This article introduces the seller’s and listing agent’s use of a home inspection report to document the present physical condition of the listed property for prospective buyers.
Transparency by design
A seller of a one-to-four unit residential property, on entering into a listing to sell the property, is asked to give the listing agent authority to order out a home inspection report (HIR) from a local home inspection company as part of the seller’s cost to market the property for sale.
The listing agent explains the HIR will be used to complete the seller’s Condition of Property (Transfer) Disclosure Statement (TDS). The report will then be attached to the seller’s TDS to more fully inform prospective buyers about the actual condition of the property.
On receipt of the report, the seller could act to eliminate some or all of the deficiencies noted in the home inspection report. On the elimination of any defects, an updated report should be ordered out for use with the TDS.
The seller’s TDS, as reviewed by the listing agent and supplemented with the HIR, will be used to inform prospective buyers about the precise condition of the property before they make an offer to purchase. Thus, the seller will not be confronted later with demands to correct defects or to adjust the sales price in order to close escrow. The property will have been purchased by the buyer “as disclosed.”
The listing agent’s marketing role
The task of gathering information about the condition of the property listed for sale and delivering the information to prospective buyers lies primarily with the listing agent. [Calif. Civil Code §2079]
Further, to retain control throughout the process of marketing, selling and transferring ownership, the listing agent should be the one who requests the HIR (on behalf of the seller). The agent will lose control over the marketing and closing process, and expose himself to claims of misrepresentation, when the buyer or the buyer’s agent is the one who first orders the HIR.
As part of the listing agent’s management of the home inspection activity, the agent should be present while the home inspector carries out his investigation of the property. The agent can discuss the home inspector’s observations and whether his findings are material in that they affect the desirability, value, habitability or safety of the property for prospective buyers.
If the listing agent cannot be present, then he should request that the home inspector call and discuss the home inspector’s findings and recommendations for further investigation with the agent before the HIR is prepared. On receipt and review of the report by the seller and listing agent, any questions or clarifications they may have on its content should be followed up by a further discussion with the home inspector, and if necessary, an amended or new report.
Home inspector’s qualifications
Any individual who holds himself out as being in the business of conducting a home inspection and preparing a home inspection report on his findings during the inspection of 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. [Calif. Business and Professions Code §7195(d)]
However, general contractors, structural pest control operators, architects and registered engineers typically conduct home inspections and prepare reports as requested by sellers, buyers and their agents. The duty of care expected of licensed members of these professions by prospective buyers who receive and rely on their reports is set by their licensing requirements and professional attributes, i.e., the skill, prudence, diligence, education, experience and financial responsibility normally possessed and exercised by members of their profession. These licensees are experts with a high level of duty owed to those who receive their reports. [Bus & P C §7068]
Those home inspectors who do not hold any type of license relating to construction, such as a person who is a construction worker or building department employee, 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. Again, the home inspector owes prospective buyers who rely on their home inspection reports a high level of duty as experts. [Bus & P C §7196]
However, a home inspector who is not a registered engineer cannot perform any analysis of systems, components or structural components which would constitute the practice of a civil, electrical or mechanical engineer. [Bus & P C §7196.1]
Hiring a home inspector
To rely on specific items in a home inspection report, a seller’s broker and listing agent must be free of simple negligence in the selection of the home inspector who inspected and prepared the HIR by the exercise of ordinary care by the broker. If care in the selection of a home inspector is lacking, then reliance on the HIR by the seller and listing agent when preparing the TDS will not relieve the broker or the listing agent of any liability should they rely on the home inspector’s error or omission to prepare the TDS. [CC §1102.4(a)]
Thus, the broker and listing agent must look into or be aware of whether the home inspector who prepares the report is qualified. The home inspector who holds a professional license or is registered 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, the qualifications to look for include:
- educational training in home inspection related courses;
- length of time in the home inspection business or related property or building inspection employment;
- errors and omissions professional liability insurance;
- 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.
Remember, the reason for hiring a home inspector in the first place is to assist the seller and his listing agent to better represent the condition of the property to prospective buyers.
Reliance by buyers on the report
A listing agent requesting a home inspection report should advise the home inspector that the seller, broker and all prospective buyers of the property will be relying on the report. This disclosure will avoid later (unenforceable) claims by the home inspector that the report was intended for the sole use of the seller, broker or buyer who signed the home inspector’s contract. [CC §1102.4(c)]
Consider a buyer under a purchase agreement who requests a home inspection report on the property being purchased. On receipt of the report, the buyer cancels the purchase agreement. Another prospective buyer receives the same home inspection report from the listing agent and relies on it to acquire the property.
However, the report fails to correctly state the extent of the defects. The second buyer discovers the errors and makes a demand on the home inspector who prepared the report for the first buyer to cover the cost to cure the defects which were the subject of the errors.
The home inspector claims the report was prepared only for the buyer who requested the report and no subsequent buyer can now rely on it, as stated in the home inspection contract.
