Communicating with home inspectors

The real estate agent and home inspector hired by a seller are crucial figures in the marketing of a home for sale — but do they need to get along?

As expected, a degree of mistrust exists on both sides. Agents may sense an inspector is needlessly riling up their seller, placing a property in jeopardy by alerting prospective buyers to details about a property’s defects, big and small. Then again, inspectors often feel a seller’s agent tends to gloss over inspection findings in an effort to preserve the seller’s net sales proceeds, even putting the buyer’s capital at risk by insisting this or that defect is “no big deal.”

In fact, a seller’s agent walks a tight line when assisting their seller by ordering a home inspection report (HIR). While the agent needs to be present for the inspection to best understand the nature of any corrective action that a defect might require, they need to avoid any interference with the inspector’s activities.

From an inspector’s point of view, the agent’s job at the inspection is to manage the client’s expectations, according to an editorial in the California Real Estate Inspection Association (CREIA).

In other words, it’s the inspector’s job to inform the seller about defects observed in the improvements on the property. But it’s the job of the seller’s agent to counsel with the seller about whether or not they will decide to fix the defects.

Or, when a seller fails to provide an HIR in advance of accepting a buyer’s offer, the buyer’s agent on receiving an HIR will assist the buyer in demanding the seller repair and eliminate the defects before closing. Under this situation, the seller will find themselves backfooted, having wasted time and effort by failing to get an HIR before preparing the Transfer Disclosure Statement (TDS) and putting the property up for sale. [See RPI Form 304]

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Home inspectors catch overlooked defects

A home inspection is a physical examination conducted on-site by a home inspector. The inspection of a one-to-four unit residential property is performed for a noncontingent fee.  Typically, the fee is paid in advance to avoid conflicts over payment when the seller is disturbed by defects disclosed in the HIR.

The purpose of the physical examination of the premises is to identify material defects in the condition of its structure, components, and systems. Material defects are conditions which affect the property’s:

• market value;
• desirability as a dwelling;
• habitability from the elements; and
• safety from injury in its use as a dwelling.

Defects become material — of concern — when the condition adversely affects the price a reasonably prudent and informed buyer will pay for the property when setting the price to be paid on entering into a purchase agreement. As the reported conditions may affect value and thus pricing, the investigation and delivery of the home inspection report to a prospective buyer is legislated to precede a prospective buyer’s offer to purchase. [See RPI Form 150; Calif. Business and Professions Code §7195(b)]

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 enter 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.

With home prices falling in 2023, HIRs are increasingly demanded by buyer’s agents as their diligence necessary to care for their homebuyer’s best interests, who generally have their pick of properties — and price.

A home inspector often detects and reports property defects overlooked by the seller and not observed during a visual inspection by the seller’s agent, but documented in an HIR. [Calif. Business and Professions Code §7195]

Significant defects which remain undisclosed at the time the buyer goes under contract tend to surface during escrow or after closing, made as claims against the seller and always the seller’s broker for deceit.

To avoid claims against the seller’s broker and the seller, an HIR is ordered and received before marketing the property. A seller’s agent uses the Authorization to Inspect and Prepare a Home Inspection Report to document their request on behalf of the seller for a home inspection. It employs the home inspector selected by the seller to conduct an inspection and prepare an HIR for prospective buyers to rely upon. [See RPI Form 130]

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Negligent failure to disclose

The inspector’s duty is owed directly to the seller and a buyer of the property — the homeowner or homebuyer — not to the seller’s agent. Still, the seller’s agent may rely on the HIR disclosures together with the agent’s knowledge of additional defects when preparing the TDS. Again, the TDS is only effective to avoid claims of nondisclosure when delivered to prospective buyers before the seller enters into a purchase agreement to sell them the property.

This concept of duty is occasionally distorted, since inspectors often rely on an agent’s referral to generate inspection fees — the ‘preferred inspector’ stereotype. Thus, the inspector may feel pressured to provide a “good” inspection report sufficient to allow an in-escrow transaction with a buyer to close smoothly, thus ensuring the agent’s fee and repeat business for the inspector.

But not only is this bad for the buyer and the seller — it opens up the home inspector and the seller’s agent to liability. When the seller’s agent steers their seller to a particular inspector of preference and the inspector does not exercise their duty of care to produce a thorough and complete report, the buyer may recover their money losses on the price paid or costs of eliminating the defect(s) from both the seller’s agent and the inspector.

A buyer has two years from the close of escrow to pursue the seller’s broker and agent to recover losses caused by the broker’s or agent’s negligent failure to disclose observable and known defects affecting the property’s physical condition and value before the buyer goes under contract to buy a property. Undisclosed and unknown defects permitting recovery are those observable by a reasonably competent broker during a visual on-site inspection. An agent is expected to be as competent as their broker in an inspection. [CC §2079.4]

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

Following their mandatory visual inspection, the seller’s broker or agent — before preparing the seller’s Transfer Disclosure Statement (TDS) and delivering it to a prospective buyer before entering into a purchase agreement — need to obtain an HIR on the property and prepare the TDS in reliance on specific items covered in an HIR. [See RPI Form 304]

When the HIR is relied on after the seller’s agent’s property inspection to prepare the TDS and the TDS is later contested by the buyer as incorrect or inadequate in a claim made on the broker, the broker and their agent are entitled to indemnification — held harmless — from the home inspection company issuing the report. [Leko  v. Cornerstone Building Inspection Service (2001) 86 CA4th 1109]

As the seller’s or buyer’s agent, remember that home inspection requests and reports are between your client and the inspector. Agents consult, assist and recommend — but leave the selection of home inspector to the client. With choices presented to the client, the issue of steering to an inspector who fails to locate a defect in the property does not morph into a claim of bad faith against an agent for improper selection of the home inspector.

The qualified and insured home inspector

To avoid liability for a negligent home inspector and faulty preparation of a TDS, the agent needs to recommend qualified and competent inspectors. Further, agents need to provide a short list of several competent inspectors from which to choose to avoid the appearance of steering the client.

Inspectors who carry Errors and Omissions (E&O) insurance provide coverage for their liability due to oversights during the inspection process. With an E&O policy, the insurance company defends claims and pays settlements or judgments against the inspector up to the limits of liability stated in the policy.

Editor’s note — As a matter of practice to limit personal liability, active real estate brokers and agents are also encouraged to purchase E&O insurance. With the payment of a premium, E&O insurance protects from the cost of defending against a negligence claim made by a client or others.

Any individual who holds themselves out as being in the business of conducting a home inspection and preparing a home inspection report on a one-to-four unit residential property is a home inspector. No licensing scheme exists to set the minimum standard of competency or qualifications necessary to enter the home inspection profession. [Bus & P C §7195(d)]

However, some real estate service providers typically conduct home inspections, such as:

• general contractors;
• structural pest control (SPC) operators;
• architects; and
• registered engineers.

Home inspectors occasionally do not hold any type of license relating to construction, such as a person who is a construction worker or building department employee. However, they are required to conduct an inspection of a property with the same degree of care a reasonably prudent home inspector would exercise to locate material defects during their physical examination of the property and report their findings. [Bus & P §7196]

Some trade groups exist which monitor standards for home inspectors. These include the:

• California Real Estate Inspection Association (CREIA);
• American Society of Home Inspectors (ASHI); and
• International Association of Home Inspectors (InterNachi).

Editor’s note — Home inspectors are separate from SPC inspectors, who are licensed to inspect for pests. When choosing an SPC company, the agent needs to protect their client and verify the individual or company’s license, the company’s registration, and the individual’s or company’s complaint history by contacting the SPC Board.

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