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The use of home inspectors by home buyers to evaluate both new and existing homes has become more prevalent in the United States in recent years. However, since home inspectors are not licensed in most states, anyone can potentially call himself a home inspector. The impact of such agents on the home selling process is therefore a concern of many real estate sales professionals. Results from a survey of 2,000 randomly selected real estate sales agents about their experiences with home inspectors indicate that most respondents had significant experience with home inspectors and that about half believed home inspectors had "killed" at least one of their transactions in the past two years. Still, well over three-fourths of the respondents recommend home inspections prior to the purchase of a home and over half believe that, overall, the effect of home inspection on the sale of a house is positive. [PUBLICATION ABSTRACT]

Introduction

Buying a home is often the largest purchase decision a person will make. It is therefore not surprising that the use of home inspectors is increasing as buyers seek to confirm the physical condition of their purchases. Home inspectors, however, have often been referred to as "deal killers" by real estate licensees because they have, on occasion, been responsible for stopping a sale of residential real estate that would have otherwise been completed. More recently, however, licensees are viewing home inspections somewhat differently. Instead of perceiving home inspectors as a potential source of reducing a real estate licensee's income, licensees are viewing them as a way to increase future sales and reduce potential liability on the buyer side of the transaction.

This study examines the role that home inspections play in the residential real estate home buying process. To date, no study has considered this impact on the sales process. Furthermore, the performance, process and other characteristics of those sales agents that have been involved with a home inspection in the residential sales process are unknown.

A Review of the Issues

Disclosure

In a recent study, Larsen and Coleman (2001) examined the effect of "psychologically impacted" properties (homes that do not suffer physical defects, but instead are associated with psychological defects such as being the site of a murder, suicide, reported haunting, etc.) on the home buying process. The authors probed the dilemma concerning whether a real estate agent should disclose the psychological characteristics of the home to the potential buyer. If the real estate agent decides to disclose the psychological defect to the client, the agent runs the risk of receiving a lower selling price (found to be 3% lower), having the property spend a longer time on the market (found to be 45% longer), or losing the sale altogether. All of these outcomes adversely affect the agent in the short term. On the other hand, if the agent does not disclose the negative psychological aspect of the property, there is the risk of that the buyer will learn of the possible defect, which could result in litigation.

The same dilemma may be present when a physical defect associated with a property is involved. Real estate agents must decide whether they should recommend that a potential home buyer, even if only a customer, hire a home inspector prior to closing. If the agent recommends the use of a home inspector, there is the risk of the buyer learning of major problems with the property, which might lower the sale price or prevent the sale altogether. On the other hand, if the agent does not recommend inspection, the client or customer may purchase the residence and later find numerous problems with the property. If this happens the buyer's dissatisfaction will undoubtedly be displaced onto the real estate agent. Dissatisfied buyers reduce future income for the agent because unhappy buyers are less likely to provide positive word-of-mouth promotions, referrals and future repeat business. In this sense, the question then becomes will a real estate agent prefer to reduce immediate income through encouraging the full disclosure of physical defects (i.e., by recommending a home inspection be performed) or will future income be reduced by not encouraging the discovery of physical defects (i.e., by not recommending a home inspection be performed)?

Licensing

Because success in the real estate business hinges considerably on agent reputation, referrals and repeat business, it would not be surprising to find that competent real estate agents would be in favor of home inspections. Agents know that a satisfied buyer leads to better word-of-mouth promotion, more referrals and future repeat business. So instead of viewing home inspections as potential "deal killers," successful real estate agents would recommend home inspections in order to better inform buyers as to what they are buying. More informed buyers will lead to more satisfied buyers. This will result in increased sales for the real estate agent.

The preceding argument is based on the assumption that home inspectors are qualified to do a competent job. Unfortunately, while home inspectors are required to be licensed in a few states, most states do not have licensing requirements. The concern for real estate agents then becomes an issue of consistency and accuracy. That is, a real estate agent might be in favor of home inspections for both clients and customers if the inspections are done well. But, if home inspectors do not do a consistently accurate job, they may unnecessarily warn potential home buyers of physical defects that are not material in nature. If this is the case, even agents who are the staunchest advocates of home inspections for both clients and customers might change their minds and not recommend inspections.

Data

The data in this study are from a survey of 2,000 randomly selected residential real estate sales agents in Ohio. Each respondent was mailed a cover letter stating the purpose of the survey, a questionnaire and a return self-addressed stamped envelope. Thirty days later, a reminder letter was sent to increase the response rate. There are a total of 362 useable surveys resulting in an adjusted response rate of 18.1%. This is consistent with previous surveys conducted on this population (Bond, Seiler, Seiler and Blake, 2000; Seiler, Seiler and Bond, 2001; and Webb and Seiler, 2001). In order to determine whether or not the results suffer from non-response bias, tests were conducted consistent with Henry (1990). Specifically, the first to arrive responses were compared to the second half of the responses under the assumption that late respondents are similar to non-respondents. Exhibit 1 shows that the between group differences in responses are not statistically significant.

