With few exceptions, sellers of a one-to-four unit residential property are required to provide property-related disclosures to prospective buyers. Likewise, brokers who list one-to-four unit residential property owe a duty, separate from the seller’s, to all prospective buyers to visually inspect and timely disclose any physical aspects of a property:
- observable by a broker on a reasonable inspection of the property; and
- affecting the property’s market value. [Calif. Civil Code §§2079 et seq, 1102(a), 1102.3]
However, unlike a Transfer Disclosure Statement (TDS) or a Natural Hazard Disclosure (NHD), a structural pest control (SPC) report is not a required disclosure in a California real estate transaction. Most conventional lenders do not require a report or clearance.
In 2005, the Federal Housing Administration (FHA) removed the requirement for automatic SPC inspections, reports and clearances on every property securing an FHA-insured mortgage. To pull down barriers to homeownership, the FHA now only requires an SPC inspection 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]
However, prudent buyer’s agents will protect their buyers with an SPC contingency provision in the purchase agreement. The contingency calls for an SPC inspection, report and certification, regardless of the nature of the buyer’s purchase-assist financing. [See first tuesday Form 150 §11.1(a)]
Seller’s agents acting in the best interest of their sellers need to urge their sellers to authorize a prompt inspection and report as a requirement of entering into the listing. The report, or notice of clearance after completion of recommended repairs, is to be included in the marketing package. The marketing package is handed to prospective buyers and their agents seeking additional property information. [See first tuesday Form 132]
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.
In addition, later renegotiations of the sales price due to a delayed, in-escrow disclosure of previously discoverable material defects are avoided.
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 best made on commencement of negotiations.
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 after the buyer inquires further into the property but prior to the seller entering into a purchase agreement. Delivery of the SPC report only after acceptance of the offer is deficient. Not only is this delivery after 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 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. [CC §1099(a)]
The term “as soon as practicable” actually carries the same meaning as does the term “as soon as possible”. Thus, ASAP means information regarding termites, including any existing termite report, will be delivered to the prospective buyer when the seller’s agent becomes aware the buyer is going to submit an offer. [Calif. Attorney General Opinion 01-406 (August 24, 2001)]
If the seller receives an offer which does not indicate the buyer or the lender will require an SPC report, it is best for the seller to deliver the SPC report with a counteroffer. If the SPC report is not available, the counteroffer advises the buyer of the termite information known to the seller or the seller’s agent.
A counteroffer may be used solely for the purpose of making the SPC disclosure, even without a change in the terms of the buyer’s offer. Disclosure is most practicable before the acceptance occurs – ASAP – if the contents of a report indicate termite conditions which may impact the buyer’s setting of the price or terms of their 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 termite damage because the readily available inspection and report was not ordered. Further, the discovery of the termite damage by all principals and agents involved was not made before the property was put under contract with the buyer.
- The seller or the seller’s agent know of the termite damage and know the termite damage adversely affects the property’s value. They resort to deceit, and do not disclose the termite damage 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]
Thus, sellers need to order the inspection and report when the property is listed. With a report in hand, any necessary repairs will be known and the cost for any correction ascertained. The report allows the seller to:
- complete the repairs before a prospective buyer is located;
- disclose the repairs to be completed by the seller prior to the close of escrow;
- offer the buyer a credit if time does not allow for the repairs to be completed prior to the close of escrow; or
- negotiate terms of the sale with the buyer based on the disclosed SPC report.
Misrepresentations of the property’s condition do not become surprises for the buyer during escrow. On the other hand, some sellers intend for the buyer to be responsible for any structural pest control clearance, an intent that easily leads to nondisclosure.
Further, the real irritation for the buyer is the concept of buyer responsibility for a portion of the repairs. This myth is fostered by the pest control provisions in California Association of Realtors (CAR) purchase agreements.
This custom brought about by the bifurcated pest control handling through an addendum to purchase agreements supplied by CAR causes agents to request the SPC company to prepare what is essentially a divided report.
The SPC report is divided into two categories:
- Section I items, which include visible evidence of active infestations, infections, or conditions that have resulted in or from infestation or infection; and
- Section II items, which include conditions likely to lead to infestation or infection but where no visible evidence of infestation or infection is found.
With this division, CAR’s addendum allows the agent to specify whether the buyer or seller pays to correct these costs. This generally results in the buyer footing the bill for certain repairs (usually Section II repairs).
However, these “defective” conditions of existing termites and their damage to the property are part and parcel of the property owned by the seller. In a bust market, the buyer’s agent is not about to let the seller pass on to the buyer any sort of deficiency which adversely affects the value of the property without setting the price accordingly.
Thus, requesting a two-part report in the current climate is misdirected. The intent of this divisible report is to divide the types of conditions existing on the property. More importantly, the end game is to shift the responsibility for termite repairs, which are the seller’s alone, to an unsuspecting buyer.
Why risk having prospective buyers walk away from your listing? Have the report prepared, disclose it and avoid having buyers abandon your seller’s property for the home just around the corner – the one with a termite clearance.