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What Is a Natural Hazards Disclosure Report and What Should Real Estate Investors Know About It? 

June 10, 2024

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Natural Hazards Disclosure Reports

If you’re a real estate investor, you know that due diligence is essential in any property transaction. 

One component of due diligence is seeking information about potential environmental hazards that could impact your property. In California, sellers are required to provide buyers with Natural Hazard Disclosure Reports (NHD) to gain vital insights about environmental hazards related to property (Cal. Civ. Code 1103-1103.15). 

In this article, we’ll discuss the importance and details of an NHD report in states like California, informing buyers and safeguarding sellers. You’ll learn how reports on hazard zones, from floods to earthquakes to other natural disasters, can impact property values and insurance costs and how to negotiate effectively and transparently while relying on these reports. 

What is an NHD Report? NHD Report Overview 

A Natural Hazard Disclosure Report (also known as an NHD report) contains pertinent information about natural and environmental hazards that could impact a piece of real estate. It discloses whether a property being sold falls into any of six “natural hazard zones”: 

  • Flood hazard zone (as defined by the Federal Emergency Management Agency, or FEMA) 
  • Dam failure inundation area 
  • High fire hazard severity zone 
  • Wildland fire area (also known as a “state fire responsibility area” or “SRA”) 
  • Earthquake fault zone 
  • Seismic hazard zone 

Natural Hazard Disclosure reports cover these six major hazards in addition to minor risks that affect insurance costs and home safety but aren’t part of a natural hazard zone listed above. Subsequently, most NHD reports are quite long, often dozens of pages. 

However, it is precisely due to this thoroughness that NHD reports are a vital tool for both buyers and sellers, offering both transparency and protection in real estate transactions. 

How Do NHD Reports Work? 

The 1998 Natural Hazards Disclosure Act requires that all California sellers provide a Natural Hazard Disclosure Statement to buyers within three days after accepting an offer. A Natural Hazard report can be acquired by sellers through a third-party company for a fee ranging from $50 to $150 and is a mandatory part of the home buying/selling process in California.  

After the seller provides the report, there is a three- to five-day right of rescission period for the buyer, allowing them to cancel the financing agreement without any financial consequences should they find anything in the report unsatisfactory.  

Benefits for Real Estate Investors 

Real estate investors benefit from the comprehensive insights provided by Natural Hazard Disclosure Reports. By understanding the specific risks associated with a property, you can make more informed investment decisions.  

Additionally, Natural Hazard Disclosure Reports offer financial insights by detailing property taxes, insurance costs, and the need for additional hazard insurance for yourself or your renters, like flood or earthquake insurance. Given that over 70% of Californians live within 30 miles of an active fault, property damage due to ground shaking is a real and active risk in the state. NHD reports ensure these risks don’t come as surprises when you need to file a claim or repair your property due to known hazards. 

Legal Requirements and Compliance 

In California, NHD reports are mandatory in each property transaction except when exempt. 

There are financial and legal consequences if a seller fails to provide an NHD report in a covered transaction. Namely, failure to comply with this law makes the seller liable for actual damages suffered by the buyer. 

California is currently the only state where NHD reports are required, but other states may have different mandatory disclosures concerning lead paint, flooding, termites, or mold damage. It’s crucial to be aware of these state-specific requirements to avoid legal issues. There may also be environment and hazard disclosures you are required by state law to include in your lease agreements with tenants. Be sure you’re aware of these, too. 

Because NHD reports are obtained through third parties, a seller who is compliant with this law has a liability shield if it turns out that any of the information provided in the NHD report is inaccurate. For example, if an NHD report claims that a property is not within an earthquake risk zone but in reality it is, the third-party experts who prepared the report will be held liable when a damaging earthquake occurs, not the seller. 

Importance in Investment Decisions 

When making real estate investment decisions in California, prioritize understanding the implications of natural hazard disclosure reports. These reports play a crucial role in assessing the risks associated with a property. 

One impact NHD reports have on investing decisions relates to property values. NHD reports disclose hazards that could decrease value and limit the amount of appreciation you could expect from a property over time. For instance, a property located in a flood plain that has flooded three times previously that decade may become difficult for an owner to sell. Insurance costs would be high for this property, while demand for properties in that area might decrease the more apparently problematic the flooding becomes. 

This can be true even if the property is outwardly very attractive, located in a prime location, or fits the market standards for upgrades and bedrooms/bathrooms. But because you have access to the NHD report before purchasing, you can take a careful look at this property and weigh its profit potential with insurance and other costs to decide whether it’s a worthwhile investment. 

By examining the details provided in the report, overall investment viability is much clearer. 

Conclusion 

As a California real estate investor, understanding Natural Hazard Disclosure Reports is crucial for making informed decisions and protecting your investments. 

By familiarizing yourself with the information provided in these reports, you can navigate potential risks, negotiate effectively, and ensure transparency in your transactions.

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