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Disclosures
Jeffrey Taylor
ADRE Licensed Instructor
(602) 708-4981
JeffreyArizona@aol.com
Going from W2 to 1099
• "The book boldly and
clearly benefits
everyone. It's got 'Joe
Six-Pack' attitude yet
also appeals to people
higher up the
corporate ladder
who've been
downsized into
unemployment."
Your Personal A-to-Z Guide to Getting Even with Corporate America
R4-28-402
Title – Chapter – Article - Section
• Licensee’s disclosure • Transaction documents
obligations to client and that should be reviewed
others • Avoiding inadvertent non-
• Seller’s and buyer’s disclosures
disclosure obligations to • Common “red flags” in a
each other real estate transaction
• Homeowners • Advising buyers and
associations and buyer’s seller of common “red
obligations to homeowner flags”
associations
• Common material facts
warranting disclosure,
and liability to failure to
disclose
General Disclosure Rule
• SPDS
• Responsible for
disclosing only
information within your
personal knowledge
• Obligated to disclose
problems that could affect
property value or
desirability.
• Illegal to fraudulently
conceal major physical
defects
SPDS
• Sellers are obligated by Arizona common
law to disclose all known material facts
about a property to the buyer.
– http://www.re.state.az.us/PUBLIC_INFO/Docu
ments/Residential_Seller_Property_Disclosur
e_Statement.pdf
– http://www.re.state.az.us/PUBLIC_INFO/Docu
ments/Every_Buyer_Is_Entitled_To_A_SPDS.
pdf
SPDS Warning
• MESSAGE TO THE SELLER Sellers are obligated by law to disclose all known material
(important) facts about the Property to the Buyer. The SPDS is designed to assist you in making
these disclosures. If you know something important about the Property that is not addressed on
the SPDS, add that information to the form. Prospective Buyers may rely on the information you
provide.
• INSTRUCTIONS: (1) Complete this form yourself. (2) Answer all questions truthfully and as fully
as possible. (3) Attach all available supporting documentation. (4) Use explanation lines as
necessary. (5) If you do not have the personal knowledge to answer a question, use the
explanation lines to explain. By signing below you acknowledge that the failure to disclose known
material information about the Property may result in liability.
• MESSAGE TO THE BUYER Although Sellers are obligated to disclose all known material
(important) facts about the Property, there are likely facts about the Property that the Sellers do
not know. Therefore, it is important that you take an active role in obtaining information about the
Property.
• INSTRUCTIONS: (1) Review this form and any attachments carefully. (2) Verify all important
information. (3) Ask about any incomplete or inadequate responses. (4) Inquire about any
concerns not addressed on the SPDS. (5) Review all other applicable documents, such as
CC&R’s, association bylaws, rules, and the title report or commitment. (6) Obtain professional
inspections of the Property. (7) Investigate the surrounding area.
• THE FOLLOWING ARE REPRESENTATIONS OF THE SELLER(S) AND ARE NOT VERIFIED
BY THE BROKER(S) OR AGENT(S).
Basic Disclosure Concepts
• Arizona requires home owners to complete a Seller’s
Property Disclosure Statement that informs potential
buyers of material facts about the house they are selling.
• Material facts consist of details about the structural
condition and present legal status of the house.
• General material facts include:
– The age of the house and its individual components
– Problems associated with components
– Structural defects of the property
– Encroachments (where someone has built on another's property
line)
– Lawsuits or claims affecting ownership (i.e. a sibling or former
spouse who has not relinquished ownership rights)
Specific Disclosure Items
• Leaks in the roof or foundation walls
• Existing mold or mildew within the home
• Damage caused by wood-destroying insects
• Problems with the plumbing system
• Difficulties with sewer or septic systems
• Condition of the heating, air conditioning, and electrical systems
• Issues relating to the property's soils
• Quality of draining
• Amount of property taxes paid each year
• Square footage of the home
• A planned roadway that will be built ten feet from the home's front yard
• The home is in an airport's routine flight path
• Details about an individual who claims to possess an interest in the property
• Information about a structure on the property that overlaps an adjacent
property
• An oil or gas tank is buried on the property
Disclose Does Not Mean Fix
• Just because you
disclose a problem
doesn't mean you
must repair or correct
it. The disclosed item
becomes a point of
negotiation between
you and your buyer.
R4-33-423. Disclosure; reports; indemnity;
applicability; violation; classification
• A disclosure report may be provided to the buyer or
seller of real property by a third party as authorized by
the buyer or seller and shall be based on officially
adopted and electronically posted governmental maps or
information
• If information that is disclosed pursuant to this section is
subsequently rendered inaccurate as a result of any
governmental action, map revision, changed information
or other act or occurrence after the delivery of the
disclosure, no person is liable for the information that
was disclosed unless the person had knowledge of the
error, inaccuracy or omission.
