Form-of-the-Week:

Authorizations to Prepare a Home Inspection Report and an NHD Report — Form 130 and 131

Investigative reports flesh out the marketing package

The primary objective of a seller’s agent on taking a listing is to solicit and locate prospective buyers who submit an offer to acquire the listed property, as sufficiently disclosed by the seller and their agent so not to mislead the buyer about its condition. When a prospective buyer is located, directly or indirectly via a buyer’s agent, the seller’s agent owes the buyer a general duty to voluntarily and promptly provide critical information on the listed property that might adversely affect its value. This property information is collectively referred to as material facts.

Upfront factual disclosures put the buyer on notice of conditions on or about the property known to the seller or the seller’s agent. Without this information, a prudent buyer is unable to set a price and make an offer. For the most efficient delivery of property information for timely presentation to prospective buyers, the seller’s agent at the listing stage gathers data on the property and organizes it into a marketing package.

The marketing package contains third-party investigative reports prepared by unbiased professionals or government agencies addressing essential aspects of the property’s condition that are of concern to prudent buyers. [See RPI Form 133]

Two of the recommended third-party reports to be included in the marketing package are:

  • Natural Hazard Disclosure Statement (NHD), provided by an NHD expert [See RPI Form 131]; and
  • home inspection report (HIR) to accompany mandated property disclosures. [See RPI Form 130]

These reports put a face on the property so it can be fully evaluated by prospective buyers and a sale more effectively negotiated. Negotiations with a prospective buyer triggering a full disclosure commence when the prospective buyer or their agent first seeks out additional information on the listed property beyond the minimal data contained in a promotional flier.

The marketing role of a home inspection for a seller’s agent

An agent of a seller of a one-to-four unit residential property prudently asks the seller to give them the authority to order a HIR on the seller’s behalf and paid for by the seller. [See RPI Form 130]

The seller’s agent explains that a home inspection report prepared by a local home inspection company is necessary for:

  • the agent to properly market the property to prospective buyers and their agents; and
  • the seller to avoid any claims made by a buyer that the condition of the property is other than represented by the seller.

The seller’s agent explains the HIR is used by the seller to best prepare their Condition of Property Transfer Disclosure Statement (TDS). The TDS is required to be handed to prospective buyers when they first become known to the seller or the seller’s agent to have a serious interest in the property, typically when negotiations commence. [See RPI Form 304]

The HIR is attached to the seller’s TDS.  Both are included in the agent’s marketing package presented to prospective buyers as soon as possible — but not later than the seller’s acceptance of an offer submitted by the buyer.

The task of coordinating the gathering of information about the condition of the listed property  and delivering the information to prospective buyers lies primarily with the seller’s agent. [Calif. Civil Code §2079]

Further, to retain control of the transaction, the seller’s agent needs to request and initially use the HIR (on behalf of the seller) to supplement their observations during the mandatory visual inspection of the property when reviewing and approving the seller prepared TDS. The seller’s agent loses control over the marketing and sales process — and exposes themselves and their seller to claims of misrepresentation — when the buyer goes under contract without first handing the HIR to the buyer or the buyer’s agent for their review, approval and reference.

The buyer’s reliance on an HIR at the time they submit their offer relieves the seller and their agent from liability for property defects not observed during the seller’s agent’s visual inspection, or which ought to have been known to the seller or the seller’s agent, known as red flag defects.

However, when the seller’s agent relies on the HIR to avoid liability for faulty preparation of the TDS, the seller’s agent needs to make a competent (read: non-negligent) selection of the home inspector they request to inspect and prepare the HIR. Thus, the seller’s agent needs to exercise ordinary care when choosing a home inspector.

On receipt of the HIR, the seller may voluntarily eliminate some or all of the deficiencies noted in the report. However, sellers are not obligated to eliminate any defects they disclose in the TDS and HIR when selling a property, unless they negotiate with the buyer to do so. On the voluntary elimination of any defects noted in the HIR, the seller’s agent orders an updated report for use with the TDS to deliver updated mandatory property disclosures to buyers intending to make an offer.

Hiring a home inspector

The Authorization to Inspect and Prepare a Home Inspection Report published by Realty Publications, Inc. (RPI) is used to document an agent’s request for an inspection. It authorizes the selected home inspector to conduct an inspection and prepare an HIR on behalf of the principal. [See RPI Form 130]

The Authorization to Inspect and Prepare a Home Inspection gives the home inspector specific information regarding the requested inspection, including:

The form also includes instructions to the inspector that the HIR is to include:

  • any improvements that are not in compliance with building codes and for which no permits exist [See RPI Form 130 §6.2]; and
  • the property’s compliance with safety codes for child resistant pool barriers, hot tub covers, automatic garage doors, door locks/latches, gas valves, security bars and water heaters [See RPI Form 130 §6.3];
  • an energy efficiency inspection. [See RPI Form 130 §6.1]

Editor’s note — Although Home Energy Raters are specially trained and certified, any home inspector may perform a home energy audit provided the audit conforms to the California Home Energy Rating System (HERS) regulations established by the California Energy Commission.

