By Bob Ramseur, Miriam Baer and Will Martin*
Significant changes to the Offer to Purchase and Contract (form 2-T) have been approved by the NC Bar Association and the NC Association of REALTORS®. The new form was released effective January 1, 2011.
Content and format. A great deal of the content of the former form (copyright 7/2008) has been carried forward into the new form, but reorganized to group related provisions in a more logical way. For example, defined terms are grouped together in a new “Terms and Definitions” paragraph at the beginning of the new form, and buyer and seller representations and obligations are grouped together in paragraphs 5 through 8.
“Alternative 1” replaced with “due diligence” approach. The most significant change in the new form is the elimination of the former “Alternative 1.” Doing away with Alternative 1’s complicated repair negotiation structure will help reduce many of the disputes that have frequently been stumbling blocks to the negotiation of repairs, including disputes over whether an item is “covered” under the list of items in Alternative 1, whether an item is “performing the function for which intended” or is “in need of immediate repair,” whether repair requests and responses to repair requests are timely, whether an item is includable under the Cost of Repair Contingency, whether the estimated cost of repairs is reasonable, and whether and when a contract is “over” following a breakdown in repair negotiations.
Replacing Alternative 1 is a new “Buyer’s Due Diligence Process” paragraph (paragraph 4). During an agreed-upon “Due Diligence Period,” the buyer will have the opportunity to investigate the property and the transaction to decide whether the buyer will proceed with or terminate the contract. Prior to the expiration of the Due Diligence Period, the buyer may terminate the contract for any reason or no reason by written notice to the seller. If the buyer decides to terminate, time is “of the essence” regarding the notice of termination.
The new due diligence paragraph is similar to Alternative 2 in the former Offer to Purchase and Contract but differs from it in some important respects.
First, unlike Alternative 2, the description of the due diligence process in paragraph 4 in the new form includes a significant amount of guidance to the parties to aid them in understanding the things they should consider doing during the due diligence period.
Examples listed of things that the buyer may consider doing during the due diligence period include:
• Conducting inspections to determine the condition of improvements on the property,
• Reviewing relevant documents such as restrictive covenants,
• Conducting an appraisal and a survey of the property,
• Investigating current or proposed zoning, the availability and cost of property insurance, and potential flood hazards,
• Pursuing qualification for and approval of any loan that the buyer may need to obtain to purchase the property.
The buyer does not have to do all or any of the listed items, but it is important that any of those items that the buyer does choose to do should be done during the due diligence period.
Separate loan condition eliminated. It is important to understand that there is no longer an independent loan condition in the contract. If the buyer has to obtain a loan to purchase the property, the buyer will be entitled to pursue qualification for and approval of the loan during the due diligence period. Depending on the length of time the buyer and seller agree that the due diligence period will last, it’s quite possible that the buyer won’t know for sure when the due diligence period expires that the loan will be approved. Thus, prior to the expiration of the due diligence period, the buyer will need to make a decision based on the information from the lender at that time whether to terminate or proceed with the transaction. If the buyer terminates the contract, the buyer gets the earnest money deposit back. If the buyer proceeds with the transaction and the lender doesn’t approve the loan for some reason, the buyer would lose the earnest money deposit if the buyer was unable to close without the loan.
Is it fair to make the buyer put the earnest money deposit at risk? Recall that the loan condition in the former contract was completely rewritten in 2008. Prior to that time, the loan condition extended right up to the date of closing and if the lender decided not to make the loan at the last minute, the buyer could terminate the contract and get the earnest money deposit back. Many felt this was unfair to the seller. It was felt that the loan condition should be changed to more fairly balance the risk between the buyer and seller of the sale not closing due to the buyer’s loan not being approved. This was accomplished in the former form by shifting that risk to the buyer at some mutually agreeable date during the transaction. The new due diligence contract uses this same basic approach. The date that the risk shifts to the buyer is the date that the due diligence period expires.
