It’s All About the Inspections

Editor’s Note: This article has been updated as of Oct. 18, 2022, to reflect that paragraph 8(G) is now paragraph 8(F) due to a revision. 

A fable

A snowstorm is in the forecast. You rush to the store, only to find that the milk cooler appears empty. But wait… here’s a carton of milk just next to the cooler. It’s not what you’d call “cold,” and appears to have leaked enough that the sell-by date is smudged and unreadable. But – it’s MILK! And you need milk for snowstorms! The next morning, you put some on your cereal and shortly thereafter you get violently and persistently ill.

Three days later, after an ER visit and lots of clear fluids, you’re telling this story to a friend and say, “It was obviously a bad idea, but if I hadn’t grabbed the carton right then and there, I wouldn’t have gotten any milk at all!!!”

What’s going on out there?

With this crazy market, the PAR Legal Hotline call volume is seriously elevated and every day involves several callers saying something like “I knew <that thing we did in the contract> was a bad idea, but if we didn’t do it, we wouldn’t have gotten the deal at all!” Of course, they’re only calling because <that thing they did in the contract> got their buyer the deal – but now the buyer’s deposit is at risk or they’re locked into buying a house that has a surprise $50,000 foundation problem and they’re probably wondering, “Why did my agent let me do that?”

Anecdotally, we’re seeing terminations and deposit disputes shoot up, as well as a spike in seller disclosure problems and about a 40% increase in buyer-seller mediation requests. Given the sums in dispute, it wouldn’t be a surprise if at least some of these cases end up in litigation with claims that poor drafting by agents and brokers caused the parties to incur damages.

So, let’s take a look at some of the issues we’re seeing. Each poses a quick scenario, identifies one the biggest problems it raises and offers a suggestion or two about how to deal with the situation in a more effective way. Remember that these are just quick hits here – there isn’t space to dig into all the details, nor to bring up all the weird tactics we’ve heard about.

Shhh. It’s a secret.

Scenario: Buyer schedules a showing through the regular scheduling method, then shows up with a home inspector who does a quick inspection during the showing.

Problem: The Code of Ethics says that Realtors® cannot provide access to the property on terms other than those established by the seller and/or listing broker. Listing agents who call the hotline clearly don’t believe they’ve authorized inspections during showings, or they wouldn’t be calling, but there is no clear rule that says this is or isn’t permitted.

Suggestion: Pre-offer inspections can be a great tool for buyers (who can make stronger offers if they know about the property) and sellers (who can feel more secure that a buyer is making a reasonably educated offer). Some listing agents are even opening the property for inspections before sellers consider offers. Most listing agents we hear from are less upset about the inspection itself and more upset that it’s being done in the guise of a regular showing.

So why not be upfront and ask the listing agent if the buyer can bring someone along to look at the property with them – or at least tell them (“I’ll be there with my inspector tomorrow morning!”), so they can push back if they feel the need. In a highly competitive market, antagonizing the seller/listing broker from first contact may not be the best approach. And if they refuse, that might also tell the buyers something about how a future transaction might go.

Where did that come from?

Scenario: Buyer waives all inspections in paragraph 12, then provides seller with a list of repairs identified by a mortgage lender and/or municipal inspection. Listing agent triumphantly shouts, “You can’t do that – you waived inspections!”

Problem: Some listing agents seem to forget that there are several places in the Agreement of Sale that cover different types of inspections. Specifically, paragraph 8(G) has a separate contingency covering repairs required by a mortgage lender or insurer and paragraph 15(B) covers violations uncovered through municipal inspections. Waiving inspections in paragraph 12 does not affect either of those provisions.

Suggestion: Read. The. Form. Buyers who ask for repairs under those provisions aren’t using a “loophole,” they’re using the form as written. Listing agents may have a lot of explaining to do if they’ve advised their sellers that waiving paragraph 12 means there are no inspection-related options for buyers to terminate. (This tip also applies to lots of other waivers that listing brokers seem to misunderstand.)

Information, please.

Scenario #1: Buyer elects one or more inspection contingencies in paragraph 12, then the words “inspections for information only” are written in the margin or in the special clauses section. Buyer tries to terminate and get their deposit back (because they have elected an inspection contingency that gives them that right), but seller resists (because they believe that “information only” overrides all the rest of the words in that contingency).

Scenario #2: Buyer waives all inspection contingencies in paragraph 12, but also writes “inspections for information only” in the margins. Buyer schedules several inspections (because they believe that writing the word “inspections” now gives them the right to do inspections despite having waived each individual inspection), but seller refuses to allow inspectors in (because the inspections were waived).

Scenario #3: Inspection contingencies are waived or elected (we’ve seen this one either way), and “inspections for information only” is written in the margins. Buyer tries to terminate or negotiate because they claim that what those words really meant were:

• Buyer could terminate if the repairs would be over $XXXX.
• The language didn’t apply to structural defects.
• I was only waiving the right to ask for repairs or credits, but I can still terminate.
• I was only waiving the right to terminate; I can still ask for repairs or credits.
• <Any other random word salad you can make up.>

Problem: There are hundreds of carefully constructed words in the existing inspection contingency and just tossing the phrase “inspections for information only” into the mix with no other explanation or changes to the pre-printed form is utterly meaningless. In fact, they’re worse than meaningless because the parties almost always disagree on the meaning, so they only cause problems without solving anything. (This also applies to lots of other ‘magic words’ that cause huge problems when agents use them without any context, like “as is” or “property must appraise.”)

Suggestion: For starters, DON’T DO THIS. Forgetting about the wisdom of waiving inspections in the first place, trying to jerry-rig a brand-new inspection concept agent-by-agent in the middle of a crazy, contentious market is just a lawsuit/ethics complaint waiting to happen. And there’s that little “practicing law without a license” thing as well.

To be clear, PAR attorneys cannot interpret language written by the parties. (Translated: No, you can’t just read it to us over the phone and have us fix it for you.) If you think it’s a great idea to substantially modify a major section of the Agreement of Sale, you could suggest your client talk with an attorney (preferably one who has used PAR forms before). Or better yet, if your broker believes that this is a viable tactic, perhaps the broker could speak with brokerage counsel about suggesting modifications or drafting a clause that could be used by their agents.

In conclusion

The amazing thing about many of these conversations is that they start with the caller admitting that they were pretty sure whatever they were doing wasn’t a good idea and/or that they weren’t quite sure what the outcome would be. So… just think on that the next time you whip out the editing pen.