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A Contract Series – Part 5

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The Arizona REALTORS® Residential Resale Purchase Contract – Disclosure

This is Part 5 of a series of articles discussing the major provisions in each of the sections of the Arizona Association of REALTORS® (“AAR”) Residential Resale Real Estate Purchase Contract (10/22) (“Contract”).  The previous articles in this series can be located at Arizona Real Estate – A Professional’s Guide to Law & Practice. (arizonarealestateprofessionalguide.blogspot.com)

A seller has a duty to disclose known facts materially affecting the value of the property that are not readily observable and are not known to the buyer. This duty was set forth by the Arizona Court of Appeals in Hill v. Jones, 151 Ariz. 81, 725 P.2d 1115 (App. 1986). In addition, there are an ever-increasing number of specific statutory disclosures that sellers are required to make to a buyer.  The disclosure section of the Contract is drafted to address these disclosures. 

DISCLOSURE SECTION

Seller’s Property Disclosure Statement (SPDS)

The AAR SPDS form is specifically required by the Contract, and the seller is obligated to deliver a completed AAR SPDS form to the buyer within three days after contract acceptance. The issue of late delivery of the SPDS is addressed in that the buyer has the inspection period or five days after receipt of the SPDS, whichever is later, in which to provide notice of items disapproved.

  • The SPDS was recently revised effective February 2023, review the redlined 2/23 SPDS for all the changes. 
  • Consider completing a SPDS form on your own home, which will help you understand how the form is completed from the seller’s perspective and anticipate any questions a seller may have. 
  • Give the seller a copy of the SPDS at the time of listing or shortly thereafter to allow them time to review the form and start gathering all of the requested information. 
  • Use the SPDS cover page to discuss the importance of the SPDS with the seller and make sure that they understand their legal obligations. 
    • The SPDS is designed to assist the seller in making the legally required disclosures and avoid inadvertent nondisclosures of material facts.
  • The SPDS also assists the buyer in the inspection and investigation of the property.

The proper use of the SPDS results in well informed buyers and reduces the likelihood of claims against the sellers and brokers involved in the transaction.

Insurance Claims History

The seller is obligated by the Contract to deliver a written five-year insurance claims history regarding the premises (or a claims history for the length of time the seller has owned the premises if less than five years) from the seller’s insurance company, an insurance support organization (such as the Comprehensive Loss Underwriting Exchange or C.L.U.E.), a consumer reporting agency, or if unavailable from these sources (for example, if the property is a second home), from the seller, within five days after contract acceptance. The buyer has the inspection period or five days after receipt of the claims history, whichever is later, to provide notice of items disapproved.

  • Insurance companies use the claims history as a rating factor in determining the cost of homeowner’s insurance.
  • The claims history also assists in disclosures and investigations regarding the property history.   

Foreign Sellers (FIRPTA)

Pursuant to the Contract, the seller agrees to comply with IRS reporting requirements. If applicable, seller agrees to complete, sign and deliver to the escrow company a certificate indicating whether the seller is a foreign person or a nonresident alien pursuant to the Foreign Investment in Real Property Tax Act (FIRPTA). The seller is advised that if the seller is a foreign person, the buyer must withhold a tax up to 15% of the purchase price, unless an exemption applies.

  • The FIRPTA withholding is to ensure that the seller pays U.S. taxes on any taxable gains.
  • A resident alien is not considered a foreign person under FIRPTA. 
  • There are numerous exemptions to the FIRPTA withholding requirements.
    • The most common exemption is when the seller furnishes a non-foreign affidavit stating under penalty of perjury that the seller is not a foreign person.
    • Another exemption is a transaction involving the transfer of a property acquired for use as the buyer’s residence and the amount realized (purchase price) does not exceed $300,000.
    • Under certain circumstances, a seller may obtain a “qualifying statement” from the IRS stating that no withholding is required.
  • Although FIRPTA generally provides that up to 15% of the purchase price must be withheld, the amount withheld should not exceed the seller’s maximum tax liability. The seller (or buyer) can request the IRS to determine the seller’s maximum tax liability with respect to the sale. 
  • A broker for either party can be held liable for the tax that should have been withheld (up to the amount of compensation received), if the broker had actual knowledge that the non-foreign affidavit is false and fails to notify the buyer and seller.  Under certain circumstances, the broker may also be liable for civil or criminal penalties.