What’s a fair period of time to give a buyer to make a decision? The buyer typically would like for this date to fall as close to the closing as possible and the seller typically would like for this date to come sooner in the process. Just as the sales price is negotiable, the date that the buyer has to make a decision to terminate or move forward is a matter of negotiation. The “Note” at the end of paragraph 4(a) in the new Offer to Purchase provides: “Buyer is advised to consult with Buyer’s lender prior to signing this offer to assure that the Due Diligence Period allows sufficient time for the appraisal to be completed and for Buyer’s lender to provide Buyer sufficient information to decide whether to proceed with or terminate the transaction.”
Repair negotiation. Regarding the negotiation of repairs, Paragraph 4 in the new form specifically states that the parties may, but are not required to, engage in repair negotiations. There is no limitation on what the buyer can ask the seller to repair, and there is no obligation on the seller’s part to repair anything. The buyer is advised to make any repair requests in sufficient time to allow any repair negotiations to be concluded by the end of the due diligence period. There is a “Warning” to the buyer in paragraph 4 that unless the seller agrees in writing to an extension of the due diligence period, the buyer should terminate the contract if the buyer is not satisfied with the results or progress of the buyer’s due diligence.
If the buyer chooses not to terminate prior to the end of the due diligence period, the buyer would lose any right to terminate the contract later based on any matter that should have been addressed during the due diligence period. However, the buyer would not lose all rights to terminate after the end of the due diligence period. The “Note” at the end of paragraph 4(g) makes it clear that the buyer would retain any right to terminate for any other reason permitted under the contract or North Carolina law. For example, if the seller was unable to deliver a deed conveying marketable and insurable title (see paragraph 8(a)), that would be considered a breach of contract by the seller. Paragraph 8(l) specifically provides that the buyer would be entitled to a refund of the earnest money deposit and any due diligence fee, and reimbursement for reasonable costs incurred by the buyer in connection with the buyer’s due diligence.
Due Diligence Fee. The “Due Diligence Fee” is defined in paragraph 1 of the new form as “[a] negotiated amount, if any, paid by Buyer to Seller with this Contract for Buyer’s right to conduct Due Diligence during the Due Diligence Period” (see paragraph 1(i)). The payment of a due diligence fee is not mandatory under the new version of the Offer to Purchase and Contract. That’s the second significant difference between the due diligence provision in the new form and former Alternative 2. To address concerns about the enforceability of the contract in situations where no due diligence fee is paid, a mutual waiver of any defense to the enforceability of the contract based on the absence or alleged insufficiency of any due diligence fee has been added at the end of paragraph 1(i).
The amount of the due diligence fee will be influenced by such things as the market for the property and the time it’s been on the market, the buyer and seller’s personal circumstances, and the length of the due diligence period. In determining how much due diligence fee he or she is willing to pay, a buyer should clearly understand that the fee is generally non-refundable (with some exceptions listed in the Due Diligence Fee definition) and that the seller is not required to make any repairs to the property or agree to any other concessions that the buyer may request. On the other hand, in deciding how much of a fee to accept, the seller should clearly understand that the buyer may walk away from the transaction for any reason or no reason, even if the seller is willing to fix everything that the buyer may request or agree to any other concessions, and that the due diligence fee is all the seller is going to get for taking the property off the market during the due diligence period.
Other significant changes. Other significant changes include the following:
• The separate appraisal, loan, and flood hazard conditions have been eliminated since obtaining an appraisal and investigating the availability of any necessary financing and potential flood hazards, among other things, will become part of the buyer’s due diligence.
• The new form recognizes a distinction between “settlement” and “closing”. “Settlement” is when all the documents are signed and delivered to the settlement agent along with the funds necessary to complete the transaction. “Closing” is a process that includes the settlement, as well as the title update following settlement, the settlement agent’s receipt of authorization to disburse all necessary funds and the recordation of the deed(s) and any deed(s) of trust (see definitions in paragraphs 1(k) and 1(m)).
