This article introduces the seller’s and listing agent’s use of a home inspection report to warrant a property’s physical condition as part of the listing package handed prospective buyers.

Being rendered redundant in many parts of the English speaking world means you’re fired. For California’s real estate brokers and agents, redundant describes the unneeded and unwanted excessive supply of homes for sale when the market shows no sign that the pace of sales will pick up or the inventory will be significantly reduced anytime soon. 

Such a lopsided supply of homes for sale compared to the demand of buyers for housing suggests that agents have overreached. They have increased the number of their listings to enhance their chance of having a match for a buyer. Of course, such an effort during a recession period is self-defeating for agents and unhelpful to sellers. 

The more homes there are “for sale”, the lower the price must become to attract buyers who are in the market.  It’s not that buyers become confused by so many qualified homes, just that they have a large selection of property to bid on at ever lower prices. Price competition among sellers eager to rid themselves of their property adds to the downward price cycle. 

Ever greater quantities of properties for sale simply drive prices down. So why haven’t prices dropped quickly to attract buyers and reduce the level of inventory for sale? 

Real estate prices have always been “sticky” when they trend downwards. Sellers who can do so sit on their hands when they receive offers from buyers.  Buyers, on the other hand, have the luxury of losing nothing when a seller refuses an offer. The buyer is but a click away from the next property, and the next, and so on until he finds a match. 

Conditions in a market when inventories of unsold properties are steadily building up are vastly different from condition in a market when barely two to three months of supply exist. With diminishing inventory, buyers are left with little selection and opportunities are too often lost to other more nimble buyers. 

Fronting all this action, or inaction, are the gatekeepers of real estate – brokers, their agents, and lenders. While real estate lenders are going bust, due to adventurous stock market bankers and bond holders eager for a higher rate of return as their prey, real estate brokers and agents have been caught running flat out to get property listings. While doing so, they fully neglected the needs of buyers. This listing conduct of real estate brokers and agents, efficient and financially effective in a market flush with cheap money, suddenly is no longer proper in a down market. 

However, a shift in market demand by buyers, from eager to reticent, does not quickly bring about a shift in brokers’ conduct to efficiently operate at levels of reduced buyer demand. You do not want to put more inventory on your listing board when you market to ever fewer buyers. The time and effort spent to manage listings consumes money and energy, and then ever more when the listings need to be extended. 

Some properties will sell in any market. It is the agent who ferrets out these few truly marketable properties – possibly one in 10 in a recessionary market – and renders redundant the other nine who will succeed financially. In other words, he must fire most of his sellers. With a reduced inventory of better quality properties to market, the agent can now concentrate on putting a top notch marketing package together on each of his few listings, while other agents spread themselves thinly across large numbers of improperly priced and unmarketable properties. 

The agent concentrating on a few good properties further refines his operations by agreeing to take listings only from those sellers who will contribute financially to build the listing package. A home with all its fundamentals laid bare in a listing package full of disclosures, transparent in all its strengths and weaknesses when presented to a buyer, is more apt to match up with a buyer than other properties in any market. 

Several reasons exist for a property to sell more quickly when the seller is willing to spend money up front to earnestly take all steps necessary at the listing stage to do what seller and agents during boom times delay until after escrow is opened. Buyers resent surprises, and when property conditions have not already been verified by inspectors, buyers instinctively sense concern for the property’s integrity. When under no pressure to compete with other buyers for a property, the buyer’s unspoken concern, unlike during boom times, is reflected in an offer at a lower price. Top prices in weak markets demand high levels of early disclosures.  It is disclosures in escrow during weak seller markets that kills deals, not disclosures to prospective buyers prior to making an offer. 

Sellers who will pay for reports, cure defects, complete retrofitting and pest control correction during the listing period, and possibly even contribute to the cost of open houses and classy flyers, are the sellers agents need to concentrate on. These sellers understand the need to dress up their property — staging. Further they have the financial ability to invest in maintaining the property in an attractive condition and enhance its curb appeal. 

Before marketing a property to locate prospective buyers, a respectable listing (marketing) package must be prepared, ready for delivery to prospective buyers who express an interest in the property. The centerpiece of any listing package is the Home Inspection Report (HIR) attached to the seller’s Condition of Property Statement (TDS). Other components of the package address its environmental hazards, natural hazards, structural pest activity, government inspections, clearances, reports on sexual predator locations and criminal activities in the area. 

