This article reviews the buyer’s use of a home inspector to confirm the physical condition of the property, as represented by the seller and listing agent, prior to entering into a purchase agreement..
Protecting the prospective buyer
A buyer, with the assistance of the buyer’s agent, locates a one-to-four unit residential property suitable for the buyer to purchase. Both the agent and his buyer walk through the property and confirm the property fits the buyer’s needs.
The buyer’s agent contacts the listing agent and informs him he has a prospective buyer who is interested in the property. The buyer’s agent requests information on the property, including a title profile, a Transfer Disclosure Statement (TDS) and a home inspection report (HIR). The listing agent responds by suggesting the buyer’s agent go ahead and submit a purchase agreement offer and that the “necessary disclosures for closing” will be delivered after an offer is accepted by the seller.
The indication the buyer’s agent gets is that the listing agent has not prepared a listing package and no information on the property will be made available to prospective buyers until it is time to close escrow.
The buyer agrees with his agent to proceed with an offer at a price and on terms which the agent believes are justified. The agent has checked out comparable sales information provided by the title company, plus he has a working knowledge of properties in the immediate area. They know of no problems presented by the physical condition of the property.
An offer is prepared with contingency provisions regarding the condition of the property. The buyer has no information on the condition of the property except for his walk-through with his agent to determine whether the arrangement of the space within the structure was suitable.
Contingency provisions included in the purchase agreement, among others, call for:
· the seller to furnish a HIR prepared by an insured home inspector showing the land and improvements to be free of material defects [See first tuesday Form 150 §11.1(b)];
· the seller and the listing agent to prepare, sign and deliver a condition of property disclosure (TDS) [See first tuesday Form 150 §11.2]; and
· the buyer to inspect the property twice — once to initially confirm the condition of the property and once again before closing escrow to confirm maintenance has not been deferred and material defects discovered after entering into the purchase agreement have been corrected or eliminated. [See first tuesday Form 150 §11.3]
The offer is submitted and promptly rejected by the seller. Eventually, a purchase agreement is entered into which eliminates the provision calling for the seller to furnish a HIR. No previous offer has been submitted to the seller by other prospective buyers who obtained an HIR on the property.
The buyer authorizes his agent to immediately obtain a HIR, which the buyer’s agent orders. The inspection takes place and the HIR is received by the buyer’s agent and reviewed with the buyer. The seller and the listing agent have not delivered a TDS or any of the other seller disclosures or inspection reports which both the seller and the listing agent are duty bound to deliver to a prospective buyer. [Calif. Civil Code §§2079, 1102]
The home inspector’s written report lists numerous significant defects he has observed during his physical inspection of the property’s condition. Repair/replacement costs are estimated at $2,500 to eliminate the defects not disclosed by the seller or observed by the buyer or the buyer’s agent on their cursory review of the space within the structure.
The buyer makes a written demand on the seller to cure (repair) the defects discovered by the home inspector based on the terms agreed to in the purchase agreement. [See first tuesday Form 150 §11.3]
A copy of the HIR and a contractor’s estimate of the cost to cure the defects are attached to the buyer’s request for repairs. Thus, the buyer substantiates his demand on the seller to cover previously undisclosed defects.
The seller and his agent prepare a TDS and note all the defects listed in the HIR and on the buyer’s notice demanding repairs. The seller then refuses to make any of the corrections, claiming he has disclosed the defects in the TDS as agreed in the purchase agreement. Eventually, the buyer is told to either close escrow or cancel.
Can the buyer require the seller to cure the material defects found by the home inspector and close escrow?
Yes! The seller must deliver the property to the buyer as disclosed by the seller and the seller’s broker and observed by the buyer at the time the buyer’s purchase agreement offer was accepted, not in the condition stated in an untimely disclosure made in the seller’s TDS during escrow.
The seller’s and listing agent’s failure to disclose prior to acceptance is an omission of facts, called negative fraud.