• The seller’s damages in the event of a breach of the contract by the buyer are limited to the earnest money deposit (see paragraph 1(e)). A seller’s damages can be difficult to determine, and unless the contract sales price is greater than the appraised value of the property at the time of the contract, the seller may not have any significant damages if the buyer breaches the contract. Limiting the seller’s damages to the earnest money deposit will give the parties greater certainty during the negotiation process about possible outcomes if the transaction doesn’t work out.
• An attorney fee provision has been added in paragraph 1(g) in an effort to help discourage frivolous disputes over earnest money.
• The separate “Fuel” provision and the necessity of measuring the amount of fuel in any tank(s) prior to closing has been eliminated. In the new form, the buyer will be entitled to whatever fuel may be in the tank(s) at Settlement (see paragraph 2).
• New representations by the buyer have been added regarding other property that the buyer may need to sell and the buyer’s financial ability to complete the transaction (see paragraphs 5(b) and 5(c)).
• New representations by the seller have been added regarding length of the seller’s ownership of the property, whether the property is the seller’s primary residence and whether there is an owners’ association (see paragraphs 7(a), 7(b) and 7(e)). The length-of–ownership representation has been added in response to loan underwriting guidelines which now commonly require that a seller has owned the property for a minimum period of time. The representation regarding primary residence was added as a result of a new North Carolina law that requires a statement whether the property includes the seller’s primary residence to be included in a deed conveying the property.
• The new form requires the attachment of an “Owners’ Association Addendum” if there is an owners’ association (see paragraphs 7(e) and 8(k)).
• The existing “Delay in Closing” provision has been simplified as a result of confusion about how it worked and a few reported problems associated with the payment of accrued per diem interest. In the new form, the per diem interest provision has been eliminated and the permitted delay shortened to fourteen days (see paragraph 13).
• In the “Fixtures” paragraph, “range/stove/oven” has been added to the list of fixtures to address the common understanding between the parties that such a device generally remains with the property. This addition will eliminate the need to add such a device in the Personal Property paragraph of the contract. In addition, the word “attached” has been added in front of “wall and/or door mirrors” primarily to distinguish bathroom mirrors that are hung like pictures from those that are attached to the wall in a more permanent way.
Changes to other forms. Corresponding changes have been made to the Offer to Purchase and Contract—Vacant Lot/Land (form 12-T) and the Guidelines for completing both forms have been updated. The various addenda to the Offer to Purchase have been updated and a new, separate Offer to Purchase and Contract for new construction has been developed.
A “Sample” of the new Offer to Purchase and Contract is available on the NC Bar Association’s website via the following link:
http://realproperty.ncbar.org/media/2114554/rp_%202_offer_to_purchase_and_contract.pdf.
Navigating the Offer to Purchase and Contract 23 sections in 9 pages |
|||
1 |
Terms and Conditions (p1) |
13 |
Delay in Settlement/Closing (p7) |
2 |
Fixtures (p3) |
14 |
Possession (p7) |
3 |
Personal Property (p3) |
15 |
Other Provisions and Conditions (p7) |
4 |
Buyer’s Due Diligence (p3) |
16 |
Assignments (p7) |
5 |
Buyer Representations (p4) |
17 |
Tax-Deferred Exchange (p8) |
6 |
Buyer Obligations (p5) |
18 |
Parties (p8) |
7 |
Seller Representations (p5) |
19 |
Survival (p8) |
8 |
Seller Obligations (p6) |
20 |
Entire Agreement (p8) |
9 |
Prorations and Adjustments (p7) |
21 |
Notice (p8) |
10 |
Home Warranty (p7) |
22 |
Execution (p8) |
11 |
Condition of Property at Closing (p7) |
23 |
Computation of Days (p8) |
12 |
Risk of Loss (p7) | Signatures, Notice, Earnest Money (p8-9) |
*Bob Ramseur and Miriam Baer are members of the Real Property Section Council of the NC Bar Association and are co-chairs of the Joint Forms Task Force, which is responsible for maintaining residential forms that are jointly-approved by the Bar Association and the NC Association of REALTORS. Will Martin is a member of the Real Property Section and the Joint Forms Task Force and acts as NCAR’s General Counsel.
