In The Beginning. When OREF came into existence, circa 1997, the goal was to develop uniform state-wide real estate forms for use by Realtors® throughout Oregon. After all, with only a few geographic differences [e.g. where areas were on wells vs. public water, or where areas had onsite septic systems rather than public sewers], the nuts and bolts of residential real estate transactions were virtually identical. Issues such as earnest money, down payment, closing, etc., were pretty much the same across the state.
OREF consisted then, and now, of three owners, the Portland Metropolitan Association of Realtors®, the Eugene Association of Realtors®, and the Oregon Association of Realtors®. Before OREF was established, each of these three Realtor® organizations had its own set of forms and market share. Generally, the development of a statewide sale agreement form went forward without a hitch – with one exception. In the Eugene area, professional inspections were negotiated and conducted pursuant to a stand-alone form that was separate from the sale agreement itself [generally referred to at the time as the “earnest money agreement”[1]].
A simple compromise was reached – the OREF Sale Agreement form permitted buyers to have three choices: (a) The professional inspection provision in the text of the document itself [currently found at Section 15.2]; (b) A separate inspection addendum [i.e. the Eugene form]; or (c) “Other,” which generally was for inspections conducted by the buyer, his/her friend, family member, or other non-professional [always a risky choice].
Mission Creep. Over the years, the OREF Forms Committee turned the Professional Inspection Addendum, Form OREF-058 into a very comprehensive list of different tests and inspections from which to select, each with a “Yes” and “No” box.[2] Over time, use of the Inspection Addendum became the preferred approach in many areas of the state.
Unquestionably, it was starkly different from the Professional Inspection provision in Section 15.2 of the Sale Agreement, which simply gave the buyer a right to have “one or more” professional inspections. The only time a buyer was required to identify a specific inspection was if it would result in some form of “invasive” actions or testing [e.g. for leaking underground storage tanks, or moisture tests that would penetrate cladding, such as EIFS].[3]
However, with these two approaches, i.e. using the separate Professional Inspection Addendum vs. following the protocol at Section 15.2 of the Sale Agreement, came certain broker practices that created risk. One practice was for Realtors® to check both boxes in the Sale Agreement. This was not only contrary to the rather easy-to-understand instruction to “Select only one,” but downright risky, since the time frames and protocols for inspection and termination were markedly different between the two approaches.
In the Addendum, the parties had a separate period to negotiate repairs following the completion of inspections, known as the “Negotiation Period.” However, at Section 15.2 of the Sale Agreement, that time period was included in the time frame known as the “Inspection Period.” In other words, in Section 15.2, there was no separate period to negotiate repairs; the inspections and negotiations had to be conducted within a single time period. Today, OREF has changed the Professional Inspection Addendum to mirror Section 15.2 of the Sale Agreement.
Memo to those who do not keep up on forms changes by attending training: Beware! There no longer is a separate period following completion of inspections to negotiate seller repairs or concessions. It must all be resolved within a single “Inspection Period.”
The second practice that creates risk – which cannot be remedied by OREF – is brokers using the Professional Inspection Addendum, but checking “Yes” to all of the boxes, with no particular intent to have all of the selected tests or inspections actually performed.[4] There are two schools of thought on this “shotgun” approach to professional inspections. One is that it’s better to be safe than sorry, i.e. asking for more inspections rather than less, reduces the risk of not selecting a particular test, and then having to ask for it later.
A contrary observation is that this practice creates risk. For example, if one selects every inspection and test on the Addendum, but has only a couple performed, a buyer could claim his/her broker neglected to see that a more important one should have been performed.
It is this debate, in my opinion, that suggests why the current text found at Section 15.2 of the Sale Agreement is a preferable approach to the issue. Under that section, buyers are entitled to have as many inspections as they want without having to identify them in advance.[5]
Professional Inspection Protocols Today – Tips and Traps. Today, as the Great Recession recedes into the rearview mirror of history, we have seen a marked change in bank underwriting policies. Loans, even for the most qualified borrowers,[6] are slow, laborious, and intrusive. Appraisers are more careful and conservative.
