120 Week 3 A /For WIZARD KIM

Chapter 21: The home inspection report 141

After reading this chapter, you will be able to:

• understand the use of a home inspection report (HIR) to mitigate risks of misrepresentation in the preparation of a seller’s Transfer Disclosure Statement (TDS);

• exercise care in the selection of a qualified home inspector; and • use an energy efficiency audit report by a Department of Energy-

certified Home Energy Rater to market property.

Learning Objectives

The home inspection report

Chapter

21

The agent for a seller of a one-to-four unit residential property asks the seller to grant them authority to order a home inspection report (HIR) on the seller’s behalf. [See RPI Form 130]

The home certification process is a cost the seller incurs to properly market the property if they are to avoid claims by buyers about defective property conditions after a purchase agreement is entered into.

The seller’s agent explains the HIR is also used to prepare the seller’s Condition of Property Transfer Disclosure Statement (TDS). The HIR will then be attached to the seller’s TDS. Both will be included in the agent’s marketing package presented to prospective buyers who seek additional property information. [See RPI Form 304; see Chapter 15]

Transparency by design, not default

home inspection report (HIR) A report prepared by a home inspector disclosing defects in improvements on a property and used by the seller’s agent to complete a TDS and assure prospective buyers about a property’s condition.

California Home Energy Rating System (HERS)

home inspection report (HIR)

home inspector

home energy audit

material defect

Key Terms

For a further discussion of this topic, see Chapter 26 of Real Estate Practice.

142 Real Estate Principles, Second Edition

On receipt of the HIR, the seller may act to eliminate some or all of the deficiencies noted in the report. Sellers are not obligated to eliminate defects they disclose when offering a property for sale, unless they choose to. If a defect is eliminated, an updated HIR report is ordered out for use with the TDS for property disclosures to interested buyers.

The seller’s TDS as reviewed by the seller’s agent and supplemented with the HIR, is 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 later confronted 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.”

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.1

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

• general contractors;

• structural pest control 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.2

Sellers and seller’s agents are encouraged by legislative policy to obtain and rely on the content of an HIR to prepare their TDS for delivery to prospective buyers.

The buyer’s reliance on an HIR at the time a purchase agreement is entered into relieves the seller and their agent of any liability for property defects they did not know about or were not observable during the mandatory visual inspection conducted by the seller’s agent.

However, for the seller’s agent to avoid liability in the preparation the TDS by relying on an HIR, the seller’s agent needs to select a competent home inspector to inspect and prepare the HIR. Thus, the seller’s agent needs to exercise ordinary care when selecting the home inspector.

1 Calif. Business and Professions Code §7195(d)

2 Bus & P C §7196

A home inspector’s

qualifications

home inspector A professional employed by a home inspection company to inspect and advise on the physical condition of property improvements in a home inspection report for reliance by the seller, the seller’s agents and the buyer as a warranty of the condition of improvements.

Hiring a home inspector

Chapter 21: The home inspection report 143

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 adversely affect the price a reasonably prudent and informed buyer would pay for the property when entering into a purchase agreement. As the report may affect value, the investigation and delivery of the home inspection report to a prospective buyer is legislated to precede a prospective buyer’s offer to purchase.3

The home inspection is 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 no 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.4

The home inspection report is the written report prepared by the home inspector which sets forth the findings while conducting the 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.5

Consider a first-time homebuyer who, acting on their own and without the advice of a buyer’s agent, buys a fixer-upper for a starter home.

In the first month of residence, the uncapped air conditioning ducts, badly sealed window frames and insufficient ceiling insulation cause the buyer’s utility bills to skyrocket past the pre-closing estimates for operating the property as the owner.

Had the buyer retained a buyer’s agent prior to making an offer or entering into a purchase agreement, the buyer would likely have been advised to ask for a home energy audit (energy audit).

3 Bus & P C §7195(b)

4 Bus & P C §7195(a)(1)

5 Bus & P C §7195(c)

The inspection and report

material defect Information about a property which might affect the price and terms a prudent buyer is willing to pay for a property.

The home energy rater

home energy audit An audit conducted by a Home Energy Rater evaluating the energy efficiency of the home.

144 Real Estate Principles, Second Edition

With the energy audit in hand, a buyer can incorporate the costs of the recommended energy efficient updates into the total costs for acquisition they are willing to pay for the property. A buyer can also use that information to compare the energy-efficiency of the home in consideration to other properties before making an offer.

In addition to ensuring the seller has hired a competent home inspector to complete the HIR, a buyer’s broker may also insist a home energy audit be performed by a competent Home Energy Rater (Rater), which can be the home inspector.

Home energy audit providers are private, non-profit organizations approved by the Department of Energy (DOE) as part of the California Home Energy Rating System (HERS) program. Audit providers have the exclusive rights to train, test and certify professional Raters.

