At the National Flood Conference on Tuesday morning, a panel of five, including three Realtors®, examined the realities surrounding flood disclosure requirements and their impact on the real estate market. Austin Perez, senior insurance policy representative for the National Association of Realtors®, moderated the discussion and opened by highlighting some of NAR’s top research on the intersection of disclosure laws and flood risks.
• Ken Austin, Broker, Mississippi Coast Realty (MS)
• Mabel Guzman, Broker, @properties (IL)
• Donna Smith, Broker, C. Dan Joyner REALTORS® (SC)
• Donald Brown, Senior Compliance Manager, Webster Bank
• Elizabeth Asche, PhD, Chief, FEMA Insurance Analytics & Policy Branch
In the bipartisan push to secure responsible National Flood Insurance Program reform – a push that has been accelerated by the program’s considerable financial problems over the past decade – environmental groups have argued that a federal flood disclosure requirement is needed to protect homebuyers who don’t know or understand the flood risks associated with certain properties.
According to the Legal Research Center, all states currently have a requirement to disclose the adverse material defects of a property, including prior flood damage. Some states have also added flood-specific questions to the mandated seller disclosure form (e.g., whether the property is known to be located in a special flood hazard area), but these come in addition to more general disclosure requirements.
These requirements, however, are either mandated by statute, regulation or case law, making the situation understandably confusing for environmental groups or others who are not familiar with state real estate laws. Regardless, as disclosure laws are considered and debated moving forward, NAR President John Smaby said Tuesday that consumers and 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.”
Current statistics, though, don’t support assertions that adding more specific state disclosures are any more effective at reducing flood risk than general requirements. In fact, Perez said that states requiring sellers to answer more flood related questions on disclosure forms tend to be those that see the most loss of private property to flood damage year-over-year.
“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.”
Perez continued to advocate 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.
“We have done study after study at NAR that show state disclosure requirements 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.”
Tuesday morning’s panel discussion allowed Realtors® with decades of experience operating in regions with a range of flood risk profiles the opportunity to provide insight into these closing processes.
Ken Austin walked the audience through how he uses flood maps, property records and a home inspector to prepare and ensure that buyers are fully informed when they consider floodplain property.
“Our duties are to give the most accurate and comprehensive information so that consumers can make the best decision possible,” Smith added. “We have a huge responsibility, and we need all information from all aspects so we can pass it along to our clients.”
Guzmán, NAR’s incoming 2020 Vice President of Advocacy, touched on the dynamic brought on by managing the expectations of both buyers and sellers in these transactions – and argued that consumer protections ultimately 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,” the 21-year Realtor® from Chicago, IL said.
In the ongoing work to address some of the shortcomings of state disclosure laws and the overall viability of the NFIP, many of America’s 1.3 million Realtors® continue to stress the need for a centralized source of flood damage records. Specifically, allowing a third-party, private entity to enter the market with a fact resource, similar to the role Carfax plays in the used car industry, would be tremendously useful to consumers in real estate transactions, NAR argues.
“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,” Guzman 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.”
In the end, Smaby said NAR acknowledges that no amount of law, regulation or statue will prevent floods from devastating communities across the country every year. “But in the effort to protect tens of millions of clients and perspective 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.”
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