Texas Real Estate Agency 9E Ch3

Specifically TPC § 5.008 states the following:

A seller of residential real property comprising not more than one dwelling unit located in this state shall give to the purchaser of the property a written notice as prescribed by this section or a written notice substantially similar to the notice prescribed by this section which contains, at a minimum, all of the items in the notice prescribed by this section.

Title Insurance Standard exceptions in Texas policies

Deed restrictions or covenants Existing liens listed in policy Unrecorded title defects Governmental rights of limitation and eminent domain Shortages in area or discrepancies in boundaries, encroachments, or overlapping of improvements Issues relating to bankruptcy Taxes for the current and subsequent years

Title Insurance Standard Coverages

Defects found in public records Forged documents Incompetent grantors Incorrect marital statements Improperly delivered deeds Lack of access to and from land Lack of good and indefeasible title

Material Facts Relating to Title Issues

"no title" is an issue There are sellers who are not owners at all. Some of these sellers actually think they do own the property but don't; others know they do not own the property but pretend to. License holders in Texas are required by TRELA to advise buyers in writing before the closing of a real estate transaction that the buyer should: (A) have the abstract covering the real estate that is the subject of the contract examined by an attorney chosen by the buyer; or (B) be provided with or obtain a title insurance policy In those instances, where a license holder is not required to use a TREC-promulgated contract form, you must provide the written notice to the buyer. Your license and your commission might be at risk if you do not provide such written notice to the buyer in a timely manner

Section 5.008. SELLER'S DISCLOSURE NOTICE

(a) A seller of residential real property comprising NOT MORE THAN ONE DWELLING UNIT located in this state shall give to the purchaser of the property a written notice as prescribed by this section or a written notice substantially similar to the notice prescribed by this section which contains, at a minimum, all of the items in the notice prescribed by this section. (b) The notice must be executed and must, at a MINIMUM, read substantially similar to the following: [See TREC No. OP-H at https://www.trec.texas.gov/ sites/default/files/pdf-forms/OP-H_0.pdf for text of disclosure notice.] (c) A seller or seller's agent shall have NO DUTY TO MAKE DISCLOSURE or release information RELATED TO whether a DEATH by natural causes, suicide, or accident unrelated to the condition of the property occurred on the property or whether a previous occupant had, may have had, has, or may have AIDS, HIV related illnesses, or HIV infection. (d) The notice shall be completed to the best of seller's belief and knowledge as of the date the notice is completed and signed by the seller. If the information required by the notice is unknown to the seller, the seller shall indicate that fact on the notice, and by that act is in compliance with this section. (e) This section does not apply to a transfer: (1) pursuant to a COURT ORDER or FORECLOSURE SALE; (2) by a TRUSTEE IN BANKRUPTY; (3) to a mortgagee by a mortgagor or SUCCESSOR IN INTEREST, or to a beneficiary of a deed of trust by a trustor or SUCCESSOR IN INTESREST; (4) by a mortgagee or a beneficiary under a DEED OF TRUST who has acquired the real property at a sale conducted PURSUANT TO A POWER OF SALE under a deed of trust or a SALE PURSUANT TO A COURT ORDERED FORECLOSURE or has acquired the real property by a DEED IN LIEU OF FORECLOSURE; (5) by a FIDUCIARY IN THE COURSE OF THE ADMINISTRATION of a decedent's estate, guardianship, conservatorship, or trust; (6) from ONE CO-OWNER TO ONE OR MORE OTHER CO-OWNERS; (7) made to a SPOUSE OR TO A PERSON OR PERSONS IN THE LINEAL LINE of consanguinity of one or more of the transferors; (8) between spouses resulting from a decree of dissolution of marriage or a decree of legal separation or from a property settlement agreement incidental to such a decree; (9) to or FROM ANY GOVERNMENT ENTITY; (10) of a new residence of NOT MORE THAN ONE DWELLING UNIT which HAS NOT BEEN PREVIOUSLY OCCUPIED for residential purposes; or (11) of real property where the VALUE OF DWELLING NOT EXCEED FIVE PERCENT of the value of the property. (f) The notice shall be delivered by the seller to the purchaser on or before the effective date of an executory contract binding the purchaser to purchase the property. - If a contract is entered without the seller providing the notice required by this section, the purchaser may TERMINATE the contract for any reason within SEVEN days after receiving the notice. (g) In this section: (1) "Blockable main drain" means a main drain of any size and shape that a human body can sufficiently block to create a suction entrapment hazard. (2) "Main drain" means a submerged suction outlet typically located at the bottom of a swimming pool or spa to conduct water to a recirculating pump.

