This article was first published in the second-quarter 2015 edition of Personal Finance magazine.
You decide that your home is too small for your growing family and start looking at houses in your spare time. Suddenly, idle curiosity turns into serious intent: you see a house that looks in good condition and has everything you need, at what seems to be a good price. You have another look around and, eager not to miss this chance, you have your bond application approved and submit your offer in record time. When it is accepted, you rush to put your present home on the market, and it is quickly sold.
Transfer takes place in under three months if all goes smoothly, and when all is said and done, hundreds of thousands – possibly millions – of rands have changed hands. Tens of thousands of rands have been paid to estate agents and attorneys; as much again has been paid to the government in transfer duty. In some circumstances, you’ll face a capital gains tax bill on the appreciation in value of the house you sold. Then there are the costs of moving …
Even if you relocate to the next road or suburb, moving is a major investment in your future lifestyle. Buying a property is the biggest financial commitment most of us make – at least until we move to a bigger and better home. Yet there is no equivalent of the test drive, roadworthy or Automobile Association assessment in most home purchases.
Most South Africans buy homes on looks alone, in a rush of adrenalin, and do so despite the ominous term “voetstoots” (meaning that the property is sold as is) in every offer to purchase. This is the word that protects the seller against claims related to faults discovered after the offer to purchase has been signed.
Duty to disclose
There is a misconception that the Consumer Protection Act (CPA) has dispensed with the voetstoots clause, but this is not so. The CPA does not apply to any property transaction in which the seller is not in the business of selling property – for example, when you sell your home.
However, the voetstoots clause does have its limitations. Sellers are protected if the buyer fails to notice visible faults because of a hasty or careless inspection. Sellers are not protected if they fail to disclose faults of which they are aware, but that are not visible to the buyer in a reasonable visual inspection – such as a leaking roof that is not apparent during the dry season, an underground drainage problem, or damp in an area to which there is no access.
Estate agents also have a duty of disclosure, because they are suppliers acting in the ordinary course of their business when they assist sellers. Non-disclosure on their part may amount to “deceiving or misleading a consumer”, which is prohibited by the CPA and carries a penalty of up to R1 million or 10 percent of turnover for the estate agency, says Trudie Broekmann, an attorney who specialises in consumer and commercial law.
Of course, the reality is that, even where the buyer does have good reason to believe a defect was deliberately hidden by the seller, the onus is on him or her to prove non-disclosure, and that can be a real problem. The only recourse is to the courts, and few people can spare the time or money for that process in the interests of fixing a defect. So in the vast majority of cases, voetstoots does mean that the buyer has no realistic prospect of claiming against the seller for anything that is not covered by the terms of the offer to purchase.
However, explains Broekmann, “where a purchaser buys from a developer, career renovator or other seller who is acting in the course of a business, the voetstoots clause is not allowed, and the seller should incorporate a defects list into the deed of sale (usually called the offer to purchase). Then, if a defect rears its head that is not disclosed on the list, the purchaser can claim from the seller to repair the defect and any damages it has caused.”
Her advice to these sellers when drawing up the defects list, as well as to home-buyers who are subject to the voetstoots clause, is to protect themselves by making use of home inspection services.
“This applies to newly built properties, as much as to second-hand ones. Sellers’ defects lists should cover patent (visible/obvious) defects, as well as all the possible latent (invisible/unknown) defects that may appear in time in the property, such as damp, land subsidence, cracks, and so on. Specialist home inspection services are ideal for sellers who want to get this list right,” Broekmann says.
The case for inspections
So, given the risk, why do South Africans traditionally buy homes without subjecting them to the level of expert scrutiny they probably insist on when buying a second-hand car? Rightly or wrongly, estate agents rank with used-car salesmen in their reputation for sexing up reality, so why hasn’t scepticism translated into self-protection?
Home inspection services have existed in South Africa for about 30 years, but, unless you have had very good reason to doubt the integrity of a building, or you have experienced the home-buying process in another country, it has probably never occurred to you to use one.
