The Dwelling Group, LLC.
BUYER ADVISORY – RESIDENTIAL PROPERTY
The Dwelling Group, LLC. recognizes that in certain market conditions buyers may waive contract addenda, contingencies, conditions or statutory rights in order for their offer to be accepted by a seller only to be disappointed before closing should the transaction fail to close and they forfeit their earnest money deposit or after closing when the property they purchased is not of the quality they assumed. Buyers should be very careful about waiving contract addenda, contingencies, conditions or statutory rights which benefit them.
The Dwelling Group, LLC has compiled this high-level topical summary of some important topics, statutory rights, contingencies, conditions, and other issues as an informational and educational tool for the benefit of The Dwelling Group, LLC clients. Buyers are advised to carefully review this material and speak with you broker before waiving an important rights, conditions or contingencies benefitting them.
INFORMATION & DISCLOSURES
Earnest money is a Buyer’s monetary deposit paid upon execution of the purchase and sale agreement. It serves as a show of good faith in proceeding with the transaction and depending upon the amount, a sign of an offer’s strength. In some situations, Buyer’s may offer non-refundable earnest money deposits to strengthen their offer, with the earnest money immediately disbursed to the Seller or remaining in selling broker’s firm or closing agent’s possession pending closing. In either case, if Seller defaults, the Buyer may lose the earnest money deposit or be faced with litigation to obtain its return. Buyers may also choose to offer a very large earnest money deposit. Washington state law sets the valid and enforceable limit on earnest money deposits to 5% of the agreement purchase price. Depending upon the circumstances anything beyond that amount is potentially recoverable by the Buyer regardless of who is in default.
SELLER DISCLOSURE STATEMENT (FORM 17).
Unless exempt, a seller of residential real property must deliver to the Buyer a completed, signed, and dated Seller Disclosure Statement (NWMLS - Form 17) within five business days of executing a written purchase and sale agreement. The Buyer can waive the right to receive Form 17, except if Seller’s answer to any questions in the “Environmental” Section would be “yes”, then the Buyer may not waive receipt of the “Environmental” Section. Form 17 contains many disclosures material to Buyer’s decision to purchase the property, including condition of Seller’s title, the property’s water resources, the quality of sewer or septic system, the condition of improvements, information regarding the homeowner’s association, environmental and lead paint risks. Upon receipt of Form 17, the Buyer has three business days (unless otherwise agreed), to rescind at Buyer’s sole discretion and obtain a return of the earnest money deposit. Your broker can provide you with a sample Form 17.
Upon the second and subsequent sales of a residential condominium, the Homeowner’s Association (“HOA”) will provide the prospective Buyer with a Resale Certificate. The Resale Certificate is prepared by the HOA and must be signed by the Seller. The Resale Certificate provides material information about the Seller and the condominium, including, for example, delinquent Seller assessments, the current special and general assessments imposed, whether a reserve study exists outlining future projects for the condominium and projected costs, the financial condition of the HOA, any limits imposed by the Declaration, Bylaws, Rules and/or Regulations related to such subjects as leasing, pets, rights of the owner to repair or remodel its unit or limited common area, smoking and HOA insurance coverage. NWMLS Form 28 ONLY gives the Buyer 5 days (unless otherwise agreed) to approve the Resale Certificate. The Buyer is advised to review the Resale Certificate with its attorneys, accountants and/or other professionals to assure Buyer fully understands its rights and responsibilities when purchasing the condominium. If the Buyer timely disapproves the Resale Certificate, the transaction is terminated and Buyer is entitled to a return of its earnest money deposit. Buyer is cautioned that the Resale Certificate does not include the HOA minutes; therefore, Buyer should include NWMLS Form 22D (discussed hereafter) in its offer to assure receipt of the HOA minutes.
KING COUNTY SEPTIC SYSTEMS.
King County requires Sellers of any single or multi-family residential property served by an on-site septic system (OSS) to have their OSS inspected by a licensed On-Site System Maintainer (OSM) PRIOR to selling the property. Only Sellers who have had an inspection performed within 6 months prior to the sale are exempt from this requirement. A copy of the inspection report must be given to the Buyer PRIOR to the transfer along with all available maintenance records. NWMLS forms 22 S (King County Addendum) and Form 22U (Seller’s Notice of OSS) are used to implement these requirements. The Buyer is advised that waiver of this OSM requirement may result in Buyer acquiring a property with an inadequate or failed septic system. Buyer is also advised about the importance of retaining its owned licensed septic engineer or designer to inspect the septic system. This can be accomplished through an Addendum for Buyer’s Septic Inspection. Buyer should also conduct its own independent review of the Health Department maintenance records of the OSS.
