Act 338 Seeks To Deter Home Inspectors From Calling Out Defects

I have written several posts about 2017 Wis. Act 338:

• Introducing 2017 Wis. Act 338
• Sellers Must Now Disclose Restrictive Covenants And Deed Restrictions
• Sellers Now Have To Disclose How Long They Have Owned The Property In Their Real Estate Condition Report
• The New Real Estate Condition Report Expands Required Disclosure Of Unpermitted Work
• Sellers Now Have To Disclose Insurance Claims In Their Real Estate Condition Report

These posts focused exclusively on how Act 338 affects the required content of seller condition disclosure reports used in residential real estate and vacant land transactions.  While these reports are the primary focus of this act, Act 338 also affects the required content of home inspection reports.

Wis. Stat. § 440.975(3)(c) used to require home inspectors to submit a written report to the client that describes any conditions detected by the home inspector during the home inspection "that, if not repaired, will have a significant adverse effect on the life expectancy of the improvement or the component of the improvement."

Act 338 repealed Wis. Stat. § 440.975(3)(c) and replaced it with Wis. Stat. § 440.975(3)(cm).  This new statute requires home inspectors to submit a written report to the client that does the following:

Describes any defect that is detected by the home inspector during his or her home inspection. A home inspector is not required to use the term “defect” in describing a defect in the written report required under this subsection. A home inspector may not use the term “defect” in a written report required under this subsection unless that use is consistent with s. 440.97 (2m).

Wis. Stat. § 440.97(2m) defines "defect" as follows:

“Defect” means a condition of any component of an improvement that would significantly impair the health or safety of future occupants of a property or that, if not repaired, removed, or replaced, would significantly shorten or adversely affect the expected normal life of the component of the improvement.

This definition of "defect" largely mirrors the definition of "defect" found in lines 449-451 of the WB-11 Residential Offer To Purchase:

"Defect" means 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."

To summarize, home inspectors are required to describe any "defects" in their written reports.  However, they are not required to use the term "defect."  More importantly, they cannot use the term "defect" unless their use is consistent with a new definition of that term that appears to have been imported from the contract between the buyer and seller.

The significance of this change is best understood by considering how home inspectors' written reports are used in most residential real estate transactions.  

While the WB-11 Residential Offer To Purchase  often grants buyers the right to back out of their purchase through delivering a Notice of Defects with the written inspection report attached, most buyers will not exercise this right.  After all, they really want this home.  Besides, the real estate agent working with them does not tell them that they have this right.  Instead, buyers use written inspection reports to negotiate concessions from sellers, such as the sellers having the conditions described by the home inspector corrected at their expense prior to closing (even when the sellers never negotiated the right to cure defects).  Sellers will argue that many of the conditions identified in the written inspection report are not really defects and do not require correction, but they will often agree to have at least some work performed prior to closing.  The sale will close, real estate commissions will be paid, and the buyers and sellers will believe that their respective agents went to bat for them.

Everything changes when a home inspector uses the term "defect" to describe a condition that he detected during his home inspection.  At least some buyers are smart enough to realize that their offer was contingent on a licensed home inspector inspecting the property and not reporting any "defects" and that their home inspector's reporting of "defects" means that they might not be obligated to close on their purchase.  Even if they don't understand the significance of the home inspector's use of the term "defect," they might consult with an attorney who can explain everything to them.  Though real estate agents cannot discourage the buyer from retaining an attorney, the last thing that they want is for the buyer to consult with another professional whose advice will not be colored by an expected sales commission.  The home inspector has placed the real estate agent working with the buyer in quite an awkward position, especially if the buyer is the real estate agent's client rather than merely a customer. 

The bottom line is that real estate agents do not want home inspectors calling a spade a spade.  They want home inspectors to describe the conditions that they observe in their written reports, but they want these descriptions to be painted in shades of gray so that it is unclear whether or not the conditions at issue are really "defects."  That way, the real estate agents will retain control of the transaction and will look like heroes to their respective sides for winning additional concessions prior to closing.

So what is a home inspector to do?  Home inspectors can and should call out "defects" in their written reports, but they need to be ready to explain and defend why these conditions qualify as "defects" based on the standard set forth in Wis. Stat. § 440.97(2m).  Assuming that the home inspector is reasonably competent, he should be able to explain and defend the opinions in his written report.

