This article reviews the equity purchase (EP) investor’s use of a home inspector to confirm the seller-in-foreclosure’s representations of the physical condition of the property and seek corrections before closing.

Avoid post-closing surprises

A seller-in-foreclosure provides an equity purchase (EP) investor with a “clean” condition of property disclosure statement that represents the property as defect-free. [See first tuesday Form 304]

In spite of the broker’s specific recommendation to hire a home inspector at the time of the listing, the seller-in-foreclosure fails to employ a home inspector to investigate and report on any defects in the physical condition of the property which can be taken into consideration in the marketing of the property.

Prior to closing, the EP investor hires a home inspector to conduct an independent inspection of the property to:

• confirm the seller-in-foreclosure’s representations; and

• eliminate any post-closing, surprise discovery of defects in the property’s physical condition.

The home inspector prepares a written report listing numerous significant defects he has observed in the property’s condition which are contrary to the seller-in-foreclosure’s disclosure statement. Repair/replacement costs are estimated at $2,500 to eliminate the defects not disclosed by the seller.

The EP investor makes a written demand on the seller-in-foreclosure to cure (repair) the defects discovered by the home inspector, based on the terms of the EP agreement. [See first tuesday Forms 156 §13.3 and Form 269]

A copy of the home inspector’s report and a contractor’s estimate of costs to cure the defects are attached to the EP investor’s request for repairs to substantiate the claim.

Can the EP investor require the seller-in-foreclosure to cure the defects found by the home inspector?

Yes! The property purchased must be delivered to the EP investor as disclosed by the seller-in-foreclosure and observed by the EP investor at the time the purchase agreement was accepted. The home inspector, having uncovered significant defects in the property’s condition not listed on the property disclosure statement at the time the offer was accepted, has created a “punch list” that identifies defects needing correction to bring the property up to the condition represented by the seller on entering into the purchase agreement.

The seller-in-foreclosure must deliver to the EP investor the property as disclosed at the time the purchase agreement was accepted.

The single problem arising out of these discoveries concerns the price agreed to be paid. The seller-in-foreclosure and the EP investor have agreed to a price for the property based on the conditions disclosed at the time the offer was accepted. Thus, the price represents the agreed-to value of a used but defect-free property, except for defects observed by the EP investor or disclosed to the EP investor. The price, as it turns out, is too high by the amount of the costs the EP investor will incur to cure the defects or the amount the seller will incur to deliver the property “as disclosed.”

Challenge the seller’s disclosures

A seller-in-foreclosure, and his listing broker, must disclose to the EP investor all known property conditions which adversely affect the value of the property.

A condition of property disclosure statement (TDS) completed by the seller-in-foreclosure without the benefit of a home inspector’s report all too frequently does not reveal any significant property defects or code violations to the EP investor.

When the seller-in-foreclosure or his listing broker fails to retain a home inspector, the EP investor should employ one after escrow is opened and before any cancellation period (contingency) expires to confirm the property’s condition. On receipt of the home inspector’s report, the EP investor can make the necessary demands to ensure the property will be delivered in the “clean” condition as disclosed by the seller on entering into the purchase agreement.

When the seller-in-foreclosure or his listing broker fails to retain a home inspector, the EP investor should employ one to confirm the property’s condition.

A home inspection is defined as a paid, non-invasive physical exam of the mechanical, electrical, plumbing or structural components of a one-to-four unit residential property being sold. [Calif. Business and Professions Code §7195(a)]It must be noted that the EP investor is under no obligation to obtain an independent inspection of the property being acquired, unless a contingency calls for his approval of such an inspection. [Calif. Civil Code §2079.5]

However, the EP investor should undertake a post-disclosure inspection in the interest of avoiding:

• after-closing discovery of defects that require correction and might delay the lease or resale of the property; and

• costly litigation against the seller-in-foreclosure to recover the money losses incurred after closing.

Also, the EP investor’s discovery of defects by his own initiative or by the seller-in-foreclosure’s voluntary but tardy disclosure after acceptance and prior to closing does not alter the EP investor’s right to close and pursue the recovery of costs.

