This is the first episode in our new series covering the contents and consequences of information in a Structural Pest Control Report (SPC), and an agent’s duty to advise sellers and buyers on their respective responsibilities for the removal of pests and needed repairs.
Pricing and asymmetric information
When a home with wood components goes on the market, the war over the Wood Destroying Pests and Organisms Inspection Report, commonly called a Structural Pest Control report (SPC), and the repairs begins.
First, in one corner is the seller. The seller will tell the seller’s agent that they have seen neither hide nor hair of anything resembling a termite infestation. Thus, there is no need for either a report or a clearance. As for repairs, the seller is all for selling the property in an “as the buyer sees things” condition.
The seller’s paladin on this field of battle is the seller’s agent. Conscientious seller’s agents will push their sellers to order out the SPC report and repair any fixable conditions now in the name of transparency—and an earlier and better priced sale.
Armed with a pest control operator’s certificate of clearance, the seller’s agent will be better able to get the listing price for the property. Later renegotiations of the sales price due to a delayed, in-escrow disclosure of discoverable material defects like wood-destroying infestations and infections is avoided.
Others, of course, prefer to do nothing and let sleeping termites lie, just as the sellers want. Thus, the uncertainty of a risk of loss is shifted to the buyer, letting buyers check out the property to see what they may find.
The buyer’s agent as champion
In the other corner is the prospective buyer. During their observations of the property, buyers are likely blind to all that moves (like termites) beneath the painted surface. Buyers want to purchase a sound home, but do not know all the right questions to ask, or worse, all the silence games the multiple listing service (MLS) gatekeepers have learned to play as seller’s agents.
Here, the buyer’s champion is the buyer’s agent. It is the buyer’s agent who is burdened with the mission of fighting industry-wide seller bias by:
- ferreting out the undisclosed facts known or readily available to the seller and the seller’s agent;
- determining the veracity of the disclosures they do receive; and
- reviewing a due diligence checklist with the buyer to make sure the buyer takes the necessary steps so the buyer’s purchase is, among other things, free of termites.
The seller who gets their way
Sellers are occasionally allowed to control the conversation with their agent at the listing stage and take a pass on the opportunity to order an SPC report and clearance. When termites are later disclosed to the buyer after acceptance of an offer to purchase, no one wins and ill-will is spread all around.
Consider an SPC report first delivered to the buyer after entering into a purchase agreement. It discloses the existence of termites or structural damage due to a termite infestation or a fungi infection which the buyer was not previously made aware of. The buyer was not told about their existence and did not observe termite conditions on the various walk-through reviews of the premises prior to the seller accepting the buyer’s purchase agreement offer.
Upon finding out, the buyer feels taken. The seller is irritated, either at being found out or at not being properly advised by their agent on the likely need for a report. To keep the deal together, the two agents must now engage in testy negotiations over who is to pay for the corrections and the issuance of a certificate of clearance, and resolve an issue that need not have existed in the first place.
The real irritation for the buyer is the concept of buyer responsibility fostered by the pest control provisions in the real estate trade association purchase agreement forms when their agent chose to use that form over others.
The provisions require the buyer to consider paying for repairs and clean-up in order to get a certificate of clearance—a contingency in the purchase agreement. But existing pest control issues adversely affect the value of the seller’s property and the price the buyer will pay.
Full transparency in marketing
In boom times, sellers get their way since they can demand top dollar, not disclose property defects until just prior to closing, refuse to correct any of those deficiencies and, by agreement, force buyers to incur the cost if they are going to finance and buy the property. Using a trade association purchase agreement with such termite provisions places the buyer at a serious disadvantage.
Worse yet, no contractual relief exists for the buyer when the seller knows termites exist before accepting a purchase offer, repairs are needed to obtain a clearance and the seller refuses the buyer’s demands for the seller to get a clearance by removing the termites and their damage.
In bust times, such as experienced during the recovery from the 2008 recession and financial crisis, it’s the buyers who get all they demand.
With full transparency at the marketing stage when the prospective buyer is first exposed to the property instead of a belated disclosure of the defects after the buyer’s purchase offer has been accepted, the seller avoids all the in-escrow demands to get the defects repaired, the property maintained, and most importantly, the price reduced for any minor dislikes threatening the close of the deal.
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 conventional lenders do not require a report or clearance.
