Understanding the intricacies of termite reports is essential for buyers and sellers because of the potentially large amounts of money involved.

Structural pest control reports are divided in Section 1 and Section 2 items. Section 1 identifies those areas where there is evidence of active infestation or infected wood. Infestation is damage caused by insects, e.g., subterranean termites, powder post beetles. Infection refers to water damage which eventually destroys the wood, e.g., fungus.

Importance of Section 2

Section 2 lists situations which are likely to lead to future destruction, but where no visible damage now exists. Buyers, sellers and even some real estate agents sometimes underestimate the possible implications of Section 2 issues.

Most Section 2 items, such as a small plumbing leak under a sink, are innocuous and of little cause for alarm. Others, conversely, can later become expensive headaches. An example is a shower stall with loose tiles and a small crack in the shower pan. When inspected, there may be no visible leakage into the walls and no evidence of rot or infection to the wood. Over time, however, this could easily develop into a major problem. If the seller agrees to pay for all Sections 1 and 2 items, this will be handled. On the other hand, as so often happens, the seller may agree to be responsible only for section 1 items. The buyer could then be stuck unless he negotiates otherwise.

In the shower stall example above, the buyer might want to talk with the pest control inspector to find out if the tiles and the crack can be grouted so as to be watertight. If not, the buyer needs to either insist that it be repaired (which the seller may feel is unnecessary), or take the risk of a future bill in the range of $3500. It is crucial for the buyer to understand the options and make a decision. The same is true for the seller. Knowledgeable agents offer their clients the necessary information to make these decisions.

Another red flag whose ramifications are not always clearly understood is an item calling for the repair of infection and/or infestation damage in and around the roof area. The pest control company will make reference in their report that the roof "may be disturbed" as a result of the repairs. Because it is not a licensed roofer and cannot give a bid on the cost of repairing the disturbed roof, it will suggest a licensed roofer be called.

The dilemma is that the seller may have agreed to pay for pest control work, but not for damage resulting from that work. If the roof is presently serviceable, he may not see the need to pay for roof repairs as well. Even though a line in the "Seller Warranty" section of the purchase contract might unwittingly commit the seller to also repairing the roof, he may not realize his obligation.

The buyer, if course, is not expecting to purchase a home with a big hole in the roof. So, who pays? Unless the agents discuss the problem with their respective clients as soon as the report is received, this could cause a major upset right before close of escrow. It might even result in a canceled sale.

Who pays?

An addendum to the purchase contract is needed at the beginning to clarify who will pay and how much. In most cases, it is the seller who pays for the roof repairs as well.

Although pest control work can be done before a contract is accepted, it is customarily completed during or after close of escrow and is paid from the seller's proceeds in escrow. Lenders ordinarily require large reports to be "cleared" before close of escrow. In these instances, I strongly suggest to my sellers that they allow the work to begin only after the buyer has removed all of his contract contingencies in writing. At this point, I also counsel my sellers to require the buyer to deposit in escrow an amount approximating the cost of the pest control work. This provides additional security for the seller that the buyer is committed to closing.

Situations need to be evaluated individually. A $20,000 report doesn't necessarily call for the buyer to deposit that amount in escrow before the work begins. The buyer could argue that, even if he walks away from the transaction, the seller will still not be harmed as the property needs the work anyway. The issue for the seller, however, is that he would not have had the work done nor laid out the money for it now, except for the buyer's offer.

Once the work is completed, the company that did the work is entitled to be paid in a timely manner. If there are no proceeds coming from the sale, and the seller doesn't have $20,000 to pay the bill, we will end up with some upset people. This is why it is so important for the seller to make sure the buyer has something serious at stake if the sale doesn't close.

New construction

What if a house has just been built? Is a pest control report necessary for brand new construction? Most people say "no," but I have had buyers who were very happy I suggested they ask for one.

In one instance, the inspection revealed infestation in several tree stumps under the house. The inspector told me that this could have led to infestation of the house itself. The stumps were chemically treated and the infestation disappeared.

In another case, the builder had covered some of the wood siding on the lower part of the home with gravel. Above it was soil that would eventually erode and make contact with the wood, leading to rot. After reading the report, my buyer requested the builder redesign this area to correct the condition, thereby eliminating what would have been a costly, future project.

Limit liability

Although there are endless considerations regarding pest control, I will close with one final caveat. It is always best for sellers to limit their liability in writing and not assume anything. As for buyers, it is not advisable for them to agree to purchase a property "As Is" without fully researching the costs.

An example is a home which was purchased this year [1995]. The property had had a pest control report of about $3000 fourteen months earlier. The work had not been done. Both the seller and his agent assumed a new report from the same firm would result in approximately the same cost. To compound matters, the seller did not order a new inspection until he had an accepted contract. Contrary to prudent practice, the seller did not limit his liability in the purchase contract. The new report came in at over $30,000.

How could this have happened? The original report clearly stated that the pest control condition was marginal and a lack of maintenance could lead to extensive damage. After over a year of neglect and abnormally heavy rains, the driveway ramp and other areas had now deteriorated badly, yet it was not noticeable.

This was a surprise the seller could have avoided. And, imagine what would have happened if the buyer had relied on the first report without getting an updated one, buying the property "As Is?"

Final thoughts

Termite reports deal with a lot more than just termites. Minimizing their importance could turn your hard-earned sawbucks into dust.

Related Article: Not Just Termites, Part 1