Pest control and marketing

This article discusses the requirements, delivery of, and repercussions of the Structural Pest Control report.

Pricing based on 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 (SPC) Report, and the repairs begins. As is often the case, custom seems mostly to blame.

First, in one corner is the seller. He will tell the listing agent (and himself) that he has seen neither hide nor hair of anything resembling a termite infestation, so obviously there is no need for either a report or a clearance. And as for repairs, he’s all for selling the property in an “as the buyer sees things” condition.

The seller’s paladin on this field of battle is his listing agent. Conscientious listing agents will push their sellers to order out the SPC report and fix the repairs now in the name of transparency—and an earlier sale. Armed with a pest control operator’s certificate of clearance, the listing agent will be better able to get the listing price for the property without having to later renegotiate the sales price downward due to delayed, in-escrow disclosures of discoverable material defects (in-fact if not in-law) like wood-destroying infestations and infections.

Others, of course, would rather 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 him check out the property to see what he finds.

In the other corner is the prospective buyer. During his observations of the property, he is likely blind to all that moves (like termites/etc.) beneath the surface. He wants to purchase a sound home, but may not know all the right questions to ask, or worse, all the games that the multiple listing service (MLS) gatekeepers have learned to play when working as listing agents on behalf of sellers.

Here, the buyer’s champion is his selling agent. It is he 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 his listing agent;
determining the veracity of the disclosures they do receive; and
reviewing a due diligence checklist with the buyer to make sure he takes the necessary steps so the buyer’s purchaseis, among other things, free of termites.

The seller who gets his way

When the seller controls the conversation at the listing stage and takes a pass on the opportunity to order an SPC report and clearance, and 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 a 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 aware of. He 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, as no doubt he should. The seller is irritated, either at being found out or at not being properly advised by his agent on the inevitable 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. They are structured to 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 andrequired for a Federal Housing Authority (FHA)-insured loan—since the pest control issue adversely affects the value of the seller’s property and the price the buyer agreed to pay.

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 eat the cost if they are going to finance and buy the property. By using a trade association purchase agreement that is exactly the position the termite provisions place the buyer in.

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 what we’re experiencing now and will most likely continue to experience into 2013, 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 disclosing 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.

Eliminate the risk

Unlike a Transfer Disclosure Statement (TDS) or a Natural Hazard Disclosure (NHD), an SPC Report is not a required disclosure in a California real estate transaction. However, before lending money on a property the FHA will require:

an inspection to be made by a licensed SPC company;
an SPC Report prepared by the SPC company after the inspection is complete; and
a subsequent Pest Control Certification stating no active infestation or infection exists on the property.

Most conventional lenders will not require a report or clearance.

However, prudent buyers and selling agents alert to the fact they are duty-bound to act in the best interests of their buyers will demand an SPC inspection, report, and certification by placing a straightforward, simple SPC contingency provision in the purchase agreement, regardless of the nature of the buyer’s purchase-assist financing. [See first tuesday Form 150 §11.1(a)]

Seller’s listing 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 listing agent’s marketing package. Disclosure upfront and before accepting offers promotes the profession’s need for transparency in a transaction in order to avoid personal liability for withholding information known to the seller or the listing agent from prospective buyers about a material fact, conduct called deceit.

The existence of termites adversely affects the value of property, which is why disclosure is compelled before the buyer enters into a purchase contract and sets the price with the seller. In an ideal world, the report and clearance would be part of the marketing package given to any prospective buyer who seeks more information on the property—the first act by a buyer in negotiations to purchase a property. This makes for a ready, willing, and (most importantly due to the existence of a certificate of clearance) able buyer.

If there is an SPC provision placed in a purchase agreement or required as a condition of financing the purchase of the property, a copy of the SPC Report must be delivered to the prospective buyer or buyer’s selling agent by the seller or his listing agent as soon as practicable (ASAP), e.g., either prior to entering into the purchase agreement, or, as has become custom, after the seller’s acceptance of a purchase agreement and prior to the close of escrow. This would then subject the closing to the buyer’s right to cancel the purchase agreement and escrow instructions. [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 the termite report will be delivered to the prospective buyer when the agents involved become aware the buyer is going to submit an offer. Should the offer be submitted to the seller without prior indication one was being considered, there is still sufficient opportunity before acceptance to advise the buyer of the information known to the seller, the listing agent, or the buyer’s agent. [Calif. Attorney General Opinion 01-406 (August 24, 2001)]

A counteroffer could be used solely for the purpose of making the disclosure, even if no need exists for a change in the terms of the buyer’s offer. Disclosure is always most practicable 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 withdraw and reconsider the price or terms of his 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. OR
The seller or the listing agent resorts to deceit when the existence of a condition which adversely affects value is known to the seller or the listing agent and not disclosed before the seller accepts the buyer’s purchase offer.