Inspections are not required by banks and are very rarely recommended by estate agents, and, because buyers take their lead from both, it is hardly surprising that close and independent examination of properties has never caught on. If they want a second opinion, buyers might call in a relative or friend with some experience in the building or property industry.
That this is less than adequate, considering the risk involved, is confirmed by veteran Durban-based home inspector Eric Bell, a former builder himself and founder of a national franchise called Inspect-A-Home.
Bell paints a grim picture of the quality of building in South Africa that should ring alarm bells for anyone contemplating buying property, new or second-hand. New homes are monitored by the National Home Builders Registration Council (NHBRC), but Bell says 40 percent of his business is inspecting new buildings, and problems are rife.
“Standards of building are at an all-time low. Builders, plasterers and carpenters used to be skilled tradesmen; now there is none of that. People play at these trades and profess to know what they’re doing, but they don’t, or they cut corners. For example, walls are supposed to be wet before you plaster them, and if this simple step is missed, the plaster is brittle and crumbly.
“This can happen in any house, even a multi-million-rand one. In a recent audit of a housing development, every house was leaking, because the drainage around the doors and windows channelled the water into the house, instead of away from it, the gutters were falling off and roof tiles were loose.”
Like Bell, most inspectors are former builders or skilled tradesmen who recognise a gap in the market. If they join an Inspect-A-Home franchise, they undergo intensive training with Bell for a week, and for three months they are required to submit their reports and photographic records to Bell for approval before delivering them to clients.
Reports are usually between six and 10 pages long, based on a visual, non-invasive inspection that usually takes between two and four hours, he says.
“We start at the driveway gates, then look at the boundary walls, outbuildings, garages and exterior plumbing. Then we climb onto the roof. Once we’ve done the outside, we go through the front door and inspect the interior, room by room, including the inside of the roof cavity. After this, homeowners can be confident that no other defects will emerge for the next three to five years, at least. In all our years of operating as a franchise, we have never had a comeback,” Bell says.
Reports are custom-made, rather than produced to a standard format, and do not include a valuation of the property, he says.
“We’ll say what needs to be done and how it can be done without costing a fortune. But we don’t recommend people to do the work, although people often ask us to. That could result in a conflict of interest, and anyone I found recommending a contractor would be fired immediately. They could not be impartial,” Bell says.
Home inspectors take a property as they find it and inspect it in relation to building regulations; they do not undertake the time-consuming (and in some cases impossible) task of checking that it conforms to building plans or that extensions or outbuildings are legal. In the United Kingdom and the United States, this is a matter for the buyer’s attorney as part of the standard research that is done on every property. In South Africa, it is up to the buyer to initiate such investigations through the estate agent.
According to the standards published by the US-based International Association of Certified Home Inspectors (interNACHI, which operates in 40 countries, including South Africa), an inspector is “not required to research the history of the property, or ... determine the age of construction or installation of any system, structure or component of a building, or differentiate between original construction and subsequent additions, improvements, renovations or replacements”.
Mortgage bond inspection
Many consumers mistakenly believe that the inspection the bank carries out when it is considering your application for a mortgage bond is all the confirmation they need that a property is a good buy.
On the contrary, as Steven Barker, the head of home loans at Standard Bank, explains: “The bank’s inspection looks at the general valuation of a property, focusing on comparable sales. We cannot go into the level of detail you get from a home inspection, so we don’t make it a condition of granting a loan. We like people who do good research on the properties they are buying, but we understand that there is a cost involved, and, in South Africa, it usually falls on the purchaser.
“People who buy more expensive homes do look at inspection services, but those who buy ordinary homes that change hands frequently don’t see the point of spending the extra money. If you are willing to pay, it is a worthwhile exercise for the extra protection it gives you. We do refer buyers to the inspectors we are aware of, but we don’t maintain a panel of inspectors, or anything like that.
“It is the choice and decision of each client, and it is up the client what he or she does with the information that comes out of the inspection.”
