Oregon Earnest Money Disputes

Introduction. The term “Earnest Money Deposit” is familiar to most people – at least on the surface: It is the “deposit” that prospective buyers initially put down when offering to purchase a home. But beyond that, there is much more, such as whether it will be refundable if buyer changes their mind? Does it stay refundable all the way to closing? What if seller changes their mind; can they just cancel the transaction, return the deposit, and resell the property for a higher price? These issues are a common source of conflict when the seller or buyer tries to withdraw from the transaction before closing.

Basics. In Oregon there are two standard form Sale Agreements: (a) The OREF form published by Oregon Real Estate Forms, LLC. It is the oldest form, dating back to the late 1990s. It is continuously updated to comply with changes in Oregon case law, statutes, and standards of practice. (b) The Oregon Realtors Association Sale Agreement form which came into existence circa 2021 and is substantially similar to the OREF form. For purposes of this article, the topics discussed below are not materially different between the two forms.

The Earnest Money Deposit (hereinafter “Deposit”) is a sum of money that normally accompanies the Sale Agreement offer. Once the terms of the transaction are mutually agreed upon, escrow is opened at a local title insurance company. Closing occurs after buyer’s funds have been deposited, the purchase money loan has funded (unless it is a cash offer), title is marketable, costs and prorates (e.g., for taxes, insurance, liens, and other expenses) have been paid, and the seller’s Deed has been signed and delivered for recording. The Deposit normally remains in escrow until closing; earlier disbursement to seller may only occur upon joint written instructions to escrow.

Liquidated Damages. There are only two or three major Oregon cases that are material to a discussion of liquidated damages. The law is fairly well settled. A well-drafted liquidated damages clause for Oregon Sale Agreements should contain the necessary recitals the law requires , such as the following elements:

The parties expressly agree seller’s economic and non-economic damages arising from buyer’s failure to close the transaction would be difficult or impossible to ascertain with any certainty;
The Deposit identified in the Sale Agreement is a fair, reasonable, and appropriate estimate of seller’s damages;
It represents a binding liquidated sum, not a penalty; and
The seller’s sole remedy against buyer for buyer’s failure to close the transaction is limited to the Deposit. (Note that buyer’s remedy for seller’s refusal to close is not limited to recovering back the Deposit. See below.)

Caveat: It is one thing if the buyer’s breach occurs soon after the Sale Agreement is signed, such as their check for the Deposit fails to clear; here the seller can quickly declare the default and put the property back on the market. But it is quite another thing if the buyer fails to show up for closing six weeks into the transaction. This is where a seller may be severely damaged for, say, moving out of the home, having stored furniture, possibly put nonrefundable money down on another home. Sellers should keep the Doomsday Scenario in mind when setting the amount of the Deposit: “What is the worst that can happen?”

Who finally decides on the amount of the Deposit for the transaction? The answer may be found in this cynical version of the Golden Rule: “He who has the gold makes the rules.” If seller needs to sell for economic reasons, the buyer’s offer will likely be at a lower price and with a smaller Deposit; if seller can afford to hold the property and wait for the highest and best offer, he/she will demand a larger Deposit.

Tips, Traps and Take-Aways. Below are a few; there are many more.

Sellers should be careful when agreeing upon the amount of the Deposit. If it is too small, say $1,000 – $2,000, it may be inadequate. For example, if the buyer finds another more desirable home, he/she could refuse to perform under the Sale Agreement, readily forfeit the small Deposit and move on. Sellers should insist that the amount of the Deposit be of sufficient size to deal with the Doomsday Scenario and in an amount that the buyer will think twice about walking away. However, it cannot be unrealistically large – otherwise it could be deemed unenforceable as a penalty.
If seller wants the Deposit to be disbursed from escrow and become nonrefundable before closing, the arrangement must be carefully drafted. Realtors should avoid the temptation of writing their own special provisions into an Addendum that amend the pre-printed terms of the Sale Agreement; legal assistance may be appropriate. Saying nothing more than that the Deposit will be “disbursed and become nonrefundable” is inadequate. Here are a couple of reasons: (a) The clause should address what happens if seller causes the default; and (b) What about the other provisions in the Sale Agreement providing that the Deposit is refundable upon certain conditions? Otherwise, the Sale Agreement and Addendum are inconsistent. These issues should be addressed.
Although the Sale Agreement contains a provision for buyers to pay an “Additional Deposit” later in the transaction, it is frequently overlooked. Yet this clause can be very useful for sellers where the closing date is extended. The longer a transaction remains pending and the home is off the market, the greater the risk of unanticipated issues arising.
When does the earnest money deposit become nonrefundable? The basic rule is that the Deposit is refundable if buyer gives seller timely written notice that one or more of the Sale Agreement’s contingency provisions have failed (e.g., for title review, property, sewer, septic, lead based paint inspection, and financing/appraisal). These standard provisions all contain a limited period of time for buyer to exercise them. Otherwise, they are waived and the Deposit can become nonrefundable. This is where a good Realtor can come in handy. Ask him/her to provide a written timeline of these important events and dates.

Conclusion. Disputes over who keeps the Deposit can be a “zero-sum” proposition. That is, when a breach occurs, the Sale Agreement says the entire sum is either forfeited to seller or refunded to buyer. There is no middle ground. (Important Note: The Sale Agreement provides that if seller breaches and refuses to close, buyer may obtain a refund of the Deposit and seek specific performance. This is because land is regarded as “unique” and recovery of money damages are not the same as awarding buyer the property.)

Lastly, remember, the Sale Agreement contains a prevailing attorney fee provision. Thus, the smaller the Deposit and the closer the case, the riskier it is to litigate/arbitrate, since legal fees can exceed the amount at issue. Losing a $15,000 earnest money deposit case and paying $25,000+ in attorney fees to the other side (in addition to your own) can be a bitter pill. For better or worse, the Sale Agreement provides that disputes over Deposits of $10,000 or less must be submitted to Small Claims Court, where attorneys are not permitted to represent the litigants. ~ Phil

Introduction. Most Oregon residential transactions are documented by one of two Sale Agreement forms, the OREF form, created circa 1997, or the Oregon Realtor (“OR”) form which was created circa 2020-23. Both forms are continuously updated. (Readers are encouraged to compare both forms before deciding which one to use. In either case, these documents are proprietary and should not be used in violation of their copyright.)¹

As explained below, the term “protocols” refers to the steps sellers and buyers follow throughout the transactional process. Over the past 25+ years, with the proliferation of state and federal real estate laws and regulations, most Oregon residential transactions have followed a “lock-step” approach, commencing with seller’s acceptance of buyer’s offer (or buyer’s acceptance of seller’s counteroffer) and ending with closing, when seller’s deed to buyer is recorded and possession changes hands.

Seller Property Disclosure Form. The genesis of this form goes back to 1993, in which the Oregon Legislature gave residential sellers a choice of offering buyers a “Disclosure” form or a “Disclaimer” form. The Disclosure form required sellers to answer a series of questions about the property, and the Disclaimer form “disclaimed” all representations about the property. The immediate result was that most attorneys advised their seller-clients to disclaim everything, rather than disclose anything. This approach did nothing to enhance transparency, so the disclaimer alternative was abandoned. In Oregon we’ve used the Disclosure form ever since. Buyers had (and still have) an absolute 5-business day right of revocation following delivery of that form.

Generally, the 1993 Disclosure form has remained substantially the same over the years, only with slightly improved text and a few new questions for sellers to answer. It is still not a model of draftsmanship (which is what occurs when representatives from the various stakeholders – e.g., title companies, consumer groups, Realtor groups, lenders, insurers, contractors, etc. – must all agree on the final product. (For an abbreviated article explaining “group think,” see “Abilene Paradox” story.)