PIERCE COUNTY SEPTIC SYSTEMS
Pierce County prohibits the completion of a real estate sale on property served by an OSS without a Report of System Status (RSS) issued by the Health Department; provided, properties where a new OSS has been in service for less than six months are exempt from this requirement. Seller is required to contact a certified Operation and Maintenance firm (O&M) and request an Onsite Sewage Inspection. The O&M inspector will check the OSS and enter the information into an electronic data base known as online RME. The seller must also submit to the Health Department the RSS application. The Health Department has 10 business days to complete the inspection and issue the report. The health officer will not issue the RSS if the OSS has an unresolved critical service item, significant defect, is failing, or is not in compliance with Health Department regulations (a “Defective Condition”). If the Defective Condition(s) cannot be corrected before closing, the Seller shall provide the Health Department with a contract or work order from a certified OSS professional to correct the Defective Condition(s), and if the health officer is satisfied with the proposed remedy, a conditional RSS may be issued subject to Seller’s obligation to correct the Defective Condition(s) within 90 days of closing. NWMLS Form 22 WW is used to implement these requirements. Buyer is also advised about the importance of retaining its owned licensed septic engineer or designer to inspect the septic system. This can be accomplished through an Addendum for Buyer’s Inspection. Buyer should also conduct its own independent review of the Health Department maintenance records of the OSS.
SNOHOMISH COUNTY SEPTIC SYSTEMS
Snohomish County does NOT have a pre-closing OSS inspection regulation similar to King, Kitsap or Pierce Counties. The Snohomish Health Department has established an online data base entitled “DAVE” (Drainfield Awareness and Vital Education) (dave.snohd.org). This website provides information about a property’s OSS, including its “as built” drawings, system type, and in some cases, specific maintenance and other permit activity. NWMLS Form 22S provides for review of the Health Department maintenance records and if the OSS has not been pumped, if necessary and inspected within 12 months of mutual acceptance, it shall be inspected and pumped by an OSS service company selected by Seller, however, this not a substitute for a full inspection by a licensed septic engineer or septic designer of Buyer’s choice. Buyers are cautioned to undertake such a review. This can be accomplished through an Addendum for Buyer’s Inspection.
KITSAP COUNTY SEPTIC SYSTEMS
Kitsap County requires that the Seller submit a Property Conveyance Inspection Application (PCA) to the Kitsap County Health District (Health District). To complete the PCA, the Seller must conduct a records search on the Health District’s website. Within 7 days of receipt of the PCA, an Environmental Health Specialist (Health Officer) will inspect the property and septic area, review inspection reports, determine the status of the septic system and issue a Property Conveyance Inspection Report (PCI). The PCI will identify defects which must be immediately corrected by the Seller, and other items which are in non-compliance (Non-Compliance Items). The Buyer and Seller will negotiate regarding which party will remediate the Non-Compliance Items. NWMLS Form 22UU is used to implement these requirements. Buyer is also advised about the importance of obtaining its own septic engineer or designer to inspect the septic system. This can be accomplished through an Addendum for Buyer’s Inspection. Buyer should also conduct its own independent review of the Health Department’s maintenance records of the OSS.
ABANDONED OIL TANKS
Many older homes have abandoned oil tanks (Most local jurisdictions consider any oil tank out of use for more than one year as abandoned). Some of the tanks have been removed, others have been decommissioned in place, yet many simply remain in place without remediation. Recent case law interpreting MTCA has held owners of homes with abandoned oil tanks strictly liable for hazardous releases during their ownership, notwithstanding that these releases occurred without intent or negligence on the part of these owners. Damages for remediation can exceed six figures. Buyers of homes with abandoned oil tanks are cautioned to conduct their own inspection of the abandoned oil tank through a qualified decommission expert. This can be accomplished through an Addendum for Abandoned Oil Tank Inspection by Buyer.