How others do things
In the UK and the US, where home inspections are a recognised part of the home buying and selling process, consumer protection regulation is much more developed and enforceable than it is in South Africa. Our CPA has scarcely been tested in the seven years since it came into force, whereas, for example, Britain’s Trading Standards Institute has been operating since 1881 and its Office of Fair Trading, which enforces consumer protection regulation and competition law, has been a force to be reckoned with since 1973.
When a home changes hands in the UK, for example, the buyer and the seller are represented separately by conveyancing attorneys, and the attorney acting for the buyer undertakes an exhaustive series of “searches” to find out all there is to know about the property, including any legal or environmental issues, such as the existence of a servitude on the property, or a history of flooding in the immediate area. And this takes place before there is any financial commitment by the buyer. Not even a deposit is paid before this process has been completed with results satisfactory to the buyer.
Given this culture of information-gathering, home inspections are a natural add-on, and many attorneys – and even estate agents – strongly advise their clients to commission one. Inspections are standardised at different levels of detail, marketed widely, regulated by august professional bodies such as the Royal Institution of Chartered Surveyors and are reasonably well understood by consumers.
However, the cost of inspections is a challenge even in relatively affluent Britain, and the industry has had to introduce pared-down, affordable inspection options to make sure people are not excluded by the price. One attempt to make commissioning an inspection report a legal requirement of marketing a home failed dramatically when sellers were discouraged by the extra cost and there was a noticeable drop in the number of houses being put on the market.
The cost squeeze
The cost factor is the biggest obstacle to greater take-up of home inspections in South Africa, too, according to Barker. Most inspectors quote about R3 000 for an inspection of a standard three-bedroomed home (see “Inspections who’s who and what you’ll pay”, below) and all provide a level of detail that not everyone wants or needs.
“We have got a very wide variety of property types in this country,” Barker says, and in some segments the industry is not as formal as it is in others – the title deed is always formal, of course, but the way the market operates is not. And home inspections are nowhere near as standardised as they are in the UK, in terms of the level of service, the level of detail in the report and the cost. You need to understand what you are asking for.
“With all the many different challenges we face, we have to be wary of driving up costs, with the consumer ending up carrying the burden. This would have a major impact on the industry and everyone involved in it. The banks would not be impacted as much as others in the value chain, such as estate agents, but nevertheless, we believe more cost and complexity is to be avoided,” Barker says.
Role of the estate agent
If the loan providers have no incentive to promote home inspections, estate agents have even less, because they risk losing the sale if the buyer is discouraged by defects revealed in an inspection report. Bell says it is not unusual to be asked by an estate agent to make the report “as nice as possible. Some inspectors say they don’t write deal-breaking reports … then what do the reports mean?
“When they heard of the CPA, to protect themselves, estate agents came up with a disclosure document that says ‘this is a true and honest assessment of the property as I know it’. The seller fills it in: roof leaks? No. Cracks? No. Geyser problem? No. And this is what is shown to the buyer,” Bell says.
“Recently, a buyer called us in and we found R400 000-worth of defects that had to be fixed … in a R1.8-million house. Although the seller is supposed to disclose defects, it is not that simple: a plumber might not have identified a geyser problem, for example. With the downturn in the economy, maintenance is not being done and, without maintenance, a R3 000 fault becomes a R20 000 repair.
“It doesn’t make sense that the CPA applies to cellphones, but doesn’t apply to the most expensive purchase you’ll ever make.”
Bell blames the single estate agent/single attorney system in South Africa for the low profile of home inspections. As he puts it: “The estate agent is the only person who has face-to-face interaction with the buyer and the seller, but he or she sells for a substantial commission, so there is a conflict of interest.”
In his experience, he says, “buyers can be very naïve and trusting. Every single house will have some form of defect; out of 100, five will have serious defects and 10 will have quite serious ones costing a reasonable amount of money to fix – R50 000 to R60 000.
