Money & the Law: 'Inspection objection' provides window for resolution

Staff reports Published: May 12, 2013 | 12:00 am 0

Now that the real estate market again has a pulse, I thought it would be useful to go over one of the more important parts of the standard Real Estate Commission-approved contract form used in Colorado for the purchase and sale of an existing home. The parts in question deal with the condition of the property.

The way the process generally works is like this: To begin, the seller provides the buyer with a property condition disclosure form, thereby giving the buyer limited information, as known by the seller, about various components of the property - for example, the roof and the plumbing. The buyer then has the right to have the property inspected by someone who purports to know how to do this sort of thing. If, based on the seller's disclosure form or the report of an inspector, the buyer doesn't like something about the property, the buyer can terminate the contract or give the seller a notice of unsatisfactory conditions the buyer wants the seller to fix. If such an 'inspection objection ' notice is given by the buyer to the seller, the parties have a short period of time in which to reach a resolution. Otherwise, the contract terminates.

Typically, a new, and often contentious, negotiation unfolds wherein the seller says something like: 'I already agreed to an outrageously low price for this sale, and I'm not going to spend another penny. ' To which the buyer responds: 'I've already agreed to pay far too much for this property, and unless the seller fixes everything on my list, I'll go find something else. '

At this point, the real estate brokers involved in the transaction (who have a considerable interest in closing) try to put together a compromise. This can be in the form of an agreement that the seller will take care of some, but not all, of the matters on the buyer's inspection objection list or a reduction in the purchase price. From a lawyer's perspective, a reduction in the purchase price is the better way to go. Otherwise, if the seller fixes things, the buyer is sure to be unhappy with the quality of the work and another round of contentious negotiations will begin.

A few other points should be made. First, although the basic contract form talks about the buyer having the right to terminate the contract because the buyer is concerned about the 'physical ' condition of the property, most real estate brokerage firms use a contract addendum that gives the buyer the right to terminate the contract if the buyer, in the buyer's 'sole subjective discretion, ' is concerned about any matters affecting the property. (For example, the neighbors' children or pets.)

Next, real estate law is still stuck in a hopeless quandary between sellers-must-disclose and buyers-must-inspect. The way this sorts out in real life is that sellers get sued by buyers for fraud if they don't disclose known latent defects. A latent defect is one not discoverable by a reasonable noninvasive inspection of the property performed by a buyer. The message to sellers is: When in doubt, disclose.

Finally, the standard Real Estate Commission contract isn't intended for new construction. There, the homebuilder will have its own contract, an important part of which will deal with warranties. A topic for another day.

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Reach Jim Flynn, a private attorney with Flynn Wright & Fredman LLC at moneylaw@jtflynn.com.

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