Why this matters: Learn how to manage a Structural Pest Control (SPC) report provider in real estate transactions and advise sellers and buyers on the disclosure of structural pests in the SPC report.
Follow along with an audio reading of this article adapted as a chapter from our upcoming Real Estate Practice course update.
Pricing results of symmetric property information
When a home with wood components goes on the market, the contractual combat over the Wood Destroying Pests and Organisms Inspection Report, commonly called a Structural Pest Control (SPC) report, and the repairs begin.
First, is the position of the property owner, the seller. The seller tells the seller agents they have not seen anything resembling a termite infestation. Thus, no need exists for either a report or a clearance. As for repairs, the seller is inclined to sell the property in an “as is” condition — let the buyer figure it out.
The seller agent negotiates with buyers and their agents as the seller’s representative. To eliminate potential disruptions with buyers, a conscientious seller agent leans on their seller to order out the SPC report and repair any fixable conditions.
For all involved in a transaction, property reports are used in the name of risk management — transparency — and a better priced sale more likely to close and close early.
Armed with a pest control operator’s certificate of clearance, and other marketing package information, the seller agent is more likely to attract a buyer at the asking price for the property. With known or readily knowable property conditions timely disclosed, the seller agent avoids renegotiating the sales price due to in-escrow disclosures or discoveries, such as wood-destroying infestations.
Some seller agents, of course, prefer to do nothing and let sleeping termites lie, as sellers often want. Thus, a seller may seek to shift the need for repairs to the buyer by non-disclosure rather than disclosure, letting the buyer check out the property to see what they may find.
Related video:
Read more about the SPC report.
The buyer agent as the buyer’s advisor
Now consider the position of the prospective buyer. During a buyer’s initial observations of the property, they are typically blind to all which moves beneath the painted surface — like termites.
Buyers want to purchase a sound home but typically do not know what questions to ask or observations to make. Worse are the silent games the gatekeepers through multiple listing services play to minimize and delay mentioning critical information, a misdirected tendency of seller agents.
Here, the buyer’s advisor for real estate-related evaluation issues is the buyer agent. To further protect buyers, a buyer agent has the task of looking past industry-wide seller bias by:
- reviewing a due diligence checklist with the buyer, taking steps to assure the buyer’s purchase of a property is, among many conditions, free of defects like termites;
- ferreting out by inquiry the undisclosed facts known or readily available to the seller and the seller agent before the buyer and the buyer agent set the price in a purchase agreement offer; and
- determining on receipt of disclosures the consequences of the disclosures on the buyer’s intended use of the property.
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The seller who gets their agent’s way
Sellers occasionally control the conversation with a seller agent when the agent solicits employment as the seller’s representative. However, a seller agent must develop the ability to relay the rules for disclosure of property conditions adverse to valuation (defects). Here, the seller is informed about their need to mitigate or eliminate risks when they put their property on the market for sale.
Consider an SPC report belatedly delivered or obtained by the buyer after entering into a purchase agreement. Remember, the buyer sets the price based on what they know about the property prior to submitting their offer — not what property information is later first brought to their or their buyer agent’s attention.
The report discloses the existence of termites and structural damage due to a termite infestation or a fungi infection, a material fact as it affects property value.
The seller and the seller agent did not tell the buyer about the existence of termites, and the buyer or the buyer agent did not observe termite conditions on their walk-through reviews of the premises — prior to entering into a purchase agreement.
To keep the deal together, the two agents now engage in negotiations over who is to pay for the corrections and the issuance of a certificate of clearance. Thus, they resolve the non-disclosure — discovered after entering into a purchase agreement — whether before or after closing.
Related article:
Brokerage Reminder: Timely termite inspections – eliminate the risk
Disclosures precede the buyer setting the price
In boom times, seller agents tend to get their way and their demand for top dollar but erroneously refuse to disclose property defects until after the buyer and seller enter into a purchase agreement. However, using a purchase agreement form with late disclosure provisions is disadvantageous for the seller.