“People buy the maximum they can afford, so when they later discover the roof is leaking, they don’t have spare money to fix it and can’t get the loan extended,” he says.
Broekmann echoes Bell’s concerns: “It is a pity that it is accepted practice for a single estate agent and single conveyancer to represent both the purchaser and the seller in a transaction, since this deters the estate agent from advising purchasers to make use of home inspection services, as they do not wish to delay or endanger the transaction.”
Estate agents, on the other hand, argue that the level of detail in the reports, including things such as dripping taps, cracked tiles and rusty towel rails, is overwhelming and off-putting for buyers making a very emotional commitment to a property.
The news that regulation was on the way that would regulate and promote pre-purchase inspections elicited some scathing website comments from estate agents. One accused home inspectors of “over-zealous” and “Bible-like” reporting to “justify their fee”. Another said he did not need “the extra hassle in my or the seller’s life – we’ve got enough with all the laws, regs we have to abide by”. Yet another pointed out that “the property is priced based on its condition and status. Beyond that, if someone needs a new house, he gets one built.” Which is to ignore the fact that he might be wise to have that inspected, too.
In the US, where the penetration of home inspections is as high as 95 percent according to interNACHI, estate agents are required to give every buyer and seller information about the value of home inspections. To avoid any conflict of interest, they may not recommend an inspector, or even provide a shortlist of inspectors; they may only give clients a full list of the services available.
A clause in most contracts makes purchase conditional on a satisfactory home inspection report, and home inspectors are regulated and licensed in many states (although not all). Massachusetts is generally acknowledged as the state with the most stringent rules, and there, home inspectors must be licensed by the government’s Board of Registration of Home Inspectors and must carry at least US$250 000 of professional indemnity insurance, so consumers can claim compensation for any losses they suffer as a result of an inspector’s error or negligence.
Reform of the system
Kenton Shepard, a Certified Master Inspector in the US and the director of international development for interNACHI, set up the South African branch as a website-based resource offering “courses and certification” (see “What interNACHI means for you”, below).
From long experience, he says it takes time for new industries to become regulated, and South Africa is following the usual pattern.
“Until problems arise, regulation is left to professional organisations and natural regulation by the market, meaning that those who are not qualified or who indulge in unethical behaviour do not remain in business,” he says.
“As the industry grows, so does the number of annual complaints. As complaints increase, so does governmental concern. Once a certain point is reached – and the criteria for determining that point vary with jurisdiction – the process of developing regulations begins. The quality of that process is important. A good understanding of the industry is necessary to keep regulations realistic and effective. Without expert advice from members of the industry, a few bad (unreasonable, conflicting, unenforceable) regulations have been passed in certain states of the US.”
The turning point seems to have arrived in South Africa. In November 2014, the chief executive of the Estate Agency Affairs Board (EAAB), Bryan Chaplog, announced in a television programme that legislation was being drafted that would bring home inspectors in from the cold and require estate agents to give buyers and sellers information about home inspections.
The legislation referred to is the Property Practitioners Bill, which is expected to create a new regulatory body to replace the EAAB, the Property Practitioners Regulatory Authority (PPRA). According to reports, home inspectors will become a category of property practitioner alongside estate agents, will be accredited by the PPRA and – presumably – subject to disciplinary measures for non-compliance with ethical and practice standards.
Chaplog would not confirm the reports and told Personal Finance it was too early to discuss the draft bill, but he and the EAAB’s technical legal analyst, Advocate Jan Tladi, have been consulting with industry experts. Bell has been helping, as has Max Lourens, a Stellenbosch-based attorney and urban developer who has been a home inspection activist for more than a decade. He has been a practising home inspector himself, and having been involved in construction, sales and conveyancing all his career, he knows property inside out.
Fifteen years go, as a director of the Jigsaw property group, which includes the ERA, Realty 1 and Aïda franchises, he got to know the problems of the group’s 3 000 estate agents, one of which was what to do about defects.
“The general feeling was ‘it’s not my problem’,” he says. “If they did know about a defect, they would have a dilemma: do I kill the deal, or keep quiet?”
