California – Let The Seller Beware

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V.I.P. Trust Deed Company

I often base these articles on true day to day stories.  Yesterday took the cake:   It was almost a course in “how to defraud your children.”

This customer was referred to us to handle a foreclosure, but as an aside he inquired about equity loans.  He had purchased an REO (bank owned property), completed an “almost complete” remodel and then sold it to one of his adult children.   It turns out the addition did not have a permit and he financed the sale (seller carry back).  The real reason for the seller carry back was that he was afraid a conventional lender would have discovered the “no permit problem.”  I was aghast to learn that he had withheld this vital and material information from the buyer–his family.  Hopefully an equity loan would somehow solve the problem–No way.

This man was totally unaware of the Real Estate Transfer Disclosure Statement required by law many years ago on single family/I-4 unit residential properties.  I asked this man what the kids were going to do when they sold this property several years from now and had to fill out a disclosure.  He had never thought about that but he then came up with the perfect solution:  “They will sell it ‘as is,'” of “They won’t use a Realtor.”  Wrong, wrong, wrong.

We spend the first half of our lives trying to accumulate wealth and the last half trying to protect it.  Trust me–The quickest way to lose a lawsuit is to sell real estate in California and withhold material facts from the buyer.  I could do a whole column on “as is” sales, but let me do it in one sentence:  “As is” generally protects the seller from items they had NO KNOWLEDGE of.  An “as is” clause rarely protects the seller from information they knew but withheld.

Though there are certain sellers exempt from issuing a Real Estate Transfer Disclosure Statement, most California sellers are required to furnish this statement by law.  A FSBO (for sale by owner) must comply with these disclosure requirements.  This disclosure is multipage and VERY COMPLETE.

This is not a guarantee of warranty; it is merely an affirmation that you were not aware of any problems.  These problems could include “room additions made without necessary permits,” flooding, drainage or grading problems, malfunctions in floors, ceilings, electrical system, etc., etc.  Not only is this form required by law; it, in fact, allows the buyer 3 days (Civil Code Section 1102.3) after delivery to rescind the contract.  Now let’s get to the bottom line.

Sellers beware!  You may sell your property in its present “as is condition” but you must disclose (in writing) every defect that you are AWARE OF.   I mentioned there were several exempt classes of sellers.  Of the people reading this column, the most common exemption would be sellers who obtained the property in question via foreclosure.  Most other people reading this column are covered.

Remember, I said above “SELLERS BEWARE.”  Most real estate contracts contain attorney’s fees provisions and “hell hath no fury like a defrauded buyer” (politically correct quotation).  Now, how about real estate sales not covered by the disclosure requirements?  My strong advise is to disclose anyway.   Is this going to make it harder to sell your property?  You betcha.  But remember, a lawsuit for fraud can sure eat up that nest egg that you have put aside for a rainy day.

If you plan to sell property not covered by disclosure requirements and you plan to withhold the fact that the neighbor manufactures drugs and the fumes sicken your livestock (or children), you should do either of the following:  Disclose the problem in any written contract or escrow instructions, or at least consult with a real estate attorney.   After spending $200-$500 for the consultation, you probably will end up with the following advice:  Full disclosure.

I may have ruined your day but hopefully I have given you advice that will enable you to sail that schooner around the world in your later years.

Peter Rosenthal
VIP Trust Deed Company