Airports
• Disclosure requirements for property which is within
"territory in the vicinity of a military airport" or "territory in
the vicinity of an ancillary military facility" as defined in
A.R.S. 28-8461, or under a "military training route" as
delineated in the military training route map prepared
pursuant to section 37-102.
– For Luke Air Force Base in Maricopa county, the zone
is ten miles to the north, south and west and four
miles to the east parallel from the center of the main
runway of the military airport.
As-Is
• Arizona law requires sellers to disclose to buyers known
material facts which might affect a buyer's decision to
purchase the property. Thus, in addition to their
contractual obligations, sellers have a common law duty
to disclose to buyers known material facts that might
effect a buyer's decision to purchase the property.
• A seller's nondisclosure of known material facts is,
therefore, substantively equivalent to the assertion that
the fact does not exist, constituting fraud and
misrepresentation -- in addition to being a direct violation
of the terms of most Arizona real estate contracts.
Environmental Hazards
• Radon
• Asbestos
• Lead
• Mold
• Hazardous Wastes
• Ground Water
Contamination
• Formaldehyde
Flood Insurance
• Is the home or vacant land you are considering buying
within a Special Flood Hazard Area? Do you need flood
insurance? It is very important to have answers to these
questions not only when purchasing a home in a
subdivision, but when constructing a custom home or
purchasing undeveloped (raw) land.
• Your regular home owner's policy does not cover flood
losses. Flood insurance is a separate policy. It is
available to every resident in most if not all Arizona
communities. Renters are eligible to purchase "contents
only" flood insurance. Owners can purchase both
building and contents coverage.
• If you are purchasing a previously owned home, check
with the owner and the appropriate city or county agency
to determine whether the property has ever been
flooded, or whether the property is within a 100-year
floodplain.
Freeways
• Is a freeway planned in the area near the home you want
to buy? The Arizona Department of Transportation
website provides schedules, maps and other information
of new freeway construction in the state.
HOA Disputes
• Among the items a typical
homeowners association may
regulate:
– pets
– shingles, siding, and exterior
paint
– fences, shrubs, and hedges
– landscaping (what flowers can
be planted)
– swing sets, basketball hoops,
and other structures for
children
– mailboxes
– noise
– tool sheds
– home-based business
– real estate signs
Lead-Based Paint and Hazards
• Built before 1978
• Residential Lead-Based Paint Hazard Reduction Act of
1992 (U.S. Code § 4852d ), also known as Title X.
• You must:
– disclose all known lead-based paint and hazards in the house
– give buyers a pamphlet prepared by the U.S. Environmental
Protection Agency (EPA) called Protect Your Family from Lead
in Your Home
– include certain warning language in the contract as well as
signed statements from all parties verifying that all requirements
were completed
– keep signed acknowledgements for three years as proof of
compliance, and
– give buyers a ten-day opportunity to test the house for lead.
• Failure to comply
– buyer can sue for triple the amount of damages actually suffered.
Soil Properties: Shrink/Swell Potential
• A soil survey contains maps and a description of each major soil in
the survey area. More important, the survey describes how soil
properties affect a wide range of rural and urban land uses. One of
these properties, shrink/swell potential, is of great importance in the
construction industry.
• Shrink/swell potential is the relative change in volume to be
expected with changes in moisture content, that is, the extent to
which the soil shrinks as it dries out or swells when it gets wet.
Extent of shrinking and swelling is influenced by the amount and
kind of clay in the soil. Shrinking and swelling of soils causes much
damage to building foundations, roads and other structures. A high
shrink/swell potential indicates a hazard to maintenance of
structures built in, on, or with material having this rating. Moderate
and low ratings lessen the hazard accordingly.
• Maps of shrink/swell potential have been created for two areas of
the state, the Greater Phoenix and Tucson Areas of Arizona.
Subdivisions
• Flooding and Drainage Disclosure
• A description of Adjacent Land and Uses
• Who provides electricity, telephone, gas, water and sewage disposal
• Common community and recreation facilities
• Assurances for completion of improvements
• Local services and facilities, including schools, shopping facilities,
public transportation, medical facilities, fire protection, ambulance
services, police protection and garbage services
• Taxes and assessments
• Property owners association details
Sex Offenders
• The Arizona Department of Public Safety
(DPS) has established this site according
to the requirements of A.R.S. 13-3827.
DPS is responsible for maintaining the site
and annually verifying the addresses of all
registered sex offenders.
Termites
• Home owners are usually
reluctant to admit to
potential buyers that their
homes are damaged by
termites. For some
people, the mere mention
of the words "termite
damage" conjures up
images of tiny insects
with very big teeth dining
on weight-bearing wood
beams until a home
collapses in a heap of
sawdust.
