Disclosure of termite inspection reports: a compliance wake-up call for real estate licensees
Updated: Aug 7
By Summer Goralik
While the disclosure of structural pest control reports, also known as “termite inspection” reports, by licensees to purchasers of real property is an old staple on the regulatory radar of the California Department of Real Estate (DRE), this area of compliance is not typically gleaned as a hot enforcement topic among agents and brokers. Recently though, I encountered a situation that is not only worthy of an article, but should motivate licensees about the utmost importance of understanding and strictly complying with all of the DRE’s requirements covering termite inspection reports. Put another way, a compliance wake-up call for one brokerage or agent can fortunately serve as a valuable learning lesson for other real estate licensees in the industry.
Admittedly, the purpose of this piece is threefold: to remind licensees about the DRE’s rules involving the disclosure of termite inspection reports; to highlight some thoughtful considerations for agents and brokers when it comes to the handling and delivery of termite inspection reports to the parties of a sale; and finally, to warn responsible brokers who oversee agents about the necessary supervision and controls required.
First things first, let’s discuss what is actually required of California real estate licensees. Pursuant to Commissioner’s Regulation (Regulation) 2905 enforced by the DRE, “In a real estate transaction subject to the provisions of Section 1099 of the Civil Code, the real estate broker acting as agent for the seller in the transaction shall effect delivery of the inspection report, certification and the notice of work completed, if any, to the buyer in accordance with said section.”
The Regulation further states that “if more than one real estate broker licensee is acting as an agent of the seller in the transaction, the broker who has obtained the offer made by the buyer shall effect delivery of the required documents to the buyer unless the seller has given written directions to another real estate broker licensee acting as agent of the seller in the transaction to effect delivery.”
With regard to “responsible brokers,” the Regulation requires that the broker maintain a record of the action taken to effect compliance with this requirement, which is of course part of the broker’s statutory duty to ensure that all records obtain or executed in the course of licensed activity are retained.
It should be noted that unlike the Real Estate Transfer Disclosure Statement or Natural Hazard Disclosure, which are required by State law, a “structural pest control report” is not a mandatory disclosure. But, if and when a termite inspection report (e.g., inspection, re-inspection, supplemental, certification and notice of work completed) in connection with a property exists and/or has been ordered, then the broker and/or agent should be aware of their duties to disclose said report(s) to the buyer of real property.
While I believe most real estate licensees are generally aware of these basic requirements, because after all, this issue is part of a larger discussion regarding disclosure and an agent’s duty to disclose all facts materially affecting the value or desirability of real property, let’s hone in on some fundamental details that agents and brokers should consider when handling termite inspection reports.
The following are some important elements that real estate licensees would be prudent to consider when handling and delivering termite inspection reports to the parties of a sale, which essentially aim to help agents and brokers avoid transactional issues, non-compliance and potential complaints filed with, and investigated by, the DRE.
Disclose material information – no exceptions
While I do not want to cut any corners here, the focus of this piece is to highlight disclosure obligations bestowed upon an agent, representing the seller, who is aware of material information, namely, a termite inspection report, and their duty to disclose that information to the buyer’s agent or buyer. Specifically, lets concentrate on the moment before a contract has been entered into between the parties, and the responsibility of the agent representing the seller who learns, or is in receipt of, a termite inspection report covering the subject property. This report may represent an inspection that took place before the property was listed for sale, or perhaps was ordered in connection with the listing. Either way, under these circumstances, the seller’s agent will have a duty to disclose and deliver this termite inspection report to the buyer.
To make matters more interesting, what if a seller has two termite inspection reports in their possession, issued by two different companies, and one inspection report reflects more or less damage than the other? The requirements don’t change here; any and all termite inspection reports need to be disclosed. In other words, the agent, or seller, does not get to pick and choose which termite inspection report will be disclosed to the buyer.
Conversely, when an agent representing a seller has material knowledge about a “second” termite inspection report, but fails to disclose it to the buyer, this frequently leads to the filing of a complaint with the DRE. In those cases, it is not uncommon for that undisclosed “second” termite inspection report to reveal more significant termite damage to the property than the termite inspection report that was disclosed to the buyer (and likely not by coincidence). More to come on this subject later.
The punchline on disclosure should be loud and clear: a real estate licensee must disclose all material information, which in this instance would mean all termite inspection reports, to the buyer.
Delivery of termite inspection report(s)
Another important aspect embedded in this area of compliance is how an agent delivers such reports to the buyer’s agent or buyer. This should be a thoughtful process, as opposed to haphazard or rushed. Meaning, as an agent representing the seller, when delivering material information regarding a property, as part of their duty to disclose all material information and facts, then they must make sure they handle and deliver this information with care. In other words, without proper delivery and written evidence or confirmation of receipt, it might be alleged that it never happened.
Nowadays, most agents deliver all documents, including material ones, to the parties of a real estate transaction by email. While this is generally fine and usually preferred, as it affords them the ability to have an automatic copy of what was sent, they must still ensure that the paper trail is clear and provides adequate proof of the actions that were taken.