EXISTING OIL TANKS
Homes with existing oil tanks properly registered with the State’s Pollution Liability Insurance Agency (PLIA) have up to $60,000 in coverage for contamination from an existing oil tank coming from leaks which occur AFTER the tank is registered with PLIA. To have the benefit of the PLIA coverage from the date of closing, Buyers are cautioned to register with PLIA no later than 180 days following closing. PLIA can be reached at 1-800-822-3905 or 360-407-0520.
SMOKE DETECTORS AND CARBON MONOXIDE ALARMS
The Seller must assure that the property is fully equipped with operational smoke detectors and carbon monoxide alarms prior to Buyer undertaking inspection. Buyer should confirm compliance with these requirements.
COMMON CONTINGENCIES AND ADDENDA BENEFITING BUYER
DEFINITION OF A CONTINGENCY
A Buyer contingency is a contractual condition which if not met allows the Buyer to terminate the transaction and obtain a return of its earnest money deposit assuming that the Buyer in good faith complied with its obligations under the contingency.
INSPECTION CONTINGENCY-NWMLS FORM 35.
The Inspection Contingency allows the Buyer to inspect the property with an inspector(s) of Buyer’s choice and terminate the contract based upon Buyer’s subjective disapproval of any defect found or ask for Seller’s concessions in the form of repairs or modification of contract terms, the latter typically in the form of a reduction of the purchase price, in return for waiving the Inspection Contingency. Outright waiver of the Inspection Contingency can result in Buyer’s failure to identify a material defect in the property.
Buyer is also cautioned that once it identifies a defect, it has a duty to conduct such further inspections as are necessary to determine the full nature and effect of the defect(s). Failure to do so will likely preclude any post-closing damages claim against Seller even if the Seller intentionally concealed the defect.
In addition to an inspection under NWMLS Form 35 after mutual execution of the sale agreement, as an alternative, the Buyer can offer to conduct an inspection PRIOR to making its offer under NWMLS Form 35P-Pre-Inspection Agreement. Buyer is cautioned that the Pre-Inspection should be of the same quality as one undertaken after mutual acceptance under NWMLS Form 35 in order to assure that defects are identified.
If the Buyer conducts an inspection, and requires that the Seller complete repairs prior to closing, conflict can occur between Buyer and Seller regarding the quality of repairs to be undertaken by Seller, the date of completion of the repairs, and Buyer’s right to re-inspect the work. Some Sellers will demand that the Buyer close even though the Buyer contests the adequacy of repairs. This can result in a dispute over the earnest money deposit if the Buyer refuses to close.
To avoid this conflict, Addendum 35R, Repair Addendum may be used to compel Seller to make the repairs, allow the Buyer time to re-inspect, and extend closing or terminate if the repairs are Inadequate. A Seller may give a Buyer an inspection report which was procured by the Seller (“Seller Procured Inspection Report”) and intended by the Seller to be part of the Seller Disclosure Statement (NWMLS – Form 17). Buyer is strongly cautioned that this Seller Procured Inspection Report is not a substitute for an inspection procured by Buyer’s own professional inspector (a “Buyer’s Inspection”). If Buyer is given a Seller Procured Inspection Report, Buyer will be asked to execute a Notice of Seller Inspection Report acknowledging that Buyer has been advised that the Seller Procured Inspection Report is given for informational and disclosure purposes only, and is not a substitute for a Buyer’s Inspection.
FINANCING CONTINGENCY-NWMLS FORM 22A.
A Financing Contingency allows the Buyer to choose the type of financing (i.e., conventional, FHA, VA, USDA, HELOC or other), amount of down payment and typically gives the buyer an exclusive period, often up to 30 days, to obtain the financing. The Financing Contingency contains a critical appraisal provision, which protects the Buyer should the property fail to appraise at the purchase price, and the Seller does not either: (a) Reduce the purchase price to the appraised value; (b) Provide an appraisal at the purchase price that lender accepts; or (c) Propose via NWMLS Form 22AN, Notice of Low Appraisal, a new purchase price less than the original purchase price, but more than the appraisal, in which Buyer agrees to pay the difference. This scenario often occurs in a rapidly rising market. Some Buyers may choose to enhance their offer should the property appraise at less than the purchase price. They can include an addendum in their initial offer to increase their down payment by a given amount should that occur. This can be accomplished through the use of NWMLS Form 22AD – Increased Down Payment for Low Appraisal Addendum.
