Watkins Realty Group - San Diego, CA

REO Disclosures Guide

REO Mandatory and Highly Recommended Transaction Disclosures

Q 1. What are the disclosure requirements for REO sales?

A An REO lender is subject to certain legally mandated disclosure requirements and is well advised to provide other disclosures. Note, however, if the bank acquires the property by means other than a foreclosure, deed-in-lieu of foreclosure, or a tax sale, then the required disclosures are the same as for the resale of any property by any seller ( See Cal. Civ. Code § 1102.2(c) and (i)). Please refer to the C.A.R. legal article, Sales Disclosure Chart for REALTORS®.

The following is a list of recommended disclosures for a typical REO sale in California--that is the lender acquired the property by foreclosure, deed-in-lieu of foreclosure or a tax sale. An explanation of this recommended list and the C.A.R. forms to use are provided in the answer to Question 4.

• Natural Hazard Disclosure Statement;

• Seller’s Affidavit of Nonforeign Status and California Withholding Exemption;

• Megan’s Law Disclosure;

• Lead Based Paint Hazards Disclosure;

• C.A.R.’s Combined Hazards Booklet;

• Water Heater and Smoke Detector Statement of Compliance;

• Methamphetamine Laboratory Activity Order;

• Condominium or Other Common Interest Development documents (if applicable);

• Seller Property Questionnaire;

• Statewide Buyer and Seller Advisory;

• Agency Disclosure Statement (applies to agents);

• Visual Inspection Disclosure (applies to agents); and

• REO Advisory (C.A.R. form REO)

In addition to the above disclosures, certain transactions may have additional requirements, including, but not limited to, government inspection or point of sale requirements imposed by local authorities, or special requirements for manufactured homes or government housing.

For a list of legally-mandated disclosures and specific exemptions for REO sales, see Questions 2 and 3.

Q 2. What are the legally-mandated disclosures for REO sales?

A The following is a list of legally-mandated federal and state disclosure requirements for a typical REO sale in California (but see Question 30 for a list of recommended disclosures):

• Natural Hazard Zones;

• Megan’s Law Disclosure;

• Lead-Based Paint Hazards Disclosures;

• Smoke Detector Statement of Compliance;

• Water Heater Bracing Statement of Compliance;

• Methamphetamine Laboratory Activity Order;

• Condominium or Other Common Interest Development documents (if applicable);and

• Agency Disclosure Statement (applies to agents).

For more information, C.A.R. provides members with a REO Disclosure Chart. C.A.R. also offers a side-by-side comparison of disclosure requirements for residential sales and REO sales in our Sales Disclosure Chart for REALTORS®.

Q 3. What are the disclosure requirements from which REO sales are specifically exempt?

A Most notably, an REO lender is exempt from the linchpin of California disclosure requirements – the Transfer Disclosure Statement (TDS). However, exemption from one requirement, such as the TDS, does not automatically exempt REO transactions from all other disclosure requirements. Nor are REO lenders exempt from any disclosure requirement for other reasons often espoused, such as they have not occupied the property, they are transitional owners, they are out of state lenders, they are self insured, they are relocation companies, or the buyer signed an “as is” clause.

Note, however, if the bank acquires the property by means other than a foreclosure, deed-in-lieu of foreclosure, or a tax sale, then the required disclosures are the same as for the resale of any property by any seller. That means the bank is not exempt from giving the TDS nor the other exemptions listed below.

The following is a list of disclosure requirements from which REO sales are specifically exempt (but see Question 1 for a list of recommended disclosures):

• Transfer Disclosure Statement (Cal. Civ. Code § 1102.2(c));

• Natural Hazard Disclosure Statement (Cal. Civ. Code § 1103.1(a)(2));

• Mello-Roos Tax and 1915 Bond Act Assessment Notice (Cal. Civ. Code § 1102.6b);

• Supplemental Property Tax Notice (Cal. Civ. Code § 1102.6c);

• Homeowner’s Guide to Earthquake Safety (and Residential Earthquake Hazards Report) (Cal. Gov’t Code § 8897.1(c)(3));

• Military Ordnance Locations (Cal. Civ. Code § 1102.15);

• Industrial Use Zoning (Cal. Civ. Code § 1102.17); and

• Private Transfer Fee Notice (Cal. Civ. Code § 1102.6e).

