Madison, WI - Madison, WI - The Inspection Contingency in
the WB-11 Residential Offer to Purchase (lines
298-315) is a provision that tends to create many
issues and questions for the real estate practitioner.
One such issue concerns the buyer's right to provide
notice of a defect, which has been identified by the
home inspector and was previously disclosed by the
seller.
As a general rule, a buyer who has actual knowledge
or written notice of a defect before writing the offer
cannot list the defect when giving a notice of defects
under the inspection contingency. There is, however,
an exception to this rule. If the seller does not make
a full and complete disclosure of the "nature and
extent" of the defect, then the buyer may still list
the defect in the inspection contingency notice.
Lines 311-315 of the offer state, "[F]or purposes
of this [inspection] contingency, a defect is defined
as a structural, mechanical or other condition that
would have a significant adverse effect on the value
of the property; that would significantly impair the
health or safety of future occupants of the property;
or that if not repaired, removed or replaced would
significantly shorten or have a significant adverse
effect on the normal life of the property. Defects
do not include structural, mechanical or other
conditions the nature and extent of which buyer had
actual knowledge or written notice before signing this
offer" (italics added).
An Example of the Issue
Mr. Seller fills out the Real Estate Condition Report
(RECR) for the sale of his single-family home. On
question C-10, relative to basement defects, the
seller checks "yes" and explains that there are some
cracks in the basement walls.
Ms. Buyer receives the RECR before submitting her
offer to purchase. During the home inspection, the
home inspector concludes that three of the basement
walls are cracked to such a degree that they are in
need of immediate repair. The inspector recommends
that a basement expert be retained and warns that the
needed repairs might exceed $10,000.
After a failed attempt to amend the offer, Ms. Buyer
delivers a notice of defects concerning the basement.
Mr. Seller objects, contending that the basement
cracks cannot be listed on the notice of defects
because they were disclosed on the RECR.
Ms. Buyer replies that Mr. Seller did not
sufficiently disclose the nature and extent of the
basement cracks, so she is entitled to give notice.
As a result of this controversy, the transaction
does not close. Such a situation can be avoided if the
seller gives a detailed explanation of the "nature and
extent" of the defect, or if the buyer drafts the
offer to provide for a closer examination of the
disclosed defect.
Detailed Seller Disclosures
Whether a seller fully disclosed the nature and extent
of a defect is ultimately a question of fact for a
court of law. In order to avoid litigating this issue,
a prudent listing agent should make sure that a seller
understands that a buyer cannot list a defect under
the inspection contingency if that defect is fully
disclosed. Conversely, a defect that is described in
only general terms, or is understated as to its depth
or degree, provides an "out" for the buyer because the
inspection contingency is still in play.
The seller's disclosure on the RECR should have
enough detail so that a home inspector cannot add any
significant information about the nature and extent of
a defect. For example, Mr. Seller's RECR could have
stated, "the north, east and south walls have numerous
and significant cracks up to one inch in diameter. As
a result, the walls have noteworthy shifting and
bowing. Seller recommends that buyer retain a
basement/foundation expert concerning any needed
repairs." If Mr. Seller does not feel he has adequate
knowledge or expertise or is simply not comfortable
making such a statement, he can retain an expert to
complete the RECR on his behalf.
Buyer-Specific Inspection Provisions
In many transactions where a defect is fully disclosed
by a seller, the buyer may still want the opportunity
to investigate the matter, get estimates for the work
and then decide if he or she wants to purchase the
property. In such a situation, the buyer may want to
alter the offer to allow him or herself to give notice
under the inspection contingency despite the seller's
full disclosure. The offer may be altered by adding
language allowing a "fully disclosed defect" to be the
subject of a notice of defects if the cost for the
replacement exceeds a given amount. Other ways to
alter the offer call for including a separate
contingency so that an appropriate expert can evaluate
the item of concern, or striking the sentence that
excludes fully disclosed defects (lines 314-315).
Published: 11/3/2004
