Caveat emptor ("let the buyer beware") has gone the way of the dinosaur in the U.S. real estate industry. In nearly every state, a "seller disclosure" duty is mandated by statute, by a standard of care, or by the real estate professional's Code of Conduct.

The transformation became complete after the National Association of Realtors® (NAR) formally endorsed seller disclosures in the early 1990s. Before that time, the disclosures were mandated in only two states, with California leading the way. NAR's intent was to better protect Realtors® from the lawsuits of unhappy buyers, by disclosing a property's "material facts" before the sale closes. And they achieved the intended result: fewer lawsuits.

But the buyer has also benefited. Mandated full disclosure has raised buyer confidence, increased consumer satisfaction with the transaction process, and, overall, improved the customer experience with the home buying process. Coupled with the increased protection from liability for both the seller and seller's agent, these upsides make full disclosure an essential part of the real estate business plan.

The concept and practice of seller disclosure has its roots in California. It was inspired 40 years ago by federally-declared disasters, driven by state and local legislation, and now relied upon by agents throughout the state with the enthusiastic endorsement of their statewide Realtor® association, the California Association of Realtors® (CAR).

The 1960's changed us for good. A hip young generation in pursuit of a just cause, or just a hot car, set new standards for culture, politics and the economy. Trends in fashion, music, social values, and relationships quickly sprawled beyond West Coast suburbs to influence a nation.

In the real estate community, nowhere was this altered consciousness more evident than in the relationship between home sellers and buyers in California's consumer-friendly regulatory climate. By the end of the decade, the stage was set for the dawning of a new age. No, not Aquarius -- the "Age of Natural Hazard Disclosure."

Idyllic dreams of surf, sand and sun in the Golden State were becoming nightmares for many homeowners by the late '60s. An exploding population had begun to collide with an up-tick in the rate of natural disasters, and where they met, lives and property increasingly were lost or damaged.

The tsunami of 1964 was the wake-up call. Spawned by a monster 9.2 earthquake in the Gulf of Alaska (which was not even felt in the lower 48 states), its waves reached 20 feet high along the California coast, killing 11 people in Crescent City and damaging boats and beachfront property as far south as San Diego.

After the tsunami, engineers in San Francisco, where the nation's previous "great" earthquake had struck (in 1906), soon realized the next Big One could strike right here. And, so, they began assessing the risks of a modern California earthquake disaster.

At the same time, in Sacramento, a lone lawmaker championed the cause of quake safety and, ultimately, hazard disclosure. State Senator Alfred Alquist, recognizing the devastation that such a disaster could inflict on California's residents and property, struggled to put seismic safety on the legislature's radar. In 1969, he introduced a bill to create a regional committee for seismic safety. Although it was quickly defeated, he succeeded later that year with a resolution creating a Joint Senate-Assembly Subcommittee on Seismic Safety, to last for four years.

Just 18 months later, at 6:01 a.m. on February 9, 1971, as the sun crested over L.A.'s San Gabriel Mountains, dawn broke hard upon California's real estate industry: the magnitude 6.5 Sylmar earthquake struck. Homes, hospitals and highways along a 12-mile swath of the northeastern San Fernando Valley lay shattered where a thrust fault had suddenly ruptured the ground surface. One-story homes instantly became "split-levels" where the mountain front had lurched upward by as much as 5 feet along the fault. Other homes were simply leveled.

By the time L.A. stopped shaking, caveat emptor had met its match.

The Sylmar earthquake left 65 dead and over $2 billion in property damage (in 2005 dollars). Public outcry over the costs and losses, channeled by the new Joint Subcommittee and a flock of latter-day legislative converts, pushed the state government to consider over 35 new earthquake safety bills by the end of 1972. Many were signed by then-Governor Ronald Reagan and became landmark legislation.

One was a mandate that all city and county General Plans include a "Seismic Safety Element" to identify and protect the community from seismic, geologic, flood and fire hazards.

