This article explains how a buyer confirms the seller’s disclosure of property conditions when entering into a purchase agreement. When defects are not disclosed prior to contracting to purchase, this article also explains how the buyer may require the seller to correct defects, adjust the sales price, or — after closing — recover the costs of correction from the seller and the seller’s broker.
Protecting the prospective buyer
California’s recessionary housing market began in mid-2022 and continues in the 2023-2024 period. Thus, brokers and their agents are now faced with a dramatic reversal away from the lax seller attitudes for interfacing with buyers which developed in the recent years of recovery and boom times.
Before 2022, sellers were often able to get away with thin and untimely property disclosures, which for agents as licensees is a dangerous path taken at their peril. Buyers — driven by historically low inventory and high demand — ingested just about anything sellers were willing to put on the market.
But this set of dynamics is now fully in the past.
In today’s buyer’s market, sellers and their agents sit on the opposite side of the scale. Thus, for seller’s agents to keep serious buyers interested (and not to mention, to fulfill their duty to disclose), property disclosures need to be thorough, complete — and delivered to interested buyers as soon as possible (ASAP). It’s practical in all situations.
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An HIR achieves expectations
In the process of purchasing a home, a buyer’s due diligence investigation includes the right to conduct a home inspection. Too often, the seller’s agent fails to anticipate this right and does not preemptively order a home inspection report and hand it over with the seller’s TDS as part of their marketing package presented to prospective buyers at their commencement of negotiations — always before an offer is accepted.
Without a home inspection report (HIR) handed over by the seller’s agent, the buyer’s agent becomes duty bound to advise their buyer about the need to request an HIR immediately upon entering into a purchase agreement with the seller. When the seller does not deliver an HIR, the buyer needs an activate the HIR contingency provision in their purchase agreement offer. [See RPI Form 150 §11]
Once the buyer and seller entering into the purchase agreement, the buyer’s agent assists in the selection of a home inspector and ordering of an HIR — when the seller will not provide one. The purpose of the home inspection is to have an independent, neutral, third party conduct an investigation and prepare an HIR on the status of the property’s improvements.
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An HIR from a competent inspector assures a prospective buyer the property is free of defects, except those listed on their inspection report. The report, when delivered to the buyer before going under contract, adds the level of care for the prospective buyer legislated for the seller and their broker to protect themselves from any buyer claims for their failure to disclose defects in the property.
The buyer’s agent counsels the buyer on the advantages of selecting an experienced, qualified and preferably certified home inspector. Further, when an HIR has not been provided by the seller’s agent, the buyer’s agent’s expertise in the selection of a qualified home inspector fulfills the buyer’s agent’s duty owed the buyer.
A marketing package advertises property conditions
Consider a buyer who, with the assistance of their agent, locates a one-to-four unit residential property suitable for the buyer’s housing objectives.
Both the buyer and their agent walk through the property and confirm the property fits the buyer’s needs. The buyer’s agent contacts the seller’s agent and informs them they have a prospective buyer who is interested in the property.
The buyer’s agent requests additional information on the property, which is the first step in negotiations, including a title profile, a Transfer Disclosure Statement (TDS) and an HIR, among other required disclosures. [Calif. Civil Code §§1102(a), 1102.3; see RPI Form 304]
The seller’s agent responds by suggesting the buyer’s agent submit a purchase agreement offer. The seller’s agent assures them that after an offer is accepted by the seller and the buyer’s loan approval confirmed, the “necessary disclosures for closing” will be forwarded.
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The indication the buyer’s agent gets is the seller’s agent has not prepared a package for marketing the property and no information on the property is going to be made available to prospective buyers until an escrow is going to close.
The buyer agrees with their 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 a title company and already has 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’s only knowledge about the condition of the property is from their observations during the walk-through with their agent.
