Inman

Home inspection industry sustains ‘surprising’ growth

Dear Barry,

As an insurance agent, I’ve watched with interest the rapid growth of the home inspection business. Fifteen years ago, I didn’t know what home inspections were. Today they seem to be center stage in every home purchase. Could you comment on some of the key trends affecting this change? For example, why has the demand for home inspections increased so strongly among home buyers? Why has the number of liability claims against home inspectors also increased? And what role, if any, do mortgage lenders play in selecting home inspectors? –Mark

Dear Mark,

Each of these questions could prompt a complete article on its own, so allow me to summarize.

The growing influence of home inspections on residential real estate sales has been rapid and unmistakable. Inspections were available in the 1970s and ’80s but were relatively unknown to most people during those years. By the early 1990s, home inspectors emerged as a significant presence in most real estate transactions, affecting the majority of purchases. Two reasons stand out as the basis for this surprising rate of growth:

1. Home prices in major real estate markets have increased dramatically, raising the level of financial commitment made by home buyers. Buyers typically seek the most expensive homes they can afford, leaving little or no reserves for repairs that might be needed after the purchase. By disclosing unseen defects, home inspections provide a means of avoiding unexpected costs after the close of escrow.

2. The litigious nature of today’s business culture arouses caution among all parties to real estate transactions. Agents and brokers have been particularly affected by this threat, causing many to become advocates for defect disclosure, in general, and home inspections, in particular. Today’s agents routinely encourage home buyers to hire home inspectors. The old-fashioned “buyer beware” agents have resisted this trend, but the general movement toward home inspection advocacy has been accepted by practical members of the real estate profession.

Accompanying the growth of home inspection services has been a parallel increase in liability claims against inspectors. Two circumstances stand out as primary causes for these claims:

1. Some claims are clearly due to inspector negligence. A contributing cause has been the rapid growth of the industry, prompting an influx of inexperienced and unqualified inspectors. The result has been incomplete or incorrect reporting of property conditions; hence, claims.

2. Many claims, on the other hand, are frivolous, owing again to the litigious nature of the business environment. While unqualified inspectors are subject to claims due to incompetence, even the best inspectors may be targeted, regardless of whether they are truly at fault. For example, an inspector might be named in a lawsuit against a negligent termite inspector. In such cases, it might be cheaper for the home inspector to settle the claim than to fight it in court. Many home inspectors carry errors-and-omissions insurance to avoid such costs, but the deep pockets of an insurance company can be the very magnet that attracts frivolous claims.

Finally, there is the question of mortgage lenders in relation to home inspections. Surprisingly, most lenders show very little interest in home inspection findings. Whereas banks and mortgage companies typically require a termite report, they seldom ask for a home inspection. This means that lenders regard termite damage as more significant than foundation settlement, roof leakage, or the safety of electrical wiring and gas-burning fixtures. This imbalance is likely to change, but so far, change has been slow in coming.

To write to Barry Stone, please visit him on the Web at www.housedetective.com.