Regardless of the above exemptions, an REO lender must nevertheless disclose any actual knowledge of material facts that affect the value or desirability of the property (C.A.R. Form SPQ). The often-quoted legal maxim, “caveat emptor” or “let the buyer beware,” does not apply to real estate transactions under California law.

Q 4. Can you explain the items on your recommended list of disclosures for REO sales?

A Yes. Here are explanations for the recommended list of disclosure requirements for REO sales, as set forth in Question 1, and what C.A.R. forms to use:

For REO Lenders

• Natural Hazard Disclosure (NHD) Statement (C.A.R. Form NHD): The law on natural hazard zones is confusing. An REO lender is specifically exempt from providing the NHD Statement (Cal. Civ. Code § 1103.1(a)(2)), such as C.A.R.’s standard form NHD. However, an REO lender is not exempt from other provisions of California law requiring sellers to disclose the fact that a property is located in a natural hazard zone. The six natural hazard zones and corresponding laws requiring disclosure are as follows: Special Flood Hazard Area (Cal. Gov’t Code § 8589.3); Area of Potential Flooding (Cal. Gov’t Code § 8589.4); Very High Fire Hazard Severity Zone (Cal. Gov’t Code § 51183.5); Wildland or State Fire Responsibility Area (Cal. Pub. Res. Code § 4136); Earthquake Fault Zone (Cal. Pub. Res. Code § 2621.9); and Seismic Hazard Zone (Cal. Pub. Res. Code § 2694).

If the law exempts an REO lender from providing the NHD Statement, but not from disclosing natural hazard zones, it makes sense to simply use the NHD Statement anyway to document the required disclosure of natural hazard zones. Moreover, the listing agent is also strongly encouraged to provide the buyer with the NHD Statement, because the law specifically places a duty of disclosing four of the six natural hazard zones on the seller’s agent if any (Special Flood Hazard Area, Area of Potential Flooding, Earthquake Fault Zone, and Seismic Hazard Zone). For more information, C.A.R. offers its members the legal article, Natural Hazard Disclosure Statement.

• Seller’s Affidavit of Nonforeign Status and California Withholding Exemption (C.A.R. Form AS): An REO lender may gain exemption from the federal and state withholding requirements by completing C.A.R.’s Form AS if applicable. Under federal law, a buyer must withhold 10 percent of the sales price from the seller’s proceeds, and send that amount to the Internal Revenue Service (IRS), unless an exemption applies (26 U.S.C. § 1445). An exemption is available if, for example, an REO lender provides a written certification using C.A.R.’s Form AS that it is a nonforeign corporation or LLC. For more information, members may refer to C.A.R.’s legal article, Federal Withholding: The Foreign Investment in Real Property Tax Act (FIRPTA).

Similarly, under state law, a buyer must generally withhold 3¹/3 percent of the sales price, and send that amount to the Franchise Tax Board (FTB) unless an exemption applies. An exemption is available if, for example, an REO lender provides a written certification using C.A.R.’s Form AS that it is a corporation or LLC that is either qualified through the California Secretary of State or has a permanent place of business in California (Cal. Rev. & Tax Code § 18662(e)(3)(D)(v)). A corporation has no permanent place of business in California if all of the following apply: (1) It is not organized and existing under the laws of California; (2) It does not qualify with the Secretary of State to transact business in California; and (3) It does not maintain and staff a permanent office in California (Cal. Rev. & Tax Code § 18622(e)(1)(B)). For more information, C.A.R. members may refer to C.A.R.’s legal article, California Withholding Tax on the Sale of Real Property.