Over the last few years, there have been many anecdotal reports that if the Professional Inspection Addendum was used, it triggered bank underwriters and appraisers to ask for copies of all reports obtained. In those cases, lenders would either request specific repairs, or condition loan approval upon them being completed. This intervention, coming after expiration of the Inspection Contingency Period, frequently caused disruption to the closing process; sellers and buyers were now forced to renegotiate allocation of the cost of the new repairs.
As most brokers who have had to deal with last minute repair costs know, risks abound. Not only does this added process slow down the transaction, but it could result in certain new conditions to the lender’s loan commitment.[7] Who would be in charge of selecting the repair bid? Who selects the contractor? Would there be a re-inspection and sign-off, and who would be responsible? Checks would have to be cut and lien releases signed prior to closing. Would the seller remain responsible for the sufficiency of the repair after closing? If the work could not be completed by closing, would there be a holdback agreement, and if so, who would draft it – the Realtors®? The parties’ attorneys? What was a reasonable formula to determine the amount of the holdback, 150%? 200%? And significantly, what exactly would the repair addendum say?
As a result, in some areas of Oregon today, use of the Professional Inspection Addendum has fallen out of favor. Apparently, even though lenders could make the same request for written reports where Section 15.2 of the Sale Agreement is selected, they do not seem to do so.
In light of this, how are some brokers negotiating seller repairs or inspections when the protocol in Section 15.2 of the Sale Agreement is followed? While different companies have different approaches, one suggestion that has been made is to merely use the Professional Inspection Addendum as an informal “punchlist” for the buyer’s agent to verbally discuss with the listing agent what tests and inspections they will want.[8] Thereafter, any seller concessions, etc. can be handled as usual, i.e. with a written addendum. The goal here is not to conceal anything from the lender or underwriter. Rather, it is to avoid having to re-negotiate inspection issues after the Inspection Contingency Period has already expired. ~PCQ
[1] Originally, the document was known as a “Sale Agreement and Receipt for Earnest Money.” The title was not only cumbersome, but a bit of an anachronism. When I first began practicing law, this document was a single page in length, and essentially consisted of a simple agreement on the amount of earnest money, the price, down payment, financing, and a closing date. When OREF was created, as its attorney, I suggested shortening the title to “Sale Agreement,” which was the term used in non-residential, i.e. commercial, transactions. The reason, then and now, is that differing only in subject matter, the legal issues covered in commercial transactions are primarily the same as in residential transactions.
[2] In this way, the buyer was called upon to select or de-select. That way there would be less risk that a single box – meaning “Yes” – would be left blank, thus creating an argument that it was simply overlooked.
[3] Note that in early 2014, radon was added as an example of an “invasive” test. While reasonable minds might differ about whether radon testing is “invasive,” the OREF Forms Committee decided to treat it as such, since it can be very inconvenient for sellers. The take-away for buyer brokers today is that if they intend to have a radon test on the seller’s property, it must be specifically called out in the Professional Inspection section of the sale agreement.
[4] In theory, OREF could include an instruction in the Addendum, to the following effect: “Select only those tests/inspections you actually intend to have.” However, if the simple and short instruction “Select only one” gets ignored, one cannot expect that a longer one, with polysyllabic words, would be heeded. In the words of most managing principal brokers, “this is a training issue.”
[5] This conclusion is subject to the proviso that “invasive” inspections or testing, e.g. radon, moisture readings and leaking fuel tanks, be specifically identified. One word of caution: OREF has not addressed the new inspection du jour, sewer scopes. Are they “invasive” or not? For the present, I suggest that if Section 15.2 of the Sale Agreement is used for professional inspections, they should be specifically called out.
[6] Apparently Ben Bernanke can’t even qualify! See: http://www.housingwire.com/articles/31588-even-ben-bernanke-cant-refinance-right-now
[7] Real estate brokers should never recommend that their buyer withhold the Addendum from a lender. It is loan fraud. An addendum – any addendum – is a part of the overall terms of the transaction, and must be submitted to the bank.
[8] Remember, with the exception of invasive inspections, including radon testing (which must be requested of the seller), the buyer may have as many inspections they want, subject only to time constraints of the Inspection Contingency Period.