The failure is a misrepresentation of the property before the seller enters into a purchase agreement with the buyer.
Eliminate the risk and close at the price agreed
Unlike a Transfer Disclosure Statement (TDS) or a Natural Hazard Disclosure (NHD), an SPC report is not a legislatively mandated disclosure in a California real estate transaction. Most federally controlled consumer mortgage loan originators (MLOs) are not mandated to require an SPC report or clearance.
Further, the Federal Housing Administration (FHA) no longer requires automatic SPC inspections, reports and clearances for home sales involving an FHA-insured mortgage. In the government’s effort to stop the decline in U.S. homeownership, the requirements for obtaining maximum purchase-assist financing insured by the FHA now only require an SPC inspection when it is:
- customary for home sales in the area;
- observed that an active infestation is on the property;
- mandated by state or local law; or
- called for by the MLO originating the mortgage. [Mortgage Letter 05-48]
With the federal government shift away from enforcing disclosures of structural pests, a buyer’s sole defense is a buyer agent who is duty-bound as a fiduciary to act in the best interests of their buyer. Thus, as a matter of proper practice, a buyer agent simply prepares purchase agreement provisions to include a call for the seller to provide an SPC inspection, report and certification.
Thus, an uncertainty about the property’s condition is eliminated by the individuals most affected — the buyer and their buyer agent. [See RPI Form 150 §10.1(a)]
A seller agent acting in the best interest of their seller needs to consider urging their seller to authorize an inspection and report at the time they enter into a seller representation agreement. The report, or better yet, the clearance after all recommended repairs are completed, is included in the marketing package the seller agent delivers to prospective buyers.
Related article:
When to deliver the SPC report
The existence of pests, such as termites, adversely affects the value of property. Defects are material facts and thus relate to evaluation of a property and its price. Material facts — defects — compel disclosure before the buyer sets the price in an offer submitted to the seller.
The report and clearance are just one part of the marketing package a seller agent prepares and hands to prospective buyers or buyer agents. Thus, all involved know exactly what the property is — as disclosed up front.
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Delivery of disclosures ASAP
To best comply with pest control disclosure, the seller or seller agent delivers a copy of the SPC report to the prospective buyer or buyer agent as soon as practicable (ASAP). The term “as soon as practicable” carries the same meaning as does the term “as soon as possible.”
The delivery always occurs prior to the seller accepting or countering a purchase agreement offer a buyer submits. Delivery of the SPC report after the seller enters into a purchase agreement is deficient disclosure. Not only is this delivery tardy based on the “ASAP” guideline, but the buyer set the price without full knowledge of a property fact adversely affecting value.
When the SPC report is not available or handed to the prospective buyer until after the seller and buyer enter into a purchase agreement, closing is automatically subject to a statutory contingency. Here, the buyer has the automatic right to cancel the purchase transaction or demand correction of the infestation and replacement of damaged wood material. [Calif. Civil Code §1099(a)]
Again, the reason is the lack of disclosure before the buyer and seller enter into a purchase agreement.
Related Client Q&A:
Failure to disclose
Failure to disclose before the seller accepts the buyer’s offer results from one of two situations:
- No one knows about the existence of termites or the damage they created, since the seller or seller agent did not order the readily available inspection and report and discovery was not made by the buyer or buyer agent before the buyer and seller enter into a purchase agreement; or
- The seller or seller agent resort to concealment of the known existing condition adversely affecting the property’s value and do not disclose the fact before the seller accepts the buyer’s purchase offer.