Abstracts of title

Abstracts of title are condensed versions of all records relating to the subject property, beginning with the initial transfer from a sovereign government forward to the present owner. The abstract contains a chronology of all instruments filed into the property records; this may include taxes, judgments, releases, and so on. Although abstractors make no judgments relative to the condition or quality of title, they are liable for failing to include or properly record all pertinent data. The abstract is then examined in detail by an attorney who evaluates the facts and submits a written report (opinion of title) on the condition of the title to the purchaser. The report is considered evidence of title for the current owner. Because both abstractor and attorney have liability for mistakes, purchasers often believe that title insurance is not necessary. Purchasers should know, however, that the liability is only for mistakes made to properly filed, truthful records.

KEY POINTS

An agency contract is a two-party agreement in which a client engages an agent to represent the client's interests; any persons who deal with the broker or client on matters related to the representation are third parties. License holders should take considerable care in avoiding misrepresentations to clients or third parties. Misrepresentations may occur by misstatements or by the omission of important facts by the license holder. While duties owed to a third party are not fiduciary duties, they are strong and include a duty to treat the third party fairly and honestly. - In addition, the license holder is obligated to disclose any material facts regarding the property that might affect the buyer's decision to purchase the property or the amount the buyer would be willing to pay. License holders should be certain that affected residential sellers complete the Seller's Disclosure Notice form in complete detail and that, whenever possible, the potential buyer receives a copy before signing an offer to purchase. Material facts are those facts that would affect a reasonable buyer's decision to buy, or the amount of money to be offered for the property, and include but are not limited to the following: - Physical condition - Title issues - Survey issues - Stigmatized properties Stigmas may be created from purely psychological sources, such as the reaction of a purchaser to a death that may have occurred on the property, or from physical conditions outside the property that may have a negative health or safety effect on the occupants. - Examples of physical stigmas are exposure to radon gas or electromagnetic fields. - The National Association of REALTORS® suggests the following guidelines when dealing with stigmatized properties: Determine whether the information is fact or fiction. Check state law. Determine materiality. Discuss disclosure with the seller. Although a license holder has a duty to disclose material facts to a third party, care should be exercised not to disclose confidential nonmaterial information to a third party that could be detrimental to the best interest of the client.

Guidelines for Disclosure of Stigmatized Properties

Determine whether the information is fact or fiction. Investigate the validity of the information by checking sources such as newspaper accounts or reports from state or local agencies. Separate rumor from reality. If the stigma is based on rumor and not on facts that can be confirmed, there may be no obligation to disclose. If, on the other hand, the stigma turns out to be factual (e.g., there was in fact a murder on or near the property) you should proceed to the next step. Check state law. In Texas the law requires disclosure of all physical facts regarding the property. With nonphysical matters, the requirement to disclose will hinge on the materiality of the matter. Determine materiality. To analyze the materiality of a set of facts that may produce a stigma, one must determine whether knowledge of those facts would affect the willingness of a reasonable person in deciding whether to buy the property or the amount of money to offer or pay for the property. Most stigmatized property cases involve stigmas that are less sensational than, for example, a multiple murder on the property. Less sensational stigmas may or may not impact the market value of the property. Whether or not the problem is a high-profile one, however, it is necessary to assess how reasonable persons would react to the information and if they are less likely to desire to purchase the property. Discuss disclosure with the sellers. A listing agent who concludes that the physical or psychological stigma-producing facts are material and need to be disclosed should also discuss with sellers the basis for his conclusions and his intended course of action. The sellers need and deserve to understand the sales agent's analysis and why the particular facts may affect the marketing and sale of their property and, thus, must be disclosed. Often sellers can understand the problem better if they are asked to consider themselves in the position of a prospective purchaser and whether or not they would want the factual information before deciding to purchase or what to offer for the property. Discussing the matter with the sellers up front avoids objections and controversy later about why the particular facts were disclosed to prospective purchasers