• Megan’s Law Disclosure (C.A.R. Form RPA-CA): An REO sale is not exempt from a seller’s duty to disclose the availability of a database of registered sex offenders in at least 8 point type font (Cal. Civ. Code § 2079.10a). The legally required notice is set forth in C.A.R.’s RPA-CA and other purchase agreements. If, however, an REO lender opts to use its own sales contract, the Megan’s Law disclosure may not be included, but is still required. For more information, C.A.R. offers its members the legal article, Megan’s Law: Disclosure of Registered Sex Offenders.

• Lead-Based Paint Hazards Disclosures (C.A.R. Forms RPA-CA and FLD): An REO sale is not exempt from federal law requiring disclosure of lead-based paint hazards when selling residential properties built before 1978. Briefly, the four lead-based paint requirements are as follows: (1) Provide the buyer with an EPA approved lead hazard pamphlet (such as "Protect Your Family From Lead in Your Home" contained in C.A.R.’s Combined Hazards Book (discussed below)); (2) Provide the buyer with a 10-day opportunity to inspect for lead-based paint hazards, unless otherwise agreed in writing (such as C.A.R.’s standard form California Residential Purchase Agreement (RPA-CA)); (3) Provide a lead-based paint disclosure statement to the buyer (such as C.A.R.’s standard form Lead-Based Paint and Lead-Based Paint Hazards Disclosure (FLD)); and (4) Disclose the presence of any known lead-based paint or lead-based paint hazard in the property (C.A.R. Form FLD) (42 U.S.C. 4852d and 40 C.F.R. § 745.107). For more information, C.A.R. members may refer to the legal article, Federal Lead Based Paint Hazard Disclosures.

• C.A.R.’s Combined Hazards Booklet: REO lenders and agents are encouraged to provide C.A.R.’s Combined Hazards booklet to prospective buyers. This Combined Hazards Booklet is a three-part booklet. Part One is the Residential Environmental Hazards booklet, Part Two is "Protect Your Family From Lead in Your Home," and Part Three is the Homeowner’s Guide to Earthquake Safety. Part One is not required for any transaction, and REO lenders are specifically exempt from Part Three. However, delivery of the Combined Hazards Book is highly recommended because it provides a valuable shield from liability. By law, delivery of the Combined Hazards Book will be deemed adequate for the seller and broker to inform the buyer about common environmental hazards (Part One) (Cal. Civ. Code § 2079.7(a)) and geologic and seismic hazards in general (Part Three) (Cal. Civ. Code § 2079.8(a)). Part Two of C.A.R.’s Combined Hazards Book, "Protect Your Family From Lead in Your Home," is required for most residential properties built before 1978, including REO transactions.

• Water Heater and Smoke Detector Statement of Compliance (C.A.R. Form WHSD): An REO sale is not exempt from the water heater bracing or smoke detector requirements. With respect to water heater bracing, the seller of any real property containing a water heater must certify in writing to the buyer that an existing residential water heater is properly braced, anchored, or strapped (Cal. Health & Safety Code § 19211). There are no exceptions to this requirement. As for smoke detectors, with certain exemptions not applicable here, the seller of a single-family dwelling or factory-built housing must have an operable smoke detector (Cal. Health & Safety Code § 13113.8(a)). Additionally, the seller must deliver to the buyer a written statement of compliance with the smoke detector law (Cal. Health & Safety Code § 13113.8(b)). For more information, C.A.R. offers its members two legal articles, Water Heater Bracing and Disclosure Requirements, and Smoke Detector Requirements.

• Methamphetamine Laboratory Activity Order (C.A.R. Form SPQ): An REO sale is not exempt from the requirement to disclose a meth lab activity order. Under that law, a seller must disclose in writing to a buyer a pending order issued by a local health officer prohibiting the use or occupancy of a property contaminated by meth lab activity. The seller must also give a copy of the pending order to the buyer to acknowledge receipt in writing. (Cal. Health & Safety Code § 25400.28.)