A home inspection report is undoubtedly the single most welcomed bit of information a buyer can get on a property which appears suitable to the buyer. With it, the buyer has assurance no defects or shortcomings in the improvement exist outside those identified in the report — if not already corrected and eliminated by the seller. As a cover for the physical condition of the improvement, which represents roughly 75% of the price paid for a property, the home inspection report is the equivalent of title insurance covering the deed to the property. If conditions are not as stated in a property report or title policy, they are cured or paid for by the companies issuing the report or the policy. Home inspectors carry errors and ommissions (E&O) insurance to cover their mistakes. Title companies, however, do not. 

Transparency by detection 

A seller of a one-to-four unit residential property, on entering into a listing to sell the property, is properly asked by the listing agent to authorize the agent to order out an HIR from a local home inspection company. The cost of the report will be paid by the seller. The agent will use the report to market the property and induce prospective buyers to purchase it.  [See first tuesday Form 107] 

The listing agent explains the HIR will be used to complete the seller’s TDS, which must be prepared by the seller and handed to prospective buyers. The report will then be attached to the seller’s TDS as a warranty by the home inspection company of the property’s actual condition

On receipt of the report, the seller may want to take steps to eliminate some or all of the deficiencies noted in the home inspection report. Alternatively, the seller may leave the property in the condition reported by doing no corrective work. Should the seller choose to eliminate any defects, an updated report would be ordered for use with the TDS. 

The seller’s TDS and the attached HIR will be used to inform prospective buyers about the precise condition of the property before the buyer sets his price and makes an offer to purchase. Thus, the seller entering into a purchase agreement will not later be confronted with demands from the buyer to correct defects or adjust the sales price in order to close escrow. The property will have been priced and purchased by the buyer “as disclosed”, a powerful position for the seller should a dispute with the buyer erupt. 

The listing agent’s marketing role 

The task of gathering information about the condition of the property listed for sale and delivering the information to prospective buyers and their agents lies primarily with the listing agent. A lazy listing agent gathers little information and hopes the MLS system will work for him one more time. [Calif. Civil Code §2079] 

Further, to retain control and keep himself informed throughout the marketing process for locating a buyer and closing an escrow, the listing agent should be the one who requests the HIR (on behalf of the seller). [See first tuesday Form 130] 

The agent who loses control over the marketing and closing process exposes himself to claims of misrepresentation when the buyer or the buyer’s agent is the one who first orders the HIR and discovers problems with the property which the listing agent knows about or should have observed. 

As part of the listing agent’s management of the home inspection activity, the agent is always present while the home inspector carries out his investigation of the property. The agent needs to discuss the home inspector’s observations and determines whether his findings are material defects which affect the desirability, value, habitability or safety of the property, and thus its value to prospective buyers, or just minor defects he has observed and reported. 

If the listing agent or a member of his team cannot be present, then he should request that the home inspector call the agent before the HIR is prepared to discuss the home inspector’s findings, whether they adversely affect the property’s value, and any recommendations he may have for further investigation. On receipt and review of the report by the seller and listing agent, any questions or clarifications they may have on its content should be followed up by a further discussion with the home inspector, and if necessary, an amended or new report. 

The inspection and report 

A home inspection is a physical examination conducted on-site by a home inspector. Unlike the agent’s mandatory visual inspection and report on his observations in the TDS, the inspection of a one-to-four unit residential property is performed in exchange for payment of a noncontingent fee

The purpose of the physical examination of the premises is to identify material defects in the condition of the land and the structure, systems, and components of the improvements on the property. Material defects are conditions which affect the property’s: 

  • market value; 
  • desirability as a dwelling; 
  • habitability from the elements; and 
  • safety from injury in its use as a dwelling. 

Defects are material if they adversely affect the price a prudent and reasonably well-informed buyer would agree to pay for the property when entering into a purchase agreement. As the report affects value and therefore price, the investigation and delivery of the home inspection report to a prospective buyer must precede a prospective buyer’s purchase offer to be meaningful. [Calif. Business and Professions Code §7195(b); Calif. Attorney General Opinion 01-406 (August 24, 2001)] 

The home inspection is a non-invasive examination of the mechanical, electrical and plumbing systems of the dwelling. Also covered are the components of the structure, such as the roof, ceiling, walls, floors and foundations. Non-invasive indicates there will be no intrusion into the roof, walls, foundation or soil by dismantling or taking apart the structure which would disturb components, or cause repairs to be made to remove the effects of the intrusion. [Bus & P C §7195(a)(1)] 

The home inspection report is the written report prepared by the home inspector to set forth his findings during his physical examination of the property. The report identifies each system and component of the structure inspected, describes any material defects the home inspector found or suspects and makes recommendations about the conditions he observed. The report will suggest any further evaluation needed to be undertaken by other experts for conditions observed by the inspector which are beyond his expertise or the scope of his inspection. [Bus & P C §7195(c)] 

The listing agent needs to make sure the report addresses the cause of any defect or code violation found which constitutes a significant defect in the property. The report should also include suspicions the home inspector might have about systems, components, or conditions on the property  which need to be clarified by further inspections and reports by others with specific expertise, such as pest control, roofers, electricians, plumbers, structural engineers, geologists, soil engineers, etc. 