Some Buyers may choose to waive the Financing Contingency, but make their purchase subject to an appraisal at the purchase price. This can be accomplished through NWMLS Form 22AA.
Some Buyers may choose to waive the Financing Contingency, and not make their purchase subject to an appraisal, but may want to have a lender required inspection or appraisal. In this scenario, Seller is not obliged to grant Buyer the right to a lender required inspection and/or appraisal unless the parties have agreed in writing to allow for such. This can be accomplished through the use of an Addendum, Lender Inspection and Appraisal – Non-Financing Contingency.
TITLE CONTINGENCY- NWMLS FORM 22T.
NWMLS FORM 22T allows the Buyer to review and approve all recorded title exceptions such as easements, covenants, restrictions, condominium declaration, survey conditions, and post-closing assessments which may affect Buyer’s ownership (an “Encumbrance”). If the Buyer objects to an Encumbrance, the Seller has until closing to remove the Encumbrance, and if it can’t, Buyer can terminate and obtain a return of its earnest money deposit. The use of this Title Contingency allows the Buyer to confirm that the Encumbrance(s) won’t affect Buyer’s intended use of the property.
INFORMATION VERIFICATION PERIOD CONTINGENCY-PARAGRAPH W
NWMLS FORMS 21, 25 and 28 contain Paragraph W, which grants the Buyer 10 days to verify all information provided by the Seller or Listing Firm (the “Seller Information”). If the Buyer identifies materially inaccurate Seller Information, the Buyer can terminate and obtain a return of its earnest money deposit. Many buyers in multiple offer situations are striking this provision which puts them at risk if they rely on the Seller Information that is materially inaccurate.
LIEN FOR UNRECORDED UTILITY CHARGES-NWMLS FORM 22K
Chapter 60.80 RCW provides that unless waived in writing by Seller and Buyer, the closing agent must disburse closing funds to satisfy the following lienable utility charges, such as water, light, power services and sewer. NWMLS Form 22K is the addendum used to effectuate RCW 60.80. If used, a utility cannot recover from the Buyer unpaid utility charges incurred prior to closing in excess of the utility’s estimated final billing submitted to the closing agent. Buyer is cautioned about the importance of utilizing NWMLS Form 22K to assure that a utility does not lien the property post-closing for pre-closing utility charges payable by the Seller.
OPTIONAL CLAUSES ADDENDUM-NWMLS FORM 22D
NWMLS FORM 22D contains both contingencies and provisions of importance to the Buyer. A Buyer of a condominium or property located within a covenanted community is benefited by Section 8-Homeowner’s Association (“HOA”) Review Period Contingency (the “Review Contingency”), which allows the Buyer to review HOA documents, such as minutes, by-laws, covenants, conditions and restrictions, rules and regulations. In a condominium setting, given the Resale Certificate does not require the HOA to provide minutes, the Buyer is cautioned to utilize the Review Contingency in order to review the minutes, which often disclose owner concerns or pending, but not yet approved, special assessments. The Buyer typically has 5 days (unless otherwise agreed) to approve the documents received under the Review Contingency, and if this contingency is disapproved, the Buyer may terminate and obtain a return of its earnest money deposit.
NWMLS FORM 22D also contains provisions pertaining to Seller’s obligation to deliver the property in a clean and sanitary condition, remove all personal property not acquired by Buyer, represent the nature of the utilities serving the property, state whether Buyer is expected to assume leases of personal property, set forth items excluded from the sale, indicate whether there is a Homeowner Transfer Fee owing the HOA upon closing, and if new construction, provide Buyer with the FTC required insulation disclosures.
MULTIPLE OFFER CONCERNS
NON-REFUNDABLE EARNEST MONEY DEPOSITS.
To enhance offers, buyers are offering large non-refundable earnest money deposits. The offer may direct escrow to immediately disburse the earnest money to the Seller or the earnest money may remain in the possession of a selling broker’s firm or closing agent pending closing. In either case, if Seller defaults, the Buyer may lose the earnest money deposit or be faced with protracted litigation to obtain its return. If Buyer chooses to place a non-refundable earnest money deposit, a Non-Refundable Earnest Money Addendum may be used for that purpose and does provide Buyer a remedy if Seller defaults.
BANK OWNED PROPERTY AND NEW CONSTRUCTION.