The first section of the survey is designed to gather information about the impact home inspections have on the home buying process. The socio-demographic characteristics of the responding real estate sales agents are generated in the second part of the questionnaire. The final section of the survey allows the sales agents to convey opinions and general comments in an open-ended manner. The questionnaire is provided in Exhibit 2.

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Survey Results

The survey results are summarized in Exhibit 3. A majority of the respondents (68.3%) felt that a home inspection may have or definitely did "kill" a deal (sale) for them at some point in their career. For those who did lose a sale because of an inspection, 61.8% believed that one or two deals had been "killed" in the last two years alone. Another 30.4% believed that three to five deals had recently been "killed" by home inspections. A large majority of the respondents (72.7%) indicated that home inspectors should be licensed, while only 11.1% believe licensing for home inspectors is not necessary. While most respondents (51.1%) do not know if home inspectors have errors and omissions insurance, only 10.3% believe they do have it.

Since home inspections have been reported to "kill" sales for real estate agents, respondents were asked if agents attempt to unduly influence home inspectors. Surprisingly, only 12.7% believe that some real estate agents attempt to do so. However, another 53.0% indicated that it is possible. An overwhelming number (86.6%) of responding agents recommend the use of a home inspection to their clients before the final purchase of a home. However, only 27.0% recommend a specific firm. The majority of respondents (56.0%) believe that the effect of home inspections on the sale of a house is slightly (26.6%) to highly (29.4%) positive. Only 18.7% believe that the effect of home inspections on the home sales process is slightly negative (14.8%) to highly negative (3.9%).

Based on these summary statistics, an inference can be drawn concerning the ability of home inspectors in the state of Ohio. The majority of real estate agents rate the overall effect of home inspections as positively influencing the sale of homes.

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More information benefits the buyer and increases transparency in the transaction process. Moreover, since the vast majority (86.6%) of real estate agents recommends the use of home inspections, but only 27.0% recommend a specifie inspector or firm, it can be inferred that the ability of home inspectors is generally high state-wide. If this were not the case, real estate agents might insist on only using certain, more qualified, home inspectors. These results are particularly interesting in the state of Ohio because home inspectors are not required to be licensed. If the results from this study hold for other states, then maybe the push to require licensing of all home inspectors is not as critical as many believe. A second explanation as to why real estate licensees are not likely to recommend a specific home inspector relates to limiting legal liability. Perhaps licensees provide home buyers with the names of multiple home inspectors to avoid the perception of a conflict of interest. If this is the case, the quality of home inspections, in general, cannot be inferred.

In order to determine whether the results are sensitive to the various socioeconomic characteristics of the responding real estate agents, univariate and multivariate models were estimated consistent with Seiler (2004). The results reveal that socioeconomic variables do not have much of an effect on the responses from various real estate agents concerning their attitudes toward how home inspections relate to the home buying process. But what about agents who have experienced more than their fair share of home inspection related killed deals? Interestingly, this variable, percentage of deals killed, is the only one found to be significant when predicting the overall effect that home inspections have on the home buying process. Specifically, agents report that the greater the percentage of deals that home inspections caused to fall through, the more negatively the agent views home inspections.

Conclusion

The disclosure and licensing issues surrounding home inspections are evaluated in this study. While the openness and honesty associated with full disclosure are ideal, this idyllic environment may fall apart if accuracy and consistency in inspections do not follow. This seems to be why the majority of real estate licensees want home inspectors to go through a licensing process, so that the quality and consistency of inspections are similar across inspectors. The results also reveal that while most real estate agents have had deals "killed" because of home inspections, they are generally positive about the influence of home inspections on the home buying process. Greater transparency in the home buy ing/selling process will benefit everyone in the long-run. But in the short-run, some transactions may be modified or undone because of home inspections.

This study is the first to examine the effect the home inspection process has on the sale of homes. Future research should build on this foundation by examining issues related to licensing and training, potential conflicts of interest and comparisons across forms of agency. The trend in the industry is toward disclosed buyer/seller and buyer brokers and away from dual agency. Future research should also pursue sale specific data. It would be interesting to see if it is possible to build a model that could be used to predict the probability that a home inspection would "kill" a deal. Factors that might be considered include low-priced versus high-priced homes, new versus old homes and specific property attributes. Finally, the ability to generalize the results across other areas of the country needs investigation.

[Author Affiliation]

*Cleveland State University, Cleveland, OH 44114 orj.webb@csuohio.edu.

**Hawaii Pacific University, Honolulu, HI 96813 or mseiler@hpu.edu.