Define the Third Party and obligations to the Third Party

In a listing agreement for agency services, the two parties are the broker and the seller. Any buyer is a third party In the context of real estate sales, the doctrine of caveat emptor or "let the buyer beware" has been replaced with sellers and their brokers having duties to purchasers pursuant to evolving public policy, ethical codes, statutory obligations, and case law on malpractice and deceptive trade practice. In some cases, the pendulum has swung from caveat emptor to caveat venditor (let the seller beware). The listing broker owes a buyer or tenant customer duties of honesty, fairness, competency, good faith, and disclosure of all material facts. While these duties are non-fiduciary in nature, they are strong duties under Texas license law and regulation, professional association codes of ethics, tort law, and deceptive trade practice law. Moreover, the listing broker and any seller's subagent broker owe the buyer certain statutory duties and other regulatory duties under TREC rules of fairness, such as promptly presenting all offers and avoiding misrepresentation and false promises. The fact that a buyer may be represented by a broker does not diminish the duties of the listing broker to the buyer, even though the buyer's broker Honesty to customers, or their brokers, does not extend to answering every question customers or their brokers ask

National Association of REALTORS property disclosures recommends the following response

It is the policy of our firm not to answer inquiries of this nature one way or the other since the firm feels that this information is not material to the transaction. In addition, any type of response to such inquiries by me or other sales agents of our firm may be a violation of the federal fair housing laws. If you believe that this information is relevant to your decision to buy the property, you must pursue this investigation on your own.

Prohibited Disclosures to Third Parties

License holders should take care during disclosure to avoid volunteering information about or responding to questions relating to protected classes under federal, state, or local fair housing laws Prohibited disclosures relate to race, color, religion, sex, national origin, familial status, or handicap care must be taken not to volunteer to the buyer so much information that the client's negotiating position is compromised.

Avoiding Disclosure and Misrepresentation Problems

Misrepresentations may occur when a license holder or a party makes a false statement to a potential buyer or when a license holder or an owner fails to disclose to the buyer important facts about the property. License holders and owners have a duty to disclose material facts, if they are aware of them, affecting the value and desirability of a property The most common complaint concerns a listing broker's failure to point out material defects or property conditions the broker is aware of. California, court rulings have identified "red flags" that should put the broker on notice that a problem exists—and should be brought to the buyer's attention. Such red flags include evidence of recent mudslides, obvious building code violations, and drainage and soil settlement problems. In Texas, the broker, even if licensed as a real estate inspector, is neither expected nor even allowed to function as both broker and inspector in the same transaction The license holder is, moreover, always responsible for revealing to a prospective buyer important negative facts about a property that the license holder knows about In most cases of liability, a threshold issue concerns the materiality of the issue and whether statements were facts or opinions. The materiality of the issue is based on misrepresentations of factual matters and whether such matters are important to reasonably prudent homebuyers in deciding to purchase. *Generally, statements of opinion are not grounds for a misrepresentation or fraud suit by a buyer or a seller The license holder is well advised to never give opinions about factual matter

Section 1101.556. DISCLOSURE OF CERTAIN INFORMATION RELATING TO OCCUPANTS.

Notwithstanding other law, a license holder is not required to inquire about, disclose, or release information relating to whether: (1) a previous or current occupant of real property had, may have had, has, or may have AIDS, an HIV- related illness, or an HIV infection as defined by the Centers for Disease Control and Prevention of the United States Public Health Service; or (2) a death occurred on a property by natural causes, suicide, or accident unrelated to the condition of the property.

