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Waiving Inspection Contingencies: Clean or Dreadfully Messy?

By Brett Woodburn, Esquire

  • 23 February 2021
  • Author: RAMP Staff
  • Number of views: 283
  • 0 Comments
When real estate market conditions evolve, real estate practices also evolve as REALTORS® strive to position their clients - and themselves- to be in the best negotiating position possible. Regardless of whether they represent buyers or sellers, REALTORS® demonstrate remarkable innovation that usually advances the real estate profession in a positive way.

Sometimes the solution is more problematic that the underlying issue. There is a disturbing trend in which buyers are encouraged to waive their rights to perform due diligence inspections prior to closing.  This trend elevates from “disturbing” to “alarming” when inspections are waived because the listing agent indicate that seller will not consider any offers with inspection contingencies, or the listing agent will advocate for the seller to accept the offer without any inspection contingencies, rather than consider an offer that has them. Being involved in a transaction in which inspections are waived can dramatically increase both agents’ exposure to legal liability, licensing violations, and claims that the National Association of REALTORS® Code of Ethics has been violated.

Legal Liability

Sellers are obligated to complete a Real Estate Sellers Disclosure Form and provide it to prospective buyers before a contract is formed, and real estate licensees are obligated to correct any information provided by sellers that does not include disclosing material defects, or that does not accurately disclose material defects. Importantly, neither sellers nor their listing agents are obligated to make any investigations into the condition of the house. In other words, sellers are permitted to complete the disclosure form based solely on their memories. Additionally, the Real Estate Seller Disclosure Law specifically states that disclosures made by sellers are not intended to warrant or guaranty any condition of the property. Finally, none of the disclosures that are set forth on the disclosure form are automatically included as terms in the agreement of sale. 

The inspection contingencies are important tools for prospective buyers to use to investigate what the seller disclosed, to find conditions that may not have been disclosed, and otherwise help educate the buyers about the condition of the property that they are buying before they actually own it. Sellers and listing agents can miss things that should be disclosed, sellers can forget to include things that should be disclosed, and sellers can be quite creative with how things are disclosed. 

Conditions that are discovered during inspections can often lead to renegotiating the Agreement of Sale by asking for repairs, credits, or price reductions. It is also not uncommon for buyers to terminate transactions as a result of what they find through their due diligence. It is understandable that sellers want to avoid these scenarios when possible. However, conditions that are discovered after closing can lead to sellers being sued. If the buyers were not given the opportunity to perform inspections, then the chance for the sellers and both real estate agents being sued, increases exponentially. Given the choice, most sellers would likely choose to avoid litigation.

Listing agents who recommend that sellers not accept an offer with inspection contingencies elected, or worse, listing agents who encourage their sellers not to even consider offers with inspection contingencies, could be defending additional claims of malfeasance and incompetence from their sellers. Buyers agents are in a different predicament if this is the paradigm in your market. When sellers are refusing to accept (or even consider) offers that include inspection contingencies, there is increasing pressure from buyers to waive the inspections because they want/need to buy a house. Many, even most buyers agents recognize the value that inspections provide to buyers and they want to encourage their buyers to protect themselves (For Your Protection Get A Home Inspection). With low inventory and increasing pressure from listing agents and sellers to submit what is described as a ‘clean’ offer containing, at most, a mortgage contingency clause, buyers agents have the unpleasant task of telling buyers they really should have a home inspection, but if they elect to have one, the likelihood is that the sellers will accept a different offer. 

If a buyer purchases a home and within three months discovers that the roof is leaking, which would have been discovered by an inspector, the buyers will look to the sellers, listing agent, and possibly their buyer’s agent to compensate them for the damage and the frustration that they experienced. The nice, clean offer has become a post-closing mess.

Licensing Violations

Before undertaking the practice of routinely recommending that inspections be waived, consider some of the following non-waivable duties of a licensee. All licensees (meaning both buyers agents and listing agents) must exercise “reasonable professional skill and care” that meets the legal standards developed by the licensing law and regulations. All licensees are obligated to present all written offers, notices and communications to their clients in a timely manner, except possibly after the property is under Agreement. Licensees must advise their clients to seek expert or legal advice on matters that are beyond the licensees’ scope of knowledge.  

Listing agents are obligated to take “action that is consistent with the seller’s interests in the transaction.” Similarly, buyers agents are charged with “taking action that is consistent with the buyer’s interests” in the transaction. In most transactions, it is safe to presume that reducing the risks that the buyers and sellers will become involved in litigation would be in the buyers’ and sellers’ interests.

Is a listing agent who advises that the seller reject any offers with inspection contingencies exercising reasonable professional skill?  Does the practice of requiring inspections to be waived in order to have an offer considered, satisfy the legal standards established by the licensing law? Is a buyers agent who advises their buyers to waive inspections so that the buyers’ offer is considered exercising reasonable and professional skill and care? Are real estate licensees competent to advise their clients about the legal consequences of waiving inspections? 

NAR Code of Ethics

While the National Association of REALTORS® Code of Ethics is an aspirational collection of standards with which REALTORS® are expected to comply, the consequences of disregarding the requirements of the Code of Ethics can be significant. Article 1 provides in part, “when representing a buyer, seller, landlord, tenant or other client as an agent, REALTORS® pledge themselves to protect and promote the interests of their client and shall conform to the standards of practice which are reasonably expected in the specific real estate disciplines in which they engage…”  Article 13 provides, “REALTORS® shall not engage in activities that constitute the unauthorized practice of law and shall recommend that legal counsel be obtained when the interests of any party to the transaction requires it."

Do not misunderstand; a buyer’s decision to waive inspections is not, in and of itself, unethical or unlawful. Buyers should be carefully counseled so that they understand the risks and rewards of electing or waiving inspections so that they can make informed decisions about the property before they own it. When buyers are put in a position in which they feel they must waive inspections in order for their offer to receive serious consideration, however, analyzing the ethical, licensing, and legal implications of waiving due diligence protections becomes far more complex.

Conclusion

In a market in which inventory is unbelievably low, buyers agents are going to do whatever they can to best position their clients to be the most attractive offer. Listing agents should be counseling their sellers to accept the best offer, having considered all of the options and factors that influence sellers’ decisions. A “clean offer” has been described on more than one occasion as an offer without any contingencies, or an offer that waives all contingencies except a financing contingency. Are they really cleaner? If REALTORS’® advice is leading their clients into litigation, is it really a clean offer? Or is it just one big mess waiting to happen…
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