Originally posted on the Big Bear REO Blog. 

During a Real Estate transaction buyers are bombarded with Disclosure after Disclosure to read and sign.  While all the Disclosures are imprortant for different reasons, some seem unnecessary to buyers.  Often times buyers even question why something so obvious has to be put down on paper.  Obviously most of the forms are to protect the parties of the transaction and none more so than the three page Transfer Disclosure Statement, commonly referred to as the TDS.

Agent Section of TDS

California law requires a TDS to be part of all transactions involving 1-4 residential units.  Although the responsibilty to deliver the TDS is on the Buyers agent, the TDS form is filled out by the seller, Listing agent and Buyers agent. 

The Two agents (or one if it is a dual agency situation) are supposed to disclose any defects or concerns they come across while doing their diligent visual inspection of all the accessable areas of the property.  While many times an agent might see something the buyer or seller doesn't, usually this section of the TDS is not as important as the section the seller fills out. 

Also good agents will fill out another form called AVID (Agent Visual Inspection Disclosure) and simply use their section of the TDS to say "see attached AVID Form.  The AVID form is a more in depth visual inspection record, that allows for more input from the agents on every section of the property.

Seller section of TDS

The seller meanwhile is asked to fill out a check list of items that are present in the house..  These items include spas, dishwashers, garage door openers and others common items found in a residence. The seller is also asked if they know of any defects to any of the items listed.

Then the seller is given the opportunity to describe any defects or concerns about the property that they know about. concerning the actual structure.  This includes walls, foundations, plumbing, driveways, etc.  Many of these defects are concerns that would show up on a home inspection as well.

Lastly the seller is asked a series of yes and no questions about their knowledge of the property.  This is important because many of these questions could only be answered by the seller.  These questions cover everything from noise problems to previous flood and earthquake damage. 

This is one of the most important sections of any form involved in the transaction.  This is where the seller has the chance to alert the buyer of encroachments, unpermitted additions and remodels and other potentitial detrimental issues.

Benefits of TDS

The important part of this section is that the seller has to explain any yes answers and give the buyer insight they normally couldn't get about the property.  Also if the seller was told of something when they bought the property, they should pass that knowledge to the new potential owner creating a chain of information that should stick with the property.  So even if a home flooded three owners ago, the new buyer should hear about it.    

After reviewing the TDS the buyer then decides whether or not to move ahead with the purchase of the property.  In some cases they may see something on the TDS that alerts them to cancel the deal before paying for a home inspection.

TDS and Foreclosed properties

There are exemptions to the TDS law.  Some of these exemptions are trivial, such as a co-owner selling their share of a property to the another co-owner.  Other exemptions are obvious, like foreclosed properties.

Since the bank never lived in the home, or recieved any of the disclosures from the previous sale they are not in a position to fill out a TDS and don't have the knowledge of the property that a traditional seller would.  So when a property goes into foreclosure it literally breaks the "Disclosure chain". 

The buyer of a bank owned property will not hear about when the property flooded two years ago.  They also won't be told about how the bonus room used to be a garage, and the owner didn't pull a permit or build it to code.  They might end up buying a property that has a deck encroaching into the "setbacks" of the lot, and on and on... 

What does this mean to the buyer of a bank owned property?

Not recieving a TDS in a transaction just makes all the investigations a buyer does that much more important.  Most likely you aren't going to get any repairs from the bank so you will want to find out all you can about the property's defects and concerns. 

A professional Home Inspector will be able to find any existing problems and a trip to the local building and safety department can help determine if permits were pulled or obvious additions are conforming. 

A trip to the county accesors office may help identify additions done to the property.  And if you are lucky enough to talk to a neighbor or someone else familiar with the area, you may find out about floods or other distaters that might have affected the property.

A buyer should always investigate any of their concerns on a purchase of property and when buying a bank owned property, this is even more true.