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The Risks of Buyers’ Pre-Sale Inspections

by | Dec 1, 2017 | Broker Practice

Bottom Line:

 

  1. LISTING AGENTS SHOULD NEVER GIVE PERMISSION TO A BUYER OR BUYER AGENT FOR A PRE-SALE INSPECTION WITHOUT THE WRITTEN PERMISSION OF SELLER.

 

  1. SELLERS SHOULD BE ADVISED OF THE RISKS OF PRE-SALE INSPECTIONS BEFORE THEY CONSIDER GIVING PERMISSION.

 

 

Q:  A prospective Buyer’s Agent contacted our office requesting that her Buyer be allowed access to one of our listings to conduct a pre-sale inspection, promising that her inspector would only provide a “confidential oral report” and that she would not tell anyone but her client about the inspector’s findings.

When the Listing Agent expressed some skepticism, the Buyer’s Agent asserted that, whether or not he agreed to allow this pre-sale inspection, her client was going to do it anyway; she said that because there is a lock-box she can provide access to the inspector at any time.  The Listing Agent then begrudgingly said it was okay to go forward with the pre-sale inspections without checking with the Seller.

The Buyer’s Agent has now called me to let me know that there is a structural problem with our listing and that her inspector (whose name is not known in the area) has opined that it will cost $100,000 to repair the problems.  The Buyer’s Agent said she called me, as the Listing Broker, to make sure that all Buyers who were making offers on our listing had this same information; she also wanted to make sure that the Sellers understood why her client’s offer was $100,000 below list price.

I feel as through we were sandbagged.  What guidance can we get on this topic should this issue ever arise again?

A:  From the vantage point of Sellers, Pre-Sale Inspections by Buyers are “risky business.”

The following procedures should be implemented by Listing Agents when there is a request for Pre-Sale Inspections by Buyers or their agents:

  1. Only the Seller can approve any request for a Pre-Sale Inspection. Listing Agents should never agree to that type of request without first securing the Seller’s written authorization.

  1. Buyers and their agents need to be told that, without first securing the written permission of ALL Sellers, there are to be no pre-sale inspections for the Buyer.  This can be added to the MLS confidential remarks.

  1. Buyers’ Agents should be advised that any attempt to conduct those inspections without the Seller’s written approval could be deemed to be a trespass.  The existence of a lock-box is not equivalent to a blanket approval that anyone can come in and conduct inspections. Unauthorized use of the lock-box to conduct pre-sale inspections could be a violation of MLS rules.

  1. Sellers should be immediately told about any request to conduct pre-sale inspections.   To enable Sellers to determine whether or not to grant permission, Sellers should be advised of the following issues, preferably in writing:

  1. If the Seller is concerned that a Buyer’s Agent or Buyer may conduct a pre-sale inspection without the Seller’s approval, then the Seller should reconsider having a lock-box and/or authorize the Listing Agent to add a statement to the MLS confidential remarks that no pre-sale inspections will be allowed.

  1. Sellers should not grant permission without knowing in advance who the inspectors are and receiving all available contact information for the inspectors, including proof that the inspectors are properly licensed and have adequate insurance coverage.

  1. When Buyer’s conduct inspections during escrow, the Purchase Agreement controls the extent of the allowable inspections (e.g., no invasive/destructive testing) as well as who bears the risk of harm that may result from such inspections (see, for example, Paragraph 12D of the CAR. Residential Purchase Agreement and Paragraph 14E of the PRDS Real Estate Purchase Contract).  If there is no fully signed Purchase Agreement, then those legal protections do not exist and are not applicable to the pre-sale inspections conducted by Buyers.

  1. Prior to granting permission, Sellers should consult with their insurance broker and should even consider contacting their own qualified California real estate attorney to draft an appropriate written agreement which would be signed by the Buyer to protect the Seller’s interests, which would need to include provisions that are comparable to those found in the standard Purchase Agreement forms regarding:
  • which inspectors may conduct the inspections;
  • the written proof that must be submitted by the inspectors to evidence their reputation, license status and insurance coverage;
  • the allowable scope of the inspections; and
  • who will be responsible for any damages or injuries.

 

Real estate licensees should not create any type of pre-sale inspection authorization agreement because that would constitute the illegal practice of law.

  1. If Buyers obtain a written report and that report is provided to the Seller and/or the Listing Agent, then a copy of that report must be provided to all prospective Buyers regardless of what it says.

  1. Although some Buyer’s Agents promise that there will only be an “oral report” report, that promise is not binding on either the Buyer or the inspector and could well be worse than a written report since it will be extremely difficult to prove what the inspector did or did not conclude about the Property.

  1. Sellers who will only agree to pre-sale inspections if there are no written reports should be aware that, even though the inspector does not prepare a written report, if the inspector’s information is conveyed to the Seller and/or the Listing Agent, either orally or in writing (such as by an e-mail) the inspector’s alleged information would still need to be shared with all prospective Buyers.

  1. Whatever decision is made by the Seller, that decision should be in writing and signed by the Seller.  That written decision should be sent to the Buyer and Buyer’s Agent.

Finally, disclosing any oral information from pre-sale inspections should be handled in the same way that we recommend that all other “oral” information be disclosed.  Oral information from any third party should be detailed in the “Other” portion of the Agent Visual Inspection Disclosure (AVID) using the “Attribute-Disclose-Disclaim” format (e.g., “According to Agent Mary Smith, Inspector John Jones allegedly said there is a drainage issue of unknown type.  I have not investigated, and will not investigate or verify this information; Buyer should investigate.”)

 

PRACTICE TIPS:

 

  1. The practice of pre-sale inspections by Buyers started because of the desire to have non-contingent offers in a highly competitive market.  Creating one set of risks to combat another risky practice is not good risk management.

  1. Buyers who want to conduct their own pre-sale inspections need to be advised of the Sellers’ risks above, and that if Sellers grant written permission, they should carefully review the written authorization provided by Sellers with their own insurance broker and/or a qualified California real estate attorney to make certain that they can comply with all of the conditions that the Sellers may impose.

  1. Sellers should be encouraged to obtain their own pre-sale inspections with reputable, licensed and insured inspectors and to make that documentation available to Buyers who, if they enter into a Purchase Agreement with the Seller, can determine whether or not to conduct additional inspections.


This Weekly Practice Tip is for the exclusive use of clients of Broker Risk Management and their agents.  It may not be reproduced or distributed without the express written consent of Broker Risk Management.  The advice and recommendations contained herein are not necessarily indicative of standards of care in the industry, but rather are intended to suggest good risk management practices.

© Copyright 2017 Broker Risk Management                    12/01/17