This article has been edited to accommodate space limitations and to recognize that the form is now in effect.
This article came from the March 2011-Vol41-3 edition of the bulletin.
Curtis E. Aldendifer has assumed the position of Associate Legal Counsel in the Legal Services Division. He is a graduate of the University of Southern California with a BA in History and received a JD from Southwestern University School of Law.
D. Scott Schiller has assumed the position of Financial Fraud Investigator in the Legal Services Division. He is a graduate of UNC-Chapel Hill with a BS in Business Administration and is a CPA.
This article came from the October 2010-Vol41-2 edition of the bulletin.
The performance of first-time real estate license examination candidates by approved schools and instructors is monitored by the North Carolina Real Estate Commission and regularly reported to schools and instructors. School and instructor examination performance records are reviewed annually by the Real Estate Commission to help assure that quality instruction is being provided in prelicensing courses by such schools and instructors. The most recent annual performance record for each school may be found on the Commission’s Web site.
The overall examination performance for all first-time candidates on the real estate examination for the period July 1, 2009 through June 30, 2010 was 74%. The Commission would like to congratulate each of the following schools and instructors (with six or more students tested) for achieving an outstanding examination performance record of 80% or higher for the year ending June 30, 2010. The Commission recognizes that to have students perform at such a level on the license examination requires a combination of high quality instruction and high course completion standards.
Schools
Allen Tate School of Real Estate, Charlotte/Raleigh; Asheville-Buncombe Community College, Asheville; Brunswick Community College, Supply/Leland; Cape Fear Community College, Castle Hayne; Central Piedmont Community College,Charlotte/Matthews/Huntersville; Cumbie and Trull School of Real Estate, Asheville; Cumbie Institute of Real Estate, Asheville; Durham Tech Community College, Durham/Hillsborough; Free School of Real Estate, Cornelius; Guilford Tech Community College, Jamestown/High Point/Greensboro; Mingle School of Real Estate, Charlotte/Cornelius; Sea Coast Real Estate Academy, Wilmington; Superior School of Real Estate, Charlotte/Concord/Cornelius/Huntersville; The Outer Banks School of Real Estate, Harbinger
Instructors
Oscar Agurs, Charlotte; William D. Beck, Sr., Bolivia; Pascall S. Camak, Pine Knoll Shores; Deborah B. Carpenter, Raleigh; Ray Cline, Charlotte; Charles L. Dotson, Matthews; Kandyce K. Ellis, Chapel Hill; Joseph Roy Faron, Merritt; Victoria B.Ferneyhough, Raleigh; Frank E. Free, Sr., Stanley; Ernest Gerald Fulghum, Raleigh;William H. Gallagher II, Charlotte; Janice C. Gullick, Clayton; Violet Locke Harrington, Durham; Carolyn C. Lambert, Charlotte; Nancy Legg, York, SC; Edward George Liptak, Maggie Valley; Saundra Martin, Salisbury; James Richard Mort, Gastonia; Gloria Muir, Greensboro; Glenda Bowen Newell, Wilmington; Laurel A. Pettys, Wilmington; Rashad I. Phillips, Charlotte; Robert H. Potts, Asheville; Dana S. Rhodes, Charlotte; Tim R. Terry, Charlotte; William J.Trull, Jr., Asheville; Elizabeth Whitcraft, Kill Devil Hills; Terry Mitchell Wilson, Huntersville; Ben C. Wirtz, Iron Station.
This article came from the October 2010-Vol41-2 edition of the bulletin.
The statistics here generally reflect the activities of the Real Estate Commission during the period from May 1, 2009 to April 30, 2010.