Nevertheless, the Disclosure form is an important first step in giving buyers a starting point for conducting their due diligence. However, sellers’ representations in the form are not warranties; they are based only upon the seller’s “actual knowledge” i.e., what he or she believes at the time of completing the form, without necessarily having performed any investigation in advance. The form warns that sellers’ representations are not intended for buyers to rely upon in lieu of conducting their own inspections and other due diligence. At best, the Disclosure form is a starting point for buyers. If negative information is revealed by the seller, e.g., prior flooding in the crawl space, it is required to be explained in an accompanying addendum, and the responsibility then shifts to the buyer to further investigate and evaluate the issue.

Real Estate Sale Agreement. Normally the buyer and/or their Realtor complete the Sale Agreement form for submission to the seller. Before acceptance, usually the only substantive information a prospective buyer has about the property consists of data obtained from available public records, e.g., property taxes, and the multiple listing service (“MLS”) information where the seller’s broker has listed the property.

Buyer Due Diligence. Once the offer is accepted, the Sale Agreement permits buyer to complete their due diligence by the exercise of several inspection contingencies including, among other things, the status of title and the physical condition of the property and its operating systems, e.g, sewer/septic, water, cooling, heating, plumbing, electrical, etc. Another major buyer contingency makes the transaction subject to a satisfactory appraisal and financing. If the buyer is dissatisfied (in his/her sole discretion) with any one of these contingencies, he/she (or their broker) may give timely written notice to the seller (or their broker) to terminate the transaction and obtain a full refund of the earnest money deposit.
Buyer Warnings. In addition to making the offer contingent upon buyer’s satisfaction with all of their contingencies, the Sale Agreement carries with it several warnings to buyers:

- Section 10 (Property Inspections) advises buyers to have a complete inspection of the Property by qualified licensed professionals (e.g., for structural condition, soil condition/compaction/stability, survey, etc.). It also provides that if the buyer proceeds to close the transaction, he/she waives all contingencies and accepts the condition of the Property.
  - Note, the inspection contingency expires at an identified time, and unless buyer gives timely written notice of termination, he/she will be deemed to have accepted the condition of the property. In other words, “silence is consent.”
- Section 14 (Seller Representations) of the Sale Agreement warns that the seller representations are not warranties regarding the condition of the Property and are not a substitute for buyer’s responsibility to conduct their own independent investigation, including the use of professionals, where appropriate.
- As if these warnings were not enough, the Sale Agreement contains at Section 16 an As-Is provision: “Except for Seller’s express written agreements and written representations contained herein, and Seller’s Property Disclosure, if any, Buyer is purchasing the Property “AS-IS,” in its present condition and with all defects apparent or not apparent.”
- Section 41 (Offer to Purchase) acknowledges that Buyer has fully read and understands the terms of the Sale Agreement and “has not relied on any oral or written statement made by Seller, Seller’s Agent, or Buyer’s Agent that is not expressly contained in this Agreement.”
  - This warning is important because the listing agreement and broker’s promotional literature may contain descriptions amenities that do not become a part of the Sale Agreement unless expressly incorporated into it.
  - Accordingly, the safest practice for buyers and their brokers is to specifically include in the offer any important representations or promises about the property that are not already found in the Sale Agreement. In short, unless expressly included, ancillary promotional information (e.g., “property abuts Green Space that cannot be developed”) does not become a part of the Sale Agreement.

Conclusion. In summary, residential real estate transactions in Oregon divide buyer and seller responsibilities as follows:

Sellers’ duties are to complete the Property Disclosure form and Sale Agreement upon their “actual knowledge.” The Sale Agreement provides the representations are made to the “best of Seller’s knowledge.” Sellers should carefully review these representations before signing the Sale Agreement. Query: Is this it, or does seller have any further duties of disclosure beyond these two forms? The answer is Yes. Oregon’s common law, i.e., the law developed in written opinions from the appellate courts over the years, still applies. This will be covered in a subsequent post.
Upon mutual execution of the Sale Agreement, the buyer’s duty is to exercise their due diligence responsibilities during the prescribed contingency periods. During this time they must review and evaluate all important information, such as the preliminary title report, professional inspections, sewer/septic reports, and all other agreed-upon inspections or tests. If financing is a contingency, it makes the sale subject to the buyer obtaining purchase money financing (unless it is a cash offer) and an appraisal that is not less than the agreed-upon purchase price of the home. As noted above, although buyers have a right to rely upon seller’s representations, those statements are not warranties or guaranties; they should not be relied upon to the exclusion of their own due diligence. If a buyer learns of a discrepancy between the seller’s written disclosures and their own due diligence, buyer should immediately stop and clarify the reason for the discrepancy. Closing without doing so can arguably result in a waiver by buyer. (Note: The preceding assumes there is no fraud or concealment by seller.)

If these protocols are followed, buyers will be able to make an informed decision whether to: (a) Allow their contingencies to lapse and close the transaction or (b) Timely withdraw from the transaction and obtain a return of the earnest money deposit. ~ Phil

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In the interest of full disclosure, as legal counsel for OREF during its first approximately 20 years I was very involved in the development of the OREF Sale Agreement and all of its other real estate forms.

Introduction. Regardless of how active (or inactive) the market is, sellers’ brokers should always be on the lookout for “red flags.” These are the often harmless-looking provisions that, if ignored, can later come back and bite sellers. Here are a few. Note that this article refers to the 2022 OREF Sale Agreement, so section and line numbers may be different today):

The “Or Assigns” Provision. First, be aware that deep in the 2022 OREF Residential Sale Agreement (Sec.37(6)) is a single sentence that many Realtors® may be unfamiliar with. It states:

“…Buyer’s rights under this Agreement, or in the Property, are not assignable without the prior written consent of Seller.” (Emphasis added.)

Where does this issue come up? When the Sale Agreement offer includes the words “or assigns” after buyer(s) names in Section 1. There is a reasonable chance when requested by buyer, his/her broker dutifully does so without inquiring about the intent or purpose of the provision. There is also a reasonable chance the buyer’s broker may not be aware of Section 37(6) saying that seller’s consent is required.

May Seller Impose Conditions on the Assignment? So, if the offer is accepted with the “or assigns” language inserted, does the seller have any say in whether they will give or withhold consent? Clearly yes – assuming they are aware that Section 37(6) gives them that right. It is my opinion that accepting an offer on the OREF Sale Agreement with the words “or assigns” inserted after the name of the buyer does not mean the buyer is free to assign the Sale Agreement without seller’s consent.

Below is a short summary of the variety of issues that arise from these two seemingly innocuous words unless fully vetted by sellers before accepting the offer. The main issue is whether seller can condition their consent upon other factors, such as:

Requiring that the assignee have the same or better financial credentials as the buyer-assignor?
Requiring that the buyer-assignor remain as a guarantor of the assignee’s performance?

There are at least two very different reasons for a buyer’s use of the “or assigns” language:

Buyer is merely acting as a middleman,[1] often with the idea of tying up the property and then “flipping” it, to use the vernacular sense. This business model is invariably coupled with the idea that the buyer intends to improve the property, either cosmetically or more substantively, and make a profit upon resale. While there should be no particular concern to the seller in this transaction (assuming the buyer is properly vetted), there should be – in my opinion – a heightened due diligence concern to third-party buyers who acquire such property. But that is the subject of another post.
As is seen in more commercial ventures, the buyer is using the “or assigns” language to acquire a property and then create a holding entity, such as an LLC, to go into title. The only issue of significance here is for sellers to make sure that the original buyer (who has presumably already been vetted for their financial bona fides) does not create the holding company that is controlled by a new member with whom seller is unacquainted. This condition can and should be included in any consent to the assignment.

