The WRA Legal Hotline has received many inquiries recently regarding the home inspection report, specifically what happens to it if the transaction falls apart. To no surprise, the discussion of how to handle the inspection report after a transaction unravels has regularly frustrated real estate agents over the years.

Once the seller is in possession of inspection reports, the seller may share reports with prospective buyers interested in the property. However, what can listing agents and future buyers do with those previous buyers’ home inspection reports? And what are the inspector’s liabilities for those reports? All these questions and more are answered in this article. 

The following is the most common scenario involving the previous buyer’s home inspection report:

The first buyer’s offer included a home inspection contingency, and the inspection revealed defects. Before the deadline of the inspection contingency expired, the buyer provided a Notice of Defects per the offer to purchase, and the seller did not have the right to cure. The buyer walked, and the listing agent has a copy of the inspection report. Now what?

Does the seller have to update the real estate condition report (RECR)?

The seller is obligated to disclose any defects the seller has notice or knowledge about. The RECR defines a “defect” as “a condition that would have a significant adverse effect on the value of the property; that would significantly impair the health or safety of future occupants of the property; or that if not repaired, removed or replaced would significantly shorten or adversely affect the expected normal life of the premises.” 

Wis. Stat. § 709.035 requires sellers to amend the RECR, prior to the acceptance of a contract, when they obtain information or become aware of any condition that would change a response on the RECR. The seller may choose to attach a copy of the first buyer’s inspection or testing report to the RECR, attach a portion of the report, amend the RECR or draft a new RECR. It is the seller’s decision regarding how to comply with Wis. Stat. § 709.035 and what use to make of the prior home inspection report.

Is the seller required to attach a copy of the previous buyer’s inspection report to the seller’s RECR?

The seller may choose to attach a copy of the first buyer’s inspection report to the RECR as part of the seller’s amendment to the RECR. The new buyer should be advised that the first buyer’s inspection report is given to provide information only. The statutes regulating home inspectors provide that the home inspector will not be liable to subsequent buyers for any errors or omissions contained in the first buyer’s inspection report. The new buyer should be advised to have a home inspection contingency as part of the offer so a home inspection can be performed if the buyer is concerned about having a home inspector be liable for any oversights relating to a report.

Is the seller obligated to give a copy of the previous buyer’s inspection report to a prospective buyer who demands to see it?

The inspection report may be given to a subsequent buyer by the seller, but it is not required. However, if the report discloses a defect, as defined in the RECR, the information referring to the defect must be disclosed either by the seller via the RECR or after by the listing agent as a material adverse fact or information suggesting a material adverse fact. 

Absent an agreement between the first buyer and the seller not to distribute the report, the seller may give the new buyer a copy.

Is the listing agent required to give a copy of the previous buyer’s inspection report to the next buyer?

A licensee may provide a copy of the previous buyer’s inspection report if it has been attached by the seller to the RECR. If the seller has not attached the previous buyer’s inspection report to the RECR, then, to guard against any possible confidentiality concerns, the licensee may wish to not unilaterally provide a future buyer with the previous buyer’s inspection report without consent of all parties to the first transaction. Note, this is a conservative approach not shared by all attorneys and, therefore, private legal counsel may offer alternative guidance.

What are the listing agent’s responsibilities regarding a previous buyer’s inspection report after a transaction has fallen apart? 

Depending on the content of the seller’s new or amended RECR, the listing firm may or may not have to make material adverse fact disclosures. If the seller chooses to make some sort of disclosure on a new or amended RECR, and the firm believes the information to be inaccurate or incomplete, then the firm may have to disclose if the firm believes the information is a material adverse fact or information suggesting a material adverse fact.

As a competent licensee, if the agent is aware that an act disclosed in the inspection report or inaccurately or incompletely disclosed on the new or amended RECR (1) has a significant adverse effect on the value of the property; (2) significantly reduces the structural integrity of the property; (3) presents a significant health risk to the occupants of the property; or (4) indicates that a party to the transaction is not able to or does not intend to meet its obligations under the contract, then the issue constitutes an adverse fact. 

If a party to the transaction were to so indicate, or if a competent licensee would generally recognize that this fact is of such importance that it would affect a reasonable party’s decision to enter into a contract or would affect the party’s decision about the terms of the contract, the fact is both adverse and material. If this fact is both adverse and material, then Wis. Admin. Code § REEB 24.07(2) requires the licensee to timely disclose the fact in writing to all parties to the transaction, even if the client would direct the licensee not to disclose.

If the licensee knows or is aware of information suggesting the possibility of a material adverse fact, Wis. Admin. Code § REEB 24.07(3) states that the licensee will be practicing competently if the licensee makes timely written disclosure of the information suggesting the material adverse fact to all parties to the transaction, recommends the parties obtain expert assistance to inspect or investigate for the possible material adverse fact, and, if directed by the parties, draft appropriate inspection or investigation contingencies. The duty to disclose has priority over any duty owed to the client. The WRA-created Disclosure of Material Adverse Fact (WRA-DMAF) material adverse fact disclosure letter is available in zipForm.

Cori Lamont is Senior Director of Legal and Public Affairs for the WRA.

WRA Legal Hotline

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