Understanding the Seller’s Disclosure Form
If you buy a property from a trust, are you less protected by disclosure rules? If you’re transferring a deed to trust property, what do you need to know for proper disclosure?
There is no one-size-fits-all answer. Disclosure of defects in real estate is a question of state law. But don’t assume that buying from a trust means buyer-beware. The states’ trust exceptions to disclosure laws tend to be narrow.
Here, we take a look at two examples, to give parties to a trust transaction an idea of the issues to spot before the deed changes hands.
Consider a case in which a California property is titled in the name of a family or company trust. A while later, the property is being sold. The trustee who will convey the home to its new owner has never lived on the property. As a legal matter, the trust is conveying the deed. Therefore, the property will be exempt from disclosures, right? Or not?
Turning to the California Civil Code, Section 1102, we see the general rule that sellers provide disclosure to their buyers. The duty is the seller’s because the seller is in the best position to know about material defects that could matter to a buyer or impact the property value. For this purpose, an agent provides a California seller with a Transfer Disclosure Statement. Any attempts to have the disclosure responsibility waived would be “void as against public policy.”
Yet in certain situations, an owner can convey a deed with no disclosure required. Examples are sales by a trustee in bankruptcy. Also exempt are sales by a trust or the transfer of the deed by a trustee “in the course of the administration of a trust, guardianship, conservatorship, or decedent’s estate.” Even with a trust-owned property, transactions other than the situations exempted in the law do need a completed Transfer Disclosure Statement.
Note that trust administration is defined narrowly. It is generally defined as management on behalf of the beneficiaries after the creator of the trust dies.
Moreover, California law holds that the exemption can only apply if the property held in trust was never in the trustee’s personal name, and may not be used by a trustee under their personal name, and may not apply to a revocable trust.
As you can see, the trust exemption is meant for specific kinds of estate administration only — it’s not the default. Written disclosure is necessary for most deed transfers.
Sellers must be sure to present buyers with all necessary forms. In California, this means completing natural hazard and wildfire disclosure statements before the title is transferred. Note that California has new wildfire disclosure laws. Buyers of homes in “high” or “very high” risk areas must be given information from the seller on the clearing of debris around structures and instructions on continued fire-proofing maintenance. The new provisions have adjusted California’s wildfire risk mitigation and disclosure law as part of the state’s response to recent fires in a disrupted climate.
Pro tip: Check the form’s language to know if it applies to a single or multi-unit property. Another thing to watch when real estate is transferred by a trust? The law has a tendency to change. So, if you have questions about the duty to disclose when a trust conveys a deed, consult a local attorney experienced in real estate matters. When liability for defects and legal costs could be at stake, it’s best never to assume.
Or, Take Texas
A Texas buyer, too, should expect disclosure in all but very narrow circumstances. Texas provides a disclosure form called the Seller’s Disclosure Notice. A seller unsure about any of the form’s required information must state on the form that they don’t know that specific information, in order to comply with Texas real estate law.
The Texas Property Code lists the situations in which a seller is exempt from disclosure provisions. Several examples of the exemptions granted by the law occur when:
- The title is going to heirs.
- The reason for the conveyance is foreclosure, or a court order such as a divorce decree.
- The property is conveyed between spouses, among co-owners, or within close family relationships.
- The deed is being transferred to or from a government agency.
- The real estate being conveyed is a newly built, single-unit property.
- The value of the building at issue is less than 5% of the value of the entire property.
- The deed is being conveyed by a trustee in bankruptcy, or within the administration of an estate, guardianship, conservatorship, or trust.
Note the similarities to California law. So, here again, only specific kinds of estate administration are exempt from the standard disclosure notice. In the typical, single-unit home sale, the form is completed in writing by the seller, executed, and presented to the buyer by the closing date. Otherwise, the buyer is allowed to cancel the purchase. A seller may not sell a home in as-is condition without disclosure.
Why a Thorough Inspection Matters
When selling on a trust’s behalf, be careful not to invite unnecessary liability. Be sure to follow current state law. The best way to go about this? Ask your real estate agent for the form that explains disclosure laws and exceptions. Then, check it against current law.
Important note: The information in this article is offered for general knowledge only; it is not intended as legal advice. Your situation is unique. If you have questions on the law in your state, consult a local real estate attorney so you can choose from the actions available to you in your own set of circumstances.
When buying from a trust, depending on who lived on the property, you could find a lot of questions filled in as “Don’t know” on the disclosure form. If the party responsible for conveying the deed is unfamiliar with the home’s defects and repair history, a new owner could have to learn some important things first-hand. If the house is not currently occupied, the seller might allow a buyer the option of moving in before closing, by paying rent and making pro-rated homeowner’s insurance payments. This can allow a buyer to get familiar with the trust property and its condition before closing. Granted, some sellers will not consider this option. It depends on the parties coming to an extra, temporary agreement to allocate liability between seller and buyer.
In any case, the key to risk management is straightforward. Have a thorough inspection done and make the purchase contingent on an acceptable inspection report. No matter how attractive the home and the deal might be, it takes a professional eye to determine structural soundness, proper drainage, the condition of the roof, vents, heating and air conditioning, safe outlets, connections for the major appliances, pipes and plumbing.
Final Word to the Wise
In any sale, the assurances in the seller’s disclosure form only go so far. All buyers of homes they haven’t personally lived in should undergo a thorough inspection process. Expect a trust home — or any home you buy — to need work, and be sure you’re financially prepared.
California Civil Code § 1102 and § 1103: Disclosures Upon Transfer of Residential Property; Disclosure of Natural and Environmental Hazards, Right-to-Farm, and Other Disclosures Upon Transfer of Residential Property.
Amendments to California’s wildfire risk mitigation and disclosure law: Fire Safety; Low-Cost Retrofits; Regional Capacity Review; Wildfire Mitigation.
Texas Real Estate Commission: Seller’s Disclosure Notice (Form OP-H).
Texas Property Code § 5.008 (regarding disclosure of material facts and the physical condition of residential property).
D. Keith Dunnagan for the BPE Law Group: Understanding the Trust Exception to Real Estate Disclosures (Mar. 9, 2021).
Deeds.com: Succeeding With Contingent Offers in a Seller’s Market (Apr. 30, 2021).