Remember, everything a licensee does or says in the course of licensed real estate activity is, or will be, reviewed or evaluated by someone, whether it’s their client, the government, or the public. So, as I said before, take care in how material information is delivered to the parties. What a licensee says today, might be investigated a year later, and they will need to be able to clearly speak to the matter, explain information in detail and include supporting evidence.
Perhaps more important than the delivery of information, is the confirmation of receipt, which will be discussed below.
Obtain written receipt
As an agent delivering a termite inspection report (or any property report) to the buyer, especially in the case of multiple reports issued by different companies, it is imperative that their receipt of any and all reports be documented in writing. Without clear evidence of receipt, you have missed a crucial step. The reality is, a licensee’s failure to document receipt of material information not only puts their client at risk, but their real estate license too.
But let’s dig deeper on this one as the details actually matter. Because I used to work in the escrow industry, I know first-hand that a lot of buyers will be asked to only sign the first page of a termite inspection report, to signify that they received the entire subject report. Honestly, I did not like that practice then, back in the early 2000s, so as you might suspect, I am still not a fan of that practice now.
In my opinion, if an agent seeks the signature of a buyer on the physical termite inspection report, as written acknowledgment of their receipt, then they need to obtain their signature on each page of the report. Or, yet another way to evidence receipt, would be to have the buyer sign an acknowledgement or detailed receipt which clearly identifies the name of the termite company who issued the report, the date of the report, the type of the report issued, and the number of pages that the report contains.
Of course, I am well aware that brokers have policies (or at least I hope that most do) which specifically instruct agents on how to effect compliance in this area. The last thing that I want to do is interfere with that policy or instruction. Conversely, my point is simple: if a licensee doesn’t unequivocally obtain written receipt from the buyer evidencing delivery of a particular report, then it could come back to haunt them.
A responsible broker operating under the DRE’s jurisdiction must ensure regulatory compliance by their brokerage and agents. Part of that job, which can be exhausting at times, is to make sure that their agents are well-trained regarding what is required of them when transacting with principals and clients in connection with the purchase or sale of real property.
In the case of termite inspection reports, it is absolutely tantamount to have policy and procedures in place, as well as training programs covering those policies, that educate and instruct agents to not only deliver and disclose all material information and reports to the buyer, and obtain their acknowledgment of all reports, but to make sure that this evidence is properly captured by the agent in writing and delivered to the broker.
In turn, when all documents are delivered to the broker, it is up to the responsible broker to ensure that their files are complete and in compliance before the closing of the sale, and that all transaction documents are retained in accordance with the Real Estate Law. If delivery of all material information and written receipt are sustained, and the paper trail clearly documents that process, then the agent and broker’s fulfilment of their statutory duties are memorialized.
The truth is, a broker and agent must work together. Regulatory compliance and success are the result of their concerted actions. Namely, the broker must make reasonable efforts to ensure that their agents are knowledgeable about the DRE’s requirements, their duties as an agent, and the broker’s policy covering the delivery and receipt of property reports. On the other hand, the agent needs to fulfill their end of the bargain by disclosing all material information as required, documenting proof of delivery and receipt, and submitting all transaction records to their broker.
It should be noted that even when an agent has made a mistake, some brokers, who have an effective and efficient system of supervision in place, may be able to catch the inadvertent error committed by their licensees, and correct or remedy the issue before any harm or risk is incurred. While I wish I could say I have witnessed more examples of that scenario, that is not the case. More commonly, it’s when policy and procedures are ignored by the agent, and/or not properly enforced by the responsible broker, and the process breaks down, that regulatory issues develop.
When it comes to real estate compliance, sometimes it takes a real-life enforcement story to drive the issue home in order to change minds or better yet, practices. I was recently involved in a case assisting a brokerage and their agent with an Accusation filed by the DRE. The alleged violations were the failure to deliver all termite inspection reports to a buyer, or more crudely put, the engagement in acts constituting misrepresentation, omission or concealment of materials facts, and essentially, dishonest dealing. Additionally, the designated officer of the brokerage was accused of lack of supervision.
Without going into all of the details, the crux of the case was that the agent, who represented the seller, was aware of and possessed two termite inspection reports, issued by two different companies. One report appeared to contain more extensive findings regarding termite damage than the other, and it was precisely this particular report that was not disclosed to and/or received by the buyer, or at least that was the allegation.
In this case, the agent emailed several documents and reports to the buyer’s agent, and claims that both termite inspection reports were attached to that email. It was later discovered that the agent was wrong, and that the “second” termite inspection report was not actually delivered to the buyer by email. Although the agent claimed that this second termite inspection report was also delivered in person to the buyer, there was no written evidence to support that claim. Needless to say, the buyer later experienced issues with the property and ended up filing a complaint with the Structural Pest Control Board. Through that investigation, the buyer learned of the second termite inspection report. Eventually, the buyer filed a complaint with the DRE.
