Inspection Notice and Resolution of unacceptable conditions Amendment

 

Video can be found at : https://www.dropbox.com/s/8zf4cr9j8u34nxh/Inspection%20Notice%20Training%20Video.mov?dl=0

You only use this form when you have an inspection period on the resale contract. Doesn’t apply to the New construction contract.

This scenario, which is most transactions for you especially if you are representing the buyer you will be initiating this form. You have a certain window of time to conduct inspections on behalf of your buyer. Then you will need to respond to the seller with what the results are with the inspections and with what decisions your buyer has made within the provisions of the contract.

This is very important that you only use with our contracts because of all of the language in our contracts, mirror each other. They are really only compatible when using the other contracts. So don’t use one or the other, they need to be used together.

Top Section (1 min 35 secs)

You will notice at the top it has room to type in your Sellers. Hopefully since you are already in a transaction with them, and if you have already used their names they will pre-populate if you have typed them in a different form. Same thing with the Buyer and the address.

Inspection Notice Delivery Date (2 mins 10 secs)

This next line is for the inspection notice delivery date. This is very important and gets folks tripped up easily. This is the date that the inspection notice is being delivered.

• Here is a Scenario: On January 1st , your buyer, admits an inspection notice, but you don’t actually come terms with the agreement until January 4th, this date (Inspection Notice Delivery Date) stays the same. If you submit an inspection notice with 5 terms on it, and the seller responds to the inspection notice with 3 terms, and you go back with 4 terms (and you come together on the last one on January 4th), your Delivery date is still January 1st.

Because your initial inspection notice was delivered on January 1st. If you remember to the base contract it outlines the Inspection period as well as the resolution period. Once you have initially submitted the inspection notice, no matter how many times you go back and forth afterwards, you are now in the resolution period. You have ended the inspection period at this point and are now in the resolution period. It is very important to mark the start of the resolution period with the inspection notice delivery date.

The other reason this is important is this proves that you delivered the inspection notice within the appropriate time window. If you remember from the base contract that your client has accepted, if you represent the buyer, and you miss the inspection deadline…Technically your client has accepted the property as is and has forfeit the right to renegotiate. This is very important to 1.) Get in on time and 2.) To document that you got it in on time. So that is what the Inspection Notice Delivery Date is used for.

For Notice Purposes (Check the applicable paragraphs below.) (3 mins 53 secs)

If you notice in this section there are 3 options that are outlined in the base contract: Accept the property “As Is” (#1 & #2), you can cancel the contract (#3), or offer to Renegotiate (#4).

Inspection Waiver & Inspection Results Acceptable

1.) Inspection Waiver – Buyer agrees to Accept property “As Is”. Buyer HAS NOT conducted inspection(s) and waives any right to cancel or renegotiate and accepts property “As IS”
2.) Inspection results acceptable – Buyer Agrees to accept property “As Is”. Buyer HAS conducted inspection(s) and agrees to accept the property “As Is”.

There is a small distinction between #1 and #2 with either HAS or HAS NOT conducted inspection(s). My impression of the law is that if your client has done inspections it alleviates the seller a little bit of liability of the conditions of the property. If something were come up down the pike whereas if they did not do inspections, they are more substantially relying on the seller’s disclosure or whatever the seller has made claims about. It puts a little more on the seller if it comes back wrong or bad. Both number 1 and number 2, are the clients accepting the property “As Is” depending on if they have or haven’t done inspections.

Cancellation of the Contract

3.) Cancellation of contract by buyer prior to expiration of inspection period. Buyer has conducted inspection(s) and found unacceptable conditions; copies of all inspections attached. Buyer cancels the contract and requests the refund of the Earnest Deposit

Always accompany this form with the cancellation if you do intend to cancel the contract. That gives the title company permission to disperse the earnest money. Technically the way the contract reads, they should be able to disperse it anyways, but they like to have that written agreement between all parties. If you were to get into a situation, where someone is refusing to sign the cancellation, when your buyer has cancelled the contract within the inspection window, get with me. I believe the language in our contracts is adequate enough for them to release that.

All copies of all inspections need to be attached. You will notice on #1 and #2 you don’t need to attach, but for #3 you do need to attach. If you remember from the base contract unacceptable conditions is any condition the buyer finds unacceptable. So, it’s kind of a freebie. Hopefully they haven’t entered the contract they intended to cancel, but it gives them a free reign to get out of the contract based on the inspections that have been returned.

