Why this matters: Learn how a buyer agent uses a home inspection report (HIR) to confirm the condition of a property as disclosed by a seller or seller agent and advises their buyer on remedies for material defects in the property noted in an HIR but not disclosed prior to the seller entering into a purchase agreement.
Follow along with an audio reading of this article adapted as a chapter from our upcoming Real Estate Practice course update.
How a buyer agent protects their buyer
Negotiations to purchase a home begin with a buyer’s or buyer agent’s first contact with the seller or the seller agent expressing the buyer’s interest in acquiring the property. While a buyer and the buyer agent are not obligated to investigate property conditions, they have the right to the seller’s Transfer Disclosure Statement (TDS) disclosures before the seller agrees to sell to the buyer.
Further, the buyer has the right to obtain a third-party home inspection report to confirm the property’s physical condition is as disclosed by the seller or seller broker.
Too often, the seller agent fails to anticipate the buyer’s right to obtain a home inspection report (HIR). More troublesome is a failure of the seller agent before marketing a property for sale to obtain a TDS prepared by the seller and confirmed by the seller agent based on their inspection observations. The seller-prepared TDS is included in the marketing package the seller agent hands to all buyers — as soon as possible (ASAP) on their initial request for property information.
When an HIR is not provided by the seller or seller agent before they submit an offer, the buyer agent includes a further-approval contingency provision for an HIR in their purchase agreement offer. On entering into a purchase agreement with the seller, the buyer agent directs the buyer to select a home inspector and orders an HIR — when the seller will not provide one.
The buyer agent advises the buyer on the advantages of selecting an experienced, qualified and preferably certified home inspector. The buyer agent provides expertise in the home inspection process and selection of a qualified home inspector when the seller agent has not or will not obtain an HIR. Thus, the buyer agent fulfills their duty owed the buyer regarding property conditions.
The purpose of the home inspection and report is to have an independent third party investigate and prepare an HIR on the physical condition of property improvements. An HIR assures a prospective buyer the property is free of defects, except those listed on the HIR report.
Related video:
Read more about the home inspection.
Marketing packages disclose property conditions
Consider a buyer who, through their agent, locates a one-to-four unit residential property suitable to meet the buyer’s housing objectives. Both the buyer and their agent walk through the property and confirm the property fits the buyer’s needs.
The buyer agent contacts the seller agent and informs them they have a prospective buyer who is interested in the property. The buyer agent requests additional information on the property, including a title profile, a TDS and an HIR, among other property disclosures.
The seller agent responds by suggesting the buyer agent needs to first submit a purchase agreement offer. The seller agent assures them the “necessary disclosures for closing” will be delivered after the seller accepts an offer.
The buyer agrees with their agent to proceed with an offer at a price and on terms which the agent believes are justified. The agent has worked up a Comparative Market Analysis (CMA) based on comparable sales information provided by a title company and possesses working knowledge of properties in the immediate area. They know of no problems with the physical condition of the property for sale. A price is established for the buyer’s offer.
An offer is prepared with contingency provisions regarding property conditions. The buyer’s only information on the condition of the property is from their walk-through with their agent to determine whether the spacing within the structure suited their use.
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Closing contingent on the property’s condition
The contingency provisions the buyer agent includes in purchase agreement offers when the seller or the seller agent fails to make disclosures prior to the buyer submitting an offer call for:
- the seller to furnish an HIR prepared by an insured home inspector showing the land and improvements are free of material defects;
- the seller and the seller agent to prepare, sign and deliver a TDS (NHD, etc.); and
- the buyer to inspect the property twice — once to initially confirm the condition of the property, and again before closing escrow to confirm maintenance is not deferred and the seller corrected or eliminated any material defects not previously disclosed.
The buyer submits the offer which the seller rejects. Eventually, the participants enter into a purchase agreement which eliminates the provision calling for the seller to furnish an HIR.
The buyer authorizes their agent to immediately obtain an HIR, which the buyer agent orders. [See RPI Form 130]
The inspection takes place, and the buyer agent receives the HIR which is reviewed with the buyer.
The home inspector’s written report lists numerous significant defects the inspector observed during their physical inspection of improvements on the property. Repair and replacement costs are estimated at $2,500 to eliminate the defects not disclosed by the seller or observed by the buyer or the buyer agent prior to the seller entering into a purchase agreement with the buyer.
