A home inspection report: the liability shield for a seller’s broker

This article explains how a home inspection report (HIR) is used by a seller’s broker to shift the risks of non-disclosure liability in their mandatory use of a seller’s Transfer Disclosure Statement (TDS).

Transparency by design — don’t wait for the buyer to inquire

California’s recessionary housing market, which began in mid-2022, brings brokers and their agents face to face with a dramatic reversal away from the crass seller attitudes about dealing with buyers which developed in recent years of recovery and boom times.

Sellers prefer asymmetric property disclosures, which for agents as licensees is a deleterious path taken at their peril.

Consider that the position of an agent in any transaction — be it a sale, lease or a mortgage — is that of a facilitator. Agents have a duty to deliver discoverable information adversely affecting the value and use of a property to all participants, to document the negotiations, and to ultimately close the transaction as intended.

Today, a seller’s agent needs to inform their seller about the challenges of selling property in a recessionary housing market. A marketing plan of full disclosure — transparency by design — is needed to maintain the seller’s competitiveness in a market thin on prospective buyers and long on inventory.

Transactions in a recession differ from the boom phase of the market when prospective buyers prepare offers and willingly enter into purchase agreements without receiving sufficient (if any) information about material facts mandated for disclosure by a seller and their agent. Thus, sellers and their agents had a wholesale tendency to delay disclosing adverse property information — the Transfer Disclosure Statement (TDS) — until after entering into a purchase agreement. [See RPI Form 150]

Today’s recessionary housing market is demonstrably different. Sellers and their agents need to gather and package critical property information and deliver it as soon as practicable (ASAP) at the time a prospective buyer or their agent first asks for more property information.

A seller during a recession needs to listen and correct any preconceived boom-time notions they espouse about pricing and buyer behavior based on their real estate agent’s listing presentation.

Related article:

A property’s energy consumption: known and demanded in a recession: Part 1

 Transfer disclosure statement (TDS)

Before a sales agent agrees to take a seller’s listing, the agent first needs the seller to agree to prepare the mandated TDS. The agent provides the seller with a blank TDS form which the seller fills out based on their prior knowledge or suspicions of property defects. Disclosures are not limited to property conditions preprinted for comment on the statutory form mandated for use by the seller. [Calif. Civil Code §1102.8; see RPI Form 304]

The seller notes in the TDS any physical, environmental or neighborhood features which:

• adversely affect the property’s value; or
• interfere with a prospective buyer’s anticipated use of the property.

After the seller has prepared the TDS, the agent and seller meet to review its contents. Meanwhile, the agent schedules their mandatory visual inspection —and home inspection report (HIR) discussed below — of the seller’s property, noting on the TDS any defects observed by the agent which the seller did not note. [CC §2079]

Any seller objections to the mandatory inspection or defects the agent observes — or noted in the HIR — do not control the agent’s conduct regarding property disclosures. The seller’s agent owes a general duty to prospective buyers to conduct the inspection, observe defects affecting the property’s value and marketability and report them on the TDS prospective buyers are to receive.

However, while the agent owes a general duty to disclose adverse property conditions to buyers, they have no duty to further investigate property conditions or make comment on the consequences of the information disclosed.

Once the agent lists their findings in the TDS, both the seller and their agent sign the TDS. Thus, they both take responsibility for its content and delivery to prospective buyers as soon as practicable when a prospective buyer asks for additional information concerning the property.  Without the TDS, prospective buyers are unable to determine the property’s condition, value, and the price they are willing to pay for it. [Jue v. Smiser (1994) 23 CA4th 312]

First the disclosures, then the agreement to sell

Consider a purchase agreement entered into by a seller prior to the buyer receiving property disclosures. Before closing, the buyer becomes aware of property defects and demands corrections before funding for the reason they were unaware of the defects when they set the price they agreed to pay.

Here, the seller’s broker and their agent expose themselves to liability for non-delivery of the TDS prior to the time the buyer and seller entered into a purchase agreement. Presenting the TDS to buyers before contracting to buy is the first step the seller’s agent and their broker take to shield themselves from liability for non-disclosure of defects.

For a seller’s broker and their agent to best market a property to mitigate risks concerning non-disclosure of material facts to a buyer, a full disclosure package is prepared and presented to prospective buyers ASAP which contains these items:

• TDS or Condition of Property Disclosure Statement; [See RPI Form 304]
• home inspection report (HIR) attached to the TDS;
• Natural Hazards Disclosure (NHD) Statement; [See RPI Form 314]
• an occupancy certificate, when required by local ordinance;
• Home Energy Rating System (HERs) report on energy efficiency;
• Property Operating Expense Profile; [See RPI Form 306
• Residential Earthquake Hazards Report; [See RPI Form 315]
• structural pest control report (SPC);
• Seller’s Neighborhood Security Disclosure; [See RPI Form 321]
• Homeowners’ Association (HOA) addendum;
• Lead-Based Paint Disclosure; [See RPI Form 313]
• Disclosure of Sexual Predator Database; [See RPI Form 319]
• Local Ordinance Report; [See RPI Form 307]
• well water report, when applicable;
• septic tank report, when applicable; and
• Comparative Market Analysis (CMA) for setting values. [See RPI Form 200-1]

 The exacting Home Inspection Report

During the initial counseling session with the seller before accepting their listing of the property for sale, the agent needs to ask the seller to provide written authority to order a Home Inspection Report (HIR).

