So 2016 is going into the record books as the second hottest Summer on record. And that’s only for the weather!
As far as the housing market goes, most Realtors will tell you it’s been their hottest one ever. But the same is not true for Inspectors.
Here at OntarioACHI we’ve heard the same story repeated time an time again. The number of inspections are down, massively. Some inspectors are seeing a drop of 75% year on year, while most outside of rural areas are seeing an average drop of 55-65% in their workload.
Income Down, Costs are up
With the decline in Inspections (more about that later) there has been a steep decline in income. It is our belief that a number of inspectors, some who have been established for a number of years, will go out of business this year leaving the market even shorter of qualified inspectors than it is already.
At the same time we’ve seen more increases in our professional Insurance premiums, with the age old claim from the insurers that “claims are up, defence costs are up and we are only keeping up with inflation” . This of course cannot be confirmed, because while the government is about to announce regulation of the home Inspection profession to provide protection to the consumer, the regulation of the Finance sector provides protection to the finance sector. Hub International, who write most of the professional Insurance for Home Inspectors across Canada state “As a privately-owned company, HUB International Limited restricts access to its financial information”. This means their costs, and profits are closely guarded. There is no way of knowing if our profession is being gouged.
Here’s a comparison though. The Home Appraisal profession, which has a similar litigious profile in Canada as the Home Inspection Profession requires Qualified Appraisers to pay around $1,200 per year for equivalent E&O Insurance, against the Home Inspection profession average of $2,800. Realtors pay around $500 per year.
Insurance in Ontario: written on risk or numbers?
There are around 74,000 Realtors in Ontario, about 1,500 Appraisers (all insured) and an estimated 1,500 Inspectors (around 500 insured). One would think that the more in a profession, the higher the likelihood of someone in the profession being sued. Certainly to look at CanLII and the RECO website one would come to the conclusion that Realtors are sued more often than Home Inspectors and Appraisers combined, so it plays out that insurance is based upon numbers. The risk argument from insurance brokers for high premiums is, in our opinion, pure hogwash.
That said, we recognise the need to have financial protection. It is needed to protect the consumer from negligent inspectors, but it is equally important to protect the Inspector from frivolous claims, and in a hot market these always climb. Inspectors have in the past been able to defend themselves from claims of wrongdoing from clients who are just trying to reduce their costs by claiming money from inspectors at a whim.
We have heard about claims from consumers who are asking for complete HVAC installation costs because an inspector reported heat pump availability in a home that had none. In Canada a Heat pump, operated properly, might save around $50 per year on heating costs, yet they are asking for $25,000 to replace the entire HVAC system. This of course will go to court, and the legal costs will probably outstrip the actual real value of the claim. But that’s how the legal system works, and protecting your business from these types of claims in important if you want to survive in business.
What about the (part-time) workers?
There are a large number of Inspectors across Canada who choose to perform maybe only one or two inspections per week. These inspectors are mostly seen to be “supper-diligent”. We’ve heard of the Inspection process (inspection, report and client follow-up consultancy) taking anything up to seven hours. The risks of these inspectors having a claim filed against them are almost negligible. Because of the numbers based calculation of the premiums, insurers are asking these inspectors to pay the same premiums as someone who does perhaps 5-6 times more inspections. We think this is wrong, and we have made our case to insurers and the government alike.
When regulation comes in, and it will, we are going to ensure that the rights and needs of ALL inspectors are taken into account.
We have been working with Hub for the last 3 years to get insurance rates down. All members of OntarioACHI get an automatic reduction of 10% on their base premium, and CCHI designates get 12.%-15%. We have arranged a reducing premiums for long-tail insurance (Insurance that covers an inspector after they retire). We still feel this is not enough.
We will continue to work with our existing insurers, but we have put them on notice that we are working with other insurers to get realistic rates for realistic insurance for our profession.
Inspectors who are insured can assist us by asking their insurer for a loss-run for their own insurance. By law your insurer cannot deny you this information, and getting it to us ASAP will allow us to fight for your rights to fair insurance based upon real numbers not “It costs more” statements.
More about the decline in Inspections
Ask any Inspector why the sudden decline in Inspections and they’ll all probably say the same thing. “Realtors are advising their clients not to have them”. While in certain cases this might be true, it’s all too easy to blame the first person you think of for a demise that appears to be outside of your own control. Sure Realtors are prime targets for this sort of accusation but let’s look a little closer at the reasons.
First and foremost, any market is driven by supply and demand. The Real Estate Market is no different. When the supply is low, and the demand is high, the price goes up, and so does the competition for the diminished supply.
The Real-estate market has a few other drivers that change the dynamics:
- Real-Estate is always viewed as an investment. Indeed, if you hang on to Real-Estate long enough, it generally is. Some have the thought that even if a property is in an unexpectedly run-down condition, they will always be able to profit from it in the long run, so don’t bother with an inspection.