The agent should also request that the home inspector conduct an inspection on the energy efficiencies of the property and include his findings in the report. On a request for an energy efficiency inspection, the home inspector will report on items including: 

  • the R-value of the insulation in the attic, roof, walls, floors and ducts; 
  • the quantity of glass panes and the types of frames; 
  • the heating and cooling equipment and fans; 
  • water heating systems; 
  • the age of major appliances and the fuel used; 
  • thermostats; 
  • energy leakage areas throughout the structure; and 
  • the solar control efficiency of the windows. [Bus & P C §7195(a)(2)] 

Buyer’s reliance on the report 

When requesting a home inspection report, a listing agent should advise the home inspector that the seller, the brokers and all prospective buyers of the property will be relying on the report. This disclosure is not mandatory, but helpful since it will avoid later (unenforceable) claims by the home inspector (or his E&O carrier) that the report was intended for the sole use of the seller, broker or buyer who entered into the home inspector’s contract. However, the use of the report can not be limited as to those buyers who may rely on it. [Leko v. Cornerstone Building Inspection Service (2001) 86 CA4th 1109] 

Consider a buyer who is already under a purchase agreement and orders a home inspection report on the property being purchased. On receipt of the report, the buyer cancels the purchase agreement. Another prospective buyer receives the same home inspection report from the listing agent and relies on it for information about the property’s condition to set his purchase price. 

However, the report fails to correctly state the extent of the defects. Within four years of the report, the second buyer discovers the errors. A demand is made on the home inspector who prepared the report to cover the cost to cure the defects which were the subject of the errors. 

The home inspector claims the report was prepared only for use by the buyer who requested and paid for the report and no one else can rely on it, as stated in the home inspection contract under which the report was prepared. 

Here, the home inspector knew the listing agent would receive the report and should have known that the agent would hand it to other prospective buyers if the buyer who ordered the report did not complete the purchase. A home inspection report, like an appraisal-of-value report or a structural pest control report, is not a confidential document. These reports merely describe the factual condition of the property. Thus, all prospective buyers of the property are entitled to rely on the existing home inspection report when they decide to buy the property, waive their right to cancel escrow or require corrections before closing. 

This reliance on an existing HIR by other prospective buyers imposes liability on the home inspector for his failure to exercise the level of care expected of a home inspector when examining the property and reporting its defects. Liability for the unreported defects is imposed even though the home inspection contract or report contain provisions restricting use of the report solely to the person who requested it. [Leko supra

Hiring a home inspector 

A seller’s broker and listing agent can rely on items entered in an HIR to make their entries on the seller’s TDS. Their reliance on an HIR prepared by an inspector relieves the listing broker (and the buyer’s broker) from liability for errors which are unknown and unobservable to them and their agents. However, to rely on the HIR, the broker must be free of simple negligence in the selection of the home inspector who inspects and prepares the HIR. Thus, the broker, not the seller, must exercise ordinary care when selecting the home inspector. [CC §1102.4(a); Leko supra

If care in the selection of a home inspector by the broker is lacking, then reliance on the HIR by the listing agent reviewing the caller’s TDS will not relieve the broker or the listing agent of liability. 

Further, use of an HIR by the listing agent does not relieve the agent (or his broker) from conducting their mandatory visual inspection. [Leko supra; Bus & PC §7196.1(b)] 

Thus, the broker and listing agent must look into or be aware of whether the home inspector who prepares the report is qualified. The home inspector who holds a professional license or is registered with the state as a general contractor, architect, pest control operator or engineer is deemed to be qualified, unless the agent knows of information to the contrary. 

When hiring a home inspector, the qualifications to look for include: 

  • educational training in home inspection related courses; 
  • length of time in the home inspection business or related property or building inspection employment; 
  • errors and omissions insurance covering professional liability; 
  • professional and client references; and 
  • membership in the California Real Estate Inspection Association, the American Society of Home Inspectors or other nationally recognized professional home inspector associations with standards of practice and codes of ethics. 

