How Real Estate Agents create liability for themselves in referring 3 Home Inspectors
written by Nathan Thornberry
It’s one of the most amazing myths in real estate, and one not only believed thoroughly but often acted upon by over 80% of participants- brokers and agents alike. Sometimes it is an office policy, sometimes it is just the way of doing business, sometimes it is bad advice from an E & O Insurer, other times it is a learned protocol from one agent to another…and it goes something like this:
“We give our clients a list of three home inspection companies to reduce our liability.”
It’s an interesting concept, and to a risk management guy like myself with 150,000+ transaction involvement in the U.S. and Canada monthly and relationships with agents going back 20+ years into a childhood that involved my parents’ home inspection business and my grandfather’s successful real estate practice, I understand where this makes sense to some or even many. The idea is that if you tell a client that the best inspector in town, based on your involvement in both sides of the transaction many times a year, is company X and company X disappoints the client or misses a material defect that this will come back to bite you as an agent in the form of a lawsuit because you might have suggested a home inspector that wasn’t qualified or didn’t treat the client with the level of care that they expected.
It is also worth noting that many if not most all E & O claims outside of fraud for real estate agents and brokers are based on property condition issues, and it’s something I wrote a whole chapter about in my book The Savvy Agent (available for free at http://www.Nathan.tv/#!Books ). So if there is anywhere we would all like to reduce our liability, this is an obvious place to start.
Here’s the problem: This is only one aspect of the scenario to consider and in the experience we have of literally millions of transactions it has proved to be 100% false.
In fact, we haven’t found one singular account of a case where a buyer, frustrated with the negligence of the inspector they ultimately hired, sued their agent for the referral and after the judge hearing that more than one inspector had been referred he stopped the proceedings and said, “oh, well if you referred not just the best inspector you knew of but also one that was worse and another that logically must have been even worse than the second inspector, then you’re in the clear and I am dismissing this case!”
It hasn’t happened in the history of the courts that we can find. (We’re happy to publish right here any actual examples of that happening, as seldom as it may have been, simply message me the case link at nathan@nathan.tv …and if I don’t get one single case from all of you attorneys in real estate pushing this myth I will be greatly disappointed! 
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So unless there are hundreds or thousands of these cases we mysteriously just haven’t seen yet…the legal liability issue is just simply a myth and one that needs to be annihilated now. Candidly, it makes me really angry when someone whether it be a lawyer, E & O agent, or even an amateur know-it-all decides to make all of my agent friends scared of the liability boogie man. I’m sure the intent is good, but if you are pushing this wrongheaded idea in the industry do us all a favor and don’t.
Now let’s look at the other aspects:
- Non-Legal Liability (referrals from clients)
- Duty to the Client
- Actual Liability (legally) regarding home inspections
Non-Legal Liability
Some may read this and say, “okay, so offering up a list of inspectors doesn’t actually reduce my chance of going to court or increase my chance of walking out of there the winner…but the bigger liability for me is a client deciding that I didn’t take care of them well and then they don’t refer me to their friends, family, and neighbors and my real estate business is heavily referral driven. What about that liability?”
This is a fair point and one I have answered live in front of agents from coast to coast at events held by Associations, Offices, and even our own series of Power Agent Conferences ( http://www.PowerAgentConference.net ). You definitely want a client to have an excellent experience in the process of buying or selling with you, which is why you give them the royal treatment, make sure they are covered by a home warranty (like the one from Residential Warranty Services at http://www.RWSwarranty.com ), and you stay up all night crossing T’s and dotting I’s on purchase agreements and closing statements. The last thing you need is for the client to feel under-served by the inspector you trusted to take care of them- especially when you kill yourself trying to take care of your clients (people outside the industry just don’t understand do they?).
Let’s play this out in a couple of ways. Let’s say you basically hand the client the phone book when it comes to home inspectors and say “pick one,” and later they have an issue. They call you to complain about it. Do you think it makes the situation better that you can tell this client that these problems are all their fault for being so idiotic as to pick inspector #3 on the list rather than inspector #1? Do you think they want to hear you tell them this isn’t your problem? I have yet to hear a good way to approach a client with a problem where we left them to do everything themselves without the representation they were paying for and they are the only ones to blame- even if it is ultimately their responsibility.
Now let’s play this out the other way: You know Inspector X is the best inspector in town. The rest don’t compare in your mind. You tell the client pick who you want, it’s a free country, but if you’re relying on my expertise I can tell you who the best inspector is. Later the client has an issue…what do you do? Well, it’s really simple when you have a great relationship with the inspector and send them a lot of work. You tell them to take care of it. You tell them to reach out to the client. Hopefully whatever the issue is falls into the category of a misunderstanding or something that is covered by a Warranty provided free of charge from the inspector if they’re one of the 5500+ top home inspectors in North America (find one at http://www.InspectionCentral.net ).