• Condominium or Other Common Interest Development Documents (C.A.R. Form HOA): The seller of a condominium or other separate interest in a common interest development must provide the governing documents and other items to the prospective buyer (Cal. Civ. Code § 1368(a)). There is no exemption from this requirement for REO lenders. The law also requires the homeowners’ association to provide these documents to the owner upon written request (Cal. Civ. Code § 1368(b)). For more information, members may refer to C.A.R.’s legal article, Condominium or Other Common Interest Development Disclosures.

• Seller Property Questionnaire (C.A.R. Form SPQ): C.A.R.’s standard form SPQ is not a legally required form, but it is recommended for all real estate transactions, including REO sales, because sellers are required to disclose any actual knowledge of material facts that affect the value or desirability of the property (see also Question 35). The often-quoted legal maxim, “caveat emptor” or “let the buyer beware,” does not apply to real estate transactions in California. For more information, C.A.R. members may access the legal article, Seller Property Questionnaire.

• Statewide Buyer and Seller Advisory (C.A.R. Form SBSA): The SBSA is not a legally required form, but it is recommended for the seller to provide this document to the buyer for any real estate transaction, including an REO sale, for review and acknowledgement of receipt. Agents are also encouraged to provide the SBSA to both the seller and buyer of any real estate transaction. The SBSA advises both the seller and buyer of various factors that may affect a sales transaction. For more information about the SBSA, see Question 6.

For Agents

• Agency Disclosure Statement (C.A.R. Form AD): A real estate agent must provide Agency Disclosure Statements for transactions involving one-to-four residential units, except certain subdivision sales (Cal. Civ. Code § 2079.14). There is no exemption for an REO sale. However, if the seller or buyer refuses to sign an acknowledgement of receipt, the agent shall set forth, sign, and date a written declaration of the facts of the refusal (Cal. Civ. Code § 2079.15). For more information, C.A.R. has the legal article, Agency Disclosure and Confirmation.

• Agent’s Visual Inspection Disclosure (C.A.R. Form AVID): A real estate agent in an REO sale is not exempt from his or her duty to conduct a reasonably competent and diligent visual inspection of the property, and to disclose to the buyer all facts materially affecting the value or desirability of the property that an investigation would reveal (Cal. Civ. Code § 2079). Generally, real estate agents use the “Agent’s Inspection Disclosure” section on page 3 of the Transfer Disclosure Statement (TDS) to document their visual inspection. However, because REO sales are exempt from the TDS requirement, agents may use the AVID instead to document their visual inspections. For more information, C.A.R. offers members the legal article, Real Estate Licensee’s Duty to Inspect Residential Property.

Q 5. What should a listing agent do if an REO lender does not comply with the recommendedlist of disclosures?

A If an REO lender or asset manager does not provide one or more of the items set forth in the recommended list of disclosures in Question 1, a prudent listing broker and agent should consider protecting themselves by taking the following steps before close of escrow:

• Write a letter to the REO lender or asset manager requesting the relevant disclosures. The listing agent may attach to that letter C.A.R.’s REO Disclosure Chart.

• Write a second request for disclosures to the REO lender or asset manager.

• Write a letter of confirmation that the REO lender and asset manager have not provided the requested disclosures. Indicate in the letter that it’s against the agent’s advice not to provide these disclosures. Also indicate that closing escrow without these disclosures may pose serious legal consequences for the REO lender and asset manager. Also indicate that the listing agent strongly recommends for the REO lender and asset manager to seek the advice of an attorney regarding those legal consequences, and instruct the listing broker how to proceed.

• Obtain an acknowledgement of receipt of any correspondence sent to the REO lender or asset manager, or a second best alternative is to retain records demonstrating that the correspondence has been sent (e.g., e-mail receipt, fax transmittal, post office’s return receipt, messenger’s delivery slip).

• Retain in broker’s file all documentation regarding disclosures, and also use conversation logs to document any verbal communications.

Q 6. If it is not customary for REO lenders to complete or sign the Seller Property Questionnaire (SPQ), Statewide Buyer and Seller Advisory (SBSA), and other forms, why are they recommended?