The HIR, together with the TDS, informs prospective buyers about the precise physical condition of the property so decisions can be made to prepare and submit an offer. An HIR notes any defects adversely affecting the:

• property’s desirability;
• property’s value; and
• buyer’s intended use.

A home inspector is a professional employed by a home inspection company to inspect and advise on the physical condition of property improvements in a home inspection report they prepare. The seller, the seller’s agent and the buyer may rely on an HIR as a warranty of the condition of improvements, except for defects known to the seller or their agents and not included in the HIR or TDS.

The home inspector who holds a professional license 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, agents can look for qualifications such as the inspector’s:

• educational training in home inspection courses;
• length of time in the home inspection business or related property or building inspection employment;
• errors and omissions (E&O) 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.

These material defects affect the property’s:

• market value;
• desirability as a dwelling;
• habitability from the elements; and
• safe usage as a dwelling.

Based on their observations, the home inspector may also recommend the need for further evaluations by other experts regarding defects they discover or perceive to exist.

To cure or not to cure defects  

On receipt of the HIR, the seller needs to decide whether they will cure some — or all — of the listed defects. The seller is not obligated to cure any of them unless they agree to make repairs. However, they are obligated to disclose the presence of known defects within the property to prospective buyers.

When the seller cures any of the defects noted in an HIR, an updated HIR is ordered. Either way, the seller signs the HIR and returns it to the agent. [See RPI Form 130]

During a recessionary market, buyers are more likely to demand the seller cures defects or accept a price reduction to cover the costs and efforts of the buyer to cure them after closing.

A TDS prepared to include defects noted in the HIR is the ultimate liability shield for agents and their brokers. An HIR used by the seller’s agent to prepare a TDS acts to mitigate their risk of liability for buyer claims in a transaction should the buyer discover defects not listed in the HIR or the TDS — before or after closing.

To be effective as a shield, the TDS and HIR disclosures need to have been handed to the buyer before the seller entered into a purchase agreement with the buyer.

However, the preparation and use of the HIR does not relieve the sales agent from conducting their mandatory visual inspection of the property. [CC §1102.4(a)]

Delivered to buyers, not to lookie loos

Once all third-party investigative reports for a property have been received, reviewed, and included within the marketing package, the seller’s agent is then prepared to locate prospective buyers and manage property disclosures the agent has a duty to deliver.

The seller’s agent need not provide the marketing package to every prospective buyer viewing the property. However, the seller’s agent does provide copies of the TDS and attached HIR to buyers and buyer’s agents when they request additional information on the property — but not to lookie loos who casually view the property with no indication they might submit an offer.

These inquiries for more information from the buyer or the buyer’s agent are evidence negotiations have started. It is negotiations which trigger the agent’s delivery of the TDS and HIR as part of the marketing package.

After receiving the TDS and HIR, the buyer’s agent reviews their contents. Unlike the seller’s agent, the buyer’s agent has no duty to inspect or confirm whether the contents of the TDS or HIR are complete.

On the outside chance the buyer’s agent observes an unlisted defect relating to the property’s components or the buyer’s intended use, they are to disclose this information to all participants.

An HIR as a relied-upon warranty

The HIR is not a confidential document, no matter who orders the report or pays for it. The HIR contains facts about a property’s conditions, and the preparer cannot limit who may rely on its contents. All buyers are entitled to information in an HIR and may rely on it to further their understanding of the property’s value and determine the price they might be willing to pay for it. [Leko v. Cornerstone Building Inspection Service (2001) 86 CA4th 1109]

Further, any provision in the home inspection contract attempting to waive or limit the inspector’s liability for a negligent investigation or preparation of the HIR is unenforceable. [Bus & Prof C §7198]

When the buyer discovers an error in the HIR after acquiring the property, they have four years from the date of the inspection to pursue any money losses they incur due to the undisclosed defects affecting the property’s value or desirability. [Bus & Prof C §7199]

Any defenses the home inspector asserts to limit the time period to less than four years for the buyer to make a claim are unenforceable. The four-year period is necessary to give buyers enough time to realize the home inspector produced a faulty HIR. [Moreno v. Sanchez (2003) 106 CA4th 1415]

By delivering the TDS and HIR to the buyer or the buyer’s agent upfront — before an offer or counter offer is accepted — the seller and their agent ensure the buyer has all the information needed on the property’s condition to set a price in their offer for their purchase of the property.