Friday, April 13, 2012

Natural Hazard Disclosure Statments

Anmmar Alsaggaf
Finance 180
Blog Post 2

Would you want to know if your house was on a fault line? How about an area that has potential flooding? Or an area subject to a wild fire? The US government is pushing off liability of events like the flooding that happen in Katrina to State agencies, in response, state agencies now have responsibility to create maps that zone areas that are potentially dangerous to people living in residential homes or any type of real property.

Let’s get into some of the history and hypothesis how this all came to be. Building a home, or developing construction on a piece of land that is subject to danger does not make any sense, yet humans do this because there has always been and always will be an opportunity cost. The opportunity cost is that the value of having shelter outweighs the conditions of the habitat, even if it means danger poses. In current times people live in naturally hazardous places like SF, Hawaii, New Orleans and many others in terms of similar geographic region and weather condition exist. These lands are at risk to earthquakes, wild fires, or floods. Some of these areas are susceptible to multiple risks proven through history of natural hazards in a certain area. Some of these risks are even caused by man, for example dams. So what can humans do to become aware of Natural Hazards and why has this not been a major issue in the past? Maybe it is that some people used to be less aware of the natural hazards, and that humans are creatures of habit that believe mother nature’s dangers are inevitable wherever you trot the globe. Humans have taken one step in minimizing the devastation of natural hazards to people by letting them know when danger is lying under their feet, or surrounding their homes.

Research through technology using Geographic Information Systems (GIS), computer software; arc map, and satellite imaging now allows for the real estate industry to have the tools to show prospective buyers of homes if 6 main natural hazards exist through a form called a natural hazard disclosure statement (NHD or NHDS). Why create such a law? “Mitigation: avoiding development in hazardous areas Preparation: organizing contingency plans and supplies.  Response: mobilizing emergency services and equipment.  Recovery: rebuilding public works and private property.” (Detwiler, 1998)

In 1998, the Natural Hazard Law was passed creating an added responsibility to real estate agents, brokers, title companies, and interested parties. This document is required by the State of California in every single residential real estate transaction in order to close escrow. There are many natural hazards in California with high severity. If a home buyer, land developer, engineer, or investor want to be aware of potential hazards they might be able to find information if research was available. Now in many large cities pieces and bits of information could be found but it is time consuming and inconsistent. Areas of smaller population and underdeveloped often do not have any available information. This creates a danger and greater risk for real properties and might create a false sense of security, because most people assume if someone built something somewhere they obviously know what they are doing and there is no doubt that something could be wrong. Well people who make such assumptions could be surprised from the reality of their geographical state whether it is natural or man-made, natural hazards do occur even in the most populated cities. This is why the Natural Hazard Statement market was created. It allows for state and local maps to be researched properly. It also assigned a job to the State in answering a problem that the US government has wanted states to take care of. The State geologist, other state and local agencies, including the Federal Emergency Management Agency (FEMA), have now taken a critical role in making sure that areas of potential hazard are zoned and outlined and disclosed to those prospective buyers who live and will reside in California residential properties.

Natural Hazard Disclosure Statement: There are 6 elements that are potentially hazardous to a real property that a buyer must know about and a seller is strongly advised to supply. The responsibility falls on the seller or sellers agent. Depending on the zone and preference of the client, a property may be subject to other disclosures in addition to the ones mentioned here: Including; Mello Roos, Military Ordinance, Tax Report, Airport Noise Ordinance, Toxic Mold information, and Megan’s Law. Additional disclosure require an additional cost due to the extra research time.

A special flood hazard area designated by the Federal Emergency Management Agency.
An area of potential flooding in the event of a dam failure, designated by the state Office of Emergency Services.
A very high fire hazard severity zone designated by the California Department of Forestry and Fire Protection.
A wildland fire area that may contain substantial forest fire risks and hazards, designated by the State Board of Forestry.
An earthquake fault zone designated by the State Geologist.
A seismic hazard zone designated by the State Geologist.

(Torlakson, 1997)

When a flood zone for example is marked “yes” as in potentially hazardous, there is a 1/100 year chance that it will occur. This is the reality of the industry, and it is the responsibility of a business to provide accurate information with no room for mistakes. In depth preparation is required to ensure the best possible outcome for each NHDS produced by experts. We will also provide interested parties with the ability to transparently see what is important regarding the Natural Hazards required to be disclosed in a residential real estate transaction by the state of CA, in an effort to allow person(s) involved in the transaction to make smart decisions in buying their real property.

Although the Natural Hazard Disclosure Statement (NHDS or NHD) is such a minute part of a real estate transaction often looked over buy agents, buyers and sellers, it is required to close escrow and in the rare times that disasters occur, it is the responsibility of a NHD expert to report real facts to protect the buyer/seller of a property and their agents. By providing full disclosure, transparency is created and confidence is built in a real estate investment. Awareness is increasing and buyers are now increasingly becoming fearful of areas of potential flooding, areas of potential seismic activity, and wild fires in respective order of most feared to least. This information was derived from a research report that surveyed a population of California residence and recent home buyers. The report mentions that buyers who were not aware of the NHD would now take it into consideration for their next home purchase and they ranked their fears from highest to lowest on the survey based on the hazards disclosed in there NHD report. What most home buyers do not realize that some are now, is that with increased risk to the property comes increased insurance costs. Some areas mandate them if one of the potential natural hazards is marked “yes”.  (Austin and Romn, 2006).

This industry of natural hazard disclosures is growing because of the inevitable fact that humans are increasing in population, with an increase in the percentage of natural disasters in every continent, and an increased need for awareness to be built. These trends set up a world where caution is eminent. In this economy people are careful about buying a home, because it’s a big investment and a long term commitment. Home owners aren’t going to get out of their homes fast like before and buy numerous times in their life. And those who are buying multiple times are investors, or they are wealthy. In any case, proper preparation is required and every step of precaution must be taken to help make better decisions.

Work Cited

       Assembly Member Torlakson, Assembly Member Strom-Martin, and Senator Kopp. "BILL NUMBER: AB 1195." CERES. California Enviornmental Resource Evaluation System, 1997. Web. 13 Apr. 2012. <>.

       Detwiler, Peter M. "Show and Tell: The New "Natural Hazard Disclosure Statement“." 1998. Web. 2012. <>.

       Troy, Austin, and Jeff Romn. An Assessment of the 1998 California Natural Hazard Disclosure Law (AB 1195). Detailed Research Findings. California Policy Research Center, University of California, 2006. Web. 2012. <>.

No comments:

Post a Comment