Uncovering the Truth: The Inspection Report When the Deal Falls Apart

The eighth installment in a series of articles ousting real estate untruths


 Cori Lamont  |    February 05, 2014
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In 2011, we introduced a series of articles exposing the truths of real estate practice and dismissing perpetuated myths. The articles have included a list of urban legends surrounding broad topics, such as buyer agency, procuring case, ‚Äúas-is‚ÄĚ transactions and the inspection contingency. However, today we will take a look at a very narrow issue surrounding the home inspection report and what to do with it once the transaction falls apart.

The discussion of how to handle the inspection report after a transaction unravels has been as frustrating for real estate agents as it was to an add a meeting into an iPhone after the iOS 7 update or trying to figure out the role of the YouTube phenomenon ‚ÄúWhat Does the Fox Say?‚ÄĚ in your daily life.¬†

The most common scenario involving the previous buyer’s home inspection report goes like this: The first buyer’s offer included a home inspection contingency, and the inspection discovered defects. Before the deadline of the inspection contingency expired, the buyer provided a notice of defects, and the seller did not have the right to cure. The buyer walked, and the listing agent has a copy of the inspection report. Now what?
Hopefully the following most common myths associated and perpetuated with this discussion will help. 

Urban legend #1

The seller must update the real estate condition report (RECR). 

The truth: The seller is obligated to disclose any defects the seller has notice or knowledge about. The RECR defines a ‚Äúdefect‚ÄĚ as ‚Äúa condition that would have a significant adverse effect on the value of the property; that would significantly impair the health or safety of future occupants of the property; or that if not repaired, removed or replaced would significantly shorten or adversely affect the expected normal life of the premises.‚ÄĚ Wis. Stat. ¬ß709.035 requires sellers to amend the RECR, prior to the acceptance of a contract, when they obtain information or become aware of any condition that would change a response on the RECR.

Urban legend #2

The seller is required to attach a copy of the previous buyer’s inspection report to the seller’s RECR. 

The truth: The seller may choose to attach a copy of the first buyer’s inspection report to the RECR as part of the seller's amendment to the RECR. The new buyer should be advised that the first buyer's inspection report is given to provide information only. The statutes regulating home inspectors provide that the home inspector will not be liable to subsequent buyers for any errors or omissions contained in the first buyer’s inspection report. The new buyer may be advised that he should have his own home inspection performed if he wants the home inspector to be liable to him for any oversights. 

Urban legend #3

A prospective buyer is demanding to see a copy of the previous buyer’s inspection report. The seller is obligated to give the buyer a copy of that previous buyer’s home inspection. 

The truth: The inspection report may be given to a subsequent buyer by the seller, but it is not required. However, if the report discloses a defect, the information referring to the defect must be disclosed either by the seller via the RECR or by the listing agent as a material adverse fact or information suggesting a material adverse fact. 

Absent an agreement between the first buyer and the seller not to distribute the report, the seller may give the new buyer a copy. 

Urban legend #4

A prospective buyer is required to use a previous buyer's inspection report rather than his own.

The truth: Again, the seller may attach a copy of that report to the RECR as part of his amendment to the RECR. If the second buyer is provided a copy of the first home inspection report, the new buyer should be advised that the first buyer’s RECR is given to provide information only. The statutes regulating home inspectors provide that the home inspector not be held liable to subsequent buyers for any errors or omissions contained in the first buyer’s RECR. The new buyer may be advised to have his own home inspection performed if he wants the home inspector to be liable for any oversights. The new buyer is not required by law to utilize a previous buyer's inspection report.

Urban legend #5

The listing agent is required to give a copy of the previous buyer’s inspection report to the next buyer. 

The truth: The listing broker is not obligated by law to provide a copy of the previous buyer’s inspection report to the next buyer. A broker may provide a copy of the first buyer’s inspection report if it has been attached by the seller to the RECR. If the seller has not attached the first buyer’s inspection report to the RECR, then to guard against any possible confidentiality concerns, the broker would not unilaterally provide a second buyer with the first buyer’s inspection report without consent of all parties to the first transaction.

Depending on the content of the seller’s new or amended RECR, the listing broker may or may not have to make material adverse fact disclosures. If the seller chooses to make some sort of disclosure on a new or amended RECR, and the broker believes the information to be inaccurate or incomplete, then the broker may have to disclose items not properly reported by the seller if the broker believes the information is a material adverse fact or information suggesting a material adverse fact.

As a competent licensee, if the agent is aware that the facts disclosed in the inspection report or inaccurately or incompletely on the new or amended RECR: 

  • Has a significant adverse effect on the value of the property.
  • Significantly reduces the structural integrity of the property.
  • Presents a significant health risk to the occupants of the property.¬†
  • Or, is information that indicates that a party to the transaction is not able to or does not intend to meet their obligations under the contract.

Then the issue constitutes an adverse fact. 

If a party to the transaction were to so indicate, or if a competent licensee would generally recognize that this fact is of such importance that it would affect a reasonable party’s decision to enter into a contract or would affect the party’s decision about the terms of the contract, the fact is both adverse and material. If this fact is both adverse and material, then Wis. Admin. Code § REEB 24.07(2) requires the licensee to timely disclose the fact in writing to all parties to the transaction, even if the client would direct the licensee not to disclose.

If the licensee knows or is aware of information suggesting the possibility of a material adverse fact, Wis. Admin. Code ¬ß REEB 24.07(3) states that the licensee will be practicing competently if the licensee makes timely written disclosure of the information suggesting the material adverse fact to all parties to the transaction, recommends the parties obtain expert assistance to inspect or investigate for the possible material adverse fact, and, if directed by the parties, draft appropriate inspection or investigation contingencies. The duty to disclose has priority over any duty owed to the client. The WRA-created Disclosure of Material Adverse Fact (WRA-DMAF) material adverse fact disclosure letter is available in zipForm¬ģ.

For further discussion of seller and licensee disclosure obligations read the October 2009 Legal Update, Diligent Disclosure, at www.wra.org/LU0910.

Cori Lamont is Director of Regulatory Affairs for the WRA.

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