At that time, Lourens says, the only agencies doing property inspections were the NHBRC, with its responsibility for the quality of new homes, and Inspect-A-Home. After working with the NHBRC and deciding that its inspection standards “left an awful lot to be desired”, he investigated, and found that there were no local standards, guidelines or formal courses in home inspection. His concern was so great that he has been on a mission ever since: he worked with Intec College to set up an NQF-level home inspection training course and then developed that into The Home Inspection Training Association, through which he offers online and classroom courses to property practitioners who want to improve their skills.
Since codes of ethics and practice are fundamental to the training, he spent time with the American Society of Home Inspectors and founded the South African version, Sashi, which gives members access to accreditation as Certified Master Inspectors. He even developed model legislation for the certification of home inspectors and sent it to the government and the EAAB. (It is available to anyone who is interested on the Sashi website, www.sashi.org.za.)
“It wasn’t my day job, so what took me 10 or 11 years to do, the EAAB can use to produce the legislation in 10 weeks. I have all the experience and training methods and will hand them over to whoever can use them,” Lourens says.
The warranty option
Buyers carry the financial risk and are regarded as having the most to gain from inspections, but Lourens believes that every seller should have an inspection done before putting a property on the market and that it should be mandatory. The price can be factored into the asking price, but, ultimately, the inspection report ensures that the selling price is pegged at the right level and prevents any unexpected glitches in the sale/transfer process. And it protects the seller from future claims by the buyer, who is given the full and frank situation from the start. It would, he says, make the market work much more efficiently.
Insurance company Hollard agrees – so much so, that it launched a unique new product in March 2015 after several years of planning: the Hollard Home Warranty, targeting sellers. They are required to have the home inspected to establish its exact condition at the time of sale, and then the property is insured for any further defects that might emerge over the next two years.
The warranty covers a long list of possible problems, from structural ones, affecting roofs, walls and foundations, to the full range of common faults, such as damp, poor drainage and blocked sewers. Sellers who want to include the areas normally covered by compliance certificates – electrical system, plumbing, gas and (in some areas) woodborer beetle – must use Hollard’s approved service providers. A list of exclusions from the cover absolves the insurer of liability for cosmetic problems that may appear in the inspection report, such as shoddy paint finishes, sagging cupboard doors, faulty locks and damaged tiles.
According to Lee-Ann Dobrescu, the head of group business development at Hollard: “Sellers who sell with a warranty differentiate their homes from the rest, give buyers complete peace of mind and are protected from the consequences of a defect showing up after the sale. They are likely to be able to command a higher price and to get that price more quickly.
“For the buyer, there’s the assurance of full disclosure. There is a misconception on the part of many consumers that bank approval of a bond is confirmation that the property is good value. Or they believe that their homeowner’s insurance will cover any defects. Neither is true. Then, if they are bonded to the hilt and a defect emerges, they are in trouble. We are stopping that gap.”
Dobrescu says consumers have so far relied on the law to protect them from the consequences of latent defects, but “the average buyer doesn’t have the time or money to go to court to prove that a seller knew about a leaking roof and failed to disclose it. It’s a huge financial risk, but people go into denial, and close their eyes and block their ears.
“We believe the time is right for this product, because the economic environment has improved and the CPA has heightened awareness of the implications of engaging in contracts. Consumers are much more conscious of rights, risks and recourse,” she says.
Why two years of cover? Dobrescu says most defects show in the first year, and the extra year covers unusual circumstances, such as very dry weather that masks a damp problem or a leaking roof for longer than usual.
The cost of the product seems high at first glance: a one-off premium of about R12 000 for a R1-million home, R17 400 for a R2-million home and R27 500 for a R3-million home (these are indications only; the product is individually priced, according to the inspection report). But it provides cover up to the full selling price of the property and the premium is taken off the selling price. Only if you sold your house for less than the total of all costs, would you have to pay in to cover the premium.