The EP investor, armed with a home inspector’s report disputing both his observations and the seller-in-foreclosure’s after-acceptance disclosure statement, can select among cancellation, correction, or price adjustment remedies. [CC §1695.9]

The EP investor’s remedies

If the home inspector discovers property defects during his inspection, the EP investor may either:

• insist the defects be corrected and either refuse to close escrow or close by agreeing to an adjusted price;

• refuse to close escrow and enforce the agreement and price correction by specific performance; or

• close escrow and enforce a return of the difference between the original purchase price and the adjustment price for the defects as provided in the purchase agreement. [Jue v. Smiser (1994) 23 CA4th 312]

Since the equity purchase agreement entered into by the seller-in-foreclosure and EP investor contains a price adjustment provision, the EP investor can, before closing, enforce a correction in the price by the amount necessary to restore the property to its condition as disclosed by the seller at the time of acceptance. [See first tuesday Form 156 §§13.2 and 13.3]

Also, by failing to deliver the property to the EP investor as disclosed on acceptance, the seller-in-foreclosure has failed to convey the property as agreed. Thus, the EP investor is justified in refusing to close escrow until the seller corrects or compensates him for the newly discovered (or disclosed) defects. However, if the EP investor is made aware of facts, on entering into the purchase agreement, which would cause an ordinary buyer to investigate into their consequences, such as a hazard disclosure that the property is in a flood plain, the EP investor cannot claim he relied on the seller-in-foreclosure’s misstatements. [CC §2079.5]

Since the equity purchase agreement contains a price adjustment provision, the EP investor can enforce a price correction by the amount necessary to restore the property to its originally disclosed condition.

Hiring a home inspector

Presently, no licensing scheme for home inspectors exists.

However, any person who performs a home inspection is considered to be a home inspector. [B & P C §7195(d)]

For example, a licensed building contractor qualifies as a home inspector by virtue of his skill and minimum education requirements for licensing as a contractor. [B & P C §7068]

As a practical matter, only licensed building contractors should be used as home inspectors until the legislature adopts a licensing standard.

Unlicensed home inspectors

Individuals who hold themselves out as professional home inspectors, but who are not licensed as general contractors, structural pest control operators, architects or professional engineers, also owe a special duty to the home buyer to use the skill, prudence and diligence commonly exercised by their professional peers – the general contractors, architects, engineers, or structural pest control operators who set the standard common among home inspectors. [Moreno v. Sanchez (March 17, 2003) __CA4th__; B & P C §7196]

Unlicensed home inspectors owe a special duty to the homebuyer to use the skill, prudence and diligence commonly exercised by their professional peers.

Any attempt by the home inspector to waive his duty of care, reduce the time limitation on claims to below four years, or limit his liability to the cost of the home inspection report or any other liquidated damages amount is void as against public policy. [Moreno, supra; B & P C §7198]Also, it is considered unfair business practice for a home inspector or company who employs a home inspector to: repair or offer to repair, for an additional fee, any part of the residence on which the inspector or the inspector’s company has prepared an inspection report in the past 12 months; have an interest in the property they are inspecting; give financial incentives or kickbacks to the owner of the inspected property, a broker or agent for referring business to the inspector or the inspector’s company; or make an inspection or prepare a report when the inspector’s fee is contingent on a pre-established finding or the close of escrow. [B & P C §7197]

A home inspector who is not a registered engineer cannot perform any analysis of systems, components or structural components which would constitute the practice of civil, electrical or mechanical engineering. [B & P C §7196.1]

Final pre-closing inspection

The EP investor should reinspect the property just before the close of escrow to confirm:

• the quality of any repairs made by the seller-in-foreclosure; and

• the general condition and maintenance of the property after entering into the purchase agreement.

The EP investor’s right to a final pre-closing inspection of the property is agreed to in the EP agreement. [See first tuesday Form 156 §13.3]

On final inspection of the property, the EP investor lists any property defects not already addressed, such as equipment malfunctions or maintenance, on the property inspection agreement. [See Form 270 accompanying this chapter, ante]

Conclusion

An EP transaction involves a residence in foreclosure. Thus, property defects are likely to exist due to the deterioration of the seller-in-foreclosure’s finances.

A seller-in-foreclosure, anxious to rid himself of the property with a minimum of personal effort and financial obligations, might be motivated to provide the EP investor with an inaccurate condition of property disclosure statement, since:

• a broker might not be involved; and

• the seller-in-foreclosure will not pay for the services of a licensed home inspector.

The risk of property defects, combined with the probability the seller-in-foreclosure is insolvent and disinterested in disclosure, justifies a property inspection and report by a home inspector retained and relied on by the EP investor.

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