Can a buyer terminate the contract because of a bad inspection?

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Professionally dressed man ripping a contract in two

11/04/2016 | Author: Legal Staff

My buyer’s right to terminate the contract under Paragraph 23 has expired, but his inspector found serious foundation problems and possible mold because of a prior roof leak. Can the buyer still terminate the contract after the option period because of these issues?

A buyer can’t terminate a contract after the option period has ended just because the inspector found problems. However, under Paragraph 7E, if the buyer’s lender requires that these problems be repaired as a condition of making the loan and the buyer and seller can’t agree on who will pay for the repairs, then the contract will terminate. The buyer will retain the earnest money. In addition, Paragraph 7E provides that if the cost of lender-required repairs exceeds 5% of the sales price, then the buyer may terminate the contract.

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Categories: Legal
Tags: legal, legal faq, buyers, contracts, inspection, inspection reports, option period, termination option


Pearla Hernandez on 02/04/2017

I am a new agent and just got a new listing . I am completely lost and I do not have a broker with an office or a lot of hand on or time. You said in your comments that if an agent needed a mentor you could help @Rick Devoss. Well I need major assessment and I am terrified to do something wrong or miss a beat. How do I contact you?

Rick DeVoss on 11/11/2016

I agree, Debbie.
I may not be willing to take on the liability of being “broker” to a bunch of agents, but I am willing to be a mentor to anyone who needs it.  Any agent out there, no matter who your affiliated broker is, feel free to call me if you need a mentor, or have a question.  ~I will not pretend to have all the answers, but I do know who to call.

I am currently fighting my way through a transaction with both an inexperienced agent and a broker.  Can you believe they balked at extending the Option Period when it took the agent 11 days to return an Offer to us, and then 8 more days to get the gas turned On…?

What happened to “Listing Agent responsibilities”...??  When we give a seller an offer to sign, and execute a contract, are we not responsible for making sure the utilities are On, especially if the seller lives in another state…?  And I am kicking myself for not checking it out, but the lights and water were On, and I forgot that the house has gas to it.  —-To make it worse, the Listing Agent has been leasing the house since it was rental property from Day 1, so they should know the status of things.

Does anyone else think we should restrict leasing agents from listing an occasional house when they have never sold properties…?  ~Maybe we need such a thing as a “Specialized License”.  ,,,That’s what the Texas Department of Insurance does~!  ( I may be licensed to sell Life Insurance, but I am not licensed as a “P&C Agent”.)

Debbie Scrimshire on 11/11/2016

I am finding with the great market that the inventory of new agents is astounding.  The problem is they go with a “rent a broker” and don’t have critical thinking skills.  So many companies have cut out the licensed office manager or a sitting broker who is accessible in order to bounce questions and scenarios off of.  When I sponsor someone into our office I tell them to call me.  They learn so much that way if I just take the time to explain why I answered the way I did.  Everyone needs a mentor.

Rick DeVoss on 11/10/2016

Agents need to be better trained and supervised before they are turned loose in the field.  ...Many Brokers are not assuring that that happens, and they have the liability.  Perhaps a course in “how to write a contract” should be mandatory for all agents, and then errors such as you described would not happen.

I am a firm believer in Continuing Education, and I think all of us need to go back to school every year.  (And I don’t mean on-line courses, either.)

The Seller’s Disclosure Notice that was drawn up by TREC is weak because it does not ask the right questions.  It is only 3 pages long, where most other forms that have been drafted are 5 to 8 pages of questions.

I recently received one from a landlord-owner who has owned the house for several years, and yet he claims that he is not aware that it has aluminum wiring, and there is Nothing that needs repairing!  ~It’s pretty obvious when you can see shingles missing from the roof, etc, etc.

My real beef is with the Listing Agent/Broker who Has seen the property, and is tasked with advising the owner before they decide to sell it.  They are not earning their fee for representing the seller!

Perhaps we need a rule that says if you specialize in Property Management, you can’t list and sell houses.  ~The leasing agents (for the most part) do not understand the sales end of the business, and many of them even refuse to work on the weekend like we do, just because they turn off their phones to avoid the tenant’s calls.

