In Part II of the series, we are asking and answering the following question:

What happens when there is damage to a home after acceptance of an offer to purchase?

Notifying the Buyer About the Damage:

Wisconsin’s Residential Offer to Purchase differentiates what happens when the property is damaged in an amount less than 5% of the purchase price and what happens when the cost of the damage is over 5% of the purchase price. Regardless of the amount of damage, the seller is under an obligation to notify the buyer of any damage to the property after the offer is accepted.

The seller can notify the buyer of the damage in a few different ways. The first and most common option is to supply the information on a Notice form disclosing the damage. The second option is the seller amending his/her Real Estate Condition Report to disclose the damage. The second option is generally not recommended, as it can trigger the buyer’s 2-business day right to rescind the offer under Wis. Stat. 709.05(2)(a)(2). When a buyer rescinds the contract based on this statute, the buyer is entitled to a refund of their earnest money deposit. The second option is only recommended if the seller understands and agrees to the prospect of the contract falling apart and/or if the seller wants to give the buyer a way out of the contract. The third way of disclosing the damage is for the seller’s real estate agent to complete a Disclosure of Material Adverse Facts.

Damage Less Than 5% of The Purchase Price:

If the damage to the property is something relatively minor, such as one broken window, then the cost to repair the damage is likely less than 5% of the purchase price. The Offer specifies that when the damage is less than 5% of the purchase price, sellers must first notify the buyer of the damage. After notifying the buyer, the seller has a duty to repair the property. Specifically, the seller has to restore the property to the same condition it was in when the buyer made his or her offer.

It is the seller’s responsibility to bear the cost of the repairs. The seller may choose to pay for the cost of the repair by including the contractor’s invoice on the closing statement, entitling the contractor to be paid from the sales proceeds. Alternatively, if the seller pays for the repair before closing, he or she must supply the buyer with a lien waiver for any lien-able repairs.

If the seller cannot repair the property before closing, then the parties can mutually agree to one of the following options:

(a) extend/postpone the closing date to give the seller time to repair the property; or

(b) the seller can give the buyer a credit or price adjustment for the cost of the repair; or

(c) Other options may be available depending on what stage of the repair process the seller is in, such as holding money in an escrow account for the cost of the repair.  An attorney should be consulted to ensure that all parties rights and obligations are clearly communicated to avoid disputes.

Damage More Than 5% of The Purchase Price:

Imagine a tornado striking the home you are under contract to either purchase or sell, resulting in the need for an entirely new roof and siding. This may likely be damage that exceeds 5% of the purchase price. In this situation, the Offer specifies that the seller must first notify the buyer of the damage and then give the buyer the option to terminate the Offer. A buyer who decides to terminate is entitled to a return of their earnest money deposit.

If the buyer decides to proceed with the purchase despite the damage, then the Offer states that the buyer is “entitled to the seller’s insurance proceeds, if any, relating to the damage to the Property, plus a credit towards the purchase price equal to the amount of Seller’s deductible on such policy, if any.”

Both parties should hire legal counsel to assist with negotiating and drafting documentation to specify who will complete the repairs, how the insurance proceeds will be allocated, what documentation the seller is required to provide, and any other considerations that may need to be arranged or put in writing, depending on the agreed-upon course of action.

Schedule a consultation with Wynn at Law, LLC today to discuss your home sale or purchase

Wynn at Law, LLC can assist you with either your purchase or sale, starting with a review of or assistance with drafting the initial offer, and ending with helping you reach a successful closing.

Contact Wynn at Law, LLC today at 262-725-0175 or visit our website’s contact page. Wynn at Law, LLC is based in Southern Wisconsin and has offices conveniently located in Salem, Delavan, and Lake Geneva, Wisconsin.

The post Part II of II – Property Damage During the Real Estate Transaction appeared first on Wynn at Law, LLC.

Hypothetical 1:

Imagine you are the seller. You go under contract to sell your home, however the deal falls apart based on the buyer’s inspection. The buyer provided you with a copy of the inspection report, and in an effort to be up-front with your next buyer and avoid another inspection, you provide the second buyer with a copy of the first buyer’s inspection report.

The seller gave a copy of the first buyer’s inspection report to the second buyer “for informational purposes only.” Is this allowed?