Risk Management Tip. There are some individuals who believe they can, without a real estate license, purchase real property using this “or assigns” verbiage, and flip the property to a third-party, taking profit from the difference between the purchase and re-selling price. I do not recommend this business model, since (a) the Oregon Real Estate Agency (at least in the past) has taken the position that this practice violates the licensing law, and can require the flipper to “disgorge” their “illegal commission” because it was obtained without an Oregon license[2]; (b) the flip requires the assignee, often a consumer, to understand and appreciate what is occurring, since by the time of the assignment, all of the standard buyer due diligence contingencies could have expired; and (c) it will raise the ire of every broker in the neighborhood, and thus result in a stream of complaints to the Agency.

Conclusion. So, the take-away here is that when buyers add the “or assigns” text to their offers, seller and listing agent antennae should go up. While there may be perfectly legitimate reasons for this approach, it bears serious vetting by sellers before accepting the offer. Waiting until after acceptance could be too late. ~ Phil

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[1] To the woke crowd, forgive me for the use of this allegedly misogynistic term. But according to Online Etymology Dictionary, here, the word “middleman” means, “…in the trading sense, ‘contractor, negotiator, broker,’ especially one who buys merchandise in bulk and sells it in smaller quantities to retailers or other traders,” 1795, from middle (adj.) + man (n.).” Accordingly, I have deferred to 200+ years of linguistic consensus saying it’s OK for me to use this word in mixed company. Whew!

[2] If you doubt the Agency’s authority to do this, take a close look at the list of activities for which Oregon requires a real estate license before earning a commission (ORS 696.010 (17), then consider ORS 696.040, which provides that “(o)ne act or transaction of professional real estate activity is sufficient to constitute engaging in professional real estate activity, within the meaning of this chapter.”

Introduction. This is a continuation of Part One, which addressed the printed contingencies found in the 2022 OREF Residential Real Estate Sale Agreement. (References to section and line numbers may be different today.)

Part One already covered:

Sections 5.1 (Financing Contingencies) and 5.2 (Failure of Financing Contingencies);
Section 6. (Seller-Carried Financing); and
Section 9 (Title Insurance).

As a reminder, a contingency is an event that must occur (or not occur)[1] for the transaction to become binding. All printed contingencies in the Sale Agreement are for the buyer’s benefit. There may be other contingencies in the transaction, such as the seller finding a replacement home, but they would be added by Addendum.[2]

Section 11.1 (Private Wells). This section asks: “Does the Property include a well that supplies or is intended to supply domestic water for household use? [ ] Yes [ ]No. If yes, Buyer has attached OREF 082 Private Well Addendum to this Agreement.”

For buyers who have never owned a property serviced by a well, this contingency demands caution. Contact the Water Resources Department for information: https://www.oregon.gov/owrd/pages/index.aspx.

Even for experienced buyers, caution must be exercised. The seller’s knowledge and opinions are important, but expert verification is critical. The Addendum asks about well logs, well reports, and other information. If available, an expert should carefully review them. If there are no such logs or reports, ask why.

Buyers should familiarize themselves with the experiences of nearby neighbors who are also on wells. Are there any known problems? How much does it cost to drill a new well in the area? Are there any geologic issues that are problematic? What about water purity and flow? Has the seller complained about any well issues in the past?

Well testing is critical. The Well Addendum provides that Seller, at Seller’s expense, is to have the well tested for arsenic, nitrates and total coliform bacteria and to submit the results to the Oregon Health Authority and buyer. However, unless there is a transfer of title, well testing is not required.

Areas impacted by recent wildfires could contain arsenic, nitrate, bacteria, lead, and, possibly benzene, toluene, ethylbenzene, and xylenes (BTEX). However, these are “extra” tests and at buyer’s cost.

Well flow testing is at buyer’s expense. It should never be waived.

Buyer’s right to terminate in the Well Addendum is slightly different from the professional inspection provision in the Sale Agreement, discussed above. In the latter, there is an immediate right to “unconditionally disapprove” of the home inspector’s report. But in the Well Addendum, after release of the test results, there is a “negotiation period” for the parties to attempt to reach agreement on the nature, cost and financial responsibility for remedying any “substantial deficiencies” in the system. However, in the end, buyer is not obligated to reach agreement on a solution and may terminate the transaction and obtain a refund of their earnest money deposit.

Risk Management Tip. Well water problems discovered after closing can be costly to buyers – and their real estate agents who may be brought into the dispute. For brokers who are new to the business or unfamiliar with well water issues, it is critical to partner with another broker with this expertise. And regardless, the buyer should always secure an experienced professional to evaluate the system. Brokers should resist the temptation to offer their opinions about a well, the system, or quality and flow of drinking water – regardless of their familiarity with the seller, well water in general, or their experience. The minute an opinion is expressed, it makes you an expert. The Sale Agreement goes to great lengths in saying Realtors® are not experts – allow that disclaimer to protect you!

Section 11.2 (Septic/Onsite Sewage System). This too is an important contingency for buyers unfamiliar with these systems. If the system is shared, buyer should have an expert review the terms of the sharing agreement. They can vary in terms and clarity. Buyers should find out if there have been any problems in cost sharing. The Oregon DEQ regulates residential septic systems. See link here.

The protocols in the Septic Addendum are similar to those for well water. But interestingly, contrary to the Well Addendum, there is no “negotiation period” after the test results are shared. The “unconditional termination” provision of the Septic Addendum is similar to the one found in the professional inspection section of the Sale Agreement.

Risk Management Tip. Brokers should always remember that when dealing with septic systems, there are two issues: (a) the tank; and, (b) the drain field. In some cases, the tank could be perfectly fine, but the drain field shot – or vice versa.

And as with the Well Water Addendum, brokers with limited familiarity with these systems should partner with a more experienced person. And as with well water problems discovered after closing, the cost to remedy a failing tank or drain field can be significant. As the dollars increase, buyers are more inclined to look around for someone – such as a real estate agent with E&O insurance – to share the cost. Let the expert do the talking and stay in the background when dealing with well water and septic systems.

Section 12. (Lead Based Paint Contingency Period). As most Realtors® know, if a residential property is being sold that was constructed before 1978, then on, or promptly after, the Effective Date of the Sale Agreement, the seller is required to deliver to buyer OREF 021 Lead-Based Paint Disclosure Addendum together with the EPA Pamphlet entitled “Protect Your Family From Lead in Your Home.”

Unless waived by Buyer in the Disclosure Addendum, buyer has ten (10) calendar days (or another mutually agreed on period) to (a) conduct a lead-based paint assessment or inspection and (b) unconditionally cancel the transaction by written notice to the seller at any time before midnight on the last day of the 10-day period. If timely made, the transaction is then terminated, and buyer has the right to recover their earnest money deposit.

Seems pretty straightforward, right? Simple enough, yes? This is what the 2022 Sale Agreement says today. This is not what it used to say for several years prior to 2022. The problem today is this: Under the terms of the 2022 Sale Agreement, buyer’s right of cancellation is unlimited, so long as it is timely made – it no longer requires any inspection or evaluation.

For example, say the buyers found a beautiful old pre-1978 home in a beautiful old neighborhood. They loved the home but had not made up their minds whether they could afford the repairs and upkeep. But it was sure to go quickly – there were already multiple offers. Rather than getting repair bids and putting a sharp pencil to the numbers, they immediately made an all-cash offer, paid $100,000 earnest money deposit, and waived their property inspection contingency. The good news for the buyers was that their offer was accepted. The bad news for the sellers is that they accepted the offer without requiring their buyers to waive the LBP Contingency. So now, buyers have tied up the property for a “free peek” and have time to decide whether to remain in the transaction with little or no risk. They may cancel the transaction within the 10-calendar day period for no reason, without inspecting or evaluating the property for LBP, and obtain a full refund of their $100,000 deposit!

