byon January 14, 2015
As General Counsel for the Arizona Association of REALTORS®, I am frequently contacted by members of the association regarding proper usage of AAR forms. Recently, I have received a number of inquiries regarding the Residential Seller’s Property Disclosure Statement (SPDS). While the questions and comments about this popular form run the gamut, I am repeatedly asked about sellers electing not use the SPDS. I therefore want to share the three most common questions I receive on this topic, along with my thoughts on the proper answer.
QUESTION ONE – Who benefits the most from use of the Residential Seller’s Property Disclosure Statement?
ANSWER ONE – Without question, use of the SPDS benefits the seller above all other parties to the transaction. Sellers are obligated by law to disclose all known material facts about the property to the buyer. The most effective way for sellers to comply with these legal obligations is to complete the SPDS to the best of their knowledge. Without using the SPDS, it is more likely that sellers will inadvertently fail to disclose a material fact, potentially subjecting them to liability. So while the SPDS is undoubtedly helpful to buyers in deciding whether to purchase the property, the form itself is of greatest benefit to sellers. For this reason, a seller may want to think twice before completing a transaction without using this document, even in instances in which the seller lacks knowledge of all aspects of the property.
QUESTION TWO – Aren’t sellers best protected by having the buyer waive the SPDS?
ANSWER TWO – Absolutely not. In fact, the opposite is likely true. This point is addressed at the top of the Residential Seller Disclosure Advisory, which is titled “When In Doubt – Disclose!”. The pertinent language states:
Arizona law requires the seller to disclose material (important) facts about the property, even if you are not asked by the buyer or a real estate agent. These disclosure obligations remain even if you and buyer agree that no Seller’s Property Disclosure Statement (“SPDS”) is provided.
As such, an agreement to waive the SPDS does not excuse the seller’s disclosure obligations. Rather, it makes it: (1) harder for sellers to satisfy their disclosure obligations; and (2) more likely that sellers will inadvertently fail to disclose a material fact, potentially rendering the seller liable for undisclosed defects. Sellers should also keep in mind that even if the property is sold in as-is condition, they are still subject to the same legally imposed disclosure obligations.
Discussing this issue with one prominent agent, he explained a practice he employs on his client’s behalf when the listing expressly states “Buyer to waive SPDS.” In the Additional Terms and Conditions Section of the Residential Resale Real Estate Purchase Contract, the agent, when representing the buyer, writes: “Seller acknowledges that even though no SPDS will be conveyed, Seller’s disclosure obligations under Arizona law remain.” In several instances, this language has caused sellers to reconsider their position and ultimately convey a completed Disclosure Statement.
QUESTION THREE – Does Arizona law require banks and “flippers” to disclose all known material facts about the property to the buyer?
ANSWER THREE – Yes. Banks, as well as investors who buy and flip homes, are not exempt from the law. As a result, banks and “flippers” are subject to the same disclosure obligations as all other sellers.
And while banks and flippers often claim to know nothing about the property because they never resided there, such representations are frequently false. Virtually all banks perform inspections of their REO (bank owned) properties. In many cases, these inspections cause the bank to authorize certain repairs before the home is sold. Similarly, many “flippers” repair and/or upgrade portions of the property before listing it for sale, leading to the term “fix and flip.” So while it is true that banks and “flippers” do not reside in the property, in many instances, each has knowledge of the property’s condition, as well as repairs that were made prior to sale. Banks and “flippers” who fail to disclose these material facts subject themselves to potential liability.
Despite the above, there are and will continue to be transactions in which no SPDS is provided to the buyer. Under those circumstances, it is recommended that the buyer’s agent have documented communication with their client addressing the associated risks and emphasizing the importance of hiring professional inspectors to thoroughly investigate the property’s condition. It’s also a good practice to provide a blank SPDS to the buyer and obtain written acknowledgement that the buyer received the document, such as by initialing or signing a copy.
Ultimately, the SPDS is a tool designed to protect the seller. Sellers who choose not to complete the document do so at their own risk as this course of action increases their potential liability. It is therefore prudent for all sellers, including banks and investors who buy and flip homes, to utilize the SPDS in each and every transaction to better ensure compliance with their legally imposed disclosure obligations.