The Truth About TDS Exemptions in Real Estate Sales
“Phantom” TDS Exemptions:
Common Misconceptions About What Is and Isn’t a TDS Exemption
The Transfer Disclosure Statement (TDS) is the granddaddy of statutory disclosures. Proposed by C.A.R. in the 1980’s, the TDS helps sellers to describe and disclose problems on the property, thereby protecting not only themselves from liability based on non-disclosure, but also agents and brokers.
It’s funny then that some agents may look for reasons to help their clients avoid filling out a TDS. The Legal Hotline attorneys have noticed a pattern of illusory TDS exemptions — or, as we like to call them, “phantom TDS exemptions” — TDS exemptions that some agents believe exist but actually don’t.
The Basic TDS Exemptions. First, let’s summarize the basic exemption rules. The TDS is required to be filled out by sellers of residential one-to-four properties. The C.A.R. purchase agreements additionally require that the seller fill out a Seller Property Questionnaire (SPQ) whenever the TDS is required. But there are a number of exemptions, about twelve in all. The most important ones from the REALTOR® perspective are the following:
• REOs and Foreclosures
• Probate
• Bankruptcy Sales
• Government Entities
• That portion of a mixed-use property not constituting residential one-to-four property
• Trusts, unless:
1) the trust is revocable
2) the trustee is a natural person and
3) the trustee was either a former owner or has lived in the property during the preceding year
Risks of Misidentifying Exemptions. In general, misidentifying a TDS exemption puts both the seller and the agent at risk for potential liability. Such a mistake may cause a seller’s breach of the law and the purchase agreement. Even in the circumstance where the seller knew absolutely nothing about the condition of the property, failure to deliver a required TDS provides the buyer with an ongoing right to cancel, even if the buyer had already removed all of the buyer’s contingencies.
Phantom TDS Exemptions. The following exemptions are illusory, because there is no legal basis behind them.
The “seller does not know anything about this property” exemption. There is no exemption based on what the seller knows or does not know about a property. If the seller does not know anything, then they will answer “no” to the questions on the TDS, indicating that they do not know. It’s true that in some rare circumstances, a seller may actually know nothing, but this is not a reason to skip the TDS requirement.
The “seller does not occupy the property” exemption. Filling out the TDS does not depend on whether the property is occupied. However, if the property is not occupied, then there is a box on the first page of the TDS to indicate that the seller does not occupy the property.
The Flipper/Investor exemption. Similar to the first two. But again, knowledge about the property, or lack thereof, is not a basis for any TDS exemption. Besides, often when a flipper says that they do not know anything about a property, it is not very credible since they are professional purchasers who’ve likely researched their investment
The Corporation, LLC, Non-Profit, Entity, etc. exemption. No such exemption exists. When an entity is the seller, the person who is most familiar with the property should assist the person who has signing authority in filling out the TDS.
The out-of-state exemption. It makes no difference where the seller lives: Alaska, France, Antarctica, etc., as they are still required to fill out the TDS. However, in regard to the items listed on the first page of the TDS, a seller who is not physically at the property and has no memory of exactly what is on it, is not required to investigate to find out. In general, the TDS is based on the information that the seller actually knows. There is no duty for the seller to investigate and find things out.
The waiver by agreement exemption. The TDS emphatically cannot be waived. This is stated in the very first section of the TDS law. Even if the buyers tells the seller that they agree to waive the TDS, it makes no difference because such a waiver is not enforceable.
The “As-Is” exemption. Often, a seller who is selling the property “As-Is” mistakenly thinks that an “As-Is” sale creates an exemption from making disclosures. But that’s just not the case. “As-Is” only means that the seller has no obligation to make repairs. It does not affect the duty to make disclosures.
The short sale exemption. In terms of disclosure law, there is nothing special about a short sale. The seller is still obliged to provide all of the normal disclosures, including the TDS. Even if the seller will not realize any financial gain whatsoever from the short sale, the seller can still have potential liability for non-disclosure.
The FSBO exemption. Whether or not a seller employs a real estate licensee has no bearing on the obligation to fill out a TDS. Thus, a seller acting on their own is still required to make all disclosures.
The tear-down exemption. Don’t be fooled by this one. It may seem that if the buyer is going to tear down the structure, then making disclosures about its condition is irrelevant. However, going down the list of questions on the second page of the TDS, you’ll notice that at least half of them concern conditions affecting something other than the physical condition of the structure itself. For example, question C.11 asks about neighborhood nuisances; question C.2 asks about features of the property shared in common with adjoining landowners; and question C.1 asks about storage tanks. Just because the buyer currently plans to tear down a property doesn’t mean that they don’t need to know about storage tanks buried beneath it. Also, there is the possibility that the buyer could change their plans for the property.
The relocation exemption. In a 1998 case, Shapiro v Sutherland, the judge ruled that even though the true sellers had transferred title to a relocation company, their fraudulent misrepresentations and material non-disclosures to the relocation company were actionable by the true buyers because the sellers would have expected their lies would be repeated by the relocation company and acted upon by the true buyers.From a risk management standpoint, the advice is clear. The true sellers should fill out a TDS and provide it to the relocation company. The relocation company will then deliver it to the true buyers. The relocation company will also fill out a TDS, even if it doesn’t have much information since the relocation company likely does not have detailed knowledge of the property.
An exemption based on a Power of Attorney. Bear in mind that someone with a Power of Attorney is merely acting for the principal, as a type of agent. Since the seller’s TDS is not waivable, using someone with a Power of Attorney to sign real estate transaction documents doesn’t excuse the seller from the TDS requirement. The principal (seller) should be filling out and signing a TDS and an SPQ.What disclosures, if any, should the person with the Power of Attorney (aka attorney-in-fact) make? As someone who is acting as an agent for the principal, it is prudent for the attorney-in-fact to disclose any material facts affecting value or desirability of the property that they personally are aware of. However, when there is someone with a durable power of attorney (because the seller is unable or unwilling to handle their financial affairs) then it may make practical sense for that person to sign the TDS on behalf of the seller (the person with the durable power of attorney may interview the seller to try to elicit information about the property).
If you are working with a seller who appears to have diminished mental capacity, you and your broker may want to consult with an attorney to ensure that you avoid any potential problems related to mental capacity issues, elder law, etc.