Why? Because the LBP Contingency no longer provides that buyer’s right of cancellation may occur only if a certified LBP inspector identifies the existence of LBP or LBP Hazards in the property.

Risk Management Tip. First, consider the rationale for buyers having LBP inspections. If the home is pre-1978 the chance of it containing LBP somewhere is pretty high since lead was found in all paint back then. The question today isn’t really if there is LBP, but whether it has been “incapsulated” – i.e., painted over with more recent non-LBP in the years since 1978 i.e., during the last 44 years.

“Lead based paint hazards” are those you can see, include peeling, chipping, chalking, cracking, damaged, or damp LBP. Certainly, these conditions bear evaluation, especially if the buyers have small children. But most buyers, assuming they are familiar with LBP risks to their kids, would likely recognize during one or more walk-throughs whether those conditions existed, and would hire remediation experts immediately after closing and before taking possession.

The Take-Away. Listing agents should view with caution buyers’ use of the LBP Contingency as it currently reads. It can – and has – been used as a ruse to tie up a property with very little risk of losing the earnest money deposit. Is it a ruse, or is it based on a legitimate good faith concern? I submit that if its use arises from a legitimate good faith concern, then listing agents suggest their seller require that the LBP Contingency include an inspection and report by a professional. But if there is a suspicion the purchasers are merely using the LBP Contingency to buy time, suggest the seller require that the purchasers waive it.

One last comment. The reason the Seller Property Disclosure Section 13 of the Sale Agreement is not discussed as a “contingency” in these two articles is because it was not created by OREF, but by Oregon statute. It really is not a “contingency” since it does not depend on any third-party events, such as unsatisfactory inspections, LBP, title defect, or sewer and well water reports.

All rights and duties relating to the Seller Property Disclosure Statement are found at ORS 105.464 et seq. It was well-intended legislation that serves as a cautionary tale about how things can go awry when forms drafting is relegated to disparate legislative committees and interest groups with differing agendas, skills, and attention spans. ~Phil

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[1] I say “not occur” because the professional inspection contingency is tied to buyer not rejecting the report. Same for the title contingency. Silence is consent.

² Note to sellers: This contingency can be risky if not carefully drafted to assure that the contingent event is not satisfied or waived too early. Merely “entering into an agreement to purchase a replacement home” can be premature. The inspection should be completed, and financing pre-approval obtained – at minimum.

Introduction. Disputes involving earnest money deposits are a “zero sum game.” There is one winner and one loser; no in-between. Arbitrators do not – or certainly should not – split the deposit in a misguided effort to equitably allocate the funds. (Note: This analysis refers to the OREF Sale Agreement form, so references to section and line numbers may be different from those today.)

Equity is not the issue; both parties have already stipulated in the Sale Agreement’s liquidated damages clause that if there is a breach, the non-breaching party keeps the deposit. (A liquidated damage clause is one in which the contracting parties agree, in advance, that should there be a breach, the damages will be the sum of X dollars. If properly drafted, the clause prevents both sides from later arguing that the actual damages resulting from the breach are either higher or lower than the pre-agreed “liquidated” amount. In the case of the buyer’s breach of the OREF Sale Agreement, the parties agree that seller’s remedy for the buyer’s breach will be to retain the deposit – i.e., it is the liquidated sum the parties have pre-agreed upon. Thus, if the seller breaches the Sale Agreement, the buyer recovers back the deposit (but retains the right to also seek specific performance of the contract). If the buyer breachs the Sale Agreement, the seller retains the deposit as liquidated damages. There is no provision in the Sale Agreement allowing the arbitrator or court to “apportion” liquidated damages.

Critical to understanding liquidated damage clauses is recognizing the difficulty in quantifying a seller’s damages when their buyer breaches the Sale Agreement. The clause relieves the seller of the difficulty in “proving” the value of the lost opportunity to sell the property to a person who never made an offer.

This is where the liquidate damages clause proves its worth. Otherwise, how is the seller to prove that but for the buyer’s offer, a better offer would have been made? Once a transaction appears as “pending” in the MLS, most prospective buyers move on – at least assuming other inventory is available. Without a liquidated damage clause it is almost impossible for sellers to prove they were damaged by “losing” an offer they never received.

Earnest Money Dispute Scenarios – Seller Keeps the Deposit

Section 28.3 of the Sale Agreement lays out three scenarios which can result in the buyer forfeiting their deposit. If seller signs and accepts the Sale Agreement, title is marketable, and seller did not breach, he or she may terminate the transaction and keep the deposit if:

Buyer misrepresented their financial status. Section 4 of the 2022 OREF Sale Agreement provides at lines 55-58:

Buyer represents that Buyer has liquid and available funds for the Deposit and down payment, and if an all-cash transaction, the full Purchase Price, sufficient to Close this transaction and is not relying on any contingent source of funds (for example, from loans, gifts, sale or closing of other property, 401(k) disbursements, etc.), except as follows (describe): _________________________

What this means is that buyers signing an offer of purchase actually have the money. Buyer agents should vet this issue with their clients; the failure to do so is a disservice to the seller and listing agent. And if sellers doubt their buyer’s financial bona fides they should counter the offer with a demand that the buyer provide proof of collected funds capable of being used to fund the deposit and down payment.

Practice Tip: Sellers and their brokers should be careful about inadvertently waiving this provision. Once a seller and/or their broker acquire knowledge that the buyer has misrepresented their financial status, seller must decide whether to terminate, or continue moving forward with the buyer. In the latter scenario, seller should call out the non-performance and give the buyer a choice to either forfeit the deposit or agree to some other solution satisfactory to seller in a written Addendum. Doing nothing and moving forward can result in a waiver of this provision.

Earnest money deposit is not timely paid. If the buyer’s bank (a) does not pay, when presented, a check given as earnest money, or (b) buyer fails to timely make a wire transfer for the deposit, it entitles the seller to claim a breach of contract and retain the deposit. But again, sellers cannot ignore the breach and only later claim it as a basis for retaining the deposit. Unfortunately, buyers’ late payments are frequently overlooked, and the parties continue to move forward, trying to keep the transaction together while the buyer struggles to find the necessary funds.

Practice Tip: Section 37.1 of the 2022 OREF Sale Agreement (Miscellaneous) provides at Line 414: “Time is of the essence of this Agreement.” Upon the failure of the deposit to be timely made, sellers and/or their brokers should immediately address it in an Addendum, reciting the default and obligating the buyer to another performance date for the deposit. Waiting after two or three failures makes it difficult for the seller to later claim that time is still “of the essence.” [Note: the 2025 form may vary slightly.]

Buyer’s fails to complete the transaction in accordance with the material terms of the Sale Agreement. This provision is a catch-all, and the most significant for sellers. However, the buyer’s failure must be “material,” i.e., a provision or condition that is essential to completion of the transaction. Technical defaults or failures quickly remedied are not always “material.”

Earnest Money Dispute Scenarios – Deposit Returned to Buyer

Refund to Buyer. The OREF Sale Agreement identifies three scenarios that will result in the buyer recovering back the deposit. However, a refund of the deposit is not the buyer’s only remedy should the seller default; buyer may also bring a claim for specific performance and/or damages.

The parties are under contract, but the seller cannot deliver “marketable title.” Marketable title is title that is free of all objectionable liens and encumbrances. For example, title to property is frequently encumbered by recorded utility easements. While they show up on the preliminary title report, and technically “encumber” or “burden” the property – they are normally not a problem. Utility easements for the installation and maintenance of powerlines, gas lines, water, etc., do not negatively affect the quality of title but, rather, enhance its developability.

When title is “unmarketable” it is encumbered by some recorded instrument, e.g., a judgment lien, a mortgage, or a tax lien, that could result in the owner having to pay money to release the lien. Similarly, certain recorded easements could negatively affect a property making it unmarketable – e.g., an unlimited public right of access over the property to the beach.