The seller-prepared TDS is reviewed by the seller’s agent and updated based on the HIR and their own visual inspection of the property. This is mandated agent conduct. The TDS is used to inform prospective buyers about the precise condition of the physical property before they submit an offer to purchase, which needs to reference the buyer’s prior receipt of the TDS. [See RPI Form 304]

Thus, the seller avoids demands to correct property defects or to adjust the sales price before escrow can close — or worse, cancellation or post-closing litigation. With the HIR and TDS delivered to the buyer prior to the seller’s acceptance of the purchase agreement, the property has been purchased by the buyer “as disclosed.”

Editor’s note  — When representing a buyer and the home inspector who prepared the HIR is unknown to the buyer’s agent, it is good practice to recommend as part of the buyer’s due diligence investigation that the buyer also conduct their own inspections pertaining to all physical aspects of the property.

A unified NHD disclosure for all real estate sales

Natural hazards come with the location of any parcel of real estate, not due to the man-made aspects of the property. Locations where a property might be subject to natural hazards include:

  • special flood hazard areas, a federal designation;
  • potential flooding and inundation areas;
  • very high fire hazard severity zones;
  • wildland fire areas;
  • earthquake fault zones; and
  • seismic hazard zones.

The existence of a hazard due to the geographic location of a property affects its desirability, and thus its value to prospective buyers — a material fact requiring disclosure before contracting to sell. Hazards, by their nature, limit a buyer’s ability to develop the property, obtain insurance or receive disaster relief.

Whether a seller lists the property with a broker or markets the property themselves, the seller is to disclose to prospective buyers any natural hazards known to the seller, including those readily available in public records.

To unify and streamline the disclosure by a seller (and in turn the seller’s agent) for a uniform presentation to all buyers concerning a property’s natural hazards, the California legislature created a statutory form entitled the Natural Hazard Disclosure (NHD) Statement, unique to California specifically. [See RPI Form 314]

Use of an expert to avoid seller liability

Delivery of natural hazard information is mandated on all types of real estate. [CC §1103.1(b)]

All sellers of real estate, and any seller’s or buyer’s agents involved, have a general duty owed to prospective buyers to disclose conditions on or about a property which are known to them and might adversely affect the buyer’s willingness to buy or influence the price and terms of payment the buyer on knowing the facts is willing to offer.

Natural hazards, or the lack thereof, irrefutably affect a property’s desirability, and thus value to a prospective buyer.

To obtain the natural hazard information, the seller and the seller’s agent are required to exercise ordinary care in gathering the information. They may gather the information themselves or the seller may employ an NHD expert, such as a geologist, to gather the information.

When an expert is employed, the expert prepares the NHD form for the seller and the seller’s agent to review, add any comments, sign and included in the marketing package to be delivered to prospective buyers seeking additional information on the property. [CC §1103.4(a)]

For the seller and the seller’s agent to rely on an NHD report prepared by others, the seller’s agent need only:

  • request an NHD report from a reliable expert in natural hazards, such as an engineer or a geologist who has studied the public records (as some natural hazards do not pertain to engineering or geology);
  • review the NHD form prepared by the expert and enter any actual knowledge the seller or seller’s agent may possess, whether contrary or supplemental to the expert’s report, on the form prepared by the expert or in an addendum attached to the form; and
  • sign the NHD Statement provided by the NHD expert and deliver it with the NHD report to prospective buyers or buyer’s agents on commencement of negotiations, but always prior to the seller’s acceptance of an offer. [CC §1103.2(f)(2)]

The Natural Hazard Disclosure scheme encourages brokers and their agents to use natural hazard experts to gather and report the information publicly available from the local planning department rather than do the work themselves. The use of an expert to gather information from the public record and prepare the report relieves the seller’s agent of any liability for errors not known to the agent to exist.

Hiring an NHD expert

The Authorization to Prepare Natural Hazard Disclosure published by RPI is used by an agent to document the request for an inspection, ordered by behalf of the seller (or buyer). It authorizes an NHD expert to prepare an NHD report for disclosing property conditions to a buyer. [See RPI Form 131]

The Authorization to Prepare Natural Hazard Disclosure contains:

  • the property address [See RPI Form 131 §1];
  • the statement the expert is being retained to prepare a NHD report for the identified property [See RPI Form 131 §2];
  • the identity of who the NHD report will be delivered to when it is complete [See RPI Form 13 §13]; and
  • the anticipated fee to be paid to the expert upon the delivery of the report to the agent. [See RPI Form 131 §4]

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