The Inspect-A-Home network has been contracted to do the warranty inspections, and, once it has reported, Hollard issues a certificate confirming that a warranty will come into force on transfer of the property and will be valid for six months. Sellers can get an extension if it takes longer than that to find a buyer and they are not liable for the premium unless they sell. There is no cost for the home inspection.
Estate agents will hand out brochures about the insurance to sellers and link interested sellers up with Hollard. In this scenario, there is no risk of conflict of interest, because everyone benefits: the seller and the agent have a more marketable product and the buyer has full disclosure and the peace of mind that comes with knowing that any defects that emerge over the next two years will be Hollard’s problem.
INSPECTIONS WHO’S WHO AND WHAT YOU’LL PAY
These are the five main players in home inspection in South Africa, with the credentials they present on their websites. Quotations for inspections vary according to property size and complexity, but this is each provider’s estimate for inspecting an ordinary three-bedroomed, two-bathroomed home with a swimming pool and double garage.
* HouseCheck(www.housecheck.co.za)
Registered with the National Home Builders Registration Council (NHBRC); certified by the International Association of Certified Home Inspectors (interNACHI): R3 300
* Inspect-A-Home(www.inspectahome.co.za)
National network of 30 franchises; member of the NHBRC; certified by interNACHI SA; “supported nationally by the Institute of Estate Agents”: R3 500
* Gauteng Home Inspections(www.gautenginspect.co.za)
Certified by interNACHI; certificate of competence from the Institute for Timber Construction; “will report on deviations from NHBRC guidelines”: R3 000
* Property Management Solutions(www.pmsinspections.co.za)
Cape Town only; certified by interNACHI: R3 000
* Home Inspection Services(www.homeinspection.co.za)
Western Cape only; certified by interNACHI; one inspector is a Certified Master Inspector through the South African Society of Home Inspectors, which is a spin-off of the American Society of Home Inspectors: R3 500 for 230 square metres (plus R15 per square metre for larger homes)
WHAT INTERNACHI MEANS FOR YOU
Membership of the United States-based trade association interNACHI and its South African branch, interNACHI South Africa, is common to all five prominent home inspection services in South Africa. So what does this mean for buyers trying to assess the quality of an unregulated service?
interNACHI claims to have members in 40 countries and to be the world’s largest organisation “dedicated solely to the training, certification, and support of professional pre-purchase property inspectors”. Members have to complete several courses online, covering ethical and practice standards, and achieve 85 percent in an exam. They pay annual subscriptions and are required to put in continuing professional development hours.
The problem for all such organisations is that they can set high standards, but their difficulty is in enforcing them. A statement on the website reads: “interNACHI South Africa takes its code of ethics seriously. Those guilty of violating it will be permanently removed from our membership. Banned members will be listed on this website.”
Kenton Shepard, interNACHI’s director of international development and a Certified Master Inspector in the US himself, admits this. “We enforce it as best we can by responding to complaints, but we don’t have the budget or manpower to actively regulate a nationwide industry,” he says. Shepard emphasises the importance of homeowners and buyers asking questions and understanding the parameters of home inspections. “A home inspection is a visual inspection for safety issues and defects in the main home systems and certain of their components. So we have to have some expertise in each of those systems, but our job is really to be ‘generalists’ and to know when to recommend a specialist inspection.”
Inspectors carry a certain amount of risk and should have professional indemnity insurance to protect both themselves and the buyer or seller who commissions them, Shepard says, although interNACHI is not in a position to do more than recommend this.
If, for example, you buy a house based on a favourable inspection report and then discover a major and expensive defect, you could have a substantial claim against the inspector. If, as the buyer, you want to be sure such claims would be paid, you need to know the inspector has appropriate cover. The forthcoming regulation in South Africa is likely to enforce this.
Where you see the interNACHI logo on a home inspection website, you can click on it to view the current certificate and check that the inspector is a member in good standing. interNACHI SA does not have this feature, but membership can be verified via the website’s “Find an inspector” facility.