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When a Sale Is Terminated, What Happens to That Inspection?

By: Brian Carter, Esq. on in  | 

After a potential sale is terminated, what are the obligations for disclosing that inspection? It’s a frequent question we hear on the PAR Legal Hotline.

The only obligation a seller has regarding inspection reports following a terminated deal rests entirely upon whether a material defect is identified through an inspection. The Pennsylvania Seller Disclosure Law requires sellers to disclose known material defects of a residential property to potential buyers, but it does not matter how a seller learns of that material defect. This includes material defects identified through a buyer’s inspection when the transaction does not ultimately close. In this situation, the seller’s property disclosure must be updated. There are three common ways for a seller to update a SPD.

One option to update the disclosure is to prepare a completely new SPD. When electing this route, the listing agent should take reasonable steps to make unavailable any previous SPD.

Another option is to use the Seller’s Property Disclosure Statement Addendum (Form SDA). The SDA can be attached to an existing seller’s disclosure when there is any change to the seller’s disclosure. When using the SDA, each item requiring additional disclosure should be specifically identified and the combined seller’s disclosure with SDA made available to potential buyers. It is not necessary to attach inspection reports to the SDA.

A final method to update a seller’s disclosure is by simply attaching the inspection reports received from the buyer to the existing seller’s disclosure. It would probably be prudent to consider attaching all of the inspection reports received by the seller and not just those portions identifying material defects, but that decision can be made on a case-by-case basis.

It is important to remember that while a seller is obligated to disclose the material defects identified through an inspection, there is no obligation for the seller to share the actual inspection reports with subsequent potential buyers, nor is there a prohibition against it. A subsequent potential buyer can certainly ask a seller for copies of prior inspection reports, but whether to share prior inspection reports is entirely within seller’s discretion.

One final thought. However the SPD is updated to disclose newly identified material defects, it should be verified that future potential buyers receive and acknowledge the most current SPD. A buyer relying upon a prior, inaccurate SPD increases the risk of a later claim against the seller, the listing agent and the listing brokerage for not properly disclosing known material defects. Additionally, a licensee could be sanctioned by the State Real Estate Commission as a result of an incomplete disclosure of material defects the licensee knew about.

Home inspection specifications

According to anecdotal evidence I’ve collected, the inspection period is one of the most anxiety-inducing times of a residential sale. There are so many factors involved, from timelines to multiple outside parties, and don’t forget that once the inspection is finished negotiations can start all over again. A home inspection can make or break a […]

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Comments (8)

Comments

  • Ryan Thomas   November 6, 2020 at 7:51 am

    It gets tricky when something in the report is questionable. For example, there is one inspection company who will ALWAYS suggest treatment on a house if ANY evidence of wood destroying insect damage is present. Not the bugs themselves, just minor damage. It could be one floor joist in a 100 year old house. They do it to cover their own liability. They have admitted that it’s a standard practice, even if it appears to be inactive and old. Another company coming to the same house and knowing what the other companies policy is does not require treatment because there is no sign of insects present. So, which should be disclosed? That is just one example. Some inspectors get things wrong or make calls to protect themselves. This is not the norm, but it does happen. It could be an issue that would scare a buyer away, but is not really a legitimate concern.

    Reply to Ryan Thomas
  • Lisa Sanderson   November 6, 2020 at 8:21 am

    This is very confusing and seems to contradict what it says on the Seller’s Property Disclosure form. #20. D. 2. includes two options, AND include the report, and, OR include the report. Please clarify.

    Reply to Lisa Sanderson
    • Brian Carter, Esq.   November 6, 2020 at 10:33 am

      Lisa – The subsection of Paragraph 20 you reference on the SPD provides notice that sellers must update the SPD with additional information they become aware of about the property. Updating the SPD is a legal obligation but the law is silent as to how to make necessary updates. There is no one set way for how to make updates and, as noted on the SPD, sellers can do so by updating the SPD and/or attaching inspection reports. This is true because not all updates are the result of an inspection. The article focuses on updating the SPD following receipt of an inspection report and provides some options as to how to go about updating the SPD. What requires updating, how to make necessary updates, and whether to attach an inspection report should be done in consultation with the seller.

      Reply to Brian Carter, Esq.
  • John Fleming   November 6, 2020 at 9:50 am

    I’m confused about what a material defect is defined as. Can it be a fogged or cracked window? How about a furnace that needs to be cleaned? How about a leaky faucet? How about a damp basement?

    Those are all minor issues in comparison to a leaky roof or a pipe with an asbestos wrap. I’ve been the second buyer’s agent in on a number of homes that have minor defects. I always tell my buyers that different inspections may yield different results. What they have to keep in mind is that they are buying a used house. If the sellers didn’t fix or update it for themselves they are under no obligation to do it for the new owner.

    As long as the home passes the U&O inspections it’s safe. This is coming from someone who bought a money pit.

    Reply to John Fleming
    • Brian Carter, Esq.   November 6, 2020 at 11:25 am

      There is no clear, bright line list of what issues constitute material defects. In most instances, a cracked window is probably not a material defect nor would a furnace that needs cleaning. It is important to remember that most home inspectors report whatever issues they find, whether it is a loose toilet (unlikely to be a material defect) or a leak in the roof (probably a material defect), and that both buyers and sellers need to consider the issues identified. For sellers, they have the added duty of working with the agent to determine whether issues noted constitute material defects, which is defined on the first page of the SPD.

      Reply to Brian Carter, Esq.
  • Andrew Wetzel   November 6, 2020 at 11:43 am

    Excellent article but, as is always the case with this topic, there is no perfect solution. The quality of inspectors and agents (both listing and selling) VARIES and the term “material defect” is not as clear cut as we might hope.

    I do have a suggestion regarding Bright MLS. I think it is a nice feature that we can upload documents to the site (especially compared to years ago when many of us made and left endless copies in the home or had to respond to requests). It would be very helpful if listing agents had a way to know who opened/ printed/ emailed a property disclosure and when that happened. Hopefully listing agents wouldn’t abuse the knowledge but it would help us know who opened a form especially when it is amended later.

    Reply to Andrew Wetzel
  • Jeffrey Hogue   November 11, 2020 at 1:18 am

    “One option to update the disclosure is to prepare a completely new SPD. When electing this route, the listing agent should take reasonable steps to make unavailable any previous SPD.”

    Disagree with this option. Amending and explaining is better than editing existing documents. If a case would get before a Judge it would be important to see all the evidence and not some edited form that is dated wrong.

    Reply to Jeffrey Hogue
  • Jeffrey Hogue   November 11, 2020 at 1:21 am

    Great article on a very delicate subject. Thank you for writing!

    Reply to Jeffrey Hogue

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