Another law was motivated by the near-collapse of a major reservoir as a result of the Sylmar quake. This legislation required that dam owners under the state's regulatory jurisdiction prepare inundation maps for evacuating downstream residents in the event of a dam failure.

Most significant for the real estate community, however, was California's -- and the nation's -- first natural hazard property disclosure law. Titled the "Alquist-Priolo Earthquake Fault Zoning Act," this 1972 law required California’s geological survey to establish narrow zones around all active faults in the state within which residential construction would be regulated. The law was revised few years later to include a disclosure obligation, mandating that a real estate licensee who represents the seller inform all prospective buyers if the property is within an "Alquist-Priolo zone" (as this natural hazard now is widely known).

The "Alquist-Priolo" Act constituted a warning shot across the bow of the real estate industry: "Buyer beware" no longer applies to natural hazards -- the seller and the seller's agent now have an affirmative duty to disclose natural hazard zones defined under California statutes in a real estate transaction, whether residential or commercial.

Just a decade later, property disclosure became general. In 1985 the state once again led the way in formally mandating full disclosure by home sellers and their agents of matters known by the seller which affect the property such as status of equipment, encroachments, structural problems and more. This disclosure obligation was codified in California Civil Code Section 1102 and mandated the use of a statutory form entitled the “Real Estate Transfer Disclosure Statement” (simply, the “TDS Form”).

Since 1972, every billion-dollar disaster in California has triggered a new round of natural hazard disclosure legislation -- the 1989 Loma Prieta earthquake, the 1991 Oakland-Berkeley Hills Firestorm, the 1994 Northridge earthquake, and the extensive floods of 1995 and 1997.

By the mid-1990s California had added two more hazard disclosure mandates in parallel with the fault zone law: a "Seismic Hazard Mapping Act" delineating zones of additional types of earthquake hazards such as quake-triggered landslides and liquefaction, and a "State Responsibility Area" disclosure for wildland areas where the state Department of Forestry and Fire Protection provides fire suppression services -- where fire stations are far apart and emergency response times may be long.

Repetitive disasters result in repetitive costs to taxpayers when the same structures are damaged again and again. In an effort to mitigate these repetitive public costs, a bill was introduced in 1995 to expand the required notice of natural hazards to prospective home buyers, and limit the ability of homeowners to receive public disaster assistance. It died in committee, but was followed in 1997 by a similar bill, authored by Assemblyman Tom Torlakson, without the provision to deny disaster aid.

The “Torlakson Bill,” as it is often called, was codified in California Civil Code 1103 (also known as the “NHD law”), which expanded mandatory seller disclosure with respect to natural hazards. It mandated three additional natural hazard disclosures and consolidated them, along with the three previously required disclosures, into a new statutory form called the "Natural Hazard Disclosure Statement" (NHDS).

Today, six "official" natural hazard disclosures are required in California for all real property transactions. Disclosure must be made to the buyer using the NHDS Form if any portion of the property is within any of these statutory hazard zones:

• A special flood hazard area (e.g., a "100-year" flood zone) designated by the Federal Emergency Management Agency.
  
• An area of potential flooding in the event of a dam failure, designated by the California Office of Emergency Services.
• A very high fire hazard severity zone designated by the California Department of Forestry and Fire Protection.
• A wildland fire area that may contain substantial forest fire risks and hazards (a state responsibility area), designated by the California Board of Forestry.
• An earthquake fault zone (potential surface fault rupture zone) designated by California’s State Geologist.
• A seismic hazard zone (e.g., a potential earthquake-triggered landslide or liquefaction zone) designated by the State Geologist.

Two additional hazard disclosure bills are currently under review in California's 2005-2006 legislative session. One is an "Asbestos Hazards Mapping Act" to delineate bedrock zones where naturally-occurring asbestos is likely to occur. The offending type of bedrock is a shiny, green and blue rock called serpentine. (Four decades ago California was also the first state to designate an "official" State Rock. By resolution of the legislature, the rock they celebrated in 1965 was, ironically, serpentine.)