Who determines whether title is unmarketable such that the buyer can cancel the transaction and obtain a refund of their earnest money deposit? If the parties cannot agree, the judge or arbitrator will decide whether the lien or encumbrance on title is sufficiently significant as to make it unmarketable.[1]

Seller fails to complete the transaction in accordance with the material terms of the Sale Agreement. For example, seller refuses to permit access to buyer’s inspector or appraiser. In such a case, a buyer could terminate the transaction and demand a full refund of the deposit. But remember, as noted above, even if the buyer recovers back his or her deposit, they may also bring a claim against the seller for “specific performance.”

Conversely, unless the Sale Agreement provides otherwise, a seller’s sole remedy on account of their buyer’s breach is to retain the deposit as “liquidated damages.” The OREF Sale Agreement, as most residential sale agreements, limits the seller’s damages to the amount of the deposit. In other words, the seller cannot pursue a defaulting buyer for “specific performance” or additional damages.[2]

If a buyer-contingency fails through no fault of the buyer. For example, if the professional inspection contingency fails, buyer is entitled to a refund of the deposit. In addition to ones inserted in the offer (e.g., sale of buyer’s residence), there are several pre-printed buyer contingencies in the Sale Agreement. Realtors® should become familiar with all of them.

Note that the “no fault of the buyer” clause does not mean the buyer cannot exercise their right of termination by disapproval of a sewer, septic, inspection report, or well water report – this is their right.

However, if a buyer sabotaged their financial statement so as to be rejected for financing, that would prevent them from obtaining a refund of the deposit. The law implies an obligation on parties under contract to exercise them in good faith; the failure to do so is a breach of that implied obligation and a breach of the contract.[3]

Liquidated Damages. There are only two or three major Oregon cases that are material to a discussion of liquidated damages. The law is fairly well settled. A well-drafted liquidated damages clause should contain the necessary recitals the law looks to in upholding them. For example, in the 2022 OREF Sale Agreement, it Section 28.3 provided:

The parties expressly agree Seller’s economic and non-economic damages arising from buyer’s failure to close this transaction in accordance with the terms of this Agreement would be difficult or impossible to ascertain with any certainty, that the Deposits identified in this Agreement are a fair, reasonable, and appropriate estimate of those damages, and represent a binding liquidated sum, not a penalty. [Note: The 2025 form may vary slightly.]

The Seller’s sole remedy against Buyer for Buyer’s failure to close this transaction in accordance with the material terms of this Agreement is limited to the amount of earnest money paid or agreed to be paid in this Agreement. Seller’s right to recover from Buyer any unpaid earnest money agreed to be paid in this Agreement will be resolved as described in the Dispute Resolution Sections below.

What has not been addressed above – but should not be ignored in any discussion of earnest money deposits, is that under the OREF Sale Agreement, and similar forms in Oregon, retention of the earnest money deposit is the seller’s sole remedy in the event of a buyer’s breach. That is why the amount of the deposit is so important.

It is one thing if the breach occurs soon after the Sale Agreement is signed, such as the buyer’s check for the deposit fails to clear – the seller can quickly declare the default and put the property back on the market. But it is quite another thing if the buyer fails to show up for closing six weeks into the transaction.

The take-away for listing agents is that they should discuss with their sellers in advance, what damage might occur if the buyer defaulted late in the transaction. The raison d’être for the deposit is to make a seller think twice about defaulting. In other words, walking away from the transaction must “hurt” financially. This is not to say it should be designed to “penalize” buyers for defaulting, but it should be a sufficient amount to keep them incentivized to remain in the transaction.[4] A deposit the buyer can walk away from without concern is not a real deposit.

Conclusion. As noted at the beginning, earnest money disputes are a “zero-sum” proposition, since a forfeiture or refund depends upon who committed the breach. Once determined, the prevailing party gets the deposit.[5]

But an equally important issue is whether both parties are prepared to roll the dice, knowing that the prevailing party is entitled to recover their attorney fees from the losing side. Thus, the loser loses big; this directs the focus on the size of the gamble. A large deposit, say $75,000 or $100,000+ might incentivize one side or the other to pursue the funds; but lesser amounts require more evaluation, especially when the amount of the deposit could be exceeded by the attorney fees expended in the battle – in other words, a Pyrrhic Victory.

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[1] Note: Title being “unmarketable” is different from saying the property cannot be sold or that it has no value. “Unmarketability” is sufficient if it reduces the property’s value such that it no longer is worth what a ready, willing and able buyer would pay for its intended purpose. For example, if the property is zoned residential, but because of recorded easements or other limitations on use, it cannot be sold as a residential lot, it is unmarketable for its highest and best use.

[2] I am speaking of customary practice in Oregon, not elsewhere.

[3] Note that all inspection reports can be rejected by buyers without having to give a reason. In other words, they can reject the “report” not some particular item in that report. If the latter standard were the rule, sellers would be forever arguing that the item buyer rejected, e.g., the furnace was fully functional, and not a good faith basis to terminate the transaction.

[4] For example, a deposit of $50,000 – $75,000, if duly considered by the seller in advance (assuming the sale price was significant), e.g., $1,000,000 would likely withstand scrutiny. $500,000 likely would not. Beware: Brokers should avoid applying a simple 10% or 20% multiplier since that is not “a fair, reasonable, and appropriate estimate” of damages – it is just a formula pulled out of the air.

[5] Lest the reader ask, rhetorically, “what happens if both seller and buyer are in default?” the answer is the latest default is the only one that counts. For example, if the buyer failed to timely make the deposit, but eventually did so – and it was accepted – that “default” has been waived by the seller. If the next default occurs, say by the seller in failing to close on time, buyer can terminate and get their deposit back. But note that the Sale Agreement expressly provides that a refund of the buyer’s deposit does not mean the seller is off the hook. The reason is because even if the deposit is returned to the buyer, he or she still has a right to seek specific performance. Otherwise, a seller could avoid having to sell to a buyer by simply creating their own default and refunding the deposit.

Introduction. As most Oregon Realtors® know, the OREF Sale Agreement provides that, subject to certain exclusions, all disputes that cannot be otherwise amicably resolved must be first mediated. If that isn’t successful, recourse is through mandatory arbitration. The filing of legal actions in court is not permitted except in cases seeking “provisional process” e.g., for injunctions, restraining orders, and similar matters requesting immediate and extraordinary relief.

The Portland Metropolitan Association of Realtors® (“PMAR”) has its own mandatory mediation process, where disputes involving transactions handled by one or more PMAR Realtors® must first be filed. If mediation is unsuccessful, the only other venue for resolution is through Arbitration Service of Portland, Inc (“ASP”). ASP administers all other non-PMAR mediations for disputes arising under the Sale Agreement.

In some of these seller-buyer disputes, one or both Realtors® may be named because a claimant feels their broker, or the other broker, or both brokers, engaged or participated in activity that caused them damage.

The Sale Agreement’s mediation/arbitration dispute resolution process involving Realtors® is not available to resolve claims for violation of the NAR Code of Ethics. Those are handled at the local Realtor® association level. Similarly, claims against brokers for violation of Oregon’s licensing laws and rules (ORS Chapter 696 and OAR 863) must be filed through the Oregon Real Estate Agency

The 2021 ASP Statistics. Annually, ASP provides PMAR with its arbitration statistics to assist in helping the industry better understand the type of property disputes that end up in arbitration. What follow is a summary of those disputes and Realtor® tips to avoid them.

Seller Misrepresentation Claims. Caveat: This discussion relates only to the topics, not the outcomes. Having several of these claims end up in arbitration does not mean they all resulted in awards for the buyer against the seller.

