Disclosures 101: What to expect and how to read them
There’s a lot that makes real estate unique in Silicon Valley and San Francisco—and this is a big one: The listing agent provides a full disclosure package to interested buyers before they make an offer. This sets up a situation where non-contingent offers are common. In other parts of California a lot of disclosures are incomplete, and may not include a home inspection report. And in other states, non-contingent offers are almost unheard of.
Reading the disclosures is no easy task. You can’t skim through two hours before making an offer, especially if there is an HOA involved. You have to understand these very complex documents, do your own research and ask the listing agent follow-up questions. There may be mistakes or things missing, and that’s why I like my clients to know what to expect before the time comes. Here are the typical disclosures you will see if you buy a property in the Bay Area:
Real Estate Transfer Disclosure Statement (TDS) and Seller Property Questionnaire (SPQ)
These two documents are basically questionnaires covering the condition of the property and the neighborhood. Think of it like a Q&A with the seller where they’re required to tell everything they know that could affect a buyer’s decision. Are there defects in the insulation, plumbing or walls? Have there been past zoning violations, neighborhood noise issues or lawsuits affecting the property, etc?
Preliminary Title Report
This document is provided by the Title Company. It identifies the legal owner of the home, legal property description and ownership rights. It will include any liens or easements to the land—like if a neighbor has an easement to use the driveway to access their property. Any evictions on the property will also be listed.
Pest Inspection Report
This is one of the easier to read documents. It’s always in the same format. The report should include any pest that is a threat to the structure of the home. In the SF Bay Area, termites are the most common threat, and it may even be referred to as a “Termite Report.” It should also include things like fungus or dry rot, and the extent of the damage. They will always include a quote to fix the problem, unlike the Home Inspection report.
Home Inspection
This is one of the more complicated documents in the disclosure package. It provides the overall condition of the home, from a structural and mechanical perspective. An inspector will look at the house from top to bottom and provide a visual report but their scope is limited. For instance, the report may note minor cracks in the foundation. You’d then need to outsource a foundation expert to find out more. You’re getting an idea of what to investigate and what to expect in the future if you buy this property. Inspectors write these reports in their own style. Some will provide a summary, some will highlight what needs to be done—each one is a little different.
Natural Hazard Zone Disclosure
This disclosure outlines how your property might be affected by natural hazards like earthquakes, floods or wildfires. It gives you an idea of what you could expect in the future and what type of insurance you’re going to need. If you’re in a flood zone, for instance, the lender will require you to get flood insurance on top of your homeowner’s insurance.
Agent’s Visual Inspection Disclosure (AVID)
The buying and selling agent both have an obligation to go through and visually identify what may be wrong with the property and neighborhood. It’s based on our opinion but that opinion is based on years of professional experience. For example, I’d flag if a home is in a neighborhood where you can’t park overnight because I know that’s something my clients care about.
When you’re buying a condo, a townhouse or a home in a planned development, the disclosure package is going to be significantly thicker. Here are some additional documents you will need to review closely:
Covenants, Conditions and Restrictions (CC&Rs)
This is an incredibly important document with all the rules and regulations for your property. It’s going to dictate what you can and can’t do. Are there rent restrictions? Can you paint the exterior? Can you put up a basketball hoop in your driveway or grill on your balcony? I’ve read so many of these documents and each one is very different. The important thing to remember is these rules can not be changed. Occasionally there may be amendments to the CC&Rs but don’t count on them. These rules affect the appearance of your home, your lifestyle and potential to use it as an income property. Read closely and make sure you can live with it.
Tip: Many people don’t realize single family homes have CC&Rs. They come with the property and are usually incorporated into the Title Report. They are more likely to be outdated since the documents don’t always keep up with changes to city rules and zoning ordinances.
HOA Budget and Budget Reserve Study
This is a difficult document to get through with a lot of numbers and complex terminology but don’t gloss over it. After reading the HOA budget, I’ve had many clients decide they do not want to buy a property. You want to make sure everything is working financially. If not, it could affect your personal finances and resale value. Know what the HOA budget is and what’s in reserve for upcoming expenses. If there’s not enough money to cover a big project like a new roof, the HOA can enforce a special assessment. That means, your HOA is going to ask you for additional money to keep the budget running, on top of your monthly dues. Depending on the project, that special assessment could cost you thousands of dollars. Be particularly thorough when reviewing smaller HOAs. They may be self-managed and often have financial issues.
HOA Meeting Minutes
HOA boards typically meet quarterly or semi-quarterly. Their meeting minutes will tell you everything they’ve been talking about—past, present and future—and could positively or negatively impact your desire to purchase a unit. One example, my clients often ask me about electric charging stations. Reading the minutes will tell us if this is something the property may implement in the future. If you plan to rent, look closely for any discussions around rental restrictions.
House Rules
There may be some overlap with CC&Rs but think of these as the rules that can more easily be updated. For example, your city passes a noise ordinance and because of this they need to shorten pool hours at your complex because it’s too noisy. Can you wash your car in the driveway? Can guests park overnight? Can you put a shed in your backyard? These are the types of things you’ll find within House Rules.
This is a legal document that confirms the basics like does the property have insurance.