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Walk-through issues

by Goldsmith, James on

The standard agreement gives the buyer an opportunity to conduct two pre-settlement walk-through inspections of the property.

Why a walk-through? The walk-through is the means by which the buyer determines that the seller has kept her end of the bargain by delivering the property in the agreed-upon condition.  Just as the seller counts the money to make sure it is all there, the buyer checks out the house to make sure it is all there.

So, what if the house “is not all there?” As you know, the range in severity of problems can vary from a leaky faucet to a leaky roof. What to do when the problem is seen at the walk-through? What are the buyer’s rights and the seller’s obligations?

It depends.  What did the seller promise to deliver that the buyer agreed to accept?  Paragraph 25 tells us that the seller had promised to deliver the property “in its present condition subject to inspection contingencies…” Regardless of severity, if problems existed when the agreement was signed and if there was no amendment or addendum providing for the repair of such item as a result of various inspections, the buyer shouldn’t complain about that problem at the pre-settlement walk-through. [Note: At this point I would ask how much deposit the buyer had on the line, and if the amount is relatively low (with a checkmark indicating that it is a liquidated damage), it is fair to predict that the buyer will walk rather than purchase a property with defects that were there to be seen, but which weren’t. This why, if you represent a seller, you want a substantial deposit.]

Of course, what constituted the “present condition” as of the signing of the agreement is subject to dispute. For that reason, a listing broker wisely makes a reasonable investigation of the property at or near the signing of the listing agreement to make note of those items that are in disrepair. The list can prove helpful in guiding a seller as to what should be done to put the property in its best light, but equally as important is its purpose in establishing “present condition” should a dispute later arise.

The scenario painted by the hotline caller who inspired this article advised that the seller had indeed hired a plumber who “fixed the faucet,” but lo and behold, the drip, drip, drip was apparent during the walk-through.

The starting point for this inquiry is with the agreement of sale and the change in terms addendum (Form CTA). Hopefully, the language is clear.  [Note: An addendum providing that the seller will have a plumber address miscellaneous plumbing issues is not the same as clearly providing that the seller will have specific items repaired by a professional plumber.]

Let’s presume that the language was sufficiently clear and that it required the seller to have the leak fixed before settlement. Now what?  On the morning of settlement there is little chance of having the drip fixed before the deed and money swap hands, so the only practical solution is to figure out how to ensure that it gets done after settlement.  But what if the problem is more substantial – like a leaky slate roof? A delay to appropriately assess a serious issue may be worth the difficulties it causes, but those difficulties may ripple through the transaction. How you address it is critical.

A common solution is to hold money in escrow until repairs are completed. PAR has a standard escrow agreement for this purpose, or sometimes an attorney or settlement company will agree to hold escrowed funds. The problem, however, is getting the parties to agree to an amount. Some smaller problems will be repaired within a financial range that is fairly tight. But other conditions require a diagnosis, that might reveal a wide range of possible remedies and costs. Advise your clients to get lawyers, but hope that they are reasonable and that a workable solution is achieved in which the escrowed funds do actually reflect the cost of required work. What if the buyer finds a problem after closing – either a condition that wasn’t fixed as promised, or one that may have cropped up between inspections and the closing date?   When found post-closing, does the buyer have any right to demand its repair by seller?

It depends. The answer partly has to do with the common-law doctrine of merger. The merger doctrine provides that in the typical real estate transaction, those obligations between the parties that are set forth in the agreement of sale are no longer enforceable after settlement.  The doctrine takes its name from the concept that all prior negotiations and agreements are deemed “merged” into the deed. It is a long-standing doctrine in Pennsylvania and elsewhere.

Like many old doctrines and concepts, courts fashion exceptions when they lead to just and proper results. When parties intend to create a right that is enforceable post-settlement, courts will usually find an exception to the merger doctrine. Likewise, when a defect is not material, courts have held that it will not merge into the deed and that the repair may be called for after settlement. It depends, however, on whether the buyer exercised due care in his walk-through and in the effort to determine that the property was in the condition it was to be delivered. Bottom line, don’t take chances. Conduct the walk-through and have the matter addressed in an addendum that is intended to survive settlement. [Note: “Survive settlement” was coined to assure that the intent of the parties, that the merger doctrine would not preclude enforcement, was clear.]

