Avoiding Litigation: The Cost of Inspections

By Keith Swift, PhD
InterNACHI member/InterNACHI Report Writing Consultant
President, Porter Valley Software

Litigation is costing the real estate industry millions of dollars every year, and that cost is increasing. The good old days when deals were cinched with a handshake are gone, and have been since the early sixties when real estate agents began to be sued as though they were vagrants selling snake oil. Defenseless, and unable to attest to the conditions of the properties they were selling, they wisely began to advise their clients to seek the evaluation of specialists. Contractors saw a new market for their services and began advertising themselves as inspectors, and an industry was born. Many others followed, some less qualified, but all equally eager to meet a growing demand. The inspection industry flourished, virtually unregulated. Organizations were formed and services became somewhat more standardized and thereby informally regulated, but despite this litigation continued to increase. The only difference was that inspectors began to be sued along with the agents, as attorneys gathered like vultures.

Faced with lawsuits, many inspectors simply faded away, and agents and inspectors came to regard each other as adversaries. And that, unfortunately, has characterized their relationship ever since, and prevents them from uniting against the threat of litigation. The agents regrouped and, in an effort to further limit their own liability, formulated lists of “approved” inspectors, who were somehow deemed worthy because they happened to have errors and omissions insurance and belonged to an organization of inspectors. In turn, the inspectors closed ranks, compared war stories, and devised spurious new contracts with mind-numbing legal jargon designed to also limit their liability, but all to no avail. Litigation continued to increase, along with the number of inspectors with deep pockets. If all litigation was fair and reasonable, or even if most of it was, there would be no cause for alarm, but it’s not. Innocent agents and inspectors alike are being sued every day, and cases are being settled that make a mockery of justice, while more and more attorneys flock to the scene with their beaks agape. Meanwhile, despite attempts by various organizations to create a professional image for inspectors, the public learns mostly from what they see on national television, and it has not been good.

Inspectors and real estate agents don’t enjoy a very positive image. Agents have long been stereotyped as being dishonest, and are ranked on a par with used-car salesmen in national surveys, but most of what the public has recently come to learn about inspectors has been from exposes of grossly incompetent ones that were paraded on national television in primetime. Of course, the exposes were carefully edited to be more entertaining than educational, which is characteristic of the liberal media. But we shouldn’t pretend that these negative stereotypes are unfounded. Some agents are corrupt, and others are simply foolish, and whereas some inspectors are merely incompetent others are truly negligent. But let’s talk about the real cost of inspections.

Geologists and structural engineers typically charge six to eight hundred dollars for a verbal report, and approximately double that for a written one. Inspectors rarely charge anywhere near that, and yet their responsibilities are far greater, and in some states their liability can extend for as long as four years. The reasons for this glaring disparity are obviously difficult to explain. Most inspectors consider geologists and engineers to be professionals, and even though their own services entail far greater responsibilities they don’t seem to regard themselves as such, or if they did you’d think they’d demand similar fees. By contrast, realtors do regard themselves as professionals, and have indirectly contributed to the negative stereotype of inspectors because, in spite of the fact that they receive a percentage of the sale’s price of a residence, they expect inspectors to charge a pittance based on its square foot size and not on its value. Similarly, they commonly shop for discounted fees, and make it clear that they are not willing to read substantial reports, and typically brand inspectors that provide them as deal-killers. What they want to see are five to six-page reports with check boxes and chicken scratches from inspectors who are “realtor friendly,” and we all know what that means. But let’s just say what it means. It means that there are thousands of inspectors doing two or three inspections a day for a mere pittance, leaving themselves in legal jeopardy, and denigrating the professional image of inspectors everywhere, while pandering to thousands of real estate agents, many of whom don’t give a damn about anything but closing their deals!

Yet, in spite of rampant litigation and escalating insurance premiums, most inspectors regard any suggestion to restructure fees as price fixing!  I’m not prepared to suggest a fee schedule but, if I did, it would certainly take into account that clients are not paying inspectors for what they do but for what they know. It would also take into account the value of a property, the duration of an inspector’s liability for it, the rising cost of their insurance, and the likelihood of their being sued, or dragged into lawsuits. So what is the true cost of an inspection? You might want to ask an attorney, but it’s stipulated in almost every summons and complaint, and typically reads something like this: “To be determined at the time of the trial.” Money is the counter by which culture is distributed.   

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