Use inspections to help protect your clients and reduce risk for all parties, including you
Minimizing Risk is a hot topic in real estate. In California, often named as the top litigious state in the nation, real estate comprises a large percentage of lawsuits overall. Disclosure is cited as the number one reason for real estate litigations.
Risk-averse agents, sellers, and buyers can utilize inspections to the advantage of all parties involved in a real estate transaction. I want to offer insight to help minimize risk for real estate professionals and their clients, using inspections and inspection reports.
How to minimize risk using inspections – On the listing side
The use of pre-listing inspections has been controversial. In presentations to real estate professionals on the topic of risk management, I’ve received contradictory views from agents regarding the listing side’s disclosure practices. Some agreed with my advocacy for sellers to have their own inspections done first, others did not.
I’d like to share why the What I don’t know, can’t hurt me approach is not the best one for the risk-averse. E & O insurance isn’t enough to protect agents, either, in my opinion.
The state of California places a burden of legal responsibility on the seller in a real estate transaction to provide meaningful disclosures for the property they are offering. Failure to disclose known defects or issues that affect value or desirability can result in considerable liability for the seller and agent, and often result in a lawsuit. It is not appropriate for a seller to simply list a property “as-is.”
Both the seller and agent must make full disclosures in the TDS (Transfer Disclosure Statement) to avoid allegations from a buyer for fraud, misrepresentation, or deceit. I recommend going one step further, and that is to order a pre-listing property inspection, as part of the marketing plan for the soon-to-be listed property. Here’s why:
Pricing: The seller may believe there are significant issues with the home, only to find they are not significant, but the property was priced lower for that reason. Conversely, the seller may hold sentimental (or other arbitrary) value for the home they’ve lived in, redecorated, and raised their family in – while ignoring service, repairs, or replacements that they don’t consider to be defects or issues.
Improved Desirability: The findings in the inspection reports can lend weight to the agent’s recommendations to schedule maintenance / service of exterior and interior items, such as: the gutters, the heating and air conditioning system, the fireplace, etc.
Further Negotiations: Set and manage expectations for repairs or credits before accepting an offer. Disclose what the seller has done to fix past issues; state what the seller does not wish to do for the remaining issues in the inspection report(s) – and – convey that the property is priced for the true AS-IS condition, prior to the acceptance of a buyer’s offer.
These excerpts from the article titled, “Don’t Get Sued!” published in NAR’s Realtor Mag (NAR RealtorMag: “Don’t Get Sued!”) list additional points in favor of seller disclosure:
“Real estate professionals are seen as convenient deep pockets. They often appear to have the money to pay a claim, or else they’re insured.”
“What’s the most common reason that real estate professionals get sued?
Without question, the major source of litigation involves failure to disclose some claimed property defect. These defects are often ordinary, run-of-the-mill problems such as a roof leak or a foundation crack.”
“How does the salesperson get caught in the middle? Let’s say a buyer moves into a new house. Two weeks later, there’s a rainstorm, and the roof leaks. The buyer goes back to the seller and asks, ‘What’s going on here? You didn’t say anything about a roof leak in your property disclosure form.’
The seller’s reply will often involve some variation on the theme that he didn’t say anything about a leak because the salesperson told him not to. Unless the salesperson can document otherwise, it’s a matter of the salesperson’s word against the word of the seller.
We find that lawyers for buyers and sellers sometimes pursue a strategy of trying to keep the deep pockets, the real estate professionals, in the middle of the litigation.”
Unfortunately, agents and buyers can’t always count upon a seller to disclose material defects, it is not a dependably objective assessment on the seller’s part. Other factors such as fear can inhibit or cloud decisions to disclose.
If the listing agent had the seller order pre-listing inspections and disclosed the reports, the issue leading to that lawsuit could have been avoided, easily, and for a nominal “marketing” fee.
One of my staff told me the other day, that when she helped her grandparents sell their home in Silicon Valley, Northern California, the top listing agent in the area insisted on pre-listing inspections for the moderately maintained home sold to them in 1969. It was an easy decision since a priority to her was selling the family property without undue stress, upfront repair costs, or inconvenience to her elderly grandmother. The sale went smoothly and quickly because of upfront disclosure; without any issues on negotiating price or credits in escrow for its “as-is” condition. The buyer also did their investigations and inspections.
That top listing agent always highly recommends pre-listing inspections to his sellers, he told my employee. He minimizes legal risk to himself, to his sellers; and minimizes risk of transactions being canceled because of the inspection contingency period for the buyers.
For both sides
Inform your client! Use the following definition and scope for real estate inspections.
At the very least, the buyer needs to know the information disclosed in home inspections to make informed decisions.
