Disclosures to Buyers Reduced as Lenders Ask for More and More
It has become the expectation in a residential real estate transaction that the seller of a property in a standard sale should notify buyers of all known material facts about their property. While there is often plausible deniability as to what is “known” and differences in opinion as to what is “material”, California Association of Realtors (CAR) has produced two common disclosures the Seller Property Questionnaire (SPQ) and Real Estate Transfer Disclosure Statement (TDS) that are filled out by the seller and provided to the buyer during the due diligence stage of a transaction. It is common practice for the seller to provide the buyer these seven pages of disclosures asking questions buyers may not think to ask such as whether all structures have been permitted, the occurrence of previous insurance claims, HOA plans for assessment or litigation, or even items such as governmental plans for eminent domain. Whether always completed with 100% accurately or not, these are still valuable pieces of information to help a buyer decide whether to continue moving forward once a transaction is already underway.
In the our current post-housing bubble lending environment, as anyone who has obtained a loan has experienced, lenders are asking for extreme amounts of documentation, that in even a noble attempt to avoid re-creating the conditions that led to the last bubble and bust, are thought by most to be excessive. In addition to asking for everything short of a urine sample and first-born child from borrowers, lenders are now often requiring these transaction disclosures as well as termite inspection reports. The TDS is required per California Civil Code and cannot be waived in a standard sale, however the SPQ is not and can be unchecked and omitted from the purchase agreement, which due to the potential for lender review and disapproval, is advisable for sellers to do when the buyer is obtaining a loan. This is especially common in a condo sale if litigation or assessments or future assessments are disclosed, a common occurrence in Playa Vista or anywhere there are newer condos.
Lenders are also scrutinizing wood destroying pest reports, typically a supplement to the purchase agreement, and looking for items, many of which may be insignificant or no more serious than typical inspection issues, to halt a potential transaction. My buyer clients were recently required to hire and pay for a licensed contractor to certify that water stains from a previous leak under a recently-replaced roof as well from a repaired leak under a sink were not current because these were called out as Section 2 items (items that may lead to wood destroying pests) in the termite report. These were not even recommended repairs, which had been pre-negotiated to be included. This held up the closing of the transaction by a week and it could have been much longer. The house in question was approximately 60 years old and a light fixer. The buyers had been given a copy of this inspection report and had had their own inspections and in no way were these the worst problems found with the house, just the only report that was checked in the purchase agreement and therefore required to be provided to the lender. The buyer was putting 20% down and not a credit risk so why the lender necessitated such assurance on these trivial issues was unfathomable. It was a case of underwriter discretion, but what in the past has been routine disclosure between the seller and the buyer has more and more frequently opened a can of worms when presented to the lender.
The solution to this problem lies in less disclosure or disclosure outside of the purchase agreement. Sellers, buyers, and real estate agents certainly want full disclosure in transactions to reduce liability, but most of all they want their deals to close. The SPQ as well as any wood destroying pest report can be omitted by the seller if the buyer agrees, but in this case the buyer suffers either by receiving less information on the property or fewer seller-required repairs. The best option is to agree in writing to have these provided outside of escrow and unchecking the boxes from section 11 of the Residential Purchase Agreement. This ensures the disclosures/reports are provided and the due diligence is only the responsibility of the buyer, not also a potential cause for concern by the lender.