Inspection Contingency. Advantage Buyer or Seller?

Intention is everything in negotiations. We lose buyers and buyers lose houses for good reasons, and sometimes for reasons that have everything to do with failing to focus on intent.

The inspection contingency is intentional. There was a time not so long ago when there was no mention of a contingency to inspect a property in the WB Offer, and rarely found on company created addenda. Once the concept found its way onto the conversation of potential contingencies for the state approved form the work of making the contingency work began. First question for the committee might have been, “Who is this for?” and the second probably was, “How will it be abused?”.

The opportunity to inspect is first a benefit to the buyer. In essence the inspection slows the process, gives the buyer the chance to get an informed opinion of the condition of the property with some limited ability to renegotiate or possibly part ways. As advantageous as this is to Buyers it’s high risk for the Seller. Inspections will identify some issues and given the chance to ask for something in concessions people tend to ask, and asking takes time. The standard offer inspection contingency gives the seller the leverage to end the conversation if they are pressed by the buyer to make concessions. That’s a necessary authority to keep everyone honest, and allow sellers the opportunity to move on when demands are unacceptable.

Of course we’re all smart and can see how the opportunity to end the conversation is powerful in the hands of the Seller. So we did what is expected of a Buyer Agent: we tweaked the contingency to flip the leverage to the buyer to the detriment of the seller. The person on the receiving end who does not comprehend the difference in the wording will discover the difference when it’s too late.

Time waiting for the contingency to be satisfied is pressure on the Seller. Pressure is stress. In negotiations the person feeling the stress is the one who knows they are at a disadvantage. Whomever has the leverage in the inspection contingency has the advantage in creating or eliminating stress.

Knowing exactly what process the inspection contingency creates is one area where any licensee can be a difference maker in negotiations. When you know who has the lever and what has to happen to get to contingency satisfaction, your client will have the information to make smart choices.

The words matter. The intent of the words is to give one side or the other leverage. Leverage is power, control, and stress inducing. Be intentional. Know the intent.

What does this mean?

Every word and punctuation in a contract may be insignificant until it’s necessary to determine what it is the parties agreed to. The Offer to Purchase has nine pages of words which may have been scrutinized to the extent that they are commonly understood to mean this or that. To help decide what is or isn’t a defect, this word has it’s own definition in the contract. Unfortunately the definition is sufficiently subjective to leave buyers and sellers at odds and locked in disagreement. The definition is so uncertain that sellers are suspicious of the inspection contingency fearing they will be entangled in a commitment to a buyer who insists a maintenance item is a defect.

Smart licensees have come up with a way to better assure sellers that their buyer client won’t come up with a list of nickle and dime conditions they want compensation for. The solution begins with assuring the seller that the buyer will not consider a condition a defect as long as the cost to cure does not exceed X dollars. Because the buyer won’t consider a condition at or below X as a defect, the seller can rest easy knowing the vague definition of a defect in the Offer has been tightened up in their favor.

A version of limiting a defect to an item in excess of X is making the rounds and its intent is not clear. Have you seen this:

With regards to the Inspection Contingency, Buyer will not amend the Offer to purchase contract with credits, price reductions or require repairs for defects summarized in buyer provided inspection report so long as the collective total of defects does not have a repair estimate greater than $1,000.

What does that mean? When placed in context with the inspection contingency it seems to mean the buyer will not request the seller to amend the offer to reduce the price, pay a credit, or require repairs for any item estimated to be $1,000 or less in cost. That’s fine but the contingency is not about amending the Offer. It’s about delivering Notice of Defects to which the buyer objects. Doesn’t it seem that the only thing accomplished by promising to not amend for conditions below a dollar amount is to promise not to amend the Offer? The buyer’s right to deliver Notice of Defects is not restricted by the buyer promising to not amend the Offer.

If we interpret the statement as meaning the buyer will not deliver Notice for such items under $1,000.00 we may be surprised when the buyer’s attorney reads the provision as it’s written and takes the position that the right to deliver notice of objection to defects is unaltered and that $900 item is a defect. Unless the parties agree a dollar amount was part of the definition of a defect, they only agreed to not amend the Offer, and any defect as defined is fair game.

Any real estate lawyers who have an opinion on this are invited to weigh in. And by “weigh in” I mean write a comment.

Olive Branch Inspection Contingency

Given a choice, without being told of potential consequences, a Buyer Client is 99% likely to include a Buyer Favorable leverage an inspection contingency, over the one on page 9 of the Offer to Purchase.  The people who created the Inspection Contingency in the Offer intentionally tilted the advantage to the Seller. Obviously the Seller has more to risk in negotiations after acceptance. The party with the most on the line should have a reasonable opportunity to cure defects, and  keep a transaction together when unexpected conditions are identified. During the Buyer Market run we had in and after the recession, more Firms began using a Buyer Favorable Inspection Contingency as standard practice. Sellers had no choice but to allow the Buyer to have the leverage which was intended for them.  That happens when the market changes.

