I’ve recently been involved in repeated discussions about consumers and agents fighting over an item listed in the inspector’s report and whether it’s a defect that the buyer can list on the buyer’s Notice of Defects. I hear things from consumers and members such as, “it’s listed as a defect in the home inspector’s report so it must be a defect,” “the listing agent doesn’t think it’s a defect, so the buyer cannot list it on the Notice of Defects,” and, “it’s listed in the home inspector’s report but it does not specifically name it as a defect.” What’s right and what’s not? And how do you find resolution?
What is a defect?
The definition of “defect” is stated on lines 182-184 of the WB-11 Residential Offer to Purchase: “a 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.”
Further, the definition of defect is also available in the Inspection Contingency on line 425 of the WB-11: “For the purposes of this contingency, Defects (see lines 182-184) do not include structural, mechanical or other conditions, the nature and extent of which Buyer had actual knowledge or written notice before signing this Offer.” Therefore, the definition of defect in the offer to purchase controls the discussion as to the Notice of Defects in the Inspection Contingency.
“But the home inspector’s report said …”
For obvious reasons, there is a great deal of emphasis placed on the home inspector’s report. However, just because an item is listed in the home inspector’s report does not necessarily mean that it falls into the definition of defect. And for that matter, just because an item is listed as a defect in the home inspector’s report does not mean that it meets the definition of defect in the offer to purchase. But let’s discuss the role of the home inspector and the content of the inspection report.
Home inspection
The home inspection is where a home inspector, who is registered in the state of Wisconsin by the Department of Safety and Professional Services, examines the readily accessible observable systems and components of improvements to residential properties. The home inspector’s report is the written opinion of the home inspector regarding the condition of the property’s improvements, mechanical and structural components of residential property that contains no more than four dwelling units.
Home inspector’s report
The report is arguably the tricky part. There is not a uniform process by which the inspector must document the report. Unlike Wisconsin real estate licensees who must use state-approved WB forms, home inspectors are not required to use a specific approved form.
Per Wis. Admin. Code § SPS 131.33(1), the written report:
- Lists the items described in § SPS 131.32 that a home inspector is required to inspect.
- Lists the items described in § SPS 131.32 that a home inspector has inspected.
- Describes the condition of any item identified in § SPS 131.32.
- Describes the condition of any item identified in § SPS 131.32 that, if not repaired, will have a significant adverse effect on the life expectancy of the identified item.
- Lists any material adverse facts that a home inspector has knowledge of or has observed.
Items that the home inspector may choose to report on but is not required to report on may surprise you. Wis. Admin. Code § SPS 131.33(2) does not require a home inspector to report on the following aspects of items:
- Their life expectancy.
- The reason for the necessity of a major repair.
- The method of making any repair or correction, the materials needed for any repair or correction, or the cost of any repair or correction.
- The suitability for any specialized use of an improvement to residential real property.
- Whether they comply with applicable regulatory requirements.
And then of course there are the items that a home inspector may never report, which include:
- The market value or marketability of a property.
- Whether a property should be purchased.
Home inspectors disclose material adverse facts
You know that the offer to purchase defines defect on lines 182-184, and that definition controls what may be listed on the buyer’s Notice of Defects. But what must the home inspector disclose?
Per Wis. Admin. Code § SPS 131.02(17), the home inspector is required to disclose material adverse facts. The definition of “material adverse fact” is found in Wis. Admin. Code § SPS 131.02(17): “a condition or occurrence that is generally recognized by a competent home inspector as doing any of the following: (a) Significantly reducing the functionality or structural integrity of components or systems of the improvements to the property being inspected. (b) Posing a significant health or safety risk to occupants of the improvements.”
In a good number of ways, the definition of material adverse fact as to what the home inspector must disclose is somewhat similar to the definition of defect in the offer to purchase. See the definition of defect from the WB-11 on lines 182-184 on the previous page.
During the home inspector’s reasonably competent and diligent inspection, the home inspector must describe “any condition of an improvement to residential real property or of any component of an improvement to residential real property that is detected by the home inspector during his or her home inspection and that, if not repaired, will have a significant adverse effect on the life expectancy of the improvement or the component of the improvement.” (See Wis. Stat. § 440.975(2)(c)).
What can licensees do?
First licensees in the transaction can help the parties understand the definition of defect included in the offer to purchase. More importantly, licensees can help parties be aware that while the inspector’s report helps identify defects, the fact of how the inspector labels items is not as relevant as whether it falls into the definition of defect per the offer to purchase.
Say a buyer wants to include 10 items in the Notice of Defects, but you don’t believe that all items fall into the definition of defect. In this situation, remind the buyer where the controlling definition exists in the offer to purchase. If the buyer still persists, then the agent should draft the Notice of Defects in the manner the buyer wishes. Keep in mind that the Notice of Defects is the buyer’s Notice of Defects. When the seller balks at the 10 listed items and says only five fall within the defect definition, and if the parties cannot agree as to the issue, then the parties will need to consult legal counsel.
When the parties don't agree
Whether any item listed is actually a defect as defined in the offer is determined on a case-by-case basis. If the parties cannot agree whether an item is a defect as defined in the offer, then the parties should be directed to their respective attorneys for advice.
Is there a way to "fix" this combative transactional issue?
The WRA is exploring the future idea of requiring a more uniform document for use by home inspectors as well as a more uniform definition of defect in the inspection report as well as the offer. However, no matter how much we can attempt to lock this confusion down, a party may always choose to argue whether an item is a defect or not.
Resources
Cori Lamont is Director of Corporate and Regulatory Affairs for the WRA.