Although Home Energy Raters are specially trained and certified, any home inspector may perform a home energy audit provided the audit conforms to the HERS regulations established by the California Energy Commission.6

6 Bus & P C §§ 7199.5, 7199.7

California Home Energy Rating System (HERS) California state system used to create a standard rating for energy efficiency and certify professional raters.

A home inspection is a non-invasive examination of the mechanical, electrical and plumbing systems of the dwelling, as well as the components of the structure.

The home inspection describes any observed or suspected material defects, and makes recommendations for each condition. Reliance on a home inspection report (HIR) prepared by an inspector relieves the seller and the seller’s broker from liability for errors in the Transfer Disclosure Statement (TDS) which are unknown to them to exist.

A buyer and their agent may also wish to assess the energy efficiency of the property and the costs of making energy efficiency upgrades. A home energy audit is performed by a Department of Energy-certified Home Energy Rater.

California Home Energy Rating System (HERS) ................ pg. 144 home inspection report (HIR) ................................................. pg. 141 home inspector ............................................................................ pg. 142 home energy audit ..................................................................... pg. 143 material defect ............................................................................ pg. 143

Chapter 21 Summary

Chapter 21 Key Terms

Quiz 5 Covering Chapters 18-23 is located on page 610.

Chapter 22: Structural pest control reports and repairs 145

After reading this chapter, you will be able to:

• explain the contents and consequences of information in a Structural Pest Control (SPC) Report; and

• manage the role of an SPC provider in real estate transactions.

Structural pest control reports and repairs

Chapter

22

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, begins.

Unlike a Transfer Disclosure Statement (TDS) or a Natural Hazard Disclosure (NHD), an SPC Report is not a legislatively mandated disclosure in a California real estate transaction. Most conventional lenders do not require a report or clearance. [See Chapter 15 and 17]

Since 2005, the FHA has not required automatic SPC inspections, reports and clearances for every home sale involving an FHA-insured mortgage. In an effort to minimize the drop in U.S. homeownership, the requirements for obtaining maximum purchase-assist financing insured by the FHA now require an inspection only if:

• it is customary for home sales in the area;

• an active infestation is observed on the property;

Eliminate the risk

Structural Pest Control (SPC) report A report disclosing any active infestations, damage from infestations or conditions which may lead to infestations.

inaccessible areas

Pest Control Certification

separated report

Structural Pest Control (SPC) report

Learning Objectives

Key Terms For a further discussion of this topic, see Chapter 29 of Real Estate Practice.

146 Real Estate Principles, Second Edition

• it is mandated by state or local law; or

• it is called for by the lender.1

A prudent buyer’s agent is alert to the rule they are duty-bound to act in the best interests of their buyers. Thus, as a matter of good practice, buyer’s agents simply prepare purchase agreement provisions to include a call for the seller to provide an SPC inspection, report and certification. Thus, an SPC contingency provision is placed in the purchase agreement to eliminate uncertainty about the property’s condition, regardless of the nature of the buyer’s purchase-assist financing. [See RPI Form 150 §11.1(a)]

Seller’s 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 seller’s agent’s marketing package.

Upfront disclosure before the seller accepts an offer promotes transparency in real estate transactions. Transparency avoids personal liability for withholding information about a material fact known to the seller or the seller’s agent before acceptance of an offer from a prospective buyer – conduct called deceit.

The existence of pests such as termites adversely affects the value of property. Since these facts relate to value, disclosure is compelled before the buyer sets the price and closing conditions in an offer submitted to the seller.

In a transparent real estate market, the report and clearance are part of the marketing package a prudent seller’s agent gives to prospective buyers. A request for further information by a prospective buyer constitutes the commencement of negotiations for the purchase of a property. Property disclosures are mandated to be made on commencement of negotiations.

To best comply with pest control disclosure, a copy of the SPC report is delivered to the prospective buyer or buyer’s agent by the seller or their agent as soon as practicable (ASAP).

The custom brought about by the bifurcated pest control handling through an addendum to purchase agreements supplied by the trade associations causes agents to request the SPC company to prepare a separated report. The SPC company is occasionally asked by seller’s agents to separate their findings and recommendations into two categories:

1. Section I items, listing items with visible evidence of active infestations, infections, or conditions that have resulted in or from infestation or infection; and

1 Mortgagee Letter 05-48

When to deliver the SPC report

A separated SPC report

separated report A report issued by a structural pest control company which is divided into Section I items, noting active infestations, and Section II items, noting adverse conditions which may lead to an infestation.

Chapter 22: Structural pest control reports and repairs 147

2. 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. Misrepresentations of the property’s condition will not then become surprises during escrow.

An active termite infestation or fungus infection is occasionally found on an inspection prior to marketing the property. The seller then needs to consider taking corrective measures to both protect the property from further damage and ready it for a prospective buyer by eliminating the issue of termites.