That being said, home inspectors should understand that they could face discipline or even possible liability if they misidentify a condition as a "defect."  Violating Wis. Stat. § 440.975(3) could subject a home inspector to professional discipline pursuant to Wis. Stat. § 440.978(2)(m).  What about legal liability though?  While the real estate agents will be angry about losing their expected sales commissions, Wis. Stat. § 440.977  appears to protect the home inspector from being sued by anyone other than the parties to the transaction for which the home inspection was conducted, namely the buyers and the sellers.  The sellers could have a claim against the home inspector for interfering with their contract to sell their property, but such a claim seems unlikely to be viable.  Wisconsin law only recognizes a claim for intentional interference with a contractual relationship.  Mere negligence by the home inspector will not suffice.  The sellers would have to prove that the home inspector acted with the purpose of interfering with the contractual relationship.  See Cudd v. Crownhart, 122 Wis. 2d 656, 364 N.W.2d 158 (Ct. App. 1985); Augustine v. Anti-Defamation League of B'Nai B'Rith, 75 Wis. 2d 207, 249 N.W.2d 547 (1977).  As long as they do not identify bogus defects with the purpose of getting buyers out of their purchase contracts, home inspectors should not have to concern themselves with such claims.  

Sellers Should Not Be Allowed To Bar Certain Home Inspectors From Their Property

I have written in the past that "Buyers Should Always Hire Their Own Inspectors."  I still agree with every word of this post and urge new readers to review it first in order to put what I am about to say in context.

I have recently become aware that a local real estate agent is barring a certain home inspector from inspecting her clients' properties due to a bad experience with a previous listing.  This home inspector identified defects in his written home inspection report, and the buyers used these defects to back out of their purchase and get their earnest money back.  In other words, the home inspector did exactly what home inspectors are supposed to do - he protected his client from purchasing a property with defects.  The real estate agent lost her commission on that sale, so she is now barring this home inspector from her listings.

Buyers and those who represent them (buyers' agents and attorneys) should know that sellers and their agents have no right to bar certain home inspectors from their properties.  Through accepting an offer contingent upon a home inspection, a seller agrees to allow the buyers' inspectors access to their property.  The only caveat is that the buyers' inspector must be a Wisconsin registered or Wisconsin licensed home inspector.  This is all clearly spelled out in lines 183-185 and lines 195-196 of the WB-11 Residential Offer To Purchase.

Fortunately, this outrageous situation appears to be quite rare.  While many real estate agents will refer unsuspecting buyers to home inspectors who know which side their bread is buttered on and thus will not identify any issues that could jeopardize the sale, this is the first time in fourteen years of practice that I have ever heard of a real estate agent telling buyers that they cannot use a diligent home inspector.  Even real estate agents who sell their own properties and thus have an enormous incentive to preserve the sale at all costs do not try to limit a buyer's choice of home inspector.  Such conduct arguably violates Wis Admin. Code § REEB 24.03(2)(b), which requires real estate licensees to act to protect the public against fraud, misrepresentation, and unethical practices.     

Buyers should not allow sellers to bully them into giving up their choice of home inspector.  Buyers need to work with professionals who are both willing and able to advocate on their behalf.  Please contact me at rudolphkuss@stevensandkuss.com if you need representation during one of the most important purchases of your lifetime.  

Sellers Now Have To Disclose Insurance Claims In Their Real Estate Condition Report

As an attorney who primarily represents buyers in court, I regularly conduct discovery on insurance claims filed by sellers.  Evidence that sellers filed an insurance claim based on the same condition that they later failed to disclose to buyers in their Real Estate Condition Report is pure gold.  Such evidence establishes that the condition existed and that the sellers thought that it was significant enough to file an insurance claim.  Sellers have a really hard time explaining why they checked "NO" to a property condition statement relating to flooding or leaks when they got $10,000 from their insurance company for basement flooding.

The new Real Estate Condition Report required by Wis. Stat. § 709.03 mitigates against such situational candor through requiring sellers to answer the following question:

Have you filed any insurance claims relating to damage to this property or premises within the last five years?

Please note that there is no exception based on the sellers' subjective belief that they have resolved whatever condition caused the damage.  If the seller has filed an insurance claim within the last five years, he or she must answer this question "YES."  The seller should explain his or her "YES" response at the end of Section G, preferably through attaching documents relating to the insurance claim.

Of course, I have also discovered that sellers "forget" to disclose conditions in their Real Estate Condition Report that previously caused them to make a warranty claim against the manufacturer of their roofing shingles, participate in a class action settlement against their siding manufacturer, or even sue their seller for misrepresentation.

Since the Real Estate Condition Report still does not specifically require sellers to disclose such claims, I sometimes write language in offers requiring sellers to provide copies of all warranties and any warranty claims.  You can also find any legal actions that your sellers have filed (or have had filed against them) in Wisconsin courts through Wisconsin Circuit Court Access.     

The New Real Estate Condition Report Expands Required Disclosure Of Unpermitted Work

Before Act 338, the statutorily-required Real Estate Condition Report asked sellers to either agree or disagree with the following statement:

I am aware either that remodeling affecting the property's structure or mechanical systems was done or that additions to to this property were made during my period of ownership without the required permits.
  