The second situation is fraudulent. As fraud, the buyer may pursue the seller and the seller agent to recover the cost of repairs. When known defects go undisclosed at the time the seller enters into a purchase agreement, any provisions in the purchase agreement allowing the seller to entirely avoid the cost of termite clearance and repairs are unenforceable. [Jue v. Smiser (1994) 23 CA4th 312]
Related article:
Disclosure of termite inspection reports: a compliance wake-up call for real estate licensees
A separated SPC report
The SPC company is occasionally asked by seller agents to separate their findings and recommendations into two categories:
- Section I items, listing items with visible evidence of active infestations, infections, or conditions which result in or from infestation; and
- Section II items, listing conditions deemed likely to lead to infestation but where the company finds no visible evidence of infestation.
When sellers order the inspection and report before marketing the property for sale, the seller learns of any necessary repairs, the cost of repairs and any remedial action before a prospective buyer is located.
On the other hand, the seller might decide to provide for a buyer to handle the SPC clearance, a scenario with property prices reflecting the buyer’s willingness to take on the cost of repairs.
However, it is the seller who owns these “defective” conditions of resident termites and their damage to the property. In a bust market, the buyer agent as the fiduciary advisor is not about to advise their buyer to let the seller burden the buyer with any sort of deficiency without a price adjustment.
Thus, requesting a separated report in the market environment of the failing real estate market of the late 2020s is misdirected. The intent of a separated report is to divide the type of conditions and, more importantly, to shift the responsibility of SPC section II preventative maintenance to the buyer.
Related video:
Read more about the SPC report contents.
A certificate of clearance
The seller occasionally is aware of an active termite infestation or fungus infection prior to marketing the property for sale. Here, the seller agent advises the seller to consider taking corrective measures to both protect the property from further damage and ready it for a prospective buyer by eliminating the issue of termites.
A Pest Control Certification is issued by an SPC company to indicate the property is free of infestation or infection in the visible and accessible areas. This certification is commonly called a termite clearance. However, when the seller fails to correct any signs of infestation or infection, the SPC company notes it in the certification. [Calif. Business and Professions Code §8519]
Section II conditions which may lead to future infestations are noted on the Pest Control Clearance by the SPC company so they avoid liability for the costs incurred to eliminate those conditions. The SPC company usually only observes Section II conditions in homes which have a crawl space beneath the floor of the structure. [Bus & P C §§8516(d), 8519]
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What and when to disclose
Consider a one-to-four unit residential property of wood frame construction marketed for sale using the services of a seller agent employed to locate a buyer.
The seller agent explains the seller needs to order an SPC inspection and report before marketing the property for sale. A prudent prospective buyer wants an SPC Report and Pest Control Certification before escrow may close.
The seller agent receives written authorization from the seller and orders an inspection and separated report from an SPC company known to the seller agent to be competent and diligent. [See RPI Form 132]
The inspection report received from the SPC company states conditions exist which may lead to an active termite infestation (Section II items) and recommends repairs or cleanup and a further inspection into inaccessible areas.
Unhappy with the report and the estimated cost of repairs, the seller has the seller agent get a second opinion from a different SPC company located by the seller.
The second company states an active termite infestation exists (a Section I item) and lists estimates for more extensive repairs than the first company’s report.
Related video:
Read more about the termite clearance.
Seller agent’s delivery of all inspection reports
Continuing our previous example, a buyer is located for the property. Deciding to go with the first SPC company’s report, the seller completes the repairs recommended by the first company. The seller agent delivers a copy of the first company’s inspection report to a buyer agent but does not inform them a second inspection report exists.
Escrow closes and the buyer moves in. The buyer discovers termites and the existence of the second inspection report. The buyer, after paying for extensive repairs and corrective measures, makes a demand on the seller agent (and their broker) for the costs to correct the damage. The buyer claims the seller agent is liable — the agent knew about the second report and the termite infestation, a material fact the agent did not disclose.
Here, the existence of the second report disclosing an active infestation is a material fact requiring its disclosure to the buyer. The condition adversely affected the value and quality of the property. Thus, the seller agent is liable for the costs of repairs as they have the general duty owed buyers to deliver all relevant inspection reports to a buyer. The seller agent may not pick and choose which reports to deliver when the reports disclose differing conditions. [Godfrey v. Steinpress (1982) 128 CA3d 154; Department of Real Estate Bulletin, Summer 2004]
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Choosing the right company
When choosing an SPC company, the seller agent owes the seller a duty to verify at pestboard.CA.gov the following;
- the individual or company’s license;
- the company’s registration; and
- the individual’s or company’s complaint history.