Contact
• 200,656 telephone calls
• 1.5 million+ Web site “hits”
Publications
• 585,000+ publications distributed to brokers, consumers, applicants
Technology
• 8,554 student rosters electronically processed for CE courses and 859 for postlicensing courses
Licensing
• 466,081 license records changed
• 3,382 applications processed for licenses by examination
• 4,281+ license examinations administered
• 2,750 licenses issued by examination, 271 by reciprocity
• 879 firm licenses issued
• 334 expired, surrendered and suspended licenses reinstated
• 2,326 Certificates of License History issued
• 187 license applications reviewed for character issues
• 63 license applicant conferences conducted
Education
• 7 new private real estate school licenses issued and 48 renewed
• 18 real estate instructors approved and 49 renewed (for a total of 225 instructors)
• 56 new continuing education elective courses approved (for a total of 433 courses)
• 25 new continuing education sponsors approved (for a total of 236)
• 16 new continuing education Update Course instructors approved (for a total of 197)
• 40 Broker-in-Charge Course sessions conducted for 1,544 licensees
Audits/Investigations
• 128 field investigations completed
• 172 trust accounts examined
• 386 persons interviewed
• 6 trust account courses conducted for 147 students
• 1,352 students instructed for trust account portion of BIC course
Legal
• 954 case (complaint) files opened and 1,062 closed
• 15 licensees reprimanded
• 45 licenses suspended
• 45 licenses revoked
• 19 licenses surrendered
• 64 cases with conditional remedies
This article came from the October 2010-Vol41-2 edition of the bulletin.
Commission members M. Rick Watts of Fayetteville and Jeffery J. Marlarney of Manteo have been reappointed by Governor Beverly E. Perdue.
Watts, a Commission member since 2002, is a former Chairman. Malarney has been a Commission member since 2008.
This article came from the October 2010-Vol41-2 edition of the bulletin.
The Commission has accepted the recommendations of the Incentive Disclosure Implementation Advisory Committee, formed earlier this year to examine the current compensation disclosure requirements in dual agency transactions.
The Committee recommended that:
• the incentive disclosure rule remain unchanged;
• the North Carolina Association of REALTORS® recommend to the forms committee that it modify the Exclusive Right to Represent Buyer agreement to incorporate a disclosure of expected firm compensation in dual agency situations; and
• the Commission initiate an educational program to teach instructors, brokers-in-charge and licensees the buyer agent’s disclosure requirements in dual agency transactions.
The current rule relating to agency compensation went into effect October 1, 2008. The primary change was to clarify disclosure requirements relating to third party payments.
In its final report, the Advisory Committee agreed that many licensees may be confused about their duty under the rule and its application in typical situations. Education through the Real Estate Bulletin, Broker-in-Charge Annual Review, and/or Update Course would provide practical scenarios and a review of specialized transactions to describe steps which can be taken to achieve compliance.
Members of the Advisory Committee were George R. Bell, Winston-Salem; Donell Croom, Greensboro; Garth K. Dunklin, Charlotte; Kelly C. Hanley, Wilmington; J. Malcolm McFadyen, Fayetteville; Sheila G. Rudisil, Lincolnton; Monica A.Thibodeau, Duck; Walt Tipper, Raleigh; Grady F. Watkins, Jr., Holden Beach; and Harriet Worley, Raleigh.
Commission Chairman Marsha H. Jordan served in an ex officio capacity.
The Commission thanked the members for their participation in the Advisory Committee.
This article came from the October 2010-Vol41-2 edition of the bulletin.
In brief, dual agency is appropriate in a sales transaction only when it is agreed to – in writing – by fully informed sellers and buyers.
One of three types of agency representation (see box), dual agency arises when a firm is representing both the sellers and buyers in an in-house sale situation.
Practicing dual agency lawfully is challenging because the sellers and buyers must agree to be represented in an adversarial relationship by the same agent. A dual agent who must act with a combination of discretion and fairness that can be difficult to balance.
Although the laws and rules by which dual agency is practiced have not been reviewed to any significant extent by the courts, theoretically a dual agent owes the full range of agency duties to both principals. This creates practical problems for the dual agent regarding such matters as disclosure of material facts (especially confidential information about a client) and advocating for clients.
