Why this matters: Learn how to use a home inspection report (HIR) to mitigate liability risks for misrepresentation in the preparation of a seller’s Transfer Disclosure Statement (TDS), exercise care in the section of a qualified home inspector and use an energy efficiency audit report by a certified home energy rater to market property.
Follow along with an audio reading of this article adapted as a chapter from our upcoming Real Estate Practice course update.
Factual symmetry in transactions, as designated
On entering into a seller representation agreement regarding a one-to-four unit residential property, the seller agent asks the seller to grant them authority to order a home inspection report (HIR) on the seller’s behalf. [See RPI Form 130]
The agent reviews the home inspection process with the seller as a cost they incur which enables the agent to best market the property. Use of an HIR is the risk-mitigating method for advising buyers about the physical condition of a home offered for sale.
The upfront purpose for an HIR is avoidance of claims made by buyers against the seller and seller agent about defective property conditions of which the buyer is informed or becomes aware after entering into a purchase agreement.
The seller agent explains the HIR is used to assist the seller and the agent to properly prepare the seller’s Condition of Property Transfer Disclosure Statement (TDS). Further, the HIR is attached to the seller’s TDS. The seller agent includes both the TDS and the HIR in their marketing package delivered ASAP to prospective buyers who seek additional property information. [See RPI Form 304]
On review of the HIR with the agent, the seller may choose to eliminate none, some or all of the deficiencies noted in the report before marketing the property. The disclosure of defects in the property does not obligate the seller to eliminate the defects when offering a property for sale. When the seller remedies a defect, an updated HIR report is ordered and used to update the TDS and HIR in the marketing package.
Again, the seller agent uses the seller’s TDS, supplemented with the HIR, to inform prospective buyers about the precise condition of the property before the seller enters into a purchase agreement. Thus, the buyer may not later confront the seller with demands to:
- correct defects the seller has not agreed to cure; or
- adjust the sales price in order to close escrow.
Here, the buyer agreed to purchase the property “as disclosed” by the seller agent prior to the seller agreeing to a sale with the buyer.
Related video:
Read more about the HIR and TDS.
The home inspection examination
A home inspection is a physical examination conducted on-site by a home inspector. The inspector charges a noncontingent fee to perform an inspection of a one-to-four unit residential property.
The purpose of the physical examination of the premises is to identify material defects in the condition of the structure and its systems and components. 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 when they adversely affect the price a reasonably prudent and informed buyer will pay for the ownership and use of a property when entering into a purchase agreement. As the report may affect value, the investigation and delivery of the HIR (with the TDS) to a prospective buyer is legislatively intended to precede a prospective buyer’s offer to purchase. [Calif. Business and Professions Code §7195(b)]
The home inspection is a non-invasive examination of the mechanical, electrical and plumbing systems of the dwelling, as well as the components of the structure, such as the roof, ceiling, walls, floors and foundations.
The term “non-invasive” indicates no intrusion by the inspector into the roof, walls, foundation or soil by dismantling or taking apart the structure sufficient to disturb components or cause repairs. [See RPI Form 130; Bus & P C §7195(a)(1)]
Related video:
Read more about the home inspection.
Contents of the home inspection report
The HIR is the written report prepared by the home inspector to lay out the inspector’s findings from their 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;
- makes recommendations about the conditions observed; and
- suggests any further evaluation other experts need to undertake. [Bus & P C §7195(c)]
The seller agent needs to confirm the report addresses the cause of any defect or code violation the inspector found which constitutes a significant defect in the use of the property or the cost to remedy the defects. The report also includes suspicions the home inspector may have which need clarity by further inspections and reports by others with more expertise.
Energy efficiency inspection
The agent, or anyone else, may also request the home inspector conduct an inspection on the energy efficiencies of the property and include the findings in the report. On a request for an energy efficiency inspection, the home inspector reports 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)]
An HIR for a residential property is intended by code to contain facts regarding the operation of an in-ground landscape irrigation system exclusively operated by the homeowner (in contrast to homeowners’ association-operated irrigation systems). This report may be prepared by a regular home inspector or a certified landscape irrigation auditor. [Bus & P C §7195.5(a)]
Related video:
Read more about the HIR.