Title Insurance Additional coverage (endorsements) may be purchased to include

Property inspection Rights of parties in possession (such as tenant's rights) Examination of survey Unrecorded liens not known of by policyholder Environmental Protection Agency (EPA) lien endorsement (concerning claims related to EPA violations) Homestead or community property or survivorship rights Tax liability due to changes in land usage (rollback taxes) Title defects relating to personal property

SUGGESTIONS FOR BROKERS

Research indicates that a key reason for complaints against license holders across the nation relates to misrepresentation or omission of important information to clients and customers. In response to this problem, brokers should encourage associated license holders to participate in continuing education efforts in this area. Further, a well-designed, ongoing legal issue program is strongly recommended as part of company training. Keep in mind that the laws governing disclosure are dynamic and must be reviewed carefully and frequently.

Megan's Law

Sanchez v. Guerrero -federal law concerning the registration of individuals convicted of child molestation and other dangerous sex crimes. The federal government now requires states to develop and implement registration procedures for released sex offenders living in their communities. The federal law requiring such registration is commonly known as Megan's Law. Current Texas law enacted as a result requires a released sex offender to register with local law enforcement agencies and be photographed and fingerprinted. This information must be submitted to superintendents of public schools and to the administrators of private primary and secondary schools in the district where the offender resides. Additionally, enforcement officials must publish in a local newspaper information regarding the offender, including the name, age, and gender, a brief description of the offense, the street name, zip code, and municipality of residence, and the person's risk level, generally. If the individual is determined to be high risk (level 3), then notices must be mailed by the Texas Department of Public Safety (DPS) to each residential address within three blocks in a subdivided area, or within one mile in an area that is not subdivided. Texas law exempts owners of single-family residences and real estate agents from a duty to disclose information relating to sex offenders to prospective buyers or tenants. License holders should refer their buyer-clients to the DPS database to conduct their own research regarding sex offenders in the area. it may be implied that when representing a buyer, a duty of care to the buyer would include disclosure of a released offender living in near proximity to a property being considered for purchase. In any event, such disclosures should be approached with great care, citing the source of information and warning that the information may be incorrect or incomplete. A license holder is cautioned from making any related statements based on rumor or hearsay.

Mortgagee's (Lender's) Title Insurance

Title coverage for the lender is available and usually required when the purchaser secures a new loan on the purchased property This sometimes is confusing when buyers who have negotiated title policies to be furnished by sellers are charged for a mortgagee's (lender's) title policy at closing. This policy is a separate policy to ensure that the lender has a valid lien against the property. The amount of coverage is for the original loan amount, and coverage decreases as the loan balance decreases, while the owner's title policy is for the sales price and remains constant. For these reasons, as well as the fact that the research is only required once, the price of a mortgagee's policy is considerably less when purchased in connection with an owner's title policy

Title Insurance

Title insurance is a contract between the insurance carrier and the policyholder to indemnify the holder for defects in title up to the policy limits. Note that the insurer does not guarantee continued ownership, only compensation for losses up to the policy limits. Title insurance companies are regulated by the Texas Department of Insurance (TDI) and are authorized to issue standard Texas policies. As a result of the 80th Texas legislative session in 2007, title insurance companies may also offer protection against defects in title for items of personal property, such as boats, RVs, automobiles, et cetera. The extension of coverage to personal property is particularly applicable in commercial real estate and farm and ranch, where lack of clear title and/or undisclosed liens to items such as office furnishings and equipment could be quite costly to the purchaser. The coverages, available endorsements, and exceptions relating to standard Texas policies that should be disclosed to buyers

Material Fact

any fact that is relevant to a person making a decision. Agents must disclose all material facts to their clients. Agents must also disclose to buyers material facts about the condition of the property, such as known structural defects building code violations, and hidden dangerous conditions

Material Facts Relating to Survey Issues

any known problems relating to the physical description of the property must be disclosed. These problems may include discrepancies in the area of the property, boundary lines, encroachments, or the overlapping of improvements from one property onto the property of another Note that these types of problems are specifically excepted from the standard title policy as shown. Buyers should be advised to rely on measurements of a registered professional land surveyor. Surveys are generally required when: conveying a portion of a given tract of land, obtaining a mortgage loan, government entities acquire land through condemnation procedures, showing the location of new or existing improvements, and determining legal descriptions of properties.