Any necessary withholding should be accomplished by requiring the escrow agent to withhold the required funds. The escrow company should be instructed to send the funds to the IRS at close of escrow (“COE”).

Lead-based Paint Disclosure

If the premises were constructed prior to 1978, the lead-based paint (“LBP”) information must be provided, preferably prior to contract acceptance. The buyer is obligated to return a signed copy of the Disclosure of Information on Lead-based Paint and Lead-based Paint Hazards to the seller prior to COE. The buyer must initial this subsection on the appropriate line in every transaction. The buyer is further advised to use certified contractors to perform renovation, repair or painting projects that disturb LBP in residential properties built before 1978 and to follow specific work practices to prevent lead contamination.

Federal law and subsequent rules and regulations require that before a buyer (or tenant) is obligated under any contract to purchase a home constructed prior to 1978, the seller must:

  • Provide the EPA-approved lead hazard pamphlet, Protect Your Family From Lead in Your Home.
  • Disclose any known information regarding lead-based paint hazards to buyers and brokers.
  • Disclose and provide any available lead-based paint records or reports to buyers.
  • Permit a 10-day opportunity (or other agreed upon time period) to conduct a lead-based paint risk assessment or inspection, unless waived by the buyer.

Every contract to sell target housing must contain (or provide as an attachment) the information contained in the AAR Disclosure of Information on Lead-based Paint and Lead-based paint Hazards (sales) form.

Affidavit of Disclosure

If the premises are located in an unincorporated area of the county, and five or fewer parcels of property other than subdivided property are being transferred, the seller must deliver a completed Affidavit of Disclosure in the form required by law to the buyer within five days after contract acceptance. The buyer must provide notice of any Affidavit of Disclosure items disapproved within the inspection period or five days after receipt of the Affidavit of Disclosure, whichever is later. The buyer should deliver the affidavit to the escrow company so that it can be recorded at COE. 

  • By statute, a seller of five or fewer parcels of land (both vacant land and properties with homes or other improvements), other than subdivided land, in an unincorporated area of a county and any subsequent seller of such a parcel is required to furnish a written Affidavit of Disclosure to the buyer at least seven days before the transfer of the property.
  • The buyer is obligated to acknowledge receipt of the Affidavit of Disclosure.
  • The buyer has the right to rescind the sales transaction for a period of five days after receipt of the Affidavit of Disclosure.
  • The executed Affidavit of Disclosure must be recorded at the same time that the deed is recorded.

Changes During Escrow

The seller agrees to immediately notify the buyer of any changes in any of the seller’s disclosures. Unless the seller is already obligated to correct or repair the changed item, the buyer has five days to provide notice of disapproval.

The seller’s notification of changes should be made on the AAR Notice/Disclosure Form.

Conclusion

Failure to disclose, and associated misrepresentation claims generally make up most real estate disputes. Many lawsuits against home sellers and brokers are brought by buyers alleging the failure to disclose a material defect in the property. The proper use of the Contract and SPDS can reduce the likelihood of nondisclosure disputes and claims. 

Next Article – Warranties Section

K. Michelle Lind, Esq. is an attorney who currently serves Of Counsel to the Arizona REALTORS®.  She is also the author of the book – Arizona Real Estate: A Professional’s Guide to Law and Practice (3rd Ed.) . 

For more real estate related articles, visit Michelle’s Blog at Arizona Real Estate – A Professional’s Guide to Law & Practice. (arizonarealestateprofessionalguide.blogspot.com) This article is of a general nature and may not be updated or revised for accuracy as statutory or case law changes following the date of first publication. Further, this article reflects only the opinion of the author, is not intended as definitive legal advice and you should not act upon it without seeking independent legal counsel. 4/6/23.