For obvious reasons, inspection contingencies are commonplace in real estate transactions. The OREF Real Estate Sale Agreement states that a buyer is purchasing the property on an “AS IS” basis, excepting various disclosures that a seller is legally required to make. As a result, a buyer wants to ensure he or she knows what he or she is buying into – a gem or a problem. In addition, a seller is willing to allow a buyer to inspect his or her home in order to successfully sell it. It is commonly known that a buyer’s home inspection report is almost never perfect – often times, inspection reports contain a large number of suggested changes, causing buyers, sellers and brokers heartburn.
Not surprisingly, brokers are intimately involved in the inspection process, as a buyer and seller may negotiate over repairs to the property through a series of forms drafted by the brokers involved in the transaction. We have spoken with many brokers about problems that have arisen in the home inspection and repair negotiation process. This article will address some of the more common mistakes made, and how brokers can avoid making them.
The Inspection Contingency
There are occasions when a buyer may wish to waive the inspection contingency without hiring an inspector. One buyer may not want to spend the money for an inspection, whereas another buyer may want his or her offer to appear more competitive, particularly in a multiple offer situation. In addition, a buyer may want to rely on a relative or close friend instead of hiring a professional home inspector.
When representing a buyer who does not wish to obtain a professional home inspection, many brokers are likely to explain the importance of inspections and properly advise the buyer that he or she may wish to reconsider. However, should that same buyer discover significant problems after closing the transaction, particularly problems that could have been discovered by a professional home inspector, he or she may claim that the broker failed to give proper advice.
In defending many brokers in lawsuits filed by unhappy buyers, it is evident that one way a broker may protect him or herself in such a situation is to document any advice given to a buyer, and document the fact that the buyer has opted not to take the advice. Such documentation may be accomplished through transaction file notes. However, a prudent broker would benefit from sending a letter or email to the buyer regarding the advice and the buyer’s decision not to follow it. Such written evidence may protect a broker in the event a buyer later learns of problems with a home that could have been discovered in advance of the transaction closing.
Upon receipt of a professional home inspection report, a buyer may wish to request that the seller complete repairs as part of the transaction. Upon receiving instructions from the buyer, the buyer’s broker will often prepare a repair addendum addressing the buyer’s specific repair requests. Many times, requested repairs may be basic in nature. However, some brokers may request repairs on behalf of their buyers that are more complex, and require the repair addendums to be drafted in greater detail. The following example illustrates the importance of specificity in repair addenda.
Suppose buyer Bob learns from his inspection report that the home requires a new roof. The professional home inspector indicates that Bob may wish to consider replacing the roof with a new 30 year roof. He instructs his broker to request that the seller have a 30 year roof installed, and the broker obliges by drafting a repair addendum that states the following: “Seller to have a new 30 year roof installed.” Seller agrees to install the roof, and the parties move towards closing. Shortly before closing, Bob drives by the house and discovers that the seller has not yet installed a new roof. He calls his broker, frustrated that the seller has not fulfilled her promise. Through the listing broker, the seller argues that no timeline was affixed to completion of the roof, but that she will have her friend promptly replace the roof. Unfortunately, the friend is not a licensed contractor, and is instructed by the seller to purchase the least expensive 30 year roof shingles available. Bob is understandably upset, and blames his broker for failing to protect him in the transaction. Is the broker liable to Bob despite Bob having signed the repair addendum? In many instances, the answer may be yes, as the broker is licensed, and Bob has a right to rely on the broker’s expertise.
In the example above, the broker would have been prudent to be clearer in drafting the repair addendum. Information such as the type and color of material, approval of contractor and bid, and timing should have been included in the repair addendum by the buyer’s broker.
Professional home inspections are an important component of a buyer’s due diligence when purchasing property. In the event a buyer chooses to forego a professional home inspection, the buyer’s broker would be wise to document in writing that the buyer’s decision may result in the discovery of undisclosed defects with the property, for which the buyer may incur significant expense in repair or remediation.
When requesting that repairs be performed by a seller, the buyer’s broker should be specific as to the standard and quality of repair. Failure to carefully specify the standard and quality of repair could lead to use of sub-standard materials or workmanship, exposing the buyer and his or her broker to possible expense down the road.
This column contains general information only and must not be construed as legal advice.
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