REO’s. Buyers may opt to make offers on bank owned property or REO’(Real Estate Owned). These properties are generally acquired by a lender through a foreclosure process and the lender may have limited knowledge about the property’s condition. Lenders utilize their own sale agreements or addenda (the “Lender Agreement”), which normally supersede the NWMLS forms. Typically, lenders will not negotiate on the provisions in their Lender Agreement(s). Lender timelines will likely be different than the timelines set forth in the NWMLS forms, particularly regarding inspection and financing contingencies. Lenders may also refuse to make repairs or conduct inspections even though mandated by local law (i.e. Septic), may refuse to provide Form 17 although mandated by state law, may require the Buyer to pay the excise tax, contrary to local practice and require the Buyer to accept the property in its “AS-IS” condition. Buyers are strongly cautioned to verify the adequacy of all utilities, obtain all inspections and title analysis necessary to make an informed decision to purchase and review the Lender Agreement with a real estate attorney before executing. An Attorney Review Addendum may be used to allow Buyer’s attorney to review and approve the Lender Agreement.
NEW CONSTRUCTION. The Sellers of new construction, especially large corporate entities, will have their own sale agreement or addenda (the “New Construction Agreement”) which normally supersede the NWMLS forms. There may be attempts to limit the Buyer’s ability to inspect the property before closing, limit Buyer’s warranties, provide for non-refundable earnest money or otherwise restrict Buyer’s rights. The Buyer is cautioned to review the New Construction Agreement with a real estate attorney, do its own due diligence by interviewing others who have purchased homes from the Seller-Contractor, check the permit file to assure all permits were properly issued and signed-off, and review the Department of Labor and Industries website to assure that the Seller-Contractor is in full compliance with the Contractor’s Registration Act. An Attorney Review Addendum, may be used to allow Buyer’s attorney to review and approve the New Construction Agreement.
POST CLOSING LEASE TO SELLER (Rent-Back) (Possession after closing)
Sellers often need time to find a new residence after closing. Buyers often accommodate Sellers by entering into post-closing leases, which may be for several months or more. Buyers are cautioned that such post-closing leases have potential risks, including: (a) The lease may violate Buyer’s covenant to its lender that the property be owner occupied; (b) Seller-tenant may not maintain the property, pay utilities or have an adequate damage deposit; and (c) Buyer’s insurance may be based upon owner occupancy, not a rental. Buyer is cautioned to review these issues with its attorney, insurance carrier and lender. An Attorney Review Addendum can be used for the attorney review.
WIRE FRAUD AND IDENTITY THEFT.
A hacker, impersonating a broker or escrow, and typically using the broker or escrow’s logo and e-mail address, may instruct a Buyer or Seller to wire funds to a bogus account believed by the Buyer or Seller to be the broker or escrow trust account.
TO PREVENT WIRE FRAUD, NEVER WIRE FUNDS WITHOUT FIRST CALLING THE KNOWN PHONE NUMBER FOR THE BROKER OR ESCROW AND CONFIRMING THE WIRE INSTRUCTIONS. DO NOT RELY UPON E-MAIL COMMUNICATIONS.
Further, to prevent the potential of wire fraud and identify theft, assure that all e-mail communications involving your confidential information (e.g. information not readily available to the public) sent by or to you from your broker, escrow, your lender or other trusted advisor is communicated in an encrypted format.
Buyers are cautioned about the importance of carefully reviewing the provisions of a proposed purchase and sale agreement (a “Sale Agreement”) with an attorney experienced in real estate matters before executing the Sale Agreement. Buyers are cautioned that the waiver of statutory rights, buyer-favorable contract addenda, contingencies and/or conditions may result in significant risk to the Buyer.
Please confirm by initialing below that you are aware that there may be monetary and other risks to you if you waive your statutory rights, buyer-favorable addenda, contingencies and/or conditions in your purchase offer.
____________(Initial and Date). Buyer acknowledges he/she has read this Buyer Advisory and that there are risks in waiving or excluding statutory rights, buyer-favorable addenda, contingencies or conditions in a purchase offer.
_____________(Initial and Date). Buyer acknowledges he/she has read this Buyer Advisory and that there are risks in waiving or excluding statutory rights, buyer-favorable addenda, contingencies or conditions in a purchase offer.