- People generally want to make the best of their money, but are not well educated on market forces and financial analysis. They are largely unaware that $500-$600 spent on a quality profession inspection might prevent them from buying a money pit or having large expenses that were otherwise avoidable.
- The Real-Estate market is similar to a very large auction room. Items come up for sale, bidding starts and the price almost never goes down below the reserve set. Some bidders in an auction get what is referred to as “auction fever”. They will bid without analysis of the risks and bid all their funds to own something that appears to be a hot property. They will avoid any rational thought that might get in the way of them owning the property, like a home Inspection.
So it is with Real-estate. Except in Real-Estate people, unless they are cash buyers, are not just bidding money in the bank, they are bidding finances they haven’t yet earned. This leaves them short and they often compound their mistake by “saving” on not having an inspection.
- Real-estate pricing is not governed solely but what people are prepared to pay, it is governed by what financial institutes are prepared to lend. This has tightened peoples budgets and reduced the amount they have for closing costs, including inspections.
- Their has been an influx of cash buyers with very long-term investment ideas, and many appear to not want to lose, no matter what. This has caused an anomaly in the market like never seen before. While they are prepared to pay over the odds for property, they are the first to minimise ancillary costs. The short-term pain from this is when these buyers look for some financial relief by blaming someone else for their mistakes.
Let’s get onto the topic of Realtors.
Unless they are double-ending, Realtors have (simply put) distinctly different roles in the home sale process.
- The Selling Realtor is responsible to protect as much as possible and work to the sole benefit of the seller.
- The buying Realtor is responsible to protect as much as possible and work to the sole benefit of the buyer.
In both cases the Realtor has to operate (in Ontario) in compliance with the Real Estate and Business Brokers Act (REBBA 2002) and the Code of Ethics and Bylaws of the Real Estate Council of Ontario (RECO)
So what happened this year?
Listing Realtors were faced with a famine with respect to housing inventory. Astute Realtors recognised immediately that this was an opportunity to help their clients sell the properties for higher values. what was different this year was that the supply of inventory was so low, and the demand in urban areas was so high, a different tactic normally seen in Realty programs in the U.S. could be employed.
Homes were advertised early by the listing agents, with no access to the property. Then an open house was staged with the mandate that no offers would be accepted early, and offers would only be entertained at a specific time and date. This generated the auction fever. It fairly well guaranteed their would be a multiple offer situation.
Buyers agents became all to aware of this very quickly. If you think it’s been a bad year for Inspectors, ask Realtors who concentrate on assisting buyers how hard it’s been.
Wary of the risks of a breach in their own code of ethics by advising their clients not to have a home inspection, yet also knowing that to not advise them so would mean their clients might not succeed in owning the home buyers’ Realtors had a problem.
The outcome was that Buyers’ Realtors correctly advised their clients that any conditions in a multiple offer situation might jeopardise their chances of succeeding in a multiple offer situation. At the same time the Realtors advised their clients a Home Inspection was the only way to protect against unforeseen expense in the home. The decision was simple for the majority of buyers. Have a condition -lose the home, have no conditions – have a better chance at winning a multiple offer bid situation. Once the decision was made, the Realtor only had to get the buyer to sign a waiver that covered the Realtor and the Auction was off to the races.
I only said the decision was simple, I did not say it was correct or not dangerous. Many buyers have in the last 8 months made monumental mistakes by failing to have a home inspection or relying on a finance clause to ensure they were protected from overbidding. Not on the valuation of the home, which has happened, but on their own financial capability.
Too little – too late
What Inspectors are reporting now is that people who have purchased homes are now looking to Home Inspectors to inspect the home after possession. The question is why?
We are hearing that the majority of these inspections are to provide a report to be able to use in a lawsuit against the Realtors and/or Vendors for defects they have now found.
Even if defects are found in these inspections, the ability of a lawyer to be able to prove it was known by the listing or buying realtor or the vendor themselves is going to prove costly. It will in many cases be thrown out as a waste of the courts time and effort.
The law of real-estate in Canada at this time is Caveat Emptor – or buyer beware. It would be well for people to understand what that phrase means in it’s entirety.
- “Caveat emptor, quia ignorare non debuit quod jus alienum emit”
This means “Let a purchaser beware, for he ought not to be ignorant of the nature of the property which he is buying from another party”
In other words, BEFORE anyone buys a home, it is their responsibility to ensure they make themselves as aware as possible of all the faults with it BEFORE they part with their hard earned finances.
Trying to rely on a Home Inspector to guarantee recovery of some financial relief when things go wrong, when the courts for thousands of years have relied on the principle of Caveat Emptor in property transactions is a gamble of epic proportions. sometimes it may pay off, but more often than not, it’s too little -too late.
The housing market will more than likely see the fall-out from these actions in the courts over the next few years. Luckily, as home Inspectors have not been involved in the process in many cases, they will not be spending too much time in court.
Maybe the Insurance Companies will have to admit they have no risks to keep the price of our premiums so high then? It’s a thought.