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Key takeaways:
- If you’re concerned about your potential liability when a client refuses your advice, make extra efforts to educate them about the risks of contingency waivers.
- Use an addendum to the sales agreement called the “potential adverse consequences acknowledgement” to document your buyers’ intentions in the transaction.
- There are other ways you can protect your clients’ interests if an inspection contingency is a deal-breaker for the seller.
As intense bidding wars accelerated this spring and summer, home buyers began waiving the inspection contingency in hopes of making their offer stand out from the competition. But some may come to regret that decision later. Those who discover costly defects after they move in could end up financially stressed as new homeowners—and looking for someone to blame for their predicament.
You may have a client now who’s living with buyer’s remorse after making a rushed home purchase in the frenzied market earlier this year. You may have one in the future, when the market inevitably reaches a hyperactive cycle again. In any market, you can protect yourself and your clients by talking to them up front about the risks of waiving contingencies.
“We had more buyers saying, ‘I don’t care what’s wrong with the house. I want the house,’” recalls Melanie Gamble, CRB, CRS, principal broker at 212 Degrees Realty in Upper Marlboro, Md., about her business in the first half of the year. Even as late as July, 27% of home buyers were waiving the inspection contingency, according to the REALTORS® Confidence Index.
Gamble says she always advises her clients to get a home inspection, even when competition is fierce. “Home buying is an emotional process, and a lot of times, emotions can get in the way and override sensibilities,” she says. “That’s why documentation always beats conversation.”
Get It in Writing
You don’t want your clients to come back later and blame you for not warning them if they’re suddenly confronting unexpected and expensive home repairs. Set up a system you’ll use to have the contingency conversation from the start of the client relationship. Gamble asks her buyers to sign a special form called the “Potential Adverse Consequence Acknowledgement,” which lists exactly what items the buyers are willing to sacrifice in order to purchase a home. The form was created by the Greater Capital Area Association of REALTORS®, Gamble’s local board.
The form, similar to others some brokerages use, helps shield agents from potential liability when their clients waive contingencies, including inspection, financing, appraisal and others. It requires buyers to acknowledge that they have been advised of the potential for adverse consequences when waiving contingencies. The form also serves as an agreement that the buyer will release the agent from any liability for loss, damage or adverse results from those waivers. Some agents also are using these forms when a buyer submits an offer higher than the listing price.
“We have clients sign this form so that they don’t come back six months down the road and say, ‘How could you let me buy this house?’” Gamble says. “I can remind them: ‘I did tell you that waiving the inspection was not going to be a good idea. So, if the HVAC goes out the first week of moving in, don’t blame me. I warned you.’”
More real estate pros and companies are working with legal counsel to create separate addenda that can be added to the purchase agreement. This provides a paper trail showing that the buyer’s agent has advised the client of the importance of the home inspection and other contingencies. “Throughout a transaction, I’m giving my clients a list of what to do and what not to do, but they are not going to remember everything I say,” Gamble adds. “They’re excited and emotional. So, that’s why I try to document everything.”
Alternatives to a Home Inspection
Having such an addendum also provides an opening for the buyer’s agent to have the conversation, says Deanne Rymarowicz, associate counsel for the National Association of REALTORS®. “They can use the form to advise the buyer of the importance of an inspection, the benefits and what all it could reveal—and that it’s part of the negotiating process for a home. If a buyer still chooses to blame [the agent] afterwards, the agent will at least have in writing that their client had full knowledge and information and agreed to give up” that contingency anyway.
A home inspection contingency, which enables buyers to discover structural or operational issues with a home and request repairs from the seller or cancel a contract, is one of the most common. Even if your buyer refuses your advice to get a home inspection, you could negotiate an alternative action. Your client could agree not to require the seller to make any repairs less than $500, for example. Buyers also could agree to request repairs only for major issues like radon or a faulty foundation, which gives them some legal recourse if they find a larger problem after moving in.
Home inspections are a chance to educate buyers about the inner workings of the house as well as to flag potential trouble with major systems, such as the HVAC, roof, plumbing, electrical system and foundation, says Adam Long, president of HomeTeam Inspection Service, which has 200-plus offices nationwide. “The number of individuals purchasing a home and waiving the inspection is higher than in the past,” Long says. “Some buyers are concerned they won’t get the home if they don’t waive it. But they could be missing out on valuable information about the home. Also, for sellers, there is a potential for lawsuits from a buyer who discovers something that was not disclosed.”