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Santa Barbara Real Estate AlertóDo your Homework before Putting your Property on the Market

Apr 11, 2014
By Eric Berg

With the recent uptick in California real estate sales volume, the duties and obligations of sellers have gained renewed focus. But when deciding to sell, it is important to first do your homework before posting your “For Sale” sign. Below are some of the key California best practices for a seller to follow before he markets his or her property for sale.

Disclosure Material Facts

To avoid liability for negligence, fraud, misrepresentation or deceit, sellers must generally disclose anything about the property that may affect the prospective buyer’s decision to purchase the property. That means full disclosure of facts that the seller not only has knowledge of, but also facts that are not easily observable by a buyer. For residential property (defined in California as one to four units), a seller’s duty of disclosure applies to all known material facts affecting the value or desirability of the property regardless of whether they are observable by the buyer.

Do not conceal facts. Do not misrepresent facts. Complete any partial disclosures. Relate any change in circumstances. Keep in mind that corrective work does not eliminate disclosure obligations. That big foundation crack that you repaired should still be disclosed as that big foundation crack that you repaired. When in doubt, ask yourself if it is something you would want to know if you were buying your property.
Also, be aware that selling your property “as is” clarifies that you are not undertaking repair obligations. Nonetheless, you must still disclose known material facts, even if they are hidden, and avoid making statements that you know to be false.

Evaluate the Physical Condition of the Property

Although a seller generally has no affirmative duty to inspect for defects, consider inspecting your property pre-sale nonetheless. This offers several advantages. It helps avoid disclosure disputes down the road. It assists in calculating the costs of repair. It will likely improve negotiations—there are advantages to addressing defects that a buyer is sure to discover on inspection, and it allows you to explain what you plan to do about the defects and why your price is appropriate. This will also preempt any argument by the buyer that the initial agreed upon price should be reduced now that defects have been discovered.

Some of the common property conditions that require disclosure are:

Structural defects;
Underground Water and Soil Conditions;
Hazardous Substances;
Termite Infestation;
Illegal Units;
Illegal Work;
Zoning and Building Violations;
Boundaries, Acreage, and Geography; and
Energy Consumption Data (for sellers of nonresidential buildings larger than 50,000 square feet.)

Prepare Required Property Disclosures

The following are the primary disclosures that must be made, but the list is not exhaustive.

First, a Transfer Disclosure Statement (TDS) must be filled out and delivered to buyers of residential property. The primary exceptions where a TDS is not required are when it is pursuant to court order, by a fiduciary administering an estate, among co-owners, between spouses, resulting from divorce decrees, and by way of foreclosure.

Also check for local disclosure requirements. Your city or county may have requirements beyond those mandated by the State.

Common required disclosures must address general earthquake safety, existence of lead-based paint, water heater bracing, existence of toxic mold, any deaths on the property, existence of airport noise, and information about the location of gas and hazardous liquid transmission pipelines.

Additionally, a written disclosure statement is required when a residential property is subject to one or more of six specified hazard zones or areas, including high fire hazard and high flood areas.

Determine the Effect of Sale on Existing Loans

It is important to review deeds of trust encumbering the property, and the notes secured by them, paying particular attention to due-on-sale and prepayment clauses to determine whether the loan is assumable and whether a sale will trigger a prepayment penalty.

If the loan is assumable, negotiate with the lender concerning who may assume the loan and on what terms, as well as what the cost of assuming the loan will be.

If there is a prepayment penalty, review the loan provisions to determine whether the prepayment penalty is even legal—consult an attorney for the specifics—and if it is, calculate what the penalty is and consider factoring that into the ultimate purchase price and deposit.

Determine the Tax Impact of Sale

Consult with an accountant or tax expert concerning all of the following issues:

Whether the deal can be structured as a tax-deferred transaction;
How to allocate proceeds among various held assets;
The impact if the seller is providing financing;
Taxes due;
Withholding requirements;
Leasing options in lieu of sale; and
The effect on any property tax reassessment.

Investigate Title to Ensure Conveyance of Clear Title

As a final pre-market step, determine how the property is held. Obtain a preliminary title report to determine your authority to sell. If title is in an individual seller’s name, determine whether an ownership interest is held by anyone whose name does not appear on record title—primarily spouses, partners, and beneficiaries. If title is in a corporate or partnership name, consult the governing documents to determine any permissions or approvals needed to move forward with the sale. If held in trust, review the trust documents for any relevant sales restrictions. If held by an estate, obtain Court and/or IRS approval as appropriate.

Review of the title report may reveal potentially problematic exceptions. If possible, negotiate removal of any liens, rights of way, restrictions, easements, encroachments, and encumbrances that will adversely affect marketability. Any remaining problems may need to be factored into the asking and purchase price upfront.

Conclusion

This checklist addresses some of the major pre-marketing best practices, but is not exhaustive. It should serve to highlight that the process from deciding to sell to posting a sign in front of your property is not instantaneous. It requires some careful consideration on the front end that will ensure a far smoother negotiation, sale and closing on the backend. Address as much as you can up front and save yourself considerable pain down the road.

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