Unquestionably, over the years, this has been the largest source of claims ending up in arbitration. Moreover, they often include the seller’s broker. This joinder of parties, i.e., naming the seller and their listing agent as co-respondents, should not be a surprise. Oftentimes, it is the listing agent to whom the seller confides, and (unfortunately) the listing agent wittingly or unwittingly, acquires information that provides the basis for a buyer’s claim against that broker.

For example, in completing the Sellers Property Disclosure Statement (“Disclosure Form” or “Form”), sellers turn to their agent to better understand how to answer particular questions: Below are some examples of Disclosure Form questions[1] – coupled with a typical inquiry the seller might have of their broker before finalizing the Form:

Are there problems with settling, soil, standing water or drainage on the property or in the immediate area? “I had some problems last year, but they all got resolved. Do I need to answer “Yes”?
Are there any pending or proposed special assessments? “There have been some recent owner complaints to the HOA about ceiling leaks in their units – but not mine. Contractors are looking at things right now. So far, there have been no assessments proposed, nor assessments made. How should I answer?”
Are there any encroachments, boundary agreements, boundary disputes, or boundary changes? “My neighbor told me he thought my fence was on his land, but he never asked me to move it. We have no dispute. Do I need to answer ‘Yes’”?
Are there any moisture problems, areas of water penetration, mildew or moisture conditions (especially in the basement)? “There are some leaks in the basement during the winter months, but they all go away when the rains stop. Do I have to answer “Yes” even though they are not really a ‘problem’ and are just temporary?”

The “Situational Ethics” Problem. Each of the above property disclosure questions might be answered differently if asked of a seller versus asking the prospective buyer. The seller who does not disclose (or “under-discloses”) may believe they are answering appropriately by strictly interpreting the scope of the question subjectively. E.g., “Yes there was a problem, but it was repaired”; “No, there is no ‘dispute’“; “No, it has not been a problem.”

But how would the seller respond to the following: “If you were a buyer wouldn’t you want to know these things – i.e., letting the buyer decide whether the issue is important in their purchasing decision?”

The minute the listing agent becomes involved in salving the seller’s conscious for not disclosing an issue because the framing of the question didn’t strictly require it, the agent has, figuratively speaking, left their “fingerprints” on the Disclosure Form, which provides a basis for including them in the claim.

The Take-Away. Buyer claims of nondisclosure against sellers and their brokers are primarily – but not exclusively – the result of information the seller could have disclosed but elected not to.

To be fair, however, some fault can be placed on the spectacularly poor and inconsistent drafting of the Disclosure Form – keeping in mind that the text is a product of legislative drafting, not OREF drafting. Time does not permit examples, but there are many.[2]

Also, sometimes seller nondisclosure claims can be traced back to other, less culpable, factors: E.g., (a) Information that was beyond the scope of the Form’s questions; (b) The seller made a good faith error;[3] (c) The buyer already knew or should have known of the defective condition; or (d) Any number of other reasons unrelated to an effort to intentionally conceal information from the buyer.

For listing agents and their sellers, there is One Rule: “If in doubt, disclose.” There is no such thing as saying too much. Or to put a finer point on it, sellers should make the same level of disclosure in answering the form as they would want if they were buyers reading the form. This approach is also known as The Golden Rule. “Disclose, Disclose, Disclose.” Let the buyer decide what is important to them.

Specific Performance Claims. The second largest category in ASP claims relate to buyers asking the arbitrator to require the seller to complete the transaction. This is called “specific performance” which is really the name of the remedy sought for the seller’s breach of contract in refusing to close the transaction.

Since money damages are not really sufficient to fully compensate a prospective buyer, specific performance is the preferred remedy – especially in times of limited inventory when a suitable replacement property is not available. These claims do not normally include the listing broker.

In many specific performance cases, though not all, the reason a seller declines to close the transaction is because they believe they underpriced the property, and/or have a back-up buyer for a better price. Occasionally, sellers decline to sell because they cannot find a replacement home and refuse to close under the misguided belief they can unwind their first transaction.[4]

If the Sale Agreement is clear on its face, the buyer has complied with its terms, and is ready, willing and able to perform, there is a potential claim for specific performance against the seller.

Earnest Money Disputes. The third largest area of contested cases involve earnest money disputes. These situations arise because either the seller or buyer believe the other side breached the pre-closing terms of the Sale Agreement. Examples include the failure to timely deposit (or provide proof of ) funds; the failure to timely secure financing; and untimely rejection of the property inspection report. There are many others.

Although these claims do not normally include a party’s broker, there are things agents can do to reduce such disputes: (a) Know all deadlines; (b) Discuss them with the buyer and seller; and (c) Make sure both agents agree on the same deadline dates.

Why Are There No Seller vs. Buyer Damage Claims In Arbitration? The answer is found in the OREF Sale Agreement – and almost all other contracts for the sale of real property. The earnest money deposited by buyer into escrow is expressly intended to serve as the seller’s agreed-upon “damages” in the event buyer fails to perform. This pre-agreed sum is known as “liquidated damages” i.e., it is stipulated to be the amount the parties have agreed upon in advance, as representing seller’s damages caused by buyer’s default.

This can be a two-edged sword. If the buyer breaches early in the transaction, the earnest money deposit may far exceed seller’s actual damages (assuming seller can quickly resell the property); but if the buyer breaches late in the transaction and the seller had moved out of the property and relocated elsewhere, their actual damages may far exceed the stipulated damages represented by the deposit. In either case, since the sum has been agreed to in advance, with the proper recitals in the Sale Agreement it is the maximum amount seller may recover for buyer’s nonperformance – nothing more.

Conclusion. Are the number of disputes that end up in mediation and arbitration going up, down, or staying the same? That question cannot be answered as it is framed. The reason is that, there should be an inverse relationship between the numbers in mediation and arbitration. That is, the more mediations there are, the fewer arbitrations there should be. To put it another way, mediations, if properly conducted, should have a prophylactic or lessening effect on the number of arbitrations. That has been the case ever since the mandatory mediation clause was instituted in the OREF Sale Agreement circa 1997.[5]

~ Phil

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[1] There are too many to list here. The failure to include them is not to minimize their importance.

[2] Drafting of legislation is often the product of committees composed of stakeholders. How many iterations the final product went through – how many drafters reviewed each one – or how many last-minute changes were made with little or no oversight, is unknown. Clearly, the Disclosure Form contains inconsistent and conflated language. [See discussion at: https://q-law.com/oregon-sellers-property-disclosure-conundrum/]

[3] To be clear, the statute, ORS 105.464, provides that the seller’s answers are based upon their “actual knowledge of the property at the time of disclosure.” Technically, if that knowledge is the result of a good faith error, it cannot (or should not) form the basis of a claim against seller. The representations in the Form are not warranties.

[4] In these situations, sellers should include a well-drafted contingency making the sale transaction subject to the purchase and closing of the replacement property. However, this requires careful drafting; some buyers may not want to wait for the seller’s purchase to close before allowing the contingency to expire. Sellers should be encouraged to consult with qualified legal counsel before entertaining offers.

[5] The reason is because for over 20 years, the mediation clause in the OREF Sale Agreement has contained a provision that if a party failed or refused to mediate first, they could not recover attorney fees later in arbitration, even if they prevailed. This became a significant incentive for recalcitrant parties to first try to settle their disputes in mediation. It worked.

Discussion. The short answer is “Yes.” But the longer answer requires more explanation. First, a caveat: By “review” I do not mean by the listing agent for the purpose of substantively changing a seller’s answers. Rather, by “review” I mean “review for completeness.” Oregon’s property disclosure statute, ORS 105.464, instructs sellers to:

“Please complete the following form. Do not leave any spaces blank.” (Emphasis added.)

Accordingly, it is my belief that brokers for both sellers and buyers should routinely review disclosure forms to confirm they are complete in two respects:

To make sure there are no unanswered questions. The choices are “Yes,” “No,” “Unknown,” or “Not Applicable;” and
To make sure that if an asterisk (*) appears next to a question, the requisite written explanation is attached.