Offer to Renegotiate

4.) Offer to Renegotiate. Buyer has conducted inspection(s) and found unacceptable conditions, copies of all inspection attached. Buyer desirers to renegotiate the terms of the contract to resolve the unacceptable conditions as identified in the FOR-RESOLUTION PURPOSES section of form.

This is the most used section that you will be using. Generally speaking, there is going to be small things that they want to renegotiate on but nothing that is a deal breaker that they want to cancel. You will notice you will only use line 31 onward if you have checked paragraph 4. If you haven’t checked paragraph 4 then the rest of the form doesn’t matter because you have either accepted as is and you don’t need that language or you cancelling the contact and you don’t need that language.

A quick note about section 5, although it is inside of the Inspection period, Inspection paragraph on the base contract, it is kind of its own animal. Because the seller has agreed to treat if you find termites. It is not a renegotiation point. It is a, “If we find termites we will treat”. So you can check Accept the property as is, and still check #5 if you found termites and that is the only you want remedied in the deal.

Wood Destroying Insects

5.) Wood Destroying Insects. The written Inspection report of a licensed pest control firm is attached. Treatment for wood destroying insects is required per The Residential Real Estate Sale Contract.

If the Lender Requires any condition accepted by BUYER to be Corrected, then Lender requirements regarding condition of Property supersede any agreement as to acceptable or unacceptable conditions. Parties agree to renegotiate the responsibility for satisfying lender conditions.

Again if this something that your client has asked you to do but they are okay with everything else you can check #2, saying that you did do inspections and accept the property as is, but you did find termites so please treat for termites. This keeps the deal together. That unilateral one sided inspection where the buyer kept the seller at the table.

For Resolution Purposes (Check the Applicable Paragraphs below.)( 8 Mins 18 Secs)

You have several paragraphs here. “Buyer Agrees to Accept Property “As Is”. Which may be a little confusing until you think through the scenario.

Accepting the Property “AS IS”

1.) BUYER AGREES TO ACCEPT PROPERTY “AS IS”. Buyer conducted inspections, unacceptable conditions and notified SELLER of Buyer’s desire to renegotiate the contract. However, BUYER now agrees to accept the Property “as is” without correction of, or other action by the SELLER with respect to the unacceptable conditions. (This election must be delivered to the Seller within the renegotiation period, but does not require Seller’s Signature to be binding).

This is something that is really important to keep in mind, if you submit on January 1st an inspection notice that says you want a whole bunch of stuff fixed and your buyer and the seller says no we won’t fix any of that…We have 5 backup offers and we will sell it to one of them instead. As long as you do this within the renegotiation period your buyer can unilaterally re-bind that seller to the contract, so they can say “we agree to that initial contract and those terms”, but the first inspection period you sent on January 1st had paragraph 4 checked. Now you have presumed that we have gone back and forth, or they haven’t responded at all. Now you would need to send them a new inspection notice/resolution.

Remember this top line will still say January 1, because you initially submitted the inspection notice on January 1. But now you are checking box 1.) (under the Resolution Purposes section) …which says basically “your client, you know we tried, and you guys didn’t agree to anything and they really want the house, so we are going to accept it as is, so you still have to sell it to us”

Correcting unacceptable conditions

2.) Correction of Unacceptable conditions (check applicable paragraph below.) Seller acknowledges receipt of buyer’s Inspection Notice and buyer’s inspection report(s) and make the repairs as indicated below in a workmanlike manner using good quality materials.

Basically this is where you outlines the terms of what everyone is agreeing to, and if everyone signs at the bottom, then everyone has agreed to what is on here. And if they haven’t then it is kind of open ended, and you can respond with another inspection notice. Don’t ever amend this inspection notice. Don’t ever go through and strike things out and initial it. My strong preference is that you prepare a whole new Inspection notice every time. Again that is what this date at the top is for, in order to make sure everyone is aware of what date the negotiations started. But make a fresh copy every time.

A. Seller Agrees to Make All Repairs

2.) Correction of Unacceptable conditions (check applicable paragraph below.) Seller acknowledges receipt of buyer’s Inspection Notice and buyer’s inspection report(s) and make the repairs as indicated below in a workmanlike manner using good quality materials.
a. Seller Agrees to make all repairs requested in buyer’s reports attached to the inspection notice. (This election must be delivered to the buyer within Renegotiation period, but does not require buyer’s signature to be binding.)