The most significant issue arising out of these discoveries concerns the price the buyer agreed to pay in the purchase agreement. The seller and buyer agreed on a price for the property based on the conditions disclosed and known to the buyer at the time the offer was accepted.
Thus, the price represents the agreed value of a used, but defect- free property, except for any defects observed by the buyer or disclosed to the buyer prior to entering into the purchase agreement. The price, as it turns out, exceeded the property’s fair market value by the amount of the costs which will be incurred to cure the defects and deliver the property “as disclosed” prior to acceptance.
Confirm the seller’s disclosures
A seller and his listing broker must disclose to a prospective buyer all known and observable property conditions which adversely affect the value of the property.
A Transfer Disclosure Statement completed by the seller and listing agent, without the benefit of a HIR, typically does not accurately or fully reveal the significant property defects or code violations which actually exist, whether or not known to the seller or listing agent.
When the seller has not obtained or refuses to authorize the preparation of a HIR prior to entering into a purchase agreement, the buyer should always order one on opening escrow to confirm the condition of the property before the expiration of any cancellation period.
A buyer should undertake an inspection in the interest of avoiding:
· after-closing discoveries of defects which require correction; and
· after-closing claims he may make against the seller to recover the value lost or the costs incurred to correct the defects.
The buyer’s discovery of defects after acceptance of the purchase agreement and prior to closing, whether by the buyer’s investigation or by the seller’s tardy disclosure, does not alter the buyer’s right to close escrow, acquire the property and pursue the recovery of costs or the loss of value due to defects known to the seller or the listing agent and not disclosed prior to entering into the purchase agreement.
Armed with a HIR containing findings of material defects not known to the buyer or disclosed at the time the purchase agreement was accepted, the buyer can then make the necessary demands on the seller. Thus, the buyer ensures the property will be delivered in the condition as disclosed by the seller on entering into the purchase agreement, whether or not a TDS was received prior to acceptance of the buyer’s offer.
The buyer’s remedies for deceit
If a home inspection report reveals property defects unknown and previously undisclosed to the buyer, the buyer may:
· make a demand on the seller to correct or eliminate the defects, and refuse to close escrow until the seller has either complied or agreed to an adjusted price [See first tuesday Form 269];
· refuse to close escrow for lack of seller compliance to the demand for corrections and enforce the agreement and its price correction provisions by specific performance; or
· close escrow and make a money demand on the seller for the difference between the purchase price set in the purchase agreement and the price as adjusted for the undisclosed defects as called for in the purchase agreement. [Jue v. Smiser (1994) 23 CA4th 312]
If the purchase agreement entered into by the seller and buyer contains a price adjustment provision, the buyer can, before closing, enforce a reduction of the purchase price. The price adjustment will be for the amount of the costs necessary to bring the property into the condition as disclosed by the seller or the seller’s broker and known to the buyer at the time of acceptance.
Also, by the seller failing to deliver the property in the condition disclosed prior to acceptance, the seller has failed to convey the property as agreed. Thus, the buyer is justified in refusing to close escrow until the seller compensates the buyer for, or corrects, the defects discovered during escrow.
However, if the buyer is made aware of facts about the condition of the property at the time the buyer enters into the purchase agreement, which would cause an ordinary buyer to be put on notice to investigate into their consequences, the buyer has no grounds for claiming a loss for the condition he knew about.
Final pre-closing inspection
A buyer must personally reinspect the property just before close of escrow to confirm:
· the quality of any repairs made by the seller; and
· the general condition and maintenance of the property after entering into the purchase agreement.
The buyer’s right to a final pre-closing inspection of the property is agreed to in the purchase agreement. [See first tuesday Form 150 §11.3(b)]
On final inspection of the property, the buyer lists any property defects not already addressed, such as equipment and fixture malfunctions or deferred maintenance, on the final walk-through inspection statement. [See first tuesday Form 270]