Due Diligence: All About The Disclosure Package
This Article Includes
What is a Disclosure Package?
The disclosure package contains a number of documents the seller and their agent have put together to share all the information they know about the property with prospective buyers. It typically includes a combination of local environmental disclosures, government ordinances that require certain inspections or repairs, other area-specific considerations, professional property inspections (such as home, pest, foundation, roof), disclosures about the property from the seller’s experience, and any other information that may be of use when considering the particular property. The package will typically be provided to you as a collection of pdfs via Box or Dropbox, or a third party disclosure service like Glide (owned by Compass, which is what I use as a listing agent) or Disclosures.io. To get a disclosure package for a home you're interested in, just as your agent and they can easily request it for you.
Once you find a home you like, things will move very fast, and it's crucial you feel comfortable with these important documents ahead of time. This way, you can focus on evaluating the home itself, and the neighborhood, rather than worrying about the nuts and bolts of the disclosures.
In this post, I'll take you on a deep dive into some of the most common disclosures, what's involved, and what you should be aware of.
Local Environmental Disclosures
This is a report that lets you know if the home you are considering falls into or is close to certain environmental conditions, such as the earthquake zone, flood zone, high fire hazard zone, and any other potential hazards around the property.
Local Government Disclosures & Point of Sale Ordinances
There are many governmental requirements regarding the condition and care of your property. Some are triggered when a property changes hands and these are called Point of Sale Ordinances. They can include disclosures, inspections, and repairs that are required to be made before the home passes to the new owners. These are normally paid for by the seller, but some can be negotiated with the buyer. For instance, a sewer lateral test is a common one required by many of the cities in San Mateo County.
In California, even in an "as is" sale, sellers are required, at the bare minimum, to install smoke and carbon monoxide detectors in specific spots in the home (usually hallways, bedrooms, and other rooms), and the hot water heater (assuming it's not a tankless) must be properly braced and strapped to code.
Below is a brief summary of what is required in local towns. Please note, local regulations can change, and this information is meant to be informative only - check with your agent or your city for what, if anything, is required.
A Brief Summary of Local Town Requirements in San Mateo County
- Burlingame
-
Sewer Lateral Compliance (check out our blog post on the sewer lateral requirement)
- Hillsborough
- San Mateo
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Sewer Lateral (beginning 12/1/20)
- Millbrae
- Daly City
- El Granada, Half Moon Bay, Miramar, Montara, and Moss Beach
- Pacifica
- Redwood City
- San Bruno
- Portola Valley
SPQ/SSC, TDS, & Exempt Seller Disclosure
The Seller's Property Questionnaire and the Transfer Disclosure Statement are required by California law (with limited exceptions) to be completed by the seller and provided to the buyer. These documents are among the most important in the disclosure package and are where the seller has the opportunity to disclose all work they have done to the property, anything they know, and any facts or defects they may know. The bar for sellers to disclose what they know is very high in California - anything that a buyer could perceive as material is important for a seller to disclose.
Agent Visual Inspection Disclosure (AVID)
The listing agent will also include an AVID in the disclosure package. You can view a blank, sample one on the California Association of Realtors website. Agents are required by California law to visit the property and in summary, to write down what they observe.
Permit History
The seller may or not include the permit history for the home. Regardless, we highly suggest obtaining a copy of the permit history before writing any offer so you are familiar with all permitted - and final - work that has been done to the property. Unfortunately, it's not uncommon to see work frequently done by homeowners without the benefit of a permit. This can be a red or yellow flag as you have no way to verify if the work was done safely and to code. It's also possible the work the seller did, if they had applied for a permit, would have been denied by the city, so you really need to be thorough in understanding what this means and your comfort level around unpermitted work.
You can view the permit history for any home in the public record at the Planning Department at City Hall, or, depending on the town, you can view online (like San Mateo, for example).