This really shouldn’t need to be used at any point because if your seller was stonewalling the buyer, and the buyer might move onto another property + its day 5 of the renegotiation period and you had 5 days. If that seller wants to bind the buyer to the original inspection notice…they would just sign the original inspection notice. This is not a paragraph you be using, at least in how we do business at Foundation Realty. I would recommend not using that paragraph ever.

Others read that to be, basically that the seller agrees to every single repair on the inspection report(s) and that is how some people use this contract. Again I would advise you guys not to use it in that fashion, because a lot of times inspection report(s) aren’t super clear on what the remedial action is. They outline the problem well but they don’t outline what should be done about it and it could be unclear. You could get some sort of issue where there was an expectation of how it would be fixed by the buyer that wasn’t met by the seller, even though the seller addressed the issue.

I always recommend to being super explicit in Paragraph B. What exactly is the seller agreeing to and what exactly is the buyer expecting to be done. That way there is no miss communications and there is nobody upset on closing day or real close to closing day.

B. Seller agrees to correct the following:

b. Seller Agrees to correct the following unacceptable conditions:

Then obviously you can attach additional pages if you need that to outline to what remediate action to be done.

Remaining Uncorrected Unacceptable conditions (12 mins 41secs)

3.) Remaining Uncorrected Unacceptable conditions. Any unacceptable conditions identified in BUYER’S offer to renegotiate or in any inspection report accompanying BUYER’S offer to renegotiate which the SELLER has not agreed to correct in this Amendment WILL NOT BE CORRECTED and BUYER agrees to accept them in their present condition without any corrective action taken or payment thereof. SELLER and Licenses assisting in the sale of the Property are released form any further obligation or liability related to the condition of the Property.

Basically if an inspector wrote it down it down but you didn’t ask for it on this form, it’s not being done…Everybody understands that.

Payment for Corrective Measures

4.) Payment for Corrective Measures. If a payment for the corrective measures is not to be directly out of escrow, SELLER shall provide proof of payment prior to closing. BUYER may, prior to Closing, inspect any corrective actions taken by SELLER. SELLER and BUYER acknowledge that BUYER’S agent, SELLER’s agent nor brokers are responsible for completion of or payment for any corrective measures

That one is pretty straight forward and self explanatory. This next paragraph is where people get tripped up on this particular form. You will notice Adjustments in price or terms, these are more fiscal aspects opposed to physical adjustments to the property.

Adjustments in Price and/or Terms (13mins 52 secs)

5.) Adjustments in Price and/or Terms. (Fiscal Adjustments)(These options require the prior approval of BUYER’s Lender.) (Check applicable box):

In Lieu of (Instead of)

There are 2 options here, In Addition to OR In Lieu of…or think of it as instead of. So if you check in Lieu of Seller correcting unacceptable conditions, Buyer and agree as follows.

EX. We submitted all of these items in the inspection that said you have all sorts of issues with your house. Instead of you doing those items we are going to take care of them after closing, whenever we want. We just want you to change the price to $x amount or pay these closing costs.

In Addition to

In Addition to: indicates the very opposite. That we want you to fix all of the items listed above AND we want these changes made.

Let’s say a roof needs done, and then there’s a whole bunch of piddly other things you might say, “seller agrees to execute attached Weddle and sons bid.” This is the thing the sellers going to execute. They’re going to replace the roof, but then we also want the purchase price that was $200,000 to be $195,000, because there is lots of other little things that we’re going to go ahead and take care of after closing, and we want to make sure we’re compensated for that. The way this reads that will be doing both this things.

“In Lieu of” Mistakes

And this if this box were checked (In Lieu of), you should have no text above here ’cause there’s nothing that’s being agreed on. So delete anything that’s up. Instead of having them replace the roof, you’re going to have them reduce the price $5000 so you can replace the roof later. It is never both. A lot of times agents like to use this contract and check In Lieu of saying, “You can either replace the roof or reduce the price $5000.” The issue with that is what was agreed on if the seller signs it just like that What is going to happen? Are they going to replace the roof or are they going to reduce the price?

It’s unclear an it it doesn’t make sense to outline two scenarios and say your choice. You can articulate that in an email saying you are comfortable with either of these scenarios. Have them let you know what to do, or submit two inspection notices at the same time. One that outlines the new price and one that outlines the roof change. Then they could sign whichever one they were comfortable with. You can’t outline two scenarios on the same form and then have it be clear with which scenario is actually going to be executed. 