Document Checklist
• MLS Printout • Affidavit of Disclosure
• SPDS (Raw land)
• Title Report / • Lead Based Paint
Commitment for Title Disclosure Form
Insurance • County Assessors
• Home Warranty Policy Records
• Covenants, Conditions & • Professional Home
Restrictions ("CC&Rs") Inspection Report
• HOA Governing • Termites & Other Wood
Documents Destroying Organisms
• HOA Disclosures • Public Report
Physical Condition Checklist
• Repairs & New • Expansive Soil
Construction • Previous Fire/Flood
• Roof • Scorpions
• Swimming Pool and • Deaths and Felonies
SPAS • Mold
• Swimming Pool • Indoor Air Quality
Barriers
• Property Boundaries
• Square Footage
• Flood Plain Status
• Sewers
• Septic
Area Checklist
• Environmental Hazards
• Superfund Sites
• Freeway Construction
• Crime Statistics
• Sex Offenders
• Military and Public Airports
• Schools
Summary
Any Questions
on
Disclosures?
TIME VALUE OF MONEY
Which would you rather have -- 1,000 today or 1,000 in 5 years?
Obviously, 1,000 today.
Money received sooner rather than later allows one to use
the funds for investment or consumption purposes. This
concept is referred to as the TIME VALUE OF MONEY!!
If you invested 2,000 today in an account
that pays 6 % interest, with interest
compounded annually, how much will be
in the account at the end of two years if
there are no withdrawals?
FUTURE VALUE
FV = PV (1+i)n = 2,000 (1.06)2
= 2,247.20
FV = future value, a value at some future point in time
PV = present value, a value today which designated as time 0
i = rate of interest per compounding period
n = number of compounding periods
PRESENT VALUE
• Since FV = PV(1 + i)n
PV = FV / (1+i)n
• Discounting is the process of
translating a future value or a set of
future cash flows into a present value.
Assume that you can sell a home in five
years for 400,000. What would you be
willing to pay for it today if you could borrow
100% at 6%?
0 5
6%
400,000
PV0
Net Present Value
• Calculating PV involves receipts and
disbursements. Investors buy real
estate (negative cash flow) and
receive rents (positive cash flows).
The difference between the PV of the
+’s and the -’s is the NPV.
MULTIPLE CASH FLOWS
Suppose a property promises a cash flow of 500
in one year, 600 at the end of two years and
10,700 at the end of the third year. If the discount
rate is 5%, what is the value of this investment
today?
0 1 2 3
5%
500 600 10,700
PV0
MULTIPLE CASH FLOWS
0 1 2 3
5%
500 600 10,700
476.19
544.22
9,243.06
10,263.47 = PV0 of the Multiple Cash Flows
Internal Rate of Return
• If you know the future value and the
present value of one or more cash
flows, you can find the interest rate
(investment rate) required to make it
happen.
»r = (FV/PV)1/n - 1
Cap Rates
• A ratio used to estimate the value of income producing properties. Put
simply, the cap rate is the net operating income divided by the sales price or
value of a property expressed as a percentage.
• Investors, lenders and appraisers use the cap rate to estimate the purchase
price for different types of income producing properties. A market cap rate
is determined by evaluating the financial data of similar properties which
have recently sold in a specific market.
• The cap rate calculation incorporates a property's selling price, gross rents,
non rental income, vacancy amount and operating expenses thus providing
a more reliable estimate of value.
• If we have a seller and an interested buyer for particular piece of income
property, the seller is trying to get the highest price for the property or sell at
the lowest cap rate possible. The buyer is trying to purchase the property at
the lowest price possible which translates into a higher cap rate.
• Investors expect a larger return when investing in high risk income
properties. The cap rate may vary in different areas of a city for many
reasons such as desirability of location, level of crime and general condition
of an area.
Co-Star March 18, 2009
• The steady rise in capitalization rates from the sale of
commercial property shows little sign of abating, adding
to the anxiety of real estate investors who don’t expect
any of the major property sectors to rebound until well
into next year.
• "Tenants are in the driver's seat, and landlords are in
survival mode, trying to preserve revenue streams in one
of the harshest ownership environments ever
encountered," said Tim Conlon, partner and U.S. real
estate sector leader for PricewaterhouseCoopers. "It will
be survival of the fittest going forward, with owners who
are able to remain financially strong being better
positioned to capitalize on the buying opportunities that
are to come."
Cap Rate Trends
• Class A office
– Late 2007 - 180 transactions - average cap rate -
6.1%
– Late 2008 - 80 transactions - average cap rate -
7.6%
– Early 2009 - 42 transactions - average cap rate -
7.9%
• Same trend in warehouse and apartments
Pro-Forma Assumptions
• Rents
• Escalations
• Operating Expenses
• Vacancies
• Reserves
• CAM
• Interest Rates
• Leverage
• Taxes
Disclosures
Jeffrey Taylor
(602) 708-4981
http://jeffreytaylorgroup.com
JeffreyArizona@aol.com