A Regardless of what is customary, it is a good practice for an REO lender to complete and sign the SPQ, because an REO lender has a legal obligation to disclose any known material facts affecting the value or desirability of the property. Although REO lenders may claim to have limited knowledge of the condition of a property, that claim may be contradicted in certain circumstances by inspection reports, status reports, repair estimates, and other documentation that the REO lender has regarding the property. It is also good practice for an REO lender to provide a buyer with the SBSA, because it informs the buyer of various factors that may affect a sales transaction. Finally, it is an excellent practice for a listing agent to have written evidence showing that he or she requested the REO lender to complete and sign certain documents, such as the SPQ and SBSA, but the REO lender has refused, against the agent’s advice (see Question 5).

Q 7. If an REO lender provides no disclosures whatsoever, what disclosures do you recommend that a listing agent of an REO sale give to a buyer anyway?

A Given the nominal cost of providing certain disclosures, as well as an agent’s duty to disclose certain items, the following is a list of recommended disclosures for a listing broker and agent to provide to a buyer, in the event the REO lender or asset manager does not do so:

• Natural Hazard Disclosure Statement (C.A.R. Form NHD), or NHD report prepared by a third- party disclosure company;

• Megan’s Law Disclosure (C.A.R. Form RPA-CA);

• Lead-Based Paint Hazards Disclosure (Agent’s Section) (C.A.R. Form FLD);

• Combined Hazards Book published by C.A.R.;

• Agent’s Visual Inspection Disclosure (C.A.R. Form AVID); and

• Statewide Buyer and Seller Advisory (C.A.R. Form SBSA).

For an explanation of the items in the above list, see the answer to Question 4. Real estate brokers may, of course, exercise their own business judgment in deciding which disclosures, if any, to provide to a buyer in the event the REO lender does not do so.

Q 8. What should a buyer’s agent do if an REO lender does not provide any disclosures?

A If an REO lender or asset manager does not provide the recommended list of disclosures in Question 1, a prudent buyer’s broker and agent should consider protecting themselves by taking the following steps before close of escrow:

• Write a letter to the listing agent requesting the relevant disclosures. The buyer’s agent may attach to that letter C.A.R.’s REO Disclosure Chart.

• Write a second request for disclosures to the listing agent.

• Write a letter of confirmation to the listing agent that the REO lender and asset manager have not provided the requested disclosures.

• Write a letter to the buyer, attaching the correspondence with the listing broker, indicating that despite his or her best efforts, the buyer’s agent has been unable to obtain the relevant disclosures. Indicate that it’s against the agent’s advice for the buyer to close escrow without these disclosures. Also indicate that closing escrow without these disclosures may pose serious legal consequences for the buyer. Also indicate that the buyer’s agent strongly recommends for the buyer to seek the advice of an attorney regarding those legal consequences and instruct the buyer’s agent how to proceed.

• Obtain an acknowledgement of receipt for any correspondence sent to the listing agent or buyer, or a second best alternative is to retain records demonstrating that the correspondence has been sent (e.g., email receipt, fax transmittal, post office’s return receipt, messenger’s delivery slip).

• Retain in broker’s file all documentation regarding disclosures, and also use conversation logs to document any verbal communications.

Q 9. If an REO lender and listing agent provide no disclosures whatsoever, what disclosures do you recommend that a buyer’s agent in an REO sale give to a buyer anyway?

A Given the nominal cost of providing certain disclosures, as well as a duty to disclose certain items, the following is a list of recommended disclosures for a buyer’s broker and agent to provide to a buyer, in the event the REO lender or listing agent does not do so:

• Megan’s Law Disclosure (C.A.R. Form RPA-CA);

• Lead-Based Paint Hazards Disclosure (Agent’s Section) (C.A.R. Form FLD);

• Combined Hazards Book published by C.A.R.;

• Agency Disclosure Statement (C.A.R. Form AD);

• Agent’s Visual Inspection Disclosure (C.A.R. Form AVID);

• Statewide Buyer and Seller Advisory (C.A.R. Form SBSA); and

• Market Conditions Advisory (C.A.R. Form MCA) (see Question 41).