RPA Termite Advice

Why "Termite" was removed from the RPA

After the recent housing market crash and flood of foreclosed properties, it soon became apparent that the long standing practice of including the terms of termite inspection into the Purchase Agreement was creating problems for Buyers. These foreclosed properties were being sold at deep discounts, but sold "As-Is" by the Banks. Buyers who were depending on a residential loan could not move forward when the Termite Report disclosed that the structure had wood destroying pest problems. A buyer could not even legally go on to the property and correct these conditions without creating a liability risk to the Bank. Catch 22: You could not obtain a loan without a Termite Clearance but there was no legal way to correct the reported conditions. The answer was to remove all language that predetermined that a Termite Report would be obtained and remove all language that determined responsibility for the Recommended Corrections. This lead to the new Residential Purchase Agreement adopted November of 2014. With the language removed, the buyer now has the option to NOT obtain a Termite Report and thereby not have knowledge of a report to disclose to their lender.

Now there are TWO options

Option One is to obtain a Termite Report. The advice from CAR legal counsel is to "Get a termite report when you take a listing" and we agree with this advice. It is always better to enter into an agreement with knowledge. Or, parties involved may choose to obtain a Termite Report when an offer has been made on a listing. In either case, the report should be disclosed to all parties with an interest in the Real Estate transaction. This would normally include the buyer, seller, agents and lender.

Option Two is to NOT obtain a Termite Report. If there is no contractual agreement to obtain a termite report and the lender does not require one, a buyer may now be able to obtain a loan on a foreclosed property without the Termite provision.

Including the Termite Report

For those agents who prefer to continue to include the Termite Report in the escrow process, you must check the box in paragraph 7.A.(2) or 7.A.(3) and specify a Termite Report. This paragraph clearly specifies that "it does not determine who is to pay for any work recommended or identified in the Report," only who is paying for the Report. This process will most likely trigger disclosure of the report to all parties of the transaction, including the Lender. Apart from agreements between the Seller and the Buyer regarding recommended corrections, the Lender may require other recommended work be completed before they will fund the loan.
Much of the previous RPA termite verbiage, related to the Termite Inspection, has been incorporated into paragraph 12.A.(ii) of the 2014 revision. Most of the previous RPA termite verbiage, related to the Termite Report corrections, has been incorporated into the "Request for Repairs" form RR paragraph 1.(b).
The one thing now missing is the clarity of Inaccessible Areas and Further Inspection Recommended. All Termite Reports are limited by portions of the structure which are not accessible for visual inspection. Often, Termite Reports will recommend Further Inspection for a variety of reasons. If you still have access to the previous RR form, review the verbiage regarding inaccessible areas. The previous RR form did a good job of clarifying the responsibilities. Further Inspection may involve partially dismantling portions of the structure to expose concealed areas. The only statement we could find that addressed Further Inspection is found in paragraph 12.A.(vii) of the RPA. This provision allows the Buyer to perform "minimally invasive" investigations without the Seller's prior written consent. The buyer must also repair any damage arising from buyer investigations as noted in paragraph 12.D.(ii). Minimal or not, we recommend that the Buyer obtain the Seller's consent prior to performing invasive investigation.

Excluding the Termite Report

The Termite Report has been excluded from the Residential Purchase Agreement verbiage as noted above. The current RPA-CA 2014 is an "AS-IS" contract. However, emphasis has been place upon the Buyer's responsibility to investigate the condition of the property. The intention was not to include a Termite Report in the negotiations, but then "exclude the Termite Report from the Lender's view". This "Option THREE" is problematic as it is likely to show up in the Transfer Disclosure Statement (TDS), Seller Property Questionnaire (SPQ), Request for Repairs (RR) or even contractor invoices submitted to Escrow. Many Underwriters go through these documents with a fine tooth comb.

Option THREE?

Some have misunderstood the purpose of the RPA changes for the 2014 contract. There are some who believe that, even if a Termite Report is obtained, you are now no longer required to provide disclosure of the termite report to the lender. Non disclosure of a material fact to a party that has financial interest in the property may expose parties involved to legal liability. The purpose of the new RPA was not to facilitate non disclosure, but to allow for the option to not obtain a report that would otherwise hinder the purchase of a bank owned property. If there is no knowledge of termite related problems, there is nothing to disclose. Kind of a "don't ask - don't tell" approach. This leaves the investigation of the condition of property fully within the lender's realm of responsibility. The Real Estate industry is no longer bound to such investigation under the new Purchase Agreement and is no longer providing a Termite Report automatically. The lender must now depend on the Appraiser's investigation to disclose defects that may affect the value of the property. Keep in mind, even though a buyer opted to not obtain a Termite Report, an Appraiser may recommend a Termite Report be obtained when they see visible pest problems.
Non disclosure of the Termite Report and corrective work may lead to future liability. It appears that the main focus of most lenders today is the Buyer's ability to pay the loan, so the existence of a Termite Report does not appear to be their focus in this current upward market trend. However, it would be wise to use caution. Non disclosure may include you in a larger pool of future liability when the market turns downward again. Public records of a termite report are easily accessible through the Structural Pest Control Board WDO search page for anyone who decides to do their homework. Upon formal request, the Structural Pest Control Board will instruct all Pest Control Operators, who have documented activity on a designated property, to send you a copy of the WDO documents they have generated within the last 2 years.