Thus, a broker’s ability to provide full representation of the client may be compromised to some extent. By entering into dual agency without the full understanding and consent of both clients, a broker may unfairly deprive those clients of the level of service they expect to receive. Additionally, brokers can potentially have more exposure to claims of conflicts of interest when practicing dual agency.
To alleviate the conflicting responsibilities of dual agency, the North Carolina Association of REALTORS® has developed agency contract forms which place limits on the disclosure by a dual agent of information relating to any party’s motivation, possible agreement to price, terms or other conditions, or any information identified as confidential. The contract forms also include an acknowledgment by the client that the agent will not act as an advocate for or exclusive representative of the client. Whether this form or another is used, all brokers are required by the Commission’s rules to reduce their dual agency agreements to writing with the seller from the outset and with the buyer before one of the partiesmakes an offer.
Designated agency (a modified form of dual agency), is defined in rules adopted by the Real Estate Commission. It gives each client exclusive representation from an individual broker, while still allowing the firm to represent all of its clients. Remember, a broker-in-charge should never act as a designated agent in a situation where the other designated agent is a provisional broker under his or her supervision. The broker-in-charge loses his or her ability to supervise or assist a provisional broker in such a situation.
An agent who lists his or her own property, or property belonging to the firm, should refrain from acting as a dual agent when selling that property, as there are inherent conflicts of interest in offering one’s own personal property for sale and then attempting to represent a buyer in the transaction as well.
What about the case of an unrepresented buyer or seller – can a broker work with him or her while solely representing another party? Yes, so long as the broker reviews and has the unrepresented party sign the Working With Real Estate Agents brochure, disclosing in writing that the broker will represent only his or her client (buyer or seller) in the transaction. Remember, there is no requirement that both the buyer and seller have broker representation in a transaction. An agent can work with an unrepresented buyer or seller as a customer, and still fully represent his or her client.
What if a previously unrepresented buyer or seller tells the listing broker that he or she would now like representation in an ongoing transaction where the listing broker has already disclosed that he or she represents only the interests of the seller? The broker’s client may object, considering the information that the client has previously given the broker about his personal situation and/or desire for exclusive representation. If the parties do not consent to Dual Agency at that point, the listing broker should refer the unrepresented party to an outside broker/firm for buyer representation.
All parties in the transaction deserve the best representation possible. Agents should remember to consider the interests of their clients first and determine which form of agency best suits their needs.
Agency Refresher
Clients may choose:
• Exclusive Representation – both the broker and the firm represent only one client in the transaction, to the exclusion of all others;
• Dual Agency – the firm and its agents may represent both the buyer and seller in a transaction; and
• Designated Dual Agency – the firm represents both the seller and buyer via one agent designated exclusively as the seller’s agent, and another agent designated exclusively as the buyer’s agent, with each agent representing only the interests of their designated client.
This article came from the October 2010-Vol41-2 edition of the bulletin.
So you have a speeding ticket or impaired driving charge, an expired registration, or an assault charge. Commission rules require that you disclose certain types of convictions to the Commission, but which ones, how, and within what time period?
1. Before reporting, wait for final adjudication, which occurs following a plea of guilty or a finding of guilt by a judge or jury. Do not file a report before a judgment is entered against you to avoid a file being opened and a permanent record made of your report, which may be unnecessary if you are found not guilty or the matter is dismissed.
2. Non-moving violations, such as expired registrations, expired tags, etc., are not reportable offenses. Likewise, you are not required to report speeding convictions. All misdemeanor and felony convictions, however, must be reported. These include convictions for DWI or reckless driving, assault, larceny, etc. If you have questions about the reporting process, call the Commission’s Legal Services Division.
3. Once you have entered a plea or otherwise have a criminal judgment against you, go to the Commission’s Web site, www.ncrec.gov and, under “Forms,” print the Criminal Conviction / Disciplinary Action Reporting Form. Please read the directions, which require you to provide a narrative in your own words explaining the incident and a CERTIFIED copy of the final order or judgment issued by the court. You have 60 days after conviction to file the form and supporting documentation with the Commission.