The disclosure statutes provide that buyers have five business days[1] after their seller’s delivery of the form to “revoke” (i.e., withdraw) their offer, based upon a “disapproval” of the seller’s information provided in the form. The buyer’s notice of revocation must be written and delivered, but there is no required wording. “I disapprove” will suffice, if timely made.

Questions:

What if one or more questions are left unanswered or the required explanation is not attached?
Has the form been “completed”?
And if not completed, does the buyer’s five-business day period for revocation still commence on delivery?
If the revocation period does not commence, does that mean buyer’s to withdraw from the transaction runs all the way to closing?[2] See, ORS 105.475(3).

The statutes are silent on these questions.

This discussion is more than hypothetical. I have seen critical questions left unanswered and unexplained; sometimes unintentionally, and other times, likely on purpose. (I will defer for another day the discussion on whether fraud by omission, e.g., silence, is any less venal than fraud by an outright misrepresentation.)

Review By Listing Agents. Most sellers and listing agents would agree that expiration of the buyer’s right of revocation is an important event. Why? Because revocation requires no explanation; it is easy – like buyer’s remorse. Secondly, only after the revocation period expires can the parties get down to the serious business of focusing on due diligence issues.

Accordingly, anything that can prolong the five-business day period, such as delivery of an incomplete disclosure form that gets returned, is a disservice to the seller. For this reason, listing agents should review their client’s disclosure form for completeness before delivery to the buyer or buyer’s agent. The failure to catch an incomplete form before delivery can result in unnecessary delay.

Review By Buyer Agents. Conversely, buyer agents should review the disclosure form for completeness immediately upon receipt. If there are critical questions left blank, or written explanations that have not been attached, the disclosure form should be promptly returned. If that occurs, it should be made clear to the listing agent that the five-business day right of revocation will not commence until the “completed” form is delivered.

However, for buyer agents another critical function exists. In some cases, a seller may answer a question in the affirmative, e.g., that the roof has leaked, or there was water in the basement, but the buyer fails to follow up. Equally problematic is when a seller responds “Unknown” to questions that demand further inquiry. In both instances, buyer agents should encourage their clients to alert the inspector to these issues. This is another reason for review – to be a second set of eyes for the buyer; it is useful for developing a due diligence checklist. If necessary, the seller should be contacted for more details.

The Take-Away. Accordingly, both agents should, at the earliest possible time, review the seller property disclosure form for completeness. Not doing so creates a risk of unnecessarily prolonging the revocation period. Again, this is not to say listing agents should become involved in answering the questions, checking boxes, or authoring explanations. Those responsibilities belong exclusively to the seller. ~ Phil

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[1] The statutory form found at ORS 105.464 is wrong. It should say “five business days.” The original legislation at Section 1, Chapter 547 of the 1993 Oregon Session Laws provided “five business days.” Why this error has remained ignored and uncorrected for nearly 20 years is a mystery. We changed the OREF Disclosure form years ago to be consistent with ORS 105.475(1).

[2] This is not to suggest that a buyer could accept a disclosure form, realize it was incomplete, say nothing and retain the right to revoke all the way to closing. A buyer’s failure to act promptly under those circumstances would likely operate as a waiver or estoppel against them.

Introduction. Oregon’s property disclosure law was first created in the 1993 Legislative Session – nearly 30 years ago. This was back when the idea of sellers having to “disclose” any information about their homes was a foreign concept. Short of outright fraud, caveat emptor[1] was the rule of the day. Of course, if a seller intentionally misrepresented the condition of their property, it was actionable – but sellers were not then required to make any disclosures, thus leaving buyers to learn as much as they could about the property on their own, before making an offer.

In fact, the concept of “disclosure” was so foreign at the time, that the Oregon legislature gave sellers the right to select between it and “disclaimer”. Thus, residential sellers had a choice between using one of two forms: (a) They could either answer a series of statutory questions about the property (“Disclosure”), or (b) tell their buyer nothing (“Disclaimer”). To lawyers advising their seller-clients, this was a no-brainer – always disclaim.

Both forms permitted buyers a fixed period of time following delivery of the disclosure of disclaimer form to withdraw from the transaction (called the “right of revocation”). This will be examined more closely in Part Two.

It was not long before the Disclaimer option eventually disappeared. Today, the law provides that unless exempted (e.g., new construction sales; sales by court-appointees; foreclosure sales, etc.), all sellers of one-to-four family homes (including condominiums and townhomes) are required to give their buyers a Seller’s Property Disclosure Statement (“SPDS”).

Seller Property Disclosure Today. Fast-forwarding to today, we see that some things have not changed. Most of the questions in the SPDS remain the same; many are poorly worded and suggest that each section was drafted by a separate group, each relying upon their own specialty, such as plumbing, heating, cooling, electrical, land use, title, condominium, etc. There appears to have been no effort to follow uniform style and syntax. Inexplicably, after nearly three decades, most of these questions remain unchanged today.

Some require knowledge of the law: “Is the property being transferred an unlawfully established unit of land?”;
Others require land use knowledge: “Are there any governmental studies, designations, zoning overlays, surveys, or notices that would affect the property?
Some questions refer only to the time of the sale: “Are there any sewage system problems or needed repairs?” This question ignores past problems.
Others refer to conditions that could have occurred at any time over the duration of a seller’s ownership: “Has the roof leaked?”

And perhaps the most open-ended of questions comes out of the blue at the end of the form:

“Are there any other material defects affecting the property or its value that a prospective buyer should know about?”[2] Not only does this question ask how a defect affects the home’s value (while all other questions relate solely to its condition) it requires the seller to know what issues are important to each buyer – metaphoricaly, it asks sellers to become mind-readers.

I do not suggest these topics are unimportant – but believe that many questions are simply beyond the ability of most sellers to answer with certainty. I suspect that less than 20% of sellers can answer all the questions with any degree of confidence.

The only saving grace in the legislation is that it expressly provides that sellers’ answers are based only upon their “best knowledge”- they are not guarantees or warranties. Thus, being wrong is permissible; it does not automatically make a seller liable; liability may only attach if the buyer can establish (through clear and convincing evidence[3]) that their seller knew an answer was false.[4]

And since most real estate listing agents try to avoid having their fingerprints on the SPDS,[5] many balk at answering their clients’ questions seeking direction or interpretation. This leaves sellers on their own.

Lastly, the SPDS form and its enabling legislation contain one glaring 28-year-old error. While the language of the form dictated by ORS 105.464 states at the beginning and end of the document that buyers have “five days” from delivery of the disclosure statement to give notice of their intent to exercise their right of revocation, the text of ORS 105.475(1) says that right commences after “five business days” following delivery.

The 28-Year-Old Mystery. How is it that for over a quarter of a century the Oregon real estate industry has ignored the admitted sloppiness of a form it had a major hand in creating?

The oft-quoted meme used to explain this anomaly is that doing so would open up the form to other stakeholders and consumer advocates (e.g., environmental, zoning, fair housing, conservation, noise pollution, etc.) who would expand the list of required disclosures into an unwieldy amalgam of questions – akin to California’s approach to seller disclosure.

Based upon this rationale it’s a wonder the U.S. Constitution was ever amended. Perfect has become the enemy of good. ~ Phil

[To be continued.]

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[1] “Buyer Beware”

[2] This is like asking a witness on the stand before stepping down: “Is there anything else you have not told the jury that they would want to know?”

[3] The burden of proof for fraud and misrepresentation.

[4] Liability can also attach if the seller “recklessly” made a statement without any basis. This is a more complicated analysis but can be a trap for the unwary seller.

[5] For fear of being brought into a buyer vs. seller claim and accused of having recommended the seller’s answer.