A Pest Control Certification, a certificate of clearance 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.2

Section 2 conditions which may lead to future infestations or infections will be noted on the Pest Control Clearance so the SPC company will not be liable for the costs incurred to eliminate those conditions. Section II 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.3

When choosing an SPC company, the seller’s 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 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.4

The individual or company who does the inspection and issues the report holds a Branch 3 Wood-Destroying Pest and Organisms License/Registration. 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.

2 Calif. Business and Professions Code §8519

3 Bus & P C §§8516(d), 8519

4 Bus & P C §8621

A certificate of clearance

Pest Control Certification A certificate of clearance by the Structural Pest Control company indicating the property is free of pest infestation or infection in the visible and accessible areas, commonly called a termite clearance.

Choosing the right company

The original inspection and report

148 Real Estate Principles, Second Edition

An inspection will cover all accessible areas to determine whether an active infestation or infection exists or if conditions which will likely lead to future infestations or infections exists. 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 includes, among other elements:

• the inspection date and the name of the licensee making the inspection;

• the name and address of the person ordering the report;

• 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 I 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 II items if a separated report is requested;

• a statement of which areas have not been inspected due to inaccessibility with recommendations for further inspection of these areas if practical;

• recommendations for treatment or repair; and

• that a reinspection will be performed if an estimate for making repairs is requested by the person ordering the original report.

The SPC chosen furnishes the individual who ordered the inspection a copy of the report within 10 business days of the inspection.5

All original inspection reports are maintained by the SPC company for three years.6

5 Bus & P C §8516(b)

6 Bus & P C §8516(b)

inaccessible areas Areas of a structure which cannot be inspected without opening the structure or removing the objects blocking the opening, such as attics or areas without adequate crawl space.

The standardized

inspection report

Chapter 22: Structural pest control reports and repairs 149

All SPC companies also post an inspection tag in the attic, subarea, or garage on completion of an inspection. The tag includes the company’s name and the date of inspection.7

If an estimate for corrective work is not given by the SPC, the company is not required to perform a reinspection. A reinspection is mandated when a separated report is requested. The separation requires an estimate for repairs to allocate the costs to perform each and every recommendation for corrective measures for Section I and II items.

The reinspection is performed within 10 days of a requested inspection. 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 is then completed and a new (original) inspection report is issued.8

The person who ordered the report is never required to hire the SPC company that inspected the property to perform any corrective measures.9

The owner may hire a licensed contractor to remove and replace a structure damaged by wood-destroying pests or organisms if the work is incidental to other work being performed or is identified by an SPC inspection report. A licensed contractor cannot perform any work that requires an SPC license to complete.10

However, when the original SPC company gives an estimate or makes a bid to undertake corrective measures and the owner hires someone else to perform the corrective measures, the original SPC company will need to return and reinspect the property before issuing a certification. The original SPC company will not certify treatments performed by another SPC company without a reinspection.11

An SPC company is required to prepare a Notice of Work Completed and Not Completed for any work they undertake on a structure. The notice is given to the owner or the owner’s agent within 10 working days after completing any work. The notice includes 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 Not Completed is delivered by the seller or seller’s agent to the buyer or buyer’s agent as soon as possible.12

After any SPC company completes treatment or repairs, a completion tag is to be placed next to the inspection tag.

7 16 CCR §1996.1

8 Bus & P C §8516(b); 16 CCR §1993

9 Bus & P C §8516(b); Pestmaster Services, Inc. v. Structural Pest Control Board (1991) 227 CA3d 903

10 Bus & P C §8556

11 Bus & P C §8516(b)

12 Bus & P C §8518; 16 CCR §1996.2; CC §1099(b)

Reinspections for corrections made

Work completion and certificates

150 Real Estate Principles, Second Edition

The existence of termites adversely affects the value of property. Thus, disclosure is compelled before the buyer sets the price and closing conditions in an offer submitted to the seller.

A Structural Pest Control (SPC) Report prepared by a pest control operator discloses any active infestations, damage from pest infestations or conditions which may lead to infestations. Once a property has been cleared of all infestations and all repairs necessary prevent infestations have been completed, a certificate of clearance is issued.

In the SPC report, the pest control operator separates their findings and recommendations into two categories:

• items with visible evidence of active infestations, infections; or

• items with conditions deemed likely to lead to infestation or infection but where no visible evidence of infestation or infection was found.

A Pest Control Certification is a statement by the SPC company indicating the property is free of infestation or infection in the visible and accessible areas.

inaccessible areas ....................................................................... pg. 148 Pest Control Certification ......................................................... pg. 147 separated report .......................................................................... pg. 146 Structural Pest Control (SPC) report ....................................... pg. 145

Chapter 22 Key Terms

Quiz 5 Covering Chapters 18-23 is located on page 610.

Chapter 22 Summary