As it turns out, the second termite inspection report was not delivered to the broker or uploaded into their transaction management software along with the other file documents. Therefore, the broker was only aware of one termite inspection report. It should be noted that, in this case, there was evidence that the brokerage and its designated officer performed reasonable supervision over the firm, its agents and their licensed activities. In addition to the establishment and enforcement of exemplar policy and procedures, as well as the employment of licensed file checkers to review all transaction files for compliance before closing, the broker also had training programs in place to educate agents about disclosure, transaction compliance, and DRE requirements.
Notwithstanding, the agent’s error, whether it was inadvertent or not, resulted in the formal filing of an Accusation by the DRE, with the brokerage, its designated officer, and additional licensed broker officers also named as Respondents. Hence, all parties’ were accused of wrongdoing and subject to potential discipline by the DRE.
Fast forward to the end, the real estate licensees were actually successful in their defense against the DRE’s Accusation, which I would argue is not a typical conclusion of a "failure to disclose" case. Keep in mind that this is my "drive through" version of the story and there were other facts, witnesses and circumstances which played a part in the resolution. More importantly, it should be pointed out that this result was only after an investigation was conducted, significant legal expenses were incurred, and an administrative hearing was held.
The real takeaways
Truthfully though, the core message to agents is that this whole ordeal could have been easily avoided. If the agent had properly ensured that all termite inspection reports were provided to the buyer and obtained a clear written receipt evidencing that both termite inspection reports were received by the buyer, then there would be no tale to tell here; no DRE complaint; no investigation and no legal proceeding.
The other part of the message speaks directly to responsible brokers: Broker supervision is critical. Without it, the firm, the responsible broker and agents are all at risk. To “say” that a responsible broker reasonably supervises their agents has no value. The real proof is the actual system of supervision in place. To that end, a responsible broker must be able to provide evidence to the DRE that they have appropriate supervisory controls in conjunction with established policy and procedures in all areas of requisite compliance.
With respect to the disclosure of termite inspection reports, and a situation like the one described in this piece, a responsible broker who is investigated by the DRE is tasked with the following: They must point the DRE to the policy and procedure that requires agents to disclose all material information to their principals and clients; to submit all documents to the broker; to make sure all reports have been delivered to the parties and that the buyer’s written receipt of all reports has been obtained; and to report to the broker when there are any disclosure, legal or compliance issues or questions, or when an agent is unable to effect compliance in this area.
Furthermore, a broker must illustrate to the DRE how and when transaction documents and files are reviewed for compliance, as well as who is responsible for this review and the procedure or system by which this process is monitored and supervised. Lastly, the broker would be wise to have some kind of training program or other method in place which educates agents about the broker’s requirements and how to satisfy them.
Moreover, returning again to my earlier message, when it comes to regulatory compliance, the broker and agent must work together. Each relies on the other to do their job, and to do it right. Without this partnership, there is potential risk.
When it comes to the disclosure of termite inspection reports, any property reports, and/or material information, agents should think twice before sending a text message or simply pressing “send” on a quick email containing a pertinent attachment. Handle material information carefully, ensure delivery of all documents and disclosure to the rightful parties, and obtain written receipt. Or, stated a bit differently, the execution of an agent’s statutory duties must be performed with extreme care and diligence.
If responsible brokers are reading this article, hopefully it’s incredibly obvious how integral their roles are to the regulatory success of their agents, transactions and firms, and how their personal licenses are undoubtedly on the hook when things go wrong.
Again, while the disclosure of termite inspection reports, or any material information, is a seemingly simple and straightforward task, let this article serve as “Exhibit A” on how the failure of an agent to correctly perform this function puts everyone at risk and may subject the brokerage to the full gamut of regulatory scrutiny.
NOTE: Any opinions, suggestions or recommendations contained in this article are based on Summer Goralik's experience working for, and knowledge of the laws enforced by, the Department of Real Estate, and must not be considered legal advice. Please consult with a licensed real estate attorney for legal support or assistance.
About the Author
Summer Goralik is a Real Estate Compliance Consultant and licensed Real Estate Broker (#02022805). Summer offers real estate brokers a variety of consulting services including assistance with California Department of Real Estate investigations and audit preparation, mock audits, brokerage compliance guidance, advertising review, and training. She helps licensees evaluate their regulatory compliance and correct any non-compliant activities. Summer has an extensive background in real estate which includes private sector, regulatory and law enforcement experience. Prior to opening her consulting business in 2016, she worked for the Orange County District Attorney's Office as a Civilian Economic Crimes Investigator in their Real Estate Fraud Unit. Before that, Summer was employed as a Special Investigator for the DRE for six years. Among many achievements, she wrote several articles for the DRE, four of which were co-authored with former Real Estate Commissioner Wayne Bell. Prior to her career in government and law enforcement, Summer also worked in the escrow industry for nearly five years. For more information about Summer's background and services, please visit her website, www.expertdrecompliance.com