Per the California Real Estate Inspection Association’s Standards of Practice, Definitions and Scope:
“A. A real estate inspection is a survey and basic operation of the systems and components of a building, which can be reached, entered, or viewed without difficulty . . . . The purpose of the inspection is to provide the Client with information regarding the general condition of the building(s). Cosmetic and aesthetic conditions shall not be considered.”
“B. A real estate inspection report provides written documentation of material defects discovered in the inspected building’s systems and components which, in the opinion of the Inspector, are safety hazards, are not functioning properly, or appear to be at the ends of their service lives.”
“A material defect is a condition that significantly affects the value, desirability, habitability, or safety of the dwelling. Style or aesthetics shall not be considered in determining whether a system, structure, or component is defective.”
How to focus on the findings in the report
If the buyer is going to negotiate for credits, repairs or replacements these should be kept in focus. Cosmetic or aesthetic conditions aren’t included.
The three reportable categories
- Safety hazards
- Items not functioning properly
- Items that appear to be at the ends of their service lives
How to choose an Inspector?
Licensing doesn’t exist for home inspectors in the state of California. Instead, have the buyer check these qualifications before scheduling the inspections:
- Membership in a Professional Trade Association for Home Inspectors, such as CREIA, ASHI or InterNACHI
- Errors and Omissions Insurance
- *General Liability Insurance
*required if the buyer doesn’t have their own general liability insurance, per the California Association of Realtors “Residential Purchase Agreement & Escrow Instructions.”
- Is the inspector willing and able to go into all accessible areas, including crawl spaces, attics and on the roof? Unless conditions or space limit the safety of the Inspector or property.
- How many inspections has the company (or inspector) performed?
- The report should be computerized and written in a narrative style, not handwritten in a checklist format.
- Photographs should be included in the report.
- Will the inspector be available via phone and email to answer questions that arise?
The Inspection report is key –Particularly for Buyers
The Buyer is advised in the STATEWIDE BUYER AND SELLER ADVISORY: “You should read all written reports given to you and discuss those reports with the persons who prepared them” and is advised again in the BUYER’S INSPECTION ELECTIONS, “It is extremely important for you to read all written reports provided by professionals.”
On the BUYER’S INSPECTION ELECTIONS form buyers are advised: If any professional recommends further Inspections, you should contact qualified experts to conduct such additional Inspections.
Are there any material defects that affect the value, desirability, habitability, or safety of the dwelling?
The general physical inspection report contains important information on every page. The report should be used as a reference for further investigation of any issue(s) by a specialist(s). The seller’s property may have material defects that need to be repaired or replaced and the report can be used to help get estimates by those who could do the work.
When a buyer misses pertinent information, it can lead to a future problem or multiple problems: Neglect of the recommendation to further inspect a system. Neglect of advice to service, repair, or replace a system or component. Agents can minimize the late night phone calls by making sure their clients read and understand the entire report.
Minimizing Risk to the transaction – Don’t blow the deal!
Knowing all the above, the agents involved in a transaction can keep control of the deal, for their clients’ best interests, by focusing attention on full disclosure and resolution through price, repairs, or credit for repairs, if warranted.
Now that both sides have the inspection reports:
Keep the buyer moving forward and on track. The common ground approach to resolve contentious issues, is to make sure the seller is informed (if the seller did not have their own pre-listing inspection) using the buyer’s inspection reports. Find issues that affect a property, whether it is being offered for sale or off-the-market. Those defects that get worse over time and affect the next contract for sale or affect the habitability or safety of living in the home. Once those are singled out, the negotiation can be done. This is where the finer negotiation skills of real estate professionals are tested and honed.
Not using the common ground approach can allow the buyer to walk away. When that happens, no one wins:
The seller is obligated to disclose the buyer’s inspection report information, at any future date when the property is offered for sale.
When the property stays on the market, the next step is usually lowering the listing price. The number of days on the market increases, while desirability as a listing, decreases. Until the next accepted offer.
When the seller decides to take the listing off the market, they must live with the defect(s) found with the dwelling, until resolved.
Both sides have wasted resources and neither has gained. It is in mutual interest to guide the seller and buyer into a fair resolution of the condition of the home / property.
If the seller blames the Listing Agent for the failure to close, they may decide to list with another agent.
The second potential buyer may have the same concerns and requests for repairs, replacements, or credits as the last, even with prior disclosure. Because this property now has a history of falling out of escrow. It is no longer a desirable and new listing.
Avoid these risks to the transaction from the beginning, whether you are the listing agent, the selling agent or both. Educate your clients on the use of inspections and inspection reports.
Inspections can take a few hours to attend. Another few hours to read the reports and contact the inspectors with any questions. In California, the cost is normally less than 1/1000th of the purchase price to invest in one of the largest financial investments of a person’s life, buying or selling. The cost of not finding out about material issues with a property can cost thousands of dollars after close of escrow, and lawsuits can cost ten times as much.
Minimize risk using inspections and inspection reports for your buyers and sellers.