We have a passion for helping people build wealth through real estate, and we understand that the education process is key for successful investments. So in this blog, we’ll walk through some specifics of evaluating a property that you have interest in. Specifically, we’ll talk about what you might find in a seller-provided disclosure packet, and what things you may want to consider regarding the long-term enjoyment and viability of your investment.
In markets like the San Francisco Bay Area that are very competitive for buyers, sellers are often providing lots of information about the property upfront to prospective buyers. They do this because it often results in cleaner offers that limit renegotiation after entering into contract. And since everything in this packet is likely to be discovered during the process anyway, why not get it out of the way early on?
Regardless of when a disclosure package is completed, there are a few items that will be in every single one. At least in the state of California. These are the required seller disclosure forms called the Transfer Disclosure Statement and the Seller Property Questionnaire. In short, these forms are covering “material facts” that the seller is aware of. A material fact is something that may impact the value of the property in the eyes of prospective purchasers. This includes things that are defective or broken, or other conditions such as smoking that occurred in the home or a neighborhood nuisance.
Additionally, part of the required seller disclosures is for the seller’s agent to present their visual inspection of the property. The agent should be noting anything regarding condition or other factors that they notice. Please note – this disclosure form should never replace an inspection provided by a licensed inspector.
More proactive sellers, which again are very common in the Bay Area, will provide much more than just these three forms. You may also find a whole series of reports, such as a general home inspection, a pest inspection, a natural hazard disclosure, a lead based paint disclosure, and more. They might also provide a handful of advisories.
So let’s talk about a few of the big report items that are commonly found. The first I mentioned was the general home inspection. This report is produced by a licensed inspector who is a generalist when it comes to all conditions regarding the physical aspects of a property. They are often retired contractors, and will be looking at the systems and structure. They’ll note the condition of the roof, the foundation, the appliances, electrical system, plumbing system, furnace and HVAC, and more. A lot more. They may provide specific pieces of advice or need for improvement, but just as often, they’ll recommend having a specialist take a look.
These home inspection reports will generally have a section dedicated to ‘action items’, or the things that the inspector felt needs immediate consideration.
A pest inspector, though, is a specialist. They are licensed and trained to inspect all things related to wood destroying pests and organisms. The most common conditions are dry rot and termites, though they’ll also note any discovery of wood-boring beetles, funguses, as well as conditions that are conducive to any of these pests. Additionally, most pest reports come with a detailed bid or estimate for correcting the conditions discovered.
The pest reports are broken into a few sections. Section 1 and 2 are the most commonly discussed. Section 1 will contain all the active infestations, while section 2 refers to conditions that, if untreated, will eventually cause active infestations. It’s also very important to take a look at Section 3, which will note items that are left for further inspection.
The most common further inspection items that we highly recommend looking into relates to stucco buildings. There is no non-disruptive way to inspect the condition of the framing behind the stucco, yet by not inspecting it, owners open themselves up to the risk of the unknown. We’ve seen widespread rot exist behind the stucco that could cost you a hundred thousand dollars or more.
The seller may also provide other property condition inspections such as a roof report or seismic or structural report. Whatever you receive, make sure it’s understood clearly before waiving your rights to perform your own inspections.
Beyond the reports on property condition, you’re likely to receive a Natural Hazard Disclosure. This report is meant to give you insight into what hazards may exist at or near the property. This includes a number of seismic dangers. The report will outline liquifaction zones: those are areas generally with sandy, saturated soil where, with forceful enough shaking, the ground can act like a liquid. Liquifaction zones are most common in the flat areas surrounding the Bay near sea-level, but can be found in other areas as well.
The natural hazard disclosure also identifies areas that are more susceptible to landlines, as well as hazards such as inundation in the case of a collapse of a nearby dam.
Additionally, you’ll see the known fault zones on the map. While it’s called a natural hazard disclosure, you’ll also see some man-made hazards. Known underground storage tanks–often used to hold gasoline–will be mapped, including those known to be leaking into the soil. Also, liquid transmission pipelines, such as those for liquid natural gas, will be included as well.
The last big piece of information you’re likely to find in a disclosure packet is related to the title of the property. You may receive a preliminary title report, which will show current liens and assessments on the property, any easements which either benefit the property or encumber it, and any Convents, Covenants, and Restrictions the property may be subject to. That last one, the CC&Rs are most common in planned developments or HOAs, but occasionally will pop up where they wouldn’t be expected.
Alright, we covered a lot of items that may show up in a disclosure packet. All of these things we discussed contain pertinent information that should be considered prior to taking ownership. Clients often ask us if there’s one specific area they should focus on. Unfortunately there isn’t. You may find only boilerplate data and content in many of the reports, yet they should still be read and understood.
So I’m curious, if you’ve been reading through a bunch of these packets, what’s the most interesting thing you’ve come across? Is there something you’ve seen that you have questions about? Contact us and let us know!