What Must Sellers Disclose? Oregon’s Property Disclosure form asks sellers whether they have had any additions, conversions or remodeling to the home. If the answer is “yes” the form asks three follow-up questions; (1) Was a building permit required? (2) Was a building permit obtained? (3) Was a final inspection obtained?

Seller and buyer agents should always be mindful of the fact that a seller’s answers to these questions can vary greatly depending upon how the question is interpreted:

Since the seller’s answers are provided upon the basis of his/her actual knowledge at the time of disclosure, Sellers who have lived in the home for a comparatively short period of time may have little or no knowledge about what additions, conversions or remodeling occurred prior to their ownership;
Even if they are aware of such work having occurred either prior or during their ownership, they may have no knowledge as to whether a permit was legally required for the work to be done;
If work was performed, the seller may regard it as merely “cosmetic” and therefore not qualifying as an “addition,” “conversion” or a “remodel;”
If the work was performed by a contractor, the owner may incorrectly assume that permits were pulled and the work inspected for compliance with the building codes.

For all of the above reasons, Realtors® should be alert to the distinct possibility that a seller’s answers to questions concerning remodeling may not always be totally reliable, even when made in good faith.

While Oregon law does not require that real estate brokers be “experts” on the issue of code compliance, it does not permit them to close their eyes to the obvious. The same is true of buyers. Here are some warning signs:

The home’s garage or attic has been converted to a sleeping area;
An older home is advertised as having been “updated” or words to that effect;
The style of the kitchen or bathroom obviously post-dates the home’s original construction;
There is a finished basement with electrical and plumbing installed.

In cases such as these, and many others, the following questions must be asked:

Who performed the work?
Was a permit required?
Was one obtained?
And did it go through a final inspection?

These questions should be asked regardless of the seller’s answers in the property disclosure form – in other words “trust but verify.”

There are several reasons for following this practice:

From the listing broker’s perspective, learning this information in advance can avoid a possible sale-fail late in the transaction when it is discovered;
For both brokers it reduces the risk of being accused of being complicit in a cover-up;
From the buyer broker’s perspective, checking with the building department early on can eliminate buyer claims after closing , since then the problem will have to be cured before the buyer can seeking permits for any further work and before placing the home on market to re-sell; and
Most importantly, verification and curing (where necessary) reduces the danger that illegally or poorly performed work might result in a catastrophic fire or other disaster causing injury or death to a buyer or buyer’s family.

When is a Permit Required?¹The answer to this question is not always clear and is oftentimes confusing. And sellers’ answers in the property disclosure form can vary dramatically.² It is true that generally owners themselves may perform work on their own home without hiring a licensed contractor.³ However, homeowners performing their own work are nevertheless subject to the same permit requirements as if they hired a qualified contractor. That is, they all must apply for and obtain the necessary permits and have the work inspected for code compliance. Work performed by a seller does not eliminate complying with the building codes.

If the work involves interior plumbing, such as repair, replacement, or relocation of lines, chances are a permit is required. The same holds true for new plumbing fixtures, such as toilets, sinks, tubs, etc. Even replacing an existing fixture, such as a tub or shower, can require a permit, if it involves concealed plumbing connections. A permit is generally not required to replace accessible plumbing fixtures or to make certain emergency repairs. If a bathroom is added to a home, this may involve obtaining not only a plumbing permit, but a building permit, an electrical permit and mechanical permits (defined below).

Work involving exterior plumbing such as sewer lines, septic systems, cesspools and drywells can require a permit. In some instances, the contractor must also be licensed by the Oregon DEQ.

Repair, replacement or installation performed on heating, cooling or ventilation systems is known as “mechanical” work for which a permit may be required. This can include installing or changing any part of a home’s heating or cooling systems, wood stoves, fireplace inserts, gas piping or fuel oil tanks.

When electrical work is done on a home by the owner, he/she must also be the occupant – otherwise a state licensed contractor must perform the work. A permit is required to install, change or repair any hard-wired electrical system. This includes installing additional wiring, adding an electrical outlet or light fixture, or changing a fuse box to circuit breakers. Even installation of low voltage systems, such as phones or security systems, may require a permit.

Building permits are required almost any time a dwelling is enlarged or altered in any material way. Examples would include finishing an attic, garage, basement, moving or adding walls, some deck and porch construction, etc. When building permits are not required, but there are concerns about how the site is used, a zoning permit may be required. For example, enlarging a driveway or paving a parking area, may require the owner to obtain a zoning permit.

Permits, if required, must be purchased before the work is performed. Any work performed under a permit must be inspected for code compliance. The permit expires after 180 days if it has not been inspected. If the city or county becomes aware that work has been performed without the necessary permit(s), the homeowner will be notified by mail to either purchase the necessary permit(s), or in the case of more complex work, to submit plans to the proper authorities. If the requested action is not obtained, the matter is turned over to code compliance authorities for follow-up. If necessary, the authorities have the power to take administrative action or issue fines against the owner of a home if the necessary permits were never issued. Since the enforcement action is against the record owner of the home, in those cases in which the home has been sold, this means the innocent buyer is now saddled with the consequences of their seller’s noncompliance.

Verification. There are many reasons why homes may not be code compliant, ranging from a failure to realize the need to obtain a permit, to acquiring a home that had alterations performed by the prior owner. The Portland Bureau of Development Services, which is charged with responsibility for ensuring that construction is properly permitted and code compliant, has a website that permits anyone to check into the permit history of a property by simply entering the address. For further information, go to: https://www.portlandoregon.gov/bds/34154

Conclusion. After a home has been sold, the new owner may become financial responsible for the expense and responsibility in making a home code compliant. In some cases, the time and cost can be substantial. Now that seller property disclosure is required to be given, owners have very little “wiggle room” to avoid addressing the issue of whether any remodeling was ever performed, whether a permit was ever issued and whether the work was ever inspected and passed. The longer the owner owned the home, the greater the likelihood he/she knows its remodeling history.

ORS 696.822(2) provides:

A real estate licensee is not liable for an act, error or omission by a principal or an agent of a principal that is not related to the licensee unless the licensee participates in or authorizes the act, error or omission. This subsection does not limit the liability of a principal real estate broker for an act, error or omission by a real estate licensee under the principal broker’s supervision. (Emphasis added.)

This provision appears to insulate real estate licensees from their clients’ misstatements, whether intentionally or negligently made. However, in this litigious society, brokers cannot rely in blind faith on their clients’ word. Listing agents should make sure their sellers understand the risk in giving untruthful answers, and buyer agents should make sure their clients understand the need to verify with the local jurisdiction exactly what work has (or has not) been permitted, inspected and passed. It is this type of value that Realtors® can bring to the transaction, and in so doing, justify their commissions. ~ Phil

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ENDNOTES

1 Much of the following information was obtained from the Portland Bureau of Development Services. Their website is http://www.bds.ci.portland.or.us/. It can be a very useful resource for Realtors® and their clients.

2 Remember, the form only requires that the seller’s answers be based upon his/her “actual knowledge.” If the seller truly doesn’t know whether a permit was required, or truly believed one was not required, it will be very difficult for a buyer to prove that the seller knew they were not telling the truth at the time they completed and signed the disclosure form.

3 The “owner” is the person named on the title – not a family member or friend of the owner.

Below is an article I authored in early 2020. How times have changed!

In a recent Housingwire.com article (here) by Kathleen Howley, we learn that the current average 30-year mortgage interest rate of 3.24% is within one basis point[1] of its all-time low of 3.23%. According to article:

Fannie Mae projected last week the average this quarter would be 3.2%, followed by 3.1% in the third quarter and 3% in the fourth quarter.

Fannie Mae is forecasting an average of 2.9% for every quarter of 2021.

Continue reading “Interest Rate Retrospective!”