Remember, the reason for hiring a home inspector in the first place is to assist the seller and his listing agent to better represent the condition of the property to prospective buyers, and in doing so reduce the risk of errors by the agent. Brokers employing agents to handle the resale of homes should include the use of an HIR in the preparation of a TDS as part of their office risk-reduction policy. 

Home inspector’s qualifications 

Any individual who holds himself out as being in the business of conducting a home inspection and preparing a home inspection report on his findings during the inspection of a one-to-four unit residential property is a home inspector. No licensing scheme exists to set the minimum standard of competency or qualifications necessary to enter the home inspection profession. [Bus & P C §7195(d)] 

However, general contractors, structural pest control operators, architects and registered engineers typically conduct home inspections and prepare reports as requested by sellers, buyers and their agents. The duty of care expected of licensed members of these professions by prospective buyers who receive and rely on their reports is set by licensing requirements and professional attributes, i.e., the skill, prudence, diligence, education, experience and financial responsibility normally possessed and exercised by members of their profession. These licensees are experts with a high level of duty owed to those who receive their reports. [Bus & P C §7068] 

Those home inspectors who do not hold any type of license relating to construction, such as a person who is a construction worker or building department employee, are required to conduct an inspection of a property and report their findings with the same “degree of care” a reasonably prudent home inspector would exercise to locate material defects during their physical examination of the property. Prospective buyers who rely on home inspection reports can expect a high level of competence from experts. [Bus & P C §7196] 

The home inspection contract 

Provisions in home inspection company contracts often purport to limit the dollar amount of their liability to buyers for errors, inaccuracies or omissions in their reporting of defects to the dollar amount of the fee they received for their report. Provisions for limiting liability for their failure are unenforceable. 

Further, any provision in the home inspection contract or condition in the home inspection report which purports to waive or limit the home inspector’s liability for the negligent investigation or preparation of the HIR is unenforceable. The home inspector is liable for the full amouint of losses caused by his failure to locate defects and report them. [Bus & P C §7198] 

For the buyer, an error in the HIR regarding the existence or nonexistence of a defect affecting the value or desirability of the property must be discovered and settled within four years after the date of the inspection. If not settled, a legal action must be filed within the four year statute of limitations period for the buyer to enforce any recovery of his money losses. [Bus & P C §7199] 

Occasionally, a boilerplate provision in the home inspector’s contract or the home inspection report will state the buyer’s period for recovery is limited to one year after the inspection occurred. However, any limitation the home inspector may place on the time period for the buyer to discover the defect and make a claim is also unenforceable. The statutory four-year period is needed to provide time for buyers to realize the home inspector produced a faulty report. [Moreno v. Sanchez (2003) 106 CA4th 1415] 

The home inspector’s malpractice insurance 

An agent ordering out a home inspection report needs to verify the home inspection company has professional liability insurance coverage before allowing the company to conduct an investigation and prepare a report. Don’t rely on their word one exists; get a copy of the declaration page from the insurance policy. The existence of the home inspector’s E&O coverage reduces the broker’s risk of loss when selling one-to-four unit residential property. 

When a home inspector fails to detect and report a material defect or the extent of the defect, the cost to correct it can be significant. Unless insurance is available to pay claims, the buyer will be seriously disadvantaged in any recovery effort against the home inspector and the home inspection company. 

Likewise, if the same defect was also missed by the listing agent due to the agent’s failure to observe  the defect during the agent’s mandatory visual inspection, the broker and the listing agent are also liable to the buyer for the costs of curing the defect — separate from the home inspector’s liability. While the buyer can only collect his losses once, both the home inspector and the broker who were negligent must contribute to the recovery. 

Here, the broker and listing agent will be able to force the home inspector to contribute his share of the responsibility for the loss to the recovery by an indemnification claim the negligent broker has against the home inspector. Unless the home inspector has insurance coverage, the ability of the seller’s broker to force the home inspection company to pay the home inspector’s share of the responsibility for his having failed to observe the defect will be limited to pursuing and liquidating the home inspector’s personal assets. [Leko, supra

The home inspector’s conflicts of interest 

The home inspector who prepares a home inspection report, the company employing the home inspector and any affiliated company may not: 

  • pay a referral fee or provide for any type of compensation to brokers, agents, owners or buyers for the referral of any home inspection business; 
  • agree to accept a contingency fee arrangement for payment of the inspection or the report, such as a fee payable based on the home inspector’s findings and conclusions in the report or on the close of a sales escrow; 
  • perform or offer to perform any repairs on a property which was the subject of a HIR prepared by them within the past 12 months; or 
  • inspect any property when they have a financial interest in its sale. [Bus & P C §7197]