Purchase and Sale Pitfalls: Due Diligence and Disclosures
Buying or selling residential and commercial real estate can come with pitfalls for investors who are not familiar with the many statutory requirements and do not have assistance from ethical and knowledgeable advisors.
As a buyer, do you know what disclosures you should be looking for to avoid a costly mistake or to preserve your rights against the seller? For buyers, one of most important things you can do is to conduct due diligence meaningfully by asking the right questions, taking inspections seriously, and making sure all of the disclosures you are entitled to are provided to you in a timely manner.
As a seller, do you know what disclosures you should be making to protect yourself from future litigation and potential liability? The answer is to make sure you are providing all of the requisite disclosures and err on the side of caution when there is uncertainty about whether or not to disclose a certain fact that may be deemed material to the value or desirability of the property. Standardized forms are available for the disclosures but it is important to have an idea of what is required.
The seller’s burden to disclose “material facts” under the common law
Under the common law in California, the seller is required to disclose to the purchaser any facts that materially impact the value or desirability of the real property which would not otherwise be apparent by the purchaser’s inspection. Depending on the circumstances, non-disclosure
could be considered fraud. That means a seller with knowledge of the following would probably be obligated to disclose, for example:
- A leak of which the source cannot be identified exists on the property;
- The property contains illegal units and has been condemned;
- A neighboring property has a private easement over the property;
- The property is on a public right of way; or
- That the government has intentions of condemning a portion of the property, as discussed in this blog post.
Sellers of residential properties or their agents are required to provide a Transfer Disclosure Statement. Residential properties are defined as properties with one to four dwelling units. Sellers with residential properties used as investment properties (such as a vacation rental) must follow the residential disclosure guidelines. For commercial property transactions not subject to the Transfer Disclosure Statement, the disclosure is made in a separate document.
The seller’s burden to make statutory disclosures
In addition to those known issues that “materially impact the value or desirability” of the property for sale, a commercial seller in California must make additional disclosure requirements.
California imposes requirements on commercial property sellers to disclose environmental hazards, asbestos, whether the property is located within an earthquake fault zone identified by one of the maps created by the California Division of Mines and Geology, whether the hot water heaters are properly strapped as to avoid falling during an earthquake, disclosure if a seller is a foreign person, whether the property is located on a wildland area fire zone, and whether the property is located in the vicinity of an airport (known as an airport influence area). Sellers are also required to provide earthquake guides for certain commercial properties.
In summary, a seller of a property must disclose any material facts about the property that impact the value or desirability of the property. If the buyer relies on his or her own inspection of the property and purchases the property, the buyer may not have recourse against the seller when problems arise. Regardless of whether one is a buyer or seller, one must take the due diligence period serious and pay close attention to disclosures.
For help with your residential or commercial sales or purchase, please contact Schorr Law. You can text us at (323) 487-7533, call us at (310) 954-1877, or send us a message by using our Contact Form.
By Valerie Li
See related: 5 Things to Disclose When Selling Your Home