New Disclosure Requirements

Buying a Pre-Owned Home in Japan: Home Inspection Disclosures

By Jeff Wynkoop

For the last 70 years, Japanese government policy has focused on overcoming this country’s long-term housing shortage by supporting the construction and sale of new housing. However, in the last decade the government has begun changing its focus from promoting the creation of new housing to promoting transactions in pre-owned residences.

Not only is the traditional devaluation of houses to practically zero salvage value after merely a few decades highly wasteful, this phenomenon causes a significant recurring cycle of loss of wealth for average consumers and the country as a whole. Furthermore, the ongoing labor shortage in the Japanese construction industry makes it imperative that going forward construction companies become more efficient in creating new value in the economy from a macroeconomic perspective.

Guidelines for Inspections of Pre-Owned Homes

To promote expansion of the market for pre-owned homes, the Ministry of Land, Infrastructure, Transport, and Tourism (the “MLIT”) issued guidelines for inspections of pre-owned residences in June 2013 (in Japanese 既存住宅インスペクション・ガイドライン). The purpose of these guidelines is to create uniform standards for inspection service providers and the contents of their inspection reports. These guidelines, however, concentrate primarily on readily visible defects, and thus do little to allay the main fear Japanese have in buying a pre-owned home: that the buyer will discover a major defect in the property after the purchase without any recourse to the seller.

New Required Disclosures

As a next step in the MLIT’s goal to grow the pre-owned home market, the Real Estate Transactions Law will be amended from April 1, 2018 to include the following three house inspection matters. The point of these amendments is to create new disclosure duties for licensed Real Estate Transaction Businesses and thereby hopefully grow demand in the market for house inspection services.

(1) Real estate agent contracts for pre-owned homes will be required to include a clause indicating whether the seller is authorizing the agent to engage an inspection service provider.

(2) In the disclosure document given to the buyer prior to sale (known as ‘The Explanation of Important Matters’ or 重要事項説明書 in Japanese), the real estate agent will be required to disclose to the prospective buyer whether an inspection has been carried out and the results of the inspection.

(3) Real estate agents will be required to issue a document outlining matters from the MLIT inspection guidelines to both the buyer and seller to evidence their mutual understanding of the condition of the asset.

Unresolved Issues

There are still many issues that need to be resolved before these amendments become effective however. For instance, currently there is discussion whether a licensed architect should be required to carry out the house inspection, and whether there are enough architects in Japan to satisfy the possible demand for these services. Another issue is for how long the results of an inspection should be considered effective. There is support for a five-year period, but what happens if there is a big earthquake six months after an inspection report is issued? Should a new buyer still be able to rely legally on the results of the report, or is this unfair to the seller and/or the inspection service provider?

Another issue is determining what level of detail Real Estate Transaction Businesses should be required to give when explaining technical aspects of an inspection report. Understandably, Real Estate Transaction Businesses want clarity regarding any new potential liability which may stem from such explanations. In sum, the MLIT is trying to carry out a delicate balancing act of increasing house inspections for stimulating the pre-owned market while not causing the already lengthy process of buying a pre-owned home (versus buying a new home) to become so onerous that new sales are actually deterred.

Top photo: House in Moriguchi-shi, Osaka

Photo Credit: m-louis .®