Q: I’m in the middle of house hunting. Some of the houses I look at have a binder with a termite report inside. When I read them, they sometimes mention termites or beetles, but a lot of times they talk about fungus and even the foundation. It’s kind of strange for the termite inspector to look at the foundation, isn’t it?
A: The term "termite report" or "pest report" is a misnomer. In many states the termite report’s formal title is the Wood Destroying Organism Report — a mouthful, which is why people casually call it a termite report. As you have discovered, these inspections are not limited in scope to termites or even pests, but actually search for any organism or condition with the potential to destroy wood members in a home.
Mindset Management
First of all, pat yourself on the back for even reading the reports! No home buyer can make a fully informed and final decision about what they should pay for a property without knowing as much as possible about the condition of the home. Traditionally, the buyer and seller negotiated a price and terms; then the buyer hired inspectors to ascertain the condition of the home; and then price and terms would need to be renegotiated to resolve any condition issues. In a growing number of geographic areas, smart sellers are providing information like pest reports and even home and roof inspection reports in advance of an offer being made, to avoid surprises and renegotiation during the inspection period.
Need-to-Knows
A report obtained by the seller prior to your presentation of the offer on a property can provide useful information, but does not necessarily preclude the need for you to obtain your own inspection(s) once you are in contract. There is a legal principle called privity of contract, which basically means that an inspector who is paid by the seller does not actually owe you any legal duties. If you rely on their report to your detriment (e.g., you buy the house and find out the inspection missed an infestation), they owe you nothing, because they had no relationship with you. Basically, under the law, you must contract with an inspector and pay for the report in order to be able to later make a claim against the inspector’s warranty for an erroneous report.
More importantly, though, there are inspection companies in every market who are known to write "light" reports, which construe everything they see in the direction of the property being more problem-free than it actually is. There are also inspection companies who make most of their money from doing repair work, and so they may have a conflict of interest in the direction of "finding" needed repairs that other inspectors would disagree are actually needed. Then, the majority of reputable inspectors are straight shooters. I mention this here so you will know to ask your Realtor how much credence they assign to the reports the seller has already obtained, depending on the company that performed the inspection.
Bottom line: Though it’s tempting to forgo additional inspections when the seller has already had some conducted, you may need to spring for another set from a company that is responsible to you during your inspection or contingency period. On occasion, if the seller has used an inspector I strongly trust, I will advise my client to pay the same inspector just to come out and do a site visit and walk them through the report, pointing out all of the findings in person. Many companies will do this, and create a legal relationship with the buyer, for the buyer’s protection, without charging the full inspection fee.
Wood Destroying Organism (WDO) inspections cover all sorts of things that are not intuitive but are involved in the destruction or decay of wood, including, but not limited to, molds and fungus, plumbing and roof leaks, dry rot, foundation, drainage and grading issues, and, finally, wood-destroying pests.
In some areas, a typical WDO report will be formatted as a "Separated Report," and each of the report’s findings will be designated as belonging to Section I or Section II. Section I items report active infestation or infection with a WDO or damage that has resulted from WDO activity. Section II items report conditions that are conducive to wood-destroying-organism infestation, where infestation has not yet occurred. Conducive conditions can include everything from excessive moisture and/or drainage problems, too short of a foundation leading to earth-to-wood contact, grading issues, failed gutters and caulking, and even debris in the crawlspace under the house.
Traditionally, sellers paid for Section I items (providing what you might hear is called a "Section I clearance") and buyers dealt with Section II items after closing, because they were thought of more as upgrade suggestions than repair items. In today’s market, though, the matter of who will pay for what items should be thought of as open to negotiation. Many sellers are disclosing these WDO reports up front by way of expressing that they have already taken the repairs needed into consideration in setting the list price, by way of communicating that they are interested only in as-is offers, and by way of disclosing the full picture of the property’s condition to the buyer in advance so that an as-is offer can be made with full information. Other times, sellers are totally open to negotiating the cost of WDO repairs in the course of the contract discussions. The issue of who will pay for what items varies by market, neighborhood and even by property; ask your Realtor for guidance in your specific situation.
WDO reports also come with repair bids in most states. Some think it is a conflict of interest for the inspection company to also bid on the work (the idea being that it would incentivize an inspector to "create" findings in order to get work). The reality is that without actual bids for repair, the inspection report would be very abstract and minimally useful. As you review WDO report bids, know that many Realtors advise their clients to use a pest company only to complete actual pest eradication work — if you buy the place, you may want to get bids from general contractors or even your handyman (or -woman) on things like window frame repairs, leak damage repairs and other things they might do less expensively than the pest specialist. Sellers’ advance WDO report bids can be a useful benchmark for comparing the work needed on different properties, but they are not necessarily authoritative on the amount it will actually cost to get work done.
Action Plan
When you get serious about a property that has a WDO report available for your review:
1. Note the date, scope and any exclusions listed in the report. The seller may or may not have had every fence, outbuilding or deck inspected — you need to know how thorough the inspection was to start to get an understanding for how seriously you should take the report.
2. Note whether any of the work recommended has already been done. Several times, I’ve seen buyers look at the dollar amounts of the repair bid on a WDO report and flip all the way out. On further review of the disclosure package, we’ve found that the sellers have actually already completed most or all of the recommended repairs, and were actually trying to use this fact as a selling point.
3. Note the inspection company. Ask your Realtor if they are familiar with the company who performed the inspection and, if so, whether the inspector has any notorious leanings or a reputation of fairness.
4. Show up to your own inspection and ask questions. Once you are in contract, attend your inspections, in person. Ask the inspector to show you any problem areas on the building. Take the report that the seller had obtained, and ask your inspector to compare and contrast; sometimes your inspector may be tipped to something he didn’t see, and sometimes you’ll learn that the original inspector missed some things.
Tara-Nicholle Nelson is author of "The Savvy Woman’s Homebuying Handbook," and "Trillion Dollar Women: Use Your Power to Make Buying and Remodeling Decisions." Ask her a real estate question online.
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