The Board maintains a two-year history of complaints against every SPC company and information on the company’s bond and insurance. [Bus & P C §8621]
Every company registered with the SPC Board needs to maintain a $12,500 bond. The bond is in favor of the State of California for the benefit of any person who, after entering a contract with a registered, licensed company, suffers money losses due to:
- fraud; or
- dishonesty. [Bus & P C §§8697, 8697.2]
Further, the bonds protect any buyer or lender suffering loss due to any violation of the SPC Act by a registered and licensed SPC company.
Related video:
Read more about the pest control operator.
The original inspection and report
The individual or company who does the inspection and issues the SPC report holds a Branch 3 Wood-Destroying Pest and Organisms License/Registration. Those with a Branch 3 license may:
- perform inspections for wood-destroying pests and organisms;
- issue inspection reports and completion notices;
- conduct treatments; and
- perform any repairs recommended on the inspection report.
An inspection covers all accessible areas to determine whether:
- an active infestation or infection exists; or
- conditions which likely leads to future infestations or infections exist.
Branch 3 licensees do not cover inaccessible areas in an inspection.
An area is inaccessible when an inspection requires:
- opening the structure; or
- removing the objects blocking the opening.
Examples of inaccessible areas are:
- attics or areas without adequate crawl space;
- slab foundations without openings to bathroom plumbing;
- floors covered by carpeting;
- wall interiors; and
- locked storage areas.
Standardized report
All SPC companies use a standardized inspection report form. An inspection report includes, among other elements:
- the inspection date and the name of the licensee making the inspection;
- the name and address of the person ordering the report;
- the address or location of the property;
- a general description of the building or premises inspected;
- a diagram detailing every part of the property checked for infestation or infections;
- a notation on the diagram of the location of any wood-destroying pests (termites, wood-boring beetles, etc.) or fungus present, and any resulting structural damage visible and accessible on the date of inspection, called Section I items when a separated report is requested;
- a notation on the diagram of the location of any conditions (excessive moisture, earth-to-wood contact, faulty grade levels, etc.) considered likely to lead to future wood-destroying pest infestations or infections, called Section II items when a separated report is requested;
- one of the following statements:
- “The exterior surface of the roof was not inspected. If you want the water tightness of the roof determined, you should contact a roofing contractor who is licensed by the Contractors’ State License Board.”
- “The exterior surface of the roof was inspected to determine whether or not wood destroying pests or organisms are present.”
- a statement of which areas have not been inspected due to inaccessibility with recommendations for further inspection of these areas when practical;
- recommendations for treatment or repair;
- information regarding the pesticide(s) to be used, when necessary;
- confirmation the SPC company performs a reinspection when the person ordering the original report requests an estimate for making repairs; and
- the following bold-type statement:
- “NOTICE: Reports on this structure prepared by various registered companies should list the same findings (i.e., termite infestations, termite damage, fungus damage, etc.). However, recommendations to correct these findings may vary from company to company. You have a right to seek a second opinion from another company.” [Bus & P C §8516(b); 16 Calif. Code of Regulations §1990]
Standardized report continued
Further, the following statement appears prior to the first finding/recommendation on a separated report:
- “This is a separated report which is defined as Section I/Section II conditions evident on the date of the inspection. Section I contains items where there is visible evidence of active infestation, infection or conditions that have resulted in or from infestation or infection. Section II items are conditions deemed likely to lead to infestation or infection but where no visible evidence of such was found. Further inspection items are defined as recommendations to inspect area(s) which during the original inspection did not allow the inspector access to complete the inspection and cannot be defined as Section I or Section II.”