The marketing role of the seller agent
The task of gathering information about the condition of the property marketed for sale and delivering the information to prospective buyers lies solely with the seller agent. [Calif. Civil Code §2079]
Further, for the seller agent to retain necessary control during the marketing, sales negotiations and closing a sales escrow, the seller agent requests authority from the seller to order an HIR and use it to prepare the TDS. Thus, the agent handing the TDS and HIR to the buyer before the seller enters into a purchase agreement is a shield limiting their exposure to claims of misrepresentation. [See RPI Form 130]
As part of the management of the home inspection process, the seller agent is present while the home inspector conducts the investigation of the property. The agent discusses the home inspector’s observations and whether the findings are material — affecting the desirability, habitability or safety of the property, and thus its value to prospective buyers.
When the seller agent is not present at the inspection, they need to discuss the findings with the inspector before the HIR is prepared and inquire about recommendations for further investigation. On receipt and review of the HIR with the seller, any questions or clarifications they may have on its content is followed up by the agent in a further discussion with the home inspector. And when necessary, an amended or new report.
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A home inspector’s qualifications
Any individual who holds themselves out as being in the business of conducting a home inspection and preparing an HIR on 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 business of providing home inspections and reports. [Bus & P C §7195(d)]
Some real estate service providers who conduct home inspections include:
- general contractors;
- structural pest control operators;
- architects; and
- registered engineers.
Related video:
Read more about the home inspector.
Duty of care owed others by a home inspector
The duty of care expected of home inspectors by prospective buyers relying on their reports includes duties attributed to the inspector under professional licenses they hold. These attributes are about the skill, prudence, diligence, education, experience and financial responsibility normally possessed and exercised by members of their licensed profession. [Bus & P C §7068]
Home inspectors occasionally hold no license related to construction, such as a person who is a construction worker or building department employee. However, they need to conduct an inspection of a property with the same “degree of care” a reasonably prudent home inspector exercises to locate material defects during their physical examination of the property. [Bus & P C §7196]
Further, a home inspector who is not a registered engineer may not perform any analysis of systems, components or structural components which constitutes the practice of a civil, electrical or mechanical engineer. [Bus & P C §7196.1]
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A home inspection report: the liability shield for a seller’s broker
Hiring a home inspector to shift risk of liability
Sellers and seller agents are encouraged by legislation to obtain and rely on the content of an HIR to prepare their TDS for delivery to prospective buyers.
When an HIR is received by the buyer prior to entering into a purchase agreement, the seller and seller agent are relieved of any liability for property defects not disclosed in the HIR, unless they:
- knew about the undisclosed defect; or
- should have observed it during the seller agent’s compulsory visual inspection before they sign the TDS.
However, the seller agent needs to select a competent home inspector to inspect and prepare the HIR to rely on the HIR disclosures to shift liability for undisclosed defects. Thus, the seller agent needs to exercise ordinary care when selecting a home inspector.
When the agent lacks care in the selection of a home inspector, then reliance on the HIR to prepare the TDS does not relieve the agent or the seller agent of liability for the home inspector’s incompetence or error.
Further, use of an HIR by the seller agent in the preparation of the TDS does not relieve the agent from conducting their mandatory visual inspection before they review and sign the seller-prepared TDS. [CC §1102.4(a)]
The home inspector who holds a professional license or registers with the state as a general contractor, architect, pest control operator or engineer is deemed qualified, unless the agent knows of information to the contrary.
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Home inspector qualifications
The qualifications of a competent home inspector include:
- educational training in home inspection related courses;
- the 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.
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Verify seller’s property disclosures: retain a home inspector
The home energy rater
Consider a first-time homebuyer who, without the advice of a buyer agent, buys a fixer-upper to use as their principal residence. The buyer determines the costs of replacing the peeling wallpaper and obsolete bathroom fixtures but has no practical idea about the costs of time, money and talent needed to properly renovate the home for occupancy.
In the first month of residence, the uncapped air conditioning ducts, badly sealed window frames and insufficient ceiling insulation cause their utility bills to skyrocket past the pre-closing estimates of costs for operating the property. The buyer’s financial options are more limited after acquiring the property by greatly reducing their cash savings.
When a buyer retains a buyer agent prior to entering into a purchase agreement on an antiquated property, the agent advises the buyer to ask for a home energy audit (energy audit) from some source, either certified or a home inspection company.
With the energy audit in hand, a buyer may incorporate the costs of the recommended energy efficient updates into the total costs for acquisition they incur to own and use the property. A buyer also uses the information to compare the energy efficiency of the home in consideration to other properties before making an offer. Information is powerful corroboration justifying the terms and conditions of an offer, but the buyer needs the information upfront, not after entering into a purchase agreement.
In addition to ensuring the seller has hired a competent home inspector to complete the HIR, a buyer agent also insists a home energy audit be performed by a competent home energy rater, which may be the home inspector.
