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Negative Inspection Reports: Is ignorance really bliss?

lady justice

By Peg Ritenour, Ohio REALTORS Vice President of Legal Services/Administration

The Ohio REALTORS Legal Assistance Hotline receives an array of real estate-related legal questions — including license law issues, disclosure, contract law, ethics and commission problems, among others. In an effort to help you work within the law we spotlight some of the timely questions that are being asked by REALTORS. This one centers on the handling of inspection reports…

Q: I represent a seller who has a pending purchase contract on his property that includes an inspection contingency. He has told me that if the buyer is unsatisfied with the inspection report that he will release the buyer from the contract with “no questions asked.” Moreover, he has instructed me to notify the buyer’s agent not to give me  a copy of the report or to communicate in any way what the issues are with the property. By doing this, the seller believes he won’t be faced with the problem of having to disclose findings that are contained in the inspection report to other potential purchasers. Is this OK? What if the buyer’s agent sends me the report anyway or tells me what defects were included in the report? Will I still need to disclose this information to subsequent buyers if the property goes back on the market?

A: Such instructions from sellers regarding inspection issues are occurring more frequently. And in some cases the listing agent is actually the one recommending this practice to their sellers. The rationale for this approach is that you can’t disclose what you don’t know. And while this may be is true, that doesn’t mean this is a good idea. And in some cases this approach of “no see , no hear, no speak” could actually create a potential risk for both the seller and agent.

So why is this a bad idea? First, by releasing a contract with no questions asked, the seller may be terminating a contract when the buyer has no legitimate basis for not performing. For example, the items that the inspector found may not be defects at all, but merely routine maintenance items. Or, the buyer may merely claim they were dissatisfied with the inspection report, when they really just have a case of “buyer’s remorse.” And there’s no guarantee that the next buyer’s inspection won’t find the same problems and the seller will be faced with the same issue again. This could result in delays in selling the property that could have been avoided by just dealing with the inspection issues with the first buyer.

But more concerning will be the situation where a defect that was found in that original report is not discovered by a subsequent buyer of the property until after closing, resulting in litigation against the seller, the listing brokerage and listing agent. In the course of discovery, it will invariably come out that there was a previous contract on the property that was terminated. Both the seller and listing agent will face questioning by the buyer’s attorney about the reason the first contract was released and the results of any inspection report. And when it is revealed that the listing agent instructed the first buyer not to provide a copy of their inspection report to the seller or to identify the unsatisfactory conditions that were found, the plaintiff’s attorney will have a field day with that listing agent and seller. It won’t take much for the buyer’s  attorney to convince a jury that the seller and the listing agent were trying to avoid disclosure of any defects to the subsequent purchaser. And that may not bode well for either the seller or their agent.

As to the situation in which — despite instructions from the listing agent — the buyer’s agent sends over the inspection report or otherwise shares information about the inspector’s findings, this places the listing agent in a precarious position. That is because the listing agent will now be considered to have knowledge of the information contained in the inspection report. And if that report disclosed any defects in the property, the agent will have a duty to disclose those defects to a subsequent buyer. If the seller instructs the listing agent not to make such a disclosure, the seller should be referred to an attorney for advice on the duty to disclose such information. The agent should also immediately bring this situation to the attention of her broker or manager. If the seller persists in instructing the agent not to disclose any defects discovered by that inspection, the listing broker should consider terminating the listing because following the seller’s instructions could put the listing agent and broker at risk of a license law violation, as well as potential civil liability.

The bottom line is that taking the approach that ignorance is bliss with respect to inspection reports is a strategy fraught with risks for not only the seller, but for the listing agent and the listing brokerage as well. For this reason listing agents should not recommend this approach to their sellers,  and agents should counsel their sellers against this practice and refer them to their legal counsel.

 

Legal articles provided in the OAR Daily Buzz are intended to provide broad, general information about the law and is not intended to be legal advice. Before applying this information to a specific legal problem, readers are urged to seek advice from an attorney. 

Tags: legal, Legally Speaking