Mark Maxwell – Senior Advisor
Conflict of Interest
“FOUL” the Seller declares, when defects are discovered during the Termite Inspection. “How can your opinion be fair when you quote prices to fix the problems you say are there?” This is a fair question to ask! How can an opinion be unbiased if a company makes money “correcting” the problems they have reported? The conflict of interest perception does not actually play itself out in the real world as some would expect. Very rarely will a Termite Report find more findings than is required by law (yes, State Law specifically dictates required findings and corrections). In most cases, many required findings are overlooked or are intentionally ignored. Let me explain…
Since the Great Depression and the advent of Federally guaranteed mortgages, the mortgage industry has developed policies to protect their investments. One of these policies was a requirement to have all wood destroying pests eliminated prior to funding. As a result, a common practice developed in the Real Estate industry regarding the condition of the property being offered for sale. Knowing that to be able to sell your home to a buyer who was obtaining a residential mortgage, Sellers and the Real Estate industry adopted the practice of the Seller assuming responsibility for providing a Termite Clearance to the Buyer. In the early years of this practice, Termite Companies would be contacted to inspect and quote prices to eliminate the termite problems found. Some companies would also offer to complete structural repairs that were needed. The policies would vary from Company to Company. The Real Estate industry became dependant on these reports and prices quoted as a convenient tool in providing the Termite Clearance needed to fulfill the contract. The policy inconsistencies among Termite Companies caused frustrations in the Real Estate industry and lead to State Law set forth in the Structural Pest Control Act, 160 pages of State Law for our industry. These Laws were administered by the Structural Pest Control Board, a division of Consumer Affairs. The “Act” standardized the report format, required findings, methods of correction and required specific verbiage for “Certification.”
Here is where the Conflict of Interest was cemented. Because of the desire of the Real Estate industry to have prices listed in these Termite Reports, it became State Law that prices for each recommended correction should be listed in the report. Here is the relevant section of the Business and Professions Code;
Section 8516 (b) (13) “An estimate or bid for repairs shall be given separately allocating the costs to perform each and every recommendation for corrective measures as specified in subdivision (c) with the original inspection report if the person who ordered the original inspection report so requests, and if the registered company is regularly in the business of performing corrective measures.”
So here is the REAL CONFLICT. All businesses live and die by how they please their clients. A Termite Company’s primary client is the Seller and/or the Realtor who advises the client of their preferred vendor(s). An unhappy Seller does not bode well for their Realtor’s reputation and future referrals. The more thorough and accurate a termite inspector becomes, will in general, cost the Seller more money. You can see where the better inspectors can become less popular with Sellers of Real Estate and preferred by Buyers of Real Estate. So here is the conflict, the Termite Inspection process is generally directed by the Seller of the property or their Realtor. Termite Companies that “cause trouble” are less likely to be called for their services. Sellers often see the “termite guy” as someone who is in a position to extort money from them. This dynamic tends to drive down the quality the inspection with the pressure to “not find too much.” This is the real conflict of interest.
I have been actively involved in the Termite and Pest Control industry since 1979 and have become fully convinced of this phenomenon. This is even more apparent in the Los Angeles area where I worked from 1982 to 1988. Optimistic inspections through rose colored glasses were common. I think most Termite Companies in California want to do a good job but succumb to the pressure in varying degrees. Since the mid 1980’s, buyers have found some protection from this conflict by hiring an experienced Home Inspector. These inspectors have enforced some accountability from the Seller’s “termite guy” by reporting their omissions at least in concerns of structural damages. The problem for a Home Inspector is that they are not licensed to render identification of Wood Destroying Pests, so they walk a fine line in such disclosures. My advice to a buyer or seller is to hire a Termite Company with a solid reputation for honesty and you will minimize unnecessary headaches.