The rater is trained and certified by one of the Department of Energy’s (DOE’s) certified providers, which are the:
- California Certified Energy Rating and Testing Services;
- California Home Energy Efficiency Rating System; and
- California Building Performance Contractors Association.
Home energy audit providers are private, nonprofit organizations approved by the DOE as part of the California Home Energy Rating System (HERS) program. Audit providers have the exclusive rights to train, test and certify professional raters.
An extensive training process certifies the rater to conduct freelance energy audits, when the assessment of the energy conditions of the property is based on guidelines established by the HERS program. Anyone may hire a rater to do an audit, the cost of which usually ranges between $300 and $800.
Although home energy raters are specially trained and certified, any home inspector may perform a home energy audit provided the audit conforms to the HERS regulations established by the California Energy Commission. [Bus & P C §§7199.5, 7199.7]
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Buyer reliance on the report
Consider a buyer under a purchase agreement who requests an HIR on the property. On receipt of the report, the buyer cancels the purchase agreement. Another prospective buyer interested in the property receives the same HIR from the seller agent and relies on it to acquire the property.
However, the report fails to correctly state the extent of the defects. The second buyer discovers the errors and makes a demand on the home inspector who prepared the report for the first buyer 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 the report, and no subsequent buyer may now rely on it, terms stated for use of the report in the home inspection contract.
Here, the home inspector knew the seller agent received the report and was aware of the agent’s duty to disclose it to prospective buyers other than the buyer who ordered the report. An HIR, like an appraisal-of-value report or a structural pest control report, is not a confidential document.
Thus, all prospective buyers of the property are entitled to rely on an existing HIR.
This reliance by other prospective buyers imposes liability on the home inspector for failure to exercise the level of care expected of a home inspector when examining the property and reporting defects. Liability for the defects exists despite the home inspection contract and report containing a provision restricting its use solely to the person who originally requested it. [Leko v. Cornerstone Building Inspection Service (2001) 86 CA4th 1109]
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The home inspection contract
Provisions in a contract with a home inspection company often purport to limit the dollar amount of their liability for errors, inaccuracies or omissions in their reporting of defects to the fee they received for the report. These limitations on liability are unenforceable.
Further, any provision in the home inspection contract or condition in the HIR which claims to waive or limit the home inspector’s liability for the negligent investigation or preparation of the HIR is unenforceable. [Bus & P C §7198]
When the buyer discovers an error in the HIR regarding a defect affecting the value or desirability of the property, the buyer has four years from the date of the inspection to file an action to recover any money losses. [Bus & P C §7199]
Occasionally, a boilerplate provision in the home inspector’s contract or the HIR attempts to limit the buyer’s period for recovery to one year after the inspection occurs. However, any such limitation on the time period for the buyer to discover and make a claim is unenforceable.
The statutory four-year period provides time for the buyer to recognize the home inspector’s report was faulty. [Moreno v. Sanchez (2003) 106 CA4th 1415]
The home inspector’s liability insurance
An agent ordering an HIR needs to verify the home inspection company has professional liability insurance coverage before employing the company to investigate and prepare an HIR report.
Home inspectors who fail to detect and report a material defect or misstate the extent of the defect may cause the buyer to incur additional costs. The buyer is seriously disadvantaged in any recovery effort against the home inspector and the home inspection company unless the inspector carries insurance to pay amounts due the buyer.
Likewise, when the same defect is also missed by the seller agent due to their negligent observation of the defect during their mandatory visual inspection, the seller agent is also liable to the buyer for the costs of curing the defect. The agent’s liability is separate and not in addition to the home inspector’s liability.
Here, the agent who relied on the HIR can force the home inspector to contribute to the recovery, called an indemnification claim or contributory negligence. Unless the home inspector has insurance coverage, the ability of the seller agent to force the home inspection company to pay the home inspector’s share is limited to the home inspector’s personal assets. [Leko, supra]
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The home inspector’s conflicts of interest
The home inspector who prepares an HIR, the company employing the home inspector and any affiliated company may not:
- pay a referral fee or provide for any type of compensation to agents, owners or buyers for the referral of any home inspection business;
- agree to accept a contingency fee arrangement for the inspection of the report, such as a fee payable based on the home inspector’s findings and conclusions in the report or on the close of escrow;
- perform or offer to perform repairs on a property which was the subject of an HIR prepared by them within the past twelve months; or
- inspect any property in which they have a financial interest. [Bus & P C §7197]
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