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If the inspection is “unsatisfactory to buyer,” how bad does it have to be?

by James Goldsmith, Esq. on

When a buyer elects an inspection contingency and the results are “unsatisfactory to buyer,” buyer has several options.

Most often, a buyer will submit a corrective proposal, though sometimes, the buyer will terminate. Less frequently, the buyer will accept the property in the condition reported by the inspector. When PAR first adopted this format in its inspection contingency, there was a substantial outcry by those who correctly observed that buyers can walk for pretty much any or no reason. Drafting a fair inspection contingency that allocates responsibility for yet-to-be-discovered conditions is nearly impossible. What we have works well, assuming we have reasonable buyers who want to buy and reasonable sellers who want to sell. Regardless, I won’t attempt here to further justify why we have the contingency we do.

This article focuses on what is meant by “unsatisfactory to buyer” that will justify a buyer’s termination and return of buyer’s deposit. Most who use this form assume that the buyer’s out created by the inspection contingency is limitless and if the buyer is dissatisfied, she cannot be stopped from walking. This is so because the standard for seeking renegotiation or terminating is subjective rather than objective. The report has to satisfy buyer and there is no telling what an idiosyncratic buyer may or may not find to be satisfactory.

I recently represented buyers who terminated an agreement to purchase on the basis of a report by a wood-destroying insect inspector. There was no evidence of infestation by wood-destroying insects, nor any finding of resultant damage from past infestation. The inspector, however, found that there were bore holes in the foundation of the property, indicating prior treatment or an application of a product used, prophylactically, to prevent possible future infestation.

Sellers thought the buyers’ objection to this finding was absurd, given there was absolutely no evidence of any problem and given the safety of any prophylactic treatment that would have been taken many years before buyers’ inspection. Sellers were convinced that citing to this cause was simply bad faith and an excuse on the part of the buyers to avoid their purchase obligation. They refused to return buyers’ deposit.

The sellers maintained their position, even after engaging counsel. I was surprised that sellers’ counsel would not recognize that a subjective standard did not have to satisfy everyone, but counsel held her ground. The insistence of the sellers’ attorney that my clients’ reason for termination had to be substantial took me to the law books. What I found was pretty much what I believed when I helped write the language in our standard agreement and what I had been employing when giving advice on the hotline these many years: The test is not whether the buyer should be dissatisfied with the finding in the inspection report, but rather whether he was dissatisfied. It does not matter what a reasonable person would find to be unsatisfactory , but only what this person did find to be unsatisfactory.

This standard does not mean that a buyer can terminate an agreement for no reason.  Dissatisfaction has to be genuine and not prompted by caprice or bad faith. The buyer who regrets her decision and uses the home inspection clause to terminate, better find a genuine reason in the inspection report.

How do we differentiate capriciousness from a buyer’s subjective concern about an inspection finding? In most cases we’ll never know. There is almost always a genuine issue advanced by an inspection report that will provide cover to a buyer who uses it, even pretextually, to avoid the purchase obligation for other, secret reasons. At least now you have better insight into the inspection contingency.

Topics

Inspection contingency
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Comments (16)

Comments

  • Andrea Lee    April 24, 2019 | 7:38 am

    So did you win your case and was your Buyer’s monies returned or is the case still in process?

    Reply to Andrea Lee
  • Charlene Haislip    April 24, 2019 | 8:05 am

    This is exactly why the new provision saying the home inspection report must be given to the seller in all circumstances, even if the buyer is not asking for any repairs and is just terminating, is so problematic. There will always be something wrong with any home, even new construction. As you say above, “There is almost always a genuine issue advanced by an inspection report that will provide cover to a buyer who uses it”. So why inflame the issue by requiring that the seller see the report in this situation? The seller reaction in your example above is not unusual. If an attorney had to “take to the law books” to untangle the nuances of this contract language, you can bet that your average non-lawyer seller will have no better and/or no different gut reaction. He too will have to contact an attorney. And so will the buyer. And the agents will be dragged into the situation. A whole cascading problem where none existed before. All due to the new agreement language.

    Reply to Charlene Haislip
  • David M. Tkacik    April 24, 2019 | 9:13 am

    Thank you for writing an article on this much needed subject. However isn’t a pretextual termination not “genuine” by definition? If the termination was not prompted by the inspection the seller should have a remedy. You can’t have it both ways.

    Reply to David M. Tkacik
  • Kathryn Masser(Kay)    April 24, 2019 | 9:19 am

    Very good article, Jim. It can spmetimes be difficult explaining this, so the article helps in those hard-to-inderstand situations be ut the buyer or seller.

    Reply to Kathryn Masser(Kay)
  • Melanie McLane    April 24, 2019 | 9:51 am

    But, Jim, the Paul Harveys out here want to know ‘the rest of the story’. How did the lawsuit turn out?

    Reply to Melanie McLane
    • Jim Goldsmith    April 24, 2019 | 12:53 pm

      Yo don’t let me get away with anything, Melanie! We approached mediation with a demand for return of the $5000 deposit. I provided Sellers, through their counsel, with a draft complaint seeking the $5K deposit and costs of suit. I couldn’t get the sellers above $3K and my buyers unhappily accepted. I compromised my fee considerably because I felt that a favorable decision would be of value to others similarly situated but it would have tied up the money for longer and ultimately cost my clients more. Sigh.

