Evaluating the Property
The most obvious part of the property evaluation conducted after contracting on a property is the physical inspection. You need to know whether the home’s structural, roofing, plumbing, heating and electrical systems are working, not to mention the doors, windows, and appliances. The standard Colorado purchase contract contains a clause in Section 10 that gives the buyer the right to have the property inspected and to either terminate the contract or ask for repairs if anything is unsatisfactory.
As indicated elsewhere (see Risk and Pitfalls), there are a host of other issues that may need to be addressed to evaluate whether you ought to g through with the purchase of the property that you now have under contract. These issues may be more important than the physical condition of the property itself. If you overlook the fact that the roof needs to be replaced, you may be out $2,000 to $10,000, but you’ll also have a new roof with 20 years of wear on it. If you overlook the fact that your new home is 500 yards from the end of the airport runway, or that the “open space” behind your home is actually the loading dock for the new neighborhood grocery, the value of your new home may have just dropped $50,000 to $100,000 and there is nothing you can do to fix it. Worse yet, what if there are massive amounts of toxic metals in your water supply and you don’t get around to looking into that until after you and your children have lived in the home for a decade. In this context, a rusted out water heater can start to look pretty trivial.
When you draft your purchase contract, I would strongly recommend expanding the standard inspection clause to permit investigation of any other issues necessary to insure that the home you’ve contracted on will be a good investment and a good place to live.
In the the standard Colorado purchase contract, the inspection clause gives the buyer the right to conduct inspections of the “physical condition of the Property and Inclusions.” The word “inclusions” refers to the personal property included with the sale, property such as the oven, the dishwasher, and the hot tub. The clause provides that the condition of the property and inclusions must be satisfactory in the buyer’s “sole subjective discretion.” If not, the buyer has the right to either terminate the contract or ask the seller to correct the problems. When properly completed, the clause specifies a deadline by which the buyer must complete inspections and deliver a written objection OR termination notice to the seller or the seller’s agent. It also specifies a deadline by which the buyer and seller need to agree on what will be done to resolve the buyer’s objections:
A few comments
Expand the Clause This clause was written to give the buyer wide latitude in determining what constitutes a problem and in deciding what they want done about it. But remember, the clause refers only to the physical condition of the property and inclusions. You may be able to argue that radon levels or contaminated water supplies fall under this umbrella, but it would be better to explicitly expand the coverage of the clause by explicitly listing these issues when you draft the offer. If you are concerned with issues like school districts, flood plains, airport runways, or coal mines, you clearly need to amend the standard contract to include these issues within the purview of the inspection clause.
Time Frame is Critical Because your rights to object and terminate are so broad, the seller will want to limit the time frame for the inspection. If you write an offer that gives you a month to do the inspection, the seller will almost certainly counter or reject the offer. Typically, 5-10 days is adequate for inspections, but you need to check with inspectors and the other experts involved to make sure that they can complete their evaluations and reports within the time provided. If you don’t complete your inspections by the deadline, you have effectively waived your right to object or terminate.
Everything is Negotiable, Nothing Required Though you have wide latitude in determining what you want to object to, the seller is under no obligation to do anything to remedy your concerns. If your requests are unreasonable or unusual, the seller may well decide to let the contract terminate. No matter how reasonable your requests, however, the seller is not obligated to fix anything unless they agree to in writing in the inspection resolution agreement.
As a practical matter, it is unusual for the buyer to terminate the contract over an inspection issue relating to the physical condition of the property. Since most physical defects can be fixed for a few hundred dollars, or at most a couple of thousand, the buyer will usually ask the seller to repair these defects rather than terminate the contract. Typically, there will be 3-10 days after the objection deadline for the buyer and seller to try to reach agreement on what the seller will do about the issues the buyer has raised. If the problems are routine, the decisions are fairly easy. If they are unusual or expensive, the buyer and seller may have get bids from contractors in order to evaluate the situation. Some sellers are quite reasonable in responding to inspection issues. Others, especially in a hot market, may refuse to do anything.
In our experience, there are three factors that determine whether you’ll get a positive response to inspection objections:
What Would the Next Buyer Do? The seller will typically be most responsive to issues that most other buyers would be concerned with too, issues such as a faulty electrical system or a leaking roof. These objections seem reasonable to the seller, and, if they let you terminate the contract over the issue, they know the next buyer is likely to object too. In contrast, if you object to minor scratches on the stair rail or to spots on the carpet, the seller may be tempted to let the contract terminate and hope the next buyer will be less picky. Oddly, this generally means that the seller will be more likely to agree to fix the more serious and therefore more expensive items.
Seller’s Want Clean Fixes. The seller won’t want to agree to fix things if there is substantial gray area between “fixed and not-fixed.” If the Seller agrees to have a furnace or electrical system repaired, it is generally fairly clear when the work has been completed properly. In contrast, if you ask the Seller to fix a loose stair rail, she may be concerned that you won’t think it’s good enough even after she’s paid somebody to do the work. All stair rails will wobble if pushed hard enough and the Seller doesn’t want to have inspection issues left up in the air to turn into disputes on the day of closing.
The Seller’s Fear of Loss. The seller is more likely to agree to pay to have things fixed if he fears losing you as a buyer and if he is truly concerned that you may let the contract terminate if he doesn’t complete the requested repairs. The seller is more likely to fear losing you as a buyer: (1) in a slow market than in a hot market, (2) if the scheduled closing is a week rather than 3 months away or (3) if he feels he’s getting a good price for his property in his contract with you. Even if the seller wants desperately to keep the contract alive, he may refuse to address your inspection concerns if he is convinced that you’ll buy the property whether he does the work or not. If you offered him $20,000 over his asking price, he may guess that you’re unlikely to back out if he refuses a $500 repair. Similarly, if you have the bank send the appraiser out (at a cost of $350) before you’ve resolved the inspection issues, the seller may guess that you’re planning on going forward with the purchase no matter what he does.