A Case for Pre-Listing Home Inspections: Reducing Your Professional Liability Exposure

Thursday, October 30, 2014

Should listing agents and brokers ever worry about getting sued for failing to tell their clients about the option of having a pre-sale home inspection?  The short answer is “yes”.  The fiduciary duties of a listing agent or broker arguably include a duty to advise a seller to at least consider the use of a pre-listing inspection.

Much has been written about how and why a pre-sale home inspection may benefit both sellers and listing agents.  Here are a few key points to consider when assessing the benefits of using a pre-listing home inspection.

·         Obtaining a pre-listing home inspection gives the seller the opportunity to address potential problems with the home’s condition before these problems become an issue in negotiations with the buyer and either delay or completely derail the sale. 

·         Having a pre-sale inspection also diffuses the emotional elements of the sale, helps the listing agent set the seller’s price expectations and allows for a price adjustment according to the true condition of the home. 

·         Ordering a pre-sale inspection and using it as a basis for full disclosure during the sale process decreases the likelihood of litigation involving claims that the seller and/or listing agent failed to disclose known defects which are later discovered by the buyer. 

More and more often listing agents and brokers are jumping on the bandwagon and recommending their clients have an inspection before putting their home on the market.  Robert MacFarlane, a real estate broker with Big Bay Properties in San Diego (Robert@bigbayproperties.com (858)336-7436) who represents both buyers and sellers, often persuades his clients to have an inspection before selling their home. 

“My job is to negotiate for my client,” explains MacFarlane, and “although convincing a seller to have a pre-listing home inspection isn’t always easy, a surprise finding from the buyer’s inspector puts my client in the position of negotiating away his or her sales price while investigating solutions.  Time is of the essence in contracts, and scrambling to find reasonable bids for repairs may leave my seller with no option other than to offer funds to the buyer at the close of escrow.  My client is much better served to know the issues upfront, get several bids to understand the cost to repair and either fix the problem before putting the home on the market, or have enough information about any issues to be confident not to cave in to unreasonable repair requests from the buyer.  Further, a seller armed with his or her own inspection report is in a better position to refute any questionable findings made by the buyer’s inspector.” 

Knowing the value of having a pre-sale inspection and the pitfalls of not having one, do listing agents and brokers also have a fiduciary duty to advise their clients about this option in the same way a buyer’s agent or broker must?  We think the answer is “yes”. It is clear that a buyer’s agent or broker has a legal obligation to act in the best interests of their clients, and must do everything they can to negotiate the best possible price and terms on the clients’ behalf.  They also have a duty to use reasonable care and diligence, including recommending that their clients obtain expert advice or assistance when appropriate.  For buyers this generally means their agent or broker recommends obtaining a home inspection as a contract contingency. In some states, there is even a waiver form a buyer must sign when declining the advice by a buyer’s agent or broker to obtain a home inspection.

Why then, would it be any different for a listing agent or broker? In discharging these and other duties, it makes sense that listing agents and brokers should also, at a minimum, have a conversation with their clients about the availability, use, and potential benefits of a pre-listing home inspection as a way to protect both themselves and their clients.

Consider these two scenarios in which a seller is not informed about the option of having a pre-sale inspection:

·         The seller accepts an offer from a buyer.  During escrow, the buyer has an inspection and discovers issues that cause him to cancel the deal.  In the meantime, the seller has lost time and potential buyers.  The seller sues his agent, claiming that had the agent advised him to have a pre-sale inspection, he would have had one done, and could have avoided a failed sale by addressing the problems upfront (instead of being blind-sided). 

·         No pre-sale inspection is done, the sale closes, but the buyer later discovers a defect and sues the seller and seller’s agent for failure to disclose a material defect.  The lawsuit, regardless of its outcome, could have been avoided had a pre-sale inspection been done, giving the seller the opportunity to fix the problem or reduce the price accordingly.  Instead, the E&O carrier for the listing agent or broker must defend the lawsuit, often at great expense.

It’s obvious from each of these examples why listing agents and brokers need to know about and explain the benefits of pre-sale inspections to their clients.    

Having a property inspection before buying a home is an accepted business practice.  For this reason a buyer’s inspection waiver form, used in many states, is given to a buyer to inform him/her of the importance of obtaining a home inspection even if the seller has provided the buyer with a copy of an inspection obtained by the seller or a previous potential buyer.  This form provides for a waiver by the buyer, stating that the decision to forego a home inspection is against the advice of the broker. 

It follows that sellers are equally entitled to similar advice from their agent or broker. Given the importance of investigating the property being sold, it seems logical that a similar explanation of the use and benefits of a home inspection should be given to sellers by the listing agent or broker.  A seller’s inspection waiver form would provide: “Agent/Broker has informed Seller about the option and potential benefits of having a pre-sale home inspection.  Seller has decided not to obtain a home inspection at this time.”  Using this type of informed consent would ultimately help listing agents and brokers discharge their fiduciary duties to the seller and avoid becoming the target of anger and blame later due to the seller’s failure to obtain a home inspection. This, in turn, should result in a smoother sale process, with fewer surprises, now or later. This improved communication and superior knowledge about the condition of a property is likely to reduce the amount of litigation between buyers, sellers, and agents and brokers over disclosure of defects.

If you are an agent or broker actively taking new listings, you may want to consider sharing the benefits of a pre-listing home inspection with your new client. If the client says “no, thank you”, you will have discharged your fiduciary duty and obtained some additional protection for you if future problems over the condition of the property develop. 

Brian Trotier, FREAWritten by Brian L. Trotier, JD,  the Executive Vice President and Chief Operating Officer of FREA, NDC and ALIA. Brian is also a former practicing attorney with more than 30 years experience in real estate and risk management.

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