It is the second situation which allows the buyer to pursue the seller and the listing broker/agent for fraud and to recover the cost of repairs without regard to the contract provisions allowing the seller to avoid the cost of termite clearance and repairs. [Jue v. Smiser (1994) 23 CA4th 312]

When the inspection is ordered, the custom brought about by the bifurcated pest control handling in an addendum to purchase agreements supplied by the trade associations causes agents to request the SPC company to prepare a separated report, making and separating their findings and recommendations into two categories:

Section I items, listing items where there is visible evidence of active infestations, infections, or conditions that have resulted in or from infestation or infection; and
Section II items, listing conditions deemed likely to lead to infestation or infection but where no visible evidence of infestation or infection was found.

However, sellers need to order the inspection and report when the property is listed so any necessary repairs will become known, the cost for any correction ascertained, and any repairs completed before a prospective buyer is located—unless it is the seller’s intention to contract for the buyer to be responsible for the structural pest control clearance. Misrepresentations of the property’s condition cannot then become surprises during escrow.

These “defective” conditions of termites and their damage to the property are owned by the seller. In a bust market, the buyer with a selling agent whose duty of care it is to protect his buyer is not about to let the seller pass any sort of deficiency which adversely affects the value of the property onto the buyer.

Therefore, requesting a separated report in the current climate is pointless as the intent of a separated report is to divide: divide the type of conditions, and more importantly, to set the seller and buyer against each other, and ultimately shift the responsibility which is the seller’s alone to shift to an unsuspecting buyer. More to the point, why risk having prospective buyers walk away from your listing, especially in a buyer’s market, just because a termite-free home with a clearance and certainty of risk is available around the corner?

If an active termite infestation or fungus infection is found on an inspection prior to marketing the property, the seller needs to consider taking corrective measures to both protect the property from further damage and ready it for a prospective buyer.

A Pest Control Certification, a statement by the SPC company indicating the property is free of infestation or infection in the visible and accessible areas, will then be issued. This certification is commonly called a termite clearance. However, if any signs of infestation or infection have not been corrected, it will be noted in the certification. [Business and Professions Code §8519]

While the FHA only requires a certificate of clearance stating that Section 1 items have been corrected, if the seller does not correct any conditions which may lead to future infestations or infections, those conditions are also noted on the Pest Control Clearance so the SPC company will not be liable for the costs incurred to eliminate conditions fostering future infestations or infections. Section 2 conditions usually are only observed in homes that do not have a slab foundation and have a crawl space beneath the floor of the structure. [Bus & P C §§8516(d), 8519]

What and when to disclose

Consider a one-to-four unit residential property of wood frame construction listed with a broker who is employed to locate a buyer.

The listing agent explains he wants the seller to order an SPC inspection and report now since any prospective buyer (or his lender) will want an SPC Report and Pest Control Certification before escrow can close.

The listing agent receives written authorization from the seller and orders an inspection and separated report from an SPC company known to the listing agent to be competent and diligent. [See first tuesday Form 132]

The inspection report received from the SPC company states conditions exist which will likely lead to an active termite infestation (Section II items) and recommends repairs and further inspection into inaccessible areas.

Unhappy with the report and the estimated cost of repairs, the seller has the listing agent get a second opinion of a different SPC company.

The second company states there is an active termite infestation (a Section I item) and lists estimates for repair which are higher than the first company’s estimates.

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 listing agent delivers a copy of the first company’s inspection report to the buyer (or buyer’s selling agent), but does not inform the buyer or his agent of the second inspection report.

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 listing agent for his costs to correct the damage, claiming the listing agent was liable since he knew about the second report and the termite infestation, a material fact he did not disclose.

Is the listing agent liable for the costs the buyer incurred to cure the termite damage since he knew about the second report and the termite damage and failed to disclose the report or its contents?

Yes! The second report stated an active infestation existed which is a material fact since the condition adversely affected the value and desirability of the property. The seller’s broker is responsible to ensure the delivery of all known inspection reports to a buyer. The seller’s agent cannot pick and choose which reports to deliver. [Godfrey v. Steinpress (1982) 128 CA3d 154; Department of Real Estate Bulletin (Summer 2004)]

Choosing the right company

When choosing an SPC company, the listing agent needs to protect his client and verify the individual or company’s license, the company’s registration, and the individual’s or company’s complaint history by calling the SPC Board at 916-561-8708 (in Sacramento) or 800-737-8188 ext. 2 (outside Sacramento), or at www.pestboard.ca.gov.

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 must maintain a $4,000 bond. The bonds are in favor of the State of California for the benefit of any person who, after entering into a contract with a registered, licensed company, is damaged by:

fraud; or
dishonesty. [Bus & P C §§8697, 8697.2]

Further, the bonds also protect any person who is damaged as a result of any violation of the SPC Act by a registered and licensed SPC company.