Property Boundaries
If you are curious about the specific boundaries of the property, it’s usually tough to figure this out as part of the relatively brief purchase process. The only way to know where exact boundaries of the property are is via a formal survey. Many people assume where the fences are is where boundaries are, however, the fences could easily be off by inches or many feet, so one can never assume. Unfortunately, most homeowners have not ever done a formal survey, so it’s hard to know. The only times a seller would typically have a survey would be is if they did an expansion of the home or built new, or were just curious, or had a dispute with their neighbor that required one.
Obtaining a survey can take several weeks at the minimum to arrange if a surveyor is available on short notice though it could take as long as two months. If this is of importance to you, definitely make sure to include a contingency in your offer for further due diligence, or consider purchasing a different property if there’s something you feel you could be concerned about.
Home Inspections
The seller will usually include a home inspection in their disclosure package. We will review it so you feel fully educated about the condition of the home before you buy it. Since most homes are older there will be issues with almost every home. My goal is for you to feel comfortable and have a handle on the big ticket items which can cost the most to repair: roof, plumbing, foundation, electrical, and HVAC (heating, venting, and air conditioning). There will inevitably be "smaller" issues that will pop up within your first year of homeownership too, which can happen when buying an older home.
Home inspections are general inspections covering the various systems of the home. The sellers usually provide a home and pest inspection in their disclosure package (not required by law, but standard practice). It is likely, if we were performing our own inspection, our inspector would identify similar issues we are already familiar with, though our inspector may identify other issues you may want to address either now or in the future so you have complete knowledge of your home. The more eyes viewing your prospective home, the better.
The home inspection typically covers the home's structure (foundation, crawl space, attic, exterior, doors and windows, and interior walls and surfaces), electrical and plumbing systems, appliances, heating and air conditioning (if present), smoke detectors, garage door, and drainage.
They will look for conditions that are not up to code, and not in compliance with current health and safety standards that you may wish to have corrected. They will typically comment on maintenance and other repairs that you might expect over time. The home inspector is not a specialist in any particular trade or system of the home; they are more of a generalist. They will generally recommend specialists as needed if they see something of concern. They also do not check for building permits.
Drainage is one area that is often a concern on the peninsula, especially with older homes. It is not uncommon to get some dampness in the soil under the home in the wintertime. Large accumulations of water under the home, especially in winter, are not a desirable situation, and drainage improvements are recommended in this case. If you buy an older home, you should pay particular attention to the drainage, and what improvements you might want to consider over time.
Cracking and settlement of the foundation is another area of concern. Some cracking is normal due to settling, shrinking lumber, or earthquakes. But if there's extensive cracking, sticking doors/windows, or uneven floors, that can be a sign of bigger settlement/foundation issues, so get a specialist to check it out. Determine the age of the home's major components, like water heaters and furnaces. Ask the home inspector how long these components are expected to last.
Lastly, while there is no legal credential to be a home inspector, the most common professional affiliation is the American Society of Home Inspectors.
Mold Inspections
This is available to you if this is a concern. Most of the time, a home inspector will note any conditions that might indicate mold and recommend a further inspection. If there are no indications of concerns, and there have been no active leaks or water releases on the property (see seller disclosure statements), then the mold is generally less of a concern.
Pest Inspections
The pest inspector is licensed by the California Structural Pest Control Board to look for active infestations and damage from wood-destroying organisms, including termites, beetles, fungi, and dry rot. There are two types of termites active in our area, and the most common way to treat them is to tent the structure.
More common are subterranean termites. These termites live in the soil and migrate to the structure by building earth tubes. These are typically treated by chemically treating the ground in and around the infected area. Any active infestation or damage will be categorized on the Report as Section 1, and have an estimate attached to it for the corrective work to repair. It is not uncommon to see Section 1 work on the peninsula - while it's not good, it's not uncommon for older homes.
Additionally, the inspector will look for conditions likely to lead to an infestation or damage but where there is currently no evidence of damage. These are considered Section 2 items, which are those that are likely to cause damage or infestation, even though there is no current damage or infestation. An example would be a poor seal between vinyl or tile flooring and a bathtub, or wood that is touching soil.