Yes, a seller may choose to provide a potential buyer with a previous buyer’s inspection report, unless the seller and previous buyer agreed not to share the report. The seller is under no obligation to the home inspector to keep the report private.

Can the listing agent provide copies of a prior buyer’s inspection report to prospective buyers?

Listing agents should avoid providing a copy of the report to guard against any possible confidentiality concerns under Wis. Stat. 452.133(1)(d) because the report may be considered confidential, unless the agent has the consent of all parties to the first transaction.

Can the new buyer still obtain an inspection?

Yes. The new buyer is not precluded from making his or her offer contingent upon an inspection contingency, wherein the new buyer would have a new home inspection done.

Cautionary Note: The new buyer should be aware that he or she can only object to newly discovered defects that were not disclosed in the prior inspection report. It is presumed that the second buyer had “actual knowledge” of the defects disclosed in the first buyer’s inspection report, given that the new buyer was given a copy of the prior report. In other words, the first buyer’s inspection report was supplied to the second buyer “for informational purposes only.”

Who does the inspector owe a duty to if errors or omissions are discovered in the inspection report?

Home inspectors are only liable to the person who contracted for the inspection and not other parties that the inspection was provided to for informational purposes. [1] Therefore, if a second buyer chooses not to obtain his or her own inspection and instead relies on a seller-provided inspection report ordered by a previous buyer, the second buyer has no recourse against an inspector for any errors or omissions that may be contained in that report.

Is the buyer required to give a copy of the inspection report or testing reports to the seller, even if the buyer does not issue a Notice of Defects? 

Yes. If a buyer has an inspection or testing done (such as radon, mold, water or septic testing), the buyer is required to supply the seller with a copy of all inspection and test reports, even if the buyer is not requesting any action from the Seller. This requirement is clearly spelled out in the WB-11 Residential Offer to Purchase at lines 190-191, which states that “Buyer agrees to promptly provide copies of all inspections and testing reports to Seller.” 

Hypothetical 2:

Suppose that you are a seller who has been presented with an offer that has the box checked to include an inspection contingency, including the seller’s right to cure the defects, however in the “additional provisions” section of the offer, it states that “the inspection shall be for informational purposes only.”

Can the buyer present the seller with a notice of defects?

Yes, the buyer is not precluded from presenting the seller with a notice of defects if the inspection contingency was included with the offer. A buyer should be aware in this case that a seller may not be willing to fix the inspection defects or provide a credit. The seller may have thought that the buyer would not ask for any repairs, given the language in the offer stating that the inspection was “for informational purposes only.”

How can the buyer clearly ask for an inspection but not make their offer contingent upon one?

If a buyer feels comfortable with making an offer not contingent upon an inspection contingency, but would still like an inspection to be completed, this should be clearly spelled out in the additional provisions section of the offer. To clearly communicate the buyer’s intent, the buyer should not check the box for an inspection contingency in the offer. The buyer or buyer’s agent should also include provisions in the offer allowing the buyer’s inspector access to the property upon advance notice to ensure that all parties are on the same page. The buyer’s agent may also request that the buyer sign paperwork confirming the risk of foregoing a home inspection contingency.

Can an inspection for “informational purposes only” cause issues with the buyer’s lender?

Possibly, depending on the buyer’s lender and the type of loan the buyer is applying for. FHA, VA, and other government-backed lenders require certain minimum property standards relating to a property’s habitability and safety in order for the loan to be issued. When government-backed lenders discover conditions falling below their minimum standards, the lender may require that these conditions be fixed. This can cause issues if the offer is not subject to an inspection contingency.

Schedule a consultation with Wynn at Law, LLC today to discuss the real estate purchase and sale process

Many of the issues discussed above can be resolved with clear contract drafting. When all parties understanding the contract, the majority of disputes disappear.

Whether you would like to discuss general real estate questions or need help ensuring that a specific offer is clearly drafted, Wynn at Law, LLC’s attorneys are here to help. Contact Wynn at Law, LLC today for a consultation at 262-725-0175 or visit our website’s contact page. Wynn at Law, LLC is based in Southern Wisconsin and has offices conveniently located in Salem, Delavan, and Lake Geneva, Wisconsin.

[1] Wis. Stat. 440.977(2)

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