Physical Stigmas

arise when some negative or detrimental physical or environmental condition exists that may not directly affect the property but may affect the health or safety of the occupants. These conditions may have real or imagined health-related problems, but in either case the property suffers a loss in marketability or value. Problems in this area may include asbestos, lead hazards, electromagnetic fields (EMFs), radon, chlorofluorocarbon emissions, hazardous waste disposal, underground storage tanks, soil or groundwater contamination, and previous use of premises for manufacture of methamphetamines.

Nonfiduciary duties

duties that are owed to customers (nonclients) and to the general public (consumers) The broker/agent of a principal may not engage in fraud on behalf of that principal against a third party or with a third party against another third party. Third parties are not only parties to the sales agreement, but other persons such as lenders, appraisers and service providers. A broker is liable to third parties for misrepresentations, particularly for failure to disclose certain material defects that may affect the buyer's good judgment and sound business practice broker must make at least three affirmative disclosures to a third party under certain circumstances: disclosing significant defects in the condition of the property; advising a purchaser to have the abstract of title covering the real estate examined; and making clear to the parties of the transaction which party the broker is working for. all license holders, when engaging in a real estate transaction on their own behalf, (i.e., not representing another person) are obligated to inform any person with whom they deal that they are licensed (broker or sales agent) and shall not use their expertise to the disadvantage of a person with whom they deal If a broker or agent receives a request for a copy of a document from a person who signed the document, the license holder is obliged under TX. Occ. Code Section 1101.652(b)(28) to provide the requested document. A license holder should never leave a successful listing or buyer representation appointment with the only copy of the signed listing agreement or buyer/ tenant representation agreement

Physical Material Facts

may relate to any negative condition of the property itself, such as: foundation cracking or movement; previous flooding; roof problems; termite infestation or damage; electrical problems or wiring issues (e.g., aluminum wiring); plumbing; heating, ventilation, and air conditioning (HVAC); well-water contamination or insufficiency; septic drainage or stoppage; lack of smoke detectors/carbon monoxide alarms; propane gas tanks; rainwater harvesting systems; and blockable drains in pools/hot tubs/spas. buyer should know that such inspections are not warranties and that they verify only that the inspected system was functioning properly or deficient at the time of inspection. The buyer and the seller should be informed that warranties are available through residential service companies (a.k.a. home warranty companies), which must be registered through TREC to offer such services in Texas

Purely Psychological Stigmas

occur as a result of real or imagined events, at the property, that have no actual physical impact on the property or the occupants. stigma may also arise from a notorious event or individual associated with the property. one person's stigma can be another person's selling point license holders to accept that whether potential buyers will be concerned about death or horrific events on a property frequently relates to whether the previous owner was celebrated or disgraced, how long ago the event occurred, and the impact of the event on the public conscience on the issue of AIDS-related disclosures, TRELA does not prohibit disclosure; rather, it merely relieves the license holder of a duty to disclose. TREC Rules actually prohibit such disclosure under the Canons of Professional Ethics and Conduct based on guidelines in the 1988 federal Fair Housing Amendment Act, which added persons with handicaps as a protected class. AIDS-HIV-related illnesses are included in the definition of a handicap only a homicide be affirmatively disclosed any type of death (or other issue) may be disclosed with permission of the client

Stigmatized Properties

perception of conditions or events (real or imagined) related to a property that reduces the marketability or value of the property. Stigmas may be classified as purely psychological stigmas or physical stigmas.