Condition of property contingencies
Contingency provisions included in the buyer’s purchase agreement offer, among others, since the seller has not made their property disclosures, call for:
- the seller to furnish an HIR prepared by an insured home inspector showing the land and improvements are free of material defects; [See RPI Form 15011.1(b)]
- the seller and the seller’s agent to prepare, sign and deliver a TDS; [See RPI Form 150 §11.2] and
- the buyer to inspect the property twice — once to initially confirm the condition of the property and 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 RPI Form 150 §11.4]
Continuing with our example, 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 an HIR.
A home inspection is a non-invasive examination of the mechanical, electrical and plumbing systems of a dwelling. It also includes the components of the structure, such as the roof, ceiling, walls, floors and foundations.
The seller’s broker on a query from the buyer’s agent discloses that no previous prospective buyers obtained an HIR on the property. The buyer authorizes their agent to immediately obtain an 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 seller’s agent have not delivered a TDS or any of the other seller disclosures or inspection reports which both the seller and the seller’s agent are duty bound to have delivered prior to contracting with a buyer. [Calif. Civil Code §§1102, 2079]
The home inspector’s written report lists numerous significant defects the inspector observed during their 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 discovery of defects leads to demands
The buyer makes a written demand on the seller to cure the defects discovered by the home inspector under the terms of the purchase agreement. [See RPI Forms 150 §11.4; 269]
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 their demand on the seller to cover previously undisclosed defects, whether intentional or negligent.
The seller and their agent prepare a TDS noting all the defects listed in the HIR and the buyer’s notice demanding repairs and hand it to the buyer’s agent. The seller refuses to make any of the corrections, claiming they have disclosed the defects in the TDS as agreed in the purchase agreement.
Eventually, the buyer is told to either close escrow or cancel.
Is the buyer able to require the seller to cure the material defects found by the home inspector and close escrow?
Yes! The seller needs to deliver the property to the buyer as was 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 after the seller entered into the purchase agreement.
Failure to timely disclose = omission of facts
The seller’s and their agent’s failure to disclose prior to acceptance is an omission of facts, called negative fraud, deceit, or misrepresentation by omission.
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.
The key: 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 exceeded the property’s fair market value (FMV) by the amount of the costs which will be incurred to cure the defects and deliver the property “as disclosed” prior to acceptance.
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Confirm the seller’s disclosures
A seller and the seller’s broker have a statutory duty to disclose to a prospective buyer all known and observable property conditions which adversely affect the value of the property.
However, a TDS completed by the seller and seller’s agent — without the benefit of an 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 seller’s agent.
When the seller has not obtained or refuses to authorize the preparation of an HIR prior to entering into a purchase agreement, the buyer is well-advised to order one on opening escrow to confirm the condition of the property before the expiration of any cancellation period the seller might use to avoid losing money.
A buyer needs to undertake an inspection and receive an HIR in the interest of avoiding:
- after-closing discoveries of defects which require correction; and
- after-closing claims made 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 later pursue the recovery of costs or the loss of value due to undisclosed defects known to the seller or the seller’s agent.
Armed with an HIR containing findings of material defects not known to the buyer or disclosed at the time the purchase agreement was accepted, the buyer is able to make the necessary demands on the seller. Thus, the buyer ensures the property is delivered in the condition as disclosed by the seller before the seller enters into the purchase agreement, whether or not a TDS was received prior to acceptance of the buyer’s offer.
A buyer’s remedies for seller deceit
When a home inspection report reveals property defects previously undisclosed and unknown 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 RPI 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.
When the purchase agreement contains a price adjustment provision, the buyer is able to enforce a reduction of the purchase price before closing. The price adjustment covers 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. [See RPI Form 150 §11.2(c)]
Further, 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, when the buyer is made aware of facts about the condition of the property at the time the buyer enters into the purchase agreement, which puts a buyer on notice to investigate into their consequences, the buyer has no grounds for claiming a loss for the condition they knew about. [Jue v. Smiser (1994) 23 CA4th 312]
Thus, the best protection provided for both the seller and buyer is to disclose all property conditions ASAP on the buyer’s first inquiry into the property — and always before the seller enters into a purchase agreement.