Make sure if you’re doing in lieu of, there should be no text up in the above paragraph. If you’re doing in addition to, then you want to make sure you’re specifying exactly what you want done in the paragraph above and exactly what you want to happen to the price change. 

Only correcting the following unacceptable conditions

You could also have nothing checked in section 5 and no price change either, and only have items listed under “Seller agrees to correct the following unacceptable conditions”. In the above scenario if they just wanted to correct the unacceptable conditions, in this case “Seller agrees to execute attached Weddle and Sons bid and this or that” or what have you.

A. Changing the Purchase Price

In paragraph A, under paragraph five, you can change the purchase price. This is super straightforward. If the purchase price was $200,000 you might change the purchase price to $195,000.

Another example would be you might have the seller fix a bunch of things, but raise the purchase price. Maybe they agreed to split the roof cost. So if they’re going to execute the $5000 roof bid, but they only want to pay $2500 of it, you might change the price to $200,000 and $202,500. It doesn’t make a ton of sense right from the get go to raise the price after you did inspections. However in the situation above, they both have decided to effectively split the bid. The borrower is raising the price, and the the buyer is raising the price to compensate for their half of the roof bid. They’re paying the seller a little more than they would have otherwise. The seller is going to pay the $5000 bid, therefore effectively reducing their price only $2500. Effectively splitting the cost of the roof bid.

B. Payment/Credit of Closing Costs/Prepaids (Section Five B (18 Min 8 Secs)

Paragraph i

The below section is really important to read. You will notice in paragraph i under B (Section Five), “If Seller previously agreed to pay any of the buyers allowable closing costs, the seller agrees to pay an additional X closing cost.” If you already have closing costs built into the contract, this is adding on to that amount. If the contract already says $2500 in closing costs and you put $2500 on Section five B I, then they are now paying $5000 in closing costs. 

Paragraph ii

Paragraph ii says, “Seller agrees to pay X dollars of buyers allowable closing costs and prepaid expenses.” This is the paragraph you would use if there was no previous agreed upon closing costs and you are just adding it to the contract. Sometimes this could get filled out thinking that it’s adding it to the existing closing costs, but technically it’s not. If you put $2500 in paragraph ii and you had $2500 on the base contract you are not adding any additional closing costs. The way this reads is that closing costs is still only $2500, because you’re not actually adding it to what was on the base contract. Even if that was your intention. Make sure if you’re adding additional closing costs to what you already had in the contract you check paragraph i and add in the amount.

Paragraph iii

In the other section, you will use this in rare occasions. This is something that’s there just in case you need to change some sort of financial terms of the agreement. There’s all kinds of weird things that you could do in a contract to make a deal work for a buyer for a seller, and this is where you would make modifications to that with ease. Otherwise you could add additional pages or just come up with an amendment. 

Bottom of the Contract (19 mins 37 secs)

Like all of our contracts, ” This agreement in this amendment constitutes the entire agreement between the buyer and seller with respect to the resolution if not understood, consult an attorney before signing.” We’re not attorneys, but our associations put these forms together for the benefit of our use. I’ve never had somebody need to consult an attorney. Hopefully you’re competent enough and explaining this to them that they don’t have any major questions. 

But again, it’s only binding if everybody has signed the contract or signed the amendment. It is not binding if only one party, or the other has signed. Unless there are provisions for that in the base contract. If the buyer is accepting the property as is or canceling the property, those are unilateral moves. In case of cancellation, the title company, still wants the sellers signatures. You don’t have to have the seller’s signature to make that those parts binding. They can’t say, “Actually no, we have a backup offer”, they are stuck with this deal. 

Just like in paragraph one under “For Resolution Purposes” it says, “delivered within the period but does not require seller’s signature to be binding.” Similarly, if you submit an initial inspection notice and offer to renegotiate. If you outline the terms below and the seller won’t agree, and on day 4 you submit a cancellation you say, “Actually, we’re going to cancel of the renegotiation period day four.” If it is before day five, as long as they’re still within the renegotiation period, they can still sign your initial offer to renegotiate and bind your buyers to the contract. 

Within the inspection period both parties have some power, but they don’t have to do anything. The buyer can be bound to what they originally agreed they would do, but nothing more or less. The seller doesn’t have to make any repairs on the contract.