Nearby activities that might concern a reasonable purchaser

persistent criminal activity, drive-by shootings, planned rezoning of vacant lot, large airport considering extending its flight path over the neighborhood, numerous pet disappearances/killings, planned sewage treatment plant, and noisy, obnoxious neighbors.

SECTION 5.008 OF THE TEXAS PROPERTY CODE (SELLER'S DISCLOSURE NOTICE)

requires a written seller's disclosure notice for most single-family residential resale properties. *it is an optional form, license holders frequently use it License holders are free to use their own versions of the notice as long as they contain the MINIMUM disclosures required by TPC Section 5.008. Conditions such as the presence of lead-based paint, termite damage, and flooding are required to be disclosed by the seller. The information required to be disclosed is frequently amended during Texas legislative sessions. The disclosures most recently added to the required disclosures include those relating to the presence of smoke detectors, carbon monoxide alarms, emergency escape ladders, the previous use of the premises for manufacture of methamphetamines, liquid propane gas, blockable drains in pools, hot tubs, or spas, rainwater harvesting systems, whether any portion of the property is located in a groundwater conservation district, and if the property may be located near a military installation The TREC form with the minimum disclosures is generally updated every two years by TREC to reflect the legislative changes to the notice If the notice is not given before the effective date of the contract for sale, the purchaser may terminate the contract for any reason within SEVEN days after receiving the notice If a brokerage is using anything other than the TREC form, there can be a problem in presenting the form to sellers and asking them to sign the form. It is not uncommon to present the form by telling the seller, "The State of Texas requires you to fill out this form." If the broker is using anything other than the TREC version, there is a problem with that statement because Texas does not require the disclosure of the additional information these brokerages' forms call for liability under the Texas Deceptive Trade Practices—Consumer Protection Act (DTPA) can accrue to a seller of property for failure to disclose any "material" fact that would influence a reasonable buyer's decision to purchase, whether or not the type of defect is listed on the form. That includes both physical defects and intangible facts or "psychological stigmas" which will be discussed later in this unit. The listing agent will most likely obtain a complete factual disclosure of property issues from the seller by explaining to the seller the purpose and importance of the Seller's Disclosure Notice form it is the seller's decision to give full disclosure, and the seller's attorney might actually advise the seller not to give it. If the seller refuses to complete a disclosure, the wise license holder should probably walk away from the listing and not become an agent for a seller who has a problem being candid

General Duties of Honesty and Fairness

the license holder "shall treat other parties to a transaction fairly" fairly does not mean "equally" the concept of equal treatment is much more relevant, particularly when applying federal fair housing laws to the required treatment of members of protected classes. When "fairly" is used in the context of a seller's broker dealing with two customers competing for the agent's seller's property, then the understanding of fairly as meaning equally is very important. list of illegal or unethical conduct of a listing broker toward two competing buyer-customers: Shopping offers—"Mr. Cunningham, if you want to have the seller accept your offer for this property, you are going to have to beat Ms. Boyd's offer of $220,000." This conduct is unfair to Ms. Boyd. The broker is treating the two customers unfairly because she is giving Mr. Cunningham information about Ms. Boyd but not giving Ms. Boyd information about Mr. Cunningham. Illegal discrimination—"Mr. Seller, I know Ms. Boyd's offer is better than Mr. Cunningham's, but since you are an atheist, I need to let you know that Ms. Boyd's mother and father are devout Irish Catholics." This conduct is unfair to Ms. Boyd because it's discriminating against her on the basis of religion. Questionable negotiating tactics—"Mr. Cunningham, before you make your offer, I need to let you know that my seller is considering an offer from Ms. Boyd, but I can't discuss the price and terms of her offer." This conduct is unfair if the broker has not told Ms. Boyd that Mr. Cunningham has made an offer (if he made an offer). It is best to tell customers, "Make your best offer the first time. I'm not going to tell you whether we have other offers or not.