The common scenario

The first buyer’s offer included a home inspection contingency. The home inspection revealed defects. Before the inspection contingency expired, the buyer provided a notice of defects, and the seller did not have the right to cure. The buyer walked away from the transaction. Both the seller and the listing agent have a copy of that buyer’s inspection report. 

Now what?

The discussion of how to handle the inspection report after a transaction unravels has been a frustrating discussion for real estate agents for decades. To provide clarity to ease some of that frustration, this article answers some of the most common questions related to this inspection predicament.

Does the seller have to update the real estate condition report (RECR)? 

The seller is obligated to disclose any defects the seller has notice or knowledge about. The RECR defines a “defect” as “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.” Wis. Stat. §709.035 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.

Is the seller required to attach a copy of the previous buyer’s inspection report to the seller’s RECR?

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 state that the home inspector will not be liable to subsequent buyers for any errors or omissions contained in the first buyer’s inspection report. New buyers may be advised to have their own home inspection performed if they want the home inspector to be liable for any oversights.

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

The inspection report may be given to a subsequent buyer by the seller, but the seller is not required to do so. 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. 

Is a prospective buyer required to use a previous buyer’s inspection report, rather than the prospective buyer getting their own inspection?

If the second buyer is provided a copy of the first home inspection report, the second buyer should be advised that the first buyer’s RECR is given to provide information only. The statutes regulating home inspectors state that the home inspector will not be liable to subsequent buyers for any errors or omissions contained in the first buyer’s inspection report. A new buyers may be advised to have their own home inspection performed if they want 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.

Is the listing agent required to give a copy of the previous buyer’s inspection report to a prospective buyer?

An agent may provide a copy of the first buyer’s inspection report if the seller attached the report 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 agent 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 agent 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 agent believes the information to be inaccurate or incomplete, then the agent may have to disclose items not properly reported by the seller if the agent believes the information is a material adverse fact or information suggesting a material adverse fact.

If the agent is aware, as a competent licensee, that the facts disclosed in the inspection report or inaccurately or incompletely on the new or amended RECR fit any of the four characteristics below, the issue constitutes an adverse fact. Those features include:

• 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.

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 § 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 Transactions (zipForm edition) as well as the subscription-based WRA PDF forms library.