It is always going to be better from a referral retention perspective to be able to step in and help the client– especially if the alternative is blaming the client. Besides, when you tell your client that you would love it if they were to share their positive experience with family and friends and refer them to you for real estate services, do you make sure they refer you and two other agents so that they don’t have any “liability”? It sounds ridiculous, I know.
Duty to the Client
What is our job as an industry? Is it to do online searches for homes in a database like it was 20 years ago? Last time I checked, that ship had sailed and it is called the USS Zillow.
Our job, put as simply as possible, is to protect clients from the start of the transaction to the end of it. Protect them from a bad deal, protect their wallets, ensure they don’t have outstanding liability, market listings aggressively, and ultimately buy or sell the house they wanted to buy or sell. Clients rely on us to be experts, to know who to call when it comes to services in the real estate transaction, and while certain regulations (especially around mortgages) sometimes limit our abilities to recommend the absolute best guy, in home inspection there is no such restriction. Anywhere.
In fact, I would say it is your Duty to the Client to ensure they get the best inspection.
It is your Duty to the Client to make sure they know that some inspectors offer things like RecallChek reports that give them free repairs to fire hazards, or SewerGard protection that will pay for a broken sewer line underground between the home and the street when other inspectors would simply say “sorry about your luck”, or even that there are thousands of inspectors that offer a 5 year Roof Leak Protection Plan that can help your clients avoid a financial disaster.
I would say at this point, especially considering the 23%+ of transactions in North America where clients (hopefully yours already) are receiving these benefits, that there is a real liability in referring any inspector that offers no protection for your client for any of these issues. Put yourself in a buyer’s shoes- they move in, have a sewer line collapse at a significant expense, and they find out that all of their neighbors had protection from this issue and one even got their issue repaired for free because they used the right home inspector. In their mind the referral to the basic home inspector in town will be an absolute dereliction of duty on your part.
What’s our duty? To know who the best provider is and to make sure we convey that to the client. If I referred a relative of mine to an agent and they knowingly gave them the name of an inspection company that they knew wasn’t the absolute best inspection company in town that offers the best protections for their clients, they would lose my referrals forever. What else are they giving bad advice on? Are they more concerned about their own liability or ensuring their clients are taken care of? That’s not a distinction nor a sacrifice I will ever make- I work hard for my clients every day and will stick my neck out unapologetically.
Actual Liability Concerns
Why do agents get sued over inspection issues? What are the real issues that come up?
More than anything, this boils down to expectations. Many inspectors in the marketplace still have a business model from 30 years ago with a 2/10 warranty. The 2/10 warranty is simple: They guarantee the results of their inspection until 2 seconds after the inspection or when they are 10 feet off the property, whichever comes soonest. Agents who refer these inspectors are more often dealing with uninsured inspectors. They’re dealing with inspectors that guarantee nothing for their clients.
Here’s what your clients believe, regardless of what you tell them:
An inspector was here yesterday, last week, last month, or 60 days ago. He said everything was fine and the faucet is leaking. He should be responsible for this.
This is one of thousands of possibilities, but you get the idea. When these things happen, you better have an inspector with policies in place to pay for these problems or you will have a disappointed client, a problem getting referrals, or worse yet a lawsuit when the issue is something big like a sewer line collapse. Sure, hidden and new issues aren’t your fault or the inspectors, but that doesn’t matter to the client. They have an expectation that the house they move into is the one they read about in the listing, toured with you, and have well documented in an inspection report. It’s not really unreasonable if you put yourself in their position and imagine yourself to have virtually zero knowledge about the real estate transaction.
Here’s how to avoid actual liability:
- Always use an inspector that checks for recalls using RecallChek.
- Always use an inspector that utilizes SewerGard to cover underground lines.
- Always use an inspector with a 90 Day Warranty.
- Always use an inspector with 5 years of Roof Leak Protection.
- Always use an inspector that is insured with negligent referral protection for the agent.
Most of you are pretty aware of items 1-4 on the list, and all the top companies in the country utilize them so they are available wherever you practice real estate. #5 may be a new one for you- but one you should know all about. Ask your inspector if his E & O coverage includes negligent referral protection for the referring agent. It comes free with most all policies now, so it doesn’t cost the inspector a dime and it makes any inspection issue literally a zero dollar out of pocket legal issue for an agent and broker.
For home inspection it is always a good idea to send your clients to the most utilized online Guide to the Home Inspection at http://www.inspectionguide.net and probably not a bad idea to read the guide yourself.
There’s other things that happen occasionally outside of inspection of course, and for those we suggest the Disclosure forms from RWS. Even if you don’t utilize an inspector that offers protections from the items listed above like sewer line collapses and mechanical/structural failures, simply disclosing to your clients that these coverages exist will not only reduce your liability in a very real way, RWS will actually pay $5000 of any E & O claim from participating offices in the disclosure form system. Check out details on that program here, which is launching in offices all across the country rapidly: http://nathan.tv/#!ZeroDeductibleForBrokers