This is the classic orphaned water heater, and it is a consequence of doing something good. A chimney flue was originally sized for the combined output of a furnace and a water heater sharing it. Replace the furnace with a high-efficiency unit that vents through the sidewall, and the water heater is left alone on a flue several times larger than it needs. A small burner cannot warm that volume of masonry quickly, so the draft is weak or absent at start-up, and flue gases linger and cool. Two problems follow: spillage of combustion products into the house while the draft establishes, and condensation inside the chimney, where acidic moisture deteriorates the liner and mortar over time. The remedy is relining the flue to a size matched to the remaining appliance, which is why the inspector reports the arrangement rather than treating it as a completed upgrade.