The SPC company chosen furnishes the individual who ordered the inspection a copy of the report within ten business days of the inspection. [Bus & P C §8516(b)]
The SPC company maintains all original inspection reports for three years. [Bus & P C §8516(b)]
All SPC companies also post an inspection tag in the attic, subarea, or garage on completion of an inspection. The tag includes the company’s name and the date of inspection. [16 CCR §1996.1]
Related video:
Read more about reinspections and completions.
Reinspections for corrections made
When the SPC company does not give an estimate for corrective work, the company is not required to perform a reinspection.
However, a reinspection is mandated when a separated report is requested. The separation requires an estimate for repairs to allocate the costs to perform each recommendation for corrective measures for Section I and II items.
The SPC company performs reinspection within ten days of a requested inspection. A simple reinspection and certification takes place. However, when more than four months have passed since the original inspection and report, a reinspection is insufficient. A full (original) inspection is then completed, and a new (original) inspection report is issued. [Bus & P C §8516(b); 16 CCR §1993]
Work completion and certifications
The person who ordered the report need not hire the SPC company which inspected the property to perform any corrective measures. For instance, the person who ordered the report may contract with another SPC company to perform the work. However, the other company needs a Branch 3 licensee to inspect the property since they may not rely on the report furnished by the original SPC company to perform repair work. [Bus & P C §8516(b); Pestmaster Services, Inc. v. Structural Pest Control Board (1991) 227 CA3d 903]
Further, the owner may not want to use an SPC company to perform the corrective work. Here, the owner may hire a licensed contractor to remove and replace improvements damaged by wood-destroying pests or organisms when the work:
- is incidental to other work the licensed contractor performs; or
- is identified by an SPC inspection report.
A licensed contractor may not perform any work which requires an SPC license to complete. [Bus & P C §8556]
When the owner hires someone other than the original SPC company to perform the corrective work, the original SPC company needs to reinspect the property before issuing a certification. The original SPC company does not certify treatments performed by another SPC company without conducting a reinspection. [Bus & P C §8516(b)]
Notice of Work Completed
An SPC company is required to prepare a Notice of Work Completed and Not Completed for any work they undertake on a structure. The SPC company gives the notice to the seller or the seller agent within ten working days after completing any work. [Bus & P C §8518; 16 CCR §1996.2; CC §1099(b)]
The work notice includes a statement of the cost of the completed work and the estimated cost of any work not completed. A copy of the work notice is delivered by the seller or seller agent to the buyer or buyer agent as soon as possible.
When a company fumigates the property, the fumigation company (which needs to hold a Branch I license) issues a certification of fumigation within five days.
After any SPC company completes treatment or repairs, the company places a completion tag next to the inspection tag. The completion tag displays:
- the name of the company;
- the date of completion; and
- the name of any chemicals used. [Bus & P C §8518; 16 CCR §1996.1]
An SPC company is only required to certify its inspection and repair work when requested by the person ordering the report. The company, after completing the inspection or work, when requested, certifies:
- the inspection disclosed no evidence of active infestations or infections in the visible and accessible areas;
- the inspection disclosed evidence of active infestations or infections which the seller corrected; or
- the property is free of active infestations or infections in the visible and accessible areas.
Related FARM letter:
Teaching your seller to “own it”
In a buyer’s market and the years immediately following, seller agents need to school their sellers on what buyers tolerate and get their seller’s authorization to hire a structural pest control operator. When it comes to the SPC inspection, report, repair and certification, the conditions all belong to the seller as part of the property.
Further, the obligation usually remains with the seller since no astute buyer agent is going to allow their buyer to purchase termites or their breeding grounds without corrections or a price adjustment.
A seller agent needs to make sure sellers understand that to end “ownership” of the termites (and the property), they need to fix and maintain the property in a marketable condition. When they do not, they need to be prepared to fight — and likely lose in a buyer’s market — over the pricing they seek for their home.
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