While every state requires home sellers to disclose property defects, including prior flood damage, environmental groups and others have called on the federal government to mandate additional flood-specific disclosures that detail a property’s risk propensity. The logic is that such a mandate would help buyers better understand the flood risks associated with certain homes or buildings and to make wiser mitigation decisions. However, questions remain in the real estate community about whether a change in disclosure policy would produce the intended results.
A panel of REALTORS®, industry experts, and government officials discussed the realities surrounding flood disclosure requirements and their impact on the real estate market at the National Flood Conference in Washington, D.C., on June 4. Austin Perez, senior insurance policy representative for the National Association of REALTORS®, opened the discussion with NAR research on the intersection of disclosure laws and flood risks.
He noted that some states have added flood-specific questions to their seller disclosure forms (such as whether the property is known to be located in a special flood hazard area). However, industry statistics show that these more specific disclosures do not do a better job of reducing flood risks than general disclosure requirements. Perez said that, in fact, states requiring sellers to answer more flood-related questions on disclosure forms tend to see the most loss of private property due to flood damage year over year.
In other words, requiring additional seller disclosures regarding flood risk doesn’t guarantee that buyers will use the information to take appropriate mitigation steps. “The idea behind these more specific disclosures is that consumers with more information will make different choices when buying properties with a history of flood damage,” Perez told the group of nearly 100 stakeholders at the Marriot Woodley Park in Washington, D.C. “If that were the case, shouldn’t we see states with more disclosures experience fewer flood losses? Instead, the data is flipped: The states with the most disclosure requirements actually have the most losses.”
NAR President John Smaby said that as disclosure laws are further debated, effective consumer protections must remain the focus of any such conversations. “The ideal consumer is an informed consumer, and America’s REALTORS® are the first line of defense for prospective home buyers on the verge of making one of the most complicated and consequential financial decisions of their lives,” Smaby said. “Denying consumers basic information about known water damage in a home would threaten America’s real estate market, and no one has more to lose from a compromised housing industry than our members and their millions upon millions of clients.”
Perez advocated for reform in the way the nation approaches and considers disclosure laws, but he reiterated Smaby’s point that well-crafted, prudent policies are ultimately best for consumers. “REALTORS® have led the charge for meaningful state disclosure requirements supported by study after study that show they lead to higher consumer satisfaction,” Perez said. “When people feel like they have been dealt with fully, fairly, and honestly—even if there is some defect that is disclosed about a property—buyers have more confidence in their purchase. Still, because of the federal Privacy Act, buyers are denied access to a property’s flood insurance claims history in FEMA’s database. This data would be extremely beneficial in helping consumers make more informed risk decisions.”
REALTORS® with decades of experience with real estate disclosures also took the opportunity at Tuesday’s event to provide insight into how they handle transactions involving properties at risk of flooding. Ken Austin, CRS, broker-owner of Mississippi Coast Realty in Pass Christian, Miss., explained how he uses flood maps, property records, and a home inspector to help inform buyers who consider purchasing floodplain property.
“Our duties are to give the most accurate and comprehensive information so that consumers can make the best decision possible,” added Donna Smith, CRS, GRI, broker-in-charge at Berkshire Hathaway HomeServices C. Dan Joyner, REALTORS®, in Greenville, S.C. “We have a huge responsibility, and we need all information from all aspects so we can pass it along to our clients.”
Mabél Guzmán, a broker at @properties in Chicago and NAR’s incoming 2020 vice president of advocacy, touched on the dynamic of managing buyers’ and sellers’ expectations in these types of transactions and argued that consumer protections transcend the best interests of either party. “It can be uncomfortable for the seller, but the last thing we want to see is a deal go south because some new piece of information surfaces a few days before closing,” she said.
In an ongoing effort to address the shortcomings of state disclosure laws and the overall viability of the National Flood Insurance Program—which Congress recently extended in an 11th-hour bid to prevent the program from lapsing—REALTORS® continue to stress the need for a centralized source of flood damage records. NAR argues that allowing a private third-party entity to enter the market with a fact resource, similar to the role Carfax plays in the auto industry, would be useful to home buyers and sellers.
“I was having a conversation with a friend a few days ago who noted that she just bought a car, spent $30,000 on it, and was able to find out whether the car flooded through Carfax,” Guzmán said. “Interestingly enough, someone is going to spend a quarter of a million, half a million, or a million dollars on a home, and they can’t find out whether there have been repetitive claims—or even if there have been no claims—on that property. What we need is a ‘flood facts’ resource that will allow buyers to access this information, with insurance agents serving as the gatekeeper.”NAR acknowledges that no number of laws, regulations, or statutes will prevent floods from devastating communities across the country every year, Smaby said. “But in the effort to protect tens of millions of clients and prospective home buyers and sellers, we strongly believe that an efficient, comprehensive, and transparent data resource will arm Americans with the knowledge they need to protect themselves against the ever-present threat of flooding.”