While I’m on my soapbox. how about a requirement to sell at least one or two houses every year, or if you don’t, then you have to take further classes to bring you up to speed…?

The absolute minimum for CE requirements does not seem to be enough for many agents.

David Davis on 11/10/2016

You are so right.  Time and time again I see contracts that are examples of agents that do not know how or what to do.  The most recent example is one in which the contract says that the Buyer will purchase a new survey within 3 days of the effective date when they purchased a 7 day option period.  As it turns up, there was a survey and elevation issue that prevents the lender from approving the loan.  The seller did not disclose that the property was in a flood zone.  And further did not properly disclose other relevant issues about the property indicating that they likely intended to conceal material or latent defects from the potential buyer.  Meanwhile the inexperienced Buyer’s agent submits an offer with 3 days to purchase the survey, and a 7 day option period.  Neither agent bothered to verify that the property was in fact in a flood zone, yet the seller discloses on the seller’s disclosure that it’s not. What were they thinking?????  Now this listing broker wants to play dumb and refuse to release the earnest money back to the buyer.  The only real question at this point is how many places to the right will that decimal point get moved before they pay?  Lawyers anyone?

Rick DeVoss on 11/10/2016

I would first of all take issue with the terminology of this question.  It does not sound like it was a “Bad” inspection; quite the contrary, it was a “Good” inspection if the inspector discovered the problems that exist in this house before the buyer bought it.

But the real concern here is Agent Responsibility.

Why did the Buyer’s Agent allow the Option Period to “expire” before they had the results of the inspection in their hands??

You can claim that it is ultimately the buyer’s responsibility to schedule the inspection in a timely fashion, and, the buyer is the one who has to make the timely decision to exercise his Option to terminate a deal gone south.

But how is the buyer’s Agent earning their commission if they don’t advise the buyer of the proper date to take action, and to provide the proper form(s) for the buyer to use…?  Every buyer’s agent should have the suspense dates marked on their calendar. 

First of all, stop putting such a short number of days in Paragraph 23 of the offer.  “7 days” is frequently not enough.  Especially when you may be working with people who don’t do anything on the weekends.  (I’m currently dealing with a property manager who refuses to even write an email on the weekend.)  In most cases, “10 days” is a wiser entry in Paragraph 23, and sometimes even that is not enough time to get all the reports back, cost estimates figured, and time for negotiations with an agent who is slow to respond to emails.  —-This is something you have to have in writing!

I cannot imagine the above scenario in any of the contracts I have negotiated.  It is too easy to fire off a “termination of contract” notice if the Option Period is coming to a close.  You can always say that you are willing to extend it, and give the seller an out.  But Never let your buyer go past the deadline for the Option without a satisfactory conclusion.

Scott Billingsley on 11/04/2016

Always refer to the contract first.  There are dozens of ways to “legally” and “contractually” kill a contract and in the majority of cases, the buyer will have his/her earnest money cheerfully refunded.

In the case described, as a primarily listing agent who mostly represents the seller, I would be extremely uneasy about forcing a buyer to fulfill the contract after latent defects are discovered.  Even on the day of closing.

I would find it extremely hard to believe that the seller had no knowledge of a bad foundation or serious mold problem existing. 

On the buyer’s side, if I was representing the buyer, I would and have advised to send in a termination of contract explaining the reason(s) for termination and request the return of the earnest money. 

Sometimes the other side is hesitant but in every case, I did get the earnest money refunded eventually.  I have been involved in thousands of transactions over the past several decades and have only had something like this happen with about 1% of the deals. 

The buyer’s side won every time.

David Davis on 11/04/2016

While “serious foundation problems and possible mold because of a prior roof leak” is certainly likely to exceed the 5% threshold in 7E mentioned above, I think we are assuming some facts that are not conclusively in evidence here.  What are the costs involved, and what was the sales price would the first two questions that come to mind.  Is this deal salvageable?  On the cover, it sounds like NO!  But I learned a long time ago, “don’t throw the baby out with the water.”

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The material provided here is for informational purposes only and is not intended and should not be considered as legal advice for your particular matter. You should contact your attorney to obtain advice with respect to any particular issue or problem. Applicability of the legal principles discussed in this material may differ substantially in individual situations.

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