These conditions may not cause damage or infestation immediately, but if left untreated, they will eventually cause problems. There is an additional category of inspection called Further Inspection. This may be a case where no apparent harm exists (otherwise it would be Section 1), but there is a good chance in the inspector's opinion that there are areas that are not apparent as a result of the condition.
Inspection info provided courtesy of Doug Buenz.
Local pest inspection companies include JK Control, Premier Termite, A&R Termite, Franz Termite, and Elite Termite.
The Preliminary Title Report
The prelim, as it is often called, is a short document prepared by the title company. The prelim is relied upon by all parties in the transaction -- the buyers, agents for both parties, the escrow officer, and the bank.
The preliminary title report is broken down into several sections, which we'll explain below.
Names & Ownership
The first section identifies the sellers' legal names. This is important as we always double-check that the sellers' names on the purchase contract match what is shown on the title document, so we know they are indeed the sellers. You will also see that the form of ownership listed on there says "fee", which is the highest form of ownership. Other types of ownership include a leasehold or estate in the remainder, but these are highly rare to see.
Loans
The prelim will show what loans have been recorded against the property. It only shows the initial amount of the loan, not the current amount owed, so the loan may have been paid off already. Typically we'll see a number in the hundreds of thousands of dollars, indicating the amount of the first loan the sellers obtained when they bought the property. Sometimes we'll see a second loan on there for a smaller amount, usually indicating a home equity line of credit, which may or may not be used. As part of the closing process, the title company will ensure that the seller's loans are paid off from their proceeds before close.
Taxes
The prelim will show if the property taxes are current and paid, or if they are delinquent.
The due dates are actually Nov. 1 and Feb 1 and delinquent Dec 10 and April 10
Property taxes are due twice a year, on November 1st and February 1st, and delinquent December 10th and April 10th. Even if the property taxes are truly delinquent, the seller is required to pay them before closing, and if it were a distressed sale, the bank would be required to pay so you would not inherit the debt. In addition, the title company double-checks to confirm the seller has not recorded any new loans against the property. The last thing they want is a seller taking out a loan to buy a luxury car, for example, and secure it against the property. This would hold up the close. For more information, check out my post All About Property Taxes.
Legal Description
You'll also note a legal description of the property. This is compiled from the county records and is what a surveyor would rely upon to determine your exact property boundaries. This would be important to you to know if you were to undertake a major expansion, or might be helpful if you were to install a new fence on the property line with your neighbor. There is always the possibility that the current fences are not on the exact boundary. They could be off by as much as several feet, even though the fence has been there for decades. If you wish to determine the exact boundaries of your property, we highly encourage you to engage a surveyor.
Easements
Lastly, the prelim will show if there are any easements for your property. An easement is a legal right of way to access your property. The most common easement we typically see is for PG&E electric lines. In this case, PG&E would have the right to enter your property to maintain the lines for safety purposes or upgrades. Of course, they would be required to knock on your front door. Another example of an easement would be a shared driveway that is on your neighbor's property but you have the right to access your home via an existing easement.
HOAs/Condos/Townhomes
The seller must provide all the standard HOA sales documents to interested buyers. This typically includes things like HOA community rules, insurance documents, budget and meeting breakdowns, and more. Below are some of the most important items/frequently asked questions we look for in these docs:
What does the HOA fee include?
Is there any pending litigation?
How many parking spots come with the unit (if any)?
What percentage of these units are rentals?
Are there rental restrictions?
Are there any upcoming special assessments or due increases?
Pet restrictions?
Any HOA violations?
For more detailed information about HOAs, I suggest reading my post All About HOAs: Important Things to Know Before Buying.
I know the above is a lot to take in and can be overwhelming, however it's really important you feel comfortable with the condition of the home you're buying. I'm here to help guide you through the home buying process, so if you're thinking about buying, or selling, please reach out to me if I can be a resource for you.
The information is intended to provide general answers to general questions and is not intended as a substitute for individual legal advice. Advice in specific situations may differ depending upon a wide variety of factors. Therefore, readers with specific legal questions should seek the advice of an attorney.
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