The seller and the seller agent failed to deliver a TDS or any other seller disclosures or inspection reports. However, they are duty bound to deliver the TDS and other seller disclosures to prospective buyers ASAP on first request for property information — and always before the seller enters into a purchase agreement with the buyer. [Calif. Civil Code §§1102, 2079]
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Demands to cure defects discovered during escrow
The buyer makes a written demand on the seller to cure the defects the home inspector discovered which were not disclosed or known to the buyer or buyer’s agent prior to the seller entering into the purchase agreement. [See RPI Form 269]
The buyer’s demand for repairs or a price reduction includes a copy of the HIR and a contractor’s estimate of the cost to cure the defects. Here, the buyer substantiates their demand to reduce the price or cure previously undisclosed defects, whether intentional or negligent, before escrow can close.
Now in escrow, the seller and their agent prepare and deliver to the buyer a TDS which notes all the defects listed in the HIR. The seller refuses to make any of the corrections, claiming they have disclosed the defects by delivering the TDS before the transfer takes place on closing. Eventually, the seller agent tells the buyer agent to either close escrow or cancel.
Can the buyer force the seller to cure the material defects found by the home inspector — or adjust the price — and close escrow?
Yes! The seller needs to deliver the property to the buyer in the physical condition as disclosed by the seller and the seller agent or observed by the buyer prior to the time the seller enters into a purchase agreement with the buyer.
The property conditions stated in an untimely disclosure made in the seller’s TDS delivered during escrow did not meet the requirement of disclosures delivered prior to the seller agreeing to sell.
The seller’s and seller agent’s failure to disclose prior to acceptance is an omission of facts, called negative fraud, deceit or misrepresentation by omission.
The critical issue for failing to disclose ASAP involves the price the buyer agreed to pay in the purchase agreement. The seller and buyer agree on a price for the property based on the conditions disclosed and known to the buyer prior to the seller’s agreement to sell to the buyer. Here, the public policy goal is symmetry of information when the buyer agrees to the price, not later.
The key: the agreed price represents the value of a used, but defect-free property, except for any defects observed by the buyer or buyer agent or disclosed to the buyer or buyer agent prior to entering into a purchase agreement.
Here, the agreed-to price exceeded the price a buyer and seller, both knowledgeable of relevant facts, would agree to. The excess amount of the price is equal to the costs needed to cure the defects and deliver the property “as disclosed” prior to acceptance.
Related video:
Read more about property disclosures.
Confirm the seller’s disclosures
A seller and seller agent disclose ASAP to a prospective buyer seeking additional property information all known and observable property conditions which adversely affect the value of the property.
A TDS is completed by the seller and seller agent, without the benefit of an HIR. Frequently without an HIR, the TDS does not accurately or fully reveal the significant property defects or code violations which actually exist, whether or not known to the seller or seller agent.
Here, a buyer needs to undertake an inspection and receive an HIR in the interest of avoiding after-closing:
- discoveries of defects which require correction; and
- claims made on the seller to recover the value lost or the costs incurred to correct the defects.
The buyer’s discovery of defects during escrow does not alter the buyer’s right to close escrow and later pursue the recovery of costs or the loss of value.
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The buyer’s remedies for deceit
When an HIR reveals property defects unknown to the buyer and the buyer broker and undisclosed by the seller or the seller agent prior to the seller entering into a purchase agreement with the buyer, the buyer may:
- make a demand on the seller to correct or eliminate the defects and refuse to close escrow until the seller has either complied or agreed to an adjusted price. [See RPI Form 269];
- refuse to close escrow for lack of seller compliance to the demand for corrections and enforce the agreement and its price correction provisions by specific performance litigation; or
- close escrow and make a money demand on the seller for the difference between the purchase price set in the purchase agreement and the price as adjusted for the undisclosed defects under provisions in the purchase agreement.
When the purchase agreement between the seller and buyer contains a price adjustment provision, the buyer may enforce a reduction of the purchase price before closing. The price adjustment equals the costs to bring the property up to the condition disclosed by the seller or the seller agent or known to the buyer prior to the seller’s acceptance. [See RPI Form 150 §10.2(c)]
Alternatively, the seller who fails to deliver the property in the condition disclosed prior to acceptance permits the buyer to refuse to close escrow until the seller adjusts the price or corrects the defects first discovered or disclosed during escrow.
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Final pre-closing inspection
A buyer needs to personally re-inspect the property a few days before close of escrow to confirm:
- the quality of any repairs made by the seller; and
- the general condition and maintenance of the property after entering into the purchase agreement.
The participants agree in the purchase agreement of the buyer’s right to a final pre-closing inspection of the property. [See RPI Form 150 §10.3(b)]
On final inspection of the property, the buyer lists any property defects not already addressed, such as equipment and fixture malfunctions or deferred maintenance, on the final walk-through inspection statement. [See RPI Form 270]
Related article:
Condition of property: the owner’s disclosures for symmetric information