A pre-settlement walk-through is not a home inspection, but can be an equally important step in the process since it is a buyer’s last chance to identify any new issues or broken promises to repair. I frequently remark that Realtors® sell a home twice: once when they get an acceptable offer and again when the home inspection report arrives. I guess there could be a third sale when the pre-settlement walk-through reveals problems not anticipated to be found. This third sale can be avoided by thorough inspections conducted during the contingency period, followed by a very carefully constructed CTA with the appropriate follow-through. If problems are found at the walk-through, however, knowing what respective rights of the parties are is critical.

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Walk-through
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Comments (8)

Comments

  • Gary Cassel    September 7, 2017 | 7:16 am

    Jim – great article, but about the escrow. Dont we need to notify the Lender regarding the escrow? And probably the Lender at that point would not allow settlement to move forward until the issue was resolved?

    Gary L Cassel

    Reply to Gary Cassel
  • Kathy Opperman    September 7, 2017 | 9:10 am

    Great article Jim! I also second Gary’s question. We are finding that Title Companies nor brokers will hold Escrows any longer. So it is becoming more difficult to handle the repairs needed that are discovered during a walk through. I have seen some people obtain an estimate and have the seller write a check directly to the contractor/repairman at closing to keep things moving forward. Rarely is there an attorney at a PA settlement in order to be involved to hold escrow. I used to love to use the (PAR) Escrow Agreement but times have changed and Lenders won’t allow it, and others won’t hold it.

    Reply to Kathy Opperman
  • Jim Goldsmith    September 7, 2017 | 9:24 am

    Gary and Kathy, sound observations! Lenders are rigid and I don’t know how you get around a problem without the lender’s approval. A buyer has, under PAR’s asr, two walk-throughs reserved so perhaps taking advantage and scheduling an earlier one will give enough time for a work-around. Eager to hear from others. Jim

    Reply to Jim Goldsmith
  • Anne M Matyjasik    September 7, 2017 | 9:45 am

    Excellent article Jim and hopefully will be read by many of our colleagues! Since Gary, Kathy & I all work in southeastern PA the issues of neither brokers nor title companies holding escrows and lenders not approving has become an issue especially if the repair required may be costly. Getting a contractor out on short notice adds to the problem and unfortunately I am not seeing many buyers take advantage of the “two walk through” option.

    Reply to Anne M Matyjasik
  • Andrew Wetzel    September 7, 2017 | 9:50 am

    Excellent and enlightening as always! I have always wondered when a “typical” buyer thinks that they have really become the owner of the property they purchased as I have seen a number of buyers (usually through their agents) question issues after settlement as if there were some implied warranty provided by the seller (obviously a home warranty would help). The final “walk-through” is especially important and I have seen buyers do this days before settlement as well as buyer agents agreeing to do the final walk-through on their own when a buyer is “unavailable”. Who knows what could happen before settlement? These are not problems until they are! When a buyer goes to the house after closing and finds a mess, life gets difficult.

    Reply to Andrew Wetzel
  • elizabeth    September 7, 2017 | 9:52 am

    What if at the settlement table, after your final walk-through , your buyer has discovered an issue that was not disclosed, but had asked during the first walk-through.Your buyer asks for an extension to get an expert in find out how to correct the issue, but the seller says no…”if settlement doesn’t happen today, we keep your deposit and we are done!”

    Reply to elizabeth
    • Jim Goldsmith    September 7, 2017 | 11:36 am

      Why wasn’t the issue dealt with immediately after the first walk-through? If an issue was discovered at that time it should have been memorialized in writing as should seller’s response. The devil is in the details and I don’t want to get too deep into a situation where the specific facts are so critical.

      Reply to Jim Goldsmith
  • Kathleen McGee-Birkelbach    May 11, 2018 | 8:13 pm

    Good Article Jim, Scheduling an earlier one will give enough time for a work-around, Don’t wait until the day or morning of closing. “Its not a problem until its a Problem.” I always schedule my 2 walk through,one just after home inspection ( repairs if any were made )and the second
    within 48 hrs of closing.
    -Kathleen McGee-Birkelbach Montgomery county PA

    Reply to Kathleen McGee-Birkelbach

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