The second pending disclosure bill would require disclosure to a prospective home buyer if a man-made environmental hazard site is within one-quarter mile of the sale property.

Along with the landmark legislation he signed in 1972, three years later Governor Reagan signed legislation establishing California's Seismic Safety Commission (CSSC). Empanelled with 17 experts from a cross-section of science, education, industry and public policy, the CSSC advises the Governor, Legislature, and state and local governments on ways to reduce earthquake risk to life and property. The CSSC proposes and sponsors seismic-related bills each year to the Legislature, and it reviews and takes formal positions on other seismic-related bills.

The Commission has made its mark on California’s real estate industry, especially since the earthquake disasters of 1989 and 1994. As a result, sellers of homes built before 1960 must now deliver to the buyer a copy of the CSSC’s “Homeowner’s Guide to Earthquake Safety” booklet. The booklet’s back page is the mandatory “Residential Earthquake Hazards Report": a checklist the seller must complete that discloses known defects and deficiencies in the property – including earthquake weaknesses and hazards – to prospective buyers. The conditions that these sellers must now disclosure include whether the water heater is braced from falling in an earthquake, whether the home’s wood frame has been anchored to the foundation, and whether the walls or foundation are made of unreinforced masonry. (A similar report is required from sellers of commercial property built before 1975 of specified construction types.)

The obligation of disclosure is not without controversy. By some estimates, over three-fourths of the liability lawsuits in the U.S. brought by buyers against agents and brokers involve issues of non-disclosure. Some agents perceive that they are becoming "insurers of last resort" for people who make bad decisions. A seller who is less than candid about property defects and neighborhood problems, or a buyer who fails to ask an important question, could land the agent in court with a costly defense or a more costly adverse judgment and a suspended license.

Overall, however, the best defense against non-disclosure liability remains, "when in doubt, disclose." And here, the "TDS Form" has proven its value in residential transactions, by documenting actual knowledge about the home and surrounding neighborhood that only the seller might possess. It's one side of the agent's due-diligence "coin." The flip side is the professional home inspection, the tool of choice for documenting the physical defects in the sale property.

Together, the seller’s TDS and property inspection report offer the real estate professional a double-barreled method of fulfilling the disclosure obligations, and documenting that they were satisfied.

California's third layer of protection -- for the seller, the buyer and their real estate professionals -- is the Natural Hazard Disclosure (NHD). Done right, it is clear and concise, and easy for all parties in the transaction to read, understand and acknowledge in writing. The NHD concept was introduced in California's real estate industry 30 years ago by a few wise lawmakers and rapidly adopted statewide through common practice by many equally wise Realtors®. It has been used successfully ever since and is now, by law, a critical part of every home transaction. Initial fears that the disclosures would ruin property values simply have not been substantiated (as California's median home prices attest!).

The hazard maps required for NHD determinations are prepared and made available by the respective government agencies. Obtaining the maps for a transaction may impose a time and expense burden on the seller and agent, and interpreting them introduces some professional liability for the agent, but there are alternatives. In California there is a service industry of NHD report providers. Under the “NHD law,” the seller and seller's agent have a “safe harbor” and can transfer all liability for the natural hazard disclosure determinations to a professional NHD provider. In addition, most disclosure companies also back up their reports with up to $20 million in various forms of liability insurance protection for all parties in the transaction. (First American NHD's liability protection exceeds $100 million.)

Disasters are not unique to California. In fact, ten states rank higher in the number of Presidentially-declared disasters per year.

Every state is vulnerable to residential property losses from natural hazards, whether earthquakes, tsunamis, floods, fires, tornados, tropical storms, hurricanes, snow and ice storms, freezes, etc. For the seller and seller's agent, "be prepared" nowadays means making sure the buyer understands this.

It's only a matter of time before the rest of the U.S. catches this wave.



(Posted: March 1, 2006)