Once you have filed your report, the Legal Services Division will review it to determine if further action is necessary. You may be contacted to provide additional information. Just remember to respond quickly, fully and completely, so the matter can be handled in a timely manner. As with everything, full disclosure is always best.
This article came from the October 2010-Vol41-2 edition of the bulletin.
Marsha H. Jordan of Lincolnton has been reelected Chairman and Benjamin Cone, III of Charlotte, Vice Chairman, of the North Carolina Real Estate Commission for the 2010-2011 term beginning August 1, it was announced by Miriam J. Baer, Executive Director.
A graduate of the University of Virginia (MWC), Jordan entered the real estate business in 1986. She is owner of Apple Realty in Lincolnton, a Graduate of the REALTOR® Institute and holds the Certified Residential Broker, Certified Residential Specialist, and GREEN designations.
Appointed to the Commission in 1999, Jordan is past president of the North Carolina Real Estate Education Foundation and past president and 2001 REALTOR® of the Year of the Lincoln County Board of REALTORS®. Active in community affairs, she is a former director of the Lincolnton Chamber of Commerce, past president for Downtown Development, and past president of the Lincolnton Rotary Club.
Jordan and her husband, Max, a REALTOR® and contractor, reside in Lincolnton and have one son, Jason, a student at the University of North Carolina at Charlotte and a REALTOR®.
Cone, a member of the Commission since 2007, is Managing Director of Milestone Partners, LLC, in Charlotte. He has held management positions in the textile and commercial furniture industries.
Cone is a graduate of the University of North Carolina with a Bachelor of Arts in Economics and North Carolina State University with a Bachelor of Science in Textile Management, Magna Cum Laude. He is one of two public members.
This article came from the October 2010-Vol41-2 edition of the bulletin.
Every year the Commission receives complaints that brokers in the vacation rental business have represented that a cottage or cabin may be occupied by more people than the septic tank permit allows.
Of course, tenants complain when the waste lines back up or the septic system fails. Health officials become concerned when failures create unsanitary conditions and when property limitations allow no room for system expansion or repairs. Agents should be aware of the dangers of advertising occupancy levels for any property served by a septic system without first verifying the system’s legal capacity.
Properties that are not served by municipal sewer systems are typically inspected by local health departments to assess the site’s capacity for on-site sewage disposal (septic systems). An application is submitted for an improvement permit and the county issues a septic permit with a maximum number of bedrooms based on the site’s capacity.
Occupancy levels are determined by the number of bedrooms allowed by the septic permit, with a maximum of two people per legal bedroom. Therefore, the septic permit is the key to identifying the total number of bedrooms and the total number of people that a particular sewage system can serve.
Brokers should understand restrictions on land usage for properties with which he/she is dealing. Brokers who advertise such properties must be careful not to overstate the number of legal bedrooms or the maximum occupancy.
Advertisements which say things like “three bedrooms and foldout sofa,” “sleeps ten,” and “two queens, two doubles, and bunk twins” all make representations about occupancy. Brokers should take care that their advertising does not promote a violation of health codes by directly or indirectly representing that a rental unit may be occupied by more persons than the septic tank permit will allow. An overloaded system can fail and lead to groundwater contamination, costly repairs, and even condemnation.
If a broker’s advertisement of a property served by a septic system includes a maximum occupancy that exceeds the ability of the septic system as provided by the permit, the agent may have misrepresented the true condition of the property.
A broker should check the county records and disclose both the legal number of bedrooms and a maximum occupancy of no greater than the number determined by this method, regardless of the actual number of bedrooms or beds in the house.
Advertising a property as having more bedrooms than permitted, even with a disclosure that the septic permit states fewer bedrooms, may still be misleading and encourage illegal use of the property.
Sometimes the original septic permit for a property cannot be located. The health department can usually make a determination based on a new inspection.
Licensees should also keep in mind the maximum occupancy must not be overstated as long as the house is serviced by a septic system, even when conversion to public sewer has been scheduled, but not completed.
This article came from the October 2010-Vol41-2 edition of the bulletin.