Ch2. Types of Disclosure — Seller Disclosure, RESPA, and Material Facts

Categories of Real Estate Disclosure

Disclosure by content type:

Physical Condition Disclosures:
  Seller's Property Disclosure Statement (seller → buyer)
  Agent's visual inspection report (agent → buyer)
  Inspection reports (inspector → buyer)

Legal and Financial Disclosures:
  Preliminary title report (title company → buyer/lender)
  Mortgage disclosure (TILA/RESPA) (lender → borrower)
  HOA documents (HOA → buyer)

Agency Disclosures:
  Agency disclosure form (agent → buyer and seller)
  Buyer representation agreement

Federal Required Disclosures:
  Lead-based paint disclosure (pre-1978 homes)
  Flood zone disclosure (NFIP requirements)
  RESPA settlement cost disclosures

Seller’s Property Disclosure Statement

Seller disclosure obligation:
Most states require sellers to complete a written disclosure form
before or at contract execution

What must be disclosed:
Known material defects — roof, foundation, plumbing, electrical,
HVAC systems
Water damage, mold, or flooding history
Presence of lead-based paint (pre-1978 — federal requirement)
Earthquake or landslide damage (in applicable states)
Environmental hazards: asbestos, radon, underground storage tanks
Neighborhood nuisances: noise, odors, pending assessments
HOA and CC&R restrictions
Legal issues: easements, encroachments, boundary disputes
Pending litigation affecting the property

Exclusions:
Seller is not required to disclose what they do not know
Seller is not required to investigate beyond their own knowledge
→ But cannot actively conceal known defects

Retention:
Transaction records, including disclosure forms, must be kept
for 3–5 years (varies by state and brokerage policy)

RESPA (Real Estate Settlement Procedures Act)

RESPA — Key Disclosures:

Loan Estimate (LE):
Provided within 3 business days of loan application
Discloses estimated interest rate, monthly payment, closing costs
Replaces the old Good Faith Estimate (GFE)

Closing Disclosure (CD):
Provided at least 3 business days before closing
Final breakdown of all loan terms and closing costs
Replaces the old HUD-1 Settlement Statement

Affiliated Business Arrangement Disclosure (ABA):
Required when a real estate company refers clients to affiliated
settlement service providers (title, escrow, insurance)
Must disclose the relationship and estimate the charges

Anti-kickback provisions (Section 8):
Prohibits paying or receiving fees, kickbacks, or unearned
compensation for referrals in a federally related transaction
Penalties: up to $10,000 fine and/or 1 year in prison

Mortgage Servicing Disclosures:
Lender must disclose whether the loan may be transferred
or sold to another servicer after closing

Preliminary Title Report and Title Insurance

Preliminary Title Report (Prelim):
Issued by a title company before closing
Shows:
  - Current vested owner
  - All recorded encumbrances (mortgages, liens, easements, CC&Rs)
  - Any title exceptions (items not covered by insurance)
  - Conditions that must be cleared before insurance is issued

How to clear encumbrances before closing:
  - Pay off mortgages and obtain lien releases
  - Resolve mechanic's liens (pay or bond)
  - Clear tax liens (pay delinquent taxes)
  - Obtain court orders to resolve disputed easements

Title Insurance:
  Owner's Policy: protects buyer against past title defects
    discovered after closing (including forged deeds, undisclosed heirs)
  Lender's Policy (ALTA policy): protects the lender's interest;
    required by virtually all mortgage lenders; covers loan amount

Limitations (standard exceptions):
  - Items disclosed in the prelim that buyer accepts
  - Government regulations (zoning, environmental)
  - Matters that would be disclosed by a survey
  - Rights of parties in possession (inspect before closing)

Extended coverage (ALTA homeowner's policy):
  Covers additional risks including:
  - Encroachments by neighbor's fence or structure
  - Post-policy forgery (limited)
  - Building permit violations by prior owners

Preliminary Report vs Final Title Insurance

┌──────────────────────┬──────────────────────────┬──────────────────────────┐
│ Feature              │ Preliminary Title Report  │ Title Insurance Policy   │
├──────────────────────┼──────────────────────────┼──────────────────────────┤
│ Purpose              │ Shows current record title│ Insures against defects  │
│ Issued when          │ Before closing            │ At closing               │
│ Duration             │ Temporary / expires       │ Permanent                │
│ Covers future claims │ No                        │ Yes (for covered risks)  │
│ Cost                 │ Free or nominal           │ One-time premium         │
└──────────────────────┴──────────────────────────┴──────────────────────────┘

Agent Disclosure Obligations

Real estate agents must disclose:

To the buyer:
  All known material facts that could affect value or desirability
  Agency relationship (who they represent)
  Any conflicts of interest

To both parties:
  Dual agency, if applicable — written consent required before creating
  any dual agency relationship

Material fact = any fact that a reasonable buyer would want to know
before making a purchase decision

Examples of material facts:
  Death on the property (varies by state — CA: 3-year disclosure rule)
  Stigmatized property (crime scene, etc.) — disclosure varies by state
  Nearby proposed developments or infrastructure projects
  Known flooding, drainage, or geological issues
  Condition of HOA finances (pending special assessments, litigation)

What agents are NOT required to disclose (in most states):
  Whether previous occupants had HIV/AIDS (Fair Housing Act protection)
  Race, religion, or national origin of neighborhood residents (Fair Housing)

Seller Disclosure Statement ★★★★★ : Written form completed by the seller disclosing known material defects and property conditions. Required in most states; must be delivered before or at contract signing. Memory tip: Seller discloses what they know; cannot conceal

RESPA — Loan Estimate & Closing Disclosure ★★★★★ : Loan Estimate within 3 business days of application; Closing Disclosure at least 3 business days before closing. Both replaced prior GFE and HUD-1 forms under TRID (2015). Memory tip: LE = 3 days after application; CD = 3 days before closing

Preliminary Title Report ★★★★☆ : Lists all recorded encumbrances and title exceptions before closing. Buyer should review carefully — items listed as exceptions may not be covered by the title insurance policy. Memory tip: Prelim = what’s on record; insurance = protection against what’s hidden

Practice Quiz

Q. What is the difference between a Loan Estimate and a Closing Disclosure under RESPA?

A Loan Estimate is provided within 3 business days of a loan application. It gives the borrower an early estimate of the loan terms and expected closing costs to enable comparison shopping. A Closing Disclosure is provided at least 3 business days before closing and reflects the actual, final loan terms and all settlement charges. The 3-day review period protects borrowers from last-minute changes.

Q. A seller knows their basement floods every spring but says nothing and the buyer’s agent does not ask. Who bears liability?

The seller has an affirmative duty to disclose known material defects in most states. Silence on a known material defect can constitute fraudulent concealment or misrepresentation by omission. The buyer may have claims against the seller for rescission or damages. If the seller’s agent knew or should have known about the condition, the agent may also have disclosure liability. The buyer’s agent’s failure to ask does not excuse the seller’s obligation to disclose.