While most would agree on what qualifies as an "addition," "remodeling" seems rather vague and indefinite.  Homeowners remodel their kitchens, bathrooms, and rec rooms in ways that affect a property's structure or electrical or plumbing systems.  What about foundation repairs though?  Such work arguably does not fall within the definition of "remodeling," but many buyers would want to know if such work was done without the required permits, especially since foundation repairs so clearly affect a property's structure.  

The new Real Estate Condition Report now required by Wis. Stat. § 709.03 asks sellers the following question:

Are you aware of any remodeling, replacements, or repairs affecting the property's structure or mechanical systems that were done or additions to to this property that were made during your period of ownership without the required permits?  

This change should decrease seller confusion about what unpermitted work must be disclosed at the time of sale and help buyers become better informed about such work. 

Trouble is, this change still depends upon sellers having awareness (i.e., knowing or being put on notice) of local permitting requirements, which vary greatly.  A seller has not answered such a question improperly if he or she was in fact unaware that the local municipality requires permits for installing a patio or replacing a roof.  Buyers should insist on receiving documentation from their sellers on all remodeling, replacements, repairs, and additions that were made during the sellers' ownership.  Buyers should also make open records requests of the local building inspector for copies of all permits that were issued during the sellers' ownership.  In Milwaukee, you can find some of this information online without having to make a formal request.

I draft language in offers protecting buyers from awful surprises like unpermitted repairs made by sellers or their unlicensed contractors.  Please contact me at rudolphkuss@stevensandkuss.com if you want to be represented during your most important purchase. 

Sellers Now Have To Disclose How Long They Have Owned The Property In Their Real Estate Condition Report

Before Act 338, Wis. Stat. § 709.03 only required sellers of residential real estate to disclose how long they had "lived" in the property in their Real Estate Condition Report.

Unfortunately, sellers' responses to this question often painted a misleading picture, particularly with regard to duplexes and other residential rental property.  After all, sellers of rental property may have never "lived" in their property.  Yet, they might have important information about their property's condition that they learned from their contractors or their tenants.  A buyer purchasing a property based on a real estate condition report saying that the owner has lived in the property for 0 years could quite reasonably assume that the owner does not know anything about the property's condition and could thus disregard the owner's representations in that condition report that he or she is not aware of any defects in the property.

Under Wis. Stat. § 709.03 as amended by Act 338, sellers now must disclose in their Real Estate Condition Report how long they have "owned" the property as well as how long they have "lived" in the property.  I view this as a positive change because it helps buyers of residential real estate - particularly rental property - distinguish between properties that have been owned by the seller for more than ten years from properties that were only recently inherited by the seller.  With that additional information, buyers should be able to more confidently rely upon a real estate condition report completed by a long-time owner of a property even if that owner has never lived onsite.

Do sellers of residential rental property really need to complete a Real Estate Condition Report?  As long as the property has 1 to 4 dwelling units and the seller is not otherwise exempt from Chapter 709's requirements (i.e., the seller is not a personal representative of an estate nor the trustee of a trust), a seller of residential rental property must complete a Real Estate Condition Report based on his or her notice or knowledge of conditions affecting the property.  If your tenants have told you that the toilets frequently overflow or that the foundation walls leak when the snow melts, you'd better include that information in your Real Estate Condition Report.

If you're selling your rental property and need help completing the new Real Estate Condition Report, please contact me at rudolphkuss@stevensandkuss.com.

Some Sellers Will Have To Complete A New Real Estate Condition Report

This post is for you if you currently have residential real estate or vacant land for sale.  

Since you read this blog, you know about Act 338 and the new Real Estate Condition Report.  July 1, 2018 has come and gone, and Section 8 of Act 338 clearly says that "[t]his Act takes effect on July 1, 2018."  You have already completed a Real Estate Condition Report.  Do you have to complete the new Real Estate Condition Report required by Wis. Stat. § 709.03 as amended by Act 338?

You do not have to complete a new Real Estate Condition Report if your Real Estate Condition Report was furnished to the prospective buyer of your property on or before June 30, 2018:

Section 7. Initial applicability.

(1) Real estate condition and vacant land disclosure reports. The treatment of sections 709.03 and 709.033 of the statutes first applies to reports that are furnished on the effective date of this subsection. 

This rule appears to apply even if the prospective buyer does not make an offer until July 1, 2018 or later.  Since you furnished a Real Estate Condition Report that complied with the previous version of the statute, you do not have to complete a new Real Estate Condition Report that complies with the amended version of the statute.

What if you completed a Real Estate Condition Report but did not furnish it to any prospective buyer on or before June 30, 2018?  The answer to that question is less clear.

