ADRE Course No. ____ - 3 credit hours in Contract Law
Due Diligence and Disclosure Issues in the Purchase Contract
What is the ten day inspection period and why is it important?
What are the pitfalls in guiding a buyer through the ten day inspection period?
What are the pitfalls in guiding a seller through the ten day inspection period?
How reliable is a seller's SPDS report?
How reliable is an inspection company's report?
What are some of the things that can go wrong during the inspection period?
Would anybody like to share a story about a botched or difficult due diligence experience?
Would anybody like to share a story about an easy and successful due diligence experience?
Section 6 of the Purchase Contract: Due Diligence
6a. This clause lays out due diligence instructions for the buyer. The buyer may accept the ten (10) day inspection period or indicate a different length of time. This clause lists the items and issues the buyer may investigate, including issues that fall under the stigmatized property laws. This clause holds the buyer responsible for any damage caused by buyer's inspectors; and requires the buyer to provide the seller with copies of any inspection reports. This clause also directs the buyer to consult the Buyer Advisory.
6b. Buyer agrees to verify square footage if it is a concern.
6c. Buyer agrees to inspect for insect damage if it is a concern.
6d. Buyer agrees to investigate for flood hazard if it is a concern.
6e. Buyer agrees to verify insurability of property during the inspection period.
6f. Buyer agrees to verify sewer connection if it is a concern.
6g. Buyer agrees to investigate the swimming pool laws if it is a concern.
6h. Buyer acknowledges that the agent and broker are not qualified or in any way responsible for conducting due diligence. (This does not excuse an agent who withholds information about material defects.)
6i. Buyer agrees to submit BISNSR after completing all inspections.
6j. Buyer sets down terms of how the BINSR negotiations will take place.
6k. Buyer agrees to provide notice of any non-working warranted items. Warranted items include heating, cooling, and other mechanical equipment, plumbing, electrical, stove, pool equipment, and built-in appliances (exact language is in section 5b. Warranties).
6l. Buyer suggests whether to buy a home warranty and who should pay for it. 6m. Buyer requests that the seller grant reasonable access for walkthroughs, but waves the right to correct last minute defects if they waive their right to a final walkthrough.
6n. The seller must make the premise available for walkthroughs and must have the utilities on.
Buyer's Inspection Notice and Seller's Response (BINSR) Page 1
This form is filled out by the buyer and buyer's agent at the close of the inspection period and is delivered to the seller. The buyer may 1) accept the house with no corrections or repairs, 2) reject the house and cancel the contract, or 3) give the seller a list of disapproved items with the hope that the seller will agree to make repairs and proceed with the contract.
If the buyer does anything besides accept the house at this stage, the seller has the right to cancel the contract. The seller does not have to fix anything, but may choose a different offer or put the house back on the market and wait for another offer.
Page 2: The buyer may list warranted items that need repair. The seller must address non-working warranted items, unless it is an "as is" sale, where additional disclosure forms must be signed.
The buyer may also sign away the right to inspect.
After examining the BINSR, the seller may decide to correct disapproved items, refuse to correct disapproved items, or offer another response, such as a cash settlement to compensate for disapproved items.
If the seller does not agree to address all disapproved items, the buyer may cancel or agree to go forward.
All negotiations must take place within the timeframe specified in clause 6j. of the Purchase Contract.
Section 6 Due Diligence and BINSR Discussion Questions
What do agents do if an out of town buyer cannot be present for the inspection period?
In what circumstances are buyers most apt to waive their rights to inspect?
What should an agent do if the buyer waives the inspection?
What should an agent do if the seller will not fill out the SPDS?
Under what circumstances should a buyer's agent agree to act as an inspector for a client? [none]
What are the possibilities of being sued or fined due to missteps during the inspection period?
What happens if the buyer waits too long to fill out the BINSR?
What happens if a seller does not sign and return the BINSR?
What if the buyer just wants out of the contract, but cannot state a reason?
What to do if a buyer asks for too many repairs?
What to do if a seller refuses to fix disapproved items?
Section 4 of the Purchase Contract: Disclosures
4a. The seller must deliver a SPDS form to buyer within five days after contract acceptance.
4b. Within five days of contract acceptance the seller must deliver an insurance claim history from the insurance company that goes back five years (or to the seller's purchase of the house if less than five years).
4c. If the home was built before 1978, the seller must disclose any known lead-based paint hazards, along with the pamphlet, "Protect Your Family from Lead in Your House." Both parties must sign the Lead Based Paint disclosure before close of escrow. All items in this section must be filled out an initialed.
4d. If the property is located in an unincorporated area, the seller must deliver an Affidavit of Disclosure within five days after contract acceptance. The buyer must point out any disapproved items within the inspection period or within five days of receiving the paperwork, whichever is later.
Disclosure of Information on Lead-Based Paint and Lead-Based Paint Hazards (Sales)
Seller must fill in and initial sections A, B, and C. Section A: seller must check either A.1 (knowledge of) or A.2 (no knowledge of) lead hazards. Section B: seller must state whether there are reports to disclose, if so, the reports must be provided. Section C: Seller acknowledges responsibility for filling this form out truthfully and fully.
Buyer acknowledges receipt of information regarding lead hazards; acknowledges receipt of the Protect Your Family pamphlet; and acknowledges the opportunity to inspect for lead hazards, or waives the opportunity to inspect for lead.
The listing and buying agents must both acknowledge that the proper steps have been taken in regards to the LBP disclosure form. The buyer, seller, buyer's agent, and seller's agent must all fill out, initial, sign, and date the same piece of paper. This is the only disclosure form where all the initials and signatures must be on the same sheet of paper. It cannot be signed in counterpart, where the sellers fill out their sheet and the buyers fill out the questions on a different sheet.
Lead-Based Paint Discussion Questions
Why was lead-based paint used before 1978?
Why is there such concern over lead-based paint?
Why do all the parties have to sign on the same sheet of paper?
Has anyone in Arizona encountered lead based paint in a property?
What if lead based paint exists, but it is encapsulated?