Legal
Myths and Realties of Home Inspection Reports, Seller Disclosure Forms, and Aprraisalsby Robert D. Butters
Real estate brokers generally assume that if a home buyer has procured a home inspection report, received a seller disclosure form, or if the lender has had an appraisal performed, the broker is protected if a property defect is later discovered by the home buyer so long as the broker did not have prior express knowledge of the defect. Most of the time this is true. But not always. A case recently decided by the West Virginia Supreme Court illustrates the myths and realities of a real estate broker's assumption that he or she is shielded from liability based upon a home buyer's reliance on reports of "third parties"--i.e., a home inspector, an appraiser, or the seller himself.
In Eblin v. Coldwell Banker Residential Affiliates, Inc., 193 W. Va. 215, 455 S.E.2d 774 (1995), the home buyers ("the Eblins") worked with a real estate broker to locate a suitable house to purchase. The Eblins identified a property fitting their needs and wants, and submitted an offer that was accepted by the seller. The offer was conditional upon "a satisfactory structural inspection."
With the consent of the Eblins, the real estate broker with whom they worked retained a local home inspector to conduct the inspection called for by the contract. The home inspector's report was submitted to the broker upon completion. The report noted a number of defects in the house, which included (1) vertical cracks at each corner of the stoop; (2) broken downspouts; (3) out-of-level floors; (4) shifting of the foundation; and (5) unsatisfactory controls to prevent water infiltration of the basement. The inspection report further stated that "No foundation repair is recommended at this time. As a routine caution, it is pointed out that repairs could be required in the future."
Upon receipt of the home inspector's report, but before `submitting the report to the Eblins, the real estate broker made a number of handwritten notes on the report. Next to the inspector's comment about the cracks by the stoop, the broker wrote "normal condition for these houses," and next to the inspector's comment about the possible need for future repairs, the broker wrote "recommended on all reports."
After receiving the home inspector's report, the Eblins requested a supplemental report on the mechanical systems and certain other parts of the home. The supplemental report did not contain any further comments on the foundation, and referred instead to the comments made in the initial report on these items.
The Eblins continued to pursue the purchase and secured financing from a lender. The lender had the property appraised by a local appraiser. The appraisal report noted certain maintenance and mechanical problems, but did not make any comment about the foundation or basement of the house. The appraiser's report also contained a statement that the appraisal report "is not an express or implied warranty of heating and cooling systems, plumbing, sewage disposal and waste treatment systems or materials used in construction nor physical condition."
Shortly before closing, the Eblins conducted a walk-through of the home. The walls were all freshly painted. Upon the Eblin's inquiry, the sellers stated that they had not experienced any problems with the basement.
After moving into the house, the Eblins discovered cracks in the basement wall and that the stairway was twisting and pulling away from the wall. Contractors advised the Eblins that the walls had to be replaced and that the entire basement had to be torn out because of extreme damage caused by underground water. The estimated cost of repair was more than half of the purchase price paid by the Eblins.
The Eblins sued the following defendants: (1) the real estate broker with whom they worked; (2) the sellers; (3) the appraiser retained by the lender; and (4) the home inspector. The trial court granted summary judgment for all of the defendants, except the home inspector. The case was tried against the home inspector, who was absolved of any liability by a jury. On appeal, the state supreme court upheld the verdict in favor of the home inspector, affirmed summary judgment for the appraiser, but reversed summary judgment for the real estate broker and seller.
The appellate court noted that, as a general rule, if purchasers undertake their own independent investigation of property for sale, and the defendant does not hinder that investigation, the purchasers will be deemed to have relied upon their own investigation, and not upon any representations made by the defendant. This is called the "independent investigation doctrine."
In this case, however, the real estate broker lost the benefit of the "independent investigation doctrine" because he decided to offer his own critique of the home inspector's report in a manner that downplayed the significance of the inspector's comments about foundation defects. The court held that the "supplemental" report prepared by the home inspector was not a subsequent "independent investigation" because it did not specifically cover the foundation, which was the object of the broker's notations on the original inspection report.
The court also concluded that the sellers could not rely upon the "independent investigation doctrine" because there was evidence that foundation cracks had been painted over and concealed from the Eblins; therefore, the sellers took affirmative steps to frustrate the Eblins' independent investigation.
The court affirmed summary judgment for the appraiser. The court noted that the appraisal report clearly indicated that the appraiser did not inspect the house for structural integrity, and the appraisal report contained an express disclaimer about such matters.
The court also affirmed the jury's verdict in favor of the home inspector. The court noted that the inspector produced evidence that the home defects were effectively camouflaged in a manner that prevented detection. The court held that this evidence could have supported the jury's conclusion that the home inspector did not act negligently.
The lesson of the Eblin case is clear: a real estate broker will lose the benefit of a home inspector's report or a seller disclosure form if the broker elects to "critique" either of these documents in a way that minimizes the significance to the buyer of any statement or fact contained in the documents. The Eblin case also makes clear that an appraiser's report prepared for a lender is not any substitute for a home inspection or a seller disclosure form.
Practice tips a broker should follow are:
1. Do not agree to arrange the home inspection for the buyer. Give the buyer the names of home inspectors (preferably at least three) with whom you are familiar and tell the buyer to make his or her own decision about who they wish to employ.
2. Do not act as the "conduit" of the home inspector's report to the buyer. Feel free to ask for a copy of the report, but do not agree to be responsible for transmitting the report from the inspector to the buyer. That should be the home inspector's job.
3. Do not offer any comments on the significance of any statement contained in the report. Refer the buyer to the home inspector who prepared the report for any clarification of the report. Remember that if you decide to comment on the report, you have probably become the guarantor of the accuracy of your comment. This applies equally to comments on seller disclosure forms.
4. Do not assume that an FHA/VA or lender's appraisal will substitute for a home inspection or seller's disclosure form. Appraisals are generally done for lenders and are opinions of value; they will always disclaim any responsibility for discovering latent defects. Courts will typically enforce these disclaimers, and therefore the appraiser's report will not be a basis to assert the "independent investigation doctrine" as a defense to a broker's own alleged misrepresentations.
In summary, home inspection reports and seller disclosure forms are potent defenses against liability for misrepresentation when they are used properly. These protections can be completely destroyed, however, if a broker decides to "interpret" the documents for the buyer.
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Robert D..Butters. All right reserved. For information contact Frog Pond at 800.704.FROG(3764) or email susie@frogpond.com.
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