Here, the home inspector knew the listing agent also received the report and should have known that the agent would properly provide it to other prospective buyers if the buyer who ordered the report did not complete the purchase. A home inspection report, like an appraisal-of-value report or a structural pest control report, is not a confidential document. Thus, all prospective buyers of the property are entitled to rely on the existing home inspection report.
This reliance by other prospective buyers imposes liability on the home inspector for his failure to exercise the level of care expected of a home inspector when examining the property and reporting defects. Liability for the defects is imposed even though the home inspection contract and report contained a provision restricting its use solely to the person who requested it. [Leko v. Cornerstone Building Inspection Service (2001) 86 CA4th 1109]
The home inspection contract
A home inspector and his home inspection company may not contract to limit the dollar amount of their liability for errors, inaccuracies or omissions in their reporting of defects to the fee received for the report.
Further, any provision in the home inspection contract or condition in the home inspection report which purports to waive or limit the home inspector’s liability for the negligent investigation or preparation of the HIR is unenforceable. [Bus & P C §7198]
Should the buyer discover an error in the HIR regarding the existence or nonexistence of a defect affecting the value or desirability of the property, the buyer has no more than four years after the date of the inspection to file a legal action to recover any money losses. [Bus & P C §7199]
Occasionally, a boilerplate provision in the home inspector’s contract or the home inspection report will attempt to limit the buyer’s period for recovery to one year after the inspection occurred. However, any such limitation the home inspector places on time periods during which the buyer must discover and make a claim is unenforceable. The statutory four year period is needed to provide time for buyers to realize the home inspector produced a faulty report. [Moreno v. Sanchez (2003) 106 CA4th 1415]
The home inspector’s malpractice insurance
An agent ordering a home inspection report needs to verify the home inspection company has professional liability insurance coverage before allowing the company to conduct an investigation and prepare a report.
Should the home inspector fail to detect and report a material defect or the extent of the defect, and the cost to correct it is significant, the buyer will be seriously disadvantaged in any recovery effort against the home inspector and the home inspection company unless insurance is available to pay amounts recoverable by the buyer.
Likewise, if the same defect was also missed by the listing agent due to the agent’s failure to observe the defect during the agent’s mandatory visual inspection, the broker and the listing agent are also liable to the buyer for the costs of curing the defect – separate from the home inspector’s liability.
Here, the broker and listing agent will be able to force the home inspector to contribute to the recovery by an indemnification claim made by the broker against the home inspector for payment of all or a portion of the buyer’s loss. Unless the home inspector has insurance coverage, the ability of the seller’s broker to force the home inspection company to pay the home inspector’s share of the responsibility for having failed to observe the same defect the listing agent missed will be limited to the home inspector’s personal assets. [Leko, supra]
The inspection and report
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.
The purpose of the physical examination of the premises is to identify material defects in the condition of the structure and its systems and components. 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 are material if they affect the price a reasonably prudent and informed buyer would pay for the property when entering into a purchase agreement. Thus, the investigation and delivery of the home inspection report must precede a prospective buyer’s offer to purchase to be meaningful. [Bus & P C §7195(b)]
The home inspection is to be a non-invasive examination of the mechanical, electrical and plumbing systems of the dwelling, as well as the components of the structure, such as the roof, ceiling, walls, floors and foundations. Non-invasive indicates there will not be an intrusion into the roof, walls, foundation or soil by dismantling or taking apart the structure which would disturb components or cause repairs to be made to remove the effects of the intrusion. [Bus & P C §7195(a)(1)]
The home inspection report is the written report prepared by the home inspector which sets forth his findings while conducting his physical examination of the property. The report identifies each system and component of the structure inspected, describes any material defects the home inspector found or suspects, makes recommendations about the conditions observed and suggests any further evaluation needed to be undertaken by other experts. [Bus & P C §7195(c)]
The listing agent needs to make sure the report addresses the cause of any defect or code violation found which constitutes a significant defect in the use of the property or cost to remedy the defects. The report should also include suspicions the home inspector might have which need to be clarified by further inspections and reports by others with more expertise.
The agent, or anyone else, may also request that the home inspector include an inspection and report on the energy efficiencies of the property. On a request for an energy efficiency inspection, the home inspector will report on items including:
- the R-value of the insulation in the attic, roof, walls, floors and ducts;
- the quantity of glass panes and the types of frames;
- the heating and cooling equipment and fans;
- water heating systems;
- the age of major appliances and the fuel used;
- energy leakage areas throughout the structure; and
- the solar control efficiency of the windows. [Bus & P C §7195(a)(2)]
The home inspector’s conflicts of interest
The home inspector who prepares a home inspection report, the company employing the home inspector and any affiliated company may not:
- pay a referral fee or provide for any type of compensation to brokers, agents, owners or buyers for the referral of any home inspection business;
- agree to accept a contingency fee arrangement for the inspection of the report, such as a fee payable based on the home inspector’s findings and conclusions in the report or on the close of a sales escrow;
- perform or offer to perform any repairs on a property which was the subject of a HIR prepared by them within the past 12 months; or
inspect any property in which they have a financial interest in its sale. [Bus & P C §7197]