Well, the market changed again. Licensees stuck in the new habit of using a company crafted Buyer Leverage Inspection contingency gave no thought to the consequences to their clients and went right on checking the box without discussing the difference between that contingency and the one on page 9 of the Offer.  Sellers and listing agents  were quick to identify the high risk condition of the Buyer Favorable contingency. For no reason other than risk, Sellers will reject Offers which give the inspection advantage to the Buyer.  It’s a shame when  a person loses a house because they weren’t given a chance to make their offer more attractive to the Seller by simply being kinder, gentler, and safe.

Knowing the difference between a Heavy Hand and an Oliver Branch allows the licensee  to  give the client a real opportunity. It’s a magical thing  watching a licensee earn the confidence of clients when they explain choices and think through a choice with clients.

Become a part of the conversation, a part of the thinking process by learning to find the trips  and traps of contingencies.  Some people will always do as they always have because that’s the way they learned it. But those people will never have the results they could have by learning why  something is as it is, and learning how to make the contingencies work for their client.  And by working for their client I don’t mean wrapping them in unnecessary protections.

Inspection Contingency

The inspection contingency in the Wisconsin Offer to Purchase is designed to permit a buyer reasonable time and access to the property to complete their due diligence.  A definition of “defect” was added to the agreement to create some objective criteria for a defect.  Objectivity is not a strength of the definition. Defect is still subject to the opinion of the buyer and seller. (Not the licensees. Our opinion is not relevant in the conversation.)

To deter a buyer from objecting to only the defects which are worth losing the property over, the contingency was built with a lever on the Seller’s side.  Here’s a visual of the deterrent: Buyer discovers a few defects he wants cured prior to closing.  The Buyer approaches the Seller with a NOTICE of Defects in his hand. Standing in front of the Seller, on a trap door, the Buyer gives the Notice to the Seller. The Seller receives the Notice and reads:  Buyer objects to the following defects identified in the attached inspection report.  The Seller has the Notice in her left hand, and her right hand is on a lever.  With no explanation required, the Seller who has been Noticed, may pull the lever, opening the trap door, and send the Buyer away.

A less risky approach could be attempted first. A buyer could offer a written amendment to the seller requesting the seller agree to a specified resolution. A repair prior to closing or a price concession are typical.

Beginning with the amendment, a Buyer retains the right to deliver the Notice prior to the deadline for delivering the Notice.  Some issues are worth the risk to some buyers. No one should take the Notice step without weighing the cost of the Seller’s choice.  On the other side, before a Seller terminates an offer because of a Notice of defects, a Seller may want to consider their obligation to future transactions now that they have some information about a condition they did not have prior. Buyers trust that the fact the owner will have to contend with the issue to satisfy the next buyer is enough to motivate the seller to cure the defects and not terminate the Offer.

Just my opinion, but people waiting in secondary positions are likely to accept a condition the first buyer would not, or because they are the fresh face waiting in the wings, Sellers are receptive to giving the next buyer something they would not give the primary buyer.  A human nature thing.

 

Duty to Disclose Conditions

Wisconsin real estate buyers are well protected in the house buying transaction. At least they are protected to the extent the Seller and licensees comply with their duty to disclose conditions which may adversely affect the transaction or the property.

Sellers of 1 to 4 family residential properties are required to complete a Real Estate Condition Report (RECR) and provide the report to the Buyer within 10 days of the accepted offer. It’s not illegal for a transaction to close without the RECR being provided. Instead, the law extends rescission rights to the buyer who does not timely receive a RECR.

A buyer who does not receive a RECR, and used the Wisconsin approved offer to purchase form will have affirmative statements from the seller representing they have no notice or knowledge of specific conditions which may be defects or material to the transaction. Unless the provisions are deleted or a counter offer is prepared to override the affirmative condition statements in the Offer, much of what is on the RECR is addressed by the seller in their acceptance of the Offer.

If the Seller declines to adequately complete the RECR the licensee still has an obligation to disclose to the seller and the buyer adverse conditions he/she is aware of from a limited inspection of the  property.

A consequence of this hyper active seller’s market may be a loss of attention to disclosure obligations. I’ve heard attorneys say their post closing complaint cases have increased in the last two years. I’m not surprised. Whether a person resents having been pressured to pay more or accept conditions without an opportunity to do discovery, adverse conditions, the extent of which are unknown until after closing are likely to bring the buyer and seller together again, and this time with lawyers instead of real estate licensees.

Suggestion:  Sellers who correct, prior to listing, and fully disclose adverse  conditions are better protected from a claim of failure to adequately disclose. I understand some people will shy away from a home with a condition report acknowledging defects, even those which have been repaired.  It’s safe to say the person who would not consider the house because of a known condition would be a prime candidate for suing a seller who didn’t disclose. Licensees who complete a pre-listing inspection of the property and document their findings in writing will have what they need to conduct an appropriate pre-listing discussion of the property condition with the seller.