Since 2005, the FHA has not required automatic SPC inspections, reports and clearances for every home sale involving an FHA-insured mortgage. In an effort to minimize the drop in U.S. homeownership, the requirements for obtaining maximum purchase-assist financing insured by the FHA now require an inspection only if:
- it is customary for home sales in the area;
- an active infestation is observed on the property;
- it is mandated by state or local law; or
- it is called for by the lender. [Mortgagee Letter 05-48]
A prudent buyer’s agent is alert to the rule they are duty-bound to act in the best interests of their buyers. Thus, as a matter of good practice, buyer’s agents simply prepare purchase agreement provisions to include a call for the seller to provide an SPC inspection, report and certification. Thus, an SPC contingency provision is placed in the purchase agreement to eliminate uncertainty about the property’s condition, regardless of the nature of the buyer’s purchase-assist financing. [See RPI Form 150 §12.1(a)]
Seller’s agents acting in the best interest of their sellers will urge their sellers to authorize a prompt inspection and report upon taking the listing. The report, or better yet the clearance after all recommended repairs are completed, will be included in the seller’s agent’s marketing package.
Upfront disclosure before the seller accepts an offer promotes transparency in real estate transactions. Transparency avoids personal liability for withholding information about a material fact known to the seller or the seller’s agent before acceptance of an offer from a prospective buyer – conduct called deceit.
When to deliver the SPC report
The existence of pests such as termites adversely affects the value of property. Since these facts relate to value, disclosure is compelled before the buyer sets the price and closing conditions in an offer submitted to the seller.
In a transparent real estate market, the report and clearance are part of the marketing package a prudent seller’s agent gives to prospective buyers. A request for further information by a prospective buyer constitutes the commencement of negotiations for the purchase of a property. Property disclosures are mandated to be made on commencement of negotiations.
Delivery ASAP
To best comply with pest control disclosure, a copy of the SPC report is delivered to the prospective buyer or buyer’s agent by the seller or their agent as soon as practicable (ASAP). If the SPC report is available, ASAP means the SPC report is to be provided at the time the prospective buyer inquires further into the property.
This always occurs prior to the seller accepting or countering a purchase agreement offer submitted by a buyer. Delivery of the SPC report after acceptance of the offer is deficient. Not only is this delivery tardy based on the “ASAP” guideline, but the price has been set without the buyer’s full knowledge of the facts adverse to value.
However, if the SPC report is not available and cannot be handed to the prospective buyer until after the seller’s acceptance of the purchase offer, closing is automatically contingent on the buyer’s right to cancel the purchase transaction. [Calif. Civil Code §1099(a)]
The term “as soon as practicable” actually carries the same meaning as does the term “as soon as possible.” Thus, ASAP means an existing termite report will be delivered to the prospective buyer when the seller’s agent involved become aware the buyer is going to submit an offer, whether or not it will call for an SPC report or for financing which requires an SPC report.
When an offer is submitted to the seller without prior indication the buyer will require an SPC report, a counteroffer may be made. The counteroffer would deliver the SPC report, and if not available, advise the buyer in the counter of the termite information known to the seller or the seller’s agent. [Calif. Attorney General Opinion 01-406 (August 24, 2001)]
A counteroffer is best used even if its sole purpose is to make the SPC disclosure, without needing to change the terms of the buyer’s offer. Disclosure is always most practical before the acceptance occurs—ASAP—to determine if the buyer’s knowledge of the contents of a report or other knowledge of the termite conditions causes the buyer to reconsider the price or terms of the offer.
The failure to disclose before the seller accepts the buyer’s offer is the result of one of two situations:
- No one knows about the existence of termites or the damage they created because the readily available inspection and report was not ordered and the discovery was not made before the property was put under contract with the buyer.
- The seller or the seller’s agent resorts to deceit as the existence of a condition which adversely affects value is known to the seller or the seller’s agent and not disclosed before the seller accepts the buyer’s purchase offer.
The second situation is fraudulent and allows the buyer to pursue the seller and the seller’s broker/agent to recover the cost of repairs. Contract provisions in the purchase agreement allowing the seller to entirely avoid the cost of termite clearance and repairs are not enforceable when known defects go undisclosed at the time the buyer goes under contract. [Jue v. Smiser (1994) 23 CA4th 312]