I disagree with those who will argue that sellers do not have to complete a new Real Estate Condition Report simply because they completed a Real Estate Condition Report that complied with the previous version of the statute.  Section 7 of Act 338 does not say that the amended version of the statute first applies to reports that are completed on the effective date; it says that the amended version of the statute first applies to reports that are furnished on the effective date.  

Within the context of Chapter 709, "furnished" means "provided" or "shared," as that is how "furnished" is used in Wis. Stat. s. 709.02(1) - the statutory subsection that requires disclosure of property conditions through a Real Estate Condition Report.  Wis. Stat. § 709.02(1) speaks of furnishing a Real Estate Condition Report to "the prospective buyer."  

Does that mean that once a prospective buyer goes away, you have to furnish a new Real Estate Condition Report that complies with the amended version of the statute to the next prospective buyer?  My original post supported that position, but I now reject it.  Section 7 of Act 338 speaks of "reports that are furnished" - not "reports that are furnished to the prospective buyer."

Does that mean that you have "furnished" a Real Estate Condition Report through sharing it on the Multiple Listing Service or on a real estate portal?  Or does that mean that you must have provided a Real Estate Condition Report that complies with the previous version of the statute to a prospective buyer?  Section 7 of Act 338 is silent on "furnished to whom," and silence breeds ambiguity.  Since the legislature did not clearly answer this question, sellers have an argument that they do not have to furnish a new Real Estate Condition Report if they shared the old one with the public, and buyers have an argument that sellers have to furnish a new Real Estate Condition Report unless the old one was furnished to a prospective buyer.  

I provide legal representation to people who are selling their home "for sale by owner," a/k/a FSBOs.  If you need help completing a new Real Estate Condition Report, please contact me at rudolphkuss@stevensandkuss.com. 

How Buyers Should Protect Themselves From Undesirable Restrictive Covenants

In my last post, I lauded the new Real Estate Condition Report's required disclosure of restrictive covenants and deed restrictions.  I write this post to emphasize that disclosure of the mere existence of restrictive covenants in a subdivision isn't good enough.

To review, sellers answer questions on a Real Estate Condition Report "YES," "NO," or "N/A."  A "YES" answer to the question "are you aware of restrictive covenants or deed restrictions on the property?" only tells buyers that there are restrictive covenants or deed restrictions; it does not inform buyers what uses of the property are actually restricted.  A mere affirmative answer to this question fails to inform buyers whether or not they can have an above-ground pool or hang out their laundry.

True, sellers are required to explain their "YES" responses.  The old Real Estate Condition Report contained an explanation section several lines in length at the end of the report.  The new Real Estate Condition Report contains explanation sections that run only three lines long at the end of each section.  Since the question about restrictive covenants is question 7 in the "LAND USE" section, sellers must explain a "YES" response to that question at the end of that section.  Even assuming that this question is the only one in that section to which the seller answered "YES," three lines is nowhere near enough space to explain restrictive covenants that may run over thirty pages in length.

Some real estate condition reports provide sellers with an option of answering "See Expert's Report" instead of "YES, "NO, or "N/A."  While restrictive covenants are not expert reports, such an option could prompt some sellers to attach their subdivision's restrictive covenants to their real estate condition reports.  Alternatively, some sellers might "explain" their "YES" response to the restrictive covenants question as "see attached restrictive covenants."  I doubt that either practice is common however.

Even before sellers were questioned about restrictive covenants and deed restrictions in the new Real Estate Condition Report, I drafted language in offers requiring sellers to deliver any restrictive covenants to buyers within 10 days of acceptance.  Even that isn't good enough however.  If the content of restrictive covenants is important to buyers and those restrictive covenants are not provided to buyers prior to acceptance, buyers might have to close on their purchase even if they later find out that they cannot have their pool.  Without a contingency or a right to rescission based on the contents of the restrictive covenants, the buyers have no excuse for failing to close and might forfeit their earnest money or even face liability for damages.

Going forward, I will draft language in offers requiring sellers to deliver any restrictive covenants to buyers within 10 days of acceptance AND giving buyers the right to rescind their offer and get their earnest money back in the event that they object to the content of any of those restrictive covenants.  Of course, some sellers will object to this language because it would allow buyers to rescind for purely subjective reasons (unlike rescissions based on the disclosure of defects in a Real Estate Condition Report, which are subject to a more objective standard).  Trouble is, I see no other way to protect buyers from purchasing a property with undesirable restrictive covenants other than demanding that sellers deliver said covenants to buyers before any offer is made, which is unrealistic under most circumstances.

Please reach out to me at rudolphkuss@stevensandkuss.com if you're interested in a property for sale in a residential subdivision.