A buyer who does not have a house inspected is taking a serious risk. For that reason, all real estate sale forms contain inspection clauses. Typically, the transaction is made contingent on the buyer in some way “approving” of the condition of the property as revealed in an inspection report or after a “due diligence” period during which the buyer is allowed to satisfy himself as to the condition of the property.
Residential real estate forms tend to use inspection contingencies that demand “professional inspections,” establishes strict disapproval criteria and requires formal affirmative disapproval by the buyer. Commercial transactions, on the other hand, tend to use general “due diligence” provisions that basically allow the buyer a specified period of time in which to satisfy themselves as to the desirability of the property. Because the residential approach to inspections is formal, expensive and strict, it is the source of a good deal of strife.
The inspection clauses used today in residential real estate forms evolved from simple “material defect” and “required repair” provisions. Historically, a residential purchaser could terminate a transaction on the basis of an inspection only if the inspection revealed “material defects.” As a result, termination under the inspection contingency was a rare and, for the most part, uncontested event.
What was less rare, historically, in residential transactions was the lender demanding certain “repairs” as a condition of making the loan. If the seller was unable or unwilling to make the lender-required repairs, the deal would fail on the loan contingency, not the inspection contingency. Standard forms from that era anticipated lender-required repairs by containing provisions for the seller to agree upfront to the amount of money they were willing to spend on “required” repairs. Thus, inspections and repairs were related but still separate provisions. Click here for a detailed discussion of the evolution of inspection clauses in residential contracts.
Modern inspection contingencies typically combine inspections and repairs in one clause. The most common way that is done in other states is to give the buyer an express right to propose repairs and then approve, or not, of the seller’s response to the repair request. Under such clauses, the buyer always has the last say on whether to go forward based on the seller’s response (or lack of response) to their repair request. Oregon does not use this approach to inspections or repairs.
In Oregon, common inspection contingencies propose an “inspection period” during which the buyer and seller may negotiate over “matters disclosed in any inspection report.” If the buyer and seller do not reach agreement on matters disclosed in an inspection report, the buyer can terminate the transaction by unconditionally disapproving of the property based on any inspection report(s). Such disapproval must be made prior to the end of the inspection period.
To place pressure on the seller, some buyer agents use “repair” addendums that say the buyer will not approve of the inspections unless the seller repairs the items listed in the addendum. This an old way of dealing with repairs and should not be used with modern inspection clauses. You will also sometimes see contingent disapproval addenda in which the buyer unconditionally disapproves, but agrees to proceed if the seller agrees to the included list of repairs. There are also homemade repair addenda out there that list the repairs desired and “disapprove” as of the last date of the inspection period if the seller has not first signed the addenda.
The problem with contingent disapproval approaches is the risk of the contract automatically terminating if the seller does not respond to the addendum. It is either that or run the risk of the buyer accepting the condition of the property without repairs by failing to disapprove within the inspection period. Standard “buyer’s repair addendum” forms used in Oregon avoid the contingent disapproval problem by simply requesting repairs without any disapproval, contingent or otherwise. The forms do, however, contain the follow warning: Warning: If the Inspection Period specified in the Sale Agreement is not properly extended, Buyer failure to provide written disapproval of the Buyer’s inspection report(s) by midnight on the last day of the Inspection Period could be deemed acceptance of the condition of the property.
The Buyer’s Repair Addendum warning is well taken. Unless the repair addendum is signed or the Inspection Period extended, the buyer must separately disapprove of the property condition based on an inspection report or accept the condition of the property. This, of course, make the Inspection Period deadline a critical date. On that date, without fail, the agent must have a copy of a signed repair addendum in their possession or a written extension of the inspection period or the buyer’s decision on whether to unconditionally disapprove or accept the condition of the property. There are no other viable alternatives.
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