The traditional notion of caveat emptor (buyer beware) has been stood on its head with California real estate. In most states there is a basic requirement that the seller 1) not fraudulently conceal a known defect in the property and 2) disclose to the buyer material facts of which the seller knows the buyer is unaware.
However, the California legislature has gone way beyond these basics by imposing upon home sellers elaborate statutory duties of disclosure. It has also imposed upon the selling and purchasing agents a positive duty to make a competent and diligent visual inspection to determine whether there are material facts that might affect the desirability of the property. This is entirely independent of any inspection that the buyer of the property may commission.
If, after the close of escrow, the buyer discovers a defect in the property or other problem that should have been disclosed, he or she has (depending upon materiality) the right to claim damages to the extent necessary to fix the problem or the right to rescind the contract and recover monies paid. If the failure to disclose was negligent or deliberate, the buyer may also be entitled to punitive damages.
In light of this, it is almost needless to say that the seller and agents are best advised to disclose anything and everything. In fact properly run real estate offices have in place elaborate systems and procedures to make sure that everything that should be disclosed is disclosed - and then some! The general procedure is that the seller makes the disclosures and the buyer acknowledges receipt. These disclosures apply to almost all residential real estate and a summary follows.
The first two disclosures are not strictly related to the property but are included for completeness.
1. Agency Disclosure: it is required by statute that agents disclose to buyers and sellers in writing the nature of the principal/agent relationship and that this may include dual agency.
2. Seller's Affidavit of Nonforeign Status and/or California Residency: This is a requirement of the IRS and California Franchise Tax Board. Without it a portion of the sales proceeds may be withheld.
3. Real Estate Transfer Disclosure Statement: this is a statutorily mandated form that the seller and both buying and selling agents are required to complete. It describes the seller's knowledge of the property, its components and any problems in great detail. It also mentions that the parties may wish to obtain professional advice and inspections relative to the property.
4. Addendum to Transfer Disclosure Statement: this is a document used by my office to elaborate upon the Transfer Disclosure Statement. It puts the buyer on notice of many of the conditions typical of and perhaps unique to the local area and local communities, of which the buyer may not be aware. In particular, it emphasizes the desirability of the buyer obtaining his or her own professional inspections. It further stipulates that should the buyer waive the right to a professional inspection, the buyer will hold the seller (and agents) harmless against any undisclosed defect or condition that would reasonably have been discovered by such an inspection. My office also provides buyers with a list of professional home inspection companies and a report explaining in detail why home inspections are so important.
5. Environmental Hazard Reports: It is a statutory requirement that the seller disclose the possibilities of environmental hazards as set out in the consumer handbooks Homeowner's Guide to Earthquake Safety & Environmental Hazards Booklet.
6. Lead-Based Paint Disclosure: It is a statutory requirement that, in respect of pre-1978 homes, the seller disclose the possibility that lead-based paint and attendant hazards may be present.
7. Smoke Detectors & Water Heaters: It is a statutory requirement that the seller provide written notice of compliance that water heaters are strapped and that smoke detectors are operable.
8. Seller Financing Disclosure: Where a seller extends credit (for example, takes back a second loan or enters a lease option), it is a statutory requirement that the seller provide certain details of the transaction, including senior loans.
9. Homeowner Association Disclosure: There is a statutory duty for the seller to provide certain homeowner association information, such as CC&Rs and Rules.
10. Natural Hazards Disclosure: This is the latest development in disclosure statements and came in force this year. There is now a statutory requirement (replacing one much less onerous) that sellers and agents must disclose certain geologic and other hazards to any buyer of a residence. The information that must be disclosed is that which is known, should be known or is "reasonably available." This is an extremely tough standard because it apparently requires homeowners and agents to become experts in seismic, geologic, fire and flood issues and be familiar with current hazard mapping on a state and local level. Fortunately, however, private enterprise has stepped in and it is now possible to obtain, for a modest fee, an independently produced natural hazards report backed up by insurance in the event of error. My office makes it mandatory that this report and insurance be obtained in every transaction.
The bottom line for the seller in all this is "disclose, disclose, disclose" - even if it seems redundant or appears ridiculous. For example, if there is a large ceiling stain in the kitchen which is obvious for the entire world (including the buyer) to see, the seller should state: "There is a large ceiling stain in the kitchen. This may mean there is a roof leak. I recommend you obtain a professional opinion." If the seller and his/her agent fail to take this simple precaution, they are potentially open to suit.
This goes not just to the physical condition of the property but even to collateral matters. For example, there was a case where a home sale was rescinded because the seller failed to disclose that there had once been a murder in the home. Full and complete disclosure, even of the obvious, will protect the seller's transaction and severely limit any possible future action on the part of the buyer.