Each company must also have general liability insurance with a minimum of:

$25,000 for bodily injury; and
$25,000 for property damage per loss.

The general liability insurance covers financial loss due to:

property damage;
public injury; and/or
illness as a result of the company’s actions.

The actual inspection and original inspection report

The individual or company who does the inspection and issues the report must hold a Branch 3 Wood-Destroying Pest and Organisms License/Registration. Only 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 will cover all accessible areas to determine whether there is an active infestation or infection or conditions which will likely lead to future infestations or infections. Inaccessible areas do not need to be covered in an inspection.

An area is considered inaccessible if it cannot be inspected without 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.

All SPC companies use a standardized inspection report form. An inspection report must include:

the inspection date and the name of the licensee making the inspection;
the name and address of the person ordering the report;
the name and address of any party in interest;
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 1 items if 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 2 items if a separated report is requested;
one of the following bold-type statements, as appropriate:
- “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 if practicable;
recommendations for treatment or repair;
information regarding the pesticide(s) to be used, if necessary;
that a reinspection will be performed if an estimate for making repairs is requested by the person ordering the original report; 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.” [Calif. Business and Professions Code §8516(b); 16 Calif. Code of Regulations §1990]

Further, the following statement must appear 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 company chosen must furnish the person who ordered the inspection a copy of the report within 10 business days. [Calif. Business and Professions Code §8516(b)]

All original inspection reports must be maintained by the SPC company for three years. [Bus & P C §8516(b)]

All SPC companies must post an inspection tag in the attic, subarea, or garage on completion of an inspection. The tag must give the company’s name and the date of inspection. [16 CCR §1996.1]

Reinspections

If an estimate for corrective work is not given in the original inspection report or thereafter, then the company is not required to perform a reinspection. A reinspection will be required if a separated report is requested as an estimate for repairs must be given separately allocating the costs to perform each and every recommendation for corrective measures for Section I and II items.

The reinspection is to be performed within 10 days of it being requested. A simple reinspection and certification will occur at that time. However, if more than four months have passed since the original inspection and report, a reinspection will not suffice. A full (original) inspection must be completed and a new (original) inspection report must be issued. [B & P C §8516(b); 16 CCR §1993]

Notices of Work Completed and Certifications

The person who ordered the report is never required to hire the SPC company chosen to inspect the property to complete any corrective measures. A second SPC company can be called in to work on the structure. However, this second company will need to have a Branch 3 licensee inspect the property first; they cannot rely on the inspection and 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]

If the owner does not want to contact a second SPC company, the owner can hire a licensed contractor to remove and replace any structure or portions of a structure damaged by wood-destroying pests or organisms if it is incidental to other work being performed or if identified by an SPC inspection report. However, the licensed contractor cannot perform any work that requires an SPC license to complete. [Bus & P C §8556]

However, if the original company gives an estimate or makes a bid for corrective measures and the owner hires another company to perform the corrective measures noted on the original company’s report, the original SPC company must return and reinspect the property before issuing a certification as the original SPC company will not certify treatments performed by another SPC company without reinspection. [Bus & P C §8516(b)]

An SPC company is required to complete a Notice of Work Completed and Not Completed if any work is done on a structure. The notice must be given to the owner or the owner’s agent within 10 working days after completing any work. The notice must include a statement of the cost of the completed work and the estimated cost of any work not completed. A copy of the Notice of Work Completed and Note Completed must then be delivered by the seller or seller’s agent to the buyer or buyer’s selling agent as soon as practicable. [Bus & P C §8518; 16 CCR §1996.2; CC §1099(b)]

If the property is fumigated, the fumigation company (which must hold a Branch 1 license) will issue a certification of fumigation within five days.

After any SPC company completes treatment or repairs, a completion tag must be placed next to the inspection tag. The completion tag must display:

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/or work if requested by the person ordering the report. The company, after completing the inspection and/or work completed will certify upon request that:

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 and that they have been corrected; or
the property is free of active infestations or infections in the visible and accessible areas.

Teaching your seller to “own it”

In this buyer’s market, and in the years to come, listing agents are going to need to school their sellers on what a buyer will and will not tolerate. When it comes to the SPC inspection, report, repair, and certification, they all initially belong to the seller. Further, the obligation usually remains with the seller since no buyer’s agent worth his salt is going to allow his buyer to purchase termites or their breeding grounds.

In a seller’s market, a seller may be able to make a buyer pay for the seller’s termite problem, leave conditions that may lead to future infestations and infections unfixed, and still command a price at a multiple of the amount they paid for the property. Those days are over.

Today, listing brokers and agents need to make sure that their sellers understand that if they don’t want to continue “owning” the termites, they need to fix and maintain the property in a (buyer’s) marketable condition or be prepared to fight over the price they want for their home, and most likely lose that battle.