      Reply to Jim Goldsmith
    • Jim Goldsmith    April 24, 2019 | 1:03 pm

      Yo don’t let me get away with anything, Melanie! We approached mediation with a demand for return of the $5000 deposit. I provided Sellers, through their counsel, with a draft complaint seeking the $5K deposit and costs of suit. I couldn’t get the sellers above $3K and my buyers unhappily accepted. I compromised my fee considerably because I felt that a favorable decision would be of value to others similarly situated but it would have tied up the money for longer and ultimately cost my clients more. Sigh.

      Reply to Jim Goldsmith
  • Karlene Smith    April 24, 2019 | 10:39 am

    Good one Melanie I mean Paul! The rest of the story please.

    When we go over the contingency section I tell my buyers and seller at time of listing, that every house is going to have general maintenance issues even new construction but we are looking for health and safety that could be a concern during a home inspection and if they are a concern to the buyer they should be a concern to the seller as well. This helps keep both buyer and sell heading toward a common goal, ask for reasonable repairs and those repairs will get done.

    Reply to Karlene Smith
    • Keith DeVries    April 24, 2019 | 1:35 pm

      With all due respect, I think the comment that we’re looking for health and safety issues is missing Jim’s point. Sellers may have a misunderstanding of the potential outcome and buyers may misunderstand their options. Buyers may find previous damage that had been corrected to the seller’s satisfaction, but not to the buyer’s and thus, wishes to terminate. It doesn’t necessarily fall into the health or safety category.

      Reply to Keith DeVries
  • David M. Tkacik    April 24, 2019 | 11:01 am

    Great article on an important topic. However, a pretextual termination is not “genuine” by definition. If a seller could show that the reason was pretextual, i.e., the real reason for the termination was something else, then the buyer was not acting in good faith. Thanks again for writing the article.

    Reply to David M. Tkacik
  • Andrew Wetzel    April 24, 2019 | 11:01 am

    Insightful as always! Of course, I have two thoughts.

    First, there seems to be a minor trend with buyers making offers “sight unseen” to beat perceived competition and I assume that many think the inspection contingency a way out since the inspection may be their first visit to the house. Admittedly, I did not realize that the contingency was so easy to exercise for termination.

    Second, while apparently not happening here, some states are seeing buyers making offers on several properties, in and of itself a potential minefield, presumably considering the inspection a way to pare the field down.

    I am sure that both of these will be fleshed out at some point but they are out there.

    Thank you!

    Reply to Andrew Wetzel
  • Stephen Marchese    April 24, 2019 | 11:05 am

    Is it wrong to consider a Home Inspection as the Buyer’s “Discovery Time” and at this time they decide if they want to live there or not? Do they have the right to see if the home fits their personal needs as but not limited to the flow of the floor plan, have to carry the trash out too far and home condition.

    Reply to Stephen Marchese
    • Jim Goldsmith    April 24, 2019 | 1:01 pm

      We can’t fully control a buyer who exploits the process, including one who uses the contingency to tie the sellers while he/she continues to shop. It’s purpose is assess those conditions not readily visible to the untrained eye and not to mark time while the buyer vets his/her decision.

      Reply to Jim Goldsmith
  • MARY LOU WITTMAN    April 24, 2019 | 11:33 am

    I have had them walk because of radon, even though seller agreed to mitigate, buyer already had cancer and it was a large concern for her.

    Reply to MARY LOU WITTMAN
  • Scott D Geller    April 24, 2019 | 12:40 pm

    Remember, we have a difference between the property inspection and the home inspection contingencies. Home inspections and material defects are defined by law, but a property inspection can include much more, and really any concerns of the buyer. The bottom line -to avoid most problems- is good communication and setting realistic expectations. We have a rarely used line in that contingency that allows the exclusions of items and conditions already known to exist. We also used to have a “deductible” amount that the buyer was willing to accept in repairs. But like Jim said, when a buyer wants to buy and a seller wants to sell, they’ll work it out. And when one party doesn’t the transaction rarely goes to settlement – and I’d venture a guess that those that do comprise a larger percentage of lawsuits than the others.

    Reply to Scott D Geller
  • Tom Woods    April 24, 2019 | 8:41 pm

    The current revised Agreement of Sale requiring delivery of the Inspection Reports to the Seller via their agent in all probability, stops people from taking the very foolish position that they don’t want to even see the reports and prefer for themselves and their sellers to remain ignorant as to possible negative conditions of the property in question, making a thorough disclosure to subsequent buyers impossible.
    I wonder how many licensees understand that the last paragraph of our SPD Seller Property Disclosure form imposes the requirement on the Seller to either update the form after learning information subsequent to completing our SPD like from a buyer’s inspection or attach the entire reports. It does not indicate that the Seller and their agent are fine with just sticking your head in the sand and remaining ignorant of the possible facts. RDR = REALTORS Don’t Read, not even their own forms. Shameful !

    Reply to Tom Woods

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