events and conditions will occur, becoming a guarantee. The difference between the wording used by an agent to express either an opinion or a guarantee exposes the agent to liability when the buyer acts and relies on the information and the event or condition fails to occur.

Question 24

Recognize situations in which opinions can become assurances or guarantees

Answer 24

In an opinion, the event or condition expressed is not a factual representation. An opinion does not create any liability if the event does not occur, so long as the agents opinion is a belief honestly held by the agent. However, a special condition or circumstance may exist which impose liability.

To prevent an opinion from becoming an assurance, the buyer’s broker needs to recommend the client investigate the terms of the opinion independently. Coupling an opinion with advice that no further investigative action is necessary elevates the opinion to the level of a guarantee.

Question 25

Shield yourself from exposure to liabilities stemming from a client’s reliance on an opionion

Answer 25

Due to an agent’s experience or special training in a particular aspect of a property or type of transaction, agents may find their opinion is given extra weight by a buyer. Thus, an agent’s wording of their opinion needs to express that the opinion is only their belief on the matter.

When an agent hold themselves out to be specially qualified in the subject matter expressed in opinion, it becomes a positive statement of Truth on which a buyer or seller of lesser knowledge can rely

Question 26

Differentiate between estimates, projections, and forecasts

Answer 26

Estimates by their nature are not facts. The amounts estimated have not yet actually occurred. The amount estimated will become certain only by its occurrence in the future. The amount actually experience may or may not equal the amount estimated. A document entitled an “estimate” is typically based on the actual amount currently experienced. Thus, estimates are expected to be fairly accurate in amount, not just guesswork. Word used in titles such as “contemplated, pro-forma, anticipated, or predicted” indicate something less than an accurate estimate, and provide less basis for a buyer to rely.

Projections and Forecasts are opinions voiced by agents about an income properties future performance.

A projection is prepared by a seller’s agent on an income property to represent its annual operations. The data is set out in an APOD sheet handed to prospective buyers to induce them to purchase the property. The data entered on the APOD is a projection based exclusively on the income and expenses actually incurred by the owner or seller of the property during the preceding 12-month period.

A forecast requires the knowledge and analysis of an anticipated change in circumstances which will influence the future income, expenses and operations of a property. There anticipated changes are distinct from trend factors used for projections. Forecast anticipate future changes in income and expense the preparer of the forecast believes will probably occur under new or developing circumstances.

Question 27

affirmative fraud

Answer 27

AFFIRMATIVE FRAUD is intentionally and knowingly misrepresenting information to someone.

Question 28

estimate

Answer 28

An ESTIMATE is a prediction of future amounts which have not yet actually occurred. Terms that are even less certain but still considered estimates include:

• approximation
• predictions
• pro forma statements
• anticipated expenditures
• contemplated charges

Question 29

fact

Answer 29

A FACT is an existing condition which is presently known or readily knowable by the agent.

Question 30

fiduciary duty

Answer 30

FIDUCIARY DUTY is the duty owed by an agent to act in the highest good faith toward their client and not to obtain any advantage over the client by the slightest misrepresentation, concealment, duress or undue influence.

Question 31

forecast

Answer 31

A FORECAST is an analysis of anticipated changes in circumstances influencing the future income, expenses and use of a property.

Question 32

guarantee

Answer 32

A GUARANTEE is a statement by an agent concerning an event or condition which has not yet occurred based on readily available facts.

Question 33

negative fraud

Answer 33

NEGATIVE FRAUD is deceitfully withholding or failing to disclose information to someone.

Question 34

opinion

Answer 34

An OPINION is a statement by an agent concerning an event or condition which has not yet occurred based on readily available facts.

Question 35

projection

Answer 35

A PROJECTION is an opinion about an income property’s future performance based on its performance during the preceding 12-month period, adjusted for presently known trends.